SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
PACIFIC AEROSPACE & ELECTRONICS, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: Set forth the amount on which the
filing fee is calculated and state how it was determined.
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
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Notice of Special Meeting of Shareholders to Be Held on March 6, 2000
================================================================================
A Special Meeting of Shareholders of Pacific Aerospace & Electronics, Inc., a
Washington corporation (the "Company"), will be held at the West Coast Wenatchee
Convention Center, located at 121 North Wenatchee Avenue, Wenatchee, Washington,
on Monday, March 6, 2000, at 3:00 p.m. Pacific Standard Time.
The Meeting is being held for the purpose of approving the issuance of
sufficient shares of the Company's common stock to permit conversion of the
Company's outstanding Series B Convertible Preferred Stock. For the reasons
described in the accompanying Proxy Statement, the Board of Directors recommends
that you vote FOR this proposal.
We will also transact any other business that may properly come before the
Meeting. However, the Board of Directors is not aware of any other business that
will come before the Meeting.
Only shareholders of record at the close of business on January 28, 2000, are
entitled to notice of and to vote at the Meeting or any adjournments of the
Meeting.
Please complete, sign, and date the enclosed proxy and return it promptly in the
enclosed envelope. If you attend the Meeting, you may revoke the proxy and vote
personally on all matters brought before the Meeting. A list of shareholders
will be available for inspection by the shareholders at the Company's corporate
headquarters at 430 Olds Station Road, Third Floor, Wenatchee, Washington 98801.
By Order of the Board of Directors,
Donald A. Wright
Chairman of the Board,
Chief Executive Officer and President
February __, 2000
Wenatchee, Washington
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN
PERSON, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE SO THAT YOUR SHARES WILL BE VOTED. THE ENVELOPE REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
430 Olds Station Road, Third Floor
Wenatchee, Washington 98801
(509) 667-9600
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PROXY STATEMENT
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Purpose
- -------
The Board of Directors of Pacific Aerospace & Electronics, Inc., a Washington
corporation (the "Company"), is furnishing this Proxy Statement in connection
with its solicitation of proxies to be voted at a special meeting of the
Company's shareholders (the "Meeting"). The Meeting will be held at the West
Coast Wenatchee Convention Center, 121 North Wenatchee Avenue, Wenatchee,
Washington, on Monday, March 6, 2000, at 3:00 p.m. Pacific Standard Time. The
accompanying Notice of Special Meeting of Shareholders, this Proxy Statement,
and the enclosed proxy are first being mailed to shareholders on or about
February __, 2000.
Record Date and Outstanding Shares
- ----------------------------------
The Board of Directors has fixed January 28, 2000, as the record date (the
"Record Date") for determining the holders of the Company's common stock, $.001
par value (the "Common Stock") who are entitled to receive notice of, and to
vote at, the Meeting. At the close of business on the Record Date, there were
____________ shares of Common Stock outstanding and entitled to vote (the
"Voting Shares").
Proxies
- -------
The Board of Directors is soliciting the enclosed proxy for use at the Meeting
and any adjournments of the Meeting and will not vote the proxy at any other
meeting. All proxies that are properly executed, received by the Company prior
to or at the Meeting, and not properly revoked by the shareholder in accordance
with the next paragraph, will be voted at the Meeting or any adjournments
thereof in accordance with the instructions in the proxy.
Revocation of Proxies
- ---------------------
The person giving any proxy in response to this solicitation may revoke it at
any time before the proxy is voted:
o by filing with the Secretary of the Company, at or before the taking
of the vote at the Meeting, a written notice of revocation bearing a
later date than the date of the proxy; or
o by signing and dating a subsequent proxy relating to the same Voting
Shares and delivering it to the Secretary of the Company before the
Meeting; or
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<PAGE>
o by attending the Meeting and voting in person. However, attendance at
the Meeting without voting in person will not constitute a revocation
of a proxy.
Any written notice revoking a proxy should be sent to Pacific Aerospace &
Electronics, Inc., 430 Olds Station Road, Third Floor, Wenatchee, Washington,
98801, Attention: Sheryl A. Symonds, Secretary, or hand delivered to Ms. Symonds
at the Meeting, at or before the taking of the vote.
Quorum
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The presence in person or by proxy of at least a majority of the Voting Shares
is required to constitute a quorum for the transaction of business at the
Meeting. Abstentions and broker non-votes will be considered represented at the
meeting for the purpose of determining a quorum.
Voting
- ------
The Voting Shares represented by each proxy will be voted in accordance with the
instructions given on the proxy. If no instructions are indicated, the proxy
will be voted FOR the approval of the proposal being considered at the Meeting,
as described in this Proxy Statement (the "Proposal") and at the discretion of
the persons named in the proxy on any other business that may properly come
before the Meeting.
Results of Voting
- -----------------
Under applicable law, the Company's Articles of Incorporation and Bylaws, and
Nasdaq requirements, if a quorum is present at the Meeting, the Proposal will be
approved if the votes cast in favor of the Proposal exceed the votes cast
against the Proposal.
Abstentions and broker non-votes will have no effect on the outcome of the
voting because they will not represent votes cast.
Solicitation of Proxies
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The Company will bear the cost of preparing, printing, and mailing this Proxy
Statement and of the solicitation of proxies by the Board of Directors.
Solicitation will be made by mail and, in addition, may be made by directors,
officers, and employees of the Company personally, or by telephone or facsimile.
The Company will request brokers, custodians, nominees, and other like parties
to forward copies of proxy materials to the beneficial owners of the Common
Stock and will reimburse such parties for their reasonable and customary charges
or expenses in this connection.
Securities Ownership of Directors, Executive Officers and Principal Shareholders
- --------------------------------------------------------------------------------
The following table shows the Common Stock owned as of January 28, 2000 by: (1)
each person known by the Company to own beneficially more than 5% of the
outstanding Common Stock; (2) each of the Company's directors; (3) each of the
Company's executive officers; 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 has been prepared to the best of the
Company's knowledge based on the records of the Company's transfer agent and the
Company's records on issuances of shares, as adjusted to reflect:
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(a) changes in ownership documented in filings with the Securities and Exchange
Commission (the "Commission") made by certain shareholders and provided to the
Company pursuant to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); and (b) statements provided to the Company by
certain shareholders.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage of
Name and Address of Beneficial Owner: Ownership (1) Common Stock
- ------------------------------------ ----------------- -------------
<S> <C> <C>
Donald A. Wright (2) 2,430,710
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801
Allen W. Dahl, M.D. (3) 42,401 *
7300 Madrona Drive NE
Bainbridge Island, WA 98110
Werner Hafelfinger(4) 214,586 *
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801
Dale L. Rasmussen (3) 20,492 *
c/o IMPCO Technologies, Inc.
708 Industrial Drive
Tukwila, WA 98188
Robert M. Stemmler (5) 8,137 *
c/o IMPCO Technologies, Inc.
16804 Gridley Place
Cerritos, CA 90703
William A. Wheeler (3) 18,092 *
2011 Lombard Lane
Yakima, WA 98902
Nick A. Gerde (6) 260,273
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801
Sheryl A. Symonds (7) 214,847
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801
Pension Fund of the Siemens
Companies in Switzerland 2,440,000
Freilagerstrasse 40
CH-8047, Zurich, Switzerland
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All executive officers and directors as a group _________
(8 persons) (8)
- --------------
* 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) 4,000 shares issuable upon exercise of public warrants, (b)
100,000 shares issuable upon exercise of another warrant, and (c) 1,907,560
shares issuable upon exercise of vested stock options.
(3) Includes 10,000 shares issuable upon exercise of vested stock options. Does
not include 10,000 shares issuable upon exercise of unvested stock options.
(4) Includes 110,000 shares issuable upon exercise of vested stock options.
(5) Includes 6,637 shares issuable upon exercise of vested stock options. Does
not include 10,000 shares issuable upon exercise of unvested stock options.
(6) Includes (a) 4,000 shares issuable upon exercise of public warrants, (b)
25,000 shares issuable upon exercise of another warrant, and (c) 191,178
shares issuable upon exercise of vested stock options. Does not include
4,878 shares issuable upon exercise of unvested stock options.
(7) Includes (a) 500 shares issuable upon exercise of public warrants and (b)
210,000 shares issuable upon exercise of vested stock options.
(8) Includes currently exercisable warrants and options to purchase up to
2,588,875 shares of Common Stock.
</TABLE>
PROPOSAL - TO APPROVE THE ISSUANCE OF SUFFICIENT SHARES OF THE COMPANY'S COMMON
STOCK TO PERMIT CONVERSION OF THE OUTSTANDING SERIES B CONVERTIBLE
PREFERRED STOCK
Description of Series B Convertible Preferred Stock and Warrants
- ----------------------------------------------------------------
The Offering
In May 1998, the Company sold 100,000 shares of Series B convertible preferred
stock, $.001 par value ("Preferred Stock") for $100 per share, and issued
warrants to purchase 138,888 shares of common stock, in a private offering to
seventeen accredited investors. The offering 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.
Release of the escrowed funds was conditioned upon the closing of the
acquisition of Aeromet International PLC ("Aeromet").
In August 1998, upon closing of the Aeromet acquisition, the Company issued to
the purchasers 70,000 additional shares of Preferred Stock and warrants to
purchase an additional 97,221 shares of common stock, in exchange for the
escrowed funds. This resulted in additional gross proceeds of $7,000,000, less
related offering costs of $369,000, for net proceeds of $6,631,000.
In total, the Company issued 170,000 shares of Preferred Stock, the terms of
which are described below. The specific terms are contained in the transaction
documents related to the offering (the
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<PAGE>
"Transaction Documents"), which were filed with the Commission as exhibits to
the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1998.
The Company issued to the purchasers of the Preferred Stock warrants to purchase
a total of 236,109 shares of common stock, at an exercise price of $7.20 per
share of common stock. The expiration date of the warrants is May 15, 2001.
The total net proceeds of the offering were $15,891,000. The Company used the
proceeds of the offering primarily to fund the acquisitions of Balo Precision
Parts, Inc. and Electronic Specialty Corporation, to pay costs of the Aeromet
acquisition, and for working capital. The Company intends to use the proceeds of
the warrants, if they are exercised, primarily for working capital or other
corporate purposes.
Terms of the Preferred Stock
Conversion Shares. Upon conversion of a share of Preferred Stock, the holder
receives a number of shares of common stock equal to $100 divided by the
then-applicable conversion price. No holder 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. Any shares of Preferred Stock
outstanding on May 15, 2003 will automatically convert into common stock at the
then-applicable conversion price.
Conversion Price. The conversion price of the Preferred Stock varies with the
market price of the Company's common stock and is 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.
Three Million Share Limit. Because of Nasdaq Stock Market requirements, the
Transaction Documents prohibit the Company from issuing more than 3,000,000
shares of common stock upon conversion of Preferred Stock without obtaining
shareholder approval for the issuance of additional shares. Alternatively, the
Transaction Documents would permit the Company to redeem the shares of Preferred
Stock the conversion of which would result in the issuance of more than
3,000,000 shares of common stock.
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. However, the
indenture governing the Company's outstanding 11 1/4% senior subordinated notes
restricts the Company's ability to redeem Preferred Stock, and the Company does
not currently expect that it would be able to redeem any of the Preferred Stock.
2% Penalty. If the Company would be obligated to issue more than 3,000,000
shares of common stock but could not either obtain shareholder approval for the
issuance or redeem the excess Preferred Stock, the Company would incur a
significant monthly penalty until the Company either obtained shareholder
approval or redeemed the excess Preferred Stock. The monthly penalty would equal
2% of the Preferred Stock's liquidation preference, which is described below.
The Company estimates that, as of January 28, 2000, the penalty would be
$____________ per month.
Conversions. At January 28, 2000, the conversion price was $______ per share.
Between February 9, 1999 and January 28, 2000, the holders have converted
Preferred Stock into common stock at conversion prices ranging between $______
and $1.97. As of January 28, 2000, the holders had converted ___________ shares
of Preferred Stock into ___________ shares of common stock, and __________
shares of Preferred Stock remained outstanding. The Company is seeking
shareholder
5
<PAGE>
approval to issue more than 3,000,000 shares of common stock so that the holders
of Preferred Stock can convert their outstanding Preferred Stock. If the Company
does not obtain shareholder approval, it will incur the significant monthly cash
penalty described above.
Effect of Future Conversions. The Company cannot predict the conversion prices
at which the outstanding Preferred Stock may be converted, or the actual number
of common shares into which the Preferred Stock may be converted, because the
conversion price varies with the market price of the Company's common stock and
because each holder has the right to choose both the times at which the holder
will convert and the amount that the holder will convert at any particular time.
In general, if the market price of the common stock rises, fewer shares will be
issuable upon conversion, and if the market price of the common stock falls,
more shares will be issuable upon conversion. However, if all of the outstanding
Preferred Stock were converted at $_________, which was the conversion price at
January 28, 2000, it would be converted into _____________ shares of common
stock.
The following table identifies the holders of the Preferred Stock, provides
information about their ownership of Preferred Stock as of January 28, 2000, and
sets forth the number of shares of common stock issuable to each of the holders
upon conversion of the outstanding Preferred Stock, based on a hypothetical
conversion of all of the outstanding Preferred Stock on January 28, 2000 at a
conversion price of $___________. The table also provides the percentage of the
Company's common stock that would be held by each of the holders of Preferred
Stock, assuming such a hypothetical conversion.
<TABLE>
<CAPTION>
Common Stock Issuable
Shares of Preferred Upon Conversion
Stock Held at if Converted on Percent of
Name of Holder January 28, 2000 January 28, 2000 Common Stock
- -------------- ------------------- --------------------- ------------
<S> <C> <C> <C>
AGR Halifax Fund, Ltd.
AG Arb Partners, L.P.
AG Super Advantage, L.P.
AG Super Fund, L.P.
AG Long Term Super Fund, L.P.
Nutmeg Partners, L.P.
PHS Bay Colony Fund, L.P.
PHS Patriot Fund, L.P.
AG MM, L.P.
Medici Partners, L.P.
Triarc Companies, Inc.
Ramius, L.P.
Baldwin Enterprises, Inc.
GAM Arbitrage Investments, Inc.
AG Super Fund International Partners, L.P.
Ramius Fund, Ltd.
Leonardo, L.P.
TOTAL
</TABLE>
6
<PAGE>
The Company expects that the actual conversion price and the number of shares of
common stock issuable upon conversion of the Preferred Stock will vary from time
to time and that they could differ substantially from the amounts set forth in
the table above. Accordingly, the following table describes the number of shares
of common stock that would be issuable assuming all of the outstanding shares of
Preferred Stock were converted at the following range of hypothetical conversion
prices.
<TABLE>
<CAPTION>
Common Stock Issuable Upon
Hypothetical Conversion Price Preferred Stock Outstanding Conversion at Hypothetical Price
----------------------------- --------------------------- --------------------------------
<S> <C> <C>
$ .50
$ .75
$ 1.00
$ 1.25
$ 1.50
$ 3.00
[Jan. 28 price]
</TABLE>
Resale of Shares Issued upon Conversion
Registration Rights. In connection with the offering, the Company agreed to
register for resale the common stock into which the Preferred Stock and the
warrants may be converted. The Company has registered 3,000,000 shares of common
stock for resale by the holders of Preferred Stock, and 236,109 shares of common
stock for resale by the holders of warrants, pursuant to a Registration
Statement on Form S-1 (Registration No. 333-66471), which became effective on
December 23, 1998, and which was amended by Post-Effective Amendment No. 1 on
Form S-3, which became effective on October 6, 1999. If this Proposal is
approved at the Meeting, the Company will be obligated to register for resale
the additional shares of common stock that may be issued upon conversion of the
outstanding Preferred Stock to the extent necessary to permit the holders to
resell the common stock in the public market.
Resale. The Company believes that, as of January 28, 2000, the holders of
Preferred Stock had resold _________ shares of the 3,000,000 shares that the
Company registered on their behalf. If the Proposal is approved at the Meeting
and the Company registers the shares of common stock into which the outstanding
Preferred Stock may be converted, as it is currently required and intends to do,
the holders of Preferred Stock will be entitled to resell all of those shares of
common stock into the public market. Although the Company cannot predict the
number of shares of common stock that would actually be issued upon conversion
of the outstanding Preferred Stock because the conversion price varies with the
market price of the Company's common stock, as described above, if all of the
outstanding Preferred Stock were converted at $_________, the conversion price
as of January 28, 2000, it would be converted into _____________ shares of
common stock. All of these shares would be registered for resale, and the
Company expects that the holders would resell all of these shares into the
public market. This would have the effect of significantly increasing the number
of shares of the Company's common stock in the public market and could
negatively affect the market price of the Company's common stock. Even if the
shares were not registered, the holders would have the right, upon expiration of
the appropriate holding period and subject to certain conditions, to resell the
shares into the public market without registration in reliance on Rule 144,
promulgated under the Securities Act of 1933, as amended.
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<PAGE>
Voting. The holders of Preferred Stock do not have voting rights, except on
certain matters that would affect the rights of the Preferred Stock. The common
stock issued upon conversion of Preferred Stock has all of the voting rights
held by any other shares of common stock.
Dividends. The Preferred Stock does not have the right to dividends, except at
the discretion of the Board of Directors. However, if a dividend is declared or
paid on common stock, other than in shares of common stock, the holders of
Preferred Stock are entitled to a dividend per share equal to the amount that
would be received if their Preferred Stock were converted to common stock at the
then applicable conversion price. The Company has never declared dividends and
has no current intention of declaring dividends in the future.
Liquidation Preference. The Preferred Stock has a liquidation preference equal
to the greater of $100 per share of Preferred Stock, plus any declared but
unpaid dividends, or the amount the holder would be entitled to receive if the
Preferred Stock were converted into common stock at the then applicable
conversion price. In the event of a liquidation of the Company, certain mergers
involving the Company, or the sale of all or substantially all of the assets of
the Company, the holders of the Preferred Stock would be entitled to receive the
liquidation preference before any proceeds of such transaction were paid to the
holders of common stock.
Why the Company is Requesting Shareholder Approval
- --------------------------------------------------
Overview
Because of Nasdaq Stock Market requirements, the Company cannot issue more than
3,000,000 shares of common stock upon conversion of Preferred Stock unless the
Company's shareholders approve the issuance of more than 3,000,000 shares.
Alternatively, the Company could redeem any Preferred Stock whose conversion
would cause the issuance of more than 3,000,000 shares of common stock, except
that the indenture governing the Company's outstanding 11 1/4% senior
subordinated notes restricts the Company's ability to redeem Preferred Stock,
and the Company does not currently expect that it would be permitted to redeem
any of the Preferred Stock, even if sufficient cash were available for such a
redemption. Without shareholder approval of the Proposal, the Company will incur
a significant monthly cash penalty.
