1 # = pounds sterling SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MAY 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-3085 WYMAN-GORDON COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-1992780 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 244 WORCESTER STREET, BOX 8001, GRAFTON, MASSACHUSETTS 01536-8001 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 508-839-4441 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $1 PAR VALUE (TITLE OF CLASS) Indicate by a check mark whether the 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] -1- 2 Aggregate market value of the voting stock held by non-affiliates of the registrant as of July 31, 1999: $548,112,873 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT JULY 31, 1999 Common Stock, $1 Par Value 36,098,928 Shares -2- 3 ITEM 1. BUSINESS THE COMPANY Wyman-Gordon Company is a leading manufacturer of high-quality, technologically advanced forging and investment casting components for the commercial aviation, commercial power and defense industries. The Company produces metal components to exacting customer specifications for technically demanding applications such as jet turbine engines, airframes and land-based and marine gas turbine engines. The Company also produces extruded seamless thick wall pipe, made from steel and other alloys for use primarily in the oil and gas industry and commercial power generation plants. The Company produces components for most of the major commercial and United States defense aerospace programs. The Company's unique combination of manufacturing facilities and broad range of metallurgical skills allows it to serve its customers effectively and to lead the development of new metal technologies for its customers' applications. Through its Scaled Composites and Scaled Technology Works subsidiaries, the Company engages in research, development, engineering and manufacture of composite airframe structures. In fiscal years 1999 and 1998, the Company's total revenues were $849.3 million and $752.9 million, respectively. The Company employs three manufacturing processes: forging, investment casting and composite production. The Company's forging process involves heating metal and shaping it through pressing or extrusion. Forged products represented 77% of the Company's total revenues in the year ended May 31, 1999. Castings is a process in which molten metal is poured into molds. Cast products represented 21% of the Company's total revenues in the year ended May 31, 1999. The Company's composite business designs, fabricates and tests composite airframe structures for the aerospace market. The composite business represented 2% of the Company's total revenues in fiscal year 1999. On May 17, 1999, the Company and Precision Castparts Corp. ("PCC") entered into a Merger Agreement pursuant to the terms of which WGC Acquisition Corp., a wholly owned subsidiary of PCC, commenced on May 21, 1999 a cash tender offer for all of the outstanding shares of common stock of the Company at a price of $20.00 per share. Consummation of the tender offer is subject, among other things, to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). PCC and the staff of the Federal Trade Commission (the "FTC") have agreed that PCC will not consummate the tender offer until ten calendar days after PCC has notified the FTC of its intent to complete the transaction. PCC has also agreed that it will not provide such notice until at least 3:00 p.m. Eastern Time on August 24, 1999. The agreement regarding timing is intended to provide additional time for PCC to negotiate with the FTC. -3- 4 As a result, the expiration date of the tender offer has been extended until midnight, New York City time, on September 10, 1999; provided, however, that if the applicable waiting period (and any extension thereof) under the HSR Act in respect of the tender offer is terminated prior to August 31, 1999, the expiration date of the tender offer will be the date that is ten business days immediately following public disclosure of the expiration or termination of the waiting period under the HSR Act. As of August 20, 1999, approximately 21,873,878 shares of common stock of the Company had been tendered in the tender offer. This constitutes approximately 62.6% of the Company's outstanding shares as of the commencement of the tender offer. WGC Acquisition Corp. has also made a tender offer for the Company's outstanding 8% Senior Notes due 2007 and has extended the Senior Notes tender offer to coincide with the extension of the tender offer for the Company's common stock. For further information concerning the tender offer, see the Company's Schedule 14D-9, Solicitation/Recommendation Statement Pursuant to the Section 14(d)(4) of the Securities Exchange Act of 1934 and the amendments to said Schedule 14D-9. MARKETS AND PRODUCTS The principal markets served by the Company are aerospace and energy. Revenue by market for the respective periods were as follows: YEAR ENDED YEAR ENDED YEAR ENDED MAY 31, 1999 MAY 31, 1998 MAY 31, 1997 % OF % OF % OF REVENUE TOTAL REVENUE TOTAL REVENUE TOTAL (000's OMITTED, EXCEPT PERCENTAGES) Aerospace $705,763 83% $622,718 83% $475,131 78% Energy 117,229 14 101,353 13 97,117 16 Other 26,269 3 28,842 4 36,494 6 $849,261 100% $752,913 100% $608,742 100% Aerospace Products Aerospace Turbine Products. The Company manufactures components from sophisticated titanium and nickel alloys for jet engines manufactured by General Electric Company ("GE"), the Pratt & Whitney Division ("Pratt & Whitney") of United Technologies Corporation ("United Technologies"), Rolls-Royce plc ("Rolls Royce") and CFM International S.A. Such jet engines are used on substantially all commercial aircraft produced by the Boeing Company ("Boeing") and Airbus Industrie, S.A. ("Airbus"). The Company's forged engine parts include fan discs, compressor discs, turbine discs, seals, spacers, shafts, hubs and cases. Cast engine parts include thrust reversers, valves and fuel system parts such as combustion chamber swirl guides. Rotating -4- 5 parts (which include fan, compressor and turbine discs) must be manufactured to precise quality specifications. The Company believes it is the leading producer of these rotating components for use in large turbine aircraft engines. Jet engines can produce in excess of 100,000 pounds of thrust and may subject parts to temperatures reaching 1,350 degrees Fahrenheit. Components for such extreme conditions therefore require precision manufacturing and expertise with high-purity titanium and nickel-based alloys. Aerospace Structural Products. The Company's airframe structural components, such as landing gear, bulkheads and wing spars, are used on every model of airplane manufactured by Boeing and Airbus. In addition, the Company's structural components are used on a number of military aircraft and in other defense-related applications, including the C-17 transport and the new F-22 fighter being jointly developed by Lockheed Martin Corporation ("Lockheed") and Boeing. The Company also produces dynamic rotor forgings for helicopters. The Company's composites subsidiary, Scaled Composites, located in Mojave, California, designs, fabricates and tests composite airframe structures made by layering carbon graphite and other fibers with epoxy resins for the aerospace market. The Company's subsidiary, Scaled Technology Works, Montrose, Colorado manufactures airplane components, principally those designed by Scaled Composites. Aerospace structural products include wing spars, engine mounts, struts, landing gear beams, landing gear, wing hinges, wing and tail flaps, housings, and bulkheads. These parts may be made of titanium, steel, aluminum and other alloys, as well as composite materials. Forging is particularly well suited for airframe parts because of its ability to impart greater strength per unit of weight to metal than other manufacturing processes. Investment casting can produce complex shapes to precise, repeatable dimensions. The Company has been a major supplier of the beams that support the main landing gear assemblies on the Boeing 747 for many years and supplies main landing gear beams for the Boeing 777. The Company forges landing gear and other airframe structural components for the Boeing 737, 747, 757, 767 and 777, and the Airbus A321, A330 and A340. The Company produces structural forgings for the F-15, F-16 and F/A-18 fighter aircraft and the Black Hawk helicopter produced by Sikorsky Aircraft Corporation, a subsidiary of United Technologies. The Company also produces large, one-piece bulkheads for Lockheed and Boeing for the F-22 fighter. Energy Products. The Company is a major supplier of extruded seamless thick wall pipe used in critical piping systems in both fossil fuel and nuclear commercial power plants worldwide as well as in oil and gas industry applications. The Company produces rotating components, such as discs and spacers, and valve components for land-based steam turbine and gas turbine generators, and in addition, also manufactures shafts, cases, and compressor and turbine discs for marine gas engines. -5- 6 The Company produces a variety of mechanical and structural tubular forged products, primarily in the form of extruded seamless pipe, for the domestic and international energy markets, which include nuclear and fossil-fueled power plants, co- generation projects and retrofit and life extension applications. In recent years the Company has developed several proprietary products for the energy exploration and power generation industries including the THOR(R) connector for the weldless joining of lengths of pipe, double ended upset pipe that facilitates joining, clad and titanium alloy pipe for corrosive environments and multiport diverter valves for offshore oil and gas production. Aluminum, Steel, and titanium products are manufactured at the Company's Houston, Texas forging facility where one of the world's largest vertical extrusion presses extrudes pipe up to 48 inches in diameter and seven inches in wall thickness and bar stock from six to 32 inches in diameter. Lengths of pipe and bar stock vary from ten to 45 feet, with a maximum forged weight of 20 tons. Similar equipment and capabilities are in operation at the Company's Livingston, Scotland, and Buffalo, New York, forging facilities. Additionally, the Houston press extrudes powder billets for use in aircraft turbine engine forgings. Other Products. The Company supplies products to builders of military ordnance. Examples of forged products include steel casings for bombs and rockets. For naval defense applications, the Company supplies components for propulsion systems for nuclear submarines and aircraft carriers as well as pump, valve, structural and non-nuclear propulsion forgings. The Company also extrudes powders for other alloy powder manufacturers. Through its investment casting operations, which utilize a process of pouring molten metal into a mold, the Company manufactures products for commercial applications such as food processing, semiconductor manufacturing, diesel turbochargers and sporting equipment. The Company is actively seeking to identify alternative applications for its capabilities, such as in the automotive and other commercial markets. In this regard, the Company recently established a facility in Mexicali, Mexico for the production of nickel and titanium aluminide turbocharger wheels for Allied Signal Corporation. CUSTOMERS The Company has approximately 290 active customers that purchase forgings, approximately 825 active customers that purchase investment castings and approximately 25 active customers that purchase composite structures. The Company's principal customers are similar across all of these production processes. Five customers accounted for 49%, 51% and 48% of the Company's revenues for the years ended May 31, 1999, 1998 and 1997, respectively. GE and United Technologies (primarily Pratt & Whitney and Sikorsky) have currently or historically each accounted for 10% or more of revenues for the years ended May 31, 1999, 1998 and 1997. -6- 7 YEAR ENDED YEAR ENDED YEAR ENDED MAY 31, 1999 MAY 31, 1998 MAY 31, 1997 % OF % OF % OF REVENUE TOTAL REVENUE TOTAL REVENUE TOTAL (000's OMITTED, EXCEPT PERCENTAGES) GE $213,598 25% $169,894 23% $156,764 26% United Technologies (1) (1) 76,786 10 60,921 10 [FN] (1) Revenues for the year ended May 31, 1999 were less than 10%. </FN> Boeing and Rolls-Royce are also significant customers of the Company. Because of the relatively small number of customers for some of the Company's principal products, those customers exercise significant influence over the Company's prices and other terms of trade. The Company has become actively involved with its aerospace customers through supply chain management initiatives, joint development relationships and cooperative research and development, engineering, quality control, just-in-time inventory control and computerized design programs. The Company believes that greater involvement in the design and development of components for its customers' products will result in significant efficiencies and will allow the Company to better serve its customers. MARKETING AND SALES The Company markets its products principally through its own sales engineers and makes only limited use of independent manufacturers' representatives. Substantially all sales are made directly to original equipment manufacturers. The Company's sales are not subject to significant seasonal fluctuations. A substantial portion of the Company's revenues are derived from long-term, fixed-price agreements ("LTAs") with major engine and aircraft manufacturers. These contracts are typically "requirements" contracts under which the purchaser commits to purchase a given portion of its requirements of a particular component from the Company. Actual purchase quantities are typically not determined until shortly before the year in which products are to be delivered. The Company has increased its efforts to obtain LTAs with customers which contain price adjustments that would compensate the Company for increased raw material costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Impact of Inflation." -7- 8 BACKLOG The Company's firm backlog includes the sales prices of all undelivered units covered by customers' orders for which the Company has production authorization. The Company's firm backlog in the various markets served by the Company has been as follows: MAY 31, 1999 MAY 31, 1998 MAY 31, 1997 % OF % OF % OF BACKLOG TOTAL BACKLOG TOTAL BACKLOG TOTAL (000's OMITTED, EXCEPT PERCENTAGES) Aerospace $643,468 87% $ 908,633 88% $767,989 86% Energy 64,240 9 94,314 9 99,172 11 Other 27,082 4 27,145 3 28,664 3 $734,790 100% $1,030,092 100% $895,825 100% At May 31, 1999, approximately $555.6 million of total firm backlog was scheduled to be shipped within one year (compared to $716.8 million at May 31, 1998 and $671.6 million at May 31, 1997) and the remainder in subsequent years. Sales during any period include sales that were not part of backlog at the end of the prior period. Customer orders in firm backlog are subject to rescheduling or termination for customer convenience and as a result of market fluctuations in the commercial aerospace industry. However, in certain cases, the Company is entitled to an adjustment in contract amounts. Because of the cyclical nature of order entry experienced by the Company and its dependence on the aerospace industry, there can be no assurance that order entry will continue at current levels or that current firm purchase orders will not be canceled or delayed. Accordingly, the Company's backlog is not necessarily indicative of the Company's revenues for any future period or periods. MANUFACTURING PROCESSES The Company employs three manufacturing processes: forging, investment casting and composites production. Forging The Company's forging process involves heating metal and shaping it through pressing or extrusion. The Company forges titanium and steel alloys, as well as high temperature nickel alloys. Forging is conducted on hydraulic presses with capacities ranging up to 55,000 tons. The Company believes that it is the leading producer of rotating components for use in turbine aircraft engines. These parts are forged from purchased ingots which are converted to billet in the Company's cogging presses and from alloy metal powders (primarily nickel alloys) which are produced, consolidated and extruded into billet entirely at the Company's facilities. -8- 9 The Company manufactures its forgings at its facilities in Grafton and Worcester, Massachusetts; Houston, Texas; Buffalo, New York; and Livingston, Scotland. The Company also operates an alloy powder metal facility in Brighton, Michigan and vacuum remelting facilities in Houston, Texas which produce steel and nickel alloy ingots. The Company has eight large closed die hydraulic forging presses rated as follows: 18,000 tons, 35,000 tons and 50,000 tons in Grafton Massachusetts; 20,000 tons, 29,000 tons and 35,000 tons in Houston, Texas; 12,000 tons in Buffalo, New York and 9,000 tons, 14,000 tons and 30,000 tons in Livingston, Scotland. The 35,000 ton vertical extrusion press in Houston can also be operated as a 55,000 ton hydraulic forging press. The Company also operates two open die cogging presses used to convert ingot into billet rated at 2,000 tons and 1,375 tons at its Grafton, Massachusetts location. The Company produces isothermal forgings on its forging press rated at 8,000 tons at its Worcester, Massachusetts location. The Company employs the following five forging processes: - Open-Die Forging. In this process, the metal is pressed between dies that never completely surround the metal, thus allowing the metal to be observed during the process. Typically, open-die forging is used to create relatively simple, preliminary shapes to be further processed by closed die forging. - Closed-Die Forging. Closed-die forging involves pressing heated metal into the required shapes and size determined by machined impressions in specially prepared dies which completely surround the metal. In hot-die forging, both titanium and nickel alloys can be forged using this process, in which the dies are heated to a temperature of approximately 1300 degrees Fahrenheit. This process allows metal to flow more easily within the die cavity which produces forgings with superior surface finish, metallurgical structures with tighter tolerances and enhanced repeatability of the part shape. - Conventional/Multi-Ram. The closed-die, multi-ram process utilized on the Company's 30,000 and 20,000 ton presses enables the Company to produce extremely complex forgings such as valve bodies with multiple cavities in a single heating and pressing cycle. Dies may be split either on a vertical or a horizontal plane and shaped punches may be operated by side rams, piercing rams, or both. Multi-ram forging enables the Company to produce a wide variety of shapes, sizes and configurations. The process also optimizes grain flow and uniformity of deformation and reduces machining requirements. - Isothermal Forging. Isothermal forging is a closed-die process in which the dies are heated to the same temperature as the metal being forged, typically in excess of 1,900 degrees Fahrenheit. The forged material typically consists of nickel alloy powders. Because of -9- 10 the high die temperatures necessary for forming these alloys, the dies are made of refractory metals, typically molybdenum, so that the die retains its strength and shape during the forging process. Because the dies may oxidize at these elevated temperatures, the forging process is carried on in a vacuum or inert gas atmosphere. The Company's isothermal press also allows it to produce near-net shape components (requiring less machining by the customer) made from titanium alloys, which can be an important competitive advantage in times of high titanium prices. The Company carries on this process in its 8,000 ton isothermal press. - Extrusion. The Company's 35,000 ton vertical extrusion press is one of the largest and most advanced extrusion presses in the world. Extrusions are produced for applications in the oil and gas industry, including tension leg platforms, riser systems and production manifolds. The extrusion process is facilitated by manipulators capable of handling work pieces weighing up to 20 tons, rotary hearth furnaces and a 14,000 ton blocking press. The Company's extrusion press is capable of producing thick wall seamless pipe with outside diameters up to 48 inches and wall thicknesses from 1/2 inch up to seven inches. Solid extrusions can be manufactured from six to 32 inches in diameter. Typical lengths vary from ten to 45 feet. Powder materials can also be compacted and extruded into forging billets utilizing this press. The 30,000 ton press in Livingston, Scotland has similar extrusion capabilities in addition to its multi-ram forging capabilities. The 12,000 ton press in Buffalo, New York is capable of producing seamless pipe with outside diameters up to 20 inches and wall thicknesses from 3/8 inches up to three inches. Metal Production. The Company's Brighton, Michigan powder metal facility has the capability to atomize, process, and consolidate (by hot isostatic pressing) alloy metal powders for use in aerospace, medical implant, petrochemical, hostile environment oil and gas drilling and production, and other applications. This facility has an annual production capacity of up to 500,000 pounds of alloy powder. After production of the powder, the Company consolidates the metal by extrusion using its 35,000 ton press in Houston, and the extruded billets are then forged into critical jet engine components on the Company's 8,000 ton isothermal press in Worcester, Massachusetts. The Company's vacuum arc remelting ("VAR") shop in Houston, Texas has five computer-controlled VAR furnaces which process electrodes up to 42 inches in diameter that weigh up to 40,000 pounds. The Houston VAR furnaces are used to remelt purchased electrodes into high purity alloys for internal use. In addition, the VAR furnaces are used for toll melting. These vacuum metallurgy techniques provide consistently high levels of purity, low gas content, and precise control over the solidification process. This minimizes segregation in complex alloys and results in improved mechanical properties, as well as hot and cold workability. -10- 11 The Company is in a joint venture with Pratt & Whitney and certain Australian investors which produces nickel alloy ingots in Perth, Australia, some of which the Company utilizes as raw materials for its forging and casting products. Support Operations. The Company designs its forging dies and manufactures some of those dies. In designing its dies, the Company utilizes its customers' drawings and engineers the dies using CAD/CAM equipment and sophisticated computer models that simulate metal flow during the forging process. This activity improves process control and permits the Company to enhance the metallurgical characteristics of the forging. At two of its three major forging locations, the Company has machine shops with computer aided profiling equipment, vertical turret lathes and other equipment that it employs to shape rough machine products. The Company also operates rotary and car-bottom furnaces for heat treatment to enhance the performance characteristics of the forgings. In fiscal year 1999, the Company entered into a joint venture in Monterrey, Mexico to machine its forgings. Testing. Because the Company's products are for high performance end uses, rigorous testing is necessary and is performed internally by Company engineers. Throughout the manufacturing process, numerous tests and inspections are performed to insure the final quality of each product; statistical process control techniques are also applied throughout the entire manufacturing process. The Company subjects its products to extensive quality inspection and contract qualification procedures involving zyglo, chemical etching, ultrasonic, red dye, hardness, and electrical conductivity testing facilities. Investment Castings The Company's investment castings operations use high-volume production equipment and both air-melt and vacuum-melt furnaces to produce a wide variety of complex investment castings. Castings are made of a range of metal alloys including steel, aluminum, nickel, titanium and magnesium. The Company's castings operations are conducted in facilities located in Groton, Connecticut; Franklin and Tilton, New Hampshire; Carson City, Nevada; San Leandro, California and Albany, Oregon. In July 1998, the Company and Titanium Metals Corporation ("TIMET") combined their respective titanium casting