<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-33438
PRECISION PARTNERS, INC.
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
DELAWARE 75-2783285
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5605 N. MacArthur Boulevard
Suite 760
IRVING, TEXAS 75038
(Address of principal executive offices)
(972) 580-1550
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ---
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 100 as of November 30, 2000.
<PAGE>
PRECISION PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
September 30, 2000 (Unaudited) and December 31, 1999
Unaudited Consolidated Statements of Operations for the 4
Three Months and Nine Months Ended September 30, 2000
and 1999
Unaudited Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk 30
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Securities Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURE 32
2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Precision Partners, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 313
Trade accounts receivable, less allowance
for doubtful accounts of $696 at September
30, 2000 and $261 at December 31, 1999 20,928 23,613
Inventories 16,955 18,404
Deferred income taxes -- 1,303
Other current assets 1,564 1,916
--------- ---------
Total current assets 39,447 45,549
Property, plant and equipment, at cost, net 60,072 71,057
Goodwill, net 72,645 77,429
Advance deposits for equipment leases 9,547 3,532
Deferred income taxes 6,549 --
Other assets 5,862 7,891
Non-compete agreement 188 933
========= =========
Total assets $ 194,310 $ 206,391
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings $ 9,805 $ 11,200
Accounts payable 13,562 7,703
Accrued expenses 11,291 11,406
Income taxes payable 300 1,014
Deferred revenue 1,872 4,700
Current installments of long term debt 4,396 2,611
Other current liabilities 5,727 3,071
--------- ---------
Total current liabilities 46,953 41,705
Long term debt, less current portion 118,043 120,737
Deferred income taxes 7,817 7,817
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value; 100 shares
authorized, issued and outstanding -- --
Additional paid-in capital 42,051 42,042
Accumulated deficit (20,554) (5,910)
--------- ---------
Total stockholder's equity 21,497 36,132
========= =========
Total liabilities and stockholder's equity $ 194,310 $ 206,391
========= =========
</TABLE>
SEE ACCOMPANYING NOTES
3
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Precision Partners, Inc.
Unaudited Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 37,589 $ 35,371 $ 125,664 $ 81,301
Cost of sales (Note 5) 33,986 28,813 101,831 61,884
Impairment of long-lived assets (Note 6) 4,270 -- 4,270 --
--------- --------- --------- ---------
Gross (loss) profit (667) 6,558 19,563 19,417
Selling, general and administrative
expenses (Note 5) 8,315 6,743 23,288 14,797
Impairment of long-lived assets (Note 6) 2,501 -- 2,501 --
--------- --------- --------- ---------
Operating (loss) income (11,483) (185) (6,226) 4,620
Other income (expense):
Interest income 7 114 30 233
Interest expense (3,860) (3,628) (12,197) (8,629)
Other (Note 5) (888) 3 (936) 9
--------- --------- --------- ---------
Loss before income taxes (16,224) (3,696) (19,329) (3,767)
Benefit for income taxes (3,920) (1,316) (4,685) (1,020)
--------- --------- --------- ---------
Net loss $ (12,304) $ (2,380) $ (14,644) $ (2,747)
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
Precision Partners, Inc.
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (14,644) $ (2,747)
Adjustments to reconcile net loss to
net cash
provided by operating activities:
provided by operating activities:
Depreciation 8,848 5,699
Amortization 4,452 3,207
Impairment of long-lived assets 6,771 --
Loss on disposal of fixed assets 1,325 --
Deferred income taxes (5,246) --
Changes in operating assets and
liabilities, net of acquisitions:
Trade accounts receivable 2,685 (4,507)
Inventories 1,449 (2,744)
Other current assets 352 (637)
Advance deposit for equipment leases (6,015) --
Other assets 2,029 210
Accounts payable 5,859 70
Accrued expenses (115) 2,914
Income taxes payable (714) (1,390)
Deferred revenue (2,828) (126)
Other current liabilities 2,656 1,175
--------- ---------
Net cash provided by operating activities 6,864 1,124
INVESTING ACTIVITIES
Proceeds from sale of property, plant
and equipment 366 --
Purchase of property, plant and
equipment (4,104) (8,307)
Acquisition of subsidiaries, net of cash (206) (111,274)
--------- ---------
Net cash used in investing activities (3,944) (119,581)
FINANCING ACTIVITIES
Proceeds from revolving line of credit 32,055 14,300
Repayment of revolving line of credit (33,450) --
Repayment of long-term debt (909) (23,200)
Proceeds from long-term debt -- 123,000
Contribution of capital 9 10,035
Payment of debt issue costs (938) (5,502)
--------- ---------
Net cash (used in) provided by
financing activities (3,233) 118,633
--------- ---------
Net (decrease) increase in cash and
cash equivalents (313) 176
Cash and cash equivalents, beginning of
period 313 963
--------- ---------
Cash and cash equivalents, end of period $ -- $ 1,139
========= =========
SUPPLEMENTARY INFORMATION FOR THE
STATEMENT OF CASH FLOWS:
Interest payments $ 14,850 $
Income tax payments $ 1,274 $ 467
Non-cash investing and financing
activities - purchase of computer
hardware/software under financing
agreements $ 97 $ 344
Non-cash director and officer insurance
premium financing activities $ -- $ 164
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
NOTES TO THE UNAUDITED 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., which
were established to acquire all of the outstanding capital stock of Mid State
Machine Products ("Mid State") and Galaxy Industries Corporation ("Galaxy") on
September 30, 1998 (Mid State and Galaxy, collectively the "1998 Acquisitions").
The purchase price, including transaction expenses, was approximately
$54,725,000 and was financed by the proceeds of the contributed capital and
borrowings under LLC's credit facilities. 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 $12,370,000
Property, plant and equipment 14,854,000
Goodwill 36,553,000
Other assets 526,000
Current liabilities (5,458,000)
Deferred taxes, non-current (4,120,000)
</TABLE>
In February 1999, Precision Partners, Inc. ("Precision" or "Company") was
formed as a wholly-owned subsidiary of Precision Partners Holdings, Inc.
("Holdings"), a wholly-owned subsidiary of LLC. On March 19, 1999, as part of a
reorganization, LLC contributed to Precision, through Holdings, its investments
and related assets in Galaxy, Mid State and Precision Partners Management
Corporation ("Management Corporation"), which comprised substantially all of the
assets 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
facilities. 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.
The 1999 Acquisitions were financed through the net proceeds of the
issuance of the Notes, together with borrowings under Precision's credit
facilities, an equity contribution of approximately $10,000,000 and available
cash. The total purchase price, including transaction expenses, was
approximately $116,593,000. 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 $27,852,000
Property, plant and equipment 54,658,000
Goodwill 45,842,000
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 in the 1998 Acquisitions and the 1999 Acquisitions was allocated to
goodwill, which is being amortized over 20 years.
6
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Prior to the 1998 Acquisitions, LLC had substantially no operations,
and prior to the reorganization and 1999 Acquisitions, Precision had
substantially no operations. For financial statement presentation purposes,
the reorganization is accounted for as if it had occurred on September 9,
1998, in a manner similar to a pooling of interests. The 1999 Acquisitions,
except for the acquisition of Gillette which occurred on September 1, 1999,
for accounting purposes are assumed to have occurred on March 31, 1999.
Therefore, the Consolidated Statement of Operations and Cash Flows for the
periods ended September 30, 1999 include (i) the operations of Mid State and
Galaxy for the three and nine months ended September 30, 1999, (ii) the
operations of Certified, General, Nationwide, and Precision's corporate
office for the three months and six months ended September 30, 1999, (iii)
the operations of Gillette for the one month ended September 30 1999, and
(iv) expenses related to the Management Corporation from January 1, 1999 to
March 19, 1999 (prior to the reorganization).
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
2000 are not necessarily, and should not be construed as, indicative of the
results that may be achieved for a full year. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated upon consolidation.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
2. INVENTORIES AND COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Inventories consist of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $ 3,993 $ 2,575
Work in process 10,394 13,978
Finished goods 2,913 2,365
------- -------
17,300 18,918
Less reserves for obsolescence 345 514
------- -------
$16,955 $18,404
======= =======
</TABLE>
Information regarding contract costs, estimating earnings and progress
billings consist of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 905 $ 9,510
Estimated earnings 258 1,187
------- -------
1,163 10,697
Less net progress billings -- 7,893
======= =======
Costs and estimated earnings on uncompleted
contracts included in work in progress
inventory $ 1,163 $ 2,804
======= =======
</TABLE>
There were no significant billings in excess of net costs and estimated
earnings on uncompleted contracts.
7
<PAGE>
3. OTHER CURRENT LIABILITIES
As a result of alleged defaults which existed under the master lease
agreement, as explained further in Notes 4 and 9, the Company had not
received funding from General Electric Capital Corporation ("GECC") under
such agreement for equipment delivered during the third quarter. As of
September 30, 2000, Precision carried approximately $5.6 million of unpaid
invoices for such machinery and equipment in other current liabilities. As
part of the December 8, 2000 amendments to its existing credit agreements
with its bank lenders and the master lease agreement with GECC, also
explained in Notes 4 and 9 below, Precision entered into an equipment term
loan from GECC, a portion of the proceeds which will be used to pay the
invoices related to the machinery and equipment delivered during the quarter.