Nasdaq Rule
The Company's common stock is quoted on the Nasdaq National Market System. As a
result, the Company is obligated to comply with applicable rules of the Nasdaq
Stock Market. Rule 4460(i)(1)(D)(ii) requires shareholder approval for the
issuance of shares of common stock in a transaction other than a public offering
involving the sale or issuance by the issuer of common stock (or securities
convertible into or exercisable for common stock) equal to 20% or more of the
common stock or 20% or more of the voting power outstanding before the issuance
for less than the greater of book or market value of the stock.
At May 15, 1998, the closing date of the offering, 3,000,000 shares of common
stock constituted approximately 19.3% of the Company's outstanding common stock.
The closing price of the Company's common stock on the Nasdaq National Market
System on that day was $5.7812, which was the lowest closing price of the
Company's common stock between February 20, 1998 and June 12, 1998. The average
conversion price that would result in the issuance of 3,000,000 shares of common
stock is $5.67 per share.
8
<PAGE>
The Company believes that it is important to the Company and its shareholders to
continue to be listed on the Nasdaq National Market System and, therefore, that
it is essential for the Company to comply with applicable Nasdaq rules. In
recognition of the possibility that the conversion price could fall to and
remain at a level that would require the Company to issue more than 3,000,000
shares of common stock, the Company agreed in the Transaction Documents that it
would either redeem the shares of Preferred Stock the conversion of which would
result in issuance of more than 3,000,000 shares or obtain shareholder approval
to issue the number of additional shares required to permit conversion of all of
the Preferred Stock.
Possible Consequences and Risks if Shareholder Approval IS Obtained
- -------------------------------------------------------------------
Effect on Market
The conversion of the Preferred Stock may result in substantial dilution to the
equity interests of other holders of the Company's common stock. The issuance of
a significant amount of additional common stock would result in a decrease in
the relative voting power of the common stock outstanding prior to the
conversion of the Preferred Stock. Furthermore, to the extent that the holders
of the Preferred Stock convert and then sell their shares of common stock, the
market price of the common stock may decrease because of the additional shares
being sold into the market. The reduced price could allow the holders of the
Preferred Stock to convert their shares into larger amounts of common stock, the
sale of which could further depress the market price of the common stock and
encourage short sales by the holders of the Preferred Stock or others. This
could place further downward pressure on the market price of the common stock.
Additionally, even prior to the time of actual conversion of Preferred Stock and
resale of common stock, the market "overhang" resulting merely from the
existence of the Preferred Stock could depress the market price of the common
stock.
Effect on Ability to Obtain Additional Capital
The existence of the overhang, the greater number of outstanding shares, and the
possibility of dilution and decreased market price of the Company's common stock
could inhibit the Company's opportunities to obtain additional public or private
financing when and if needed or on terms acceptable to the Company.
Potential for Change of Control
The approval of the Proposal could result in the issuance of a large number of
shares of common stock. Although the Company believes that the holders of the
Preferred Stock intend to convert relatively small numbers of shares of
Preferred Stock at any one time and immediately resell the shares of common
stock received upon conversion, as they have done previously, it would be
possible for the holders to convert larger numbers of Preferred Stock and retain
a sufficient number of shares of common stock to effect a change of control of
the Company. Even though each holder is prohibited by the terms of the Preferred
Stock from owning more than 9.9% of the Company's outstanding common stock at
any time, the holders could effect a change of control if they were to act as a
group. In addition to the changes, such as the ability to elect new directors
and change the policies of the Company that would ordinarily be associated with
a change of control, certain changes of control, such as beneficial ownership by
a group of more than 35% of the voting power of outstanding stock, could have
the effect of requiring the Company to offer to repurchase the notes held by
each holder of the Company's 11 1/4% senior subordinated notes at a cash price
equal to 101% of the principal amount, plus accrued interest and possible
liquidated damages. The Company does not currently have sufficient cash to
repurchase the notes, and there is no assurance that the Company would have cash
available, or
9
<PAGE>
the ability to obtain cash, sufficient to repurchase any or all of the notes if
it were required to do so. Failure to offer to repurchase the notes in the event
of such a change of control would constitute a default under the indenture.
Consequences if Shareholder Approval IS NOT Obtained
- ----------------------------------------------------
2% Penalty
If the shareholders do not approve the Proposal and the Company cannot redeem
Preferred Stock, the Company will be required to pay to the holders of Preferred
Stock a monthly penalty of 2% of the Preferred Stock's liquidation preference
each month until the Company redeems the Preferred Stock or obtains shareholder
approval to issue additional shares. The liquidation preference of the Preferred
Stock is the greater of (i) $100 per share plus any declared but unpaid
dividends (of which there have been none), or (ii) the amount the holder would
be entitled to receive if the Preferred Stock were converted to common stock at
the then applicable conversion price.
The Company estimates that, as of January 28, 2000, the penalty would be
$_________ per month. The Board believes that payment of this penalty would have
a serious negative impact on the Company's financial position and that the
Company's cash should be used for other corporate purposes. Furthermore, even if
payment of the penalty were an appropriate use of cash, the Company may not have
sufficient cash available on a monthly basis to pay such a large penalty. In
addition, the indenture may restrict the Company's ability to use cash to pay
the penalty.
Either payment of the penalty or failure to pay the penalty if it became due
could have serious adverse consequences to the Company.
Additional Costs
Failure to approve this Proposal could also cause the Company to incur
additional expenses associated with calling and conducting another special
meeting of shareholders to reconsider and act upon the Proposal at a future
time.
Recommendation
- --------------
The Company's Board of Directors determined that the sale of the Preferred Stock
was in the best interests of the Company at the time the transaction was
consummated. The Board of Directors has now determined that issuance of the
additional shares, and avoidance of the 2% monthly penalty, would be in the best
interests of the Company. The Board of Directors therefore recommends that the
Company's shareholders vote to approve the issuance of sufficient shares to
permit conversion of all of the Preferred Stock, which will be convertible into
more than 20% of the total number of shares of common stock outstanding prior to
the offering.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PROPOSAL.
10
<PAGE>
INDEX TO FINANCIAL INFORMATION
Page
PACIFIC AEROSPACE & ELECTRONICS, INC. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Second Quarter and Six
Months Ended November 30, 1999 ...................................... 12
Unaudited Consolidated Financial Statements - Second Quarters
and Six Months Ended November 30, 1999 and 1998
-------------------------------------------------------------
Consolidated Balance Sheets as of November 30, 1999 and May 31,
1999............................................................. 17
Consolidated Statements of Operations for the second quarters
and six months ended November 30, 1999 and 1998.................. 18
Consolidated Statements of Cash Flows for the six months ended
November 30, 1999 and 1998 ...................................... 19
Management's Statement and Notes to Unaudited Consolidated
Financial Statements for the second quarters and six
months ended November 30, 1999 and 1998.......................... 20
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Fiscal Year Ended May 31, 1999......... 30
Audited Consolidated Financial Statements - Fiscal Years Ended
May 31, 1997, 1998 and 1999
--------------------------------------------------------------
Independent Auditor's Reports........................................ 41
Consolidated Balance Sheets as of May 31, 1998 and 1999 ............. 43
Consolidated Statements of Operations for the years ended
May 31, 1997, 1998 and 1999 ..................................... 44
Consolidated Statements of Stockholders' Equity for the
years May 31, 1997, 1998 and 1999 ................................ 45
Consolidated Statements of Cash Flows for the years
ended May 31, 1997, 1998 and 1999 ................................ 46
Notes to Consolidated Financial Statements .......................... 48
AEROMET INTERNATIONAL PLC and Subsidiaries
Financial Statements - Fiscal Years Ended December 31, 1996
and 1997 (audited) and Five Months Ended May 31, 1997 and
1998 (unaudited)
-----------------------------------------------------------
Independent Auditors' Reports........................................ 79
Balance Sheets as of December 31, 1996 and 1997, and as of
May 31, 1998 (unaudited) ......................................... 80
Statements of Operations for the years ended December 31,
1996 and 1997 and the five months ended May 31, 1997
and 1998 (unaudited) ............................................. 81
Statements of Shareholder's Equity for the years ended
December 31, 1996 and 1997 and the five-month period
ended May 31, 1998 (unaudited) .................................. 82
Statements of Cash Flows for the years ended December 31,
1996 and 1997 and the five months ended May 31, 1997
and 1998 (unaudited) ............................................ 83
Notes to Financial Statements ....................................... 84
UNAUDITED PRO FORMA FINANCIAL DATA
Unaudited Pro Forma Financial Data................................... 95
Unaudited Pro Forma Statement of Operations Data for year
ended May 31, 1999 .............................................. 96
Notes to Unaudited Pro Forma Statement of Operations Data............ 97
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
The Management's Discussion and Analysis of Financial Condition and Results of
Operations sections of this Proxy Statement 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 these sections.
- --------------------------------------------------------------------------------
The following discussion was contained in the Company's quarterly report on Form
10-Q for the quarter ended November 30, 1999 and relates to the unaudited
consolidated financial statements contained in that report. This discussion
should be read in conjunction with those statements and the audited consolidated
financial statements for the fiscal year ended May 31, 1999 and the related
notes thereto.
Results of Operations
- ---------------------
Quarter Ended November 30, 1999 Compared to Quarter Ended November 30, 1998
Net Sales. Net sales decreased by $1.5 million, or 4.9%, to $29.0 million for
the quarter ended November 30, 1999, from $30.5 million for the quarter ended
November 30, 1998. The European Aerospace Group contributed $15.0 million, down
$1.1 million from the $16.1 million contributed during the quarter ended
November 30, 1998. We believe that customer inventory evaluation and reduction
initiatives, which have also impacted our U.S. Aerospace Group operations over
the past year, are the primary cause for the decline in the European Aerospace
Group revenue. We expect that our net sales in the European Aerospace Group will
be slightly down in the third and fourth quarters of fiscal 2000 as compared to
corresponding quarters in fiscal 1999. Net sales in the U.S. Aerospace Group
were $7.8 million during the quarter ended November 30, 1999, versus $8.4
million contributed during the quarter ended November 30, 1998. Our U.S.
Aerospace Group experienced a decrease in order backlog and corresponding
slowdown of product deliveries to Boeing during fiscal 1999. This situation has
continued through the second quarter of fiscal 2000. We anticipate that sales
volume in our U.S. Aerospace Group will stabilize and may start to increase
during the third quarter of fiscal 2000, in part due to the signing of a new
multiple year supplier contract with Boeing in the third quarter. Our U.S.
Electronics Group contributed $6.2 million to net sales during the quarter ended
November 30, 1999, up $0.2 million from $6.0 million contributed during the
quarter ended November 30, 1998. This increase was primarily attributable to
additional sales of products for communications, satellite and weapons systems.
We expect the sales volume in our U.S. Electronics Group to remain at current
levels or decrease slightly during the third quarter of fiscal 2000 due to order
timing.
Gross Profit. Gross profit increased by $0.4 million, or 8.3%, to $5.2 million
for the quarter ended November 30, 1999, from $4.8 million for the quarter ended
November 30, 1998. As a percentage of net sales, gross profit increased to 18.1%
for the quarter ended November 30, 1999 from 15.8% for the quarter ended
November 30, 1998. The quarter ended November 30, 1998 included a $1.6 million
inventory impairment charge. Without that charge, gross profit would have been
$6.4 million, or 21.1% of net sales. The resulting comparative decrease in gross
profit in the second quarter of fiscal 2000 from the second quarter of fiscal
1999 was due to lower gross margins in our U.S. Aerospace Group due to customer
pricing reduction programs and lower sales volumes. We anticipate that gross
margins in our third quarter of fiscal 2000 will increase slightly over margins
achieved in the second quarter, with further improvement in the fourth quarter
of fiscal 2000 due to anticipated increases in sales volume within our U.S.
Aerospace Group as mentioned above.
12
<PAGE>
Operating Expenses. Operating expenses increased by $0.2 million, or 4.5%, to
$4.6 million for the quarter ended November 30, 1999, from $4.4 million for the
quarter ended November 30, 1998. As a percentage of net sales, operating
expenses increased 1.5 percentage points, to 15.8% for the quarter ended
November 30, 1999 from 14.3% for the quarter ended November 30, 1998. The
increase in operating expenses is attributable mainly to computer system
upgrades and other "Y2K" preparations.
Interest Expense. Interest expense decreased by $0.1 million to $2.6 million for
the quarter ended November 30, 1999, from $2.7 million for the quarter ended
November 30, 1998. This decrease in interest expense was due to principal paid
down during the previous year. Of the interest expense for the quarter ended
November 30, 1999, $2.4 million related to our outstanding 11 1/4% senior
subordinated notes.
Provision for Income Taxes. Income taxes for the quarter ended November 30, 1999
represent estimated U.K. tax on earnings in the U.K. No U.S. tax provision was
recorded during the quarter because of our pre-tax loss position.
Net Loss. Net loss decreased by $0.6 million, or 23.1%, to a net loss of $2.0
million for the quarter ended November 30, 1999, from a net loss of $2.6 million
for the quarter ended November 30, 1998, due to the factors listed above.
Six Months Ended November 30, 1999 Compared to Six Months Ended November 30,
1998
Net Sales. Net sales increased by $7.9 million, or 15.7%, to $57.6 million for
the six months ended November 30, 1999, from $49.7 million for the six months
ended November 30, 1998. The European Aerospace Group contributed $29.3 million,
up $8.8 million from the $20.5 million contributed during the six months ended
November 30, 1998. This increase was primarily due to six months of operations
of the European Aerospace Group during the six month period in 1999, compared to
four months of operations during the same period in 1998. The increase in the
European Aerospace Group net sales was partially offset by a decrease in net
sales of $1.7 million from the U.S. Aerospace Group, which contributed $15.8
million during the six months ended November 30, 1999, versus $17.5 million
contributed during the six months ended November 30, 1998. Our U.S. Aerospace
Group experienced a decrease in order backlog and corresponding slowdown of
product deliveries to Boeing during fiscal 1999. This situation has continued
through the second quarter of fiscal 2000. We anticipate that sales volume in
our U.S. Aerospace Group will stabilize and may start to increase during the
third quarter of fiscal 2000, in part due to the signing of a new multiple year
supplier contract with Boeing in the third quarter. Our U.S. Electronics Group
contributed $12.5 million to net sales during the six months ended November 30,
1999, up $0.9 million from $11.6 million contributed during the six months ended
November 30, 1998. This increase was primarily attributable to additional sales
of products for communications, satellite and weapons systems. We expect the
sales volume in our U.S. Electronics Group to remain at current levels or
decrease slightly during the second half of fiscal 2000 due to order timing.
Gross Profit. Gross profit increased by $2.3 million, or 24.2%, to $11.8 million
for the six months ended November 30, 1999, from $9.5 million for the six months
ended November 30, 1998. This increase was primarily due to six months of
operations of the European Aerospace Group in 1999 versus four months in 1998.
As a percentage of net sales, gross profit increased to 20.5% for the six months
ended November 30, 1999, from 19.1% for the six months ended November 30, 1998.
The six months ended November 30, 1998 included a $1.6 million inventory
impairment charge. Without that charge, gross profit would have been $11.1
million, or 22.3% of net sales. The resulting comparative decrease in gross
profit during the first six months of fiscal 2000 from the first six months of
fiscal 1999 was due to lower gross margins in our U.S. Aerospace group primarily
due to customer pricing reduction programs and lower sales volumes. We
anticipate that gross margins in the second half of fiscal 2000 will increase
slightly over margins
13
<PAGE>
achieved during the first six months of fiscal 2000 due to anticipated increases
in sales volume within our U.S. Aerospace Group as mentioned above.
Operating Expenses. Operating expenses increased by $1.6 million, or 19.8%, to
$9.7 million for the six months ended November 30, 1999, from $8.1 million for
the six months ended November 30, 1998. As a percentage of net sales, operating
expenses increased 0.4 percentage points, to 16.8% for the six months ended
November 30, 1999, from 16.4% for the six months ended November 30, 1998. The
increase in operating expenses is primarily attributable to six months of
operations in our European Aerospace group in 1999 versus four months of
operations in 1998. In addition, computer system upgrades and other "Y2K"
expenditures have caused an increase in operating expenses during the first six
months of fiscal 2000.
Interest Expense. Interest expense increased by $1.4 million, or 36.8%, to $5.2
million for the six months ended November 30, 1999, from $3.8 million for the
six months ended November 30, 1998. This increase was due to six months of
interest expense during 1999 on our 11 1/4% senior subordinated notes, versus
four months of interest expense on these notes in 1998, offset slightly by
principal pay down of other debt during fiscal 1999.
Other Income (Expense). Other income (expense) includes non-recurring and
non-operational income and expense for the period. Other expense decreased by
$6.9 million, to $11,000, for the six months ended November 30, 1999. Other
expense during the six months ended November 30, 1998 included non-recurring
charges of $3.6 million and $3.1 million related to goodwill and investment
valuation allowances, respectively.
Provision for Income Taxes. Income taxes for the six months ended November 30,
1999 and 1998 primarily represent changes in the valuation allowance to adjust
deferred income tax assets to amounts determined to be realizable based upon
current operating results, and U.K. tax on U.K. earnings of our European
Aerospace Group. At November 30, 1999, we had net operating loss (NOLs)
carryforwards for federal income tax purposes of approximately $14.0 million,
the benefits of which expire in the tax year 2001 through the tax year 2019. The
NOLs created by our 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 $1.5 million of the $14.0 million of
NOLs will never become available. At November 30, 1999 we had net deferred tax
assets of $4.0 million, the realization of which is dependent on material
increases in present levels of pre-tax income, primarily in the United States.
We expect to achieve these increases by continuing to streamline operations,
reduce corporate overhead and focus our resources on higher growth and higher
margin opportunities. We are also actively evaluating strategic alternatives to
reduce debt and related interest expense. We anticipate that our effective
income tax rate will approach and may exceed the statutory rate in the future as
pre-tax income is achieved. In addition, undistributed earnings of our foreign
subsidiaries, for which a minimal amount of U.S. income taxes have been
provided, aggregated approximately $1.4 million at November 30, 1999.
Net Loss. Net loss decreased by $3.5 million, or 50.0%, to a net loss of $3.5
million for the six months ended November 30, 1999, from a net loss of $7.0
million for the six months ended November 30, 1998, due to the factors listed
above.
Liquidity and Capital Resources
- -------------------------------
Liquidity. During the quarter and six months ended November 30, 1999, our
operating activities used cash of $292,000 and $3.3 million, respectively. Cash
at November 30, 1999 was $3.6 million (compared to
14
<PAGE>
$8.1 million at May 31, 1999). All but $322,000 of the cash resides at
subsidiaries that are not guarantors of our 11 1/4% senior subordinated notes.
Remittance of cash from non-guarantor subsidiaries may cause us to incur income
tax expense in the U.S. on the amount of earnings of our foreign subsidiaries.
