<PAGE>
PROSPECTUS
PRECISION PARTNERS, INC.
OFFER TO EXCHANGE OUR 12% SENIOR SUBORDINATED NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR OUR OUTSTANDING 12% SENIOR SUBORDINATED NOTES DUE 2009
THESE NOTES ARE GUARANTEED ON A SENIOR SUBORDINATED BASIS BY:
MID STATE MACHINE PRODUCTS
GALAXY INDUSTRIES CORPORATION
CERTIFIED FABRICATORS, INC.
GENERAL AUTOMATION, INC.
NATIONWIDE PRECISION PRODUCTS CORP.
GILLETTE MACHINE & TOOL CO., INC.
---------------------
THE EXCHANGE OFFER
- - Precision Partners will exchange all outstanding notes that are validly
tendered and not validly withdrawn for an equal principal amount of exchange
notes that are freely tradeable.
- - You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
- - The exchange offer expires at 5:00 p.m., New York City time, on June 5, 2000,
unless extended. We do not currently intend to extend the expiration date.
RESALES OF THE EXCHANGE NOTES
- - We do not intend to list the exchange notes on any securities exchange or to
seek approval through any automated quotation system, and no active public
market for the exchange notes is anticipated.
------------------------
You should carefully consider the risk factors beginning on page 9 of this
prospectus before deciding to participate in the exchange offer.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is May 5, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Forward-Looking Statements........... i
Where You Can Find More Information.. ii
Summary.............................. 1
Risk Factors......................... 9
The Exchange Offer................... 19
Use of Proceeds...................... 27
Capitalization....................... 28
Pro Forma Financial Information...... 29
Selected Historical Financial
Information........................ 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 33
Business............................. 39
Management........................... 49
Security Ownership................... 52
Related Party Transactions........... 53
Description of Credit Facilities..... 54
Description of Exchange Notes........ 56
Book-Entry; Delivery And Form........ 94
Registration Rights For Outstanding
Notes.............................. 97
Plan of Distribution................. 99
Certain U.S. Federal Income Tax
Considerations..................... 101
Legal Matters........................ 103
Experts.............................. 103
Index to Financial Statements........ F-1
</TABLE>
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, including those described under "Risk
Factors," many of which are beyond our control. Forward-looking statements are
typically identified by words such as "believe," "expect," "anticipate,"
"intend," "estimate" and similar expressions, and include, among others,
statements concerning:
- our strategy;
- our liquidity and capital expenditures;
- our debt levels and ability to obtain financing and service debt;
- competitive pressures and trends in the precision machining industry;
- cyclicality and economic condition of the industries we currently serve;
- prevailing levels of interest rates;
- legal proceedings and regulatory matters; and
- general economic conditions.
Actual results could differ materially from those contemplated by the
forward-looking statements as a result of factors such as those described in
"Risk Factors." In light of these risks and uncertainties, we cannot assure you
that the results and events contemplated by the forward-looking statements
contained in this prospectus will in fact transpire. You are cautioned not to
place undue reliance on these forward-looking statements. We do not undertake
any obligation to update or revise any forward-looking statements. All
subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements.
i
<PAGE>
------------------------
WHERE YOU CAN FIND MORE INFORMATION
Precision Partners and the subsidiary guarantors have filed a registration
statement on Form S-4 to register with the SEC the exchange notes to be issued
in exchange for the outstanding notes. This prospectus is part of that
registration statement. As allowed by the SEC's rules, this prospectus does not
contain all of the information you can find in the registration statement or the
exhibits to the registration statement. For further information about us and
about the exchange offer and the exchange notes, you should consult the
registration statement, including the exhibits and schedules. A copy of the
registration statement and any exhibits may be obtained from the SEC or by
writing or telephoning us at the following address and telephone number:
Precision Partners, Inc.
5605 N. MacArthur Boulevard
Suite 760
Irving, Texas 75038
(972) 580-1550
Attention: Chief Financial Officer
Upon effectiveness of the registration statement, we will file reports,
proxy statements and other documents with the SEC in accordance with the
requirements of the Securities Exchange Act of 1934. You may read and copy the
registration statement and, when filed, such reports, proxy statements and other
documents at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information regarding the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site, located at http://www.sec.gov., that contains
reports, proxy statements and other documents regarding registrants, including
us, that file electronically with the SEC. In addition, we are required by the
terms of the indenture to furnish the trustee and the holders of exchange and
outstanding notes with quarterly and annual reports and other information within
15 days of filing the reports or other information with the SEC.
You may also find further information about us and the subsidiary guarantors
at our website
http://www.precisionpartnersinc.com. The information contained on our website is
not a part of this prospectus.
------------------------
This exchange offer is not being made to, nor will tenders of outstanding
notes be accepted 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.
ii
<PAGE>
SUMMARY
The following summary details the most important features of this offering.
THE COMPANY
GENERAL
Precision Partners is a leading contract mechanical manufacturing services
supplier of complex precision metal parts, tooling and assemblies for original
equipment manufacturers. Our flexible manufacturing facilities and operating
processes enable us to service customers across a wide range of industries and
aggressively pursue new customers in industries where we see the potential for
strong growth. Our customers include industry leaders such as General Electric,
New Venture Gear (a joint venture of General Motors and DaimlerChrysler), Xerox,
LucasVarity (Kelsey Hayes), Boeing, Caterpillar and Dana. We have earned
"Preferred" or "Qualified" supplier status with most of our customers and are
predominantly the sole-source supplier to our customers of the parts we
manufacture. Our pro forma revenues and EBITDA for the year ended December 31,
1999 were $149.8 million and $26.1 million, respectively, representing a 17.5%
EBITDA margin.
Our broad manufacturing capabilities and highly engineered processes allow
us to meet the critical specifications of our customers. We manufacture parts,
ranging in size from approximately 1 ounce to over 100,000 pounds, to extremely
close tolerances. We are also able to maintain tight tolerances across flat
sheets and surfaces with multiple contours. We work with traditional materials
such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic
and difficult to machine materials such as titanium, inconel, invar and
hastelloy. In addition, we provide our customers with design assistance, process
and product engineering support and quality testing.
Our manufacturing expertise includes precision machining such as milling,
turning, boring, drilling, broaching and grinding, as well as value-added
services such as prototyping, assembly, forming, welding, heat treating and
plating.
The industries we serve and the related precision parts, assemblies and
tooling we machine and manufacture include:
- Power Generation Industry - specialty alloy turbine wheels and spacers,
shrouds and nozzles;
- Automotive Industry - piston valves used primarily for automatic braking
systems in light trucks and sport utility vehicles and machined engine
blocks;
- Business Machines Industry - bases and internal components for high-end
scanners, digital imaging machines and copiers;
- Space and Satellite Industries - adapter rings, thrust rings, casting
chambers and handling and transport aids;
- Aerospace Industry, Commercial and Military - precision tooling including
bond jigs, assembly jigs and mill fixtures;
- Agriculture and Construction Equipment Industries - high tolerance bearing
caps, transmission housings and diesel and gas pump housings; and
- Transportation Industry - class eight heavy truck axles, engine blocks and
related parts.
INDUSTRY
The U.S. precision custom manufacturing industry is highly fragmented and,
excluding precision manufacturing operations owned directly by original
equipment manufacturers, is estimated to be comprised of approximately 7,500
companies representing, over the last several years, annual revenues
1
<PAGE>
in excess of $20 billion. Within this market, precision machine shops and
specialty tool manufacturers represent in excess of $13 billion of these
revenues. As a result of high fragmentation and a large number of captive
original equipment manufacturer operations, we believe there has been and will
continue to be significant consolidation opportunities among industry
participants.
We believe that there are two main trends in the U.S. precision machining
industry:
- an increased amount of outsourced manufacturing by original equipment
manufacturers; and
- increased reliance by original equipment manufacturers on a few
"Preferred" or "Qualified" suppliers that can provide a full line of high
quality manufacturing and sub-assembly services, as well as process
engineering and design assistance.
We intend to continue to capitalize on these industry trends by providing
our customers with a broad array of precision machining capabilities and by
leveraging our competitive strengths. See "Business--Industry."
COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths:
- Leading supplier of high quality, difficult-to-produce parts;
- Broad manufacturing capabilities serving diverse end markets;
- Strong customer relationships;
- Modern, high quality operations; and
- An experienced management team.
BUSINESS STRATEGY
Our business strategies are as follows:
- Capitalize on the industry trends among leading original equipment
manufacturers to increase manufacturing outsourcing and concentrate on
fewer, more reliable suppliers;
- Pursue cross-selling opportunities and broaden our customer base across
the diverse manufacturing capabilities and complementary customer bases of
our operating subsidiaries;
- Implement the best operating practices of each of our operations and
utilize production resources to maximize manufacturing efficiency; and
- Pursue strategic acquisitions.
------------------------
The principal executive offices of Precision Partners and the subsidiary
guarantors are located at 5605 N. MacArthur Boulevard, Suite 760, Irving, Texas
75038 and our telephone number is (972) 580-1550.
2
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................... We are offering to exchange up to $100,000,000 aggregate
principal amount of our registered 12% Senior Subordinated
Notes due 2009 for an equal principal amount of our
outstanding 12% Senior Subordinated Notes due 2009. The
terms of the exchange notes are identical in all material
respects to those of the outstanding notes, except for
transfer restrictions and registration rights relating to
the outstanding notes.
Purpose of the Exchange
Offer.............................. The exchange notes are being offered to satisfy our
obligations under a registration rights agreement.
Expiration Date; Withdrawal of
Tender............................. The exchange offer will expire at 5:00 p.m., New York City
time, on June 5, 2000, or on a later date and time to which
we extend it. The tender of outstanding notes in the
exchange offer may be withdrawn at any time prior to the
expiration date. Any outstanding notes not accepted for
exchange for any reason will be returned without expense to
the tendering holder as promptly as practicable after the
expiration or termination of the exchange offer.
Procedures for Tendering Outstanding
Notes.............................. Each holder of outstanding notes wishing to accept the
exchange offer must complete, sign and date the letter of
transmittal, in accordance with its instructions, and mail
or otherwise deliver it, together with the outstanding notes
and any other required documentation to the exchange agent
at the address listed in the letter of transmittal.
Outstanding notes may be physically delivered, but physical
delivery is not required if a confirmation of a book-entry
transfer of the outstanding notes to the exchange agent's
account at Depository Trust Company, or DTC, is delivered in
a timely fashion. See "The Exchange Offer--Procedures for
Tendering Outstanding Notes."
Conditions to the Exchange Offer..... The exchange offer is not conditioned upon any minimum
aggregate principal amount of outstanding notes being
tendered for exchange. The exchange offer is subject to
certain customary conditions, which may be waived by us. We
currently expect that each of the conditions will be
satisfied and that no waivers will be necessary. See "The
Exchange Offer--Conditions to the Exchange Offer."
Exchange Agent....................... The Bank of New York.
U.S. Federal Income Tax
Considerations..................... Your exchange of an outstanding note for an exchange note
will not constitute a taxable exchange. The exchange will
not result in taxable income, gain or loss being recognized
by you or by us. Immediately after the exchange, you will
have the same adjusted basis and holding period in each
exchange note received as you had immediately prior to the
exchange in the corresponding outstanding note surrendered.
See "Income Tax Considerations."
</TABLE>
3
<PAGE>
THE EXCHANGE NOTES
The terms of the exchange notes are identical in all material respects to
those of the outstanding notes, except for the transfer restrictions and
registration rights relating to the oustanding notes that do not apply to the
exchange notes.
<TABLE>
<S> <C>
Issuer............................... Precision Partners, Inc.
Securities Offered................... $100,000,000 aggregate principal amount of 12% Senior
Subordinated Notes due 2009. The exchange notes will each be
represented by one or more global certificates registered in
the name of DTC. Transfer of exchange notes will be limited
to transfers of book-entry interests within DTC and its
participants.
Maturity............................. March 15, 2009.
Interest............................. The exchange notes will accrue interest from the last
interest payment date. Interest on the notes will be payable
semi-annually in arrears on each March 15 and September 15.
Sinking Fund......................... None.
Optional Redemption.................. We can redeem the exchange notes at any time on or after
March 15, 2004, in whole or in part, at the redemption
prices described under "Description of Exchange
Notes--Optional Redemption," plus accrued and unpaid
interest.
Optional Redemption after Certain
Equity Offerings................... At any time and from time to time on or prior to March 15,
2002, we can redeem up to 35% of the exchange notes and the
outstanding notes with the net cash proceeds of certain
equity offerings, as long as:
- we pay 112% of the principal amount of the notes to be
redeemed, plus accrued and unpaid interest;
- we redeem the notes within 180 days of the completion of
the equity offering; and
- at least 65% of exchange notes and the outstanding notes
remains outstanding afterwards.
Change of Control.................... If we undergo a change of control, you will have the right,
as a holder of exchange notes, to require us to repurchase
all of your exchange notes at a repurchase price equal to
101% of their face amount, plus accrued and unpaid interest.
We might not be able to pay you the required price for
exchange notes you request us to purchase at the time of a
change of control because we may not have enough funds at
that time or the terms of our other indebtedness may prevent
us from doing so.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Ranking.............................. The exchange notes will be unsecured and will be
subordinated in right of payment to all of our existing and
future senior debt, including debt under our credit
facilities. Because the exchange notes are subordinated, in
the event of our bankruptcy, liquidation or dissolution,
holders of notes will not be entitled to receive any payment
until all holders of our senior debt have been paid in full.
As of December 31, 1999, we had approximately
$134.5 million of senior debt outstanding (excluding the
$13.8 million of availability under our new revolving credit
facility).
Guarantees........................... All of our existing and certain of our future subsidiaries
will fully and unconditionally guarantee the exchange notes
on a joint and several basis. The subsidiary guarantees will
each be unsecured and will each be subordinated in right of
payment to each subsidiary guarantor's existing and future
senior debt.
Key Indenture Covenants.............. The indenture governing the exchange notes will contain
covenants that, among other things, limit our and some of
our subsidiaries' ability to:
- incur additional debt;
- pay dividends on or redeem or repurchase capital stock;
- issue or allow any person to own preferred stock of
subsidiaries;
- incur or permit to exist indebtedness senior to the notes,
but subordinated to any of our other indebtedness;
- in the case of certain subsidiaries, guarantee debt
without also guaranteeing the notes;
- in the case of certain subsidiaries, create or permit to
exist dividend or payment restrictions with respect to us;
- make certain investments;
- incur or permit to exist certain liens;
- enter into transactions with affiliates;
- merge, consolidate or amalgamate with another company; and
- transfer or sell assets.
These covenants are subject to a number of important
exceptions and limitations, which are described under the
heading "Description of Exchange Notes." All of our
subsidiaries on the issue date will be restricted for
purposes of the indenture.
</TABLE>
RISK FACTORS
An investment in the notes involves a high degree of risk. We urge you to
review carefully the Risk Factors beginning on page 9 for a discussion of
factors you should consider before making an investment in the exchange notes.
5
<PAGE>
THE ACQUISITIONS
On September 30, 1998 our indirect parent, Precision Partners L.L.C.,
acquired all of the outstanding capital stock of Mid Sate Machine Products and
Galaxy Industries Corporation for an aggregate purchase price of approximately
$54.5 million. On March 19, 1999, we underwent a corporate reorganization under
which we acquired all of the issued and outstanding capital stock of Mid State
and Galaxy. Also on March 19, 1999, we acquired all of the issued and
outstanding capital stock of Certified Fabricators, Inc. and its sister company,
Calbrit Design, Inc. and purchased substantially all of the assets and assumed
some liabilities of General Automation, Inc. and Nationwide Precision Products
Corp. for an aggregate purchase price of approximately $100.7 million, excluding
fees and expenses and an additional conditional payment which may be payable by
our parent, Precision Partners Holding Company. In July 1999, we merged Calbrit
into Certified. On September 1, 1999, we acquired all of the issued and
outstanding stock of Gillette Machine & Tool Co., Inc. for $11.4 million. The
purchase price for one of the companies acquired in March included a
$4.0 million escrow to be paid out upon the company meeting specified EBITDA
targets through April 30, 1999. Since these targets were not met, the
$4.0 million was returned to us, effectively reducing the purchase price by
$4.0 million.
In connection with the March acquisitions, we entered into new credit
facilities. See "Description of Credit Facilities."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
Prior to the acquisitions of Mid State and Galaxy in September 1998,
Precision Partners, L.L.C. had substantially no operations and, prior to the
completion of the reorganization and acquisitions of Certified, Calbrit,
Nationwide and General Automation in March 1999, we had substantially no
operations. As a result, we believe historical financial information for our
company prior to March 1999 and for our predecessor for accounting purposes, Mid
State, is of limited relevance in understanding what our actual results of
operations, financial position or cash flows would have been for historical
periods had we in fact been organized and owned all of our current subsidiaries
for such periods. For this reason, the following table sets forth summary
historical financial information and summary unaudited pro forma financial
information for our company only as of and for the year ended December 31, 1999.
In addition, for financial statement presentation purposes, the
reorganization is accounted for as if it occurred in September 1998 and we are
treated as having commenced operations at that time in a manner similar to a
pooling of interests. See Note 1 to our consolidated financial statements.
The summary unaudited pro forma financial information gives effect to the
following transactions as if each had occurred on January 1, 1999:
- the acquisitions of Certified, Calbrit, Nationwide, General Automation and
Gillette;
- the reorganization under which we received the capital stock of Mid State
and Galaxy as a capital contribution from Precision Partners, L.L.C.; and
- the new credit facilities we entered into in March 1999 and the related
prepayment of an existing term loan.
The summary unaudited pro forma financial information is for illustrative
purposes only and does not purport to be indicative of what the actual results
of operations and financial position of our company would have been as of and
for the periods presented, nor does it purport to represent our future financial
position or results of operations. In addition, the fair value of the net assets
at the actual closing date of the acquisitions could be significantly different
than the fair value of the net assets used for purposes of the unaudited pro
forma financial information. The following summary unaudited pro forma financial
information should be read in conjunction with "Unaudited Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the historical audited financial statements of our
company, Precision Partners, L.L.C., Mid State, Certified, Nationwide, General
Automation and Gillette including the notes thereto, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
---------------------------------
HISTORICAL PRO FORMA
------------- -----------------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................... $123,188 $149,749
Gross profit................................................ 29,754 36,240
Operating income............................................ 4,914 10,724
Interest expense(1)......................................... 12,567 15,671
Net loss.................................................... (5,515) (3,738)
OTHER FINANCIAL DATA:
EBITDA(2)(3)................................................ 16,820 26,144
EBITDA margin(4)............................................ 13.7% 17.5%
Depreciation and amortization............................... 11,906 15,420
Capital expenditures........................................ 10,260 11,677
Ratio of earnings to fixed charges(5)....................... -- --
Ratio of EBITDA to interest expense(1)...................... 1.3x 1.7x
Ratio of net debt to EBITDA(3)(6)........................... 8.0x 5.1x
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
HISTORICAL
-----------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 313
Working capital............................................. 3,844
Total assets................................................ 206,391
Total debt.................................................. 134,548
Stockholders' equity........................................ 36,132
</TABLE>
- ------------------------
(1) Interest expense is shown net of historical and pro forma interest income of
$245 and $298, respectively. Both historical and pro forma interest expense
include $1,051 of amortization of deferred financing fees.
(2) Historical EBITDA is defined as operating income plus depreciation and
amortization of $11,906. Pro forma EBITDA is defined as pro forma operating
income plus depreciation and amortization of $15,420. EBITDA is not a
measure of performance under generally accepted accounting principles. While
EBITDA should not be used in isolation or as a substitute for net income,
cash flows from operating activities or other income or cash flow statement
data prepared in accordance with generally accepted accounting principles,
or as a measure of profitability or liquidity, management believes that it
may be used by certain investors as supplemental information to evaluate a
company's financial performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." In addition, the
definition of EBITDA used in this prospectus may not be comparable to the
definition of EBITDA used by other companies.
(3) EBITDA includes a jet aircraft lease expense of $186. This lease was
terminated at closing in connection with our acquisition of General
Automation pursuant to the terms of the purchase agreement. Excluding the
effects of this lease for the entire period, EBITDA would have been $17,006
and $26,330, respectively, for historical 1999 and pro forma 1999 and the
ratio of net debt to EBITDA would have been 7.9x and 5.1x, respectively, for
historical 1999 and pro forma 1999.
(4) EBITDA margin is calculated by dividing EBITDA for the period by net sales
for the period, expressed as a percentage.
(5) Earnings is defined as pre-tax income plus fixed charges, excluding
capitalized interest and preferred stock dividend requirements. Fixed
charges are defined as the sum of all interest expense (whether capitalized
or expensed), the amortization of debt issue costs and discount or premium
relating to any indebtedness (whether expensed or capitalized), the interest
portion of rental expense, and preferred stock dividend requirements for
majority-owned subsidiaries. For historical and pro forma 1999, earnings
were insufficient to cover fixed charges by $7,645 and $4,811, respectively.
(6) Net debt is defined as total debt less cash and cash equivalents.
(FOOTNOTES ON NEXT PAGE)
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH BELOW AS WELL AS
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS PRIOR TO ACCEPTING THE EXCHANGE
OFFER.
RISK FACTORS ASSOCIATED WITH THE NOTES
IF YOU DO NOT EXCHANGE YOUR OUTSTANDING NOTES FOR EXCHANGE NOTES IN THE EXCHANGE
OFFER, YOUR EXCHANGE NOTES WILL CONTINUE TO BE SUBJECT TO SIGNIFICANT
RESTRICTIONS ON TRANSFER, AND MAY BE SUBJECT TO A LIMITED TRADING MARKET AND A
SIGNIFICANT DIMINUTION IN VALUE.
If you do not exchange your outstanding notes for the exchange notes in the
exchange offer, you will continue to be subject to the restrictions on transfer
described in the legend on your outstanding notes. In general, you may only
offer or sell the outstanding notes if they are registered under the Securities
Act and applicable state securities laws, or offered or sold pursuant to an
exemption from such requirements. We do not intend to register the outstanding
notes under the Securities Act. To the extent other outstanding notes are
tendered and accepted in the exchange offer, the trading market, if any, for the
remaining outstanding notes would be adversely affected and there could be a
significant diminution in the value of the outstanding notes as compared to the
value of the exchange notes. See "The Exchange Offer--Consequences of the
Failure to Exchange."
AN ACTIVE PUBLIC MARKET MAY NOT DEVELOP FOR THE EXCHANGE NOTES, WHICH COULD
ADVERSELY AFFECT THE MARKET PRICE AND LIQUIDITY OF THE EXCHANGE NOTES.
The exchange notes constitute securities for which there is no established
trading market. We do not intend to list the exchange notes on any securities
exchange or to seek approval for quotation through any automated quotation
system, and no active public market for the exchange notes is currently
anticipated. If a market for the exchange notes should develop, the exchange
notes could trade at a discount from their principal amount and they may be
difficult to sell. Future trading prices of the exchange notes will depend on
many factors, including prevailing interest rates, our operating results and the
market for similar securities. As a result, we can not give you any assurance
that you will be able to resell any exchange notes or, if you are able to resell
the price at which you will be able to do so.
IF YOU PARTICIPATE IN THE EXCHANGE OFFER FOR THE PURPOSE OF PARTICIPATING IN A
DISTRIBUTION OF THE EXCHANGE NOTES YOU COULD BE DEEMED AN UNDERWRITER UNDER THE
SECURITIES ACT.
If you exchange your outstanding notes in the exchange offer for the purpose
of participating in a distribution of the exchange notes, you may be deemed an
underwriter under the Securities Act. If so, you will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the exchange notes.
OUR INABILITY TO GENERATE SUFFICIENT CASH COULD RESULT IN A FAILURE TO MAKE
REQUIRED REPURCHASES OF TENDERED NOTES FOR A CHANGE OF CONTROL.
Upon a change of control, we will be required to make an offer to purchase
all outstanding notes and exchange notes. We would be required to purchase all
of the notes at 101% of their principal amount plus accrued and unpaid interest
up to, but not including, the date of repurchase. The source of funds for any
such purchase would be our available cash or cash generated from other sources.
However, we can not assure you that we will have or will be able to borrow
sufficient funds at the time of any change of control to make any required
repurchases of tendered notes. We also can not assure you that restrictions in
our credit facilities or other senior debt we may incur in the future would
permit us to make such required repurchases. See "Description of Exchange
Notes--Change of Control."
9
<PAGE>
RISK FACTORS ASSOCIATED WITH OUR INDEBTEDNESS
OUR SUBSTANTIAL DEBT AND THE SIGNIFICANT DEMANDS ON OUR CASH RESOURCES COULD
AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE EXCHANGE NOTES AND ACHIEVE OUR
BUSINESS PLAN.
SUBSTANTIAL DEBT. We have incurred a substantial amount of indebtedness
which requires significant interest payments. As of December 31, 1999, we had
total consolidated debt of $134.5 million and net interest expense of
approximately $12.6 million for the year then ended. Subject to the limits
contained in the indenture governing the notes and the new credit facilities, we
and our subsidiaries may incur additional indebtedness from time to time to
finance capital expenditures, investments or acquisitions or for other general
corporate purposes.
DEMANDS ON CASH RESOURCES. We have substantial demands on our cash
resources in addition to operating expenses and interest expense on the notes,
including, among others, interest and amortization payments under our credit
facilities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
EFFECTS ON YOUR INVESTMENTS AND OUR BUSINESS STRATEGY. Our level of
indebtedness and these significant demands on our cash resources could have
important effects on your investment in the notes. For example they could:
- make it more difficult for us to satisfy our obligations with respect to
the notes and our secured indebtedness;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the amount of
our availability of our cash flow available for working capital, capital
expenditures, acquisitions and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
industry (including the pursuit of our growth strategy);
- place us at a competitive disadvantage compared to our competitors that
have fewer debts and significantly greater operating and financing
flexibility than we do;
- limit, along with the financial and other restrictive covenants applicable
to our indebtedness, among other things, our ability to borrow additional
funds even when necessary to maintain adequate liquidity;
- increase our vulnerability to general adverse economic and industry
conditions; and
- result in an event of default upon a failure to comply with these
covenants which, if not cured or waived, could have a material adverse
effect on our business, financial condition or results of operations.
Our ability to pay interest on the notes, to repay portions of our long-term
indebtedness including under the notes and the credit facilities, and to satisfy
our other debt obligations will depend upon our future operating performance and
the availability of refinancing indebtedness, which will be affected by the
instruments governing our indebtedness, including the indenture and the credit
facilities, prevailing economic conditions and financial, business and other
factors, certain of which are beyond our control.
If we are unable to service our indebtedness and fund our business, we will
be forced to adopt an alternative strategy that may include:
- reducing or delaying capital expenditures;
- seeking additional debt financing or equity capital;
- selling assets; or
- restructuring or refinancing our indebtedness.
10
<PAGE>
We cannot assure you that any such strategy could be effected on terms
satisfactory to us or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
EFFECT OF ADDITIONAL DEBT. Subject to the limits of our debt instruments,
we may incur additional indebtedness from time to time to finance capital
expenditures, investments or acquisitions for other purposes, including the
borrowing of amounts repaid under our credit facilities. This could further
exacerbate the risks described below.
THE INDENTURE AND OUR CREDIT FACILITIES RESTRICT OUR ABILITY AND THE ABILITY OF
SOME OF OUR SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS.
INDENTURE. The indenture restricts our ability and the ability of some of
our subsidiaries to, among other things:
- incur additional debt;
- pay dividends on or redeem or repurchase capital stock;
- issue or allow any person to own preferred stock of subsidiaries;
- incur or permit to exist indebtedness senior to the notes, but
subordinated to any of our other indebtedness;
- in the case of non-guarantor subsidiaries, guarantee debt without also
guaranteeing the notes;
- in the case of restricted subsidiaries, create or permit to exist dividend
or payment restrictions with respect to us;
- make investments;
- incur or permit to exist liens;
- enter into transactions with affiliates;
- merge, consolidate or amalgamate with another company; and
- transfer or sell assets.
CREDIT FACILITIES. The credit facilities also contain similar covenants, as
well as a number of financial covenants requiring us to meet financial ratios
and financial condition tests. Our ability to borrow under our revolving credit
facility depends upon satisfaction of these covenants and our borrowing base
requirements. Our ability to meet these covenants and requirements can be
affected by events beyond our control. There can be no assurance that we will
meet these requirements.
EFFECT OF BREACH. Our failure to comply with the obligations and covenants
in the credit facilities or the indenture could result in an event of default
under the credit facilities or the indenture that, if not cured or waived, could
terminate our ability to borrow under the revolving credit facility, could
permit acceleration of the relevant debt and acceleration of debt under other
instruments and, in the case of the credit facilities, could permit foreclosure
on any collateral granted.
THE EXCHANGE NOTES AND SUBSIDIARY GUARANTEES ARE JUNIOR IN RIGHT OF PAYMENT TO
ALL OF OUR AND OUR SUBSIDIARY GUARANTOR'S INDEBTEDNESS, WHICH COULD ADVERSELY
AFFECT YOUR INVESTMENT.
The payment of principal, premium, if any, interest and additional interest,
if any, on the exchange notes and the subsidiary guarantees will, to the extent
set forth in the indenture, be subordinated in right of payment to all of our
and the subsidiary guarantors' indebtedness, including under the credit
11
<PAGE>
facilities, except any future indebtedness that expressly provides that it ranks
equal with, or junior in right of payment to, the exchange notes and the
subsidiary guarantees.
SUBSTANTIALLY ALL OF OUR ASSETS AND THOSE OF OUR SUBSIDIARIES SECURE OTHER LONG
TERM DEBT WHICH COULD REQUIRE US TO SATISFY THOSE OBLIGATIONS BEFORE THE
EXCHANGE NOTES IN THE EVENT OF BANKRUPTCY, LIQUIDATION OR REORGANIZATION.
The credit facilities are secured by, among other things, substantially all
of our assets and those of our subsidiaries. Consequently, upon any distribution
to our creditors or the creditors of a subsidiary guarantor in a bankruptcy,
liquidation or reorganization or similar proceeding relating to us or such
subsidiary guarantor or our or its property, the holders of our and its senior
debt, including the lenders under our credit facilities, will be entitled to be
paid in full in cash before any payment may be made with respect to the exchange
notes. Because we and such subsidiary guarantor may not have sufficient funds or
assets to pay all of our or its creditors, holders of exchange notes may receive
less, ratably, than the holders of senior debt.
In addition, the payment of principal, premium, if any, interest and
additional interest, if any, on the exchange notes will be prohibited in the
event of a payment default on any of our or a subsidiary guarantor's senior debt
and may be blocked, at the option of the holders of such senior debt, for up to
179 of 180 consecutive days in the event of specified non-payment defaults.
As of March 21, 2000, we had approximately $144.6 million of consolidated
senior debt outstanding, excluding $3.7 million of availability under our
revolving credit facility. In addition, subject to the terms of the indenture
and the credit facilities, we will be permitted to borrow substantial additional
indebtedness, including senior debt, in the future.
RISK FACTORS ASSOCIATED WITH PRECISION PARTNERS, INC.
WE ARE STRUCTURED AS A HOLDING COMPANY AND WE DEPEND ON OUR SUBSIDIARIES IN
ORDER TO SERVICE OUR DEBT.
We are now, and continue to be, structured as a holding company. Our only
significant asset is the capital stock or other equity interests of our
operating subsidiaries. As a holding company, we conduct all of our business
through our subsidiaries. Consequently, our cash flow and ability to service our
debt obligations, including the exchange notes, are dependent upon the earnings
of our operating subsidiaries and the distribution of those earnings to us, or
upon loans, advances or other payments made by these subsidiaries to us. The
ability of our subsidiaries to pay dividends or make other payments or advances
to us will depend upon their operating results and will be subject to applicable
laws and contractual restrictions contained in the instruments governing their
indebtedness, including our credit facilities and the indenture. Although the
indenture will limit the ability of these subsidiaries to enter into consensual
restrictions on their ability to pay dividends and make other payments to us,
these limitations will be subject to a number of significant qualifications. See
"Description of Exchange Notes--Certain Covenants--Limitations on Dividend and
Other Payment Restrictions Affecting Subsidiaries." There can be no assurance
that the earnings of our operating subsidiaries will be adequate for us to
service our debt obligations, including the exchange notes.
BECAUSE OF OUR LIMITED OPERATING HISTORY, AND THE NUMBER OF ACQUISITIONS WE HAVE
MADE, WE BELIEVE THAT HISTORICAL INFORMATION REGARDING OUR COMPANY PRIOR TO
MARCH 1999 AND FOR OUR PREDECESSOR FOR ACCOUNTING PURPOSES, MID STATE, IS OF
LITTLE RELEVANCE IN UNDERSTANDING OUR BUSINESS AS CURRENTLY CONDUCTED.
Precision Partners, L.L.C. was incorporated in September 1998 and we were
incorporated in February 1999 for the sole purpose of completing acquisitions.
Until the acquisitions of Mid State and
12
<PAGE>
Galaxy in September 1998, Precision Partners, L.L.C. had substantially no
operations and, until the consummation of the reorganization and the
acquisitions of Certified, Calbrit, Nationwide and General Automation in March
1999, we had substantially no operations. As a result, we believe the historical
financial information presented in this prospectus, other than for 1999, is of
limited relevance in understanding what our results of operations, financial
position or cash flows would have been for the historical periods presented had
we in fact been organized and owned all of our current subsidiaries. See "Pro
Forma Financial Information," "Selected Historical Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
THE SUCCESS OF OUR ACQUISITION STRATEGY DEPENDS ON THE AVAILABILITY OF SUITABLE
ACQUISITION CANDIDATES, DIVERSION OF MANAGEMENT TIME AND RISK OF UNDISCLOSED
LIABILITIES.
A significant aspect of our strategy is to continue to pursue select
strategic acquisitions of companies that we believe can benefit from our
operations, management and access to capital and enhance our relationships with
existing customers or augment our manufacturing capabilities. Our ability to
grow by acquisition is dependent upon, and may be limited by, the availability
of suitable acquisition candidates and capital, and the restrictions contained
in the new credit facilities, the indenture and any future financing
arrangements. In addition, growth by acquisition involves risks that could
adversely affect our operating results, including the substantial amount of
management time that may be diverted from operations in order to pursue and
complete such acquisitions, difficulties in managing the additional operations
and personnel of acquired companies and the potential loss of key employees of
acquired companies. There can be no assurance that we will be able to obtain the
capital necessary to pursue our growth strategy or consummate acquisitions on
satisfactory terms, if at all. Possible future acquisitions could result in the
incurrence of additional debt, costs, contingent liabilities and amortization
expenses related to goodwill and other intangible assets, all of which could
materially adversely affect our business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Although we perform a due diligence investigation of each business that we
acquire, there may be liabilities of the acquired companies, including Mid
State, Galaxy, Certified, General Automation, Nationwide and Gillette, that we
fail or are unable to discover during our due diligence investigation and for
which we, as a successor owner, may be responsible. In connection with
acquisitions, we generally seek to minimize the impact of these liabilities by
obtaining indemnities and warranties from the seller which may be supported by
deferring payment of a portion of the purchase price. However, these indemnities
and warranties, if obtained, may not fully cover the liabilities due to their
limited scope, amount, or duration, the financial limitations of the indemnitor
or warrantor, or other reasons.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY OPERATE OUR SUBSIDIARIES ON A
COMBINED BASIS.
Mid State, Galaxy, Certified, Nationwide, General Automation and Gillette
previously operated independently of one another and there can be no assurance
that we will be able to effectively manage these six operating companies on a
combined basis. In addition, to the extent management time may be diverted to
any one or more of the companies, the other operating companies may be adversely
affected. A failure by us to operate these businesses profitably or to manage
them effectively on a combined basis could have a material adverse effect on our
results of operations and financial condition.
THE SUCCESS OF OUR BUSINESS STRATEGY TO REALIZE A NUMBER OF CROSS SELLING
OPPORTUNITIES COULD BE AFFECTED BY A NUMBER OF FACTORS BEYOND OUR CONTROL.
As part of our business strategy, we intend to capitalize on a number of
cross-selling opportunities we believe exist as a result the complementary
customer bases and manufacturing capabilities of the
13
<PAGE>
acquired companies and to implement certain operating improvements. Our ability
to implement and realize the benefits of this strategy could be affected by a
number of factors beyond our control, such as operating difficulties, increased
operating costs, regulatory developments, general economic conditions, increased
competition, or the inability to obtain adequate financing for our operations on
suitable terms. In addition, after gaining experience with our operations under
this strategy, we may decide to alter or discontinue certain aspects of it. Any
failure to implement aspects of our strategy may adversely affect our results of
operations, financial condition and ability to service debt, including our
ability to make principal and interest payments on the notes. See
"Business--Business Strategy."
OUR INABILITY TO ACCESS ADDITIONAL CAPITAL COULD HAVE A NEGATIVE IMPACT ON OUR
GROWTH STRATEGY.
Our growth strategy will require additional capital investment. Capital will
be required for, among other purposes, completing acquisitions, managing
acquired companies, acquiring new equipment and maintaining the condition of our
existing equipment. We intend to pay for future acquisitions using cash, capital
stock, debt financings and/or assumption of indebtedness. However, our ability
to make acquisitions and the manner in which they are financed will be limited
by the covenants contained in the indenture and our credit facilities. To the
extent that cash generated internally and cash available under our credit
facilities is not sufficient to fund capital requirements, we will require
additional debt and/or equity financing. There can be no assurance, however,
such financing will be available or, if available, will be available on terms
satisfactory to us. Future debt financings, if available, may result in
increased interest and amortization expense, increased leverage and decreased
income available to fund further acquisitions and expansion, and may limit our
ability to withstand competitive pressures and render us more vulnerable to
economic downturns. If we fail to obtain sufficient additional capital in the
future, we could be forced to curtail our growth strategy by reducing or
delaying capital expenditures and acquisitions, selling assets or restructuring
or refinancing our indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
A LOSS OF KEY EMPLOYEES AND HIGHLY SKILLED WORKERS COULD ADVERSELY AFFECT OUR
BUSINESS.
Some of our executive officers are key to our management and direction. Our
future success will depend on our ability to retain capable management. To
assist with the integration of the operations of our subsidiaries, we have
retained the services of key personnel of these companies. The success of our
operations may depend, in part, on the successful retention, at least initially,
of these key personnel, as well as our ability to attract and retain additional
talented personnel. Although we believe we will be able to attract and retain
talented personnel and that we could replace key personnel should the need
arise, the inability to attract or retain such personnel could have a material
adverse effect on our business. In addition, because our products and processes
are complex and require a high level of precision, we are generally dependent on
an educated and trained workforce. We would be adversely affected by a shortage
of skilled employees. See "Management--Directors and Executive Officers."
FAILURE TO MAINTAIN RELATIONSHIPS WITH OUR LARGER CUSTOMERS AND FAILURE BY OUR
CUSTOMERS TO CONTINUE TO PURCHASE EXPECTED QUANTITIES DUE TO CHANGES IN MARKET
CONDITIONS COULD HAVE AN ADVERSE EFFECT ON OUR OPERATIONS.
Our largest customer, General Electric, accounted for approximately 26.5% of
our 1999 net sales and our top ten customers accounted for approximately 67% of
our 1999 net sales. The termination by General Electric or any one or more of
our other top 10 customers of its relationship with us could have a material
adverse effect upon our business, financial condition and results of operations.
In addition, we have recently been awarded long-term contracts with
Caterpillar and Dana. We currently anticipate that we will need to enter into up
to approximately $35 million of new operating leases in connection with
financing the new equipment necessary to meet the production requirements
14
<PAGE>
for these contracts. To the extent we are unable to purchase, integrate and make
operational this equipment on a cost-effective or timely basis, or to the extent
the costs associated with purchasing, integrating or making operational this
equipment are higher than we currently anticipate, our relationship with these
customers and our business and results of operations could be negatively
impacted.
OUR REVENUES AND OPERATING RESULTS MAY BE SUBJECT TO SIGNIFICANT FLUCTUATION.
A significant portion of our revenues is derived from new projects and
contracts, the timing of which is subject to a variety of factors beyond our
control, including customer budgets and modifications in customer products. We
cannot predict the degree to which, on a consolidated basis, these trends will
continue. A portion of our operating expenses are relatively fixed. Because we
typically do not enter into long-term contracts or have volume commitments with
our customers, we must anticipate the future volume of orders based upon the
historic purchasing patterns of our customers and upon discussions with our
customers as to their future requirements. Cancellations, reductions or delays
in orders by a customer or group of customers could have a material adverse
effect on our business, financial condition or results of operations.
Additionally, we may periodically incur cost increases due to hiring and
training of new employees in anticipation of future growth. The size, timing and
integration of possible future acquisitions may also cause substantial
fluctuations in operating results from quarter to quarter. As a result,
operating results for any fiscal quarter may not be indicative of the results
that may be achieved for any subsequent fiscal quarter or for a full fiscal
year.
THERE MAY BE CIRCUMSTANCES IN WHICH THE INTERESTS OF OUR INVESTORS COULD BE IN
CONFLICT WITH YOUR INTERESTS AS A HOLDER OF EXCHANGE NOTES.
