-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OATw8xEzeX1ed1F9Ct0Kbu1S5pHm5jNgNDoSGYNJ8h0q4G87tQ30U34zDr9JDMUt 5yKGDJOwURmGjILNi1mocg== 0001032210-01-500344.txt : 20010416 0001032210-01-500344.hdr.sgml : 20010416 ACCESSION NUMBER: 0001032210-01-500344 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC AEROSPACE & ELECTRONICS INC CENTRAL INDEX KEY: 0000790023 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 911744587 STATE OF INCORPORATION: WA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26088 FILM NUMBER: 1602278 BUSINESS ADDRESS: STREET 1: 430 OLDS STATION RD CITY: WENATCHEE STATE: WA ZIP: 98801 BUSINESS PHONE: 5096679600 MAIL ADDRESS: STREET 1: 430 OLDS STATION ROAD CITY: WENATCHEE STATE: WA ZIP: 98801 FORMER COMPANY: FORMER CONFORMED NAME: PCT HOLDINGS INC /NV/ DATE OF NAME CHANGE: 19950223 FORMER COMPANY: FORMER CONFORMED NAME: VERAZZANA VENTURES LTD DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VERAZZANA VENTURES SYSTEMS LTD DATE OF NAME CHANGE: 19890618 10-Q 1 d10q.txt FORM 10-Q FOR THE PERIOD ENDED FEBRUARY 28, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2001 [ _ ] 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 incorporation (I.R.S. Employer Identification No.) or organization)
430 Olds Station Road, Third Floor, Wenatchee, Washington 98801 (Address of Principal Executive Offices; Zip Code) Registrant's telephone number, including area code: (509) 667-9600 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ ----- Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. Yes____ No____ Applicable only to corporate issuers: State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of April 9, 2001, there were 38,686,301 shares outstanding of the Company's Common Stock, par value $.001 per share. PART 1 FINANCIAL INFORMATION --------------------- ITEM 1: FINANCIAL STATEMENTS Consolidated Balance Sheets - February 28, 2001 and May 31, 2000 Consolidated Statements of Operations and Comprehensive Income (Loss) - Third Quarters and Nine Months Ended February 28, 2001 and February 29, 2000. Consolidated Statements of Cash Flows - Nine Months Ended February 28, 2001 and February 29, 2000 Management's Statement and Notes to Unaudited Consolidated Financial Statements - - Third Quarter and Nine Months Ended February 28, 2001 and February 29, 2000 2 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 28, 2001 and May 31, 2000
February 28, May 31, 2001 2000 ASSETS (Unaudited) (Audited) - --------------------------------------------------------------------- -------------- -------------- CURRENT ASSETS Cash $ 1,468,000 $ 2,154,000 Accounts receivable, net 18,722,000 21,210,000 Inventories 25,365,000 27,849,000 Deferred income taxes 117,000 872,000 Prepaid expense and other 1,993,000 1,668,000 -------------- -------------- Total Current Assets 47,665,000 53,753,000 -------------- -------------- PROPERTY AND EQUIPMENT, NET 34,227,000 44,076,000 -------------- -------------- OTHER ASSETS Costs in excess of net book value of acquired subsidiaries, net 9,329,000 38,291,000 Patents, net 1,102,000 1,158,000 Deferred income taxes - 2,303,000 Deferred financing costs, net 3,326,000 3,597,000 Other assets 548,000 404,000 -------------- -------------- Total Other Assets 14,305,000 45,753,000 -------------- -------------- TOTAL ASSETS $ 96,197,000 $ 143,582,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) - --------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $ 14,108,000 $ 10,630,000 Accrued liabilities 4,663,000 4,589,000 Accrued interest 597,000 2,372,000 Current portion of long-term debt 1,039,000 1,098,000 Current portion of capital lease obligations 443,000 504,000 Lines of credit - 5,379,000 -------------- -------------- Total Current Liabilities 20,850,000 24,572,000 -------------- -------------- LONG-TERM LIABILITIES Long-term debt, net of current portion 3,419,000 4,161,000 Capital lease obligations, net of current portion 959,000 1,065,000 Senior subordinated notes payable 63,700,000 63,700,000 Short-term obligations to be refinanced with long-term debt 9,306,000 - Deferred rent and other 2,205,000 316,000 -------------- -------------- Total Long Term Liabilities 79,589,000 69,242,000 -------------- -------------- Total Liabilities 100,439,000 93,814,000 -------------- -------------- STOCKHOLDERS' EQUITY (DEFICIT) Convertible preferred stock - - Common stock 38,000 30,000 Additional paid in capital 85,009,000 83,173,000 Accumulated other comprehensive loss (8,589,000) (6,250,000) Accumulated deficit (80,700,000) (27,185,000) -------------- -------------- Total Stockholders' Equity (Deficit) (4,242,000) 49,768,000 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 96,197,000 $ 143,582,000 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 3 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Third Quarters and Nine Months Ended February 28, 2001 and February 29, 2000
Quarters Ended Nine Months Ended --------------------------- --------------------------- February 28, February 29, February 28, February 29, 2001 2000 2001 2000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ------------ ------------ NET SALES $ 27,068,000 $ 26,501,000 $ 82,148,000 $ 84,072,000 COST OF SALES 27,993,000 21,355,000 75,065,000 67,115,000 ------------ ------------ ------------ ------------ GROSS PROFIT (LOSS) (925,000) 5,146,000 7,083,000 16,957,000 OPERATING EXPENSES 37,044,000 4,646,000 47,710,000 14,332,000 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS (37,969,000) 500,000 (40,627,000) 2,625,000 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest Income - 1,000 - 54,000 Interest Expense (2,354,000) (2,516,000) (6,891,000) (7,668,000) Other (18,000) 10,000 95,000 (1,000) ------------ ------------ ------------ ------------ (2,372,000) (2,505,000) (6,796,000) (7,615,000) ------------ ------------ ------------ ------------ NET LOSS BEFORE INCOME TAX (40,341,000) (2,005,000) (47,423,000) (4,990,000) PROVISION FOR INCOME TAXES (5,976,000) 330,000 (6,089,000) (205,000) ------------ ------------ ------------ ------------ NET LOSS (46,317,000) (1,675,000) (53,512,000) (5,195,000) ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation 877,000 (830,000) (2,339,000) (969,000) Income tax benefit (expense) - (634,000) - (681,000) ------------ ------------ ------------ ------------ 877,000 (1,464,000) (2,339,000) (1,650,000) ------------ ------------ ------------ ------------ COMPREHENSIVE LOSS $(45,440,000) $ (3,139,000) $(55,851,000) $ (6,845,000) ============ ============ ============ ============ NET LOSS PER SHARE: BASIC $ (1.32) $ (0.08) $ (1.57) $ (0.26) DILUTED $ (1.32) $ (0.08) $ (1.57) $ (0.26) SHARES USED IN COMPUTATION OF NET LOSS PER SHARE: BASIC 35,020,000 21,043,000 34,135,000 20,044,000 DILUTED 35,020,000 21,043,000 34,135,000 20,044,000
The accompanying notes are an integral part of these consolidated financial statements. 4 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended February 28, 2001 and February 29, 2000
Nine Months Ended ----------------------------- February 28, February 29, 2001 2000 (Unaudited) (Unaudited) ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net cash used in operating activities $ (572,000) $ (4,994,000) ----------- ------------ CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment (2,904,000) (3,434,000) Proceeds from sale of property and equipment 1,733,000 21,000 Acquisition of subsidiaries - (1,282,000) Increase in notes receivable - (1,505,000) ----------- ------------ Net cash used in investing activities (1,171,000) (6,200,000) ----------- ------------ CASH FLOW FROM FINANCING ACTIVITIES Net borrowings under line of credit 319,000 5,871,000 Proceeds from long-term debt 272,000 - Payments on long term debt and cap leases (1,220,000) (2,047,000) Sale of common stock, net of issuance costs 1,840,000 98,000 Sale of preferred stock, net of issuance costs - (4,000) Proceeds from exercise of warrants 4,000 87,000 ----------- ------------ Net cash provided by financing activities 1,215,000 4,005,000 ----------- ------------ NET CHANGE IN CASH (528,000) (7,189,000) CASH AT BEGINNING OF PERIOD 2,154,000 8,134,000 EFFECT OF EXCHANGE RATES ON CASH (158,000) 157,000 ----------- ------------ CASH AT END OF PERIOD $ 1,468,000 $ 1,102,000 =========== ============ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Cash paid during the period for: Interest $ 4,577,000 $ 9,296,000 Income taxes 192,000 2,185,000 Short-term obligations to be refinanced with long-term debt 9,306,000 -
The accompanying notes are an integral part of these consolidated financial statements. 5 PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES MANAGEMENT'S STATEMENT AND NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Third Quarter and Nine Months Ended February 28, 2001 Management's Statement - ---------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with Form 10-Q instructions and, in the opinion of management, contain all adjustments necessary to present fairly the Company's consolidated financial position as of February 28, 2001 and May 31, 2000, the consolidated results of operations for the quarters and nine months ended February 28, 2001 and February 29, 2000, and the consolidated statements of cash flows for the nine months ended February 28, 2001 and February 29, 2000. All significant intercompany transactions have been eliminated in the consolidation process. These results have been determined on the basis of generally accepted accounting principles and practices applied consistently with those used in the preparation of the Company's annual and quarterly reports under the Securities Exchange Act of 1934, as amended. Certain information and footnote disclosures normally included in audited financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended May 31, 2000 and 1999. The results of operations for the quarter and nine months ended February 28, 2001 are not necessarily indicative of the results to be expected or anticipated for the full fiscal year. Note 1: Net Loss Per Share: ------------------ Basic loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period using the treasury stock method. As the Company had a net loss for the periods ended February 28, 2001 and February 29, 2000, basic and diluted net loss per share are the same. Potential amounts of shares that were not included in the computation of weighted average diluted shares were 7,114,844, as of February 28, 2001. This number does not include warrants to purchase an additional 4,729,052 shares that we issued to four lenders and a placement agent in connection with a loan that closed on March 1, 2001. 6 Note 2: Inventories ----------- Components of inventories are as follows: February 28, May 31, 2001 2000 ---- ---- Raw materials $ 5,875,000 $ 7,204,000 Work in progress 12,678,000 13,581,000 Finished goods 6,812,000 7,064,000 ----------- ----------- Total $25,365,000 $27,849,000 =========== =========== Note 3: Going Concern ------------- The Company's consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended February 28, 2001, the Company's operating activities used cash of $572,000. The Company's future success will depend heavily on its ability to generate cash from operating activities and to meet its obligations as they become due. If the Company is not sufficiently successful in increasing cash provided by operating activities, it may need to sell additional common stock or other securities, or it may need to sell assets outside of the ordinary course of business in order to meet its obligations. There is no assurance that the Company will be able to achieve sufficient cash from operations, to sell additional common stock or other securities, or to sell assets for amounts in excess of book value. The Company's ability to obtain additional cash if and when needed could have a material adverse effect on its financial position, results of operations and its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Note 4: Segment Information and Concentration of Risk --------------------------------------------- The Company is organized into three operational segments, "U.S. Aerospace, " "European Aerospace," and "U.S. Electronics." The Aerospace segments are primarily comprised of machined, formed and cast metal product operations. Net sales of the Aerospace segments include sales to customers in the aerospace, defense and transportation industries. Net sales of the Electronics segment also include sales to customers in the aerospace and defense industries. Historically, these segments have been cyclical and sensitive to general economic and industry specific conditions. In particular, the aerospace industry, in recent years, has been adversely affected by a number of factors, including reduced demand for commercial aircraft, a decline in military spending, postponement of overhaul and maintenance of aircraft, increased fuel and labor costs, increased regulations, and intense price competition, among other factors. In addition, there is no assurance that general economic conditions will not lead to a downturn in demand for core components and products of the Company, in each of its operational segments. 7 Presented below is the Company's operational segment information. In addition, all operational segments identified as "U.S." and Corporate are located within the U.S. while the operations and assets of the "European Aerospace" segment are located within the United Kingdom. Nine months ended February 28, 2001
Corporate, U.S. European U.S. other and Aerospace Aerospace Electronics eliminations Total ------------- ------------ ------------- --------------- ------------- Net sales to customers $ 22,405,000 37,662,000 22,081,000 - 82,148,000 Net sales between segments 489,000 - - (489,000) - Income (loss) from operations (14,082,000) (24,270,000) 3,454,000 (5,729,000) (40,627,000) Interest income - - - - - Interest expense 274,000 3,007,000 101,000 3,509,000 6,891,000 Other income (expense) 52,000 - 55,000 (12,000) 95,000 Identifiable assets 22,118,000 44,285,000 20,278,000 9,516,000 96,197,000
Nine months ended February 29, 2000
Corporate, U.S. European U.S. other and Aerospace Aerospace Electronics eliminations Total ------------- ------------- ------------- --------------- ------------ Net sales to customers $ 23,298,000 42,588,000 18,186,000 - 84,072,000 Net sales between segments 160,000 - - (160,000) - Income (loss) from operations 92,000 2,026,000 5,049,000 (4,542,000) 2,625,000 Interest income - 35,000 - 19,000 54,000 Interest expense 271,000 3,311,000 100,000 3,986,000 7,668,000 Other income (expense) 50,000 - 51,000 (102,000) (1,000) Identifiable assets 33,533,000 79,893,000 20,379,000 18,282,000 152,087,000
Note 5: Potential Sale or Closure of Subsidiaries ----------------------------------------- As previously announced, the Company has decided to sell its U.K. subsidiary, which makes up its European Aerospace Group. The Company has engaged an investment banking institution to assist it in marketing that business. The European Aerospace Group contributed approximately 46% of the Company's consolidated revenue for the nine months ended February 28, 2001 and represented approximately 46% of the Company's consolidated assets at February 28, 2001. Although at this time the Company has not committed to a specific buyer of the group, it has received several bona-fide preliminary indicative offers to purchase the group. The Company's goal is to complete the sale of the European Aerospace Group by May 31, 2001. In addition, the Company is in the process of downsizing its U.S. Aerospace Group's Engineering & Fabrication Division by closing its fabrication facilities in Sedro-Woolley, Washington and selling assets related to the fabrication business. The downsizing of the fabrication operations began in March 2001 and is expected to be complete by summer. The Engineering & Fabrication Division provided approximately 6% of the Company's consolidated net revenue for the nine months ended February 28, 2001 and represented 8 approximately 4% of the Company's consolidated assets at February 28, 2001. The Company is also pursuing opportunities to sell other under utilized assets used in its U.S. Aerospace Group.
