AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1999
REGISTRATION NO 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPASS AEROSPACE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 3728 95-4659126
(State of jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1501 Hughes Way, Suite 400
Long Beach, California 90815
(310) 522-0600
N. Paul Brost
Vice President, Chief Financial Officer and Treasurer
Compass Aerospace Corporation
1501 Hughes Way, Suite 400
Long Beach, California 90815
(310) 522-0600
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
Copies to:
Peter P. Wallace, Esq.
Morgan, Lewis & Bockius LLP
300 South Grand Avenue, 22nd Floor
Los Angeles, California 90071-3132
Jurisdiction Primary Standard IRS
Name of Additional of Industrial Employee
Registrants* Incorporation Classification Identification Numbers
Number
Aeromil Engineering Company Delaware 3728 95-4659131
Barnes Machine, Inc. Washington 3728 91-1195226
Brittain Machine, Inc. Kansas 3728 48-0816118
Modern Manufacturing, Inc. Delaware 3728 91-1413338
Pacific Hills Manufacturing Co. California 3469 95-4446681
Sea-Lect Products, Inc. Delaware 3728 95-4682821
Western Methods Machinery California 3728 95-3195940
Corporation
Wichita Manufacturing, Inc. California 3728 33-0536613
* Address and telephone number of the principal executive offices of the
additional registrants are the same as those of Compass Aerospace Corporation.
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Securities
Act"), check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
Title Of Each Class of Securities Amount To Be Proposed Maximum Proposed Maximum Aggregate Amount Of
To Be Registered Registered Offering Price Per Unit Offering Price (1) Registration Fee
10 1/8% Series B Senior Subordinated
Notes due 2005 $110,000,000 100% $110,000,000 $30,580
Guarantees of the 10 1/8% Series B
Senior Subordinated Notes due 2005
by Registrants other than Compass
Aerospace Corporation $110,000,000 (2) (2) (2)
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Pursuant to Rule 457(n), no separate registration fee is required with
respect to the guarantees.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED APRIL 2, 1999
COMPASS AEROSPACE CORPORATION
Offer to Exchange its
10 1/8% Series B Senior Subordinated Notes due 2005
for any and all of its outstanding
10 1/8% Senior Subordinated Notes due 2005
($110,000,000 aggregate principal amount outstanding)
Guaranteed by Aeromil Engineering Company, Barnes
Machine, Inc., Brittain Machine, Inc., Modern Manufacturing, Inc.,
Pacific Hills Manufacturing Co., Sea-Lect Products, Inc.,
Western Methods Machinery Corporation and
Wichita Manufacturing, Inc. (collectively, the "Guarantors")
---------------------------------------
TERMS OF EXCHANGE OFFER
- Expires at 5:00 p.m., New York City time, on , 1999,
unless extended
- Not subject to any condition other than that the Exchange Offer not
violate applicable law or any applicable interpretation of the staff
of the Securities and Exchange Commission
- Tenders of outstanding 10 1/8% Senior Subordinated Notes due 2005 (the
"Outstanding Notes") may be withdrawn any time before 5:00 p.m. on the
business day prior to expiration of the Exchange Offer
- The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes
- We will not receive any proceeds from the Exchange Offer
- The terms of the notes to be issued are identical in all material
respects to the Outstanding Notes, except they lack certain transfer
restrictions and registration rights relating to the Outstanding Notes
---------------------------------------
See "Risk Factors" beginning on page 15 for a discussion of certain matters
that should be considered by prospective investors.
---------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes to be distributed in
the exchange offer or determined that this Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
---------------------------------------
The date of this Prospectus is , 1999
TABLE OF CONTENTS
Page
----
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Unaudited Pro Forma Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 22
Selected Historical Consolidated Financial Data. . . . . . . . . . . . . . . . . . 24
Management's Discussion and Analysis of Consolidated Financial Condition
and Consolidated Results of Operations . . . . . . . . . . . . . . . . . . . . . 26
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Description of Credit Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 55
Description of the New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Certain United States Federal Income Tax Consequences. . . . . . . . . . . . . . . 82
Certain United States Federal Income Tax Consequences to Non-U.S. Holders. . . . . 82
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties, and assumptions about us, including, among other things:
- Our anticipated growth strategies,
- Our expected internal growth,
- Our intention to produce integrated parts,
- Technological advances in our industry,
- Anticipated trends and conditions in our industry,
- Our ability to integrate acquired businesses,
- Our future capital needs,
- Our ability to compete, including internationally, and
- Our ability to implement a Year 2000 readiness program.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and
assumptions, the forward-looking events discussed in this Prospectus might
not occur.
2
AVAILABLE INFORMATION
This Prospectus constitutes a part of a registration statement on Form S-4
(the "Registration Statement") filed by us with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"). As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto. As such we make
in this Prospectus reference to the Registration Statement and to the exhibits
and schedules thereto. For further information about us and about the
securities we hereby offer, you should consult the Registration Statement and
the exhibits and schedules thereto. You should be aware that statements
contained in this Prospectus concerning the provisions of any documents filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
Upon the effectiveness of the Registration Statement, we will be subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith we will file periodic
reports and other information with the Commission. The Registration Statement,
reports and other information filed by us with the Commission will be available
for inspection and copying at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Suite 1400, Northwestern
Atrium Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material will also be available at prescribed rates by writing to
the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also be able to access this information electronically
through the Commission's web page on the Internet at http://www.sec.gov. This
web site contains reports and other information regarding registrants such as
ourselves that have filed electronically with the Commission.
The indenture governing the notes provides that we will furnish to the
holders of the notes copies of the periodic reports required to be filed with
the Commission under the Exchange Act. Even if we are not subject to the
periodic reporting and informational requirements of the Exchange Act, we will
make such filings to the extent that such filings are accepted by the
Commission. We will make these filings regardless of whether we have a class of
securities registered under the Exchange Act. Furthermore, we will provide the
Trustee for the notes and the holders of the notes within 15 days after such
filings with annual reports containing the information required to be contained
in Form 10-K, and quarterly reports containing the information required to be
contained in Form 10-Q promulgated by the Exchange Act. From time to time, we
will also provide such other information as is required to be contained in Form
8-K promulgated by the Exchange Act. If the filing of such information is not
accepted by the Commission or is prohibited by the Exchange Act, we will then
provide promptly upon written request, and at our cost, copies of such reports
to prospective purchasers of the notes.
-----------------------------------------
This Exchange Offer is not being made to, nor will we accept surrenders for
exchange from, holders of Outstanding Notes in any jurisdiction in which this
Exchange Offer or the acceptance thereof would not be in compliance with the
Securities or Blue Sky Laws of such jurisdiction.
3
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY
NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ
THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL DATA AND RELATED
NOTES AND THE SECTION ENTITLED "RISK FACTORS," BEFORE MAKING A DECISION ABOUT
WHETHER TO EXCHANGE THE OUTSTANDING NOTES YOU HOLD FOR 10 1/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2005 (THE "NEW NOTES"). THE TERMS "COMPASS,"
THE "COMPANY," "OUR" AND "WE" AS USED IN THIS PROSPECTUS REFER TO COMPASS
AEROSPACE CORPORATION AND ITS SUBSIDIARIES AS A COMBINED ENTITY, EXCEPT WHERE
IT IS CLEAR THAT SUCH TERM MEANS ONLY THE PARENT COMPANY. COMPASS'
SUBSIDIARIES ARE: AEROMIL ENGINEERING COMPANY ("AEROMIL"), BARNES MACHINE,
INC. ("BARNES MACHINE"), BRITTAIN MACHINE, INC. ("BRITTAIN MACHINE"), MODERN
MANUFACTURING, INC. ("MODERN"), PACIFIC HILLS MANUFACTURING CO. (FORMERLY
LAMSCO WEST, INC., "PACIFIC HILLS"), SEA-LECT PRODUCTS, INC. (TOGETHER WITH ITS
FORMER SUBSIDIARY J&J LEASING, INC., "SEA-LECT"), WESTERN METHODS MACHINERY
CORPORATION ("WESTERN METHODS") AND WICHITA MANUFACTURING, INC. ("WICHITA").
THE EXCHANGE OFFER
On April 21, 1998 we completed the private offering of $110.0 million of
Outstanding Notes. We entered into a registration rights agreement with the
initial purchasers in the private offering in which we agreed, among other
things, to deliver to you this Prospectus and to complete the Exchange Offer
within 330 days of the issuance of the Outstanding Notes. You are entitled to
exchange in the Exchange Offer your Outstanding Notes for registered notes with
terms which are identical in all material respects to the Outstanding Notes,
except for certain transfer restrictions and registration rights. If a
registration statement was not filed within 240 days, or was not declared
effective within 300 days, of the issuance date of the Outstanding Notes, or the
Exchange Offer is not completed within 30 days after a registration statement is
declared effective, or a Shelf Registration Statement is not declared effective
on or prior to the 60th day after the obligation to file a Shelf Registration
Statement arises, we agreed to pay certain additional interest on the
Outstanding Notes until the Exchange Offer is completed. Increased interest is
currently accruing. You should read the discussion under the headings "Summary
Description of the New Notes--Exchange Offer; Registration Rights" and "The
Exchange Offer--Certain Conditions of the Exchange Offer" for further
information regarding the registration rights agreement.
We believe that the New Notes issued in the Exchange Offer may be resold by you
without compliance with the registration and prospectus delivery provisions of
the Securities Act, subject to certain conditions. You should read the
discussion under the headings "Summary of the Terms of the Exchange Offer" and
"The Exchange Offer" for further information regarding the Exchange Offer and
resale of the New Notes.
COMPASS
Compass was founded in October 1997 to become a major supplier of precision
machined individual metal parts and of higher value-added sub-assemblies,
manufacturing kits and structural components ("Integrated Products") used by
aerospace manufacturers in structural frames and other metal aircraft
components. We intend to capitalize on the trends among aircraft manufacturers
which seek to increase outsourcing, concentrate supplier relationships and
encourage suppliers of individual parts to manage the supply chain and produce
more value-added Integrated Products.
Compass commenced operations in November 1997 with the simultaneous acquisitions
of two established precision machining subcontractors. In 1998 we acquired six
additional operating companies. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Consolidated Results of Operations--
Consolidated Results of Operations" and "The Business--Compass." These
companies have precision machining and tooling capabilities which provide
Compass with a diverse and flexible manufacturing capability. We intend to
leverage our subsidiaries' consolidated capabilities, focus on supply chain
management and just-in-time delivery, expand our production of Integrated
Products and acquire businesses with complementary capabilities.
At present, we primarily manufacture individual parts for aircraft to precise
specifications from metals including aluminum, titanium and steel through the
use of precision computer numerically-controlled ("CNC") machine tools. We use a
variety of advanced techniques and machinery including horizontal and vertical
machining centers and state-of-the-art, high-speed precision machining
equipment, as well as three-spindle five-axis gantry mills. We
4
believe that Compass' machining capabilities are among the broadest, and that
we have among the largest number of three-spindle five-axis gantry mills of
all aerospace suppliers in the United States. We currently produce parts as
original equipment for:
- - all of the commercial jet models (717, 737, 747, 757, 767, 777, MD-11,
MD-80 and MD-90) produced by The Boeing Company through its various
divisions (collectively, "Boeing"),
- - certain other commercial aircraft manufacturers, including certain models
(A320, A330, A340) produced by Airbus Industrie ("Airbus")
- - and for several United States military programs.
We believe that the long-standing relationships that management has established
with our key customers, the strong name recognition of our subsidiaries, our
subsidiaries' established track records of quality manufacturing and their
consistent histories of timely deliveries are among the key factors in our
success. For the year ended December 31, 1998 we generated combined pro forma
revenues and EBITDA of approximately $183.4 million and $52.6 million,
respectively. At December 31, 1998 we had a total revenue backlog of
approximately $145.0 million, of which approximately $90.0 million is
deliverable in 1999.
INDUSTRY OVERVIEW
Commercial aircraft manufacturers are experiencing a sustained period of
historically high demand for new aircraft. According to the Aerospace Industries
Association of America, the annual worldwide market for aircraft was
approximately $78.0 billion in 1998. Manufacturing U.S.A., Sixth Edition,
estimates the value of aircraft equipment shipped in 1998 was approximately
$20.4 billion. In response to the increased demand for aircraft, the major
aircraft manufacturers are dramatically changing their manufacturing and
purchasing practices to increase production rates and reduce costs. More
specifically, aircraft manufacturers are increasing outsourcing and imposing
increased responsibilities, such as the production of more Integrated Products,
just-in-time deliveries and quality control inspections before shipping, on a
smaller number of qualified suppliers. Outsourcing also reduces costs because
subcontractors can produce parts at a fraction of the cost of in-house
manufacturing. At present, the aerospace supplier industry is highly fragmented,
consisting of a limited number of well-capitalized companies which offer a broad
range of products and services, and a large number of smaller, specialized
companies. As a result of the aircraft manufacturers' new manufacturing and
purchasing practices, the supplier industry has been consolidating at an
increasing pace in recent years and we believe that such consolidation will
continue.
STRATEGY
Our principal strategic objective is to increase revenues and profits by
managing the supply chain for our customers. We also seek to increase our
operating efficiencies and to reduce our customer concentration by diversifying
our revenue mix among aerospace customers. To reach our objectives we intend
to:
- - consolidate our acquired businesses;
- - increase operating efficiencies and asset utilization by implementing lean
manufacturing practices and through strategic coordination of production
among our manufacturing facilities to increase production runs, reduce
set-up times and utilize the most appropriate machinery for each production
job;
- - maximize the production volume of our manufacturing facilities, some of
which are under-utilized;
- - increase our production of Integrated Products by more effective use of our
broad, flexible manufacturing capabilities while continuing to produce
individual parts;
- - continue to centralize certain administrative functions at the corporate
level including finance, accounting, purchasing, tax, sales and marketing,
payroll, employee benefits and insurance and other administrative
activities to generate economies of scale and minimize costs;
- - continue to update and consolidate our management information systems to
improve internal controls and coordinate operations;
5
- - consolidate certain of the engineering functions currently spread across
our manufacturing facilities;
- - improve marketing by proactively marketing our broad, flexible
manufacturing capabilities to secure additional long-term production
contracts from existing customers;
- - target customers that our subsidiaries could not significantly penetrate
individually, including Airbus, which represented less than one percent of
our 1998 consolidated revenues;
- - increase outsourcing of certain production functions to small machine shops
to increase manufacturing efficiencies and capacity;
- - diversify our revenue mix among aerospace customers by targeting the Airbus
and the business jet markets, and United States military programs beyond
our current participation in the C-17 transport and F-18 fighter aircraft
programs; and
- - acquire additional businesses with complementary manufacturing capabilities
that will enhance our ability to produce Integrated Products, increase our
operating efficiencies and/or diversify our revenue mix.
-----------------------------------------
Compass' principal executive offices are located at 1501 Hughes Way, Suite 400,
Long Beach, California 90815 and our telephone number is (310) 522-0600.
6
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $110.0 million
aggregate principal amount of Outstanding Notes for an equal aggregate
principal amount of New Notes. The New Notes will be obligations of Compass
entitled to the benefits of the indenture governing the Outstanding Notes and
will be irrevocably and unconditionally guaranteed by each of Compass'
subsidiaries. The form and terms of the New Notes are identical in all
material respects to the form and terms of the Outstanding Notes, except that
the New Notes have been registered under the Securities Act and therefore are
not entitled to the benefits of the registrations rights granted under the
registration rights agreement, executed as part of the offering of the
Outstanding Notes, dated April 21, 1998 by and among Compass and Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), BancBoston Securities Inc.
("BSI") and Libra Investments, Inc. ("Libra") as the initial purchasers of
the Outstanding Notes.
Termination of Certain Rights. . . You are entitled to exchange your notes
for registered notes that are identical
in all material respects to the form and
terms of the Outstanding Notes, except
for certain transfer restrictions and
registration rights. The Exchange Offer
is intended to satisfy these rights.
After the Exchange Offer is complete,
you will no longer be entitled to any
exchange or registration rights with
respect to your notes.
The Exchange Offer . . . . . . . . We are offering to exchange $1,000
principal amount of New Notes which have
been registered under the Securities Act
for each $1,000 principal amount of
Outstanding Notes which we issued in
April 1998 in a private offering. In
order to be exchanged, an Outstanding
Note must be properly tendered and
accepted. All Outstanding Notes that
are validly tendered, and not validly
withdrawn, will be exchanged.
At this date there is $110.0 million
principal amount of notes outstanding.
We will issue registered notes on or
promptly after the expiration of the
Exchange Offer.
Resale of the New Notes. . . . . . Based on an interpretation of the staff
of the Commission set forth in no-action
letters issued to third parties,
including "Exxon Capital Holdings
Corporation" (available May 13, 1988),
"Morgan Stanley & Co. Incorporated"
(available June 5, 1991), "Mary Kay
Cosmetics, Inc." (available June 5,
1991) and "Warnaco, Inc." (available
October 11, 1991), we believe that the
notes issued in the exchange offer may
be offered for resale, resold and
otherwise transferred by you without
compliance with the registration and
prospectus delivery provisions of the
Securities Act provided that:
- the notes issued in the Exchange
Offer are being acquired in the
ordinary course of business;
- you are not participating, do not
intend to participate, and have no
arrangement or understanding with
any person to participate, in the
distribution of the notes issued to
you in the Exchange Offer;
7
- you are not a broker-dealer who
purchased such notes directly from
us for resale pursuant to Rule 144A
or any other available exemption
under the Securities Act; and
- you are not an "affiliate" of ours.
If our belief is inaccurate and you
transfer any note issued to you in the
Exchange Offer without delivering a
prospectus meeting the requirements of
the Securities Act or without an
exemption from registration of your
notes from such requirements, you may
incur liability under the Securities
Act. We do not assume or indemnify you
against such liability.
Expiration Date. . . . . . . . . . The Exchange Offer will expire at 5:00
p.m., New York City time, on
, 1999, or, at our option, at
the time that 100% of the Outstanding
Notes have been validly tendered and not
withdrawn, unless we decide to extend
the expiration date.
Accrued Interest on the New
Notes and Outstanding Notes. . . . The New Notes will bear interest from
their date of issuance. Holders of
Outstanding Notes whose notes are
accepted for exchange will be deemed
to have waived the right to receive any
payment of interest on such Outstanding
Notes accrued on and after the date
of issuance of the New Notes.
Consequently, holders who exchange their
Outstanding Notes for New Notes will
receive the same interest payment on
October 15, 1999 (the third interest
payment date with respect to the
Outstanding Notes and the first interest
payment date with respect to the New
Notes to be issued in the Exchange
Offer) that they would have received had
they not accepted the Exchange Offer.
Termination of the
Exchange Offer . . . . . . . . . . We may terminate the Exchange Offer if
we determine that our ability to proceed
with the Exchange Offer could be
materially impaired due to any legal or
governmental action, new law, statute,
rule or regulation or any interpretation
of the staff of the Commission of any
existing law, statute, rule or
regulation. We do not expect any of the
foregoing conditions to occur, although
there can be no assurance that such
conditions will not occur. Holders of
Outstanding Notes will have certain
rights against our Company under the
registration rights agreement executed
as part of the offering of the
Outstanding Notes should we fail to
consummate the Exchange Offer.
Procedures for Tendering
Outstanding Notes. . . . . . . . . If you are a holder of a note and you
wish to tender your note for exchange
pursuant to the Exchange Offer you must
transmit to IBJ Whitehall Bank & Trust
Company, as Exchange Agent, on or prior
to the Expiration Date:
8
either:
- a properly completed and duly
executed Letter of Transmittal,
which accompanies this Prospectus,
or a facsimile of the Letter of
Transmittal, the certificates for
the Outstanding Notes being
tendered, and all other documents
required by the Letter of
Transmittal, to the Exchange Agent
at the address set forth on the
cover page of the Letter of
Transmittal; or
- a computer-generated message
transmitted to The Depository
Trust Company ("DTC") by means of
the Automated Tender Offer Program
("ATOP") system and received by the
Exchange Agent and forming a part
of a confirmation of book entry
transfer in which you acknowledge
and agree to be bound by the terms
of the Letter of Transmittal;
and, either
- a timely confirmation of book-entry
transfer of your Outstanding Notes
into the Exchange Agent's account
at DTC pursuant to the procedure
for book-entry transfers described
in this Prospectus under the
headings "The Exchange
Offer--Procedures for Tendering
Outstanding Notes," and "The
Exchange Offer--Book-Entry
Transfer;" or
- the documents necessary for
compliance with the guaranteed
delivery procedures described
below, must be received by the
Exchange Agent on or prior to the
Expiration Date.
By executing the Letter of Transmittal,
each holder will represent to us that,
among other things, (i) the notes to be
issued in the Exchange Offer are being
obtained in the ordinary course of
business of the person receiving such
notes whether or not such person is the
holder, (ii) neither the holder nor any
such other person has an arrangement or
understanding with any person to
participate in the distribution of such
notes and (iii) neither the holder nor
any such other person is an "affiliate,"
as defined in Rule 405 under the
Securities Act, of Compass.
Special Procedures
for Beneficial Owners. . . . . . . If you are the beneficial owner of
Outstanding Notes and your name does not
appear on a security position listing of
DTC as the holder of such notes or if
you are a beneficial owner of
Outstanding Notes that are registered in
the name of a broker, dealer, commercial
bank, trust company or other nominee and
you wish to tender such notes in the
Exchange Offer, you should contact such
person in whose name your notes are
registered promptly and instruct such
person to tender on your behalf. If you
are a beneficial owner and you
9
wish to tender your Outstanding Notes on
your own behalf you must, prior to
completing and executing the Letter of
Transmittal and delivering your
Outstanding Notes, either make
appropriate arrangements to register
ownership of the Outstanding Notes in
your name or obtain a properly
completed bond power from the
registered holder. The transfer
of record ownership may take
considerable time.
Guaranteed Delivery
Procedures . . . . . . . . . . . . If you wish to tender your notes and
time will not permit your required
documents to reach the Exchange Agent
by the Expiration Date, or the procedure
for book-entry transfer cannot be
completed on time or certificates for
Outstanding Notes cannot be delivered on
time, you may tender your notes pursuant
to the procedures set forth under the
heading "The Exchange Offer-- Guaranteed
Delivery Procedures."
Withdrawal of Tenders. . . . . . . You may withdraw the tender of your
notes at any time before 5:00 p.m., New
York City time, on ,
1999, one business day prior to the
Expiration Date, unless your notes were
previously accepted for exchange.
Acceptance of Outstanding Notes and
Delivery of New Notes . . . . . . Subject to certain conditions (as
summarized above in "Termination of the
Exchange Offer" and described more fully
under the heading "The Exchange Offer
--Termination"), we will accept for
exchange any and all Outstanding Notes
which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date.
The notes issued pursuant to the
Exchange Offer will be delivered
promptly following the Expiration Date.
Certain Federal Income
Tax Consequences . . . . . . . . . We believe the exchange of the New Notes
for the Outstanding Notes should not be
a sale or exchange for United States
federal income tax purposes and
therefore, that you will not recognize
any taxable gain or loss or any interest
income as a result of such exchange.
Use of Proceeds. . . . . . . . . . We will not receive any proceeds from
the issuance of notes pursuant to the
Exchange Offer. We will pay all
expenses incident to the Exchange Offer.
Exchange Agent . . . . . . . . . . IBJ Whitehall Bank & Trust Company is
serving as the exchange agent in
connection with the Exchange Offer. The
Exchange Agent can be reached at P.O.
Box 84, Bowling Green Station, New York,
New York, 10274-0084. For more
information with respect to the Exchange
Offer, the telephone number for the
Exchange Agent is (212) 858-2103 and the
facsimile for the Exchange Agent is
(212) 858-2611.
10
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the Outstanding Notes and the New Notes are identical in all
material respects, except for certain transfer restrictions and registration
rights relating to the Outstanding Notes.
Notes Offered. . . . . . . . . . . $110.0 million aggregate principal
amount of 101/8% Series B Senior
Subordinated Notes due 2005.
Issuer . . . . . . . . . . . . . . Compass Aerospace Corporation
Maturity Date. . . . . . . . . . . April 15, 2005.
Interest Payment Dates . . . . . . April 15 and October 15 of each year,
commencing October 15, 1999.
Ranking. . . . . . . . . . . . . . The New Notes will be unsecured senior
subordinated obligations and will be
subordinated to all our existing and
future senior indebtedness. The New
Notes will rank senior to or equal to
all our future subordinated
indebtedness. Because the New Notes are
subordinated, in the event of
bankruptcy, liquidation or dissolution,
holders of the New Notes will not
receive any payment until holders of
senior indebtedness have been paid in
full. The terms "senior indebtedness"
and "subordinated indebtedness" are
defined in the "Description of the New
Notes--Subordination" and "Description
of the New Notes--Certain Definitions"
sections of this Prospectus.
At December 31, 1998, we had outstanding
$81.0 million of senior indebtedness and
$110.0 million of senior subordinated
indebtedness.
Guarantees . . . . . . . . . . . . The New Notes will be jointly and
severally, irrevocably and
unconditionally guaranteed on a senior
subordinated basis by each of Compass'
present and future subsidiaries. The
guarantees will be unsecured senior
subordinated obligations of our
subsidiaries and will be subordinated to
all existing and future senior
indebtedness of our subsidiaries. At
December 31, 1998 our subsidiaries had
$6.0 million of indebtedness
outstanding.
Optional Redemption. . . . . . . . We may redeem the New Notes, in whole or
in part, at any time on or after April
15, 2002, at the redemption prices set
forth in this Prospectus.
Public Equity Offering
Optional Redemption. . . . . . . . Before April 15, 2001, we may redeem up
to 35% of the aggregate principal amount
of the notes originally outstanding with
the net proceeds of a public equity
offering at 110.125% of the principal
amount thereof, plus accrued interest,
if at least 65% of the aggregate
principal amount of the notes originally
issued remains outstanding after such
redemption. See "Description of the New
Notes--Optional Redemption."
11
Change of Control. . . . . . . . . Upon certain change of control events,
each holder of New Notes may require us
to repurchase all or a portion of its
New Notes at a purchase price equal to
101% of the principal amount thereof,
plus accrued interest. See "Description
of the New Notes--Certain Covenants"
and "Description of the New Notes--
Certain Definitions" for the definition
of "Change of Control."
Certain Covenants. . . . . . . . . The indenture governing the New Notes
contains covenants that, among other
things, will limit our ability and the
ability of our restricted subsidiaries
to:
- incur additional indebtedness,
- issue Disqualified Capital Stock,
- pay dividends or make other
distributions with respect to our
capital stock,
- create certain liens,
- sell certain assets,
- sell the capital stock of our
subsidiaries,
- engage in certain transactions with
affiliates, and
- effect certain consolidations or
mergers.
These covenants are subject to important
exceptions and qualifications, which are
described under the heading "Description
of the New Notes" in this Prospectus.
Exchange Offer;
Registration Rights. . . . . . . . Under a registration rights agreement
executed as part of the offering of
the Outstanding Notes, we have agreed to:
- file a registration statement
within 240 days after the issue
date of the Outstanding Notes
enabling note holders to exchange
the privately notes for publicly
registered notes that are identical
in all material respects to the
form and terms of the Outstanding
Notes;
- use our best efforts to cause the
registration statement to become
effective within 300 days after the
issue date of the Outstanding
Notes;
- consummate the Exchange Offer
within 30 days of the effective
date of our registration date; and
- use our best efforts to file a
shelf registration statement for
the resale of the notes if we
cannot effect an Exchange Offer
within the time periods listed
above and in certain other
circumstances.
12
The interest rate on the Outstanding
Notes has increased as a form of
liquidated damages because we did not
comply with our obligations under the
registration rights agreement. As a
result of the registration statement not
yet having been declared effective by
the Commission, liquidated damages are
currently accruing at the rate of
$11,000 per week in the aggregate for
the $110.0 million principal amount of
Outstanding Notes. See "The Exchange
Offer--Certain Conditions of the
Exchange Offer."
Risk Factors . . . . . . . . . . . See "Risk Factors" for a discussion of
factors you should carefully consider
before deciding to invest in the notes.
13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with summary historical consolidated
financial data of Compass. We have prepared this information using the
consolidated financial statements of Compass as of and for the period October
21, 1997 (date of incorporation) through December 31, 1997 and for the year
ended December 31, 1998. Such financial statements have been audited by Ernst &
Young LLP, independent auditors.
When you read this summary historical consolidated financial data, it is
important that you read along with it the historical consolidated financial
statements and the related notes thereto, as well as the sections titled
"Unaudited Pro Forma Financial Data," "Selected Historical Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this Prospectus.
Compass
36 days Year
Ended Ended
December 31, December 31,
1997 1998
------------ ------------
(dollars in thousands)
Income Statement Data:
Revenues ......................................... $ 3,057 $ 96,547
Gross Profit ..................................... 671 26,137
Operating Income ................................. 267 11,600
Other Data:
Cash flow provided by (used in) operations ....... $ 269 $ (6,677)
EBITDA (1) ....................................... 486 20,550
EBITDA margin .................................... 15.9% 21.3%
Depreciation and Amortization .................... $ 219 $ 8,440
Capital Expenditures ............................. 25 5,701
Balance Sheet Data (at period end):
Cash and Cash Equivalents ........................ $ 443 $ 7,871
Total Assets ..................................... 33,789 255,505
Long Term Debt (including current portion) ....... 20,585 196,968
Stockholders' Equity ............................. 9,074 29,955
(1) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under generally accepted accounting principles ("GAAP") and
should not be construed as an alternative to operating income or cash flows
from operating activities as determined by GAAP. EBITDA is not indicative
of Compass' operating performance, does not provide a measure of liquidity
and does not represent available or discretionary funds of Compass.
RATIO OF EARNINGS TO FIXED CHARGES
In the table below, we provide you with the ratio of earnings to fixed
charges for Compass and its predecessor, Brittain Machine. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Consolidated
Results of Operations--Consolidated Results of Operations."
Brittain Machine
Brittain Machine for the for the period Compass for the Compass for the
Years Ended from July 1, 1997 36 days Ended Year Ended
June 30, through April 21, December 31, December 31,
1994 1995 1996 1997 1998 1997 1998
---- ---- ---- ---- ---- ---- ----
(unaudited)
Ratio of earnings
to fixed charges(1) 10.4x (0.2)x 10.7x 8.4x 20.5x 1.5x 1.3x
(1) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges, by fixed charges. Fixed
charges consist of interest expense and 33% of operating rental expense,
which management believes is representative of the interest component of
rental expense. Earnings were insufficient to cover fixed charges for the
year ended June 30, 1995 by $757,000.
14
RISK FACTORS
You should carefully consider the following factors and other information
in this Prospectus before deciding to invest in the notes.
WE HAVE A LIMITED COMBINED OPERATING HISTORY AND MAY NOT HAVE THE RESOURCES TO
SUCCESSFULLY INTEGRATE AND MANAGE OUR COMBINED ENTITY
We began operations in November 1997. Between November 1997 and January
1999, we acquired eight operating companies. Prior to our acquisition of our
subsidiaries, each of our subsidiaries operated independently and we may not be
able to integrate these businesses successfully. The combined financial results
of Compass covers periods when all of our subsidiaries were not under the common
control of our management and may not be indicative of our future financial or
operating results. Our management group has been assembled only recently,
including the recent additions of our Chief Financial Officer and Executive Vice
President, Aircraft Structures North America, and our management control
structure is still in its formative stages. Our ability to continue to achieve
our goals will depend upon our ability to integrate effectively the recent and
any future acquisitions and to achieve operating and cost efficiencies. Any
failure by us to effectively oversee the combined entity could have a material
adverse effect on our business, financial condition or results of operations.
WE ARE DEPENDENT ON A KEY CUSTOMER
Our largest customer is Boeing, which directly accounted for approximately
72.0% of our combined pro forma revenues for the year ended December 31, 1998.
In addition, approximately 13.0% of the remainder of our combined pro forma
revenues for the year ended December 31, 1998 were derived from Boeing
indirectly through sales to suppliers of Boeing. Most of our sales to Boeing are
pursuant to contracts and purchase orders which may be terminated by Boeing at
any time. Boeing has announced that it will stop producing the MD-80 and MD-90
in 2000 and the MD-11 in 2001, models for which we currently produce parts. In
addition, under certain circumstances, Boeing may enforce alternative economic
terms pursuant to such contracts in which case the contracts could become less
commercially favorable to us or we may elect to terminate the applicable portion
of such contracts. We cannot assure you that Boeing will not terminate its
contracts with us, or that we will be able to maintain our current level of
sales to Boeing and Boeing's suppliers. The loss of all or a substantial portion
of our revenues from Boeing could have a material adverse effect on our
business, financial condition or results of operations.
WE ARE DEPENDENT ON THE COMMERCIAL AIRCRAFT INDUSTRY WHICH HAS HISTORICALLY BEEN
HIGHLY CYCLIC
Our principal customers are commercial aircraft manufacturers. As a
result, our business is closely related to the financial performance of the
commercial airlines, which has historically been highly cyclical and
competitive. Consequently, demand from the aircraft industry has historically
been subject to cyclical fluctuations and has been adversely affected in the
past by a number of factors, including, but not limited to, increased fuel and
labor costs and intense price competition. Several domestic and foreign
commercial airlines have in the past encountered significant financial
difficulties, resulting in several airlines delaying aircraft orders, canceling
their options to purchase aircraft, or seeking protection under bankruptcy laws.
Deferrals or cancellations in aircraft orders could adversely affect the volume
and price of orders placed for products used to manufacture commercial aircraft,
including the individual parts and Integrated Products we manufacture. Changes
in the rate of future aircraft deliveries, including cancellations or deferrals
of scheduled deliveries, could have a material adverse effect on our business,
financial condition or results of operations. See "Business--Industry Overview
and Trends."
In particular, Boeing has developed a large backlog of aircraft sales to
customers in Asia. Recent financial turmoil in Asia, including currency
devaluations affecting Boeing's Asian customers, has resulted in Boeing
announcing that it will adjust its production schedule over the next several
years to adjust for delays or cancellations of orders. One Boeing customer, the
People's Republic of China, has announced that it will seek to postpone
deliveries of approximately 25 aircraft from Boeing presently scheduled for
delivery in 2000 and 2001. Boeing's changes in its production schedules may
reduce
15
Boeing's demand for our products, and could thus have a material adverse
effect on our business, financial condition or results of operations.
WE ARE DEPENDENT ON CUSTOMER CERTIFICATION OF OUR MANUFACTURING FACILITIES
We manufacture parts to exact specifications provided by our aerospace
customers in engineering drawings. See "Business--Operations--Certification" and
"Business--Sales and Marketing." Our customers require us to perform quality
standards testing and certification procedures on all manufactured parts and
provide detailed records to ensure traceability of each part. Our customers
typically certify our manufacturing facilities as meeting their quality
standards. Such customer certification is necessary for us to manufacture parts
for our aerospace customers. From time to time, other aerospace industry
subcontractors have lost their customer certifications by reason of, among other
things, problems with product quality, manufacturing processes or documentation.
We have no reason to believe that any of our certified manufacturing facilities
will lose any of their customer certifications, but we cannot assure you that
such an event will not occur. If a significant customer were to terminate our
facility certification at one or more of our facilities, it could have a
material adverse effect on our business, financial condition or results of
operations.
YOU MAY NOT BE ABLE TO RELY ON FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements which involve risks and
uncertainties. Those statements appear in a number of places in this Prospectus
and include statements regarding our intent, belief or current expectations,
including statements made with respect to future acquisitions, industry trends,
the on-going needs of our existing customers, especially Boeing, our ability to
integrate the operations of our subsidiaries and of future acquisitions, our
ability to expand our customer base and our future operating performance. You
should be aware that any such forward looking statements are not guarantees of
future performance and that actual results may differ from those in the forward
looking statements as a result of various factors. The accompanying information
contained in this Prospectus identifies important factors that could cause such
differences.
WE MAY NOT HAVE THE RESOURCES TO SUCCESSFULLY MANAGE ADDITIONAL GROWTH
One of our key strategies is to grow by acquiring and integrating
complementary businesses. If we are unable to find suitable companies for
acquisition or adequate capital to complete our planned acquisitions, we may not
be able to achieve our goals. In addition, growth by acquisition involves risks
such as difficulties in integrating the operations and personnel of acquired
companies and the potential loss of key employees of acquired companies. Any
delays or unexpected costs incurred in connection with the integration of
acquired companies could have a material adverse effect on our business,
financial condition or results of operations.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND ON THE CONTINUING AVAILABILITY OF
A SUPPLY OF QUALIFIED PERSONNEL
Our success depends to an extent on our ability to retain and attract
existing and new key personnel. We have entered into employment agreements with
Alexander Hogg, Chief Executive Officer and President and certain other key
personnel, but we cannot assure you that such individuals will remain with
Compass throughout the terms of their agreements, or thereafter. Although we
believe replacement personnel, including persons already employed by Compass,
could be found, the loss of the services of one or more of these key employees
before we are able to attract and retain qualified replacement personnel could
have a material adverse effect on our business, financial condition or results
of operations.
Our ability to attract and retain skilled personnel is also important to
our business. Competition for qualified personnel in the aerospace industry is
intense. We may not be able to retain our existing staff or fill new positions
or vacancies created by expansion or turnover.
16
WE HAVE A SIGNIFICANT AMOUNT OF DEBT
At December 31, 1998 we had approximately $197.0 million of consolidated
indebtedness outstanding, approximately $7.9 million of cash, approximately
$255.5 million of total assets, approximately $121.3 million of total tangible
assets and approximately $30.0 million of stockholders' equity. On a pro forma
combined basis, Compass' EBITDA for the year ended December 31, 1998 would have
equaled 2.7 times pro forma net interest expense. On a pro forma combined basis
at December 31, 1998, Compass would have had net debt (total debt less cash)
equal to 3.6 times pro forma combined 1998 EBITDA. See "Capitalization,"
"Management's Discussion and Analysis of Consolidated Financial Condition and
Consolidated Results of Operations" and "Unaudited Pro Forma Financial Data."
Our high level of indebtedness could have important consequences to note
holders such as:
- limiting our ability to obtain additional financing to fund our growth
strategy, working capital, capital expenditures, debt service
requirements or other purposes;
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds
to make principal payments and pay interest expense;
- increasing our vulnerability to adverse economic and industry
conditions; and
- increasing our vulnerability to interest rate increases because
borrowings under our bank credit facilities are at variable interest
rates.
Our ability to pay interest on the notes and to satisfy our other debt
obligations will depend upon, among other things, our future operating
performance and our ability to refinance indebtedness when necessary. Each of
these factors is to a large extent dependent on economic, financial, competitive
and other factors beyond our control. If, in the future, we cannot generate
sufficient cash from operations to make scheduled payments on the notes or to
meet our other obligations we will need to refinance, obtain additional
financing or sell assets. We cannot assure you that our business will generate
cash flow, or that we will be able to obtain funding sufficient to satisfy our
debt service requirements.
WE OPERATE IN A COMPETITIVE INDUSTRY
We compete with a number of established companies that may have
significantly greater financial, technological and marketing resources than we
do. Our primary competitors in the parts manufacturing business for the
structural frames of aircraft are Stellex Aerospace, Ducommun Incorporated and
The Triumph Group, Inc., each of which has significantly greater financial and
marketing resources than we do. Our ability to compete depends on our continued
certification under customer quality assurance programs, such as Boeing's
D1-9000 certification program, high product performance, timely deliveries,
competitive prices and superior customer service and support. We cannot assure
you that we will be able to compete successfully with respect to these or other
factors. See "Business--Competition."
OUR CONTRACTS ASSOCIATED WITH OUR BACKLOG COULD BE TERMINATED
Our backlog and bookings are subject to fluctuations and are not
necessarily indicative of future revenues. Our contracts typically contain
contingency provisions permitting termination by the customer at any time
without penalty. We cannot assure you that backlog will be completed and booked
as revenue. Cancellations of pending contracts or terminations or reductions of
contracts in progress could have a material adverse effect on our business,
financial condition or results of operations. See "Business--Backlog."
17
WE MAY BE EXPOSED TO ENVIRONMENTAL RISKS AT OUR MANUFACTURING FACILITIES AND ARE
SUBJECT TO ENVIRONMENTAL REGULATION
We are subject to federal, state, local and foreign laws, regulations and
ordinances establishing health and environmental quality standards, and may be
subject to liabilities or penalties for violations of those standards. We are
also subject to laws and regulations governing remediation of contamination at
facilities currently or formerly owned or operated by us or to which we have
sent hazardous substances or wastes for treatment, recycling or disposal. We
acquire, and expect to continue to acquire, pre-existing businesses that have
historical and ongoing operations. We have and will have limited information
about the past activities of those businesses and their operations on the
acquired properties. We have acquired at least one leased property that is
currently under investigation by governmental authorities for groundwater
contamination and we have been asked to conduct certain additional
investigations. We have also been named a defendant in an action filed by an
owner of property adjacent to property we lease. At this time, we cannot
determine, in either case, what cleanup activities, if any, will be required.
Soil and groundwater contamination may also exist on our other properties as a
result of current or former operations on our properties, or operations on other
properties. We may be subject to future liabilities or obligations as a result
of new or more stringent interpretations of existing laws and regulations. In
addition, we may have liabilities or obligations in the future if we discover
any environmental contamination or liability at any of our facilities, or at
facilities we may acquire. Such matters may have a material adverse effect on
our business, financial condition or results of operations.
WE MAY SUFFER A LOSS IF AVIATION-RELATED OR PRODUCT LIABILITY CLAIMS EXCEED
INSURANCE COVERAGE
We currently carry aviation products insurance. To date, we have not
experienced any significant uninsured or insured aviation-related claims or any
material product liability claims. However, we cannot assure you that our
existing insurance coverage will be adequate to cover future claims that may
arise or we will be able to renew such coverage at commercially reasonable
rates.
WE ARE DEPENDENT UPON THE AVAILABILITY OF RAW MATERIALS
We utilize substantial amounts of aircraft-quality metals including
aluminum and titanium. In the recent past, there have been significant increases
in the price of titanium. We cannot assure you that we will be able to purchase
such items at all times in sufficient quantities or on satisfactory terms and
conditions.
FRAUDULENT TRANSFER STATUTES MAY LIMIT YOUR RIGHTS AS A NOTE HOLDER
Each of our subsidiaries is a guarantor of the notes. In the event of the
bankruptcy or other financial difficulty of a guarantor, the guarantees of the
notes by the guarantors may be subject to review under state or federal
fraudulent transfer laws. Under those laws a court could avoid a guarantor's
guarantee and direct the return of any amounts paid under its guarantee to the
guarantor or to a fund for the benefit of the guarantor's creditors. As a
result, such funds would not be available to repay the guarantor's obligations
to the note holders. A court would consider factors such as whether a guarantor
received less than fair consideration for incurring its obligations under its
guarantee, and whether:
- a guarantor was insolvent at the time it entered into the guarantee or
was rendered insolvent by entering into the guarantee;
- a guarantor's remaining unencumbered assets constituted sufficient
capital for the conduct of the guarantor's business or operations; and
- a guarantor intended to incur or believed it would incur debts beyond
its ability to pay as such debts matured.
A court could also avoid a guarantor's guarantee if it found that the guarantor
entered into the guarantee with the actual intent to hinder, delay or defraud
its creditors.
18
If a guarantor's liability under its guarantee exceeds the amount the
guarantor directly benefits from the proceeds of the notes, a court is likely to
find that it did not receive fair consideration or reasonably equivalent value
for its guarantee.
A court will use a different measure of insolvency for purposes of the
foregoing depending on the law of the jurisdiction being applied. Generally,
however, an entity would be considered insolvent if the sum of its debts
(including contingent or unliquidated debts) is greater than all of its property
at a fair valuation or if the present fair market value of its assets is less
than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and matured.
THE NOTES WILL BE SUBORDINATED TO OUR OTHER DEBT AND OUR HOLDING COMPANY
STRUCTURE MAY ADVERSELY AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS
UNDER THE NOTES
The notes are subordinate to all our senior indebtedness. In addition,
the notes effectively rank junior to all liabilities of our subsidiaries. At
December 31, 1998 we had outstanding $81.0 million of senior indebtedness and
$110.0 million of senior subordinated indebtedness and our subsidiaries had
$6.0 million in outstanding indebtedness. We may also incur additional
senior indebtedness consistent with the terms of our debt agreements, such as
borrowings in connection with future acquisitions.
In the event of our default in any payment due on our senior indebtedness,
or our bankruptcy, liquidation or dissolution, our assets would be available to
pay obligations on the notes only after all payments had been made on our senior
indebtedness. As a result, the lenders under our credit facility may receive
more, ratably and note holders may receive less ratably, than our other
creditors. See "Description of Notes--Subordination."
We are a holding company whose material assets consist primarily of the
capital stock of our subsidiaries. Consequently, we are dependent upon the legal
and contractual ability of our subsidiaries to pay dividends in order to make
payments on the notes and satisfy any repurchase obligations relating to the
notes, as a result of a Change of Control or a sale or other disposition of
certain assets. See "--Fraudulent Transfer Considerations" and "Description of
the New Notes." We cannot assure you that our subsidiaries will make sufficient
dividend payments to enable us to meet our obligations under the notes.
RESTRICTIVE COVENANTS IN OUR INDENTURE AND OUR CREDIT AGREEMENT MAY ADVERSELY
AFFECT US
The indenture governing the notes and our credit agreement contain
restrictive covenants which, among other things, restrict us and our
subsidiaries from:
- incurring additional indebtedness;
- incurring liens;
- paying dividends;
- making certain other restricted payments or investments;
- consummating certain asset sales;
- entering into certain transactions with affiliates;
- merging or consolidating with another entity;
- disposing of all or substantially all of our assets; and
- prepaying the notes, except in certain circumstances.
The credit agreement also requires us to maintain specified financial ratios and
satisfy certain financial tests. Our ability to meet such financial ratios and
tests may be affected by events beyond our control. We cannot assure that we
will meet such tests. A breach of any of these covenants could result in an
19
event of default under the credit agreement. If such an event of default occurs,
the lenders could accelerate our indebtedness to them under the credit
agreement. We cannot assure you that our assets would be sufficient to repay
our indebtedness in full, including the notes. See "Description of the
Notes--Certain Covenants" and "Description of Credit Agreement."
NO PUBLIC TRADING MARKET FOR THE NOTES EXISTS
There has not been an established trading market for the notes. Although
the initial purchasers have told us they currently make a market in the
Outstanding Notes, and, if issued, intend to make a market in the New Notes,
which will replace the Outstanding Notes, they have no obligation to do so and
may discontinue making a market at any time without notice.
The notes are eligible for trading in the Private Offerings, Resale and
Trading through the Automatic Linkage ("PORTAL") market. However, we do not
intend to apply for listing of the Outstanding Notes, or, if issued, the New
Notes, on any securities exchange or for quotation through the National
Association of Securities Dealers' Automated Quotation System. The liquidity of
any market for the notes will depend upon the number of holders of the notes,
our performance, prevailing interest rates, the market for similar securities,
the interest of securities dealers in making a market for the notes and other
factors. A liquid trading market may not develop for the notes. We cannot
assure you that a liquid trading market will develop for the notes, or that
holders of the notes will be able to sell the notes at an acceptable price, if
at all.