Saunders, Karp & Megrue, L.P., a private equity firm, and its co-investors,
including Carlisle Enterprises L.P. and, Harvey Equity Partners, L.L.C., also
private equity firms, members of our management team, employees and some of the
selling stockholders of companies we have acquired or will acquire in the
acquisitions, indirectly own all of our equity securities. In addition, funds
sponsored by Saunders, Karp & Megrue own indirectly 66.8% of our outstanding
equity securities and, pursuant to our bylaws, Saunders, Karp & Megrue has the
right to appoint three of our six directors and the right to have one of its
appointees exercise two votes when all other directors have the right to only
one vote. Carlisle, Harvey and the members of our management team who have
invested in our company each have the right to appoint one of the remaining
three directors. As a result, circumstances may occur in which the interests of
Saunders, Karp & Megrue and/or the other investors could be in conflict with
your interests as a holder of exchange notes. In addition, Saunders, Karp &
Megrue and/or the other investors may have an interest in pursuing acquisitions,
divestitures or other transactions that, in their judgment, could enhance their
equity investment, even though such transactions might involve risks to the
holders of exchange notes.
We may from time to time engage in transactions with related parties and
affiliates which include, among other things, business arrangements, lease
arrangements for certain manufacturing facilities and offices and the payment of
fees or commissions for the transfer of manufacturing by one operating company
to another. Although the indenture will require that these types of transactions
be on terms no less favorable to us or the applicable subsidiary than those
which could be obtained on an arms' length basis from third parties, there can
be no assurance that these transactions will not adversely affect our business,
financial condition or results of operations. See "Related Party Transactions."
15
<PAGE>
SIGNIFICANT COMPETITION FOR PRECISION PART MANUFACTURING OUTSOURCED BY ORIGINAL
EQUIPMENT MANUFACTURERS MAY AFFECT OUR ABILITY TO SUCCEED.
We operate in an industry which is highly fragmented and competitive. A
variety of suppliers with different subsets of our manufacturing capabilities
compete to supply the stringent demands of large original equipment
manufacturers. In addition, our customers are continually seeking to consolidate
their business among one or more "Preferred" or "Qualified" suppliers. If any
customer becomes dissatisfied with our prices, quality or timeliness of
delivery, among other things, it could award future business or, in an extreme
case, move existing business to our competitors. We cannot assure you that our
products will continue to compete successfully with the products of our
competitors, including original equipment manufacturers themselves, many of
which are significantly larger and have greater financial and other resources
than we do. See "Business--Competition."
THE CYCLICAL NATURE OF THE INDUSTRIES WE CURRENTLY SERVE COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR COMPANY.
A majority of our revenues are derived from customers which are in
industries and businesses that are cyclical in nature and subject to changes in
general economic conditions, such as the construction, aerospace and automotive
industries. General economic or industry specific downturns could have a
material adverse effect on our company and our business, results of operations
and financial condition.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO OBTAIN RAW
MATERIALS AND COMPONENTS FROM OUR SUPPLIERS ON FAVORABLE TERMS.
Generally, our major raw materials consist of traditional materials such as
steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and
difficult to machine materials such as titanium, inconel, invar and hastelloy. A
majority of our raw materials are supplied by our customers on consignment. Raw
materials not supplied by our customers are purchased from several suppliers.
Although all of these materials were available in adequate quantities to meet
our production demands in 1998 and 1999, we can give you no assurance that such
materials will be available in adequate quantities in the future.
We do not presently anticipate any raw material shortages which would
significantly affect production. However, the lead times between the placement
of orders for certain raw materials and actual delivery to us may vary
significantly and we may from time to time be required to order raw materials in
quantities and at prices less than optimal to compensate for the variability of
lead times of delivery. Because we maintain a relatively small inventory of raw
materials and component parts, our business could be adversely affected if we
are unable to obtain these raw materials and components from our suppliers on
favorable terms.
OUR BUSINESS COULD BE ADVERSELY AFFECTED TO THE EXTENT THE U.S. GOVERNMENT
TERMINATED OR MODIFIED A CONTRACT WITH US OR ONE OF OUR CUSTOMERS.
We are generally not a direct party to any contracts with the U.S.
Government. However, a portion of our sales are to customers who use the parts,
assemblies or tooling we supply to them to fill orders under U.S. government
contracts to which they are a party. U.S. government contracts have significant
inherent risks, including:
- the ability of the U.S. government to terminate a contract for
convenience, in which case the other party could be limited to receiving
only costs already incurred or committed;
- modification of U.S. government contracts due to lack of Congressional
funding or changes in such funds; and
16
<PAGE>
- an extensive and complex regulatory structure, which could subject the
other party to contract termination, civil and criminal penalties and in
some cases, suspension or disbarment from future U.S. government
contracts.
To the extent the U.S. government terminates or modifies a contract with one
of our customers, we could be adversely affected if the affected customer
reduced its purchases from us as a result. In addition, in the few instances
where we are a direct party to a U.S. government contract, the inherent risks
described above, as well as risks associated with the competitive bidding
atmosphere under which U.S. government contracts are awarded and unreimbursed
cost overruns in fixed-price contracts, could have a material adverse effect on
our results of operations and financial condition.
OUR EQUIPMENT, FACILITIES AND OPERATIONS ARE SUBJECT TO NUMEROUS ENVIRONMENTAL
AND OTHER GOVERNMENT REGULATIONS WHICH MAY BECOME MORE STRINGENT IN THE FUTURE
AND MAY RESULT IN INCREASED LIABILITY AND INCREASED CAPTIAL EXPENDITURES.
Our equipment, facilities and operations are subject to increasingly complex
and stringent federal, state and local laws and regulations pertaining to
protection of human health and the environment. These include, among other
things, the discharge of contaminants into the environment and the handling and
disposition of wastes (including industrial, solid and hazardous wastes). In
addition, we are required to obtain and maintain regulatory approvals in the
United States in connection with our operations. Many environmental laws and
regulations provide for substantial fines and criminal sanctions for violations.
It is difficult to predict the future development of such laws and regulations
or their impact on future earnings and operations, but we anticipate that these
laws and regulations will continue to require increased capital expenditures
because environmental standards will become more stringent. We cannot assure you
that material costs or liabilities will not be incurred.
Certain environmental laws provide for strict, joint and several liability
for investigation and remediation of spills and other releases of hazardous
materials. These laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of any hazardous
materials. Persons who "arrange", as defined under these laws, for the disposal
or treatment of hazardous materials also may be liable for the costs of
investigation, removal or remediation of such materials at the disposal or
treatment site, regardless of whether the affected site is owned or operated by
them. Such liability is strict, and may be joint and several.
Because we own and operate a number of facilities, and because we arrange
for the disposal of hazardous materials at many disposal sites, we may incur
costs for investigation, removal and remediation, as well as capital costs
associated with compliance with environmental laws and regulations. Although
such environmental costs have not been material in the past and are not expected
to be material in the future, changes in environmental laws and regulations or
unexpected investigations and clean-up costs could have a material adverse
effect on our business, financial condition or results of operations. See
"Business--Environmental and Safety Regulation."
A GUARANTEE COULD BE VOIDED IF THE GUARANTOR FRAUDULENTLY TRANSFERRED THE
GUARANTEE AT THE TIME IT INCURRED THE INDEBTEDNESS, WHICH COULD RESULT IN
NOTEHOLDERS BEING ABLE TO RELY ONLY UPON US TO SATISFY CLAIMS.
Under the U.S. bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guarantee can be voided, or claims in respect of a guarantee
may be subordinated to all other debts of that guarantor if, among other things,
the guarantor, at the time it incurred the indebtedness evidenced by its
guarantee:
- intended to hinder, delay or defraud any present or future creditor; or
17
<PAGE>
- received less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
- was insolvent or rendered insolvent by reason of such incurrence;
or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond
its ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could be
voided and required to be returned to the guarantor or to a fund for the benefit
of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the governing law. Generally, however, a guarantor
would be considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets, or
- if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature, or
- it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that the subsidiary guarantees are being incurred
for proper purposes and in good faith and that each subsidiary guarantor, after
giving effect to its guarantee of the notes, will not be insolvent, will not
have unreasonably small capital for the business in which it is engaged and will
not have incurred debts beyond its ability to pay such debts as they mature.
There can be no assurance, however, as to what standard a court would apply in
making such determinations or that a court would agree with our conclusions in
this regard.
18
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the offering of the outstanding notes, we entered into a
registration rights agreement with the initial purchasers of the outstanding
notes. We are making this exchange offer to satisfy our obligations under the
registration rights agreement.
TERMS OF THE EXCHANGE
We are offering to exchange, upon the terms and subject to the conditions
set forth in this prospectus and in the accompanying letter of transmittal,
exchange notes for an equal principal amount of outstanding notes. The terms of
the exchange notes are identical in all material respects to those of the
outstanding notes, except for the transfer restrictions and registration rights
relating to the outstanding notes. The exchange notes will be entitled to the
benefits of the indenture. See "Description of the Notes."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered or accepted for exchange. As of the
date of this prospectus, $100 million aggregate principal amount of the
outstanding notes is outstanding. Outstanding notes tendered in the exchange
offer must be in denominations of a minimum principal amount of $1,000 or any
integral multiple thereof.
Based on certain interpretive letters issued by the staff of the SEC to
third parties in unrelated transactions, holders of outstanding notes, except
any holder who is an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act, who exchange their outstanding notes for exchange notes
pursuant to the exchange offer generally may offer the exchange notes for
resale, resell the exchange notes and otherwise transfer the exchange notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act, PROVIDED that the exchange notes are acquired in the
ordinary course of the holders' business and such holders are not participating
in, and have no arrangement or understanding with any person to participate in,
a distribution of the exchange notes.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where the outstanding notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. See "Plan of Distribution." In addition,
to comply with the securities laws of individual jurisdictions, if applicable,
the exchange notes may not be offered or sold unless they have been registered
or qualified for sale in the jurisdiction or an exemption from registration or
qualification is available and complied with. We have agreed, pursuant to our
registration rights agreement to register or qualify the exchange notes for
offer or sale under the securities or blue sky laws of the jurisdictions you
request in writing. If you do not exchange such outstanding notes for exchange
notes pursuant to the exchange offer, your outstanding notes will continue to be
subject to the restrictions on transfer contained in the legend.
If any holder of the outstanding notes is an affiliate of ours, is engaged
in or intends to engage in or has any arrangement or understanding with any
person to participate in the distribution of the exchange notes to be acquired
in the exchange offer, the holder could not rely on the applicable
interpretations of the SEC and must comply with the registration requirements of
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the registration requirement of the Securities Act and
applicable state securities laws.
19
<PAGE>
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer expires on the expiration date, which is 5:00 p.m., New
York City time, on June 5, 2000 unless we in our sole discretion extend the
period during which the exchange offer is open.
We reserve the right to extend the exchange offer at any time and from time
to time prior to the expiration date by giving written notice to The Bank of New
York, the exchange agent, and by public announcement communicated by no later
than 9:00 a.m. on the next business day following the previously scheduled
expiration date, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
exchange offer, all outstanding notes previously tendered will remain subject to
the exchange offer and may be accepted for exchange by us.
The exchange date will be the second business day following the expiration
date. We expressly reserve the right to:
- terminate the exchange offer and not accept for exchange any outstanding
notes for any reason, including if any of the events set forth below under
"--Conditions to the Exchange Offer" shall have occurred and shall not
have been waived by us; and
- amend the terms of the exchange offer in any manner, whether before or
after any tender of the outstanding notes.
If any termination or amendment occurs, we will notify the exchange agent in
writing and will either issue a press release or give written notice to the
holders of the outstanding notes as promptly as practicable.
Unless we terminate the exchange offer prior to 5:00 p.m., New York City
time, on the expiration date, we will exchange the exchange notes for the
tendered outstanding notes on the exchange date. Any outstanding notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder as promptly as practicable after expiration or termination of
the exchange offer. See "--Acceptance of Outstanding Notes for Exchange;
Delivery of Exchange Notes."
This prospectus and the related letter of transmittal and other relevant
materials will be mailed by us to record holders of outstanding notes and will
be furnished to brokers, banks and similar persons whose names, or the names of
whose nominees, appear on the lists of holders for subsequent transmittal to
beneficial owners of outstanding notes.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender of outstanding notes by you pursuant to any one of the procedures
set forth below will constitute an agreement between you and us in accordance
with the terms and subject to the conditions set forth in this prospectus and in
the letter of transmittal.
GENERAL PROCEDURES. You may tender the notes by:
- properly completing and signing the letter of transmittal or a facsimile
and delivering the letter of transmittal together with
-- the certificate or certificates representing the outstanding notes
being tendered and any required signature guarantees, to the
exchange agent at its address set forth in the letter of transmittal
on or prior to the expiration date, or
-- a timely confirmation of a book-entry transfer of the outstanding
notes being tendered, if the procedure is available, into the
exchange agent's account at DTC pursuant to the procedure for
book-entry transfer described below,
20
<PAGE>
- or complying with the guaranteed delivery procedures described below.
If tendered outstanding notes are registered in the name of the signer of
the letter of transmittal and the exchange notes to be issued in exchange
therefor are to be issued, and any untendered outstanding notes are to be
reissued, in the name of the registered holder, the signature of the signer need
not be guaranteed. In any other case, the tendered outstanding notes must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to us and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a commercial bank or
trust company located or having an office or correspondent in the United States
or by a member firm of a national securities exchange or of the National
Association of Securities Dealers, Inc. or by a member of a signature medallion
program such as "STAMP." If the exchange notes and/or outstanding notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the outstanding notes, the signature
on the letter of transmittal must be guaranteed by an eligible institution.
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 should contact the holder promptly and instruct the
holder to tender outstanding notes on the beneficial owner's behalf. If the
beneficial owner wishes to tender the outstanding notes itself, the beneficial
owner must, prior to completing and executing the letter of transmittal and
delivering the outstanding notes, either make appropriate arrangements to
register ownership of the outstanding notes in the beneficial owner's name or
follow the procedures described in the immediately preceding paragraph. The
transfer of record ownership may take considerable time.
A tender will be deemed to have been received as of the date when:
- the tendering holder's properly completed and duly signed letter of
transmittal accompanied by the outstanding notes is received by the
exchange agent,
- the tendering holder's properly completed and duly signed letter of
transmittal accompanied by a book-entry confirmation is received by the
exchange agent, or
- a notice of guaranteed delivery or letter or facsimile transmission to
similar effect from an eligible institution is received by the exchange
agent.
Issuances of exchange notes in exchange for outstanding notes tendered
pursuant to a notice of guaranteed delivery or letter or facsimile transmission
to similar effect by an eligible institution will be made only against deposit
of the letter of transmittal, the tendered outstanding notes, or book-entry
confirmation, if applicable and any other required documents.
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance for exchange of any tender of outstanding notes will be
determined by us, and will be final and binding. We reserve the absolute right
to reject any or all tenders not in proper form or the acceptances for exchange
of which may, in the opinion of our counsel, be unlawful. We also reserve the
absolute right to waive any of the conditions of the exchange offer or any
defects or irregularities in tenders of any particular holder whether or not
similar defects or irregularities are waived in the case of other holders.
Neither we, the exchange agent nor any other person will be under any duty to
give notification of any defects or irregularities in tenders or will incur any
liability for failure to give any such notification. Our interpretation of the
terms and conditions of the exchange offer, including the letter of transmittal
and its instructions, will be final and binding.
The method of delivery of outstanding notes and all other documents is at
the election and risk of the tendering holders, and delivery will be deemed made
only when actually received and confirmed by the exchange agent. If the delivery
is by mail, it is recommended that registered mail properly insured with return
receipt requested be used and that the mailing be made sufficiently in advance
of the
21
<PAGE>
expiration date to permit delivery to the exchange agent prior to 5:00 p.m., New
York City time, on the expiration date. As an alternative to delivery by mail,
holders may wish to consider overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the exchange agent prior
to 5:00 p.m., New York City time, on the expiration date. No letter of
transmittal or outstanding notes should be sent to us. Holders may request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect the above transactions for the holders.
BOOK-ENTRY TRANSFER. The exchange agent will make a request to establish an
account with respect to the outstanding notes at the book-entry transfer
facility for purposes of the exchange offer within two business days after the
date of the prospectus, and any financial institution that is a participant in
the book-entry transfer facility's systems may make book-entry delivery of
outstanding notes by causing the book-entry transfer facility to transfer the
outstanding notes into the exchange agent's account at the book-entry transfer
facility in accordance with the book-entry transfer facility's procedures for
transfer.
GUARANTEED DELIVERY PROCEDURES. If you desire to tender outstanding notes
pursuant to the exchange offer, but time will not permit a letter of
transmittal, the outstanding notes or other required documents to reach the
exchange agent on or before the expiration date, or if the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the exchange agent has received at its office a letter or facsimile
transmission from an eligible institution setting forth the name and address of
the tendering holder, the names in which the outstanding notes are registered,
the principal amount of the outstanding notes being tendered and, if possible,
the certificate numbers of the outstanding notes to be tendered, and stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange trading days after the expiration date, the outstanding
notes, in proper form for transfer, or a book-entry confirmation, as the case
may be, together with a properly completed and duly executed letter of
transmittal and any other required documents, will be delivered by the eligible
institution to the exchange agent in accordance with the procedures outlined
above. Unless outstanding notes being tendered by the above-described method are
deposited with the exchange agent, including through a book-entry confirmation,
within the time period set forth above and accompanied or preceded by a properly
completed letter of transmittal and any other required documents, we may, at our
option, reject the tender. Copies of a notice of guaranteed delivery which may
be used by eligible institutions for the purposes described in this paragraph
are available from the exchange agent.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The letter of transmittal contains, among other things, the following terms
and conditions, which are part of the exchange offer.
The transferring party tendering outstanding notes for exchange thereby
exchanges, assigns and transfers the outstanding notes to us and irrevocably
constitutes and appoints the exchange agent as the transferor's agent and
attorney-in-fact to cause the outstanding notes to be assigned, transferred and
exchanged. The transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the outstanding notes and to
acquire exchange notes issuable upon the exchange of the tendered outstanding
notes and that, when the same are accepted for exchange, we will acquire good
and unencumbered title to the tendered outstanding notes, free and clear of all
liens, restrictions except restrictions on transfer, charges and encumbrances
and not subject to any adverse claim. The transferor also warrants that it will,
upon request, execute and deliver any additional documents deemed by the
exchange agent or us to be necessary or desirable to complete the exchange,
assignment and transfer of tendered outstanding notes. The transferor further
agrees that acceptance of any tendered outstanding notes by us and the issuance
of exchange notes in exchange therefor will constitute performance in full by us
of our obligations under the registration rights agreement and that we will have
no further obligations or liabilities under the registration rights agreement,
except in
22
<PAGE>
certain limited circumstances. All authority conferred by the transferor will
survive the death, bankruptcy or incapacity of the transferor and every
obligation of the transferor will be binding upon the heirs, legal
representatives, successors, assigns, executors, administrators and trustees in
bankruptcy of the transferor.
By tendering outstanding notes and executing the letter of transmittal, the
transferor certifies that:
- it is not an affiliate of Precision Partners, the subsidiary guarantors or
any of our affiliates or, if the transferor is an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable;
- the exchange notes are being acquired in the ordinary course of business
of the person receiving the exchange notes, whether or not the person is
the holder;
- the transferor has not entered into an arrangement or understanding with
any other person to participate in the distribution, within the meaning of
the Securities Act, of the exchange notes;
- the transferor is not a broker-dealer who purchased the outstanding notes
for resale pursuant to an exemption under the Securities Act; and
- the transferor will be able to trade the exchange notes acquired in the
exchange offer without restriction under the Securities Act.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of such exchange notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Outstanding notes tendered pursuant to the exchange offer may be withdrawn
at any time prior to the expiration date.
For a withdrawal to be effective, a written letter or facsimile transmission
notice of withdrawal must be received by the exchange agent at its address set
forth in the letter of transmittal not later than the close of business on the
expiration date. Any notice of withdrawal must specify the person named in the
letter of transmittal as having tendered outstanding notes to be withdrawn, the
certificate numbers and principal amount of outstanding notes to be withdrawn,
that the holder is withdrawing its election to have such outstanding notes
exchanged and the name of the registered holder of the outstanding notes, and
must be signed by the holder in the same manner as the original signature on the
letter of transmittal, including any required signature guarantees, or be
accompanied by evidence satisfactory to us that the person withdrawing the
tender has succeeded to the beneficial ownership of the outstanding notes being
withdrawn. The exchange agent will return the properly withdrawn outstanding
notes promptly following receipt of notice of withdrawal. Properly withdrawn
outstanding notes may be retendered by following one of the procedures described
under "--Procedures for Tendering Outstanding Notes" above at any time on or
prior to the expiration date. If outstanding notes have been tendered pursuant
to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn outstanding notes and
otherwise comply with the procedures of such facility. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by us, and will be final and binding on all parties.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the exchange offer, the
acceptance for exchange of outstanding notes validly tendered and not withdrawn
and the issuance of the exchange notes will be
23
<PAGE>
made on the exchange date. For purposes of the exchange offer, we will be deemed
to have accepted for exchange validly tendered outstanding notes when, and if we
have given written notice to the exchange agent.
The exchange agent will act as agent for the tendering holders of
outstanding notes for the purposes of receiving exchange notes from us and
causing the outstanding notes to be assigned, transferred and exchanged. Upon
the terms and subject to the conditions of the exchange offer, delivery of
exchange notes to be issued in exchange for accepted outstanding notes will be
made by the exchange agent promptly after acceptance of the tendered outstanding
notes. Any outstanding notes which have been tendered for exchange but which are
not exchanged for any reason will be returned to the holder without cost to the
holder, or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at the book-entry transfer facility pursuant
to the book-entry procedures described above, the outstanding notes will be
credited to an account maintained by the holder with the book-entry transfer
facility for the outstanding notes, as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, or any extension
of the exchange offer, we will not be required to issue exchange notes in
exchange for any properly tendered outstanding notes not previously accepted and
may terminate the exchange offer, by oral or written notice to the exchange
agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service, or, at its option, modify or otherwise amend the exchange offer, if:
- there shall be threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree shall have been issued by, any
court or governmental agency or other governmental regulatory or
administrative agency or commission
-- seeking to restrain or prohibit the making or consummation of the
exchange offer or any other transaction contemplated by the exchange
offer,
-- assessing or seeking any damages as a result thereof, or
-- resulting in a material delay in our ability to accept for exchange or
exchange some or all of the outstanding notes pursuant to the exchange
offer; or
- the exchange offer shall violate any applicable law or any applicable
interpretation of the staff of the SEC.
The foregoing conditions are for our sole benefit and may be asserted by us
with respect to all or any portion of the exchange offer regardless of the
circumstances, including any action or inaction by us, giving rise to the
condition or may be waived by us in whole or in part at any time or from time to
time in its sole discretion. The failure by us at any time to exercise any of
the foregoing rights will not be deemed a waiver of any such right, and each
right will be deemed an ongoing right which may be asserted at any time or from
time to time. In addition, we have reserved the right, notwithstanding the
satisfaction of each of the foregoing conditions, to terminate or amend the
exchange offer.
Any determination by us concerning the fulfillment or non-fulfillment of any
conditions will be final and binding upon all parties.
In addition, we will not accept for exchange any outstanding notes tendered,
and no exchange notes will be issued in exchange for any outstanding notes, if
at such time any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or
qualification of the indenture under the Trust Indenture Act of 1939.
24
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as the exchange agent for the
exchange offer. Questions relating to the procedure for tendering, as well as
requests for additional copies of this prospectus or the letter of transmittal
and requests for notices of guaranteed delivery, should be directed to the
exchange agent addressed as follows:
<TABLE>
<S> <C> <C>
BY REGISTERED OR CERTIFIED FACSIMILE TRANSMISSION BY HAND/OVERNIGHT DELIVERY:
MAIL: NUMBER:
The Bank of New York (FOR ELIGIBLE INSTITUTIONS The Bank of New York
101 Barclay Street, 7E ONLY) 101 Barclay Street
New York, New York 10286 (212) 815-6339 Corporate Trust Services
Attention: Reorganization Window, Ground Level
Section TO CONFIRM BY TELEPHONE OR New York, New York 10286
FOR Attention: Reorganization
INFORMATION CALL: Section
(212) 815-6337
</TABLE>
Delivery of the letter of transmittal to an address other than as set forth
above, or transmission of instructions via facsimile other than as set forth
above, will not constitute a valid delivery.
The Bank of New York also acts as trustee under the indenture.
SOLICITATION OF TENDERS; EXPENSES
We have not retained any dealer-manager or similar agent in connection with
the exchange offer and we will not make any payments to brokers, dealers or
others for soliciting acceptances of the exchange offer. We will, however, pay
the exchange agent reasonable and customary fees for its services and will
reimburse it for reasonable out-of-pocket expenses in connection therewith. The
expenses to be incurred in connection with the exchange offer, including the
fees and expenses of the exchange agent and printing, accounting and legal fees,
will be paid by us and are estimated at approximately $0.5 million.
No person has been authorized to give any information or to make any
representations in connection with the exchange offer other than those contained
in this prospectus. If given or made, the information or representations should
not be relied upon as having been authorized by us. Neither the delivery of this
prospectus nor any exchange made hereunder shall, under any circumstances,
create any implication that there has been no change in our affairs since the
respective dates as of which information is given in this prospectus. The
exchange offer is not being made to, nor will tenders be accepted from or on
behalf of, holders of outstanding notes in any jurisdiction in which the making
of the exchange offer or the acceptance would not be in compliance with the laws
of the jurisdiction. However, we may, at our discretion, take any action as we
may deem necessary to make the exchange offer in any jurisdiction and extend the
exchange offer to holders of outstanding notes in the jurisdiction. In any
jurisdiction the securities laws or blue sky laws of which require the exchange
offer to be made by a licensed broker or dealer, the exchange offer is being
made on behalf of us by one or more registered brokers or dealers which are
licensed under the laws of the jurisdiction.
APPRAISAL RIGHTS
You will not have dissenters' rights or appraisal rights in connection with
the exchange offer.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the carrying value of the outstanding
notes as reflected in the issuer's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting
25
<PAGE>
purposes will be recognized by the issuer upon the exchange of exchange notes
for outstanding notes. Expenses incurred in connection with the issuance of the
exchange notes will be amortized over the term of the exchange notes.
TRANSFER TAXES
If you tender your outstanding notes, you will not be obligated to pay any
transfer taxes in connection therewith except that unless you instruct us to
register exchange notes in the name of, or request outstanding notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered holder, you will be responsible for the payment of any
applicable transfer tax.
INCOME TAX CONSIDERATIONS
You should consult your own tax advisers with respect to your particular
circumstances and with respect to the effects of state, local or foreign tax
laws to which you may be subject. The following discussion is based upon the
provisions of the Internal Revenue Code of 1986, regulations, rulings and
judicial decisions, in each case as in effect on the date of this prospectus,
all of which are subject to change.
The exchange of an outstanding note for an exchange note will not constitute
a taxable exchange. Such an exchange will not result in taxable income, gain or
loss being recognized by you or by us. Immediately after the exchange, you will
have the same adjusted basis and holding period in each exchange note received
as you had immediately prior to the exchange in the corresponding outstanding
note surrendered. See "Income Tax Considerations."
CONSEQUENCES OF FAILURE TO EXCHANGE
As consequence of the offer or sale of the outstanding notes pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws, holders
of outstanding notes who do not exchange outstanding notes for exchange notes
pursuant to the exchange offer will continue to be subject to the restrictions
on transfer of the outstanding notes as set forth in the legend. In general, the
outstanding notes may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. We do not
currently anticipate that we will register the outstanding notes under the
Securities Act.
Upon consummation of the exchange offer, due to the restrictions on transfer
of the outstanding notes and the absence of such restrictions applicable to the
exchange notes, it is likely that the market, if any, for outstanding notes will
be relatively less liquid than the market for exchange notes. Consequently,
holders of outstanding notes who do not participate in the exchange offer could
experience significant diminution in the value of their outstanding notes,
compared to the value of the exchange notes.
26
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. The net proceeds
from the sale of the outstanding notes were approximately $95.3 million, after
deducting discounts, commissions and expenses of the offering. We used these
proceeds, together with borrowings under our credit facilities, an equity
contribution of $10.0 million from our investors and available cash, to finance
the Certified, Calbrit, Nationwide and General Automation acquisitions and to
prepay a term loan. The following table illustrates the sources and uses of
proceeds in connection with the March acquisitions and the sale of the
outstanding notes (in millions):
<TABLE>
<CAPTION>
- ------------------------------------
- ------------------------------------
<S> <C>
Term loan........................... $ 23.0
Cash purchase price for the
Outstanding notes................... $100.0
acquisitions(1)................... 100.7
Equity contribution................. 10.0
Prepayment of indebtedness(2)....... 23.0
Available cash...................... 0.3
Fees and expenses................... 9.6
------
------
Total sources of funds............ $133.3
Total uses of funds............... $133.3
======
======
</TABLE>
- ------------------------
(1) Includes the prepayment of approximately $11.1 of outstanding indebtedness
of Certified plus approximately $0.4 million of related prepayment
penalties.
(2) Consisted of a $23.0 million floating rate term loan with an interest rate
of 7.6% as of February 15, 1999. Amortization payments in respect of this
loan were scheduled to begin December 31, 1999 and continue through
September 30, 2004.
27
<PAGE>
CAPITALIZATION
The following table sets forth our cash and temporary investments and our
consolidated capitalization as at December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
(IN MILLIONS)
<S> <C>
Cash and temporary investments.............................. $ 0.3
Debt:
Term loan................................................. 23.0
Revolving credit facility(1).............................. 11.2
12% Senior Subordinated Notes due 2009.................... 100.0
Other long-term debt...................................... 0.3
Total debt.............................................. 134.5
Stockholders equity......................................... 36.1
------
Total capitalization.................................... $170.9
======
</TABLE>
- ------------------------
(1) As at December 31, 1999, $11.2 million of our $25.0 million revolving credit
facility was outstanding. As of the closing date for the sale of the
outstanding notes, no indebtedness was outstanding under this facility. As
of March 21, 2000, $21.3 million was outstanding.
28
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1999 gives effect to:
- the acquisitions of Certified, Nationwide, General Automation and
Gillette;
- the reorganization under which we received the capital stock of Mid State
and Galaxy as a capital contribution from Precision Partners, L.L.C.; and
- the new credit facilities we entered into in March 1999 and the related
prepayment of an existing term loan,
as if each such transaction had occurred on January 1, 1999. For purposes of the
unaudited pro forma consolidated statement of operations, the historical
financial information of General Automation and Nationwide has been adjusted to
eliminate the effect of assets not acquired and liabilities not assumed in the
relevant acquisition, in each case in accordance with the terms of the purchase
agreement relating to such acquisition.
The unaudited pro forma consolidated statement of operations should be read
in conjunction with our historical financial statements and those of Mid State,
Certified, Nationwide, General Automation and Gillette, including the notes
thereto, in each case included elsewhere in this prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The adjustments necessary to fairly present this pro forma consolidated
financial information have been made based on available information and in the
opinion of management are reasonable and are described in the accompanying
notes. The pro forma consolidated financial information should not be considered
indicative of actual results that would have been achieved had the transactions
been consummated on the date indicated and do not purport to indicate results of
operations as of any future date or for any future period. We cannot assure you
that the assumptions used in the preparation of the pro forma consolidated
financial information will prove to be correct.
The acquisitions of Mid State, Galaxy, Certified, Nationwide, General
Automation and Gillette were accounted for using the purchase method of
accounting, pursuant to which the purchase price was allocated among the assets
acquired and liabilities assumed in accordance with estimates of fair value as
of the date of acquisition. However, the unaudited pro forma consolidated
statement of operations reflects management's estimates of fair value as of
January 1, 1999 and not at the actual date of acquisition. In addition, the pro
forma adjustments are based upon available information and certain assumptions
that management considers reasonable under the circumstances. Consequently, the
amounts reflected in the unaudited pro forma consolidated statement of
operations are subject to change, which could be significant.
29
<PAGE>
PRECISION PARTNERS, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
(HISTORICAL) ------------------------------------------------------------------
CONSOLIDATED CERTIFIED NATIONWIDE GENERAL GILETTE
PRECISION FOR THE THREE FOR THE THREE FOR THE THREE FOR THE EIGHT
PARTNERS, INC. MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED PRO FORMA
DECEMBER 31, 1999 MARCH 19, 1999 MARCH 19, 1999 MARCH 19, 1999 AUGUST 31, 1999 ADJUSTMENTS
----------------- -------------- -------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $123,188 $ 5,739 $6,214 $4,464 $10,144 $ --
Cost of sales............... 93,434 5,110 4,940 2,270 6,810 945 (1)
Selling, general and
administrative expenses... 24,840 1,080 554 509 2,796 (4,263)(2)
Operating income (loss)..... 4,914 (451) 720 1,685 538 3,318
Other income (expense):
Net interest expense...... (12,567) (647) (166) 18 (112) (2,197)(3)
Other, net................ 8 4 (4) -- 128 --
Income (loss) before income
taxes..................... (7,645) (1,094) 550 1,703 554 1,121
Provision (benefit) for
income taxes.............. (2,130) -- -- 18 272 767 (4)
Net income (loss)........... (5,515) (1,094) 550 1,685 282 354
Depreciation................ 8,525 634 453 274 603 831
Amortization................ 3,381 -- -- -- -- 719
EBITDA (5),(6).............. 16,820 183 1,173 1,959 1,141 4,868
<CAPTION>
PRO
FORMA
--------
<S> <C>
Net sales................... $149,749
Cost of sales............... 113,509
Selling, general and
administrative expenses... 25,516
Operating income (loss)..... 10,724
Other income (expense):
Net interest expense...... (15,671)
Other, net................ 136
Income (loss) before income
taxes..................... (4,811)
Provision (benefit) for
income taxes.............. (1,073)
Net income (loss)........... (3,738)
Depreciation................ 11,320
Amortization................ 4,100
EBITDA (5),(6).............. 26,144
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------
(1) The pro forma adjustments for cost of sales reflect the
following:
Adjustment for additional depreciation for step-up in fair
market value of fixed assets related to the purchase
transactions.............................................. $ 831
Adjustment for new lease terms of facilities renegotiated in
connection with the purchase transaction.................. 114
-------
$ 945
=======
(2) The pro forma adjustments for selling, general and
administrative expenses reflect the following:
Adjustments for termination of executive positions held by
shareholders and related parties as part of the purchase
contract whose positions will not be replaced............. $(4,769)
Adjustment for additional amortization of goodwill related
to the purchase transaction which is being amortized over
twenty years.............................................. 719
Adjustments for professional fees expensed by one of the
acquisitions to negotiate and consummate the purchase
transaction............................................... (213)
-------
$(4,263)
=======
(3) Adjustment to record additional interest expense associated
with the notes offered for exchange herein (net of the
elimination of historical interest expense related to debt
not assumed or refinanced), and amortization of the
related debt issue costs over the ten year term of the
notes totaling $1,051..................................... $(2,197)
=======
(4) Adjustment to record the income tax benefit on pro forma
income before income taxes.
(5) Pro forma EBITDA is defined as operating income plus
depreciation and amortization of $15,420. EBITDA is not a
measure of performance under generally accepted accounting
principles. While EBITDA should not be used in isolation
or as a substitute for net income, cash flows from
operating activities or other income or cash flow
statement data prepared in accordance with generally
accepted accounting principles or as a measure of
profitability or liquidity, management believes that it
may be used by certain investors as supplemental
information to evaluate a company's financial performance.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, the
definition of EBITDA used in this prospectus may not be
comparable to the definition of EBITDA used by other
companies.
(6) EBITDA includes the effect of a jet aircraft lease expense
of $186. This lease was terminated at closing in
connection with the acquisition of General Automation
pursuant to the terms of the purchase agreement. Excluding
the effects of this lease for the entire period, EBITDA
would have been $26,330.
</TABLE>
30
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
Prior to the acquisitions of Mid State and Galaxy in September 1998,
Precision Partners, L.L.C. had substantially no operations and, prior to the
completion of the reorganization and acquisitions of Certified, Calbrit,
Nationwide and General Automation in March 1999, we had substantially no
operations. As a result, we believe historical financial information for our
company prior to March 1999 and for Precision Partners, L.L.C. and our
predecessor for accounting purposes, Mid State, is of limited relevance in
understanding what our actual results of operations, financial position or cash
flows would have been for historical periods had we in fact been organized and
owned all five subsidiaries for such periods. In addition, for financial
statement presentation purposes, the reorganization is accounted for as if it
had occurred in September 1998 and we are treated as having commenced operations
at that time in a manner similar to a pooling of interests. See Note 1 to our
consolidated financial statements. The selected historical financial information
should be read in conjunction with our consolidated financial statements and Mid
State, including the notes thereto, included elsewhere in this prospectus, and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PRECISION
MID STATE (PREDECESSOR) PARTNERS, INC.
--------------------------------------------------- --------------------------------
JANUARY 1, 1998 SEPTEMBER 9, 1998
THROUGH THROUGH
1995 1996 1997 SEPTEMBER 30, 1998 DECEMBER 31, 1998 1999
-------- -------- -------- ------------------ ----------------- ------------
(IN THOUSANDS, EXCEPT RATIO AND DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales...................... $29,824 $28,462 $33,870 $24,106 $12,602 $123,188
Cost of sales.................. 24,206 20,290 24,581 16,326 9,090 93,434
------- ------- ------- ------- ------- --------
Gross profit................... 5,618 8,172 9,289 7,780 3,512 29,754
Selling, general and
administrative expenses...... 4,141 4,322 4,571 3,374 3,134 24,840
------- ------- ------- ------- ------- --------
Operating income............... 1,477 3,850 4,718 4,406 378 4,914
Interest expense, net.......... 108 69 85 37 526 12,567
Other income (expense), net.... 475 1,157 1,220 12 (138) 8
------- ------- ------- ------- ------- --------
Income (loss) before provision
for income taxes............. 1,844 4,938 5,853 4,381 (286) (7,645)
Provision (benefit) for income
taxes........................ 671 1,818 2,310 1,677 109 (2,130)
------- ------- ------- ------- ------- --------
Net income (loss).............. $ 1,173 $ 3,120 $ 3,543 $ 2,704 $ (395) $ (5,515)
======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PRECISION
MID STATE (PREDECESSOR) PARTNERS, INC.
--------------------------------------------------- --------------------------------
JANUARY 1, 1998 SEPTEMBER 9, 1998
THROUGH THROUGH
1995 1996 1997 SEPTEMBER 30, 1998 DECEMBER 31, 1998 1999
-------- -------- -------- ------------------ ----------------- ------------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)...................... $ 2,287 $ 4,734 $ 5,770 $ 5,212 $ 1,483 $ 16,820
Depreciation and
amortization................. $ 810 $ 884 $ 1,052 $ 806 $ 1,105 $ 11,906
Ratio of earnings to fixed
charges(2)................... 7.2x 20.2x 22.4x 25.6x -- --
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents...... $ 2,638 $ 40 $ 963 $ 313
Working capital................ 14,019 5,769 5,748 3,844
Total assets................... 20,119 11,574 63,321 206,391
Total debt..................... 686 403 23,000 134,548
Stockholders' equity........... 17,094 8,265 31,605 36,132
</TABLE>
- ------------------------
(1) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is not a measure of performance under generally accepted accounting
principles. While EBITDA should
31
<PAGE>
not be used in isolation or as a substitute for net income, cash flows from
operating activities or other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure of
profitability or liquidity, management believes that it may be used by
certain investors as supplemental information to evaluate a company's
financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, the definition
of EBITDA used in this prospectus may not be comparable to the definition of
EBITDA used by other companies.
(2) Earnings are defined as pre-tax income plus fixed charges, excluding
capitalized interest and preferred stock dividend requirements. Fixed
charges are defined as the sum of all interest (whether capitalized or
expensed), the amortization of debt issue costs and discount or premium
relating to any indebtedness (whether expensed or capitalized), the interest
portion of rental expense, and preferred stock dividend requirements for
majority-owned subsidiaries. For the period from September 9, 1998 through
December 31, 1998 and for 1999, earnings were insufficient to cover fixed
charges by $286 and $7,645, respectively.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are a leading contract mechanical manufacturing services supplier of
complex precision metal parts, tooling and assemblies for original equipment
manufacturers. Our broad manufacturing capabilities and highly engineered
processes allow us to meet the critical specifications of our customers across a
wide range of industries. We have earned "Preferred or "Qualified" supplier
status with most of our customers and are predominately the sole-source supplier
to our customers of the parts we manufacture.
Precision Partners, L.L.C. was formed in September 1998 and we were formed
in February 1999 for the sole purpose of consummating acquisitions in the
business of manufacturing and supplying complex precision metal parts, tooling
and assembles for original equipment manufacturers. On September 30, 1998,
Precision Partners, L.L.C. acquired all of the outstanding capital stock of Mid
State and Galaxy. In March 1999, we underwent a corporate reorganization under
which we acuired all of the issued and outstanding capital stock of Mid State
and Galaxy. At the same time, we also purchased all of the issued and
outstanding capital stock of Certified and Calbrit and we purchased
substantially all of the assets and assumed some liabilities of General
Automation and Nationwide. The aggregate purchase price for the March
acquisitions was approximately $100.7 million, excluding fees and expenses, and
was financed through the net proceeds from the sale of the outstanding notes,
borrowings under our credit facilities, an equity contribution and available
cash. In July 1999, we merged Calbrit into Certified and in September 1999 we
acquired Gillette. The purchase price for the Gillette acquisition was
approximately $14.4 million and was financed using existing cash and borrowings
under our revolving credit facility.