During the six months ended November 30, 1999, we borrowed $5.6 million under a
previously unused $6.3 million line of credit. We believe that our working
capital and unused lines of credit are sufficient to meet our obligations as
they become due during fiscal 2000. However, we may need to obtain additional
cash during or after fiscal 2000. Should we need to dispose of assets to
generate cash, there is no assurance that the carrying values will be realizable
upon liquidation outside of the ordinary course of business. Our inability to
obtain additional cash if and when needed could have a material adverse effect
on our financial position and results of operations. As part of our 11 1/4%
senior subordinated notes, we are subject to an indenture that, among other
things, limits our ability to enter into various financing transactions and to
sell certain assets. We are actively evaluating strategic alternatives to reduce
debt and related interest expense.
Financing. Our primary banking relationships include a revolving line of credit
up to $6.3 million for our U.S. operations and a revolving line of credit up to
approximately $5.6 million ((pound)3.5 million) for our European operations. As
of November 30, 1999, we had drawn $5.6 million on our U.S. line of credit, and
our European line of credit was unused. Proceeds from the U.S. line of credit
have been used to fund working capital due to losses (approximately $3.0
million), payments related to the Orca guarantee (approximately $1.0 million),
and a loan to Nova-Tech Engineering, Inc. (approximately $1.5 million).
Capital Expenditures. We made capital expenditures of $1.3 million during the
second quarter of fiscal 2000. The expenditures were primarily for manufacturing
equipment and building improvements. The expansion of the manufacturing facility
that is used by two divisions of our U.S. Electronics Group has been
rescheduled, although most of the building material needed to complete the
project was purchased prior to the decision to defer the expansion. This
expansion is expected to be completed late in fiscal 2000 or early in the next
fiscal year, for a total cost of approximately $800,000, of which approximately
$200,000 has already been expended.
We have also entered into a stock purchase agreement for the proposed
acquisition of Nova-Tech Engineering, Inc. ("Nova-Tech"). The purchase price
will consist of approximately $1.5 million in cash, and we will pay off certain
outstanding debts of Nova-Tech at closing. The stock purchase agreement contains
conditions to closing, including receipt of a letter ruling from the Internal
Revenue Service that is necessary to permit Nova-Tech's Employee Stock Ownership
Plan to sell its Nova-Tech stock on the agreed terms. The letter ruling request
was delivered to the Internal Revenue Service in November 1999, and we cannot
predict when a response will be received. We are currently providing services to
Nova-Tech under an Operating Agreement dated April 23, 1999. As of November 30,
1999, we had loaned $2.5 million to Nova-Tech for working capital. These loans
have been made under the terms of two demand notes dated April 26, 1999 and
August 5, 1999, each of which is secured by substantially all of the assets of
Nova-Tech.
As of November 30, 1999, we had no other material commitments outstanding for
the purchases of capital assets.
Orca Technologies, Inc. In July 1997 we guaranteed a $1.3 million line of credit
between Orca Technologies, Inc. and its principal lender. In June 1999, as
guarantor of Orca's line of credit, we advanced $300,000 for a partial repayment
of the line of credit required by the lender. In October 1999, we advanced an
additional $522,000 for another partial repayment required by the lender. During
the second quarter of fiscal 2000, we advanced $509,000, and early in the third
quarter of fiscal 2000 we advanced $82,000, which completely repaid the
guaranteed debt. Those advances are secured by a security interest in
substantially all of Orca's assets. We also entered into an agreement with Orca
regarding those advances that restricts Orca's ability to take certain actions
without our consent. During fiscal 1999, we recorded in other expense an
allowance for certain expenses and the guarantee of Orca's
15
<PAGE>
line of credit totaling approximately $2.0 million. This allowance had the
effect of writing off the entire amount of our guarantee obligation. As a
result, the payments described above affected cash flow, but did not affect
earnings during fiscal 2000. As of November 30, 1999, Orca was sixteen months
delinquent to us in interest payments on a $950,000 promissory note. We reserved
the entire amount of this note in other expense during fiscal 1998 and fiscal
1999. During the second and third quarters of fiscal 2000, we negotiated with a
potential investor in Orca for the possible sale by us of certain of Orca's debt
obligations to us for a deeply discounted price. This sale did not occur, and we
are continuing to investigate our options for recovering some of the previously
written off debt. As of November 30, 1999, Orca was also sixteen months
delinquent on lease payments for premises that it subleased from us. In November
1999 we evicted Orca from most of the space that it previously subleased from
us, and we negotiated a termination of our lease of that facility and the
re-leasing of the space to another tenant of the building. Under the termination
agreement, our rentable space was reduced from approximately 21,390 square feet
to 3,808 square feet, and the lease term was shortened from August 31, 2004 to
February 28, 2000. Our obligations to the landlord have terminated with respect
to the approximately 17,500 square feet that have been delivered to the new
tenant, and will terminate with respect to the remaining space, which is
currently occupied by Orca, on or about February 28, 2000. We have notified Orca
that they must vacate that space prior to February 28, 2000.
Significant Events During The Quarter
- -------------------------------------
Year 2000
- ---------
Our comprehensive strategy for updating our information management and
manufacturing systems for Year 2000, or Y2K, compliance appears to have been
successful. Our information technology ("IT") systems appear to be working
properly, with only a few minor glitches as a result of Y2K problems. We are
continuing to monitor all of our systems for any current or future problems. We
have not to date experienced any material Y2K problems related to any of our
vendors or customers. We incurred approximately $275,000 in costs related to
addressing Y2K issues during fiscal 1999 and the first two quarters of fiscal
2000, and approximately $25,000 more during December 1999.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board 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 was effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, which delays implementation of SFAS No. 133 until fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to
have a material effect on the Company's financial position.
16
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 1999 and May 31, 1999
November 30, May 31,
1999 1999
ASSETS (Unaudited) (Audited)
- -------------------------------------------------------- -------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 3,582,000 $ 8,134,000
Accounts receivable, net 23,526,000 24,992,000
Inventories 25,663,000 24,616,000
Deferred income taxes 879,000 880,000
Prepaid expense and other 2,393,000 2,316,000
-------------- --------------
Total Current Assets 56,043,000 60,938,000
-------------- --------------
PROPERTY AND EQUIPMENT, NET 45,930,000 45,279,000
-------------- --------------
OTHER ASSETS
Note receivable, net 2,500,000 1,458,000
Investment 19,000 72,000
Costs in excess of net book value of acquired
subsidiaries, net 41,973,000 41,052,000
Patents, net 1,209,000 1,255,000
Deferred income taxes 3,180,000 3,395,000
Deferred financing costs, net 4,633,000 5,029,000
Other assets 322,000 249,000
-------------- --------------
Total Other Assets 53,836,000 52,510,000
-------------- --------------
TOTAL ASSETS $ 155,809,000 $ 158,727,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 9,924,000 $ 10,484,000
Accrued liabilities 3,899,000 5,615,000
Accrued interest 2,859,000 2,813,000
Current portion of long-term debt 1,129,000 1,278,000
Current portion of capital lease obligations 208,000 297,000
Line of credit 5,648,000 0
Other current liabilities 60,000 2,122,000
-------------- --------------
Total Current Liabilities 23,727,000 22,609,000
-------------- --------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 4,855,000 5,220,000
Capital lease obligations, net of current portion 1,462,000 1,615,000
Senior subordinated notes payable 75,000,000 75,000,000
Deferred rent and other 303,000 264,000
-------------- --------------
Total Long-Term Liabilities 81,620,000 82,099,000
-------------- --------------
TOTAL LIABILITIES 105,347,000 104,708,000
-------------- --------------
STOCKHOLDERS' EQUITY
Convertible preferred stock - -
Common stock 20,000 19,000
Additional paid-in capital 69,331,000 69,276,000
Accumulated other comprehensive loss (1,232,000) (1,140,000)
Accumulated deficit (17,657,000) (14,136,000)
-------------- --------------
Total Stockholders' Equity 50,462,000 54,019,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 155,809,000 $ 158,727,000
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Second Quarters and Six Months Ended November 30, 1999 and 1998
Quarters Ended Six Months Ended
---------------------------- ----------------------------
November 30, November 30, November 30, November 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 29,000,000 $ 30,477,000 $ 57,571,000 $ 49,655,000
COST OF SALES
Inventory impairment - 1,600,000 - 1,600,000
Other cost of sales 23,749,000 24,055,000 45,760,000 38,559,000
------------- ------------- ------------- -------------
TOTAL COST OF SALES 23,749,000 25,655,000 45,760,000 40,159,000
------------- ------------- ------------- -------------
GROSS PROFIT 5,251,000 4,822,000 11,811,000 9,496,000
OPERATING EXPENSES 4,582,000 4,355,000 9,686,000 8,131,000
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 669,000 467,000 2,125,000 1,365,000
------------- ------------- ------------- -------------
OTHER INCOME AND EXPENSE
Interest Income 5,000 137,000 53,000 363,000
Interest Expense (2,604,000) (2,683,000) (5,152,000) (3,752,000)
Other (14,000) (196,000) (11,000) (6,917,000)
------------- ------------- ------------- -------------
(2,613,000) (2,742,000) (5,110,000) (10,306,000)
------------- ------------- ------------- -------------
NET LOSS BEFORE INCOME TAX (1,944,000) (2,275,000) (2,985,000) (8,941,000)
PROVISION FOR INCOME TAXES (70,000) (300,000) (535,000) 1,955,000
------------- ------------- ------------- -------------
NET LOSS (2,014,000) (2,575,000) (3,520,000) (6,986,000)
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation (142,000) (1,220,000) (139,000) 494,000
Income tax benefit (expense) 48,000 415,000 47,000 (168,000)
Valuation of available for sale securities - - - 436,000
------------- ------------- ------------- -------------
(94,000) (805,000) (92,000) 762,000
------------- ------------- ------------- -------------
COMPREHENSIVE LOSS $ (2,108,000) $ (3,380,000) $ (3,612,000) $ (6,224,000)
============= ============= ============= =============
NET LOSS PER SHARE:
BASIC $ (0.10) $ (0.15) $ (0.18) $ (0.43)
DILUTED $ (0.10) $ (0.15) $ (0.18) $ (0.43)
SHARES USED IN COMPUTATION OF
NET LOSS PER SHARE:
BASIC 19,992,000 16,731,000 19,547,000 16,073,000
DILUTED 19,992,000 16,731,000 19,547,000 16,073,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended November 30, 1999 and 1998
Six Months Ended
---------------------------------
November 30, November 30,
1999 1998
(Unaudited) (Unaudited)
-------------- --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ (3,251,000) $ (184,000)
-------------- --------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,509,000) (3,592,000)
Proceeds from sale of property and equipment 10,000 -
Acquisition of subsidiaries (1,282,000) (69,146,000)
Increase in notes receivable (1,505,000) -
-------------- --------------
Net cash from investing activities (5,286,000) (72,738,000)
-------------- --------------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit 5,648,000 (1,511,000)
Proceeds from long-term debt - 72,622,000
Payments on long-term debt and capital leases (1,700,000) (4,824,000)
Sale of common stock, net of issuance costs 55,000 4,838,000
Sale of preferred stock, net of issuance costs - 6,707,000
-------------- --------------
Net cash from financing activities 4,003,000 77,832,000
-------------- --------------
NET CHANGE IN CASH (4,534,000) 4,910,000
CASH AT BEGINNING OF PERIOD 8,134,000 11,461,000
EFFECT OF EXCHANGE RATES ON CASH (18,000) 21,000
-------------- --------------
CASH AT END OF PERIOD $ 3,582,000 $ 16,392,000
============== ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Seller financed acquisition of property, plant and equipment $ - $ 290,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
19
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Second Quarters and Six Months Ended November 30, 1999 and 1998
Management's Statement
- ----------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form 10-Q instructions and, in the opinion of management,
contain all adjustments necessary to present fairly the Company's consolidated
financial position as of November 30, 1999 and May 31, 1999, the consolidated
results of operations for the quarters and six months ended November 30, 1999
and 1998, and the consolidated statements of cash flows for the six months ended
November 30, 1999 and 1998. 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 consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the years ended May 31, 1999 and 1998.
The results of operations for the quarter and six months ended November 30, 1999
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: Net Income (Loss) Per Share:
Basic income (loss) per share is computed using the weighted average number of
common shares outstanding during the period. Diluted income (loss) 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.
As the Company had a net loss for the periods ended November 30, 1999 and 1998,
basic and diluted net loss per share are the same.
Note 2: Inventories
Components of inventories are as follows:
November 30, May 31,
1999 1999
------------- -------------
Raw materials $ 5,349,000 $ 7,374,000
Work in progress 14,396,000 11,478,000
Finished goods 5,918,000 5,764,000
------------- -------------
Total $ 25,663,000 $ 24,616,000
============= =============
20
<PAGE>
Note 3: Liquidity
During the quarter and six months ended November 30, 1999, the Company's
operating activities used cash of $292,000 and $3.3 million, respectively. Cash
at November 30, 1999 was $3.6 million (compared to $8.1 million at May 31,
1999). All but $322,000 of the cash resides at subsidiaries that are not
guarantors of the Company's 11 1/4% senior subordinated notes. Remittance of
cash from non-guarantor subsidiaries may cause the Company to incur income tax
expense in the U.S. on the amount of earnings of the Company's foreign
subsidiaries. During the six months ended November 30, 1999, the Company
borrowed $5.6 million under a previously unused $6.3 million line of credit. The
Company believes that its working capital and unused lines of credit are
sufficient to meet its obligations as they become due during fiscal 2000.
However, the Company may need to obtain additional cash during or after fiscal
2000. Should the Company need to dispose of assets to generate cash, there is no
assurance that the carrying values will be realizable upon liquidation outside
of the ordinary course of business. The Company's inability to obtain additional
cash if and when needed could have a material adverse effect on its financial
position and results of operations.
Note 4: 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, have been guaranteed by all of the Company's U.S. wholly owned
subsidiaries. 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.
