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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1999
REGISTRATION NO. 333-75643-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 4 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
COMPASS AEROSPACE CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3728 95-4659126
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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1501 HUGHES WAY, SUITE 400
LONG BEACH, CALIFORNIA 90810
(310) 522-0600
N. PAUL BROST
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
COMPASS AEROSPACE CORPORATION
1501 HUGHES WAY, SUITE 400
LONG BEACH, CALIFORNIA 90810
(310) 522-0600
(Name and address, including zip code, of agent for service)
------------------------------
COPIES TO:
PETER P. WALLACE, ESQ.
MORGAN, LEWIS & BOCKIUS LLP
300 SOUTH GRAND AVENUE, 22ND FLOOR
LOS ANGELES, CALIFORNIA 90071-3132
------------------------------
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JURISDICTION OF PRIMARY STANDARD INDUSTRIAL IRS EMPLOYEE
NAME OF ADDITIONAL REGISTRANTS INCORPORATION CLASSIFICATION NUMBER IDENTIFICATION NUMBERS
- ------------------------------ --------------- --------------------------- ----------------------
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Aeromil Engineering
Company*.................... Delaware 3728 95-4659131
Barnes Machine, Inc.*......... Delaware 3728 91-1165226
Brittain Machine, Inc.*....... Delaware 3728 48-0816118
Modern Manufacturing, Inc.*... Delaware 3728 91-1413338
Pacific Hills Manufacturing
Co.*........................ California 3469 95-4446681
Sea-Lect Products, Inc.*...... Delaware 3728 95-4682821
Western Methods Machinery
Corporation*................ California 3728 95-3195940
Wichita Manufacturing,
Inc.*....................... California 3728 33-0536613
Compass Aerospace Limited*.... England and Wales 3728 --
Diac Limited**................ England and Wales 3728 --
Trefn Engineering Limited**... England and Wales 3728 --
Trefn Engineering (Metal
Treatments Division)
Limited**................... England and Wales 3728 --
Trefn Fabrications
Limited**................... England and Wales 3728 --
Trim Engineering Limited**.... England and Wales 3728 --
</TABLE>
- ------------------------------
* Address and telephone number of the principal executive offices of these
additional registrants are the same as those of Compass Aerospace
Corporation.
** Address and telephone number of the principal executive offices of these
additional registrants are 7 Lyon Road, Wallisdown, Poole, Dorset BH 12 5HF,
011-44-120-253-5536.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effectiveness of this Registration Statement.
------------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
10 1/8% Series B Senior Subordinated Notes
due 2005................................... $110,000,000 100% $110,000,000 $30,580(2)
10 1/8% Series D Senior Subordinated Notes
due 2005................................... $19,000,000 100% $19,000,000 $5,282(2)
Guarantees of the 10 1/8% Series B Senior
Subordinated Notes due 2005 and the 10 1/8%
Series D Senior Subordinated Notes due 2005
by registrants other than Compass Aerospace
Corporation................................ $129,000,000 (3) (3) (3)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
(3) Pursuant to Rule 457(n), no separate registration fee is required with
respect to the guarantees.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement covers the registration of an aggregate
principal amount of $110,000,000 of our 10 1/8% Series B senior subordinated
notes due 2005 that may be exchanged for equal principal amounts of our
outstanding 10 1/8% Series A senior subordinated notes due 2005 and the
registration of an aggregate principal amount of $19,000,000 of our 10 1/8%
Series D senior subordinated notes due 2005 that may be exchanged for equal
principal amounts of our outstanding 10 1/8% Series C senior subordinated notes
due 2005. This registration statement also covers the registration of the
Series B and Series D notes for resale by broker-dealers in market-making
transactions. The complete prospectus relating to the exchange offer follows
immediately after this Explanatory Note. Following the prospectus are pages of
the prospectus relating solely to such market-making transactions (the
"market-making prospectus"), including alternate front and back cover pages, a
section entitled "Risk Factors--There Is No Existing Trading Market For The
Notes And Any Market-Making Activities May Be Terminated At Any Time" to be used
in lieu of the section entitled "Risk Factors--No Public Trading Market For The
Notes Exists And You May Not Be Able To Sell Them," a "Use of Proceeds" section
and an alternate "Plan of Distribution" section. In addition, the market-making
prospectus will not include the following captions nor the information set forth
under such captions included in the prospectus: "Summary--The Exchange Offer,"
"Summary of the Terms of the Exchange Offer," "Risk Factors--Outstanding
Series A and Series C Notes That Are Not Exchanged will Continue To Be Subject
To Transfer Restrictions," "The Exchange Offer" and "United States Federal
Income Tax Consequences for Holders of Series B Notes and for Holders of
Series D Notes." All other sections of the prospectus will be included in the
market-making prospectus.
<PAGE>
SUBJECT TO COMPLETION DATED [ ], 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
COMPASS AEROSPACE CORPORATION
Offer to Exchange its
10 1/8% Series B Senior Subordinated Notes due 2005
for any and all of its outstanding
10 1/8% Series A Senior Subordinated Notes due 2005
($110,000,000 aggregate principal amount outstanding)
and its
10 1/8% Series D Senior Subordinated Notes due 2005
for any and all of its outstanding
10 1/8% Series C Senior Subordinated Notes due 2005
($19,000,000 aggregate principal amount outstanding)
Series A, Series B, Series C and Series D Notes Guaranteed by Aeromil
Engineering Company, Barnes Machine, Inc., Brittain Machine, Inc., Compass
Aerospace Limited, Diac Limited, Modern Manufacturing, Inc., Pacific Hills
Manufacturing Co., Sea-Lect Products, Inc., Trefn Engineering Limited, Trefn
Fabrications Limited, Trefn (Metal Treatments Division) Limited, Trim
Engineering Limited, Western Methods Machinery Corporation and Wichita
Manufacturing, Inc.
---------------------
TERMS OF EXCHANGE OFFER
- Expires at 5:00 p.m., New York City time, on , 1999, unless
extended
- Not subject to any condition other than that the exchange offer not
violate applicable law or any applicable interpretation of the staff of
the Securities and Exchange Commission
- Tenders of outstanding 10 1/8% Series A and Series C senior subordinated
notes due 2005 may be withdrawn any time before 5:00 p.m. on the business
day prior to expiration of the exchange offer
- The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes
- We will not receive any proceeds from the exchange offer
- The terms of the Series B notes to be issued are identical in all material
respects to the outstanding Series A notes and the terms of the Series D
notes to be issued are identical in all material respects to the
outstanding Series C notes, except the Series B and Series D notes lack a
number of transfer restrictions and registration rights relating to the
outstanding Series A and Series C notes.
------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A
DISCUSSION OF VARIOUS MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes to be distributed in the
exchange offer or determined that this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999
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TABLE OF CONTENTS
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PAGE
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Available Information....................................... 3
Summary..................................................... 4
Risk Factors................................................ 16
Capitalization.............................................. 24
Unaudited Pro Forma Financial Data.......................... 25
Selected Historical Consolidated Financial Data............. 32
Management's Discussion and Analysis of Consolidated
Financial Condition and Consolidated Results of
Operations................................................ 35
The Exchange Offer.......................................... 45
Business.................................................... 57
Management.................................................. 69
Principal Stockholders...................................... 74
Description of Credit Agreement............................. 75
Description of the Series B Notes........................... 76
Description of the Series D Notes........................... 112
United States Federal Income Tax Consequences for Holders of
Series B Notes and for Holders of Series D Notes.......... 148
Plan of Distribution........................................ 152
Legal Matters............................................... 153
Experts..................................................... 153
Index to Financial Statements............................... F-1
</TABLE>
2
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AVAILABLE INFORMATION
This prospectus constitutes a part of a registration statement on Form S-4
filed by us with the Securities and Exchange Commission under the Securities Act
of 1933. As permitted by the rules and regulations of the Commission, this
prospectus does not contain all of the information contained in the registration
statement, including additional exhibits and schedules not included in this
prospectus. In this prospectus we refer to the registration statement and to the
exhibits and schedules. For further information about us and about the
securities we are offering, you should consult the registration statement,
including the exhibits and schedules. You should be aware that statements
contained in this prospectus concerning the provisions of any documents filed as
an exhibit to the registration statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
Upon the effectiveness of the registration statement, we will be subject to
the informational requirements of the Securities Exchange Act of 1934.
Accordingly, we will file periodic reports and other information with the
Commission. The registration statement, reports and other information filed by
us with the Commission will be available for inspection and copying at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Suite 1400, Northwestern Atrium Center, 14th Floor, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material will also be
available at prescribed rates by writing to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549. If you would like
information on the operation of the Public Reference Room, you may call
1-800-SEC-0330. You may also be able to access this information electronically
through the Commission's web page on the Internet at http://www.sec.gov. This
web site contains reports and other information regarding registrants such as
ourselves that have filed electronically with the Commission.
The indentures governing the notes provide that we will furnish the holders
of the notes copies of the periodic reports required to be filed with the
Commission under the Exchange Act. Even if we are not subject to the periodic
reporting and informational requirements of the Exchange Act, we will make such
filings to the extent that such filings are accepted by the Commission. We will
make these filings regardless of whether we have a class of securities
registered under the Exchange Act. Furthermore, we will provide the trustee for
the notes and the holders of the notes within 15 days after such filings with
annual reports containing the information required to be contained in
Form 10-K, and quarterly reports containing the information required to be
contained in Form 10-Q promulgated by the Exchange Act. From time to time, we
will also provide such other information as is required to be contained in
Form 8-K promulgated by the Exchange Act. If the filing of such information is
not accepted by the Commission or is prohibited by the Exchange Act, we will
then provide promptly upon written request, and at our cost, copies of such
reports to prospective purchasers of the notes.
------------------------
This exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of outstanding notes in any jurisdiction in which this
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of that jurisdiction.
3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL DATA AND RELATED NOTES AND THE
SECTION ENTITLED "RISK FACTORS," BEFORE MAKING A DECISION ABOUT WHETHER TO
EXCHANGE EITHER THE OUTSTANDING SERIES A NOTES YOU HOLD FOR 10 1/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2005 OR THE OUTSTANDING SERIES C NOTES YOU HOLD
FOR 10 1/8% SERIES D SENIOR SUBORDINATED NOTES DUE 2005. THE TERMS "COMPASS,"
OUR" AND "WE" AS USED IN THIS PROSPECTUS REFER TO COMPASS AEROSPACE CORPORATION
AND ITS SUBSIDIARIES, AS A COMBINED ENTITY, EXCEPT WHERE IT IS CLEAR THAT SUCH
TERM MEANS ONLY THE PARENT COMPANY. COMPASS' SUBSIDIARIES ARE: AEROMIL
ENGINEERING COMPANY, BARNES MACHINE, INC., BRITTAIN MACHINE, INC., COMPASS
AEROSPACE LIMITED, DIAC LIMITED, MAYBREY PRECISION CASTING LIMITED, MODERN
MANUFACTURING, INC. (FORMERLY KNOWN AS Y.F. AMERICAS, INC.), PACIFIC HILLS
MANUFACTURING CO. (FORMERLY KNOWN AS LAMSCO WEST, INC.), SEA-LECT
PRODUCTS, INC., TREFN ENGINEERING LIMITED, TREFN ENGINEERING (METAL TREATMENTS
DIVISION) LIMITED, TREFN FABRICATIONS LIMITED, TRIM ENGINEERING LIMITED, WESTERN
METHODS MACHINERY CORPORATION AND WICHITA MANUFACTURING, INC.
TRIM'S FINANCIAL STATEMENTS ARE DENOMINATED IN POUNDS STERLING. FOR THE
PURPOSES OF THIS PROSPECTUS, TRIM'S UNAUDITED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE TWELVE MONTHS ENDED MARCH 31, 1999 HAS BEEN TRANSLATED TO
U.S. DOLLARS AT THE AVERAGE INTERBANK EXCHANGE RATE FOR THE TWELVE MONTHS ENDED
MARCH 31, 1999 OF L1.0 = $1.65. TRIM'S UNAUDITED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1999 TO JULY 30, 1999 HAS BEEN
TRANSLATED TO U.S. DOLLARS AT THE AVERAGE INTERBANK EXCHANGE RATE FOR THE PERIOD
OF L1.0 = $1.61.
THE EXCHANGE OFFER
SERIES A NOTES
On April 21, 1998 we completed the private offering of $110.0 million of
Series A notes. You are entitled to exchange in the exchange offer your
Series A notes for registered Series B notes with terms which are identical in
all material respects to the Series A notes, except for a number of transfer
restrictions and registration rights.
Under a registration rights agreement executed as part of the offering of
the Series A notes, we agreed to:
- file a registration statement within 240 days after the issue date of the
Series A notes enabling note holders to exchange the Series A notes they
hold for publicly registered notes that are identical in all material
respects to the form and terms of the Series A notes;
- use our best efforts to cause the registration statement to become
effective within 300 days after the issue date of the Series A notes;
- use our best efforts to consummate the exchange offer within 30 days of
the effective date of our registration statement; and
- use our best efforts to file a shelf registration statement for the resale
of the notes if we cannot effect an exchange offer within the time periods
listed above and in various other circumstances.
The interest rate on the Series A notes increased as a form of liquidated
damages because we did not comply with some of our obligations under the
registration rights agreement. Liquidated damages are currently accruing at the
rate of $22,000 per week in the aggregate for the $110.0 million principal
amount of outstanding Series A notes. Liquidated damages will cease to accrue
once a registration statement registering the Series B notes is declared
effective by the Commission. You should read the discussion under the headings
"Summary Description of the Series B Notes Exchange Offer; Registration Rights"
and "The Exchange Offer--Conditions of the Exchange Offer" for further
information regarding the registration rights agreement which relates to the
Series A notes.
SERIES C NOTES
On July 30, 1999 we completed the private offering of $19.0 million of
Series C notes. You are entitled to exchange in the exchange offer your
Series C notes for registered Series D notes with terms which are identical in
all material respects to the Series C notes, except for a
4
<PAGE>
number of transfer restriction and registration rights.
Under a registration rights agreements executed as part of the offering of
the Series C notes, we agreed to:
- file a registration statement within 105 days after the issue date of the
Series C notes enabling note holders to exchange the Series C notes they
hold for publicly registered notes that are identical in all material
respects to the form and terms of the outstanding Series C notes;
- use our best efforts to cause the registration statement to become
effective within 180 days after the issue date of the outstanding
Series C notes;
- use our best efforts to consummate the exchange offer within 30 days of
the effective date of our registration statement; and
- use our best efforts to file a shelf registration for the resale of the
notes if we cannot effect an exchange offer within the time periods listed
above and various other circumstances.
If we do not comply with our obligations under the registration rights
agreement, our interest rate on the Series C notes may increase as a form of
liquidated damages. You should read the discussion under the headings "Summary
Description of the Series D Notes Exchange Offer; Registration Rights" and "The
Exchange Offer--Conditions of the Exchange Offer" for further information
regarding the registration rights agreement which relates to the Series C notes.
We believe that the Series B and the Series D notes issued in the exchange
offer may be resold by you without compliance with the registration and
prospectus delivery provisions of the Securities Act, subject to various
conditions. You should read the discussion under the headings "Summary of the
Terms of the Exchange Offer" and "The Exchange Offer" for further information
regarding the exchange offer and resale of the Series B and Series D notes.
COMPASS
Compass was founded in October 1997 to become a major supplier of precision
machined individual metal parts and of higher value-added sub-assemblies,
manufacturing kits and structural components used by aerospace manufacturers in
structural frames and other metal aircraft components. We intend to capitalize
on the trends among aircraft manufacturers which seek to increase outsourcing,
concentrate supplier relationships and encourage suppliers of individual parts
to manage the supply chain and produce more value-added sub-assemblies,
manufacturing kits and structural components. You should read the discussion
under the headings "Management's Discussion and Analysis of Consolidated
Financial Condition and Consolidated Results of Operations--Results of
Operations" and "The Business" for more information on our business and
financial condition.
At present, we primarily manufacture individual parts for aircraft to
precise specifications from metals through the use of precision
computer-numerically-controlled machine tools. We use a variety of advanced
techniques and machinery. Our precision machining and tooling capabilities
provide us with a diverse and flexible manufacturing capability.
We believe that our machining capabilities are among the broadest, and that
we have among the largest number of three-spindle five-axis gantry mills of all
aerospace suppliers in the United States and in the United Kingdom. We currently
produce original equipment parts, sub-assemblies and structural components for:
- The Boeing Company (717, 737, 747, 757, 767, 777, MD-11, MD-80 and MD-90)
- Airbus Industrie (A300, A310, A320, A330 and A340)
- Bombardier Inc. (Canadair Regional Jet-Registered Trademark- 700, Canadair
Global Express, Lear and Dash-8)
- several other commercial and military aircraft manufacturers
We believe that the long-standing relationships that our management has
established with our key customers, the strong name recognition of our
subsidiaries, our subsidiaries' established track records of quality
manufacturing and their consistent histories of timely deliveries are among the
key factors in
5
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our success. For the nine months ended September 30, 1999 we had consolidated
revenues of $101.4 million, EBITDA of $23.7 million, a net loss of $4.1 million
and a net cash flow of $4.8 million. Net cash provided by operating activities
was $9.2 million. Investing activities consisting of business acquisitions and
purchases of property and equipment used $59.2 million of cash flow. Financing
activities generated $54.8 million in cash consisting of proceeds from debt
financing and the sale of stock, partly offset by principal payments on long
term debt. At October 31, 1999 we had a total revenue backlog of approximately
$158.0 million, of which approximately $25.0 million is deliverable in the
remainder of 1999.
INDUSTRY OVERVIEW
Commercial aircraft manufacturers are experiencing a period of high demand
for new aircraft. According to the Aerospace Industries Association of America,
the annual worldwide market for commercial and military aircraft was
approximately $78.0 billion in 1998. Manufacturing U.S.A., Sixth Edition,
estimates the value of aircraft equipment shipped in 1998 was approximately
$20.4 billion. In response to the increased demand for aircraft, the major
aircraft manufacturers are increasing outsourcing and imposing increased
responsibilities on a smaller number of qualified suppliers to enable the
aircraft manufacturers to increase production rates.
STRATEGY
Our principal strategic objective is to increase revenues and profits by
managing the supply chain for our customers. We also seek to increase our
operating efficiencies and to reduce our customer concentration by diversifying
our revenue mix among aerospace customers. To reach our objectives we intend to:
- consolidate our acquired businesses;
- increase operating efficiencies and asset utilization;
- maximize the production volume of our manufacturing facilities;
- increase our production of sub-assemblies, manufacturing kits and
structural components by more effective use of our broad, flexible
manufacturing capabilities;
- continue to centralize various administrative functions at the corporate
level to generate economies of scale and minimize costs;
- continue to update and consolidate our management information systems to
improve internal controls and coordinate operations;
- consolidate engineering functions;
- improve marketing by proactively marketing our broad, flexible
manufacturing capabilities;
- target customers that our subsidiaries could not significantly penetrate
individually;
- increase outsourcing of some production functions to small machine shops
to increase manufacturing efficiencies and capacity; and
- diversify our revenue mix among aerospace customers by targeting the
Airbus and the business jet markets, and United States military programs.
RECENT DEVELOPMENTS
On July 30, 1999 we acquired Trim and its subsidiaries in the United
Kingdom. Trim's subsidiaries are Trefn, Trefn Fabrications, Trefn Metal
Treatments, Diac and Maybrey. Trim and its subsidiaries primarily produce parts
and sub-assemblies for divisions of Airbus. You should read the discussions
under the headings "Risk Factors--Our International Operations Are Subject To A
Number Of Risks That Could Adversely Affect The Results From These Operations
And Our Overall Business," "Risk Factors--Our Other Operations Are Located In
The United States And We May Not Have The Resources To Successfully Integrate
And Manage Our Combined Entity," "Unaudited Pro Forma Financial Data" and "The
Business" for further information on the business of Trim and the effects on us
of our acquisition of Trim.
------------------------
Our principal executive offices are located at 1501 Hughes Way, Suite 400,
Long Beach, California 90810. Our telephone number is (310) 522-0600.
6
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $110.0 million aggregate
principal amount of outstanding Series A notes for an equal aggregate principal
amount of Series B notes and to the exchange of up to $19.0 million aggregate
principal amount of outstanding Series C Notes for an equal aggregate principal
amount of Series D notes. The Series B notes will be obligations of ours
entitled to the benefits of the indenture governing the Series A notes, and the
Series D notes will be obligations of ours entitled to the benefits of the
indenture governing the Series C notes. The Series B and Series D notes will be
fully, irrevocably and unconditionally guaranteed by each of our subsidiaries
except for Maybrey on a joint and several basis. The form and terms of the
Series B notes are identical in all material respects to the form and terms of
the Series A notes and the form and term of the Series D notes are identical in
all material respects to the form and terms of the Series C notes, except that
the Series B and Series D notes have been registered under the Securities Act.
<TABLE>
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Termination of Rights.......................... You are entitled to exchange your notes for registered
notes that are identical in all material respects to the
form and terms of the Series A or Series C notes that you
hold, except for various transfer restrictions and
registration rights. The exchange offer is intended to
satisfy these rights. After the exchange offer is complete,
you will no longer be entitled to any exchange or
registration rights with respect to your notes.
The Exchange Offer............................. We are offering to exchange $1,000 principal amount of
Series B notes which have been registered under the
Securities Act for each $1,000 principal amount of
Series A notes which we issued in April 1998 in a private
offering. We are also offering to exchange $1,000 principal
amount of Series D notes which have been registered under
the Securities Act for each $1,000 principal amount of
Series C notes which we issued in July 1999 in a private
offering. In order to be exchanged, an outstanding note
must be properly tendered and accepted. All outstanding
notes that are validly tendered, and not validly withdrawn,
will be exchanged. We will issue registered notes on or
promptly after the expiration of the exchange offer.
At this date there is $129.0 million principal amount of
notes outstanding.
Resale of the Series B and Series D Notes...... Based on an interpretation of the staff of the Securities
and Exchange Commission set forth in no-action letters
issued to third parties, including "Exxon Capital Holdings
Corporation" (available May 13, 1988), "Morgan Stanley &
Co. Incorporated" (available June 5, 1991), "Mary Kay
Cosmetics, Inc." (available June 5, 1991) and "Warnaco,
Inc." (available October 11, 1991), we believe that the
notes issued in the exchange offer may be offered for
resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery
provisions of the Securities Act provided that:
- the notes issued in the exchange offer are being
acquired in the ordinary course of business;
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7
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<TABLE>
<S> <C>
- you are not participating, do not intend to participate,
and have no arrangement or understanding with any person to
participate, in a distribution of the notes issued to
you in the exchange offer;
- you are not a broker-dealer who purchased such notes
directly from us for resale pursuant to Rule 144A or any
other available exemption under the Securities Act; and
- you are not an "affiliate" of ours.
If our belief is inaccurate and you transfer any note
issued to you in the exchange offer without delivering a
prospectus meeting the requirements of the Securities Act
or without an exemption from registration of your notes
from such requirements, you may incur liability under the
Securities Act. We do not assume or indemnify you against
such liability.
Expiration Date................................ The exchange offer will expire at 5:00 p.m., New York City
time, on , 1999, or, at our option, at the time
that 100% of the outstanding notes have been validly
tendered and not withdrawn, unless we decide to extend the
expiration date.
Accrued Interest on the Series B and Series D
Notes and Series A and Series C Notes........ The Series B and Series D notes will bear interest from
their date of issuance. Holders of Series A and Series C
notes whose notes are accepted for exchange will be deemed
to have waived the right to receive any payment of interest
on such outstanding notes accrued on and after the date of
issuance of the Series B and Series D notes. Consequently,
holders who exchange their Series A notes for Series B
notes and holders who exchange their Series C notes for
Series D notes will receive the same interest payment on
April 15, 2000, which is the fourth interest payment date
with respect to the Series A notes, the second interest
payment date with respect to the Series C notes, and the
first interest payment date with respect to the Series B
and Series D notes to be issued in the exchange offer,
that they would have received had they not accepted the
exchange offer.
Termination of the Exchange Offer.............. We may terminate the exchange offer if we determine that
our ability to proceed with the exchange offer could be
materially impaired due to any legal or governmental
action, new law, statute, rule or regulation or any
interpretation of the staff of the Commission of any
existing law, statute, rule or regulation. We do not expect
any of the foregoing conditions to occur, although there
can be no assurance that such conditions will not occur.
Holders of outstanding notes will have rights against us
under the registration rights agreements executed as part
of the offerings of the Series A and Series C notes should
we fail to consummate the exchange offer.
</TABLE>
8
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<TABLE>
<S> <C>
Procedures for Tendering Outstanding Notes..... If you are a holder of a note and you wish to tender your
note for exchange pursuant to the exchange offer you must
transmit to The Bank of New York, as exchange agent, on or
prior to the expiration date:
either:
- a properly completed and duly executed letter of
transmittal, which accompanies this prospectus, or a
facsimile of the letter of transmittal, the certificates
for the outstanding notes being tendered, and all other
documents required by the letter of transmittal, to the
exchange agent at the address set forth on the cover
page of the letter of transmittal; or
- a computer-generated message transmitted to The
Depository Trust Company by means of the Automated Tender
Offer Program system and received by the exchange agent
and forming a part of a confirmation of book entry
transfer in which you acknowledge and agree to be bound
by the terms of the letter of transmittal;
and, either
- a timely confirmation of book-entry transfer of your
outstanding notes into the exchange agent's account at
DTC pursuant to the procedure for book-entry transfers
described in this prospectus under the headings "The
Exchange Offer--Procedures for Tendering Outstanding
Notes," and "The Exchange Offer--Book-Entry Transfer;"
or
- the documents necessary for compliance with the
guaranteed delivery procedures described below, must be
received by the Exchange Agent on or prior to the
expiration date.
By executing the letter of transmittal, each holder will
represent to us that, among other things:
- the notes to be issued in the exchange offer are being
obtained in the ordinary course of business of the
person receiving such notes whether or not such person
is the holder;
- neither the holder nor any such other person has an
arrangement or understanding with any person to
participate in the distribution of such notes; and
- neither the holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities
Act, of ours.
Special Procedures for Beneficial Owners....... If you are the beneficial owner of outstanding notes and
your name does not appear on a security position listing of
DTC as the holder of such notes or if you are a beneficial
owner of outstanding notes that are registered in the name
of a broker, dealer, commercial bank, trust company or
other nominee and you wish to tender such notes in the
exchange offer, you should
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
contact the person in whose name your notes are registered
promptly and instruct that person to tender on your behalf.
If you are a beneficial owner and you wish to tender your
outstanding notes on your own behalf you must, prior to
completing and executing the letter of transmittal and
delivering your outstanding notes, either make appropriate
arrangements to register ownership of the outstanding notes
in your name or obtain a properly completed bond power from
the registered holder. The transfer of record ownership may
take considerable time.
Guaranteed Delivery Procedures................. If you wish to tender your notes and time will not permit
your required documents to reach the exchange agent by the
expiration date, or the procedure for book-entry transfer
cannot be completed on time or certificates for outstanding
notes cannot be delivered on time, you may tender your
notes pursuant to the procedures set forth under the
heading "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal of Tenders.......................... You may withdraw the tender of your notes at any time
before 5:00 p.m., New York City time, on , 1999,
one business day prior to the expiration date, unless your
notes were previously accepted for exchange.
Acceptance of Outstanding Notes and Delivery of
Series B and Series D Notes.................. Subject to various conditions, including those summarized
above in "Termination of the Exchange Offer" and described
more fully under the heading "The Exchange
Offer--Termination," we will accept for exchange any and
all outstanding notes which are properly tendered in the
exchange offer prior to 5:00 p.m., New York City time, on
the expiration date. The notes issued pursuant to the
exchange offer will be delivered promptly following the
expiration date.
Federal Income Tax Consequences................ We believe the exchange of the Series B notes for the
Series A notes and the exchange of the Series D notes for
the Series C notes should not be a sale or exchange for
United States federal income tax purposes and therefore,
that you will not recognize any taxable gain or loss or any
interest income as a result of such exchange.
Use of Proceeds................................ We will not receive any proceeds from the issuance of notes
pursuant to the exchange offer. We will pay all expenses
incident to the exchange offer.
Exchange Agent................................. The Bank of New York is serving as the exchange agent in
connection with the exchange offer. The exchange agent can
be reached at The Bank of New York, Debt Processing
Group-7E, P.O. Box 11265, New York, NY 10286. For more
information with respect to the exchange offer, the
telephone number for the exchange agent is (212) 815-2568.
The facsimile for the exchange agent is (212) 815-6339.
</TABLE>
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SUMMARY DESCRIPTION OF THE SERIES B AND SERIES D NOTES
The terms of the Series A notes and the Series B notes are identical in all
material respects, except that the Series A notes are subject to various
transfer restrictions and have registration rights that the Series B notes do
not. The terms of the Series C notes and the Series D notes are identical in all
material respects, except that the Series C notes are subject to various
transfer restrictions and have registration rights that the Series D notes do
not.
<TABLE>
<S> <C>
Notes Offered to Holders of Series A
Notes................................ $110.0 million aggregate principal amount of 10 1/8%
Series B senior subordinated notes due 2005.
Notes Offered to Holders of Series C
Notes................................ $19.0 million aggregate principal amount of 10 1/8%
Series D senior subordinated notes due 2005.
Issuer................................. Compass Aerospace Corporation
Maturity Date.......................... April 15, 2005.
Interest Payment Dates................. April 15 and October 15 of each year, commencing
April 15, 2000.
Ranking................................ The Series B and Series D notes will be unsecured senior
subordinated obligations and will be subordinated to all
our existing and future senior indebtedness. The Series B
and Series D notes will rank equal to each other and
senior to or equal to all our existing and future
subordinated indebtedness. Because the Series B and
Series D notes are subordinated to our senior
indebtedness, in the event of bankruptcy, liquidation or
dissolution, holders of the Series B and Series D notes
will not receive any payment until holders of senior
indebtedness have been paid in full. The terms "senior
indebtedness" and "subordinated indebtedness" are defined
in the "Description of the Series B Notes--Subordination,"
"Description of the Series B Notes--Definitions,"
"Description of the Series D Notes--Subordination" and
"Description of the Series D Notes--Definitions" sections
of this prospectus.
At October 31, 1999 we had outstanding $97.7 million of
senior indebtedness which will rank senior to the Series B
and Series D notes and $128.9 million of senior
subordinated indebtedness.
Guarantees............................. The Series B and Series D notes will be jointly and
severally, fully, irrevocably and unconditionally
guaranteed on a senior subordinated basis by each of our
present and future restricted subsidiaries. The guarantees
will be unsecured senior subordinated obligations of our
restricted subsidiaries and will be subordinated to all
existing and future senior indebtedness of our restricted
subsidiaries. At September 30, 1999 our subsidiaries had
$7.1 million of indebtedness outstanding.
</TABLE>
11
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<TABLE>
<S> <C>
Optional Redemption.................... We may redeem the Series B or Series D notes, in whole or
in part, at any time on or after April 15, 2002, at the
redemption prices set forth in this prospectus. You should
read the discussions under the headings "Description of
the Series B Notes--Optional Redemption" and "Description
of the Series D Notes--Optional Redemption" for more
information on the optional redemption of the notes.
Public Equity Offering Optional
Redemption of Series B and Series D
Notes................................ Before April 15, 2001, we may redeem up to 35% of the
aggregate principal amount of the Series B notes
originally outstanding with the net proceeds of a public
equity offering at 110.125% of the principal amount of the
redeemed notes, plus accrued interest, if at least 65% of
the aggregate principal amount of the Series B notes
originally issued remains outstanding after such
redemption. Before April 15, 2001, we may also redeem up
to 35% of the aggregate principal amount of the Series D
notes originally outstanding with the net proceeds of a
public equity offering at 110.125% of the principal amount
of the redeemed notes, plus accrued interest, if at least
65% of the aggregate principal amount of the Series D
notes originally issued remains outstanding after such
redemption. You should read the discussions under the
headings "Description of the Series B Notes--Optional
Redemption" and "Description of the Series D
Notes--Optional Redemption" for more information on the
optional redemption of the Series B and Series D notes.
Change of Control...................... Upon a change of control event, each holder of Series B or
Series D notes may require us to repurchase all or a
portion of their Series B or Series D notes at a purchase
price equal to 101% of the principal amount of the
repurchased notes, plus accrued interest. You should read
the discussions under the headings "Description of the
Series B Notes--Covenants," "Description of the Series B
Notes--Definitions," "Description of the Series D
Notes--Covenants" and "Description of the Series D
Notes--Definitions" for a more complete definition of
"Change of Control."
Covenants.............................. The indenture governing the Series B notes and the
indenture governing the Series D notes each contain
covenants that, among other things, will limit our ability
and the ability of our restricted subsidiaries to:
- incur additional indebtedness,
- issue some kinds of capital stock,
- pay dividends or make other distributions with
respect to our capital stock,
- create liens,
- sell assets,
</TABLE>
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<S> <C>
- sell the capital stock of our subsidiaries,
- engage in transactions with affiliates, and
- effect consolidations or mergers.
These covenants are subject to important exceptions and
qualifications which are described under the headings
"Description of the Series B Notes" and "Description of
the Series D Notes" in this prospectus.
Exchange Offer; Registration Rights.... In connection with the offering of the Series A notes, we
entered into a registration rights agreement with
Donaldson, Lufkin & Jenrette Securities Corporation,
BancBoston Securities Inc. and Libra Investments, Inc., as
the initial purchasers of the Series A notes. We also
entered into a registration rights agreement with
BancBoston Robertson Stephens Inc. as the initial
purchasers of the Series C notes in connection with the
offering of the Series C notes. Under the registration
rights agreements, we agreed to register new notes and
exchange them for the Series A or Series C notes. Upon
completion of this exchange offer, the Series B and
Series D notes and the remaining outstanding Series A and
Series C notes will not be entitled to the benefits of the
registration rights granted under the registration rights
agreements. You should read the discussion under the
heading "The Exchange Offer--Conditions of the Exchange
Offer" for further information about these registration
rights.
</TABLE>
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with a summary of our historical
consolidated financial data. We have prepared this information using our
consolidated financial statements as of and for the period October 21, 1997, the
date of incorporation through December 31, 1997 and for the year ended
December 31, 1998. These financial statements have been audited by Ernst & Young
LLP, independent auditors. We have also included data from our unaudited
consolidated financial statements as of and for the nine months ended
September 30, 1998 and 1999.
When you read this summary historical consolidated financial data, it is
important that you read along with it the historical consolidated financial
statements and the related notes thereto, as well as the sections titled
"Unaudited Pro Forma Financial Data," "Selected Historical Consolidated
Financial Data" and "Management's Discussion and Analysis of Consolidated
Financial Condition and Consolidated Results of Operations," included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
COMPASS
-----------------------------------------------------------
YEAR 36 DAYS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1999 1998
------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................. $ 96,547 $ 3,057 $101,443 $ 65,556
Gross profit............................. 26,137 671 29,168 16,965
Operating income......................... 11,600 267 10,801 7,924
Net income (loss)........................ 915 74 (4,149) 1,120
Other Data:
Cash flow provided by (used in):
operating activities................... $ (6,677) $ 269 $ 9,215 $ 6,008
investing activities................... (172,117) (23,456) (59,252) (81,001)
financing activities................... 186,222 23,630 54,834 104,999
Net increase in cash..................... 7,428 443 4,797 30,006
EBITDA(1)................................ 20,550 486 23,661 13,648
EBITDA margin............................ 21.3% 15.9% 23.3% 20.8%
Depreciation and amortization............ $ 8,440 $ 219 $ 14,060 $ 5,858
Capital expenditures..................... 5,701 25 5,156 6,025
Balance Sheet Data (at period end):
Cash and cash equivalents................ $ 7,871 $ 443 $ 12,668 $ 30,449
Total assets............................. 255,505 33,789 308,120 170,335
Long-term obligations (including current
portion)(2)............................ 196,968 20,585 233,643 116,300
Stockholders' Equity..................... 29,955 9,074 40,806 30,160
</TABLE>
- ------------------------
(1) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under generally accepted accounting principles ("GAAP") and
should not be construed as an alternative to operating income or cash flows
from operating activities as determined by GAAP. EBITDA data is presented
because such data is used by some investors to determine our ability to meet
debt service requirements and is used in some debt covenant calculations
required under the indentures and our existing credit agreement. EBITDA is
not indicative of our operating performance, does not provide a measure of
liquidity and does not represent our available or discretionary funds.
Furthermore, EBITDA as reported by us may not be comparable to EBITDA
reported by other companies.
(2) Long-term obligations include long-term debt, including the current portion,
and capital leases.
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RATIO OF EARNINGS TO FIXED CHARGES
In the table below, we provide you with the ratio of earnings to fixed
charges for us and our predecessor, Brittain Machine.
<TABLE>
<CAPTION>
BRITTAIN MACHINE FOR
COMPASS FOR ------------------------------------------------------------
THE THE PERIOD FROM
YEARS ENDED JULY 1, 1997
DECEMBER 31, THROUGH THE YEARS ENDED JUNE 30,
---------------------- APRIL 21, ------------------------------------------
1998 1997 1998 1997 1996 1995 1994
-------- -------- --------------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges(1)......................... 1.3x 1.5x 20.6x 14.6x 10.9x 10.4x
<CAPTION>
COMPASS FOR THE
-----------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Ratio of earnings to fixed
charges(1)......................... 1.4x
</TABLE>
- ------------------------------
(1) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges, by fixed charges. Fixed
charges consist of interest expense and 33% of operating rental expense,
which management believes is representative of the interest component of
rental expense. Earnings were insufficient to cover fixed charges for the
year ended June 30, 1995 and the nine months ended September 30, 1999 by
$0.4 million and $6.5 million, respectively.
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RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the notes.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT WHICH LIMITS OUR FLEXIBILITY AND INCREASES
OUR VULNERABILITY TO A DECREASE IN REVENUES OR CASH FLOW AND WHICH MAY AFFECT
OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES
At September 30, 1999 we had approximately $233.6 million of consolidated
indebtedness outstanding, approximately $12.7 million of cash, approximately
$308.1 million of total assets, approximately $166.0 million of total tangible
assets and approximately $40.8 million of stockholders' equity. On a pro forma
basis, our EBITDA for the year ended December 31, 1998 would have equaled 2.7
times pro forma net interest expense. On a pro forma basis at December 31, 1998,
we would have had net debt equal to 3.9 times pro forma 1998 EBITDA. You should
read the discussions under the headings "Capitalization," "Management's
Discussion and Analysis of Consolidated Financial Condition and Consolidated
Results of Operations" and "Unaudited Pro Forma Financial Data" for further
information on our financial results.
Our high level of indebtedness could have important consequences to note
holders such as:
- limiting our ability to obtain additional financing to fund our working
capital needs, capital expenditures, debt service requirements or other
purposes;
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
make principal payments and pay interest expense;
- increasing our vulnerability to a decrease in revenues or cash flow
because a greater portion of our resources must be dedicated to servicing
our debt obligations and we may have fewer resources available to assist
us in maintaining our business operations during adverse conditions; and
- increasing our vulnerability to interest rate increases because borrowings
under our bank credit facilities are at variable interest rates.
Pro forma interest expense for the year ended December 31, 1998 was $23.3
million which was 37.7% of pro forma EBITDA for the year ended December 31,
1998. Pro forma interest expense for the nine months ended September 30, 1999
was $18.1 million which was 64.1% of pro forma EBITDA for the nine months ended
September 30, 1999.
Our ability to pay interest on the notes and to satisfy our other debt
obligations will depend upon, among other things, our future operating
performance and our ability to refinance indebtedness when necessary. Each of
these factors is to a large extent dependent on economic, financial, competitive
and other factors beyond our control. If, in the future, we cannot generate
sufficient cash from operations to make scheduled payments on the notes or to
meet our other obligations we will need to refinance, obtain additional
financing or sell assets. We cannot assure you that our business will generate
cash flow, or that we will be able to obtain funding sufficient to satisfy our
debt service requirements.
WE ARE DEPENDENT ON A KEY CUSTOMER AND COULD SUFFER FINANCIAL HARM IF WE WERE TO
LOSE THAT CUSTOMER'S BUSINESS
Our largest customer is Boeing, which directly accounted for approximately
59.0% of our combined pro forma revenues for the year ended December 31, 1998.
In addition, approximately 11.0% of the remainder of our combined pro forma
revenues for the year ended December 31, 1998 were derived from Boeing
indirectly through sales to suppliers of Boeing. Most of our sales to Boeing are
pursuant to contracts and purchase orders which may be terminated by Boeing at
any time. Boeing has
16
<PAGE>
announced that it will stop producing the MD-80 and MD-90 in 2000 and the MD-11
in 2001, models for which we currently produce parts, and may stop producing
other models for which we produce parts. In addition, under some circumstances,
Boeing may enforce alternative economic terms pursuant to such contracts, in
which case the contracts could become less commercially favorable to us.
Alternatively, we may elect to terminate the applicable portion of such
contracts. We cannot assure you that Boeing will not terminate its contracts
with us, or that we will be able to maintain our current level of sales to
Boeing and Boeing's suppliers.
Our subsidiaries that operate in the United States have experienced a
decrease in the value and number of orders from Boeing for delivery in 1999 as
compared to 1998. Boeing has announced it intends to increase its annual
inventory turn rate, which is currently approximately two times, to an annual
inventory turn rate of four times. We believe the reduction in the value and
number of orders from Boeing is due to changes in Boeing's purchasing practices
implemented as part of Boeing's strategy to reduce inventories and increase its
use of just-in-time manufacturing techniques. In addition, Boeing is forecasting
a reduction in its delivery of commercial aircraft to 480 aircraft in 2000
relative to projected deliveries of 620 aircraft in 1999, which may also reduce
the value and number of orders we receive from Boeing. Furthermore, Boeing
recently entered into an agreement with the union which represents approximately
30% of its employees in which Boeing agreed it would not lay off employees due
to Boeing's use of subcontractors. Boeing also agreed to establish a joint
labor-management committee to review outsourcing plans, although Boeing retains
the right to outsource to subcontractors. As a result of the new agreement with
the union, Boeing may produce some parts itself rather than outsourcing
production of parts to subcontractors such as ourselves. Boeing orders could
continue to decline and we cannot assure you that Boeing orders will increase or
return to the 1998 level in 1999 or in 2000. The loss of all or a substantial
portion of our revenues from Boeing could have a material adverse effect on our
business, financial condition or results of operations.
WE ARE DEPENDENT ON THE COMMERCIAL AIRCRAFT INDUSTRY WHICH HAS HISTORICALLY BEEN
HIGHLY CYCLICAL AND COULD SUFFER FINANCIALLY IF A DOWNWARD CYCLE CONTINUED TOO
LONG
Changes in the rate of future aircraft deliveries, including cancellations
or deferrals of scheduled deliveries, could have a material adverse effect on
our business, financial condition or results of operations because our principal
customers are commercial aircraft manufacturers. Our business is closely related
to the financial performance of the commercial airlines, which has historically
been highly cyclical and competitive. Consequently, demand from the aircraft
industry has historically been subject to cyclical fluctuations and has been
adversely affected in the past by a number of factors, including, but not
limited to, increased fuel and labor costs and intense price competition.
Several domestic and foreign commercial airlines have in the past encountered
significant financial difficulties, resulting in several airlines delaying
aircraft orders, canceling their options to purchase aircraft, or seeking
protection under bankruptcy laws. Deferrals or cancellations in aircraft orders
could adversely affect the volume and price of orders placed for products used
to manufacture commercial aircraft, including the individual parts and
sub-assemblies, manufacturing kits and structural components we manufacture. You
should read the discussion under the heading "Business--Industry Overview and
Trends" for more information on the commercial aircraft industry.
In particular, Boeing has developed a large backlog of aircraft sales to
customers in Asia. Recent financial turmoil in Asia, including currency
devaluations affecting Boeing's Asian customers, has resulted in Boeing
announcing that it will adjust its production schedule over the next several
years to adjust for delays or cancellations of orders. One Boeing customer, the
People's Republic of China, has announced that it will seek to postpone
deliveries of approximately 25 aircraft from Boeing presently scheduled for
delivery in 2000 and 2001. Boeing has announced that it expects to deliver 480
aircraft in 2000, compared to expected deliveries of approximately 620 aircraft
in 1999. Boeing's changes in its production schedules may reduce Boeing's demand
for our products and could thus have a material adverse effect on our business,
financial condition or results of operations.
17
<PAGE>
RESTRICTIVE COVENANTS IN OUR INDENTURES AND OUR CREDIT AGREEMENT COULD CAUSE US
TO DEFAULT AND ACCELERATE OUR INDEBTEDNESS UNDER THE CREDIT AGREEMENT
If we fail to meet various restrictive covenants in the indentures governing
our notes or in our credit agreement, we could default and our payments could be
accelerated. In such an event, sufficient funds may not be available to pay the
noteholders. The restrictive covenants, among other things, restrict us and our
restricted subsidiaries from:
- incurring additional indebtedness;
- incurring liens;
- paying dividends;
- making some types of other restricted payments or investments;
- consummating some types of asset sales;
- entering into some types of transactions with affiliates;
- merging or consolidating with another entity;
- disposing of all or substantially all of our assets; and
- prepaying the notes, except in a few specific circumstances.
The credit agreement also requires us to maintain specified financial ratios
and satisfy various financial tests. At March 31, 1999 we failed to meet three
of the financial covenants under our credit agreement. We have retroactively
amended the credit agreement effective March 31, 1999 such that we are deemed to
have been in compliance on March 31, 1999 and we are in compliance with the
financial covenants at this time. We cannot assure you that we will be able to
continue to meet such tests. Our ability to meet such financial ratios and tests
may be affected by events beyond our control. A breach of any of these covenants
could result in an event of default under the credit agreement. If such an event
of default occurs, the lenders could accelerate our indebtedness to them under
the credit agreement. We cannot assure you that our assets would be sufficient
to repay our indebtedness in full, including the notes. You should read the
discussions under the headings "Description of the Series B Notes--Covenants,"
"Description of the Series D Notes--Covenants" and "Description of Credit
Agreement" for more details about our indebtedness.
WE BEGAN OPERATIONS IN NOVEMBER 1997 AND WE MAY NOT HAVE THE RESOURCES TO
SUCCESSFULLY INTEGRATE AND MANAGE OUR COMBINED ENTITY
We began operations in November 1997. Between November 1997 and July 1999,
we acquired fourteen operating companies. Prior to our acquisition of our
subsidiaries in the United States, each of those subsidiaries operated
independently. We also recently acquired Trim and its subsidiaries, which was
the first acquisition we have completed outside of the United States. We may not
be able to integrate these businesses successfully. Our combined financial
results covers periods when all of our subsidiaries were not under the common
control of our management and may not be indicative of our future financial or
operating results. In addition, our management group has been assembled only
recently. Our management control structure is still in its formative stages and
we are currently seeking additional qualified senior managers. Our ability to
continue to achieve our goals will depend upon our ability to integrate
effectively our prior and any future acquisitions and to achieve operating and
cost efficiencies. Any failure by us to effectively oversee the combined entity
could have a material adverse effect on our business, financial condition, or
results of operations.
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OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS THAT COULD
ADVERSELY AFFECT THE RESULTS FROM THESE OPERATIONS AND OUR OVERALL BUSINESS
Trim and its subsidiaries were our first acquisitions outside the United
States. For the nine months ended September 30, 1999 on a pro forma basis,
approximately 26.3% of our combined revenues would be derived from our
international operations. Having acquired our subsidiaries located in the United
Kingdom will require us to manage international operations for the first time.
Our international operations are subject to a number of risks including:
- foreign currency risks
- differences in accounting practices
- work stoppages
- transportation delays and interruptions
- tariffs and import and export controls
- differing licensing and permit requirements
- conflicting U.S. and foreign laws
If these risks negatively affect the results of operations of our
international operations, it could have a material adverse effect on our
business, financial condition, or results of operations.
WE MAY HAVE ACQUIRED UNKNOWN OR UNDISCOVERED LIABILITIES WHEN WE ACQUIRED TRIM
AND ITS SUBSIDIARIES WHICH MAY AFFECT OUR FINANCIAL CONDITION
Although we have performed a legal and financial due diligence investigation
of Trim and its subsidiaries, including environmental studies of Trim and its
subsidiaries' major facilities, unknown or undisclosed legal, financial or
operational weakness or liabilities may exist or arise. We could become liable
as a successor owner of Trim and its subsidiaries for such liabilities, which
could include, among other things, liabilities arising from litigation, product
liability claims, employee benefit obligations or non-compliance with
environmental requirements of taxation regulation. Although the terms of the
share purchase agreement relating to our acquisition of Trim and its
subsidiaries is likely to provide warranty protection in relation to such
potential liabilities, we cannot assure you that we will be able to enforce
those warranties, which are in themselves subject to significant limitations, or
that they would be sufficient to fully protect us against such liabilities. The
acquisition of undisclosed or unknown liabilities could have a material adverse
effect on our business, financial condition, or results of operations.
WE ARE DEPENDENT ON CUSTOMER CERTIFICATION OF OUR MANUFACTURING FACILITIES WHICH
COULD BE TERMINATED RESULTING IN FINANCIAL LOSS
We manufacture parts to exact specifications provided by our aerospace
customers in engineering drawings. You should read the discussions under the
headings "Business--Operations--Certification" and "Business--Sales and
Marketing" for more information on our manufacturing and operations. Our
customers require us to perform quality standards testing and certification
procedures on all manufactured parts and provide detailed records to ensure
traceability of each part. Our customers typically certify our manufacturing
facilities as meeting their quality standards. Such customer certification is
necessary for us to manufacture parts for our aerospace customers. From time to
time, other aerospace industry subcontractors have lost their customer
certifications by reason of, among other things, problems with product quality,
manufacturing processes or documentation. We have no reason to believe that any
of our certified manufacturing facilities will lose any of their customer
certifications, but we cannot assure you that such an event will not occur. If a
significant customer were to terminate our facility certification at one or more
of our facilities, it could have a material adverse effect on our business,
financial condition or results of operations.
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<PAGE>
YOU MAY NOT BE ABLE TO RELY ON FORWARD LOOKING STATEMENTS BECAUSE UNEXPECTED
CIRCUMSTANCES COULD ALTER CONDITIONS AND HARM OUR BUSINESS
This prospectus contains forward looking statements which involve risks and
uncertainties. Those statements appear in a number of places in this prospectus.
We have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties, and assumptions about us, including, among other things:
- Our anticipated growth strategies,
- Our expected internal growth,
- Our intention to produce integrated parts,
- Technological advances in our industry,
- Anticipated trends and conditions in our industry,
- The on-going needs of our existing customers, especially Boeing,
- Our ability to integrate acquired businesses,
- Our ability to expand our customer base,
- Our future capital needs,
- Our future operating performance,
- Our ability to compete, including internationally, and
- Our ability to complete our Year 2000 readiness program.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this prospectus might not occur. You should be aware that
any such forward looking statements are not guarantees of future performance and
that actual results may differ from those in the forward looking statements as a
result of various factors. The accompanying information contained in this
prospectus identifies important factors that could cause such differences.
OUR CONTRACTS ASSOCIATED WITH OUR BACKLOG COULD BE TERMINATED, WHICH WOULD
DECREASE OUR FUTURE REVENUE
Our backlog and bookings are subject to fluctuations and are not necessarily
indicative of future revenues. Our contracts typically contain contingency
provisions permitting termination by the customer at any time without penalty.
We cannot assure you that backlog will be completed and booked as revenue.
Cancellations of pending contracts or terminations or reductions of contracts in
progress could have a material adverse effect on our business, financial
condition or results of operations. You should read the discussion under the
heading "Business--Backlog" for more information on how backlog affects our
business.
WE MAY BE EXPOSED TO ENVIRONMENTAL RISKS AT OUR MANUFACTURING FACILITIES AND ARE
SUBJECT TO ENVIRONMENTAL REGULATION
We are subject to federal, state, local and foreign laws, regulations and
ordinances establishing health and environmental quality standards, and may be
subject to liabilities or penalties for violations of those standards. We are
also subject to laws and regulations governing remediation of contamination at
facilities currently or formerly owned or operated by us or to which we have
sent hazardous substances or wastes for treatment, recycling or disposal. We
acquire, and expect to continue to acquire, pre-existing businesses that have
historical and ongoing operations. We have and will have limited information
about the past activities of those businesses and their operations on the
acquired properties. We have acquired at least one leased property that is
currently under investigation by
20
<PAGE>
governmental authorities for groundwater contamination and we have been asked to
conduct additional investigations. We have also been named a defendant in an
action filed by an owner of property adjacent to property we lease. At this
time, we cannot determine, in either case, what cleanup activities, if any, will
be required. Soil and groundwater contamination may also exist on our other
properties as a result of current or former operations on our properties, or
operations on other properties. We may be subject to future liabilities or
obligations as a result of new or more stringent interpretations of existing
laws and regulations. In addition, we may have liabilities or obligations in the
future if we discover any environmental contamination or liability at any of our
facilities, or at facilities we may acquire. Such matters may have a material
adverse effect on our business, financial condition or results of operations.
WE MAY BE REQUIRED TO PAY OUT OF POCKET COSTS IF AVIATION-RELATED OR PRODUCT
LIABILITY CLAIMS EXCEED INSURANCE COVERAGE
We currently carry aviation products insurance. To date, we have not
experienced any significant uninsured or insured aviation-related claims or any
material product liability claims. However, we cannot assure you that our
existing insurance coverage will be adequate to cover future claims that may
arise or we will be able to renew such coverage at commercially reasonable
rates.
FRAUDULENT TRANSFER STATUTES MAY LIMIT YOUR RIGHTS AS A NOTE HOLDER TO RECEIVE
PAYMENTS ON THE NOTES
Each of our restricted subsidiaries is a guarantor of the notes. In the
event of the bankruptcy or other financial difficulty of a guarantor, the
guarantees of the notes by the guarantors may be subject to review under state
or federal fraudulent transfer laws. Under those laws a court could avoid a
guarantor's guarantee and direct the return of any amounts paid under its
guarantee to the guarantor or to a fund for the benefit of the guarantor's
creditors. As a result, such funds would not be available to repay the
guarantor's obligations to the note holders. A court would consider factors such
as whether a guarantor received less than fair consideration for incurring its
obligations under its guarantee, and whether:
- a guarantor was insolvent at the time it entered into the guarantee or was
rendered insolvent by entering into the guarantee;
- a guarantor's remaining unencumbered assets constituted sufficient capital
for the conduct of the guarantor's business or operations; and
- a guarantor intended to incur or believed it would incur debts beyond its
ability to pay as such debts matured.
A court could also avoid a guarantor's guarantee if it found that the
guarantor entered into the guarantee with the actual intent to hinder, delay or
defraud its creditors.
If a guarantor's liability under its guarantee exceeds the amount by which
the guarantor directly benefits from the proceeds of the notes, a court is
likely to find that it did not receive fair consideration or reasonably
equivalent value for its guarantee.
A court will use a different measure of insolvency for purposes of the
foregoing depending on the law of the jurisdiction being applied. Generally,
however, an entity would be considered insolvent if the sum of its debts is
greater than all of its property at a fair valuation or if the present fair
market value of its assets is less than the amount that will be required to pay
its probable liability on its existing debts as they become absolute and mature.
Similar laws exist in the United Kingdom with respect to the above matters.
21
<PAGE>
THE NOTES WILL BE SUBORDINATED TO OUR OTHER DEBT AND OUR HOLDING COMPANY
STRUCTURE MAY ADVERSELY AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS UNDER THE
NOTES
The outstanding Series A and Series C notes and the Series B and Series D
notes will rank equally in right of payment and will be subordinated in right of
payment to all our existing and future senior indebtedness. In addition, the
guarantees effectively rank junior to the senior debt of our restricted
subsidiaries. At September 30, 1999 we had outstanding $97.7 million of senior
indebtedness and $128.9 million of senior subordinated indebtedness and our
subsidiaries had $7.1 million in outstanding indebtedness. We may also incur
additional senior indebtedness consistent with the terms of our debt agreements,
such as borrowings in connection with future acquisitions.
In the event of our default in any payment due on our senior indebtedness,
or our bankruptcy, liquidation or dissolution, our assets would be available to
pay obligations on the notes only after all payments had been made on our senior
indebtedness. As a result, the lenders under our credit facility may receive
more ratably, and note holders may receive less ratably, than our other
creditors and may receive no compensation of any kind in the event of
bankruptcy, liquidation, reorganization, or a similar proceeding. You should
read the discussions under the headings, "Description of the Series B
Notes--Subordination" and "Description of the Series D Notes--Subordination" for
more information on the ranking of the notes in relation to our other
indebtedness.
We are a holding company whose material assets consist primarily of the
capital stock of our subsidiaries. Consequently, we are dependent upon the legal
and contractual ability of our subsidiaries to pay dividends in order to make
payments on the notes and satisfy any repurchase obligations relating to the
notes, as a result of a Change of Control or a sale or other disposition of
various assets. You should read the discussions under the headings "--Fraudulent
Transfer Statutes May Limit Your Rights as a Note Holder to Receive Payment on
the Notes," "Description of the Series B Notes" and "Description of the
Series D Notes" for more information on our dependence on our subsidiaries. We
cannot assure you that our subsidiaries will make sufficient dividend payments
to enable us to meet our obligations under the notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURES
Upon the occurrence of some specific kinds of change of control events, we
will be required by the indentures to offer to repurchase all outstanding notes.
However, it is possible that we will not have sufficient funds at the time of
the change of control to make the required repurchase of notes or that
restrictions in our credit agreement will not allow such repurchases. Our
failure to repurchase the notes could result in a default under the indentures
and could also result in a default under our credit agreement, thus restricting
our ability to make payments to the holders of the notes. If we default on our
obligations under the indentures, including the obligation to repurchase the
notes upon a change in control, holders of the notes would be entitled to
exercise remedies under the indentures. You should read the discussions under
the headings "Description of the Series B Notes--Events of Default and Remedies"
and "Description of the Series D Notes--Events of Default and Remedies" for more
information on the remedies which may be available to you if we are unable to
repurchase the notes upon a change in control.
WE MAY NOT BE REQUIRED TO MAKE A CHANGE OF CONTROL OFFER IF WE SELL OR TRANSFER
OUR ASSETS TO ANOTHER PARTY
The ability of a holder of notes to require us to repurchase such notes as a
result of a sale or transfer of less than all of our assets and those of the
guarantors to another person or group may be uncertain. The definition of change
of control includes a phrase relating to the direct or indirect sale or transfer
of "all or substantially all" of our assets on a consolidated basis. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of
22
<PAGE>
the phrase under applicable law. The interpretation of the phrase "substantially
all" will be dependent upon particular facts and circumstances. You should read
the discussions under the headings "Description of the Series B
Notes--Covenants--Repurchase of Notes at the Option of the Holder Upon a Change
of Control" and "Description of the Series D Notes--Covenants--Repurchase of
Notes at the Option of the Holder Upon a Change of Control" for more information
on your ability to require us to repurchase your notes upon a change of control.
NO PUBLIC TRADING MARKET FOR THE NOTES EXISTS AND YOU MAY NOT BE ABLE TO SELL
THEM
There has not been an established trading market for the notes. Although two
of the initial purchasers have told us they currently make a market in the
Series A notes, and, if issued, intend to make a market in the Series B notes
which will replace the Series A notes, and the initial purchaser of the
Series C notes has told us it intends to make a market in the Series D notes,
which, if issued, will replace the Series C notes, they have no obligation to do
so and may discontinue making a market at any time without notice.
The notes are eligible for trading in the Private Offerings, Resale and
Trading through the Automatic Linkage ("PORTAL") market. However, we do not
intend to apply for listing of the Series A or Series C notes, or, if issued,
the Series B or Series D notes, on any securities exchange or for quotation
through the National Association of Securities Dealers' Automated Quotation
System. The liquidity of any market for the notes will depend upon the number of
holders of the notes, our performance, prevailing interest rates, the market for
similar securities, the interest of securities dealers in making a market for
the notes, and other factors. A liquid trading market may not develop for the
notes. We cannot assure you that a liquid trading market will develop for the
notes, or that holders of the notes will be able to sell the notes at an
acceptable price, if at all.
OUTSTANDING SERIES A AND SERIES C NOTES THAT ARE NOT EXCHANGED WILL CONTINUE TO
BE SUBJECT TO TRANSFER RESTRICTIONS
Untendered Series A notes that are not exchanged for Series B notes, and
untendered Series C notes that are not exchanged for Series D notes, pursuant to
the exchange offer will remain restricted securities. Series A and Series C
notes will continue to be subject to the following restrictions on transfer:
- Series A and Series C notes may be resold only if registered under the
Securities Act, if an exemption from registration is available thereunder,
or if neither such registration nor such exemption is required by law;
- Series A and Series C notes will bear a legend restricting transfer in the
absence of registration or an exemption therefrom;
- a holder of Series A or Series C notes who desires to sell or otherwise
dispose of all or any part of its Series A or Series C notes to an
institutional accredited investor under an exemption from registration
under the Securities Act, must deliver to the trustee a signed letter
containing various representations and agreements relating to the transfer
of the Series A or Series C notes. If such transfer is for an aggregate
principal amount of Series A or Series C notes less than $250,000, the
holder must deliver to us, if we so request, an opinion of counsel
acceptable to us that the transfer is in compliance with the Securities
Act; and
- a holder of Series A or Series C notes who desires to sell or otherwise
dispose of all or any part of its Series A or Series C notes under
specific exemptions to the Securities Act must deliver to us, upon our
request, an opinion of counsel satisfactory to us that such exemption is
available.
23
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited consolidated cash and
consolidated capitalization at September 30, 1999 on an actual basis. This table
should be read in conjunction with our consolidated financial statements,
including the notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30,
1999
--------------
ACTUAL
--------------
(UNAUDITED)
<S> <C>
(DOLLARS IN THOUSANDS)
CASH AND CASH EQUIVALENTS................................... $ 12,668
========
DEBT (INCLUDING CURRENT PORTION):
Notes (1)................................................. $126,228
Term Loan A............................................... 32,375
Term Loan B............................................... 44,663
Acquisition Line.......................................... 20,700
Capital leases and other.................................. 7,077
Seller variable rate note due 2002........................ 2,600
--------
Long-term obligations (including current portion) (2)... $233,643
STOCKHOLDERS' EQUITY:
Common stock.............................................. 350
Additional paid-in capital................................ 43,616
Retained earnings......................................... (3,160)
--------
TOTAL STOCKHOLDERS' EQUITY.............................. 40,806
--------
TOTAL CAPITALIZATION.................................... $274,449
========
</TABLE>
- ------------------------
(1) Net of $2.8 million of original issue discount from the Series C notes.
(2) Long-term obligations include long-term debt, including the current portion,
and capital leases.
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data are derived by the
application of pro forma adjustments to our historical consolidated financial
statements included elsewhere in this prospectus. The historical consolidated
financial statements for Trim have been presented using U.S. GAAP.
The unaudited pro forma combined condensed statement of operations data for
the year ended December 31, 1998 give effect to the acquisitions we completed in
1998 and 1999 as if such acquisitions were consummated as of January 1, 1998.
The unaudited consolidated statements of operations data for Trim for the twelve
months ended March 31, 1999 has been translated from pounds sterling to U.S.
dollars at the average interbank exchange rate for the twelve months ended
March 31, 1999 of L1.0=$1.65.
The unaudited pro forma combined condensed statement of operations data for
the nine months ended September 30, 1999 give effect to the acquisitions we
completed in 1999 as if such acquisitions were consummated as of January 1,
1999. The consolidated statement of operations data for Trim for the period from
January 1, 1999 to July 30, 1999 has been translated from pounds sterling to
U.S. dollars at the average interbank exchange rate for the period of
L1.0=$1.61.
The unaudited pro forma financial data are not necessarily indicative of
operating results or financial position that would have been achieved had the
events described above been consummated at January 1, 1998 or at January 1, 1999
and should not be construed as representative of our future operating results or
financial position. The unaudited pro forma financial data set forth below are
derived in part from the historical consolidated financial statements and the
related notes thereto included elsewhere in this prospectus.
The pro forma adjustments are applied to the historical consolidated
financial statements to reflect and account for the acquisitions completed by us
in 1998 and 1999 as a purchase. Accordingly, the pro forma data reflect the
preliminary allocations of purchase prices, based on estimated fair values of
the tangible and intangible assets and liabilities of the acquired businesses.
Management believes that the final allocations will not vary significantly from
such preliminary allocations.
25
<PAGE>
COMPASS AEROSPACE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 ACQUISITIONS
FROM COMPASS
COMPASS JANUARY 1, 1998 TRIM PRO FORMA
YEAR ENDED THROUGH COMPASS TWELVE MONTHS YEAR ENDED
DECEMBER 31, THE DATE OF COMBINED WITH ENDED MARCH 31, DECEMBER 31,
1998(1) ACQUISITION(2) 1998 ACQUISITIONS(3) 1999(4) ADJUSTMENTS(5) 1998(6)
------------ ----------------- -------------------- ---------------- -------------- ------------
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $96,547 $86,897 $183,444 $43,921 $ -- $227,365
Cost of sales........... 70,410 50,538 120,948 27,847 852 149,647
------- ------- -------- ------- -------- --------
Gross profit............ 26,137 36,359 62,496 16,074 (852) 77,718
Selling, general and
administrative
expenses.............. 14,537 17,216 31,753 8,317 (5,819) 34,251
------- ------- -------- ------- -------- --------
Operating income........ 11,600 19,143 30,743 7,757 4,967 43,467
Interest (income)
expense, net(7)....... 8,493 717 9,210 (700) 14,796 23,306
Other (income)
expense............... 670 1,212 1,882 (387) (50) 1,445
------- ------- -------- ------- -------- --------
Income (loss) before
taxes................. 2,437 17,214 19,651 8,844 (9,779) 18,716
Income taxes............ 1,522 2,061 3,583 2,399 3,002 8,984
------- ------- -------- ------- -------- --------
Net income (loss)....... $ 915 $15,153 $ 16,068 $ 6,445 $(12,781) $ 9,732
======= ======= ======== ======= ======== ========
OTHER DATA:
Net cash flow provided
by (used in):
operating
activities............ $(6,677) $14,179 $ 7,502 $ 8,245 $ (463) $ 15,284
EBITDA(8)............... 20,550 20,578 41,128 9,051 11,677 61,856
EBITDA margin........... 21.3% 23.7% 22.4% 20.6% 27.2%
Depreciation and
amortization.......... $ 8,440 $ 1,435 $ 9,875 $ 1,294 $ 6,102 $ 17,271
</TABLE>
- ------------------------
(1) Reflects the results of operations of Brittain Machine, Wichita
Manufacturing, Barnes Machine, Sea-Lect and Pacific Hills for the period
from each of their dates of acquisition by us through December 31, 1998.
Also reflects our operations and those of Aeromil and Western Methods for
the year ended December 31, 1998.
(2) Reflects the results of operations of: (a) Brittain Machine and its
subsidiary, Wichita Manufacturing and Barnes Machine for the period from
January 1, 1998 through April 21, 1998, (b) Sea-Lect for the period from
January 1, 1998 through May 11, 1998, (c) Pacific Hills for the period from
January 1, 1998 through November 20, 1998, and (d) Modern for the year ended
December 31, 1998.
26
<PAGE>
The 1998 results of operations for each of these companies for the
period prior to acquisition is as follows:
<TABLE>
<CAPTION>
BRITTAIN MACHINE BARNES
& SUBSIDIARY MACHINE SEA-LECT PACIFIC HILLS MODERN
FROM FROM FROM FROM FROM
JANUARY 1, 1998 JANUARY 1, 1998 JANUARY 1, 1998 JANUARY 4, 1998 JANUARY 1, 1998
THROUGH THROUGH THROUGH THROUGH THROUGH
(DOLLARS IN THOUSANDS) APRIL 21, 1998 APRIL 21, 1998 MAY 11, 1998 NOVEMBER 20, 1998 DECEMBER 31, 1998
---------------------- ---------------- --------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Revenues................... $21,344 $5,854 $5,369 $28,282 $26,048
Cost of sales.............. 14,121 3,795 4,474 10,687 17,461
------- ------ ------ ------- -------
Gross profit............... 7,223 2,059 895 17,595 8,587
Selling, general and
administrative
expenses................. 4,901 185 772 7,389 3,969
------- ------ ------ ------- -------
Operating income........... 2,322 1,874 123 10,206 4,618
Interest expense, net...... 114 34 66 -- 503
Other expense (income)..... (123) -- (4) -- 1,339
------- ------ ------ ------- -------
Income before income
taxes.................... 2,331 1,840 61 10,206 2,776
Income taxes............... 936 645 -- -- 480
------- ------ ------ ------- -------
Net income................. $ 1,395 $1,195 $ 61 $10,206 $ 2,296
======= ====== ====== ======= =======
OTHER DATA:
Net cash flow provided by
(used) in operating
activities............... $ 2,739 $ (55) $ (138) $10,789 $ 844
EBITDA..................... 2,935 1,950 203 10,386 5,104
EBITDA margin.............. 13.8% 33.3% 3.8% 36.7% 19.6%
Depreciation and
amortization............. $ 613 $ 76 $ 80 $ 180 $ 486
</TABLE>
(3) Presents an aggregate of the first two columns reflecting historical data of
our results of operations combined with results of operations from
pre-acquisition periods in 1998 of Brittain Machine and Subsidiary, Barnes
Machine, Sea-Lect, and Pacific Hills.
27
<PAGE>
(4) The unaudited pro forma consolidated statement of operations for Trim for
the twelve months ended March 31, 1999 was derived from Trim's historical
consolidated statement of operations for the year ended April 30, 1999,
adjusted to exclude the month ended April 30, 1999 and to include the month
ended April 30, 1998 as follows:
<TABLE>
<CAPTION>
TRIM TRIM TRIM TRIM
YEAR ONE MONTH ONE MONTH TWELVE MONTHS
ENDED ENDED ENDED ENDED
APRIL 30, 1999 APRIL 30, 1998 APRIL 30, 1999 MARCH 31, 1999
(DOLLARS IN THOUSANDS) --------------- --------------- --------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $45,602 $3,478 $5,159 $43,921
Cost of sales....................................... 28,935 2,208 3,296 27,847
------- ------ ------ -------
Gross profit........................................ 16,667 1,270 1,863 16,074
Selling, general and administrative expenses........ 9,060 998 1,741 8,317
------- ------ ------ -------
Operating income.................................... 7,607 272 122 7,757
Interest (income) expense, net...................... (651) (31) 18 (700)
Other expense (income).............................. (361) -- 26 (387)
------- ------ ------ -------
Income before income taxes.......................... 8,619 303 78 8,844
Income taxes........................................ 2,462 91 154 2,399
------- ------ ------ -------
Net income (loss)................................... $ 6,157 $ 212 $ (76) $ 6,445
======= ====== ====== =======
OTHER DATA:
Cash flow provided by (used in) operating
activities........................................ $ 8,245 $ 469 $ 343 $ 8,245
EBITDA.............................................. 8,909 513 371 9,051
EBITDA margin....................................... 19.5% 14.8% 7.2% 20.6%
Depreciation and amortization....................... $ 1,294 $ 241 $ 241 $ 1,294
</TABLE>
(5) Includes positive and negative pro forma adjustments, as if each acquisition
were consummated as of January 1, 1998, as follows:
(a) Cost of Sales:
- Additional depreciation expense of $1.1 million from step up of asset
values related to acquisitions completed in 1998.
- Reduced expense of $0.3 million to eliminate the costs associated with
discontinued lease payments by the acquired business to an affiliate of
the former owner(s) of the acquired business. We will not be continuing
such payments.
(b) Selling, General and Administrative Expenses:
- Reduced expense of $7.1 million to eliminate compensation to former
owners/executives of acquired companies under obligations that existed
under the previous ownership and which we are not obligated to, and
will not, continue. In each case the amounts involved relate to
compensation to individuals that have no continuing association with
us.
- Increased expense of $4.9 million to reflect the amortization of
goodwill related to acquired businesses. Goodwill is amortized on a
straight-line basis over a period of 20 years.
- Reduced expense of $0.2 million to eliminate the cost associated with
discontinued lease payments by the acquired company to an affiliate of
the former owner(s) of the acquired businesses.
- Reduced expense of $3.8 million related to one-time non-recurring bonus
payments by the former owner(s) of acquired companies to employees of
acquired businesses. The former owners are no longer in our employ or
that of the acquired businesses. We are under no obligation and do not
intend to make such payments in the future.
28
<PAGE>
- Increased expense of $0.6 million related to increased management fees
associated with increased pro forma earnings.
(c) Interest Expense:
- Includes additional interest expense of $14.8 million based on actual
debt incurred to complete our acquisitions in 1998 and 1999 as if the
acquisitions and additional borrowings had been completed/incurred as
of January 1, 1998.
(d) Income Taxes:
- Assumes a pro forma combined 48.0% income tax rate.
(6) Presents an aggregate of the third and fourth columns in order to present
pro forma data for the year ended December 31, 1998.
(7) The pro forma adjustment to interest expense assumes that the additional
borrowings related to the acquisitions we completed in 1998 and 1999 were
incurred as of January 1, 1998. The pro forma adjustment to interest expense
for the pro forma year ended December 31, 1998 consists of:
- Interest expense on the senior subordinated debt of $110.0 million at
10 1/8% for the period from January 1, 1998 through April 20, 1998 of
approximately $3.4 million.
- Interest expense on senior debt of $81.0 million at 9% for the period from
January 1, 1998 through December 31, 1998, less actual interest on senor
debt incurred during the period November 20,1998 through December 31,
1998, of approximately $6.5 million.
- Interest expense on the senior subordinated debt of $19.0 million at
10 1/8% for the period from January 1, 1998 through December 31, 1998 of
approximately $1.9 million, plus amortization of original issue discount
of approximately $0.4 million.
- Interest expense on senior debt of $19.7 million at 8 1/2% for the period
from January 1, 1998 through December 31, 1998 of approximately
$1.7 million.
- Interest expense on a $2.6 million seller variable rate note at 9.0% for
the period from January 1, 1998 through December 31, 1998 of approximately
$0.2 million.
- The elimination of $0.7 million of interest income from Trim and its
subsidiaries.
The effect on interest expense of a 1/4% change in interest rate of our
variable rate debt would be approximately $0.3 million.
(8) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under GAAP and should not be construed as an alternative to
operating income or cash flows from operating activities as determined by
GAAP. EBITDA data is presented because such data is used by some investors
to determine our ability to meet debt service requirements and is used in
some debt covenant calculations required under the indentures and our
existing credit agreement. EBITDA is not indicative of our operating
performance, does not provide a measure of liquidity and does not represent
our available or discretionary funds. Furthermore, EBITDA as reported by us
may not be comparable to EBITDA reported by other companies.