4. DEBT
Precision maintains a revolving line of credit of $25.0 million, which
matures on March 31, 2005, under which it can borrow funds or secure letters of
credit at prevailing market rates. As of September 30, 2000, Precision had
outstanding draws on the line of credit totaling approximately $9.8 million (at
an interest rate of approximately 9.6% at September 30, 2000). The revolving
line of credit is secured by substantially all accounts receivable and
inventory. Advances under the line are available based upon 85% of outstanding
eligible accounts receivable and 50% of eligible inventories. A commitment fee
of 0.5% per annum is payable in connection with the line of credit 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 are terminated, computed at the
applicable rate based on the actual daily amount of available revolving
commitment of each lending during the period. As of September 30, 2000, the
Company had approximately $15.2 million of available borrowing capacity under
the revolving credit facility.
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(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 $100,000
Note payable to a bank, due in quarterly principal
installments plus interest at
a variable rate (9.0625% as of September 30, 2000),
maturing March 31, 2005,
secured by all assets and property of Precision
Partners and its subsidiaries. Quarterly principal
installments of $805,000 began on June 30, 2000, and
increase 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 22,195 23,000
Financial software financing agreement due in twelve
quarterly installments of $32,471, including interest
at 7.8% per annum, ending March 2002 182 265
Director and officer insurance premium financing
agreement, due in six quarterly installments of
$28,997, including interest at 7.15% per annum -- 83
Computer hardware financing agreement due in thirty six
monthly installments of $2,214, including interest at
10.8% per annum, ending June 2003 62 --
-------- --------
122,439 123,348
Less current portion 4,396 2,611
======== ========
$118,043 $120,737
======== ========
</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, from 12.50% to 12.75% on December 16, 1999, and
from 12.75% to 13.00% on March 14, 2000. This increase in the interest rate was
a contractual obligation that arose because Precision did not file a
registration statement with the SEC relating to an offer to exchange new notes
for the Notes issued in March 1999, and because Precision did not have the
registration statement declared effective and
8
<PAGE>
did not consummate the exchange within prescribed time periods. The exchange
offer registration statement was filed and became effective on May 5, 2000 and
the exchange offer was completed on June 7, 2000. Upon the completion of the
exchange offer, the interest payable on the Notes reverted to 12.00%, the stated
amount of interest payable on the face of the Notes.
Precision has unamortized deferred financing costs of $5.1 million related
to the Notes, the note payable and its revolving credit facility. The costs are
being amortized over the life of the related Notes, note payable and revolving
credit facility.
The indenture governing the Notes, as well as the terms of Precision's
note payable and revolving credit facility, contain covenants that limit
Precision's and some of its 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.
Under the terms of the credit facilities, Precision is also required to
maintain certain leverage, interest coverage, and fixed charge coverage ratios
on a consolidated basis as well as comply with certain other covenants. The
terms of these credit facilities provide for the suspension of borrowings and
the repayment of all debt in the event of default. In addition, a default under
the credit facilities could potentially result in a default under other
agreements to which Precision is a party, including lease agreements, such as
the master lease agreement with GECC described in more detail in Note 9 and
the new GECC equipment term loan facility described below. On September 21,
2000, the Company notified its bank group of its anticipated noncompliance
with financial covenants applicable to the third quarter of 2000. In
recognition of the reorganization activity and the related $10.9 million
charge as discussed in Notes 5 and 6 below, on September 30, 2000, the bank
group agreed to waive compliance with the financial covenants through
December 29, 2000. As of September 30, 2000, the Company had $32.0 million of
indebtedness outstanding under its credit facilities.
Additionally, on November 1, 2000, GECC notified the Company that it was
in default under a master lease agreement between the parties as a result of the
Company's noncompliance with the same financial covenants as those contained in
the credit agreement for the third quarter and other unspecified covenants and
representations. On November 14, 2000, GECC agreed to waive these defaults
through November 30, 2000 on the condition that the parties enter into an
amendment to the lease on or prior to such date. As of September 30, 2000, the
Company had $18.5 million of operating leases outstanding under the master
lease.
On November 13, 2000, as a result of the existence of the defaults under
the GECC master lease agreement discussed above, the bank group notified the
Company of additional defaults under the credit facility. On November 14, 2000,
the bank group waived these defaults through November 30, 2000 and amended the
September 30 waiver to apply only through that date. On November 30, 2000,
the bank group extended this waiver through December 8, 2000.
On December 8, 2000, the Company entered into an amendment and waiver
with respect to its credit facilities, an amended and restated master lease
with GECC, and a new $20.8 million six-year equipment term loan facility with
GECC. In connection with these transactions, the Company received an equity
contribution from its primary shareholder of $6.0 million. At closing, the
Company drew down the entire $20.8 million under the GECC term loan facility.
The Company used approximately $11.8 million of these borrowings to
permanently prepay operating leases outstanding as of such date under the
amended and restated master lease, approximately $2.9 million to repay
advances under the Company's revolving credit facility that were used to fund
equipment purchases, and approximately $6.1 million to pay outstanding
invoices for new equipment. The $6.0 million proceeds of the equity
contribution were used to pay the fees and expenses associated with these
transactions and to repay advances under the Company's revolving credit
facility used to purchase new equipment.
The amendment and waiver in respect of the Company's credit facilities
includes a waiver of all defaults which may have existed on or prior to November
14, 2000, as well as a reduction in the revolving credit line from $25.0 million
to $22.0 million and an increase in the interest rate payable under both the
revolving and term loan facilities. Interest will continue to accrue and be paid
at either the base rate or LIBOR, plus an applicable margin ranging from 3.0% to
4.0%, depending on Precision's consolidated leverage ratio. This new interest
rate represents an increase of approximately 1.0% in the aggregate in the
interest payable by the Company over what the Company had paid in prior periods.
The financial ratios and tests, which the Company must meet, have also
been amended to reset the minimum and maximum quarterly requirements, as well as
to take account of rental expense under the amended and restated master lease.
The credit facilities, as amended, also contain additional tests and ratios
which the Company must meet on a
9
<PAGE>
monthly and quarterly basis, including minimum consolidated EBITDA ratios.
There have been no changes to the borrowing base formula under the revolving
credit line.
The new equipment term loan facility matures December 1, 2005, subject
to an automatic 12-month extension if no default or event of default has
occurred or is continuous at the time the extension becomes effective.
Borrowings under this facility bear interest at a rate of LIBOR plus a margin
of 5.0% subject to reduction under certain limited circumstances based on the
Company's consolidated leverage ratio. If at any time after the applicable
margin has been reduced, the Company fails to meet its consolidated leverage
ratio, the applicable margin will be reset to 5.0%. The new equipment term
loan facility requires the Company to comply with all of the financial
covenants contained in the Company's credit facilities, as amended. The new
equipment facility term loan also imposes limitations on the ability of the
Company and its subsidiaries (other than Certified and Gillette, which are
not obligors under this facility) to, among other things, incur additional
indebtedness, incur liens, make new investments, pay dividends or make
certain other restricted payments, enter into sale/leaseback transactions,
merge or consolidate with any other persons, or sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of its assets and
contains customary events of default.
The borrowers' obligation under the new equipment term loan are secured
by a first priority security interest in all equipment financed with
borrowings under the facility as well as a second priority lien in all the
Company's and its subsidiaries' (other than Gillette and Certified) assets
and property pledged to the lenders under the Company's note payable and
credit facility.
5. OPERATIONAL REVIEW AND OTHER ADJUSTMENTS
Due to ongoing losses at Galaxy, management performed an operational
assessment of the facility. Based on the results of that assessment, adjustments
of $3,006, $377, and $728 are included in cost of sales, selling, general and
administrative expenses, and other income (expense), respectively. The
adjustments relate to the write-off of certain inventory, accounts receivable,
and machinery and equipment no longer in use.
In addition, as part of the executed release agreement with a former
president of one of Precision's subsidiaries, additional amortization in
selling, general and administrative expenses. This additional amortization
expense reflects the change in the termination date of that former
president's covenant not to compete agreement from August 31, 2004 to
December 31, 2000.
6. IMPAIRMENT CHARGES
The Company evaluates its long-lived assets, including machinery,
equipment and goodwill, on an ongoing basis. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the related asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the asset to future undiscounted cash flows expected to be generated by the
asset. If the asset is determined to be impaired, the impairment recognized is
measured by the amount by which the carrying value of the assets exceeds its
fair value. Significant adverse changes in Galaxy's and Certified's business
environments, as well as historical, current and projected cash flow losses led
management to evaluate the operations of these two businesses. As a result of
this evaluation, management concluded that goodwill, machinery and equipment was
impaired, and in accordance with Precision's accounting policies, an impairment
loss of $2,318 relating to goodwill and $4,453 relating to machinery and
equipment at Galaxy and Certified was recognized in the third quarter of 2000.
