<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Filed Pursuant To Rule 424(a)
Registration No. 333-56833
SUBJECT TO COMPLETION
DATED JULY 21, 1998
5,400,000 SHARES
ARGO-TECH GROUP, INC.
COMMON SHARES
------------------
Of the 5,400,000 Common Shares, without par value (the "Common Shares"),
being offered hereby (the "Offering"), 3,600,000 shares are being sold by
Argo-Tech Group, Inc. ("Argo-Tech" or the "Company") and 1,800,000 shares are
being sold by a selling shareholder (the "Selling Shareholder"). See "Principal
and Selling Shareholder." Prior to the Offering, there has been no public market
for the Common Shares. It is currently estimated that the initial public
offering price will be between $13.00 and $15.00 per share. See "Underwriting"
for the factors considered in determining the initial public offering price.
Application has been made to have the Common Shares listed on the New York Stock
Exchange under the symbol " ".
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total (2).............. $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses estimated at $ , payable by the Company.
(2) The Company and the Selling Shareholder have granted the Underwriters a
30-day option to purchase up to 810,000 additional Common Shares solely to
cover over-allotments, if any. To the extent that the option is exercised,
the Underwriters will offer the additional shares at the Price to Public
shown above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company, and Proceeds to
the Selling Shareholder will be $ , $ , $ and $ ,
respectively. See "Underwriting".
------------------
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the Common Shares offered hereby will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1998.
BT Alex. Brown McDonald & Company
Securities, Inc.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 2
The Company's logo is at the top of the page. There is a photograph of a
large commercial aircraft. Photographs labeled "Main Engine Pump," "Boost and
Transfer Pump," "Hydraulic Motor" and "Fuel System Component Gate Assembly"
point to the aircraft, indicating where such Company-manufactured equipment is
used.
------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE COMMON SHARES IN THE OPEN MARKET. FOR A DISCUSSION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
As used herein, unless the context otherwise indicates, references to the
"Company" or "Argo-Tech" refer to Argo-Tech Group, Inc., and its direct and
indirect wholly owned subsidiaries (the "Subsidiaries"), including Argo-Tech
Corporation ("ATC") and J.C. Carter Company ("Carter"). Unless otherwise
indicated or the context otherwise requires, all share and per-share data in
this Prospectus and all other information relating to the Offering (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) gives effect to the
9.2157-for-1 share split of the Common Shares (the "Share Split") and (iii)
gives effect to the Reorganization (as defined). As used herein, "large
commercial aircraft" refers to jet aircraft manufactured outside of the former
Soviet bloc, capable of seating 100 or more passengers, "large commercial
aircraft engines" refers to commercial jet engines manufactured outside of the
former Soviet bloc that have 10,000 pounds of thrust or more, and "airframes"
refers to jet airframes manufactured outside of the former Soviet bloc.
THE COMPANY
The Company is a leading designer, manufacturer and servicer of high
performance fuel flow devices for the aerospace industry. The Company provides a
broad range of products and services to substantially all commercial and
domestic military engine and airframe manufacturers, to airlines worldwide and
to the U.S. and certain foreign militaries. The Company is the world's leading
supplier of main engine fuel pumps to the commercial aircraft industry and is a
leading supplier of airframe products and aerial refueling systems. As of
December 31, 1997, the Company's main engine fuel pumps were used in
approximately 8,500, or two-thirds, of the large commercial aircraft in service
throughout the world and during calendar year 1997 the Company received orders
for approximately 74% of all new main engine fuel pumps ordered by large
commercial engine manufacturers worldwide. The Company estimates that one or
more of its airframe fuel pumps or accessories are installed on over 80% of all
large commercial and U.S. designed military aircraft currently in use. Aerial
refueling components manufactured by the Company are, or are scheduled to be,
installed in 100% of the U.S. designed military aircraft equipped with aerial
refueling capabilities. The Company is also a leading manufacturer of components
for ground fueling systems and estimates that one or more of its fueling
hydrants, couplers and nozzles are installed in approximately 65% of airports
worldwide.
Main engine fuel pumps are precision mechanical pumps, mounted to the
aircraft's engines, that maintain the flow of fuel to the engine at a precise
rate and pressure. Airframe fuel pumps and airframe accessories are used to
transfer fuel to the engine systems and to shift and control fuel between tanks
in order to maintain aircraft balance. Aerial refueling systems permit military
aerial tankers to refuel fighter, bomber and other military aircraft while in
flight. Ground fueling systems transfer fuel from fueling trucks and underground
tanks to the underwing fuel receptacle of the aircraft. Sales to original
equipment manufacturers ("OEMs") provide the Company with a platform for its
substantial aerospace aftermarket business, which accounted for approximately
49% of its net revenues for the 27 week period ended May 2, 1998.
The Company expects the airline industry to grow over the next several
years as many key indicators of demand -- airline traffic and profitability,
aircraft utilization and firm aircraft orders -- remain favorable. According to
Boeing's 1998 Current Market Outlook (the "Boeing Report"), world air traffic
grew at a rate of 6.1% in 1997 and is expected to increase by an average of 5.0%
per year over the next ten years. The Airline Monitor, an industry trade
publication, reports that commercial airlines are currently experiencing
historically high passenger capacity ratios of approximately 70%, which suggests
that the industry is bordering on a capacity shortage. This potential shortage
is evidenced by increased demand for new aircraft as well as for spare parts and
repair and overhaul services. Moreover, delayed airline retirements of existing
aircraft as well as conversions from retired commercial passenger to freight
carrier service can extend the normal life cycle of an aircraft from 25 years to
35 years, which in turn increases and extends the demand for typically higher
margin aftermarket services. Management believes that these favorable industry
conditions will continue for the near term. Unlike commercial aerospace demand,
which has been susceptible to regular business cycles, demand for military
aerospace products is primarily driven by the requirements of the defense
industry and government spending. In addition, demand is tied to specific
military aircraft programs which typically call for steady, low-rate production
volumes.
1
<PAGE> 4
From fiscal 1995 to fiscal 1997, the Company's sales, adjusted operating
income and adjusted net income increased from $86.7 million, $15.1 million and
$2.2 million, respectively, to $117.1 million, $28.2 million and $8.8 million,
respectively, representing compound annual growth rates of 16.2%, 36.7% and
100.0%, respectively. Excluding the acquisition of Carter (the "Acquisition"),
the Company's sales, adjusted operating income and adjusted net income increased
to $113.3 million, $27.7 million and $9.0 million, representing compound annual
growth rates of 14.3%, 35.5% and 102.3% respectively. For the 27 week period
ended May 2, 1998, the Company's sales, adjusted operating income and adjusted
net income increased 61.3%, 83.5% and 65.7% over the comparable prior period, to
$85.8 million, $21.1 million and $5.8 million, respectively. Adjusted operating
income and adjusted net income exclude charges for the amortization of inventory
step-up related to the Acquisition amounting to $1.5 million ($0.9 million net
of tax) and $9.0 million ($5.3 million net of tax) for fiscal 1997 and the 27
week period ended May 2, 1998, respectively. Operating income and net income
were $26.7 million and $7.9 million, respectively, for fiscal 1997 and $12.1
million and $0.5 million, respectively, for the 27 week period ended May 2,
1998. Excluding the Acquisition, for the 27 week period ended May 2, 1998, the
Company's sales, operating income and net income increased 15.0%, 55.7% and
120.0%, respectively, over the comparable prior period.
From fiscal 1995 to fiscal 1997, the Company's debt increased from $118.6
million to $248.9 million. This increase is attributable to the Acquisition and
the repurchase of the Company's preferred stock, and payment of the related
accrued dividends, all of which occurred in fiscal 1997.
COMPETITIVE STRENGTHS
The Company believes it has a strong competitive position as a result of
the following factors:
- Strong Industry Position and Largest Installed Base. Argo-Tech is the
world's leading supplier of main engine fuel pumps for commercial use
with the largest installed base (approximately 30,000) in the aerospace
industry. The Company is a leading supplier of military main engine fuel
pumps and airframe fuel pumps and accessories with an installed base of
over 215,000. In addition, the company has an installed base of 145,000
other engine pumps and airframe accessories, including fuel gear motors
and small engine fuel pumps for helicopters, turboprop and business
aircraft as well as an installed base of 5,800 aerial refueling
components.
- Recurring and Profitable Aftermarket Business. The strong demand for the
Company's aftermarket parts and services is directly related to the
Company's extensive installed base. The Company's spare parts, repair and
overhaul services can often generate six or more times the aggregate
sales of the OEM program at significantly higher margins, since most
modern aircraft have a useful life of 25 years or more, and require
regular maintenance. Replacement parts for airframe and engine components
must be certified or accepted by the Federal Aviation Administration (the
"FAA"), the United States Department of Defense (the "DOD") and similar
agencies in foreign countries, as well as by the specific airline
customer. Accordingly, these parts are almost exclusively provided by the
original manufacturer of the component in order to avoid the time and
expense of recertification. The Company's aerospace aftermarket, military
and industrial sales constituted 78% of total sales for the 27 week
period ended May 2, 1998, providing the Company with a recurring and
profitable revenue base.
- Technological Leadership and New Product Development. Management
believes that the Company is a technological leader in its industry. The
Company maintains its technological leadership by operating
state-of-the-art facilities and employing over 110 engineers. The Company
also staffs an on-site design engineer at two of its major OEM customers.
These on-site engineers, in combination with its engineering and design
staffs, assist the Company in the development of innovative products that
address the needs and requirements of its customers and enhance its
ability to win new contracts. As a result of this technological
leadership, the Company's main engine fuel pumps have been selected for
22 of the 34 large commercial aircraft engine programs put into
production over the last 20 years.
- Strong Relationships with Customers Worldwide. The Company has developed
strong relationships with its OEM customers (including General Electric
Company ("GE"), Pratt and Whitney and Rolls-Royce), airline customers
(including American Airlines, Lufthansa, Japan Air Lines and United
Airlines) and freight carrier customers (including Federal Express and
United Parcel Service). Specifically, the
2
<PAGE> 5
Company has been a major supplier of main engine fuel pumps to Pratt and
Whitney for over 40 years, and has maintained its relationship with
United Airlines since 1962. Management believes that the Company's
reputation for quality and service in the aftermarket has further
solidified its relationships with its airline and freight carrier
customers. In addition to purchasing parts and services in the
aftermarket, these airline customers are also influential in the engine
OEM's supplier selection process, enhancing the Company's ability to
secure positions on new engine platforms. The Company has expanded these
strong customer relationships through its recent acquisition of Carter.
- Superior Quality and Service. The Company believes it offers its
customers superior quality and service by adhering to its operating
philosophy of time, performance and value. Argo-Tech believes that it can
respond to its customers' needs faster and more efficiently than any of
its competitors. For example, ATC achieves over 90% compliance with
product development and customer schedule requirements. In addition,
management believes, based on customer feedback, that its main engine
fuel pumps cost, on average, approximately 20% less to operate per flight
hour than the pumps of its nearest competitor.
- Experienced Management Team. The Company has become one of the largest
and most profitable manufacturers of high performance fuel flow devices
for the aerospace industry, largely through the leadership and vision of
Michael Lipscomb, Argo-Tech's Chairman and CEO. Mr. Lipscomb and five
other members of senior management have been with the Company since 1981,
and together have 134 years of combined industry experience.
BUSINESS STRATEGY
The Company's business strategy includes the following key components:
- Enhance Leadership Positions in Fuel Flow Devices. The Company plans to
enhance its leadership positions in the design, manufacture and sale of
fuel flow devices by capitalizing on its technological innovation, strong
customer relationships and reputation for quality and service, as well as
by introducing new products.
- Grow Through Acquisitions. The Company plans to pursue strategic
acquisitions in the aerospace and industrial fluid flow device
industries. The Company intends to become the leading aerospace fuel flow
system provider in order to capitalize on the industry trend toward
system integration. For example, the recent acquisition of Carter
expanded the Company's product lines to include aerial refueling
components, aerospace valves and other fuel transfer control components
and enhanced its base from which to design, manufacture and deliver a
broader range of fuel transfer systems and components.
- Expand Industrial Product Lines. The Company plans to capitalize on its
reputation for quality and service and apply its technological leadership
in the aerospace business to expand into specific industrial markets. The
Company's long-term relationships with GE, Pratt and Whitney and
Rolls-Royce have already led to development and production contracts for
industrial products such as lube and scavenge pumps and fuel flow
dividers. In addition, the Company intends to expand the sales and
development of its ground fueling products.
- Continue to Increase Profitability. The Company increased its operating
margin from 12.0% in fiscal 1993 to 22.8% in fiscal 1997 largely due to
management programs to reduce inventory levels, improve quality and
on-time performance, reduce manufacturing lead times, reduce staffing
redundancies and capitalize on its profitable aftermarket product
offering. Management continually reviews opportunities to increase
profitability through further reducing costs, increasing manufacturing
efficiencies and optimizing its product mix.
ARGO-TECH HISTORY
The Company, an Ohio corporation, was formed in 1996 and will,
contemporaneous with the Offering, become the successor to AT Holdings
Corporation, a Delaware corporation ("ATH"). ATH was formed in 1990 to acquire
ATC, which acquired the Power Accessories Division of TRW Inc. in 1986 (the "TRW
Transaction"). The Company and its predecessors have more than 50 years of
experience in the aerospace industry.
The Company's executive offices and principal production facilities are
located at 23555 Euclid Avenue, Cleveland, Ohio 44117-1795 (the "Cleveland
Facility") and its telephone number is (216) 692-6000.
3
<PAGE> 6
THE OFFERING
Common Shares offered by the
Company.......................... 3,600,000 shares
Common Shares offered by the
Selling Shareholder.............. 1,800,000 shares
Common Shares to be outstanding
after the Offering............... 15,611,540 shares(1)
Use of Proceeds.................. The aggregate net proceeds to the Company
from the Offering are expected to be
approximately $45.9 million. The Company
intends to use such net proceeds to repay
existing bank debt. See "Use of Proceeds".
The Company will not receive any proceeds
from the Common Shares to be sold by the
Selling Shareholder.
NYSE Symbol......................
- ---------------
(1) Does not include (a) the exercise of outstanding options to purchase 371,070
Common Shares under the Company's 1991 Performance Stock Option Plan and
1991 Management Incentive Stock Option Plan or options to acquire 779,998
and 98,414 Common Shares to be granted at the initial public offering price
in conjunction with the termination of the Employee Stock Ownership Plan
(the "ESOP") and 1997 Stock Appreciation Rights Plan (the "SAR Plan"),
respectively.
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" on page 7 for risks involved with an
investment in the Common Shares offered hereby.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary consolidated historical financial
and other data of Argo-Tech for (i) the fiscal years 1995 through 1997, which
have been derived from Argo-Tech's audited consolidated financial statements for
those years, (ii) fiscal 1997, unaudited pro forma for the Acquisition and the
Offering and (iii) the 27 weeks ended May 3, 1997 and May 2, 1998, which have
been derived from Argo-Tech's unaudited consolidated financial statements for
those periods, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the unaudited interim periods.
Results for the 27 weeks ended May 2, 1998 are not necessarily indicative of
results that may be expected for the entire year. Argo-Tech's fiscal year ends
on the last Saturday in October and is identified according to the calendar year
in which it ends. For example, the fiscal year ended October 25, 1997 is
referred to as "fiscal 1997." All of the fiscal years presented consisted of
52-week periods. The information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Consolidated Financial Information," "Unaudited Pro Forma
Consolidated Financial Information" and the consolidated financial statements
and notes thereto included elsewhere herein. For information concerning an
expected non-cash, non-recurring charge for Benefits Restructuring (as defined),
as well as the Company's anticipated results for the third fiscal quarter of
1998, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Expected Charge from Benefits Restructuring,"
"-- Anticipated Results for the Fiscal Quarter Ending August 1, 1998" and
"Forward-Looking Information."
<TABLE>
<CAPTION>
27 WEEKS ENDED
FISCAL YEAR ENDED --------------------
-------------------------------- PRO FORMA MAY 3, MAY 2,
1995 1996 1997 1997 1997 1998(G)
-------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $ 86,671 $ 96,437 $117,086 $160,102 $ 53,159 $ 85,835
Operational costs..................... 54,222 57,882 69,458 91,962 31,891 46,524
Amortization of inventory step-up..... -- -- 1,496 -- -- 8,976
-------- -------- -------- -------- -------- --------
Cost of revenues...................... 54,222 57,882 70,954 91,962 31,891 55,500
-------- -------- -------- -------- -------- --------
Gross profit.......................... 32,449 38,555 46,132 68,140 21,268 30,335
Operating expenses.................... 17,390 19,307 19,466 34,939 9,719 18,276
-------- -------- -------- -------- -------- --------
Income from operations................ 15,059 19,248 26,666 33,201 11,549 12,059
Interest expense...................... 11,924 10,138 12,827 18,028 5,640 11,337
Other, net............................ (588) (142) (388) 76 (237) (216)
Income tax provision.................. 1,553 3,608 4,841 5,869 2,643 477
Extraordinary loss(a)................. -- -- 1,529 -- -- --
-------- -------- -------- -------- -------- --------
Net income............................ $ 2,170 $ 5,644 $ 7,857 $ 9,228 $ 3,503 $ 461
======== ======== ======== ======== ======== ========
Income (loss) per share to common
before extraordinary loss:(b)
Basic............................. $ (.59) $ (.31) $ .32 $ .49 $ .21 $ .05
Diluted........................... (.59) (.31) .31 .48 .20 .04
Net income (loss) per share to
common:(b)
Basic............................. $ (.59) $ (.31) $ .16 $ .49 $ .21 $ .05
Diluted........................... (.59) (.31) .16 .48 .20 .04
Weighted average number of shares
outstanding:
Basic............................. 8,867 9,262 9,621 15,644 9,614 9,952
Diluted........................... 8,867 9,262 9,942 15,970 9,928 10,272
OTHER DATA:
Gross margin.......................... 37.4% 40.0% 39.4% 42.6% 40.0% 35.3%
Adjusted gross margin(c).............. 37.4 40.0 40.7 42.6 40.0 45.8
EBITDA(d)............................. $ 22,231 $ 26,710 $ 34,191 $ 47,039 $ 15,062 $ 19,213
EBITDA margin(e)...................... 25.6% 27.7% 29.2% 29.4% 28.3% 22.4%
Adjusted EBITDA(d).................... $ 23,901 $ 29,039 $ 38,607 $ 49,959 $ 16,751 $ 30,246
Adjusted EBITDA margin(e)............. 27.6% 30.1% 33.0% 31.2% 31.5% 35.2%
Net cash flows provided by operating
activities.......................... $ 17,963 $ 15,983 $ 18,244 $ 3,885 $ 13,124
Net cash flows used in investing
activities.......................... (2,918) (3,355) (110,252) (798) (1,061)
Net cash flows provided by (used in)
financing activities................ (19,847) (11,041) 87,813 (7,306) (19,503)
Depreciation and amortization(f)...... 7,172 7,462 7,525 13,838 3,513 7,154
Capital expenditures.................. 2,918 3,355 2,690 2,690 798 1,061
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
MAY 2, 1998
--------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................................................................... $283,335 $283,335
Total debt................................................................................. 229,731 183,784
Shareholders' equity/(deficiency).......................................................... (26,246) 44,172
</TABLE>
(a) The extraordinary loss, net of federal income tax benefit of $1,019, relates
to the write-off of unamortized debt issuance costs of a previous credit
facility that was refinanced with the proceeds of a new credit facility on
July 18, 1997.
(b) Net income was reduced by dividends accrued on redeemable preferred stock
and accretion of redeemable common shares and ESOP shares to compute income
(loss) available to common shareholders as follows:
<TABLE>
<CAPTION>
27 WEEKS ENDED
FISCAL YEAR ENDED --------------------
-------------------------------- PRO FORMA MAY 3, MAY 2,
1995 1996 1997 1997 1997 1998
-------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary loss.... $ 2,170 $ 5,644 $ 9,386 $ 9,228 $ 3,503 $ 461
Less: accrued preferred stock
dividends..................... 3,509 3,848 1,527 1,527 1,527 --
accretion of redeemable common
shares........................ 449 756 746 -- -- --
accretion of ESOP shares........ 3,417 3,878 4,012 -- -- --
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
loss available to common
shareholders...................... (5,205) (2,838) 3,101 7,701 1,976 461
Extraordinary loss.................. -- -- 1,529 -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) available to
common shareholders............... $ (5,205) $ (2,838) $ 1,572 $ 7,701 $ 1,976 $ 461
======== ======== ======== ======== ======== ========
</TABLE>
(c) Adjusted gross margin is computed as gross profit plus amortization of
inventory step-up as a percentage of net revenues.
(d) EBITDA and Adjusted EBITDA represent income from operations plus non-cash
charges as follows:
<TABLE>
<CAPTION>
27 WEEKS ENDED
FISCAL YEAR ENDED --------------------
-------------------------------- PRO FORMA MAY 3, MAY 2,
1995 1996 1997 1997 1997 1998
-------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income from operations.............. $ 15,059 $ 19,248 $ 26,666 $ 33,201 $ 11,549 $ 12,059
Depreciation and amortization....... 7,172 7,462 7,525 13,838 3,513 7,154
-------- -------- -------- -------- -------- --------
EBITDA.............................. 22,231 26,710 34,191 47,039 15,062 19,213
Compensation expense -- ESOP........ 1,670 2,329 2,920 2,920 1,689 2,057
Amortization of inventory step-up... -- -- 1,496 -- -- 8,976
-------- -------- -------- -------- -------- --------
Adjusted EBITDA..................... $ 23,901 $ 29,039 $ 38,607 $ 49,959 $ 16,751 $ 30,246
======== ======== ======== ======== ======== ========
</TABLE>
Argo-Tech's EBITDA and Adjusted EBITDA are not intended to represent cash
flow from operations as defined by generally accepted accounting principles
and should not be considered as an alternative to net income as an indicator
of operating performance or to cash flow as a measure of liquidity.
Argo-Tech has included information concerning EBITDA and Adjusted EBITDA as
it understands that they are used by certain investors as one measure of a
borrower's historical ability to incur and service debt. EBITDA and Adjusted
EBITDA, as presented, may not be comparable to similarly titled measures
reported by other companies, since not all companies necessarily calculate
EBITDA and Adjusted EBITDA in an identical manner, and therefore are not
necessarily an accurate means of comparison between companies.
(e) EBITDA margin and Adjusted EBITDA margin is computed as EBITDA and Adjusted
EBITDA as a percentage of net revenues, respectively.
(f) Depreciation and amortization excludes deferred financing fees of $1,405,
$1,191, $887, $911, $584 and $512 for the fiscal years ended 1995, 1996,
1997, Pro forma 1997 and the 27 weeks ended May 3, 1997 and May 2, 1998,
respectively.
(g) Adjusted for the effect of the repayment of debt with the proceeds of the
Offering which would reduce interest expense by $1,068 after tax, pro forma
net income for the interim period ended May 2, 1998 is $1,529. Net income
per share to common would be $.10 basic and diluted based on weighted
average number of shares outstanding of 15,582 basic and 15,903 diluted.
6
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Shares offered by this Prospectus.
Dependence on Aerospace Industry. Substantially all of the Company's gross
profit and operating income is derived from its sales of products to the
aerospace industry. The Company designs, engineers and manufactures aircraft
components for OEMs and supplies spare parts and performs repair and overhaul
services on existing installed components for its commercial and military
customers (the "aftermarket"). The commercial OEM segment of the aerospace
industry has historically been subject to fluctuations due to general economic
conditions. A reduction in airline travel will generally result in reduced
orders for new commercial aircraft, reduced utilization of commercial aircraft
and a corresponding decrease in the Company's sales of new components, related
income and cash flow. The commercial airline industry was adversely affected by
a severe downturn during the three year period ended December 31, 1993. This
downturn resulted in record losses for the commercial airline industry and a
decrease in production of commercial engine and airframe assemblies, which
caused a corresponding decline in the aerospace industry from 1993 to 1995.
Accordingly, the Company's commercial OEM business experienced a similar
decline. In addition, aftermarket sales were negatively affected as airlines
delayed purchases of spare parts, preferring to use existing spare parts
inventory. Management believes that airlines currently maintain little or no
spare parts inventory, which should cause future aftermarket sales to remain
relatively stable even in an OEM downturn. However, there can be no assurance
that airlines will not increase their spare parts inventory in the future. Any
such increase in inventories, combined with an economic downturn, could have a
material adverse effect on the Company. In addition, the recent economic
downturn in Asia, while not currently having a material effect on the Company's
business or operations, could, in the future, significantly impact the Company's
customers and the aerospace industry generally. There can be no assurance that
such an impact would not have a material adverse effect on the Company.
Due to the relatively small number of customers for certain of the
Company's products, such customers are able to influence the Company's prices
and other terms of sale. Such influence, individually or in the aggregate, may
have a material adverse effect on the Company. Moreover, the loss of one or more
significant customers could have a material adverse effect on the Company. See
"Business -- Industry."
Government Regulation and Oversight. The aerospace industry is highly
regulated in the United States and in other countries. The Company must be
certified or accepted by the FAA, the DOD and similar agencies in foreign
countries and by individual OEMs in order to sell and service parts and
components used in specific aircraft models. If material certifications,
authorizations or approvals were revoked or suspended, the operations of the
Company would be adversely affected. In the future, new and more stringent
government regulations may be adopted or industry oversight may be heightened,
which may have a material adverse effect on the Company.
Reduction in Defense Spending; Risks Related to Government Contracts. Pro
forma for the Acquisition, in fiscal 1997 approximately 19% of the Company's
sales were related to products used in U.S. designed military aircraft. In
general, the U.S. defense budget has been declining in recent years, resulting
in reduced demand for new aircraft and spare parts. In addition, foreign
military sales are affected by U.S. Government regulations, regulations by the
purchasing foreign government and political uncertainties in the U.S. and
abroad. There can be no assurance that the U.S. defense budget will not continue
to decline or that sales of defense related items to foreign governments will
continue at present levels. In addition, the terms of defense contracts with the
U.S. Government generally permit the Government to terminate such contracts,
with or without cause, at any time. Any unexpected termination of a significant
U.S. Government contract could have a material adverse effect on the Company.
Risks Associated with Future Acquisitions. The Company's objective is to
grow through, among other things, strategic acquisitions. The Company's
acquisition strategy entails risks inherent in assessing the value, strengths,
weaknesses, contingent and other liabilities and potential profitability of
acquisition candidates and in integrating the operations of acquired businesses.
There can be no assurance that acquisition opportunities will be available, that
the Company will have access to the capital required to finance potential
acquisitions or that any business acquired will be integrated successfully or
prove profitable. See "Business -- Business Strategy -- Grow Through
Acquisitions."
7
<PAGE> 10
Risks Associated with the Company's Workforce and Suppliers; Employee
Relations. The Company's sophisticated production processes and the aerospace
industry standards imposed on its products make the Company's operations highly
dependent on an educated and trained workforce. The Company could be adversely
affected by long-term or short-term shortages of appropriately skilled
production and professional workers. All of the hourly employees at the
Cleveland Facility have been represented by the United Auto Workers Union
("UAW") since 1987. The current collective bargaining agreement, signed in 1996
after an extended period of negotiations commencing in 1994, expires on March
31, 2000. There can be no assurance that the Company will be able to negotiate a
satisfactory renewal of the collective bargaining agreement or that the
Company's employee relations will remain stable. Because the Company maintains a
relatively small inventory of finished goods and the aerospace industry operates
on relatively long production lead times, any interruption of the work force
could have a material adverse effect on the Company.
In addition, the Company's profitability is affected by the price and
continuity of supply of its raw materials and component parts. The Company, and
all other aerospace fuel pump manufacturers, rely on one supplier for CPM-10V, a
powdered metal used in the manufacture of certain pump components. If that
supply ceased to exist, the Company would be adversely affected. The Company
could also be adversely affected by factors affecting its suppliers, or by
increased costs associated with such materials or components if the Company is
unable to increase the prices of its own products. The Company maintains a
relatively small inventory of raw materials and component parts and could be
adversely affected by a curtailment of supply from its vendors. Although
management believes that alternative suppliers, or alternatives for such
materials or components, could be identified, the lengthy and expensive FAA and
OEM certification process associated with aerospace products could prevent
efficient replacement of a material or supplier and could have a material
adverse effect on the Company.
Highly Competitive Industry. The global aerospace industry is highly
competitive. The industry has experienced significant consolidation, and the
Company's competitors include several companies that have significantly greater
financial resources. The Company competes primarily with Sundstrand Corporation
("Sundstrand"), Chandler-Evans Fuel Systems, a division of Coltec Industries,
Inc. ("CECO") and Lucas Aerospace, a division of Lucas Varity ("Lucas"), in the
production of main engine fuel pumps. Competitors in the Company's other product
lines range in size from divisions of large corporations to small privately held
entities, with only one or two components in their entire product line. The
Company's primary airframe pump competitors are GEC Marconi Aerospace ("GEC
Aerospace"), Hydroaire, a division of Crane Corporation ("Hydroaire") and
Intertechnique S.A. ("Intertechnique"); the Company's primary airframe valve
competitors are Parker-Hannifin Corp. ("Parker-Hannifin"), ITT Aerospace
Controls ("ITT Aerospace") and Whittaker Controls, Inc. ("Whittaker"); the
Company's primary ground fueling competitor is Whittaker; and the Company's
primary aerial refueling competitor is Parker-Hannifin. See
"Business -- Industry."
Dependence on Key Management. The success of the Company depends upon the
efforts, abilities and expertise of its executive officers, including Michael S.
Lipscomb, its Chairman, Chief Executive Officer and President, as well as other
members of the Company's senior management team. The loss of the services of
such individuals and/or other key individuals could have a material adverse
effect on the Company. See "Management."
Dependence Upon Primary Facility. The Company believes that its success to
date has been, and future results of operations will be, dependent in large part
upon its ability to manufacture and deliver products promptly upon receipt of
orders and to provide prompt and efficient service to its customers. As a
result, any disruption of the Company's day-to-day operations could have a
material adverse effect upon the Company. The Cleveland Facility is the
Company's primary production, research and marketing facility for Argo-Tech
products and also serves as the Company's corporate headquarters. A fire, flood,
earthquake or other disaster or condition affecting the Cleveland Facility could
disable these functions. Any such damage to, or other condition interfering with
the operation of, this facility would have a material adverse effect on the
Company's business, financial position and results of operations. See
"Business -- Properties and Facilities."
Fluctuations in Operating Results; Limitations of Quarterly
Comparisons. The Company's results of operations are subject to fluctuations
from quarter to quarter due to changes in demand for its products, changes
8
<PAGE> 11
in product mix and other factors. Demand for the Company's products can vary
from quarter to quarter due to changes in demand for, and timing of deliveries
of, OEM, aftermarket and military products and services. In particular, the
timing of the Company's aftermarket sales tends not to occur on a predictable
schedule and, furthermore, these sales tend to occur in large quantities which
can significantly impact quarterly comparisons. In addition, net revenues of the
Company's products in the third and fourth quarters can be lower than the first
two quarters because of planned production shut downs at the Company's Cleveland
Facility. These changes in product mix may cause margins to vary from quarter to
quarter.
For example, in the first fiscal quarter of 1998, the Company's sales were
comparatively high due to large volumes shipped to a distributor. In addition,
the sales for this period consisted of a comparatively high percentage of
aftermarket sales. This combination of high-volume, high margin sales led to
comparatively favorable results in the first quarter, despite the amortization
charges relating to the Acquisition. However, in the second fiscal quarter of
1998, the Company's sales mix had a greater percentage of lower margin OEM sales
and, as a result, operational expenses rose despite a drop in net revenues and
the Company experienced a net loss of $975,000 for this quarterly period. A
similar fluctuation occurred in the third fiscal quarter of 1997 when, due to
comparatively high sales and a larger percentage of aftermarket sales, the
Company's net income was unusually high. As discussed in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Anticipated Results for the Fiscal Quarter Ending August 1, 1998,"
the third fiscal quarter of 1998 will not compare favorably with the third
fiscal quarter of 1997.
In addition, on September 26, 1997, ATC acquired all of the outstanding
shares of Carter for $107.6 million, including acquisition costs. Carter's
inventory was increased by $12.2 million to record inventories at their fair
value as of the date of acquisition in accordance with Accounting Principles
Board Opinion No. 16 -- "Business Combinations." Based on Carter's inventory
turnover rate, $1.5 million, $4.5 million and $4.5 million of this amount is
included in cost of revenues for the fourth quarter of 1997 and the first and
second quarters of 1998, respectively. In addition, $99.7 million of identified
intangibles and goodwill are being amortized over an 8 to 40 year period. These
amortizations increased operating expenses $0.4 million, $1.2 million and $1.3
million for the fourth quarter of 1997 and the first and second quarters of
1998, respectively.
Accordingly, year-to-year and quarter-to-quarter comparisons of quarterly
results may not be meaningful, and quarterly results during the year are not
necessarily indicative of the results that may be expected for any future period
or for the entire year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
Costs Associated with the Benefits Restructuring. In connection with the
Benefits Restructuring (as defined), the Company expects to incur non-cash,
non-recurring charges aggregating $25.2 million in compensation expense as a
result of (i) the termination of the Company's ESOP, (ii) the immediate vesting
of stock options and SARs and (iii) the conversion of the supplemental employee
retirement plan into a key employee security option plan. These charges will be
reflected in the results for the fiscal quarter in which the Offering is
consummated. There can be no assurance that such charges will be limited to the
anticipated aggregate amount described above. See "Management -- Employee
Benefit Plans."
Potential Exposure to Environmental Liabilities. The Company's business
operations and facilities are subject to a number of federal, state and local
laws and regulations, which govern, among other things, the discharge of
pollutants and hazardous substances into the air and water as well as the
handling, storage and disposal of such materials. Pursuant to certain
environmental laws, the Company as a current or previous owner or operator of
real property could be held liable for the costs of removal or remediation of
hazardous substances at such property. Environmental laws typically impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous substances.
The Company's Cleveland and Costa Mesa facilities are currently the subject
of environmental remediation regarding contamination that resulted from the
operations of the Company's predecessors in interest. Those predecessors have
indemnified the Company for substantially all costs of remediation at those
sites. There can be no assurance, however, that such parties will continue to
satisfy their respective indemnification obligations or that the Company would
not be responsible as owner and/or operator of these sites for remediation costs
that would be of material significance. Moreover, there can be no assurance that
future changes in environmental laws or the nature of the Company's operations
will not require the Company to make significant additional
9
<PAGE> 12
expenditures to ensure future environmental compliance. The Company also
recently became aware that it had not filed a required application for an
operating permit under the Federal Clean Air Act. The Company made the necessary
application but may be subject to governmental sanctions as a result of not
filing on a timely basis. See "Business -- Environmental Matters."
Product Liability. While the Company has never been a defendant in a
product liability case involving its aerospace or ground fueling products, the
Company's overall operations expose it to potential liabilities for personal
injury or death as a result of the failure of an aircraft component that has
been designed, manufactured or serviced by the Company, or the irregularity of
metal products processed or distributed by the Company. Carter is a defendant in
one product liability case involving an industrial marine product for which
Carter believes it is entitled to indemnification. While management believes
that its liability insurance is adequate to protect it from future product
liability claims, there can be no assurance that, if claims were to arise, such
insurance coverage will be adequate. Additionally, there can be no assurance
that insurance coverage can be maintained in the future at an acceptable cost.
Any such liability not covered by insurance or for which third party
indemnification is not available could have a material adverse effect on the
Company.