29
<PAGE>
COMPASS AEROSPACE CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
COMPASS COMPASS
NINE MONTHS TRIM COMPASS PRO FORMA
ENDED FOR THE PERIOD FROM COMBINED NINE MONTHS ENDED
SEPTEMBER 30, JANUARY 1 THROUGH WITH SEPTEMBER 30,
1999 JULY 30, 1999 TRIM(1) ADJUSTMENTS(2) 1999(3)
(DOLLARS IN THOUSANDS) -------------- ------------------- -------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues............. $101,443 $25,963 $127,406 $ -- $127,406
Cost of sales........ 72,275 16,689 88,964 -- 88,964
-------- ------- -------- ------- -------
Gross profit......... 29,168 9,274 38,442 -- 38,442
Selling, general and
administrative
expenses........... 18,367 5,450 23,817 702 24,519
-------- ------- -------- ------- -------
Operating income..... 10,801 3,824 14,625 (702) 13,923
Interest (income)
expense, net(4).... 15,672 (347) 15,325 2,815 18,140
Other (income)
expense............ 1,674 (430) 1,244 -- 1,244
-------- ------- -------- ------- -------
Income (loss) before
taxes.............. (6,546) 4,601 (1,944) (3,517) (5,461)
Income taxes
(benefit).......... (2,396) 2,448 52 (2,674) (2,622)
-------- ------- -------- ------- -------
Net income (loss).... $ (4,149) $ 2,153 $ (1,996) $ (843) $(2,839)
======== ======= ======== ======= =======
OTHER DATA:
Net cash flow provided
by (used in):
operating
activities......... $ 9,215 $ 5,244 14,459 $ (702) $13,757
EBITDA(5)............ 23,661 4,493 $ 28,154 144 28,298
EBITDA margin........ 23.3% 17.3% 22.1% -- 22.2%
Depreciation and
amortization....... $ 14,060 $ 663 $ 14,723 $ 776 $15,499
</TABLE>
- ------------------------
(1) Presents an aggregate of the first two columns reflecting historical data of
our results of operations combined with results of operations from the
pre-acquisition period in 1999 of Trim and its subsidiaries.
(2) Includes positive and negative pro forma adjustments as if the acquisition
of Trim and its subsidiaries were consummated as of January 1, 1999, as
follows:
(a) Selling, General and Administrative Expenses:
- Reduced expense of $0.1 million to eliminate compensation to the former
owners that existed under previous ownership and which we are not
obligated to, and will not, continue.
- Increased expense of $0.1 million related to increased management fees
associated with increased pro forma earnings.
- Increased expense of $0.8 to reflect amortization of goodwill related
to an acquired business. Goodwill is amortized on a straight line basis
over 20 years.
(b) Interest Expense:
- Eliminates interest income of $0.3 million.
- Increases interest expense based on the estimated rates and additional
borrowings as if the acquisition of Trim and its subsidiaries was
completed as of January 1, 1999.
(c) Income Taxes:
- Assumes a pro forma combined 48.0% income tax rate.
30
<PAGE>
(3) Presents an aggregate of the third and fourth columns in order to present
pro forma data for the nine month period ended September 30, 1999.
We filed suit against the former shareholder of Pacific Hills and the
stockholders of that former shareholder on May 28, 1999. Our suit alleges
violations of federal securities laws, fraud and breach of contract, among
other allegations. One of the remedies we are seeking is recission. While we
can give no assurance that recission will be granted as a remedy, were
recission to be granted the effect on our financial statements as of and for
the nine month period ended September 30, 1999 would include a decrease in
revenues of $7.8 million to $119.6 million from $127.4 million, an increase
in operating income of $0.5 million to $14.4 million from $13.9 million and
an increase in net income of $2.9 million to $0.0 million from a loss of
$2.9 million. In addition, our current assets would decrease by $2.2 million
to $74.8 million from $77.0 million, our total assets would decrease by
$69.0 million to $239.1 million from $308.1 million, our current liabilities
would decrease by $3.6 million to $25.7 million from $29.3 million, our
total liabilities would decrease by $77.3 million to $190.0 million from
$267.3 million and our stockholders' equity would increase by $8.3 million
to $49.1 million from $40.8 million. The effect on our statements of
operations for the year ended December 31, 1998 were recission to be granted
would include a decrease in revenues of $30.0 million to $197.4 million from
$227.4 million, a decrease in operating income of $13.8 million to $29.7
million from $43.5 million and a decrease in net income of $3.6 million to
$6.1 million from $9.7 million. You should read the discussion under the
heading "Business--Legal Proceedings" for further information on this suit.
(4) The pro forma adjustment to interest expense for the nine month period ended
September 30, 1999 consists of:
- Interest expense on the senior subordinated debt of $19.0 of 10 1/8%
for the period from January 1, 1999 to September 30, 1999 of
approximately $1.1 million, plus amortization of original issue
discount of approximately $0.2 million.
- Interest expense on senior debt of $19.7 million at 8 1/2% for the
period from January 1, 1999 to September 30, 1999 of approximately
$1.0 million.
- Interest expense on a $2.6 million seller variable rate note at 9.0%
from the period January 1, 1999 to September 30, 1999 of approximately
$0.1 million.
- The elimination of $0.3 million of interest income from Trim and its
subsidiaries.
(5) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under GAAP and should not be construed as an alternative to
operating income or cash flows from operating activities as determined by
GAAP. EBITDA data is presented because such data is used by some investors
to determine our ability to meet debt service requirements and is used in
some debt covenant calculations required under the indentures and our
existing credit agreement. EBITDA is not indicative of our operating
performance, does not provide a measure of liquidity and does not represent
our available or discretionary funds. Furthermore, EBITDA as reported by us
may not be comparable to EBITDA reported by other companies.
31
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data are derived
from our consolidated financial statements and those of our predecessor,
Brittain Machine. See "Management's Discussion and Analysis of Consolidated
Financial Condition and Consolidated Results of Operations--Consolidated Results
of Operations." Our consolidated financial statements as of December 31, 1997
and 1998 and for the period October 21, 1997 (date of incorporation) through
December 31, 1997 and for the year ended December 31, 1998 have been audited by
Ernst & Young, LLP, independent auditors, and are included elsewhere in this
prospectus. Our consolidated financial statements for the nine months ended
September 30, 1998 and 1999 are derived from unaudited financial statements
included elsewhere in this prospectus. The consolidated financial statements of
Brittain Machine as of and for the period from July 1, 1997 through April 21,
1998 and as of and for the year ended June 30, 1997 have been audited by other
independent auditors and are included elsewhere in this prospectus. The
consolidated financial statements of Brittain Machine as of and for the year
ended June 30, 1996 have been audited by Ernst & Young, LLP, independent
auditors, and are included elsewhere in this prospectus. The following selected
historical consolidated financial data for Brittain Machine as of and for the
years ended June 30, 1994 and 1995 are derived from unaudited financial
statements which are not included herein.
The information contained in this table should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Consolidated Results of Operations" and the financial statements and related
notes thereto included elsewhere in this prospectus.
32
<PAGE>
<TABLE>
<CAPTION>
BRITTAIN
COMPASS COMPASS MACHINE FOR
FOR THE FOR THE THE PERIOD
YEAR 36 DAYS FROM JULY 1, BRITTAIN MACHINE FOR THE YEARS
ENDED ENDED 1997 THROUGH ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, APRIL 21, -----------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1998 1997 1996 1995 1994
- ---------------------- ------------ ------------ ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues................. $ 96,547 $ 3,057 $49,682 $35,481 $26,892 $19,244 $20,788
Cost of sales............ 70,410 2,386 34,640 25,656 19,076 16,708 14,729
-------- ------- ------- ------- ------- ------- -------
Gross profit............. 26,137 671 15,042 9,825 7,816 2,536 6,059
Selling, general and
administrative
expenses............... 14,537 404 6,798 3,229 2,953 2,654 2,632
-------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. 11,600 267 8,244 6,596 4,863 (118) 3,427
Interest expense, net.... 8,493 166 386 398 403 359 293
Other (income) expense... 670 (16) (20) 84 77 (63) (20)
-------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. 2,437 117 7,878 6,114 4,383 (414) 3,154
Income taxes (benefit)... 1,522 43 2,901 2,208 1,637 (194) 1,282
-------- ------- ------- ------- ------- ------- -------
Net income (loss)........ $ 915 $ 74 $ 4,977 $ 3,906 $ 2,746 $ (220) $ 1,872
======== ======= ======= ======= ======= ======= =======
OTHER DATA:
Net cash flow provided by
(used in):
operating activities... $ (6,677) $ 269 $ 7,978 $ (155) $ 2,381 $ 1,027 $ 2,858
investing activities... (172,117) (23,456) (3,535) (1,244) (1,619) (2,293) (1,198)
financing activities... 186,222 23,630 (3,215) 1,763 (835) 1,331 (1,234)
-------- ------- ------- ------- ------- ------- -------
Net increase (decrease)
in cash................ $ 7,428 $ 443 $ 1,228 $ 364 $ (73) $ 65 $ 426
======== ======= ======= ======= ======= ======= =======
EBITDA(1)................ $ 20,550 $ 486 $ 9,755 $ 8,265 $ 6,255 $ 1,185 $ 4,544
EBITDA margin............ 21.3% 15.9% 19.6% 23.3% 23.3% 6.2% 21.9%
Depreciation and
amortization........... $ 8,440 $ 219 $ 1,511 $ 1,669 $ 1,392 $ 1,303 $ 1,117
Capital expenditures..... 5,701 25 3,559 1,072 1,519 2,575 1,056
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents............ $ 7,871 $ 443 $ 1,683 $ 455 $ 91 $ 164 $ 589
Total assets............. 255,505 33,789 $32,776 28,602 22,095 17,290 15,110
Long-term obligations
(including current
portion) (2)........... 196,968 20,585 $ 3,775 3,950 4,495 5,131 3,957
Stockholders' equity
(3).................... 29,955 9,074 20,243 15,266 11,360 8,614 8,834
<CAPTION>
COMPASS
FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ---------------------- -------- --------
<S> <C> <C>
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues................. $101,443 $ 65,556
Cost of sales............ 72,275 48,591
-------- --------
Gross profit............. 29,168 16,695
Selling, general and
administrative
expenses............... 18,367 9,041
-------- --------
Operating income
(loss)................. 10,801 7,924
Interest expense, net.... 15,672 4,858
Other (income) expense... 1,674 913
-------- --------
Income (loss) before
taxes.................. (6,545) 2,153
Income taxes (benefit)... (2,396) 1,033
-------- --------
Net income (loss)........ $ (4,149) $ 1,120
======== ========
OTHER DATA:
Net cash flow provided by
(used in):
operating activities... $ 9,215 $ 6,008
investing activities... (59,252) (81,001)
financing activities... 54,834 104,999
-------- --------
Net increase (decrease)
in cash................ $ 4,797 $ 30,006
======== ========
EBITDA(1)................ $ 23,661 $ 13,648
EBITDA margin............ 23.3% 20.8%
Depreciation and
amortization........... $ 14,060 $ 5,858
Capital expenditures..... 5,156 6,025
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents............ $ 12,668 $ 30,449
Total assets............. 308,120 170,335
Long-term obligations
(including current
portion) (2)........... 233,643 116,300
Stockholders' equity
(3).................... 40,806 30,160
</TABLE>
- ------------------------
(1) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under GAAP and should not be construed as an alternative to
operating income or cash flows from operating activities as determined by
GAAP. EBITDA data is presented because such data is used by some investors
to determine our ability to meet debt service requirements and is used in
some debt covenant calculations required under the indentures and our
existing credit agreement. EBITDA is not indicative of our operating
performance, does not provide a measure of liquidity and does not represent
our available or discretionary funds. Furthermore, EBITDA as reported by us
may not be comparable to EBITDA reported by other companies.
(2) Long-term obligations include long-term debt, including the current portion,
and capital leases.
(3) The purchase price for each company we acquired in 1998 and 1999 was as
follows:
- Brittain Machine--$46.9 million
- Wichita Manufacturing--$8.0 million
- Barnes Machine--$15.0 million
- Sea-Lect (including J&J Leasing, Inc., acquired as a subsidiary of
Sea-Lect and merged into Sea-Lect in March 1999)--$12.2 million
33
<PAGE>
- Pacific Hills--$73.7 million
- Modern (including Modern Holdings, Inc. and Modern Manufacturing, Inc., a
Washington corporation, acquired as subsidiaries of Modern and merged into
Modern in January 1999)--$23.1 million
- Trim and its subsidiaries--$50.7 million
The purchase price for each of our subsidiaries was allocated as follows:
<TABLE>
<CAPTION>
BARNES BRITTAIN WICHITA
MACHINE MACHINE MANUFACTURING SEA-LECT PACIFIC HILLS MODERN TRIM
-------- -------- ------------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash
equivalents.......... $ 687 $ 971 $ 631 $ -- $ -- $ 1,590 $ --
Accounts receivable.... 2,035 7,093 1,732 2,246 2,258 1,294 11,028
Inventories............ 1,584 7,043 1,803 2,584 2,662 6,632 6,499
Prepaid expenses and
other current
assets............... 13 36 25 -- 34 358 --
------- ------- ------- ------- ------- ------- -------
Total current assets..... 4,319 15,143 4,191 4,830 4,954 9,874 17,527
Property and equipment,
net.................... 6,712 19,329 4,488 4,587 1,584 6,782 19,079
Other Assets............. 133 637 -- -- -- -- --
Goodwill................. 6,768 19,258 2,359 4,155 67,920 8,664 26,670
------- ------- ------- ------- ------- ------- -------
Total assets............. $17,932 $54,367 $11,038 $13,572 $74,458 $25,320 $63,276
======= ======= ======= ======= ======= ======= =======
Liabilities and
stockholders' equity
Current liabilities:
Accounts payable....... $ 1,162 $ 1,191 $ 1,596 $ 1,169 $ 510 $ 892 $10,604
Accrued expenses....... 242 1,917 272 240 276 296 --
Income taxes payable... 489 (644) 222 -- -- -- --
Current portion of long
term debt............ -- 55 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total current
liabilities............ 1,893 2,519 2,090 1,409 786 1,188 10,604
Deferred tax liability... 1,050 4,282 976 -- -- 1,037 1,754
Other debt, less current
portion................ -- 645 -- -- -- -- 240
Stockholders' equity:
Paid-in-capital.......... 14,989 46,921 7,972 12,163 73,672 23,095 50,678
------- ------- ------- ------- ------- ------- -------
Total stockholders'
equity................. 14,989 46,921 7,972 12,163 73,672 23,095 50,678
------- ------- ------- ------- ------- ------- -------
Total liabilities and
stockholders' equity... $17,932 $54,367 $11,038 $13,572 $74,458 $25,320 $63,276
======= ======= ======= ======= ======= ======= =======
</TABLE>
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical Consolidated Financial Data," "Unaudited Pro Forma Financial Data"
and our consolidated financial statements and notes related thereto and those of
our predecessor, Brittain Machine, and other more detailed financial data
appearing elsewhere in this prospectus.
GENERAL
We began operations in November 1997 with the simultaneous acquisitions of
Western Methods and Aeromil. Since November 1997 we have completed the following
acquisitions:
<TABLE>
<S> <C>
April 1998:................ Brittain Machine, Wichita Manufacturing and Barnes Machine
May 1998:.................. Sea-Lect
November 1998:............. Pacific Hills
December 1998:............. Modern
July 1999:................. Trim and its subsidiaries
</TABLE>
Prior to our acquisition of our subsidiaries, each of our subsidiaries,
except for Brittain Machine and its subsidiary, Wichita Manufacturing, had been
operating independently and were not subject to common management. Trim and its
subsidiaries had been operating as a group prior to our acquisition of those
companies. We intend to integrate our acquired businesses, their operations and
their administrative functions.
CONSOLIDATED RESULTS OF OPERATIONS
For accounting and financial reporting purposes, Brittain Machine is deemed
to be our predecessor based on the relative significance of Brittain Machine's
revenues, size and operating capacity. When we acquired Brittain Machine on
April 21, 1998, Brittain Machine represented, on a historical basis, 68% of the
revenues and 87% of the pre-tax income of the combined historical results of
Aeromil, Western Methods and Brittain Machine prior to our acquisition of those
companies. The acquisition of Brittain Machine added additional operating
capacity and manufacturing capabilities that significantly advanced our goal of
producing more sub-assemblies, manufacturing kits and structural components. The
following discussion therefore includes the results of operations of Brittain
Machine as our predecessor for the periods shown below.
COMPASS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1998.
REVENUES. Revenues increased $35.8 million to $101.4 million for the nine
months ended September 30, 1999 from $65.6 million for the nine months ended
September 30, 1998. Combined revenues of Western Methods and Aeromil for the
nine months ended September 30, 1999 decreased by $2.3 million, a decrease of
9.0%, as compared to the nine months ended September 30, 1998 as a result of
lower Boeing requirements in 1999 as compared to 1998. Consolidated revenues
increased as a result of our acquisitions of Brittain Machine, Barnes Machine,
Wichita Manufacturing, Sea-Lect, Pacific Hills, Modern and Trim and its
subsidiaries.
COST OF SALES. Cost of sales increased $23.7 million to $72.3 million for
the nine months ended September 30, 1999 from $48.6 million for the nine months
ended September 30, 1998. The increase in cost of sales was primarily
attributable to the acquisitions we completed in 1998 and 1999. Cost of sales as
a percentage of revenues decreased to 71.2% for the nine months ended
September 30, 1999 from
35
<PAGE>
74.1% for the nine months ended September 30, 1998. This percentage decrease was
primarily attributable to the acquisitions we completed in 1998 and 1999 which
provided a higher level of average margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $9.4 million to $18.4 million for the nine
months ended September 30, 1999 from $9.0 million for the nine months ended
September 30, 1998. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions we completed in 1998 and
1999. Selling, general and administrative expenses as a percentage of revenues
increased to 18.1% for the nine months ended September 30, 1999 from 13.8% for
the nine months ended September 30, 1998. Selling, general and administrative
expenses as a percentage of revenues for Western Methods and Aeromil was 14.1%
for the nine months ended September 30, 1999 as compared to 13.8% for the nine
months ended September 30, 1998. Selling, general and administrative expenses as
a percentage of revenues for the nine months ended September 30, 1999 for the
companies we acquired in 1998 was 18.1%. Corporate office selling, general and
administrative expenses, including management fees, was $4.1 million for the
nine months ended September 30, 1999 as compared to $0.6 million for the nine
months ended September 30, 1998. The increase in selling, general and
administrative expenses is primarily attributable to our overall growth and the
development of our corporate office. The increase in selling, general and
administrative expenses as a percentage of revenues for the nine months ended
September 30, 1999 is primarily attributable to the goodwill associated with the
acquisitions we completed in 1998 and 1999.
OPERATING INCOME. Operating income increased $2.9 million to $10.8 million
for the nine months ended September 30, 1999 from $7.9 million for the nine
months ended September 30, 1998. The increase in operating income was primarily
attributable to the operating income derived from acquisitions we completed in
1998 and 1999, partly offset by higher selling, general and administrative
expenses related to those acquisitions and increased corporte expenses related
to our growth. Operating income as a percentage of revenues decreased to 10.6%
for the nine months ended September 30, 1999 from 12.1% for the nine months
ended September 30, 1998 as a result of higher selling, general and
administrative expenses associated with the acquisitions we completed in 1998
and 1999 and the development of our corporate office.
INTEREST EXPENSE. Interest expense increased $10.8 million to
$15.7 million for the nine months ended September 30, 1999 from $4.9 million for
the nine months ended September 30, 1998. Approximately $3.8 million of the
increase in interest expense is attributable to our issuance of the Series A
notes in April 1998, $5.8 million of the increase is attributable to increased
bank borrowings by us in November 1998, $0.7 million of the increase is
attributable to our issuance of the Series C Notes, the seller variable rate
note due 2002 and increased bank borrowings in July 1999, and $0.5 million is
attributable to interest on operating leases. Interest expense attributable to
our issuance of the Series A notes in April 1998 will decrease once we cease
paying increased interest on the Series A notes as a form of liquidated damages
after the registration statement of which this prospectus is a part becomes
effective. As of September 30, 1999 increased interest on the Series A notes as
a form of liquidated damages totaled $0.4 million.
NET INCOME. Net income decreased $5.2 million to a net loss of
$4.1 million for the nine months ended September 30, 1999 from net income of
$1.1 million for the nine months ended September 30, 1998. The decrease in net
income was primarily attributable to an increase in operating income of
$2.9 million, offset by an increase in interest expense of $10.8 million,
increased amortization of deferred financial fees of $0.8 million and a decrease
in income tax expense of $3.4 million during the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash flow
provided by operating activities increased $3.2 million to $9.2 million for the
nine months ended September 30, 1999 from
36
<PAGE>
$6.0 million for the nine months ended September 30, 1998. The increase in net
cash flow provided by operating activities during the nine months ended
September 30, 1999 was primarily attributable to an $8.2 million increase in
depreciation and amortization expense and an increase in changes in operating
assets and liabilities of $6.0 million, partly offset by a reduction in net
income of $5.2 million and a reduction in the change in other assets and
liabilities of $5.8 million during the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998.
NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash flow
used in investing activities was related to the purchase of property, plant and
equipment and was $59.2 million for the nine months ended September 30, 1999 and
$81.0 million for the nine months ended September 30, 1998.
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash flow
provided by financing activities was $54.8 million for the nine months ended
September 30, 1999 as compared to net cash flow provided by financing activities
of $105.0 million for the nine months ended September 30, 1998. The decrease in
net cash flow provided by financing activities for the nine months ended
September 30, 1999 was primarily attributable to the issuance of the Series A
notes during the nine months ended September 30, 1998.
EBITDA. EBITDA increased $10.1 million to $23.7 million for the nine months
ended September 30, 1999 from $13.6 million for the nine months ended
September 30, 1998 as a result of the acquisitions we completed in 1998 and
1999. EBITDA as a percentage of revenues increased to 23.3% for the nine months
ended September 30, 1999 from 20.8% for the nine months ended September 30,
1998. The increase in EBITDA was primarily attributable to an increase in
revenues of $35.8 million, an increase in gross profit of $12.2 million and an
increase in operating income of $2.9 million in the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998.
HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED
TO PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
REVENUES. Historical revenues were $96.5 million for the year ended
December 31, 1998 compared to pro forma revenues of $227.4 million for the same
period. The difference was primarily attributable to the timing of our
acquisitions in 1998 of Brittain Machine, Barnes Machine, Wichita Manufacturing,
Sea-Lect and Pacific Hills and our acquisition of Trim and its subsidiaries in
1999.
COST OF SALES. Historical cost of sales was $70.4 million for the year
ended December 31, 1998 compared to pro forma cost of sales of $149.6 million
for the same period. The difference was primarily attributable to the
acquisitions we completed in 1998 and 1999 and to pro forma adjustments which
increased pro forma cost of sales $0.9 million. Historical cost of sales as a
percentage of historical revenues was 73.0% for the year ended December 31, 1998
as compared to pro forma cost of sales as a percentage of pro forma revenues of
65.8% for the same period. The difference was primarily attributable to our
acquisitions in 1998 of Brittain Machine, Barnes Machine, Wichita Manufacturing,
Sea-Lect and Pacific Hills and our acquisition in 1999 of Trim and its
subsidiaries which provided a higher level of average margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Historical selling, general
and administrative expenses were $14.5 million for the year ended December 31,
1998 compared to pro forma selling, general and administrative expenses of
$34.3 million for the same period. The difference was primarily attributable to
the acquisitions we completed in 1998 and 1999 and to pro forma adjustments
which reduced pro forma selling, general and administrative expenses by
$5.8 million. Historical selling, general and administrative expenses as a
percentage of historical revenues was 15.0% for the year ended December 31, 1998
compared to pro forma selling, general and administrative expenses as a
percentage of pro forma revenues of 15.1% for the same period.
37
<PAGE>
OPERATING INCOME. Historical operating income was $11.6 million for the
year ended December 31, 1998 compared to pro forma operating income of
$43.5 million for the same period. The difference was primarily attributable to
the acquisitions we completed in 1998 and 1999 and to pro forma adjustments
which increased pro forma operating income by $5.0 million. Historical operating
income as a percentage of historical revenues was 12.0% for the year ended
December 31, 1998 compared to pro forma operating income as a percentage of pro
forma revenues of 19.1% for the same period. The difference was primarily
attributable to our acquisitions in 1998 of Brittain Machine, Barnes Machine,
Wichita Manufacturing, Sea-Lect and Pacific Hills and our acquisition in 1999 of
Trim and its subsidiaries which provided a higher level of operating income.
INTEREST EXPENSE. Historical interest expense was $8.5 million for the year
ended December 31, 1998 compared to pro forma interest expense of $23.3 million
for the same period. The difference was primarily attributable to pro forma
adjustments to increase interest expense related to increased borrowings
required to reflect the acquisitions we completed in 1998 and 1999 as if they
had occurred on January 1, 1998.
NET INCOME. Historical net income was $0.9 million for the year ended
December 31, 1998 compared to pro forma net income of $9.7 million for the same
period. The difference was primarily attributable to the acquisitions we
completed in 1998 and 1999 and pro forma adjustments.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Historical net
cash flow used in operating activities was $6.7 million for the year ended
December 31, 1998 compared to pro forma net cash flow provided by operating
activities of $15.3 million for the same period. The difference was primarily
attributable to the acquisitions we completed in 1998 and 1999 which increased
pro forma net cash flow offset by increased pro forma working capital
requirements.
EBITDA. Historical EBITDA was $20.6 million for the year ended
December 31, 1998 compared to pro forma EBITDA of $61.9 million for the same
period. The difference was primarily attributable to the acquisitions we
completed in 1998 and 1999 and to higher margins of the acquired companies.
Historical EBITDA as a percentage of historical revenues was 21.3% for the year
ended December 31, 1998 compared to pro forma EBITDA as a percentage of pro
forma revenues of 27.2% for the same period.
BRITTAIN MACHINE FOR THE PERIOD FROM JULY 1, 1997 THROUGH APRIL 21, 1998
COMPARED TO THE YEAR ENDED JUNE 30, 1997.
REVENUES. Revenues increased $14.2 million to $49.7 million for the period
from July 1, 1997 through April 21, 1998 from $35.5 million for the year ended
June 30, 1997. The increase was primarily attributable to a further increase in
capacity by the addition of two high-speed, three-spindle five-axis gantry mills
and two machining centers, as well as increased shipments to both Boeing and
Northrop Grumman Corporation.
COST OF SALES. Cost of sales increased $8.9 million to $34.6 million for
the period from July 1, 1997 to April 21, 1998 from $25.7 million for the year
ended June 30, 1997. Cost of sales increased primarily as a result of the
increase in sales. Cost of sales as a percentage of revenues decreased to 69.7%
for the period from July 1, 1997 to April 21, 1998 from 72.3% for the year ended
June 30, 1997. This decrease was primarily attributable to a reduction in the
level of start up costs encountered in the previous period as well as improved
productivity gains.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.6 million to $6.8 million for the period
from July 1, 1997 to April 21, 1998 from $3.2 million for the year ended
June 30, 1997. Selling, general and administrative expenses for the period from
July 1, 1997 to April 21, 1998 include $3.8 million of non-recurring management
and employee bonuses paid in connection with the sale of Brittain Machine.
Selling, general and
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administrative expenses as a percentage of revenues increased to 13.7% for the
period from July 1, 1997 to April 21, 1998 from 9.1% for the year ended
June 30, 1997. Excluding non-recurring bonuses, selling, general and
administrative expenses as a percentage of revenues for the period from July 1,
1997 to April 21, 1998 was 6.0%.
OPERATING INCOME. Operating income increased $1.6 million to $8.2 million
for the period from July 1, 1997 through April 21, 1998 from $6.6 million for
the year ended June 30, 1997 as a result of an increase in revenues. Operating
income as a percentage of revenues decreased to 16.6% for the period from
July 1, 1997 through April 21, 1998 from 18.6% for the year ended June 30, 1997.
NET INCOME. Net income increased $1.1 million to $5.0 million for the
period from July 1, 1997 through April 21, 1998 from $3.9 million for the year
ended June 30, 1997. The increase in net income was primarily attributable to
increased revenues and higher gross profit margins.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash flow
provided by operating activities increased $8.2 million to $8.0 million for the
period from July 1, 1997 through April 21, 1998 from net cash flow used in
operating activities of $0.2 million for the year ended June 30, 1997. The
primary sources of cash during the period from July 1, 1997 through April 21,
1998 related to increases in net income, accounts payable and accrued expenses,
and a decrease in inventories.
NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash flow
used in investing activities was primarily related to purchases of property and
equipment. Net cash flow used in investing activities was $3.5 million for the
period from July 1, 1997 through April 21, 1998 and $1.2 million for the year
ended June 30, 1997.
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash flow
used in financing activities increased $5.0 million to net cash flow used in
financing activities of $3.2 million for the period from July 1, 1997 through
April 21, 1998 from $1.8 million of net cash flow provided by financing
activities for the year ended June 30, 1997. The increase in net cash flow used
in financing activities was primarily attributable to the repayments of
outstanding lines of credit and principal payments on debt.
EBITDA. EBITDA increased $1.5 million to $9.8 million for the period from
July 1, 1997 through April 21, 1998 from $8.3 million for the year ended
June 30, 1997. The increase was primarily the result of an increase in revenues.
EBITDA as a percentage of revenues decreased to 19.6% for the period from
July 1, 1997 through April 21, 1998 from 23.3% for the year ended June 30, 1997,
primarily as a result of increased selling, general and administrative expense
related to non-recurring bonuses above paid in connection with the sale of
Brittain Machine to us.
BRITTAIN MACHINE FOR THE YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED
JUNE 30, 1996.
REVENUES. Revenues increased $8.6 million to $35.5 million for the year
ended June 30, 1997 from $26.9 million for the year ended June 30, 1996. The
increase was primarily attributable to the addition of four high-speed,
three-spindle five-axis gantry mills, increased sales of 747 parts to Northrop,
increased sales to Boeing-Wichita under a series of contracts relating to the
Next-Generation 737 and increased sales of fabricated tooling and fixtures.
COST OF SALES. Cost of sales increased $6.6 million to $25.7 million for
the year ended June 30, 1997 from $19.1 million for the year ended June 30,
1996. Cost of sales as a percentage of revenues increased to 72.3% for the year
ended June 30, 1997 from 70.9% for the year ended June 30, 1996. The increase in
cost of sales was primarily attributable to the high percentage of new work
undertaken during the year ended June 30, 1997, requiring higher start up costs.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million to $3.2 million for the year
ended June 30, 1997 from $3.0 million for the year ended June 30, 1996. Selling,
general and administrative expense as a percentage of revenues decreased to 9.1%
for the year ended June 30, 1997 from 11.0% for the year ended June 30, 1996.
The increase in selling, general and administrative expense was primarily
attributable to increased selling activity.
OPERATING INCOME. Operating income increased $1.7 million to $6.6 million
for the year ended June 30, 1997 from $4.9 million for the year ended June 30,
1996 as a result of an increase in revenues. Operating income as a percentage of
revenues increased to 18.6% for the year ended June 30, 1997 from 18.1% for the
year ended June 30, 1996.
NET INCOME. Net income increased $1.2 million to $3.9 million for the year
ended June 30, 1997 from $2.7 million for the year ended June 30, 1996. The
increase in net income was primarily attributable to the increase of revenues.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash flow
provided by operating activities decreased $2.6 million to net cash flow used in
operating activities of $0.2 million for the year ended June 30, 1997 from
$2.4 million of net cash flow provided by operating activities for the year
ended June 30, 1996. The primary uses of cash during the year ended June 30,
1997 related to an increase in inventories partly offset by an increase in net
income.
NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash flow
used in investing activities was primarily related to purchases of property and
equipment. Net cash flow used in investing activities was $1.2 million for the
year ended June 30, 1997 compared to $1.6 million for the year ended June 30,
1996.
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash flow
provided by financing activities increased $2.6 million to $1.8 million for the
year ended June 30, 1997 from $0.8 million net cash flow used in financing
activities for the year ended June 30, 1996. The increase in net cash flow
provided by financing activities was primarily attributable to increased short
term borrowings.
EBITDA. EBITDA increased $2.0 million to $8.3 million for the year ended
June 30, 1997 from $6.3 million for the year ended June 30, 1996 as a result of
an increase in revenues. EBITDA as a percentage of revenues was 23.3% for the
years ended June 30, 1997 and June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been borrowings, proceeds from the
sale of stock and, to a lesser extent, cash flows from operating activities. At
September 30, 1999 we had cash of approximately $12.7 million, working capital
of approximately $47.8 million and total debt, including the current portion of
long term debt, of approximately $233.6 million.
On April 21, 1998, we completed the private offering of $110.0 million of
Series A notes. After fees and expenses of $3.3 million, the net cash proceeds
of $106.7 million from the issuance and sale of the Series A notes were used to
finance acquisitions and for general corporate purposes. The net proceeds from
the issuance and sale of the Series A notes were also used to repay existing
bank debt which had been used to finance our acquisition of Western Methods and
Aeromil and which was to mature on November 25, 2000 and bore interest at a
blended rate of approximately prime plus 83 basis points. In April and
May 1998, we also issued additional shares of common stock for approximately
$13.5 million in cash.
On July 30, 1999, we completed the private offering of $19.0 million of
Series C notes. After the original issue discount of $2.8 million, the net cash
proceeds of $16.2 million were used to partly
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finance our acquisition of Trim and our other subsidiaries located in the United
Kingdom. We also issued additional shares of common stock in July 1999 for
$15.0 million in cash.
We entered into a credit agreement dated November 20, 1998, as amended and
restated on February 11, 1999, as amended further on June 7, 1999, as amended
further on July 30, 1999, with BankBoston, N.A. as Agent, NationsBank, N.A. as
Co-Agent, the lenders named therein, including BankBoston as a lender, Royal
Bank of Canada as Syndication Agent, General Electric Capital Corporation as
Documentation Agent and BancBoston Robertson Stephens Inc., an affiliate of
BankBoston, as arranger, providing for borrowing availability, after the
amendments, of up to $140.0 million. Our obligations under the credit agreement
are guaranteed on a senior basis by our direct and indirect subsidiaries, except
for Maybrey, and secured by a security interest in substantially all of our
assets and those of our subsidiaries. The credit agreement contains customary
conditions to borrowing and contains customary restrictions and covenants. The
June 7, 1999 amendment to the credit agreement retroactively amended some of
these covenants effective as of March 31, 1999, particularly covenants based on
EBITDA targets and EBITDA ratios, to enable us to maintain compliance with the
terms of the credit agreement, as amended. The June 7, 1999 amendment also
increased interest rates by 0.25% and increased some fees which are based on
leverage ratios. You should read the discussions under the headings "Risk
Factors--Restrictive Covenants In Our Indenture And Our Credit Agreement Could
Cause Us To Default And Accelerate Our Indebtedness Under The Credit Agreement"
and "The Credit Agreement" for further information on restrictive covenants
contained in the credit agreement and the amendments to the credit agreement.
The credit agreement, as amended, consists of a revolving credit facility of
$25.0 million, a $35 million term loan ("Term Loan A"), a $45 million term loan
("Term Loan B") and a $35 million acquisition line (the "Acquisition Line"). At
October 31, 1999 we had borrowed $97.7 million under the credit agreement,
consisting of the full amount of Term A Loan and Term B Loan and $20.7 million
of the Acquisition Line. You should read the discussion under the heading
"Description of Credit Agreement" for more information on the terms of the
credit agreement. The credit agreement replaced and terminated a $20.0 million
senior secured revolving credit facility with BankBoston as lender and
administrative agent.
The Series A notes call for semi-annual interest payments on April 15 and
October 15 of each year, beginning October 15, 1998. The Series C notes call for
semi-annual interest payments on April 15 and October 15 of each year, beginning
October 15, 1999. The Series A and Series C notes are guaranteed by all of our
current subsidiaries except for Maybrey, are subordinate to borrowings under the
credit agreement and require us to meet specific financial ratios, and satisfy
other financial condition tests prior to incurring additional debt or making
some payments. The terms of the notes and the credit agreement include
restrictive covenants that restrict our ability to pay dividends, sell some
assets and incur additional indebtedness. Our ability to pay principal and
interest on our indebtedness, including the notes, will depend upon the future
operating performance of our subsidiaries and will require a substantial portion
of our cash flow from operations.
Operating activities provided $9.2 million of cash flow during the nine
months ended September 30, 1999. Net cash used in investing activities during
the nine months ended September 30, 1999 related to purchases of property and
equipment and was $5.2 million. Net cash provided by financing activities during
the nine months ended September 30, 1999 was $54.8 million.
The principal use of cash during the year ended December 31, 1998 was to
fund the acquisitions we completed during 1998 and to repay indebtedness
incurred to finance our first two acquisitions in 1997. We used $6.7 million in
net cash for operating activities for the year ended December 31, 1998. Net cash
provided by financing activities was $186.2 million for the year ended
December 31, 1998. Net cash used for investing activities was $172.1 million for
the year ended December 31, 1998.
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Capital expenditures during the nine months ended September 30, 1999 were
approximately $5.2 million for machinery and miscellaneous equipment. Capital
expenditures for the year ended December 31, 1998 were approximately
$5.7 million. The capital expenditures were primarily for high-speed
manufacturing equipment. We believe that funds generated from operations and
borrowing availability under the credit agreement will be sufficient to finance
our current operations and planned capital expenditure requirements for the next
12 months.
We may pursue other acquisition opportunities. We expect to fund future
acquisitions, if any, through the issuance of additional equity securities,
incurrence of additional indebtedness, including use of amounts available under
the credit agreement, and cash flow from operations. To the extent we fund a
significant portion of the consideration for future acquisitions with cash, we
may have to increase the amount of our credit agreement or obtain other sources
of financing. There can be no assurance that we will be able to obtain financing
for potential acquisitions on satisfactory terms and conditions.
INDUSTRY TRENDS
We and other suppliers to Boeing have recently experienced a decrease in the
value and number of orders from Boeing for delivery in 1999 as compared to 1998.
We believe the reduction is due to changes in Boeing's purchasing practices
implemented as part of Boeing's strategy to reduce inventories and increase its
use of just-in-time manufacturing techniques. Boeing's stated goal is to
increase its annual inventory turn rate, which is currently approximately two
times, to an annual inventory turn rate of four times. In addition, Boeing is
forecasting a reduction in its delivery of commercial aircraft to 480 aircraft
in 2000 relative to projected deliveries of 620 aircraft in 1999. We are
particularly experiencing a decline in the value of orders by Boeing for
delivery in 1999 at Brittain Machine and at Pacific Hills. The consolidated
revenues of our subsidiaries that are located in the United States where Boeing
is our largest customer for the nine months ended September 30, 1999 were
$93.9 million, a decrease of approximately 31.4% from the combined revenues of
our subsidiaries that are located in the United States during the same period in
1998. Boeing orders could continue to decline and we cannot assure you that
Boeing orders will increase or return to the 1998 level in 1999 or in 2000. In
addition, our results of operations in 1999 probably will not exceed 1998 pro
forma results.
MARKET RISK AND RISK MANAGEMENT POLICIES
Our results of operations are affected by numerous external factors such as
general economic conditions, domestic and foreign competition, raw material
availability and production delays by aerospace manufacturers. You should read
the discussions under the section entitled "Risk Factors" for further
information on factors that may affect our results of operations. We are also
exposed to changes in interest rates primarily from our long term debt issued at
a fixed rate. Under our current policies we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point decrease in interest rates along the entire interest rate yield
curve would adversely affect the net fair value of all interest sensitive
financial instruments by $1.0 million for the nine months ended September 30,
1999. Based on the current holdings of debt, we do not believe our exposure to
interest rate risk is material. Fixed rate debt obligations currently issued by
us are callable prior to maturity under some circumstances. You should read the
discussions under the headings "Description of the Series B Notes--Optional
Redemption" and "Description of the Series D Notes--Optional Redemption" for
further information regarding redemption of the notes.
INFLATION
We believe that inflation has not had a material impact on its results of
operations for the 36 days ended December 31, 1997, the year ended December 31,
1998 and the nine months ended September 30, 1999.
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RECENT ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), effective January 1, 1998. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. There was no impact on
the financial statements of Compass due to the adoption of SFAS No. 130.
We also adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS"
No. 131"), on January 1, 1998. This statement requires us to report financial
and descriptive information about its reportable operating segments. There was
no impact on our financial statements due to the adoption of SFAS No. 131.
Also effective January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 supersedes the
disclosure requirements in Statements of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," Statements of Financial Accounting
Standards No. 88, "Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and Statements of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." SFAS No. 132 is intended to improve and standardize
disclosures regarding pensions and post-retirement benefits. There was no impact
on our financial statements due to the adoption of SFAS No. 132.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
was issued, effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. We do not expect the impact of SFAS No. 133 to have a material
effect on our financial reporting.
In June 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which is effective for fiscal years beginning after
December 15, 1998. SOP 98-1 requires capitalization and amortization of
qualified computer software costs over their estimated useful life. We do not
expect the adoption of SOP 98-1 to have a material impact on our financial
statements.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"), which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 requires costs of start-up activities, as defined in
Statement SOP 98-5, to be expenses as incurred. Compass does not expect the
adoption of SOP 98-5 to have a material impact on its financial statements.
YEAR 2000
The Year 2000 issue concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000.
As a result of our acquisition program, we have acquired and operate a
number of stand-alone computer systems. We have completed an evaluation of our
primary computer software programs and operating systems used for business
processes to identify Year 2000 issues. Based upon this review, we have
determined that some of our subsidiaries' primary systems are not Year 2000
compliant. These primary systems handle such functions as purchasing, sales
order entry, warehouse inventory management, invoicing and accounts receivable,
and accounts payable.
We have developed plans to address the possible impact of the Year 2000
issue on our computer systems. In 1998 we decided to replace our Year 2000
non-compliant computer systems and install replacement systems. The installation
of the replacement systems is substantially complete.
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We are currently developing a plan to evaluate Year 2000 compliance for all
of our non-information technology systems such as telephone systems, fax
machines and security systems. We have substantially completed our evaluation
and remediation of non-compliant non-information technology systems.
The majority of our cost to become Year 2000 compliant is related to the
purchase and installation of the computer system upgrades and the new computer
systems described above. We are expensing all costs except major software
packages as the costs are incurred. The cost of major software packages will be
amortized over a period of three to five years. Costs to remediate non-compliant
non-information technology systems will be expensed as incurred. At
September 30, 1999 we had spent an estimated $0.8 million on development and
implementation of Year 2000 compliant computer systems. We have not sought
independent verification by third parties of our Year 2000 risk or cost
estimates.
We are developing a plan to identify third parties with which we have a
significant business relationship and to survey such parties as to their Year
2000 compliance. We cannot ensure that all third parties significant to our
operations will be compliant by December 31, 1999. We believe a reasonably
likely worst case scenario resulting from non-compliance by some of our major
customers or critical vendors could include adverse effects on our revenue
collection, disbursements and communications, as well as the scheduling and
delivery of inventory resulting in a material adverse effect on our business,
financial condition or results of operations. In addition, loss of utility
service resulting from disruptions in power generation, transmission or
distribution could adversely affect our manufacturing facilities, leading to
delays in or the inability to provide products to our customers, resulting in a
material adverse effect on our business, financial condition or results of
operations. If it appears likely that any major customer or critical vendor will
not be compliant, we intend to develop contingency plans, if possible, to
mitigate the impact of non-compliance.
While we expect to resolve our Year 2000 risks without a material adverse
effect on our business, financial condition or results of operations, there can
be no assurance as to the ultimate success of our Year 2000 compliance program.
Uncertainties exist as to our ability to detect all Year 2000 issues as well as
our ability to achieve successful and timely resolution of all Year 2000 issues.
Uncertainties also exist concerning the preparedness of our major customers and
critical vendors to avoid Year 2000 issue related service and delivery
interruptions. We cannot predict the eventual outcome associated with the
possible situations that could result from the impact of Year 2000 issues on its
customers or vendors.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
SERIES A NOTES
The outstanding Series A notes were sold by us on April 21, 1998 to
Donaldson, Lufkin & Jenrette, BancBoston Securities and Libra Investments as the
initial purchasers of the Series A notes, pursuant to a purchase agreement dated
April 15, 1998 by and among us, Aeromil, Western Methods and the initial
purchasers. The initial purchasers are qualified institutional buyers, as
defined in Rule 144A under the Securities Act. As a condition to the purchase
agreement, we entered into a registration rights agreement with the initial
purchasers on April 21, 1998. Pursuant to the registration rights agreement, we
agreed to:
- file a registration statement under the Securities Act with the Commission
with respect to the Series B notes within 240 days after the date of the
original issuance of the Series A notes,
- use our best efforts to cause the registration statement covering the
exchange offer to become effective under the Securities Act within
300 days after the Series A notes were originally issued, and
- use our best efforts to consummate the exchange offer within 30 days after
the registration statement covering the exchange offer is declared
effective.
We did not file a registration statement within the required 240 days from the
date we issued the Series A notes and the registration statement did not become
effective within the required 300 days from the date we issued the Series A
notes. As a result, increased interest is accruing on the outstanding Series A
notes at the rate of $22,000 per week. The registration statement of which this
prospectus is a part is intended to satisfy our obligations under the
registration rights agreement. When the registration statement goes effective,
liquidated damages will cease to accrue. You should read the discussion under
the heading "--Conditions of the Exchange Offer" for further information
regarding the registration rights agreement.
SERIES C NOTES
The outstanding Series C notes were sold by us on July 30, 1999 to
BancBoston Robertson Stephens Inc. as the initial purchaser of the Series C
notes, pursuant to a purchase agreement dated July 23, 1999 by and among us, all
of our subsidiaries at that time and the initial purchaser. The initial
purchaser is a qualified institutional buyer, as defined in Rule 144A under the
Securities Act. As a condition to the purchase agreement, we entered into a
registration rights agreement with the initial purchaser on July 30, 1999.
Pursuant to the registration rights agreement, we agreed to:
- file a registration statement under the Securities Act with the Commission
with respect to the Series D notes within 105 days after the date of the
original issuance of the Series C notes,
- use our best efforts to cause the registration statement covering the
exchange offer to become effective under the Securities Act within
180 days after the Series C notes were originally issued, and
- use our best efforts to consummate the exchange offer within 30 days after
the registration statement covering the exchange offer is declared
effective.
If we do not comply with the requirements of the registration rights agreement,
increased interest will accrue on the outstanding Series C notes as a form of
liquidated damages. The registration statement of which this prospectus is a
part is intended to satisfy our obligations under the registration rights
agreement. You should read the discussion under the heading "Conditions of the
Exchange Offer" for further information regarding the registration rights
agreement.
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TERMS OF THE EXCHANGE OFFER
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying letter of transmittal, to exchange
$1,000 in principal amount of Series B notes for each $1,000 in principal amount
of the Series A notes, and to exchange $1,000 in principal amount of Series D
notes for each $1,000 in principal amount of the Series C notes. Series B notes
will be issued only in integral multiples of $1,000 to each tendering holder
whose outstanding Series A notes are accepted in the exchange offer. Series D
notes will be issued only in integral multiples of $1,000 to each tendering
holder whose outstanding Series C notes are accepted in the exchange offer. We
will accept any outstanding notes validly tendered and not withdrawn prior to
5:00 p.m. New York City time on the expiration date. Outstanding notes that are
not accepted for exchange will be returned as promptly as practicable after the
expiration date. Registered holders of Series A and Series C notes, or their
legal representative or attorney-in-fact, as reflected on the records of the
trustee under the indentures governing the notes are each eligible holders and
may tender all or a portion of the Series A or Series C notes they hold pursuant
to the exchange offer.
The form and terms of the Series B notes under the indenture governing the
Series A and Series B notes will be identical in all material respects to the
form and terms of the Series A notes. The form and terms of the Series D notes
under the indenture governing the Series C and Series D notes will be identical
in all material respects to the form and terms of the Series C notes. The
Series B and Series D notes evidence the same debt as the Series A and Series C
notes which they replace, and will be issued under, and be entitled to the
benefits of, the indenture governing the Series A in the case of the Series B
notes, or the indenture governing the Series C notes in the case of the
Series D notes. The Series B notes will bear interest from their date of
issuance at the same rate and upon the same terms as the Series A notes. The
Series D notes will bear interest from their date of issuance at the same rate
and upon the same terms as the Series C notes. You should read the discussions
under the headings "Description of the Series B Notes" and "Description of the
Series D Notes" for more information on the form and terms of the Series B and
Series D notes.
As of the date of this prospectus, $110.0 million aggregate principal amount
of the Series A notes are outstanding and there are registered holders
thereof. As of the date of this prospectus, $19.0 million aggregate principal
amount of the Series C notes are outstanding and there are registered
holders thereof. Solely for reasons of administration (and for no other purpose)
we have fixed the close of business of , 1999, as the record date for
the exchange offer for purposes of determining the holders of certificated
Series A and Series C notes to whom this prospectus and the letter of
transmittal will be mailed initially. Only an eligible holder may participate in
the exchange offer. There will be no fixed record date for determining
registered holders of Series A and Series C notes entitled to participate in the
exchange offer.
Eligible holders of Series A and Series C notes do not have any appraisal or
dissenters' rights under the General Corporation Law of the State of Delaware or
the indentures governing the notes in connection with the exchange offer. We
intend to conduct the exchange offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the
Commission.
We shall be deemed to have accepted validly tendered Series A and Series C
notes when, as, and if we have given oral or written notice to that effect to
the exchange agent. The exchange agent will act as agent for the tendering
holders of Series A and Series C notes for the purposes of receiving the
Series B and Series D notes from us.
If any tendered Series A or Series C notes are not accepted for exchange
because of an invalid tender, the occurrence of some other events described in
this prospectus or otherwise, any such unaccepted Series A or Series C notes
will be returned, without expense, to the tendering holder as promptly as
practicable after the expiration date.
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Tendering eligible holders will not be required to pay broker commissions or
fees or, subject to the instructions in the letter of transmittal, transfer
taxes with respect to the exchange of Series A notes for Series B notes or with
respect to the exchange of Series C notes for Series D notes pursuant to the
exchange offer. We will pay all charges and expenses, other than some taxes
which may be levied in the event of any transfer of ownership, in connection
with the exchange offer. You should read the discussion under the heading
"--Fees and Expenses" for more information on the allocation of fees.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The "expiration date" shall be 5:00 p.m., New York City time, on ,
1999, or, at our option, such earlier date upon which 100% of the outstanding
notes shall have been validly tendered pursuant to the exchange offer and not
withdrawn. We may, however, in our sole discretion, extend the exchange offer,
in which case the "expiration date" shall be the latest date and time to which
the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will make a public announcement
thereof, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
- to delay accepting any outstanding notes,
- to extend the exchange offer,
- to terminate the exchange offer if it is determined that the exchange
offer does not meet the conditions set forth in "Conditions of the
Exchange Offer" below, in each case by giving oral or written notice of
such delay, extension, or termination to the exchange agent, or
- to amend the terms of the exchange offer in any manner.
Any delay in acceptance of the outstanding notes, or extension, termination, or
amendment or the exchange offer will be followed as promptly as practicable by a
public announcement thereof. If the exchange offer is amended in a manner
determined by us to constitute a material change, we will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders of Series A and Series C notes. We will then extend the
exchange offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the exchange offer would otherwise expire during that five to ten
business day period.
Without limiting the manner in which we may choose to make a public
announcement of the delay, extension, termination, or amendment of the exchange
offer, we shall not have an obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE SERIES B AND SERIES D NOTES
The Series B and Series D notes will bear interest from their date of
issuance. Holders of Series A or Series C notes that are accepted for exchange
will be entitled to receive, in cash, accrued and unpaid interest thereon to,
but not including, the date of issuance of the Series B or Series D notes,
respectively, and will be deemed to have waived the right to receive any payment
in respect of interest on the Series A or Series C notes accrued from and after
the date of issuance of the Series B or Series D notes, respectively. Such
accrued and unpaid interest on the outstanding notes will be paid to registered
holders of the Series B and Series D notes, as applicable, with the first
interest payment on the Series B and Series D notes. Interest on the outstanding
Series A and Series C notes accepted for exchange will cease to accrue on the
day prior to the issuance of the Series B and Series D notes.
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<PAGE>
The Series B and Series D notes and the Series A and Series C notes bear
interest at a rate equal to 10 1/8% per annum. Interest on the Series B and
Series D notes is payable on each April 15 and October 15, commencing on
April 15, 2000.
PROCEDURES FOR TENDERING SERIES A AND SERIES C NOTES
The tender by an eligible holder as set forth below and the acceptance
thereof will constitute a binding agreement between the tendering eligible
holder and us upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal. Except as set forth
below, an eligible holder who wishes to tender Series A or Series C notes for
exchange pursuant to the exchange offer must transmit a properly completed and
duly executed letter of transmittal, the certificates for the outstanding notes
being tendered, and all other documents required by the letter of transmittal,
to the exchange agent at the address set forth in the letter of transmittal on
or prior to 5:00 p.m., New York City time, on the expiration date. Eligible
holders wishing to accept the exchange offer through the book-entry transfer
procedure described below, if such procedure is available, may transfer the
Series A or Series C notes being tendered via ATOP. In tendering the Series A or
Series C notes via ATOP, such holder will expressly acknowledge the receipt, and
agree to be bound by, the terms of the letter of transmittal. In the case of a
tender by guaranteed delivery, a holder who tenders Series A or Series C notes
via ATOP will acknowledge the receipt of, and agree to be bound by, the Notice
of Guaranteed Delivery. Book-Entry Confirmation must be received by the exchange
agent by 5:00 p.m., New York City time, on the expiration date. Alternatively,
an eligible holder may accept the exchange offer by complying with the
guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
SERIES A OR SERIES C NOTES, LETTERS OF TRANSMITTAL, AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Each signature on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution, unless the
outstanding notes surrendered for exchange pursuant thereof are tendered:
- by a registered holder of the Series A notes who has completed either the
box entitled "Special Issuance Instructions for Series B Notes" or the box
entitled "Special Delivery Instructions for Series B Notes " on the letter
of transmittal,
- be a registered holder of the Series C notes who has completed either the
box entitled "Special Issuance Instructions for Series D Notes" or the box
entitled "Special Delivery Instructions for Series D Notes" on the letter
of transmittal, or
- by an eligible institution.
An eligible institution is a firm which is a member of a registered national
securities exchange or a member of the NASD, a commercial bank or trust company
having an office or correspondent in the United States or is otherwise an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act. If Series A or Series C notes are registered in the name of a
person other than a signer of the letter of transmittal, the Series A or
Series C notes surrendered for exchange must either:
- be endorsed by the registered holder, with the signature thereon
guaranteed by an eligible institution, or
- be accompanied by a bond power, in satisfactory form as determined by us
in our sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an eligible institution along with any
other documents required upon transfer.
The term "registered holder" as used with respect to the outstanding notes means
any person in whose name the Series A or Series C notes are registered on the
books of the registrar for the Series A and Series C notes.
48
<PAGE>
Tenders of Series A or Series C notes may be made only in principal amounts
of $1,000 and integral multiples thereof. Subject to the foregoing, eligible
holders may tender less than the aggregate principal amount represented by the
Series A or Series C notes deposited with the exchange agent provided they
appropriately indicate this fact on the letter of transmittal accompanying the
tendered Series A and Series C notes.
All questions as to the validity, form, eligibility, time of receipt,
acceptance, and withdrawal of outstanding notes tendered for exchange will be
determined by us in our sole, reasonable discretion, which determination shall
be final and binding on all parties. We reserve the absolute right to reject any
and all tenders of any particular outstanding notes not properly tendered or to
reject any particular Series A or Series C notes whose acceptance might, in our
judgment or that of our counsel, be unlawful. We also reserve the absolute right
to waive any defects or irregularities or conditions of the exchange offer as to
any particular outstanding notes either before or after the expiration date. We
reserve the right to waive the ineligibility of any holder who seeks to tender
outstanding notes in the exchange offer. Our interpretation of the terms and
conditions of the exchange offer, including the letter of transmittal and the
instructions to that letter, shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Series A or
Series C notes for exchange must be cured within such reasonable period of time
as we shall determine. We will use reasonable efforts to give notification of
defects or irregularities with respect to tenders of Series A or Series C notes
for exchange but shall not incur any liability for failure to give such
notification. Tenders of the Series A and Series C notes will not be deemed to
have been made until such irregularities have been cured or waived.
If any letter of transmittal, endorsement, bond power, power of attorney, or
any other document required by the letter of transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation,
or other person acting in a fiduciary or representative capacity, such person
should so indicate when signing. Unless waived by us, proper evidence
satisfactory to us of a person's authority to act in a fiduciary or
representative capacity must be submitted.
Any beneficial owner whose outstanding notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender outstanding notes in the exchange offer should contact such registered
holder promptly and instruct such registered holder to tender on the beneficial
owner's behalf. If a beneficial owner wishes to tender directly, the beneficial
owner must make appropriate arrangements to register ownership of the Series A
or Series C notes in that beneficial owner's name prior to completing and
executing the letter of transmittal and tendering outstanding notes. Beneficial
owners should be aware that the transfer of registered ownership may take
considerable time.
Each eligible holder accepting the exchange offer is required to make the
representations to us described under "--Resales of the Series B and Series D
Notes" below.
BOOK ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the Series A notes and an account with respect to the Series C notes at DTC
for purposes of the exchange offer within two business days after the date of
this prospectus. Any financial institution that is a participant in DTC's system
may make book-entry delivery of Series A or Series C notes by causing DTC to
transfer such Series A or Series C notes into the exchange agent's account at
DTC in accordance with DTC's procedures for transfer. A holder tendering the
notes via ATOP will expressly acknowledge the receipt of, and agree to be bound
by, the terms of the letter of transmittal. In the case of a tender by
guaranteed delivery, the holder will expressly acknowledge the receipt of, and
agree to be bound by, the Notice of Guaranteed Delivery.
49
<PAGE>
GUARANTEED DELIVERY PROCEDURES
If a registered holder of outstanding notes desires to tender their
Series A or Series C notes other than through book-entry transfer procedures and
such outstanding notes are not immediately available, or if time will not permit
such holder's Series A or Series C notes or other required documents to reach
the exchange agent on or prior to the expiration date, a tender may be effected
if:
- the tender is made by or through an eligible institution,
- prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed letter of
transmittal or facsimile thereof and Notice of Guaranteed Delivery,
substantially in the form provided by us, by either facsimile
transmission, mail or hand delivery.
The letter and notice should set forth:
- the name and address of the holder of Series A or Series C notes,
- the certificate number or numbers of any Series A or Series C notes which
will not be tendered by book-entry transfer,
- the amount of Series A or Series C notes tendered,
- a statement that the tender is being made thereby,
- a guarantee that within three business days after the date of execution of
the Notice of Guaranteed Delivery, the certificates for all physically
tendered Series A or Series C notes, in proper form for transfer, and any
documents required by the letter of transmittal will be deposited by the
eligible institution with the exchange agent, and
- the certificates for all physically tendered Series A or Series C notes,
in proper form for transfer, and all other documents required by the
letter of transmittal, are received by the exchange agent within three
business days after the date of execution of the Notice of Guaranteed
Delivery.
If a registered holder of Series A or Series C notes desires to tender such
outstanding notes by book-entry transfer and the procedure for book-entry
transfer cannot be completed on or prior to the expiration date, a tender may be
effected if:
- the tender is made by or through an eligible institution,
- the exchange agent receives confirmation from DTC of receipt by DTC of a
Notice of Guaranteed Delivery via ATOP, by which the tendering holder will
expressly acknowledge the receipt of, and agree to be bound by, the Notice
of Guaranteed Delivery, including guarantee that Book-Entry Confirmation
will be received by the exchange agent within three business days after
the date of the transmittal of the Notice of Guaranteed Delivery via ATOP,
and
- Book-Entry Confirmation is received by the exchange agent within three
business days after the date of the transmittal of the Notice of
Guaranteed Delivery via ATOP.
ACCEPTANCE OF SERIES A AND SERIES C NOTES FOR EXCHANGE; DELIVERY OF SERIES B AND
SERIES D NOTES
Except as set forth under "--Conditions of the Exchange Offer" below, we
will accept, promptly after the expiration date, all outstanding notes properly
tendered and will issue the Series B and Series D notes promptly after
acceptance of the Series A and Series C notes. For purposes of the exchange
offer, we shall be deemed to have accepted properly tendered Series A and
Series C notes for exchange when, as, and if we have given oral or written
notice to that effect to the exchange agent.
50
<PAGE>
In all cases, issuances of Series B for Series A notes or Series D notes for
Series C notes that are accepted for exchange pursuant to the exchange offer
will be made only after timely receipt by the exchange agent of certificates for
outstanding Series A or Series C notes or a Book-Entry Confirmation of such
outstanding notes into the exchange agent's account at DTC, a properly completed
and duly executed letter of transmittal, and all other required documents;
PROVIDED, HOWEVER, that we have given oral or written notice thereof to the
exchange agent, and PROVIDED FURTHER that we reserve the absolute right to waive
any defects or irregularities in the tender or conditions of the exchange offer.
If any tendered Series A or Series C notes are not accepted for any reason set
forth in the terms and conditions of the exchange offer or if Series A or
Series C notes are submitted for a greater principal amount than the eligible
holder desires to exchange, such unaccepted or non-exchanged outstanding notes
or substitute outstanding notes evidencing the unaccepted portion, as
appropriate, will be returned without expense to the tendering eligible holder
thereof as promptly as practicable after the expiration or termination of the
exchange offer.
WITHDRAWAL RIGHTS
Tenders of the Series A or Series C notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, one business day prior to the expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at its address set forth under "--Exchange Agent"
below. Any such notice of withdrawal must:
- specify the name of the person having tendered the Series A or Series C
notes to be withdrawn,
- identify the Series A or Series C notes to be withdrawn, including the
principal amount of such outstanding notes, and
- if certificates for Series A or Series C notes were tendered, specify the
name in which such outstanding notes were registered, if different from
that of the withdrawing holder.
If certificates for Series A or Series C notes have been delivered or
otherwise identified to the exchange agent then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an eligible institution unless such holder is an
eligible institution. If Series A or Series C notes have been tendered pursuant
to the procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at DTC to be credited with the withdrawn
Series A or Series C notes, and otherwise comply with the procedures of DTC. All
questions as to the validity, form, eligibility and time of receipt of such
notices will be determined by us in our sole, reasonable discretion. This
determination shall be final and binding on all parties. The Series A and
Series C notes so withdrawn, if any, will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer. Any Series A and
Series C notes that have been tendered for exchange but which are withdrawn will
be returned to the eligible holder without cost to the eligible holder as soon
as practicable after withdrawal. Properly withdrawn Series A or Series C notes
may be retendered by following one of the procedures described under
"--Procedures for Tendering Series A or Series C Notes" above at any time on or
prior to the expiration date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the exchange offer, we shall not be
required to accept any Series A or Series C notes for exchange, or to issue the
Series B notes in exchange for the Series A notes, or to issue the Series D
notes in exchange for the Series C notes. We may terminate or amend the exchange
offer if, prior to the exchange of the Series B notes for the Series A notes and
the
51
<PAGE>
Series D notes for the Series C notes, we determine, in our sole discretion,
that any of the following situations exist:
- there has been a commencement of any action, legal or governmental, with
respect to the exchange offer or which we reasonably determine would make
it inadvisable to proceed with the exchange offer,
- there has been a banking moratorium or similar event or international
calamity involving the United States,
- there has been a change in our business or prospects that may have a
material adverse effect on us, or
- the exchange offer violates any applicable law.
If we make any of the foregoing determinations, we may:
- refuse to accept any Series A or Series C notes and return all tendered
Series A and Series C notes to the tendering holders, or
- extend the exchange offer, retain all Series A and Series C notes tendered
prior to the expiration date, and use reasonable efforts to satisfy any
such condition, subject, however, to the rights of eligible holders to
withdraw such outstanding notes.
You should read the discussion under the heading "--Withdrawal Rights" for
further information regarding your rights to withdraw tendered notes. In
addition, we will not accept for exchange any Series A or Series C notes
tendered, and no Series B or Series D notes will be issued in exchange for any
such outstanding notes, if at such time any stop order shall be threatened or in
effect with respect to the registration statement or the qualification of the
indentures governing the notes under the Trust Indenture Act of 1939, as in
effect on the date of the indentures.
Holders of outstanding notes may have rights and remedies against us under
the registration rights agreement should we fail to consummate the exchange
offer, notwithstanding any nonfulfillment of the above conditions. Such
conditions are not intended to modify such rights and remedies in any respect.
Under the registration rights agreement relating to the Series A notes,
during the first 90-day period immediately following the occurrence of any of
the following events, we agreed to pay to each holder of the Series A notes an
additional amount equal to $0.05 per week or partial week, per $1,000 principal
amount of the Series A notes held by such holder as liquidated damages, if,
other than as a result of actions by the holders of the Series A notes:
- the registration statement relating to the Series B notes was not filed by
December 17, 1998,
- the registration statement filed with the Commission relating to the
exchange offer for the Series A notes was not declared effective by the
Commission by February 16, 1999, or
- the exchange offer for the Series A notes is not consummated within
30 days after the registration statement is declared effective.
The amount of liquidated damages will increase by an additional $0.05 per
week or partial week, per $1,000 principal amount at the beginning of each
subsequent 90-day period to a maximum amount of liquidated damages of $0.50 per
week per $1,000 principal amount. Liquidated damages will continue to accrue
until the conditions noted above have been cured. Liquidated damages accrued as
of any interest payment date will be payable on that date. Because we did not
comply with some of these provisions, liquidated damages are currently accruing
with respect to the Series A notes at the rate of $22,000 per week. Liquidated
damages will cease to accrue when this registration statement is declared
effective.
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<PAGE>
Under the registration rights agreement relating to the Series C notes,
during the first 90-day period immediately following the occurrence of any of
the following events, we have agreed to pay to each holder of the Series C notes
an additional amount equal to $0.05 per week or partial week, per $1,000
principal amount of the Series C notes held by such holder as liquidated
damages, if, other than as a result of actions by the holders of the Series C
notes:
- the registration statement relating to the Series D notes is not filed by
November 12, 1999,
- the registration statement filed with the Commission relating to the
exchange offer for the Series C notes is not declared effective by the
Commission by January 26, 2000, or
- the exchange offer for the Series C notes is not consummated within 30
days after the registration statement is declared effective.
The amount of liquidated damages will increase by an additional $0.05 per
week or partial week, per $1,000 principal amount at the beginning of each
subsequent 90-day period to a maximum amount of liquidated damages of $0.05 per
week per $1,000 principal amount. Liquidated damages will continue to accrue
until the conditions noted above have been cured. Liquidated damages accrued as
of any interest payment date will be payable on that date.
TERMINATION OF RIGHTS
Eligible holders of the Series A notes to whom this exchange offer is made
have rights under the registration rights agreement and purchase agreement which
relate to the Series A notes that will terminate upon the consummation of the
exchange offer. These rights include, without limitation the right to require
us:
- to file the exchange offer registration statement relating to the
Series B notes under the Securities Act with the Commission within
240 days after the Series A notes were originally issued;
- to use our best efforts to cause the registration statement relating to
the Series B notes to become effective under the Securities Act within
300 days after the Series A notes were originally issued;
- to consummate the exchange offer for the Series A notes within 30 days
after the registration statement covering the exchange offer is declared
effective; and
- if some events described in the registration rights agreement relating to
the Series A notes occur, to:
- file a shelf registration statement covering resales of the notes,
- use our best efforts to cause such shelf registration statement to be
declared effective under the Securities Act, and
- keep such shelf registration statement effective for the period
described in the registration rights agreement.
Eligible holders of the Series C notes to whom this exchange offer is made
have rights under the registration rights agreement and purchase agreement which
relate to the Series C notes that will terminate upon the consummation of the
exchange offer. These rights include, without limitation the right to require
us:
- to file the exchange offer registration statement relating to the
Series D notes under the Securities Act with the Commission within 105
days after the Series C notes were originally issued;
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- to use our best efforts to cause the registration statement relating to
the Series D notes to become effective under the Securuties Act within 180
days after the Series C notes were originally issued;
- to consummate the exchange offer for the Series C notes within 30 days
after the registration statement covering the exchange offer is declared
effective; and
- if some events described in the registration rights agreement relating to
the Series C notes occur, to;
- file a shelf registration statement covering resales of the notes,
- use our best efforts to cause such shelf registration statement to be
declared effective under the Series Act, and
- keep such shelf registration statement effective for the period
described in the registration rights agreement.
The right to receive liquidated damages from us under specific circumstances
described in the registration rights agreements will also terminate upon
consummation of exchange offer.
EXCHANGE AGENT
All tendered Series A and Series C notes, executed letters of transmittal,
and other related documents should be directed to the exchange agent at one of
the addresses set forth below. In addition, any questions and requests for
assistance and requests for additional copies of this prospectus, the letter of
transmittal, and other related documents should be addressed to the exchange
agent as follows:
<TABLE>
<S> <C> <C>
IF BY OVERNIGHT CARRIER OR BY IF BY REGISTERED OR CERTIFIED IF BY FACSIMILE:
HAND: MAIL: (212) 815-6339
Bank of New York Bank of New York CONFIRM BY TELEPHONE:
101 Barclay Street Debt Processing Group-7E (212) 815-6331
Reorg. Department-7E P.O. Box 11265
New York, NY 10286 New York, NY 10286
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by us. The principal
solicitation is being made by mail; however, additional solicitation may be made
by facsimile, telephone or in person by our officers and regular employees and
our affiliates. We have not retained any dealer-manager in connection with the
exchange offer. We will, however, reimburse brokers, dealers, commercial banks
and trust companies for reasonable and necessary costs and expenses incurred by
them in forwarding this prospectus and the related exchange offer documents to
the beneficial owners of Series A or Series C notes held by them as nominee or
in a fiduciary capacity. We will also pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses. The cash expenses to be incurred in connection with the
exchange offer will be paid by us and are estimated to be approximately
$350,000. Such expenses include fees and expenses of the exchange agent,
accounting and legal fees, filing fees and printing costs.
We will pay all transfer taxes, if any, applicable to the exchange of
Series A and Series C notes pursuant to the exchange offer. If, however, a
transfer tax is imposed for any reason other than the exchange of Series A and
Series C notes pursuant to the exchange offer, then the amount of any such
transfer taxes will be payable by the tendering holder, whether imposed on the
registered holder or any
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other persons. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Series B notes will be recorded at the same carrying value as the
Series A notes and the Series D notes will be recorded at the same carrying
value as the Series C notes, as reflected in our accounting records on the date
of the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the exchange offer will be amortized over the term
of the Series B and Series D notes.
RESALES OF THE SERIES B AND SERIES D NOTES
With respect to resales of Series B and Series D notes, based on an
interpretation by the staff of the Securities and Exchange Commission set forth
in no-action letters issued to third parties, we believe that an eligible
holder, other than:
- an affiliate of our within the meaning of Rule 405 under the Securities
Act, or
- a broker-dealer, who exchanges Series A notes for Series B notes or
Series C notes for Series D notes in the ordinary course of its business
and who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in a
distribution of the Series B or Series D notes,
will be allowed to resell the Series B or Series D notes to the public without
further registration under the Securities Act and without delivering to the
purchasers of the Series B or Series D notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any eligible
holder acquires Series B or Series D notes in the exchange offer for the purpose
of distributing or participating in a distribution of the Series B or Series D
notes, that eligible holder cannot rely on the position of the staff of the
Securities and Exchange Commission enunciated in "Exxon Capital Holdings
Corporation" (available May 13, 1988) or similar no-action letters or any
similar interpretive letters. In that case, the holder must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available.
As contemplated by the above no-action letters and the registration rights
agreement, each holder of Series A or Series C notes accepting the exchange
offer is required to represent to us in the letter of transmittal that:
- any Series B or Series D notes are to be acquired in the ordinary course
of business of the person receiving such Series B or Series D notes,
- neither the holder of the Series A or Series C notes nor any such other
person receiving the Series B or Series D notes is participating, intends
to participate, or has any arrangement or understanding with any person to
participate, in a distribution of the Series B or Series D notes, as
applicable, and
- except as otherwise disclosed, neither the holder of the Series A or
Series C notes, as applicable, nor any such other person is an affiliate
of ours within the meaning of Rule 405 under the Securities Act.
Further, each holder of Series A or Series C notes accepting the exchange offer
must acknowledge that any person participating in the exchange offer for the
purpose of distributing the Series B notes in the case of the Series A note
holders, or the Series D notes in the case of the Series C note holders, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection
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<PAGE>
with a secondary resale of the Series B or Series D notes and cannot rely on the
no-action letters discussed above.
Each broker-dealer that receives Series B or Series D notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B or Series D notes. The
letter of transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Series B or Series D notes received in exchange
for Series A or Series C notes, respectively, where such Series A or Series C
notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, for a period of up to one year after the
expiration date. We have agreed to make this prospectus, as it may be amended or
supplemented from time to time, available to any broker-dealer, at no charge,
for use in connection with any such resale for a period of up to one year after
the expiration date of the exchange offer, or for such shorter period that will
terminate when such broker-dealers have sold all of such Series B and Series D
notes. You should read the discussion under the heading "Plan of Distribution"
for further information on the continuing availability of this prospectus after
the expiration date.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Series A or Series C notes who do not exchange their Series A
notes for Series B notes or Series C notes for Series D notes pursuant to the
exchange offer will continue to be subject to the restrictions on transfer of
such Series A and Series C notes as set forth in the legends thereon. In
general, the Series A and Series C notes may not be offered or sold, unless
registered under the Securities Act and applicable state securities laws. We do
not intend to register the Series A or Series C notes under the Securities Act
or any state securities laws.
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BUSINESS
COMPASS
We commenced operations in November 1997 with the simultaneous acquisitions
of two established precision machining subcontractors. In 1998 and 1999 we
acquired a total of twelve additional operating companies. Our acquisitions to
date and our principal manufacturing facilities are summarized in the following
table.
<TABLE>
<CAPTION>
YEAR DATE MANUFACTURING
BUSINESS BUSINESS CAPABILITIES/ MAJOR
BUSINESS ACQUIRED FOUNDED ACQUIRED LOCATION SPECIALITIES CUSTOMERS(2)
- ----------------- -------- ---------- -------------- -------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Aeromil............................... 1971 Nov. 1997 Santa Ana, CA Medium-sized Boeing, Korean
machined parts Airlines,
Hughes Aircraft,
Raytheon
Western Methods....................... 1978 Nov. 1997 Gardena, CA Small to medium- Boeing, Northrop,
sized machined parts Lockheed, NASA-JPL
Brittain Machine...................... 1966 April 1998 Wichita, KS Small to large-sized Boeing, Raytheon,
machined parts, Hughes Aircraft,
fabrication and Cessna, Shorts Brothers
tooling
Wichita Manufacturing................. 1992 April 1998 Cerritos, CA Small to medium- Boeing, Northrop,
sized machined parts Tolo
Barnes Machine........................ 1982 April 1998 Shelton, WA Small to medium- Boeing, Northrop,
sized machined parts Kawasaki
Sea-Lect(1)........................... 1989 May 1998 Kent, WA Sheet metal and Boeing, Japan Airlines,
extruded/machined B.F.
parts, assembly Goodrich, Lucas
including bonding/ Aerospace,
riveting, tool and Mitsubishi, Kawasaki
die making
Pacific Hills......................... 1962 Nov. 1998 Valencia, CA Shim stock, Boeing, Rohr
Kent, WA laminated shims,
stampings, flat
patterns
Modern(3)............................. 1966 Dec. 1998 Renton, WA Small to medium- Boeing, Hawker
sized machined parts
Trim.................................. 1962 July 1999 Wallisdown, Machining, assembly, Applied Materials,
Poole, turning Shorts Brothers,
Dorset(4) British
Aerospace-Airbus
Diac.................................. 1984 July 1999 New Addington Machining, assembly Shorts Brothers
Croydon and
Biggin Hill,
Kent(4)
Maybrey............................... 1962 July 1999 Lower Non-ferrous casting Edwards
Sydenham(4)
Trefn................................. 1978 July 1999 Llay, Wrexham, Machining, assembly, Applied Materials,
Wales(4) turning British Aerospace-
Airbus
Trefn Metal Treatments................ 1982 July 1999 Llay, Wrexham, Heat treating, British Aerospace-
Wales(4) anodizing, shot- Airbus
peening
Trefn Fabrications.................... 1994 July 1999 Llay, Wrexham, Metal forming, British Aerospace-
Wales(4) fabrication, Airbus
assembly
</TABLE>
- ------------------------
(1) We simultaneously acquired the assets of Sea-Lect and the stock of J&J
Leasing, Inc. as a subsidiary of Sea-Lect in May 1998. Subsequent to the
acquisition of these businesses, J&J, which
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had previously leased machinery and equipment to Sea-Lect and did not
conduct any manufacturing operations, was merged into Sea-Lect.