operations in Franklin, New Hampshire and Albany, Oregon into Wyman Gordon Titanium Castings, LLC, a Delaware limited liability company, (the "Joint Venture"), 80.1% owned by the Company and 19.9% by TIMET. The parties have agreed, in general, that the Joint Venture will be the exclusive means by which they conduct their titanium castings operations. -11- 12 The Company produces its investment castings by the "lost wax" process, a method developed in China over 5,000 years ago. The initial step in producing investing castings is to create a wax form of the ultimate metal part by injecting molten wax into an aluminum mold, known as a "tool." These tools are produced to the specifications of the customer and are primarily purchased from outside die makers, although the Company maintains internal tool-making capabilities. The wax patterns are then mechanically coated with a ceramic slurry in a process known as investment. This forms a ceramic shell which is subsequently air-dried and hardened under controlled environmental conditions. Next, the wax inside this shell is melted and removed in a high temperature steam autoclave and the molten wax is recycled. In the next, or "foundry" stage, metal is melted in an electric furnace in either an air or vacuum environment and poured into the ceramic shell. After cooling, the ceramic shells are removed by vibration, chipping or various types of water or air blasting. The metal parts are then cleaned in a high temperature caustic bath, followed by water rinsing. In the finishing stage, the castings are finished by grinding and polishing to remove excess metal. The final product then undergoes a lengthy series of testing (radiography, fluorescent penetrant, magnetic particle and dimensional) to ensure quality and consistency. Composites The Company's composites subsidiary, Scaled Composites, located in Mojave, California, designs, fabricates and tests composite airframe structures made by layering carbon graphite and other fibers with epoxy resins for the aerospace market. During fiscal year 1998, the Company completed the construction of a 120,000-square-foot facility in Montrose, Colorado, where the Company's subsidiary, Scaled Technology Works, manufactures airplane components, principally those designed by Scaled Composites. OPERATING FACILITIES The following table sets forth certain information with respect to the Company's operating facilities at May 31, 1999, all of which are owned. The Company believes that its operating facilities are well maintained, are suitable to support the Company's business and are adequate for the Company's present and anticipated needs. On average, during the Company's fiscal year 1999, the Company's forging, investment castings and composites facilities were operating at approximately 78%, 76% and 73% of their total productive capacity, respectively. -12- 13 APPROXIMATE SQUARE LOCATION FOOTAGE PRIMARY FUNCTION Brighton, Michigan 34,500 Alloy Powder Production Grafton, Massachusetts 85,420 Administrative Offices Grafton, Massachusetts 843,200 Forging Houston, Texas 1,283,800 Forging Livingston, Scotland 405,200 Forging Millbury, Massachusetts 104,125 Research and Development Worcester, Massachusetts 22,300 Forging Buffalo, New York (2 plants) 235,000 Forging Carson City, Nevada 55,000 Casting Franklin, New Hampshire 43,200 Casting Groton, Connecticut (2 plants) 162,550 Casting San Leandro, California 60,000 Casting Tilton, New Hampshire 94,000 Casting Albany, Oregon 60,400 Casting Mojave, California 67,000 Composites Montrose, Colorado 120,000 Composites RAW MATERIALS Raw materials used by the Company in its forgings and castings include titanium, nickel, steel, aluminum, cobalt, magnesium and other metallic alloys. The composites operation uses high strength fibers such as fiberglass or graphite, as well as materials such as foam and epoxy, to fabricate composite structures. The major portion of metal requirements for forged and cast products are purchased from major metal suppliers producing forging and casting quality material as needed to fill customer orders. The Company has two or more sources of supply for all significant raw materials. Its principal suppliers of nickel alloys include Special Metals Corporation, Allegheny Teledyne, Inc., and Carpenter Technologies Corporation. Its principal suppliers of titanium alloys are TIMET, Allegheny Teledyne, Inc. and RMI Titanium Company. In July 1998, the Company exchanged certain assets of its Millbury, Massachusetts titanium vacuum arc remelting facility for certain assets of TIMET's Albany, Oregon titanium castings business. In connection with such exchange the Company and TIMET entered into a long term supply agreement pursuant to which the Company will acquire a substantial portion of its titanium raw material requirements from TIMET. The Company's powder metal facility in Brighton, Michigan produces nickel alloy powder. In addition, the Company utilizes a portion of the output of its Australian joint venture for its own use. -13- 14 The titanium and nickel alloys utilized by the Company have a relatively high dollar value. Accordingly, the Company attempts to recover and recycle scrap materials such as machine turnings, forging flash, scrapped forgings, test pieces and casting sprues, risers and gates. In the event a customer cancels an order for which material has been purchased, the Company may, under certain circumstances, obtain reimbursement from the customer if the material cannot be diverted to other uses. Costs of material already on hand, along with any conversion costs incurred, are generally billed to the customer unless transferable to another order. Many of the Company's customer contracts have fixed prices for extended time periods and do not provide complete price adjustments for changes in the prices of raw materials such as metals. The Company attempts to reduce its risk with respect to its customer contracts by procuring long-term contracts with suppliers of metal alloys, but the Company's supply contracts typically do not completely insulate the Company from fluctuations in the prices of raw materials. ENERGY USAGE The Company is a large consumer of energy. Energy is required primarily for heating metals to be forged and melting metals to be cast, melting of ingots, heat-treating products after forging and casting, operating forging presses, melting furnaces, mechanical manipulation and pollution control equipment and space heating. Supplies of natural gas, oil and electricity used by the Company have been sufficient and there is no anticipated shortage for the future. However, significant increases in the price of or shortages in these energy supplies may have an adverse impact on the Company's results of operations. EMPLOYEES As of May 31, 1999, the Company had approximately 3,955 employees, of whom 1,039 were executive, administrative, engineering, research, sales and clerical and 2,916 were production and craft. Approximately 35% of the production and craft employees, consisting of employees in the forging business, are represented by unions. The Company has entered into collective bargaining agreements with these union employees as follows: -14- 15 NUMBER OF EMPLOYEES COVERED BY BARGAINING INITIATION EXPIRATION LOCATION AGREEMENTS DATE DATE Grafton and Worcester, Massachusetts 471 April 6, 1997 March 24, 2002 Houston, Texas 570 August 10, 1998 August 12, 2001 39 September 28, 1998 September 28, 2001 Livingston, Scotland 171 December 1, 1998 November 30, 2001 60 February 1, 1999 January 31, 2002 Buffalo,New York 69 June 7, 1999 June 2, 2003 Total 1,380 The Company believes it has good relations with its employees, but there can be no assurances that the Company will not experience a strike or other work stoppage or that acceptable collective bargaining agreements can be negotiated when the existing collective bargaining agreements expire. RESEARCH AND PATENTS The Company maintains research and development departments at both Millbury, Massachusetts, and Houston, Texas, which are engaged in applied research and development work primarily relating to the Company's forging operations. The Company works closely with customers, universities and government technical agencies in developing advanced forging and casting materials and processes. The Company's castings operations conduct research and development related to advanced casting materials and processes at its Groton, Connecticut, and Tilton, New Hampshire, facilities. The Company's composites operation conducts research and development related to aerospace composite structures at the Mojave, California, facility. The Company spent approximately $2.9 million, $3.3 million and $2.9 million on applied research and development work during the years ended May 31, 1999, 1998 and 1997, respectively. Although the Company owns patents covering certain of its processes, the Company does not consider that these patents are of material importance to the Company's business as a whole. Most of the Company's products are manufactured to customer specifications and, consequently, the Company has few proprietary products. COMPETITION Most of the Company's production capabilities are possessed in varying degrees by other companies in the industry, including both domestic and foreign manufacturers. Competition in each of the Company's current product markets is cyclical, intensifying during upturns and lessening during downturns, but such cyclicality of competition is especially present in aerospace structural products markets because of the cyclical nature of the -15- 16 commercial and defense aerospace industries. In the aerospace turbine products market, the Company's largest competitors are Ladish Co., Inc., Fortech, S.A. and Thyssen AG. In the aerospace structural products market, Alcoa Corporation and Schultz Steel Company are the Company's largest competitors. In the energy products market, the Company faces mostly international competition from Mannesmann A.G. and Sumitomo Corporation, among others. In the aerospace castings products market, Howmet Corporation and Precision Castparts Corp. are the Company's largest competitors. In the future, the Company may face increased competition from international companies as the Company's customers seek lower cost sources of supply. International competition in the forging and casting processes may also increase in the future as a result of strategic alliances among aircraft prime contractors and foreign companies, particularly where "offset" or "local content" requirements create purchase obligations with respect to products manufactured in or directed to a particular country. Competition is often intense among the companies currently involved in the industry. Competitive advantages are afforded to those with high quality products, low cost manufacturing, excellent customer service and delivery and engineering and production expertise. The Company believes that it has strength in these areas, but there can be no assurance that the Company can maintain its share of the market for any of its products. ENVIRONMENTAL REGULATIONS The Company's operations are subject to extensive, stringent and changing federal, state and local environmental laws and regulations, including those regulating the use, handling, storage, discharge and disposal of hazardous substances and the remediation of alleged environmental contamination. Accordingly, the Company is involved from time to time in administrative and judicial inquiries and proceedings regarding environmental matters. Nevertheless, the Company believes that compliance with these laws and regulations will not have a material adverse effect on the Company's operations as a whole. However, it is not possible to predict accurately the amount or timing of costs of any future environmental remediation requirements. The Company continues to design and implement a system of programs and facilities for the management of its raw materials, production processes and industrial waste to promote compliance with environmental requirements. As of May 31, 1999, aggregate environmental reserves amounted to $15.5 million, which includes expected cleanup costs estimated between $4.4 million and $5.4 million upon the eventual sale of the Worcester, Massachusetts facility, certain environmental issues, including the remediation of on-site landfills, at the Houston, Texas facility amounting to approximately $3.0 million, $4.4 million in remediation projects at the Grafton facility, $0.8 million for remediation at the Buffalo facility and $1.1 million for various Superfund sites. There can be no assurance that the actual costs of remediation will not eventually materially exceed the amount presently accrued. -16- 17 Pursuant to an agreement entered into with the U.S. Air Force upon the acquisition of the Grafton facility from the federal government in 1982, the Company agreed to make expenditures totaling $20.8 million for environmental management and remediation at that site, of which $3.3 million remained as of May 31, 1999. Approximately one-half of the remaining Air Force projects are capital in nature and the remainder are covered by existing reserves. These expenditures will not resolve all of the Company's obligations to federal and state regulatory authorities, who are not parties to the agreement, however, and the Company expects to incur an additional amount, currently estimated at approximately $2.8 million, to comply with current federal and state environmental requirements governing the investigation and remediation of contamination at the site. The Company's Grafton facility was formerly included in the U.S. Nuclear Regulatory Commission's ("NRC") May 1992 Site Decommissioning Management Plan ("SDMP") for low-level radioactive waste as the result of the disposal of magnesium thorium alloys at the facility in the 1960s and early 1970s under license from the Atomic Energy Commission. On March 31, 1997, the NRC informed the Company that jurisdiction for the Grafton site had been transferred to the Commonwealth of Massachusetts Department of Public Health (the "DPH") and that the Grafton facility had been removed from the SDMP. Although it is unknown what specific remediation and disposal requirements may be imposed on the Company by the DPH, the Company believes that a reserve of $1.5 million, included within the $2.8 million noted above, is sufficient to cover all costs. There can be no assurance, however, that such reserve will be adequate to cover any obligations that the DPH may ultimately impose on the Company. The Company, together with numerous other parties, has been named a PRP under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for the cleanup of the following Superfund sites: Operating Industries, Monterey Park, California; PSC Resources, Palmer, Massachusetts; the Harvey GRQ site, Harvey, Illinois; and the Gemme/Fournier site, Leicester, Massachusetts. The Company believes that a reserve of $1.1 million recorded on its books is sufficient to cover all costs. At the Gemme/Fournier site, a proposed agreement would allocate 33% of the cleanup costs to the Company. In September 1995, a consulting firm retained by the PRP group made a preliminary remediation cost estimate of $1.4 million to $2.8 million. The Company's insurance company is defending the Company's interests, and the Company believes that any recovery against the Company would be offset by recovery of insurance proceeds. The Company expects to incur between $4.4 and $5.4 million in cleanup expenses upon the planned sale of its Worcester, Massachusetts facility to remedy certain contamination discovered on site. The Massachusetts Department of Environmental Protection has classified the site as a Tier II site under the Massachusetts Contingency Plan. -17- 18 PRODUCT LIABILITY EXPOSURE The Company produces many critical engine and structural parts for commercial and military aircraft. As a result, the Company faces an inherent business risk of exposure to product liability claims. The Company maintains insurance against product liability claims, but there can be no assurance that such coverage will continue to be available on terms acceptable to the Company or that such coverage will be adequate for liabilities actually incurred. The Company has not experienced any material loss from product liability claims and believes that its insurance coverage is adequate to protect it against any claims to which it may be subject. LEGAL PROCEEDINGS In addition to the matters disclosed below, at May 31, 1999, the Company was involved in certain legal proceedings arising in the normal course of its business. The Company believes the outcome of these matters will not have a material adverse effect on the Company. On December 22, 1996, a serious industrial accident occurred at the Houston, Texas, facility of Wyman-Gordon Forgings, Inc. ("WGFI"), a wholly-owned subsidiary of the Company, in which eight employees were killed, and three employees and several subcontractor employees were injured. The Company and WGFI have settled the lawsuits brought by all decedents' families and other claimants on terms acceptable to the Company and its insurance carriers. The amounts paid in settlement of the lawsuits exceeded the Company's available liability insurance. The Company recorded a charge of $13.8 million in the third quarter of fiscal year 1999 that covered its share of the costs of defending the lawsuits and funding the agreed settlements. On September 25, 1997, the Company received a subpoena from the United States Department of Justice informing it that the Department of Defense and other federal agencies had commenced an investigation with respect to the manufacture and sale of investment castings at the Company's Tilton, New Hampshire facility. The Company does not believe that the federal investigation is likely to result in a material adverse impact on the Company's financial condition or results of operations, although no assurance as to the outcome or impact of that investigation can be given. ITEM 2. PROPERTIES The response to ITEM 2. PROPERTIES incorporates by reference the paragraphs captioned "Facilities" included in ITEM 1. BUSINESS. -18- 19 ITEM 3. LEGAL PROCEEDINGS The response to ITEM 3. LEGAL PROCEEDINGS incorporates by reference the paragraphs captioned "Environmental Regulations" and "Legal Proceedings" included in ITEM 1. BUSINESS. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended May 31, 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Wyman-Gordon Company's common stock, par value $1.00 per share, is listed on the New York Stock Exchange under the symbol WYG. The table below lists the quarterly price range per share for the years ended May 31, 1999 and 1998. The quarterly price range per share is based on the high and low sales prices. At May 31, 1999, there were approximately 1,927 holders of record of the Company's common stock. YEAR ENDED YEAR ENDED MAY 31, 1999 MAY 31, 1998 HIGH LOW HIGH LOW First quarter $21 1/8 $13 $28 1/4 $23 3/8 Second quarter 16 7/8 11 1/2 30 20 5/8 Third quarter 15 5/8 7 3/8 22 1/8 16 1/2 Fourth quarter 19 5/16 8 1/4 23 1/8 19 3/4 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data and other operating information of Wyman-Gordon Company. The selected financial data in the table are derived from the consolidated financial statements of Wyman-Gordon Company. The data should be read in conjunction with the consolidated financial statements, related notes, other financial information and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein. -19- 20 YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED, EXCEPT PER-SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA(1): Revenues $849,261 $ 752,913 $608,742 Gross profit 133,359 115,646 97,634 Other charges(credits)(2) 13,745 (4,900) 23,083 Income (loss) from operations 62,952 68,892 30,322 Net income (loss)(3) 37,028 33,890 50,023 BASIC PER SHARE DATA: Income (loss) per share before extraordinary item $ 1.02 $ 1.07 $ 1.40 Net income (loss) per share (3) 1.02 .93 1.40 DILUTED PER SHARE DATA: Income (loss) per share before extraordinary item $ 1.01 $ 1.05 $ 1.35 Net income (loss) per share (3) 1.01 .91 1.35 Shares used to compute income (loss) per share: Basic 36,149 36,331 35,825 Diluted 36,589 37,357 37,027 BALANCE SHEET DATA (AT END OF PERIOD(2): Working capital $230,027 $ 223,764 $166,205 Total assets 581,710 551,610 454,371 Long-term debt 164,338 162,573 96,154 Stockholders' equity 233,762 204,820 164,398 OTHER DATA: Order backlog (at end of period) $734,790 $1,030,092 $895,825 -20- 21 YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1996 1995 (000'S OMITTED, EXCEPT PER-SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA(1): Revenues $499,624 $396,639 Gross profit 78,132 49,388 Other charges(credits)(2) 2,717 (710) Income (loss) from operations 37,699 13,718 Net income (loss)(3) 25,234 1,039 BASIC PER SHARE DATA: Income (loss) per share before extraordinary item $ 0.72 $ 0.03 Net income (loss) per share (3) 0.72 0.03 DILUTED PER SHARE DATA: Income (loss) per share before extraordinary item $ 0.70 $ 0.03 Net income (loss) per share (3) 0.70 0.03 Shares used to compute income (loss) per share: Basic 35,243 34,813 Diluted 36,241 35,148 BALANCE SHEET DATA (AT END OF PERIOD(2): Working capital $116,534 $ 93,062 Total assets 375,890 369,064 Long-term debt 90,231 90,308 Stockholders' equity 109,943 80,855 OTHER DATA: Order backlog (at end of period) $598,438 $468,721 [FN] (1) On April 9, 1998, the Company acquired International Extruded Products, LLC ("IXP"). The Selected Consolidated Financial Data include the accounts of IXP from the date of acquisition. IXP's operating results from April 9, 1998 to May 31, 1998 are not material to the consolidated statement of operations for the year ended May 31, 1998. (2) During the year ended May 31, 1996, the Company provided $1,900,000 in order to recognize its 25.0% share of the net losses of its Australian joint venture and to reduce the carrying value of such joint venture. Additionally, the Company provided $800,000 to reduce the carrying value of the cash surrender value of certain company-owned life insurance policies. </FN> -21- 22 [FN] During the year ended May 31, 1997, the Company recorded other charges of $23,100,000, which included $4,600,000 to provide for the costs of workforce reductions at the Company's Grafton, Massachusetts, Forging facility, $3,400,000 to the write-off and disposal of certain forging equipment, $2,300,000 to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations, $1,200,000 to consolidate the titanium castings operations, $2,500,000 to reduce the carrying value of the Australian joint venture, $5,700,000 to reduce the carrying value of the cash surrender value of certain Company-owned life insurance policies, $1,900,000 to reduce the carrying value of a building held for sale and $250,000 to reduce the carrying value of other assets. Other charges (credits) in the year ended May 31, 1997 also included a charge of $1,200,000, net of insurance recovery of $6,900,000, related to the accident at the Houston, Texas, facility of Wyman- Gordon Forgings, Inc. in December 1996. Other charges (credits) in the year ended May 31, 1998 includes a credit of $4,000,000 for the recovery of cash surrender value of certain company-owned life insurance policies, a credit of $1,900,000 resulting from the disposal of a building held for sale and a charge of $1,000,000 to provide for costs as a result of the six-month shutdown of the 29,000-ton press at the Company's Houston, Texas, forging facility. During the year ended May 31, 1999, the Company recorded other charges of $13,745,000. Such other charges include a net charge of $12,955,000 to provide for settlement costs associated with the Houston industrial accident, $4,700,000 to provide for the costs of Company-wide workforce reductions, a charge of $1,090,000 to reduce the carrying value and dispose of certain assets of the Company's titanium Castings operations and a credit of $5,000,000 resulting from the sale of the operating assets of the Company's Millbury, Massachusetts vacuum remelting facility to TIMET. (3) In the year ended May 31, 1997, net tax benefits of $25,680,000 were recognized, including a refund of prior years' income taxes amounting to $19,680,000, plus interest of $3,484,000, and $6,500,000 related to the expected realization of net operating losses ("NOLs") in future years and $10,250,000 related to current NOLs benefit offsetting $10,750,000 of current income tax expense. The refund relates to the carryback of tax net operating losses to tax years 1981, 1984 and 1986 under the applicable provisions of Internal Revenue Code Section 172(f). </FN> -22- 