<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number: 0-26088
PACIFIC AEROSPACE & ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1744587
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
430 Olds Station Road, Third Floor, Wenatchee, Washington 98801
(Address of Principal Executive Offices; Zip Code)
Registrant's telephone number, including area code: (509) 667-9600
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No_____
-----
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes____ No____
Applicable only to corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: As of January 8, 2001, there were
34,367,246 shares outstanding of the Company's Common Stock, par value $.001 per
share.
<PAGE>
PART I - FINANCIAL INFORMATION
---------------------
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - November 30, 2000 and May 31, 2000
Consolidated Statements of Operations - Second Quarters and Six Months Ended
November 30, 2000 and 1999
Consolidated Statements of Cash Flows - Six Months Ended November 30, 2000 and
1999
Management's Statement and Notes to Unaudited Consolidated Financial Statements
- Second Quarter and Six Months Ended November 30, 2000
2
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 2000 and May 31, 2000
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
ASSETS (Unaudited) (Audited)
------------------------------------------------------------------- ------------- ------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 1,527,000 $ 2,154,000
Accounts receivable, net 19,700,000 21,210,000
Inventories 27,963,000 27,849,000
Deferred income taxes 865,000 872,000
Prepaid expense and other current assets 2,125,000 1,668,000
------------- -------------
Total Current Assets 52,180,000 53,753,000
------------- -------------
PROPERTY AND EQUIPMENT, NET 41,126,000 44,076,000
------------- -------------
OTHER ASSETS
Costs in excess of net book value of acquired subsidiaries, net 35,917,000 38,291,000
Patents, net 1,122,000 1,158,000
Deferred financing costs, net 3,261,000 3,597,000
Deferred income taxes 2,813,000 3,006,000
Other assets 444,000 404,000
------------- -------------
Total Other Assets 43,557,000 46,456,000
------------- -------------
TOTAL ASSETS $ 136,863,000 $ 144,285,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 12,814,000 $ 10,630,000
Accrued liabilities 3,783,000 4,589,000
Accrued interest 2,389,000 2,372,000
Current portion of long-term debt 1,077,000 1,098,000
Current portion of capital lease obligations 436,000 504,000
Line of credit 5,947,000 5,379,000
------------- -------------
Total Current Liabilities 26,446,000 24,572,000
------------- -------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 3,630,000 4,161,000
Capital lease obligations, net of current portion 863,000 1,065,000
Senior subordinated notes payable 63,700,000 63,700,000
Deferred income taxes 667,000 703,000
Deferred rent and other 316,000 316,000
------------- -------------
Total Long Term Liabilities 69,176,000 69,945,000
------------- -------------
Total Liabilities 95,622,000 94,517,000
------------- -------------
STOCKHOLDERS' EQUITY
Convertible preferred stock - -
Common stock 34,000 30,000
Additional paid in capital 85,054,000 83,173,000
Accumulated other comprehensive income (9,466,000) (6,250,000)
Accumulated deficit (34,381,000) (27,185,000)
------------- -------------
Total Stockholders' Equity 41,241,000 49,768,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 136,863,000 $ 144,285,000
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Second Quarters and Six Months Ended November 30, 2000 and 1999
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
-------------------------------- ---------------------------------
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 27,437,000 $ 29,000,000 $ 55,080,000 $ 57,571,000
COST OF SALES 24,351,000 23,749,000 47,072,000 45,760,000
------------ ------------ ------------ ------------
GROSS PROFIT 3,086,000 5,251,000 8,008,000 11,811,000
OPERATING EXPENSES 4,863,000 4,582,000 9,675,000 9,686,000
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,777,000) 669,000 (1,667,000) 2,125,000
------------ ------------ ------------ ------------
OTHER INCOME AND EXPENSE
Interest Income - 5,000 - 53,000
Interest Expense (2,241,000) (2,604,000) (4,537,000) (5,152,000)
Other (925,000) (14,000) (878,000) (11,000)
------------ ------------ ------------ ------------
(3,166,000) (2,613,000) (5,415,000) (5,110,000)
------------ ------------ ------------ ------------
NET LOSS BEFORE INCOME TAX EXPENSE (4,943,000) (1,944,000) (7,082,000) (2,985,000)
PROVISION FOR INCOME TAXES - (70,000) (113,000) (535,000)
------------ ------------ ------------ ------------
NET LOSS (4,943,000) (2,014,000) (7,195,000) (3,520,000)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE LOSS:
Foreign currency translation (950,000) (142,000) (3,216,000) (139,000)
Income tax benefit - 48,000 - 47,000
------------ ------------ ------------ ------------
(950,000) (94,000) (3,216,000) (92,000)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (5,893,000) $ (2,108,000) $(10,411,000) $ (3,612,000)
============ ============ ============ ============
NET LOSS PER SHARE:
BASIC $ (0.14) $ (0.10) $ (0.21) $ (0.18)
DILUTED $ (0.14) $ (0.10) $ (0.21) $ (0.18)
SHARES USED IN COMPUTATION OF
NET LOSS PER SHARE:
BASIC 34,292,000 19,992,000 33,700,000 19,547,000
DILUTED 34,292,000 19,992,000 33,700,000 19,547,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended November 30, 2000 and 1999
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
November 30, November 30,
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash from operating activities $ (568,000) $(3,251,000)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,694,000) (2,509,000)
Proceeds from sale of property and equipment 65,000 10,000
Acquisition of subsidiaries - (1,282,000)
Increase in notes receivable - (1,505,000)
Other changes, net (15,000) -
----------- -----------
Net cash from investing activities (1,644,000) (5,286,000)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit 579,000 5,648,000
Proceeds from long-term debt 70,000 -
Payments on long term debt and capital leases (854,000) (1,700,000)
Sale of common stock and warrants, net 1,885,000 55,000
----------- -----------
Net cash from financing activities 1,680,000 4,003,000
----------- -----------
NET CHANGE IN CASH (532,000) (4,534,000)
CASH AT BEGINNING OF PERIOD 2,154,000 8,134,000
EFFECT OF EXCHANGE RATES ON CASH (95,000) (18,000)
----------- -----------
CASH AT END OF PERIOD $ 1,527,000 $ 3,582,000
=========== ===========
SUPPLEMENTAL CASH FLOW:
Cash paid during the period for:
Interest $ 4,191,000 $ 4,797,000
Income taxes - 1,705,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Second Quarter and Six Months Ended November 30, 2000
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, 2000 and May 31, 2000, the consolidated
results of operations for the quarters and six months ended November 30, 2000
and November 30, 1999, and the consolidated statements of cash flows for the six
months ended November 30, 2000 and November 30, 1999. 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, 2000 and 1999.
The results of operations for the quarter and six months ended November 30, 2000
are not necessarily indicative of the results to be expected or anticipated for
the full fiscal year.
Note 1: Net Loss Per Share:
------------------
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted 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, 2000 and November 30, 1999,
basic and diluted net loss per share are the same.
Potential amounts of shares that were not included in the computation of
weighted average diluted shares were 7,088,344, which represents warrants and
options outstanding. This amount does not include a currently undeterminable
number of shares issuable with respect to the adjustable warrants or the vesting
warrants issued in the Company's Summer 2000 private placement, which could be
material.
Note 2: Inventories
-----------
Components of inventories are as follows:
November 30, May 31,
2000 2000
------------ -----------
Raw materials $ 6,885,000 $ 7,176,000
Work in progress 14,039,000 13,580,000
Finished goods 7,039,000 7,093,000
----------- -----------
Total $27,963,000 $27,849,000
=========== ===========
6
<PAGE>
Note 3: Going Concern
-------------
The Company's consolidated financial statements have been prepared assuming the
Company will continue as a going concern.
During the six months ended November 30, 2000, the Company's operating
activities used cash of $568,000. The Company's future success will depend
heavily on its ability to generate cash from operating activities and to meet
its obligations as they become due. If the Company is not sufficiently
successful in increasing cash provided by operating activities, it may need to
sell additional common stock or sell assets outside of the ordinary course of
business in order to meet its obligations. There is no assurance that the
Company will be able to achieve sufficient cash from operations, to sell
additional common stock, or to sell assets for amounts in excess of book value.
The Company's ability to obtain additional cash if and when needed could have a
material adverse effect on its financial position, results of operations and its
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Note 4: 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 engineering and machined, formed 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, and 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.
Presented below is the Company's operational segment information. In addition,
all operational segments identified as "U.S." and Corporate are located within
the U.S. while the operations and assets of the "European Aerospace" segment are
located within the United Kingdom.
7
<PAGE>
Six months ended November 30, 2000
<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 $ 14,878,000 25,021,000 15,181,000 - 55,080,000
Net sales between segments 407,000 - - (407,000) -
Income (loss) from operations (3,342,000) 771,000 4,604,000 (3,700,000) (1,667,000)
Interest income - - - - -
Interest expense 180,000 2,012,000 63,000 2,282,000 4,537,000
Other income (expense) (666,000) - (212,000) - (878,000)
<CAPTION>
Six months ended November 30, 1999
Corporate,
U.S. European U.S. other and
Aerospace Aerospace Electronics eliminations Total
----------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales to customers $ 15,771,000 29,333,000 12,467,000 - 57,571,000
Net sales between segments 91,000 - - (91,000) -
Income (loss) from operations (36,000) 1,827,000 3,311,000 (2,977,000) 2,125,000
Interest income - 35,000 - 18,000 53,000
Interest expense 185,000 2,207,000 67,000 2,693,000 5,152,000
Other income (expense) 36,000 - 36,000 (83,000) (11,000)
</TABLE>
Note 5: Potential Sale of Operating Subsidiary
--------------------------------------
The Company is pursuing the sale of its U.K. subsidiary, which makes up its
European Aerospace Group. The Company has engaged an investment banking firm to
assist it in marketing this business. The Company expects to begin to receive
initial bids in February 2001, and the Company's goal is to close the
transaction by May 31, 2001. At this time the Company cannot reasonably
determine the timing of a sale or the final selling price for this business
unit. The European Aerospace Group contributed approximately 45% of the
Company's consolidated revenue for the six months ended November 30, 2000 and
represented approximately 50% of its consolidated assets at November 30, 2000.
If, at such time as the Company has committed to a formal plan of disposition of
the European Aerospace Group, any impairment of the assets of this subsidiary
can be reasonably determined, the Company will record any such impairment loss
in its consolidated financial statements. Although the Company cannot currently
reasonably determine the extent of any such impairment loss, it could be
substantial.
8
<PAGE>
Note 6: Consolidating Condensed Financial Statements
---------------------------------------------
The following financial statements present consolidating condensed financial
information of the Company for the indicated periods. The Company's senior
subordinated notes, which were used to finance the Aeromet acquisition in July
1998, 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.