The write-down of goodwill, machinery and equipment under SFAS 121 is not
deductible for income tax purposes. As a result of the recognition of these
impairment charges, management estimates an annual reduction of $0.1 million and
$0.9 million in amortization and depreciation expenses, respectively.
7. LITIGATION
Precision and/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 these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
8. INCOME TAXES
Tax benefits for the three and nine months ended September 30, 2000 and
1999 were impacted by permanent differences between pre-tax losses for financial
reporting purposes and taxable losses resulting primarily from non-deductible
goodwill generated by the stock acquisitions of Mid State, Galaxy, Certified,
and Gillette.
9. OPERATING LEASES
10
<PAGE>
As of September 30, 2000, Precision had funded approximately $18.5
million of its capital equipment needs with operating leases under the $35.0
million master lease agreement with GECC. This equipment is required
primarily to service Precision's recent contracts with Caterpillar and Dana
and increased unit delivery requirements from General Electric. After giving
effect to the amendments described below, minimum rental commitments under
noncancellable operating leases are as follows: 2001--$4.8 million;
2002--$4.6 million; 2003--$3.7 million; 2004--$3.5 million; 2005--$4.7
million.
On November 1, 2000, GECC notified the Company that it was in default
under the master lease agreement as a result of the Company's noncompliance with
the same financial covenants as those contained in the credit agreement for the
third quarter and other unspecified covenants and representations. On November
14, 2000, GECC agreed to waive these defaults through November 30, 2000 on the
condition that the parties enter into an amendment to the lease on or prior to
such date. On November 30, 2000, GECC extended the waiver through December 8,
2000.
On December 8, 2000, in connection with the amendment and waiver with
respect to its credit facilities and the new $20.8 million six-year equipment
term loan facility with GECC, the Company and GECC amended and restated the
master lease. As described in Note 4, approximately $11.8 million of the new
GECC equipment term loan was used to prepay operating leases outstanding at
such date, thereby reducing the remaining operating lease obligations to
approximately $6.7 million in the aggregate. Rent payments under the amended
and restated master lease consist of payments of principal plus interest at a
rate per annum of LIBOR plus a margin of 5.0%, subject to reduction in the
same manner and under the same circumstances as the applicable margin for the
GECC equipment term loan described in Note 4. This new interest rate
represents an increase of approximately 1.8% over the rate previously paid.
The covenants in the master lease were also amended to provide for, among
other things, permitted liens and incorporation of the financial covenants
and events of default contained in the new GECC equipment term loan facility.
For a description of these covenants and events of default, see Note 4 above.
11
<PAGE>
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of the historical information contained in this report,
the matters described herein contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and may
contain the words "believe," "anticipate," "expect," "estimate," "intend,"
"project," "will be," "will likely continue," "will likely result," or words or
phrases of similar meaning including, statements concerning:
o the Company's liquidity and capital resources,
o the Company's debt levels and ability to obtain financing and
service debt,
o competitive pressures and trends in the precision tooling industry,
o prevailing interest rates,
o legal proceedings and regulatory matters,
o general economic and business conditions, and
o other factors discussed under "Risk Factors."
Forward-looking statements involve risks and uncertainties (including, but not
limited to, economic, competitive, governmental and technological factors
outside the control of the Company) which may cause actual results to differ
materially from the forward-looking statements. These risks and uncertainties
may include the ability of management to implement its business strategy in view
of the Company's limited operating history; the highly competitive nature of the
precision tooling industry and the intense competition from other makers of
precision machined metal parts, tooling and assemblies, its dependence on
certain key customers; the Company's dependence on certain executive officers;
and changes in environmental and other government regulations. The Company
operates in a very competitive environment in which new risk factors can emerge
from time to time. It is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on the Company's
business or the extent to which any factor, or a combination of factors, may
cause actual results to differ materially from those contained in
forward-looking statements. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on forward-looking statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Precision Partners, Inc. is a leading contract mechanical manufacturing
services supplier of complex precision metal parts, tooling and assemblies for
original equipment manufacturers. Precision's broad manufacturing capabilities
and highly engineered processes allow Precision to meet the critical
specifications of its customers across a wide range of industries. Precision has
earned "Preferred or "Qualified" supplier status with most of its customers and
are predominately the sole-source supplier to its customers of the parts it
manufactures.
Precision Partners, L.L.C. was formed in September 1998 and Precision was
formed in February 1999 for the sole purpose of acquiring and operating
companies in the business of manufacturing and supplying complex precision metal
parts, tooling and assemblies for original equipment manufacturers. On September
30, 1998, Precision Partners, L.L.C. acquired all of the outstanding capital
stock of Mid State Machine Products and Galaxy Industries Corporation. In March
1999, Precision underwent a corporate reorganization under which it acquired all
of the issued and outstanding capital stock of Mid State and Galaxy. At the same
time, Precision also purchased all of the issued and outstanding capital stock
of Certified Fabricators, Inc. and Calbrit Design, Inc., together referred to as
Certified, and it purchased
12
<PAGE>
substantially all of the assets and assumed some liabilities of General
Automation, Inc. and Nationwide Precision Products Corp. The aggregate purchase
price including fees and expenses for the March acquisitions was approximately
$102.2 million and was financed through the net proceeds from the sale of the
outstanding notes, borrowings under Precision's credit facilities, an equity
contribution and available cash. In July 1999, Precision merged Calbrit into
Certified and in September 1999 Precision acquired Gillette Machine & Tool
Co., Inc. The purchase price for the Gillette acquisition was approximately
$14.4 million and was financed using existing cash and borrowings under
Precision's 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, Nationwide and General
Automation, Precision 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 Precision is treated as having commenced operations at
that time. See Note 1 to the unaudited consolidated financial statements. For
this reason, the following management's discussion and analysis for the three
and nine months ended September 30, 1999 includes the results of operations
of: (1) Mid State and Galaxy for the three months and nine months ended
September 30, 1999, (2) Certified, General, and Nationwide for the three and
six months ended September 30, 1999, (3) Gillette for the one month ended
September 30, 1999, (4) the expenses of the Management Corporation from
January 1, 1999 through March 19, 1999, and (5) the expenses of Precision's
management office from March 20, 1999 through September 30, 1999.
Due to continuing losses and indicators of impairment noted during the
third quarter of 2000, Precision began reorganizing two of its business units,
Galaxy and Certified. Galaxy's new engine block operation is now under the
management of Nationwide, which specializes in long-run production processes for
auto and light truck components. Galaxy's other three plants are now under the
management of Gillette, which specializes in short-run precision machined
production for the business machine, medical, and railroad switching equipment
industries. To improve operational performance, management intends to
consolidate the three Galaxy manufacturing operations under Gillette's
management into one facility. This consolidation is expected to be completed in
the first quarter of 2001.
Earlier this year, Precision began a similar reorganization at Certified.
Since January 1, 2000, Certified's workforce has been reduced by approximately
36 percent, from 127 to 81. The Company also further rationalized Certified's
product line. On September 11, 2000, Dennis Williams was named President and CEO
of Certified. Since March 1999, Mr. Williams has held various positions at
Certified, most recently as Director of Manufacturing. Prior to 1999, Mr.
Williams spent 13 years at the Boeing Commercial Airplane Group.
As a result of the reorganization and the indicators of impairment of
long-lived assets at Galaxy and Certified, the Company incurred non-cash,
after-tax charges of approximately $9.0 million ($10.9 million pre-tax) in the
aggregate for the quarter ended September 30, 2000. Additional cash costs of
approximately $1.4 million ($1.9 million pre-tax), related to the reorganization
and plant consolidation at Galaxy and Certified, are expected to be incurred in
the fourth quarter of 2000. These additional costs are expected to be partially
offset by the sale of real estate and other assets no longer being utilized by
the Company. These changes are described in more detail below in the discussion
of Precision's historical and pro forma results of operations.
HISTORICAL RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES
Net sales increased 6.3% to $37.6 million in the third quarter of 2000
compared to $35.4 million in the same period 1999. The increase is primarily due
to the acquisition of Gillette in September 1999 and continued growth in power
generation, light truck, and business machine component sales partially offset
by continuing declines in aerospace and automotive component sales. Power
generation, light truck and business machine component sales are expected to
continue to grow, although the declining aerospace tooling marketplace is
expected to continue to have a negative impact on net sales and therefore
Precision's results of operations in the near term.
COST OF SALES
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<PAGE>
Cost of sales increased to $34.0 million in the third quarter of 2000
compared to $28.8 million in the third quarter of 1999. The increase is
primarily due to an adjustment of $3.0 million recorded in the third quarter of
2000 related to the write-down in value of certain inventory, machinery and
equipment no longer in use at Galaxy, as well as the increase in net sales.