23 [FN] In the year ended May 31, 1998, the Company provided $16,355,000 for income taxes, net of a tax benefit of approximately $1,800,000 relating to the utilization of NOLs carryforwards. In addition, the Company has recorded a $2,920,000 tax benefit against the extraordinary loss of $8,112,000 associated with the early extinguishment of the Company's 10 3/4% Senior Notes. In the year ended May 31, 1999, the Company provided $10,467,000 for income taxes, net of a tax benefit of approximately $6,400,000 associated with the expected realization of certain tax assets. </FN> -23- 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED MAY 31, 1999 ("FISCAL YEAR 1999") COMPARED TO YEAR ENDED MAY 31, 1998 ("FISCAL YEAR 1998") OVERVIEW Total revenues in fiscal year 1999 reached a record $849.3 million, an increase of 12.8% from fiscal year 1998 sales of $752.9 million. Revenue increases by market in fiscal year 1999 compared to fiscal year 1998 were as follows: a $83.0 million, or 13.3%, increase in aerospace, a $15.9 million, or 15.7%, increase in energy and a $2.6 million, or 8.9%, decrease in other. Increased throughput at the Company's Houston, TX and Grafton, MA facilities attributed to the growth in aerospace and energy revenues as well as the recent venture with TIMET and the full year of revenues from the acquisition of IXP in fiscal year 1998. Earnings before interest, taxes, depreciation, amortization, other charges and extraordinary items ("EBITDA") in fiscal year 1999 increased to $103.1 million, or 12.1% of revenues compared to $86.6 million, or 11.5% of revenues in fiscal year 1998. EBITDA in fiscal year 1999 was negatively affected by the following: a one-time charge of $5.8 million, or 0.7%, related to sales commitments under contractual agreements with certain customers that will result in losses, a $3.1 million, or 0.4%, impact resulting from production inefficiencies incurred in the first three months of fiscal year 1999 resulting from the recommissioning of the Company's 29,000 ton press and approximately $8.0 million, or 0.9%, primarily relating to overtime and outsourcing costs associated with reducing overdue customers orders, fixed costs escalations, and underabsorption in the Company's energy product line. EBITDA should not be considered a substitute for net income as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity, in each case determined in accordance with generally accepted accounting principles. Investors should be aware that EBITDA as reported within may not be comparable to similarly titled measures presented by other companies, and comparisons could be misleading unless all companies and analysts calculate this measure in the same fashion. OUTLOOK The Company expects fiscal year 2000 will see a decline in revenues by approximately 15% from fiscal year 1999, while maintaining operating margins approximating fiscal year 1999 levels. The anticipated decline in revenues is attributable to a downturn in the aerospace cycle, the overall weakness in the oil and gas industries and the weak Asian economy. Through planned cost reduction programs and actions taken to align the cost structure of the Company, it is estimated that EBITDA margins for fiscal year 2000 will approximate the same levels as that of fiscal year 1999 although no assurances can be given that the Company will achieve such EBITDA margins. -24- 25 FINANCIAL RESULTS BY SEGMENT In fiscal year 1999, the Company adopted Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which revises reporting and disclosure requirements for operating segments. The Statement requires that the Company present segment data based on the way that management organizes the business within the Company for making operating decisions and assessing performance. The three segments, based on markets served, are Aerospace, Energy and Other. AEROSPACE MARKET The Aerospace Market segment produces components utilizing all of the Company's manufacturing disciplines: forging, investment casting and composites. The parts produced in this segment are used extensively by the major jet engine manufacturers and airframe builders within the commercial and military aircraft industry. A variety of engine parts produced by the Company include fan discs, compressor discs, turbine discs, seals, shafts, hubs, reversers and valves. Aerospace airframe components include landing gear, bulkheads, wing spars, engine mounts, struts, wing and tail flaps and bulkheads. The Company produces these components from titanium, nickel, steel, aluminum and composite materials. The Aerospace Market segment reported fiscal year 1999 revenues of $705.8 million and EBITDA of $101.1 million. Fiscal year 1999 revenues increased 13.3% over last year's $622.7 million, and EBITDA as a percentage of sales improved to 14.3% in fiscal year 1999 from 13.0% in fiscal year 1998. The increase in aerospace market revenues was the result of an increase in aerospace turbine sales volume due to significant throughput improvements on the Company's 29,000 ton press, increased aerospace structural sales from the joint venture with TIMET and throughput improvements generated from the reorganization of the Grafton, MA facility. The higher EBITDA reflected leverage from the higher sales volume, improved operating performance at the Grafton, MA facility and improved production efficiencies resulting from repairs and refurbishment's on the Company's 29,000 ton press in Houston, TX. ENERGY MARKET The Company is a major supplier of products used in nuclear and fossil-fueled commercial power plants, co-generation projects and retrofit and life extension applications as well as in the oil and gas industry. Products produced within the energy product segment include extruded seamless thick wall pipe, connectors, and valves. The Company produces rotating components, such as discs and spacers, and valve components for land-based steam turbine and gas turbine generators. -25- 26 Fiscal year 1999 revenues for the Energy Market segment totaled $117.2 million, as compared to $101.4 million in fiscal year 1998, an increase of 15.7%. The segment's EBITDA, however, saw some deterioration, falling to $10.6 million from last year's $11.4 million. The Energy Market segment is currently experiencing the effect of lower oil prices worldwide, which has dramatically affected sales of oil and gas products both domestically and internationally. In addition, the weakened Asian economy has resulted in a reduction in the installation of power generation systems in that geographical area. The decline in these markets has not only caused a substantial reduction in orders, but has also increased competitive pricing pressures, which adversely affected normal margin opportunities during fiscal year 1999. OTHER MARKET The Company manufacturers a variety of products for defense related applications. Some of the products produced within this segment include steel casings for bombs and rockets, components for propulsion systems for nuclear submarines and aircraft carriers as well as pump, valve, structural and non-nuclear propulsion forgings. The Company also manufactures products for commercial applications such as food processing, semiconductor manufacturing, diesel turbochargers and sporting equipment. The Other Market segment revenues decreased to $26.3 million in fiscal year 1999 compared to $28.8 million in fiscal year 1998, a decrease of 8.9%. EBITDA decreased from $4.8 million in fiscal year 1998 to $2.6 million in fiscal year 1999. The decline in revenues was largely due to reduced sales of ordnance products. EBITDA was unfavorably impacted by the product mix making up fiscal year 1998 revenues and the decrease in ordnance revenues and associated margins. EBITDA benefited from a $1.8 million LIFO credit in fiscal year 1999. The positive impact primarily affected the aerospace market segment EBITDA results. There was no LIFO charge (credit) in fiscal year 1998. The Company's backlog decreased to $734.8 million at May 31, 1999 from $1,030.1 million at May 31, 1998. This decrease resulted from the following factors: 1. Reduction in build rates of the Company's engine and airframe customers due to a downturn in the commercial aircraft cycle, 2. Inventory reduction programs initiated by certain major customers, and 3. A decrease in overdue orders to customer delivery dates as a result of increased capacity from recommissioning of major presses coupled with reduced bookings. Of the Company's total current backlog, $555.6 million is shippable in the next twelve months. The Company believes that it will be able to fulfill those twelve-month requirements. -26- 27 Selling, general and administrative expenses increased 9.7% to $56.7 million during fiscal year 1999 from $51.7 million during fiscal year 1998. Selling, general and administrative expenses as a percentage of revenues improved to 6.7% in fiscal year 1999 from 6.9% in fiscal year 1998. Excluding a $3.4 million charge in fiscal year 1998 for compensation expense associated with the Company's performance share program, selling, general and administrative expense as a percentage of revenue increased by 0.3% in fiscal year 1999 compared to fiscal year 1998. This overall increase as a percentage of revenue was due primarily to costs associated with the development of the Company's oil and gas business in its Livingston, Scotland facility, and development of the Company's composite business in Montrose, Colorado. During the year ended May 31, 1999, the Company recorded other charges of $13.7 million. Such other charges include a net charge of $13.0 million to provide for settlement costs associated with the Houston industrial accident, $4.7 million to provide for the costs of Company-wide workforce reductions, a charge of $1.1 million to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations and a credit of $5.0 million resulting from the sale of the operating assets of the Company's Millbury, Massachusetts vacuum remelting facility to TIMET. During fiscal year 1998, the Company recorded net other credits of $4.9 million. Such other credits include $1.9 million resulting from the disposal of a building held for sale and $4.0 million for the recovery of cash surrender value of certain Company-owned life insurance policies offset by other charges of $1.0 million to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas, forging facility. Interest expense increased $1.7 million to $14.2 million in fiscal year 1999 compared to $12.5 million in fiscal year 1998. The increase results from a higher average debt level for the full year in fiscal year 1999 compared to fiscal year 1998 due to the issuance of $150.0 million of 8% Senior Notes in the third quarter of fiscal year 1998. The Company provided $10.5 million for income taxes, net of a tax benefit of approximately $6.4 million associated with the expected realization of certain tax assets. In fiscal year 1999, net income was $37.0 million, or $1.01 per share (diluted). In fiscal year 1998, net income before extraordinary item was $39.1 million, or $1.05 per share (diluted), and net income, including extraordinary item, was $33.9 million, or $.91 per share (diluted). In fiscal year 1998, the Company recorded an extraordinary charge of $5.2 million, or $.14 per share (diluted), net of tax, in connection with the extinguishment of $84.7 million of its 10 3/4% Senior Notes. The decrease resulted from the items described above. -27- 28 YEAR ENDED MAY 31, 1998 ("FISCAL YEAR 1998") COMPARED TO YEAR ENDED MAY 31, 1997 ("FISCAL YEAR 1997") OVERVIEW The Company's revenue increased 23.7% to $752.9 million in fiscal year 1998 from $608.7 million in fiscal year 1997. These revenue increases during fiscal year 1998 as compared to fiscal year 1997 are reflected by market as follows: a $147.6 million, or 31.1%, increase in aerospace, a $4.2 million, or 4.4%, increase in energy and a $7.7 million, or 21.0%, decrease in other. Revenue growth in the aerospace market was the result of higher airplane and engine build rates and higher demands for spares by aerospace engine prime contractors. The increase in energy revenue was a result of higher shipments of land-based gas turbine products in fiscal year 1998 compared to fiscal year 1997. The cause of the decrease in other markets is primarily due to the decline in the titanium golf club head business as the Company exited this business in fiscal year 1997. EBITDA increased to $86.6 million from $79.1 million in fiscal year 1998. EBITDA as a percentage of revenues decreased to 11.5% from 13.0% in fiscal year 1997. Aerospace market EBITDA in fiscal year 1998 was negatively affected by the impact of the Company's 29,000 ton press being taken out of service for repairs for six months. During the six month period the press was out of service, the work scheduled on the 29,000 ton press was performed on alternative presses at a significant increased cost. The Company has estimated that EBITDA in fiscal year 1998 was negatively impacted by approximately 2.3% as a result of underabsorption, inefficiencies and other items, all of which include extra labor, higher overtime, tooling modifications and higher scrap and rework costs. FINANCIAL RESULTS BY SEGMENT The three segments, based on markets served, are Aerospace, Energy and Other. AEROSPACE MARKET Fiscal year 1998 revenues for the Aerospace Market segment totaled $622.7 million compared to $475.1 million in fiscal year 1997, an increase of 31.1%. EBITDA increased to $81.2 million in fiscal year 1998 from $75.0 million in fiscal year 1997. The growth in revenues was attributable to higher airplane and engine build rates and higher demands for spares by aerospace engine prime contractors. Although there were higher shipments to aerospace customers during fiscal year 1998, the shipments to aerospace customers were impacted by the Company's 29,000 ton press being out of service for repairs for six months. In addition to impacts on revenues, EBITDA was negatively impacted by the disruption of that press being out of service. EBITDA as a percentage of sales decreased to 13.0% in fiscal year 1998 compared to 15.8% in fiscal year 1997. Significant costs were -28- 29 incurred in order to meet engine customers' product demands. The Company incurred production inefficiencies and high levels of overtime and rework resulting from production of turbine parts on alternate presses. ENERGY MARKET Fiscal year 1998 revenues for the Energy Market segment totaled $101.4 million, as compared to $97.1 million in fiscal year 1997, an increase of 4.4%. EBITDA also showed modest growth to $11.4 million in fiscal year 1998 from $9.6 million in fiscal year 1997. The growth in revenues was primarily attributable to higher shipments of land-based gas turbine products in fiscal year 1998 compared to fiscal year 1997. Improvements in EBITDA resulted from strong focus on cost management throughout the year. OTHER MARKET The Other Market segment revenues were $28.8 million, a $7.7 million decrease from $36.5 million in fiscal year 1998. Although revenues decreased, EBITDA grew to $4.8 million, or 16.6% of revenues, compared to $2.8 million, or 7.7% of revenues in fiscal year 1998. The decline in other market revenues was primarily due to exiting the cast titanium golf club head business in fiscal year 1997. EBITDA in fiscal year 1997 was negatively impacted by price and demand declines within the titanium golf club head business which accounted for a significant portion of this segment's revenues. Although revenues decreased, higher margin parts generated from ordnance and commercial product sales resulted in a significant improvement in EBITDA for fiscal year 1998. There was no LIFO charge (credit) impacting EBITDA in fiscal year 1998. In fiscal year 1997, EBITDA, primarily impacting the aerospace market segment, was negatively impacted by a LIFO charge of $1.6 million. The Company's backlog increased to $1,030.1 million at May 31, 1998 from $895.8 million at May 31, 1997. This increase resulted from the following factors: 1. Higher build rates of the Company's engine and airframe customers, 2. Higher prices for the Company's aerospace products, and 3. An increase in overdue orders to customer delivery dates as a result of shipping delays at the Company due to equipment repairs and raw material unavailability. -29- 30 Selling, general and administrative expenses increased 16.8% to $51.7 million during fiscal year 1998 from $44.2 million during fiscal year 1997. Selling, general and administrative expenses as a percentage of revenues improved to 6.9% in fiscal year 1998 from 7.3% in fiscal year 1997. The improvement as a percent of revenues was primarily the result of higher revenues. Although selling, general and administrative expense in fiscal year 1998 improved, it includes higher costs associated with relocating employees, development costs associated with the Company's composite operations and $2.0 million higher compensation expense, as compared to fiscal year 1997, associated with the Company's performance share program. During fiscal year 1998, the Company recorded net other credits of $4.9 million. Such other credits include $1.9 million resulting from the disposal of a building held for sale and $4.0 million for the recovery of cash surrender value of certain Company-owned life insurance policies offset by other charges of $1.0 million to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas, forging facility. During fiscal year 1997, the Company recorded other charges of $23.1 million. Such other charges included $4.6 million to provide for the costs of workforce reductions at the Company's Grafton, Massachusetts, facility, $3.4 million to write off and dispose of certain forging equipment, $2.3 million to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations, $1.2 million to consolidate the titanium castings operations, $2.5 million to recognize the Company's 25.0% share of the net losses of its Australian joint venture and to reduce the carrying value of such joint venture, $0.3 million relating to expenditures for an investment in another joint venture, $5.7 million to reduce the carrying value of the cash surrender value of certain Company-owned life insurance policies and $1.2 million of costs, net of insurance recovery of $6.9 million, related to the Houston accident and $1.9 million to reduce the carrying value of the Jackson, Michigan, facility being held for sale. As of May 31, 1997, the Company had fully written off its investment in the Australian joint venture. However, in the future, the Company may make additional capital contributions to the Australian joint venture to satisfy its cash or other requirements and may be required to recognize its share of any additional losses or may write off such additional capital contributions. There were no contributions made to the joint venture in fiscal year 1998. Interest expense increased $1.7 million to $12.5 million in fiscal year 1998 compared to $10.8 million in fiscal year 1997. The increase results primarily from an issuance of $150.0 million of 8% Senior Notes offset by repayment of $84.7 million of 10 3/4% Senior Notes. -30- 31 Miscellaneous, net was an expense of $0.9 million in fiscal year 1998 as compared to income of $4.8 million in fiscal year 1997. Miscellaneous, net in fiscal year 1998, included a $0.7 million loss on the sale of fixed assets. Miscellaneous, net in fiscal year 1997 included interest income on a refund of prior years' income taxes amounting to $3.5 million and a $2.0 million gain on the sale of fixed assets. The Company provided $16.4 million for income taxes, net of a tax benefit of approximately $1.8 million relating to the utilization of NOL carryforwards. In addition, the Company recorded a $2.9 million tax benefit against the extraordinary loss of $8.1 million associated with the early extinguishment of the Company's 10 3/4% Senior Notes. Net tax benefits of $25.7 million were recognized in fiscal year 1997, including a refund of prior years' income taxes amounting to $19.7 million and $6.5 million related to the expected realization of NOLs in the future years and $10.3 million related to current NOLs benefit offsetting $10.8 million of current income tax expense. The refund related to the carryback of tax net operating losses to tax years 1981, 1984 and 1986 under applicable provisions of Internal Revenue Code Section 172(f). In fiscal year 1998, net income before extraordinary item was $39.1 million, or $1.05 per share (diluted), and net income, including extraordinary item, was $33.9 million, or $.93 per share (diluted). In fiscal year 1998, the Company recorded an extraordinary charge of $5.2 million, or $.14 per share (diluted), net of tax, in connection with the extinguishment of $84.7 million of its 10 3/4% Senior Notes. In fiscal year 1997, the Company reported net income of $50.0 million, or $1.40 per share (diluted). The decrease resulted from the items described above. LIQUIDITY AND CAPITAL RESOURCES The increase in the Company's cash of $9.3 million to $73.9 million at May 31, 1999 from $64.6 million at May 31, 1998 resulted from cash provided by operating activities of $59.8 million, issuance of common stock of $5.2 million in connection with employee compensation and benefit plans, $6.7 million of proceeds from the sale of fixed assets, and $0.4 million generated from other, net investing and financing activities, offset by capital expenditures of $47.4 million, $13.1 million repurchase of common stock and $2.3 million payment to Cooper Industries, Inc. ("Cooper"). The $2.3 million payment to Cooper was the final payment made in accordance with the Company's promissory note payable to Cooper under the terms of the Stock Purchase Agreement with Cooper related to the acquisition of Cameron Forged Products Company in May 1994. -31- 32 The increase in the Company's working capital of $6.2 million to $230.0 million at May 31, 1999 from $223.8 million at May 31, 1998 resulted primarily from (in millions): Net income $37.0 Decrease in: Long-term restructuring, integration disposal and environmental (1.9) Long-term benefit liabilities (2.8) Deferred taxes and other (0.2) Other changes in stockholders' equity (0.2) Pension liability (1.1) Intangible assets 1.2 Net repurchase of common stock (7.9) Increase in: Other assets (2.4) Long-term debt 1.7 Property, plant and equipment, net (17.2) Increase in working capital $ 6.2 As of May 31, 1999, the Company estimated the remaining cash requirements for the 1999 severance reserves to be $2.9 million, which the Company expects to spend during fiscal year 2000. As of May 31, 1999, the Company estimated the remaining cash requirements for the 1997 restructuring to be $2.5 million, of which the Company expects to spend approximately $2.2 million during fiscal year 2000 and $0.3 million thereafter. The Company spent $1.0 million in fiscal year 1999 for non-capitalizable environmental projects and has a reserve with respect to environmental matters of $15.5 million, of which it expects to spend $1.3 million in fiscal year 2000 and the remainder in future periods on non-capitalizable environmental activities. The Company from time to time expends cash on capital expenditures for more cost-effective operations, environmental projects and joint development programs with customers. In fiscal year 1999, capital expenditures amounted to $47.4 million and are expected to be approximately $25.0 million in fiscal year 2000. During fiscal year 1998, the Company issued $150.0 million of 8% Senior Notes due 2007 under an indenture between the Company and a bank as trustee. The 8% Senior Notes pay interest semi-annually in arrears on June 15 and December 15 of each year. The 8% Senior Notes are general unsecured obligations of the Company, are non-callable for a five-year period, and are senior to any future subordinated indebtedness of the Company. Proceeds from the sale of the 8% Senior Notes were used to repurchase $84.7 million (94%) of its outstanding 10 3/4% Senior Notes due 2003. -32- 33 The Company's revolving receivables-backed credit facility (the "Receivables Financing Program") provides the Company with an aggregate maximum borrowing capacity of $65.0 million (subject to a borrowing base), with a letter of credit sub-limit of $35.0 million. The term of the Receivables Financing Program is five years with a renewal option. As of May 31, 1999, the total availability under the Receivables Financing Program was $65.0 million, there were no borrowings and letters of credit amounting to $9.8 million were outstanding. Wyman-Gordon Limited, the Company's subsidiary located in Livingston, Scotland, entered into a credit agreement ("the U.K. Credit Agreement") with Clydesdale