Substantial Leverage. The Company owns its operating businesses through
ATC. ATC is highly leveraged, with a debt to total capitalization ratio of 101%
(prior to the Offering and application of net proceeds therefrom), and its debt
service requirements are substantial. As of May 2, 1998, the Company had an
aggregate of $229.7 million of outstanding indebtedness (excluding unused
commitments) and a shareholders' deficiency of $26.2 million. Although the
indenture (the "Indenture") pursuant to which ATC's 8 5/8% Senior Subordinated
Notes due 2007 (the "Senior Subordinated Notes") were issued permits ATC and its
subsidiaries which have guaranteed the Senior Subordinated Notes to incur
additional indebtedness, there can be no assurance that such additional
financing can be obtained on terms acceptable to the Company, if at all. The
Company also has additional borrowing capacity on a revolving credit basis under
the Credit Facility (as defined). The Company has guaranteed ATC's obligations
under the Credit Facility. See "Capitalization."
ATC's high degree of leverage could have important consequences to the
Company, including the following: (i) the Company's ability to obtain additional
financing for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired in the future; (ii) a
substantial portion of ATC's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for other purposes; (iii) ATC's borrowings under
the Credit Facility are and will continue to be at variable rates of interest,
which exposes the Company to the risk of increased rates; and (iv) the Company's
flexibility to adjust to changing market conditions and ability to withstand
competitive pressures could be limited and the Company may be more vulnerable to
a downturn in general economic conditions or its business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company's ability to make scheduled payments, perform its guarantor
obligations or to refinance its obligations with respect to its indebtedness
will depend on its financial and operating performance, which, in turn, is
subject to prevailing economic conditions and to certain financial, business and
other factors beyond its control. If the Company's cash flow and capital
resources are insufficient to fund its debt service obligations, the Company may
be forced to reduce or delay capital expenditures, sell assets, obtain
additional equity capital or restructure its debt. There can be no assurance
that the Company's cash flow and capital resources will be sufficient for
payment of its indebtedness in the future. In the absence of such operating
results and resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the timing of
such sales or the adequacy of the proceeds which the Company could realize
therefrom. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Restrictive Debt Covenants. The Credit Facility and the Indenture contain a
number of covenants that, among other things, limit ATC's ability to incur
additional indebtedness, pay dividends, prepay subordinated indebtedness,
dispose of certain assets, create liens, make capital expenditures, make certain
investments or acquisitions and otherwise restrict corporate activities. The
Credit Facility and the Indenture also require ATC to comply with certain
financial ratios and tests, under which ATC will be required to achieve certain
financial and
10
<PAGE> 13
operating results. The ability of ATC to comply with such provisions may be
affected by events beyond its control. If the indebtedness under the Credit
Facility or the Indenture were to be accelerated, there can be no assurance that
the assets of the Company would be sufficient to repay in full such indebtedness
and the other indebtedness of the Company. Any refinancing of the Credit
Facility is likely to contain similar covenants.
Controlling Shareholders. The Company's management and an employee stock
ownership plan (the "ESOP") currently own approximately 36% of the Common
Shares. Mr. Masashi Yamada holds approximately 49% of the outstanding Common
Shares through AT Holdings, LLC ("AT LLC"), a domestic limited liability company
under his control, and an additional approximate 6% of the Common Shares through
YC International ("YCI"), which is a subsidiary of Yamada Corporation, a
Japanese trading company controlled by Mr. Yamada. Following the Offering, Mr.
Yamada would control approximately 32% of the Common Shares, the ESOP would hold
approximately 25% of the Common Shares, and the executive officers and directors
of the Company as a group would own approximately 4% of the Common Shares
(approximately 29%, 24% and 4%, respectively, if the Underwriters'
over-allotment option is exercised in full). Mr. Yamada and members of the
Company's management are expected to enter into a shareholders agreement prior
to the consummation of the Offering that will provide a procedure for nomination
of future directors with the probable effect of ensuring that such nominees will
be elected. Accordingly, such persons or groups, individually or in the
aggregate, have substantial control over the Company's future. See "Principal
Shareholders -- Shareholder Agreement."
Anti-Takeover Provisions. Certain provisions of the Company's Articles of
Incorporation (the "Articles") and Code of Regulations (the "Regulations") and
of the Ohio General Corporation Law could have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of the
Company. Any one of such anti-takeover provisions could discourage a third party
from attempting to acquire control of the Company. Such provisions could delay,
discourage, hinder or preclude an unsolicited acquisition of the Company, could
make it less likely that shareholders receive a premium for their shares as a
result of any such attempt and could adversely affect the market price of the
Common Shares. See "Description of Common Shares -- Ohio Law and Certain Charter
Provisions."
No Prior Public Market; Potential Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Shares and there can be
no assurance that an active trading market will develop or, if a trading market
does develop, that it will be sustained. Accordingly, no assurance can be given
as to the liquidity of the market for the Common Shares or the price at which
any sales may occur, which price will depend upon the numbers of holders
thereof, the interest of securities dealers in maintaining a market in the
Common Shares and other factors beyond the control of the Company. The initial
public offering price will be determined solely by negotiations among the
Company and representatives of the Underwriters based on several factors and
will not necessarily reflect the market price of the Common Shares after the
Offering or the price at which the Common Shares may be sold in the public
market after the Offering. In addition, the stock market has from time to time
experienced extreme price and volume volatility. These fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded. Market fluctuations may adversely affect the market price of the Common
Shares. The market price of the Common Shares could be subject to significant
fluctuations in response to the Company's operating results and other factors,
and there can be no assurance that the market price of the Common Shares will
not decline substantially below the initial public offering price. See
"Underwriting."
Shares Eligible for Future Sale. The Common Shares offered hereby will be
freely transferable by persons who are not affiliates of the Company without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"). Assuming no exercise of the Underwriters' over-allotment
option, of the 15,611,540 Common Shares outstanding upon the completion of this
Offering, 8,619,072 are freely transferable. The 6,992,468 Common Shares held by
affiliates of the Company are subject to limitations on the volume that may be
sold other than sales pursuant to a registration statement under the Securities
Act or an applicable exemption from registration thereunder, including sales
pursuant to Rule 144 promulgated thereunder. The Company, its officers,
directors and principal shareholders (other than the ESOP Trustee (as defined))
have agreed not to offer, sell or otherwise dispose of any Common Shares for a
period of 180 days from the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated. The sale or issuance or the
11
<PAGE> 14
potential for sale or issuance of such shares could have an adverse impact on
the market price of the Common Shares. See "Principal Shareholders" and
"Underwriting."
Immediate and Substantial Dilution. The initial public offering price of
the Common Shares will be substantially higher than the net tangible book value
per share of the Common Shares. Accordingly, purchasers of the Common Shares
will experience immediate and substantial dilution of $23.00 per share. See
"Dilution."
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Shares in the
Offering are expected to be approximately $45.9 million. The Company anticipates
that it will use the net proceeds to repay bank debt outstanding under the
Credit Facility. At May 2, 1998, $89.5 million was outstanding under the Credit
Facility. The borrowings under the Credit Facility currently bear interest at
LIBOR plus 1.50% and mature on July 18, 2004. Debt outstanding under the Credit
Facility was incurred in July 1997 in connection with the refinancing of a prior
credit facility originally entered into in 1990. The Company expects to
subsequently reborrow some or all of the available amounts under the Credit
Facility and use such borrowings to finance future acquisitions. The Company
will not receive any proceeds from the sale of Common Shares by the Selling
Shareholder. See "Business -- Business Strategy -- Grow Through Acquisitions."
DIVIDEND POLICY
The Company currently intends to retain earnings to support its growth
strategy and does not anticipate paying dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. The Company is a holding company and all
operations of the Company are, and are expected to continue to be, conducted
through its Subsidiaries. The covenants in certain of the Company's
Subsidiaries' debt instruments restrict the ability of the Subsidiaries to make
distributions to the Company, which materially restricts the Company's ability
to pay dividends while such obligations are outstanding. The amount of dividends
that may be paid under each of these agreements is based in part on the
operating results of the Company's Subsidiaries, and there can be no assurance
as to the amount or frequency of dividends that can be paid to the Company in
future years. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
FORWARD-LOOKING INFORMATION
This Prospectus includes forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Reform
Act")). The "safe-harbor" protections of the Reform Act are not available to
initial public offerings, including this Offering. These forward looking
statements include, but are not limited to, the statements in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Expected Charge from Benefits Restructuring" and " -- Anticipated
Results for the Fiscal Quarter Ending August 1, 1998" and statements regarding,
among other items, the discussions of the Company's business strategy and
expectations concerning the Company's position in the industry, future
operations, margins, profitability, changes in demand for, and timing of
deliveries of, OEM, aftermarket and military products and services and the
Company's liquidity and capital resources. These forward-looking statements are
based largely on the Company's expectations and are subject to a number of risks
and uncertainties, certain of which are beyond the Company's control. Actual
results could differ materially from these forward-looking statements as a
result of many factors, including, but not limited to, the factors described in
"Prospectus Summary," "Risk Factors" and "Business" including, among other
things, changes in the competitive marketplace. Other factors that materially
affect actual results include, among others, the following: general economic and
business conditions; industry capacity; changes in customer preferences;
demographic changes; competition; changes in methods of marketing and in
technology; changes in political, social and economic conditions; regulatory
factors and various other factors beyond the Company's control. The Company
undertakes no obligations to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Prospectus will in fact transpire.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth as of May 2, 1998 (i) the historical
consolidated capitalization of the Company assuming the Reorganization (as
defined) immediately prior to the consummation of the Offering and (ii) as
adjusted to reflect the Offering with net proceeds to the Company of $45.9
million and the application of such net proceeds. See "Use of Proceeds."
<TABLE>
<CAPTION>
MAY 2, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt....................... $ 4,758 $ 3,046
Long-term debt:
Term loans............................................ 84,886 40,651
Senior Subordinated Notes due 2007.................... 140,000 140,000
Other debt............................................ 87 87
-------- --------
Total long-term debt.................................. 224,973 180,738
Redeemable common shares, no par value; 645,680 shares
issued and 624,447 shares outstanding (a)............. 4,813 --
Redeemable ESOP shares, no par value; 3,870,594 shares
issued and 3,817,993 shares outstanding (a)........... 29,738 --
Unearned ESOP shares.................................... (10,080) --
-------- --------
19,658 --
Shareholders' equity/(deficiency)
Preferred Shares, no par value, 5,000,000 shares
authorized; none issued and outstanding............ -- --
Common Shares, no par value, 50,000,000 shares
authorized; 8,055,720 shares issued, and 8,017,880
(actual) and 16,060,320 (as adjusted) outstanding
(b)................................................ -- --
Paid-in capital....................................... -- 63,214
Subscriptions receivable.............................. (770) (770)
Accumulated deficit................................... (24,835) (6,711)
Common shares in the treasury......................... (641) (11,561)
-------- --------
Total shareholders' equity/(deficiency)............... (26,246) 44,172
-------- --------
Total capitalization.................................... $227,956 $227,956
======== ========
</TABLE>
- ---------------
(a) In connection with the Offering, provisions in the ESOP agreement and a
shareholders agreement allowing management shareholders and ESOP
participants to put their shares back to the Company will be eliminated.
(b) Excludes 371,992 Common Shares issuable upon exercise of stock options
outstanding as of May 2, 1998, of which options to purchase 304,321 shares
were then exercisable.
In connection with the proposed Offering, the Company has elected to (i)
terminate the ESOP, (ii) grant all remaining stock appreciation rights ("SARs")
outstanding under the SAR Plan, (iii) immediately vest all granted stock options
and SARs and (iv) terminate the SAR Plan and the Supplemental Employee
Retirement Plan (the "SERP"). The Company will also recognize compensation
expense for the SERP in connection with the termination of the ESOP. The Company
expects that these actions will result in a non-recurring charge of $25.2
million ($25.2 million after-tax). The ESOP termination will result in the
repayment of the $10.9 million ESOP Loan (as defined) to the Company through the
return of 779,998 Common Shares. The Company will also allow management to
purchase an aggregate of 295,050 Common Shares at the initial public offering
price in settlement of the SAR Plan and SERP liability. Finally, in connection
with the termination of the ESOP and the SAR Plan, the Company anticipates that
it will grant options for an aggregate of 878,412 Common Shares to the 308
participating employees. The impact of these transactions has not been reflected
in the above information.
14
<PAGE> 17
DILUTION
As of May 2, 1998, the Company's net tangible book deficit was $(186.4)
million, or $(14.96) per share. After giving effect to the sale of the Common
Shares in the Offering at an assumed initial public offering price of $14.00 per
share, and application of the estimated net proceeds therefrom, the pro forma
net tangible book deficit as of May 2, 1998 was $(140.5) million, or $(9.00) per
share. This amount represents an immediate increase in net tangible book value
of $5.96 per share to existing shareholders and an immediate dilution in pro
forma net tangible book value of $23.00 per share to new investors. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................ $ 14.00
Consolidated net tangible book deficit per share as of
May 2, 1998........................................... $(14.96)
Increase per share attributable to the Offering(1)..... 5.96
-------
Pro forma consolidated net tangible book deficit after
the Offering.......................................... (9.00)
-------
Dilution per share to new investors.................... $ 23.00
-------
</TABLE>
- ---------------
(1) After deducting underwriting discounts and commissions and estimated
offering expenses.
The following table summarizes the differences, on a pro forma basis as of
May 2, 1998, between the existing shareholders and the new investors with
respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid (in thousands, except
share and per share data):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............ 12,460,320 77.6% $13,521 21.2% $ 1.09
New investors.................... 3,600,000 22.4 50,400 78.8 14.00
---------- ----- ------- -----
Total....................... 16,060,320 100.0% $63,921 100.0%
---------- ----- ------- -----
</TABLE>
The tables above assume no exercise of any outstanding options to purchase
Common Shares and is based on shares outstanding at May 2, 1998, excluding
371,992 Common Shares issuable upon exercise of stock options outstanding as of
May 2, 1998, of which options to purchase 304,321 shares were then exercisable
at a weighted average exercise price of $1.09 per share. The exercise of the
options above will be dilutive to new investors.
At May 2, 1998, the Company's historical net tangible book deficit of
$(186.4) million, or $(14.96) per share, includes 4,442,440 shares of redeemable
Common Shares and ESOP shares since the provisions in the ESOP agreement and a
shareholders agreement allowing management shareholders and ESOP participants to
put their shares back to the Company will be eliminated upon consummation of the
Offering.
In connection with the proposed Offering, the Company has elected to (i)
terminate the ESOP, (ii) grant all remaining SARs outstanding under the SAR
Plan, (iii) immediately vest all granted stock options and SARs and (iv)
terminate the SAR Plan and the SERP. The Company will also recognize
compensation expense for the SERP in connection with the termination of the
ESOP. The Company expects that these actions will result in a non-recurring
charge of $25.2 million ($25.2 million after-tax). The ESOP termination will
result in the repayment of the $10.9 million ESOP Loan to the Company through
the return of 779,998 Common Shares. The Company will also allow management to
purchase an aggregate of 295,050 Common Shares at the initial public offering
price in settlement of the SAR Plan and SERP liability. Finally, in connection
with the termination of the ESOP and the SAR Plan, the Company anticipates that
it will grant options for an aggregate of 878,412 Common Shares to the 308
participating employees. The impact of these transactions has not been reflected
in the above information.
15
<PAGE> 18
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information of the Company
for the fiscal year ended October 25, 1997 includes the historical operations of
the Company and gives effect to the Acquisition and the Offering as if they had
occurred at the beginning of the period indicated.
The unaudited pro forma consolidated financial information, which has been
prepared by the Company's management, has been derived from the historical
statements of operations of ATC and Carter. The Acquisition has been accounted
for under the purchase method of accounting using the assumptions and
adjustments disclosed in the notes to the unaudited pro forma consolidated
financial information.
The information is not designed to represent and does not represent what
the Company's results of operations actually would have been had the
transactions been completed as of the beginning of the period indicated, or to
project the Company's results of operations for any future period. The pro forma
adjustments are based on available information and certain assumptions that the
Company currently believes are reasonable under the circumstances. The unaudited
pro forma consolidated financial information should be read in conjunction with
the more detailed information contained in the historical consolidated financial
statements and notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Use of Proceeds," "Capitalization," and
the historical financial information included elsewhere in this Prospectus.
16
<PAGE> 19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FOR THE FISCAL YEAR ENDED OCTOBER 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
ARGO-TECH CARTER(A) FOR THE ACQUISITION CONSOLIDATED FOR THE OFFERING AS ADJUSTED
--------- --------- ------------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............... $117,086 $43,016 $ -- $160,102 $ -- $160,102
Cost of revenues........... 70,954 21,512 (504)(b) 91,962 -- 91,962
-------- ------- -------- -------- ------ --------
Gross profit............. 46,132 21,504 504 68,140 -- 68,140
Selling, general and
administrative........... 10,932 8,397 -- 19,329 -- 19,329
Research and development... 5,682 2,367 -- 8,049 -- 8,049
Office of the President.... -- 9,368 (9,368)(c) -- -- --
Amortization of intangible
assets................... 2,852 -- 4,709(d) 7,561 -- 7,561
-------- ------- -------- -------- ------ --------
Operating expenses....... 19,466 20,132 (4,659) 34,939 -- 34,939
-------- ------- -------- -------- ------ --------
Income from operations..... 26,666 1,372 5,163 33,201 -- 33,201
Interest expense........... 12,827 970 7,792(e) 21,589 (3,561)(h) 18,028
Other, net................. (388) 464 -- 76 -- 76
-------- ------- -------- -------- ------ --------
Income (loss) before income
taxes and extraordinary
loss..................... 14,227 (62) (2,629) 11,536 3,561 15,097
Income tax provision
(benefit)................ 4,841 (2,335) 1,939(f)(g) 4,445 1,424(i) 5,869
-------- ------- -------- -------- ------ --------
Income before extraordinary
loss..................... $ 9,386 $ 2,273 $ (4,568) $ 7,091 $2,137 $ 9,228
======== ======= ======== ======== ====== ========
Earnings before
extraordinary loss per
common share data:
Income before extraordinary
loss..................... $ 9,386 $ 9,228
Less: accrued preferred
stock dividends...... 1,527 1,527
accretion of redeemable
common shares.......... 746 --
accretion of ESOP
shares 4,012 --
-------- --------
Income before extraordinary
loss available to common
shareholders............. $ 3,101 $ 7,701
======== ========
Weighted average shares
outstanding:
Basic:
Basic weighted average
shares outstanding... 9,621 15,644
======== ========
Diluted:
Basic weighted average
shares outstanding... 9,621 15,644
Effect of dilutive
options.............. 320 326
-------- --------
Diluted weighted
average shares
outstanding.......... 9,941 15,970
======== ========
Earnings before
extraordinary loss per
common share:
Basic.................. $ .32 $ .49
Diluted................ .31 .48
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information.
17
<PAGE> 20
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
(IN THOUSANDS)
(a) Represents the results of operations of Carter for the period from November
1, 1996 through September 26, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
OCTOBER 25,
1997
-----------
<S> <C> <C>
(b) Represents a reduction to cost of goods sold for:
Amortization of inventory step-up to APB No. 16............. $(1,496)
Depreciation of property and equipment that was written up
to fair market value for the Acquisition and is being
depreciated over estimated useful lives ranging from 7 to 30
years....................................................... 992
-------
$ (504)
=======
(c) Office of the President expenses were incurred by Carter for
the benefit of the President and a director of Carter. These
expenses included salaries, benefits, personal expenses and
costs associated with operating and maintaining personal
assets such as a private airplane, an airplane hangar,
personal residences and numerous automobiles. These expenses
and assets were terminated or disposed of concurrent with
the Acquisition in accordance with the stock purchase
agreement relating to the Acquisition. Any services which
were provided by such individuals were assumed by existing
officers of the Company with no incremental costs.
Accordingly, the Company believes it is appropriate to
exclude all Office of the President expenses in determining
the pro forma operating results of the Company.............. $(9,368)
=======
(d) Represents the incremental amortization due to:
Goodwill created as a result of the Acquisition which is
being amortized over 40 years............................... $ 1,018
Amortization of identifiable intangible assets resulting
from the Acquisition:
Workforce (8 years)......................................... 562
Contracts (10 years)........................................ 1,567
Spare parts annuity (10-28 years)........................... 1,539
Patents (14-17 years)....................................... 23
-------
$ 4,709
=======
(e) Represents the net effect on interest for pro forma
adjustments:
Interest expense related to the Senior Subordinated Notes
incurred to finance the Acquisition (rate of 8 5/8%)........ $11,102
Amortization of deferred financing fees associated with the
purchase of the Senior Subordinated Notes................... 550
Interest expense related to the Credit Facility (assumed
rate of 7 3/4%)............................................. 6,519
Amortization of deferred financing fees associated with the
Credit Facility............................................. 270
Elimination of historical interest expense on a previous
credit facility............................................. (5,500)
Elimination of loan fee amortization and guarantee fees
related to a previous credit facility....................... (1,313)
Elimination of the interest expense incurred on the
refinancing of promissory notes which were repaid in
September 1997.............................................. (2,866)
Elimination of historical interest expense related to Carter
indebtedness................................................ (970)
-------
$ 7,792
=======
A 1/8% change in the variable interest rate on the Credit
Facility would change the pre-tax interest expense by $138.
</TABLE>
<TABLE>
<S> <C> <C>
(f) Represents the elimination of the tax effect of changing
Carter's Subchapter S Corporation status to a C Corporation,
at the Company's 40% statutory tax rate..................... $ 2,583
=======
</TABLE>
(g) Represents the income tax effects, at the Company's 40% statutory tax rate,
of the pro forma adjustments described in Notes (b), (c), (d) and (e), net
of adjustment for goodwill.
(h) Represents the effect on interest expense related to repayment of $45.9
million on the Credit Facility (assumed rate of 7 3/4%).
(i) Represents the income tax effect, at the Company's 40% statutory tax rate,
of the pro forma adjustment described in Note (h).
In connection with the proposed Offering, the Company has elected to (i)
terminate the ESOP (ii) grant all remaining SARs outstanding under the SAR Plan,
(iii) immediately vest all granted stock options and SARs and (iv) terminate the
SAR Plan and SERP. The Company will also recognize compensation expense for the
SERP in connection with the termination of the ESOP. The Company expects that
these actions will result in a non-recurring charge of $25.2 million ($25.2
million after-tax). The ESOP termination will result in the repayment of the
$10.9 million ESOP Loan to the Company through the return of 779,998 Common
Shares. The Company
18
<PAGE> 21
anticipates that it will make additional annual cash contributions to a defined
contribution plan in an amount not to exceed the ESOP compensation expense which
will cease in connection with the termination of the ESOP. The Company will also
allow management to purchase an aggregate of 295,050 Common Shares at the
initial public offering price in settlement of the SAR Plan and SERP liability.
Finally, in connection with the termination of the ESOP and the SAR Plan, the
Company anticipates that it will grant options for an aggregate of 878,412
Common Shares to the 308 participating employees. The impact of these
transactions have not been reflected in the above information.
19
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
and other data of Argo-Tech for (i) the fiscal years 1993 through 1997, which
have been derived from Argo-Tech's audited consolidated financial statements for
those years and (ii) the 27 weeks ended May 3, 1997 and May 2, 1998, which have
been derived from Argo-Tech's unaudited consolidated financial statements for
those periods, which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the unaudited interim periods.
Results for the 27 weeks ended May 2, 1998 are not necessarily indicative of
results that may be expected for the entire year. Argo-Tech's fiscal year ends
on the last Saturday in October and is identified according to the calendar year
in which it ends. For example, the fiscal year ended October 25, 1997 is
referred to as "fiscal 1997." All of the fiscal years presented consisted of
52-week periods. The information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
27 WEEKS ENDED
FISCAL YEAR ENDED ---------------------
------------------------------------------------- MAY 3, MAY 2,
1993 1994 1995 1996 1997 1997 1998(G)
------- ------- ------- -------- -------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................... $88,484 $79,709 $86,671 $ 96,437 $117,086 $53,159 $85,835
Operational costs.............................. 63,336 54,276 54,222 57,882 69,458 31,891 46,524
Amortization of inventory step-up.............. -- -- -- -- 1,496 -- 8,976
------- ------- ------- -------- -------- ------- -------
Cost of revenues............................... 63,336 54,276 54,222 57,882 70,954 31,891 55,500
------- ------- ------- -------- -------- ------- -------
Gross profit................................... 25,148 25,433 32,449 38,555 46,132 21,268 30,335
Operating expenses............................. 14,497 14,789 17,390 19,307 19.466 9,719 18,276
------- ------- ------- -------- -------- ------- -------
Income from operations......................... 10,651 10,644 15,059 19,248 26,666 11,549 12,059
Interest expense............................... 10,371 10,117 11,924 10,138 12,827 5,640 11,337
Other, net..................................... 127 75 (588) (142) (388) (237) (216)
Income tax provision........................... 61 279 1,553 3,608 4,841 2,643 477
Extraordinary loss(a).......................... -- -- -- -- 1,529 -- --
------- ------- ------- -------- -------- ------- -------
Net income..................................... $ 92 $ 173 $ 2,170 $ 5,644 $ 7,857 $ 3,503 $ 461
======= ======= ======= ======== ======== ======= =======
Income (loss) per share to common before
extraordinary loss:(b)
Basic...................................... $ (.22) $ (.28) $ (.59) $ (.31) $ .32 $ .21 $ .05
Diluted.................................... (.22) (.28) (.59) (.31) .31 .20 .04
Net income (loss) per share to common:(b)
Basic...................................... $ (.22) $ (.28) $ (.59) $ (.31) $ .16 $ .21 $ .05
Diluted.................................... (.22) (.28) (.59) (.31) .16 .20 .04
Weighted average number of shares outstanding
Basic...................................... 12,407 10,552 8,867 9,262 9,621 9,614 9,952
Diluted.................................... 12,407 10,552 8,867 9,262 9,942 9,928 10,272
OTHER DATA:
Gross margin..................................... 28.4% 31.9% 37.4% 40.0% 39.4% 40.0% 35.3%
Adjusted gross margin(c)......................... 28.4 31.9 37.4 40.0 40.7 40.0 45.8
EBITDA(d)........................................ $21,188 $19,370 $22,231 $ 26,710 $ 34,191 $15,062 $19,213
EBITDA margin(e)................................. 23.9% 24.3% 25.6% 27.7% 29.2% 28.3% 22.4%
Adjusted EBITDA(d)............................... $21,188 $20,210 $23,901 $ 29,039 $ 38,607 $16,751 $30,246
Adjusted EBITDA margin(e)........................ 23.9% 25.4% 27.6% 30.1% 33.0% 31.5% 35.2%
Net cash flows provided by operating
activities..................................... $20,907 $17,531 $17,963 $ 15,983 $ 18,244 $ 3,885 $13,124
Net cash flows used in investing activities...... (2,190) (1,475) (2,918) (3,355) (110,252) (798) (1,061)
Net cash flows provided by (used in) financing
activities..................................... (16,917) (5,855) (19,847) (11,041) 87,813 (7,306) (19,503)
Depreciation and amortization(f)................. 10,537 8,726 7,172 7,462 7,525 3,513 7,154
Capital expenditures............................. 2,076 1,475 2,918 3,355 2,690 798 1,061
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
27 WEEKS ENDED
----------------------
FISCAL YEAR ENDED MAY 2, 1998
---------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED
-------- -------- -------- -------- -------- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets................................. $188,963 $183,826 $167,057 $167,106 $300,960 $283,335 $283,335
Total debt................................... 128,000 137,607 118,607 107,607 248,862 229,731 183,784
Redeemable preferred stock................... 24,400 25,908 25,908 25,908 -- -- --
Redeemable common shares..................... -- 2,862 3,311 4,067 4,813 4,813 --
Redeemable ESOP shares....................... -- 680 5,767 11,974 18,906 19,658 --
Shareholders' equity/ (deficiency)........... 1,245 (20,390) (25,617) (28,219) (27,941) (26,246) 44,172
</TABLE>
- ---------------
(a) The extraordinary loss, net of federal income tax benefit of $1,019, relates
to the write-off of unamortized debt issuance costs of a previous credit
facility that was refinanced with the proceeds of a new credit facility on
July 18, 1997.
(b) Net income was reduced by dividends accrued on redeemable preferred stock
and accretion of redeemable common shares and ESOP shares to compute income
(loss) available to common shareholders as follows:
<TABLE>
<CAPTION>
27 WEEKS ENDED
FISCAL YEAR ENDED ----------------------
---------------------------------------------------- MAY 3, MAY 2,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary loss............... $ 92 $ 173 $ 2,170 $ 5,644 $ 9,386 $ 3,503 $ 461
Less: accrued preferred stock dividends........ 2,792 3,124 3,509 3,848 1,527 1,527 --
accretion of redeemable common stock...... -- -- 449 756 746 -- --
accretion of ESOP shares.................. -- -- 3,417 3,878 4,012 -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary loss
available to common shareholders............. (2,700) (2,951) (5,205) (2,838) 3,101 1,976 461
Extraordinary loss............................. -- -- -- -- 1,529 -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders................................. $ (2,700) $ (2,951) $ (5,205) $ (2,838) $ 1,572 $ 1,976 $ 461
======== ======== ======== ======== ======== ======== ========
</TABLE>
(c) Adjusted gross margin is computed as gross profit plus amortization of
inventory step-up as a percentage of net revenues.
(d) EBITDA and Adjusted EBITDA represent income from operations plus non-cash
charges as follows:
<TABLE>
<CAPTION>
27 WEEKS ENDED
FISCAL YEAR ENDED ----------------------
---------------------------------------------------- MAY 3, MAY 2,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income from operations......................... $ 10,651 $ 10,644 $ 15,059 $ 19,248 $ 26,666 $ 11,549 $ 12,059
Depreciation and amortization.................. 10,537 8,726 7,172 7,462 7,525 3,513 7,154
-------- -------- -------- -------- -------- -------- --------
EBITDA......................................... 21,188 19,370 22,231 26,710 34,191 15,062 19,213
Compensation expense--ESOP..................... -- 840 1,670 2,329 2,920 1,689 2,057
Amortization of inventory step-up.............. -- -- -- -- 1,496 -- 8,976
-------- -------- -------- -------- -------- -------- --------
Adjusted EBITDA................................ $ 21,188 $ 20,210 $ 23,901 $ 29,039 $ 38,607 $ 16,751 $ 30,246
======== ======== ======== ======== ======== ======== ========
</TABLE>
Argo-Tech's EBITDA and Adjusted EBITDA are not intended to represent cash
flow from operations as defined by generally accepted accounting principles
and should not be considered as an alternative to net income as an indicator
of operating performance or to cash flow as a measure of liquidity. Argo-Tech
has included information concerning EBITDA and Adjusted EBITDA as it
understands that they are used by certain investors as one measure of a
borrower's historical ability to incur and service debt. EBITDA and Adjusted
EBITDA, as presented, may not be comparable to similarly titled measures
reported by other companies, since not all companies necessarily calculate
EBITDA and Adjusted EBITDA in an identical manner, and therefore are not
necessarily an accurate means of comparison between companies.
(e) EBITDA margin and Adjusted EBITDA margin are computed as EBITDA and Adjusted
EBITDA as a percentage of net revenues, respectively.
(f) Depreciation and amortization excludes deferred financing fees of $1,923,
$1,451, $1,405, $1,191, $887, $584 and $512 for the fiscal years ended 1993,
1994, 1995, 1996, 1997, and the 27 weeks ended May 3, 1997 and May 2, 1998,
respectively.
(g) Adjusted for the effect of the repayment of debt with the proceeds of the
Offering which would reduce interest expense by $1,068 after tax, pro forma
net income for the interim period ended May 2, 1998 is $1,529. Net income
per share to common would be $.10 basic and diluted based on weighted
average number of shares outstanding of 15,582 basic and 15,903 diluted.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Information" and the financial statements of
the Company and notes thereto included elsewhere herein. Certain statements in
the following discussion are forward-looking statements or discussion of trends
which by their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results and trends may
differ materially from those described below depending on a variety of factors,
including those detailed under the caption "Risk Factors" and elsewhere in this
Prospectus. Argo-Tech's fiscal year ends on the last Saturday of October and is
identified according to the calendar year in which it ends. For example, the
fiscal year ended October 25, 1997 is referred to as "fiscal 1997." All of the
fiscal years discussed consisted of 52 weeks.
OVERVIEW
In fiscal 1997, the aerospace business generated approximately 94% of the
Company's net revenues. The balance of the Company's net revenues were generated
from sales of ground fueling equipment, certain industrial products and revenues
from the operation of Heritage Business Park (the "Business Park") which
includes the Cleveland Facility.
As is customary in the commercial aerospace industry, the Company incurs
substantial costs, for which it is generally not reimbursed, to design, test and
qualify original equipment for OEMs. Once qualified, OEM products generally are
sold at or below cost of production in anticipation of receiving orders for
commercial spare parts and overhaul services at significantly higher margins.
Over the approximately 25 year life cycle of an aircraft program, commercial
spare parts and overhaul services for products manufactured by the Company often
generate six or more times the aggregate net revenues of the OEM program.
In contrast to the practice in the commercial aerospace industry, the
Company is generally reimbursed for the design, test and qualification costs of
equipment used on military aircraft. Military original equipment shipments
generally are sold at cost plus a reasonable profit. Due to lower aircraft
utilization, military aftermarket sales are less significant than commercial
aftermarket sales. Aftermarket margins for military products are at a level
higher than original equipment shipments.
THE REORGANIZATION
Contemporaneous with the Offering, the Company, an Ohio corporation, will
become a successor to ATH, a Delaware corporation, which is the parent company
of ATC and its subsidiaries. Prior to the Offering, ATH will merge into the
Company (the "Reorganization") and the Company will become the direct parent of
ATC, and the indirect parent of ATC's subsidiaries, Argo-Tech Corporation
(Aftermarket), Argo-Tech Corporation (HBP), Argo-Tech Corporation (OEM), Carter,
AT Insurance and AT Export.
Prior to the Reorganization, the capital stock of ATH consisted of Class A
Common Shares, Class B Common Shares, Class C Common Shares and Class D Common
Shares (collectively, the "ATH Shares"). With the consummation of the
Reorganization, all classes of ATH Shares will be extinguished, and each
outstanding ATH Share will be converted into 9.2157 Common Shares.
GENERAL
During the period from 1993 to 1995, the aerospace industry experienced a
significant downturn in its business cycle. During this period, Argo-Tech
initiated a workforce reduction (the "Workforce Reduction") of approximately
30%, including early retirement programs. In addition, Argo-Tech undertook
process improvement programs, which are still ongoing, such as Argo-Tech's
certified operator and certified supplier programs (together with the Workforce
Reduction, known as "Cost Reductions"). As the aerospace industry has moved into
its recovery phase, the increase in volume of products manufactured, coupled
with the Cost Reductions has allowed Argo-Tech to spread its fixed manufacturing
costs over a larger volume of products, thereby increasing the absorption of
such fixed costs ("Operating Leverage").
22
<PAGE> 25
DEVELOPMENT EXPENSE TRENDS
In connection with new aerospace product development programs, Argo-Tech
incurs significant research and development expenditures to design, test and
qualify main engine fuel pumps and accessories for engine and airframe OEMs.
Prior to 1990, these engine and airframe OEMs reimbursed Argo-Tech for a
majority of these research and development expenditures. Since 1990, commercial
OEMs have significantly reduced, and in many cases eliminated, the reimbursement
of these development programs, which has resulted in increased levels of
research and development expenditures funded by Argo-Tech. Research and
development expenditures are expensed as incurred, and such expenditures are
expected to continue at historical levels.