OUTSTANDING NOTES THAT ARE NOT EXCHANGED WILL CONTINUE TO BE SUBJECT TO TRANSFER
RESTRICTIONS
Untendered Outstanding Notes that are not exchanged for New Notes pursuant
to the Exchange Offer will remain restricted securities. Outstanding Notes will
continue to be subject to the following restrictions on transfer:
- Outstanding Notes may be resold only if registered under the
Securities Act, if an exemption from registration is available
thereunder, or if neither such registration nor such exemption is
required by law;
- Outstanding Notes shall bear a legend restricting transfer in the
absence of registration or an exemption therefrom;
- a holder of Outstanding Notes who desires to sell or otherwise dispose
of all or any part of its Outstanding Notes to an institutional
accredited investor under an exemption from registration under the
Securities Act, must deliver to the trustee a signed letter containing
certain representations and agreements relating to the transfer of the
Outstanding Notes and, if such transfer is for an aggregate principal
amount of Outstanding Notes less than $250,000, must deliver to us, if
we so request, an opinion of counsel acceptable to us that the
transfer is in compliance with the Securities Act; and
- a holder of Outstanding Notes who desires to sell or otherwise dispose
of all or any part of its Outstanding Notes under certain exemptions
to the Securities Act must deliver to us, upon our request, an opinion
of counsel satisfactory to us that such exemption is available.
20
CAPITALIZATION
The following table sets forth the consolidated cash and consolidated
capitalization of Compass at December 31, 1998. This table should be read in
conjunction with the consolidated financial statements of Compass and our
subsidiaries, including the notes thereto, included elsewhere in this
Prospectus.
AT DECEMBER 31,
1998
---------------
(DOLLARS IN THOUSANDS)
CASH AND CASH EQUIVALENTS.................................. $ 7,871
---------------
---------------
DEBT (INCLUDING CURRENT PORTION):
Notes ......................................... $ 110,000
Term Loan A....................................... 35,000
Term Loan B....................................... 45,000
Acquisition Line.................................. 1,000
Capital leases and other.......................... 5,968
---------------
TOTAL DEBT............................... $ 196,968
STOCKHOLDERS' EQUITY:
Common stock...................................... 248
Additional paid-in capital........................ 28,718
Retained earnings................................. 989
---------------
TOTAL STOCKHOLDERS' EQUITY............... 29,955
---------------
TOTAL CAPITALIZATION..................... $ 226,923
---------------
---------------
21
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data are derived by the
application of pro forma adjustments to historical consolidated financial
statements included elsewhere in this Prospectus. The unaudited pro forma
income statement data for the year ended December 31, 1998 give effect to
acquisitions as if such acquisitions were consummated as of January 1, 1998.
The unaudited pro forma financial data are not necessarily indicative of
operating results or financial position that would have been achieved had the
events described above been consummated at January 1, 1998 and should not be
construed as representative of Compass' future operating results or financial
position. The unaudited pro forma financial data set forth below are derived in
part from the historical consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus.
The pro forma adjustments are applied to the historical consolidated
financial statements to reflect and account for the acquisitions completed by
Compass in 1998 as a purchase. Accordingly, the pro forma data reflect the
preliminary allocations of purchase prices, based on estimated fair values of
the tangible and intangible assets and liabilities of the acquired businesses.
Management believes that the final allocations will not vary significantly from
such preliminary allocations.
COMPANY
PRO FORMA
COMPANY COMPANY YEAR ENDED
YEAR ENDED 1998 ACQUISITIONS FROM COMBINED DECEMBER 31,
DECEMBER 31, JANUARY 1, 1998 THROUGH WITH ADJUSTMENTS (4) 1998 (5)
(DOLLARS IN THOUSANDS) 1998 (1) THE DATE OF ACQUISITION (2) 1998 ACQUISITIONS (3) (UNAUDITED) (UNAUDITED)
------------ --------------------------- --------------------- --------------- ------------
INCOME STATEMENT DATA:
Revenues.................... $ 96,547 $86,897 $183,444 $ 0 $183,444
Cost of goods sold.......... 70,410 50,538 120,948 852 121,800
------------ ------- -------- ------- ------------
Gross profit................ 26,137 36,359 62,496 (852) 61,644
Selling, general and
administrative expenses... 14,537 17,216 31.753 (7,042) 24,711
------------ ------- -------- ------- ------------
Operating income............ 11,600 19,143 30,743 6,190 36,933
Interest (income) expense,
net....................... 8,493 717 9,210 10,151 19,361
Other (income) expense...... 670 1,212 1,882 (50) 1,832
------------ ------- -------- ------- ------------
Income (loss) before
taxes..................... 2,437 17,214 19,651 (3,911) 15,740
Income taxes................ 1,522 2,061 3,583 3,969 7,552
------------ ------- -------- ------- ------------
Net income (loss)........... $ 915 $15,153 $ 16,068 $(7,880) $ 8,188
------------ ------- -------- ------- ------------
------------ ------- -------- ------- ------------
OTHER DATA:
Net cash flow provided by
(used in) operations...... $ (6,677) $14,179 $ 7,502 $ 760 $ 8,262
EBITDA (6).................. 20,550 20,578 41,128 11,430 52,558
EBITDA margin............... 21.3% 23.7% 22.4% 6.2% 28.7%
Depreciation and
amortization.............. 8,440 1,435 9,875 4,772 14,647
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents... $ 7,871 N/A $ 7,871 N/A $ 7,871
Total assets................ 255,505 255,505 255,505
Total debt (including
current portion).......... 196,968 196,968 196,968
Stockholders' equity
(deficit)................. 29,955 29,955 29,955
___________
(1) Reflects the results of operations of Brittain Machine, Wichita, Barnes
Machine, Sea-Lect and Pacific Hills for the period from each of their dates
of acquisition by Compass through December 31, 1998. Also reflects the
operations of Compass, Aeromil and Western Methods for the year ended
December 31, 1998.
22
(2) Reflects the results of operations of: (a) Brittain Machine, Wichita and
Barnes Machine for the period from January 1, 1998 through April 21, 1998,
(b) Sea-Lect for the period from January 1, 1998 through May 11, 1998, (c)
Pacific Hills for the period from January 1, 1998 through November 20,
1998, and (d) Modern for the year ended December 31, 1998.
(3) Presents an aggregate of the first two columns reflecting historical data
of results of operations for Compass combined with results of operations
from pre-acquisition periods in 1998 of Brittain Machine, Wichita, Barnes
Machine, Sea-Lect, and Pacific Hills.
(4) Includes positive and negative pro forma adjustments, as if each
acquisition were consummated as of January 1, 1998, as follows:
(a) Cost of Sales:
- Additional depreciation expense of $1.1 million from step up of
asset values related to acquisitions completed in 1998.
- Reduced expense of $0.3 million to eliminate the costs associated
with discontinued lease payments by the acquired business to an
affiliate of the former owner(s) of the acquired business.
Compass will not be continuing such payments.
(b) Selling, General and Administrative Expenses:
- Reduced expense of $6.9 million to eliminate compensation to
former owners/executives of acquired companies under obligations
that existed under the previous ownership and which Compass is
not obligated to, and will not, continue. In each case the
amounts involved relate to compensation to individuals that have
no continuing association with Compass.
- Increased expense of $3.6 million to reflect the amortization of
goodwill related to acquired businesses.
- Reduced expense of $0.2 million to eliminate the cost associated
with discontinued lease payments by the acquired company to an
affiliate of the former owner(s) of the acquired businesses.
- Reduced expense of $3.8 million related to one-time non-recurring
bonus payments by the former owner(s) of acquired companies to
employees of acquired businesses. Compass is under no obligation
to make such payments in the future.
- Increased expense of $0.5 million related to increased management
fees associated with increased pro forma earnings.
(c) Interest Expense:
- Includes additional interest expense of $10.2 million based on
actual debt incurred to complete 1998 acquisitions as if the
acquisitions and additional borrowings had been
completed/incurred as of January 1, 1998.
(d) Income Taxes:
- Assumes a 48.0% income tax rate.
(5) Presents an aggregate of the third and fourth columns in order to present
pro forma data for Compass for the year ended December 31, 1998.
(6) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under GAAP and should not be construed as an alternative to
operating income or cash flows from operating activities as determined by
GAAP. EBITDA is not indicative of Compass' operating performance, does not
provide a measure of liquidity and does not represent available or
discretionary funds of Compass.
23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data are derived
from consolidated financial statements of Compass and its predecessor, Brittain
Machine. See "Management's Discussion and Analysis of Consolidated Financial
Condition and Consolidated Results of Operations--Consolidated Results of
Operations." The consolidated financial statements of Compass as of and for the
period ended October 21, 1997 (date of incorporation) through December 31, 1997
and for the year ended December 31, 1998 have been audited by Ernst & Young,
LLP, independent auditors, and are included elsewhere in this Prospectus. The
consolidated financial statements of Brittain Machine as of and for the period
from July 1, 1997 through April 21, 1998 and for the year ended June 30, 1997
have been audited by other independent auditors and are included elsewhere in
this Prospectus. The consolidated financial statements of Brittain Machine for
the year ended June 30, 1996 have been audited by Ernst & Young, LLP,
independent auditors, and are included elsewhere in this Prospectus. The
following selected historical consolidated financial data for Brittain Machine
for the years ended June 30, 1994 and 1995 are derived from unaudited financial
statements which are not included herein.
The information contained in this table should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Consolidated Results of Operations" and the financial statements and related
notes thereto included elsewhere in this Prospectus.
BRITTAIN
MACHINE FOR COMPASS
THE PERIOD FOR THE COMPASS
FROM JULY 1, 36 DAYS FOR THE
BRITTAIN MACHINE FOR THE YEARS 1997 THROUGH ENDED YEAR ENDED
ENDED JUNE 30, APRIL 21, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997 1998 1997 1998
---- ---- ---- ---- ---- ---- ----
(unaudited)
(DOLLARS IN THOUSANDS)
INCOME STATEMENT
DATA:
Revenues ................. $ 20,788 $ 19,244 $ 26,892 $ 35,481 $ 49,682 $ 3,057 $ 96,547
Cost of goods sold ....... 14,729 16,708 19,076 25,656 34,640 2,386 70,410
-----------------------------------------------------------------------------------------------------
Gross profit ............. 6,059 2,536 7,816 9,825 15,042 671 26,137
Selling, general and
administrative expenses .. 2,156 2,654 2,353 2,770 6,798 404 14,537
-----------------------------------------------------------------------------------------------------
Operating income (loss) .. 3,903 (118) 5,463 7,055 8,244 267 11,600
Interest (income)
expense, net ............. 293 301 403 398 386 166 8,493
Other (income) expense ... 456 (5) 677 162 (20) (16) 670
-----------------------------------------------------------------------------------------------------
Income (loss) before
taxes .................... 3,154 (414) 4,383 6,114 7,878 117 2,437
Income taxes ............. 1,282 (194) 1,637 2,208 2,901 43 1,522
-----------------------------------------------------------------------------------------------------
Net income (loss) ........ $ 1,672 $ (220) $ 2,746 $ 3,906 $ 4,977 $ 74 $ 915
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
OTHER DATA:
Net cash flow provided
by (used in) operations .. $ 2,858 $1,1027 $ 2,381 $ (155) $ 7,978 $ 269 $ (6,667)
EBITDA (1) ............... 4,999 1,185 6,855 8,724 9,755 486 20,550
EBITDA margin ............ 24.0% 6.2% 25.5% 24.6% 19.6% 15.9% 21.3%
Depreciation and
amortization ............. 1,096 1,303 1,392 1,669 1,511 219 8,440
Capital
expenditures ............. 1,056 2,575 1,519 1,072 3559 25 5,701
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents .............. $ 589 $ 164 $ 91 $ 455 $ 1,683 $ 443 $ 7,871
24
Total assets ............. 15,110 17,290 22,095 28,602 $ 32,776 33,789 255,505
Total debt (including
current portion) ......... 3,957 5,131 4,495 3,950 3,775 20,585 196,968
Stockholders'
equity ................... 8,834 8,614 11,360 15,266 20,243 9,074 29,955
(1) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under GAAP and should not be construed as an alternative to
operating income or cash flows from operating activities as determined by
GAAP. EBITDA is not indicative of Compass' operating performance, does not
provide a measure of liquidity and does not represent available or
discretionary funds of Compass.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Historical Consolidated Financial Data" and the consolidated
financial statements and notes related thereto of Compass and its
predecessor, Brittain Machine, appearing elsewhere in this Prospectus and
other more detailed financial data appearing elsewhere herein.
GENERAL
Compass began operations in November 1997 with the simultaneous
acquisitions of Western Methods and Aeromil. In 1998 Compass completed the
following acquisitions:
April: Brittain Machine, Wichita and Barnes Machine
May: Sea-Lect
November: Pacific Hills
December: Modern
Prior to their acquisition by Compass, each of Compass' subsidiaries had been
operating independently and were not subject to common management. Compass
intends to integrate its acquired businesses, their operations and their
administrative functions.
CONSOLIDATED RESULTS OF OPERATIONS
For accounting and financial reporting purposes, Brittain Machine is deemed
to be the predecessor of Compass based on the relative significance of Brittain
Machine's revenues, size and operating capacity. When Compass acquired Brittain
Machine on April 21, 1998 Brittain Machine represented, on a historical basis,
68% of the revenues and 87% of the pre-tax income of the combined historical
results of Aeromil, Western Methods and Brittain Machine prior to their
acquisitions by Compass. The acquisition of Brittain Machine added additional
operating capacity and manufacturing capabilities that significantly advanced
Compass' goal of producing Integrated Products. The following discussion
therefore includes the results of operations of Brittain Machine as a
predecessor of Compass for the periods shown below.
COMPASS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE 36 DAYS ENDED
DECEMBER 31, 1997
REVENUES. Revenues increased $93.5 million to $96.6 million for the
year ended December 31, 1998 from $3.1 million for the 36 days ended December
31, 1997. The increase was attributable to an increase in net sales
resulting from the acquisitions of Brittain Machine, Barnes Machine, Wichita,
Sea-Lect and Pacific Hills, and a full year of operations of Aeromil and
Western Methods in 1998.
COST OF SALES. Cost of sales increased $68.0 million to $70.4 million for
the year ended December 31, 1998 from $2.4 million for the 36 days ended
December 31, 1997. The increase in cost of sales was primarily attributable to
the acquisitions completed by Compass in 1998. Cost of sales as a percentage of
revenues decreased to 72.9% for the year ended December 31, 1998 from 78.1% for
the 36 days ended December 31, 1997. This percentage decrease was primarily
attributable to the aforementioned acquisitions which provided a higher level
of average margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $14.1 million to $14.5 million for the year
ended December 31, 1998 from $0.4 million for the 36 days ended December 31,
1997. This increase in selling, general and administrative expenses was
primarily attributable to the acquisitions completed by Compass in 1998.
Selling, general and administrative expenses as a percentage of revenues
increased to 15.1% for the year ended December 31, 1998 from 13.2% for the 36
days ended December 31, 1997. Excluding the effect of certain non-cash
compensation and consulting fees related to stock grants, selling, general and
administrative expenses as a percentage of revenues was 14.6% for the year ended
December 31, 1998.
26
OPERATING INCOME. Operating income increased $11.3 million to $11.6
million for the year ended December 31, 1998 from $0.3 million for the 36 days
ended December 31, 1997. The increase in operating income was primarily
attributable to the acquisitions completed by Compass in 1998. Operating income
as a percentage of revenues increased to 12.0% for the year ended December 31,
1998 from 8.7% for the 36 days ended December 31, 1997.
INTEREST EXPENSE. Interest expense increased $8.3 million to $8.5 million
for the year ended December 31, 1998 from $0.2 million for the 36 days ended
December 31, 1997. The increase in interest expense was primarily attributable
to increased borrowings in connection with the acquisitions completed by Compass
in 1998 and to a full year of borrowings in connection with the acquisitions
completed by Compass in 1997].
NET CASH FLOW PROVIDED BY (USED IN) OPERATIONS. Net cash from
operations decreased $7.0 million to net cash used in operations of $6.7
million for the year ended December 31, 1998 from $0.3 million of net cash
from operations for the 36 days ended December 31, 1997. The primary uses of
cash during the year ended December 31, 1998 related to increased
inventories, and increased accounts receivable and deferred loan fees partly
offset by net income, non-cash charges to operations for depreciation and
amortization, non-cash compensation and deferred taxes, and a net increase in
accounts payable and accrued expenses.
EBITDA. EBITDA increased $20.1 million to $20.6 million for the year
ended December 31, 1998 from $0.5 million for the 36 days ended December 31,
1997 as a result of the factors discussed above. EBITDA as a percentage of
revenues increased to 21.2% for the year ended December 31, 1998 from 15.9% for
the 36 days ended December 31, 1997.
PROVISION FOR INCOME TAXES. Compass' provision for income taxes differs
from the federal statutory rate principally due to state income taxes (net of
federal income tax benefit) and the amortization of goodwill attributable to
certain acquisitions which is not deductible for tax purposes.
BRITTAIN MACHINE FOR THE PERIOD FROM JULY 1, 1997 THROUGH APRIL 21, 1998
COMPARED TO THE YEAR ENDED JUNE 30, 1997.
REVENUES. Revenues increased $14.2 million to $49.7 million for the period
from July 1, 1997 through April 21, 1998 from $35.5 million for the year ended
June 30, 1997. The increase was primarily attributable to a further increase in
capacity by the addition of two high-speed, three-spindle five-axis gantry mills
and two machining centers, as well as increased shipments to both Boeing and
Northrop Grumman Corporation ("Northrop").
COST OF SALES. Cost of sales increased $8.9 million to $34.6 million for
the period from July 1, 1997 to April 21, 1998 from $25.7 million for the year
ended June 30, 1997. Cost of sales increased primarily as a result of the
increase in sales. Cost of sales as a percentage of revenues decreased to 69.7%
for the period from July 1, 1997 to April 21, 1998 from 72.3% for the year ended
June 30, 1997. This decrease was primarily attributable to a reduction in the
level of start up costs encountered in the previous period as well as improved
productivity gains.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.0 million to $6.8 million for the period
from July 1, 1997 to April 21, 1998 from $2.8 million for the year ended June
30, 1997. Selling, general and administrative expenses for the period from July
1, 1997 to April 21, 1998 include $3.8 million of non-recurring management and
employee bonuses paid in connection with the sale of Brittain Machine to
Compass. Selling, general and administrative expenses as a percentage of
revenues increased to 13.7% for the period from July 1, 1997 to April 21, 1998
from 7.8% for the year ended June 30, 1997. Excluding non-recurring bonuses,
selling, general and administrative expenses as a percentage of revenues for the
period from July 1, 1997 to April 21, 1998 was 6.0%.
OPERATING INCOME. Operating income increased $1.1 million to $8.2 million
for the period from July 1, 1997 through April 21, 1998 from $7.1 million for
the year ended June 30, 1997 as a result of the factors discussed above.
Operating income as a percentage of revenues decreased to 16.6% for the period
from July 1, 1997 through April 21, 1998 from 19.9% for the year ended June 30,
1997.
27
NET CASH FLOW PROVIDED BY (USED IN) OPERATIONS. Net cash flow from
operations increased $8.2 million to $8.0 million for the period from July 1,
1997 through April 21, 1998 from net cash used in operations of $0.2 million
for the year ended June 30, 1997. The primary sources of cash during the
period from July 1, 1997 through April 21, 1998 related to increases in net
income, accounts payable and accrued expenses, and a decrease in inventories.
EBITDA. EBITDA increased $1.1 million to $9.8 million for the period
from July 1, 1997 through April 21, 1998 from $8.7 million for the year ended
June 30, 1997 as a result of the factors discussed above. EBITDA as a
percentage of revenues decreased to 19.6% for the period from July 1, 1997
through April 21, 1998 from 24.6% for the year ended June 30, 1997, primarily
as a result of increased selling, general and administrative expense related
to the non-recurring bonuses mentioned above paid in connection with the sale
of Brittain Machine to Compass.
BRITTAIN MACHINE FOR THE YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED
JUNE 30, 1996.
REVENUES. Revenues increased $8.6 million to $35.5 million for the year
ended June 30, 1997 from $26.9 million for the year ended June 30, 1996. The
increase was primarily attributable to the addition of four high-speed,
three-spindle five-axis gantry mills, increased sales of 747 parts to
Northrop, increased sales to Boeing-Wichita under a series of contracts
relating to the new generation 737 and increased sales of fabricated tooling
and fixtures.
COST OF SALES. Cost of sales increased $6.6 million to $25.7 million
for the year ended June 30, 1997 from $19.1 million for the year ended June
30, 1996. Cost of sales as a percentage of revenues increased to 72.3% for
the year ended June 30, 1997 from 70.9% for the year ended June 30, 1996.
The increase in cost of sales was primarily attributable to the high
percentage of new work undertaken during the year ended June 30, 1997,
requiring higher start up costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.4 million to $2.8 million for the year
ended June 30, 1997 from $2.4 million for the year ended June 30, 1996.
Selling, general and administrative expense as a percentage of revenues
decreased to 7.8% for the year ended June 30, 1997 from 8.7% for the year
ended June 30, 1996. The increase in selling, general and administrative
expense was primarily attributable to increased selling activity.
OPERATING INCOME. Operating income increased $1.6 million to $7.1
million for the year ended June 30, 1997 from $5.5 million for the year ended
June 30, 1996 as a result of the factors discussed above. Operating income
as a percentage of revenues decreased to 19.9% for the year ended June 30,
1997 from 20.3% for the year ended June 30, 1996.
NET CASH FLOW PROVIDED BY (USED IN) OPERATIONS. Net cash from
operations decreased $2.6 million to net cash used in operations of $0.2
million for the year ended June 30, 1997 from $2.4 million of net cash from
operations for the year ended June 30, 1996. The primary uses of cash during
the year ended June 30, 1997 related to an increase in inventories partly
offset by an increase in net income.
EBITDA. EBITDA increased $1.8 million to $8.7 million for the year ended
June 30, 1997 from $6.9 million for the year ended June 30, 1996 as a result of
the factors discussed above. EBITDA as a percentage of revenues decreased to
24.6% for the year ended June 30, 1997 from 25.5% for the year ended June 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
Compass' principal sources of liquidity have been borrowings, proceeds from
the sale of stock and, to a lesser extent, cash flows from operating activities.
At December 31, 1998 Compass had cash of approximately $7.9 million, working
capital of approximately $38.1 million and total debt (including the current
portion of long term debt) of approximately $197.0 million.
On April 21, 1998, Compass completed the private offering of $110.0
million of Outstanding Notes. The net cash proceeds of $106.7 million (after
fees and expenses of $3.3 million) from the issuance and sale of the
Outstanding Notes were used to repay existing bank debt, to finance
acquisitions and for
28
general corporate purposes. In April and May 1998, Compass also issued
additional shares of common stock for approximately $13.5 million in cash.
Compass entered into a credit agreement dated November 20, 1998, as amended
and restated on February 11, 1999 (the "Credit Agreement"), with BankBoston as
Agent, NationsBank, N.A. as Co-Agent, the lenders named therein, including
BankBoston as a lender, Royal Bank of Canada as Syndication Agent, General
Electric Capital Corporation as Documentation Agent and BancBoston Robertson
Stephens Inc. ("BRSI"), an affiliate of BankBoston, as arranger, providing for
borrowing availability of up to $170.0 million. Compass' obligations under the
Credit Agreement are guaranteed on a senior basis by Compass' direct and
indirect subsidiaries, and secured by a security interest in substantially all
of the assets of Compass and such subsidiaries. The Credit Agreement contains
customary conditions to borrowing and contains customary restrictions and
covenants. The Credit Agreement consists of a revolving credit facility of
$25.0 million, a $35 million term loan ("Term Loan A"), a $45 million term loan
("Term Loan B") and a $65 million acquisition line (the "Acquisition Line"). At
December 31, 1998 Compass had borrowed $81.0 million under the Credit Agreement,
consisting of the full amount of the Term A Loan and the Term B Loan and $1.0
million of the Acquisition Line. An additional $34 million of the Acquisition
Line is currently available and the remaining $30.0 million of the Acquisition
Line will become available provided Compass raises one dollar of equity for
every additional dollar of borrowings over the initial $35 million of
availability. See "Description of Credit Agreement." The Credit Agreement
replaced and terminated a $20.0 million senior secured revolving credit facility
with BankBoston, N.A. ("BankBoston") as lender and administrative agent.
The Outstanding Notes call for semi-annual interest payments on April 15
and October 15 of each year, beginning October 15, 1998. The Outstanding Notes
are guaranteed by all of Compass' current subsidiaries, are subordinate to
borrowings under the Credit Agreement and require Compass to meet certain
financial ratios, and satisfy certain financial condition tests prior to
incurring additional debt or making certain payments. The terms of the Notes
and the Credit Agreement include restrictive covenants that restrict Compass'
ability to pay dividends, sell certain assets and incur additional indebtedness.
Compass' ability to pay principal and interest on its indebtedness, including
the Notes, will depend upon the future operating performance of its subsidiaries
and will require a substantial portion of Compass' cash flow from operations.
The principal use of cash during the year ended December 31, 1998 was to
fund the acquisitions Compass completed during 1998 and to repay indebtedness
incurred to finance Compass' first two acquisitions in 1997. Net cash
provided by financing activities was $186.2 million for the year ended
December 31, 1998. Net cash used for investing activities was $172.1 million
for the year ended December 31, 1998. Compass used $6.7 million in net cash
for operating activities for the year ended December 31, 1998.
Compass' capital expenditures for the year ended December 31, 1998 were
approximately $5.7 million. These capital expenditures were primarily for
high-speed manufacturing equipment. Compass believes that funds generated
from operations and borrowing availability under the Credit Agreement will be
sufficient to finance its current operations and planned capital expenditure
requirements for the next 12 months.
Compass intends to continue to actively pursue acquisition opportunities.
Compass expects to fund future acquisitions through the issuance of additional
equity securities, incurrence of additional indebtedness, including use of
amounts available under the Credit Agreement, and cash flow from operations. To
the extent Compass funds a significant portion of the consideration for future
acquisitions with cash, it may have to increase the amount of the Credit
Agreement or obtain other sources of financing. There can be no assurance that
Compass will be able to obtain financing for potential acquisitions on
satisfactory terms and conditions.
MARKET RISK AND RISK MANAGEMENT POLICIES
Compass' results of operations are affected by numerous external factors
such as general economic conditions, domestic and foreign competition, raw
material availability and production delays by aerospace manufacturers. See
"Risk Factors." Compass is also exposed to changes in interest rates primarily
from its long term debt issued at a fixed rate. Under its current policies
Compass does not use interest rate derivative instruments to manage exposure to
interest rate changes. A hypothetical 100 basis point decrease in interest
29
rates along the entire interest rate yield curve would adversely affect the net
fair value of all interest sensitive financial instruments by $1.2 million at
December 31, 1998. Based on the current holdings of debt, Compass does not
believe its exposure to interest rate risk is material. Fixed rate debt
obligations currently issued by Compass are callable prior to maturity under
certain circumstances. See "Description of the New Notes--Optional
Redemption."
INFLATION
Compass believes that inflation has not had a material impact on its
results of operations for the 36 days ended December 31, 1997 and the year ended
December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
Compass has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), effective January 1, 1998.
This Statement establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. There was
no impact on the financial statements of Compass due to the adoption of SFAS
No. 130.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS" No. 131"), was also
adopted on January 1, 1998. This statement requires Compass to report financial
and descriptive information about its reportable operating segments. There was
no impact on the financial statements of Compass due to the adoption of SFAS No.
131.
Also effective January 1, 1998, Compass adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 supersedes the
disclosure requirements in Statements of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," Statements of Financial Accounting
Standards No. 88, "Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and Statements of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." SFAS No. 132 is intended to improve and standardize
disclosures regarding pensions and post-retirement benefits. There was no
impact on the financial statements of Compass due to the adoption of SFAS No.
132.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
was issued, effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Compass does not expect the impact of SFAS No. 133 to have a
material effect on its financial reporting.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which is effective for fiscal years beginning after
December 15, 1998. SOP 98-1 requires capitalization and amortization of
qualified computer software costs over their estimated useful life. Compass
does not expect the adoption of SOP 98-1 to have a material impact on its
financial statements.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"), which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 requires costs of start-up activities, as defined
in Statement SOP 98-5, to be expenses as incurred. Compass does not expect the
adoption of SOP 98-5 to have a material impact on its financial statements.
YEAR 2000
The Year 2000 issue concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000.
As a result of its acquisition program, Compass has acquired and operates a
number of stand-alone computer systems. Compass has completed an evaluation of
its primary computer software programs and operating systems used for business
processes to identify Year 2000 issues. Based upon this review,
30
Compass has determined that certain of its subsidiaries' primary systems are not
Year 2000 compliant. These primary systems handle such functions as purchasing,
sales order entry, warehouse inventory management, invoicing and accounts
receivable, and accounts payable.
Compass has developed plans to address the possible impact of the Year 2000
issue on its computer systems. In 1998 Compass decided to replace its Year 2000
non-compliant computer systems and install replacement systems. The
installation of the replacement systems is currently underway and Compass
believes it will complete its replacement program by September 30, 1999.
Compass is currently developing a plan to evaluate Year 2000 compliance for
all non-information technology systems such as telephone systems, fax machines
and security systems. Compass expects to complete its evaluation and
remediation of non-compliant non-information technology systems by September 30,
1999.
The majority of the cost incurred by Compass to become Year 2000 compliant
is related to the purchase and installation of the computer system upgrades and
the new computer systems described above. Compass is expensing all costs except
major software packages as the costs are incurred. The cost of major software
packages will be amortized over a period of three to five years. Costs to
remediate non-compliant non-information technology systems will be expensed as
incurred. At December 31, 1998 Compass had spent an estimated $0.2 million on
development and implementation of Year 2000 compliant computer systems. The
remaining system replacement or upgrade costs, which Compass estimates at
approximately $0.5 million will be incurred in 1999. Compass has not sought
independent verification by third parties of its Year 2000 risk or cost
estimates.
Compass is developing a plan to identify third parties with which it has
a significant business relationship and to survey such parties as to their
Year 2000 compliance. Compass cannot ensure that all third parties
significant to Compass' operations will be compliant by December 31, 1999.
Compass believes a reasonably likely worst case scenario resulting from
non-compliance by certain of Compass' major customers or critical vendors
could include adverse effects on Compass' revenue collection, disbursements
and communications, as well as the scheduling and delivery of inventory
resulting in a material adverse effect on Compass' business, financial
condition or results of operations. In addition, loss of utility service
resulting from disruptions in power generation, transmission or distribution
could adversely affect Compass' manufacturing facilities, leading to delays
in or the inability to provide products to Compass' customers, resulting in a
material adverse effect on Compass' business, financial condition or results
of operations. If it appears likely that any major customer or critical
vendor will not be compliant, Compass intends to develop contingency plans,
if possible, to mitigate the impact of non-compliance.
While Compass expects to resolve its Year 2000 risks without a material
adverse effect on its business, financial condition or results of operations,
there can be no assurance as to the ultimate success of Compass' Year 2000
compliance program. Uncertainties exist as to Compass' ability to detect all
Year 2000 issues as well as its ability to achieve successful and timely
resolution of all Year 2000 issues. Uncertainties also exist concerning the
preparedness of Compass' major customers and critical vendors to avoid Year 2000
issue related service and delivery interruptions. Compass cannot predict the
eventual outcome associated with the possible situations that could result from
the impact of Year 2000 issues on its customers or vendors.
31
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by Compass on April 21, 1998 to DLJ, BSI
and Libra (the "Initial Purchasers"), pursuant to a Purchase Agreement dated
April 15, 1998 (the "Purchase Agreement") by and among Compass, Aeromil,
Western Methods and the Initial Purchasers. The Initial Purchasers are
qualified institutional buyers, as defined in Rule 144A under the Securities
Act. As a condition to the Purchase Agreement, Compass and the Initial
Purchasers entered into the Registration Rights Agreement on April 21, 1998.
Pursuant to the Registration Rights Agreement, Compass agreed to (i) file
with the Commission a registration statement under the Securities Act with
respect to the New Notes within 240 days after the date of the original
issuance of the Outstanding Notes (the "Issue Date"), (ii) use its best
efforts to cause the Registration Statement covering the Exchange Offer to
become effective under the Securities Act within 300 days after the Issue
Date, and (iii) use its best efforts to consummate the Exchange Offer within
30 days after the Registration Statement covering the Exchange Offer is
declared effective. Compass did not file a registration statement within the
required 240 days and increased interest is currently accruing on the
Outstanding Notes. The Registration Statement of which this Prospectus is a
part is intended to satisfy such obligations of Compass under the
Registration Rights Agreement. See "--Certain Conditions of the Exchange
Offer."
TERMS OF THE EXCHANGE OFFER
Compass hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of New Notes for each $1,000 in principal amount of the
Outstanding Notes. New Notes will be issued only in integral multiples of
$1,000 to each tendering holder whose Outstanding Notes are accepted in the
Exchange Offer. Compass will accept any Outstanding Notes validly tendered and
not withdrawn prior to 5:00 p.m. New York City time, on the Expiration Date.
Outstanding Notes that are not accepted for exchange will be returned as
promptly as practicable after the Expiration Date. Registered holders of
Outstanding Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the indenture governing the notes
(each an "Eligible Holder") may tender all or a portion of the Outstanding Notes
pursuant to the Exchange Offer.
The form and terms of the New Notes under the Indenture will be
identical in all material respects to the form and terms of the Outstanding
Notes. The New Notes evidence the same debt as the Outstanding Notes (which
they replace) and will be issued under, and be entitled to the benefits of,
the indenture governing the Outstanding Notes. The New Notes will bear
interest from their date of issuance at the same rate and upon the same terms
as the Outstanding Notes. See "Description of the New Notes." Accrued and
unpaid interest on the Outstanding Notes accepted for exchange for the period
to but not including the date of issuance of the New Notes (the "Exchange
Date") will be paid to the registered holders of New Notes on the first
interest payment date of the New Notes. Holders whose Outstanding Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Outstanding Notes accrued on and after
the Exchange Date.
As of the date of this Prospectus, $110.0 million aggregate principal
amount of the Outstanding Notes are outstanding and there are
registered holders thereof. Solely for reasons of administration (and for no
other purpose) Compass has fixed the close of business of ,
1999, as the record date (the "Record Date") for the Exchange Offer for purposes
of determining the holders of certificated Outstanding Notes to whom this
Prospectus and the Letter of Transmittal will be mailed initially. Only an
Eligible Holder may participate in the Exchange Offer. There will be no fixed
record date for determining registered holders of Outstanding Notes entitled to
participate in the Exchange Offer.
Eligible Holders of Outstanding Notes do not have any appraisal or
dissenters' rights under the General Corporation Law of the State of Delaware or
the indenture governing the notes in connection with the Exchange Offer.
Compass intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder.
Compass shall be deemed to have accepted validly tendered Outstanding Notes
when, as, and if Compass has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as
32
agent for the tendering holders of Outstanding Notes for the purposes of
receiving the New Notes from Compass.
If any tendered Outstanding Notes are not accepted for exchange because
of an invalid tender, the occurrence of certain other events set forth herein
or otherwise, any such unaccepted Outstanding Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Tendering Eligible Holders will not be required to pay broker
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Outstanding Notes
for New Notes pursuant to the Exchange Offer. Compass will pay all charges
and expenses, other than certain taxes which may be levied in the event of
any transfer of ownership, in connection with the Exchange Offer. See "--Fees
and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1999, or, at Compass' option, such earlier date
upon which 100% of the Outstanding Notes shall have been validly tendered
pursuant to the Exchange Offer and not withdrawn, unless Compass, in its sole
discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date and time to which the Exchange Offer is
extended.
In order to extend the Exchange Offer, Compass will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 10:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
Compass reserves the right, in its sole discretion, (i) to delay
accepting any Outstanding Notes, (ii) to extend the Exchange Offer, (iii) to
terminate the Exchange Offer if it is determined that the Exchange Offer does
not meet the conditions set forth in "Certain Conditions of the Exchange
Offer" below, in each case by giving oral or written notice of such delay,
extension, or termination to the Exchange Agent, or (iv) to amend the terms
of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination, or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by Compass to constitute a material change,
Compass will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders of Outstanding
Notes, and Compass will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the amendment and the
manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
Without limiting the manner in which Compass may choose to make a public
announcement of the delay, extension, termination, or amendment of the
Exchange Offer, Compass shall not have an obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders
of Outstanding Notes that are accepted for exchange will be entitled to
receive, in cash, accrued and unpaid interest thereon to, but not including,
the date of issuance of the New Notes and will be deemed to have waived the
right to receive any payment in respect of interest on the Outstanding Notes
accrued from and after the date of issuance of the New Notes. Such accrued
and unpaid interest on the Outstanding Notes will be paid to registered
holders of the New Notes with the first interest payment on the New Notes.
Interest on the Outstanding Notes accepted for exchange will cease to accrue
on the day prior to the issuance of the New Notes.
The New Notes bear interest (as do the Outstanding Notes) at a rate equal
to 101/8% per annum. Interest on the New Notes is payable on each April 15 and
October 15, commencing on October 15, 1999.
33
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender by an Eligible Holder as set forth below and the acceptance
thereof by Compass will constitute a binding agreement between the tendering
Eligible Holder and Compass upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal.
Except as set forth below, an Eligible Holder who wishes to tender
Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, the certificates
for the Outstanding Notes being tendered, and all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth in
the Letter of Transmittal on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Eligible Holders wishing to accept the Exchange Offer
through the book-entry transfer procedure described below, if such procedure
is available, may transfer the Outstanding Notes being tendered via ATOP. In
tendering the Outstanding Notes via ATOP, such holder will expressly
acknowledge the receipt, and agree to be bound by, the terms of the Letter of
Transmittal (or, in the case of a tender by guaranteed delivery, that such
holder has received and agrees to be bound by the Notice of Guaranteed
Delivery). Book-Entry Confirmation must be received by the Exchange Agent by
5:00 p.m., New York City time, on the Expiration Date. Alternatively, an
Eligible Holder may accept the Exchange Offer by complying with the
guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
OUTSTANDING NOTES, LETTERS OF TRANSMITTAL, AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed unless the Outstanding Notes surrendered
for exchange pursuant thereof are tendered (i) by a registered holder of the
Outstanding Notes who has completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" on the
Letter of Transmittal or (ii) by an Eligible Institution (as defined below).
In the event that a signature on a Letter of Transmittal or a notice of
withdrawal, as the case may be, is required to be guaranteed, such guarantee
must be by a firm which is a member of a registered national securities
exchange or a member of the NASD, a commercial bank or trust company having
an office or correspondent in the United States or is otherwise an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (collectively, "Eligible Institutions"). If Outstanding Notes are
registered in the name of a person other than a signer of the Letter of
Transmittal, the Outstanding Notes surrendered for exchange must either (i)
be endorsed by the registered holder, with the signature thereon guaranteed
by an Eligible Institution or (ii) be accompanied by a bond power, in
satisfactory form as determined by Compass in its sole discretion, duly
executed by the registered holder, with the signature thereon guaranteed by
an Eligible Institution along with any other documents required upon
transfer. The term "registered holder" as used herein with respect to the
Outstanding Notes means any person in whose name the Outstanding Notes are
registered on the books of the registrar for the Outstanding Notes.
Tenders may be made only in principal amounts of $1,000 and integral
multiples thereof. Subject to the foregoing, Eligible Holders may tender
less than the aggregate principal amount represented by the Outstanding Notes
deposited with the Exchange Agent provided they appropriately indicate this
fact on the Letter of Transmittal accompanying the tendered Outstanding Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of Outstanding Notes tendered for
exchange will be determined by Compass in its sole, reasonable discretion,
which determination shall be final and binding on all parties. Compass
reserves the absolute right to reject any and all tenders of any particular
Outstanding Notes not properly tendered or to reject any particular
Outstanding Notes whose acceptance might, in the judgment of Compass or its
counsel, be unlawful. Compass also reserves the absolute right to waive any
defects or irregularities or conditions of the Exchange Offer as to any
particular Outstanding Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Outstanding Notes in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer (including the Letter of
Transmittal and the instructions thereto) by Compass shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes for exchange must be cured
within such reasonable period of time as Compass shall determine. Compass
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Outstanding Notes for
34
exchange but shall not incur any liability for failure to give such
notification. Tenders of the Outstanding Notes will not be deemed to have
been made until such irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of
attorney, or any other document required by the Letter of Transmittal is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation, or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing, and,
unless waived by Compass, proper evidence satisfactory to Compass of such
person's authority to so act must be submitted.
Any beneficial owner whose Outstanding Notes are registered in the name
of a broker, dealer, commercial bank, trust company, or other nominee and who
wishes to tender Outstanding Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered holder to tender on
such beneficial owner's behalf. If such beneficial owner wishes to tender
directly, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and tendering Outstanding Notes, make appropriate
arrangements to register ownership of the Outstanding Notes in such
beneficial owner's name. Beneficial owners should be aware that the transfer
of registered ownership may take considerable time.
Each Eligible Holder accepting the Exchange Offer is required to make
the representations to Compass described under "--Resales of the New Notes"
below.
BOOK ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Outstanding Notes at DTC for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any
financial institution that is a participant in DTC's system may make
book-entry delivery of Outstanding Notes by causing DTC to transfer such
Outstanding Notes into the Exchange Agent's account at DTC in accordance
with DTC's procedures for transfer. A holder tendering the Outstanding
Notes via ATOP will expressly acknowledge the receipt, and agree to be bound
by, the terms of the Letter of Transmittal (or, in the case of a tender by
guaranteed delivery, that such holder has received and agrees to be bound by
the Notice of Guaranteed Delivery).
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Outstanding Notes desires to tender such
Outstanding Notes (other than through book-entry transfer procedures) and
such Outstanding Notes are not immediately available, or if time will not
permit such holder's Outstanding Notes or other required documents to reach
the Exchange Agent on or prior to the Expiration Date, a tender may be
effected if (i) the tender is made by or through an Eligible Institution,
(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by Compass (by facsimile transmission,
mail or hand delivery), setting forth the name and address of the holder of
Outstanding Notes, the certificate number or numbers of any Outstanding
Notes which will not be tendered by book-entry transfer and the amount of
Outstanding Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange trading days after the
date of execution of the Notice of Guaranteed Delivery, the certificates for
all physically tendered Outstanding Notes, in proper form for transfer, and
any documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Outstanding Notes, in proper form for transfer, and
all other documents required by the Letter of Transmittal, are received by
the Exchange Agent within five New York Stock Exchange trading days after the
date of execution of the Notice of Guaranteed Delivery. If a registered
holder of Outstanding Notes desires to tender such Outstanding Notes by
book-entry transfer and the procedure for book-entry transfer cannot be
completed on or prior to the Expiration Date, a tender may be effected if (i)
the tender is made by or through an Eligible Institution, (ii) the Exchange
Agent receives confirmation from DTC of receipt by DTC of a Notice of
Guaranteed Delivery via ATOP, by which the tendering holder will expressly
acknowledge the receipt of, and agree to be bound by, the Notice of
Guaranteed Delivery, including guarantee that Book-Entry Confirmation will be
received by the Exchange Agent within five New York Stock Exchange trading
days after the date of the transmittal of the Notice of Guaranteed Delivery
via ATOP, and (iii) Book-Entry Confirmation is received by the Exchange Agent
within five New York Stock Exchange trading days after the date of the
transmittal of the Notice of Guaranteed Delivery via ATOP.
35
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Except as set forth under "--Certain Conditions of the Exchange Offer"
below, Compass will accept, promptly after the Expiration Date, all
Outstanding Notes properly tendered and will issue the New Notes promptly
after acceptance of the Outstanding Notes. For purposes of the Exchange
Offer, Compass shall be deemed to have accepted properly tendered Outstanding
Notes for exchange when, as, and if Compass has given oral or written notice
thereof to the Exchange Agent.
In all cases, issuances of New Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Outstanding
Notes or a Book-Entry Confirmation of such Outstanding Notes into the
Exchange Agent's account at DTC, a properly completed and duly executed
Letter of Transmittal, and all other required documents; PROVIDED, HOWEVER,
that Compass has given oral or written notice thereof to the Exchange Agent,
and PROVIDED FURTHER that Compass reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer.
If any tendered Outstanding Notes are not accepted for any reason set forth
in the terms and conditions of the Exchange Offer or if Outstanding Notes are
submitted for a greater principal amount than the Eligible Holder desires to
exchange, such unaccepted or non-exchanged Outstanding Notes or substitute
Outstanding Notes evidencing the unaccepted portion, as appropriate, will be
returned without expense to the tendering Eligible Holder thereof as promptly
as practicable after the expiration or termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of the Outstanding Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, one business day prior to the Expiration
Date. For a withdrawal to be effective, a written notice of withdrawal must
be received by the Exchange Agent at its address set forth under "Exchange
Agent" below. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Outstanding Notes to be withdrawn, (ii) identify
the Outstanding Notes to be withdrawn (including the principal amount of such
Outstanding Notes), and (iii) if certificates for Outstanding Notes were
tendered, specify the name in which such Outstanding Notes were registered,
if different from that of the withdrawing holder. If certificates for
Outstanding Notes have been delivered or otherwise identified to the Exchange
Agent then, prior to the release of such certificates, the withdrawing holder
must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If
Outstanding Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn Outstanding
Notes, and otherwise comply with the procedures of DTC. All questions as to
the validity, form, and eligibility (including time of receipt) of such
notices will be determined by Compass in its sole, reasonable discretion,
which determination shall be final and binding on all parties. The
Outstanding Notes so withdrawn, if any, will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any
Outstanding Notes that have been tendered for exchange but which are
withdrawn will be returned to the Eligible Holder thereof without cost to
such Eligible Holder as soon as practicable after withdrawal. Properly
withdrawn Outstanding Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Outstanding Notes"
above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, Compass
shall not be required to accept for exchange, or to issue the New Notes in
exchange for, any Outstanding Notes and may terminate or amend the Exchange
Offer if, prior to the exchange of the New Notes for the Outstanding Notes,
Compass determines, in its sole discretion, that (i) there has been a
commencement of any action, legal or governmental, with respect to the
Exchange Offer or which Compass reasonably determines would make it
inadvisable to proceed with the Exchange Offer, (ii) there has been a banking
moratorium or similar event or international calamity involving the United
States, (iii) there has been a change in the business or prospects of Compass
that may have a material adverse effect on Compass, or (iv) the Exchange
Offer violates any applicable law. If Compass makes any of the foregoing
determinations, Compass may (i) refuse to accept any Outstanding Notes and
return all tendered Outstanding Notes to the tendering holders or (ii) extend
the Exchange Offer, retain all Outstanding Notes tendered prior to the
Expiration Date, and use
36
reasonable efforts to satisfy any such condition, subject, however, to the
rights of Eligible Holders to withdraw such Outstanding Notes (see
"--Withdrawal Rights" above). In addition, Compass will not accept for
exchange any Outstanding Notes tendered, and no New Notes will be issued in
exchange for any such Outstanding Notes, if at such time any stop order shall
be threatened or in effect with respect to the Registration Statement or the
qualification of the indenture governing the notes under the Trust Indenture
Act of 1939, as amended, as in effect on the date of the indenture (the
"Trust Indenture Act").