9
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
November 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 499,000 $ 76,000 $ 952,000 $ -- $ 1,527,000
Accounts receivable, net -- 8,878,000 11,080,000 (258,000) 19,700,000
Inventories -- 18,621,000 9,342,000 -- 27,963,000
Other 965,000 1,102,000 923,000 -- 2,990,000
------------- ------------- ------------- ------------- -------------
Total current assets 1,464,000 28,677,000 22,297,000 (258,000) 52,180,000
PROPERTY, PLANT, AND EQUIPMENT, net 6,319,000 21,446,000 13,361,000 -- 41,126,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net -- 3,143,000 32,774,000 -- 35,917,000
Investment in and loans to subsidiaries 101,593,000 71,744,000 -- (173,337,000) --
Other 6,885,000 755,000 -- -- 7,640,000
------------- ------------- ------------- ------------- -------------
Total other assets 108,478,000 75,642,000 32,774,000 (173,337,000) 43,557,000
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 116,261,000 $ 125,765,000 $ 68,432,000 $(173,595,000) $ 136,863,000
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 999,000 $ 6,309,000 $ 5,764,000 $ (258,000) $ 12,814,000
Current portion of long-term debt 144,000 933,000 -- -- 1,077,000
Line of credit 5,947,000 -- -- -- 5,947,000
Other 2,909,000 2,345,000 1,354,000 -- 6,608,000
------------- ------------- ------------- ------------- -------------
Total current liabilities 9,999,000 9,587,000 7,118,000 (258,000) 26,446,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 64,896,000 2,434,000 -- -- 67,330,000
Intercompany loan payable -- 69,526,000 37,418,000 (106,944,000) --
Other 125,000 631,000 1,090,000 -- 1,846,000
------------- ------------- ------------- ------------- -------------
Total long-term liabilities 65,021,000 72,591,000 38,508,000 (106,944,000) 69,176,000
STOCKHOLDERS' EQUITY
Convertible preferred stock -- -- -- -- --
Common stock 34,000 56,139,000 33,710,000 (89,849,000) 34,000
Additional paid-in capital 85,054,000 -- -- -- 85,054,000
Accumulated other comprehensive loss (9,466,000) -- (9,466,000) 9,466,000 (9,466,000)
Accumulated deficit (34,381,000) (12,552,000) (1,438,000) 13,990,000 (34,381,000)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity 41,241,000 43,587,000 22,806,000 (66,393,000) 41,241,000
------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,261,000 $ 125,765,000 $ 68,432,000 $(173,595,000) $ 136,863,000
============= ============= ============= ============= =============
</TABLE>
10
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
May 31, 2000
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ (184,000) $ 58,000 $ 2,280,000 $ -- $ 2,154,000
Accounts receivable, net -- 9,047,000 12,527,000 (364,000) 21,210,000
Inventories -- 17,307,000 10,542,000 -- 27,849,000
Other 895,000 1,145,000 500,000 -- 2,540,000
------------- ------------- ------------- ------------- -------------
Total current assets 711,000 27,557,000 25,849,000 (364,000) 53,753,000
PROPERTY, PLANT, AND EQUIPMENT, net 6,340,000 22,995,000 14,741,000 -- 44,076,000
OTHER ASSETS
Costs in excess of net book value
of acquired subsidiaries, net -- 3,296,000 34,995,000 -- 38,291,000
Investment in and loans to subsidiaries 111,792,000 72,618,000 (184,410,000) --
Other 5,183,000 2,982,000 -- 8,165,000
------------- ------------- ------------- ------------- -------------
Total other assets 116,975,000 78,896,000 34,995,000 (184,410,000) 46,456,000
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 124,026,000 $ 129,448,000 $ 75,585,000 $(184,774,000) $ 144,285,000
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 667,000 $ 3,729,000 $ 6,598,000 $ (364,000) $ 10,630,000
Current portion of long-term debt 170,000 928,000 -- -- 1,098,000
Line of credit 5,379,000 -- -- -- 5,379,000
Other 2,989,000 2,898,000 1,578,000 -- 7,465,000
------------- ------------- ------------- ------------- -------------
Total current liabilities 9,205,000 7,555,000 8,176,000 (364,000) 24,572,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion 64,928,000 2,933,000 -- -- 67,861,000
Intercompany loan payable -- 71,484,000 38,957,000 (110,441,000) --
Other 125,000 706,000 1,253,000 -- 2,084,000
------------- ------------- ------------- ------------- -------------
Total long-term liabilities 65,053,000 75,123,000 40,210,000 (110,441,000) 69,945,000
STOCKHOLDERS' EQUITY
Convertible preferred stock -- -- -- -- --
Common stock 30,000 56,139,000 33,710,000 (89,849,000) 30,000
Additional paid-in capital 83,173,000 -- -- -- 83,173,000
Accumulated other comprehensive loss (6,250,000) -- (6,250,000) 6,250,000 (6,250,000)
Accumulated deficit (27,185,000) (9,369,000) (261,000) 9,630,000 (27,185,000)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity 49,768,000 46,770,000 27,199,000 (73,969,000) 49,768,000
------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 124,026,000 $ 129,448,000 $ 75,585,000 $(184,774,000) $ 144,285,000
============= ============= ============= ============= =============
</TABLE>
11
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Quarter Ended November 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 16,009,000 $ 12,399,000 $ (971,000) $ 27,437,000
Cost of Sales -- 14,288,000 11,034,000 (971,000) 24,351,000
------------ ------------ ------------ ------------ ------------
Gross profit -- 1,721,000 1,365,000 -- 3,086,000
Operating expenses 1,974,000 3,587,000 964,000 (1,662,000) 4,863,000
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (1,974,000) (1,866,000) 401,000 1,662,000 (1,777,000)
Other income (expense)
Parent's share of subsidiaries net income (loss) (3,485,000) -- -- 3,485,000 --
Interest expense (2,102,000) (1,065,000) (986,000) 1,912,000 (2,241,000)
Other 2,618,000 31,000 -- (3,574,000) (925,000)
------------ ------------ ------------ ------------ ------------
Total other income (expense) (2,969,000) (1,034,000) (986,000) 1,823,000 (3,166,000)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (4,943,000) (2,900,000) (585,000) 3,485,000 (4,943,000)
Income tax benefit (expense) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss (4,943,000) (2,900,000) (585,000) 3,485,000 (4,943,000)
Other comprehensive income (loss)
Foreign currency translation, net of tax (950,000) -- (950,000) 950,000 (950,000)
------------ ------------ ------------ ------------ ------------
Total other comprehensive loss (950,000) -- (950,000) 950,000 (950,000)
------------ ------------ ------------ ------------ ------------
Comprehensive loss $ (5,893,000) $ (2,900,000) $ (1,535,000) $ 4,435,000 $ (5,893,000)
============ ============ ============ ============ ============
</TABLE>
12
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Quarter Ended November 30, 1999
<TABLE>
<CAPTION>
GUARANTOR NON-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)
------------ ------------ ------------ ------------ ------------
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 loss (1,993,000) (174,000) (312,000) 465,000 (2,014,000)
Other comprehensive loss
Foreign currency translation, net of tax -- -- (94,000) -- (94,000)
------------ ------------ ------------ ------------ ------------
Total other comprehensive loss -- -- (94,000) -- (94,000)
------------ ------------ ------------ ------------ ------------
Comprehensive loss $ (1,993,000) $ (174,000) $ (406,000) $ 465,000 $ (2,108,000)
============ ============ ============ ============ ============
</TABLE>
13
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Six Months Ended November 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ -- $ 31,790,000 $ 25,021,000 $ (1,731,000) $ 55,080,000
Cost of Sales -- 26,616,000 22,187,000 (1,731,000) 47,072,000
------------ ------------ ------------ ------------ ------------
Gross profit -- 5,174,000 2,834,000 -- 8,008,000
Operating expenses 3,700,000 7,236,000 2,063,000 (3,324,000) 9,675,000
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (3,700,000) (2,062,000) 771,000 3,324,000 (1,667,000)
Other income (expense)
Parent's share of subsidiaries net income
(loss) (4,360,000) -- -- 4,360,000 --
Interest expense (4,243,000) (2,204,000) (2,012,000) 3,922,000 (4,537,000)
Other 5,285,000 1,083,000 -- (7,246,000) (878,000)
------------ ------------ ------------ ------------ ------------
Total other income (expense) (3,318,000) (1,121,000) (2,012,000) 1,036,000 (5,415,000)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (7,018,000) (3,183,000) (1,241,000) 4,360,000 (7,082,000)
Income tax benefit (expense) (177,000) -- 64,000 -- (113,000)
------------ ------------ ------------ ------------ ------------
Net loss (7,195,000) (3,183,000) (1,177,000) 4,360,000 (7,195,000)
Other comprehensive loss
Foreign currency translation (3,216,000) -- (3,216,000) 3,216,000 (3,216,000)
------------ ------------ ------------ ------------ ------------
Total other comprehensive loss (3,216,000) -- (3,216,000) 3,216,000 (3,216,000)
------------ ------------ ------------ ------------ ------------
Comprehensive loss $(10,411,000) $ (3,183,000) $ (4,393,000) $ 7,576,000 $(10,411,000)
============ ============ ============ ============ ============
</TABLE>
14
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Operations
For the Six Months Ended November 30, 1999
<TABLE>
<CAPTION>
GUARANTOR NON-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)
------------ ------------ ------------ ------------ ------------
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>
15
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Six Month Period Ended November 30, 2000
<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 $(1,921,000) $(3,957,000) $ 950,000 $ 4,360,000 $ (568,000)
CASH FLOW FROM INVESTING ACTIVITIES:
-----------------------------------
Acquisition of property, plant and equipment (243,000) (883,000) (568,000) -- (1,694,000)
Investment in and loans to subsidiaries (953,000) 3,500,000 -- (2,547,000) --
Other changes, net -- 50,000 -- -- 50,000
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (1,196,000) 2,667,000 (568,000) (2,547,000) (1,644,000)
CASH FLOW FROM FINANCING ACTIVITIES:
-----------------------------------
Net borrowings under line of credit 567,000 -- 12,000 -- 579,000
Payments on long-term debt and capital leases (84,000) (645,000) (125,000) -- (854,000)
Proceeds from long-term debt 26,000 44,000 -- -- 70,000
Proceeds from sale of common stock and warrants, net 1,885,000 -- -- -- 1,885,000
Other changes, net 1,406,000 1,909,000 (1,502,000) (1,813,000) --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 3,800,000 1,308,000 (1,615,000) (1,813,000) 1,680,000
----------- ----------- ----------- ----------- -----------
NET CHANGE IN CASH 683,000 18,000 (1,233,000) -- (532,000)
CASH AT BEGINNING OF PERIOD (184,000) 58,000 2,280,000 -- 2,154,000
EFFECT OF EXCHANGE RATES ON CASH -- -- (95,000) -- (95,000)
----------- ----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 499,000 $ 76,000 $ 952,000 $ -- $ 1,527,000
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW:
-----------------------
Noncash operating expense related to:
Depreciation $ 264,000 $ 1,704,000 $ 1,205,000 $ -- $ 3,173,000
Amortization -- 195,000 450,000 -- 645,000
Cash paid during the period for:
Interest $ 3,897,000 $ 243,000 $ 2,012,000 $(1,961,000) $ 4,191,000
</TABLE>
16
<PAGE>
Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Six Months Ended November 30, 1999
<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 $(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 and warrants, 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>
17
<PAGE>
Inventories consist of the following:
November 30, May 31,
2000 2000
---- ----
Guarantor subsidiaries
Raw materials $ 5,413,000 $ 5,464,000
Work in progress 6,626,000 5,438,000
Finished goods 6,582,000 6,405,000
------------- ------------
$ 18,621,000 $ 17,307,000
============= ============
Non-guarantor subsidiaries
Raw materials $ 1,472,000 $ 1,712,000
Work in progress 7,413,000 8,142,000
Finished goods 457,000 688,000
------------- ------------
$ 9,342,000 $ 10,542,000
============= ============
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
-----------------------------------------------------
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is subject to the safe harbor created by those sections. Actual
results could differ materially from those projected in the forward-looking
statements set forth in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Overview
--------
Pacific Aerospace & Electronics, Inc., is an engineering and manufacturing
company with operations in the United States and the United Kingdom. We design,
manufacture and sell components and subassemblies used in technically demanding
environments. Products that we produce primarily for the aerospace and
transportation industries include engineering and machined, cast, and formed
metal parts and subassemblies, using aluminum, titanium, magnesium, and other
metals. Products that we produce primarily for the defense, electronics,
telecommunications, energy and medical industries include components such as
hermetically sealed electrical connectors and instrument packages and ceramic
capacitors, filters and feed-throughs. Our customers include global leaders in
all of these industries. We are organized into three operational groups: U.S.