ESOP
ATC established its ESOP in 1994 by purchasing 3,870,594 Common Shares with
the proceeds of a $16.8 million term loan funded through a then existing credit
facility, which was refinanced on July 18, 1997. The ESOP will be terminated
concurrently with the consummation of the Offering. The ESOP, which includes
each of ATC's approximately 308 salaried employees, holds approximately 30% of
the Company's Common Shares. Generally accepted accounting principles ("GAAP")
require that non-cash ESOP compensation expense and a corresponding increase in
shareholders' equity be recorded annually as shares held by the ESOP are
allocated to participants and the loan made to the ESOP is repaid. GAAP also
requires that this non-cash ESOP compensation expense be added back to net
income in the determination of cash flow from operations. The aggregate amount
of such non-cash ESOP compensation expense was $1.7 million, $2.3 million and
$2.9 million for the fiscal years ended 1995, 1996 and 1997, respectively. See
"Management -- Employee Benefit Plans."
BUSINESS PARK
Argo-Tech owns and operates the Business Park, a 150 acre, 1.8 million
square foot business park in Cleveland, Ohio. ATC acquired the Business Park as
part of the TRW Transaction in 1986. In 1990, ATC underwent a corporate
restructuring, was acquired by ATH and disposed of substantially all of its
operations except for its aircraft fuel pump business and the Business Park. In
connection with this corporate restructuring, Argo-Tech entered into certain
lease and service agreements with the disposed operations located in the
Business Park. The service agreements covered certain support functions,
including computerized information services, equipment maintenance, and certain
office administrative services. The service agreements ensured that the disposed
businesses would have the necessary support functions to operate until they
became self sufficient. The planned elimination of services to these tenants has
resulted in a continual reduction of service-related revenues. In addition to
providing space and services to operations formerly owned by it, the Company
also leases space in the Business Park to other businesses. Pro forma for the
Acquisition, the Business Park accounted for 3.1% of the Company's fiscal 1997
revenues.
ACQUISITION
On September 26, 1997, ATC acquired all of the outstanding shares of
Carter, a manufacturer of aircraft fluid control component parts, industrial
marine cryogenic pumps, and ground fueling components for $107.6 million,
including acquisition costs. The Acquisition was funded by the issuance of the
Senior Subordinated Notes. The results of Carter's operations have been combined
with those of the Company since the date of the Acquisition. The purchase price
of $107.6 million exceeded the fair value of the net tangible assets of Carter
at the date of the Acquisition by $99.7 million. Of that excess, $60.6 million
was assigned to identified intangible assets and the remainder of $39.1 million
was considered goodwill that is being amortized on a straight-line basis over 40
years based on a preliminary allocation of the purchase price using estimated
fair market values of the assets acquired and liabilities assumed as of the
Acquisition date.
EXPORT SALES
Substantially all of the Company's export sales are denominated in U.S.
dollars. Export sales for fiscal years 1995, 1996 and 1997 and the 27 week
period ended May 2, 1998 were $37.5 million, $44.1 million, $59.5 million and
$39.0 million, respectively (which accounted for 43.2%, 45.7%, 50.7% and 45.4%
of such
23
<PAGE> 26
period's net revenue). Sales to Europe were $10.1 million, $13.2 million, $18.8
million and $14.7 million and export sales to all other regions, individually
less than 10%, were $27.4 million, $30.9 million, $40.7 million and $24.3
million for fiscal years 1995, 1996 and 1997 and the 27 week period ended May 2,
1998, respectively.
BACKLOG
Management believes that unfilled orders are not necessarily an indicator
of future shipment levels of its products. As customers demand shorter lead
times and flexibility in delivery schedules, they have also revised their
purchasing practices. As a result, notification of firm orders may occur only
within thirty to sixty days of delivery. In addition, due to the government
funding process, backlog can vary on a period to period basis depending on the
stage of completion of the contracts represented by such backlog. Therefore,
management believes that the backlog of unfilled orders cannot be relied upon as
a valid indication of the Company's sales or profitability in a subsequent year.
YEAR 2000
The Company has initiated activities to identify actions necessary to
become Year 2000 compliant, and where such actions have been identified, has
begun to implement these actions to provide uninterrupted, normal operations of
critical business systems before, during, and after the Year 2000. The Company
is primarily using internal resources to make the required modifications and
upgrades, and plans to complete the implementation of all significant
applications by mid 1999. This schedule will allow the Company adequate time to
assess and correct any significant issues that may materialize. Substantially
all of the upgrades necessary to achieve Year 2000 compliance are being done in
conjunction with normal upgrades and conversions of the Company's systems and
are being expensed as incurred. Such costs are not expected to have a material
adverse effect on the Company. In addition, the Company is actively working with
its customers and suppliers to assess their compliance efforts, as well as the
Company's potential exposure to the failure of such suppliers and customers to
become Year 2000 compliant. While the Company believes that such exposure is
minimal, there can be no assurance that the systems of suppliers and customers
will be timely converted, or that the failure of such companies to complete the
conversion process will not have a material adverse effect on the Company.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, selected items in
the Company's consolidated statements of income as a percentage of net revenues.
<TABLE>
<CAPTION>
27 WEEKS ENDED
FISCAL YEAR ENDED ---------------
------------------------ MAY 3, MAY 2,
1995 1996 1997(A) 1997 1998
----- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................................. 37.4% 40.0% 39.4% 40.0% 35.3%
Operating expenses........................... 20.0% 20.0% 16.6% 18.3% 21.3%
----- ----- ----- ----- -----
Income from operations....................... 17.4% 20.0% 22.8% 21.7% 14.0%
Interest expense............................. 13.8% 10.5% 11.0% 10.6% 13.2%
Other, net................................... (0.7)% (0.1)% (0.3)% (0.5)% (0.3)%
----- ----- ----- ----- -----
Income before income taxes................... 4.3% 9.6% 12.1% 11.6% 1.1%
Income tax provision......................... 1.8% 3.7% 4.1% 5.0% 0.6%
----- ----- ----- ----- -----
Income before extraordinary items............ 2.5% 5.9% 8.0% 6.6% 0.5%
Extraordinary loss........................... -- -- 1.3% -- --
----- ----- ----- ----- -----
Net income................................... 2.5% 5.9% 6.7% 6.6% 0.5%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(a) Includes the results of Carter from the date of the Acquisition, September
26, 1997, to October 25, 1997.
24
<PAGE> 27
27 WEEK PERIOD ENDED MAY 2, 1998 COMPARED WITH THE 27 WEEK PERIOD ENDED MAY 3,
1997
Net revenues for the 27 week period ended May 2, 1998 increased $32.6
million, or 61.3%, to $85.8 million from $53.2 million for the 27 week period
ended May 3, 1997. This increase was primarily due to the Acquisition in
September 1997 and increased customer demand in the ATC commercial aftermarket
and OEM product lines. Revenues attributable to Carter in the 27 week period
ended May 2, 1998 were $24.6 million, accounting for 75.5% of the net revenue
increase. ATC commercial aftermarket revenues increased $5.2 million, or 16.3%,
to $37.1 million and commercial OEM revenues, exclusive of Carter, increased
$1.6 million, or 11.0% to $16.1 million in the 27 week period ended May 2, 1998
due to continued strength in airline traffic and airline capital spending. ATC
military revenues increased $1.4 million, or 35.0%, to $5.4 million, while other
revenues declined $0.2 million, or 7.7% to $2.6 million, in the 27 week period
ended May 2, 1998. The increase in military revenues was primarily due to
increased F-15 foreign military shipments. The decline in other revenues was due
to a planned reduction of services offered to Business Park tenants.
Gross profit for the 27 week period ended May 2, 1998 increased $9.0
million, or 42.3%, to $30.3 million from $21.3 million in the 27 week period
ended May 3, 1997 due to the inclusion of Carter, increased ATC aerospace
revenues and improved operating efficiency in the Cleveland Facility, offset by
$9.0 million of amortization related to the step-up of Carter inventory to fair
market value. Gross margin for the 27 week period ended May 2, 1998 decreased to
35.3% from 40.0% for the 27 week period ended May 3, 1997 due to amortization
related to the step-up of Carter inventory to fair value, partially offset by
favorable Carter sales mix and improved operating efficiency in the Cleveland
Facility's manufacturing operations. Excluding the $9.0 million charge for
amortization related to the step-up of inventory to fair value in connection
with the Acquisition, gross margin increased to 45.8% for the 27 week period
ended May 2, 1998.
Operating expenses for the 27 week period ended May 2, 1998 increased $8.6
million, or 88.7%, to $18.3 million from $9.7 million in the 27 week period
ended May 3, 1997. This increase was primarily attributable to the inclusion of
Carter operating expenses and amortization of intangible assets, offset by a
decrease in ATC customer directed research and development expense. Operating
expenses as a percent of revenues increased to 21.3% for the 27 week period
ended May 2, 1998 from 18.3% for the comparable period in fiscal 1997. Excluding
the $2.5 million of Carter amortization of intangible assets, operating expenses
as a percent of revenues would have been 18.4% for the 27 week period ended May
2, 1998.
Income from operations for the 27 week period ended May 2, 1998 increased
$0.5 million, or 4.3%, to $12.1 million from $11.6 million in the 27 week period
ended May 3, 1997. This increase was primarily due to the inclusion of Carter,
increased ATC aerospace sales and improved operating efficiency in the Cleveland
Facility, offset by the amortization related to the step-up of Carter inventory
to fair market value and amortization of Carter intangible assets. As a percent
of revenues, income from operations for the 27 week period ended May 2, 1998
decreased to 14.0% from 21.7% for the 27 week period ended May 3, 1997.
Excluding the $9.0 million charge for amortization related to the step-up of
inventory to fair value in connection with the Acquisition, income from
operations as a percent of revenues increased to 24.6%.
Interest expense for the 27 week period ended May 2, 1998 increased $5.7
million, or 101.8%, to $11.3 million from $5.6 million for the 27 week period
ended May 3, 1997 primarily due to the issuance of the Senior Subordinated Notes
in connection with the Acquisition in September 1997, the repurchase of all of
the outstanding preferred stock of the Company in March 1997, and an increase in
the average interest rate.
The income tax provision for the 27 week period ended May 2, 1998 decreased
$2.1 million, or 80.8%, to $0.5 million from $2.6 million in the 27 week period
ended May 3, 1997, attributable to a decrease of $5.2 million in pre-tax income,
to $0.9 million for the 27 week period ended May 2, 1998 from $6.1 million for
the 27 week period ended May 3, 1997.
Net income for the 27 week period ended May 2, 1998 decreased $3.0 million,
or 85.7%, to $0.5 million from $3.5 million for the 27 week period ended May 3,
1997 primarily due to the factors discussed above. Excluding the $9.0 million
charge ($5.3 million net of tax) for amortization related to the step-up of
inventory to fair value in connection with the Acquisition, net income increased
65.7% to $5.8 million.
25
<PAGE> 28
Net revenues in the second fiscal quarter of 1998 decreased $3.1 million,
or 7.0%, to $41.4 million from $44.5 million in the first fiscal quarter due
principally to large orders of high margin aftermarket products shipped by the
Company to a distributor in the first quarter. The Company experienced a net
loss of $975,000 in the second quarter compared to net income for the first
quarter of $1.4 million. This decline was due to the comparative impact of the
aforementioned first quarter shipments to a distributor combined with a greater
percentage of higher margin aftermarket sales in the first quarter versus the
second quarter. See " -- Quarterly Results of Operations -- Fluctuations of
Operating Results; Limitations of Quarterly Comparisons."
FISCAL 1997 COMPARED WITH FISCAL 1996
Net revenues for fiscal 1997 increased $20.7 million, or 21.5%, to $117.1
million from $96.4 million for fiscal 1996 due to an increase of $22.0 million
for aerospace products, including $2.6 million of Carter aerospace products, and
an increase of $1.3 million related to Carter ground fueling and industrial
marine products offset by a $2.6 million decrease in revenues related to the
Business Park. Commercial aftermarket revenues increased 29.8%, or $15.9
million, to $69.3 million and commercial OEM revenues increased 13.6%, or $3.6
million, to $30.0 million due to a continued increase in both airline traffic
and airline capital spending. Total military revenues increased $2.5 million to
$11.0 million due to an increase of $1.5 million in military OEM revenues and
the addition of $1.5 million of Carter military sales offset by a reduction of
$0.5 million of aftermarket revenues. The decline in Business Park revenues from
the prior fiscal year was due to a planned reduction in the maintenance and
other services offered to tenants and a reduction in the rental rate and square
footage requirements of a major tenant's lease.
Gross profit for fiscal 1997 increased $7.5 million, or 19.4%, to $46.1
million from $38.6 million for fiscal 1996 primarily due to increased aerospace
revenues. Gross margin decreased to 39.4% for fiscal 1997 from 40.0% in fiscal
1996 due to the amortization related to the step-up of Carter inventory to fair
market value. Excluding the $1.5 million charge for amortization related to the
step-up of inventory to fair value in connection with the Acquisition, gross
margin for fiscal 1997 increased to 40.7%.
Operating expenses for fiscal 1997 were $19.5 million, a slight increase
from $19.3 million for fiscal 1996. Selling, general and administrative expenses
increased $0.9 million primarily due to the addition of expenses related to
Carter. Research and development expenditures decreased by $0.7 million
primarily due to an increase in customer reimbursements received on commercial
aerospace development programs. Operating expenses decreased as a percentage of
net revenues to 16.6% in fiscal 1997 from 20.0% in fiscal 1996. The decrease was
primarily the result of improved Operating Leverage.
Income from operations for fiscal 1997 increased $7.5 million, or 39.1%, to
$26.7 million from $19.2 million for fiscal 1996 and increased as a percentage
of net revenues to 22.8% in fiscal 1997 from 20.0% in fiscal 1996. This increase
was due to higher net revenues and improved Operating Leverage.
Interest expense for fiscal 1997 increased $2.7 million, or 26.7%, to $12.8
million from $10.1 million for fiscal 1996 due to the increase in the average
amount of indebtedness outstanding related to the redemption of preferred stock
and payment of accrued dividends in March 1997 (see Note 11 to the consolidated
financial statements) and the Acquisition.
The income tax provision for fiscal 1997 of $4.8 million represents an
effective tax rate of 34.0% compared to 39.0% for fiscal 1996. The decrease in
the effective tax rate is primarily due to the impact of lower tax rates on the
Company's foreign sales corporation earnings and reduction in taxable income
subject to state and local taxes.
The extraordinary loss for fiscal 1997 of $1.5 million represents the
write-off of unamortized debt issuance costs, net of federal income tax
benefits, related to the then existing credit facility, which was refinanced
with a new credit facility on July 18, 1997. See Note 10 to the consolidated
financial statements.
Net income for fiscal 1997 increased $2.3 million, or 41.1%, to $7.9
million, from $5.6 million for fiscal 1996 primarily due to the factors
discussed above. Excluding the $1.5 million charge ($0.9 million net of tax) for
amortization related to the step-up of inventory to fair value in connection
with the Acquisition, net income for fiscal 1997 increased 57.1% to $8.8
million.
26
<PAGE> 29
FISCAL 1996 COMPARED TO FISCAL 1995
Net revenues for fiscal 1996 increased $9.7 million, or 11.2%, to $96.4
million from $86.7 million in fiscal 1995 due to an increased demand for
aerospace products. Commercial aftermarket revenues increased 6.8%, or $3.4
million, to $53.3 million from $49.9 million in fiscal 1995. Commercial OEM
revenues increased 21.7%, or $4.7 million, to $26.4 million from $21.7 million
in fiscal 1995, in each case primarily driven by increased capital investment by
Argo-Tech's commercial airline customers. Total military revenues increased
34.9% or $2.2 million, to $8.5 million from $6.3 million in fiscal 1995, as a
result of increased revenues relating to sales of F119 actuator fuel pumps and
increased spare parts deliveries for C-5 and F-15 aircraft. Business Park
revenues in fiscal 1996 were $0.6 million lower than in fiscal 1995 due to a
planned reduction in the level of maintenance and other services offered to
tenants and a reduction of rental square footage requirements by a major tenant.
Gross profit in fiscal 1996 increased $6.2 million, or 19.1%, to $38.6
million from $32.4 million in fiscal 1995 while gross margin improved to 40.0%
in fiscal 1996 from 37.4% in fiscal 1995. These improvements were a result of
higher net revenues, improved Operating Leverage and the continued benefits of
Cost Reductions.
Operating expenses in fiscal 1996, while stable as a percentage of
revenues, increased $1.9 million, or 10.9%, to $19.3 million from $17.4 million
in fiscal 1995 as Argo-Tech added incremental customer support of $0.3 million
and increased the level of research and development expenditures by $0.3
million.
Income from operations in fiscal 1996 increased by $4.2 million, or 28.0%
to $19.2 million from $15.0 million in fiscal 1995 and increased as a percentage
of net revenues to 20.0% in fiscal 1996 from 17.4% in fiscal 1995. Improved
Operating Leverage and the continued benefits of Cost Reductions initiated in
prior years were the primary reasons for the increase.
Interest expense in fiscal 1996 declined $1.8 million, or 15.1%, to $10.1
million from $11.9 million in fiscal 1995 primarily due to the lower average
level of outstanding indebtedness.
The income tax provision in fiscal 1996 of $3.6 million represents an
effective tax rate of 39.0% compared to 41.7% for fiscal 1995. The lower
effective income tax rate in fiscal 1996 is due to the impact of lower tax rates
on the Company's foreign sales corporation earnings and the effect of the
non-deductible amortization of goodwill in proportion to lower pre-tax income in
fiscal 1995.
Net income in fiscal 1996 increased $3.4 million, or 154.5%, to $5.6
million from $2.2 million in fiscal 1995 primarily due to the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that receives all of its operating income
from its Subsidiaries. As a result, Argo-Tech's primary source of liquidity for
conducting business activities and servicing its indebtedness has been cash
flows from operating activities.
In March 1997, the Company repurchased all of the preferred stock reflected
on the Company's financial statements, totaling $25.9 million, along with
accrued dividends of $19.3 million, in exchange for $41.1 million of
subordinated notes and cash of $4.1 million. Interest on the notes was payable
quarterly at 11 1/4% and they were to have matured on December 31, 2007. The
Company's subsidiary, ATC, also had $5.0 million of notes payable, which were to
mature on December 31, 2007, paid interest quarterly at the prime rate and were
subordinate to ATC's senior debt (including the Credit Facility). These notes
(the "Existing Notes"), together with the accrued interest thereon of
approximately $0.6 million, were repaid with the proceeds of the offering of the
Senior Subordinated Notes.
In September 1997, ATC amended its then existing credit facility consisting
of a seven-year $100.0 million term loan, a seven-year $20.0 million revolving
credit facility and a seven-year $15.0 million delayed draw acquisition loan
(the "Credit Facility") to allow for, among other things, the Acquisition and
the issuance of the Senior Subordinated Notes. The Company has guaranteed ATC's
obligations under the Credit Facility. This credit facility was originally put
in place in July 1997. Under the Credit Facility, ATC has outstanding $89.5
million principal amount of term loans and also has available, after $0.3
million of letters of credit, $19.7 million of the seven-year $20.0 million
revolving credit facility at May 2, 1998. The unused balance of the revolving
credit
27
<PAGE> 30
facility is subject to a .375% commitment fee, a reduction from the October 1997
commitment fee of .5%. In connection with the credit facility put in place in
July 1997, ATC recorded an extraordinary charge before tax of $2.5 million,
consisting primarily of the write-off of unamortized financing costs related to
a prior credit facility. The Credit Facility contains a number of covenants
that, among other things, limit ATC's ability to incur additional indebtedness,
pay dividends, prepay subordinate indebtedness, dispose of certain assets,
create liens, make capital expenditures, make certain investments or
acquisitions and otherwise restrict corporate activities. The Credit Facility
also requires ATC to comply with certain financial ratios and tests, under which
ATC will be required to achieve certain financial and operating results. ATC was
in compliance with all financial ratios and tests at May 2, 1998. Interest is
calculated, at ATC's option, using an Alternate Base Rate ("ABR") or LIBOR, plus
a supplemental percentage determined by the ratio of total debt to EBITDA. The
interest rate is not to exceed ABR plus 1.00% or LIBOR plus 2.00%.
In September 1997, concurrently with the Acquisition, ATC issued $140.0
million aggregate principal amount of Senior Subordinated Notes (the "Note
Offering"). Proceeds from the Note Offering, together with a portion of the
borrowings under the Credit Facility were used to finance the Acquisition, repay
in full $46.1 million of Existing Notes, and to pay fees and expenses incurred
in connection with the Acquisition. The Senior Subordinated Notes bear interest
at a rate of 8 5/8% per annum, payable semi-annually on each April 1 and October
1, commencing April 1, 1998. The Senior Subordinated Notes have been jointly,
severally, fully and unconditionally guaranteed by all of ATC's wholly owned
subsidiaries, with the exception of two direct, and two indirect, wholly owned
inconsequential subsidiaries. The indenture pursuant to which the Senior
Subordinated Notes were issued contains certain optional and mandatory
redemption features and other customary financial covenants and restrictions.
The issuance of the Senior Subordinated Notes will contribute to a future net
increase of interest expense.
Total debt at May 2, 1998 consisted of $89.5 million principal amount of
term loans, $140.0 million principal amount of Senior Subordinated Notes and
$0.2 million of capitalized lease obligations. Payments of $19.1 million were
made on term loans in the first 27 weeks of 1998, which included prepayments of
$1.4 million as a result of ATC's excess cash flow (as defined in the Credit
Facility) at October 25, 1997 and $15.0 million as a voluntary prepayment. As of
May 2, 1998, there were no borrowings on the Credit Facility.
ATC occasionally hedges its exposure to floating interest rates under its
bank credit facilities by entering into fixed-for-floating interest rate swaps
with financial institutions. In connection with the Credit Facility, ATC entered
into an interest rate swap that effectively converts $30.0 million of floating
rate borrowings into a 6.785% fixed rate obligation. This swap agreement
terminates in October 2000 and is currently the only interest rate derivative
the Company has in place.
In fiscal years 1995 through 1997, interest rate swaps converted $20.0
million, $20.0 million and $30.0 million of ATC's floating rate borrowings under
its bank credit facilities into fixed rate obligations with average interest
rates of 5.715%, 5.80% and 6.66%, respectively. Gains and losses incurred are
recognized as interest expense and resulted in a gain of $0.1 million in 1995
and losses of $0.4 million and $0.3 million in fiscal 1996 and fiscal 1997,
respectively.
Cash Flows from Operating Activities. Cash flow from operating activities
for the 27 week period ended May 2, 1998 increased $9.2 million to $13.1
million, primarily due to improved operating results offset by unfavorable
changes in working capital. Cash flow from operating activities for fiscal 1997
increased $2.2 million to $18.2 million from $16.0 million fiscal 1996,
primarily as a result of improved operating results offset by an increase in
receivables. Cash flows from operating activities in fiscal 1996 decreased $2.0
million to $16.0 million from $18.0 million in fiscal 1995, primarily as a
result of a small increase in inventory compared to a significant reduction in
inventory for fiscal year 1995, partially offset by an increase in operating
results.
Cash Flows from Investing Activities. Net cash used in investing activities
for the 27 week period ended May 2, 1998 was $1.1 million for the purchases of
property, plant and equipment compared to $0.8 million for the same period in
fiscal 1997. Net cash used in investing activities for fiscal year 1997 was
$110.3 million which included the acquisition of Carter for $107.6 million, and
capital expenditures of $2.7 million. Expenditures for property, plant and
equipment of $2.7 million, $3.4 million, and $2.9 million for fiscal years 1997,
1996 and 1995, respectively, reflect a normal range of capital investments
necessary to maintain the efficiency and manufacturing capabilities of the
Company.
28
<PAGE> 31
Cash Flows from Financing Activities. Cash used in financing activities for
the 27 week period ended May 2, 1998 of $19.5 million was primarily for
scheduled repayments and voluntary prepayments of long-term debt. Net cash used
in financing activities of $7.3 million for the 27 week period ended May 3, 1997
consisted of net borrowings of $37.9 million offset by the redemption of
preferred stock and payment of accrued interest totaling $45.2 million. Cash
provided by financing activities for fiscal 1997 was $87.8 million, consisting
of net borrowings of $141.0 million offset by the redemption of preferred stock
and payment of accrued interest totaling $45.2 million and payment of $7.3
million in deferred financing fees related to the Credit Facility and the Note
Offering. Cash used in financing activities for fiscal 1996 and 1995 was $11.0
million and $19.8 million, respectively, to make scheduled repayments as well as
voluntary prepayments of long-term debt.
Capital Expenditures. Capital expenditures for the 27 week period ended May
2, 1998 totaled $1.1 million compared to $0.8 million for the comparable period
in 1997. The Company expects to incur capital expenditures of approximately $4.9
million for the remainder of fiscal 1998, related to the continued maintenance
of facilities and equipment to support current operating activities. Capital
expenditures are financed with cash generated from operations.
The Company believes that cash flow from operations will provide adequate
funds for its working capital needs, planned capital expenditures and debt
service obligations. The Company's ability to fund its operations, make planned
capital expenditures, and to make scheduled payments on its indebtedness depends
on its future operating performance and cash flow, which in turn are subject to
prevailing conditions and to financial, business, and other factors, some of
which are beyond its control.
QUARTERLY RESULTS OF OPERATIONS
Historical Quarterly Results. The following table sets forth certain
quarterly statement of operations data. This unaudited quarterly information has
been prepared on the same basis as the annual information presented elsewhere
herein and, in management's opinion, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for each of the unaudited quarters presented.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- -----------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $25,086 $22,558 $23,849 $24,944 $25,191 $27,968 $31,733 $32,194 $44,462 $41,373
Operational costs.... 13,808 13,890 15,162 15,022 15,152 16,739 16,806 20,761 22,994 23,530
Amortization of
inventory
step-up............ -- -- -- -- -- -- -- 1,496 4,488 4,488
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues..... 13,808 13,890 15,162 15,022 15,152 16,739 16,806 22,257 27,482 28,018
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit..... 11,278 8,668 8,687 9,922 10,039 11,229 14,927 9,937 16,980 13,355
Selling, general and
administrative..... 2,371 2,464 2,472 2,728 2,412 2,483 2,315 3,722 5,347 6,083
Engineering and
development........ 1,670 1,594 1,528 1,637 2,081 1,488 1,496 617 1,740 1,351
Goodwill/Intangible
amortization....... 583 584 583 1,092 649 606 605 992 1,932 1,823
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating
expenses....... 4,624 4,642 4,583 5,457 5,142 4,577 4,416 5,331 9,019 9,257
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
operations......... 6,654 4,026 4,104 4,465 4,897 6,652 10,511 4,606 7,961 4,098
Interest expense..... 2,691 2,486 2,466 2,495 2,616 3,024 3,582 3,605 6,084 5,253
Other expense, net... (101) (7) (9) (24) (124) (113) (76) (75) (202) (14)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes....... 4,064 1,547 1,647 1,994 2,405 3,741 7,005 1,075 2,079 (1,141)
Income tax provision
(benefit).......... 1,478 551 1,143 436 1,062 1,581 2,656 (458) 643 (166)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss), before
extraordinary
loss............... 2,586 996 504 1,558 1,343 2,160 4,349 1,534 1,436 (975)
Extraordinary loss,
net of income tax
benefit of
$1,019............. -- -- -- -- -- -- 1,529 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).... $ 2,586 $ 996 $ 504 $ 1,558 $ 1,343 $ 2,160 $ 2,820 $ 1,534 $ 1,436 $ (975)
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE> 32
Fluctuations of Operating Results; Limitations of Quarterly Comparisons.
The Company's results of operations are subject to fluctuations from quarter to
quarter due to changes in demand for its products, changes in product mix and
other factors. Demand for the Company's products can vary from quarter to
quarter due to changes in demand for, and timing of deliveries of, OEM,
aftermarket and military products and services. In particular, the timing of the
Company's aftermarket sales tend not to occur on a predictable schedule and,
furthermore, the sales tend to occur in large quantities which can significantly
impact quarterly comparisons. In addition, net revenues of the Company's
products in the third and fourth quarters can be lower than the first two
quarters because of planned production shut downs at the Company's Cleveland
Facility.
For example, in the first fiscal quarter of 1998, the Company's sales were
comparatively high due to large volumes shipped to a distributor. In addition,
the sales for this period consisted of a comparatively high percentage of
aftermarket sales. This combination of high-volume, high margin sales led to
comparatively favorable results in the first quarter, despite the amortization
charges relating to the Acquisition. However, in the second fiscal quarter of
1998, the Company's sales mix had a greater percentage of lower margin OEM sales
and, as a result, operational expenses rose despite a drop in net revenues and
the Company experienced a net loss of $975,000 for this quarterly period. A
similar fluctuation occurred in the third fiscal quarter of 1997 when, due to
comparatively high sales and a larger percentage of aftermarket sales, the
Company's net income was unusually high.
In addition, on September 26, 1997, ATC acquired all of the outstanding
shares of Carter for $107.6 million, including acquisition costs. Carter's
inventory was increased by $12.2 million to record inventories at their fair
value as of the date of acquisition in accordance with Accounting Principles
Board Opinion No. 16 -- "Business Combinations." Based on Carter's inventory
turnover rate, $1.5 million, $4.5 million and $4.5 million of this amount is
included in cost of revenues for the fourth quarter of 1997 and the first and
second quarters of 1998, respectively. In addition, $99.7 million of identified
intangibles and goodwill are being amortized over an 8 to 40 year period. These
amortizations increased operating expenses $0.4 million, $1.2 million and $1.3
million for the fourth quarter of 1997 and the first and second quarters of
1998, respectively.
Accordingly, year-to-year and quarter-to-quarter comparisons of quarterly
results may not be meaningful, and quarterly results during the year are not
necessarily indicative of the results that may be expected for any future period
or for the entire year. See "Risk Factors -- Fluctuations in Operating Results;
Limitations of Quarterly Comparisons."
ANTICIPATED RESULTS FOR THE FISCAL QUARTER ENDING AUGUST 1, 1998.
The Company expects that net revenues for the third fiscal quarter of 1998
will be slightly higher than those realized in the second fiscal quarter of
1998. The negative effect to gross profit of a larger percentage of lower margin
OEM sales in the third fiscal quarter of 1998 versus the second fiscal quarter
of 1998 is expected to be more than offset by reduced amortization of inventory
step-up which will end in the third fiscal quarter of 1998 and has negatively
impacted gross profit since the Acquisition. As a result, the Company expects
gross profit for the third fiscal quarter of 1998 to be slightly higher than for
the second fiscal quarter of 1998 and the Company expects to post a modest net
income for the third fiscal quarter of 1998 versus a net loss for the second
fiscal quarter of 1998. See "-- Quarterly Results of Operations" and
"Forward-Looking Information."
Net revenues for the third fiscal quarter of 1998 are expected to be
substantially greater than those realized in the third fiscal quarter of 1997,
primarily due to revenues attributable to the Acquisition. However, due to the
negative effect on gross profit caused by a larger percentage of lower margin
OEM sales in the third fiscal quarter of 1998 versus the third fiscal quarter of
1997, as well as the continued negative impact in the third fiscal quarter of
1998 of amortization of inventory step-up, goodwill and intangibles as well as
higher operating costs and interest expense, all associated with the
Acquisition, the Company expects a modest net income for the third fiscal
quarter, although substantially less than net income for the third fiscal
quarter of 1997. See "-- Quarterly Results of Operations" and "Forward-Looking
Information."
EXPECTED CHARGE FROM BENEFITS RESTRUCTURING
In connection with the Benefits Restructuring, the Company expects to incur
non-recurring charges of $21.5 million ($22.6 million after tax) in compensation
expense as a result of the termination of the Company's ESOP, $2.5 million ($1.5
million after tax) in compensation expense due to the immediate vesting of
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<PAGE> 33
stock options and SARs and $1.2 million ($1.1 million after tax) in compensation
expense as a result of the conversion of the supplemental employee retirement
plan into a key employee security option plan. These charges, aggregating $25.2
million ($25.2 million after tax), will be reflected in the results for the
fiscal quarter in which the Offering is consummated. See "Management--Employee
Benefit Plans."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Also, in June 1997, the
FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." This statement requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments such as a measure of segment profit or loss, certain specific revenue
and expense items, and segment assets. SFAS 130 and SFAS 131 must be implemented
by the Company in fiscal 1999. The Company has not completed its evaluation of
these statements, but does not anticipate a material impact on the consolidated
financial statements from the adoption of the additional disclosure requirements
of these accounting standards.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement does not
change the recognition or measurement of pension or postretirement benefit
plans, but standardizes disclosure requirements for pensions and other
postretirement benefits, eliminates certain disclosures and requires certain
additional information. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997.
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<PAGE> 34
BUSINESS
OVERVIEW
The Company is a leading designer, manufacturer and servicer of high
performance fuel flow devices for the aerospace industry. The Company provides a
broad range of products and services to substantially all commercial and
domestic military engine and airframe manufacturers, to airlines worldwide and
to the U.S. and certain foreign militaries. The Company is the world's leading
supplier of main engine fuel pumps to the commercial aircraft industry and is a
leading supplier of airframe products and aerial refueling systems. As of
December 31, 1997, the Company's main engine fuel pumps were used in
approximately 8,500, or two-thirds, of the large commercial aircraft in service
throughout the world and during calendar year 1997 the Company received orders
for approximately 74% of all new main engine fuel pumps ordered by large
commercial engine manufacturers worldwide. The Company estimates that one or
more of its airframe fuel pumps or accessories are installed on over 80% of all
large commercial and U.S. designed military aircraft currently in use. Aerial
refueling components manufactured by the Company are, or are scheduled to be,
installed in 100% of the U.S. designed military aircraft equipped with aerial
refueling capabilities. The Company is also a leading manufacturer of components
for ground fueling systems and estimates that one or more of its fueling
hydrants, couplers and nozzles are installed in approximately 65% of airports
worldwide.
Main engine fuel pumps are precision mechanical pumps, mounted to the
aircraft's engines that maintain the flow of fuel to the engine at a precise
rate and pressure. Airframe fuel pumps and airframe accessories are used to
transfer fuel to the engine systems and to shift and control fuel between tanks
in order to maintain aircraft balance. Aerial refueling systems permit military
aerial tankers to refuel fighter, bomber and other military aircraft while in
flight. Ground fueling systems transfer fuel from fueling trucks and underground
tanks to the underwing fuel receptacle of the aircraft. Sales to OEMs provide
the Company with a platform for its substantial aerospace aftermarket business
which accounted for approximately 49% of its net revenues for the 27 week period
ended May 2, 1998.
From fiscal 1995 to fiscal 1997, the Company's sales, adjusted operating
income and adjusted net income increased from $86.7 million, $15.1 million and
$2.2 million, respectively, to $117.1 million, $28.2 million and $8.8 million,
respectively, representing compound annual growth rates of 16.2%, 36.7% and
100.0%, respectively. For the 27 week period ended May 2, 1998, the Company's
sales, adjusted operating income and adjusted net income increased 61.3%, 83.5%
and 65.7% over the comparable prior period, to $85.8 million, $21.1 million and
$5.8 million, respectively. Adjusted operating income and adjusted net income
exclude charges for the amortization of inventory step-up related to the
Acquisition amounting to $1.5 million ($0.9 million net of tax) and $9.0 million
($5.3 million net of tax) for fiscal 1997 and the 27 week period ended May 2,
1998, respectively. Operating income and net income were $26.7 million and $7.9
million, respectively, for fiscal 1997 and $12.1 million and $0.5 million,
respectively, for the 27 week period ended May 2, 1998. Excluding the
Acquisition, for the 27 week period ended May 2, 1998, the Company's sales,
operating income and net income increased 15.0%, 55.7% and 120.0%, respectively,
over the comparable prior period.