European Aerospace Group Engineering & Fabrication Division Nine Months Ending Nine Months Ending ----------------------------------------- -------------------------------------- February 28, February 29, February 28, February 29, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales to customers $ 37,662,000 42,588,000 4,951,000 4,173,000 Income (loss) from operations (24,270,000) 2,026,000 (8,776,000) (676,000)
Note 6: Asset Impairment ---------------- Based upon preliminary indicative offers to purchase the European Aerospace Group, the Company recognized a $25.0 million charge to reduce the $33.0 million carrying value of goodwill associated with the European Aerospace Group to net estimated realizable value, approximately $8.0 million. The Company has a potential opportunity to sell certain property, plant, and equipment used in our U.S. Aerospace Group. Based upon our evaluation of those assets the Company has recognized a $3.5 million charge to reduce the $6.5 million carrying value of those assets to estimated net realizable value, approximately $3.0 million. Also included in operating expenses are non-cash charges of approximately $3.3 million to reduce the $3.5 million carrying value of goodwill and equipment used in the U.S. Aerospace Group's Engineering & Fabrication Division to estimated liquidation value, approximately $0.2 million. Within the U.S. Electronic Group's Display Division the Company recognized a non-cash charge of approximately $0.6 million to reduce the $0.9 million of equipment used to produce low power relays to net realizable value, approximately $0.3 million. The equipment, inventory, and intellectual property used to produce low power relays were sold subsequent to the end of the third quarter. Gross proceeds from the sale were $400,000 compared to a carrying amount of approximately $1.0 million. Note 7: Deferred Tax Assets ------------------- Due to continued losses, the Company has concluded that substantially all of its deferred income tax assets do not meet the accounting requirement of "more likely than not" to be realized. Therefore, the Company wrote off approximately $4.8 million of deferred income tax assets during the quarter ended February 28, 2001. Income tax expense in the future should be minimal until such time as the Company becomes consistently profitable. Note 8: Short Term Obligations To Be Refinanced --------------------------------------- On March 2, 2001 the Company refinanced certain short-term obligations, its lines of credit and accrued interest on its 11 1/4% senior subordinated notes, with long-term debt. The long-term debt is a senior secured term loan of $13.8 million from four institutional lenders that closed on March 1, 2001. The loan bears interest at 18% per annum, payable quarterly, and has a two-year term. The Company has the right to defer and accrue a portion of the interest on the loan, up to 1 1/4% per quarter, for up to a year at the time of any interest payment. The 9 loan is secured by the Company's assets, the assets of its U.S. subsidiaries, and other intangibles. This senior secured loan is a term loan rather than a revolving loan. As a result, if the Company makes payments of principal before the loan's maturity, additional loan proceeds will not become available, and the loan will not provide an additional source of cash to fund the Company's operations or to meet its obligations as they become due. Note 9: Consolidating Condensed Financial Statements -------------------------------------------- The following financial statements present consolidating condensed financial information of the Company for the indicated periods. The Company's 11 1/4% senior subordinated notes, which were used to finance the Aeromet acquisition in July 1998, have been guaranteed by all of the Company's U.S. wholly owned subsidiaries. The guarantor subsidiaries have fully and unconditionally guaranteed this debt on a joint and several basis. This debt is not guaranteed by the Company's foreign subsidiaries, which consist of Aeromet and two related holding companies. There are no significant contractual restrictions on the distribution of funds from the guarantor subsidiaries to the parent corporation. The consolidating condensed financial information is presented in lieu of separate financial statements and other disclosures of the guarantor subsidiaries, as management has determined that such information is not material to investors. 10 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Balance Sheet February 28, 2001
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------- ------------- ------------ ASSETS - ------ CURRENT ASSETS Cash $ 355,000 $ 29,000 $ 1,084,000 $ - $ 1,468,000 Accounts receivable, net - 8,384,000 10,504,000 (166,000) 18,722,000 Inventories - 16,016,000 9,349,000 - 25,365,000 Other 146,000 428,000 1,536,000 - 2,110,000 ------------- ------------- ------------ ------------- ------------ Total current assets 501,000 24,857,000 22,473,000 (166,000) 47,665,000 PROPERTY, PLANT, AND EQUIPMENT, net 5,450,000 14,996,000 13,781,000 - 34,227,000 OTHER ASSETS Costs in excess of net book value of acquired subsidiaries, net - 1,298,000 8,031,000 - 9,329,000 Investment in and loans to subsidiaries 63,831,000 71,744,000 - (135,575,000) - Other 3,536,000 1,440,000 - - 4,976,000 ------------- ------------- ------------ ------------- ------------ Total other assets 67,367,000 74,482,000 8,031,000 (135,575,000) 14,305,000 ============= ============= ============ ============= ============ TOTAL ASSETS $ 73,318,000 $ 114,335,000 $ 44,285,000 $(135,741,000) $ 96,197,000 ============= ============= ============ ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts payable $ 1,058,000 $ 6,831,000 $ 6,385,000 $ (166,000) $ 14,108,000 Current portion of long-term debt 116,000 923,000 - - 1,039,000 Line of credit - - - - - Other 1,206,000 2,313,000 2,184,000 - 5,703,000 ------------- ------------- ------------ ------------- ------------ Total current liabilities 2,380,000 10,067,000 8,569,000 (166,000) 20,850,000 LONG-TERM LIABILITIES Long-term debt, net of current portion 74,176,000 2,249,000 - - 76,425,000 Intercompany loan payable - 69,779,000 38,394,000 (108,173,000) - Other 125,000 1,977,000 1,062,000 - 3,164,000 ------------- ------------- ------------ ------------- ------------ Total long-term liabilities 74,301,000 74,005,000 39,456,000 (108,173,000) 79,589,000 STOCKHOLDERS' EQUITY (DEFICIT) Convertible preferred stock - - - - - Common stock 38,000 56,139,000 33,710,000 (89,849,000) 38,000 Additional paid-in capital 85,009,000 - - - 85,009,000 Accumulated other comprehensive loss (8,589,000) - (8,589,000) 8,589,000 (8,589,000) Retained earnings (accumulated deficit) (79,821,000) (25,876,000) (28,861,000) 53,858,000 (80,700,000) ------------- ------------- ------------ ------------- ------------ Total stockholders' equity (deficit) (3,363,000) 30,263,000 (3,740,000) (27,402,000) (4,242,000) ============= ============= ============ ============= ============ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,318,000 $ 114,335,000 $ 44,285,000 $(135,741,000) $ 96,197,000 ============= ============= ============ ============= ============
11 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Balance Sheet May 31, 2000
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------- ------------ ------------ ASSETS - ------ CURRENT ASSETS Cash $ (184,000) $ 58,000 $ 2,280,000 $ - $ 2,154,000 Accounts receivable, net - 9,047,000 12,527,000 (364,000) 21,210,000 Inventories - 17,307,000 10,542,000 - 27,849,000 Other 895,000 1,145,000 500,000 - 2,540,000 -------------- ------------- ------------ -------------- ------------- Total current assets 711,000 27,557,000 25,849,000 (364,000) 53,753,000 PROPERTY, PLANT, AND EQUIPMENT, net 6,340,000 22,995,000 14,741,000 - 44,076,000 OTHER ASSETS Costs in excess of net book value of acquired subsidiaries, net - 3,296,000 34,995,000 - 38,291,000 Investment in and loans to subsidiaries 111,792,000 72,618,000 - (184,410,000) - Other 5,183,000 2,982,000 (703,000) - 7,462,000 -------------- ------------- ------------ -------------- ------------- Total other assets 116,975,000 78,896,000 34,292,000 (184,410,000) 45,753,000 ============== ============= ============ ============== ============= TOTAL ASSETS $ 124,026,000 $ 129,448,000 $ 74,882,000 $ (184,774,000) $ 143,582,000 ============== ============= ============ ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts payable $ 667,000 $ 3,729,000 $ 6,598,000 $ (364,000) $ 10,630,000 Current portion of long-term debt 170,000 928,000 - - 1,098,000 Line of credit 5,379,000 - - - 5,379,000 Other 2,989,000 2,898,000 1,578,000 - 7,465,000 -------------- ------------- ------------ -------------- ------------- Total current liabilities 9,205,000 7,555,000 8,176,000 (364,000) 24,572,000 LONG-TERM LIABILITIES Long-term debt, net of current portion 64,928,000 2,933,000 - - 67,861,000 Intercompany loan payable - 71,484,000 38,957,000 (110,441,000) - Other 125,000 706,000 550,000 - 1,381,000 -------------- ------------- ------------ -------------- ------------- Total long-term liabilities 65,053,000 75,123,000 39,507,000 (110,441,000) 69,242,000 STOCKHOLDERS' EQUITY Convertible preferred stock - - - - - Common stock 30,000 56,139,000 33,710,000 (89,849,000) 30,000 Additional paid-in capital 83,173,000 - - - 83,173,000 Accumulated other comprehensive loss (6,250,000) - (6,250,000) 6,250,000 (6,250,000) Retained earnings (accumulated deficit) (27,185,000) (9,369,000) (261,000) 9,630,000 (27,185,000) -------------- ------------- ------------ -------------- ------------- Total stockholders' equity 49,768,000 46,770,000 27,199,000 (73,969,000) 49,768,000 ============== ============= ============ ============== ============= TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 124,026,000 $ 129,448,000 $ 74,882,000 $ (184,774,000) $ 143,582,000 ============== ============= ============ ============== =============
12 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Operations and Comprehensive Income (Loss) For the Quarter Ended February 28, 2001
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------- ------------ ------------ Net Sales $ - $ 14,673,000 $ 12,641,000 $ (246,000) $ 27,068,000 Cost of Sales - 16,441,000 11,798,000 (246,000) 27,993,000 ------------- ------------- -------------- ------------ ------------- Gross profit (loss) - (1,768,000) 843,000 - (925,000) Operating expenses (2,029,000) 10,777,000) (26,084,000) 1,846,000) 37,044,000 ------------- ------------- -------------- ------------ ------------- Income (loss) from operations (2,029,000) (12,545,000) (25,241,000) 1,846,000 (37,969,000) Other income (expense) Parent's share of subsidiaries net income (loss) (40,747,000) - - 40,747,000 - Interest expense (2,204,000) (1,107,000) (995,000) 1,952,000 (2,354,000) Other 2,811,000 969,000 - (3,798,000) (18,000) ------------- ------------- -------------- ------------ ------------- Total other income (expense) (40,140,000) (138,000) (995,000) 38,901,000 (2,372,000) ------------- ------------- -------------- ------------ ------------- Income (loss) before income taxes (42,169,000) (12,683,000) (26,236,000) 40,747,000 (40,341,000) Income tax benefit (expense) (4,148,000) (641,000) (1,187,000) - (5,976,000) ------------- ------------- -------------- ------------ ------------- Net income (loss) (46,317,000) (13,324,000) (27,423,000) 40,747,000 (46,317,000) Other comprehensive income (loss) Foreign currency translation, net of tax 877,000 - 877,000 (877,000) 877,000 ------------- ------------- -------------- ------------ ------------- Total other comprehensive income (loss) 877,000 - 877,000 (877,000) 877,000 ------------- ------------- -------------- ------------ ------------- Comprehensive income (loss) $ (45,440,000) $ (13,324,000) $ (26,546,000) $ 39,870,000 $ (45,440,000) ============= ============= ============== ============ =============
13 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Operations and Comprehensive Income (Loss) For the Quarter Ended February 29, 2000
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net Sales $ - $ 14,058,000 $ 13,255,000 $ (812,000) $ 26,501,000 Cost of Sales - 10,659,000 11,508,000 (812,000) 21,355,000 ------------ ------------ ------------ ------------ ------------ Gross profit - 3,399,000 1,747,000 - 5,146,000 Operating expenses 1,565,000 3,230,000 1,548,000 (1,697,000) 4,646,000 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations (1,565,000) 169,000 199,000 1,697,000 500,000 Other income (expense) Parent's share of subsidiaries net loss (501,000) - - 501,000 - Interest expense (2,373,000) (1,199,000) (1,104,000) 2,160,000 (2,516,000) Other 2,758,000 1,110,000 - (3,857,000) 11,000 ------------ ------------ ------------ ------------ ------------ Total other income (expense) (116,000) (89,000) (1,104,000) (1,196,000) (2,505,000) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes (1,681,000) 80,000 (905,000) 501,000 (2,005,000) Income tax benefit (expense) 6,000 195,000 129,000 - 330,000 ------------ ------------ ------------ ------------ ------------ Net income (loss) (1,675,000) 275,000 (776,000) 501,000 (1,675,000) Other comprehensive income (loss) Foreign currency translation, net of tax (1,464,000) - (1,464,000) 1,464,000 (1,464,000) Adjustment for unrealized loss on investment - - - - - ------------ ------------ ------------ ------------ ------------ Total other comprehensive income (loss) (1,464,000) - (1,464,000) 1,464,000 (1,464,000) ------------ ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (3,139,000) $ 275,000 $ (2,240,000) $ 1,965,000 $ (3,139,000) ============ ============ ============ ============ ============
14 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Operations and Comprehensive Income (Loss) For the Nine Months Ended February 28, 2001
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net Sales $ - $ 46,463,000 $ 37,662,000 $ (1,977,000) $ 82,148,000 Cost of Sales - 43,057,000 33,985,000 (1,977,000) 75,065,000 ------------ ------------ -------------- ------------ ------------- Gross profit - 3,406,000 3,677,000 - 7,083,000 Operating expenses 5,729,000 19,004,000 28,147,000 (5,170,000) 47,710,000 ------------ ------------ -------------- ------------ ------------- Income (loss) from operations (5,729,000) (15,598,000) (24,470,000) 5,170,000 (40,627,000) Other income (expense) Parent's share of subsidiaries net income (loss) (45,107,000) - - 45,107,000 - Interest expense (6,447,000) (3,311,000) (3,007,000) 5,874,000 (6,891,000) Other 8,096,000 3,043,000 - (11,044,000) 95,000 ------------ ------------ -------------- ------------ ------------- Total other income (expense) (43,458,000) (268,000) (3,007,000) 39,937,000 (6,796,000) ------------ ------------ -------------- ------------ ------------- Income (loss) before income taxes (49,187,000) (15,866,000) (27,477,000) 45,107,000 (47,423,000) Income tax benefit (expense) (4,325,000) (641,000) (1,123,000) - (6,089,000) ------------ ------------ -------------- ------------ ------------- Net income (loss) (53,512,000) (16,507,000) (28,600,000) 45,107,000 (53,512,000) Other comprehensive income (loss) Foreign currency translation, net of tax (2,339,000) - (2,339,000) 2,339,000 (2,339,000) ------------ ------------ -------------- ------------ ------------- Total other comprehensive income (loss) (2,339,000) - (2,339,000) 2,339,000 (2,339,000) ------------ ------------ -------------- ------------ ------------- Comprehensive income (loss) $(55,851,000) $(16,507,000) $ (30,939,000) $ 47,446,000 $ (55,851,000) ============ ============ ============== ============ =============
15 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Operations and Comprehensive Income (Loss) For the nine months ended February 29, 2000
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ Net Sales $ - $ 43,174,000 $ 42,588,000 $ (1,690,000) $ 84,072,000 Cost of Sales - 32,741,000 36,064,000 (1,690,000) 67,115,000 ------------ ------------ ------------ ------------ ------------ Gross profit - 10,433,000 6,524,000 - 16,957,000 Operating expenses 4,542,000 9,651,000 4,498,000 (4,359,000) 14,332,000 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations (4,542,000) 782,000 2,026,000 4,359,000 2,625,000 Other income (expense) Parent's share of subsidiaries net loss (943,000) - - 943,000 - Interest expense (7,234,000) (3,619,000) (3,311,000) 6,496,000 (7,668,000) Other 7,524,000 3,349,000 35,000 (10,855,000) 53,000 ------------ ------------ ------------ ------------ ------------ Total other income (expense) (653,000) (270,000) (3,276,000) (3,416,000) (7,615,000) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes (5,195,000) 512,000 (1,250,000) 943,000 (4,990,000) Income tax benefit (expense) - (12,000) (193,000) - (205,000) ------------ ------------ ------------ ------------ ------------ Net income (loss) (5,195,000) 500,000 (1,443,000) 943,000 (5,195,000) Other comprehensive income (loss) Foreign currency translation, net of tax (1,650,000) - (1,654,000) 1,654,000 (1,650,000) Adjustment for unrealized loss on investment - - - - - ------------ ------------ ------------ ------------ ------------ Total other comprehensive income (loss) (1,650,000) - (1,654,000) 1,654,000 (1,650,000) ------------ ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (6,845,000) $ 500,000 $ (3,097,000) $ 2,597,000 $ (6,845,000) ============ ============ ============ ============ ============
16 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Cash Flows For the Nine Month Period Ended February 28, 2001
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES: - ------------------------------------ Net cash provided by (used in) operating activities $(1,202,000) $ (400,000) $ 1,030,000 $ - $ (572,000) CASH FLOW FROM INVESTING ACTIVITIES: - ------------------------------------ Acquisition of property, plant and equipment (443,000) (1,044,000) (1,417,000) - (2,904,000) Investment in and loans to subsidiaries (768,000) - - 768,000 - Other changes, net 913,000 820,000 - - 1,733,000 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities (298,000) (224,000) (1,417,000) 768,000 (1,171,000) CASH FLOW FROM FINANCING ACTIVITIES: - ------------------------------------ Net borrowings under line of credit 307,000 - 12,000 - 319,000 Payments on long-term debt and capital leases (138,000) (945,000) (137,000) - (1,220,000) Proceeds from long-term debt 26,000 246,000 - - 272,000 Proceeds from sale of common stock, net 1,840,000 - - 1,840,000 Other changes, net 4,000 1,294,000 (526,000) (768,000) 4,000 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 2,039,000 595,000 (651,000) (768,000) 1,215,000 ----------- ----------- ----------- ----------- ----------- NET CHANGE IN CASH 539,000 (29,000) (1,038,000) - (528,000) CASH AT BEGINNING OF PERIOD (184,000) 58,000 2,280,000 - 2,154,000 EFFECT OF EXCHANGE RATES ON CASH - - (158,000) - (158,000) ----------- ----------- ----------- ----------- ----------- CASH AT END OF PERIOD $ 355,000 $ 29,000 $ 1,084,000 $ - $ 1,468,000 =========== =========== =========== =========== =========== SUPPLEMENTAL CASH FLOW: - ----------------------- Noncash operating expense related to: Depreciation $ 407,000 $ 2,554,000 $ 1,829,000 $ - $ 4,790,000 Amortization - 307,000 674,000 - 981,000 Cash paid during the period for: Interest 4,133,000 3,311,000 3,007,000 (5,874,000) 4,577,000 Income taxes - - 192,000 - 192,000 Short-term obligations to be refinanced with long-term debt 9,306,000 - - - 9,306,000
17 Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Cash Flows For the nine months ended February 29, 2000
GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES: - ------------------------------------ Net cash provided by (used in) operating activities $ (3,826,000)$ 2,180,000 $ (4,832,000) $ 1,484,000 $ (4,994,000) CASH FLOW FROM INVESTING ACTIVITIES: - ------------------------------------ Purchase of property, plant and equipment (625,000) (1,837,000) (972,000) - (3,434,000) Acquisition of subsidiaries (1,282,000) - - - (1,282,000) Other changes, net (1,505,000) 21,000 85,000 (85,000) (1,484,000) ------------ ----------- ------------ ----------- ------------ Net cash provided by (used in) investing activities (3,412,000) (1,816,000) (887,000) (85,000) (6,200,000) ------------ ----------- ------------ ----------- ------------ CASH FLOW FROM FINANCING ACTIVITIES: - ------------------------------------ Net borrowings (repayments) under line of credit 5,871,000 - - - 5,871,000 Payments on long-term debt and capital leases (86,000) (1,822,000) (139,000) - (2,047,000) Sale of common stock, net of issuance costs 98,000 - - - 98,000 Other changes, net (2,000) 488,000 50,000 (453,000) 83,000 ---------- ----------- ------------ ----------- ------------ Net cash provided by (used in) financing activities 5,881,000 (1,334,000) (89,000) (453,000) 4,005,000 ---------- ----------- ------------ ----------- ------------ NET CHANGE IN CASH (1,357,000) (970,000) (5,808,000) 946,000 (7,189,000) CASH AT BEGINNING OF PERIOD 1,798,000 39,000 6,297,000 - 8,134,000 EFFECT OF EXCHANGE RATES ON CASH - - 157,000 - 157,000 ---------- ----------- ------------ ------------ ------------ CASH AT END OF PERIOD $ 441,000 $ (931,000) $ 646,000 $ 946,000 $ 1,102,000 ========== =========== ============ ============ ============ SUPPLEMENTAL CASH FLOW: - ----------------------- Noncash operating expenses related to: Depreciation $ 319,000 $ 2,312,000 $ 2,067,000 $ - 4,698,000 Amortization - 327,000 742,000 - 1,069,000 Cash paid during the period for: Interest 8,860,000 3,609,000 7,880,000 (11,053,000) 9,296,000 Income taxes - - 2,185,000 - 2,185,000
18
Inventories consist of the following: February 28, May 31, 2001 2000 ---- ---- Guarantor subsidiaries Raw materials $ 4,104,000 $ 5,492,000 Work in progress 5,533,000 5,439,000 Finished goods 6,379,000 6,376,000 ----------- ----------- $16,016,000 $17,307,000 =========== =========== Non-guarantor subsidiaries Raw materials $ 1,771,000 $ 1,712,000 Work in progress 7,145,000 8,142,000 Finished goods 433,000 688,000 ----------- ----------- $ 9,349,000 $10,542,000 =========== ===========