(2) Major customers include Boeing, British Aerospace-Airbus, Northrop, Korean
Airlines Co., Ltd., Hughes Aircraft Company, Raytheon Aircraft Company,
Lockheed Martin Corporation, National Air Space Administration-Jet
Propulsion Laboratory, Cessna Aircraft Co., Japan Airlines Co., Ltd., B.F.
Goodrich Aerospace, a division of The B.F. Goodrich Company, Lucas
Aerospace, a division of LucasVarity plc, Mitsubishi Heavy Industries Ltd.,
Kawasaki Heavy Industries, Ltd., Hawker de Havilland Inc., Shorts Brothers
PLC, Edwards High Vacuum, Tolo Inc., a subsidiary of B.F. Goodrich and
Rohr, Inc., a subsidiary of B.F. Goodrich.
(3) We are in the process of consolidating the business operations of Modern
with Barnes Machine and Sea-Lect, including moving machinery and equipment
from the Modern facility to the facilities at Barnes Machine and Sea-Lect.
We believe this consolidation will assist us in achieving our strategic
goals by improving our utilization of our existing facilities and decreasing
our costs.
(4) There are multiple buildings and manufacturing sites at each location.
Prior to our acquisition of our subsidiaries, our subsidiaries operated
under independent management. As part of our strategy, we intend to leverage the
consolidated capabilities of our subsidiaries, expand production of
sub-assemblies, manufacturing kits and structural components and acquire
businesses with complementary capabilities.
At present, we are principally engaged in manufacturing individual parts for
aircraft to precise specifications from metals including aluminum, titanium and
steel through the use of precision computer numerically-controlled machine tools
and metal forming equipment. Our facilities in the United Kingdom are also
engaged in metal treatment, non-ferrous casting and produce welded assemblies
and components. We use a variety of advanced techniques and machinery including
horizontal and vertical machining centers and state-of-the-art high-speed
precision machining equipment, as well as three-spindle five-axis gantry mills.
We produce original equipment parts, sub-assemblies, manufacturing kits and
structural components for:
- all of the commercial jet models (717, 737, 747, 757, 767, 777, MD-11,
MD-80 and MD-90) produced by Boeing,
- Airbus single-aisle (A319, A320 and A321) and twin-aisle (A300, A310,
A330 and A340), models,
- Bombardier (Canadair Regional Jet-Registered Trademark-, Canadair
Global Express, Lear and Dash-8 models)
- Embrear Aircraft Corporation (ERJ-145),
- as well as for several United States military programs and various
other commercial aircraft manufacturers.
We believe that among the key factors in our success are the long-standing
relationships that our management has established with its our customers, as
well as the strong name recognition of our subsidiaries, established track
records of quality manufacturing and consistent histories of timely deliveries
by our subsidiaries.
STRATEGY
Our principal strategic objective is to increase revenues and profits by
managing the supply chain for our customers, by consolidating our acquired
businesses and by producing sub-assemblies, manufacturing kits and structural
components as well as individual parts. We also seek to increase our
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operating efficiencies and to reduce our customer concentration by diversifying
our revenue mix among aerospace customers. To reach our objectives we intend to:
CONSOLIDATE ACQUIRED BUSINESSES; INCREASE REVENUES AND MARGINS
We believe that there are significant opportunities to increase revenues and
margins by increasing operating efficiencies and asset utilization through
strategic coordination of production among our manufacturing facilities to
increase production runs, reduce set-up times and utilize the most appropriate
machinery for each production job. We have begun to introduce lean management
practices to reduce scrap rates, decrease direct manufacturing time per part,
decrease inventory levels and improve margins. We also believe that some of our
manufacturing facilities are underutilized. This excess capacity gives us the
opportunity to shift production among our manufacturing facilities to achieve
increased operating efficiencies. We are also in the process of consolidating
the operations of Modern with those of Barnes Machine and Sea-Lect and expect to
complete this consolidation during the fourth quarter of 1999. We believe that
the consolidation of the specialized and complementary manufacturing
capabilities of our facilities in the United States, combined with our strong
customer relationships, reputation for quality and ability to coordinate
production among our facilities, should allow us to grow internally and increase
profits by producing individual parts more efficiently. We believe that many of
the same opportunities also exist with respect to our facilities located in the
United Kingdom.
Each of our subsidiaries has substantial experience in the aerospace
industry and has experienced management and highly-skilled employees. We seek to
retain the technical expertise of many of these individuals and utilize their
expertise throughout our manufacturing facilities.
In addition, we are centralizing a number of administrative functions at the
corporate level including finance, accounting, purchasing, tax, sales and
marketing, payroll, employee benefits and insurance and other administrative
activities to realize economies of scale and reduce costs. We are updating and
consolidating our management information systems to improve internal controls
and coordinate operations and our consolidating some of the engineering
functions currently spread across our manufacturing facilities.
FOCUS ON SUPPLY CHAIN MANAGEMENT AND INCREASE PRODUCTION OF SUB-ASSEMBLIES,
MANUFACTURING KITS AND STRUCTURAL COMPONENTS
We intend to increase our production of sub-assemblies, manufacturing kits
and structural components while maintaining our on-going business of
manufacturing individual parts. While we currently produce a limited number of
sub-assemblies and manufacturing kits, we believe that we are capable of
producing a wide range of sub-assemblies, manufacturing kits and structural
components by more effective use of our broad, flexible manufacturing
capabilities without significant additional capital expenditures. We believe the
ability to produce sub-assemblies, manufacturing kits and structural components
will become increasingly important as customers such as Boeing reduce their
inventories of individual parts. We intend to offer our customers supply chain
management services by providing just-in-time delivery and electronic data
interchange with our customers. We believe that we will be able to leverage our
specialized and complementary manufacturing capabilities and marketing expertise
to be awarded additional production contracts for sub-assemblies, manufacturing
kits and structural components.
IMPROVE MARKETING
Although our subsidiaries have enjoyed strong customer relationships and
repeat business as a result of strong name recognition, established track
records of quality manufacturing and consistent histories of timely deliveries,
they have not maximized marketing opportunities. We intend to proactively market
our broad, flexible manufacturing capabilities to secure additional long-term
production contracts from existing customers. We intend to position ourself as
an outsource alternative
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to our customers' own facilities by offering our customers lower part costs and
increased inventory turnover. In addition, we are targeting customers that our
subsidiaries could not significantly penetrate individually, including Airbus
which represented less than one percent of our 1998 consolidated revenues. We
believe that improved marketing of our ability to produce precision machined
individual parts and sub-assemblies, manufacturing kits and structural
components to precise specifications with timely deliveries should allow us to
achieve our objectives of becoming a major supplier to the aerospace industry.
DIVERSIFY REVENUE MIX
We participate in all Boeing commercial jet programs, and, with the
acquisition of Trim and its subsidiaries, we participate in all of the Airbus
commercial jet programs. We believe that our recent acquisition of our
facilities in the United Kingdom will assist us in achieving our goal of
diversifying our revenue mix within the aerospace industry. We believe that our
United Kingdom facilities will provide us with a platform from which to grow our
business with European aircraft manufacturers because of the equipment for
machining and surface treatments of long parts which is located at those
facilities. We also believe our facilities located in the United Kingdom are of
sufficient size to meet our customers outsourcing needs and that they have an
established reputation in the European market. In addition, we believe that
there are opportunities to increase revenues from regional and business jet
manufacturers and from United States military programs beyond our current
participation in the C-17 transport and F-18 fighter aircraft programs.
INCREASE OUTSOURCING
We utilize small machine shops for some production functions to increase
manufacturing efficiencies and capacity. We intend to increase outsourcing to
these small machine shops to augment our capacity and supplement our
capabilities without additional capital expenditures, thus enhancing our ability
to produce sub-assemblies, manufacturing kits and structural components. We will
pre-qualify, execute formal supply agreements and be held accountable for
meeting the quality standards of our customers. To ensure that the outsourced
parts shipped under its supplier numbers and purchase order numbers meet the
requirements of our customers, we will impose the quality requirements in our
contracts and audit our subcontractors in a similar manner to which we are
required to perform and are audited by our customers. We will also inspect the
outsourced parts in our own quality control departments.
INDUSTRY OVERVIEW AND TRENDS
In response to an increased demand for aircraft, the major aircraft
manufacturers are dramatically changing their manufacturing and purchasing
practices to increase production rates and reduce costs. More specifically,
aircraft manufacturers are increasing outsourcing and imposing increased
responsibilities, such as the production of more sub-assemblies, manufacturing
kits and structural components, just-in-time deliveries and quality control
inspections before shipping on a smaller number of qualified suppliers.
Outsourcing also reduces costs because subcontractors can produce parts at a
fraction of the cost of in-house manufacturing. At present, the aerospace
supplier industry is highly fragmented, consisting of a limited number of
well-capitalized companies which offer a broad range of products and services,
and a large number of smaller, specialized companies. As a result of the
aircraft manufacturers' new manufacturing and purchasing practices, the supplier
industry has been consolidating at an increasing pace in recent years and
management believes that such consolidation will continue.
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Significant trends currently affecting the market for parts for aircraft
manufacturers include the following:
INCREASES IN AIR TRANSIT AND AIRCRAFT PRODUCTION
Boeing's 1999 Current Market Outlook projected that, through the year 2008,
global air travel will increase by 59% and that the number of passenger and
cargo delivery aircraft in service will increase by 52%, with approximately
8,900 new airplanes delivered worldwide through the year 2008. At December 31,
1998 Boeing reported unfilled announced orders for 1,786 aircraft, with orders
for 656 aircraft received as of December 31, 1998. Boeing delivered 270, 375 and
563 airplanes in 1996, 1997 and 1998, respectively. These numbers include
airplanes delivered by the former McDonnell Douglas Corporation, which was
acquired by Boeing in 1997. Boeing has publicly announced plans to increase its
delivery of aircraft to approximately 620 airplanes in 1999, followed by a
decrease in deliveries of aircraft to approximately 480 airplanes in 2000. At
September 30, 1999 Boeing reported unfilled announced orders for 1,469 aircraft.
At September 30, 1999 Boeing had delivered 455 commercial aircraft in 1999.
Airbus' 1999 Global Market Forecast projected that through the year 2018,
the number of aircraft in active service should increase by 91% and over 89% of
the current passenger jet fleet should be replaced, requiring approximately
14,768 new passenger aircraft. At September 30, 1999 Airbus' reported unfilled
announced orders for 1,427 aircraft. At September 30, 1999 Airbus had delivered
211 commercial aircraft in 1999.
We believe that the following factors, among others, are contributing to the
high levels of new aircraft production:
- a turnaround in worldwide airline operating performance from substantial
operating losses in 1992 to approximately $12.0 billion and $15.5 billion
of operating profit in 1996 and 1997, respectively;
- projected worldwide airline traffic growth of 5.0% per year and projected
cargo traffic growth of 6.4% per year over the next decade;
- increased aircraft load factors during the 1990-96 period;
- increases in the average age of commercial aircraft during the 1990-96
period; and
- the increasing importance to the airline industry of city pair marketing
and flight frequencies.
We believe that over the longer term this trend will be driven, in part, by
the anticipated continued growth of carriers engaged in the air freight and
package delivery businesses and the expected commencement of new airlines,
especially in China and other Asian countries where air traffic was previously
limited. Further, retirement of aging aircraft and the anticipated removal of
approximately 1,000 airplanes domestically from the operating fleet to comply
with mandatory noise reduction standards by December 31, 1999 should contribute
to the increased demand for new aircraft production. The number of surplus
aircraft is expected to decline significantly while new aircraft production is
expected to increase over the next several years. The expected growth in air
transit and aircraft production should increase the demand for structural parts
from subcontractors as aircraft manufacturers increase outsourcing to reduce
costs and increase production rates.
REDUCTION IN THE NUMBER OF APPROVED SUBCONTRACTORS
In order to devote additional resources to their core competencies, reduce
operating and purchasing costs and streamline purchasing decisions while
retaining control over quality, aircraft manufacturers have been reducing the
number of approved subcontractors. Additionally, aircraft manufacturers have
established quality and operating criteria to ensure that approved
subcontractors
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operate with the required proficiency. We believe that, due to the established
market presence of our subsidiaries, their ability to manufacture precision
machined parts and their track records for quality, our manufacturing facilities
will continue to be approved suppliers to Boeing, British Aerospace-Airbus and
other major aircraft manufacturers.
OPERATIONS
Our existing manufacturing capabilities are principally centered around the
precision machining of aluminum, titanium and steel and the production of sheet
metal details, as well as the production of sub-assemblies, manufacturing kits
and structural components. In addition, we engage in fabrication, metal bonding,
metal treatment, non-ferrous casting and minor assembly.
MANUFACTURING FACILITIES
At October 31, 1999 we maintained our corporate headquarters and operated at
the manufacturing facilities listed below, comprising an aggregate of
approximately 782,650 square feet of space. The following table describes the
principal manufacturing facilities and indicates the location, function,
approximate size and ownership status of each location. We believe that our
facilities are suitable for their present intended purposes and adequate for our
present and anticipated level of operations.
<TABLE>
<CAPTION>
APPROXIMATE
PRODUCTS FACILITY SIZE
LOCATION AND FUNCTION (SQ. FEET) OWNERSHIP
- -------- ---------------------------- ------------- -----------------
<S> <C> <C> <C>
Long Beach, CA................... Corporate Headquarters 8,670 Leased
Santa Ana, CA.................... Manufacturing 65,000 Leased(1)
Gardena, CA...................... Manufacturing 20,500 Leased
Wichita, KS...................... Manufacturing 153,000 Owned
Cerritos, CA..................... Manufacturing 42,500 Leased
Shelton, WA...................... Manufacturing 50,000 Owned
Kent, WA......................... Manufacturing 77,180 Leased
Valencia, CA..................... Manufacturing 31,280 Leased
Kent, WA......................... Manufacturing 10,450 Leased
Renton, WA....................... Manufacturing 95,070 Owned(2)
Wallisdown, Poole, Dorset........ Manufacturing 30,000 Leased and Owned
Llay, Wrexham, Wales............. Manufacturing 75,000 Owned
Llay Wrexham, Wales.............. Manufacturing 36,000 Owned
New Addington, Croydon and Biggin
Hill, Kent..................... Manufacturing 28,000 Leased
Lower Sydenham, Croydon.......... Manufacturing 40,000 Leased and Owned
Llay, Wrexham, Wales............. Manufacturing 20,000 Owned
</TABLE>
- ------------------------
(1) We lease our Santa Ana facility from a former Aeromil affiliate at a fair
market rent.
(2) We currently intend to offer this facility for sale following the
consolidation of Modern, which presently operates at this facility, with
Barnes Machine and Sea-Lect.
We have a large portfolio of complex machinery which cut, fold, form and
drill metals and other materials used during our manufacturing processes,
including: sheet metal forming equipment, high-speed and conventional computer
numerically-controlled horizontal and vertical machining centers and
three-spindle five-axis gantry mills, computer-numerically-controlled long-bed
machining and milling centers, conventional and gap lathes, stretch presses,
bladder presses, and brakes and shears. These machines provide broad, flexible
manufacturing capabilities. We maintain in-house engineering departments at each
manufacturing facility, some of which utilize CATIA-CADAM Solutions and
Unigraphics systems to create machine control programs from digital parts
specifications received directly from the aircraft manufacturers.
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We are is also engaged in metal bonding and assembly operations at several
of our manufacturing facilities. Western Methods has developed its own
Boeing-certified specialized bonding process which enables the assembly/bonding
department to bond composite material to aluminum and mechanical hardware to
milled parts. Britain Machine fabricates assembly and tooling platforms and has
diversified into complex assembly production involving bonding and riveting
individual parts together. Western Methods, Britain Machine and Barnes Machine
also participate in Boeing's Advanced Technology Assembly program under which
they manufacture parts requiring drilling precise manufacturing assembly
location holes. In addition, Trefn Fabrications engages in specialty welding and
Maybrey has a full range of non-ferrous casting capabilities, including sand,
die and investment casting.
PRODUCTS
We manufacture parts for all of the Boeing and Airbus commercial aircraft
models, as well as for a variety of aircraft from other commercial aircraft
manufacturers and several U.S. military aircraft and other programs. Our
products range in size from large ribs used in wings and vertical stabilizers to
engine mounts, door stops and shims and range in value from less than $50 to
more than $20,000. We primarily manufacture original equipment parts from
various metals such as aluminum, titanium and steel which are used in the
structural elements of aircraft.
SOURCES AND AVAILABILITY OF RAW MATERIALS
We use a variety of metals in our manufacturing processes, including
aluminum, titanium and steel. We generally acquire these metals from third party
suppliers. The availability and prices of these materials may fluctuate. Any
delay in our ability to obtain necessary raw materials may affect our ability to
meet our customer's needs. In some instances, Boeing may supply us with the
metals we will use in manufacturing parts under a specific purchase order.
Boeing may also require us to acquire metals from some third party suppliers
identified by Boeing. If Boeing requires us to acquire metals from third party
suppliers, Boeing has agreed to reimburse us for the actual cost of those
metals.
CERTIFICATION
We manufacture parts to exact specifications provided by our aerospace
customers in engineering drawings. Our customers require our manufacturing
facilities to perform quality standards testing and certification procedures on
all manufactured parts and provide detailed records to ensure traceability of
each part. Such customers typically certify our manufacturing facilities as
meeting specific quality standards, which certification is necessary for us to
submit bids and manufacture parts for such customers. You should read the
discussions under the headings "Risk Factors--Certification" and "--Sales and
Marketing" for more information on the impact of certification on us.
Our manufacturing facilities have imposed quality control criteria on their
manufacturing processes and all of our facilities located in the United States
have received Boeing's D1-9000 certification. Boeing's D1-9000 certification is
site specific and certifies that a facility meets a number of specific customer
satisfaction requirements, including manufacturing parts that comply with
specifications and delivery of parts on time and at cost. Furthermore, all but
one of our facilities located in the United States have received Boeing's
D1-9000-A certification, which allows the facility to produce more critical
parts. Some of our facilities in the United Kingdom have received Boeing's
DI-4426 certification, which enables those facilities to produce certain parts
for Boeing. Our Shelton, Washington facility and two of our facilities in the
United Kingdom have received ISO 9002 certification, which indicates that the
facilities have met quality standards set by an international bureau of quality
standards.
Qualified suppliers often subcontract parts to other machine shops while
still remaining responsible for quality and delivery schedules. Several of our
subsidiaries have been selected as Boeing-Wichita key suppliers, which permits
them to subcontract production without Boeing's supervision. Some of our
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facilities are also certified by other customers including Northrop, Lockheed,
Raytheon, Airbus, Menasco Aerospace, a division of Coltec Industries Inc., and
B.F. Goodrich. The certification process necessary to become an aerospace
supplier, combined with the aircraft manufacturers' desire to reduce their
number of approved suppliers, provide barriers to entry for machining companies
from industries which have greater tolerances for production variances and which
accept parts produced to less precise specifications under less rigorous
manufacturing procedures.
QUALITY CONTROL
We believe that our machining and quality control equipment is among the
best of any independent aerospace supplier in the United States and the United
Kingdom and represents state-of-the-art technology. Each of our manufacturing
facilities maintains quality control departments utilizing computer-assisted
inspections which meet or exceed customer requirements and produce required
documentation to each customer's standards.
We maintain the most stringent quality control of our manufactured parts and
services. Our customers require our manufacturing facilities to satisfy specific
standards relating to the quality of our manufactured parts and services. Our
manufacturing facilities perform testing and certification procedures on all
manufactured parts and provide detailed records to ensure traceability of parts.
In addition, we perform quality control tests on all parts we outsource to small
machine shops. We believe that the emphasis on quality control has enabled our
manufacturing facilities to obtain D1-9000, D1-9000-A and other customer
certifications which contribute to our ability to successfully market our
manufacturing and production capabilities. The expense required to institute and
maintain quality control procedures comparable to ours represents a barrier to
entry for other companies.
BACKLOG
The growth of orders for new aircraft has created a substantial backlog of
purchase orders and parts ordered under long term agreements. We operate under a
series of long term contracts with the major aircraft manufacturers which
generally cover a two-to five-year period for various part numbers. Each long
term contract includes customer estimates of the number of parts the customer
will require over the term of the contract and defines the responsibilities of
the parties, pricing formulas and product specifications for specific parts
covered by the contract. The customer generally issues purchase orders for
selected parts six to twelve months prior to the required shipping date under
the pricing terms and conditions agreed upon in the contract. Most of our
shipments are made pursuant to purchase orders. The long term contracts and
purchase orders are often terminable at will by the customer with respect to
uncompleted portions of the contract or purchase order. The backlog consists of
customers' unfilled purchase orders and therefore is represented largely by
contracts and orders that may be canceled by customers. At October 31, 1999 we
had a total revenue backlog of approximately $158.0 million, of which
approximately $25.0 million is deliverable in the remainder of 1999.
CUSTOMERS
Our principal customer is Boeing, which directly accounted for approximately
59.0% of our pro forma combined revenues for the year ended December 31, 1998
and indirectly accounted for approximately 11.0% of our pro forma combined
revenues for the year ended December 31, 1998. We supply parts to a number of
major Boeing divisions, including Boeing-Wichita, Boeing-Seattle, Boeing-
Auburn, Boeing-Portland and Douglas Products, which typically make independent
purchasing decisions. Boeing has announced that it will decrease its delivery of
commercial aircraft from approximately 620 aircraft in 1999 to 480 aircraft in
2000. Boeing orders could decline as a result of such a reduction in deliveries.
A decline in Boeing orders could have a material adverse effect on our business,
financial condition or results of operations. You should read the discussions
under the Headings "Risk Factors--We Are Dependent On A Key Customer And Could
Suffer Financial Harm
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If We Were To Lose That Customer's Business" and "Management's Discussion And
Analysis Of Consolidated Financial Condition And Consolidated Results Of
Operations--Industry Trends" for further information on our dependence on Boeing
as a key customer.
Our other customers include Airbus, Northrop, Lockheed, Raytheon, Cessna,
Learjet, NASA-JPL, Rockwell International Corporation, General Dynamics
Corporation, British Aerospace, Bombardier, Inc. Canadair, Shorts Brothers PLC
and Embrear Aircraft Corporation, some of which are also Boeing suppliers.
SALES AND MARKETING
Our products are sold directly to aircraft manufacturers such as Boeing,
British Aerospace-Airbus, Lockheed and Raytheon, which perform final assembly of
aircraft, and to large aerospace subcontractors through both direct sales
efforts and independent sales representatives. The aircraft manufacturers and
subcontractors purchase products from qualified subcontractors under rigorous
ongoing certification programs such as Boeing's D1-9000 certification.
The sales process primarily entails relationship management to maximize new
sales from existing customers. The direct sales effort is primarily via
communication with our key customers and is continually maintained by senior
management and dedicated sales professionals. Technical support for such sales,
which is a critical component of the marketing process, is provided through line
manufacturing managers, engineering and quality control personnel. Our
management has long-standing relationships with our key customers and we believe
that our integrated capabilities will allow us to bid on sub-assemblies,
manufacturing kits and structural components programs which typically offer
higher contract value compared to purchase orders for individual parts.
We produce parts to the exact specifications of customer-provided
engineering drawings. We believe a key element of our competitive strength and
marketing strategy is our ability to deliver parts on schedule and maintain
specifications and quality standards. Sales are generally made under two- to
five-year long term contracts in which the customer specifies the number of
parts it estimates it will require over the term of the contract and the
responsibilities of the parties, pricing formulas and product specifications are
documented. The customer generally issues purchase orders for selected parts six
to twelve months prior to the required shipping date under the pricing terms and
conditions agreed upon in the contract. The customer generally has the right to
delay shipment of placed orders or not to place orders previously forecasted.
Most of our shipments are made pursuant to purchase orders.
COMPETITION
The aerospace supplier industry is highly fragmented, consisting of both a
limited number of well-capitalized companies which offer a broad range of
products and services and a large number of smaller, specialized companies. We
believe that the principal competitive factors in the aerospace supplier
industry are quality, precision-machining ability, timely deliveries, overall
customer service and price. We believe that we compete favorably on the basis of
the foregoing factors. We compete with third party manufacturers, some of which
are divisions or subsidiaries of aircraft manufacturers or other large
companies, in the manufacture of individual parts and sub-assemblies,
manufacturing kits and structural components. Some of these competitors have
greater financial and other resources than we do.
GOVERNMENT REGULATION
The aviation industry is highly regulated in the United States by the
Federal Aviation Administration and in other countries by similar agencies. The
FAA regulates commercial flight operations in the United States and requires
that aircraft components meet stringent standards. FAA
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regulations provide that aircraft manufacturers must operate under one or more
of several different FAA authorizations. Manufacturers holding FAA production
approvals are known as production approval holders and may engage a supplier to
manufacture all or a portion of an authorized part. If the supplier manufactures
complete parts, the production approval holder must ensure that the parts are
fabricated and inspected under the production approval holder's FAA-approved
quality control system. We must satisfy the requirements of our customers that
are subject to FAA regulations, and provide these customers with products and
services that comply with the government regulations. If material authorizations
or approvals held by our customers were revoked or suspended, our operations
could be adversely affected.
An initial parts manufacturer approval is, in general, an approval of a
manufacturing or modification facility's production quality control system. A
supplemental parts manufacturer approval authorizes the manufacture of a
particular part in accordance with the requirements of the corresponding FAA
production certificate. We are currently in the process of applying for a parts
manufacturer approval for some parts produced at one of our manufacturing
facilities. Our FAA approvals will be owned, and may only be used by, the
manufacturing facility obtaining such approval. We do not believe a parts
manufacturer approval is necessary to operate our business as it is currently
being conducted. We believe any delay or failure to obtain the parts
manufacturer approval will not have a material adverse effect on our business,
financial condition or results of operations.
The aviation industry is regulated in the United Kingdom by the Civil
Aviation Authority and in other European countries by similar agencies. The CAA
regulates aircraft operated in the United Kingdom. CAA regulations provide that
aircraft manufacturers must operate under CAA authorization. In addition, some
of our customers are subject to similar regulation in other European countries.
Aircraft manufacturers holding CAA approvals or approvals from other European
regulatory agencies may, subject to undertakings to, and regulation by, the
relevant state authority, engage a supplier to manufacture all or a portion of
an authorized part. The aircraft manufacturer must ensure that the parts
manufactured by its suppliers meet approved quality control standards. We must
satisfy the requirements of our customers that are subject to CAA and European
regulations. If material authorizations or approvals held by our customers were
revoked or suspended, our operations could be adversely affected.
Our manufacturing operations in the United States are subject to a variety
of worker and community safety laws. The Occupational Safety and Health Act of
1970 mandates general requirements for safe workplaces for all employees. In
addition, OSHA provides special procedures and measures for the handling of
hazardous and toxic substances. Specific safety standards have been promulgated
for workplaces engaged in the treatment, disposal or storage of hazardous waste.
We believe that our operations are in material compliance with OSHA's health and
safety requirements.
Our manufacturing operations in the United Kingdom are subject to a variety
of worker and European community safety laws. The Health and Safety at Work Act
of 1974, and regulations made thereunder, mandates general requirements for safe
workplaces for all employees. We believe that our operations in the United
Kingdom are in material compliance with the Health and Safety at Work
requirements.
ENVIRONMENTAL MATTERS
We are subject to federal, state, local and foreign laws, regulation and
ordinances that:
- govern activities or operations that may have adverse environmental
effects, such as discharges to air and water,
- establish handling and disposal practices for solid and hazardous wastes,
and
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- impose liability for the clean-up costs of, and some of the damages
resulting from, past spills, disposal or other releases of hazardous
substances.
Our operations use some substances and generate some wastes that are regulated
or may be deemed hazardous under applicable environmental laws. Although we
endeavor at each of our facilities to assure compliance with environmental laws
and regulations, from time to time our operations and those of our predecessors
have resulted in, and may in the future result in, some degree of noncompliance
with applicable requirements under environmental laws for which we may incur
liability. We believe, based on currently available information, that any such
noncompliance under current environmental laws will not have a material adverse
effect on our business, financial condition or results of operations. There can
be no assurance that future changes in such laws, regulations or interpretations
thereof, or the nature of our operations, will not require us to make
significant additional capital expenditures to ensure environmental compliance
in the future.
We have acquired and expect to continue to acquire, pre-existing businesses
that have historical and ongoing operations. We have and will have limited
information about past activities of those companies and operations on our
properties. We are aware that at one of our leased properties, governmental
authorities are currently investigating groundwater contamination and we have
been asked to conduct additional investigations. We have also been named a
defendant in an action filed by an owner of property adjacent to property we
lease. We are indemnified by the owner of the property leased by us, and that
owner has assumed the defense of this action. At this time, we cannot determine,
in either case, what cleanup activities, if any, will be required. Soil and
groundwater contamination may also exist on our other properties as a result of
current or former operations on our properties, or operations on other
properties. Based in part on indemnities obtained in connection with our past
acquisitions, we believe, although there can be no assurance, that such matters
will not have a material adverse effect on our business, financial condition or
results of operations.
We may also incur liability under the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and
Recovery Act and similar state and local laws. Some of these laws impose strict,
and in some cases, joint and several liability, for the cleanup of contamination
resulting from past disposal of waste, including disposal at off-site locations.
A pre-existing business acquired by us has been named as a potentially
responsible party under CERCLA at a site where it disposed of waste in the past.
Based on the information available to us, including the apparent limited amount
of waste sent to the site by that business, as well as an existing indemnity
from the seller of the business, we believe that this matter will not have a
material adverse effect on our business, financial condition or results of
operation.
Our operations in the United Kingdom are subject to European community and
United Kingdom regulations, directives and legislation, that:
- govern activities or operations that may have adverse environmental
effects, such as discharges to air and water
- establish handling and disposal practices for solid and hazardous wastes
- impose liability for the clean-up costs of, and some of the damages
resulting from, past spills, disposal or other releases of hazardous
substances.
Our operations in the United Kingdom use some substances and generate some
wastes that are regulated or may be deemed hazardous under applicable
environmental laws. Although we endeavor at each of our facilities in the United
Kingdom to assure compliance with environmental laws and regulations, from time
to time our operations or those of our predecessors may have resulted in, and
may in the future result in, some degree of noncompliance with applicable
requirements under environmental laws for which we may incur liability. We
believe, based on currently available information, that any such noncompliance
under current environmental laws will not have a material
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adverse effect on our business, financial condition or results of operations.
There can be no assurance that future changes in such laws, regulations or
interpreting thereof, or the nature of our operations in the United Kingdom,
will not require us to make significant additional capital expenditures to
ensure environmental compliance in the future. Based in part on warranties
covering Trim and some of its subsidiaries that we obtained in connection with
our acquisition of Trim and its subsidiaries, we believe, although there can be
no assurance, that such matters will not have a material adverse effect on our
business, financial condition or results of operations.
TRADEMARKS
We hold a trademark registered in the United States and nine other countries
through one of our subsidiaries. We believe that the termination, expiration or
infringement of our trademark would not have a material adverse effect on our
business, financial condition or results of operation.
EMPLOYEES
We had 692 employees at October 31, 1999 in three states and had no
collective bargaining agreements in the United States. We had 518 employees at
October 31, 1999 in our United Kingdom facilities. At one of our subsidiaries in
the United Kingdom, a union has been granted sole collective bargaining rights
for 60 hourly paid employees. The same union is recognized at another of our
United Kingdom subsidiaries, but plays no direct role in negotiating employment
terms and conditions. Neither of these arrangements is documented. The union is
currently seeking recognition at another one of our facilities in the United
Kingdom. We have not experienced any strikes or general work stoppages at any of
our facilities and we believe that our relations with our employees is
excellent.
LEGAL PROCEEDINGS
On May 28, 1999, we filed suit against Alinabal Holdings Corporation, the
former shareholder of Pacific Hills, and the three principal stockholders of
Alinabal, Samuel S. Bergami, Jr., Stephen G. Cerri and Kevin M. Conlisk, in U.S.
District Court of the Southern District of New York. The suit, which alleges
violations of federal securities laws, fraud and breach of contract, seeks
recision of the Amended and Restated Stock Purchase Agreement dated
November 20, 1998 by and among us. Alinabal and the three stockholders of
Alinabal pursuant to which we acquired Pacific Hills, or in the alternative,
$79.0 million in damages. On July 9, 1999 the defendants filed an answer and
counterclaim seeking, among other relief, release of $0.7 million from escrow.
Both sides are engaged in discovery and trial is scheduled to begin in March
2000. At this preliminary stage of the proceedings, we cannot determine or
predict the outcome of this suit.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our directors and
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Douglas M. Hayes....................... 56 Chairman of the Board and Director
Alexander Hogg......................... 52 Chief Executive Officer, President and Director
N. Paul Brost.......................... 46 Vice President, Chief Financial Officer and Treasurer
Douglas B. Solomon..................... 44 Secretary and Director
Harald H. Ludwig....................... 45 Director
James P. Angus......................... 53 Director
William R. Monkman..................... 56 Director
Michael Dritz.......................... 61 Director
Philip J. Olsson....................... 50 Director
</TABLE>
DOUGLAS M. HAYES has been a Director and our Chairman of the Board since
November 1997. Mr. Hayes has been a Managing Director of Macluan Capital
Corporation, a private investment company and President of Hayes Capital
Corporation, a private investment company since June 1997. From 1986 to June
1997, Mr. Hayes was a Managing Director of Donaldson, Lufkin & Jenrette
Securities Corporation. Mr. Hayes is a graduate of Dartmouth College and holds
an M.B.A. from the Harvard Business School. Mr. Hayes also serves on the board
of directors of GameTech International, Inc. and Reliance Steel & Aluminum Co.
ALEXANDER HOGG has been a Director and our President and Chief Executive
Officer since November 1997. Mr. Hogg has spent his entire career in the
aerospace industry and has more than 30 years of experience in manufacturing
aircraft and major systems such as landing gear, flight controls and complex
machine parts. From 1995 to 1997, Mr. Hogg was General Manager of Castle
Precision, Inc. and from 1992 to 1995, he held the position of Operating Officer
of Hydromil Co. Mr. Hogg's prior work experience includes, among other
positions, service as Vice President, General Manager of Menasco (Canada)
Aerospace, Director of Production Engineering for Boeing De Havilland and
Manager, Manufacturing Engineering, Canadair, Ltd. Mr. Hogg attended Boeing's
Senior Management Training Program and personally received Boeing's PRIDE IN
EXCELLENCE AWARD for his contributions to the 757 and 767 programs. Mr. Hogg is
a graduate of Heriot Watt University with a degree in Mechanical Engineering.
N. PAUL BROST has been our Vice President, Chief Financial Officer and
Treasurer since September 1998. From 1993 to 1998, Mr. Brost served as Segment
Financial Executive for Textron Inc. responsible for the Systems and Component
Segment, and as Vice President-Finance and Administration for HR Textron, a
division of Textron Inc. From 1976 to 1993, Mr. Brost was with Ernst & Young
LLP, most recently as a partner, with responsibility for numerous manufacturing,
aerospace and defense clients. Mr. Brost is a graduate of Southern Illinois
University and is a Certified Public Accountant.
DOUGLAS B. SOLOMON has been a Director and our Secretary since
November 1997. Mr. Solomon has been a Managing Director of Macluan Capital
Corporation since December 1998 and a Managing Director of Hayes Capital
Corporation since August 1997. From August 1997 to December 1998, Mr. Solomon
served as a Senior Vice President of Macluan Capital Corporation. Since 1992,
Mr. Solomon has been President of The Woodland Company, which provides financial
advisory and consulting services. Mr. Solomon was a Managing Director of The
Chase Manhattan Investment Bank from 1989 to 1991. Mr. Solomon is a graduate of
the University of California-Davis and holds an M.B.A. from the University of
California-Los Angeles.
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HARALD H. LUDWIG has been a Director of Compass since November 1997.
Mr. Ludwig co-founded and has been President of Macluan Capital Corporation
since 1985. He is a graduate of Simon Fraser University and holds an L.L.B. from
Osgoode Hall Law School. An entity controlled by Mr. Ludwig controls Compass
Holdings, LLC, which is the majority stockholder of Compass. Mr. Ludwig also
serves on the board of directors for Lions Gate Entertainment Corp. and for West
Fraser Timber Limited.
JAMES P. ANGUS has been a Director of Compass since March 1998. Mr. Angus is
a co-founder of Macluan Capital Corporation and has been President of Angroup
Holdings Limited, a private investment company with interests in marine
transportation, real estate development and other industries, since 1986.
Mr. Angus is a graduate of the University of Victoria and holds an M.B.A. from
the University of Western Ontario.
WILLIAM R. MONKMAN has been a Director of Compass since March 1998.
Mr. Monkman is also the Chief Executive Officer and President of Precision
Aerospace Corporation, which manufactures fuel control systems and carburetors
for aerospace customers and fuel control systems for industrial engines at
plants in Washington, California and Virginia. Mr. Monkman has been affiliated
with Precision Aerospace Corporation since 1981. Between 1981 and 1997
Mr. Monkman was also affiliated with Suntree Industries Limited, most recently
as Chief Executive Officer. Mr. Monkman is a graduate of the University of
Alberta and holds an M.B.A. from the University of Western Ontario.
MICHAEL DRITZ has been a Director of Compass since March 1998. Mr. Dritz is
also the Chairman of Dritz Enterprises LLC which provides consulting services
for the financial industry, serving in that capacity since 1997. From 1995 to
1996, Mr. Dritz was a Managing Director for Merrill Lynch and Chairman of the
Smith Brothers International Advisory Division. Mr. Dritz was the President and
Chief Executive Officer of Smith New Court, Inc. and an Executive Director of
Smith New Court PLC from 1985 to 1995. Mr. Dritz is a graduate of Syracuse
University.
PHILIP J. OLSSON has been a Director of Compass since March 1999.
Mr. Olsson is also a Managing Director of Royal Bank Equity Partners Limited,
having served in such a capacity since 1997. From 1986 to 1997, Mr. Olsson
served in various positions at RBC Dominion Securities, including as Vice
Chairman. Mr. Olsson is a graduate of and holds an M.B.A. from Vanderbilt
University. Mr. Olsson also serves on the board of directors of Anchor
Lamina, Inc.
Our directors will serve until their respective successors are elected or
until death, resignation or removal. Executive Officers are appointed by, and
serve at the pleasure of, the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has established an Audit Committee and a Compensation
Committee.
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent public accountants to be selected to conduct
the annual audit of our books and records, reviewing the proposed scope of such
audit and approving the audit fees to be paid, reviewing our accounting and
financial controls with the independent public accountants and our financial and
accounting staff and reviewing and approving transactions between us and our
directors, officers and affiliates. Messrs. Angus, Monkman and Solomon are the
members of the Audit Committee.
The Compensation Committee provides a general review of our compensation
plans and policies to ensure that they meet corporate objectives. Our existing
plans with respect to executive compensation are largely based upon contractual
commitments set forth in employment and consulting agreements. You should read
the discussion under the heading "Employment Agreements" for further information
on the terms and conditions of existing employment contracts with our executive
officers. The Compensation Committee's responsibilities also include
administering the 1998 Stock Incentive Plan, including selecting the officers
and salaried employees to whom awards will be granted.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hayes, Ludwig and Dritz served as the members of the Compensation
Committee in 1998. Mr. Hayes served as our Chairman of the Board and for each of
our subsidiaries in 1998. Mr. Hayes did not receive any compensation for such
service.
Mr. Hayes and Mr. Ludwig are affiliates of Hayes Capital Corporation and
Dunhill Bank Caribbean Ltd., respectively, which are parties to a management
consulting agreement with us. You should read the discussion under "--Certain
Relationships and Related Party Transactions" for further information on the
terms of the management consulting agreement.
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as one of our
officers, employees or consultants are entitled to receive an annual retainer
fee of $12,000, plus reimbursement of expenses for each Board of Directors'
meeting and each committee meeting that they attend in person.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our Chief
Executive Officer and one other executive officer for the fiscal year ended
December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
ANNUAL COMPENSATION SECURITIES
NAME AND ---------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS (#) COMPENSATION ($)
- ------------------ -------- ---------- --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Alexander Hogg..................... 1998 $250,000 $200,000(1) 346,291 $ --
Chief Executive Officer and
President
N. Paul Brost...................... 1998 35,577(2) 5,000 25,000 --
Vice President, Chief Financial
Officer and Treasurer
</TABLE>
- ------------------------
(1) Pursuant to the terms of his employment agreement, Mr. Hogg may be granted
certain stock options based on our 1998 performance. You should read the
discussion under the heading "--Employment Agreements" for more information
on the terms of Mr. Hogg's employment.
(2) Represents Mr. Brost's salary for the partial year from September 21, 1998
when Mr. Brost began his employment with us. You should read the discussion
under the heading "-Employment Agreements" for more information on the terms
of Mr. Brost's employment.
OPTION/SAR GRANTS IN 1998
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
OPTIONS/ POTENTIAL REALIZABLE VALUE
NUMBER OF SARS AT ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OF OPTION TERM
OPTIONS/SARS IN BASE PRICE EXPIRATION --------------------------
NAME GRANTED (#) 1998 ($/SH) DATE 5% ($) 10%($)
- ---- ------------ ---------- ----------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alexander Hogg........... 346,291 42.1% $1.00 March 10, 2008 $564,000 $898,000
N. Paul Brost............ 25,000 3.0 $1.47 October 14, 2008 60,000 95,000
</TABLE>
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1998 STOCK INCENTIVE PLAN
In March 1998 our Board of Directors adopted, and the shareholders approved,
the Compass Aerospace Corporation 1998 Stock Incentive Plan. The 1998 Stock
Incentive Plan is administered by the Compensation Committee of the Board of
Directors. All officers, directors, employees and independent contractors of
Compass are eligible for discretionary awards under the 1998 Stock Incentive
Plan. The 1998 Stock Incentive Plan provides for stock-based incentive awards,
including incentive stock options, non-qualified stock options and restricted
stock. The 1998 Stock Incentive Plan permits the Compensation Committee to
select eligible persons to receive awards and to determine terms and conditions
of such awards, including the vesting schedule and exercise price of each award,
PROVIDED, that the option exercise price may not be less than 85% of the fair
market value per share of our common stock on the date of the grant. Under the
1998 Stock Incentive Plan, no participant may be granted incentive stock options
that are first exercisable in any one calendar year with fair market value in
excess of $100,000. Two million shares of our common stock have been reserved
for issuance under the 1998 Stock Incentive Plan.
The 1998 Stock Incentive Plan may be amended, suspended or terminated at any
time. However, neither the maximum number of shares that may be sold or issued
under the 1998 Stock Incentive Plan, nor the benefits accruing to participants
thereunder may be increased, nor may the class of persons eligible to
participate in the 1998 Stock Incentive Plan be altered, without the approval of
our shareholders; PROVIDED, HOWEVER, that adjustments to the number of shares
subject to the 1998 Stock Incentive Plan and to individual awards thereunder
and/or to the exercise price of awards previously granted are permitted without
shareholder approval upon the occurrence of specific events affecting our
capital structure.
EMPLOYMENT AGREEMENTS
Effective November 26, 1997 we entered into an employment agreement with
Alexander Hogg, pursuant to which we agreed to employ Mr. Hogg as President and
Chief Executive Officer for a term of five years at an annual base salary,
beginning January 2, 1998 of $250,000. Mr. Hogg also received $21,000 in salary
for the period from the agreement's effective date through January 1, 1998. In
addition, the agreement provides that Mr. Hogg shall be granted an option to
purchase 346,291 shares of our common stock at an exercise price equal to $1.00
per share, which shall vest and become exercisable on November 26, 1999. Mr.
Hogg's option to purchase 346,291 shares vested on November 26, 1999.
Mr. Hogg's option will also fully vest and become immediately exercisable if:
- any entity other than Compass Holdings, LLC or its successors acquires
51% or more of our common stock or if we sell all or substantially all of
our assets, or
- Mr. Hogg's employment is terminated without cause.
Mr. Hogg will also be granted stock options to purchase an additional 62,500
shares, on each of March 1, 2000, 2001 and 2002 if we meet specific EBITDA
targets. Mr. Hogg will also be entitled to receive his base salary to the end of
the term of the agreement if he is terminated without cause.
Effective September 21, 1998 we entered into an employment agreement with N.
Paul Brost, pursuant to which we agreed to employ Mr. Brost as Vice President
and Chief Financial Officer for a term of three years at an annual base salary
of $125,000, which has been raised to $180,000, and a minimum $15,000 bonus
payable in 1999. In addition, the agreement provides that Mr. Brost will be
granted stock options to purchase 25,000 shares of our common stock at an
exercise price equal to $1.47 per share. Such options will vest at the rate of
6,250 shares per year on September 21 of each
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year, beginning September 21, 1999. On that date, options for 6,250 shares
vested. Mr. Brost's options will fully vest and become immediately exercisable:
- in the event of a sale of 81% or more of our voting common stock in a
single transaction or a related series of transactions within a six
months period, or
- Mr. Brost's employment is terminated due to death or permanent
disability.
Mr. Brost will also be granted stock options to purchase an additional
10,000 shares per annum, at an exercise price to be determined which shall vest
over a four year period at 25% per year if we meet specific EBITDA targets.
Mr. Brost will also be entitled to receive up to six months of his then current
base salary if he is terminated without cause.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We are a party to a management consulting agreement with Dunhill Bank
Caribbean Ltd. and Hayes Capital Corporation, which provides for the payment of
management fees from us to Dunhill Bank Caribbean Ltd. and Hayes Capital
Corporation in an annual aggregate amount equal to $200,000 plus 1.5% of our
EBITDA plus expenses, payable quarterly in arrears. Fifty percent of this
management fee is payable to Dunhill Bank Caribbean Ltd. and 50% is payable to
Hayes Capital Corporation. Mr. Ludwig is the beneficial owner of Dunhill Bank
Caribbean Ltd. Mr. Hayes and Mr. Solomon are the President and a Managing
Director of Hayes Capital Corporation, respectively. Payment of the management
fee is subordinated to the notes and is subject to the limitation on restricted
payments set forth in the indentures governing the notes to the extent that such
fees exceed $500,000 in any fiscal year. You should read the discussions under
the headings "Description of the Series B Notes--Limitation on Restricted
Payments" and "Description of the Series D Notes--Limitation on Restricted
Payments" for further information on the subordination of, and limitations on,
the management fee under the indentures. In addition to the management fee
described above, we typically also pay advisory fees to Dunhill Bank Caribbean
Ltd. and Hayes Capital Corporation in an amount equal to an aggregate of 1% of
the consideration paid for each business acquired by us. We believe that the
management fees and the advisory fees are on terms no less favorable to us than
those that could be obtained from independent third-parties in arms-length
negotiations.
BankBoston, a lender and the administrative agent under the credit
agreement, and BancBoston Robertson Stephens, the arranger under the credit
agreement, are affiliates of BancBoston Securities, an initial purchaser of the
outstanding notes, and are affiliates of BancBoston Ventures Inc. which holds
11.7% of our voting common stock.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our capital stock as of the date of this prospectus of:
- each person known to us to beneficially own more than 5% of our voting
securities;
- each of our directors and executive officers; and
- our directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP
NUMBER OF OF CLASS A
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES COMMON STOCK
- ------------------------------------ ---------- --------------
<S> <C> <C>
Compass Holdings, L.L.C. (1)................................ 19,691,602 56.3%
RBC Equity Investments, Inc. (2)............................ 10,238,904 29.3%
BancBoston Ventures, Inc. (4)............................... 4,085,181 11.7%
Douglas M. Hayes (3)(6)..................................... 256,000 *
Alexander Hogg (3).......................................... 416,667 1.2%
N. Paul Brost (3)........................................... 6,250 *
Douglas B. Solomon (3)...................................... 290,014 *
Harald H. Ludwig (1)(5)..................................... 19,691,602 56.3%
James P. Angus (1).......................................... -- *
William R. Monkman.......................................... -- *
Michael Dritz............................................... -- *
Philip J. Olsson............................................ -- *
All directors and officers as a group....................... 20,660,533 58.5%
</TABLE>
- ------------------------
* Less than one percent.
(1) The stockholder's address is 940-1040 W. Georgia Street, Vancouver, British
Columbia, Canada V6E 4H1.
(2) The stockholder's address is 200 Bay Street, Royal Bank Plaza, 4th Floor,
North Tower, Toronto, Ontario M51 2W7. Mr. Olsson is an officer of RBC
Equity Investments, Inc.
(3) The stockholder's address is 1501 Hughes Way, Suite 400, Long Beach, CA
90815.
(4) The stockholder's address is 175 Federal Street, M/S75-10-01, Boston,
Massachusetts 02110.
(5) Represents shares owned by Compass Holdings, LLC. Under the terms of the
Operating Agreement of Compass Holdings, Mr. Ludwig has sole voting power
and investment power with respect to the shares held by Compass Holdings.
Messrs. Hayes, Dritz, Monkman, Angus and Brost hold membership interests in
Compass Holdings or its affiliates.
(6) Represents shares owned by the D&C Hayes Living Trust. Mr. Hayes is a
co-trustee of the trust and shares voting power and investment power with
respect to the Class A Common Stock held by the trust.
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DESCRIPTION OF CREDIT AGREEMENT
We are a party to a $140.0 million senior revolving credit facility. The
credit agreement was originally entered into on November 20, 1998, was amended
and restated on February 11, 1999, was amended again on June 7, 1999 and was
further amended on July 30, 1999. The June 7, 1999 amendment included amendments
to the covenants entitled "Minimum Consolidated EBITDA," "Minimum Interest
Coverage Ratio," "Maximum Leverage Ratio," "Minimum Debt Service Coverage" and
"Maximum Capital Expenditures." The June 7, 1999 amendment also reduced the
amount available under the credit facility from $170.0 million to $140.0
million, set the Acquisition Line to $35 million, increased some fees and
increased interest rates under the credit agreement. The July 30, 1999 amendment
provided for the acquisition of Trim and its subsidiaries and included
adjustments to the covenants entitled "Minimum Consolidated EBITDA" and "Maximum
Capital Expenditures."
The proceeds of the credit agreement will be used for working capital and
general corporate purposes and to finance permitted acquisitions. The credit
agreement currently consists of a $25 million revolving credit facility, a
$35 million Acquisition Line, a $35 million "Term Loan A" and a $45 million
"Term Loan B". Availability under the revolving credit facility is limited to
85.0% of eligible accounts receivable, plus 50.0% of the net book value of
eligible inventory, plus 25.0% of the orderly liquidation value of machinery and
equipment, subject to reserves that may be established by BankBoston from time
to time. Availability under the Acquisition Line is subject to approval by a
majority of the lenders.
Each of the facilities other than Term Loan B will mature five years
following its inception. Term Loan B will mature on February 1, 2005. Amounts
outstanding under Term Loan A will bear interest at the agent bank's base rate
plus a margin between 1.00% and 1.75%, or the Eurocurrency rate plus a margin
between 2.50% and 3.25% based on the leverage ratio. Amounts outstanding under
Term Loan B will bear interest at the agent bank's base rate plus a margin
between 2.00% and 2.25%, or the Eurocurrency rate plus a margin between 3.50%
and 3.75% based on the leverage ratio. We may prepay the indebtedness evidenced
by the credit agreement in whole or in part at any time without penalty, subject
to reimbursement of the lenders' breakage and redeployment costs actually
incurred in the case of prepayment of Eurodollar borrowings.
Repayment of the indebtedness evidenced by the credit agreement is secured
by a security interest in all of our accounts receivable, inventory, property,
machinery and equipment, intangibles, contract rights and other personal
property and those of our subsidiaries, including the pledge of all of the
capital stock of our subsidiaries in the United States and the pledge of 65.0%
of the capital stock of our subsidiaries in the United Kingdom. The credit
agreement also allows the lenders to place a lien on our real property in the
United States. In addition, repayment is guaranteed by all of our subsidiaries,
except Maybrey. The credit agreement allows us to incur up to an additional
$8.0 million of mortgage indebtedness and allows for capital expenditures and
purchase money indebtedness of up to $10.0 million in the aggregate.
The loan documents also contain representations, indemnification and other
provisions that are usual and customary for credit facilities of this type. The
credit agreement requires us to meet customary financial maintenance and other
covenants.
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DESCRIPTION OF THE SERIES B NOTES
You can find the definitions of some of the terms used in this description
under the subheading "Definitions." In this description, the words "Compass,"
"us," "we," and "our" refer only to Compass Aerospace Corporation and not to any
of our subsidiaries.
The outstanding Series A notes were issued under an indenture dated as of
April 21, 1998 by and among Compass, Western Methods, Aeromil, Brittain Machine,
Barnes Machine and IBJ Whitehall Bank & Trust Company, (formerly known as IBJ
Schroder Bank & Trust Company), as trustee. Upon the issuance of the Series B
notes the indenture will be subject to and governed by the Trust Indenture Act
of 1939. The following description is a summary of the material provisions of
the indenture. It does not restate that agreement in its entirety. We urge you
to read the indenture because it, and not this description, defines your rights
as holders of the notes. Any Series A notes that remain outstanding after the
consummation of the exchange offer, together with the Series B notes, will be
treated as a single class of securities under the indenture. The outstanding
Series A notes and the Series B notes are collectively referred to herein as the
"notes."
BRIEF DESCRIPTION OF THE SERIES B NOTES AND THE SUBSIDIARY GUARANTEES
THE SERIES B NOTES
The Series B notes will be:
- senior subordinated, unsecured, general obligations of Compass;
- limited in aggregate principal amount to $110.0 million;
- subordinated in right of payment to some of our other debt obligations;
- senior or PARI PASSU in right of payment to all our existing and future
subordinated indebtedness; and
- jointly and severally, fully, irrevocably and unconditionally guaranteed
on a senior subordinated basis by each of our present and future
restricted Subsidiaries, all of whom are guarantors of the notes.
THE SUBSIDIARY GUARANTEES
The Subsidiary guarantees of the notes will be:
- unsecured, general obligations of each of the guarantors;
- subordinated in right of payment to all senior debt of each of the
guarantors; and
- senior or PARI PASSU in right of payment to all existing and future
subordinated indebtedness of each of the guarantors.
The term "Subsidiaries" as used in this description of the Series B notes
does not include Unrestricted Subsidiaries. Our Unrestricted Subsidiaries will
not guarantee the notes. You should read the discussion under the heading
"--Bankruptcy Limitations" for further information regarding the guarantees.
PRINCIPAL, MATURITY AND INTEREST
The Series B notes will be issued solely in exchange for an equal principal
amount of outstanding Series A notes pursuant to the exchange offer. The form
and terms of the Series B notes will be identical in all material respects to
the form and terms of the outstanding Series A notes except that:
- the Series B notes will have been registered under the Securities Act, and
- the registration rights and liquidated damages applicable to the
outstanding Series A notes will not be applicable to the Series B notes.
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The Series B notes will be issued only in fully registered form without
coupons in denominations of $1,000 and integral multiples thereof, and will
mature on April 15, 2005. The Series B notes will bear interest at 10 1/8% per
annum from the date of issuance or from the most recent Interest Payment Date to
which interest has been paid or provided for. Interest will be payable
semi-annually on April 15 and October 15 of each year, commencing April 15,
2000, to the persons in whose names such notes are registered at the close of
business on the April 1 or October 1 immediately preceding such Interest Payment
Date. Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
METHODS OF RECEIVING PAYMENT ON THE NOTES
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be presented for registration of transfer or exchange, at the
office or agency maintained by us for such purpose in the Borough of Manhattan,
The City of New York. Except as set forth below, at our option, payment of
interest may be made by check mailed to the holders of the notes at the
addresses set forth upon our registry books. No service charge will be made for
any registration of transfer or exchange of notes, but we may require payment of
a sum sufficient to cover any tax or other governmental charge payable in
connection with a transfer or exchange. Until otherwise designated by us, our
office or agency will be the corporate trust office of the trustee presently
located in the Borough of Manhattan, The City of New York.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the notes will
be subordinated to the prior payment in full of our senior debt and that of each
of the guarantors. At October 31, 1999 we and the guarantors had outstanding an
aggregate of approximately $97.7 million of secured senior debt.
If any of our senior debt or that of the guarantors has matured, the holders
of senior debt will be entitled to receive payment in full in cash or cash
equivalents of all obligations due in respect of senior debt before the holders
of the notes will be entitled to receive any payment, other than with Junior
Securities, with respect to the notes, including:
- the principal of, premium if any, or interest accrued on the notes;
- payments to repurchase any of the notes; or
- payments to redeem any of the notes.
We or a guarantor, as applicable, may also not make any payment with respect
to the notes, other than with Junior Securities, if:
- a payment default on our senior debt or that of that guarantor occurs and
is continuing beyond any applicable grace period; or
- any other default occurs and is continuing on senior debt that permits the
holders of that senior debt to accelerate its maturity and we and the
trustee receive written notice of that default (a "Payment Notice") from
the holders of the senior debt.
Payments on the notes may and shall be resumed:
- in the case of a payment default, upon the date on which that default is
cured or waived; and
- in the case of a default other than a payment default, the earlier of the
date on which that default is cured or waived or 179 days after the date
on which the applicable Payment Notice is received (the "Payment Blockage
Period"), unless the maturity of the senior debt has been accelerated.
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Any number of Payment Notices may be given, provided that :
- no more than one Payment Notice may be given within a period of any 360
consecutive days; and
- no default that existed upon the date of a Payment Notice or the
commencement of a Payment Blockage Period shall be made the basis for the
commencement of any other Payment Blockage Period.
Any subsequent action, or any subsequent breach of any financial covenant
for a period commencing after the expiration of a Payment Blockage Period that
would give rise to a new event of default, even though it is an event that would
also have been a separate breach pursuant to any provision under which a prior
event of default previously existed, shall constitute a new event of default.
In the event of any distribution of our assets or those of the guarantors
in:
- a total or partial liquidation, dissolution, winding up or reorganization
of us or a guarantor, whether voluntary or involuntary;
- a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to us or our property;
- an assignment for the benefit or creditors; or
- any marshaling of our assets or liabilities;
the holders of all our senior debts or those of the guarantors will be entitled
to receive payment in full in cash or Cash Equivalents of all amounts due in
respect of senior debt before the holders of notes will be entitled to receive
any payment, other than with Junior Securities, with respect to the notes.
Any payment or distribution of our assets or those of any guarantor whether
in cash, property or securities other than Junior Securities to which the
holders or the trustee on behalf of the holders would be entitled except for the
subordination provisions in the indenture, will be paid by the liquidating
trustee or agent or other person making such a payment or distribution directly
to the holders of the senior debt or their representative to the extent
necessary to make payment in full on all the senior debt remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of the
senior debt.
In the event that any payment or distribution of our assets or those of any
guarantor other than Junior Securities shall be received by the trustee or the
holders of the notes at a time when that payment or distribution is prohibited
by the foregoing provisions, such payment or distribution shall be held in trust
for the benefit of the holders of the senior debt. The payment shall be paid or
delivered by the trustee or the holders of the notes, as the case may be, to the
holders of the senior debt remaining unpaid or to their representatives, or to
the trustee or trustees under any indenture pursuant to which any instruments
evidencing any of unpaid senior debt may have been issued. The payment or
distribution shall be paid to the holders of senior debt ratably according to
the aggregate principal amounts remaining unpaid on account of such senior debt.
The payment shall be applied to all unpaid senior debt to the extent necessary
to pay or to provide for the payment of all such senior debt in full after
giving effect to any concurrent payment or distribution to the holders of such
senior debt.
No provision contained in the indenture or the notes will affect our
obligation or that of the guarantors, which is absolute and unconditional, to
pay, when due, principal of, premium, if any, and interest on the notes. The
subordination provisions of the indenture and the notes will not prevent the
occurrence of any Default or Event of Default under the indenture or limit the
rights of the trustee or any holder to pursue any other rights or remedies with
respect to the notes.
As a result of these subordination provisions, holders of the notes may
receive ratably less than other creditors in the event of the liquidation,
bankruptcy, reorganization, insolvency, receivership or
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similar proceeding or an assignment for the benefit of our creditors or a
marshalling of our assets or liabilities. You should read the discussion under
the heading "Risk Factors-Subordination" for further information on the risk
that you may receive ratably less than other creditors under some circumstances.
BANKRUPTCY LIMITATIONS
We are a holding company which conducts our business through our
Subsidiaries. The Subsidiaries have guaranteed or will guarantee our obligations
with respect to the notes. Our Unrestricted Subsidiaries will not guarantee the
notes. Holders of the notes will be direct creditors of each guarantor by virtue
of its guarantee. Nonetheless, in the event of the bankruptcy or financial
difficulty of a guarantor, such guarantor's obligations under its guarantee may
be subject to review and avoidance under state and federal fraudulent transfer
laws. Among other things, a guarantor may avoid its obligations if a court
concludes that the obligations were incurred for less than reasonably equivalent
value or fair consideration at a time when the guarantor was insolvent, was
rendered insolvent, or was left with inadequate capital to conduct its business.
A court would likely conclude that a guarantor did not receive reasonably
equivalent value or fair consideration to the extent that the aggregate amount
of its liability on its guarantee exceeds the economic benefits it receives in
the offering of the outstanding Series A notes. Similar laws exist in the United
Kingdom with respect to these issues. The obligations of each guarantor under
its guarantee are limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law although we cannot assure you that a
court would give the holder the benefit of such a provision. You should read the
discussion under the heading "Risk Factors-Fraudulent Transfer Considerations"
for further discussion of the risk that the guarantors may avoid their
obligations under their guarantees.
If the obligations of a guarantor under its guarantee were avoided, holders
of notes would have to look to the assets of any remaining guarantors for
payment. We cannot assure you that the assets of the remaining guarantors would
suffice to pay the outstanding principal and interest on the notes.
OPTIONAL REDEMPTION
At any time prior to April 15, 2001, upon an Initial Public Equity Offering
of common stock for cash, up to 35% of the aggregate principal amount of the
notes originally issued under the indenture may be redeemed at our option with
cash from the Net Cash Proceeds of the Initial Public Equity Offering at a
redemption price equal to 110.125% of principal; PROVIDED HOWEVER that:
- immediately following such redemption not less than 65% of the original
aggregate principal amount of the notes remain outstanding;
- we must give at least 30 days, but no more than 60 days, notice to each
holder of notes to be redeemed; and
- the redemption must occur within 90 days of the Initial Public Equity
Offering.
Except pursuant to the preceding paragraphs, we may not redeem the notes
prior to April 15, 2002.
At any time on or after April 15, 2002, we may redeem all or a part of the
notes for cash upon not less than 30 days nor more than 60 days notice to each
holder of notes, at the following redemption prices, expressed as percentages of
the principal amount, if redeemed during the 12-month period commencing
April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2002........................................................ 105.063%
2003........................................................ 102.531%
2004........................................................ 100.000%
</TABLE>
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Any optional redemption of the notes will in each case be subject to the
rights of holders of record on a Record Date to receive the interest due on an
Interest Payment Date corresponding to that Record Date that occurs prior to the
Redemption Date, together with accrued and unpaid interest on the notes prior to
the Redemption Date.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
shall select the notes for redemption on a PRO RATA basis, by lot or in such
other manner it deems appropriate and fair. The notes may be redeemed in part in
multiples of $1,000 only.
The notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least
30 days and not more than 60 days before the Redemption Date to each holder of
notes to be redeemed at the holder's registered address. If any note is to be
redeemed in part only, the notice of redemption that relates to that note must
state the portion of the principal amount that will not be redeemed and must
state that on and after the date of redemption, upon surrender of the note, a
new note or notes, in a principal amount equal to the unredeemed portion of the
note will be issued. On and after the date of redemption, interest will cease to
accrue on the notes or portions of them called for redemption, unless we default
in the payment thereof.
COVENANTS
There are covenants in the indenture in addition to those described here.
You should read the indenture for more complete information.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
If a Change of Control occurs, each holder of notes has the right to require
us to repurchase all or any part of such holder's notes equal to $1,000 or an
aggregate amount thereof pursuant to a Change of Control Offer. In the Change of
Control Offer, we will offer a Change of Control Payment in cash equal to 101%
of the aggregate principal amount of notes repurchased plus accrued and unpaid
interest thereon, if any, to the date of purchase. Within 10 days following any
Change of Control, we will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on the Change of Control Purchase Date which must occur no
later than 35 days after the occurrence of the Change of Control. The Change of
Control Offer must remain open for 20 business days after we mail a Change in
Control Offer to the holders of the notes (the "Change in Control Offer
Period").
Upon expiration of the Change of Control Offer Period, we promptly shall
purchase all notes properly tendered in response to the Change of Control Offer.
On or before the Change of Control Purchase Date, we will:
- accept for payment notes or portions thereof properly tendered pursuant to
the Change of Control Offer;
- deposit with the Paying Agent cash sufficient to pay the Change of Control
Purchase Price, together with accrued and unpaid interest and liquidated
damages, if any, of all notes so tendered; and
- deliver to the trustee notes so accepted together with an Officers'
Certificate listing the notes or portions thereof being purchased by us.
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The Paying Agent will promptly pay the holders of notes so accepted an
amount equal to the Change of Control Purchase Price together with accrued and
unpaid interest and liquidated damages, if any. The trustee will promptly
authenticate and deliver to such holders a new note equal in principal amount to
any unpurchased portion of the note surrendered. Any notes not so accepted will
be delivered promptly by us to the holder thereof. We will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
The Change of Control purchase feature of the notes may make more difficult
or discourage a takeover of Compass, and, thus, the removal of incumbent
management.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale or transfer of "all or substantially all" of our assets on a
consolidated basis. Although there is a limited body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. The interpretation of the phrase "substantially
all" will be dependent upon particular facts and circumstances. As a result, the
ability of a holder of notes to require us to repurchase such notes as a result
of a sale or transfer of less than all of our assets and those of the guarantors
to another person or group may be uncertain. In addition, we cannot assure you
that we will be able to acquire notes tendered upon the occurrence of a Change
of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this paragraph, compliance by us or
any of the guarantors with such laws and regulations shall not in and of itself
cause a breach of its obligations under the indenture.
If the Change of Control Purchase Date is on or after an interest payment
Record Date and on or before the associated Interest Payment Date, any accrued
and unpaid interest, due on such Interest Payment Date will be paid to the
person in whose name a note is registered at the close of business on such
Record Date. Such interest will not be payable to holders who tender the notes
pursuant to the Change of Control Offer.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
We will not and we will not permit any of our Subsidiaries to, and the
guarantors will not and will not permit any of their Subsidiaries to, directly
or indirectly, issue, assume, guaranty, incur, become directly or indirectly
liable with respect to, or otherwise become responsible for, contingently or
otherwise, including as a result of an Acquisition, any Indebtedness or any
Disqualified Capital Stock including Acquired Indebtedness, other than Permitted
Indebtedness. Notwithstanding the foregoing, we may incur such Indebtedness or
Disqualified Capital Stock and the guarantors may incur such Indebtedness, other
than Disqualified Capital Stock, if:
- no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to,
such incurrence of Indebtedness or Disqualified Capital Stock; and
- on the date of such incurrence (the "Incurrence Date"), the Consolidated
Coverage Ratio of Compass for the Reference Period immediately preceding
the Incurrence Date, after giving effect on a pro forma basis to such
incurrence of such Indebtedness or Disqualified Capital Stock and, to the
extent set forth in the definition of the Consolidated Coverage Ratio, the
use of proceeds thereof, would be at least 2.0 to 1 (as applicable, each
the "Debt Incurrence Ratio").
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In addition, the foregoing limitations will not apply:
(1) to the incurrence by us or any guarantor of Purchase Money Indebtedness,
PROVIDED, that:
(a) the aggregate principal amount of such Indebtedness incurred on or after
the Issue Date and outstanding at any time pursuant to this paragraph
shall not exceed $2.0 million, including any Refinancing Indebtedness and
other Indebtedness issued to refinance, replace, defease or refund
Purchase Money Indebtedness; and
(b) in each case, Purchase Money Indebtedness shall not constitute more than
100% of the cost determined in accordance with GAAP to us or such
guarantor, as applicable, of the property so purchased or leased;
(2) if no Event of Default shall have occurred and be continuing, the incurrence
by us or any guarantor of Indebtedness in an aggregate principal amount
outstanding at any time of up to $5.0 million, including Refinancing
Indebtedness and other Indebtedness incurred to refinance, replace, defease
or refund such Indebtedness;
(3) to the incurrence by us or any guarantor of Mortgage Indebtedness or
Indebtedness pursuant to the credit agreement up to an aggregate principal
amount outstanding under the credit agreement or of Mortgage Indebtedness
collectively not to exceed in the aggregate $12.0 million, in each case
including any Refinancing Indebtedness and other Indebtedness incurred to
refinance, replace, defease or refund such Indebtedness; PROVIDED, THAT:
(a) in the case of Indebtedness pursuant to the credit agreement minus the
amount of any such Indebtedness retired with the Net Cash Proceeds from
any Asset Sale applied to permanently reduce the outstanding amounts or
the commitments with respect to such Indebtedness pursuant the covenant
"Limitation on Sale of Assets and Subsidiary Stock," or
(b) assumed by a transferee in an Asset Sale, and
(c) in the case of Mortgage Indebtedness such Indebtedness shall not
constitute more than 100% of the cost determined in accordance with GAAP
to us or such guarantor, as applicable, of such mortgaged real estate
asset.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes our Subsidiary or is merged with or
into or consolidated with us or one of our Subsidiaries shall be deemed to have
been incurred at the time such Person becomes our Subsidiary or is merged with
or into or consolidated with us one of our Subsidiaries.
Upon each incurrence of Indebtedness, we may designate under which provision
of this covenant such Indebtedness is being incurred. Such Indebtedness will be
deemed to have been incurred under that provision and no other provision of this
covenant, except as specifically provided otherwise.
LIMITATION ON RESTRICTED PAYMENTS
We will not and we will not permit any of our Subsidiaries, and the
guarantors will not and will not permit any of their Subsidiaries, directly or
indirectly, to make any Restricted Payment if, after giving effect to such
Restricted Payment on a pro forma basis:
(1) a Default or an Event of Default shall have occurred and be continuing;
(2) we are not permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt Incurrence Ratio in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock; or
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(3) the aggregate amount of all Restricted Payments made by us and our
Subsidiaries, including after giving effect to such proposed Restricted
Payment, from and after the Issue Date, would exceed, without duplication,
the sum of:
(a) 50% of our aggregate Consolidated Net Income for the period taken as one
accounting period that commences on the first day of the first full
fiscal quarter commencing after the Issue Date and continues to and
includes the last day of the fiscal quarter ended immediately prior to
the date of each such calculation, or, in the event Consolidated Net
Income for such period is a deficit, then minus 100% of such deficit;
plus
(b) the aggregate Net Cash Proceeds received by us from a Capital
Contribution or the sale of our Qualified Capital Stock, other than to
one of our Subsidiaries, to the extent applied in connection with a
Qualified Exchange and to the extent credited in accordance with the
following paragraph, after the Issue Date, plus
(c) other than amounts credited pursuant to clauses 1 and 2 of the next
following paragraph, the net amount of any Restricted Investments not to
exceed the original amount of such Investment made after the Issue Date
that are returned to us or the guarantor that made such prior Investment,
without restriction in cash on or prior to the date of any such
calculation.
So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby, the preceding provisions will not prohibit:
(1) Restricted Investments in a Related Business, PROVIDED, that, after giving
pro forma effect to such Investment, the aggregate amount of all such
Investments made on or after the Issue Date that are outstanding at any time
does not exceed $4.0 million, after giving effect to any such Investments
that are returned to us or the Subsidiary guarantor that made such prior
Investment, without restriction, in cash on or prior to the date of any such
calculation, or
(2) repurchases of Capital Stock from our employees or employees of our
Subsidiaries upon the death, disability or termination of employment in an
aggregate amount to all employees not to exceed $300,000 in any fiscal year
or $1.5 million in the aggregate on and after the Issue Date, net of the Net
Cash Proceeds received by us from subsequent reissuances of such Qualified
Capital Stock to new employees that are not Excluded Persons.
Even if a Default or Event of Default shall have occurred and is continuing
or would be caused thereby, the preceding provisions against making Restricted
Payments will not apply to:
(3) a Qualified Exchange,
(4) the payment of any dividend on Qualified Capital Stock within 60 days after
the date of its declaration if such dividend could have been made on the
date of such declaration in compliance with the foregoing provisions, or
(5) Permitted Payments to Parent.
The full amount of any Restricted Payment made pursuant to the foregoing
clauses (1), (2), (4) and (5) of the immediately preceding sentences, however,
will be deducted in the calculation of the aggregate amount of Restricted
Payments available to be made.
In addition, we will not and we will not permit any of our Subsidiaries to,
and the guarantors will not and will not permit any of their Subsidiaries to,
directly or indirectly, make any Management Fee Payment or similar payment to
Affiliates other than Subsidiaries, except for Permitted Payments to Parent if,
on a pro forma basis after giving effect to such Management Fee Payments or
similar payments, a Default or an Event of Default shall have occurred and be
continuing.
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For purposes of this covenant, the amount of any Restricted Payment, if
other than in cash, shall be the fair market value thereof, as determined in the
good faith reasonable judgment of our Board of Directors. Additionally, on the
date of each Restricted Payment, we shall deliver an Officers' Certificate to
the trustee:
- describing in reasonable detail the nature of such Restricted Payment,
- stating the amount of such Restricted Payment,
- stating in reasonable detail the provisions of the indenture pursuant to
which such Restricted Payment was made, and
- certifying that such Restricted Payment was made in compliance with the
terms of the indenture.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
We will not and we will not permit any of our Subsidiaries to, and the
guarantors will not and will not permit any of their Subsidiaries to, directly
or indirectly, create, assume or suffer to exist any consensual restriction on
the ability of any of our Subsidiaries to:
(1) pay dividends or make other distributions to or on behalf of, or
(2) pay any obligation to or on behalf of, or
(3) otherwise to transfer assets or property to or on behalf of, or
(4) make or pay loans or advances to or on behalf of us or any of our
Subsidiaries.
