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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-26088
PACIFIC AEROSPACE & ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1744587
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
430 Olds Station Road
Wenatchee, Washington 98801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509) 667-9600
Securities registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Common Stock Purchase Warrants
(Title of class)
Indicate by check mark whether the registrant (1) has 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates,
based on the closing price for the registrant's Common Stock on the Nasdaq
National Market System, as of August 27, 1998: approximately $46,808,154.00.
Indicate the number of shares outstanding of each of the registrant's classes of
common equity, as of August 27, 1998: Common Stock, $.001 par value ("Common
Stock"): 15,986,323 shares
Documents Incorporated by Reference: None, except certain Exhibits referred to
on the list of Exhibits, contained in Item 14 of this report.
TABLE OF CONTENTS
-----------------
Item of Form 10-K Page
- ----------------- ----
PART I
Item 1 - Description of Business............................................ 1
Item 2 - Description of Property............................................17
Item 3 - Legal Proceedings..................................................18
Item 4 - Submission of Matters to a Vote of Security Holders................18
PART II
Item 5 - Market for Common Equity and Related Shareholder Matters...........19
Item 6 - Selected Financial Data ...........................................23
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................25
Item 8 - Financial Statements...............................................31
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................54
PART III
Item 10 - Directors and Executive Officers of the Company....................55
Item 11 - Executive Compensation.............................................58
Item 12 - Security Ownership of Certain Beneficial
Owners and Management..............................................62
Item 13 - Certain Relationships and Related
Transactions.......................................................64
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K....66
SIGNATURES....................................................................71
EXHIBIT INDEX.................................................................72
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Pacific Aerospace & Electronics, Inc. and its subsidiaries as of May 31,
1998 (the "Company") develop, manufacture and market high-performance
electronics and metal components and assemblies for the aerospace, defense,
electronics and transportation industries. The Company has been an active
consolidator of companies, having integrated eight U.S. operating companies
since 1990. On July 30, 1998, the Company nearly doubled its size by acquiring
Aeromet International plc, a British limited company ("Aeromet"). See
"--Corporate History--Aeromet Acquisition," and "--Risk Factors--Acquisition
Risks" and "--Management of Growth." The Company has focused its consolidation
strategy on identifying and acquiring companies that (i) provide the opportunity
for increased sales penetration with the Company's existing customers and new
sales to the Company's potential customers and (ii) extend and vertically
integrate the Company's manufacturing capabilities or product lines. Since the
Company acquired Aeromet after fiscal 1998, references to the "Company" in this
Form 10-K generally do not include Aeromet, which is addressed separately.
Corporate History
The Holding Company
Donald A. Wright, the Company's Chief Executive Officer and President,
acquired Pacific Coast Technologies, Inc. ("Pacific Coast") in 1990. In 1994,
Mr. Wright formed PCT Holdings, Inc., a Washington corporation, to hold the
stock of Pacific Coast and future acquisitions. In 1995, that holding company
merged into a wholly owned subsidiary of Verazzana Ventures, Ltd. ("Verazzana"),
an inactive public company. In that merger, Verazzana changed its name to PCT
Holdings, Inc., a Nevada corporation ("PCTH"). In 1996, PCTH merged into the
Company, with the Company as the surviving entity, in order to reincorporate
under the laws of the State of Washington.
Acquisitions Through May 31, 1998
The following chart identifies each of the Company's acquisitions through
May 31, 1998, the year in which each acquisition was completed and the current
location of the acquired company's facilities, assets or processes:
Year of
Acquired Company Acquisition Current Location
---------------- ----------- ----------------
Pacific Coast Technologies, Inc. 1990 Wenatchee, Washington
Cashmere Manufacturing Co., Inc. ("Cashmere") 1994 Wenatchee, Washington
Ceramic Devices, Inc. ("Ceramic Devices") 1995 Wenatchee, Washington
Morel Industries, Inc. ("Morel") 1995 Entiat, Washington
Seismic Safety Products, Inc. ("Seismic") 1995 Wenatchee, Washington
Northwest Technical Industries, Inc. ("NTI") 1997 Sequim, Washington
Balo Precision Parts, Inc. ("Balo") 1998 Butler, New Jersey
Electronic Speciality Corporation and Displays &
Technologies, Inc. (collectively, "ESC") 1998 Vancouver, Washington
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Aeromet Acquisition
On July 30, 1998, the Company acquired Aeromet through the Company's
indirect wholly owned subsidiary, Pacific Aerospace & Electronics (UK) Limited,
for (pound)42 million (approximately $69 million) in cash (the "Aeromet
Acquisition"). Aeromet is the largest company acquired by the Company to date
and nearly doubles the Company's workforce, facilities and revenues. Aeromet is
one of the leading suppliers in the United Kingdom of magnesium and aluminum
precision sand and investment castings and titanium and aluminum formed sheet
products for the aerospace, defense and motorsport industries in Europe. The
Aeromet Acquisition has significantly expanded the Company's customer base and
product offerings. Aeromet's casting and forming technologies and products are
complementary extensions of the Company's precision metals product lines.
In order to fund the Aeromet Acquisition and provide working capital, the
Company issued $75 million of 11 1/4% Senior Subordinated Notes due 2005 (the
"Notes") in a private placement under Rule 144A of the Securities Act of 1933,
as amended ("Securities Act") that closed simultaneously with the Aeromet
Acquisition (the "Offering"). The Notes were purchased by qualified
institutional buyers and were issued pursuant to an Indenture (the "Indenture"),
dated July 30, 1998, between the Company, the Company's U.S. subsidiaries (the
"Subsidiaries") and IBJ Schroder Bank & Trust Company, as trustee. The Notes (i)
are senior subordinated, unsecured, general obligations of the Company, (ii)
will mature on August 1, 2005, unless previously redeemed pursuant to the
Indenture, and (iii) are jointly and severally guaranteed on a senior
subordinated basis by each of the Subsidiaries. See "--Business
Considerations--Significant Leverage; Liquidity" and "--Restrictive Debt
Covenants."
Business Strengths
Significant Customer Base
The Company counts among its customers many of the world's leading
aerospace, defense, electronics and transportation companies, including The
Boeing Company ("Boeing"), Raytheon/ Hughes Aircraft Company
("Raytheon/Hughes"), Honeywell, Inc. ("Honeywell"), Lockheed Martin Corporation
("Lockheed Martin"), Northrop Grumman Corporation ("Northrop Grumman"), Space
Systems/Loral, Inc., Westinghouse Electric Corporation, TRW, Inc., and Litton
Industries Inc. ("Litton"). Aeromet's leading customers include British
Aerospace plc ("British Aerospace"), Rolls Royce plc ("Rolls Royce"), GKN
Westland Aerospace, a division of GKN plc ("GKN Westland"), Lucas Aerospace plc
("Lucas Aerospace") and Alenia (Aermacchi). The Company believes that one of the
key advantages of the Aeromet Acquisition is the opportunity it creates for the
Company to access this significant base of additional customers.
Strong Position in Major Aerospace and Defense Programs
The Company supplies components and parts to Boeing for each of Boeing's
737, 747, 757, 767 and 777 commercial aircraft construction programs. Aeromet
participates in the Airbus A300/310, A320 and A330/340 commercial aircraft
construction programs. In addition, both the Company and Aeromet participate in
major defense and military aircraft programs. The Company has received numerous
quality awards from customers such as Boeing, Northrop Grumman and the aerospace
group of Kawasaki Heavy Industries Ltd. ("Kawasaki").
2
Diversity of Product Offerings and Capabilities
The Company manufactures a broad range of precision cast, machined and
assembled electronics products, which in fiscal 1998 were sold to over 250
customers in approximately 25 countries. Aeromet manufactures a broad range of
precision cast and formed metal products. In calendar 1997, Aeromet products
were sold to over 350 customers in approximately 16 countries. The Company
collaborates with many of its customers to develop products that meet specific
design or customization requests. In addition, many of the Company's
custom-developed electronics components have become widely accepted in the
industry. The Company believes that its experience and capabilities in working
with the changing needs of its customers will allow it to continue to respond to
changing market trends in its industries.
Strong Technology Position
The Company and Aeromet utilize specialized manufacturing techniques,
advanced materials science, process engineering and proprietary technologies or
processes in the manufacture of their metals and assembled products. In
particular, the Company has a broad base of expertise in the manufacture of cast
aluminum products using lost foam, sand and permanent mold casting technologies,
and in its precision machined, explosively bonded and assembled electronics
products. Aeromet possesses specialized expertise in casting magnesium and
aluminum products using lost wax and sand casting techniques and its licensed
"Sophia Process" technology, and in super plastic forming of titanium and
stretch forming of aluminum alloys. The Company owns 32 U.S. patents used in the
manufacture of its electronics products and maintains an ongoing program of
evaluating and protecting its proprietary rights and processes. The Company and
Aeromet have a number of additional patent applications pending.
Strategy
The Company's objective is to generate profitable growth by taking
advantage of available opportunities in its industries. The Company believes
that pursuing the following business strategies will enable the Company to
increase market penetration, create operating efficiencies and enhance its
competitive position in its core markets.
Leverage the Aeromet Platform
The Aeromet Acquisition significantly enhances the Company's commercial
aerospace and defense industry presence and provides the Company with a solid
platform from which to access major European commercial aircraft and aircraft
engine programs as well as markets within the European defense and
transportation industries. These markets would be difficult for the Company to
enter without a physical presence in Europe. The Company also believes that
Aeromet may provide a strategic opportunity for pursuing acquisitions of other
European aerospace, defense and transportation companies on a model similar to
that which the Company has pursued successfully in the United States.
Increase Margins Through Enhanced Marketing and Vertical Integration
The Company's strategy is to improve profit margins and revenues by (i)
consolidating the marketing of companies that share similar product lines or
customer bases and by leveraging the synergies among its consolidated companies
in order to increase customer penetration and (ii) continuing to vertically
integrate its manufacturing processes in order to improve operating efficiencies
and to develop new products and product enhancements. A key component of this
strategy is to use the Company's and Aeromet's expertise in advanced materials
science and in the manufacture and assembly of precision products to identify
new products, services and markets. The Company also
3
intends to capitalize on the current shift of commercial aircraft manufacturers
and defense contractors toward purchasing from a smaller number of suppliers
that can supply more complete systems and preassembled parts. Assembled parts
and systems generally are higher margin products than individual metal parts. By
producing products that integrate the Company's and Aeromet's metals casting,
forming and machining expertise with the Company's expertise in the manufacture
of connectors, seals, filters, relays and electronic packages, the Company
expects to improve its profit margins and position itself to capture a larger
share of its customers' total product requirements.
Leverage Product Development through Strategic and Proprietary Technologies
The Company develops new products from existing technologies in response to
specific customer requests. The Company plans to continue development of new
products for its customers and, where appropriate, to apply for additional
patents for those new technologies. The Company may acquire additional strategic
and proprietary technologies from third parties and expects to continue to
develop its research and development capabilities. The Company does not expect
to devote substantial resources to research and development that is not funded
by customers.
Pursue Other Strategic Acquisitions
The Company believes that there are and will continue to be opportunities
to grow the Company and enhance its profitability through acquisitions. The
Company intends to continue to pursue acquisitions of companies and technologies
that it believes will provide the opportunity for increased sales penetration
with existing customers and new sales to potential customers, and that will
extend and vertically integrate the Company's products and technologies.
Industry Overview
The aerospace supply industry is currently enjoying favorable trends driven
by strong growth in commercial aircraft fundamentals. Industry sources estimate
that the worldwide market for aircraft, including components, will be
approximately $520 billion over the ten-year period of 1997 through 2007.
Demand for aerospace components is closely related to delivery and use
rates for commercial aircraft. Delivery and use rates are in turn directly
related to the actual and projected volume of passenger and freight traffic,
average aircraft age and global fleet size. According to the Boeing 1998 Current
Market Outlook, world air traffic grew 6% from 1996 to 1997, following a 7%
increase in the previous year. Boeing and Airbus forecast that world air traffic
will grow by more than 5% each year over the next ten years. Boeing also
projects that during this same period domestic and international airlines will
lease or purchase over 7,600 new aircraft, thereby increasing the worldwide
commercial fleet from approximately 12,300 aircraft at the end of 1997 to
approximately 17,700 aircraft (net of retirements) at the end of 2007.
In 1997, Boeing delivered over 320 new aircraft compared to 220 new
aircraft it delivered in the prior year. In 1997, Airbus delivered 182 new
aircraft compared to 126 in the prior year. Boeing predicts that in 1998,
approximately 550 airplanes will be delivered. The Company believes that through
the near term the world's airlines will continue to add capacity and order new
aircraft in order to meet anticipated demand.
Additionally, according to the U.S. Department of Defense, defense
procurement funding is expected to grow by 40%, from approximately $43 billion
in 1998 to approximately $60 billion in 2001. The Company believes that both its
electronics and aerospace business segments will benefit from this trend.
4
As in other transportation segments, aircraft manufacturers and defense
contractors have been aggressively searching for ways to improve the quality and
reduce the cost of their manufactured products. One major area of focus has been
the manner in which they work with their supply base. Similar to automotive
manufacturers, aircraft manufacturers and defense contractors have increasingly
become product designers and assemblers rather than vertically integrated
manufacturers. As a result, these manufacturers are outsourcing component
manufacturing to independent suppliers, seeking to benefit from an independent
supplier's lower cost structure and specialized manufacturing knowledge.
Suppliers that demonstrate an ability to effectively deliver a high quality
product on the required delivery schedule at a reasonable cost will benefit from
this shift. In addition, commercial aircraft manufacturers are tending, and
defense contractors are being strongly encouraged by the U.S. Department of
Defense, to purchase from suppliers that can supply more complete systems and
preassembled parts. These shifts are leading to a consolidation in the supply
base. Certain segments of the aerospace supply base are already consolidated,
such as engines, avionics and landing gears. Other segments, however, including
structural components and electronics, remain fragmented. The Company believes
that this trend toward consolidation presents an opportunity for suppliers with
the financial and management resources to complete acquisitions and expand their
operations.
The electronics industry is similarly enjoying revenue growth in several
product sectors. According to the Economic Industries Alliance, the annual
worldwide market for electronics and components produced in the United States
totaled approximately $460 billion in 1997, representing an 11% increase over
1996 figures. Electronics components comprise the largest portion of the
worldwide electronics market, accounting for $148 billion in sales in 1997. The
Company estimates the current size of the electronics connector market to be
approximately $1 billion in annual sales. The Company believes that both defense
industry sales and sales of hermetically sealed components accounted for
significant portions of that market. Additionally, the Company estimates the
size of the electronics packaging market to be over $50 million in annual sales.
The growth in the electronics industry has been fueled by several factors,
including the rapid pace of technological advancement and development of new
products. The growth in demand by consumers and businesses for technologically
advanced electronics products has prompted manufacturers to create more
elaborate designs, which frequently require more components per unit.
Additionally, international demand for advanced electronics components is
growing rapidly as an increasing array of more complex products becomes
available in developing regions. The Company expects these favorable trends in
the electronics industry to continue and believes the outlook for the
electronics component supply industry will continue to be strong.
5
Products, Processes and Markets
The products, manufacturing processes and markets of the Company in fiscal
1998 and of Aeromet, and the industry segments in which they operate, are
summarized separately below. See "Financial Statements -- Note 3."
Segments Manufacturing Processes Sample Products Company/Facility
- -----------------------------------------------------------------------------------------------------------------------
Aerospace Metals Hot and superplastic Jet engine bulkhead components, Aeromet: Welwyn
Forming titanium forming airframe and engine details, Garden City, England
helicopter erosion shields
---------------------------------------------------------------------------------------
Cold stretch Aircraft skin panels, leading Aeromet:
aluminum forming edges and acoustic panels Birmingham, England
-------------------------------------------------------------------------------------------------------
Precision Sand, lost foam and Aircraft and truck parts Pacific Aerospace:
Casting permanent mold Entiat, Washington
casting
---------------------------------------------------------------------------------------
Investment casting Aircraft parts Aeromet: Worcester
and Rochester, England
---------------------------------------------------------------------------------------
Sand casting Aircraft engine parts and Aeromet:
windscreen canopies; Sittingbourne, England
motorsport engine parts
-------------------------------------------------------------------------------------------------------
Precision Precision machining Aircraft parts Pacific Aerospace:
Machining of bonded and cast Wenatchee, Washington
metals
------------------------------------------------------------
Aircraft parts Aeromet:
Sittingbourne, England
- -----------------------------------------------------------------------------------------------------------------------
Electronics Explosive Explosive bonding Bonded stainless steel and Pacific Aerospace:
Bonding of dissimilar metals aluminum for use in electronic Sequim, Washington
connectors and assemblies
-------------------------------------------------------------------------------------------------------
Assembled Design and Electronic connectors and Pacific Aerospace:
Electronic manufacture assemblies with ceramic and Wenatchee, Washington
Products glass hermetic seals Butler, New Jersey
------------------------------------------------------------
Ceramic discoidal electromagnetic Pacific Aerospace:
filters and capacitors Wenatchee, Washington
------------------------------------------------------------
Relays and solenoids; ruggedized Pacific Aerospace:
flat panel displays Vancouver, Washington
- -----------------------------------------------------------------------------------------------------------------------
Metals Forming
At its Welwyn Garden City and Birmingham facilities, Aeromet uses hot and
cold metal forming technologies to manufacture titanium and aluminum assemblies
and details for the commercial aerospace and defense industry. Aeromet also
performs finishing, welding, brazing and riveting processes on these parts.
Testing of these products is done using non-destructive techniques and in-house
X-ray facilities. Interactive discussions with customers enable Aeromet to
closely match component design to the most suitable forming process.
Hot Forming of Titanium. Aeromet's Welwyn Garden City facility specializes
in hot and super-plastic forming of titanium, and the Company believes it has
the largest independent capability in the European Union for that process.
Unlike most sheet metal materials, titanium and its alloys are extremely
difficult to form in a cold condition. To overcome this, Aeromet has developed
at its Welwyn Garden City site a variety of hot forming processes, including hot
die forming, hot brake press forming, superplastic forming, gas blow forming and
hot stretch-forming. These processes maximize weight savings, maintain
structural integrity, minimize cost and enable the designer to manipulate the
developing alloys into complex shapes. The components have no spring back,
little or no residual stress and are repeatable in form and thickness. Aeromet
undertakes responsibility for the design and manufactures the necessary tooling
using its in-house pattern facility, coupled with a tool bedding, fettling and
surface dressing capability. The forming equipment consists of air circulating,
low thermal mass heat treatment furnaces for temperatures up to 1,100 degrees
centigrade and related
6
quenching facilities. The Welwyn Garden City site also has the capability to
chemically mill three-dimensional components in titanium. Aeromet markets its
hot-formed titanium products primarily to the commercial aircraft, helicopter
and military aircraft markets. Aeromet's titanium products include jet engine
Nacelle bulkhead components, airframe and engine details and erosion shields for
helicopters. Aeromet's titanium products are included on the Airbus model 320,
321, 330 and 340 aircraft, the Boeing model 717 and 737 aircraft and the Dash
8-400 aircraft.
Cold Forming of Aluminum Alloys. At its Birmingham facility, Aeromet
specializes in the pressing and cold forming of aluminum alloys used for
aircraft skin panels, leading edges and acoustic panel liners. Stretch forming
is a process well suited to producing aircraft skin panels and leading edges.
Specialized equipment in the Birmingham facility has the capability to form
sheets up to 8 feet wide and up to 13 feet long with stretching loads of up to
700 tons being applied. Most tools are machined from oxidation-resistant
stainless steel castings, and forming dies up to four tons can be handled.
Together with specialist gripper jaws and rotational platen, this enables
Aeromet to stretch-form aluminum alloys into a wide variety of shapes and sizes.
Aeromet's capabilities extend from design to completion, including tooling
design and manufacture, forming, chemical milling, trimming, assembly and
quality control. The cold formed aluminum alloy products are marketed primarily
to the aerospace market.
Precision Casting
Pacific Aerospace. At its Morel facility in Entiat, Washington, the Company
designs and manufactures precision cast aluminum parts using permanent mold,
sand and lost foam casting technologies. The cast parts produced at the Morel
facility are sold principally to the transportation and aerospace industries.
Permanent Mold Casting. The permanent mold process is well-suited for
high strength, long production life parts that do not require frequent changes
in design and can be made in high volume. The Company uses this process
primarily to produce components used in diesel engines and other structural
parts for the transportation industry. The permanent mold process uses a cast
iron mold to shape the part to be cast. Molten aluminum is ladled into the
heated mold and, once cooled, the casting is removed from the mold. As the mold
is not destroyed in the production process, it can be reused.
Sand Casting. The sand casting process is more appropriate for lower
volume parts. This process uses a wooden pattern of the part to be cast, with
complex geometry and high metalicized quality. The Company uses this process to
produce parts for the aerospace industry such as housings. An automatic molding
machine hydraulically squeezes molding sand to accurately reproduce the pattern.
After molten aluminum is poured into the mold, the sand is removed, leaving the
casting. The sand mold is destroyed in the process but the sand may be recycled
for future moldings.
Lost Foam Casting. The lost foam process is well-suited for producing
parts with complex patterns, which reduces the amount of machining that would be
required if the parts had been made with sand or permanent mold castings. The
Company uses this process to produce support brackets and housings for the
transportation and aerospace industries. In the lost foam process, the pattern
is created from expanded polystyrene beads. The foam pattern is then suspended
in a large metal flask and surrounded with dry sand. Molten aluminum is poured
directly on the pattern, which vaporizes as the aluminum replaces every detail
of the pattern. The lost foam process allows for complex details of a part to be
cast with little or no touch-up, and the tooling used to create the polystyrene
patterns has an unlimited life as the tooling only comes in contact with the
polystyrene beads.