21
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
November 30, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 300,000 $ 22,000 $ 3,260,000 $ - $ 3,582,000
Accounts receivable, net - 9,377,000 14,458,000 (309,000) 23,526,000
Inventories - 14,150,000 11,513,000 - 25,663,000
Other 2,183,000 1,312,000 878,000 (1,101,000) 3,272,000
------------- ------------- ------------- ------------- -------------
Total current assets 2,483,000 24,861,000 30,109,000 (1,410,000) 56,043,000
PROPERTY AND EQUIPMENT, net 6,472,000 22,959,000 16,499,000 - 45,930,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net - 4,232,000 37,741,000 - 41,973,000
Investment 19,000 - - - 19,000
Investment in and loans to
subsidiaries 117,689,000 72,618,000 - (190,307,000) -
Other 9,371,000 2,587,000 (114,000) - 11,844,000
------------- ------------- ------------- ------------- -------------
Total other assets 127,079,000 79,437,000 37,627,000 (190,307,000) 53,836,000
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 136,034,000 $ 127,257,000 $ 84,235,000 $(191,717,000) $ 155,809,000
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 364,000 $ 2,772,000 $ 7,097,000 $ (309,000) $ 9,924,000
Current portion of long-term debt 165,000 964,000 - - 1,129,000
Line of credit 5,648,000 - - - 5,648,000
Other 2,983,000 1,680,000 3,464,000 (1,101,000) 7,026,000
------------- ------------- ------------- ------------- -------------
Total current liabilities 9,160,000 5,416,000 10,561,000 (1,410,000) 23,727,000
LONG-TERM LIABILITIES
Long-term debt, net of current
portion 76,302,000 3,553,000 - - 79,855,000
Intercompany note and loan payable - 65,067,000 38,957,000 (104,024,000) -
Other 110,000 811,000 844,000 - 1,765,000
------------- ------------- ------------- ------------- -------------
Total long-term liabilities 76,412,000 69,431,000 39,801,000 (104,024,000) 81,620,000
STOCKHOLDERS' EQUITY
Convertible preferred stock - - - - -
Common stock 20,000 56,139,000 33,710,000 (89,849,000) 20,000
Additional paid-in capital 69,331,000 - - - 69,331,000
Accumulated other comprehensive loss (1,232,000) - (1,232,000) 1,232,000 (1,232,000)
Retained earnings (accumulated
deficit) (17,657,000) (3,729,000) 1,395,000 2,334,000 (17,657,000)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity 50,462,000 52,410,000 33,873,000 (86,283,000) 50,462,000
------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 136,034,000 $ 127,257,000 $ 84,235,000 $(191,717,000) $ 155,809,000
============= ============= ============= ============= =============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
May 31, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,798,000 $ 39,000 $ 6,297,000 $ - $ 8,134,000
Accounts receivable, net - 8,723,000 16,661,000 (392,000) 24,992,000
Inventories - 13,564,000 11,052,000 - 24,616,000
Other 4,535,000 1,517,000 660,000 (3,516,000) 3,196,000
------------- ------------- ------------- ------------- -------------
Total current assets 6,333,000 23,843,000 34,670,000 (3,908,000) 60,938,000
PROPERTY AND EQUIPMENT, net 6,151,000 21,930,000 17,198,000 - 45,279,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net - 2,717,000 38,335,000 - 41,052,000
Investment in common stock, net 72,000 - - - 72,000
Investment in and loans to
subsidiaries 115,099,000 75,000,000 85,000 (190,184,000) -
Other 8,254,000 3,295,000 (163,000) - 11,386,000
------------- ------------- ------------- ------------- -------------
Total other assets 123,425,000 81,012,000 38,257,000 (190,184,000) 52,510,000
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 135,909,000 $ 126,785,000 $ 90,125,000 $(194,092,000) $ 158,727,000
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 180,000 $ 2,542,000 $ 8,154,000 $ (392,000) $ 10,484,000
Current portion of long-term debt 138,000 1,140,000 - - 1,278,000
Other 5,084,000 1,597,000 7,682,000 (3,516,000) 10,847,000
------------- ------------- ------------- ------------- -------------
Total current liabilities 5,402,000 5,279,000 15,836,000 (3,908,000) 22,609,000
LONG-TERM LIABILITIES
Long-term debt, net of current
portion 76,375,000 3,845,000 - - 80,220,000
Intercompany note and loan payable 85,000 61,869,000 37,500,000 (99,454,000) -
Other 28,000 1,105,000 746,000 - 1,879,000
------------- ------------- ------------- ------------- -------------
Total long-term liabilities 76,488,000 66,819,000 38,246,000 (99,454,000) 82,099,000
STOCKHOLDERS' EQUITY
Convertible preferred stock - - - - -
Common stock 19,000 58,641,000 35,117,000 (93,758,000) 19,000
Additional paid-in capital 69,276,000 - - - 69,276,000
Accumulated other comprehensive
loss (1,140,000) - (1,136,000) 1,136,000 (1,140,000)
Retained earnings (accumulated
deficit) (14,136,000) (3,954,000) 2,062,000 1,892,000 (14,136,000)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity 54,019,000 54,687,000 36,043,000 (90,730,000) 54,019,000
------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 135,909,000 $ 126,785,000 $ 90,125,000 $(194,092,000) $ 158,727,000
============= ============= ============= ============= =============
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Quarter Ended November 30, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 14,605,000 $ 14,960,000 $ (565,000) $ 29,000,000
Cost of Sales - 11,509,000 12,805,000 (565,000) 23,749,000
------------- ------------- ------------- ------------- -------------
Gross profit - 3,096,000 2,155,000 - 5,251,000
Operating expenses 1,410,000 3,219,000 1,295,000 (1,342,000) 4,582,000
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (1,410,000) (123,000) 860,000 1,342,000 669,000
Other income (expense)
Parent's share of
subsidiaries net loss (465,000) - - 465,000 -
Interest expense (2,471,000) (1,192,000) (1,107,000) 2,166,000 (2,604,000)
Other 2,353,000 1,141,000 5,000 (3,508,000) (9,000)
------------- ------------- ------------- ------------- -------------
Total other income (expense) (583,000) (51,000) (1,102,000) (877,000) (2,613,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes (1,993,000) (174,000) (242,000) 465,000 (1,944,000)
Income tax benefit (expense) - - (70,000) - (70,000)
------------- ------------- ------------- ------------- -------------
Net income (loss) (1,993,000) (174,000) (312,000) 465,000 (2,014,000)
Other comprehensive income (loss)
Foreign currency
translation, net of tax - - (94,000) - (94,000)
Adjustment for unrealized
loss on investment - - - - -
------------- ------------- ------------- ------------- -------------
Total other comprehensive
income (loss) - - (94,000) - (94,000)
------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) $ (1,993,000) $ (174,000) $ (406,000) $ 465,000 $ (2,108,000)
============= ============= ============= ============= =============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Quarter Ended November 30, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 14,925,000 $ 16,098,000 $ (546,000) $ 30,477,000
Cost of Sales - 13,099,000 13,102,000 (546,000) 25,655,000
------------- ------------- ------------- ------------- -------------
Gross profit - 1,826,000 2,996,000 - 4,822,000
Operating expenses 1,057,000 2,779,000 1,080,000 (561,000) 4,355,000
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (1,057,000) (953,000) 1,916,000 561,000 467,000
Other income (expense)
Parent's share of subsidiaries
net income (loss) (1,156,000) - - 1,156,000 -
Interest expense (2,533,000) (143,000) (1,413,000) 1,406,000 (2,683,000)
Other 2,171,000 (263,000) - (1,967,000) (59,000)
------------- ------------- ------------- ------------- -------------
Total other income (expense) (1,518,000) (406,000) (1,413,000) 595,000 (2,742,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes (2,575,000) (1,359,000) 503,000 1,156,000 (2,275,000)
Income tax benefit (expense) - - (300,000) - (300,000)
------------- ------------- ------------- ------------- -------------
Net income (loss) (2,575,000) (1,359,000) 203,000 1,156,000 (2,575,000)
Other comprehensive income (loss)
Foreign currency translation,
net of tax (805,000) - (805,000) 805,000 (805,000)
------------- ------------- ------------- ------------- -------------
Total other comprehensive
income (loss) (805,000) - (805,000) 805,000 (805,000)
------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) $ (3,380,000) $ (1,359,000) $ (602,000) $ 1,961,000 $ (3,380,000)
============= ============= ============= ============= =============
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Six Months Ended November 30, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 29,116,000 $ 29,333,000 $ (878,000) $ 57,571,000
Cost of Sales - 22,082,000 24,556,000 (878,000) 45,760,000
------------- ------------- ------------- ------------- -------------
Gross profit - 7,034,000 4,777,000 - 11,811,000
Operating expenses 2,977,000 6,421,000 2,950,000 (2,662,000) 9,686,000
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (2,977,000) 613,000 1,827,000 2,662,000 2,125,000
Other income (expense)
Parent's share of subsidiaries
net income (loss) (538,000) - - 538,000 -
Interest expense (4,861,000) (2,420,000) (2,207,000) 4,336,000 (5,152,000)
Other 4,766,000 2,239,000 35,000 (6,998,000) 42,000
------------- ------------- ------------- ------------- -------------
Total other income (expense) (633,000) (181,000) (2,172,000) (2,124,000) (5,110,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes (3,610,000) 432,000 (345,000) 538,000 (2,985,000)
Income tax benefit (expense) (6,000) (207,000) (322,000) - (535,000)
------------- ------------- ------------- ------------- -------------
Net income (loss) (3,616,000) 225,000 (667,000) 538,000 (3,520,000)
Other comprehensive income (loss)
Foreign currency translation, net
of tax 4,000 - (96,000) - (92,000)
Adjustment for unrealized loss on
investment - - - - -
------------- ------------- ------------- ------------- -------------
Total other comprehensive income
(loss) 4,000 - (96,000) - (92,000)
------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) $ (3,612,000) $ 225,000 $ (763,000) $ 538,000 $ (3,612,000)
============= ============= ============= ============= =============
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Six Months Ended November 30, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 30,206,000 $ 20,559,000 $ (1,110,000) $ 49,655,000
Cost of Sales - 24,503,000 16,766,000 (1,110,000) 40,159,000
------------- ------------- ------------- ------------- -------------
Gross profit - 5,703,000 3,793,000 - 9,496,000
Operating expenses 1,790,000 5,916,000 1,553,000 (1,128,000) 8,131,000
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (1,790,000) (213,000) 2,240,000 1,128,000 1,365,000
Other income (expense)
Parent's share of subsidiaries
net income (loss) (2,920,000) - - 2,920,000 -
Interest expense (3,412,000) (326,000) (1,420,000) 1,406,000 (3,752,000)
Other (262,000) (3,767,000) 9,000 (2,534,000) (6,554,000)
------------- ------------- ------------- ------------- -------------
Total other income (expense) (6,594,000) (4,093,000) (1,411,000) 1,792,000 (10,306,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes (8,384,000) (4,306,000) 829,000 2,920,000 (8,941,000)
Income tax benefit (expense) 1,398,000 1,002,000 (445,000) - 1,955,000
------------- ------------- ------------- ------------- -------------
Net income (loss) (6,986,000) (3,304,000) 384,000 2,920,000 (6,986,000)
Other comprehensive income (loss)
Foreign currency translation,
net of tax 326,000 - 326,000 (326,000) 326,000
Adjustment for unrealized loss
on investment 436,000 - - - 436,000
------------- ------------- ------------- ------------- -------------
Total other comprehensive
income (loss) 762,000 - 326,000 (326,000) 762,000
------------- ------------- ------------- ------------- -------------
Comprehensive income (loss) $ (6,224,000) $ (3,304,000) $ 710,000 $ 2,594,000 $ (6,224,000)
============= ============= ============= ============= =============
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Six Months Ended November 30, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
- ------------------------------------
Net cash provided by (used in)
operating activities $ (2,818,000) $ 1,343,000 $ (2,314,000) $ 538,000 $ (3,251,000)
CASH FLOW FROM INVESTING ACTIVITIES:
- ------------------------------------
Acquisition of property, plant and
equipment (530,000) (1,264,000) (715,000) - (2,509,000)
Acquisition of subsidiaries (1,282,000) - - - (1,282,000)
Other changes, net (2,440,000) 10,000 85,000 850,000 (1,495,000)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities (4,252,000) (1,254,000) (630,000) 850,000 (5,286,000)
CASH FLOW FROM FINANCING ACTIVITIES:
- ------------------------------------
Net borrowings under line of credit 5,648,000 - - - 5,648,000
Payments on long-term debt and
capital leases (46,000) (1,529,000) (125,000) - (1,700,000)
Proceeds from sale of common
stock, net 55,000 - - - 55,000
Other changes, net (85,000) 1,423,000 50,000 (1,388,000) -
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 5,572,000 (106,000) (75,000) (1,388,000) 4,003,000
NET CHANGE IN CASH (1,498,000) (17,000) (3,019,000) - (4,534,000)
CASH AT BEGINNING OF PERIOD 1,798,000 39,000 6,297,000 - 8,134,000
EFFECT OF EXCHANGE RATES ON CASH - - (18,000) - (18,000)
------------- ------------- ------------- ------------- -------------
CASH AT END OF PERIOD $ 300,000 $ 22,000 $ 3,260,000 $ - $ 3,582,000
============= ============= ============= ============= =============
SUPPLEMENTAL CASH FLOW:
- -----------------------
Noncash operating expenses related to:
Depreciation $ 208,000 $ 1,531,000 $ 1,380,000 $ - $ 3,119,000
Amortization - 215,000 494,000 - 709,000
Cash paid during the period for:
Interest 4,504,000 252,000 4,618,000 (4,577,000) 4,797,000
Income taxes - - 1,705,000 - 1,705,000
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Six Months Ended November 30, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
- ------------------------------------
Net cash provided by (used in)
operating activities $ (2,748,000) $ 1,080,000 $ 187,000 $ 1,297,000 $ (184,000)
CASH FLOW FROM INVESTING ACTIVITIES:
- ------------------------------------
Acquisition of property, plant and
equipment (779,000) (2,327,000) (486,000) - (3,592,000)
Acquisition of subsidiaries (69,146,000) (73,617,000) (73,617,000) 147,234,000 (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) (75,944,000) (71,076,000) 151,076,000 (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 37,500,000 37,500,000 (75,000,000) 72,622,000
Proceeds from sale of common
stock, net 4,838,000 36,117,000 36,117,000 (72,234,000) 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 76,183,000 73,939,000 (152,373,000) 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 property,
plant and equipment 128,000 162,000 - - 290,000
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED MAY 31, 1999
The following discussion was contained in the Company's annual report on Form
10-K for the fiscal year ended May 31, 1999 and relates to the audited
consolidated financial statements contained in that report. This discussion
should be read in conjunction with those statements and the related notes
thereto.
Overview
The Company has been an active consolidator of companies, and its results of
operations have been substantially affected by acquisitions. The Company has
acquired and integrated eleven companies since 1990. 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").
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 has had a significant effect
on the Company's operations and on comparisons of income, expense, and balance
sheet items in periods after July 1998. The Company's financial results for
fiscal 1999 include ten months of operations of Aeromet.
Substantially all of the Company's revenues are generated by sales to customers
in the commercial aerospace, defense, electronics, and transportation
industries, with commercial aerospace and defense industry sales being the most
significant. The commercial aerospace and defense industries are cyclical in
nature and subject to changes based on general economic conditions, and on
commercial airline industry, defense and government spending.
The Company's operations focus on developing, manufacturing and marketing high
performance electronics and metal components and assemblies. The Company's
electronics products are characterized by relatively low volumes and high
margins. In comparison, volumes have historically been higher and margins lower
for the Company's metals products. The Company believes that margins will remain
higher for electronic and assembled products than for its metals products.
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.
30
<PAGE>
Results of Operations
For an understanding of the significant factors that influenced the Company's
performance during the past three fiscal years, the following discussion should
be read in conjunction with the consolidated financial statements of the Company
presented in this Proxy Statement.
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,
-----------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..............$ 11,035 100.0% $ 20,725 100.0% $ 34,175 100.0% $ 54,099 100.0% $ 107,366 100.0%
Cost of sales.......... 9,092 82.4 16,439 79.3 25,969 76.0 39,487 73.0 86,094 80.2
------------------- ------------------- ------------------- ------------------- -------------------
Gross profit........... 1,943 17.6 4,286 20.7 8,206 24.0 14,612 27.0 21,272 19.8
Operating expenses..... 3,327 30.1 4,869 23.5 6,259 18.3 9,872 18.2 17,308 16.1
------------------- ------------------- ------------------- ------------------- -------------------
Income (loss) from
operations.......... (1,384) (12.5) (583) (2.8) 1,947 5.7 4,740 8.8 3,964 3.7
Net interest expense... (282) (2.6) (498) (2.4) (384) (1.1) (755) (1.4) (8,140) (7.6)
Other income (expense). 14 0.1 15 - 169 0.5 (853) (1.6) (11,332) (10.6)
Income tax benefit
(expense)........... 241 2.2 67 0.3 (50) (0.1) 482 0.9 2,639 2.5
------------------- ------------------- ------------------- ------------------- -------------------
Net income (loss)......$ (1,411) (12.8)% $ (999) (4.9)% $ 1,682 5.0% $ 3,614 6.7% $ (12,869) (12.0)%
=================== =================== =================== =================== ===================
EBITDA.................$ (976) (8.8)% $ 288 1.4% $ 3,305 9.7% $ 6,944 12.8% $ 10,669 9.9%
=================== =================== =================== =================== ===================
</TABLE>
Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
Net Sales. Net sales increased by $53.3 million, or 98.5%, to $107.4 million for
fiscal 1999 from $54.1 million in fiscal 1998. The significant increase in net
sales for fiscal 1999 from fiscal 1998 included a significant net sales
contribution from Aeromet ($52.8 million), and an increase in sales of
electronic products for aerospace, satellite and weapons systems (a $3.5 million
increase), offset by a decrease in commercial aerospace and transportation net
sales (a $3.0 million decrease). The commercial aerospace industry net sales
decrease was primarily attributable to decreases in production of certain
aircraft models and inventory minimization initiatives at Boeing.
The Company completed the Aeromet acquisition in July 1998. This acquisition
expanded the Company's operations to the European aerospace and defense markets,
as well as adding to the Company's core competencies in casting and forming.
Accordingly, net sales for fiscal 1999 included ten months of operations of
Aeromet, contributing $52.8 million in net sales.
Gross Profit. Gross profit increased by $6.7 million, or 45.9%, to $21.3 million
for fiscal 1999 from $14.6 million in fiscal 1998. As a percentage of net sales,
gross profit decreased to 19.8% in fiscal 1999 from 27.0% in fiscal 1998. This
percentage decrease was primarily attributable to three factors. First, the
addition of Aeromet has caused consolidated average margins to be lower because
casting segment gross profits have been historically lower, generally in the 18%
to 22% range (gross profits on Aeromet net sales for fiscal 1999 were 20%).
Second, commercial aerospace net sales decreased during fiscal 1999. Third, the
Company recorded approximately $2.2 million in non-recurring adjustments to
inventories, which reduced gross profits 2.1% for fiscal 1999.
Operating Expenses. Operating expenses increased by $7.4 million, or 75.3%, to
$17.3 million for fiscal 1999 from $9.9 million in fiscal 1998. The Aeromet
acquisition added $3.6 million, corporate operational costs added $2.0 million,
and the remainder of $2.2 million was attributable to general cost increases in
operating businesses. As a percentage of net sales, operating expenses decreased
from 18.2% to 16.1%.
EBITDA. EBITDA, as defined, increased by $3.7 million, or 53.6%, to $10.7
million for fiscal 1999 from $6.9 million in fiscal 1998. As a percentage of net
sales, EBITDA decreased to 9.9% in fiscal 1999
31
<PAGE>
from 12.8% in fiscal 1998. The decrease in EBITDA as a percentage of net sales
during this period was primarily attributable to $2.2 million in non-recurring
adjustments to inventories recorded during the year and the decreased gross
profit due to the decline in commercial aerospace net sales and Aeromet's lower
margins.
Net Interest Expense. Net interest expense increased $7.4 million, or 980.1%, to
$8.1 million for fiscal 1999 from $755,000 in fiscal 1998. This increase was
primarily due to the Company's financing of the Aeromet acquisition in July 1998
with the issuance of $75.0 million of 11 1/4% senior subordinated notes (a $7.7
million increase in interest expense and the associated amortization of issuance
costs).
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other expense increased to
$11.3 million in fiscal 1999 from $853,000 in fiscal 1998. This increase of
$10.5 million was due principally to a $7.8 million write-down of the Company's
investment in Orca Technologies, Inc., a write-off of $2.0 million of goodwill,
net, associated with the acquisition of Electronic Specialty Corporation ("ESC")
in April 1998, and a $1.1 million write-down for long-lived asset impairment at
ESC.
Net Income. Net income decreased $16.5 million, to a $12.9 million loss for
fiscal 1999 from a $3.6 million income in fiscal 1998, primarily as a result of
the factors discussed above. Income tax benefit increased $2.1 million, to $2.6
million for fiscal 1999 from $482,000 in fiscal 1998, primarily as a result of
the net operating losses incurred in fiscal 1999.
32
<PAGE>
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 acquisition of Balo Precision Parts, Inc. ("Balo") 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. 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.
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 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.
33
<PAGE>
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 Northwest Technical Industries, Inc. ("NTI") in April 1997,
which added capabilities for explosive bonding of specialty metals. 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 Ceramic Devices,
Inc. in the U.S. Electronics Group and Cashmere Manufacturing Co., Inc. in the
U.S. Aerospace Group were consolidated into the Company's Wenatchee
manufacturing campus.
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.
34
<PAGE>
Liquidity and Capital Resources
Cash used in operating activities was $372,000 for fiscal 1999 compared to cash
provided by operating activities of $1.6 million in fiscal 1998. The change in
net cash from operations was primarily a result of the net loss for the year and
decreases in accounts payable, accrued liabilities and other liabilities,
partially offset by decreases in inventories.
Cash used in investing activities increased from $16.7 million in fiscal 1998 to
$79.3 million in fiscal 1999, an increase of $62.6 million. The change results
primarily from the Company's acquisition of Aeromet in July 1998 ($69.4 million)
and increased investment in property and equipment of $8.0 million in fiscal
1999 compared to $6.5 million in fiscal 1998, partially offset by a $4.8 million
decrease in issuance of notes receivable.
Cash generated from financing activities increased by $52.9 million, to $76.4
million in fiscal 1999, from $23.5 million in fiscal 1998. During fiscal 1999,
the Company completed several financing transactions. As a result, the Company
received net proceeds of: (i) $71.7 million from the issuance of senior
subordinated notes to support the Aeromet acquisition; (ii) $4.9 million from
the sale of Common Stock; and (iii) $6.6 million from the sale of Series B
Convertible Preferred Stock. Cash generated by the debt and equity financing
transactions was offset to a certain degree by payments on long-term debt and
capital leases of $5.8 million and financing costs of $1.0 million during fiscal
1999.
At May 31, 1999, the Company's primary banking relationships include a revolving
line of credit of up to $6.3 million for the Company's U.S. operations, which
expires in September 1999, and a revolving line of credit up to approximately
$7.2 million (4.5 million pounds sterling) for the Company's U.K. operations,
which expired in July 1999. The Company is currently negotiating with its
lenders to renew these lines of credit. As of May 31, 1999, both revolving lines
of credit were unused.