Holders of Outstanding Notes may have certain rights and remedies
against Compass under the Registration Rights Agreement should Compass fail
to consummate the Exchange Offer, notwithstanding any nonfulfillment of the
above conditions. Such conditions are not intended to modify such rights and
remedies in any respect.
Under the Registration Rights Agreement, if, other than as a result of
actions by the holders of the Outstanding Notes, (i) the Registration
Statement was not filed by December 17, 1998 (the "Filing Date"), (ii) the
Registration Statement filed with the Commission relating to the Exchange
Offer was not declared effective by the Commission by February 16, 1999 (the
"Effectiveness Date"), or (iii) if the Exchange Offer has not been
consummated within 30 days after the Registration Statement is declared
effective (the "Consummation Date"), then Compass will pay to each holder of
the Outstanding Notes an additional amount equal to $0.05 per week (or
partial week) per $1,000 principal amount of the Outstanding Notes held by
such holder, during the first 90-day period immediately following the Filing
Date, the Effectiveness Date or the Consummation Date as liquidated damages;
PROVIDED, HOWEVER, that the amount of liquidated damages will increase by an
additional $0.05 per week (or partial week), per $1,000 principal amount at
the beginning of each subsequent 90-day period in the case of (i), (ii) or
(iii) above, to a maximum amount of liquidated damages of $0.50 per week per
$1,000 principal amount, which provision for liquidated damages will continue
until such conditions as noted in (i), (ii) or (iii) have been cured.
Because Compass did not comply with certain of these provisions, liquidated
damages are currently accruing at the rate of $11,000 per week. Liquidated
damages accrued as of any interest payment date will be payable on such date.
TERMINATION OF CERTAIN RIGHTS
Eligible Holders of the Outstanding Notes to whom this Exchange Offer is
made have certain rights under the Registration Rights Agreement and Purchase
Agreement that will terminate upon the consummation of the Exchange Offer,
which rights include, without limitation, (a) the right to require Compass
(i) to file with the Commission the Exchange Offer Registration Statement
under the Securities Act within 240 days following the Issue Date; (ii) to
use its best efforts to cause such Registration Statement to become
effective under the Securities Act within 300 days after the Issue Date;
(iii) to consummate the Exchange Offer within 30 days after the Registration
Statement covering the Exchange Offer is declared effective; and (iv) if
certain events described in the Registration Rights Agreement occur (x) to
file a Shelf Registration Statement covering resales of the Outstanding
Notes, (y) to use its best efforts to cause such Shelf Registration Statement
to be declared effective under the Securities Act and (z) to keep such Shelf
Registration Statement effective for the period described in the Registration
Rights Agreement; and (b) the right to receive liquidated damages from
Compass under certain circumstances described in the Registration Rights
Agreement.
EXCHANGE AGENT
All tendered Outstanding Notes, executed Letters of Transmittal, and
other related documents should be directed to the Exchange Agent at one of
the addresses set forth below. In addition, any questions and requests for
assistance and requests for additional copies of this Prospectus, the Letter
of Transmittal, and other related documents should be addressed to the
Exchange Agent:
IF BY OVERNIGHT CARRIER OR BY HAND: IF BY REGISTERED OR CERTIFIED MAIL: IF BY FACSIMILE:
IBJ Whitewhall Bank & Trust Company IBJ Whitehall Bank & Trust Company (212) 858-2611
One State Street P.O. Box 84
New York, New York Bowling Green Station CONFIRM BY TELEPHONE:
Attn: Securities Processing Window New York, New York 10274-0084
Subcellar One, (SC-1) Attn: Reorganization Department (212) 858-2103
37
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE
A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Compass. The
principal solicitation is being made by mail; however, additional
solicitation may be made by facsimile, telephone or in person by officers and
regular employees of Compass and its affiliates. Compass has not retained
any dealer-manager in connection with the Exchange Offer. Compass, however,
will reimburse brokers, dealers, commercial banks and trust companies for
reasonable and necessary costs and expenses incurred by them in forwarding
this Prospectus and the related Exchange Offer documents to the beneficial
owners of Outstanding Notes held by them as nominee or in a fiduciary
capacity. Compass also will pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The cash expenses to be incurred in
connection with the Exchange Offer will be paid by Compass and are estimated
to be approximately $250,000. Such expenses include fees and expenses of the
Exchange Agent, accounting and legal fees, filing fees and printing costs.
Compass will pay all transfer taxes, if any, applicable to the exchange
of Outstanding Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Outstanding Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the
Outstanding Notes, as reflected in Compass' accounting records on the date of
the Exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the
term of the New Notes.
RESALES OF THE NEW NOTES
With respect to resales of New Notes, based on an interpretation by the
Staff of the Commission set forth in no-action letters issued to third
parties, Compass believes that an Eligible Holder (other than (i) an
affiliate of Compass within the meaning of Rule 405 under the Securities Act
or (ii) a broker-dealer, (except as provided below) who exchanges Outstanding
Notes for New Notes in the ordinary course of its business and who is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes, will be allowed to resell the New Notes to the public without further
registration under the Securities Act and without delivering to the
purchasers of the New Notes a prospectus that satisfies the requirements of
Section 10 thereof. However, if any Eligible Holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such Eligible Holder cannot rely on the
position of the Staff of the Commission enunciated in "Exxon Capital Holdings
Corporation" (available May 13, 1988) or similar no-action letters or any
similar interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is
otherwise available.
As contemplated by the above no-action letters and the Registration Rights
Agreement, each holder of Outstanding Notes accepting the Exchange Offer is
required to represent to Compass in the Letter of Transmittal that (i) any New
Notes are to be acquired in the ordinary course of business of the person
receiving such New Notes, (ii) neither the holder of such Outstanding Notes nor
any such other person receiving such New Notes is participating, intends to
participate, or has any arrangement or understanding with any person to
participate, in the distribution of the New Notes, and (iii) except as otherwise
disclosed, neither the holder of such Outstanding Notes nor any such other
person is an affiliate of Compass within the meaning of Rule 405 under the
Securities Act. Further, each holder of Outstanding Notes accepting the
Exchange Offer must acknowledge that any person participating in the Exchange
Offer for the purpose of
38
distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale of the New Notes and cannot rely on the no-action letters discussed
above.
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Outstanding Notes, where
such Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, for a period of 90 days
after the Expiration Date. Compass will make this Prospectus available to
any broker-dealer, at no charge, for use in connection with any such resale
for a period of 90 days after the Expiration Date. See "Plan of
Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Old Notes for
New Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Outstanding Notes as set forth in the legend
thereon. In general, the Outstanding Notes may not be offered or sold,
unless registered under the Securities Act and applicable state securities
laws. Compass does not intend to register the Outstanding Notes under the
Securities Act or any state securities laws.
39
BUSINESS
Compass
Compass was founded in October 1997 to become a major supplier of
precision machined individual parts and of Integrated Products used by
aerospace manufacturers in structural frames and other metal aircraft
components. Compass intends to capitalize on the trends among aircraft
manufacturers which seek to increase outsourcing, concentrate supplier
relationships and encourage suppliers of individual parts to manage the
supply chain which produces Integrated Products. Compass' acquisitions to
date and its principal manufacturing facilities are summarized in the
following table.
YEAR DATE MANUFACTURING
BUSINESS BUSINESS BUSINESS CAPABILITIES/ MAJOR
ACQUIRED FOUNDED ACQUIRED LOCATION SPECIALITIES CUSTOMERS(2)
Aeromil 1971 Nov. 1997 Santa Ana, CA Medium-sized Boeing, Korean Airlines,
machined parts Hughes Aircraft, Raytheon
Aircraft
Western Methods 1978 Nov. 1997 Gardena, CA Small to medium- Boeing, Northrop, Lockheed,
sized machined parts NASA-JPL
Brittain Machine 1966 April 1998 Wichita, KS Small to large-sized Boeing, Raytheon, Hughes,
machined parts, Cessna, Shorts Brothers
fabrication and
tooling
Wichita 1992 April 1998 Cerritos, CA Small to medium- Boeing, Northrop, Tolo
sized machined parts
Barnes Machine 1982 April 1998 Shelton, WA Small to medium- Boeing, Northrop, Kawasaki
sized machined parts
Sea-Lect (1) 1989 May 1998 Kent, WA Sheet metal and Boeing, Japan Airlines, B.F.
extruded/machined Goodrich, Lucas Aerospace,
parts, assembly Mitsubishi, Kawasaki
including bonding/
riveting, tool and die
making
Pacific Hills 1962 Nov. 1998 Valencia, CA Shim stock, laminated Boeing, Rohr
shims, stampings,
Kent, WA flat patterns
Modern 1966 Dec. 1998 Renton, WA Small to medium- Boeing, Hawker
sized machined-parts
(1) Compass simultaneously acquired Sea-Lect and J&J Leasing, Inc. ("J&J")
as a subsidiary of Sea-Lect in May 1998. Subsequent to the acquisition of
these businesses, J&J, which had previously leased machinery and equipment to
Sea-Lect and did not conduct any manufacturing operations, was merged into
Sea-Lect.
(2) Major customers include Boeing, Northrop, Korean Airlines Co., Ltd.
("Korean Airlines"), Hughes Aircraft Company ("Hughes"), Raytheon Aircraft
Company ("Raytheon"), Lockheed Martin Corporation ("Lockheed"), National Air
Space Administration-Jet Propulsion Laboratory ("NASA-JPL"), Cessna Aircraft
Co. ("Cessna"), Japan Airlines Co., Ltd. ("Japan Airlines"), B.F. Goodrich
Aerospace, a division of The B.F. Goodrich Company ("B.F. Goodrich"), Lucas
Aerospace, a division of LucasVarity plc ("Lucas Aerospace"), Mitsubishi
Heavy Industries Ltd. ("Mitsubishi"), Kawasaki Heavy Industries, Ltd.
("Kawasaki"), Hawker de Havilland Inc. ("Hawker"), Shorts Brothers PLC
("Shorts Brothers"), Tolo Inc., a subsidiary of B.F. Goodrich ("Tolo") and
Rohr, Inc., a subsidiary of B.F. Goodrich ("Rohr").
40
These companies have precision machining and tooling capabilities which
provide Compass with a diverse and flexible manufacturing capability. Prior
to their acquisition by Compass, Compass' subsidiaries operated under
independent management. As part of its strategy, Compass intends to leverage
the consolidated capabilities of its subsidiaries, expand production of
Integrated Products and acquire businesses with complementary capabilities.
At present, Compass is principally engaged in manufacturing individual
parts for aircraft to precise specifications from metals including aluminum,
titanium and steel through the use of precision CNC machine tools and metal
forming equipment. Compass uses a variety of advanced techniques and
machinery including horizontal and vertical machining centers and
state-of-the-art high-speed precision machining equipment, as well as
three-spindle five-axis gantry mills. Management believes that Compass'
machining capabilities are among the broadest, and that Compass has among the
largest number of three-spindle five-axis gantry mills, of all aerospace
suppliers in the United States.
Compass produces parts as original equipment for:
- all of the commercial jet models (717, 737, 747, 757, 767, 777, MD-11,
MD-80 and MD-90) produced by Boeing,
- Airbus (A320, A330 and A340 models),
- Bombardier Inc. Canadair Regional Jet-Registered Trademark- 700,
- Embrear Aircraft Corporation (ERJ-145),
- as well as for several United States military programs and certain
other commercial aircraft manufacturers.
Compass believes that among the key factors in its success are the
long-standing relationships that management has established with its key
customers, as well as the strong name recognition of its subsidiaries,
established track records of quality manufacturing and consistent histories
of timely deliveries by its subsidiaries. Compass generated combined pro
forma revenues and EBITDA for the year ended December 31, 1998 of
approximately $183.4 million and $52.6 million, respectively. At December
31, 1998 Compass had a total revenue backlog of approximately $145.0
million, of which approximately $90.0 million is deliverable in 1999.
STRATEGY
Compass' principal strategic objective is to increase revenues and
profits by managing the supply chain for its customers, by consolidating its
acquired businesses and by producing Integrated Products as well as
individual parts. Compass also seeks to increase its operating efficiencies
and to reduce its customer concentration by diversifying its revenue mix
among aerospace customers. To reach its objectives Compass intends to:
CONSOLIDATE ACQUIRED BUSINESSES; INCREASE REVENUES AND MARGINS
Management believes that there are significant opportunities to increase
revenues and margins by increasing operating efficiencies and asset
utilization through strategic coordination of production among Compass'
manufacturing facilities to increase production runs, reduce set-up times and
utilize the most appropriate machinery for each production job. Management
has begun to introduce lean management practices to reduce scrap rates,
decrease direct manufacturing time per part, increase inventory margins and
improve margins. Management also believes that some of Compass' manufacturing
facilities are underutilized. This excess capacity gives Compass the
opportunity to shift production among its manufacturing facilities to achieve
increased operating efficiencies. Management believes that the consolidation
of the specialized and complementary manufacturing capabilities of Compass'
nine facilities, combined with Compass' strong customer relationships,
reputation for quality and ability to coordinate production among its
facilities, should allow Compass to grow internally and increase profits by
producing individual parts more efficiently.
41
Each of Compass' subsidiaries has substantial experience in the
aerospace industry and has experienced management and highly-skilled
employees. Compass seeks to retain the technical expertise of many of these
individuals and utilize their expertise throughout Compass' manufacturing
facilities and many of the acquired companies' key employees are remaining
with Compass.
In addition, Compass is centralizing certain administrative functions at
the corporate level including finance, accounting, purchasing, tax, sales and
marketing, payroll, employee benefits and insurance and other administrative
activities to realize economies of scale and reduce costs. Compass is
updating and consolidating its management information systems to improve
internal controls and coordinate operations and is consolidating certain of
the engineering functions currently spread across its manufacturing
facilities.
FOCUS ON SUPPLY CHAIN MANAGEMENT AND INCREASE PRODUCTION OF INTEGRATED
PRODUCTS
Compass intends to increase its production of Integrated Products while
maintaining its on-going business of manufacturing individual parts. While
Compass currently produces a limited number of sub-assemblies and
manufacturing kits, Compass believes that it is capable of producing a wide
range of Integrated Products by more effective use of its broad, flexible
manufacturing capabilities without significant additional capital
expenditures. Management believes the ability to produce Integrated Products
will become increasingly important as customers such as Boeing reduce their
inventories of individual parts. Compass intends to offer its customers
supply chain management services by providing just-in-time delivery and
electronic data interchange with its customers. Compass believes that it
will be able to leverage its specialized and complementary manufacturing
capabilities and marketing expertise to be awarded production contracts for
Integrated Products.
IMPROVE MARKETING
Although Compass' subsidiaries have enjoyed strong customer
relationships and repeat business as a result of strong name recognition,
established track records of quality manufacturing and consistent histories
of timely deliveries, they have not maximized marketing opportunities.
Management intends to proactively market Compass' broad, flexible
manufacturing capabilities to secure additional long-term production
contracts from existing customers. Compass intends to position itself as an
outsource alternative to its customers' own facilities by offering its
customers lower part costs and increased inventory turnover. In addition,
management is targeting customers that Compass' subsidiaries could not
significantly penetrate individually, including Airbus which represented less
than one percent of Compass' 1998 consolidated revenues. Compass has retained
a former Finance Director of British Aerospace Airbus Limited as its Vice
President in Europe, to develop a strong business relationship with Airbus
and to identify suitable acquisition candidates. As a result of his efforts,
Compass obtained additional contracts with Airbus in 1998. Management
believes that improved marketing of Compass' ability to produce precision
machined individual parts and Integrated Products to precise specifications
with timely deliveries should allow Compass to achieve its objectives of
becoming a major supplier to the aerospace industry and diversifying its
revenue mix within the aerospace industry.
DIVERSIFY REVENUE MIX
Compass participates in all Boeing commercial jet programs, but does not
generate significant revenues from Airbus or the business jet market, two
segments targeted by Compass for greater penetration in the future. Compass
obtained additional contracts with Airbus in 1998 and currently manufactures
parts for the A320, A330 and A340 models. Compass also believes that there
are opportunities to increase revenues from regional and commercial jet
manufacturers and from United States military programs beyond its current
participation in the C-17 transport and F-18 fighter aircraft programs.
INCREASE OUTSOURCING
Compass utilizes small machine shops for certain production functions to
increase manufacturing efficiencies and capacity. Compass intends to increase
outsourcing to these small machine shops to augment its capacity and
supplement its capabilities without additional capital expenditures, thus
enhancing its ability to produce Integrated Products. The machine shops will
be pre-qualified by Compass, execute formal supply
42
agreements and be held accountable for meeting the quality standards of
Compass' customers. To ensure that the outsourced parts shipped under its
supplier numbers and purchase order numbers meet the requirements of Compass'
customers, Compass will impose the quality requirements in its contracts and
audit its subcontractors in a similar manner to which Compass is required to
perform and is audited by its customers. Compass will also inspect the
outsourced parts in its own quality control departments.
ACQUIRE COMPLEMENTARY BUSINESSES
Compass believes that it is well positioned to take advantage of
opportunistic acquisitions of complementary businesses in the highly
fragmented aerospace supplier industry. Management believes that a lack of
managerial expertise and financial and marketing resources at many small and
mid-sized aerospace subcontractors has constrained growth, modernization and
the addition of integration capabilities. Management believes that, as a
result, there is significant potential to increase revenues and margins at
many acquired companies. Compass is actively evaluating potential
acquisitions domestically and in Europe. In evaluating potential acquisition
targets, Compass focuses on acquiring businesses with complementary
manufacturing capabilities that will enhance Compass' ability to produce
higher value-added Integrated Products, increase its operating efficiencies
and/or diversify its revenue mix.
INDUSTRY OVERVIEW AND TRENDS
Commercial aircraft manufacturers are experiencing a sustained period of
historically high demand for new aircraft. According to the Aerospace
Industries Association of America, the annual worldwide market for aircraft
was approximately $78.0 billion in 1998, an 8.3% increase from $72.0 billion
in 1997. Manufacturing U.S.A., Sixth Edition, estimates the value of
aircraft equipment shipped in 1998 was approximately $20.4 billion. In
response to the increased demand for aircraft, the major aircraft
manufacturers are dramatically changing their manufacturing and purchasing
practices to increase production rates and reduce costs. More specifically,
aircraft manufacturers are increasing outsourcing and imposing increased
responsibilities, such as the production of more Integrated Products,
just-in-time deliveries and quality control inspections before shipping on a
smaller number of qualified suppliers. Outsourcing also reduces costs because
subcontractors can produce parts at a fraction of the cost of in-house
manufacturing. At present, the aerospace supplier industry is highly
fragmented, consisting of a limited number of well-capitalized companies
which offer a broad range of products and services, and a large number of
smaller, specialized companies. As a result of the aircraft manufacturers'
new manufacturing and purchasing practices, the supplier industry has been
consolidating at an increasing pace in recent years and management believes
that such consolidation will continue.
Significant trends currently affecting the market for parts for aircraft
manufacturers include the following:
INCREASES IN AIR TRANSIT AND AIRCRAFT PRODUCTION
Boeing's 1998 Current Market Outlook projected that, through the year
2007, global air travel will increase by 63% and that the number of passenger
and cargo delivery aircraft in service will increase by 44%, with
approximately 7,600 new airplanes delivered worldwide through the year 2007.
Airbus' 1998 Global Market Forecast projected that through the year 2017, the
number of aircraft in active service should increase by 88% and over 87% of
the current passenger jet fleet should be replaced, requiring approximately
16,700 replacement passenger aircraft. At December 31, 1998 Boeing's unfilled
announced order backlog was 1,786 aircraft, with orders for 656 aircraft
received as of December 31, 1998. Boeing delivered 271, 375 and 563 airplanes
(including airplanes delivered by the former McDonnell Douglas Corporation,
which was acquired by Boeing in 1997) in 1996, 1997 and 1998, respectively,
and has publicly announced plans to increase production rates to
approximately 620 airplanes in 1999.
Compass believes that the following factors, among others, are
contributing to the increase in new aircraft orders: (i) a turnaround in
worldwide airline operating performance (from substantial operating losses in
1992 to approximately $12.0 billion and $15.5 billion of operating profit in
1996 and 1997, respectively); (ii) projected worldwide airline traffic growth
of 5.0% per year and projected cargo traffic growth of 6.4% per year over the
next decade; (iii) increased aircraft load factors during the 1990-96 period;
(iv) increases in the average age of commercial aircraft during the 1990-96
period; and (v) the increasing importance of city pair marketing and flight
frequencies to the airline industry. Compass believes that this
43
trend will be driven, in part, by the anticipated continued growth of
carriers engaged in the air freight and package delivery businesses and the
expected commencement of new airlines, especially in China and other Asian
countries where air traffic was previously limited. Further, retirement of
aging aircraft and the anticipated removal of approximately 1,000 airplanes
domestically from the operating fleet to comply with mandatory noise
reduction standards by December 31, 1999 should contribute to the increased
demand for new aircraft production. The number of surplus aircraft is
expected to decline significantly while new aircraft production is expected
to increase over the next several years. The expected growth in air transit
and aircraft production should increase the demand for structural parts from
subcontractors as aircraft manufacturers increase outsourcing to reduce costs
and increase production rates.
REDUCTION IN THE NUMBER OF APPROVED SUBCONTRACTORS
In order to devote additional resources to their core competencies,
reduce operating and purchasing costs and streamline purchasing decisions
while retaining control over quality, aircraft manufacturers have been
reducing the number of approved subcontractors. Additionally, aircraft
manufacturers have established quality and operating criteria to ensure that
approved subcontractors operate with the required proficiency. Compass
believes that, due to the established market presence of its subsidiaries,
their ability to manufacture precision machined parts and their track records
for quality, Compass' manufacturing facilities will continue to be approved
suppliers to Boeing and other major aircraft manufacturers.
OPERATIONS
Compass' existing manufacturing capabilities are principally centered
around the precision machining of aluminum, titanium and steel and the
production of sheet metal details. In addition, Compass engages in
fabrication, metal bonding and minor assembly.
MANUFACTURING FACILITIES
At March 31, 1999 Compass maintained its corporate headquarters and
operated at nine manufacturing facilities comprising an aggregate of
approximately 553,650 square feet of space. The following table describes
the principal manufacturing facilities and indicates the location, function,
approximate size and ownership status of each location. Compass believes
that its facilities are suitable for their present intended purposes and
adequate for Compass' present and anticipated level of operations.
APPROXIMATE
PRODUCTS AND FACILITY SIZE
LOCATION FUNCTION (SQ. FEET) OWNERSHIP
Long Beach, CA Corporate 8,670
Headquarters
Santa Ana, CA Manufacturing 65,000 Leased(2)
Gardena, CA Manufacturing 20,500 Leased
Wichita, KS Manufacturing 153,000 Owned
Cerritos, CA Manufacturing 42,500 Leased
Shelton, WA Manufacturing 50,000 Owned
Kent, WA Manufacturing 77,180 Leased
Valencia, CA Manufacturing 31,280 Leased
Kent, WA Manufacturing 10,450 Leased
Renton, WA Manufacturing 95,070 Owned
(2) Compass leases its Santa Ana facility from a former Aeromil affiliate at
a fair market rent.
44
Compass has a large portfolio of sheet metal forming equipment,
high-speed and conventional CNC machining equipment, including horizontal and
vertical machining centers and three-spindle five-axis gantry mills, stretch
presses, bladder presses and brakes and shears at its eight manufacturing
facilities, which provide broad, flexible manufacturing capabilities. Compass
maintains in-house engineering departments at each manufacturing facility,
some of which utilize CATIA-CADAM Solutions and Unigraphics systems, to
create machine control programs from digital parts specifications received
directly from the aircraft manufacturers.
Compass also engages in metal bonding and assembly operations at several
of its manufacturing facilities. Western Methods has developed its own
Boeing-certified specialized bonding process which enables the
assembly/bonding department to bond composite material to aluminum and
mechanical hardware to milled parts. Brittain Machine fabricates assembly and
tooling platforms and has diversified into complex assembly production
involving bonding and riveting individual parts together. Western Methods,
Brittain Machine and Barnes Machine also participate in Boeing's Advanced
Technology Assembly program under which subcontractors manufacture parts
requiring drilling precise manufacturing assembly location holes.
PRODUCTS
Compass manufactures parts for all Boeing commercial aircraft models, as
well as for a variety of aircraft from other commercial aircraft
manufacturers and several U.S. military aircraft and other programs. Compass'
products range in size from large ribs used in wings and vertical stabilizers
to engine mounts, door stops and shims and range in value from less than $50
to more than $20,000. Compass primarily manufactures original equipment parts
from various metals such as aluminum, titanium and steel which are used in
the structural elements of aircraft.
CERTIFICATION
Compass manufactures parts to exact specifications provided by its
aerospace customers in engineering drawings. Compass' customers require
Compass' manufacturing facilities to perform quality standards testing and
certification procedures on all manufactured parts and provide detailed
records to ensure traceability of each part. Such customers typically certify
Compass' manufacturing facilities as meeting certain quality standards, which
certification is necessary for Compass to submit bids and manufacture parts
for such customers. See "Risk Factors--Certification" and "--Sales and
Marketing."
Compass' manufacturing facilities have imposed certain quality control
criteria and all of Compass' facilities have received Boeing's D1-9000
certification for quality standards. Furthermore, all of Compass' facilities
have received Boeing's D1-9000-A certification, which certifies the facility
as well as particular machines and allows the facility to produce more
critical parts with the certified equipment. Compass' Shelton, Washington
facility has received on ISO 9002 certification, which is an European
classification. Qualified suppliers often subcontract parts to other machine
shops while still remaining responsible for quality and delivery schedules.
Several of Compass' subsidiaries have been selected as Boeing-Wichita key
suppliers, which permits them to subcontract production without Boeing's
supervision. Certain of Compass' facilities are also certified by other
customers including Northrop, Lockheed, Raytheon, Airbus, Menasco Aerospace,
a division of Coltec Industries Inc., and B.F. Goodrich. The certification
process necessary to become an aerospace supplier, combined with the aircraft
manufacturers' desire to reduce their number of approved suppliers, provide
substantial barriers to entry for machining companies from industries which
have greater tolerances for production variances and accept parts produced to
less precise specifications under less rigorous manufacturing procedures.
QUALITY CONTROL
Compass believes that its machining and quality control equipment is
among the best of any independent aerospace supplier in the United States and
represents state-of-the-art technology. Each of Compass' nine manufacturing
facilities maintains quality control departments utilizing computer-assisted
inspections which meet or exceed customer requirements and produce required
documentation to each customer's standards.
Compass maintains the most stringent quality control of its manufactured
parts and services. Compass' customers require Compass' manufacturing
facilities to satisfy certain standards relating to the quality of
45
its manufactured parts and services. Compass' manufacturing facilities
perform testing and certification procedures on all manufactured parts and
provide detailed records to ensure traceability of parts. In addition,
Compass performs quality control tests on all parts Compass outsources to
small machine shops. Compass believes that the emphasis on quality control
has enabled its manufacturing facilities to obtain D1-9000, D1-9000-A and
other customer certifications which contribute to Compass' ability to
successfully market Compass' manufacturing and production capabilities. The
expense required to institute and maintain quality control procedures
comparable to Compass' represents a barrier to entry for other companies.
BACKLOG
The growth of orders for new aircraft has created a substantial backlog
of purchase orders and parts ordered under long term agreements. Compass
operates under a series of long term contracts with the major aircraft
manufacturers which generally cover a two-to five-year period for various
part numbers. Each long term contract includes customer estimates of the
number of parts the customer will require over the term of the contract and
defines the responsibilities of the parties, pricing formulas and product
specifications for specific parts covered by the contract. The customer
generally issues purchase orders for selected parts six to twelve months
prior to the required shipping date under the pricing terms and conditions
agreed upon in the contract. Most of Compass' shipments are made pursuant to
purchase orders. The long term contracts and purchase orders are often
terminable at will by the customer with respect to uncompleted portions of
the contract or purchase order. The backlog consists of customers' unfilled
purchase orders and therefore is represented largely by contracts and orders
that may be canceled by customers. At December 31, 1998 Compass had a total
revenue backlog of approximately $145.0 million, of which approximately $90.0
million is deliverable in 1999.
CUSTOMERS
Compass' principal customer is Boeing, which directly accounted for
approximately 72.0% of Compass' combined pro forma revenues for the year
ended December 31, 1998. In addition, approximately 13.0% of the remainder of
Compass' combined pro forma revenues for the year ended December 31, 1998
were derived from Boeing indirectly through sales to suppliers of Boeing.
Compass supplies parts to a number of major Boeing divisions, including
Boeing-Wichita, Boeing-Seattle, Boeing-Auburn, Boeing-Portland and Douglas
Products, which typically make independent purchasing decisions. Compass'
other customers include Northrop, Lockheed, Raytheon, Cessna, Learjet,
NASA-JPL, Rockwell International Corporation, General Dynamics Corporation,
British Aerospace, Bombardier, Inc. Canadair, Shorts Brothers PLC and
Embrear Aircraft Corporation, some of which are also Boeing suppliers.
SALES AND MARKETING
Compass' products are sold directly to aircraft manufacturers such as
Boeing, Lockheed and Raytheon which perform final assembly of aircraft and to
large aerospace subcontractors through both direct sales efforts and
independent sales representatives. The aircraft manufacturers and
subcontractors purchase products from qualified subcontractors under rigorous
ongoing certification programs such as Boeing's D1-9000 certification.
The sales process primarily entails relationship management to maximize
new sales from existing customers. The direct sales effort is primarily via
communication with key customers and is continually maintained by senior
management and dedicated sales professionals. Technical support for such
sales, which is a critical component of the marketing process, is provided
through line manufacturing managers, engineering and quality control
personnel. Compass' management has long-standing relationships with key
customers and management believes that its integrated capabilities will allow
it to bid on Integrated Products programs which typically offer higher
contract value compared to purchase orders for individual parts.
Compass produces parts to the exact specifications of customer-provided
engineering drawings. Management believes a key element of Compass'
competitive strength and marketing strategy is Compass' ability to deliver
parts on schedule and maintain specifications and quality standards. Sales
are generally made under two-to five-year long term contracts in which the
customer specifies the number of parts it estimates it will require over the
term of the contract and the responsibilities of the parties, pricing
formulas and product specifications are documented. The customer generally
issues purchase orders for selected parts six to twelve months prior to the
required shipping date under the pricing terms and conditions agreed upon
46
in the contract. The customer generally has the right to delay shipment of
placed orders or not to place orders previously forecasted. Most of Compass'
shipments are made pursuant to purchase orders.
COMPETITION
The aerospace supplier industry is highly fragmented, consisting of both
a limited number of well-capitalized companies which offer a broad range of
products and services and a large number of smaller, specialized companies.
Compass believes that the principal competitive factors in the aerospace
supplier industry are quality, precision-machining ability, timely
deliveries, overall customer service and price. Compass believes that it
competes favorably on the basis of the foregoing factors. Compass competes
with third party manufacturers, some of which are divisions or subsidiaries
of aircraft manufacturers or other large companies in the manufacture of
individual parts and Integrated Products. Some of these competitors have
greater financial and other resources than does Compass. See "Risk
Factors--Competition."
GOVERNMENT REGULATION
The aviation industry is highly regulated in the United States by the
Federal Aviation Administration ("FAA") and in other countries by similar
agencies. The FAA regulates commercial flight operations in the United States
and requires that aircraft components meet stringent standards. FAA
regulations provide that aircraft manufacturers must operate under one or
more of several different FAA authorizations. Manufacturers holding FAA
production approvals (a production approval holder, or "PAH") may engage a
supplier to manufacture all or a portion of an authorized part. If the
supplier manufactures complete parts, the PAH must ensure that the parts are
fabricated and inspected under the PAH's FAA-approved quality control system.
Compass must satisfy the requirements of its customers that are subject to
FAA regulations, and provide these customers with products and services that
comply with the government regulations. If material authorizations or
approvals held by Compass' customers were revoked or suspended, Compass'
operations could be adversely affected.
An initial Parts Manufacturer Approval ("PMA") is, in general, an
approval of a manufacturing or modification facility's production quality
control system. A supplemental PMA authorizes the manufacture of a particular
part in accordance with the requirements of the corresponding FAA production
certificate. Compass is currently in the process of applying for a PMA for
certain parts produced at one of its manufacturing facilities. Compass' FAA
approvals will be owned, and may only be used by, the manufacturing facility
obtaining such approval. Compass does not believe a PMA is necessary to
operate its business as it is currently being conducted and management
believes any delay or failure to obtain the PMA will not have a material
adverse effect on the business, financial condition or results of operations
of Compass.
Compass' manufacturing operations are also subject to a variety of
worker and community safety laws. The Occupational Safety and Health Act of
1970 ("OSHA") mandates general requirements for safe workplaces for all
employees. In addition, OSHA provides special procedures and measures for the
handling of certain hazardous and toxic substances. Specific safety standards
have been promulgated for workplaces engaged in the treatment, disposal or
storage of hazardous waste. Compass believes that its operations are in
material compliance with OSHA's health and safety requirements.
ENVIRONMENTAL MATTERS
Compass is subject to federal, state, local and foreign laws, regulation
and ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes, and (ii)
impose liability for the clean-up costs of, and certain damages resulting
from, past spills, disposals or other releases of hazardous substances
(together, "Environmental Laws"). Compass' operations use certain substances
and generate certain wastes that are regulated or may be deemed hazardous
under applicable Environmental Laws. Although Compass endeavors at each of
its facilities to assure compliance with Environmental Laws and regulations,
from time to time operations of Compass and its predecessors have resulted
in, and may in the future result in, certain noncompliance with applicable
requirements under Environmental Laws for which Compass may incur liability.
Compass believes, based on currently available information, that any such
noncompliance under current Environmental Laws will not have a material
adverse effect on Compass'
47
business, financial condition or results of operations. There can be no
assurance that future changes in such laws, regulations or interpretations
thereof, or the nature of Compass' operations will not require Compass to
make significant additional capital expenditures to ensure environmental
compliance in the future.
Compass has acquired, and expects to continue to acquire, pre-existing
businesses that have historical and ongoing operations, and Compass has and
will have limited information about past activities of those companies and
operations on its properties. Compass is aware that at one of its leased
properties, governmental authorities are currently investigating groundwater
contamination and Compass has been asked to conduct certain additional
investigations. Compass has also been named a defendant in an action filed by
an owner of property adjacent to property we lease. Compass is indemnified
by the owner of the property leased by Compass and that owner has assumed the
defense of this action. At this time, Compass cannot determine, in either
case, what cleanup activities, if any, will be required. Soil and groundwater
contamination may also exist on Compass' other properties as a result of
current or former operations on Compass' properties, or operations on other
properties. Based in part on indemnities obtained in connection with Compass'
past acquisitions, Compass believes, although there can be no assurance, that
such matters will not have a material adverse effect on Compass' business,
financial condition or results of operations.
Compass may also incur liability under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended ("CERCLA"), the
Resource Conservation and Recovery Act and similar state and local laws, some
of which impose strict, and in some cases, joint and several liability for
the cleanup of contamination resulting from past disposal of waste, including
disposal at off-site locations. A pre-existing business acquired by Compass
has been named as a potentially responsible party under CERCLA at a site
where it disposed of waste in the past. Based on the information available to
Compass, including the apparent limited amount of waste sent to the site by
that business, as well as an existing indemnity from the seller of the
business, Compass believes that this matter will not have a material adverse
effect on Compass' business, financial condition or results of operation.
TRADEMARKS
Compass holds a trademark registered in the United States and nine other
countries through one of its subsidiaries. Compass believes that the
termination, expiration or infringement of its trademark would not have a
material adverse effect on its business, financial condition or results of
operation.
EMPLOYEES
Compass had 956 employees at December 31, 1998 in three states and had
no collective bargaining agreements. Compass has not experienced any strikes
or general work stoppages and believes that its relations with its employees
are excellent.
LEGAL PROCEEDINGS
Compass is not party to litigation or other legal proceedings which
Compass believes could reasonably be expected to have a material adverse
effect on Compass' business, financial condition or results of operations.
48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to
directors and executive officers of Compass.
NAME AGE POSITION
---- --- --------
Douglas M. Hayes . . . . . . . 55 Chairman of the Board and Director
Alexander Hogg . . . . . . . . 52 Chief Executive Officer, President and
Director
Pasquale DiGirolamo . . . . . . 59 Executive Vice President, Aircraft
Structures North America
N. Paul Brost . . . . . . . . . 45 Vice President, Chief Financial Officer
and Treasurer
Douglas B. Solomon . . . . . . 44 Secretary and Director
Harald H. Ludwig . . . . . . . 44 Director
James P. Angus . . . . . . . . 52 Director
William R. Monkman . . . . . . 55 Director
Michael Dritz . . . . . . . . . 60 Director
Philip J. Olsson . . . . . . . 49 Director
DOUGLAS M. HAYES has been a Director and Compass' Chairman of the Board
since November 1997. Mr. Hayes has been a Managing Director of Macluan
Capital Corporation ("Macluan") and President of Hayes Capital Corporation
("Hayes Capital") since June 1997. From 1986 to June 1997, Mr. Hayes was a
Managing Director of Donaldson, Lufkin & Jenrette Securities Corporation. Mr.
Hayes is a graduate of Dartmouth College and holds an M.B.A. from the Harvard
Business School. Mr. Hayes also serves on the board of directors of GameTech
International, Inc. and Reliance Steel & Aluminum Co.
ALEXANDER HOGG has been a Director and Compass' President and Chief
Executive Officer since November 1997. Mr. Hogg has spent his entire career
in the aerospace industry and has more than 30 years of experience in
manufacturing aircraft, major systems such as landing gear, flight controls
and complex machine parts. From 1995 to 1997, Mr. Hogg was General Manager of
Castle Precision, Inc. and from 1992 to 1995, he held the position of
Operating Officer of Hydromil Co. Mr. Hogg's prior work experience includes,
among other positions, service as Vice President, General Manager of Menasco
(Canada) Aerospace, Director of Production Engineering for Boeing De
Havilland and Manager, Manufacturing Engineering, Canadair, Ltd. Mr. Hogg
attended Boeing's Senior Management Training Program and personally received
Boeing's PRIDE IN EXCELLENCE AWARD for his contributions to the 757 and 767
programs. Mr. Hogg is a graduate of Heriot Watt University with a degree in
Mechanical Engineering.
PASQUALE DIGIROLAMO has been Compass' Executive Vice President, Aircraft
Structures North America since December 1998. From 1994 to 1998, Mr.
DiGirolamo served as Operations Manager for B.F. Goodrich Aerospace, Landing
Gear Division. From 1993 to 1994, Mr. DiGirolamo served as plant manager for
Kelsey-Hayes Company, an automotive parts manufacturer. Prior to 1993, Mr.
DiGirolamo's prior work experience includes various positions with Delco
Chassis and General Motors. Mr. DiGirolamo is a graduate of the University
of Dayton with a degree in Mechanical Engineering.
N. PAUL BROST has been Compass' Vice President, Chief Financial Officer
and Treasurer since September 1998. From 1993 to 1998, Mr. Brost served as
Segment Financial Executive for Textron Inc. responsible for the Systems and
Component Segment, and as Vice President-Finance and Administration for HR
Textron, a division of Textron Inc. From 1976 to 1993, Mr. Brost was with
Ernst & Young LLP, most recently as a partner, with responsibility for
numerous manufacturing, aerospace and defense clients. Mr. Brost is a
graduate of Southern Illinois University and is a Certified Public Accountant.
DOUGLAS B. SOLOMON has been a Director and Compass' Secretary since
November 1997. Mr. Solomon has been a Managing Director of Macluan since
December 1998 and a Managing Director of Hayes Capital since August 1997.
From August 1997 to December 1998, Mr. Solomon served as a Senior Vice
President of Macluan. Since 1992, Mr. Solomon has been President of The
Woodland Company, which provides financial advisory and consulting services.
Mr. Solomon was a Managing Director of The Chase Manhattan Investment Bank
from 1989 to 1991. Mr. Solomon is a graduate of the University of
California-Davis and holds an M.B.A. from the University of California-Los
Angeles.
49
HARALD H. LUDWIG has been a Director of Compass since November 1997. Mr.
Ludwig co-founded and has been President of Macluan, a private investment
company, since 1985. He is a graduate of Simon Fraser University and holds a
L.L.B. from Osgoode Hall Law School. An entity controlled by Mr. Ludwig
controls Holdings, which is the majority stockholder of Compass. Mr. Ludwig
also serves on the board of directors for Lions Gate Entertainment Corp. and
for West Fraser Timber Limited.
JAMES P. ANGUS has been a Director of Compass since March 1998. Mr.
Angus is a co-founder of Macluan and has been President of Angroup Holdings
Limited, a private investment company with interests in marine
transportation, real estate development and other industries, since 1986. Mr.
Angus is a graduate of the University of Victoria and holds an M.B.A. from
the University of Western Ontario.
WILLIAM R. MONKMAN has been a Director of Compass since March 1998. Mr.
Monkman is also the Chief Executive Officer and President of Precision
Aerospace Corporation, which manufactures fuel control systems and
carburetors for aerospace customers and fuel control systems for industrial
engines at plants in Washington, California and Virginia. Mr. Monkman has
been affiliated with Precision Aerospace Corporation since 1981. Between
1981 and 1997 Mr. Monkman was also affiliated with Suntree Industries
Limited, most recently as Chief Executive Officer. Mr. Monkman is a graduate
of the University of Alberta and holds an M.B.A. from the University of
Western Ontario.
MICHAEL DRITZ has been a Director of Compass since March 1998. Mr. Dritz
is also the Chairman of Dritz Enterprises LLC which provides consulting
services for the financial industry, serving in that capacity since 1997.
From 1995 to 1996, Mr. Dritz was a Managing Director for Merrill Lynch and
Chairman of the Smith Brothers International Advisory Division. Mr. Dritz was
the President and Chief Executive Officer of Smith New Court, Inc. and an
Executive Director of Smith New Court PLC from 1985 to 1995. Mr. Dritz is a
graduate of Syracuse University.
PHILIP J. OLSSON has been a Director of Compass since March 1999. Mr.
Olsson is also a Managing Director of Royal Bank Equity Partners Limited,
having served in such a capacity since 1997. From 1986 to 1997, Mr. Olsson
served in various positions at RBC Dominion Securities, including as Vice
Chairman. Mr. Olsson is a graduate of and holds an M.B.A. from Vanderbilt
University. Mr. Olsson also serves on the board of directors of Anchor
Lamina, Inc.
Compass' directors will serve until their respective successors are
elected or until death, resignation or removal. Executive Officers are
appointed by, and serve at the pleasure of, the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Compass' Board of Directors has established an Audit Committee and a
Compensation Committee.
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent public accountants to be selected to
conduct the annual audit of Compass' books and records, reviewing the
proposed scope of such audit and approving the audit fees to be paid,
reviewing Compass' accounting and financial controls with the independent
public accountants and Compass' financial and accounting staff and reviewing
and approving transactions between Compass and its directors, officers and
affiliates. Messrs. Angus, Monkman and Solomon are the members of the Audit
Committee.
The Compensation Committee provides a general review of Compass'
compensation plans and policies to ensure that they meet corporate objectives.
Compass' existing plans with respect to executive compensation are largely based
upon contractual commitments set forth in employment and consulting agreements
that are either in effect or are to be entered into upon consummation of the
Pending Acquisitions. See "--Employment Agreements." The Compensation
Committee's responsibilities also include administering the 1998 Stock Incentive
Plan (as defined herein), including selecting the officers and salaried
employees to whom awards will be granted.
50
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hayes, Ludwig and Dritz served as the members of the Compensation
Committee in 1998. Mr. Hayes served as Chairman of the Board for Compass and
for each of its subsidiaries in 1998. Mr. Hayes did not receive any
compensation for such service.
Mr. Hayes and Mr. Ludwig are affiliates of Hayes Capital and Dunhill Bank
Caribbean Ltd. ("Dunhill"), respectively, which are parties to a Management
Consulting Agreement with Compass. See "--Certain Relationships and Related
Party Transactions."
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers,
employees or consultants of Compass are entitled to receive an annual
retainer fee of $12,000, plus reimbursement of expenses for each Board of
Directors' meeting and each committee meeting that they attend in person.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Compass to its
Chief Executive Officer and the two other most highly compensated executive
officers for the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS(#) COMPENSATION ($)
- ------------------ ---- ---------- --------- --------------- ----------------
Alexander Hogg........................ 1998 $250,000 $200,000(1) 346,291 $ -
Chief Executive Officer and
President
Pasquale DiGirolamo................... 1998 16,154(2) 50,000 40,000 16,817(4)
Executive Vice President, Aircraft
Structures North America
N. Paul Brost......................... 1998 35,577(3) 5,000 25,000 -
Vice President, Chief Financial
Officer and Treasurer
(1) Pursuant to the terms of his employment agreement, Mr. Hogg may be granted
certain stock options based on Compass' 1998 performance. See
"--Employment Agreements."
(2) Represents Mr. DiGirolamo's salary for the partial year from December 1,
1998 when Mr. DiGirolamo began his employment with Compass. Mr.
DiGirolamo's annual salary is presently $200,000. See "--Employment
Agreements."
(3) Represents Mr. Brost's salary for the partial year from September 21, 1998
when Mr. Brost began his employment with Compass. Mr. Brost's annual
salary is presently $150,000. See "--Employment Agreements."
(3) Represents relocation expenses incurred by Mr. DiGirolamo and paid by
Compass.
51
OPTION/SAR GRANTS IN 1998
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS/ EXERCISE VALUE AT ASSUMED
SECURITIES SARS OF ANNUAL RATES OF
UNDERLYING GRANTED TO BASE STOCK PRICE
OPTIONS/SARS EMPLOYEES PRICE EXPIRATION APPRECIATION FOR
NAME GRANTED (#) IN 1998 ($/SH) DATE OPTION TERM
---- ------------ ------- ------ ---- -----------
5% ($) 10% ($)
------ -------
Alexander Hogg............. 346,291 42.1% $1.00 March 10, 2008 $564,000 $898,000
Pasquale DiGirolamo........ 40,000 4.9 $1.47 November 30, 2008 96,000 153,000
N. Paul Brost.............. 25,000 3.0 $1.47 October 14, 2008 60,000 95,000
1998 STOCK INCENTIVE PLAN
In March 1998 Compass' Board of Directors adopted, and the shareholders
approved, the Compass Aerospace Corporation 1998 Stock Incentive Plan (the
"1998 Stock Incentive Plan"). The 1998 Stock Incentive Plan will be
administered by the Compensation Committee of the Board of Directors (the
"Committee"). All officers, directors, employees and independent contractors
of Compass are eligible for discretionary awards under the 1998 Stock
Incentive Plan. The 1998 Stock Incentive Plan provides for stock-based
incentive awards, including incentive stock options, non-qualified stock
options and restricted stock. The 1998 Stock Incentive Plan permits the
Committee to select eligible persons to receive awards and to determine
certain terms and conditions of such awards, including the vesting schedule
and exercise price of each award, PROVIDED, that the option exercise price
may not be less than 85% of the fair market value per share of Compass'
Common Stock on the date of the grant. Under the 1998 Stock Incentive Plan,
no participant may be granted incentive stock options that are first
exercisable in any one calendar year with fair market value in excess of
$100,000. 2,000,000 shares of Compass' Common Stock have been reserved for
issuance under the 1998 Stock Incentive Plan.