7
Aeromet. At its Rochester, Worcester and Sittingbourne, England facilities,
Aeromet manufactures aluminum investment castings and aluminum and magnesium
precision sand castings. Aeromet is a European leader in the production of light
alloy sand and investment castings for the commercial aerospace and defense
sectors.
Precision Investment Casting. At its Worcester, England facility,
Aeromet manufactures aluminum investment casting products, including aircraft
and defense system components such as electronic enclosures, aircraft engine
outer guide vanes, navigation lights, wing tip fences, winglet components, duct
stators and heads up display units. At its Rochester, England facility, Aeromet
manufactures aircraft components such as pressure tight fuel connectors. The
versatility, accuracy and replicability of the investment casting process
provides many advantages over more traditional methods of machining and
fabricating metal products from solid components. The investment casting process
uses a metal die manufactured to required specifications. Aeromet's precision
tooling capabilities permit production of metal dies that incorporate a variety
of details and features. A die can be reused to produce the required number of
parts without degradation to the original die. Aeromet's production of the die
gives the customer an incentive to order additional units of the part from
Aeromet.
Sophia Process Investment Casting. At its Worcester, England facility,
Aeromet uses the computerized "Sophia Process" to manufacture significantly
larger, more complex castings than can be made as a single part using more
traditional investment casting processes. Aeromet is one of only four licensees
of the Sophia Process, and is licensed to make and sell metal castings in the
United Kingdom, Ireland, Australia, New Zealand and certain African and Asian
countries. Parts made with the Sophia Process have relatively thin wall
thickness but have strength and ductility values comparable to fabricated,
forged and machined solid components. The Sophia Process stringently controls
the heat level and process parameters to make lighter but stronger components
that resist fracture and fatigue, and reduces machining, fabrication and
assembly costs, by eliminating both doublers at material interfaces and the
weakness and stress associated with riveted assemblies. Aeromet uses high
strength alloys with good castability to ensure that the integrity and enhanced
properties from one casting are identical to the next, and to achieve the
desired combination of tensile strength, ductility and elongation. Parts made
with the Sophia Process are used for the commercial aerospace, defense and
transportation industries. Such applications include civil aircraft, military
aircraft, missiles and underwater weapons applications and applications for the
motorsport industry. Aeromet is using the Sophia Process to produce components
for the Airbus A320, A330 and A340 aircraft, such as navigation light housings
and wing tip fences, as a single part. Parts manufactured with the Sophia
Process constituted 2% of Aeromet's 1997 net revenues. The Company believes that
the advantages of the Sophia Process and the increasing customer awareness of
those advantages will result in increased demand for parts fabricated using the
Sophia Process.
Sand Casting. At its Sittingbourne, England facility, Aeromet
manufactures aluminum and magnesium alloy precision sand castings, including
machined and finished parts for the commercial aerospace, defense and motorsport
industries. Sand casting is suitable for products that are larger than the
typical investment casting parts or products that require heavy wall sections.
These products include aircraft engine heat exchangers and air intakes, aircraft
engine fuel pump housings, aircraft windscreen canopies and high performance
motorsport engine components and gearboxes. The aluminum and magnesium alloys
have high strength and long freezing ranges and are resistant to elevated
temperatures. For such customer requirements, sand casting provides an effective
method of producing components with strength and uniformity. Aeromet has made
significant advances in both the process and materials technology for magnesium
and aluminum sand castings. Aeromet uses engineered patterns utilizing computer
assisted design technologies in order to achieve repeatable high casting
integrity and enhanced mechanical properties. Aeromet has complete
non-destructive testing and inspection facilities, such as dye penetrant flaw
detection and X-ray testing of components, as required by the rigorous standards
of the aerospace industry.
8
Precision Machining
Pacific Aerospace. At its Cashmere facility in Wenatchee, Washington, the
Company operates a precision machine shop that produces precision machined
components, structural parts and assemblies principally from aluminum and
explosively bonded metals for the commercial aerospace and defense industries.
These products range from small connectors to complex assemblies for use in
commercial and military aircraft, heavy trucks and seismic safety gas shutoff
valves. The Company uses computerized numerical control ("CNC") machining cells
to manufacture particularly complex components and assembly housings. The
Company builds its machined products either to customer specifications or
according to an engineering and tooling design developed by the Company to suit
a customer's particular need. The Company has a direct computer link to Boeing
that allows immediate access to the drawings for Boeing parts. The Company
inspects and tests its machined products at various stages of production using
non-destructive methods such as X-ray, ultra-sound and dyes before being passed
for shipment to the customer. The Company's machining operations are ISO 9002
compliant, qualifying it to perform work for most aerospace, medical equipment
and general electronic companies, and are also DI-9000A approved by Boeing.
In response to changes in its customers' manufacturing processes, the
Company often supplies its precision machined parts on a "just in time to point
of use" basis. As a result of these processes and the high quality of its
machined parts, the Company has won numerous awards for supplier excellence from
Boeing, Northrop Grumman and Kawasaki.
Aeromet. At its Sittingbourne, England facility, Aeromet operates a
precision machine shop that provides machinery and assembling capabilities for
Aeromet's casting and forming operations. This machining facility has the
technical capabilities to provide the range of machining services for complete
production and finishing of components, including design, pattern production,
casting and final machining of a component. Aeromet also performs specialized
machining of small detail components in steel and titanium.
Explosive Bonding
At its NTI facility in Sequim, Washington, the Company manufactures over 30
specialty metals using explosive metallurgical technology. Using this
technology, an explosive charge combines, at the molecular level, the surfaces
of metals such as aluminum and stainless steel, that will not normally bond to
each other using adhesives or welding. The result is a strong but lightweight
metal that can be machined and welded into complex assemblies. The Company
finishes the metals to the customer's specifications using milling, welding,
lathe and rolling techniques, and tests the finished products in its
metallurgical lab using non-destructive testing such as dye penetration and
ultrasonic scanning. The Company also uses its explosive technology to
shock-harden metals for use in applications where extremely high tensile
strength is required, such as rail track intersections and switch components and
to pressure form complex metal parts under water.
The Company's explosively bonded metals are used by customers in the
aerospace, defense, energy and marine industries. Explosively bonded metals are
used to fabricate products for highly specialized applications such as
satellites, aircraft and missiles where weight minimization is a critical
factor; oil drill heads, aircraft engine exchange tubes, and flanges and
feed-throughs for nuclear particle accelerators where strength at high
temperature and heat dissipation are critical; and naval interfaces and galvanic
structures where corrosion resistance is a requirement.
Assembled Electronics Products
The Company develops, manufactures and markets a wide array of complex
hermetically-sealed electronic connectors and assemblies, ceramic capacitors and
filters, relays and solenoids and
9
flat panel display units. These products are used for specialized applications
in the aerospace, defense, telecommunications, energy, medical and electronics
industries. Many of the Company's assembled electronics products are
specifically engineered to withstand degradation or destruction in harsh
environments, such as the ocean, space and the human body. These environments
experience extremes in temperature, pressure, corrosiveness and impact that can
make product repair or replacement difficult or impossible. To meet the demands
of these challenging applications, the Company has developed or acquired 32
patents and many proprietary processes. The types of assembled electronics
products manufactured by the Company, and their respective manufacturing
processes are as follows:
Hermetically Sealed Products. At its Pacific Coast facility in Wenatchee,
Washington, and at its Balo facility in Butler, New Jersey, the Company designs
and manufactures two lines of hermetically sealed electronic connectors,
feed-throughs, assemblies and instrument packages. Electronics must be
hermetically sealed when used in locations where the external environment can
penetrate the unit. The product line manufactured at the Balo facility is sealed
with a cost-effective, traditional glass-based sealant, which provides an
effective seal in less demanding environments. The product line manufactured at
the Pacific Coast facility is sealed with the Company's more expensive,
proprietary Kryoflex ceramic sealant for use in products that must withstand
extremely invasive environments, such as pacemakers, down-hole drilling tools,
the fiber optic termini used on the Space Station and radar arrays. Both lines
of the Company's hermetically sealed products are manufactured to customer
specifications using the Company's engineering and design expertise,
metallurgical and ceramic analysis capabilities and ceramics formulation and
production processes. Raw materials for the connectors' packages and assemblies
are formed on the Company's machining centers, CNC lathes, Swiss screw machines
and CNC-controlled laser welding machines. The Company also has the capacity to
electroplate and chemically film its products.
The Company's Pacific Coast facility also manufactures hermetically bonded
products using the Company's proprietary ceramic adhesive. This ceramic adhesive
bonds metals that will not normally bond, such as aluminum and stainless steel.
The resulting component is nearly as light as aluminum but has the superior
bonding and sealing capacity of stainless steel, making it the preferred product
where weight minimization is important, such as in space applications. The
Company also holds patents in metal matrix composite technology, which the
Company believes will allow it to produce even lighter, more durable electronics
packages in the future.
Ceramic Filters. At its Ceramic Devices facility in Wenatchee, Washington,
the Company designs and manufactures very small, specialized multilayer
discoidal (round) ceramic capacitors and filters. These products are advanced
electronic circuit filtering devices designed to filter out electromagnetic
interference ("EMI") and other undesirable electrical signals that pose
significant problems for the manufacturers and users of high-performance,
high-reliability electronic systems operating in harsh environments. The
Company's products include mini screw-in filters for telecommunications,
aerospace and defense applications; ring laser gyros; commercial eyelets for
identification friend or foe systems and satellite amplifiers; high reliability
bolts for the space shuttle's main engine controllers; filter pins and custom
filter assemblies and broad bands for military display systems. The Company is
an approved supplier of EMI devices to most aerospace and defense contractors,
and uses these filters in its own hermetically sealed electronic products. The
Company's Ceramic Devices operation has a self contained facility with plating,
Swiss turning, assembly, and product testing capabilities, and has received a
number of military and industry qualification ratings.
Relays and Solenoids. At its ESC facility in Vancouver, Washington, the
Company designs, manufactures and markets electromechanical devices, such as
relays, solenoids, sensors, electronic assemblies, actuators, time delays and
flat panel display units used in a wide variety of satellite, aircraft and
military hardware applications. The Company's relay and solenoid products
function as automatic electrical switches, designed to military specifications,
for use in demanding environments.
10
These high reliability but low power switches use only one to ten amperes,
making them suitable for applications such as satellite power bus controllers
and aircraft fuel control valves. The Company's products have been used in many
space vehicles launched by the United States and European countries. The Company
has specialized equipment for CNC milling, turning and welding which is used for
producing these products.
Flat Panel Displays and Optical Filters. At its Displays & Technologies
unit at the ESC facility, the Company designs and manufactures ruggedized and
optically enhanced flat panel displays and optical filters. The flat panel
display unit is used for commercial applications that range from GPS displays
and light control filters used on private and commercial aircraft to ground
vehicle displays and automatic teller machine displays. Military uses include
military aircraft cockpit instrumentation and high impact displays on M1A2
tanks. These displays allow users to view the image at a much higher resolution
than standard commercial resolutions. The Company's flat panel display product
is a commercial liquid crystal display ("LCD") sandwiched between layers of
glass and optical filter in the front, and heating and cooling units, and a
computerized optical enhancer, in the back. The entire unit is mounted in a
heavy duty housing unit.
Sales and Marketing; Distribution
The Company markets its precision cast and precision machined products
using the Company's direct sales force. The Company currently has direct
regional sales personnel covering the west coast of the United States and
intends to expand this sales force to cover other geographic regions as the
Company's business expands. The Company markets its assembled electronics
products in the United States, Europe and Japan through a network of
manufacturer representatives and resellers, generally established on a
geographic basis. In addition, the Company maintains an internal sales and
customer service staff and engineering capability for its assembled electronics
products to meet customer requirements for technical support. Aeromet utilizes
its own employee sales force for sales of its products to customers in England
and Wales. This internal sales force is organized into two groups, one group
responsible for sales of precision castings and one group responsible for metal
formed products. Aeromet uses independent agents to market its products to
customers in Scotland and in countries other than the United Kingdom.
Customers
The Company's top five customers, Boeing, PACCAR, Northrop Grumman, Deere &
Company and Honeywell, accounted for approximately 28%, 17%, 8%, 4% and 4%,
respectively, of the Company's fiscal 1998 net sales. Aeromet's top five
customers, British Aerospace, Rolls Royce, GKN Westland, Lucas Aerospace and
Alenia (Aermacchi), accounted for 12%, 11%, 7%, 6% and 5% of Aeromet's calendar
1997 net sales. No other customer accounted for more than 5% of either the
Company's or Aeromet's revenues during those periods. Because of the relatively
small number of customers for most of the products made by both the Company and
Aeromet, the Company's largest customers can influence product pricing and other
terms of trade. The loss of any of the Company's or Aeromet's largest customers
or reduced or canceled orders from any of those customers could have a material
adverse effect on the Company and its financial performance.
The Company and Aeromet currently serve substantially different customer
bases in similar markets. For example, the Company currently supplies components
and parts to Boeing (not currently a significant Aeromet customer) for each of
Boeing's 737, 747, 757, 767 and 777 commercial aircraft construction programs.
Aeromet currently supplies components and parts for each of Airbus' A300/310,
A320 and A330/340 commercial aircraft construction programs, for which Pacific
Aerospace is not currently a supplier. As a result, the Company expects that the
Aeromet Acquisition will provide substantial opportunities to cross market to
the Company's and Aeromet's respective customer bases.
11
Backlog
The majority of the Company's sales are made pursuant to individual
purchase orders and are subject to termination by the customer upon payment of
the cost of work in process plus a related profit factor. Historically, the
Company has experienced no significant order cancellations. As of May 31, 1998,
the Company had purchase orders and contractual arrangements evidencing
anticipated future deliveries ("backlog") through fiscal year 2000 of
approximately $70.0 million. After giving pro forma effect to the Aeromet
Acquisition as if it had occurred on June 1, 1997, the Company would have had
pro forma revenue backlog of approximately $110.0 million through fiscal year
2000, of which approximately $80.0 million is expected to be delivered in fiscal
year 1999. There is no assurance that backlog will be completed and booked as
net sales. Cancellations of pending contracts or terminations or reductions of
contracts in progress could have a material adverse effect on the Company and
its financial performance.
Competition
The Company and Aeromet are subject to substantial competition in many of
the markets that they serve. In the hot forming market, Aeromet's competitors
include Die Barnes Group Inc. and GKN Westland Aerospace (North America). In the
cold forming market, Aeromet competes with companies such as AHF and Pendle as
well as the in-house cold forming capabilities of certain of its customers,
including British Aerospace. In the sand casting market, the Company competes
with a number of regional foundries, and Aeromet's competitors include SFU
Naley, Hitchcock, and Teledyne Ryan Aeronautical. In the investment casting
market, Aeromet's competitors include the Cercast Group, Tital and Tritech. In
the precision machining market, the Company competes with a number of regional
machine shops. In the assembled electronics markets, the Company's competitors
include Amphenol Corporation, Hermetiz Seal Corporation, AVX Corporation,
Spectrum Control, Inc. and Electronics Design and Communications Instruments.
Many of these competitors have greater financial resources, broader experience,
better name recognition and more substantial marketing operations than the
Company or Aeromet, and represent substantial long-term competition for the
Company.
Components and products similar to those made by the Company and Aeromet
can be made by competitors using a number of different manufacturing processes.
Although the Company believes that its manufacturing processes, technology and
experience provide advantages to the Company's customers, such as high quality,
competitive prices and physical properties that often meet stringent demands,
alternative forms of manufacturing can be used to produce many of the components
and products made by the Company and Aeromet. Although the Company believes that
its proprietary technology may give it a competitive advantage with respect to
certain of its products, new developments by competitors are expected to
continue. The Company's and Aeromet's competitors may develop products that are
viewed by customers as more effective or more economic than the Company's
product lines. The Company and Aeromet may not be able to compete successfully
against current and future competitors, and the competitive pressures faced by
the Company and Aeromet may have a material adverse effect on the Company and
Aeromet and their financial performance.
Raw Materials
Aeromet obtains approximately 70% of its titanium from one supplier and is
subject to a lead time of approximately 80 weeks in ordering and obtaining
titanium. While Aeromet generally has managed the ordering process to obtain
titanium when needed, any failure of Aeromet to obtain titanium when needed or
any titanium cost increases imposed by that supplier could have a material
adverse effect on the Company and its financial performance. The Company
generally has readily
12
available sources of all raw materials and supplies it needs to manufacture its
products and, where possible, the Company maintains alternate sources of supply.
However, the Company does not have fixed price contracts or arrangements for all
of the raw materials and other supplies it purchases. Shortages of, or price
increases for, certain raw materials and supplies used by the Company have
occurred in the past and may occur in the future. Future shortages or price
fluctuations could have a material adverse effect on the Company's and Aeromet's
ability to manufacture and sell their products in a timely and cost-effective
manner.
Proprietary Rights
Significant aspects of the business of the Company and of Aeromet depend on
proprietary processes, know-how and other technology that is not subject to
patent protection. The Company and Aeromet each rely on a combination of trade
secret, copyright and trademark laws, confidentiality procedures and other
intellectual property protection to protect their proprietary technology.
However, there is no assurance that the Company's competitors may not develop or
utilize technology that is the same as or similar to such technology of the
Company.
The Company has 32 U.S. patents, four U.S. patent applications pending, one
Canadian patent application pending and one European patent enforceable in the
U.K., almost all of which apply to certain aspects of the Company's electronics
business and not to its aerospace business. Aeromet currently holds no patents,
but has one patent application pending in the U.K. and before the European
Patent Office. There is no assurance that any of these patent applications will
result in issued patents, that existing patents or any future patents will give
the Company any competitive advantages for its products or technology, or that,
if challenged, these patents will be held valid and enforceable. The Company's
issued patents expire at various times over the next 17 years, with 14 patents
expiring over the next five years. Although the Company believes that the
manufacturing processes of much of its patented technology are sufficiently
complex that competing products made with the same technology are unlikely,
there is no assurance that the Company's competitors will not design competing
products using the same or similar technology after these patents have expired.
Despite the precautions taken by the Company, unauthorized parties may
attempt to copy aspects of the Company's products or obtain and use information
that the Company regards as proprietary. Existing intellectual property laws
give only limited protection with respect to such actions and policing
violations of such laws is difficult. The laws of certain countries in which the
Company's products are or may be distributed do not protect products and
intellectual property rights to the same extent as do the laws of the United
States. The Company may be required to enter into costly litigation to enforce
its intellectual property rights or to defend infringement claims by others.
Such infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all.
Environmental Matters
The Company's and Aeromet's facilities are subject to federal, state and
local laws and regulations concerning solid waste disposal, hazardous materials
generation, storage, use and disposal, air emissions, waste water discharge,
employee health and other environmental matters (together, "Environmental
Laws"). Proper waste disposal and environmental regulation are major
considerations for the Company because a number of the metals, chemicals and
other materials used in and resulting from its manufacturing processes are
classified as hazardous substances and hazardous wastes. If permitting and other
requirements of applicable Environmental Laws are not met, the Company could be
liable for damages and for the costs of remedial actions and could also be
subject to fines or other penalties, including revocation of permits needed to
conduct its business. Any permit revocation could require the Company to cease
or limit production at one or more of its facilities, which could have a
material adverse effect on the Company and its financial performance. The
Company has an
13
ongoing program of monitoring and addressing environmental matters and from time
to time in the ordinary course of business is required to address minor issues
of noncompliance at its operating sites. Recently the Company identified certain
operations or processes that lacked required permits or otherwise are not in
full compliance with applicable Environmental Laws that the Company believes are
not material. The Company is taking steps to remedy this noncompliance. In
connection with its evaluation of the Aeromet Acquisition, the Company obtained
an environmental investigation of each of Aeromet's facilities. These
environmental investigations identified certain issues related to potential
permitting and remediation matters that the Company believes are not material.
The Company intends to investigate further to determine whether any actions are
required under applicable United Kingdom law.
Environmental Laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violations. As a generator of hazardous materials, the Company is subject to
financial exposure with regard to its properties even if it fully complies with
these laws. In addition, certain of the Company's facilities are located in
industrial areas and have lengthy operating histories. As a consequence, it is
possible that historical or neighboring activities have affected properties
currently owned by the Company and that, as a result, additional environmental
issues may arise in the future, the precise nature of which the Company cannot
now predict. There is no assurance that any present or future noncompliance with
Environmental Laws or future discovery of contamination will not have a material
adverse effect on the Company's results of operations or financial condition.
Government Regulation
Certain of the Company's products are manufactured and sold under United
States government contracts or subcontracts. As with all companies that provide
products or services to the federal government, the Company is directly and
indirectly subject to various federal rules, regulations and orders applicable
to government contractors. Some of these regulations relate specifically to the
vendor-vendee relationship with the government, such as the bidding and pricing
rules. Under regulations of this type, the Company must observe certain pricing
restrictions, produce and maintain detailed accounting data, and meet various
other requirements. The Company is also subject to many regulations affecting
the conduct of its business generally. For example, the Company must adhere to
federal acquisition requirements and standards established by the Occupational
Safety and Health Act relating to labor practices and occupational safety
standards. The Company is currently updating and implementing written policies
and training programs relating to employee health and safety matters at several
of its facilities. See "--Environmental Matters." Violation of applicable
government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts, or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds. Some of
the Company's customers are in the defense industry, and loss of governmental
certification by such customers could have a material adverse effect on their
purchases from the Company and the Company's business and financial performance.