Aerospace, U.S. Electronics, and European Aerospace.
For our fiscal year ended May 31, 2000, we had net sales of approximately $113
million, with the European Aerospace Group contributing approximately $57
million in net sales. On October 31, 2000, we announced our intention to sell
our European Aerospace Group in order to reduce our outstanding 11 1/4% senior
subordinated notes. As of May 31, 2000, we had approximately $64 million in
principal amount of 11 1/4% senior subordinated notes outstanding. Because we
have just begun the process of seeking buyers for our European Aerospace Group,
we do not know whether we will be successful in selling that group and, if
successful, we do not know the amount of net proceeds that would be available to
reduce our 11 1/4% senior subordinated notes.
Results of Operations
---------------------
Quarter Ended November 30, 2000 Compared to Quarter Ended November 30, 1999
Net Sales. Net sales decreased by $1.6 million, or 5.5%, to $27.4 million for
the quarter ended November 30, 2000, from $29.0 million for the quarter ended
November 30, 1999. The European Aerospace Group contributed $12.4 million, down
$2.6 million from the $15.0 million contributed during the quarter ended
November 30, 1999. Our customers in the European aerospace market have been
initiating lean manufacturing methods and just-in-time inventory delivery
requirements similar to those previously initiated by our customers in the U.S.
aerospace market. These initiatives have resulted in delays in orders for our
European
19
<PAGE>
Aerospace Group, which we expect to continue throughout this fiscal year. We
expect these delays to cause the group's net sales volumes to remain flat or
decrease slightly from last year. The weakness of the exchange rate of the
British pound sterling versus the U.S. dollar is also contributing to lower
reported net sales volumes from the European Aerospace Group. If the average
exchange rate for the quarter ended November 30, 2000 had been equal to the
average exchange rate for the quarter ended November 30, 1999, reported net
sales for our European Aerospace Group would have been approximately $14.1
million, or $1.7 million higher than actual. Net sales in the U.S. Aerospace
Group were $7.6 million during the quarter ended November 30, 2000, versus $7.8
million contributed during the quarter ended November 30, 1999. The U.S.
Aerospace Group's casting businesses continued to experience decreased revenues
from the heavy trucking industry similar to the first quarter of this fiscal
year. This decrease in revenue was offset partially by increased revenue from
telecommunications companies in our machining business. We expect that net sales
in our U.S. Aerospace Group will remain at approximately the current levels
throughout the remainder of this fiscal year. Our U.S. Electronics Group
contributed $7.4 million to net sales during the quarter ended November 30,
2000, up $1.2 million from $6.2 million contributed during the quarter ended
November 30, 1999. This increase was primarily attributable to additional sales
by our Filter Division of products for telecommunications systems and sales by
our Display Division of non-ruggedized flat panel displays. We expect net sales
volumes in our U.S. Electronics Group to remain constant during the remainder of
fiscal 2001.
Receivable collection periods, as calculated by dividing ending accounts
receivable balances by annualized sales for the quarter multiplied by 360 days,
decreased to 64.6 days for the quarter ended November 30, 2000 from 73.0 days
for the quarter ended November 30, 1999. This decrease was due primarily to a
decrease in accounts receivable in our European Aerospace Group and U.S.
Aerospace Group. This decrease was due to a concerted effort by the management
of the groups to increase collection efforts.
Gross Profit. Gross profit decreased by $2.2 million, or 41.5%, to $3.1 million
for the quarter ended November 30, 2000 from $5.3 million for the quarter ended
November 30, 1999. As a percentage of net sales, gross profit decreased to 11.2%
for the quarter ended November 30, 2000 from 18.1% for the quarter ended
November 30, 1999. The most significant gross margin decrease occurred in our
U.S. Aerospace Group, which continues to underperform due to the effects of
cyclical downturns in the commercial aerospace and heavy trucking transportation
industries. Gross margins for the U.S. Aerospace Group decreased from 3.87%
during the quarter ended November 30, 1999 to negative 15.56% during the quarter
ended November 30, 2000. We continue to monitor the performance of this group
closely. We have closed our U.S. Aerospace Group Casting Division's production
facility in Tacoma, Washington, and we are evaluating our options with respect
to the U.S. Aerospace Group's Casting Division. We are continuing to make
adjustments at the U.S. Aerospace Group's Engineering & Fabrication Division
that are intended to bring that division to profitability. The U.S. Aerospace
Group's Machining Division is starting to slowly recover due to orders from non-
aerospace customers, specifically telecommunications customers. We plan to
transition this non-aerospace work into our U.S. Electronics Group in order to
process the orders more efficiently. The U.S. Aerospace Group's Machining
Division will focus primarily on aerospace industry machining and assembly work.
Therefore, we expect that the
20
<PAGE>
Machining Division will continue to struggle until the effects of the apparent
aerospace industry upswing reach the second tier supply level. For the U.S.
Aerospace Group overall, we expect that gross margins will remain negative for
the remainder of the current fiscal year.
Gross margins decreased in our European Aerospace Group from 14.41% for the
quarter ended November 30, 1999 to 11.0% for the quarter ended November 30,
2000. This decrease was due to a combination of lower sales volumes, pricing
pressure from customers, and the startup costs of new product introductions. We
expect the gross margins for the European Aerospace Group to remain flat for the
third quarter of this fiscal year.
Gross margins decreased in our U.S. Electronics Group from 44.09% for the
quarter ended November 30, 1999 to 39.63% for the quarter ended November 30,
2000. This decrease was due to a different product mix within the group,
primarily an increased number of non-ruggedized flat panel displays, which had
the effect of lowering overall gross margins in this group. We expect margins
to continue to decrease slightly within the U.S. Electronics Group as the non-
aerospace machining work, which has a lower average gross margin, is
transitioned to this group from the U.S. Aerospace Group during the third
quarter of this fiscal year.
Overall, we expect consolidated gross margins to remain flat during the third
quarter of this fiscal year and to increase somewhat during the fourth quarter
with more work and shipping days and consequently higher revenue levels.
Inventory turnover, as calculated by dividing annualized sales volume for the
quarter by ending inventory, decreased to 3.9 turns for the quarter ending
November 30, 2000 from 4.5 turns for the quarter ending November 30, 1999. The
decrease in the number of inventory turns was due to lower sales volumes coupled
with higher inventory levels in our U.S. Aerospace Group. Inventory levels
increased in our U.S. Aerospace Group due to product diversification efforts.
As a result of the slowdown in commercial aerospace sales over the past two
years, inventory used for those products has not been depleted. At the same
time, efforts to diversify into other non-commercial aerospace products, such as
telecommunications products, has required a build up of inventory to support
production. We expect that our inventory turns will increase in future periods.
Operating Expenses. Operating expenses increased by $0.3 million, or 6.5%, to
$4.9 million for the quarter ended November 30, 2000 from $4.6 million for the
quarter ended November 30, 1999. As a percentage of net sales, operating
expenses increased 1.9 percentage points, to 17.7% for the quarter ended
November 30, 2000 from 15.8% for the quarter ended November 30, 1999. The
increase in operating expenses is attributable mainly to increased sales and
marketing expenditures during the quarter and to the costs of ISO certification
audits conducted in our U.S. Aerospace and U.S. Electronics Groups.
Interest Expense. Interest expense decreased by $0.4 million to $2.2 million for
the quarter ended November 30, 2000 from $2.6 million for the quarter ended
November 30, 1999. This decrease was primarily due to the $11.3 million
principal reduction in the fourth quarter of fiscal 2000 on our 11 1/4% senior
subordinated notes, which was accomplished through an exchange of outstanding
principal for common stock. The principal reduction resulted in a
21
<PAGE>
decrease of approximately $0.3 million in interest expense for the quarter. The
remaining decrease in interest expense is attributable to principal pay-down of
our bank debt during fiscal 2000 and 2001.
Other Income (Expense). Other income (expense) represents non-operational income
and expense for the period. Other expense increased to $925,000 for the quarter
ended November 30, 2000 from $14,000 for the quarter ended November 30, 1999.