Bank PLC ("Clydesdale") effective June 22, 1998. The maximum borrowing capacity under the U.K. Credit Agreement is #2,000,000 (approximately $3,200,000) with separate letter of credit and guarantee limits of #1,000,000 (approximately $1,600,000) each. Borrowings bear interest at 1% over Clydesdale's base rate. In the event that borrowings by way of overdraft are allowed to exceed the agreed limit, interest on the excess borrowings will be charged at the rate of 1.5% per annum over Clydesdale's base rate. The U.K. Credit Agreement is secured by all present and future assets of Wyman-Gordon Limited (including without limitation, accounts receivable, inventory, property, plant and equipment, intellectual property, intercompany loans, and other real and personal property). The U.K. Credit Agreement contains covenants representations and warranties customary for such facilities. There were no borrowings outstanding at May 31, 1999 or May 31, 1998. At May 31, 1999, and May 31, 1998, Wyman-Gordon Limited had outstanding #1,069,000 (approximately $1,710,000), and #975,000 (approximately $1,590,000) respectively, of letters of credit or guarantees under the U.K. Credit Agreement. The primary sources of liquidity available to the Company to fund operations and other future expenditures include available cash ($73.9 million at May 31, 1999), borrowing availability under the Company's Receivables Financing Program, cash generated by operations and reductions in working capital requirements through planned inventory reductions and accounts receivable management. The Company believes that it has adequate resources to provide for its operations and the funding of restructuring, capital and environmental expenditures. IMPACT OF INFLATION The Company's earnings may be affected by changes in price levels and in particular, changes in the price of basic metals. The Company's contracts generally provide for fixed prices for finished products with limited protection against cost increases. The Company would therefore be affected by changes in prices of the raw materials during the term of any such contract. The Company attempts to minimize this risk by entering into fixed price arrangements with raw material suppliers and, where possible, negotiating price escalators into its customer contracts to offset a portion of raw material cost increases. -33- 34 ACCOUNTING AND TAX MATTERS Reporting Comprehensive Income: In fiscal year 1999, the Company adopted Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes standards for reporting and display of comprehensive income and its components. The Company has reclassified all years presented to reflect accumulated other comprehensive income and its components in the consolidated statements of comprehensive income. Segment Information: In fiscal year 1999, the Company adopted Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which revises reporting and disclosure requirements for operating segments. The Statement requires that the Company present segment data based on the way that management organizes the businesses within the Company for making operating decisions and assessing performance. Pensions and Other Post Retirement Benefits: In fiscal year 1999, the Company adopted Statement No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132") which revises disclosures about pension and other postretirement benefits. Accounting for Derivative Instruments and Hedging Activities: In June, 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 is not expected to have material impact on the Company's consolidated financial statements. This Statement is effective for fiscal years beginning after June 15, 2000. The Company will adopt this accounting standard as required in fiscal 2001. YEAR 2000 The Year 2000 computer issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the computer programs in the Company's computer systems and plant equipment systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. -34- 35 The Company's overall Year 2000 project approach and status is as follows: ESTIMATED STATE OF TIMETABLE DESCRIPTION OF APPROACH COMPLETION FOR COMPLETION Computer Systems: Assess systems for possible Year 2000 impact 100% Completed Modify or replace non-compliant systems 90% September 30, 1999 Test systems with system clocks set at current date 90% September 30, 1999 Test systems off-line with system clocks set at various Year 2000 related critical dates 90% September 30,1999 Plant Equipment: Computer-dependent plant equipment assessment and compliance procedures performed 90% October 30, 1999 The Company has completed a comprehensive inventory of substantially all computer systems and programs. All hardware required for stand alone testing of systems has been installed in order to perform off-line testing for Year 2000 program compliance. The Company has identified all software supplied by outside vendors that is not Year 2000 compliant. With respect to approximately 90% such non-compliant software the Company has acquired the most recent release and is currently testing such versions for Year 2000 compliance. All software developed in-house has been reviewed and necessary modifications are in process. In addition to assessing the Company's Year 2000 readiness, the Company has also undertaken an action plan to assess and monitor the progress of third-party vendors in resolving Year 2000 issues. To date, the Company has generated correspondence to each of its third-party vendors to assure their Year 2000 readiness. At this time, correspondence received and communication with the Company's major suppliers indicates Year 2000 readiness plans are currently being developed and monitored. The Company is using both internal and external resources to reprogram, or replace, and test software for Year 2000 modifications. The Year 2000 project is 90% complete and the Company anticipates completing the project by October 30, 1999. Maintenance or modification costs will be expensed as incurred, while the costs of new information technology will be capitalized and amortized in accordance with Company policy. The Company estimates it will cost approximately $1.2 million to make its computer-dependent plant equipment Year 2000 compliant. The total -35- 36 estimated cost of the Year 2000 computer project, including software modifications, consultants, replacement costs for non-compliant systems and internal personnel costs, based on presently available information, is not material to the financial operations of the Company and is estimated at approximately $2.0 million. However, if such modifications and conversions are not made, or are not completed in time, the Year 2000 computer issue could have a material impact on the operations of the Company. The Company is currently assessing Year 2000 contingency plans. The Company has multiple business systems at different locations. In case of the failure of a system at one location, the Company's contingency plan is to evaluate the use of an alternate compliant business system at another location. The Company will continue to assess possible contingency plan solutions. The forecast costs and the date on which the Company believes it will complete its Year 2000 computer modifications are based on its best estimates, which, in turn, were based on numerous assumptions of future events, including third-party modification plans, continued availability of resources and other factors. The Company cannot be sure that these estimates will be achieved and actual results could differ materially from those anticipated. "FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY" Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995). The words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. In addition, information concerning raw material prices and availability, customer orders and pricing, and industry cyclicality and their impact on gross margins and business trends, as well as liquidity and sales volume are forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Company and may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the following: The Company's ability to successfully negotiate long-term contracts with customers and raw materials suppliers at favorable prices and other terms acceptable to the Company, the Company's ability to obtain required raw materials and to supply its customers on a timely basis and the cyclicality of the aerospace industry. -36- 37 For further discussion identifying important factors that could cause actual results to differ materially from those anticipated in forward-looking statements, see "Business -- The Company," "Customers," "Marketing and Sales," "Backlog," "Raw Materials," "Energy Usage," "Employees," "Competition," "Environmental Regulations," "Product Liability Exposure" and "Legal Proceedings". ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company uses derivative financial instruments to limit exposure to changes in foreign currency exchange rates and interest rates. FOREIGN CURRENCY RISK The Company's subsidiary in Livingston, Scotland enters into foreign exchange contracts to manage risk on transactions conducted in foreign currencies. As discussed in the "Commitments and Contingencies" footnote, the Company had several foreign currency hedges in place at May 31, 1999 to reduce such exposure. The potential loss in fair value on such financial instruments from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates would not have been material to the financial position of the Company as of the end of fiscal year 1999 or fiscal year 1998. INTEREST RATE RISK As discussed in the "Short-Term and Long-Term Debt" footnote, the Company was committed to an interest rate swap on a revolving credit facility at May 31, 1999. If market rates would have averaged 10 percent higher than actual levels in fiscal year 1999, the effect on the Company's interest expense and net income, after considering the effects of the interest swap contract would not have been material. There were no borrowings under the Company's WGRC Revolving Credit Facility or the U.K. Credit Agreement during any period in fiscal years 1999 or 1998. As such, if market rates would have averaged 10 percent higher than actual levels in fiscal years 1999 and 1998, there would have been no impact to interest expense or net income as reported. -37- 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT To the Stockholders of Wyman-Gordon Company: We have prepared the financial statements included herein and are responsible for all information and representations contained therein. The financial statements were prepared in accordance with generally accepted accounting principles appropriate in the circumstances, based on our best estimates and judgements. Wyman-Gordon maintains accounting and internal control systems that are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce records adequate for preparation of financial information. These systems are established and monitored in accordance with written policies that set forth management's responsibility for proper internal controls and the adequacy of these controls is subject to continuing independent review by our external auditors, Ernst & Young LLP. To assure the effective administration of internal control, we carefully select and train our employees, develop and disseminate written policies and procedures and provide appropriate communication channels. We believe that it is essential for the Company to conduct its business affairs in accordance with the highest ethical standards. The financial statements have been audited by Ernst & Young LLP, Independent Auditors, in accordance with generally accepted auditing standards. In connection with their audit, Ernst & Young LLP has developed an understanding of our accounting and financial controls, and conducted such tests and related procedures as it considers necessary to render their opinion on the financial statements. The financial data contained in these financial statements were subject to review by the Audit Committee of the Board of Directors. The Audit Committee meets periodically during the year with Ernst & Young LLP and with management to review accounting, auditing, internal control and financial reporting matters. We believe that our policies and procedures provide reasonable assurance that operations are conducted in conformity with applicable laws and with our commitment to a high standard of business conduct. /S/ DAVID P. GRUBER David P. Gruber Chairman and Chief Executive Officer /S/ DAVID J. SULZBACH David J. Sulzbach Vice President, Finance, Corporate Controller and Principal Accounting Officer -38- 39 WYMAN-GORDON COMPANY REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Stockholders of Wyman-Gordon Company: We have audited the accompanying consolidated balance sheets of Wyman-Gordon Company and subsidiaries as of May 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, cash flows and comprehensive income for each of the three years in the period ended May 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wyman-Gordon Company and subsidiaries at May 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 1999 in conformity with generally accepted accounting principles. /S/ERNST & YOUNG LLP Boston, Massachusetts June 23, 1999 -39- 40 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED, EXCEPT PER-SHARE DATA) Revenue $849,261 $752,913 $608,742 Cost of goods sold 715,902 637,267 511,108 Selling, general and administrative expenses 56,662 51,654 44,229 Other charges (credits) 13,745 (4,900) 23,083 786,309 684,021 578,420 Income from operations 62,952 68,892 30,322 Other deductions (income): Interest expense 14,234 12,548 10,822 Miscellaneous, net 1,223 907 (4,843) 15,457 13,455 5,979 Income before income taxes 47,495 55,437 24,343 Provision (benefit) for income taxes 10,467 16,355 (25,680) Income before extraordinary item 37,028 39,082 50,023 Extraordinary loss, net of income tax benefit (Note E) - 5,192 - Net income $ 37,028 $ 33,890 $ 50,023 Basic net income per share: Income before extraordinary item $ 1.02 $ 1.07 $ 1.40 Extraordinary item, net of tax - (.14) - Net income $ 1.02 $ .93 $ 1.40 Diluted net income per share: Income before extraordinary item $ 1.01 $ 1.05 $ 1.35 Extraordinary item, net of tax - (.14) - Net income $ 1.01 $ .91 $ 1.35 Shares used to compute net income per share: Basic 36,149 36,331 35,825 Diluted 36,589 37,357 37,027 The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -40- 41 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, MAY 31, 1999 1998 (000'S OMITTED) ASSETS Cash and cash equivalents $ 73,867 $ 64,561 Accounts receivable 156,042 124,658 Inventories 97,603 133,134 Prepaid expenses 6,768 6,710 Deferred income taxes 6,400 - Total current assets 340,680 329,063 Property, plant and equipment, net 214,604 197,363 Intangible assets 18,296 19,461 Other assets 8,130 5,723 Total assets $581,710 $551,610 LIABILITIES Current portion of long-term debt $ 965 $ 3,017 Accounts payable 52,561 51,590 Accrued liabilities and other 57,127 50,692 Total current liabilities 110,653 105,299 Restructuring, integration, disposal and environmental 15,444 17,314 Long-term debt 164,338 162,573 Pension liability 1,771 2,908 Deferred income taxes and other 13,857 14,066 Postretirement benefits 41,885 44,630 STOCKHOLDERS' EQUITY Preferred stock, no par value: Authorized 5,000,000 shares; none issued - - Common stock, par value $1.00 per share: Authorized 70,000,000 shares; issued 37,052,720 37,053 37,053 Capital in excess of par value 27,360 28,037 Retained earnings 185,875 148,847 Accumulated other comprehensive income 1,267 1,465 Treasury stock, 1,417,737 and 543,077 shares at May 31, 1999 and 1998 (17,793) (10,582) Total stockholders' equity 233,762 204,820 Total liabilities and stockholders' equity $581,710 $551,610 The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -41- 42 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) OPERATING ACTIVITIES: Net income $ 37,028 $ 33,890 $ 50,023 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on debt retirement - 5,192 - Depreciation and amortization 27,576 23,473 20,872 Deferred income taxes (6,400) 6,500 (6,500) Gain on sale of operating assets (5,000) - - Other charges 9,779 - 19,145 Losses on equity investment - - 2,734 Change in assets and liabilities: Accounts receivable (31,409) (1,547) (24,430) Inventories 35,531 (38,219) (27,235) Prepaid expenses and other assets (2,421) 727 4,754 Accrued restructuring, integration, disposal and environmental (4,385) (3,536) (3,950) Income and other taxes payable 5,804 (123) (5,241) Accounts payable and accrued and other liabilities (6,318) (11,931) 17,839 Net cash provided by operating activities 59,785 14,426 48,011 INVESTING ACTIVITIES: Investment in acquired subsidiaries - (15,460) - Capital expenditures (47,380) (48,017) (34,123) Proceeds from sale of fixed assets 6,660 869 559 Other, net 716 (221) (921) Net cash (used) by investing activities (40,004) (62,829) (34,485) FINANCING ACTIVITIES: Payment to Cooper Industries, Inc. (2,300) (2,300) - Net borrowings (repayments) of debt (287) 55,463 5,923 Net proceeds from issuance of common stock 5,214 12,433 7,325 Repurchase of common stock (13,102) (4,603) (4,937) Net cash provided (used) by financing activities (10,475) 60,993 8,311 Increase in cash 9,306 12,590 21,837 Cash, beginning of period 64,561 51,971 30,134 Cash, end of period $ 73,867 $ 64,561 $ 51,971 The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -42- 43 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CAPITAL COMMON STOCK IN SHARES PAR EXCESS OF RETAINED ISSUED VALUE PAR VALUE EARNINGS (000'S OMITTED) Balance, May 31, 1996 37,053 $37,053 $33,291 $64,934 Net income 50,023 Stock plans (5,838) Stock repurchase Savings/Investment Plan match 155 Pension equity adjustment Currency translation Balance, May 31, 1997 37,053 37,053 27,608 114,957 Net income 33,890 Stock plans 12 Stock repurchase Savings/Investment Plan match 417 Pension equity adjustment Currency translation Balance, May 31, 1998 37,053 37,053 28,037 148,847 Net income 37,028 Stock plans (311) Stock repurchase Savings/Investment Plan match (366) Pension equity adjustment Currency translation Balance, May 31, 1999 37,053 $37,053 $27,360 $185,875 </TABLE The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -43- 44 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ACCUMULATED OTHER COMPREHENSIVE TREASURY INCOME STOCK TOTALS (000'S OMITTED) Balance, May 31, 1996 $ 719 $(26,054) $109,943 Net income 50,023 Stock plans 11,106 5,268 Stock repurchase (4,937) (4,937) Savings/Investment Plan match 1,902 2,057 Pension equity adjustment (23) (23) Currency translation 2,067 2,067 Balance, May 31, 1997 2,763 (17,983) 164,398 Net income 33,890 Stock plans 9,982 9,994 Stock repurchase (4,603) (4,603) Savings/Investment Plan match 2,022 2,439 Pension equity adjustment (901) (901) Currency translation (397) (397) Balance, May 31, 1998 1,465 (10,582) 204,820 Net income 37,028 Stock plans 2,973 2,662 Stock repurchase (13,102) (13,102) Savings/Investment Plan match 2,918 2,552 Pension equity adjustment 663 663 Currency translation (861) (861) Balance, May 31, 1999 $ 1,267 $(17,793) $233,762 </TABLE The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -44- 45 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) Net income $37,028 $33,890 $50,023 Other comprehensive income (loss): Minimum pension liability adjustment 663 (901) (23) Foreign currency translation adjustments (861) (397) 2,067 Total other comprehensive income (loss) (198) (1,298) 2,044 Total comprehensive income $36,830 $32,592 $52,067 The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -45- 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company is engaged principally in the design, engineering, production and marketing of high-technology forged and investment cast metal and composite components used for a wide variety of aerospace and power generation applications. The Company maintains its books using a 52/53 week year ending on the Saturday nearest to May 31. For purposes of the consolidated financial statements, the year-end is stated at May 31. The years ended May 31, 1999, 1998 and 1997 consisted of 52 weeks. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition: Sales and income are recognized at the time products are shipped. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Where appropriate, prior year amounts have been reclassified to permit comparison. Cash and Cash Equivalents: Cash equivalents include short-term investments with maturities of less than three months at the time of investment. Inventories: Inventories are valued at both the lower of first-in, first-out (FIFO) cost or market, or for certain forgings raw material and work-in-process inventories, the last-in, first-out (LIFO) method. On certain orders, usually involving lengthy raw material procurement and production cycles, progress payments received from customers are reflected as a reduction of inventories. Product repair costs are expensed as incurred. Long-Term, Fixed Price Contracts: A substantial portion of the Company's revenues is derived from long-term, fixed price contracts with major engine and aircraft manufacturers. These contracts are typically "requirements" contracts under which the purchaser commits to purchase a given portion of its requirements of a particular component from the Company. Actual purchase quantities are typically not determined until shortly before the year in which products are to be delivered. Losses on such contracts are provided when available information indicates that the sales price is less than a fully allocated cost projection. -46- 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciable Assets: Property, plant and equipment, including significant renewals and betterments, are capitalized at cost and are depreciated on the straight-line method. Generally, depreciable lives range from 10 to 20 years for land improvements, 10 to 40 years for buildings and 5 to 15 years for machinery and equipment. Tooling production costs are primarily classified as machinery and equipment and are capitalized at cost less associated reimbursement from customers and depreciated over 5 years. Depreciation expense amounted to $26,871,000, $22,835,000 and $20,168,000 in the years ended May 31, 1999, 1998 and 1997, respectively. Bank Fees: Bank fees and related costs of obtaining credit facilities are recorded as other assets and amortized over the term of the facilities. Net Income per Share: The Company reports earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic per-share data are computed based on the weighted average number of common shares outstanding during each year. Diluted per-share data include common stock equivalents related to outstanding stock options unless their inclusion would be antidilutive. Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing. The Company has approximately 1,140 active customers. However, the Company's accounts receivable are concentrated with a small number of Fortune 500 companies with whom the Company has long-standing relationships. Accordingly, management considers credit risk to be low. Five customers accounted for 48.6%, 50.5% and 47.7% of the Company's revenues during the years ended May 31, 1999, 1998 and 1997, respectively. Currency Translation: For foreign operations, the local currency is the functional currency. Assets and liabilities are translated at year-end exchange rates, and statement of income items are translated at the average exchange rates for the year. Translation adjustments are reported in accumulated other comprehensive income as a separate component of stockholders' equity, which also includes exchange gains and losses on certain intercompany balances of a long-term investment nature. Research and Development: Research and development expenses, including related depreciation, amounted to $2,947,000, $3,290,000 and $2,895,000 for the years ended May 31, 1999, 1998 and 1997, respectively. -47- 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangible Assets: Intangible assets consist primarily of costs of acquired businesses in excess of net assets acquired and are amortized on a straight line basis over periods up to 35 years. On a periodic basis, the Company estimates the future undiscounted cash flows of the businesses to which the costs of acquired businesses in excess of net assets acquired relate in order to ensure that the carrying value of such intangible asset has not been impaired. Accounting for Stock-Based Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), in accounting for its employee stock option plans because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Impairment of Long-Lived Assets: The Company adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 prescribes the accounting for the impairment of long-lived assets that are to be held and used in the business and similar assets to be disposed of. The adoption has not had a material effect on earnings or the financial position of the Company. Reporting Comprehensive Income: In fiscal year 1999, the Company adopted Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes standards for reporting and display of comprehensive income and its components. The Company has reclassified all years presented to reflect accumulated other comprehensive income and its components in the consolidated statements of comprehensive income. The components that make up accumulated other comprehensive income as of May 31, 1999, 1998 and 1997 are as follows: MAY 31, MAY 31, May 31, 1999 1998 1997 (000's OMITTED) Accumulated Pension liability adjustment $ (315) $ (976) $ (76) Accumulated foreign currency translation 1,582 2,441 2,839 Total accumulated other comprehensive income $1,267 $1,465 $2,763 -48- 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) B. ACQUISITIONS 1999 On July 31, 1998, the Company and Titanium Metals Corporation ("TIMET") combined their respective titanium casting businesses into a jointly-owned venture. The joint venture, 80.1% owned by Wyman-Gordon and 19.9% owned by TIMET, consists primarily of Wyman-Gordon's titanium casting business located in Franklin, New Hampshire, and TIMET's titanium casting business located in Albany, Oregon. The joint venture produces investment castings primarily for the aerospace market and seeks to develop new applications for titanium castings. The joint venture and its operating results from the date of acquisition are not material to the consolidated financial statements of the Company. In connection with the formation of the joint venture, Wyman-Gordon exchanged the operating assets from its Millbury, Massachusetts, vacuum arc remelting facility, which produces titanium ingots for further processing into finished forgings, for $5.0 million and similar operating assets of TIMET's titanium casting business, valued at approximately $7.0 million. The exchange was treated as a nonmonetary exchange of assets, and a gain was recognized for the cash received. In addition, Wyman- Gordon and TIMET have entered into a ten-year supply agreement pursuant to which TIMET will supply a portion of Wyman-Gordon's requirements for titanium raw materials for its forging and casting operations. 1998 On April 9, 1998, the Company acquired International Extruded Products, LLC ("IXP"), a specialty manufacturer of extruded seamless wall pipe, for approximately $15,460,000. The acquisition was financed through operating cash. The acquisition was accounted for as a purchase and the net assets and results of operations have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. This acquisition did not materially impact consolidated results, therefore no pro forma information is provided. -49- 50 C. BALANCE SHEET INFORMATION Components of selected captions in the consolidated balance sheets follow: MAY 31, MAY 31, 1999 1998 (000'S OMITTED) PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements $132,834 $133,401 Machinery and equipment 359,786 330,337 Under construction 23,555 27,065 516,175 490,803 Less: accumulated depreciation 301,571 293,440 $214,604 $197,363 INTANGIBLE ASSETS: Pension intangible $ 1,387 $ 1,847 Costs in excess of net assets acquired 28,786 28,786 Less: accumulated amortization (11,877) (11,172) $ 18,296 $ 19,461 OTHER ASSETS: Cash surrender value of Company-owned life insurance policies $ 1,170 $ 1,105 Other 6,960 4,618 $ 8,130 $ 5,723 ACCRUED LIABILITIES AND OTHER: Accrued payroll and benefits $ 13,254 $ 12,520 Restructuring, integration, disposal and environmental reserves 12,211 5,330 Other 31,662 32,842 $ 57,127 $ 50,692 D. INVENTORIES Inventories consisted of the following: MAY 31, MAY 31, 1999 1998 (000'S OMITTED) Raw Material $ 36,849 $ 50,050 Work-in-process 65,654 92,136 Other 3,204 4,221 105,707 146,407 Less progress payments 8,104 13,273 $ 97,603 $133,134 -50- 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At May 31, 1999 and 1998 approximately 33% and 38%, respectively, of inventories are valued at LIFO cost. If all inventories valued at LIFO cost had been valued at FIFO cost or market which approximates current replacement cost, inventories would have been $16,446,000 and $18,262,000 higher than reported at May 31, 1999 and 1998, respectively. LIFO inventory quantities decreased in the year ended May 31, 1999. LIFO inventory quantities increased in each of the years ended May 31, 1998 and 1997, respectively. Inflation and deflation have negative and positive effects on income from operations, respectively. The effects of lower quantities and deflation (inflation) were as follows: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) Lower quantities $1,398 $ - $ - Deflation (inflation) 418 - (1,600) Net increase (decrease) to income from operations $1,816 $ - $(1,600) E. SHORT-TERM AND LONG-TERM DEBT Short-term and long-term debt consisted of the following: MAY 31, MAY 31, 1999 1998 (000'S OMITTED) Current portion of long-term debt $ 965 $ 3,017 Long-term debt: 8% Senior Notes $150,000 $150,000 10 3/4% Senior Notes 5,275 5,275 Industrial Revenue Bond 4,800 5,600 Revolving Credit Facility, fixed rate of 6.48% under a swap agreement at May 31, 1999, variable rate of 5.7% (LIBOR plus .75%) at June 2, 1999, expiring fiscal 2002 4,000 - Other 263 1,698 Total long-term debt $164,338 $162,573 -51- 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During fiscal year 1998, the Company issued $150,000,000 of 8% Senior Notes due 2007 ("8% Senior Notes") under an indenture between the Company and a bank as trustee. The 8% Senior Notes pay interest semi-annually in arrears on June 15 and December 15 of each year. The 8% Senior Notes are general unsecured obligations of the Company, are non-callable for a five year period, and are senior to any future subordinated indebtedness of the Company. Proceeds from the sale of the 8% Senior Notes were used to repurchase $84,725,000 (94%) of its outstanding 10 3/4% Senior Notes due 2003 ("10 3/4% Senior Notes"). In conjunction with the extinguishment of the 10 3/4% Senior Notes, the Company recorded an extraordinary loss, net of income tax benefit of $2,920,000, amounting to $5,192,000. The extraordinary after-tax loss relates to (i) the premium related to the retirement of the 10 3/4% Senior Notes, (ii) the write-off of certain deferred debt issue expenses and (iii) fees and expenses paid by the Company with respect to the tender offer for the 10 3/4% Senior Notes. The estimated fair value of the combined 8% and 10 3/4% Senior Notes was $151,952,000 and $157,067,000 at May 31, 1999 and 1998, respectively, based on third party valuations. During fiscal year 1997, the Company issued an Industrial Revenue Bond (the "IRB") for the construction of a facility in Montrose, Colorado amounting to $6,000,000. The IRB bears an interest rate approximating 3.5%, fluctuating weekly. The fair value approximates market value. The Company maintains a letter of credit to collateralize the IRB. On May 20, 1994, the Company initiated, through a subsidiary, Wyman-Gordon Receivables Corporation ("WGRC"), a revolving credit agreement with a group of five banks ("Receivables Financing Program"). WGRC is a separate corporate entity from Wyman-Gordon Company and its other subsidiaries, with its own separate creditors. WGRC's business is the purchase of accounts receivable from Wyman-Gordon Company and certain of its subsidiaries ("Sellers"), and neither WGRC on the one hand nor the Sellers (or subsidiaries or affiliates of the Sellers) on the other have agreed to pay or make their assets available to pay creditors of others. WGRC's creditors have a claim on its assets prior to those assets becoming available to any creditors of any of the Sellers. The facility provides for a total commitment by the banks of up to $65,000,000, including a letter of credit sub- facility of up to $35,000,000. Interest on borrowings is charged at LIBOR plus 0.625% or based on the bank's base rate. -52- 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) There were no borrowings outstanding under the Receivables Financing Program at May 31, 1999 and 1998. At May 31, 1999 and 1998, the total availability under the Receivables Financing Program was $65,000,000, there were no borrowings against the available amounts in either year and letters of credit amounting to $9,808,000 and $8,373,000 were outstanding, respectively. Wyman-Gordon Limited, the Company's subsidiary located in Livingston, Scotland, entered into a credit agreement ("the U.K. Credit Agreement") with Clydesdale Bank PLC ("Clydesdale") effective June 22, 1998. The maximum borrowing capacity under the U.K. Credit Agreement is #2,000,000 (approximately $3,200,000) with separate letter of credit and guarantee limits of #1,000,000 (approximately $1,600,000) each. Borrowings bear interest at 1% over Clydesdale's base rate. In the event that borrowings by way of overdraft are allowed to exceed the agreed limit, interest on the excess borrowings will be charged at the rate of 1.5% per annum over Clydesdale's base rate. The U.K. Credit Agreement is secured by all present and future assets of Wyman-Gordon Limited (including without limitation, accounts receivable, inventory, property, plant and equipment, intellectual property, intercompany loans, and other real and personal property). The U.K. Credit Agreement contains covenants representations and warranties customary for such facilities. There were no borrowings outstanding at May 31, 1999 or May 31, 1998. At May 31, 1999, and May 31, 1998, Wyman-Gordon Limited had outstanding #1,069,000 (approximately $1,710,000), and #975,000 (approximately $1,590,000) respectively, of letters of credit or guarantees under the U.K. Credit Agreement. For the years ended May 31, 1999 and 1998, the weighted average interest rate on short-term borrowings was 4.4% and 6.5%, respectively. Annual maturities of long-term debt in the next five years amount to $965,460 for 2000, $897,707 for 2001, $4,907,732 for 2002, $6,132,978 for 2003, $800,000 for 2004 and $151,600,000 thereafter. On June 30, 1998, the Company made a final principal payment of $2,300,000 under the Company's promissory note to Cooper Industries, Inc. provided under the terms of the Stock Purchase Agreement with Cooper Industries, Inc. -53- 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of interest expense are as follows: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) Interest on debt $13,069 $11,319 $ 9,795 Capitalized interest - - (528) Amortization of financing fees and other 1,165 1,229 1,555 Interest expense $14,234 $12,548 $10,822 Total interest paid approximates "Interest on debt" stated in the table above. F. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (CREDITS) Cameron Purchase Cash Costs: In connection with the acquisition of Cameron Forged Products Company ("Cameron"), the Company recorded $7,000,000 for costs related to the relocation of Cameron machinery and dies, severance of Cameron personnel and other costs. All activities associated with these reserves have been completed. 1994 Cameron Integration Costs: The integration of Cameron in May 1994 resulted in the Company's recording an integration restructuring charge totalling $24,100,000 to provide for relocating machinery, equipment, tooling and dies of the Company, relocation and severance costs of Company personnel and the write-down of certain assets of the Company. The reserve was comprised of non-cash charges of $15,800,000 which were fully charged by the end of fiscal year 1995, and a charge of $8,300,000 representing estimated future cash charges. As of May 31, 1999, the Company estimates future cash outlays of approximately $300,000 in the year ended May 31, 2000 and $200,000 thereafter, in accordance with future payments under contractual obligations. -54- 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1997 Restructuring: The Company recorded a charge totalling $11,500,000 which included $4,600,000 to provide for severance and other personnel costs associated with workforce reductions at the Company's Grafton, Massachusetts forging facility, $3,400,000 to write-off and dispose of certain Forging equipment, $2,300,000 to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations and $1,200,000 to consolidate the titanium castings operations. The Company made a total of $3,900,000 of cash charges against these reserves during the years ended May 31, 1999, 1998 and 1997 and estimates that the remaining reserves associated with the disposal of Forging equipment and consolidation of the titanium castings operations will require cash outlays of $2,200,000 in the year ended May 31, 2000 and $300,000 thereafter. -55- 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of charges made or estimated to be made against restructuring, integration and disposal reserves is as follows: FIVE MONTHS ENDED MAY 31, 1994 YEAR THROUGH THE ENDED YEAR ENDED MAY 31, TOTAL MAY 31, 1997 1998 (000'S OMITTED) CAMERON PURCHASE CASH COSTS: Cost of relocating Cameron's machinery and equipment and tooling and dies $ 3,200 $ 2,800 $ 100 Severance of personnel 3,800 3,600 - Total cash charges $ 7,000 $ 6,400 $ 100 1994 CAMERON INTEGRATION COSTS: Movement of machinery, equipment and tooling and dies $ 4,300 $ 3,200 $ 400 Severance and other personnel costs 4,000 3,600 100 Total cash charges $ 8,300 $ 6,800 $ 500 1997 RESTRUCTURING: Cash: Severance and other personnel costs $ 2,200 $ 200 $1,400 Disposal of Forging equipment 2,300 - 400 Castings titanium operations 1,900 700 - Total cash charges 6,400 900 1,800 Non-cash: Severance and other personnel costs 2,400 2,400 - Asset write-off and revaluation 2,700 2,700 - Total non-cash charges 5,100 5,100 - Total 1997 Restructuring charges $11,500 $ 6,000 $1,800 -56- 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR YEAR ENDED ENDED MAY 31, MAY 31, 2000 AND 1999 THEREAFTER (000'S OMITTED) CAMERON PURCHASE CASH COSTS: Cost of relocating Cameron's machinery and equipment and tooling and dies $ 300 $ - Severance of personnel 200 - Total cash charges $ 500 $ - 1994 CAMERON INTEGRATION COSTS: Movement of machinery, equipment and tooling and dies $ 200 $ 500 Severance and other personnel costs 300 - Total cash charges $ 500 $ 500 1997 RESTRUCTURING: Cash: Severance and other personnel costs $ 600 $ - Disposal of Forging equipment 600 1,300 Castings titanium operations - 1,200 Total cash charges 1,200 2,500 Non-Cash: Severance and other personnel costs - - Asset write-off and revaluation - - Total non-cash charges - - Total 1997 Restructuring charges $ 1,200 $2,500 -57- 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other Charges (Credits): Other charges (credits) are as follows: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) Write-off of Australian joint venture $ - $ - $ 2,484 (Recovery) write-off of cash surrender value of company- owned life insurance polices - (4,000) 5,745 (Recovery) write-off of building held for sale - (1,900) 1,900 Houston accident costs - - 1,200 Houston accident claim settlement costs 12,955 - - Gain on sale of operating assets of Millbury facility (5,000) - - Severance and asset write-down 5,790 - - Other - 1,000 250 $13,745 $(4,900) $11,579 During fiscal year 1999, the Company recorded a charge totalling $5,790,000 which included $4,700,000 to provide for severance and other personnel costs associated with company-wide headcount reductions and a charge of $1,090,000 to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations. The Company made a total of $1,800,000 of cash charges against this reserve during fiscal year 1999 and estimates the remaining severance and other personnel costs will require a cash outlay of $2,900,000 in the year ending May 31, 2000. G. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive, stringent and changing federal, state and local environmental laws and regulations, including those regulating the use, handling, storage, discharge and disposal of hazardous substances and the remediation of alleged environmental contamination. Accordingly, the Company is involved from time to time in administrative and judicial inquiries and proceedings regarding environmental matters. Nevertheless, the Company believes that compliance with these laws and regulations will not have a material adverse effect on the Company's operations as a whole. However, it is not possible to predict accurately the amount or timing of costs of any future environmental remediation requirements. The Company continues to design and implement a system of programs and facilities for the management of its raw materials, production processes and industrial waste to promote compliance with -58- 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) environmental requirements. As of May 31, 1999, aggregate environmental reserves amounted to $15.5 million, which includes expected cleanup costs estimated between $4.4 million and $5.4 million upon the eventual sale of the Worcester, Massachusetts facility, certain environmental issues, including the remediation of on-site landfills, at the Houston, Texas facility amounting to approximately $3.0 million, $4.4 million in remediation projects at the Grafton, Massachusetts facility, $0.8 million for remediation at the Buffalo, New York facility and $1.1 million for various Superfund sites. There can be no assurance that the actual costs of remediation will not eventually materially exceed the amount presently accrued. Pursuant to an agreement entered into with the U.S. Air Force upon the acquisition of the Grafton facility from the federal government in 1982, the Company agreed to make expenditures totaling $20.8 million for environmental management and remediation at that site, of which $3.3 million remained as of May 31, 1999. Approximately one-half of the remaining Air Force projects are capital in nature and the remainder are covered by existing reserves. These expenditures will not resolve all of the Company's obligations to federal and state regulatory authorities, who are not parties to the agreement, however, and the Company expects to incur an additional amount, currently estimated at approximately $2.8 million, to comply with current federal and state environmental requirements governing the investigation and remediation of contamination at the site. The Company's Grafton facility was formerly included in the U.S. Nuclear Regulatory Commission's ("NRC") May 1992 Site Decommissioning Management Plan ("SDMP") for low-level radioactive waste as the result of the disposal of magnesium thorium alloys at the facility in the 1960s and early 1970s under license from the Atomic Energy Commission. On March 31, 1997, the NRC informed the Company that jurisdiction for the Grafton site had been transferred to the Commonwealth of Massachusetts Department of Public Health (the "DPH") and that the Grafton facility had been removed from the SDMP. Although it is unknown what specific remediation and disposal requirements may be imposed on the Company by the DPH, the Company believes that a reserve of $1.5 million, included within the $2.8 million noted above, is sufficient to cover all costs. There can be no assurance, however, that such reserve will be adequate to cover any obligations that the DPH may ultimately impose on the Company. The Company, together with numerous other parties, has been named a PRP under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for the cleanup of the following Superfund sites: Operating Industries, Monterey Park, California; PSC Resources, Palmer, Massachusetts; the Harvey GRQ site, Harvey, Illinois; and the Gemme/Fournier site, Leicester, Massachusetts. The Company believes that a reserve of $1.1 million recorded on its books is sufficient to cover all costs. -59- 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At the Gemme/Fournier site, a proposed agreement would allocate 33% of the cleanup costs to the Company. In September 1995, a consulting firm retained by the PRP group made a preliminary remediation cost estimate of $1.4 million to $2.8 million. The Company's insurance company is defending the Company's interests, and the Company believes that any recovery against the Company would be offset by recovery of insurance proceeds. The Company expects to incur between $4.4 and $5.4 million in cleanup expenses upon the planned sale of its Worcester, Massachusetts facility to remedy certain contamination discovered on site. The Massachusetts Department of Environmental Protection has classified the site as a Tier II site under the Massachusetts Contingency Plan. H. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has a defined benefit pension plan covering substantially all employees. Benefits are generally based on years of service and a fixed monthly rate or average earnings during the last years of employment. Pension plan assets are invested in equity and fixed income securities, pooled funds including real estate funds and annuities. Company contributions are determined based upon the funding requirements of U.S. and other governmental laws and regulations. The Company also provides most retired employees with health care and life insurance benefits. The majority of these health care and life insurance benefits are provided through insurance companies, some of whose premiums are computed on a cost plus basis. The Company has no plans for funding the liability and will continue to pay for retiree medical costs as they occur. In fiscal year 1999, the Company adopted Statement No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132") which revises disclosures about pension and other postretirement benefits. The following information is provided in accordance with the requirements of the statement for the plans discussed above. -60- 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. Pension and Postretirement Benefit Plans POSTRETIREMENTS PENSION BENEFITS BENEFITS YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, MAY 31, 1999 1998 1999 1998 (000's OMITTED) Change in plan assets: Beginning fair value of plan assets $195,987 $164,977 $ - $ - Actual return on plan assets 12,299 45,296 - - Benefits paid (14,499) (14,286) - - Ending fair value of plan assets $193,787 $195,987 $ - $ - Change in benefit obligations: Beginning benefit obligations $180,707 $169,965 $ 46,638 $ 46,443 Service cost 5,326 4,961 166 160 Interest cost 11,694 12,179 3,063 3,372 Amendments - - (271) - Special termination costs (benefits) 522 - (234) - Actuarial (gains) losses (1,054) 8,794 657 2,476 Benefits paid (15,490) (15,192) (5,756) (5,813) Ending benefit obligations $181,705 $180,707 $ 44,263 $ 46,638 Reconciliation to balance sheet amounts: Funded status of the plan (underfunded) $ 12,083 $ 15,280 $(44,263) $(46,638) Unrecognized actuarial net (gain) loss (24,057) (28,221) 2,020 1,335 Unrecognized prior service cost 6,462 7,503 358 673 Unrecognized transition obligation 1,271 2,021 - - Accrued benefit cost $ (4,241) $ (3,417) $(41,885) $(44,630) -61- 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POSTRETIREMENTS PENSION BENEFITS BENEFITS YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, MAY 31, 1999 1998 1999 1998 (000's OMITTED) Amounts recognized in the balance sheets: Prepaid benefit cost $ 3,842 $ 3,750 $ - $ - Accrued benefit liability (9,785) (9,990) - - Pension intangible asset 1,387 1,847 - - Accumulated other comprehensive (income) loss 315 976 - - Accrued retirement benefits obligation - - (41,885) (44,630) Accrued benefit cost $(4,241) $(3,417) $(41,885) $(44,630) Included in the aggregated data in the above tables are amounts applicable to the Company's pension plans with accumulated benefit obligations in excess of plan assets. The Company maintains two unfunded pension plans and the amounts related to such plans were as follows: YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1999 1998 (000's OMITTED) Projected benefit obligation $ 11,952 $ 11,202 Accumulated benefit obligation $ 9,785 $ 9,990 -62- 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assumptions used in determining the benefit obligations in fiscal years 1999 and 1998 were as follows: POSTRETIREMENTS PENSION BENEFITS BENEFITS YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, MAY 31, 1999 1998 1999 1998 Discount rate 6.75% 7.00% 6.75% 7.00% Expected return on plan assets 10.50% 10.00% - - Rate of compensation increase 3.00% 4.00-5.00% - - The assumed health care cost trend rate has a significant effect on the amounts reported. For the year ended May 31, 1999, the medical trend rates for indemnity and Health Maintenance Organization ("HMO") inflationary costs are 6.0% and 4.0%, respectively. The rates for indemnity and HMO for the year ended May 31, 2000 are 5.5% and 4.0% and are ultimately estimated at 5.0% and 4.0%, respectively, for the year ended May 31, 2001. 