GROSS (LOSS) PROFIT
Gross (loss) profit decreased to a loss of $0.1 million in the third
quarter of 2000 compared to a profit of $6.6 million in the same period in 1999
primarily due to impairment charges recognized in the third quarter of 2000
related to the carrying value of long-lived assets at Galaxy and Certified and
the above-described adjustment to inventory and machinery and equipment at
Galaxy. These charges totaled $7.3 million and reflect the impairment of fixed
assets related to unprofitable business lines in the aerospace and heavy
equipment sectors and the results of an operational review at Galaxy. Increases
in gross profit at Mid State, Nationwide, and General, together with the gross
profit contributed by Gillette for a full quarter in 2000 compared to only one
month in the third quarter of 1999 partially offset the effects of the
impairment and special charges. Gross margin decreased by 21.0% to (2.4%) in the
third quarter of 2000 from 18.5% in the comparable period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased 23.3% to $8.3
million in the third quarter of 2000 compared to $6.7 million in the same period
of 1999. An increase in the allowance for doubtful accounts for disputed
receivables and the inclusion of selling, general, and administrative expenses
of Gillette for a full quarter in 2000 compared to only one month in the third
quarter of 1999 contributed to the increase.
In addition, a special charge of $2.5 million was recognized during the
third quarter of 2000 reflecting the impairment of goodwill and other long-lived
assets related to unprofitable business lines in the heavy equipment sector.
OPERATING LOSS
As a result of the above mentioned discussion, an operating loss of $11.5
million was incurred in the third quarter of 2000 compared to an operating loss
of $0.2 million in the same period in 1999.
INCOME TAX BENEFIT
The third quarter of 2000 and 1999 tax benefits were impacted by permanent
differences between pre-tax loss for financial reporting purposes and taxable
losses resulting primarily from non-deductible goodwill generated by the stock
acquisitions.
NET LOSS
Net loss was $12.3 million in the third quarter of 2000, compared to net
loss of $2.4 million in the same period of 1999 due to the above mentioned
charges, as well as interest expense associated with funding the Gillette
acquisition and new capital equipment programs at Mid State, Galaxy, and
Nationwide. Losses on disposal of idle or obsolete equipment during the period
also contributed to the period over period increase in net loss.
DEPRECIATION AND GOODWILL AMORTIZATION
Depreciation and goodwill amortization increased 29.8% to $4.6 million
in the third quarter of 2000 compared to $3.6 million in the same period of
1999. The increase is largely due to the acceleration of amortization expense
relating to the change in the length of a covenant not to compete agreement
with a former president of one of Precision's subsidiaries. Depreciation on
capital expenditures, as well as depreciation and goodwill amortization from
the acquisition of Gillette in 1999 also contributed to the period over
period increase. In addition, as a result of the recognition of the
above-mentioned charges, management estimates an annual reduction of $0.1
million and $0.9 million in amortization and depreciation expenses,
respectively.
14
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
NET SALES
Net sales increased 54.6% to $125.7 million in the nine months ended
September 30, 2000 compared to $81.3 million in the same period in 1999. The
increase is primarily due to the acquisitions of Certified, General, Nationwide,
and Gillette in 1999, as well as growth in power generation, light truck, and
business machine component sales partially offset by continuing declines in
aerospace and other automotive component sales.
COST OF SALES
Cost of sales increased to $101.8 million for the nine months ended
September 30, 2000 compared to $61.9 million for the nine months ended September
30, 1999. This increase is primarily due to the increase in net sales and the
1999 acquisitions of Certified, Nationwide, General, and Gillette, as well as an
adjustment of $3.0 million recorded in the third quarter of 2000 related to the
write-down in value of certain inventory and of certain machinery and equipment
no longer in use.
GROSS PROFIT
Gross profit increased to $19.6 million in the nine months ended September
30, 2000 compared to $19.4 million in the same period in 1999. This increase is
primarily due to increased power generation, light truck and business machine
component sales, partially offset by the special and impairment charges
recognized in the third quarter of 2000 related to the carrying value of
long-lived assets at Galaxy and Certified and the above-described adjustment to
inventory and machinery and equipment at Galaxy. Gross margin decreased to 15.6%
in the nine months ended September 30, 2000 from 23.9% in the comparable period
in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased to $23.3 million
in the nine months ending September 30, 2000 compared to $14.8 million in the
same period 1999. The increase is primarily attributable to the acquisitions of
Certified, General, Nationwide, and Gillette in 1999 and an increase in the
allowance for doubtful accounts relating to disputed receivables. Costs related
to increased net sales and severance costs relating to management changes also
contributed to the period over period increase.
In addition, a special charge of $2.5 million was recognized during the
third quarter of 2000 reflecting the impairment of goodwill and other long-lived
assets related to unprofitable business lines in the heavy equipment sector.
OPERATING (LOSS) INCOME
For the nine months ended September 30, 2000, the Company generated
operating losses of $6.2 million compared to operating income of $4.6 million
for the nine months ended September 30, 1999.
INCOME TAX BENEFIT
Tax benefits for the nine months ended September 30, 2000 and 1999 were
impacted by permanent differences between pre-tax loss for financial reporting
purposes and taxable losses resulting primarily from non-deductible goodwill
generated by the stock acquisitions.
NET LOSS
Net loss was $14.6 million in the nine months ended September 30, 2000,
compared to a net loss of $2.7 million in the same period of 1999 due to the
aforementioned reasons and interest expense associated with the outstanding 12%
senior subordinated notes, the proceeds of which were used to fund the
Certified, General, and Nationwide acquisitions, and interest expense associated
with funding the Gillette acquisition and new capital equipment programs at Mid
State,
15
<PAGE>
Galaxy, and Nationwide. Losses on disposal of idle or obsolete equipment during
the third quarter of 2000 also contributed to the period over period increase in
net loss.
DEPRECIATION AND GOODWILL AMORTIZATION
Depreciation and goodwill amortization increased 58.0% to $12.6 million
in the nine months ending September 30, 2000 compared to $8.0 million in the
same period of 1999. The increase is primarily due to depreciation and
goodwill amortization from the acquisitions of Certified, General,
Nationwide, and Gillette in 1999, as well as the acceleration of amortization
expense relating to the change in length of a covenant not to compete
agreement with a former president of one of Precision's subsidiaries. In
addition, as a result of the recognition of the above-mentioned charges,
management estimates an annual reduction of $0.1 million and $0.9 million in
amortization and depreciation expenses, respectively.
16
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations for the nine
month period ended September 30, 1999 includes the operations of Mid State and
Galaxy for the period and gives effect to the 1999 Acquisitions as if the
transactions had occurred on January 1, 1999. For purposes of the unaudited pro
forma consolidated statements of operations, the historical financial
information of General and Nationwide has been adjusted to eliminate the effect
of certain assets not acquired and certain liabilities not assumed in the
acquisition by Precision, in each case in accordance with the terms of the
purchase agreement relating to such acquisition. The unaudited pro forma
consolidated financial statements should be read in conjunction with the
unaudited historical consolidated financial statements of Precision, including
the notes thereto, included elsewhere in this report.
Management believes that 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 respective dates indicated and do not
purport to indicate results of operations as of any future date or for any
future period. The assumptions used in the preparation of the pro forma
consolidated financial information include significant subjective judgment on
the part of management, and although it believes such assumptions to be
reasonable, Precision cannot assure you that all of those assumptions will prove
to be correct. Although not required by Regulation S-X, due to the significance
of the 1999 Acquisitions, Precision is presenting this pro forma consolidated
financial information to provide a meaningful comparison for the nine months
ended September 30, 2000 and the corresponding period in the prior year.
The following table sets forth Precision's unaudited historical
consolidated statement of operations and other information for the nine months
ended September 30, 2000 and the pro forma statement of operations and other pro
forma information for the nine months ended September 30, 1999, both in dollars
and expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Nine months ending
September 30,
--------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
(PRO FORMA)
<S> <C> <C>
Net sales $ 125,664 $ 107,862
Cost of sales (1) 101,831 81,956
Impairment of long-lived assets 4,270 --
--------- ---------
Gross profit 19,563 25,906
% of sales 15.6% 24.0%
Selling, general and
administrative
expenses (2) 23,288 18,474
Impairment of long-lived assets 2,501 --
--------- ---------
Operating (loss) income (6,226) 7,432
% of sales (5.0%) 6.9%
Other income (expense):
Net interest expense (3) (12,167) (11,803)
Other (936) 143
--------- ---------
Loss before income taxes (19,329) (4,228)
% of sales (15.4%) (3.9%)
Benefit for income taxes (4) (4,685) (943)
--------- ---------
Net loss $ (14,644) $ (3,285)
========= =========
% of sales (11.7%) (3.1%)
EBITDA: (5)
Operating income $ (6,226) $ 7,432
Depreciation 8,848 8,448
Goodwill amortization (6) 3,804 3,075
--------- ---------
Total $ 6,426 $ 18,955
% of sales 5.1% 17.6%
</TABLE>
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NOTES TO PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Nine months ended
-----------------------------
September 30, September 30,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
(1) COST OF SALES PRO FORMA ADJUSTMENTS:
Increased depreciation due to fixed asset
step up to fair market value $ -- $ 831
Adjustment for new lease terms of
facilities at Nationwide made as part
of the purchase, net of the
elimination of depreciation expense on
a building not acquired -- 136
Adjustment for new lease terms of
facilities at General made as part of
the purchase agreement -- (24)
------- -------
$ -- $ 943
------- -------
(2) SG&A PRO FORMA ADJUSTMENTS:
Goodwill amortization related to the
acquisitions $ -- 718
Adjustments for termination of executive
positions held by shareholders
and related parties as part of the
purchase contract of Gillette
whose positions
will not be replaced -- (1,515)
Reduction in shareholders' compensation,
bonus, and benefits as a result of
employment contracts executed in
connection with the transactions -- (254)
Elimination of acquisition related expenses -- (212)
------- -------
$ -- $(1,263)
------- -------
</TABLE>
(3) Interest expense related to the $100,000,000 Precision Partners,
Inc. 12% Senior Subordinated Notes due 2009, the $23,000,000 note
payable to a bank, the $25,000,000 revolving credit facility, and
debt issue costs expensed in refinancing.