Other expense for the quarter ended November 30, 2000 primarily represents a
non-cash charge of approximately $700,000 to reduce the carrying value,
approximately $900,000, of equipment used in one of our U.S. Aerospace Group's
Casting Division locations that was removed from operations, to estimated
liquidation value, approximately $200,000. This equipment is currently held for
sale. Other expense also includes an approximately $280,000 non-cash accrual for
loss on the sale of an unused building in Butler, New Jersey that was sold
during December 2000. Net proceeds from the sale of the building were
approximately $700,000, versus a carrying amount of approximately $980,000.
These non-cash charges were offset by approximately $55,000 of non-operational
income, primarily rent income derived from the non-operational building that was
sold. Future sales of assets and business units could result in significant non-
cash losses.
Provision for Income Taxes. No U.S. or U.K. tax provision or benefit was
recorded during the quarter because of our pre-tax loss position and uncertainty
of future taxable income.
Net Loss. Net loss increased by $2.9 million, or 145.0%, to a net loss of $4.9
million for the quarter ended November 30, 2000, from a net loss of $2.0 million
for the quarter ended November 30, 1999, due to the factors listed above. We
believe that we will continue to realize net losses for the remainder of this
fiscal year.
Six Months Ended November 30, 2000 Compared to Six Months Ended November 30,
1999
Net Sales. Net sales decreased by $2.5 million, or 4.3%, to $55.1 million for
the six months ended November 30, 2000, from $57.6 million for the six months
ended November 30, 1999. The European Aerospace Group contributed $25.0 million,
down $4.3 million from the $29.3 million contributed during the six months ended
November 30, 1999. Our customers in the European aerospace market have been
initiating lean manufacturing methods and just-in-time inventory delivery
requirements similar to those previously initiated by our customers in the U.S.
aerospace market. These initiatives have resulted in delays in orders for our
European Aerospace Group, which we expect to continue throughout this fiscal
year. We expect these delays to cause the group's net sales volumes to remain
flat or decrease slightly from last year. The weakness of the exchange rate of
the British pound sterling versus the U.S. dollar is also contributing to lower
net sales volumes from the European Aerospace Group. If the average exchange
rate for the six months ended November 30, 2000 had been equal to the average
exchange rate for the six months ended November 30, 1999, reported net sales for
our European Aerospace Group would have been approximately $27.5 million, or
$2.5 million higher than actual. The U.S. Aerospace Group contributed $14.9
million during the six months ended November 30, 2000, down $0.9 million from
the $15.8 million contributed
22
<PAGE>
during the six months ended November 30, 1999. The U.S. Aerospace Group's
casting businesses experienced an unanticipated revenue decline during the first
six months of fiscal 2001 as a result of lower demand for heavy trucking
products, which was primarily a result of higher fuel costs and a cyclical
downturn in the heavy trucking segment of the transportation market. This
decrease in revenue was offset partially by increased revenue from
telecommunications companies in our machining business. We expect that net sales
in our U.S. Aerospace Group will continue to remain at the approximately current
levels throughout the remainder of this fiscal year. Our U.S. Electronics Group
contributed $15.2 million to net sales during the six months ended November 30,
2000, up $2.7 million from $12.5 million contributed during the six months ended
November 30, 1999. This increase was primarily attributable to additional sales
by our U.S. Electronics Group's Filter Division of products for
telecommunications systems and sales of non-ruggedized flat panel displays by
our U.S. Electronics Group's Display Division. We expect the sales volume in our
U.S. Electronics Group to remain at approximately the current levels during the
second half of fiscal 2001.
Receivable collection periods, as calculated by dividing ending accounts
receivable balances by annualized sales for the six months multiplied by 360
days, decreased to 64.4 days for the six months ended November 30, 2000 from
73.6 days for the six months ended November 30, 1999. This decrease was due
primarily to a decrease in accounts receivable in our European Aerospace Group
and U.S. Aerospace Group. This decrease was due to a concerted effort by the
management of the groups to increase collection efforts.
Gross Profit. Gross profit decreased by $3.8 million, or 32.2%, to $8.0 million
for the six months ended November 30, 2000, from $11.8 million for the six
months ended November 30, 1999. As a percentage of net sales, gross profit
decreased to 14.5% for the six months ended November 30, 2000, from 20.5% for
the six months ended November 30, 1999. The most significant gross margin
decrease occurred in our U.S. Aerospace Group, which continues to underperform
due to the drawn out cyclical downturns in the commercial aerospace and heavy
trucking transportation industries. Gross margins for the U.S. Aerospace Group
decreased from 9.4% during the six months ended November 30, 1999 to negative
9.5% during the six months ended November 30, 2000. We continue to monitor the
performance of this group closely. We have closed our U.S. Aerospace Group
Casting Division's production facility in Tacoma, Washington, and we are
evaluating our options with respect to the U.S. Aerospace Group's Casting
Division. We are continuing to make adjustments at the U.S. Aerospace Group's
Engineering & Fabrication Division that are intended to bring that division to
profitability. The U.S. Aerospace Group Machining Division is starting to slowly
recover due to orders from non-aerospace customers, specifically
telecommunications customers. We plan to transition this non-aerospace work into
our U.S. Electronics Group in order to produce the orders more efficiently. The
U.S. Aerospace Group Machining Division will focus primarily on aerospace
industry machining and assembly work. Therefore, we expect that the Machining
Division will continue to struggle until the effects of the apparent aerospace
industry upswing reach the second tier supply level. For the U.S. Aerospace
Group overall, we expect that gross margins will remain negative for the
remainder of the current fiscal year.
23
<PAGE>
Gross margins decreased in our European Aerospace Group from 16.3% for the six
months ended November 30, 1999 to 11.3% for the six months ended November 30,
2000. This decrease was due to a combination of lower sales volumes, pricing
pressure from customers, and the startup costs of new product introductions. We
expect the gross margins for the European Aerospace Group to remain flat during
the third quarter of this fiscal year.
Gross margins increased slightly in our U.S. Electronics Group from 42.7% for
the six months ended November 30, 1999 to 43.0% for the six months ended
November 30, 2000. This increase was due to a different product mix within the
group, primarily an increase in sales volumes by our Filter Division which
substantially increased gross margins offset by increased number of non-
ruggedized flat panel displays, which had the effect of lowering gross margins
in this group. We expect margins to decrease slightly within the U.S.
Electronics Group as the non-aerospace machining work, which has a lower average
gross margin, is transitioned to this group from the U.S. Aerospace Group during
the third quarter of this fiscal year.
Overall, we expect consolidated gross margins to remain flat during the third
quarter of this fiscal year and to increase somewhat during the fourth quarter
with more work and shipping days and consequently higher revenue levels.
Inventory turnover, as calculated by dividing annualized sales volume for the
six month period by ending inventory, decreased to 3.9 turns for the six months
ending November 30, 2000 from 4.5 turns for the six months ending November 30,
1999. The decrease in the number of inventory turns was due to lower sales
volumes coupled with higher inventory levels in our U.S. Aerospace Group.
Inventory levels increased in our U.S. Aerospace Group due to product
diversification efforts. As a result of the slowdown in commercial aerospace
sales over the past two years, inventory used for those products has not been
depleted. At the same time, efforts to diversify into other non-commercial
aerospace products, such as telecommunications products, has required a build up
of inventory to support production. We expect that our inventory turns will
increase in future periods.
Operating Expenses. Operating expenses remained unchanged at $9.7 million for
the six months ended November 30, 2000 and 1999. As a percentage of net sales,
operating expenses increased 0.8 percentage points, to 17.6% for the six months
ended November 30, 2000, from 16.8% for the six months ended November 30, 1999.
Interest Expense. Interest expense decreased by $0.7 million, or 13.5%, to $4.5
million for the six months ended November 30, 2000, from $5.2 million for the
six months ended November 30, 1999. This decrease was primarily due to the $11.3
million principal reduction in the fourth quarter of fiscal 2000 on our 11 1/4%
senior subordinated notes, which was accomplished through an exchange of
outstanding principal for common stock. The principal reduction resulted in a
decrease of approximately $0.6 million in interest expense for the six months.
The remaining decrease in interest expense is attributable to principal pay-down
of our bank debt in fiscal 2000 and 2001.
Other Income (Expense). Other income (expense) includes non-recurring and non-
operational income and expense for the period. Other expense increased to
$878,000 for the six months
24
<PAGE>
ended November 30, 2000, from $11,000 for the six months ended November 30,
1999. Other expense for the six months ended November 30, 2000 primarily
represents a non-cash charge of approximately $700,000 to reduce the carrying
value of equipment, approximately $900,000, used in one of our U.S. Aerospace
Group's Casting Division locations that was removed from operations, to
estimated liquidation value, approximately $200,000. This equipment is currently
held for sale. Other expense also includes an approximately $280,000 non-cash
accrual for loss on the sale of an unused building in Butler, New Jersey that
was sold during December 2000. Net proceeds from the sale of the building were
approximately $700,000, versus a carrying amount of approximately $980,000.
These non-cash charges were offset by approximately $100,000 of non-operational
income, primarily rent income derived from the non-operational building that was
sold. Future sales of assets and business units could result in significant non-
cash losses.
Provision for Income Taxes. Income taxes for the six months ended November 30,
2000 and 1999 primarily represent changes in the valuation allowance to adjust
deferred income tax assets to amounts determined to be more likely than not to
be realizable in accordance with the guidelines set forth in FAS 109, Accounting
for Income Taxes. The adjustment for the current six month period was based upon
the amount of our U.S. net operating loss (NOL) for the current period and carry
forward amounts which will expire during this fiscal year. We believe that we
will not have sufficient taxable income during the fiscal year to be able to
derive any benefits from the expiring NOL's. No income tax benefit was recorded
for the current period NOL's, due to the uncertainty of their realization.
Deferred income tax expense will increase in the future unless it is determined
that deferred tax assets are more likely than not to be realizable.
Net Loss. Net loss increased by $3.7 million, or 105.7%, to a net loss of $7.2
million for the six months ended November 30, 2000, from a net loss of $3.5
million for the six months ended November 30, 1999, due to the factors listed
above. We believe that we will continue to realize net losses for the remainder
of this fiscal year.
Liquidity and Capital Resources
--------------------------------
Cash used in operating activities was $568,000 during the six months ended
November 30, 2000, compared to cash used in operating activities of $3.3 million
during the six months ended November 30, 1999. The change in cash used in
operating activities was primarily a result of decreasing accounts receivable
balances and increasing accounts payable and accrued liability balances. Our
success as a company will depend heavily on our ability to generate cash from
operating activities in the future. We can offer no assurance that we will
achieve profitable operations or that any profitable operations will be
sustained. We are focusing on initiatives that specifically address the need to
increase cash provided by operating activities. Some of these initiatives
include, but are not limited to, staff reductions, sales or closures of
unprofitable business units, selling of excess inventory, and general and
administrative cost controls. If we are not successful in increasing cash
provided by operating activities, we may need to sell additional equity
securities or sell assets outside of the ordinary course of business in order to
meet our obligations. There is no assurance that we will be able to sell
additional
25
<PAGE>
equity securities or to sell our assets for amounts in excess of book value. In
that situation, our inability to obtain sufficient cash if and when needed could
have a material adverse effect on our financial position, the results of our
operations, and our ability to continue as a going concern.