Capital expenditures, other than for the Aeromet acquisition, were approximately
$8.1 million in fiscal 1999. Of this amount, $2.7 million was for a building and
land and approximately $5.4 million was for equipment. Included in the amount
spent for capital equipment was the purchase of substantially all the assets of
Lyden Castparts, Inc. ("Lyden") from a related party by the Company's Aeromet
America, Inc. subsidiary. The purchase price consisted of approximately $642,000
of Lyden's liabilities, which the Company paid, plus approximately $300,000 in
assumed liabilities consisting primarily of trade payables. On June 1, 1999, the
Company acquired all of the stock of Skagit Engineering & Manufacturing, Inc.
for $1.3 million in cash. The Company has also entered into a letter of intent
to acquire Nova-Tech Engineering, Inc. ("Nova-Tech"). The Company is negotiating
the terms of a stock purchase agreement with Nova-Tech's shareholders and
expects that the purchase price will consist of approximately $2.7 million in
cash and $250,000 in stock. The Company expects that the definitive stock
purchase agreement will contain conditions to closing, including receipt of a
letter ruling from the Internal Revenue Service that is necessary to permit
Nova-Tech's Employee Stock Ownership Plan to sell its Nova-Tech stock on the
terms anticipated. The Company is providing services to Nova-Tech under an
Operating Agreement dated April 23, 1999. As of May 31, 1999, the Company had
loaned $735,000 to Nova-Tech for working capital. As of August 19, 1999, the
Company had loaned Nova-Tech an additional $1,365,000. These loans have been
made under the terms of two demand notes dated April 26, 1999 and August 5,
1999, each of which is secured by substantially all of the assets of Nova-Tech.
As of May 31, 1999, the Company had no other material commitments outstanding
for purchases of additional capital assets.
In December 1998, the Company entered into an agreement giving it the option to
purchase three parcels of land that make up its Wenatchee campus from the Port
of Chelan County for $5.4 million. The purchase of the first parcel was
completed in early February 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 in December 2000 and the third is expected to close in August
2001.
35
<PAGE>
The Company's working capital, as of May 31, 1999 and 1998 was $38.3 million and
$25.6 million, respectively. The increase in working capital in fiscal 1999 over
fiscal 1998 was primarily the result of debt and equity financing activities. In
July 1998, the Company completed an offering of $75.0 million of 11 1/4% senior
subordinated notes (the "Old Notes") to qualified institutional buyers to
finance the Aeromet acquisition. In February 1999, the Company exchanged the Old
Notes for new senior subordinated notes (the "Notes") of an equal principal
amount. The Notes will mature on August 1, 2005, unless previously redeemed. The
Notes will be redeemable at the option of the Company on or after August 1,
2003. In addition, on or before August 1, 2001, the Company may redeem up to 20%
of the original aggregate principal amount of the Notes, subject to certain
conditions.
The Company believes that the current cash balances and credit facilities, plus
cash from future operations, will be sufficient to meet the Company's operating
cash requirements and to fund budgeted capital expenditures. The Company may,
however, need to issue more equity in the future to fund possible acquisition
opportunities, or to fund the eventual redemption or repayment of the Notes used
to finance the Aeromet acquisition.
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, and 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 May 31, 1999.
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.
At May 31, 1999, the Company had net operating loss (NOLs) carryforwards for
federal income tax purposes of approximately $14.0 million, the benefits of
which expire in the tax year 2001 through the tax year 2019. 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 $1.0 million of the $14.0 million of NOLs will
never become available. At May 31, 1999, the Company recorded a valuation
allowance of $2.2 million because management believed that it was uncertain that
some portion or all of the deferred tax assets would be realized. At May 31,
1999, the Company had net deferred tax assets of $4.3 million, the realization
of which is dependent on material increases over present levels of pre-tax
income, primarily in the United States. The Company expects to achieve these
increases through continued integration, cross selling, and operational
efficiencies of its businesses. The Company anticipates that its effective
income tax rate will continue to approach the statutory rate in the future. In
addition, undistributed earnings of the Company's foreign subsidiaries, for
which no U.S. income taxes have been provided, aggregated approximately $3.7
million at May 31, 1999. No provision for foreign withholding or U.S. federal
income taxes was made for the undistributed earnings, as it is management's
intention that earnings will be reinvested indefinitely in foreign operations or
will be remitted substantially free of additional taxes.
36
<PAGE>
Significant 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.
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 IBJ Schroder Bank & Trust Company (now
known as IBJ Whitehall Bank & Trust Company), as trustee (the "Trustee"). In
February 1999, the Company exchanged the Old Notes for new senior subordinated
notes (the "Notes") of an equal principal amount and registered the Notes on a
Form S-4 Registration Statement, which was declared effective on January 22,
1999. The terms of the Notes are substantially identical to the terms of the Old
Notes, except that they are not subject to transfer restrictions or registration
rights, unless held by certain broker-dealers, affiliates or certain other
persons. The 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. operating subsidiaries.
The Company is subject to a number of restrictive covenants under the Indenture.
In addition, if there is a change of control of the Company's Common Stock, the
Company may be required to repay the Notes.
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 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.
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 fiscal
1999.
37
<PAGE>
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 Offering 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 gross purchase price of $17 million. On
October 30, 1998, the Company filed a Form S-1 Registration Statement covering
resale of up to 3,000,000 shares of Common Stock issuable upon conversion of the
Preferred Stock and 236,109 shares issuable upon exercise of the related
warrants. The Registration Statement was declared effective on December 23,
1998.
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 the placement agent in connection with the offering. The Company
agreed to file a registration statement registering these shares for resale
during April 1999. The Company offered to file such a registration statement
prior to that date, but as of August 24, 1999, the investors have not elected to
have the Company proceed with the registration.
Electronic Specialty Corporation Settlement
In April 1999, the Company reached a settlement with Deltec Holdings, Inc.
("Deltec Holdings") and certain parties related to Deltec Holdings, with respect
to the purchase of the Company's wholly-owned subsidiary, ESC. As of March 1,
1998, a wholly-owned subsidiary of the Company purchased substantially all of
the assets of Deltec Holdings, which had been known as Electronic Specialty
Corporation (the "ESC Acquisition"). In consideration for the purchase, the
Company delivered to Deltec Holdings $2 million in cash and 923,304 shares of
restricted Common Stock. The number of shares issued was determined based on a
per share value of $6.4984, which was the average closing price of the Company's
Common Stock on the Nasdaq National Market System for the 20 consecutive trading
days preceding the closing date.
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 Deltec Holdings in the closing documents.
The Company took a number of actions, including reducing ESC's workforce,
appointing a new general manager, and reassessing ESC's business opportunities
and relationships with customers and suppliers. During the first quarter of
fiscal 1999, the Company wrote off its goodwill in ESC in the amount of
$3,581,000, and during the second quarter of fiscal 1999, the Company recorded a
$1.6 million non-recurring inventory write-down due to the discontinuation of an
unprofitable product line. In the fourth quarter of fiscal 1999, the Company
recorded a $1.1 million non-recurring charge for the impairment of long-lived
assets at ESC.
The Company made claims against Deltec Holdings based on Deltec Holdings'
representations and warranties in the Asset Purchase Agreement related to the
ESC acquisition. The parties settled those claims on April 2, 1999, and Deltec
Holdings agreed to return to the Company for cancellation 225,000 of the shares
of Common Stock that it received as part of the purchase price. The settlement
resulted in the Company recognizing a non-recurring gain of $1.4 million during
the fourth quarter of fiscal 1999.
38
<PAGE>
Orca Technologies, Inc.
At May 31, 1999, the Company held 2,289,309 shares (the "Orca Shares") of common
stock of Orca Technologies, Inc. ("Orca"), which, to the Company's knowledge,
constituted approximately 14% of Orca's issued and outstanding common stock. The
Company acquired 179,600 of the Orca Shares in a market transaction, and
acquired 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. See "Notes to Consolidated
Financial Statements - Note 8" in the Company's financial statements for May 31,
1999. The Orca 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. The Company also
sublets its Bothell, Washington office space to Orca for a base rent of
approximately $32,000 per month.
As of May 31, 1998, the Company recorded a temporary unrealized loss, included
in stockholders' equity, on the Orca Shares of $436,000. During the year ended
May 31, 1999, the Company determined that the decline of the stock price was
other than a temporary decline in the fair value and recorded a loss of $4.9
million, which included the previous temporary unrealized loss and is included
in other expense. At May 31, 1999, the carrying value of the Company's
investment in the Orca Shares was $72,000. In addition, the Company recorded an
allowance for certain expenses and the guarantee of Orca's line of credit
totaling approximately $2.0 million, which has been included in other expense.
On June 29, 1999, the Company, as guarantor of Orca's line of credit, advanced
$300,000 for a partial repayment of the line of credit required by the lender.
As of May 31, 1999, Orca was ten months delinquent in its interest payments, and
the Company had not received the scheduled principal payments as outlined in the
Orca Note. The Company had reserved $250,000 of the Orca Note in the fourth
quarter of fiscal 1998, and during fiscal 1999, the Company reserved the
remaining balance of $700,000, which has been included in other expense. As of
May 31, 1999, Orca was also ten months delinquent on its lease payments to the
Company. The Company has retained a real estate broker and is negotiating to
sublease the Bothell space to a third party.
Year 2000
The Company is developing and carrying out a comprehensive strategy for updating
its information management and manufacturing systems for Year 2000 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 has been
made Y2K compliant through vendor-provided updates or replacement with other Y2K
compliant hardware and software. The Company has identified 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 that
required renovations, validation and implementations will be completed by
September 30, 1999.
The Company is continuing to identify 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
39
<PAGE>
more of these parties could result in a material adverse effect on the Company's
operating results and financial position. The Company is continuing to make
inquiries of these third parties to assess their Y2K readiness. The Company
expects that this process will continue throughout the remainder of calendar
1999.
The Company expects that costs to address Y2K issues will total approximately
$250,000, of which approximately $125,000 was spent in fiscal 1999, with the
remainder being spent during fiscal 2000. Costs include salary and fringe
benefits for personnel, hardware and software costs, and consulting and travel
expenses associated, directly or indirectly, with addressing Y2K issues. Y2K
issues have received a high priority within the Company and, as a result,
certain other IT projects have been delayed. While such non-Y2K projects are
expected to enhance operational efficiencies and improve the quality of
information available to management, the delay of such projects is not expected
to have a material adverse impact on the Company's operations. Worst case Y2K
scenarios could be as insignificant as a minor interruption in production or
shipping resulting from unanticipated problems encountered in the IT systems of
the Company or any of the significant third parties with whom the Company does
business. The pervasiveness of the Y2K issue makes it likely that previously
unidentified issues will require remediation during the normal course of
business. In such a case, the Company anticipates that transactions could be
processed manually while IT and other systems are repaired and that such
interruptions would have a minor effect on the Company's operations. On the
other hand, a worst case Y2K scenario could be as catastrophic as an extended
loss of utility service resulting from interruptions at the point of power
generation, long-line transmission, or local distribution to the Company's
production facilities. Such an interruption could result in an inability to
provide products to the Company's customers, resulting in a material adverse
effect on the Company's operating results and financial position. The Company is
in the process of developing a contingency plan in the event of a catastrophic
Y2K problem and expects to have a plan in place by September 30, 1999.
New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities. This accounting
standard, which is effective for fiscal years beginning after December 15, 1998,
requires that certain costs of start-up activities and organization costs be
expensed as incurred. The adoption of SOP 98-5 is not expected to have a
material effect on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board 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 was effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, which delays implementation of SFAS No. 133 until fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to
have a material effect on the Company's financial position or results of
operations.
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years 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 audits. The
accompanying consolidated statements of operations, stockholders' equity, and
cash flows of Pacific Aerospace & Electronics, Inc. for the year ended May 31,
1997 were audited by other auditors whose report thereon dated July 2, 1997,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Seattle, Washington
July 16, 1999, except as to note 24 which is as of August 19, 1999
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Pacific Aerospace & Electronics, Inc.
and subsidiaries for the year ended May 31, 1997. This consolidated financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this consolidated financial statement 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 statement referred to above presents
fairly, in all material respects, the results of operations and cash flows of
Pacific Aerospace & Electronics, Inc. and subsidiaries for the year ended May
31, 1997 in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Everett, Washington
July 2, 1997
42
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
May 31, 1998 and 1999
Assets 1998 1999
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,461,000 8,134,000
Accounts receivable, net of allowance for doubtful accounts of
$130,000 in 1998 and $355,000 in 1999 9,375,000 24,992,000
Inventories 16,184,000 24,616,000
Deferred income taxes 386,000 880,000
Prepaid expenses and other 272,000 2,316,000
--------------- ---------------
Total current assets 37,678,000 60,938,000
--------------- ---------------
Property, plant and equipment, net 26,335,000 45,279,000
--------------- ---------------
Other assets:
Notes receivable from related parties 700,000 1,458,000
Investment 4,579,000 72,000
Costs in excess of net book value of acquired subsidiaries, net of
accumulated amortization of $439,000 in 1998 and $1,430,000 in 1999 6,515,000 41,052,000
Patents, net of accumulated amortization of $307,000 in 1998
and $407,000 in 1999 1,229,000 1,255,000
Deferred financing costs, net of accumulated amortization of
$664,000 in 1999 -- 5,029,000
Deferred income taxes 222,000 3,395,000
Other 1,322,000 249,000
--------------- ---------------
Total other assets 14,567,000 52,510,000
--------------- ---------------
$ 78,580,000 158,727,000
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,748,000 10,484,000
Accrued liabilities 2,370,000 5,615,000
Accrued interest 217,000 2,813,000
Current portion of long-term debt 1,027,000 1,278,000
Current portion of capital lease obligations 206,000 297,000
Line of credit 1,511,000 --
Other current liabilities -- 2,122,000
--------------- ---------------
Total current liabilities 12,079,000 22,609,000
Long-term liabilities:
Long-term debt, net of current portion 9,059,000 5,220,000
Capital lease obligations, net of current portion 941,000 1,615,000
Senior subordinated notes payable -- 75,000,000
Deferred rent and other 359,000 264,000
--------------- ---------------
Total liabilities 22,438,000 104,708,000
--------------- ---------------
Stockholders' equity:
Series B convertible preferred stock, $0.001 par value, 5,000,000 shares
authorized, 100,000 shares issued and outstanding at May 31, 1998
and 161,035 shares issued and outstanding at May 31, 1999 -- --
Common stock, $0.001 par value, 100,000,000 shares authorized,
15,395,723 and 18,932,779 shares issued and outstanding at
May 31, 1998 and 1999, respectively 15,000 19,000
Additional paid-in capital 57,830,000 69,276,000
Cumulative other comprehensive loss (436,000) (1,140,000)
Accumulated deficit (1,267,000) (14,136,000)
--------------- ---------------
Total stockholders' equity 56,142,000 54,019,000
Commitments, contingencies and subsequent events -- --
--------------- ---------------
$ 78,580,000 158,727,000
=============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended May 31, 1997, 1998 and 1999
1997 1998 1999
------------------- ------------------ ------------------
<S> <C> <C> <C>
Net sales $ 34,175,000 54,099,000 107,366,000
Cost of sales 25,969,000 39,487,000 86,094,000
------------------- ------------------ ------------------
Gross profit 8,206,000 14,612,000 21,272,000
Operating expenses 6,259,000 9,872,000 17,308,000
------------------- ------------------ ------------------
Income from operations 1,947,000 4,740,000 3,964,000
------------------- ------------------ ------------------
Other income (expense):
Interest income 126,000 110,000 532,000
Interest expense (510,000) (865,000) (8,672,000)
Other 169,000 (853,000) (11,332,000)
------------------- ------------------ ------------------
(215,000) (1,608,000) (19,472,000)
------------------- ------------------ ------------------
Income (loss) before income tax
benefit (expense) 1,732,000 3,132,000 (15,508,000)
Income tax benefit (expense) (50,000) 482,000 2,639,000
------------------- ------------------ ------------------
Net income (loss) 1,682,000 3,614,000 (12,869,000)
------------------- ------------------ ------------------
Other comprehensive income (loss):
Foreign currency translation -- -- (1,727,000)
Income tax benefit -- -- 587,000
Valuation of available for sale securities -- (436,000) 436,000
------------------- ------------------ ------------------
Total other comprehensive loss -- (436,000) (704,000)
------------------- ------------------ ------------------
Comprehensive income (loss) $ 1,682,000 3,178,000 (13,573,000)
=================== ================== ==================
Net income (loss) per share:
Basic $ 0.18 0.29 (0.74)
Diluted 0.17 0.27 (0.74)
Shares used in computation of net income (loss)
per share:
Basic 9,499,980 12,486,077 17,359,491
Diluted 10,035,846 13,606,061 17,359,491
See accompanying notes to consolidated financial statements.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
(page 1 of 2)
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1997, 1998 and 1999
Series A Series B
convertible convertible
preferred stock preferred stock Common stock
----------------------- ------------------------ --------------------------
Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1996 -- $ -- -- $ -- 7,478,309 $ 8,000
Sale of common stock -- -- -- -- 2,264,400 2,000
Issuance of warrants -- -- -- -- -- --
Issuance of common stock
in connection with an acquisition -- -- -- -- 477,540 --
Sale of preferred stock for cash 50,000 -- -- -- -- --
Net income -- -- -- -- -- --
--------- --------- --------- --------- ---------- ----------
Balance at May 31, 1997 50,000 -- -- -- 10,220,249 10,000
Issuance of common stock -- -- -- -- 8,559 --
Sale of common stock for cash -- -- -- -- 524,000 1,000
Increase in preferred stock,
net of issuance costs -- -- 100,000 -- -- --
Issuance of warrants -- -- -- -- -- --
Exercise of warrants for cash,
net of tax effects of $99,000 -- -- -- -- 795,000 1,000
Issuance of common stock on
conversion of convertible notes
and accrued interest of $154,000 -- -- -- 1,405,018 1,000
Exercise of options for cash -- -- -- -- 25,000 --
Issuance of common stock on
conversion of preferred stock (50,000) -- -- -- 1,494,593 1,000
Unrealized losses on available
for sale securities -- -- -- -- -- --
Issuance of common stock
in connection with an acquisition -- -- -- -- 923,304 1,000
Net income -- -- -- -- -- --
--------- --------- --------- --------- ---------- ----------
Balance at May 31, 1998 100,000 15,395,723 15,000
Issuance of preferred stock, net of
issuance costs of $370,000 -- -- 70,000 -- -- --
Issuance of common stock for services -- -- -- -- 590,000 1,000
Cancellation of warrants -- -- -- -- -- --
Valuation of available for
sale securities -- -- -- -- -- --
Foreign currency translation adjustment
net of tax effect of $587,000 -- -- -- -- -- --
Issuance of common stock on
conversion of Series B preferred stock -- -- (8,965) -- 545,114 --
Issuance of common stock under
employee stock purchase plan, net
of related expense of $4,000 -- -- -- -- 41,942 --
Sale of common stock for cash, net of
issuance costs of $344,000 -- -- -- -- 2,585,000 3,000
Common shares redeemed in
connection with a prior acquisition -- -- -- -- (225,000) --