(4) Adjustment to record the income tax benefit on pro forma loss
before income taxes.
(5) EBITDA is defined as operating income plus depreciation and
amortization. EBITDA includes impairment charges recognized under
SFAS 121 totaling $6,771. Excluding the effects of these impairment
charges, which are non-cash in nature, EBITDA for the nine months
ended September 30, 2000 would have been $13,197 or 10.5% of net
sales. 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
report may not be comparable to the definition of EBITDA used by
other companies.
(6) Goodwill amortization includes the amortization of payments made
to a former owner of Galaxy Industries for rights not to compete
with Precision. The period of non-competition commenced in October
of 1999 and will terminate on December 31, 2000.
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<PAGE>
PRO FORMA RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
NET SALES
Net sales increased 16.5% to $125.7 million for the nine months ended
September 30, 2000, compared to $107.9 million for the same period in 1999.
During this period sales at Mid State and Galaxy increased 45.1% to $64.1
million from $44.2 million in the prior period, mainly due to increased orders
from General Electric and Caterpillar. Sales at General and Nationwide for the
period ending September 30, 2000 increased 6.4% to $38.0 million from $35.8
million during the comparable period in 1999 due to increased sales in the
automotive tooling and component business. Gillette sales for the period
increased 22.8% to $13.8 million from $11.3 million during the comparable period
of 1999 due to increased business machine and medical product volume. Sales at
Certified for the period ending September 30, 2000 decreased 41.7% to $9.7
million from $16.7 million during the comparable period in 1999, due to
contract-pricing difficulties and continued overall softness in the defense and
aerospace sectors.
COST OF SALES
Cost of sales increased to $101.8 million for the nine months ended
September 30, 2000 compared to $82.0 million for the nine months ended September
30, 1999. This increase is primarily due to the increase in net sales, as well
as an adjustment of $3.0 million recorded in the third quarter of 2000 related
to the write-down in value of certain inventory and of certain machinery and
equipment no longer in use.
GROSS PROFIT
Gross profit for the period ending September 30, 2000 decreased 24.5% to
$19.6 million from $25.9 million in the comparable period in 1999 primarily due
to charges of $4.3 million related to the impairment of fixed assets at
facilities servicing the aerospace and heavy construction sectors. Continued
margin strength in the power generation and automotive component sectors helped
offset these impairment and special charges. Gross margin decreased 8.4% during
this period to 15.4% from 24.0%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased to $23.3 million
in the nine months ending September 30, 2000 compared to $18.5 million in the
same period 1999. Costs related to increased net sales, increases in the
allowance for doubtful accounts relating to disputed receivables, increases in
professional fees, and severance costs relating to management changes
contributed to the period over period increase.
In addition, a special charge of $2.5 million was recognized during the
third quarter of 2000 reflecting the impairment of goodwill and other long-lived
assets related to unprofitable business lines in the heavy equipment sector.
OPERATING (LOSS) INCOME
For the nine months ended September 30, 2000, the Company generated
operating losses of $6.2 million compared to operating income of $7.4 million
for the nine months ended September 30, 1999.
INCOME TAX BENEFIT
Income tax benefit increased to $4.7 million for the nine months ended
September 30, 2000 from $0.9 million in the same period in 1999 due to the
increase in taxable loss.
NET LOSS
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<PAGE>
As a result of the foregoing, the net loss during the period ending
September 30, 2000 was $14.6 million compared to $3.3 million during the same
period in 1999. Losses on disposal of idle or obsolete equipment during the
third quarter of 2000 also contributed to the period over period increase in net
loss.
DEPRECIATION AND GOODWILL AMORTIZATION
Depreciation and goodwill amortization expense increased 9.6% in the nine
months ended September 30, 2000 to $12.7 million from $11.5 million in the nine
months ended September 30, 1999 due to capital expenditures during 2000, as
well as the acceleration of amortization expense relating to the change in
the length of a covenant not to compete agreement with a former president of
one of Precision's subsidiaries.
BACKLOG
Backlog for the period ending September 30, 2000 increased 22.2% to $131.5
million from $107.7 million at December 31, 1999.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended
September 30, 2000 increased to $6.8 million compared to $1.1 million for the
same period in 1999. This increase primarily reflects increased operating
profits at Mid State and General and profits contributed by Gillette for the
full nine months in 2000 compared to only one month in 1999, partially offset by
the effects of the impairment and special charges recognized in the third
quarter of 2000 in connection with the reorganization and restructuring at
Galaxy and Certified.
Net cash used in investing activities decreased to $3.9 million for the
nine months ended September 30, 2000 from $119.6 million for the same period in
1999. This decrease primarily represents a significant decrease in acquisition
activity in 2000 as compared to 1999, as well as a reduction in capital
expenditures as a result of the equipment operating leases provided by GECC
under the master lease entered into in March of 1999. At September 30, 2000,
Precision had $18.5 million of operating leases under this agreement.
Net cash used in financing activities in the nine months ended September
30, 2000 was $3.2 million, primarily reflecting repayment of debt and payment of
debt issue costs, net of borrowings under Precision's revolving credit facility.
Net cash provided by financing activities was $118.6 for the nine months ended
September 30, 1999 primarily reflecting the issuance of the Precision's
outstanding senior subordinated notes, the entering into of new credit
facilities and equity contributions received from shareholder in March 1999 in
connection with the 1999 acquisitions, net of repayment of pre-existing debt and
payments of fees relating to the issuance of Precision's outstanding senior
subordinated notes.
Precision's principal sources of liquidity are available borrowings under
its reducing credit facility and cash flow from operations. Precision expects
that its principal uses of liquidity will continue to be working capital,
capital expenditures, debt service requirements and permitted acquisitions.
Precision's credit facilities consist of a $23.0 million note payable
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 September 30, 2000, Precision
has total debt of approximately $132.2 million, primarily consisting of the
outstanding principal amount on Precision's note payable of $22.2 million, the
outstanding aggregate principal amount of the Notes and $9.8 million of
outstanding borrowings under Precision's revolving credit facility. Precision's
ability to borrow under the revolving credit facility is subject to Precision's
compliance with the financial covenants described below and a borrowing base
that is based on Precision's eligible accounts receivables and inventory.
The obligations of Precision and its subsidiaries under the revolving
credit facility are secured by a first priority security interest in
substantially all inventory and accounts receivable, and their obligations
under the note payable are secured by a first priority interest in
substantially all other property and assets of Precision and its subsidiaries
(other than equipment leased from GECC under the master lease and equipment
financed under the GECC equipment term loan, in which the lenders have a second
priority lien).
The indenture and Precision's credit facilities impose limitations on
Precision's 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 Precision's assets. In addition, the credit facilities
limit Precision's ability to enter into sale and leaseback transactions and
to make capital expenditures. The credit facilities require Precision to meet
and maintain certain financial ratios and tests as described below, 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.
Precision's amortization requirements are limited to the note payable
and the GECC equipment term loan facility over the next two years.
Precision's other debt service requirements over the next two years consist
primarily of interest expense on the Notes and borrowings under the revolving
credit facility. Precision's short-term cash requirements for its operations
are expected to consist mainly of capital expenditures to maintain and expand
Precision's manufacturing capabilities and working capital requirements.
Precision currently expects that its capital expenditures will be
approximately $33.0 million in 2000, including maintenance capital
expenditures of approximately $1.5 million. As of September 30, 2000,
Precision had funded approximately $18.5 million of capital equipment needs
under its master lease with GECC. This equipment is related to Precision's
recent contracts with Caterpillar and Dana and increased unit delivery
requirements from General Electric. Approximately $11.8 million of these
operating leases were retained under the GECC equipment term loan of amounts
previously funded under operating leases. However, Precision's capital
expenditures will be affected by, and may be greater than currently
anticipated depending upon the size and nature of new business opportunities.
21 <PAGE>
The aggregate purchase price, including fees and expenses, for the
acquisitions of Certified, Nationwide and General of $102.0 million does not
include potential effects of certain contingent purchase arrangements. A
contingent payment may be payable by Precision's parent, Precision Partners
Holdings Company, in the form of cash or a note payable-in-kind maturing
September 30, 2009, if one of the companies Precision acquired in March 1999
achieves specified EBITDA targets in 2000. Based on year-to-date operating
results and projections for the remainder of 2000, management believes the
contingent payment described above will not be earned. 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, to
the former stockholder of this company who is now an employee of Precision's
company was accrued in December 1999 as compensation expense and was paid in
April 2000.