1 PERCENTAGE 1 PERCENTAGE POINT INCREASE POINT DECREASE (000's OMITTED) Effect on total of service and interest cost components $ 235 $ (214) Effect on postretirement benefit obligation $3,074 $(2,816) The net cost for the Company's U.S. pension plans consisted of the following components: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000's OMITTED) Service cost $ 5,326 $ 4,961 $ 4,298 Interest cost 11,694 12,179 11,302 Expected return on plan assets (17,653) (14,611) (14,658) Amortization of prior service cost 1,041 1,041 820 Amortization of transitional (asset) or obligation 750 750 750 Recognized actuarial loss 135 97 6 Enhanced benefit package for early retirement 522 - 3,775 Net pension cost $ 1,815 $ 4,417 $ 6,293 -63- 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The cost of postretirement benefits other than pensions consisted of the following components: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000's OMITTED) Service cost $ 166 $ 160 $ 380 Prior service cost 44 61 - Benefit from early retirement package (234) - (1,375) Interest cost 3,062 3,372 3,550 Net amortization and deferral - - 409 Postretirement benefit cost $3,038 $3,593 $ 2,964 U.K. Pension Plan YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1999 1998 (000's OMITTED) Change in Plan Assets: Beginning fair value of plan assets $26,686 $21,873 Actual return on plan assets 1,259 4,595 Company contributions 840 776 Plan participants' contributions 418 388 Benefits and expenses paid (1,152) (445) Ending fair value of plan assets $28,051 $27,187 YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1999 1998 (000's OMITTED) Change in Benefit Obligations: Beginning benefit obligations $25,306 $21,035 Service cost 896 737 Interest cost 1,568 1,674 Plan participants' contributions 418 388 Liability loss 2,558 2,183 Benefits paid (942) (236) Ending benefit obligation $29,804 $25,781 -64- 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1999 1998 (000's OMITTED) Reconciliation to balance sheet amounts: Funded status of the plan (underfunded) $(1,753) $ 1,406 Unrecognized net loss/(gain) 2,042 (1,322) Prepaid pension cost $ 289 $ 84 The assumptions used in determining the benefit obligation in fiscal years 1999 and 1998 were as follows: YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1999 1998 Discount rate 5.75% 6.25% Expected return on plan assets 6.25% 6.25% Rate of compensation increase 3.25% 3.25% Pension expense for the U.K. pension plan consisted of the following components: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) Service cost $ 924 $ 746 $ 629 Interest cost 1,617 1,695 1,507 Expected return on assets (1,739) (1,800) (1,640) Net pension expense $ 802 $ 641 $ 496 -65- 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Defined Contribution Plan The Company also makes a 401(k) plan available to most full-time employees. Employer contributions to the defined contribution plan are made at the Company's discretion and are reviewed periodically. The Company made cash contribution of $704,000 for the year ended May 31, 1999. There were no cash contributions in the years ended May 31, 1998 and 1997. Additionally, for the years ended May 31, 1999, 1998 and 1997, the Company contributed 176,617, 100,409 and 97,696 shares of its common stock from Treasury to its defined contribution plan, respectively, and recorded expense relating thereto of $2,552,000, $2,439,000 and $2,057,000, respectively. I. FEDERAL, FOREIGN AND STATE INCOME TAXES The components of the net provision (benefit) for income taxes for the years ended May 31, 1999, 1998 and 1997 are as follows: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000's OMITTED) Current tax provision: Federal $13,864 $ 5,778 $ 7,900 State 2,000 1,250 680 Foreign 1,003 2,827 2,170 16,867 9,855 10,750 Deferred tax (credit) provision: Federal (5,600) 6,500 (34,080) State (800) - (480) Foreign - - (1,870) (6,400) 6,500 (36,430) Net provision (benefit) for income taxes $10,467 $16,355 $(25,680) In the year ended May 31, 1999, the Company provided $10,467,000 for income taxes. In the year ended May 31, 1998, the Company provided $16,355,000 for income taxes, net of a tax benefit of approximately $1,800,000 relating to the utilization of NOL carryforwards. In fiscal year 1998, the Company recorded a $2,920,000 tax benefit against the extraordinary loss of $8,112,000 associated with the early extinguishment of the Company's 10 3/4% Senior Notes. -66- 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for income taxes before extraordinary item is at a rate other than the federal statutory tax rate for the following reasons: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) Provision at the applicable U.S. federal statutory tax rate $16,623 $19,403 $ 8,442 Benefit from net permanent tax differences (510) (4,059) - Benefit of higher statutory tax rates in applicable prior years realized in Section 172(f) carryback claims - - (2,700) State income taxes 1,300 1,640 200 (Decrease) increase of deferred tax asset valuation allowance (6,400) 1,168 (30,626) Other (546) (1,797) (996) Income tax provision (benefit) before extraordinary loss tax benefit $10,467 $16,355 $(25,680) The principal components of deferred tax assets and liabilities were as follows: MAY 31, 1999 MAY 31, 1998 (000'S OMITTED) DEFERRED TAX ASSETS Provision for postretirement benefits $ 17,173 $ 18,298 Net operating loss carryforwards 6,714 4,667 Restructuring provisions 11,120 8,406 Alternative minimum tax carryforward credit 2,781 5,964 Other 9,145 8,205 46,933 45,540 Valuation allowance (26,613) (32,269) 20,320 13,271 DEFERRED TAX LIABILITIES Accelerated depreciation 13,594 12,409 Other 326 862 13,920 13,271 Net deferred tax asset $ 6,400 $ - -67- 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has recorded a valuation allowance for deferred tax assets because of uncertainties associated with the realization of some of the deferred tax benefits. The change in the valuation allowance primarily reflects the expected utilization of AMT credits, use of certain state NOL carryforwards and credits associated with various other deferred assets. J. NET INCOME PER SHARE There were no adjustments required to be made to income before extraordinary item for purposes of computing basic and diluted net income per share. A reconciliation of the average number of common shares outstanding used in the calculation of basic and diluted net income per share is as follows: MAY 31, MAY 31, MAY 31, 1999 1998 1997 Shares used to compute basic net income per share 36,149,072 36,331,305 35,824,576 Dilutive effect of stock options 440,277 1,025,553 1,202,247 Shares used to compute diluted net income per share 36,589,349 37,356,858 37,026,823 There were stock options outstanding that were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore would be antidilutive. The following table summarizes all options exceeding average market price as of the years ended May 31, 1999, 1998 and 1997: MAY 31, MAY 31, MAY 31, 1999 1998 1997 Options exceeding average market price 1,243,145 240,000 185,000 Exercise price range $16.56- $25.50 $23.00 $25.50 -68- 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) K. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS The Company, through administration by the Compensation Committee of the Company's Board of Directors (the "Committee"), may grant awards under the Company's Long-Term Incentive Plans in the form of non-qualified stock options or incentive stock options to those key employees it selects to purchase in the aggregate up to 3,400,000 shares of newly issued or treasury common stock. Options expire after 10 years from the date of grant and generally become exercisable ratably over a three to seven year period commencing from the date of grant. The exercise price of stock options may not be less than 100% of the fair market value on the date of grant. Awards of stock appreciation rights ("SAR's") may also be granted, either in tandem with grants of stock options (and exercisable as an alternative to the exercise of stock options) or separately. In addition, the Committee may grant other awards that consist of, are denominated in or are payable in shares or that are valued by reference to shares, including, for example, restricted shares, phantom shares, performance units, performance bonus awards or other awards payable in cash, shares or a combination thereof at the Committee's discretion. Information concerning stock options issued to officers and other employees is presented in the following table. YEAR WEIGHTED YEAR WEIGHTED ENDED AVERAGE ENDED AVERAGE MAY 31, EXERCISE MAY 31, EXERCISE 1999 PRICE 1998 PRICE (SHARES IN THOUSANDS) Number of shares under option: Outstanding at beginning of year 2,462 $14.46 2,648 $12.56 Granted 322 13.24 356 24.11 Exercised (141) 10.86 (500) 10.74 Canceled or expired (197) 18.19 (42) 18.95 Outstanding at end of year 2,446 $14.20 2,462 $14.46 Exercisable at end of year 1,723 1,598 -69- 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR WEIGHTED ENDED AVERAGE MAY 31, EXERCISE 1997 PRICE (SHARES IN THOUSANDS) Number of shares under option: Outstanding at beginning of year 2,295 $ 9.46 Granted 817 18.34 Exercised (415) 6.60 Canceled or expired (49) 14.18 Outstanding at end of year 2,648 $12.56 Exercisable at end of year 1,189 At May 31, 1999 and 1998, 1,186,191 and 1,304,207 shares were available for future grants, respectively. The following tables summarize information about stock options outstanding at May 31, 1999: OPTIONS OUTSTANDING OPTIONS EXERCISABLE WTD. AVG. WTD. WTD. RANGE OF REMAINING AVG. AVG. EXERCISE CONTRACTUAL EXER. EXER. PRICES SHARES LIFE(YRS.) PRICE SHARES PRICE (SHARES IN THOUSANDS) $ 3.00-$ 7.99 675 2.8 $ 5.77 675 $ 5.77 $ 8.00-$12.99 257 6.4 $12.25 232 $12.51 $13.00-$17.99 1,032 7.3 $15.83 551 $16.68 $18.00-$22.99 104 5.1 $20.20 82 $20.15 $23.00-$27.99 378 7.7 $24.48 183 $24.06 2,446 5.9 $14.20 1,723 $12.79 -70- 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition to stock options, the Company grants performance shares to key executive employees. There were no performance shares granted during the year ended May 31, 1999 and 1998. During the year ended May 31, 1997, awards of 118,000 shares of the Company's common stock were made, subject to restrictions based upon continued employment and the performance of the Company. There was no compensation expense relating to the awards for the year ended May 31, 1999. Compensation expense totalling $3,412,000 and $1,403,000 relating to the awards were recorded during the years ended May 31, 1998 and 1997, respectively. EMPLOYEE STOCK PURCHASE PLAN Effective January 1, 1996, the Company adopted a qualified, noncompensatory Employee Stock Purchase Plan. This plan enables substantially all employees to subscribe to purchase shares of the Company's common stock on an annual basis. Such shares are subscribed at the lower of 85% of their fair market value on the first day of the plan year, January 1, or 85% of their fair market value on the last business day of the plan year, usually December 31. Each eligible employee's participation is limited to 10% of base wages and a maximum of 450,000 shares are authorized for subscription. Employee subscriptions for the twelve months ended December 31, 1998 were 80,147 shares at $8.77 per share based on 85% of the fair market value on December 31, 1998 ($10.31). Under the terms of the Merger agreement between Wyman- Gordon Company and Precision Castparts Corp.("PCC"), the Company terminated the 1999 Employee Stock Purchase Plan on May 17, 1999. All proceeds received under this plan were used to purchase shares of the Company's common stock at a price per share equal to 85% of the $10.31 closing price on December 31, 1998, or $8.77 per share. Employees have the option of tendering these shares to PCC at a price of $20.00 per share in accordance with PCC's tender offer. See footnote N. Pending Merger. Accounting for stock-based plans is in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense has been recognized for fixed stock option plans or the Employee Stock Purchase Plan. -71- 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As required by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has determined the weighted average fair values of stock-based arrangements granted during the years ended May 31, 1999, 1998 and 1997 to be $7.77, $14.94 and $11.28, respectively. The fair values of stock-based compensation awards granted were estimated using the Black-Scholes model with the following assumptions. YEAR EXPECTED RISK-FREE ENDED GRANT OPTION DIVIDEND INTEREST MAY 31, DATE TERM VOLATILITY YIELD RATE 1999 7/31/98 7 years 50% -- 5.54% 10/21/98 7 years 50% -- 5.54% 1/20/99 7 years 50% -- 5.54% 1998 10/15/97 10 years 41% -- 5.57% 1/14/98 9 years 41% -- 5.57% 2/17/98 10 years 41% -- 5.57% 1997 7/16/96 9 years 38% -- 6.67% 10/16/96 10 years 38% -- 6.67% 1/15/97 10 years 38% -- 6.67% 3/17/97 9 years 38% -- 6.67% Had compensation expense for the Company's stock-based plans and Employee Stock Purchase Plan been accounted for using the fair value method prescribed by SFAS No. 123, net income and earnings per share would have been as follows: 1999 1998 1997 (000'S OMITTED, EXCEPT PER-SHARE DATA) Net income as reported $37,028 $33,890 $50,023 Pro forma net income under SFAS No. 123 31,595 32,062 47,399 Net income per share as reported: Basic $ 1.02 $ .93 $ 1.40 Diluted 1.01 .91 1.35 Pro forma net income per share under SFAS No. 123: Basic $ .87 $ .88 $ 1.32 Diluted .86 .86 1.28 The effects of applying SFAS No. 123 in the above pro forma disclosure are not indicative of future amounts. -72- 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) L. STOCK PURCHASE RIGHTS On October 21, 1998, the Company's Board of Directors unanimously adopted a shareholder rights agreement under which preferred share purchase rights were distributed as a dividend on shares of Wyman-Gordon Company's common stock. The rights will be exercisable only if a person or group acquires 15 percent or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock or the determination by the Board of Directors that any person is an "Adverse Person." Each right entitles the registered holder thereof to purchase from the Company a unit consisting of one ten-thousandth of a share of Series B Junior Participating Cumulative Preferred Stock, at a cash exercise price of $75 per unit. The dividend distribution was made on November 30, 1998, payable to stockholders of record on that date. The rights will expire on November 30, 2008, subject to earlier redemption or exchange by Wyman-Gordon Company as described in the plan. The rights distribution is not taxable to stockholders. During fiscal year 1999, the Company's Board of Directors authorized a stock repurchase program to acquire up to 4 million shares of Wyman-Gordon Company's common stock. The shares may be purchased from time-to-time in the open market. As of May 31, 1999, the Company had purchased 1,273,900 shares, at an average price of $10.28 per share, under this program. M. COMMITMENTS AND CONTINGENCIES At May 31, 1999, certain lawsuits arising in the normal course of business were pending. In the opinion of management, the outcome of these legal matters will not have a material adverse effect on the Company's financial position and results of operations. The Company has entered into various foreign exchange contracts to manage its foreign exchange risks. Through its foreign currency hedging activities, the Company seeks to minimize the risk that the eventual cash flows resulting from purchase and sale transactions denominated in other than the functional currency of the operating unit will be affected by changes in exchange rates. Foreign currency transaction exposures generally are the responsibility of the Company's individual operating units to manage as an integral part of their business. The Company hedges its foreign currency transaction exposures based on judgment, generally through the use of forward exchange contracts. Gains and losses on the Company's foreign currency transaction hedges are recognized as an adjustment to the underlying hedged transactions. Deferred gains and losses on -73- 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) foreign exchange contracts were not significant at May 31, 1999 and 1998. The Company had foreign exchange contracts totaling $13,486,000 at May 31, 1999. Such contracts include forward contracts of $4,855,000 for the purchase of U.K. pounds and $8,631,000 for the sale of U.K. pounds. These contracts hedge certain normal operating purchase and sales transactions, generally mature within six months and require the Company to exchange U.K. pounds for non-U.K. currencies or non-U.K. currencies for U.K. pounds. Translation and transaction gains and losses included in the Consolidated Statements of Net Income and Consolidated Statements of Comprehensive Income for the years ended May 31, 1999, 1998 and 1997 were not significant. On December 22, 1996, a serious industrial accident occurred at the Houston, Texas, facility of Wyman-Gordon Forgings, Inc. ("WGFI"), a wholly-owned subsidiary of the Company, in which eight employees were killed, and three employees and several subcontractor employees were injured. The Company and WGFI have settled the lawsuits brought by all decedents' families and other claimants on terms acceptable to the Company and its insurance carriers. The amounts paid in settlement of the lawsuits exceeded the Company's available liability insurance. The Company recorded a charge of $13.8 million in the third quarter of fiscal year 1999 that covered its share of the costs of defending the lawsuits and funding the agreed settlements. On September 25, 1997, the Company received a subpoena from the United States Department of Justice informing it that the Department of Defense and other federal agencies had commenced an investigation with respect to the manufacture and sale of investment castings at the Company's Tilton, New Hampshire facility. The Company does not believe that the federal investigation is likely to result in a material adverse impact on the Company's financial condition or results of operations, although no assurance as to the outcome or impact of that investigation can be given. N. PENDING MERGER On May 17, 1999, Precision Castparts, Corp. ("PCC") and the Company announced that PCC has agreed to acquire 100 percent of the Company's common stock in a cash tender offer of $20 per share, valued at approximately $825,000,000, including the assumption of $104,000,000 of net debt. Upon completion of the tender offer and subsequent merger, Wyman-Gordon will become a wholly-owned subsidiary of PCC. The completion of the tender offer is conditioned upon the tender of at least two-thirds of the outstanding shares of Wyman-Gordon and certain other conditions, including compliance with the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. PCC, headquartered in Portland, Oregon, is a worldwide manufacturer of complex metal components and products. -74- 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) O. SEGMENT INFORMATION In fiscal year 1999, the Company adopted Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which revises reporting and disclosure requirements for operating segments. The Statement requires that the Company present segment data based on the way that management organizes the businesses within the Company for making operating decisions and assessing performance. The three segments, based on markets served, are Aerospace, Energy and Other. Aerospace Market The Aerospace Products Segment produces components utilizing all of the Company's manufacturing disciplines: forging, investment casting and composites. The parts produced in this segment are used extensively by the major jet engine manufacturers and airframe builders within the commercial and military aircraft industry. A variety of engine parts produced by the Company include fan discs, compressor discs, turbine discs, seals, shafts, hubs, reversers and valves. Aerospace airframe components include landing gear, bulkheads, wing spars, engine mounts, struts, wing and tail flaps and bulkheads. The Company produces these components from titanium, nickel, steel, aluminum and composite materials. Energy Market The Company is a major supplier of products used in nuclear and fossil-fueled commercial power plants, co-generation projects and retrofit and life extension applications as well as in the oil and gas industry. Products produced within the energy product segment include extruded seamless thick wall pipe, connectors, and valves. The Company produces rotating components, such as discs and spacers, and valve components for land-based steam turbine and gas turbine generators. Other Market The Company manufactures a variety of products for defense related applications. Some of the products produced within this segment include steel casings for bombs and rockets, components for propulsion systems for nuclear submarines and aircraft carriers as well as pump, valve, structural and non-nuclear propulsion forgings. The Company manufactures extruded missile, rocket and bomb casings and supplies extruded products for nuclear submarines and aircraft carriers, including thick wall piping for nuclear propulsion systems, torpedo tubes and catapult launch tubes. The Company also manufactures products for commercial applications such as food processing, semiconductor manufacturing, diesel turbochargers and sporting equipment. -75- 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes segment information: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 Net sales Aerospace products $705,763 $622,718 $475,131 Energy products 117,229 101,353 97,117 Other products 26,269 28,842 36,494 Consolidated net sales $849,261 $752,913 $608,742 EBITDA(1) Aerospace products $101,053 $ 81,175 $ 75,013 Energy products 10,563 11,413 9,563 Other products 2,597 4,775 2,808 Corporate (11,163) (10,805) (8,264) Total EBITDA 103,050 86,558 79,120 Depreciation and Amortization 27,576 23,473 20,872 Other charges (credit) 13,745 (4,900) 23,083 Interest expense 14,234 12,548 10,822 Income before income taxes and extraordinary item $ 47,495 $ 55,437 $ 24,343 [FN] (1) Earnings before interest, taxes, depreciation, amortization, extraordinary items and other charges (credits). </FN> The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Expenses that are not directly identifiable to a business market are allocated. Common administrative expenses are allocated based on revenue, common period costs are allocated based on value added. In fiscal year 1998, the Company recorded an extraordinary loss, net of income tax benefit of $2,920,000, of $5,192,000. The extraordinary loss is not included in the segment EBITDAs for fiscal year 1998 disclosed above. The Company's management uses Revenues and EBITDA by business market as its primary information for decision-making purposes. The Company's revenues are predominantly generated in the Aerospace market segment. All plants with the exception of the Buffalo, New York facility, which has approximately $25,783,000 of total assets and generates all of its revenues from the Energy market segment, generate the majority of its revenues from the Aerospace market. Certain plants manufacture products for all segments; however, due to the significance of the Aerospace market segment (83% of revenues), assets of the Company are not managed by business markets but are managed on a plant-by-plant basis. Because the Company does not prepare and management does not use asset information by the segments identified, assets by segments are not presented in these financial statements. -76- 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Certain information on a geographic basis follows: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 1998 1997 (000'S OMITTED) REVENUES FROM UNAFFILIATED CUSTOMERS: United States (including direct export sales) $771,961 $676,342 $541,456 United Kingdom 77,300 76,571 67,286 $849,261 $752,913 $608,742 EXPORT SALES: United States direct export sales $139,113 $118,407 $ 88,888 IDENTIFIABLE ASSETS (EXCLUDING INTERCOMPANY): United States $509,174 $479,181 $390,540 United Kingdom 62,190 63,759 54,777 General Corporate 10,346 8,670 9,054 $581,710 $551,610 $454,371 General Electric Company ("GE") and United Technologies Corporation ("UT") have