INDUSTRY
Aerospace
The Company expects the airline industry to grow over the next several
years as many key indicators of demand--airline traffic and profitability,
aircraft utilization and firm aircraft orders--remain favorable. According to
the Boeing Report, world air traffic grew at a rate of 6.1% in 1997 and is
expected to increase by an average of 5.0% per year over the next ten years. The
Airline Monitor, an industry trade publication, reports that commercial airlines
are currently experiencing historically high passenger capacity ratios of
approximately 70%, which suggests that the industry is bordering on a capacity
shortage. This potential shortage is evidenced by increased demand for new
aircraft as well as for spare parts and repair and overhaul services. Moreover,
delayed airline retirements of existing aircraft as well as conversions from
retired commercial passenger to freight carrier service can extend the normal
life cycle of an aircraft from 25 years to 35 years, which in turn increases and
extends the demand for typically higher margin aftermarket services. Management
believes that these favorable industry conditions will continue for the near
term. Unlike commercial aerospace demand, which has been
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<PAGE> 35
susceptible to regular business cycles, demand for military aerospace products
is primarily driven by the requirements of the defense industry and government
spending. In addition, demand is tied to specific military aircraft programs
which typically call for steady, low-rate production volumes.
Faced with a permanent decline in defense spending, the aerospace and
defense industry has undergone significant consolidation over the past five
years with major companies such as Martin Marietta Corp., Grumman Corp., Vought
Aircraft Co. and the defense businesses of GE, Loral Corp., Rockwell
International Corp. ("Rockwell"), Texas Instruments Inc. and Westinghouse being
acquired to form three dominant U.S. aerospace and defense firms: The Boeing
Company ("Boeing"), Lockheed Martin Corp. ("Lockheed Martin") and Raytheon
Company ("Raytheon"). Boeing, the world's largest commercial aerospace company,
purchased the defense business of Rockwell in 1996 and then merged its
operations with McDonnell Douglas Corporation ("McDonnell Douglas") on August 1,
1997. The addition of McDonnell Douglas, a leading military contractor and the
largest producer of military aircraft, is expected to significantly improve
Boeing's competitive posture in the defense sector. The combined company is
expected to have annual revenues of approximately $48 billion of which 60% will
be commercial and 40% military, compared to Boeing's 80-85% commercial revenues
prior to the merger. In response to objections raised by the European
Commission, Boeing has agreed to maintain Douglas Aircraft Company as a separate
legal entity for ten years and to commit itself not to profit from its
relationships with suppliers in order to obtain preferential treatment through
its expanded purchasing power. In 1998, Raytheon merged with Hughes Defense,
creating a company with annual revenues of approximately $20 billion.
Ground Fueling
The demand for ground fueling products is directly related to the
construction and expansion of airports, the volume of air travel and the
maintenance and usage practices with which ground fueling products are used. As
detailed above, the Boeing Report projects that world air travel will continue
to grow. The Company believes, based on industry sources, that major investments
in airport expansion will be required to provide and support adequate
infrastructure. Airport expansion has already begun to take place in
international markets. This increase in expansion results in greater demand for
ground fueling components. For example, ground fueling components manufactured
by the Company have been selected for use in all nine of the major commercial
airports constructed in the past ten years, including the recently completed
Denver and Hong Kong international airports.
COMPETITIVE STRENGTHS
The Company believes it has a strong competitive position as a result of
the following factors:
- Strong Industry Position and Largest Installed Base. Argo-Tech is the
world's leading supplier of main engine fuel pumps for commercial use
with the largest installed base (approximately 30,000) in the aerospace
industry. The Company is a leading supplier of military main engine fuel
pumps and airframe fuel pumps and accessories with an installed base of
over 215,000. In addition, the company has an installed base of 145,000
other engine pumps and airframe accessories, including fuel gear motors
and small engine fuel pumps for helicopters, turboprop and business
aircraft, as well as an installed base of 5,800 aerial refueling
components.
- Recurring and Profitable Aftermarket Business. The strong demand for the
Company's aftermarket parts and services is directly related to the
Company's extensive installed base. The Company's spare parts, repair and
overhaul services can often generate six or more times the aggregate
sales of the OEM program at significantly higher margins, since most
modern aircraft have a useful life of 25 years or more, and require
regular maintenance. Replacement parts for airframe and engine components
must be certified or accepted by the FAA, the DOD and similar agencies in
foreign countries, as well as by the specific airline customer.
Accordingly, these parts are almost exclusively provided by the original
manufacturer of the component in order to avoid the time and expense of
recertification. The Company's aerospace aftermarket, military and
industrial sales constituted 78% of total sales for the 27 week period
ended May 2, 1998, providing the Company with a recurring and profitable
revenue base.
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<PAGE> 36
- Technological Leadership and New Product Development. Management
believes that the Company is a technological leader in its industry. The
Company maintains its technological leadership by operating
state-of-the-art facilities and employing over 110 engineers. The Company
also staffs an on-site design engineer at two of its major OEM customers.
These on-site engineers, in combination with its engineering and design
staffs, assist the Company in the development of innovative products that
address the needs and requirements of its customers and enhance its
ability to win new contracts. As a result of this technological
leadership, the Company's main engine fuel pumps have been selected for
22 of the 34 large commercial aircraft engine programs put into
production over the last 20 years.
- Strong Relationships with Customers Worldwide. The Company has developed
strong relationships with its OEM customers (including GE, Pratt and
Whitney and Rolls-Royce), airline customers (including American Airlines,
Lufthansa, Japan Air Lines and United Airlines) and freight carrier
customers (including Federal Express and United Parcel Service).
Specifically, the Company has been a major supplier of main engine fuel
pumps to Pratt and Whitney for over 40 years, and has maintained its
relationship with United Airlines since 1962. Management believes that
the Company's reputation for quality and service in the aftermarket has
further solidified its relationships with its airline and freight carrier
customers. In addition to purchasing parts and services in the
aftermarket, these airline customers are also influential in the engine
OEM's supplier selection process, enhancing the Company's ability to
secure positions on new engine platforms. The Company has expanded these
strong customer relationships through its recent acquisition of Carter.
- Superior Quality and Service. The Company believes it offers its
customers superior quality and service by adhering to its operating
philosophy of time, performance and value. Argo-Tech believes that it can
respond to its customers' needs faster and more efficiently than any of
its competitors. For example, ATC achieves nearly 100% compliance with
product development and customer schedule requirements. In addition,
management believes, based on customer feedback, that its main engine
fuel pumps cost, on average, approximately 20% less to operate per flight
hour than the pumps of its nearest competitor.
- Experienced Management Team. The Company has become one of the largest
and most profitable manufacturers of high performance fuel flow devices
for the aerospace industry, largely through the leadership and vision of
Michael Lipscomb, Argo-Tech's Chairman and CEO. Mr. Lipscomb and five
other members of senior management have been with the Company since 1981,
and together have 134 years of combined industry experience.
BUSINESS STRATEGY
The Company's business strategy includes the following key components:
- Enhance Leadership Positions in Fuel Flow Devices. The Company plans to
enhance its leadership positions in the design, manufacture and sale of
fuel flow devices by capitalizing on its technological innovation, strong
customer relationships and reputation for quality and service, as well as
by introducing new products.
- Grow Through Acquisitions. The Company plans to pursue strategic
acquisitions in the aerospace and industrial fluid flow device
industries. The Company intends to become the leading aerospace fuel flow
system provider in order to capitalize on the industry trend toward
system integration. For example, the recent acquisition of Carter
expanded the Company's product lines to include aerial refueling
components, aerospace valves and other fuel transfer control components
and enhanced its base from which to design, manufacture and deliver a
broader range of fuel transfer systems and components.
- Expand Industrial Product Lines. The Company plans to capitalize on its
reputation for quality and service and apply its technological leadership
in the aerospace business to expand into specific industrial markets. The
Company's long-term relationships with GE, Pratt and Whitney and
Rolls-Royce have already led to development and production contracts for
industrial products such as lube and scavenge pumps and fuel flow
dividers. In addition, the Company intends to expand the sales and
development of its ground fueling products.
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<PAGE> 37
- Continue to Increase Profitability. The Company increased its operating
margin from 12.0% in fiscal 1993 to 22.8% in fiscal 1997 largely due to
management programs to reduce inventory levels, improve quality and
on-time performance, reduce manufacturing lead times, reduce staffing
redundancies and capitalize on its profitable aftermarket product
offering. Management continually reviews opportunities to increase
profitability through further reducing costs, increasing manufacturing
efficiencies and optimizing its product mix.
PRODUCTS
Aerospace OEM
Main Engine Fuel Pumps. Main engine fuel pumps are precision mechanical
pumps, mounted to the engine, that maintain the flow of fuel to the engine at a
precise rate and pressure. All Argo-Tech main engine fuel pumps are designed at
the Cleveland Facility. These pumps consist of an aluminum body which is cast by
one of two selected certified subcontractors. The Company then machines the
casting, adds a variety of gears and other components, and performs rigorous
testing at the Cleveland Facility. Large main engine fuel pumps vary in size
according to the thrust power of the engine for which they are designed, and are
typically sold to OEMs at a cost ranging from $8,000 to $17,000 per unit.
In 1997, the Company received orders for approximately 74% of all new large
main engine fuel pumps ordered by large commercial aircraft engine manufacturers
worldwide. The Company is the sole source supplier of main engine fuel pumps for
all CFM56 series engines, one of the most popular series of large commercial
aircraft engines used today. The CFM56 series engines, which power the Airbus
A-319, A-320, A-321 and A-340 and the Boeing 737 aircraft, were installed on
approximately 55% of all commercial aircraft ordered in 1997. The Company is
also the sole source supplier of main engine fuel pumps for all engines used on
the Boeing 777 aircraft.
In 1992, the Company expanded its market to include large regional and
business jet applications by securing the BR710 engine program, which is used on
the high-end Bombardier Canadair Aerospace ("Canadair") Global Express and the
Gulfstream Aerospace Corp. ("Gulfstream") V aircraft. In 1996, the Company added
to its growing base of regional and business jet applications by winning the GE
CF34-8C engine program, which is used on the Canadair RJ700 aircraft.
As shown in the following chart, the Company's main engine fuel pumps are
used across the full spectrum of commercial engine designs. The Company believes
its experience with engine systems of all sizes and performance characteristics
is a competitive advantage in the bidding process to become a supplier of
components for newly designed engine systems.
This chart sets forth the following information:
- All airframes currently in commercial service, denoting those which are
not currently in production;
- The size of such airframes, categorized by engine thrust expressed in
pounds; and
- The engines in service on such airframes for which the Company and its
three primary competitors supply main engine fuel pumps. Engines that
remain in service, but are no longer in current production, are denoted
as such.
35
<PAGE> 38
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ENGINE INSTALLED PUMP AND ENGINE TYPE(5)
Thrust ---------------------------------------------------------------------------------
(X 1,000 LBS.) AIRFRAME ARGO-TECH PUMP SUNDSTRAND PUMP LUCAS PUMP CECO PUMP
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
Cessna Citation Williams FJ44 Pratt & Whitney Allison
Canada Engine
PW500 AE 3007
------------------------------------------------------------------------------------------------------
Raytheon Premier 1 Williams FJ44
------------------------------------------------------------------------------------------------------
Beechcraft Beech Jet Pratt & Whitney
Canada JT15D
------------------------------------------------------------------------------------------------------
British Aerospace BAe125 Allied Signal
TFE-731
------------------------------------------------------------------------------------------------------
Less British Aerospace AVRO Allied Signal
Than 10 ALF 507
------------------------------------------------------------------------------------------------------
Dassault Falcon GE/Allied
Signal CFE 738
------------------------------------------------------------------------------------------------------
Canadair GE
Challenger CF34-3
------------------------------------------------------------------------------------------------------
Canadair RJ200 GE
CF34-3
------------------------------------------------------------------------------------------------------
Embraer EMB-145 Allison
Engine
AE3007
- -------------------------------------------------------------------------------------------------------------------------------
Canadair Global Express BMW/Rolls-Royce
BR 710
------------------------------------------------------------------------------------------------------
Canadair RJ700 GE CF34-8C
------------------------------------------------------------------------------------------------------
Boeing 727(1) 100/200 Pratt & Whitney
JT8D
------------------------------------------------------------------------------------------------------
Boeing 737(1) 100/200 Pratt & Whitney
JT8D
------------------------------------------------------------------------------------------------------
McDonnell Douglas DC 9(1) Pratt & Whitney
JT8D
------------------------------------------------------------------------------------------------------
10-22 McDonnell Douglas MD 80 Pratt & Whitney
JT8D
------------------------------------------------------------------------------------------------------
Gulfstream IV Rolls-Royce
RR Tay
------------------------------------------------------------------------------------------------------
Gulfstream V BMW/Rolls-Royce
BR 710
------------------------------------------------------------------------------------------------------
Boeing 717(4) BMW/Rolls-Royce
BR 715
- -------------------------------------------------------------------------------------------------------------------------------
Fokker 70, 100(1) Rolls-Royce
RR Tay
------------------------------------------------------------------------------------------------------
Boeing 737 300/800 GE/SNECMA
CFM56-3,7
------------------------------------------------------------------------------------------------------
Airbus A319 GE/SNECMA International
CFM56-5 Aero V2500
------------------------------------------------------------------------------------------------------
22-35 Airbus A320 GE/SNECMA International
CFM56-5 Aero V2500
------------------------------------------------------------------------------------------------------
Airbus A321 GE/SNECMA International
CFM56-5 Aero V2500
------------------------------------------------------------------------------------------------------
McDonnell Douglas MD 90 International
Aero V2500
- -------------------------------------------------------------------------------------------------------------------------------
Airbus A340 GE/SNECMA
CFM56-5
------------------------------------------------------------------------------------------------------
35-45 Boeing 757 Rolls-Royce Pratt & Whitney Rolls-Royce
RB211-535(3) PW2000 RB211-535(3)
- -------------------------------------------------------------------------------------------------------------------------------
Boeing 747 Pratt & Whitney GE Rolls-Royce GE
JT9(2), PW4000 CF6 RB211-524 CF6-50(2)
------------------------------------------------------------------------------------------------------
Boeing 767 Pratt & Whitney GE GE
JT9(2), PW4000 CF6 CF6-50(2)
------------------------------------------------------------------------------------------------------
Airbus A300 Pratt & Whitney GE GE
JT9(2), PW4000 CF6 CF6-50(2)
------------------------------------------------------------------------------------------------------
Airbus A310 Pratt & Whitney GE GE
PW4000 CF6 CF6-50(2)
------------------------------------------------------------------------------------------------------
Airbus A330 Rolls-Royce GE
45-75 RB211 - Trent 700, Pratt CF6
&
Whitney PW4000
------------------------------------------------------------------------------------------------------
Airbus A340-600 RB211 - Trent
500, 600
------------------------------------------------------------------------------------------------------
McDonnell Douglas MD 11(1) Pratt & Whitney GE
PW4000 CF6
------------------------------------------------------------------------------------------------------
McDonnell Douglas DC 10(1) Pratt & Whitney GE
JT9(2), PW4000 CF6
------------------------------------------------------------------------------------------------------
Lockheed L1011(1) Rolls-Royce
RB211-524
- -------------------------------------------------------------------------------------------------------------------------------
Boeing 777 Rolls-Royce
Greater RB211 - Trent 800,
Than 75 GE GE90, Pratt & Whitney
PW4084, PW4088,
PW4090, PW4098
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Airframe still in service, but not in current production.
(2) Engine still in service, but not in current production.
(3) The Company replaced the incumbent supplier and will begin supplying main
engine fuel pumps in the second half of 1998.
(4) Airframe in production, but not currently in service.
(5) Source: Company information.
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<PAGE> 39
Airframe Products. Fuel pumps and other airframe fuel transfer control
systems in the airframe are necessary to transfer fuel to the engine systems and
to maintain aircraft balance by shifting fuel between tanks. The Company
manufactures boost and transfer fuel pumps and fuel transfer control components,
including fuel flow proportioners, fuel system gate assemblies, and a variety of
airframe valves, adapters, nozzles and caps. These components are used to manage
storage, fueling, transfer and engine feed functions during ground and flight
operations. The acquisition of Carter significantly increased the Company's
presence in the airframe fuel transfer control systems market. The Company
supplies airframe fuel transfer control components for more than 100 models of
commercial and military aircraft creating an installed base of over 290,000
components.
Aerial Refueling Systems. The Company is a major supplier of components for
aerial refueling systems, which are produced only for military applications.
Aerial refueling components manufactured by the Company, including pumps and
couplers, are, or are scheduled to be, installed in the refueling systems of
100% of U.S. designed military aircraft equipped with such capability. Pressure
surges, resulting from unplanned, rapid changes in fuel flow rates, can cause
premature failure of fuel system components. Management believes that the
Company's expertise in the development of fuel flow control devices that
eliminate pressure surges has resulted in the award of several contracts to
retrofit aircraft with surge control devices. In 1995, the Company was awarded
the first of two sole-source contracts to retrofit the U.S. Air Force's KC-135
fleet with dry run aerial refueling pumps. Valued at approximately $10 million,
the initial contract was for 1,060 pumps. In April 1998, the Company was awarded
the second contract for pumps to allow the retrofit of 540 U.S. Air Force KC-135
aircraft.
New Products. The Company has successfully developed new market
opportunities which include lube oil and scavenge pumps and fuel flow dividers.
Lube oil and scavenge pumps supply lubrication to aerospace and industrial gas
turbine engine components. Fuel flow dividers divide fuel flow into precisely
metered portions for more efficient combustion and lower emissions. As a result
of an investment of more than $1 million, the Company secured a contract with
Rolls-Royce to supply components on an industrial power generation platform and
is currently in production. Due to aggressive marketing and an established
record of performance with its engine customers, the Company has also gained
entry into the land-based gas turbine business, securing development and
production contracts with GE, Pratt and Whitney, Rolls-Royce and Westinghouse
Electric Corp. ("Westinghouse").
In 1993, McDonnell Douglas awarded the Company the development contract for
the 480 gallon external fuel tank used on the Navy's F-18 E/F aircraft. Due to
the proprietary design of the internal components of the fuel tank, the Company
was awarded the initial production contract for 36 tanks. Management believes
the total contract will exceed 1,000 fuel tanks.
Ground Fueling Products
The Company manufactures various ground fueling hydrants, couplers and
nozzles for commercial and military airports around the world. The Company
estimates that components of its ground fueling equipment systems, which connect
the fuel pumps to the fuel receptacles in the aircraft, are installed in
approximately 65% of major commercial airports worldwide. Ground fueling systems
are used to transfer fuel from underground fuel tanks and ground fueling trucks
to the underwing fuel receptacle of the aircraft. In addition to nozzles,
couplers and hydrants, the Company also sells pressure control valves and
systems. The Company has successfully implemented the use of dry-break
technology to its current line of ground fueling products. Dry-break technology,
which is used in some military applications, stops the flow of fuel
automatically if the fueling connection between the fuel pump and the fuel
receptacle is broken. The Company also developed the AVR2000 Fuel Delivery
Meter, a hardware and software system for customized fuel utilization
management, data collection and billing.
New Products. The Company has recently developed digital pressure control
valves which incorporate a microprocessor to enhance fuel flow control and allow
for accurate measurement of pressure into fuel tanks. In addition, the Company
has identified three new potential product applications for its ground fueling
technology: railroad fuel transfers, fueling of off-road construction and mining
equipment and Liquified Natural Gas
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<PAGE> 40
("LNG") nozzles and receptacles for use on alternative fuel vehicles. Management
believes that these new potential product lines could add significant ground
fueling sales.
Industrial and Other
The Company has been widely recognized as a leading designer and supplier
of high performance submerged motor pumps for liquefied gas. Since 1961, the
Company has delivered over 3,400 of the approximately 6,200 liquefied submerged
motor gas pumps installed worldwide. The Company sold its OEM business for
industrial LNG pumps installed outside North America in 1987. As a result, new
pump delivery is extremely limited; however, the Company continues to provide
spare parts, testing, and upgrade and repair services. The Company also
maintains certain real estate and materials laboratory operations associated
with the Cleveland Facility.
AFTERMARKET SALES
Aftermarket sales, which accounted for approximately 49% of the Company's
sales for the 27 week period ended May 2, 1998, comprise the largest component
of the Company's business and consist of spare parts sales and overhaul,
retrofit, repair and technical support services to commercial and military
customers worldwide. Currently, over 35% of Argo-Tech spare parts sales are
attributable to overhaul and repair services performed by Argo-Tech, with the
remaining sales resulting from spare part purchases by third-party shops and
airlines. The Company overhauls and repairs approximately 30% of the products
manufactured by ATC. Argo-Tech also performs overhaul services for non-Company
manufactured products.
The strong demand for the Company's aftermarket parts and services is
directly related to the Company's extensive installed base. Since most modern
aircraft have a useful life of 25 years or more, and require regular
maintenance, spare parts and repair and overhaul services can often generate six
or more times the aggregate sales of the OEM program at significantly higher
margins. Replacement parts for airframe and engine components must be certified
or accepted by the FAA, the DOD and similar agencies in foreign countries, as
well as by the specific airline customer. Accordingly, these parts are almost
exclusively provided by the original manufacturer of the component in order to
avoid the time and expense of recertification.
CUSTOMERS
Aerospace
OEM customers for the Company's aerospace products include the world's
major aircraft engine manufacturers: Allison Engine, BMW/Rolls-Royce (BRR), GE,
Pratt and Whitney (including Pratt and Whitney Canada), Rolls-Royce, SNECMA/GE
(CFMI) and Williams International Corp. Customers for the Company's airframe
pumps and valves include Airbus, Boeing, Cessna, Gulfstream, Lear Corp.
("Lear"), Lockheed Martin, Raytheon and various U.S. Government agencies. Orders
for military components come to the Company through customers such as Lockheed
Martin, Boeing and Pratt and Whitney. The Company's aftermarket customers
include all major aircraft and engine repair facilities and all major airlines
worldwide. Currently the total number of airline and third party customers for
spare parts and overhaul services exceeds 200. The Company is the sole source
supplier of main engine fuel pumps for all CFM56 series engines, which were
selected for installation on approximately 55% of all large commercial aircraft
ordered in 1997. This engine powers the Airbus Industries ("Airbus") A-319,
A-320, A-321 and A-340 and Boeing 737 aircraft. The Company is also the sole
source supplier of main engine fuel pumps for all engines used on the Boeing 777
aircraft.
The Company is a leading supplier of components used on U.S. designed
military aircraft. The Company's products are used on a variety of fighter,
training, transport and cargo aircraft, bombers and helicopters. Military
aircraft using the Company's products include the KC-135, F-15, F-16, F-18,
F-22, B-1B, B-2, B-52, C-17, C-130 and CV-Helo. Substantially all of the
Company's military products are sold to the DOD, certain foreign militaries and
airframe OEMs including Lockheed Martin, Boeing and Northrop. For the 27 week
period ended May 2, 1998, sales to the U.S. military accounted for approximately
18% of the Company's net revenues.
38
<PAGE> 41
Upsilon International Corporation ("UIC"), in its capacity as foreign
distributor of Argo-Tech products, accounted for approximately 18% of the
Company's net revenues for the 27 week period ended May 2, 1998. No other
customer accounted for more than 10% of the Company's sales during such period.
Ground Fueling
Most ground fueling products are sold to customers through independent
distributors. Customers in the domestic markets include a variety of airlines,
airports and various fixed base operators. In international markets, the
Company's ground fueling products are purchased by several oil companies,
including several state-run oil companies and airport authorities.
Industrial and Other
The industrial customer base includes shipping vessels operated by domestic
and foreign carriers, liquefied gas ship loading terminal owners, liquefied gas
receiving terminals, petrochemical plants and large architectural and
engineering companies worldwide.
SALES AND MARKETING
The Company markets and sells its aerospace and ground fueling products and
services through a combination of direct marketing, sales personnel and
independent manufacturing representatives and U.S. and international
distributors. The Company supplies spare parts directly to domestic airlines and
third-party overhaul shops. Foreign customers that purchase Argo-Tech products
receive their spare parts through UIC, which operates a distribution facility in
Torrance, California. Foreign customers receive spare parts for Carter products
directly from the Costa Mesa Facility. See "Certain Transactions."
Engine and airframe OEMs select suppliers of aerospace components primarily
on the basis of custom design capabilities, product quality and performance,
prompt delivery, price and aftermarket service. The Company believes that it
meets these requirements in a timely, responsive manner which has resulted in an
extensive installed base of components and substantial aftermarket sales. The
Company also staffs an on-site design engineer with two of its customers to
represent its products and to work closely with the customer to develop new
components.
SUPPLIERS AND RAW MATERIALS
The Company utilizes a certified supplier program that demands a commitment
to 100% quality and on-time deliveries. Supplier performance is measured by the
Company's comprehensive supplier rating system. As of May 2, 1998, approximately
40 certified suppliers accounted for a majority of the Company's total
purchases. The Company continues to move toward consolidating its overall
supplier base while increasing its number of certified suppliers.
Aluminum castings are the highest volume raw material supplied to the
Company for the manufacture of Argo-Tech products and are provided by five
certified suppliers under long-term arrangements. The Company also buys
quantities of steel bar stock to produce gears and shafts from multiple
producers. However, CPM-10V, a powdered metal essential for the manufacture of
certain of the Company's main engine fuel pumps, is a proprietary product
available only from Crucible Specialty Metals ("Crucible"). The Company does not
have a contractual arrangement with Crucible, but purchases CPM-10V pursuant to
standard purchase orders. The Company retains an approximately six month supply
of CPM-10V, which is warehoused at Crucible until it is released according to
the Company's manufacturing schedule. Another material has been identified that
would replace CPM-10V, but that material has not yet been certified by the
Company's customers. The Company believes certification of this material could
be obtained before the six month supply has been depleted. See "Risk
Factors -- Risks Associated with the Company's Workforce and Suppliers; Employee
Relations."
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<PAGE> 42
RESEARCH AND DEVELOPMENT
In connection with new aerospace product development programs, Argo-Tech
makes significant research and development expenditures to design, test and
qualify main engine fuel pumps and accessories for engine and airframe OEMs.
Research and development expenditures by the Company are expensed as incurred,
and for the fiscal years 1995, 1996, 1997 and the 27 weeks ended May 2, 1998,
such expenses totaled $5.7 million, $6.4 million, $5.7 million and $3.1 million,
respectively. In addition, customer-sponsored research and development
expenditures for the fiscal years 1995, 1996, 1997 and the 27 weeks ended May 2,
1998 totaled $0.9 million, $1.6 million, $2.1 million and $0.4 million,
respectively.
MANUFACTURING
The Company manufactures a major portion of its Argo-Tech products at its
Cleveland Facility, which was acquired from TRW Inc. ("TRW") in 1986. This
facility houses the Company's senior management and the majority of its
aerospace engineering and design staff, sales team, and production and main
distribution facilities. The Cleveland Facility is organized around four
manufacturing "cells" that operate its bearing, gear, housing and shaft
productions. By creating cells, the necessary people, machinery, materials and
methods are organized into four distinct business teams. Within each
manufacturing cell are members from each of the Manufacturing, Quality,
Production Control, Statistical Process Control, and Manufacturing Engineering
disciplines. In addition, the Company's design engineering staff is organized
into cells which correspond to and complement the manufacturing cells. The
manufacturing and engineering cells work together to meet the Company's
integrated operating plan and to ensure timely production of the Company's
products.
By using the cell structure and continuous improvement initiatives, the
Cleveland Facility has greatly improved its production performance and quality
since 1986, achieving over 90% compliance with product development and customer
schedule requirements. For example, typical production lead time for a new pump
was reduced from approximately 60 weeks after first order in fiscal 1991, to
approximately 20 weeks in fiscal 1998, and overdue pump shipments decreased from
over 500 in fiscal 1993 to fewer than 10 in fiscal 1997. Management believes
that these performance standards are substantially better than those of its
competition. Based on industry statistics, management also believes that in
fiscal 1997, its main engine fuel pumps cost an average of approximately 20%
less to operate per flight hour than the pumps of its nearest competitor.
Management believes that the Company's manufacturing systems and
state-of-the-art equipment are critical competitive factors which permit it to
meet the tight tolerances and cost sensitive price structure of aerospace
customers.
In contrast to its substantial reliance on internal manufacturing of
Argo-Tech products, the Company outsources most of the machining and
pre-assembly production of Carter products to external providers. However, the
Company does maintain internal equipment capacity at its Costa Mesa Facility
which enables it to produce small quantity, quick turn components and to reduce
setup/breakdown times on smaller jobs. The Company has lowered the cost of
Carter products by outsourcing capital intensive tasks such as casting and
machining, while completing final assembly and testing on the premises. With
lead times of 8 to 50 weeks depending on the complexity of the component, a
typical production cycle for a Carter product takes an additional four weeks
once the machined and pre-assembled parts are received.
In addition to its manufacturing facilities, the Company maintains
sophisticated testing facilities at its Cleveland, Inglewood and Costa Mesa
locations. These testing facilities allow for simulation of typical conditions
and stresses that will be endured by products during use. Products are also
thoroughly tested for design compliance, performance and durability. To
facilitate quality control and product development, the Company maintains a
sophisticated chemistry and metallurgy laboratory at the Cleveland Facility,
which includes a scanning electron microscope.
The Company has obtained and preserved its ISO certifications, which are
recognized by most of the Company's customers, as well as by the FAA and U.S.
Government supply organizations, as the most widely accepted replacement for the
Military Standards formerly used in the aerospace industry.
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<PAGE> 43
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental laws and to regulation by government agencies, including the
Federal Environmental Protection Agency (the "EPA"). Among other matters, these
regulatory authorities impose requirements that regulate the emission,
discharge, generation, management, transportation and disposal of pollutants and
hazardous substances, govern response actions to hazardous substances which may
be or have been released to the environment, and require the Company to obtain
and maintain permits in connection with its operations. This extensive
regulatory framework imposes significant compliance burdens and risks on the
Company. In December 1997, as part of a comprehensive effort to ensure
compliance with the operating permit requirements under the Federal Clean Air
Act, the EPA notified a number of companies throughout Ohio, including the
Company, that they may be required to file operating permit applications for
their respective facilities and that the application deadline had passed. Upon
review, the Company concluded that such a permit application was necessary for
the Cleveland Facility and made the appropriate filing but the Company may be
subject to governmental sanctions as a result of not filing on a timely basis.
Although management believes that the Company's operations and its
facilities are currently in compliance in all material respects with applicable
environmental laws, there can be no assurance that future changes in such laws,
regulations or interpretations thereof or the nature of the Company's operations
will not require the Company to make significant additional expenditures to
ensure compliance in the future. The Company does not presently contemplate
material capital expenditures for environmental remediation for the 1998 fiscal
year.
The Cleveland Facility is currently the subject of environmental
remediation activities, the cost of which is the responsibility of TRW pursuant
to the purchase agreement by which ATC acquired TRW's Power Accessories Division
in 1986 (the "TRW Purchase Agreement"). Remediation has been underway since 1989
and is expected to continue for the foreseeable future. The Company has not
borne any material portion of the cost of the remediation and does not expect to
do so in the future. TRW has funded all necessary remediation costs and is
expected to do so in the future. The Company estimates that TRW has spent in
excess of $10 million for environmental remediation at the Cleveland Facility.
The TRW Purchase Agreement also requires TRW, for a period of 20 years, to
indemnify ATC for (i) costs associated with third party environmental claims
relating to environmental conditions arising from activities conducted by TRW in
TRW's operation of its Power Accessories Division, which have not been conducted
by ATC after its purchase of the assets of the Power Accessories Division in
1986, and (ii) a portion of the costs associated with third party environmental
claims arising from activities conducted by TRW and ATC, the portion of the
costs to be paid by each party being determined based on the length of time each
party conducted the activity giving rise to the claim. To date, there have been
no third party environmental claims relating to ATC or the Cleveland Facility.
In March 1986, a two thousand gallon spent underground storage tank ("UST")
was removed from the Costa Mesa Facility. Petroleum hydrocarbon soil
contamination was discovered during the UST removal, prompting the Orange County
Health Care Agency to require a site assessment. Subsequent site investigations
revealed that groundwater underlying the site is impacted by trichloroethene and
perchloroethylene. In 1990, the Regional Water Quality Control Board ("RWQCB")
issued a Cleanup and Abatement Order (the "Cleanup Order") to Carter related to
the investigation and remediation of groundwater contamination. To date, the
full lateral extent of the groundwater contamination has not been ascertained.
By virtue of its acquisition of Carter, the Company has assumed responsibility
for satisfying the Cleanup Order. However, the Company obtained indemnification
from Carter's selling stockholders for, among other things, all costs and
expenses related to satisfaction of the RWQCB's Cleanup Order. However, there
can be no assurance that such indemnification obligations with respect to the
Cleanup Order will be satisfied. See "Risk Factors--Potential Exposure to
Environmental Liabilities."
PATENTS AND TRADEMARKS
The Company has a number of patents and trademarks and pending patent
applications related to its products. While in the aggregate its patents and
trademarks are of material importance to its business,
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<PAGE> 44
management believes no single patent or trademark or group of patents or
trademarks is of material importance to its business as a whole.
GOVERNMENT REGULATIONS
The commercial aerospace industry is highly regulated by both the FAA in
the United States and by the Joint Aviation Authorities in Europe, while the
military aerospace industry is governed by military quality (ISO-9000)
specifications. The Company is required to be certified by one or more of these
entities, and, in some cases, by individual OEMs in order to engineer and
service parts and components used in specific aircraft models. The Company must
also satisfy the requirements of its customers, including OEMs and airlines,
that are subject to FAA regulations, and provide these customers with products
and services that comply with the government regulations applicable to
commercial flight operations. In addition, the FAA requires that various
maintenance routines be performed on aircraft components, and the Company
currently satisfies or exceeds these maintenance standards in its repair and
overhaul services. Several of the Company's operating divisions include
FAA-approved repair stations.
The Company's aviation and metals operations are also subject to a variety
of worker and community safety laws. The Occupational Safety and Health Act of
1970 ("OSHA") mandates general requirements for safe workplaces for all
employees. In addition, OSHA provides special procedures and measures for the
handling of certain hazardous and toxic substances. The Company believes that
its operations are in material compliance with OSHA's health and safety
requirements.
COMPETITION
Competition among aerospace component manufacturers is based on product
quality, reliability and on-time delivery. The Company's primary main engine
fuel pump competitors are Sundstrand, CECO and Lucas. Sundstrand is the
Company's closest competitor in the main engine fuel pump market.
Competitors in the Company's other product lines range in size from
divisions of large corporations to small privately held entities, with only one
or two components in their entire product line. The Company's primary airframe
pump competitors are GEC Aerospace, Hydroaire and Intertechnique; the Company's
primary airframe valve competitors are Parker-Hannifin, ITT Aerospace and
Whittaker; the Company's primary ground fueling competitor is Whittaker; and the
Company's primary aerial refueling competitor is Parker-Hannifin. See "Risk
Factors -- Highly Competitive Industry."
PROPERTIES AND FACILITIES
The Company owns and operates a 150-acre Business Park, which includes 1.8
million square feet of engineering, manufacturing and office space. The Company
occupies approximately 475,000 square feet for its main engine fuel pump
business and leases over one million square feet of the facility to third
parties. Management believes that the Cleveland Facility's machinery, plants and
offices are in satisfactory operating condition, and has sufficient capacity to
meet foreseeable future needs without incurring significant additional capital
expenditures.