Cash used in investing activities decreased to $1.6 million during the six
months ended November 30, 2000, from $5.3 million during the six months ended
November 30, 1999. Amounts invested during the six months ended November 30,
2000 were primarily for production equipment and facilities improvements. We
expect to invest a similar amount into equipment during the second six months of
fiscal 2001, but we have not committed to do so. We currently do not expect to
acquire any new businesses during fiscal 2001.
Cash generated from financing activities decreased to $1.7 million during the
six months ended November 30, 2000, from $4.0 million during the six months
ended November 30, 1999. This decrease was due to substantially lower borrowings
under our lines of credit and lower long-term debt and capital lease principal
payments, offset slightly by increased proceeds from the sale of common stock
and warrants. Our existing cash and credit facilities may not be sufficient to
meet our obligations as they become due during the remainder of fiscal 2001. Our
actual cash needs will depend primarily on the amount of cash generated from or
used by operating activities. We cannot predict accurately the amount or timing
of all of our future cash needs. We are required to make an interest payment of
approximately $3.6 million on our 11 1/4% senior subordinated notes on February
1, 2001. We do not currently have sufficient cash to make this payment. If we
cannot obtain additional cash if and when needed, we may be unable to make this
interest payment or fund our operations and pay all obligations as they become
due or at all.
At May 31, 2000, our primary banking relationships included a revolving line of
credit of up to $6.3 million in the U.S. and a revolving line of credit of up to
approximately $5.0 million ((Pounds)3.5 million) in the U.K. As of November 30,
2000 the U.S. line was drawn $5.9 million and the U.K. line was unused. Our U.S.
operating line of credit has been extended through February 5, 2001. Due to our
continued losses, our current U.S. senior lender has decided not to renew our
current revolving line of credit once we have found a replacement lender. We are
currently negotiating to obtain a replacement revolving line of credit and
possible additional term loan financing in the U.S. Our current senior lender in
the U.S. has orally expressed willingness to extend our current revolving line
of credit until a replacement facility is in place, but we do not have a written
commitment to this effect. Our U.K. operating line of credit has been extended
through February 28, 2001, but the effective borrowing limit has been reduced to
approximately $2.1 million ((Pounds)1.5 million). Our continued losses and the
"going concern" warning in our auditor's report for the year ended May 31, 2000,
have made it difficult to renew or replace our existing credit facilities. If we
are unable to renew or replace our credit lines, we may not have enough cash to
fund or sustain our current operations or to meet our obligations as they become
due, including the $3.6 million interest payment on our 11 1/4% senior
subordinated notes that is due on February 1, 2001.
26
<PAGE>
In December 1998, we entered into an agreement giving us the option to purchase
three parcels of land that make up our Wenatchee campus from the Port of Chelan
County for $5.4 million. The purchase of the first parcel was completed in early
February 1999. We currently do not expect to exercise the remaining two options.
As of November 30, 2000 we had no other material commitments outstanding for
purchases of additional capital assets.
Subsequent to the end of the second quarter of fiscal 2001, in December 2000, we
sold our building located in Butler, New Jersey. The net proceeds from the sale
were approximately $700,000, compared to a carrying value of approximately
$980,000, which resulted in an approximate $280,000 loss. In December 2000 we
also sold a vacant parcel of land and parking lot located near our Wenatchee
campus for net proceeds of approximately $912,000, which resulted in an
immaterial loss on the sale.
Our working capital as of November 30, 2000 and May 31, 2000 was $25.7 million
and $29.2 million, respectively. The working capital decrease was caused by
continued losses, increasing accounts payable and accrued liability balances,
and decreasing accounts receivable balances. If we are not able to increase our
cash from operations, achieve net income and secure additional long-term
financing, our working capital will continue to decline during the remainder of
fiscal 2001.
Our consolidated financial statements have been prepared assuming that we will
continue as a going concern. However, our independent auditors in their report
accompanying our audited consolidated financial statements for fiscal 2000
stated that we have suffered recurring losses from operations which raise
substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty. If we are not sufficiently
successful in generating cash from operating activities, we may need to sell
additional common stock or other securities, or we may need to sell assets
outside the ordinary course of business. If we need to dispose of assets outside
of the ordinary course of business to generate cash, we may not be able to
realize the carrying value of those assets upon liquidation. If we are unable to
generate the necessary cash, we could be unable to continue operations.
The functional currency of our European Aerospace Group is the British Pound
Sterling. We translate the activity of our European Aerospace Group into U.S.
Dollars on a monthly basis. The balance sheet of the European Aerospace Group 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 we use the
weighted average exchange rate for the period. The value of our assets,
liabilities, revenue, and expenses may vary materially from one reporting period
to the next solely as a result of varying exchange rates. During the quarter and
six months ended November 30, 2000, the foreign currency translation adjustment
was $1.0 million and $3.2 million, respectively. We have not entered into any
hedging activity as of November 30, 2000.
At November, 2000, we had a net operating loss (NOL) carry forward for federal
income tax purposes of approximately $20 million, the benefits of which expire
in the tax year 2001 through the tax year 2020. The NOL created by the our
subsidiaries prior to their acquisition
27
<PAGE>
and the NOL 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 $2.0 million of the $20
million NOL will never become available. We have recorded a net deferred tax
asset of approximately $3.0 million at November 30, 2000. Our ability to realize
the deferred tax asset is dependent on material increases in present levels of
pre-tax income, primarily in the U.S. We expect to achieve these increases
through our continued integration, cross selling, and other operational
efficiencies, as well as other tax strategies. Deferred income tax expense will
increase in the future unless it is determined that deferred tax assets are more
likely than not to be realizable.
Significant Events During The Quarter
-------------------------------------
Potential Sale of Operating Subsidiary. We are pursuing the sale of our U.K.
subsidiary, which makes up our European Aerospace Group. We have engaged an
investment banking firm to assist us in marketing this business. We expect to
begin to receive initial bids in February 2001, and our goal is to close the
transaction by May 31, 2001. At this time we cannot reasonably determine the
timing of a sale or the final selling price for this business unit. The
European Aerospace Group contributed approximately 45% of our consolidated
revenue for the six months ended November 30, 2000 and represented approximately
50% of our consolidated assets at November 30, 2000.
If, at such time as we have committed to a formal plan of disposition of the
European Aerospace Group, any impairment of the assets of this subsidiary can be
reasonably determined, we will record any such impairment loss in our
consolidated financial statements. Although we cannot currently reasonably
determine the extent of any such impairment loss, it could be substantial.
New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, as
amended, 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. We will adopt the
provision of SFAS No. 133 in the first quarter of fiscal year 2002. We have not
determined the impact the adoption of SFAS No. 133 will have on our consolidated
financial statements.
28
<PAGE>
ITEM 3. 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 and revolving debt issued at variable
rates. Our revolving debt, which is from our credit lines in the U.S. and U.K.,
during the six month period ended November 30, 2000, had an simple average
balance of $5.7 million. Changes in the variable rate of interest will not have
a material effect on our net income. For example, a change in the variable rate
of interest of 1% would have had the effect of changing our interest expense for
the six months by approximately $28,500. Our fixed-rate debt obligations are
generally not callable until maturity and, therefore, market fluctuations in
interest rates will not affect our earnings for the period. Based upon these
facts, we do not consider the market risk exposure for interest rates to be
material. The fair value of such instruments approximates their face value,
except for our 11 1/4% senior subordinated notes, which as of November 30, 2000,
we believe were trading on the open market for approximately 50% of face value.
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. During the quarter and six months ended November 30, 2000, the
foreign currency translation adjustments were $1.0 million and $3.2 million,
respectively. We have not entered into any hedging activity as of November 30,
2000.
We are exposed to commodity price fluctuations through purchases of aluminum,
titanium, 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 November
30, 2000, we had purchase commitments for raw materials aggregating
approximately $3.0 million. Of our $3.0 million purchase commitments for raw
materials at November 30, 2000, approximately $500,000 related to an aluminum
supply purchase order with a fixed price that goes through October 2001, and the
remainder relates to a titanium supply agreement with a fixed price that goes
through December 2001. These commitments at November 30, 2000 represented less
than 5% of our consolidated cost of goods sold for fiscal 2000.
29
<PAGE>
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings relating to
claims arising out of operations in the normal course of business. The Company
is not aware of any material legal proceedings pending or threatened against the
Company or any of its properties.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) Dividend Payment Restrictions
In connection with the issuance of its 11 1/4% Senior Subordinated Notes due
2005, which have been exchanged for 11 1/4% Series B Senior Subordinated Notes
due 2005, the Company is subject to an Indenture that limits the Company's
ability to pay dividends, repurchase its equity securities, make certain other
kinds of restricted payments, and incur certain indebtedness. The Company has
never declared or paid cash dividends on the Common Stock. The Company
currently anticipates that it will retain all future earnings to fund the
operation of its business and does not anticipate paying dividends on the Common
Stock in the foreseeable future.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company (the "Annual Meeting") was
held on October 10, 2000. The shareholders voted upon the following matters at
the Annual Meeting:
(a) Election of Directors
The following six directors nominated by the Board of Directors were elected to
serve as directors of the Company until the 2001 Annual Meeting of Shareholders:
30
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
BROKER
DIRECTOR FOR AGAINST ABSTAIN NON-VOTES
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Werner Hafelfinger 27,577,728 271,287 1,189,874 -0-
Dale Rasmussen 27,672,430 176,585 1,189,874 -0-
Gene C. Sharratt 27,621,093 227,922 1,189,874 -0-
Robert M. Stemmler 27,672,541 176,474 1,189,874 -0-
William A. Wheeler 27,667,274 181,741 1,189,874 -0-
Donald A. Wright 27,334,490 514,525 1,189,874 -0-
-----------------------------------------------------------------------------------------------------------
</TABLE>
(b) Ratification of KPMG LLP as the Company's Independent Auditor
The selection of KPMG LLP as the Company's independent auditor for the 2001
fiscal year was ratified by the following vote:
For 28,419,337
Against 547,241
Abstain 72,311
Broker Non-Votes -0-
TOTAL 29,038,889
Item 5. OTHER INFORMATION
Summer 2000 Private Placement
Description of Summer 2000 Private Placement. On July 27, 2000, we issued
1,142,860 shares of common stock and warrants to purchase additional shares to
two accredited investors, Strong River Investments, Inc. and Bay Harbor
Investments, Inc., for gross proceeds of $2.0 million. We paid a commission to
Rochon Capital Group, Ltd. comprised of $80,000 in cash and warrants to purchase
79,150 shares of common stock, at an exercise price of $1.7688 per share,
exercisable through July 27, 2003, for representing Pacific Aerospace in this
transaction. After taking into consideration other expenses related to the
transaction, we received net proceeds at closing of $1,886,500, which we used to
pay down our U.S. credit line.