currently or historically each accounted for 10%, or more, of the Company's revenues as follows: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1999 % 1998 % 1997 % (000's OMITTED, EXCEPT PERCENTAGES) GE $213,598 25 $169,894 23 $156,764 26 UT (1) (1) 76,786 10 60,921 10 [FN] (1) Revenues for the year ended May 31, 1999 were less than 10%. </FN> -77- 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended May 31, 1999 and 1998 were as follows: QUARTER FIRST SECOND THIRD FOURTH (000'S OMITTED, EXCEPT PER-SHARE DATA) YEAR ENDED MAY 31, 1999 Revenue $189,664 $238,829 $211,223 $209,545 Cost of goods sold 161,067 197,551 188,506 168,778 Other charges (credits) (5,000) - 18,990 (245) Income (loss) from operations 20,117 26,920 (10,923) 26,838 Net income (loss) 11,852 15,046 (9,357) 19,487 Net income (loss) per share: Basic .32 .41 (.26) .55 Diluted .32 .41 (.26) .54 YEAR ENDED MAY 31, 1998 Revenue $180,009 $189,370 $181,764 $201,771 Cost of goods sold 146,764 157,422 159,229 173,852 Other charges (credits) (1,900) (3,000) - - Income from operations 21,750 21,771 9,577 15,794 Income before extra- ordinary item 11,859 13,336 3,963 9,924 Extraordinary item, net of tax - - (5,192) - Net income (loss) 11,859 13,336 (1,229) 9,924 Basic net income per share: Income before extra- ordinary item .33 .37 .11 .27 Net income (loss) .33 .37 (.03) .27 Diluted net income per share: Income before extra- ordinary item .32 .36 .11 .27 Net income (loss) .32 .36 (.03) .27 -78- 79 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company are as follows: NAME AGE POSITION David P. Gruber 57 Chairman and Chief Executive Officer J. Douglas Whelan 60 President, Chief Operating Officer and Director William T. McGovern 52 Vice President, Human Resources Sanjay N. Shah 48 Vice President, Corporate Strategy Planning and Business Development J. Stewart Smith 57 President, Turbine Products Colin Stead 60 Senior Vice President, Quality and Technology Wallace F. Whitney, Jr. 56 Vice President, General Counsel and Clerk Frank J. Zugel 54 President, Structural and Energy Products E. Paul Casey 69 Director Warner S. Fletcher 54 Director Robert G. Foster 61 Director Charles W. Grigg 60 Director M Howard Jacobson 66 Director Robert L. Leibensperger 60 Director Andrew E. Lietz 60 Director David A. White, Jr. 57 Director DAVID P. GRUBER was elected Chairman and Chief Executive Officer of the Company on October 15, 1997, having previously served as President and Chief Executive Officer since May 1994 and as President and Chief Operating Officer since he joined the Company in October 1991. Director of the Company since 1992. Term expires in 2001. Prior to joining the Company, Mr. Gruber served as Vice President, Advanced Ceramics, of Compagnie de Saint Gobain (which acquired Norton Company in 1990), a position he held with Norton Company since 1987. Mr. Gruber previously held various executive and technical positions with Norton Company since 1978. He is a Director of State Street Corporation, a Trustee of the Manufacturers' Alliance for Productivity and Innovation, and a member of the Mechanical Engineering Advisory Committee of Worcester Polytechnic Institute. -79- 80 J. DOUGLAS WHELAN was elected President and Chief Operating Officer of the Company on October 15, 1997, having previously served as President, Forgings since he joined the Company in March 1994. Director of the Company since 1998. Term expires in 2001. Prior to joining the Company, he had served for a short time as the President of Ladish Co., Inc., a forging company in Cudahy, Wisconsin, and prior thereto, had been Vice President, Operations of Cameron Forged Products Company, with which company and its predecessors he had been employed since 1965 in various executive capacities. Mr. Whelan is a Director of Sifco Industries, Inc. and a member of the President's Council of Manufacturers Alliance. WILLIAM T. MCGOVERN joined the Company in 1999 as Vice President, Human Resources. Prior to that time, he had served as Vice President, Human Resources, Contract and Commercial SBU of Staples, Inc. since 1995. From 1994 to 1995 he had been employed as Training Director for the City of Worcester, Massachusetts. SANJAY N. SHAH was elected Vice President, Corporate Strategy Planning and Business Development in May 1994, having previously served as Vice President and Assistant General Manager of the Company's Aerospace Forgings Division. He has held a number of executive, research, engineering and manufacturing positions at the Company since joining the Company in 1975. J. STEWART SMITH was elected President, Turbine Products of the Company in January 1999, having previously served as President, Manufacturing since 1997 and before then as Vice President, Manufacturing and Engineering of the Forgings Division since he joined the Company in 1994. Prior to that time, Mr. Smith had held various technical and manufacturing positions with Cameron and its predecessors since joining that company in 1978. COLIN STEAD was elected Senior Vice President, Quality and Technology of the Company on October 15, 1997, having previously served as Vice President, Quality and Metallurgy of the Forgings Division since 1994. Prior thereto, he had served in various technical and quality positions with Cameron and its predecessors since joining that company in 1984. WALLACE F. WHITNEY, JR. joined the Company in 1991. Prior to that time, he had been Vice President, General Counsel and Secretary of Norton Company since 1988, where he had been employed in various legal capacities since 1973. FRANK J. ZUGEL was elected President, Structural and Energy Products of the Company in January, 1999, having previously served as President, Marketing since 1997 and before then as President, Investment Castings, since he joined the Company in 1993. Prior to that time, he had served as President of Stainless Steel Products, Inc., a metal fabricator for aerospace applications, since 1992. -80- 81 E. PAUL CASEY, Chairman and General Partner, Metapoint Partners, Peabody, Massachusetts (an investment partnership which he established in 1988), has been a Director of the Company since 1993. Term expires in 1999. He served as Vice Chairman of Textron, Inc. from 1986 to 1987 and as Chief Executive Officer and President of Ex-Cell-O Corporation during 1978 to 1986. Mr. Casey is a Director of Comerica, Inc. and Hood Enterprises, Inc., a Trustee of Henry Ford Health Care System and President of the Hobe Sound, Florida Community Chest. WARNER S. FLETCHER, Attorney and Director of the law firm of Fletcher, Tilton & Whipple, P.C., Worcester, Massachusetts, has been a Director of the Company since 1987. Term expires in 1999. Mr. Fletcher is an Advisory Director of Bank of Boston, Worcester. He is also Chairman of The Stoddard Charitable Trust, a Trustee of The Fletcher Foundation, the George I. Alden Trust, Worcester Polytechnic Institute, Worcester Foundation for Experimental Biology, Bancroft School and the Worcester Art Museum. ROBERT G. FOSTER, President, Chief Executive Officer and Chairman of the Board of Commonwealth BioVentures, Inc., Portland, Maine (a venture capital company engaged in biotechnology) since 1987. Director of the Company since 1989. Term expires 2000. He is also a Director of United Timber Corp., Meridian Medical Technologies, Phytera, the Small Enterprise Growth Fund for the State of Maine, Intellicare American and Epic Pharmaceuticals. CHARLES W. GRIGG, Chairman and Chief Executive Officer of SPS Technologies, Inc. (a manufacturer of high technology products in the field of fastening, precision components and materials handling), was elected a Director in 1996. Term expires 2000. Prior to joining SPS Technologies in 1993, Mr. Grigg spent ten years at Watts Industries, Inc. (a Massachusetts manufacturer of valves for industrial applications), the last nine of which as President and Chief Operating Officer. M HOWARD JACOBSON, Senior Advisor, Bankers Trust, New York, has been a Director of the Company since 1993. Term expires in 1999. Mr. Jacobson was for many years President and Treasurer and a Director of Idle Wild Foods, Inc. until that company was sold in 1986. Mr. Jacobson is a Director of Allmerica Financial Corporation and Stonyfield Farm, Inc. He is Chairman of the Overseers of WGBH Public Broadcasting, the Massachusetts Biotechnology Research Institute, a Trustee of the Worcester Foundation for Biomedical Research, a Trustee of the Worcester Polytechnic Institute, UMass Memorial Healthcare and a member of the Harvard University Overseers' Committee on University Resources. He is also a member of the Commonwealth of Massachusetts Board of Higher Education. -81- 82 ROBERT L. LEIBENSPERGER, Executive Vice President, Chief Operating Officer and President -- Bearings of The Timken Company, Canton, Ohio (a manufacturer of precision bearings.) Mr. Leibensperger joined the Company's Board of Directors in January 1998. Term expires 2001. Mr. Leibensperger has been employed by The Timken Company since 1960, where he has held various research, engineering, sales and marketing, and executive positions. Mr. Leibensperger is a member of the American Bearing Manufacturers Association Executive Committee, the Council on Competitiveness Global R&D Committee, the Stark County (Ohio) Capital Campaigns Committee, the Cultural Center for the Arts (Canton, Ohio) House & Grounds Committee and the Goodwill Industries (Canton, Ohio) Transportation Services Committee. ANDREW E. LIETZ, President and Chief Executive Officer and Director of HADCO Corporation, Salem, New Hampshire. (Manufacturer of electronic interconnect products.) Mr. Lietz joined the Company's Board of Directors in January 1998. Term expires in 2001. Mr. Lietz has held various executive positions with HADCO Corporation since 1984. He is director of EnergyNorth, Inc., Business and Industry Association and National Electronics Manufacturing Initiative, as well as a member of the advisory Board of the University of New Hampshire Whittemore School of Business and the Executive Committee of New Hampshire Industrial Research Center. DAVID A. WHITE, JR., Senior Vice President of Strategic Planning for Cooper, was elected a Director in 1996. Term expires in 1999. Since joining Cooper as a Planning Analyst in 1971, Mr. White has served in various planning and finance capacities. In 1980, he was named Vice President and General Manager of the Cooper Power Tools Division and in 1988 he became Vice President, Corporate Planning and Development. He assumed his present position in 1996. Mr. White serves as Vice Chairman of the Strategic Planning and Development Council of the Manufacturers' Alliance for Productivity and Innovation. In addition to the executive officers of the Company, David J. Sulzbach, who has been employed by the Company in various financial capacities since 1977, serves as Corporate Controller and Principal Accounting Officer of the Company. -82- 83 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership with the Securities and Exchange Commission (the "SEC") and the New York Stock Exchange. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports and amendments thereto furnished to the Company and written representations that no other reports were required during, or with respect to, the Company's fiscal year ended May 31, 1999, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were satisfied except for the Securities and Exchange Commission filings on Form 4 for Mr. Gruber and a former director of the Company which were not timely filed. Such filings, have been subsequently corrected. -83- 84 ITEM 11. EXECUTIVE COMPENSATION The remuneration of the Company's Chief Executive Officer and each of the four most highly compensated executive officers at May 31, 1999 for services rendered to the Company during its fiscal year then ended and the Company's prior two fiscal years ended May 31, 1998 and 1997 is reported in the table set forth below. SUMMARY COMPENSATION TABLE ALL NAME AND FISCAL ANNUAL LONG- OTHER PRINCIPAL YEAR COMPENSATION TERM COMPEN- POSITION ENDED SALARY BONUS AWARDS SATION(1) David P. Gruber 05/31/99 $491,797 $ 85,500 - $11,909 Chairman and 05/31/98 458,340 85,500 - 24,738 Chief Executive 05/31/97 400,004 286,875 - 16,001 Officer J. Douglas Whelan 05/31/99 309,711 45,000 - 13,566 President and 05/31/98 295,833 45,000 - 18,144 Chief Operating 05/31/97 242,333 123,750 - 14,677 Officer J. Stewart Smith 05/31/99 194,108 24,700 - 68,892 President, 05/31/98 174,853 68,980 - 6,958 Turbine Products 05/31/97 142,850 208,320 - 5,482 Wallace F. Whitney, Jr. 05/31/99 191,000 20,460 - 8,124 Vice President, 05/31/98 184,168 20,460 - 9,744 General Counsel 05/31/97 173,340 78,000 - 6,827 and Clerk Frank J. Zugel 05/31/99 223,724 28,600 - 13,179 President, 05/31/98 215,004 28,600 - 13,110 Structural and 05/31/97 198,335 76,200 - 9,569 Energy Products [FN] (1) Consists of group term life insurance premiums, the value of the shares allocated to the executive's account under the Company's Savings/Investment Plan and Deferred Compensation Plan as a matching contribution, in the case of Mr. Smith and Mr. Whelan moving expense reimbursement and related income tax gross up in 1999 and 1998, respectively, and in the case of Mr. Zugel, car allowance. </FN> During the Company's fiscal year ended May 31, 1999 Messrs. Gruber, Whelan, Smith, Whitney and Zugel were not granted any stock options because such officers participate in the Executive Long-Term Incentive Plan (the "LTIP") described below. -84- 85 The following table relates to aggregate grants of options under the 1997 Long-Term Incentive Plan and predecessor plans. AGGREGATE OPTION EXERCISES IN THE COMPANY'S 1999 FISCAL YEAR AND MAY 31, 1999 OPTION VALUES VALUE OF NUMBER OF UNEXERCISED NO. OF UNEXERCISED IN-THE-MONEY SHARES OPTIONS OPTIONS ACQUIRED AT 5/31/99 AT 5/31/99 ON VALUE (EXERCISABLE/ (EXERCISABLE/ NAME EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE) D.P. Gruber - - 148,750/29,250 $ 638,765/$78,609 J.D. Whelan - - 54,000/19,750 $ 270,125/$53,078 J.S. Smith - - 7/364/11,539 $ 49,700/$29,569 W.F. Whitney, Jr. 5,000 $43,000 122,375/14,625 $1,055,508/$39,305 F.J. Zugel 6,000 $93,000 87,109/19,750 $ 323,142/$53,078 AGREEMENTS WITH MANAGEMENT Chairman and Chief Executive Officer At the time of his election as President and Chief Executive Officer in 1994, Mr. Gruber and the Company entered into an agreement that provides for a two year rolling term of employment and for continuation of employee benefits in the event of termination of his employment under specified conditions. Mr. Gruber and the Company have also entered into a severance agreement, a performance share agreement and irrevocable trust arrangement, as well as the agreements pursuant to the LTIP. In addition, when Mr. Gruber became Chief Executive Officer the Compensation Committee of the Company's Board of Directors ("the Committee") granted him 150,000 shares under a performance share agreement at which time the Company's stock price was $5.125 per share. The shares granted to Mr. Gruber pursuant to this agreement were subject to restrictions. Under the performance share agreement, the shares vested in Mr. Gruber only if he remained in the employ of the Company for a period of five years and if the Company's stock reached target price levels of at least $10 per share with full vesting at $12 per share. The $12 target has been achieved, and consequently the Committee approved an arrangement whereby the 150,000 shares were transferred to an irrevocable trust that held the shares until May 24, 1999 when they were distributed to Mr. Gruber. Mr. Gruber sold 70,500 of such shares in May 1999 to provide funds for the payment of income taxes due upon the distribution of shares to him. Mr. Gruber now beneficially owns 123,030 Shares, including the shares issued to him in accordance with his performance share agreement and the 28,500 shares granted to him under the LTIP. In addition, Mr. Gruber has been granted options to purchase a total of 178,000 shares. -85- 86 Severance Agreements The Company has entered into severance agreements with each of its executive officers and with Mr. Sulzbach that would provide such officers with specified benefits in the event of termination of employment within three years following a change of control of the Company when both employment termination and such change in control occur under conditions defined in the agreements. Such benefits include a payment equal to a maximum of 250% of the executive officer's annual compensation, continuation of insurance coverage for up to twenty-four months following termination and accelerated vesting of existing options and stock appreciation rights and certain benefits under the Company's deferred compensation plan. No benefits are payable under the severance agreements in the event of an executive officer's termination for cause, in the event of retirement, disability or death or in cases of voluntary termination in circumstances other than those specified in the agreements that would entitle an executive officer to benefits. At its meeting on March 17, 1999, the Committee amended the severance agreements to provide that following a "change of control" of the Company SERP benefits (described below under "Pension Benefits") for SERP participants will continue to accrue for a period of two years following a qualifying termination of employment. Executive Long-Term Incentive Plan In 1996 the Committee developed an Executive Long-Term Incentive Plan ("LTIP") which results in significant payouts to the participants if significant price appreciation in the Company's stock is achieved. Under the LTIP the Company's executive officers (including Messrs. Gruber, Whelan, Smith, Whitney and Zugel) and other key executives will not participate in the annual grant of stock options for the five year term of the LTIP. The LTIP provides for a one-time grant of stock options which are the normal options under the Company's stock option plans except that they vest in equal installments over four years rather than three. The second element of the LTIP consists of performance stock options that are ten year options that vest upon the achievement of certain stock prices. For example, 10% of the performance stock options vest if the stock reaches $21.00 per share, and at $30.00 per share the performance stock options become fully vested. In any event, the options vest seven years after the date of grant. The third element of the LTIP consists of performance shares which are subject to risk of loss and forfeiture if the price of the shares does not achieve certain price levels. The price levels are the same as under the performance stock options, and if the stock reaches a price of $21.00 per share, 10% of the performance shares vest and are not subject to forfeiture. Similarly if the price reaches $30.00 per share, the performance shares vest in their entirety. If the stock fails to reach the target levels during the five year term of the LTIP, then the performance shares are forfeited to the extent the target levels have not been attained. At the time of the grants to executive officers under the LTIP on April 17, 1996, the price of the Company's stock was 16 5/8 per share. -86- 87 As of September 15, 1997 the price of the Company's stock had reached the $27 per share level and therefore 80% of the performance stock options have vested and restrictions on 80% of the performance shares have lapsed. Under the terms of the LTIP, the Committee has granted 202,125 stock options, 928,375 performance stock options, and 226,800 performance shares, including the grant to Mr. Gruber of 25,000 stock options, 115,000 performance stock options and 28,500 performance shares. In the event of a change of control of the Company, including a change of control resulting from the PCC tender offer, any remaining invested stock options and performance stock options immediately vest and any and all restrictions lapse. At its meeting on May 13, 1999 the Committee voted that in the event that a "change of control" of the Company results from the PCC tender offer the remaining 20% of the performance shares that had not previously vested shall vest and the restrictions or such shares shall lapse. As a result of the consummation of the transactions contemplated by the Merger Agreement with PCC unvested performance shares under the LTIP and unvested options set forth in the following table held by the officers will become fully vested. NUMBER OF NUMBER OPTION PERFORM- OF SHARES ANCE OPTION EXERCISE NAME SHARES SHARES PRICE($) David P. Gruber 5,700 29,250 16.625 J. Douglas Whelan 3,800 19,750 16.625 William T. McGovern - 15,000 9.875 Sanjay N. Shah 2,800 14,625 16.625 J. Stewart Smith 1,820 11,539 16.75 Colin Stead 1,820 11,539 16.75 David J. Sulzbach 1,820 11,539 16.75 Wallace F. Whitney, Jr. 2,800 14,625 16.625 Frank J. Zugel 3,800 19,750 16.625 PENSION BENEFITS Salaried employees and executive officers of the Company participate in the Company's qualified defined benefit pension plan (the "Plan"). Under the terms of the Plan each eligible employee receives a retirement benefit based on the number of years of his or her credited service (to a maximum 35 years) and average annual total earnings (salary plus incentive bonus only) for the five consecutive most highly paid years during the ten years preceding retirement. In addition, the executive officers covered by the Summary Compensation Table and certain other key executives designated by the Committee are eligible to receive -87- 88 benefits under the Supplemental Retirement Plan for Senior Executives (the "SERP"). Under the SERP, participants who have been employed by the Company for at least five years who retire at age 62 are entitled to receive a pension equal to their highest average annual earnings during any preceding 60- consecutive month period multiplied by 4% for each year of service up to ten years and 2% per year from ten to fifteen years. This supplemental benefit is reduced if the participant retires prior to age 62 and is further reduced by benefits payable under the Company's qualified pension plan and by social security payments. If the Committee so determines, payments under the SERP may be terminated if a retired participant becomes "substantively employed," as defined in the SERP, by another employer before age 65. The following table indicates the aggregate estimated annual benefit payable, as single life annuity amounts, under both the Plan and the SERP to participants retiring in various categories of earnings and years of service. To the extent that an annual retirement benefit exceeds the limits imposed by the Internal Revenue Code, the difference will be paid from the general operating funds of the Company. As of May 31, 1999, the individuals named in the Summary Compensation Table had full credited years of service with the Company as follows: Mr. Gruber, seven years; Mr. Whelan, five years; Mr. Smith, five years; Mr. Whitney, eight years, and Mr. Zugel, six years. PENSION BENEFITS YEARS OF SERVICE 15 AND REMUNERATION 5 10 ABOVE $250,000 50,000 100,000 125,000 350,000 70,000 140,000 175,000 450,000 90,000 180,000 225,000 550,000 110,000 220,000 275,000 650,000 130,000 260,000 325,000 750,000 150,000 300,000 375,000 TOTAL STOCKHOLDER RETURN The graph presented below compares the yearly percentage change in the Company's cumulative total stockholder return, assuming dividend reinvestment, with the cumulative total return of the Dow Jones Equity Market Index, a broad market index, and the Dow Jones Aerospace & Defense Sector index, which includes several of the Company's most significant customers and other aerospace industry companies, for the five-year period ending May 31, 1999. -88- 89 The Stock Performance Graph assumes an investment of $100 in each of the Company and the two indices, and the reinvestment of any dividends. The historical information set forth below is not necessary indicative of future performance. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG WYMAN-GORDON COMPANY, DOW JONES EQUITY MARKET INDEX AND DOW JONES AEROSPACE AND DEFENSE SECTOR 5/27/94 6/2/95 5/31/96 Aerospace & Defense 100 139.5 207.1 Equity Mkt Index 100 119.4 153.7 Wyman-Gordon Co. 100 175.7 273.8 5/30/97 5/29/98 5/28/99 Aerospace & Defense 250.3 266.8 251.5 Equity Mkt Index 197.7 259.5 314.8 Wyman-Gordon Co. 356.9 311.8 302.9 COMPENSATION COMMITTEE REPORT OVERALL POLICY The Compensation Committee (the "Committee") of the Board of Directors is composed entirely of non-employee directors. The Committee is responsible for setting and administering the policies that govern the Company's executive compensation and stock ownership programs. The Company's executive compensation program is designed to be closely linked to corporate performance and return to stockholders. To this end, the Company maintains an overall compensation policy and specific compensation plans that tie a significant portion of executive compensation to the Company's success in meeting specified annual performance goals and to appreciation in the Company's stock price. The overall objectives of this strategy are to attract and retain talented executives, to motivate these executives to achieve the goals inherent in the Company's business strategy, to link executive and stockholder interests through equity based incentive plans and finally to provide a compensation package that recognizes individual contributions as well as overall business results. The Committee approves the compensation of David P. Gruber, Chairman and Chief Executive Officer, and corporate executives, including Messrs. Whelan, Smith, Whitney and Zugel, who report to Mr. Gruber. The Committee also sets policies in order to ensure consistency throughout the executive compensation program. In reviewing the individual performance of the executives whose compensation is determined by the Committee (other than Mr. Gruber), the Committee takes into account Mr. Gruber's evaluation of their performance. -89- 90 There are three principal elements of the Company's executive compensation program: base salary, annual bonus and long-term stock-based incentives consisting of stock options and performance share grants. The Committee's policies with respect to each of these elements, including the bases for the compensation awarded to Mr. Gruber, are discussed below. In addition, while the elements of compensation described below are considered separately, the Committee takes into account the full compensation package provided by the Company to the individual, including pension benefits, supplemental retirement benefits, savings plans, severance plans, insurance and other benefits, as well as the programs described below. In carrying out its responsibilities the Committee has in recent years obtained advice from William M. Mercer & Co. and Towers Perrin, compensation consulting firms. BASE SALARIES Base salaries for new executive officers are initially determined by evaluating the responsibilities of the position held and the experience of the individual, and by reference to the competitive marketplace, including a comparison to base salaries for comparable positions at other companies. Annual salary adjustments are determined by evaluating the performance of the Company and of each executive officer, and also take into account changed responsibilities. The Committee also uses industry surveys to assist in ensuring that executive salaries are consistent with industry practice. Mr. Gruber serves as Chairman and Chief Executive Officer of the Company pursuant to a May 16, 1994 Employment Agreement. Mr. Gruber's Employment Agreement calls for the payment of an annual base salary of $300,000 during his service as the Company's Chief Executive Officer or such higher amount as the Board may determine. The Committee and the Board have set Mr. Gruber's annual salary to $510,000 and have voted to increase such annual salary to $525,000 effective October 1999. ANNUAL BONUS The Company maintains a Management Incentive Plan ("MIP") under which executive officers are eligible for an annual cash bonus. The Committee approves individual employee's participation in, and awards under, the MIP based on recommendations of Mr. Gruber. The Committee established goals for earnings per share and return on investment as the basis of MIP payouts for fiscal year 1999. In addition, the Committee retained a 20% discretionary factor in determining annual incentive compensation. Under the MIP, Mr. Gruber can receive an incentive payment up to 90% of his base salary. For other participants in the MIP, the maximum bonus opportunities range from 55% to 75% of base salary. The Company did not meet its goals for earnings per share and return on investment for fiscal year 1999 primarily because of the costs of the Houston accident settlement and aftereffects of the 29,000 ton press outage. -90- 91 Recognizing, however, the efforts by management on behalf of the Company and its shareholders, the Committee authorized bonus payments equal to the bonus payments that the MIP participants received for fiscal year 1998. As a result, Mr. Gruber earned a bonus of $85,500 for fiscal year 1999 while other executive officers earned bonuses ranging from 10% to 14% of base salary. STOCK BASED COMPENSATION Under the Company's 1997 Long-Term Incentive Plan, which was approved by stockholders at the 1997 Annual Meeting of Stockholders, and under predecessor plans, options with respect to the Company's common stock may be granted to the Company's key employees. In addition, the Committee may grant other stock- based awards such as restricted shares, performance shares, stock appreciation rights, phantom shares, performance units and bonus awards. The Committee sets guidelines for the size of awards based on similar factors, including industry surveys, as those used to determine base salaries and annual bonus. Stock-based compensation is designed to align the interests of executives with those of the stockholders. The approach is designed to provide an incentive for the creation of stockholder value since the benefit of the compensation package cannot be realized unless stock price appreciates. In the past the Committee has made annual grants of stock options, and during the Company's 1999 Fiscal Year the Committee granted options to a total of 147 key employees. The Committee believes that broad dissemination of options within the Company enhances the benefits to the Company of stock-based incentives. The Committee also believes that significant equity interests in the Company held by the Company's management align the interests of stockholders and management and foster an emphasis on the creation of stockholder value. In order to focus on the creation of long-term stockholder value, and with the advice of Towers Perrin, in 1996 the Committee developed the LTIP (described above), which results in significant payouts to the participants if significant price appreciation in the Company's stock is achieved. Under the LTIP the Company's executive officers (including Messrs. Gruber, Whelan, Smith, Whitney and Zugel) and other key executives do not participate in the annual grant of stock options for the five year term of the LTIP. Stock grants to Mr. Gruber and other officers under the LTIP and under other plans and agreements are described above on pages 85-87. -91- 92 TAX MATTERS The Omnibus Budget Reconciliation Act of 1993 imposes a limit, with certain exceptions, on the amount that a publicly held corporation may deduct in any year for the compensation paid or accrued with respect to its five most highly compensated officers. The Committee intends to try to preserve the tax deductibility of all executive compensation while maintaining the Company's compensation program as described in this report. Towards this end the Company's 1997 Long-Term Incentive Plan approved by the shareholders at the 1997 Annual Meeting of Shareholders has been designed in such a manner so that awards thereunder to the Company's executive officers, including LTIP awards, will qualify as performance-based compensation and, therefore, deductible by the Company. CONCLUSION Through the incentive and stock-based option programs described above, a significant portion of the Company's executive compensation is linked directly to individual and corporate performance and stock price appreciation. The Committee intends to continue the policy of linking executive compensation to corporate performance and return to stockholders. E. Paul Casey, Chairman Charles W. Grigg Andrew E. Lietz -92- 93 ITEM 12. SHARES OF COMPANY STOCK BENEFICIALLY OWNED BY CERTAIN OWNERS AND BY MANAGEMENT The following table sets forth as of July 31, 1999 (except as otherwise indicated) certain information regarding the beneficial ownership of the Shares of the Company's common stock by (i) each person or "group" (as that term is defined in Section 13(d)(3) of the Exchange Act) known by the Company to be the beneficial owner of 5% or more of the outstanding Shares, (ii) each of the Company's directors, nominees for director and executive officers and (iii) all directors and executive officers as a group. Except as otherwise indicated, each person listed below has sole voting and investment power over the shares of Common Stock shown as beneficially owned. NUMBER OF OPTIONS SHARES EXERCISABLE PERCENT BENEFICIALLY WITHIN OF NAME OWNED(1) 60 DAYS CLASS(2) ICM Asset Management, Inc.(3) 3,649,523 - 10.3% 601 W. Main Ave. Suite 600 Spokane, WA 99201 Scudder Kemper Investments, Inc.(4) 2,130,500 - 6.0% 345 Park Ave. New York, NY 10154 Directors and Officers: E. Paul Casey 25,372 3,999 Warner S. Fletcher(5)(6) 2,684,349 3,999 7.6% Robert G. Foster 1,072 3,999 Charles W. Grigg 3,372 1,666 David P. Gruber 123,030 148,750 M Howard Jacobson 1,372 3,999 Robert L. Leibensperger 1,372 666 Andrew E. Lietz 5,372 666 William T. McGovern - - Sanjay N. Shah 14,247 151,340 J. Stewart Smith 10,010 9,395 Colin Stead 15,040 25,792 J. Douglas Whelan 24,491 54,000 David J. White, Jr. 1,500 1,666 Wallace F. Whitney, Jr. 12,507 122,375 Frank J. Zugel 24,463 75,709 All directors and executive officers as a group(5)(6) 744,956 608,021 3.7% -93- 94 [FN] (1) The address of all directors and executive officers is Wyman-Gordon Company, 244 Worcester Street, North Grafton, MA 01536. (2) Unless other wise indicated, less than one percent. Includes exercisable options. (3) Based on information contained in Schedule 13G filed by ICM Asset Management, Inc. with the Securities and Exchange Commission on March 10, 1999. (4) Based on information contained in a Schedule 13G filed by Scudder Kemper Investments, Inc. with the Securities and Exchange Commission on February 16, 1999. (5) Warner S. Fletcher is one of the five trustees of The Stoddard Charitable Trust (the "Stoddard Trust"), a charitable trust which owns 1,458,000 Shares. The Shares owned by the Stoddard Trust are therefore reported in the above table. Mr. Fletcher disclaims any beneficial interest in the Shares owned by the Stoddard Trust. (6) Mr. Fletcher is a trustee of the Fletcher Foundation, which hold 311,000 Shares and of other trusts that hold 119,880 Shares for the benefit of Judith S. King, a former director of the Company, and her sister, who are his cousins, and 313,733 Shares for the benefit of his sister. Although the Shares owned by the Fletcher Foundation and by such trusts are therefore reported in the above table, Mr. Fletcher disclaims beneficial ownership of such Shares. </FN> CHANGE OF CONTROL On May 17, 1999, the Company and Precision Castparts Corp. ("PCC") entered into a Merger Agreement pursuant to the terms of which WGC Acquisition Corp., a wholly owned subsidiary of PCC, commenced on May 21, 1999, a cash tender offer for all of the outstanding shares of common stock of the Company at a price of $20.00 per share. Consummation of the tender offer is subject, among other things, to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). PCC and the staff of the Federal Trade Commission (the "FTC") have agreed that PCC will not consummate the tender offer until ten calendar days after PCC has notified the FTC of its intent to complete the transaction. PCC has also agreed that it will not provide such notice until at least 3:00 p.m. Eastern Time on August 24, 1999. The agreement regarding timing is intended to provide additional time for PCC to negotiate with the FTC. As a result, the expiration date of the tender offer has been extended until midnight, New York City time, on September 10, 1999; provided, however, that if the applicable waiting period (and any extension thereof) under the HSR Act in respect of the tender offer is terminated prior to August 31, 1999, the expiration date of the tender offer will be the date that is ten -94- 95 business days immediately following public disclosure of the expiration or termination of the waiting period under the HSR Act. As of August 20, 1999, approximately 21,873,878 shares of common stock of the Company had been tendered in the tender offer. This constitutes approximately 62.6% of the Company's outstanding shares as of the commencement of the tender offer. WGC Acquisition Corp. has also made a tender offer for the Company's outstanding 8% Senior Notes due 2007 and has extended the Senior Notes tender offer to coincide with the extension of the tender offer for the Company's common stock. For further information concerning the tender offer, see the Company's Schedule 14D-9, Solicitation/Recommendation Statement Pursuant to the Section 14(d)(4) of the Securities Exchange Act of 1934 and the amendments to said Schedule 14D-9. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Documents Filed as a Part of this Report PAGES 1. Financial Statements: Report of Management 38 Report of Independent Auditors 39 Consolidated Statements of Income 40 Consolidated Balance Sheets 41 Consolidated Statements of Cash Flows 42 Consolidated Statements of Stockholders' Equity 43 Consolidated Statements of Comprehensive Income 45 Notes to Consolidated Financial Statements 46 (a)(2) Schedules Valuation and qualifying accounts are not material to the Company's consolidated financial statements. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. -95- 96 2. Exhibits: Exhibits to the Form 10-K have been included only with the copies of the Form 10-K filed with the Commission. Upon request to the Company and payment of a reasonable fee, copies of the individual exhibits will be furnished. EXHIBIT INDEX EXHIBIT DESCRIPTION PAGE 3.A Restated Articles of Organization of Wyman- Gordon Company - incorporated by reference to Exhibit 3A to the Company's Form 10-K for the year ended June 3, 1995. - 3.B Bylaws of Wyman-Gordon Company, as amended through May 24, 1994 - incorporated by reference to Exhibit 3B to the Company's Form 10-K for the year ended June 3, 1995. - 4.A Amended and Restated Rights Agreement, dated as of January 10, 1994 between the Company and State Street Bank & Trust Company, as Rights Agent - incorporated by reference to Exhibit 1 to the Company's Report on Form 8-A/A dated January 21, 1994. - 4.B Indenture dated as of March 16, 1993 among Wyman-Gordon Company, its Subsidiaries and State Street Bank and Trust Company as Trustee with respect to Wyman-Gordon Company's 10 3/4% Senior Notes due 2003 - incorporated by reference to Exhibit 4C to the Company's Report on Form 10-K for the year ended December 31, 1992. - 4.C 10 3/4% Senior Notes due 2003. Supplemental Indenture dated May 19, 1994 - incorporated by reference to Exhibit 5 to the Company's Report on Form 8-K dated May 26, 1994. - 4.D 10 3/4% Senior Notes due 2003. Second Supplemental Indenture and Guarantee dated May 27, 1994 - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. - 4.E Instruments defining the rights of holders of long-term debt are omitted pursuant to paragraph (b)(4)(iii) of Regulation S-K Item 601. The Company agrees to furnish such instruments to the Commission upon request. - 4.F 10 3/4% Senior Notes due 2003. Third Supplemental Indenture dated December 9, 1997. - 4.G Indenture dated as of December 15, 1997 among Wyman-Gordon Company, its Subsidiaries and State Street Bank and Trust Company as Trustee with respect to Wyman-Gordon Company's 8% Senior Notes due 2007. - -96- 97 EXHIBIT DESCRIPTION PAGE 4.H 8% Senior Notes due 2007. Supplemental Indenture dated December 15, 1997. - 10.A J. Stewart Smith, Performance Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated July 16, 1996 - incorporated by reference on Form 10-K dated May 31, 1998. - 10.B David P. Gruber, Performance Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.H of the Company's Report on Form 10-K dated May 31, 1996. - 10.C Sanjay N. Shah, Performance Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.I of the Company's Report on Form 10-K dated May 31, 1996. - 10.D J. Douglas Whelan, Performance Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.J of the Company's Report on Form 10-K dated May 31, 1996. - 10.E Wallace F. Whitney, Jr, Performance Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.K of the Company's Report on Form 10-K dated May 31, 1996. - 10.F Frank J. Zugel, Performance Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.L of the Company's Report on Form 10-K dated May 31, 1996. - 10.G J. Stewart Smith, Performance Share Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated July 16, 1996 - incorporated by reference to Exhibit 10.M of the Company's Report on Form 10-K dated May 31, 1998. - 10.H David P. Gruber, Performance Share Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.N of the Company's Report on Form 10-K dated May 31, 1996. - -97- 98 EXHIBIT DESCRIPTION PAGE 10.I Sanjay N. Shah, Performance Share Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.O of the Company's Report on Form 10-K dated May 31, 1996. - 10.J J. Douglas Whelan, Performance Share Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.P of the Company's Report on Form 10-K dated May 31, 1996. - 10.K Wallace F. Whitney, Jr., Performance Share Agreement under the Wyman-Gordon Company Long- term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.Q of the Company's Report on Form 10-K dated May 31, 1996. - 10.L Frank J. Zugel, Performance Share Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.R of the Company's Report on Form 10-K dated May 31, 1996. - 10.M David P. Gruber, Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.T of the Company's Report on Form 10-K dated May 31, 1996. - 10.N Sanjay N. Shah, Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.U of the Company's Report on Form 10-K dated May 31, 1996. - 10.O J. Douglas Whelan, Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.V of the Company's Report on Form 10-K dated May 31, 1996. - 10.P Wallace F. Whitney, Jr., Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.W of the Company's Report on Form 10-K dated May 31, 1996. - 10.Q Frank J. Zugel, Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.X of the Company's Report on Form 10-K dated May 31, 1996. - -98- 99 EXHIBIT DESCRIPTION PAGE 10.R Amendment to Performance Share Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated May 24, 1994 between Wyman-Gordon Company and David P. Gruber - incorporated by reference to Exhibit 10.Y of the Company's Report on Form 10-K dated May 31, 1996. - 10.S Revolving Credit Agreement dated as of May 20, 1994 among Wyman-Gordon Receivables Corporation, the Financial Institutions Parties Hereto and Shawmut Bank N.A. as Issuing Bank, as Facility Agent and as Collateral Agent - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. - 10.T Receivables Purchase and Sale Agreement dated as of May 20, 1994 among Wyman-Gordon Company, Wyman-Gordon Investment Castings, Inc. and Precision Founders Inc. as the Sellers, Wyman- Gordon Company as the Servicer and Wyman-Gordon Receivables Corporation as the Purchaser - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. - 10.U Performance Share Agreement under the Wyman- Gordon Company Long-term Incentive Plan between the Company and David P. Gruber dated as of May 24, 1994 - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. - 10.V Long-term Incentive Plan dated July 19, 1995 incorporated by reference to Appendix A of the Company's "Proxy Statement for Annual Meeting of Stockholders" on October 18, 1995. - 10.W Wyman-Gordon Company Non-Employee Director Stock Option Plan dated January 18, 1995 - incorporated by reference to Appendix C of the Company's "Proxy Statement for Annual Meeting of Stockholders" on October 18, 1995. - 10.X Wyman-Gordon Company Long-term Incentive Plan dated January 15, 1997 - incorporated by reference to Appendix A of the Company's "Proxy Statement for Annual Meeting to Stockholders" to be held on October 15, 1997. - 10.Y Colin Stead, Performance Stock Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated July 16, 1996 - incorporated by reference to Exhibit 10.AI of the Company's Report on Form 10-K dated May 31, 1998. - 10.Z Colin Stead, Performance Share Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated July 16, 1996 - incorporated by reference to Exhibit 10.AJ of the Company's Report on Form 10-K dated May 31, 1998. - -99- 100 EXHIBIT DESCRIPTION PAGE 10.AA Agreement and Plan of Merger, dated May 17, 1999, by and among Precision Castparts Corp., WGC Acquisition Corp. and Wyman-Gordon Company (incorporated herein by reference to Exhibit 3 to the Company's Solicitation/Recommendation Statement on Schedule 14D-9, dated May 21, 1999 (File No. 005-10796)). - 10.AB Form of Executive Severance Agreement. Wyman-Gordon Company has entered into such agreements with the following of its officers: David P. Gruber, J. Douglas Whelan, Sanjay N. Shah, J. Stewart Smith, Colin Stead, Wallace F. Whitney, Jr., Frank J. Zugel, William T. McGovern and David J. Sulzbach (incorporated herein by reference to Exhibit 4 to the Company's Solicitation/Recommendation Statement on Schedule 14D-9, dated May 21, 1999 (File No. 005-10796)). - 10.AC Form of Amendment to Severance Agreement. Wyman-Gordon Company has entered into such agreements with the following of its officers: David P. Gruber, J. Douglas Whelan, Sanjay N. Shah, J. Stewart Smith, Colin Stead, Wallace F. Whitney, Jr., Frank J. Zugel and William T. McGovern (incorporated herein by reference to Exhibit 5 to the Company's Solicitation/ Recommendation Statement on Schedule 14D-9, dated May 21, 1999 (File No. 005-10796)). - 21 List of Subsidiaries E-1 23 Consent of Ernst & Young LLP 102 27 Financial Data Schedule E-2 -100- 101 (b) Reports on Form 8-K On August 11, 1998, the Company filed a Form 8-K with the Commission to report that it and Titanium Metals Corporation completed a transaction in which the parties have combined their respective titanium castings businesses into a jointly-owned venture. On October 29, 1999, the Company filed a Form 8-K with the Commission to report the adoption of (i) certain amendments to the Company's By-laws and (ii) a Shareholder Rights Agreement. On April 4, 1999, the Company filed a Form 8-K with the Commission to report the resignation of Edward J. Davis, the Company's Vice President, Chief Financial Officer and Treasurer. On April 9, 1999, the Company filed a Form 8-K with the Commission to report a pre-tax charge of $13.8 million relating to the settlement of claims associated with a previously reported industrial accident that occurred on December 22, 1996. -101- 102 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8, File Numbers 2-56547, 2-75980, 33-26980, 33-48068 and 33-64503) pertaining to the Wyman-Gordon Company Executive Long-Term Incentive Program (1975) -- Amendment No. 6, the Wyman-Gordon Company Stock Purchase Plan, the Wyman-Gordon Company Savings/Investment Plan, the Wyman-Gordon Company Long-Term Incentive Plan and the Wyman-Gordon Company Employee Stock Purchase Plan; and the Registration Statements (Form S-3, File Numbers 33-63459 and 333-32149) of Wyman-Gordon Company and in the related Prospectuses of our report dated June 23, 1999, with respect to the consolidated financial statements of Wyman-Gordon Company and subsidiaries included in this Annual Report (Form 10-K) for the year ended May 31, 1999. /S/ ERNST & YOUNG LLP Boston, Massachusetts August 26, 1999 -102- 103 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Wyman-Gordon Company (REGISTRANT) By: /S/ DAVID J. SULZBACH David J. Sulzbach Vice President, Finance and Corporate Controller and Principal Accounting Officer Date: August 27, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /S/ DAVID P. GRUBER Chairman of the Board August 27, 1999 David P. Gruber of Directors and Chief Executive Officer /S/ J. DOUGLAS WHELAN President and Chief August 27, 1999 J. Douglas Whelan Operating Officer /S/ DAVID J. SULZBACH Vice President, August 27, 1999 David J. Sulzbach Finance and Corporate Controller and Principal Accounting Officer /S/ E. PAUL CASEY Director August 27, 1999 E. Paul Casey /S/ WARNER S. FLETCHER Director August 27, 1999 Warner E. Fletcher /S/ ROBERT G. FOSTER Director August 27, 1999 Robert G. Foster /S/ CHARLES W. GRIGG Director August 27, 1999 Charles W. Grigg /S/ M HOWARD JACOBSON Director August 27, 1999 M Howard Jacobson -103- 104 SIGNATURE TITLE DATE /S/ ROBERT L. LEIBENSPERGER Director August 27, 1999 Robert L. Leibensperger /S/ ANDREW E. LIETZ Director August 27, 1999 Andrew E. Lietz /S/ DAVID A. WHITE, JR. Director August 27, 1999 David A. White, Jr. -104-