Employees
The Aeromet Acquisition nearly doubled the Company's workforce. As of May
31, 1998, the Company had a total of 748 employees, of whom approximately 679
were engaged in manufacturing functions, 19 in sales and marketing, 38 in
administrative functions and 12 in executive functions. As of May 31, 1998,
Aeromet had a total of 580 employees, of whom approximately 543 were engaged in
manufacturing functions, 13 in sales and marketing, 16 in administrative
functions and eight in executive functions. None of the Company's workforce is
unionized. Certain of Aeromet's manufacturing and engineering employees are
represented by labor unions, although all negotiations are carried out through
employee work committees. Neither the Company nor Aeromet
14
have experienced any work stoppages and both believe that their relationships
with their employees are good.
Risk Factors
Acquisition Risks. The Aeromet Acquisition has substantially expanded the
Company's operations, and the performance of Aeromet will have a significant
impact on the Company's future financial results. The Aeromet Acquisition more
than doubled the Company's net sales on a pro forma basis, nearly doubled the
Company's workforce, resulted in the Company having substantial foreign
operations and imposed substantial debt service obligations on the Company. In
fiscal 1998, the Company's net sales were $54.1 million, with less than 5%
derived from foreign sales. After giving effect to the Aeromet Acquisition, pro
forma net sales for fiscal 1998 would have been $115.5 million, with
approximately 48% derived from sales outside the United States. The success of
the Company's strategy to pursue acquisitions depends upon the Company's ability
to manage the risks associated with acquisitions, including the risks of
assessing the value, strengths and weaknesses of acquisition candidates,
possible diversion of management attention from operating aspects of the
Company's business, increased borrowings, disruption of product development
cycles and dilution of earnings per share. The success of the Company's strategy
to pursue acquisitions also depends on the ability of the Company to accurately
assess problems and efficiently implement necessary changes at newly acquired
subsidiaries. For example, the Company is currently in the process of
instituting personnel and management changes and developing and implementing new
business plans for ESC, which the Company acquired in the fourth quarter of
fiscal 1998. There is no assurance that the Company's assessment of problems and
implementation of changes will be successful. A failure to achieve or sustain
the anticipated benefits of the Aeromet Acquisition or any other acquisition by
the Company could have a material adverse effect on the Company and its
financial performance.
Foreign Operations. Aeromet subjects the Company to the risks of foreign
operations, including foreign government policies and regulations; tariffs,
taxes and other trade barriers; exchange controls and limitations on dividends
or other payments; and devaluations and fluctuations in currency exchange rates.
The Company has not previously engaged in foreign currency hedging transactions,
and there is no assurance that any hedging transactions by the Company would
offset unfavorable changes in foreign currency rates.
Significant Leverage; Liquidity. As a result of the Offering, the Company
has substantial indebtedness and significant debt service obligations. The level
of the Company's indebtedness could have important consequences, including, but
not limited to, the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
product development, general corporate purposes or other purposes may be
materially limited or impaired; (ii) a significant portion of the Company's cash
flow from operations will be dedicated to the payment of principal and interest
on the Notes, thereby reducing the funds available to the Company for its
operations and future business opportunities; (iii) the Company's borrowings
from its primary bank lender bear interest at variable rates, which could result
in higher interest expense in the event of increases in interest rates; (iv) the
Company may be substantially more leveraged than certain of its competitors,
which may place the Company at a competitive disadvantage; and (v) the Company's
substantial degree of leverage may limit its flexibility to adjust to changing
market conditions, reduce its ability to withstand competitive pressures and
make it more vulnerable to a downturn in general economic conditions or in its
business or may make the Company unable to make capital expenditures. The
Company's ability to make scheduled payments on the Notes or to refinance its
other debt obligations will depend upon its future financial and operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its control.
There is no assurance that the Company's operating results, cash flow and
capital resources will be sufficient for payment of its indebtedness in the
future, and if insufficient, the Company could face substantial liquidity
problems and could be forced to reduce or
15
delay capital expenditures, dispose of material assets or operations, reduce,
restructure or refinance its indebtedness or seek additional equity capital to
meet its debt service and other obligations. There is no assurance that any of
these actions could be effected on satisfactory terms, if at all.
Restrictive Debt Covenants. The Indenture contains a number of significant
covenants that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness (including the Notes), amend certain debt instruments (including
the Indenture), pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, make capital expenditures, change the
business conducted by the Company or its subsidiaries, or engage in certain
transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under some of the agreements governing its senior
indebtedness, the Company is subject to similar covenants and certain additional
restrictions. The Company's ability to comply with such covenants may be
affected by events beyond its control, including prevailing economic, financial
and industry conditions. The breach of any of such covenants or restrictions
could result in a default, which would permit the senior lenders, or the holders
of the Notes, or both, as the case may be, to declare all amounts owed them to
be due and payable, together with accrued and unpaid interest. As a result, any
commitments of the Company's senior lenders to make further extensions of credit
could be terminated. If the Company is unable to repay its indebtedness to its
senior lenders, such lenders could proceed against any collateral securing such
indebtedness.
Aerospace Industry Risks; Cyclicality; Asia Volatility. The Company and
Aeromet operate in historically cyclical industries. The aerospace, defense and
transportation industries are sensitive to general economic conditions and have
been adversely affected by past recessions. For example, from 1990 to 1994 the
aerospace industry experienced reduced demand for commercial aircraft, a decline
in military spending and the postponement of overhaul and maintenance on
existing aircraft. In past years, the aerospace industry has been adversely
affected by a number of factors, including increased fuel and labor costs and
intense price competition. Although the aerospace supply industry currently is
enjoying favorable trends driven by strong growth in commercial aircraft demand,
there is no assurance that such trends will continue or that general economic
conditions will not lead to a downturn in demand for core components and
products of the Company or Aeromet. Moreover, as of January 1998, Boeing and
Airbus each had a 10% backlog of aircraft sales to customers in Asia. Current
financial difficulties in Asia, including currency devaluations and volatile
financial markets, are adversely affecting some Asian customers. These
difficulties may result in cancellations or delays in aircraft orders. Boeing
indicated that due to the Asian financial crisis, it expects worldwide
requirements for commercial jets will be reduced over the five-year period of
1998 through 2002 from 4,150 to 4,000 aircraft. Any cancellations or delays in
aircraft orders from customers of Boeing or Airbus could reduce demand for the
Company's products and could have a material adverse effect on the Company and
its financial performance. See "--Industry Overview."
Management of Growth. The Company has experienced rapid growth that has
placed and will continue to place significant demands on its managerial,
administrative, financial and operational resources. The Company's total number
of employees increased from approximately 748 to over 1,200 upon consummation of
the Aeromet Acquisition, and the number of its operating sites increased from
five in the United States to a total of ten in the United States and the United
Kingdom. The Company has pursued an aggressive growth strategy and expects to
continue to evaluate and pursue potential strategic acquisitions. To manage its
growth effectively, the Company must continue to improve its operational,
financial and other management processes and systems and continue to attract and
retain highly skilled personnel. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Possible Need for Additional Capital. The Company believes that the net
proceeds from the Offering together with cash from operations and other sources
will be sufficient to meet the
16
Company's currently budgeted working capital requirements for at least the next
12 months. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company's actual capital needs, however, will depend
on many factors, including the amount of revenue generated from operations,
amounts required to pay principal and interest on the Notes, bank borrowings and
other indebtedness, capital expenditures required to remain competitive, cash
required for acquired companies and future acquisitions and acquisition and
financing transaction costs, none of which can be predicted with certainty. As a
result of these factors, the Company is unable to predict accurately the amount
or timing of its future capital needs, if any. The inability to obtain
additional capital if and when needed could have a material adverse effect on
the Company and its financial performance.
Dependence on Key Personnel. The Company's success depends significantly on
Donald A. Wright, the Company's Chief Executive Officer and President, and on a
number of other senior management and operational personnel. The loss of the
services of any of these employees could have a material adverse effect on the
Company's ability to achieve its business objectives. The Company has a key man
life insurance policy on the life of Mr. Wright in the amount of $3 million. The
Company's growth and future success will depend in large part on its ability to
attract and retain additional senior managers and highly skilled personnel to
provide management and technological depth and support, to enhance and market
its existing products and to develop new products. Competition for skilled
management, technical, marketing and sales personnel is intense. There is no
assurance that the Company will be successful in attracting and retaining the
key management, technical, marketing and sales personnel needed to support its
business and its recent and future acquisitions, and failure to do so could have
a material adverse effect on the Company and its financial performance.
Technological Change; Development of New Products. The market for the
Company's and Aeromet's products is characterized by evolving technology and
industry standards, changes in customer needs, adaptation of products to
customer needs and new product introductions. The Company's success will depend
on its ability to enhance its current products and to develop new products that
meet changing customer needs, advertise and market its products and respond to
evolving industry standards and other technological changes on a timely and
cost-effective basis. The Company may not succeed in developing new products or
enhancing its existing products on a timely basis, and such new products or
enhancements may not achieve market acceptance. Furthermore, from time to time
the Company's competitors may announce new products, enhancements or
technologies that have the potential to replace or render the Company's existing
products obsolete. Any failure by the Company to anticipate or respond
adequately to changes in technology and customer preferences or to product
introductions or enhancements by others, or any significant delays in the
development or introduction of new products or product enhancements by the
Company could have a material adverse effect on the Company and its financial
performance. See "--Business Strengths; --Strategy."
Product Liability. The Company is subject to the risk of product liability
claims and lawsuits for harm caused by products of the Company. The Company
maintains product liability insurance with a maximum coverage of $2 million.
However, there is no assurance that the Company's insurance will be sufficient
to cover any claims that may arise. A successful product liability claim in
excess of the Company's insurance coverage could have a material adverse effect
on the Company and its financial performance.
ITEM 2. DESCRIPTION OF PROPERTY
The principal executive and administrative offices of the Company are
located at 430 Olds Station Road, Wenatchee, Washington. The Company's
headquarters building provides approximately 18,000 square feet of office space,
and is owned by the Company. The Company also occupies leased office facilities
in Bothell, Washington, of approximately 21,390 square feet, for base rent of
$295,000
17
per year under a lease that expires in 2003. The Company subleases 95% of the
Bothell facility to a third party and guarantees payment of the sublease. See
"Certain Relationships and Related Transactions."
The general location, use and approximate size of the Company's and
Aeromet's principal owned and leased manufacturing properties are as follows:
Approx. Own/ Annual Lease Mortgage
Segment Location Area Lease Rent Expiration Balance
- ---------------------------------------------------------------------------------------------------------------------------
Aerospace Wenatchee, Washington 42,000 Lease $199,000 2007 N/A
----------------------------------------------------------------------------------------------------------
Entiat, Washington 84,000 Own N/A N/A $1,107,000
----------------------------------------------------------------------------------------------------------
Sittingbourne, Welwyn 157,000 Lease (pound)751,000 2018 N/A
Garden City and Worcester
----------------------------------------------------------------------------------------------------------
Worcester 15,000 Lease (pound) 45,000 2003 N/A
----------------------------------------------------------------------------------------------------------
Rochester 34,000 Lease (pound)180,000 2001 N/A
----------------------------------------------------------------------------------------------------------
Birmingham 59,000 Lease (pound)236,000 2008 N/A
----------------------------------------------------------------------------------------------------------
Sittingbourne 7,000 Lease (pound) 45,000 2005 N/A
- ---------------------------------------------------------------------------------------------------------------------------
Electronics Wenatchee, Washington 49,000 Lease $200,000 2007 N/A
----------------------------------------------------------------------------------------------------------
Sequim, Washington 18,355 Own N/A N/A None
----------------------------------------------------------------------------------------------------------
Butler, New Jersey 22,400 Lease $192,000 1998 N/A
----------------------------------------------------------------------------------------------------------
Vancouver, Washington 50,000 Lease $336,000 2009 N/A
- ---------------------------------------------------------------------------------------------------------------------------
In connection with the Aeromet Acquisition, the Company entered into a
12-month option to purchase the Sittingbourne, Worcester and Welwyn Garden City
facilities that are being leased by Aeromet, for a purchase price of
approximately $12.5 million in cash. The Company is also currently negotiating
to purchase its Butler, New Jersey facility for $1.1 million in cash. That
purchase is expected to close in September 1998, subject to satisfaction of
certain closing conditions. The Company's lease on the Butler, New Jersey
facility expired in July 1998, and the Company is currently renting the facility
on a month-to-month basis.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information, Shareholders, and Dividends
- -----------------------------------------------
Until March 13, 1995, there was no public market for the Company's Common
Stock. From that date through September 14, 1995, the Common Stock was listed on
the Nasdaq Electronic Bulletin Board. From September 15, 1995 through July 15,
1996, the Common Stock was traded on the Nasdaq - Small Cap Market System under
the symbol "PCTH." Since July 16, 1996, the Company's Common Stock and Common
Stock Purchase Warrants ("Warrants") have been traded on the Nasdaq National
Market System under the symbols "PCTH" for the Common Stock and "PCTHW" for the
Warrants. Each Warrant entitles the holder to purchase one share of Common Stock
at an exercise price of $4.6875 per share.
The Nasdaq National Market System reported the following range of high and
low sales prices for the Common Stock and the Warrants for each calendar quarter
within the Company's 1997 and 1998 fiscal years:
Common Stock Warrants
-------------------- --------------------
Calendar Period High Low High Low
--------------- ------- ------- ------- -------
1996
First Quarter.................................. $4.38 $3.75 -- --
Second Quarter................................. 5.00 2.75 -- --
Third Quarter.................................. 5.0625 2.00 $ .75 $ .375
Fourth Quarter ................................ 3.125 1.9375 .6875 .28125
1997
First Quarter.................................. 4.75 2.75 1.40625 .5
Second Quarter ................................ 4.0625 2.6875 1.1875 .71875
Third Quarter.................................. 5.0625 3.7188 2.25 1.25
Fourth Quarter................................. 6.8750 4.00 2.75 1.50
1998
First Quarter.................................. 7.0313 4.1875 3.1250 1.1250
Second Quarter (April 1 - May 31, 1998)........ 6.9375 5.75 3.00 2.375
As of August 27, 1998, the closing sales price on the Nasdaq National
Market System for the Common Stock was $3.00 per share and the closing sales
price on the Nasdaq National Market System for the Warrants was $1.219 per
Warrant.
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. The Company's agreement with its
principal lender and the Indenture restrict the Company's ability to pay
dividends.
Common Stock
As of August 27, 1998, there were 940 holders of record of 15,986,323
shares of fully paid and nonassessable Common Stock outstanding. Each share of
outstanding Common Stock is entitled to participate equally in dividends as and
when declared by the Board of Directors of the Company, out of funds legally
available therefor, and is entitled to participate equally in any distribution
of net assets made to the Company's shareholders in the event of liquidation of
the Company after payment
19
to all creditors thereof. There are no preemptive rights or rights to convert
Common Stock into any other securities. The holders of the Common Stock are
entitled to one vote for each share held of record on all matters voted upon by
the Company's shareholders and may not cumulate votes for the election of
directors. Thus, the owners of a majority of the shares of the Common Stock
outstanding may elect all of the directors of the Company and the owners of the
balance of the shares of the Common Stock would not be able to elect any
directors of the Company.
Preferred Stock
The Company's Board of Directors has the authority to issue shares of
Preferred Stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights of any series
of preferred stock, including dividend rights, conversion rights, voting rights,
redemption terms, liquidation preferences, sinking fund terms and the number of
shares constituting any series, without shareholder approval, unless such
approval is required by applicable law or by the rules of any stock exchange or
automated quotation system on which securities of the Company may be listed or
traded.
Series A Preferred. In February 1997, the Board of Directors authorized the
issuance of 50,000 shares of the Company's Series A Convertible Preferred Stock
("Series A Preferred"), which were sold to a limited number of institutional
investors under Rule 506 of the Securities Act. Effective as of June 11, 1997,
the Company registered for resale up to 1,948,541 shares of Common Stock
underlying the Series A Preferred on a Form S-3 registration statement. As of
May 14, 1998, the Series A Preferred had been fully converted into 1,494,593
shares of Common Stock. The Company is in the process of deregistering the
remaining unissued 453,948 shares of Common Stock.
Series B Preferred. In May 1998, the Company sold 100,000 shares of Series
B Convertible Preferred Stock ("Series B Preferred"), and warrants to purchase
138,888 shares of Common Stock, in a private offering that generated $10.0
million in gross proceeds. In addition, the purchasers deposited $7.0 million
into escrow. Upon the closing of the Aeromet Acquisition, the Company issued the
purchasers 70,000 additional shares of Series B Preferred, and warrants to
purchase an additional 97,221 shares of Common Stock, in exchange for delivery
of the escrowed funds to the Company. The holders of the warrants issued in
connection with the Series B Preferred may exercise those warrants after May
1999 for $7.20 per share of Common Stock.
The Common Stock issuable upon conversion of the Series B Preferred and
upon exercise of the related warrants is subject to a registration rights
agreement that requires the Company to file a registration statement covering
those shares by November 1998, and to use its best efforts to make that
registration statement effective by January 1999. The registration rights
agreement also grants certain piggyback registration rights with regard to the
shares of Common Stock underlying the Series B Preferred and the related
warrants.
Upon conversion of a share of Series B Preferred, the holder will receive
the number of shares of Common Stock equal to $100 divided by the
then-applicable conversion price of the Series B Preferred. Up to $7,000,000 of
the Common Stock underlying the Series B Preferred may be converted and sold at
any time, if that Common Stock is included in an effective piggyback
registration. Shares of Series B Preferred whose underlying shares of Common
Stock are not included in a piggyback registration are not convertible until
August 1998, and may not be sold until February 1999. At that time, the
underlying Common Stock may be sold upon the effectiveness of a registration
statement, or under any applicable exemption from registration. From August 1998
until February 1999, the conversion price of the Series B Preferred is $7.20 per
share. After February 1999, the conversion price of the Series B Preferred is
equal to the lower of (a) $7.20 per share, or (b) the average of the three
lowest closing bid prices per share of the Common Stock over the 22 trading days
before conversion, but not less than a floor price (the "Floor Price"), which is
currently
20
$5.67, except in certain limited circumstances. No holder of Series B Preferred
is entitled to voluntarily convert Series B Preferred that would cause the
holder to own more than 9.9% of the Company's total outstanding Common Stock at
any one time. Any Series B Preferred outstanding on May 2003 will automatically
convert into Common Stock at the then-applicable conversion price.
After the sale in a piggyback registration, if any, of any Common Stock
issued upon conversion of Series B Preferred, the Floor Price would be
recomputed to an amount that would allow the maximum number of shares of Common
Stock to be issued, without shareholder approval, upon conversion of the
remaining unconverted shares of Series B Preferred. If the average closing bid
price of the Common Stock remains below the Floor Price for any 30 consecutive
trading days occurring after August 13, 1998, and a conversion of the Series B
Preferred into Common Stock is requested or required, then the Company must
elect to do one of the following: (A) redeem any shares of Series B Preferred
which would result upon conversion in the issuance of more than 3,000,000 shares
of Common Stock (the maximum issuable without shareholder approval), or (B)
obtain any shareholder approval necessary under its Nasdaq maintenance
requirements to allow the conversion to occur.
The Company may redeem the Series B Preferred at a redemption price of $115
per share upon 20-days notice to the holder if the holder does not elect to
convert within 15 days of receiving a redemption notice. The Company must either
redeem any Series B Preferred that it is not permitted to convert without
shareholder approval under Nasdaq requirements or obtain shareholder approval
for such conversion. So long as the Company's senior lender requires, any
redemption price, or other cash payments due to the holders, shall be converted
into promissory notes in favor of the holder until conversion or redemption is
allowed to occur.
Warrants
As of August 27, 1998, the Company had outstanding warrants to purchase
Common Stock as follows: (a) publicly traded Warrants to purchase 2,295,000
shares of Common Stock that were issued as part of the units sold in a July 1996
registered public offering, which have an exercise price of $4.6875 per share
and expire in July 2001 ("Units"); (b) warrants to purchase Units consisting of
180,000 shares of registered Common Stock and 180,000 Warrants, which were
issued to underwriters in the July 1996 public offering, and which have an
exercise price of $3.75 per Unit and expire in July 2001; (c) warrants to
purchase a total of 247,500 shares of Common Stock issued to several employees
and consultants of the Company, which have exercise prices ranging from $2.00 to
$4.80 per share, and expiration dates that range from December 2000 to February
2005; and (d) warrants to purchase 170,000 shares of Common Stock issued in
connection with the Series B Preferred ("Series B warrants"), as discussed
above. No holder of the warrants possesses any rights as a shareholder under
such warrants until such holder exercises such warrant. Of the shares issuable
upon exercise of the employee and consultant warrants, 160,000 shares have been
registered by the Company under a Form S-8 registration statement (see
"Executive Compensation") and 87,500 shares are registered for resale under a
Form S-3 registration statement.
Registration Rights
As of August 27, 1998, up to $7,000,000 in value of the Common Stock
issuable upon conversion of the Series B Preferred and Series B warrants (the
"Conversion Shares") and 590,000 shares of unregistered Common Stock are
entitled to exercise certain piggyback rights to register such shares for resale
in certain public offerings of Common Stock by the Company for its own account
or for the account of others, subject to certain conditions, including the right
of the Company's underwriters to limit the number of such shares included in the
registration. The Company has agreed to register for resale
21
any unregistered Conversion Shares by November 1998 and to use its best efforts
to have such registration statement declared effective by January 1999.