Precision plans to continue its acquisition strategy and expect to finance
future acquisitions using cash, capital stock, notes and/or assumption of
indebtedness. However, the restrictions imposed on Precision by its long-term
debt instruments may affect this strategy. In addition, to fully implement its
growth strategy and meet the resulting capital requirements, Precision may be
required to request increases in amounts available under its credit facilities,
issue future debt securities or raise additional capital through equity
financings. There can be no assurance that any such increase to Precision's
credit facilities will be available or, if available, will be on terms
satisfactory to Precision, or that it will be able to successfully complete any
future debt or equity financings on satisfactory terms, if at all. As a result,
Precision could be placed at a competitive disadvantage in pursuing
acquisitions.
Based upon current operations and the historical results of its
subsidiaries, Precision believes that its cash flow from operations, together
with available borrowings under its revolving credit facility, will be adequate
to meet its 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 Precision will continue to generate cash
flow above current levels or that the acquired companies will repeat their
performance. In addition, Precision's ability to pay the outstanding senior
notes at maturity will depend on the availability of refinancing.
On September 21, 2000, the Company notified its bank group of its
anticipated noncompliance with certain financial covenants applicable to the
third quarter of 2000. In recognition of the reorganization activity and the
related $10.9 million charge, on September 30, 2000, the bank group agreed to
waive compliance with the financial covenants through December 29, 2000. As of
September 30, 2000, the Company had $32.0 million of indebtedness outstanding
under its credit facilities.
Additionally, on November 1, 2000, GECC notified the Company that it was
in default under a master lease agreement between the parties as a result of the
Company's noncompliance with the same financial covenants as those contained in
the credit agreement for the third quarter and other unspecified covenants and
representations. On November 14, 2000, GECC agreed to waive these defaults
through November 30, 2000 on the condition that the parties enter into an
amendment to the lease on or prior to such date.
On November 13, 2000, as a result of the existence of the defaults under
the GECC master lease agreement discussed above, the bank group notified the
Company of additional defaults under the credit facility. On November 14, 2000,
the bank group waived these defaults through November 30, 2000 and amended the
September 30 waiver to apply only through that date.
On November 30, 2000, the bank group and GECC extended their waivers
through December 8, 2000.
On December 8, 2000, the Company entered into an amendment and waiver
with respect to its credit facilities, an amended and restated master lease
with GECC, and a new $20.8 million six-year equipment term loan facility with
GECC. In connection with these transactions, the Company received an equity
contribution from its primary shareholder of $6.0 million. At closing, the
Company drew down the entire $20.8 million under the GECC term loan facility.
The Company used approximately $11.8 million of these borrowings to
permanently prepay operating leases outstanding as of such date under the
amended and restated master lease, approximately $2.9 million to repay
advances under the Company's revolving credit facility that were used to fund
equipment purchases and approximately $6.1 million to pay outstanding
invoices for new equipment. The $6.0 million
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equity contribution was used to pay the fees and expenses associated with
these transactions and to repay advances under the Company's revolving credit
facility used to purchase new equipment. The total costs and expenses
relating to these transactions are expected to be approximately $1.3 million.
The amendment and waiver in respect of the Company's credit facilities
includes a waiver of all defaults which may have existed on or prior to
November 14, 2000, as well as a reduction in the revolving credit line from
$25.0 million to $22.0 million and an increase in the interest rate payable
under both the revolving credit facility and note payable. Interest will
continue to accrue and be paid at either the base rate or LIBOR, plus (in
each case) a margin ranging from 3.0% to 4.0%, depending on Precision's
consolidated leverage ratio. This new interest rate represents an increase of
approximately 1.0% in the aggregate in the interest payable by the Company
over what the Company had paid in prior periods.
The financial ratios and tests, which the Company must meet under the
terms of its credit facilities, have also been amended to reset the minimum
and maximum quarterly requirements, as well as to take account of rental
expense under the amended and restated master lease. The credit facilities,
as amended, also contain additional tests and ratios, which the Company must
meet on a monthly and quarterly basis, including a minimum consolidated
EBITDA ratios. There has been no change to the borrowing base formula the
revolving credit line.
The new equipment term loan facility matures December 1, 2005, subject
to an automatic 12-month extension if no default or event of default has
occurred or is continuous at the time the extension becomes effective.
Borrowings under this facility bear interest at a rate of LIBOR plus a margin
of 5.0% subject to reduction under certain limited circumstances based on the
Company's consolidated leverage ratio. If at any time after the applicable
margin has been reduced, the Company fails to meet its consolidated leverage
ratio, the applicable margin will be reset to 5.0% above LIBOR.
The borrower's obligations under the new equipment term loan are
secured by a first priority security interest in all equipment financed with
borrowings under the facility as well as a second priority lien in all the
Company's and its subsidiaries' (other than Gillette and Certified) assets
and property pledged to the lender under the Company's credit facilities.
The new equipment term loan facility requires the Company to comply with
all of the financial covenants contained in the Company's credit facilities, as
amended. The new equipment facility term loan also imposes limitations on the
ability of the Company and its subsidiaries (other than Certified and Gillette,
which are not obligors under this facility) to, among other things, incur
additional indebtedness, incur liens, make new investments, pay dividends or
make certain other restricted payments, enter into sale/leaseback transactions,
merge or consolidate with any other persons, or sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of its assets. Events of
default include failure to pay principal or interest when due, failure to comply
with affirmative or negative covenants, failure to comply with or perform any
other provision of the loan documents, breach of representations and warranties,
a default under the GECC master lease or the Company's credit facilities,
certain events of bankruptcy, liquidation or dissolution, judgement default and
failure to pay when due certain other indebtedness of the Company.
On December 8, 2000, in connection with the amendment and waiver with
respect to its credit facilities and the new $20.8 million six-year equipment
term loan facility with GECC, the Company and GECC amended and restated the
master lease. As described in Note 4 to the financial statements,
approximately $11.8 million of the new GECC equipment term loan was used to
prepay operating leases outstanding at such date, thereby reducing the
remaining outstanding operating lease obligations to approximately to $6.7
million in the aggregate. Rent payments under the amended and restated master
lease consist of payments of principal plus interest at a rate per annum of
LIBOR plus a margin of 5.0%, subject to reduction in the same manner and
under the same circumstances as the applicable margin for the GECC equipment
term loan described above. This new interest rate represents an increase of
approximately 1.8% over the rate previously paid. The covenants in the master
lease were also amended to provide for, among other things, permitted liens
and incorporation of the financial covenants and events of default contained
in the new GECC equipment term loan facility as described above.
The Company's ability to comply with both the new and amended covenants
contained in its credit facilities, the GECC equipment term loan facility and
the amended and restated master lease, including its ability to meet and
maintain the financial ratios and tests, may be affected events beyond its
control, such as those described below under "Risk Factors."
RISK FACTORS
PRECISION'S SUBSTANTIAL DEBT AND THE SIGNIFICANT DEMANDS ON ITS CASH RESOURCES
COULD AFFECT ITS ABILITY TO MAKE PAYMENTS ON THE EXCHANGE NOTES AND ACHIEVE ITS
BUSINESS PLAN.
SUBSTANTIAL DEBT. Precision has incurred a substantial amount of
indebtedness that requires significant interest payments. As of September 30,
2000, Precision had total consolidated debt of $132.2 million and net interest
expense of approximately $12.2 million for the nine month period then ended. In
addition, Precision had $18.5 million of operating
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leases outstanding under its master lease agreement with GECC. Giving effect to
the transactions of December 8, 2000, described above under "Liquidity and
Capital Resources", the Company would have total consolidated debt of $144.1
million and $6.7 million of operating leases outstanding. Subject to the limits
contained in the indenture governing Precision's outstanding senior subordinated
notes ("the Notes"), its credit facilities, the GECC master lease and the GECC
equipment term loan facility, Precision and its 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. Precision has substantial demands on its cash
resources in addition to operating expenses and interest expense on the Notes,
including, among others, interest and amortization payments under its credit
facilities, the GECC equipment term loan and rental payments under the GECC
master lease. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
EFFECTS ON YOUR INVESTMENTS AND PRECISION'S BUSINESS STRATEGY. Precision's
level of indebtedness and these significant demands on its cash resources could
have important effects on your investment in the Notes. For example these
demands could, among other things,:
o make it more difficult for Precision to satisfy its debt service
obligations with respect to the Notes and its secured indebtedness
under its credit facilities and the GECC equipment term loan;
o require Precision to dedicate a substantial portion of its cash flow
from operations debt service, thereby reducing the amount of its
cash flow available for working capital, capital expenditures,
acquisitions and other general corporate purposes;
o limit Precision's flexibility in planning for, or reacting to,
changes in its industry (including the pursuit of its growth
strategy);
o place Precision at a competitive disadvantage compared to its
competitors that have fewer debts and significantly greater
operating and financing flexibility than Precision does;
o limit, along with the financial and other restrictive covenants
applicable to Precision's indebtedness, among other things, its
ability to borrow additional funds even when necessary to maintain
adequate liquidity;
o increase Precision's vulnerability to general adverse economic and
industry conditions; and
o result in an event of default upon a failure to comply with these
covenants which, if not cured or waived, could result in a default
under other agreements to which Precision is a party, causing any
monetary obligations under those agreements to become immediately
due and payable, which could have a material adverse effect on
Precision's business, financial condition or results of operations.