Prior to the acquisitions of Mid State and Galaxy, Precision Partners,
L.L.C. had substantially no operations and, prior to the consummation of the
reorganization and the acquisitions of Certified, Calbrit, Nationwide and
General Automation, we had substantially no operations. For financial statement
presentation purposes, and for purposes of the following discussion, the
reorganization is accounted for as if it occurred on September 9, 1998 and we
are treated as having commenced operations at that time. See Note 1 to our
consolidated financial statements. For this reason, the following management's
discussion and analysis relates to the financial condition and results of
operations of:
- a combination of Mid State, as predecessor, for the period from
January 1, 1998 through September 30, 1998 and our company for the period
from September 9, 1998 (inception) through December 31, 1998 on a
consolidated basis, including Mid State and Galaxy for the period from
October 1, 1998 through December 31, 1998 and LLC for the period from
September 9, 1998 through December 31, 1998; and
- a combination of our company for the period from February 9, 1999
(inception) through December 31, 1999 on a consolidated basis, including
Certified, Nationwide and General Automation from March 19, 1999 through
December 31, 1999, Precision Partners, L.L.C. from January 1, 1999 to
March 19, 1999 and Gillette from September 1, 1999 to December 31, 1999.
This discussion and analysis should be read in conjunction with our historical
audited financial statements and those of Mid State, and the Unaudited Pro Forma
Consolidated Statement of Operations, including the notes thereto, included
elsewhere in this prospectus.
As a result, we believe the historical financial information presented in
this prospectus for periods prior to 1999 is of limited relevance in
understanding what our results of operations, financial position or cash flows
would have been for the historical periods presented had we in fact been
organized and owned all of our current subsidiaries for such periods.
33
<PAGE>
A change in the senior management at Galaxy occurred during the third
quarter of 1999, and in connection with this change, we engaged in a review of
the operations (including customer and vendor relations) and accounting
practices and procedures at Galaxy. This review was performed by a team
consisting of internal management and outside professionals and has revealed
administration and accounting practices inconsistent with our policies and
procedures. These inconsistencies include the failure to execute proper cut-off
procedures at month-end and the failure to recognize certain expenses in the
period in which those expenses were incurred. We believe our 1999 financial
results accurately reflect the excess costs associated with these matters, and
after a review, we do not believe that our financial results for 1999 or any
previously reported period have been materially misstated as a result of past
practices at Galaxy.
The following table sets forth, for the periods indicated, information
derived from our audited consolidated statement of operations and the audited
consolidated statements of operations of Mid State, in each case, for the
periods indicated, both in dollars and expressed as a percentage of net sales
(dollars in thousands):
<TABLE>
<CAPTION>
MID STATE (HISTORICAL)
---------------------------------------------------------------
JANUARY 1, 1998
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------- SEPTEMBER 30,
1996 1997 1998
------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............ $28,462 100.0% $33,870 100.0% $24,106 100.0%
Cost of sales........ 20,290 71.3 24,581 72.6 16,326 67.7
Gross profit......... 8,172 28.7 9,289 27.4 7,780 32.3
Selling, general and
administrative
expenses........... 4,322 15.2 4,571 13.5 3,374 14.0
Operating income..... 3,850 13.5 4,718 13.9 4,406 18.3
Net income (loss).... 3,120 11.0 3,543 10.5 2,704 11.2
======= ======= ======= ======= ======= =======
Depreciation and
amortization....... $ 884 3.1% $ 1,052 3.1% $ 806 3.3%
EBITDA(1)............ 4,734 16.6 5,770 17.0 5,212 21.6
<CAPTION>
PRECISION PARTNERS, INC.
(HISTORICAL)
---------------------------------------------------------------
SEPTEMBER 9,
1998
THROUGH YEAR ENDED
DECEMBER 31, COMBINED DECEMBER 31,
1998 1998(2) 1999(3)
------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............ $12,602 100.0% $36,708 100.0% $123,188 100.0%
Cost of sales........ 9,090 72.1 25,416 69.2 93,434 75.8
Gross profit......... 3,512 27.9 11,292 30.8 29,754 24.2
Selling, general and
administrative
expenses........... 3,134 24.9 6,508 17.7 24,840 20.2
Operating income..... 378 3.0 4,784 13.0 4,914 4.0
Net income (loss).... (395) (3.1) 2,309 6.3 (5,515) (4.5)
======= ======= ======= ======= ======== =======
Depreciation and
amortization....... $ 1,105 8.8% $ 1,911 5.2% $ 11,906 9.7%
EBITDA(1)............ 1,483 11.8 6,695 18.2 16,820 13.7
</TABLE>
- ---------------
(1) For historical financial information purposes, EBITDA is defined as
operating income plus depreciation and amortization. EBITDA is not a measure
of performance under generally accepted accounting principles. While EBITDA
should not be used in isolation or as a substitute for net income, cash
flows from operating activities or other income or cash flow statements data
prepared in accordance with generally accepted accounting principles, or as
a measure of profitability or liquidity, management believes that it may be
used by certain investors as supplemental information to evaluate a
company's financial performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." In addition, the
definition of EBITDA used in this prospectus may not be comparable to the
definition of EBITDA used by other companies.
(2) Precision Partners combined consists of our results of operations from
September 9, 1998 (inception) through December 31, 1998 and of Mid State
(predecessor) for the nine months ended September 30, 1998.
(3) Our results for the period from February 9, 1999 (inception) through
December 31, 1999, include Certified, Nationwide and General Automation,
Precision Partners, L.L.C.'s results from January 1, 1999 to March 19, 1999
and Gillette's results from September 1, 1999 to December 31, 1999.
HISTORICAL RESULTS OF OPERATIONS
1999 COMPARED TO 1998 COMBINED
NET SALES. Net sales increased 235.6% to $123.2 million in 1999 compared to
$36.7 million in 1998. The increase is due to the March acquisitions of
Certified, General Automation, and Nationwide and the September acquisition of
Gillette with aggregate sales for all of the acquired companies totaling
$58.8 million for the nine months ended December 31, 1999. Sales at Mid State
and Galaxy
34
<PAGE>
increased 40.8% and 24.4%, respectively, to $64.4 million due to increased
orders for gas turbine parts and engine and transmission components for large
construction equipment.
GROSS PROFIT. Gross profit for 1999 increased 163.5% to $29.8 million from
$11.3 million in 1998. Gross margin decreased to 24.2% from 30.8% in 1998. The
increase in gross profit is primarily attributable to the acquisitions of
Certified, General Automation, Nationwide, and Gillette. The decrease in gross
margin results from the lower margin products manufactured by the acquisitions
as well as changes in product mix at Mid State that reduced its gross margin by
1.5% from 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 281.7% to $24.8 million from $6.5 million in
1998. This increase is mainly due to $7.2 million in general and administrative
expense at Precision Partners, including the recognition of $3.0 million in
bonus compensation paid to a selling shareholder of one of the acquired
companies, $0.6 million in aborted acquisition costs, $6.5 million of selling,
general and administrative expenses at Certified, General Automation,
Nationwide, and Gillette expenses, and $4.5 million of goodwill amortization and
additional depreciation expense resulting from a step-up in basis of the
property, plant, and equipment of Certified, General Automation, Nationwide, and
Gillette in connection with their acquisition by us.
OPERATING INCOME. As a result of the foregoing, operating income increased
2.7% to $4.9 million in 1999 from $4.8 million in 1998.
INCOME TAX EXPENSE. We realized an income tax benefit of $2.1 million in
1999 compared to income tax expense of $1.8 million in 1998. Our effective tax
benefit rate was 27.9% in 1999 compared to an effective tax expense rate of
43.6% for 1998. The decrease in income tax expense is primarily due to interest
expense in 1999 of $12.8 million related to the issuance of the outstanding
notes resulting in a loss before taxes. The decrease in the effective benefit
rate is primarily due to the impact of non-deductible goodwill generated from
the 1999 acquisitions of Certified and Gillette and the 1998 acquisitions of Mid
State and Galaxy.
NET INCOME (LOSS). Net income decreased 338.8% to a loss of $5.5 million in
1999 from income of $2.3 million in 1998 for the aforementioned reasons.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for 1999 was
$11.9 million, which includes $3.4 million of amortization of $77.0 million of
goodwill resulting from the acquisitions of Mid State, Galaxy, Certified,
Nationwide, General Automation, and Gillette. The $8.5 million of depreciation
expense is mainly attributable to the additional depreciation expense associated
with the step-up in basis resulting from the acquisitions of these six
companies.
1998 COMPARED TO 1997
NET SALES. Net sales increased 8.4% to $36.7 million in 1998 compared to
$33.9 million in 1997. The increase is due to the acquisition of Galaxy in
September 1998 with sales of $2.8 million in the fourth quarter of 1998. Sales
at Mid State remained essentially flat. Increased orders for North American gas
turbine parts substantially offset the effect of delayed delivery dates for
hydroelectric turbine parts, which resulted from the downturn in the Asian
economy.
GROSS PROFIT. Gross profit for 1998 increased 21.6% to $11.3 million from
$9.3 million in 1997. Gross margin increased to 30.8% in 1998 from 27.4% in
1997. The increase is primarily attributable to the acquisition of Galaxy in
September 1998, which contributed fourth quarter gross profit of $0.7 million
and Mid State's product mix. Mid State also reduced costs through improved
production processes, increased operating efficiencies and the elimination of
large discretionary management bonuses paid in 1997.
35
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 increased 42.4% to $6.5 million from
$4.6 million in 1997. This increase is mainly due to $1.1 million in general and
administrative expense at Precision Partners, L.L.C. from September 9, 1998
(inception) to December 31, 1998, as well as additional Galaxy expenses totaling
$0.5 million in the last quarter of 1998.
OPERATING INCOME. As a result of the foregoing, operating income increased
slightly to $4.8 million in 1998 from $4.7 million in 1997.
INCOME TAX EXPENSE. Income tax expense was $1.8 million in 1998 compared to
$2.3 million in 1997. Our effective tax rate was 43.6% for 1998 compared to
39.5% for Mid State in 1997. The increase in the effective rate for 1998 is
primarily due to non-deductible goodwill generated in the acquisitions of Mid
State and Galaxy.
NET INCOME. Net income decreased 34.8% to $2.3 million for 1998 from
$3.5 million in 1997 for the aforementioned reasons.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
81.7% to $1.9 million in 1998 from $1.1 million in 1997. The increase includes
$0.4 million in amortization of $35.0 million of goodwill resulting from the
acquisitions of Mid State and Galaxy in September 1998, additional depreciation
on the step-up in basis of property, plant and equipment and the inclusion of
$0.3 million of depreciation expense recorded by Galaxy in the three months
ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are available borrowings under our
revolving credit facility and cash flow from operations. We expect that our
principal uses of liquidity will continue to be working capital, capital
expenditures, debt service requirements and permitted acquisitions.
Our credit facilities consist of a $23.0 million term loan facility and a
$25.0 million revolving credit facility, including a $2.0 million sublimit for
letters of credit, each maturing on March 31, 2005, unless terminated sooner
upon an event of default. As of December 31, 1999, we have total debt of
approximately $134.5 million, consisting of our $23.0 million term loan, the
outstanding aggregate principal amount of the notes and $11.2 million of
outstanding borrowings under our revolving credit facility. See
"Capitalization." Our ability to borrow under the revolving credit facility is
subject to our compliance with the financial covenants described below and a
borrowing base based on our eligible accounts receivables and inventory. See
"Description of Credit Facilities."
The indenture and our credit facilities impose limitations on our ability
to, among other things, incur additional indebtedness (including capital
leases), incur liens, pay dividends or make other restricted payments,
consummate asset sales, enter into transactions with affiliates, issue preferred
stock, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our assets. In
addition, the credit facilities limit our ability to enter into sale and
leaseback transactions and to make capital expenditures. The credit facilities
also require that we meet and maintain certain financial ratios and tests,
including (i) a minimum interest coverage ratio, EBITDA to interest expense,
(ii) a maximum leverage ratio, total debt to EBITDA, and (iii) a minimum fixed
charge coverage ratio, EBITDA to interest expense plus other fixed charges. Our
ability to comply with these covenants and to meet and maintain these financial
ratios and tests may be affected by events beyond our control, such as those
described under "Risk Factors."
As a result of the failure to have an exchange offer registration statement
filed by September 15, 1999, to have it declared effective by September 16, 1999
and to complete the exchange offer by October 15, 1999, we are paying additional
interest on the outstanding notes. The amount of additional interest has ranged
from 0.5% per annum for the period from September 15, 1999 through
36
<PAGE>
December 14, 1999 to 0.75% per annum for the period December 15, 1999 through
March 14, 2000. Beginning March 15, 2000, the amount of additional interest
increased to 1.0% per annum and will continue at that rate until effectiveness
of the registration statement and completion of the exchange offer. The
additional interest is expected to be nonrecurring with no impact on our
continuing operations.
We have limited amortization requirements under our credit facilities over
the next two years. Our other debt service requirements over the next two years
consist primarily of interest expense on the notes. Our short-term cash
requirements for our operations are expected to consist mainly of capital
expenditures to continue to maintain and expand our manufacturing capabilities
and working capital requirements. We currently expect that our capital
expenditures will be approximately $10.6 million in 2000, including maintenance
capital expenditures of approximately $5.0 million. However, our capital
expenditures will be affected by, and may be greater than currently anticipated
depending upon, the size and nature of new business opportunities. We also
expect to have to enter into approximately $35 million of operating leases in
2000 primarily for new equipment related to our recent contracts with
Caterpillar and Dana and increased unit delivery requirements from General
Electric.
The aggregate purchase price for the acquisitions of Certified, Calbrit,
Nationwide and General Automation of $100.7 million does not include fees and
expenses or the potential effects of certain contingent purchase arrangements.
The purchase price for one of the companies acquired included a $4.0 million
escrow to be paid out upon the company meeting specified EBITDA targets through
April 30, 1999. The targets were not met and the escrow has been returned to us,
effectively reducing the purchase price and the resulting goodwill by
$4.0 million. A contingent payment may be payable by our parent, Precision
Partners Holdings Company, in the form of cash or a note payable-in-kind
maturing September 30, 2009, based on one of the companies we acquired in March
1999 achieving specified EBITDA targets in 2000. Payment by Precision Partners
Holding Company of this additional contingent payment, assuming the maximum
amount is earned, would result in an annual increase in our goodwill
amortization of approximately $0.5 million. Additional contingent payments,
which were payable by Precision Partners Holding Company, based on this company
and another company acquired in March 1999 meeting certain EBITDA targets in
1999 were not earned. In addition, a bonus payment of $3.0 million, based on one
of the acquired companies achieving certain 1999 EBITDA targets, is payable in
2000 to the former stockholder of this company who is now an employee of our
company. This bonus payment was accrued in December 1999 as compensation expense
and will be paid no later than April 2000.
We plan to continue our acquisition strategy and expect to finance future
acquisitions using cash, capital stock, notes and/or assumption of indebtedness.
However, the restrictions imposed on us by our long-term debt instruments may
affect this strategy. In addition, to fully implement our growth strategy and
meet the resulting capital requirements, we may be required to request increases
in amounts available under our credit facilities, issue future debt securities
or raise additional capital through equity financings. There can be no assurance
that any such increase to our credit facilities will be available or, if
available, will be on terms satisfactory to us, or that we will be able to
successfully complete any future debt or equity financings on satisfactory
terms, if at all. As a result, we could be placed at a competitive disadvantage
in pursuing acquisitions.
Based upon current operations and the historical results of our
subsidiaries, we believe that our cash flow from operations, together with
available borrowings under our new revolving credit facility, will be adequate
to meet our anticipated requirements for working capital, capital expenditures,
lease payments, and scheduled interest payments over the next 12 months.
However, there can be no assurance that we will continue to generate cash flow
above current levels or that the acquired companies will repeat their historical
performance. In addition, our ability to pay the notes at maturity will depend
on the availability of refinancing. See "Risk Factors--Risks Associated With Our
Indebtedness."
37
<PAGE>
BACKLOG
Firm backlog for 1999 increased 36.1% to $107.7 million from $79.1 million
at December 31, 1998. Firm backlog represents the sales price of all undelivered
products for which we have customer purchase orders or contractual coverage that
will be delivered within the next 12 months. All of our firm backlog is subject
to price renegotiations, terminations or rescheduling at the customer's
convenience. Firm backlog for December 31, 1998 has been restated to be
consistent with the current method of calculating backlog.
DISCLOSURE ABOUT MARKET RISK
Our term loan facility provides for interest to be charged at either the
Eurodollar rate or a base rate determined in accordance with the credit
agreement. Based on our current level of borrowings from our term loan facility,
a 1.0% change in interest rate would result in a $0.2 million annual change in
interest expense. Our revolving line of credit provides for interest to be
charged at either the Eurodollar rate or a base rate determined in accordance
with the credit agreement. Based on our current level of outstanding revolving
line of credit, a 1.0% change in interest rate would result in a $0.1 million
annual change in interest expense. The remainder of our debt is at fixed
interest rates that are not subject to changes in interest rates. We do not own
nor are we obligated for other significant debt or equity securities that would
be affected by fluctuations in market risk.
INFLATION
We do not believe that inflation has had a significant impact on our cost of
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued the FASB
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which is effective for fiscal periods beginning after June 15, 2000. We adopted
this statement during 1999 and such adoption had no material effect on our
financial statements.
YEAR 2000
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
on-going business as a result of the "Year 2000 issue." However, it is possible
that the full impact of the date change, which was of concern due to computer
programs that use two digits instead of four digits to define years, has not
been fully recognized. For example, it is possible that Year 2000 or similar
issues such as leap year-related problems may occur with billing, payroll, or
finanical closings at month, quarterly or year end. We believe that any such
problems are likely to be minor and correctable. In addition, we could still be
negatively impacted if our customers or suppliers are adversely affected by the
Year 2000 or similar issues. We currently are not aware of any significant Year
2000 or similar problems that have arisen for our customers and suppliers.
We expended $0.9 million on Year 2000 readiness efforts from 1997 to 1999.
These efforts included replacing some outdated, noncompliant hardware and
noncompliant software as well as indentifying and remediating Year 2000
problems.
38
<PAGE>
BUSINESS
THE COMPANY
We are a leading contract mechanical manufacturing services supplier of
complex precision metal parts, tooling and assemblies for original equipment
manufacturers. Our flexible manufacturing facilities and operating processes
enable us to service customers across a wide range of industries and
aggressively pursue new customers in industries where we see the potential for
strong growth. Our customers include industry leaders such as General Electric,
New Venture Gear, a joint venture of General Motors and DaimlerChrysler, Xerox,
Boeing, Caterpillar and Dana. We have earned "Preferred" or "Qualified" supplier
status with most of our customers and are predominantly the sole-source supplier
to our customers of the parts we manufacture. Our pro forma revenues and EBITDA
for the fiscal year ended December 31, 1999 were $149.8 million and
$26.1 million, respectively, representing a 17.5% EBITDA margin.
Our broad manufacturing capabilities and highly engineered processes allow
us to meet the critical specifications of our customers. We manufacture parts,
ranging in size from approximately 1 ounce to over 100,000 pounds, to extremely
close tolerances. We are also able to maintain tight tolerances, across flat
sheets and surfaces with multiple contours. We work with traditional materials
such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic
and difficult to machine materials such as titanium, inconel, invar and
hastelloy. In addition, we provide our customers with design assistance, process
and product engineering support and quality testing.
Our manufacturing expertise includes precision machining such as milling,
turning, boring, drilling, broaching and grinding, as well as value-added
services such as prototyping, assembly, forming, welding, heat treating and
plating.
The industries we serve and the related precision parts, assemblies and
tooling we machine and manufacture include:
- Power Generation Industry - specialty alloy turbine wheels and spacers,
shrouds and nozzles;
- Automotive Industry - piston valves used primarily for automatic braking
systems in light trucks and sport utility vehicles and machined engine
blocks;
- Business Machines Industry - bases and internal components for high-end
scanners, digital imaging machines and copiers;
- Space and Satellite Industries - adapter rings, thrust rings, casting
chambers and handling and transport aids;
- Aerospace Industry; Commercial and Military - precision tooling including
bond jigs, assembly jigs and mill fixtures;
- Agriculture and Construction Equipment Industries - high tolerance bearing
caps, transmission housings and diesel and gas pump housings; and
- Transportation Industry - class eight heavy truck axles and related parts
and engine blocks.
INDUSTRY
The U.S. precision custom manufacturing industry is highly fragmented and,
excluding precision manufacturing operations owned directly by original
equipment manufacturers, is estimated to be comprised of approximately 7,500
companies representing, over the last several years, annual revenues in excess
of $20 billion. Within this market, precision machine shops and specialty tool
manufacturers represent in excess of $13 billion of these revenues. As a result
of high fragmentation and a large number of captive original equipment
manufacturer operations, we believe there has been and will
39
<PAGE>
continue to be significant consolidation opportunities among industry
participants. According to industry sources, since 1992, the U.S. precision
machining industry has grown at a rate of approximately 10% per year. We believe
that a significant component of this growth has been and will continue to be
attributable to an increase in outsourcing by original equipment manufacturers.
Historically, many of the large original equipment manufacturers were
vertically integrated with large in-house component machining capabilities. They
primarily utilized precision machining companies only for short term over-flow
production of parts during periods of great demand. During the past several
years, however, original equipment manufacturers have been increasingly
outsourcing component manufacturing functions and, in many cases, eliminating
their in-house machining capabilities. This outsourcing has been driven by the
original equipment manufacturers' desire to:
- reduce costs;
- increase efficiency;
- improve quality;
- shorten product development cycles; and
- increase their focus on core capabilities.
Furthermore, while original equipment manufacturers continue to increase the
amount of outsourced manufacturing, they have also begun to consolidate their
supplier bases to ensure quality, decrease administrative costs and improve
service, design and assembly coordination. Leading original equipment
manufacturers are increasingly relying on their "Preferred" or "Qualified"
suppliers to provide a full line of high quality manufacturing and sub-assembly
services, as well as manufacturing engineering and design assistance. We intend
to continue to capitalize on these industry trends by providing our customers
with a broad array of precision machining capabilities and by leveraging our
competitive strengths.
COMPETITIVE STRENGTHS
LEADING SUPPLIER OF HIGH QUALITY, DIFFICULT-TO-PRODUCE PARTS. We focus on
manufacturing and supplying precision metal parts and assemblies which require
exceptionally close tolerances and involve complex processes. Many of our parts
also involve microfine surface finishes and exotic, difficult to machine
materials. We manufacture parts ranging in size from approximately 1 ounce to
over 100,000 pounds and from less than 1 inch to over 20 feet in diameter. These
parts are manufactured to tolerances as tight as 50 millionths of an inch. We
are also able to maintain tolerances across flat sheets and surfaces with
multiple contours to within 1/1000 of an inch to produce three-dimensional
sculptured contouring and precise geometric shaping of parts. By focusing
primarily on more complex parts and assemblies with exacting dimensional and
cosmetic requirements, we believe we distinguish ourselves as a unique contract
manufacturer of a variety of high quality, difficult-to-produce parts.
BROAD MANUFACTURING CAPABILITIES SERVING DIVERSE END MARKETS. Our broad
range of manufacturing capabilities allows us to meet the exacting requirements
of customers serving a variety of end markets and reduces the need for our
customers to rely on multiple suppliers. Most of our manufacturing processes and
equipment can, with certain adjustments, produce a variety of parts and
assemblies. We therefore have the flexibility to serve customers in a wide range
of industries. We currently serve such diverse industries as power generation,
automotive, business machines, space and satellites, agriculture and
construction equipment, commercial and military aerospace and surgical supplies.
We believe that our manufacturing adaptability, coupled with our diverse range
of end markets, allows us to mitigate volatility or downturns in any one
particular sector. Additionally, through our ability to produce a wide range of
parts and assemblies we are able to capitalize on the increasing trend among our
customers to focus on a fewer number of "Preferred" or "Qualified" suppliers
capable of servicing their multiple needs.
40
<PAGE>
STRONG CUSTOMER RELATIONSHIPS. We have built strong relationships with our
customers by focusing on delivering high-quality complex precision parts and by
consistently offering on-time delivery, quick product turnaround and value-added
services. We have earned "Preferred" or "Qualified" supplier status with most of
our customers and we are predominantly the sole-source supplier to our customers
of the parts we manufacture. Our customer base consists of industry leaders such
as General Electric, New Venture Gear, Xerox, Mannesmann (Rexroth), LucasVarity
(Kelsey Hayes), Raytheon, Boeing, DaimlerChrysler, Robert Bosch, Caterpillar,
Johnson & Johnson, Kodak and Dana. We proactively work with customers and their
engineers to improve the design and manufacturing specifications of the product
material, the part to be produced and the tooling required to produce the
customer's finished product. These initiatives often lead to improved quality
and part performance, increased operating efficiency and reduced manufacturing
costs. We believe that the strong relationships and "Preferred" or "Qualified"
supplier status we have established with our customers present a significant
barrier to entry for our competitors on the parts we manufacture and give us a
competitive advantage procuring additional work.
MODERN, HIGH QUALITY OPERATIONS. We believe that our modern facilities,
diverse manufacturing capabilities and commitment to continuous operational
improvements enable us to consistently meet the demanding quality, tolerance and
cosmetic requirements of our customers. Over the last two years, we have
invested a substantial amount to ensure that our facilities are state-of-the-art
and will remain so for years to come without substantial additional
expenditures. Our modern manufacturing operations utilize advanced computer
numerically controlled machines with automatic tool changers and on-machine
gauging, as well as laser inspection machines. Our facilities and processes meet
demanding customer certification and quality requirements. We participate in
General Electric's Six Sigma program, are a D-1 supplier for Boeing and have
received NASA's coveted Silver Snoopy award for outstanding effort in
contributing to the success of space flight missions based on quality, safety
and cost efficiency. Currently, five of our manufacturing facilities are ISO
9000, DI 9000, and/or QS 9000 certified, with the remaining facility expected to
be certified by August 2000. Management believes that our commitment to modern,
high-quality manufacturing processes has been and will continue to be a key
reason for our strong growth and improvements in operating profitability.
EXPERIENCED MANAGEMENT TEAM. Our management team is comprised of executives
and plant managers who have, on average, over 25 years of manufacturing,
engineering and operational experience. We believe this management team has
demonstrated an ability to attract new customers, adapt to changing industry
trends and continuously improve manufacturing operations and efficiency. We also
believe that this management team will be able to continue to grow our company
and to manage even larger operations as we grow.
BUSINESS STRATEGY
CAPITALIZE ON INDUSTRY TRENDS. We intend to capture additional business
from existing customers and actively pursue new customers by capitalizing on
recent trends among leading original equipment manufacturers to increase
manufacturing outsourcing and concentrate on fewer, more reliable suppliers. By
leveraging our competitive strengths, we believe we can offer customers the
significant competitive advantages that can be obtained from manufacturing
outsourcing, including reduced costs, increased efficiency, improved quality and
shortened product development cycles. By continuing to focus on customer needs
and aggressively marketing our diverse manufacturing capabilities, we believe we
can capture incremental and new business from existing customers as well as
become the supplier of choice and sole-source for a variety of key complex
precision machine parts for new customers with outsourcing needs.
PURSUE CROSS-SELLING OPPORTUNITIES AND BROADEN CUSTOMER BASE. Our operating
subsidiaries' diverse manufacturing capabilities and complementary customer
bases create a number of cross-selling
41
<PAGE>
opportunities which we intend to aggressively pursue. We intend to proactively
market to both current and new customers our full range of process capabilities.
By doing so, we expect to further penetrate certain of the industries we
currently serve, as well as to expand into other industries where we see the
potential for strong growth.
IMPLEMENT OPERATING BEST PRACTICES AND MAXIMIZE EFFICIENCIES. We intend to
continue to focus and capitalize on the best practices of each of our operations
including manufacturing processes, capacity utilization, inventory management
and cycle and flow times from customer order to delivery. Management plans to
utilize production resources to maximize manufacturing efficiency across our
operating subsidiaries. Our operating philosophy is based on increasingly lean
production systems supported by excellence in customer service, as measured by
quality, on-time delivery, quick turnaround and low manufacturing cost. We have
a comprehensive company-wide management system that includes site visits and
periodic operating management meetings to leverage our market and manufacturing
expertise, focus on innovation and benchmarking and solve problems using a team
oriented approach. We believe implementing these best practices and maximizing
operating efficiencies will lead to continuing improvements in labor
productivity, reductions in overhead and scrap rates, decreased manufacturing
flow time and increased working capital turnover.
PURSUE STRATEGIC ACQUISITIONS. We believe we are well-positioned to take
advantage of the high fragmentation in the precision custom manufacturing
industry to continue to build a world class contract manufacturer of precision
parts, assemblies and tooling. We intend to do this by pursuing strategic
acquisitions which will expand, diversify our existing customer base, end
markets served and our portfolio of processing capabilities. We will continue to
focus on acquisitions of financially sound companies that manufacture high
quality, difficult to produce parts, tooling and assemblies and that are the
leading suppliers of those products to their customers.
CUSTOMERS
We currently service customers across a wide range of industries including
the power generation, automotive, business machines, space and satellite,
agriculture and construction equipment, commercial and military aerospace,
surgical supply and transportation industries. We have focused on developing
solid relationships with customers that are leaders in their respective
industries such as General Electric, New Venture Gear, Xerox, Mannesmann
(Rexroth), LucasVarity (Kelsey Hayes), Raytheon, Boeing, DaimlerChrysler, Robert
Bosch, Caterpillar, Johnson & Johnson, Kodak and Dana. Our largest customer,
General Electric, accounted for approximately 26.5% of our 1999 net sales and
our top ten customers represented approximately 67% of our 1999 net sales. We
have earned "Preferred" or "Qualified" supplier status with most of our
customers and we are predominantly the sole-source supplier to our customers of
the parts we manufacture.
We believe that we have developed strong and loyal customer relationships
with leading original equipment manufacturer's based on our ability to reliably
deliver high-precision, high-quality metal parts and our focus on providing the
highest level of service. We believe that the strong relationships and the
"Preferred" and "Qualified" supplier status we have established with our
customers present a significant barrier to entry for our competitors.
We obtain most of our orders for new precision parts, tooling or assemblies
through a presourcing process by which the customer invites one or more
"Preferred" or "Qualified" suppliers to bid on the design and/or manufacture of
a part or assembly that meets certain price, timing and functional parameters.
We then typically receive a blanket purchase order that covers parts and/or
assemblies to be supplied for the particular end-product. These supply
arrangements normally extend over the life of the particular part or assembly.
In addition, we compete to supply parts and assemblies for successor models of a
customer's product, even though we may currently be a preferred supplier of
parts or assemblies on a current or predecessor model. Our customer
relationships, coupled with the essential
42
<PAGE>
nature of many of the complex, close tolerance products we manufacture, have
enabled us to participate with our customers in the development of products and
to receive contracts that range in duration from annual blanket purchase orders
to six years.
Bids for new business are based on a target sale price, based on our
experience with making parts or assemblies of a similar nature. Prior to our
commitment for full production, we and the customer generally agree on a final
price, which, in some instances, may be subject to negotiated price reductions
over the life of the project.
MARKETING AND DISTRIBUTION
We market our parts and manufacturing capabilities either through an
internal sales force or an outside agency. We believe that our stable and
experienced sales force, coupled with senior management communication with key
customers, has been a key reason for our success in maintaining customer loyalty
and building new customer relationships. Most of our sales personnel have worked
with the same customers for many years. Prior to their acquisition by our
company, the sales forces at each of our subsidiaries operated independently of
one another. While maintaining the decentralized focus to promote customer
service and expertise, we expect to introduce an additional focus on marketing
our broad operating capabilities to pursue a number of cross-selling
opportunities which we believe exist between the complementary customer bases of
our subsidiaries. We compensate our sales force based on a base salary and/or
commissions.
Our parts either are shipped by common carrier, picked up by customers at
our facilities or delivered to customers by our own truck fleet.
PARTS AND END USES
Many of the parts we manufacture require innovative technical production
solutions to customer-specific requirements, as well as considerable
manufacturing expertise. The following table sets forth a sample of the complex,
precision parts or assembles that we manufacture for our customers, together
with the industry and end-use for such part.
<TABLE>
<CAPTION>
INDUSTRY CUSTOMER PART/ASSEMBLY END USE
- --------------------------- -------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Power Generation General Electric Turbine Wheel Hot section of land-based
power turbine
Automotive LucasVarity (Kelsey Piston/Pump Assembly Anti-lock braking systems
Hayes) Engine Blocks for light trucks
Business Machines Xerox Internal Components and High volume copiers,
Bases digital imaging copiers,
scanners
Agriculture and Caterpillar Bearing Caps Stabilizes engine shaft
Construction Equipment Transmission Housings and
Casings
Automotive New Venture Gear Transmission Housings Transmissions for light
trucks
Surgical Supplies Johnson & Johnson Surgical Saw Shaft Lapthroscopic and
endoscopic disposable
instruments
Military and Commercial Boeing Bond Jig Tooling Tooling for manufacture of
Aerospace nacelle frame
Space Thiokol Assembly Mold Tooling Tooling for Space Shuttle
rocket
Automotive Mannesmann (Rexroth) Diesel Engine Pump Housings Diesel gas pumps
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
INDUSTRY CUSTOMER PART/ASSEMBLY END USE
- --------------------------- -------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Business Machines Kodak Internal Components and High and low volume copiers
Bases and thermal printers
Commercial Satellites Northrop Grumman Cure Fixtures Tooling Molds for commercial
satellite rocket components
Specialty Automotive DaimlerChrysler High Performance Engine Holds moving engine parts
Blocks for racing cars
Transportation Dana, Alstom Truck Axles, Switching Class eight trucks and
Signaling and Gears and Engine Blocks railroad switch gears
Caterpillar
Medical Ortho Clinical Base plate Blood analyzer
Diagnostics
</TABLE>
A majority of our parts are manufactured by us in their final configuration
with no additional processing, including brake piston plungers for LucasVarity,
bearing caps and engine blocks for Caterpillar and bond jigs for Boeing. In
concert with our customers, we routinely develop prototype parts. For example,
we have produced prototype parts for Johnson & Johnson's lapthroscopic and
endoscopic disposable instruments, for the joint strike fighter, for General
Electric's land-based power generation systems, for the Delta IV rocket and for
the assembly which links the modules of the International Space Station.
DESIGN, DEVELOPMENT AND ENGINEERING
Our customer-focused approach fosters a close working relationship with our
customers' engineers to improve the design and manufacturing specifications of
the parts we produce. We are able to develop our own tools, processes and
prototypes to test design parameters for minimization of variability and
lead-times. We apply engineering techniques such as computer aided design,
computer aided manufacturing and failure mode and effects analyses to optimize
part functionality and manufacturability. We believe our in-house capability to
develop and produce prototypes using standard and customized manufacturing
equipment and processes is a competitive advantage. We provide our customers
with full systems support to control product timing and ensure part quality and
reliability through all phases of design, launch and production manufacturing.
As a result, we are able to take an innovative, leadership role in the
development, design and assembly of parts, machines and systems to meet or
exceed customer requirements.
Through our computer aided manufacturing and computer aided design systems
we are able to provide virtual prototyping. This process enables hundreds of
design solutions to be visualized quickly and easily and facilitates product
design and manufacturing. Our computer systems are capable of finite element
analyses and simulation, as well as design for manufacturing and assembly. These
processes allow many aspects of a design to be evaluated prior to production,
resulting in lower tooling costs, reduced testing requirements and quicker time
to market.
Our reputation for quality, reliability and design improvement has led to
numerous requests for participation on customer engineering teams. Our
understanding of cutting tool technology and difficult to machine materials
makes our employees value-adding members of these teams. Through this
participation we are able to work with our customers to identify the most cost
effective process, materials and manufacturing methods for any specific
application. Once the design phase of the engineering process is completed, our
expertise and experience allow us to engineer and customize our tooling,
machines and systems to achieve the highest quality path to the customer's
requirements.
The parts we manufacture often have sophisticated tooling requirements which
we internally build or customize. The development costs are either billed to the
customer or amortized over the life of the parts. The tooling development
typically begins early in the engineering cycle and is quickly completed after
being selected as the supplier of choice.
44
<PAGE>
MANUFACTURING
Our manufacturing expertise includes precision machining capabilities such
as turning, milling, boring, drilling, broaching and grinding, as well as
value-added services such as prototyping, forming, fabrication, welding, heat
treating, plating, painting, tapping and assembly. We believe that the breadth
of our in-house process capability provides us with a significant competitive
advantage in being a sole-source supplier for our customers' multiple needs. To
produce many of our components, we develop innovative solutions to
customer-specific requirements by customizing either the process, the tooling or
the machines.
By highly engineering the process, we are able to utilize general-purpose
machines with computer numerically controlled capabilities to manufacture very
complex and difficult to machine parts in many different configurations with a
high degree of accuracy. Through data feedback, we systematically test for
quality throughout the entire manufacturing process. Our advanced computer
numerically controlled equipment includes machines with automatic tool changers
and on-machine gauging, as well as laser inspection machines. With computer
numerically controlled equipment, we are able to increase efficiency and
turn-around times by identifying, documenting and correcting potential defects
and irregularities and by more accurately shaping or cutting parts, while at the
same time, allowing the parts we are manufacturing to be run quickly and in
small lot sizes.
We are also able to manufacture complex and difficult to machine parts by
customizing our tooling and equipment. We are able to do this by capitalizing on
our substantial expertise and experience with a wide variety of part styles and
sizes, our knowledge of various cutting tools and our highly skilled workforce.
As a result, we are able to design and develop our own tooling, customize
conventional tooling and create customized machinery. Based on our innovative
approach to tooling and fixturing, we are able to tailor-make fixtures that help
hold tolerances and improve repeatability and consistency. We can also
reengineer conventional machines and cutting tools by changing heads, adding
computer numerically controlled capability or combining the most appropriate
aspects of different apparatus to create a better-designed machine to improve
manufacturability of parts. We also utilize functional gauging for quality
inspections to ensure accuracy and precision, thereby also improving
repeatability and consistency.
We emphasize a cellular approach to manufacturing. This approach allows our
processes to utilize such technology as optical measuring devices and robotics.
Further, we utilize a pelletized manufacturing approach which is easily
converted from one product application to another, and has lower reprogramming
costs than the traditional hard automation approach. Cellular manufacturing also
helps promote our team approach for optimizing the manufacturability of a part
by reducing inventory and increasing our through-put rate by better process
control, minimization of set-up times and improved traceability and
correctibility of errors at all stages of the manufacturing process. We also
utilize just-in-time manufacturing and sourcing systems which help us to meet
our customer requirements for faster deliveries while also minimizing inventory
levels.
Our operating philosophy emphasizes delivering a quality product, on time,
at the lowest achievable cost. Continuous improvement on these operating
parameters is achieved by driving our operations toward shorter and shorter lead
and cycle times, which in turn requires increasingly higher standards of
quality. We believe our disciplined approach to our manufacturing operations,
including monthly operations reviews and meetings, facilitates employee
participation and motivates management and employees to strive for better
operational performance. Through this process, we are also able to leverage
market and manufacturing expertise, put a focus on innovation and benchmarking
and solve problems using a team oriented approach. As a result, we can improve
productivity, quality and employee commitment while reducing inventory, floor
space requirements and lead times.
45
<PAGE>
QUALITY
Product quality is among the most important factors in maintaining
"Preferred" and "Qualified" supplier status with original equipment
manufacturers. In order to meet the exacting requirements of our customers, we
maintain the most stringent standards of quality control. We routinely employ
in-process inspection by using testing equipment as a process aid during all
stages of design, launch and the machining process to assess compliance. These
include state-of-the-art computer assisted design and computer assisted
manufacturing equipment, statistical process control systems, laser tracking
devices, failure mode and effect analysis and coordinate measuring machines. We
are also able to extract numerical control quality control data from our
computer numerically controlled machines, a statistical measurement of the
quality of the parts being manufactured. Our customers use this information in
place of inspections to determine quality assurance. In some cases, we have
installed testing equipment identical to that of our customers, again
eliminating the need for reinspection by our customers. We also perform quality
control tests on all parts we outsource to small machine shops. As a result, we
are able to significantly reduce defective parts and therefore improve
efficiency, quality and reliability.
Currently, five of our manufacturing facilities are ISO 9000, DI 9000,
and/or QS 9000 certified, with the remaining facility expected to be certified
by August 2000. Original equipment manufacturers are increasingly requiring
these standards in lieu of individual certification procedures and as a
condition to awarding business. We participate in General Electric's Six Sigma
program, are a D-1 9000 supplier for Boeing and have received NASA's coveted
Silver Snoopy award for outstanding effort in contributing to the success of
space flight missions based on quality, safety and cost efficiency.
We believe that our commitment to modern, high-quality manufacturing
processes has been and will continue to be a key reason for our strong customer
loyalty and growth and that the expense required to institute and maintain
quality control procedures comparable to ours represents a barrier to entry for
other companies.
COMPETITION
We operate in an industry which is highly fragmented and competitive. A
variety of suppliers with different subsets of our manufacturing capabilities
compete to supply the stringent demands of large original equipment
manufacturers. Competition is generally based on price, quality, timeliness of
delivery, design and engineering support and service and, in some instances, on
our ability to deliver assemblies or sub-assemblies rather than individual
parts. To an extent, the original equipment manufacturers are able to compete
with their suppliers, since they can produce their own components and assemblies
if they so choose. However, during the past several years, original equipment
manufacturers have been increasingly outsourcing component manufacturing
functions and, in many cases, eliminating their in-house machining capabilities,
in an effort to reduce costs, increase efficiency, improve quality and shorten
product development cycles.