However, the preceding restrictions will not apply to:
(1) restrictions imposed by the notes or the indenture or by our other
indebtedness (which may also be guaranteed by the guarantors) ranking senior
or PARI PASSU with the notes or the guarantees, provided such restrictions
are no more restrictive than those imposed by the indenture and the notes;
(2) restrictions imposed by applicable law;
(3) existing restrictions under Indebtedness outstanding on the Issue Date,
including pursuant to the credit agreement;
(4) restrictions under any Acquired Indebtedness not incurred in violation of
the indenture or any agreement relating to any property, asset, or business
acquired by us or any of our Subsidiaries, which restrictions in each case
existed at the time of acquisition, were not put in place in connection with
or in anticipation of such acquisition and are not applicable to any person,
other than the person acquired, or to any property, asset or business, other
than the property, assets and business so acquired;
(5) any such restriction or requirement imposed by Indebtedness incurred under
the credit agreement pursuant to the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," provided such
restriction or requirement is no more restrictive than that imposed by the
credit agreement as of the Issue Date;
(6) restrictions with respect solely to a Subsidiary of ours imposed pursuant to
a binding agreement which has been entered into for the sale or disposition
of all or substantially all of the Equity Interests or assets of such
Subsidiary, provided such restrictions apply solely to the Equity Interests
or assets of such Subsidiary which are being sold;
(7) restrictions on transfer contained in Purchase Money Indebtedness or
Mortgage Indebtedness incurred pursuant to the covenant "Limitation on
Incurrence of Additional Indebtedness and
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Disqualified Capital Stock," provided such restrictions relate only to the
transfer of the property acquired with the proceeds of such Purchase Money
Indebtedness or Mortgage Indebtedness, as applicable; and
(8) in connection with and pursuant to permitted Refinancings, replacements of
restrictions imposed pursuant to clauses (1), (3) or (4) of this paragraph
that are not more restrictive than those being replaced and do not apply to
any other person or assets than those that would have been covered by the
restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, neither:
- customary provisions restricting subletting or assignment of any lease
entered into in the ordinary course of business, consistent with industry
practice, nor
- Liens permitted under the terms of the indenture on assets securing senior
debt, Purchase Money Indebtedness, or Mortgage Indebtedness incurred in
accordance with the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock,"
shall in and of themselves be considered a restriction on the ability of the
applicable Subsidiary to transfer such agreement or assets.
LIMITATIONS ON LAYERING INDEBTEDNESS
We will not and we will not permit any of our Subsidiaries to, and the
guarantors will not and will not permit any of their Subsidiaries to, directly
or indirectly, incur, or suffer to exist any Indebtedness that is subordinate in
right of payment to any other Indebtedness of ours or a guarantor unless, by its
terms, such Indebtedness is subordinate in right of payment to, or ranks PARI
PASSU with, the notes or the guarantees, as applicable.
LIMITATION ON LIENS SECURING INDEBTEDNESS
Unless we provide and cause our Subsidiaries to provide that the notes are
equally and ratably secured, we will not and we will not permit any of our
Subsidiaries to, and the guarantors will not and will not permit any of their
Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind,
other than Permitted Liens, upon any of their respective assets now owned or
acquired on or after the date of the indenture or upon any income or profits
therefrom securing any of our Indebtedness or that of any guarantor other than
Senior Indebtedness, PROVIDED that:
- if such Indebtedness is Subordinated Indebtedness, the Lien securing such
Subordinated Indebtedness shall be subordinate and junior to the Lien
securing the notes with the same relative priority as such Subordinated
Indebtedness shall have with respect to the notes, and
- this clause shall not be applicable to any Liens securing any such
Indebtedness which became our Indebtedness pursuant to a transaction
subject to the provisions of the indenture described below under
"Limitation on Merger, Sale or Consolidation" or which constitutes
Acquired Indebtedness and which in either case were in existence at the
time of such transaction, unless such Indebtedness was incurred or such
Lien created in connection with or in contemplation of, such transaction,
so long as such Liens do not extend to or cover any of our property or
assets or that of any of our Subsidiaries other than property or assets
acquired in such transaction.
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LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
We will not, and we will not permit any of our Subsidiaries to, and the
guarantors will not and will not permit any of their Subsidiaries to, convey,
sell, transfer, assign or otherwise dispose of, directly or indirectly, any of
our property, business or assets, including by merger, or consolidation of our
Subsidiary and including any sale or other transfer or issuance of any Equity
Interests of any Subsidiary, whether by us or a Subsidiary and including any
sale and leaseback transaction (any of the foregoing, an "Asset Sale"), unless:
(1) (a) the Net Cash Proceeds therefrom (the "Asset Sale Offer Amount") are
applied:
- within 270 days after the date of such Asset Sale to the optional
redemption of the notes in accordance with the terms of the
indenture and other Indebtedness of ours ranking on a parity with
the notes and with similar provisions requiring us to redeem such
Indebtedness with the proceeds for asset sales, pro rata in
proportion to the respective principal amounts of the notes and
such other Indebtedness then outstanding, or
- within 300 days after the date of such Asset Sale to the repurchase
of the notes and such other Indebtedness on a parity with the notes
and with similar provisions requiring us to make an offer to
purchase such Indebtedness with the proceeds for asset sales
pursuant to a cash offer pro rata in proportion to the respective
principal amounts of the notes and such other Indebtedness then
outstanding (the "Asset Sale Offer") at a purchase price of 100% of
principal amount (the "Asset Sale Offer Price") together with
accrued and unpaid interest and liquidated damages, if any, to the
date of payment, made within 270 days of such Asset Sale, or
(b) within 270 days following such Asset Sale, the Asset Sale Offer
Amount is:
- invested, or committed to be invested, and is invested, within an
additional 90 days in tangible assets and property other than
notes, bonds, obligations and securities which in the good faith
reasonable judgment of the Board will immediately constitute or be
a part of a Related Business of ours or such Subsidiary immediately
following such transaction, or
- used to retire Purchase Money Indebtedness, Mortgage Indebtedness
or senior debt and, to permanently reduce the amount of such
Indebtedness, incurred under the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock,"
(c) at least 90% of the consideration for such Asset Sale or series of
related Asset Sales consists of cash or Cash Equivalents,
(d) no Default or Event of Default shall have occurred and be continuing
at the time of, or would occur after giving effect, on a pro forma basis,
to, such Asset Sale, and
(e) our Board of Directors determines in good faith that we or such
Subsidiary, as applicable, will receive fair market value for such Asset
Sale.
An acquisition of notes pursuant to an Asset Sale Offer may be deferred
until the accumulated Net Cash Proceeds from Asset Sales not applied to the uses
set forth in (1)(a) or (b) above (the "Excess Proceeds") exceeds $5.0 million.
Each Asset Sale Offer shall remain open for 20 Business Days following its
commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset Sale
Offer Period, we shall apply the Asset Sale Offer Amount plus an amount equal to
accrued and unpaid interest and liquidated damages, if any, to the purchase of
all Indebtedness properly tendered at the Asset Sale Offer Price, together with
accrued interest and liquidated damages, if any. The Asset Sale
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Offer Amount shall be applied on a PRO RATA basis if the Asset Sale Offer Amount
is insufficient to purchase all Indebtedness so tendered. To the extent that the
aggregate amount of notes and such other PARI PASSU Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Asset Sale Offer Amount, we may
use any remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the indenture. Following each Asset Sale Offer the Excess Proceeds
amount shall be reset to zero.
For purposes of determining the percentage of the consideration for the
Asset Sale received in cash or Cash Equivalents, total consideration received
means the total consideration received for such Asset Sales minus the amount of:
- Purchase Money Indebtedness or Mortgage Indebtedness secured solely by the
assets sold and assumed by a transferee, and
- property that within 30 days of such Asset Sale is converted into cash or
Cash Equivalents, PROVIDED that such cash and Cash Equivalents shall be
treated as Net Cash Proceeds attributable to the original Asset Sale for
which such property was received.
Notwithstanding, and without complying with, the provisions of this
covenant, we and our Subsidiaries may:
(1) in the ordinary course of business:
(a) convey, sell, transfer, assign or otherwise dispose of inventory and
other assets acquired and held for resale in the ordinary course of
business, and
(b) liquidate Cash Equivalents;
(2) convey, sell, transfer, assign or otherwise dispose of assets pursuant
to and in accordance with the covenant "Limitation on Merger, Sale or
Consolidation;"
(3) sell or dispose of damaged, worn out, scrap or other obsolete property
in the ordinary course of business so long as such property is no longer
necessary for the proper conduct of the business of ours or such
Subsidiary, as applicable; and
(4) convey, sell, transfer, assign or otherwise dispose of assets to us or
any of our Wholly-owned Subsidiary guarantors;
(5) in the ordinary course of business, convey, sell, transfer, assign, or
otherwise dispose of assets or related assets in related transactions
with a fair market value of less than $250,000; and
(6) surrender or waive contract rights or settle, release or surrender of
contract, tort or other claims of any kind or grant Liens not prohibited
by the indenture.
All Net Cash Proceeds from an Event of Loss relating to a Material Facility
shall be invested, used for prepayment of Senior Indebtedness or used to
repurchase notes, all within the period and as otherwise provided above in
clauses (1)(a) or (b) of the first paragraph of this covenant plus 90 days.
In addition to the foregoing and notwithstanding anything herein to the
contrary, we will not, and will not permit any of our Subsidiaries to, directly
or indirectly make any Asset Sale of any of the Equity Interests of any
Subsidiary of ours other than us or a Wholly-owned Subsidiary guarantor, except
pursuant to an Asset Sale of all the Equity Interests of such Subsidiary.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this paragraph, compliance
by us or any of
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our subsidiaries with such laws and regulations shall not in and of itself cause
a breach of our obligations under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest will be paid to the
person in whose name a note is registered at the close of business on such
Record Date, and such interest will not be payable to holders who tender notes
pursuant to such Asset Sale Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
Neither we nor any of our Subsidiaries will be permitted to enter into or
suffer to exist any contract, agreement, arrangement or transaction with any
Affiliate, an "Affiliate Transaction", or any series of related Affiliate
Transactions, other than Exempted Affiliate Transactions, unless:
- it is determined that the terms of such Affiliate Transaction are fair and
reasonable to us, and no less favorable to us than could have been
obtained in an arm's length transaction with a non-Affiliate,
- if involving consideration to either party in excess of $1.0 million, the
Affiliate Transaction is evidenced by an Officers' Certificate addressed
and delivered to the trustee certifying that such Affiliate Transaction
has been approved by a majority of the members of the Board of Directors
that are disinterested in such transaction, and
- if involving consideration to either party in excess of $5.0 million, we
obtain, prior to the consummation of an Affiliate Transaction, a written
favorable opinion as to the fairness of the transaction to us from a
financial point of view from an independent investment banking firm of
national reputation or, if pertaining to a matter for which such
investment banking firms do not customarily render such opinions, an
appraisal or valuation firm of national reputation.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
We will not consolidate with or merge with or into another person or,
directly or indirectly, sell, lease, convey or transfer all or substantially all
of our assets (computed on a consolidated basis), whether in a single
transaction or a series of related transactions, to another Person or group of
affiliated Persons unless:
(1) we are the continuing entity;
(2) the resulting, surviving or transferee entity is a corporation organized
under the laws of the United States, any state thereof or the District of
Columbia and expressly assumes by supplemental indenture all of our
obligations in connection with the notes and the indenture;
(3) no Default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction; and
(4) unless such transaction is solely the merger of us and one of our
previously existing Wholly-owned Subsidiaries which is also a guarantor
and which transaction is not in connection with any other transaction,
immediately after giving effect to such transaction on a pro forma basis,
the consolidated resulting, surviving or transferee entity would
immediately thereafter be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio set forth in the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially all
of our assets in accordance with the foregoing, the successor corporation formed
by such consolidation or into which
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we are merged or to which such transfer is made shall succeed to and be
substituted for us, and may exercise every right and power of ours under the
indenture with the same effect as if such successor corporation had been named
therein as us. We shall be released from the obligations under the notes and the
indenture except with respect to any obligations that arise from, or are related
to, such transaction.
For purposes of the foregoing, the transfer by lease, assignment, sale or
otherwise of all or substantially all of the properties and assets of one or
more Subsidiaries, our interest in which constitutes all or substantially all of
our properties and assets shall be deemed to be the transfer of all or
substantially all of our properties and assets.
LIMITATION ON LINES OF BUSINESS
Neither we nor any of our Subsidiaries shall directly or indirectly engage
to any substantial extent in any line or lines of business activity other than
that which, in the reasonable good faith judgment of our Board of Directors, is
a Related Business.
FUTURE SUBSIDIARY GUARANTORS
All of our present and future Subsidiaries will jointly and severally,
fully, irrevocably and unconditionally guarantee all principal, premium, if any,
and interest on the notes on a senior subordinated basis. The term Subsidiary
does not include Unrestricted Subsidiaries.
RELEASE OF GUARANTORS
The indenture provides that no guarantor shall consolidate or merge with or
into another person, whether or not such guarantor is the surviving person,
unless:
- subject to the provisions of the following paragraph and other provisions
of the indenture, the person formed by or surviving any such consolidation
or merger, if other than such guarantor, assumes all the obligations of
such guarantor pursuant to a supplemental indenture in form reasonably
satisfactory to the trustee, pursuant to which such person shall
unconditionally guarantee, on a senior subordinated basis, all of such
guarantor's obligations under such guarantor's guarantee, on the terms set
forth in the indenture; and
- immediately before and immediately after giving effect to such transaction
on a pro forma basis, no Default or Event of Default shall have occurred
or be continuing.
A guarantor will be deemed released from its obligations under its guarantee
of the notes upon the sale or disposition, whether by merger, stock purchase,
asset sale or otherwise, of that guarantor or all of its assets to an entity
which is not a guarantor or the designation of a Subsidiary to become an
Unrestricted Subsidiary, which transaction is otherwise in compliance with the
indenture; PROVIDED, HOWEVER, that any such termination shall occur only in the
event that all obligations of that guarantor under all of its guarantees of and
under all of its pledges of assets or other security interests which secure any
Indebtedness of ours or any other of our Subsidiary shall also terminate upon
such release, sale or transfer.
LIMITATION ON STATUS AS INVESTMENT COMPANY
We and our Subsidiaries may not be required to register as an "investment
company," as that term is defined in the Investment Company Act of 1940, or may
not otherwise become subject to regulation under the Investment Company Act.
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REPORTS
Whether or not we are subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, we shall deliver to the trustee and to each holder
within 15 days after the time period specified in the Securities and Exchange
Commission's rules and regulations:
- all annual and quarterly financial statements substantially equivalent to
financial statements that would have been included in reports filed with
the Commission on Forms 10-K and 10-Q, including, with respect to annual
information only, a report thereon by our certified independent public
accountants as such would be required in such reports to the Commission;
and
- all current reports that would be required to be filed with the Commission
on Form 8-K if we were required to file such reports.
In each case, we shall include a management's discussion and analysis of
financial condition and results of operations which would be so required. Unless
the Commission will not accept such reports, we will file with the Commission
the annual, quarterly and other reports which we are or would have been required
to file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
- our failure to pay any installment of interest or liquidated damages, if
any, on the notes as and when the same becomes due and payable and the
continuance of any such failure for 30 days;
- our failure to pay all or any part of the principal, or premium, if any,
on the notes when and as the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation,
payment of the Change of Control Purchase Price or the Asset Sale Offer
Price;
- the failure by us or any Subsidiary of ours to observe or perform any
other covenant or agreement contained in the notes or the indenture and,
subject to some exceptions, the continuance of such failure for a period
of 30 days after written notice is given to us by the trustee or to us and
the trustee by the holders of at least 25% in aggregate principal amount
of the notes outstanding;
- events of bankruptcy, insolvency or reorganization with respect to us or
any of our Significant Subsidiaries;
- a default in any issue of our Indebtedness or that of any of our
Subsidiaries with an aggregate principal amount in excess of $5.0 million
resulting from either the failure to pay principal at maturity or as a
result of which the maturity of such Indebtedness has been accelerated
prior to its stated maturity; and
- final unsatisfied judgments not covered by insurance aggregating in excess
of $5.0 million at any one time, rendered against us or any of our
Subsidiaries which are not stayed, bonded or discharged within 60 days.
If a Default occurs and is continuing, the trustee must give the holders
notice of such default within 90 days after the occurrence of such default.
Other than an Event of Default resulting from events of bankruptcy,
insolvency or reorganization relating to us or any of our Significant
Subsidiaries, if an Event of Default occurs and is continuing, then in every
such case, either the trustee or the holders of at least 25% in aggregate
principal amount of the notes then outstanding, by notice in writing to us and
to the trustee if given by holders (an "Acceleration Notice"), may declare all
principal, determined as set forth below, and accrued interest and liquidated
damages, if any, thereon to be due and payable immediately. If any senior debt
is
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outstanding pursuant to the credit agreement, upon a declaration of such
acceleration, such principal and interest shall be due and payable upon the
earlier of:
- the third Business Day after the sending to us and the Representative of
such written notice, unless such Event of Default is cured or waived prior
to such date; and
- the date of acceleration of any senior debt under the credit agreement.
If an Event of Default resulting from events of bankruptcy, insolvency or
reorganization relating to Compass or any of its Significant Subsidiaries
occurs, all principal and accrued interest and liquidated damages, if any,
thereon will be immediately due and payable on all outstanding notes without any
declaration or other act on the part of trustee or the holders. The holders of a
majority in aggregate principal amount of notes generally are authorized to
rescind such acceleration if all existing Events of Default have been cured or
waived, other than:
- the non-payment of the principal of, premium, if any, and interest on the
notes which have become due solely by such acceleration, and
- except on default with respect to any provision requiring a supermajority
approval to amend, which default may only be waived by such a
supermajority.
Prior to the declaration of acceleration of the maturity of the notes, the
holders of a majority in aggregate principal amount of the notes at the time
outstanding may waive on behalf of all the holders any default, except:
- a default with respect to any provision requiring a supermajority approval
to amend, which default may only be waived by such a supermajority,
- a default in the payment of principal of or interest on any note not yet
cured, or
- a default with respect to any covenant or provision which cannot be
modified or amended without the consent of the holder of each outstanding
note affected.
Subject to the provisions of the indenture relating to the duties of the
trustee, the trustee will be under no obligation to exercise any of its rights
or powers under the indenture at the request, order or direction of any of the
holders, unless such holders have offered to the trustee reasonable security or
indemnity. Subject to all provisions of the indenture and applicable law, the
holders of a majority in aggregate principal amount of the notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee, or exercising
any trust or power conferred on the trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option, elect to have our obligations and the obligations of
the guarantors discharged with respect to the outstanding notes ("Legal
Defeasance"). Such Legal Defeasance means that we shall be deemed to have paid
and discharged the entire indebtedness represented, and the indenture shall
cease to be of further effect as to all outstanding notes and guarantees, except
as to:
- rights of holders to receive payments in respect of the principal of,
premium, if any, and interest and liquidated damages, if any, on such
notes when such payments are due from the trust funds;
- our obligations with respect to such notes concerning issuing temporary
notes, registration of notes, mutilated, destroyed, lost or stolen notes,
and the maintenance of an office or agency for payment and money for
security payments held in trust;
- the rights, powers, trust, duties, and immunities of the trustee, and our
obligations in connection therewith; and
- the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations and the guarantors released with respect to some of the covenants
that are described in the indenture
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("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the notes. Covenant Defeasance will not affect holders' rights with respect to
non-payment, guarantees, bankruptcy, receivership, rehabilitation and insolvency
events.
In order to exercise either Legal Defeasance or Covenant Defeasance, we must
irrevocably deposit with the trustee, in trust, for the benefit of the holders
of the notes:
(1) U.S. legal tender, U.S. Government Obligations or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal
of, premium, if any, and interest on such notes on the stated date for
payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on such notes,
and
(2) the holders of notes must have a valid, perfected, exclusive security
interest in such trust;
(3) in the case of Legal Defeasance, we shall have delivered to the trustee
an opinion of counsel in the United States reasonably acceptable to the
trustee confirming that:
(a) we have received from, or there has been published by the Internal
Revenue Service, a ruling, or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that
the holders of such notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred.
(4) in the case of Covenant Defeasance, we shall have delivered to the
trustee an opinion of counsel in the United States reasonably acceptable
to such trustee confirming that the holders of such notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
(5) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit;
(6) we shall have delivered to the trustee an Officer's Certificate
acceptable to the trustee, to the effect that, assuming no intervening
bankruptcy of ours between the date of deposit and the 91st day following
the deposit and that no holder of the notes is an insider of ours, after
the 91st day following the deposit, the trust funds will not be subject
to the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors rights generally;
(7) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the indenture or
any other material agreement or instrument to which we or any of our
Subsidiaries is a party or by which we or any of our Subsidiaries is
bound;
(8) we shall have delivered to the trustee an Officers' Certificate stating
that the deposit was not made by us with the intent of preferring the
holders of such notes over any other creditors of ours or with the intent
of defeating, hindering, delaying or defrauding any other creditors of
ours or others;
(9) we shall have delivered to the trustee an Officers' Certificate stating
that the conditions precedent set forth above in the first eight clauses
of this paragraph have been complied with; and
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(10) we shall have delivered to the trustee an opinion of counsel, stating
that the conditions precedent set forth above in the first clause of this
paragraph with respect to the validity and perfection of the security
interest, and in the second, third and fifth clauses of this paragraph
have been complied with.
If the funds deposited with the trustee to effect Covenant Defeasance are
insufficient to pay the principal of, premium, if any, and interest on the notes
when due, then our obligations and those of the guarantors under the indenture
and the Collateral Agreement will be revived and no such defeasance will be
deemed to have occurred.
AMENDMENTS AND SUPPLEMENTS
We, the guarantors and the trustee may enter into a supplemental indenture
for limited purposes without the consent of the holders. With the consent of the
holders of not less than a majority in aggregate principal amount of the notes
at the time outstanding, we, the guarantors and the trustee are permitted to
amend or supplement the indenture or any supplemental indenture or modify the
rights of the holders. No such modification may, however, without the consent of
holders of at least 66 2/3% in aggregate principal amount of notes at the time
outstanding, modify the provisions including the defined terms used therein of
the covenant "Repurchase of Notes at the Option of the Holder Upon a Change of
Control" in a manner adverse to the holders; and no such modification may,
without the consent of each holder affected thereby:
- change the Stated Maturity on any note;
- reduce the principal amount thereof or the rate or extend the time for
payment of interest thereon or any premium payable upon the redemption at
our option thereof;
- change the place of payment where, or the coin or currency in which, any
note or any premium or the interest thereon is payable;
- impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity thereof, or, in the case of redemption at
our option, on or after the Redemption Date;
- reduce the Change of Control Purchase Price or the Asset Sale Offer Price;
- alter the provisions, including the defined terms used therein, regarding
our right to redeem the notes as a right, or at our option in a manner
adverse to the holders;
- reduce the percentage in principal amount of the outstanding notes, the
consent of whose holders is required for any such amendment, supplemental
indenture or waiver provided for in the indenture; or
- modify any of the waiver provisions, except to increase any required
percentage or to provide that other specific provisions of the indenture
cannot be modified or waived without the consent of the holder of each
outstanding note affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
No past, present or future direct or indirect stockholder, employee, officer
or director, as such, of ours, our guarantors or any successor entity shall have
any personal liability for any of our obligations or those of the guarantors
under the indenture or the notes solely by reason of his, her or its status as
such stockholder, employee, officer or director. This provision shall not limit
the obligation of any guarantor pursuant to any guarantee of the notes.
DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of ours,
including by designation, or is merged or consolidated into or with us or one of
our Subsidiaries.
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"ACQUISITION" means the purchase or other acquisition of any person or all
or substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"AFFILIATE" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with us. For purposes
of this definition, the term "control" means the power to direct the management
and policies of a person, directly or through one or more intermediaries,
whether through the ownership of voting securities, by contract, or otherwise,
PROVIDED, THAT, with respect to ownership interest in us and our Subsidiaries, a
Beneficial Owner of 10% or more of the total voting power normally entitled to
vote in the election of directors, managers or trustees, as applicable, shall
for such purposes be deemed to constitute control.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing:
(1) the sum of the products:
(a) of the number of years from the date of determination to the date or
dates of each successive scheduled principal or redemption payment of
such security or instrument and
(b) the amount of each such respective principal or redemption payment;
(2) by the sum of all such principal or redemption payments.
"BENEFICIAL OWNER" or "BENEFICIAL OWNER" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Issue Date, whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"BOARD OF DIRECTORS" means, with respect to any person, the board of
directors of such person or any committee of the Board of Directors of such
person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such person.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL CONTRIBUTION" means any contribution to our equity from our direct
or indirect parent for which no consideration other than the issuance of common
stock with no redemption rights and no special preferences, privileges or voting
rights is given.
"CAPITALIZED LEASE OBLIGATION" means, as to any person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests, however designated, in
stock issued by that corporation.
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"CASH EQUIVALENT" means any of the following which matures within one year
after the date of acquisition:
- securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America
is pledged in support thereof);
- time deposits and certificates of deposit and commercial paper issued by
the parent corporation of any domestic commercial bank of recognized
standing having capital and surplus in excess of $500 million; or
- commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or at least P-2 or the equivalent
thereof by Moody's Investors Service, Inc.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) prior to consummation of an Initial Public Equity Offering, the Excluded
Persons shall cease to own beneficially and of record at least 51% of the
total voting power in the aggregate of all classes of our Capital Stock
then outstanding normally entitled to vote in elections of directors; or
(2) on or following the consummation of an Initial Public Equity Offering;
(a) any merger or consolidation of us with or into any person or any
direct or indirect sale, transfer or other conveyance, in one
transaction or a series of related transactions, of all or
substantially all of our assets, on a consolidated basis if,
immediately after giving effect to such transaction(s):
- any "person" or "group" as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, other than any of the
Excluded Persons, is or becomes the "beneficial owner," directly or
indirectly, of more than 35% of the total voting power in the
aggregate normally entitled to vote in the election of directors,
managers, or trustees of the transferee(s) or surviving entity or
entities; and
- any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting power,
than beneficially owned by the Excluded Persons;
(b) any "person" or "group" as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, other than any of the
Excluded Persons:
- is or becomes the "beneficial owner," directly or indirectly, of more
than 35% of the total voting power in the aggregate of all classes of
our Capital Stock then outstanding normally entitled to vote in
elections of directors; and
- any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting power,
than beneficially owned by the Excluded Persons; or
(c) during any period of 12 consecutive months after the Issue Date,
individuals who at the beginning of any such 12-month period
constituted our Board of Directors, together with any new directors
whose election by such Board of Directors or whose nomination for
election by our shareholders was approved by a vote of a majority of
the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority of our Board of Directors then in office.
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"CONSOLIDATION" means, with respect to us, the consolidation of the accounts
of the Subsidiaries with our accounts, all in accordance with GAAP; PROVIDED
that "consolidation" will not include consolidation of the accounts of any
Unrestricted Subsidiary with our accounts. The term "consolidated" has a
correlative meaning to the foregoing.
"CONSOLIDATED COVERAGE RATIO" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of:
(1) the aggregate amount of Consolidated EBITDA of such person attributable
to continuing operations and businesses (exclusive of amounts
attributable to operations and businesses permanently discontinued or
disposed of) for the Reference Period
(2) to the aggregate Consolidated Fixed Charges of such person (exclusive of
amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations
giving rise to such Consolidated Fixed Charges would no longer be
obligations contributing to such person's Consolidated Fixed Charges
subsequent to the Transaction Date) during the Reference Period;
PROVIDED, that for purposes of such calculation:
- Acquisitions which occurred during the Reference Period or subsequent to
the Reference Period and on or prior to the Transaction Date shall be
assumed to have occurred on the first day of the Reference Period;
- transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period;
- the incurrence of any Indebtedness or issuance of any Disqualified Capital
Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the
proceeds therefrom to the extent used to refinance or retire other
Indebtedness) shall be assumed to have occurred on the first day of the
Reference Period; and
- the Consolidated Fixed Charges of such person attributable to interest on
any Indebtedness or dividends on any Disqualified Capital Stock bearing a
floating interest or dividend rate shall be computed on a pro forma basis
as if the average rate in effect from the beginning of the Reference
Period to the Transaction Date had been the applicable rate for the entire
period, unless such Person or any of its Subsidiaries is a party to an
Interest Swap or Hedging Obligation, which shall remain in effect for the
12-month period immediately following the Transaction Date, that has the
effect of fixing the interest rate on the date of computation, in which
case such rate, whether higher or lower, shall be used.
"CONSOLIDATED EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto,
to the extent deducted from net revenues in determining Consolidated Net Income,
without duplication:
(1) the sum of:
(a) Consolidated income tax expense,
(b) Consolidated depreciation and amortization expense, and
(c) Consolidated Fixed Charges,
(2) less the amount of all cash payments made by such person or any of its
Subsidiaries during such period to the extent such payments relate to
non-cash charges that were added back in determining Consolidated EBITDA
for such period or any prior period, provided that consolidated income
tax expense and depreciation and amortization of a Subsidiary that is a
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less than Wholly-owned Subsidiary shall only be added to the extent of
our equity interest in such Subsidiary.
"CONSOLIDATED FIXED CHARGES" of any person means, for any period, the
aggregate amount, determined in each case in accordance with GAAP and without
duplication, of:
(1) interest expensed or capitalized, paid, accrued, or scheduled to be paid
or accrued, including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations, of such person
and its Consolidated Subsidiaries during such period, including:
(a) original issue discount and non-cash interest payments or accruals on
any Indebtedness,
(b) the interest portion of all deferred payment obligations, and
(c) all commissions, discounts and other fees and charges owed with
respect to bankers' acceptances and letters of credit financings and
currency and Interest Swap and Hedging Obligations, in each case to
the extent attributable to such period, and
(2) the amount of dividends accrued or payable or guaranteed by such person
or any of its Consolidated Subsidiaries in respect of Preferred Stock,
other than by Subsidiaries of such person to such person or such person's
Wholly-owned Subsidiaries, except if such Preferred Stock is a
payment-in-kind ("PIK") security, issuance of such additional PIK
securities would not count as dividends for purposes of this definition.
For purposes of this definition:
- interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined in good faith by us to be the rate of
interest implicit in such Capitalized Lease Obligation in accordance with
GAAP, and
- interest expense attributable to any Indebtedness represented by the
guaranty by such person or a Subsidiary of such person of an obligation of
another person shall be deemed to be the interest expense attributable to
the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the net income or loss of such person and its Consolidated Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP and adjusted
to exclude, only to the extent included in computing such net income or loss and
without duplication:
- all gains, but not losses, which are either extraordinary, as determined
in accordance with GAAP, or are either unusual or nonrecurring, including
any gain from the sale or other disposition of assets outside the ordinary
course of business or from the issuance or sale of any capital stock;
- the net income, if positive, of any person, other than a Consolidated
Subsidiary, in which such person or any of its Consolidated Subsidiaries
has an interest, except to the extent of the amount of any dividends or
distributions actually paid in cash to such person or a Consolidated
Subsidiary of such person during such period, but in any case not in
excess of such person's PRO RATA share of such person's net income for
such period;
- the net income or loss of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition; and
- the net income, if positive, of any of such person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the
terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary.
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"CONSOLIDATED SUBSIDIARY" means, for any person, each Subsidiary of such
person, whether now existing or hereafter created or acquired, the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"CREDIT AGREEMENT" means the credit agreement entered into by and among
Compass, its subsidiaries, various financial institutions, and BancBoston
Securities as arranger, BankBoston as a lender and administrative agent, and
Donaldson, Lufkin & Jenrette Capital Funding as documentation agent, providing a
revolving credit facility, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as such
credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time whether
or not with the same agent, trustee, representative lenders or holders, and
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of the foregoing, the term "Credit Agreement" shall
include agreements in respect of Interest Swap and Hedging Obligations with
lenders party to the credit agreement and shall also include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any credit agreement and all refundings, refinancings and
replacements of any credit agreement, including any agreement:
- extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
- adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of us and our Subsidiaries and
their respective successors and assigns,
- increasing the amount of Indebtedness incurred thereunder or available to
be borrowed thereunder, PROVIDED that on the date such Indebtedness is
incurred in accordance with the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," or
- otherwise altering the terms and conditions thereof in a manner not
prohibited by the terms of the indenture.
"DISQUALIFIED CAPITAL STOCK" means:
- with respect to any person, Equity Interests of such person that, by its
terms or by the terms of any security into which it is convertible,
exercisable or exchangeable, is, or upon the happening of an event or the
passage of time or both would be, required to be redeemed or repurchased,
including at the option of the holder thereof, such person or any of its
Subsidiaries, in whole or in part, on or prior to the Stated Maturity of
the notes, and
- with respect to any Subsidiary of such person, including with respect to
any Subsidiary of ours, any Equity Interests other than any common equity
with no preference, privileges, or redemption or repayment provisions.
"EQUITY INTEREST" of any Person means any shares, interests, participations
or other equivalents, however designated, in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"EVENT OF LOSS" means, with respect to any property or asset, any:
- loss, destruction or damage of such property or asset or
- any condemnation, seizure or taking, by exercise of the power of eminent
domain or otherwise, of such property or asset, or confiscation or
requisition of the use of such property or asset.
"EXCLUDED PERSON" means our officers and directors and those persons who
beneficially own membership interests in Compass Holdings LLC, in each case, as
of the Issue Date.
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"EXEMPTED AFFILIATE TRANSACTION" means:
- customary employee compensation arrangements approved by a majority of
independent members of our Board of Directors who are independent with
respect to such transactions;
- dividends permitted under the terms of the covenant discussed above under
"Limitation on Restricted Payments" above and payable, in form and amount,
on a pro rata basis to all holders of our common stock;
- Management Fee Payments up to $500,000 in any fiscal year and the
reimbursement by us of reasonable out-of-pocket costs and expenses
incurred in connection with the rendering of management services to us on
our behalf;
- Permitted Payments to Parent;
- transactions solely between us and any of our Wholly-owned Consolidated
Subsidiaries or solely among our Wholly-owned Consolidated Subsidiaries;
and
- the payment of $750,000 to Parent for reimbursement of the nonrefundable
deposit against the purchase price for the acquisition of Barnes Machine.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"GUARANTOR" means each Subsidiary of ours that executes a guarantee
guaranteeing the notes in accordance with the provisions of the indenture.
"INDEBTEDNESS" of any person means, without duplication
(1) all liabilities and obligations, contingent or otherwise, of such any
person, to the extent such liabilities and obligations would appear as a
liability upon the consolidated balance sheet of such person in
accordance with GAAP:
(a) in respect of borrowed money, whether or not the recourse of the
lender is to the whole of the assets of such person or only to a
portion thereof,
(b) evidenced by bonds, notes, debentures or similar instruments,
(c) representing the balance deferred and unpaid of the purchase price of
any property or services, except those incurred in the ordinary
course of its business that would constitute ordinarily a trade
payable to trade creditors, excluding accounts payable or other
obligations to trade creditors which have remained unpaid for greater
than 60 days past their original due date;
(2) all liabilities and obligations, contingent or otherwise, of such person
(a) evidenced by bankers' acceptances or similar instruments issued or
accepted by banks,
(b) relating to any Capitalized Lease Obligation, or
(c) evidenced by a letter of credit or a reimbursement obligation of such
person with respect to any letter of credit;
(3) all net obligations of such person under Interest Swap and Hedging
Obligations;
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(4) all liabilities and obligations of others of the kind described in the
preceding clauses that such person has guaranteed or that is otherwise
its legal liability or which are secured by any assets or property of
such person and all obligations to purchase, redeem or acquire any Equity
Interests;
(5) any and all deferrals, renewals, extensions, refinancing and refundings,
whether direct or indirect, of, or amendments, modifications or
supplements to, any liability of the kind described in any of the
preceding clauses, or this clause, whether or not between or among the
same parties; and
(6) all Disqualified Capital Stock of such Person measured at the greater of
its voluntary or involuntary maximum fixed repurchase price plus accrued
and unpaid dividends.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be determined in good faith by the
board of directors or managing general partner of the issuer of such
Disqualified Capital Stock.
"INITIAL PUBLIC EQUITY OFFERING" means an initial underwritten offering of
our common stock or that of Parent for cash pursuant to an effective
registration statement under the Securities Act as a consequence of which our
common stock or that of Parent is listed on a national securities exchange or
quoted on the national market system of the Nasdaq stock market.
"INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"INVESTMENT" by any person in any other person means, without duplication:
- the acquisition, whether by purchase, merger, consolidation or otherwise,
by such person, whether for cash, property, services, securities or
otherwise, of capital stock, bonds, notes, debentures, partnership or
other ownership interests or other securities, including any options or
warrants, of such other person or any agreement to make any such
acquisition;
- the making by such person of any deposit with, or advance, loan or other
extension of credit to, such other person, including the purchase of
property from another person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other person, or
any commitment to make any such advance, loan or extension, but excluding
accounts receivable, endorsements for collection or deposits arising in
the ordinary course of business;
- other than guarantees of Indebtedness of us or any guarantor to the extent
permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," the entering into by such
person of any guarantee of, or other credit support or contingent
obligation with respect to, Indebtedness or other liability of such other
person;
- the making of any capital contribution by such person to such other
person; and
- the designation by our Board of Directors of any person to be an
Unrestricted Subsidiary.
We shall be deemed to make an Investment in an amount equal to the fair
market value of the net assets of any subsidiary, or, if neither we nor any of
our Subsidiaries have theretofore made an
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Investment in such subsidiary, in an amount equal to the Investments being made,
at the time that such subsidiary is designated an Unrestricted Subsidiary, and
any property transferred to an Unrestricted Subsidiary from us or a Subsidiary
of ours shall be deemed an Investment valued at its fair market value at the
time of such transfer.
"ISSUE DATE" means the date of first issuance of the notes under the
indenture.
"JUNIOR SECURITY" means any Qualified Capital Stock and any Indebtedness of
ours or a guarantor, as applicable, that is subordinated in right of payment to
senior debt at least to the same extent as the notes or the guarantee, as
applicable, and has no scheduled installment of principal due, by redemption,
sinking fund payment or otherwise, on or prior to the Stated Maturity of the
notes; PROVIDED, that in the case of subordination in respect of senior debt
under the credit agreement, "Junior Security" shall mean any Qualified Capital
Stock and any Indebtedness of ours or the guarantor, as applicable, that:
- has a final maturity date occurring after the final maturity date of, all
senior debt outstanding under the credit agreement on the date of issuance
of such Qualified Capital Stock or Indebtedness,
- is unsecured,
- has an Average Life longer than the security for which such Qualified
Capital Stock or Indebtedness is being exchanged, and
- by their terms or by law are subordinated to senior debt outstanding under
the credit agreement on the date of issuance of such Qualified Capital
Stock or Indebtedness at least to the same extent as the notes.
"LIEN" means any mortgage, charge, pledge, statutory or other lien,
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"MANAGEMENT FEE PAYMENTS" means payments from us to Dunhill Bank Caribbean
Ltd. and Hayes Capital Corporation under a Management Consulting Agreement,
dated March 9, 1998, by and between us, Dunhill Bank Caribbean Ltd. and Hayes
Capital Corporation, in accordance with the terms and provisions of such
Management Consulting Agreement on the Issue Date, PROVIDED, HOWEVER, that our
obligation to make such payments will be subordinated to the payment of all
Obligations with respect to the notes and any guarantee thereof.
"MATERIAL FACILITY" means a facility that has a customer certification
including without limitation D1-9000.
"MORTGAGE INDEBTEDNESS" of any person means any Indebtedness of such person
secured by real property of such person which in the reasonable good faith
judgment of the Board of Directors is directly related to a Related Business of
ours.
"NET CASH PROCEEDS" means:
(1) the aggregate amount of cash or Cash Equivalents received by us in the
case of a sale of Qualified Capital Stock and by us and our Subsidiaries
in respect of an Asset Sale;
(2) plus, in the case of an issuance of Qualified Capital Stock upon any
exercise, exchange or conversion of securities, including options,
warrants, rights and convertible or exchangeable debt of ours that were
issued for cash on or after the Issue Date the amount of cash originally
received by us upon the issuance of such securities, including options,
warrants, rights and convertible or exchangeable debt;
(3) less:
(a) in each case, the sum of all payments, fees, commissions and, in the
case of Asset Sales, reasonable and customary expenses, including,
without limitation, the fees and expenses
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of legal counsel and investment banking fees and expenses incurred in
connection with such Asset Sale or sale of Qualified Capital Stock,
and
(b) in the case of an Asset Sale only, the amount estimated reasonably
and in good faith by us of income, franchise, sales and other
applicable taxes, the computation of which shall take into account
any available net operating losses and other tax attributes of
Parent, and us and our Subsidiaries required to be paid by us or any
of our respective Subsidiaries in the taxable year of such sale in
connection with such Asset Sale.
"NON-RECOURSE INDEBTEDNESS" means our Indebtedness or that of our
Subsidiaries to the extent that:
- under the terms thereof or pursuant to law, no personal recourse may be
had against us or our Subsidiaries for the payment of the principal of or
interest or premium on such Indebtedness, and enforcement of obligations
on such Indebtedness, except with respect to fraud, willful misconduct,
misrepresentation, misapplication of funds, reckless damage to assets and
undertakings with respect to environmental matters or construction
defects, is limited only to recourse against interests in specified assets
and property (the "Special Assets"), accounts and proceeds arising
therefrom, and rights under purchase agreements or other agreements with
respect to such Subject Assets;
- such Indebtedness is incurred concurrently with the acquisition by us or
our Subsidiaries of such Subject Assets, or a Person or interests in a
Person holding such Subject Assets, or constitutes Refinancing
Indebtedness with respect to Indebtedness so incurred; and
- the Subject Assets are not existing assets and no existing assets or
proceeds from the sale, transfer or other disposition of existing assets
were used to acquire such Subject Assets.
"OBLIGATION" means any principal, premium or interest payment, or monetary
penalty, or damages, due by us or any guarantor under the terms of the notes or
the indenture, including any liquidated damages due pursuant to the terms of the
registration rights agreement.
"PARENT" means Compass Holdings LLC or its successor, so long as such entity
owns at least 51% of the Capital Stock of Compass.
"PERMITTED INDEBTEDNESS" means that:
- we and the guarantors may incur Indebtedness evidenced by the notes and
represented by the indenture up to the amounts specified therein as of the
date thereof;
- we and the guarantors, as applicable, may incur Refinancing Indebtedness
with respect to any Indebtedness or Disqualified Capital Stock, as
applicable, described in the foregoing clause of this definition or
incurred under the Debt Incurrence Ratio test of the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
or which is outstanding on the Issue Date, after giving effect to the
issuance of the outstanding notes, and $3.5 million of Mortgage
Indebtedness to be incurred in connection with the acquisition of Brittain
Machine and within six months after the Issue Date, which will be
considered outstanding on the Issue Date for purposes of this clause,
provided that in each case such Refinancing Indebtedness is secured only
by the assets that secured the Indebtedness so refinanced;
- we and our Subsidiaries may incur Indebtedness solely in respect of
bankers acceptances, and performance bonds to the extent that such
incurrence does not result in the incurrence of any obligation to repay
any obligation relating to borrowed money of others, all in the ordinary
course of business in accordance with customary industry practices, in
amounts and for the purposes customary in our industry; PROVIDED, that the
aggregate principal amount outstanding of such Indebtedness, including any
Refinancing Indebtedness and any other Indebtedness issued to refinance,
refund, defease or replace such Indebtedness, shall at no time exceed
$250,000;
- we may incur Indebtedness to any guarantor, and any guarantor may incur
Indebtedness to any other guarantor or to us; PROVIDED, that, in the case
of our Indebtedness, such obligations shall
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be unsecured and subordinated in all respects to our obligations pursuant
to the notes and the date of any event that causes such guarantor no
longer to be a guarantor shall be an Incurrence Date; and
- any guarantor may guaranty any of our Indebtedness or that of another
guarantor that was permitted to be incurred pursuant to the indenture,
substantially concurrently with such incurrence or at the time such person
becomes a guarantor.
"PERMITTED INVESTMENT" means:
- Investments in any of the notes;
- Investments in Cash Equivalents;
- intercompany notes to the extent permitted under the definition of
"Permitted Indebtedness;" and
- any Investment by us or any guarantor in a Person if as a result of such
Investment such Person immediately becomes a Wholly-owned Subsidiary
guarantor or such Person is immediately merged with or into us or a
Wholly-owned Subsidiary guarantor.
"PERMITTED LIEN" means:
(1) Liens existing on the Issue Date;
(2) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with
respect thereto are maintained on our books in accordance with GAAP;
(3) statutory liens of carriers, warehousemen, mechanics, material men,
landlords, repairmen or other like Liens arising by operation of law in
the ordinary course of business provided that:
(a) the underlying obligations are not overdue for a period of more than
30 days, or
(b) such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are maintained
on our books in accordance with GAAP;
(4) Liens securing the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(5) easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects which, singly or in the aggregate, do not
in any case materially detract from the value of the property, subject
thereto (as such property is used by us or any of our Subsidiaries) or
interfere with the ordinary conduct of our business or that of any of our
Subsidiaries;
(6) Liens arising by operation of law in connection with judgments, only to
the extent, for an amount and for a period not resulting in an Event of
Default with respect thereto;
(7) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(8) Liens securing the notes;
(9) Liens securing Indebtedness of a Person existing at the time such Person
becomes a Subsidiary or is merged with or into us or a Subsidiary or
Liens securing Indebtedness incurred in connection with an Acquisition,
PROVIDED that such Liens were in existence prior to the date of such
acquisition, merger or consolidation, were not incurred in anticipation
thereof, and do not extend to any other assets;
(10) Liens arising from Purchase Money Indebtedness or Mortgage Indebtedness
permitted to be incurred pursuant to the covenant "Limitation on
Incurrence of Additional Indebtedness and
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Disqualified Capital Stock" PROVIDED such Liens relate solely to the
property which is subject to such Purchase Money Indebtedness or Mortgage
Indebtedness, as applicable;
(11) Leases or subleases granted to other persons in the ordinary course of
business not materially interfering with the conduct of our business or
that of any of our Subsidiaries or materially detracting from the value
of our relative assets or those of any Subsidiary;
(12) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by us or any of
our Subsidiaries in the ordinary course of business;
(13) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse
to the holders of the notes than the terms of the Liens securing such
refinanced Indebtedness, and provided that the Indebtedness secured is
not increased and the lien is not extended to any additional assets or
property that would not have been security for the Indebtedness
refinanced; and
(14) Liens securing Indebtedness incurred under the credit agreement in
accordance with the terms of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
"PERMITTED PAYMENTS TO PARENT" means without duplication:
- payments to Parent in an amount sufficient to permit Parent to pay
reasonable and necessary operating expenses and other general corporate
expenses to the extent such expenses relate or are fairly allocable to us
and our Subsidiaries, provided such expenses do not exceed $250,000 in any
fiscal year; and
- payments to Parent to enable Parent to pay foreign, federal, state or
local tax liabilities ("Tax Payment"), not to exceed the amount of any tax
liabilities that would be otherwise payable by us and our Subsidiaries and
Unrestricted Subsidiaries to the appropriate taxing authorities if they
filed separate tax returns to the extent that Parent has an obligation to
pay such tax liabilities relating to our operations, assets or capital or
those of our Subsidiaries and Unrestricted Subsidiaries;
PROVIDED, HOWEVER, that, notwithstanding the foregoing:
- in the case of determining the amount of a Tax Payment that is permitted
to be paid by us and any of our United States subsidiaries in respect of
their Federal income tax liability, such payment shall be determined on
the basis of assuming that all payments made to Parent pursuant to the
immediately preceding clause shall be treated as a deductible expense of
ours in the taxable year during which the obligation to make such payment
accrues; and
- any Tax Payments shall either be used by Parent to pay such tax
liabilities within 90 days of Parent's receipt of such payment or refunded
to the payee.
"PURCHASE MONEY INDEBTEDNESS" of any person means any Non-Recourse
Indebtedness of such person to any seller or other person incurred solely to
finance the acquisition (including in the case of a Capitalized Lease
Obligation, the lease) of any after acquired tangible property which, in the
reasonable good faith judgment of our Board of Directors of Compass, is directly
related to a Related Business of ours and which is incurred substantially
concurrently with such acquisition and is secured only by the assets so
financed.
"QUALIFIED CAPITAL STOCK" means any of our Capital Stock that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or of our Indebtedness issued
on or after the Issue Date with the Net Cash Proceeds received by us from the
substantially concurrent sale of Qualified Capital Stock or any exchange of
Qualified Capital Stock for any of our Capital Stock or for our Indebtedness
issued on or after the Issue Date.
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"REFERENCE PERIOD" with regard to any person means the four full fiscal
quarters, or such lesser period during which such person has been in existence,
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the notes or the indenture.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock:
(1) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease,
refund, refinance, discharge or otherwise retire for value, in whole or
in part, or constituting an amendment, modification or supplement to, or
a deferral or renewal of (a "Refinancing"), any Indebtedness or
Disqualified Capital Stock in a principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, not to exceed the
lesser of the following, after deduction of reasonable and customary fees
and expenses incurred in connection with the Refinancing plus the amount
of any premium paid in connection with such Refinancing in accordance
with the terms of the documents governing the Indebtedness refinanced
without giving effect to any modification thereof made in connection with
or in contemplation of such refinancing:
(a) the principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, of the Indebtedness or Disqualified Capital
Stock so Refinanced, and
(b) if such Indebtedness being Refinanced was issued with an original
issue discount, the accreted value thereof, as determined in
accordance with GAAP, at the time of such Refinancing;
(2) PROVIDED, that:
(a) such Refinancing Indebtedness of any Subsidiary of ours shall only be
used to Refinance outstanding Indebtedness or Disqualified Capital
Stock of such Subsidiary,
(b) such Refinancing Indebtedness shall not have an Average Life shorter
than the Indebtedness or Disqualified Capital Stock to be so
refinanced at the time of such Refinancing and in all respects, be no
less subordinated or junior, if applicable, to the rights of holders
of the notes than was the Indebtedness or Disqualified Capital Stock
to be refinanced,
(c) such Refinancing Indebtedness shall have a final stated maturity or
redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or
Disqualified Capital Stock to be so refinanced, and
(d) such Refinancing Indebtedness shall be secured, if secured, in a
manner no more adverse to the holders of the notes than the terms of
the Liens, if any, securing such refinanced Indebtedness, including,
without limitation, the amount of Indebtedness secured shall not be
increased.
"RELATED BUSINESS" means the business conducted, or proposed to be
conducted, by us and our Subsidiaries as of the Issue Date and any and all
businesses that in the good faith judgment of our Board of Directors are
materially related businesses.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than other Permitted Investments.
"RESTRICTED PAYMENT" means, with respect to any person:
- the declaration or payment of any dividend or other distribution in
respect of Equity Interests of such person or any parent or Subsidiary of
such person;
- any payment on account of the purchase, redemption or other acquisition or
retirement for value of Equity Interests of such person or any Subsidiary
or parent of such person;
- other than with the proceeds from the substantially concurrent sale of, or
in exchange for, Refinancing Indebtedness any purchase, redemption, or
other acquisition or retirement for value
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of, any payment in respect of any amendment of the terms of or any
defeasance of, any Subordinated Indebtedness, directly or indirectly, by
such person or a parent or Subsidiary of such person prior to the
scheduled maturity, any scheduled repayment of principal, or scheduled
sinking fund payment, as the case may be, of such Indebtedness;
- any Restricted Investment by such person, and
- any Management Fee Payments or similar payments to any Affiliates other
than Subsidiaries in excess of an aggregate of $500,000 in any fiscal
year; PROVIDED, HOWEVER, that our obligation to pay such Management Fee
Payments will be subordinated to the payment of all Obligations with
respect to the notes and any guarantee thereof.
The term "Restricted Payment" shall not include:
- any dividend, distribution or other payment on or with respect to Equity
Interests of an issuer to the extent payable solely in shares of Qualified
Capital Stock of such issuer;
- any dividend, distribution or other payment to us, or to any of our
guarantors, by us or any of our Subsidiaries; or
- the payment of $750,000 to Parent for reimbursement for the down payment
on the purchase price of Barnes Machine.
"SENIOR DEBT" of ours or any guarantor means Indebtedness, including any
monetary obligation in respect of the credit agreement, and interest, whether or
not allowable, accruing on Indebtedness incurred pursuant to the credit
agreement after the filing of a petition initiating any proceeding under any
bankruptcy, insolvency or similar law, of us or such guarantor arising under the
credit agreement or that, by the terms of the instrument creating or evidencing
such Indebtedness, is expressly designated senior debt and made senior in right
of payment to the notes or the applicable guarantee; PROVIDED, that in no event
shall senior debt include:
- Indebtedness to any of our Subsidiaries or any of our officers, directors
or employees or those of any of our Subsidiaries;
- Indebtedness incurred in violation of the terms of the indenture;
- Indebtedness to trade creditors;
- Disqualified Capital Stock;
- Capitalized Lease Obligations; and
- any liability for taxes owed or owing by us or such guarantor.
"SIGNIFICANT SUBSIDIARY" shall have the meaning provided under
Regulation S-X of the Securities Act, as in effect on the Issue Date.
"STATED MATURITY," when used with respect to any note, means April 15, 2005.
"SUBORDINATED INDEBTEDNESS" means our Indebtedness or that of a guarantor
that is subordinated in right of payment by its terms or the terms of any
document or instrument relating thereto to the notes or such guarantee, as
applicable, in any respect or has a stated maturity after the Stated Maturity.
"SUBSIDIARY," with respect to any person, means:
- a corporation a majority of whose Equity Interests with voting power,
under ordinary circumstances, to elect directors is at the time, directly
or indirectly, owned by such person, by such person and one or more
Subsidiaries of such person or by one or more Subsidiaries of such person;
- any other person, other than a corporation, in which such person, one or
more Subsidiaries of such person, or such person and one or more
Subsidiaries of such person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest; or
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- a partnership in which such person or a Subsidiary of such person is, at
the time, a general partner.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall not be a
Subsidiary of ours or of any of our Subsidiaries. Unless the context requires
otherwise, Subsidiary means each of our direct and indirect Subsidiaries.
"UNRESTRICTED SUBSIDIARY" means any of our Subsidiaries that does not own
any Capital Stock of, or own or hold any Lien on any of our property or that of
any of our Subsidiaries and that, at the time of determination, shall be an
Unrestricted Subsidiary as designated by our Board of Directors; PROVIDED, that:
- such subsidiary shall not engage, to any substantial extent, in any line
or lines of business activity other than a Related Business;
- neither immediately prior thereto nor after giving pro forma effect to
such designation would there exist a Default or Event of Default; and
- immediately after giving pro forma effect thereto, we could incur at least
$1.00 of Indebtedness pursuant to the Debt Incurrence Ratio of the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
Our Board of Directors may designate any Unrestricted Subsidiary to be a
Subsidiary, PROVIDED, that:
- no Default or Event of Default is existing or will occur as a consequence
thereof; and
- immediately after giving effect to such designation, on a pro forma basis,
we could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock."
Each such designation shall be evidenced by filing with the trustee a certified
copy of the resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions.
"U.S. GOVERNMENT OBLIGATIONS" means direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
"WHOLLY-OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of
which are owned by us or one or more of our Wholly-owned Subsidiaries.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Series B notes will be issued in the form of one or more registered
global notes without interest coupons (collectively, the "Global Notes"). Upon
issuance, the Global Notes will be deposited with the trustee, as custodian for
DTC, in New York, New York, and registered in the name of DTC or its nominee for
credit to the accounts of DTC's Direct and Indirect Participants, as defined
below.
Beneficial interests in all Global Notes and all Certificated Notes, as
defined below, if any, will be subject to restrictions on transfer and will bear
a restrictive legend as described under "Notice to Investors." In addition,
transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
including, if applicable, those of Euroclear and CEDEL, which may change from
time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in limited
circumstances. Beneficial interests in the Global Notes may be exchanged for
notes in certificated form in limited circumstances. You should read the
discussion under the heading "--Transfer of Interests in Global Notes for
Certificated Notes" for further information regarding such an exchange.
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Initially, the trustee will act as Paying Agent and Registrar. The notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITORY PROCEDURES
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the "Direct
Participants") and to facilitate the clearance and settlement of transactions in
those securities between Direct Participants through electronic book-entry
changes in accounts of Participants. The Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and various
other organizations, including Euroclear and Cedel. Access to DTC's system is
also available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"Indirect Participants").
DTC has also advised Compass that, pursuant to procedures established by it:
- upon deposit of the Global Notes for exchange, DTC will credit the
accounts of the Direct Participants with such portions of the principal
amount of the Global Notes as determined based on the portion of
outstanding notes deposited by such Direct Participant as designated by
the exchange agent, and
- DTC will maintain records of the ownership interests of such Direct
Participants in the Global Notes and the transfer of ownership interests
by and between Direct Participants.
DTC will not maintain records of the ownership interests of, or the transfer
of ownership interests by and between, Indirect Participants or other owners of
beneficial interests in the Global Notes. Direct Participants and Indirect
Participants must maintain their own records of the ownership interests of, and
the transfer of ownership interests by and between, Indirect Participants and
other owners of beneficial interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. All ownership interests in
any Global Notes may be subject to the procedures and requirements of DTC.
The laws of some states in the United States require that some persons take
physical delivery in definitive, certificated form, of securities that they own.
This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. You should read the
discussion under the heading "--Transfers of Interests in Global Notes for
Certificated Notes" for further information on other restrictions on the
transferability of the notes.
Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the indenture for any purpose.
Under the terms of the indenture, we, the guarantors and the trustee will
treat the persons in whose names the notes are registered, including notes
represented by Global Notes, as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Payments in respect of
the principal, premium, and interest on Global Notes registered in the name of
DTC or its nominee will be payable by the trustee to DTC or its nominee as the
registered holder under the
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indenture. Consequently, neither we, the trustee nor any agent of ours or the
trustee has or will have any responsibility or liability for:
- any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's
or Indirect Participant's records relating to the beneficial ownership
interests in any Global Note, or
- any other matter relating to the actions and practices of DTC or any of
its Direct Participants or Indirect Participants.
DTC has advised us that its current payment practice for payments of
principal, interest and the like with respect to securities such as the notes is
to credit the accounts of the relevant Direct Participants with such payment on
the payment date in amounts proportionate to such Direct Participant's
respective ownership interests in the Global Notes as shown on DTC's records.
Payments by Direct Participants and Indirect Participants to the beneficial
owners of the notes will be governed by standing instructions and customary
practices between them and will not be the responsibility of DTC, the trustee,
us or the guarantors. Neither we, the guarantors nor the trustee will be liable
for any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the notes, and we and the trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee as the registered owner of the notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants, other than Indirect Participants
who hold an interest in the notes through Euroclear or CEDEL, who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the notes through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the notes
described herein, cross-market transfers between Direct Participants in DTC, on
the one hand, and Indirect Participants who hold interests in the notes through
Euroclear or CEDEL, on the other hand, will be effected by Euroclear's or
CEDEL's respective Nominee through DTC in accordance with DTC's rules on behalf
of Euroclear or CEDEL. Delivery of instructions relating to crossmarket
transactions must be made directly to Euroclear or CEDEL, as the case may be, by
the counterparty in accordance with the rules and procedures of Euroclear or
CEDEL and within their established deadlines (Brussels time for Euroclear and
U.K. time for CEDEL). Indirect Participants who hold interest in the notes
through Euroclear and CEDEL may not deliver instructions directly to Euroclear's
or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction meets its
settlement requirements, deliver instructions to its respective Nominee to
deliver or receive interests on Euroclear's or CEDEL's behalf in the relevant
Global Note in DTC, and make or receive payment in accordance with normal
procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a
Global Note to a DTC Participant until the European business day for Euroclear
or CEDEL immediately following DTC's settlement date.
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DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more Direct Participants to
whose account interests in the Global Notes are credited and only in respect of
such portion of the aggregate principal amount of the notes to which such Direct
Participant or Direct Participants has or have given direction. However, if
there is an Event of Default under the notes, DTC reserves the right to exchange
Global Notes, without the direction of one or more of its Direct Participants,
for legended notes in certificated form, and to distribute such certificated
forms of notes to its Direct Participants. You should read the discussion under
the heading "--Transfers of Interests in Global Notes for Certificated Notes"
for further information regarding such transfers.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among Direct Participants,
including Euroclear and CEDEL, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. None of us, the guarantors or the trustee shall have any
responsibility for the performance by DTC, Euroclear or CEDEL or their
respective Direct and Indirect Participants of their respective obligations
under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that we believe to be
reliable, but we take no responsibility for the accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive notes in registered,
certificated form without interest coupons ("Certificated Notes") if:
- DTC notifies us that it is unwilling or unable to continue as depositary
for the Global Notes and we thereupon fail to appoint a successor
depositary within 90 days, or DTC has ceased to be a clearing agency
registered under the Exchange Act,
- we, at our option, notify the trustee in writing that we elect to cause
the issuance of Certificated Notes, or
- there shall have occurred and be continuing a Default or an Event of
Default with respect to the notes.
In any such case, we will notify the trustee in writing that, upon surrender
by the Direct and Indirect Participants of their interest in such Global Note,
Certificated Notes will be issued to each person that such Direct and Indirect
Participants and DTC identify as being the beneficial owner of the related
notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant for itself or on behalf of an Indirect Participant, to the
trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants in accordance with DTC's
customary procedures.
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless we determine
otherwise in compliance with applicable law.
Neither we, the guarantors nor the trustee will be liable for any delay by
the holder of any Global Note or DTC in identifying the beneficial owners of
notes, and we and the trustee may conclusively rely on, and will be protected in
relying on, instructions from the holder of the Global Note or DTC for all
purposes.
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TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the trustee a written certificate and, in some circumstances, an opinion of
counsel confirming that, in connection with such transfer, it has complied with
the restrictions on transfer described under "Notice to Investors."
SAME DAY SETTLEMENT AND PAYMENT
Payments in respect of the notes represented by the Global Notes, including
principal, premium, if any, interest and Liquidated Damages, if any, shall be
made by wire transfer of immediately available same day funds to the accounts
specified by the holder of interests in such Global Note. With respect to
Certificated Notes, we will make all payments of principal, premium, if any,
interest and liquidated damages, if any, by wire transfer of immediately
available same day funds to the accounts specified by the holders thereof or, if
no such account is specified, by mailing a check to each such holder's
registered address. We expect that secondary trading in the Certificated Notes
will also be settled in immediately available funds.
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DESCRIPTION OF THE SERIES D NOTES
You can find the definitions of some of the terms used in this description
under the subheading "Definitions." In this description, the words "Compass,"
"us," "we," and "our" refer only to Compass Aerospace Corporation and not to any
of our subsidiaries.
The outstanding Series C notes were issued under an indenture dated as of
July 30, 1999 by and among Compass, Western Methods, Aeromil, Brittain Machine,
Barnes Machine, Wichita Manufacturing, Sea-Lect, Pacific Hills, Modern, Compass
Limited, Trim Engineering, Trefn Engineering, Trefn Metal Treatments, Trefn
Fabrications, Diac and IBJ Whitehall Bank & Trust Company as trustee. Upon the
issuance of the Series D notes the indenture will be subject to and governed by
the Trust Indenture Act of 1939. The following description is a summary of the
material provisions of the indenture. It does not restate that agreement in its
entirety. We urge you to read the indenture because it, and not this
description, defines your rights as holders of the notes. Any Series C notes
that remain outstanding after the consummation of the exchange offer, together
with the Series D notes, will be treated as a single class of securities under
the indenture. The outstanding Series C notes and the Series D notes are
collectively referred to herein as the "notes."
BRIEF DESCRIPTION OF THE SERIES D NOTES AND THE SUBSIDIARY GUARANTEES
THE SERIES D NOTES
The Series D notes will be:
- senior subordinated, unsecured, general obligations of Compass;
- limited in aggregate principal amount to $19.0 million;
- subordinated in right of payment to some of our other debt obligations;
- senior or PARI PASSU in right of payment to all our existing and future
subordinated indebtedness; and
- jointly and severally, fully, irrevocably and unconditionally guaranteed
on a senior subordinated basis by each of our present and future
restricted Subsidiaries, all of whom are guarantors of the notes.
THE SUBSIDIARY GUARANTEES
The Subsidiary guarantees of the notes will be:
- unsecured, general obligations of each of the guarantors;
- subordinated in right of payment to all senior debt of each of the
guarantors; and
- senior or PARI PASSU in right of payment to all existing and future
subordinated indebtedness of each of the guarantors.
The term "Subsidiaries" as used in this description of the Series D notes
does not include Unrestricted Subsidiaries. Our Unrestricted Subsidiaries will
not guarantee the notes. You should read the discussion under the heading
"--Bankruptcy Limitations" for further information regarding the guarantees.
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PRINCIPAL, MATURITY AND INTEREST
The Series D notes will be issued solely in exchange for an equal principal
amount of outstanding Series C notes pursuant to the exchange offer. The form
and terms of the Series D notes will be identical in all material respects to
the form and terms of the outstanding Series C notes except that:
- The Series D notes will have been registered under the Securities Act, and
- the registration rights and liquidation damages applicable to the
outstanding Series C notes will not be applicable to the Series D notes.
The Series D notes will be issued only in fully registered form without
coupons in denominations of $1,000 and integral multiples thereof, and will
mature on April 15, 2005. The Series D notes will bear interest at 10 1/8% per
annum from the date of issuance or from the most recent Interest Payment Date to
which interest has been paid or provided for. Interest will be payable
semi-annually on April 15 and October 15 of each year, commencing April 15,
2000, to the persons in whose names such notes are registered at the close of
business on the April 1 or October 1 immediately preceding such Interest Payment
Date. Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
METHODS OF RECEIVING PAYMENT ON THE NOTES
Principal of, premium, if any, interest and liquidated damages, if any, on
the notes will be payable, and the notes may be presented for registration of
transfer or exchange, at the office or agency maintained by us for such purpose
in the Borough of Manhattan, The City of New York. Except as set forth below, at
our option, payment of interest may be made by check mailed to the holders of
the notes at the addresses set forth upon our registry books. No service charge
will be made for any registration of transfer or exchange of notes, but we may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection with a transfer or exchange. Until otherwise
designated by us, our office or agency will be the corporate trust office of the
trustee presently located in the Borough of Manhattan, The City of New York.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the notes will
be subordinated to the prior payment in full of all our senior debt and that of
each of the guarantors. At October 31, 1999 we and the guarantors had
outstanding an aggregate of approximately $97.7 million of secured senior debt.
If any of our senior debt or that of the guarantors has matured, the holders
of senior debt will be entitled to receive payment in full in cash or cash
equivalents of all obligations due in respect of senior debt before the holders
of the notes will be entitled to receive any payment, other than with Junior
Securities, with respect to the notes, including:
- the principal of, premium if any, or interest accrued on the notes;
- payments to repurchase any of the notes; or
- payments to redeem any of the notes.
We or a guarantor, as applicable, may also not make any payment with respect
to the notes, other than with Junior Securities, if:
- a payment default on our senior debt or that of that guarantor occurs and
is continuing beyond any applicable grace period; or
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- any other default occurs and is continuing on senior debt that permits the
holders of that senior debt to accelerate its maturity and we and the
trustee receive written notice of that default (a "Payment Notice") from
the holders of the senior debt.
Payments on the notes may and shall be resumed:
- in the case of a payment default, upon the date on which that default is
cured or waived; and
- in the case of a default other than a payment default, the earlier of the
date on which that default is cured or waived or 179 days after the date
on which the applicable Payment Notice is received (the "Payment Blockage
Period"), unless the maturity of the senior debt has been accelerated.
Any number of Payment Notices may be given, provided that:
- no more than one Payment Notice may be given within a period of any 360
consecutive days; and
- no default that existed upon the date of a Payment Notice or the
commencement of a Payment Blockage Period shall be made the basis for the
commencement of any other Payment Blockage Period.
Any subsequent action, or any subsequent breach of any financial covenant
for a period commencing after the expiration of a Payment Blockage Period that
would give rise to a new event of default, even though it is an event that would
also have been a separate breach pursuant to any provision under which a prior
event of default previously existed, shall constitute a new event of default.
In the event of any distribution of our assets or those of the guarantors
in:
- a total or partial liquidation, dissolution, winding up or reorganization
of us or a guarantor, whether voluntary or involuntary;
- a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to us or our property;
- an assignment for the benefit or creditors; or
- any marshaling of our assets or liabilities;
the holders of all our senior debts or those of the guarantors will be entitled
to receive payment in full in cash or Cash Equivalents of all amounts due in
respect of senior debt before the holders of notes will be entitled to receive
any payment, other than with Junior Securities, with respect to the notes.
Any payment or distribution of our assets or those of any guarantor whether
in cash, property or securities other than Junior Securities to which the
holders or the trustee on behalf of such holders would be entitled except for
the subordination provisions in the indenture, will be paid by the liquidating
trustee or agent or other person making such a payment or distribution directly
to the holders of the senior debt or their representative to the extent
necessary to make payment in full on all the senior debt remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of the
senior debt.
In the event that any payment or distribution of our assets or those of any
guarantor other than Junior Securities shall be received by the trustee or the
holders of the notes at a time when that payment or distribution is prohibited
by the foregoing provisions, such payment or distribution shall be held in trust
for the benefit of the holders of the senior debt. The payment shall be paid or
delivered by the trustee or the holders of the notes, as the case may be, to the
holders of the senior debt remaining unpaid or to their representatives, or to
the trustee or trustees under any indenture pursuant
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to which any instruments evidencing any of unpaid senior debt may have been
issued. The payment or distribution shall be paid to the holders of senior debt
ratably according to the aggregate principal amounts remaining unpaid on account
of such senior debt. The payment shall be applied to all unpaid senior debt to
the extent necessary to pay or to provide for the payment of all such senior
debt in full in cash or Cash Equivalents after giving effect to any concurrent
payment or distribution to the holders of such senior debt.
No provision contained in the indenture or the notes will affect our
obligations or that of the guarantors, which is absolute and unconditional, to
pay, when due, principal of, premium, if any, and interest on the notes. The
subordination provisions of the indenture and the notes will not prevent the
occurrence of any Default or Event of Default under the indenture or limit the
rights of the trustee or any holder to pursue any other rights or remedies with
respect to the notes.
As a result of these subordination provisions, holders of the notes may
receive ratably less than other creditors in the event of the liquidation,
bankruptcy, reorganization, insolvency, receivership or similar proceeding or an
assignment for the benefit of our creditors or a marshalling of our assets or
liabilities. You should read the discussion under the heading "Risk
Factors--Subordination" for further information on the risk that you may receive
ratably less than other creditors under some circumstances.
BANKRUPTCY LIMITATIONS
We are a holding company which conducts our business through our
Subsidiaries. Our Subsidiaries have guaranteed or will guarantee our obligations
with respect to the notes. Our Unrestricted Subsidiaries will not guarantee the
notes. Holders of the notes will be direct creditors of each guarantor by virtue
of its guarantee. Nonetheless, in the event of the bankruptcy or financial
difficulty of a guarantor, such guarantor's obligations under its guarantee may
be subject to review and avoidance under state and federal fraudulent transfer
laws. Among other things, a guarantor may avoid its obligations if a court
concludes that the obligations were incurred for less than reasonably equivalent
value or fair consideration at a time when the guarantor was insolvent, was
rendered insolvent, or was left with inadequate capital to conduct its business.
A court would likely conclude that a guarantor did not receive reasonably
equivalent value or fair consideration to the extent that the aggregate amount
of its liability on its guarantee exceeds the economic benefits it receives in
the offering of the outstanding Series C notes. Similar laws exist in the United
Kingdom with respect to these issues. The obligations of each guarantor under
its guarantee are limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law although we cannot assure you that a
court would give the holder the benefit of such a provision. You should read the
discussion under the heading "Risk Factors--Fraudulent Transfer Considerations"
for further discussion of the risk that the guarantors may avoid their
obligations under their guarantees.
If the obligations of a guarantor under its guarantee were avoided, holders
of notes would have to look to the assets of any remaining guarantors for
payment. We cannot assure you that the assets of the remaining guarantors would
suffice to pay the outstanding principal and interest on the notes.
OPTIONAL REDEMPTION
At any time prior to April 15, 2001, upon an Initial Public Equity Offering
of common stock for cash, up to 35% of the aggregate principal amount of the
notes originally issued under the indenture with cash from the Net Cash Proceeds
of the Initial Public Equity Offering at a redemption price equal to 110.125% of
principal; PROVIDED HOWEVER that:
- immediately following such redemption not less than 65% of the original
aggregate principal amount of the notes remain outstanding;
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- we must give at least 30 days, but no more than 60 days, notice to each
holder of notes to be redeemed; and
- the redemption must occur within 90 days of the Initial Public Equity
Offering.
Except pursuant to the preceding paragraph, we may not redeem the notes
prior to April 15, 2002.
At any time on or after April 15, 2002, we may redeem all or a part of the
notes for cash upon not less than 30 days nor more than 60 days notice to each
holder of notes, at the following redemption prices, expressed as percentages of
the principal amount, if redeemed during the 12-month period commencing
April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2002........................................................ 105.063%
2003........................................................ 102.531%
2004........................................................ 100.000%
</TABLE>
Any optional redemption of the notes will in each case be subject to the
rights of holders of record on a Record Date to receive the interest due on an
Interest Payment Date corresponding to that Record Date that occurs prior to the
Redemption Date, together with accrued and unpaid interest on the notes prior to
the Redemption Date.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
shall select the notes for redemption on a PRO RATA basis, by lot or in such
other manner it deems appropriate and fair. The notes may be redeemed in part in
multiples of $1,000 only.
The notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least
30 days and not more than 60 days before the Redemption Date to each holder of
notes to be redeemed at the holder's registered address. If any note is to be
redeemed in part only, the notice of redemption that relates to that note must
state the portion of the principal amount that will not be redeemed and must
state that on and after the date of redemption, upon surrender of the note, a
new note or notes, in a principal amount equal to the unredeemed portion of the
note will be issued. On and after the date of redemption, interest will cease to
accrue on the notes or portions of them called for redemption, unless we default
in the payment thereof.
COVENANTS
There are covenants in the indenture in addition to those described here.
You should read the indenture for more complete information.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
If a Change of Control occurs, each holder of notes has the right to require
us to repurchase all or any part of such holder's notes equal to $1,000 or an
aggregate amount thereof pursuant to a Change of Control Offer. In the Change of
Control Offer, we will offer a Change of Control Payment in cash equal to 101%
of the aggregate principal amount of notes repurchased plus accrued and unpaid
interest thereon, if any, to the date of purchase. Within 10 days following any
Change of Control, we will mail a notice to each holder of notes describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase the notes on the Change of Control Purchase Date which must occur
no later than 35 days after the occurrence of the Change of Control. The Change
of
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Control Offer must remain open for 20 business days after we mail a Change in
Control Offer to the holders of the notes (the "Change in Control Offer
Period").
Upon expiration of the Change of Control Offer Period, we promptly shall
purchase all notes properly tendered in response to the Change of Control Offer.
On or before the Change of Control Purchase Date, we will:
- accept for payment notes or portions thereof properly tendered pursuant to
the Change of Control Offer;
- deposit with the Paying Agent cash sufficient to pay the Change of Control
Purchase Price, together with accrued and unpaid interest and liquidated
damages, if any, of all notes so tendered; and
- deliver to the trustee the notes so accepted together with an Officers'
Certificate listing the notes or portions thereof being purchased by us.
The Paying Agent will promptly pay the holders of notes so accepted an
amount equal to the Change of Control Purchase Price together with accrued and
unpaid interest and liquidated damages, if any. The trustee will promptly
authenticate and deliver to such holders a new note equal in principal amount to
any unpurchased portion of the note surrendered. Any notes not so accepted will
be delivered promptly by us to the holder thereof. We will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
The Change of Control purchase feature of the notes may make more difficult
or discourage a takeover of Compass, and, thus, the removal of incumbent
management.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale or transfer of "all or substantially all" of our assets on a
consolidated basis. Although there is a limited body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. The interpretation of the phrase "substantially
all" will be dependent upon particular facts and circumstances. As a result, the
ability of a holder of notes to require us to repurchase such notes as a result
of a sale or transfer of less than all of our assets and those of the guarantors
to another person or group may be uncertain. In addition, we cannot assure you
that we will be able to acquire notes tendered upon the occurrence of a Change
of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this paragraph, compliance by us or
any of the guarantors with such laws and regulations shall not in and of itself
cause a breach of its obligations under the indenture.