Anti-Takeover Laws
The Company, as a Washington corporation, is subject to certain provisions
of Washington law regarding significant business transactions and fair price
restrictions. These provisions may have the effect of delaying or deterring a
hostile takeover of the Company.
Washington's "Significant Business Transactions" statute (Chapter 23B.19 of
the Washington Business Corporation Act) applies to public companies that are
incorporated under Washington law. The statute prohibits, subject to certain
exceptions, a corporation from entering into any "significant business
transactions" with an "Acquiring Person" (defined generally as a person who or
an affiliated group that beneficially owns 10% or more of the outstanding voting
securities of a corporation) for a period of five years after such person or
affiliated group becomes an Acquiring Person unless the transaction or share
acquisition made by the Acquiring Person is approved prior to the share
acquisition by a majority of the target corporation's directors. In addition,
this statute prohibits a corporation subject thereto from entering into a
significant business transaction with an Acquiring Person unless the
consideration to be received by the corporation's shareholders in connection
with the proposed transaction satisfies the "fair price" provisions set forth in
the statute.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock and
publicly traded Warrants is Interwest Transfer Co., Inc.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents selected historical
financial data of the Company as of and for the years ended May 31, 1994, 1995,
1996, 1997 and 1998, is derived from the Company's audited financial statements
and contains no financial data of Aeromet. This data should be read in
conjunction with the Company's Financial Statements and Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Years Ended May 31,
--------------------------------------------------------
(in thousands, except percentage and per share data)
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Statement of Operations Data:
Net sales(1)....................... $ 2,940 $ 11,035 $20,725 $ 34,175 $ 54,099
Cost of sales...................... 2,860 9,092 16,439 25,969 39,487
-------- -------- -------- -------- --------
Gross profit....................... 80 1,943 4,286 8,206 14,612
Operating expenses................. 964 2,789 4,869 6,259 9,872
-------- -------- -------- -------- --------
Income (loss) from operations...... (884) (846) (583) 1,947 4,740
Net interest expense............... 203 282 498 384 755
Other income (expense)............. (11) (524) 15 169 (853)
-------- -------- -------- -------- --------
Income (loss) before taxes......... (1,098) (1,652) (1,066) 1,732 3,132
Income taxes (benefit)............. -- (241) (67) 50 (482)
-------- -------- -------- -------- --------
Net income (loss).................. $ (1,098) $ (1,411) $ (999) $ 1,682 $ 3,614
======== ======== ======== ======== ========
Net income (loss) per share:
Basic............................ (.60) (.41) (.16) .18 .29
Diluted.......................... (.60) (.41) (.16) .17 .27
Shares used in computation of
income (loss) per share:
Basic............................ 1,826 3,469 6,209 9,500 12,486
Diluted.......................... 1,826 3,469 6,209 10,036 13,606
Other Financial Data:
EBITDA(2).......................... $ (739) $ (437) $ 288 $ 3,305 $ 6,944
EBITDA margin...................... -- -- 1.4% 9.7% 12.8%
Depreciation and amortization...... $ 145 $ 409 $ 871 $ 1,358 $ 2,204
Capital expenditures(3)............ 81 959 1,293 2,739 10,290
At May 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents.......... $ 27 $ 1,079 $ 725 $ 3,048 $ 11,461
Working capital (deficit).......... (1,237) 1,758 952 13,090 25,599
Total assets....................... 7,894 11,630 27,649 35,752 78,580
Long-term debt (including current
portion)........................ 3,662 3,902 6,304 4,233 11,233
Shareholders' equity............... 1,226 5,454 12,539 25,619 56,142
- --------------
(1) The increases in net sales are attributable to acquisitions by the Company
and internal growth. See "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) "EBITDA" represents income from operations plus depreciation and
amortization expense. EBITDA should not be construed as an alternative to
(i) net income, as defined by generally accepted accounting principles, as
an indicator of the Company's operating performance or (ii) cash flow, as
defined by generally accepted accounting principles, as a measure of
liquidity.
23
(3) Fiscal 1998 includes capital expenditures of approximately $1.3 million for
a manufacturing building expansion, approximately $500,000 for capital
equipment and approximately $400,000 of metal finishing expenditures
associated with such manufacturing building expansion, approximately $2.0
million for a machining cell and approximately $2.7 million associated with
the acquisition and construction of the Company's headquarters building.
24
ITEM 7. 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 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" under
the captions "Overview" and "Liquidity and Capital Resources," and in
"Description of Business" under each of the captions.
Overview
The Company has been an active consolidator of companies, and its results
of operations have been substantially affected by acquisitions. As of May 31,
1998, the Company had acquired and integrated eight companies since 1990. See
"Description of Business--Corporate History." These acquisitions, as well as
internal growth in the Company's existing and acquired businesses, have resulted
in substantial increases in net sales. The Company's operating expenses and
margins and other expenses also have been affected by certain expenses directly
associated with the acquisitions and related capital raising transactions. The
Company has experienced substantial increases in all other expense categories as
a result of the increases in its operations. A portion of these expenses is
attributable to the assimilation of acquired operations into the Company's
existing businesses.
In July 1998, the Company completed the Aeromet Acquisition. The Aeromet
Acquisition will have a significant effect on the Company's future operations
and on comparisons of income, expense and balance sheet items in periods after
fiscal 1998.
Substantially all of the Company's revenues are generated by sales to
customers in the commercial aerospace, defense, electronics and transportation
industries, with commercial aerospace and defense industry sales being the most
significant. Sales to commercial aerospace and defense industry customers
comprised 42% and 20%, respectively, of total net sales in fiscal 1998. The
commercial aerospace and defense industries are cyclical in nature and subject
to changes based on general economic conditions and commercial airline industry,
defense and government spending. See "Description of Business--Industry
Overview" and "--Business Considerations--Aerospace Industry Risks; Cyclicality;
Asia Volatility."
The Company's operations are focused in development, manufacturing and
marketing of high performance electronics and metal components and assemblies.
The Company's electronics products are characterized by relatively low volumes
and high margins. In comparison, volumes have historically been higher and
margins lower for the Company's metals products. See "--Results of Operations."
The Company believes that margins will remain higher for electronic and
assembled products than for its metals products. Products incorporating both
electronics and metal parts are expected to generate margins closer to
electronics product margins. As a result of margin differences, changes in
product mix among its electronics, assembled and metals products can be expected
to affect overall margins for the Company.
The Company's sales are not subject to significant seasonal fluctuations.
However, production and resulting sales are subject to the number of working
days in any given period. Results for various periods may vary materially due to
the number of working days available in any period.
25
Results of Operations
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
discussion should be read in conjunction with the consolidated financial
statements presented in this report.
The following table sets forth for the periods indicated certain historical
statement of operations data of the Company expressed in dollars (in thousands)
and as a percentage of net sales.
Years Ended May 31,
--------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
Net sales................................ $ 20,725 100.0% $ 34,175 100.0% $ 54,099 100.0%
Cost of sales............................ 16,439 79.3 25,969 76.0 39,487 73.0
-------- -------- -------- -------- -------- --------
Gross profit............................. 4,286 20.7 8,206 24.0 14,612 27.0
Operating expenses....................... 4,869 23.5 6,259 18.3 9,872 18.2
-------- -------- -------- -------- -------- --------
Income (loss) from operations............ (583) (2.8) 1,947 5.7 4,740 8.8
Net interest expense..................... 498 2.4 384 1.1 755 1.4
Other income (expense)................... 15 -- 169 0.5 (853) (1.6)
Income tax benefit (expense)............. 67 0.3 (50) (0.1) 482 0.9
-------- -------- -------- -------- -------- --------
Net income (loss)........................ $ (999) (4.8) $ 1,682 4.9 $ 3,614 6.7
======== ======== ========
EBITDA................................... $ 288 1.4 $ 3,305 9.7 $ 6,944 12.8
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Net Sales. Net sales increased by $19.9 million, or 58%, to $54.1 million
for fiscal 1998 from $34.2 million in fiscal 1997. The significant increase in
net sales for fiscal 1998 from fiscal 1997 included increases in both commercial
aerospace industry net sales (an $11.3 million increase) and defense industry
net sales (a $3.5 million increase). The commercial aerospace industry net sales
increase was primarily attributable to increases in production at Boeing and the
related increase in demand from that customer for the Company's precision cast
and machined products. The defense industry net sales increase was primarily
attributable to an increase in orders of aerospace, satellite and weapons
systems electronics products.
Of total net sales in fiscal 1998, commercial aerospace industry net sales
comprised 42.6% of total net sales, up from 34.5% of net sales in fiscal 1997.
Defense industry sales comprised 19.9% of total net sales in fiscal 1998, down
from 21.3% of net sales in fiscal 1997.
The Company completed its Balo acquisition in February 1998 and its ESC
acquisition, effective as of March 1998. These acquisitions expanded production
of hermetically sealed product offerings and added relay, solenoid and flat
panel display product lines. See "Description of Business--Corporate History"
and "--Products, Processes and Markets--Assembled Electronics Products."
Accordingly, net sales for fiscal 1998 also included approximately four months
of operations of Balo and three months of operations for ESC, contributing
approximately $4.3 million to net sales in fiscal 1998.
Gross Profit. Gross profit increased by $6.4 million, or 78.0%, to $14.6
million for fiscal 1998 from $8.2 million in fiscal 1997. As a percentage of net
sales, gross profit increased to 27.0% in fiscal 1998 from 24.0% in fiscal 1997,
which was primarily attributable to increased efficiencies gained in
manufacturing processes and in-house production of processes that had previously
been purchased from outside vendors. The Company also believes that capital
investments in equipment and production processes contributed to the improvement
in gross profit margins.
26
Operating Expenses. Operating expenses increased by $3.6 million, or 57.1%,
to $9.9 million for fiscal 1998 from $6.3 million in fiscal 1997, partially due
to the Balo and ESC acquisitions and increased levels of operations in fiscal
1998. As a percentage of net sales, operating expenses remained essentially
unchanged.
EBITDA. EBITDA increased by $3.6 million, or 109.1%, to $6.9 million for
fiscal 1998 from $3.3 million in fiscal 1997. As a percentage of net sales,
EBITDA increased to 12.8% in fiscal 1998 from 9.7% in fiscal 1997. The increase
in EBITDA as a percentage of net sales during this period was primarily
attributable to production efficiencies and improved capacity utilization.
Net Interest Expense. Net interest expense increased $371,000, or 96.6%, to
$755,000 for fiscal 1998 from $384,000 in fiscal 1997. This increase was
primarily due to the Company's financing of capital equipment purchases and the
debt incurred to finance the expansion of its Wenatchee facilities to support
growth in net sales.
Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other expense increased to
$853,000 in fiscal 1998 from income of $169,000 in fiscal 1997. This increase of
$1,022,000 was due principally to a $1.0 million write-off of portions of notes
receivable and associated debt restructuring and related expenses in connection
with the termination of the Company's efforts during the third quarter of fiscal
1998 to form an information technology group. See "Certain Relationships and
Related Transactions."
Net Income. Net income increased $1.9 million, or 111.8% to $3.6 million
for fiscal 1998 from $1.7 million in 1997, primarily as a result of the factors
discussed above.
Year Ended May 31, 1997 Compared to Year Ended May 31, 1996
Net Sales. Net sales increased by $13.5 million, or 65.2%, to $34.2 million
for fiscal 1997 from $20.7 million in fiscal 1996. This increase was primarily
attributable to larger order sizes for electronics products, due to broader
market acceptance of the Company's electronics products and technologies, which
increased sales of higher priced products and added new customers.
The Company acquired NTI in April 1997, which added capabilities for
explosive bonding of specialty metals. See "Business--Corporate History" and
"--Products, Processes and Markets--Explosive Bonding." Accordingly, net sales
for fiscal 1997 included one month of operations of NTI, which contributed
$183,000 to total net sales for that year.
Gross Profit. Gross profit increased by $3.9 million, or 90.7%, to $8.2
million for fiscal 1997, up from $4.3 million in fiscal 1996. As a percentage of
net sales, gross profit increased to 24.0% in fiscal 1997 from 20.7% in fiscal
1996. The increase in gross profit as a percentage of net sales was primarily
attributable to achieving revenue levels which allowed for production
efficiencies and increased capacity utilization. The Company also believes that
its investments in manufacturing equipment contributed to improvements in gross
profit margins.
Operating Expenses. Operating expenses increased by $1.4 million, or 28.6%,
to $6.3 million for fiscal 1997, from $4.9 million for fiscal 1996. As a
percentage of net sales, operating expenses decreased to 18.3% in fiscal 1997
from 23.5% in fiscal 1996. The substantial decrease in operating expenses as a
percentage of net sales was primarily attributable to the Company's improved
ability to leverage its operating costs and the consolidation of certain
operations to the Company's Wenatchee manufacturing campus. Specifically, both
CDI in the electronics segment and Cashmere in the aerospace segment were
consolidated into the Company's Wenatchee manufacturing campus. See "Description
of Business--Products, Processes and Markets--Assembled Electronics Products"
and "--Precision Machining."
27
EBITDA. EBITDA increased by $3.0 million, or 1,000.0%, to $3.3 million for
fiscal 1997, up from $300,000 for fiscal 1996. As a percentage of net sales,
EBITDA increased to 9.7% in fiscal 1997, from 1.4% in fiscal 1996. The
substantial increase in EBITDA as a percentage of net sales was primarily
attributable to efficiencies gained in manufacturing processes, consolidation of
certain operations to the Company's Wenatchee campus allowing for overhead
efficiencies, and increases in net sales not requiring incremental increases in
operating expenses.
Net Interest Expense. Net interest expense decreased $114,000, or 22.9%, to
$384,000 for fiscal 1997 from $498,000 in fiscal 1996, primarily as a result of
the repayment of debt that was funded by proceeds from a July 1996 public and a
February 1997 private offering of equity securities, and the reduction of bank
line of credit balances throughout the year.
Other Income (Expense). Other income increased to $169,000 in fiscal 1997
from income of $15,000 in fiscal 1996 primarily as a result of sale of scrap and
recycling of excess materials in the manufacturing process.
Net Income. Net income increased $2.7 million to $1.7 million for fiscal
1997 from a loss of $999,000 in fiscal 1996 primarily as a result of factors
discussed above.
Inflation
Management believes that the Company's operations for the periods discussed
have not been adversely affected by inflation.
Liquidity and Capital Resources
Cash generated from operating activities was $1.6 million for fiscal 1998
compared to cash used of $212,000 in fiscal 1997. The change in net cash from
operations was primarily a result of 111.8% increase in net income from $1.7
million in fiscal 1997 to $3.6 million in fiscal 1998. The increase in net
income was partially offset by increases in accounts receivable and inventories
to support revenue growth. Increases in accounts payable, accrued liabilities
and other liabilities also contributed to increased cash from operations.
Cash used in investing activities increased from $2.0 million in fiscal
1997 to $16.7 million in fiscal 1998, an increase of $14.7 million. The change
results primarily from the Company's increased investment in property and
equipment of $6.5 million in fiscal 1998 compared to $2.1 million in fiscal 1997
and the issuance of $6.3 million in notes receivable in connection with the
investment in a proposed information technology group. Of the total $6.3
million, a net of $4.6 million is represented by an investment in the common
stock of a third party internet services provider. See "Certain Relationships
and Related Transactions."
Cash generated from financing activities increased by $19.0 million, to
$23.5 million in fiscal 1998, from $4.5 million in fiscal 1997. During fiscal
1998, the Company completed several financing transactions, receiving net
proceeds from long-term debt financing of $10.1 million (including net proceeds
from convertible notes of $5.4 million); $2.2 million from the sale of Common
Stock; net proceeds of $9.3 million from the sale of Series B Preferred, and
$3.8 million from the proceeds from exercise of stock options and warrants. Cash
generated by the equity financing transactions was offset to a certain degree by
payments on long-term debt and capital leases of $1.5 million during the year.
See "Market for Common Equity and Related Shareholder Matters."
Capital expenditures were $10.3 million during fiscal 1998, which is higher
than normal due to approximately $4.7 million for expansion of the Company's
Wenatchee manufacturing facilities and acquisition and construction of its
headquarters, with the balance of $5.6 million related primarily to
28
purchases of machinery and equipment. During fiscal 1998, the Company
substantially completed an addition to its Wenatchee facilities consisting of
approximately 12,000 square feet of production space. The cost of this expansion
was approximately $1.3 million. The Company has entered into a term loan with
its primary senior lender for approximately $712,000 of these expansion costs.
The Company has also acquired certain property adjacent to its existing
Wenatchee on which it built an office building to house the Company's executive,
administrative and accounting personnel. This facility was occupied in August
1998. Total project costs for the office building are estimated at approximately
$3.0 million and have been or will be funded from working capital. The Company
is currently negotiating the purchase of the Balo facility for approximately
$1.1 million. As of May 31, 1998, the Company had no material commitments
outstanding for purchases of additional capital assets.
The Company's working capital, as of May 31, 1998 and 1997 was $25.6
million and $13.1 million, respectively. The increase in working capital in
fiscal 1998 over fiscal 1997 was primarily the result of the equity and
financing activities discussed above and the Company's improved net income from
operations. In July 1998, the Company completed an offering of $75,000,000 of 11
1/4% senior subordinated notes (the "Notes") to qualified institutional buyers
to finance the Aeromet Acquisition. The Notes will mature on August 1, 2005,
unless previously redeemed. The Notes will be redeemable at the option of the
Company on or after August 1, 2003. In addition, on or before August 1, 2001,
the Company may redeem up to 20% of the original aggregate principal amount of
the Notes, subject to certain conditions. The Company believes that the net
proceeds from this Offering plus cash from operations will be sufficient to meet
the Company's cash requirements and to fund budgeted capital expenditures for
fiscal 1999. See "Description of Business--Corporate History--Aeromet
Acquisition" and "--Business Considerations--Significant Leverage; Liquidity;
- --Possible Need for Additional Capital."
The Company's banking relationships include a revolving line of credit up
to $3.5 million, a non-revolving capital expenditures facility up to $2.0
million expiring September 30, 1998, and a term loan for approximately $700,000
for building improvements. The line of credit and capital expenditure facilities
have no outstanding balance, and the term loan was funded during fiscal 1998.
The Company has received a proposal from its bank to extend and increase the
revolving line of credit to $7.5 million through September 1999, subject to
final credit committee approval. The Company has also received a facility
commitment letter from Aeromet's current lead bank in the United Kingdom to
provide a revolving line of credit for 4.5 million pounds sterling, or
approximately $7.5 million.
The Company has net operating loss (NOLs) carryforwards for federal income
tax purposes of approximately $4.9 million, the benefits of which expire in the
tax year 2001 through the tax year 2011. The NOLs created by the Company's
subsidiaries prior to their acquisition and the NOLs created as a consolidated
group or groups subsequent to a qualifying tax free merger or acquisition, have
limitations related to the amount of usage by each subsidiary or consolidated
group as described in the Internal Revenue Code. As a result of these
limitations, approximately $800,000 of the $4.9 million of NOLs will never
become available.
At May 31, 1997, the Company recorded a valuation allowance because
management believed that it was uncertain that some portion or all of the
deferred tax assets would be realized. At May 31, 1998, the Company eliminated
the valuation allowance for deferred taxes due to management's assessment of
improved probability of realization. The Company anticipates that its effective
income tax rate will continue to approach the statutory rate in the future.
29
Year 2000
The Company (including Aeromet) is in the process of developing a plan to
address the Year 2000 computer problem and to begin converting its computer
systems to be Year 2000 compliant. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company presently believes that with upgrades to existing
software and possibly some replacement, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems. However, if
such upgrades and replacements are not completed timely or effectively, the Year
2000 problem could have a material impact on the operations of the Company. The
Company expects to incur internal staffing costs, as well as the cost of the
software upgrades and replacement as a part of this effort. However, until the
Company's plan is finalized, management is unable to reasonably estimate the
costs of achieving Year 2000 compliance.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130,
which is effective for fiscal years beginning after December 15, 1997, requires
restatement of financial statements for earlier periods to be provided for
comparative purposes. The Company anticipates that implementing the provisions
of SFAS No. 130 will not have a significant impact on the Company's existing
disclosures. The Company has not determined the manner in which it will present
the information required by SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of SFAS No. 131 will not
have a significant impact on the Company's existing disclosures. The Company has
not determined the manner in which it will present the information required by
SFAS No. 131.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The Company has
not determined the manner in which it will present the information required by
SFAS No. 132.
30
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
June 30, 1998
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Aerospace & Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the two-year period ended May 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
results of their operations and their cash flows for each of the years in the
two-year period ended May 31, 1997 in conformity with generally accepted
accounting principles.