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Preliminary Note Regarding Forward-Looking Statements - ----------------------------------------------------- This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by those sections. Actual results could differ materially from those projected in the forward-looking statements set forth in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview - -------- Pacific Aerospace & Electronics, Inc., is an engineering and manufacturing company with operations in the United States and the United Kingdom. We design, manufacture and sell components and subassemblies used in technically demanding environments. Products that we produce primarily for the aerospace and transportation industries include machined, cast, and formed metal parts and subassemblies, using aluminum, titanium, magnesium, and other metals. Products that we produce primarily for the defense, electronics, telecommunications, energy and medical industries include components such as hermetically sealed electrical connectors and instrument packages and ceramic capacitors, filters and feed-throughs. Our customers include global leaders in all of these industries. We are organized into three operational groups: U.S. Aerospace, U.S. Electronics, and European Aerospace. For our fiscal year ended May 31, 2000, we had net sales of approximately $113 million, with the European Aerospace Group contributing approximately $57 million in net sales. On October 31, 2000, we announced our intention to sell our European Aerospace Group in order to reduce our outstanding 11 1/4% senior subordinated notes. As of May 31, 2000, we had approximately $64 million in principal amount of 11 1/4% senior subordinated notes outstanding. Because we are in the process of seeking buyers for our European Aerospace Group, we do not know whether we will be successful in selling that group and, if successful, we do not know the amount of net proceeds that would be available to reduce our 11 1/4% senior subordinated notes or our approximately $13.8 million of 18% senior secured notes. We are required to pay our senior secured lenders at least $7.5 million upon the sale of our European Aerospace Group. If, at such time as we have committed to a formal plan of disposition of the European Aerospace Group, any impairment of the assets of that group can be reasonably determined, we will record any such impairment loss in our consolidated financial statements. Although at this time we have not committed to a specific buyer of the group, we have received several bona-fide preliminary indicative offers to purchase the group. If these preliminary offers approximate the final negotiated sales price for the group and we obtain required consents to the sale, the preliminary offers indicate that we have incurred an impairment loss related to goodwill of approximately $25 million. Consequently, for the quarter ended February 28, 2001, we recorded an impairment loss in that amount related to 20 our European Aerospace Group goodwill, as well as impairment losses related to other intangibles and property, for a total of approximately $32 million. On March 30, 2001, we announced that we are putting in place a plan to restructure our operations. In connection with the plan, our European Aerospace Group is for sale, and we recently closed an unprofitable foundry in Tacoma, Washington. We are also in the process of downsizing our U.S. Aerospace Group's Engineering & Fabrication Division by closing our fabrication facilities in Sedro-Woolley, Washington and selling assets related to the fabrication business. The downsizing of the fabrication operations began in March 2001, and we expect to complete it by Summer 2001. We will continue to strengthen and support our core electronics, engineering and aerospace machining operations. Results of Operations - --------------------- Quarter Ended February 28, 2001 Compared to Quarter Ended February 29, 2000 Net Sales. Net sales increased by $0.6 million, or 2.3%, to $27.1 million for the quarter ended February 28, 2001, from $26.5 million for the quarter ended February 29, 2000. The European Aerospace Group contributed $12.6 million during the quarter ended February 28, 2001, down $0.7 million from the $13.3 million contributed during the quarter ended February 29, 2000. This decrease in net sales for the quarter was entirely due to lower average exchange rates of the British pound sterling versus the U.S. dollar. Had the average exchange rate during the quarter ended February 28, 2001 been the same as the average exchange rate during the quarter ended February 29, 2000, net sales for this group would have been approximately $13.9 million for the quarter ended February 28, 2001. Net sales stated in the British pound sterling increased from (Pounds)8,193,000 for the quarter ended February 29, 2000 to (Pounds)8,629,000 for the quarter ended February 28, 2001. This slight increase in net sales was due to higher demand for the European Aerospace Group's cast aerospace parts. We expect this group's net sales volumes to remain relatively flat during the fourth quarter of our fiscal year ending May 31, 2001. Net sales in the U.S. Aerospace Group remained flat at $7.5 million for the quarters ended February 28, 2001 and February 29, 2000. The U.S. Aerospace Group's casting businesses continued to experience decreased revenues from the heavy trucking industry similar to the first and second quarters of this fiscal year. This decrease in revenue was offset by increased revenue in our machining business from telecommunications companies. We have recently transitioned machining of telecommunications parts out of the U.S. Aerospace Group into the U.S. Electronics Group in order to process the orders more efficiently. Due to this transition and the continued weakness in the heavy trucking industry, we expect that net sales in our U.S. Aerospace Group will decline slightly during the fourth quarter of fiscal 2001. Our U.S. Electronics Group contributed $6.9 million to net sales during the quarter ended February 28, 2001, up $1.2 million from $5.7 million contributed during the quarter ended February 29, 2000. This increase was primarily attributable to additional sales generated from the machining of telecommunications parts, sales by our Display Division of non-ruggedized flat panel displays and final shipments of low power relays. Our Display Division will no longer produce low power relays. During the third quarter of fiscal 2001, we shut down the Display Division's relay operations because we 21 determined that these operations were no longer core to the operations of the division or necessary for the proper conduct of the division's business. In March 2001, subsequent to the end of our third quarter, we sold all of the equipment, inventory, and related intellectual property associated with low power relays for $400,000, which we believe was the fair market value of these assets. We expect net sales volumes in our U.S. Electronics Group to remain constant during the fourth quarter of fiscal 2001. Receivable collection periods, as calculated by dividing ending accounts receivable balances by annualized sales for the quarter multiplied by 360 days, decreased to 62.2 days for the quarter ended February 28, 2001, from 68.6 days for the quarter ended February 29, 2000. This decrease was due primarily to increased collection efforts. Gross Profit. Gross profit decreased by $6.0 million, or 117.6%, to negative $0.9 million for the quarter ended February 28, 2001, from $5.1 million for the quarter ended February 29, 2000. As a percentage of net sales, gross profit decreased to negative 3.4% for the quarter ended February 28, 2001, from 19.4% for the quarter ended February 29, 2000. The most significant gross margin decrease occurred in our U.S. Aerospace Group, which continues to underperform due to the lingering effects of the recent downturn in the commercial aerospace industry and the drawn out cyclical downturn in the heavy trucking transportation industry. Gross margins for the U.S. Aerospace Group decreased from 10.6% during the quarter ended February 29, 2000 to negative 34.0% during the quarter ended February 28, 2001. We have made the decision to close or sell the fabrication portion of the U.S. Aerospace Group's Engineering & Fabrication Division by May 31, 2001 and to substantially reduce engineering staffing in that division. The U.S. Aerospace Group's Machining Division has been starting to slowly recover, due primarily to orders from non-aerospace customers, specifically telecommunications customers. However, we have transitioned this non-aerospace work into our U.S. Electronics Group in order to produce the orders more efficiently, and the U.S. Aerospace Group's Machining Division will focus primarily on aerospace industry machining and assembly work. Therefore, we expect that the Machining Division will continue to struggle until the effects of the apparent aerospace industry upswing are felt. For the U.S. Aerospace Group overall, we expect that gross margins will remain negative during the fourth quarter of fiscal 2001. Gross margins decreased in our European Aerospace Group from 13.2% for the quarter ended February 29, 2000 to 6.7% for the quarter ended February 28, 2001. This decrease was due primarily to pricing pressure from customers. We expect the gross margins for the European Aerospace Group to remain flat during the fourth quarter of fiscal 2001. Gross margins decreased in our U.S. Electronics Group from 45.5% for the quarter ended February 29, 2000 to 11.5% for the quarter ended February 28, 2001. This decrease is due to a different product mix within the group for the quarter, primarily an increased number of non-ruggedized flat panel displays, low power relays, and machined telecommunications parts, which had the effect of lowering overall gross margins in this group. We also had a $1.1 million inventory charge during the quarter related to the termination of a contract in our U.S. Electronic Group's Display Division. Without that charge, gross margin would have been 28.0%. We expect margins to increase within the U.S. Electronics Group during the fourth 22 quarter of fiscal 2001. However, gross margins during the fourth quarter of fiscal 2001 are expected to be lower than margins achieved during the fourth quarter of fiscal 2000. Overall, we expect consolidated gross margins to increase somewhat during the fourth quarter of fiscal 2001. Inventory turnover, as calculated by dividing annualized sales volume for the quarter by ending inventory, increased to 4.3 turns for the quarter ending February 28, 2001, from 4.0 turns for the quarter ending February 29, 2000. The increase was due to lower inventory levels coupled with higher inventory reserves. We increased our inventory reserve by $1.1 million during the quarter due to the termination of a contract in our U.S. Electronic Group's Display Division. We expect that our inventory turns will increase in future periods. Operating Expenses. Operating expenses increased by $32.4 million, to $37.0 million for the quarter ended February 28, 2001, from $4.6 million for the quarter ended February 29, 2000. The increase in operating expenses is attributable to non-cash charges totaling approximately $32.4 million. Based upon preliminary indicative offers to purchase our European Aerospace Group, we recognized a $25.0 million charge to reduce the $33.0 million carrying value of goodwill associated with our European Aerospace Group to estimated value of approximately $8.0 million. Our goal is to complete the sale of the European Aerospace Group by May 31, 2001. We also have a potential opportunity to sell certain property, plant, and equipment used in our U.S. Aerospace Group. Based upon our evaluation of those assets we recognized a $3.5 million charge to reduce the $6.5 million carrying value of those assets to estimated net realizable value, approximately $3.0 million. Our goal is to complete the sale of those assets by May 31, 2001. Also included in operating expenses are non- cash charges of approximately $3.3 million to reduce the $3.5 million carrying value of goodwill and equipment used in the U.S. Aerospace Group's Engineering & Fabrication Division to estimated net realizable value, approximately $0.2 million. Our goal is to have the fabrication portion of the Engineering & Fabrication Division shut down or sold by May 31, 2001. Within the U.S. Electronic Group's Display Division we recognized a non-cash charge of approximately $0.6 million to reduce the $0.9 million of equipment used to produce low power relays to its net realizable value, approximately $0.3 million. The equipment, inventory, and intellectual property used to produce low power relays were sold subsequent to the end of the third quarter. Gross proceeds from the sale were $400,000, compared to a carrying amount of approximately $1.0 million. Interest Expense. Interest expense decreased by $0.2 million, to $2.3 million for the quarter ended February 28, 2001, from $2.5 million for the quarter ended February 29, 2000. This decrease was primarily due to the $11.3 million principal reduction in the fourth quarter of fiscal 2000 on our 11 1/4% senior subordinated notes, which was accomplished through an exchange of outstanding principal for common stock. The principal reduction resulted in a decrease of approximately $0.3 million in interest expense for the quarter. The remaining increase in interest expense is attributable to higher average balances on our revolving debt. We expect interest expense to go up during the fourth quarter of fiscal 2001 due to additional term loan borrowings at substantially higher rates of interest in the fourth quarter. 23 Other Income (Expense). Other income (expense) represents non-operational income and expense for the period. Other expense for the quarter was due to loss on the sale of certain pieces of equipment used in various divisions. Provision for Income Taxes. Income taxes for the quarter ended February 28, 2001 primarily represent changes in the valuation allowance, $4.8 million, to adjust deferred income tax assets to amounts determined to be more likely than not to be realizable in accordance with the guidelines set forth in FAS 109, Accounting for Income Taxes. In addition, due to a potential tax assessment in the U.K. related to interest remitted to Pacific Aerospace, as foreign parent, tax expense also includes an accrual of approximately $1.0 million. We expect income tax expense in foreseeable future periods to be minimal. Net Loss. Net loss increased by $44.6 million, to a net loss of $46.3 million for the quarter ended February 28, 2001, from a net loss of $1.7 million for the quarter ended February 29, 2000, due to the factors listed above. We believe that we will continue to realize net losses for the remainder of this fiscal year and that the losses may be substantial. Nine Months Ended February 28, 2001 Compared to Nine Months Ended February 29, 2000 Net Sales. Net sales decreased by $1.9 million, or 2.3%, to $82.1 million for the nine months ended February 28, 2001, from $84.1 million for the nine months ended February 29, 2000. The European Aerospace Group contributed $37.7 million, down $4.9 million from the $42.6 million contributed during the nine months ended February 29, 2000. Our customers in the European aerospace market have been initiating lean manufacturing methods and just-in-time inventory delivery requirements similar to those previously initiated by our customers in the U.S. aerospace market. These initiatives resulted in decreased orders for our European Aerospace Group. We expect this group's net sales volumes to remain flat or decrease from last year and for order backlog to decrease accordingly. The lowering of the exchange rate of the British pound sterling versus the U.S. dollar also contributed to lower net sales volumes from the European Aerospace Group during the first three quarters of fiscal 2001 and may continue to do so during the fourth quarter. Had the average exchange rate for the nine months ended February 28, 2001 been equal to the average exchange rate for the nine months ended February 29, 2000, reported net sales for our European Aerospace Group would have been approximately $41.4 million, or $3.7 million higher than actual. The U.S. Aerospace Group contributed $22.4 million during the nine months ended February 28, 2001, down $0.9 million from the $23.3 million contributed during the nine months ended February 29, 2000. The U.S. Aerospace Group's casting businesses experienced an unanticipated revenue decline during the first nine months of fiscal 2001 due in large part to lower demand for heavy trucking products, which we believe was primarily a result of higher fuel costs and a cyclical downturn in the heavy trucking segment of the transportation market. This decrease in revenue was offset partially by increased revenue from telecommunications companies in our machining business. We expect that net sales in our U.S. Aerospace Group will decline slightly during the fourth quarter of fiscal 2001. Our U.S. Electronics Group contributed $22.1 million to net sales during the nine months ended February 28, 2001, up $3.9 million from $18.2 million contributed during the nine months ended February 29, 2000. This increase was primarily attributable to additional sales by our U.S. Electronics Group's Filter Division of 24 products for telecommunications systems and sales of non-ruggedized flat panel displays by our U.S. Electronics Group's Display Division. We expect the sales volume in our U.S. Electronics Group to remain at approximately the current levels during the fourth quarter of fiscal 2001. Receivable collection periods, as calculated by dividing ending accounts receivable balances by annualized sales for the nine months multiplied by 360 days, decreased to 61.5 days for the nine months ended February 28, 2001 from 68.6 days for the nine months ended February 29, 2000. This decrease was due to a concerted effort to increase collection efforts. Gross Profit. Gross profit decreased by $9.9 million, or 32.2%, to $7.1 million for the nine months ended February 28, 2001, from $17.0 million for the nine months ended February 29, 2000. As a percentage of net sales, gross profit decreased to 8.6% for the nine months ended February 28, 2001, from 20.2% for the nine months ended February 29, 2000. The most significant gross margin decrease occurred in our U.S. Aerospace Group, which continues to underperform due to the lingering effects of the downturn in the commercial aerospace industry and the drawn out cyclical downturn in the heavy trucking transportation industry. Gross margins for the U.S. Aerospace Group decreased from 9.9% during the nine months ended February 29, 2000 to negative 18.3% during the nine months ended February 28, 2001. We have made the decision to close or sell the fabrication portion of the U.S. Aerospace Group's Engineering & Fabrication Division by May 31, 2001 and to substantially reduce the engineering component of that division. The U.S. Aerospace Group's Machining Division has been starting to slowly recover, due primarily to orders from non- aerospace customers, specifically telecommunications customers. However, we have transitioned this non-aerospace work into our U.S. Electronics Group in order to produce the orders more efficiently, and the U.S. Aerospace Group's Machining Division will focus primarily on aerospace industry machining and assembly work. Therefore, we expect that the Machining Division will continue to struggle until the effects of the apparent aerospace industry upswing are felt. For the U.S. Aerospace Group overall, we expect that gross margins will remain negative for the remainder of the current fiscal year. Gross margins decreased in our European Aerospace Group from 15.3% for the nine months ended February 29, 2000 to 9.8% for the nine months ended February 28, 2001. This decrease was due primarily to pricing pressure from customers. We expect the gross margins for the European Aerospace Group to remain flat during the fourth quarter of this fiscal year. Gross margins decreased in our U.S. Electronics Group from 44.7% for the nine months ended February 29, 2000 to 34.0% for the nine months ended February 28, 2001. This decrease was due to a different product mix within the group, primarily an increase in sales volumes by our Filter Division, which increased gross margins, offset by an increased number of non-ruggedized flat panel displays, low power relays, and telecommunications parts, which had the effect of lowering overall gross margins in this group. We also had a $1.1 million inventory charge during the third quarter of this fiscal year related to the termination of a contract in our U.S. Electronic Groups Display Division. Without this charge, gross margins would have been 39.1%. We expect gross margins to increase slightly within the U.S. Electronics Group during the remainder of this fiscal year. Overall, we expect consolidated gross margins to increase somewhat during the fourth quarter of this fiscal year. 25 Inventory turnover, as calculated by dividing annualized sales volume for the nine month period by ending inventory, increased to 4.3 turns for the quarter ending February 28, 2001 from 4.0 turns for the nine months ending February 29, 2000. The increase was due to lower inventory levels coupled with higher inventory reserves. We increased our inventory reserve by $1.1 million during the quarter due to the termination of a contract in our U.S. Electronics Group's Display Division. We expect that our inventory turns will increase in future periods. Operating Expenses. Operating expenses increased by $33.4 million, to $47.7 million for the nine months ended February 28, 2001, from $14.3 million for the nine months ended February 29, 2000. The increase in operating expenses is attributable to non-cash charges totaling approximately $32.4 million. Based upon preliminary indicative offers to purchase our European Aerospace Group, we recognized a $25.0 million charge to reduce the $33.0 million carrying value of goodwill associated with our European Aerospace Group to net estimated realizable value, approximately $8.0 million. Our goal is to complete the sale of the European Aerospace Group by May 31, 2001. We also have a potential opportunity to sell certain property, plant, and equipment used in our U.S. Aerospace Group. Based upon our evaluation of those assets, we recognized a $4.2 million charge to reduce the $7.4 million carrying value of those assets to estimated net realizable value, approximately $3.2 million. Our goal is to complete the sale of those assets by May 31, 2001. Also included in operating expenses are non-cash charges of approximately $3.3 million to reduce the $3.5 million carrying value of goodwill and equipment used in the U.S. Aerospace Group's Engineering & Fabrication Division to estimated liquidation value, approximately $0.2 million. Our goal is to have the fabrication portion of the Engineering & Fabrication Division shut down or sold by May 31, 2001. Within the U.S. Electronic Group's Display Division we recognized a non-cash charge of approximately $0.6 million to reduce the $0.9 million of equipment used to produce low power relays to its net realizable value, approximately $0.3 million. The equipment, inventory, and intellectual property used to produce low power relays were sold subsequent to the end of the third quarter. Gross proceeds from the sale were $400,000, compared to a carrying amount of approximately $1.0 million. Operating expenses also include an approximately $320,000 non-cash charge, which we recognized in the quarter ended November 30, 2000, for the loss on the sale of an unused building in Butler, New Jersey, that was sold during December 2000. Net proceeds from the sale of the building were approximately $660,000, versus a carrying amount of approximately $980,000. Interest Expense. Interest expense decreased by $0.8 million, or 13.5%, to $6.9 million for the nine months ended February 28, 2001, from $7.7 million for the nine months ended February 29, 2000. This decrease was primarily due to the $11.3 million principal reduction in the fourth quarter of fiscal 2000 on our 11 1/4% senior subordinated notes, which was accomplished through an exchange of outstanding principal for common stock. The principal reduction resulted in a decrease of approximately $0.9 million in interest expense for the nine months. The remaining increase in interest expense is attributable to higher average revolving loan balances during the period. We expect interest expense to go up during the fourth quarter of fiscal 2001 due to additional term loan borrowings at substantially higher rates of interest in the fourth quarter. 