If the Change of Control Purchase Date is on or after an interest payment
Record Date and on or before the associated Interest Payment Date, any accrued
and unpaid interest, due on such Interest Payment Date will be paid to the
person in whose name a note is registered at the close of business on such
Record Date. Such interest will not be payable to holders who tender their notes
pursuant to the Change of Control Offer.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
We will not and we will not permit any of our Subsidiaries to, the
guarantors will not and will not permit any of their subsidiaries to, directly
or indirectly, issue, assume, guaranty, incur, become directly or indirectly
liable with respect to, or otherwise become responsible for, contingently or
otherwise, including as a result of an Acquisition, any Indebtedness or any
Disqualified Capital Stock including
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Acquired Indebtedness, other than Permitted Indebtedness. Notwithstanding the
foregoing, we may incur such Indebtedness or Disqualified Capital Stock and the
guarantors may incur such Indebtedness, other than Disqualified Capital Stock,
if:
- no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to,
such incurrence of Indebtedness or Disqualified Capital Stock; and
- on the date of such incurrence (the "Incurrence Date"), the Consolidated
Coverage Ratio of Compass for the Reference Period immediately preceding
the Incurrence Date, after giving effect on a pro forma basis to such
incurrence of such Indebtedness or Disqualified Capital Stock and, to the
extent set forth in the definition of Consolidated Coverage Ratio, the use
of proceeds thereof, would be at least 2.0 to 1 (as applicable, each the
"Debt Incurrence Ratio").
In addition, the foregoing limitations will not apply:
(1) to the incurrence by us or any guarantor of Purchase Money Indebtedness,
PROVIDED, that:
(a) the aggregate principal amount of such Indebtedness incurred on or after
the Issue Date and outstanding at any time pursuant to this paragraph
shall not exceed $2.0 million, including any Refinancing Indebtedness and
other Indebtedness issued to refinance, replace, defease or refund
Purchase Money Indebtedness; and
(b) in each case, Purchase Money Indebtedness shall not constitute more than
100% of the cost determined in accordance with GAAP to us or such
guarantor, as applicable, of the property so purchased or leased;
(2) if no Event of Default shall have occurred and be continuing, the incurrence
by us or any guarantor of Indebtedness in an aggregate principal amount
outstanding at any time of up to $5.0 million, including Refinancing
Indebtedness and other Indebtedness incurred to refinance, replace, defease
or refund such Indebtedness;
(3) to the incurrence by us or any guarantor of Mortgage Indebtedness or
Indebtedness pursuant to the credit agreement up to an aggregate principal
amount outstanding under the credit agreement or of Mortgage Indebtedness
collectively not to exceed in the aggregate $12.0 million, in each case
including any Refinancing Indebtedness and other Indebtedness incurred to
refinance, replace, defease or refund such Indebtedness; PROVIDED, THAT:
(a) in the case of Indebtedness pursuant to the credit agreement minus the
amount of any such Indebtedness retired with the Net Cash Proceeds from
any Asset Sale applied to permanently reduce the outstanding amounts or
the commitments with respect to such Indebtedness pursuant the covenant
"Limitation on Sale of Assets and Subsidiary Stock," or
(b) assumed by a transferee in an Asset Sale, and
(c) in the case of Mortgage Indebtedness such Indebtedness shall not
constitute more than 100% of the cost determined in accordance with GAAP
to us or such guarantor, as applicable, of such mortgaged real estate
asset.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes our Subsidiary or is merged with or
into or consolidated with us or a Subsidiary of ours shall be deemed to have
been incurred at the time such Person becomes our Subsidiary or is merged with
or into or consolidated with us or a Subsidiary of ours.
Upon each incurrence of Indebtedness, we may designate under which provision
of this covenant such Indebtedness is being incurred. Such Indebtedness will be
deemed to have been incurred under that provision and no other provision of this
covenant, except as specifically provided otherwise.
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LIMITATION ON RESTRICTED PAYMENTS
We will not and we will not permit any of our Subsidiaries, and the
guarantors will not and will not permit any of their subsidiaries, directly or
indirectly, to make any Restricted Payment if, after giving effect to such
Restricted Payment on a pro forma basis:
(1) a Default or an Event of Default shall have occurred and be continuing;
(2) we are not permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt Incurrence Ratio in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"; or
(3) the aggregate amount of all Restricted Payments made by us and our
Subsidiaries, including after giving effect to such proposed Restricted
Payment, from and after the Issue Date, would exceed, without duplication,
the sum of:
(a) 50% of our aggregate Consolidated Net Income for the period taken as one
accounting period that commences on the first day of the first full
fiscal quarter commencing after the Issue Date and continues to and
includes the last day of the fiscal quarter ended immediately prior to
the date of each such calculation, or, in the event Consolidated Net
Income for such period is a deficit, then minus 100% of such deficit;
plus
(b) the aggregate Net Cash Proceeds received by us from a Capital
Contribution or the sale of our Qualified Capital Stock, other than to
one of our Subsidiaries, to the extent applied in connection with a
Qualified Exchange and to the extent credited in accordance with the
following paragraph, after the Issue Date; plus
(c) other than amounts credited pursuant to clauses 1 and 2 of the next
following paragraph, the net amount of any Restricted Investments not to
exceed the original amount of such Investment made after the Issue Date
that are returned to us or the guarantor that made such prior Investment,
without restriction in cash on or prior to the date of any such
calculation.
So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby, the preceding provisions will not prohibit:
(1) Restricted Investments in a Related Business, PROVIDED, that, after giving
pro forma effect to such Investment, the aggregate amount of all such
Investments made on or after the Issue Date that are outstanding at any time
does not exceed $4.0 million, after giving effect to any such Investments
that are returned to us or the Subsidiary guarantor that made such prior
Investment, without restriction, in cash on or prior to the date of any such
calculation, or
(2) repurchases of Capital Stock from our employees or employees of our
Subsidiaries upon the death, disability or termination of employment in an
aggregate amount to all employees not to exceed $300,000 in any fiscal year
or $1.5 million in the aggregate on and after the Issue Date, net of the Net
Cash Proceeds received by us from subsequent reissuances of such Qualified
Capital Stock to new employees that are not Excluded Persons.
Even if a Default or Event of Default shall have occurred and is continuing
or would be caused thereby, the preceding provisions against making Restricted
Payments will not apply to:
(3) a Qualified Exchange,
(4) the payment of any dividend on Qualified Capital Stock within 60 days after
the date of its declaration if such dividend could have been made on the
date of such declaration in compliance with the foregoing provisions, or
(5) Permitted Payments to Parent.
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The full amount of any Restricted Payment made pursuant to the foregoing
clauses (1), (2), (4) and (5) of the immediately preceding sentences, however,
will be deducted in the calculation of the aggregate amount of Restricted
Payments available to be made.
In addition, we will not and we will not permit any of our Subsidiaries to,
and the guarantors will not and will not permit any of their Subsidiaries to,
directly or indirectly, make any Management Fee Payment or similar payment to
Affiliates other than Subsidiaries, except for Permitted Payments to Parent if,
on a pro forma basis after giving effect to such Management Fee Payments or
similar payments, a Default or an Event of Default shall have occurred and be
continuing.
For purposes of this covenant, the amount of any Restricted Payment, if
other than in cash, shall be the fair market value thereof, as determined in the
good faith reasonable judgment of our Board of Directors. Additionally, on the
date of each Restricted Payment, we shall deliver an Officers' Certificate to
the trustee:
- describing in reasonable detail the nature of such Restricted Payment,
- stating the amount of such Restricted Payment,
- stating in reasonable detail the provisions of the indenture pursuant to
which such Restricted Payment was made, and
- certifying that such Restricted Payment was made in compliance with the
terms of the indenture.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
We will not and we will not permit any of our Subsidiaries to, and the the
guarantors will not and will not permit any of their Subsidiaries to, directly
or indirectly, create, assume or suffer to exist any consensual restriction on
the ability of any of our Subsidiaries to:
(1) pay dividends or make other distributions to or on behalf of, or
(2) pay any obligation to or on behalf of, or
(3) otherwise to transfer assets or property to or on behalf of, or
(4) make or pay loans or advances to or on behalf of us or any of our
Subsidiaries.
However, the preceding restrictions will not apply to:
(1) restrictions imposed by the notes or the indenture or by our other
indebtedness (which may also be guaranteed by the guarantors) ranking senior
or PARI PASSU with the notes or the guarantees, provided such restrictions
are no more restrictive than those imposed by the indenture and the notes;
(2) restrictions imposed by applicable law;
(3) existing restrictions under Indebtedness outstanding on the Issue Date,
including pursuant to the credit agreement;
(4) restrictions under any Acquired Indebtedness not incurred in violation of
the indenture or any agreement relating to any property, asset, or business
acquired by us or any of our Subsidiaries, which restrictions in each case
existed at the time of acquisition, were not put in place in connection with
or in anticipation of such acquisition and are not applicable to any person,
other than the person acquired, or to any property, asset or business, other
than the property, assets and business so acquired;
(5) any such restriction or requirement imposed by Indebtedness incurred under
the credit agreement pursuant to the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified
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Capital Stock," provided such restriction or requirement is no more
restrictive than that imposed by the credit agreement as of the Issue Date;
(6) restrictions with respect solely to a Subsidiary of ours imposed pursuant to
a binding agreement which has been entered into for the sale or disposition
of all or substantially all of the Equity Interests or assets of such
Subsidiary, provided such restrictions apply solely to the Equity Interests
or assets of such Subsidiary which are being sold;
(7) restrictions on transfer contained in Purchase Money Indebtedness or
Mortgage Indebtedness incurred pursuant to the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
provided such restrictions relate only to the transfer of the property
acquired with the proceeds of such Purchase Money Indebtedness or Mortgage
Indebtedness, as applicable; and
(8) in connection with and pursuant to permitted Refinancings, replacements of
restrictions imposed pursuant to clauses (1), (3) or (4) of this paragraph
that are not more restrictive than those being replaced and do not apply to
any other person or assets than those that would have been covered by the
restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, neither:
- customary provisions restricting subletting or assignment of any lease
entered into in the ordinary course of business, consistent with industry
practice, nor
- Liens permitted under the terms of the indenture on assets securing senior
debt, Purchase Money Indebtedness, or Mortgage Indebtedness incurred in
accordance with the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock,"
shall in and of themselves be considered a restriction on the ability of the
applicable Subsidiary to transfer such agreement or assets.
LIMITATIONS ON LAYERING INDEBTEDNESS
We will not and we will not permit any of our Subsidiaries to, and the
guarantors will not and will not permit any of their subsidiaries to, directly
or indirectly, incur, or suffer to exist any Indebtedness that is subordinate in
right of payment to any other Indebtedness of ours or a guarantor unless, by its
terms, such Indebtedness is subordinate in right of payment to, or ranks PARI
PASSU with, the notes or the guarantees, as applicable.
LIMITATION ON LIENS SECURING INDEBTEDNESS
Unless we provide and cause our Subsidiaries to provide that the notes are
equally and ratably secured, we will not and we will not permit any of our
Subsidiaries to, and the guarantors will not and will not permit any of their
Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind,
other than Permitted Liens, upon any of their respective assets now owned or
acquired on or after the date of the indenture or upon any income or profits
therefrom securing any of our Indebtedness or that of any guarantor other than
Senior Indebtedness, PROVIDED that:
- if such Indebtedness is Subordinated Indebtedness, the Lien securing such
Subordinated Indebtedness shall be subordinate and junior to the Lien
securing the notes with the same relative priority as such Subordinated
Indebtedness shall have with respect to the notes, and
- this clause shall not be applicable to any Liens securing any such
Indebtedness which became our Indebtedness pursuant to a transaction
subject to the provisions of the indenture described below under
"Limitation on Merger, Sale or Consolidation" or which constitutes
Acquired Indebtedness and which in either case were in existence at the
time of such transaction, unless
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such Indebtedness was incurred or such Lien created in connection with or
in contemplation of, such transaction, so long as such Liens do not extend
to or cover any of our property or assets or that of any of our
Subsidiaries other than property or assets acquired in such transaction.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
We will not and we will not permit any of our Subsidiaries to, and the
guarantors will not and will not permit and of their Subsidiaries to, convey,
sell, transfer, assign or otherwise dispose of, directly or indirectly, any of
our property, business or assets, including by merger, or consolidation of our
Subsidiaries and including any sale or other transfer or issuance of any Equity
Interests of any of our Subsidiaries, whether by us or a Subsidiary, or through
the issuance, sale or transfer of Equity Interests by any of our Subsidiaries,
and including any sale and leaseback transaction (any of the foregoing, an
"Asset Sale"), unless:
(1) (a) the Net Cash Proceeds therefrom (the "Asset Sale Offer Amount") are
applied:
- within 270 days after the date of such Asset Sale to the optional
redemption of the notes in accordance with the terms of the indenture
and other Indebtedness of ours ranking on a parity with the notes and
with similar provisions requiring us to redeem such Indebtedness with
the proceeds for asset sales, pro rata in proportion to the
respective principal amounts of the notes and such other Indebtedness
then outstanding, or
- within 300 days after the date of such Asset Sale to the repurchase
of the notes and such other Indebtedness on a parity with the notes
and with similar provisions requiring us to make an offer to purchase
such Indebtedness with the proceeds for asset sales pursuant to a
cash offer pro rata in proportion to the respective principal amounts
of the notes and such other Indebtedness then outstanding (the "Asset
Sale Offer") at a purchase price of 100% of principal amount (the
"Asset Sale Offer Price") together with accrued and unpaid interest
and liquidated damages, if any, to the date of payment, made within
270 days of such Asset Sale, or
(b) within 270 days following such Asset Sale, the Asset Sale Offer
Amount is:
- invested, or committed to be invested, and is invested, within an
additional 90 days in tangible assets and property other than notes,
bonds, obligations and securities which in the good faith reasonable
judgment of the Board will immediately constitute or be a part of a
Related Business of ours or such subsidiary immediately following
such transaction, or
- used to retire Purchase Money Indebtedness, Mortgage Indebtedness or
senior debt and, to permanently reduce the amount of such
Indebtedness, incurred under the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock,"
(c) at least 90% of the consideration for such Asset Sale or series of
related Asset Sales consists of cash or Cash Equivalents,
(d) no Default or Event of Default shall have occurred and be continuing
at the time of, or would occur after giving effect, on a pro forma basis,
to, such Asset Sale, and
(e) our Board of Directors determines in good faith that we or such
Subsidiary, as applicable, will receive fair market value for such Asset
Sale.
An acquisition of notes pursuant to an Asset Sale Offer may be deferred
until the accumulated Net Cash Proceeds from Asset Sales not applied to the uses
set forth in (1)(a) or (b) above (the
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"Excess Proceeds") exceeds $5.0 million. Each Asset Sale Offer shall remain open
for 20 Business Days following its commencement (the "Asset Sale Offer Period").
Upon expiration of the Asset Sale Offer Period, we shall apply the Asset Sale
Offer Amount plus an amount equal to accrued and unpaid interest and liquidated
damages, if any, to the purchase of all Indebtedness properly tendered at the
Asset Sale Offer Price, together with accrued interest and liquidated damages,
if any. The Asset Sale Offer Amount shall be applied on a PRO RATA basis if the
Asset Sale Offer Amount is insufficient to purchase all Indebtedness so
tendered. To the extent that the aggregate amount of notes and such other PARI
PASSU Indebtedness tendered pursuant to an Asset Sale Offer is less than the
Asset Sale Offer Amount, we may use any remaining Net Cash Proceeds for general
corporate purposes as otherwise permitted by the indenture. Following each Asset
Sale Offer the Excess Proceeds amount shall be reset to zero.
For purposes of determining the percentage of the consideration for the
Asset Sale received in cash or Cash Equivalents, total consideration received
means the total consideration received for such Asset Sales minus the amount of:
- Purchase Money Indebtedness or Mortgage Indebtedness secured solely by the
assets sold and assumed by a transferee, and
- property that within 30 days of such Asset Sale is converted into cash or
Cash Equivalents, PROVIDED that such cash and Cash Equivalents shall be
treated as Net Cash Proceeds attributable to the original Asset Sale for
which such property was received.
Notwithstanding, and without complying with, the provisions of this
covenant, we and our Subsidiaries may:
(1) in the ordinary course of business:
(a) convey, sell, transfer, assign or otherwise dispose of inventory and
other assets acquired and held for resale in the ordinary course of
business, and
(b) liquidate Cash Equivalents;
(2) convey, sell, transfer, assign or otherwise dispose of assets pursuant
to and in accordance with the covenant "Limitation on Merger, Sale or
Consolidation";
(3) sell or dispose of damaged, worn out, scrap or other obsolete property
in the ordinary course of business so long as such property is no longer
necessary for the proper conduct of the business of ours or such
Subsidiary, as applicable; and
(4) convey, sell, transfer, assign or otherwise dispose of assets to us or
any of our Wholly-owned Subsidiary guarantors;
(5) in the ordinary course of business, convey, sell, transfer, assign, or
otherwise dispose of assets or related assets in related transactions
with a fair market value of less than $250,000; and
(6) surrender or waive contract rights or settle, release or surrender of
contract, tort or other claims of any kind or grant Liens not prohibited
by the indenture.
All Net Cash Proceeds from an Event of Loss relating to a Material Facility
shall be invested, used for prepayment of Senior Indebtedness or used to
repurchase notes, all within the period and as otherwise provided above in
clauses (1)(a) or (b) of the first paragraph of this covenant plus 90 days.
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In addition to the foregoing and notwithstanding anything herein to the
contrary, we will not, and will not permit any of our Subsidiaries to, directly
or indirectly make any Asset Sale of any of the Equity Interests of any
Subsidiary of ours other than us or a Wholly-owned Subsidiary guarantor, except
pursuant to an Asset Sale of all the Equity Interests of such Subsidiary.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this paragraph, compliance
by us or any of our subsidiaries with such laws and regulations shall not in and
of itself cause a breach of our obligations under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest will be paid to the
person in whose name a note is registered at the close of business on such
Record Date, and such interest will not be payable to holders who tender notes
pursuant to such Asset Sale Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
Neither we nor any of our Subsidiaries will be permitted to enter into or
suffer to exist any contract, agreement, arrangement or transaction with any
Affiliate, an "Affiliate Transaction", or any series of related Affiliate
Transactions, other than Exempted Affiliate Transactions, unless:
- it is determined that the terms of such Affiliate Transaction are fair and
reasonable to us, and no less favorable to us than could have been
obtained in an arm's length transaction with a non-Affiliate,
- if involving consideration to either party in excess of $1.0 million, the
Affiliate Transaction is evidenced by an Officers' Certificate addressed
and delivered to the trustee certifying that such Affiliate Transaction
has been approved by a majority of the members of the Board of Directors
that are disinterested in such transaction, and
- if involving consideration to either party in excess of $5.0 million, we
obtain, prior to the consummation of an Affiliate Transaction, a written
favorable opinion as to the fairness of the transaction to us from a
financial point of view from an independent investment banking firm of
national reputation or, if pertaining to a matter for which such
investment banking firms do not customarily render such opinions, an
appraisal or valuation firm of national reputation.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
We will not consolidate with or merge with or into another person or,
directly or indirectly, sell, lease, convey or transfer all or substantially all
of our assets (computed on a consolidated basis), whether in a single
transaction or a series of related transactions, to another Person or group of
affiliated Persons unless:
(1) we are the continuing entity;
(2) the resulting, surviving or transferee entity is a corporation organized
under the laws of the United States, any state thereof or the District of
Columbia and expressly assumes by supplemental indenture all of our
obligations in connection with the notes and the indenture;
(3) no Default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction; and
(4) unless such transaction is solely the merger of us and one of our
previously existing Wholly-owned Subsidiaries which is also a guarantor
and which transaction is not in connection with any other transaction,
immediately after giving effect to such transaction on a pro forma basis,
the consolidated resulting, surviving or transferee entity would
immediately thereafter be
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permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Debt Incurrence Ratio set forth in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially all
of our assets in accordance with the foregoing, the successor corporation formed
by such consolidation or into which we are merged or to which such transfer is
made shall succeed to and be substituted for us, and may exercise every right
and power of ours under the indenture with the same effect as if such successor
corporation had been named therein as us. We shall be released from the
obligations under the notes and the indenture except with respect to any
obligations that arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer by lease, assignment, sale or
otherwise of all or substantially all of the properties and assets of one or
more Subsidiaries, our interest in which constitutes all or substantially all of
our properties and assets shall be deemed to be the transfer of all or
substantially all of our properties and assets.
LIMITATION ON LINES OF BUSINESS
Neither we nor any of our Subsidiaries shall directly or indirectly engage
to any substantial extent in any line or lines of business activity other than
that which, in the reasonable good faith judgment of our Board of Directors, is
a Related Business.
FUTURE SUBSIDIARY GUARANTORS
All of our present and future Subsidiaries will jointly and severally,
fully, irrevocably and unconditionally guarantee all principal, premium, if any,
and interest on the notes on a senior subordinated basis. The term Subsidiary
does not include Unrestricted Subsidiaries.
RELEASE OF GUARANTORS
The indenture provides that no guarantor shall consolidate or merge with or
into another person, whether or not such guarantor is the surviving person,
unless:
- subject to the provisions of the following paragraph and other provisions
of the indenture, the person formed by or surviving any such consolidation
or merger, if other than such guarantor, assumes all the obligations of
such guarantor pursuant to a supplemental indenture in form reasonably
satisfactory to the trustee, pursuant to which such person shall
unconditionally guarantee, on a senior subordinated basis, all of such
guarantor's obligations under such guarantor's guarantee, on the terms set
forth in the indenture; and
- immediately before and immediately after giving effect to such transaction
on a pro forma basis, no Default or Event of Default shall have occurred
or be continuing.
A guarantor will be deemed released from its obligations under its guarantee
of the notes upon the sale or disposition, whether by merger, stock purchase,
asset sale or otherwise, of that guarantor or all of its assets to an entity
which is not a guarantor or the designation of a Subsidiary to become an
Unrestricted Subsidiary, which transaction is otherwise in compliance with the
indenture; PROVIDED, HOWEVER, that any such termination shall occur only in the
event that all obligations of that guarantor under all of its guarantees of and
under all of its pledges of assets or other security interests which secure any
Indebtedness of ours or any other of our Subsidiary shall also terminate upon
such release, sale or transfer.
LIMITATION ON STATUS AS INVESTMENT COMPANY
We and our Subsidiaries may not be required to register as an "investment
company," as that term is defined in the Investment Company Act of 1940, or may
not otherwise become subject to regulation under the Investment Company Act.
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REPORTS
Whether or not we are subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, we shall deliver to the trustee and to each holder
within 15 days after the time period specified in the Securities and Exchange
Commission's rules and regulations:
- all annual and quarterly financial statements substantially equivalent to
financial statements that would have been included in reports filed with
the Commission on Forms 10-K and 10-Q, including, with respect to annual
information only, a report thereon by our certified independent public
accountants as such would be required in such reports to the Commission;
and
- all current reports that would be required to be filed with the Commission
on Form 8-K if we were required to file such reports.
In each case, we shall include a management's discussion and analysis of
financial condition and results of operations which would be so required. Unless
the Commission will not accept such reports, we will file with the Commission
the annual, quarterly and other reports which we are or would have been required
to file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
- our failure to pay any installment of interest or liquidated damages, if
any, on the notes as and when the same becomes due and payable and the
continuance of any such failure for 30 days;
- our failure to pay all or any part of the principal, or premium, if any,
on the notes when and as the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation,
payment of the Change of Control Purchase Price or the Asset Sale Offer
Price;
- the failure by us or any Subsidiary of ours to observe or perform any
other covenant or agreement contained in the notes or the indenture and,
subject to some exceptions, the continuance of such failure for a period
of 30 days after written notice is given to us by the trustee or to us and
the trustee by the holders of at least 25% in aggregate principal amount
of the notes outstanding;
- events of bankruptcy, insolvency or reorganization with respect to us or
any of our Significant Subsidiaries;
- a default in any issue of our Indebtedness or that of any of our
Subsidiaries with an aggregate principal amount in excess of $5.0 million
resulting from either the failure to pay principal at maturity or as a
result of which the maturity of such Indebtedness has been accelerated
prior to its stated maturity; and
- final unsatisfied judgments not covered by insurance aggregating in excess
of $5.0 million at any one time, rendered against us or any of our
Subsidiaries which are not stayed, bonded or discharged within 60 days.
If a Default occurs and is continuing, the trustee must give the holders
notice of such default within 90 days after the occurrence of such default.
Other than an Event of Default resulting from events of bankruptcy,
insolvency or reorganization relating to us or any of our Significant
Subsidiaries, if an Event of Default occurs and is continuing, then in every
such case, either the trustee or the holders of at least 25% in aggregate
principal amount of the notes then outstanding, by notice in writing to us and
to the trustee if given by holders (an "Acceleration Notice"), may declare all
principal, determined as set forth below, and accrued interest and liquidated
damages, if any, thereon to be due and payable immediately. If any senior debt
is
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outstanding pursuant to the credit agreement, upon a declaration of such
acceleration, such principal and interest shall be due and payable upon the
earlier of:
- the third Business Day after the sending to us and the Representative of
such written notice, unless such Event of Default is cured or waived prior
to such date; and
- the date of acceleration of any senior debt under the credit agreement.
If an Event of Default resulting from events of bankruptcy, insolvency or
reorganization relating to us or any of our Significant Subsidiaries occurs, all
principal and accrued interest and liquidated damages, if any, thereon will be
immediately due and payable on all outstanding notes without any declaration or
other act on the part of trustee or the holders. The holders of a majority in
aggregate principal amount of notes generally are authorized to rescind such
acceleration if all existing Events of Default have been cured or waived, other
than:
- the non-payment of the principal of, premium, if any, and interest on the
notes which have become due solely by such acceleration, and
- except on default with respect to any provision requiring a supermajority
approval to amend, which default may only be waived by such a
supermajority.
Prior to the declaration of acceleration of the maturity of the notes, the
holders of a majority in aggregate principal amount of the notes at the time
outstanding may waive on behalf of all the holders any default, except:
- a default with respect to any provision requiring a supermajority approval
to amend, which default may only be waived by such a supermajority,
- a default in the payment of principal of or interest on any note not yet
cured, or
- a default with respect to any covenant or provision which cannot be
modified or amended without the consent of the holder of each outstanding
note affected.
Subject to the provisions of the indenture relating to the duties of the
trustee, the trustee will be under no obligation to exercise any of its rights
or powers under the indenture at the request, order or direction of any of the
holders, unless such holders have offered to the trustee reasonable security or
indemnity. Subject to all provisions of the indenture and applicable law, the
holders of a majority in aggregate principal amount of the notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee, or exercising
any trust or power conferred on the trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option, elect to have our obligations and the obligations of
the guarantors discharged with respect to the outstanding notes ("Legal
Defeasance"). Such Legal Defeasance means that we shall be deemed to have paid
and discharged the entire indebtedness represented, and the indenture shall
cease to be of further effect as to all outstanding notes and guarantees, except
as to:
- rights of holders to receive payments in respect of the principal of,
premium, if any, and interest and liquidated damages, if any, on such
notes when such payments are due from the trust funds;
- our obligations with respect to such notes concerning issuing temporary
notes, registration of notes, mutilated, destroyed, lost or stolen notes,
and the maintenance of an office or agency for payment and money for
security payments held in trust;
- the rights, powers, trust, duties, and immunities of the trustee, and our
obligations in connection therewith; and
- the Legal Defeasance provisions of the indenture.
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In addition, we may, at our option and at any time, elect to have our
obligations and the guarantors released with respect to some of the covenants
that are described in the indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the notes. Covenant Defeasance will not affect
holders' rights with respect to non-payment, guarantees, bankruptcy,
receivership, rehabilitation and insolvency events.
In order to exercise either Legal Defeasance or Covenant Defeasance, we must
irrevocably deposit with the trustee, in trust, for the benefit of the holders
of the notes:
(1) U.S. legal tender, U.S. Government Obligations or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal
of, premium, if any, and interest on such notes on the stated date for
payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on such notes,
and
(2) the holders of notes must have a valid, perfected, exclusive security
interest in such trust;
(3) in the case of Legal Defeasance, we shall have delivered to the trustee
an opinion of counsel in the United States reasonably acceptable to the
trustee confirming that:
(a) we have received from, or there has been published by the Internal
Revenue Service, a ruling, or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that
the holders of such notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred.
(4) in the case of Covenant Defeasance, we shall have delivered to the
trustee an opinion of counsel in the United States reasonably acceptable
to such trustee confirming that the holders of such notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
(5) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit;
(6) we shall have delivered to the trustee an Officer's Certificate
acceptable to the trustee, to the effect that, assuming no intervening
bankruptcy of ours between the date of deposit and the 91st day following
the deposit and that no holder of the notes is an insider of ours, after
the 91st day following the deposit, the trust funds will not be subject
to the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors rights generally;
(7) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the indenture or
any other material agreement or instrument to which we or any of our
Subsidiaries is a party or by which we or any of our Subsidiaries is
bound;
(8) we shall have delivered to the trustee an Officers' Certificate stating
that the deposit was not made by us with the intent of preferring the
holders of such notes over any other creditors of ours or with the intent
of defeating, hindering, delaying or defrauding any other creditors of
ours or others;
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(9) we shall have delivered to the trustee an Officers' Certificate stating
that the conditions precedent set forth above in the first eight clauses
of this paragraph have been complied with; and
(10) we shall have delivered to the trustee an opinion of counsel, stating
that the conditions precedent set forth above in the first clause of this
paragraph with respect to the validity and perfection of the security
interest, and in the second, third and fifth clauses of this paragraph
have been complied with.
If the funds deposited with the trustee to effect Covenant Defeasance are
insufficient to pay the principal of, premium, if any, and interest on the notes
when due, then our obligations and those of the guarantors under the indenture
and the Collateral Agreement will be revived and no such defeasance will be
deemed to have occurred.
AMENDMENTS AND SUPPLEMENTS
We, the guarantors and the trustee may enter into a supplemental indenture
for limited purposes without the consent of the holders. With the consent of the
holders of not less than a majority in aggregate principal amount of the notes
at the time outstanding, we, the guarantors and the trustee are permitted to
amend or supplement the indenture or any supplemental indenture or modify the
rights of the holders. No such modification may, however, without the consent of
holders of at least 66 2/3% in aggregate principal amount of notes at the time
outstanding, modify the provisions including the defined terms used therein of
the covenant "Repurchase of Notes at the Option of the Holder Upon a Change of
Control" in a manner adverse to the holders; and no such modification may,
without the consent of each holder affected thereby:
- change the Stated Maturity on any note;
- reduce the principal amount thereof or the rate or extend the time for
payment of interest thereon or any premium payable upon the redemption at
our option thereof;
- change the place of payment where, or the coin or currency in which, any
note or any premium or the interest thereon is payable;
- impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity thereof, or, in the case of redemption at
our option, on or after the Redemption Date;
- reduce the Change of Control Purchase Price or the Asset Sale Offer Price;
- alter the provisions, including the defined terms used therein, regarding
our right to redeem the notes as a right, or at our option in a manner
adverse to the holders;
- reduce the percentage in principal amount of the outstanding notes, the
consent of whose holders is required for any such amendment, supplemental
indenture or waiver provided for in the indenture; or
- modify any of the waiver provisions, except to increase any required
percentage or to provide that other specific provisions of the indenture
cannot be modified or waived without the consent of the holder of each
outstanding note affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
No past, present or future direct or indirect stockholder, employee, officer
or director, as such, of ours, our guarantors or any successor entity shall have
any personal liability for any of our obligations or those of the guarantors
under the indenture or the notes solely by reason of his, her or its status as
such stockholder, employee, officer or director. This provision shall not limit
the obligation of any guarantor pursuant to any guarantee of the notes.
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DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of ours,
including by designation, or is merged or consolidated into or with us or one of
our Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of any person or all
or substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"AFFILIATE" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with us. For purposes
of this definition, the term "control" means the power to direct the management
and policies of a person, directly or through one or more intermediaries,
whether through the ownership of voting securities, by contract, or otherwise,
PROVIDED, THAT, with respect to ownership interest in us and our Subsidiaries, a
Beneficial Owner of 10% or more of the total voting power normally entitled to
vote in the election of directors, managers or trustees, as applicable, shall
for such purposes be deemed to constitute control.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing:
(1) the sum of the products:
(a) of the number of years from the date of determination to the date or
dates of each successive scheduled principal or redemption payment of
such security or instrument and
(b) the amount of each such respective principal or redemption payment;
(2) by the sum of all such principal or redemption payments.
"BENEFICIAL OWNER" or "BENEFICIAL OWNER" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Issue Date, whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"BOARD OF DIRECTORS" means, with respect to any person, the board of
directors of such person or any committee of the Board of Directors of such
person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such person.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL CONTRIBUTION" means any contribution to our equity from our direct
or indirect parent for which no consideration other than the issuance of common
stock with no redemption rights and no special preferences, privileges or voting
rights is given.
"CAPITALIZED LEASE OBLIGATION" means, as to any person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests, however designated, in
stock issued by that corporation.
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"CASH EQUIVALENT" means any of the following which matures within one year
after the date of acquisition:
- securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America
is pledged in support thereof);
- time deposits and certificates of deposit and commercial paper issued by
the parent corporation of any domestic commercial bank of recognized
standing having capital and surplus in excess of $500 million; or
- commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or at least P-2 or the equivalent
thereof by Moody's Investors Service, Inc.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) prior to consummation of an Initial Public Equity Offering, the Excluded
Persons shall cease to own beneficially and of record at least 51% of the
total voting power in the aggregate of all classes of our Capital Stock
then outstanding normally entitled to vote in elections of directors; or
(2) on or following the consummation of an Initial Public Equity Offering;
(a) any merger or consolidation of us with or into any person or any
direct or indirect sale, transfer or other conveyance, in one
transaction or a series of related transactions, of all or
substantially all of our assets, on a consolidated basis if,
immediately after giving effect to such transaction(s):
- any "person" or "group" as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, other than any of the
Excluded Persons, is or becomes the "beneficial owner," directly or
indirectly, of more than 35% of the total voting power in the
aggregate normally entitled to vote in the election of directors,
managers, or trustees of the transferee(s) or surviving entity or
entities; and
- any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting
power, than beneficially owned by the Excluded Persons;
(b) any "person" or "group" as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, other than any of the
Excluded Persons:
- is or becomes the "beneficial owner," directly or indirectly, of
more than 35% of the total voting power in the aggregate of all
classes of our Capital Stock then outstanding normally entitled to
vote in elections of directors; and
- any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting
power, than beneficially owned by the Excluded Persons; or
(c) during any period of 12 consecutive months after the Issue Date,
individuals who at the beginning of any such 12-month period
constituted our Board of Directors, together with any new directors
whose election by such Board of Directors or whose nomination for
election by our shareholders was approved by a vote of a majority of
the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority of our Board of Directors then in office.
"CONSOLIDATION" means, with respect to us, the consolidation of the accounts
of the Subsidiaries with our accounts, all in accordance with GAAP; PROVIDED
that "consolidation" will not include
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consolidation of the accounts of any Unrestricted Subsidiary with our accounts.
The term "consolidated" has a correlative meaning to the foregoing.
"CONSOLIDATED COVERAGE RATIO" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of:
(1) the aggregate amount of Consolidated EBITDA of such person attributable
to continuing operations and businesses (exclusive of amounts
attributable to operations and businesses permanently discontinued or
disposed of) for the Reference Period
(2) to the aggregate Consolidated Fixed Charges of such person (exclusive of
amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations
giving rise to such Consolidated Fixed Charges would no longer be
obligations contributing to such person's Consolidated Fixed Charges
subsequent to the Transaction Date) during the Reference Period;
PROVIDED, that for purposes of such calculation:
- Acquisitions which occurred during the Reference Period or subsequent to
the Reference Period and on or prior to the Transaction Date shall be
assumed to have occurred on the first day of the Reference Period;
- transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period;
- the incurrence of any Indebtedness or issuance of any Disqualified Capital
Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the
proceeds therefrom to the extent used to refinance or retire other
Indebtedness) shall be assumed to have occurred on the first day of the
Reference Period; and
- the Consolidated Fixed Charges of such person attributable to interest on
any Indebtedness or dividends on any Disqualified Capital Stock bearing a
floating interest or dividend rate shall be computed on a pro forma basis
as if the average rate in effect from the beginning of the Reference
Period to the Transaction Date had been the applicable rate for the entire
period, unless such Person or any of its Subsidiaries is a party to an
Interest Swap or Hedging Obligation, which shall remain in effect for the
12-month period immediately following the Transaction Date, that has the
effect of fixing the interest rate on the date of computation, in which
case such rate, whether higher or lower, shall be used.
"CONSOLIDATED EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto,
to the extent deducted from net revenues in determining Consolidated Net Income,
without duplication:
(1) the sum of:
(a) Consolidated income tax expense,
(b) Consolidated depreciation and amortization expense, and
(c) Consolidated Fixed Charges,
(2) less the amount of all cash payments made by such person or any of its
Subsidiaries during such period to the extent such payments relate to
non-cash charges that were added back in determining Consolidated EBITDA
for such period or any prior period, provided that consolidated income
tax expense and depreciation and amortization of a Subsidiary that is a
less than Wholly-owned Subsidiary shall only be added to the extent of
our equity interest in such Subsidiary.
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"CONSOLIDATED FIXED CHARGES" of any person means, for any period, the
aggregate amount, determined in each case in accordance with GAAP and without
duplication, of:
(1) interest expensed or capitalized, paid, accrued, or scheduled to be paid
or accrued, including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations, of such person
and its Consolidated Subsidiaries during such period, including:
(a) original issue discount and non-cash interest payments or accruals on
any Indebtedness,
(b) the interest portion of all deferred payment obligations, and
(c) all commissions, discounts and other fees and charges owed with
respect to bankers' acceptances and letters of credit financings and
currency and Interest Swap and Hedging Obligations, in each case to
the extent attributable to such period, and
(2) the amount of dividends accrued or payable or guaranteed by such person
or any of its Consolidated Subsidiaries in respect of Preferred Stock,
other than by Subsidiaries of such person to such person or such person's
Wholly-owned Subsidiaries, except if such Preferred Stock is a
payment-in-kind ("PIK") security, issuance of such additional PIK
securities would not count as dividends for purposes of this definition.
For purposes of this definition:
- interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined in good faith by us to be the rate of
interest implicit in such Capitalized Lease Obligation in accordance with
GAAP, and
- interest expense attributable to any Indebtedness represented by the
guaranty by such person or a Subsidiary of such person of an obligation of
another person shall be deemed to be the interest expense attributable to
the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the net income or loss of such person and its Consolidated Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP and adjusted
to exclude, only to the extent included in computing such net income or loss and
without duplication:
- all gains, but not losses, which are either extraordinary, as determined
in accordance with GAAP, or are either unusual or nonrecurring, including
any gain from the sale or other disposition of assets outside the ordinary
course of business or from the issuance or sale of any capital stock;
- the net income, if positive, of any person, other than a Consolidated
Subsidiary, in which such person or any of its Consolidated Subsidiaries
has an interest, except to the extent of the amount of any dividends or
distributions actually paid in cash to such person or a Consolidated
Subsidiary of such person during such period, but in any case not in
excess of such person's PRO RATA share of such person's net income for
such period;
- the net income or loss of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition; and
- the net income, if positive, of any of such person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the
terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary.
"CONSOLIDATED SUBSIDIARY" means, for any person, each Subsidiary of such
person, whether now existing or hereafter created or acquired, the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
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"CREDIT AGREEMENT" means the credit agreement entered into by and among us,
our subsidiaries, various financial institutions, and BancBoston Robertson
Stephens Inc. as arranger, BankBoston, N.A. as a lender and agent, Bank of
America, N.A. (formerly known as NationsBank, N.A.) as co-agent, the lenders
named therein, Royal Bank of Canada as syndication agent and General Electric
Capital Corporation as documentation agent, providing a revolving credit
facility, term loans and an acquisition line, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, as such credit agreement and/or related documents may be
amended, restated, supplemented, renewed, replaced or otherwise modified from
time to time whether or not with the same agent, trustee, representative lenders
or holders, and irrespective of any changes in the terms and conditions thereof.
Without limiting the generality of the foregoing, the term "Credit Agreement"
shall include agreements in respect of Interest Swap and Hedging Obligations
with lenders party to the Credit Agreement and shall also include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any credit agreement and all refundings, refinancings and
replacements of any credit agreement, including any agreement:
- extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
- adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of us and our Subsidiaries and
their respective successors and assigns,
- increasing the amount of Indebtedness incurred thereunder or available to
be borrowed thereunder, PROVIDED that on the date such Indebtedness is
incurred in accordance with the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," or
- otherwise altering the terms and conditions thereof in a manner not
prohibited by the terms of the indenture.
"DISQUALIFIED CAPITAL STOCK" means:
- with respect to any person, Equity Interests of such person that, by its
terms or by the terms of any security into which it is convertible,
exercisable or exchangeable, is, or upon the happening of an event or the
passage of time or both would be, required to be redeemed or repurchased,
including at the option of the holder thereof, such person or any of its
Subsidiaries, in whole or in part, on or prior to the Stated Maturity of
the notes, and
- with respect to any Subsidiary of such person, including with respect to
any Subsidiary of ours, any Equity Interests other than any common equity
with no preference, privileges, or redemption or repayment provisions.
"EQUITY INTEREST" of any Person means any shares, interests, participations
or other equivalents, however designated, in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such Person.
"EVENT OF LOSS" means, with respect to any property or asset, any:
- loss, destruction or damage of such property or asset or
- any condemnation, seizure or taking, by exercise of the power of eminent
domain or otherwise, of such property or asset, or confiscation or
requisition of the use of such property or asset.
"EXCLUDED PERSON" means our officers and directors and those persons who
beneficially own membership interests in Compass Holdings LLC, in each case, as
of the Issue Date.
"EXEMPTED AFFILIATE TRANSACTION" means:
- customary employee compensation arrangements approved by a majority of
independent members of our Board of Directors who are independent with
respect to such transactions;
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- dividends permitted under the terms of the covenant discussed above under
"Limitation on Restricted Payments" above and payable, in form and amount,
on a pro rata basis to all holders of our common stock;
- Management Fee Payments up to $500,000 in any fiscal year and the
reimbursement by us of reasonable out-of-pocket costs and expenses
incurred in connection with the rendering of management services to us on
our behalf;
- Permitted Payments to Parent; and
- transactions solely between us and any of our Wholly-owned Consolidated
Subsidiaries or solely among our Wholly-owned Consolidated Subsidiaries.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"GUARANTOR" means each Subsidiary of ours that executes a guarantee
guaranteeing the notes in accordance with the provisions of the indenture.
"INDEBTEDNESS" of any person means, without duplication
(1) all liabilities and obligations, contingent or otherwise, of such any
person, to the extent such liabilities and obligations would appear as a
liability upon the consolidated balance sheet of such person in
accordance with GAAP:
(a) in respect of borrowed money, whether or not the recourse of the
lender is to the whole of the assets of such person or only to a
portion thereof,
(b) evidenced by bonds, notes, debentures or similar instruments,
(c) representing the balance deferred and unpaid of the purchase price of
any property or services, except those incurred in the ordinary
course of its business that would constitute ordinarily a trade
payable to trade creditors, excluding accounts payable or other
obligations to trade creditors which have remained unpaid for greater
than 60 days past their original due date;
(2) all liabilities and obligations, contingent or otherwise, of such person
(a) evidenced by bankers' acceptances or similar instruments issued or
accepted by banks,
(b) relating to any Capitalized Lease Obligation, or
(c) evidenced by a letter of credit or a reimbursement obligation of such
person with respect to any letter of credit;
(3) all net obligations of such person under Interest Swap and Hedging
Obligations;
(4) all liabilities and obligations of others of the kind described in the
preceding clauses that such person has guaranteed or that is otherwise
its legal liability or which are secured by any assets or property of
such person and all obligations to purchase, redeem or acquire any Equity
Interests;
(5) any and all deferrals, renewals, extensions, refinancing and refundings,
whether direct or indirect, of, or amendments, modifications or
supplements to, any liability of the kind described in any of the
preceding clauses, or this clause, whether or not between or among the
same parties; and
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(6) all Disqualified Capital Stock of such Person measured at the greater of
its voluntary or involuntary maximum fixed repurchase price plus accrued
and unpaid dividends.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be determined in good faith by the
board of directors or managing general partner of the issuer of such
Disqualified Capital Stock.
"INITIAL PUBLIC EQUITY OFFERING" means an initial underwritten offering of
our common stock or that of Parent for cash pursuant to an effective
registration statement under the Securities Act as a consequence of which our
common stock or that of Parent is listed on a national securities exchange or
quoted on the national market system of the Nasdaq stock market.
"INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"INVESTMENT" by any person in any other person means, without duplication:
- the acquisition, whether by purchase, merger, consolidation or otherwise,
by such person, whether for cash, property, services, securities or
otherwise, of capital stock, bonds, notes, debentures, partnership or
other ownership interests or other securities, including any options or
warrants, of such other person or any agreement to make any such
acquisition;
- the making by such person of any deposit with, or advance, loan or other
extension of credit to, such other person, including the purchase of
property from another person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other person, or
any commitment to make any such advance, loan or extension, but excluding
accounts receivable, endorsements for collection or deposits arising in
the ordinary course of business;
- other than guarantees of Indebtedness of us or any guarantor to the extent
permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," the entering into by such
person of any guarantee of, or other credit support or contingent
obligation with respect to, Indebtedness or other liability of such other
person;
- the making of any capital contribution by such person to such other
person; and
- the designation by our Board of Directors of any person to be an
Unrestricted Subsidiary.
We shall be deemed to make an Investment in an amount equal to the fair
market value of the net assets of any subsidiary, or, if neither we nor any of
our Subsidiaries have theretofore made an Investment in such subsidiary, in an
amount equal to the Investments being made, at the time that such subsidiary is
designated an Unrestricted Subsidiary, and any property transferred to an
Unrestricted Subsidiary from us or a Subsidiary of ours shall be deemed an
Investment valued at its fair market value at the time of such transfer.
"ISSUE DATE" means the date of first issuance of the notes under the
indenture.
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"JUNIOR SECURITY" means any Qualified Capital Stock and any Indebtedness of
ours or a guarantor, as applicable, that is subordinated in right of payment to
senior debt at least to the same extent as the notes or the guarantee, as
applicable, and has no scheduled installment of principal due, by redemption,
sinking fund payment or otherwise, on or prior to the Stated Maturity of the
notes; PROVIDED, that in the case of subordination in respect of senior debt
under the credit agreement, "Junior Security" shall mean any Qualified Capital
Stock and any Indebtedness of ours or the guarantor, as applicable, that:
- has a final maturity date occurring after the final maturity date of, all
senior debt outstanding under the credit agreement on the date of issuance
of such Qualified Capital Stock or Indebtedness,
- is unsecured,
- has an Average Life longer than the security for which such Qualified
Capital Stock or Indebtedness is being exchanged, and
- by their terms or by law are subordinated to senior debt outstanding under
the credit agreement on the date of issuance of such Qualified Capital
Stock or Indebtedness at least to the same extent as the notes.
"LIEN" means any mortgage, charge, pledge, statutory or other lien,
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"MANAGEMENT FEE PAYMENTS" means payments from us to Dunhill Bank Caribbean
Ltd. and Hayes Capital Corporation under a Management Consulting Agreement,
dated March 9, 1998, by and between us, Dunhill Bank Caribbean Ltd. and Hayes
Capital Corporation, in accordance with the terms and provisions of such
Management Consulting Agreement on the Issue Date, PROVIDED, HOWEVER, that our
obligation to make such payments will be subordinated to the payment of all
Obligations with respect to the notes and any guarantee thereof.
"MATERIAL FACILITY" means a facility that has a customer certification
including without limitation D1-9000.
"MORTGAGE INDEBTEDNESS" of any person means any Indebtedness of such person
secured by real property of such person which in the reasonable good faith
judgment of the Board of Directors is directly related to a Related Business of
ours.
"NET CASH PROCEEDS" means:
(1) the aggregate amount of cash or Cash Equivalents received by us in the
case of a sale of Qualified Capital Stock and by us and our Subsidiaries
in respect of an Asset Sale;
(2) plus, in the case of an issuance of Qualified Capital Stock upon any
exercise, exchange or conversion of securities, including options,
warrants, rights and convertible or exchangeable debt of ours that were
issued for cash on or after the Issue Date the amount of cash originally
received by us upon the issuance of such securities, including options,
warrants, rights and convertible or exchangeable debt;
(3) less:
(a) in each case, the sum of all payments, fees, commissions and, in the
case of Asset Sales, reasonable and customary expenses, including,
without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses incurred in connection with such
Asset Sale or sale of Qualified Capital Stock, and
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(b) in the case of an Asset Sale only, the amount estimated reasonably
and in good faith by us of income, franchise, sales and other
applicable taxes, the computation of which shall take into account
any available net operating losses and other tax attributes of
Parent, and us and our Subsidiaries required to be paid by us or any
of our respective Subsidiaries in the taxable year of such sale in
connection with such Asset Sale.
"NON-RECOURSE INDEBTEDNESS" means our Indebtedness or that of our
Subsidiaries to the extent that:
- under the terms thereof or pursuant to law, no personal recourse may be
had against us or our Subsidiaries for the payment of the principal of or
interest or premium on such Indebtedness, and enforcement of obligations
on such Indebtedness, except with respect to fraud, willful misconduct,
misrepresentation, misapplication of funds, reckless damage to assets and
undertakings with respect to environmental matters or construction
defects, is limited only to recourse against interests in specified assets
and property (the "Special Assets"), accounts and proceeds arising
therefrom, and rights under purchase agreements or other agreements with
respect to such Subject Assets;
- such Indebtedness is incurred concurrently with the acquisition by us or
our Subsidiaries of such Subject Assets, or a Person or interests in a
Person holding such Subject Assets, or constitutes Refinancing
Indebtedness with respect to Indebtedness so incurred; and
- the Subject Assets are not existing assets and no existing assets or
proceeds from the sale, transfer or other disposition of existing assets
were used to acquire such Subject Assets.
"OBLIGATION" means any principal, premium or interest payment, or monetary
penalty, or damages, due by us or any guarantor under the terms of the notes or
the indenture, including any liquidated damages due pursuant to the terms of the
registration rights agreement.
"PARENT" means Compass Holdings LLC or its successor, so long as such entity
owns at least 51% of our Capital Stock.
"PERMITTED INDEBTEDNESS" means that:
- we and the guarantors may incur Indebtedness evidenced by the notes and
represented by the indenture up to the amounts specified therein as of the
date thereof;
- we and the guarantors, as applicable, may incur Refinancing Indebtedness
with respect to any Indebtedness or Disqualified Capital Stock, as
applicable, described in the foregoing clause of this definition or
incurred under the Debt Incurrence Ratio test of the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
or which is outstanding on the Issue Date, provided that in each case such
Refinancing Indebtedness is secured only by the assets that secured the
Indebtedness so refinanced;
- we and our Subsidiaries may incur Indebtedness solely in respect of
bankers acceptances, and performance bonds to the extent that such
incurrence does not result in the incurrence of any obligation to repay
any obligation relating to borrowed money of others, all in the ordinary
course of business in accordance with customary industry practices, in
amounts and for the purposes customary in our industry; PROVIDED, that the
aggregate principal amount outstanding of such Indebtedness, including any
Refinancing Indebtedness and any other Indebtedness issued to refinance,
refund, defease or replace such Indebtedness, shall at no time exceed
$250,000;
- we may incur Indebtedness to any guarantor, and any guarantor may incur
Indebtedness to any other guarantor or to us; PROVIDED, that, in the case
of our Indebtedness, such obligations shall be unsecured and subordinated
in all respects to our obligations pursuant to the notes and the date of
any event that causes such guarantor no longer to be a guarantor shall be
an Incurrence Date; and
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- any guarantor may guaranty any of our Indebtedness or that of another
guarantor that was permitted to be incurred pursuant to the indenture,
substantially concurrently with such incurrence or at the time such person
becomes a guarantor.
"PERMITTED INVESTMENT" means:
- Investments in any of the notes;
- Investments in Cash Equivalents;
- intercompany notes to the extent permitted under the definition of
"Permitted Indebtedness" and
- any Investment by us or any guarantor in a Person if as a result of such
Investment such Person immediately becomes a Wholly-owned Subsidiary
guarantor or such Person is immediately merged with or into us or a
Wholly-owned Subsidiary guarantor.
"PERMITTED LIEN" means:
(1) Liens existing on the Issue Date;
(2) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with
respect thereto are maintained on our books in accordance with GAAP;
(3) statutory liens of carriers, warehousemen, mechanics, material men,
landlords, repairmen or other like Liens arising by operation of law in
the ordinary course of business provided that:
(a) the underlying obligations are not overdue for a period of more than
30 days, or
(b) such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are maintained
on our books in accordance with GAAP;
(4) Liens securing the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(5) easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects which, singly or in the aggregate, do not
in any case materially detract from the value of the property, subject
thereto (as such property is used by us or any of our Subsidiaries) or
interfere with the ordinary conduct of our business or that of any of our
Subsidiaries;
(6) Liens arising by operation of law in connection with judgments, only to
the extent, for an amount and for a period not resulting in an Event of
Default with respect thereto;
(7) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(8) Liens securing the notes;
(9) Liens securing Indebtedness of a Person existing at the time such Person
becomes a Subsidiary or is merged with or into us or a Subsidiary or
Liens securing Indebtedness incurred in connection with an Acquisition,
PROVIDED that such Liens were in existence prior to the date of such
acquisition, merger or consolidation, were not incurred in anticipation
thereof, and do not extend to any other assets;
(10) Liens arising from Purchase Money Indebtedness or Mortgage Indebtedness
permitted to be incurred pursuant to the covenant "Limitation on
Incurrence of Additional Indebtedness and
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Disqualified Capital Stock" PROVIDED such Liens relate solely to the
property which is subject to such Purchase Money Indebtedness or Mortgage
Indebtedness, as applicable;
(11) Leases or subleases granted to other persons in the ordinary course of
business not materially interfering with the conduct of our business or
that of any of our Subsidiaries or materially detracting from the value
of our relative assets or those of any Subsidiary;
(12) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by us or any of
our Subsidiaries in the ordinary course of business;
(13) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse
to the holders of the notes than the terms of the Liens securing such
refinanced Indebtedness, and provided that the Indebtedness secured is
not increased and the lien is not extended to any additional assets or
property that would not have been security for the Indebtedness
refinanced; and
(14) Liens securing Indebtedness incurred under the credit agreement in
accordance with the terms of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
"PERMITTED PAYMENTS TO PARENT" means without duplication:
- payments to Parent in an amount sufficient to permit Parent to pay
reasonable and necessary operating expenses and other general corporate
expenses to the extent such expenses relate or are fairly allocable to us
and our Subsidiaries, provided such expenses do not exceed $250,000 in any
fiscal year; and
- payments to Parent to enable Parent to pay foreign, federal, state or
local tax liabilities ("Tax Payment"), not to exceed the amount of any tax
liabilities that would be otherwise payable by us and our Subsidiaries and
Unrestricted Subsidiaries to the appropriate taxing authorities if they
filed separate tax returns to the extent that Parent has an obligation to
pay such tax liabilities relating to our operations, assets or capital or
those of our Subsidiaries and Unrestricted Subsidiaries;
PROVIDED, HOWEVER, that, notwithstanding the foregoing:
- in the case of determining the amount of a Tax Payment that is permitted
to be paid by us and any of our United States subsidiaries in respect of
their Federal income tax liability, such payment shall be determined on
the basis of assuming that all payments made to Parent pursuant to the
immediately preceding clause shall be treated as a deductible expense of
ours in the taxable year during which the obligation to make such payment
accrues; and
- any Tax Payments shall either be used by Parent to pay such tax
liabilities within 90 days of Parent's receipt of such payment or refunded
to the payee.
"PURCHASE MONEY INDEBTEDNESS" of any person means any Non-Recourse
Indebtedness of such person to any seller or other person incurred solely to
finance the acquisition (including in the case of a Capitalized Lease
Obligation, the lease) of any after acquired tangible property which, in the
reasonable good faith judgment of our Board of Directors, is directly related to
a Related Business of ours and which is incurred substantially concurrently with
such acquisition and is secured only by the assets so financed.
"QUALIFIED CAPITAL STOCK" means any of our Capital Stock that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or of our Indebtedness issued
on or after the Issue Date with the Net Cash
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Proceeds received by us from the substantially concurrent sale of Qualified
Capital Stock or any exchange of Qualified Capital Stock for any of our Capital
Stock or for our Indebtedness issued on or after the Issue Date.
"REFERENCE PERIOD" with regard to any person means the four full fiscal
quarters, or such lesser period during which such person has been in existence,
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the notes or the indenture.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock:
(1) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease,
refund, refinance, discharge or otherwise retire for value, in whole or
in part, or constituting an amendment, modification or supplement to, or
a deferral or renewal of (a "Refinancing"), any Indebtedness or
Disqualified Capital Stock in a principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, not to exceed the
lesser of the following, after deduction of reasonable and customary fees
and expenses incurred in connection with the Refinancing plus the amount
of any premium paid in connection with such Refinancing in accordance
with the terms of the documents governing the Indebtedness refinanced
without giving effect to any modification thereof made in connection with
or in contemplation of such refinancing:
(a) the principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, of the Indebtedness or Disqualified Capital
Stock so Refinanced, and
(b) if such Indebtedness being Refinanced was issued with an original
issue discount, the accreted value thereof, as determined in
accordance with GAAP, at the time of such Refinancing;
(2) PROVIDED, that:
(a) such Refinancing Indebtedness of any Subsidiary of ours shall only be
used to Refinance outstanding Indebtedness or Disqualified Capital
Stock of such Subsidiary,
(b) such Refinancing Indebtedness shall not have an Average Life shorter
than the Indebtedness or Disqualified Capital Stock to be so
refinanced at the time of such Refinancing and in all respects, be no
less subordinated or junior, if applicable, to the rights of holders
of the notes than was the Indebtedness or Disqualified Capital Stock
to be refinanced,
(c) such Refinancing Indebtedness shall have a final stated maturity or
redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or
Disqualified Capital Stock to be so refinanced, and
(d) such Refinancing Indebtedness shall be secured, if secured, in a
manner no more adverse to the holders of the notes than the terms of
the Liens, if any, securing such refinanced Indebtedness, including,
without limitation, the amount of Indebtedness secured shall not be
increased.
"RELATED BUSINESS" means the business conducted, or proposed to be
conducted, by us and our Subsidiaries as of the Issue Date and any and all
businesses that in the good faith judgment of our Board of Directors are
materially related businesses.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than other Permitted Investments.
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"RESTRICTED PAYMENT" means, with respect to any person:
- the declaration or payment of any dividend or other distribution in
respect of Equity Interests of such person or any parent or Subsidiary of
such person;
- any payment on account of the purchase, redemption or other acquisition or
retirement for value of Equity Interests of such person or any Subsidiary
or parent of such person;
- other than with the proceeds from the substantially concurrent sale of, or
in exchange for, Refinancing Indebtedness any purchase, redemption, or
other acquisition or retirement for value of, any payment in respect of
any amendment of the terms of or any defeasance of, any Subordinated
Indebtedness, directly or indirectly, by such person or a parent or
Subsidiary of such person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the case may
be, of such Indebtedness;
- any Restricted Investment by such person, and
- any Management Fee Payments or similar payments to any Affiliates other
than Subsidiaries in excess of an aggregate of $500,000 in any fiscal
year; PROVIDED, HOWEVER, that our obligation to pay such Management Fee
Payments will be subordinated to the payment of all Obligations with
respect to the notes and any guarantee thereof.
The term "Restricted Payment" shall not include:
- any dividend, distribution or other payment on or with respect to Equity
Interests of an issuer to the extent payable solely in shares of Qualified
Capital Stock of such issuer; or
- any dividend, distribution or other payment to us, or to any of our
guarantors, by us or any of our Subsidiaries.
"SENIOR DEBT" of ours or any guarantor means Indebtedness, including any
monetary obligation in respect of the credit agreement, and interest, whether or
not allowable, accruing on Indebtedness incurred pursuant to the credit
agreement after the filing of a petition initiating any proceeding under any
bankruptcy, insolvency or similar law, of us or such guarantor arising under the
credit agreement or that, by the terms of the instrument creating or evidencing
such Indebtedness, is expressly designated senior debt and made senior in right
of payment to the notes or the applicable guarantee; PROVIDED, that in no event
shall senior debt include:
- Indebtedness to any of our Subsidiaries or any of our officers, directors,
or employees or those of any of our Subsidiaries;
- Indebtedness incurred in violation of the terms of the indenture;
- Indebtedness to trade creditors;
- Disqualified Capital Stock;
- Capitalized Lease Obligations; and
- any liability for taxes owed or owing by us or such guarantor.
"SIGNIFICANT SUBSIDIARY" shall have the meaning provided under
Regulation S-X of the Securities Act, as in effect on the Issue Date.
"STATED MATURITY," when used with respect to any note, means April 15, 2005.
"SUBORDINATED INDEBTEDNESS" means our Indebtedness or that of a guarantor
that is subordinated in right of payment by its terms or the terms of any
document or instrument relating thereto to the notes or such guarantee, as
applicable, in any respect or has a stated maturity after the Stated Maturity.
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"SUBSIDIARY," with respect to any person, means:
- a corporation a majority of whose Equity Interests with voting power,
under ordinary circumstances, to elect directors is at the time, directly
or indirectly, owned by such person, by such person and one or more
Subsidiaries of such person or by one or more Subsidiaries of such person;
- any other person, other than a corporation, in which such person, one or
more Subsidiaries of such person, or such person and one or more
Subsidiaries of such person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest; or
- a partnership in which such person or a Subsidiary of such person is, at
the time, a general partner.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall not be a
Subsidiary of ours or of any of our Subsidiaries. Unless the context requires
otherwise, Subsidiary means each direct and indirect Subsidiary of ours.
"UNRESTRICTED SUBSIDIARY" means any of our Subsidiaries that does not own
any Capital Stock of, or own or hold any Lien on any of our property or that of
any of our Subsidiaries and that, at the time of determination, shall be an
Unrestricted Subsidiary as designated by our Board of Directors; PROVIDED, that:
- such subsidiary shall not engage, to any substantial extent, in any line
or lines of business activity other than a Related Business;
- neither immediately prior thereto nor after giving pro forma effect to
such designation would there exist a Default or Event of Default; and
- immediately after giving pro forma effect thereto, we could incur at least
$1.00 of Indebtedness pursuant to the Debt Incurrence Ratio of the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
Our Board of Directors may designate any Unrestricted Subsidiary to be a
Subsidiary, PROVIDED, that:
- no Default or Event of Default is existing or will occur as a consequence
thereof; and
- immediately after giving effect to such designation, on a pro forma basis,
we could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock."
Each such designation shall be evidenced by filing with the trustee a certified
copy of the resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions.
"U.S. GOVERNMENT OBLIGATIONS" means direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
"WHOLLY-OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of
which are owned by us or one or more of our Wholly-owned Subsidiaries.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Series D notes will be issued in the form of one or more registered
global notes without interest coupons (collectively, the "Global Notes"). Upon
issuance, the Global Notes will be deposited with the trustee, as custodian for
DTC, in New York, New York, and registered in the name of DTC or its nominee for
credit to the accounts of DTC's Direct and Indirect Participants, as defined
below.
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Beneficial interests in all Global Notes and all Certificated Notes, as
defined below, if any, will be subject to restrictions on transfer and will bear
a restrictive legend as described under "Notice to Investors." In addition,
transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
including, if applicable, those of Euroclear and CEDEL, which may change from
time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in limited
circumstances. Beneficial interests in the Global Notes may be exchanged for
notes in certificated form in limited circumstances. You should read the
discussion under the heading "--Transfer of Interests in Global Notes for
Certificated Notes" for further information regarding such an exchange.
Initially, the trustee will act as Paying Agent and Registrar. The notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITORY PROCEDURES
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the "Direct
Participants") and to facilitate the clearance and settlement of transactions in
those securities between Direct Participants through electronic book-entry
changes in accounts of Participants. The Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and various
other organizations, including Euroclear and Cedel. Access to DTC's system is
also available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"Indirect Participants").
DTC has also advised us that, pursuant to procedures established by it:
- upon deposit of the Global Notes for exchange, DTC will credit the
accounts of the Direct Participants with such portions of the principal
amount of the Global Notes as determined based on the portion of
outstanding Series C notes deposited by such Direct Participant as
designated by the exchange agent, and
- DTC will maintain records of the ownership interests of such Direct
Participants in the Global Notes and the transfer of ownership interests
by and between Direct Participants.
DTC will not maintain records of the ownership interests of, or the transfer
of ownership interests by and between, Indirect Participants or other owners of
beneficial interests in the Global Notes. Direct Participants and Indirect
Participants must maintain their own records of the ownership interests of, and
the transfer of ownership interests by and between, Indirect Participants and
other owners of beneficial interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. All ownership interests in
any Global Notes may be subject to the procedures and requirements of DTC.
The laws of some states in the United States require that some persons take
physical delivery in definitive, certificated form, of securities that they own.
This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. You should read the
discussion under the heading "--Transfers of Interests in Global Notes for
Certificated Notes" for further information on other restrictions on the
transferability of the notes.
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Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the indenture for any purpose.
Under the terms of the indenture, we, the guarantors and the trustee will
treat the persons in whose names the notes are registered, including notes
represented by Global Notes, as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Payments in respect of
the principal, premium, and interest on Global Notes registered in the name of
DTC or its nominee will be payable by the trustee to DTC or its nominee as the
registered holder under the indenture. Consequently, neither we, the trustee nor
any agent of ours or the trustee has or will have any responsibility or
liability for:
- any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's
or Indirect Participant's records relating to the beneficial ownership
interests in any Global Note, or
- any other matter relating to the actions and practices of DTC or any of
its Direct Participants or Indirect Participants.
DTC has advised us that its current payment practice for payments of
principal, interest and the like with respect to securities such as the notes is
to credit the accounts of the relevant Direct Participants with such payment on
the payment date in amounts proportionate to such Direct Participant's
respective ownership interests in the Global Notes as shown on DTC's records.
Payments by Direct Participants and Indirect Participants to the beneficial
owners of the notes will be governed by standing instructions and customary
practices between them and will not be the responsibility of DTC, the trustee,
us or the guarantors. Neither we, the guarantors nor the trustee will be liable
for any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the notes, and we and the trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee as the registered owner of the notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants, other than Indirect Participants
who hold an interest in the notes through Euroclear or CEDEL, who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the notes through Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the notes
described herein, cross-market transfers between Direct Participants in DTC, on
the one hand, and Indirect Participants who hold interests in the notes through
Euroclear or CEDEL, on the other hand, will be effected by Euroclear's or
CEDEL's respective Nominee through DTC in accordance with DTC's rules on behalf
of Euroclear or CEDEL. Delivery of instructions relating to crossmarket
transactions must be made directly to Euroclear or CEDEL, as the case may be, by
the counterparty in accordance with the rules and procedures of Euroclear or
CEDEL and within their established deadlines (Brussels time for Euroclear and
U.K. time for CEDEL). Indirect Participants who hold interest in the notes
through Euroclear and CEDEL may not deliver instructions directly to Euroclear's
or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction meets its
settlement requirements, deliver instructions to its respective Nominee to
deliver or receive interests on Euroclear's or CEDEL's behalf in the relevant
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Global Note in DTC, and make or receive payment in accordance with normal
procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a
Global Note to a DTC Participant until the European business day for Euroclear
or CEDEL immediately following DTC's settlement date.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more Direct Participants to
whose account interests in the Global Notes are credited and only in respect of
such portion of the aggregate principal amount of the notes to which such Direct
Participant or Direct Participants has or have given direction. However, if
there is an Event of Default under the notes, DTC reserves the right to exchange
Global Notes, without the direction of one or more of its Direct Participants,
for legended notes in certificated form, and to distribute such certificated
forms of notes to its Direct Participants. You should read the discussion under
the heading "--Transfers of Interests in Global Notes for Certificated Notes"
for further information regarding such transfers.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among Direct Participants,
including Euroclear and CEDEL, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. None of us, the guarantors or the trustee shall have any
responsibility for the performance by DTC, Euroclear or CEDEL or their
respective Direct and Indirect Participants of their respective obligations
under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that we believe to be
reliable, but we take no responsibility for the accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive notes in registered,
certificated form without interest coupons ("Certificated Notes") if:
- DTC notifies us that it is unwilling or unable to continue as depositary
for the Global Notes and we thereupon fail to appoint a successor
depositary within 90 days, or DTC has ceased to be a clearing agency
registered under the Exchange Act,
- we, at our option, notify the trustee in writing that we elect to cause
the issuance of Certificated Notes, or
- there shall have occurred and be continuing a Default or an Event of
Default with respect to the notes.
In any such case, we will notify the trustee in writing that, upon surrender
by the Direct and Indirect Participants of their interest in such Global Note,
Certificated Notes will be issued to each person that such Direct and Indirect
Participants and DTC identify as being the beneficial owner of the related
notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant for itself or on behalf of an
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Indirect Participant, to the trustee in accordance with customary DTC
procedures. Certificated Notes delivered in exchange for any beneficial interest
in any Global Note will be registered in the names, and issued in any approved
denominations, requested by DTC on behalf of such Direct or Indirect
Participants in accordance with DTC's customary procedures.
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless we determine
otherwise in compliance with applicable law.
Neither we, the guarantors nor the trustee will be liable for any delay by
the holder of any Global Note or DTC in identifying the beneficial owners of
notes, and we and the trustee may conclusively rely on, and will be protected in
relying on, instructions from the holder of the Global Note or DTC for all
purposes.
TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the trustee a written certificate and, in some circumstances, an opinion of
counsel confirming that, in connection with such transfer, it has complied with
the restrictions on transfer described under "Notice to Investors."
SAME DAY SETTLEMENT AND PAYMENT
Payments in respect of the notes represented by the Global Notes, including
principal, premium, if any, interest and Liquidated Damages, if any, shall be
made by wire transfer of immediately available same day funds to the accounts
specified by the holder of interests in such Global Note. With respect to
Certificated Notes, we will make all payments of principal, premium, if any,
interest and liquidated damages, if any, by wire transfer of immediately
available same day funds to the accounts specified by the holders thereof or, if
no such account is specified, by mailing a check to each such holder's
registered address. We expect that secondary trading in the Certificated Notes
will also be settled in immediately available funds.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
FOR HOLDERS OF SERIES B NOTES AND FOR HOLDERS OF SERIES D NOTES
The following is a summary of material United States federal income tax
consequences of the exchange offer to holders of Series A and Series C notes and
the ownership and disposition of Series B or Series D notes by holders who
acquire Series B or Series D notes pursuant to the exchange offer. This summary
is based upon existing United States federal income tax law, which is subject to
change, possibly with retroactive effect. We have not and will not seek any
rulings or opinions from the Internal Revenue Service or counsel with respect to
the matters discussed below. There can be no assurance that the IRS will not
take positions concerning the tax consequences of the exchange offer and the
ownership and disposition of Series B and Series D notes which are different
from those discussed herein. This summary does not discuss all aspects of United
States federal income taxation which may be important to particular investors in
light of their specific circumstances, such as:
- to investors subject to special tax rules, including financial
institutions, insurance companies, broker-dealers and tax-exempt
organizations, or
- to persons that will hold the Series B or Series D notes as part of a
straddle, hedge, conversion, synthetic security, or constructive sale
transaction for United States federal income tax purposes, or
- to persons that have a functional currency other than the United States
dollar, or
- to investors in pass-through entities.
All of these persons may be subject to tax rules that differ significantly from
those summarized below. In addition, this summary does not discuss any foreign,
state, or local tax considerations. This summary assumes that investors will
hold their notes as "capital assets" (generally, property held for investment)
within the meaning of the United States Internal Revenue code of 1986. WE URGE
EACH PROSPECTIVE INVESTOR TO CONSULT HIS TAX ADVISOR REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE
EXCHANGE OFFER AND THE OWNERSHIP AND DISPOSITION OF THE SERIES B OR SERIES D
NOTES IN LIGHT OF THEIR PARTICULAR SITUATION.
The exchange of Series A notes for Series B notes and the exchange of
Series C notes for Series D notes under the terms of the exchange offer should
not constitute a taxable exchange. As a result:
- a holder should not recognize taxable gain or loss as a result of
exchanging Series A notes for Series B notes or Series C notes for
Series D notes under the terms of the exchange offer,
- the holding period of the Series B notes should include the holding period
of the Series A notes exchanged for the Series B notes,
- the holding period of the Series D notes should include the holding period
of the Series C notes exchanged for the Series D notes,
- the adjusted tax basis of the Series B notes should be the same as the
adjusted tax basis of the Series A notes exchanged therefor immediately
before the exchange, and
- the adjusted tax basis of the Series D notes should be the same as the
adjusted tax basis of the Series C notes exchanged therefor immediately
before the exchange.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
For purposes of this summary, a "U.S. Holder" is a beneficial owner of a
Series B or Series D note who is:
- an individual who is a citizen or resident of the United States,
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- a corporation created or organized in, or under the laws of, the United
States or any State thereof,
- an estate that is subject to United States federal income taxation without
regard to the source of its income, or
- a trust the administration of which is subject to the primary supervision
of a United States court and which has one or more United States persons
who have the authority to control all substantial decisions of the trust.
DISPOSITION OF THE SERIES B AND SERIES D NOTES
A U.S. Holder will recognize capital gain or loss upon the sale, redemption,
or other disposition of a Series B or Series D note in an amount equal to the
difference between the amount realized from such disposition and his adjusted
tax basis in the Series B or Series D note. Any such gain or loss will be
long-term gain or loss if the Series B or Series D note has been held for more
than one year at the time of the disposition.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payments of interest on, and the proceeds from the sale,
redemption or other disposition of Series B or Series D notes, other than
Series B or Series D notes held by certain exempt persons, including most
corporations and other persons who, when required, demonstrate their exempt
status, will be subject to information reporting requirements. "Backup
withholding" at a rate of 31% may apply to such payments of the U.S. Holder
fails to furnish a correct taxpayer identification number or otherwise fails to
comply with all backup withholding requirements.
The backup withholding tax is not an additional tax and may be credited
against a U.S. Holder's regular United States federal income tax liability or
refunded by the Internal Revenue Service.
The payment of proceeds from the disposition of Series B or Series D notes
to or through the United States office of a broker will be subject to
information reporting and backup withholding rules unless the owner establishes
an exemption. Special rules may apply with respect to the payment of the
proceeds from the disposition of Series B or Series D notes to or through
foreign offices of certain brokers.
ORIGINAL ISSUE DISCOUNT WITH RESPECT TO SERIES D NOTES ONLY
The Series C notes were issued with original issue discount for United
States federal income tax purposes. Accordingly, U.S. Holders of Series C notes
and persons who exchange Series C notes for Series D notes pursuant to the
exchange offer will be required to include original issue discount in gross
income over the period that they hold the Series D notes in advance of the
receipt of the cash attributable thereto. The amount of original issue discount
to be included in income will be determined using a constant yield method, which
will result in a greater portion of such discount being included in income in
the later part of the term of the Series D notes. Any amount of original issue
discount included in income will increase a U.S. Holder's tax basis in the
Series D notes.
We will report annually to the Internal Revenue Service and to record U.S.