A large number of actual or potential competitors exist, including the
internal component operations of the original equipment manufacturers as well as
independent suppliers, some of which are larger and have greater financial and
other resources than we do. However, we believe that none of these competitors
competes with us along all of our manufacturing capabilities. In addition, our
business is increasingly competitive due to the supplier consolidation resulting
from increased outsourcing by original equipment manufacturers and supplier
management policies designed to strengthen their supply base. These policies
include designating a limited number of suppliers as "Preferred" or "Qualified"
suppliers and, in some cases, encouraging new suppliers to begin to supply
selected product groups. We principally compete for new business both at the
beginning of the development of new products and upon the redesign of existing
products by our major customers. Because of the large investment by original
equipment manufacturers in tooling and the long lead time required to commence
production, original equipment manufacturers generally do not change a
46
<PAGE>
supplier during a program. If, however, a customer becomes dissatisfied with our
prices, quality or timeliness of delivery, it could award future business or, in
an extreme case, move existing business to another supplier.
SUPPLIERS, SUBCONTRACTORS AND RAW MATERIALS
Generally, our raw materials consist of traditional materials such as steel,
aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to
machine materials such as titanium, inconel, invar and hastelloy. These
materials are typically delivered in the form of bar stock, precision forgings,
castings and flat sheets. A majority of our raw materials are supplied by our
customers on consignment. Raw materials not supplied by our customers are
purchased from several suppliers, and we do not believe that we are dependent on
one or very few of them. All of these materials were available in adequate
quantities to meet our production demands in 1998 and 1999.
We may subcontract certain of our manufacturing or services such as plating
or painting, among others, to third parties. We have an active subcontractor
program that, among other things, assesses subcontractor capabilities and
quality on an on-going basis. We use a limited number of subcontractors based on
their ability to deliver high quality parts or services on a cost effective
basis. We have not experienced any difficulty obtaining necessary raw materials
or subcontractor services.
FACILITIES
In addition to our corporate office, we operate ten manufacturing
facilities, two of which we own and the remainder of which we lease. Leases
expire at various times through April 2007 and we generally have extension
options.
The following table summarizes the location of our manufacturing facilities
and their general size:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE TYPE OF INTEREST
- -------- -------------- ----------------
<S> <C> <C>
FACILITIES:
Buena Park, California (Altura)................ 32,000 Leased
Buena Park, California (Burnham)............... 41,000 Leased
Cerritos, California........................... 28,000 Leased
Plymouth, Michigan............................. 52,000 Owned
Canton, Michigan............................... 29,000 Leased
Canton, Michigan............................... 66,000 Leased
Skokie, Illinois............................... 82,000 Owned
Winslow, Maine................................. 92,000 Leased
Rochester, New York............................ 140,000 Leased
Rochester, New York............................ 73,000 Leased
CORPORATE OFFICE:
Irving, Texas.................................. 3,000 Leased
</TABLE>
BACKLOG
Firm backlog for 1999, increased 36.1% to $107.7 million from $79.1 million
at December 31, 1998. Firm backlog represents the sales price of all undelivered
products for which we have customer purchase orders or contractual coverage that
will be delivered within the next 12 months. All of our firm backlog is subject
to price renegotiations, termination or rescheduling or the customer's
convenience. Firm backlog for December 31, 1998, has been restated to be
consistent with the current method of calculating backlog.
47
<PAGE>
ENVIRONMENTAL AND SAFETY REGULATION
Our equipment, facilities and operations are subject to increasingly complex
and stringent federal, state and local laws and regulations pertaining to the
protection of human health and the environment. These include, among other
things, the discharge of contaminants into the environment and the handling and
disposition of wastes (including industrial, solid and hazardous wastes). In
addition, we are required to obtain and maintain regulatory approvals in the
United States in connection with our operations. Many environmental laws and
regulations provide for substantial fines and criminal sanctions for violations.
Based on the results of Phase I environmental site assessments which were
performed at each of our facilities in 1998 and 1999, we believe that we are in
material compliance with applicable environmental laws and regulations. We
continue to incur capital expenditures to ensure compliance with applicable
environmental laws and regulations. However, in 1998 and 1999, capital
expenditures for environmental control projects were not material. Based on
current information, we estimate that capital expenditures for environmental
control projects in 2000 will also not be material. It is difficult to predict
the future development of such laws and regulations or their impact on future
earnings and operations. The timing and magnitude of costs related to
environmental compliance may vary and we cannot assure you that material costs
or liabilities will not be incurred.
Certain environmental laws provide for strict, joint and several liability
for investigation and remediation of spills and other releases of hazardous
materials. These laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of any hazardous
materials. Persons who arrange (as defined under these laws) for the disposal or
treatment of hazardous materials also may be liable for the costs of
investigation, removal or remediation of such materials at the disposal or
treatment site, regardless of whether the affected site is owned or operated by
them. Such liability is strict, and may be joint and several.
Because we own and operate a number of facilities, and because we arrange
for the disposal of hazardous materials at many disposal sites, we may incur
costs for investigation, removal and remediation, as well as capital costs
associated with compliance with environmental laws and regulations. Although
such environmental costs have not been material in the past and are not expected
to be material in the future, changes in environmental laws and regulations or
unexpected investigations and clean-up costs could have a material adverse
effect on our business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1999, we had over 1,000 employees, approximately 87.5% of
whom were employed in manufacturing and the remainder of whom were office and
managerial employees. None of our employees is represented by a union or covered
by a collective bargaining agreement. We believe our relations with our
employees are satisfactory.
LEGAL PROCEEDINGS
We are a party to various litigation matters that are incidental to our
business. We do not believe that the outcome of any of these legal proceedings
will have a material adverse effect on our business, financial condition or
results of operations.
48
<PAGE>
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
directors and executive officers as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
James E. Ashton...................... 57 Chief Executive Officer and Director
Ronald M. Miller..................... 55 Chief Financial Officer and Secretary
Melvin D. Johnson.................... 53 Executive Vice-President for Operations
Robert Womack........................ 62 Chairman and Director
John F. Megrue....................... 41 Director
William J. Gumina.................... 29 Director
Richard W. Detweiler................. 58 Director
David W.M. Harvey.................... 35 Director
</TABLE>
Effective as of April 26, 2000, Mr. Womack was appointed to our Board of
Directors to fill the vacancy that was left when John Clark resigned as a
director in February, 2000. Effective as of April 26, 2000, Dr. Ashton resigned
as Chairman of our Company. He will, however, continue to serve as Chief
Executive Officer and director until his successor is named. In addition, on
that same date, we announced that Messrs. Miller and Johnson will also be
resigning. However, each will continue to serve in their current positions until
their successors are named.
DR. JAMES E. ASHTON has been our Chairman of the Board of Directors, Chief
Executive Officer, and a director since our formation. He has over 30 years of
experience in the aerospace, defense, oil service, medical products and
composite materials industries. Prior to joining our company, Dr. Ashton served
as Chairman and CEO of Fiberite, Inc. ("Fiberite"), a manufacturer of composite
materials. From April 1989 to June 1994, he served as Vice President and General
Manager of the Armament Systems division of FMC Corp. (now United Defense,
L.P.), a defense contractor ("FMC"). Prior to 1989, Dr. Ashton served in various
management positions at Rockwell International Corporation, Schlumberger Ltd.,
Healthdyne, Inc. and General Dynamics Corporation.
RONALD M. MILLER has been our Chief Financial Officer since our formation.
Prior to joining our company, he served as the Chief Financial Officer and Vice
President, Finance and Treasurer of Fiberite. Before joining Fiberite in
April 1996, Mr. Miller served in various management positions at Rohr, Inc., an
aerospace manufacturing company, including as its Vice President, Finance &
Treasurer.
MELVIN D. JOHNSON has been our Executive Vice-President for Operations since
our formation. He has over 28 years of experience in the aerospace/defense,
transportation, oilfield services, computer peripherals and photocopying
industries. Prior to joining our company, Mr. Johnson was a member of the
executive team of Fiberite, and served as general manager of Fiberite's Winona,
Minnesota division. From 1970 until 1996, Mr. Johnson held management positions
with Xerox Corporation, CalComp Technology Inc., a manufacturer of computer
graphic peripherals and a subsidiary of Lockheed Martin Corp.,
Schlumberger Ltd., FMC and Trailmobile Trailer Corporation, a manufacturer of
platform trailers.
ROBERT WOMACK has served as our Chairman and as a director since April 26,
2000. Prior thereto, he served as Chairman and Chief Executive Officer of U.S.
Industries Bath and Plumbing Products, a diversified manufacturer of plumbing,
bath and HVAC products. From October, 1994 to January, 2000, he served as
Chairman and Chief Executive Officer of Zurn Industries, a diversified
manufacturing and engineering company. Mr. Womack has over 40 years of
manufacturing and consulting experience.
JOHN F. MEGRUE has been a director since our formation. He also serves as
Chairman of the Board and a director of Hibbett Sporting Goods, Inc., as Vice
Chairman of the Board and a director of
49
<PAGE>
Dollar Tree Stores, Inc., and as a director of The Children's Place Retail
Stores, Inc. Mr. Megrue has been a partner of Saunders, Karp & Megrue since
1992.
WILLIAM J. GUMINA has been a director since our formation. Mr. Gumina has
been a Vice President with Saunders, Karp & Megrue since January 1999 and was an
associate with Saunders, Karp & Megrue from March 1998 until he became a Vice
President. Prior to his association with Saunders, Karp & Megrue, Mr. Gumina was
an associate with Donaldson, Lufkin & Jenrette Merchant Banking Partners.
RICHARD W. DETWEILER has been a director since our formation. He also serves
on the Board of Directors of TreeSource Industries, Inc. Mr. Detweiler has been
a Managing Director with Carlisle since November 1996. Prior thereto he was
Chairman and CEO of Precision Aerotech, Inc., a publicly traded, diversified
manufacturing company. Mr. Detweiler has also held senior general management,
financial and manufacturing positions with Caterpillar, Inc., Sundstrand
Corporation and International Harvester (Navistar).
DAVID W. M. HARVEY has been a director since our formation in September
1998. Mr. Harvey is the President of Harvey & Company LLC, a merchant banking
and advisory services firm, he founded in 1998. Prior thereto, he was a managing
director of W.E. Myers & Co.
BOARD OF DIRECTORS
BOARD CONSTITUTION. Our bylaws provide that our Board of Directors consist
of six directors, four of whom are to be nominated by the Precision Fund, one by
Harvey and one collectively by Messrs. Ashton, Miller and Johnson. Currently,
all directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of our board of directors.
DIRECTOR COMPENSATION. Members of our Board appointed by Harvey, Saunders,
Karp & Megrue and Carlisle are reimbursed for expenses pursuant to certain
advisory agreements. See "Related Party Transactions." Dr. Ashton is reimbursed
by us for travel expenses incurred in connection with attending meetings.
We have established one standing committee of the board of directors, a
compensation committee. The compensation committee reviews and approves
executive salaries and administers our bonus, stock option and incentive
compensation plans. The compensation committee advises and consults with
management regarding significant employee benefit and compensation policies and
practices. Currently, the only member of the committee is Mr. Detweiler. A
replacement has not yet been appointed for Mr. Clark, who had been a member of
the compensation committee until his resignation.
EMPLOYMENT AGREEMENTS
We intend to enter into employment agreements with our senior management but
have not yet done so.
EXECUTIVE COMPENSATION
The following table provides information relating to compensation for our
chief executive officer and our two other most highly compensated executive
officers whose compensation is required to be disclosed by the rules and
regulations of the Securities Act. The compensation information for all of
50
<PAGE>
the named executive officers for 1999 and 1998 is based on their compensation
from us and has been annualized to reflect what their compensation would have
been had we been operating for all of 1998:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION/AWARD
------------------
ANNUAL COMPENSATION OTHER SHARES OF COMMON
------------------- ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- -------- -------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James E. Ashton........... 1999 $178,000 -- $ 7,868 -- --
Chief Executive Officer 1998 $130,000 $32,500 $ 2,368 -- --
Ronald M. Miller.......... 1999 $107,000 -- 22,809 -- --
Chief Financial Officer 1998 $ 78,000 $ 9,750 2,368 -- --
Melvin D. Johnson......... 1999 $100,000 -- 17,056 -- --
Executive Vice-President 1998 $ 73,000 $ 9,125 2,368 -- --
for Operations
</TABLE>
OPTION GRANTS
None of the executive officers named in the summary compensation table have
options to purchase common stock under Precision Partners Holding Company's 1999
Stock Option Plan.
PRECISION PARTNERS HOLDING COMPANY 1999 STOCK OPTION PLAN
Precision Partners Holding Company adopted its 1999 Stock Option Plan to
provide an incentive to attract, retain and reward certain individuals
performing services for Precision Partners Holding Company, its subsidiaries or
affiliates. The plan provides for the granting of options to purchase shares of
Class B common stock of Precision Partners Holding Company to employees,
directors or consultants. The board of directors of Precision Partners Holding
Company, the members of which are the same as the members of our board of
directors, currently administers the plan. Under the plan the board of the
directors has the power to:
- determine the persons eligible to receive options and the number of shares
subject to each option;
- designate the options as incentive stock options or nonstatutory stock
options;
- determine the fair market value of shares of stock;
- determine the terms and conditions applicable to each option;
- approve one or more forms of option agreements;
- amend, modify or otherwise adjust the exercise price of an option;
- accelerate, continue, extend to defer the exercisability of any option;
and
- otherwise administer and interpret the plan.
As of the date of this prospectus, eligible individuals have been granted
options to purchase 2,669,000, net of forfeitures, under the 1999 plan pursuant
to option agreements. An additional 1,000 shares of common stock are reserved
for issuance under the plan. All of the options were granted at fair market
value. Precision Partners Holdings Company intends that any additional options
granted under the plan will be exercisable at a price per share not less than
the fair market value of the common shares at the date of the grant. The option
agreements provide that the options can vest based upon the period of services
provided to the Precision Partners Holding Company, the attainment of specified
performance objectives, and/or the passage of a specified period of time.
51
<PAGE>
SECURITY OWNERSHIP
The following table sets forth information regarding beneficial ownership of
our common stock as of March 1, 2000 held by:
- each person or group believed by us to beneficially own more than 5% of
our common stock;
- our directors, chief executive officer and two other most highly
compensated executive officers; and
- all our directors and executive officers as a group.
Virtually all of our outstanding common stock is owned indirectly by Precision
Partners, L.L.C. through Precision Partners Holding Company. The applicable
percentage ownership for our common stock set forth below is based on 43,683,612
membership units of Precision Partners, L.L.C. outstanding as of March 1, 2000.
Under the rules and regulations of Regulation S-K under the Securities Act,
beneficial ownership is calculated in accordance with Rule 13d-1 under the
Exchange Act. Under these rules, the term includes not only shares owned by a
person or group, but also shares over which the person or group exercises voting
and/or investment power. These rules also treat common stock subject to options,
warrants or other securities that are currently, or within 60 days will be,
convertible into or exchangeable for common stock, including preferred stock, as
outstanding for purposes of calculating the beneficial ownership of the person
owning such option warrant or other convertible or exchangeable security but not
outstanding for purposes of computing the total number of outstanding shares or
the beneficial ownership of any other person. Except as otherwise noted, we
believe that each of the holders listed below has sole voting and investment
power over the shares beneficially owned by them.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF NUMBER OF SHARES COMMON
BENEFICIAL OWNER BENEFICIALLY OWNED STOCK OUTSTANDING
- ------------------------------------------------------------ ------------------ -----------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS(1):
James E. Ashton............................................. 2,552,184 5.8%
Ronald M. Miller............................................ 419,494 1.0%
Melvin D. Johnson........................................... 251,697 0.6%
John F. Megrue(2)........................................... -- --
William J. Gumina(2)........................................ -- --
Richard W. Detweiler(2)..................................... -- --
David W.M. Harvey(3)........................................ -- --
All directors and executive officers as a group, 7
persons................................................... 3,223,375 7.4%
5% STOCKHOLDERS:
Precision Partners Investment Fund, L.L.C.(2)............... 36,367,236 83.2%
</TABLE>
- ------------------------
(1) All addresses are in care our company, except for Precision Partners
Investment Fund, L.L.C. whose address is 262 Harbor Drive, Stamford, CT
06902.
(2) Precision Partners Investment Fund, L.L.C. is owned by two private equity
funds sponsored by Saunders, Karp & Megrue, which collectively beneficially
own approximately 66.8% of our outstanding common stock, and by three
private equity funds sponsored by Carlisle, which collectively own
approximately 16.4% of our outstanding common stock. Messrs. Megrue and
Gumina are principals of Saunders, Karp and Megrue and may be deemed to be
beneficially own the shares owned by the two Saunders, Karp & Megrue
sponsored funds. Mr. Detweiler is a Managing Director with Carlisle and may
be deemed to beneficially own the shares owned by the
52
<PAGE>
three Carlisle funds. Each of Messrs. Megrue, Gumina and Detweiler disclaim
beneficial ownership of such shares.
(3) Harvey Equity Partners, L.L.C., which owns approximately 3.3% of our
outstanding common stock, is a private equity fund sponsored by Harvey &
Company LLC, a merchant banking and advisory services firm, of which
Mr. Harvey is President and a founder. Mr. Harvey may be deemed to
beneficially own the shares owned by Harvey Equity Partners, L.L.C.
Mr. Harvey disclaims beneficial ownership of such shares.
Founded in 1990, Saunders, Karp & Megrue is a private equity investment firm
currently managing over $800 million of private equity capital. Since its
inception, Saunders, Karp & Megrue has focused on investing in recapitalizations
and buyouts of high-growth, middle market companies in the U.S. and on executing
consolidation strategies of fragmented U.S. industry segments. Saunders, Karp &
Megrue, through its private equity funds, has invested over $475 million in 27
companies concentrated in basic manufacturing, consumer products, restaurant,
retail, financial services and distribution industries.
Thomas A. Saunders, III and Allan W. Karp founded Saunders, Karp & Megrue in
1990 and in 1992 were joined by John F. Megrue (together, the "Saunders, Karp &
Megrue Founders"). Since that time, the Saunders, Karp & Megrue Founders have
invested the Saunders, Karp & Megrue equity funds and actively managed their
respective portfolio investments. The Saunders, Karp & Megrue Founders are
joined by other senior investment professionals and collectively they have
significant experience in both the formation, management and investment of
equity capital pools, and in the global capital markets, including financial
advisory and mergers and acquisitions activity.
RELATED PARTY TRANSACTIONS
A majority of our directors are also principals of Saunders, Karp & Megrue,
Carlisle and Harvey and are therefore in positions involving possible conflicts
of interest. However, our directors and officers and those of our subsidiaries
are subject to fiduciary obligations to act in our and our subsidiaries' best
interests, as the case may be. We maintain with a third party insurer, for the
benefit of our and our subsidiaries' directors and officers, liability insurance
against certain liabilities incurred by these directors and officers in such
capacity.
We may from time to time engage in certain transactions with related parties
and affiliates which include, among other things:
- business arrangements;
- lease arrangements for certain manufacturing facilities and offices; and
- the payment of fees or commissions for the transfer of manufacturing by
one operating company to another.
The indenture governing the outstanding notes and which will govern the
exchange notes generally requires that these types of transactions be on terms
no less favorable to us or the applicable subsidiary than those which could be
obtained on an arms' length basis from third parties. However, we can not
provide you with any assurance that such transactions will not adversely affect
our business, financial condition or results of operations.
Certain consulting and advisory fees were payable to Harvey in connection
with the financial performance of one of the companies acquired in March. In
addition, similar fees may be payable if that company achieves specific
financial performance targets in 2000 in connection with future acquisitions.
From time to time, Saunders, Karp & Megrue, Carlisle and Harvey may also receive
other customary fees in connection with divestitures, acquisitions and other
transactions involving us or our subsidiaries. In addition, Precision Partners
Holding Company has agreed to pay Saunders, Karp & Megrue and Carlisle an annual
monitoring fee.
53
<PAGE>
DESCRIPTION OF CREDIT FACILITIES
GENERAL. We have a $23.0 million term loan facility and a $25.0 million
revolving credit facility, including a $2.0 million sublimit for letters of
credit. Each matures on March 31, 2005, unless terminated sooner upon an event
of default. If terminated upon an event of default, all outstanding advances
under the credit facilities may be required to be immediately repaid. The credit
facilities can be used to complete permitted acquisitions, pay fees and
expenses, or for working capital and other general corporate purposes.
Borrowings under the credit facilities bear interest, at our option, at either a
fixed rate equal to the higher of the overnight federal funds rate plus 50 basis
points and the prime rate announced from time to time by Citibank, N.A. plus a
margin of 100 to 200 basis points, based on our leverage ratio, or a floating
rate equal to LIBOR plus a margin of 200 to 300 basis points, also based on our
leverage ratio. Our ability to borrow under the credit facilities is subject to
our compliance with the covenants described below and a borrowing base based on
eligible accounts receivable and eligible inventory. At March 21, 2000,
approximately $44.3 million of borrowings were outstanding under the credit
facilities, consisting of the $23.0 million term loan and $21.3 million
outstanding under our revolver.
GUARANTEES AND SECURITY. All of our obligations under the credit facilities
are guaranteed, jointly and severally, by our existing and future domestic
subsidiaries and by Precision Partners Holding Company. In addition, our
obligations under the credit facilities are secured by a first priority pledge
of and security interest in all of the outstanding capital stock of our existing
subsidiaries and future domestic subsidiaries, 65% of the outstanding capital
stock of any future foreign subsidiary and substantially all of our assets and
the assets of our existing and future domestic subsidiaries, including
inventory, accounts receivable and all of our property, plants and equipment.
Our obligations under the credit facilities are also secured by a pledge by
Precision Partners Holding Company of all of our outstanding capital stock.
CERTAIN FINANCIAL COVENANTS. The credit facilities require that we meet and
maintain certain financial ratios and tests, including:
- a maximum consolidated leverage ratio, total debt to EBITDA;
- a minimum consolidated interest coverage ratio, EBITDA to interest
expense; and
- a minimum consolidated fixed charge coverage ratio, EBITDA to interest
expense plus other fixed charges.
CERTAIN OTHER COVENANTS. The credit facilities also contain covenants that
limit our ability and that of our operating subsidiaries to take various
actions, including:
- incurring additional indebtedness and liens;
- fundamentally changing corporate structure, including mergers,
consolidations and liquidations;
- disposing of property;
- making certain payments, including on indebtedness prior to maturity,
dividends and capital stock purchases;
- making investments;
- making capital expenditures;
- modifying certain instruments;
- changing fiscal periods;
- entering into sale and leaseback transactions;
- entering into affiliate transactions;
- entering into agreements restricting distributions;
- amending the acquisition documents;
- granting negative pledges; and
- entering into unrelated lines of business.
54
<PAGE>
EVENTS OF DEFAULT. The credit facilities contain customary events of
default with respect to us and our operating subsidiaries, including:
- nonpayment of principal, interest or fees when due;
- defaults with respect to other indebtedness;
- noncompliance with covenants and other agreements contained in the new
credit facilities;
- breaches of representations or warranties;
- events of bankruptcy;
- failure to satisfy or stay execution of judgments in excess of $1,500,000;
- incurrence of certain employee benefit liabilities;
- invalidity of any guarantee;
- failure of any new subsidiary to deliver documents necessary to create
valid, preferred security interests in collateral;
- invalidity or non-perfection of security interests in collateral;
- failure of the notes or guarantees thereof to be subordinated; and
- changes of control.
55
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
The outstanding notes were, and the exchange notes will be issued under an
indenture among us, the subsidiary guarantors and The Bank of New York, as
trustee, as amended by the First and Second Supplemental Indentures thereto. The
following is a summary of the material provisions of the indenture as so
amended. It does not include all of the provisions of the indenture. We urge you
to read the indenture because it defines your rights. The terms of the exchange
notes include those stated in the indenture and those made part of the indenture
by reference to the Trust Indenture Act of 1939, as amended (the "TIA"). Copies
of the indenture and of the first and second supplemental indentures have been
filed as exhibits to the registration statement of which this prospectus is a
part and may be obtained from the SEC or from us as described under "Where to
Find More Information." You can find definitions of certain capitalized terms
used in this description under "--Certain Definitions." For purposes of this
section, references to the "Company" include only Precision Partners, Inc. and
not our subsidiaries.
BRIEF DESCRIPTION OF THE NOTES
The exchange notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt of the Company. The exchange
notes will be obligations of the Company evidencing the same indebtedness as the
outstanding notes.
Except as otherwise indicated, the following description relates to both the
outstanding notes and the exchange notes. The form and terms of the exchange
notes are the same as the form and terms of the outstanding notes in all
material respects, except that:
- The exchange notes have been registered under the Securities Act and
therefore will not bear legends restricting their transfer and will not
contain provisions relating to an increase in the interest rate which were
included in the terms of the outstanding notes in circumstances relating
to the timing of the exchange offer, and
- the holders of the exchange notes will not be entitled to all of the
rights of the holders of the outstanding notes under the registration
rights agreement, which rights shall terminate upon the consummation of
the exchange offer.
The indenture provides that the exchange notes may be issued in fully
registered form only, without coupons, in denominations of $1,000 and integral
multiples thereof. Initially, the exchange notes will be issued in the form of
one or more global notes and the trustee will act as Paying Agent and Registrar
for the notes. See "Book Entry; Delivery and Form." The exchange notes may be
presented for registration or transfer and exchange at the offices of the
Registrar, which initially will be the trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to holders of
the exchange notes ("Holders"). The Company will pay principal (and premium, if
any) on the exchange notes at the trustee's corporate office in New York, New
York. At the Company's option, interest may be paid at the trustee's corporate
trust office or by check mailed to the registered address of the Holders. Any
outstanding notes that remain outstanding after the completion of the exchange
offer, together with the exchange notes issued in the exchange offer, will be
treated as a single class of securities under the indenture.
PRINCIPAL, MATURITY AND INTEREST
Notes issued under the indenture are limited in aggregate principal amount
to $150 million, of which $100 million was issued in the offer and sale of the
outstanding notes. For each outstanding note accepted for exchange, the Holder
will receive an exchange not having a principal amount equal to that of the
surrendered outstanding note. The exchange notes will mature on March 15, 2009.
Additional notes may be issued from time to time subject to the limitations set
forth under "Certain Covenants--Limitation on Incurrence of Additional
Indebtedness." Holders of such additional notes will have the right to vote
together with Holders of exchange notes and of outstanding notes as a single
class.
56
<PAGE>
Interest on the exchange notes will accrue at the rate of 12% per annum and will
be payable semiannually in cash on each March 15 and September 15 to the persons
who are registered Holders at the close of business on the March 1 and
September 1 immediately preceding the applicable interest payment date. Interest
on the exchange notes will accrue from and including the most recent date to
which interest has been paid or, if no interest has been paid, from and
including March 19, 1999, the date of issuance of the outstanding notes. The
interest rate on the exchange notes is subject to increase in the circumstances
described under "Exchange Offer and Registration Rights." Such additional
interest will be payable on the same interest payment dates. As a result of the
failure to have an exchange offer registration statement filed by September 15,
1999, to have it declared effective by September 16, 1999 and to complete the
exchange offer by October 15, 1999, we are paying additional interest. The
amount of additional interest has ranged from 0.5% per annum on September 15,
1999 to 0.75% per annum currently. Unless the registration statement is declared
effective and the exchange offer completed by March 14, 2000, the amount of
additional interest will increase to 1.0% per annum beginning on March 15, 2000
until effectiveness of the registration statement and completion of the exchange
offer.
SINKING FUND
The exchange notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below, the exchange notes are not
redeemable before March 15, 2004. Thereafter, the Company may redeem the
exchange notes at its option, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-month
period commencing on March 15 of the year set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004..................................... 106.000%
2005..................................... 104.000%
2006..................................... 102.000%
2007 and thereafter...................... 100.000%
</TABLE>
In addition, the Company must pay accrued and unpaid interest on the
exchange notes redeemed.
OPTIONAL REDEMPTION UPON QUALIFIED EQUITY OFFERINGS. At any time, or from
time to time, on or prior to March 15, 2002, the Company may, at its option, use
the net cash proceeds of one or more Qualified Equity Offerings (as defined
below) to redeem up to 35% of all notes issued under the indenture at a
redemption price equal to 112% of the principal amount thereof plus accrued and
unpaid interest, if any, thereon to the date of redemption; provided that:
(1) at least 65% of the principal amount of notes issued under the indenture
remains outstanding immediately after any such redemption; and
(2) the Company makes such redemption not more than 180 days after the
consummation of any such Qualified Equity Offering.
As used in the preceding paragraph, "Qualified Equity Offering" means a
primary offering of Qualified Capital Stock, or rights, warrants or options to
acquire Qualified Capital Stock, of Precision Partners Holding Company or
Precision Partners, L.L.C. in the United States of at least $25 million to
Persons who are not Affiliates of Precision Partners or Precision Partners
Holding Company provided that, in the case of any such offering of Qualified
Capital Stock of Precision Partners Holdings or Precision Partners, L.L.C., all
the net proceeds thereof necessary to pay the aggregate redemption price (plus
accrued interest to the redemption date) of the notes to be redeemed pursuant to
the preceding paragraph are contributed to the Company.
57
<PAGE>
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are to be redeemed at any time,
selection of such notes for redemption will be made by the trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which such notes are listed; or
(2) if such notes are not then listed on a national securities
exchange, on a pro rata basis, by lot or by such method as the trustee shall
deem fair and appropriate.
No notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the proceeds of a Qualified Equity
Offering, selection of the notes or portions thereof for redemption shall be
made by the trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of notes to
be redeemed at its registered address. If any note is to be redeemed in part
only, the notice of redemption that relates to such note shall state the portion
of the principal amount thereof to be redeemed. A new note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original note. On and after the redemption
date, interest will cease to accrue on notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the indenture.
SUBORDINATION
The payment of all Obligations on the notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due upon all Senior Debt shall first be paid in
full in cash or Cash Equivalents, or such payment duly provided for to the
satisfaction of the holders of Senior Debt, before any payment or distribution
of any kind or character is made on account of any Obligations on the notes or
for the acquisition of any of the notes for cash or property or otherwise. If
any default occurs and is continuing in the payment when due, whether at
maturity, upon any redemption, by declaration or otherwise, of any principal of,
interest on, unpaid drawings for letters of credit issued in respect of, or
regularly accruing fees with respect to, any Senior Debt, no payment of any kind
or character shall be made by or on behalf of the Company or any other Person on
its behalf with respect to any Obligations on the notes or to acquire any of the
notes for cash or property or otherwise. In addition, if any other event of
default occurs and is continuing with respect to any Designated Senior Debt, as
such event of default is defined in the instrument creating or evidencing such
Designated Senior Debt, permitting the holders of such Designated Senior Debt
then outstanding to accelerate the maturity thereof and if the Representative
for such Designated Senior Debt gives written notice of the event of default to
the trustee (a "Default Notice"),then, unless and until all events of default
with respect to such Designated Senior Debt have been cured or waived or have
ceased to exist or the trustee receives notice from the Representative for such
Designated Senior Debt terminating the Blockage Period (as defined below),
during the 180 days after the delivery of such Default Notice (the "Blockage
Period"), neither the Company nor any other Person on its behalf shall (x) make
any payment of any kind or character with respect to any Obligations on the
notes or (y) acquire any of the notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a Blockage
Period extend beyond 180 days from the date the Default Notice was delivered to
the trustee and only one such Blockage Period may be commenced within any 360
consecutive days. No event of default
58
<PAGE>
which existed or was continuing on the date of the commencement of any Blockage
Period with respect to the Designated Senior Debt shall be, or be made, the
basis for commencement of a second Blockage Period by the Representative of such
Designated Senior Debt whether or not after a period of 360 consecutive days,
unless such event of default shall have been cured or waived or ceased to exist
for a period of not less than 90 consecutive days (it being acknowledged that
any subsequent action, or any breach of any financial covenants for a period
commencing after the date of commencement of such Blockage Period that, in
either case, would give rise to an event of default pursuant to any provisions
of the Designated Senior Debt under which an event of default previously existed
or was continuing shall constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders, may recover less, ratably, than holders of Senior Debt.
GUARANTEES
The Guarantors, jointly and severally, will fully and unconditionally
guarantee the Company's obligations under the indenture and the notes. Each
Guarantee will be subordinated to Guarantor Senior Debt on the same basis as the
notes are subordinated to Senior Debt. The obligations of each Guarantor under
its Guarantee will be limited as necessary to prevent the Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company without limitation, or with other Persons upon the terms and conditions
set forth in the indenture. See "Certain Covenants--Merger, Consolidation and
Sale of Assets." In the event all of the Capital Stock of a Guarantor owned by
the Company or a Restricted Subsidiary is sold by the Company and/or a
Restricted Subsidiary or all or substantially all of the assets of a Guarantor
are sold by such Guarantor and the sale complies with the provisions set forth
in "Certain Covenants--Limitation on Asset Sales," such Guarantor's Guarantee
will be released at the time of such sale.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Company's obligations pursuant to the notes, and the aggregate net assets,
earnings and equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company purchase all or a portion of such Holder's notes
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the principal amount thereof plus accrued
interest, if any, thereon to the date of purchase.
Prior to the mailing of the notice referred to below, but in any event
within 30 days following any Change of Control, the Company will be required to
use its reasonable efforts to:
(i) repay in full and terminate all commitments under all Indebtedness under
the Credit Agreement and all other Senior Debt the terms of which
require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit
Agreement and all other such Senior Debt and to repay the Indebtedness
owed to each lender which has accepted such offer; or
(ii) obtain the requisite consents under the Credit Agreement and all other
Senior Debt to permit the repurchase of the notes as provided below.
The Company shall first comply with the covenant in the immediately
preceding sentence before it shall be required to repurchase notes pursuant to
the provisions described below.
59
<PAGE>
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 60 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a note purchased pursuant to a Change of
Control Offer will be required to surrender the note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is required to be made, there can be no
assurance that the Company will be permitted by the terms of its Senior Debt to
make such a Change of Control Offer or that it will have available funds
sufficient to pay the Change of Control purchase price for all the notes that
might be delivered by Holders seeking to accept the Change of Control Offer. In
addition, the exercise by the holders of notes of their right to require the
Company to repurchase the notes upon a Change of Control could cause a default
under such Senior Debt, even if the Change of Control itself does not, due to
the financial effect of such repurchase on the Company, which could cause an
acceleration of such Senior Debt and a foreclosure with respect to any
collateral securing it in the event such Senior Debt was not paid. In the event
the Company is required to purchase outstanding notes pursuant to a Change of
Control Offer, the Company expects that it would seek third party financing to
the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing.
Neither the Board of Directors of the Company nor the trustee (without the
consent of a majority in principal amount of the notes then outstanding) may
waive the covenant relating to a Holder's right to require the purchase of notes
upon a Change of Control. This right and other restrictions in the indenture
described herein on the ability of the Company and the Restricted Subsidiaries
to incur additional Indebtedness, to grant liens on its property, to make
Restricted Payments and to make Asset Sales may also make more difficult or
discourage a sale or takeover of the Company and, as a result, the removal of
incumbent management, whether such sale or takeover is favored or opposed by
such management. This right of the holders to require a repurchase of notes upon
a Change of Control, however, is not part of a plan by management to adopt a
series of anti-takeover provisions. Instead, the Change of Control purchase
feature is a result of negotiations between the Company and the Initial
Purchasers. Management has no present intention to engage in a transaction
involving a Change of Control, although it is possible that the Company may
decide to do so in the future. Subject to the restrictions contained in the
indenture described herein on the ability of the Company to incur additional
Indebtedness, grant liens on its property, make Restricted Payments and make
Asset Sales, the Company could, in the future, enter into certain highly
leveraged transactions, including acquisitions, mergers, refinancings,
restructurings or other recapitalizations, that would not constitute a Change of
Control under the indenture, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect the Company's capital structure or
credit ratings and the holders of the notes. Except for limitations contained in
such covenants, however, the indenture will not contain any covenants or
provisions that would afford the holders of the notes protection in the event of
any such highly leveraged transaction that does not constitute a Change of
Control.
The Company's obligation to make a Change of Control Offer may be discharged
if a third party makes the Change of Control Offer in the manner and at the
times and otherwise in compliance with the requirements applicable to a Change
of Control Offer to be made by the Company and such third party purchases all
notes properly tendered under such Change of Control Offer.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with a Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the indenture,
the Company shall
60
<PAGE>
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the "Change of Control" provisions
of the indenture by virtue thereof.
CERTAIN COVENANTS
The indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and the
Restricted Subsidiaries that are not Guarantors may incur Acquired Indebtedness,
in each case if on the date of the incurrence of such Indebtedness, after giving
effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio
of the Company is greater than 2.0 to 1.0 if such date of incurrence is on or
prior to March 15, 2002 and 2.25 to 1 thereafter.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness or is entitled to be incurred pursuant to the prior
sentence, the Company shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such categories of Permitted Indebtedness (or divided and classified in more
than one of such categories of Permitted Indebtedness) or pursuant to the prior
sentence. Accrual of interest, the accretion of accreted value and the payment
of interest in the form of additional Indebtedness will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the Company
or in options, warrants or other rights to purchase Qualified Capital Stock
of the Company) on or in respect of shares of the Company's Capital Stock;
(b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase
or acquire shares of any class of such Capital Stock; or
(c) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (a), (b) and (c) being referred to as
a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto:
(i) a Default or an Event of Default shall have occurred and be
continuing; or
(ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
covenant described under "--Limitation on Incurrence of Additional
Indebtedness"; or
(iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the
amount expended for such purpose, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith
by the Board of Directors of the Company) shall exceed the sum of:
(A) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company
61
<PAGE>
earned during the period beginning on the first day of the fiscal
quarter commencing prior to the Issue Date and through the end of the
most recent fiscal quarter for which financial statements are
available prior to the date such Restricted Payment occurs (the
"Reference Date") (treating such period as a single accounting
period); plus
(B) 100% of the aggregate net cash proceeds and the fair market
value of property other than cash (as determined in good faith by the
Company) received by the Company from any Person (other than a
Subsidiary of the Company) from the issuance and sale subsequent to
the Issue Date of Qualified Capital Stock of the Company or of other
Indebtedness or securities converted to or exchanged for Qualified
Capital Stock of the Company; plus
(C) without duplication of any amounts included in clause
(iii)(B) above, 100% of the aggregate net cash proceeds of any
contribution to the equity capital of the Company (other than the
Disqualified Capital Stock) received by the Company (excluding, in
the case of clauses (iii)(B) and (C), any net proceeds from a
Qualified Equity Offering to the extent used to redeem the notes);
plus
(D) an amount equal to the lesser of:
(a) the sum of the fair market value of the Capital Stock of
an Unrestricted Subsidiary owned by the Company and/or a
Restricted Subsidiary and the aggregate amount of all
Indebtedness of such Unrestricted Subsidiary owed to the Company
and each Restricted Subsidiary on the date of Revocation of such
Unrestricted Subsidiary as an Unrestricted Subsidiary in
accordance with the covenant described under "--Limitation on
Designations of Unrestricted Subsidiaries;" and
(b) the Designation Amount with respect to such Unrestricted
Subsidiary on the date of the Designation of such Subsidiary as
an Unrestricted Subsidiary in accordance with the covenant
described under "--Limitation on Designations of Unrestricted
Subsidiaries;" plus
(E) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment made after the Issue
Date, an amount equal to the lesser of the return of capital with
respect to such Investment and the initial amount of such Investment
which was treated as a Restricted Payment, less, in either case, the
cost of the disposition of such Investment and net of taxes.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend or distribution within 60 days after
the date of declaration of such dividend if the dividend or distribution
would have been permitted on the date of declaration;
(2) any dividend or distribution in respect of or the repurchase,
redemption, retirement or other acquisition of any shares of Capital Stock
of the Company, either (i) solely by conversion into or in exchange for
shares of Qualified Capital Stock of the Company or (ii) through the
application of net proceeds of a substantially concurrent sale for cash
(other than to a Restricted Subsidiary of the Company) of shares of
Qualified Capital Stock of the Company;
(3) so long as no Default or Event of Default shall have occurred and
be continuing, repurchases of Capital Stock (or options therefor) of the
Company from current or former officers, directors, employees or consultants
pursuant to equity ownership or compensation plans or stockholders
agreements not to exceed $1.0 million in any year (with unused amounts in
any calendar year being carried over to succeeding calendar years, but not
to exceed $1.5 million in any one year);
62
<PAGE>
(4) payments pursuant to any tax sharing arrangement between the
Company or any of its Restricted Subsidiaries and any other Person with
which the Company or such Restricted Subsidiary files a consolidated tax
return or with which the Company or such Restricted Subsidiary is part of a
consolidated group for tax purposes not to exceed the amount the Company
would be required to pay on a stand-alone basis;
(5) the purchase or redemption of notes following a Change of Control
after the Company shall have complied with the provisions under "--Change of
Control," including payment of the purchase price pursuant to a Change of
Control Offer;
(6) the payment to Holdings of up to $800,000 in the aggregate in any
fiscal year for Holdings to pay annual monitoring fees to Saunders, Karp &
Megrue and Carlisle;
(7) the payment of consulting and advisory fees to Harvey in connection
with the 1999 Acquisitions or any future acquisition and related expenses;
(8) the declaration and payment of dividends to holders of any class or
series of Disqualified Capital Stock of the Company issued in accordance
with the covenant entitled "--Limitation on Incurrence of Additional
Indebtedness;" and
(9) so long as no Default or Event of Default shall have occurred and
be continuing, other Restricted Payments in an aggregate amount not to
exceed $5 million.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1) and (2(ii)) shall be
included in such calculation.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
the Restricted Subsidiaries to, consummate an Asset Sale unless:
(i) the Company or the applicable Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at least equal
to the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Board of Directors of the Company);
(ii) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in
the form of cash or Cash Equivalents or Replacement Assets and is received
at the time of such disposition (provided that the amount of (x) any
Indebtedness of the Company or any Guarantor that is actually assumed by the
transferee in such Asset Sale and from which the Company and the Guarantors
are fully and unconditionally released, (y) Indebtedness of a Restricted
Subsidiary that is no longer such as a result of such Asset Sale (to the
extent the Company and each other Restricted Subsidiary us released from any
guarantee thereof) and (z) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash shall each be deemed to be
cash for purposes of clause (i) above); and
(iii) upon the consummation of an Asset Sale, the Company shall apply,
or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating
to such Asset Sale within 360 days of receipt thereof either:
(A) to prepay any Senior Debt or Guarantor Senior Debt and, in the
case of any Senior Debt or Guarantor Senior Debt under any revolving
credit facility, effect a permanent reduction in the availability under
such revolving credit facility;
(B) to acquire Replacement Assets; or
(C) a combination of prepayment and investment permitted by the
foregoing clauses (iii)(A) and (iii) (B).