26 Other Income (Expense). Other income (expense) includes non-operational income and expense for the period. Other income increased to $95,000 for the nine months ended February 28, 2001, from other income of $53,000 for the nine months ended February 29, 2000. This change was primarily attributed to rent derived from the non-operational building in Butler, New Jersey, that was sold in December 2000. Provision for Income Taxes. Income taxes for the nine months ended February 28, 2001 primarily represent changes in the valuation allowance related to deferred income tax assets, $4.9 million, to adjust deferred income tax assets to amounts determined to be more likely than not to be realizable in accordance with the guidelines set forth in FAS 109, Accounting for Income Taxes. In addition, due to a potential tax assessment in the U.K. related to interest remitted to Pacific Aerospace, as foreign parent, tax expense also includes an accrual of approximately $1.0 million. We expect income tax expense in foreseeable future periods to be minimal. Net Loss. Net loss increased by $48.3 million, to a net loss of $53.5 million for the nine months ended February 28, 2001, from a net loss of $5.2 million for the nine months ended February 29, 2000, due to the factors listed above. We believe that we will continue to realize net losses for the remainder of this fiscal year and that the losses may be substantial. Liquidity and Capital Resources - -------------------------------- Cash used in operating activities was $572,000 during the nine months ended February 28, 2001, compared to cash used in operating activities of $5.0 million during the nine months ended February 29, 2000. The change in cash used in operating activities was primarily a result of decreasing accounts receivable and inventory balances and increasing accounts payable and accrued liability balances, despite increasing net losses. Our success as a company will depend heavily on our ability to generate cash from operating activities in the future. We can offer no assurance that we will achieve profitable operations or that any profitable operations will be sustained. We are focusing on initiatives that specifically address the need to increase cash provided by operating activities. Some of these initiatives include, but are not limited to, sales or closures of unprofitable business units, staff reductions, selling of excess inventory, increased accounts receivable collection efforts, and general and administrative cost controls. If we are not successful in increasing cash provided by operating activities, we may need to sell additional common stock or other securities, or we may need to sell assets outside of the ordinary course of business in order to meet our obligations. There is no assurance that we will be able to sell additional equity securities or that we will be able to sell assets outside the ordinary course of business for amounts in excess of book value. In that situation, our inability to obtain sufficient cash if and when needed could have a material adverse effect on our financial position, the results of our operations, and our ability to continue as a going concern. Our existing cash and credit facilities will not be sufficient to meet our obligations as they become due. Consequently, we will need to obtain additional cash. Our actual cash needs will depend primarily on the amount of cash generated from or used by operations and financing 27 activities. We cannot predict accurately the amount or timing of our future cash needs. Our next semi-annual interest payment of approximately $3.6 million on our 11 1/4% senior subordinated notes is due on August 1, 2001. We did not make our February 1, 2001 interest payment on those notes until March 2, 2001, which was one day before expiration of the 30-day grace period to make that payment before an event of default would have occurred. We made the interest payment from the proceeds of an approximately $13.8 million senior secured loan that closed on March 1, 2001. The March 1, 2001 loan bears interest at 18% per annum, payable quarterly. The first interest payment was due on March 31, 2001, and we paid it on time. We have the option to defer and accrue a portion of the quarterly interest, up to 1 1/4% per quarter, for up to a year at the time of any interest payment. We do not currently have sufficient cash to make the August 1, 2001 interest payment on our 11 1/4% senior subordinated notes, and we will need to raise additional cash to make that payment. We also need to raise additional cash to make future interest payments on our 18% senior secured loan and to fund our operations. If we are unable to obtain sufficient cash when needed to fund our operations, to make these interest payments, and to pay our other obligations when due, we may be forced to seek protection from creditors under the bankruptcy laws. Cash used in investing activities decreased to $1.2 million during the nine months ended February 28, 2001, from $6.2 million during the nine months ended February 29, 2000. Amounts invested during the nine months ended February 28, 2001 were primarily for production equipment and facilities improvements. We expect that investments in equipment during the remainder of fiscal 2001 will remain at approximately the same level, but we have not made significant purchase commitments. We will not acquire any new businesses during fiscal 2001. Cash generated from financing activities decreased to $1.2 million during the nine months ended February 28, 2001, from $4.0 million during the nine months ended February 29, 2000. This decrease was due to substantially lower additional borrowings under our lines of credit and lower long-term debt and capital lease principal payments, offset slightly by increased proceeds from the sale of common stock. At May 31, 2000, our primary banking relationships included a revolving line of credit of up to $6.3 million in the U.S. and a revolving line of credit of up to approximately $5.0 million ((Pounds)3.5 million) in the U.K. Both of these credit facilities have been replaced subsequent to the end of the third quarter with a senior secured term loan of $13.8 million from four institutional lenders. The loan bears interest at 18% per annum, payable quarterly, and has a two-year term. We have the right to defer and accrue a portion of the interest on the loan, up to 1 1/4% per quarter, for up to a year at the time of any interest payment. The loan is secured by our assets, the assets of our United States subsidiaries, and other intangibles. This senior secured loan is a term loan rather than a revolving loan. As a result, if we make payments of principal before the loan's maturity, additional loan proceeds will not become available, and the loan will not provide an additional source of cash to fund our operations or to meet our obligations as they become due. As previously announced, we have decided to sell our U.K. subsidiary, which makes up our European Aerospace Group. We have engaged an investment banking institution to assist us in 28 marketing this business. The European Aerospace Group contributed approximately 46% of our consolidated revenue for the nine months ended February 28, 2001 and represented approximately 46% of our consolidated assets at February 28, 2001. Although at this time we have not committed to a specific buyer of the group, we have received several bona-fide preliminary indicative offers to purchase the group. Our goal is to complete the sale of the European Aerospace Group on or around May 31, 2001. We plan to use the proceeds to pay closing costs of the sale, repay $7.5 million of our 18% senior secured loan, and repay a substantial portion of our 11 1/4% senior subordinated notes. In December 1998, we entered into an agreement giving us the option to purchase three parcels of land that make up our Wenatchee campus from the Port of Chelan County for $5.4 million. The purchase of the first parcel was completed in early February 1999. We resold that parcel to the Port of Chelan County in December 2001, and we currently do not expect to exercise the remaining two options. As of February 28, 2001 we had no other material commitments outstanding for purchases of additional capital assets. Our working capital as of February 28, 2001 and May 31, 2000 was $26.8 million and $29.2 million, respectively. The working capital decrease was positively impacted by the refinancing of certain short-term obligations with long-term debt. The increase in working capital as a result of the refinancing was offset by continued losses, increasing accounts payable and accrued liability balances, and decreasing accounts receivable and inventory balances. If we are not able to increase our cash from operations, increase net income and secure additional long-term financing or sell additional equity, our working capital will decline during the remainder of fiscal 2001. Our consolidated financial statements have been prepared assuming that we will continue as a going concern. However, our independent auditors in their report accompanying our audited consolidated financial statements for fiscal 2000 stated that we have suffered recurring losses from operations which raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. If we are not sufficiently successful in generating cash from operating activities, we may need to sell additional common stock or other securities, or we may need to sell assets outside the ordinary course of business. If we need to dispose of assets outside of the ordinary course of business to generate cash, we may not be able to realize the carrying value of those assets upon liquidation. If we are unable to generate the necessary cash, we could be unable to continue operations. The functional currency of our European Aerospace Group is the British pound sterling. We translate the activity of our European Aerospace Group into U.S. dollars on a monthly basis. The balance sheet of the European Aerospace Group is translated using the exchange rate as of the date of the balance sheet, and for purposes of the statements of operations and statements of cash flows we use the weighted average exchange rate for the period. The value of our assets, liabilities, revenue, and expenses may vary materially from one reporting period to the next solely as a result of varying exchange rates. During the quarter and nine months ended February 28, 2001, the foreign currency translation adjustments were positive $0.9 million and 29 negative $2.3 million, respectively. We have not entered into any hedging activity as of February 28, 2001. Significant Events During and After the Quarter - ----------------------------------------------- Sales of Assets. During the quarter ended February 28, 2001, we sold our building in Butler, New Jersey, that was previously used as a manufacturing site by our Interconnect Division. Net proceeds from the sale of the building were approximately $660,000, versus a carrying amount of approximately $980,000, and we recorded the resultant loss of $320,000 as an operating expense in our financial statements for the quarter ended November 30, 2000. We also sold a parcel of land located near our Wenatchee campus. The selling price and carrying value of the land and improvements were both approximately $930,000. Potential Sale or Closure of Subsidiaries. As previously announced, we have decided to sell our U.K. subsidiary, which makes up our European Aerospace Group. We have engaged an investment banking institution to assist us in marketing this business. The European Aerospace Group contributed approximately 46% of our consolidated revenue for the nine months ended February 28, 2001 and represented approximately 46% of our consolidated assets at February 28, 2001. Although at this time we have not committed to a specific buyer of the group, we have received several bona-fide preliminary indicative offers to purchase the group. Our goal is to complete the sale of the European Aerospace Group by May 31, 2001. In addition, we are in the process of downsizing the U.S. Aerospace Group's Engineering & Fabrication Division by closing its fabrication facilities in Sedro-Woolley, Washington and selling assets related to the fabrication business. The downsizing of the fabrication operations began in March 2001 and is expected to be complete by summer. The Engineering & Fabrication Division provided approximately 6% of our consolidated net revenues for the nine months ended February 28, 2001 and represented approximately 4% of our consolidated assets at February 28, 2001. Based upon preliminary indicative offers to purchase the European Aerospace Group, we recognized a $25.0 million charge to reduce the $33.0 million carrying value of goodwill associated with the European Aerospace Group to net estimated realizable value, approximately $8.0 million. We have a potential opportunity to sell certain property, plant, and equipment used in our U.S. Aerospace Group. Based upon our evaluation of those assets we recognized a $3.5 million charge to reduce the $6.5 million carrying value of those assets to estimated net realizable value, approximately $3.0 million. Also included in operating expenses are non-cash charges of approximately $3.3 million to reduce the $3.5 million carrying value of goodwill and equipment used in the U.S. Aerospace Group's Engineering & Fabrication Division to estimated liquidation value, approximately $0.2 million. Within the U.S. Electronic Group's Display Division we recognized a non-cash charge of approximately $0.6 million to reduce the $0.9 million of equipment used to produce low power relays to net realizable value, approximately $0.3 million. The equipment, inventory, and intellectual property used to produce low power relays were sold subsequent to the end of the third quarter. Gross proceeds from the sale were $400,000, compared to a carrying amount of approximately $1.0 million. 30 Subsequent Events - ----------------- 18% Senior Secured Loan. On March 1, 2001, we borrowed approximately $13.8 million from four institutional lenders. The loan bears interest at 18% per annum, payable quarterly, and has a two-year term. We have the right to defer and accrue a portion of the interest on the loan, up to 1 1/4% per quarter, for up to a year at the time of any interest payment. The loan is secured by our assets, the assets of our United States subsidiaries, and other intangibles. We have used approximately $9.5 million of the proceeds from the loan to repay our revolving line of credit in the U.S. and to pay the interest payment on our 11 1/4% senior subordinated notes that was due on February 1, 2001. The remaining portion of the proceeds from the secured loans has been or will be used to repay other indebtedness, to pay the costs related to the loan transaction, and for general corporate purposes. In connection with the secured loan, we issued to the lenders warrants to purchase an aggregate of 4,036,978 shares of our common stock at an exercise price of $.001 per share. The value of these warrants using the Black Scholes valuation model is $1.6 million at March 1, 2001, and will be amortized over the life of the loan using the straight line method of amortization, as interest expense. In addition, we paid a commission of approximately $415,000 to the placement agent that represented us in the transaction, and we also issued warrants to the placement agent to purchase up to 692,074 shares of our common stock, at an exercise price of $.4062 per share. Restructuring Plan. On March 30, 2001, we announced that we are putting in place a plan to restructure our operations. In connection with the plan, our European Aerospace Group is for sale, and we recently closed an unprofitable foundry in Tacoma, Washington. We are also in the process of downsizing our U.S. Aerospace Group's Engineering & Fabrication Division by closing our fabrication facilities in Sedro-Woolley, Washington and selling assets related to the fabrication business. The downsizing of the fabrication operations began in March 2001, and we expect to complete it by Summer 2001. We will continue to strengthen and support our core electronics, engineering and aerospace machining operations.
European Aerospace Group Engineering & Fabrication Division Nine Months Ending Nine Months Ending --------------------------------- ---------------------------------- February 28, February 29, February 28, February 29, 2001 2000 2001 2000 ---- ---- ---- ---- Net sales to customers $ 37,662,000 42,588,000 4,951,000 4,173,000 Income (loss) from operations (24,270,000) 2,026,000 (8,776,000) (676,000)
Recent Accounting Developments - ------------------------------ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes a new model for accounting for derivatives and hedging activities, supersedes and amends existing accounting standards, and is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivatives be recognized in the balance sheet at their fair market value, and that corresponding derivative gains or losses be either reported in the statement of operations or as a component of other 31 comprehensive income, depending on the type of hedging relationship that exists with respect to the derivative. We will adopt the provisions of SFAS 133 in the first quarter of fiscal year 2002. We do not expect the adoption of SFAS 133 to have a material impact on our consolidated financial statements. In June 2000, the SEC updated Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." The most recent update (SAB 101B) delays the effective date of SAB 101 to the fourth quarter of fiscal 2001 (i.e. our quarter beginning March 1, 2001). SAB 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. We will adopt the provisions of SAB 101 in the fourth quarter of fiscal 2001. We do not expect the adoption of SAB 101 to have a material impact on our consolidated financial statements. In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires that amounts billed to customers for shipping and handling fees be included as revenue and that associated costs be included in cost of goods sold. The consensus is effective for our fourth quarter of fiscal 2001 and requires that comparative financial statements for prior periods be reclassified. We do not expect the adoption of this consensus to have a material impact on our consolidated financial statements. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have financial instruments that are subject to interest rate risk, primarily debt obligations issued at a fixed rate and variable rates. Our fixed-rate debt obligations are generally not callable until maturity and therefore market fluctuations in interest rates will not affect our earnings for the period. Based upon these facts, we do not consider the market risk exposure for interest rates to be material. The fair value of such instruments approximates their face value, except for our 11 1/4% senior subordinated notes, which as of February 28, 2001, we believe were trading on the open market for approximately 50% of face value. We are subject to foreign currency exchange rate risk relating to receipts from and payments to suppliers in foreign currencies. Since approximately 50% of our transactions are conducted in foreign currency, the exchange rate risk could be material. During the quarter and nine months ended February 28, 2001, the foreign currency translation adjustment was positive $0.9 million and negative $2.3 million, respectively. We have not entered into any hedging activity as of February 28, 2001. We are exposed to commodity price fluctuations through purchases of aluminum, titanium, and other raw materials. We enter into certain supplier agreements that guarantee quantity and price of the applicable commodity to limit the exposure to commodity price fluctuations and availability concerns. At February 28, 2001, we had purchase commitments for raw materials aggregating approximately $2.5 million. This amount relates to a titanium supply agreement with a fixed price that goes through December 2001. This commitment at February 28, 2001 represented less than 5% of our consolidated cost of goods sold for fiscal 2000. 33 PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS From time to time the Company is involved in legal proceedings relating to claims arising out of operations in the normal course of business. We are not aware of any material legal proceedings pending or threatened against the Company or any of its properties. ITEM 2. CHANGES IN SECURITIES (a) None. (b) Dividend Payment Restrictions. In connection with the issuance of our 11 1/4% Senior Subordinated Notes due 2005, which have been exchanged for 11 1/4% Series B Senior Subordinated Notes due 2005, we are subject to an Indenture that limits our ability to pay dividends, repurchase our equity securities, make certain other kinds of restricted payments, dispose of assets, and incur certain indebtedness. We have never declared or paid cash dividends on the common stock. We currently anticipate that we will retain any future earnings to fund the operation of our business, and we do not anticipate paying dividends on the common stock in the foreseeable future. (c) Equity Securities. Amendment to and Exercise of Warrants Issued in Summer 2000 Private Placement - ----------------------------------------------------------------------------- Background. On July 27, 2000, we issued 1,142,860 shares of common stock and warrants to purchase additional shares to two accredited investors, Strong River Investments, Inc. and Bay Harbor Investments, Inc., for gross proceeds of $2.0 million. We paid a commission to Rochon Capital Group, Ltd. comprised of $80,000 in cash and warrants to purchase 79,150 shares of common stock, at an exercise price of $1.7688 per share, exercisable through July 27, 2003, for representing us in this transaction. After taking into consideration other expenses related to the transaction, we received net proceeds at closing of $1,886,500, which we used to pay down our U.S. credit line. We also issued to the investors on July 27, 2000, closing warrants to purchase an aggregate of 385,000 shares of common stock at an exercise price of $2.01 per share, exercisable through July 27, 2003, and adjustable warrants and vesting warrants to purchase an indeterminate number of shares, as described below. The vesting dates and expiration dates contained in the warrants and the numbers of shares issuable upon exercise of the warrants are (or were, until exercised) subject to anti-dilutive adjustments. The terms of the transaction, including the terms of the warrants, were determined by arms length negotiations between Pacific Aerospace and the investors. 