The Company also owns the 9.2 acre Costa Mesa Facility, which encompasses
165,000 covered square feet and manufactures certain of the Company's airframe
products and accessories as well as ground fueling and aerial refueling
equipment. Management believes that the Costa Mesa Facility has sufficient
capacity to permit further growth in the Company's product lines without
significant additional capital expenditure.
The Company's Inglewood, California leased facility occupies approximately
10,000 square feet and includes available space for expansion. Its primary
purpose is to repair and overhaul main engine fuel pumps owned by airline
customers. Inglewood's assets include test stands for testing fuel pumps after
overhaul and a small machine shop for simple rework of pump components.
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<PAGE> 45
EMPLOYEES
As of May 2, 1998, the Company had 772 full-time employees; of which 474
are salaried and 298 are hourly. Approximately 33% of the salaried employees
have college degrees, with approximately 8% holding advanced degrees. The 220
hourly employees located at the Cleveland Facility are represented by the UAW
under a collective bargaining agreement expiring on March 31, 2000 and have an
average of over 18 years of experience in the industry.
LEGAL PROCEEDINGS
While the Company is not presently involved in any material legal
proceedings, during the ordinary course of business, the Company, from time to
time, is threatened with, or may become a party to, legal actions and other
proceedings. The Company believes that its potential exposure to such legal
actions is adequately covered by its aviation product and general liability
insurance.
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<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the current
directors and executive officers of the Company and the additional persons
expected to be directors upon consummation of the Offering. Directors serve
until their successors are elected at each annual meeting. Officers hold office
until their successors are elected and qualified.
Current Directors and Executive Officers
<TABLE>
<CAPTION>
YEARS IN
NAME AGE INDUSTRY POSITION
---- --- -------- --------
<S> <C> <C> <C>
Michael S. Lipscomb..................... 52 27 Chairman, President and CEO, Director
Frances S. St. Clair.................... 42 7 Vice President and CFO
David L. Chrencik....................... 47 21 Vice President, Operations
Yoichi Fujiki........................... 48 7 Vice President and Treasurer, Director
Paul R. Keen............................ 48 21 Vice President, General Counsel and
Secretary
Badrik Melikian......................... 44 11 Chief Operating Officer, Carter
Additional Directors
Remi de Chastenet....................... 26 -- Aftermarket Sales Manager at ATC, Director
Thomas F. Dougherty..................... 54 -- Director
Prakash A. Melwani...................... 39 -- Director
Robert Y. Nagata........................ 52 -- Director
Karl F. Storrie......................... 60 -- Director
</TABLE>
Michael S. Lipscomb has been Chairman, President and Chief Executive
Officer since 1994. Mr. Lipscomb joined TRW's corporate staff in February 1981
and was made Director of Operations for the Power Accessories Division in 1985.
Mr. Lipscomb was named Vice President of Operations when Argo-Tech Corporation
was formed in 1986, becoming President in 1990 and Chairman in 1994. Mr.
Lipscomb has also served as a director of the Company and ATC since 1990.
Frances S. St. Clair has been Vice President and Chief Financial Officer
since 1992. Ms. St. Clair joined the Company in 1991 as Controller and was
promoted to Vice President and Controller in November 1991. Prior to joining
Argo-Tech, Ms. St. Clair served as the Vice President and Controller of the
Sheffield Measurement Unit of the Cross and Trecker Corporation, a machine tool
manufacturer. Ms. St. Clair received her C.P.A. certification in 1984.
David L. Chrencik has been Vice President, Operations since December 1990.
Since joining Argo-Tech (TRW) in 1977, Mr. Chrencik has held various
manufacturing engineering and operations management positions.
Yoichi Fujiki has been Vice President and Treasurer since joining Argo-Tech
in 1991. Prior to joining Argo-Tech, he was Senior Vice President and Chief
Credit Officer of American Pacific State Bank in Los Angeles. Mr. Fujiki has
also served as a director of ATC since 1991 and became a director of the Company
in 1998.
Paul R. Keen has been Vice President, General Counsel and Secretary since
1990. Mr. Keen was named Vice President and General Counsel in 1987, and became
Secretary in December 1990. Prior to 1987, he spent the majority of his career
with TRW as Senior Counsel, Securities and Finance and as primary legal counsel
to two operating groups.
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<PAGE> 47
Badrik Melikian has been Chief Operating Officer of Carter since January
1994. Mr. Melikian joined Carter in 1987 and held management positions in
Carter's Ground Fueling Group before becoming the General Manager of the
Industrial Marine division when it was formed in 1990.
Remi de Chastenet became a director of the Company and ATC in 1997. Mr. de
Chastenet currently serves as an Aftermarket Sales Manager at ATC. Mr. de
Chastenet previously worked at Vestar Capital Partners ("Vestar") as a Financial
Analyst.
Thomas F. Dougherty has served as a director of the Company and ATC since
1995. Mr. Dougherty is President of the Columbiana Boiler Company, a chemical
and materials fabricator, Chairman of Anderson Columbiana Trading Corporation, a
wholesaler of storage and transportation tanks for gas and liquids, and
President of Dougherty Development Corp., a venture capital investment company.
Mr. Dougherty is also a principal in Dougherty Capital Partners, a private
equity investment fund.
Prakash A. Melwani has served as a director of ATC since 1990 and became a
director of the Company in 1998. Mr. Melwani is a founding partner of Vestar,
which organized the Vestar Investment Partnership to acquire Argo-Tech in 1990.
Mr. Melwani is also a director of Alvey Systems, Inc., a materials handling
system manufacturer.
Robert Y. Nagata has served as a director of the Company since 1990, and
became a director of ATC in 1997. Mr. Nagata is a partner in the Los Angeles law
firm of Musick, Peeler & Garrett.
Karl F. Storrie has served as a director of ATC since 1990 and became a
director of the Company in 1998. Mr. Storrie is President, CEO and a director of
Dura Automotive Systems, Inc., an automotive component manufacturer.
EXECUTIVE COMPENSATION
The following table sets forth for fiscal 1997 certain information about
the compensation paid to the Chief Executive Officer and each of the other four
most highly compensated executive officers of the Company (the "Named
Executives").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
--------------------------- COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1)(2)
--------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Michael S. Lipscomb................................. 1997 $300,000 $168,228 $44,481
Chairman, President and CEO
Frances S. St. Clair................................ 1997 140,856 57,348 3,784
Vice President and CFO
David Chrencik...................................... 1997 140,856 57,348 4,959
Vice President, Operations
Yoichi Fujiki....................................... 1997 137,640 59,647 27,264
Vice President and Treasurer
Paul R. Keen........................................ 1997 155,352 66,691 6,242
Vice President, General Counsel and Secretary
</TABLE>
- ---------------
(1) Other annual compensation did not exceed the lesser of $50,000 or 10% of
salary plus bonus of any of the Named Executives in fiscal 1997.
(2) The amounts listed consist of the value of life insurance provided by the
Company for the benefit of the Named Executives in excess of the value of
life insurance provided by the Company for the benefit of all other salaried
employees. For each of Mr. Lipscomb and Mr. Fujiki, the amounts listed also
include $22,000 paid as directors' fees.
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<PAGE> 48
CERTAIN AGREEMENTS
Management Retention Agreements
Stay Pay and Severance Agreements. ATC has entered into Stay Pay and
Severance Agreements (the "Severance Agreements") with each of the Named
Executives. The Board of Directors of the Company believes that such Severance
Agreements benefit ATC by securing the continued services of key management
personnel and by enabling management to perform their duties and
responsibilities without the distracting uncertainty generally associated with a
change in control.
The Severance Agreements provide that, if a Change in Control (as defined
in the Severance Agreements) occurs and the executive remains employed by ATC on
a full-time basis through the effective date of the Change in Control, the
executive will receive a single lump sum payment equal to 25% of the sum of the
highest annual base salary and the highest bonus amount received by the
executive in the preceding five years (the "Stay Payment").
The Severance Agreements also provide that if an executive's full-time
employment is terminated without Cause (as defined in the Severance Agreements),
either before or after a Change in Control has occurred, or upon a voluntarily
termination of employment by an executive upon the reduction of his or her base
salary by 5% or more, if such reduction is not a result of a company policy to
reduce the salaries of a substantial number of officers or employees, or if the
executive ceases to be employed in a position involving substantially the same
level of responsibility or duties as performed by the executive on the date the
Severance Agreement was executed (a "Qualifying Voluntary Termination"), the
executive will receive a payment consisting of a single lump sum equal to the
sum of the highest annual base salary and the highest bonus amount received by
the executive in the preceding five years (the "Basic Severance Payment").
Additional payments will be made to the executive in the event that a
Change in Control has occurred and the executive's employment is terminated
without Cause within the six-month period following the effective date of such
Change in Control, or upon a Qualifying Voluntary Termination within such
period. The executive will receive payments equal to the amount the executive
would have received had employment continued, at the same intervals and at the
same rate of base salary the executive was receiving during the month preceding
termination, until the six-month anniversary of the effective date of the Change
in Control (the "Additional Severance Payments"). The Additional Severance
Payments, if paid, would be in addition to the Basic Severance Payment and the
Stay Payment.
Each executive is entitled to several other benefits contained in the
Severance Agreements, including (i) life, health, medical/hospital, dental, and
vision insurance benefits for a period of 12 months in the event that an
executive's full-time employment is terminated without Cause or upon a
Qualifying Voluntary Termination, either before or after a Change in Control has
occurred and (ii) gross-up payments to cover any excise tax imposed by Section
4999 of the Internal Revenue Code upon any payment made to the executive under
the Severance Agreements, subject to certain limitations defined in therein.
ATC has agreed to be solely responsible for any and all attorneys' fees and
related expenses incurred by the executive in the event that it fails to comply
with its obligations under the Severance Agreements.
Trust Agreement. In connection with a Stay Pay Agreement, dated February
13, 1989 entered into between the Company and Mr. Lipscomb (the "Original Stay
Pay Agreement"), ATC and Key Trust Corporation of Ohio, N.A. (as successor to
Society National Bank) (the "Trustee") entered into a Trust Agreement, dated as
of October 28, 1994, (the "Trust Agreement") establishing an irrevocable grantor
trust (the "Trust") for the benefit of Mr. Lipscomb (the "Beneficiary") or any
Successor (as defined in the Trust Agreement). The Original Stay Pay Agreement
provides for payment of $315,600 (the "Payment") on January 1, 2007, or earlier,
upon Mr. Lipscomb's voluntary or involuntary termination of full-time employment
with ATC, with or without Cause (as defined in the Original Stay Pay Agreement).
The assets to be held by the Trust include the original deposit of
principal and any other contributions made at the option of ATC (the "Trust
Assets"). The Trust Assets are to be disposed of by the Trustee when the Trustee
receives either (i) a certificate and affidavit signed by the Beneficiary or
Successor, in the form attached to the
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<PAGE> 49
Trust Agreement, stating that the conditions under the Original Stay Pay
Agreement have occurred and the Beneficiary or Successor is entitled to the
Payment or (ii) a written direction certified by two officers of ATC other than
the Beneficiary or Successor. If the amount disbursed by the Trustee is
insufficient to fully fund the Payment specified under the Original Stay Pay
Agreement, ATC will be required to pay the balance. However, if the amount
disbursed by the Trustee exceeds the amount to which the Beneficiary or
Successor is entitled under the Severance Agreement, the Beneficiary or
Successor is entitled to retain such excess. The Trust Assets and any income
earned on such Trust Assets remain at all times subject to the claims of general
creditors of ATC under state and federal law.
The Original Stay Payment Agreement also provides for the payment of
attorneys' expenses if enforcement of the contract becomes necessary, and
contains certain restrictions on Competitive Activity (as defined in the
Original Stay Pay Agreement). The benefits provided by the Original Stay Pay
Agreement and the Trust Agreement are in addition to the benefits provided under
the Severance Agreements and Mr. Lipscomb's Additional Contract (as defined).
Additional Employment Agreements and Arrangements. ATC has entered into
additional employment contracts with two of the Named Executives, Mr. Lipscomb
and Mr. Keen (collectively, the "Additional Contracts"). Each Additional
Contract provides for the payment of severance benefits upon termination of
employment without Cause (as defined in the Additional Contracts). In the event
of such a termination, Mr. Lipscomb will receive all salary and bonuses for a
period of twelve months from the date of termination, in an amount equal to all
salary and bonuses received during the twelve month period immediately preceding
termination. Mr. Keen will receive, in the event of such a termination, a single
lump sum payment equal to 24 months of his base salary, in an amount calculated
from the base salary in effect for the full month immediately preceding the date
of termination. Both Mr. Lipscomb and Mr. Keen will receive life, health,
medical/hospital, dental and vision insurance benefits for a period of twelve
months. Mr. Keen's Additional Contract also provides for the payment of
attorneys' expenses if enforcement of the contract becomes necessary, and
contains restrictions on Competitive Activity (as defined in the Additional
Contract). The benefits provided by the Additional Contracts are provided in
addition to the benefits provided under the Severance Agreements, the Original
Stay Pay Agreement and the Trust Agreement.
EMPLOYEE BENEFIT PLANS
Overview and Proposed Restructuring
The Company currently maintains a number of independent plans structured to
attract and retain highly qualified employees and management personnel. These
plans include, among others, the Salaried Pension Plan (as defined), the Savings
Plan (as defined), the ESOP and the SERP. In addition, the Company also
maintains certain stock option and stock appreciation rights plans. Certain of
these employee benefit plans are being restructured to reduce the impact of
future Common Share price fluctuations on the reported earnings of the Company
and to simplify its ongoing employee benefit structure. As a result, the Company
has elected to (i) terminate the existing ESOP and the SERP and to (ii) convert
all granted SARs to rights to purchase restricted Common Shares and option
grants pursuant to the Salaried Omnibus Plan (as defined). The proposed
restructuring (the "Benefits Restructuring") of these plans will occur
concurrently with the Offering and will result in a one-time pre-tax charge to
the Company of $25.2 million ($25.2 million after-tax) based upon an assumed
initial public offering price of $14 per share. This one-time charge will be
dependent upon the initial public offering price of the Common Shares. A $1 per
share increase in the initial public offering price would result in a decrease
to the pre-tax charge of $0.3 million ($0.3 million after-tax). Similarly, a $1
per share decrease in the initial public offering price would result in an
increase to the pre-tax charge of $0.3 million ($0.3 million after-tax).
Continuing Employee Benefit Plans
Salaried Pension Plan. ATC maintains the Argo-Tech Corporation Salaried
Pension Plan (the "Salaried Pension Plan"). The Salaried Pension Plan was
established effective November 1, 1986. Prior to July 1, 1994, regular,
permanent, salaried employees of ATC were eligible to participate in the
Salaried Pension Plan.
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<PAGE> 50
Participation in the Salaried Pension Plan was closed to any person who was not
a participant on June 30, 1994, and all benefit accruals ceased as of the close
of business on June 30, 1994. The benefits of participants in the Salaried
Pension Plan who were employees on June 30, 1994, became vested (to the extent
otherwise non-vested) as of the close of business on June 30, 1994. Employee
contributions were neither required nor permitted. All Salaried Pension Plan
assets are presently invested in an annuity contract with Aetna Life Insurance
Company as the funding agent.
The monthly normal retirement benefit under the Salaried Pension Plan is
1.25% of a participant's final average monthly compensation multiplied by the
participant's years of benefit service. Compensation earned after June 30, 1994,
and service performed after June 30, 1994, are not taken into account in
determining a participant's benefit under the Salaried Pension Plan. Final
average monthly compensation means the average monthly compensation (computed
before withholdings, deductions for taxes or other purposes, and salary
reduction amounts under the Argo-Tech Employee Savings Plan (the "Savings
Plan")) paid or payable to the participant for the five calendar years which
produce the highest such average, determined as if the participant's employment
terminated on June 30, 1994 (or, if earlier, the date the participant's
employment actually terminated or the participant ceased to be within the class
of employees eligible to participate in the Salaried Pension Plan). If a
participant ceased to be within the class of employees eligible to participate
or a participant's employment terminated (or is deemed to have terminated) prior
to July 1 of a calendar year, that calendar year is not taken into account for
purposes of determining final average monthly compensation. A participant's
vested benefit cannot be less than the participant's vested benefit under the
Salaried Pension Plan, if any, as of October 31, 1989.
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
maximum annual retirement benefit payable under the Salaried Pension Plan and
the maximum amount of annual compensation that can be taken into account in
calculating benefits under the Salaried Pension Plan are limited.
At retirement, based on benefits accrued as of June 30, 1994, the monthly
retirement benefits payable to each of the individuals named in the Summary
Compensation Table are:
<TABLE>
<CAPTION>
NAME MONTHLY BENEFIT
---- ---------------
<S> <C>
Michael S. Lipscomb................................... $1,799.32
Frances S. St. Clair.................................. 411.56
David L. Chrencik..................................... 949.57
Yoichi Fujiki......................................... 488.15
Paul R. Keen.......................................... 1,188.83
</TABLE>
The benefits shown above are in the form of a single life annuity
commencing as of the first day of the month after the participant attains age
65. Benefits may commence at any time after age 55 if the participant had at
least five years of service when the participant's employment terminated.
Actuarial reductions would apply for early commencement and for payment in the
form of a joint and survivor annuity.
The normal form of payment under the Salaried Pension Plan is a single life
annuity; however, participants may elect payment of retirement benefits under
several joint and survivor forms of payment, subject to the requirement that a
married participant receive benefits in the form of a joint and survivor annuity
with the spouse as contingent annuitant unless the spouse consents to the
participant's election of another form of payment, another contingent annuitant,
or both, as applicable.
Savings Plan. ATC's Savings Plan became effective on May 1, 1987. Regular,
permanent, salaried employees of ATC who have completed at least 3 months of
service are eligible to participate in the Savings Plan. All assets of the
Savings Plan are held in trust by Key Trust Company of Ohio, N.A., the current
Trustee.
Participants may elect to have "tax-deferred" (401(k) compensation
reduction) contributions made to the Savings Plan of up to 13% of their eligible
compensation. Participants may also elect to have after-tax contributions made
to the Savings Plan of up to 10% of their eligible compensation. With respect to
periods prior to July 1, 1994, the Savings Plan provided for employer matching
contributions as follows: Basic matching contributions of 25% of each
participant's tax-deferred contributions not in excess of 3% of compensation and
discretionary additional matching contributions of a percentage (within the
range of 0% and 125% established for
48
<PAGE> 51
each fiscal year (the "Plan Year")) of each participant's tax-deferred
contributions not in excess of 3% of compensation. Employer matching
contributions to the Savings Plan ceased on July 1, 1994. A participant's
benefit under the Savings Plan is the balance of the participant's accounts
attributable to after-tax contributions and the vested balance of the
participant's accounts attributable to employer matching contributions.
Tax-deferred contributions and after-tax contributions are always 100% vested.
Participants (including former employees) whose accounts attributable to
employer matching contributions had not been forfeited prior to November 1,
1994, became, to the extent otherwise non-vested, 100% vested. Benefits are
payable in the form of a single lump sum payment.
Under the Code, the maximum annual contributions that can be made to the
Savings Plan and the maximum amount of annual compensation that can be taken
into account in calculating contributions to the Savings Plan are limited.
Contributions for a Plan Year on behalf of certain highly compensated
individuals may also be limited to comply with nondiscrimination requirements
under the Code.
Benefits are generally payable after a participant is separated from
service. A participant who is an employee may, however, apply for an in-service
distribution of all or a portion of the participant's vested account balance
after attainment of age 59 1/2 or in the event of a hardship (as defined in the
Savings Plan). A participant may apply for an in-service distribution of
after-tax contributions at any age and for any reason. A participant who is a
"party in interest" may apply for a loan of up to 50% of the participant's
vested account balance under the Savings Plan. In connection with the Benefits
Restructuring termination of the ESOP, the Company will make a cash contribution
to the Savings Plan of $10.9 million, representing the balance of the ESOP Loan
for the benefit of the current ESOP participants. This contribution will be made
in equal annual installments over the next six years.
1998 Omnibus Incentive Plan. The Company expects to adopt the Argo-Tech
Group, Inc. 1998 Omnibus Incentive Plan (the "Omnibus Plan") upon consummation
of the Offering. A maximum of 1,249,000 Common Shares may be issued under the
Omnibus Plan. A wide range of awards, including stock options, stock
appreciation rights, performance awards, other stock-based incentive awards, and
rights to purchase restricted shares may be made under the Omnibus Plan to
senior executives, directors, and other employees of the Company and its
Subsidiaries. It is anticipated that the Company will grant an unknown number of
options under the Omnibus Plan to the Named Executives contemporaneous with the
Offering.
1998 Salaried Employee Omnibus Plan. The Company expects to adopt the
Argo-Tech Group, Inc. Salaried Employee Omnibus Plan (the "Salaried Omnibus
Plan") upon consummation of the Offering. Awards under the Salaried Omnibus Plan
will be limited to stock options and rights to purchase restricted shares.
Concurrently with the adoption of this plan, and in connection with the
termination of the ESOP, the Company expects to grant a total of 779,998 options
to current employees who are participants in the ESOP upon its termination. In
addition, in connection with the conversion of the SAR Plan, the Company expects
to grant a total of 98,414 options and rights to purchase a total of 219,066
restricted shares to the 11 SAR Plan participants. The Named Executives will be
granted options and rights to purchase restricted shares under the Salaried
Omnibus Plan as follows: Mr. Lipscomb, options and rights to purchase
restricted shares; Ms. St. Clair, options and rights to purchase
restricted shares; Mr. Chrencik, options and rights to purchase
restricted shares; Mr. Fujiki, options and rights to purchase
restricted shares; and Mr. Keen, options and rights to purchase
restricted shares. All of the stock options and rights to purchase restricted
shares will be awarded upon the consummation of the Offering and no additional
grants will be made under this plan.
1998 Key Employee Security Option Plan. In connection with the Benefits
Restructuring, the Company expects to adopt the Argo-Tech Group, Inc. 1998 Key
Employee Security Option Plan (the "KEYSOP") upon the consummation of the
Offering. Under the KEYSOP, key employees, including the Named Executives, may
elect to forgo a portion of their annual compensation and benefits and instead
receive an option to purchase investment securities from the Company. In
connection with the Benefits Restructuring, employees covered by the SERP will
receive options under the KEYSOP with value equivalent to that previously
contained in the SERP.
Executive Life Insurance Plan. ATC's executive life insurance plan permits
certain officers and key employees to obtain life insurance benefits in addition
to those generally provided to salaried employees. The
49
<PAGE> 52
level of coverage provided to such officers and key employees consists of basic
term and whole life insurance coverage equal to three times the individual's
salary.
Bonus Plan. ATC maintains an incentive plan pursuant to which officers and
other key management employees may receive cash bonuses paid according to the
achievement of specified cash flow goals in the preceding fiscal year and
individual performance. The amounts of such bonus awards are approved by ATC's
Compensation Committee.
Compensation of Directors. The Company pays each Director a quarterly fee
of $2,500. Each director also receives $3,000 plus reasonable out-of-pocket
expenses for each board meeting attended. Members of the Audit and the
Compensation Committees of the Company receive $3,000 for attendance at a
committee meeting that is not held on the same day as a meeting of the Board of
Directors. Fees paid to Mr. Lipscomb and Mr. Fujiki are included in the Summary
Compensation table. See "Management -- Executive Compensation."
The members of the Company's Audit Committee are Thomas F. Dougherty,
Prakash A. Melwani and Karl F. Storrie. The members of the Company's
Compensation Committee are Prakash A. Melwani, Karl F. Storrie and Robert Y.
Nagata.
Discontinued Employee Benefit Plans
Employee Stock Ownership Plan. The Company established its ESOP effective
May 17, 1994 and all salaried employees of ATC were eligible to participate. Key
Trust Company of Ohio, N.A., serves as Trustee (the "ESOP Trustee") and holds in
trust all of the ESOP's assets. As part of the Benefits Restructuring, the ESOP
will be terminated concurrently with the consummation of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On May 17, 1994, the ESOP Trustee purchased 3,870,594 Common Shares with
the proceeds of a $16.8 million loan to the ESOP from ATC (the "ESOP Loan"). The
term of the loan was to end on April 28, 2004, but will be prepaid as part of
the Benefits Restructuring by the surrender of the appropriate number of Common
Shares, valued at the initial public offering price to equate to the $10.9
million currently outstanding under the ESOP Loan. The interest rate for the
ESOP Loan had been fixed for the ten year term at 7.16% per annum, and the
original purchase price for the common shares purchased by the ESOP was $4.34
per share. Upon termination of the ESOP, unallocated ESOP shares remaining after
the repayment of the ESOP Loan will be allocated to the employees and will
remain held, along with the previously allocated ESOP shares, in trust by the
ESOP Trustee.
ESOP participants may elect to receive the shares of qualifying employer
securities credited to their accounts after their termination of employment, and
in certain instances, after attaining age 55 with 10 or more years of
participation in the ESOP. Voting rights on and decisions whether to tender or
exchange shares of qualifying employer securities held in the ESOP are "passed
through" to ESOP participants. Each participant is entitled to direct the ESOP
Trustee as to the voting of shares of qualifying employer securities credited to
the participant's account. In the event of a tender or exchange offer for
qualifying employer securities held in the ESOP, each participant is entitled to
direct the ESOP Trustee whether to tender or exchange shares of qualifying
employer securities held in the ESOP in a manner similar to the voting
directions described above.
For the Plan Year ended October 31, 1997, the number of Common Shares
allocated under the ESOP to the accounts of the individuals named in the Summary
Compensation Table were:
<TABLE>
<CAPTION>
SHARES ALLOCATED
------------------------------------
YEAR ENDED CUMULATIVE TO
NAME OCTOBER 31, 1997 OCTOBER 31, 1997
---- ---------------- ----------------
<S> <C> <C>
Michael S. Lipscomb................... 3,709.9302 13,500.5093
Frances S. St. Clair.................. 3,709.9302 13,049.2681
David L. Chrencik..................... 3,709.9302 13,135.7648
Yoichi Fujiki......................... 3,709.9302 13,336.5463
Paul R. Keen.......................... 3,709.9302 13,500.5093
</TABLE>
50
<PAGE> 53
GAAP requires that any third party borrowing by the ESOP be reflected as a
liability on ATC's balance sheet. Since the ESOP borrowed from ATC, this
obligation was not treated as a liability, but was excluded from shareholders'
equity.
The Internal Revenue Service has issued a determination letter that the
ESOP is qualified under Section 401(a) of the Code and is an employee stock
ownership plan under Section 4975(e)(7) of the Code. Contributions to the ESOP
and allocations to the accounts of eligible participants thereunder are subject
to applicable limitations imposed under the Code. The ESOP is subject to the
requirements of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the regulations thereunder.
Supplemental Employee Retirement Plan. ATC maintained the SERP, an unfunded
plan to provide for cash payments to employees participating in the ESOP which
were limited as to allocations to their ESOP accounts because of limitations
under the Code applicable to tax-qualified plans. As part of the Benefits
Restructuring, this plan will be terminated upon the consummation of the
Offering, and will be replaced by the KEYSOP.
The Company maintains a bookkeeping account for amounts credited to the
accounts of SERP participants. For the Plan Year ended October 31, 1997, the
amounts credited to the SERP accounts of the individuals named in the Summary
Compensation Table were:
<TABLE>
<CAPTION>
EQUIVALENT SHARES ALLOCATED
------------------------------------
YEAR ENDED CUMULATIVE TO
NAME OCT. 31, 1997 OCT. 31, 1997
---- ---------------- ----------------
<S> <C> <C>
Michael S. Lipscomb................... 6,821.000 18,482.814
Frances S. St. Clair.................. 747.854 1,421.753
David L. Chrencik..................... 747.854 1,421.753
Yoichi Fujiki......................... 727.119 1,651.924
Paul R. Keen.......................... 1,283.978 3,583.562
</TABLE>
1991 Performance Stock Option Plan. The 1991 Performance Stock Option Plan
provides for option agreements on the purchase of Common Shares, at a price of
$1.09 per share. The 311,030 options which are currently outstanding were
granted by the Compensation Committee of the Company's Board of Directors upon
the recommendation of the ATC Compensation Committee and will expire on November
9, 2001. The options were exercisable only in quarters over four successive
years, but will become exercisable in full upon the completion of the Offering,
and no additional grants will be made.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS
FY-END AT FY-END($)(1)
-------------------- ------------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- -------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Lipscomb......................................... 76,508 / 12,607 $987,718 / $162,756
3,428 / 10,303 44,255 / 133,012
Frances S. St. Clair........................................ 22,533 / 5,023 290,901 / 64,847
1,383 / 4,147 17,855 / 53,538
Paul R. Keen................................................ 22,533 / 5,023 290,901 / 64,847
1,383 / 4,147 17,855 / 53,538
Yoichi Fujiki............................................... 7,788 / 5,023 100,543 / 64,847
1,383 / 4,147 17,855 / 53,538
David L. Chrencik........................................... 22,533 / 5,023 290,901 / 64,847
1,383 / 4,147 17,855 / 53,538
</TABLE>
- ---------------
(1) Calculated by subtracting the option price from the initial public offering
price of $14.00 per share.
51
<PAGE> 54
1991 Management Incentive Stock Option Plan. The 1991 Management Incentive
Stock Option Plan provides for option agreements on the purchase of Common
Shares, at a price not less than $1.09 per share. The 60,040 options, which are
currently outstanding were granted by the Compensation Committee of the
Company's Board of Directors upon the recommendation of the ATC Compensation
Committee and will expire on November 9, 2001. The options were exercisable only
in quarters over four successive years, but will become exercisable in full upon
completion of the Offering, and no additional grants will be made.
1997 Stock Appreciation Rights Plan. The SAR Plan was approved by ATC's
Board of Directors on October 22, 1997. The SAR Plan provided for grants of up
to 317,480 SARs. Each SAR entitles the holder to receive, in cash, an amount
equal to the increase, if any, in the value of one Common Share from a date
specified by the Compensation Committee of the Board of Directors of ATC to the
date of the exercise. The SAR Plan will be terminated upon the consummation of
the Offering and all 158,740 currently outstanding SARs will cease to be
outstanding. Participating employees will receive the value of such SARs,
calculated at the initial public offering price, either in cash or in a
combination of option grants and rights to purchase restricted shares pursuant
to the Salaried Omnibus Plan, at the election of each participant. The remaining
158,740 ungranted SARs will be granted immediately prior to the termination of
the SAR Plan, and each participating employee will receive the value of such
SARs, calculated at the initial public offering price, in a combination of
option grants and rights to purchase restricted shares pursuant to the Salaried
Omnibus Plan. The Company expects to advance a loan to each SAR Plan participant
for any tax liability relating to the rights to purchase restricted shares made
in connection with the termination of the plan. See "Certain
Transactions -- Officer Loans."
SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF
TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS/SARS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE MARKET STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE PRICE OPTION TERMS
OPTIONS/SARS IN FISCAL PRICE ON DATE EXPIRATION -----------------------------
NAME GRANTED(#) YEAR ($/SH) OF GRANT DATE 0% 5% 10%
- ---------------------- ------------ ------------ -------- -------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael S. Lipscomb... 13,731 21.6% $4.34 $7.79 01/02/05 $47,371 $ 92,393 $152,862
Frances S. St.
Clair............... 5,529 8.7 4.34 7.79 01/02/05 19,075 37,204 61,552
Paul R. Keen.......... 5,529 8.7 4.34 7.79 01/02/05 19,075 37,204 61,552
Yoichi Fujiki......... 5,529 8.7 4.34 7.79 01/02/05 19,075 37,204 61,552
David L. Chrencik..... 5,529 8.7 4.34 7.79 01/02/05 19,075 37,204 61,552
</TABLE>
52
<PAGE> 55
CERTAIN TRANSACTIONS
COMPANY POLICY REGARDING RELATED PARTY TRANSACTIONS
Prior to entering into any related party transaction, the transaction is
reviewed and approved by members of the Board of Directors of the Company who
are not affiliated with such transaction. The Company believes that this
procedure ensures that any related party transaction will be on terms fair to
the Company and its unaffiliated shareholders.
VESTAR CONSULTING AGREEMENT
ATC has retained Vestar (of which Prakash A. Melwani, a director of the
Company and ATC, is a Managing Director) to provide it with financial and
corporate consulting services. In exchange for such services, the Company has
agreed to pay Vestar an annual consulting fee of approximately $110,000, payable
semi-annually in advance, plus Vestar's reasonable out-of-pocket costs and
expenses. Management believes that these terms of the consulting agreement are
no less favorable to the Company than would have been available pursuant to
arms' length negotiations with unaffiliated parties. The consulting agreement
will continue until December 31, 2000 and thereafter shall be renewed
automatically for additional one-year terms unless the Company or Vestar gives
written notice of termination.
OFFICER LOANS
Several of the Named Executives and one Director have entered into
presently outstanding loan agreements with the Company. The largest amount of
indebtedness outstanding since the beginning of fiscal 1998 for each such Named
Executive was: $254,780 (Mr. Lipscomb), $232,467 (Mr. Keen), $84,031 (Mr.
Chrencik) and $60,323 (Ms. St. Clair). The largest amount of indebtedness
outstanding since the beginning of fiscal 1998 for Thomas Dougherty, a Director
of the Company, was $75,665. Each loan is due October 28, 2000 and accrues
interest at 6.75% annually. These full recourse loans, secured by a pledge of
Common Shares, were extended for the purchase of Common Shares, or for the
personal use of the Named Executive. Each of the Named Executives having an
outstanding loan has entered into a Pledge Agreement and Promissory Note with
the Company in connection with such loans. Management believes that the terms of
these loans are no less favorable to the Company than would have been available
pursuant to arms' length negotiations with unaffiliated parties.
In connection with the termination of the SAR Plan, it is anticipated that
the Company will make full recourse loans to the SAR Plan participants,
including each of the Named Executives. These loans are expected to be made to
each Named Executive in an amount equal to the estimated tax liability (based on
an assumed tax rate of 50%) due in connection with the grants of rights to
purchase restricted shares under the Salaried Omnibus Plan in exchange for such
Named Executive's outstanding SARs. The loans are expected to be made in the
following amounts: $155,118 (Mr. Lipscomb), $63,828 (Ms. St. Clair), $63,828
(Mr. Chrencik), $63,828 (Mr. Fujiki) and $63,828 (Mr. Keen). These loans are
expected to bear interest at approximately 6% and will mature upon the earlier
of (i) the termination of such Named Executive's employment, (ii) January 2,
2005 or (iii) upon the sale of such shares.
UIC DISTRIBUTION AGREEMENT
UIC, a company owned by YCI (which is under the control of Mr. Yamada, the
Company's majority stockholder and Honorary Chairman of the Board of Directors),
was appointed by the Company as its exclusive distributor of Argo-Tech products
in 1990 with respect to the Japanese market and in 1994 for the entire
international market under a long-term agreement (the "Distribution Agreement").
Management believes that the Distribution Agreement was entered into on terms
and conditions customary for the industry in all respects with the exception of
the basic contract term of 50 years and termination provisions which are more
favorable to UIC than industry norm. The Distribution Agreement provides for a
15% discount from catalog prices on all purchases of Argo-Tech products by UIC.
For fiscal year 1997 and the six months ended May 2, 1998, sales to UIC
accounted for approximately 22.1% and 18% of the Company's net revenues,
respectively.