Holders information with respect to the amount of original issue discount
accruing during the calendar year.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO US WITH RESPECT TO SERIES D
NOTES ONLY; DIVIDENDS RECEIVED DEDUCTION
The Series D notes will constitute "applicable high yield discount
obligations," for United States federal income tax purposes. We will not be
entitled to claim a deduction for original issue discount
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that accrues on the Series D notes for United States federal income tax
purposes, until amounts attributable to such original issue discount are paid in
cash. In addition, to the extent that the yield to maturity of the Series D
notes exceeds the sum of the "applicable Federal rate" plus six percentage
points, any deduction we claim that is attributable to such excess yield will be
disallowed. Such disallowed deduction will be treated as a dividend to the
extent it is deemed to have been paid out of our current or accumulated earnings
and profits. Accordingly, a U.S. Holder of a Series D note that is a corporation
may be entitled to a dividends received deduction with respect to any such
disallowed interest received by such corporate U.S. Holder with respect to a
Series D note.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS.
As used herein the term "Non-U.S. Holder" means a beneficial owner of a
Series B or Series D note that is, for United States federal income tax
purposes:
- a nonresident alien individual,
- a foreign corporation, or
- a nonresident alien fiduciary of a foreign estate or trust.
Interest that we pay to Non-U.S. Holders of Series B and Series D notes, and
original issue discount included in income by Non-U.S. Holders of Series D
notes, will not be subject to United States federal income or withholding tax;
PROVIDED THAT:
- such holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to vote,
- such holder is not a controlled foreign corporation that is related to us
through stock ownership, a foreign tax-exempt organization or foreign
private foundation for United States federal income tax purposes, and
- the requirements of section 871(h) or 881(c) of the Code are satisfied as
described below under the heading "Owner Statement Requirement."
Notwithstanding the above, a Non-U.S. Holder that is engaged in the conduct
of a United States trade or business will be subject to:
- United States federal income tax on interest, including original issue
discount, that is effectively connected with the conduct of such trade or
business, and
- if the Non-U.S. Holder is a corporation, a United States branch profits
tax equal to 30% of its "effectively connected earnings and profits" as
adjusted for the taxable year, unless the holder qualifies for an
exemption from such tax or a lower tax rate under an applicable treaty.
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to United States federal
income tax on gain recognized on a sale, redemption, or other disposition of a
Series B or Series D note if such gain is not effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Holder,
except that in the case of a Non-U.S. Holder who is an individual, such holder
may be subject to tax at a flat rate of 30%, unless exempt by an applicable
treaty, on any such gain if the Non-U.S. Holder who is an individual is present
in the United States for 183 or more days during the taxable year and other
specific requirements are met. Any gain recognized on a sale, redemption, or
other disposition of a Series B or Series D note that is effectively connected
with the conduct of a United States trade or business by a Non-U.S. Holder will
be subject to United States federal income tax on a net income basis in the same
manner as if such holder were a U.S. Holder. If such Non-U.S. Holder is
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a corporation, such gain may also be subject to the 30% United States branch
profits tax described above.
OWNER STATEMENT REQUIREMENT
Sections 871(h) and 881(c) of the Code require that either:
- the beneficial owner of a Series B or Series D note, or
- a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business and that holds a Series B note on behalf of a beneficial owner of
a Series B note, or holds a Series D note on behalf of a beneficial owner
of a Series D note,
file a statement with us or our agent to the effect that the beneficial owner is
not a United States person for United States federal income tax purposes in
order to avoid withholding of United States federal income tax. Under current
regulations, this requirement will be satisfied if we or our agent receive:
- a statement from the beneficial owner of a Series B or Series D note in
which such owner certifies, under penalties of perjury, that such owner is
not a United States person and provides its name and address, or
- a statement from the financial institution holding the Series B or
Series D note on behalf of the beneficial owner in which the financial
institution certifies, under penalties of perjury, that it has received a
statement from the beneficial owner of the Series B or Series D note,
together with a copy of the statement.
The beneficial owner must inform us or our agent, or, in the case of a statement
made to a financial institution, the financial institution, within 30 days of
any change in information on the statement made by such beneficial owner.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Current United States federal income tax law provides that in the case of
payments of interest to Non-U.S. Holders, the 31% backup withholding tax will
not apply to payments made outside the United States by us or a paying agent on
a Series B or Series D note if a statement by the beneficial owner as described
above is received or an exemption has otherwise been established; provided in
each case that we or the paying agent, as the case may be, do not have actual
knowledge that the payee is a United States person.
Under current Treasury Regulations, payments of the proceeds of the sale of
a Series B or Series D note to or through a foreign office of a "broker" will
not be subject to backup withholding but will be subject to information
reporting if the broker is, for United States federal income tax purposes:
- a United States person,
- a controlled foreign corporation,
- a foreign person 50% or more of whose gross income is from a United States
trade or business for a specified three-year period or,
- in the case of payments made after December 31, 2000, a foreign
partnership with specific connections to the United States,
unless the broker has in its records documentary evidence that the holder is not
a U.S. Holder and other specific conditions are met or the holder otherwise
establishes an exemption. Payment of the
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proceeds of a sale to or through the United States office of a broker is subject
to backup withholding and information reporting unless the holder certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption.
The Treasury Department recently promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. Under the final regulations, special
rules apply which permit the shifting of primary responsibility for withholding
to certain financial intermediaries acting on behalf of beneficial owners. The
final regulations are anticipated to be effective for payments made after
December 31, 2000, subject to some transition rules.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B or Series D notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B or Series D notes.
This prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Series B notes received in
exchange for Series A notes, or of Series D notes received in exchange for
Series C notes, where such outstanding notes were acquired as a result of
market-making activities or other trading activities. We have agreed that we
will make this prospectus, as amended or supplemented, available to any broker-
dealer for use in connection with any such resales for a period of up to one
year after the expiration date, or for such shorter period that will terminate
when such broker-dealers have sold all of such Series B or Series D notes.
We will not receive any proceeds from any sale of Series B notes or
Series D by broker-dealers. Series B and Series D notes received by
broker-dealers for their own accounts pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Series B or
Series D notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Series B or Series D notes. Any broker-dealer that
resells Series B or Series D notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such Series B or Series D notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Series B or Series D notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
We have been advised by two of the initial purchasers of the Series A notes
and the initial purchaser of the Series C notes that following completion of the
exchange offer they intend to make a market in the Series B and Series D notes
to be issued in the exchange offer. However, such entities are under no
obligation to do so and any such market-making activities with respect to the
Series B or Series D notes may be discontinued at any time.
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LEGAL MATTERS
The validity of the Series B and Series D notes offered hereby will be
passed upon for us by Morgan, Lewis & Bockius LLP, Los Angeles, California.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998 and
for the period October 21, 1997 through December 31, 1997 and for the year ended
December 31, 1998, the financial statements of Aeromil, the consolidated
financial statements of Brittain Machine as of June 30, 1996 and for the year
then ended, the financial statements of Barnes Machine, the combined financial
statements of Sea-Lect and the consolidated financial statements of Modern and
Subsidiary appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, to the extent indicated in
their reports thereon also appearing elsewhere herein and in the registration
statement. Such financial statements have been included herein in reliance upon
such reports given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Trim as of and for the year ended
April 30, 1999 appearing in this prospectus and registration statement have been
audited by Ernst & Young, independent auditors, to the extent indicated in their
report thereon also appearing elsewhere herein and in the registration
statement. Such financial statements have been included herein in reliance upon
such reports given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Brittain Machine as of April 21,
1998 and June 30, 1997 and for the period July 1, 1997 through April 21, 1998
and for the year ended June 30, 1997 appearing in this prospectus and
registration statement have been audited by Grant Thornton LLP, independent
auditors, to the extent indicated in their reports thereon also appearing
elsewhere herein and in the registration statement. Such consolidated financial
statements have been included herein in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
The financial statements of Pacific Hills appearing in this prospectus and
registration statement have been audited by McGladrey & Pullen, LLP, independent
auditors, to the extent indicated in their reports thereon also appearing herein
and in the registration statement. Such financial statements have been included
herein in reliance upon such reports given on the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Trim as of April 30, 1997 and 1998
and for the years ended April 30, 1997 and 1998 appearing in this prospectus and
registration statement have been audited by Pricecroft Redman, independent
auditors, to the extent indicated in their reports thereon also appearing herein
and in the registration statement. Such financial statements have been included
herein in reliance upon such reports given on the authority of such firm as
experts in accounting and auditing.
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COMPASS AEROSPACE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
COMPASS AEROSPACE CORPORATION
For the nine months ended September 30, 1999 and September
30, 1998
Consolidated Condensed Balance Sheets at September 30,
1999 (unaudited) and December 31, 1998.................. F-4
Consolidated Condensed Statements of Operations
(unaudited)............................................. F-5
Consolidated Condensed Statements of Cash Flows
(unaudited)............................................. F-6
Notes to Unaudited Interim Consolidated Condensed
Financial Statements.................................... F-7
For the year ended December 31, 1998 and for the period from
October 21, 1997 (date of incorporation) through December
31, 1997
Report of Independent Auditors............................ F-9
Consolidated Balance Sheets............................... F-10
Consolidated Statements of Income......................... F-11
Consolidated Statements of Stockholders' Equity........... F-12
Consolidated Statements of Cash Flows..................... F-13
Notes to Consolidated Financial Statements................ F-14
AEROMIL ENGINEERING COMPANY
For the period from January 1, 1997 through November 25,
1997
Report of Independent Auditors............................ F-25
Balance Sheet............................................. F-26
Statement of Operations and Retained Earnings............. F-27
Statement of Cash Flows................................... F-28
Notes to Financial Statements............................. F-29
BRITTAIN MACHINE, INC.
For the period from July 1, 1997 through April 21, 1998
Report of Independent Certified Public Accountants........ F-35
Consolidated Balance Sheet................................ F-36
Consolidated Statement of Earnings and Retained
Earnings................................................ F-37
Consolidated Statement of Cash Flows...................... F-38
Notes to Consolidated Financial Statements................ F-39
For the years ended June 30, 1997 and June 30, 1996
Report of Independent Certified Public Accountants........ F-46
Report of Independent Auditors............................ F-47
Consolidated Balance Sheets............................... F-48
Consolidated Statements of Earnings and Retained
Earnings................................................ F-50
Consolidated Statements of Cash Flows..................... F-51
Notes to Consolidated Financial Statements................ F-52
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
BARNES MACHINE, INC.
For the period from October 1, 1997 through April 21, 1998
and for the year ended September 30, 1997
Report of Independent Auditors............................ F-60
Balance Sheets............................................ F-61
Statements of Income and Retained Earnings................ F-62
Statements of Cash Flows.................................. F-63
Notes to Financial Statements............................. F-64
SEA-LECT PRODUCTS, INC.
For the period from January 1, 1998 through May 11, 1998 and
for the year ended December 31, 1997
Report of Independent Auditors............................ F-69
Combined Balance Sheets................................... F-70
Combined Statements of Income............................. F-71
Combined Statements of Shareholders' Equity............... F-72
Combined Statements of Cash Flows......................... F-73
Notes to Combined Financial Statements.................... F-74
PACIFIC HILLS MANUFACTURING CO. (formerly known as Lamsco
West, Inc.)
For the period from January 4, 1998 through November 20,
1998 and for the years ended January 3, 1998 and December
28, 1996
Independent Auditor's Report.............................. F-77
Balance Sheets............................................ F-78
Statements of Income...................................... F-79
Statements of Retained Earnings........................... F-80
Statements of Cash Flows.................................. F-81
Notes to Financial Statements............................. F-82
MODERN MANUFACTURING, INC. (formerly Y.F. Americas, Inc.)
For the years ended December 31, 1998, December 31, 1997 and
December 31, 1996
Report of Independent Auditors............................ F-86
Consolidated Balance Sheets............................... F-87
Consolidated Statements of Income......................... F-88
Consolidated Statements of Shareholders' Equity........... F-89
Consolidated Statements of Cash Flows..................... F-90
Notes to Consolidated Financial Statements................ F-91
TRIM ENGINEERING LIMITED
For the year ended April 30, 1999
Report of Independent Auditors............................ F-97
Consolidated Profit and Loss Account...................... F-98
Consolidated Balance Sheet................................ F-99
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Consolidated Cash Flow Statement.......................... F-100
Notes to the Accounts..................................... F-101
For the years ended April 30, 1998 and April 30, 1997
Report of the directors................................... F-110
Statement of director's responsibilities.................. F-112
Report of the auditors for the year ended April 30,
1998.................................................... F-113
Consolidated Profit and Loss Account...................... F-114
Consolidated Balance Sheet................................ F-115
Balance Sheet............................................. F-116
Consolidated Cash Flow Statement.......................... F-117
Notes to the Consolidated Cash Flow Statement............. F-118
Notes to the Accounts..................................... F-119
Report of the auditors for the year ended April 30,
1997.................................................... F-129
</TABLE>
F-3
<PAGE>
COMPASS AEROSPACE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,668 $ 7,871
======== ========
Accounts receivable, net.................................. 22,670 19,553
Inventories............................................... 36,925 32,631
Prepaid expenses and other current assets................. 4,778 3,407
-------- --------
Total current assets........................................ 77,041 63,462
======== ========
Property and equipment, net................................. 72,671 58,914
Goodwill, net............................................... 142,164 120,412
Other assets................................................ 16,244 12,717
-------- --------
Total assets................................................ $308,120 $255,505
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,338 $ 10,827
Accrued expenses.......................................... 14,703 9,910
Current portion of long-term debt and capital leases...... 5,238 4,632
-------- --------
Total current liabilities................................... 29,279 25,369
Deferred income taxes....................................... 9,630 7,845
Long-term debt and capital leases, less current portion..... 228,405 192,336
Stockholders' equity:
Common stock.............................................. 350 248
Paid-in capital........................................... 43,616 28,718
Retained earnings......................................... (3,160) 989
-------- --------
Total stockholders' equity.................................. 40,806 29,955
-------- --------
Total liabilities and stockholders' equity.................. $308,120 $255,505
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
COMPASS AEROSPACE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $101,443 $65,556
Cost of sales............................................... 72,275 48,591
-------- -------
Gross profit................................................ 29,168 16,965
Selling, general and administrative expenses................ 13,539 7,772
Amortization of goodwill.................................... 4,828 1,269
-------- -------
18,367 9,041
Operating income............................................ 10,801 7,924
Interest expense, net....................................... 15,672 4,858
Other expense............................................... 1,674 913
-------- -------
Income (loss) before income taxes........................... (6,545) 2,153
Income tax expense (benefit)................................ (2,396) 1,033
-------- -------
Net income (loss)........................................... $ (4,149) $ 1,120
======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
COMPASS AEROSPACE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (4,149) $ 1,120
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 14,060 5,858
Stock issued for compensation............................. -- 466
Deferred taxes............................................ (321) 81
Changes in operating assets and liabilities:
Accounts receivable..................................... 5,993 (641)
Inventories............................................. 3,620 (1,509)
Prepaid expenses and other assets....................... (1,166) 174
Accounts payable........................................ (5,403) (1,242)
Accrued expenses and other liabilities.................. 1,407 1,701
Change in other assets.................................... (4,826) --
-------- --------
Net cash provided by operating activities................... 9,215 6,008
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (5,156) (6,025)
Acquired businesses, net of cash acquired................... (54,096) (74,976)
-------- --------
Net cash used in investing activities....................... (59,252) (81,001)
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 21,884 1,527
Proceeds from note offering................................. 18,743 110,000
Repayment of debt........................................... (793) (20,028)
Proceeds from the sale of stock............................. 15,000 13,500
-------- --------
Net cash provided by financing activities................... 54,834 104,999
Net increase in cash........................................ 4,797 30,006
Cash and cash equivalents at beginning of period............ 7,871 443
-------- --------
Cash and cash equivalents at end of period.................. $ 12,668 $ 30,449
======== ========
</TABLE>
See accompanying notes
F-6
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for fair
presentation, with respect to the interim financial statements have been
included. The results of operations for the nine month period ended
September 30, 1999 are not necessarily indicative of the results for the full
year ending December 31, 1999. For further information, refer to the Compass
Aerospace Corporation consolidated financial statements and notes thereto for
the year ended December 31, 1998.
The accompanying consolidated financial statements include the accounts of
Compass Aerospace Corporation and its wholly owned subsidiaries, Western Methods
Machinery Corporation, Aeromil Engineering Company, Barnes Machine, Inc.,
Brittain Machine, Inc., Wichita Manufacturing, Inc., Sea-Lect Products, Inc.,
Pacific Hills Manufacturing Company, Modern Manufacturing, Inc. and Trim
Engineering Limited and its subsidiaries (collectively, the Company). All
significant intercompany accounts have been eliminated in consolidation.
2. OTHER FINANCIAL INFORMATION
Earnings before interest, income taxes, depreciation and amortization for
the nine month period ended September 30, 1999 and September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Operating Income.......................................... $10,801 $ 7,924
Plus: Depreciation........................................ 7,527 4,130
Plus: Amortization........................................ 4,828 1,269
Plus: Management Fees..................................... 505 400
Less: Extraordinary Expenses.............................. -- (75)
------- -------
EBITDA.................................................... $23,661 $13,648
</TABLE>
3. RECENT DEVELOPMENTS
On July 31, 1999 the Company acquired 100% of the outstanding capital stock
of Trim Engineering Limited for $51.2 million, net of acquired cash, including a
$2.6 million seller variable rate note due 2002. Trim is a leading manufacturer
of aerospace structural parts in the United Kingdom. The company manufactures
individual parts, sub-assemblies and structural components for aerospace
manufacturers from a variety of metals including aluminum, titanium and steel
through the use of precision computer-numerically-controlled and conventional
machine tools and metal forming equipment. Trim also provides its customers with
metal treatments, non-ferrous castings and welded assemblies and components.
In July 1999, the Company sold approximately 10.2 million shares of common
stock for $15.0 million in cash. The proceeds are to be used to fund current and
anticipated working capital requirements, capital expenditures and in part to
fund the aforementioned acquisition of Trim.
F-7
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
SEPTEMBER 30, 1999
3. RECENT DEVELOPMENTS (CONTINUED)
The acquisition of Trim was funded through the issuance of $19.0 million of
10 1/8% Senior Subordinated Notes (net proceeds of $16.2 million), a
$19.7 million bank loan under the Company's existing acquisition line, a
$2.6 million variable rate note payable to the seller (due in 2002) and
available cash.
4. YEAR 2000 COMPLIANCE
The Year 2000 issue concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000.
The Company has developed plans to address the possible impact of the Year
2000 issue on its computer systems. In 1998, the Company decided to replace its
Year 2000 non-compliant systems and install replacement systems. The
installation of the replacement systems is substantially complete.
The Company has also substantially completed its evaluation of Year 2000
compliance of non-information technology systems such as telephone systems, fax
machines, security systems, etc.
The Company has substantially completed a plan to identify third parties
with which it has a significant business relationship and to survey such parties
as to their Year 2000 compliance. The Company cannot ensure that all third
parties significant to the Company's operations will be compliant by
December 31, 1999. The Company believes a reasonably likely worst case scenario
resulting from non-compliance by certain of the Company's major customers or
critical vendors could include adverse effects on the Company's revenue
collection, disbursements and communications, as well as the scheduling and
delivery of inventory resulting in a material adverse effect on the Company's
business, financial condition or results of operations. In addition, loss of
utility service resulting from disruptions in power generation, transmission or
distribution could adversely affect the Company's manufacturing facilities,
leading to delays in or the inability to provide products to the Company's
customers, resulting in a material adverse effect on the Company's business,
financial condition or results of operations. If it appears likely that any
major customer or critical vendor will not be compliant, the Company intends to
develop contingency plans, if possible, to mitigate the impact of
non-compliance.
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Compass Aerospace Corporation
We have audited the accompanying consolidated balance sheets of Compass
Aerospace Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related statements of income, stockholders' equity, and cash flows for the year
ended December 31, 1998 and the period October 21, 1997 (date of incorporation)
through December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 21(b). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule 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 consolidated financial position of Compass
Aerospace Corporation and subsidiaries at December 31, 1998 and 1997 and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1998 and the period October 21, 1997 (date of incorporation)
through December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presented fairly, in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Long Beach, California
March 15, 1999
F-9
<PAGE>
COMPASS AEROSPACE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
<S> <C> <C>
1998 1997
-------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,871 $ 443
Accounts receivable less allowance for doubtful accounts
of $756 in 1998 and $31 in 1997......................... 19,553 2,168
Inventories............................................... 32,631 5,559
Deferred income taxes..................................... 2,100 123
Refundable income taxes................................... 889 --
Prepaid expenses and other current assets................. 418 350
-------- -------
Total current assets...................................... 63,462 8,643
Property and equipment, net............................... 58,914 11,947
Goodwill, net of accumulated amortization of $2,519 in
1998 and $53 in 1997.................................... 120,412 13,199
Other assets.............................................. 12,717 --
-------- -------
Total assets.............................................. $255,505 $33,789
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,827 $ 2,084
Accrued liabilities....................................... 9,910 742
Income taxes payable...................................... -- 889
Current portion of long-term debt and capital leases...... 4,632 2,104
Line of credit............................................ -- 4,034
-------- -------
Total current liabilities................................. 25,369 9,853
Deferred income taxes..................................... 7,845 415
Long-term debt and capital leases, less current portion... 192,336 8,447
Mezzanine debt with related party......................... -- 6,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares:
36,000,000 at December 31, 1998
20,000,000 at December 31, 1997
Issued and Outstanding:
24,775,628 at December 31, 1998
9,000,000 at December 31, 1997........................ 248 90
Paid-in capital........................................... 28,718 8,910
Retained earnings......................................... 989 74
-------- -------
Total stockholders' equity................................ 29,955 9,074
-------- -------
Total liabilities and stockholders' equity................ $255,505 $33,789
======== =======
</TABLE>
See accompanying notes.
F-10
<PAGE>
COMPASS AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 21
YEAR ENDED THROUGH
DECEMBER DECEMBER
31, 31,
1998 1997
---------- -----------
<S> <C> <C>
Net sales................................................... $96,547 $3,057
Cost of sales............................................... 70,410 2,386
------- ------
Gross profit................................................ 26,137 671
Selling, general and administrative expenses................ 14,537 404
------- ------
Operating income............................................ 11,600 267
Interest expense............................................ 8,493 166
Other (expense) income...................................... (670) 16
------- ------
Income before income taxes.................................. 2,437 117
Income tax expense.......................................... 1,522 43
------- ------
Net income.................................................. $ 915 $ 74
======= ======
</TABLE>
F-11
<PAGE>
COMPASS AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- -------- ---------- -------- -------------
COMMON STOCK
----------------------
<S> <C> <C> <C> <C> <C>
Balance at October 21, 1997 (date of
incorporation)......................... $ -- $ -- $ -- $ -- $ --
Proceeds from initial private placement
of stock............................... 9,000,000 90 8,910 -- 9,000
Net income............................... -- -- 74 74
----------- ---- ------- ---- -------
Balance at December 31, 1997............. 9,000,000 90 8,910 74 9,074
Issuance of stock........................ 582,376 6 460 -- 466
Conversion of mezzanine debt to stock.... 6,000,000 60 5,940 -- 6,000
Issuance of stock........................ 9,193,252 92 13,408 -- 13,500
Net income............................... -- -- -- 915 915
----------- ---- ------- ---- -------
Balance at December 31, 1998............. 24,775,628 $248 $28,718 $989 $29,955
=========== ==== ======= ==== =======
</TABLE>
See accompanying notes.
F-12
<PAGE>
COMPASS AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 21
YEAR ENDED THROUGH
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 915 $ 74
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation.............................................. 5,974 166
Amortization.............................................. 2,466 53
Stock issued for compensation............................. 466 --
Deferred taxes............................................ (317) --
Changes in operating assets and liabilities:
Accounts receivable..................................... (681) 249
Inventories............................................. (5,253) 308
Prepaid expenses and other assets....................... (14,829) (136)
Accounts payable........................................ 2,432 (530)
Accrued expenses and other liabilities.................. 2,150 85
--------- --------
Net cash (used in) provided by operating activities....... (6,677) 269
INVESTING ACTIVITIES
Purchase of property and equipment........................ (5,701) (25)
Acquired businesses, net of cash acquired................. (166,416) (23,431)
--------- --------
Net cash used in investing activities..................... (172,117) (23,456)
FINANCING ACTIVITIES
Proceeds from note offering............................... 110,000 --
Proceeds from long-term debt.............................. 81,000 10,262
Proceeds from mezzanine debt.............................. -- 6,000
Proceeds from sale of stock............................... 13,500 9,000
Payments on long-term debt and capital leases............. (14,244) (5,666)
Net (decrease) increase in line of credit................. (4,034) 4,034
--------- --------
Net cash provided by financing activities................. 186,222 23,630
--------- --------
Net increase in cash...................................... 7,428 443
Cash and cash equivalents at beginning of period.......... 443 --
--------- --------
Cash and cash equivalents at end of period................ $ 7,871 $ 443
========= ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest.................................................. $ 6,600 $ 33
========= ========
Income taxes.............................................. $ 2,100 $ 110
========= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Conversion of mezzanine debt to stock..................... $ 6,000 $ --
========= ========
Assets acquired under capital leases...................... $ 4,672 $ --
========= ========
</TABLE>
See accompanying notes.
F-13
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Compass Aerospace Corporation and its wholly owned subsidiaries, Western Methods
Machinery Corporation (Western), Aeromil Engineering Company (Aeromil), Barnes
Machine, Inc. (Barnes), Brittain Machine Inc. (Brittain), Wichita
Manufacturing Inc. (Wichita), Sea-Lect Products Inc. (Sea-Lect), Lamsco
West, Inc. (Lamsco), and Modern Manufacturing, Inc. (formerly known as
Y.F. Americas, Inc.) (Modern) (collectively, the Company). All significant
intercompany accounts and transactions have been eliminated in consolidation.
BUSINESS
The Company was founded in October 1997 to become a major supplier of
precision machined individual parts, and of higher value-added sub-assemblies,
manufacturing kits and structural components used by aerospace manufacturers in
structural frames and other metal aircraft components. Customers include
domestic and foreign entities.
The Company manufactures its products using various metals including
aluminum, titanium and steel through the use of precision computer numerically
controlled machine tools. The Company uses a variety of advanced techniques and
machinery including horizontal and vertical machining centers and
state-of-the-art high-speed precision machining equipment, as well as
three-spindle five-axis gantry mills.
ACCOUNTING 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions. The Company is
subject to risk for amounts in excess of federal deposit insurance limits.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company conducts a major portion of its business with a limited number of
customers. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent with those present throughout the
industry. Typically, the Company does not require collateral from customers.
Sales to the Boeing Company accounted for 72% and 77% of total consolidated
sales for the year ended December 31, 1998 and for the period October 21, 1997
through December 31, 1997, respectively. Trade accounts receivable from the
Boeing Company accounted for 63% and 76% of total consolidated accounts
receivable as of December 31, 1998 and 1997, respectively.
F-14
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents approximate cost due to the short
period of time to maturity. Fair values of long-term debt, which have been
determined based on borrowing rates currently available to the Company for loans
with similar terms of maturity, approximate the carrying amounts in the
consolidated financial statements.
INVENTORIES
Inventories are valued under methodologies that approximate the first-in
first-out method of cost, and are stated at the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The provision for depreciation
of property and equipment, which includes amortization of assets under capital
leases, is generally computed on the straight-line method over the following
useful lives:
<TABLE>
<S> <C>
Buildings and improvements...... 5-40 years
Machinery and equipment......... 2-10 years
Furniture and fixtures.......... 5-10 years
Leasehold improvements.......... Lease term or life of asset, whichever is shorter
</TABLE>
GOODWILL
Goodwill represents the excess of the purchase price over the estimated fair
value of the net assets acquired in connection with business combinations.
Amortization is provided for on a straight-line basis over 20 years.
Amortization expense related to goodwill was $2,466,000 for the year ended
December 31, 1998 and $53,000 for the period October 21, 1997 through
December 31, 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets are reviewed periodically and if
future cash flows are believed insufficient to recover the remaining carrying
value of the related assets, the carrying value is written down to its estimated
fair value in the period the impairment is identified.
STOCK-BASED COMPENSATION
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and related interpretations. Under the provisions of APB
25, compensation expense is measured at the grant date for the difference
between the fair value of the stock and the exercise price.
F-15
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. Provisions are made currently for estimated returns.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," effective January 1, 1998. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. There was no impact on
the financial statements of the Company due to the adoption of SFAS No. 130.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," was also adopted on January 1, 1998, which requires the Company to
report financial and descriptive information about its reportable operating
segments. There was no impact on the financial statements of the Company due to
the adoption of SFAS No. 131.
Also effective January 1, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement supersedes the disclosure requirements in Statements of Financial
Accounting Standards 87, "Employers' Accounting for Pensions," 88, "Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans for
Termination Benefits," and 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." The objective of SFAS No. 132 is to improve and
standardize disclosures regarding pensions and postretirement benefits. There
was no impact on the financial statements of the Company due to the adoption of
SFAS No. 132.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The Company
believes that there will be no impact due to the adoption of Statement No. 133.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 requires capitalization of qualified computer software costs with
amortization recognized over their estimated useful lives. The Company believes
that there will be no impact due to the adoption of SOP 98-1.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," which is effective for
fiscal years beginning after December 15, 1998. SOP 98-5 requires costs of
start-up activities, as defined in the Statement, to be expensed as incurred.
The Company believes that there will be no impact due to the adoption of SOP
98-5.
2. ACQUISITIONS
Each of the following transactions has been accounted for under the purchase
method of accounting for business combinations. Accordingly, the accompanying
consolidated statements of operations include
F-16
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
revenues and expenses related to these entities since their respective closing
dates. The financial statements reflect the preliminary allocations of the
purchase price, though the purchase price allocation has not been finalized on
certain of the Company's business combinations.
During 1997, the Company funded the November 26, 1997 acquisitions of
Western and Aeromil under its then existing credit facility. The purchase prices
for Western and Aeromil were $16.8 million and $13.2 million, respectively.
During 1998, the Company paid down the debt related to the 1997 acquisitions and
funded its 1998 acquisitions through the proceeds provided by the $110 million
Offering and the $170 million Credit Agreement (see Notes 5 and 7).
Each of the businesses discussed below, acquired during 1998, manufactures
parts for aerospace customers, including precision machined parts from titanium,
aluminum, and steel.
On April 21, 1998, the Company acquired all of the outstanding common stock
of Barnes Machine, Inc., located in Shelton, Washington. The Company also
acquired certain land and buildings owned by the stockholders and used in the
operation of the business. The purchase price was $15.0 million. The Company
also retired debt of approximately $0.8 million upon acquisition.
On April 21, 1998, the Company acquired all of the outstanding stock of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita
Manufacturing, Inc. Brittain is located in Wichita, Kansas, and Wichita is
located in Cerritos, California. The purchase price was $54.9 million. The
Company also retired debt of approximately $3.0 million upon acquisition.
On May 11, 1998, the Company acquired certain assets and liabilities of
Sea-Lect Products, Inc. and all of the outstanding common stock of its affiliate
J&J Leasing (collectively Sea-Lect). Sea-Lect is located in Kent, Washington.
The purchase price was $12.2 million. The Company also retired debt of
$0.9 million upon acquisition.
On November 20, 1998, the Company purchased all of the outstanding stock of
Lamsco West, Inc. Lamsco's operations are located in Santa Clarita, California,
and Kent, Washington. The purchase price was $73.7 million. At December 31,
1998, $2.5 million is held for the seller in escrow pending fulfillment of
provisions in the purchase agreement.
On December 31, 1998, the Company acquired all of the outstanding common
stock of Modern Manufacturing, Inc. (formerly Y.F. Americas, Inc.), located in
Renton, Washington. The purchase price was $23.1 million. At December 31, 1998,
$2.5 million is held in escrow for the seller pending fulfillment of certain
provisions in the purchase agreement.
The following unaudited consolidated supplemental pro forma information
includes the accounts of Compass Aerospace Corporation and its wholly owned
subsidiaries, Western, Aeromil, Barnes, Brittain, Wichita Manufacturing,
Sea-Lect, Lamsco and Modern. The pro forma information assumes that all the
acquisitions were consummated on January 1, 1997 (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
<S> <C> <C>
1998 1997
-------- --------
Net sales............................................... $183,444 $150,785
======== ========
Net income.............................................. $ 8,188 $ 5,745
======== ========
</TABLE>
F-17
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
The pro forma consolidated results of operations included adjustments to
give effect to amortization of goodwill, interest on acquisition debt,
additional depreciation expense based on the fair market value of the property,
plant and equipment acquired and certain other adjustments, together with the
income tax effects. The unaudited consolidated pro forma information is not
necessarily indicative of the combined results that would have occurred had the
acquisitions and borrowings occurred on those dates, nor is it indicative of the
results that may occur in the future.
3. INVENTORY
The following is a summary of inventory (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials.............................................. $10,048 $ --
Work in process............................................ 16,970 5,356
Finished goods............................................. 5,613 203
------- ------
$32,631 $5,559
======= ======
</TABLE>
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, which is recorded at
cost (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Land...................................................... $ 1,991 $ --
Building and improvements................................. 6,098 --
Furniture and fixtures.................................... 1,376 264
Leasehold improvements.................................... 547 301
Machinery and equipment................................... 55,042 11,548
------- -------
65,054 12,113
Accumulated depreciation.................................. (6,140) (166)
------- -------
$58,914 $11,947
======= =======
</TABLE>
Included in machinery and equipment is approximately $2,565,000 of equipment
under capital lease arrangements (see Note 12).
5. DEBT OFFERING
On April 21, 1998, the Company completed a $110 million debt offering of
10 1/8% Senior Subordinated Notes (the Notes) due 2005 (the Offering). The Notes
are unconditionally guaranteed on a senior subordinated basis by the Company's
existing subsidiaries and all future subsidiaries. The net proceeds from the
Offering were used to repay all outstanding bank debt, to finance the
acquisitions, and for general corporate purposes. The transaction costs of
$7.3 million incurred in connection with the Offering were recorded as a
deferred charge and are amortized over the seven-year life of the Notes using
the straight-line method.
F-18
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. DEBT OFFERING (CONTINUED)
The Notes mature on April 15, 2005, unless redeemed prior to that time.
Interest on the Notes is payable semiannually on April 15 and October 15 of each
year, commencing October 15, 1998, to holders of record. The Notes will be
redeemable at the option of the Company, in whole or in part, on or after
April 15, 2002 at the redemption price as defined in the agreement. In addition,
on or before April 15, 2001 the Company may redeem up to 35% of the Notes at a
redemption price of 110.125% of the principal amount with the net proceeds of
one or more public equity offerings as defined and provided for in the
agreement.
Under provisions of the indenture applicable to the Notes, the Company may,
under certain circumstances, be limited in its ability to incur additional
indebtedness or issue Disqualified Capital Stock (as defined), pay dividends or
make other distributions, create certain liens on assets, sell certain assets
and stock of subsidiaries, enter into certain transactions with affiliates, and
effect certain mergers and consolidations. The Company is also subject to
certain restrictive covenants and is required to maintain certain financial
ratios in connection with the Notes.
6. MEZZANINE DEBT
In connection with the acquisitions of Western Methods and Aeromil, the
Company entered into a subordinated note with its largest stockholder for
$6 million bearing interest at 11%, payable quarterly. On March 18, 1998, the
Note and related accrued interest was exchanged for 6 million shares of the
Company's common stock.
7. BANK BORROWINGS
Long-term debt and capital leases consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Senior subordinated notes................................ $110,000 $ --
Term Loan A.............................................. 35,000 --
Term Loan B.............................................. 45,000 --
Acquisition line of credit............................... 1,000 --
Capital leases and other................................. 5,968 10,551
-------- -------
$196,968 $10,551
======== =======
</TABLE>
On November 20, 1998, the Company entered into a $170 million credit
agreement (Credit Agreement) with BankBoston, N.A. and its participants. This
credit agreement, as amended and restated on February 11, 1999, replaced a prior
revolving credit facility with BankBoston. The credit agreement includes a
$25 million revolving credit note (Revolver), Term Loan A with available lending
of up to $35 million, Term Loan B with available lending of up to $45 million,
and an acquisition line of credit (Acquisition Line) for up to $65 million. The
transaction costs of $5.2 million incurred in connection with the credit
agreement were recorded as a deferred charge and are amortized over the life of
the credit agreement using the straight-line method. The credit agreement
accrues interest at variable rates based upon the bank's prime rate or
Eurocurrency rate and is payable quarterly. The interest rate in effect at
F-19
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. BANK BORROWINGS (CONTINUED)
December 31, 1998, was approximately 10.1%. The Revolver matures November 2003.
Term Loan A is payable in equal quarterly installments, totaling 10% of the
outstanding principal in 1999, 15% of the outstanding principal in 2000 and
2001, 23.75% of the outstanding principal in 2002, and the remainder in 2003.
Term Loan B is payable in equal quarterly installments totaling 1% of the
outstanding principal in 1999 through 2003, and 47.5% of the outstanding
principal in 2004 and 2005. Payments on the Acquisition Line begin at
December 31, 2000 and are payable in 13 equal quarterly installments. The credit
agreement contains certain restrictive covenants and requires the maintenance of
certain financial ratios.
As prescribed by and defined in the credit agreement, availability under the
Revolver is limited to 85% of eligible accounts receivable, plus 50% of the net
book value of eligible inventory, plus 25% of the orderly liquidation value of
machinery and equipment, subject to reserves that may be established by the
lender. Subject to these provisions, the Company has $25 million available under
the Revolver and an initial availability of $35 million under the Acquisition
Line. The remaining $30 million of the Acquisition Line will become available
provided the Company raises one dollar of equity for every additional dollar of
borrowings over the initial $35 million of availability.
As of December 31, 1997, the Company had a note payable to a bank for
$10.3 million. The note was secured by substantially all of the Company's assets
and accrued interest at 9.5%. Interest and principal payments were due monthly.
The note had a maturity date of November 2000. At December 31, 1997, the Company
also had outstanding an installment loan with a bank for $300,000 that was
payable monthly with 8.6% interest and an original maturity of October 2002.
Both of these loans were paid in full during 1998 and there are no outstanding
balances under either credit facility at the end of 1998.
Maturities of long-term debt, excluding capital lease payments (see
Note 12) as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 4,304
2000........................................................ 6,159
2001........................................................ 6,422
2002........................................................ 9,509
2003........................................................ 13,633
Thereafter.................................................. 154,376
--------
194,403
Less current portion........................................ 4,304
--------
Long-term debt.............................................. $190,099
========
</TABLE>
8. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes
F-20
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. INCOME TAXES (CONTINUED)
to be paid for the period and the change during the period in the deferred tax
assets and liabilities. Significant components of the Company's deferred tax
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not deductible for tax................ $ 735 $ 62
Inventories............................................ 1,365 61
------- -----
Total deferred tax assets.............................. 2,100 123
Deferred tax liabilities:
Depreciation and amortization.......................... (7,645) --
Other.................................................. (200) (415)
------- -----
Total deferred tax liabilities......................... (7,845) (415)
------- -----
Net deferred tax liability............................. $(5,745) $(292)
======= =====
</TABLE>
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 21,
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current:
Federal........................................... $1,770 $36
State............................................. 69 7
------ ---
1,839 43
Deferred:
Federal........................................... (270) --
State............................................. (47) --
------ ---
(317) --
------ ---
$1,522 $43
====== ===
</TABLE>
F-21
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. INCOME TAXES (CONTINUED)
The reconciliation of income tax at the U.S. federal statutory rate to
income tax expense is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 21,
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Income tax at U.S. statutory rates.................. 34% 34%
State income tax, net of federal benefit............ 3 3
Goodwill............................................ 27 --
Other............................................... (2) --
-- --
62% 37%
== ==
</TABLE>
9. STOCKHOLDERS' EQUITY
In October 1997, the Company was incorporated with the issuance of
9 million shares of common stock in a private placement, generating net proceeds
of $9 million. The proceeds from this placement were primarily used to acquire
Western and Aeromil.
In April 1998, the Company amended its articles of incorporation to increase
the number of authorized shares from 20 million to 36 million and to establish a
second class of common stock, Class B. All rights remain the same as Class A,
except Class B stock is nonvoting and contains conversion rights based upon
certain criteria.
In connection with the Offering, the Company issued approximately
5.4 million shares of Class B and 3.7 million shares of Class A shares for
$13.5 million in cash. Additionally, 582,376 shares of stock were issued to
board members and the president as compensation for services related to the
acquisitions. Shares outstanding as of December 31, 1998, under Class A and
Class B, amounted to 19,327,775 and 5,447,853, respectively.
10. STOCK OPTION PLAN
In March 1998, the Company's Board of Directors adopted, and the
shareholders approved, the Compass Aerospace Corporation 1998 Stock Incentive
Plan (the Plan). The Plan will be administered by the Compensation Committee of
the Board of Directors (the Committee). All officers, directors, employees and
independent contractors of the Company are eligible for discretionary awards
under the Plan. The Plan provides for stock-based incentive awards, including
incentive stock options, non-qualified stock options and restricted stock. The
Plan permits the Committee to select eligible persons to receive awards and to
determine certain terms and conditions of such awards, including the vesting
schedule and exercise price of each award, provided, that the option exercise
price may not be less than 85% of the fair market value per share of the
Company's Common Stock on the date of the grant. Under the Plan, no participant
may be granted incentive stock options that are first exercisable in any one
calendar year with fair market value in excess of $100,000. 2,000,000 shares of
the Company's Common Stock have been reserved for issuance under the Plan.
F-22
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. STOCK OPTION PLAN (CONTINUED)
No options were granted as of December 31, 1997. The status of the Company's
stock option plan during 1998 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS
----------
<S> <C>
Outstanding at January 1, 1998.............................. --
Granted..................................................... 888,291
Exercised................................................... --
Canceled.................................................... --
-------
Outstanding at December 31, 1998............................ 888,291
=======
Options Exercisable at December 31, 1998.................... 60,000
=======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options, as allowed for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation." Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma net income, as required to be disclosed by SFAS No. 123,
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement, would be $840,000. The fair value for
these options was estimated at the date of grant using a binomial option pricing
model with the following weighted-average assumptions for December 31, 1998:
dividend yield of 0.0%; volatility of 36.30%; risk-free interest rates ranging
from 4.58% to 4.66% depending on a weighted-average expected life ranging from
two to four years.
The weighted average fair value of options granted during 1998 is $.37 per
option. The weighted average exercise price for 1998 was $1.22. The weighted
average remaining contractual life of options outstanding is 9.5 years.
During 1998, the Company approved several stock option agreements to
purchase 888,291 shares of the Company's common stock at an exercise price
ranging from $1.00 to $1.47 per share. All options granted have 10-year terms.
One option for 60,000 shares is fully vested and immediately exercisable. The
remainder of the options vest and become exercisable at various dates through
December 1, 2002.
11. RELATED PARTY TRANSACTIONS
The Company has entered into a management fee agreement with certain
entities controlled by directors of the Company. Under this agreement, the
Company is required to pay an annual aggregate amount equal to $200,000 plus
1.5% of the Company's earnings before income taxes, depreciation, amortization,
and management fees. The Company also typically pays advisory fees to these
affiliates in an amount equal to an aggregate of 1% of the consideration paid
for each business acquired by the Company. Management and advisory fees paid to
these affiliates were $3,165,000 and $282,000 in 1998 and 1997.
F-23
<PAGE>
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain machinery and equipment under capital leases
expiring at various dates through 2007. The Company also leases office spaces
under operating leases with terms expiring at various dates through 2008. Rent
expense for operating leases amounted to $1,125,000 and $53,000 for the year
ended December 31, 1998 and the period October 21 through December 31, 1997,
respectively.
Future minimum payments by year and in the aggregate under all
non-cancelable operating and capital leases with terms in excess of one year at
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDED DECEMBER 31 LEASES LEASES
- ---------------------- --------- --------
<S> <C> <C>
1999...................................................... $1,205 $ 494
2000...................................................... 1,110 494
2001...................................................... 1,122 494
2002...................................................... 1,126 494
2003...................................................... 1,036 484
Thereafter................................................ 3,574 725
------ ------
$9,173 3,185
======
Less amount representing interest......................... 620
------
Present value of net minimum lease payments............... 2,565
Less current portion...................................... 328
------
Long-term leases payable.................................. $2,237
======
</TABLE>
During the normal course of business, the Company is involved in various
lawsuits. Management, in consultation with legal counsel, does not believe that
the outcome of these lawsuits will have a materially adverse impact on the
financial position or future operations of the Company.
13. PROFIT SHARING PLANS
As a result of the acquisitions of the subsidiaries, the Company has
maintained the profit-sharing plans covering all of its eligible employees for
those entities acquired. Contributions to the plans are at the discretion of the
Board of Directors and may not exceed the maximum amount permitted by the
Internal Revenue Code. During the year ended December 31, 1998 and the period
from October 21, 1997 through December 31, 1997, the Company charged $1,078,000
and $26,000, respectively, to expense pursuant to the Plans.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Aeromil Engineering Company
We have audited the accompanying balance sheet of Aeromil Engineering
Company as of November 25, 1997, and the related statements of operations and
retained earnings and cash flows for the period January 1, 1997 through
November 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aeromil Engineering Company
at November 25, 1997, and the results of its operations and its cash flows for
the period January 1, 1997 through November 25, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Long Beach, California
March 19, 1998
F-25
<PAGE>
AEROMIL ENGINEERING COMPANY
BALANCE SHEET
NOVEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 182
Accounts receivable....................................... 1,680
Inventories............................................... 3,213
Related party receivables................................. 32
Prepaid expenses and other assets......................... 52
-------
Total current assets........................................ 5,159
Property and equipment, net................................. 4,860
-------
Total assets................................................ $10,019
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,310
Accrued expenses.......................................... 276
Loan payable, shareholder................................. 677
Current portion of long-term debt......................... 600
Line of credit............................................ 1,445
-------
Total current liabilities................................... 4,308
Long-term debt, less current portion........................ 1,556
Commitments................................................. --
-------
Stockholders' equity:
Capital stock, $100 par value:
Authorized shares-750
Issued and outstanding shares-300....................... 30
Retained earnings........................................... 4,125
-------
Total stockholders' equity.................................. 4,155
-------
Total liabilities and stockholders' equity.................. $10,019
=======
</TABLE>
See accompanying notes.
F-26
<PAGE>
AEROMIL ENGINEERING COMPANY
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales................................................... $11,077
Cost of sales............................................... 11,095
-------
Gross loss.................................................. (18)
Selling, general and administrative expenses................ 499
-------
Operating loss.............................................. (517)
Interest expense............................................ (229)
Other income, net........................................... 48
-------
Loss before income taxes.................................... (698)
-------
Income taxes................................................ 1
Net loss.................................................... (699)
Retained earnings at beginning of period.................... 4,824
-------
Retained earnings at end of period.......................... $ 4,125
=======
</TABLE>
See accompanying notes.
F-27
<PAGE>
AEROMIL ENGINEERING COMPANY
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (699)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 681
Changes in operating assets and liabilities:
Accounts receivables.................................... (549)
Inventories............................................. (283)
Prepaid expenses and other assets....................... (7)
Accounts payable........................................ (441)
Accrued expenses........................................ 159
------
Net cash used in operating activities....................... (1,139)
INVESTING ACTIVITIES
Increase in related party receivables....................... (29)
Purchase of property and equipment.......................... (1,665)
------
Net cash used in investing activities....................... (1,694)
------
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 2,420
Payments on long-term debt.................................. (343)
Net increase in line of credit.............................. 935
------
Net cash provided by financing activities................... 3,012
------
Net increase in cash........................................ 179
Cash at beginning of period................................. 3
------
Cash at end of period....................................... $ 182
======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest.................................................. $ 229
</TABLE>
See accompanying notes.
F-28
<PAGE>
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 25, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Aeromil Engineering Company (the "Company"), a closely held California
corporation, manufactures medium-sized parts for aerospace customers,
specializing in the precision machining of hard metals such as titanium, as well
as the high-speed precision machining of aluminum.
Effective on the close of business on November 25, 1997 the Company sold
substantially all of its net assets to Compass Aerospace Corporation for
$7,985,000 in cash. The Company's financial statements have been prepared on a
historical basis and, as such, do not reflect any adjustments that may result
from the sale.
ACCOUNTING 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, the
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.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to limited number of customers within the aerospace
and defense industry. Credit is extended based upon an evaluation of each
customer's financial condition, with terms consistent in the industry and no
collateral required. The Company has historically incurred minimal credit
losses.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company for loans with
similar terms or maturity, approximate the carrying amounts in the financial
statements.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions.
INVENTORIES
Inventories which consist primarily of work-in-process, are valued at
average cost, which approximates first-in first-out cost, and finished goods and
are stated at the lower of cost or market. Finished goods amounted to
approximately $192,000 at November 25, 1997.
F-29
<PAGE>
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The provision for depreciation of property and equipment is generally
computed on the straight-line method over the following useful lives:
<TABLE>
<S> <C>
Machinery and equipment.............. 8 - 10 years
Furniture and fixtures............... 5 years
Automotive equipment................. 3 - 5 years
Leasehold improvements............... Term of lease or life of asset,
whichever is shorter
</TABLE>
INCOME TAXES
The Company adopted S corporation status for both federal and state income
tax purposes. Accordingly, the Company has no current liability or provision for
federal taxes based on income. The provision for California franchise tax is at
the statutory rate applicable to S corporations.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. The effect of these programs is estimated and current period sales
and cost of sales are adjusted accordingly.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income," which is effective for
financial statements for periods beginning after December 15, 1997. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. The Company believes
there will be no impact on its financial statements due to the adoption of
Statement 130.
In June 1997 the FASB also issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
financial statements for periods beginning after December 15, 1997. At that
time, the Company will be required to report financial and descriptive
information about its reportable operating segments. The Company believes there
will be no impact on its financial statements due to the adoption of Statement
131.
F-30
<PAGE>
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, which is recorded at
cost (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 25,
1997
------------
<S> <C>
Automotive equipment........................................ $ 85
Furniture and fixtures...................................... 421
Leasehold improvements...................................... 450
Machinery and equipment..................................... 12,030
-------
12,986
Allowance for depreciation.................................. (8,126)
-------
$ 4,860
=======
</TABLE>
3. LOAN PAYABLE, STOCKHOLDER
During 1996, the Company received an advance of $677,000 from a Company
stockholder. The loan is unsecured, non-interest bearing and payable on demand.
4. LINE OF CREDIT
The Company has a line of credit with National Bank of Southern California
which provides for borrowings up to $1,500,000. Interest is payable monthly at
1% over the Wall Street Journal's prime interest rate. The balance outstanding
was $1,445,000 at November 25, 1997. The line of credit is guaranteed by the
Company's stockholders and is secured by substantially all of the Company's
assets.
5. LONG-TERM DEBT
The following is a summary of long-term debt at November 25, 1997 (in
thousands):
<TABLE>
<S> <C>
Note payable to National Bank of Southern California,
payable in monthly installments of $25,000 including
interest at 1% over prime, maturity date January 3, 2001,
secured by one Cincinnati Milacron milling machine and
attachments............................................... $ 750
Note payable to National Bank of Southern California,
payable in monthly installments of $25,000 plus interest
at 1% over prime, maturity July 30, 2002, secured by
assets of the Company..................................... 1,406
------
2,156
Long-term Debt, less current portion........................ (600)
------
$1,556
======
</TABLE>
F-31
<PAGE>
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
5. LONG-TERM DEBT (CONTINUED)
Future minimum payments of long-term debt are (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 600
1999........................................................ 558
2000........................................................ 537
2001........................................................ 300
2002........................................................ 161
------
$2,156
======
</TABLE>
6. PROFIT SHARING PLANS
The Company has a profit-sharing plan covering all of its employees.
Contributions to the plan are at the discretion of the Board of Directors and
may not exceed the maximum amount permitted by the Internal Revenue Code. The
Company did not make a contribution to the plan during the period from
January 1, 1997 through November 25, 1997.
The Company has also adopted a profit sharing plan which qualifies under
Section 401(k) of the Internal Revenue Code. The plan covers all eligible
employees who may elect to contribute a percentage of their gross earnings to
the plan. Contributions to the plan by the Company equal up to a maximum of 6%
of each participating employee's annual salary. The Company's contribution to
the plan for the period from January 1, 1997 through November 25, 1997 was
$50,000.
7. PROVISION FOR CALIFORNIA FRANCHISE TAX
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
state income tax purposes. The provision for California franchise tax consists
of $800 California minimum franchise tax. Significant components of the
Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 25,
1997
------------
<S> <C>
Deferred tax assets:
Net Operating Loss carryforward........................... $ 9
Tax credit carryforward................................... 37
----
$ 46
Deferred tax liabilities:
Tax depreciation in excess of book........................ (15)
----
31
Valuation allowance......................................... (31)
----
Net deferred taxes.......................................... --
====
</TABLE>
The Company is providing for deferred taxes using a rate of 1.5% for
California purposes.
F-32
<PAGE>
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
7. PROVISION FOR CALIFORNIA FRANCHISE TAX (CONTINUED)
For California purposes, the Company has a net operating loss carryforward
of $1,097,000 available to offset its state taxable income in future years,
expiring through 2012. The Company also has an enterprise zone sales tax credit
carryforward of $36,900 available to offset its state income tax in future
years, expiring in 2010.
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases its manufacturing and office facility and its warehouse
space from a shareholder under ten-year noncancelable operating leases expiring
on November 25, 2007. The leases provide for periodic adjustments to the monthly
rent payments based on changes in the consumer price index. The leases also
require the Company to pay property taxes. Rent expense under these leases
amounted to $354,000 during the period from January 1, 1997 through
November 25, 1997.
Future minimum lease payments by year under these leases consisted of the
following as of November 26, 1997 (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 467
1999........................................................ 471
2000........................................................ 513
2001........................................................ 513
2002........................................................ 513
Thereafter.................................................. 2,523
------
$5,000
</TABLE>
9. REVENUES FROM MAJOR CUSTOMERS
Due to the nature of the aerospace industry, the Company conducts a major
portion of its business with a limited number of customers. For the period from
January 1, 1997 through November 25, 1997, revenues from one major customer
amounted to 79% of sales. The total accounts receivable from this customer at
November 25, 1997 amounted to 70% of the total trade accounts receivable
balance.
10. IMPACT ON YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will replace
its software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company presently believes that with
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such conversions are
not made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
F-33
<PAGE>
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
10. IMPACT ON YEAR 2000 (UNAUDITED) (CONTINUED)
The Company will initiate formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure to contingencies related to the Year 2000 issue
for the products it has sold.
The Company anticipates completing the Year 2000 project no later than
December 31, 1998, which is prior to any anticipated impact on its operating
systems. Company management is currently working with outside consultants to
estimate the costs associated with replacing or modifying its operating systems.
The total cost of the project is expected to be funded through operating cash
flows and will be capitalized or expensed based upon generally accepted
accounting principles and corporate policy. To date, the Company has not
incurred any costs related to the assessment of, and preliminary efforts on, its
Year 2000 project and the development of a modification plan, purchase of new
systems and systems modifications.
F-34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Brittain Machine, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Brittain
Machine, Inc. and Subsidiary as of April 21, 1998, and the related consolidated
statements of earnings and retained earnings and cash flows for the period
July 1, 1997 through April 21, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Brittain
Machine, Inc. and Subsidiary as of April 21, 1998, and the consolidated results
of their operations and their consolidated cash flows for the period July 1,
1997 through April 21, 1998 in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Wichita, Kansas
July 9, 1998
F-35
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
APRIL 21, 1998
<TABLE>
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,683,235
Accounts receivable
Trade accounts receivable............................... 7,672,400
Other................................................... 46,955
Inventories............................................... 8,845,527
Refundable income taxes................................... 401,691
Prepaid expenses and other................................ 73,147
Deferred income taxes..................................... 606,936
-----------
Total current assets.................................. 19,329,891
PROPERTY AND EQUIPMENT, AT COST
Land...................................................... $ 200,604
Buildings................................................. 3,691,276
Machinery and equipment................................... 20,828,710
Vehicles.................................................. 148,425
Office equipment.......................................... 730,218
Construction in progress.................................. 2,892,234
-----------
28,491,467
Less accumulated depreciation............................. 15,134,005 13,357,462
-----------
INVESTMENTS AND OTHER ASSETS
Funds held by trustee..................................... 55,408
Bond issuance costs....................................... 33,682 89,090
----------- -----------
$32,776,443
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 1,784,819
Accrued payroll, bonuses and employee benefits............ 3,992,423
Payable to affiliate...................................... 1,600,000
Other accrued liabilities................................. 233,937
Current maturities of capital lease obligations........... 428,757
Current maturities of long-term debt...................... 508,151
Current maturities of industrial revenue bonds............ 55,000
-----------
Total current liabilities............................. 8,603,087
LONG-TERM LIABILITIES
Capital lease obligations................................. 1,585,953
Long-term debt............................................ 551,809
Industrial revenue bonds.................................. 645,000
Deferred income taxes..................................... 1,147,273
-----------
3,930,035
STOCKHOLDERS' EQUITY
Common stock, Class A, voting, par value $1
Authorized-300,000 shares Issued and outstanding-90,000
shares.................................................. $ 90,000
Common stock, Class B, nonvoting, par value $1
Authorized-300,000 shares Issued and outstanding-90,000
shares.................................................. 90,000
Additional paid-in capital................................ 55,004
Retained earnings......................................... 20,008,317 20,243,321
----------- -----------
$32,776,443
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-36
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
PERIOD JULY 1, 1997 THROUGH APRIL 21, 1998
<TABLE>
<S> <C>
Sales....................................................... $49,682,444
Cost of sales............................................... 34,640,582
-----------
Gross margin on sales....................................... 15,041,862
General, administrative and selling expenses................ 2,966,547
Nonrecurring management and employee bonuses paid in
connection with sale of Company........................... 3,831,472
-----------
Earnings from operations.................................... 8,243,843
Other income (expense)
Interest income........................................... 13,327
Interest expense.......................................... (398,808)
Loss on sale of assets.................................... (59,184)
Other..................................................... 79,410
-----------
(365,255)
-----------
Earnings before income taxes................................ 7,878,588
Income taxes................................................ 2,901,353
-----------
NET EARNINGS............................................ 4,977,235
Retained earnings at July 1, 1997........................... 15,031,082
-----------
Retained earnings at April 21, 1998......................... $20,008,317
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD JULY 1, 1997 THROUGH APRIL 21, 1998
<TABLE>
<S> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings.............................................. $ 4,977,235
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization........................... 1,510,526
Deferred income taxes................................... 72,078
Loss on disposal of property and equipment.............. 59,184
Change in assets and liabilities
Increase in accounts receivable....................... (2,618,103)
Increase in income taxes receivable................... (294,205)
Decrease in inventories............................... 2,132,289
Increase in accounts payable.......................... 172,920
Increase in accrued payroll, bonuses and employee
benefits............................................ 2,273,572
Other................................................. (307,565)
-----------
Net cash provided by operating activities........... 7,977,931
Cash flows from investing activities
Purchase of property and equipment........................ (3,558,952)
Proceeds from disposal of property and equipment.......... 24,418
-----------
Net cash used in investing activities............... (3,534,534)
Cash flows from financing activities
Net increase in payable to affiliate...................... 1,600,000
Net decrease in line of credit............................ (3,855,000)
Repayments of long-term debt and industrial revenue
bonds................................................... (702,314)
Repayments of capital lease obligations................... (258,125)
-----------
Net cash used in financing activities............... (3,215,439)
-----------
Net increase in cash and cash equivalents................... 1,227,958
Cash and cash equivalents at July 1, 1997................... 455,277
-----------
Cash and cash equivalents at April 21, 1998................. $ 1,683,235
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 21, 1998
NOTE A--SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. BUSINESS ACTIVITY, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Brittain Machine, Inc. manufactures parts according to customer
specification primarily for use in the aerospace industry. The Company also
designs, manufactures and sells tooling, machinery and equipment for use in the
aerospace industry.
Wichita Manufacturing, Inc., a wholly-owned subsidiary, is located in
Cerritos, California, and is engaged in the same line of business as Brittain
Machine, Inc.
The consolidated financial statements include the consolidated accounts of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita
Manufacturing, Inc. immediately prior to the sale of the Company to Compass
Aerospace Corporation (see Note L). All significant intercompany accounts have
been eliminated.
2. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
3. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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.
4. INVENTORIES
Inventories are stated at the lower of weighted average cost or net
realizable value.
5. PROPERTY AND EQUIPMENT
Land, buildings and equipment are carried at cost. Major additions and
betterments are charged to the property accounts while replacements, maintenance
and repairs which do not improve or extend the life of the respective assets are
expensed currently. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings................................................... 10-30 years
Machinery and equipment..................................... 7-10 years
Vehicles.................................................... 4- 6 years
Office equipment............................................ 5- 7 years
</TABLE>
F-39
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
6. INCOME TAXES
The Company files a consolidated income tax return with its subsidiary.
Deferred income tax assets and liabilities are determined based on the
temporary differences between the financial accounting and tax basis of assets
and liabilities. Deferred tax assets or liabilities at the end of each period
are determined using the currently enacted tax rate expected to apply to taxable
income in the periods in which the deferred tax asset or liability is expected
to be realized or settled.
7. SELF INSURANCE
The Company participates in various self-insurance programs for medical and
workers' compensation risks. In connection with these programs the Company has
mitigated its exposure through the purchase of stipulated stop-loss coverage
with insurance companies. The Company estimates and accrues its liability for
the self-insurance portions of the risks covered by such programs.
8. CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with maturities of less than three
months to be cash equivalents.
9. REVENUE RECOGNITION
The Company's sales contracts are generally of a short-term nature and are
billed upon delivery. Revenue from such contracts is recognized upon passage of
title to the customer which, in most cases, coincides with shipments of the
related products to customers. Provisions for anticipated losses on contracts,
if any, are made currently as the amount of the loss is determinable.
NOTE B--INVENTORIES
Inventories consist of the following at April 21, 1998:
<TABLE>
<S> <C>
Raw material and supplies................................... $2,889,886
Work in progress............................................ 5,306,881
Finished goods.............................................. 648,760
----------
$8,845,527
==========
</TABLE>
NOTE C--LINE OF CREDIT
At April 21, 1998, the Company had available a line of credit with a bank
for up to $5,000,000. There were no borrowings outstanding at April 21, 1998.
Interest is payable monthly on the outstanding balance at a variable rate equal
to the bank's base rate (9.5% at April 21, 1998). There are no compensating
balance or commitment fee requirements. Borrowings under the line of credit are
collateralized by substantially all assets of the Company.
F-40
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE D--INCOME TAXES
Income tax expense for the period July 1, 1997 through April 21, 1998
consists of the following:
<TABLE>
<S> <C>
Current..................................................... $2,829,275
Deferred.................................................... 72,078
----------
$2,901,353
==========
</TABLE>
The principal reason for the variation between income taxes computed at the
federal tax rate of 34% and actual income taxes is state income tax expense.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at April 21, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets
Inventory valuation differences........................... $ 438,819
Accrued expenses not deductible until paid................ 168,117
----------
606,936
Deferred tax liabilities
Depreciation of property and equipment.................... 891,579
Capital leases treated as operating leases for tax
purposes................................................ 255,694
----------
1,147,273
----------
Net deferred tax liability.............................. $ 540,337
==========
</TABLE>
NOTE E--LONG-TERM DEBT
Long-term debt consists of the following at April 21, 1998:
<TABLE>
<S> <C>
Note payable to bank, payable in monthly installments
including variable interest at the bank's base interest
rate adjusted annually (effective rate 9.25% April 21,
1998), due in 2000 and collateralized by certain equipment
and machinery............................................. $ 906,452
Note payable to bank, payable in monthly installments
including variable interest, due in 1998 and
collateralized by a $250,000 real estate mortgage......... 7,458
Note payable to former stockholder, payable in equal monthly
installments including fixed interest at 9%, due in
2007-not collateralized................................... 146,050
----------
1,059,960
Less current maturities..................................... 508,151
----------
$ 551,809
==========
</TABLE>
F-41
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE E--LONG-TERM DEBT (CONTINUED)
In connection with the sale of the Company (see Note K), all notes payable
were paid in full subsequent to April 21, 1998.
NOTE F--INDUSTRIAL REVENUE BONDS
The Company financed $2,500,000 for the purchase of certain equipment and
the construction of a building through industrial revenue bonds issued by the
City of Wichita, Kansas and maturing through 2006. The principal and interest
(6% to 8%) on the bonds are serviced by biannual payments by the Company to a
trustee who then remits the funds to the City on the scheduled interest payment
and bond maturity dates. Certain of the proceeds from the bonds and the biannual
payments made by the Company have been and are deposited with the trustee.
The total amount of bonds outstanding at April 21, 1998 was $700,000.
Aggregate annual maturities are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 55,000
2000........................................................ 60,000
2001........................................................ 65,000
2002........................................................ 70,000
2003........................................................ 75,000
Thereafter.................................................. 375,000
--------
$700,000
========
</TABLE>
NOTE G--RELATED PARTY TRANSACTIONS
LEASING ACTIVITIES
The Company has entered into several agreements with an entity, affiliated
by common stockholders, to lease a building and certain machinery and equipment.
Due to the related party relationship with the affiliate and based upon the
underlying economic substance of the leasing arrangements, the leases have been
recorded as capital lease obligations. The recorded lease obligations represent
the outstanding principal balance on the loans incurred by the affiliated entity
to finance that entity's purchase of the building and machinery and equipment
(the "underlying debt"). In addition, the Company is the guarantor of such debt.
A summary of lease payments made during the period July 1, 1997 through
April 21, 1998 under these capital leases is as follows:
<TABLE>
<S> <C>
Total lease payments........................................ $ 653,100
Amount representing interest................................ (105,401)
Amount representing excess lease payments................... (289,574)
---------
Principal payments.......................................... $ 258,125
=========
</TABLE>
F-42
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the leases, property, plant and equipment at April 21,
1998 included the following:
<TABLE>
<S> <C>
Machinery and equipment..................................... $2,293,024
Building.................................................... 347,561
----------
2,640,585
Less accumulated depreciation............................... (566,142)
----------
$2,074,443
==========
</TABLE>
Depreciation expense for the property under lease was $307,270 for the
period July 1, 1997 through April 21, 1998.
The following is a schedule by years of future minimum lease payments under
capital leases:
<TABLE>
<S> <C>
1999........................................................ $ 975,720
2000........................................................ 975,720
2001........................................................ 751,720
2002........................................................ 551,720
2003........................................................ 311,720
Thereafter.................................................. 1,005,480
-----------
Total minimum lease payments................................ 4,572,080
Amount representing interest................................ (521,176)
Amount representing excess lease payments................... (2,036,194)
-----------
Total capital lease obligations............................. 2,014,710
Less current maturities..................................... 428,757
-----------
$ 1,585,953
===========
</TABLE>
In connection with the sale of the Company (see Note K), all capital leases
were paid in full subsequent to April 21, 1998.
In addition, the Company leased equipment under an operating lease from this
affiliated entity which expired March 1, 1998. The lease which began March 1996
provided for monthly payments of $14,000 per month.
The Company also has a month-to-month rental agreement with a stockholder
for two warehouses. In connection with such agreement rental expense charged to
operations by the Company for the period July 1, 1997 through April 21, 1998 was
$33,500.
OTHER TRANSACTIONS
The Company purchased goods from an entity controlled by the spouse of a
stockholder in the amount of $2,956,000 during the period July 1, 1997 through
April 21, 1998. An amount of $204,000 was due to such affiliate at April 21,
1998 and was included in accounts payable in the accompanying consolidated
balance sheet. The Company also paid $344,000 to an individual related to the
Company's
F-43
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
principal stockholders during the period July 1, 1997 through April 21, 1998 for
debarring services performed.
NOTE H--RETIREMENT PLAN
All employees who have completed one year of service and who have attained
21 years of age are eligible to participate in the Company's Profit Sharing
Retirement Plan. Contributions to the Plan are discretionary and made by the
Company for amounts that are determined by the Board of Directors based on a
percentage of each participant's annual compensation. Employees may also
contribute a portion of their compensation to the Plan. The Company charged
$864,000 to expense pursuant to the plan during the period July 1, 1997 through
April 21, 1998.
NOTE I--COMMITMENTS
The Company provides group medical insurance for its employees through a
self-insured medical plan. The Company has purchased a stop-loss insurance
policy that will pay claims in excess of $30,000 per year per individual and in
excess of annual aggregate claims of $420,000.
The Company is self-insured for workers' compensation claims. The Company
has purchased a stop-loss insurance policy that pays workers' compensation
claims in excess of $175,000 per occurrence and aggregate annual claims in
excess of $430,292. The Company has obtained a $655,000 letter of credit from a
bank in favor of the State of Kansas in connection with a self-insurance
program.
Wichita Manufacturing, Inc. leases its facility located in Cerritos,
California at a rental cost of $12,000 per month through October 31, 1998 for a
total commitment of $72,000.
NOTE J--CONTINGENCY
In January 1996, the Company was found liable in a civil action for, inter
alia, breach of contract and termination of joint venture/partnership associated
with a relationship the Company had with another entity. A judgment was recorded
against the Company in the amount of $600,000. The Company secured a $750,000
letter of credit in favor of the plaintiffs and filed a Notice of Appeal. The
plaintiffs filed a Notice of Cross-Appeal seeking damages of approximately
$1,500,000. Through April 21, 1998 the Company recorded a liability for the
$600,000 judgment plus $116,000 of post-judgment interest. On April 21, 1998,
the Company's principal owner assumed the liability. In connection with the
assumption of the liability, the Company transferred life insurance policies
with recorded cash surrender values of $614,000 to the principal owner. The
Company recorded a gain of $102,000 in connection with the transaction.
NOTE K--CONCENTRATION OF SALES
Substantially all of the Company's sales are made to a very few customers.
These customers are typically large companies in the aerospace industry. If the
Company were to lose one or more of these customers and were unable to find
replacement customers, sales would be adversely affected. Two customers
accounted for 73% and 13% of sales for the period July 1, 1997 through
April 21, 1998. Amounts due from these customers accounted for 68% and 12% of
total accounts receivable at April 21, 1998.
F-44
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE L--SALE OF COMPANY
Effective April 21, 1998, the Company was sold and became a subsidiary of
Compass Aerospace Corporation (Compass). At April 21, 1998, Compass had advanced
the Company $1,600,000 which is shown as due to affiliate in the accompanying
balance sheet.
In anticipation of and in connection with the sale of the Company, certain
nonrecurring management and employee bonuses were declared. Bonuses totaling
$1,600,000 were paid to management/minority stockholders of the Company. Bonuses
and related payroll taxes totaling $2,231,472 were accrued to other employees of
the Company.
NOTE M--SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<S> <C>
Cash paid during the period for
Interest.................................................. $ 407,788
Income taxes.............................................. 3,286,467
Noncash investing and financing activity
Acquisition of property and equipment under capital lease
obligations............................................. 785,061
Transfer of life insurance policies and assumption of
litigation
liability by the Company's principal owner.............. 614,000
</TABLE>
F-45
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Brittain Machine, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Brittain
Machine, Inc. and Subsidiary as of June 30, 1997, and the related consolidated
statements of earnings and retained earnings and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Brittain Machine, Inc. and Subsidiary as of June 30, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Wichita, Kansas
October 17, 1997
F-46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Brittain Machine, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Brittain
Machine, Inc. and Subsidiary as of June 30, 1996, and the related consolidated
statements of earnings and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Brittain Machine, Inc. and Subsidiary at June 30, 1996, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Wichita, Kansas
September 3, 1996
F-47
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 455 $ 91
Accounts receivable
Trade accounts receivable............................. 4,913 5,386
Other................................................. 188 109
Income tax receivable................................... 107 --
Inventories............................................. 10,978 4,878
Note receivable from affiliate.......................... -- 207
Prepaid expenses and other.............................. 50 56
Deferred income taxes................................... 694 608
------- -------
Total current assets.................................. 17,385 11,335
PROPERTY AND EQUIPMENT, AT COST
Land.................................................... 201 199
Buildings............................................... 3,603 2,812
Machinery and equipment................................. 19,754 18,669
Vehicles................................................ 180 175
Office equipment........................................ 775 679
Construction in progress................................ 99 6
------- -------
24,612 22,540
Less accumulated depreciation........................... 14,007 12,357
------- -------
10,605 10,183
INVESTMENTS AND OTHER ASSETS
Funds held by trustee................................... 56 52
Cash surrender value of life insurance.................. 520 486
Bond issuance costs..................................... 36 39
------- -------
612 577
------- -------
$28,602 $22,095
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving note payable to bank.......................... $ 3,855 $ 525
Accounts payable........................................ 1,612 923
Accrued payroll and employee benefits................... 1,719 1,388
Litigation judgment payable............................. 672 600
Income taxes payable.................................... -- 1,621
Other accrued liabilities............................... 366 187
Current maturities of capital lease obligations......... 285 156
Current maturities of long-term debt.................... 741 972
Current maturities of industrial revenue bonds.......... 50 400
------- -------
Total current liabilities............................. 9,300 6,772
LONG-TERM LIABILITIES
Capital lease obligations............................... 1,203 507
Long-term debt.......................................... 971 1,710
Industrial revenue bonds................................ 700 750
Deferred income taxes................................... 1,162 996
------- -------
4,036 3,963
STOCKHOLDERS' EQUITY
Common stock, Class A, voting, par value $1
Authorized--300,000 shares
Issued and outstanding--90,000 shares................. 90 90
Common stock, Class B, nonvoting, par value $1
Authorized--300,000 shares
Issued and outstanding--90,000 shares................. 90 90
Additional paid-in capital.............................. 55 55
Retained earnings....................................... 15,031 11,125
------- -------
15,266 11,360
------- -------
$28,602 $22,095
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Sales..................................................... $35,481 $26,892
Cost of sales............................................. 25,656 19,076
------- -------
Gross margin on sales..................................... 9,825 7,816
General, administrative and selling expenses.............. 2,770 2,353
Write off note receivable from affiliate.................. 386 --
Litigation expense........................................ 73 600
------- -------
Earnings from operations.................................. 6,596 4,863
Other income (expense)
Interest income......................................... 11 28
Interest expense........................................ (409) (431)
Gain (loss) on sale of assets........................... 5 (8)
Other................................................. (89) (69)
------- -------
(482) (480)
------- -------
Earnings before income taxes.............................. 6,114 4,383
Income taxes.............................................. 2,208 1,637
------- -------
NET EARNINGS........................................ 3,906 2,746
Retained earnings at beginning of year.................... 11,125 8,379
------- -------
Retained earnings at end of year.......................... $15,031 $11,125
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net earnings.............................................. $3,906 $2,746
Adjustments to reconcile net earnings to net cash provided
by (used in)
operating activities
Depreciation and amortization........................... 1,669 1,392
Deferred income taxes................................... 80 (280)
(Gain) loss on disposal of property and equipment....... (5) 8
Write-off uncollectible note receivable from
affiliate............................................. 386 --
Change in assets and liabilities
(Increase) decrease in accounts receivable............ 393 (2,384)
Increase in income taxes receivable................... (107) --
Increase in inventories............................... (6,099) (2,240)
Increase in accounts payable.......................... 688 302
Increase (decrease) in accrued payroll and employee
benefits............................................ 331 (28)
Increase in litigation judgment payable............... 73 600
Increase (decrease) in income taxes payable........... (1,621) 2,404
Other................................................. 151 (139)
------ ------
Net cash provided by (used in) operating
activities........................................ (155) 2,381
Cash flows from investing activities
Decrease in marketable securities......................... -- 12
Purchase of property and equipment........................ (1,072) (1,519)
Proceeds from disposal of property and equipment.......... 7 17
Increase in note receivable from affiliate................ (179) (129)
------ ------
Net cash used in investing activities................... (1,244) (1,619)
Cash flows from financing activities
Net change in funds held by trustee....................... (3) 377
Net change in line of credit.............................. 3,331 165
Repayments of long-term debt and industrial revenue
bonds................................................... (1,370) (1,299)
Repayments of capital lease obligations................... (195) (78)
------ ------
Net cash provided by (used in) financing activities..... 1,763 (835)
------ ------
Net increase (decrease) in cash and cash equivalents........ 364 (73)
Cash and cash equivalents at beginning of year.............. 91 164
------ ------
Cash and cash equivalents at end of year.................... $ 455 $ 91
====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. BUSINESS ACTIVITY AND PRINCIPLES OF CONSOLIDATION
Brittain Machine, Inc. manufactures parts according to customer
specification primarily for use in the aerospace industry. The Company also
designs, manufactures and sells tooling, machinery and equipment for use in the
aerospace industry.