The 1998 Stock Incentive Plan may be amended, suspended or terminated at
any time. However, neither the maximum number of shares that may be sold or
issued under the 1998 Stock Incentive Plan, nor the benefits accruing to
participants thereunder may be increased, nor may the class of persons
eligible to participate in the 1998 Stock Incentive Plan be altered, without
the approval of Compass' shareholders; PROVIDED, HOWEVER, that adjustments to
the number of shares subject to the 1998 Stock Incentive Plan and to
individual awards thereunder and/or to the exercise price of awards
previously granted are permitted without shareholder approval upon the
occurrence of certain events affecting the capital structure of Compass.
EMPLOYMENT AGREEMENTS
Effective November 26, 1997 Compass entered into an employment agreement
(amended as of April 14, 1998) with Alexander Hogg, pursuant to which Compass
agreed to employ Mr. Hogg as President and Chief Executive Officer for a term
of five years at an annual base salary of $250,000, beginning January 2,
1998. Mr. Hogg also received $21,000 in salary for the period from the
agreement's effective date through January 1, 1998. In addition, the
agreement provides that Mr. Hogg shall be granted an option to purchase
346,291 shares of Compass' common stock at an exercise price equal to $1.00
per share, which shall vest and become exercisable on November 26, 1999. Mr.
Hogg's option will also fully vest and become immediately exercisable if (i)
any entity other than Holdings or its successors acquires 51% or more of the
common stock of Compass or if Compass sells all or substantially all of its
assets, or (ii) Mr. Hogg's employment is terminated without cause. Mr. Hogg
will also be granted stock options to purchase an additional 62,500 shares,
on each of March 1, 1999, 2000, 2001 and 2002, respectively, if Compass meets
certain EBITDA targets. Mr. Hogg will also be entitled to receive his base
salary to the end of the term of the agreement if he is terminated without
cause.
52
Effective December 1, 1998 Compass entered into an employment agreement
with Pasquale DiGirolamo, pursuant to which Compass agreed to employ Mr.
DiGirolamo as Executive Vice President, Aircraft Structures North America for
a term of three years at an annual base salary of $200,000 and an annual
bonus of $50,000 to be paid on each of December 15, 1998, 1999 and 2000. In
addition, the agreement provides that Mr. DiGirolamo will be granted stock
options to purchase 40,000 shares of Compass' common stock at an exercise
price equal to $1.47 per share. Such options will vest at the rate of 10,000
shares per year on December 1 of each year, beginning on December 1, 1999.
Mr. DiGirolamo's options will fully vest and become immediately exercisable
(i) in the event of a sale of 81% or more of Compass' voting common stock in
a single transaction or a related series of transactions within a six month
period, or (ii) Mr. DiGirolamo's employment is terminated due to death or
permanent disability. Mr. DiGirolamo will also be granted stock options to
purchase an additional 10,000 shares per annum, at an exercise price to be
determined which shares shall vest over a four-year period at 25% per year if
Compass meets certain EBITDA targets. Mr. DiGirolamo will also be entitled to
receive up to six months of his then current base salary if he is terminated
without cause.
Effective September 21, 1998 Compass entered into an employment
agreement with N. Paul Brost, pursuant to which Compass agreed to employ Mr.
Brost as Vice President and Chief Financial Officer for a term of three years
at an annual base salary of $125,000, which has been adjusted to $150,000,
and a minimum $15,000 bonus payable in 1999. In addition, the agreement
provides that Mr. Brost will be granted stock options to purchase 25,000
shares of Compass' common stock at an exercise price equal to $1.47 per
share. Such options will vest at the rate of 6,250 shares per year on
September 21 of each year, beginning September 21, 1999. Mr. Brost's options
will fully vest and become immediately exercisable (i) in the event of a sale
of 81% or more of Compass' voting common stock in a single transaction or a
related series of transactions within a six months period, or (ii) Mr.
Brost's employment is terminated due to death or permanent disability. Mr.
Brost will also be granted stock options to purchase an additional 10,000
shares per annum, at an exercise price to be determined which shall vest
over a four year period at 25% per year if Compass meets certain EBITDA
targets. Mr. Brost will also be entitled to receive up to six months of his
then current base salary if he is terminated without cause.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Compass is a party to a Management Consulting Agreement with Dunhill and
Hayes Capital, which provides for the payment of management fees from Compass
to Dunhill and Hayes Capital (the "Management Fee") in an annual aggregate
amount equal to $200,000 plus 1.5% of Compass' EBITDA plus expenses, payable
quarterly in arrears. Of such fees, 50% is payable to Dunhill and 50% is
payable to Hayes Capital. Mr. Ludwig is the beneficial owner of Dunhill. Mr.
Hayes and Mr. Solomon are the President and a Managing Director of Hayes
Capital, respectively. Payment of such fees is subordinated to the notes and
is subject to the limitation on restricted payments set forth in the
indenture governing the notes to the extent that such fees exceed $500,000 in
any fiscal year. See "Description of Notes--Limitation on Restricted
Payments." In addition to the fees described above, Compass typically also
pays advisory fees to Dunhill and Hayes Capital in an amount equal to an
aggregate of 1% of the consideration paid for each business acquired by
Compass.
BankBoston, a lender and the administrative agent under the Credit
Agreement, and BRSI, the arranger under the Credit Agreement, are affiliates of
BSI, an Initial Purchaser of the Outstanding Notes, and are affiliates of
BancBoston Ventures Inc. which holds 17.6% of Compass' voting common stock.
53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Compass' capital stock as of the date of this
Prospectus of: (i) each person known to Compass to beneficially own more
than 5% of Compass' voting securities; (ii) each director and each of the
executive officers of Compass; and (iii) the directors and executive officers
of Compass as a group.
OWNERSHIP OF CLASS A
COMMON STOCK(1)
NAME AND ADDRESS OF NUMBER OF PERCENTAGE
BENEFICIAL OWNER SHARES OF OWNERSHIP
Compass Holdings, L.L.C. (2) ................ 15,000,000 77.6%
RBC Equity Investments, Inc. ................ 5,447,853 22.0%
BancBoston Ventures, Inc. (4) ............... 3,404,908 17.6
Douglas M. Hayes (3)(5)(6) .................. 256,000 1.3
Alexander Hogg (3) .......................... 70,376 *
Pasquale DiGirolamo (3) ..................... - *
N. Paul Brost (3) ........................... - *
Douglas B. Solomon(3) ....................... 256,000 1.3
Harald H. Ludwig (2)(5) ..................... 15,000,000 77.6
James P. Angus (2)(5) ....................... - *
William R. Monkman (3) ...................... - *
Michael Dritz (3)(5) ........................ - *
Philip J. Olsson (3) ........................ - *
All directors and officers as a group ....... 15,582,376 80.6
* Less than one percent.
(1) Compass has outstanding certain shares of non-voting Series B Common
Stock. None of the directors or officers of Compass are the beneficial
owners of any Series B Common Stock.
(2) The stockholder's address in each case is 940-1040 W. Georgia Street,
Vancouver, British Columbia, Canada V6E 4H1.
(3) The stockholder's address is 200 Bay Street, Royal Bank Plaza, 4th Floor,
North Tower, Toronto, Ontario M51 2W7. Represents 5,447,853 shares of
non-voting Class B Common Stock, convertible to Class A Common Stock. Mr.
Olsson is an officer of RBC Equity Investments, Inc.
(4) The stockholder's address in each case is 1501 Hughes Way, Suite 400, Long
Beach, CA 90815.
(5) The stockholder's address is 175 Federal Street, M/S75-10-01, Boston,
Massachusetts 02110.
(6) Represents shares owned by Holdings. Under the terms of the Operating
Agreement of Holdings, Mr. Ludwig has sole voting power and investment
power with respect to the shares held by Holdings. Messrs. Hayes, Dritz
and Angus hold membership interests in Holdings or its affiliates.
(7) Represents shares owned by the D&C Hayes Living Trust. Mr. Hayes is
a co-trustee of the trust and shares voting power and investment
power with respect to the Class A Common Stock held by the trust.
54
DESCRIPTION OF CREDIT AGREEMENT
Compass entered into the Credit Agreement consisting of a $170.0 million
senior revolving credit facility on November 20, 1998, as amended and restated
February 11, 1999. The proceeds of the Credit Agreement will be used for
working capital and general corporate purposes and to finance permitted
acquisitions. The Credit Agreement consists of a $25 million revolving credit
facility, a $65 million Acquisition Line, a $35 million "Term Loan A" and a $45
million "Term Loan B". Availability under the facility is limited to 85.0% of
eligible accounts receivable, plus 50.0% of the net book value of eligible
inventory, plus 25.0% of the orderly liquidation value of machinery and
equipment, subject to reserves that may be established by BankBoston.
Each of the facilities other than Term Loan B will mature five years
following its inception. Term Loan B will mature on February 1, 2005.
Amounts outstanding under the Credit Agreement will bear interest at the
agent bank's base rate plus a margin between 1.00% and 2.00%, or the
Eurodollar rate plus a margin between 2.5% and 3.5% based on the leverage
ratio. Compass is permitted to prepay the indebtedness evidenced by the
Credit Agreement in whole or in part at any time without penalty (subject to
reimbursement of the lenders' breakage and redeployment costs actually
incurred in the case of prepayment of Eurodollar borrowings).
Repayment of the indebtedness evidenced by the Credit Agreement is secured
by a security interest in all accounts receivable, inventory, property,
machinery and equipment, intangibles, contract rights and other personal
property of Compass and its subsidiaries. In addition, repayment is guaranteed
by all of Compass' subsidiaries. The Credit Agreement allows Compass to incur
up to an additional $8.0 million of mortgage indebtedness and allows for capital
expenditures and purchase money indebtedness of up to $10.0 million in the
aggregate.
The loan documents also contain representations, indemnification and other
provisions that are usual and customary for credit facilities of this type. The
Credit Agreement requires Compass to meet customary financial maintenance and
other covenants.
55
DESCRIPTION OF THE NEW NOTES
The Outstanding Notes were issued under an indenture dated as of April 21,
1998 (the "Indenture") by and among Compass Aerospace Corporation (for purposes
of this description, the "Company"), the Guarantors (as defined herein) and IBJ
Schroder Bank & Trust Company, as trustee (the "Trustee"). Upon the issuance of
the New Notes the Indenture will be subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summaries of certain provisions of the Indenture are summaries only, do not
purport to be complete and are qualified in their entirety by reference to all
of the provisions of the Indenture. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the Indenture.
Wherever particular provisions of the Indenture or the Trust Indenture Act are
referred to in this summary, such provisions are incorporated by reference as a
part of the statements made and such statements are qualified in their entirety
by such reference. Any Outstanding Notes that remain outstanding after the
consummation of the Exchange Offer, together with the New Notes, will be treated
as a single class of securities under the Indenture. The Outstanding Notes and
the New Notes are collectively referred to herein as the "Notes."
GENERAL
The Notes will be senior subordinated, unsecured, general obligations of
Compass, limited in aggregate principal amount to $110.0 million. The Notes will
be subordinate in right of payment to certain other debt obligations of Compass.
The Notes will be jointly and severally, irrevocably and unconditionally
guaranteed on a senior subordinated basis by each of Compass' present and future
Subsidiaries (the "Guarantors"). See "Certain Bankruptcy Limitations" below. The
term "Subsidiaries" as used in this Description of the New Notes, however, does
not include Unrestricted Subsidiaries. The New Notes will be issued solely in
exchange for an equal principal amount of Outstanding Notes pursuant to the
Exchange Offer. The form and terms of the New Notes will be identical in all
material respects to the form and terms of the Outstanding Notes except that:
(i) the New Notes will have been registered under the Securities Act and (ii)
the Registration Rights and Liquidated Damages applicable to the Outstanding
Notes will not be applicable to the New Notes. The New Notes will be issued
only in registered form without coupons in denominations of $1,000 and integral
multiples thereof.
The Notes will mature on April 15, 2005. The Notes will bear interest at
the rate per annum stated on the cover page hereof from the date of issuance or
from the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on April 15 and October 15 of each year,
commencing October 15, 1998, to the persons in whose names such Notes are
registered at the close of business on the April 1 or October 1 immediately
preceding such Interest Payment Date. Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest (and Liquidated Damages, if
any,) on the Notes will be payable, and the Notes may be presented for
registration of transfer or exchange, at the office or agency of Compass
maintained for such purpose, which office or agency shall be maintained in the
Borough of Manhattan, The City of New York. Except as set forth below, at the
option of Compass, payment of interest may be made by check mailed to the
Holders of the Notes at the addresses set forth upon the registry books of
Compass. No service charge will be made for any registration of transfer or
exchange of Notes, but Compass may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. Until
otherwise designated by Compass, Compass' office or agency will be the corporate
trust office of the Trustee presently located at the office of the Trustee in
the Borough of Manhattan, The City of New York.
SUBORDINATION
The Notes and the Guarantees will be general, unsecured obligations of
Compass and the Guarantors, respectively, subordinated in right of payment to
all Senior Debt of Compass and the Guarantors, as applicable. At December 31,
1998 Compass had outstanding an aggregate of approximately $197.0 million of
secured Senior Debt.
The Indenture provides that no payment (by set-off or otherwise) may be
made by or on behalf of Compass or a Guarantor, as applicable, on account of any
Obligation in respect of the Notes, including the principal of, premium, if any,
or interest on the Notes (including any repurchases of Notes), or on account
56
of the redemption provisions of the Notes for cash or property (other than
Junior Securities), (i) upon the maturity of any Senior Debt of Compass or
such Guarantor by lapse of time, acceleration (unless waived) or otherwise,
unless and until all principal of, premium, if any, and the interest on such
Senior Debt are first paid in full in cash or Cash Equivalents (or such
payment is duly provided for) or otherwise to the extent holders accept
satisfaction of amounts due by settlement in other than cash or Cash
Equivalents, or (ii) in the event of default in the payment of any principal
of, premium, if any, or interest on Senior Debt of Compass or such Guarantor
when it becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise (a "Payment Default"), unless and
until such Payment Default has been cured or waived or otherwise has ceased
to exist.
Upon (i) the happening of an event of default other than a Payment Default
that permits the holders of Senior Debt to declare such Senior Debt to be due
and payable and (ii) written notice of such event of default given to Compass
and the Trustee by the Representative under the Credit Agreement or the holders
of an aggregate of at least $10.0 million principal amount outstanding of any
other Senior Debt or their representative (a "Payment Notice"), then, unless and
until such event of default has been cured or waived or otherwise has ceased to
exist, no payment (by set-off or otherwise) may be made by or on behalf of
Compass or any Guarantor which is an obligor under such Senior Debt on account
of any Obligation in respect of the Notes, including the principal of, premium,
if any, or interest on the Notes, (including any repurchases of any of the
Notes), or on account of the redemption provisions of the Notes, in any such
case, other than payments made with Junior Securities. Notwithstanding the
foregoing, unless the Senior Debt in respect of which such event of default
exists has been declared due and payable in its entirety within 179 days after
the Payment Notice is delivered as set forth above (the "Payment Blockage
Period") (and such declaration has not been rescinded or waived), at the end of
the Payment Blockage Period, Compass and the Guarantors shall be required to pay
all sums not paid to the holders of the Notes during the Payment Blockage Period
due to the foregoing prohibitions and to resume all other payments as and when
due on the Notes. Any number of Payment Notices may be given; PROVIDED, HOWEVER,
that (i) not more than one Payment Notice shall be given within a period of any
360 consecutive days, and (ii) no default that existed upon the date of such
Payment Notice or the commencement of such Payment Blockage Period (whether or
not such event of default is on the same issue of Senior Debt) shall be made the
basis for the commencement of any other Payment Blockage Period (it being
acknowledged that any subsequent action, or any subsequent breach of any
financial covenant for a period commencing after the expiration of such Payment
Blockage Period that, in either case, would give rise to a new event of default,
even though it is an event that would also have been a separate breach pursuant
to any provision under which a prior event of default previously existed, shall
constitute a new event of default for this purpose).
Upon any distribution of assets of Compass or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of
Compass or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities, (i) the
holders of all Senior Debt of Compass or such Guarantor, as applicable, will
first be entitled to receive payment in full in cash or Cash Equivalents (or
have such payment duly provided for) or otherwise to the extent holders
accept satisfaction of amounts due by settlement in other than cash or Cash
Equivalents before the holders are entitled to receive any payment on account
of any Obligation in respect of the Notes, including the principal of,
premium, if any, and interest on the Notes (other than Junior Securities) and
(ii) any payment or distribution of assets of Compass or such Guarantor of
any kind or character from any source, whether in cash, property or
securities (other than Junior Securities) to which the holders or the Trustee
on behalf of the holders would be entitled (by set-off or otherwise), except
for the subordination provisions contained in the Indenture, will be paid by
the liquidating trustee or agent or other person making such a payment or
distribution directly to the holders of such Senior Debt or their
representative to the extent necessary to make payment in full (or have such
payment duly provided for) on all such Senior Debt remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of
such Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of Compass or any Guarantor (other than Junior
Securities) shall be received by the Trustee or the holders at a time when such
payment or distribution is prohibited by the foregoing provisions, such payment
or distribution shall be held in trust for the benefit of the holders of such
Senior Debt, and shall be paid or delivered by the Trustee or such holders, as
the case may be, to the holders of such Senior Debt remaining unpaid or
unprovided for or to their representative or representatives, or to the trustee
or trustees under any indenture pursuant to which any instruments evidencing any
of such Senior Debt may have been issued, ratably according to the
57
aggregate principal amounts remaining unpaid on account of such Senior Debt
held or represented by each, for application to the payment of all such
Senior Debt remaining unpaid, to the extent necessary to pay or to provide
for the payment of all such Senior Debt in full in cash or Cash Equivalents
or otherwise to the extent holders accept satisfaction of amounts due by
settlement in other than cash or Cash Equivalents after giving effect to any
concurrent payment or distribution to the holders of such Senior Debt.
No provision contained in the Indenture or the Notes will affect the
obligation of Compass and the Guarantors, which is absolute and unconditional,
to pay, when due, principal of, premium, if any, and interest on (or if
applicable Liquidated Damages) the Notes. The subordination provisions of the
Indenture and the Notes will not prevent the occurrence of any Default or Event
of Default under the Indenture or limit the rights of the Trustee or any holder
to pursue any other rights or remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors or Compass or a
marshalling of assets or liabilities of Compass, holders of the Notes may
receive ratably less than other creditors.
CERTAIN BANKRUPTCY LIMITATIONS
Compass is a holding company, conducting its business through its
Subsidiaries, which have guaranteed or will guarantee Compass' Obligations with
respect to the Notes, and Unrestricted Subsidiaries, which Unrestricted
Subsidiaries will not guarantee the Notes. See "Risk Factors." Holders of the
Notes will be direct creditors of each Guarantor by virtue of its guarantee.
Nonetheless, in the event of the bankruptcy or financial difficulty of a
Guarantor, such Guarantor's obligations under its guarantee may be subject to
review and avoidance under state and federal fraudulent transfer laws. Among
other things, such obligations may be avoided if a court concludes that such
obligations were incurred for less than reasonably equivalent value or fair
consideration at a time when the Guarantor was insolvent, was rendered
insolvent, or was left with inadequate capital to conduct its business. A court
would likely conclude that a Guarantor did not receive reasonably equivalent
value or fair consideration to the extent that the aggregate amount of its
liability on its guarantee exceeds the economic benefits it receives in the
Offering. The obligations of each Guarantor under its guarantee will be limited
in a manner intended to cause it not to be a fraudulent conveyance under
applicable law, although no assurance can be given that a court would give the
holder the benefit of such provision. See "Risk Factors--Fraudulent Transfer
Considerations."
If the obligations of a Guarantor under its guarantee were avoided, holders
of Notes would have to look to the assets of any remaining Guarantors for
payment. There can be no assurance in that event that such assets would suffice
to pay the outstanding principal and interest on the Notes.
OPTIONAL REDEMPTION
Compass will not have the right to redeem any Notes prior to April 15,
2002, other than out of the Net Cash Proceeds of an Initial Public Equity
Offering of common stock, as described in the next following paragraph. The
Notes will be redeemable for cash at the option of Compass, in whole or in part,
at any time on or after April 15, 2002 upon not less than 30 days nor more than
60 days notice to each holder of Notes, at the following redemption prices
(expressed as percentages of the principal amount) if redeemed during the
12-month period commencing April 15 of the years indicated below, in each case
(subject to the right of holders of record on a Record Date to receive the
corresponding interest due (and the corresponding Liquidated Damages, if any) on
an Interest Payment Date corresponding to such Record Date that is on or prior
to such Redemption Date) together with accrued and unpaid interest and
Liquidated Damages, if any, thereon to the Redemption Date:
YEAR PERCENTAGE
---- ----------
2002 . . . . . . . . . . . . . . . . . . . . . . . . 105.063%
2003 . . . . . . . . . . . . . . . . . . . . . . . . 102.531%
2004 . . . . . . . . . . . . . . . . . . . . . . . . 100.000%
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Until April 15, 2001, upon an Initial Public Equity Offering of common
stock for cash, up to 35% of the aggregate principal amount of the Notes
originally outstanding may be redeemed at the option of Compass within 90 days
of such Initial Public Equity Offering, on not less than 30 days, but not more
than 60 days, notice to each holder of the Notes to be redeemed, with cash from
the Net Cash Proceeds to Compass of such Initial Public Equity Offering, at a
redemption price equal to 110.125% of principal, (subject to the right of
holders of record on a Record Date to receive interest due on an Interest
Payment Date that is on or prior to such Redemption Date) together with accrued
and unpaid interest and Liquidated Damages, if any, to the date of redemption;
PROVIDED, HOWEVER, that immediately following such redemption not less than 65%
of the original aggregate principal amount of the Notes remain outstanding.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
holder of each Note to be redeemed to such holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless Compass defaults in the payment thereof.
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each holder of Notes has the right, at such holder's option, pursuant
to an offer (subject only to conditions required by applicable law, if any) by
Compass (the "Change of Control Offer"), to require Compass to repurchase all or
any part of such holder's Notes (PROVIDED, that the principal amount of such
Notes must be $1,000 or an integral multiple thereof) on a date (the "Change of
Control Purchase Date") that is no later than 35 Business Days after the
occurrence of such Change of Control, at a cash price equal to 101% of the
principal amount thereof (the "Change of Control Purchase Price"), together with
accrued and unpaid interest and Liquidated Damages, if any, to the Change of
Control Purchase Date. The Change of Control Offer shall be made within 10
Business Days following a Change of Control and shall remain open for 20
Business Days following its commencement (the "Change of Control Offer Period").
Upon expiration of the Change of Control Offer Period, Compass promptly shall
purchase all Notes properly tendered in response to the Change of Control Offer.
As used herein, a "Change of Control" means (i) prior to consummation of an
Initial Public Equity Offering the Excluded Persons shall cease to own
beneficially and of record at least 51% of the total voting power in the
aggregate of all classes of Capital Stock of Compass then outstanding normally
entitled to vote in elections of directors or (ii) on or following the
consummation of an Initial Public Equity Offering, (A) any merger or
consolidation of Compass with or into any person or any sale, transfer or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of Compass, on a consolidated basis, in one transaction or a series of
related transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) (other
than any of the Excluded Persons) (a) is or becomes the "beneficial owner,"
directly or indirectly, of more than 35% of the total voting power in the
aggregate normally entitled to vote in the election of directors, managers, or
trustees, as applicable, of the transferee(s) or surviving entity or entities,
and (b) any such person or group becomes, directly or indirectly, the beneficial
owner of a greater percentage of such total voting power, than beneficially
owned by the Excluded Persons, (B) any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable) (other than any of the Excluded Persons) (a) is or becomes the
"beneficial owner," directly or indirectly, of more than 35% of the total voting
power in the aggregate of all classes of Capital Stock of Compass then
outstanding normally entitled to vote in elections of directors, and
59
(b) any such person or group becomes, directly or indirectly, the beneficial
owner of a greater percentage of such total voting power, than beneficially
owned by the Excluded Persons, or (C) during any period of 12 consecutive
months after the Issue Date, individuals who at the beginning of any such
12-month period constituted the Board of Directors of Compass (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of Compass, as applicable, was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of Compass, as applicable,
then in office.
On or before the Change of Control Purchase Date, Compass will (i) accept
for payment Notes or portions thereof properly tendered pursuant to the Change
of Control Offer, (ii) deposit with the Paying Agent cash sufficient to pay the
Change of Control Purchase Price (together with accrued and unpaid interest and
Liquidated Damages, if any), of all Notes so tendered and (iii) deliver to the
Trustee Notes so accepted together with an Officers' Certificate listing the
Notes or portions thereof being purchased by Compass. The Paying Agent promptly
will pay the holders of Notes so accepted an amount equal to the Change of
Control Purchase Price (together with accrued and unpaid interest and Liquidated
Damages, if any), and the Trustee promptly will authenticate and deliver to such
holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered. Any Notes not so accepted will be delivered promptly by
Compass to the holder thereof. Compass publicly will announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of Compass, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of the assets of Compass will likely
be interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of Compass has occurred. In addition, no assurances can be given that
Compass will be able to acquire Notes tendered upon the occurrence of a Change
of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this paragraph, compliance by
Compass or any of the Guarantors with such laws and regulations shall not in and
of itself cause a breach of its obligations under such covenant.
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any), due on such
Interest Payment Date will be paid to the person in whose name a Note is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to holders who tender the
Notes pursuant to the Change of Control Offer.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth in this covenant,
Compass and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur,
become directly or indirectly liable with respect to (including as a result
of an Acquisition), or otherwise become responsible for, contingently or
otherwise (individually and collectively, to "incur" or, as appropriate, an
"incurrence"), any Indebtedness or any Disqualified Capital Stock (including
Acquired Indebtedness), other than Permitted Indebtedness. Notwithstanding
the foregoing if (i) no Default or Event of Default shall have occurred and
be continuing at the time of, or would occur after giving effect on a pro
forma basis to, such incurrence of Indebtedness or Disqualified Capital Stock
and (ii) on the date of such incurrence (the "Incurrence Date"), the
Consolidated Coverage Ratio of Compass for the Reference Period immediately
preceding the Incurrence Date, after giving effect on a pro forma basis to
such incurrence of such Indebtedness or Disqualified Capital Stock and, to
the extent set forth in the definition of Consolidated Coverage Ratio, the
use of proceeds thereof, would be at least 2 to 1 (as applicable, each the
"Debt Incurrence Ratio"), then Compass may incur such Indebtedness or
Disqualified Capital Stock and the Guarantors may incur such Indebtedness
(other than Disqualified Capital Stock).
60
In addition, the foregoing limitations will not apply to:
(a) the incurrence by Compass or any Guarantor of Purchase Money
Indebtedness, PROVIDED, that (i) the aggregate principal amount of such
Indebtedness incurred on or after the Issue Date and outstanding at any time
pursuant to this paragraph (a) (including any Refinancing Indebtedness and other
Indebtedness issued to refinance, replace, defease or refund such Indebtedness)
shall not exceed $2.0 million, and (ii) in each case, such Indebtedness shall
not constitute more than 100% of the cost (determined in accordance with GAAP)
to Compass or such Guarantor, as applicable, of the property so purchased or
leased;
(b) if no Event of Default shall have occurred and be continuing, the
incurrence by Compass or any Guarantor of Indebtedness in an aggregate principal
amount outstanding at any time (including Refinancing Indebtedness and other
Indebtedness incurred to refinance, replace, defease or refund such
Indebtedness) of up to $5.0 million;
(c) the incurrence by Compass or any Guarantor of Mortgage Indebtedness or
Indebtedness pursuant to the Credit Agreement up to an aggregate principal
amount outstanding under the Credit Agreement or of Mortgage Indebtedness
collectively (in each case including any Refinancing Indebtedness and other
Indebtedness incurred to refinance, replace, defease or refund such
Indebtedness) not to exceed in the aggregate $12.0 million, PROVIDED, THAT
(A) in the case of Indebtedness pursuant to the Credit Agreement minus the
amount of any such Indebtedness (i) retired with the Net Cash Proceeds from any
Asset Sale applied to permanently reduce the outstanding amounts or the
commitments with respect to such Indebtedness pursuant to clause (1)(b)(ii) of
the first paragraph of the covenant "Limitation on Sale of Assets and Subsidiary
Stock" or (ii) assumed by a transferee in an Asset Sale, and (B) in the case of
Mortgage Indebtedness such Indebtedness shall not constitute more than 100% of
the cost (determined in accordance with GAAP) to Compass or such Guarantor, as
applicable, of such mortgaged real estate asset.
Indebtedness or Disqualified Capital Stock of any Person which is
outstanding at the time such Person becomes a Subsidiary of Compass (including
upon designation of any subsidiary or other person as a Subsidiary) or is merged
with or into or consolidated with Compass or a Subsidiary of Compass shall be
deemed to have been Incurred at the time such Person becomes such a Subsidiary
of Compass or is merged with or into or consolidated with Compass or a
Subsidiary of Compass, as applicable.
Upon each incurrence of Indebtedness, Compass may designate under which
provision of this covenant such Indebtedness is being incurred and such
Indebtedness should be deemed to have been so incurred under such provision and
no other provision of this covenant except as specifically provided otherwise.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that Compass and the Guarantors will not, and will
not permit any of their Subsidiaries to, directly or indirectly, make any
Restricted Payment if, after giving effect to such Restricted Payment on a pro
forma basis, (1) a Default or an Event of Default shall have occurred and be
continuing, (2) Compass is not permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio in the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock," or
(3) the aggregate amount of all Restricted Payments made by Compass and its
Subsidiaries, including after giving effect to such proposed Restricted Payment,
from and after the Issue Date, would exceed, without duplication, the sum of
(a) 50% of the aggregate Consolidated Net Income of Compass for the period
(taken as one accounting period), commencing on the first day of the first full
fiscal quarter commencing after the Issue Date, to and including the last day of
the fiscal quarter ended immediately prior to the date of each such calculation
(or, in the event Consolidated Net Income for such period is a deficit, then
minus 100% of such deficit), plus (b) the aggregate Net Cash Proceeds received
by Compass from a Capital Contribution or the sale of its Qualified Capital
Stock (other than (i) to a Subsidiary of Compass, (ii) to the extent applied in
connection with a Qualified Exchange and (iii) to the extent credited in (v) and
(w) in the following paragraph), after the Issue Date, plus (c) other than
amounts credited pursuant to clause (v) of the next following paragraph, the net
amount of any Restricted Investments (not to exceed the original amount of such
Investment) made after the Issue Date that are returned to Compass or the
Guarantor that made such prior Investment, without restriction in cash on or
prior to the date of any such calculation.
61
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit (v) Restricted Investments in a Related Business,
PROVIDED, that, after giving pro forma effect to such Investment, the aggregate
amount of all such Investments made on or after the Issue Date that are
outstanding (after giving effect to any such Investments that are returned to
Compass or the Subsidiary Guarantor that made such prior Investment, without
restriction, in cash on or prior to the date of any such calculation) at any
time does not exceed $4.0 million, (w) repurchases of Capital Stock from
employees of Compass or its Subsidiaries upon the death, disability or
termination of employment in an aggregate amount to all employees not to exceed
$300,000 in any fiscal year or $1.5 million in the aggregate on and after the
Issue Date net of the Net Cash Proceeds received by Compass from subsequent
reissuances of such Qualified Capital Stock to new employees that are not
Excluded Persons, and the provisions of the immediately preceding paragraph will
not prohibit, (x) a Qualified Exchange, (y) the payment of any dividend on
Qualified Capital Stock within 60 days after the date of its declaration if such
dividend could have been made on the date of such declaration in compliance with
the foregoing provisions or (z) Permitted Payments to Parent. The full amount of
any Restricted Payment made pursuant to the foregoing clauses (v), (w), (y) and
(z) (but not pursuant to clause (x)) of the immediately preceding sentence,
however, will be deducted in the calculation of the aggregate amount of
Restricted Payments available to be made referred to in clause (3) of the
immediately preceding paragraph.
In addition, Compass and the Guarantors will not, and will not permit any
of their Subsidiaries to, directly or indirectly, make any Management Fee
Payment or similar payment to Affiliates (other than Subsidiaries) other than
Permitted Payments to Parent if, after giving effect to such Management Fee
Payments or similar payments, on a pro forma basis after giving effect to such
payment, a Default or an Event of Default shall have occurred and be continuing.
For purposes of this covenant, the amount of any Restricted Payment, if
other than in cash, shall be the fair market value thereof, as determined in the
good faith reasonable judgment of the Board of Directors of Compass.
Additionally, on the date of each Restricted Payment, Compass shall deliver an
Officers' Certificate to the Trustee describing in reasonable detail the nature
of such Restricted Payment, stating the amount of such Restricted Payment,
stating in reasonable detail the provisions of the Indenture pursuant to which
such Restricted Payment was made and certifying that such Restricted Payment was
made in compliance with the terms of the Indenture.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that Compass and the Guarantors will not, and will
not permit any of their Subsidiaries to, directly or indirectly, create, assume
or suffer to exist any consensual restriction on the ability of any Subsidiary
of Compass to pay dividends or make other distributions to or on behalf of, or
to pay any obligation to or on behalf of, or otherwise to transfer assets or
property to or on behalf of, or make or pay loans or advances to or on behalf
of, Compass or any Subsidiary of Compass, except (a) restrictions imposed by the
Notes or the Indenture or by other indebtedness of Compass (which may also be
guaranteed by the Guarantors) ranking senior or PARI PASSU with the Notes or the
guarantees, as applicable, provided such restrictions are no more restrictive
than those imposed by the Indenture and the Notes, (b) restrictions imposed by
applicable law, (c) existing restrictions under Indebtedness outstanding on the
Issue Date, including pursuant to the Credit Agreement, (d) restrictions under
any Acquired Indebtedness not incurred in violation of the Indenture or any
agreement relating to any property, asset, or business acquired by Compass or
any of its Subsidiaries, which restrictions in each case existed at the time of
acquisition, were not put in place in connection with or in anticipation of such
acquisition and are not applicable to any person, other than the person
acquired, or to any property, asset or business, other than the property, assets
and business so acquired, (e) any such restriction or requirement imposed by
Indebtedness incurred under the Credit Agreement pursuant to the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock" provided such restriction or requirement is no more restrictive than that
imposed by the Credit Agreement as of the Issue Date, (f) restrictions with
respect solely to a Subsidiary of Compass imposed pursuant to a binding
agreement which has been entered into for the sale or disposition of all or
substantially all of the Equity Interests or assets of such Subsidiary, provided
such restrictions apply solely to the Equity Interests or assets of such
Subsidiary which are being sold (g) restrictions on transfer contained in
Purchase Money Indebtedness or Mortgage Indebtedness incurred pursuant to the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock," provided such restrictions relate only to the transfer of the
property acquired with the proceeds of such Purchase Money Indebtedness or
Mortgage Indebtedness, as applicable and (h) in connection with and pursuant to
permitted Refinancings,
62
replacements of restrictions imposed pursuant to clauses (a), (c) or (d) of
this paragraph that are not more restrictive than those being replaced and do
not apply to any other person or assets than those that would have been
covered by the restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, neither (a) customary provisions restricting
subletting or assignment of any lease entered into in the ordinary course of
business, consistent with industry practice, nor (b) Liens permitted under
the terms of the Indenture on assets securing Senior Debt, Purchase Money
Indebtedness, or Mortgage Indebtedness incurred in accordance with the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock" shall in and of themselves be considered a
restriction on the ability of the applicable Subsidiary to transfer such
agreement or assets, as the case may be.
LIMITATIONS ON LAYERING INDEBTEDNESS
The Indenture provides that Compass and the Guarantors will not, and will
not permit any of their Subsidiaries to, directly or indirectly, incur, or
suffer to exist any Indebtedness that is subordinate in right of payment to any
other Indebtedness of Compass or a Guarantor unless, by its terms, such
Indebtedness is subordinate in right of payment to, or ranks PARI PASSU with,
the Notes or the Guarantee, as applicable.
LIMITATION ON LIENS SECURING INDEBTEDNESS
Compass and the Guarantors will not, and will not permit any of their
Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind,
other than Permitted Liens, upon any of their respective assets now owned or
acquired on or after the date of the Indenture or upon any income or profits
therefrom securing any Indebtedness of Compass or any Guarantor other than
Senior Indebtedness, unless Compass provides, and causes its Subsidiaries to
provide, concurrently therewith, that the Notes are equally and ratably so
secured, PROVIDED that, if such Indebtedness is Subordinated Indebtedness, the
Lien securing such Subordinated Indebtedness shall be subordinate and junior to
the Lien securing the Notes with the same relative priority as such Subordinated
Indebtedness shall have with respect to the Notes, and PROVIDED, FURTHER, that
this clause shall not be applicable to any Liens securing any such Indebtedness
which became Indebtedness of Compass pursuant to a transaction subject to the
provisions of the Indenture described below under "Limitation on Merger, Sale or
Consolidation" or which constitutes Acquired Indebtedness and which in either
case were in existence at the time of such transaction (unless such Indebtedness
was incurred or such Lien created in connection with or in contemplation of,
such transaction), so long as such Liens do not extend to or cover any property
or assets of Compass or any Subsidiary of Compass other than property or assets
acquired in such transaction.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that Compass and the Guarantors will not, and will
not permit any of their Subsidiaries to, in one or a series of related
transactions, convey, sell, transfer, assign or otherwise dispose of, directly
or indirectly, any of its property, business or assets, including by merger or
consolidation (in the case of a Subsidiary of Compass), and including any sale
or other transfer or issuance of any Equity Interests of any Subsidiary of
Compass, whether by Compass or a Subsidiary of either or through the issuance,
sale or transfer of Equity Interests by a Subsidiary of Compass, and including
any sale and leaseback transaction (any of the foregoing, an "Asset Sale"),
unless (l)(a) the Net Cash Proceeds therefrom (the "Asset Sale Offer Amount")
are applied (i) within 270 days after the date of such Asset Sale to the
optional redemption of the Notes in accordance with the terms of the Indenture
and other Indebtedness of Compass ranking on a parity with the Notes and with
similar provisions requiring Compass to redeem such Indebtedness with the
proceeds for asset sales, pro rata in proportion to the respective principal
amounts (or accreted values in the case of Indebtedness issued with an original
issue discount) of the Notes and such other Indebtedness then outstanding or
(ii) within 300 days after the date of such Asset Sale to the repurchase of the
Notes and such other Indebtedness on a parity with the Notes and with similar
provisions requiring Compass to make an offer to purchase such Indebtedness with
the proceeds for asset sales pursuant to a cash offer (subject only to
conditions required by applicable law, if any) (pro rata in proportion to the
respective principal amounts (or accreted values in the case of Indebtedness
issued with an original issue discount) of the Notes and such other Indebtedness
then outstanding) (the "Asset Sale Offer") at a purchase price of 100% of
principal amount (or accreted value in the case of Indebtedness issued with an
original issue discount) (the "Asset Sale Offer Price") together with accrued
and unpaid interest and Liquidated Damages, if any, to the date of payment, made
within 270 days of such Asset Sale or (b) within 270 days following such Asset
Sale, the Asset Sale Offer Amount is (i) invested (or committed, pursuant to a
binding commitment subject only to
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reasonable, customary closing conditions, to be invested, and in fact is so
invested, within an additional 90 days) in tangible assets and property other
than notes, bonds, obligations and securities) which in the good faith
reasonable judgment of the Board will immediately constitute or be a part of
a Related Business of Compass or such Subsidiary (if it continues to be a
Subsidiary) immediately following such transaction or (ii) used to retire
Purchase Money Indebtedness, Mortgage Indebtedness or Senior Debt and, to
permanently reduce (in the case of Senior Debt that is not Purchase Money
Indebtedness or Mortgage Indebtedness) the amount of such Indebtedness,
incurred under (d) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" (including that in the case of a
revolver or similar arrangement that makes credit available, such commitment
is so permanently reduced by such amount), (2) at least 90% of the
consideration for such Asset Sale or series of related Asset Sales consists
of cash or Cash Equivalents, (3) no Default or Event of Default shall have
occurred and be continuing at the time of, or would occur after giving
effect, on a pro forma basis, to, such Asset Sale, and (4) the Board of
Directors of Compass determines in good faith that Compass or such
Subsidiary, as applicable, receives fair market value for such Asset Sale.
The Indenture provides that an acquisition of Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses set forth in 1(a)(i) or 1(b) above (the "Excess
Proceeds") exceeds $5.0 million and that each Asset Sale Offer shall remain open
for 20 Business Days following its commencement (the "Asset Sale Offer Period").
Upon expiration of the Asset Sale Offer Period, Compass shall apply the Asset
Sale Offer Amount plus an amount equal to accrued and unpaid interest and
Liquidated Damages, if any, to the purchase of all Indebtedness properly
tendered (on a PRO RATA basis if the Asset Sale Offer Amount is insufficient to
purchase all Indebtedness so tendered) at the Asset Sale Offer Price (together
with accrued interest and Liquidated Damages, if any). To the extent that the
aggregate amount of Notes and such other PARI PASSU Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Asset Sale Offer Amount,
Compass may use any remaining Net Cash Proceeds for general corporate purposes
as otherwise permitted by the Indenture and following each Asset Sale Offer the
Excess Proceeds amount shall be reset to zero. For purposes of (2) above, total
consideration received means the total consideration received for such Asset
Sales minus the amount of, (a) Purchase Money Indebtedness or Mortgage
Indebtedness secured solely by the assets sold and assumed by a transferee and
(b) property that within 30 days of such Asset Sale is converted into cash or
Cash Equivalents, PROVIDED that such cash and Cash Equivalents shall be treated
as Net Cash Proceeds attributable to the original Asset Sale for which such
property was received.
Notwithstanding, and without complying with, the provisions of this
covenant:
(i) Compass and its Subsidiaries may, in the ordinary course of
business, (1) convey, sell, transfer, assign or otherwise dispose of
inventory and other assets acquired and held for resale in the ordinary
course of business and (2) liquidate Cash Equivalents;
(ii) Compass and its Subsidiaries may convey, sell, transfer,
assign or otherwise dispose of assets pursuant to and in accordance with
the covenant "Limitation on Merger, Sale or Consolidation";
(iii) Compass and its Subsidiaries may sell or dispose of damaged,
worn out, scrap or other obsolete property in the ordinary course of
business so long as such property is no longer necessary for the proper
conduct of the business of Compass or such Subsidiary, as applicable; and
(iv) Compass and the Guarantors may convey, sell, transfer, assign
or otherwise dispose of assets to Compass or any of its wholly owned
Guarantors;
(v) Compass and its Subsidiaries, in the ordinary course of
business, may convey, sell, transfer, assign, or otherwise dispose of
assets (or related assets in related transactions) with a fair market value
of less than $250,000; and
(vi) Compass and each of its Subsidiaries may surrender or waive
contract rights or settle, release or surrender of contract, tort or other
claims of any kind or grant Liens not prohibited by the Indenture;
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All Net Cash Proceeds from an Event of Loss relating to a Material Facility
shall be invested, used for prepayment of Senior Indebtedness or used to
repurchase Notes, all within the period and as otherwise provided above in
clauses 1(a) or 1(b)(i) of the first paragraph of this covenant plus 90 days.
In addition to the foregoing and notwithstanding anything herein to the
contrary, Compass will not, and will not permit any of its Subsidiaries to,
directly or indirectly make any Asset Sale of any of the Equity Interests of
any Subsidiary of Compass (other than Compass or a Wholly Owned Subsidiary
Guarantor) except pursuant to an Asset Sale of all the Equity Interests of
such Subsidiary.
Any Asset Sale Offer shall be made in compliance with all applicable
laws, rules, and regulations, including, if applicable, Regulation 14E of the
Exchange Act and the rules and regulations thereunder and all other
applicable Federal and state securities laws. To the extent that the
provisions of any securities laws or regulations conflict with the provisions
of this paragraph, compliance by Compass or any of its subsidiaries with such
laws and regulations shall not in and of itself cause a breach of its
obligations under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is
on or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated
Damages, if any, due on such Interest Payment Date) will be paid to the
person in whose name a Note is registered at the close of business on such
Record Date, and such interest (or Liquidated Damages, if applicable) will
not be payable to holders who tender Notes pursuant to such Asset Sale Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither Compass nor any of its Subsidiaries
will be permitted on or after the Issue Date to enter into or suffer to exist
any contract, agreement, arrangement or transaction with any Affiliate (an
"Affiliate Transaction"), or any series of related Affiliate Transactions,
(other than Exempted Affiliate Transactions), (i) unless it is determined
that the terms of such Affiliate Transaction are fair and reasonable to
Compass, and no less favorable to Compass, than could have been obtained in
an arm's length transaction with a non-Affiliate, and (ii) if involving
consideration to either party in excess of $1.0 million, unless such
Affiliate Transaction(s) is evidenced by an Officers' Certificate addressed
and delivered to the Trustee certifying that such Affiliate Transaction (or
Transactions) has been approved by a majority of the members of the Board of
Directors that are disinterested in such transaction and (iii) if involving
consideration to either party in excess of $5.0 million, unless in addition
Compass, prior to the consummation thereof, obtains a written favorable
opinion as to the fairness of such transaction to Compass from a financial
point of view from an independent investment banking firm of national
reputation or, if pertaining to a matter for which such investment banking
firms do not customarily render such opinions, an appraisal or valuation firm
of national reputation.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that Compass will not consolidate with or merge
with or into another person or, directly or indirectly, sell, lease, convey
or transfer all or substantially all of its assets (computed on a
consolidated basis), whether in a single transaction or a series of related
transactions, to another Person or group of affiliated Persons unless (i)
either (a) Compass is the continuing entity or (b) the resulting, surviving
or transferee entity is a corporation organized under the laws of the United
States, any state thereof or the District of Columbia and expressly assumes
by supplemental indenture all of the obligations of Compass in connection
with the Notes and the Indenture; (ii) no Default or Event of Default shall
exist or shall occur immediately after giving effect on a pro forma basis to
such transaction; and (iii) unless such transaction is solely the merger of
Compass and one of its previously existing Wholly-owned Subsidiaries which is
also a Guarantor and which transaction is not in connection with any other
transaction immediately after giving effect to such transaction on a pro
forma basis, the consolidated resulting, surviving or transferee entity would
immediately thereafter be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio set forth in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock."