We also issued to the investors on July 27, 2000, closing warrants to purchase
an aggregate of 385,000 shares of common stock at an exercise price of $2.01 per
share, exercisable through July 27, 2003, and adjustable warrants and vesting
warrants to purchase a currently indeterminate number of shares, as described
below. The vesting dates and expiration dates contained in the warrants and the
numbers of shares issuable upon exercise of the warrants are subject to anti-
dilutive adjustments. The terms of the transaction, including the terms of the
warrants, were determined by arms length negotiations between Pacific Aerospace
and the investors.
31
<PAGE>
The transaction documents also provided that upon effectiveness of the
registration statement within 60 days after the first closing, a second closing
would occur, and the investors would pay an additional $1.5 million and receive
857,140 additional shares of common stock. No additional warrants would be
issued at a second closing. The effectiveness of the registration statement
within 60 days after the first closing was the only condition to the second
closing. This condition was not satisfied, and the investors have decided not
to waive the condition. As a result, the second closing will not occur.
The private placement was made pursuant to the exemption from registration
contained in Rule 506 of Regulation D under the Securities Act based on the sale
to accredited investors in a private transaction with the purchasers
acknowledging that the securities cannot be resold unless registered or exempt
from registration under the securities laws.
Closing Warrants. On July 27, 2000, Pacific Aerospace issued the accredited
investors closing warrants to purchase an aggregate of 385,000 shares of common
stock at an exercise price of $2.01 per share. The closing warrants were
exercisable in full on the date of issuance and remain exercisable until their
expiration on July 27, 2003. These warrants are not subject to any adjustments
relating to market price. The exercise price can be paid in cash, or the holder
can utilize a cashless exercise provision. The purpose of the closing warrants
was to provide the investors with an opportunity to obtain an additional return
on their investment if the common stock price exceeds $2.01 per share prior to
expiration of the warrants.
Adjustable Warrants. The adjustable warrants permit the investors to acquire
additional shares of common stock for an exercise price of $.001 per share if
the market price of the Pacific Aerospace common stock does not achieve and
maintain a specific price during each of three vesting periods. Each vesting
period consists of the 20 consecutive trading days before each vesting date.
The vesting dates are the 20th, 40th and 60th trading days after the effective
date of the registration statement, subject to the right of the investors to
accelerate the vesting dates if any of the triggering events provided in the
adjustable warrants occurs. The registration statement was filed with the
Securities and Exchange Commission on August 28, 2000, but has not yet become
effective.
On each vesting date, Pacific Aerospace will determine with the investors, based
on a formula contained in the adjustable warrants, whether the warrants have
become exercisable for any warrant shares. For each vesting period, the lowest
five closing prices for Pacific Aerospace common stock during that period will
be averaged. If the average during a vesting period is less than $1.9022 per
share, the investors will be entitled to purchase additional shares in an amount
equal to: (i) one-third of the shares purchased by the investors at closing,
multiplied by (ii) the difference between $1.9022 and the average of the lowest
five closing prices for Pacific Aerospace common stock during that vesting
period, all divided by such average. The $1.9022 was derived by taking $1.75,
which was the negotiated number intended to approximate the fair market value of
the shares and warrants sold at closing, and dividing that number by .92.
Because there are three vesting periods, the formula applies on each vesting
date to one-third of the shares purchased by the investors at closing, which
limits the effect of the market prices during any single vesting period.
32
<PAGE>
If the average of the lowest five closing prices for Pacific Aerospace common
stock is $1.9022 or above during a vesting period, Pacific Aerospace will not
have to issue additional shares of common stock for that vesting period. In
addition, if the average closing price of Pacific Aerospace common stock exceeds
$2.19 per share for any 20 consecutive trading days following the effective date
of the registration statement, no further vesting will occur and Pacific
Aerospace will never have to issue additional shares under the adjustable
warrants.
The investors can exercise adjustable warrants at an exercise price of $.001 per
share for fifteen trading days following each of the three vesting dates. The
adjustable warrants expire fifteen trading days after the third vesting date.
Once the adjustable warrants expire, the investors will not be entitled to
additional shares under the adjustable warrants, even if the Pacific Aerospace
stock price decreases after that date.
If any of several triggering events occurs before the third vesting date, the
investors will have the right to accelerate the vesting of shares under the
adjustable warrants. The triggering events include: (1) the acquisition of
more than one-third of the voting securities of Pacific Aerospace; (2) the
replacement of more than one-half of the members of the Pacific Aerospace board
of directors existing as of July 27, 2000; (3) the merger, consolidation or sale
of all or substantially all of Pacific Aerospace's assets if the holders of
Pacific Aerospace securities following the transaction hold less than two-thirds
of the securities of the surviving entity or the acquirer of the assets; (4) a
transaction that would change Pacific Aerospace from a public company to a
private company; (5) the delisting of Pacific Aerospace common stock for ten
consecutive days; (6) failure to deliver certificates to the holders in a timely
manner; (7) material breach under the transaction documents; (8) failure to
obtain an effective registration statement within 180 days after the closing; or
(9) failure to maintain the registration statement effective for the required
time period.
If any of these triggering events occurs, the investors may give Pacific
Aerospace notice, and, to the extent the adjustable warrants have not already
vested, Pacific Aerospace will have to determine whether additional shares are
issuable under the warrants, using the 20 trading days before the date of the
notice as the vesting period. These provisions have several purposes. In the
event of any of the fundamental changes to Pacific Aerospace listed as items (1)
through (5), these provisions give the investors the ability to get an early
determination of whether they are entitled to additional shares under the
adjustable warrants. Item (8) above gives the investors the right to trigger
vesting by the passage of time, even if the registration statement does not
become effective. Finally, these provisions give Pacific Aerospace an
additional incentive to comply with its obligations covered by the triggering
events listed as (6) through (9) and to cure any failure to comply.
After the number of shares issuable under the adjustable warrants is determined,
Pacific Aerospace will be required to file another registration statement to
register the resale of those shares by the investors.
Vesting Warrants. The vesting warrants permit the investors to acquire
additional shares of common stock for an exercise price of $.001 per share if
any of two sets of triggering events occurs. The purpose of the vesting warrants
is to give Pacific Aerospace an incentive not to
33
<PAGE>
cause any of the triggering events to occur prior to expiration of the vesting
warrants and an incentive to cure triggering events that occur, if they can be
cured. Each set of events has a different formula for determining the number of
shares that become issuable under the vesting warrants. If any of the nine
triggering events listed above occurs, the investors will be entitled to receive
the number of additional shares of common stock equal to the product of 30% of
$3,500,000 divided by the closing price of Pacific Aerospace common stock on the
trading day before the date of the event.
The vesting warrants also provide for additional shares under a different
formula if a second set of triggering events occurs. These events include: (1)
failure to have the registration statement effective within 60 days after the
closing; (2) other events relating to actions of Pacific Aerospace in obtaining
and maintaining an effective registration statement, and (3) the delisting of
Pacific Aerospace common stock for ten consecutive days. If any of these events
occurs, and on each monthly anniversary thereafter until cured, the investors
will be entitled to receive a number of additional shares equal to the product
of 3% of $3,500,000 divided by the closing price of Pacific Aerospace common
stock on the trading day before the date of the event or the closing price on
the trading day before the date of the anniversary, whichever is applicable.
The figure $3,500,000 represents the amount of the entire investment the
investors would have made if the second closing had occurred, and that amount
and the 30% and 3% figures were terms of the vesting warrants negotiated with
the investors.
The vesting warrants were included in this transaction instead of Pacific
Aerospace being obligated to make cash payments to the investors upon the
occurrence or continuance of the triggering events. Under the indenture
governing its outstanding 11 1/4% senior subordinated notes, Pacific Aerospace
would not be permitted to make cash payments to the investors. The vesting
warrants provide comparable equity incentives.
One of the second set of triggering events occurred because the registration
statement did not become effective within 60 days after the closing. However,
the investors waived their rights to any shares under the vesting warrants as a
result of that event. If the registration statement is not effective 180 days
after closing, shares would vest under the formula described above for the first
set of triggering events under the vesting warrants.
The vesting warrants expire five business days after the expiration of the
adjustable warrants. Once the vesting warrants expire, the investors will not be
entitled to additional shares under the vesting warrants, if one of the
triggering events occurs after the expiration date.
Limits on Shares Issuable to the Investors. The adjustable warrants and the
vesting warrants, by their terms, cannot be exercised for a number of shares
greater than the number Pacific Aerospace may issue without shareholder approval
under applicable Nasdaq rules. If the number of shares issuable would exceed
the number of shares permitted to be issued without shareholder approval under
applicable Nasdaq rules, Pacific Aerospace would have two choices. First,
Pacific Aerospace could choose to make a cash payment to the investors, if and
to the extent the cash payment is permitted by Pacific Aerospace's lenders,
equal to the excess
34
<PAGE>
shares multiplied by the closing price of Pacific Aerospace common stock on
either the 60th day following the exercise date or the exercise date, whichever
is greater. Alternatively, Pacific Aerospace could use its best efforts to
obtain shareholder approval for the issuance of the additional shares. The
indenture governing the outstanding 11 1/4% senior subordinated notes would not
currently permit Pacific Aerospace to make the cash payments to the investors.
If this circumstance were to arise, Pacific Aerospace would most likely seek
shareholder approval to issue additional shares. Pacific Aerospace would not be
subject to additional penalties if, after unsuccessfully using its best efforts
to obtain shareholder approval, the indenture prevented Pacific Aerospace from
making cash payments to the investors. In the event that the common stock is
delisted from Nasdaq, Pacific Aerospace would not be required to seek
shareholder approval to issue excess shares, and Pacific Aerospace does not
expect that it would seek shareholder approval for the issuance of excess
shares.
The closing warrants, the adjustable warrants and the vesting warrants each
provides that an investor may not exercise a warrant to the extent that such
exercise would result in the investor beneficially owning more than 9.999% of
outstanding Pacific Aerospace common stock.