/s/ MOSS ADAMS LLP
Everett, Washington
July 2, 1997
32
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1997 and 1998
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,048,000 $ 11,461,000
Certificate of deposit............................................................ 1,000,000 --
Accounts receivable, net of allowance for doubtful accounts of $247,000 in
1997 and $130,000 in 1998...................................................... 5,455,000 9,375,000
Inventories....................................................................... 9,082,000 16,184,000
Deferred income taxes............................................................. -- 386,000
Prepaid expenses and other........................................................ 354,000 272,000
------------ ------------
Total current assets......................................................... 18,939,000 37,678,000
------------ ------------
Property, plant and equipment, net..................................................... 13,190,000 26,335,000
------------ ------------
Other assets:
Note receivable from related party................................................ 125,000 700,000
Investment........................................................................ -- 4,579,000
Costs in excess of net book value of acquired subsidiaries, net of accumulated
amortization of $223,000 in 1997 and $439,000 in 1998.......................... 2,071,000 6,515,000
Patents, net of accumulated amortization of $205,000 in 1997 and $307,000
in 1998........................................................................ 1,331,000 1,229,000
Deferred income taxes............................................................. -- 222,000
Other............................................................................. 96,000 1,322,000
------------ ------------
Total other assets........................................................... 3,623,000 14,567,000
------------ ------------
$ 35,752,000 $ 78,580,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 3,736,000 $ 6,748,000
Accrued liabilities............................................................... 1,116,000 2,587,000
Current portion of long-term debt................................................. 855,000 1,027,000
Current portion of capital lease obligations...................................... 142,000 206,000
Line of credit.................................................................... -- 1,511,000
------------ ------------
Total current liabilities.................................................... 5,849,000 12,079,000
Long-term liabilities:
Long-term debt, net of current portion............................................ 2,899,000 9,059,000
Capital lease obligations, net of current portion................................. 337,000 941,000
Deferred income taxes............................................................. 592,000 --
Deferred rent and other........................................................... 456,000 359,000
------------ ------------
Total liabilities............................................................ 10,133,000 22,438,000
------------ ------------
Shareholders' equity:
Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized:
Series A, 50,000 shares issued and outstanding at May 31, 1997 and
none issued and outstanding at May 31, 1998.................................. -- --
Series B, none issued and outstanding at May 31, 1997 and
100,000 shares issued and outstanding at May 31, 1998........................ -- --
Common stock, $0.001 par value. 100,000,000 shares authorized,
10,220,249 and 15,395,723 issued and outstanding at May 31, 1997
and 1998, respectively......................................................... 10,000 15,000
Additional paid-in capital........................................................ 30,490,000 57,830,000
Cumulative unrealized loss on investment.......................................... -- (436,000)
Accumulated deficit............................................................... (4,881,000) (1,267,000)
------------ ------------
Total shareholders' equity................................................... 25,619,000 56,142,000
Commitments, contingencies, and subsequent events...................................... -- --
------------ ------------
$ 35,752,000 $ 78,580,000
============ ============
See accompanying notes to consolidated financial statements.
33
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
Net sales............................................................. $ 20,725,000 $ 34,175,000 $ 54,099,000
Cost of sales......................................................... 16,439,000 25,969,000 39,487,000
------------ ------------ ------------
Gross profit................................................ 4,286,000 8,206,000 14,612,000
Operating expenses.................................................... 4,869,000 6,259,000 9,872,000
------------ ------------ ------------
Income (loss) from operations............................... (583,000) 1,947,000 4,740,000
------------ ------------ ------------
Other income (expense):
Interest income.................................................. 37,000 126,000 110,000
Interest expense................................................. (535,000) (510,000) (865,000)
Other............................................................ 15,000 169,000 (853,000)
------------ ------------ ------------
(483,000) (215,000) (1,608,000)
------------ ------------ ------------
Income (loss) before income taxes........................... (1,066,000) 1,732,000 3,132,000
Income tax benefit (expense).......................................... 67,000 (50,000) 482,000
------------ ------------ ------------
Net income (loss)........................................... $ (999,000) $ 1,682,000 $ 3,614,000
============ ============ ============
Net income (loss) per share:
Basic............................................................ $ (0.16) 0.18 0.29
Diluted.......................................................... (0.16) 0.17 0.27
Shares used in computation of net income (loss) per share:
Basic............................................................ 6,209,000 9,499,980 12,486,077
Diluted.......................................................... 6,209,000 10,035,846 13,606,061
See accompanying notes to consolidated financial statements.
34
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended May 31, 1996, 1997 and 1998
Series A Series B
convertible convertible
preferred stock preferred stock Common stock Additional Cumulative Total
----------------- ----------------- ------------------- paid-in unrealized Accumulated shareholders'
Shares Amount Shares Amount Shares Amount capital losses deficit equity
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
Balance at
May 31, 1995 -- $ -- -- $ -- 5,196,008 $ 5,000 11,013,000 -- (5,564,000) 5,454,000
Sale of common
stock -- -- -- -- 1,503,551 2,000 4,930,000 -- -- 4,932,000
Issuance of
warrant -- -- -- -- -- -- 69,000 -- -- 69,000
Issuance of
common stock
in connection
with acquisitions -- -- -- -- 778,750 1,000 3,082,000 -- -- 3,083,000
Net loss -- -- -- -- -- -- -- -- (999,000) (999,000)
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
Balance at
May 31, 1996 -- -- -- -- 7,478,309 8,000 19,094,000 -- (6,563,000) 12,539,000
Sale of common
stock -- -- -- -- 2,264,400 2,000 5,347,000 -- -- 5,349,000
Issuance of
warrants -- -- -- -- -- -- 16,000 -- -- 16,000
Issuance of
common stock
in connection
with an
acquisition -- -- -- -- 477,540 -- 1,552,000 -- -- 1,552,000
Sale of preferred
stock for cash 50,000 -- -- -- -- -- 4,481,000 -- -- 4,481,000
Net income -- -- -- -- -- -- -- -- 1,682,000 1,682,000
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
Balance at
May 31, 1997 50,000 -- -- -- 10,220,249 10,000 30,490,000 -- (4,881,000) 25,619,000
Issuance of
common stock -- -- -- -- 8,559 -- 13,000 -- -- 13,000
Sale of common
stock for cash -- -- -- -- 524,000 1,000 2,222,000 -- -- 2,223,000
Increase in
preferred stock,
net of issuance
costs -- -- 100,000 -- -- -- 9,260,000 -- -- 9,260,000
Issuance of warrants -- -- -- -- -- -- 444,000 -- -- 444,000
Exercise of warrants
for cash, net of
tax effects of
$99,000 -- -- -- -- 795,000 1,000 3,723,000 -- -- 3,724,000
Issuance of common
stock on conversion
of convertible
notes and accrued
interest of $154,000 -- -- -- -- 1,405,018 1,000 5,518,000 -- -- 5,519,000
Exercise of options
for cash -- -- -- -- 25,000 -- 53,000 -- -- 53,000
Issuance of common
stock on
conversion of
preferred stock (50,000) -- -- -- 1,494,593 1,000 (1,000) -- -- --
Unrealized losses
on available
for sale securities -- -- -- -- -- -- -- (436,000) -- (436,000)
Issuance of common
stock in
connection with
acquisition -- -- -- -- 923,304 1,000 6,108,000 -- -- 6,109,000
Net income -- -- -- -- -- -- -- -- 3,614,000 3,614,000
-------- -------- -------- -------- ---------- -------- ---------- ---------- ---------- -------------
Balance at
May 31, 1998 -- $ -- 100,000 $ -- 15,395,723 $ 15,000 57,830,000 (436,000) (1,267,000) 56,142,000
======== ======== ======== ======== ========== ======== ========== ========== ========== =============
See accompanying notes to consolidated financial statements.
35
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
Cash flow from operating activities:
Net income (loss) ................................................ $ (999,000) 1,682,000 3,614,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................. 871,000 1,358,000 2,204,000
Allowance on note receivable.................................. -- -- 250,000
Loss on restructuring of note receivable...................... -- -- 1,038,000
Loss on sale of property, plant and equipment................. 8,000 -- --
Director compensation paid in common stock.................... 24,000 44,000 13,000
Consulting services paid through issuance of stock options
and warrants............................................... -- 6,000 139,000
Federal income tax benefit.................................... (67,000) -- (1,200,000)
Changes in operating assets and liabilities:
Accounts receivable...................................... (1,018,000) (1,774,000) (2,286,000)
Inventories.............................................. (1,303,000) (1,951,000) (3,387,000)
Prepaid expenses and other current assets................ 8,000 (178,000) 474,000
Other assets............................................. (79,000) 44,000 (1,176,000)
Accounts payable, accrued liabilities and
other liabilities..................................... (216,000) 557,000 1,911,000
------------ ------------ ------------
Net cash provided by (used in) operating activities. (2,771,000) (212,000) 1,594,000
------------ ------------ ------------
Cash flow from investing activities:
Sale (purchase) of certificate of deposit.......................... -- (1,000,000) 1,000,000
Proceeds from stock subscription receivable........................ -- 1,030,000 --
Acquisition of property, plant and equipment....................... (754,000) (2,100,000) (6,509,000)
Proceeds from sale of property, plant and equipment................ 9,000 -- --
Acquisition of subsidiaries........................................ -- -- (3,289,000)
Acquisition of patents............................................. (400,000) -- --
Acquisition of investment.......................................... -- -- (742,000)
Issuance of notes receivable....................................... -- -- (6,261,000)
Payments received on note receivable from related party............ 44,000 58,000 125,000
Purchase of goodwill............................................... -- -- (1,029,000)
------------ ------------ ------------
Net cash used in investing activities............... (1,101,000) (2,012,000) (16,705,000)
------------ ------------ ------------
Cash flow from financing activities:
Net borrowings (repayments) under line of credit................... 308,000 (1,224,000) (358,000)
Decrease (increase) in restricted cash............................. (1,000,000) 1,000,000 --
Proceeds from long-term debt and convertible notes................. 2,105,000 237,000 10,125,000
Payments on long-term debt and capital leases...................... (1,457,000) (5,686,000) (1,503,000)
Proceeds from sale of common stock, net............................ 3,550,000 5,739,000 2,223,000
Proceeds from sale of preferred stock, net......................... -- 4,481,000 9,260,000
Proceeds from exercise of stock options and warrants............... -- -- 3,777,000
Proceeds from sale of warrants..................................... 12,000 -- --
------------ ------------ ------------
Net cash provided by financing activities........... 3,518,000 4,547,000 23,524,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (354,000) 2,323,000 8,413,000
------------ ------------ ------------
Cash and cash equivalents at beginning of year.......................... 1,079,000 725,000 3,048,000
------------ ------------ ------------
Cash and cash equivalents at end of year................................ $ 725,000 $ 3,048,000 $ 11,461,000
============ ============ ============
36
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years ended May 31, 1996, 1997 and 1998
1996 1997 1998
------------ ------------ ------------
Supplemental cash flow: Cash paid during the year for:
Interest........................................................ $ 658,000 $ 613,000 $ 712,000
Federal income taxes............................................ -- 18,000 521,000
Acquisition of subsidiaries:
Fair value of assets acquired and resulting goodwill,
excluding cash................................................ 10,286,000 1,928,000 10,034,000
Liabilities assumed............................................. (7,203,000) (482,000) 3,925,000
Common stock issued............................................. 3,083,000 1,446,000 6,109,000
Noncash investing and financing activities:
Seller financed acquisition of property, plant and equipment.... 539,000 639,000 3,336,000
Seller financed acquisition of patents.......................... 520,000 35,000 --
Stock subscriptions receivable for issuance of common stock .... 1,030,000 -- --
Conversion of notes and accrued interest to common stock........ -- -- 5,519,000
Restructuring of certain notes receivable for an investment
in common stock............................................... -- -- 6,053,000
Property, plant and equipment included in accounts payable ..... -- -- 445,000
Deferred portion of common stock issued for consulting services. -- -- 305,000
Long-term debt retired through acquisition of subsidiary ....... -- -- 139,000
See accompanying notes to consolidated financial statements.
37
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1996, 1997 and 1998
(1) Description of Business and Basis of Presentation
Description of Business
Pacific Aerospace & Electronics, Inc., with headquarters in Wenatchee,
Washington, develops, manufactures and markets high performance electronics and
metal components and assemblies for the aerospace, defense, electronics and
transportation industries. The consolidated financial statements include the
accounts of Pacific Aerospace & Electronics, Inc. and its wholly-owned
subsidiaries (collectively, the "Company").
Basis of Presentation
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United States (U.S.) and
present the financial position, results of operations and changes in financial
position of the Company. All material intercompany balances and transactions
have been eliminated in consolidation.
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
(2) Summary of Significant Accounting Principles
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, demand deposits with banks and
highly liquid investments with maturity dates at purchase of three months or
less.
Inventories
Inventories are stated at the lower of cost, primarily determined by the
first-in, first-out method, or market (replacement cost for raw materials and
net realizable value for work in progress and finished goods).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the lower of the fair market value
of the assets or the present value of minimum lease payments at the inception of
the leases.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the owned assets ranging from 5 years for certain
machinery and equipment to 40 years for certain buildings. Property, plant and
equipment held under capital leases are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease terms,
ranging from 7 to 10 years from the inception of the leases.
Expenditures for maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is
reflected in other income or expense.
38
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
At May 31, 1998, the Company had an investment in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment is classified as an available-for-sale security in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and is reported at fair
value, with unrealized gains and losses excluded from the statements of
operations and reported as a separate component of shareholders' equity.
Unrealized losses which are determined to be other-than-temporary are included
in the statements of operations. Fair value of the common stock is determined as
the quoted value of the stock in the over-the-counter market, without any
discounts for large blocks or unregistered shares. There is no assurance that
such values will be realizable upon liquidation or sale.
Intangible Assets
Costs in excess of net book value of acquired subsidiaries is amortized
using the straight-line method over 15 years from the date of acquisition.
Purchased patents are recorded at cost. Developed patents are recorded at
the value of related compensation awarded. Patents are amortized using the
straight-line method over the estimated useful lives of the patents ranging from
10 to 17 years.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Revenue Recognition
Revenue is recognized when products are shipped to customers.
Research and Development
Research and development costs are expensed as incurred and are included in
operating expenses.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the estimated future
tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
39
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. This statement permits a company to choose either a
new fair-value method or the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, intrinsic-value based method of
accounting for stock-based compensation arrangements. SFAS No. 123 requires pro
forma disclosure of net income and earnings per share computed as if the
fair-value based method had been applied in financial statements of companies
that continue to account for such arrangements under APB Opinion No. 25. The
Company has elected to continue to record stock-based compensation using the APB
Opinion No. 25 intrinsic-value-based method and, therefore, the adoption of SFAS
No. 123 has not impacted the Company's financial positions, results of
operations, or liquidity.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share, and for companies with complex capital structures,
diluted earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period using the
treasury stock method. The Company has presented historical basic and diluted
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in the year ended May 31, 1996, basic and diluted net loss per share is
the same.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130, which is effective for
fiscal years beginning after December 15, 1997, requires restatement of
financial statements for earlier periods to be provided for comparative
purposes. The Company anticipates that implementing the provisions of SFAS No.
130 will not have a significant impact on the Company's existing disclosures.
The Company has not determined the manner in which it will present the
information required by SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of SFAS No. 131 will not
have a significant impact on the Company's existing disclosures. The Company has
not determined the manner in which it will present the information required by
SFAS No. 131.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent
40
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. The Company has not determined
the manner in which it will present the information required by SFAS No. 132.
(3) Segment Information and Concentration of Risk
The Company conducts its business in two business segments, "Aerospace"
and "Electronics." The Aerospace business segment primarily comprises machined
and cast metal products operations. Net sales of the Aerospace business segment
include sales to customers in the aerospace, defense and transportation
industries. Net sales of the Electronics business segment also include sales to
customers in the aerospace and defense industries. Historically, these segments
have been cyclical and sensitive to general economic and industry specific
conditions. In particular, the aerospace industry, in past years, has been
adversely affected by a number of factors, including reduced demand for
commercial aircraft, a decline in military spending, postponement of overhaul
and maintenance of aircraft, increased fuel and labor costs, increased
regulations, and intense price competition, among other factors. Although the
aerospace supply industry currently is enjoying favorable trends, there is no
assurance that such trends will continue. There is also no assurance that
general economic conditions will not lead to a downturn in demand for core
components and products of the Company, in each of its business segments.
Presented below is the Company's business segment information. Identifiable
assets are those assets used in the Company's operations in each business
segment, and do not include advances or loans between the business segments.
Corporate assets are identified below, and no allocations were necessary for
assets used jointly by the business segments.
Year ended May 31, 1996:
Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
Net sales to customers............................ $12,382,000 8,343,000 -- 20,725,000
Net sales between segments........................ 376,000 -- (376,000) --
Income (loss) from operations..................... (278,000) 405,000 (710,000) (583,000)
Identifiable assets............................... 17,429,000 7,527,000 2,693,000 27,649,000
Capital expenditures.............................. 824,000 469,000 -- 1,293,000
Depreciation and amortization..................... 541,000 330,000 -- 871,000
Year ended May 31, 1997:
Corporate,
other and
Aerospace Electronics eliminations Total
----------- ----------- ----------- -----------
Net sales to customers............................ $22,949,000 11,226,000 -- 34,175,000
Net sales between segments........................ 151,000 -- (151,000) --
Income (loss) from operations..................... 1,043,000 2,203,000 (1,299,000) 1,947,000
Identifiable assets............................... 21,011,000 11,419,000 3,322,000 35,752,000
Capital expenditures.............................. 1,961,000 778,000 -- 2,739,000
Depreciation and amortization..................... 897,000 461,000 -- 1,358,000
41
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year ended May 31, 1998:
Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
Net sales to customers............................ $34,146,000 19,953,000 -- 54,099,000
Net sales between segments........................ 162,000 5,000 (167,000) --
Income (loss) from operations..................... 4,665,000 2,454,000 (2,379,000) 4,740,000
Identifiable assets............................... 29,761,000 28,943,000 19,876,000 78,580,000
Capital expenditures.............................. 4,212,000 1,333,000 4,745,000 10,290,000
Depreciation and amortization..................... 1,301,000 855,000 48,000 2,204,000
The Company had two customers, each comprising greater than 10% of net
sales, aggregating 65%, 43%, and 45% for the fiscal years ended May 31, 1996,
1997, and 1998, respectively.
At May 31, 1997, the Company had one customer which represented 14% of
accounts receivable. At May 31, 1998, the Company had two customers, aggregating
25%, each of which comprised greater than 10% of accounts receivable.
Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required.
The Company currently purchases aluminum and other raw materials from a
limited number of suppliers. Although there are a limited number of potential
suppliers of such raw materials, management believes that other suppliers could
provide these raw materials on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing, increased costs, and a possible loss of
sales, which could have a material adverse effect on the manufacturing and
delivery of the Company's products. The Company purchased $1,762,000,
$2,570,000, and $2,723,000 from one supplier during the years ended May 31,
1996, 1997, and 1998, respectively.
The Company purchases other raw materials, of lesser significance, which
are available from a limited number of suppliers.
At May 31, 1998, the Company had purchase commitments for raw materials
aggregating $4,064,000.
(4) Business Acquisitions
In November 1995, a wholly-owned subsidiary of the Company acquired all of
the assets and assumed certain liabilities of Seismic Safety Products, Inc. The
asset purchase price consisted of $70,000 in cash and 128,750 shares of the
Company's common stock valued at $483,000, for a total of $553,000. In
connection with the transaction, the Company acquired certain patents for total
consideration of $520,000. Costs in excess of net book value of $535,000 were
recorded as a result of this acquisition.
Effective for accounting purposes in November 1995, a wholly-owned
subsidiary of the Company merged with Morel Industries, Inc. The purchase price
consisted of 650,000 shares of the Company's common stock valued at
approximately $2.6 million. Costs in excess of net book value of $939,000 were
recorded as a result of this acquisition.
In April 1997, a wholly-owned subsidiary of the Company acquired all of the
assets and assumed certain liabilities of Northwest Technical Industries, Inc.
The asset purchase price consisted of 477,540 shares of the Company's common
stock valued at $1,552,000. Costs in excess of net book value of $270,000 were
recorded as a result of this acquisition.
Effective for accounting purposes in February 1998, a wholly-owned
subsidiary of the Company acquired substantially all of the assets and assumed
certain liabilities of PCC Composites, Inc.'s
42
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating unit, Balo Precision Parts. The purchase price consisted of $2.25
million in cash and resulted in costs in excess of net book value of $1,029,000.
Effective for accounting purposes in March 1998, a wholly-owned subsidiary
of the Company acquired substantially all assets and certain liabilities of
Electronic Specialty Corporation and its wholly-owned subsidiary, Displays &
Technologies, Inc. (collectively "ESC"). The purchase price consisted of $2.0
million in cash, 923,304 shares of the Company's common stock valued at
$6,109,000, and acquisition costs of $77,000 for a total of $8,186,000. Costs in
excess of net book value of $3,631,000 were recorded as a result of this
acquisition.
The business combinations described above have been accounted for using the
purchase method. Accordingly, assets and liabilities have been recorded at their
fair value at acquisition date. Operating results of these acquired companies
are included in the Company's consolidated statements of operations from the
respective acquisition dates.
The following summary, prepared on a pro forma basis, presents the
unaudited consolidated condensed results of operations of the Company, as if the
aforementioned business acquisitions were made as of the first day of the
immediately preceding fiscal year in which the entity was acquired.
There are no material adjustments which impact the summary.
Year ended May 31 (unaudited)
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
Net sales....................................................... $ 26,801,000 $ 49,117,000 $ 64,968,000
Income (loss) from operations................................... (908,000) 444,000 4,384,000
Net income (loss)............................................... (1,660,000) 249,000 3,003,000
Net income (loss) per share:
Basic...................................................... (0.25) 0.03 0.23
Diluted.................................................... (0.25) 0.02 0.21
Shares used in computation of net income (loss) per share:
Basic...................................................... 6,687,000 9,936,962 13,287,961
Diluted.................................................... 6,687,000 10,027,762 14,407,945
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
of the date indicated nor are they intended to indicate results that may occur
in the future.