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of Compass in accordance with the foregoing, the successor
corporation formed by such consolidation or into which Compass is merged or
to which such transfer is made shall succeed to and (except in the case of a
lease) be
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substituted for, and may exercise every right and power of, Compass under the
Indenture with the same effect as if such successor corporation had been
named therein as Compass, and (except in the case of a lease) Compass shall
be released from the obligations under the Notes and the Indenture except
with respect to any obligations that arise from, or are related to, such
transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise) of all or substantially all of the properties and assets of one
or more Subsidiaries, Compass' interest in which constitutes all or
substantially all of the properties and assets of Compass shall be deemed to
be the transfer of all or substantially all of the properties and assets of
Compass.
LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither Compass nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good
faith judgment of the Board of Directors of Compass, is a Related Business.
FUTURE SUBSIDIARY GUARANTORS
The Indenture provides that all present and future Subsidiaries of
Compass jointly and severally will guaranty irrevocably and unconditionally
all principal, premium, if any, and interest on (and Liquidated Damages, if
any) the Notes on a senior subordinated basis. The term Subsidiary does not
include Unrestricted Subsidiaries.
RELEASE OF GUARANTORS
The Indenture provides that no Guarantor shall consolidate or merge with
or into (whether or not such Guarantor is the surviving person) another
person unless (i) subject to the provisions of the following paragraph and
certain other provisions of the Indenture, the person formed by or surviving
any such consolidation or merger (if other than such Guarantor) assumes all
the obligations of such Guarantor pursuant to a supplemental indenture in
form reasonably satisfactory to the Trustee, pursuant to which such person
shall unconditionally guarantee, on a senior subordinated basis, all of such
Guarantor's obligations under such Guarantor's guarantee, on the terms set
forth in the Indenture; and (ii) immediately before and immediately after
giving effect to such transaction on a pro forma basis, no Default or Event
of Default shall have occurred or be continuing.
Upon the sale or disposition (whether by merger, stock purchase, asset
sale or otherwise) of a Subsidiary Guarantor or all of its assets to an
entity which is not a Subsidiary Guarantor or the designation of a Subsidiary
to become an Unrestricted Subsidiary, which transaction is otherwise in
compliance with the Indenture (including, without limitation, the provisions
of the covenant Limitations on Sale of Assets and Subsidiary Stock), such
Subsidiary Guarantor will be deemed released from its obligations under its
Guarantee of the Notes; PROVIDED, HOWEVER, that any such termination shall
occur only in the event that all obligations of such Subsidiary Guarantor
under all of its guarantees of, and under all of its pledges of assets or
other security interests which secure, any Indebtedness of Compass or any
other Subsidiary of Compass shall also terminate upon such release, sale or
transfer.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits Compass and its Subsidiaries from being required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming
subject to regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not Compass is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, Compass
shall deliver to the Trustee and, to each holder and to prospective
purchasers of Notes identified to Compass by an Initial Purchaser, within 15
days after it is or would have been (if it were subject to such reporting
obligations) required to file such with the Commission, (i) all annual and
quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission
on Forms 10-K and 10-Q, if Compass were subject
66
to the requirements of Section 13 or 15(d) of the Exchange Act, including,
with respect to annual information only, a report thereon by Compass'
certified independent public accountants as such would be required in such
reports to the Commission and (ii) all current reports that would be required
to be filed with the Commission on Form 8-K if Compass were required to file
such reports; and, in each case, together with a management's discussion and
analysis of financial condition and results of operations which would be so
required and, unless the Commission will not accept such reports, file with
the Commission the annual, quarterly and other reports which it is or would
have been required to file with the Commission.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by Compass
to pay any installment of interest (or Liquidated Damages, if any) on the
Notes as and when the same becomes due and payable and the continuance of any
such failure for 30 days, (ii) the failure by Compass to pay all or any part
of the principal, or premium, if any, on the Notes when and as the same
becomes due and payable at maturity, redemption, by acceleration or
otherwise, including, without limitation, payment of the Change of Control
Purchase Price or the Asset Sale Offer Price, or otherwise, (iii) the failure
by Compass or any Subsidiary of Compass to observe or perform any other
covenant or agreement contained in the Notes or the Indenture and, subject to
certain exceptions, the continuance of such failure for a period of 30 days
after written notice is given to Compass by the Trustee or to Compass and the
Trustee by the holders of at least 25% in aggregate principal amount of the
Notes outstanding, (iv) certain events of bankruptcy, insolvency or
reorganization in respect of Compass or any of its Significant Subsidiaries,
(v) a default in any issue of Indebtedness of Compass or any of its
Subsidiaries with an aggregate principal amount in excess of $5.0 million (a)
resulting from the failure to pay principal at maturity or (b) as a result of
which the maturity of such Indebtedness has been accelerated prior to its
stated maturity, and (vi) final unsatisfied judgments not covered by
insurance aggregating in excess of $5.0 million, at any one time rendered
against Compass or any of its Subsidiaries and not stayed, bonded or
discharged within 60 days. The Indenture provides that if a Default occurs
and is continuing, the Trustee must, within 90 days after the occurrence of
such default, give to the holders notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to Compass or any of its
Significant Subsidiaries,) then in every such case, unless the principal of
all of the Notes shall have already become due and payable, either the
Trustee or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice in writing to Compass (and to the Trustee
if given by holders) (an "Acceleration Notice"), may declare all principal,
determined as set forth below, and accrued interest (and Liquidated Damages,
if any) thereon to be due and payable immediately; PROVIDED, however, that if
any Senior Debt is outstanding pursuant to the Credit Agreement, upon a
declaration of such acceleration, such principal and interest shall be due
and payable upon the earlier of (x) the third Business Day after the sending
to Compass and the Representative of such written notice, unless such Event
of Default is cured or waived prior to such date and (y) the date of
acceleration of any Senior Debt under the Credit Agreement. If an Event of
Default specified in clause (iv), above, relating to Compass or any of its
Significant Subsidiaries occurs, all principal and accrued interest (and
Liquidated Damages, if any) thereon will be immediately due and payable on
all outstanding Notes without any declaration or other act on the part of
Trustee or the holders. The holders of a majority in aggregate principal
amount of Notes generally are authorized to rescind such acceleration if all
existing Events of Default, other than the non-payment of the principal of,
premium, if any, and interest on the Notes which have become due solely by
such acceleration and except on default with respect to any provision
requiring a supermajority approval to amend, which default may only be waived
by such a supermajority, and have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes,
the holders of a majority in aggregate principal amount of the Notes at the
time outstanding may waive on behalf of all the holders any default, except
on default with respect to any provision requiring a supermajority approval
to amend, which default may only be waived by such a supermajority, and
except a default in the payment of principal of or interest on any Note not
yet cured or a default with respect to any covenant or provision which cannot
be modified or amended without the consent of the holder of each outstanding
Note affected. Subject to the provisions of the Indenture relating to the
duties of the Trustee, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request, order or
direction of any of the Holders, unless such Holders have offered to the
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate
principal amount of
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the Notes at the time outstanding will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that Compass may, at its option, elect to have
its obligations and the obligations of the Guarantors discharged with respect
to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means
that Compass shall be deemed to have paid and discharged the entire
indebtedness represented, and the Indenture shall cease to be of further
effect as to all outstanding Notes and Guarantees, except as to (i) rights of
Holders to receive payments in respect of the principal of, premium, if any,
and interest (and Liquidated Damages, if any) on such Notes when such
payments are due from the trust funds; (ii) Compass' obligations with respect
to such Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes, and the maintenance of an office
or agency for payment and money for security payments held in trust; (iii)
the rights, powers, trust, duties, and immunities of the Trustee, and
Compass' obligations in connection therewith; and (iv) the Legal Defeasance
provisions of the Indenture. In addition, Compass may, at its option and at
any time, elect to have the obligations of Compass and the Guarantors
released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, guarantees, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default"
will no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Compass must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, U.S. legal tender, U.S. Government Obligations
or a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants, to
pay the principal of, premium, if any, and interest on such Notes on the
stated date for payment thereof or on the redemption date of such principal
or installment of principal of, premium, if any, or interest on such Notes,
and the holders of Notes must have a valid, perfected, exclusive security
interest in such trust; (ii) in the case of Legal Defeasance, Compass shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) Compass has received
from, or there has been published by the Internal Revenue Service, a ruling
or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders of such
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, Compass shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to such Trustee
confirming that the holders of such Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit and Compass shall have
delivered to the Trustee an Officer's Certificate, subject to such
qualifications and exceptions as the Trustee deems appropriate, to the effect
that, assuming no intervening bankruptcy of Compass between the date of
deposit and the 91st day following the deposit and that no holder of the
Notes is an insider of Compass, after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors rights
generally; (v) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under the Indenture or
any other material agreement or instrument to which Compass or any of its
Subsidiaries is a party or by which Compass or any of its Subsidiaries is
bound; (vi) Compass shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by Compass with the intent
of preferring the holders of such Notes over any other creditors of Compass
or with the intent of defeating, hindering, delaying or defrauding any other
creditors of Compass or others; and (vii) Compass shall have delivered to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
the conditions precedent provided for in, in the case of the Officers'
Certificate, (i) through (vi) and, in the case of the opinion of counsel,
clauses (i), (with respect to the validity and perfection of the security
interest) (ii), (iii) and (v) of this paragraph have been complied with.
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If the funds deposited with the Trustee to effect Covenant Defeasance
are insufficient to pay the principal of, premium, if any, and interest on
the Notes when due, then the obligations of Compass and the Guarantors under
the Indenture and the Collateral Agreement will be revived and no such
defeasance will be deemed to have occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting Compass, the Guarantors and
the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the holders. With the consent of the holders
of not less than a majority in aggregate principal amount of the Notes at the
time outstanding, Compass, the Guarantors and the Trustee are permitted to
amend or supplement the Indenture or any supplemental indenture or modify the
rights of the holders; provided that no such modification may, without the
consent of holders of at least 66-2/3% in aggregate principal amount of Notes
at the time outstanding, modify the provisions (including the defined terms
used therein) of the covenant "Repurchase of Notes at the Option of the
holder upon a Change of Control" in a manner adverse to the holders and
provided, that no such modification may, without the consent of each holder
affected thereby: (i) change the Stated Maturity on any Note, or reduce the
principal amount thereof or the rate (or extend the time for payment) of
interest thereon or any premium payable upon the redemption at the option of
Compass thereof, or change the place of payment where, or the coin or
currency in which, any Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any
such payment on or after the Stated Maturity thereof (or, in the case of
redemption at the option of Compass, on or after the Redemption Date), or
reduce the Change of Control Purchase Price or the Asset Sale Offer Price or
alter the provisions (including the defined terms used therein) regarding the
right of Compass to redeem the Notes as a right, or at the option of Compass
in a manner adverse to the holders, or (ii) reduce the percentage in
principal amount of the outstanding Notes, the consent of whose holders is
required for any such amendment, supplemental indenture or waiver provided
for in the Indenture, or (iii) modify any of the waiver provisions, except to
increase any required percentage or to provide that certain other provisions
of the Indenture cannot be modified or waived without the consent of the
holder of each outstanding Note affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of Compass, the
Guarantors or any successor entity shall have any personal liability in
respect of the obligations of Compass or the Guarantors under the Indenture
or the Notes solely by reason of his or its status as such stockholder,
employee, officer or director, except that this provision shall in no way
limit the obligation of any Guarantor pursuant to any guarantee of the Notes.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock
of any person existing at the time such person becomes a Subsidiary of
Compass, including by designation, or is merged or consolidated into or with
Compass or one of its Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of any person or
all or substantially all the assets of any person by any other person,
whether by purchase, merger, consolidation, or other transfer, and whether or
not for consideration.
"AFFILIATE" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with Compass. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by
contract, or otherwise, PROVIDED, THAT, with respect to ownership interest in
Compass and its Subsidiaries, a Beneficial Owner of 10% or more of the total
voting power normally entitled to vote in the election of directors, managers
or trustees, as applicable, shall for such purposes be deemed to constitute
control.
"AVERAGE LIFE" means, as of the date of determination, with respect to
any security or instrument, the quotient obtained by dividing (i) the sum of
the products (a) of the number of years from the date of determination to the
date or dates of each successive scheduled principal (or redemption) payment
of such
69
security or instrument and (b) the amount of each such respective principal
(or redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"BENEFICIAL OWNER" or "BENEFICIAL OWNER" for purposes of the definition
of Change of Control and Affiliate has the meaning attributed to it in Rules
13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue Date),
whether or not applicable, except that a "person" shall be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time.
"BOARD OF DIRECTORS" means, with respect to any person, the board of
directors of such person or any committee of the Board of Directors of such
person authorized, with respect to any particular matter, to exercise the
power of the board of directors of such person.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York, New York
are authorized or obligated by law or executive order to close.
"CAPITAL CONTRIBUTION" means any contribution to the equity of Compass
from a direct or indirect parent of Compass for which no consideration other
than the issuance of common stock with no redemption rights and no special
preferences, privileges or voting rights is given.
"CAPITALIZED LEASE OBLIGATION" means, as to any person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the
capitalized amount of such obligations at such date, determined in accordance
with GAAP.
"CAPITAL STOCK" means, with respect to any corporation, any and all
shares, interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"CASH EQUIVALENT" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States of America is pledged in support thereof) or (ii) time deposits
and certificates of deposit and commercial paper issued by the parent
corporation of any domestic commercial bank of recognized standing having
capital and surplus in excess of $500 million or (iii) commercial paper
issued by others rated at least A-2 or the equivalent thereof by Standard &
Poor's Corporation or at least P-2 or the equivalent thereof by Moody's
Investors Service, Inc., and in the case of each of (i), (ii), and (iii)
maturing within one year after the date of acquisition.
"CONSOLIDATION" means, with respect to Compass, the consolidation of the
accounts of the Subsidiaries with those of Compass, all in accordance with
GAAP; PROVIDED that "consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary with the accounts of Compass. The
term "consolidated" has a correlative meaning to the foregoing.
"CONSOLIDATED COVERAGE RATIO" of any person on any date of determination
(the "Transaction Date") means the ratio, on a basis, of (a)the aggregate
amount of Consolidated EBITDA of such person attributable to continuing
operations and businesses (exclusive of amounts attributable to operations
and businesses permanently discontinued or disposed of) for the Reference
Period to (b) the aggregate Consolidated Fixed Charges of such person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations
giving rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; PROVIDED, that for purposes of
such calculation, (i) Acquisitions which occurred during the Reference Period
or subsequent to the Reference Period and on or prior to the Transaction Date
shall be assumed to have occurred on the first day of the Reference Period,
(ii) transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period, (iii) the incurrence of any Indebtedness or issuance of any
Disqualified Capital Stock during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date (and the application
of the proceeds therefrom to the extent
70
used to refinance or retire other Indebtedness) shall be assumed to have
occurred on the first day of the Reference Period, and (iv) the Consolidated
Fixed Charges of such person attributable to interest on any Indebtedness or
dividends on any Disqualified Capital Stock bearing a floating interest (or
dividend) rate shall be computed on a pro forma basis as if the average rate
in effect from the beginning of the Reference Period to the Transaction Date
had been the applicable rate for the entire period, unless such Person or any
of its Subsidiaries is a party to an Interest Swap or Hedging Obligation
(which shall remain in effect for the 12-month period immediately following
the Transaction Date) that has the effect of fixing the interest rate on the
date of computation, in which case such rate (whether higher or lower) shall
be used.
"CONSOLIDATED EBITDA" means, with respect to any person, for any period,
the Consolidated Net Income of such person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of (i) Consolidated income tax
expense, (ii) Consolidated depreciation and amortization expense, and (iii)
Consolidated Fixed Charges, less the amount of all cash payments made by such
person or any of its Subsidiaries during such period to the extent such
payments relate to non-cash charges that were added back in determining
Consolidated EBITDA for such period or any prior period, provided that
consolidated income tax expense and depreciation and amortization of a
Subsidiary that is a less than wholly owned Subsidiary shall only be added to
the extent of the equity interest of Compass in such Subsidiary.
"CONSOLIDATED FIXED CHARGES" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in
accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued,
or scheduled to be paid or accrued (including, in accordance with the
following sentence, interest attributable to Capitalized Lease Obligations)
of such person and its Consolidated Subsidiaries during such period,
including (i) original issue discount and non-cash interest payments or
accruals on any Indebtedness, (ii) the interest portion of all deferred
payment obligations, and (iii) all commissions, discounts and other fees and
charges owed with respect to bankers' acceptances and letters of credit
financings and currency and Interest Swap and Hedging Obligations, in each
case to the extent attributable to such period, and (b) the amount of
dividends accrued or payable (or guaranteed) by such person or any of its
Consolidated Subsidiaries in respect of Preferred Stock (other than by
Subsidiaries of such person to such person or such person's wholly owned
Subsidiaries), except if such Preferred Stock is a payment-in-kind ("PIK")
security, issuance of such additional PIK securities would not count as
dividends for purposes of this definition. For purposes of this definition,
(x) interest on a Capitalized Lease Obligation shall be deemed to accrue at
an interest rate reasonably determined in good faith by Compass to be the
rate of interest implicit in such Capitalized Lease Obligation in accordance
with GAAP and (y) interest expense attributable to any Indebtedness
represented by the guaranty by such person or a Subsidiary of such person of
an obligation of another person shall be deemed to be the interest expense
attributable to the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" means, with respect to any person for any
period, the net income (or loss) of such person and its Consolidated
Subsidiaries (determined on a consolidated basis in accordance with GAAP) for
such period, adjusted to exclude (only to the extent included in computing
such net income (or loss) and without duplication): (a) all gains (but not
losses) which are either extraordinary (as determined in accordance with
GAAP) or are either unusual or nonrecurring (including any gain from the sale
or other disposition of assets outside the ordinary course of business or
from the issuance or sale of any capital stock), (b) the net income, if
positive, of any person, other than a Consolidated Subsidiary, in which such
person or any of its Consolidated Subsidiaries has an interest, except to the
extent of the amount of any dividends or distributions actually paid in cash
to such person or a Consolidated Subsidiary of such person during such
period, but in any case not in excess of such person's PRO RATA share of such
person's net income for such period, (c) the net income or loss of any person
acquired in a pooling of interests transaction for any period prior to the
date of such acquisition, (d) the net income, if positive, of any of such
person's Consolidated Subsidiaries to the extent that the declaration or
payment of dividends or similar distributions is not at the time permitted by
operation of the terms of its charter or bylaws or any other agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary.
"CONSOLIDATED SUBSIDIARY" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting
purposes with the financial statements of such person in accordance with GAAP.
"CREDIT AGREEMENT" means the credit agreement entered into by and among
Compass, certain of its subsidiaries, certain financial institutions and, BSI
as arranger, BankBoston as a lender and administrative
71
agent, and DLJ Capital Funding as documentation agent, providing a revolving
credit facility, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as
such credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time
whether or not with the same agent, trustee, representative lenders or
holders, and, subject to the proviso to the next succeeding sentence,
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of the foregoing, the term "Credit Agreement" shall
include agreements in respect of Interest Swap and Hedging Obligations with
lenders party to the Credit Agreement and shall also include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any Credit Agreement and all refundings, refinancings and
replacements of any Credit Agreement, including any agreement (i) extending
the maturity of any Indebtedness incurred thereunder or contemplated thereby,
(ii) adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of Compass and its Subsidiaries and
their respective successors and assigns, (iii) increasing the amount of
Indebtedness incurred thereunder or available to be borrowed thereunder,
PROVIDED that on the date such Indebtedness is incurred in accordance with
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock" or (iv) otherwise altering the terms and
conditions thereof in a manner not prohibited by the terms of the Indenture.
"DISQUALIFIED CAPITAL STOCK" means (a) except as set forth in (b), with
respect to any person, Equity Interests of such person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time or
both would be, required to be redeemed or repurchased (including at the
option of the holder thereof) by such person or any of its Subsidiaries, in
whole or in part, on or prior to the Stated Maturity of the Notes and (b)
with respect to any Subsidiary of such person (including with respect to any
Subsidiary of Compass), any Equity Interests other than any common equity
with no preference, privileges, or redemption or repayment provisions.
"EQUITY INTEREST" of any Person means any shares, interests,
participations or other equivalents (however designated) in such Person's
equity, and shall in any event include any Capital Stock issued by, or
partnership or membership interests in, such Person.
"EVENT OF LOSS" means, with respect to any property or asset, any (i)
loss, destruction or damage of such property or asset or (ii) any
condemnation, seizure or taking, by exercise of the power of eminent domain
or otherwise, of such property or asset, or confiscation or requisition of
the use of such property or asset.
"EXCLUDED PERSON" means officers and directors of Compass and those
persons who beneficially own membership interests in Compass Holdings LLC, in
each case, as of the Issue Date.
"EXEMPTED AFFILIATE TRANSACTION" means (a) customary employee
compensation arrangements approved by a majority of independent (as to such
transactions) members of the Board of Directors of Compass, (b) dividends
permitted under the terms of the covenant discussed above under "Limitation
on Restricted Payments" above and payable, in form and amount, on a pro rata
basis to all holders of common stock of Compass, (c) Management Fee Payments
up to $500,000 in any fiscal year and the reimbursement by Compass of
reasonable out-of-pocket costs and expenses incurred in connection with the
rendering of management services to or on behalf of Compass, (d) Permitted
Payments to Parent, (e) transactions solely between Compass and any of its
wholly owned Consolidated Subsidiaries or solely among wholly owned
Consolidated Subsidiaries of Compass and (f) the payment of $750,000 to
Parent for reimbursement of the nonrefundable deposit against the purchase
price for the acquisition of Barnes Machine.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"GUARANTOR" means each Subsidiary of Compass that executes a Guarantee
guaranteeing the Notes in accordance with the provisions of the Indenture.
72
"INDEBTEDNESS" of any person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise, of such any person, to
the extent such liabilities and obligations would appear as a liability upon
the consolidated balance sheet of such person in accordance with GAAP, (i) in
respect of borrowed money (whether or not the recourse of the lender is to
the whole of the assets of such person or only to a portion thereof), (ii)
evidenced by bonds, notes, debentures or similar instruments, (iii)
representing the balance deferred and unpaid of the purchase price of any
property or services, except (other than accounts payable or other
obligations to trade creditors which have remained unpaid for greater than 60
days past their original due date) those incurred in the ordinary course of
its business that would constitute ordinarily a trade payable to trade
creditors; (b) all liabilities and obligations, contingent or otherwise, of
such person (iv) evidenced by bankers' acceptances or similar instruments
issued or accepted by banks, (v) relating to any Capitalized Lease
Obligation, or (vi) evidenced by a letter of credit or a reimbursement
obligation of such person with respect to any letter of credit; (c) all net
obligations of such person under Interest Swap and Hedging Obligations; (d)
all liabilities and obligations of others of the kind described in the
preceding clause (a), (b) or (c) that such person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property
of such person and all obligations to purchase, redeem or acquire any Equity
Interests; (e) any and all deferrals, renewals, extensions, refinancing and
refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b), (c) or (d), or this clause (e), whether or not between or
among the same parties; and (f) all Disqualified Capital Stock of such Person
(measured at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends). For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital
Stock were purchased on any date on which Indebtedness shall be required to
be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the Fair Market Value of such Disqualified Capital Stock, such
Fair Market Value to be determined in good faith by the board of directors of
the issuer (or managing general partner of the issuer) of such Disqualified
Capital Stock.
"INITIAL PUBLIC EQUITY OFFERING" means an initial underwritten offering
of common stock of Compass or Parent for cash pursuant to an effective
registration statement under the Securities Act as a consequence of which the
common stock of Compass or Parent is listed on a national securities exchange
or quoted on the national market system of the Nasdaq stock market.
"INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any
person pursuant to any interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate exchange agreement,
currency exchange agreement or any other agreement or arrangement designed to
protect against fluctuations in interest rates or currency values, including,
without limitation, any arrangement whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated
by applying either a fixed or floating rate of interest on a stated notional
amount in exchange for periodic payments made by such person calculated by
applying a fixed or floating rate of interest on the same notional amount.
"INVESTMENT" by any person in any other person means (without
duplication) (a) the acquisition (whether by purchase, merger, consolidation
or otherwise) by such person (whether for cash, property, services,
securities or otherwise) of capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities, including any
options or warrants, of such other person or any agreement to make any such
acquisition; (b) the making by such person of any deposit with, or advance,
loan or other extension of credit to, such other person (including the
purchase of property from another person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such other
person) or any commitment to make any such advance, loan or extension (but
excluding accounts receivable, endorsements for collection or deposits
arising in the ordinary course of business); (c) other than guarantees of
Indebtedness of Compass or any Guarantor to the extent permitted by the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," the entering into by such person of any
guarantee of, or other credit support or contingent obligation with respect
to, Indebtedness or other liability of such other person; (d) the making of
any capital contribution by such person to such other person; and (e) the
designation by the Board of Directors of Compass of any person to be an
Unrestricted Subsidiary. Compass shall be deemed to make an Investment in an
amount equal to the fair market value of the net assets of any subsidiary
(or, if neither Compass nor any of its Subsidiaries has theretofore made an
Investment in such subsidiary, in an amount equal to the Investments being
made), at the time that such subsidiary is designated an Unrestricted
Subsidiary, and any property transferred to an Unrestricted Subsidiary from
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Compass or a Subsidiary of Compass shall be deemed an Investment valued at
its fair market value at the time of such transfer.
"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"JUNIOR SECURITY" means any Qualified Capital Stock and any Indebtedness
of Compass or a Guarantor, as applicable, that is subordinated in right of
payment to Senior Debt at least to the same extent as the Notes or the
Guarantee, as applicable, and has no scheduled installment of principal due,
by redemption, sinking fund payment or otherwise, on or prior to the Stated
Maturity of the Notes; PROVIDED, that in the case of subordination in respect
of Senior Debt under the Credit Agreement, "Junior Security" shall mean any
Qualified Capital Stock and any Indebtedness of Compass or the Guarantor, as
applicable, that (i) has a final maturity date occurring after the final
maturity date of, all Senior Debt outstanding under the Credit Agreement on
the date of issuance of such Qualified Capital Stock or Indebtedness, (ii) is
unsecured, (iii) has an Average Life longer than the security for which such
Qualified Capital Stock or Indebtedness is being exchanged, and (iv) by their
terms or by law are subordinated to Senior Debt outstanding under the Credit
Agreement on the date of issuance of such Qualified Capital Stock or
Indebtedness at least to the same extent as the Notes.
"LIEN" means any mortgage, charge, pledge, lien (statutory or
otherwise), privilege, security interest, hypothecation or other encumbrance
upon or with respect to any property of any kind, real or personal, movable
or immovable, now owned or hereafter acquired.
"MANAGEMENT FEE PAYMENTS" means payments from Compass to Dunhill and
Hayes Capital under that certain Management Consulting Agreement, dated March
9, 1998, as amended, by and between Compass, Dunhill Bank Caribbean Ltd. and
Hayes Capital, in accordance with the terms and provisions of such Management
Consulting Agreement on the Issue Date, PROVIDED, HOWEVER, that the
obligation of Compass to make such payments will be subordinated to the
payment of all Obligations with respect to the Notes (and any Guarantee
thereof).
"MATERIAL FACILITY" means a facility that has a customer certification
including without limitation D1-9000.
"MORTGAGE INDEBTEDNESS" of any person means any Indebtedness of such
person secured by real property of such person which in the reasonable good
faith judgment of the Board of Directors is directly related to a Related
Business of Compass.
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash
Equivalents received by Compass in the case of a sale of Qualified Capital
Stock and by Compass and its Subsidiaries in respect of an Asset Sale plus,
in the case of an issuance of Qualified Capital Stock upon any exercise,
exchange or conversion of securities (including options, warrants, rights and
convertible or exchangeable debt) of Compass that were issued for cash on or
after the Issue Date, the amount of cash originally received by Compass upon
the issuance of such securities (including options, warrants, rights and
convertible or exchangeable debt) less, in each case, the sum of all
payments, fees, commissions and (in the case of Asset Sales, reasonable and
customary), expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in
connection with such Asset Sale or sale of Qualified Capital Stock, and, in
the case of an Asset Sale only, less the amount (estimated reasonably and in
good faith by Compass) of income, franchise, sales and other applicable taxes
(the computation of which shall take into account any available net operating
losses and other tax attributes of Parent, and Compass and their
Subsidiaries) required to be paid by Compass or any of its respective
Subsidiaries in the taxable year of such sale in connection with such Asset
Sale.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness of Compass or its
Subsidiaries to the extent that, (i) under the terms thereof or pursuant to
law, no personal recourse may be had against Compass or its Subsidiaries for
the payment of the principal of or interest or premium on such Indebtedness,
and enforcement of obligations on such Indebtedness (except with respect to
fraud, willful misconduct, misrepresentation, misapplication of funds,
reckless damage to assets and undertakings with respect to environmental
matters or construction defects) is limited only to recourse against
interests in specified assets and property (the "Special Assets"), accounts
and proceeds arising therefrom, and rights under purchase agreements or other
agreements with respect to such Subject Assets; (ii) such Indebtedness (x) is
incurred
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concurrently with the acquisition by Compass or its Subsidiaries of such
Subject Assets or a Person (or interests in a Person) holding such Subject
Assets, or (y) constitutes Refinancing Indebtedness with respect to
Indebtedness so incurred; and (iii) the Subject Assets are not existing
assets and no existing assets or proceeds from the sale, transfer or other
disposition of existing assets were used to acquire such Subject Assets.
"OBLIGATION" means any principal, premium or interest payment, or
monetary penalty, or damages, due by Compass or any Guarantor under the terms
of the Notes or the Indenture, including any liquidated damages due pursuant
to the terms of the Registration Rights Agreement.
"PARENT" means Compass Holdings LLC or its successor, so long as such
entity owns at least 51% of the Capital Stock of Compass.
"PERMITTED INDEBTEDNESS" means that: (a) Compass and the Guarantors may
incur Indebtedness evidenced by the Notes and represented by the Indenture up
to the amounts specified therein as of the date thereof; (b) Compass and the
Guarantors, as applicable, may incur Refinancing Indebtedness with respect to
any Indebtedness or Disqualified Capital Stock, as applicable, described in
clause (a) of this definition or incurred under the Debt Incurrence Ratio
test of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," or which is outstanding on the Issue Date (after
giving effect to the transactions contemplated in this Offering Memorandum,
and $3.5 million of Mortgage Indebtedness to be incurred in connection with
the acquisition of Brittain Machine and within six months after the Issue
Date, which will be considered outstanding on the Issue Date for purposes of
this paragraph (b)), provided that in each case such Refinancing Indebtedness
is secured only by the assets that secured the Indebtedness so refinanced;
(c) Compass and its Subsidiaries may incur Indebtedness solely in respect of
bankers acceptances, and performance bonds (to the extent that such
incurrence does not result in the incurrence of any obligation to repay any
obligation relating to borrowed money of others), all in the ordinary course
of business in accordance with customary industry practices, in amounts and
for the purposes customary in Compass' industry; PROVIDED, that the aggregate
principal amount outstanding of such Indebtedness (including any Refinancing
Indebtedness and any other Indebtedness issued to refinance, refund, defease
or replace such Indebtedness) shall at no time exceed $250,000; (d) Compass
may incur Indebtedness to any Subsidiary Guarantor, and any Subsidiary
Guarantor may incur Indebtedness to any other Subsidiary Guarantor or to
Compass; PROVIDED, that, in the case of Indebtedness of Compass, such
obligations shall be unsecured and subordinated in all respects to Compass'
obligations pursuant to the Notes and the date of any event that causes such
Subsidiary Guarantor no longer to be a Subsidiary Guarantor shall be an
Incurrence Date; and (e) any Guarantor may guaranty any Indebtedness of
Compass or another Guarantor that was permitted to be incurred pursuant to
the Indenture, substantially concurrently with such incurrence or at the time
such person becomes a Guarantor.
"PERMITTED INVESTMENT" means (a) Investments in any of the Notes; (b)
Investments in Cash Equivalents; (c) intercompany notes to the extent
permitted under clause (d) of the definition of "Permitted Indebtedness" and
(d) any Investment by Compass or any Subsidiary Guarantor in a Person if as a
result of such Investment such Person immediately becomes a Wholly Owned
Subsidiary Guarantor or such Person is immediately merged with or into
Compass or a Wholly Owned Subsidiary Guarantor.
"PERMITTED LIEN" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges
not yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of Compass in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, material men, landlords,
repairmen or other like Liens arising by operation of law in the ordinary
course of business provided that (i) the underlying obligations are not
overdue for a period of more than 30 days, or (ii) such Liens are being
contested in good faith and by appropriate proceedings and adequate reserves
with respect thereto are maintained on the books of Compass in accordance
with GAAP; (d) Liens securing the performance of bids, trade contracts (other
than borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (e) easements, rights-of-way, zoning, similar
restrictions and other similar encumbrances or title defects which, singly or
in the aggregate, do not in any case materially detract from the value of the
property, subject thereto (as such property is used by Compass or any of its
Subsidiaries) or interfere with the ordinary conduct of the business of
Compass or any of its Subsidiaries; (f) Liens arising by operation of law in
connection with judgments, only to the extent, for an amount and for a period
not resulting in an Event of
75
Default with respect thereto; (g) pledges or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security legislation; (h) Liens securing
the Notes; (i) Liens securing Indebtedness of a Person existing at the time
such Person becomes a Subsidiary or is merged with or into Compass or a
Subsidiary or Liens securing Indebtedness incurred in connection with an
Acquisition, PROVIDED that such Liens were in existence prior to the date of
such acquisition, merger or consolidation, were not incurred in anticipation
thereof, and do not extend to any other assets; (j) Liens arising from
Purchase Money Indebtedness or Mortgage Indebtedness permitted to be incurred
pursuant to the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock" PROVIDED such Liens relate solely to the
property which is subject to such Purchase Money Indebtedness or Mortgage
Indebtedness, as applicable; (k) leases or subleases granted to other persons
in the ordinary course of business not materially interfering with the
conduct of the business of Compass or any of its Subsidiaries or materially
detracting from the value of the relative assets of Compass or any
Subsidiary; (l) Liens arising from precautionary Uniform Commercial Code
financing statement filings regarding operating leases entered into by
Compass or any of its Subsidiaries in the ordinary course of business; (m)
Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to
the holders of the Notes than the terms of the Liens securing such refinanced
Indebtedness, and provided that the Indebtedness secured is not increased and
the lien is not extended to any additional assets or property that would not
have been security for the Indebtedness refinanced; and (n) Liens securing
Indebtedness incurred under the Credit Agreement in accordance with the terms
of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
"PERMITTED PAYMENTS TO PARENT" means without duplication, (a) payments
to Parent in an amount sufficient to permit Parent to pay reasonable and
necessary operating expenses and other general corporate expenses to the
extent such expenses relate or are fairly allocable to Compass and its
Subsidiaries, provided such expenses do not exceed $250,000 in any fiscal
year; and (b) payments to Parent to enable Parent to pay foreign, federal,
state or local tax liabilities ("Tax Payment"), not to exceed the amount of
any tax liabilities that would be otherwise payable by Compass and its
Subsidiaries and Unrestricted Subsidiaries to the appropriate taxing
authorities if they filed separate tax returns to the extent that Parent has
an obligation to pay such tax liabilities relating to the operations, assets
or capital of Compass or its Subsidiaries and Unrestricted Subsidiaries
PROVIDED, HOWEVER, that (i), notwithstanding the foregoing, in the case of
determining the amount of a Tax Payment that is permitted to be paid by
Company and any of its United States subsidiaries in respect of their Federal
income tax liability, such payment shall be determined on the basis of
assuming that all payments made to Parent pursuant to the immediately
preceding clause (a) shall be treated as a deductible expense of Compass in
the taxable year during which the obligation to make such payment accrues and
(ii) any Tax Payments shall either be used by Parent to pay such tax
liabilities within 90 days of Parent's receipt of such payment or refunded to
the payee.
"PURCHASE MONEY INDEBTEDNESS" of any person means any Non-Recourse
Indebtedness of such person to any seller or other person incurred solely to
finance the acquisition (including in the case of a Capitalized Lease
Obligation, the lease) of any after acquired tangible property which, in the
reasonable good faith judgment of the Board of Directors of Compass, is
directly related to a Related Business of Compass and which is incurred
substantially concurrently with such acquisition and is secured only by the
assets so financed.
"QUALIFIED CAPITAL STOCK" means any Capital Stock of Compass that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or of Indebtedness of
Compass issued on or after the Issue Date with the Net Cash Proceeds received
by Compass from the substantially concurrent sale of Qualified Capital Stock
or any exchange of Qualified Capital Stock for any Capital Stock or for
Indebtedness of Compass issued on or after the Issue Date.
"REFERENCE PERIOD" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in
existence) ended immediately preceding any date upon which any determination
is to be made pursuant to the terms of the Notes or the Indenture.
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"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital
Stock (a) issued in exchange for, or the proceeds from the issuance and sale
of which are used substantially concurrently to repay, redeem, defease,
refund, refinance, discharge or otherwise retire for value, in whole or in
part, or (b) constituting an amendment, modification or supplement to, or a
deferral or renewal of ((a) and (b) above are, collectively, a
"Refinancing"), any Indebtedness or Disqualified Capital Stock in a principal
amount or, in the case of Disqualified Capital Stock, liquidation preference,
not to exceed (after deduction of reasonable and customary fees and expenses
incurred in connection with the Refinancing plus the amount of any premium
paid in connection with such Refinancing in accordance with the terms of the
documents governing the Indebtedness refinanced without giving effect to any
modification thereof made in connection with or in contemplation of such
refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so Refinanced and (ii) if such Indebtedness being
Refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such
Refinancing; PROVIDED, that (A) such Refinancing Indebtedness of any
Subsidiary of Compass shall only be used to Refinance outstanding
Indebtedness or Disqualified Capital Stock of such Subsidiary, (B) such
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness or Disqualified Capital Stock to be so refinanced at the time of
such Refinancing and (y) in all respects, be no less subordinated or junior,
if applicable, to the rights of holders of the Notes than was the
Indebtedness or Disqualified Capital Stock to be refinanced, (C) such
Refinancing Indebtedness shall have a final stated maturity or redemption
date, as applicable, no earlier than the final stated maturity or redemption
date, as applicable, of the Indebtedness or Disqualified Capital Stock to be
so refinanced, and (D) such Refinancing Indebtedness shall be secured (if
secured) in a manner no more adverse to the holders of the Notes than the
terms of the Liens (if any) securing such refinanced Indebtedness, including,
without limitation, the amount of Indebtedness secured shall not be increased.
"RELATED BUSINESS" means the business conducted (or proposed to be
conducted) by Compass and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of
Compass are materially related businesses.
"RESTRICTED INVESTMENT" means, in one or a series of related
transactions, any Investment, other than other Permitted Investments.
"RESTRICTED PAYMENT" means, with respect to any person, (a) the
declaration or payment of any dividend or other distribution in respect of
Equity Interests of such person or any parent or Subsidiary of such person,
(b) any payment on account of the purchase, redemption or other acquisition
or retirement for value of Equity Interests of such person or any Subsidiary
or parent of such person, (c) other than with the proceeds from the
substantially concurrent sale of, or in exchange for, Refinancing
Indebtedness any purchase, redemption, or other acquisition or retirement for
value of, any payment in respect of any amendment of the terms of or any
defeasance of, any Subordinated Indebtedness, directly or indirectly, by such
person or a parent or Subsidiary of such person prior to the scheduled
maturity, any scheduled repayment of principal, or scheduled sinking fund
payment, as the case may be, of such Indebtedness, (d) any Restricted
Investment by such person and (e) any Management Fee Payments or similar
payments to any Affiliates (other than Subsidiaries) in excess of an
aggregate of $500,000 in any fiscal year, PROVIDED, HOWEVER, that the
obligation of Compass to pay such Management Fee Payments will be
subordinated to the payment of all Obligations with respect to the Notes (and
any Guarantee thereof); PROVIDED, HOWEVER, that the term "Restricted Payment"
does not include (i) any dividend, distribution or other payment on or with
respect to Equity Interests of an issuer to the extent payable solely in
shares of Qualified Capital Stock of such issuer; or (ii) any dividend,
distribution or other payment to Compass, or to any of its Guarantors, by
Compass or any of its Subsidiaries; or (iii) the payment of $750,000 to
Parent for reimbursement for the down payment on the purchase price of Barnes
Machine.
"SENIOR DEBT" of Compass or any Guarantor means Indebtedness (including
any monetary obligation in respect of the Credit Agreement, and interest,
whether or not allowable, accruing on Indebtedness incurred pursuant to the
Credit Agreement after the filing of a petition initiating any proceeding
under any bankruptcy, insolvency or similar law) of Compass or such Guarantor
arising under the Credit Agreement or that, by the terms of the instrument
creating or evidencing such Indebtedness, is expressly designated Senior Debt
and made senior in right of payment to the Notes or the applicable Guarantee;
provided, that in no event shall Senior Debt include (a) Indebtedness to any
Subsidiary of Compass or any officer, director or employee of Compass or any
Subsidiary of Compass, (b) Indebtedness incurred in violation of the terms
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of the Indenture, (c) Indebtedness to trade creditors, (d) Disqualified
Capital Stock, (e) Capitalized Lease Obligations, and (f) any liability for
taxes owed or owing by Compass or such Guarantor.
"SIGNIFICANT SUBSIDIARY" shall have the meaning provided under
Regulation S-X of the Securities Act, as in effect on the Issue Date.
"STATED MATURITY," when used with respect to any Note, means April 15,
2005.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of Compass or a Guarantor
that is subordinated in right of payment by its terms or the terms of any
document or instrument relating thereto to the Notes or such Guarantee, as
applicable, in any respect or has a stated maturity after the Stated Maturity.
"SUBSIDIARY," with respect to any person, means (i) a corporation a
majority of whose Equity Interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly,
owned by such person, by such person and one or more Subsidiaries of such
person or by one or more Subsidiaries of such person, (ii) any other person
(other than a corporation) in which such person, one or more Subsidiaries of
such person, or such person and one or more Subsidiaries of such person,
directly or indirectly, at the date of determination thereof has at least
majority ownership interest, or (iii) a partnership in which such person or a
Subsidiary of such person is, at the time, a general partner. Notwithstanding
the foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of
Compass or of any Subsidiary of Compass. Unless the context requires
otherwise, Subsidiary means each direct and indirect Subsidiary of Compass.
"UNRESTRICTED SUBSIDIARY" means any subsidiary of Compass that does not
own any Capital Stock of, or own or hold any Lien on any property of, Compass
or any other Subsidiary of Compass and that, at the time of determination,
shall be an Unrestricted Subsidiary (as designated by the Board of Directors
of Compass); PROVIDED, that (i) such subsidiary shall not engage, to any
substantial extent, in any line or lines of business activity other than a
Related Business, (ii) neither immediately prior thereto nor after giving pro
forma effect to such designation would there exist a Default or Event of
Default and (iii) immediately after giving pro forma effect thereto, Compass
could incur at least $1.00 of Indebtedness pursuant to the Debt Incurrence
Ratio of the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock." The Board of Directors of Compass may
designate any Unrestricted Subsidiary to be a Subsidiary, provided, that (i)
no Default or Event of Default is existing or will occur as a consequence
thereof and (ii) immediately after giving effect to such designation, on a
pro forma basis, Compass could incur at least $1.00 of Indebtedness pursuant
to the Debt Incurrence Ratio of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock." Each such
designation shall be evidenced by filing with the Trustee a certified copy of
the resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"U.S. GOVERNMENT OBLIGATIONS" means direct non-callable obligations of,
or non-callable obligations guaranteed by, the United States of America for
the payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
"WHOLLY-OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of
which are owned by Compass or one or more Wholly-owned Subsidiaries of
Compass.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The New Notes will be issued in the form of one or more registered
global notes without interest coupons (collectively, the "Global Notes").
Upon issuance, the Global Notes will be deposited with the Trustee, as
custodian for DTC, in New York, New York, and registered in the name of DTC
or its nominee for credit to the accounts of DTC's Direct and Indirect
Participants (as defined below).
Beneficial interests in all Global Notes and all Certificated Notes (as
defined below), if any, will be subject to certain restrictions on transfer
and will bear a restrictive legend as described under "Notice to Investors."
In addition, transfer of beneficial interests in any Global Notes will be
subject to the applicable rules and procedures of DTC and its Direct or
Indirect Participants (including, if applicable, those of Euroclear and
CEDEL), which may change from time to time.
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The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances.
See "--Transfer of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of
the Registrar.
DEPOSITORY PROCEDURES
DTC has advised Compass that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through
electronic book-entry changes in accounts of Participants. The Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, including Euroclear
and Cedel. Access to DTC's system is also available to other entities that
clear through or maintain a direct or indirect, custodial relationship with a
Direct Participant (collectively, the "Indirect Participants").
DTC has also advised Compass that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes for exchange, DTC will credit the accounts
of the Direct Participants with such portions of the principal amount of the
Global Notes as determined based on the portion of Outstanding Notes
deposited by such Direct Participant as designated by the Exchange Agent, and
(ii) DTC will maintain records of the ownership interests of such Direct
Participants in the Global Notes and the transfer of ownership interests by
and between Direct Participants. DTC will not maintain records of the
ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain
their own records of the ownership interests of, and the transfer of
ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. All ownership
interests in any Global Notes may be subject to the procedures and
requirements of DTC.
The laws of some states in the United States require that certain
persons take physical delivery in definitive, certificated form, of
securities that they own. This may limit or curtail the ability to transfer
beneficial interests in a Global Note to such persons. Because DTC can act
only on behalf of Direct Participants, which in turn act on behalf of
Indirect Participants and others, the ability of a person having a beneficial
interest in a Global Note to pledge such interest to persons or entities that
are not Direct Participants in DTC, or to otherwise take actions in respect
of such interests, may be affected by the lack of physical certificates
evidencing such interests. For certain other restrictions on the
transferability of the Notes see "--Transfers of Interests in Global Notes
for Certificated Notes."
Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Notes will
not have Notes registered in their names, will not receive physical delivery
of Notes in certificated form and will not be considered the registered
owners or holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, Compass, the Guarantors and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any,
and interest on Global Notes registered in the name of DTC or its nominee
will be payable by the Trustee to DTC or its nominee as the registered holder
under the Indenture. Consequently, neither Compass, the Trustee nor any agent
of Compass or the Trustee has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Direct Participant's or Indirect
Participant's records relating to the beneficial ownership interests in any
Global Note or (ii) any other matter relating to the actions and practices of
DTC or any of its Direct Participants or Indirect Participants.
