AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 1999
REGISTRATION NO. 333-75643-01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2 TO
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 or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
------------------------------
1501 HUGHES WAY, SUITE 400
LONG BEACH, CALIFORNIA 90810
(310) 522-0600
N. PAUL BROST
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
COMPASS AEROSPACE CORPORATION
1501 HUGHES WAY, SUITE 400
LONG BEACH, CALIFORNIA 90810
(310) 522-0600
(Name and address, including zip code, of agent for service)
------------------------------
COPIES TO:
PETER P. WALLACE, ESQ.
MORGAN, LEWIS & BOCKIUS LLP
300 SOUTH GRAND AVENUE, 22ND FLOOR
LOS ANGELES, CALIFORNIA 90071-3132
------------------------------
PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL IRS EMPLOYEE
NAME OF ADDITIONAL REGISTRANTS* INCORPORATION CLASSIFICATION NUMBER IDENTIFICATION NUMBERS
- ---------------------------------------------- ----------------------- -------------------------- -----------------------
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 Corporation......... California 3728 95-3195940
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
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
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) THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
This registration statement covers the registration of an aggregate
principal amount of $110,000,000 of 10 1/8% Series B senior subordinated notes
due 2005 of Compass Aerospace Corporation that may be exchanged for equal
principal amounts of our outstanding 10 1/8% senior subordinated notes due 2005.
This registration statement also covers the registration of the Series B notes
for resale by broker-dealers in market-making transactions. The complete
prospectus relating to the exchange offer follows immediately after this
Explanatory Note. Following the prospectus are pages of the prospectus relating
solely to such market-making transactions (the "market-making prospectus"),
including alternate front and back cover pages, a section entitled "Risk
Factors--There Is No Existing Trading Market For The Notes And Any Market-Making
Activities May Be Terminated At Any Time" to be used in lieu of the section
entitled "Risk Factors--No Public Trading Market For The Notes Exists And You
May Not Be Able To Sell Them," a "Use of Proceeds" section and an alternate
"Plan of Distribution" section. In addition, the market-making prospectus will
not include the following captions nor the information set forth under such
captions included in the prospectus: "Summary--The Exchange Offer," "Summary of
the Terms of the Exchange Offer," "Risk Factors--Outstanding Notes That Are Not
Exchanged will Continue To Be Subject To Transfer Restrictions," "The Exchange
Offer," "United States Federal Income Tax Consequences" and "United States
Federal Income Tax Consequences to Non-U.S. Holders." All other sections of the
prospectus will be included in the market-making prospectus.
SUBJECT TO COMPLETION DATED [ ], 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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.
---------------------
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 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 a number of transfer
restrictions and registration rights relating to the outstanding notes
------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A
DISCUSSION OF VARIOUS MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes to be distributed in the
exchange offer or determined that this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999
TABLE OF CONTENTS
PAGE
-----
Available Information...................................................................................... 3
Summary.................................................................................................... 4
Risk Factors............................................................................................... 15
Capitalization............................................................................................. 23
Unaudited Pro Forma Financial Data......................................................................... 24
Selected Historical Consolidated Financial Data............................................................ 28
Management's Discussion and Analysis of Consolidated Financial Condition and Consolidated Results of
Operations............................................................................................... 30
The Exchange Offer......................................................................................... 40
Business................................................................................................... 50
Management................................................................................................. 61
Principal Stockholders..................................................................................... 67
Description of Credit Agreement............................................................................ 68
Description of the Series B Notes.......................................................................... 69
United States Federal Income Tax Consequences.............................................................. 105
United States Federal Income Tax Consequences to Non-U.S. Holders.......................................... 105
Plan of Distribution....................................................................................... 108
Legal Matters.............................................................................................. 109
Experts.................................................................................................... 109
Index to Financial Statements.............................................................................. F-1
2
AVAILABLE INFORMATION
This prospectus constitutes a part of a registration statement on Form S-4
filed by us with the Securities and Exchange Commission under the Securities Act
of 1933. As permitted by the rules and regulations of the Commission, this
prospectus does not contain all of the information contained in the registration
statement, including additional exhibits and schedules not included in this
prospectus. In this prospectus we refer to the registration statement and to the
exhibits and schedules. For further information about us and about the
securities we are offering, you should consult the registration statement,
including the exhibits and schedules. You should be aware that statements
contained in this prospectus concerning the provisions of any documents filed as
an exhibit to the registration statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
Upon the effectiveness of the registration statement, we will be subject to
the informational requirements of the Securities Exchange Act of 1934.