53
<PAGE> 56
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the ownership of the Common Shares as if the
Reorganization had occurred as of May 2, 1998 by (i) each person known to the
Company to be the beneficial owner of more than 5% of any class of Common
Shares, (ii) each director of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) the Selling Shareholder. On May 2,
1998, the number of Common Shares outstanding was 12,460,320 shares. The table
does not reflect the effects of the Benefits Restructuring. The Selling
Shareholder has granted the Underwriters a 30-day over-allotment option to
purchase 270,000 Common Shares.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
-------------------- NUMBER OF --------------------
NAME NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
---- --------- ------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
AT Holdings, LLC............................. 6,096,738 48.9 1,800,000 4,296,738 27.5
1890 Highway 50 East
Suite 4
Carson City, NV 89701
Key Trust Company of Ohio, N.A.(1)........... 3,817,993 30.6 -- 3,817,993 24.5
127 Public Square
Cleveland, OH 44114
Sunhorizon International, Inc................ 1,192,530 9.6 -- 1,192,530 7.6
13221 Ranchwood Road
Tustin, CA 92680
YC International Inc......................... 691,177(2) 5.5 -- 691,177(2) 4.4
725 South Figueroa Street
Suite 3870
Los Angeles, CA 90117
Chrencik, David.............................. 86,465(3) ** -- 86,465(3) **
de Chastenet, Remi*.......................... -- -- -- -- --
Dougherty, Thomas*........................... 15,242 ** -- 15,242 **
Fujiki, Yoichi*.............................. 39,556(3) ** -- 39,556(3) **
Keen, Paul................................... 146,870(3) 1.2 -- 146,870(3) **
Lipscomb, Michael*........................... 280,497(3) 2.3 -- 280,497(3) 1.8
Melwani, Prakash*............................ -- -- -- -- --
Nagata, Robert*.............................. -- -- -- -- --
St. Clair, Frances........................... 89,144(3) ** -- 89,144(3) **
Storrie, Karl*............................... 15,242(4) ** -- 15,242(4) **
Directors and Executive Officers as a
Group...................................... 673,016 5.4 -- 673,016 4.3
(10 persons)
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Director of the Company
** Less than 1%
(1) As ESOP Trustee, holds Common Shares in trust for the
benefit of the ESOP participants and shares beneficial
ownership with the participants. ESOP participants have
voting power with respect to shares allocated to their
individual accounts. Unallocated shares are voted by the
ESOP Trustee on a proportionate basis with those allocated
shares for which voting directions have been provided.
(2) AT LLC has the option to purchase all of YCI's shares. AT
LLC disclaims all beneficial ownership of such shares.
(3) Includes Common Shares allocated to such individual's ESOP
account, over which the participant shares beneficial
ownership with the ESOP Trustee through the power to direct
voting, as follows: Mr. Lipscomb, 13,500; Ms. St. Clair,
13,049; Mr. Chrencik, 13,136; Mr. Fujiki, 13,337; and Mr.
Keen, 13,500. Also includes options exercisable for Common
Shares within 60 days of May 2, 1998, as follows: Mr.
Lipscomb, 76,508; Ms. St. Clair, 22,533; Mr. Chrencik,
22,533; Mr. Fujiki, 7,788; and Mr. Keen, 22,533.
(4) Includes options to purchase 4,147 Common Shares that are
immediately exercisable.
</TABLE>
SHAREHOLDER AGREEMENT
Concurrent with the Offering, the Company, AT LLC, Sunhorizon
International, Inc. ("Sunhorizon"), YCI and certain management shareholders are
expected to enter into the 1998 Argo-Tech Shareholders' Agreement
54
<PAGE> 57
(the "1998 Shareholders' Agreement"). The 1998 Shareholders' Agreement is
expected to provide that the Board of Directors of the Company initially will
consist of seven directors: three of whom are to be nominated by AT LLC,
Sunhorizon and YCI and two of whom are to be nominated by the then-serving chief
executive officer of the Company. These five directors would unanimously
nominate two independent directors. Any future expansion of the Board of
Directors would be accomplished by the addition of directors selected
unanimously by the five directors nominated by AT LLC, Sunhorizon, YCI and the
then-serving chief executive officer. The 1998 Shareholders' Agreement further
provides that (i) AT LLC, Sunhorizon, YCI and the management shareholders agree
to vote in favor of the director nominees as set forth in the previous sentence
and (ii) the management shareholders agree to recommend to the other ESOP
participants that they also vote for the above referenced director nominees.
The 1998 Shareholders' Agreement is expected to supersede the terms of a
shareholders agreement entered into by ATH, which provides that the shareholders
party to such agreement had the right, subject to certain restrictions and
limitations, to require the Company to effect registration under the Securities
Act of such shareholder's Common Shares. In addition, under certain
circumstances and subject to certain restrictions and limitations, if the
Company registers Common Shares, such shareholders were entitled to include
their Common Shares in such registration. The 1998 Shareholders' Agreement is
expected to contain similar registration rights, and will remain effective until
the parties to the agreement, together with the ESOP Trustee, have less than 35%
of the combined voting power of the Company.
55
<PAGE> 58
DESCRIPTION OF COMMON SHARES
AUTHORIZED CAPITAL STOCK
The Company has 50,000,000 Common Shares, without par value, authorized. In
addition, there are authorized 5,000,000 voting preferred shares, without par
value, issuable in series and 5,000,000 non-voting preferred shares, without par
value, issuable in series (collectively, the "Preferred Shares"). The following
summary description of the capital shares of the Company is qualified in its
entirety by reference to the form of Articles of Incorporation (the "Articles")
of the Company and Code of Regulations of the Company (the "Regulations"), a
copy of each of which is filed as an exhibit to the Registration Statement to
which this Prospectus forms a part.
COMMON SHARES
Immediately prior to consummation of the Offering and the Benefits
Restructuring, there are expected to be an aggregate of 12,496,489 Common Shares
outstanding. There will be 15,611,540 Common Shares outstanding after giving
effect to the sale of Common Shares offered hereby and the Benefits
Restructuring and assuming no exercise of the Underwriters' over-allotment
option (16,151,540 shares if such over-allotment option is exercised). An
additional 2,498,482 Common Shares will be reserved for issuance upon the
Company's grants of options to employees and directors under the Company's stock
option plans. See "Management -- Employee Benefit Plans." All shares to be
outstanding after completion of the Offering will be duly authorized, validly
issued, fully paid and nonassessable.
Holders of Common Shares are entitled to one vote per share on all matters
to be voted upon by the shareholders. The holders of Common Shares are not
entitled to cumulative voting rights. Holders of Common Shares are entitled to
receive dividends and other distributions when, as and if declared from time to
time by the Board of Directors out of funds legally available for such purposes
subject to any preferential rights of, and any sinking fund or redemption or
purchase rights with respect to, outstanding Preferred Shares, if any. In the
event of a voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of Common Shares would be entitled to share ratably in
all assets remaining after payment of liabilities subject to prior distribution
rights and payment of any distributions owing to holders of Preferred Shares
then outstanding, if any. Holders of the Common Shares have no preemptive or
conversion rights, and the Common Shares are not subject to further calls or
assessment by the Company. There are no redemption or sinking fund provisions
applicable to the Common Shares.
PREFERRED SHARES
There are no Preferred Shares outstanding. The Board of Directors has the
authority, without further action by the shareholders, to issue Preferred Shares
in one or more series and to fix the rights, designations, preferences,
privileges, qualifications, and restrictions thereof, including dividend rights,
conversion rights, terms and rights of redemption, liquidation preferences, and
sinking fund terms (any or all of which may be greater than the rights of the
Common Shares). Although Ohio law currently does not permit the Board of
Directors, without further action by the shareholders, to amend the Articles to
fix the voting rights of any unissued or treasury shares of any class of
Preferred Shares, the Company's Articles would allow the Board of Directors to
make such amendments should Ohio law later so allow. The Board of Directors,
without shareholder approval, can issue Preferred Shares with conversion and
other rights which could adversely affect the rights of the holders of Common
Shares.
OHIO LAW AND CERTAIN CHARTER PROVISIONS
Statutory provisions of Ohio law and the Company's Articles and Regulations
may have the effect of deterring hostile takeovers or delaying or preventing
changes in control or changes in management of the Company, including
transactions in which shareholders of the Company might otherwise receive a
premium over the then current market price for their shares. The size of the
Board of Directors is fixed at not less than five nor more than nine directors
and is divided into two or three classes depending on the size of the board,
with each
56
<PAGE> 59
class serving for staggered terms of two years (if the board is divided into two
classes) or three years (if the board is divided into three classes).
Immediately following consummation of the Offering, the Board of Directors is
expected to be composed of seven directors, divided into two classes, with three
directors serving terms expiring in 1999 and four directors serving terms
expiring in 2000. Each class of directors will hold office until the annual
meeting of shareholders in the year their respective term ends, at which time
their successors will be elected. In addition to having a potential
anti-takeover effect, such classification reduces the ability to alter the
composition of the Board of Directors.
The Company's Articles and Regulations contain various provisions that may
have the effect, either alone or in combination with each other, of making more
difficult or discouraging a business combination or an attempt to obtain control
of the Company that is not approved by the Board of Directors. These provisions
include (i) the right of the Board of Directors to issue unissued and unreserved
Common Shares without shareholder approval, (ii) the right of the Board of
Directors to issue Preferred Shares, without shareholder approval, in one or
more series and to designate the number of shares of each such series and the
relative rights and preferences of such series, including voting rights (to the
extent now or hereafter permitted by law), terms of redemption, redemption
prices and conversion rights, (iii) the classification of the Board of
Directors, as described above, (iv) a limitation on the removal of directors
except upon the vote of 80% of the outstanding shares, (v) a limitation on the
ability of shareholders to call a special meeting except upon the consent of
shareholders representing 50% of the outstanding shares entitled to vote at such
a meeting, and (vi) a limitation on the ability of shareholders to fill
vacancies in the Board of Directors except after a vote to increase the number
of directors at a meeting called for that purpose.
The Company's Regulations also contain provisions requiring advance notice
to the Company of (i) nominations of candidates for election to the Board of
Directors who are not nominated by the Company and (ii) proposals to be brought
before the Company's annual meeting of shareholders not made by the Company.
Without compliance with these provisions, any such nominations or shareholder
proposals may not be considered by the Company.
Further, Ohio law prohibits any person who beneficially owns 10% or more of
a corporation's shares from engaging in mergers, consolidations, majority share
acquisitions, asset sales, loans and certain other transactions with the
corporation for a three-year period after acquiring the 10% ownership, unless
approval is first obtained from the corporation's board of directors. After the
three-year waiting period, the 10% shareholder can complete the transaction only
if, among other things: (i) approval is received from two-thirds of all voting
shares and from a majority of shares not held by the 10% shareholder or certain
affiliated persons, or (ii) the transaction meets certain criteria designed to
ensure fairness to all remaining shareholders. Mr. Yamada's ownership of Common
Shares has been approved by the Company's Board of Directors and is therefore
not restricted by these statutory provisions.
Under Ohio's control share acquisition statute, any person who proposes to
make a control share acquisition must obtain prior shareholder approval. A
control share acquisition is the acquisition of shares of an issuing public
corporation resulting in the person being able to exercise voting power in the
election of directors of the issuing public corporation within three ranges: (a)
one-fifth to one-third, (b) one-third to one-half and (c) more than one-half of
such voting power. The issuing public corporation must call a special
shareholders' meeting to vote on the proposed acquisition. The acquiring person
may proceed with the control share acquisition if it is approved by both the
affirmative vote of shares representing a majority of the shares represented at
the meeting and by a majority of such shares (after excluding the voting power
of any interested shares). Once an acquiring person obtains more than 50% of the
corporation's voting power, no further shareholder approval is required under
the control share acquisition act for his acquisition of additional shares.
As a result of the Offering, Argo-Tech will become an issuing public
corporation and Ohio's control share acquisition statute will become applicable.
Unless pre-approved by at least 80% of the Company's directors, the approval of
shareholders representing 80% of the outstanding shares is required for any
merger or consolidation of the Company, or a sale of all or substantially all of
its assets, or a sale, transfer or other disposition of any of its shares in a
transaction that otherwise requires shareholder approval under Ohio law, or to
authorize transactions that require approval under Ohio's control share
acquisition statute.
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<PAGE> 60
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Generally, a director of an Ohio corporation will not be found to have
violated his fiduciary duties unless there is proof by clear and convincing
evidence that the director has not acted in good faith, in a manner he or she
reasonably believes to be in or not opposed to the best interests of the
corporation, or with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In general, a director is liable
for monetary damages for any action or omission as a director only if it is
proved by clear and convincing evidence that such act or omission was undertaken
either with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interests of the corporation.
Under Ohio law, a corporation must indemnify its directors, as well as its
officers, employees and agents, against expenses where any such person is
successful on the merits or otherwise in defense of an action, suit or
proceeding. A corporation may indemnify such persons in actions, suits and
proceedings (including derivative suits) if the individual has acted in good
faith and in a manner that he believes to be in or not opposed to the best
interests of the corporation. In the case of a criminal proceeding, the
individual must also have no reasonable cause to believe that his conduct was
unlawful. Indemnification may be made only if ordered by a court or if
authorized in a specific case upon a determination that the applicable standard
of conduct has been met. Such a determination may be made by a majority of the
disinterested directors, by independent legal counsel or by the shareholders. In
order to obtain reimbursement for expenses in advance of the final disposition
of any action, the individual must provide an undertaking to repay the amount if
it is ultimately determined that he is not entitled to be indemnified.
In general, Ohio law requires that all expenses, including attorneys fees,
incurred by a director in defending any action, suit or proceeding to be paid by
the corporation as they are incurred in advance of final disposition if the
director agrees to repay such amounts if it is proved by clear and convincing
evidence that his action or omission was undertaken with deliberate intent to
cause injury to the corporation or with reckless disregard for the best
interests of the corporation and if the director reasonably cooperates with the
corporation concerning the action, suit or proceeding.
The Company's Regulations provide for indemnification, which is coextensive
with that permitted under Ohio law, and authorize the Company to enter into
indemnification agreements with each present and future director and such
officers, employees or agents as specified in the Regulations. The Regulations
also authorize the Company to enter into agreements to indemnify such persons to
the maximum extent permitted by applicable law. The indemnification so granted
may exceed the indemnification specifically authorized by the Ohio General
Corporation Law. Each agreement would represent a contractual obligation of the
Company which could not be altered unilaterally.
TRANSFER AGENT AND REGISTRAR
The Company presently intends to use Harris Trust and Savings Bank,
Chicago, Illinois as the Transfer Agent and Registrar for the Common Shares.
58
<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
15,611,540 Common Shares. All of these shares (plus up to 540,000 additional
shares if the Underwriters exercise their over-allotment option from the
Company) will be freely tradeable without restriction or further registration
(except by affiliates of the Company or persons acting as underwriters (any
shares owned by such persons, "Restricted Shares")) under the Securities Act.
None of the 6,992,468 Common Shares (6,722,468 shares if the Underwriters
exercise their over-allotment option from the Selling Shareholder) subject to
lock-up may be sold until the expiration of the lock-up periods discussed below
or thereafter unless they are registered under the Securities Act or are sold
pursuant to an exemption from registration, such as the exemption provided by
Rule 144 promulgated under the Securities Act. Market sales of a substantial
number of Common Shares or the availability of such shares for sale in the
public market could adversely affect prevailing market prices of the Common
Shares.
In general, commencing 90 days after the completion of the Offering, Rule
144 allows a person who has beneficially owned Restricted Shares for at least
one year, including persons who may be deemed affiliates of the Company, to
sell, within any three-month period, up to the number of Restricted Shares that
does not exceed the greater of (i) one percent of the then outstanding Common
Shares, and (ii) the average weekly trading volume during the four calender
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. A person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned his or her Restricted Shares for at least two years would
be entitled to sell such Restricted Shares under Rule 144(k) without regard to
the volume limitations described above and the other conditions of Rule 144.
Rule 144A under the Securities Act provides a nonexclusive safe harbor
exemption from the registration requirements of the Securities Act for specified
resales of restricted securities (as defined in Rule 144) to certain
institutional investors. In general, Rule 144A allows unregistered resales of
restricted securities to a "qualified institutional buyer," which generally
includes an entity, acting for its own account or for the account of other
qualified institutional buyers, that in the aggregate owns or invests at least
$100 million in securities of unaffiliated issuers. Rule 144A does not extend an
exemption to the offer or sale of securities which, when issued, were of the
same class as securities listed on a national securities exchange or quoted on
the NASDAQ National Market. The Common Shares outstanding as of the date of this
Prospectus would not be eligible for resale under Rule 144A because such shares,
when issued were not of the same class as any listed or quoted securities.
The Company, its officers, directors and principal shareholders (other than
the ESOP Trustee) have agreed not to offer, sell or otherwise dispose of any
Restricted Shares for a period of 180 days after the date of this Prospectus
without the prior written consent of BT Alex. Brown Incorporated. Such
Restricted Shares may be sold by such officers, directors and principal
shareholders after expiration of such period subject to the volume limitations
of Rule 144 noted above.
Upon completion of the Offering, 371,070 Common Shares will be issuable
upon the exercise of outstanding options under the Company's 1991 Performance
Stock Option Plan and the Company's 1991 Management Incentive Stock Option Plan.
59
<PAGE> 62
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS TO NON-U.S. HOLDERS
The following is a general summary of the material United States Federal
income and estate tax considerations to a Non-U.S. Holder (as defined below)
relevant to the ownership and disposition of Common Shares. This summary is
based on the Internal Revenue Code of 1986, as amended (the "Code"), final,
temporary and proposed United States Treasury regulations promulgated
thereunder, Internal Revenue Service (the "IRS") rulings, official
pronouncements and judicial decisions, all as in effect on the date hereof and
all of which are subject to change, possibly with retroactive effect, or
different interpretations. This summary does not discuss all the tax
consequences that may be relevant to a particular Non-U.S. Holder in light of
the holder's particular circumstances and it is not intended to be applicable in
all respects to all categories of Non-U.S. Holders, some of whom may be subject
to special rules not discussed below. In addition, this summary does not address
any state, local or foreign tax considerations that may be relevant to a
Non-U.S. Holder's decision to purchase Common Shares.
For purposes of this discussion, a "Non-U.S. Holder" is a person or entity
that, for U.S. Federal income tax purposes, is either a non-resident alien
individual, a foreign corporation, a foreign partnership, an estate the income
of which, from sources without the United States that is not effectively
connected with the conduct of a trade or business within the United States, is
not includible in gross income under the Code, or a trust if either no court
within the United States is able to exercise primary supervision over the
administration of the trust or no U.S. person has the authority to control all
substantial decisions of the trust, in each case not subject to U.S. Federal
income tax on a net income basis in respect of income or gain with respect to
Common Shares. An individual may be deemed to be a resident alien (as opposed to
a non-resident alien) by virtue of being present in the United States on at
least 31 days during the calendar year and for an aggregate of 183 days during
the calendar year and the two preceding calendar years (counting, for such
purpose, all the days present in the current year, one-third of the days present
in the immediately preceding year and one sixth of the days present in the
second preceding year). In addition to the "substantial presence test" described
in the immediately preceding sentence, an individual may be treated as a
resident alien if he or she (i) meets the lawful permanent residence test (a
so-called "green card" test) or (ii) elects to be treated as a U.S. resident,
meets the "substantial presence test" in the immediately following year, is
present in the United States for a period of at least 31 consecutive days in the
election year, and is present in the United States during the period beginning
with the first day of such 31-day period and ending with the last day of the
election year (the "testing period") for a number of days equal to or exceeding
75% of the number of days in the testing period (provided that, for tax purposes
an individual shall be treated as present in the United States for up to five
days during the testing period when he or she is absent from the United States).
Generally, resident aliens are subject to U.S. Federal income and estate tax in
the same manner as U.S. citizens and residents.
ALL NON-U.S. HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF COMMON SHARES IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
DIVIDENDS ON COMMON SHARES
Generally, any dividends paid on Common Shares will be subject to United
States Federal withholding tax at a rate of 30% of the amount of the dividend,
or at a lower applicable treaty rate. However, if the dividend is effectively
connected with a United States trade or business of a Non-U.S. Holder (and is
attributable to a U.S. permanent establishment of such holder, if an applicable
income tax treaty so requires as a condition for the Non-U.S. Holder to be
subject to U.S. income tax on a net income basis in respect of such dividends)
it will be subject to United States Federal income tax on a net basis at
ordinary Federal income tax rates (in which case the branch profits tax at a
rate of 30% (or such lower rate as may be specified in an applicable treaty) may
also apply if such holder is a foreign corporation), and will not be subject to
the 30% withholding tax.
Under current Treasury regulations, a holder's status as a Non-U.S. Holder
and eligibility for a tax treaty reduced rate of withholding will be determined
by reference to the holder's address and to any outstanding certificates or
statements concerning eligibility for a reduced rate of withholding, unless
facts and circumstances indicate that reliance on such address, certificates or
statements is not warranted. However, recently issued
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<PAGE> 63
Treasury regulations require a Non-U.S. Holder to provide certifications under
penalties of perjury in order to obtain treaty benefits for payments made after
December 31, 1999.
SALE OR EXCHANGE OF COMMON SHARES
Subject to the discussion of backup withholding below, any capital gain
realized upon a sale or exchange of Common Shares by a beneficial owner who is a
Non-U.S. Holder ordinarily will not be subject to United States Federal income
tax unless (i) such gain is effectively connected with a trade or business
conducted by such Non-U.S. Holder within the United States (in which case the
branch profits tax at a rate of 30% (or such lower rate as may be specified in
an applicable treaty) may also apply if the holder is a foreign corporation,
(ii) in the case of a Non-U.S. Holder that is an individual, such holder is
present in the United States for a period or periods aggregating 183 days or
more in the taxable year of the sale or exchange and either (a) has a "tax home"
for Federal income tax purposes in the United States or (b) has an office or
other fixed place of business in the United States to which the gain is
attributable or (iii) the Company is or has been a "United States real property
holding corporation" (a "USRPHC") for Federal income tax purposes, within the
lesser of (a) the five-year period ending on the date of the sale or exchange
and (b) the Non-U.S. Holder's holding period, and, in each case, no treaty
exception is applicable. The Company is not currently a USRPHC, and does not
expect to become a USRPHC in the foreseeable future. Moreover, even if the
company were to become a USRPHC, any gain recognized by a Non-U.S. Holder still
would not be subject to U.S. tax if any class of the Company's stock were
"regularly traded" (within the meaning of applicable Treasury regulations) on an
established securities market (such as the NYSE) and the U.S. Holder did not
own, directly or constructively, more than 5% of the outstanding Common Shares
during the shorter of the two periods described in clauses (iii)(a) and (b)
above.
FEDERAL ESTATE TAXES
Common Shares that are beneficially owned by an individual who is neither a
citizen nor a resident of the United States at the time of death will be
included in such individual's gross estate for United States Federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, dividends on Common Shares paid to Non-U.S. Holders that are
subject to the 30% or a reduced treaty rate of United States Federal withholding
tax will be exempt from backup withholding tax. Otherwise, backup withholding of
United States Federal income tax at a rate of 31% may apply to dividends paid
with respect to Common Shares to holders that are not "exempt recipients" and
that fail to provide certain information (including the holder's taxpayer
identification number) in the manner required by United States law and
applicable regulations.
Payment of the proceeds from the sale by a Non-U.S. Holder of Common Shares
made to or through a foreign office of a broker will not be subject to
information reporting or backup withholding except that if the broker is a
United States person, a controlled foreign corporation for United States tax
purposes or a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified three-year
period, information reporting may apply to such payments. Payments of the
proceeds from the sale of Common Shares to or through the United States office
of a broker will be subject to information reporting and backup withholding
unless the holder certifies as to its non-United States status or otherwise
establishes an exemption from information reporting and backup withholding.
Recently adopted Treasury regulations change information reporting requirements
for Non-U.S. Holders for payments made after December 31, 1999. Accordingly, a
Non-U.S. Holder should consult its tax advisor regarding the effects on it, if
any, of these new regulations.
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<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives, BT
Alex. Brown Incorporated and McDonald & Company Securities, Inc. (the
"Representatives") have severally agreed to purchase from the Company and the
Selling Shareholder the following respective numbers of Common Shares at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BT Alex. Brown Incorporated.................................
McDonald & Company Securities, Inc..........................
---------
Total..................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Common Shares offered hereby if any of
such shares are purchased.
The Company and the Selling Shareholder have been advised by the
Representatives that the Underwriters propose to offer the Common Shares to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After
commencement of the initial public offering, this offering price and other
selling terms may be changed by the Representatives.
The Company and the Selling Shareholder have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 810,000 additional Common Shares at the initial public offering
price set forth on the cover page of this Prospectus less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of Common Shares to be purchased by it shown in the above table
bears to the initial commitment of the Underwriters, and the Company and the
Selling Shareholder will be obligated, pursuant to such option, to sell such
shares to the Underwriters. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of Common Shares offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the shares are being offered in the Offering.
At the request of the Company, the Underwriters have reserved up to 270,000
of the Common Shares offered hereby for sale at the initial public offering
price set forth on the cover page of this Prospectus to certain employees of the
Company and to certain other persons. The number of shares available for sale to
the general public will be reduced to the extent that such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other Common Shares
offered hereby.
Application has been made to have the Common Shares listed on the New York
Stock Exchange under the symbol " ".
To facilitate the Offering of the Common Shares, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the Common Shares. Specifically, the Underwriters may over-allot the
Common Shares in connection with this Offering, thereby creating a short
position in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Shares, the
Underwriters may bid for, and purchase, Common Shares in the open market. Any of
these activities may maintain the market price of the Common Shares at a level
above that which might otherwise prevail in the open market. The Underwriters
are not required to engage in these activities, and, if commenced, any such
activities may be discontinued at any time. The Representatives, on behalf of
the Underwriters, also may reclaim
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<PAGE> 65
selling concessions allowed to an Underwriter or dealer if the syndicate
repurchases Common Shares distributed by that Underwriter or dealer.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company, its officers, directors and principal shareholders (other than
the ESOP Trustee) have agreed not to offer, sell or otherwise dispose of any
Common Shares for a period of 180 days after the date of this Prospectus without
the prior consent of BT Alex. Brown Incorporated.
The Representatives have advised the Company and the Selling Shareholder
that the Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
has been determined by negotiation among the Company, the Selling Shareholder
and the Representatives. Among the factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company, the Selling Shareholder and the Representatives believed to
be comparable to the Company, estimates of the business potential of the
Company, the present state of the Company's development and other factors deemed
relevant.
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<PAGE> 66
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Cravath, Swaine &
Moore, New York, New York are acting as counsel for the Underwriters in
connection with certain legal matters relating to the Common Shares offered
hereby.
EXPERTS
The consolidated financial statements of the Company as of October 25, 1997
and October 26, 1996 and for each of the three years in the period ended October
25, 1997 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of J. C. Carter Company, Inc. at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement
(together with any amendments thereto, the "Registration Statement") on Form S-1
under the Securities Act, with respect to the Common Shares offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission, and to
which reference is hereby made. For further information, prospective investors
should refer to the Registration Statement and the exhibits and schedules
thereto, which may be inspected without charge at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
be obtained at prescribed rates by writing the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site, located at http://www.sec.gov, that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission. The
Company's Common Shares are expected to be listed on the New York Stock Exchange
(subject to approval and official notice of issuance), and reports, proxy
statements and other information concerning the Company may also be inspected at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
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<PAGE> 67
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARGO-TECH GROUP, INC. (FORMERLY AT HOLDINGS CORPORATION)
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet at May 2, 1998....... F-2
Condensed Consolidated Statements of Net Income for the 27
Weeks Ended May 3, 1997 and May 2, 1998................ F-3
Condensed Consolidated Statements of Cash Flows for the 27
Weeks Ended May 3, 1997 and May 2, 1998................ F-4
Notes to Condensed Consolidated Financial Statements...... F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................. F-7
Consolidated Balance Sheets at October 26, 1996 and
October 25, 1997....................................... F-8
Consolidated Statements of Net Income for the Fiscal Years
Ended October 28, 1995, October 26, 1996 and October
25, 1997............................................... F-9
Consolidated Statements of Shareholders'
Equity/(Deficiency) for the Fiscal Years Ended October
28, 1995, October 26, 1996 and October 25, 1997........ F-10
Consolidated Statements of Cash Flows for the Fiscal Years
Ended October 28, 1995, October 26, 1996 and October
25, 1997............................................... F-11
Notes to Consolidated Financial Statements................ F-12
J.C. CARTER COMPANY, INC.
UNAUDITED CONDENSED FINANCIAL STATEMENTS:
Condensed Statements of Operations for the Six Months
Ended June 30, 1997 and 1996........................... F-26
Condensed Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996........................... F-27
Notes to Condensed Financial Statements................... F-28
AUDITED FINANCIAL STATEMENTS:
Report of Independent Auditors............................ F-30
Balance Sheets at December 31, 1996 and 1995.............. F-31
Statements of Operations and Retained Earnings for the
Years Ended December 31, 1996, 1995 and 1994........... F-32
Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994.................................... F-33
Notes to Financial Statements............................. F-34
</TABLE>
F-1
<PAGE> 68
ARGO-TECH GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 2,
1998
--------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,921
Receivables, net.......................................... 22,906
Inventories............................................... 32,790
Deferred income taxes and prepaid expenses................ 4,795
--------
Total current assets.............................. 62,412
--------
PROPERTY AND EQUIPMENT, net of accumulated depreciation..... 34,843
GOODWILL, net of accumulated amortization................... 119,477
INTANGIBLE ASSETS........................................... 58,235
OTHER ASSETS................................................ 8,368
--------
Total assets...................................... $283,335
========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 4,758
Accounts payable.......................................... 5,947
Accrued liabilities....................................... 17,906
--------
Total current liabilities......................... 28,611
--------
LONG-TERM DEBT, net of current maturities................... 224,973
OTHER NONCURRENT LIABILITIES................................ 31,526
--------
Total liabilities................................. 285,110
--------
REDEEMABLE COMMON SHARES, no par value; 645,680 shares
issued and 624,447 shares outstanding..................... 4,813
REDEEMABLE ESOP SHARES, no par value; 3,870,594 shares
issued and 3,817,993 shares outstanding................... 29,738
Unearned ESOP shares...................................... (10,080)
--------
19,658
--------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY/(DEFICIENCY):
Preferred Shares, no par value, 5,000,000 shares
authorized; none issued and outstanding................ --
Common Shares, no par value, 50,000,000 shares authorized;
8,055,720 shares issued and 8,017,880 shares
outstanding............................................ --
Paid-in capital........................................... --
Subscriptions receivable.................................. (770)
Accumulated deficit....................................... (24,835)
Common Shares in the treasury............................. (641)
--------
Total shareholders' equity/(deficiency)........... (26,246)
--------
Total liabilities and shareholders'
equity/(deficiency)............................... $283,335
========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of this statement.
F-2
<PAGE> 69
ARGO-TECH GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
27 WEEKS ENDED
-------------------------
MAY 3, MAY 2,
1997 1998
---------- -----------
<S> <C> <C>
Net revenues................................................ $ 53,159 $ 85,835
Cost of revenues (including charge of $8,976 for write-off
of inventory purchase accounting adjustment in 1998)...... 31,891 55,500
---------- -----------
Gross profit...................................... 21,268 30,335
---------- -----------
Selling, general and administrative......................... 4,895 11,430
Research and development.................................... 3,569 3,091
Amortization of intangible assets........................... 1,255 3,755
---------- -----------
Operating expenses................................ 9,719 18,276
---------- -----------
Income from operations...................................... 11,549 12,059
Interest expense............................................ 5,640 11,337
Other, net.................................................. (237) (216)
---------- -----------
Income before income taxes.................................. 6,146 938
Income tax provision........................................ 2,643 477
---------- -----------
Net income.................................................. $ 3,503 $ 461
========== ===========
Earnings per common share data (Note 3):
Net income.................................................. $ 3,503 $ 461
Less: accrued preferred stock dividends..................... 1,527 --
---------- -----------
Net income available to common shareholders................. $ 1,976 $ 461
========== ===========
Weighted average shares outstanding:
Basic:
Basic weighted average shares outstanding.............. 9,613,612 9,951,804
========== ===========
Diluted:
Basic weighted average shares outstanding.............. 9,613,612 9,951,804
Effect of dilutive options............................. 313,895 320,172
---------- -----------
Diluted weighted average shares outstanding............ 9,927,507 10,271,976
========== ===========
Earnings per common share:
Basic earnings per common share........................... $ .21 $ .05
Dilutive earnings per common share........................ $ .20 $ .04
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of this statement.
F-3
<PAGE> 70
ARGO-TECH GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
27 WEEKS ENDED
-------------------------
MAY 3, MAY 2,
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,503 $ 461
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 2,258 3,399
Amortization of goodwill and deferred financing
costs................................................. 1,839 4,267
Compensation expense recognized in connection with
employee stock ownership plan......................... 1,689 2,057
Amortization of inventory step-up...................... -- 8,976
Deferred income taxes.................................. (440) (342)
Changes in operating assets and liabilities:
Receivables.......................................... (1,316) 1,477
Inventories.......................................... (1,938) (3,412)
Prepaid expenses..................................... (258) 1,325
Accounts payable..................................... (1,544) (423)
Accrued and other liabilities........................ 278 (4,797)
Other, net............................................. (186) 136
-------- --------
Net cash provided by operating activities................. 3,885 13,124
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -- Capital
expenditures.............................................. (798) (1,061)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowing of long-term debt.................... 41,100 --
Repayment of long-term debt............................... (3,200) (19,131)
Payment of financing related fees......................... -- (372)
Redemption of preferred stock............................. (25,908) --
Payment of redeemable preferred dividends................. (19,298) --
-------- --------
Net cash used in financing activities..................... (7,306) (19,503)
-------- --------
CASH AND CASH EQUIVALENTS:
Net decrease for the period................................. (4,219) (7,440)
Balance, beginning of period................................ 13,556 9,361
-------- --------
Balance, end of period...................................... $ 9,337 $ 1,921
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................... $ 4,377 $ 10,608
Income taxes................................................ 2,278 4,123
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of this statement.
F-4
<PAGE> 71
ARGO-TECH GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Argo-Tech Group, Inc. and subsidiaries (the "Company")
(formerly AT Holdings Corporation) pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the Company's annual
financial statements and footnotes, which describe the Company's summary of
significant accounting policies. The unaudited condensed consolidated statement
of net income for the 27 weeks ended May 2, 1998 is not necessarily indicative
of the results to be expected for the full year.
2. INVENTORIES
Inventories are stated at standard cost which approximates the costs which
would be determined using the first-in, first-out (FIFO) method. The recorded
value of inventories is not in excess of market value. Inventories consist of
the following (in thousands):
<TABLE>
<CAPTION>
MAY 2,
1998
-------
<S> <C>
Finished goods....................................... $ 2,037
Work-in-process and purchased parts.................. 22,905
Raw materials and supplies........................... 12,196
-------
Total.............................................. 37,138
Reserve for excess and obsolete inventory............ (4,348)
-------
Inventories -- net................................... $32,790
=======
</TABLE>
Inventory amounts include $1.7 million at May 2, 1998 which represents the
unamortized portion of inventories at their fair value as of the date of
acquisition of J.C. Carter in accordance with Accounting Principles Board
Opinion No. 16 -- "Business Combinations." Based on Carter's inventory turnover
rate, $9.0 million has been included in cost of revenues for the 27 week period
ended May 2, 1998.
3. EARNINGS PER SHARE ("EPS")
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" in fiscal 1998. Basic earnings per share is computed using
the weighted average number of common shares, less treasury shares, outstanding
during the year; diluted earnings per share is computed after consideration of
the dilutive effect of stock options.