Precision's ability to pay interest on its long-term indebtedness and to
satisfy its other debt obligations will depend upon its future operating
performance and the availability of refinancing indebtedness, which will be
affected by the instruments governing its indebtedness, including the indenture,
the credit facilities, the GECC master lease and the GECC equipment term loan
facility, prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control.
If Precision is unable to service its indebtedness and fund its business,
it will be forced to adopt an alternative strategy that may include:
o reducing or delaying capital expenditures;
o seeking additional debt financing or equity capital;
o selling assets; or
o restructuring or refinancing its indebtedness.
Precision cannot assure you that any such strategy could be effected on
terms satisfactory to it 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 Precision's debt
instruments and the GECC master lease, it 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 its credit
facilities. This could further exacerbate the risks described below.
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THE INDENTURE AND PRECISION'S CREDIT FACILITIES RESTRICT ITS ABILITY AND THE
ABILITY OF SOME OF ITS SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS.
INDENTURE. The indenture restricts Precision's ability and the ability of
some of its subsidiaries to, among other things:
o incur additional debt;
o pay dividends on or redeem or repurchase capital stock;
o issue or allow any person to own preferred stock of subsidiaries;
o incur or permit to exist indebtedness senior to the Notes, but
subordinated to any of its other indebtedness;
o in the case of non-guarantor subsidiaries, guarantee debt without
also guaranteeing the Notes;
o in the case of restricted subsidiaries, create or permit to exist
dividend or payment restrictions with respect to Precision;
o make investments;
o incur or permit to exist liens;
o enter into transactions with affiliates;
o merge, consolidate or amalgamate with another company; and
o transfer or sell assets.
CREDIT FACILITIES, GECC MASTER LEASE AND GECC EQUIPMENT TERM LOAN.
Precision's credit facilities, the GECC master lease and the GECC equipment term
loan also contain similar covenants, as well as a number of financial covenants
requiring Precision to meet financial ratios and financial condition tests.
Precision's ability to borrow under its revolving credit facility and GECC's
obligation to lease equipment to Precision and its subsidiaries under the master
lease depends upon satisfaction of these covenants and, in the case of the
revolving credit facilities, borrowing base requirements. Precision's ability to
meet these covenants and requirements can be affected by events beyond its
control. There can be no assurance that Precision will meet these requirements.
As described above under "Liquidity and Capital Resources" Precision was not in
compliance with financial covenants under its credit facilities and the GECC
master lease for the third quarter of 2000. Although Precision has received
permanent waivers from its bank group and GECC, there can be no assurance that
the covenants will be amended or that Precision will be able to meet these
covenants in the future, whether or not amended.
EFFECT OF BREACH. Precision's failure to comply with the obligations and
covenants in the credit facilities, the GECC equipment term loan, the GECC
master lease or the indenture could result in an event of default under one or
more of those agreements that, if not cured or waived, could terminate its
ability to borrow under the revolving credit facility or lease additional
equipment under the GECC master lease, could permit acceleration of the relevant
debt and acceleration of debt under other instruments and, in the case of the
credit facilities and the GECC equipment term loan, could permit foreclosure on
any collateral granted.
PRECISION IS STRUCTURED AS A HOLDING COMPANY AND IT DEPENDS ON ITS SUBSIDIARIES
IN ORDER TO SERVICE ITS DEBT.
Precision structured as a holding company. Precision's only significant
asset is the capital stock or other equity interests of Precision's operating
subsidiaries. As a holding company, Precision conducts all of its business
through its subsidiaries. Consequently, Precision's cash flow and ability to
service Precision's debt obligations, including the Notes, are dependent upon
the earnings of Precision's operating subsidiaries and the distribution of those
earnings to Precision, or upon loans, advances or other payments made by these
subsidiaries to Precision. The ability of Precision's subsidiaries to pay
dividends or make other payments or advances to Precision will depend upon their
operating results and will be subject to applicable laws and contractual
restrictions contained in the instruments governing their indebtedness,
including Precision's credit facilities, the indenture, the GECC master lease
and the GECC equipment term loan. Although the indenture limits the ability of
these subsidiaries to enter into consensual restrictions on their ability to pay
dividends and make other payments to Precision, these limitations will be
subject to a number of
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significant qualifications. There can be no assurance that the earnings of
Precision's operating subsidiaries will be adequate for Precision to service its
debt obligations.
THE SUCCESS OF PRECISION'S ACQUISITION STRATEGY DEPENDS ON THE AVAILABILITY OF
SUITABLE ACQUISITION CANDIDATES, DIVERSION OF MANAGEMENT TIME AND RISK OF
UNDISCLOSED LIABILITIES.
A significant aspect of Precision's strategy is to continue to pursue
select strategic acquisitions of companies that Precision believes can benefit
from its operations, management and access to capital and enhance Precision's
relationships with existing customers or augment Precision's manufacturing
capabilities. Precision's 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 credit facilities, the indenture
governing the Notes, the GECC master lease ,the GECC equipment term loan, and
any future financing arrangements. In addition, growth by acquisition involves
risks that could adversely affect Precision's 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 Precision
will be able to obtain the capital necessary to pursue its 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 Precision's
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 Precision performs a due diligence investigation of each business
that it acquires, there may be liabilities of the acquired companies, including
Mid State, Galaxy, Certified, General Automation, Nationwide and Gillette, that
Precision fails or is unable to discover during its due diligence investigation
and for which it, as a successor owner, may be responsible. In connection with
acquisitions, Precision generally seeks to minimize the impact of these
liabilities by obtaining indemnities and warranties from the seller that 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.
PRECISION'S SUCCESS DEPENDS ON ITS ABILITY TO SUCCESSFULLY OPERATE ITS
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 Precision 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 Precision to operate these businesses
profitably or to manage them effectively on a combined basis could have a
material adverse effect on its results of operations and financial condition.
THE SUCCESS OF PRECISION'S BUSINESS STRATEGY TO REALIZE A NUMBER OF CROSS
SELLING OPPORTUNITIES COULD BE AFFECTED BY A NUMBER OF FACTORS BEYOND ITS
CONTROL.
As part of its business strategy, Precision intends to capitalize on a
number of cross-selling opportunities it believes exist as a result of the
complementary customer bases and manufacturing capabilities of the acquired
companies and to implement certain operating improvements. Precision's ability
to implement and realize the benefits of this strategy could be affected by a
number of factors beyond its control, such as operating difficulties, increased
operating costs, regulatory developments, general economic conditions, increased
competition, or the inability to obtain adequate financing for Precision's
operations on suitable terms. In addition, after gaining experience with its
operations under this strategy, Precision may decide to alter or discontinue
certain aspects of it. Any failure to implement aspects of Precision's strategy
may adversely affect its results of operations, financial condition and ability
to service debt, including Precision's ability to make principal and interest
payments on the Notes.
PRECISION'S INABILITY TO ACCESS ADDITIONAL CAPITAL COULD HAVE A NEGATIVE IMPACT
ON ITS GROWTH STRATEGY.
Precision's 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
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condition of Precision's existing equipment. Precision intends to pay for future
acquisitions using cash, capital stock, debt financings and/or assumption of
indebtedness. However, Precision's ability to make acquisitions and the manner
in which they are financed will be limited by the covenants contained in the
indenture governing the Notes, Precision's credit facilities, the GECC master
lease, and the GECC equipment term loan. To the extent that cash generated
internally and cash available under Precision's credit facilities is not
sufficient to fund capital requirements, Precision 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
Precision. 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 Precision's
ability to withstand competitive pressures and render it more vulnerable to
economic downturns. If Precision fails to obtain sufficient additional capital
in the future, it could be forced to curtail its growth strategy by reducing or
delaying capital expenditures and acquisitions, selling assets or restructuring
or refinancing its 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
PRECISION'S BUSINESS.
Some of Precision's executive officers are key to Precision's management
and direction. Precision's future success will depend on its ability to retain
capable management. Precision recently appointed a new executive management
team, and Precision's continued success will depend in part on the successful
integration of that team with the operations of Precision's subsidiaries. To
assist with the integration of the operations of its subsidiaries, Precision has
retained the services of key personnel of these companies. The success of
Precision's operations may depend, in part, on the successful retention, at
least initially, of these key personnel, as well as Precision's ability to
attract and retain additional talented personnel. Although Precision believe it
will be able to attract and retain talented personnel and that it could replace
key personnel should the need arise, the inability to attract or retain such
personnel could have a material adverse effect on its business. In addition,
because its products and processes are complex and require a high level of
precision, Precision is generally dependent on an educated and trained
workforce. Precision would be adversely affected by a shortage of skilled
employees.