Accordingly, we will file periodic reports and other information with the
Commission. The registration statement, reports and other information filed by
us with the Commission will be available for inspection and copying at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Suite 1400, Northwestern Atrium Center, 14th Floor, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material will also be
available at prescribed rates by writing to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549. If you would like
information on the operation of the Public Reference Room, you may call
1-800-SEC-0330. You may also be able to access this information electronically
through the Commission's web page on the Internet at http://www.sec.gov. This
web site contains reports and other information regarding registrants such as
ourselves that have filed electronically with the Commission.
The 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 that 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 TERMS "COMPASS," OUR" AND "WE" AS USED IN THIS PROSPECTUS
REFER TO COMPASS AEROSPACE CORPORATION AND ITS SUBSIDIARIES, AS A COMBINED
ENTITY, EXCEPT WHERE IT IS CLEAR THAT SUCH TERM MEANS ONLY THE PARENT COMPANY.
COMPASS' SUBSIDIARIES ARE: AEROMIL ENGINEERING COMPANY, BARNES MACHINE, INC.,
BRITTAIN MACHINE, INC., MODERN MANUFACTURING, INC. (FORMERLY KNOWN AS Y.F.
AMERICAS, INC.), PACIFIC HILLS MANUFACTURING CO. (FORMERLY KNOWN AS LAMSCO WEST,
INC.), SEA-LECT PRODUCTS, INC., WESTERN METHODS MACHINERY CORPORATION AND
WICHITA MANUFACTURING, INC.
THE EXCHANGE OFFER
On April 21, 1998 we completed the private offering of $110.0 million of
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 a number of transfer
restrictions and registration rights.
Under a registration rights agreement executed as part of the offering of
the outstanding notes, we agreed to:
- file a registration statement within 240 days after the issue date of the
outstanding notes enabling note holders to exchange the outstanding held
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 various other circumstances.
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 having been
filed within 240 days after the issue date of the outstanding notes and not yet
having been declared effective by the Securities and Exchange Commission,
liquidated damages are currently accruing at the rate of $16,500 per week in the
aggregate for the $110.0 million principal amount of outstanding notes. You
should read the discussion under the headings "Summary Description of the Series
B Notes-Exchange Offer; Registration Rights" and "The Exchange Offer--Conditions
of the Exchange Offer" for further information regarding the registration rights
agreement.
We believe that the Series B notes issued in the exchange offer may be
resold by you without compliance with the registration and prospectus delivery
provisions of the Securities Act, subject to various conditions. You should read
the discussion under the headings "Summary of the Terms of the Exchange Offer"
and "The Exchange Offer" for further information regarding the exchange offer
and resale of the Series B Notes.
COMPASS
Compass was founded in October 1997 to become a major supplier of precision
machined individual metal parts and of higher value-added sub-assemblies,
manufacturing kits and structural components used by aerospace manufacturers in
structural frames and other metal aircraft components. We intend to capitalize
on the trends among aircraft manufacturers which seek to increase outsourcing,
concentrate supplier relationships and encourage suppliers of individual parts
to manage the supply chain and produce more value-added sub-assemblies,
4
manufacturing kits and structural components. You should read the discussion
under the headings "Management's Discussion and Analysis of Consolidated
Financial Condition and Consolidated Results of Operations -- Results of
Operations" and "The Business-- Compass" for more information on Compass'
business and financial condition.
At present, we primarily manufacture individual parts for aircraft to
precise specifications from metals through the use of precision
computer-numerically-controlled machine tools. We use a variety of advanced
techniques and machinery. Compass' precision machining and tooling capabilities
provide Compass with a diverse and flexible manufacturing capability.
We 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 produced by The Boeing Company through
its various divisions
- various other commercial aircraft manufacturers, including Airbus
Industrie
- 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 three months ended March 31, 1999 we
generated consolidated revenues of $34.4 million, EBITDA of approximately $7.6
million and net cash flow of $2.2 million. Net cash provided by operating
activities was $4.7 million. Investing activities consisting of purchases of
property and equipment used $0.7 million of cash flow. Financing activities
consisting of principal payments on long term debt used $1.8 million in cash. At
May 31, 1999 we had a total revenue backlog of approximately $150.0 million, of
which approximately $70.0 million is deliverable in the remainder of 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 increasing outsourcing and imposing increased
responsibilities on a smaller number of qualified suppliers to enable the
aircraft manufacturers to increase production rates.