63
<PAGE>
On the 361st day after an Asset Sale or such earlier date, if any, as the
Board of Directors of the Company or of such Restricted Subsidiary determines
not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a
"Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds
that have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company to
make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net
Proceeds Offer Payment Date") not less than 30 nor more than 60 days following
the applicable Net Proceeds Offer Trigger Date, all outstanding notes up to a
maximum principal amount of notes equal to the Note Pro Rata Share, at a
purchase price in cash equal to 100% of the principal amount of notes, plus
accrued and unpaid interest (including additional interest, if any) thereon, if
any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any
non-cash consideration received by the Company or any Restricted Subsidiary, as
the case may be, in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash (other than interest received with respect to any
such non-cash consideration) or Cash Equivalents, then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant.
The Company may defer the Net Proceeds Offer until there is an aggregate
unutilized Net Proceeds Offer Amount equal to or in excess of $10 million
resulting from one or more Asset Sales or deemed Asset Sales (at which time, the
entire unutilized Net Proceeds Offer Amount, and not just the amount in excess
of $10 million, shall be applied as required pursuant to this paragraph).
In the event that any other Indebtedness of the Company that ranks equally
to in right of payment with the notes requires that such Indebtedness be repaid
or repurchased upon the consummation of any Asset Sale (the "Other
Indebtedness"), the Company may use the Net Proceeds Offer Amount otherwise
required to be used to repay or repurchase such Other Indebtedness and to make a
Net Proceeds Offer so long as the amount of such Net Proceeds Offer Amount
available to be applied to purchase the notes is not less than the Note Pro Rata
Share. With respect to any Net Proceeds Offer Amount, the Company shall make the
Net Proceeds Offer in respect thereof at the same time as the analogous
repayment or repurchase is made under any Other Indebtedness and the date of
purchase in respect thereof shall be the same under the indenture as the
repayment or purchase of any Other Indebtedness.
With respect to any Net Proceeds Offer effected pursuant to this covenant,
to the extent that the principal amount of the notes tendered pursuant to such
Net Proceeds Offer exceeds the Note Pro Rata Share to be applied to the purchase
thereof, such notes shall be purchased PRO RATA based on the principal amount of
such notes tendered by each holder.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," which transaction does not constitute a Change of Control,
the successor corporation shall be deemed to have sold the properties and assets
of the Company and the Restricted Subsidiaries not so transferred for purposes
of this covenant and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale. In addition, the fair
market value (as determined in good faith by the Board of Directors of the
Company) of such properties and assets of the Company or the Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the trustee, and shall comply with the procedures set forth
in the indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender notes in an amount
exceeding the Net
64
<PAGE>
Proceeds Offer Amount, notes of tendering Holders will be purchased on a pro
rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open
for a period of 20 business days or such longer period as may be required by
law. If not fully subscribed, the Company may retain and use the remaining Net
Cash Proceeds for any purpose not otherwise prohibited by the indenture.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions on or in respect of
its Capital Stock;
(b) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary; or
(c) transfer any of its property or assets to the Company or any other
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reasons of:
(1) applicable law;
(2) the indenture, the notes or the Guarantees;
(3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary;
(4) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired;
(5) the Credit Agreement;
(6) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date;
(7) any other agreement entered into after the Issue Date that
contains encumbrances and restrictions that are not materially more
restrictive with respect to any Restricted Subsidiary than those in
effect with respect to such Restricted Subsidiary pursuant to agreements
as in effect on the Issue Date;
(8) agreements governing Permitted Indebtedness;
(9) customary bank credit agreements Incurred pursuant to clause
(xv) of the definition of Permitted Indebtedness;
(10) customary restrictions on the transfer of any property or
assets arising under a security agreement governing a Lien permitted
under the indenture;
(11) customary restrictions with respect to a Restricted Subsidiary
pursuant to an agreement that has been entered into in connection with
the sale or disposition of all or substantially all of the Capital Stock
or assets of such Restricted Subsidiary;
(12) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature
discussed in clause (c) above on the property so acquired;
65
<PAGE>
(13) secured Indebtedness otherwise permitted to be incurred
pursuant to the covenants described under "--Limitations on Incurrence of
Additional Indebtedness" and "--Limitation on Liens" that limit the right
of the debtor to dispose of the assets securing such Indebtedness;
(14) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business; and
(15) any agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4), (5), (6), (8) or (13) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are not
materially more restrictive than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such
clause (2), (4), (5), (6), (8) or (13) above.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Restricted Subsidiary) or permit any Person
(other than the Company or a Restricted Subsidiary) to own any Preferred Stock
of any Restricted Subsidiary.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of the Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless:
(i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the notes, the notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens; and
(ii) in all other cases, the notes are equally and ratably secured with
the obligations so secured until such obligations are no longer secured by a
Lien, except for:
(A) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date;
(B) Liens securing Senior Debt, Guarantor Senior Debt or
Indebtedness of a Restricted Subsidiary that is not a Guarantor that is
permitted to be incurred under the indenture;
(C) Liens securing the notes and any Guarantees;
(D) Liens in favor of the Company or a Restricted Subsidiary;
(E) Liens securing Refinancing Indebtedness incurred to Refinance
any Indebtedness which has been secured by a Lien permitted under the
indenture and which has been incurred in accordance with the provisions
of the indenture; provided, however, that such Liens do not extend to or
cover any property or assets of the Company or any of the Restricted
Subsidiaries not securing the Indebtedness so Refinanced (other than
improvements, additions or accessions thereto); and
(F) Permitted Liens.
66
<PAGE>
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will
not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness
that is senior in right of payment to the notes or the Guarantee of such
Guarantor and subordinate in right of payment to any other Indebtedness of the
Company or such Guarantor, as the case may be.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, and will
not cause or permit any Guarantor (other than any Guarantor whose Guarantee is
to be released in accordance with the terms of the Guarantee and indenture in
connection with any transaction complying with the provisions of the covenant
described under "--Limitation on Asset Sales") to, in a single transaction or
series of related transactions, consolidate or merge with or into any Person, or
sell, assign, transfer, lease, convey or otherwise dispose of (or cause or
permit any Restricted Subsidiary to sell, assign, transfer, lease, convey or
otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless:
(i) either:
(1) the Company or such Guarantor shall be the surviving or
continuing corporation; or
(2) the Person (if other than the Company or such Guarantor)
formed by such consolidation or into which the Company or such
Guarantor is merged or the Person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and
assets of the Company and the Restricted Subsidiaries substantially
as an entirety (the "Surviving Entity"):
(x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the
District of Columbia; and
(y) shall expressly assume, by supplemental indenture (in
form and substance reasonably satisfactory to the trustee),
executed and delivered to the trustee, the due and punctual
payment of the principal of, and premium, if any, and interest on
all of the notes and the performance of every covenant of the
notes, the Guarantee, if applicable, the indenture and, if then
effect, the Registration Rights Agreement on the part of the
Company or such Guarantor to be performed or observed;
PROVIDED that a Guarantor may merge with or into the Company or
another Guarantor without complying with this clause (i).
(ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness
incurred or anticipated to be incurred in connection with or in respect of
such transaction) on a pro forma basis, the Company or such Surviving
Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "--Limitation on Incurrence of Additional
Indebtedness;" PROVIDED that a Guarantor may merge into the Company or
another Guarantor without complying with this clause (ii);
(iii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness
incurred or anticipated to be incurred and any Lien granted in connection
with or in respect of the transaction), no Default or Event of Default shall
have occurred or be continuing; and
(iv) the Company or the Surviving Entity shall have delivered to the
trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is
67
<PAGE>
required in connection with such transaction, such supplemental indenture
comply with the applicable provisions of the indenture and that all
conditions precedent in the indenture relating to such transaction have been
satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The indenture will provide that upon any consolidation, combination or
merger of the Company or a Guarantor or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, in which the
Company or such Guarantor is not the continuing corporation, the Surviving
Entity formed by such consolidation or into which the Company or such Guarantor
is merged or to which such conveyance, lease or transfer is made shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company or such Guarantor under the indenture, the notes and the Guarantees with
the same effect as if such Surviving Entity had been named as such and, except
in the case of a conveyance, transfer or lease, the Company or such Guarantor,
as the case may be, shall be released from the obligation to pay the principal
of and interest on the notes or in respect of its guarantee, as the case may be,
and all of the Company's or such Guarantor's other obligations and covenants
under the notes, the indenture and its Guarantee, if applicable.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are not materially less favorable than those that would have
reasonably been expected in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Company or such
Restricted Subsidiary. All Affiliate Transactions (and each series of related
Affiliate Transactions which are similar or part of a common plan) involving
aggregate payments or other property with a fair market value in excess of $5.0
million shall be approved by the Board of Directors of the Company or such
Restricted Subsidiary, as the case may be, such approval to be evidenced by a
Board Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary enters into an Affiliate Transaction (or series of related
Affiliate Transactions related to a common plan) that involves an aggregate fair
market value of more than $10.0 million, the Company or such Restricted
Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain
a favorable opinion as to the fairness of such transaction or series of related
transactions to the Company or the relevant Restricted Subsidiary, as the case
may be, from a financial point of view, from an Independent Financial Advisor
and file the same with the trustee.
(b) The restrictions set forth in clause (a) shall not apply to:
(i) employment, consulting and compensation arrangements and
agreements of the Company or any Restricted Subsidiary consistent
with past practice or approved by a majority of the disinterested
members of the Board of Directors of the Company (or a committee
comprised of disinterested directors);
(ii) reasonable fees and compensation paid to and indemnity
provided on behalf of, officers, directors, employees, consultants or
agents of the Company or any Restricted Subsidiary as determined in
good faith by the Company's Board of Directors or senior management,
including, without limitation, any issuance or grant of stock
options, bonuses or similar rights to such employees, officers and
directors;
68
<PAGE>
(iii) transactions exclusively between or among the Company and
any of the Restricted Subsidiaries or exclusively between or among
such Restricted Subsidiaries, provided such transactions are not
otherwise prohibited by the indenture;
(iv) Restricted Payments permitted to be made pursuant to the
"--Limitation on Restricted Payments" covenant;
(v) the payment to Holdings of up to $800,000 in the aggregate
in any fiscal year for Holdings to pay annual monitoring fees to
Saunders, Karp & Megrue and Carlisle;
(vi) the payment of consulting and advisory fees to Harvey in
connection with the 1999 Acquisitions or any future acquisition and
related expenses;
(vii) payments to the selling stockholders of Mid State, Galaxy
and Certified pursuant to the relevant acquisition agreements or
documents delivered in connection therewith (whether in cash or in
the form of bonus compensation, a note or other security);
(viii) Permitted Investments,
(ix) in connection with a public offering of Common Stock of the
Company, Holdings or any Restricted Subsidiary, loans or advances,
having a maturity of one year or less after the date first made, to
employees to finance the purchase by such employees of such Common
Stock;
(x) the issuance or sale of any Qualified Capital Stock of the
Company or of any Guarantor; and
(xi) the payment of all fees and expenses related to the 1999
Acquisitions, the new credit facilities and this offering (whether
paid at or subsequent to the closing of such transactions).
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any Restricted
Subsidiary transfers or causes to be transferred, in one transaction or a series
of related transactions, any property with a book value in excess of $500,000 to
any Domestic Restricted Subsidiary that is not a Guarantor, or if the Company or
any of its Restricted Subsidiaries shall organize, acquire or otherwise invest
in another Domestic Restricted Subsidiary having total assets with a book value
in excess of $500,000, then such transferee or acquired or other Restricted
Subsidiary shall:
(1) execute and deliver to the trustee a supplemental indenture in form
reasonably satisfactory to the trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the notes and the indenture on the terms set forth in the indenture;
and
(2) deliver to the trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary. Thereafter, such
Restricted Subsidiary shall be a Guarantor for all purposes of the
indenture.
The Indebtedness evidenced by any Guarantee (including the payment of
principal of, premium, if any, and interest on the notes) will be subordinated
to Guarantor Senior Debt on terms analogous to those applicable to the notes.
See "--Subordination."
The obligations of each Guarantor under its Guarantee will be limited to the
maximum amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor (including, without limitation, any guarantees
under the Credit Agreement) and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the indenture, result in
69
<PAGE>
the obligations of the Guarantor under the Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. Each
Guarantor that makes a payment for distribution under a Guarantee is entitled to
a contribution from each other Guarantor in a pro rata amount based on the
Adjusted Net Assets of each Guarantor.
CONDUCT OF BUSINESS. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any businesses which are not either: (i) the
same, similar or related to the businesses in which the Company or any of the
Restricted Subsidiaries are engaged on the Issue Date, (ii) businesses acquired
through an acquisition after the Issue Date which are not material to the
Company and the Restricted Subsidiaries, taken as a whole, or (iii) Permitted
Investments.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
that owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the indenture (a "Designation") only if:
(i) the Subsidiary to be so designated has total assets of $1,000 or
less or
(ii) such Subsidiary has total assets greater than $1,000 and
(a) no Default shall have occurred and be continuing after
giving effect to such Designation; and
(b) the Company would be permitted under the indenture to make
an Investment at the time of Designation (assuming the effectiveness
of such Designation) in an amount (the "Designation Amount") equal to
the sum of (i) the fair market value of the Capital Stock of such
Subsidiary owned by the Company and/or any of the Restricted
Subsidiaries on such date and (ii) the aggregate amount of
Indebtedness of such Subsidiary owed to the Company and the
Restricted Subsidiaries on such date; and
(c) after giving effect to such designation, the Company would
be permitted to incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the covenant described under
"--Limitation on Incurrence of Additional Indebtedness" at the time
of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment in the Designation Amount
pursuant to the covenant described under "-- Limitation on Restricted Payments"
for all purposes of the indenture. The indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness that provides that the holder
thereof may (upon notice, lapse of time or both) declare a default thereon or
cause the payment thereof to be accelerated or payable prior to its final
scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"--Limitation on Restricted Payments."
The indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary ("Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time and
after giving effect to such Revocation; and
70
<PAGE>
(b) all Liens and Indebtedness of such Unrestricted Subsidiaries
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the indenture.
All Designations and Revocations must be evidenced by an officers'
certificate of the Company delivered to the trustee certifying compliance with
the foregoing provisions.
REPORTS TO HOLDERS. The indenture will provide that the Company will
deliver to the trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, that the Company is required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Sections 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the trustee and Holders with such annual and quarterly reports and such
information, documents and other reports specified in Section 13 and 15(d) of
the Exchange Act. The Company will also comply with the other provisions of TIA
Section314(a).
EVENTS OF DEFAULT
The following events are defined in the indenture as "Events of Default:"
(i) the failure to pay interest on any notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
indenture);
(ii) the failure to pay the principal on any notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer) (whether or not such
payment shall be prohibited by the subordination provisions of the
indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the indenture which default continues for a period
of 45 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the trustee or the
Holders of at least 25% of the outstanding principal amount of the notes
(except in the case of a default with respect to the covenant described
under "--Certain Covenants--Merger, Consolidation and Sale of Assets," which
will constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment
of which is guaranteed by the Company or any Restricted Subsidiary), whether
such Indebtedness now exists or is created after the Issue Date, which
default (a) is caused by a failure to pay principal of such Indebtedness
after notice and the lapse of any applicable grace period provided in such
Indebtedness on the date of such default (a "payment default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity (and such acceleration is not rescinded, or such Indebtedness is
not repaid, within 30 days) and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity of
which has been so accelerated (and such acceleration is not rescinded, or
such Indebtedness is not repaid, within 30 days), aggregates $7.5 million;
(v) one or more judgments in an aggregate amount in excess of $7.5
million not covered by adequate insurance shall have been rendered against
the Company or any of the Restricted Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such judgment
or judgments become final and nonappealable;
71
<PAGE>
(vi) certain events of bankruptcy affecting the Company or any of the
Significant Subsidiaries; or
(vii) any Guarantee of a Significant Subsidiary ceases to be in full
force and effect or any Guarantee of a Significant Subsidiary declared to be
null and void and unenforceable or any Guarantee of a Significant Subsidiary
is found to be invalid or any of the Guarantors that is a Significant
Subsidiary denies its liability under its Guarantee (other than by reason of
release of a Guarantor in accordance with the terms of the indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above shall occur and be continuing, the trustee or the Holders of at least
25% in principal amount of outstanding notes may declare the principal of,
premium, if any, and accrued interest on all the notes to be due and payable by
notice in writing to the Company and (if given by the Holders) the trustee
specifying the respective Events of Default and that it is a "notice of
acceleration," and the same shall become immediately due and payable. If an
Event of Default specified in clause (vi) above occurs and is continuing, then
all unpaid principal of, premium, if any, and accrued and unpaid interest on all
of the outstanding notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the trustee or any
Holder.
The indenture will provide that, at any time after a declaration of
acceleration with respect to the notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the then outstanding notes may
rescind and cancel such declaration and its consequences:
(i) if the rescission would not conflict with any judgment or decree;
(ii) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(iii) to the extent the payment of such interest is lawful, if interest
on overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid;
(iv) if the Company has paid the trustee its reasonable compensation
and reimbursed the trustee for its expenses, disbursements and advances; and
(v) in the event of the cure or waiver of an Event of Default of the
type described in clause (vi) of the description above of Events of Default,
the trustee shall have received an officers' certificate and an opinion of
counsel that such Event of Default has been cured or waived. No such
rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the then outstanding notes
may waive any existing Default or Event of Default under the indenture, and its
consequences, except a default in the payment of the principal of or interest on
any notes.
Holders of the notes may not enforce the indenture or the notes or institute
any proceeding with respect thereto or for any remedy thereunder except as
provided in the indenture and under the TIA. Subject to the provisions of the
indenture relating to the duties of the trustee, the trustee is 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 indemnity. Subject to all provisions of the
indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding notes 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.
Under the indenture, the Company is required to provide an officers'
certificate to the trustee promptly upon the Company obtaining knowledge of any
Default or Event of Default (provided that the Company shall provide such
certification at least annually whether or not it knows of any Default
72
<PAGE>
or Event of Default) that has occurred and, if applicable, describe such Default
or Event of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of any Guarantors discharged with respect to the
outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding notes, except for:
(i) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the notes when such payments
are due;
(ii) the Company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payments;
(iii) the rights, powers, trust, duties and immunities of the trustee
and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the indenture ("Covenant Defeasance") and thereafter any
omission or failure to comply with such obligations shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "--Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the trustee, in trust,
for the benefit of the Holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient (through the payment of principal and interest), to pay the
principal of, premium, if any, and interest on the notes on the stated date
of payment thereof or on the applicable redemption date, as the case may be;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that:
(A) the Company has 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, and
based thereon such opinion of counsel shall confirm that, the Holders
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;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that the Holders 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;
73
<PAGE>
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(v) 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 the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(vi) the Company shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
(vii) the Company shall have delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(viii) the Company shall have delivered to the trustee an opinion of
counsel to the effect that:
(A) the trust funds will not be subject to any rights of holders of
Senior Debt, including, without limitation, those arising under the
indenture; and
(B) 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; and
(ix) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clause
(ii) above with respect to a Legal Defeasance need not be delivered if all notes
not theretofore delivered to the trustee for cancellation (1) have become due
and payable or (2) will become due and payable on the maturity date within one
year under arrangements satisfactory to the trustee for the giving of notice of
redemption by the trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture) as to all outstanding notes
when:
(i) either:
(a) all the notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid and
notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the trustee
for cancellation; or
(b) all notes not theretofore delivered to the trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the notes not
theretofore delivered to the trustee for cancellation, for principal of,
premium, if any, and interest on the notes to the date of deposit
together with irrevocable instructions from the Company directing the
trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
(ii) the Company has paid all other sums payable under the indenture by
the Company; and
74
<PAGE>
(iii) the Company has delivered to the trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent under the
indenture relating to the satisfaction and discharge of the indenture have
been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the trustee, without the
consent of the Holders, may amend the indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding notes
issued under the indenture, except that, without the consent of each Holder
affected thereby, no amendment may:
(i) reduce the amount of notes whose holders must consent to an
amendment;
(ii) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any notes;
(iii) reduce the principal of or change or have the effect of changing
the fixed maturity of any notes, or change the date on which any notes may
be subject to redemption or repurchase, or reduce the redemption or
repurchase price therefor;
(iv) make any notes payable in money other than that stated in the
notes;
(v) make any change in provisions of the indenture protecting the right
of each Holder to receive payment of principal of and interest on such notes
on or after the stated due date thereof or to bring suit to enforce such
payment, or permitting Holders of a majority in principal amount of the then
outstanding notes to waive Defaults or Events of Default;
(vi) amend, change or modify in any material respect the obligation of
the Company to make and consummate a Change of Control Offer after the
occurrence of a Change of Control or make and consummate a Net Proceeds
Offer with respect to any Asset Sale that has been consummated or modify any
of the provisions or definitions with respect thereto;
(vii) modify or change any provision of the indenture or the related
definitions affecting the subordination or ranking of the notes or any
Guarantee in a manner which adversely affects the Holders; or
(viii) release any Guarantor from any of its obligations under its
Guarantee or the indenture otherwise than in accordance with the terms of
the indenture.
GOVERNING LAW
The indenture will provide that it, the notes and any Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The indenture will provide that, except during the continuance of an Event
of Default, the trustee will perform only such duties as are specifically set
forth in the indenture. During the existence of an Event of Default, the trustee
will exercise such rights and powers vested in it by the indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
75
<PAGE>
The indenture and the provisions of the TIA contain certain limitations on
the rights of the trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
trustee will be permitted to engage in other transactions; provided that if the
trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed by the Company or any Restricted Subsidiary in
connection with the acquisition of assets from such Person and in each case
whether or not such Indebtedness is incurred by such Person in connection with,
or in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary or such acquisition, merger or consolidation.
"ADJUSTED NET ASSETS" of a Guarantor at any date means the lesser of the
amount by which (x) the fair value of the property of such Guarantor exceeds the
total amount of its liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities
incurred or assumed on such date), but excluding liabilities under the Guarantee
of such Guarantor at such date, and (y) the present fair salable value of the
assets of such Guarantor at such date exceeds the amount that will be required
to pay the probable liability of such Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities incurred or assumed on such
date and after giving effect to any collection from any Subsidiary of such
Guarantor in respect of the obligations of such Subsidiary under such
Guarantor's Guarantee), excluding debt in respect of the Guarantee, as they
become absolute and matured.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"AFFILIATE TRANSACTION" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."
"ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be merged with or into the Company or any
Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any Person (other than a Restricted Subsidiary) that
constitute all or substantially all of the assets of such Person or comprise any
division or line of business of such Person or any other properties or assets of
such Person other than in the ordinary course of business.
76
<PAGE>
"ASSET SALE" means any direct or indirect sale, issuance, conveyance, lease
(other than operating leases entered into in the ordinary course of business),
assignment or other transfer (other than the granting of a Lien in accordance
with the indenture) for value by the Company or any of the Restricted
Subsidiaries (including any Sale and Leaseback Transaction) to any Person other
than the Company or a Restricted Subsidiary of (a) any Capital Stock of any
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary); or (b) any other property or assets of the Company or
any Restricted Subsidiary other than in the ordinary course of business;
provided, however, that Asset Sales shall not include (i) a transaction or
series of related transactions for which the Company or the Restricted
Subsidiaries receive aggregate consideration of less than $1.0 million, (ii) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets of the Company as permitted by the covenant described under
"--Certain Covenants--Merger, Consolidation and Sale of Assets," (iii) any
Restricted Payment made in accordance with the covenant described under
"--Certain Covenants--Limitation on Restricted Payments," (iv) the sale, lease,
conveyance, disposition or other transfer of property or equipment that has
become worn out, obsolete or damaged or otherwise unsuitable for use in
connection with the business of the Company or any Restricted Subsidiary, (v)
the creation or realization of any Permitted Lien, (vi) the sale of receivables
or other assets pursuant to a receivables or asset securitization or similar
program, (vii) any disposition the making of which is a Permitted Investment,
(viii) the sale of any Cash Equivalents owned by the Company or any of its
Subsidiaries and (ix) any exchange of like property pursuant to Section 1031 of
the Internal Revenue Code of 1986, as amended.
"BLOCKAGE PERIOD" has the meaning set forth under "--Subordination."
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the trustee.
"CAPITAL STOCK" means:
(i) with respect to any Person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person; and
(ii) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.
"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.
"CARLISLE" means Carlisle Enterprises, LLC.
"CASH EQUIVALENTS" means:
(i) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one
77
<PAGE>
year from the date of acquisition thereof and, at the time of acquisition,
having one of the two highest ratings obtainable from either Standard &
Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's");
(iii) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250,000,000;
(v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered
into with any bank meeting the qualifications specified in clause (iv)
above; and
(vi) investments in money market funds that invest substantially all
their assets in securities of the types described in clauses (i) through (v)
above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:
(i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of the Company to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
indenture);
(ii) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the indenture); or
(iii) any Person or Group, other than the Permitted Holders, becomes
the beneficial owner, directly or indirectly, of more than 50% of the total
voting power of the Capital Stock of the Company, and the Permitted Holders
beneficially own, directly or indirectly in the aggregate, a lesser
percentage of the total voting power of the Capital Stock of the Company
than such Person or Group and do not have the right or ability by voting
power, contract, or otherwise to elect or designate for election a majority
of the Board of Directors (or any analogous governing body) of the Company;
or
(iv) following the consummation of an initial public offering of the
Company, the replacement of a majority of the Board of Directors of the
Company or Holdings over a two-year period from the directors who
constituted the Board of Directors of the Company or Holdings, as the case
may be, at the beginning of such period, and such replacement shall not have
been approved by a vote of at least a majority of the Board of Directors of
the Company or Holdings, as the case may be, then still in office who either
were members of such Board of Directors at the beginning of such period or
whose election as a member of such Board of Directors was previously so
approved.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "--Change of
Control."
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "--Change
of Control."
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
78
<PAGE>
"CONSOLIDATED EBITDA" means, with respect to the Company, for any period,
the sum (without duplication) of:
(i) Consolidated Net Income; and
(ii) to the extent Consolidated Net Income has been reduced thereby:
(A) all income taxes of the Company and the Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary or nonrecurring gains or taxes
attributable to Asset Sales outside the ordinary course of business);
(B) Consolidated Interest Expense;
(C) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period,
(D) the net income of any Person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a Restricted
Subsidiary or is merged or consolidated with the Company or any
Restricted Subsidiary but after the first day of the relevant Four
Quarter Period as used in the definition of "Consolidated Fixed Charge
Coverage Ratio,"
(E) the aggregate amount of any earn-out payments or bonuses paid to
the selling stockholders of Mid State and Galaxy during the relevant Four
Quarter Period;
(F) in the case of a successor to the Company by consolidation or
merger or as a transferee of the Company's assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer of
assets but after the first day of the relevant Four Quarter Period as
used in the definition of "Consolidated Fixed Charge Coverage Ratio," and
(G) monitoring fees paid by Holdings to Saunders, Karp & Megrue and
Carlisle in an amount not to exceed $350,000 in the aggregate during the
Four-Quarter Period
all as determined on a consolidated basis for the Company and the Restricted
Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the four most
recent full consecutive fiscal quarters (the "Four Quarter Period") ending on or
prior to the date of the transaction giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to
Consolidated Fixed Charges of the Company for the Four Quarter Period. In
addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
(i) the incurrence or repayment of any Indebtedness of the Company or
any of the Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any incurrence
or repayment of other Indebtedness (and the application of the proceeds
thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of
the Four Quarter Period; and
(ii) any Asset Sales or other dispositions or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of the Company
79
<PAGE>
or one of the Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also
including any Consolidated EBITDA (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X under the
Exchange Act) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date as if such Asset Sale or Asset Acquisition or other
disposition (including the incurrence, assumption or liability for any such
Acquired Indebtedness) occurred on the first day of the Four Quarter Period.
If the Company or any of the Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if the Company
or any Restricted Subsidiary had directly incurred or otherwise assumed such
guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date;
(2) if interest on any Indebtedness actually incurred on the
Transaction Date may optionally be determined at an interest rate based upon
a factor of a prime or similar rate, a eurocurrency interbank offered rate,
or other rates, then the interest rate in effect on the Transaction Date
will be deemed to have been in effect during the Four Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined on
a fluctuating basis, to the extent such interest is covered by agreements
relating to Interest Swap Obligations, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements.
For purposes of this definition, whenever pro forma effect is to be given to
an Asset Acquisition, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
on a basis consistent with Regulation S-X under the Exchange Act, which
determination shall be made in good faith by a responsible financial or
accounting officer of the Company and such pro forma calculations may include
such pro forma adjustments for nonrecurring non-cash items that the Company
considers reasonable and quantifiable in order to reflect the ongoing impact of
any such transaction on the Company's results of operations.
"CONSOLIDATED FIXED CHARGES" means, with respect to the Company for any
period, the sum, without duplication, of:
(i) Consolidated Interest Expense; plus
(ii) the product of (x) the amount of all dividend payments on any
series of Preferred Stock of the Company (other than dividends paid in
Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued
during such period times (y) a fraction, the numerator of which is one and
the denominator of which is one minus the then current effective
consolidated federal, state and local income tax rate of the Company,
expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company for any
period, the sum of, without duplication:
(i) the aggregate of the interest expense of the Company and the
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP (excluding fees and expenses incurred in connection
with the offer and sale of the notes), including without limitation,
80
<PAGE>
(a) any amortization of debt discount, (b) the net costs under Interest Swap
Obligations, (c) all capitalized interest and (d) the interest portion of
any deferred payment obligation; and
(ii) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by the Company and the
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom:
(a) after-tax gains and losses from Asset Sales or abandonments or
reserves relating thereto other than in the ordinary course of business;
(b) after tax items classified as extraordinary or nonrecurring gains
or losses;
(c) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or
is merged or consolidated with the Company or any Restricted Subsidiary;
(d) the net income (but not loss) of any Restricted Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by a contract, operation
of law or otherwise (except for restrictions existing pursuant to clause (9)
of the covenant described under "--Limitation on Dividend and Other Payment
Restrictions Affecting Subsidiaries");
(e) the net income of any Person, other than a Restricted Subsidiary,
except to the extent of cash dividends or distributions paid to the Company
or to a Restricted Subsidiary by such Person;
(f) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued); and
(g) in the case of a successor to the Company by consolidation or
merger or as a transferee of the Company's assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer of
assets.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charge that requires an accrual of or a reserve
for cash charges for any future period).
"COVENANT DEFEASANCE" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"CREDIT AGREEMENT" means the Credit Agreement dated as of the Issue Date by
and among the Company, the guarantors named therein, the lenders named therein,
Citibank, N.A., as administrative agent, Bank of America National Trust and
Savings Association, as syndication agent, and Sun Trust Bank, Atlanta, as
documentation agent, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (provided that such increase in borrowings is permitted by the
covenant described under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness" (including the definition of Permitted Indebtedness))
or adding Restricted Subsidiaries as additional borrowers or guarantors
thereunder) all
81
<PAGE>
or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice of both would be, an Event of Default.
"DEFAULT NOTICE" has the meaning set forth under "--Subordination."
"DESIGNATED SENIOR DEBT" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt that,
at the time of determination, has an aggregate principal amount of at least
$25,000,000 and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"DESIGNATION" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"DESIGNATION AMOUNT" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock that,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event (other than a
Change of Control), matures or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or is mandatorily exchangeable for Indebtedness,
or is redeemable, or exchangeable for Indebtedness, at the sole option of the
holder thereof (except upon the occurrence of a Change of Control) on or prior
to the final maturity date of the notes.
"DOMESTIC RESTRICTED SUBSIDIARY" means a Restricted Subsidiary incorporated
or otherwise organized or existing under the laws of the United States, any
state thereof or any territory or possession of the United States.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction between a
willing seller and a willing and able buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair market value shall be
determined by the Board of Directors of the Company acting reasonably and in
good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the trustee.
"FOREIGN RESTRICTED SUBSIDIARY" means any Restricted Subsidiary that is
organized and existing under the laws of a jurisdiction other than the United
States, any State thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accounts and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession
of the United States, which are in effect as of the Issue Date.
"GUARANTEE" means as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or
82
<PAGE>
payment of damages in the event of non-performance) of all or any part of such
obligation, including, without limiting the foregoing, the payment of amounts
drawn down by letters of credit. A guarantee will include, without limitation,
any agreement to maintain or preserve any other Person's financial condition or
to cause any other Person to achieve certain levels of operating results.
"GUARANTEE" has the meaning set forth under "--Certain Covenants--Additional
Subsidiary Guarantees."
"GUARANTOR" means (i) each Subsidiary of the Company guaranteeing the notes
as of the Issue Date and (ii) each other Person that in the future executes a
Guarantee pursuant to the covenant described under "--Certain
Covenants--Additional Subsidiary Guarantees" or otherwise; provided that any
Person constituting a Guarantor as described above shall cease to constitute a
Guarantor when its Guarantee is released in accordance with the terms of the
indenture.
"GUARANTOR SENIOR DEBT" means, with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of such Guarantor,
whether outstanding on the Issue Date or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the Guarantee of such Guarantor. Without limiting the generality of
the foregoing, "Guarantor Senior Debt" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of:
(x) all monetary obligations of every nature of the Company or any
Guarantor with respect to the Credit Agreement, including, without
limitation, obligations to pay principal and interest, reimbursement
obligations under letters of credit, fees, expenses and indemnities;
(y) all Interest Swap Obligations; and
(z) all obligations under Currency Agreements;
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include:
(i) any Indebtedness of such Guarantor owing to a Subsidiary of such
Guarantor or any Affiliate of such Guarantor or any of such Affiliate's
Subsidiaries;
(ii) Indebtedness to, or guaranteed on behalf of, any stockholder,
director, officer or employee of such Guarantor or any Subsidiary of such
Guarantor (including, without limitation, amounts owed for compensation);
(iii) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(iv) Indebtedness represented by Disqualified Capital Stock;
(v) any liability for federal, state, local or other taxes owed or
owing by such Guarantor;
(vi) Indebtedness incurred in violation of the covenant described under
"--Certain Covenants--Limitation on Incurrence of Additional Indebtedness";
(vii) Indebtedness that, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to such Guarantor; and
83
<PAGE>
(viii) any Indebtedness that is, by its express terms, subordinated in
right of payment to any other Indebtedness of such Guarantor.
"HARVEY" means Harvey Equity Partners, L.L.C.
"HOLDINGS" means Precision Partners Holding Company or any successor or
assign thereof that owns 100% of the Qualified Capital Stock of the Company.
"INCUR" has the meaning set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness."
"INDEBTEDNESS" means, with respect to any Person, without duplication:
(i) all Obligations of such Person for borrowed money;
(ii) all Obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(iii) all Capitalized Lease Obligations of such Person;
(iv) all Obligations of such Person issued or assumed as the deferred
purchase price of property or services, all conditional sale obligations and
all Obligations under any title retention agreement (but excluding trade or
other accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 90 days or more or are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted);
(v) all Obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(vi) guarantees and other contingent obligations in respect of
Indebtedness of any other Person referred to in clauses (i) through (v)
above and clause (viii) below;
(vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) that are secured by any Lien on any property or
asset of such first Person, the amount of such Obligation being deemed to be
the lesser of the fair market value of such property or asset or the amount
of the Obligation so secured;
(viii) all Obligations under currency agreements and all interest swap
obligations of such Person; and
(xi) all Disqualified Capital Stock issued by such Person with the
amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference
and its maximum fixed repurchase price, but excluding accrued dividends, if
any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock that 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 shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) that does not, and whose
directors, officers and employees and Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) that, in the judgment of the
Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
84
<PAGE>
"INITIAL PURCHASERS" means Salomon Smith Barney Inc. and NationsBanc
Montgomery Securities LLC.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, (i) any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or (ii) any purchase or acquisition by such Person of any Capital
Stock, bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other Person. "Investment" shall exclude extensions of trade
credit by the Company and the Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of the Company or such
Restricted Subsidiary, as the case may be. If the Company or any Restricted
Subsidiary sells or otherwise disposes of less than all of the Capital Stock of
any Restricted Subsidiary (the "Referent Subsidiary") such that, after giving
effect to any such sale or disposition the Referent Subsidiary shall cease to be
a Restricted Subsidiary, the Company shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Capital Stock of the Referent Subsidiary not sold or disposed of.
"ISSUE DATE" means March 19, 1999.
"LEGAL DEFEASANCE" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"LLC" means Precision Partners, L.L.C.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest), received
by the Company or any of the Restricted Subsidiaries from such Asset Sale net
of:
(a) actual expenses and fees relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, sales
commissions and relocation expenses);
(b) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements;
(c) repayments of Indebtedness secured by the property or assets
subject to such Asset Sale that is required to be repaid in connection with
such Asset Sale;
(d) provision for minority interest holders in any Restricted
Subsidiary as a result of such Asset Sale;
(e) payments of unassumed liabilities (not constituting Indebtedness)
relating to the assets sold at the time of, or within 30 days after, the
date of such Asset Sale; and
(f) appropriate amounts to be determined by the Company or any
Restricted Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such
85
<PAGE>
Asset Sale and retained by the Company or any Restricted Subsidiary, as the
case may be, after such Asset Sale, including, without limitation, pension
and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"NET PROCEEDS OFFER" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"NET PROCEEDS OFFER PAYMENT DATE" had the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"NOTE PRO RATA SHARE" means the amount of the applicable Net Proceeds Offer
Amount obtained by multiplying the amount of such Net Proceeds Offer Amount by a
fraction, (i) the numerator of which is the aggregate principal amount of notes
outstanding at the time of the applicable Asset Sale with respect to which the
Company is required to use the Net Proceeds Offer Amount to repay or make a Net
Proceeds Offer or repay and (ii) the demoninator of which is the sum of (a) the
aggregate accreted value and/or principal amount, as the case may be, of all
Other Indebtedness outstanding at the time of the applicable Asset Sale and (b)
the aggregate principal amount of all notes outstanding at the time of the
applicable Net Proceeds Offer with respect to which the Company is required to
use the applicable Net Proceeds Offer Amount to offer to repay or make a Net
Proceeds Offer or repay.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PERMITTED HOLDERS" means (i) Saunders, Karp & Megrue and (ii) any Person
"controlled" (as defined in the definition of "Affiliate") by one or more
Persons identified in clause (i) of this definition.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(i) Indebtedness under the notes, the indenture and any Guarantees
issued in respect thereto, outstanding on the Issue Date, not to exceed an
aggregate principal amount of $100 million;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the greater
of (a) $50 million and (b) the sum of (x) 85% of the book value of the
accounts receivable of the Company and its Restricted Subsidiaries on a
consolidated basis plus (y) 50% of the book value of the inventory of the
Company and its Restricted Subsidiaries on a consolidated basis plus (z) $25
million;
(iii) other Indebtedness of the Company and the Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any proceeds from
Asset Sales used to repay such Indebtedness pursuant to the covenant
"--Limitation on Asset Sales;"
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any Guarantor and Interest Swap Obligations of any Restricted
Subsidiary covering Indebtedness of such Restricted Subsidiary; provided,
however, that such Interest Swap Obligations are entered into to protect the
Company and the Restricted Subsidiaries from fluctuations in interest rates
on Indebtedness incurred in accordance with the indenture to the extent the
notional principal amount of such Interest Swap Obligations does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligations relates;
86
<PAGE>
(v) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vi) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided that if
as of any date any Person other than the Company or a Restricted Subsidiary
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Restricted Subsidiary for so
long as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided that if as of any date any Person other than a
Restricted Subsidiary owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient funds
in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
(ix) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance, performance or surety bonds entered into in the ordinary
cause of business or similar requirements in the ordinary course of
business;
(x) Refinancing Indebtedness;
(xi) Purchase Money Indebtedness and Capitalized Lease Obligations (and
any Indebtedness incurred to Refinance such Purchase Money Indebtedness or
Capitalized Lease Obligations) not to exceed $10.0 million at any one time
outstanding;
(xii) guarantees of the obligations of Restricted Subsidiaries;
(xiii) Indebtedness of the Company or any of its Restricted
Subsidiaries arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guarantees,
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries, incurred
or assumed in connection with the disposition of any business, any Asset
Sale or any disposition of the Capital Stock of a Restricted Subsidiary
other than guarantees or similar credit support by the Company or any of its
Restricted Subsidiaries of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or Capital Stock for the purpose of
financing such acquisition; provided that the maximum aggregate liability in
respect of all such Indebtedness in the nature of such guarantees shall at
no time exceed the gross proceeds actually received by the Company from the
sale of such business, assets or Capital Stock;
(xiv) reimbursement obligations relating to undrawn standby letters of
credit (other than under the Credit Agreement) issued in the ordinary course
of business;
(xv) Indebtedness of Foreign Restricted Subsidiaries in an aggregate
amount not to exceed $7.5 million; and
87
<PAGE>
(xvi) additional Indebtedness of the Company and the Guarantors in an
aggregate principal amount not to exceed $12.5 million at any one time
outstanding (which amount may, but need not, be incurred under the Credit
Agreement).