Net loss -- -- -- -- -- --
--------- --------- --------- --------- ---------- ----------
Balance at May 31, 1999 -- $ -- 161,035 $ -- 18,932,779 $ 19,000
========= ========= ========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
45a
<PAGE>
<TABLE>
<CAPTION>
(page 2 of 2)
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1997, 1998 and 1999
Accumulated
other
Additional compre- Total
paid-in hensive Accumulated stockholders'
capital loss deficit equity
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at May 31, 1996 19,094,000 -- (6,563,000) 12,539,000
Sale of common stock 5,347,000 -- -- 5,349,000
Issuance of warrants 16,000 -- -- 16,000
Issuance of common stock
in connection with an acquisition 1,552,000 -- -- 1,552,000
Sale of preferred stock for cash 4,481,000 -- 4,481,000
Net income -- -- 1,682,000 1,682,000
---------- ---------- ---------- ----------
Balance at May 31, 1997 30,490,000 -- (4,881,000) 25,619,000
Issuance of common stock 13,000 -- -- 13,000
Sale of common stock for cash 2,222,000 -- -- 2,223,000
Increase in preferred stock,
net of issuance costs 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 3,723,000 -- -- 3,724,000
Issuance of common stock on
conversion of convertible notes
and accrued interest of $154,000 5,518,000 -- -- 5,519,000
Exercise of options for cash 53,000 -- -- 53,000
Issuance of common stock on
conversion of preferred stock (1,000) -- -- --
Unrealized losses on available
for sale securities -- (436,000) -- (436,000)
Issuance of common stock
in connection with an acquisition 6,108,000 -- -- 6,109,000
Net income -- -- 3,614,000 3,614,000
---------- ---------- ---------- ----------
Balance at May 31, 1998 57,830,000 (436,000) (1,267,000) 56,142,00
Issuance of preferred stock, net of
issuance costs of $370,000 6,630,000 -- -- 6,630,000
Issuance of common stock for services 1,769,000 -- -- 1,770,000
Cancellation of warrants (360,000) -- -- (360,000)
Valuation of available for
sale securities -- 436,000 -- 436,000
Foreign currency translation adjustment
net of tax effect of $587,000 -- (1,140,000) -- (1,140,000)
Issuance of common stock on
conversion of Series B preferred stock -- -- -- --
Issuance of common stock under
employee stock purchase plan, net
of related expense of $4,000 72,000 -- -- 72,000
Sale of common stock for cash, net of
issuance costs of $344,000 4,823,000 -- -- 4,826,000
Common shares redeemed in
connection with a prior acquisition (1,488,000) -- -- (1,488,000)
Net loss -- -- (12,869,000) (12,869,000)
---------- ---------- ---------- ----------
Balance at May 31, 1999 69,276,000 (1,140,000) (14,136,000) 54,019,000
=========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
45b
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended May 31, 1997, 1998 and 1999
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 1,682,000 3,614,000 (12,869,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,358,000 2,204,000 6,705,000
Amortization of deferred finance costs -- -- 664,000
Allowance on note receivable and guarantees -- 250,000 2,884,000
Unrealized loss on investment -- -- 4,943,000
Loss on restructuring of note receivable -- 1,038,000 --
Loss recorded on impairment of long lived assets -- -- 3,275,000
Loss on sale of property, plant and equipment -- -- 86,000
Director compensation paid in common stock 44,000 13,000 --
Consulting services paid through issuance of
stock options and warrants 6,000 139,000 --
Federal income tax benefit -- (1,200,000) (4,287,000)
Changes in operating assets and liabilities:
Accounts receivable (1,774,000) (2,286,000) (121,000)
Inventories (1,951,000) (3,387,000) 2,751,000
Prepaid expenses and other current assets (178,000) 474,000 (421,000)
Other assets 44,000 (1,176,000) 1,077,000
Accounts payable, accrued liabilities and other liabilities 557,000 1,911,000 (5,059,000)
-------------- -------------- --------------
Net cash provided by (used in) operating activities (212,000) 1,594,000 (372,000)
-------------- -------------- --------------
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 (2,100,000) (6,509,000) (8,040,000)
Proceeds from sale of property, plant and equipment -- -- 104,000
Acquisition of subsidiaries -- (4,318,000) (69,752,000)
Acquisition of patents -- -- (128,000)
Acquisition of investment -- (742,000) --
Issuance of notes receivable -- (6,261,000) (1,458,000)
Payments received on note receivable from related party 58,000 125,000 --
-------------- -------------- --------------
Net cash used in investing activities (2,012,000) (16,705,000) (79,274,000)
-------------- -------------- --------------
Cash flow from financing activities:
Net repayments under line of credit (1,224,000) (358,000) (1,511,000)
Decrease in restricted cash 1,000,000 -- --
Proceeds from long-term debt and convertible notes 237,000 10,125,000 1,442,000
Payments on long-term debt and capital leases (5,686,000) (1,503,000) (5,752,000)
Proceeds from sale of common stock, net 5,739,000 2,223,000 4,898,000
Proceeds from sale of preferred stock, net 4,481,000 9,260,000 6,630,000
Proceeds from issuance of senior subordinated notes, net -- -- 71,731,000
Proceeds from exercise of stock options and warrants -- 3,777,000 --
Payment of financing costs -- -- (1,013,000)
-------------- -------------- --------------
Net cash provided by financing activities 4,547,000 23,524,000 76,425,000
-------------- -------------- --------------
Effect of exchange rates on cash -- -- (106,000)
-------------- -------------- --------------
Net increase (decrease) in cash
and cash equivalents 2,323,000 8,413,000 (3,327,000)
Cash and cash equivalents at beginning of year 725,000 3,048,000 11,461,000
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 3,048,000 11,461,000 8,134,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended May 31, 1997, 1998 and 1999
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental cash flow: Cash paid during the year for:
Interest $ 613,000 712,000 5,296,000
Federal income taxes 18,000 521,000 411,000
Acquisition of subsidiaries:
Fair value of assets acquired and resulting
goodwill, excluding cash 1,928,000 10,034,000 86,593,000
Liabilities assumed 482,000 3,925,000 16,811,000
Common stock issued 1,446,000 6,109,000 --
Noncash investing and financing activities:
Seller financed acquisition of property, plant
and equipment 639,000 3,336,000 241,000
Seller financed acquisition of patents 35,000 -- --
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 --
Reclassification of property, plant and equipment to
other assets -- -- 1,217,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
47
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(1) Description of Business and Basis of Presentation
(a) Description of Business
Pacific Aerospace & Electronics, Inc., headquartered in Wenatchee,
Washington, is an international engineering and manufacturing company
which develops, manufactures and markets high performance electronic
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").
(b) 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 and its subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation.
Certain 1997 and 1998 amounts have been reclassified to conform with
the 1999 presentation.
(2) Summary of Significant Accounting Principles
(a) 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.
(b) 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).
(c) 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 and amortization are 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 undercapital 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.
48
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(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.
(d) Investment
At May 31, 1998 and 1999, the Company had an investment in the common
stock, registered and unregistered shares, of a public company of less
than 20%. 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 temporary
unrealized gains and losses excluded from the statements of operations
and reported as a separate component of stockholders' equity.
Unrealized losses which are determined to be other-than-temporary are
included in other income or expense in the statements of operations.
Fair value of the registered shares of common stock at May 31, 1998 and
1999, and unregistered shares at May 31, 1998 is determined as the
quoted value of the stock in the over-the-counter market, without any
discounts for large blocks or unregistered shares. Fair value of the
unregistered shares at May 31, 1999 is determined based on expected net
realizable value. There is no assurance that such values will be
realizable upon liquidation or sale.
(e) Intangible Assets
Costs in excess of net book value of acquired subsidiaries are
amortized using the straight-line method over a period ranging from 15
to 40 years from the date of acquisition.
Purchased patents are recorded at cost. Developed patents are recorded
at the value of the 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.
Deferred financing costs were incurred in connection with the Senior
Subordinated Note offering and are being amortized using the
straight-line method over the seven year life of the notes.
(f) 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.
(g) Revenue Recognition
Revenue is recognized when products are shipped to customers and when
services are earned.
49
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(h) Research and Development
Research and development costs are expensed as incurred and are
included in cost of sales.
(i) 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 the period
that includes the enactment date.
(j) 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
(loss) and earnings (loss) 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.
(k) Net Income (Loss) Per Share
Basic income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted income
(loss) 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. As the Company had a net loss
for the year ended May 31, 1999, basic and diluted net loss per share
are the same.
(l) Foreign Currency
The functional currency of the Company's foreign subsidiaries is the
local currency of the country in which the subsidiary is incorporated.
Assets and liabilities of foreign operations are translated into U.S.
dollars using rates of exchange in effect at the end of the reporting
period. Income and expense accounts are translated into U.S. dollars
using average rates of exchange during the reporting period. The net
gain or loss resulting from translation is shown as a foreign currency
translation adjustment and is included in accumulated other
comprehensive income (loss) in stockholders' equity. Gains and losses
from foreign currency transactions are included in other income or
expense in the consolidated statements of operations. There were no
significant foreign currency transaction gains or losses for the years
ended May 31, 1997, 1998 and 1999.
50
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(m) Comprehensive Income (Loss)
On June 1, 1998, the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for the
reporting and disclosure of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of consolidated
financial statements. The Company's comprehensive income (loss)
primarily consists of the valuation of available-for-sale securities
and foreign currency translation adjustments.
(n) Use of Estimates
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(o) New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities. This accounting standard, which is effective for fiscal
years beginning after December 15, 1998, requires that certain costs of
start-up activities and organization costs be expensed as incurred. The
adoption of SOP 98-5 is not expected to have a material effect on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board 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 was effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137 which delays
implementation of SFAS No. 133 until fiscal years beginning after June
15, 2000. The adoption of SFAS No. 133 is not expected to have a
material effect on the Company's financial position or results of
operations.
(3) Segment Information and Concentration of Risk
The Company is organized into three operational segments, "U.S.
Aerospace," "European Aerospace," and "U.S. Electronics." The
Aerospace segments are primarily comprised of machined and cast metal
product operations. Net sales of the Aerospace segments include sales
to customers in the aerospace, defense and transportation industries.
Net sales of the Electronics 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 recent 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, intense price competition,
among other factors. In addition, there is 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 operational
segments.
51
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
Presented below is the Company's operational segment information. In
addition, all operational segments identified as "U.S." and the
Corporate are located within the U.S. while the operations and assets
of the "European Aerospace" segment are located within the United
Kingdom. Identifiable assets are those assets used in the Company's
operations in each 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
segments.
Year ended May 31, 1997:
<TABLE>
<CAPTION>
Corporate,
U.S. European U.S. other and
Aerospace Aerospace Electronics eliminations Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Interest income 13,000 -- -- 113,000 126,000
Interest expense 297,000 -- 131,000 82,000 510,000
</TABLE>
Year ended May 31, 1998:
<TABLE>
<CAPTION>
Corporate,
U.S. European U.S. other and
Aerospace Aerospace Electronics eliminations Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Interest income -- -- 46,000 64,000 110,000
Interest expense 381,000 -- 104,000 380,000 865,000
</TABLE>
52
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
Year ended May 31, 1999:
<TABLE>
<CAPTION>
Corporate,
U.S. European U.S. other and
Aerospace Aerospace Electronics eliminations Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales to customers $ 31,096,000 52,814,000 23,456,000 -- 107,366,000
Net sales between
segments 239,000 -- -- (239,000) --
Income (loss) from
operations 2,148,000 6,983,000 (1,281,000) (3,886,000) 3,964,000
Identifiable assets 26,655,000 90,125,000 21,735,000 20,212,000 158,727,000
Capital expenditures 1,681,000 1,556,000 2,332,000 2,712,000 8,281,000
Depreciation and
amortization 1,659,000 3,170,000 1,684,000 192,000 6,705,000
Interest income -- 17,000 19,000 496,000 532,000
Interest expense 419,000 3,516,000 202,000 4,535,000 8,672,000
</TABLE>
The Company had net sales to two customers, each comprising greater
than 10% of net sales, aggregating 43% and 45% in the years ended May
31, 1997 and 1998, respectively. The Company had net sales to one
customer comprising greater than 10% of net sales, aggregating 13% in
the year ended May 31, 1999.
The Company had accounts receivable from two customers, each comprising
greater than 10% of accounts receivable, aggregating 25% in the year
ended May 31, 1998. The Company had accounts receivable from one
customer comprising greater than 10% of accounts receivable,
aggregating 11% in the year ended May 31, 1999.
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 $2,570,000, $2,723,000 and
$6,570,245 from one supplier during the years ended May 31, 1997, 1998
and 1999, respectively.
The Company purchases other raw materials, of lesser significance,
which are available from a limited number of suppliers.
At May 31, 1999, the Company had purchase commitments for raw materials
aggregating $4,414,000 and equipment aggregating $881,000.
53
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(4) Business Acquisitions
In April 1997, 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, 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, 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.
The purchase price and related acquisition costs were allocated as
follows:
Current assets $ 4,066,000
Equipment 4,364,000
Other non-current assets 50,000
Cost in excess of net book value 3,631,000
Liabilities assumed (3,925,000)
------------
Total $ 8,186,000
============
During the year ended May 31, 1999, the Company made claims against the
previous owner of ESC based on certain representations and warranties
in the purchase agreement. In April 1999, the previous owner of ESC
agreed to return 225,000 of the Company's common shares previously
received in the acquisition.
In July 1998, the Company purchased all of the outstanding stock of
Aeromet International PLC (Aeromet). The purchase price consisted of
(pound)42,000,000 (approximately $68,875,000) in cash and acquisition
costs of $542,000 for a total of $69,417,000.
The purchase price and related acquisition costs were allocated as
follows:
Current assets $ 27,529,000
Equipment 18,177,000
Cost in excess of net book value 39,884,000
Liabilities assumed (16,173,000)
------------
Total $ 69,417,000
============
54
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
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.
<TABLE>
<CAPTION>
Year ended May 31
(unaudited)
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Net sales $ 119,798,000 117,368,000
Income from operations 6,278,000 4,096,000
Net income (loss) 1,118,000 (14,286,000)
Net income (loss) per share:
Basic 0.08 (0.82)
Diluted 0.08 (0.82)
Shares used in computation of net income (loss) per share:
Basic 13,287,961 17,359,491
Diluted 14,407,945 17,359,491
</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>
1998 1999
-------------- --------------
<S> <C> <C>
Raw materials $ 5,789,000 7,374,000
Work in progress 5,683,000 11,478,000
Finished goods 4,712,000 5,764,000
-------------- --------------
$ 16,184,000 24,616,000
============== ==============
</TABLE>
55
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(6) Property, Plant and Equipment
Property, plant and equipment, including assets under capital lease
arrangements, at May 31 consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Land $ 1,171,000 2,028,000
Buildings 4,380,000 8,765,000
Leasehold improvements 1,738,000 2,285,000
Machinery and equipment 18,331,000 38,687,000
Furniture and fixtures 2,494,000 3,099,000
-------------- --------------
28,114,000 54,864,000
Less accumulated depreciation and amortization 5,108,000 10,295,000
-------------- --------------
23,006,000 44,569,000
Construction and purchases in progress 3,329,000 710,000
-------------- --------------
$ 26,335,000 45,279,000
============== ==============
</TABLE>
The Company recognized depreciation of property, plant and equipment of
$1,103,000, $1,851,000 and $5,448,000 during the years ended May 31,
1997, 1998 and 1999, respectively.
Included in property, plant and equipment are costs of $1,402,000 and
$3,244,000 and related accumulated amortization of $208,000 and
$893,000 recorded under capital leases at May 31, 1998 and 1999,
respectively.
(7) Notes Receivable from Related Parties
At May 31, 1999, the Company had notes receivable from two individual
entities in which the Company has entered into signed letters of intent
to purchase. The first, which is due on demand subsequent to December
15, 1999, allows for a maximum draw of $1.5 million and bears interest
at a fixed rate of 7.5%. The note had an outstanding balance of
$735,000 at May 31, 1999. The second note, which is due on demand,
allows for a maximum draw of $750,000 and bears interest at a fixed
rate of 7.5%. The note had an outstanding balance of $723,000 at May
31, 1999. The Company to which the second note relates was acquired
subsequent to year-end (see note 24). Each note is secured by
substantially all of the assets of the respective entity. The Company
has classified these notes as noncurrent at May 31, 1999.
See note 8 for a discussion of the related party note receivable at May
31, 1998.
56
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(8) Investments
At May 31, 1998 and 1999, the Company held an interest in the common
stock, registered and unregistered shares of a public company of less
than 20%. 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 an April 1998 restructuring agreement. Under the
restructuring agreement, the public company agreed to convert notes,
previously issued to the Company by 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's credit facility of $1.3
million and an equipment lease of $373,000.
As of May 31, 1998, the Company recorded a temporary unrealized loss,
included in stockholders' equity, on the shares of $436,000. During the
year ended May 31, 1999, the Company determined that the decline of the
stock price was other than a temporary decline in the fair value and
recorded a loss of $4,943,000 which included the previous temporary
unrealized loss and is included in other expense. At May 31, 1999, the
registered shares are valued at the quoted market price while the
unregistered shares are valued at expected net realizable value. In
addition, the Company recorded an allowance for certain expenses and
the guarantee of the public company's line of credit totaling
approximately $2 million which has been included in other expense. 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. As of May 31, 1999, the Company
has not received the scheduled principal or interest payments as
outlined in the note. As a result, the Company has fully reserved the
note and related interest receivable as of May 31, 1999.
Certain of the Company's officers were directors of the public company
through June 1997, and certain of the Company's former 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. Certain
directors and officers of the Company personally guaranteed certain
debt of the public company until July 1997.
(9) Credit Facility
The Company has a credit facility with a bank consisting of (a) a
revolving working capital line of credit of up to $6,300,000 which
expires in September 1999 (the "Line of Credit"), (b) a capital
equipment acquisition credit facility of up to $2,000,000 which expires
in June 2008 (the "Equipment Line"), and (c) a term loan of
approximately $700,000 which expires in March 2008 (the "Construction
Loan"). As of May 31, 1999, the Equipment Line had an outstanding
balance of $1,184,000 and the Line of Credit and Construction Loan had
an outstanding balance of $685,000. Borrowings under the credit
facilities bear interest at variable rates ranging from 6.94% to 7.19%
at May 31, 1999, and are secured by inventories, accounts receivable,
and certain equipment and building improvements. The agreement
57
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
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, 1999.
The Company also has a (pound)4,500,000 line of credit with a bank in
the U.K. which expires in July 1999. Borrowings under the line of
credit bear interest at variable rates (7% at May 31, 1999). At May 31,
1999, there were no borrowings outstanding on the line of credit.
In connection with the acquisition of ESC, the Company assumed a
revolving working capital line of credit. The outstanding balance at
May 31, 1998 was $1,511,000. Subsequent to May 31, 1998, the line of
credit balance was repaid in full and was not renewed.