34 The shares issuable upon exercise of the closing warrants and the shares issued to investors on July 27, 2000 are covered by a registration statement that was declared effective by the SEC on January 31, 2001. The registration statement permits the investors to make public resales of those shares. The investors have advised us that they have completed the resale of all of the shares issued to them on July 27, 2000. The transaction documents also provided that upon effectiveness of the registration statement within 60 days after the first closing, a second closing would occur, and the investors would pay an additional $1.5 million and receive 857,140 additional shares of common stock. This condition was not satisfied within 60 days after the first closing, and the investors decided not to waive the condition. As a result, the second closing did not occur. Adjustable Warrants. On July 27, 2000, Pacific Aerospace issued to the investors adjustable warrants, which permitted the investors to acquire additional shares of common stock at an exercise price of $.001 per share if the market price of our common stock did not achieve and maintain a specific price during each of three vesting periods. On February 15, 2001, Pacific Aerospace and the investors agreed to amend the adjustable warrants to provide that each of the two investors, upon exercise in full of its adjustable warrant, would be entitled to purchase 2,095,243 shares of common stock. The fixed number of shares specified in the amendment was negotiated to replace the provisions of the adjustable warrants that would have determined the number of shares issuable under those warrants based on a formula that depended on the market price of our common stock during three vesting periods. The vesting periods would have been the 20 consecutive trading days before the 20th, 40th, and 60th trading days after the effective date of the registration statement covering the shares issued to the investors on July 27, 2000. That registration statement became effective on January 31, 2001. The closing price of our common stock on February 15, 2001, was $.4063 per share. If the adjustable warrants had not been amended and our common stock price had been $.4063 throughout the three vesting periods, a total of 4,207,666 shares would have been issuable under the adjustable warrants. However, as of April 9, 2001, the market price of our common stock has ranged between $.20 and $.5312 since January 31, 2001, and we cannot predict how many shares would actually have become issuable if the adjustable warrants had not been amended. On February 15, 2001, the investors exercised the adjustable warrants in full, as so amended, for the exercise price of $.001 per share. The exercise price was not changed by the amendment described above. As a result of the exercise, we delivered to the investors a total of 4,190,486 shares of common stock. The shares issued upon exercise of the adjustable warrants are covered by a registration statement that was declared effective by the SEC on March 16, 2001. The registration statement permits the investors to make public resales of those shares. Vesting Warrants. We also issued vesting warrants to the investors on July 27, 2000. The purpose of the vesting warrants was to give Pacific Aerospace an incentive not to cause any triggering events to occur prior to expiration of the vesting warrants and an incentive to cure 35 triggering events that occurred, if they could be cured. On February 15, 2001, Pacific Aerospace and the investors agreed that the vesting warrants would expire on the fifth business day after we delivered the shares issuable upon exercise of the adjustable warrants. We delivered the shares on February 21, 2001, and the vesting warrants expired on February 28, 2001. As originally issued, the vesting warrants entitled the investors to purchase additional shares of common stock if any of two sets of triggering events provided in those warrants occurred. One set of triggering events included: the acquisition by any person or entity of more than one-third of the voting securities of Pacific Aerospace; the replacement of more than one-half of the members of our board of directors existing as of July 27, 2000; the merger, consolidation or sale of all or substantially all of our assets if the holders of our securities following the transaction held less than two-thirds of the securities of the surviving entity or the acquirer of the assets; a transaction that would change Pacific Aerospace from a public company to a private company; the failure of Pacific Aerospace to deliver stock certificates to the investors in a timely manner; a material breach under the transaction documents; the failure to obtain an effective registration statement within 180 days after the closing (which the investors previously agreed to extend to 200 days); the failure to maintain an effective registration statement for a specified time period; or the delisting of our common stock for 10 consecutive trading days. The other set of triggering events included: our failure to have the registration statement effective within 60 days after the closing (an event that the investors previously waived); events relating to actions of Pacific Aerospace in obtaining and maintaining an effective registration statement; and the delisting of our common stock for 10 consecutive trading days. For example, if one of the first set of triggering events had occurred prior to expiration of the vesting warrants, assuming a market price of our common stock of $.4063 per share, each investor would have received an additional 2,584,297 shares. If one of the second set of triggering events had occurred, also assuming a market price of the common stock of $.4063 per share, each investor would have received 258,430 additional shares on the date the triggering event occurred and additional shares monthly until the vesting warrants expired or the triggering event was cured. The investors would have received these additional shares under both sets of triggering events if our common stock was delisted. Because of the accelerated expiration date provided for in the amendment, the vesting warrants expired on February 28, 2001 without any shares being issued under those warrants. Closing Warrants. On July 27, 2000, we also issued the investors in the private placement closing warrants to purchase an aggregate of 385,000 shares of common stock at an exercise price of $2.01 per share. The February 15, 2001 amendment did not amend the terms of the closing warrants. The closing warrants were exercisable in full on the date of issuance and remain exercisable until their expiration on July 27, 2003. These warrants are not subject to any adjustments relating to market price, but the exercise price would be adjusted for the issuance of common stock or common stock equivalents at a price below the warrant exercise price while the warrants are outstanding. The exercise price can be paid in cash, or the holder can utilize a cashless exercise provision. The purpose of the closing warrants was to provide 36 the investors with an opportunity to obtain an additional return on their investment if our common stock price exceeds $2.01 per share prior to expiration of the warrants. Issuance of Warrants Related to 18% Senior Secured Loan - --------------------------------------------------------- On March 1, 2001, we borrowed approximately $13.8 million from four lenders: B III Capital Partners, L.P., B III-A Capital Partners, L.P., DDJ Canadian High Yield Fund and State Street Bank & Trust, as Custodian for General Motors Employees Global Group Pension Trust. In connection with the secured loan, we issued warrants to purchase an aggregate of 4,036,978 shares of common stock with an exercise price of $.001 per share to the four lenders as an incentive for them to make the loan. The warrants were issued pursuant to the exemption from registration contained in Rule 506 of Regulation D under the Securities Act based on the sale to accredited investors in a private transaction with the purchasers acknowledging that the securities cannot be resold unless registered or exempt from registration under the securities laws. The warrants are exercisable at any time through March 1, 2006 and contain weighted average anti- dilution protection in the event we issue equity securities at a price less than market price on the date of issuance of the new securities. We agreed with the investors to file a registration statement to register the shares issuable upon exercise of the warrants for resale in the U.S. We filed a registration statement on April 2, 2001, and the registration statement was declared effective on April 6, 2001. The terms of the transaction, including the terms of the warrants, were determined by arms length negotiations between Pacific Aerospace and the lenders. We paid a commission of approximately $415,000 to the placement agent that represented us in the transaction, First Albany Corporation, and we also issued warrants to the placement agent to purchase up to 692,074 shares of our common stock, at an exercise price of $.4062 per share. The placement agent warrants are exercisable at any time through April 9, 2006. The placement agent warrants were issued pursuant to the exemption from registration contained in Rule 506 of Regulation D under the Securities Act, and neither the warrants nor the shares issuable upon exercise of the warrants may be resold unless registered or exempt from registration under the securities laws. The placement agent has piggy-back registration rights with respect to the shares issuable upon exercise of the warrants. We used approximately $9.5 million of the loan to repay our revolving line of credit in the U.S. and to pay the interest payment on our 11 1/4% senior subordinated notes that was due on February 1, 2001. The remainder of the proceeds was used to replace our line of credit in the United Kingdom, to pay costs of the secured loan transaction and to provide working capital. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 37 Item 5. OTHER INFORMATION Nasdaq - ------ Our common stock is currently quoted on the Nasdaq National Market. In order to remain listed on this market, we must meet Nasdaq's listing maintenance standards. If we were unable to meet Nasdaq's standards for any reason, our common stock could be delisted from the Nasdaq National Market. On March 22, 2001 we received a determination letter from Nasdaq indicating that, absent a successful appeal by the Company, our common stock would be removed from listing on the Nasdaq National Market. The determination was based on the failure of our common stock to comply with Nasdaq Marketplace Rule 4450(a)(5), which requires listed stock to maintain a minimum bid price of $1.00. Our common stock has traded below $1.00 since November 7, 2000. We requested an oral hearing before a Nasdaq Listing Qualifications Panel to appeal the staff's determination to delist our common stock, and that hearing has been set for May 11, 2001. Although there can be no assurance that the panel will grant our request for continued listing, we will have the opportunity to present arguments at the hearing. Nasdaq has advised us that, pending completion of the panel appeal, our common stock will continue to be listed on the Nasdaq National Market. We must demonstrate our ability to regain compliance with the minimum bid price requirement, as well as demonstrate our ability to sustain long-term compliance with all applicable continued listing requirements, including the requirement of Nasdaq Marketplace Rule 4450(a)(3) that we maintain net tangible assets of at least $4 million, which we failed to comply with as of February 28, 2001. We do not currently know how long the appeal process will last. Consequently, we cannot currently predict when our common stock will be delisted if our appeal is unsuccessful. We also received a letter from Nasdaq on December 6, 2000, raising concerns about whether we would be able to sustain compliance with the continued listing requirements of the Nasdaq Stock Market as a result of the "going concern" warning that we received from our independent auditors in their last audit report. Nasdaq requested that we provide it with certain information addressing its concerns. We responded to that request in a timely manner, and we have not received further correspondence from Nasdaq regarding our response. If our common stock were delisted, it would trade on the electronic bulletin board, rather than on either the Nasdaq National Market or Small Market, and the liquidity for our common stock would be adversely affected. We believe that it is important to Pacific Aerospace and its shareholders for our common stock to continue to be listed on the Nasdaq National Market. Although we have not yet determined what actions we need to take in conjunction with our appeal or what actions we should take if our appeal is unsuccessful, one alternative could be to call a special meeting of our shareholders to approve a reverse stock split or to approve such other appropriate action as would be reasonably calculated to bring our common stock into compliance with the minimum bid requirement. 38 Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits. The following documents are filed as exhibits to this Quarterly Report: Exhibit Number Description 3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc./(6)/ 3.2 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series A Convertible Preferred Stock, as corrected./(8)/ 3.3 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series B Convertible Preferred Stock./(20)/ 3.4 Bylaws of Pacific Aerospace & Electronics, Inc., as amended. /(35)/ 4.1 Form of specimen certificate for Common Stock./(6)/ 4.2 Form of specimen certificate for public warrants./(6)/ 4.3 Form of specimen certificate for the Series A Convertible Preferred Stock./(8)/ 4.4 Form of specimen certificate for the Series B Convertible Preferred Stock./(20)/ 4.5 Form of Common Stock Purchase Warrant issued to holders of the Series B Convertible Preferred Stock on May 15, 1998./(20)/ 4.6 Securities Purchase Agreement among Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.7 Registration Rights Agreement between Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.8 Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000./(33)/ 4.9 Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.10 Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000./(33)/ 4.11 Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.12 Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000./(33)/ 4.13 Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.14 Letter agreement among Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc., dated as of February 15, 2001./(38)/ 4.15 Placement Agent Warrant between Pacific Aerospace & Electronics, Inc. and Rochon Capital Group, Ltd., dated as of July 27, 2000./(34)/ 39 4.16 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)/ 4.17 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)/ 4.18 Registration Rights Agreement, dated as of July 30, 19998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities Inc./(18)/ 4.19 Form of Global Note by Pacific Aerospace & Electronics, Inc. /(18)/ 4.20 Form of Subsidiary Guaranty from the U.S. subsidiaries of Pacific Aerospace & Electronics, Inc./(25)/ 4.21 Loan Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc., as Borrowers, Pacific A&E Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet International PLC, the Foreign Subsidiaries, and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 4.22 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of B III Capital Partners, L.P., dated March 1, 2001, in the amount of $6,459,361.00./(39)/ 4.23 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of B III-A Capital Partners, L.P., dated March 1, 2001, in the amount of $2,768,298.00./(39)/ 40 4.24 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of DDJ Canadian High Yield Fund, dated March 1, 2001, in the amount of $1,845,531.00./(39)/ 4.25 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of State Street Bank & Trust, as Custodian for General Motors Employees Global Group Pension Trust, dated March 1, 2001, in the amount of $2,768,298.00./(39)/ 4.26 Security Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 4.27 Intellectual Property Security Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 4.28 Pledge Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc., PA&E International, Inc., Pacific A&E Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet International PLC, and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 4.29 Warrant Agreement, by and among Pacific Aerospace & Electronics, Inc. and Holders, dated March 1, 2001./(39)/ 4.30 Warrant Certificate, dated March 1, 2001, issued to B III Capital Partners, L.P., exercisable for 1,883,923 shares of Common Stock./(39)/ 4.31 Warrant Certificate, dated March 1, 2001, issued to B III-A Capital Partners, L.P., exercisable for 807,396 shares of Common Stock./(39)/ 4.32 Warrant Certificate, dated March 1, 2001, issued to DDJ Canadian High Yield Fund, exercisable for 538,263 shares of Common Stock./(39)/ 4.33 Warrant Certificate, dated March 1, 2001, issued to State Street Bank & Trust, as Custodian for General Motors Employees Global Group Pension Trust, exercisable for 807,396 shares of Common Stock./(39)/ 4.34 Equity Registration Rights Agreement, by and among Pacific Aerospace & 41 Electronics, Inc. and Holders, dated March 1, 2001./(39)/ 4.35 Warrant Agreement by and among Pacific Aerospace & Electronics, Inc. and First Albany Corporation, dated April 9, 2001./(40)/ 4.36 Warrant Certificate, dated April 9, 2001, issued to First Albany Corporation, exercisable for 694,074 shares of Common Stock./(40)/ 10.1 Amended and Restated Stock Incentive Plan./(5)/ 10.2 Amendment No. 1 to the Amended and Restated Stock Incentive Plan./(19)/ 10.3 Amended and Restated Independent Director Stock Plan./(21)/ 10.4 1999 Stock Incentive Plan/(30)/ 10.5 1997 Employee Stock Purchase Plan./(11)/ 10.6 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright./(9)/ 10.7 Amendment No. 1 to Employment Agreement, dated January 29, 1999, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright./(27)/ 10.8 Employment Agreement, dated March 1, 1999, between Pacific Aerospace & Electronics, Inc. and Werner Hafelfinger./(27)/ 10.9 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Nick A. Gerde./(9)/ 10.10 Employment Agreement, dated September 1, 1997, between Pacific Aerospace & Electronics, Inc. and Sheryl A. Symonds./(12)/ 10.11 Incentive Compensation Program./(35)/ 10.12 Promissory Note, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(15)/ 10.13 Security Agreement, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(15)/ 10.14 Loan Agreement, dated September 7, 1999, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(29)/ 10.15 Promissory Note, dated September 22, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(22)/ 10.16 Modification and/or Extension Agreement, dated October 6, 1999, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(29)/ 10.17 Commercial Security Agreement, dated September 7, 1999, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(29)/ 10.18 Promissory Note, dated September 30, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(22)/ 10.19 Deed of Trust, dated September 30, 1998, between Pacific Aerospace & Electronics, Inc., KeyBank National Association and Land Title Company, Chelan-Douglas County, Inc./(22)/ 10.20 Modification and/or Extension Agreement, dated September 6, 2000, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(35)/ 10.21 Modification and/or Extension Agreement, dated November 13, 2000, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(36)/ 10.22 Modification and/or Extension Agreement dated November 28, 2000, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(36)/ 10.23 Modification and/or Extension Agreement dated January 5, 2001, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(36)/ 42 10.24 Modification and/or Extension Agreement dated February 7, 2001, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(37)/ 10.25 Facility Letter, dated July 30, 1998, from Barclays Bank plc to Aeromet International plc./(20)/ 10.26 General Terms Agreement No. BCA-65323-0458 dated December 20, 1999 between The Boeing Company and Pacific Aerospace & Electronics, Inc. (U.S. Aerospace Group and European Aerospace Group)./(31)/ 10.27 Special Business Provisions No. POP-65323-0519 December 20, 1999 between The Boeing Company and Pacific Aerospace & Electronics, Inc. (U.S. Aerospace Group and European Aerospace Group)./(1)(31)/ 10.28 Long Term Agreement No. 0108098 between Northrop Grumman Corporation and Cashmere Manufacturing Co., Inc. effective as of April 6, 1998./(1)(20)/ 10.29 Option to Purchase, dated January 29, 1999, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright./(27)/ 10.30 Real Estate Agreement, dated January 15, 1999, between Pacific Aerospace & Electronics, Inc. and the Port of Chelan County./(27)/ 10.31 Real Estate Purchase and Sale Agreement dated December 29, 2000, between Pacific Aerospace & Electronics, Inc. and the Port of Chelan County./(36)/ 10.32 Agreement of Sale, dated October 23, 2000 between Balo Precision Parts, Inc. and D&G Group II, LLC, Louis E. and Mary E. Giresi Grandchildren's Education Trust./(36)/ ____________________ /(1)/ Subject to confidential treatment. Omitted confidential information was filed separately with the Securities and Exchange Commission. /(2)/ Incorporated by reference to the Company's Annual Report on Form 10- KSB for the year ended May 31, 1995. /(3)/ Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form SB-2 filed on June 19, 1996. /(4)/ Incorporated by reference to the Company's Annual Report on Form 10- KSB for the year ended May 31, 1996. /(5)/ Incorporated by reference to the Company's Current Report on Form 10- QSB for the quarterly period ended November 30, 1996. /(6)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on December 12, 1996, reporting the reincorporation merger. /(7)/ Incorporated by reference to the Company's Registration Statement of Certain Successor Issuers on Form 8-B filed on February 6, 1997. /(8)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on March 12, 1997, reporting the Series A Preferred Stock offering. /(9)/ Incorporated by reference to the Company's Annual Report on Form 10- KSB for the fiscal year ending May 31, 1997. /(10)/ Incorporated by reference to the Company's Registration Statement on Form S-8 filed on June 11, 1997. /(11)/ Incorporated by reference to the Company's Definitive Proxy Statement for its 1997 Annual Shareholders Meeting, filed on August 28, 1997. /(12)/ Incorporated by reference to the Post-Effective Amendment No. 1 to Form SB-2, filed on November 3, 1997. /(13)/ Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ending November 30, 1997. 43 /(14)/ Incorporated by reference to the Company's Registration Statement on Form S-3 filed on December 3, 1997. /(15)/ Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ending February 28, 1998. /(16)/ Incorporated by reference to the Company's Current Report on Form 8- K/A, filed on May 1, 1998. /(17)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on July 10, 1998. /(18)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on August 14, 1998. /(19)/ Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 7, 1997. /(20)/ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ending May 31, 1998. /(21)/ Incorporated by reference to the Company's Definitive Proxy Statement filed on September 1, 1998. /(22)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q, and Form 10-Q/A, for the quarterly period ending August 31, 1998. /(23)/ Incorporated by reference to the Company's Registration Statement on Form S-1 filed on October 30, 1998. /(24)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending November 30, 1998. /(25)/ Incorporated by reference to Registration Statement on Form S-4 filed on November 25, 1998. /(26)/ Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-4 filed on January 20, 1999. /(27)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 28, 1999. /(28)/ Incorporated by reference to the Company's Annual Report on Form 10-K filed on August 30, 1999. /(29)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending August 31, 1999. /(30)/ Incorporated by reference to the Company's Definitive Proxy Statement filed on September 1, 1999. /(31)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A for the quarterly period ending February 29, 2000. /(32)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on May 31, 2000. /(33)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on August 8, 2000. /(34)/ Incorporated by reference to the Company's Annual Report on Form 10-K filed on August 28, 2000. /(35)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending August 31, 2000. /(36)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending November 30, 2000. /(37)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on February 9, 2001. 