"PERMITTED INVESTMENTS" means:
(i) Investments by the Company or any Restricted Subsidiary in any
Person that is or will become immediately after such Investment a Restricted
Subsidiary or that will merge or consolidate into the Company or a
Restricted Subsidiary;
(ii) Investments in the Company or any Restricted Subsidiary by any
Restricted Subsidiary; provided that any Indebtedness evidencing such
Investment is unsecured and subordinate to the notes;
(iii) Investments in cash and Cash Equivalents;
(iv) loans and advances to employees, officers and directors of the
Company and the Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes not in excess of 1.0 million at any time
outstanding;
(v) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of the Company's or a Restricted Subsidiary's businesses
and otherwise in compliance with the indenture;
(vi) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(vii) Investments made by the Company or the Restricted Subsidiaries as
a result of consideration received in connection with an Asset Sale made in
compliance with the covenant described under "-- Certain Covenants --
Limitation on Asset Sales";
(viii) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms, provided that such
trade terms may include such concessionary trade terms as the Company or
such Restricted Subsidiary deems reasonable under the circumstances;
(ix) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(x) lease, utility and other similar deposits in the ordinary course of
business;
(xi) Investments paid for solely in Qualified Capital Stock of the
Company;
(xii) Investments acquired by the Company or a Restricted Subsidiary as
a result of a foreclosure by, or other transfer of title to, the Company or
such Restricted Subsidiary with respect to any secured Investment;
(xiii) loans and advances to employees, officers and directors of the
Company and the Restricted Subsidiaries in the ordinary course of business
to purchase Capital Stock (or options therefor) of the Company in an amount
not to exceed $1.5 million in the aggregate outstanding at any one time; and
(xiv) additional Investments not to exceed $10.0 million at any one
time outstanding.
88
<PAGE>
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or any Restricted Subsidiary shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges, restrictions or encumbrances in respect of real property or minor
imperfections of title which do not, in the aggregate, impair in any
material respect the ordinary conduct of the business of the Company and the
Restricted Subsidiaries taken as a whole;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(vii) purchase money Liens securing Indebtedness incurred to finance
property or assets of the Company or any Restricted Subsidiary acquired in
the ordinary course of business, and Liens securing Indebtedness which
Refinances any such Indebtedness; provided, however, that (A) the related
purchase money Indebtedness (or Refinancing Indebtedness) shall not exceed
the lesser of the fair market value and the cost of such property or assets
plus the aggregate amount of fees and expenses incurred in connection
therewith and shall not be secured by any property or assets of the Company
or any Restricted Subsidiary other than the property and assets so acquired
and (B) the Lien securing the purchase money Indebtedness shall be created
within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
89
<PAGE>
(xi) Liens securing Interest Swap Obligations, which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness (and any Indebtedness which
Refinances such Acquired Indebtedness) incurred in accordance with the
covenant described under "-- Certain Covenants -- Limitation on Incurrence
of Additional Indebtedness"; provided that (A) such Liens secured the
Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and were not
granted in connection with, or in anticipation of the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and (B) such
Liens do not extend to or cover any property or assets of the Company or of
any of the Restricted Subsidiaries other than the property or assets that
secured the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary;
(xiv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xv) Liens arising pursuant to Sale and Leaseback Transactions entered
into in compliance with the indenture;
(xvi) Liens on the Capital Stock or other securities of an Unrestricted
Subsidiary that secures indebtedness or other obligations of such
Unrestricted Subsidiary;
(xvii) any encumbrance or restriction (including put and call
arrangements) with respect to the Capital Stock of any joint venture,
partnership or similar arrangement pursuant to any joint venture,
partnership or similar agreement; and
(xviii) Liens securing Indebtedness that otherwise may be incurred
under the indenture in an aggregate amount not to exceed $5 million.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed the lesser of the fair market value of such property or such purchase
price or cost.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"QUALIFIED EQUITY OFFERING" has the meaning set forth under "
- --Redemption--Optional Redemption upon Qualified Equity Offerings."
"REFERENCE DATE" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"REFINANCE" means in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "--Certain Covenants--
90
<PAGE>
Limitation on Incurrence of Additional Indebtedness" (other than pursuant to
clause (ii), (iv), (v), (vi), (vii), (viii), (ix) and (xi) through (xvi)
inclusive of the definition of Permitted Indebtedness), in each case that does
not:
(1) result in an increase in the aggregate principal amount of any
Indebtedness provided that the amount of any premium reasonably necessary to
Refinance such Indebtedness and the amount of reasonable expenses incurred
by the Company in connection with such Refinancing shall not be deemed an
increase in the aggregate principal amount of the Indebtedness to be
Refinanced;
(2) create Indebtedness (A) the portion of which is scheduled to mature
prior to the notes with a Weighted Average Life to Maturity that is less
than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced or (B) with a final maturity earlier than the final maturity of
the Indebtedness being Refinanced or the notes, whichever is later; provided
that if such Indebtedness being Refinanced is Indebtedness of the Company or
a Guarantor, then such Refinancing Indebtedness shall be Indebtedness solely
of the Company and/or Guarantors.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated the Issue Date by and among the Company, the Guarantors and the Initial
Purchasers.
"REPLACEMENT ASSETS" means assets and property that will be used in the
business of the Company and/or its Restricted Subsidiaries as existing on the
Issue Date or in a business the same, similar or reasonably related thereto
(including Capital Stock of a Person that becomes a Restricted Subsidiary if
such Person is engaged in businesses that comply with the covenant described
under "--Certain Covenants--Conduct of Business").
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt: provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"RESTRICTED PAYMENT" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "--Certain Covenants--Limitation on
Designations of Unrestricted Subsidiaries." Any such Designation may be revoked
by a Board Resolution of the Company delivered to the trustee, subject to the
provisions of such covenant.
"REVOCATION" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property other than
between the Company and a Restricted Subsidiary or between Restricted
Subsidiaries.
"SEC" means the U.S. Securities and Exchange Commission, as from time to
time constituted, or if at any time after the execution of the indenture the SEC
is not existing and performing the applicable duties now assigned to it, then
the body or bodies performing such duties at such time.
91
<PAGE>
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"SENIOR DEBT" means:
(i) the principal of, premium, if any, and interest (including any
interest accruing subsequent to the filing of a petition of bankruptcy at
the rate provided for in the documentation with respect thereto, whether or
not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the notes. Without
limiting the generality of the foregoing, "Senior Debt" shall also include
the principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided
for in the documentation with respect thereto, whether or not such interest
is an allowed claim under applicable law) on, and all other amounts owing in
respect of:
(x) all monetary obligations of every nature of the Company, under
the Credit Agreement, including, without limitation, obligations to pay
principal and interest reimbursement obligations under letters of credit,
fees, expenses and indemnities;
(y) all Interest Swap Obligations; and
(z) all obligations under Currency Agreements, in each case whether
outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(i) any Indebtedness of the Company to a Restricted Subsidiary or
any Affiliate of the Company or any of such Affiliate's Subsidiaries;
(ii) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of the Company or any Restricted Subsidiary
(including without limitation, amounts owed for compensation);
(iii) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(iv) Indebtedness represented by Disqualified Capital Stock;
(v) Indebtedness incurred in violation of the covenant described
under "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness"; and
(vi) any Indebtedness that is, by its express terms, subordinated in
right of payment to any other Indebtedness of the Company or a Restricted
Subsidiary and senior in right of payment to the notes.
"SIGNIFICANT SUBSIDIARY" means, with respect to any Person, any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"SKM" means Saunders Karp & Megrue, L.P.
"SUBSIDIARY," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
92
<PAGE>
"SURVIVING ENTITY" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
trustee, subject to the provisions of such covenant.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date the making of such payment.
93
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The outstanding notes were issued in the form of two global certificates,
one representing the outstanding notes issued under Rule 144A and the other
representing the notes issued under Regulation S. The exchange notes will be
issued in the form of one or more global certificates. The outstanding global
notes were deposited on the date of closing of the sale of the outstanding
notes, and the exchange global notes will be deposited on the exchange date,
with the trustee as custodian for The Depository Trust Company, or DTC, and
registered in the name of DTC or its nominee for credit to the account of a
direct or indirect participant in DTC, as described below. The term "global
notes" means the outstanding global notes or the exchange global notes, as the
context may require.
Except as set forth below, 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. Beneficial interests in the global notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"--Exchange of Book-Entry Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the global
notes will not be entitled to receive physical delivery of certificated notes.
Transfers of beneficial interests in the 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.
Initially, the trustee will act as paying agent and registrar. The exchange
notes may be presented for registration of transfer and exchange at the offices
of the registrar.
DEPOSITORY PROCEDURES
The following information regarding the operations and procedures of DTC,
Euroclear and Cedel has been provided by such organizations and is provided
solely as a matter of convenience. These operations and procedures are solely
within the control of the respective settlement systems and are subject to
change by them from time to time. We take no responsibility for these operations
and procedures (or the description thereof) and urge investors to contact the
system or their participants directly to discuss these matters.
DTC has advised us that it is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the company that, pursuant to procedures established by
it, (i) upon deposit of the global notes, DTC will credit the accounts of
Participants designated by the trustee with portions of the principal amount of
the global notes and (ii) ownership of such interests in the global notes will
be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the global notes).
Investors in the exchange notes may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations, including Euroclear and Cedel, which are Participants in such
system. Euroclear and Cedel will hold interests in the global notes on behalf of
94
<PAGE>
their participants through customers' securities accounts in their respective
names on the books of their respective depositories, which are Morgan Guaranty
Trust Company of New York, Brussels office, as operator of Euroclear, and
Citibank, N.A., as operator of Cedel. All interests in a global note, including
those held through Euroclear or Cedel, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Cedel may also be
subject to the procedures and requirements of such systems. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a global note to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants and certain banks, the ability of a person having
beneficial interests in a global note to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF 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.
Payments in respect of the principal of, and premium, if any, and interest
on a global note registered in the name of DTC or its nominee will be payable to
DTC in its capacity as the registered Holder under the indenture. Under the
terms of the indenture, both we and the trustee will treat the persons in whose
names the exchange notes, including the global notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither we, the trustee nor any agent
of ours or of the trustee has or will have any responsibility or liability for
(i) any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership interest
in the global notes, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the global notes or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised the company that its current practice,
upon receipt of any payment in respect of securities such as the exchange notes,
including principal and interest, is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interest in the
relevant security as shown on the records of DTC, unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants, as the case
may be, and will not be the responsibility of DTC, the trustee or us. Neither we
nor the trustee will be liable for any delay by DTC or any of its Participants
or Indirect Participants in identifying the beneficial owners of the exchange
notes, and both we and the trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants, interests
in the global notes are expected to be eligible to trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will,
therefore, settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its Participants. See "--Same Day Settlement and
Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or Cedel participants, on the other hand, will be effected through DTC
in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case may
be, by its respective depositary; however, such cross-
95
<PAGE>
market transactions will require delivery of instructions to Euroclear or Cedel,
as the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by delivering
or receiving interests in the global note in DTC, and making or receiving
payment in accordance with normal procedures for same-day funds settlement
applicable to DTC. Euroclear participants and Cedel participants may not deliver
instructions directly to the depositories for Euroclear or Cedel.
DTC has advised us that it will take any action permitted to be taken by a
Holder of exchange notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the global notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default with respect to the notes, DTC reserves
the right to exchange the global notes for legended notes in certificated form,
and to distribute such notes to its Participants.
Neither we nor the trustee nor any of our respective agents will have any
responsibility for the performance by DTC, Euroclear or Cedel or our respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A global note is exchangeable for definitive notes in registered
certificated form only if (i) DTC (x) notifies us that it is unwilling or unable
to continue as depositary for the global notes and fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) we, at our option, notify the trustee in writing
that we elect to cause the issuance of the notes or (iii) there shall have
occurred and be continuing an event of default with respect to the notes. In
addition, beneficial interests in a global note may be exchanged for
certificated notes upon request but only upon prior written notice given to the
trustee by or on behalf of DTC in accordance with the indenture. In all cases,
certificated notes delivered in exchange for any global note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary, in accordance with
its customary procedures.
SAME-DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the exchange notes
represented by the global notes, including principal, premium, if any, and
interest, be made by wire transfer of immediately available funds to the
accounts specified by the Holder of the global notes. With respect to exchange
notes in certificated form, we will make all payments of principal, premium, if
any, and interest on the exchange notes at the office or agency maintained by us
for such purpose within the City and State of New York, initially the office of
the paying agent maintained for such purpose, or, at our option, by check mailed
to the Holders thereof at their respective addresses set forth in the register
of Holders of exchange notes; PROVIDED that all payments of principal, premium,
if any, and interest on exchange notes in certificated form the Holders of which
have given wire transfer instructions to us will be required to be made by wire
transfer of immediately available funds to the accounts specified by such
Holders. The exchange notes represented by the global notes are expected to
trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such exchange notes will, therefore, be required by
DTC to be settled in immediately available funds. We expect that secondary
trading in any certificated notes will also be settled in immediately available
funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a global note from a Participant or
Indirect Participant in DTC will be
96
<PAGE>
credited, and any such crediting will be reported to the relevant Euroclear or
Cedel participant, during the securities settlement processing day, which must
be a business day for Euroclear and Cedel, immediately following the settlement
date of DTC. DTC has advised us that cash received in Euroclear or Cedel as a
result of sales of interests in a global note by or through a Euroclear or Cedel
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or Cedel
cash account only as of the business day for Euroclear or Cedel following DTC's
settlement date.
REGISTRATION RIGHTS FOR OUTSTANDING NOTES
The following is a summary of the material terms of the registration rights
agreement. Under the registration rights agreement, we were required to:
- by September 15, 1999, file a registration statement relating to the
exchange offer with the SEC;
- by September 16, 1999, use our best efforts to have the registration
statement declared effective; and
- by October 15, 1999, use our best efforts to consummate the exchange
offer.
Under existing SEC interpretations contained in several no-action letters to
unrelated third parties, the exchange notes will be freely transferable by
holders which are not our affiliates after the exchange offer without further
registration under the Securities Act if the holder of the exchange notes can
make the representations described under "Exchange Offer--Terms and Conditions
of the Letter of Transmittal." Broker-dealers receiving exchange notes in the
exchange offer will, however, have a prospectus delivery requirement with
respect to resales of such exchange notes, as described in "Plan of
Distribution." In the no-action letters, the SEC has taken the position that
broker-dealers receiving exchange notes in the exchange offer may fulfill their
prospectus delivery requirements with respect to exchange notes, other than a
resale of an unsold allotment from the original sale of the outstanding notes,
with this prospectus. We have agreed for a period of 180 days after completion
of the exchange offer to make available a prospectus meeting the requirements of
the Securities Act to these broker-dealers and other persons, if any, with
similar prospectus delivery requirements for use in connection with any resale
of exchange notes.
If we are not permitted to consummate the exchange offer because it is not
permitted by applicable law or SEC policy or any holder of outstanding notes
notifies us prior to the 60th day following completion of the exchange offer
that:
- it is prohibited by law or SEC policy from participating in the exchange
offer,
- that it may not resell the exchange notes acquired by it in the exchange
offer to the public without delivering a prospectus and this prospectus is
not appropriate or available for such resale, or
- that it is a broker-dealer and owns outstanding notes acquired directly
from us or one of our affiliates,
we and the subsidiary guarantors have agreed to file with the SEC a shelf
registration statement to cover resales of outstanding notes by holders who
satisfy specified conditions relating to the provision of information in
connection with the shelf registration statement. We have agreed to use our best
efforts to cause the shelf registration statement to be declared effective as
promptly as possible by the SEC.
Upon the occurrence of events which would require an amendment or supplement
to the prospectus, public resales will not be permitted under a shelf
registration statement or this prospectus until the amendment or supplement is
provided to holders, including a period of up to 120 days in any
97
<PAGE>
calendar year during which we are entitled under the registration rights
agreement to suspend use of the shelf registration statement or this prospectus
to avoid public disclosure of an event that would have a material adverse effect
on us or require public disclosure of a pending material transaction not
previously disclosed.
If we fail to meet any of the deadlines described above for the exchange
offer or a shelf registration statement, additional interest will accrue on the
outstanding notes over and above the stated interest rate of 12% at a rate of
0.50% per annum for the first 90 days after the default and increasing by an
additional 0.25% per annum at the beginning of each subsequent 90-day period.
However, the additional interest rate on the outstanding notes may not exceed in
the aggregate 1.0% per annum. Upon curing the registration default, additional
interest on the outstanding notes as a result of such registration default shall
cease to accrue. If, after curing all registration defaults, there is a
subsequent registration default, the rate of additional interest will initially
be 0.50%, regardless of the additional interest rate in effect with respect to
any prior registration default. As a result of the failure to have an exchange
offer registration statement filed by September 15, 1999, to have it declared
effective by September 16, 1999 and to complete the exchange offer by
October 15, 1999, we are paying additional interest on the outstanding notes.
The amount of additional interest has ranged from 0.5% per annum on
September 15, 1999 to 1.0% per annum currently. Additional interest will
continue to accrue at that rate until effectiveness of the registration
statement and completion of the exchange offer.
Any amount of additional interest that becomes due is payable in cash, on
the same dates as interest payments are made on the outstanding notes. The
amount of additional interest is determined by multiplying the applicable
additional interest rate by the principal amount of the outstanding notes
multiplied by a fraction, the numerator of which is the number of days the
additional interest rate was applicable during such period, determined on the
basis of a 360-day year comprised of twelve 30-day months, and the denominator
of which is 360.
98
<PAGE>
PLAN OF DISTRIBUTION
Except as provided below, this prospectus may not be used for an offer to
resell, resale or other retransfer of the exchange notes.
Each broker-dealer receiving exchange notes for its own account from the
exchange offer must acknowledge that it will deliver a prospectus if it resells
the exchange notes. This prospectus may be used by a broker-dealer who resells
exchange notes received in exchange for outstanding notes, but only if the
broker-dealer acquired the outstanding notes from its market-making activities
or other trading activities. We have agreed that for 180 days after the exchange
date, we will make this prospectus available to any broker-dealer to use in a
resale of the exchange notes. In addition, until August 3, 2000, 90 days after
the date of this prospectus, all dealers effecting transactions in the exchange
notes may be required to deliver a prospectus. We acknowledge and each holder,
except a broker-dealer, must acknowledge, that it is not engaged in, does not
intend to engage in, and does not have an arrangement or understanding with any
person to participate in any distribution of exchange notes.
We will not receive any proceeds from the exchange of outstanding notes for
exchange notes or from any resale of exchange notes by broker-dealers.
Broker-dealers who receive exchange notes for their own accounts through the
exchange offer may sell using the following resale methods, alone or in
combination:
- resale in the over-the-counter market;
- resale in negotiated transactions; or
- resale by writing options on the exchange notes
Any resale by the preceding methods must be at the prevailing market price
at the time of resale, at some price related to the prevailing market price, or
at negotiated prices. Resales may be made directly to purchasers or to or
through brokers or dealers. Broker-dealers may receive compensation in the form
of commissions or concessions from any other broker-dealer or from the
purchasers of exchange notes. A broker-dealer that resells exchange notes
received for its own account through the exchange offer, and a broker or dealer
that participates in a distribution of the exchange notes, may be deemed an
underwriter within the meaning of the Securities Act. Consequently, any profit
on the resale of exchange notes and any commission or concessions the broker or
dealer receives may be considered underwriting compensation under the Securities
Act. The letter of transmittal states that, by acknowledging that 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.
By tendering outstanding notes and executing the letter of transmittal,
holders tendering outstanding notes for exchange notes certifies that:
- it is not an affiliate of ours or of our subsidiaries or affiliates or, if
the tendering party is an affiliate of ours or of our subsidiaries or
affiliates, it will comply with the registration and prospectus
requirements of the Securities Act if applicable;
- the exchange notes are being acquired in the ordinary course of business
of the person receiving the exchange notes, whether or not that person is
the holder of the exchange notes;
- the tendering party has not entered into any arrangement or understanding
with any person to participate in the distribution of exchange notes;
- the tendering party is not a broker-dealer who purchased the outstanding
notes for resale through an exemption under the Securities Act; and
- the tendering party will be able to trade the exchange notes acquired in
the exchange offer without restriction under the Securities Act.
99
<PAGE>
In addition, any broker-dealer who acquired the outstanding notes for its
own account by its market-making activities or other trading activities must
deliver a prospectus that complies with the Securities Act. Except in the case
where a broker-dealer resells an unsold allotment from the original sale of the
outstanding notes, the SEC has indicated that a participating broker-dealer may
fulfill its prospectus delivery requirements with this prospectus. For 180 days
after the expiration date, we will promptly send additional copies of this
prospectus, and any amendments or supplements, to any participating
broker-dealer that requests the prospectus in the letter of transmittal. We will
pay all expenses incident to the exchange offer. This does not include, however,
any commissions or concessions of any brokers or dealers. Additionally, we will
indemnify the holders of the notes, including participating broker-dealers,
against liabilities, including liabilities under the Securities Act.
By accepting this exchange offer, each participating broker-dealer agrees
that it will discontinue its use of this prospectus if the we should notify it
that an event has occurred that makes a statement in the prospectus materially
false or misleading. Once we provide the participating broker-dealer with an
amendment or supplement to the prospectus correcting any misstatement or
omission, then the broker-dealer may resume using the prospectus with the
amendment or supplement, as the case may be. If we give notice to the
broker-dealer to suspend use of the prospectus, then the 180-day period referred
to above will be extended by the number of days from the date the broker-dealer
received notice until the date the broker-dealer received the amended or
supplemented prospectus. For our part, we agree to promptly notify participating
broker-dealers of material changes that render any statement in the prospectus
false or misleading.
100
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of notes by an initial beneficial owner of notes that, for United States federal
income tax purposes, is not a "United States person" (a "Non-United States
Holder"). This discussion is based upon the United States federal tax law now in
effect, which is subject to change, possibly retroactively.
When we use the term "United States person," we generally mean a holder of
notes who (for United States Federal income tax purposes):
- is a citizen or resident of the United States;
- is a corporation (including an entity treated as a corporation for federal
income tax purposes) created or organized in or under the laws of the
United States or any state thereof or the District of Columbia;
- is an estate, the income of which is subject to United States Federal
income taxation regardless of its source; or
- is a trust whose administration 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 (or,
is a trust that was a "United States person" under the law in effect on
August 20, 1996 and elected to continue to be so treated).
The tax treatment applicable to each holder of the notes may vary depending
upon the particular situation of such holder. United States persons acquiring
the notes are subject to different rules than those discussed below. In
addition, certain other holders (including, but not limited to, insurance
companies, tax exempt organizations, financial institutions, persons who own
notes through partnerships or other pass-through entities, broker-dealers and
individuals who are United States expatriates) may be subject to special rules
not discussed below. WE ADVISE YOU TO CONSULT WITH YOUR OWN TAX ADVISOR
REGARDING THE TAX CONSEQUENCES TO YOU OF THE ACQUISITION, OWNERSHIP AND SALE OF
THE NOTES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
INTEREST
Interest paid by the company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not "effectively connected with the conduct of a trade or business within the
United States" (within the meaning of the United States Internal Revenue Code of
1986, as amended (the "Code") carried on by such Non-United States Holder and
such Non-United States Holder:
- does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the company;
- is not a "controlled foreign corporation" (within the meaning of the Code)
with respect to which the company is a "related person" (within the
meaning of the Code); and
- certifies, under penalties of perjury, that it is not a United States
person and provides its name and address (on Internal Revenue Service
Form W-8 or W-8BEN, as appropriate) to the company or an agent appointed
by the company (or, a securities clearing organization, bank or other
financial institution that holds the notes on behalf of the Non-United
States Holder in the ordinary course of its trade or business certifies on
behalf of such holder that it has received such certification from the
holder and provides a copy to the company or its agent).
101
<PAGE>
If you are not qualified for exemption under these rules, interest paid to
you may be subject to withholding tax at the rate of 30% (or any lower
applicable treaty rate). The payment of interest effectively connected with your
United States trade or business, however, would not be subject to a 30%
withholding tax so long as you provide the company or its paying agent an
adequate certification (on Internal Revenue Service Form W-8ECI or 4224, as
appropriate), but such interest would be subject to United States federal income
tax on a net basis at the rates applicable to United States persons generally
(and, if you are a corporation, you may also be subject to branch profits tax at
a rate of 30% or a lower treaty rate).
GAIN ON DISPOSITION
If you are a Non-United States Holder, you will generally not be subject to
United States federal income tax on gain recognized on a sale, exchange, (other
than pursuant to this exchange offer), redemption or other disposition of a
note, unless any of the following is true:
- your investment in the notes is effectively connected with a United States
trade or business that is carried on by you; or
- if you are a nonresident alien individual and you hold the note as a
capital asset or you are present in the United States for 183 or more days
in the taxable year within which such sale, exchange, redemption or other
disposition takes place and, in each case, certain other requirements are
met.
If you have a United States trade or business and the investment in the
notes is effectively connected with such United States trade or business, any
gain recognized on a sale, redemption or other disposition of notes may be
subject to United States federal income tax on a net basis at the rates
applicable to United States persons generally (and, if you are a corporation,
you may also be subject to branch profits tax at a rate of 30% or a lower treaty
rate).
If you exchange our outstanding notes for our exchange notes pursuant to
this exchange offer, you wil not recognize any taxable gain or loss because of
that exchange. Your tax basis in the exchange notes you receive in the exchange
will be the same as your tax basis (immediately before the exchange) in the
outstanding notes you surrended in the exchange. Your holding period for the
exchange notes you receive in the exchange will include your holding period for
the outstanding notes you surrendered in the exchange.
FEDERAL ESTATE TAXES
If interest on the notes is not effectively connected with a United States
trade or business, and is exempt from withholding of United States federal
income tax under the rules described above (other than by treaty), the notes
will not be included in the estate of a deceased Non-United States Holder for
United States federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The company will, where required, report to the holders of notes and the
Internal Revenue Service the amount of any interest paid on the notes in each
calendar year and the amounts of tax withheld, if any, from those payments.
In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting requirements will not apply to payments for which the
requisite certification, as described above, has been received or an exemption
has otherwise been established, provided that neither the company nor its
payment agent has actual knowledge that the holder is a United States person or
that the conditions of any other exemption are not in fact satisfied. Under
temporary Treasury regulations, these information reporting
102
<PAGE>
and backup withholding requirements will apply, however, to the gross proceeds
paid to a Non-United States Holder on the disposition of the notes by or through
a United States office of a United States or foreign broker, unless the holder
certifies to the broker under penalties of perjury as to its name, address and
status as a foreign person or the holder otherwise establishes an exemption. As
a general matter, information reporting and backup withholding will not apply to
a payment of the proceeds of a disposition of the notes by or through a foreign
office of a foreign broker. Information reporting (but not backup withholding)
will apply, however, to a payment of the proceeds of a sale of notes by a
foreign office of a broker that:
- is a United States person;
- derives 50% or more of its gross income for certain periods from
activities that are effectively connected with the conduct of a trade or
business in the United States; or
- is a "controlled foreign corporation."
Even if a broker meets one of these three conditions, information reporting
will not apply if the broker has documentary evidence in its records that the
holder is not a United States person and certain other conditions are met.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
You should be aware that the Treasury Department promulgated revised final
regulations regarding the withholding and information reporting rules discussed
above. In general, the final regulations do not significantly change the
substantive withholding and information reporting requirements, but unify
current certification procedures and forms. The final regulations are generally
effective for payments made after December 31, 2000, subject to certain
transition rules. WE STRONGLY URGE PROSPECTIVE NON-UNITED STATES HOLDERS TO
CONSULT THEIR OWN TAX ADVISORS FOR INFORMATION ON THE IMPACT, IF ANY, OF THE NEW
FINAL REGULATIONS.
LEGAL MATTERS
The validity of the exchange notes will be passed upon for us by Jones Day
Reavis & Pogue, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 1998 and
the year ended December 31, 1999, and for the period from September 9, 1998
(inception) to December 31, 1998 (Precision), and of Mid State (Predecessor) for
the nine month period ended September 30, 1998, appearing in this prospectus and
registration statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of Mid State (Predecessor) for the
year ended December 31, 1997, appearing in this prospectus and registration
statement, have been audited by Baker Newman & Noyes, independent auditors, as
indicated in their report thereon appearing elsewhere herein and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
The financial statements of General Automation as of March 19, 1999 and
December 31, 1998 and for the period from January 1, 1999 to March 19, 1999 and
the years ended December 31, 1998 and 1997, appearing in this prospectus and
registration statement, have been audited by
103
<PAGE>
Ernst & Young, LLP independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firms as experts in accounting and auditing.
The combined financial statements of Certified and Calbrit as of March 19,
1999 and October 31, 1998 and for the period from November 1, 1998 to March 19,
1999 and the years ended October 31, 1998 and 1997, appearing in this prospectus
and registration statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of Nationwide as of March 19, 1999 and for the
period from June 1, 1998 to March 19, 1999, included in this prospectus and
registration statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of Nationwide for years ended May 31, 1998 and
1997, included in this prospectus, have been audited by Insero, Kasperski,
Ciaccia & Co., P.C., independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The financial statements of Gillette as of August 31, 1999 and for the
period from March 1, 1999 to August 31, 1999, included in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of Gillette as of February 28, 1999 and for the
year then ended, included in this Prospectus and Registration Statement, have
been audited by Bonadio & Co., LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF PRECISION PARTNERS,
INC. (PRECISION) AND MID STATE MACHINE PRODUCTS
(PREDECESSOR)
Report of Independent Auditors, Ernst & Young LLP........... F-3
Report of Independent Auditors, Ernst & Young LLP........... F-4
Report of Independent Auditors, Baker Newman & Noyes........ F-5
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 1998 (Precision)............................. F-6
Consolidated Statements of Operations for the year ended
December 31, 1999 and the period from September 9, 1998
(Inception) to December 31, 1998 (Precision), and the nine
months ended September 30, 1998 and year ended
December 31, 1997 (Predecessor)........................... F-7
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1999 and the period from September 9,
1998 (Inception) to December 31, 1998 (Precision), and the
nine months ended September 30, 1998 and year ended
December 31, 1997 (Predecessor)........................... F-8
Consolidated Statements of Cash Flows for the year ended
December 31, 1999 and the period from September 9, 1998
(Inception) to December 31, 1998 (Precision), and the nine
months ended September 30, 1998 and year ended
December 31, 1997 (Predecessor)........................... F-9
Notes to Consolidated Financial Statements.................. F-11
FINANCIAL STATEMENTS OF GENERAL AUTOMATION, INC.
Report of Independent Auditors, Ernst &Young LLP............ F-22
Balance Sheets as of March 19, 1999 and December 31, 1998... F-23
Statements of Income for the period from January 1, 1999 to
March 19, 1999, and the years ended December 31, 1998 and
1997...................................................... F-24
Statements of Stockholders' Equity for the period from
January 1, 1999 to March 19, 1999, and the years ended
December 31, 1998 and 1997................................ F-25
Statements of Cash Flows for the period from January 1, 1999
to March 19, 1999, and the years ended December 31, 1998
and 1997.................................................. F-26
Notes to Financial Statements............................... F-27
COMBINED FINANCIAL STATEMENTS OF CERTIFIED FABRICATORS, INC.
AND CALBRIT DESIGN, INC.
Report of Independent Auditors, Ernst & Young LLP........... F-31
Combined Balance Sheets as of March 19, 1999 and
October 31, 1998.......................................... F-32
Combined Statements of Operations for the period from
November 1, 1998 to March 19, 1999, and for the years
ended October 31, 1998 and 1997........................... F-33
Combined Statements of Stockholders' Equity for the period
from November 1, 1998 to March 19, 1999, and the years
ended October 31, 1998 and 1997........................... F-34
Combined Statements of Cash Flows for the period from
November 1, 1998 to March 19, 1999, and for the years
ended October 31, 1998 and 1997........................... F-35
Notes to Combined Financial Statements...................... F-36
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
FINANCIAL STATEMENTS OF NATIONWIDE PRECISION PRODUCTS CORP.
Report of Independent Auditors, Ernst & Young LLP........... F-46
Report of Independent Auditors, Insero, Kasperski, Ciaccia &
Co., P.C.................................................. F-47
Balance Sheets as of March 19, 1999 and May 31, 1998........ F-48
Statements of Income for the period from June 1, 1999 to
March 19, 1999, and the years ended May 31, 1998 and
1997...................................................... F-49
Statements of Stockholders' Equity for the period from
June 1, 1999 to March 19, 1999, and the years ended
May 31, 1998 and 1997..................................... F-50
Statements of Cash Flows for the period from June 1, 1999 to
March 19, 1999, and the years ended May 31, 1998 and
1997...................................................... F-51
Notes to Financial Statements............................... F-52
FINANCIAL STATEMENTS OF GILLETTE MACHINE & TOOL CO., INC.
Report of Independent Auditors, Ernst & Young LLP........... F-59
Report of Independent Auditors, Bonadio & Co., LLP.......... F-60
Balance Sheets as of August 31, 1999 and February 28,
1999...................................................... F-61
Statements of Income and Retained Earnings for the period
from March 1, 1999 to August 31, 1999, and the year ended
February 28, 1999......................................... F-62
Statements of Cash Flows for the period from March 1, 1999
to August 31, 1999, and the year ended February 28,
1999...................................................... F-63
Notes to Financial Statements............................... F-64
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
The Board of Directors
Precision Partners, Inc.
We have audited the consolidated balance sheets of Precision Partners, Inc.
("Precision") as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1999 and the period from September 9, 1998 (inception) through
December 31, 1998. These financial statements are the responsibility of
Precision's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 Precision
Partners, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for the year ended December 31, 1999 and the
period from September 9, 1998 (inception) through December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
March 17, 2000 /s/ Ernst & Young LLP
Dallas, Texas
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
The Management Committee
Precision Partners, Inc.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Mid State Machine Products (the "Predecessor") for the nine
month period ended September 30, 1998. These financial statements are the
responsibility of the Predecessor's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards 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 evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements of Mid State Machine Products referred
to above present fairly, in all material respects, the consolidated results of
its operations and its cash flows for the nine month period ended September 30,
1998 in conformity with accounting principles generally accepted in the United
States.
January 19, 1999 /s/ Ernst & Young LLP
Boston, Massachusetts
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS, BAKER NEWMAN & NOYES
The Board of Directors
Mid State Machine Products
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Mid State Machine Products for the year ended December 31,
1997. These financial statements are the responsibility of 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 of Mid State Machine Products referred
to above present fairly, in all material respects, the consolidated results of
its operations and its cash flows for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
February 2, 1998 /s/ Baker Newman & Noyes LLC
Portland, Maine
F-5
<PAGE>
PRECISION PARTNERS, INC. (PRECISION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 313 $ 963
Trade accounts receivable, less allowance for doubtful
accounts of $260,838 and $85,000 at December 31, 1999
and 1998, respectively 23,613 5,719
Inventories 18,404 4,340
Current deferred income taxes 1,303 37
Other current assets 1,916 499
-------- -------
Total current assets 45,549 11,558
Property, plant and equipment, at cost, net 71,611 15,224
Goodwill, net 77,429 34,589
Non-compete agreement, net 933 1,000
Other assets 10,869 950
-------- -------
Total assets $206,391 $63,321
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 11,200 $ --
Accounts payable 7,703 3,215
Accrued expenses 11,406 1,613
Income taxes payable 1,014 232
Deferred revenue 4,700 --
Current installments of long-term debt 2,611 750
Other current liabilities 3,071 --
-------- -------
Total current liabilities 41,705 5,810
Long-term debt, less current portion 120,737 22,250
Non-current deferred taxes 7,817 3,656
Stockholders' equity:
Common stock, Class A, $.01 par value, 100 shares
authorized, issued and outstanding -- --
Additional paid-in capital 42,042 32,000
Accumulated deficit (5,910) (395)
-------- -------
Total stockholders' equity 36,132 31,605
-------- -------
Total liabilities and stockholders' equity $206,391 $63,321
======== =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRECISION
---------------------------------
PERIOD FROM PREDECESSOR
SEPTEMBER 9, ----------------------------------
YEAR ENDED 1998 (INCEPTION) NINE MONTH PERIOD YEAR ENDED
DECEMBER 31, THROUGH ENDED SEPTEMBER 30, DECEMBER 31,
1999 DECEMBER 31, 1998 1998 1997
------------- ----------------- ------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $123,188 $12,602 $24,106 $33,870
Cost of sales 93,434 9,090 16,326 24,581
-------- ------- ------- -------
Gross profit 29,754 3,512 7,780 9,289
Selling, general and administrative
expenses 24,840 3,134 3,374 4,571
-------- ------- ------- -------
Operating income 4,914 378 4,406 4,718
Other income (expense):
Investment income 245 -- 103 1,197
Interest expense (12,812) (526) (37) (85)
Gain on sale of property and
equipment -- -- -- 29
Other 8 (138) (91) (6)
-------- ------- ------- -------
(Loss) income before income taxes (7,645) (286) 4,381 5,853
(Benefit) provision for income
taxes (2,130) 109 1,677 2,310
-------- ------- ------- -------
Net (loss) income $ (5,515) $ (395) $ 2,704 $ 3,543
======== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON RETAINED
STOCK STOCK EARNINGS TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
PREDECESSOR:
Balance at January 1, 1997 $25 $25 $13,701 $13,751
Net income -- -- 3,543 3,543
Dividend paid -- -- (200) (200)
--- --- ------- -------
Balance at December 31, 1997 25 25 17,044 17,094
Net income -- -- 2,704 2,704
Redemption of shares (6) (6) (11,521) (11,533)
--- --- ------- -------
Balance at September 30, 1998 $19 $19 $ 8,227 $ 8,265
=== === ======= =======
</TABLE>
<TABLE>
<CAPTION>
CLASS A ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
PRECISION:
Initial capitalization at September 9, 1998.......... $ -- $32,000 $ -- $32,000
Net loss............................................. -- -- (395) (395)
------- ------- ------- -------
Balance at December 31, 1998......................... -- 32,000 (395) $31,605
Additional capitalization at time of
reorganization..................................... -- 10,035 -- 10,035
Capital contributions................................ -- 7 -- 7
Net loss............................................. -- -- (5,515) (5,515)
------- ------- ------- -------
Balance at December 31, 1999......................... $ -- $42,042 $(5,910) $36,132
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PRECISION
--------------------------------------- PREDECESSOR
PERIOD FROM SEPTEMBER 9, ----------------------------------
YEAR ENDED 1998 (INCEPTION) NINE MONTH PERIOD YEAR ENDED
DECEMBER 31, THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31,
1999 1998 1998 1997
------------ ------------------------ ------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (5,515) $ (395) $ 2,704 $ 3,543
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation 8,525 658 806 1,052
Amortization 4,432 447 -- --
Gain on sale of fixed assets -- -- -- (29)
Loss (gain) on trading securities -- -- 200 (836)
Purchase of trading securities -- -- (3,382) (4,826)
Proceeds from the sale of trading
securities -- -- 9,564 3,197
Deferred income taxes (1,510) (22) (315) 115
Changes in operating assets and
liabilities, net of
acquisitions:
Trade accounts receivable (5,531) 772 (805) (1,277)
Inventories (4,345) 1,413 (1,623) (471)
Income taxes receivable -- -- 364 --
Other current assets (7,190) (267) 4 57
Accounts payable 1,551 385 87 (184)
Accrued expenses 7,553 (130) 97 142
Income taxes payable (192) (107) 354 (674)
Deferred revenue -- -- 183 (53)
Other current liabilities 7,620 -- -- --
-------- -------- -------- -------
Net cash provided by (used in)
operating activities 5,398 2,754 8,238 (244)
INVESTING ACTIVITIES
Proceeds from sale of property, plant
and equipment -- -- -- 30
Proceeds from sale of Sukee Arena -- -- 260 --
Purchase of property, plant and
equipment (10,260) (751) (623) (928)
Payment of deferred acquisition costs -- (342) -- --
Acquisition of subsidiaries, net of
cash (111,277) (53,483) -- --
Payment for non-compete agreement -- (1,000) -- --
Proceeds from available-for-sale
securities -- -- 500 (500)
Proceeds from maturities of held-to-
maturity securities -- -- 808 1,382
Proceeds from note receivable,
stockholder 90 -- 175 100
-------- -------- -------- -------
Net cash (used in) provided by
investing activities (121,447) (55,576) 1,120 84
FINANCING ACTIVITIES
Proceeds from revolving line of credit 11,200
Repayment of long-term debt (250) (595) (283) (305)
Proceeds from long-term debt 100,000 23,000 -- 400
</TABLE>
F-9
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PRECISION
--------------------------------------- PREDECESSOR
PERIOD FROM SEPTEMBER 9, ----------------------------------
YEAR ENDED 1998 (INCEPTION) NINE MONTH PERIOD YEAR ENDED
DECEMBER 31, THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31,
1999 1998 1998 1997
------------ ------------------------ ------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Contribution of capital $ 10,042 $ 32,000 $ -- $ --
Payment of debt issue costs (5,593) (660) -- --
Common stock redemption -- -- (11,673) --
Dividends paid -- -- -- (200)
-------- -------- -------- -------
Net cash provided by (used in)
financing activities 115,399 53,745 (11,956) (105)
-------- -------- -------- -------
Net increase (decrease) in cash and
cash equivalents (650) 923 (2,598) (265)
Cash and cash equivalents, beginning
of period 963 40 2,638 2,903
-------- -------- -------- -------
Cash and cash equivalents, end of
period $ 313 $ 963 $ 40 $ 2,638
======== ======== ======== =======
SUPPLEMENTARY INFORMATION FOR THE
STATEMENT OF CASH FLOWS:
Interest payments $ 7,897 $ 548 $ 34 $ 84
Income tax payments $ 547 $ 253 $ 1,276 $ 2,868
Non-cash investing and financing
activities - purchase of software
under financing agreements $ 344 $ -- $ -- $ --
</TABLE>
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Precision Partners, L.L.C. (LLC) was incorporated on September 9, 1998 for
the purpose of acquiring and operating companies in the business of
manufacturing and supplying complex precision metal parts, toolings and
assemblies for original equipment manufacturers ("OEMS").