(10) Long-Term Debt
Long-term debt at May 31 consists of the following:
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C>
Industrial revenue bond payable to a bank in monthly installments of
$19,200, including interest at 8.12%, through July 2004 $ 1,108,000 961,000
Note payable to a bank in monthly installments of $7,000, including
interest at LIBOR plus 2% (6.94% at May 31, 1999), with the
remaining principal balance due in full in March 2008 712,000 685,000
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 505,000 457,000
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, 1999) through March 31, 2003 265,000 205,000
Notes payable to a pension fund and others, with interest at 6.75%,
repaid in full during the year ended May 31, 1999 4,050,000 --
Notes payable to a financing company for certain equipment in
aggregate monthly installments of $58,000, including interest at
9% to 10.9%, with maturity dates through 2004 2,685,000 2,220,000
Other notes payable for vehicles and certain equipment in aggregate
monthly installments of $30,000, including interest at 7.9% to
10.9% with maturity dates through December 2003 761,000 786,000
Note payable to a bank in monthly installments of $10,127, including
interest at LIBOR plus 2.25% (7.19% at May 31, 1999) through June
2008 -- 1,184,000
------------------ ------------------
10,086,000 6,498,000
Less current portion 1,027,000 1,278,000
------------------ ------------------
Long-term debt, net of current portion $ 9,059,000 5,220,000
================== ==================
</TABLE>
The industrial revenue bond agreement and a certain note payable to a
bank require, 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, 1999.
58
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
Scheduled principal maturities of long-term debt at May 31, 1999 are as
follows for each of the following fiscal year-ends:
2000 $ 1,278,000
2001 1,083,000
2002 981,000
2003 861,000
2004 601,000
Thereafter 1,694,000
--------------
$ 6,498,000
==============
Long-term debt is secured by substantially all assets of the Company
and, in certain circumstances, through personal guarantees of certain
stockholders.
(11) Senior Subordinated Notes Payable
In July 1998, the Company completed a $75 million debt offering of 11
1/4% Senior Subordinated Notes (the Notes) due in August 2005 (the
Offering). The Notes are unconditionally guaranteed on a senior
subordinated basis by the Company's U.S. subsidiaries. The net proceeds
from the Offering were used to finance the acquisition of Aeromet.
Interest on the Notes is payable semiannually on February 1 and August 1
of each year, commencing February 1, 1999. The Notes may be redeemable at
the option of the Company, in whole or in part, on or after August 1,
2003 at the redemption price as defined in the agreement. In addition, on
or before August 1, 2001, the Company may redeem up to 20% of the Notes
at a redemption price of 111.25% of the principal amount plus accrued and
unpaid interest.
Under provisions of the indenture applicable to the Notes, the Company is
limited in its ability to incur additional indebtedness or issue
Disqualified Capital Stock, pay dividends or make other distributions,
create certain liens on assets, sell certain assets and stock of
subsidiaries, enter into certain transactions with affiliates, and effect
certain mergers and consolidations. The Company is also subject to
certain restrictive covenants and is required to maintain certain
financial ratios in connection with the Notes. Management believes the
Company is in compliance with these covenants at May 31, 1999.
59
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(12) Leasing Arrangements
(a) Capital Leases
The Company leases certain property, plant and equipment under capital
lease agreements that expire at various dates through 2008. Capital
lease obligations are secured by the underlying leased assets.
Aggregate minimum payments to be made under these agreements at May 31,
1999 are as follows for each of the following fiscal year-ends:
2000 $ 475,000
2001 484,000
2002 374,000
2003 316,000
2004 290,000
Thereafter 444,000
-------------------
2,383,000
Less amounts representing interest
ranging from 6% to 16% 471,000
-------------------
Present value of net minimum
capital lease obligations 1,912,000
Less current portion 297,000
-------------------
Capital lease obligations, less
current portion $ 1,615,000
===================
(b) Operating Leases
The Company leases certain property, plant and equipment under
operating lease agreements that expire at various dates through June
2026. Aggregate minimum rental payments to be made under these
agreements at May 31, 1999 are as follows for each of the following
fiscal year-ends:
2000 $ 3,417,000
2001 3,329,000
2002 2,922,000
2003 2,896,000
2004 2,669,000
Thereafter 26,134,000
-------------------
$ 41,367,000
===================
Total rent expense during the years ended May 31, 1997, 1998 and 1999
amounted to $475,000, $788,000 and $3,356,000, respectively.
(13) 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
60
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
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.
(14) Common Stock
In July 1996, the Company conducted a public offering of 2,250,000
units at a price of $3.125 per unit. At May 31, 1997, 1998 and 1999,
all of these warrants were outstanding. In addition, the Company issued
warrants to two underwriters for the purchase of an additional 225,000
units at $3.75 per unit. Each unit is composed of one share of the
Company's common stock and a warrant to purchase one share of the
Company's common stock. The warrants entitled the holder to purchase
one share of common stock at $4.6875 per share, exercisable any time
through July 2001. The Company incurred a total of $1,726,000 in costs
related to the offering. The costs incurred 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. No warrants were exercised during the year
ended May 31, 1999.
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 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 was repaid in full during the year ended
May 31, 1999.
In November 1998, the Company sold 2,585,000 shares of its common stock
at $2.00 per share, in a private offering to institutional investors.
Proceeds from the offering totaled $5,170,000 before expenses of
$341,000.
(15) Convertible Preferred Stock
(a) 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. At May 31, 1998, all of the shares of
Series A had been converted into 1,494,593 shares of common stock.
(b) 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 $10.0 million, less related offering
costs of $740,000 for net proceeds of $9,260,000. In addition, the
purchasers deposited $7.0 million in an escrow account which,
subsequent to the closing of the purchase of Aeromet, was exchanged by
the Company for 70,000 additional shares of Series B and additional
warrants to purchase 97,221 shares of common stock. Net proceeds to the
Company, subsequent to offering costs of $369,000, were $6,631,000.
61
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
Upon conversion of shares 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. The conversion price of
the Series B at May 31, 1999 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.
No holder of Series B is 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.
Series B has a liquidation preference equal to the greater of the sum
of $100 per Series B share and any declared but unpaid dividends or the
amount the holder would be entitled to if the Series B were converted
to common stock at the then applicable conversion rate. Dividends on
Series B are based on the discretion of the board of directors and no
dividends on the Series B have been declared or paid as of May 31,
1999. If a dividend is declared or paid on common stock, other than in
shares of common stock, Series B holders are entitled to a dividend per
share of Series B equal to the amount which would be received as if the
Series B were converted to common stock at the then applicable
conversion rate. The Company may redeem the Series B at a redemption
price of $115 per share under certain circumstances.
As of May 31, 1999, 8,965 shares of Series B have been converted into
545,114 shares of common stock.
(16) Warrants
The Company periodically issues warrants to purchase common shares in
connection with preferred stock, debt and certain consulting services.
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 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
Granted 97,221 7.20
Canceled (1,290,000) 4.62
------------------ ------------------
Balance at May 31, 1999 483,609 4.24
================== ==================
</TABLE>
62
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
The following summarizes warrants outstanding, excluding warrants
issued in connection with the public offering in July 1996, at May 31,
1999:
<TABLE>
<CAPTION>
Weighted
average
remaining Weighted
Range of Number contractual average Number
exercise prices outstanding life exercise price exercisable
--------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
$ 2.00 - 4.00 210,000 3.69 years 2.35 210,000
4.01 - 6.00 37,500 2.00 years 4.80 37,500
6.01 - 8.00 236,109 4.00 years 7.20 236,109
-----------
483,609
===========
</TABLE>
(17) Compensation Plans
(a) 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.
As of May 31, 1997, 1998 and 1999, the Company had not issued any stock
appreciation rights, stock and 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>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 1,682,000 3,614,000 (12,869,000)
Pro forma 75,000 2,478,000 (14,962,000)
Net income (loss) per share:
As reported:
Basic 0.18 0.29 (0.74)
Diluted 0.17 0.27 (0.74)
Pro forma:
Basic 0.01 0.20 (0.86)
Diluted 0.01 0.18 (0.86)
Shares used in computation
of net income (loss)
per share:
Basic 9,499,980 12,486,077 17,359,491
Diluted 10,035,846 13,606,061 17,359,491
</TABLE>
63
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
The fair value of the options granted during 1997, 1998 and 1999 is
estimated as $1,853,000, $3,007,000 and $474,340, 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.
In December 1998, the Company repriced certain options to purchase
1,466,056 shares to a lower exercise price. The repricing resulted in
additional compensation costs under SFAS No. 123 of $352,000, which are
included in the pro forma amounts disclosed above.
A summary of the Company's Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Shares of common stock
----------------------------- Weighted
Available Options average price
options under plan of shares
------------- ------------- -------------
<S> <C> <C> <C>
Balance at June 1, 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
Granted (1,804,388) 1,804,388 2.51
Expired 30,000 (30,000) 2.00
Canceled 1,466,056 (1,466,056) (3.70)
Terminations 72,500 (72,500) 6.13
------------- ------------- -------------
Balance at May 31, 1999 508,052 2,466,948 $ 3.32
============= ============= =============
</TABLE>
No options were exercised during the years ended May 31, 1997 and 1999.
64
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
The following summarizes options outstanding at May 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------ ----------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life price exercisable price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00 - $4.00 1,859,388 8.42 $ 2.51 1,653,583 $ 2.53
$4.01 - $6.00 607,560 7.21 4.69 607,560 4.69
----------- -----------
2,466,948 2,261,143
=========== ===========
</TABLE>
(b) Independent Director Stock Plan
The Company has an Independent Director Stock Plan under which
nonemployee directors of the Company are awarded common stock and stock
options of the Company for serving on its board of directors. The plan
authorizes and reserves for issuance a maximum of 500,000 common
shares. At May 31, 1999, 420,804 shares were available for future
issuance. During the years ended May 31, 1997 and 1998, 14,400 and
8,559 shares of the Company's common stock, respectively, were issued
under the plan, of which all were vested at May 31, 1999. During the
year ended May 31, 1999, 600 shares and 56,637 options were issued
under the plan. Included in compensation expense are $44,000, $13,000,
and $89,000 for the years ended May 31, 1997, 1998, and 1999,
respectively, resulting from the shares and options issued.
(c) 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 year ended May 31, 1997. The Company contributed
$27,000 and $48,000 to the plan during the years ended May 31, 1998 and
1999, respectively.
(d) 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
began in November 1998. During the year ended May 31, 1999, 41,942
shares were purchased by employees under the plan.
65
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(18) Other Income and Expense
Included in other income and expense during the year ended May 31, 1999
are other than temporary unrealized losses related to the Company's
investment in shares of a public company of $4,943,000 as well as
allowances totaling $2,884,000 related to the Company's guarantees of
certain debt, a reserve for the outstanding note receivable and other
expenses of the public company expected to be incurred by the Company.
Other income and expense also includes a net amount of $2,033,000
resulting from the write-off of costs in excess of net book value of
acquired subsidiaries recorded in conjunction with the acquisition of
ESC, and a long-lived asset impairment charge of $1,150,000 related to
certain of ESC's fixed assets.
(19) Income Taxes
Total income tax benefit (expense) is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ (50,000) (593,000) 262,000
Foreign -- -- (1,422,000)
Deferred:
Federal -- 1,075,000 3,799,000
-------------- -------------- --------------
Total $ (50,000) 482,000 2,639,000
============== ============== ==============
</TABLE>
The domestic and foreign components of income (loss) before income tax
benefit (expense) were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Domestic $ 1,732,000 3,132,000 (18,992,000)
Foreign -- -- 3,484,000
-------------- -------------- --------------
Income (loss) before income
tax benefit (expense) $ 1,732,000 3,132,000 (15,508,000)
============== ============== ==============
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries for which
no U.S. income taxes have been provided aggregates approximately
$3,700,000 at May 31, 1999. No provision for foreign withholding or
United States Federal income taxes was made for the undistributed
earnings, as it is management's intention that earnings will be
reinvested indefinitely in foreign operations or will be remitted
substantially free of additional taxes.
66
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
A reconciliation of the United States Federal statutory tax rate of 34%
and the Company's effective tax rates of 3%, 15% and 17% in the years
ended May 31, 1997, 1998 and 1999, respectively, is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Computed expected income tax
benefit (expense) $ (588,000) (1,065,000) 5,273,000
Change in valuation allowance 558,000 1,717,000 (2,200,000)
Other (20,000) (170,000) (434,000)
-------------- -------------- --------------
$ (50,000) 482,000 2,639,000
============== ============== ==============
</TABLE>
Significant components of the Company's deferred tax assets
(liabilities) at May 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets:
NOL carryforward $ 1,387,000 4,427,000
Unrealized capital loss -- 1,532,000
Other 641,000 1,550,000
Valuation allowances -- (2,200,000)
-------------- --------------
2,028,000 5,309,000
Deferred tax liabilities - depreciation (1,420,000) (1,034,000)
-------------- --------------
Net deferred tax asset $ 608,000 4,275,000
============== ==============
</TABLE>
The Company has net operating loss (NOLs) carryforwards for U.S.
Federal income tax purposes of approximately $14,000,000, the benefits
of which expire in the tax year 2001 through the tax year 2019.
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 $1,000,000 of the
$14,000,000 total NOLs at May 31, 1999 will never become available.
(20) Earnings Per Share
Basic earnings per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share
is computed on the basis of the weighted average number of common
shares outstanding, using the "if-converted" method, and outstanding
stock options, using the "treasury stock" method.
67
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
The components of basic and diluted earnings per share at May 31 were
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) available for
common shareholders $ 1,682,000 3,614,000 (12,869,000)
Average outstanding shares of
common stock 9,499,980 12,486,077 17,359,491
Dilutive effect of:
Warrants 273,564 853,470 --
Employee stock options 262,302 266,514 --
Common stock and common
stock equivalents 10,035,846 13,606,061 17,359,491
Earnings (loss) per share:
Basic $ 0.18 0.29 (0.74)
Diluted 0.17 0.27 (0.74)
</TABLE>
(21) Fair Value of Financial Instruments
The Company's financial instruments include cash, receivables,
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, with the exception of the senior subordinated notes payable,
which are currently trading at approximately 75% of face value.
(22) Contingencies
(a) Legal
The Company 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 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.
68
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(b) Year 2000
Like most other companies, the Year 2000 computer issue creates risks
for the Company. The Year 2000 issue exists because many computer
programs use two digit rather than four digit date fields to define the
applicable year. As a result, computer equipment and software and
devices with imbedded technology that are time-sensitive may recognize
a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions
of operations, including, among other things, production delays and a
temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Incomplete or untimely
resolution of the Year 2000 issue by the Company or critically
important suppliers or customers of the Company could have a materially
adverse effect on the Company's business, financial condition, or
results of operations.
(23) Consolidating Condensed Financial Statements
The following 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, have been guaranteed by all of the Company's
U.S. wholly owned subsidiaries. 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.