44 /(38)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on February 21, 2001 /(39)/ Incorporated by reference to the Company's Current Report on Form 8-K filed on March 7, 2001. /(40)/ Filed with this report. b. Reports on Form 8-K. (i) The Company filed a Current Report on Form 8-K on February 21, 2001, reporting the amendment of the adjustable warrants issued in the Company's Summer 2000 private placement. (ii) The Company filed a Current Report on Form 8-K on February 9, 2001, reporting the execution of a commitment letter for the 18% senior secured loan and the extension of a line of credit. (iii) The Company filed an amended Current Report on Form 8-K/A on January 17, 2001, including required financial information related to the acquisition of Nova-Tech Engineering, Inc. 45 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PACIFIC AEROSPACE & ELECTRONICS, INC. Date: April 13, 2001 /s/ Donald A.Wright -------------------------------------------------- Donald A. Wright President, Chief Executive Officer, and Chairman of the Board (Principal Executive Officer) Date: April 13, 2001 /s/ Nick A. Gerde -------------------------------------------------- Nick A. Gerde Vice President Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 46 EXHIBIT INDEX The following documents are filed as exhibits to this Quarterly Report: Exhibit Number Description 3.1 Articles of Incorporation of Pacific Aerospace & Electronics, Inc./(6)/ 3.2 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series A Convertible Preferred Stock, as corrected./(8)/ 3.3 Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series B Convertible Preferred Stock./(20)/ 3.4 Bylaws of Pacific Aerospace & Electronics, Inc., as amended./(35)/ 4.1 Form of specimen certificate for Common Stock./(6)/ 4.2 Form of specimen certificate for public warrants./(6)/ 4.3 Form of specimen certificate for the Series A Convertible Preferred Stock./(8)/ 4.4 Form of specimen certificate for the Series B Convertible Preferred Stock./(20)/ 4.5 Form of Common Stock Purchase Warrant issued to holders of the Series B Convertible Preferred Stock on May 15, 1998./(20)/ 4.6 Securities Purchase Agreement among Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.7 Registration Rights Agreement between Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc., dated as of July 27, 2000.(33) 4.8 Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000./(33)/ 4.9 Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.10 Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000./(33)/ 4.11 Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.12 Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000./(33)/ 4.13 Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000./(33)/ 4.14 Letter agreement among Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc., dated as of February 15, 2001./(38)/ 4.15 Placement Agent Warrant between Pacific Aerospace & Electronics, Inc. and Rochon Capital Group, Ltd., dated as of July 27, 2000./(34)/ 4.16 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)/ 4.17 Indenture dated as of July 30, 1998, between Pacific Aerospace & Electronics, Inc. 47 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)/ 4.18 Registration Rights Agreement, dated as of July 30, 19998, between Pacific Aerospace & Electronics, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc., Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., PA&E International, Inc. and Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities Inc./(18)/ 4.19 Form of Global Note by Pacific Aerospace & Electronics, Inc./(18)/ 4.20 Form of Subsidiary Guaranty from the U.S. subsidiaries of Pacific Aerospace & Electronics, Inc./(25)/ 4.21 Loan Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc., as Borrowers, Pacific A&E Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet International PLC, the Foreign Subsidiaries, and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 4.22 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of B III Capital Partners, L.P., dated March 1, 2001, in the amount of $6,459,361.00./(39)/ 4.23 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of B III-A Capital Partners, L.P., dated March 1, 2001, in the amount of $2,768,298.00./(39)/ 4.24 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of DDJ Canadian High Yield Fund, dated March 1, 2001, in the amount of $1,845,531.00./(39)/ 4.25 Term Loan Note, executed by Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. in favor of State Street Bank & Trust, as Custodian for General Motors Employees Global Group Pension Trust, dated March 1, 2001, in the amount of $2,768,298.00./(39)/ 4.26 Security Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 48 4.27 Intellectual Property Security Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc. and PA&E International, Inc. and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 4.28 Pledge Agreement, by and among Pacific Aerospace & Electronics, Inc., Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., Seismic Safety Products, Inc., Skagit Engineering & Manufacturing, Inc., PA&E International, Inc., Pacific A&E Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet International PLC, and DDJ Capital Management, LLC, as Agent for the Lenders, dated March 1, 2001./(39)/ 4.29 Warrant Agreement, by and among Pacific Aerospace & Electronics, Inc. and Holders, dated March 1, 2001./(39)/ 4.30 Warrant Certificate, dated March 1, 2001, issued to B III Capital Partners, L.P., exercisable for 1,883,923 shares of Common Stock./(39)/ 4.31 Warrant Certificate, dated March 1, 2001, issued to B III-A Capital Partners, L.P., exercisable for 807,396 shares of Common Stock./(39)/ 4.32 Warrant Certificate, dated March 1, 2001, issued to DDJ Canadian High Yield Fund, exercisable for 538,263 shares of Common Stock./(39)/ 4.33 Warrant Certificate, dated March 1, 2001, issued to State Street Bank & Trust, as Custodian for General Motors Employees Global Group Pension Trust, exercisable for 807,396 shares of Common Stock./(39)/ 4.34 Equity Registration Rights Agreement, by and among Pacific Aerospace & Electronics, Inc. and Holders, dated March 1, 2001./(39)/ 4.35 Warrant Agreement by and among Pacific Aerospace & Electronics, Inc. and First Albany Corporation, dated April 9, 2001./(40)/ 4.36 Warrant Certificate, dated April 9, 2001, issued to First Albany Corporation, exercisable for 694,074 shares of Common Stock./(40)/ 10.1 Amended and Restated Stock Incentive Plan./(5)/ 10.2 Amendment No. 1 to the Amended and Restated Stock Incentive Plan./(19)/ 10.3 Amended and Restated Independent Director Stock Plan./(21)/ 10.4 1999 Stock Incentive Plan /(30)/ 10.5 1997 Employee Stock Purchase Plan./(11)/ 10.6 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright./(9)/ 10.7 Amendment No. 1 to Employment Agreement, dated January 29, 1999, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright./(27)/ 10.8 Employment Agreement, dated March 1, 1999, between Pacific Aerospace & Electronics, Inc. and Werner Hafelfinger./(27)/ 10.9 Employment Agreement, dated June 1, 1997, between Pacific Aerospace & Electronics, Inc. and Nick A. Gerde./(9)/ 10.10 Employment Agreement, dated September 1, 1997, between Pacific Aerospace & Electronics, Inc. and Sheryl A. Symonds./(12)/ 10.11 Incentive Compensation Program./(35)/ 10.12 Promissory Note, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(15)/ 10.13 Security Agreement, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(15)/ 10.14 Loan Agreement, dated September 7, 1999, between Pacific Aerospace & Electronics, 49 Inc. and KeyBank National Association./(29)/ 10.15 Promissory Note, dated September 22, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(22)/ 10.16 Modification and/or Extension Agreement, dated October 6, 1999, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association (29) 10.17 Commercial Security Agreement, dated September 7, 1999, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(29)/ 10.18 Promissory Note, dated September 30, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association./(22)/ 10.19 Deed of Trust, dated September 30, 1998, between Pacific Aerospace & Electronics, Inc., KeyBank National Association and Land Title Company, Chelan-Douglas County, Inc./(22)/ 10.20 Modification and/or Extension Agreement, dated September 6, 2000, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(35)/ 10.21 Modification and/or Extension Agreement, dated November 13, 2000, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(36)/ 10.22 Modification and/or Extension Agreement dated November 28, 2000, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(36)/ 10.23 Modification and/or Extension Agreement dated January 5, 2001, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(36)/ 10.24 Modification and/or Extension Agreement dated February 7, 2001, between Pacific Aerospace & Electronics, Inc. and KeyBank National Association./(37)/ 10.25 Facility Letter, dated July 30, 1998, from Barclays Bank plc to Aeromet International plc./(20)/ 10.26 General Terms Agreement No. BCA-65323-0458 dated December 20, 1999 between The Boeing Company and Pacific Aerospace & Electronics, Inc. (U.S. Aerospace Group and European Aerospace Group)./(31)/ 10.27 Special Business Provisions No. POP-65323-0519 December 20, 1999 between The Boeing Company and Pacific Aerospace & Electronics, Inc. (U.S. Aerospace Group and European Aerospace Group)./(1)(31)/ 10.28 Long Term Agreement No. 0108098 between Northrop Grumman Corporation and Cashmere Manufacturing Co., Inc. effective as of April 6, 1998./(1)(20)/ 10.29 Option to Purchase, dated January 29, 1999, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright./(27)/ 10.30 Real Estate Agreement, dated January 15, 1999, between Pacific Aerospace & Electronics, Inc. and the Port of Chelan County./(27)/ 10.31 Real Estate Purchase and Sale Agreement dated December 29, 2000, between Pacific Aerospace & Electronics, Inc. and the Port of Chelan County./(36)/ 10.32 Agreement of Sale, dated October 23, 2000 between Balo Precision Parts, Inc. and D&G Group II, LLC, Louis E. and Mary E. Giresi Grandchildren's Education Trust./(36)/ __________________ (1) Subject to confidential treatment. Omitted confidential information was filed separately with the Securities and Exchange Commission. (2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended May 31, 1995. (3) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form SB-2 filed on June 19, 1996. (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended May 31, 1996. (5) Incorporated by reference to the Company's Current Report on Form 10-QSB for the quarterly period ended November 30, 1996. 50 (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) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ending May 31, 1997. (10) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on June 11, 1997. (11) Incorporated by reference to the Company's Definitive Proxy Statement for its 1997 Annual Shareholders Meeting, filed on August 28, 1997. (12) Incorporated by reference to the Post-Effective Amendment No. 1 to Form SB- 2, filed on November 3, 1997. (13) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ending November 30, 1997. (14) Incorporated by reference to the Company's Registration Statement on Form S-3 filed on December 3, 1997. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ending February 28, 1998. (16) Incorporated by reference to the Company's Current Report on Form 8-K/A, filed on May 1, 1998. (17) Incorporated by reference to the Company's Current Report on Form 8-K filed on July 10, 1998. (18) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 14, 1998. (19) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 7, 1997. (20) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ending May 31, 1998. (21) Incorporated by reference to the Company's Definitive Proxy Statement filed on September 1, 1998. (22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, and Form 10-Q/A, for the quarterly period ending August 31, 1998. (23) Incorporated by reference to the Company's Registration Statement on Form S-1 filed on October 30, 1998. (24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending November 30, 1998. (25) Incorporated by reference to Registration Statement on Form S-4 filed on November 25, 1998. (26) Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-4 filed on January 20, 1999. (27) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending February 28, 1999. (28) Incorporated by reference to the Company's Annual Report on Form 10-K filed on August 30, 1999. (29) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending August 31, 1999. (30) Incorporated by reference to the Company's Definitive Proxy Statement filed on September 1, 1999. (31) Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A for the quarterly period ending February 29, 2000. (32) Incorporated by reference to the Company's Current Report on Form 8-K filed on May 31, 2000. (33) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 8, 2000. 51 (34) Incorporated by reference to the Company's Annual Report on Form 10-K filed on August 28, 2000. (35) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending August 31, 2000. (36) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ending November 30, 2000. (37) Incorporated by reference to the Company's Current Report on Form 8-K filed on February 9, 2001. (38) Incorporated by reference to the Company's Current Report on Form 8-K filed on February 21, 2001 (39) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 7, 2001. (40) Filed with this report. 52 EX-4.35 2 dex435.txt WARRANT AGREEMENT DATED APRIL 9, 2001 EXHIBIT 4.35 ================================================================================ WARRANT AGREEMENT BY AND AMONG PACIFIC AEROSPACE & ELECTRONICS, INC. AND FIRST ALBANY CORPORATION April 9, 2001 ================================================================================ TABLE OF CONTENTS ARTICLE I DEFINITIONS.................................................................................... 1 Section 1.1. Definitions.............................................................................. 1 ARTICLE II ISSUANCE, EXECUTION AND TRANSFER OF WARRANT CERTIFICATES...................................... 3 Section 2.1. Warrants to be Issued.................................................................... 3 Section 2.2. Form of Warrant Certificates............................................................. 3 Section 2.3. Execution of Warrant Certificates........................................................ 3 Section 2.4. Transfer and Exchange of Warrant Certificates............................................ 3 Section 2.5. Lost, Stolen, Mutilated or Destroyed Warrant Certificates................................ 4 ARTICLE III EXERCISE PRICE AND EXERCISE OF WARRANTS...................................................... 4 Section 3.1. Exercise Price........................................................................... 4 Section 3.2. Registration of Warrant Shares........................................................... 5 Section 3.3. Exercise of Warrants..................................................................... 5 Section 3.4. Issuance of Warrant Shares............................................................... 6 Section 3.5. Certificates for Unexercised Warrants.................................................... 6 Section 3.6. Reservation of Warrant Shares............................................................ 6 Section 3.7. No Impairment............................................................................ 6 ARTICLE IV ADJUSTMENTS, NOTICE PROVISIONS AND ISSUANCE OF ADDITIONAL SECURITIES.......................... 7 Section 4.1. Adjustment of Exercise Price............................................................. 7 Section 4.2. No Adjustments to Exercise Price......................................................... 8 Section 4.3. Adjustment of Number of Shares........................................................... 8 Section 4.4. Reorganizations.......................................................................... 9 Section 4.5. Verification of Computations............................................................. 9 Section 4.6. Exercise Price Less Than Par Value....................................................... 9 Section 4.7. Notice of Certain Actions................................................................ 10 Section 4.8. Certificate of Adjustments............................................................... 10 Section 4.9. Warrant Certificate Amendments........................................................... 10 Section 4.10. Fractional Shares........................................................................ 11 ARTICLE V SPLIT UP, COMBINATION, EXCHANGE, TRANSFER AND CANCELLATION OF WARRANT CERTIFICATES............. 11 Section 5.1. Split Up, Combination, Exchange and Transfer of Warrant Certificates..................... 11 Section 5.2. Cancellation of Warrant Certificates..................................................... 11 ARTICLE VI HOLDER REPRESENTATION AND WARRANTIES........................................................... 11 Section 6.1. Purchase for Investment.................................................................. 11 ARTICLE VII MISCELLANEOUS................................................................................ 12 Section 7.1. Changes to Agreement..................................................................... 12 Section 7.2. Assignment............................................................................... 12
ii Section 7.3. Successor to Company..................................................................... 12 Section 7.4. Notices.................................................................................. 12 Section 7.5. Governing Law............................................................................ 13 Section 7.6. Standing................................................................................. 13 Section 7.7. Headings................................................................................. 13 Section 7.8. Counterparts............................................................................. 13 Section 7.9. Availability of the Agreement............................................................ 13 Section 7.10. Entire Agreement......................................................................... 13 Section 7.11. Rights of Warrant Holders................................................................ 13 EXHIBIT A Form of Warrant Certificate..................................................................... 1 Form of Election To Purchase.............................................................................. 3 Assignment................................................................................................ 4
iii WARRANT AGREEMENT THIS WARRANT AGREEMENT (the "Agreement"), dated as of April 9, 2001, is entered into by and among Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), and First Albany Corporation (the "Holder" and collectively with its permitted transferees, the "Holders"). This Agreement is made in connection with the engagement letter dated January 23, 2001 between the Company and the Holder, as amended by that certain letter agreement dated February 5, 2001 between the Company and the Holder (collectively, the "Engagement Letter"). WITNESSETH THAT: WHEREAS, the Company and its domestic subsidiaries entered into a Loan Agreement on March 1, 2001 with DDJ Capital Management, LLC, as agent, and the Lenders listed therein, whereby the Company received a loan in the aggregate principal amount of $13,841,488 (the "Transaction"); WHEREAS, in consideration for its services as placement agent in connection with the Transaction, the Company has agreed to pay to the Holder a cash fee as set forth in the Engagement Letter and to grant to Holder warrants to purchase Common Stock of the Company as set forth herein; WHEREAS, the Company proposes to issue and deliver Warrant Certificates evidencing Warrants (each, as defined herein) to acquire up to an aggregate of 694,074 shares of the Company's Common Stock, subject to adjustment from time to time as set forth herein (the Common Stock issuable upon exercise of the Warrants being referred to herein as the "Warrant Shares"); and WHEREAS, the Company desires to enter into this Agreement to set forth the terms and conditions of the Warrants and the rights of the holders thereof. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. As used in this Agreement, the following terms shall have the following respective meanings (all terms defined herein in the singular are to have the correlative meanings when used in the plural and vice versa): "Closing Price" means, for any date, the last sale price reported in the Wall Street Journal or other trade publication regular way or, in case no such reported sale takes place on such date, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed if that is the principal market for the Common Stock or, if not listed on any national securities exchange or if such national securities exchange is not the principal market for the Common Stock, the average of the closing high bid and low asked prices as reported by The Nasdaq Stock Market, Inc. or its successor, if any, or if the Common Stock is not so reported, as furnished by the National Quotation Bureau, Inc., or if such firm is not then engaged in the business of reporting such prices, as furnished by any similar firm then engaged in such business and selected by the Company or, if there is no such firm, as furnished by any NASD member selected by the Company. "Common Stock" means the Common Stock of the Company, par value $.001 per share. "Date of Exercise" means, with respect to any Warrant, the date on which a Warrant to be exercised has been received by the Company (in accordance with Section 7.4 hereof). "Expiration Date" means April 9, 2006. "Officers' Certificate" means a certificate signed by any two of the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Secretary or an Assistant Secretary of the Company. "Person" means any natural person, corporation, partnership, trust, joint venture, limited liability company, or any other entity or organization. "Restricted Securities" means the Warrants issued on the date hereof and any Warrant Shares which have been issued or are issuable upon the exercise of such Warrants until such time as any such Restricted Securities (i) have been sold pursuant to an effective registration statement under the Securities Act, (ii) are distributed to the public pursuant to Rule 144 (or any similar provision then in force) under the Securities Act or (iii) have been otherwise transferred without registration under the Act pursuant to an exemption from the registration requirements of the Securities Act. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor statute, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. "Trading Days" means, with respect to the Common Stock (i) if the Common Stock is quoted on the National Market System of the Nasdaq Stock Market, Inc. or any similar system of automated dissemination of quotations of securities prices, days on which trades may be made on such system or (ii) if the Common Stock is listed or admitted for trading on any national securities exchange, days on which such national securities exchange is open for business. "Warrant Certificates" means the certificates representing the Warrants. "Warrant Shares" means the shares of Common Stock issuable upon the exercise of any Warrant. "Warrants" means the Warrants exercisable for shares of Common Stock issued pursuant to this Agreement. 