FAILURE TO MAINTAIN RELATIONSHIPS WITH PRECISION'S LARGER CUSTOMERS AND FAILURE
BY PRECISION'S CUSTOMERS TO CONTINUE TO PURCHASE EXPECTED QUANTITIES DUE TO
CHANGES IN MARKET CONDITIONS COULD HAVE AN ADVERSE EFFECT ON ITS OPERATIONS.
Precision's largest customer, General Electric, accounted for
approximately 35.2% of its net sales for the nine months ended September 30,
2000, and its top ten customers accounted for approximately 76% of its such net
sales. The termination by General Electric or any one or more of Precision's
other top 10 customers of their relationship with Precision could have a
material adverse effect upon its business, financial condition and results of
operations.
In addition, Precision has been awarded long-term contracts with
Caterpillar and Dana. As of September 30, 2000, Precision funded approximately
$18.5 million of its capital equipment needs under its $35.0 million operating
lease facility with General Electric Credit Corporation. This equipment is
related to Precision's recent contracts with Caterpillar and Dana and increased
unit delivery requirements from General Electric. To the extent Precision is
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
Precision currently anticipates, its relationship with these customers and its
business and results of operations could be negatively impacted.
PRECISION'S REVENUES AND OPERATING RESULTS MAY BE SUBJECT TO SIGNIFICANT
FLUCTUATION.
A significant portion of Precision's revenues is derived from new projects
and contracts, the timing of which is subject to a variety of factors beyond
Precision's control, including customer budgets and modifications in customer
products. Precision cannot predict the degree to which, on a consolidated basis,
these trends will continue. A portion of Precision's operating expenses are
relatively fixed. Because it typically do not enter into long-term contracts or
have volume commitments with its customers, Precision must anticipate the future
volume of orders based upon the historic purchasing patterns of its customers
and upon discussions with its 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 Precision's business,
financial condition or results of operations. Additionally, Precision may
periodically incur cost
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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.
SIGNIFICANT COMPETITION FOR PRECISION PART MANUFACTURING OUTSOURCED BY ORIGINAL
EQUIPMENT MANUFACTURERS MAY AFFECT PRECISION'S ABILITY TO SUCCEED.
Precision operates in an industry that is highly fragmented and
competitive. A variety of suppliers with different subsets of Precision's
manufacturing capabilities compete to supply the stringent demands of large
original equipment manufacturers. In addition, Precision's customers are
continually seeking to consolidate their business among one or more "Preferred"
or "Qualified" suppliers. If any customer becomes dissatisfied with Precision's
prices, quality or timeliness of delivery, among other things, it could award
future business or, in an extreme case, move existing business to Precision's
competitors. Precision cannot assure you that its products will continue to
compete successfully with the products of its competitors, including original
equipment manufacturers themselves, many of which are significantly larger and
have greater financial and other resources than Precision does.
THE CYCLICAL NATURE OF THE INDUSTRIES PRECISION CURRENTLY SERVES COULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS COMPANY.
A majority of Precision's revenues are derived from customers that 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 Precision and its business, results of operations and
financial condition.
PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED IF IT IS UNABLE TO OBTAIN RAW
MATERIALS AND COMPONENTS FROM ITS SUPPLIERS ON FAVORABLE TERMS.
Generally, Precision's 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 its raw materials are supplied by its customers on
consignment. Raw materials not supplied by its customers are purchased from
several suppliers. Although all of these materials have been available in
adequate quantities to meet its production demands, Precision can give you no
assurance that such materials will be available in adequate quantities in the
future. Precision does not presently anticipate any raw material shortages that
would significantly affect production. However, the lead times between the
placement of orders for certain raw materials and actual delivery to Precision
may vary significantly and Precision 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 Precision maintains a
relatively small inventory of raw materials and component parts, its business
could be adversely affected if it is unable to obtain these raw materials and
components from its suppliers on favorable terms.
PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED TO THE EXTENT THE U.S.
GOVERNMENT TERMINATED OR MODIFIED A CONTRACT WITH PRECISION OR ONE OF ITS
CUSTOMERS.
Precision is generally not a direct party to any contracts with the U.S.
Government. However, a portion of its sales are to customers who use the parts,
assemblies or tooling Precision supplies 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:
o 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;
o modification of U.S. government contracts due to lack of
Congressional funding or changes in such funds; and
o 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.
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To the extent the U.S. government terminates or modifies a contract with
one of Precision's customers, Precision could be adversely affected if the
affected customer reduced its purchases from Precision as a result. In addition,
in the few instances where Precision is 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 its results of operations and financial condition.
PRECISION'S EQUIPMENT, FACILITIES AND OPERATIONS ARE SUBJECT TO NUMEROUS
ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS THAT MAY BECOME MORE STRINGENT IN
THE FUTURE AND MAY RESULT IN INCREASED LIABILITY AND INCREASED CAPITAL
EXPENDITURES.
Precision's 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, Precision is required to obtain and maintain regulatory
approvals in the United States in connection with its 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
Precision anticipates that these laws and regulations will continue to require
increased capital expenditures because environmental standards will become more
stringent. Precision 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 Precision owns and operates a number of facilities, and because it
arranges for the disposal of hazardous materials at many disposal sites, it 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 Precision's business, financial condition or results of operations.
INFLATION
Precision does not believe that inflation has had a significant impact on
its cost of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Precision's 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 Precision's level of outstanding borrowings from
its term loan facility at September 30, 2000, a 1.0% change in interest rate
would result in a $0.2 million annual change in interest expense. Precision's
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 Precision's level of outstanding borrowings under its
revolving line of credit as of September 30, 2000, a 1.0% change in interest
rates would result in a $0.1 million annual change in interest expense.
Precision's $35.0 million operating lease program provides for interest to be
charged at the LIBOR rate plus basis points in accordance with the master
lease agreement. Based on Precision's level of outstanding operating lease
obligations at September 30, 2000, a 1.0% change in the LIBOR interest rate
would result in a $0.2 million annual change in equipment rental expense.
Giving effect to the December 8, 2000, amendment to the GECC master lease
described in "Liquidity and Capital Resources," a 1.0% change in interest rates
would result in a $0.1 million annual change in rental expense. Giving effect
to the new GECC equipment term loan executed on December 8, 2000, also described
in "Liquidity and Capital Resources," a 1.0% charge in interest rates would
result in a $0.2 million annual charge in interest expense.
The remainder of Precision's debt is at fixed interest rates that are not
subject to changes in interest rates. Precision does not own nor is it obligated
for other significant debt or equity securities that would be affected by
fluctuations in market risk.
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PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) through (d) Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith:
10.1 Waiver and Amendment No. 3 to the Credit Agreement dated as of
December 8, 2000 among the Company, Precision Partners Holding Company, Mid
State, Galaxy, Certified, General Automation, Nationwide, Gillette, the
Lenders listed on the signature pages thereof and Citicorp USA, Inc., as
Administrative Agent for the Lenders.
10.2 Loan, Security and Guaranty Agreement dated as of December 8,
2000 by and between (a) Galaxy, Mid State, Nationwide, General Automation (b)
GECC, for itself and as agent for certain participants (together with its
successors and assigns, the Lender; and (c) the Company, as Guarantor.
10.3 Note dated December 8, 2000 executed by Galaxy, Mid State,
Nationwide and General Automation, as Borrowers evidencing a promise to pay
to the order of GECC, for itself and as agent for certain Participants, as
Lender the principal sum of $20,770,826.00 pursuant to the Loan Agreement.
10.4 Amended and Restated Master Lease Agreement dated as of December
8, 2000 between GECC, for itself and as agent for certain Participants, as
Lessor, and Galaxy, Mid State, Nationwide, and General Automation, as Lessees.
10.5 Final Schedule dated December 8, 2000 to Amended and Restated
Master Lease Agreement dated as of December 8, 2000 between GECC, for itself
and as agent for certain Participants, as Lessor, and Galaxy, Mid State,
Nationwide, and General Automation, as Lessees.
10.6 Security Agreement dated as of December 8, 2000 among Citicorp,
as agent for GECC, for itself and as agent for certain Participants, and the
Company, Galaxy, Mid State, Nationwide, and General Automation.
10.7 Security Agreement dated as of December 8, 2000 among GECC, as
agent for Citicorp in its capacity as Administrative Agent for certain
lenders under the Credit Agreement and Galaxy, Mid State, Nationwide, and
General Automation.
10.8 Intercreditor Agreement dated as of December 8, 2000 between
Citicorp, as Administrative Agent for the Lenders under the Credit Agreement
and GECC, for itself and as agent for certain Participants under the Loan,
Security and Guaranty Agreement.
27.1 Financial Data Schedule
99.1 Press Release dated December 8, 2000
(b) Reports on Form 8-K
(i) Current Report on Form 8-K filed by Precision Partners, Inc. on
November 15, 2000.
(ii) Current Report on Form 8-K filed by Precision Partners, Inc. on
December 5, 2000.
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PRECISION PARTNERS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRECISION PARTNERS, INC.
Dated: December 11, 2000 By: /s/ Frank R. Reilly
---------------------------------
Frank R. Reilly
Chief Financial Officer
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