Wichita Manufacturing, Inc., a wholly-owned subsidiary, is located in
Cerritos, California, and is engaged in the same line of business as Brittain
Machine, Inc.
The consolidated financial statements include the consolidated accounts of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita
Manufacturing, Inc. All significant intercompany accounts have been eliminated.
2. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
3. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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.
4. INVENTORIES
Inventories are stated at the lower of weighted average cost or net
realizable value.
5. PROPERTY AND EQUIPMENT
Land, buildings and equipment are carried at cost. Major additions and
betterments are charged to the property accounts while replacements, maintenance
and repairs which do not improve or extend the life of the respective assets are
expensed currently. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings................................................... 10-30 years
Machinery and equipment..................................... 7-10 years
Vehicles.................................................... 4-6 years
Office equipment............................................ 5-7 years
</TABLE>
F-52
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
6. INCOME TAXES
The Company files a consolidated income tax return with its subsidiary.
Deferred income tax assets and liabilities are determined based on the
temporary differences between the financial accounting and tax basis of assets
and liabilities. Deferred tax assets or liabilities at the end of each period
are determined using the currently enacted tax rate expected to apply to taxable
income in the periods in which the deferred tax asset or liability is expected
to be realized or settled.
7. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company pays the premiums on certain life insurance policies insuring
the lives of two of its stockholders. The cumulative value of net premiums paid
by the Company on behalf of the beneficiary of such life insurance policies is
recorded as an asset as this amount is payable by the policy owner to the
Company upon death of the insured.
The cash surrender values of certain other life insurance contracts owned by
the Company are recorded as assets. The change in such cash surrender values is
accounted as an adjustment of premiums paid in determining the expense or income
to be recognized under the contract for the period.
8. SELF INSURANCE
The Company participates in various self-insurance programs for medical and
workers' compensation risks. In connection with these programs the Company has
mitigated its exposure through the purchase of stipulated stop-loss coverage
with insurance companies. The Company estimates its liability for the
self-insured portions of the risks covered by such programs and accrues
appropriate reserves.
9. CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with maturities of less than three
months to be cash equivalents.
10. REVENUE RECOGNITION
The Company's sales contracts are generally of a short-term nature and are
billed upon delivery. Revenue from such contracts is recognized upon passage of
title to the customer which, in most cases, coincides with shipments of the
related products to customers. Provisions for anticipated losses on contracts,
if any, are made currently as the amount of the loss is determinable.
F-53
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE B--INVENTORIES
Inventories consist of the following at June 30 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw material and supplies.................................. $ 3,108 $1,155
Work in progress........................................... 7,260 3,445
Finished goods............................................. 610 278
------- ------
$10,978 $4,878
======= ======
</TABLE>
NOTE C--LINE OF CREDIT
At June 30, 1997, the Company had available a line of credit with a bank for
up to $5,000,000, of which $3,855,000 and $524,519 was outstanding at June 30,
1997 and 1996, respectively. Interest is payable monthly on the outstanding
balance at a variable rate equal to the bank's base rate (9.25% at June 30,
1997). There are no compensating balance or commitment fee requirements.
Borrowings under the line of credit are collateralized by substantially all
assets of the Company.
NOTE D--INCOME TAXES
Income tax expense for the years ended June 30 consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current..................................................... $2,128 $1,917
Deferred.................................................... 80 (280)
------ ------
$2,208 $1,637
====== ======
</TABLE>
The principal reason for the variation between income taxes computed at the
federal tax rate of 34% and actual income taxes is state income tax expense.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at June 30 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets
Inventory valuation differences........................... $ 317 $ 393
Accrued expenses not deductible until paid................ 458 377
----- -----
775 770
Deferred tax liabilities
Depreciation of property and equipment.................... 1,026 1,009
Capital leases treated as operating leases for tax
purposes................................................ 136 68
Other..................................................... 81 81
----- -----
1,243 1,158
----- -----
Net deferred tax liability.............................. $ 468 $ 388
===== =====
</TABLE>
F-54
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE E--LONG-TERM DEBT
Long-term debt consists of the following at June 30 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note payable to bank, payable in monthly installments
including variable interest at the bank's base interest
rate adjusted annually (effective rate 9.125% and 9.0% at
June 30, 1997 and 1996, respectively), due in 2000 and
collateralized by certain equipment and machinery......... $1,280 $1,692
Equipment loans payable to a finance company, payable in
monthly installments including interest at a fixed rate of
7.95% changing to a variable rate during the final year of
the loan, which will range from the index rate (a) to the
index rate plus 1.5% maturing at various dates through
1998 and collateralized by the equipment financed and the
personal guarantees of two stockholders................... 238 751
Note payable to bank, payable in monthly installments
including variable interest, due in 1998 and
collateralized by a $250,000 real estate mortgage......... 40 77
Unsecured note payable to former stockholder, payable in
equal monthly installments including fixed interest at 9%,
due in 2007............................................... 154 162
------ ------
1,712 2,682
Less current maturities..................................... 741 972
------ ------
$ 971 $1,710
====== ======
</TABLE>
(a) The index rate is a rate equal to the highest of (i) the Prime Rate of
Chemical Bank, (ii) the Wall Street Journal prime rate or (iii) the
commercial paper rate in effect from time to time.
Aggregate annual maturities are as follows for the years ending June 30
(dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 741
1999........................................................ 506
2000........................................................ 343
2001........................................................ 12
2002........................................................ 13
Thereafter.................................................. 97
------
$1,712
======
</TABLE>
Interest capitalized during the years ended June 30, 1997 and 1996 was
$17,000 and $125,000 respectively.
NOTE F--INDUSTRIAL REVENUE BONDS
The Company financed $2,500,000 for the purchase of certain equipment and
the construction of a building through industrial revenue bonds issued by the
City of Wichita, Kansas and maturing through 2006. The principal and interest
(6% to 8%) on the bonds are serviced by biannual payments by the Company to a
trustee who then remits the funds to the City on the scheduled interest payment
and bond maturity dates. Certain of the proceeds from the bonds and the biannual
payments made by the Company have been and are deposited with the trustee.
F-55
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE F--INDUSTRIAL REVENUE BONDS (CONTINUED)
The total amount of bonds outstanding at June 30, 1997 and 1996 was $750,000
and $1,150,000, respectively. Aggregate annual maturities are as follows for the
years ended June 30 (dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 50
1999........................................................ 55
2000........................................................ 60
2001........................................................ 65
2002........................................................ 70
Thereafter.................................................. 450
----
$750
====
</TABLE>
NOTE G--RELATED PARTY TRANSACTIONS
LEASING ACTIVITIES
The Company has entered into several agreements with an entity, affiliated
by common stockholders, to lease a building and certain machinery and equipment.
Due to the related party relationship with the affiliate and based upon the
underlying economic substance of the leasing arrangements, the leases have been
recorded as capital lease obligations. The recorded lease obligation represents
the outstanding principal balance on the loans incurred by the affiliated entity
to finance that entity's purchase of the building and machinery and equipment
(the "underlying debt"). In addition, the Company is the guarantor of such debt.
A summary of lease payments made during the years ended June 30 under these
capital leases is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Total lease payments........................................ $483 $192
Amount representing interest................................ (72) (29)
Amount representing excess lease payments................... (216) (85)
---- ----
Principal payments.......................................... $195 $ 78
==== ====
</TABLE>
In connection with the leases, property, plant and equipment at June 30
included the following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Machinery and equipment..................................... $1,508 $836
Building.................................................... 348 --
------ ----
1,856 836
Less accumulated depreciation............................... (259) (16)
------ ----
$1,597 $820
====== ====
</TABLE>
F-56
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
Depreciation expense for the property under lease was $242,474 and $16,398
for the years ended June 30, 1997 and 1996, respectively.
The following is a schedule by years of future minimum lease payments under
capital leases (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30
- -------------------
<S> <C>
1998........................................................ $ 736
1999........................................................ 736
2000........................................................ 736
2001........................................................ 448
2002........................................................ 272
Thereafter.................................................. 1,098
------
Total minimum lease payments................................ 4,026
Amount representing interest................................ (457)
Amount representing excess lease payments................... (2,081)
------
Total capital lease obligations............................. 1,488
Less current maturities..................................... 285
------
$1,203
======
</TABLE>
In addition, the Company leases equipment under an operating lease from this
affiliated entity which expires March 1, 1998. The lease which began March 1996
provides for monthly payments of $14,000 per month.
The Company also has a month-to-month rental agreement with a stockholder
for two warehouses. In connection with such agreement rental expense charged to
operations by the Company for the years ended June 30, 1997 and 1996 was $60,000
annually.
OTHER TRANSACTIONS
The Company pays the premiums on certain policies insuring the lives of two
of its stockholders. The aggregate amount of such premiums paid during the years
ended June 30, 1997 and 1996 was $103,000 and $87,000, respectively.
The Company purchased goods from an entity controlled by the spouse of a
stockholder in the amount of $4,117,000 and $2,331,000 during 1997 and 1996,
respectively. Additionally, an amount of $502,000 and $285,000 was due to such
affiliate at June 30, 1997 and 1996, respectively, and was included in accounts
payable in the accompanying consolidated balance sheets. The Company also paid
to an individual related to the Company's principal stockholders $310,000 and
$186,000 during 1997 and 1996, respectively, for debarring services performed.
NOTE H--RETIREMENT PLAN
All employees who have completed one year of service and who have attained
age 21 years of age are eligible to participate in the Company's Profit Sharing
Retirement Plan. Contributions to the Plan are
F-57
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE H--RETIREMENT PLAN (CONTINUED)
made by the Company for amounts that are determined by the Board of Directors
based on a percentage of each participant's annual compensation. Employees may
also contribute a portion of their compensation to the Plan. During the years
ended June 30, 1997 and 1996, the Company charged $842,000 and $834,000 to
expense pursuant to the Plan.
NOTE I--COMMITMENTS
The Company provides group medical insurance for its employees through a
self-insured medical plan. The Company has purchased a stop-loss insurance
policy that will pay claims in excess of $30,000 per year per individual and in
excess of annual aggregate claims of $420,000.
The Company is self-insured for workers' compensation claims. The Company
has purchased a stop-loss insurance policy that pays workers' compensation
claims in excess of $175,000 per occurrence and aggregate annual claims in
excess of $430,292. The Company has obtained a $655,000 letter of credit from a
bank in favor of the State of Kansas in connection with a self-insurance
program.
Wichita Manufacturing, Inc. leases its facility located in Cerritos,
California at a rental cost of $12,000 per month through October 31, 1998. The
lease provides an option for an extension of a three-year period. Future
noncancelable lease commitments are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $144
1999........................................................ 48
----
$192
====
</TABLE>
The Company had at June 30, 1997 a commitment to purchase additional
equipment costing $1,748,000. The equipment is scheduled to be delivered in
December 1997.
NOTE J--CONTINGENCY
In January 1996, the Company was found liable in a civil action for, inter
alia, breach of contract and termination of joint venture/partnership associated
with a relationship the Company had with another entity. A judgment was recorded
against the Company in the amount of $600,000. However, the Company has filed a
Notice of Appeal. The plaintiffs have filed a Notice of Cross-Appeal seeking
damages of approximately $1,500,000. While the ultimate outcome of the
disposition of the matter is presently difficult to estimate, the Company
recorded a provision during 1996 of $600,000 and believes that the ultimate
outcome will not have a material adverse effect on its financial position. An
additional provision of $72,500 was recorded in 1997 for post-judgment interest.
NOTE K--CONCENTRATION OF SALES
Nearly all of the Company's sales are made to a very few customers. These
customers are typically large companies in the aerospace industry. If the
Company were to lose one or more of these customers and were unable to find
replacement customers, sales would be adversely affected. One customer accounted
for 67% and 56% of sales for 1997 and 1996, respectively. Amounts due from this
customer accounted for 60% and 64% of total accounts receivable at June 30, 1997
and 1996, respectively.
F-58
<PAGE>
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE L--SUPPLEMENTAL CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash paid during the year for
Interest.................................................. $ 405 $586
Income taxes.............................................. 3,852 --
Noncash investing and financing activity
Acquisition of property and equipment under capital lease
obligations............................................. 1,019 741
</TABLE>
F-59
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Barnes Machine, Inc.
We have audited the accompanying balance sheets of Barnes Machine, Inc. as
of April 21, 1998 and September 30, 1997, and the related statements of income
and retained earnings and cash flows for the period from October 1, 1997 to
April 21, 1998 and for the year ended September 30, 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 accepting 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 Barnes Machine, Inc. at
April 21, 1998 and September 30, 1997, and the results of its operations and its
cash flows for the period from October 1, 1997 to April 21, 1998 and the year
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Long Beach, California
August 12, 1998
F-60
<PAGE>
BARNES MACHINE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 21, SEPTEMBER 30,
1998 1997
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 687 $ 655
Accounts receivable less allowance for doubtful accounts
of $39
in 1998 and 1997........................................ 1,951 1,250
Inventories............................................... 1,861 1,005
Prepaid expenses.......................................... 26 27
Deferred assets........................................... 41 25
------ ------
Total current assets........................................ 4,566 2,962
Property and equipment, net................................. 2,106 1,401
Other assets................................................ 217 427
------ ------
Total assets................................................ $6,889 $4,790
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $1,161 $ 711
Accrued expenses.......................................... 808 660
Loan payable-stockholders................................. -- 209
Current portion of long-term debt......................... 153 147
------ ------
Total current liabilities................................... 2,122 1,727
Long-term debt, less current portion........................ 631 722
Commitments
Deferred taxes.............................................. 66 39
Stockholders' equity:
Common stock, par value $1 per share:
Authorized shares 50,000
Issued and outstanding shares 2,500......................... 3 3
Capital in excess of par.................................. 247 7
Retained earnings......................................... 3,820 2,292
------ ------
Total stockholders' equity.................................. 4,070 2,302
------ ------
Total liabilities and stockholders' equity.................. $6,889 $4,790
====== ======
</TABLE>
See accompanying notes.
F-61
<PAGE>
BARNES MACHINE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1, 1997
TO YEAR ENDED
APRIL 21, 1998 SEPTEMBER 30, 1997
--------------- ------------------
<S> <C> <C>
Net sales................................................... $8,809 $7,693
Cost of sales............................................... 6,057 4,854
------ ------
Gross profit................................................ 2,752 2,839
Selling, general and administrative expenses................ 362 1,587
------ ------
Operating income............................................ 2,390 1,252
Interest expense............................................ 50 9
Other (income) expense, net................................. (4) (21)
------ ------
Income before income taxes.................................. 2,344 1,264
Income tax expense.......................................... 816 438
------ ------
Net income.................................................. 1,528 826
Retained earnings at beginning of period.................... 2,292 1,466
------ ------
Retained earnings at end of period.......................... $3,820 $2,292
====== ======
</TABLE>
See accompanying notes.
F-62
<PAGE>
BARNES MACHINE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1, 1997 YEAR ENDED
TO SEPTEMBER 30,
APRIL 21, 1998 1997
--------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $1,528 $ 826
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred taxes............................................ 11 (1)
Depreciation.............................................. 171 208
Changes in operating assets and liabilities:
Accounts receivable..................................... (701) (339)
Inventories............................................. (856) (937)
Prepaid expenses and other assets....................... 211 (425)
Accounts payable........................................ 450 450
Accrued expenses........................................ 148 113
------ -----
Net cash provided by (used in) operating activities......... 962 (105)
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (636) (931)
FINANCING ACTIVITIES
(Payments on) proceeds from long-term debt.................. (85) 868
Payment of loan payable to stockholder...................... (209) (28)
------ -----
Net cash (used in) provided by financing activities......... (294) 840
------ -----
Net increase (decrease) in cash............................. 32 (196)
Cash and cash equivalents at beginning of period............ 655 851
------ -----
Cash and cash equivalents at end of period.................. $ 687 $ 655
====== =====
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 50 $ 9
Income taxes.............................................. $ 220 $ 361
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Donation of machinery and equipment by owners............. $ 240 $ --
</TABLE>
See accompanying notes.
F-63
<PAGE>
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 21, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Barnes Machine, Inc. (the Company) manufactures small to medium-sized
structural parts for aerospace customers, specializing in precision machining of
titanium and steel and the high-speed precision machining of aluminum.
At the close of business on April 21, 1998, 100% of the issued and
outstanding common stock of the Company and land and buildings owned by the
stockholders were sold to Compass Aerospace, Inc. for a total sales price of
$13,620,000. Transactions related to the sale have been treated as subsequent
events and are not reflected in the accompanying financial statements. These
transactions include the repayment of the Company's interest bearing note, as
well as purchase price allocations which affect the carrying value of the
Company's assets and liabilities.
CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to a limited number of customers within the aerospace
and defense industry. Revenues from one major customer amounted to 96% of sales
for the seven months ended April 21, 1998 and 90% for the year ended
September 30, 1997. Total accounts receivable from this customer amounted to 98%
and 95% of total trade accounts receivable at April 21, 1998 and September 30,
1997, respectively. Credit is extended based upon an evaluation of each
customer's financial condition, with terms consistent in the industry and no
collateral required. The Company has historically incurred minimal credit
losses.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents and the current portion of
long-term debt approximate cost due to the short period of time to maturity.
Fair values of long-term debt, which have been determined based on borrowing
rates currently available to the Company for loans with similar terms of
maturity, approximate the carrying amounts in the financial statements.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions.
INVENTORIES
Inventories consist primarily of work-in-process which are recorded on a
weighted average basis, which approximates first-in first-out, and are stated at
the lower of cost or market.
F-64
<PAGE>
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The provision for depreciation of property and equipment is generally
computed on the straight-line method over the following useful lives:
<TABLE>
<S> <C>
Machinery and equipment.............. 3--10 years
Furniture and fixtures............... 5--7 years
Automotive equipment................. 5 years
Leasehold improvements............... Term of lease or life of asset,
whichever is shorter
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. The effect of these programs is estimated and current period sales
and cost of sales are adjusted accordingly.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for financial
statements for fiscal years beginning after June 15, 1999, and which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. There will be no impact due to the adoption
of SFAS No. 133.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which is effective for financial
statements for periods beginning after December 15, 1997, and which revises and
standardizes disclosure requirements for pensions and other postretirement
benefits. The Company will revise its disclosures as necessary upon adoption of
SFAS No. 132.
In March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed for or Obtained for Internal Use," was issued,
which is effective for fiscal years beginning after December 15, 1998. SOP 98-1
requires capitalization and amortization of qualified computer software costs
over its estimated useful life. There will be no impact due to the adoption of
SOP 98-1.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-65
<PAGE>
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, which is recorded at
cost (in thousands):
<TABLE>
<CAPTION>
APRIL 21, SEPTEMBER 30,
1998 1997
--------- -------------
<S> <C> <C>
Automotive equipment................................... $ 122 $ 121
Furniture and fixtures................................. 487 403
Leasehold improvements................................. 309 281
Machinery and equipment................................ 3,017 2,279
------- -------
3,935 3,084
Allowance for depreciation............................. (1,829) (1,683)
------- -------
$ 2,106 $ 1,401
======= =======
</TABLE>
3. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes to be
paid for the respective periods ended and the change during each period in the
deferred tax assets and liabilities. Significant components of the Company's
deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 21, SEPTEMBER 30,
1998 1997
--------- -------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not deductible for tax.............. $ 41 $ 25
Deferred tax liabilities:
Tax depreciation over book........................... (66) (39)
---- ----
Net deferred tax liability............................. $(25) $(14)
==== ====
</TABLE>
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
OCTOBER 1, 1997 YEAR ENDED
THROUGH SEPTEMBER 30,
APRIL 21, 1998 1997
--------------- -------------
<S> <C> <C>
Federal:
Current......................................... $805 $439
Deferred........................................ 11 (1)
---- ----
$816 $438
==== ====
</TABLE>
F-66
<PAGE>
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
4. DEBT
The Company has a promissory note with Keybank National Association, payable
in monthly installments of $17,936 plus interest at 8.50% with a maturity date
of October 15, 2002. The promissory note is secured by a milling machine.
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $153
2000........................................................ 167
2001........................................................ 182
2002........................................................ 198
2003........................................................ 84
----
Total....................................................... $784
====
</TABLE>
The Company has an unsecured line of credit with Key Bank, which provides
for borrowings up to $500,000 under a revolving line of credit that bears
interest at 1% over prime. There was no balance outstanding at April 21, 1998 or
September 30, 1997.
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company rents office, plant and warehouse space on a monthly basis from
its stockholders. Property rent expense amounted to $193,000 for the seven
months ended April 21, 1998 and $251,000 for the year ended September 30, 1997.
The Company also leases machinery and equipment from its stockholders. The
machinery and equipment lease has a one-year term and may be cancelled with
sixty days' advance notice. Rent expense under this arrangement amounted to
$78,000 for the seven months ended April 21, 1998 and $139,000 for the year
ended September 30, 1997. The leases require the Company to pay property taxes.
The Company had outstanding notes payable to its stockholders for $209,000
at September 30, 1997. These notes were repaid during the period ended
April 21, 1998. Interest expense was $3,000 and $6,000 for the period ended
April 21, 1998 and the year ended September 30, 1997, respectively.
The Company is a defendant in various legal proceedings arising in the
normal course of business. In consultation with legal counsel, management has
reviewed these proceedings and, based upon current information, believes that
the ultimate disposition thereof will have no material effect on the Company's
consolidated financial position.
6. PROFIT SHARING PLAN
The Company has adopted a profit sharing plan which qualifies under
Section 401(k) of the Internal Revenue Code. The plan covers all eligible
employees who may elect to contribute a percentage of their gross earnings to
the Plan. Contributions to the plan by the Company are discretionary.
Contributions to the profit sharing plan for the period from October 1, 1997 to
April 21, 1998 and the year ended September 30, 1997 were $10,000 and $150,000,
respectively.
F-67
<PAGE>
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Company does not anticipate that there would be a material impact on the
results of operations or cash flows of the Company related to the Year 2000
issue. The Year 2000 issue addresses computer programs which have time-sensitive
software that recognizes a date using "00" as the year 1900 rather than the year
2000. The Company converted to a new computer system in 1998 and is currently
seeking a Year 2000 compliant certification from the Company's software vendor.
In addition, the Company has an ongoing program to test its systems for such
compliance. The major business systems of the Company are not vulnerable to
third parties failure to remediate their own Year 2000 issues, as the Company's
interface with third parties, including customers and vendors, does not involve
date-dependent computer communication systems. The Company believes that with
the conversions to new software and modifications to other existing software,
the Year 2000 issue will not pose significant operational problems for its
computer system. In the event the remaining conversions and modifications are
not made, or are not completed timely, the Year 2000 issue is not expected to
have a material impact on the operations of the Company, as the products sold by
the Company and the processing and delivery equipment used are not
date-dependent, minimizing the impact of any Year 2000 issues related to meeting
customer requirements.
As the Company has been incurring costs related to this project since 1997
and no significant additional costs have been identified, the Company does not
anticipate a material impact on the results of operations related to the Year
2000 issue.
F-68
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sea-Lect Products Inc. and Affiliate
We have audited the accompanying combined balance sheets of Sea-Lect
Products Inc. and Affiliate as of May 11, 1998 and December 31, 1997 and the
related combined statements of income, shareholders' equity, and cash flows for
the period from January 1, 1998 through May 11, 1998 and for the year ended
December 31, 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, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Sea-Lect
Products Inc. and Affiliate at May 11, 1998 and December 31, 1997, and the
combined results of their operations and their cash flows for the period from
January 1, 1998 through May 11, 1998, and for the year ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Long Beach, California
September 25, 1998
F-69
<PAGE>
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 11, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 6,260 $ 70,915
Accounts receivable net of an allowance of $100,000 in
1998 and $54,000 in 1997................................ 2,245,912 1,531,163
Inventories:
Raw materials........................................... 729,505 513,165
Work in process......................................... 1,334,515 1,322,138
Finished goods.......................................... 518,591 729,572
----------- -----------
Total current assets........................................ 4,834,783 4,166,953
Property and equipment:
Machinery and equipment................................... 3,582,271 3,582,271
Automobiles............................................... 132,902 132,902
Office equipment.......................................... 98,167 98,167
Leasehold improvements.................................... 93,843 93,843
----------- -----------
3,907,183 3,907,183
Less accumulated depreciation............................... (2,750,366) (2,670,659)
----------- -----------
Total property and equipment................................ 1,156,817 1,236,524
----------- -----------
Total assets................................................ $ 5,991,600 $ 5,403,477
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 1,316,422 $ 701,755
Shareholders' notes payable............................... 348,257 375,182
Accounts payable.......................................... 1,165,825 713,179
Wage and related accruals................................. 421,705 304,808
Other accrued liabilities................................. 69,847 187,304
Due to shareholders....................................... -- 200,000
Current portion of long-term debt......................... 258,252 384,165
----------- -----------
Total current liabilities................................... 3,580,308 2,866,393
Long-term debt, less current portion........................ 665,398 665,399
Commitments and contingencies
Shareholders' equity:
Sea-Lect common stock, $1 par value; authorized 50,000
shares; issued and outstanding 10,200 shares............ 10,200 10,200
J&J Leasing, Inc. common stock, no par value; authorized
1,000,000 shares; issued and outstanding 2,000 shares,
stated capital.......................................... 113,350 113,350
Retained earnings......................................... 1,622,344 1,748,135
----------- -----------
Total shareholders' equity.................................. 1,745,894 1,871,685
----------- -----------
Total liabilities and shareholders' equity.................. $ 5,991,600 $ 5,403,477
=========== ===========
</TABLE>
See notes to combined financial statements.
F-70
<PAGE>
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1998
THROUGH YEAR ENDED
MAY 11, 1998 DECEMBER 31, 1997
--------------- -----------------
<S> <C> <C>
Sales....................................................... $5,368,737 $14,162,416
Cost of goods sold.......................................... 4,393,686 10,437,350
---------- -----------
Gross profit................................................ 975,051 3,725,066
Selling, general and administrative expenses................ 772,173 1,905,679
---------- -----------
202,878 1,819,387
Other income (expenses):
Interest expense.......................................... (65,811) (275,084)
Miscellaneous (expense) income............................ 3,651 137,915
---------- -----------
Other expenses, net......................................... (62,160) (137,169)
========== ===========
Net income.................................................. $ 140,718 $ 1,682,218
========== ===========
</TABLE>
See notes to combined financial statements.
F-71
<PAGE>
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEA-LECT J&J LEASING, INC.
COMMON STOCK COMMON STOCK
------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ------- ----- -------- ---------- ----------
Balance at January 1, 1997........... 10,200 $10,200 2,000 $113,350 $ 875,917 $ 999,467
Net income......................... -- -- -- -- 1,682,218 1,682,218
Distributions to shareholders...... -- -- -- -- (810,000) (810,000)
------ ------- ----- -------- ---------- ----------
Balance at December 31, 1997......... 10,200 10,200 2,000 113,350 1,748,135 1,871,685
Net income......................... -- -- -- -- 140,718 140,718
Distributions to shareholders...... -- -- -- -- (266,509) (266,509)
------ ------- ----- -------- ---------- ----------
Balance at May 11, 1998.............. 10,200 $10,200 2,000 $113,350 $1,622,344 $1,745,894
====== ======= ===== ======== ========== ==========
</TABLE>
See notes to combined financial statements.
F-72
<PAGE>
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1998
THROUGH YEAR ENDED
MAY 11, 1998 DECEMBER 31, 1997
--------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 140,718 $ 1,682,218
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 79,707 228,466
Gain on sale of equipment................................. -- (13,000)
Changes in operating assets and liabilities:
Accounts receivable..................................... (714,749) (479,769)
Inventories............................................. (17,736) (418,412)
Accounts payable and accrued liabilities................ 452,086 253,170
Prepaid expenses........................................ -- 36,000
----------- ------------
Net cash (used in) provided by operating activities......... (59,974) 1,288,673
INVESTING ACTIVITIES
Purchase of equipment....................................... -- (813,277)
Proceed from sale of equipment.............................. -- 13,000
----------- ------------
Net cash used in investing activities....................... -- (800,277)
FINANCING ACTIVITIES
Distributions to shareholders............................... (466,509) (610,000)
Repayments on short-term borrowings......................... (4,678,252) (14,231,408)
Advances on short-term borrowings........................... 5,292,919 13,970,352
Repayments on long-term debt................................ (125,914) (363,143)
Advances on long-term debt.................................. -- 782,440
Repayment on shareholders' note............................. (26,925) (283,360)
Advances made from shareholders............................. -- 259,713
----------- ------------
Net cash used in financing activities....................... (4,681) (475,406)
----------- ------------
Net (decrease) increase in cash............................. (64,655) 12,990
Cash at beginning of period................................. 70,915 57,925
----------- ------------
Cash at end of period....................................... $ 6,260 $ 70,915
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 65,811 $ 267,762
=========== ============
</TABLE>
See notes to combined financial statements.
F-73
<PAGE>
SEA-LECT PRODUCTS INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 11, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF COMBINATION AND ORGANIZATION
The accompanying combined financial statements include the accounts of the
Sea- Lect Products, Inc. (Sea-Lect) and its affiliate, J&J Leasing (J&J) (the
Company). These financial statements have been combined due to their common
ownership and management. Significant intercompany accounts and transactions
have been eliminated in combination.
Sea-Lect is a Washington S corporation, which operates a manufacturing
facility in Kent, Washington, for the purpose of metal fabrication. A
significant portion of its business is with customers in the aerospace business,
primarily in North America. J&J is a Washington S corporation that primarily
leases machinery and equipment to Sea-Lect. Some of the shareholders of J&J are
also shareholders in Sea-Lect.
At the close of business on May 11, 1998, the net assets of Sea-Lect and
100% of J&J's issued and outstanding common stock were sold to SLP Acquisition
Co., a subsidiary of Compass Aerospace Corporation for a total sales price of
$10,500,000. Transactions related to the sale have been treated as subsequent
events and are not reflected in the accompanying financial statements. These
transactions include the repayment of the Company's interest bearing note, as
well as purchase price allocations which affect the carrying value of the
Company's assets and liabilities.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost being
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over five to seven years.
INCOME TAXES
The shareholders of Sea-Lect and J&J have elected, under Subchapter S of the
Internal Revenue Code, to include each company's income in their own income for
federal income tax purposes. Accordingly, no provision has been made for federal
income taxes.
2. LINE OF CREDIT
The Company has an operating line of credit agreement with a bank that
provides for borrowings up to $1.3 million with interest at the bank's prime
rate plus 1% on an individual promissory note basis with no expiration date. At
May 11, 1998, the Company had $1,316,422 outstanding under this agreement with
interest at 9.5%. The borrowings under this agreement are secured by the
Company's accounts receivable and inventory.
F-74
<PAGE>
SEA-LECT PRODUCTS INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MAY 11, 1998
3. SHAREHOLDERS' NOTES PAYABLE
The Company has unsecured notes payable to its shareholders that bear
interest at 12% per annum. The notes are payable on demand and $300,000 of the
balance is subordinated to the line of credit. Interest expense on these notes
was approximately $32,000 and $46,000 for the period from January 1, 1998
through May 11, 1998 and the year ended December 31, 1997, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 11, 1998 1997
------------ ------------
<S> <C> <C>
Note payable, due in monthly installments of $9,727
including interest at 9.25%, due July 25, 2000............ $209,732 $ 266,587
Note payable, due in monthly installments of $8,655
including interest at 9.25%, due July 25, 2000............ 10,933 237,291
Note payable, due in monthly installments of $5,060
including interest at 9.25%, due April 25, 2000........... 34,253 126,684
Note payable, due in monthly installments of $2,656
including interest at 9.5%, due April 25, 2002............ 235,612 112,523
Note payable, due in monthly installments of $3,732
including interest at 9.25%, due March 25, 2000........... 24,806 90,346
Note payable, due in monthly installments of $2,619
including interest at 9.25%, due April 25, 2000........... 78,087 65,611
Various other notes payable, due in monthly installments of
$6,859 including interest at 9.75%, due starting June 25,
1998 through December 25, 2000............................ 330,227 150,522
-------- ----------
923,650 1,049,564
Less current portion........................................ 258,252 384,165
-------- ----------
$665,398 $ 665,399
======== ==========
</TABLE>
The above notes payable are secured by certain equipment, machinery and
automobiles and guaranteed by shareholders of J&J.
The aggregate maturities of the above notes payable are as follows as of
May 11:
<TABLE>
<S> <C>
1998........................................................ $258,252
1999........................................................ 410,428
2000........................................................ 215,693
2001........................................................ 29,414
2002........................................................ 9,863
--------
$923,650
========
</TABLE>
F-75
<PAGE>
SEA-LECT PRODUCTS INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MAY 11, 1998
5. COMMITMENTS AND RELATED-PARTY TRANSACTIONS
The Company has several noncancelable operating leases for buildings and
equipment. Buildings are leased from an affiliated joint venture, Building Joint
Venture (JV), that is owned by the shareholders of J&J. Future minimum lease
payments under noncancelable operating leases are as follows as of May 11:
<TABLE>
<CAPTION>
EQUIPMENT
BUILDING (JV) (NON-AFFILIATE) TOTAL
------------- --------------- ----------
<S> <C> <C> <C>
1998.................................... $ 244,599 $ 456,973 $ 701,572
1999.................................... 389,916 704,952 1,094,868
2000.................................... 396,024 439,540 835,564
2001.................................... 14,090 87,322 101,412
---------- ---------- ----------
$1,044,629 $1,688,787 $2,733,416
========== ========== ==========
</TABLE>
Rent expense to affiliated parties for the period from January 1, 1998
through May 11, 1998 and the year ended December 31, 1997 was $137,163 and
$293,532, respectively. Rent expense to a non-affiliated party for the period
from January 1, 1998 through May 11, 1998 and the year ended December 31, 1997
was $24,839 and $49,500, respectively.
6. CONCENTRATIONS
Approximately 42% and 43% of sales for the period from January 1, 1998
through May 11, 1998 and the year ended December 31, 1997, respectively, were
made to one customer. Accounts receivable from this customer amounted to
$777,165 at May 11, 1998 and $676,428 at December 31, 1997.
The Company's borrowings under the line of credit agreement and long-term
debt are made from the same bank.
7. 401(K) PLAN
The Company has a defined contribution plan (401(k)) covering substantially
all permanent employees who have completed six months of services and are at
least 18 years of age. Under the plan, the Company has agreed to contribute to
each eligible participant's account an amount equal to 50% of the amount
contributed by each participant, up to 6% of each participant's annual salary.
The 401(k) expense was $7,518 for the period from January 1, 1998 through
May 11, 1998 and $21,000 for the year ended December 31, 1997.
8. YEAR 2000 ISSUE--UNAUDITED
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company substantially completed the project during 1997. The
Company does not expect the remaining project to have a significant effect on
operations. The Company will continue to implement systems with strategic value,
although some projects may be delayed due to resource constraints.
F-76
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pacific Hills Manufacturing Co.
(formerly known as Lamsco West, Inc.)
Milford, Connecticut
We have audited the accompanying balance sheets of Pacific Hills
Manufacturing Co. (formerly known as Lamsco West, Inc.), a wholly-owned
subsidiary of Alinabal Holdings Corporation, as of November 20, 1998,
January 3, 1998 and December 28, 1996, and the related statements of income,
retained earnings and cash flows for the period January 4, 1998 to November 20,
1998 and the years ended January 3, 1998 and December 28, 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 Pacific Hills Manufacturing
Co. (formerly known as Lamsco West, Inc.) as of November 20, 1998, January 3,
1998 and December 28, 1996, and the results of its operations and its cash flows
for the period January 4, 1998 to November 20, 1998 and the years ended
January 3, 1998 and December 28, 1996 in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
March 5, 1999
F-77
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 20, JANUARY 3, DECEMBER 28,
1998 1998 1996
------------ ---------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Accounts receivable, less allowance for doubtful
accounts 1998 $100,000; 1997 $75,000; 1996 $30,000
(Note 2)............................................ $2,258,948 $4,190,653 $1,195,504
Inventories........................................... 2,662,332 2,223,305 1,267,825
Prepaid expenses...................................... 33,580 47,989 21,079
---------- ---------- ----------
Total current assets................................ 4,954,860 6,461,947 2,484,408
---------- ---------- ----------
Equipment and Leasehold Improvements
Machinery and equipment............................... 1,804,692 1,596,146 920,908
Leasehold improvements................................ 275,908 146,629 114,297
---------- ---------- ----------
2,080,600 1,742,775 1,035,205
Less accumulated depreciation and amortization........ 711,132 530,923 380,195
---------- ---------- ----------
1,369,468 1,211,852 655,010
---------- ---------- ----------
$6,324,328 $7,673,799 $3,139,418
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Excess of outstanding checks over bank balances....... $ $ 37,400 $ 168,415
Accounts payable...................................... 509,838 905,978 400,540
Accrued liabilities................................... 275,910 984,547 193,033
---------- ---------- ----------
Total current liabilities........................... 785,748 1,927,925 761,988
---------- ---------- ----------
Commitments and Contingency (Notes 3 and 4)
Stockholder's Equity
Common stock, $.01 par value; 20,000 shares
authorized, 100 shares issued and outstanding....... 1 1 1
Paid-in capital....................................... 99 99 99
Retained earnings..................................... 5,538,480 5,745,774 2,377,330
---------- ---------- ----------
5,538,580 5,745,874 2,377,430
---------- ---------- ----------
$6,324,328 $7,673,799 $3,139,418
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-78
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 4, FISCAL YEAR ENDED
1998 TO --------------------------
NOVEMBER 20, JANUARY 3, DECEMBER 28,
1998 1998 1996
------------ ----------- ------------
<S> <C> <C> <C>
Net Sales
Commercial sales (Note 2)........................... $28,095,863 $33,382,982 $10,593,249
Intercompany sales.................................. 186,453 151,715 221,922
----------- ----------- -----------
Total net sales................................... 28,282,316 33,534,697 10,815,171
Cost of Goods Sold.................................... 10,686,881 12,644,551 5,134,677
----------- ----------- -----------
Gross profit...................................... 17,595,435 20,890,146 5,680,494
Selling, General and Administrative Expenses
(Notes 3 and 4)..................................... 7,388,484 12,030,687 2,017,970
----------- ----------- -----------
Income before provision in lieu of income taxes... 10,206,951 8,859,459 3,662,524
Provision in lieu of income taxes..................... 1,282,000
----------- ----------- -----------
Net income........................................ $10,206,951 $ 8,859,459 $ 2,380,524
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-79
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM FISCAL YEAR ENDED
JANUARY 4, 1998 TO -----------------------------------
NOVEMBER 20, 1998 JANUARY 3, 1998 DECEMBER 28, 1996
------------------ --------------- -----------------
<S> <C> <C> <C>
Balance, beginning............................. $ 5,745,774 $2,377,330 $1,187,193
Net income................................... 10,206,951 8,859,459 2,380,524
Cash transfers to parent, net................ (10,414,245) (5,491,015) (1,190,387)
----------- ---------- ----------
Balance, ending................................ $ 5,538,480 $5,745,774 $2,377,330
=========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-80
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM FISCAL YEAR ENDED
JANUARY 4, 1998 -------------------------
TO NOVEMBER 20, JANUARY 3, DECEMBER 28,
1998 1998 1996
--------------- ---------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income........................................... $10,206,951 $8,859,459 $2,380,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 180,209 152,250 76,412
Provision for doubtful accounts.................... 25,000 75,000 5,000
Changes in working capital components:
Decrease (increase) in accounts receivable....... 1,906,705 (3,070,149) (800,651)
Increase in inventories.......................... (439,027) (955,480) (424,968)
Decrease (increase) in prepaid expenses.......... 14,409 (26,910) (12,955)
(Decrease) increase in accounts payable.......... (433,540) 374,423 361,945
(Decrease) increase in accrued liabilities....... (708,637) 791,514 112,270
----------- ---------- ----------
Net cash provided by operating activities...... 10,752,070 6,200,107 1,697,577
----------- ---------- ----------
Cash Flows From Investing Activities
Purchases of equipment and leasehold improvements.... (337,825) (709,092) (507,190)
----------- ---------- ----------
Cash Flows From Financing Activities
Cash transfers to parent, net........................ (10,414,245) (5,491,015) (1,190,387)
----------- ---------- ----------
Net increase in cash...........................
Cash
Beginning............................................
----------- ---------- ----------
Ending............................................... $ $ $
=========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-81
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 20, 1998
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Until November 20, 1998, Pacific Hills Manufacturing Co. (formerly known as
Lamsco West, Inc., the "Company") was a wholly-owned subsidiary of Alinabal
Holdings Corporation ("Alinabal" or "Parent"). On November 20, 1998, the Company
was sold to Compass Aerospace Corporation ("Compass"). The Company is engaged in
the manufacturing of shims for the aerospace, defense and industrial markets.
The Company's sales are primarily to customers located throughout the United
States to whom they extend credit on an unsecured basis on terms it establishes
for each individual customer.
THESE STATEMENTS HAVE BEEN PREPARED ON A STAND-ALONE BASIS FOR THE COMPANY
AND THEREFORE INTERCOMPANY SALES TO OTHER AFFILIATES OF ALINABAL HAVE NOT BEEN
ELIMINATED.
ACCOUNTING PERIOD
The Company utilizes a fiscal year that ends on the Saturday nearest to
December 31. Fiscal years ended on January 3, 1998 ("fiscal year 1997") and
December 28, 1996 ("fiscal year 1996") included 53 weeks and 52 weeks of
activity, respectively. The accounting period, which ended on November 20, 1998,
began on January 4, 1998 and included 46 weeks of activity.
ESTIMATES
The preparation of financial statements 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.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. The provision for such returns is estimated and current period
sales and cost of sales are adjusted accordingly.
INVENTORIES
Inventories, consisting principally of raw materials, are stated at the
lower of cost (first-in, first-out method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Depreciation is
provided primarily utilizing the straight-line method over the estimated useful
lives of the respective assets which range from four to ten years. Leasehold
improvements are amortized over the shorter of the remaining lease period or
useful life of the respective asset.
F-82
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company participates in Alinabal's defined benefit pension plan. To be
eligible, an employee must have completed one year of service and attained the
age of twenty-one. The plan provides benefits based on years of service and the
employee's compensation during their last five years of employment.
PROFIT SHARING AND SAVINGS PLAN
Employees of the Company are included in Alinabal's 401(k) employee profit
sharing and savings plan. Participants can make salary reduction contributions
to the plan equal to the lesser of 15% of their earnings or the maximum
allowable by the Internal Revenue Code. Company contributions are discretionary
and determined annually.
INCOME TAXES
Through fiscal year 1996, the Company filed a consolidated tax return with
its Parent; accordingly, for fiscal year 1996, the Company recognized a
provision in lieu of income taxes for its proportionate share of the Parent's
income tax provision.
Effective December 29, 1996, the Parent elected to be taxed under provisions
of Subchapter S of the Internal Revenue Code (S Corporation Status), which
provides that, in lieu of corporate income taxes, the stockholders separately
account for their pro rata share of the income, deductions, losses and credits
of the Company. State income taxes are generally insignificant to the Company
due to state allocations and low tax rates. As a result, no provision for
federal or state income taxes is made in these financial statements for the
period from January 4, 1998 to November 20, 1998 and for fiscal year 1997.
When the Parent elected S Corporation Status, the Parent became contingently
liable for income taxes (built in gains tax) at the maximum corporate rate if
certain assets are sold at a gain for a ten year period following the election.
As a result of the sale of the Company, the Parent will be responsible for
approximately $3,300,000 of built-in gains tax.
NOTE 2. MAJOR CUSTOMER
During the period from January 4, 1998 to November 20, 1998 and during
fiscal years 1997 and 1996, one customer accounted for approximately $20,807,000
(74%); $28,938,000 (86%); and $8,150,000 (75%), respectively, of the Company's
net sales and approximately $2,000,000 (89%); $3,921,000 (94%); and $1,066,000
(89%), of the Company's accounts receivable at November 20, 1998, January 3,
1998 and December 28, 1996, respectively. If the Company were to lose this
customer and was unable to find replacement customers, sales would be adversely
affected.
In March 1998, the Company signed an agreement in which the Company will be
the sole source supplier of certain defined parts, primarily shims, to this
customer in exchange for a 10% price reduction. The agreement contains certain
circumstances in which the customer can elect not to purchase from the Company.
F-83
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 3. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, 1998 JANUARY 3, 1998 DECEMBER 28, 1996
----------------- --------------- -----------------
<S> <C> <C> <C>
Customer advances.............................. $ $613,531 $
Accrued profit sharing......................... 110,000 176,680 130,700
Accrued payroll................................ 41,886 40,376 23,559
Other.......................................... 124,024 153,960 38,774
-------- -------- --------
$275,910 $984,547 $193,033
======== ======== ========
</TABLE>
NOTE 4. LEASES
The Company leases equipment and certain manufacturing facilities under
operating leases. Future annual lease commitments under these operating leases
are summarized as follows:
<TABLE>
<CAPTION>
LEASE
FISCAL YEAR ENDING COMMITMENT
- ------------------ --------------
<S> <C>
January 2, 1999............................................. $266,651
January 1, 2000............................................. 266,149
December 30, 2000........................................... 33,695
December 29, 2001........................................... 24,429
December 28, 2002........................................... 1,834
--------
$592,758
========
</TABLE>
Rent expense was approximately $216,000, $278,000 and $121,000 during the
period from January 4, 1998 to November 20, 1998 and during fiscal years 1997
and 1996, respectively.
NOTE 5. EMPLOYEE BENEFIT PLANS
PENSION PLAN
Contributions to the Alinabal sponsored defined benefit pension plan, which
were derived through application of various actuarial assumptions to the
Company's employee group, approximated $37,000, $24,500 and $19,500 during the
period from January 4, 1998 to November 20, 1998 and during fiscal years 1997
and 1996, respectively.
PROFIT-SHARING PLAN
For the period from January 4, 1998 to November 20, 1998 and during fiscal
years 1997 and 1996, the Company made contributions on behalf of its employees
to Alinabal's profit-sharing and savings plan of approximately $16,000, $12,000
and $6,000, respectively.
F-84
<PAGE>
PACIFIC HILLS MANUFACTURING CO.
(FORMERLY KNOWN AS LAMSCO WEST, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 6. IMPACT OF YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations. The Company and its Parent have developed a three-phase program for
Y2K information systems compliance. Phase I is to identify those systems with
which the Company has exposure to Y2K issues. Phase II is the development and
implementation of action plans to be Y2K compliant in all areas by mid 1999.
Phase III, to be completed by late 1999, is the final testing of each major area
of exposure to ensure compliance. The Company has identified three major areas
determined to be critical for successful Y2K compliance: (1) financial and
informational system applications, (2) manufacturing applications, and
(3) third-party relationships.
The Company, in accordance with Phase I of the program, is in the process of
conducting an internal review of all systems and contacting all software
suppliers to determine major areas of exposure to Y2K issues. In the financial
and information system area, a number of applications have been identified as
being Y2K compliant due to their recent implementation. The Company's core
financial and reporting systems are not Y2K compliant but were already scheduled
for replacement by early 1999. In the manufacturing area, the Company is in the
process of identifying areas of exposure, however, it does not believe that
there is material exposure in this area. In the third-party area, the Company
has contacted most of its major third parties. Most of these parties state that
they intend to be Y2K compliant by 2000.
The Company currently believes the cost to replace the core financial and
reporting systems will not be significant. The Company is interviewing outside
consultants to undertake a portion of the work and expects most of the cost to
be incurred during 1999. The Company has yet to determine what costs, if any,
will be incurred in connection with the manufacturing area and the third-party
area.
NOTE 7. SUBSEQUENT EVENTS
The Company's new parent, Compass Aerospace Corporation, is registering the
exchange of $110 million of debt securities with the Securities and Exchange
Commission. Effective November 20, 1998, the Company became a corporate
guarantor of these debt securities.
UNAUDITED EVENTS
Subsequent to November 20, 1998, sales to the major customer discussed in
Note 2 to the financial statements have decreased to approximately 40% of the
annualized sales occurring in the period ended November 20, 1998.
On May 28, 1999, Compass filed suit against Alinabal and the three primary
shareholders of Alinabal seeking recision of the Stock Purchase Agreement. The
ultimate outcome of this litigation is presently not determinable.
F-85
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Modern Manufacturing, Inc. (formerly Y.F. Americas, Inc. and Subsidiary)
We have audited the accompanying consolidated balance sheets of Modern
Manufacturing, Inc. (formerly YF Americas, Inc. and Subsidiary) as of
December 31, 1998 and 1997, and the related consolidated statements of income,
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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 consolidated financial position of Modern
Manufacturing, Inc. (formerly YF Americas, Inc. and Subsidiary) at December 31,
1998 and 1997 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Long Beach, California
April 27, 1999
F-86
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
<S> <C> <C>
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,590 $ 2,134
Accounts receivable less allowance for doubtful accounts
of $117 in 1998
and $80 in 1997......................................... 1,294 2,002
Inventories............................................... 6,631 5,856
Deferred tax assets....................................... 397 1,051
Prepaid expenses and other assets......................... 185 148
------- -------
Total current assets........................................ 10,097 11,191
Property and equipment, net................................. 4,842 4,410
Goodwill, net of accumulated amortization of $364 in 1998
and $329 in 1997.......................................... 130 165
------- -------
Total assets................................................ $15,069 $15,766
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 892 $ 1,276
Accrued expenses.......................................... 382 470
Current portion of long-term debt and capital leases...... -- 158
Line of credit............................................ 1,389 2,189
------- -------
Total current liabilities................................... 2,663 4,093
Deferred tax liability...................................... 127 131
Payable to affiliate, long-term............................. -- 3,613
Long-term debt and capital leases, less current portion..... 2,329 3,458
Commitments and contingencies
Shareholder's equity:
Common stock, 1,000 shares authorized, issued and
outstanding shares 94.4191 in 1998 and 100 in 1997, $.01
par value............................................... -- --
Paid-in capital........................................... 11,726 8,100
Accumulated deficit....................................... (1,776) (3,629)
------- -------
Total shareholder's equity.................................. 9,950 4,471
------- -------
Total liabilities and shareholder's equity.................. $15,069 $15,766
======= =======
</TABLE>
See accompanying notes.
F-87
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $26,967 $22,470 $11,401
Cost of sales............................................... 17,965 15,416 7,797
------- ------- -------
Gross profit................................................ 9,002 7,054 3,604
Selling, general and administrative expenses................ 5,679 3,729 2,094
------- ------- -------
Operating income............................................ 3,323 3,325 1,510
Interest expense, net....................................... 502 854 370
Other income................................................ -- -- (12)
------- ------- -------
Income before income taxes.................................. 2,821 2,471 1,152
Income tax expense.......................................... 968 881 414
------- ------- -------
Net income.................................................. $ 1,853 $ 1,590 $ 738
======= ======= =======
</TABLE>
See accompanying notes.
F-88
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996................ 100 $ -- $8,100 $(5,957) $2,143
Net income.............................. -- -- -- 738 738
------- ------ ------- ------- ------
Balance at December 31, 1996.............. 100 -- 8,100 (5,219) 2,881
Net income.............................. -- -- -- 1,590 1,590
------- ------ ------- ------- ------
Balance at December 31, 1997.............. 100 -- 8,100 (3,629) 4,471
Conversion of debt to equity............ -- -- 3,626 -- 3,626
Treasury stock transferred by
shareholder to Company and retired.... (5.5809) -- -- -- --
Net income.............................. -- -- -- 1,853 1,853
------- ------ ------- ------- ------
Balance at December 31, 1998.............. 94.4191 $ -- $11,726 $(1,776) $9,950
======= ====== ======= ======= ======
</TABLE>
See accompanying notes.
F-89
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,853 $ 1,590 $ 738
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation.............................................. 457 375 359
Amortization.............................................. 35 35 35
Deferred taxes............................................ 650 846 414
Gain on sale of property and equipment.................... (34) -- (102)
Changes in operating assets and liabilities:
Accounts receivable..................................... 708 (682) (393)
Inventories............................................. (775) (915) (1,340)
Prepaid expenses and other assets....................... (37) (119) 22
Accounts payable........................................ (384) 372 462
Accrued expenses and other liabilities.................. (88) (132) 560
------- ------- ------
Net cash provided by operating Activities................... 2,385 1,370 755
INVESTING ACTIVITIES
Proceeds from the sale of property and equipment............ 100 -- 344
Purchases of property and equipment......................... (953) (142) (103)
------- ------- ------
Net cash (used in) provided by investing activities......... (853) (142) 241
FINANCING ACTIVITIES
Proceeds from long-term debt................................ -- 2,415 --
Payments on long-term debt and capital leases............... (1,287) (380) (206)
Net increase (decrease) in long-term payable to affiliate... 11 (376) (97)
Net decrease in line of credit.............................. (800) (2,171) --
------- ------- ------
Net cash used in financing activities....................... (2,076) (512) (303)
------- ------- ------
Net (decrease) increase in cash............................. (544) 716 693
Cash and cash equivalents at beginning of period............ 2,134 1,418 725
------- ------- ------
Cash and cash equivalents at end of period.................. $ 1,590 $ 2,134 $1,418
======= ======= ======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest.................................................. $ 547 $ 856 $ 678
======= ======= ======
Income taxes.............................................. $ 480 $ 20 $ --
======= ======= ======
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Assets acquired under capital leases........................ $ -- $ 325 $ 653
======= ======= ======
Conversion of debt to equity................................ $ 3,624 $ -- $ --
======= ======= ======
</TABLE>
See accompanying notes.
F-90
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Y.F. Americas, Inc. owns 100% of the shares of Modern Holdings, Inc., which
owns 100% of the shares of Modern Manufacturing, Inc. The accompanying
consolidated financial statements include the accounts of Y.F. Americas, Inc.,
Modern Holdings, Inc. and Modern Manufacturing, Inc. (collectively, Y.F.
Americas, Inc. and Subsidiary, or the Company). All significant intercompany
balances and transactions have been eliminated in consolidation.
Y.F. Americas, Inc. is a Delaware corporation and is a wholly-owned
subsidiary of Y.F. International Ltd., a Hong Kong corporation. Modern
Holdings, Inc. and Modern Manufacturing, Inc. are Washington corporations.
Effective with the close of business on December 31, 1998, Y.F.
International Ltd. sold the Company to Compass Aerospace Corporation. The
accompanying financial statements have been prepared on a historical basis and,
as such, do not reflect any adjustments that may result from the sale of the
Company.
DESCRIPTION OF BUSINESS
The Company is located in Renton, Washington, and is a supplier of precision
machined small to medium-sized structural parts and structural components used
by aerospace manufacturers in structural frames and other metal aircraft
components. Customers include domestic and foreign entities.
ACCOUNTING 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are held by major financial institutions. The Company is subject to
risk for amounts in excess of federal deposit insurance limits.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company conducts a major portion of its business with a limited number of
customers. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent with those present throughout the
industry. Typically, the Company does not require collateral from customers.
Sales to the Boeing Company accounted for 82%, 83%, and 82% of total
consolidated sales for the years ended December 31, 1998, 1997 and 1996,
respectively. Trade accounts receivable from the Boeing
F-91
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company accounted for 69% and 70% of total consolidated accounts receivable as
of December 31, 1998 and 1997, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents approximate cost due to the short
period of time to maturity. Fair values of long-term debt, which have been
determined based on borrowing rates currently available to the Company for loans
with similar terms of maturity, approximate the carrying amounts in the
consolidated financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The provision for depreciation
of property and equipment is generally computed on the straight-line method over
the following useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 27.5-31.5 years
Furniture and fixtures...................................... 5-7 years
Vehicles, machinery and equipment........................... 3-10 years
</TABLE>
GOODWILL
Goodwill represents the excess of the purchase price over the estimated fair
value of the net assets acquired in connection with business combinations.
Amortization is provided on a straight-line basis over 14 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets are reviewed periodically and if
future cash flows are believed insufficient to recover the remaining carrying
value of the related assets, the carrying value is written down to its estimated
fair value in the period the impairment is identified.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
Customers typically have the right to return products that are damaged or
defective. Provisions are made currently for estimated returns.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after
F-92
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 15, 1998. SOP 98-1 requires capitalization of qualified computer
software costs with amortization recognized over their estimated useful lives.
The Company believes that there will be no impact due to the adoption of SOP
98-1.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," which is effective for
fiscal years beginning after December 15, 1998. SOP 98-5 requires costs of
start-up activities, as defined in the Statement, to be expensed as incurred.
The Company believes that there will be no impact due to the adoption of SOP
98-5.
2. INVENTORIES
The following is a summary of inventories (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
<S> <C> <C>
1998 1997
------ ------
Raw materials............................................... $1,770 $1,608
Work in process............................................. 2,137 2,338
Finished goods.............................................. 2,724 1,910
------ ------
$6,631 $5,856
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
<S> <C> <C>
1998 1997
------ ------
Land........................................................ $1,474 $1,474
Building and improvements................................... 2,421 2,421
Furniture and fixtures...................................... 537 543
Vehicles, machinery and equipment........................... 3,927 3,128
Machinery under capital leases.............................. 1,340 1,340
------ ------
9,699 8,906
Less accumulated depreciation............................... 4,857 4,496
------ ------
$4,842 $4,410
====== ======
</TABLE>
4. LINE OF CREDIT
The Company has a revolving credit facility agreement with the Bank of China
for $3.5 million. The Company had availability of approximately $2.1 million at
December 31, 1998. Interest is due quarterly at prime (7.75% at December 31,
1998) plus 0.25%. The line of credit expires October 15, 1999, and is secured by
substantially all of the assets of the Company.
F-93
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. LONG-TERM DEBT
Long-term debt includes a note payable to the Bank of China. The note
totaled $2.5 million and $2.3 million as of December 31, 1998 and 1997,
respectively. Interest on the note is set at the London Inter-Bank Offered Rate
(5.2% at December 31, 1998) plus 2.25%, and is due monthly. The note matures in
January 2003, at which time the principal is due in full. This loan is secured
by real property owned by the Company.
At December 31, 1997, the Company had a mortgage loan payable to U.S.
Bancorp Mortgage Company for $0.5 million. The Company had obligations under
capital lease agreements of approximately $0.8 million at December 31, 1997.
Though the original maturity dates under these agreements extended beyond 1998,
the Company paid these obligations in full during 1998.
6. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes to be
paid for the period and the change during the period in the deferred tax assets
and liabilities.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
<S> <C> <C>
1998 1997
---- -----
Deferred tax assets:
Net operating losses...................................... $ -- $ 470
Inventory reserves........................................ 285 233
Management fees........................................... -- 231
Accrued expenses not deductible for tax................... 112 51
Other..................................................... -- 66
---- -----
Total deferred tax assets................................... 397 1,051
Deferred tax liabilities:
Depreciation and amortization............................. 83 50
Other..................................................... 44 81
---- -----
Total deferred tax liabilities.............................. 127 131
---- -----
Net deferred tax asset...................................... $270 $ 920
==== =====
</TABLE>
F-94
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Current:
Federal............................................. $318 $ 35 $ 20
Deferred:
Federal............................................. 650 846 394
---- ---- ----
$968 $881 $414
==== ==== ====
</TABLE>
The reconciliation of income tax at the U.S. federal statutory rate to
income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Income tax at U.S. statutory rates.................... 34.0% 34.0% 34.0%
Book expenses not deductible for tax purposes......... 0.3 1.7 1.9
---- ---- ----
34.3% 35.7% 35.9%
==== ==== ====
</TABLE>
7. RELATED PARTY TRANSACTIONS
During 1998, the Company's parent, Y.F. International, Ltd., contributed
advances previously made to the Company totaling $3.6 million as additional
equity. This balance is recorded as additional paid-in capital at December 31,
1998.
8. CONTINGENCIES
During the normal course of business, the Company is involved in various
lawsuits and other legal matters. Management, in consultation with legal
counsel, does not believe that the outcome of these matters will have a
materially adverse impact on the financial position or future operations of the
Company.
9. SALARY DEFERRAL PLAN AND TRUST
The Company has a qualified retirement plan and trust covering substantially
all full-time employees with more than one year of service. Company
contributions to the defined contribution plan are made at the discretion of the
board of directors. During the years ended December 31, 1998, 1997, and 1996,
the Company charged $29,000, $31,000, and $16,000, respectively, to expense
pursuant to the Plans.
F-95
<PAGE>
MODERN MANUFACTURING, INC.
(FORMERLY YF AMERICAS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. SUBSEQUENT EVENT
Modern Holdings, Inc. and Modern Manufacturing, Inc. merged with Y.F.
Americas, Inc. on January 15, 1999 and January 19, 1999, respectively, to
form a single corporation. After the mergers, Y.F. Americas, Inc. changed its
name to Modern Manufacturing, Inc.
11. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000.
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has completed converting critical data processing
systems. The Company substantially completed the project during 1999. The
Company does not expect the remaining project to have a significant effect on
operations. The Company will continue to implement systems with strategic value,
although some projects may be delayed due to resource constraints.
F-96
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Trim Engineering Limited
We have audited the accompanying consolidated balance sheet of Trim
Engineering Limited as at April 30, 1999, and the related consolidated profit
and loss account and cash flow statement for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with United Kingdom auditing standards
which do not differ in any significant respect from those generally accepted in
the United States. 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 evaluation the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Trim Engineering Limited at April 30, 1999, and its consolidated profit and cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United Kingdom.
/s/ Ernst & Young
Southampton, England
October 12, 1999
F-97
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH APRIL 1999
<TABLE>
<CAPTION>
NOTES 1999
-------- ----------
L
<S> <C> <C>
TURNOVER.................................................... 2 27,637,607
Cost of sales............................................... 17,536,491
----------
GROSS PROFIT................................................ 10,101,116
Administrative expenses..................................... 5,490,837
----------
4,610,279
Other operating income...................................... 3 218,901
----------
Operating profit for the year............................... 4 4,829,180
Interest receivable and similar income
Bank interest............................................. 423,720
----------
5,252,900
Interest payable and similar charges........................ 7 29,464
----------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............... 5,223,436
Taxation on profit on ordinary activities................... 8 1,491,866
----------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................ 3,731,570
Minority interests.......................................... 356,965
----------
PROFIT ATTRIBUTABLE TO SHAREHOLDERS......................... 3,374,605
----------
GROUP RETAINED PROFIT FOR THE YEAR.......................... 3,374,605
Group retained profits brought forward...................... 14,653,824
----------
Group retained profits carried forward...................... 18,028,429
----------
</TABLE>
The profit and loss account contains all the recognised gains and losses for the
current and preceding year.
The notes to these accounts form part of these accounts.
F-98
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED BALANCE SHEET
AT 30TH APRIL 1999
<TABLE>
<CAPTION>
NOTES 1999
-------- ----------
L
<S> <C> <C>
FIXED ASSETS
Intangible asset..........................................
Goodwill................................................ 2
Tangible assets........................................... 9 11,854,769
----------
11,854,771
CURRENT ASSETS
Stocks and work-in-progress............................... 10 4,169,239
Debtors................................................... 11 6,354,086
Cash at bank and in hand.................................. 12 12,439,515
----------
22,962,840
CREDITORS--amounts falling due within one year.............. 13 12,627,663
----------
NET CURRENT ASSETS.......................................... 10,335,177
----------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 22,189,948
PROVISION FOR LIABILITIES AND CHARGES
Deferred taxation......................................... 14 1,110,157
----------
21,079,791
DEFERRED INCOME
Deferred Government grants................................ 154,517
----------
20,925,274
Less: Minority interests (equity interests)................. 2,514,726
----------
NET ASSETS.................................................. 18,410,548
==========
CAPITAL AND RESERVES
Called up share capital................................... 17 100,000
Capital reserve on consolidation.......................... 282,119
Profit and loss account................................... 18 18,028,429
----------
SHAREHOLDERS' FUNDS......................................... 18,410,548
==========
</TABLE>
The notes to these accounts form part of these accounts.
F-99
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH APRIL 1999
<TABLE>
<CAPTION>
1999
----------
L
<S> <C>
Net cash inflow from operating activities................... 4,996,642
----------
Returns on investments and servicing of finance
Interest received......................................... 423,720
Interest paid............................................. (29,464)
----------
394,256
----------
Taxation
Corporation tax paid (including advance corporation
tax).................................................... (1,062,392)
----------
Capital expenditure
Payments to acquire tangible fixed assets................. (4,560,099)
Receipts from sale of tangible fixed assets............... 15,440
----------
(4,544,659)
----------
Decrease in cash............................................ (216,153)
----------
</TABLE>
<TABLE>
<CAPTION>
1999
----------
L
<S> <C> <C>
1. Reconciliation of operating profit to net cash inflow from
operating activities
Operating profit............................................ 4,829,180
Profit on sale of assets.................................... (510)
Depreciation charges........................................ 789,110
Decrease in stocks.......................................... 746,575
Increase in debtors......................................... (1,104,110)
Decrease in creditors....................................... (247,733)
Government grants released.................................. (15,870)
----------
Net cash inflow from operating activities................... 4,996,642
==========
2. Reconciliation of net cash to movements in net debt
Decrease in cash for the year............................... (216,153)
Net debt at 1st May 1998.................................... 6,422,065
----------
Net debt at 30th April 1999................................. 6,205,912
==========
</TABLE>
<TABLE>
<CAPTION>
AT CASH AT
1.5.98 FLOWS 30.4.99
3. Analysis of changes in net debt ---------- ---------- ----------
L L L
<S> <C> <C> <C> <C>
Cash at bank and in hand.............................. 9,405,669 3,033,846 12,439,515
Bank overdraft........................................ (2,983,604) (3,249,999) (6,233,603)
---------- ---------- ----------
6,422,065 (216,153) 6,205,912
========== ========== ==========
</TABLE>
F-100
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS
FOR THE YEAR ENDED 30TH APRIL 1999
1. ACCOUNTING POLICIES
a) BASIS OF ACCOUNTING
The accounts are prepared under the historical cost convention and in
accordance with applicable United Kingdom accounting standards.
b) BASIS OF CONSOLIDATION
The group accounts consolidate the accounts of the company and all its
subsidiary undertakings, after eliminating internal sales and profits and
recognising the minority interests in subsidiary undertakings.
c) DEPRECIATION
Depreciation is provided on all tangible fixed assets in use at rates
calculated to write off the cost or valuation, less estimated residual
value, of each asset over its expected useful life, calculated as follows:
<TABLE>
<S> <C> <C>
Leasehold land and buildings - Straight line over 60 years
Freehold industrial buildings - Straight line over 50 years
Plant and machinery - 15% p.a. reducing balance
Fixtures, fittings and 10% p.a. reducing balance
equipment -
Computer equipment - Straight line over 3 years
Motor vehicles - 25% p.a. reducing balance
</TABLE>
The cost of payments on account and the cost of assets in course of
construction are not depreciated until the asset is brought into use.
No depreciation is provided on the following properties:
a) Freehold land.
b) A freehold hotel property, as it is the company's practice to
maintain this asset in a continual state of sound repair and
accordingly the directors consider that the life of this asset is so
long and the residual value (based on prices prevailing at the time
of acquisition) so high, that its depreciation is insignificant. Any
permanent diminution in the value of the property is charged to
profit and loss account as appropriate.
d) STOCKS AND WORK-IN-PROGRESS
Stocks and work-in-progress are stated at the lower of cost and net
realisable value. Cost is determined on a "first in, first out" basis and in
the case of work-in-progress and finished goods includes production expenses
and overheads, based on normal levels of activity.
e) TITLE TO ASSETS
Assets to which title has not passed to the company by virtue of non-payment
are treated as if title had passed on delivery rather than on the date of
payment and the liability in respect of those assets is not considered as
secured.
F-101
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
1. ACCOUNTING POLICIES (CONTINUED)
f) DEFERRED TAXATION
Deferred taxation is accounted for using the liability method on all
material timing differences to the extent that it is probable that
liabilities or assets will crystallise in the foreseeable future. Advance
corporation tax is carried forward to the extent that it is expected to be
recovered. Timing differences are taxable items, allowances or reliefs which
are given effect to in taxation periods different from those in which they
have effect in the accounts.
g) TURNOVER
Turnover represents the net amounts invoiced to customers, less trade
discounts and value added tax, and excluding sales of fixed assets.
h) GOODWILL
In the case of two subsidiary undertakings, goodwill has been written off to
profit and loss account in a previous year, except for a nominal amount of
L1 for each subsidiary undertaking.
Goodwill arising on consolidation has been written off to profit and loss
account in the year of acquisition.
i) FOREIGN CURRENCIES
Transactions denominated in foreign currencies are translated into sterling
at the rate of exchange ruling at the date of the transaction. Exchange
differences arising in the ordinary course of business are included in
operating profit.
Assets and liabilities denominated in foreign currencies are translated into
sterling at the exchange rates ruling at the balance sheet date.
j) GOVERNMENT GRANTS
Government grants in respect of capital expenditure are credited to a
deferred income account and are released to the profit and loss account over
the expected useful lives of the relevant assets. Revenue grants are
released to the profit and loss account over the life of the project to
which they relate.
F-102
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
2. TURNOVER AND RESULTS
<TABLE>
<CAPTION>
1999
----------
L
<S> <C>
The analysis of turnover by activity is as follows:
Engineering................................................. 27,574,367
Building and construction................................... 2,180
Hotel and restaurant........................................ 61,060
----------
27,637,607
==========
The profit (loss) before taxation by activity is as follows:
Engineering................................................. 5,269,765
Building and construction................................... 1,665
Hotel and restaurant........................................ (47,994)
----------
5,223,436
==========
</TABLE>
During the year the company discontinued its hotel and restaurant
activities. Subsequent to the end of the year, the hotel was disposed of for
a sum equal to its net book value.
3. OTHER OPERATING INCOME
<TABLE>
<CAPTION>
1999
--------
L
<S> <C>
Rent receivable............................................. 18,137
Government grant............................................ 15,870
Currency gains on trading items............................. 184,894
-------
218,901
=======
</TABLE>
4. OPERATING PROFIT
<TABLE>
<CAPTION>
1999
--------
L
<S> <C>
This is stated after charging (crediting):
Profit on sale of assets.................................. (510)
Hire and lease of plant and machinery..................... 48,614
Auditors' remuneration.................................... 58,400
Depreciation.............................................. 789,108
=======
</TABLE>
F-103
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
5. STAFF COSTS--(including directors)
<TABLE>
<CAPTION>
1999
----------
L
<S> <C>
Directors' benefits in kind................................. 17,521
Directors' remuneration..................................... 370,653
Wages and salaries.......................................... 9,837,149
Social security costs....................................... 1,017,102
Other pension costs (see note 6)............................ 345,228
Redundancy costs............................................ 11,221
Staff BUPA contributions.................................... 3,389
----------
11,602,263
==========
</TABLE>
<TABLE>
<CAPTION>
1999
NO.
--------
<S> <C>
The average number of employees during the year was made up
as follows:
Directors................................................. 3
Administration............................................ 64
Production................................................ 444
---
511
===
</TABLE>
<TABLE>
<CAPTION>
1999
--------
L
<S> <C>
Highest paid director:
Aggregate emoluments...................................... 178,688
=======
</TABLE>
6. PENSION SCHEME--STAFF
The group operates a contributory defined contribution pension scheme for
some employees. The assets of the scheme are held separately from those of
the group, being invested with insurance companies.
The group is also responsible for a now closed defined benefits pension
scheme in respect of Maybrey Precision Castings Limited. The scheme is
currently L188,000 underfunded on the basis of a transfer to Scottish Life
Assurance Company. This sum has been provided for in the year.
The pension cost for the year represents contributions payable to the fund
amounting to L154,104 and L188,000 provided in the year in respect of the
deficit on the defined benefit pension scheme.
PENSION SCHEME--DIRECTORS
The company operates for two directors a defined contribution pension
scheme. The assets of the scheme are held in separate trustee administered
funds. The pension charge for the year was L3,124.
F-104
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
7. INTEREST PAYABLE
<TABLE>
<CAPTION>
1999
--------
L
<S> <C>
On bank loans, overdrafts and other loans:
--repayable within five years............................. 0
--on directors' loans (see note 22)....................... 29,464
------
29,464
======
</TABLE>
8. TAXATION ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1999
---------
L
<S> <C>
Based on the profit for the year:
Corporation tax at an effective rate of 30.918%........... 1,378,576
Adjustment in respect of prior years...................... (58,409)
Deferred taxation at 30.918%.............................. 239,816
Adjustment in respect of Prior years...................... (68,117)
---------
1,491,866
=========
</TABLE>
9. TANGIBLE FIXED ASSETS--GROUP
<TABLE>
<CAPTION>
FREEHOLD LEASEHOLD PLANT, MACHINERY
PROPERTIES PROPERTIES AND EQUIPMENT TOTAL
---------- ---------- ---------------- ----------
L L L L
<S> <C> <C> <C> <C>
Cost:
1st May 1998................. 3,441,891 390,304 15,601,561 19,433,756
Additions at cost............ 820,632 1,553 3,737,914 4,560,099
Disposals.................... -- -- (31,266) (31,266)
--------- --------- ---------- ----------
30th April 1999.............. 4,262,523 391,857 19,308,209 23,962,589
========= ========= ========== ==========
Depreciation:
1st May 1998................. 498,685 39,030 10,797,331 11,335,046
Disposals.................... -- -- (16,334) (16,334)
Provision for year........... 47,836 6505 734,767 789,108
--------- --------- ---------- ----------
30th April 1999.............. 546,521 45,535 11,515,764 12,107,820
========= ========= ========== ==========
Net book values:
30th April 1999.............. 3,716,002 346,322 7,792,445 11,854,769
========= ========= ========== ==========
</TABLE>
F-105
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
9. TANGIBLE FIXED ASSETS--GROUP (CONTINUED)
The net book values of freehold properties comprise:
<TABLE>
<CAPTION>
1999
---------
L
<S> <C>
Freehold land............................................... 735,046
Freehold industrial buildings............................... 2,624,029
Freehold hotel.............................................. 356,927
---------
3,716,002
=========
</TABLE>
10. STOCKS AND WORK IN PROGRESS
<TABLE>
<CAPTION>
1999
---------
L
<S> <C>
Raw materials and consumables............................... 946,761
Work-in-progress............................................ 3,222,478
---------
4,169,239
=========
</TABLE>
11. DEBTORS
<TABLE>
<CAPTION>
1999
---------
L
<S> <C>
Trade debtors............................................... 5,928,758
Other debtors............................................... 282,553
Prepayments and accrued income.............................. 142,775
---------
6,354,086
=========
</TABLE>
13. CREDITORS: amounts falling due within one year
<TABLE>
<CAPTION>
1999
----------
L
<S> <C>
Bank loans and overdrafts................................... 6,233,603
Trade creditors............................................. 1,803,623
Amounts due to group undertakings........................... --
Directors' loan accounts (see below)........................ 1,718
Corporation tax............................................. 1,348,728
Other creditors including taxation and social security...... 603,569
Accruals and deferred income................................ 2,636,422
----------
12,627,663
==========
</TABLE>
F-106
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
13. CREDITORS: amounts falling due within one year (Continued)
Directors' loan accounts
<TABLE>
<CAPTION>
1999
--------
L
<S> <C>
J.R. Pinson Esq............................................. 1,481
B.D.W. Pinson Esq........................................... 237
-----
1,718
=====
</TABLE>
14. DEFERRED TAXATION
The movement on the provision for deferred taxation is as follows:
<TABLE>
<CAPTION>
1999
---------
L
<S> <C>
At 1st May 1998............................................. 938,458
Charge for the year......................................... 171,699
---------
At 30th April 1999.......................................... 1,110,157
=========
</TABLE>
Deferred taxation provided in the accounts, and the total potential
liability including the amounts for which provision has been made, are as
follows:
<TABLE>
<CAPTION>
1999
------------------------
FULL
POTENTIAL PROVIDED IN
LIABILITY THE ACCOUNTS
--------- ------------
L L
<S> <C> <C>
Timing differences arising from Accelerated tax
allowances.......................................... 1,110,157 1,110,157
========= =========
</TABLE>
F-107
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
15. CONTINGENT LIABILITIES
Diac Limited
Rental and service charges on a lease which was assigned during the year
ended 30th April 1988 (when the annual rent was L36,000) and expiring in the
year ending 30th April 2006.