4. CONTINGENCIES
ENVIRONMENTAL MATTERS -- The soil and groundwater at the Company's Euclid,
Ohio facility and the Costa Mesa, California facility contain elevated levels of
certain contaminants which are currently in the process of being removed and/or
remediated. Because the Company has certain indemnification rights from former
owners of the facilities for liabilities arising from these or other
environmental matters, in the opinion of the Company's management, the ultimate
outcome is not expected to materially affect the Company's financial condition,
results of operations or liquidity.
F-5
<PAGE> 72
ARGO-TECH GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
OTHER MATTERS -- The Company is subject to various legal actions and other
contingencies. In the opinion of the Company's management, after reviewing the
information which is currently available with respect to such matters and
consulting with the Company's legal counsel, any liability which may ultimately
be incurred with respect to these additional matters is not expected to
materially affect the Company's financial condition, results of operations or
liquidity.
5. SUBSEQUENT EVENTS
SAR PLAN -- Effective November 1, 1996 and November 1, 1997, a stock
appreciation rights plan ("SAR Plan") was created for the benefit of various
members of the Company's management. The SAR Plan provides for the right to
receive, pursuant to certain provisions of the SAR Plan, an amount, in cash
(less appropriate withholdings), equal to the increase, if any, in the value,
determined in accordance with the SAR Plan, of one share of the Company's Common
Shares from a date specified by the Compensation and Benefits Committee of the
Company's Board of Directors to the date of exercise of the stock appreciation
right in accordance with the SAR Plan. All of the rights granted under the SAR
Plan vest prorata from the effective date, over a period of four years. However,
the stock appreciation rights granted under the SAR plan would become
immediately exercisable in full should the Company complete an initial public
offering or has a change in control.
INITIAL PUBLIC OFFERING -- The Company is currently in the process of
issuing and selling 3.6 million common shares through an initial public offering
(the "Offering") at a price range of $13.00 to $15.00 per share. The Company
intends to use the net proceeds of the Offering to repay existing bank debt
outstanding under the Company's $135.0 million Credit Facility.
PREFERRED AND COMMON STOCK CHANGES -- All preferred and common stock,
shares and per share data have been adjusted to reflect: (i) reclassification of
all classes of common stock into one, (ii) the increase in the number of
authorized common shares to 50,000,000 shares, (iii) the 9.2157 for 1 split of
common stock, and (iv) the authorization of 5,000,000 non-voting preferred
shares.
REDEEMABLE COMMON AND ESOP STOCK -- In connection with the Offering, the
provision allowing management and ESOP shareholders to put shares held by them
back to the Company will be eliminated.
PROPOSED EMPLOYEE BENEFIT PLAN RESTRUCTURING -- Concurrent with the
proposed Offering, the Company has elected to terminate the ESOP, make
additional cash contributions to a defined contribution plan, grant all
remaining SARs, increase the number of options available for grant and grant new
options.
* * * * * *
F-6
<PAGE> 73
The information in the Prospectus (including, without limitation, financial
statements and share data) assumes consummation of a corporate reorganization in
which AT Holdings Corporation, a Delaware corporation, will merge with and into
Argo-Tech Group, Inc., an Ohio corporation which is currently a wholly owned
subsidiary of AT Holdings Corporation. In the reorganization, all shares of AT
Holdings Corporation will change into shares of Argo-Tech Group, Inc., which
will be the surviving corporation.
The accompanying consolidated financial statements reflect: (i)
reclassification of all classes of common stock into one, (ii) the increase in
the number of authorized common shares to 50,000,000 shares, (iii) the 9.2157
for 1 split of common stock, and (iv) the authorization of 5,000,000 non-voting
preferred shares, all of which are to be effected immediately prior to the
consummation of the offering contemplated by this Registration Statement. The
following opinion is in the form which will be signed by Deloitte & Touche LLP
upon consummation of the above, as described in Note 18 of the notes to
consolidated financial statements assuming that from December 12, 1997 to the
date of such events no other material events have occurred that would affect the
accompanying financial statements or require disclosure therein.
/S/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
July 17, 1998
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of Argo-Tech Group, Inc. (formerly AT Holdings Corporation)
We have audited the accompanying consolidated balance sheets of Argo-Tech
Group, Inc. (the "Company") (formerly AT Holdings Corporation) as of October 26,
1996 and October 25, 1997 and the related consolidated statements of net income,
shareholders' equity/(deficiency), and cash flows for each of the three years in
the period ended October 25, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 26,
1996 and October 25, 1997, and the results of their net income and their cash
flows for each of the three years in the period ended October 25, 1997 in
conformity with generally accepted accounting principles.
Cleveland, Ohio
December 12, 1997 ( , 1998 as to Note 18)
F-7
<PAGE> 74
ARGO-TECH GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 13,556 $ 9,361
Receivables, net.......................................... 15,105 24,383
Inventories............................................... 15,637 38,354
Deferred income taxes and prepaid expenses................ 3,821 1,636
-------- --------
Total current assets................................... 48,119 73,734
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation..... 27,919 37,181
GOODWILL, net of accumulated amortization................... 83,686 121,191
INTANGIBLE ASSETS........................................... -- 60,245
OTHER ASSETS................................................ 7,382 8,609
-------- --------
Total assets........................................... $167,106 $300,960
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 4,500 $ 6,904
Accounts payable.......................................... 4,556 6,369
Accrued liabilities....................................... 13,532 17,814
-------- --------
Total current liabilities.............................. 22,588 31,087
-------- --------
LONG-TERM DEBT, net of current maturities................... 103,107 241,958
OTHER NONCURRENT LIABILITIES................................ 27,681 32,137
-------- --------
Total liabilities...................................... 153,376 305,182
-------- --------
REDEEMABLE PREFERRED STOCK, $1.00 par value, 259,085 shares
authorized; 259,085 shares of Series A Cumulative
Redeemable Preferred Stock issued and outstanding with
$100 per share redemption value........................... 25,908 --
REDEEMABLE COMMON SHARES, no par value; 639,229 shares
issued, 639,229 and 617,996 shares outstanding at October
26, 1996 and October 25, 1997, respectively............... 4,067 4,813
REDEEMABLE ESOP SHARES, no par value; 3,870,594 shares
issued, and 3,862,650 and 3,829,308 shares outstanding at
October 26, 1996 and October 25, 1997, respectively....... 24,574 29,826
Unearned ESOP shares...................................... (12,600) (10,920)
-------- --------
11,974 18,906
COMMITMENTS AND CONTINGENCIES (Notes 10 and 16)
SHAREHOLDERS' EQUITY/(DEFICIENCY):
Preferred Shares, no par value, 5,000,000 shares
authorized; none issued and outstanding................ -- --
Common Shares, no par value, 50,000,000 shares authorized;
8,055,720 shares issued and 8,017,880 shares
outstanding at October 26, 1996 and October 25, 1997,
respectively........................................... -- --
Paid-in capital........................................... -- --
Subscriptions receivable.................................. (421) (720)
Accumulated deficit....................................... (27,593) (26,668)
Common Shares in the treasury............................. (205) (553)
-------- --------
Total shareholders' equity/(deficiency)................ (28,219) (27,941)
-------- --------
Total liabilities and shareholders'
equity/(deficiency)................................... $167,106 $300,960
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-8
<PAGE> 75
ARGO-TECH GROUP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------
OCTOBER 28, OCTOBER 26, OCTOBER 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues................................................ $ 86,671 $ 96,437 $ 117,086
Cost of revenues (including charge of $1,496 for write-off
of inventory purchase accounting adjustment in 1997) (Note
6)........................................................ 54,222 57,882 70,954
---------- ---------- ----------
Gross profit.............................................. 32,449 38,555 46,132
---------- ---------- ----------
Selling, general and administrative......................... 9,392 10,036 10,932
Research and development.................................... 5,664 6,429 5,682
Amortization of intangible assets........................... 2,334 2,842 2,852
---------- ---------- ----------
Operating expenses........................................ 17,390 19,307 19,466
---------- ---------- ----------
Income from operations...................................... 15,059 19,248 26,666
Interest expense............................................ 11,924 10,138 12,827
Other, net.................................................. (588) (142) (388)
---------- ---------- ----------
Income before income taxes and extraordinary loss........... 3,723 9,252 14,227
Income tax provision........................................ 1,553 3,608 4,841
---------- ---------- ----------
Income before extraordinary loss............................ 2,170 5,644 9,386
Extraordinary loss, net of income tax benefit of $1,019..... -- -- 1,529
---------- ---------- ----------
Net income.................................................. $ 2,170 $ 5,644 $ 7,857
========== ========== ==========
Earnings (loss) per common share data (Note 2):
Income before extraordinary loss............................ $ 2,170 $ 5,644 $ 9,386
Less: accrued preferred stock dividends..................... 3,509 3,848 1,527
accretion of redeemable common shares.................. 449 756 746
accretion of ESOP shares............................... 3,417 3,878 4,012
---------- ---------- ----------
Income (loss) before extraordinary loss available to common
shareholders.............................................. (5,205) (2,838) 3,101
Extraordinary loss.......................................... -- -- 1,529
---------- ---------- ----------
Net income (loss) available to common shareholders.......... $ (5,205) $ (2,838) $ 1,572
========== ========== ==========
Weighted average shares outstanding:
Basic:
Basic weighted average shares outstanding............... 8,867,110 9,261,767 9,621,165
========== ========== ==========
Diluted:
Basic weighted average shares outstanding............... 8,867,110 9,261,767 9,621,165
Effect of dilutive options.............................. -- -- 320,404
---------- ---------- ----------
Diluted weighted average shares outstanding............. 8,867,110 9,261,767 9,941,569
========== ========== ==========
Earnings (loss) per common share:
Basic:
Earnings (loss) before extraordinary loss............... $ (.59) $ (.31) $ .32
Extraordinary loss...................................... -- -- (.16)
---------- ---------- ----------
Basic earnings (loss) per common share.................. $ (.59) $ (.31) $ .16
========== ========== ==========
Diluted:
Earnings (loss) before extraordinary loss............... $ (.59) $ (.31) $ .31
Extraordinary loss...................................... -- -- (.15)
---------- ---------- ----------
Diluted earnings (loss) per common share................ $ (.59) $ (.31) $ .16
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-9
<PAGE> 76
ARGO-TECH GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
COMMON PAID-IN SUBSCRIPTIONS ACCUMULATED SHARES IN
SHARES CAPITAL RECEIVABLE DEFICIT THE TREASURY TOTAL
------- -------- ------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 29, 1994............... $ -- $ -- $(268) $(19,918) $(204) $(20,390)
Net income.............................. -- -- -- 2,170 -- 2,170
Dividends accrued on preferred stock.... -- -- -- (3,509) -- (3,509)
Accretion of redeemable common shares... -- -- -- (449) -- (449)
Accretion of ESOP shares................ -- -- -- (3,417) -- (3,417)
Other, net.............................. -- -- (88) 93 (27) (22)
------- -------- ----- -------- ----- --------
Balance, October 28, 1995............... $ -- $ -- $(356) $(25,030) $(231) $(25,617)
Net income.............................. -- -- -- 5,644 -- 5,644
Dividends accrued on preferred stock.... -- -- -- (3,848) -- (3,848)
Accretion of redeemable common shares... -- -- -- (756) -- (756)
Accretion of ESOP shares................ -- -- -- (3,878) -- (3,878)
Other, net.............................. -- -- (65) 275 26 236
------- -------- ----- -------- ----- --------
Balance, October 26, 1996............... $ -- $ -- $(421) $(27,593) $(205) $(28,219)
Net income.............................. -- -- -- 7,857 -- 7,857
Dividends accrued on preferred stock.... -- -- -- (1,527) -- (1,527)
Accretion of redeemable common shares... -- -- -- (746) -- (746)
Accretion of ESOP shares................ -- -- -- (4,012) -- (4,012)
Additional minimum pension liability.... -- -- -- (792) -- (792)
Other, net.............................. -- -- (299) 145 (348) (502)
------- -------- ----- -------- ----- --------
Balance, October 25, 1997............... $ -- $ -- $(720) $(26,668) $(553) $(27,941)
======= ======== ===== ======== ===== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-10
<PAGE> 77
ARGO-TECH GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
OCTOBER 28, OCTOBER 26, OCTOBER 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 2,170 $ 5,644 $ 7,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 4,838 4,620 4,665
Amortization of goodwill and deferred financing
costs............................................. 3,739 4,033 3,747
Compensation expense recognized in connection with
employee stock ownership plan..................... 1,670 2,329 2,920
Deferred rental income.............................. (670) (288) --
Deferred income taxes............................... 700 825 (413)
Extraordinary loss on early extinguishment of
debt.............................................. -- -- 1,529
Changes in operating assets and liabilities:
Receivables....................................... 270 434 (4,001)
Inventories....................................... 5,793 (168) 2,013
Prepaid expenses.................................. (290) 958 115
Accounts payable.................................. 1,777 291 (1,073)
Accrued and other liabilities..................... (2,693) (2,972) (377)
Other, net.......................................... 659 277 1,262
------- ------- --------
Net cash provided by operating activities.............. 17,963 15,983 18,244
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of J.C. Carter............................. -- -- (107,562)
Capital expenditures................................... (2,918) (3,355) (2,690)
------- ------- --------
Net cash used in investing activities.................. (2,918) (3,355) (110,252)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowing of long-term debt................. -- -- 156,100
Repayment of long-term debt............................ (19,000) (11,000) (155,090)
Redemption of redeemable preferred stock............... -- -- (25,908)
Payment of redeemable preferred dividends.............. -- -- (19,298)
Sale of Senior Subordinated Notes...................... -- -- 140,000
Payment of financing related fees...................... (730) -- (7,344)
Purchase of treasury stock............................. (117) (41) (647)
------- ------- --------
Net cash provided by (used in) financing activities.... (19,847) (11,041) 87,813
------- ------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) for the period................... (4,802) 1,587 (4,195)
Balance, beginning of period............................. 16,771 11,969 13,556
------- ------- --------
Balance, end of period................................... $11,969 $13,556 $ 9,361
======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-11
<PAGE> 78
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED OCTOBER 28, 1995, OCTOBER 26, 1996 AND
OCTOBER 25, 1997
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements present the financial
position, results of operations, cash flows and shareholders'
equity/(deficiency) of Argo-Tech Group, Inc. (the "Company") (formerly AT
Holdings Corporation), a parent holding company of Argo-Tech Corporation (ATC),
which is comprised of 4 wholly-owned operating subsidiaries, Argo-Tech
Corporation (HBP), Argo-Tech Corporation (OEM), Argo-Tech Corporation
(Aftermarket) and J.C. Carter Company, Inc. ("Carter"). The Company's principal
operations include the design, manufacture and distribution of aviation
products, primarily aircraft fuel pumps, throughout the world. In addition, the
Company leases a portion of its manufacturing facility to other parties. The
Company's fiscal year ends on the last Saturday in October. All fiscal years
presented consist of 52 week periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions between these entities have been
eliminated.
CASH EQUIVALENTS -- Cash equivalents represent short-term investments with
an original maturity of three months or less.
RECEIVABLES -- The Company does not generally require collateral or other
security to guarantee trade receivables.
INVENTORIES -- Inventories are stated at standard cost which approximates
the costs which would be determined using the first-in, first-out (FIFO) method.
The recorded value of inventories is not in excess of market value.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and are
depreciated using the straight-line or an accelerated method over their
estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements................... 7 to 30 years
Equipment.................................... 3 to 10 years
</TABLE>
GOODWILL -- Goodwill is amortized on a straight-line basis over forty
years. Accumulated amortization at October 26, 1996 and October 25, 1997 was
$14,947,000 and $17,450,000, respectively. The Company periodically evaluates
the recoverability of goodwill by comparing the book value of such assets to
expected future cash flows, on an undiscounted basis, over the remaining
amortization period of the asset. At October 25, 1997 no such impairment has
been recorded.
DEFERRED FINANCING COSTS -- The costs of obtaining financing are amortized
over the terms of the financing. The amortized cost is included in interest
expense in the consolidated statements of net income. Accumulated amortization
at October 26, 1996 and October 25, 1997 was $8,314,000 and $138,000,
respectively.
REVENUE AND COST RECOGNITION -- The Company recognizes revenues and costs
upon the shipment of goods or rendering of services to customers. The Company's
product development activities are conducted principally under cost-sharing
arrangements that are funded by the Company. The need for and timing of
expenditures under these arrangements is generally determined by the Company.
The estimated unreimbursable costs under the activities are expensed as
incurred.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent costs incurred plus estimated profit, less amounts billed to
customers. Incurred costs include production costs and related overhead.
General and administrative expenses and research and development expenses
are considered period costs and, accordingly, are charged to operations on a
current basis.
F-12
<PAGE> 79
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain customers have title to, or security interest in, certain
inventories by reason of progress payments.
EXTRAORDINARY LOSS -- In connection with the early extinguishment of debt
under the Company's previous bank credit agreement, the Company recognized an
extraordinary loss of $1.5 million, in fiscal 1997 net of income tax benefit of
$1.0 million, resulting from the write-off of unamortized debt issuance costs.
INCOME TAXES -- Income taxes are accounted for under the asset and
liability approach, which can result in recording tax provisions or benefits in
periods different than the periods in which such taxes are paid or benefits
realized. Expected tax benefits from temporary differences that will result in
deductible amounts in future years and from carryforwards, if it is more likely
than not that such tax benefits will be realized, are recognized currently.
EARNINGS PER SHARE ("EPS") -- The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" in fiscal 1998. This
statement established standards for computing and presenting earnings per share.
Such adoption was not required for the fiscal year ended October 25, 1997,
however, such information has been presented for comparison purposes. Basic
earnings per share is computed using the weighted average number of common
shares, less treasury shares, outstanding during the year; diluted earnings per
share is computed after consideration of the dilutive effect of stock options.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITION OF J.C. CARTER, INC.
On September 26, 1997 the Company acquired all of the outstanding shares of
Carter, a manufacturer of aircraft fluid control component parts, industrial
marine cryogenic pumps, and ground fueling components for $107.6 million,
including acquisition costs. The acquisition was funded by the issuance of
8 5/8% Senior Subordinated Notes (Note 10). The results of Carter's operations
have been combined with those of the Company since the date of acquisition. The
purchase price of $107.6 million exceeded the fair value of the net tangible
assets of Carter at the date of acquisition by $99.7 million. Of the excess,
$60.6 million was assigned to identified intangible assets as follows (in
thousands):
<TABLE>
<CAPTION>
FAIR ESTIMATED
MARKET ECONOMIC
VALUE LIFE
------ ---------
<S> <C> <C>
Workforce................................................... $ 4,900 8 Years
Contracts................................................... 17,100 10 Years
Spare parts annuity......................................... 38,200 10-28 Years
Patents..................................................... 380 14-17 Years
-------
Total..................................................... $60,580
=======
</TABLE>
The remaining excess of $39.1 million was considered goodwill that is being
amortized on a straight-line basis over 40 years.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, a preliminary allocation of the purchase price has been made
using estimated fair market values of the assets acquired and liabilities
assumed as of the acquisition date.
F-13
<PAGE> 80
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Carter as if the
acquisition had occurred October 29, 1995 (in thousands):
<TABLE>
<CAPTION>
1996(a) 1997(b)
------- -------
<S> <C> <C>
Revenues.................................................... $138,003 $160,102
Net income.................................................. 274 7,091
</TABLE>
(a)-Twelve months ended September 30, 1996 for Carter.
(b)-Twelve months ended October 25, 1997 for Carter.
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense as a result of a step-up in the basis of fixed assets, additional
amortization expense as a result of goodwill and other intangible assets, an
increase in the interest expense on the acquisition debt, and an adjustment on
certain shareholder expenses which were terminated concurrent with the
acquisition. In management's opinion, the unaudited pro forma combined results
of operations are not necessarily indicative of the actual results that would
have occurred had the acquisition been consummated at the beginning of fiscal
1996 or of future operations of the combined companies under the ownership and
management of the Company.
4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
The major components of the following balance sheet captions were (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Accrued liabilities:
Salaries and accrued compensation......................... $ 4,867 $ 8,609
Accrued interest.......................................... 2,070 979
Accrued warranty.......................................... 1,725 2,778
Other..................................................... 4,870 5,448
------- -------
Total.................................................. $13,532 $17,814
======= =======
Other noncurrent liabilities:
Accumulated dividends on redeemable preferred stock....... $17,770 $ --
Deferred income taxes..................................... -- 23,300
Other..................................................... 9,911 8,837
------- -------
Total.................................................. $27,681 $32,137
======= =======
</TABLE>
5. RECEIVABLES
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Amounts billed -- net of allowance for uncollectible amounts
of $164 and $142.......................................... $ 13,002 $ 23,047
-------- --------
Amounts unbilled (principally commercial customers):
Net reimbursable costs incurred on uncompleted
contracts.............................................. 16,785 13,775
Billings to date.......................................... (14,682) (12,439)
-------- --------
Total unbilled -- net.................................. 2,103 1,336
-------- --------
Receivables -- net.......................................... $ 15,105 $ 24,383
======== ========
</TABLE>
F-14
<PAGE> 81
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Finished goods.............................................. $ 1,658 $ 1,874
Work-in-process and purchased parts......................... 15,658 19,918
Raw materials and supplies.................................. 499 20,160
------- -------
Total..................................................... 17,815 41,952
Reserve for excess and obsolete inventory................... (2,178) (3,598)
------- -------
Inventories -- net.......................................... $15,637 $38,354
======= =======
</TABLE>
Inventory is recorded net of progress payments received of approximately
$2,655,000 at October 25, 1997.
The Carter inventory amounts at September 26, 1997 were increased by $12.2
million to record inventories at their fair value as of the date of acquisition
in accordance with Accounting Principles Board Opinion No. 16 -- "Business
Combinations." Based on Carter's inventory turnover rate, $1.5 million of this
amount is included in cost of revenues in fiscal 1997.
7. PROPERTY AND EQUIPMENT
OWNED PROPERTY -- Property and equipment owned by the Company consists of
the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Land and land improvements.................................. $ 4,488 $ 7,628
Buildings and building equipment............................ 29,042 31,941
Machinery and equipment..................................... 26,442 31,927
Office and automotive equipment............................. 4,748 5,714
Construction-in-progress.................................... 2,043 1,094
-------- --------
Total..................................................... 66,763 78,304
Accumulated depreciation.................................... (38,844) (41,123)
-------- --------
Total -- net................................................ $ 27,919 $ 37,181
======== ========
</TABLE>
PROPERTY LEASED TO OTHERS -- The Company leases certain portions of its
facility in Euclid, Ohio. The leases have been accounted for as operating leases
whereby revenue is recognized as earned over the lease terms. The cost of
property leased to others is included in property and equipment and is being
depreciated over its estimated useful life. It is not practical to determine the
cost of the property that is being leased to others or the related amount of
accumulated depreciation. In addition, the Company has separate service
contracts with its tenants under which the Company provides maintenance,
telecommunications and various other services. A large portion of the Company's
cost related to the receipts based on usage is variable in nature.
F-15
<PAGE> 82
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rental revenue under the property leases and service contracts was as
follows for fiscal 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Minimum contractual amounts under property leases........... $ 6,675 $ 6,056 $ 3,960
Service contracts revenue based on usage.................... 2,055 1,484 949
------- ------- -------
Total..................................................... $ 8,730 $ 7,540 $ 4,909
======= ======= =======
</TABLE>
Future minimum rentals under the noncancelable property leases and service
contracts at October 25, 1997 are (in thousands): $2,915 in 1998, $1,680 in
1999, $1,675 in 2000, $1,675 in 2001 and $1,675 in 2002.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN -- The Company has an Employee Stock
Ownership Plan (ESOP) to provide retirement benefits to qualifying, salaried
employees. The ESOP grants to participants in the plan certain ownership rights
in, but not possession of, the common stock of the Company held by the Trustee
of the Plan. Shares of common stock are allocated annually to participants in
the ESOP pursuant to a prescribed formula. The value of the shares committed to
be released by the Trustee under the Plan's provisions for allocation to
participants was recognized as an expense of $1,670,000, $2,329,000 and
$2,920,000 for fiscal 1995, 1996 and 1997, respectively. The cost of the shares
acquired for the ESOP that are not committed to be released to participants is
shown as "Unearned ESOP shares".
Summary information regarding ESOP activity consists of the following:
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Allocated shares............................................ 580,589 967,649
Shares released for allocation.............................. 387,059 387,059
Unearned ESOP shares........................................ 2,902,946 2,515,886
----------- -----------
Total ESOP shares........................................... 3,870,594 3,870,594
Repurchased shares received as distributions................ (7,944) (41,286)
----------- -----------
Total available ESOP shares................................. 3,862,650 3,829,308
=========== ===========
Fair market value of unearned ESOP shares................... $18,468,450 $19,595,940
=========== ===========
</TABLE>
All of the shares acquired for the ESOP (both allocated and unearned
shares) are owned and held in trust by the ESOP.
The Company's stock is not listed or traded on an active stock market and
market prices are, therefore, not available. Annually, an independent financial
consulting firm determines the fair market value based upon the Company's
performance and financial condition.
The Company provides an "internal market" for shareholders through its
purchase of their common shares. Participants in the Company's ESOP have the
right to require the Company, within a specified period, to repurchase shares
received as distributions under the ESOP at their fair market value.
PENSION AND SAVINGS PLANS -- The Company has two noncontributory defined
benefit pension plans for qualifying hourly and salary employees. The plan
covering salaried employees provides pension benefits that are based on the
employees' compensation and years of service. The future accrual of benefits was
terminated in connection with the formation of the ESOP. The plan covering
hourly employees provides benefits of stated amounts for each year of service.
The Company's funding policy is to contribute actuarially determined amounts
allowable under Internal Revenue Service regulations. The Company also sponsors
three employee savings plans
F-16
<PAGE> 83
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which cover substantially all of the Company's employees. The plan covering
Carter employees provides for a match of participating employees contributions.
The Company's contribution, recognized as expense was approximately $50,000 in
fiscal 1997.
A summary of the components of net periodic pension cost for the pension
plans for fiscal 1995, 1996 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 167 $ 218 $ 201
Interest cost on projected benefit obligation............... 701 805 971
Actual return on plan assets................................ (1,520) (1,488) (2,524)
Net amortization and deferral............................... 576 483 1,429
------- ------- -------
Net periodic pension cost (benefit)......................... $ (76) $ 18 $ 77
======= ======= =======
</TABLE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's balance sheets for its pension plan (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, 1996 OCTOBER 25, 1997
-------------------------- --------------------------
(ACCUMULATED (ASSETS (ACCUMULATED (ASSETS
BENEFITS EXCEED BENEFITS EXCEED
EXCEED ACCUMULATED EXCEED ACCUMULATED
ASSETS) BENEFITS) ASSETS) BENEFITS)
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation................ $ (3,450) $ (7,328) $ (5,585) $ (8,295)
======== ======== ======== ========
Accumulated benefit obligation........... $ (3,526) $ (7,328) $ (5,596) $ (8,295)
======== ======== ======== ========
Projected benefit obligation............. $ (3,526) $ (7,328) $ (5,596) $ (8,295)
Plan assets at fair value.................. 2,923 8,535 3,429 10,177
-------- -------- -------- --------
Projected benefit obligation (in excess of)
or less than plan assets................. (603) 1,207 (2,167) 1,882
Unrecognized prior service cost............ 451 -- 405 --
Unrecognized net (gain) loss from past
experience different from that assumed... (874) (2,661) 614 (3,023)
Adjustment required to recognize minimum
liability................................ -- -- (1,019) --
-------- -------- -------- --------
Accrued pension cost recognized in the
consolidated balance sheets.............. $ (1,026) $ (1,454) $ (2,167) $ (1,141)
======== ======== ======== ========
</TABLE>
The assumptions used to determine net periodic pension cost as well as the
funded status are:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Discount rate........................................ 8.0% 7.5%
Long-term rate of return on plan assets.............. 9.0% 9.0%
</TABLE>
The plans' assets consist primarily of insurance company pooled separate
accounts.
OTHER POSTRETIREMENT BENEFITS -- The Company provides certain
postretirement health care benefits to hourly retirees and their dependents.
Effective November 1, 1995, the Company adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement requires that costs of these postretirement benefits be accrued during
an employee's active working career. Prior to adoption of this statement, the
cost of providing these benefits was previously recognized on a pay-as-you-go
basis and amounted to $83,000 for fiscal 1995.
F-17
<PAGE> 84
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company implemented SFAS No. 106 on the immediate recognition basis by
recording a postretirement benefit obligation of $5,809,000, and, according to
Statement provisions related to business combinations occurring after December
21, 1990, a resulting increase in Goodwill and Deferred Income Taxes of
$3,485,000 and $2,324,000, respectively.
The net postretirement benefit cost for fiscal 1996 and 1997 includes the
following components (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Service cost................................................ $158 $149
Interest cost on accumulated postretirement benefit
obligation................................................ 460 592
Net amortization and deferral............................... -- 33
---- ----
Net postretirement benefit cost............................. $618 $774
==== ====
</TABLE>
Benefit costs were generally estimated assuming retiree health care costs
would initially increase at an 11% annual rate, decreasing gradually to a 5%
annual growth rate after 12 years and remain at a 5% annual growth rate
thereafter. A 1% increase in this annual trend rate would have increased the
accumulated postretirement benefit obligation at October 25, 1997 by $1,379,000
with a corresponding effect on the fiscal 1997 postretirement benefit expense of
$135,000. The discount rate used to estimate the accumulated postretirement
benefit obligation was 8.0% and 7.5% for fiscal 1996 and 1997, respectively.
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents................................... $(1,464) $(3,843)
Fully eligible active plan participants................... (1,629) (1,756)
Other active participants................................. (3,224) (3,135)
------- -------
(6,317) (8,734)
Unrecognized net loss from past experience different from
that assumed........................................... 28 1,823
------- -------
Postretirement benefit liability recognized on the balance
sheet.................................................. $(6,289) $(6,911)
======= =======
</TABLE>
9. INCOME TAXES
The income tax provision consists of the following for fiscal 1995, 1996
and 1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current tax provision:
Federal................................................... $ 764 $ 2,153 $ 4,118
State and local........................................... 89 630 117
------- ------- -------
Total.................................................. 853 2,783 4,235
Deferred tax provision(benefit)............................. 700 825 (413)
------- ------- -------
Income tax provision........................................ $ 1,553 $ 3,608 $ 3,822
======= ======= =======
</TABLE>
F-18
<PAGE> 85
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the recorded income tax provision and the amounts
computed using the statutory U.S. Federal income tax rate are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income tax provision at statutory rate...................... $ 1,266 $ 3,146 $ 3,988
State tax provision -- net of federal benefits.............. 78 416 100
Other -- net................................................ 209 46 (266)
------- ------- -------
Income tax provision........................................ $ 1,553 $ 3,608 $ 3,822
======= ======= =======
</TABLE>
During fiscal 1995, 1996 and 1997 the Company paid (net of refunds
received) approximately $1.2, $2.6 and $4.6 million in income taxes,
respectively.
The components of the Company's net deferred tax asset (liability) are as
follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Current:
Deductible temporary differences.......................... $ 3,493 $ 5,368
Inventories............................................... -- (4,329)
------- --------
Total....................................................... $ 3,493 $ 1,039
======= ========
Long-term:
Hourly retiree medical.................................... $ 2,453 $ 2,677
Deductible temporary differences.......................... 1,627 714
Property and equipment.................................... (347) (2,593)
Intangible assets......................................... -- (24,098)
------- --------
Total....................................................... $ 3,733 $(23,300)
======= ========
</TABLE>
The temporary differences described above principally represent differences
between the tax bases of assets (principally inventory, property and equipment)
or liabilities (principally related to employee benefits, loss reserves and
rental credits) and their reported amounts in the consolidated financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets or liabilities are recovered or settled,
respectively.
10. DEBT
SUMMARY -- The Company's long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
----------- -----------
<S> <C> <C>
Term loans........................... $ 52,600 $108,625
Senior Subordinated Notes............ -- 140,000
Subordinated loan.................... 50,000 --
Notes payable........................ 5,007 --
Other................................ -- 237
-------- --------
Total borrowings................... 107,607 248,862
Current maturities................... (4,500) (6,904)
-------- --------
Long-term portion.................... $103,107 $241,958
======== ========
</TABLE>
CREDIT FACILITY AND TERM LOANS -- On September 26, 1997, the Company
amended its then existing credit facility consisting of a seven-year $100.0
million term loan, a seven-year $20.0 million revolving credit facility
F-19
<PAGE> 86
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and a seven-year $15.0 million delayed draw acquisition loan (the "Credit
Facility") to allow for, among other things, the acquisition of Carter and the
issuance of the Senior Subordinated Notes. The Company has guaranteed ATC's
obligations under the Credit Facility. This credit facility was originally put
in place in July 1997. Under the Credit Facility, the Company has $110.0 million
principal amount of term loans, of which $108.6 million is outstanding at
October 25, 1997, and also has available a seven-year $20.0 million revolving
credit facility. The unused balance of the revolving credit facility ($19.7
million at October 25, 1997) is subject to a .50% commitment fee. In connection
with the credit facility put in place in July 1997, the Company recorded an
extraordinary charge of $2.5 million, consisting primarily of the write-off of
unamortized financing costs related to a prior credit facility. The Credit
Facility is collateralized by substantially all of the tangible assets of the
Company (including the capital stock of ATC) as well as the unearned shares of
the Company's common stock held by the ESOP. The Credit Facility contains a
number of covenants that, among other things, limit the Company's ability to
incur additional indebtedness, pay dividends, prepay subordinated indebtedness,
dispose of certain assets, create liens, make capital expenditures, make certain
investments or acquisitions and otherwise restrict corporate activities. The
Credit Facility also requires the Company to comply with certain financial
ratios and tests, under which the Company will be required to achieve certain
financial and operating results. The Company was in compliance with the
covenants at October 25, 1997. Interest will be calculated, at the Company's
choice, using an alternate base rate (ABR) or LIBOR, plus a supplemental
percentage determined by the ratio of debt to EBITDA. The interest rate is not
to exceed ABR plus 1.00% or LIBOR plus 2.00%.
The Company had entered into three interest rate swap agreements with a
financial institution which fixed the interest rate on the notional amounts of
$20.0 million at 5.80% and $20.0 million at 5.715% through October 1997, and
$30.0 million at 6.66% through October 2000. In July 1997 the Company unwound
$40.0 million of the swap agreements which were to terminate in October 1997.
The remaining $30.0 million swap was transferred to another financial
institution which fixed the rate at 6.785% through October 2000. The
gains/losses on the swap agreements were recognized as interest expense and
amounted to a $0.1 million gain in fiscal 1995, a $0.4 million loss in fiscal
1996 and a $0.3 million loss in fiscal 1997. The Company has no other derivative
financial instruments.
SENIOR SUBORDINATED NOTES -- The 8 5/8% Senior Subordinated Notes due 2007
(the "Notes") were issued by the Company on September 26, 1997. Proceeds from
the offering, together with a portion of the borrowings under the Credit
Facility, were used (i) to finance the acquisition of Carter, (ii) to repay in
full $46.1 million in existing notes and, (iii) to pay fees and expenses
incurred in connection with the acquisition.