Effect of the Adjustable Warrants and the Vesting Warrants. The following table
outlines the number of common shares that would be issuable under the adjustable
warrants at several hypothetical adjustment prices. The table also sets forth
the total number of shares the investors would beneficially own at such
hypothetical adjustment prices and the percentage that such shares would
constitute of the resulting outstanding common stock of Pacific Aerospace,
assuming the investors had not purchased or sold any Pacific Aerospace
securities. Each of the investors, Strong River and Bay Harbor, would own half
of the securities shown below.
The closing price of Pacific Aerospace common stock on July 26, 2000, the
trading day immediately before the closing of this transaction, was $1.5938 per
share. During calendar year 1999, the closing price of Pacific Aerospace common
stock ranged from a low of $0.5938 to a high of $2.9688 per share. During
calendar year 2000, the closing price of the common stock ranged from a low of
$0.3438 to a high of $7.00 per share.
35
<PAGE>
<TABLE>
<CAPTION>
Shares Issuable Total Shares Total Shares as
Hypothetical Shares Issuable Under Shares Issuable Issued and a Percent of
Adjustment Shares Issued Under Closing Adjustable Under Vesting Issuable to Outstanding
Price/(1)/ at Closing Warrants Warrants/(1)/ Warrants/(2)/ Investors Stock/(3)/
----- ---------- -------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
$0.25 1,142,860 385,000 7,552,814 0 9,080,674 20.90%
$0.50 1,142,860 385,000 3,204,977 0 4,732,837 12.10%
$0.60 1,142,860 385,000 2,480,338 0 4,008,198 10.44%
$0.625/(4)/ 1,142,860 385,000 2,335,410 0 3,863,270 10.11%
$0.75 1,142,860 385,000 1,755,698 0 3,283,558 8.72%
$1.00 1,142,860 385,000 1,031,058 0 2,558,918 6.93%
$1.25 1,142,860 385,000 596,275 0 2,124,135 5.82%
$1.50 1,142,860 385,000 304,419 0 1,832,279 5.06%
$1.75 1,142,860 385,000 99,379 0 1,627,239 4.52%
$2.00 1,142,860 385,000 0 0 1,527,860 4.26%
$3.00 1,142,860 385,000 0 0 1,527,860 4.26%
</TABLE>
___________________
/(1)/ Under the adjustable warrants, the adjustment price would be based on the
average of the lowest five closing prices for Pacific Aerospace common
stock during the 20 consecutive trading days before each of three vesting
dates. This table assumes that the hypothetical adjustment price is the
same for each of these vesting periods.
/(2)/ If triggering events occur under the vesting warrants, the number of
shares issuable under the vesting warrants would depend on the type and
duration of the triggering event and the price of Pacific Aerospace
common stock. This table assumes that no shares are issuable under the
vesting warrants.
/(3)/ Based on 34,367,246 shares of common stock outstanding on January 8,
2001, plus the shares issuable to investors under the adjustable
warrants, vesting warrants and closing warrants shown above.
/(4)/ Closing price of Pacific Aerospace common stock on January 8, 2001.
Nasdaq
On December 21, 2000, we received a letter from Nasdaq raising a concern
regarding the continued listing of our common stock on the Nasdaq National
Market System. The letter advised us that our common stock had failed to
maintain a minimum bid price greater than or equal to $1.00 over the previous
thirty consecutive trading days, as required by applicable Nasdaq rules. As of
January 8, 2001, our common stock continued to trade below $1.00.
36
<PAGE>
The letter advised us that we would be provided 90 calendar days, or until March
21, 2001, to regain compliance with the minimum bid price rule. The letter
further advised that if, at any time before March 21, 2001, the bid price of our
shares of common stock is equal to or greater than $1.00 for a minimum of ten
consecutive trading days, Nasdaq would determine if we comply with the rule.
However, if we were unable to demonstrate compliance with the requirement on or
before March 21, 2001, Nasdaq would provide us with written notification that
Nasdaq had determined to delist our common stock. We would then be entitled to
request a review of that determination.
We also received a letter from Nasdaq on December 6, 2000, raising concerns
about whether we would be able to sustain compliance with the continued listing
requirements of the Nasdaq Stock Market as a result of the "going concern"
warning that we received from our independent auditors in their last audit
report. Nasdaq requested that we provide it with certain information addressing
its concerns. We responded to that request in a timely manner, and Nasdaq has
not yet notified us as to whether we adequately addressed its concerns.
If our common stock were delisted, it would trade on the electronic bulletin
board, rather than on either the Nasdaq National Market or Small Cap Systems,
and the liquidity for our common stock would be adversely affected. In
addition, delisting would trigger the vesting of penalty shares under the
vesting warrants held by the investors in our Summer 2000 private placement,
which would result in additional dilution.
We believe that it is important to Pacific Aerospace and its shareholders to
continue to be listed on the Nasdaq National Market System. Accordingly, if
Nasdaq were to determine that we continued to be out of compliance with the
minimum bid price requirement or any other listing or maintenance requirements,
we currently intend that we would request a review of that determination.
Although we have not yet determined what course of action we would take if such
an appeal were unsuccessful, one alternative could be to call a special meeting
of our shareholders to approve a reverse stock split or to approve such other
appropriate action as would be reasonably calculated to bring the common stock
into compliance with the requirement.
37
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits.
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Description
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc./(6)/
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Convertible Preferred Stock, as
corrected./(8)/
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Convertible Preferred Stock.
/(20)/
3.4 Bylaws of Pacific Aerospace & Electronics, Inc., as amended./(35)/
4.1 Form of specimen certificate for Common Stock./(6)/
4.2 Form of specimen certificate for public warrants./(6)/
4.3 Form of specimen certificate for the Series A Convertible
Preferred Stock./(8)/
4.4 Form of specimen certificate for the Series B Convertible
Preferred Stock./(20)/
4.5 Form of Common Stock Purchase Warrant issued to holders of the
Series B Convertible Preferred Stock on May 15, 1998./(20)/
4.6 Securities Purchase Agreement among Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.7 Registration Rights Agreement between Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.8 Warrant between Pacific Aerospace & Electronics, Inc. and Strong
River Investments, Inc., dated as of July 27, 2000./(33)/
4.9 Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.10 Warrant between Pacific Aerospace & Electronics, Inc. and Strong
River Investments, Inc., dated as of July 27, 2000./(33)/
4.11 Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.12 Vesting Warrant between Pacific Aerospace & Electronics, Inc. and
Strong River Investments, Inc., dated as of July 27, 2000./(33)/
4.13 Vesting Warrant between Pacific Aerospace & Electronics, Inc. and
Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.14 Placement Agent Warrant between Pacific Aerospace & Electronics,
Inc. and Rochon Capital Group, Ltd., dated as of July 27, 2000.
/(34)/
38
<PAGE>
4.15 Purchase Agreement dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc./(18)/
4.16 Indenture dated as of July 30, 1998, between Pacific Aerospace &
Electronics, Inc. Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety
Products, Inc., PA&E International, Inc. and IBJ Schroder Bank &
Trust Company./(18)/
4.17 Registration Rights Agreement, dated as of July 30, 19998, between
Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc./(18)/
4.18 Form of Global Note by Pacific Aerospace & Electronics, Inc./(18)/
4.19 Form of Subsidiary Guaranty from the U.S. subsidiaries of
Pacific Aerospace & Electronics, Inc./(25)/
10.1 Amended and Restated Stock Incentive Plan./(5)/
10.2 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
/(19)/
10.3 Amended and Restated Independent Director Stock Plan./(21)/
10.4 1999 Stock Incentive Plan/(30)/
10.5 1997 Employee Stock Purchase Plan./(11)/
10.6 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright./(9)/
10.7 Amendment No. 1 to Employment Agreement, dated January 29, 1999,
between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright./(27)/
10.8 Employment Agreement, dated March 1, 1999, between Pacific
Aerospace & Electronics, Inc. and Werner Hafelfinger./(27)/
10.9 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde./(9)/
10.10 Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds./(12)/
10.11 Incentive Compensation Program./(35)/
10.12 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association./(15)/
10.13 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association./(15)
10.14 Loan Agreement, dated September 7, 1999, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.
/(29)/
10.15 Promissory Note, dated September 22, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association./(22)/
10.16 Modification and/or Extension Agreement, dated October 6, 1999,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association/(29)/
39
<PAGE>
10.17 Commercial Security Agreement, dated September 7, 1999, between
Pacific Aerospace & Electronics, Inc. and KeyBank National
Association./(29)/
10.18 Promissory Note, dated September 30, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association./(22)/
10.19 Deed of Trust, dated September 30, 1998, between Pacific
Aerospace & Electronics, Inc., KeyBank National Association and
Land Title Company, Chelan-Douglas County, Inc./(22)/
10.20 Modification and/or Extension Agreement, dated September 6,
2000, between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(35)/
10.21 Modification and/or Extension Agreement, dated November 13,
2000, between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(36)/
10.22 Modification and/or Extension Agreement dated November 28, 2000,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(36)/
10.23 Modification and/or Extension Agreement dated January 5, 2001,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(36)/
10.24 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc./(20)/
10.25 General Terms Agreement No. BCA-65323-0458 dated December 20,
1999 between The Boeing Company and Pacific Aerospace &
Electronics, Inc. (U.S. Aerospace Group and European Aerospace
Group)./(31)/
10.26 Special Business Provisions No. POP-65323-0519 December 20, 1999
between The Boeing Company and Pacific Aerospace & Electronics,
Inc. (U.S. Aerospace Group and European Aerospace Group)./(1)(31)/
10.27 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998./(1)(20)/
10.28 Option to Purchase, dated January 29, 1999, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright./(27)/
10.29 Real Estate Agreement, dated January 15, 1999, between Pacific
Aerospace & Electronics, Inc. and the Port of Chelan County./(27)/
10.30 Real Estate Purchase and Sale Agreement dated December 29, 2000,
between Pacific Aerospace & Electronics, Inc. and the Port of
Chelan County./(36)/
10.31 Agreement of Sale, dated October 23, 2000 between Balo Precision
Parts, Inc. and D&G Group II, LLC, Louis E. and Mary E. Giresi
Grandchildren's Education Trust./(36)/
27.1 Financial Data Schedule./(36)/
---------------
/(1)/ Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
/(2)/ Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended May 31, 1995.
/(3)/ Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 filed on June 19, 1996.
/(4)/ Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended May 31, 1996.
/(5)/ Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.
/(6)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 12, 1996, reporting the reincorporation merger.
40
<PAGE>
/(7)/ Incorporated by reference to the Company's Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.
/(8)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 12, 1997, reporting the Series A Preferred Stock
offering.
/(9)/ Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ending May 31, 1997.