(5) Inventories
Inventories at May 31 consist of the following:
1997 1998
----------- -----------
Raw materials....................... $ 2,685,000 $ 5,789,000
Work in progress.................... 3,387,000 5,683,000
Finished goods...................... 3,010,000 4,712,000
----------- -----------
$ 9,082,000 $16,184,000
43
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Property, Plant and Equipment
Property, plant and equipment, including assets under capital lease
arrangements, at May 31 consist of the following:
1997 1998
------------ ------------
Land.............................................................. $ 895,000 $ 1,171,000
Buildings......................................................... 4,300,000 4,380,000
Leasehold improvements............................................ 401,000 1,738,000
Machinery and equipment........................................... 9,305,000 18,331,000
Furniture and fixtures............................................ 1,215,000 2,494,000
------------ ------------
16,116,000 28,114,000
Less accumulated depreciation and amortization .............. 3,309,000 5,108,000
------------ ------------
12,807,000 23,006,000
Construction and purchases in progress............................ 383,000 3,329,000
------------ ------------
$ 13,190,000 $ 26,335,000
The Company recognized depreciation of property, plant and equipment of
$696,000, $1,103,000 and $1,851,000 during the years ended May 31, 1996, 1997
and 1998, respectively.
(7) Note Receivable From Related Party
At May 31, 1997, the Company had a note receivable from a shareholder
collectible in monthly principal and interest installments of $5,900, with the
final principal balance due in March 1999. During the year ended May 31, 1998,
the note receivable was repaid in full. Also see Note 8.
(8) Investment
At May 31, 1998, the Company held an interest in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment consists of shares which were purchased on the open market and
shares which were obtained in conjunction with the settlement of certain
outstanding notes receivable from the public company under a restructuring
agreement, amounting to approximately $359,000 and $4,220,000, respectively, at
May 31, 1998. The Company recorded an unrealized loss, included in shareholders'
equity, on the shares of $436,000 as of May 31, 1998. Under the restructuring
agreement, the public company converted notes, previously issued by the Company
to the public company and its subsidiaries, into shares of the public company
stock at $2.00 per share. In addition, the public company agreed to grant the
Company demand registration rights for those shares and, in the event of an
underwritten public offering, piggyback registration rights, which will be
effective after the earliest of (a) the closing of the public company's third
round of financing, or (b) the first anniversary of the closing of the
restructuring agreement. The Company also agreed to continue guaranteeing the
public company credit facility of $1.3 million and an equipment lease of
$373,000.
At May 31, 1998, the Company had a note receivable from the public company.
The note accrues interest at 8% per annum, requires interest-only payments for
the first year, and requires fully amortizing monthly payments of principal plus
interest for the final four years of the note. In the restructuring agreement,
the public company also agreed to purchase certain other notes and interests of
the Company (including warrants and interests in a lawsuit and bankruptcy
action) for a $950,000 promissory note from the public company. The note accrues
interest at 8% per annum, requires interest-only payments for the first year,
and requires fully-amortizing monthly payments of principal plus interest for
the final four years of the note.
In conjunction with the restructuring agreement, the Company recorded a
nonrecurring charge during the year ended May 31, 1998 of $1,038,000 to reflect
the restructuring of the debt and the difference between the Company's carrying
amounts of the other notes and the interest in the lawsuit
44
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and bankruptcy and the public company promissory note. The amount has been
included in other expense for the year ending May 31, 1998.
Certain of the Company's directors were also directors of the public
company through January 1998. In addition, certain officers of the Company were
individual shareholders of the public company until such shares were sold in May
1998. The Company also subleases approximately 95% of the square footage of its
Bothell, Washington office space to the public company for an amount equivalent
to the percentage of the lease payment for that space. Certain directors and
officers of the Company personally guarantee certain debt of the public company.
(9) Credit Facility
In May 1997, the Company executed a commitment letter with a bank for a
credit facility consisting of (a) a revolving working capital line of credit of
up to $3,500,000 that extends from June 1997 to September 1998 (the "Line of
Credit"), (b) a seven-year capital equipment acquisition credit facility of up
to $2,000,000 (the "Equipment Line"), and (c) a 10-year term loan of
approximately $700,000, or approximately 80% of the cost of a recent addition to
a subsidiary's building (the "Construction Loan"). The Company has executed the
documents for the Line of Credit and the Construction Loan, but has not yet
elected to close the Equipment Line. As of May 31, 1998, the Line of Credit had
no outstanding balance and the Company had not yet requested funding of the
Equipment Line. Borrowings will bear interest at variable rates, and will be
secured by inventories, accounts receivable, and certain equipment and building
improvements. The agreement contains restrictive covenants related to working
capital, net worth and debt service coverage. Management believes the Company is
in compliance with these covenants at May 31, 1998.
In connection with the acquisition of ESC, the Company assumed a revolving
working capital line of credit. Interest accrues at the 30-day commercial paper
rate plus 3.25% (8.75% at May 31, 1998) and the outstanding balance was
$1,511,000 at May 31, 1998. There are certain restrictive covenants related to
tangible net worth and debt to tangible net worth ratios. Management believes
the Company is in compliance with these covenants at May 31, 1998. Subsequent to
May 31, 1998, the line of credit was reduced to $1,200,000.
45
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Long-Term Debt
Long-term debt at May 31 consists of the following:
1997 1998
---------- ----------
Industrial revenue bond payable to a bank in monthly installments of
$19,200, including interest at 8.12%, through November 2009..................... $1,242,000 $1,108,000
Note payable to a bank in monthly installments of $7,000, including
interest at 8.39% with the principal balance due in full in March 2008.......... -- 712,000
Subordinated note payable to the City of Entiat in monthly installments of
$7,300, including interest at 8%, with the principal balance due in full
in May 2001..................................................................... 551,000 505,000
Note payable to bank in monthly principal installments of $5,000 plus
interest at the 30-day commercial paper rate plus 3.25% (8.75% at May
31, 1998) through October 2002.................................................. -- 265,000
Notes payable to a pension fund and others, with interest only payments at
6.75% due quarterly commencing January 1998 through October 2001,
with the principal balance due in full in October 2001.......................... -- 4,050,000
Notes payable to a financing company for certain equipment in aggregate
monthly installments of $58,000, including interest at 9% to 10.7%,
with maturity dates ranging from April 2000 to May 2004......................... -- 2,685,000
Other notes payable for vehicles and certain equipment in aggregate
monthly installments of $52,000, including interest at 5.9% to 10.9%
with maturity dates ranging from November 1998 to July 2006..................... 1,216,000 761,000
Notes payable with interest ranging from 8% to 10.25%, repaid in full
during the year ended May 31, 1998.............................................. 745,000 --
---------- ----------
3,754,000 10,086,000
Less current portion............................................................... 855,000 1,027,000
---------- ----------
Long-term portion............................................................. $2,899,000 9,059,000
========== ==========
The industrial revenue bond agreement requires, among other items, that the
Company maintain minimum working capital, tangible net worth and debt to
tangible net worth ratios. Management believes the Company is in compliance with
these covenants at May 31, 1998.
Scheduled principal maturities of long-term debt at May 31, 1998 are as
follows for each of the following fiscal year-ends:
1999.................................................. $ 1,027,000
2000.................................................. 1,038,000
2001.................................................. 984,000
2002.................................................. 4,957,000
2003.................................................. 812,000
Thereafter............................................ 1,268,000
------------
$ 10,086,000
============
Long-term debt is secured by substantially all assets of the Company and,
in certain circumstances, through personal guarantees of certain shareholders.
46
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Leasing Arrangements
Capital Leases
The Company leases certain property, plant and equipment under capital
lease agreements that expire through September 2004. Aggregate minimum principal
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:
1999.................................................. $ 206,000
2000 ................................................. 218,000
2001 ................................................. 216,000
2002 ................................................. 186,000
2003 ................................................. 151,000
Thereafter ........................................... 170,000
----------
$1,147,000
==========
Included in property, plant and equipment are costs of $551,000 and
$1,402,000 and related accumulated amortization of $58,000 and $208,000 recorded
under capital leases at May 31, 1997 and 1998, respectively.
Operating Leases
The Company leases certain property, plant and equipment under operating
lease agreements that expire through June 2026. Aggregate minimum rental
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:
1999 ................................................ $ 1,252,000
2000 ................................................ 1,206,000
2001 ................................................ 1,194,000
2002 ................................................ 1,192,000
2003 ................................................ 1,090,000
Thereafter .......................................... 4,400,000
------------
$ 10,334,000
============
Total rent expense during the years ended May 31, 1996, 1997 and 1998
amounted to $516,000, $475,000 and $788,000, respectively.
(12) Convertible Notes
In August 1997, the Company closed a private offering of $5,800,000, before
expenses of $435,000, in convertible promissory notes (the "Convertible Notes")
to two accredited investors. The Company intends to use the proceeds of this
offering primarily in connection with proposed and future acquisitions. The
Company subsequently filed a registration statement, which was declared
effective, registering for resale up to 1,720,690 shares of common stock
issuable upon conversion of the Convertible Notes. As of May 31, 1998, all of
the Convertible Notes had been converted into 1,405,018 shares of common stock.
(13) Common Stock
During the year ended May 31, 1996, the Company sold 1,429,470 shares of
its common stock at an average of $3.43 per share, in a private offering to
institutional investors. The Company incurred approximately $375,000 of costs
related to the offering, which were charged against the proceeds of the offering
in 1996.
In July 1996, the Company conducted a public offering of 2,250,000 units,
each unit composed of one share of the Company's common stock and a warrant to
purchase one share of the Company's
47
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock at a price of $3.125 per unit in a public offering. The warrants
entitled the holder to purchase one share of common stock at $4.6875 per share,
exercisable any time through July 2001. In addition, the Company issued warrants
to two underwriters for the purchase of an additional 225,000 units at $3.75 per
unit. All of these warrants were outstanding at May 31, 1997 and 1998. During
the years ended May 31, 1996 and 1997, the Company incurred $328,000 and
$1,398,000, respectively, of costs related to the offering. The costs incurred
during the year ended May 31, 1996 were deferred and were charged against the
proceeds of the stock offering in the year ended May 31, 1997. During the year
ended May 31, 1998, 45,000 of the underwriter's warrants were exercised for
45,000 units.
In November 1997, the Company closed a private offering of $6,408,000,
before expenses of $320,000, in common stock and notes payable to three
accredited investors. The Company subsequently filed a registration statement,
which was declared effective, registering for resale the 524,000 shares of
common stock sold in the offering. The outstanding balance of the notes payable
of $4,050,000 is included in long-term debt at May 31, 1998. In conjunction with
the private offering, consulting fees of $320,000 were paid to a director and
shareholder of the Company.
(14) Convertible Preferred Stock
Series A Convertible Preferred Stock
In February 1997, the Company sold 50,000 shares of Series A convertible
preferred stock (Series A) in a private placement for $5,000,000, and incurred
related offering costs of $519,000, resulting in net proceeds of $4,481,000.
Conversion provisions include conversion any time after June 12, 1997;
conversion to common stock at a rate equal to $100 divided by the lower of $3.49
or 85% of the average closing common per share bid price over the five days
before conversion; and total shares converted cannot exceed 20% of total common
stock outstanding, or approximately 1,950,000 shares. At May 31, 1998, all of
the shares of Series A were converted into 1,494,593 shares of common stock.
Series B Convertible Preferred Stock
In May 1998, the Company sold 100,000 shares of Series B convertible
preferred stock (Series B) for $100 per share, and issued warrants to purchase
138,888 shares of Common Stock, in a private offering which resulted in gross
proceeds of $10,000,000, less related offering costs of $740,000, for net
proceeds of $9,260,000. In addition, the purchasers deposited $7,000,000 into
escrow, and, upon the closing of the acquisition of Aeromet International plc
(Aeromet), the Company will issue the purchasers 70,000 additional shares of
Series B, and warrants to purchase an additional 97,221 shares of Common Stock,
in exchange for the escrowed funds. If the Aeromet Acquisition fails to close,
the purchasers may elect not to purchase the additional shares of Series B and
related warrants, and to have the escrowed funds returned to them.
The Common Stock issuable upon conversion of the Series B and upon exercise
of the related warrants are subject to a registration rights agreement that
requires the Company to file a registration statement covering those shares by
November 1998, and to use its best efforts to make that registration statement
effective by January 1999. The registration rights agreement also grants certain
piggyback registration rights with regard to the shares of Common Stock
underlying the Series B and the related warrants.
Upon conversion of a share of Series B, the holder will receive the number
of shares of Common Stock equal to $100 divided by the then applicable
conversion price of the Series B. Up to $7,000,000 in value of the Common Stock
underlying the Series B Preferred may be converted and sold at any time, if that
Common Stock is included in an effective piggyback registration. Shares of
Series B whose underlying shares of Common Stock are not included in a piggyback
registration are not convertible until August 1998, and may not be sold until
February 1999. At that time, the underlying Common Stock may be sold upon the
effectiveness of a registration statement, or under any applicable
48
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exemption from registration. From August 1998 until February 1999, the
conversion price of the Series B is $7.20 per share. After February 1999, the
conversion price of the Series B is equal to the lower of (a) $7.20 per share,
or (b) the average of the three lowest closing bid prices per share of the
Common Stock over the 22 trading days before conversion, but not less than
$5.67, except in certain limited circumstances. No holder of Series B is
entitled to voluntarily convert Series B that would cause the holder to own more
than 9.9% of the Company's total outstanding Common Stock at any one time. Any
Series B outstanding on May 2003 will be automatically converted into Common
Stock at the then-applicable conversion price.
The Series B has no voting rights and certain preferences relating to
dividends, liquidation, and in specific situations, redemption.
(15) Warrants
In connection with certain notes payable, in May 1996, the Company issued
the lenders warrants to purchase 337,500 shares of common stock at an exercise
price of $4.80 per share. The warrants expire in May 2001 and were valued at
approximately $12,000. During the year ended May 31, 1997, there were no
warrants exercised for shares of common stock. During the year ended May 31,
1998, there were 300,000 warrants exercised for shares of common stock.
In June 1997, the Company issued warrants to purchase 125,000 shares of
common stock for $3.45 per share in consideration for certain financial
consulting services. The warrants, which expire in June 2002, were valued at
$24,000. During the year ended May 31, 1998, 75,000 of the warrants were
exercised for shares of common stock.
In December 1997, the Company issued warrants to purchase 375,000 shares of
common stock for $4.6875 per share in consideration for a financial consulting
and services agreement. The warrants, which expire in June 1998, were valued at
$60,000. During the year ended May 31, 1998, all of the warrants were exercised
for shares of common stock.
In February 1998, the Company issued warrants to purchase 1,290,000 shares
of common stock at an exercise price of $4.62 per share in consideration for a
financial consulting and services agreement. The warrants, which expire in
February 2002, were valued at $360,000. During the year ended May 31, 1998,
there were no warrants exercised for shares of common stock.
In May 1998, the Company issued warrants to purchase 138,888 shares of
common stock at an exercise price of $7.20 per share in conjunction with the
Series B offering. The warrants, which expire in May 2003, were valued at
$220,589 and included in additional paid in capital at May 31, 1998.
A summary of the Company's warrants, excluding warrants issued in
connection with the public offering in July 1996, is as follows:
Weighted
average
price
Warrants of shares
---------- ----------
Balance at June 1, 1995........................... 160,000 $ 2.00
Granted........................................... 337,500 4.80
---------- ----------
Balance at May 31, 1996 and 1997.................. 497,500 4.34
Granted........................................... 1,928,888 4.74
Exercised......................................... (750,000) 4.61
---------- ----------
Balance at May 31, 1998........................... 1,676,388 $ 4.36
========== ==========
49
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes warrants outstanding, excluding warrants issued in
connection with the public offering in July 1996, at May 31, 1998:
Weighted
average Weighted
Range of remaining average
exercise Number contractual exercise Number
prices outstanding life price exercisable
------------ ------------- ------------- ------------- -------------
$2.00 - 4.00 210,000 4.69 years $ 2.35 210,000
4.01 - 6.00 1,327,500 3.97 years 4.63 1,327,500
6.01 - 8.00 138,888 5.00 years 7.20 --
---------- ---------
1,676,388 1,537,500
========== =========
The 138,888 warrants issued in connection with the Series B are exercisable
beginning in May 1999. All other warrants are fully exercisable at May 31, 1998.
(16) Compensation Plans
Long-Term Investment and Incentive Plan
The Company has a long-term stock investment and incentive plan (Option
Plan) under which directors, officers, key employees and other key individuals
may be awarded stock options, stock appreciation rights, stock and cash bonuses,
restricted stock, or performance units. Under the Option Plan, the exercise
price of options issued is not less than fair-market value at the date of grant.
Options expire ten years from the grant date.
For the year ended May 31, 1998, the Company had not issued any stock
appreciation rights, stock or cash bonuses, restricted stock, or performance
units under the Option Plan.
As the Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan, no compensation costs have been recognized for
stock options issued to employees. Had compensation costs for stock options been
determined consistent with SFAS No. 123, the results of the Company would have
been adjusted to the pro forma amounts indicated below:
1996 1997 1998
----------- ----------- -----------
Net income (loss):
As reported................................................... $ (999,000) $ 1,682,000 $ 3,614,000
Pro forma..................................................... (1,043,000) 75,000 2,478,000
Net income (loss) per share:
As reported:
Basic.................................................... (0.16) 0.18 0.29
Diluted.................................................. (0.16) 0.17 0.27
Pro forma:
Basic.................................................... (0.17) 0.01 0.20
Diluted.................................................. (0.17) 0.01 0.18
Shares used in computation of net income (loss) per share:
Basic ...................................................... 6,209,000 9,499,980 12,486,077
Diluted ..................................................... 6,209,000 10,035,846 13,606,061
The fair value of the options granted during 1996, 1997 and 1998 is
estimated as $248,000, $1,853,000 and $3,007,000, respectively, using the
Black-Scholes option-pricing model with the
50
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
following assumptions on the date of grant: zero percent dividend yield,
expected volatility from 24% to 73%, risk-free interest rate from 5.55% to
6.59%, and expected lives ranging from 5 to 10 years.
A summary of the Company's Stock Option Plan is as follows:
Shares of common stock Weighted
---------------------------- average
Available Options price
options under plan of shares
----------- ----------- -----------
Balance at June 1, 1995....................................... 1,000,000 -- $ --
Granted....................................................... (145,283) 145,283 5.09
----------- ----------- -----------
Balance at May 31, 1996....................................... 854,717 145,283 5.09
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (998,333) 998,333 4.53
----------- ----------- -----------
Balance at May 31, 1997....................................... 856,384 1,143,616 4.61
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (1,112,500) 1,112,500 5.49
Exercised..................................................... -- (25,000) 2.11
----------- ----------- -----------
Balance at May 31, 1998....................................... 743,884 2,231,116 $ 5.09
=========== =========== ===========
No options were exercised or lapsed during the years ended May 31, 1996 and
1997.
The following summarizes options outstanding at May 31, 1998:
Options outstanding Options exercisable
--------------------------------------------------- -----------------------------
Weighted average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
--------------- ----------- ---------------- -------------- ----------- --------------
$2.00--4.00 248,333 8.68 years $ 3.05 248,333 $ 3.05
4.01--6.00 1,400,283 8.56 years 4.74 1,327,113 4.72
6.01--8.00 580,500 9.97 years 6.13 97,500 6.13
---------- ---------
2,229,116 1,672,946
========== =========
Independent Director Stock Plan
The Company has an Independent Director Stock Plan under which nonemployee
directors of the Company are awarded common stock of the Company for serving on
its board of directors. The plan authorizes and reserves for issuance a maximum
of 100,000 common shares. At May 31, 1998, 68,041 shares were available for
future issuance. During the years ended May 31, 1996, 1997 and 1998, 9,000,
14,400 and 8,559 shares of the Company's common stock, respectively, were issued
under the plan of which 27,009 were vested at May 31, 1998. Included in
compensation expense is $24,000, $44,000 and $13,000 for the years ended May 31,
1996, 1997 and 1998, respectively, resulting from the shares issued.
Retirement Plan
The Company maintains a 401(k) plan covering all eligible employees who
meet service requirements as provided in the plan. Company contributions to the
profit-sharing plan are determined annually by the board of directors. No
contributions were made by the Company to the plan during
51
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the years ended May 31, 1996 and 1997. The Company contributed $27,000 to the
plan in the year ended May 31, 1998.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which employees are
eligible to purchase shares of the Company's common stock, through payroll
deductions, at the lower of 85% of the Company's stock price on the first day of
an offering period or 100% of the Company's stock price on the last day of an
offering period. The first offering period is expected to begin in September
1998 and end approximately one year later.
(17) Income Taxes
Total income tax benefit (expense) is as follows:
1996 1997 1998
-------- -------- -----------
Current Federal............................................ $ -- $(50,000) $ (593,000)
Deferred Federal........................................... 67,000 -- 1,075,000
-------- -------- -----------
Total................................................. $ 67,000 $(50,000) $ 482,000
======== ======== ===========
A reconciliation of the Federal statutory tax rate of 34% and the Company's
effective tax rates of 6%, 3% and 15% in the years ended May 31, 1996, 1997 and
1998, respectively, is as follows:
1996 1997 1998
--------- ---------- ------------
Computed expected income tax benefit (expense)............. $ 362,000 $ (588,000) $ (1,065,000)
Change in valuation allowance.............................. (241,000) 558,000 1,717,000
Other...................................................... (54,000) (20,000) (170,000)
--------- ---------- ------------
$ 67,000 $ (50,000) $ 482,000
========= ========== ============
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
1997 1998
----------- -----------
Deferred tax assets:
NOL carryforward...................................... $ 2,135,000 $ 1,387,000
Other................................................. 290,000 641,000
Valuation allowances.................................. (1,717,000) --
----------- -----------
708,000 2,028,000
Deferred tax liabilities--depreciation................ (1,300,000) (1,420,000)
----------- -----------
Net deferred tax asset (liability)............... $ (592,000) $ 608,000
=========== ===========
The Company has net operating loss (NOLs) carryforwards for Federal income
tax purposes of approximately $4,880,000, the benefits of which expire in the
tax year 2001 through the tax year 2011. The NOLs created by the Company's
subsidiaries prior to their acquisition and the NOLs created as a consolidated
group or groups subsequent to a qualifying tax free merger or acquisition, have
limitations related to the amount of usage by each subsidiary or consolidated
group as described in the Internal Revenue Code. As a result of these
limitations, approximately $800,000 of the $4,880,000 of NOLs will never become
available.