2 ARTICLE II ISSUANCE, EXECUTION AND TRANSFER OF WARRANT CERTIFICATES Section 2.1. Warrants to be Issued. The Company will issue Warrants to purchase up to an aggregate of 692,074 fully paid and nonassessable shares of the Company's Common Stock, subject to the terms hereof, at the Exercise Price (as defined in Section 3.1), subject to adjustment pursuant to the provisions of Article IV hereof. Section 2.2. Form of Warrant Certificates. The Warrant Certificates shall be issued substantially in the form of Exhibit A attached hereto. In addition, the Warrant Certificates may have such letters, numbers or other marks of identification or designation and such legends, summaries, or endorsements stamped, printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as, in any particular case, may be required to comply with any law or with any rule or regulation of any regulatory authority or agency, or to conform to customary usage. Each Warrant shall evidence the right, subject to the provisions of this Agreement and of the Warrant Certificate, to purchase such number of shares of Common Stock of the Company as set forth in the Warrant Certificate at the Exercise Price (as defined in Section 3.1), subject to adjustment pursuant to the provisions of Article IV hereof. Section 2.3. Execution of Warrant Certificates. The Warrant Certificates shall be executed on behalf of the Company by its Chairman or President or any Vice President and attested to by its Secretary or Assistant Secretary, either manually or by facsimile signature printed thereon. In case any authorized officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company either before or after delivery thereof by the Company to the holder thereof, the signature of such person on such Warrant Certificates shall be valid nevertheless, and such Warrant Certificates shall have the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. Section 2.4. Transfer and Exchange of Warrant Certificates. (a) Warrant Certificates evidencing Restricted Securities and only such Warrant Certificates will bear a legend in substantially the following form: NEITHER THE ISSUANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE ISSUANCE OF ANY SECURITIES ISSUABLE UPON EXERCISE HEREOF HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR PURSUANT TO THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT AND THE RULES AND REGULATIONS THEREUNDER OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. 3 (b) Neither the Warrant Certificates nor the Warrants represented thereby may be transferred to any person other than an officer, director or employee of the initial Holder. (c) Prior to or concurrently with the transfer or exchange of any Warrant Shares (other than pursuant to an effective registration statement under the Securities Act), the transferor of such Warrant Shares shall, upon request of the Company, deliver to the Company an opinion of counsel, in substance reasonably satisfactory to the Company, to the effect that such Warrant Shares to be issued upon such transfer or exchange will be issued in compliance with applicable Securities laws and/or may be so issued without the foregoing legend. Notwithstanding the foregoing, it shall be understood that no opinion of counsel shall be required for transfers to officers, directors or employees of the initial Holder. (d) No Restricted Security shall be transferred, unless such transfer is in compliance with all applicable securities laws (including, without limitation, the Securities Act and any applicable state securities laws). (e) Subject to paragraph (a) and (b) above, the Company shall register the transfer of all or any whole number of Warrants covered by any outstanding Warrant Certificate upon surrender to the Company of Warrant Certificates accompanied by a written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the Warrant holder or his attorney duly authorized in writing. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee and the Company shall promptly cancel the surrendered Warrant Certificate. Warrant Certificates may be exchanged at the option of the holder thereof, upon surrender, properly endorsed by the holder, to the Company, with written instructions, for other Warrant Certificates representing in the aggregate a like number of Warrants. Section 2.5. Lost, Stolen, Mutilated or Destroyed Warrant Certificates. If any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Warrant Certificate, or in lieu of or in substitution for a lost, stolen or destroyed Warrant Certificate, a substitute Warrant Certificate, but only upon receipt of evidence of such loss, theft or destruction of such Warrant Certificate, and of the ownership thereof. Any such new Warrant Certificate shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant Certificate shall be at any time enforceable by anyone. ARTICLE III EXERCISE PRICE AND EXERCISE OF WARRANTS Section 3.1. Exercise Price. Each Warrant Certificate shall, when signed by the Chairman or President or any Vice President and attested to by the Secretary or Assistant Secretary of the Company, entitle the holder thereof subject to the provisions thereof and of this Agreement, to purchase from the Company at any time after the date hereof and before 5:00 p.m., New York time, on the Expiration Date, such number of shares of Common Stock of the Company as set forth in the Warrant Certificate for each of the Warrants specified therein, at a purchase price of $.4062 per share (the "Exercise Price") or such adjusted number of shares at 4 such adjusted exercise price as may be established from time to time pursuant to the provisions of Article IV hereof, payable in full in accordance with Section 3.3 hereof, at the time of exercise of the Warrant. Except as the context otherwise requires, the term "Exercise Price" as used in this Agreement shall mean the purchase price of one Warrant Share pursuant to the Warrant Certificates reflecting all appropriate adjustments made in accordance with the provisions of Article IV hereof. Section 3.2. Registration of Warrant Shares. The Company shall secure the effective registration of the Warrant Shares under the Securities Act and applicable state laws and maintain such registration or qualification in effect, all on the same terms set forth in the Registrations Rights Agreement between the Company and DDJ Capital Management, LLC, and the other parties thereto dated as of March 1, 2001 (other than Section 2 thereof, which requires that a registration statement be filed within 30 days after the date of that agreement). Promptly after a registration statement under the Securities Act covering the Warrant Shares has become effective, the Company shall cause notice thereof together with copies of the prospectus covering the Warrant Shares to be mailed to each holder of a Warrant Certificate. Section 3.3. Exercise of Warrants. (a) Warrants may be exercised by surrendering the Warrant Certificate evidencing such Warrants to the Company with the Election to Purchase form attached to the Warrant Certificate duly completed and executed by the holder thereof or his attorney duly authorized in writing (the "Exercise Notice"), accompanied by payment in full, as set forth below, of the Exercise Price for each share of Common Stock as to which Warrants are exercised. Such Exercise Price shall be paid in full by (i) cash or a certified check or a wire transfer in same day funds in an amount equal to the then applicable Exercise Price multiplied by the number of Warrant Shares then being purchased, (ii) delivery to the Company of that number of shares of Common Stock, duly endorsed, having an aggregate Fair Market Value (as defined in Section 4.1(d)) equal to the then applicable Exercise Price multiplied by the number of Warrant Shares then being purchased or (iii) by any combination of (i) and (ii). In the alternative, the holder of a Warrant Certificate may exercise its right to purchase some or all of the Warrant Shares subject to such Warrant Certificate, on a net basis, such that, without the exchange of any funds, such holder receives that number of Warrant Shares subscribed to pursuant to such Warrant Certificate less that number of shares of Common Stock having an aggregate Fair Market Value at the Date of Exercise equal to the aggregate Exercise Price that would otherwise have been paid by such holder for the number of Warrant Shares subscribed to pursuant to such Warrant Certificate. A Warrant holder may exercise all or any number of whole Warrants represented by a Warrant Certificate. (b) A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of the due surrender for exercise of the Warrant Certificate and payment to the Company of the Exercise Price. Each Person in whose name any such certificate for shares of Common Stock is issued shall for all purposes be deemed to have become the holder of record of such shares at the close of business on the date on which the Warrant Certificate was duly surrendered to the Company and payment of the Exercise Price was made to the Company, irrespective of the date of delivery of such share certificate, except that, if the date 5 of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open (whether before or after the Expiration Date in such case). Section 3.4. Issuance of Warrant Shares. As soon as practicable and no later than five (5) business days after the Date of Exercise of any Warrants, the Company shall issue, or cause its transfer agent to issue, a certificate or certificates for the number of full Warrant Shares to which the holder is entitled, registered in accordance with the instructions set forth in the Election to Purchase, together with cash, as provided in Section 4.10 hereof, in respect of any fractional share. All Warrant Shares issued upon the exercise of any Warrants shall be validly authorized and issued, fully paid and non- assessable, free of preemptive rights and free from all taxes, liens, security interests and charges created by the Company in respect of the issuance thereof. Each person in whose name any such certificate for Warrant Shares is issued shall for all purposes be deemed to have become the holder of record of the Common Stock represented thereby on the Date of Exercise of the Warrants resulting in the issuance of such shares, irrespective of the date of issuance or delivery of such certificate for Warrant Shares. Section 3.5. Certificates for Unexercised Warrants. In the event that fewer than all of the Warrants represented by a Warrant Certificate are exercised, the Company shall execute and mail, by first-class mail, within ten (10) days of the Date of Exercise, to the holder of such Warrant Certificate, or such other Person as shall be designated in the Election to Purchase, a new Warrant Certificate representing the number of Warrants not exercised. Section 3.6. Reservation of Warrant Shares. The Company shall at all times reserve and keep available for issuance upon the exercise of Warrants a number of its authorized but unissued shares or treasury shares, or both, of Common Stock that will be sufficient to permit the exercise in full of all outstanding Warrants. Section 3.7. No Impairment. The Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, stock split, stock dividend or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Warrant holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares receivable upon the exercise of the Warrants above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate to assure that the par value of the Common Stock is at all times equal to or less than the Exercise Price (including without limitation approving and submitting to the stockholders of the Company for approval an amendment to the Company's Bylaws to reduce such par value), (c) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of any Warrant, and (d) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under the Warrants. 6 ARTICLE IV ADJUSTMENTS, NOTICE PROVISIONS AND ISSUANCE OF ADDITIONAL SECURITIES Section 4.1. Adjustment of Exercise Price. Subject to the provisions of this Article IV, the Exercise Price in effect from time to time shall be subject to adjustment, as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on the outstanding shares of Common Stock in shares of Common Stock or any class thereof, (ii) subdivide or reclassify the outstanding shares of Common Stock or any class thereof into a greater number of shares, or (iii) combine or reclassify the outstanding shares of its Common Stock into a smaller number of shares, the Exercise Price in effect immediately after the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately before such dividend, distribution, subdivision, combination or reclassification, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such dividend, distribution, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event specified above shall occur. (b) In case the Company shall fix a record date for the issuance of rights, options, warrants or convertible or exchangeable securities to all holders of its Common Stock entitling them (for a period expiring within forty- five (45) days after such record date) to subscribe for or purchase shares of its Common Stock at a price per share less than the Fair Market Value on such record date the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered would purchase at the Fair Market Value per share, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever such a record date is fixed. To the extent that any such rights, options, warrants or convertible or exchangeable securities are not so issued or expire unexercised, the Exercise Price then in effect shall be readjusted to the Exercise Price which would then be in effect if such unissued or unexercised rights, options, warrants or convertible or exchangeable securities had not been issuable. (c) In case the Company shall fix a record date for the making of a distribution to all holders of shares of Common Stock of (i) shares of any class other than Common Stock or (ii) evidences of its indebtedness or (iii) assets (excluding cash dividends or distributions (other than extraordinary cash dividends or distributions), and dividends or distributions referred to in Section 4.1(a) hereof) or (iv) rights, options, warrants or convertible or exchangeable securities (excluding those rights, options, warrants or convertible or exchangeable securities referred to in Section 4.1(b) hereof), then in each such case the Exercise 7 Price in effect immediately thereafter shall be determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of shares of Common Stock outstanding on such record date multiplied by the Fair Market Value per share on such record date, less the aggregate fair market value as determined in good faith by the Board of Directors of the Company of said shares or evidences of indebtedness or assets or rights, options, warrants or convertible or exchangeable securities so distributed, and of which the denominator shall be the total number of shares of Common Stock outstanding on such record date multiplied by such Fair Market Value per share. Such adjustment shall be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the Exercise Price then in effect shall be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed. (d) For the purpose of any computation under Section 4.1(b) or 4.1(c) hereof, the "Fair Market Value" per share at any date (the "Computation Date") shall be as follows: (i) if the Common Stock is listed on a national securities exchange or quoted on a national quotation system, the Current Market Price, which shall be deemed to be the average of the Closing Prices of the Common Stock for the five (5) Trading Days immediately preceding the Computation Date; provided, however, that if there shall have occurred prior to the Computation Date any event described in Section 4.1(a), 4.1(b) or 4.1(c) which shall have become effective with respect to market transactions at any time (the "Market- Effect Date") on or after the beginning of such 5-day period, the Closing Price for each Trading Day preceding the Market-Effect Date shall be adjusted, for purposes of calculating such average, by multiplying such Closing Price by a fraction the numerator of which is the Exercise Price as in effect immediately prior to the Computation Date and the denominator of which is the Exercise Price as in effect immediately prior to the Market-Effect Date, it being understood that the purpose of this proviso is to ensure that the effect of such event on the market price of the Common Stock shall, as nearly as possible, be eliminated in order that the distortion in the calculation of the Fair Market Value may be minimized and it being understood that if the Exercise Price may not be adjusted due to the provisions of Section 4.6, for purposes of the calculation above, the Exercise Price shall be deemed the Exercise Price as if it had been adjusted or (ii) there is no public market for Common Stock, the fair market value per share of Common Stock as determined in good faith by the Company's Board of Directors. Section 4.2. No Adjustments to Exercise Price. No adjustment in the Exercise Price in accordance with the provisions of Section 4.1(a), 4.1(b) or 4.1(c) hereof need be made unless such adjustment would amount to a change of at least .5% in such Exercise Price of the Warrant Certificates; provided, however, that the amount by which any adjustment is not made by reason of the provisions of this Section 4.2 shall be carried forward and taken into account at the time of any subsequent adjustment in the Exercise Price. Section 4.3. Adjustment of Number of Shares. Upon each adjustment of the Exercise Price pursuant to Section 4.1(a), 4.1(b) or 4.1(c) hereof, each Warrant shall thereupon evidence the right to purchase that number of Warrant Shares (calculated to the nearest hundredth of a share) obtained by multiplying the number of Warrant Shares purchasable immediately prior to such adjustment upon exercise of the Warrant by the Exercise Price in effect immediately prior to such adjustment and dividing the product so obtained by the Exercise Price in effect immediately after such adjustment. In the event that the Exercise Price may not be adjusted due 8 to the provisions of Section 4.6 hereof, the number of Warrant Shares purchasable upon the exercise of each Warrant shall be adjusted hereunder as if the Exercise Price had been so adjusted. Section 4.4. Reorganizations. In case of any capital reorganization, other than in the cases referred to in Section 4.1 hereof, or the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock or the conversion of such outstanding shares of Common Stock into shares of other stock or other securities or property), or the sale or conveyance of the property of the Company as an entirety or substantially as an entirety (collectively such actions being hereinafter referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of any Warrant (in lieu of the number of Warrant Shares theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the number of Warrant Shares which would otherwise have been deliverable upon the exercise of such Warrant would have been entitled upon such Reorganization if such Warrant was fully exercisable and had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, appropriate adjustment, as determined in good faith by the Board of Directors of the Company, shall be made in the application of the provisions herein set forth with respect to the rights and interests of Warrant holders so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of Warrants. Any such adjustment shall be made by and set forth in a supplemental agreement prepared by the Company or any successor thereto, between the Company, or any successor thereto, and shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. The Company shall not effect any such Reorganization unless upon or prior to the consummation thereof the successor corporation, (or if the Company shall be the surviving corporation in any such Reorganization and is not the issuer of the shares of stock or other securities or property to be delivered to holders of shares of the Common Stock outstanding at the effective time thereof, then such issuer), shall assume by written instrument the obligation to deliver to the holder of any Warrant Certificate such shares of stock, securities, cash or other property as such holder shall be entitled to purchase in accordance with the foregoing provisions. Section 4.5. Verification of Computations. The Company shall, if requested by a Holder of a majority of the outstanding Warrants, select a firm of independent public accountants, which selection may be changed from time to time, to verify each computation and/or adjustment made in accordance with this Article IV. The certificate, report or other written statement of any such firm shall be conclusive evidence of the correctness of any computation made under this Article IV. Promptly upon its receipt of such certificate, report or statement from such firm of independent public accountants, the Company shall deliver a copy thereof to each holder of Warrants Section 4.6. Exercise Price Less Than Par Value. The Exercise Price shall not be adjusted below the par value per share of the Common Stock for the purpose of making any adjustment as may be required pursuant to this Article IV. 9 Section 4.7. Notice of Certain Actions. In the event the Company shall: (a) declare any dividend payable in stock to the holders of the Common Stock or make any other distribution in property other than cash to the holders of the Common Stock; (b) offer to the holders of the Common Stock rights to subscribe for or purchase any shares of any class of stock or any other rights or options; or (c) effect any reclassification of the Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock) or any capital reorganization or any consolidation or merger (other than a merger in which no distribution of securities or other property is made to holders of Common Stock), or any sale, transfer or other disposition of its property, assets and business substantially as an entirety, or the liquidation, dissolution or winding up of the Company; then, in each such case, the Company shall mail notice of such proposed action to each holder of Warrants at least ten (10) days prior to such action. Such notice shall specify the date on which the books of the Company shall close, or a record be taken, for determining holders of Common Stock entitled to receive such stock dividend or other distribution or such rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, dissolution, winding up or exchange shall take place or commence, as the case may be, and the date as of which it is expected that holders of record of Common Stock shall be entitled to receive securities or other property deliverable upon such action, if any such date has been fixed. Such notice shall be mailed in the case of any action covered by paragraph (a) or (b) of this Section 4.7, at least ten (10) days prior to the record date for determining holders of the Common Stock for purposes of receiving such payment or offer, and in the case of any action covered by paragraph (c) of this Section 4.7, at least ten (10) days prior to the earlier of the date upon which such action is to take place or any record date to determine holders of Common Stock entitled to receive such securities or other property. Section 4.8. Certificate of Adjustments. Whenever any adjustment is to be made pursuant to this Article IV, the Company shall prepare an Officers' Certificate setting forth such adjustment to be mailed to each transfer agent for the Common Stock and to each holder of a Warrant Certificate at least five (5) days prior thereto, such notice to include in reasonable detail (i) the events precipitating the adjustment, (ii) the computation of any adjustments, and (iii) the Exercise Price and the number of Warrant Shares or the securities or other property purchasable upon exercise of each Warrant after giving effect to such adjustment. Section 4.9. Warrant Certificate Amendments. Irrespective of any adjustments pursuant to this Article IV, Warrant Certificates theretofore or thereafter issued need not be amended or replaced, but certificates thereafter issued shall bear an appropriate legend or other notice of any adjustments; provided the Company may, at its option, issue new Warrant Certificates evidencing Warrants in such form as may be approved by its Board of Directors to reflect any adjustment in the Exercise Price and number of Warrant Shares purchasable under the Warrant Certificates and deliver the same to the holders thereof in substitution for existing Warrant Certificates. 