On September 30, 1998, investors contributed approximately $32 million of
capital to LLC which was then contributed by LLC to two wholly-owned
subsidiaries, Mid State Acquisition Corp. and Galaxy Acquisition Corp.,
established to acquire on September 30, 1998 all of the outstanding capital
stock of Mid State Machine Products ("Mid State") and Galaxy Industries
Corporation ("Galaxy") (the "1998 Acquisitions"). The total purchase price
including transaction expenses was approximately $54,483,000 and was financed by
the proceeds of the contributed capital and borrowings under the Company's
credit facility. The purchase price was allocated to the estimated fair value of
the assets acquired and liabilities assumed in accordance with the purchase
method of accounting as follows:
<TABLE>
<S> <C>
Current assets $12,472,000
Property, plant and equipment 15,131,000
Goodwill 35,036,000
Other assets 1,007,000
Current liabilities (5,553,000)
Deferred taxes, non-current (3,610,000)
</TABLE>
In February, 1999 Precision Partners, Inc. ("Precision" or "Company") was
formed as a wholly-owned subsidiary of Precision Partners Holdings, Inc.
(Holdings) which is a wholly-owned subsidiary of LLC. On March 19, 1999 as part
of a reorganization, LLC contributed through Holdings to Precision its
investments and related equity in Galaxy, Mid State and Precision Partners
Management Corporation ("Management Corporation"), which comprised substantially
all of the equity of LLC. Simultaneous with this reorganization, Precision
issued $100,000,000 of 12% Senior Subordinated Notes (the "Notes") in order to
purchase all of the issued and outstanding capital stock of Certified
Fabricators, Inc. and its sister company Calbrit Design, Inc. (together,
"Certified") and to purchase substantially all of the assets and assume certain
liabilities of General Automation, Inc. ("General Automation") and Nationwide
Precision Products Corp. ("Nationwide"). Also, on September 1, 1999, Precision
purchased all of the issued and outstanding capital stock of Gillette Machine &
Tool, Inc. ("Gillette") using existing cash and borrowings under Precision's
credit facility. The acquisitions of Certified, General Automation, Nationwide,
and Gillette are referred to collectively as the "1999 Acquisitions." Subsequent
to this reorganization, capital totaling approximately $42 million had been
contributed to LLC by investors; this capital has been contributed through
Holdings to Precision.
F-11
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1999 Acquisitions were financed through the net proceeds of the issuance
of the Notes, together with borrowings under our credit facilities, an equity
contribution of approximately $10,000,000 and available cash. The total purchase
price, including transaction expenses, was approximately $116,388,000, and the
purchase price was allocated to estimated fair value of the assets acquired and
liabilities assumed in accordance with the purchase method of accounting as
follows:
<TABLE>
<S> <C>
Current assets $27,848,000
Property, plant, and equipment 54,658,000
Goodwill 45,641,000
Other assets 309,000
Current liabilities (6,466,000)
Deferred taxes, non-current (5,602,000)
</TABLE>
The excess of the purchase price over the net fair value of the assets
acquired was allocated to goodwill, which is being amortized over 20 years. We
are still in the process of obtaining appraisals for certain assets and there
are also contingent payments which may subject the purchase price to future
refinements. The purchase price for one company acquired in 1999 included a
$4 million escrow to be paid out upon the company meeting certain operating
targets through April 30, 1999. Such targets were not met and, accordingly, the
escrow has been returned to Precision, thereby reducing the purchase price and
the resulting goodwill by $4 million. The acquisitions which have been accounted
for under the purchase method of accounting have been included in results of
operations since the date of the acquisitions.
The Company's unaudited pro forma revenues and net loss, after giving effect
to the 1999 and 1998 Acquisitions, as if each such acquisition had occurred on
January 1, 1998, were $149,749,000 and $3,738,000 and $147,078,000 and $488,000
for 1999 and 1998, respectively.
Prior to the 1998 Acquisitions, LLC had substantially no operations and
prior to the 1999 Acquisitions, Precision had substantially no operations. For
financial statement presentation purposes, the reorganization is being accounted
for as if it had occurred on September 9, 1998 in a manner similar to a pooling
of interests. Therefore, operations for the period from September 9, 1998
through December 31, 1998 are shown only for Precision and consist of the
operations of Mid State and Galaxy from the date of acquisition through
December 31, 1998 and of LLC from inception (September 9, 1998) through
December 31, 1998. Similarly, 1999 operations are shown for Precision and
consist of the operations of Mid State and Galaxy for the entire year, of LLC
from January 1, 1999 through March 19, 1999 and the 1999 Acquisitions from the
date of acquisition through December 31, 1999. Since Precision is treated as
having commenced operations in September 1998, Mid State is considered the
predecessor for financial reporting purposes. The predecessor financial
statements include the operations of Mid State and its wholly-owned subsidiaries
for the periods reported. All significant intercompany balances and transactions
for both the Company's financial statements and the Predecessor's financial
statements have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the actual amounts reported in the financial statement
and accompanying notes. Actual results could differ from those estimates.
F-12
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash in bank demand deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk with respect to cash.
The Company is materially dependent on a small group of customers. During
the year ended December 31, 1999, 26.5%, 7.4%, and 6.8% of the Company's sales
were to three customers. As of December 31, 1999, the Company's receivables from
these three customers were approximately $4,674,000, $4,717,000 and $1,125,000.
During the period from September 9, 1998 through December 31, 1998, 60.5%,
14.8%, and 11.2% of the Company's sales were to three customers. As of
December 31, 1998, the Company's receivables from these three customers were
approximately $1,906,000, $782,000, and $686,000. The Predecessor was materially
dependent on a single customer representing 74% and 72% of sales for the nine
month period ended September 30, 1998 and year ended December 31, 1997,
respectively. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its trade accounts receivable
credit risk exposure is limited. The Company does not require collateral or
security for these receivables.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term, highly liquid investments
which are readily convertible into cash with original maturities of 90 days or
less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments consisting of cash and cash
equivalents, trade accounts receivable, accounts payable and accrued liabilities
are stated at expected settlement amounts which approximate fair value. The
carrying amounts of the note payable to the bank and the line of credit
approximate fair value due to the variable rate interest feature on the related
debt. Management believes the carrying amount of the subodinated notes is not
materially different from the estimated fair value based on prevailing interest
rates for similar notes.
INVENTORIES
Inventories are stated at the lower of cost or market. The Predecessor used
the first-in, first out (FIFO) method for pricing material and the last-in,
first-out (LIFO) method for labor and overhead. At the acquisition date, the
Company valued the inventories at fair value which approximated the FIFO method
and will account for inventories on a FIFO basis.
DEBT ISSUE COSTS
The Company incurred costs related to obtaining financing. These costs are
being amortized on a straight line basis over the term of the related debt. The
difference between the straight line method and interest method for amortizing
debt issue costs is not significant.
F-13
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED ACQUISITION AND OFFERING COSTS
The Company has deferred $6,261,617 of costs related to issuance of the
Notes. The costs related to the Notes will be amortized over the term of the
Notes and the accumulated amortization of those costs totaled $1,077,137 as of
December 31, 1999.
DEPRECIATION AND AMORTIZATION
Buildings, machinery and equipment, and furniture and fixtures are
depreciated using both straight line and declining balance methods over the
estimated useful lives of the individual assets. The lives are five to seven
years on furniture and fixtures, five to ten years for machinery and equipment,
twenty years for land improvements and forty years for building and
improvements. Leasehold improvements are amortized on a straight line basis over
the lesser of the estimated service lives or the terms of the leases.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under FASB No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, which requires impairment losses to be recognized for long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are not
sufficient to recover the assets' carrying amount. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount.
INTANGIBLES
The excess of cost over the fair market value of net assets acquired
(goodwill) is amortized on a straight-line basis over 20 years. Accumulated
amortization was $3,831,100 and $450,000 as of December 31, 1999 and 1998,
respectively.
In connection with the acquisition of one of its subsidiaries, the Company
entered into a non-compete agreement with the seller for $1,000,000. The
$1,000,000 is amortized on a straight line basis over the non-compete period.
Accumulated amortization at December 31, 1999 is approximately $67,000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued FASB Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION which is
effective for fiscal years beginning after December 15, 1997. This statement
changes the way that companies report information about operating segments in
financial statements. The Company adopted this statement during 1998 and
determined that it is one reportable segment and such adoption had no material
effect on the financial statements.
In June 1998, the Financial Accounting Standards Board issued FASB Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
effective for fiscal periods beginning after June 15, 2000. The adoption of this
statement is not expected to have a material effect on the financial statements.
F-14
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred and amounted to approximately
$214,408 for the year ended December 31, 1999, $61,188 for the period from
September 9, 1998 through December 31, 1998 and $222,738 and $230,115 for the
nine month period ended September 30, 1998 and the year ended December 31, 1997,
respectively.
INCOME TAXES
The Company accounts for taxes under the liability method where deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
REVENUE RECOGNITION
Sales are recorded when products are shipped to customers. Revenues from
long-term contracts are recognized on the percentage-of-completion method,
measured by the percentage of total costs incurred to date to estimated total
costs of the contract. Total costs include all direct material and labor costs
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Contract revisions are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
STOCK COMPENSATION
Precision has elected to account for stock-based compensation to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market value of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the stock.
EARNINGS PER SHARE
Earnings per share is not presented for either Precision or the Predecessor
since such amounts are not considered meaningful.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
presentation.
F-15
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES AND COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw material $ 2,575 $1,122
Work in process 13,978 2,968
Finished goods 2,365 300
------- ------
18,918 4,390
Less reserves for obsolescence 514 50
------- ------
$18,404 $4,340
======= ======
</TABLE>
Information regarding contract costs, estimating earnings, and progress
billings consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Costs incurred on uncompleted contracts $ 9,510
Estimated earnings 1,187
-------
10,697
Less net progress billings 7,893
-------
Costs and estimated earnings on uncompleted contracts
included in work in process inventory $ 2,804
=======
</TABLE>
There were no significant billings in excess of net costs and estimated
earnings on uncompleted contracts.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which are valued at cost, consists of the
following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Building and improvements $ 4,799 $ 2,034
Leasehold improvements 2,079 749
Machinery and equipment 72,868 12,935
Furniture, fixtures and other 2,567 164
------- -------
82,313 15,882
Less accumulated depreciation and amortization 10,702 658
------- -------
$71,611 $15,224
======= =======
</TABLE>
4. INVESTMENT SECURITIES
Gross unrealized holding gains for investments categorized as held to
maturity were $0 and $3,615 for the nine month period ended September 30, 1998,
and for the year ended December 31, 1997, respectively.
F-16
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT SECURITIES (CONTINUED)
Net income includes gross realized gains (losses) of approximately
($200,000) and $652,000 for the nine month period ended September 30, 1998 and
the year ended December 31, 1997, respectively.
5. DEBT
Precision maintains a line of credit of $25,000,000, which matures on
March 31, 2005, under which it can borrow funds or secure letters of credit at
prevailing market rates. As of December 31, 1999, we had outstanding draws on
the line of credit totaling $11,200,000 (9.85% at December 31, 1999). The
revolving line of credit is secured by accounts receivable and inventory of
Precision. Advances under the line are available to us based upon 85% of
outstanding eligible accounts receivable and 50% of eligible inventories.
Associated with the line of credit is a commitment fee of 0.5% per annum payable
in arrears on the last day of each quarter. The fee is calculated from the
closing date, March 19, 1999, to the date the revolving commitments have been
terminated, computed at the committment fee rate on the actual daily amount of
available revolving commitment of such lending during the period. As of
December 31, 1999, the Company had approximately $12,600,000 available under the
revolving credit facility.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Precision Partners, Inc. 12% Senior Subordinated Notes due
2009, interest paid semiannually on March 15 and
September 15 commencing on September 15, 1999. $100,000 $ --
Note payable to a bank, due in quarterly principal
installments plus interest at a variable rate (8.44% as of
December 31, 1999), maturing March 31, 2005. Quarterly
principal installments of $805,000 begin on June 30, 2000,
increasing to $920,000 on June 30, 2001, $1,150,000 on
June 30, 2002, $1,380,000 on June 30, 2003, and $1,495,000
on June 30, 2004, secured by all assets of Precision
Partners and its subsidiaries. 23,000 --
Financial software financing agreement, due in twelve
quarterly installments of $32,471, including interest at
7.8%. 265 --
Director and officer insurance premium financing agreement
due in six quarterly installments of $28,997, including
interest at 7.15%. 83 --
Note payable to a bank, due in quarterly principal
installments plus interest at a variable rate (9.00% at
December 31, 1998), refinanced on March 19, 1999. -- 23,000
-------- -------
123,348 23,000
Less current installments 2,611 750
-------- -------
$120,737 $22,250
======== =======
</TABLE>
Pursuant to the terms entered into in conjunction with the March 19, 1999
issuance of the Notes, the interest payable on the Notes increased from 12.00%
to 12.50% on September 16, 1999 and from 12.50% to 12.75% on December 16, 1999.
This increase in the interest rate is a contractual obligation which has arisen
because the Notes were not registered with the SEC within 180 days of their
initial issuance. Until the registration of the Notes is complete and effective,
the interest rate will increase by an additional 0.25% per annum for each 90-day
period subsequent to December 16, 1999, but the additional interest shall not
exceed 1.0% per annum regardless of the effective date of the registration.
F-17
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
The company has unamortized deferred costs of $5,184,480 related to the
Notes and the $23,000,000 term loan and credit facility. The costs are being
amortized over the life of the related Notes, term loan and credit facility.
Aggregate future maturities of long-term debt are as follows:
2000--$2,611,000; 2001--$3,686,000; 2002--$4,402,000; 2003--$5,290,000;
2004--$5,865,000; thereafter--$101,494,000.
Under the terms of the note payable to the bank, the Company is required to
maintain certain leverage, interest coverage, and fixed charge coverage ratios
on a consolidated basis. The company was in compliance with all of the
restrictive covenants at December 31, 1999.
The indenture governing the Notes contains covenants that limit our and some
of our subsidiaries' ability to incur additional debt, pay dividends on or
redeem or repurchase capital stock, enter into transactions with affiliates and
transfer or sell assets, among other things.
6. INCOME TAXES
The income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
PRECISION
-------------------------------
PERIOD FROM PREDECESSOR
SEPTEMBER 9, ----------------------------
1998 (INCEPTION) NINE MONTH
YEAR ENDED THROUGH PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1998 1998 1997
------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Current federal $ -- $ 40 $1,553 $1,723
Current state 303 91 439 472
------- ---- ------ ------
Total current tax provision 303 131 1,992 2,195
------- ---- ------ ------
Deferred federal (1,917) (28) (237) 46
Deferred state (516) 6 (78) 69
------- ---- ------ ------
Total deferred tax provision (benefit) (2,433) (22) (315) 115
------- ---- ------ ------
Total tax provision $(2,130) $109 $1,677 $2,310
======= ==== ====== ======
</TABLE>
The difference between the effective rate reflected in the income tax
expense (benefit) and the amount determined by applying the statutory U.S. rate
of 34% to income (loss) before income tax
F-18
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
expense (benefit) for the period September 9, 1998 through December 31, 1998,
the nine month period ended September 30, 1998 and the year ended December 31,
1997 is analyzed below:
<TABLE>
<CAPTION>
PRECISION
-------------------------------
PERIOD FROM PREDECESSOR
SEPTEMBER 9, ----------------------------
1998 (INCEPTION) NINE MONTH
YEAR ENDED THROUGH PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1998 1998 1997
------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Income tax expense (benefit) at statutory
rate $(2,599) $(97) $1,489 $1,990
Permanent differences, primarily goodwill 672 159 (46) (56)
State income tax, net of federal income
tax benefit (203) 47 239 376
Other -- -- (5) --
------- ---- ------ ------
Total tax provision $(2,130) $109 $1,677 $2,310
======= ==== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
PRECISION
---------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Net operating losses $ 1,097 $ 5
Tax credit carryforwards 576 243
Other accruals and reserves 1,806 217
Property, plant and equipment (9,041) (3,708)
Inventories (176) (176)
Goodwill amortization (433) --
Deferred tax asset valuation allowance (343) (200)
------- -------
Net deferred tax liability $(6,514) $(3,619)
======= =======
Net non-current deferred tax liability $(7,817) $(3,656)
Net current deferred tax asset 1,303 37
------- -------
Net deferred tax liability $(6,514) $(3,619)
======= =======
</TABLE>
7. PROFIT SHARING/401K PLANS
The Company's subsidiaries sponsor defined contribution plans covering all
their employees. Pension expense related to these plans, which are generally
based on partial matching of employee contributions, amounted to $672,643 for
the year ended December 31, 1999, $123,447 for the period from September 9, 1998
(inception) to December 31, 1998 and $335,950 and $407,426 for the nine month
period ended September 30, 1998 and the year ended December 31, 1997,
respectively.
F-19
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under operating leases.
Rent expense totaled approximately $2,407,000 and $276,898 for the year ended
December 31, 1999 and the period from September 9, 1998 (inception) to
December 31, 1998, respectively. Rent expense for the nine month period ended
September 30, 1998 and year ended December 31, 1997, was $369,378 and $564,500,
respectively. Minimum rental commitments under noncancellable operating leases
are as follows: 2000--$3,441,181; 2001--$3,499,464; 2002--$3,242,202;
2003--$2,330,696; 2004--$2,054,525; thereafter--$3,219,614.
9. STOCK OPTION PLAN
In April 1999 Holdings approved an Incentive Stock Option Plan (Plan) for
certain employees including employees of Precision and Precision's wholly-owned
subsidiaries for the issuance of up to 2,700,000 shares of Holdings common
stock. During 1999, 2,454,000 options were granted with an exercise price of
$.1875, which was the market value of Holdings common stock at the date of grant
as determined by management and the Board of Directors. At December 31, 1999,
74,343 options had been exercised and 645,000 options had been forfeited leaving
1,734,657 options outstanding at December 31, 1999. These options vest up to a
period of four years. The impact of accounting for the employee stock options
under the fair value method provided for under Financial Accounting Standards
Board Statement No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION is immaterial to
the Company's financial statements.
10. LITIGATION
Precision or its subsidiaries are defendants from time to time in lawsuits
and disputes arising in the normal course of business. Management believes that
the ultimate outcome of those matters will not have a materially adverse effect
on the consolidated financial position, results of operations, or cash flows.
11. YEAR 2000 (UNAUDITED)
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
on-going business as a result of the "Year 2000 issue." However, it is possible
that the full impact of the date change, which was of concern due to computer
programs that use two digits instead of four digits to define years, has not
been fully recognized. For example, it is possible that Year 2000 or similar
issues such as leap year-related problems may occur with billing, payroll, or
financial closings at month, quarterly, or year end. We believe that any such
problems are likely to be minor and correctable. In addition, we could still be
negatively impacted if our customers or suppliers are adversely affected by the
Year 2000 or similar issues. We currently are not aware of any significant Year
2000 or similar problems that have arisen for our customers and suppliers.
We expended $0.9 million on Year 2000 readiness efforts in 1999. These
efforts including replacing some outdated, non-compliant hardware and
noncompliant software, as well as identifying and remediating Year 2000
problems.
F-20
<PAGE>
PRECISION PARTNERS, INC. (PRECISION) AND
MID STATE MACHINE PRODUCTS (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
To support recently signed sales contracts, which will require new
facilities, machinery, and equipment of approximately $35,000,000, the Company
plans to enter into operating lease agreements to meet those requirements.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
To the Board of Directors of
Precision Partners, Inc.
We have audited the accompanying balance sheets of General Automation, Inc. as
of March 19, 1999 and December 31, 1998, and the related statements of income,
stockholder's equity, and cash flows for the period from January 1, 1999 to
March 19, 1999 and each of the two 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 auditing standards 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 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 General Automation, Inc. at
March 19, 1999 and December 31, 1998, and the results of its operations and its
cash flows for the period from January 1 to March 19, 1999 and for each of the
two years in the period ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
March 10, 2000 /s/ Ernst & Young LLP
Dallas, Texas
F-22
<PAGE>
GENERAL AUTOMATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 19, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 464 $ 678
Trade accounts receivable, net of allowance for doubtful
accounts of $65,000 at March 19, 1999 and December 31,
1998 2,952 2,734
Inventories 870 694
Prepaid expenses and other 20 31
------- -------
Total current assets 4,306 4,137
Property, plant and equipment, at cost, net 8,731 9,046
Receivables from employees 131 135
------- -------
Total assets $13,168 $13,318
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 89 $ 89
Accounts payable 471 631
Accrued state income taxes 27 141
Accrued real estate tax 211 272
Other accrued expenses 244 153
------- -------
Total current liabilities 1,042 1,286
Long-term debt, less current portion 50 57
Stockholder's equity:
Common stock, $100 par value; 1,000 authorized shares; 900
issued shares (including 616 shares in treasury stock);
and 284 shares outstanding 90 90
Retained earnings 12,841 12,740
Less: Cost of common stock in treasury (855) (855)
------- -------
Total stockholder's equity 12,076 11,975
------- -------
Total liabilities and stockholder's equity $13,168 $13,318
======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-23
<PAGE>
GENERAL AUTOMATION, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
JANUARY 1 TO -------------------------
MARCH 19, 1999 1998 1997
--------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales $ 4,464 $19,776 $16,520
Cost of sales 2,270 11,080 10,388
------- ------- -------
Gross profit 2,194 8,696 6,132
Selling, general and administrative expenses 525 2,055 1,855
Special recovery -- (70) (720)
Other operating (income) expenses (16) 23 35
------- ------- -------
Operating income 1,685 6,688 4,962
Other income (expense):
Interest income 19 86 97
Interest expense (1) (16) (32)
------- ------- -------
Income before income taxes 1,703 6,758 5,027
Provision for state income taxes 18 102 76
------- ------- -------
Net income $ 1,685 $ 6,656 $ 4,951
======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-24
<PAGE>
GENERAL AUTOMATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON TREASURY RETAINED
STOCK STOCK EARNINGS TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $90 $ (855) $ 8,238 $ 7,473
Net income -- -- 4,951 4,951
Distributions -- -- (2,329) (2,329)
--- ------ ------- -------
Balance at December 31, 1997 90 (855) 10,860 10,095
Net income -- -- 6,656 6,656
Distributions -- -- (4,776) (4,776)
--- ------ ------- -------
Balance at December 31, 1998 90 (855) 12,740 11,975
Net income -- -- 1,685 1,685
Distributions -- -- (1,584) (1,584)
--- ------ ------- -------
Balance at March 19, 1999 $90 $ (855) $12,841 $12,076
=== ====== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-25
<PAGE>
GENERAL AUTOMATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JANUARY 1 TO DECEMBER 31,
MARCH 19, -------------------
1999 1998 1997
------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,685 $6,656 $4,951
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 340 1,427 1,178
(Gain) loss on sale of property, plant and equipment -- (9) 13
Changes in operating assets and liabilities:
Trade accounts receivable (218) (578) (945)
Inventories (176) (6) (144)
Receivables from employees 4 80 44
Prepaid expenses and other 11 (10) 1
Accounts payable (160) (415) (132)
Accrued expenses and taxes (83) 124 99
------- ------ ------
Net cash provided by operating activities 1,403 7,269 5,065
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net of deposit on
machinery (26) (3,612) (1,907)
Proceeds from sale of property, plant and equipment -- 153 9
Proceeds from (payments on) cash surrender value
stockholder's life insurance -- 197 (17)
------- ------ ------
Net cash used in investing activities (26) (3,262) (1,915)
FINANCING ACTIVITIES
Distributions to stockholder (1,584) (4,776) (2,329)
Payment of long-term debt (7) (81) (79)
Payment on note payable to bank -- -- (487)
------- ------ ------
Net cash used in financing activities (1,591) (4,857) (2,895)
------- ------ ------
Net (decrease) increase in cash and cash equivalents (214) (850) 255
Cash and cash equivalents, beginning of period 678 1,528 1,273
------- ------ ------
Cash and cash equivalents, end of period $ 464 $ 678 $1,528
======= ====== ======
Supplementary information for the statement of cash flows:
Interest payments $ 1 $ 16 $ 32
State income tax payments $ 21 -- 35
</TABLE>
SEE ACCOMPANYING NOTES.
F-26
<PAGE>
GENERAL AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
General Automation, Inc. (the Company) machines and sells precision screw
machine and other products to serve as component parts to a wide variety of
manufacturers (e.g., automotive, surgical equipment, and aerospace).
BASIS OF PRESENTATION
The financial statements include all accounts of General Automation, Inc.
Pursuant to a contract with Precision Partners Holdings, Inc. ("Holdings") that
was signed on February 5, 1999, the Company agreed to sell substantially all of
the Company's assets and Holdings agreed to assume substantially all of the
Company's liabilities. The contract was assigned by Holdings to its wholly-owned
subsidiary, Precision Partners, Inc., and the transaction was closed on March
19, 1999. The financial statements are presented on a historical cost basis and
do not include any adjustments related to the purchase transaction.
USE OF ESTIMATES
The preparation of the 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term, highly liquid investments
which are readily convertible into cash with original maturities of 90 days or
less.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first in, first out (FIFO) method of determining cost for its inventories.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash in bank demand deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk with respect to cash. The Company is materially
dependent on a small group of customers. The Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
DEPRECIATION
Buildings, machinery and equipment, and furniture and fixtures are
depreciated using the straight-line method over the estimated useful lives of
the individual assets. The general range of estimated lives is 15 to 39 years
for buildings and improvements, five to seven years for machinery and equipment,
five years for automobiles, and five to seven years for office furniture and
equipment.
F-27
<PAGE>
GENERAL AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company elected by consent of its stockholder to be taxed under the
provisions of subchapter S of the Internal Revenue Code. Under these provisions,
the taxable income of the Company is reported directly in the sole stockholder's
individual tax returns.
LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are not sufficient to recover
the assets' carrying amount. The impairment loss is measured by comparing the
fair value of the asset to its carrying amount.
REVENUE RECOGNITION
Sales are recorded when products are shipped to a customer.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 19, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $234 $205
Work in process 432 318
Finished goods 204 171
---- ----
$870 $694
==== ====
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 19, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Land $ 480 $ 480
Buildings 4,099 4,099
Machinery and equipment 12,761 12,741
Furniture, fixtures and other 728 723
------- ------
18,068 18,043
Less accumulated depreciation 9,337 8,997
------- ------
Property, plant and equipment, net $ 8,731 $9,046
======= ======
</TABLE>
F-28
<PAGE>
GENERAL AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEBT
As of March 19, 1999 and December 31, 1998, the Company had no outstanding
bank borrowings.
The Company has a note payable to a former stockholder (a party related to the
current stockholder) related to the purchase of the former stockholder's
interest in the Company. The note payable requires a monthly payment of $8,333,
which includes annual interest at 10.0%. Aggregate future maturities as of
March 19, 1999 of the note payable are as follows, remainder of 1999--$89,477
and 2000--$49,414.
As of March 19, 1999 and December 31, 1998 the Company was technically in
default on its note payable to a former stockholder because the Company
terminated an insurance policy that served as collateral for the note payable,
and the proceeds from the policy were distributed to the sole stockholder. No
actions have been taken by the former stockholder and the note payable
obligation was current at March 19, 1999.
5. BENEFIT PLAN 401(K)
The Company sponsors a 401(k) plan covering substantially all full-time
employees who meet age and service requirements. Discretionary contributions to
the 401(k) plan amounted to $70,000 and $78,000 for the years ended
December 31, 1998 and 1997, respectively. The contribution for the period ended
March 19, 1999 has not yet been determined.
6. RELATED PARTY TRANSACTIONS, LEASE OBLIGATIONS, AND CONTINGENCIES
The Company leases certain warehouse space from a limited liability company
whose owners are the sole stockholder and his children. The lease is for a term
of one year through May 1999 and requires payments of $10,000 per month plus the
payment of all insurance, real estate tax, and maintenance costs. The Company
paid and expensed $24,000, $131,970, and $0 related to such lease for the period
ended March 19, 1999 and the years ended December 31, 1998 and 1997,
respectively. Also, in conjunction with such arrangement, the Company guaranteed
a mortgage loan related to the warehouse. The guaranteed mortgage was originally
$275,000 and as of March 19, 1999, was approximately $233,000.
The Company leases a jet aircraft from a business owned by the sole
stockholder. The jet aircraft lease was for a term of three years through
December 31, 1999, and requires payments of $10,000 per month, plus $60 per
engine hour operated, and plus all operating expenses. In conjunction with the
jet aircraft lease, the Company has a sublease obligation for a hangar that
houses the jet aircraft. The current hangar lease was renewed on March 31, 1998,
for a term of three years and requires payments of $5,650 per month. The Company
recorded expenses of $186,928, $528,962 and $576,339; for the jet aircraft and
hangar leases in the period ended March 19, 1999 and the years ended
December 31, 1998 and 1997, respectively.
Future minimum lease commitments for the jet aircraft, hangar and warehouse
amount to $140,850 for 1999; $67,800 for 2000; and $16,950 for 2001.
7. SPECIAL CHARGE (RECOVERY)
The Company incurred a $1,315,000 loss due to the embezzlement of funds by a
former contracted (i.e., not an employee of the Company) accountant. The loss
was discovered and expensed in 1996.
F-29
<PAGE>
GENERAL AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SPECIAL CHARGE (RECOVERY) (CONTINUED)
Recoveries of amounts from the accountant and insurance company were received
and recorded as income in 1997 and 1998.
8. MAJOR CUSTOMERS
The Company has two major customers which accounted for 57.2%, 48.1% and
54.4% of the Company's sales for the period ended March 19, 1999 and the years
ended December 31, 1998 and 1997, respectively. As of March 19, 1999 and
December 31, 1998, the Company's receivables from these two customers were
$1,849,780 and $1,651,905, respectively.
9. YEAR 2000 (UNAUDITED)
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
on-going business as a result of the "Year 2000 issue." However, it is possible
that the full impact of the date change, which was of concern due to computer
programs that use two digits instead of four digits to define years, has not
been fully recognized. For example, it is possible that Year 2000 or similar
issues such as leap year-related problems may occur with billing, payroll, or
financial closings at month, quarterly, or year end. We believe that any such
problems are likely to be minor and correctable. In addition, we could still be
negatively impacted if our customers or suppliers are adversely affected by the
Year 2000 or similar issues. We currently are not aware of any significant Year
2000 or similar problems that have arisen for our customers and suppliers.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
The Board of Directors
Precision Partners, Inc.
We have audited the accompanying combined balance sheets as of March 19, 1999
and October 31, 1998, of the companies listed in Note 1, and the related
combined statements of operations, stockholders' equity, and cash flows for the
period from November 1, 1998 to March 19, 1999, and for each of the two years in
the period ended October 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 auditing standards 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 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 at March 19, 1999 and
October 31, 1998, of the companies listed in Note 1, and the combined results of
their operations and their cash flows for the period from November 1, 1998 to
March 19, 1999, and for each of the two years in the period ended October 31,
1998, in conformity with accounting principles generally accepted in the United
States.
March 10, 2000 /s/ Ernst & Young LLP
Dallas, Texas
F-31
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,859 $ 2,890
Trade accounts receivable 2,889 4,086
Net costs and estimated earnings in excess of billings on
uncompleted contracts 4,131 4,641
Other current assets 153 7
------- -------
Total current assets 10,032 11,624
Property and equipment, net 10,785 11,338
Due from related parties 760 795
Notes receivable from stockholders 768 727
Deposits and other assets 35 210
------- -------
Total assets $22,380 $24,694
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,400 $ 1,400
Accounts payable 906 1,520
Accrued expenses 1,042 1,304
Current portion of notes payable and capital lease
obligations 1,949 2,042
Billings in excess of net costs and estimated earnings on
uncompleted contracts 225 185
Notes payable to stockholders 95 25
Income taxes payable 977 1,795
------- -------
Total current liabilities 6,594 8,271
Notes payable and capital lease obligations, less current
portion 6,879 7,354
Deferred income taxes 943 896
Commitments
Stockholders' equity:
Common stock, no par value:
Authorized shares - 25,000 Certified; 1,000,000 Calbrit
Issued and outstanding shares at March 19, 1999 and
October 31, 1998 - 9,305 Certified; 2,041 Calbrit 93 93
Retained earnings 7,871 8,080
------- -------
Total stockholders' equity 7,964 8,173
------- -------
Total liabilities and stockholders' equity $22,380 $24,694
======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-32
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
PERIOD FROM 31,
NOVEMBER 1, 1998 -------------------
TO MARCH 19, 1999 1998 1997
------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales $ 9,465 $37,433 $30,377
Cost of sales 7,712 27,209 21,136
------- ------- -------
Gross profit 1,753 10,224 9,241
Selling, general and administrative expenses 1,347 4,813 4,999
Related party rent expense 268 460 352
------- ------- -------
Operating income 138 4,951 3,890
Other income (expense):
Interest income 43 126 80
Interest expense (362) (1,092) (651)
Miscellaneous income 2 7 79
------- ------- -------
(317) (959) (492)
------- ------- -------
(Loss) income before income taxes (179) 3,992 3,398
Provision for income taxes 30 1,689 1,315
------- ------- -------
Net income (loss) $ (209) $ 2,303 $ 2,083
======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-33
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED EARNINGS TOTAL
------------ ----------------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Balance at October 31, 1996 $93 $3,694 $3,787
Net income -- 2,083 2,083
--- ------ ------
Balance at October 31, 1997 93 5,777 5,870
Net income -- 2,303 2,303
--- ------ ------
Balance at October 31, 1998 93 8,080 8,173
Net loss -- (209) (209)
--- ------ ------
Balance at March 19, 1999 $93 $7,871 $7,964
=== ====== ======
</TABLE>
SEE ACCOMPANYING NOTES.
F-34
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
PERIOD FROM NOVEMBER 1, -----------------------
1998 TO MARCH 19, 1999 1998 1997
----------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (209) $ 2,303 $ 2,083
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 821 2,027 1,242
Provision for deferred income taxes 47 378 205
Changes in operating assets and liabilities:
Trade accounts receivable 1,197 118 (1,605)
Net costs and estimated earnings in excess
of billings on uncompleted contracts 510 (426) (974)
Other current assets (146) (4) 1
Deposits and other assets 175 47 (2)
Due from stockholders (41) (436) (16)
Accounts payable (614) 308 280
Accrued expenses (262) (259) 388
Billings in excess of net costs and
estimated earnings on uncompleted
contracts 40 52 7
Income taxes payable (818) (54) 112
------ ------- -------
Net cash provided by operating activities 700 4,054 1,721
INVESTING ACTIVITIES
Purchases of property and equipment (14) (724) (447)
------ ------- -------
Net cash used in investing activities (14) (724) (447)
FINANCING ACTIVITIES
Proceeds from stockholders' notes payable 117 125 420
Repayments of stockholders' notes payable (47) (170) (350)
Payments on line of credit -- -- 218
Repayments of notes payable and capital lease
obligations (822) (2,096) (1,202)
Repayments (advances) from related parties 35 (163) (546)
------ ------- -------
Net cash used in financing activities (717) (2,304) (1,460)
------ ------- -------
Net increase (decrease) in cash and cash equivalents (31) 1,026 (186)
Cash and cash equivalents, beginning of period 2,890 1,864 2,050
------ ------- -------
Cash and cash equivalents, end of period $2,859 $ 2,890 $ 1,864
====== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-35
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Certified Fabricators, Inc.'s principal activities relate to the manufacture
and assembly of highly sophisticated structural steel components. Calbrit
Design, Inc.'s principal activity is the technical design and drawings of parts
used in the aerospace industry.
BASIS OF PRESENTATION
The combined financial statements include all accounts of Certified
Fabricators, Inc. and Calbrit Design, Inc. ("the Company") which are under
common control. All significant intercompany balances and transactions have been
eliminated in the combination. On November 6, 1998, the Company entered into an
agreement with Precision Partners, L.L.C. ("LLC") to sell all of the outstanding
common stock of the Company. The agreement was assigned by LLC to a wholly-owned
subsidiary, Precision Partners Holdings, Inc. ("Holdings") which was in turn
assigned to Holdings' wholly-owned subsidiary, Precision Partners, Inc. The
transaction was completed on March 19, 1999. The combined financial statements
are presented on a historical cost basis and do not include any adjustments
related to the purchase transaction.
USE OF ESTIMATES
The preparation of the 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.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
The following table sets forth certain non-cash transactions excluded from
the statements of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD FROM OCTOBER 31,
NOVEMBER 1, 1998 ---------------
TO MARCH 19, 1999 1998 1997
---------------------- ------ ------
<S> <C> <C> <C>
(IN THOUSANDS)
Acquisition of equipment through notes payable and
capital leases $254 $3,678 $5,807
Forgiveness of advances to former stockholder -- -- 21
</TABLE>
REVENUE RECOGNITION
Revenues from contracts are recognized on the percentage-of-completion
method, measured by the percentage of total costs incurred to date to estimated
total costs of the contract. Total costs include all direct material and labor
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Contract revisions are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
F-36
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Profit incentives are included in revenues when their realization is
reasonably assured. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be
reasonably estimated.
The asset, "Net costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of net costs and estimated earnings
on uncompleted contracts," represents billings in excess of revenues recognized.
CONCENTRATION OF CREDIT RISK
The Company sells to customers throughout the United States. The Company is
materially dependent on a small group of customers. During the period ended
March 19, 1999 and the years ended October 31, 1998 and 1997, the Company had a
total of four customers whose sales represented 10% or more of sales in certain
or all years. Sales to these customers were approximately 79%, 81% and 79% of
total sales for the period ended March 19, 1999 and the years ended October 31,
1998 and 1997, respectively. These customers also represented 71% and 72% of the
accounts receivable balance at March 19, 1999 and October 31, 1998,
respectively. Sales to customers are subject to cancellation which can occur due
to cancellation clauses given by the manufacturer to its customer. The Company
has, nevertheless, maintained a strong relationship with these customers and,
providing it continues to meet shipment schedules and quality standards,
management believes that its trade accounts receivable credit risk exposure is
limited.
No other customer represented more than 10% of the Company's annual total
sales.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and amounts have been provided for doubtful
accounts as deemed necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
expenses are calculated using the straight-line method. The depreciation and
amortization methods are designed to amortize the cost of the assets over their
estimated useful lives, in years, of the respective assets as follows:
<TABLE>
<S> <C>
Machinery and equipment 3 to 20
Furniture, fixtures and
other 3 to 14
Leasehold improvements 5 to 39
</TABLE>
Leasehold improvements are amortized over the shorter of the term of the
lease or the life of the improvements. Maintenance and repairs are charged to
expense as incurred. Renewals and improvements of a major nature are
capitalized. At the time of retirement or other disposition of property and
equipment, the cost and accumulated depreciation are removed from the accounts
and any resulting gains or losses are reflected in income.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under FASB No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, which requires
F-37
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are not sufficient to recover the assets'
carrying amount. The impairment loss is measured by comparing the fair value of
the asset to its carrying amount.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were approximately $12,000,
$191,000 and $66,000 for the period ended March 19, 1999 and years ended
October 31, 1998 and 1997, respectively.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, receivables, net costs and estimated earnings in excess of billings
on uncompleted contracts, payables, and billings in excess of net costs and
estimated earnings on uncompleted contracts. The Company believes all of the
financial instruments' recorded values approximate current values.