16. LEASING COMMITMENTS
The company occupies premises at Lyon Road which are owned by the Director's
pension fund. An annual rental of L37,000 is payable by the company.
17. SHARE CAPITAL
<TABLE>
<CAPTION>
1999
--------
L
<S> <C>
Authorised
100,000 ordinary shares of L1 each.......................... 100,000
=======
Allotted, called up and fully paid
100,000 ordinary shares of L1 each.......................... 100,000
=======
</TABLE>
18. CAPITAL AND RESERVES--MOVEMENT IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
PROFIT
SHARE & LOSS
CAPITAL ACCOUNT
-------- ----------
L L
<S> <C> <C>
As at 1st May 1998..................................... 100,000 14,653,824
Retained profit for the year........................... -- 3,374,605
------- ----------
As at 30th April 1999.................................. 100,000 18,028,429
======= ==========
</TABLE>
19. TRANSACTIONS INVOLVING DIRECTORS
a) Loan interest of L29,464 was payable to the following directors in
respect of their loans to the company. The rate of interest applied was at a
commercial level.
<TABLE>
<CAPTION>
L
<S> <C>
R.W.H. Pinson Esq........................................... 24,589
B.D.W. Pinson Esq........................................... 4,875
------
29,464
======
</TABLE>
b) The company occupies property owned by the directors' pension scheme and
pays rent of L37,000. All the directors are trustees of the scheme and, in
addition, J.R. Pinson Esq. and B.D.W. Pinson Esq. are scheme members.
F-108
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1999
20. CAPITAL COMMITMENTS
At 30 April 1999 the Group had contracted but not provided for in these
financial statements the sum of L456,077 in respect of building work at
Trefn Engineering (Metal Treatments) Limited.
21. POST BALANCE SHEET EVENT
On 30 July 1999 the entire share capital of the company was acquired by
Compasss Aerospace Corporation.
22. STATUTORY ACCOUNTS
These accounts do not compromise the company's statutory accounts within the
meaning of Section 420 of the Companies Act 1985 of Great Britain. Statutory
accounts for the year ended 30 April 1999, on which the auditors have given
an unqualified opinion, will be delivered to the Registrar of Companies for
England and Wales.
F-109
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
REPORT OF THE DIRECTORS
FOR THE YEAR ENDED 30TH APRIL 1998
<TABLE>
<S> <C>
Business address & registered office:... 7 Lyon Road, Wallisdown, Poole, Dorset.
Registered number:...................... 723273
</TABLE>
The directors have pleasure in presenting their report and the group
accounts for the year ended 30th April 1998.
<TABLE>
<CAPTION>
L
RESULTS AND DIVIDENDS ---------
<S> <C>
Profit attributable to shareholders......................... 2,491,569
Dividend--interim paid...................................... 266,667
---------
Group retained profit for the year.......................... 2,224,902
=========
</TABLE>
The directors do not recommend payment of a final dividend.
REVIEW OF THE BUSINESS AND DEVELOPMENTS
The principal activity of the company and five of its subsidiary
undertakings continued to be precision engineering and services mainly allied to
the aircraft industry. Those subsidiary undertakings with other activities were
as follows:
Poole Bay Construction Co. Limited's main activity continued to be
construction work and sub-contract repair and development work in the building
industry but the only activity was the sale of its remaining trading property.
Holland Granfield Limited, Pinson Investments Limited and C & C Production
Services Limited did not trade during the year and in fact the latter company
was dissolved on 16th September 1997.
Following general increase in trade there will be further investment in
factory premises for Trefn Engineering Ltd. and Trefn Engineering (Metal
Treatments Division) Ltd. as well as new offices for Trim Engineering Ltd. The
anticipated cost will be Ll,400,000 and new plant across the group will be
purchased for around L3,000,000. The Hotel and Restaurant owned by Trim was
closed after the summer season and will be sold.
DIRECTORS' INTERESTS
The directors of the company and their beneficial interests in the share
capital of the company were as follows:
<TABLE>
<CAPTION>
ORDINARY SHARES
OF L1 EACH
-----------------------
30.4.98 1.5.97
-------- --------
<S> <C> <C>
R.W.H. Pinson Esq........................................... 46,000 46,000
J.R. Pinson Esq............................................. 28,000 28,000
B.D.W. Pinson Esq........................................... 26,000 26,000
</TABLE>
R.W.H. Pinson Esq. retires by rotation at the forthcoming annual general
meeting and, being eligible, offers himself for re-election.
F-110
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
REPORT OF THE DIRECTORS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
EMPLOYMENT POLICY
The group offers equal opportunities to all applicants for employment,
whatever their sex, race, religion or marital status. Disabled people are
offered employment, training, career development and promotion on the basis of
their aptitude and abilities, in common with all employees. It is the policy
throughout the group to ensure that health and safety standards are constantly
reviewed and maintained at a high level.
CLOSE COMPANY
The company is a close company within the provisions of the Income and
Corporation Taxes Act 1988.
AUDITORS
In accordance with Section 385 of the Companies Act 1985 a resolution
proposing the reappointment of Prince, Croft & Ball as auditors to the company
will be put to the annual general meeting.
By order of the board
J.R. Pinson Esq.
Secretary
Date: 19th February 1999
F-111
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
STATEMENT OF DIRECTORS' RESPONSIBILITIES
FOR THE YEAR ENDED 30TH APRIL 1998
Company law requires the directors to prepare accounts for each financial
year which give a true and fair view of the company's and group's state of
affairs at the end of the year and of its profit or loss for that period. In
preparing those accounts the directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the accounts;
- prepare the accounts on the going concern basis unless it is inappropriate
to assume that the group will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
group and to enable them to ensure that the accounts comply with the Companies
Act 1985. They are also responsible for safeguarding the assets of the group and
hence for taking reasonable steps for the prevention and detection of fraud or
irregularities.
F-112
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
REPORT OF THE AUDITORS TO THE MEMBERS OF
TRIM ENGINEERING LIMITED
FOR THE YEAR ENDED 30TH APRIL 1998
We have audited the accounts on pages F-114 to F-128 which have been
prepared under the accounting policies set out on pages F-119 and F-120.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page F-112 the company's directors are responsible for the
preparation of accounts. It is our responsibility to form an independent
opinion, based on our audit, on those accounts and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the accounts. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the accounts, and of whether the accounting
policies are appropriate to the group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the accounts are free from
material misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of the information in the accounts.
OPINION
In our opinion the accounts give a true and fair view of the state of the
company and of the group's affairs as at 30th April 1998 and of its profit for
the year then ended and have been properly prepared in accordance with the
Companies Act 1985.
19th February 1999
3 Lorne Park Road Prince, Croft & Ball
Bournemouth BH1 1LD Chartered Accountants
Registered Auditors
F-113
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30TH APRIL 1998
<TABLE>
<CAPTION>
NOTES 1998 1997
-------- ---------- ----------
L L
<S> <C> <C> <C>
TURNOVER.................................................... 2 24,231,075 17,831,255
Cost of Sales............................................... 15,419,628 12,612,931
---------- ----------
GROSS PROFIT................................................ 8,811,447 5,218,324
Administrative expenses..................................... 4,921,581 4,528,339
---------- ----------
3,889,866 689,985
Other operating income...................................... 3 (68,984) (304,829)
---------- ----------
Operating profit for the year............................... 4 3,820,882 385,156
Interest receivable and similar income
Bank interest............................................. 228,790 217,499
---------- ----------
4,049,672 602,655
Interest payable and similar charges........................ 7 82,002 81,541
---------- ----------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............... 3,967,670 521,114
Taxation on profit on ordinary activities................... 8 1,218,983 152,965
---------- ----------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................ 2,748,687 368,149
Minority interests.......................................... 257,118 (6,894)
---------- ----------
PROFIT ATTRIBUTABLE TO SHAREHOLDERS......................... 2,491,569 375,043
Dividend.................................................... 9 266,667 266,667
---------- ----------
GROUP RETAINED PROFIT FOR THE YEAR.......................... 2,224,902 108,376
Group retained profits brought forward...................... 12,428,922 12,320,546
---------- ----------
Group retained profits carried forward...................... 14,653,824 12,428,922
---------- ----------
</TABLE>
The profit and loss account contains all the recognised gains and losses for the
current and preceding year.
The notes on pages F-119 to F-128 form part of these accounts.
F-114
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED BALANCE SHEET
AT 30TH APRIL 1998
<TABLE>
<CAPTION>
NOTES 1998 1997
-------- ---------- ----------
L L
<S> <C> <C> <C>
FIXED ASSETS
Intangible asset
Goodwill (cost L68,100)............................... 2 2
Tangible assets......................................... 10 8,098,710 7,530,032
---------- ----------
8,098,712 7,530,034
CURRENT ASSETS
Stocks and work-in-progress............................. 13 4,915,814 4,233,955
Debtors................................................. 14 5,249,976 4,228,619
Cash at bank and in hand................................ 15 9,405,669 6,330,499
---------- ----------
19,571,459 14,793,073
CREDITORS-- amounts falling due within one year............. 16 9,367,22 6,559,511
---------- ----------
NET CURRENT ASSETS.......................................... 10,203,837 8,193,562
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 18,302,549 15,723,596
PROVISION FOR LIABILITIES AND CHARGES
Deferred taxation....................................... 17 938,458 869,290
---------- ----------
17,364,091 14,854,306
----------
DEFERRED INCOME
Deferred Government grants.............................. 170,387 142,622
---------- ----------
17,193,704 14,711,684
Less: Minority interests................................ 2,157,761 1,900,643
---------- ----------
NET ASSETS.................................................. 15,035,943 12,811,041
========== ==========
CAPITAL AND RESERVES
Called up share capital................................. 19 100,000 100,000
Capital reserve on consolidation........................ 282,119 282,119
Profit and loss account................................. 20 14,653,824 12,428,922
---------- ----------
SHAREHOLDERS' FUNDS......................................... 15,035,943 12,811,041
========== ==========
</TABLE>
Approved by the board
and signed on its behalf by:
J.R. Pinson DIRECTOR
Date 19th February 1999
The notes on pages F-119 to F-128 form part of these accounts.
F-115
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
BALANCE SHEET
AT 30TH APRIL 1998
<TABLE>
<CAPTION>
NOTES 1998 1997
-------- --------- ---------
L L
<S> <C> <C> <C>
FIXED ASSETS
Tangible asset............................................ 11 3,144,360 2,472,253
Investments............................................... 12 94,900 94,900
--------- ---------
3,239,260 2,567,153
CURRENT ASSETS
Stocks and work-in-progress............................... 13 2,239,366 1,184,140
Debtors................................................... 14 1,565,835 1,302,975
Cash at bank and in hand.................................. 15 4,554,239 3,807,964
--------- ---------
8,359,440 6,295,079
CREDITORS - amounts falling due within one year............. 16 6,606,915 4,403,040
--------- ---------
NET CURRENT ASSETS.......................................... 1,752,525 1,892,039
--------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 4,991,785 4,459,192
PROVISION FOR LIABILITIES AND CHARGES
Deferred taxation......................................... 17 281,904 205,193
--------- ---------
NET ASSETS.................................................. 4,709,881 4,253,999
========= =========
CAPITAL AND RESERVES
Called up share capital................................... 19 100,000 100,000
Profit and loss account................................... 20 4,609,881 4,153,999
--------- ---------
SHAREHOLDERS' FUNDS......................................... 4,709,881 4,253,999
========= =========
</TABLE>
Approved by the board
and signed on its behalf by:
J.R. Pinson DIRECTOR
Date 19th February 1999
The notes on pages F-119 to F-128 form part of these accounts.
F-116
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH APRIL 1998
<TABLE>
<CAPTION>
1998 1997
---------- ----------
L
L
<S> <C> <C>
Net cash inflow from operating activities................... 3,905,228 1,210, 522
---------- ----------
Returns on investments and servicing of finance
Interest received......................................... 228,790 217,499
Interest paid............................................. (94,007) (57,711)
---------- ----------
134,783 159,788
---------- ----------
Taxation
Corporation tax paid (including advance corporation
tax).................................................... (238,362) (501,517)
---------- ----------
Capital Expenditure
Payments to acquire tangible fixed assets................. (1,414,554) (1,114,930)
Receipts from sale of tangible fixed assets............... 152,949 30,402
Government grant received................................. 55,000 45,000
---------- ----------
(1,206,605) (1,039,528)
----------
Dividend paid............................................... (266,667) (266,667)
---------- ----------
Increase/(decrease) in cash................................. 2,328,377 (437,402)
========== ==========
</TABLE>
The notes on page F-118 form part of this cash flow statement.
F-117
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH APRIL 1998
<TABLE>
<CAPTION>
1998 1997
---------- ---------
L L
<S> <C> <C> <C>
1. Reconciliation of operating profit to net cash inflow from
operating activities
Operating profit............................................ 3,820,882 385,156
Loss/(profit) on sale of assets............................. 23,050 (1,690)
Depreciation charges........................................ 722,316 741,240
(Increase) in stocks........................................ (681,859) (148,135)
(Increase) in debtors....................................... (1,021,357) (267,528)
Increase in creditors....................................... 1,069,431 524,409
Government grants released.................................. (27,235) (22,930)
---------- ---------
Net cash inflow from operating activities................... 3,905,228 1,210,522
========== =========
2. Reconciliation of net cash to movements in net debt
Increase/(decrease) in cash for the year.................... 2,328,377 (437,402)
Net debt at 1st May 1997.................................... 4,093,688 4,531,090
---------- ---------
Net debt at 30th April 1998................................. 6,422,065 4,093,688
========== =========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AT CASH AT
1.5.97 FLOWS 30.4.98
3. Analysis of changes in net debts L L L
Cash at bank and in hand............................... 6,330,499 3,075,170 9,405,669
Bank overdraft......................................... (2,236,811) (746,793) (2,983,604)
---------- --------- ----------
4,093,688 2,328,377 6,422,065
========== ========= ==========
</TABLE>
F-118
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS
FOR THE YEAR ENDED 30TH APRIL 1998
1. ACCOUNTING POLICIES
a. BASIS OF ACCOUNTING
The accounts are prepared under the historical cost convention and in
accordance with applicable accounting standards.
b. BASIS OF CONSOLIDATION
The group accounts consolidate the accounts of the company and all its
subsidiary undertakings after eliminating internal sales and profits and
recognising the minority interests in subsidiary undertakings. No profit and
loss account is presented for Trim Engineering Limited as permitted by
Section 230 of the Companies Act 1985.
c. DEPRECIATION
Depreciation is provided on all tangible fixed assets in use at rates
calculated to write off the cost or valuation, less estimated residual
value, of each asset over its expected useful life, calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Leasehold land and buildings - Straight line over 60 years
Freehold industrial buildings - Straight line over 50 years
Plant and machinery - 15% p.a. reducing balance
Fixtures, fittings and
equipment - 10% p.a. reducing balance
Computer equipment - Straight line over 3 years
Motor vehicles - 25% p.a. reducing balance
</TABLE>
The cost of payments on account and the cost of assets in course of
construction are not depreciated until the asset is brought into use.
No depreciation is provided on the following properties:
a) Freehold land.
b) A freehold hotel property, as it is the company's practice to
maintain this asset in a continual state of sound repair and
accordingly the directors consider that the life of this asset is so
long and the residual value (based on prices prevailing at the time
of acquisition) so high, that its depreciation is insignificant. Any
permanent diminution in the value of the property is charged to
profit and loss account as appropriate.
d. STOCKS AND WORK-IN-PROGRESS
Stocks and work-in-progress are stated at the lower of cost and net
realisable value. Cost is determined on a "first in, first out" basis and in
the case of work-in-progress and finished goods includes all direct
expenditure of production, based on normal levels of activity.
e. TITLE TO ASSETS
Assets to which title has not passed to the company by virtue of non-payment
are treated as if title had passed on delivery rather than on the date of
payment and the liability in respect of those assets is not considered as
secured.
f. DEFERRED TAXATION
Deferred taxation is accounted for using the liability method on all
material timing differences to the extent that it is probable that
liabilities or assets will crystallise in the foreseeable future. Advance
F-119
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
1. ACCOUNTING POLICIES (CONTINUED)
corporation tax is carried forward to the extent that it is expected to be
recovered. Timing differences are taxable items, allowances or reliefs which
are given effect to in taxation periods different from those in which they
have effect in the accounts.
g. TURNOVER
Turnover represents the net amounts invoiced to customers, less trade
discounts and value added tax, and excluding sales of fixed assets. In
respect of the engineering companies, and as is normal in the industry,
sales have only been included when prices have been accepted by the
customer. Where prices are still being negotiated the items have been
included in work-in-progress.
h. GOODWILL
In the case of two subsidiary undertakings, goodwill has been written off to
profit and loss account in a previous year, except for a nominal amount of
L1 for each subsidiary undertaking.
Goodwill arising on consolidation has been written off to profit and loss
account in the year of acquisition.
i. FOREIGN CURRENCIES
Transactions denominated in foreign currencies are translated into sterling
at the rate of exchange ruling at the date of the transaction. Exchange
differences arising in the ordinary course of business are included in
operating profit.
Assets and liabilities denominated in foreign currencies are translated into
sterling at the exchange rates ruling at the balance sheet date.
j. GOVERNMENT GRANTS
Government grants in respect of capital expenditure are credited to a
deferred income account and are released to the profit and loss account over
the expected useful lives of the relevant assets. Revenue grants are
released to the profit and loss account over the life of the project to
which they relate.
2. TURNOVER AND RESULTS--GROUP
<TABLE>
<CAPTION>
1998 1997
---------- ----------
L L
<S> <C> <C>
The analysis of turnover by activity is as follows:
Engineering.......................................... 23,400,399 17,584,726
Building and construction............................ 600,000 1,563
Hotel and restaurant................................. 230,676 244,966
---------- ----------
24,231,075 17,831,255
========== ==========
The profit (loss) before taxation by activity is as
follows:
Engineering.......................................... 3,751,991 541,648
Building and construction............................ 299,869 2,681
Hotel and restaurant................................. (84,190) (23,215)
---------- ----------
3,967,670 521,114
========== ==========
</TABLE>
F-120
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
3. OTHER OPERATING INCOME
<TABLE>
<CAPTION>
1998 1997
-------- --------
L L
<S> <C> <C>
Rent receivable.......................................... 3,055 1,450
Government grant......................................... 27,235 22,930
Currency losses on trading items......................... (99,274) (329,209)
------- --------
(68,984) (304,829)
======= ========
</TABLE>
4. OPERATING PROFIT
<TABLE>
<CAPTION>
1998 1997
-------- --------
L L
<S> <C> <C>
This is stated after charging (crediting):
Loss/(profit) on sale of assets......................... 23,050 (1,690)
Hire and lease of plant and machinery................... 30,507 24,518
Auditors' renumeration.................................. 40,550 42,450
Depreciation............................................ 722,316 741,240
======= =======
</TABLE>
The auditors' remuneration of L40,550 (1997 - L42,450) includes L20,000 (1997 -
L18,000) in respect of Trim Engineering Limited.
5. STAFF COSTS--(including directors)
<TABLE>
<CAPTION>
1998 1997
---------- ---------
L L
<S> <C> <C>
Directors' benefits in kind........................... 16,523 19,293
Directors' remuneration............................... 351,936 145,787
Wages and salaries.................................... 9,238,731 8,016,644
Social security costs................................. 877,416 708,605
Other pension costs (see note 6)...................... 138,037 185,176
Redundancy costs...................................... -- 79,374
Staff BUPA contributions.............................. 5,923 2,165
---------- ---------
10,628,566 9,157,044
========== =========
</TABLE>
F-121
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
5. STAFF COSTS--(including directors) (Continued)
The average number of employees during the year was made up as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
NO. NO.
<S> <C> <C>
Directors............................................. 3 3
Administration........................................ 58 61
Production............................................ 421 373
---------- ---------
482 437
========== =========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Highest paid director:-
Aggregate emoluments.................................. 173,710 72,781
========== =========
</TABLE>
6. PENSION SCHEME--STAFF
The group operates a contributory defined contribution pension scheme for
some employees. The assets of the scheme are held separately from those of
the group, being invested with insurance companies. The pension cost charge
represents contributions payable by the group to the fund and amounted to
L135,252 (1997 L183,316).
PENSION SCHEME--DIRECTORS
The company operates for two directors a defined contribution pension
scheme. The assets of the scheme are held in separate trustee administered
funds. The pension charge for the year was L2,785 (1997 L1,860).
7. INTEREST PAYABLE
<TABLE>
<CAPTION>
1998 1997
-------- --------
L L
<S> <C> <C>
On bank loans, overdrafts and other loans:
- --repayable within five years............................... 58 41
- --on directors' loans (see note 21)......................... 81,944 81,500
------ ------
82,002 81,541
====== ======
</TABLE>
F-122
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
8. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
--------- --------
L L
<S> <C> <C>
Based on the profit for the year:
Corporation tax at an effective rate of 31% (1997 -
31%).................................................. 1,149,700 176,908
Adjustment in respect of prior years.................... 115 32,313
Deferred taxation at 31% (1997 - 31%)................... 69,168 (56,256)
--------- -------
1,218,983 152,965
========= =======
</TABLE>
9. DIVIDENDS
<TABLE>
<CAPTION>
1998 1997
-------- --------
L L
<S> <C> <C>
Dividend paid............................................. 266,667 266,667
======= =======
</TABLE>
10. TANGIBLE FIXED ASSETS--GROUP
<TABLE>
<CAPTION>
FREEHOLD LEASEHOLD PLANT, MACHINERY
PROPERTIES PROPERTIES AND EQUIPMENT TOTAL
---------- ---------- ---------------- ----------
L L L L
<S> <C> <C> <C> <C>
Cost of valuation:
1st of May................... 3,531,342 391,303 14,268,077 18,190,722
Additions at cost............ 21,269 -- 1,445,724 1,466,993
Disposals.................... (111,719) -- (112,239) (223,958)
---------- ------- ---------- ----------
30th of April 1998........... 3,440,892 391,303 15,601,562 19,433,757
========== ======= ========== ==========
Depreciation:
1st of May 1997.............. 444,326 32,525 10,183,839 10,660,690
Disposals.................... -- -- (47,959) (47,959)
Provision for year........... 54,359 6,505 661,452 722,316
---------- ------- ---------- ----------
30th April 1998.............. 498,685 39,030 10,797,332 11,335,047
========== ======= ========== ==========
Net book values:
30th April 1997.............. 3,087,016 358,778 4,084,238 7,530,032
========== ======= ========== ==========
30th April 1998.............. 2,942,207 352,273 4,804,230 8,098,710
========== ======= ========== ==========
</TABLE>
F-123
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
10. TANGIBLE FIXED ASSETS--GROUP (CONTINUED)
The net book values of freehold properties comprise:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
L L
<S> <C> <C>
Freehold land.......................................... 735,046 735,046
Freehold industrial buildings.......................... 1,850,234 1,883,324
Freehold hotel......................................... 356,927 356,927
Freehold investment property........................... -- 111,719
--------- ---------
2,942,207 3,087,016
========= =========
</TABLE>
11. TANGIBLE FIXED ASSETS--COMPANY
<TABLE>
<CAPTION>
FREEHOLD PLANT, MACHINERY
PROPERTIES AND EQUIPMENT TOTAL
---------- ---------------- ---------
L L L
<S> <C> <C> <C>
Cost or valuation:
1st May 1997............................. 1,382,734 3,287,933 4,670,667
Additions at cost........................ 14,518 1,041,683 1,056,201
Disposals................................ (111,719) (99,300) (211,019)
--------- --------- ---------
30 April 1998............................ 1,285,533 4,230,316 5,515,849
========= ========= =========
Depreciation:
1st May 1997............................. 151,497 2,046,917 2,198,414
Disposals................................ -- (39,276) (39,276)
Provision for year....................... 21,054 191,297 212,351
--------- --------- ---------
30th April 1998.......................... 172,551 2,198,938 2,371,489
========= ========= =========
Net book values:
30th April 1997.......................... 1,231,237 1,241,016 2,472,253
========= ========= =========
30th April 1998.......................... 1,112,982 2,031,378 3,144,360
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
L L
<S> <C> <C>
The net book values of freehold properties compromise:
Freehold land.......................................... 225,859 225,859
Freehold industrial buildings.......................... 530,196 536,742
Freehold hotel......................................... 356,927 356,927
Freehold investment property........................... -- 111,719
--------- ---------
1,112,982 1,231,237
========= =========
</TABLE>
F-124
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
12. INVESTMENTS--COMPANY
<TABLE>
<CAPTION>
PROPORTION OF THE NOMINAL VALUE
OF ORDINARY SHARES HELD % 1998 1997
------------------------------- -------- --------
L L
<S> <C> <C> <C>
Cost of ordinary shares in subsidiary
undertakings:
Diac Limited..................................... 80.0 321 321
Holland Granfield Limited........................ 77.5 -- --
Maybrey Precision Castings Ltd................... 90.0 15,329 15,329
Trefn Engineering Limited........................ 85.0 4,250 4,250
Trefn Fabrications Limited....................... 100.0 75,000 75,000
Poole Bay Construction Co. Ltd................... 100.0 -- --
Pinson Investments Limited....................... 100.0 -- --
----- ------ ------
94,900 94,900
====== ======
</TABLE>
Trefn engineering limited owns 100% (1997 -100%) of the ordinary issued
shares of Trefn Engineering (Metal Treatments Division) Limited.
The cost of the investments in Holland Granfield Limited, Poole Bay
Construction Co. Limited and Pinson Investments Limited were written off to
the profit and loss account in a previous year.
All the subsidiary undertakings are incorporated in Great Britain.
13. STOCKS AND WORK IN PROGRESS
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
COMPANY GROUP COMPANY GROUP
--------- --------- --------- ---------
L L L L
<S> <C> <C> <C> <C>
Raw materials and consumables..... 247,850 698,944 187,386 659,030
Work-in-progress.................. 1,991,516 4,216,870 996,754 3,574,925
--------- --------- --------- ---------
2,239,336 4,915,814 1,184,140 4,233,955
========= ========= ========= =========
</TABLE>
14. DEBTORS
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
COMPANY GROUP COMPANY GROUP
--------- --------- --------- ---------
L L L L
<S> <C> <C> <C> <C>
Trade debtors..................... 1,376,721 4,756,816 1,228,468 3,930,136
Other debtors..................... 146,224 333,254 14,563 141,455
Prepayments and accrued income.... 42,890 159,906 59,944 157,028
--------- --------- --------- ---------
1,565,835 5,249,976 1,302,975 4,228,619
========= ========= ========= =========
</TABLE>
F-125
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
15. CASH AT BANK AND IN HAND
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
COMPANY GROUP COMPANY GROUP
--------- --------- --------- ---------
L L L L
<S> <C> <C> <C> <C>
4,554,239 9,405,669 3,807,964 6,330,499
========= ========= ========= =========
</TABLE>
16. CREDITORS: amounts falling due within one year
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
COMPANY GROUP COMPANY GROUP
--------- --------- --------- ---------
L L L L
<S> <C> <C> <C> <C>
Banks loans and overdrafts........................ 1,162,078 2,983,604 351,373 2,236,811
Trade creditors................................... 840,169 1,968,531 440,871 1,547,353
Amounts due to group undertakings................. 2,352,294 -- 1,757,976 --
Directors' loan accounts (see below).............. 1,579,350 1,579,350 1,410,434 1,410,434
Advance corporation tax........................... -- -- 66,667 66,667
Corporation tax................................... 185,348 1,090,953 15,356 112,833
Other creditors including taxation and social
security........................................ 41,713 345,954 48,116 312,974
Accruals and deferred income...................... 445,963 1,399,230 312,247 912,439
--------- --------- --------- ---------
6,606,915 9,367,622 4,403,040 6,599,511
========= ========= ========= =========
</TABLE>
Director's loan accounts
<TABLE>
<CAPTION>
1998 1997
--------- ---------
L L
<S> <C> <C>
R. W. H. Pinson, Esq................................... 1,272,927 1,103,763
J. R. Pinson, Esq...................................... 241,185 252,234
B.D.W. Pinson Esq...................................... 65,238 54,437
--------- ---------
1,579,350 1,410,434
========= =========
</TABLE>
17. DEFERRED TAXATION
The movement on the provision for deferred taxation is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
COMPANY GROUP COMPANY GROUP
-------- -------- -------- --------
L L L L
<S> <C> <C> <C> <C>
At 1st May 1997......................... 205,193 869,290 197,659 925,546
Charge (credit) for the year............ 76,711 69,168 7,534 (56,256)
------- ------- ------- -------
At 30th April 1998...................... 281,904 938,458 205,193 869,290
======= ======= ======= =======
</TABLE>
F-126
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
17. DEFERRED TAXATION (CONTINUED)
Deferred taxation provided in the accounts, and the total potential
liability including the amounts for which provision has been made, as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
FULL FULL
POTENTIAL PROVIDED IN POTENTIAL PROVIDED IN
LIABILITY THE ACCOUNTS LIABILITY THE ACCOUNTS
--------- ------------ --------- ------------
L L L L
<S> <C> <C> <C> <C>
GROUP:
Timing differences arising from
accelerated tax allowances........ 938,458 938,458 869,290 869,290
======= ======= ======= =======
COMPANY:
Timing differences arising from
accelerated tax allowances........ 281,904 281,904 205,193 205,193
======= ======= ======= =======
</TABLE>
18. CONTINGENT LIABILITIES
Diac Limited
Rental and service charges on a lease was assigned during the year ended
30th April 1988 (when the annual rent was L36,000) and expiring in the year
ending
30th April 2006.
19. SHARE CAPITAL
<TABLE>
<CAPTION>
1998 1997
-------- --------
L L
<S> <C> <C>
Authorised
100,000 ordinary shares of L1 each........................ 100,000 100,000
======= =======
Allotted, called up and fully paid........................ 100,000 100,000
======= =======
</TABLE>
F-127
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
NOTES TO THE ACCOUNTS (CONTINUED)
FOR THE YEAR ENDED 30TH APRIL 1998
20. CAPITAL AND RESERVES--MOVEMENT IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
SHARE PROFIT & LOSS
CAPITAL ACCOUNT
-------- -------------
L L
<S> <C> <C>
GROUP:
As at 1st May 1997..................................... 100,000 12,428,922
Retained profit for the year........................... -- 2,224,902
------- ----------
As at 30th April 1998.................................. 100,000 14,653,824
======= ==========
COMPANY:
As at 1st May 1997..................................... 100,000 4,153,999
Retained profit for the year........................... -- 455,882
------- ----------
As at 30th April 1998.................................. 100,000 4,609,881
======= ==========
</TABLE>
21. TRANSACTIONS INVOLVING DIRECTORS
a) Loan interest of L81,994 was payable to the following directors in
respect of their loans to the company:-
<TABLE>
<CAPTION>
L
<S> <C>
R.W.H. Pinson, Esq.......................................... 50,000
J. R. Pinson Esq............................................ 26,500
D.W. Pinson Esq............................................. 5,444
------
81,944
</TABLE>
The rate of interest applied was at a commercial level.
b) The company occupies property owned by the directors' pension scheme and
pays rent of L37,000. All the directors are trustees of the scheme and,
in addition, J.R. Pinson Esq. and B.D.W. Pinson Esq. are scheme members.
22. CAPITAL COMMITMENTS
The directors have authorised and contracted expenditure for the company of
LNil relating to the purchase of plant and machinery. (1997 - L135,000 for
the company and for the group).
F-128
<PAGE>
TRIM ENGINEERING LIMITED AND SUBSIDIARY UNDERTAKINGS
REPORT OF THE AUDITORS TO THE MEMBERS OF
TRIM ENGINEERING LIMITED
FOR THE YEAR ENDED 30TH APRIL 1997
The 1997 comparative figures within these financial statements have been
extracted from the consolidated financial statements for Trim Engineering
Limited for the year ended April 30, 1997. This Report of the Auditors was
issued in respect of these financial statements.
We have audited the accounts on pages F-114 to F-128 which have been
prepared under the accounting policies set out on pages F-119 and F-120.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page F-112 the company's directors are responsible for the
preparation of accounts. It is our responsibility to form an independent
opinion, based on our audit, on those accounts and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the accounts. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the accounts, and of whether the accounting
policies are appropriate to the group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the accounts are free from
material misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of the information in the accounts.
OPINION
In our opinion the accounts give a true and fair view of the state of the
company and of the group's affairs as at 30th April 1997 and of its profit for
the year then ended and have been properly prepared in accordance with the
Companies Act 1985.
30th January 1998
3 Lorne Park Road Prince, Croft & Ball
Bournemouth BH1 1LD Chartered Accountants
Registered Auditors
F-129
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$110,000,000
AND
$19,000,000
EXCHANGE OFFER
COMPASS AEROSPACE CORPORATION
[LOGO]
10 1/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2005
AND
10 1/8% SERIES D SENIOR SUBORDINATED NOTES DUE 2005
---------------------
PROSPECTUS
, 1999
---------------------
UNTIL , 2000 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE FRONT COVER FOR MARKET-MAKING PROSPECTUS]
SUBJECT TO COMPLETION DATED [ ], 1999
COMPASS AEROSPACE CORPORATION
10 1/8% Series B Senior Subordinated Notes due 2005
and
10 1/8% Series D Senior Subordinated Notes due 2005
------------------------
- The Series B notes were issued in exchange for our 10 1/8% Series A senior
subordinated notes due 2005
- The Series D notes were issued in exchange for our 10 1/8% Series C senior
subordinated notes due 2005
- The Series B and Series D notes will mature on April 15, 2005
- Interest on the Series B and Series D notes is payable on April 15 and
October 15 of each year, commencing April 15, 2000
- We may redeem the Series B notes, in whole or in part, at any time on or
after April 15, 2002, at the redemption prices set forth on page 84, plus
accrued interest
- We may redeem the Series D notes, in whole or in part, at any time on or
after April 15, 2002, at the redemption prices set forth on page 121, plus
accrued interest
- For each of the Series B and the Series D notes before April 15, 2001, we
may redeem up to 35% of the aggregate principal amount of the notes
originally outstanding with the net proceeds of a public equity offering
at 110.125% of the principal amount of the redeemed notes, plus accrued
interest, if at least 65% of the aggregate principal amount of the notes
originally issued remains outstanding after such redemption
- You have the right to require us to purchase the Series B and the Series D
notes upon the occurrence of some change of control events at a purchase
price equal to 101% of the principal amount of the repurchased notes, plus
accrued interest
- The Series B and the Series D notes are unsecured senior subordinated
obligations and rank junior to all our existing and future senior
indebtedness. The Series B and Series D notes rank equal to each other and
rank senior to or equal to all our future subordinated indebtedness
- The Series B and Series D notes are jointly and severally, fully,
irrevocably and unconditionally guaranteed on a senior subordinated basis
by each of our present subsidiaries, except Maybrey, and effectively rank
junior to all existing and future senior indebtedness of our subsidiaries
- We will not receive the proceeds of the sale of the notes
------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A
DISCUSSION OF SOME MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
This prospectus is to be used by broker-dealers in connection with offers
and sales in
market-making transactions at negotiated prices related to prevailing market
prices. We do not intend to list the Series B or Series D notes on any
securities exchange. Some broker-dealers have informed us that they intend to
make a market in the Series B and Series D notes, however, they are under no
obligation to do so and may stop at any time.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Series B or Series D notes or
determined that this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
[ALTERNATE RISK FACTOR FOR MARKET-MAKING PROSPECTUS]
THERE IS NO EXISTING TRADING MARKET FOR THE NOTES AND ANY MARKET-MAKING
ACTIVITIES MAY BE TERMINATED AT ANY TIME
There is no existing trading market for the notes. We cannot assure you that
any market for the notes will develop, or about your ability to sell the notes
or the price at which you may be able to sell them. If such a market were to
develop, the notes could trade at prices that may be higher or lower than their
initial offering price. That trading price could depend on many factors,
including prevailing interest rates, our operating results and the market for
similar securities. We have also been advised by some broker-dealers that,
subject to applicable laws and regulations, they currently intend to make a
market in the notes. However, they are under no obligation to do so and they may
discontinue or interrupt any such market-making at any time without notice.
One such broker-dealer who has notified us it intends to make a market in
the notes may be deemed to be our "affiliate" (as defined in the Securities Act)
and, as such, may be required to deliver a prospectus in connection with its
market-making activities in the notes. Pursuant to the registration rights
agreements we signed with the initial purchasers of the Series A notes in
connection with our initial offering of the Series A notes and the initial
purchaser of the Series C Notes in connection with our initial offering of the
Series C notes, we have agreed to use our best efforts to file and maintain a
registration statement that would allow a broker-dealer who may be deemed to be
an affiliate of ours to engage in market-making transactions in the Series B or
Series D notes for up to one year from the date on which we consummate the offer
to exchange the Series B notes for Series A notes and the Series C notes for
Series D notes. We have agreed to bear substantially all the costs and expenses
related to that registration.
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the notes by a
broker-dealer in market-making transactions. We will not receive any of the
proceeds from such transactions.
<PAGE>
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This prospectus is to be used by broker-dealers in connection with offers
and sales of Series B or Series D notes in market-making transactions effected
from time to time. We have agreed that we will make this prospectus, as amended
or supplemented, available to any broker-dealer for a period of up to one year
after the date of issuance of the Series B and Series D notes.
We will not receive any proceeds from any sale of Series B or Series D notes
by broker-dealers. Series B and Series D notes received by broker-dealers for
their own accounts pursuant to market-making transactions may be sold from time
to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Series B or
Series D notes or a combination of such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Any such sale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any Series B or Series D notes. A broker-dealer may act as a principal or agent
for one party when acting as principal or as agent for both parties, and may
receive compensation in the form of discounts and commissions, including from
both parties when it acts as agent for both.
We have been advised by some broker-dealers that, subject to applicable laws
and regulations, they currently intend to make a market in the Series B and
Series D notes following completion of the exchange offer. However, no
broker-dealer is under any obligation to do so and they may discontinue or
interrupt any such market-making activities at any time without notice. Any such
market-making activity also will be subject to the limits imposed by the
Securities Act and the Securities Exchange Act of 1934. We cannot assure you
that any market for the Series B or Series D notes will develop, or about your
ability to sell the notes you hold or the price at which you may be able to sell
them.
<PAGE>
[ALTERNATE BACK COVER FOR MARKET-MAKING PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$110,000,000
and
$19,000,000
COMPASS AEROSPACE CORPORATION
[LOGO]
10 1/8% Series B Senior Subordinated Notes due 2005
and
10 1/8% Series D Senior Subordinated Notes due 2005
---------------------
PROSPECTUS
, 1999
------------------------
UNTIL , 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENT OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
COMPASS
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation or were or are serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, if such directors, officers, employees or agents acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a derivative
action, i.e., one by or in the right of the corporation, indemnification may be
made only for expenses actually and reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement of an action or
suit, and only with respect to a matter as to which they shall have acted in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interests of the corporation, unless and only to the extent that the
court in which the action or suit was brought shall determine upon application
that the defendant directors, officers, employees, or agents are fairly and
reasonably entitled to indemnification for such expenses despite such
adjudication of liability.
Our by-laws provide that we shall, to the full extent authorized or
permitted by law, indemnify any current or former director or officer. Subject
to applicable law, we may indemnify an employee or agent of ours to the extent
that the Board of Directors may determine in its discretion.
Article Seven of our Certificate of Incorporation, as amended, provides that
a director of ours shall not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent provided by applicable law for liability (a) for any breach of the duty
of loyalty to us or our stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(c) pursuant to Section 174 of the General Corporation Law of the State of
Delaware, or (d) for any transaction from which a director derived an improper
personal benefit.
Our directors and officers are covered by insurance policies indemnifying
them against some civil liabilities, including liabilities under the federal
securities laws, which might be incurred by them in such capacity.
THE GUARANTORS
The guarantors are incorporated under the laws of the States of California
(Pacific Hills, Western Methods and Wichita Manufacturing), Delaware (Aeromil,
Barnes, Brittain, Modern and Sea-Lect) and England and Wales (Trim, Trefn
Engineering, Trefn Fabrications, Trefn Metal Treatments and Diac). As with the
General Corporation Law of the State of Delaware, the California Corporations
Code and the private limited liability company act of England and Wales
authorize a corporation, under certain circumstances, to indemnify its directors
and officers (including to reimburse them for expenses incurred).
As with our Certificate of Incorporation, as amended, and our By-Laws, each
of the guarantor's organizational documents and bylaws generally provide for the
indemnification of officers and directors to the full extent permitted by law.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
**3.1 Certificate of Incorporation of Compass Aerospace
Corporation ("Compass"), as amended to date.
**3.2 Amended and Restated By-Laws of Compass
**3.3 Certificate of Incorporation of AOM Acquisition Co. (which
later changed its name to "Aeromil Engineering Company"), as
amended to date.
**3.4 Amended and Restated By-laws of Aeromil Engineering Company
**3.5 Articles of Incorporation of Western Methods Machinery
Corporation.
**3.6 Amended and Restated Bylaws of Western Methods Machinery
Corporation.
**3.7 Certificate of Incorporation of Brittain Machine, Inc.
**3.8 By-laws of Brittain Machine, Inc.
**3.9 Articles of Incorporation of Wichita Manufacturing, Inc.
**3.10 Amended and Restated Bylaws of Wichita Manufacturing, Inc.
**3.11 Certificate of Incorporation of Barnes Machine, Inc.
**3.12 By-laws of Barnes Machine, Inc.
**3.13 Certificate of Incorporation of SLP Acquisition Co. (which
later changed its name to Sea-Lect Products, Inc.), as
amended to date.
**3.14 By-Laws of SLP Acquisition Co.
**3.15 Restated Articles of Incorporation of Pacific Hills
Manufacturing Co.
**3.16 Amended and Restated Bylaws of Pacific Hills Manufacturing
Co.
**3.17 Certificate of Incorporation of W.S.I. Inc. (which later
changed its name first to Y.F. Americas, Inc., and then to
Modern Manufacturing, Inc.), as amended to date.
**3.18 By-Laws of W.S.I. Inc.
**3.19 Memorandum of Association of Compass Aerospace Limited
**3.20 Articles of Association of Compass Aerospace Limited
**3.21 Memorandum of Association of Diac Limited
**3.22 Articles of Association of Diac Limited
**3.23 Memorandum of Association of Trefn Engineering Limited
**3.24 Articles of Association of Trefn Engineering Limited
**3.25 Memorandum of Association of Trefn Engineering (Metal
Treatments Division) Limited
**3.26 Articles of Association of Trefn Engineering (Metal
Treatments Division) Limited
**3.27 Memorandum of Association of Trefn Fabrications Limited
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
**3.28 Articles of Association of Trefn Fabrications Limited
**3.29 Memorandum of Association of Trim Engineering Limited
**3.30 Articles of Association of Trim Engineering Limited
**4.1 Indenture, dated April 21, 1998, by and among Compass, the
Guarantors listed therein and IBJ Whitehall Bank & Trust
Company (formerly IBJ Schroder Bank & Trust Company) as
Trustee, relating to the 10 1/8% Series B Senior
Subordinated Notes due 2005 of Compass and the 10 1/8%
Series A Senior Subordinated Notes due 2005 of Compass.
**4.2 Amended and Restated Credit Agreement, dated as of November
20, 1998 and amended and restated as of February 11, 1999,
by and among Compass, BankBoston, N.A. as agent and a
lender, NationsBank, N.A. as Co-Agent, the Lenders named
therein, Royal Bank of Canada as Syndication Agent, General
Electric Capital Corporation as Documentation Agent and
BancBoston Robertson Stephens, Inc. as arranger
**4.3 Security Agreement, dated November 20, 1998, by and among
Compass, Compass' subsidiaries named therein, BankBoston,
N.A. as agent and the lenders identified therein.
**4.4 Stock Pledge Agreement, dated as of November 20, 1998 by and
among Compass, Brittain Machine, Inc., Sea-Lect Products,
Inc. and BankBoston, N.A. as agent.
**4.5 Amendment No. 1 to Credit Agreement, dated as of June 7,
1999 by and among Compass, Bank Boston, N.A. as Issuing
Bank, as Agent and as a lender, NationsBank, N.A. as Co-
Agent, the Lenders named therein, Royal Bank of Canada as
Syndication Agent, General Electric Capital Corporation as
Documentation Agent.
**4.6 Consent, Waiver and Amendment No. 2 to Credit Agreement,
dated as of July 30, 1999 by and among Compass, Bank Boston,
N.A. as Issuing Bank, as Agent and as a lender, Bank of
America, N.A. (formerly known as NationsBank, N.A.) as
Co-Agent, the Lenders named therein, Royal Bank of Canada as
Syndication Agent, General Electric Capital Corporation as
Documentation Agent.
**4.7 Indenture, dated July 30, 1999, by and among Compass, the
Guarantors listed therein and IBJ Whitehall Bank & Trust
Company as Trustee, relating to the 10 1/8% Series D Senior
Subordinated Notes due 2005 of Compass and the 10 1/8%
Series C Senior Subordinated Notes due 2005 of Compass.
5.1 Opinion of Morgan, Lewis & Bockius, LLP, counsel to Compass.
**10.1 Employment Agreement, dated as of November 26, 1997, by and
between Compass and Alexander Hogg.
**10.2 Employment Agreement, dated as of September 21, 1998, by and
between Compass and N. Paul Brost.
**10.4 Compass Aerospace Corporation 1998 Stock Incentive Plan.
**10.5 Management Agreement, dated November 26, 1997, by and among
Compass, Dunhill Bank Caribbean Ltd. and Hayes Capital
Corporation, as amended to date.
12.1 Statement regarding the computation of ratio of earnings to
fixed charges for Compass.
**21.1 Subsidiaries of Compass.
23.1 Consent of Ernst & Young, LLP.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
23.2 Consent of Grant Thornton LLP.
23.3 Consent of McGladrey & Pullen, LLP.
23.4 Consent of Morgan, Lewis & Bockius LLP, counsel to Compass
(included in Exhibit 5.1).
23.5 Consent of Princecroft Redman.
23.6 Consent of Ernst & Young.
**24.1 Power of Attorney (included in signature page).
25.1 Statements of Eligibility on Form T-1 of The Bank of New
York, as successor Trustee under the Indentures relating to
the Series B and Series D Notes.
27.1 Financial Data Schedule.
**99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
**99.3 Form of Exchange Agency Agreement.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because the information is not
applicable or is not material or because the information required is set forth
in the financial statements on the notes thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
II-4
<PAGE>
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrants are foreign private issuers, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, PROVIDED, that
the registrants include in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on
Form F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the registrants
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the From F-3.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Registrants
pursuant to the foregoing provisions, or otherwise, the Registrants have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrants hereby undertake to file, during any period in
which offers or sales are being made, a new registration statement if any new
guarantors of the Series B or Series D notes are added.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Los Angeles, State of
California, on December 2, 1999.
<TABLE>
<S> <C> <C>
COMPASS AEROSPACE CORPORATION
BY: /S/ DOUGLAS M. HAYES
-----------------------------------------
Douglas M. Hayes
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS M. HAYES Chairman of the Board of December 2, 1999
------------------------------------------- Directors
Douglas M. Hayes
/s/ ALEXANDER HOGG* Director, President and December 2, 1999
------------------------------------------- Chief Executive Officer
Alexander Hogg
/s/ N. PAUL BROST* Vice President, Chief December 2, 1999
------------------------------------------- Financial Officer and
N. Paul Brost Treasurer (Principal
Financial and Accounting
Officer)
/s/ DOUGLAS B. SOLOMON* Director and Secretary December 2, 1999
-------------------------------------------
Douglas B. Solomon
/s/ JAMES P. ANGUS* Director December 2, 1999
-------------------------------------------
James P. Angus
/s/ MICHAEL DRITZ* Director December 2, 1999
-------------------------------------------
Michael Dritz
/s/ HARALD H. LUDWIG* Director December 2, 1999
-------------------------------------------
Harald H. Ludwig
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM R. MONKMAN* Director December 2, 1999
-------------------------------------------
William R. Monkman
/s/ PHILIP J. OLSSON* Director December 2, 1999
-------------------------------------------
Philip J. Olsson
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ DOUGLAS M. HAYES
--------------------------------------
Douglas M. Hayes
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, each Additional
Registrant listed on the cover page of this registration statement has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Los Angeles, State of
California, on December 2, 1999.
<TABLE>
<S> <C> <C>
AEROMIL ENGINEERING COMPANY
BARNES MACHINE, INC.
BRITTAIN MACHINE, INC.
COMPASS AEROSPACE LIMITED
DIAC LIMITED
MODERN MANUFACTURING, INC.
PACIFIC HILLS MANUFACTURING CO.
SEA-LECT PRODUCTS, INC.
TREFN ENGINEERING LIMITED
TREFN ENGINEERING (METAL TREATMENTS
DIVISION) LIMITED
TREFN FABRICATIONS LIMITED
TRIM ENGINEERING LIMITED
WESTERN METHODS MACHINERY CORPORATION
WICHITA MANUFACTURING, INC.
By: /s/ DOUGLAS M. HAYES
-----------------------------------------
Douglas M. Hayes
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS M. HAYES Chairman of the Board of Directors of December 2, 1999
------------------------------ each Additional Registrant
Douglas M. Hayes
/s/ ALEXANDER HOGG* Director of each Additional Registrant, December 2, 1999
------------------------------ Chief Executive Officer and President
Alexander Hogg of Aeromil, Barnes Machine, Brittain
Machine, Modern, Pacific Hills,
Sea-Lect, Western Methods and Wichita
Manufacturing
/s/ N. PAUL BROST* Vice President, Chief Financial Officer December 2, 1999
------------------------------ and Treasurer (Principal Financial and
N. Paul Brost Accounting Officer) of Aeromil, Barnes
Machine, Brittain Machine, Modern,
Pacific Hills, Sea-Lect, Western
Methods and Wichita Manufacturing
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS B. SOLOMON* Director of each Additional Registrant, December 2, 1999
------------------------------ Secretary of Aeromil, Barnes Machine,
Douglas B. Solomon Brittain Machine, Modern, Pacific
Hills, Sea-Lect, Western Methods and
Wichita Manufacturing
/s/ HARALD H. LUDWIG* Director of each Additional Registrant December 2, 1999
------------------------------
Harald H. Ludwig
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By /s/ DOUGLAS M. HAYES
-------------------------
Douglas M. Hayes
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
COMPASS AEROSPACE CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES EXPENSES (1) PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ADDITIONS
As Compass Aerospace Corporation
YEAR ENDED DECEMBER 31, 1997
Reserve and allowance deducted from asset
accounts
Allowance for uncollectible accounts..... $ -- $ -- $ 49 $18 $ 31
YEAR ENDED DECEMBER 31, 1998
Reserve and allowance deducted from asset
accounts
Allowance for uncollectible accounts..... $ 31 $ 3 $776 $54 $756
As Brittain Machine, Inc.(2)
YEAR ENDED JUNE 30, 1996
Reserve and allowances deducted from
asset accounts
Allowance for uncollectible accounts..... $ -- $ -- $ -- $-- $ --
YEAR ENDED JUNE 30, 1997
Reserve and allowance deducted from asset
accounts
Allowance for uncollectible accounts..... $ -- $ -- $ -- $-- $ --
YEAR ENDED APRIL 21, 1998
Reserve and allowances deducted from
asset accounts
Allowance for uncollectible accounts..... $ -- $ -- $ -- $-- $ --
</TABLE>
- ------------------------
(1) Net of recoveries.
(2) Brittain Machine, Inc. is included as the predecessor of Compass Aerospace
Corporation.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
**3.1 Certificate of Incorporation of Compass Aerospace
Corporation ("Compass"), as amended to date.
**3.2 Amended and Restated By-Laws of Compass
**3.3 Certificate of Incorporation of AOM Acquisition Co. (which
later changed its name to "Aeromil Engineering Company"), as
amended to date.
**3.4 Amended and Restated By-laws of Aeromil Engineering Company
**3.5 Articles of Incorporation of Western Methods Machinery
Corporation.
**3.6 Amended and Restated Bylaws of Western Methods Machinery
Corporation.
**3.7 Certificate of Incorporation of Brittain Machine, Inc.
**3.8 By-laws of Brittain Machine, Inc.
**3.9 Articles of Incorporation of Wichita Manufacturing, Inc.
**3.10 Amended and Restated Bylaws of Wichita Manufacturing, Inc.
**3.11 Certificate of Incorporation of Barnes Machine, Inc.
**3.12 By-laws of Barnes Machine, Inc.
**3.13 Certificate of Incorporation of SLP Acquisition Co. (which
later changed its name to Sea-Lect Products, Inc.), as
amended to date.
**3.14 By-Laws of SLP Acquisition Co.
**3.15 Restated Articles of Incorporation of Pacific Hills
Manufacturing Co.
**3.16 Amended and Restated Bylaws of Pacific Hills Manufacturing
Co.
**3.17 Certificate of Incorporation of W.S.I. Inc. (which later
changed its name first to Y.F. Americas, Inc., and then to
Modern Manufacturing, Inc.), as amended to date.
**3.18 By-Laws of W.S.I. Inc.
**3.19 Memorandum of Association of Compass Aerospace Limited
**3.20 Articles of Association of Compass Aerospace Limited
**3.21 Memorandum of Association of Diac Limited
**3.22 Articles of Association of Diac Limited
**3.23 Memorandum of Association of Trefu Engineering Limited
**3.24 Articles of Association of Trefu Engineering Limited
**3.25 Memorandum of Association of Trefu Engineering (Metal
Treatments Division) Limited
**3.26 Articles of Association of Trefu Engineering (Metal
Treatments Division) Limited
**3.27 Memorandum of Association of Trefu Fabrications Limited
**3.28 Articles of Association of Trefu Fabrications Limited
**3.29 Memorandum of Association of Trim Engineering Limited
**3.30 Articles of Association of Trim Engineering Limited
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
**4.1 Indenture, dated April 21, 1998, by and among Compass, the
Guarantors listed therein and IBJ Whitehall Bank & Trust
Company (formerly IBJ Schroder Bank & Trust Company) as
Trustee, relating to the 10 1/8% Series B Senior
Subordinated Notes due 2005 of Compass and the 10 1/8%
Series A Senior Subordinated Notes due 2005 of Compass.
**4.2 Amended and Restated Credit Agreement, dated as of November
20, 1998 and amended and restated as of February 11, 1999,
by and among Compass, BankBoston, N.A. as agent and a
lender, NationsBank, N.A. as Co-Agent, the Lenders named
therein, Royal Bank of Canada as Syndication Agent, General
Electric Capital Corporation as Documentation Agent and
BancBoston Robertson Stephens, Inc. as arranger
**4.3 Security Agreement, dated November 20, 1998, by and among
Compass, Compass' subsidiaries named therein, BankBoston,
N.A. as agent and the lenders identified therein.
**4.4 Stock Pledge Agreement, dated as of November 20, 1998 by and
among Compass, Brittain Machine, Inc., Sea-Lect Products,
Inc. and BankBoston, N.A. as agent.
**4.5 Amendment No. 1 to Credit Agreement, dated as of June 7,
1999 by and among Compass, Bank Boston, N.A. as Issuing
Bank, as Agent and as a lender, NationsBank, N.A. as Co-
Agent, the Lenders named therein, Royal Bank of Canada as
Syndication Agent, General Electric Capital Corporation as
Documentation Agent.
**4.6 Consent, Waiver and Amendment No. 2 to Credit Agreement,
dated as of July 30, 1999 by and among Compass, Bank Boston,
N.A. as Issuing Bank, as Agent and as a lender, Bank of
America, N.A. (formerly known as NationsBank, N.A.) as
Co-Agent, the Lenders named therein, Royal Bank of Canada as
Syndication Agent, General Electric Capital Corporation as
Documentation Agent.
**4.7 Indenture, dated July 30, 1999, by and among Compass, the
Guarantors listed therein and IBJ Whitehall Bank & Trust
Company as Trustee, relating to the 10 1/8% Series D Senior
Subordinated Notes due 2005 of Compass and the 10 1/8%
Series C Senior Subordinated Notes due 2005 of Compass.
5.1 Opinion of Morgan, Lewis & Bockius, LLP, counsel to Compass.
**10.1 Employment Agreement, dated as of November 26, 1997, by and
between Compass and Alexander Hogg.
**10.2 Employment Agreement, dated as of September 21, 1998, by and
between Compass and N. Paul Brost.
**10.4 Compass Aerospace Corporation 1998 Stock Incentive Plan.
**10.5 Management Agreement, dated November 26, 1997, by and among
Compass, Dunhill Bank Caribbean Ltd. and Hayes Capital
Corporation, as amended to date.
12.1 Statement regarding the computation of ratio of earnings to
fixed charges for Compass.
**21.1 Subsidiaries of Compass.
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Grant Thornton LLP.
23.3 Consent of McGladrey & Pullen, LLP.
23.4 Consent of Morgan, Lewis & Bockius LLP, counsel to Compass
(included in Exhibit 5.1).
23.5 Consent of Princecroft Redman.
23.6 Consent of Ernst & Young.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
**24.1 Power of Attorney (included in signature page).
25.1 Statements of Eligibility on Form T-1 of The Bank of New
York as successor Trustee under the Indentures relating to
the Series B and Series D Notes.
27.1 Financial Data Schedule.
**99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
**99.3 Form of Exchange Agency Agreement.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
Exhibit 5.1
[Morgan, Lewis & Bockius LLP Letterhead]
December 2, 1999
Compass Aerospace Corporation
1501 Hughes Way, Suite 400
Long Beach, California 90810
Re: Issuance of Series B and Series D Senior Subordinated Notes Pursuant to
the Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to Compass Aerospace Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), of a Registration Statement
on Form S-4 (the "Registration Statement") relating to the offer to exchange
the Company's 10 1/8 % Series B Senior Subordinated Notes due 2005 (the
"Series B Notes") for any and all of its outstanding 10 1/8% Series A Senior
Subordinated Notes due 2005 and the Company's 10 1/8% Series D Senior
Subordinated Notes due 2005 (the "Series D Notes") for any and all of its
outstanding 10 1/8% Series C Senior Subordinated Notes due 2005.
In so acting, we have examined originals, or copies certified or otherwise
identified to our satisfaction, of the Certificate of Incorporation of the
Company, the By-Laws of the Company and such other documents, records,
certificates and other instruments of the Company as in our judgment are
necessary or appropriate for purposes of this opinion.
Based on the foregoing, we are of the following opinion:
1. The Company is a corporation duly incorporated and validly existing in
good standing under the laws of the State of Delaware.
2. When the Series B Notes and the Series D Notes shall have been issued
in accordance with the terms of the appropriate indenture and upon (i)
the due execution, authentication and issuance of the Series B Notes
and the Series D Notes, and (ii) the delivery and exchange of the
Series B Notes and the Series D Notes as contemplated by
<PAGE>
Compass Aerospace Corporation
December 2, 1999
Page 2
the Registration Statement, the Series B Notes and the Series D Notes
will be binding obligations of the Company enforceable against the
Company in accordance with their terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency or other
similar laws now or hereafter in effect relating to creditors' rights
generally, and (b) general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
We render the foregoing opinion as members of the Bar of the State of New York
and express no opinion as to any law other than the General Corporation Law of
the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement. In giving this consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 12.1
Compass Aerospace Corporation
Statements re Computation of Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed charges
consist of interest expense and one third of operating rental expense, which
management believes is representative of the interest component of rental
expenses.
<TABLE>
<CAPTION>
Compass Aerospace
Corporation Brittain Machine, Inc.(1)
for the for the for the years ended June 30
Year Ended 36 Days Ended for the period from
December 31, December 31, June 30, 1997 to
1998 1997 April 21, 1998 1997 1996 1995 1994
-------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges
Interest (income) expense, net 8,493 166 385 398 403 359 293
Interest portion of Net Rental 416 53 17 52 40 42 42
Expense
-------------------------- --------------------------------------------------------
Total Fixed Charges 8,909 219 402 450 443 401 335
========================== ========================================================
Earnings
Income (loss) before taxes 2,347 117 7,879 6,114 4,383 (414) 3,154
Fixed Charges 8,909 219 402 450 443 401 335
-------------------------- --------------------------------------------------------
Total Adjusted Earnings 11,256 336 8,281 6,564 4,826 (13) 3,489
========================== ========================================================
Ratio of earnings to fixed charges 1.3 1.5 20.6 14.6 10.9 (0.0) 10.4
========================== ========================================================
<CAPTION>
for the Nine for the Nine
Months Ended Months Ended
September 30, 1999 September 30, 1999
---------------------------------------
<S> <C> <C>
Fixed Charges
Interest (income) expense, net 15,672 4,858
Interest portion of Net Rental 618 295
Expense
---------------------------------------
Total Fixed Charges 16,290 5,153
=======================================
Earnings
Income (loss) before taxes (6,545) 2,153
Fixed Charges 16,290 5,153
---------------------------------------
Total Adjusted Earnings 9,745 7,306
=======================================
Ratio of earnings to fixed charges 0.6 1.4
=======================================
</TABLE>
(1) Brittain Machine, Inc. is included as the predecessor of Compass Aerospace
Corporation.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts," "Summary
Financial Data," and "Selected Historical Consolidated Financial Data" and to
the use of our report dated March 15, 1999 in connection with the
consolidated financial statements of Compass Aerospace Corporation; our
report dated March 19, 1998 in connection with the financial statements of
Aeromil Engineering Company; our report dated September 3, 1996 in connection
with the consolidated financial statements of Brittain Machine, Inc. and
Subsidiary; our report dated August 12, 1998 in connection with the financial
statements of Barnes Machine, Inc.; our report dated September 25, 1998 in
connection with the combined financial statements of Sea-Lect Products Inc.
and Affiliate; our report dated April 27, 1999 in connection with the
consolidated financial statements of Modern Manufacturing, Inc. (formerly
Y.F. Americas, Inc. and Subsidiary) included in Amendment No. 4 to the
Registration Statement (Form S-4 No.333-75643-01) and related Prospectus of
Compass Aerospace Corporation for the registration of $110,000,000 of
10 1/8% Series B Senior Subordinated Notes due 2005, $19,000,000 of 10 1/8%
Series D Senior Subordinated Notes due 2005 and $129,000,000 of related
guarantees.
/s/ Ernst & Young LLP
Long Beach, California
December 1, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated October 17, 1997 accompanying the
consolidated financial statements of Brittain Machine, Inc. as of June 30,
1997 and for the year then ended and our report dated July 9, 1998
accompanying the consolidated financial statements of Brittain Machine, Inc.
as of April 21, 1998 and for the period July 1, 1997 through April 21, 1998
contained in the Amendment No. 4 to the Compass Aerospace Corporation
Registration Statement (Form S-4 No. 333-75643-01) and Prospectus. We consent
to the use of the aforementioned reports in the Registration Statement and
Prospectus and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
Wichita, Kansas
December 1, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in this Amendment No. 4 to Registration
Statement on Form S-4 of our report, dated March 5, 1999, relating to the
financial statements of Pacific Hills Manufacturing Co. (formerly known as
Lamsco West, Inc). We also consent to the reference to
our Firm under the caption "Experts" in the Prospectus.
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
November 29, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
our reports dated 30th January, 1998, and 19th February, 1999, relating to
the financial statements of the Trim Engineering Group for the years ending
30th April, 1997 and 1998. We also consent to the reference to our Firm
under the caption "Experts" in the Prospectus.
/s/ PRINCECROFT REDMAN
Princecroft Redman, formerly Prince, Croft & Ball
1st December 1999
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 4 to the Registration Statement (Form S-4 No. 333-75643-01) and
related Prospectus of Compass Aerospace Corporation for the registration of
$110,000,000 of its 10 1/8% Series B Senior Subordinated Notes due 2005,
$19,000,000 of its 10 1/8% Series D Senior Subordinated Notes due 2005 and
$129,000,000 of its Guarantees of the 10 1/8% Series B Senior Subordinated
Notes due 2005 and to the inclusion therein of our report dated October 12,
1999 with respect to the consolidated financial statements of Trim
Engineering Limited.
/s/ ERNST & YOUNG
------------------
Ernst & Young
Southampton, England
2 December, 1999
<PAGE>
Exhibit 25.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) / /
---------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
---------------------
COMPASS AEROSPACE CORPORATION
(Exact name of obligor as specified in its charter)
Delaware 95-4659126
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Aeromil Engineering Company
(Exact name of obligor as specified in its charter)
Delaware 95-4659131
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
<PAGE>
Barnes Machine, Inc.
(Exact name of obligor as specified in its charter)
Delaware 91-1165226
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Brittain Machine, Inc.
(Exact name of obligor as specified in its charter)
Delaware 48-0816118
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Modern Manufacturing, Inc.
(Exact name of obligor as specified in its charter)
Delaware 91-1413338
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Pacific Hills Manufacturing Co.
(Exact name of obligor as specified in its charter)
California 95-4446681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
-2-
<PAGE>
Sea-Lect Products, Inc.
(Exact name of obligor as specified in its charter)
Delaware 95-4682821
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Western Methods Machinery Corporation
(Exact name of obligor as specified in its charter)
California 95-3195940
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Wichita Manufacturing, Inc.
(Exact name of obligor as specified in its charter)
California 33-0536613
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Compass Aerospace Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
-3-
<PAGE>
Diac Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
Trefn Engineering Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
Trefn Engineering (Metal Treatments Division) Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
Trefn Fabrications Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
-4-
<PAGE>
Trim Engineering Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
---------------------
10-1/8% Series D Senior Subordinated Notes due 2005
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO
THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R.229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains
the authority to commence business and a grant of powers to
exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to
Form T-1 filed with Registration Statement No. 33-6215, Exhibits
1a and 1b to Form T-1 filed with Registration Statement No.
33-21672 and Exhibit 1 to Form T-1 filed with Registration
Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
-6-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 1st day of December, 1999.
THE BANK OF NEW YORK
By: /S/ MARY LAGUMINA
-------------------------------------
Name: MARY LAGUMINA
Title: ASSISTANT VICE PRESIDENT
<PAGE>
- -------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1999, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS In Thousands
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency
and coin ............................................................... $ 6,394,412
Interest-bearing balances .............................................. 3,966,749
Securities:
Held-to-maturity securities ............................................ 805,227
Available-for-sale securities .......................................... 4,152,260
Federal funds sold and Securities purchased under
agreements to resell ................................................... 1,449,439
Loans and lease financing receivables:
Loans and leases, net of unearned
income................................................................ 37,900,739
LESS: Allowance for loan and
lease losses.......................................................... 572,761
LESS: Allocated transfer risk
reserve............................................................... 11,754
Loans and leases, net of unearned income,
allowance, and reserve ............................................... 37,316,224
Trading Assets ............................................................ 1,646,634
Premises and fixed assets (including capitalized
leases) ................................................................ 678,439
Other real estate owned ................................................... 11,571
Investments in unconsolidated subsidiaries and
associated companies ................................................... 183,038
Customers' liability to this bank on acceptances
outstanding ............................................................ 349,282
Intangible assets ......................................................... 790,558
Other assets .............................................................. 2,498,658
-----------
Total assets .............................................................. $60,242,491
===========
</TABLE>
<PAGE>
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices .................................................... $26,030,231
Noninterest-bearing .................................................... 11,348,986
Interest-bearing ....................................................... 14,681,245
In foreign offices, Edge and Agreement
subsidiaries, and IBFs ............................................... 18,530,950
Noninterest-bearing .................................................... 156,624
Interest-bearing ....................................................... 18,374,326
Federal funds purchased and Securities sold under
agreements to repurchase ............................................... 2,094,678
Demand notes issued to the U.S.Treasury ................................... 232,459
Trading liabilities ....................................................... 2,081,462
Other borrowed money:
With remaining maturity of one year or less ............................ 863,201
With remaining maturity of more than one year
through three years .................................................. 449
With remaining maturity of more than three years ....................... 31,080
Bank's liability on acceptances executed and
outstanding ............................................................ 351,286
Subordinated notes and debentures ......................................... 1,308,000
Other liabilities ......................................................... 3,055,031
-----------
Total liabilities ......................................................... 54,578,827
===========
EQUITY CAPITAL
Common stock .............................................................. 1,135,284
Surplus ................................................................... 815,314
Undivided profits and capital reserves .................................... 3,759,164
Net unrealized holding gains (losses) on
available-for-sale securities .......................................... (15,440)
Cumulative foreign currency translation adjustments ....................... (30,658)
-----------
Total equity capital ...................................................... 5,663,664
-----------
Total liabilities and equity capital ...................................... $60,242,491
===========
</TABLE>
<PAGE>
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of
Governors of the Federal Reserve System and is true to the best of my
knowledge and belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni
Alan R. Griffith Directors
Gerald L. Hassell
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) / /
------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
------------------
COMPASS AEROSPACE CORPORATION
(Exact name of obligor as specified in its charter)
Delaware 95-4659126
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Aeromil Engineering Company
(Exact name of obligor as specified in its charter)
Delaware 95-4659131
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
<PAGE>
Barnes Machine, Inc.
(Exact name of obligor as specified in its charter)
Delaware 91-1165226
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Brittain Machine, Inc.
(Exact name of obligor as specified in its charter)
Delaware 48-0816118
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Modern Manufacturing, Inc.
(Exact name of obligor as specified in its charter)
Delaware 91-1413338
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Pacific Hills Manufacturing Co.
(Exact name of obligor as specified in its charter)
California 95-4446681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
-2-
<PAGE>
Sea-Lect Products, Inc.
(Exact name of obligor as specified in its charter)
Delaware 95-4682821
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Western Methods Machinery Corporation
(Exact name of obligor as specified in its charter)
California 95-3195940
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Wichita Manufacturing, Inc.
(Exact name of obligor as specified in its charter)
California 33-0536613
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
Compass Aerospace Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1501 Hughes Way
Suite 400
Long Beach, California 90810
(Address of principal executive offices) (Zip code)
-3-
<PAGE>
Diac Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
Trefn Engineering Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
Trefn Engineering (Metal Treatments Division) Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
Trefn Fabrications Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
-4-
<PAGE>
Trim Engineering Limited
(Exact name of obligor as specified in its charter)
England and Wales
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7 Lyon Road
Wallisdown, Poole
Dorset BH 12 5HF
(Address of principal executive offices) (Zip code)
-------------
10-1/8% Series B Senior Subordinated Notes due 2005
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO
THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
- --------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------
<TABLE>
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains
the authority to commence business and a grant of powers to
exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to
Form T-1 filed with Registration Statement No. 33-6215, Exhibits
1a and 1b to Form T-1 filed with Registration Statement No.
33-21672 and Exhibit 1 to Form T-1 filed with Registration
Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
-6-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in The City of New
York, and State of New York, on the 1st day of December, 1999.
THE BANK OF NEW YORK
By: /s/ MARY LAGUMINA
-------------------------------------
Name: MARY LAGUMINA
Title: ASSISTANT VICE PRESIDENT
<PAGE>
- ------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1999, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS In Thousands
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency
and coin ............................................................... $ 6,394,412
Interest-bearing balances .............................................. 3,966,749
Securities:
Held-to-maturity securities ............................................ 805,227
Available-for-sale securities .......................................... 4,152,260
Federal funds sold and Securities purchased under
agreements to resell ................................................... 1,449,439
Loans and lease financing receivables:
Loans and leases, net of unearned income................................ 37,900,739
LESS: Allowance for loan and lease losses............................... 572,761
LESS: Allocated transfer risk reserve................................... 11,754
Loans and leases, net of unearned income,
allowance, and reserve ............................................... 37,316,224
Trading Assets ............................................................ 1,646,634
Premises and fixed assets (including capitalized
leases) ................................................................ 678,439
Other real estate owned ................................................... 11,571
Investments in unconsolidated subsidiaries and
associated companies ................................................... 183,038
Customers' liability to this bank on acceptances
outstanding ............................................................ 349,282
Intangible assets ......................................................... 790,558
Other assets .............................................................. 2,498,658
------------
Total assets .............................................................. $60,242,491
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Deposits:
In domestic offices .................................................... $26,030,231
Noninterest-bearing .................................................... 11,348,986
Interest-bearing ....................................................... 14,681,245
In foreign offices, Edge and Agreement
subsidiaries, and IBFs ............................................... 18,530,950
Noninterest-bearing .................................................... 156,624
Interest-bearing ....................................................... 18,374,326
Federal funds purchased and Securities sold under
agreements to repurchase ............................................... 2,094,678
Demand notes issued to the U.S.Treasury ................................... 232,459
Trading liabilities ....................................................... 2,081,462
Other borrowed money:
With remaining maturity of one year or less ............................ 863,201
With remaining maturity of more than one year
through three years .................................................. 449
With remaining maturity of more than three years ....................... 31,080
Bank's liability on acceptances executed and
outstanding ............................................................ 351,286
Subordinated notes and debentures ......................................... 1,308,000
Other liabilities ......................................................... 3,055,031
-----------
Total liabilities ......................................................... 54,578,827
===========
EQUITY CAPITAL
Common stock .............................................................. 1,135,284
Surplus ................................................................... 815,314
Undivided profits and capital reserves .................................... 3,759,164
Net unrealized holding gains (losses) on
available-for-sale securities .......................................... (15,440)
Cumulative foreign currency translation adjustments........................ (30,658)
-----------
Total equity capital ...................................................... 5,663,664
-----------
Total liabilities and equity capital ...................................... $60,242,491
===========
</TABLE>
<PAGE>
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni
Alan R. Griffith Directors
Gerald L. Hassell
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO OF COMPASS AEROSPACE
CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001081008
<NAME> COMPASS AEROSPACE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,668
<SECURITIES> 0
<RECEIVABLES> 22,670
<ALLOWANCES> 569
<INVENTORY> 36,925
<CURRENT-ASSETS> 77,041
<PP&E> 86,538
<DEPRECIATION> 13,667
<TOTAL-ASSETS> 308,120
<CURRENT-LIABILITIES> 29,279
<BONDS> 126,228
0
0
<COMMON> 350
<OTHER-SE> 43,616
<TOTAL-LIABILITY-AND-EQUITY> 308,120
<SALES> 101,443
<TOTAL-REVENUES> 101,443
<CGS> 72,275
<TOTAL-COSTS> 72,275
<OTHER-EXPENSES> 1,674
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,672
<INCOME-PRETAX> (6,545)
<INCOME-TAX> (2,396)
<INCOME-CONTINUING> (4,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,149)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