/(10)/ Incorporated by reference to the Company's Registration Statement on
Form S-8 filed on June 11, 1997.
/(11)/ Incorporated by reference to the Company's Definitive Proxy Statement
for its 1997 Annual Shareholders Meeting, filed on August 28, 1997.
/(12)/ Incorporated by reference to the Post-Effective Amendment No. 1 to Form
SB-2, filed on November 3, 1997.
/(13)/ Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ending November 30, 1997.
/(14)/ Incorporated by reference to the Company's Registration Statement on
Form S-3 filed on December 3, 1997.
/(15)/ Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ending February 28, 1998.
/(16)/ Incorporated by reference to the Company's Current Report on Form 8-K/A,
filed on May 1, 1998.
/(17)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 10, 1998.
/(18)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 14, 1998.
/(19)/ Incorporated by reference to the Company's Registration Statement on
Form S-8 filed on November 7, 1997.
/(20)/ Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ending May 31, 1998.
/(21)/ Incorporated by reference to the Company's Definitive Proxy Statement
filed on September 1, 1998.
/(22)/ Incorporated by reference to the Company's Quarterly Report on Form
10-Q, and Form 10-Q/A, for the quarterly period ending August 31, 1998.
/(23)/ Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on October 30, 1998.
/(24)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 1998.
/(25)/ Incorporated by reference to Registration Statement on Form S-4 filed on
November 25, 1998.
/(26)/ Incorporated by reference to Amendment No. 1 to Registration Statement
on Form S-4 filed on January 20, 1999.
/(27)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.
/(28)/ Incorporated by reference to the Company's Annual Report on Form 10-K
filed on August 30, 1999.
/(29)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 1999.
/(30)/ Incorporated by reference to the Company's Definitive Proxy Statement
filed on September 1, 1999.
41
<PAGE>
/(31)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending February 29, 2000.
/(32)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 31, 2000.
/(33)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 8, 2000.
/(34)/ Incorporated by reference to the Company's Annual Report on Form 10-K
filed on August 28, 2000.
/(35)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 2000.
/(36)/ Filed with this report.
b. Reports on Form 8-K.
None.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PACIFIC AEROSPACE & ELECTRONICS, INC.
Date: January 12, 2001 /s/ Donald A. Wright
-------------------------------------------------
Donald A. Wright
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
Date: January 12, 2001 /s/ Nick A. Gerde
-------------------------------------------------
Nick A. Gerde
Vice President Finance, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
43
<PAGE>
EXHIBIT INDEX
The following documents are filed as exhibits to this Quarterly Report:
Exhibit
Number Description
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc./(6)/
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Convertible Preferred Stock,
as corrected./(8)/
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Convertible Preferred Stock.
/(20)/
3.4 Bylaws of Pacific Aerospace & Electronics, Inc., as amended.
/(35)/
4.1 Form of specimen certificate for Common Stock./(6)/
4.2 Form of specimen certificate for public warrants./(6)/
4.3 Form of specimen certificate for the Series A Convertible
Preferred Stock./(8)/
4.4 Form of specimen certificate for the Series B Convertible
Preferred Stock./(20)/
4.5 Form of Common Stock Purchase Warrant issued to holders of the
Series B Convertible Preferred Stock on May 15, 1998./(20)/
4.6 Securities Purchase Agreement among Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.7 Registration Rights Agreement between Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.8 Warrant between Pacific Aerospace & Electronics, Inc. and Strong
River Investments, Inc., dated as of July 27, 2000./(33)/
4.9 Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.10 Warrant between Pacific Aerospace & Electronics, Inc. and Strong
River Investments, Inc., dated as of July 27, 2000./(33)/
4.11 Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000./(33)/
4.12 Vesting Warrant between Pacific Aerospace & Electronics, Inc.
and Strong River Investments, Inc., dated as of July 27, 2000.
/(33)/
4.13 Vesting Warrant between Pacific Aerospace & Electronics, Inc.
and Bay Harbor Investments, Inc., dated as of July 27, 2000.
/(33)/
4.14 Placement Agent Warrant between Pacific Aerospace & Electronics,
Inc. and Rochon Capital Group, Ltd., dated as of July 27, 2000.
/(34)/
44
<PAGE>
4.15 Purchase Agreement dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., Seismic Safety Products, Inc., PA&E
International, Inc. and Friedman, Billings, Ramsey & Co., Inc.
and BancBoston Securities Inc./(18)/
4.16 Indenture dated as of July 30, 1998, between Pacific Aerospace &
Electronics, Inc. Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
Seismic Safety Products, Inc., PA&E International, Inc. and IBJ
Schroder Bank & Trust Company./(18)/
4.17 Registration Rights Agreement, dated as of July 30, 19998,
between Pacific Aerospace & Electronics, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices,
Inc., Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., Seismic Safety Products, Inc., PA&E
International, Inc. and Friedman, Billings, Ramsey & Co., Inc.
and BancBoston Securities Inc./(18)/
4.18 Form of Global Note by Pacific Aerospace & Electronics, Inc.
/(18)/
4.19 Form of Subsidiary Guaranty from the U.S. subsidiaries of
Pacific Aerospace & Electronics, Inc./(25)/
10.1 Amended and Restated Stock Incentive Plan./(5)/
10.2 Amendment No. 1 to the Amended and Restated Stock Incentive
Plan./(19)/
10.3 Amended and Restated Independent Director Stock Plan./(21)/
10.4 1999 Stock Incentive Plan/(30)/
10.5 1997 Employee Stock Purchase Plan./(11)/
10.6 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright./(9)/
10.7 Amendment No. 1 to Employment Agreement, dated January 29, 1999,
between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright./(27)/
10.8 Employment Agreement, dated March 1, 1999, between Pacific
Aerospace & Electronics, Inc. and Werner Hafelfinger./(27)/
10.9 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde./(9)/
10.10 Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds./(12)/
10.11 Incentive Compensation Program./(35)/
10.12 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association./(15)/
10.13 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association./(15)/
10.14 Loan Agreement, dated September 7, 1999, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.
/(29)/
10.15 Promissory Note, dated September 22, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association./(22)/
10.16 Modification and/or Extension Agreement, dated October 6, 1999,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association/(29)/
45
<PAGE>
10.17 Commercial Security Agreement, dated September 7, 1999, between
Pacific Aerospace & Electronics, Inc. and KeyBank National
Association./(29)/
10.18 Promissory Note, dated September 30, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association./(22)/
10.19 Deed of Trust, dated September 30, 1998, between Pacific
Aerospace & Electronics, Inc., KeyBank National Association and
Land Title Company, Chelan-Douglas County, Inc./(22)/
10.20 Modification and/or Extension Agreement, dated September 6,
2000, between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(35)/
10.21 Modification and/or Extension Agreement, dated November 13,
2000, between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(36)/
10.22 Modification and/or Extension Agreement dated November 28, 2000,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(36)/
10.23 Modification and/or Extension Agreement dated January 5, 2001,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association./(36)/
10.24 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc./(20)/
10.25 General Terms Agreement No. BCA-65323-0458 dated December 20,
1999 between The Boeing Company and Pacific Aerospace &
Electronics, Inc. (U.S. Aerospace Group and European Aerospace
Group)./(31)/
10.26 Special Business Provisions No. POP-65323-0519 December 20, 1999
between The Boeing Company and Pacific Aerospace & Electronics,
Inc. (U.S. Aerospace Group and European Aerospace Group)./(1)/
/(31)/
10.27 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998./(1)//(20)/
10.28 Option to Purchase, dated January 29, 1999, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright./(27)/
10.29 Real Estate Agreement, dated January 15, 1999, between Pacific
Aerospace & Electronics, Inc. and the Port of Chelan County.
/(27)/
10.30 Real Estate Purchase and Sale Agreement dated December 29, 2000,
between Pacific Aerospace & Electronics, Inc. and the Port of
Chelan County./(36)/
10.31 Agreement of Sale, dated October 23, 2000 between Balo Precision
Parts, Inc. and D&G Group II, LLC, Louis E. and Mary E. Giresi
Grandchildren's Education Trust./(36)/
27.1 Financial Data Schedule./(36)/
---------------
/(1)/ Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
/(2)/ Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended May 31, 1995.
/(3)/ Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 filed on June 19, 1996.
/(4)/ Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended May 31, 1996.
/(5)/ Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.
/(6)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 12, 1996, reporting the reincorporation merger.
46
<PAGE>
/(7)/ Incorporated by reference to the Company's Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.
/(8)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 12, 1997, reporting the Series A Preferred Stock
offering.
/(9)/ Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ending May 31, 1997.
/(10)/ Incorporated by reference to the Company's Registration Statement on
Form S-8 filed on June 11, 1997.
/(11)/ Incorporated by reference to the Company's Definitive Proxy Statement
for its 1997 Annual Shareholders Meeting, filed on August 28, 1997.
/(12)/ Incorporated by reference to the Post-Effective Amendment No. 1 to Form
SB-2, filed on November 3, 1997.
/(13)/ Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ending November 30, 1997.
/(14)/ Incorporated by reference to the Company's Registration Statement on
Form S-3 filed on December 3, 1997.
/(15)/ Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ending February 28, 1998.
/(16)/ Incorporated by reference to the Company's Current Report on Form 8-K/A,
filed on May 1, 1998.
/(17)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 10, 1998.
/(18)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 14, 1998.
/(19)/ Incorporated by reference to the Company's Registration Statement on
Form S-8 filed on November 7, 1997.
/(20)/ Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ending May 31, 1998.
/(21)/ Incorporated by reference to the Company's Definitive Proxy Statement
filed on September 1, 1998.
/(22)/ Incorporated by reference to the Company's Quarterly Report on Form
10-Q, and Form 10-Q/A, for the quarterly period ending August 31, 1998.
/(23)/ Incorporated by reference to the Company's Registration Statement on
Form S-1 filed on October 30, 1998.
/(24)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 1998.
/(25)/ Incorporated by reference to Registration Statement on Form S-4 filed on
November 25, 1998.
/(26)/ Incorporated by reference to Amendment No. 1 to Registration Statement
on Form S-4 filed on January 20, 1999.
/(27)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.
/(28)/ Incorporated by reference to the Company's Annual Report on Form 10-K
filed on August 30, 1999.
/(29)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 1999.
/(30)/ Incorporated by reference to the Company's Definitive Proxy Statement
filed on September 1, 1999.
47
<PAGE>
/(31)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending February 29, 2000.
/(32)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 31, 2000.
/(33)/ Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 8, 2000.
/(34)/ Incorporated by reference to the Company's Annual Report on Form 10-K
filed on August 28, 2000.
/(35)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 2000.
/(36)/ Filed with this report.
48