10 Section 4.10. Fractional Shares. The Company shall not be required upon the exercise of any Warrant to issue fractional Warrant Shares which may result from adjustments in accordance with this Article IV to the Exercise Price or number of Warrant Shares purchasable under each Warrant or otherwise. If more than one Warrant is exercised at one time by the same holder, the number of full Warrant Shares which shall be deliverable shall be computed based on the number of shares deliverable in exchange for the aggregate number of Warrants exercised. With respect to any final fraction of a Warrant Share called for upon the exercise of any Warrant or Warrants, the Company shall pay a cash adjustment to the holders of the Warrants in respect of such final fraction in an amount equal to the same fraction of the Closing Price of a Warrant Share, as determined by the Company on the basis of the Closing Price per share of Common Stock on the business day next preceding the date of such exercise. The holder of each Warrant Certificate, by his acceptance of the Warrant Certificate, shall expressly waive any right to receive any fractional Warrant Share upon exercise of the Warrants. All calculations under this Section 4.10 shall be made to the nearest hundredth of a share. ARTICLE V SPLIT UP, COMBINATION, EXCHANGE, TRANSFER AND CANCELLATION OF WARRANT CERTIFICATES Section 5.1. Split Up, Combination, Exchange and Transfer of Warrant Certificates. Subject to Article II hereof, Warrant Certificates, subject to the provisions of Section 5.2, may be split up, combined or exchanged for other Warrant Certificates of the same type representing a like aggregate number of Warrants or may be transferred in whole or in part. Any holder desiring to split up, combine or exchange a Warrant Certificate or Warrant Certificates shall make such request in writing delivered to the Company and shall surrender the Warrant Certificate or Warrant Certificates so to be split up, combined or exchanged. Upon any such surrender for split up, combination, exchange or transfer, the Company shall execute and deliver to the person entitled thereto a Warrant Certificate or Certificates, as the case may be, as so requested. Section 5.2. Cancellation of Warrant Certificates. Any Warrant Certificate surrendered upon the exercise of Warrants or for split up, combination, exchange or transfer, or purchased or otherwise acquired by the Company, shall be canceled and shall not be reissued by the Company; and, except as provided in Section 3.5 hereof in case of the exercise of less than all of the Warrants evidenced by a Warrant Certificate or in Section 5.1 in case of a split up, combination, exchange or transfer, no Warrant Certificate shall be issued hereunder in lieu of such cancelled Warrant Certificate. ARTICLE VI HOLDER REPRESENTATION AND WARRANTIES Section 6.1. Purchase for Investment. The Holder is (a) acquiring the Warrants and the Warrant Shares for Holder's own account and not with a view to the distribution thereof in violation of the securities laws of the United States or any state thereof, provided that the disposition of Holder's property shall at all times be within Holder's control, and (b) is an "accredited investor" as defined in Rule 501 (a) of Regulation D under the Securities Act and 11 able to evaluate the merits and risks of the investment. Holder understands that the Warrants and the Warrant Shares have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or in an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law. ARTICLE VII MISCELLANEOUS Section 7.1. Changes to Agreement. The Company, when authorized by its Board of Directors, may amend or supplement this Agreement with the written consent of the Holder or Holders of a majority of the outstanding Warrants. Section 7.2. Assignment. All the covenants and provisions of this Agreement by or for the benefit of the Company shall bind and inure to the benefit of their respective successors and assigns. Section 7.3. Successor to Company. The Company will not merge or consolidate with or into any other corporation or sell or otherwise transfer its property, assets and business substantially as an entirety to a successor corporation, unless the corporation resulting from such merger, consolidation, sale or transfer (if not the Company) shall expressly assume, by supplemental agreement satisfactory in form and substance to the Holders and delivered to the Holders, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company. Section 7.4. Notices. All notices and other communications provided for or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by facsimile or overnight courier, addressed as follows: If to the Company, to: Pacific Aerospace & Electronics, Inc. 430 Olds Station Road Wenatchee, WA 98801 Attn: President Fax: (509) 667-9696 With copies to: Pacific Aerospace & Electronics, Inc. 110 Main Street, Suite 100 Edmonds, WA 98020 Attn: General Counsel Fax: (425) 774-0103 12 Milbank, Tweed, Hadley & McCloy LLP 601 South Figueroa Street, 30th Floor Los Angeles, CA 90017 Attn: Kenneth J. Baronsky, Esq. Fax: (213) 629-5063 If to the Holder, if addressed to such Holder at the address set forth on the signature page hereto. Failure to file any certificate or notice or to mail any notice, or any defect in any certificate or notice pursuant to this Agreement shall not affect in any way the rights of any holder of a Warrant Certificate or the legality or validity of any adjustment made pursuant to Section 4.1 hereof, or any transaction giving rise to any such adjustment, or the legality or validity of any action taken or to be taken by the Company. Section 7.5. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be governed by the laws of the State of New York without regard to principles of conflicts of laws thereof. Section 7.6. Standing. Nothing in this Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company and the Holder of the Warrant Certificates any right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement contained herein; and all covenants, conditions, stipulations, promises and agreements contained in this Agreement shall be for the sole and exclusive benefit of the Company and their successors, and the Holder of the Warrant Certificates. Section 7.7. Headings. The descriptive headings of the articles and sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 7.8. Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. Section 7.9. Availability of the Agreement. The Company shall keep copies of this Agreement available for inspection by holders of Warrants during normal business hours. Copies of this Agreement may be obtained upon written request addressed to the Company at the address set forth in Section 7.4 hereof. Section 7.10. Entire Agreement. This Agreement, including the Exhibits referred to herein and the other writings specifically identified herein or contemplated hereby, is complete, reflects the entire agreement of the parties with respect to its subject matter, and supersedes all previous written or oral negotiations, commitments and writings. Section 7.11. Rights of Warrant Holders. No Warrant Certificate shall entitle the holder thereof to any of the rights of a stockholder of the Company, including, without limitation, the 13 right to vote, to receive dividends and other distributions, to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company. IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the parties as of the day and year first above written. PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington corporation By: /s/ Donald A. Wright ----------------------------------------- Name: Donald A. Wright Title: President and Chief Executive Officer HOLDER: FIRST ALBANY CORPORATION By: /s/ Frank Lunn ----------------------------------------- Name: Frank Lunn Title: Senior Vice President Notice Address: First Albany Corporation FAC/Equities One Penn Plaza, 42nd Floor New York, NY 10119-4000 Attn: Frank P. Lunn III Phone: (212) 273-7140 Fax: (212) 273-7320 14 EXHIBIT A Form of Warrant Certificate NEITHER THE ISSUANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE ISSUANCE OF ANY SECURITIES ISSUABLE UPON EXERCISE HEREOF HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR PURSUANT TO THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT AND THE RULES AND REGULATIONS THEREUNDER OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. No. FAC- _______ April 9, 2001 Certificate for _________Shares NOT EXERCISABLE AFTER 5:00 P.M., New York TIME, ON April 9, 2006 PACIFIC AEROSPACE & ELECTRONICS, INC. COMMON STOCK PURCHASE WARRANT CERTIFICATE THIS CERTIFIES that _____________________ or its assigns is the holder of this Warrant which represents the right to purchase [____________] fully paid and non-assessable shares of Common Stock, par value $.001 per share (the "Common Stock"), of Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), at an initial exercise price (the "Exercise Price") equal to $.4062 per share, at the times provided in the Warrant Agreement (as hereinafter defined), by surrendering this Warrant Certificate, with the Election to Purchase attached hereto duly executed and by paying in full the Exercise Price. Payment of the Exercise Price may be made at the option of the holder hereof by (i) cash, certified check or a wire transfer in same day funds in an amount equal to the then applicable Exercise Price multiplied by the number of Warrant Shares then being purchased, (ii) delivery to the Company of that number of shares of Common Stock, duly endorsed, having an aggregate Fair Market Value equal to the then applicable Exercise Price multiplied by the number of Warrant Shares then being purchased or (iii) by any combination of (i) and (ii). In the alternative, the holder of a Warrant Certificate may exercise its right to purchase some or all of the Warrant Shares subject to such Warrant Certificate, on a net basis, such that, without the exchange of any funds, such holder receives that number of Warrant Shares subscribed to pursuant to such Warrant Certificate less that number of shares of Common Stock having an aggregate Fair Market Value at the Date of Exercise equal to the aggregate Exercise Price that would otherwise have been paid by such holder for the number of Warrant Shares subscribed to pursuant to such Warrant Certificate. No Warrant may be exercised after 5:00 P.M., New York time, on April 9, 2006, (the "Expiration Date"). All Warrants evidenced hereby shall thereafter become void, subject to the terms of the Warrant Agreement. Prior to the Expiration Date, subject to any applicable laws, rules or regulations restricting transferability and to any restriction on transferability that may appear on this Warrant Certificate and in accordance with the terms of the Warrant Agreement, the holder shall be entitled to transfer this Warrant Certificate, in whole or in part, upon surrender of this Warrant Certificate to the Company with the Assignment on the reverse hereof. Upon any such transfer, a new Warrant Certificate or Warrant Certificates representing the same aggregate number of Warrants will be issued in accordance with instructions in the form of assignment. Upon the exercise of less than all of the Warrants evidenced by this Warrant Certificate, there shall be issued to the holder a new Warrant Certificate in respect of the Warrants not exercised. Prior to the Expiration Date, the holder shall be entitled to exchange this Warrant Certificate, with or without other Warrant Certificates, for another Warrant Certificate or Warrant Certificates for the same aggregate number of Warrants, upon surrender of this Warrant Certificate to the Company as set forth in the Warrant Agreement. Upon certain events provided for in the Warrant Agreement, the Exercise Price and the number of shares of Common Stock issuable upon the exercise of each Warrant are required to be adjusted. No fractional shares will be issued upon the exercise of Warrants. As to any final fraction of a share which the holder of one or more Warrant Certificates, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Company shall pay the cash value thereof determined as provided in the Warrant Agreement. This Warrant Certificate is issued under and in accordance with the Warrant Agreement dated as of April 9, 2001 between the Company and the holder and is subject to the terms and provisions contained in said Warrant Agreement, to all of which terms and provisions the holder consents by acceptance hereof. All capitalized terms not defined herein shall have the meaning set forth in the Warrant Agreement. This Warrant Certificate shall not entitle the holder to any of the rights of a stockholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to attend or receive any notice of meetings of stockholders or any other proceedings of the Company. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its facsimile Corporate Seal. PACIFIC AEROSPACE & ELECTRONICS, INC. By: ------------------------------------- Name: Donald A. Wright Title: President and Chief Financial Officer Attest: By: ------------------------------------- Name: Sheryl A. Symonds Title: Secretary Form of Election To Purchase The undersigned hereby irrevocably elects to exercise this Warrant with respect to [________________] shares of Common Stock represented by this Warrant Certificate and to purchase such shares of Common Stock issuable upon the exercise of said Warrant, and requests that Certificates for such shares be issued and delivered as follows: ISSUE TO:_______________________________________________________________________ (NAME) ________________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) ________________________________________________________________________________ (SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER) DELIVER TO: ____________________________________________________________________ (NAME) at _____________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) If the number of shares hereby purchased is less than all the shares represented by this Warrant Certificate, the undersigned requests that a new Warrant Certificate representing the number of full shares not exercised be issued and delivered as set forth above. In full payment of the exercise price with respect to the shares purchased and transfer taxes, if any, the undersigned hereby tenders payment of $______ by (i) $_______ in cash, certified check or wire transfer in same day funds, (ii) surrender to the Company of certificate no(s) ____________ representing ______ shares of Common Stock, (iii) a combination of (i) an (ii) or (iv) purchasing the shares on a net basis such that the number of shares of Common Stock otherwise receivable by the holder pursuant to the Warrants exercised shall be reduced by the number of shares of Common Stock having an aggregate Fair Market Value equal to the exercise price with respect to the number of shares purchased. Date:_________________, _____ __________________________________________ Signature (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) PLEASE INSERT SOCIAL SECURITY OR TAX I.D. NUMBER OF HOLDER __________________________________________ Assignment FOR VALUE RECEIVED, the undersigned hereby irrevocably sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned represented by the within Warrant Certificate, with respect to the number of shares set forth below: Name of Assignee Address No. of Shares and does hereby irrevocably constitute and appoint ___________________________, Attorney, to make such transfer on the books of Pacific Aerospace & Electronics, Inc. maintained for that purpose, with full power of substitution in the premises. Date:_________________, _____ ___________________________________ Signature EX-4.36 3 dex436.txt WARRANT CERTIFICATE DATED APRIL 9, 2001 EXHIBIT 4.36 Warrant Certificate NEITHER THE ISSUANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE ISSUANCE OF ANY SECURITIES ISSUABLE UPON EXERCISE HEREOF HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR PURSUANT TO THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT AND THE RULES AND REGULATIONS THEREUNDER OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. No. FAC-1 April 9, 2001 Certificate for 694,074 Shares NOT EXERCISABLE AFTER 5:00 P.M., NEW YORK TIME, ON APRIL 9, 2006 PACIFIC AEROSPACE & ELECTRONICS, INC. COMMON STOCK PURCHASE WARRANT CERTIFICATE THIS CERTIFIES that First Albany Corporation or its assigns is the holder of this Warrant which represents the right to purchase 694,074 fully paid and non-assessable shares of Common Stock, par value $.001 per share (the "Common Stock"), of Pacific Aerospace & Electronics, Inc., a Washington corporation (the "Company"), at an initial exercise price (the "Exercise Price") equal to $.4062 per share, at the times provided in the Warrant Agreement (as hereinafter defined), by surrendering this Warrant Certificate, with the Election to Purchase attached hereto duly executed and by paying in full the Exercise Price. Payment of the Exercise Price may be made at the option of the holder hereof by (i) cash, certified check or a wire transfer in same day funds in an amount equal to the then applicable Exercise Price multiplied by the number of Warrant Shares then being purchased, (ii) delivery to the Company of that number of shares of Common Stock, duly endorsed, having an aggregate Fair Market Value equal to the then applicable Exercise Price multiplied by the number of Warrant Shares then being purchased or (iii) by any combination of (i) and (ii). In the alternative, the holder of a Warrant Certificate may exercise its right to purchase some or all of the Warrant Shares subject to such Warrant Certificate, on a net basis, such that, without the exchange of any funds, such holder receives that number of Warrant Shares subscribed to pursuant to such Warrant Certificate less that number of shares of Common Stock having an aggregate Fair Market Value at the Date of Exercise equal to the aggregate Exercise Price that would otherwise have been paid by such holder for the number of Warrant Shares subscribed to pursuant to such Warrant Certificate. No Warrant may be exercised after 5:00 P.M., New York time, on April 9, 2006, (the "Expiration Date"). All Warrants evidenced hereby shall thereafter become void, subject to the terms of the Warrant Agreement. Prior to the Expiration Date, subject to any applicable laws, rules or regulations restricting transferability and to any restriction on transferability that may appear on this Warrant Certificate and in accordance with the terms of the Warrant Agreement, the holder shall be entitled to transfer this Warrant Certificate, in whole or in part, upon surrender of this Warrant Certificate to the Company with the Assignment on the reverse hereof. Upon any such transfer, a new Warrant Certificate or Warrant Certificates representing the same aggregate number of Warrants will be issued in accordance with instructions in the form of assignment. Upon the exercise of less than all of the Warrants evidenced by this Warrant Certificate, there shall be issued to the holder a new Warrant Certificate in respect of the Warrants not exercised. Prior to the Expiration Date, the holder shall be entitled to exchange this Warrant Certificate, with or without other Warrant Certificates, for another Warrant Certificate or Warrant Certificates for the same aggregate number of Warrants, upon surrender of this Warrant Certificate to the Company as set forth in the Warrant Agreement. Upon certain events provided for in the Warrant Agreement, the Exercise Price and the number of shares of Common Stock issuable upon the exercise of each Warrant are required to be adjusted. No fractional shares will be issued upon the exercise of Warrants. As to any final fraction of a share which the holder of one or more Warrant Certificates, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Company shall pay the cash value thereof determined as provided in the Warrant Agreement. This Warrant Certificate is issued under and in accordance with the Warrant Agreement dated as of April 9, 2001 between the Company and the holder and is subject to the terms and provisions contained in said Warrant Agreement, to all of which terms and provisions the holder consents by acceptance hereof. All capitalized terms not defined herein shall have the meaning set forth in the Warrant Agreement. This Warrant Certificate shall not entitle the holder to any of the rights of a stockholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to attend or receive any notice of meetings of stockholders or any other proceedings of the Company. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its facsimile Corporate Seal. PACIFIC AEROSPACE & ELECTRONICS, INC. By: /s/ Donald A. Wright ------------------------------------- Name: Donald A. Wright Title: President and Chief Financial Officer Attest: By: /s/ Sheryl A. Symonds ------------------------------------- Name: Sheryl A. Symonds Title: Secretary Form of Election To Purchase The undersigned hereby irrevocably elects to exercise this Warrant with respect to [________________] shares of Common Stock represented by this Warrant Certificate and to purchase such shares of Common Stock issuable upon the exercise of said Warrant, and requests that Certificates for such shares be issued and delivered as follows: ISSUE TO:_______________________________________________________________________ (NAME) ________________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) ________________________________________________________________________________ (SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER) DELIVER TO: ____________________________________________________________________ (NAME) at _____________________________________________________________________________ (ADDRESS, INCLUDING ZIP CODE) If the number of shares hereby purchased is less than all the shares represented by this Warrant Certificate, the undersigned requests that a new Warrant Certificate representing the number of full shares not exercised be issued and delivered as set forth above. In full payment of the exercise price with respect to the shares purchased and transfer taxes, if any, the undersigned hereby tenders payment of $______ by (i) $_______ in cash, certified check or wire transfer in same day funds, (ii) surrender to the Company of certificate no(s) ____________ representing ______ shares of Common Stock, (iii) a combination of (i) an (ii) or (iv) purchasing the shares on a net basis such that the number of shares of Common Stock otherwise receivable by the holder pursuant to the Warrants exercised shall be reduced by the number of shares of Common Stock having an aggregate Fair Market Value equal to the exercise price with respect to the number of shares purchased. Date:_________________, _____ __________________________________________ Signature (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) PLEASE INSERT SOCIAL SECURITY OR TAX I.D. NUMBER OF HOLDER __________________________________________ Assignment FOR VALUE RECEIVED, the undersigned hereby irrevocably sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned represented by the within Warrant Certificate, with respect to the number of shares set forth below: Name of Assignee Address No. of Shares and does hereby irrevocably constitute and appoint ____________________________, Attorney, to make such transfer on the books of Pacific Aerospace & Electronics, Inc. maintained for that purpose, with full power of substitution in the premises. Date:_________________, _____ _________________________________ Signature -----END PRIVACY-ENHANCED MESSAGE-----