At May 31, 1997, the Company recorded a valuation allowance because
management believed that it was uncertain that some portion or all of the
deferred tax assets would not be realized. At May 31, 1998, the Company
eliminated the valuation allowance for deferred taxes due to management's
assessment of improved probability of realization.
52
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(18) Fair Value of Financial Instruments
The Company's financial instruments include cash, receivables, an
investment, accounts payable and short- and long-term borrowings. The fair value
of these financial instruments approximates their carrying amounts based on
current market indicators, such as prevailing interest rates.
(19) Contingencies
Legal
The Company is currently subject and party to various legal actions arising
out of the normal course of business. Management believes the ultimate
liability, if any, arising from such claims or contingencies is not likely to
have a material adverse effect on the Company's results of operations or
financial condition.
In the normal course of business, the Company disposes of potentially
hazardous material which could result in claims related to environmental
cleanup. The Company has not been notified of any related claims. The Company is
subject to various other environmental and governmental regulations. Although
the extent of any noncompliance with those regulations, if any, is not
completely ascertainable, management believes the ultimate liability is not
likely to have a material adverse effect on the Company's results of operations
or financial condition.
Year 2000
The Company is in process of developing a plan to address the Year 2000
computer problem and to begin converting its computer systems to be Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company presently believes that with upgrades to existing software and possibly
some replacement, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems. However, if such upgrades and
replacements are not completed timely or effectively, the Year 2000 problem may
have a material impact on the operations of the Company. The Company expects to
incur internal staffing costs, as well as the cost of software upgrades and
replacement as part of this effort. However, until the Company's plan is
finalized, management is unable to reasonably estimate the costs of achieving
Year 2000 compliance.
(20) Subsequent Events
In July 1998, the Company expects to complete the issuance of $75 million
of notes and, subsequently, consummate the acquisition of Aeromet, a company
headquartered in the United Kingdom. Aeromet is one of the leading suppliers of
magnesium and aluminum precision sand and investment castings, and titanium and
aluminum formed sheet products for the aerospace, defense, and transportation
industries in the United Kingdom. For the year ended December 31, 1997, Aeromet
had net sales of $48.7 million, income from operations of $1.6 million, and a
net loss of approximately $30,000. The acquisition is expected to be accounted
for using the purchase method. There is no assurance that the aforementioned
transactions will be completed or that the aforementioned financial results will
be indicative of future results.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 17, 1998, the appointment of Moss Adams LLP, the Company's
previous principal independent accountant, was terminated, and KPMG Peat Marwick
LLP was engaged, as the Company's principal independent accountant. The decision
to change principal independent accountants was approved by the finance and
audit committee of the Company's Board of Directors.
In connection with the audits for fiscal years ended May 31, 1996 and May
31, 1997, and the subsequent interim period through April 17, 1998:
(a) the reports of Moss Adams LLP contained no adverse opinion or
disclaimer of opinion, or modification as to uncertainty, audit scope or
accounting principles; and
(b) there were no disagreements with Moss Adams LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which, if not resolved to the satisfaction of Moss Adams
LLP, would have caused it to make reference to the subject matter of the
disagreement in connection with its reports.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors and Executive Officers
The following table sets forth information as of August 27, 1998 (unless
otherwise noted), regarding the directors and executive officers of the Company.
Name Age Position with Company
-----------------------------------------------------------------------------------------------
Donald A. Wright(1)................ 46 Chairman of the Board, Chief Executive
Officer and President
Nick A. Gerde...................... 53 Chief Financial Officer, Vice President
Finance, Treasurer and Assistant Secretary
Sheryl A. Symonds.................. 43 Vice President Administration, General
Counsel and Secretary
Allen W. Dahl, M.D.(2)(4).......... 70 Director
Dr. Urs Diebold(1)(2)(3)........... 47 Director
Werner Hafelfinger (5)............. 52 Director
Dale L. Rasmussen(1)(3)(4)......... 48 Director
William A. Wheeler(2)(3)(4)........ 64 Director
- --------------
(1) Member of the Nominating Committee
(2) Member of the Option Committee
(3) Member of the Finance and Audit Committee
(4) Member of the Compensation Committee
(5) Director of the Company since August 17, 1998
Donald A. Wright. Donald A. Wright has been the Chairman of the Board,
Chief Executive Officer and President of the Company since February 1995, and of
its predecessors since 1990. Mr. Wright is also an officer and director of each
of the Company's operating subsidiaries.
Nick A. Gerde. Nick A. Gerde has been the Vice President Finance and Chief
Financial Officer of the Company since February 1995. He has been the Treasurer
of the Company since August 1996, and Assistant Secretary since November 1996.
Mr. Gerde is also an officer and director of each of the Company's operating
subsidiaries. Mr. Gerde served as Controller/CFO of Hydraulic Repair & Design,
Inc., a regional hydraulic component repair and wholesale distribution company,
from March 1990 through April 1993, as a Business Development Specialist with
the Economic Development Council of North Central Washington from July 1993 to
June 1994, and as Vice President of Televar Northwest, Inc. (a subsidiary of
Orca Technologies, Inc.) from July 1994 to February 1995. See "Certain
Relationships and Related Transactions." Mr. Gerde is a Certified Public
Accountant.
Sheryl A. Symonds. Sheryl A. Symonds has been the Vice President
Administration and General Counsel of the Company since September 1997. Prior to
joining the Company, Ms. Symonds was a partner at Stoel Rives LLP, currently the
Company's primary outside legal counsel. Ms. Symonds joined Stoel Rives LLP in
1985 and became a partner in 1992. Ms. Symonds has been Secretary of the Company
since August 1996 and is also Secretary of each of the Company's operating
subsidiaries.
Allen W. Dahl. Dr. Allen W. Dahl has been a director of the Company since
February 1995, and of its predecessors since September 1994. Dr. Dahl is retired
from practice as a physician in the Puget Sound region of Washington.
55
Urs Diebold. Dr. Urs Diebold has been a director of the Company since July
1997. Dr. Diebold has been a director of Lysys AG ("Lysys"), a Swiss financing
and investment management company, since September 1990. Prior to joining Lysys
in 1990, Dr. Diebold was an investment advisor at the Zurich office of Credit
Suisse. Dr. Diebold is also a director of one of the Company's shareholders,
Capital International Fund Limited. See "Certain Relationships and Related
Transactions."
Werner Hafelfinger. Werner Hafelfinger has been a director of the Company
since August 17, 1998. Mr. Hafelfinger has been Vice President of Global
Manufacturing of St. Jude Medical (Cardiac Rhythm Management Division), a
manufacturer of implantable medical devices, since 1984.
Dale L. Rasmussen. Dale L. Rasmussen has been a director of the Company
since June 1997. Mr. Rasmussen has been employed as the Senior Vice President
and Secretary of AirSensors, Inc., now IMPCO Technologies, Inc. since 1989.
William A. Wheeler. William A. Wheeler has been a director of the Company
since June 1997. Mr. Wheeler retired from Dowty Aerospace Yakima in May 1997,
where he served as President, Chief Executive Officer and Chairman of the Board
of Directors since 1979.
Significant Employees
Lewis L. Wear. Lewis L. Wear, 57, has been the Electronics Group President
since August 1996, President of Pacific Coast since February 1996, and a
director of Pacific Coast since November 1995. He also has been a director of
Ceramic Devices since November 1995, President and a director of NTI since April
1997 and a director of Balo since February 1998. Prior to November 1995, Mr.
Wear was Vice President of Operations for Vacuum Atmospheres, a division of
WEMS, Inc.
Garry R. Vandekieft. Garry R. Vandekieft, 57, has been the Aerospace Group
President since October 1996, President of Cashmere since August 1996, a
director of Cashmere since October 1996, and was General Manager of Cashmere
from June 1996 to August 1996. Prior to being employed by Cashmere, Mr.
Vandekieft served as Manufacturing Operations Manager of Advanced Wind Turbines
during 1995 and 1996, and as Director of Manufacturing of Master-Halco from 1990
through 1994.
Duncan Crighton. Duncan Crighton, 62, has been Chief Executive Officer of
Aeromet since March 1997 and became President of the Company's Aerospace (U.K.)
Group upon closing of the Aeromet Acquisition. Mr. Crighton served as Managing
Director of Aeromet's predecessor, Kent Aerospace Castings plc, from 1990
through 1995, and as a management consultant to Aeromet from 1995 to February
1997.
Committees of the Board of Directors; Tenure; Compensation
The Option Committee of the Board of Directors administers the Company's
Amended and Restated Stock Incentive Plan. Dr. Dahl, Dr. Diebold and Mr. Wheeler
are the current members of the Option Committee. The Finance and Audit Committee
of the Board of Directors reviews the Company's accounting policies, practices,
internal accounting controls and financial reporting. The Finance and Audit
Committee also oversees the engagement of the Company's independent auditors,
reviews the audit findings and recommendations of the independent auditors and
monitors the extent to which management has implemented the findings and
recommendations of the independent auditors. Dr. Diebold, Mr. Rasmussen and Mr.
Wheeler are the current members of the Finance and Audit Committee. The
Compensation Committee of the Board of Directors establishes salaries,
incentives and other forms of compensation for the chief executive officer, the
chief financial officer, the general counsel, the subsidiary presidents and
certain other key employees of the Company and its subsidiaries. The
Compensation Committee also administers policies relating to compensation and
benefits other than option grants, including the Director Plan and the Employee
Stock Purchase Plan. Dr. Dahl, Mr. Rasmussen and Mr. Wheeler are the current
members of the Compensation Committee. The Nominating Committee of the Board of
Directors recommends individuals to be presented to the
56
shareholders for election or reelection to the Board of Directors. Mr. Wright,
Dr. Diebold and Mr. Rasmussen are the current members of the Nominating
Committee.
Directors of the Company hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and duly
qualified. Under the terms of a 1995 agreement between Lysys and the Company,
Lysys had the right to nominate one of the Company's Board members until July
1998. Dr. Diebold is the current designee of Lysys to the Board of Directors.
See "Certain Relationships and Related Transactions." Executive officers are
elected by the Board of Directors of the Company at the first Board meeting
after each annual meeting of shareholders and hold office until their successors
are elected and duly qualified.
Pursuant to the Company's Independent Director Stock Plan as of May 31,
1998 (the "Director Plan"), each non-employee director of the Company receives
an initial award of 500 shares of Common Stock, an annual award of $5,000 worth
of Common Stock, $1,000 in cash per year for each committee on which the
director serves, and an additional $500 in cash per year for serving as
chairperson of a committee. The Board may elect to pay any of the cash fees in
shares of Common Stock. See "Executive Compensation--Benefit Plans--Independent
Director Stock Plan." All directors are reimbursed for reasonable travel and
other out-of-pocket expenses incurred in attending meetings of the Board of
Directors. On August 14, 1998, the Board of Directors approved an Amended and
Restated Independent Director Plan, which will be submitted to the Company's
shareholders for approval at the 1998 annual meeting of shareholders. See
"Executive Compensation--Benefit Plans--Independent Director Stock Plan."
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during its most recent fiscal
year, and on written representations of the Company's officers, directors, or
principal shareholders ("Reporting Persons") that no other reports were
required, the Company believes that, during the fiscal year ended May 31, 1998,
the Reporting Persons complied in all material respects with all applicable
filing requirements under Section 16(a) of the Exchange Act, except that Mr.
Wright filed a Form 5 that was two days late, and Mr. Gerde and Ms. Symonds each
filed a Form 5 that was one day late, each of which was amended in August 1998.
57
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth in summary form the compensation paid by the
Company to the Chief Executive Officer and to the Company's three most highly
compensated executive officers (the "Named Executives") for services in all
capacities to the Company for the last three fiscal years:
Long-Term
Compensation
Annual --------------
Compensation Securities
Fiscal ------------ Underlying Other Annual
Name and Principal Position Year Salary($) Options/SARs(#) Compensation($)(2)
- --------------------------- ------ ------------ --------------- ------------------
Donald A. Wright...................................... 1998 192,000 275,000 4,800
CEO and President 1997 160,000 920,000 400
1996 110,577 15,000 400
Nick A. Gerde......................................... 1998 100,000 40,000 2,400
CFO, VP Finance, Treasurer 1997 84,160 38,333 --
and Assistant Secretary 1996 62,500 8,333 --
Sheryl A. Symonds(3).................................. 1998 105,000 125,000 --
VP Administration, General
Counsel and Secretary
- --------------
(1) Represents exercisable warrants and options to purchase shares of Common
Stock. See "Aggregated Options and Fiscal Year-End Option Values."
(2) Represents estimated value of the personal use of a company car and other
miscellaneous benefits.
(3) Represents the compensation received by Ms. Symonds during the nine months
since she joined the Company. Under her employment agreement, Ms. Symonds
received salary at an annual rate of $140,000 for fiscal year 1998.
Option Grants
The following table sets forth information on grants of stock options by
the Company during the year ended May 31, 1998 to the Named Executives:
Securities % of Total
Underlying Options Granted Exercise or Market Price
Options Granted to Employees in Base Price on Grant Date
Name (#) Fiscal Year ($/Share) ($/Share) Expiration Date
---- --------------- --------------- ------------ -------------- --------------------
Donald A. Wright............. 650,000 58.4% 4.72 to 6.13 4.72 to 6.13 2/9/08 to 5/28/08
Nick A. Gerde................ 75,000 6.7% 3.00 to 6.13 3.00 to 6.13 6/2/07 to 5/28/08
Sheryl A. Symonds............ 160,000 14.4% 4.00 to 6.13 4.00 to 6.13 7/18/07 to 5/28/08
Aggregated Options and Fiscal Year-End Option Values
The following table summarizes the aggregate stock options and warrants,
and their market values at May 31, 1998, held by the Named Executives:
58
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-end(#) at FY-end($)
-------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable(1) Unexercisable
---- ----------- ------------- -------------- -------------
Donald A. Wright....................................... 1,349,024 433,536 2,345,101 58,536
Nick A. Gerde.......................................... 121,422 49,634 344,880 14,634
Sheryl A. Symonds...................................... 125,000 35,000 229,625 --
- --------------
(1) Value of exercisable options and warrants having exercise prices of less
than $6.125 per share, the closing price of the Common Stock on May 29,
1998.
Employment Agreements
The Company has entered into employment agreements with each of the Named
Executives. The employment agreements employ Mr. Wright through fiscal 2003, Mr.
Gerde through fiscal 2000 and Ms. Symonds through fiscal 2002. The employment
agreements provide for an annual salary in fiscal 1999 of $253,920, $130,000 and
$163,300, for Mr. Wright, Mr. Gerde and Ms. Symonds, respectively. The
employment agreements also provide for the annual grant to each of the Named
Executives of options to purchase up to 275,000, 25,000 and 50,000 shares of
Common Stock, respectively. The exercise price of such options shall be equal to
the fair market value of the Common Stock on the date of grant. Each option will
contain vesting and other terms as are approved by the Board of Directors, and
will expire ten years after the date of grant. If a Named Executive's employment
with the Company is terminated without cause, or if there is a change of
control, as those terms are defined in their employment agreements, the Company
will be required to make severance payments equal to, in the case of Mr. Wright,
twice Mr. Wright's then-current annual base salary, in the case of Mr. Gerde,
six months of Mr. Gerde's then-current annual base salary and, in the case of
Ms. Symonds, eighteen months of Ms. Symonds' then-current annual base salary.
Under these employment agreements, Mr. Wright and Mr. Gerde agree not to compete
with the Company for two years following termination of employment.
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Code, if the Company pays more that
$1,000,000 in compensation to a "covered employee" (the chief executive officer
and the next four highest paid employees) in a single year, then the Company's
deduction for such compensation could be limited to $1,000,000.
Benefit Plans
Amended and Restated Stock Incentive Plan
The Company's shareholders adopted the Company's Amended and Restated Stock
Incentive Plan (the "Option Plan") in October 1996. The Company has reserved for
issuance under the Option Plan a maximum of 3,000,000 shares of Common Stock,
subject to certain adjustments. Under the Option Plan, the plan administrator
may award incentive stock options ("ISOs") to key employees, and may award
non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"), stock
and cash bonus awards, restricted stock, and performance units to employees and
certain non-employees (other than non-employee directors) who have important
relationships with the Company or its subsidiaries. However, no person may
receive options to purchase more than 1,000,000 shares in any one year. As of
May 31, 1998, options to purchase an aggregate of 2,256,116 shares of Common
Stock had been granted under the Option Plan, of which options for 25,000 shares
have been exercised, leaving 743,884 shares available for future grant under the
Option Plan. No SARs, stock or cash bonus awards, restricted stock or
performance units have been granted under the Option Plan.
The Option Plan is administered by the Option Committee of the Board of
Directors, which is comprised of disinterested directors in accordance with Rule
16b-3 under the Exchange Act, and of
59
outside directors under Section 162(m) of the Internal Revenue Code. However,
only the Board of Directors may amend or terminate the Option Plan. Unless
terminated sooner by the Board of Directors, the Option Plan expires in October
2006. In general, vested options and any related rights may only be exercised
when (a) the recipient is employed by or in the service of the Company, (b)
within 12 months following termination of employment by reason of death or
disability, or (c) within three months following termination for any other
reason except for cause. Options, SARs, cash and stock bonus awards and
performance units are nonassignable and nontransferable except by will or by the
laws of descent and distribution at the time of the recipient's death. On the
date an ISO is granted, the aggregate fair market value of the Common Stock
issuable under ISOs available for exercise during any calendar year, may not
exceed $100,000. ISOs must expire ten years from the date of grant, and the
exercise price must equal the fair market value of the underlying shares of
Common Stock at the date of grant. ISOs may not be granted to employees holding
more than 10% of the Company's total voting power unless (a) the exercise price
is at least 110% of the Common Stock's fair market value on the date of grant,
and (b) the option is not exercisable until five years after the date of grant.
Independent Director Stock Plan
The Company's shareholders adopted the Company's Independent Director Stock
Plan (the "Director Plan") in November 1995. The Company has reserved for
issuance under the Director Plan a maximum of 100,000 shares of Common Stock,
subject to adjustments, to directors who are not employees of the Company or any
of its subsidiaries. At May 31, 1998, 31,959 shares had been issued under the
Director Plan, 27,009 of which are fully vested, and 68,041 remain available for
future grant.
The Director Plan is administered by the Compensation Committee of the
Board of Directors in accordance with Rule 16b-3 adopted under the Exchange Act.
No director may vote on any matter relating to an award held by such director.
Only the Board of Directors may suspend, amend or terminate the Director Plan.
Unless terminated sooner by the Board of Directors, the Director Plan expires on
October 2005. Under the Director Plan each Independent Director receives 500
fully-vested shares of Common Stock upon election to the Board (the "Initial
Award"). Each time an Independent Director is elected to the Board (or on the
date of each annual shareholders' meeting during terms longer than one year),
each Independent Director receives $5,000 worth of shares based on fair market
value of the Common Stock on the award date (the "Annual Award"). Annual Awards
vest in full on the first anniversary of grant (the "Vesting Period") only if
the Independent Director has attended at least 75% of the regularly scheduled
Board meetings during the Vesting Period. Otherwise the Annual Award is
forfeited, unless the Board of Directors votes unanimously to waive or modify
the vesting requirement. An unvested Annual Award will also be forfeited if the
director ceases to be an Independent Director during the Vesting Period for any
reason other than death or disability. However, unvested Annual Awards
automatically vest (a) if the director is unable to continue due to disability
or death, (b) upon the closing of any merger, consolidation or plan of exchange
in which the Company does not survive or (c) upon sale of all or substantially
all of the Company's assets. No Independent Director may transfer any interest
in unvested Annual Awards to any person other than to the Company.
On August 14, 1998, the Board of Directors of the Company approved the
Amended and Restated Independent Director Plan (the "Amended Director Plan"),
subject to shareholder approval at the 1998 Annual Meeting of Shareholders (the
"Annual Meeting"). The proposed amendments to the Director Plan (1) increase the
number of shares of Common Stock reserved for issuance under the Director Plan
from 100,000 to 500,000 shares, (2) provide for the award of non-qualified stock
options, instead of shares of the Company's Common Stock, to non-employee
directors of the Company, and (3) change the formula for determining the fair
market value of the shares of the Company's Common Stock. The Board of Directors
believes that the grant of stock options instead of shares helps to provide
non-employee directors with an incentive for continued service and to more
closely align their interests with those of the shareholders. Under the Amended
Director Plan each Independent Director would receive a fully-vested option to
purchase 2,500 shares of Common Stock upon election to the Board. Each time an
Independent Director is elected to the Board (or on the date of each annual
shareholders' meeting during terms longer than one year), each Independent
Director would receive an unvested option to purchase 10,000 shares of
60
Common Stock. Upon shareholder approval and unless terminated sooner by the
Board of Directors, the Amended Director Plan would continue in effect until the
earlier of: (i) ten years from the date on which the Director Plan was first
adopted by the Board, and (ii) the date on which all shares of Common Stock
available for issuance under the Amended Director Plan have been issued.