Interest on the Notes will be payable semiannually on April 1 and October 1
of each year, commencing on April 1, 1998. The Notes will mature on October 1,
2007. Except as described below, the Company may not redeem the Notes prior to
October 1, 2002. On or after such date, the Company may redeem the Notes, in
whole or in part, at the redemption prices at the time, together with accrued
and unpaid interest, if any, to the date of redemption. In addition, at any time
on or prior to October 1, 2000, the Company may, subject to certain
requirements, redeem up to 33 1/3% of the original aggregate principal amount of
the Notes with net cash proceeds of one or more public equity offerings by the
Company, at a redemption price equal to 108.625% of the principal amount to be
redeemed, together with accrued and unpaid interest, if any, to the date of
redemption, provided that at least 66 2/3% of the original aggregate principal
amount of the Notes remains outstanding immediately after each such redemption.
The Notes are unsecured and are subordinated in right of payment to all
existing and future Senior Indebtedness of the Company.
SUBORDINATED LOAN -- The Subordinated loan, which was due October 28, 2000,
and was guaranteed by the parent company of the majority shareholder of the
Company and was subordinate to the amounts payable under the prior credit
facility, was refinanced with proceeds from the credit facility put in place in
July 1997. The Subordinated loan was payable to the financial institution which
provided the Company's credit facility and bore
F-20
<PAGE> 87
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest at the Company's option equal to (1) the LIBOR Rate for Eurodollar
Loans plus 1% or (2) the higher of the overnight federal funds rate or the prime
rate.
NOTES PAYABLE -- The repayment of the notes payable, which were due on
October 28, 2000, was subordinate to the Company's other long-term debt.
Interest on the notes was payable at the prime rate. The notes payable were
repaid in September 1997 with proceeds from the Senior Subordinated Notes.
ANNUAL MATURITIES AND INTEREST PAYMENTS -- The maturities of the Company's
long-term debt during each of the next five fiscal years are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- -------------- --------
<S> <C>
1998.......... $ 6,904
1999.......... 6,899
2000.......... 10,885
2001.......... 13,576
2002.......... 21,722
Thereafter.... 188,876
--------
Total......... $248,862
========
</TABLE>
The total interest paid during fiscal 1995, 1996 and 1997 was $9.8 million,
$9.2 million and $12.5 million, respectively.
The covenants in certain of ATC's debt instruments restrict the ability of
ATC to make distributions to the Company, which materially restricts ATC's
ability to pay dividends while such obligations are outstanding.
11. REDEEMABLE STOCK
Redeemable preferred stock of the Company consisted of $1 par value Series
A Cumulative Redeemable Preferred Stock. The preferred stock was to be redeemed
by December 24, 2000 at a liquidation preference of $25.9 million ($100 per
share) plus accrued dividends. All of the preferred stock was redeemable prior
to December 24, 2000 upon a change in the control of the Company (as defined)
and up to $10.0 million was redeemable from the proceeds from certain sales of
the Company's real estate, including the Euclid, Ohio facility. Under the terms
of the Company's articles of incorporation and by-laws, no additional shares of
preferred stock were available for issuance.
Dividends were accrued at an annual rate of 9.33% (based on a $100 per
share value), compounded quarterly. Dividends accrued during the period December
24, 1990 through December 24, 1997 could be paid at any time prior to December
24, 2000. At October 26, 1996 dividends of $17.8 million were accrued on the
preferred stock and included in other long-term liabilities on the accompanying
consolidated balance sheets.
In March 1997, the Company redeemed all of its preferred stock and paid the
accrued dividends in exchange for $41.1 million of subordinated notes and cash
of $4.1 million. The $41.1 million in subordinated notes was repaid in full in
September 1997 with proceeds from the issuance of $140.0 million in Senior
Subordinated Notes (Note 10).
Redeemable common shares represent a right (a "put") that management
shareholders have to require the Company to repurchase shares of common stock at
the greater of their fair market value or $4.34 (as adjusted for split) per
share, subject to certain limitations through April 30, 2004. There were 639,229
and 617,996 of these shares outstanding at October 26, 1996 and October 25,
1997, respectively.
F-21
<PAGE> 88
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK OPTIONS
The Company's Board of Directors has authorized the issuance of Company
Common Shares under two qualified stock option plans at an exercise price of
$1.09 (as adjusted for split) per share. All stock options expire in the year
2001. All of the options granted vest proratably over a period of four years.
A summary of changes in the stock options granted is as follows:
<TABLE>
<CAPTION>
OPTIONS
-------
<S> <C>
Outstanding, October 29, 1994............................... 215,970
Granted................................................... 71,790
Exercised................................................. (461)
Cancelled................................................. (4,147)
-------
Outstanding, October 28, 1995............................... 283,152
Granted................................................... 95,290
-------
Outstanding, October 26, 1996............................... 378,442
No Activity............................................... --
-------
Outstanding, October 25, 1997............................... 378,442
Options exercisable at October,
1995........................................................ 227,232
1996........................................................ 268,997
1997........................................................ 310,772
</TABLE>
The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which
compensation cost has been recognized for all common stock options that were
issued with a price below fair market value. Such expense is recognized over the
vesting period of the options. The Company recognized compensation expense of
$94,000, $277,000 and $145,000 during fiscal 1995, 1996 and 1997, respectively.
At October 25, 1997, unrecognized deferred compensation was approximately
$101,000. As all options outstanding at October 25, 1997 had been issued in
years prior to the effective date of SFAS No. 123, "Accounting for Stock-Based
Compensation," such standard had no effect on the Company's net income.
13. RELATED PARTY TRANSACTIONS
Management fees and out-of-pocket expenses were charged to operations in
accordance with the provisions of a management agreement between the Company and
a related party. Fees payable to the parent company of the majority shareholder
for the guarantee of the Company's subordinated loan were charged to operations.
The total related party fees charged to operations during fiscal 1995, 1996 and
1997 approximated 1.0%, 0.8% and 0.6% of net revenues, respectively. In
addition, during fiscal 1995, 1996 and 1997 sales of $17.4 million, $21.1
million and $25.9 million, respectively, were made to a related party.
14. MAJOR CUSTOMERS AND EXPORT SALES
During fiscal 1995, 1996 and 1997, the Company had revenues in excess of
10% from the following customers (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Customer A.............. $17,444 $21,167 $25,896
Customer B.............. 12,172 16,177 14,562
Customer C.............. -- -- 12,740
</TABLE>
F-22
<PAGE> 89
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1995, 1996 and 1997, export sales to foreign customers were
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Europe........................... $10,096 $13,158 $18,786
All others (individually
less than 10%)................. 27,437 30,911 40,707
------- ------- -------
$37,533 $44,069 $59,493
======= ======= =======
</TABLE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has various financial instruments, including cash and
short-term investments, interest rate swaps and long-term debt. The Company has
determined the estimated fair value of these financial instruments by soliciting
available market information and utilizing appropriate valuation methodologies
which require judgment. The Company believes that the carrying values of these
financial instruments approximate their fair value.
16. CONTINGENCIES
ENVIRONMENTAL MATTERS -- The soil and groundwater at the Company's Euclid,
Ohio facility and the Costa Mesa, California facility contain elevated levels of
certain contaminants which are currently in the process of being removed and/or
remediated. Because the Company has certain indemnification rights from former
owners of the facilities for liabilities arising from these or other
environmental matters, in the opinion of the Company's management, the ultimate
outcome is not expected to materially affect the Company's financial condition,
results of operations or liquidity.
OTHER MATTERS -- The Company is subject to various legal actions and other
contingencies. In the opinion of the Company's management, after reviewing the
information which is currently available with respect to such matters and
consulting with the Company's legal counsel, any liability which may ultimately
be incurred with respect to these additional matters is not expected to
materially affect the Company's financial condition, results of operations or
liquidity.
17. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Also, in June 1997, the
FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." The statement requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments such as a measure of segment profit or loss, certain specific revenue
and expense items, and segment assets. SFAS 130 and SFAS 131 must be implemented
by the Company in fiscal 1999. The Company has not completed its evaluation of
these statements, but does not anticipate a material impact on the consolidated
financial statements from the adoption of the additional disclosure requirements
of these accounting standards.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement does not
change the recognition or measurement of pension or postretirement benefit
plans, but standardizes disclosure requirements for pensions and other
postretirement benefits, eliminates certain disclosures and requires certain
additional information. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997.
F-23
<PAGE> 90
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENTS
SAR PLAN -- Effective November 1, 1996 and November 1, 1997, a stock
appreciation rights plan ("SAR Plan") was created for the benefit of various
members of the Company's management. The SAR Plan provides for the right to
receive, pursuant to certain provisions of the SAR Plan, an amount, in cash
(less appropriate withholdings), equal to the increase, if any, in the value,
determined in accordance with the SAR Plan, of one share of the Company's Common
Shares from a date specified by the Compensation and Benefits Committee of the
Company's Board of Directors to the date of exercise of the stock appreciation
right in accordance with the SAR Plan. All of the rights granted under the SAR
Plan vest prorata from the effective date, over a period of four years. However,
the stock appreciation rights granted under the SAR plan would become
immediately exercisable in full should the Company complete an initial public
offering or has a change in control.
INITIAL PUBLIC OFFERING -- The Company is currently in the process of
issuing and selling 3.6 million common shares through an initial public offering
(the "Offering") at a price range of $13.00 to $15.00 per share. The Company
intends to use the net proceeds of the Offering to repay existing bank debt
outstanding under the Company's $135.0 million Credit Facility.
PREFERRED AND COMMON STOCK CHANGES -- All preferred and common stock,
shares and per share data have been adjusted to reflect: (i) reclassification of
all classes of common stock into one, (ii) the increase in the number of
authorized common shares to 50,000,000 shares, (iii) the 9.2157 for 1 split of
common stock, and (iv) the authorization of 5,000,000 non-voting preferred
shares.
REDEEMABLE COMMON AND ESOP STOCK -- In connection with the Offering, the
provision allowing management and ESOP shareholders to put shares held by them
back to the Company will be eliminated.
PROPOSED EMPLOYEE BENEFIT PLAN RESTRUCTURING -- Concurrent with the
proposed Offering, the Company has elected to terminate the ESOP, make
additional cash contributions to a defined contribution plan, grant all
remaining SARs, increase the number of options available for grant and grant new
options.
19. PARENT COMPANY FINANCIAL STATEMENTS
As discussed in Note 10, the covenants in certain of ATC's debt instruments
restrict the ability of ATC to make distributions to the Company, which
materially restricts ATC's ability to pay dividends while such obligations are
outstanding. Accordingly, the following parent company only financial statements
are presented since the distribution of net assets at ATC is restricted.
F-24
<PAGE> 91
ARGO-TECH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 25,
1996 1997
---------------- ----------------
<S> <C> <C>
Assets:
Equity investment in subsidiaries......................... $ 31,500 $ --
-------- --------
Total assets........................................... $ 31,500 $ --
======== ========
Liabilities:
Deficit in subsidiaries................................... $ -- $ 4,222
Dividends payable......................................... 17,770 --
-------- --------
Total liabilities...................................... 17,770 4,222
-------- --------
Redeemable Preferred Stock................................ 25,908 --
Redeemable Common Shares.................................. 4,067 4,813
Redeemable ESOP Shares, net............................... 11,974 18,906
Shareholders' Equity/(Deficiency):
Subscriptions receivable.................................. (421) (720)
Shareholders' equity/(deficiency)......................... (27,798) (27,221)
-------- --------
Total shareholders' equity/(deficiency)................ (28,219) (27,941)
-------- --------
Total liabilities and shareholders'
equity/deficiency.................................... $ 31,500 $ --
======== ========
</TABLE>
CONDENSED STATEMENTS OF NET INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------
OCTOBER 28, OCTOBER 26, OCTOBER 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Equity in undistributed net income (loss) of subsidiaries... $(5,205) $(2,838) $ 1,572
------- ------- -------
Net income (loss) available to common shareholders..... $(5,205) $(2,838) $ 1,572
======= ======= =======
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------
OCTOBER 28, OCTOBER 26, OCTOBER 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) available to common shareholders........ $(5,205) $(2,838) $ 1,572
Adjustments to reconcile net income (loss) available to
common shareholders to net cash provided by operating
activities............................................. 5,205 2,838 (1,572)
------- ------- -------
Net cash provided by operating activities................. -- -- --
------- ------- -------
Net increase in cash........................................ -- -- --
Cash at beginning of the period............................. -- -- --
------- ------- -------
Cash at end of the period................................... $ -- $ -- $ --
======= ======= =======
Non-cash redemption of Preferred Stock and dividends
payable................................................... $ -- $ -- $45,205
======= ======= =======
</TABLE>
* * * * * *
F-25
<PAGE> 92
J.C. CARTER COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenues................................................ $24,008 $22,131
Cost of revenues............................................ 12,144 12,052
------- -------
Gross profit...................................... 11,864 10,079
------- -------
Selling, general and administrative......................... 4,395 3,564
Engineering and development................................. 1,309 790
Office of the President..................................... 6,088 4,840
------- -------
Operating expenses................................ 11,792 9,194
------- -------
Income from operations...................................... 72 885
Interest expense............................................ 537 489
Other expense, net.......................................... 214 54
------- -------
Income (loss) before income taxes........................... (679) 342
Income tax provision (benefit).............................. (2,271) 43
------- -------
Net income.................................................. $ 1,592 $ 299
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-26
<PAGE> 93
J.C. CARTER COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 1,592 $ 299
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 359 301
Provision for deferred income taxes.................... (2,207) --
Loss on sale of property, plant and equipment.......... 150 123
Changes in operating assets and liabilities:
Accounts receivable.................................. 360 (215)
Cost and estimated earnings in excess of billings on
uncompleted contracts............................... 133 (146)
Inventory............................................ (1,124) 205
Prepaid expenses, other and refundable income
taxes............................................... (13) 86
Note and accrued interest receivable from an
officer/shareholder............................... (14) 245
Accounts payable and accrued liabilities............. (188) (234)
Accrued bonuses...................................... (520) (139)
------- -------
Net cash provided by (used in) operating activities....... (1,472) 525
INVESTING ACTIVITIES:
Capital expenditures...................................... (69) (4,170)
Proceeds from sale of property, plant and equipment....... -- 3,855
Acquisition of IMS........................................ (407) --
------- -------
Net cash used in investing activities..................... (476) (315)
FINANCING ACTIVITIES:
Proceeds from bank borrowings............................. -- 42
Principal payments on debt................................ (650) (650)
Net borrowings on credit line............................. 2,847 55
Payments on capital lease obligations..................... (46) (8)
------- -------
Net cash provided by (used in) financing activities....... 2,151 (561)
------- -------
NET INCREASE (DECREASE) IN CASH............................. 203 (351)
CASH AT BEGINNING OF YEAR................................... -- 420
------- -------
CASH AT END OF YEAR......................................... $ 203 $ 69
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-27
<PAGE> 94
J. C. CARTER COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by J.C.
Carter Company, Inc. (the "Company") pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules. The Company believes
that the disclosures made are adequate to make the information presented not
misleading. The statement of operations for the six months ended June 30, 1997
is not necessarily indicative of the results to be expected for the full year.
INVENTORY
Inventory is stated at the lower of cost or market. Cost has been
determined under the first-in, first-out method. Inventory at June 30, 1997
consists of the following (in thousands):
<TABLE>
<S> <C>
Finished goods awaiting shipment............................ $ 496
Work in process............................................. 1,756
Material and spare parts.................................... 9,156
-------
$11,408
=======
</TABLE>
CASH FLOWS
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $187,000 and $488,000, respectively for six months ended
June 30, 1997.
INCOME TAXES
Effective January 1, 1997, the Company voluntarily terminated the
Subchapter S tax status and will be taxed at the applicable state and federal
statutory rates. The Company will record a tax benefit of approximately
$2,207,000, in the six months ended June 30, 1997, for the impact on the
deferred assets for the change in tax status.
REVENUE RECOGNITION
The Company uses the unit-of-delivery or percentage-of-completion methods
for recognizing sales and cost of sales under long-term contracts. A majority of
revenues from product sales and long-term contracts are recorded as units are
shipped. Revenues, which includes costs incurred plus a portion of estimated
profit, applicable to certain fixed-price long-term contracts (principally
design and development contracts), are recognized on the
percentage-of-completion (cost-to-cost) method, whereby revenue is measured by
relating costs incurred to total estimated costs. Any anticipated losses on
contracts are charged to earnings when identified. Revenues related to claims or
contract changes that have not been completely priced, negotiated, documented or
funded are not recognized unless realization is considered probable.
CONTRACTS IN PROCESS
Costs and estimated earnings in excess of billings on uncompleted contracts
represents costs incurred plus estimated profit, less amounts billed to
customers. Incurred costs include production costs and related overhead.
F-28
<PAGE> 95
J. C. CARTER COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
CONTINGENCIES
During 1990, the Company received a cleanup and abatement order from the
California Regional Ground Water Quality Control Board (Santa Ana Region)
related to certain hazardous waste materials that are present under the
Company's facilities. The Company filed an appeal of the order with the State
Water Resources Control Board (the State Board). The Company continues to
negotiate with the Regional Board as to that responsibility, if any, the Company
will have for site investigation or cleanup. Management and their consultants
believe that much of the pollution is from sources outside the Company, and the
Company intends to vigorously defend against all liability arising from this
issue.
The potential costs related to the above matters, and the possible impact
thereof on future operations, are uncertain and it is not possible at the
present time to estimate the ultimate range of legal and financial liability
with regard to the above matters. No reserve is included in accrued liabilities
at June 30, 1997 for anticipated cleanup or other costs related to the hazardous
waste materials mentioned in the previous paragraph. Management believes that
the remaining liability will not materially affect the Company's financial
condition, results of operations or liquidity.
The Company is a defendant in various lawsuits. In the opinion of
management, potential losses, if any, would not materially affect the Company's
financial condition, results of operations or liquidity.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt this
standard during fiscal 1998. Such adoption is not expected to have a material
effect on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprises report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. The Company will adopt this standard during fiscal 1998.
Such adoption is not expected to have a material effect on the Company.
SUBSEQUENT EVENTS
On August 1, 1997, the shareholders of J.C. Carter Company, Inc. entered
into an agreement to sell 100% of the outstanding common stock of the Company to
Argo-Tech Corporation for approximately $107.0 million in cash, subject to
post-closing adjustment. The sale was completed on September 26, 1997.
On August 25, 1997 the Company met with the California Regional Quality
Control Board, Santa Ana Region (the "Board") to present recent results from
newly installed wells. The Board's position is that both onsite remediation and
offsite groundwater investigation will be required. The Company intends to
propose additional solutions to the Board. The estimate to remediate onsite and
investigate offsite groundwater is approximately $500,000 to $1,500,000. The
shareholders of J.C. Carter Company, Inc. have agreed to indemnify Argo-Tech
Corporation for the costs of all known environmental liabilities if the purchase
agreement is finalized.
* * * * * *
F-29
<PAGE> 96
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
J.C. Carter Company, Inc.
We have audited the accompanying balance sheets of J.C. Carter Company,
Inc. as of December 31, 1996 and 1995, and the related statements of operations
and retained earnings, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of J.C. Carter Company, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Long Beach, California
March 21, 1997
F-30
<PAGE> 97
J.C. CARTER COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ -- $ 420
Accounts receivable, net of allowance of $63 in 1996 and
$73 in 1995............................................ 5,161 4,741
Note and accrued interest receivable from an
officer/shareholder.................................... 2,266 2,256
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 792 859
Inventory................................................. 10,228 10,203
Prepaid expenses and other................................ 520 496
------- -------
Total current assets................................... 18,967 18,975
PROPERTY, PLANT AND EQUIPMENT, net.......................... 5,549 5,142
------- -------
TOTAL ASSETS................................................ $24,516 $24,117
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,071 $ 2,974
Accrued liabilities....................................... 2,069 2,238
Accrued bonuses........................................... 2,581 2,272
Current portion of capital lease obligation............... 95 17
Current portion of long-term debt......................... 8,680 8,800
------- -------
Total current liabilities.............................. 16,496 16,301
CAPITAL LEASE OBLIGATION, less current portion.............. 226 77
LONG-TERM DEBT, less current portion........................ 2,387 3,658
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, no par value: authorized
shares -- 2,000,000; issued and outstanding
shares -- 1,125,000.................................... 1,125 1,125
Retained earnings......................................... 4,282 2,956
------- -------
Total shareholders' equity............................. 5,407 4,081
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $24,516 $24,117
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-31
<PAGE> 98
J.C. CARTER COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net revenues................................................ $44,450 $39,986 $38,727
Cost of revenues............................................ 22,558 20,384 18,983
------- ------- -------
Gross profit.............................................. 21,892 19,602 19,744
Selling, general and administrative......................... 7,919 6,760 6,452
Engineering and development................................. 2,007 2,062 2,008
Office of the President..................................... 9,339 10,994 7,963
------- ------- -------
Operating expenses........................................ 19,265 19,816 16,423
------- ------- -------
Income (loss) from operations............................... 2,627 (214) 3,321
Interest expense............................................ 970 934 859
Other expense, net.......................................... 226 101 396
------- ------- -------
Income (loss) before income taxes........................... 1,431 (1,249) 2,066
Income tax provision........................................ 105 188 60
------- ------- -------
Net income (loss)........................................... 1,326 (1,437) 2,006
Retained earnings at beginning of year...................... 2,956 4,393 2,387
------- ------- -------
Retained earnings at end of year............................ $ 4,282 $ 2,956 $ 4,393
======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-32
<PAGE> 99
J.C. CARTER COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,326 $(1,437) $ 2,006
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 587 860 455
Provision for deferred income taxes.................. 5 7 33
Gain on sale of property, plant and equipment........ (214) (19) (11)
Changes in operating assets and liabilities:
Accounts receivable............................... (420) (1,187) 1,039
Cost and estimated earnings in excess of billings
on uncompleted contracts........................ 67 (827) (8)
Inventory......................................... (25) (1,180) (782)
Prepaid expenses and other........................ (29) 102 23
Note and accrued interest receivable from an
officer/shareholder............................. (10) (227) 435
Accounts payable and accrued liabilities.......... (72) 579 (2,185)
Accrued bonuses................................... 309 2,272 --
------- ------- -------
Net cash provided by (used in) operating activities....... 1,524 (1,057) 1,005
INVESTING ACTIVITIES:
Capital expenditures...................................... (4,991) (712) (867)
Proceeds from sale of property, plant and equipment....... 4,211 30 12
Long-term accounts receivable from officer/shareholder.... -- -- 24
------- ------- -------
Net cash used in investing activities..................... (780) (682) (831)
FINANCING ACTIVITIES:
Proceeds from bank borrowings............................. -- 5,500 1,614
Principal payments on debt................................ (1,261) (6,067) (1,500)
Net (payments) borrowings on credit line.................. (130) 2,488 (1,088)
Net borrowings (payments) on capital lease obligations.... 227 84 (12)
Net repayments on note receivable from
officer/shareholder.................................... -- -- 966
------- ------- -------
Net cash (used in) provided by financing activities....... (1,164) 2,005 (20)
------- ------- -------
NET (DECREASE) INCREASE IN CASH............................. (420) 266 154
CASH AT BEGINNING OF YEAR................................... 420 154 --
------- ------- -------
CASH AT END OF YEAR......................................... $ -- $ 420 $ 154
======= ======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-33
<PAGE> 100
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND CREDIT RISK -- J. C. Carter Company, Inc. (the "Company")
manufactures certain aircraft fluid control component parts, industrial marine
cryogenic pumps, and special ground fueling components which are sold to U.S.
and foreign government prime contractors and subcontractors, commercial airlines
and airplane manufacturers.
Sales under U.S. government prime contractors and subcontractors were
$23,495,000, or 53% of total sales, $19,654,000, or 49% of total sales, and
$19,205,000, or 50% of total sales, in 1996, 1995 and 1994, respectively.
INVENTORY -- Inventory is stated at the lower of cost or market. Cost has
been determined under the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated on
the basis of cost. Depreciation is computed using the straight-line method, at
rates designated to distribute the cost of assets over the useful lives,
estimated as follows:
<TABLE>
<S> <C>
Buildings and improvements................... 7 years
Furniture and fixtures....................... 5 years
Machinery and equipment...................... 3-7 years
</TABLE>
REVENUE RECOGNITION -- The Company uses the unit-of-delivery or
percentage-of-completion methods for recognizing sales and cost of sales under
long-term contracts. A majority of revenues from product sales and long-term
contracts are recorded as units are shipped. Revenues, which includes costs
incurred plus a portion of estimated profit, applicable to certain fixed-price
long-term contracts (principally design and development contracts), are
recognized on the percentage-of-completion (cost to-cost) method, whereby
revenue is measured by relating costs incurred to total estimated costs. Any
anticipated losses on contracts are charged to earnings when identified.
Revenues related to claims or contract changes that have not been completely
priced, negotiated, documented or funded are not recognized unless realization
is considered probable.
Revenues, costs, and earnings on long-term contracts are based, in part, on
estimates and as a result, actual earnings may differ from those estimates.
CONTRACTS IN PROCESS -- Costs and estimated earnings in excess of billings
on uncompleted contracts represents costs incurred plus estimated profit, less
amounts billed to customers. Incurred costs include production costs and related
overhead.
General and administrative expenses and research and development expenses
are considered period costs and, accordingly, are charged to operations on a
current basis.
Certain customers have title to, or security interest in, certain
inventories by reason of progress payments.
RESEARCH AND DEVELOPMENT -- Research and development expenses of $411,000,
$416,000 and $512,000 in 1996, 1995 and 1994, respectively, are included in
engineering and development costs and expenses in the accompanying statements of
operations.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1995
and 1994 financial statements to conform to the 1996 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at
F-34
<PAGE> 101
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Finished goods awaiting shipment............................ $ 249 $ 283
Work in process............................................. 1,564 2,396
Material and spare parts.................................... 8,415 7,524
------- -------
$10,228 $10,203
======= =======
</TABLE>
Inventory is reflected net of certain valuation allowances. Included in the
inventory valuation allowance is a reserve of $503,000 and $623,000 at December
31, 1996 and 1995, respectively, for losses on certain contracts where the
estimated cost at completion of the contract exceeds the contract sales value.
Contracts in process are recorded net of progress payments received of
approximately $1,284,000 and $0 at December 31, 1996 and 1995, respectively.
3. NOTE AND ACCRUED INTEREST RECEIVABLE FROM AN OFFICER/SHAREHOLDER
The note and accrued interest receivable from an officer/shareholder,
consisting of approximately $1,593,000 and $1,343,000 in borrowings and accrued
interest amounting to $673,000 and $663,000 at December 31, 1996 and 1995,
respectively, accrues interest at the bank's prime rate. The entire balance,
including accrued interest amounting to $2,266,000 at December 31, 1996, was due
on March 31, 1995. The Company is verbally extending the term on a monthly
basis.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Land........................................................ $ 2,909 $ 2,909
Buildings and improvements.................................. 1,664 1,645
Furniture and fixtures...................................... 1,475 1,883
Machinery and equipment..................................... 6,381 5,639
------- -------
12,429 12,076
Less accumulated depreciation and amortization.............. 6,880 6,934
------- -------
$ 5,549 $ 5,142
======= =======
</TABLE>
F-35
<PAGE> 102
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Credit line with a bank for borrowings up to $9,500,
expiring May 31, 1997, with interest payable at either the
bank's reference rate plus .25% or the Eurodollar rate
plus 2.25%................................................ $ 7,370 $ 7,500
Term loan with a bank for borrowings up to $5,500, expiring
July 31, 1999, with principal and interest payable monthly
at the bank's reference rate plus .375%, cost of funds
rate plus 2.375% or the Eurodollar rate plus 2.375%....... 3,658 4,958
Other long-term debt........................................ 39 --
------- -------
11,067 12,458
Less current portion........................................ 8,680 8,800
------- -------
$ 2,387 $ 3,658
======= =======
</TABLE>
The bank facility requires the Company to maintain certain net worth, debt
to equity, and other financial ratio levels and is secured by substantially all
of the assets of the Company.
The Company had $1,500,000 of available letters of credit, of which,
$1,247,000 and $1,500,000 were unused at December 31, 1996 and 1995,
respectively.
Interest paid was $1,047,000, $984,000 and $716,000 during 1996, 1995 and
1994, respectively. Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 8,680
1998........................................................ 1,316
1999........................................................ 1,071
-------
Total....................................................... $11,067
=======
</TABLE>
6. LEASES
The Company leases various office equipment under both capital and
operating leases. Included in machinery and equipment is $344,000 and $95,000 at
December 31, 1996 and 1995, respectively, under capital leases. Accumulated
amortization of equipment under capital lease amounted to $19,000 and $0 at
December 31, 1996 and 1995, respectively, and is included in accumulated
depreciation and amortization.
F-36
<PAGE> 103
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Future minimum payments, by year and in the aggregate, under capital leases
and noncancelable operating leases with initial or remaining terms of one year
or more, consisted of the following at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997........................................................ $121 $ 696
1998........................................................ 121 603
1999........................................................ 121 576
2000........................................................ 25 576
2001........................................................ -- 48
---- ------
Total minimum lease payments................................ 388 $2,499
======
Amounts representing interest............................... 67
----
Present value of net minimum lease payments (including $95
classified as current).................................... $321
====
</TABLE>
Gross rental expense on operating leases was $759,000, $660,000 and
$555,000 in 1996, 1995 and 1994, respectively.
7. INCOME TAXES
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................... $120 $237 $ 27
State..................................................... (20) (56) --
---- ---- ----
100 181 27
Deferred -- State........................................... 5 7 33
---- ---- ----
Total.................................................. $105 $188 $ 60
==== ==== ====
</TABLE>
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Bonus accrual............................................. $ 39 $ 33
Manufacturing investment credit........................... 34 35
Excess and obsolete inventory reserve..................... 15 13
Other..................................................... 28 40
---- ----
Total.................................................. $116 $121
==== ====
</TABLE>
F-37
<PAGE> 104
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The following table reconciles the provision for income taxes to the
statutory income tax rate (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
State income tax provision (benefit)........................ $ 21 $ (18) $ 31
Federal built-in gains tax.................................. 120 237 27
Manufacturing investment tax credit......................... (43) (35) --
Other....................................................... 7 4 2
----- ----- -----
$ 105 $ 188 $ 60
===== ===== =====
Effective tax rate.......................................... 7.34% 15.05% 2.90%
===== ===== =====
</TABLE>
The manufacturing investment credit expires through fiscal 2006. Effective
October 1, 1992, the shareholders of the Company elected under Subchapter S of
the Internal Revenue Code to include the Company's income in their own income
for federal income tax purposes. Accordingly, effective October 1, 1992, the
Company is not generally subject to federal income tax and is subject to a 1.5%
state franchise tax. In addition to the franchise tax, the Company is subject to
a federal tax on built-in gains recognized on the disposition of any prior
appreciated C-Corporation assets within 10 years from the first day of the
S-Corporation's first tax year. Income taxes paid were $156,000, $220,000 and
$50,000 during 1996, 1995 and 1994, respectively.
Effective January 1, 1997, the Company voluntarily terminated the
Subchapter S tax status and will be taxed at the applicable state and federal
statutory rates. The Company will receive a tax benefit of approximately
$2,207,000 in fiscal 1997, for the impact on the deferred assets for the change
in tax status. If the Company were taxed at the applicable C-Corporation state
and federal statutory rates, net income and tax expense (benefit) for the years
ending December 31, 1996, 1995 and 1994, would have been approximately (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes..................... $ 1,431 $(1,249) $ 2,066
Pro forma tax expense (benefit)....................... 529 (535) 826
------- ------- -------
Pro forma net income (loss)........................... $ 902 $ (714) $ 1,240
======= ======= =======
</TABLE>
8. CONTINGENCIES
During 1990, the Company received a cleanup and abatement order from the
California Regional Ground Water Quality Control Board (Santa Ana Region)
related to certain hazardous waste materials that are present under the
Company's facilities. The Company filed an appeal of the order with the State
Water Resources Control Board (the State Board). The Company continues to
negotiate with the Regional Board as to what responsibility, if any, the Company
will have for site investigation or cleanup. Management and their consultants
believe that much of the pollution is from sources outside the Company, and the
Company intends to vigorously defend against all liability arising from this
issue.
The potential costs related to the above matters, and the possible impact
thereof on future operations, are uncertain and it is not possible at the
present time to estimate the ultimate range of legal and financial liability
with regard to the above matters. Included in accrued liabilities is $0 and
$250,000 at December 31, 1996 and 1995, for anticipated cleanup or other costs
related to the hazardous waste materials mentioned in the previous paragraph.
Management believes that the remaining liability will not materially affect the
Company's financial condition, results of operations or liquidity.
F-38
<PAGE> 105
J. C. CARTER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The Company is a defendant in various lawsuits. In the opinion of
management, potential losses, if any, would not materially affect the Company's
financial condition, results of operations or liquidity.
9. EMPLOYEES' 401(k) PLAN
The Company maintains a 401(k) Plan (the "Plan"), which is qualified under
the Internal Revenue Code. Substantially all employees over age 21 are eligible
to participate in the Plan after six months of employment. Employees may make
voluntary contributions to the Plan, which are matched by the Company, subject
to certain limitations. The Company's contributions, recognized as expense, were
approximately $414,000, $350,000 and $382,000 in 1996, 1995 and 1994,
respectively.
10. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
On August 1, 1997, the shareholders of J.C. Carter Company, Inc. entered
into an agreement to sell 100% of the outstanding common stock of the Company to
Argo-Tech Corporation for approximately $107.0 million in cash, subject to
post-closing adjustment. The sale was completed on September 26, 1997.
On August 25, 1997 the Company met with the California Regional Quality
Control Board, Santa Ana Region (the "Board") to present recent results from
newly installed wells. The Board's position is that both onsite remediation and
offsite groundwater investigation will be required. The Company intends to
propose additional solutions to the Board. The estimate to remediate onsite and
investigate offsite groundwater is approximately $500,000 to $1,500,000. The
shareholders of J.C. Carter Company, Inc. have agreed to indemnify Argo-Tech
Corporation for the costs of all known environmental liabilities if the purchase
agreement is finalized.
F-39
<PAGE> 106
The Company's logo is at the top of the page. There is a photograph of a
KC-135 tanker aircraft about to refuel an F-16 fighter aircraft. Photographs
labeled "Aerial Refueling Coupling," "Aerial Refueling Pump," "Boost and
Transfer Pump," "Lube and Scavenge Pump" and "Main Engine Pump" point to the
KC-135, and indicates where such Company-manufactured equipment would be used on
an appropriate aircraft. Photographs labeled "Main Engine Pump" and "Fuel Flow
Proportions" point to the F-16, indicating where such Company-manufactured
equipment is used on the F-16. Beneath those photographs, under the heading
"Ground Fueling Equipment" are photographs labeled "Pressure Coupler," "AVR 2000
Fuel Delivery Meter" and "Underwing Nozzle." The Argo-Tech logo appears at the
bottom of the page.
<PAGE> 107
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Use of Proceeds....................... 13
Dividend Policy....................... 13
Forward-Looking Information........... 13
Capitalization........................ 14
Dilution.............................. 15
Unaudited Pro Forma Consolidated
Financial Information............... 16
Selected Consolidated Financial
Information......................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 32
Management............................ 44
Certain Transactions.................. 53
Principal and Selling Shareholders.... 54
Description of Common Shares.......... 56
Shares Eligible for Future Sale....... 59
Certain United States Federal Tax
Considerations to Non-U.S.
Holders............................. 60
Underwriting.......................... 62
Legal Matters......................... 64
Experts............................... 64
Available Information................. 64
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,400,000 SHARES
[ARGO-TECH LOGO]
ARGO-TECH
GROUP, INC.
COMMON SHARES
------------------------
PROSPECTUS
------------------------
BT Alex. Brown
McDonald & Company
Securities, Inc.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