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DTC has advised Compass that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to
the beneficial owners of the Notes will be governed by standing instructions
and customary practices between them and will not be the responsibility of
DTC, the Trustee, Compass or the Guarantors. Neither Compass, the Guarantors
nor the Trustee will be liable for any delay by DTC or its Direct
Participants or Indirect Participants in identifying the beneficial owners of
the Notes, and Compass and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the
registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System
and, therefore, transfers between Direct Participants in DTC will be effected
in accordance with DTC's procedures, and will be settled in immediately
available funds. Transfers between Indirect Participants (other than Indirect
Participants who hold an interest in the Notes through Euroclear or CEDEL)
who hold an interest through a Direct Participant will be effected in
accordance with the procedures of such Direct Participant but generally will
settle in immediately available funds. Transfers between and among Indirect
Participants who hold interests in the Notes through Euroclear and CEDEL will
be effected in the ordinary way in accordance with their respective rules and
operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the
Notes through Euroclear or CEDEL, on the other hand, will be effected by
Euroclear's or CEDEL's respective Nominee through DTC in accordance with
DTC's rules on behalf of Euroclear or CEDEL; HOWEVER, delivery of
instructions relating to crossmarket transactions must be made directly to
Euroclear or CEDEL, as the case may be, by the counterparty in accordance
with the rules and procedures of Euroclear or CEDEL and within their
established deadlines (Brussels time for Euroclear and U.K. time for CEDEL).
Indirect Participants who hold interest in the Notes through Euroclear and
CEDEL may not deliver instructions directly to Euroclear's or CEDEL's
Nominee. Euroclear or CEDEL will, if the transaction meets its settlement
requirements, deliver instructions to its respective Nominee to deliver or
receive interests on Euroclear's or CEDEL's behalf in the relevant Global
Note in DTC, and make or receive payment in accordance with normal procedures
for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will
be credited, and any such crediting will be reported to Euroclear or CEDEL
during the European business day immediately following the settlement date of
DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and CEDEL customers will not have
access to the cash amount credited to their accounts as a result of a sale of
an interest in a Global Note to a DTC Participant until the European business
day for Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised Compass that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the
Notes to which such Direct Participant or Direct Participants has or have
given direction. However, if there is an Event of Default under the Notes,
DTC reserves the right to exchange Global Notes (without the direction of one
or more of its Direct Participants) for legended Notes in certificated form,
and to distribute such certificated forms of Notes to its Direct
Participants. See "--Transfers of Interests in Global Notes for Certificated
Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes among
Direct Participants, including Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of Compass, the Guarantors
or the Trustee shall have any responsibility for the performance by DTC,
Euroclear or CEDEL or their respective Direct and Indirect Participants of
their respective obligations under the rules and procedures governing any of
their operations.
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The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that Compass believes
to be reliable, but Compass takes no responsibility for the accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in
registered, certificated form without interest coupons ("Certificated Notes")
if (i) DTC (x) notifies Compass that it is unwilling or unable to continue as
depositary for the Global Notes and Compass thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) Compass, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes
or (iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, Compass will notify the
Trustee in writing that, upon surrender by the Direct and Indirect
Participants of their interest in such Global Note, Certificated Notes will
be issued to each person that such Direct and Indirect Participants and DTC
identify as being the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by
such Direct Participant (for itself or on behalf of an Indirect Participant),
to the Trustee in accordance with customary DTC procedures. Certificated
Notes delivered in exchange for any beneficial interest in any Global Note
will be registered in the names, and issued in any approved denominations,
requested by DTC on behalf of such Direct or Indirect Participants (in
accordance with DTC's customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless Compass
determines otherwise in compliance with applicable law.
Neither Compass, the Guarantors nor the Trustee will be liable for any
delay by the holder of any Global Note or DTC in identifying the beneficial
owners of Notes, and Compass and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the holder of the Global
Note or DTC for all purposes.
TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first
delivers to the Trustee a written certificate (and, in certain circumstances,
an opinion of counsel) confirming that, in connection with such transfer, it
has complied with the restrictions on transfer described under "Notice to
Investors."
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
same day funds to the accounts specified by the holder of interests in such
Global Note. With respect to Certificated Notes, Compass will make all
payments of principal, premium, if any, interest and Liquidated Damages, if
any, by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by
mailing a check to each such holder's registered address. Compass expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences of the Exchange Offer to holders of Notes. This summary is
based upon existing United States federal income tax law and interpretation
thereof, which is subject to change, possibly retroactively. Compass has not
and will not seek any rulings or opinions from the Internal Revenue Service
("IRS") or counsel with respect to the matters discussed below. There can be
no assurance that the IRS will not take positions concerning the tax
consequences of the Exchange Offer which are different from those discussed
herein. This summary does not discuss all aspects of United States federal
income taxation which may be important to particular holders in light of
their individual investment circumstances, such as Notes held by investors
subject to special tax rules (e.g., financial institutions, insurance
companies, broker-dealers, and tax-exempt organizations) or to persons that
will hold the Notes as a part of a straddle, hedge, or synthetic security
transaction for United States federal income tax purposes, or that have a
functional currency other than the United States dollar, all of whom may be
subject to tax rules that differ significantly from those summarized below.
In addition, this summary does not discuss any foreign, state, or local tax
considerations. This summary assumes that investors will hold their Notes as
"capital assets" (generally, property held for investment) under the United
States Internal Revenue Code of 1986, as amended. HOLDERS OF OUTSTANDING
NOTES SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL,
STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSIDERATIONS OF THE EXCHANGE
OFFER IN LIGHT OF THEIR PARTICULAR SITUATIONS.
The exchange of Outstanding Notes for New Notes under the terms of the
Exchange Offer should not constitute a taxable exchange. As a result, a
holder (i) should not recognize taxable gain or loss as a result of
exchanging Outstanding Notes for New Notes under the terms of the Exchange
Offer, (ii) the holding period of the New Notes should include the holding
period of the Old Notes exchanged for the New Notes and (iii) the adjusted
tax basis of the New Notes should be the same as the adjusted tax basis of
the Outstanding Notes exchanged therefor immediately before the exchange.
CERTAIN UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a summary of certain United States federal income tax
consequences of the purchase, ownership, and disposition of Notes by an
initial purchaser of Notes that, for United States federal income tax
purposes, is not a "United States person" as defined below (a "Non-U.S.
Holder"). This summary is based upon existing United States federal income
tax law and interpretations thereof, which is subject to change, possibly
retroactively. This summary does not discuss all aspects of United States
federal income taxation which may be important to particular Non-U.S. Holders
in light of their individual investment circumstances, such as Notes held by
investors subject to special tax rules (E.G., financial institutions,
insurance companies, broker-dealers, and tax-exempt organizations) or to
persons that will hold the Notes as a part of a straddle, hedge, or synthetic
security transaction for United States federal income tax purposes, or that
have a functional currency other than the United States dollar, all of whom
may be subject to tax rules that differ significantly from those summarized
below. In addition, this summary does not discuss any foreign, state, or
local tax considerations. This summary assumes that investors will hold their
Notes as "capital assets" (generally, property held for investment) under the
United States Internal Revenue Code of 1986, as amended (the "Code").
Prospective investors are urged to consult their tax advisors regarding the
United States federal, state, local, and foreign income and other tax
considerations of the purchase, ownership, and disposition of the Notes.
For purposes of this summary, a "United States person" is (i) an
individual who is a citizen or resident of the United States, (ii) a
corporation, partnership, or other entity created or organized under the laws
of the United States or any state or political subdivision thereof, (iii) an
estate that is subject to United States federal income taxation without
regard to the source of its income, or (iv) a trust whose administration is
subject to the primary supervision of a United States court and which has one
or more United States persons who have the authority to control all
substantial decisions of the trust.
WITHHOLDING TAX. Under present United States federal income tax law,
payments of principal, premium (if any) and interest on the Notes by Compass
to a Non-U.S. Holder, will be exempt from United States federal income or
withholding tax (the "Portfolio Interest Exemption"), provided that (i) such
holder does not own, actually or constructively, 10 percent or more of the
total combined voting power of all classes of
82
stock of Compass entitled to vote, is not a controlled foreign corporation
related to Compass through stock ownership and is not a bank receiving
interest described in section 881(c)(3)(A) of the Code and (ii) the Owner's
Statement Requirement discussed below has been satisfied by or with respect
to the beneficial owner. Notwithstanding the above, a Non-U.S. Holder that is
engaged in the conduct of a United States trade or business will be subject
to (i) United States federal income tax on interest that is effectively
connected with the conduct of such trade or business and (ii) if the Non-U.S.
Holder is a corporation, a United States branch profits tax equal to 30% of
its "effectively connected earnings and profits" as adjusted for the taxable
year, unless the holder qualifies for an exemption from such tax or a lower
tax rate under an applicable treaty.
GAIN ON DISPOSITION. A Non-U.S. Holder will generally not be subject to
United States federal income tax on gain recognized on a sale, redemption, or
other disposition of a Note unless (i) the gain is effectively connected with
the conduct of a trade or business within the United States by the Non-U.S.
Holder or (ii) in the case of a Non-U.S. Holder who is a nonresident alien
individual, such holder is present in the United States for 183 or more days
during the taxable year and certain other requirements are met. Any such gain
that is effectively connected with the conduct of a United States trade or
business by a Non-U.S. Holder will be subject to United States federal income
tax on a net income basis in the same manner as if such holder were a United
States person and, if such Non-U.S. Holder is a corporation, such gain may
also be subject to the 30% United States branch profits tax described above.
FEDERAL ESTATE TAXES. A Note held by an individual who at the time of death
is not a citizen or resident of the United States will not be subject to
United States federal estate taxation as a result of such individual's death,
provided that (i) the individual does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of Compass
entitled to vote and (ii) the interest accrued on the Note was not
effectively connected with the conduct of a United States trade or business.
OWNER'S STATEMENT REQUIREMENT. Sections 871(h) and 881(c) of the Code
require that, in order to obtain the Portfolio Interest Exemption, either the
beneficial owner of the Note, or a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution") and that holds
the Note on behalf of such beneficial owner, file a statement with the
withholding agent to the effect that the beneficial owner of the Note is not
a United States person (within the meaning of section 7701(a)(30) of the
Code). Under temporary United States Treasury regulations, which apply to
stated interest paid on a Note on or before December 31, 1999, and to
payments on or before such date of the proceeds from a sale or exchange of a
Note, the statement requirement of sections 871(h) and 881(c) will be
satisfied if (i) the beneficial owner of a Note certifies on Internal Revenue
Service Form W-8, under penalties of perjury, that it is not a United States
person and provides its name and address and (ii) any Financial Institution
holding the Note on behalf of the beneficial owner files a statement with the
withholding agent to the effect that it has received such a statement from
the beneficial owner (and furnishes the withholding agent with a copy
thereof). Recently issued final United States Treasury regulations, which
apply to stated interest paid on a Note after December 31, 1999, and to
payments made after such date of the proceeds from a sale or exchange of a
Note, also provide that the statement requirement of sections 871(h) and
881(c) will be satisfied if the two conditions set forth in the preceding
sentence are met (although a beneficial owner that is a foreign estate or
trust (or fiduciary thereof), a foreign partnership that has entered into a
withholding agreement with the Internal Revenue Service or a Non-U.S. Holder
holding a Note through its United States branch will be required to provide
its taxpayer identification number in addition to its name and address, on
the statement described in clause (i) of the preceding sentence).
In the case of a Non-U.S. Holder who is engaged in a United States trade
or business and receives interest on a Note that is effectively connected
with the conduct of such trade or business, the holder will be required to
provide Compass, in lieu of certificate described above, a properly executed
Internal Revenue Service Form 4224 (or, after December 31, 1999, an Internal
Revenue Service Form W-8) in order to establish an exemption from United
States federal withholding taxes.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
will not apply to payments made by Compass on a Note if the Owner's Statement
Requirement has been satisfied, PROVIDED that Compass does not have actual
knowledge (and, with respect to payments made after December 31, 1999, does
not have reason to know) that the payee is a United States person.
Payments of proceeds from the sale or exchange of a Note generally will
not be subject to backup withholding tax if they are made to or through a
foreign office of a broker. If such broker is a United States
83
person, a controlled foreign corporation for United States federal income tax
purposes, a foreign person 50 percent or more of whose gross income is
effectively connected with the conduct of a United States trade or business
for a specified three-year period or, in the case of payments made after
December 31, 1999, a foreign partnership at least 50 percent of the capital
or profits interests in which are owned by United States persons or that has
a United States trade or business, information reporting will be required
unless the broker has in its records documentary evidence that the beneficial
owner is not a United States person and certain other conditions are met or
the beneficial owner otherwise establishes an exemption. Payments to or
through the United States office of a broker will be subject to backup
withholding tax and information reporting unless the beneficial owner
certifies, under penalties of perjury, that it is not a United States person
or otherwise establishes an exemption.
84
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired as a result of market-making
activities or other trading activities. Compass has agreed that it will make
this Prospectus, as amend or supplemented, available to any broker-dealer for
use in connection with any such resales for a period of 90 days after the
Expiration Date.
Compass will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealer for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
Compass has been advised by DLJ, BSI and Libra, the initial purchasers
of the Outstanding Notes, that following completion of the Exchange Offer
they intend to make a market in the New Notes to be issued in the Exchange
Offer. However, such entities are under no obligation to do so and any market
activities with respect to the New Notes may be discontinued at any time.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for
Compass by Morgan, Lewis & Bockius LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of Compass, the financial
statements of Aeromil, the consolidated financial statements of Brittain
Machine, the financial statements Barnes Machine, the combined financial
statements of Sea-Lect and the consolidated financial statements of Modern
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, to the extent indicated in their
reports thereon also appearing elsewhere herein and in the Registration
Statement. Such financial statements have been included herein in reliance
upon such reports given on the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Brittain Machine appearing in
this Prospectus and Registration Statement have been audited by Grant
Thornton LLP, independent auditors, to the extent indicated in their reports
thereon also appearing elsewhere herein and in the Registration Statement.
Such consolidated financial statements have been included herein in reliance
upon such reports given on the authority of such firm as experts in
accounting and auditing.
The financial statements of Lamsco West, Inc. appearing in this
Prospectus and Registration Statement have been audited by McGladrey &
Pullen, LLP, independent auditors, to the extent indicated in their reports
thereon also appearing elsewhere herein and in the Registration Statement.
Such financial statements have been included herein in reliance upon such
reports given on the authority of such firm as experts in accounting and
auditing.
85
COMPASS AEROSPACE CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
COMPASS AEROSPACE CORPORATION
For the year ended December 31, 1998 and for the period from October 21, 1997 (date of incorporation)
through December 31, 1997
Report of Independent Auditors......................................................................... F-3
Consolidated Balance Sheets............................................................................ F-4
Consolidated Statements of Income...................................................................... F-5
Consolidated Statements of Stockholders' Equity........................................................ F-6
Consolidated Statements of Cash Flows.................................................................. F-7
Notes to Consolidated Financial Statements............................................................. F-8
AEROMIL ENGINEERING COMPANY
For the period from January 1, 1997 through November 25, 1997
Report of Independent Auditors......................................................................... F-19
Balance Sheet.......................................................................................... F-20
Statement of Operations and Retained Earnings.......................................................... F-21
Statement of Cash Flows................................................................................ F-22
Notes to Financial Statements.......................................................................... F-23
BRITTAIN MACHINE, INC.
For the period from July 1, 1997 through April 21, 1998
Report of Independent Certified Public Accountants..................................................... F-29
Consolidated Balance Sheet............................................................................. F-30
Consolidated Statement of Earnings and Retained Earnings............................................... F-31
Consolidated Statement of Cash Flows................................................................... F-32
Notes to Consolidated Financial Statements............................................................. F-33
For the years ended June 30, 1997 and June 30, 1996
Report of Independent Certified Public Accountants..................................................... F-40
Report of Independent Auditors......................................................................... F-41
Consolidated Balance Sheets............................................................................ F-42
Consolidated Statements of Earnings and Retained Earnings.............................................. F-44
Consolidated Statements of Cash Flows.................................................................. F-45
Notes to Consolidated Financial Statements............................................................. F-46
BARNES MACHINE, INC.
For the period from October 1, 1997 through April 21, 1998 and for the year ended
September 30, 1997
Report of Independent Auditors......................................................................... F-54
Balance Sheets......................................................................................... F-55
Statements of Income and Retained Earnings............................................................. F-56
Statements of Cash Flows............................................................................... F-57
Notes to Financial Statements.......................................................................... F-58
F-1
PAGE
---------
SEA-LECT PRODUCTS, INC.
For the period from January 1, 1998 through May 11, 1998 and for the year ended
December 31, 1997
Report of Independent Auditors......................................................................... F-63
Combined Balance Sheets................................................................................ F-64
Combined Statements of Income.......................................................................... F-65
Combined Statements of Shareholders' Equity............................................................ F-66
Combined Statements of Cash Flows...................................................................... F-67
Notes to Combined Financial Statements................................................................. F-68
LAMSCO WEST, INC.
For the period from January 4, 1998 through November 20, 1998 and for the years ended
January 3, 1998 and December 28, 1996
Independent Auditor's Report........................................................................... F-71
Balance Sheets......................................................................................... F-72
Statements of Income................................................................................... F-73
Statements of Retained Earnings........................................................................ F-74
Statements of Cash Flows............................................................................... F-75
Notes to Financial Statements.......................................................................... F-76
MODERN MANUFACTURING, INC. (formerly Y.F. Americas, Inc.)
[to be supplied]
F-2
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Compass Aerospace Corporation
We have audited the accompanying consolidated balance sheets of Compass
Aerospace Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related statements of income, stockholders' equity, and cash flows for the year
ended December 31, 1998 and the period October 21, 1997 (date of incorporation)
through December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 21(b). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Compass
Aerospace Corporation and subsidiaries and the consolidated results of its
operations and its cash flows for the year ended December 31, 1998 and the
period October 21, 1997 (date of incorporation) through December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presented fairly, in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
Long Beach, California
March 15, 1999
F-3
COMPASS AEROSPACE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31
---------------------
1998 1997
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 7,871 $ 443
Accounts receivable less allowance for doubtful accounts of $756 in 1998 and $31 in
1997................................................................................... 19,553 2,168
Inventories.............................................................................. 32,631 5,559
Deferred income taxes.................................................................... 2,100 123
Refundable income taxes.................................................................. 889 --
Prepaid expenses and other current assets................................................ 418 350
---------- ---------
Total current assets....................................................................... 63,462 8,643
Property and equipment, net................................................................ 58,914 11,947
Goodwill, net of accumulated amortization of $2,519 in 1998 and $53 in 1997................ 120,412 13,199
Other assets............................................................................... 12,717 --
---------- ---------
Total assets............................................................................... $ 255,505 $ 33,789
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 10,827 $ 2,084
Accrued liabilities...................................................................... 9,910 742
Income taxes payable..................................................................... -- 889
Current portion of long-term debt and capital leases..................................... 4,632 2,104
Line of credit........................................................................... -- 4,034
---------- ---------
Total current liabilities.................................................................. 25,369 9,853
Deferred income taxes...................................................................... 7,845 415
Long-term debt and capital leases, less current portion.................................... 192,336 8,447
Mezzanine debt with related party.......................................................... -- 6,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares:
36,000,000 at December 31, 1998
20,000,000 at December 31, 1997
Issued and outstanding:
24,775,628 at December 31, 1998
9,000,000 at December 31, 1997....................................................... 248 90
Paid-in capital.......................................................................... 28,718 8,910
Retained earnings........................................................................ 989 74
---------- ---------
Total stockholders' equity................................................................. 29,955 9,074
---------- ---------
Total liabilities and stockholders' equity................................................. $ 255,505 $ 33,789
---------- ---------
---------- ---------
See accompanying notes.
F-4
COMPASS AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
PERIOD FROM
OCTOBER 21
YEAR ENDED THROUGH
DECEMBER 31 DECEMBER 31
1998 1997
------------ -------------
Net sales............................................................................. $ 96,547 $ 3,057
Cost of sales......................................................................... 70,410 2,386
------------ ------
Gross profit.......................................................................... 26,137 671
Selling, general and administrative expenses.......................................... 14,537 404
------------ ------
Operating income...................................................................... 11,600 267
Interest expense...................................................................... 8,493 166
Other (expense) income................................................................ (670) 16
------------ ------
Income before income taxes............................................................ 2,437 117
Income tax expense.................................................................... 1,522 43
------------ ------
Net income............................................................................ $ 915 $ 74
------------ ------
------------ ------
See accompanying notes.
F-5
COMPASS AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------ ----------- ----------- ----------- ------------
Balance at October 21, 1997 (date of
incorporation)..................................... -- $ -- $ -- $ -- $ --
Proceeds from initial private placement of stock... 9,000,000 90 8,910 -- 9,000
Net income......................................... -- -- 74 74
------------ ----- ----------- ----- ------------
Balance at December 31, 1997......................... 9,000,000 90 8,910 74 9,074
Issuance of stock.................................. 582,376 6 460 -- 466
Conversion of mezzanine debt to stock.............. 6,000,000 60 5,940 -- 6,000
Issuance of stock.................................. 9,193,252 92 13,408 -- 13,500
Net income......................................... -- -- -- 915 915
------------ ----- ----------- ----- ------------
Balance at December 31, 1998......................... 24,775,628 $ 248 $ 28,718 $ 989 $ 29,955
------------ ----- ----------- ----- ------------
------------ ----- ----------- ----- ------------
See accompanying notes.
F-6
COMPASS AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 21
YEAR ENDED THROUGH
DECEMBER 31 DECEMBER 31
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net income............................................................................ $ 915 $ 74
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation........................................................................ 5,974 166
Amortization........................................................................ 2,466 53
Stock issued for compensation....................................................... 466 --
Deferred taxes...................................................................... (317) --
Changes in operating assets and liabilities:
Accounts receivable............................................................... (681) 249
Inventories....................................................................... (5,253) 308
Prepaid expenses and other assets................................................. (14,829) (136)
Accounts payable.................................................................. 2,432 (530)
Accrued expenses and other liabilities............................................ 2,150 85
------------ ------------
Net cash (used in) provided by operating activities................................... (6,677) 269
INVESTING ACTIVITIES
Purchase of property and equipment.................................................... (5,701) (25)
Acquired businesses, net of cash acquired............................................. (166,416) (23,431)
------------ ------------
Net cash used in investing activities................................................. (172,117) (23,456)
FINANCING ACTIVITIES
Proceeds from note offering........................................................... 110,000 --
Proceeds from long-term debt.......................................................... 81,000 10,262
Proceeds from mezzanine debt.......................................................... -- 6,000
Proceeds from sale of stock........................................................... 13,500 9,000
Payments on long-term debt and capital leases......................................... (14,244) (5,666)
Net (decrease) increase in line of credit............................................. (4,034) 4,034
------------ ------------
Net cash provided by financing activities............................................. 186,222 23,630
------------ ------------
Net increase in cash.................................................................. 7,428 443
Cash and cash equivalents at beginning of period...................................... 443 --
------------ ------------
Cash and cash equivalents at end of period............................................ $ 7,871 $ 443
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest............................................................................ $ 6,600 $ 33
------------ ------------
------------ ------------
Income taxes........................................................................ $ 2,100 $ 110
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Conversion of mezzanine debt to stock................................................. $ 6,000 $ --
------------ ------------
------------ ------------
Assets acquired under capital leases.................................................. $ 4,672 $ --
------------ ------------
------------ ------------
See accompanying notes.
F-7
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Compass Aerospace Corporation and its wholly owned subsidiaries, Western Methods
Machinery Corporation (Western), Aeromil Engineering Company (Aeromil), Barnes
Machine, Inc. (Barnes), Brittain Machine Inc. (Brittain), Wichita Manufacturing
Inc. (Wichita), Sea-Lect Products Inc. (Sea-Lect), Lamsco West, Inc. (Lamsco),
and Modern Manufacturing, Inc. (Modern) (collectively, the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
BUSINESS
The Company was founded in October 1997 to become a major supplier of
precision machined individual parts, and of higher value-added sub-assemblies,
manufacturing kits and structural components used by aerospace manufacturers in
structural frames and other metal aircraft components. Customers include
domestic and foreign entities.
The Company manufactures its products using various metals including
aluminum, titanium and steel through the use of precision computer numerically
controlled machine tools. The Company uses a variety of advanced techniques and
machinery including horizontal and vertical machining centers and state-of-
the-art high-speed precision machining equipment, as well as three-spindle
five-axis gantry mills.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions. The Company is
subject to risk for amounts in excess of federal deposit insurance limits.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company conducts a major portion of its business with a limited number of
customers. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent with those present throughout the
industry. Typically, the Company does not require collateral from customers.
Sales to the Boeing Company accounted for 72% and 77% of total consolidated
sales for the year ended December 31, 1998 and for the period October 21, 1997
through December 31, 1997, respectively. Trade accounts receivable from the
Boeing Company accounted for 63% and 76% of total consolidated accounts
receivable as of December 31, 1998 and 1997, respectively.
F-8
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents approximate cost due to the short
period of time to maturity. Fair values of long-term debt, which have been
determined based on borrowing rates currently available to the Company for loans
with similar terms of maturity, approximate the carrying amounts in the
consolidated financial statements.
INVENTORIES
Inventories are valued under methodologies that approximate the first-in
first-out method of cost, and are stated at the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The provision for depreciation
of property and equipment, which includes amortization of assets under capital
leases, is generally computed on the straight-line method over the following
useful lives:
Buildings and improvements........... 5 - 40 years
Machinery and equipment.............. 2 - 10 years
Furniture and fixtures............... 5 - 10 years
Leasehold improvements............... Lease term or life of asset,
whichever is shorter
GOODWILL
Goodwill represents the excess of the purchase price over the estimated fair
value of the net assets acquired in connection with business combinations.
Amortization is provided for on a straight-line basis over 20 years.
Amortization expense related to goodwill was $2,466,000 for the year ended
December 31, 1998 and $53,000 for the period October 21, 1997 through December
31, 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets are reviewed periodically and if
future cash flows are believed insufficient to recover the remaining carrying
value of the related assets, the carrying value is written down to its estimated
fair value in the period the impairment is identified.
STOCK-BASED COMPENSATION
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and related interpretations. Under the provisions of APB
25, compensation expense is measured at the grant date for the difference
between the fair value of the stock and the exercise price.
F-9
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. Provisions are made currently for estimated returns.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," effective January 1, 1998. This Statement
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. There was no impact on the financial
statements of the Company due to the adoption of SFAS No. 130.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," was also adopted on January 1, 1998, which requires the Company to
report financial and descriptive information about its reportable operating
segments. There was no impact on the financial statements of the Company due to
the adoption of SFAS No. 131.
Also effective January 1, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement supersedes the disclosure requirements in Statements of Financial
Accounting Standards 87, "Employers' Accounting for Pensions," 88, "Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans for
Termination Benefits," and 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." The objective of SFAS No. 132 is to improve and
standardize disclosures regarding pensions and postretirement benefits. There
was no impact on the financial statements of the Company due to the adoption of
SFAS No. 132.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Company
believes that there will be no impact due to the adoption of Statement No. 133.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 requires capitalization of qualified computer software costs with
amortization recognized over their estimated useful lives. The Company believes
that there will be no impact due to the adoption of SOP 98-1.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," which is effective for
fiscal years beginning after December 15, 1998. SOP 98-5 requires costs of
start-up activities, as defined in the Statement, to be expensed as incurred.
The Company believes that there will be no impact due to the adoption of SOP
98-5.
2. ACQUISITIONS
Each of the following transactions has been accounted for under the purchase
method of accounting for business combinations. Accordingly, the accompanying
consolidated statements of operations include
F-10
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
revenues and expenses related to these entities since their respective closing
dates. The financial statements reflect the preliminary allocations of the
purchase price, though the purchase price allocation has not been finalized on
certain of the Company's business combinations.
During 1997, the Company funded the acquisitions of Western and Aeromil
under its then existing credit facility. During 1998, the Company paid down the
debt related to the 1997 acquisitions and funded its 1998 acquisitions through
the proceeds provided by the $110 million Offering and the $170 million Credit
Agreement (see Notes 5 and 7).
Each of the businesses discussed below, acquired during 1998, manufactures
parts for aerospace customers, including precision machined parts from titanium,
aluminum, and steel.
On April 21, 1998, the Company acquired all of the outstanding common stock
of Barnes Machine, Inc., located in Shelton, Washington. The Company also
acquired certain land and buildings owned by the stockholders and used in the
operation of the business. The purchase price was $15.1 million. The Company
also retired debt of approximately $0.8 million upon acquisition.
On April 21, 1998, the Company acquired all of the outstanding stock of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita Manufacturing,
Inc. Brittain is located in Wichita, Kansas, and Wichita is located in Cerritos,
California. The purchase price was $55.0 million. The Company also retired debt
of approximately $3.0 million upon acquisition.
On May 11, 1998, the Company acquired certain assets and liabilities of
Sea-Lect Products, Inc. and all of the outstanding common stock of its affiliate
J&J Leasing (collectively Sea-Lect). Sea-Lect is located in Kent, Washington.
The purchase price was $12.2 million. The Company also retired debt of $0.9
million upon acquisition.
On November 20, 1998, the Company purchased all of the outstanding stock of
Lamsco West, Inc. Lamsco's operations are located in Santa Clarita, California,
and Kent, Washington. The purchase price was $73.7 million. At December 31,
1998, $2.5 million is held for the seller in escrow pending fulfillment of
provisions in the purchase agreement.
On December 31, 1998, the Company acquired all of the outstanding common
stock of Modern Manufacturing, Inc. (formerly Y.F. Americas, Inc.), located in
Renton, Washington. The purchase price was $23.1 million. At December 31, 1998,
$2.5 million is held in escrow for the seller pending fulfillment of certain
provisions in the purchase agreement.
The following unaudited consolidated supplemental pro forma information
includes the accounts of Compass Aerospace Corporation and its wholly owned
subsidiaries, Western, Aeromil, Barnes, Brittain, Wichita, Sea-Lect, Lamsco and
Modern. The pro forma information assumes that all the acquisitions were
consummated on January 1, 1997 (in thousands).
DECEMBER 31
----------------------
1998 1997
---------- ----------
Net sales............................................................. $ 183,444 $ 150,785
---------- ----------
---------- ----------
Net income............................................................ $ 8,188 $ 5,745
---------- ----------
---------- ----------
F-11
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
The pro forma consolidated results of operations included adjustments to
give effect to amortization of goodwill, interest on acquisition debt,
additional depreciation expense based on the fair market value of the property,
plant and equipment acquired and certain other adjustments, together with the
income tax effects. The unaudited consolidated pro forma information is not
necessarily indicative of the combined results that would have occurred had the
acquisitions and borrowings occurred on those dates, nor is it indicative of the
results that may occur in the future.
3. INVENTORY
The following is a summary of inventory (in thousands):
DECEMBER 31
------------------------
1998 1997
----------- -----------
Raw materials......................................................... $ 10,048 $ --
Work in process....................................................... 16,970 5,356
Finished goods........................................................ 5,613 203
----------- -----------
$ 32,631 $ 5,559
----------- -----------
----------- -----------
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, which is recorded at
cost (in thousands):
DECEMBER 31
------------------------
1998 1997
----------- -----------
Land.................................................................. $ 1,991 $ --
Building and improvements............................................. 6,098 --
Furniture and fixtures................................................ 1,376 264
Leasehold improvements................................................ 547 301
Machinery and equipment............................................... 55,042 11,548
----------- -----------
65,054 12,113
Accumulated depreciation.............................................. (6,140) (166)
----------- -----------
$ 58,914 $ 11,947
----------- -----------
----------- -----------
Included in machinery and equipment is approximately $2,565,000 of equipment
under capital lease arrangements (see Note 12).
5. DEBT OFFERING
On April 21, 1998, the Company completed a $110 million debt offering of
10 1/8% Senior Subordinated Notes (the Notes) due 2005 (the Offering). The Notes
are unconditionally guaranteed on a senior subordinated basis by the Company's
existing subsidiaries and all future subsidiaries. The net proceeds from the
Offering were used to repay all outstanding bank debt, to finance the
acquisitions, and for general corporate purposes. The transaction costs of $7.3
million incurred in connection with the Offering were
F-12
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. DEBT OFFERING (CONTINUED)
recorded as a deferred charge and are amortized over the seven-year life of the
Notes using the straight-line method.
The Notes mature on April 15, 2005, unless redeemed prior to that time.
Interest on the Notes is payable semiannually on April 15 and October 15 of each
year, commencing October 15, 1998, to holders of record. The Notes will be
redeemable at the option of the Company, in whole or in part, on or after April
15, 2002 at the redemption price as defined in the agreement. In addition, on or
before April 15, 2001 the Company may redeem up to 35% of the Notes at a
redemption price of 110.125% of the principal amount with the net proceeds of
one or more public equity offerings as defined and provided for in the
agreement.
Under provisions of the indenture applicable to the Notes, the Company may,
under certain circumstances, be limited in its ability to incur additional
indebtedness or issue Disqualified Capital Stock (as defined), pay dividends or
make other distributions, create certain liens on assets, sell certain assets
and stock of subsidiaries, enter into certain transactions with affiliates, and
effect certain mergers and consolidations. The Company is also subject to
certain restrictive covenants and is required to maintain certain financial
ratios in connection with the Notes.
6. MEZZANINE DEBT
In connection with the acquisitions of Western Methods and Aeromil, the
Company entered into a subordinated note with its largest stockholder for $6
million bearing interest at 11%, payable quarterly. On March 18, 1998, the Note
and related accrued interest was exchanged for 6 million shares of the Company's
common stock.
7. BANK BORROWINGS
Long-term debt and capital leases consist of the following (dollars in
thousands):
DECEMBER 31
-----------------------
1998 1997
---------- -----------
Senior subordinated notes............................................. $ 110,000 $ --
Term Loan A........................................................... 35,000 --
Term Loan B........................................................... 45,000 --
Acquisition line of credit............................................ 1,000 --
Capital leases and other.............................................. 5,968 10,551
---------- -----------
$ 196,968 $ 10,551
---------- -----------
---------- -----------
On November 20, 1998, the Company entered into a $170 million credit
agreement (Credit Agreement) with BankBoston, N.A. and its participants. This
Credit Agreement, as amended and restated on February 11, 1999, replaced a prior
revolving credit facility with BankBoston. The Credit Agreement includes a $25
million revolving credit note (Revolver), Term Loan A with available lending of
up to $35 million, Term Loan B with available lending of up to $45 million, and
an acquisition line of credit (Acquisition Line) for up to $65 million. The
transaction costs of $5.2 million incurred in connection with the Credit
Agreement were recorded as a deferred charge and are amortized over the life of
the Credit
F-13
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. BANK BORROWINGS (CONTINUED)
Agreement using the straight-line method. The Credit Agreement accrues interest
at variable rates based upon the bank's prime rate or Eurocurrency rate and is
payable quarterly. The interest rate in effect at December 31, 1998, was
approximately 10.1%. The Revolver matures November 2003. Term Loan A is payable
in equal quarterly installments, totaling 10% of the outstanding principal in
1999, 15% of the outstanding principal in 2000 and 2001, 23.75% of the
outstanding principal in 2002, and the remainder in 2003. Term Loan B is payable
in equal quarterly installments totaling 1% of the outstanding principal in 1999
through 2003, and 47.5% of the outstanding principal in 2004 and 2005. Payments
on the Acquisition Line begin at December 31, 2000 and are payable in 13 equal
quarterly installments. The Credit Agreement contains certain restrictive
covenants and requires the maintenance of certain financial ratios.
As prescribed by and defined in the Credit Agreement, availability under the
Revolver is limited to 85% of eligible accounts receivable, plus 50% of the net
book value of eligible inventory, plus 25% of the orderly liquidation value of
machinery and equipment, subject to reserves that may be established by the
lender. Subject to these provisions, the Company has $25 million available under
the Revolver and an initial availability of $35 million under the Acquisition
Line. The remaining $30 million of the Acquisition Line will become available
provided the Company raises one dollar of equity for every additional dollar of
borrowings over the initial $35 million of availability.
As of December 31, 1997, the Company had a note payable to a bank for $10.3
million. The note was secured by substantially all of the Company's assets and
accrued interest at 9.5%. Interest and principal payments were due monthly. The
note had a maturity date of November 2000. At December 31, 1997, the Company
also had outstanding an installment loan with a bank for $300,000 that was
payable monthly with 8.6% interest and an original maturity of October 2002.
Both of these loans were paid in full during 1998 and there are no outstanding
balances under either credit facility at the end of 1998.
Maturities of long-term debt, excluding capital lease payments (see Note 12)
as of December 31, 1998 are as follows (in thousands):
1999.............................................................. $ 4,304
2000.............................................................. 6,159
2001.............................................................. 6,422
2002.............................................................. 9,509
2003.............................................................. 13,633
Thereafter........................................................ 154,376
---------
194,403
Less current portion.............................................. 4,304
---------
Long-term debt.................................................... $ 190,099
---------
---------
8. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes
F-14
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. INCOME TAXES (CONTINUED)
to be paid for the period and the change during the period in the deferred tax
assets and liabilities. Significant components of the Company's deferred tax
assets and liabilities are as follows (in thousands):
DECEMBER 31
------------------------
1998 1997
----------- -----------
Deferred tax assets:
Accrued expenses not deductible for tax............................. $ 735 $ 62
Inventories......................................................... 1,365 61
----------- -----
Total deferred tax assets............................................. 2,100 123
Deferred tax liabilities:
Depreciation and amortization....................................... (7,645) --
Other............................................................... (200) (415)
----------- -----
Total deferred tax liabilities........................................ (7,845) (415)
----------- -----
Net deferred tax liability............................................ $ (5,745) $ (292)
----------- -----
----------- -----
Significant components of the provision for income taxes are as follows (in
thousands):
PERIOD FROM
OCTOBER 21
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------
Current:
Federal........................................................ $ 1,770 $ 36
State.......................................................... 69 7
------------ ------
1,839 43
Deferred:
Federal........................................................ (270) --
State.......................................................... (47) --
------------ ------
(317) --
------------ ------
$ 1,522 $ 43
------------ ------
------------ ------
F-15
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. INCOME TAXES (CONTINUED)
The reconciliation of income tax at the U.S. federal statutory rate to
income tax expense is as follows:
PERIOD FROM
OCTOBER 21
YEAR ENDED THROUGH DECEMBER
DECEMBER 31, 1998 31, 1997
----------------- -----------------
Income tax at U.S. statutory rates............................... 34% 34%
State income tax, net of federal benefit......................... 3 3
Goodwill......................................................... 27 --
Other............................................................ (2) --
-- --
62% 37%
-- --
-- --
9. STOCKHOLDERS' EQUITY
In October 1997, the Company was incorporated with the issuance of 9 million
shares of common stock in a private placement, generating net proceeds of $9
million. The proceeds from this placement were primarily used to acquire Western
and Aeromil.
In April 1998, the Company amended its articles of incorporation to increase
the number of authorized shares from 20 million to 36 million and to establish a
second class of common stock, Class B. All rights remain the same as Class A,
except Class B stock is nonvoting and contains conversion rights based upon
certain criteria.
In connection with the Offering, the Company issued approximately 5.4
million shares of Class B and 3.7 million shares of Class A shares for $13.5
million in cash. Additionally, 582,376 shares of stock were issued to board
members and the president as compensation for services related to the
acquisitions. Shares outstanding as of December 31, 1998, under Class A and
Class B, amounted to 19,327,775 and 5,447,853, respectively.
10. STOCK OPTION PLAN
In March 1998, the Company's Board of Directors adopted, and the
shareholders approved, the Compass Aerospace Corporation 1998 Stock Incentive
Plan (the Plan). The Plan will be administered by the Compensation Committee of
the Board of Directors (the Committee). All officers, directors, employees and
independent contractors of the Company are eligible for discretionary awards
under the Plan. The Plan provides for stock-based incentive awards, including
incentive stock options, non-qualified stock options and restricted stock. The
Plan permits the Committee to select eligible persons to receive awards and to
determine certain terms and conditions of such awards, including the vesting
schedule and exercise price of each award, provided, that the option exercise
price may not be less than 85% of the fair market value per share of the
Company's Common Stock on the date of the grant. Under the Plan, no participant
may be granted incentive stock options that are first exercisable in any one
calendar year with fair market value in excess of $100,000. 2,000,000 shares of
the Company's Common Stock have been reserved for issuance under the Plan.
F-16
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. STOCK OPTION PLAN (CONTINUED)
No options were granted as of December 31, 1997. The status of the Company's
stock option plan during 1998 is summarized as follows:
NUMBER OF
OPTIONS
-----------
Outstanding at January 1, 1998.................................................... --
Granted........................................................................... 888,291
Exercised......................................................................... --
Canceled.......................................................................... --
-----------
Outstanding at December 31, 1998.................................................. 888,291
-----------
-----------
Options Exercisable at December 31, 1998.......................................... 60,000
-----------
-----------
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options, as allowed for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation." Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma net income, as required to be disclosed by SFAS No. 123,
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement, would be $840,000. The fair value for
these options was estimated at the date of grant using a binomial option pricing
model with the following weighted-average assumptions for December 31, 1998:
dividend yield of 0.0%; volatility of 36.30%; risk-free interest rates ranging
from 4.58% to 4.66% depending on a weighted-average expected life ranging from
two to four years.
The weighted average fair value of options granted during 1998 is $.37 per
option. The weighted average exercise price for 1998 was $1.22. The weighted
average remaining contractual life of options outstanding is 9.5 years.
During 1998, the Company approved several stock option agreements to
purchase 888,291 shares of the Company's common stock at an exercise price
ranging from $1.00 to $1.47 per share. All options granted have 10-year terms.
One option for 60,000 shares is fully vested and immediately exercisable. The
remainder of the options vest and become exercisable at various dates through
December 1, 2002.
11. RELATED PARTY TRANSACTIONS
The Company has entered into a management fee agreement with certain
entities controlled by directors of the Company. Under this agreement, the
Company is required to pay an annual aggregate amount equal to $200,000 plus
1.5% of the Company's earnings before income taxes, depreciation, amortization,
and management fees. The Company also typically pays advisory fees to these
affiliates in an amount equal to an aggregate of 1% of the consideration paid
for each business acquired by the Company. Management and advisory fees paid to
these affiliates were $3,165,000 and $282,000 in 1998 and 1997.
F-17
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain machinery and equipment under capital leases
expiring at various dates through July 2008. The Company also leases office
spaces under operating leases with terms expiring at various dates through 2007.
Rent expense for operating leases amounted to $1,125,000 and $53,000 for the
year ended December 31, 1998 and the period October 21 through December 31,
1997, respectively.
Future minimum payments by year and in the aggregate under all
non-cancelable operating and capital leases with terms in excess of one year at
December 31, 1998 are as follows (in thousands):
OPERATING CAPITAL
YEAR ENDED DECEMBER 31 LEASES LEASES
- ------------------------------------------------------------------------- ----------- ---------
1999..................................................................... $ 1,205 $ 494
2000..................................................................... 1,110 494
2001..................................................................... 1,122 494
2002..................................................................... 1,126 494
2003..................................................................... 1,036 484
Thereafter............................................................... 3,574 725
----------- ---------
$ 9,173 3,185
-----------
-----------
Less amount representing interest........................................ 620
---------
Present value of net minimum lease payments.............................. 2,565
Less current portion..................................................... 328
---------
Long-term leases payable................................................. $ 2,237
---------
---------
During the normal course of business, the Company is involved in various
lawsuits. Management, in consultation with legal counsel, does not believe that
the outcome of these lawsuits will have a materially adverse impact on the
financial position or future operations of the Company.
13. PROFIT SHARING PLANS
As a result of the acquisitions of the subsidiaries, the Company has
maintained the profit-sharing plans covering all of its eligible employees for
those entities acquired. Contributions to the plans are at the discretion of the
Board of Directors and may not exceed the maximum amount permitted by the
Internal Revenue Code. During the year ended December 31, 1998 and the period
from October 21, 1997 through December 31, 1997, the Company charged $1,078,000
and $26,000, respectively, to expense pursuant to the Plans.
F-18
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Aeromil Engineering Company
We have audited the accompanying balance sheet of Aeromil Engineering
Company as of November 25, 1997, and the related statements of operations and
retained earnings and cash flows for the period January 1, 1997 through November
25, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aeromil Engineering Company
at November 25, 1997, and the results of its operations and its cash flows for
the period January 1, 1997 through November 25, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Long Beach, California
March 19, 1998
F-19
AEROMIL ENGINEERING COMPANY
BALANCE SHEET
NOVEMBER 25, 1997
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 182
Accounts receivable.............................................................. 1,680
Inventories...................................................................... 3,213
Related party receivables........................................................ 32
Prepaid expenses and other assets................................................ 52
---------
Total current assets............................................................... 5,159
Property and equipment, net........................................................ 4,860
---------
Total assets....................................................................... $ 10,019
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 1,310
Accrued expenses................................................................. 276
Loan payable, shareholder........................................................ 677
Current portion of long-term debt................................................ 600
Line of credit................................................................... 1,445
---------
Total current liabilities.......................................................... 4,308
Long-term debt, less current portion............................................... 1,556
Commitments........................................................................ --
---------
Stockholders' equity:
Capital stock, $100 par value:
Authorized shares--750
Issued and outstanding shares--300............................................. 30
Retained earnings.................................................................. 4,125
---------
Total stockholders' equity......................................................... 4,155
---------
Total liabilities and stockholders' equity......................................... $ 10,019
---------
---------
See accompanying notes.
F-20
AEROMIL ENGINEERING COMPANY
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 25, 1997
(DOLLARS IN THOUSANDS)
Net sales.......................................................................... $ 11,077
Cost of sales...................................................................... 11,095
---------
Gross loss......................................................................... (18)
Selling, general and administrative expenses....................................... 499
---------
Operating loss..................................................................... (517)
Interest expense................................................................... (229)
Other income, net.................................................................. 48
---------
Loss before income taxes........................................................... (698)
---------
Income taxes....................................................................... 1
Net loss........................................................................... (699)
Retained earnings at beginning of period........................................... 4,824
---------
Retained earnings at end of period................................................. $ 4,125
---------
---------
See accompanying notes.
F-21
AEROMIL ENGINEERING COMPANY
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH NOVEMBER 25, 1997
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net loss........................................................................... $ (699)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation..................................................................... 681
Changes in operating assets and liabilities:
Accounts receivables........................................................... (549)
Inventories.................................................................... (283)
Prepaid expenses and other assets.............................................. (7)
Accounts payable............................................................... (441)
Accrued expenses............................................................... 159
---------
Net cash used in operating activities.............................................. (1,139)
INVESTING ACTIVITIES
Increase in related party receivables.............................................. (29)
Purchase of property and equipment................................................. (1,665)
---------
Net cash used in investing activities.............................................. (1,694)
---------
FINANCING ACTIVITIES
Proceeds from long-term debt....................................................... 2,420
Payments on long-term debt......................................................... (343)
Net increase in line of credit..................................................... 935
---------
Net cash provided by financing activities.......................................... 3,012
---------
Net increase in cash............................................................... 179
Cash at beginning of period........................................................ 3
---------
Cash at end of period.............................................................. $ 182
---------
---------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest......................................................................... $ 229
See accompanying notes.