2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information regarding contract costs, estimated earnings, and progress
billings consisted of the following at:
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Costs incurred on uncompleted contracts $ 11,867 $11,077
Estimated earnings 2,197 1,552
-------- -------
14,064 12,629
Less net progress billings 10,158 8,173
-------- -------
$ 3,906 $ 4,456
======== =======
</TABLE>
F-38
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (CONTINUED)
The above amounts are included in the Company's balance sheets under the
following captions at:
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Net costs and estimated earnings in excess of
billings on uncompleted contracts $ 4,131 $ 4,641
Billings in excess of net costs and estimated
earnings on uncompleted contracts (225) (185)
-------- -------
$ 3,906 $ 4,456
======== =======
</TABLE>
3. DUE FROM RELATED PARTIES
The Company has advanced monies to a partnership for use in financing
various properties. The partnership is 100% owned by the stockholders of the
Company. At March 19, 1999 and October 31, 1998, the Company has advanced
$760,000 and $795,000, respectively.
4. NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders consisted of the following at:
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
6% note receivable, interest accrues monthly, due on
demand $220 $215
6% note receivable, interest accrues monthly, due on
demand 91 89
10% note receivable, interest accrues monthly, with
principal and interest due November 2002 85 82
10% note receivable, interest accrues monthly, with
principal and interest due November 2002 28 27
Note receivable, interest and payment terms undetermined 172 157
Note receivable, interest and payment terms undetermined 172 157
---- ----
$768 $727
==== ====
</TABLE>
F-39
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
OCTOBER
MARCH 19, 31,
1999 1998
--------- --------
<S> <C> <C>
(IN THOUSANDS)
Machinery and equipment $17,416 $17,152
Furniture, fixtures and other 1,877 1,876
Leasehold improvements 1,117 1,114
------- -------
20,410 20,142
Less accumulated depreciation and amortization 9,625 8,804
------- -------
$10,785 $11,338
======= =======
</TABLE>
6. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company maintains a $3,000,000 credit line under which it can borrow
funds or secure letters of credit at prevailing market rates. The credit line is
renewable each year on April 30. As of March 19, 1999, $1,400,000 was
outstanding. The revolving line of credit is secured by accounts receivable and
all other assets of the Company. Interest accrues beginning at the date of
advance at the bank's base rate plus .25% (the bank's base rate at March 31,
1999 was 8.00%). Advances under the line are available to the Company based upon
80% of outstanding eligible accounts receivable. Eligible accounts receivable
consist of those accounts which are less than ninety days from the date of
invoice. The unused portion of the credit line is subject to withdrawal at the
discretion of the Company.
Under the terms of the line of credit, the Company is required to maintain
minimum levels of tangible net worth, current ratio, working capital and maximum
level of debt to tangible net worth. Subsequent to the balance sheet date, the
Company sold all of the outstanding common stock to Precision Partners, Inc. The
outstanding draws on the credit line were paid off as a result of that
transaction.
Notes payable, including capital lease obligations, consisted of the
following at (in thousands):
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to stockholders, interest of 8.5%, monthly
installments range from $2 to $3, due 12/31/97 to 1/31/98 $ -- $ 25
Notes payable to stockholders, interest of 8.5%, monthly
installments, $2, due 1/5/00 95 --
------ ------
$ 95 $ 25
====== ======
Installment contracts with vendors, interest ranging from
10.1% to 25.7%, monthly installments totaling from $1 to
$14, due 1/31/98 to 3/31/00, secured by equipment $ 93 $ 238
Term loans with finance companies, interest ranging from
4.7% to 10.8%, monthly installments totaling from $1 to
$71, due 2/28/00 to 7/31/01, secured by equipment 8,402 8,726
</TABLE>
F-40
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Installment loans with finance companies, interest ranging
from 6.2% to 10.3%, monthly installments totaling from $1
to $6, secured by equipment $ 333 $ 294
Interim loan with finance companies, bearing 11.3% interest,
fixed interest paid monthly, due on demand, secured by
equipment -- 138
------ ------
8,828 9,396
Less current portion 1,949 2,042
------ ------
$6,879 $7,354
====== ======
</TABLE>
Aggregate future maturities of notes payables at March 19, 1999 are as
follows, in thousands:
<TABLE>
<S> <C>
1999 $1,527
2000 1,924
2001 1,873
2002 1,994
2003 1,510
</TABLE>
Interest paid to third parties was $362,000, $1,092,000 and $651,000, for
the period from November 1, 1998 to March 19, 1999, and for the years ended
October 31, 1998, and 1997, respectively. Pursuant to the purchase transaction
completed on March 19, 1999, the Company's debt was paid by Precision Partners,
Inc.
7. INCOME TAXES
The income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
PERIOD FROM NOVEMBER 1, 1998 TO OCTOBER 31,
MARCH 19, -------------------
1999 1998 1997
------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current federal $ 31 $1,256 $1,084
Current state 12 55 26
---- ------ ------
Total current tax provision 43 1,311 1,110
Deferred federal (12) 274 257
Deferred state (1) 104 (52)
---- ------ ------
Total deferred tax provision
(benefit) (13) 378 205
---- ------ ------
Total tax provision $ 30 $1,689 $1,315
==== ====== ======
</TABLE>
The difference between the effective rate reflected in the income tax
provision for income taxes and the amount determined by applying the statutory
U.S. rate to income before income taxes for the
F-41
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
period from November 1, 1998 to March 19, 1999 and the years ended October 31,
1998 and 1997 is analyzed below:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, YEAR ENDED
1998 TO OCTOBER 31,
MARCH 19, -------------------
1999 1998 1997
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate $(61) $1,357 $1,155
Valuation allowance 65 -- --
State income tax, net of federal income tax
benefit 8 104 (17)
Permanent differences 12 44 27
Other 6 184 150
---- ------ ------
Total income tax provision $ 30 $1,689 $1,315
==== ====== ======
</TABLE>
The Company reported deferred tax liabilities and assets as follows at:
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $(1,096) $(1,013)
------- -------
Total deferred tax liabilities (1,096) (1,013)
Deferred tax assets:
Accrued expenses 18 11
Tax credit carryforwards 90 60
Other 45 46
------- -------
Total deferred tax assets 153 117
------- -------
Net deferred tax liabilities $ (943) $ (896)
======= =======
</TABLE>
At March 19, 1999, the Company has approximately $60,000 of California
manufacturing investment credits and $30,000 of federal alternative minimum tax
credits, which do not expire. In addition, the Company has approximately
$190,000 of net operating loss carryforwards which expire in 2020.
Income taxes paid in the period 1999, 1998 and 1997 were approximately
$100,000, $1,365,000 and $943,000, respectively.
8. COMMITMENTS WITH RELATED AND UNRELATED PARTIES
The Company's operations are conducted in four buildings, all of which are
owned by a partnership that includes the Company's principal stockholders (the
Partnership). The principal stockholders own a 100% interest in the Partnership
at March 31, 1999. One building is leased from the Partnership under a
noncancellable ten year lease agreement with a monthly rent of $15,000. The
lease agreement dated February 1, 1993 expires February 1, 2003. Under the
leasing agreement, the
F-42
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS WITH RELATED AND UNRELATED PARTIES (CONTINUED)
Company is required to pay property taxes and common area charges (maintenance,
utilities and property insurance) attributable to the lease. Total rent expense
for the related party operating lease for the period from November 1, 1998 to
March 19, 1999 and the years ended October 31, 1998, and 1997 was $75,000,
$180,000 and $180,000, respectively.
The second building is leased from the Partnership under a noncancellable
ten year lease agreement with varying monthly rents starting at $25,000 on
May 1, 1997 and increasing to $30,000 on May 1, 1999. The lease agreement dated
May 1, 1997 expires April 30, 2007. Total rent expense for the related party
operating lease for the period from November 1, 1998 to March 19, 1999 and the
years ended October 31, 1998 and 1997 was $125,000, $269,000 and $184,000,
respectively. The Company subleases a portion of this space under a
non-cancelable two year agreement with monthly rental income of approximately
$11,000. The sublease is dated May 1, 1997 and expires on April 30, 2000. Total
rent expense, net of sublease income, for the period from November 1, 1998 to
March 19, 1999 and the years ended October 31, 1998 and 1997 was $70,000,
$135,000 and $117,000, respectively.
The third building was previously leased from an unrelated party under a
noncancellable lease agreement expiring December 31, 1998 with an option to
purchase the property. The lease provided for monthly rents of $10,000 through
December 31, 1997 and $10,000 through December 31, 1998. The Partnership
exercised the option to purchase the property in May 1997.
The Company now leases from the Partnership under a noncancellable five year
lease agreement with a monthly rent of $10,000. The agreement, dated May 16,
1997 expires May 16, 2002. Total rent expense for this related party operating
lease for the period from November 1, 1998 to March 19, 1999 and the years ended
October 31, 1998, and 1997 was $50,000, $120,000, and $118,000, respectively.
The fourth building is leased from the Partnership under a noncancellable
ten year lease agreement with a monthly rent of $2,500. The lease agreement
dated January 1, 1998 expires on December 31, 2003. Total rent expense for the
related party operating lease for the period from November 1, 1998 to March 19,
1999 and the year ended October 31, 1998 was $12,500 and $25,000, respectively.
The Company leased an additional warehouse facility under a noncancellable
lease agreement with an unrelated party. The monthly rent on the aforementioned
lease was $10,000 and expired on August 31, 1998. The Company subsequently
entered into a new lease agreement with the same monthly rent of $11,000 that
will expire on August 31, 2001. Total rent expense for the operating lease for
the period from November 1, 1998 to March 19, 1999 and the years ended
October 31, 1998, and 1997 was $56,000, $121,000 and $118,000, respectively.
Total rent expense for all of the Company's facilities under noncancellable
operating lease agreements, net of sublease income, for the period from
November 1, 1998 to March 19, 1999 and the years ended October 31, 1998, and
1997 was $264,000, $632,000, and $586,000, respectively.
The Company leases machinery and equipment from a related party under a
month to month lease agreement with monthly rents of $4,000.
The Company has assisted two affiliated entities in obtaining financing. The
affiliated entities have recorded the assets and liabilities on their books. The
Company, however, has guaranteed the indebtedness outstanding of $3,395,000 and
$3,490,000 at March 31, 1999 and October 31, 1998, respectively.
F-43
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS WITH RELATED AND UNRELATED PARTIES (CONTINUED)
Future rental commitments for the remaining years of all noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
UNRELATED
RELATED PARTIES-- SUBLEASE TOTAL
PARTIES FACILITIES INCOME COMMITMENTS
-------- ---------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Years ending October 31:
1999 $ 357 $240 $ (78) $ 519
2000 713 270 (134) 849
2001 738 194 (45) 887
2002 700 32 -- 732
2003 550 5 -- 555
Thereafter 1,648 -- -- 1,648
------ ---- ----- ------
$4,706 $741 $(257) $5,190
====== ==== ===== ======
</TABLE>
9. CAPITAL LEASES
The following is an analysis of leased property under capital leases
included in property and equipment (Note 5) at:
<TABLE>
<CAPTION>
MARCH 19, OCTOBER 31,
1999 1998
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 1,507 $ 1,507
Furniture, fixtures and other 714 714
Leasehold improvements 10 10
------- -------
2,231 2,231
Less accumulated amortization 1,388 1,268
------- -------
$ 843 $ 963
======= =======
</TABLE>
Amortization of equipment under capital leases is included in depreciation
and amortization in the accompanying Combined Statements of Cash Flows.
F-44
<PAGE>
CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL LEASES (CONTINUED)
The following is a schedule of future minimum lease payments under capital
lease agreements together with the present value of the net minimum lease
payments included in notes payable (Note 6) as of March 19, 1999, in thousands:
<TABLE>
<S> <C>
Years ending October 31:
1999 $163
2000 137
2001 27
----
327
Less amount representing interest at rates from 6.2% to
16.5% 26
----
Present value of net minimum lease payments $301
====
</TABLE>
10. PROFIT SHARING/401K PLANS
The Company sponsors a profit sharing plan covering all eligible employees
whereby the Company may contribute the lesser of $30,000 or 15% of annual
compensation. The Company may make discretionary contributions to the profit
sharing plan annually in amounts determined by management. Profit sharing
contributions for the period from November 1, 1998 to March 19, 1999 and the
years ended October 31, 1998, and 1997 were $0, $150,000, and $500,000,
respectively.
The Company also sponsors a 401K plan (the Plan) covering all eligible
employees whereby the Company may make matching contributions on the first 6% of
employee contributions in an amount or percentage determined by the Company, if
any. Matching contributions vest over a seven year period or 100% at normal
retirement as defined by the Plan. No matching contributions have been made
through March 19, 1999.
11. YEAR 2000 (UNAUDITED)
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
on-going business as a result of the "Year 2000 issue." However, it is possible
that the full impact of the date change, which was of concern due to computer
programs that use two digits instead of four digits to define years, has not
been fully recognized. For example, it is possible that Year 2000 or similar
issues such as leap year-related problems may occur with billing, payroll, or
financial closings at month, quarterly, or year end. We believe that any such
problems are likely to be minor and correctable. In addition, we could still be
negatively impacted if our customers or suppliers are adveresly affected by the
Year 2000 or similar issues. We currently are not aware of any significant Year
2000 or similar problems that have arisen for our customers and suppliers.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
The Board of Directors
Precision Partners, Inc.
We have audited the balance sheet of Nationwide Precision Products Corp. as of
March 19, 1999, and the related statements of income, stockholders' equity and
cash flows for the period from June 1, 1998 to March 19, 1999. These financial
statements are the responsibility of the management of Nationwide Precision
Products Corp. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Parlec, Inc. (a
corporation in which Nationwide Precision Products Corp. has a 44% interest),
have been audited by other auditors whose report has been furnished to us;
insofar as our opinion on the financial statements relates to data included for
Parlec, it is based solely on their report.
We conducted our audit in accordance with auditing standards 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 evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide
a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Nationwide Precision Products Corp. as of March 19,
1999, and the results of its operations and its cash flows for the period from
June 1, 1998 to March 19, 1999 in conformity with accounting principles
generally accepted in the United States.
February 25, 2000 /s/ Ernst & Young LLP
Dallas, Texas
F-46
<PAGE>
REPORT OF INDEPENDENT AUDITORS, INSERO, KASPERSKI, CIACCIA & CO., P.C.
The Board of Directors
Nationwide Precision Products Corp.
We have audited the balance sheet of Nationwide Precision Products Corp., as of
May 31, 1998, and the related statements of income, stockholders' equity and
cash flows for each of the two years in the period ended May 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 financial position of Nationwide Precision Products
Corp. at May 31, 1998, and the results of its operations and its cash flows for
each of the two years in the period ended May 31, 1998, in conformity with
generally accepted accounting principles.
June 29, 1998 /s/ Insero, Kasperski, Ciaccia & Co., P.C.
Rochester, New York
F-47
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 19, MAY 31,
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 442 $ 183
Accounts receivable, net of allowance for doubtful
accounts of $30,838 at March 19, 1999 and May 31, 1998 3,522 3,590
Accounts receivable from affiliate -- 592
Inventories 2,683 3,301
Prepaid expenses and other current assets 98 133
------- -------
Total current assets 6,745 7,799
Property, plant and equipment, at cost, net 17,580 17,008
Investment in Parlec, Inc. 4,821 2,598
Notes receivable from officers -- 295
Notes receivable from employee -- 105
Cash surrender value of officers' life insurance, net of
loans of $0 at
March 19, 1999 and $769,523, at May 31, 1998 -- 297
Debt issue costs, net 82 100
Federal tax deposit 273 274
------- -------
Total assets $29,501 $28,476
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,109 $ --
Accounts payable and accrued expenses 1,329 4,258
Current maturities of long-term debt and capital lease
obligations 2,564 2,065
------- -------
Total current liabilities 5,002 6,323
Long-term debt and capital lease obligations, less current
portion 9,370 8,842
Stockholders' equity:
Common stock, no par value; 700 shares authorized, 600
issued and outstanding 3 3
Additional paid-in capital 275 275
Retained earnings 14,851 13,033
------- -------
Total stockholders' equity 15,129 13,311
------- -------
Total liabilities and stockholders' equity $29,501 $28,476
======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-48
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED MAY 31,
JUNE 1, 1998 -------------------
TO MARCH 19, 1999 1998 1997
------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales $22,141 $28,440 $23,251
Cost of sales 17,056 22,239 18,549
------- ------- -------
Gross profit 5,085 6,201 4,702
Bonuses 773 895 640
Selling, general and administrative expenses 1,880 2,113 1,938
------- ------- -------
Operating income 2,432 3,193 2,124
Interest expense, net 529 682 646
------- ------- -------
Income before equity in net (loss) income of investee 1,903 2,511 1,478
Equity in net (loss) income of investee (85) 373 284
------- ------- -------
Net income $ 1,818 $ 2,884 $ 1,762
======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-49
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL PAID-IN RETAINED
COMMON STOCK CAPITAL EARNINGS TOTAL
------------ ------------------ -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at June 1, 1996 $3 $275 $ 9,767 $10,045
Net income -- -- 1,762 1,762
Distributions -- -- (800) (800)
-- ---- ------- -------
Balance at May 31, 1997 3 275 10,729 11,007
Net income -- -- 2,884 2,884
Distributions -- -- (580) (580)
-- ---- ------- -------
Balance at May 31, 1998 3 275 13,033 13,311
Net income -- -- 1,818 1,818
-- ---- ------- -------
Balance at March 19, 1999 $3 $275 $14,851 $15,129
== ==== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-50
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED MAY 31,
JUNE 1, 1998 -------------------
TO MARCH 19, 1999 1998 1997
------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,818 $ 2,884 $ 1,762
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,469 1,662 1,532
Equity in net loss (income) of investee 85 (373) (284)
Changes in operating assets and liabilities:
Accounts receivable 68 (1,287) 867
Accounts receivable from affiliate 592 (424) 49
Inventories (650) (634) (766)
Prepaid expenses 35 (35) 14
Federal tax deposit 1 197 87
Accounts payable and accrued expenses (2,929) 2,136 267
------- ------- -------
Net cash provided by operating activities 489 4,126 3,528
INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,023) (4,945) (557)
Increase in investment in minority interest of investee (1,040) -- --
Cash surrender value of officers' life insurance 297 (14) (41)
Repayments from officers and employees 400 135 175
------- ------- -------
Net cash used in investing activities (2,366) (4,824) (423)
FINANCING ACTIVITIES
Borrowings of long-term debt 3,000 3,500 --
Repayments of long-term debt (1,973) (2,228) (2,207)
Borrowings under line of credit 1,109 -- --
Distributions -- (580) (800)
------- ------- -------
Net cash provided by (used in) financing activities 2,136 692 (3,007)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 259 (6) 98
Cash and cash equivalents, beginning of period 183 189 91
------- ------- -------
Cash and cash equivalents, end of period $ 442 $ 183 $ 189
======= ======= =======
Supplementary information for the statement of cash flows:
Interest payments $ 600 $ 748 $ 750
Note receivable and inventory converted to equity in
investee $ 1,618 -- --
</TABLE>
SEE ACCOMPANYING NOTES.
F-51
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Nationwide Precision Products Corp. ("the Company"), located in Rochester,
New York, manufactures precision machined parts, extrusions and castings for a
customer base primarily in the United States. The Company has a 44% interest in
Parlec, Inc., a producer of tooling and tool measuring equipment utilized by
manufacturing companies primarily in the United States, Canada and Western
Europe, located in Rochester, New York. On December 4, 1998, the Company entered
into an agreement with Precision Partners, L.L.C. ("LLC") to sell substantially
all of its assets exclusive of its investment in Parlec and certain other
assets, and for LLC to assume certain liabilities. The agreement was assigned by
LLC to a wholly-owned subsidiary, Precision Partners Holdings, Inc. ("Holdings")
which was in turn assigned to Holdings' wholly-owned subsidiary, Precision
Partners, Inc. The acquistion was completed on March 19, 1999. The financial
statements are presented on a historical cost basis and do not include any
adjustments related to the purchase transaction.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the actual amounts reported in the financial statement
and accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash in bank demand deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk with respect to cash. The Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term, highly liquid investments
which are readily convertible into cash with original maturities of 90 days or
less.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method of determining cost for the majority of its
inventories.
REVENUE RECOGNITION
Sales are recorded when products are shipped to a customer.
DEPRECIATION
Buildings, machinery and equipment, and furniture and fixtures are
depreciated using both straight-line and declining balance methods over the
estimated useful lives of the individual assets. The
F-52
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
lives are five to ten years for equipment, twenty years for land improvements
and forty years for building and improvements.
INCOME TAXES
The Company has elected to be treated as an S Corporation for Federal and
New York State income tax purposes under the provisions of subchapter S of the
Internal Revenue Code. Under these provisions, the taxable income of the Company
is reported directly on the stockholders' individual tax returns.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to
be recognized for long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 19, MAY 31,
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $1,353 $2,416
Work-in-process 206 449
Finished goods 1,357 686
------ ------
2,916 3,551
Reserve for obsolescence (233) (250)
------ ------
$2,683 $3,301
====== ======
</TABLE>
F-53
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued at cost and consist of the
following:
<TABLE>
<CAPTION>
MARCH 19, MAY 31,
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements $ 980 $ 980
Buildings and improvements 5,343 5,187
Machinery and equipment 26,585 24,778
Furniture, fixtures and other 670 610
------- -------
33,578 31,555
Less accumulated depreciation 15,998 14,547
------- -------
Property, plant and equipment, net $17,580 $17,008
======= =======
</TABLE>
4. DEBT
At March 19, 1999, the Company has $4,862,219 of unused letters-of-credit
with a bank to guarantee payment of the Industrial Revenue Bonds. A
letter-of-credit fee is charged at approximately 1% of the outstanding balance.
The Company has available a $2,000,000 working capital line-of-credit.
Borrowings on the line bear interest at the Bank's prime rate (7.75% at
March 31, 1999). The outstanding balance on this line is $1,109,000 at
March 19, 1999. There was no outstanding balance at May 31, 1998.
The Company has available a $600,000 equipment line-of-credit to fund future
equipment purchases for specific contracts. Borrowings on this line bear
interest at the Bank's prime rate (7.75% at March 19, 1999). There were no
outstanding balances on this line at March 19, 1999 and May 31, 1998.
F-54
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, MAY 31,
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligation consisting of a Tax Exempt
Industrial Revenue Bond, variable interest on outstanding
balance (3.10% at March 31, 1999), maturing 2004. No
principal payments are required until 2003. $ 3,325 $ 3,325
Capital lease obligation consisting of a Taxable Industrial
Revenue Bond, variable interest rate on outstanding
balance (5.20% at March 31, 1999), maturing 2003.
Principal installment of $180,000 began in fiscal 1996 and
increase by $20,000 per year through maturity. 1,435 1,675
Note payable to bank, $68,750 monthly plus 7.67% interest,
matured July, 1998. -- 138
Note payable to bank, $25,000 monthly plus 8.25% interest,
maturing December, 1999. 225 475
Note payable to bank, $31,250 monthly plus 8.035% interest,
maturing April, 2000. 406 719
Note payable to bank, $41,667 monthly plus 7.74% interest,
maturing May, 2000. 583 1,000
Note payable to bank, $71,445 monthly, including interest at
7.7%, maturing July, 2003. 3,101 3,500
Note payable to bank, $58,698 monthly, including interest at
6.5%, maturing September, 2003. 2,792 --
Deferred compensation payable to a former employee requiring
yearly payments of $15,000, including imputed interest at
9%, maturing 2005. 67 75
------- -------
11,934 10,907
Less current portion 2,564 2,065
------- -------
$ 9,370 $ 8,842
======= =======
</TABLE>
The Company's debt is collateralized by substantially all of the Company's
assets.
Aggregate future maturities of long-term debt are as follows:
2000--$2,564,000; 2001--$1,686,000; 2002--$1,680,000; 2003--$1,792,000;
2004--$4,194,000; thereafter--$18,000.
CAPITAL LEASE OBLIGATION
On December 1, 1994, the Company entered into an agreement to purchase land,
construct an addition to its facility in Henrietta, New York and to extend the
County of Monroe Industrial Development Agency (COMIDA) lease term of the 1986
bonds which related to the original building construction. The new bonds are
ten-year Industrial Development Revenue Bonds (IRB) issued through the COMIDA
and originally totaled $5,600,000. The Company leases the building under a
ten-year agreement with COMIDA. At the end of the lease term, the Company has an
option to purchase the property for one dollar, thus the lease has been
capitalized for financial reporting purposes.
F-55
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
The present value of future minimum lease payments based on current
prevailing interest rates as of March 31, 1999, is as follows, in thousands:
<TABLE>
<S> <C>
Years ending March 31,
2000 $ 470
2001 477
2002 481
2003 485
2004 488
Thereafter 3,381
-------
5,782
Less amount representing interest 1,022
-------
Present value of future minimum lease payments $ 4,760
=======
</TABLE>
5. PROFIT SHARING/401(K) PLANS
The Company, along with Parlec, Inc., sponsors a profit sharing and 401(k)
plan covering their employees. The Plan is a discretionary profit sharing plan
where contributions are determined annually by the Board of Directors. No
contributions were made during the periods presented. In addition, the Company
makes matching contributions equal to 50% of the employee's elective deferrals
up to a maximum of $250 per year. Matching contributions totaled approximately
$28,000, $27,400, and $16,500 for the period from June 1, 1998 to March 19,
1999, and the years ended May 31, 1998 and 1997, respectively.
6. RELATED PARTIES
NOTES RECEIVABLE FROM OFFICERS
During 1991 and 1993, the President of the Company (Michael Nuccitelli)
borrowed various monies to purchase interests in Parlec, Inc. (Parlec), a
manufacturing company related through common management and the real estate
partnership that owns the Parlec facility. Interest accrues at rates that
approximate market rates (6.25% at March 19, 1999) and is payable annually. The
balance outstanding on these notes was $0 and $295,000 at March 19, 1999 and
May 31, 1998, respectively.
INVESTMENT IN PARLEC, INC.
In May 1994, the Company purchased 30% of the outstanding shares of
Parlec, Inc. The aggregate purchase price for these share was $1,200,000. The
investment has been accounted for using the equity method of accounting. At the
date of acquisition, the investment in Parlec exceeded the Company's share of
the underlying net assets by $1,055,400. This amount is being amortized as
goodwill on a straight-line basis over 40 years.
In December 1998, the Company purchased 200,000 shares, or an additional 14%
of the outstanding shares of Parlec. The aggregate purchase price for the shares
was $2,658,000, which consisted of cash and inventory of $1,040,000 and
$1,268,000, respectively, and the "forgiveness" of a 1993 loan due to the
Company from Parlec of $350,000 which was included in the Investment in
F-56
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTIES (CONTINUED)
Parlec, Inc. On the date of the transaction, the additional investment in Parlec
exceeded the Company's share of the underlying net assets by approximately
$1,576,000. This amount will be amortized over 40 years beginning in 1999.
The following summarized balance sheet is presented for Parlec, Inc. as of
March 19, 1999 and May 31, 1998:
<TABLE>
<CAPTION>
MARCH 19, MAY 31,
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets
Current assets $ 9,554 $ 8,564
Fixed and other assets 7,194 7,323
------- -------
$16,748 $15,887
======= =======
Liabilities
Current liabilities $ 6,663 $ 7,086
Long-term debt 3,452 4,149
Other long-term debt (Nationwide) -- 350
------- -------
10,115 11,585
Stockholders' Equity 6,633 4,302
------- -------
Total $16,748 $15,887
======= =======
</TABLE>
The following summarized statements of operations is presented for
Parlec, Inc. for the period from June 1, 1998 to March 19, 1999 and the years
ended May 31, 1998 and 1997:
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED MAY 31,
JUNE 1, 1998 TO -------------------
MARCH 19, 1999 1998 1997
---------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales $20,133 $24,541 $17,381
Cost of sales 15,819 16,650 11,053
------- ------- -------
Gross profit $ 4,314 $ 7,891 $ 6,328
======= ======= =======
Net (loss) income, before tax $ (327) $ 1,329 $ 1,033
======= ======= =======
</TABLE>
SALES
During the period from June 1, 1998 to March 19, 1999 and the years ended
May 31, 1998 and 1997 the Company had sales to Parlec, Inc. of approximately
$1,617,550, $2,672,000 and $2,559,000 respectively. As of March 19, 1999 and
May 31, 1998, amounts due from Parlec, Inc. were approximately $309,000 and
$572,000, respectively.
F-57
<PAGE>
NATIONWIDE PRECISION PRODUCTS CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. MAJOR CUSTOMERS
During the period from June 1, 1998 to March 19, 1999 and the years ended
May 31, 1998 and 1997, 68%, 70% and 71%, respectively, of the Company's sales
were to three customers. As of March 19, 1999 and May 31, 1998, the Company's
receivables from these three customers were approximately $1,734,541 and
$2,701,000, respectively.
8. YEAR 2000 (UNAUDITED)
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
on-going business as a result of the "Year 2000 issue." However, it is possible
that the full impact of the date change, which was of concern due to computer
programs that use two digits instead of four digits to define years, has not
been fully recognized. For example, it is possible that Year 2000 or similar
issues such as leap year-related problems may occur with billing, payroll, or
financial closings at month, quarterly, or year end. We believe that any such
problems are likely to be minor and correctable. In addition, we could still be
negatively impacted if our customers or suppliers are adversely affected by the
year 2000 or similar issues. We currently are not aware of any significant Year
2000 or similar problems that have arisen for our customers and suppliers.
F-58
<PAGE>
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
The Board of Directors
Precision Partners, Inc.
We have audited the balance sheet of Gillette Machine & Tool Co., Inc.
("Gillette") as of August 31, 1999, and the related statements of income and
retained earnings and cash flows for the period from March 1, 1999 to
August 31, 1999. These financial statements are the responsibility of Gillette's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards 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 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 Gillette at August 31, 1999,
and the results of its operations and its cash flows for the period from
March 1, 1999 to August 31, 1999 in conformity with accounting principles
generally accepted in the United States.
March 10, 2000 /s/ Ernst & Young LLP
Dallas, Texas
F-59
<PAGE>
REPORT OF INDEPENDENT AUDITORS, BONADIO & CO., LLP
The Board of Directors
Precision Partners, Inc.
We have audited the combined balance sheet of Gillette Machine & Tool Co., Inc.
("Gillette") as of February 28, 1999, and the related statements of income and
retained earnings and cash flows for the year then ended. These financial
statements are the responsibility of Gillette'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 Gillette at February 28, 1999,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
August 27, 1999 /s/ Bonadio & Co., LLP
Rochester, New York
F-60
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1999 FEBRUARY 28, 1999
--------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash $ -- $ 68
Accounts receivable 1,948 1,742
Due from related party -- 87
Inventories 3,159 3,489
Prepaid expenses 142 50
---------- ----------
Total current assets 5,249 5,436
Property, plant and equipment, net 1,698 1,890
Deferred tax asset, net 97 163
---------- ----------
Total assets $ 7,044 $ 7,489
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 224 $ --
Demand note payable 267 300
Current portion of long-term debt 170 164
Accounts payable 832 906
Accrued expenses 290 363
Accrued income taxes 43 171
Due to related party 57 134
Due to stockholders -- 323
---------- ----------
Total current liabilities 1,883 2,361
Long-term debt, net of current portion 480 640
Stockholders' equity:
Common stock, Class A, voting, par value $2, 5,000 shares
authorized, 375 shares issued and outstanding 1 1
Common stock, Class B, non-voting, par value $2,
45,000 shares authorized, 3,375 shares issued and
outstanding 7 7
Retained earnings 4,673 4,480
---------- ----------
Total stockholders' equity 4,681 4,488
---------- ----------
Total liabilities and stockholders' equity $ 7,044 $ 7,489
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-61
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM MARCH 1, 1999
TO YEAR ENDED
AUGUST 31, 1999 FEBRUARY 28, 1999
------------------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Sales $ 7,977 $ 13,469
Cost of goods sold 5,387 10,195
-------- --------
Gross profit 2,590 3,274
Selling, general and administrative expenses 2,345 2,724
-------- --------
Income from operations 245 550
Other income (expense):
Miscellaneous income 46 62
Interest expense (50) (94)
Gain on sale of equipment 62 38
-------- --------
Other income, net 58 6
-------- --------
Income before income taxes 303 556
Income tax expense 110 199
-------- --------
Net income 193 357
Retained earnings, beginning of period 4,480 4,123
-------- --------
Retained earnings, end of period $ 4,673 $ 4,480
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-62
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1999
TO
AUGUST 31, YEAR ENDED
1999 FEBRUARY 28, 1999
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income $ 193 $ 357
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred tax expense (benefit) 66 (30)
Depreciation and amortization 247 620
Gain on sale of equipment (62) (38)
Changes in operating assets and liabilities:
Accounts receivable (206) (1)
Due to/from related party 10 67
Inventories 330 (1,074)
Prepaid expenses (92) (6)
Prepaid income taxes -- 16
Accounts payable and cash overdraft 150 175
Accrued expenses (73) 80
Accrued income taxes (128) 171
Customer advances -- (69)
----- -------
Net cash provided by operating activities 435 268
Investing activities:
Purchases of property, plant and equipment (58) (357)
Proceeds from the sale of equipment 65 38
----- -------
Net cash provided by (used in) investing
activities 7 (319)
Financing activities:
Payments on demand note payable (33) (116)
Borrowings on long-term debt -- 115
Payments on long-term debt (154) (126)
(Decrease) increase in due to stockholders (323) 203
----- -------
Net cash (used in) provided by financing
activities (510) 76
----- -------
(Decrease) increase in cash (68) 25
Cash at beginning of period 68 43
----- -------
Cash at end of period $ -- $ 68
===== =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-63
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Gillette Machine & Tool Co., Inc. (the "Company") is a manufacturer of
precision machined components for customers located primarily in the northeast
United States operating in a variety of industries.
BASIS OF PRESENTATION
On June 17, 1999 the Company entered into an agreement with Precision
Partners, Inc. to sell all of the outstanding common stock of the Company. The
transaction was completed on September 1, 1999. The financial statements are
presented on a historical cost basis and do not include any adjustments related
to the purchase.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term, highly liquid investments
which are readily convertible into cash with original maturities of 90 days or
less.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains its cash in bank demand deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk with respect to cash. The Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
REVENUE RECOGNITION
Sales are recorded when products are shipped to a customer.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method of determining cost.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
which range from three to twenty-four years.
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.
F-64
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to
be recognized for long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing to the fair value of the asset to its
carrying amount.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
2. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 74 $ 71
Work-in-process 2,607 2,596
Finished goods 528 872
----------- -----------
3,209 3,539
Less reserve for obsolescence 50 50
----------- -----------
$ 3,159 $ 3,489
=========== ===========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at:
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 7,922 $ 8,207
Leasehold improvements 1,187 1,184
Office equipment 460 437
Vehicles 181 170
----------- -----------
9,750 9,998
Less accumulated depreciation and amortization 8,052 8,108
----------- -----------
$ 1,698 $ 1,890
=========== ===========
</TABLE>
F-65
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FINANCING ARRANGEMENTS
The Company may borrow up to $3,500,000 under the terms of an annually
renewable line-of-credit agreement with a bank. Amounts borrowed bear interest
at the bank's prime rate, are collateralized by substantially all assets of the
Company, and are guaranteed by the estate of Frank P. Gillette. There were no
amounts outstanding at August 31, 1999.
Long term debt consists of the following at:
<TABLE>
<CAPTION>
FEBRUARY 28,
AUGUST 31, 1999 1999
---------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank in monthly installments of $7,397,
including interest at 7.94% through November 2001 $ 194 $ 223
Note payable to the estate of Frank P. Gillette in monthly
installments of $3,029, including interest at 9.5% through
February 2007 197 206
Note payable to the estate of Frank P. Gillette in monthly
installments of $500, including interest at 9.5% through
May 2025 155 158
Note payable to bank in monthly installments of $2,282,
including interest at 7.25% through February 2004 104 115
Note payable to bank in monthly installments of $4,437,
including interest at 7.55% through February 2001 -- 102
---------- --------
650 804
Less current portion 170 164
---------- --------
$ 480 $ 640
========== ========
</TABLE>
The notes payable to bank are collateralized by substantially all assets of
the Company and are guaranteed by the stockholders of the Company and the estate
of Frank P. Gillette.
All debt was subsequently paid at September 1, 1999 pursuant to the terms of
the Stock Purchase Agreement between the former stockholders of Gillette and
Precision Partners, Inc. (See Note 1).
Interest paid for the period ended August 31, 1999 and year ended February
28, 1999 was approximately $50,000 and $91,000, respectively.
5. INCOME TAXES
Deferred taxes are provided in the financial statements for significant
temporary differences arising from assets and liabilities whose bases are
different for financial reporting and income tax purposes. The primary
differences are attributable to inventory, depreciation, alternative minimum tax
credit carryforwards and investment tax credit carryforwards.
F-66
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The benefit (provision) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD FROM MARCH 1, 1999 FEBRUARY 28,
TO AUGUST 31, 1999 1999
------------------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current $ 46 $ 229
Deferred 64 (30)
--------- ---------
$ 110 $ 199
========= =========
</TABLE>
The tax effect of temporary differences that give rise to the net deferred
tax asset are as follows:
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax asset:
Inventory reserve $ 19 $ 20
Accrued expenses 22 20
Alternative minimum tax credit 157 192
Net operating loss carryforward--New York -- 10
New York State investment tax credit 187 187
--------- ---------
385 429
Deferred tax liability:
Accelerated depreciation (288) (266)
--------- ---------
Net deferred tax asset $ 97 $ 163
========= =========
</TABLE>
At August 31, 1999, the Company has investment tax credits of approximately
$290,000 available to reduce future New York State tax liabilities. These
credits will begin to expire in 2005.
The provision for income taxes differs from the "expected" provision for the
periods (computed by applying the U.S. Federal corporate income tax rate of 34%
to income before income taxes) as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD FROM MARCH 1, 1999 FEBRUARY 28,
TO AUGUST 31, 1999 1999
------------------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Computed "expected" tax expense $ 105 $ 189
State income taxes, net of Federal income
tax benefit 7 33
Other, net (2) (23)
--------- ---------
$ 110 $ 199
========= =========
</TABLE>
F-67
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS
LEASING
The Company has a lease for its facilities with the estate of Frank
P. Gillette through 2001. This lease is renewable for additional five year
periods. Rent expense was approximately $87,667 and $158,200 for the period
March 1, 1999 to August 31, 1999 and the year ended February 28, 1999,
respectively.
Pursuant to the terms of the Stock Purchase Agreement between Precision
Partners and the former stockholders, a new lease was executed as of
September 1, 1999 with two five year terms plus two additional five year options
to renew. Future minimum annual lease payments for the years ending August 31
are:
<TABLE>
<S> <C>
2000 $ 282,438
2001 282,438
2002 282,438
2003 282,438
2004 282,438
Thereafter 1,412,190
</TABLE>
MANUFACTURING SERVICES
The Company purchases machining services at agreed upon rates from a
partnership in which the Company's stockholders are the partners. The Company
also sells labor to the partnership at agreed upon rates.
The Company sold labor totaling $193,662 and $400,577 to the partnership and
purchased machining services totaling $401,349 and $817,540 from the partnership
for the six months ended August 31, 1999 and the year ended February 28, 1999,
respectively.
Pursuant to the terms of the Stock Purchase Agreement between Precision
Partners and the former shareholders of the Company, the Partnership was
dissolved effective September 1, 1999.
7. PROFIT-SHARING PLAN
The Company contributes to a profit sharing and 401(k) plan. The Company
matched employee contributions up to 3% of their eligible compensation in 1999.
Profit-sharing contributions to the plan are at the discretion of the Board of
Directors and are allocated to eligible employees based on wages. The Company
accrued approximately $106,000 for the six months ended August 31, 1999 and
contributed approximately $182,000 to the Plan for the year ended February 28,
1999.
8. MAJOR CUSTOMERS
During the period from March 1, 1999 to August 31, 1999, 68% of the
Company's sales were to two customers. As of August 31, 1999, the Company's
receivables from these two customers were approximately $1,421,000. During the
year ended February 28, 1999, 78% of the Company's sales were to four customers.
As of February 28, 1999, the Company's receivables from these four customers
were approximately $1,399,000.
F-68
<PAGE>
GILLETTE MACHINE & TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. YEAR 2000 (UNAUDITED)
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
on-going business as a result of the "Year 2000 issue." However, it is possible
that the full impact of the date change, which was of concern due to computer
programs that use two digits instead of four digits to define years, has not
been fully recognized. For example, it is possible that Year 2000 or similar
issues such as leap year-related problems may occur with billing, payroll, or
financial closings at month, quarterly, or year end. We believe that any such
problems are likely to be minor and correctable. In addition, we could still be
negatively impacted if our customers or suppliers are adversely affected by the
Year 2000 or similar issues. We currently are not aware of any significant Year
2000 or similar problems that have arisen for our customers and suppliers.
F-69
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRECISION PARTNERS, INC.
OFFER TO EXCHANGE
12% SENIOR SUBORDINATED NOTES DUE 2009
FOR ITS OUTSTANDING
12% SENIOR SUBORDINATED NOTES DUE 2009
[LOGO]
--------
PROSPECTUS
MAY 5, 2000
--------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