69
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(a) Consolidating condensed balance sheet information at May 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Assets Parent subsidiaries subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,798,000 39,000 6,297,000 -- 8,134,000
Accounts receivable, net -- 8,723,000 16,661,000 (392,000) 24,992,000
Inventories -- 13,564,000 11,052,000 -- 24,616,000
Other 4,535,000 1,517,000 660,000 (3,516,000) 3,196,000
------------- ------------ ------------- ------------ ------------
Total current assets 6,333,000 23,843,000 34,670,000 (3,908,000) 60,938,000
------------- ------------ ------------- ------------ ------------
Property, plant and equipment, net 6,151,000 21,930,000 17,198,000 -- 45,279,000
------------- ------------ ------------- ------------ ------------
Other assets:
Investment 72,000 -- -- -- 72,000
Costs in excess of net book value
of acquired subsidiaries, net -- 2,717,000 38,335,000 -- 41,052,000
Investment in and loans to subsidiaries 115,099,000 75,000,000 85,000 (190,184,000) --
Other 8,254,000 3,295,000 (163,000) -- 11,386,000
------------- ------------ ------------- ------------ ------------
Total other assets 123,425,000 81,012,000 38,257,000 (190,184,000) 52,510,000
------------- ------------ ------------- ------------ ------------
Total assets $ 135,909,000 126,785,000 90,125,000 (194,092,000) 158,727,000
============= ============ ============= ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 180,000 2,542,000 8,154,000 (392,000) 10,484,000
Current portion of long-term debt 138,000 1,140,000 -- -- 1,278,000
Other 5,084,000 1,597,000 7,682,000 (3,516,000) 10,847,000
------------- ------------ ------------- ------------ ------------
Total current liabilities 5,402,000 5,279,000 15,836,000 (3,908,000) 22,609,000
Long-term liabilities:
Long-term debt, net of current portion 76,375,000 3,845,000 -- -- 80,220,000
Intercompany note and loan payable 85,000 61,869,000 37,500,000 (99,454,000) --
Other 28,000 1,105,000 746,000 -- 1,879,000
------------- ------------ ------------- ------------ ------------
Total liabilities 81,890,000 72,098,000 54,082,000 (103,362,000) 104,708,000
------------- ------------ ------------- ------------ ------------
Stockholders' equity:
Convertible preferred stock -- -- -- -- --
Common stock 19,000 58,641,000 35,117,000 (93,758,000) 19,000
Additional paid-in capital 69,276,000 -- -- -- 69,276,000
Accumulated other comprehensive loss (1,140,000) -- (1,136,000) 1,136,000 (1,140,000)
Retained earnings (accumulated deficit) (14,136,000) (3,954,000) 2,062,000 1,892,000 (14,136,000)
------------- ------------ ------------- ------------ ------------
Total stockholders' equity 54,019,000 54,687,000 36,043,000 (90,730,000) 54,019,000
------------- ------------ ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 135,909,000 126,785,000 90,125,000 (194,092,000) 158,727,000
============= ============ ============= ============ ============
(Continued)
</TABLE>
70
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(b) Consolidating condensed balance sheet information at May 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 9,398,000 2,063,000 -- -- 11,461,000
Accounts receivable, net -- 9,608,000 -- (233,000) 9,375,000
Inventories -- 16,184,000 -- -- 16,184,000
Other 12,000 646,000 -- -- 658,000
------------- ------------ ------------- ------------ ------------
Total current assets 9,410,000 28,501,000 -- (233,000) 37,678,000
------------- ------------ ------------- ------------ ------------
Property, plant and equipment, net 3,464,000 22,871,000 -- -- 26,335,000
------------- ------------ ------------- ------------ ------------
Other assets:
Investment 4,579,000 -- -- -- 4,579,000
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) --
Intercompany note and loan receivable 19,764,000 -- -- (19,764,000) --
Other 3,186,000 287,000 -- -- 3,473,000
------------- ------------ ------------- ------------ ------------
Total other assets 48,981,000 6,802,000 -- (41,216,000) 14,567,000
------------- ------------ ------------- ------------ ------------
Total assets $ 61,855,000 58,174,000 -- (41,449,000) 78,580,000
============= ============ ============= ============ ============
Liabilities and Stockholders' 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 635,000 3,669,000 -- -- 4,304,000
------------- ------------ ------------- ------------ ------------
Total current liabilities 1,586,000 10,726,000 -- (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 note and loan payable -- 19,764,000 -- (19,764,000) --
Other -- 1,300,000 -- -- 1,300,000
------------- ------------ ------------- ------------ ------------
Total liabilities 5,713,000 36,722,000 -- (19,997,000) 22,438,000
------------- ------------ ------------- ------------ ------------
Stockholders' 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 stockholders' equity 56,142,000 21,452,000 -- (21,452,000) 56,142,000
------------- ------------ ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 61,855,000 58,174,000 -- (41,449,000) 78,580,000
============= ============ ============= ============ ============
(Continued)
</TABLE>
71
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(c) Consolidating condensed statement of operations information for the year
ended May 31, 1999 is as follows:
<TABLE>
<CAPTION>
Guarantor Non-guarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- 56,675,000 52,814,000 (2,123,000) 107,366,000
Cost of sales -- 45,942,000 42,275,000 (2,123,000) 86,094,000
------------- ------------ ------------- ------------ ------------
Gross profit -- 10,733,000 10,539,000 -- 21,272,000
Operating expenses 4,367,000 11,463,000 3,556,000 (2,078,000) 17,308,000
------------- ------------ ------------- ------------ ------------
Income (loss) from operations (4,367,000) (730,000) 6,983,000 2,078,000 3,964,000
------------- ------------ ------------- ------------ ------------
Other income (expense):
Parent's share of subsidiaries net loss (1,800,000) -- -- 1,800,000 --
Interest expense (8,050,000) (622,000) (3,516,000) 3,516,000 (8,672,000)
Other (727,000) (4,496,000) 17,000 (5,594,000) (10,800,000)
------------- ------------ ------------- ------------ ------------
Total other expense (10,577,000) (5,118,000) (3,499,000) (278,000) (19,472,000)
------------- ------------ ------------- ------------ ------------
Income (loss) before income taxes (14,944,000) (5,848,000) 3,484,000 1,800,000 (15,508,000)
Income tax benefit (expense) 2,075,000 1,986,000 (1,422,000) -- 2,639,000
------------- ------------ ------------- ------------ ------------
Net income (loss) (12,869,000) (3,862,000) 2,062,000 1,800,000 (12,869,000)
Other comprehensive income (loss):
Foreign currency translation, net of tax (4,000) -- (1,136,000) -- (1,140,000)
Valuation of available for sale securities 436,000 -- -- -- 436,000
------------- ------------ ------------- ------------ ------------
Total other comprehensive
income (loss) 432,000 -- (1,136,000) -- (704,000)
------------- ------------ ------------- ------------ ------------
Comprehensive income (loss) $ (12,437,000) (3,862,000) 926,000 1,800,000 (13,573,000)
============= ============ ============= ============ ============
(Continued)
</TABLE>
72
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(d) Consolidating condensed statement of operations information for the year
ended May 31, 1998 is as follows:
<TABLE>
<CAPTION>
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
Other comprehensive loss - valuation
of available-for-sale securities (436,000) -- -- -- (436,000)
------------- ------------ ------------- ------------ ------------
Comprehensive income $ 3,178,000 4,778,000 -- (4,778,000) 3,178,000
============= ============ ============= ============ ============
(Continued)
</TABLE>
73
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(e) Consolidating condensed statement of operations information for the year
ended May 31, 1997 is as follows:
<TABLE>
<CAPTION>
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
Other comprehensive income -- -- -- -- --
------------- ------------ ------------- ------------ ------------
Comprehensive income $ 1,682,000 1,691,000 -- (1,691,000) 1,682,000
============= ============ ============= ============ ============
(Continued)
</TABLE>
74
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(f) Consolidating condensed statement of cash flows information for the year
ended May 31, 1999 is as follows:
<TABLE>
<CAPTION>
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 $ (6,795,000) 696,000 3,927,000 1,800,000 (372,000)
------------- ------------ ------------- ------------ ------------
Cash flow from investing activities:
Acquisition of property, plant
and equipment (2,471,000) (4,013,000) (1,556,000) -- (8,040,000)
Investment in and loans to subsidiaries (69,752,000) (75,000,000) (75,000,000) 150,000,000 (69,752,000)
Other changes, net (6,401,000) 76,000 (85,000) 4,928,000 (1,482,000)
------------- ------------ ------------- ------------ ------------
Net cash used in investing
activities (78,624,000) (78,937,000) (76,641,000) 154,928,000 (79,274,000)
------------- ------------ ------------- ------------ ------------
Cash flow from financing activities:
Proceeds from long-term debt, senior
subordinated notes and convertible
notes, net 72,160,000 37,500,000 37,500,000 (75,000,000) 72,160,000
Payments on long-term debt and
capital leases (4,154,000) (1,548,000) (50,000) -- (5,752,000)
Proceeds from sale of common stock, net 4,898,000 37,500,000 37,500,000 (75,000,000) 4,898,000
Proceeds from sale of preferred stock, net 6,630,000 -- -- -- 6,630,000
Other changes, net (1,715,000) 2,765,000 4,167,000 (6,728,000) (1,511,000)
------------- ------------ ------------- ------------ ------------
Net cash provided by financing
activities 77,819,000 76,217,000 79,117,000 (156,728,000) 76,425,000
Net change in cash and
cash equivalents (7,600,000) (2,024,000) 6,403,000 -- (3,221,000)
Cash and cash equivalents at beginning
of year 9,398,000 2,063,000 -- -- 11,461,000
Effect of exchange rates on cash -- -- (106,000) -- (106,000)
------------- ------------ ------------- ------------ ------------
Cash and cash equivalents at end of year $ 1,798,000 39,000 6,297,000 -- 8,134,000
Supplemental cash flow:
Noncash operating expenses related to:
Depreciation $ 192,000 2,951,000 2,326,000 -- 5,469,000
Amortization -- 392,000 844,000 -- 1,236,000
Cash paid during the year for:
Interest 4,870,000 413,000 13,000 -- 5,296,000
Federal income taxes 100,000 -- 311,000 -- 411,000
Acquisition of subsidiaries:
Fair value of assets acquired and
resulting goodwill, excluding cash 86,593,000 -- -- -- 86,593,000
Liabilities assumed 16,811,000 -- -- -- 16,811,000
Noncash investing and financing
activities:
Seller financed acquisition of
property, plant and equipment 241,000 -- -- -- 241,000
Reclassification of property,
plant and equipment to other
assets -- 1,217,000 -- -- 1,217,000
============= ============ ============= ============ ============
(Continued)
</TABLE>
75
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(g) Consolidating condensed statement of cash flows information for the year
ended May 31, 1998 is as follows:
<TABLE>
<CAPTION>
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 (4,318,000) -- -- -- (4,318,000)
Other changes, net (14,085,000) 125,000 -- 8,082,000 (5,878,000)
------------- ------------ ------------- ------------ ------------
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 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
Other changes, net 3,777,000 2,946,000 -- (3,304,000) 3,419,000
------------- ------------ ------------- ------------ ------------
Net cash provided by
financing activities 24,725,000 2,103,000 -- (3,304,000) 23,524,000
------------- ------------ ------------- ------------ ------------
Net change in cash and
cash equivalents 7,335,000 1,078,000 -- -- 8,413,000
Cash and cash equivalents at beginning
of year 2,063,000 985,000 -- 3,048,000
------------- ------------ ------------- ------------ ------------
Cash and cash equivalents at end of year $ 9,398,000 2,063,000 -- -- 11,461,000
============= ============ ============= ============ ============
Supplemental cash flow:
Noncash operating expenses related to:
Depreciation $ 34,000 1,874,000 -- -- 1,908,000
Amortization -- 296,000 -- -- 296,000
Cash paid during the year 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
============= ============ ============= ============ ============
(Continued)
</TABLE>
76
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(h) Consolidating condensed statement of cash flows information for the year
ended May 31, 1997 is as follows:
<TABLE>
<CAPTION>
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 $ 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 and
convertible notes -- 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 and
cash equivalents 1,745,000 578,000 -- -- 2,323,000
Cash and cash equivalents at beginning
of year 318,000 407,000 -- -- 725,000
------------- ------------ ------------- ------------ ------------
Cash and cash equivalents at end of year $ 2,063,000 985,000 -- -- 3,048,000
============= ============ ============= ============ ============
Supplemental cash flow:
Noncash operating expenses related to:
Depreciation $ -- 1,290,000 -- -- 1,290,000
Amortization -- 68,000 -- -- 68,000
Cash paid during the year 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
============= ============ ============= ============ ============
(Continued)
</TABLE>
77
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998 and 1999
(Continued)
(i) Inventory Information at May 31 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Guarantor subsidiaries
Raw materials $ 5,789,000 5,074,000
Work in progress 5,683,000 3,788,000
Finished goods 4,712,000 4,702,000
-------------- --------------
16,184,000 13,564,000
-------------- --------------
Non-guarantor subsidiaries:
Raw materials -- 2,300,000
Work in progress -- 7,690,000
Finished goods -- 1,062,000
-------------- --------------
-- 11,052,000
-------------- --------------
Total inventory $ 16,184,000 24,616,000
============== ==============
</TABLE>
(24) Subsequent Events
On June 1, 1999, the Company acquired all of the stock of Skagit
Engineering & Manufacturing, Inc. for $1.3 million in cash. The Company
also entered into a letter of intent to acquire Nova-Tech Engineering,
Inc. (Nova-Tech) and expects that the purchase price will consist of
approximately $2.7 million in cash and $250,000 in stock. The Company
expects that the definitive stock purchase agreement will contain
conditions to closing, including receipt of a letter ruling from the
Internal Revenue Service that is necessary to permit Nova-Tech's
Employee Stock Ownership Plan to sell its Nova-Tech stock on the terms
anticipated. The Company is providing services to Nova-Tech under an
Operating Agreement dated April 23, 1999. As of May 31, 1999, the
Company had loaned $735,000 to Nova-Tech for working capital. As of
August 19, 1999, the Company had loaned Nova-Tech an additional
$1,365,000. These loans have been made under the terms of two demand
notes dated April 26, 1999 and August 5, 1999, each of which is secured
by substantially all of the assets of Nova-Tech.
78
<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
79
<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>
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>
80
<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>
81
<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)
Accumulated
Common stock Other Total
-------------------- Additional Comprehensive Accumulated Comprehensive Shareholder's
Shares Amount Capital Income (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>
82
<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>
83
<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
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<PAGE>
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.
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.
85
<PAGE>
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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>
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.
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<PAGE>
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.
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.
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<PAGE>
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:
<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>
December, 31 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net loss
As reported.......................... $ 30 800
Pro forma............................ 56 850
</TABLE>
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<PAGE>
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.
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>
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<PAGE>
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>
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%.
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<PAGE>
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:
Year ended
December 31,
--------------------
1996 1997
------- -------
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
======= =======
Significant components of Aeromet's deferred tax assets and liabilities are
as follows:
December 31,
--------------------
1996 1997
------- -------
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
======= =======
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
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<PAGE>
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.
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<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data for the year ended May 31, 1999
gives effect to the Company's acquisition of Aeromet in the first quarter of
fiscal 1999, including related financing transactions, as if such transactions
had occurred on June 1, 1998. The historical statement of operations data of the
Company for the year ended May 31, 1999, already reflects the results of
operations of Aeromet since the time of its acquisition 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 date 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 and Aeromet,
including the notes thereto, included elsewhere in this Proxy Statement.
The acquisition referred to in this unaudited pro forma financial data has been
accounted for using the purchase method of accounting. Accordingly, the assets
acquired and liabilities assumed have been recorded at their fair values as of
the date of their acquisition.
95
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Statement of Operations Data
For the year ended May 31, 1999
(In thousands)
Historical
----------------------- Pro forma Pro forma
Company(1) Aeromet(2) Adjustments As Adjusted(3)
---------- ---------- ----------- --------------
<S> <C> <C> <C>
Net sales $ 107,366 9,582 - 116,948
Cost of sales 86,094 8,270 150 (4) 94,514
Gross profit 21,272 1,312 (150) 22,434
Operating expenses 17,308 1,012 (167)(5) 18,153
Income from operations 3,964 300 17 4,281
Net interest expense (8,140) (125) (1,380)(6) (9,645)
Other income (expense) (11,332) - - (11,332)
Income (loss) before income taxes (15,508) 175 (1,363) (16,696)
Income tax expense (benefit) (2,639) 152 (282)(7) (2,769)
---------- ---------- ----------- --------------
Net income (loss) $ (12,869) 23 (1,081) (13,927)
========== ========== =========== ==============
</TABLE>
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<PAGE>
Notes to Unaudited Pro Forma Statement of Operations Data
(1) Represents the results of operations of the Company for the year ended May
31, 1999, and the results of operations of Aeromet from the effective date
of acquisition.
(2) Represents the results of operations for Aeromet from June 1, 1998, through
the effective date of its acquisition (July 30, 1999).
(3) Presents the statement of operations data of the Company as if the
acquisition of Aeromet and related financing transactions had occurred on
June 1, 1998.
(4) 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.
(5) 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.
(6) 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 incurred in the acquisition. Interest expense on debt
not assumed in the Aeromet acquisition has been eliminated. Deferred
financing costs ($4.0 million) are amortized over 7 years.
(7) Tax provision to reflect the Company's estimated taxes on certain pro forma
adjustments.
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<PAGE>
Independent Accountants
- -----------------------
Moss Adams LLP was previously the principal independent accountant for the
Company. On April 17, 1998, the appointment of Moss Adams LLP was terminated,
and KPMG LLP was engaged, as the Company's principal independent accountant. The
decision to change principal independent accountants was approved by the Finance
and Audit Committee of the Company's Board of Directors.
In connection with the audit for fiscal year ended May 31, 1997, and the
subsequent interim period through April 17, 1998:
(a) the reports of Moss Adams LLP contained no adverse opinion or
disclaimer of opinion, or modification as to uncertainty, audit scope or
accounting principles; and
(b) there were no disagreements with Moss Adams LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which, if not resolved to the satisfaction of Moss Adams
LLP, would have caused it to make reference to the subject matter of the
disagreement in connection with its reports.
KPMG LLP has been the Company's principal independent accountant since April 17,
1998. Representatives of KPMG LLP will be present at the Meeting. They will have
the opportunity to make a statement if they desire to do so, and they will be
available to respond to appropriate questions.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
We have financial instruments that are subject to interest rate risk, primarily
debt obligations issued at a fixed rate. However, fixed-rate debt obligations
issued by us are generally not callable until maturity. The fair value of such
instruments approximates their face value, except for the 11 1/4% senior
subordinated notes which, as of January 28, 2000, were trading on the open
market for approximately ____% to ____% of face value. We do not consider the
market risk exposure for interest rates to be material.
We are subject to foreign currency exchange rate risk relating to receipts from
and payments to suppliers in foreign currencies. Since approximately 50% of our
transactions are conducted in foreign currency, the exchange rate risk could be
material. We have not entered into any hedging activity as of January 28, 2000.
We are exposed to commodity price fluctuations through purchases of aluminum and
other raw materials. We enter into certain supplier agreements that guarantee
quantity and price of the applicable commodity to limit the exposure to
commodity price fluctuations and availability concerns. At January 28, 2000, we
had purchase commitments for raw materials aggregating approximately
$___________.
We hold an investment in the common stock of a public company. We are exposed to
risks associated with the quoted equity price of the common stock. At November
30, 1999, the reported value of the investment was $19,000.
Shareholder Proposals for 2000 Annual Meeting
- ---------------------------------------------
Any shareholder proposal intended for inclusion in proxy materials for the
Company's 2000 annual meeting of shareholders must be received in proper form by
the Company at its principal office no later than May 6, 2000.
98
<PAGE>
Other Matters
- -------------
The Board of Directors is not aware of any business other than the Proposal
discussed above that will be presented for consideration at the Meeting. If
other matters properly come before the Meeting, it is the intention of the
persons named in the enclosed proxy to vote on such matters in accordance with
their best judgment.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE HOPE THAT YOU WILL HAVE YOUR
STOCK REPRESENTED BY COMPLETING, SIGNING, DATING AND RETURNING YOUR ENCLOSED
PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
By Order of the Board of Directors,
Donald A. Wright
Chairman of the Board,
Chief Executive Officer and President
February ___, 2000
99
<PAGE>
PROXY
PACIFIC AEROSPACE & ELECTRONICS, INC.
Special Meeting of Shareholders, March 6, 2000
PROXY SOLICITED BY BOARD OF DIRECTORS
PLEASE SIGN AND RETURN THIS PROXY
The undersigned hereby appoints Donald A. Wright and Nick A. Gerde, and
each of them, proxies with power of substitution to vote on behalf of the
undersigned all shares that the undersigned may be entitled to vote at the
Special Meeting of Shareholders of Pacific Aerospace & Electronics, Inc. (the
"Company"), on March 6, 2000, and any adjournments of that meeting, with all
powers that the undersigned would possess, if personally present, with respect
to the following:
1. APPROVAL OF THE PROPOSAL TO APPROVE THE ISSUANCE OF SUFFICIENT COMMON STOCK
TO PERMIT CONVERSION OF THE COMPANY'S OUTSTANDING SERIES B CONVERTIBLE
PREFERRED STOCK:
[ ] FOR [ ] AGAINST [ ] ABSTENTION
2. TRANSACTION OF ANY BUSINESS THAT MAY PROPERLY COME BEFORE THE MEETING OR
ANY ADJOURNMENTS OF THE MEETING. A MAJORITY OF THE PROXIES OR SUBSTITUTES
AT THE MEETING MAY EXERCISE ALL THE POWERS GRANTED BY THIS PROXY.
[FRONT]
The shares represented by this proxy will be voted as specified on the front of
this proxy, but if no specification is made, this proxy will be voted FOR
approval of the proposal to approve the issuance of sufficient common stock to
permit conversion of the Company's outstanding Series B Convertible Preferred
Stock. The proxies may vote in their discretion as to other matters that may
properly come before this meeting.
No. of Shares: ___________ Date: ___________, 2000
--------------------------------------------------
Signature or Signatures
Please date and sign above as your name is printed
to the left of the signature line, including
designation as executor, trust, etc., if
applicable. A corporation must be signed for by
the president or other authorized officer.
The Special Meeting of Shareholders of Pacific
Aerospace & Electronics, Inc. will be held at the
West Coast Wenatchee Convention Center, located at
121 North Wenatchee Avenue, Wenatchee, Washington,
on March 6, 2000, at 3:00 p.m. Pacific Standard
Time.
Please Note: Any shares of stock of the Company held in the name of fiduciaries,
custodians or brokerage houses for the benefit of their clients may only be
voted by the fiduciary, custodian or brokerage house itself. The beneficial
owner may not directly vote or appoint a proxy to vote the shares and must
instruct the person or entity in whose name the shares are held how to vote the
shares held for the beneficial owner. Therefore, if any shares of stock of the
Company are held in "street name" by a brokerage house, only the brokerage
house, at the instructions of its client, may vote or appoint a proxy to vote
the shares.
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