F-22
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 25, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Aeromil Engineering Company (the "Company"), a closely held California
corporation, manufactures medium-sized parts for aerospace customers,
specializing in the precision machining of hard metals such as titanium, as well
as the high-speed precision machining of aluminum.
Effective on the close of business on November 25, 1997 the Company sold
substantially all of its net assets to Compass Aerospace Corporation for
$7,985,000 in cash. The Company's financial statements have been prepared on a
historical basis and, as such, do not reflect any adjustments that may result
from the sale.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to limited number of customers within the aerospace
and defense industry. Credit is extended based upon an evaluation of each
customer's financial condition, with terms consistent in the industry and no
collateral required. The Company has historically incurred minimal credit
losses.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company for loans with
similar terms or maturity, approximate the carrying amounts in the financial
statements.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions.
INVENTORIES
Inventories which consist primarily of work-in-process, are valued at
average cost, which approximates first-in first-out cost, and finished goods and
are stated at the lower of cost or market. Finished goods amounted to
approximately $192,000 at November 25, 1997.
F-23
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The provision for depreciation of property and equipment is generally
computed on the straight-line method over the following useful lives:
Machinery and equipment............. 8 - 10 years
Furniture and fixtures.............. 5 years
Automotive equipment................ 3 - 5 years
Leasehold improvements.............. Term of lease or life of asset,
whichever is shorter
INCOME TAXES
The Company adopted S corporation status for both federal and state income
tax purposes. Accordingly, the Company has no current liability or provision for
federal taxes based on income. The provision for California franchise tax is at
the statutory rate applicable to S corporations.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. The effect of these programs is estimated and current period sales
and cost of sales are adjusted accordingly.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income," which is effective for
financial statements for periods beginning after December 15, 1997. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. The Company believes
there will be no impact on its financial statements due to the adoption of
Statement 130.
In June 1997 the FASB also issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
financial statements for periods beginning after December 15, 1997. At that
time, the Company will be required to report financial and descriptive
information about its reportable operating segments. The Company believes there
will be no impact on its financial statements due to the adoption of Statement
131.
F-24
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, which is recorded at
cost (in thousands):
NOVEMBER 25,
1997
-------------
Automotive equipment............................................................ $ 85
Furniture and fixtures.......................................................... 421
Leasehold improvements.......................................................... 450
Machinery and equipment......................................................... 12,030
------
12,986
Allowance for depreciation...................................................... (8,126)
------
$ 4,860
------
------
3. LOAN PAYABLE, STOCKHOLDER
During 1996, the Company received an advance of $677,000 from a Company
stockholder. The loan is unsecured, non-interest bearing and payable on demand.
4. LINE OF CREDIT
The Company has a line of credit with National Bank of Southern California
which provides for borrowings up to $1,500,000. Interest is payable monthly at
1% over the Wall Street Journal's prime interest rate. The balance outstanding
was $1,445,000 at November 25, 1997. The line of credit is guaranteed by the
Company's stockholders and is secured by substantially all of the Company's
assets.
5. LONG-TERM DEBT
The following is a summary of long-term debt at November 25, 1997 (in
thousands):
Note payable to National Bank of Southern California, payable in
monthly installments of $25,000 including interest at 1% over
prime, maturity date January 3, 2001, secured by one Cincinnati
Milacron milling machine and attachments........................... $ 750
Note payable to National Bank of Southern California, payable in
monthly installments of $25,000 plus interest at 1% over prime,
maturity July 30, 2002, secured by assets of the Company........... 1,406
---------
2,156
Long-term Debt, less current portion................................ (600)
---------
$ 1,556
---------
---------
F-25
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
5. LONG-TERM DEBT (CONTINUED)
Future minimum payments of long-term debt are (in thousands):
1998................................................................ $ 600
1999................................................................ 558
2000................................................................ 537
2001................................................................ 300
2002................................................................ 161
---------
$ 2,156
---------
---------
6. PROFIT SHARING PLANS
The Company has a profit-sharing plan covering all of its employees.
Contributions to the plan are at the discretion of the Board of Directors and
may not exceed the maximum amount permitted by the Internal Revenue Code. The
Company did not make a contribution to the plan during the period from January
1, 1997 through November 25, 1997.
The Company has also adopted a profit sharing plan which qualifies under
Section 401(k) of the Internal Revenue Code. The plan covers all eligible
employees who may elect to contribute a percentage of their gross earnings to
the plan. Contributions to the plan by the Company equal up to a maximum of 6%
of each participating employee's annual salary. The Company's contribution to
the plan for the period from January 1, 1997 through November 25, 1997 was
$50,000.
7. PROVISION FOR CALIFORNIA FRANCHISE TAX
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
state income tax purposes. The provision for California franchise tax consists
of $800 California minimum franchise tax. Significant components of the
Company's deferred tax assets and liabilities are as follows (in thousands):
NOVEMBER 25,
1997
-------------
Deferred tax assets:
Net Operating Loss carryforward............................................... $ 9
Tax credit carryforward....................................................... 37
------
$ 46
Deferred tax liabilities:
Tax depreciation in excess of book............................................ (15)
------
31
Valuation allowance............................................................. (31)
------
Net deferred taxes.............................................................. --
------
------
The Company is providing for deferred taxes using a rate of 1.5% for
California purposes.
F-26
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
7. PROVISION FOR CALIFORNIA FRANCHISE TAX (CONTINUED)
For California purposes, the Company has a net operating loss carryforward
of $1,097,000 available to offset its state taxable income in future years,
expiring through 2012. The Company also has an enterprise zone sales tax credit
carryforward of $36,900 available to offset its state income tax in future
years, expiring in 2010.
8. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases its manufacturing and office facility and its warehouse
space from a shareholder under ten-year noncancelable operating leases expiring
on November 25, 2007. The leases provide for periodic adjustments to the monthly
rent payments based on changes in the consumer price index. The leases also
require the Company to pay property taxes. Rent expense under these leases
amounted to $354,000 during the period from January 1, 1997 through November 25,
1997.
Future minimum lease payments by year under these leases consisted of the
following as of November 26, 1997 (in thousands):
1998........................................ $ 467
1999........................................ 471
2000........................................ 513
2001........................................ 513
2002........................................ 513
Thereafter.................................. 2,523
---------
$ 5,000
9. REVENUES FROM MAJOR CUSTOMERS
Due to the nature of the aerospace industry, the Company conducts a major
portion of its business with a limited number of customers. For the period from
January 1, 1997 through November 25, 1997, revenues from one major customer
amounted to 79% of sales. The total accounts receivable from this customer at
November 25, 1997 amounted to 70% of the total trade accounts receivable
balance.
10. IMPACT ON YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will replace
its software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company presently believes that with
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such conversions are
not made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
F-27
AEROMIL ENGINEERING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 25, 1997
10. IMPACT ON YEAR 2000 (UNAUDITED) (CONTINUED)
The Company will initiate formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company has
determined it has no exposure to contingencies related to the Year 2000 issue
for the products it has sold.
The Company anticipates completing the Year 2000 project no later than
December 31, 1998, which is prior to any anticipated impact on its operating
systems. Company management is currently working with outside consultants to
estimate the costs associated with replacing or modifying its operating systems.
The total cost of the project is expected to be funded through operating cash
flows and will be capitalized or expensed based upon generally accepted
accounting principles and corporate policy. To date, the Company has not
incurred any costs related to the assessment of, and preliminary efforts on, its
Year 2000 project and the development of a modification plan, purchase of new
systems and systems modifications.
F-28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Brittain Machine, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Brittain
Machine, Inc. and Subsidiary as of April 21, 1998, and the related consolidated
statements of earnings and retained earnings and cash flows for the period July
1, 1997 through April 21, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Brittain
Machine, Inc. and Subsidiary as of April 21, 1998, and the consolidated results
of their operations and their consolidated cash flows for the period July 1,
1997 through April 21, 1998 in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Wichita, Kansas
July 9, 1998
F-29
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
APRIL 21, 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................. $1,683,235
Accounts receivable
Trade accounts receivable............................................... 7,672,400
Other................................................................... 46,955
Inventories............................................................... 8,845,527
Refundable income taxes................................................... 401,691
Prepaid expenses and other................................................ 73,147
Deferred income taxes..................................................... 606,936
----------
Total current assets................................................ 19,329,891
PROPERTY AND EQUIPMENT, AT COST
Land...................................................................... $ 200,604
Buildings................................................................. 3,691,276
Machinery and equipment................................................... 20,828,710
Vehicles.................................................................. 148,425
Office equipment.......................................................... 730,218
Construction in progress.................................................. 2,892,234
----------
28,491,467
Less accumulated depreciation............................................. 15,134,005 13,357,462
----------
INVESTMENTS AND OTHER ASSETS
Funds held by trustee..................................................... 55,408
Bond issuance costs....................................................... 33,682 89,090
---------- ----------
$32,776,443
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................... $1,784,819
Accrued payroll, bonuses and employee benefits............................ 3,992,423
Payable to affiliate...................................................... 1,600,000
Other accrued liabilities................................................. 233,937
Current maturities of capital lease obligations........................... 428,757
Current maturities of long-term debt...................................... 508,151
Current maturities of industrial revenue bonds............................ 55,000
----------
Total current liabilities........................................... 8,603,087
LONG-TERM LIABILITIES
Capital lease obligations................................................. 1,585,953
Long-term debt............................................................ 551,809
Industrial revenue bonds.................................................. 645,000
Deferred income taxes..................................................... 1,147,273
----------
3,930,035
STOCKHOLDERS' EQUITY
Common stock, Class A, voting, par value $1 Authorized--300,000 shares
Issued and outstanding--90,000 shares................................... $ 90,000
Common stock, Class B, nonvoting, par value $1 Authorized--300,000 shares
Issued and outstanding--90,000 shares................................... 90,000
Additional paid-in capital................................................ 55,004
Retained earnings......................................................... 20,008,317 20,243,321
---------- ----------
$32,776,443
----------
----------
The accompanying notes are an integral part of this statement.
F-30
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
PERIOD JULY 1, 1997 THROUGH APRIL 21, 1998
Sales.......................................................................... $49,682,444
Cost of sales.................................................................. 34,640,582
----------
Gross margin on sales.......................................................... 15,041,862
General, administrative and selling expenses................................... 2,966,547
Nonrecurring management and employee bonuses paid in connection with sale of
Company...................................................................... 3,831,472
----------
Earnings from operations....................................................... 8,243,843
Other income (expense)
Interest income.............................................................. 13,327
Interest expense............................................................. (398,808)
Loss on sale of assets....................................................... (59,184)
Other........................................................................ 79,410
----------
(365,255)
----------
Earnings before income taxes................................................... 7,878,588
Income taxes................................................................... 2,901,353
----------
NET EARNINGS............................................................. 4,977,235
Retained earnings at July 1, 1997.............................................. 15,031,082
----------
Retained earnings at April 21, 1998............................................ $20,008,317
----------
----------
The accompanying notes are an integral part of this statement.
F-31
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD JULY 1, 1997 THROUGH APRIL 21, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net earnings.................................................................. $4,977,235
Adjustments to reconcile net earnings to net cash provided by operating
activities
Depreciation and amortization............................................... 1,510,526
Deferred income taxes....................................................... 72,078
Loss on disposal of property and equipment.................................. 59,184
Change in assets and liabilities............................................
Increase in accounts receivable........................................... (2,618,103)
Increase in income taxes receivable....................................... (294,205)
Decrease in inventories................................................... 2,132,289
Increase in accounts payable.............................................. 172,920
Increase in accrued payroll, bonuses and employee benefits................ 2,273,572
Other..................................................................... (307,565)
----------
Net cash provided by operating activities............................... 7,977,931
Cash flows from investing activities
Purchase of property and equipment............................................ (3,558,952)
Proceeds from disposal of property and equipment.............................. 24,418
----------
Net cash used in investing activities................................... (3,534,534)
Cash flows from financing activities
Net increase in payable to affiliate.......................................... 1,600,000
Net decrease in line of credit................................................ (3,855,000)
Repayments of long-term debt and industrial revenue bonds..................... (702,314)
Repayments of capital lease obligations....................................... (258,125)
----------
Net cash used in financing activities................................... (3,215,439)
----------
Net increase in cash and cash equivalents....................................... 1,227,958
----------
Cash and cash equivalents at July 1, 1997....................................... 455,277
----------
Cash and cash equivalents at April 21, 1998..................................... $1,683,235
----------
----------
The accompanying notes are an integral part of this statement.
F-32
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 21, 1998
NOTE A--SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. BUSINESS ACTIVITY, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Brittain Machine, Inc. manufactures parts according to customer
specification primarily for use in the aerospace industry. The Company also
designs, manufactures and sells tooling, machinery and equipment for use in the
aerospace industry.
Wichita Manufacturing, Inc., a wholly-owned subsidiary, is located in
Cerritos, California, and is engaged in the same line of business as Brittain
Machine, Inc.
The consolidated financial statements include the consolidated accounts of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita Manufacturing,
Inc. immediately prior to the sale of the Company to Compass Aerospace
Corporation (see Note L). All significant intercompany accounts have been
eliminated.
2. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
3. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. INVENTORIES
Inventories are stated at the lower of weighted average cost or net
realizable value.
5. PROPERTY AND EQUIPMENT
Land, buildings and equipment are carried at cost. Major additions and
betterments are charged to the property accounts while replacements, maintenance
and repairs which do not improve or extend the life of the respective assets are
expensed currently. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives are as follows:
10-30
Buildings....................................................... years
Machinery and equipment......................................... 7-10 years
Vehicles........................................................ 4- 6 years
Office equipment................................................ 5- 7 years
F-33
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
6. INCOME TAXES
The Company files a consolidated income tax return with its subsidiary.
Deferred income tax assets and liabilities are determined based on the
temporary differences between the financial accounting and tax basis of assets
and liabilities. Deferred tax assets or liabilities at the end of each period
are determined using the currently enacted tax rate expected to apply to taxable
income in the periods in which the deferred tax asset or liability is expected
to be realized or settled.
7. SELF INSURANCE
The Company participates in various self-insurance programs for medical and
workers' compensation risks. In connection with these programs the Company has
mitigated its exposure through the purchase of stipulated stop-loss coverage
with insurance companies. The Company estimates and accrues its liability for
the self-insurance portions of the risks covered by such programs.
8. CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with maturities of less than three
months to be cash equivalents.
9. REVENUE RECOGNITION
The Company's sales contracts are generally of a short-term nature and are
billed upon delivery. Revenue from such contracts is recognized upon passage of
title to the customer which, in most cases, coincides with shipments of the
related products to customers. Provisions for anticipated losses on contracts,
if any, are made currently as the amount of the loss is determinable.
NOTE B--INVENTORIES
Inventories consist of the following at April 21, 1998:
Raw material and supplies....................................... $2,889,886
Work in progress................................................ 5,306,881
Finished goods.................................................. 648,760
---------
$8,845,527
---------
---------
NOTE C--LINE OF CREDIT
At April 21, 1998, the Company had available a line of credit with a bank
for up to $5,000,000. There were no borrowings outstanding at April 21, 1998.
Interest is payable monthly on the outstanding balance at a variable rate equal
to the bank's base rate (9.5% at April 21, 1998). There are no compensating
balance or commitment fee requirements. Borrowings under the line of credit are
collateralized by substantially all assets of the Company.
F-34
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE D--INCOME TAXES
Income tax expense for the period July 1, 1997 through April 21, 1998
consists of the following:
Current......................................................... $2,829,275
Deferred........................................................ 72,078
---------
$2,901,353
---------
---------
The principal reason for the variation between income taxes computed at the
federal tax rate of 34% and actual income taxes is state income tax expense.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at April 21, 1998 are as follows:
Deferred tax assets
Inventory valuation differences............................... $ 438,819
Accrued expenses not deductible until paid.................... 168,117
---------
606,936
Deferred tax liabilities
Depreciation of property and equipment........................ 891,579
Capital leases treated as operating leases for tax purposes... 255,694
---------
1,147,273
---------
Net deferred tax liability.................................. $ 540,337
---------
---------
NOTE E--LONG-TERM DEBT
Long-term debt consists of the following at April 21, 1998:
Note payable to bank, payable in monthly installments including
variable interest at the bank's base interest rate adjusted
annually (effective rate 9.25% April 21, 1998), due in 2000
and collateralized by certain equipment and machinery......... $ 906,452
Note payable to bank, payable in monthly installments including
variable interest, due in 1998 and collateralized by a
$250,000 real estate mortgage................................. $ 7,458
Note payable to former stockholder, payable in equal monthly
installments including fixed interest at 9%, due in 2007--not
collateralized................................................ 146,050
---------
1,059,960
Less current maturities......................................... 508,151
---------
$ 551,809
---------
---------
F-35
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE E--LONG-TERM DEBT (CONTINUED)
In connection with the sale of the Company (see Note K), all notes payable
were paid in full subsequent to April 21, 1998.
NOTE F--INDUSTRIAL REVENUE BONDS
The Company financed $2,500,000 for the purchase of certain equipment and
the construction of a building through industrial revenue bonds issued by the
City of Wichita, Kansas and maturing through 2006. The principal and interest
(6% to 8%) on the bonds are serviced by biannual payments by the Company to a
trustee who then remits the funds to the City on the scheduled interest payment
and bond maturity dates. Certain of the proceeds from the bonds and the biannual
payments made by the Company have been and are deposited with the trustee.
The total amount of bonds outstanding at April 21, 1998 was $700,000.
Aggregate annual maturities are as follows:
1999.............................................................. $ 55,000
2000.............................................................. 60,000
2001.............................................................. 65,000
2002.............................................................. 70,000
2003.............................................................. 75,000
Thereafter........................................................ 375,000
---------
$ 700,000
---------
---------
NOTE G--RELATED PARTY TRANSACTIONS
LEASING ACTIVITIES
The Company has entered into several agreements with an entity, affiliated
by common stockholders, to lease a building and certain machinery and equipment.
Due to the related party relationship with the affiliate and based upon the
underlying economic substance of the leasing arrangements, the leases have been
recorded as capital lease obligations. The recorded lease obligations represent
the outstanding principal balance on the loans incurred by the affiliated entity
to finance that entity's purchase of the building and machinery and equipment
(the "underlying debt"). In addition, the Company is the guarantor of such debt.
A summary of lease payments made during the period July 1, 1997 through
April 21, 1998 under these capital leases is as follows:
Total lease payments............................................. $ 653,100
Amount representing interest..................................... (105,401)
Amount representing excess lease payments........................ (289,574)
---------
Principal payments............................................... $ 258,125
---------
---------
F-36
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the leases, property, plant and equipment at April 21,
1998 included the following:
Machinery and equipment......................................... $2,293,024
Building........................................................ 347,561
---------
2,640,585
Less accumulated depreciation................................... (566,142)
---------
$2,074,443
---------
---------
Depreciation expense for the property under lease was $307,270 for the
period July 1, 1997 through April 21, 1998.
The following is a schedule by years of future minimum lease payments under
capital leases:
1999.......................................................... $ 975,720
2000.......................................................... 975,720
2001.......................................................... 751,720
2002.......................................................... 551,720
2003.......................................................... 311,720
Thereafter.................................................... 1,005,480
----------
Total minimum lease payments.................................... 4,572,080
Amount representing interest.................................... (521,176)
Amount representing excess lease payments....................... (2,036,194)
----------
Total capital lease obligations................................. 2,014,710
Less current maturities......................................... 428,757
----------
$1,585,953
----------
----------
In connection with the sale of the Company (see Note K), all capital leases
were paid in full subsequent to April 21, 1998.
In addition, the Company leased equipment under an operating lease from this
affiliated entity which expired March 1, 1998. The lease which began March 1996
provided for monthly payments of $14,000 per month.
The Company also has a month-to-month rental agreement with a stockholder
for two warehouses. In connection with such agreement rental expense charged to
operations by the Company for the period July 1, 1997 through April 21, 1998 was
$33,500.
OTHER TRANSACTIONS
The Company purchased goods from an entity controlled by the spouse of a
stockholder in the amount of $2,956,000 during the period July 1, 1997 through
April 21, 1998. An amount of $204,000 was due to such affiliate at April 21,
1998 and was included in accounts payable in the accompanying consolidated
balance sheet. The Company also paid $344,000 to an individual related to the
Company's
F-37
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
principal stockholders during the period July 1, 1997 through April 21, 1998 for
deburring services performed.
NOTE H--RETIREMENT PLAN
All employees who have completed one year of service and who have attained
21 years of age are eligible to participate in the Company's Profit Sharing
Retirement Plan. Contributions to the Plan are discretionary and made by the
Company for amounts that are determined by the Board of Directors based on a
percentage of each participant's annual compensation. Employees may also
contribute a portion of their compensation to the Plan. The Company charged
$864,000 to expense pursuant to the plan during the period July 1, 1997 through
April 21, 1998.
NOTE I--COMMITMENTS
The Company provides group medical insurance for its employees through a
self-insured medical plan. The Company has purchased a stop-loss insurance
policy that will pay claims in excess of $30,000 per year per individual and in
excess of annual aggregate claims of $420,000.
The Company is self-insured for workers' compensation claims. The Company
has purchased a stop-loss insurance policy that pays workers' compensation
claims in excess of $175,000 per occurrence and aggregate annual claims in
excess of $430,292. The Company has obtained a $655,000 letter of credit from a
bank in favor of the State of Kansas in connection with a self-insurance
program.
Wichita Manufacturing, Inc. leases its facility located in Cerritos,
California at a rental cost of $12,000 per month through October 31, 1998 for a
total commitment of $72,000.
NOTE J--CONTINGENCY
In January 1996, the Company was found liable in a civil action for, inter
alia, breach of contract and termination of joint venture/partnership associated
with a relationship the Company had with another entity. A judgment was recorded
against the Company in the amount of $600,000. The Company secured a $750,000
letter of credit in favor of the plaintiffs and filed a Notice of Appeal. The
plaintiffs filed a Notice of Cross-Appeal seeking damages of approximately
$1,500,000. Through April 21, 1998 the Company recorded a liability for the
$600,000 judgment plus $116,000 of post-judgment interest. On April 21, 1998,
the Company's principal owner assumed the liability. In connection with the
assumption of the liability, the Company transferred life insurance policies
with recorded cash surrender values of $614,000 to the principal owner. The
Company recorded a gain of $102,000 in connection with the transaction.
NOTE K--CONCENTRATION OF SALES
Substantially all of the Company's sales are made to a very few customers.
These customers are typically large companies in the aerospace industry. If the
Company were to lose one or more of these customers and were unable to find
replacement customers, sales would be adversely affected. Two customers
accounted for 73% and 13% of sales for the period July 1, 1997 through April 21,
1998. Amounts due from these customers accounted for 68% and 12% of total
accounts receivable at April 21, 1998.
F-38
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
NOTE L--SALE OF COMPANY
Effective April 21, 1998, the Company was sold and became a subsidiary of
Compass Aerospace Corporation (Compass). At April 21, 1998, Compass had advanced
the Company $1,600,000 which is shown as due to affiliate in the accompanying
balance sheet.
In anticipation of and in connection with the sale of the Company, certain
nonrecurring management and employee bonuses were declared. Bonuses totaling
$1,600,000 were paid to management/minority stockholders of the Company. Bonuses
and related payroll taxes totaling $2,231,472 were accrued to other employees of
the Company.
NOTE M--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest...................................................... $ 407,788
Income taxes.................................................. 3,286,467
Noncash investing and financing activity
Acquisition of property and equipment under capital lease
obligations................................................. 785,061
Transfer of life insurance policies and assumption of
litigation liability by the Company's principal owner....... 614,000
F-39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Brittain Machine, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Brittain
Machine, Inc. and Subsidiary as of June 30, 1997, and the related consolidated
statements of earnings and retained earnings and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Brittain Machine, Inc. and Subsidiary as of June 30, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Wichita, Kansas
October 17, 1997
F-40
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Brittain Machine, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Brittain
Machine, Inc. and Subsidiary as of June 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Brittain Machine, Inc. and Subsidiary at June 30, 1996, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Wichita, Kansas
September 3, 1996
F-41
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
(DOLLARS IN THOUSANDS)
ASSETS
1997 1996
--------- ---------
CURRENT ASSETS
Cash and cash equivalents................................................................. $ 455 $ 91
Accounts receivable
Trade accounts receivable............................................................... 4,913 5,386
Other................................................................................... 188 109
Income tax receivable..................................................................... 107 --
Inventories............................................................................... 10,978 4,878
Note receivable from affiliate............................................................ -- 207
Prepaid expenses and other................................................................ 50 56
Deferred income taxes..................................................................... 694 608
--------- ---------
Total current assets.................................................................. 17,385 11,335
PROPERTY AND EQUIPMENT, AT COST
Land...................................................................................... 201 199
Buildings................................................................................. 3,603 2,812
Machinery and equipment................................................................... 19,754 18,669
Vehicles.................................................................................. 180 175
Office equipment.......................................................................... 775 679
Construction in progress.................................................................. 99 6
--------- ---------
24,612 22,540
Less accumulated depreciation............................................................. 14,007 12,357
--------- ---------
10,605 10,183
INVESTMENTS AND OTHER ASSETS
Funds held by trustee..................................................................... 56 52
Cash surrender value of life insurance.................................................... 520 486
Bond issuance costs....................................................................... 36 39
--------- ---------
612 577
--------- ---------
$ 28,602 $ 22,095
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-42
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
--------- ---------
CURRENT LIABILITIES
Revolving note payable to bank............................................................ $ 3,855 $ 525
Accounts payable.......................................................................... 1,612 923
Accrued payroll and employee benefits..................................................... 1,719 1,388
Litigation judgment payable............................................................... 672 600
Income taxes payable...................................................................... -- 1,621
Other accrued liabilities................................................................. 366 187
Current maturities of capital lease obligations........................................... 285 156
Current maturities of long-term debt...................................................... 741 972
Current maturities of industrial revenue bonds............................................ 50 400
--------- ---------
Total current liabilities............................................................. 9,300 6,772
LONG-TERM LIABILITIES
Capital lease obligations................................................................. 1,203 507
Long-term debt............................................................................ 971 1,710
Industrial revenue bonds.................................................................. 700 750
Deferred income taxes..................................................................... 1,162 996
--------- ---------
4,036 3,963
STOCKHOLDERS' EQUITY
Common stock, Class A, voting, par value $1
Authorized--300,000 shares
Issued and outstanding--90,000 shares................................................... 90 90
Common stock, Class B, nonvoting, par value $1
Authorized--300,000 shares
Issued and outstanding--90,000 shares................................................... 90 90
Additional paid-in capital................................................................ 55 55
Retained earnings......................................................................... 15,031 11,125
--------- ---------
15,266 11,360
--------- ---------
$ 28,602 $ 22,095
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-43
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
Sales....................................................................................... $ 35,481 $ 26,892
Cost of sales............................................................................... 25,656 19,076
--------- ---------
Gross margin on sales....................................................................... 9,825 7,816
General, administrative and selling expenses................................................ 2,770 2,353
--------- ---------
Earnings from operations.................................................................... 7,055 5,463
Other income (expense)
Write off note receivable from affiliate.................................................. (386) --
Interest income........................................................................... 11 28
Interest expense.......................................................................... (409) (431)
Gain (loss) on sale of assets............................................................. 5 (8)
Litigation expense........................................................................ (73) (600)
Other..................................................................................... (89) (69)
--------- ---------
(941) (1,080)
--------- ---------
Earnings before income taxes................................................................ 6,114 4,383
Income taxes................................................................................ 2,208 1,637
--------- ---------
NET EARNINGS.......................................................................... 3,906 2,746
Retained earnings at beginning of year...................................................... 11,125 8,379
--------- ---------
Retained earnings at end of year............................................................ $ 15,031 $ 11,125
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-44
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
Cash flows from operating activities
Net earnings.............................................................................. $ 3,906 $ 2,746
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities
Depreciation and amortization........................................................... 1,669 1,392
Deferred income taxes................................................................... 80 (280)
(Gain) loss on disposal of property and equipment....................................... (5) 8
Write-off uncollectible note receivable from affiliate.................................. 386 --
Change in assets and liabilities
(Increase) decrease in accounts receivable............................................ 393 (2,384)
Increase in income taxes receivable................................................... (107) --
Increase in inventories............................................................... (6,099) (2,240)
Increase in accounts payable.......................................................... 688 302
Increase (decrease) in accrued payroll and employee benefits.......................... 331 (28)
Increase in litigation judgment payable............................................... 73 600
Increase (decrease) in income taxes payable........................................... (1,621) 2,404
Other................................................................................. 151 (139)
--------- ---------
Net cash provided by (used in) operating activities................................. (155) 2,381
Cash flows from investing activities
Decrease in marketable securities......................................................... -- 12
Purchase of property and equipment........................................................ (1,072) (1,519)
Proceeds from disposal of property and equipment.......................................... 7 17
Increase in note receivable from affiliate................................................ (179) (129)
--------- ---------
Net cash used in investing activities................................................... (1,244) (1,619)
Cash flows from financing activities
Net change in funds held by trustee....................................................... (3) 377
Net change in line of credit.............................................................. 3,331 165
Repayments of long-term debt and industrial revenue bonds................................. (1,370) (1,299)
Repayments of capital lease obligations................................................... (195) (78)
--------- ---------
Net cash provided by (used in) financing activities..................................... 1,763 (835)
--------- ---------
Net increase (decrease) in cash and cash equivalents........................................ 364 (73)
Cash and cash equivalents at beginning of year.............................................. 91 164
--------- ---------
Cash and cash equivalents at end of year.................................................... $ 455 $ 91
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-45
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. BUSINESS ACTIVITY AND PRINCIPLES OF CONSOLIDATION
Brittain Machine, Inc. manufactures parts according to customer
specification primarily for use in the aerospace industry. The Company also
designs, manufactures and sells tooling, machinery and equipment for use in the
aerospace industry.
Wichita Manufacturing, Inc., a wholly-owned subsidiary, is located in
Cerritos, California, and is engaged in the same line of business as Brittain
Machine, Inc.
The consolidated financial statements include the consolidated accounts of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita Manufacturing,
Inc. All significant intercompany accounts have been eliminated.
2. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
3. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. INVENTORIES
Inventories are stated at the lower of weighted average cost or net
realizable value.
5. PROPERTY AND EQUIPMENT
Land, buildings and equipment are carried at cost. Major additions and
betterments are charged to the property accounts while replacements, maintenance
and repairs which do not improve or extend the life of the respective assets are
expensed currently.
F-46
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES--CONTINUED
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives are as follows:
10-30
Buildings....................................................... years
Machinery and equipment......................................... 7-10 years
Vehicles........................................................ 4-6 years
Office equipment................................................ 5-7 years
6. INCOME TAXES
The Company files a consolidated income tax return with its subsidiary.
Deferred income tax assets and liabilities are determined based on the
temporary differences between the financial accounting and tax basis of assets
and liabilities. Deferred tax assets or liabilities at the end of each period
are determined using the currently enacted tax rate expected to apply to taxable
income in the periods in which the deferred tax asset or liability is expected
to be realized or settled.
7. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company pays the premiums on certain life insurance policies insuring
the lives of two of its stockholders. The cumulative value of net premiums paid
by the Company on behalf of the beneficiary of such life insurance policies is
recorded as an asset as this amount is payable by the policy owner to the
Company upon death of the insured.
The cash surrender values of certain other life insurance contracts owned by
the Company are recorded as assets. The change in such cash surrender values is
accounted as an adjustment of premiums paid in determining the expense or income
to be recognized under the contract for the period.
8. SELF INSURANCE
The Company participates in various self-insurance programs for medical and
workers' compensation risks. In connection with these programs the Company has
mitigated its exposure through the purchase of stipulated stop-loss coverage
with insurance companies. The Company estimates its liability for the self-
insured portions of the risks covered by such programs and accrues appropriate
reserves.
9. CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with maturities of less than three
months to be cash equivalents.
10. REVENUE RECOGNITION
The Company's sales contracts are generally of a short-term nature and are
billed upon delivery. Revenue from such contracts is recognized upon passage of
title to the customer which, in most cases, coincides with shipments of the
related products to customers. Provisions for anticipated losses on contracts,
if any, are made currently as the amount of the loss is determinable.
F-47
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE B--INVENTORIES
Inventories consist of the following at June 30 (dollars in thousands):
1997 1996
--------- ---------
Raw material and supplies................................................ $ 3,108 $ 1,155
Work in progress......................................................... 7,260 3,445
Finished goods........................................................... 610 278
--------- ---------
$ 10,978 $ 4,878
--------- ---------
--------- ---------
NOTE C--LINE OF CREDIT
At June 30, 1997, the Company had available a line of credit with a bank for
up to $5,000,000, of which $3,855,000 and $524,519 was outstanding at June 30,
1997 and 1996, respectively. Interest is payable monthly on the outstanding
balance at a variable rate equal to the bank's base rate (9.25% at June 30,
1997). There are no compensating balance or commitment fee requirements.
Borrowings under the line of credit are collateralized by substantially all
assets of the Company.
NOTE D--INCOME TAXES
Income tax expense for the years ended June 30 consists of the following
(dollars in thousands):
1997 1996
--------- ---------
Current.................................................................... $ 2,128 $ 1,917
Deferred................................................................... 80 (280)
--------- ---------
$ 2,208 $ 1,637
--------- ---------
--------- ---------
The principal reason for the variation between income taxes computed at the
federal tax rate of 34% and actual income taxes is state income tax expense.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at June 30 are as follows (dollars in thousands):
1997 1996
--------- ---------
Deferred tax assets
Inventory valuation differences.......................................... $ 317 $ 393
Accrued expenses not deductible until paid............................... 458 377
--------- ---------
775 770
Deferred tax liabilities
Depreciation of property and equipment................................... 1,026 1,009
Capital leases treated as operating leases for tax purposes.............. 136 68
Other.................................................................... 81 81
--------- ---------
1,243 1,158
--------- ---------
Net deferred tax liability............................................. $ 468 $ 388
--------- ---------
--------- ---------
F-48
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE E--LONG-TERM DEBT
Long-term debt consists of the following at June 30 (dollars in thousands):
1997 1996
--------- ---------
Note payable to bank, payable in monthly installments including variable
interest at the bank's base interest rate adjusted annually (effective
rate 9.125% and 9.0% at June 30, 1997 and 1996, respectively), due in
2000 and collateralized by certain equipment and machinery............... $ 1,280 $ 1,692
Equipment loans payable to a finance company, payable in monthly
installments including interest at a fixed rate of 7.95% changing to a
variable rate during the final year of the loan, which will range from
the index rate (a) to the index rate plus 1.5% maturing at various dates
through 1998 and collateralized by the equipment financed and the
personal guarantees of two stockholders.................................. 238 751
Note payable to bank, payable in monthly installments including variable
interest, due in 1998 and collateralized by a $250,000 real estate
mortgage................................................................. 40 77
Unsecured note payable to former stockholder, payable in equal monthly
installments including fixed interest at 9%, due in 2007................. 154 162
--------- ---------
1,712 2,682
Less current maturities.................................................... 741 972
--------- ---------
$ 971 $ 1,710
--------- ---------
--------- ---------
(a) The index rate is a rate equal to the highest of (i) the Prime Rate of
Chemical Bank, (ii) the Wall Street Journal prime rate or (iii) the
commercial paper rate in effect from time to time.
Aggregate annual maturities are as follows for the years ending June 30
(dollars in thousands):
1998................................................................ $ 741
1999................................................................ 506
2000................................................................ 343
2001................................................................ 12
2002................................................................ 13
Thereafter.......................................................... 97
---------
$ 1,712
---------
---------
Interest capitalized during the years ended June 30, 1997 and 1996 was
$17,000 and $125,000 respectively.
NOTE F--INDUSTRIAL REVENUE BONDS
The Company financed $2,500,000 for the purchase of certain equipment and
the construction of a building through industrial revenue bonds issued by the
City of Wichita, Kansas and maturing through
F-49
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE F--INDUSTRIAL REVENUE BONDS (CONTINUED)
2006. The principal and interest (6% to 8%) on the bonds are serviced by
biannual payments by the Company to a trustee who then remits the funds to the
City on the scheduled interest payment and bond maturity dates. Certain of the
proceeds from the bonds and the biannual payments made by the Company have been
and are deposited with the trustee.
The total amount of bonds outstanding at June 30, 1997 and 1996 were
$750,000 and $1,150,000, respectively. Aggregate annual maturities are as
follows for the years ended June 30 (dollars in thousands):
1998................................................................. $ 50
1999................................................................. 55
2000................................................................. 60
2001................................................................. 65
2002................................................................. 70
Thereafter........................................................... 450
---------
$ 750
---------
---------
NOTE G--RELATED PARTY TRANSACTIONS
LEASING ACTIVITIES
The Company has entered into several agreements with an entity, affiliated
by common stockholders, to lease a building and certain machinery and equipment.
Due to the related party relationship with the affiliate and based upon the
underlying economic substance of the leasing arrangements, the leases have been
recorded as capital lease obligations. The recorded lease obligation represents
the outstanding principal balance on the loans incurred by the affiliated entity
to finance that entity's purchase of the building and machinery and equipment
(the "underlying debt"). In addition, the Company is the guarantor of such debt.
A summary of lease payments made during the years ended June 30 under these
capital leases is as follows (dollars in thousands):
1997 1996
--------- ---------
Total lease payments.......................................................... $ 483 $ 192
Amount representing interest.................................................. (72) (29)
Amount representing excess lease payments..................................... (216) (85)
--------- ---------
Principal payments............................................................ $ 195 $ 78
--------- ---------
--------- ---------
F-50
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the leases, property, plant and equipment at June 30
included the following (dollars in thousands):
1997 1996
--------- ---------
Machinery and equipment.................................................... $ 1,508 $ 836
Building................................................................... 348 --
--------- ---------
1,856 836
Less accumulated depreciation.............................................. (259) (16)
--------- ---------
$ 1,597 $ 820
--------- ---------
--------- ---------
Depreciation expense for the property under lease was $242,474 and $16,398
for the years ended June 30, 1997 and 1996, respectively.
The following is a schedule by years of future minimum lease payments under
capital leases (dollars in thousands):
Year ending June 30
1998............................................................. $ 736
1999............................................................. 736
2000............................................................. 736
2001............................................................. 448
2002............................................................. 272
Thereafter....................................................... 1,098
---------
Total minimum lease payments....................................... 4,026
Amount representing interest....................................... (457)
Amount representing excess lease payments.......................... (2,081)
---------
Total capital lease obligations.................................... 1,488
Less current maturities............................................ 285
---------
$ 1,203
---------
---------
In addition, the Company leases equipment under an operating lease from this
affiliated entity which expires March 1, 1998. The lease which began March 1996
provides for monthly payments of $14,000 per month.
The Company also has a month-to-month rental agreement with a stockholder
for two warehouses. In connection with such agreement rental expense charged to
operations by the Company for the years ended June 30, 1997 and 1996 was $60,000
annually.
OTHER TRANSACTIONS
The Company pays the premiums on certain policies insuring the lives of two
of its stockholders. The aggregate amount of such premiums paid during the years
ended June 30, 1997 and 1996 was $103,000 and $87,000, respectively.
F-51
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
The Company purchased goods from an entity controlled by the spouse of a
stockholder in the amount of $4,117,000 and $2,331,000 during 1997 and 1996,
respectively. Additionally, an amount of $502,000 and $285,000 was due to such
affiliate at June 30, 1997 and 1996, respectively, and was included in accounts
payable in the accompanying consolidated balance sheets. The Company also paid
to an individual related to the Company's principal stockholders $310,000 and
$186,000 during 1997 and 1996, respectively, for deburring services performed.
NOTE H--RETIREMENT PLAN
All employees who have completed one year of service and who have attained
age 21 years of age are eligible to participate in the Company's Profit Sharing
Retirement Plan. Contributions to the Plan are made by the Company for amounts
that are determined by the Board of Directors based on a percentage of each
participant's annual compensation. Employees may also contribute a portion of
their compensation to the Plan. During the years ended June 30, 1997 and 1996,
the Company charged $842,000 and $834,000 to expense pursuant to the Plan.
NOTE I--COMMITMENTS
The Company provides group medical insurance for its employees through a
self-insured medical plan. The Company has purchased a stop-loss insurance
policy that will pay claims in excess of $30,000 per year per individual and in
excess of annual aggregate claims of $420,000.
The Company is self-insured for workers' compensation claims. The Company
has purchased a stop-loss insurance policy that pays workers' compensation
claims in excess of $175,000 per occurrence and aggregate annual claims in
excess of $430,292. The Company has obtained a $655,000 letter of credit from a
bank in favor of the State of Kansas in connection with a self-insurance
program.
Wichita Manufacturing, Inc. leases its facility located in Cerritos,
California at a rental cost of $12,000 per month through October 31, 1998. The
lease provides an option for an extension of a three-year period. Future
noncancelable lease commitments are as follows (dollars in thousands):
1998................................................................. $ 144
1999................................................................. 48
---------
$ 192
---------
---------
The Company had at June 30, 1997 a commitment to purchase additional
equipment costing $1,748,000. The equipment is scheduled to be delivered in
December 1997.
NOTE J--CONTINGENCY
In January 1996, the Company was found liable in a civil action for, inter
alia, breach of contract and termination of joint venture/partnership associated
with a relationship the Company had with another entity. A judgment was recorded
against the Company in the amount of $600,000. However, the Company has filed a
Notice of Appeal. The plaintiffs have filed a Notice of Cross-Appeal seeking
damages of approximately $1,500,000. While the ultimate outcome of the
disposition of the matter is presently difficult
F-52
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE J--CONTINGENCY (CONTINUED)
to estimate, the Company recorded a provision during 1996 of $600,000 and
believes that the ultimate outcome will not have a material adverse effect on
its financial position. An additional provision of $72,500 was recorded in 1997
for post-judgment interest.
NOTE K--CONCENTRATION OF SALES
Nearly all of the Company's sales are made to a very few customers. These
customers are typically large companies in the aerospace industry. If the
Company were to lose one or more of these customers and were unable to find
replacement customers, sales would be adversely affected. One customer accounted
for 67% and 56% of sales for 1997 and 1996, respectively. Amounts due from this
customer accounted for 60% and 64% of total accounts receivable at June 30, 1997
and 1996, respectively.
NOTE L--SUPPLEMENTAL CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
Cash paid during the year for
Interest................................................................. $ 405 $ 586
Income taxes............................................................. 3,852 --
Noncash investing and financing activity
Acquisition of property and equipment under capital lease obligations.... 1,019 741
F-53
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Barnes Machine, Inc.
We have audited the accompanying balance sheets of Barnes Machine, Inc. as
of April 21, 1998 and September 30, 1997, and the related statements of income
and retained earnings and cash flows for the period from October 1, 1997 to
April 21, 1998 and for the year ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepting auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Barnes Machine, Inc. at
April 21, 1998 and September 30, 1997, and the results of its operations and its
cash flows for the period from October 1, 1997 to April 21, 1998 and the year
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Long Beach, California
August 12, 1998
F-54
BARNES MACHINE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
APRIL 21, SEPTEMBER 30,
1998 1997
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 687 $ 655
Accounts receivable less allowance for doubtful
accounts of $39
in 1998 and 1997.............................. 1,951 1,250
Inventories..................................... 1,861 1,005
Prepaid expenses................................ 26 27
Deferred assets................................. 41 25
----------- ------
Total current assets.............................. 4,566 2,962
Property and equipment, net....................... 2,106 1,401
Other assets...................................... 217 427
----------- ------
Total assets...................................... $ 6,889 $ 4,790
----------- ------
----------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 1,161 $ 711
Accrued expenses................................ 808 660
Loan payable--stockholders...................... -- 209
Current portion of long-term debt............... 153 147
----------- ------
Total current liabilities......................... 2,122 1,727
Long-term debt, less current portion.............. 631 722
Commitments
Deferred taxes.................................... 66 39
Stockholders' equity:
Common stock, par value $1 per share:
Authorized shares 50,000
Issued and outstanding shares 2,500........... 3 3
Capital in excess of par........................ 247 7
Retained earnings............................... 3,820 2,292
----------- ------
Total stockholders' equity........................ 4,070 2,302
----------- ------
Total liabilities and stockholders' equity........ $ 6,889 $ 4,790
----------- ------
----------- ------
See accompanying notes.
F-55
BARNES MACHINE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
OCTOBER 1, 1997 YEAR ENDED
TO SEPTEMBER 30,
APRIL 21, 1998 1997
--------------- -------------
Net sales...................................................................... $ 8,809 $ 7,693
Cost of sales.................................................................. 6,057 4,854
------ ------
Gross profit................................................................... 2,752 2,839
Selling, general and administrative expenses................................... 362 1,587
------ ------
Operating income............................................................... 2,390 1,252
Interest expense............................................................... 50 9
Other (income) expense, net.................................................... (4) (21)
------ ------
Income before income taxes..................................................... 2,344 1,264
Income tax expense............................................................. 816 438
------ ------
Net income..................................................................... 1,528 826
Retained earnings at beginning of period....................................... 2,292 1,466
------ ------
Retained earnings at end of period............................................. $ 3,820 $ 2,292
------ ------
------ ------
See accompanying notes.
F-56
BARNES MACHINE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
OCTOBER 1, 1997 YEAR ENDED
TO SEPTEMBER 30,
APRIL 21, 1998 1997
--------------- -------------------
OPERATING ACTIVITIES
Net income................................................................. $ 1,528 $ 826
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred taxes........................................................... 11 (1)
Depreciation............................................................. 171 208
Changes in operating assets and liabilities:
Accounts receivable.................................................... (701) (339)
Inventories............................................................ (856) (937)
Prepaid expenses and other assets...................................... 211 (425)
Accounts payable....................................................... 450 450
Accrued expenses....................................................... 148 113
------ ------
Net cash provided by (used in) operating activities........................ 962 (105)
INVESTING ACTIVITIES
Purchase of property and equipment......................................... (636) (931)
FINANCING ACTIVITIES
(Payments on) proceeds from long-term debt................................. (85) 868
Payment of loan payable to stockholder..................................... (209) (28)
------ ------
Net cash (used in) provided by financing activities........................ (294) 840
------ ------
Net increase (decrease) in cash............................................ 32 (196)
Cash and cash equivalents at beginning of period........................... 655 851
------ ------
Cash and cash equivalents at end of period................................. $ 687 $ 655
------ ------
------ ------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................................. $ 50 $ 9
Income taxes............................................................. $ 220 $ 361
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Donation of machinery and equipment by owners............................ $ 240 $ --
See accompanying notes.
F-57
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 21, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Barnes Machine, Inc. (the Company) manufactures small to medium-sized
structural parts for aerospace customers, specializing in precision machining of
titanium and steel and the high-speed precision machining of aluminum.
At the close of business on April 21, 1998, 100% of the issued and
outstanding common stock of the Company and land and buildings owned by the
stockholders were sold to Compass Aerospace, Inc. for a total sales price of
$13,620,000. Transactions related to the sale have been treated as subsequent
events and are not reflected in the accompanying financial statements. These
transactions include the repayment of the Company's interest bearing note, as
well as purchase price allocations which affect the carrying value of the
Company's assets and liabilities.
CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to a limited number of customers within the aerospace
and defense industry. Revenues from one major customer amounted to 96% of sales
for the seven months ended April 21, 1998 and 90% for the year ended September
30, 1997. Total accounts receivable from this customer amounted to 98% and 95%
of total trade accounts receivable at April 21, 1998 and September 30, 1997,
respectively. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent in the industry and no collateral
required. The Company has historically incurred minimal credit losses.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents and the current portion of
long-term debt approximate cost due to the short period of time to maturity.
Fair values of long-term debt, which have been determined based on borrowing
rates currently available to the Company for loans with similar terms of
maturity, approximate the carrying amounts in the financial statements.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions.
INVENTORIES
Inventories consist primarily of work-in-process which are recorded on a
weighted average basis, which approximates first-in first-out, and are stated at
the lower of cost or market.
F-58
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The provision for depreciation of property and equipment is generally
computed on the straight-line method over the following useful lives:
Machinery and equipment.............. 3 - 10 years
Furniture and fixtures............... 5 - 7 years
Automotive equipment................. 5 years
Leasehold improvements............... Term of lease or life of asset,
whichever is shorter
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. The effect of these programs is estimated and current period sales
and cost of sales are adjusted accordingly.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for financial
statements for fiscal years beginning after June 15, 1999, and which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. There will be no impact due to the adoption
of SFAS No. 133.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which is effective for financial
statements for periods beginning after December 15, 1997, and which revises and
standardizes disclosure requirements for pensions and other postretirement
benefits. The Company will revise its disclosures as necessary upon adoption of
SFAS No. 132.
In March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed for or Obtained for Internal Use," was issued,
which is effective for fiscal years beginning after December 15, 1998. SOP 98-1
requires capitalization and amortization of qualified computer software costs
over its estimated useful life. There will be no impact due to the adoption of
SOP 98-1.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-59
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, which is recorded at
cost (in thousands):
APRIL 21, SEPTEMBER 30,
1998 1997
--------- -------------
Automotive equipment................................................ $ 122 $ 121
Furniture and fixtures.............................................. 487 403
Leasehold improvements.............................................. 309 281
Machinery and equipment............................................. 3,017 2,279
--------- -------------
3,935 3,084
Allowance for depreciation.......................................... (1,829) (1,683)
--------- -------------
$ 2,106 $ 1,401
--------- -------------
--------- -------------
3. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes to be
paid for the respective periods ended and the change during each period in the
deferred tax assets and liabilities. Significant components of the Company's
deferred tax assets and liabilities are as follows (in thousands):
APRIL 21, SEPTEMBER 30,
1998 1997
----------- ---------------
Deferred tax assets:
Accrued expenses not deductible for tax........................... $ 41 $ 25
Deferred tax liabilities:
Tax depreciation over book........................................ (66) (39)
----- -----
Net deferred tax liability.......................................... $ (25) $ (14)
----- -----
----- -----
Significant components of the provision for income taxes are as follows (in
thousands):
FOR THE
PERIOD FROM
OCTOBER 1, 1997 YEAR ENDED
THROUGH SEPTEMBER 30,
APRIL 21, 1998 1997
----------------- ---------------
Federal:
Current..................................................... $ 805 $ 439
Deferred.................................................... 11 (1)
----- -----
$ 816 $ 438
----- -----
----- -----
F-60
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEBT
The Company has a promissory note with Keybank National Association, payable
in monthly installments of $17,936 plus interest at 8.50% with a maturity date
of October 15, 2002. The promissory note is secured by a milling machine.
Maturities of long-term debt are as follows (in thousands):
1999............................................................ $ 153
2000............................................................ 167
2001............................................................ 182
2002............................................................ 198
2003 84
---------
Total........................................................... $ 784
---------
---------
The Company has an unsecured line of credit with Key Bank, which provides
for borrowings up to $500,000 under a revolving line of credit that bears
interest at 1% over prime. There was no balance outstanding at April 21, 1998 or
September 30, 1997.
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company rents office, plant and warehouse space on a monthly basis from
its stockholders. Property rent expense amounted to $193,000 for the seven
months ended April 21, 1998 and $251,000 for the year ended September 30, 1997.
The Company also leases machinery and equipment from its stockholders. The
machinery and equipment lease has a one-year term and may be cancelled with
sixty days' advance notice. Rent expense under this arrangement amounted to
$78,000 for the seven months ended April 21, 1998 and $139,000 for the year
ended September 30, 1997. The leases require the Company to pay property taxes.
The Company had outstanding notes payable to its stockholders for $209,000
at September 30, 1997. These notes were repaid during the period ended April 21,
1998. Interest expense was $3,000 and $6,000 for the period ended April 21, 1998
and the year ended September 30, 1997, respectively.
The Company is a defendant in various legal proceedings arising in the
normal course of business. In consultation with legal counsel, management has
reviewed these proceedings and, based upon current information, believes that
the ultimate disposition thereof will have no material effect on the Company's
consolidated financial position.
6. PROFIT SHARING PLAN
The Company has adopted a profit sharing plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan covers all eligible employees who
may elect to contribute a percentage of their gross earnings to the Plan.
Contributions to the plan by the Company are discretionary. Contributions to the
profit sharing plan for the period from October 1, 1997 to April 21, 1998 and
the year ended September 30, 1997 were $10,000 and $150,000, respectively.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Company does not anticipate that there would be a material impact on the
results of operations or cash flows of the Company related to the Year 2000
issue. The Year 2000 issue addresses computer programs which have time-sensitive
software that recognizes a date using "00" as the year 1900 rather than
F-61
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
the year 2000. The Company converted to a new computer system in 1998 and is
currently seeking a Year 2000 compliant certification from the Company's
software vendor. In addition, the Company has an ongoing program to test its
systems for such compliance. The major business systems of the Company are not
vulnerable to third parties failure to remediate their own Year 2000 issues, as
the Company's interface with third parties, including customers and vendors,
does not involve date-dependent computer communication systems. The Company
believes that with the conversions to new software and modifications to other
existing software, the Year 2000 issue will not pose significant operational
problems for its computer system. In the event the remaining conversions and
modifications are not made, or are not completed timely, the Year 2000 issue is
not expected to have a material impact on the operations of the Company, as the
products sold by the Company and the processing and delivery equipment used are
not date-dependent, minimizing the impact of any Year 2000 issues related to
meeting customer requirements.
As the Company has been incurring costs related to this project since 1997
and no significant additional costs have been identified, the Company does not
anticipate a material impact on the results of operations related to the Year
2000 issue.
F-62
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sea-Lect Products Inc. and Affiliate
We have audited the accompanying combined balance sheets of Sea-Lect
Products Inc. and Affiliate as of May 11, 1998 and December 31, 1997 and the
related combined statements of income, shareholders' equity, and cash flows for
the period from January 1, 1998 through May 11, 1998 and for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Sea-Lect Products
Inc. and Affiliate at May 11, 1998 and December 31, 1997, and the combined
results of their operations and their cash flows for the period from January 1,
1998 through May 11, 1998, and for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Long Beach, California
September 25, 1998
F-63
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED BALANCE SHEETS
DECEMBER 31,
MAY 11, 1998 1997
------------ ------------
ASSETS
Current assets:
Cash............................................................................... $ 6,260 $ 70,915
Accounts receivable net of an allowance of $100,000 in 1998 and $54,000 in 1997.... 2,245,912 1,531,163
Inventories:
Raw materials.................................................................... 729,505 513,165
Work in process.................................................................. 1,334,515 1,322,138
Finished goods................................................................... 518,591 729,572
------------ ------------
Total current assets................................................................. 4,834,783 4,166,953
Property and equipment:
Machinery and equipment............................................................ 3,582,271 3,582,271
Automobiles........................................................................ 132,902 132,902
Office equipment................................................................... 98,167 98,167
Leasehold improvements............................................................. 93,843 93,843
------------ ------------
3,907,183 3,907,183
Less accumulated depreciation........................................................ (2,750,366) (2,670,659)
------------ ------------
Total property and equipment......................................................... 1,156,817 1,236,524
------------ ------------
Total assets......................................................................... $ 5,991,600 $5,403,477
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit..................................................................... $ 1,316,422 $ 701,755
Shareholders' notes payable........................................................ 348,257 375,182
Accounts payable................................................................... 1,165,825 713,179
Wage and related accruals.......................................................... 421,705 304,808
Other accrued liabilities.......................................................... 69,847 187,304
Due to shareholders................................................................ -- 200,000
Current portion of long-term debt.................................................. 258,252 384,165
------------ ------------
Total current liabilities............................................................ 3,580,308 2,866,393
Long-term debt, less current portion................................................. 665,398 665,399
Commitments and contingencies
Shareholders' equity:
Sea-Lect common stock, $1 par value; authorized 50,000 shares; issued and
outstanding 10,200 shares........................................................ 10,200 10,200
J&J Leasing, Inc. common stock, no par value; authorized 1,000,000 shares; issued
and outstanding 2,000 shares, stated capital..................................... 113,350 113,350
Retained earnings.................................................................. 1,622,344 1,748,135
------------ ------------
Total shareholders' equity........................................................... 1,745,894 1,871,685
------------ ------------
Total liabilities and shareholders' equity........................................... $ 5,991,600 $5,403,477
------------ ------------
------------ ------------
See notes to combined financial statements.
F-64
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF INCOME
PERIOD FROM
JANUARY 1, YEAR ENDED
1998 THROUGH DECEMBER 31,
MAY 11, 1998 1997
------------ -------------
Sales............................................................................... $5,368,737 $ 14,162,416
Cost of goods sold.................................................................. 4,393,686 10,437,350
------------ -------------
Gross profit........................................................................ 975,051 3,725,066
Selling, general and administrative expenses........................................ 772,173 1,905,679
------------ -------------
202,878 1,819,387
Other income (expenses):
Interest expense.................................................................. (65,811) (275,084)
Miscellaneous (expense) income.................................................... 3,651 137,915
------------ -------------
Other expenses, net................................................................. (62,160) (137,169)
------------ -------------
Net income.......................................................................... $ 140,718 $ 1,682,218
------------ -------------
------------ -------------
See notes to combined financial statements.
F-65
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
SEA-LECT J&J LEASING, INC.
COMMON STOCK COMMON STOCK
-------------------- ----------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
--------- --------- ----------- ---------- ------------ -------------
Balance at January 1, 1997................. 10,200 $ 10,200 2,000 $ 113,350 $ 875,917 $ 999,467
Net income............................... -- -- -- -- 1,682,218 1,682,218
Distributions to shareholders............ -- -- -- -- (810,000) (810,000)
--------- --------- ----- ---------- ------------ -------------
Balance at December 31, 1997............... 10,200 10,200 2,000 113,350 1,748,135 1,871,685
Net income............................... -- -- -- -- 140,718 140,718
Distributions to shareholders............ -- -- -- -- (266,509) (266,509)
--------- --------- ----- ---------- ------------ -------------
Balance at May 11, 1998.................... 10,200 $ 10,200 2,000 $ 113,350 $ 1,622,344 $ 1,745,894
--------- --------- ----- ---------- ------------ -------------
--------- --------- ----- ---------- ------------ -------------
See notes to combined financial statements.
F-66
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1, YEAR ENDED
1998 THROUGH DECEMBER 31,
MAY 11, 1998 1997
------------- --------------
OPERATING ACTIVITIES
Net income $ 140,718 $ 1,682,218
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization.................................................... 79,707 228,466
Gain on sale of equipment........................................................ -- (13,000)
Changes in operating assets and liabilities:
Accounts receivable............................................................ (714,749) (479,769)
Inventories.................................................................... (17,736) (418,412)
Accounts payable and accrued liabilities....................................... 452,086 253,170
Prepaid expenses............................................................... -- 36,000
------------- --------------
Net cash (used in) provided by operating activities................................ (59,974) 1,288,673
INVESTING ACTIVITIES
Purchase of equipment.............................................................. -- (813,277)
Proceed from sale of equipment..................................................... -- 13,000
Net cash used in investing activities.............................................. -- (800,277)
FINANCING ACTIVITIES
Distributions to shareholders...................................................... (466,509) (610,000)
Repayments on short-term borrowings................................................ (4,678,252) (14,231,408)
Advances on short-term borrowings.................................................. 5,292,919 13,970,352
Repayments on long-term debt....................................................... (125,914) (363,143)
Advances on long-term debt......................................................... -- 782,440
Repayment on shareholders' note.................................................... (26,925) (283,360)
Advances made from shareholders.................................................... -- 259,713
------------- --------------
Net cash used in financing activities.............................................. (4,681) (475,406)
------------- --------------
Net (decrease) increase in cash.................................................... (64,655) 12,990
Cash at beginning of period........................................................ 70,915 57,925
Cash at end of period.............................................................. $ 6,260 $ 70,915
------------- --------------
------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest........................................... $ 65,811 $ 267,762
------------- --------------
------------- --------------
See notes to combined financial statements.
F-67
SEA-LECT PRODUCTS INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 11, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF COMBINATION AND ORGANIZATION
The accompanying combined financial statements include the accounts of the
Sea-Lect Products, Inc. (Sea-Lect) and its affiliate, J&J Leasing (J&J) (the
Company). These financial statements have been combined due to their common
ownership and management. Significant intercompany accounts and transactions
have been eliminated in combination.
Sea-Lect is a Washington S corporation, which operates a manufacturing
facility in Kent, Washington, for the purpose of metal fabrication. A
significant portion of its business is with customers in the aerospace business,
primarily in North America. J&J is a Washington S corporation that primarily
leases machinery and equipment to Sea-Lect. Some of the shareholders of J&J are
also shareholders in Sea-Lect.
At the close of business on May 11, 1998, the net assets of Sea-Lect and
100% of J&J's issued and outstanding common stock were sold to SLP Acquisition
Co., a subsidiary of Compass Aerospace Corporation for a total sales price of
$10,500,000. Transactions related to the sale have been treated as subsequent
events and are not reflected in the accompanying financial statements. These
transactions include the repayment of the Company's interest bearing note, as
well as purchase price allocations which affect the carrying value of the
Company's assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost being
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over five to seven years.
INCOME TAXES
The shareholders of Sea-Lect and J&J have elected, under Subchapter S of the
Internal Revenue Code, to include each company's income in their own income for
federal income tax purposes. Accordingly, no provision has been made for federal
income taxes.
2. LINE OF CREDIT
The Company has an operating line of credit agreement with a bank that
provides for borrowings up to $1.3 million with interest at the bank's prime
rate plus 1% on an individual promissory note basis with no expiration date. At
May 11, 1998, the Company had $1,316,422 outstanding under this agreement with
interest at 9.5%. The borrowings under this agreement are secured by the
Company's accounts receivable and inventory.
F-68
SEA-LECT PRODUCTS INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MAY 11, 1998
3. SHAREHOLDERS' NOTES PAYABLE
The Company has unsecured notes payable to its shareholders that bear
interest at 12% per annum. The notes are payable on demand and $300,000 of the
balance is subordinated to the line of credit. Interest expense on these notes
was approximately $32,000 and $46,000 for the period from January 1, 1998
through May 11, 1998 and the year ended December 31, 1997, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following at:
MAY 11, DECEMBER 31,
1998 1997
---------- ------------
Note payable, due in monthly installments of $9,727 including interest at 9.25%, due
July 25, 2000........................................................................ $ 209,732 $ 266,587
Note payable, due in monthly installments of $8,655 including interest at 9.25%, due
July 25, 2000........................................................................ 10,933 237,291
Note payable, due in monthly installments of $5,060 including interest at 9.25%, due
April 25, 2000....................................................................... 34,253 126,684
Note payable, due in monthly installments of $2,656 including interest at 9.5%, due
April 25, 2002....................................................................... 235,612 112,523
Note payable, due in monthly installments of $3,732 including interest at 9.25%, due
March 25, 2000....................................................................... 24,806 90,346
Note payable, due in monthly installments of $2,619 including interest at 9.25%, due
April 25, 2000....................................................................... 78,087 65,611
Various other notes payable, due in monthly installments of $6,859 including interest
at 9.75%, due starting June 25, 1998 through December 25, 2000....................... 330,227 150,522
---------- ------------
923,650 1,049,564
Less current portion................................................................... 258,252 384,165
---------- ------------
$ 665,398 $ 665,399
---------- ------------
---------- ------------
The above notes payable are secured by certain equipment, machinery and
automobiles and guaranteed by shareholders of J&J.
The aggregate maturities of the above notes payable are as follows as of May
11:
1998.............................................................................. $ 258,252
1999.............................................................................. 410,428
2000.............................................................................. 215,693
2001.............................................................................. 29,414
2002.............................................................................. 9,863
----------
$ 923,650
----------
----------
F-69
SEA-LECT PRODUCTS INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
MAY 11, 1998
5. COMMITMENTS AND RELATED-PARTY TRANSACTIONS
The Company has several noncancelable operating leases for buildings and
equipment. Buildings are leased from an affiliated joint venture, Building Joint
Venture (JV), that is owned by the shareholders of J&J. Future minimum lease
payments under noncancelable operating leases are as follows as of May 11:
EQUIPMENT
BUILDING (NON-
(JV) AFFILIATE) TOTAL
------------ ------------ ------------
1998.......................................................... $ 244,599 $ 456,973 $ 701,572
1999.......................................................... 389,916 704,952 1,094,868
2000.......................................................... 396,024 439,540 835,564
2001.......................................................... 14,090 87,322 101,412
------------ ------------ ------------
$ 1,044,629 $ 1,688,787 $ 2,733,416
------------ ------------ ------------
------------ ------------ ------------
Rent expense to affiliated parties for the period from January 1, 1998
through May 11, 1998 and the year ended December 31, 1997 was $137,163 and
$293,532, respectively. Rent expense to a non-affiliated party for the period
from January 1, 1998 through May 11, 1998 and the year ended December 31, 1997
was $24,839 and $49,500, respectively.
6. CONCENTRATIONS
Approximately 42% and 43% of sales for the period from January 1, 1998
through May 11, 1998 and the year ended December 31, 1997, respectively, were
made to one customer. Accounts receivable from this customer amounted to
$777,165 at May 11, 1998 and $676,428 at December 31, 1997.
The Company's borrowings under the line of credit agreement and long-term
debt are made from the same bank.
7. 401(K) PLAN
The Company has a defined contribution plan (401(k)) covering substantially
all permanent employees who have completed six months of services and are at
least 18 years of age. Under the plan, the Company has agreed to contribute to
each eligible participant's account an amount equal to 50% of the amount
contributed by each participant, up to 6% of each participant's annual salary.
The 401(k) expense was $7,518 for the period from January 1, 1998 through May
11, 1998 and $21,000 for the year ended December 31, 1997.
8. YEAR 2000 ISSUE -- UNAUDITED
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company substantially completed the project during 1997. The
Company does not expect the remaining project to have a significant effect on
operations. The Company will continue to implement systems with strategic value,
although some projects may be delayed due to resource constraints.
F-70
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Lamsco West, Inc.
Milford, Connecticut
We have audited the accompanying balance sheets of Lamsco West, Inc., a
wholly-owned subsidiary of Alinabal Holdings Corporation, as of November 20,
1998, January 3, 1998 and December 28, 1996, and the related statements of
income, retained earnings and cash flows for the period January 4, 1998 to
November 20, 1998 and the years ended January 3, 1998 and December 28, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lamsco West, Inc. as of
November 20, 1998, January 3, 1998 and December 28, 1996, and the results of its
operations and its cash flows for the period January 4, 1998 to November 20,
1998 and the years ended January 3, 1998 and December 28, 1996 in conformity
with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
March 5, 1999
F-71
LAMSCO WEST, INC.
BALANCE SHEETS
NOVEMBER 20, JANUARY 3, DECEMBER 28,
1998 1998 1996
------------ ------------ ------------
ASSETS
Current Assets
Accounts receivable, less allowance for doubtful accounts 1998
$100,000; 1997 $75,000; 1996 $30,000 (Note 2)..................... $2,258,948 $ 4,190,653 $1,195,504
Inventories......................................................... 2,662,332 2,223,305 1,267,825
Prepaid expenses.................................................... 33,580 47,989 21,079
------------ ------------ ------------
Total current assets 4,954,860 6,461,947 2,484,408
------------ ------------ ------------
Equipment and Leasehold Improvements
Machinery and equipment............................................. 1,804,692 1,596,146 920,908
Leasehold improvements.............................................. 275,908 146,629 114,297
------------ ------------ ------------
2,080,600 1,742,775 1,035,205
Less accumulated depreciation and amortization...................... 711,132 530,923 380,195
------------ ------------ ------------
1,369,468 1,211,852 655,010
------------ ------------ ------------
$6,324,328 $ 7,673,799 $3,139,418
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Excess of outstanding checks over bank balances..................... $ $ 37,400 $ 168,415
Accounts payable.................................................... 509,838 905,978 400,540
Accrued liabilities................................................. 275,910 984,547 193,033
------------ ------------ ------------
Total current liabilities......................................... 785,748 1,927,925 761,988
------------ ------------ ------------
Commitments and Contingency (Notes 3 and 4)
Stockholder's Equity
Common stock, $.01 par value; 20,000 shares authorized, 100 shares
issued and outstanding............................................ 1 1 1
Paid-in capital..................................................... 99 99 99
Retained earnings................................................... 5,538,480 5,745,774 2,377,330
------------ ------------ ------------
5,538,580 5,745,874 2,377,430
------------ ------------ ------------
$6,324,328 $ 7,673,799 $3,139,418
------------ ------------ ------------
------------ ------------ ------------
See Notes to Financial Statements.
F-72
LAMSCO WEST, INC.
STATEMENTS OF INCOME
PERIOD FROM FISCAL YEAR ENDED
JANUARY 4, 1998 ----------------------------
TO NOVEMBER 20, JANUARY 3, DECEMBER 28,
1998 1998 1996
---------------- ------------- -------------
Net Sales
Commercial sales (Note 2)...................................... $ 28,095,863 $ 33,382,982 $ 10,593,249
Intercompany sales............................................. 186,453 151,715 221,922
---------------- ------------- -------------
Total net sales.............................................. 28,282,316 33,534,697 10,815,171
Cost of Goods Sold............................................... 10,686,881 12,644,551 5,134,677
---------------- ------------- -------------
Gross profit................................................. 17,595,435 20,890,146 5,680,494
Selling, General and Administrative Expenses (Notes 3 and 4)..... 7,388,484 12,030,687 2,017,970
---------------- ------------- -------------
Income before provision in lieu of income taxes.............. 10,206,951 8,859,459 3,662,524
Provision in lieu of income taxes................................ 1,282,000
---------------- ------------- -------------
Net income................................................... $ 10,206,951 $ 8,859,459 $ 2,380,524
---------------- ------------- -------------
---------------- ------------- -------------
See Notes to Financial Statements.
F-73
LAMSCO WEST, INC.
STATEMENTS OF RETAINED EARNINGS
PERIOD FROM FISCAL YEAR ENDED
JANUARY 4, 1998 ----------------------------
TO NOVEMBER 20, JANUARY 3, DECEMBER 28,
1998 1998 1996
---------------- ------------- -------------
Balance, beginning............................................... $ 5,745,774 $ 2,377,330 $ 1,187,193
Net income..................................................... 10,206,951 8,859,459 2,380,524
Cash transfers to parent, net.................................. (10,414,245) (5,491,015) (1,190,387)
---------------- ------------- -------------
Balance, ending.................................................. $ 5,538,480 $ 5,745,774 $ 2,377,330
---------------- ------------- -------------
---------------- ------------- -------------
See Notes to Financial Statements.
F-74
LAMSCO WEST, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM FISCAL YEAR ENDED
JANUARY 4, 1998 ----------------------------
TO NOVEMBER 20, JANUARY 3, DECEMBER 28,
1998 1998 1996
---------------- ------------- -------------
Cash Flows From Operating Activities
Net income..................................................... $ 10,206,951 $ 8,859,459 $ 2,380,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 180,209 152,250 76,412
Provision for doubtful accounts.............................. 25,000 75,000 5,000
Changes in working capital components:
Decrease (increase) in accounts receivable................. 1,906,705 (3,070,149) (800,651)
Increase in inventories.................................... (439,027) (955,480) (424,968)
Decrease (increase) in prepaid expenses.................... 14,409 (26,910) (12,955)
(Decrease) increase in accounts payable.................... (433,540) 374,423 361,945
(Decrease) increase in accrued liabilities................. (708,637) 791,514 112,270
---------------- ------------- -------------
Net cash provided by operating activities................ 10,752,070 6,200,107 1,697,577
---------------- ------------- -------------
Cash Flows From Investing Activities
Purchases of equipment and leasehold improvements.............. (337,825) (709,092) (507,190)
---------------- ------------- -------------
Cash Flows From Financing Activities
Cash transfers to parent, net.................................. (10,414,245) (5,491,015) (1,190,387)
---------------- ------------- -------------
Net increase in cash.....................................
Cash
Beginning......................................................
---------------- ------------- -------------
Ending......................................................... $ $ $
---------------- ------------- -------------
---------------- ------------- -------------
See Notes to Financial Statements.
F-75
LAMSCO WEST, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 20, 1998
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Until November 20, 1998, Lamsco West, Inc. (the 'Company') was a
wholly-owned subsidiary of Alinabal Holdings Corporation ('Alinabal' or
'Parent'). On November 20, 1998, the Company was sold to Compass Aerospace
Corporation. The Company is engaged in the manufacturing of shims for the
aerospace, defense and industrial markets. The Company's sales are primarily to
customers located throughout the United States to whom they extend credit on an
unsecured basis on terms it establishes for each individual customer.
ACCOUNTING PERIOD
The Company utilizes a fiscal year that ends on the Saturday nearest to
December 31. Fiscal years ended on January 3, 1998 ('fiscal year 1997') and
December 28, 1996 ('fiscal year 1996') included 53 weeks and 52 weeks of
activity, respectively. The accounting period, which ended on November 20, 1998,
began on January 4, 1998 and included 46 weeks of activity.
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. The provision for such returns is estimated and current period
sales and cost of sales are adjusted accordingly.
INVENTORIES
Inventories, consisting principally of raw materials, are stated at the
lower of cost (first-in, first-out method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Depreciation is
provided primarily utilizing the straight-line method over the estimated useful
lives of the respective assets which range from four to ten years. Leasehold
improvements are amortized over the shorter of the remaining lease period or
useful life of the respective asset.
EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company participates in Alinabal's defined benefit pension plan. To be
eligible, an employee must have completed one year of service and attained the
age of twenty-one. The plan provides benefits based on years of service and the
employee's compensation during their last five years of employment.
F-76
LAMSCO WEST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROFIT SHARING AND SAVINGS PLAN
Employees of the Company are included in Alinabal's 401(k) employee profit
sharing and savings plan. Participants can make salary reduction contributions
to the plan equal to the lesser of 15% of their earnings or the maximum
allowable by the Internal Revenue Code. Company contributions are discretionary
and determined annually.
INCOME TAXES
Through fiscal year 1996, the Company filed a consolidated tax return with
its Parent; accordingly, for fiscal year 1996, the Company recognized a
provision in lieu of income taxes for its proportionate share of the Parent's
income tax provision.
Effective December 29, 1996, the Parent elected to be taxed under provisions
of Subchapter S of the Internal Revenue Code (S Corporation Status), which
provides that, in lieu of corporate income taxes, the stockholders separately
account for their pro rata share of the income, deductions, losses and credits
of the Company. State income taxes are generally insignificant to the Company
due to state allocations and low tax rates. As a result, no provision for
federal or state income taxes is made in these financial statements for the
period from January 4, 1998 to November 20, 1998 and for fiscal year 1997.
When the Parent elected S Corporation Status, the Parent became contingently
liable for income taxes (built in gains tax) at the maximum corporate rate if
certain assets are sold at a gain for a ten year period following the election.
As a result of the sale of the Company, the Parent will be responsible for
approximately $3,300,000 of built-in gains tax.
NOTE 2. MAJOR CUSTOMER
During the period from January 4, 1998 to November 20, 1998 and during
fiscal years 1997 and 1996, one customer accounted for approximately $20,807,000
(74%); $28,938,000 (86%); and $8,150,000 (75%), respectively, of the Company's
net sales and approximately $2,000,000 (89%); $3,921,000 (94%); and $1,066,000
(89%), of the Company's accounts receivable at November 20, 1998, January 3,
1998 and December 28, 1996, respectively. If the Company were to lose this
customer and was unable to find replacement customers, sales would be adversely
affected.
In March 1998, the Company signed an agreement in which the Company will be
the sole source supplier of certain defined parts, primarily shims, to this
customer in exchange for a 10% price reduction. The agreement contains certain
circumstances in which the customer can elect not to purchase from the Company.
F-77
LAMSCO WEST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 3. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
NOVEMBER 30, JANUARY 3, DECEMBER 28,
1998 1998 1996
------------ ---------- ------------
Customer advances............................................. $ $ 613,531 $
Accrued profit sharing........................................ 110,000 176,680 130,700
Accrued payroll............................................... 41,886 40,376 23,559
Other......................................................... 124,024 153,960 38,774
------------ ---------- ------------
$ 275,910 $ 984,547 $ 193,033
------------ ---------- ------------
------------ ---------- ------------
NOTE 4. LEASES
The Company leases equipment and certain manufacturing facilities under
operating leases. Future annual lease commitments under these operating leases
are summarized as follows:
LEASE
FISCAL YEAR ENDING COMMITMENT
- -------------------------------------------------------------------------------- ------------
January 2, 1999................................................................. $ 266,651
January 1, 2000................................................................. 266,149
December 30, 2000............................................................... 33,695
December 29, 2001............................................................... 24,429
December 28, 2002............................................................... 1,834
------------
$ 592,758
------------
------------
Rent expense was approximately $216,000, $278,000 and $121,000 during the
period from January 4, 1998 to November 20, 1998 and during fiscal years 1997
and 1996, respectively.
NOTE 5. EMPLOYEE BENEFIT PLANS
PENSION PLAN
Contributions to the Alinabal sponsored defined benefit pension plan, which
were derived through application of various actuarial assumptions to the
Company's employee group, approximated $37,000, $24,500 and $19,500 during the
period from January 4, 1998 to November 20, 1998 and during fiscal years 1997
and 1996, respectively.
PROFIT-SHARING PLAN
For the period from January 4, 1998 to November 20, 1998 and during fiscal
years 1997 and 1996, the Company made contributions on behalf of its employees
to Alinabal's profit-sharing and savings plan of approximately $16,000, $12,000
and $6,000, respectively.
NOTE 6. IMPACT OF YEAR 2000
The Year 2000 ('Y2K') issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year
F-78
LAMSCO WEST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 6. IMPACT OF YEAR 2000 (CONTINUED)
1999, which could cause a system failure or other computer errors, leading to
disruptions in operations. The Company and its Parent have developed a
three-phase program for Y2K information systems compliance. Phase I is to
identify those systems with which the Company has exposure to Y2K issues. Phase
II is the development and implementation of action plans to be Y2K compliant in
all areas by mid 1999. Phase III, to be completed by late 1999, is the final
testing of each major area of exposure to ensure compliance. The Company has
identified three major areas determined to be critical for successful Y2K
compliance: (1) financial and informational system applications, (2)
manufacturing applications, and (3) third-party relationships.
The Company, in accordance with Phase I of the program, is in the process of
conducting an internal review of all systems and contacting all software
suppliers to determine major areas of exposure to Y2K issues. In the financial
and information system area, a number of applications have been identified as
being Y2K compliant due to their recent implementation. The Company's core
financial and reporting systems are not Y2K compliant but were already scheduled
for replacement by early 1999. In the manufacturing area, the Company is in the
process of identifying areas of exposure, however, it does not believe that
there is material exposure in this area. In the third-party area, the Company
has contacted most of its major third parties. Most of these parties state that
they intend to be Y2K compliant by 2000.
The Company currently believes the cost to replace the core financial and
reporting systems will not be significant. The Company is interviewing outside
consultants to undertake a portion of the work and expects most of the cost to
be incurred during 1999. The Company has yet to determine what costs, if any,
will be incurred in connection with the manufacturing area and the third-party
area.
NOTE 7. SUBSEQUENT EVENT
The Company's new parent, Compass Aerospace Corporation, is registering $110
million of debt securities with the Securities and Exchange Commission. This
registration is expected to be filed on or about March 29, 1999. Effective
November 20, 1998, the Company became a corporate guarantor of these debt
securities.
F-79
$110,000,000
EXCHANGE OFFER
Compass Aerospace Corporation
[LOGO]
10 1/8 Series B Senior Subordinated Notes due 2005
PROSPECTUS
, 1999]
Until , 1999 (90 days after the date of this
Prospectus), all dealers that effect transactions in these securities, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotment or
subscriptions.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
COMPASS
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation or were or are serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, if such directors, officers, employees or agents acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a
derivative action, i.e., one by or in the right of the corporation,
indemnification may be made only for expenses actually and reasonably incurred
by directors, officers, employees or agents in connection with the defense or
settlement of an action or suit, and only with respect to a matter as to which
they shall have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees, or
agents are fairly and reasonably entitled to indemnification for such expenses
despite such adjudication of liability.
Compass' By-laws provide that Compass shall, to the full extent authorized
or permitted by law, indemnify any current or former director or officer of
Compass. Subject to applicable law, Compass may indemnify an employee or agent
of Compass to the extent that the Board of Directors may determine in its
discretion.
Article Seven of Compass' Certificate of Incorporation, as amended,
provides that a director of Compass shall not be personally liable to Compass or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent provided by applicable law for liability (a) for
any breach of the duty of loyalty to Compass or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) pursuant to Section 174 of the General Corporation
Law of the State of Delaware, or (d) for any transaction from which a director
derived an improper personal benefit.
Compass' directors and officers are covered by insurance policies
indemnifying them against certain civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.
THE GUARANTORS
The Guarantors are incorporated under the laws of the States of
California (Pacific Hills, Western Methods and Wichita), Delaware (Aeromil,
Modern and Sea-Lect), Kansas (Brittain Machine) and Washington (Barnes
Machine). As with the General Corporation Law of the State of Delaware, the
California Corporations Code, the Kansas General Corporation Code and the
Washington Business Corporation Act authorize a corporation, under certain
circumstances, to indemnify its directors and officers (including to
reimburse them for expenses incurred).
As with Compass' Certificate of Incorporation, as amended, and its By-Laws,
each of the Guarantor's organizational documents and bylaws generally provide
for the indemnification of officers and directors to the full extent permitted
by law.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits:
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of Compass Aerospace Corporation
("Compass"), as amended to date.
3.2 By-Laws of Compass , as amended to date.
*3.3 Certificate of Incorporation of AOM Acquisition Co. (which later
changed its name to "Aeromil Engineering Company"), as amended to
date.
*3.4 Bylaws of AOM Acquisition Co.
*3.5 Articles of Incorporation of Western Methods Machinery
Corporation.
*3.6 Bylaws of Western Methods Machinery Corporation.
*3.7 Articles of Incorporation of Brittain Machine, Inc.
*3.8 Bylaws of Brittain Machine, Inc., as amended to date.
*3.9 Articles of Incorporation of Wichita Manufacturing, Inc.
*3.10 Bylaws of Wichita Manufacturing, Inc.
*3.11 Articles of Incorporation of Barnes Machine, Inc.
*3.12 Bylaws of Barnes Machine, Inc.
*3.13 Certificate of Incorporation of SLP Acquisition Co. (which later
changed its name to Sea-Lect Products, Inc.), as amended to date.
*3.14 By-Laws of SLP Acquisition Co.
*3.15 Articles of Incorporation of Lamsco West, Inc. (which later
changed its name to Pacific Hills Manufacturing Co.), as amended
to date.
*3.16 Bylaws of Lamsco West, Inc., as amended to date.
*3.17 Certificate of Incorporation of W.S.I. Inc. (which later changed
its name first to Y.F. Americas, Inc., and then to Modern
Manufacturing, Inc.), as amended to date.
*3.18 By-Laws of W.S.I. Inc.
4.1 Indenture, dated April 21, 1998, by and among Compass, the
Guarantors listed therein and IBJ Whitehall Bank & Trust Company
(formerly IBJ Schroder Bank & Trust Company) as Trustee, relating
to the 10 1/8% Series B Senior Subordinated Notes due 2005 of
Compass (the "New Notes") and the 10 1/8% Senior Subordinated
Notes due 2005 of Compass (the "Outstanding Notes").
4.2 Amended and Restated Credit Agreement, dated as of November 20,
1998 and amended and restated as of February 11, 1999, by and
among Compass, BankBoston, N.A. as agent and a lender,
NationsBank, N.A.
II-2
as Co-Agent, the Lenders named therein, Royal Bank of Canada as
Syndication Agent, General Electric Capital Corporation as
Documentation Agent and BancBoston Robertson Stephens, Inc.
as arranger..
4.3 Security Agreement, dated November 20, 1998, by and among
Compass, Compass' subsidiaries named therein, BankBoston, N.A. as
agent and the lenders identified therein.
4.4 Stock Pledge Agreement, dated as of November 20, 1998 by and
among Compass, Brittain Machine, Inc., Sea-Lect Products, Inc.
and BankBoston, N.A. as agent.
*5.1 Opinion of Morgan, Lewis & Bockius, LLP, counsel to Compass.
10.1 Employment Agreement, dated as of November 26, 1997, by and
between Compass and Alexander Hogg.
*10.2 Employment Agreement, dated as of September 21, 1998, by and
between Compass and N. Paul Brost.
*10.3 Employment Agreement, dated as of December 1, 1998, by and
between Compass and Pasquale DiGirolamo.
10.4 Compass Aerospace Corporation 1998 Stock Incentive Plan.
10.5 Management Agreement, dated November 26, 1997, by and among
Compass, Dunhill Bank Caribbean Ltd. and Hayes Capital
Corporation, as amended to date.
12.1 Statement regarding the computation of ratio of earnings to
fixed charges for Compass.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Ernst & Young, LLP.
*23.2 Consent of Grant Thorton LLP.
23.3 Consent of McGladery & Pullen, LLP.
*23.4 Consent of Morgan, Lewis & Bockius LLP, counsel to Compass
(included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
*25.1 Statement of Eligibility and Qualification on Form T-1 of IBJ
Whitehall Bank & Trust Company, as Trustee under the Indenture
relating to the New Notes.
27.1 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Exchange Agent Agreement.
- ------------------------
* To be filed by amendment.
II-3
(b) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because the information is
not applicable or is not material or because the information
required is set forth in the financial statements on the notes
thereto.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrants of expenses incurred or paid by a director, officer or
controlling person of the Registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request.
(c) The undersigned Registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and Compass
being acquired involved therein, that was not the subject of and included
in the Registration Statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Los Angeles, State of
California, on March 30, 1999.
COMPASS AEROSPACE CORPORATION
By: /s/ Douglas M. Hayes
----------------------------------
Douglas M. Hayes
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby constitutes
and appoints Douglas M. Hayes and Douglas B. Solomon, and each or either of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) and supplements to this Registration Statement and to file the same
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requested or necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Douglas M. Hayes Chairman of the Board of Directors March 30, 1999
- ------------------------
Douglas M. Hayes
/s/ Alexander Hogg Director, President
- ------------------------ and Chief Executive Officer March 30, 1999
Alexander Hogg
/s/ N. Paul Brost Vice President, Chief Financial
- ------------------------ Officer and Treasurer (Principal March 30, 1999
N. Paul Brost Financial and Accounting Officer)
/s/ Douglas B. Solomon Director and Secretary March 30, 1999
- ------------------------
Douglas B. Solomon
/s/ James P. Angus Director March 30, 1999
- ------------------------
James P. Angus
II-5
Signature Title Date
--------- ----- ----
/s/ Michael Dritz Director March 30, 1999
- ------------------------
Michael Dritz
/s/ Harald H. Ludwig Director March 30, 1999
- ------------------------
Harald H. Ludwig
/s/ William R. Monkman Director March 30, 1999
- ------------------------
William R. Monkman
/s/ Philip J. Olsson Director March 30, 1999
- ------------------------
Philip J. Olsson
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, each Additional
Registrant listed on the cover page of this Registration Statement has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Los Angeles, State of
California, on March 30, 1999.
AEROMIL ENGINEERING COMPANY
BARNES MACHINE, INC.
BRITTAIN MACHINE, INC.
PACIFIC HILLS MANUFACTURING CO.
MODERN MANUFACTURING, INC.
SEA-LECT PRODUCTS, INC.
WESTERN METHODS MACHINERY CORPORATION
WICHITA MANUFACTURING, INC.
By: /s/ Douglas M. Hayes
----------------------------------
Douglas M. Hayes
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby constitutes
and appoints Douglas M. Hayes and Douglas B. Solomon, and each or either of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) and supplements to this Registration Statement and to file the same
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requested or necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Douglas M. Hayes Chairman of the Board of Directors March 30, 1999
- ------------------------ of each Additional Registrant
Douglas M. Hayes
/s/ Alexander Hogg Director, and Chief Executive March 30, 1999
- ------------------------ Officer of each Additional Registrant
Alexander Hogg
/s/ N. Paul Brost Vice President, Chief Financial March 30, 1999
- ------------------------ Officer and Treasurer (Principal
N. Paul Brost Financial and Accounting Officer)
of each Additional Registrant
/s/ Douglas B. Solomon Director and Secretary of each March 30, 1999
- ------------------------ Additional Registrant
Douglas B. Solomon
/s/ Harald H. Ludwig Director of each Additional March 30, 1999
- ------------------------ Registrant
Harald H. Ludwig
II-7
EXHIBIT INDEX
3.1. Certificate of Incorporation of Compass Aerospace
Corporation ("Compass"), as amended to date.
3.2. By-Laws of Compass , as amended to date.
*3.3. Certificate of Incorporation of AOM Acquisition Co. (which
later changed its name to "Aeromil Engineering Company"), as
amended to date.
*3.4. Bylaws of AOM Acquisition Co.
*3.5. Articles of Incorporation of Western Methods Machinery
Corporation.
*3.6. Bylaws of Western Methods Machinery Corporation.
*3.7. Articles of Incorporation of Brittain Machine, Inc.
*3.8. Bylaws of Brittain Machine, Inc., as amended to date.
*3.9. Articles of Incorporation of Wichita Manufacturing, Inc.
*3.10. Bylaws of Wichita Manufacturing, Inc.
*3.11. Articles of Incorporation of Barnes Machine, Inc.
*3.12. Bylaws of Barnes Machine, Inc.
*3.13. Certificate of Incorporation of SLP Acquisition Co. (which
later changed its name to Sea-Lect Products, Inc.), as
amended to date.
*3.14. By-Laws of SLP Acquisition Co.
*3.15. Articles of Incorporation of Lamsco West, Inc. (which later
changed its name to Pacific Hills Manufacturing Co.), as
amended to date.
*3.16. Bylaws of Lamsco West, Inc., as amended to date.
*3.17. Certificate of Incorporation of W.S.I. Inc. (which later
changed its name, first to Y.F. Americas, Inc. and then to
Modern Manufacturing, Inc.), as amended to date.
*3.18. By-Laws of W.S.I. Inc.
4.1. Indenture, dated April 21, 1998, by and among Compass, the
Guarantors listed therein and IBJ Whitehall Bank & Trust
Company (formerly IBJ Schroder Bank & Trust Company) as
Trustee, relating to the 101/8% Series B Senior Subordinated
Notes due 2005 of Compass (the "New Notes") and the 101/8%
Senior Subordinated Notes due 2005 of Compass (the
"Outstanding Notes").
4.2. Amended and Restated Credit Agreement, dated as of November
20, 1998 and amended and restated as of February 11, 1999,
by and among Compass, Bank Boston, N.A. as Agent and a
lender, NationsBank, N.A. as Co-Agent, the Lenders named
therein, Royal Bank of Canada as Syndication Agent, General
Electric Capital Corporation as Documentation Agent and
BancBoston Robertson Stephens, Inc. as arranger..
4.3. Security Agreement, dated November 20, 1998, by and among
Compass, Compass' subsidiaries named therein, BankBoston,
N.A. as agent and the lenders identified therein.
4.4. Stock Pledge Agreement, dated as of November 20, 1998 by and
among Compass, Brittain Machine, Inc., Sea-Lect Products,
Inc. and BankBoston, N.A. as agent.
*5.1. Opinion of Morgan, Lewis & Bockius, LLP, counsel to Compass.
10.1. Employment Agreement, dated as of November 26, 1997, by and
between Compass and Alexander Hogg.
*10.2. Employment Agreement, dated as of September 21, 1998, by and
between Compass and N. Paul Brost.
*10.3. Employment Agreement, dated as of December 1, 1998, by and
between Compass and Pasquale DiGirolamo.
10.4. Compass Aerospace Corporation 1998 Stock Incentive Plan.
10.5. Management Agreement, dated November 26, 1997, by and among
Compass, Dunhill Bank Caribbean Ltd. and Hayes Capital
Corporation, as amended to date.
12.1. Statement regarding the computation of ratio of earnings to
fixed charges for Compass.
*21.1. Subsidiaries of the Company.
*23.1. Consent of Ernst & Young, LLP.
*23.2. Consent of Grant Thorton LLP.
23.3. Consent of McGladery & Pullen, LLP.
*23.4. Consent of Morgan, Lewis & Bockius LLP, counsel to Compass
(included in Exhibit 5.1).
24.1. Power of Attorney (included in signature page).
*25.1. Statement of Eligibility and Qualification on Form T-1 of
IBJ Whitehall Bank & Trust Company, as Trustee under the
Indenture relating to the New Notes.
27.1. Financial Data Schedule.
*99.1. Form of Letter of Transmittal.
*99.2. Form of Notice of Guaranteed Delivery.
*99.3. Form of Exchange Agent Agreement.
- --------------------
* To be filed by amendment.
COMPASS AEROSPACE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
Balance at Charged Balance
Beginning to Charged to at
Description of Costs and Other End of
Period Expenses Expenses Deductions(1) Period
As Compass Aerospace Corporation
YEAR ENDED DECEMBER 31, 1997
Reserve and allowance deducted
from asset accounts
Allowance for uncollectible
accounts......................... $ - $ - $ 49 $ 18 $ 31
YEAR ENDED DECEMBER 31, 1998
Reserve and allowance deducted
from asset accounts
Allowance for uncollectible
accounts......................... $ 31 $ 3 $ 776 $ 54 $ 756
As Brittain Machine, Inc.(2)
YEAR ENDED JUNE 30, 1996
Reserve and allowances deducted
from asset accounts
Allowance for uncollectible
accounts......................... $ - $ - $ - $ - $ -
YEAR ENDED JUNE 30, 1997
Reserve and allowance deducted
from asset accounts
Allowance for uncollectible
accounts......................... $ - $ - $ - $ - $ -
YEAR ENDED APRIL 21, 1998
Reserve and allowances deducted
from asset accounts
Allowance for uncollectible
accounts........................ $ - $ - $ - $ - $ -
(1) Net of recoveries.
(2) Brittain Machine, Inc. is included as the predecessor of Compass Aerospace
Corporation.
S-1