Employee Stock Purchase Plan
The Company's shareholders adopted the Company's 1997 Employee Stock
Purchase Plan in October 1997 (the "Employee Stock Plan"). The Company has
reserved for issuance under the Employee Stock Plan a maximum of 1,000,000
shares of Common Stock, subject to certain adjustments, for issuance to eligible
employees of the Company and its subsidiaries. The Company pays all expenses
relating to the Employee Stock Plan except expenses related to the resale of
shares acquired by employees under the plan. The Employee Stock Plan is
administered by the Compensation Committee of the Board of Directors. The plan
administrator will designate a financial firm as the plan's custodian to vote
the shares pursuant to the participants' instructions, keep the plan records,
and provide periodic statements to participants. Under the Employee Stock Plan,
eligible employees may purchase shares of the Company's Common Stock through
payroll deductions ranging from a minimum of $20 bi-weekly, to a maximum of 15%
of the employee's annual gross pay or $25,000. The purchase price per share will
be the lower of (a) 85% of fair market value on the first day of the offering
period, or (b) 100% of fair market value on the last day of the offering period.
The Company currently anticipates that the first offering period will begin
approximately November 1, 1998 and that offering periods will be one month each.
Plan participants may sell their shares through the plan custodian for a
discounted brokage fee. If a participant's employment terminates before the end
of any offering period, no shares will be purchased for the participant during
that period and the payroll deductions will be returned to the participant.
61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table shows, to the best of the Company's knowledge based on
the records of the Company's transfer agent and the Company's records on
issuances of shares, as adjusted to reflect changes in ownership documented in
filings with the Securities and Exchange Commission made by certain shareholders
and provided to the Company pursuant to Section 16 of the Exchange Act, and
statements provided to the Company by certain shareholders, the Common Stock
owned as of August 27, 1998 by (1) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock (each a "Principal
Shareholder"); (2) each of the Company's directors; (3) the Named Executives and
(4) all executive officers and directors of the Company as a group. Except as
otherwise noted, the Company believes the persons listed below have sole
investment and voting power with respect to the Common Stock owned by them.
Amount and Percentage
Nature of of
Beneficial Common
Name and Address of Beneficial Owner: Ownership (1) Stock
- ------------------------------------ ------------- -------------
Donald A. Wright 2,067,986(2) 11.66%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
Allen W. Dahl, M.D. 32,401(3) *
7300 Madrona Drive NE
Bainbridge Island, WA 98110
Dr. Urs Diebold 1,900(3) *
c/o Lysys AG
Gessnerallee 38
PO Box CH-8023
Zurich, Switzerland
Werner Hafelfinger(4) 2,220(4) *
15900 Valley View Court
Sylmar, CA 91342
William A. Wheeler 6,092(3) *
2011 Lombard Lane
Yakima, WA 98902
Dale L. Rasmussen 2,092(3) *
c/o IMPCO Technologies, Inc.
708 Industrial Dr.
Tukwila, WA 98188
Nick A. Gerde 180,550(5) 1.12%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
Sheryl A. Symonds 161,200(6) 1.00%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801
62
Deltec Holdings, Inc. 901,187 5.85%
14511 NE 13th Avenue
Vancouver, Washington 98668-3501
All executive officers and directors as a group 2,454,441(7) 13.59%
(8 persons)
- --------------
* Less than 1%.
(1) Shares that a person has the right to acquire within 60 days are treated as
outstanding for determining the amount and percentage of Common Stock owned
by such person but are not deemed to be outstanding as to any other person
or group.
(2) Includes (a) 32,666 shares held by Ragen MacKenzie, Incorporated, custodian
for Donald A. Wright, in two IRA accounts, (b) 1,500 shares issuable upon
exercise of Warrants, (c) 100,000 shares issuable upon exercise of another
warrant and (d) 1,643,536 shares issuable upon exercise of vested stock
options. Does not include 39,024 unvested stock options.
(3) Includes 825 unvested shares issued pursuant to the Director Plan on
October 8, 1997 which will vest at the next annual Board of Directors
meeting if certain conditions have been satisfied.
(4) Includes 600 shares issued on August 17, 1998 pursuant to the Director
Plan, 100 shares of which will vest at the next annual Board of Directors
meeting if certain conditions have been met.
(5) Includes (a) 4,000 shares issuable upon exercise of Warrants, (b) 25,000
shares issuable upon exercise of another warrant, and (c) 136,300 shares
issuable upon exercise of vested stock options.
Does not include 9,756 unvested stock options.
(6) Includes (a) 500 shares issuable upon exercise of Warrants and (b) 160,000
shares issuable upon exercise of vested stock options.
(7) Includes currently exercisable Warrants, other warrants and options to
purchase up to 2,070,836 shares of Common Stock.
63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into employment agreements with Donald A. Wright,
Nick A. Gerde and Sheryl A. Symonds. See "Executive Officers--Employment
Agreements."
Dr. Urs Diebold, a director of the Company, is also a director of Lysys and
a director of Capital International Fund Limited (the "CI Fund"), a shareholder
of the Company. Lysys provided placement agency services in connection with
certain capital raising transactions in May 1996, November 1997 and May 1998.
The May 1996 transaction involved the issuance by the Company of 838,470 shares
of Common Stock to private investors for gross proceeds of approximately $3.4
million, from which Lysys was paid a commission of $235,000. The Company also
issued 30,000 shares of Common Stock to a designee of Lysys as additional
compensation in connection with that offering. The November 1997 transactions
involved the issuance by the Company of 524,000 shares of Common Stock and
$4,050,000 in principal amount of promissory notes to private investors, one of
which was the CI Fund. Lysys received a $320,000 fee for its services in that
transaction, of which $142,000 was paid directly to Dr. Diebold. The May 1998
transaction involved the issuance by the Company of 100,000 shares of its Series
B Convertible Preferred Stock to third-party investors for gross proceeds to the
Company of $10.0 million. Lysys received $425,000 in placement agency fees for
its services in the May transaction, none of which was paid to Dr. Diebold.
In June 1997, the Company announced a plan to form an Information
Technology Group and to acquire six companies for that group. The Company
entered into nonbinding letters of intent with six potential target companies
for inclusion in that group, including Orca Technologies, Inc. ("Orca") and
Brigadoon.com, Inc. ("Brigadoon"), two development stage internet service
providers. In connection with the proposed acquisitions, the Company advanced
operating funds to Brigadoon and Orca and guaranteed a $1.3 million bank line of
credit and a $373,000 equipment lease to Orca. In December 1997, the Company
announced that after completing due diligence investigations it had determined
to terminate the letters of intent and related operating agreements. As a part
of terminating its effort to develop an information technology group, in April
1998 the Company completed a debt restructuring arrangement with Orca under
which (i) $4.2 million of indebtedness from Orca and its subsidiaries to the
Company was converted into 2,109,709 shares of Orca common stock, (ii) Orca
granted the Company certain demand and piggyback registration rights with regard
to those shares and (iii) the Company agreed to continue guaranteeing Orca's
credit facility and equipment lease, subject to certain time limitations. In
addition, Orca delivered to the Company a $950,000 promissory note (the "Orca
Note") in exchange for (i) $1.3 million in promissory notes made by Brigadoon to
the Company, (ii) a common stock purchase warrant held by the Company to
purchase a 12.5% fully diluted interest in Brigadoon common stock, (iii) the
Company's collection lawsuit against Brigadoon and (iv) the Company's claim in
an involuntary bankruptcy action against Brigadoon. The Orca Note matures in
April 2003 and accrues interest at 8% per annum. Under the Orca Note, Orca is
obligated to pay interest only for the first year and to then make
fully-amortizing monthly payments of principal plus interest for the final four
years of the note term. The Company currently owns 2,289,309 shares of Orca
common stock, which the Company believes as of May 31, 1998 represents
approximately 19.5% of Orca's outstanding common stock. The Company also
subleases approximately 95% of the square footage of its Bothell, Washington
office space to Orca for an equivalent percentage of the lease payment for that
space. Roger Vallo and Donald Cotton, who were directors of the Company until
January 1998, are directors, and Mr. Vallo is CEO, of Orca. Donald A. Wright,
the Company's Chief Executive Officer and President, and Nick A. Gerde, the
Company's Chief Financial Officer, Vice President Finance and Treasurer, were
directors of Orca until June 1997 and shareholders of Orca until May 1998, and
personally guaranteed or indemnified certain obligations of Orca. In May 1998,
Mr. Wright and Mr. Gerde sold their shares in private transactions. Dr. Allen
Dahl, a director of the Company, continues to be a shareholder of Orca.
In June 1997, the Company entered into a financial services agreement with
Liviakis Financial Communications, Inc. ("Liviakis") to provide financial and
public relations services to the Company. In connection with that consulting
agreement, the Company issued to Liviakis and Robert B. Prag, one of its
principals, warrants to purchase an aggregate of 1,290,000 shares of Common
Stock, which resulted in their beneficially owning more than 5% of the
outstanding Common Stock as of May 31, 1998. In August 1998, the Company,
Liviakis and Mr. Prag entered into an agreement in which (a)
64
a finder's fee claim by Liviakis was resolved in exchange for the Company's
issuance of an aggregate of 590,000 shares of Common Stock to Liviakis and Mr.
Prag, and (b) Liviakis and Mr. Prag transferred the warrants previously issued
to them to the Company for cancellation.
65
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
2.1 Share Acquisition Agreement dated July 1, 1998, by and between
Charles Baynes plc, Westpark Limited, Pacific Aerospace and
Electronics (U.K.) Limited, and Pacific Aerospace & Electronics,
Inc.(18)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc. as filed on September 20, 1996, with the Secretary of State
of the State of Washington.(6)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Preferred, as corrected. (8)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Preferred. (20)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6)
4.1 Form of specimen certificate for Common Stock.(6)
4.2 Form of specimen certificate for Warrants.(6)
4.3 Form of specimen certificate for the Series A Preferred.(8)
4.4 Form of specimen certificate for the Series B Preferred.(20)
4.5 Form of Common Stock Purchase Warrant issued to holders of the
Series B Preferred on May 15, 1998.(20)
4.6 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(20)
4.7 Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1, 1996.(4)
4.8 Form of Stock Purchase Agreement for Fall 1997 Offering (14)
4.9 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Paulson Investment Company, Inc., dated September 30, 1997.(20)
4.10 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Chester L. Paulson, dated September 30, 1997.(20)
4.11 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to M.
Lorraine Maxfield dated September 30, 1997.(20)
4.12 Common Stock Purchase Warrant No. 001 from Pacific Aerospace &
Electronics, Inc. to Donald A. Wright dated as of November 30,
1996.(10)
66
Exhibit
Number Description
------- -----------
4.13 Common Stock Purchase Warrant No. 002 from Pacific Aerospace &
Electronics, Inc. to Nick A. Gerde dated as of November 30,
1996.(10)
4.14 Common Stock Purchase Warrant No. 003 from Pacific Aerospace &
Electronics, Inc. to Edward A. Taylor dated as of November 30,
1996.(10)
4.15 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert
L. Smith Unified Credit Trust dated as of February 5, 1998.(20)
4.16 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to David A. Noyes & Company dated June 3, 1997.
(9)
4.17 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (9)
4.18 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (9)
4.19 Securities Purchase Agreement, dated May 15, 1998, between
Pacific Aerospace & Electronics, Inc. and the purchasers of the
Company's Series B Preferred. (20)
4.20 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)
4.21 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)
4.22 Form of Global Note from Pacific Aerospace & Electronics,
Inc.(18)
4.23 Registration Rights Agreement, dated as of July 30, 1998, between
Pacific Aerospace & Electronics, Inc., Balo Precision Parts,
Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(18)
10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings,
Inc. and Lysys Ltd.(1)
10.2 Placement Agreement, dated October 21, 1997, between Pacific
Aerospace & Electronics, Inc. and Lysys Ltd. (12)
67
Exhibit
Number Description
------- -----------
10.3 Placement Agreement, dated March 25, 1998, as amended May 15,
1998, between Pacific Aerospace & Electronics, Inc. and Lysys
Ltd. (20)
10.4 Amended and Restated Stock Incentive Plan.(5)
10.5 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
(19)
10.6 Independent Director Stock Plan.(7)
10.7 1997 Employee Stock Purchase Plan (11)
10.8 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)
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 Loan Agreement, dated June 30, 1997, between Key Bank National
Association and Pacific Aerospace & Electronics, Inc.(9)
10.12 Revolving Note, dated June 30, 1997, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(9)
10.13 Consulting Agreement, dated February 3, 1998, between Liviakis
Financial Communications, Inc. and the Company.(15)
10.14 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.(15)
10.15 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(13)
10.16 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(15)
10.17 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics Inc. to KeyBank National Association.(15)
10.18 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc.(20)
10.19 Asset Purchase Agreement, dated April 13, 1998, between Pacific
Aerospace & Electronics, Inc. and Electronic Specialty, Inc.(17)
10.20 Sublease between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. dated April 27, 1998.(20)
68
Exhibit
Number Description
------- -----------
10.21 General Terms Agreement No. PLR-950 Relating to Boeing Model
Aircraft between Cashmere Manufacturing Co., Inc. and Boeing
Commercial Airplane Group, effective as of February 5, 1990, as
amended.(2)
10.22 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 18, 1992.(2)(3)
10.23 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 31, 1991.(2)(3)
10.24 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
August 11, 1994.(2)(3)
10.25 Special Business Provisions No. PLR-950A between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 5, 1990.(2)(3)
10.26 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(2)
10.27 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)(3)
10.28 General Terms Agreement No. BCA-65311-0044 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)
10.29 General Terms Agreement No. BCA-65311-0140 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)
10.30 Special Business Provisions No. POP-65311-0143 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)(3)
10.31 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998.(20)(3)
10.32 Agreement, dated as of August 27, 1998, between Pacific Aerospace
& Electronics, Inc., Liviakis Financial Communications, Inc. and
Robert B. Prag.(20)
16.1 Letter from accountant regarding a change of accountants.(16)
21.1 List of Subsidiaries.(20)
23.1 Consent of Moss Adams LLP.(20)
69
Exhibit
Number Description
------- -----------
23.2 Consent of KPMG Peat Marwick LLP.(20)
27.1 Financial Data Schedule.(20)
- --------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB of
the year ended May 31, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(3) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(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.
(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) Filed with 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) Filed with the Company's Definitive Proxy Statement for its 1997 Annual
Shareholders Meeting, on August 28, 1997.
(12) Submitted with the Post-Effective Amendment No. 1 to Form SB-2, filed on
October 31, 1997.
(13) Filed with 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) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending February 28, 1998.
(16) Filed with the Company's Current Report on Form 8-K, dated April 22, 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) Filed with this report.
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K, dated April 22,
1998 and an amendment thereto dated May 1, 1998, reporting the changes in the
Company's certifying accountant.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: August 28, 1998
PACIFIC AEROSPACE & ELECTRONICS, INC.
By /s/ DONALD A. WRIGHT
--------------------------------------
DONALD A. WRIGHT
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on August 28, 1998.
Signatures Title
- ---------- -----
/s/ DONALD A. WRIGHT President, Chief Executive Officer, and
- ---------------------------------- Chairman of the Board
DONALD A. WRIGHT (Principal Executive Officer)
/s/ NICK A. GERDE Vice President, Finance, Chief Financial
- ---------------------------------- Officer, Treasurer and Assistant
NICK A. GERDE Secretary (Principal Financial and
Accounting Officer)
/s/ ALLEN W. DAHL Director
- ----------------------------------
ALLEN W. DAHL
/s/ DALE L. RASMUSSEN Director
- ----------------------------------
DALE L. RASMUSSEN
/s/ URS DIEBOLD Director
- ----------------------------------
URS DIEBOLD
/s/ WILLIAM A. WHEELER Director
- ----------------------------------
WILLIAM A. WHEELER
Director (since 8/17/98)
- ----------------------------------
WERNER HAFELFINGER
71
EXHIBIT INDEX
The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
Exhibit
Number Description
------- -----------
2.1 Share Acquisition Agreement dated July 1, 1998, by and between
Charles Baynes plc, Westpark Limited, Pacific Aerospace and
Electronics (U.K.) Limited, and Pacific Aerospace & Electronics,
Inc.(18)
3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc. as filed on September 20, 1996, with the Secretary of State
of the State of Washington.(6)
3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Preferred, as corrected. (8)
3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Preferred. (20)
3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6)
4.1 Form of specimen certificate for Common Stock.(6)
4.2 Form of specimen certificate for Warrants.(6)
4.3 Form of specimen certificate for the Series A Preferred.(8)
4.4 Form of specimen certificate for the Series B Preferred.(20)
4.5 Form of Common Stock Purchase Warrant issued to holders of the
Series B Preferred on May 15, 1998.(20)
4.6 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Preferred.(20)
4.7 Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1, 1996.(4)
4.8 Form of Stock Purchase Agreement for Fall 1997 Offering (14)
4.9 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Paulson Investment Company, Inc., dated September 30, 1997.(20)
4.10 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Chester L. Paulson, dated September 30, 1997.(20)
4.11 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to M.
Lorraine Maxfield dated September 30, 1997.(20)
4.12 Common Stock Purchase Warrant No. 001 from Pacific Aerospace &
Electronics, Inc. to Donald A. Wright dated as of November 30,
1996.(10)
Exhibit
Number Description
------- -----------
4.13 Common Stock Purchase Warrant No. 002 from Pacific Aerospace &
Electronics, Inc. to Nick A. Gerde dated as of November 30,
1996.(10)
4.14 Common Stock Purchase Warrant No. 003 from Pacific Aerospace &
Electronics, Inc. to Edward A. Taylor dated as of November 30,
1996.(10)
4.15 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert
L. Smith Unified Credit Trust dated as of February 5, 1998.(20)
4.16 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to David A. Noyes & Company dated June 3, 1997.
(9)
4.17 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (9)
4.18 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (9)
4.19 Securities Purchase Agreement, dated May 15, 1998, between
Pacific Aerospace & Electronics, Inc. and the purchasers of the
Company's Series B Preferred. (20)
4.20 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)
4.21 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)
4.22 Form of Global Note from Pacific Aerospace & Electronics,
Inc.(18)
4.23 Registration Rights Agreement, dated as of July 30, 1998, between
Pacific Aerospace & Electronics, Inc., Balo Precision Parts,
Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(18)
10.1 Letter Agreement, dated January 3, 1995, between PCT Holdings,
Inc. and Lysys Ltd.(1)
10.2 Placement Agreement, dated October 21, 1997, between Pacific
Aerospace & Electronics, Inc. and Lysys Ltd. (12)
Exhibit
Number Description
------- -----------
10.3 Placement Agreement, dated March 25, 1998, as amended May 15,
1998, between Pacific Aerospace & Electronics, Inc. and Lysys
Ltd. (20)
10.4 Amended and Restated Stock Incentive Plan.(5)
10.5 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
(19)
10.6 Independent Director Stock Plan.(7)
10.7 1997 Employee Stock Purchase Plan (11)
10.8 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)
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 Loan Agreement, dated June 30, 1997, between Key Bank National
Association and Pacific Aerospace & Electronics, Inc.(9)
10.12 Revolving Note, dated June 30, 1997, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(9)
10.13 Consulting Agreement, dated February 3, 1998, between Liviakis
Financial Communications, Inc. and the Company.(15)
10.14 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.(15)
10.15 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(13)
10.16 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(15)
10.17 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics Inc. to KeyBank National Association.(15)
10.18 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc.(20)
10.19 Asset Purchase Agreement, dated April 13, 1998, between Pacific
Aerospace & Electronics, Inc. and Electronic Specialty, Inc.(17)
10.20 Sublease between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. dated April 27, 1998.(20)
Exhibit
Number Description
------- -----------
10.21 General Terms Agreement No. PLR-950 Relating to Boeing Model
Aircraft between Cashmere Manufacturing Co., Inc. and Boeing
Commercial Airplane Group, effective as of February 5, 1990, as
amended.(2)
10.22 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 18, 1992.(2)(3)
10.23 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 31, 1991.(2)(3)
10.24 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
August 11, 1994.(2)(3)
10.25 Special Business Provisions No. PLR-950A between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 5, 1990.(2)(3)
10.26 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(2)
10.27 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)(3)
10.28 General Terms Agreement No. BCA-65311-0044 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)
10.29 General Terms Agreement No. BCA-65311-0140 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)
10.30 Special Business Provisions No. POP-65311-0143 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)(3)
10.31 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998.(20)(3)
10.32 Agreement, dated as of August 27, 1998, between Pacific Aerospace
& Electronics, Inc., Liviakis Financial Communications, Inc. and
Robert B. Prag.(20)
16.1 Letter from accountant regarding a change of accountants.(16)
21.1 List of Subsidiaries.(20)
23.1 Consent of Moss Adams LLP.(20)
Exhibit
Number Description
------- -----------
23.2 Consent of KPMG Peat Marwick LLP.(20)
27.1 Financial Data Schedule.(20)
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(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB of
the year ended May 31, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(3) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(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.
(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) Filed with 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) Filed with the Company's Definitive Proxy Statement for its 1997 Annual
Shareholders Meeting, on August 28, 1997.
(12) Submitted with the Post-Effective Amendment No. 1 to Form SB-2, filed on
October 31, 1997.
(13) Filed with 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) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending February 28, 1998.
(16) Filed with the Company's Current Report on Form 8-K, dated April 22, 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) Filed with this report.