STRATEGY
Our principal strategic objective is to increase revenues and profits by
managing the supply chain for our customers. We also seek to increase our
operating efficiencies and to reduce our customer concentration by diversifying
our revenue mix among aerospace customers. To reach our objectives we intend to:
- consolidate our acquired businesses;
- increase operating efficiencies and asset utilization;
- maximize the production volume of our manufacturing facilities;
- increase our production of sub-assemblies, manufacturing kits and
structural components by more effective use of our broad, flexible
manufacturing capabilities;
- continue to centralize various administrative functions at the corporate
level to generate economies of scale and minimize costs;
- continue to update and consolidate our management information systems to
improve internal controls and coordinate operations;
5
- consolidate engineering functions;
- improve marketing by proactively marketing our broad, flexible
manufacturing capabilities;
- target customers that our subsidiaries could not significantly penetrate
individually;
- increase outsourcing of some production functions to small machine shops
to increase manufacturing efficiencies and capacity;
- diversify our revenue mix among aerospace customers by targeting the
Airbus and the business jet markets, and United States military programs;
and
- acquire additional businesses with complementary manufacturing
capabilities that will enhance our ability to produce sub-assemblies,
manufacturing kits and structural components, 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 90810. 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
Series B notes. The Series B notes will be obligations of Compass entitled to
the benefits of the indenture governing the outstanding notes and will be fully,
irrevocably and unconditionally guaranteed by each of Compass' subsidiaries on a
joint and several basis. The form and terms of the Series B notes are identical
in all material respects to the form and terms of the outstanding notes, except
that the Series B notes have been registered under the Securities Act.
Termination of Rights.......... You are entitled to exchange your notes for registered
notes that are identical in all material respects to the
form and terms of the outstanding notes, except for various
transfer restrictions and registration rights. The exchange
offer is intended to satisfy these rights. After the
exchange offer is complete, you will no longer be entitled
to any exchange or registration rights with respect to your
notes.
The Exchange Offer............. We are offering to exchange $1,000 principal amount of
Series B notes which have been registered under the
Securities Act for each $1,000 principal amount of
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. We will issue
registered notes on or promptly after the expiration of the
exchange offer.
At this date there is $110.0 million principal amount of
notes outstanding.
Resale of the Series B Notes... Based on an interpretation of the staff of the Securities
and Exchange Commission set forth in no-action letters
issued to third parties, including "Exxon Capital Holdings
Corporation" (available May 13, 1988), "Morgan Stanley &
Co. Incorporated" (available June 5, 1991), "Mary Kay
Cosmetics, Inc." (available June 5, 1991) and "Warnaco,
Inc." (available October 11, 1991), we believe that the
notes issued in the exchange offer may be offered for
resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery
provisions of the Securities Act provided that:
- the notes issued in the exchange offer are being
acquired in the ordinary course of business;
- 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;
- 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.
7
If our belief is inaccurate and you transfer any note
issued to you in the exchange offer without delivering a
prospectus meeting the requirements of the Securities Act
or without an exemption from registration of your notes
from such requirements, you may incur liability under the
Securities Act. We do not assume or indemnify you against
such liability.
Expiration Date................ The exchange offer will expire at 5:00 p.m., New York City
time, on , 1999, or, at our option, at the time
that 100% of the outstanding notes have been validly
tendered and not withdrawn, unless we decide to extend the
expiration date.
Accrued Interest on the Series The Series B notes will bear interest from their date of
B Notes and Outstanding issuance. Holders of outstanding notes whose notes are
Notes........................ accepted for exchange will be deemed to have waived the
right to receive any payment of interest on such
outstanding notes accrued on and after the date of issuance
of the Series B notes. Consequently, holders who exchange
their outstanding notes for Series B notes will receive the
same interest payment on October 15, 1999, which is the
third interest payment date with respect to the outstanding
notes and the first interest payment date with respect to
the Series B notes to be issued in the exchange offer, that
they would have received had they not accepted the exchange
offer.
Termination of the Exchange We may terminate the exchange offer if we determine that
Offer........................ our ability to proceed with the exchange offer could be
materially impaired due to any legal or governmental
action, new law, statute, rule or regulation or any
interpretation of the staff of the Commission of any
existing law, statute, rule or regulation. We do not expect
any of the foregoing conditions to occur, although there
can be no assurance that such conditions will not occur.
Holders of outstanding notes will have rights against
Compass 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 If you are a holder of a note and you wish to tender your
Outstanding Notes............ 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:
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
8
- a computer-generated message transmitted to The
Depository Trust Company by means of the Automated Tender
Offer Program system and received by the exchange agent
and forming a part of a confirmation of book entry
transfer in which you acknowledge and agree to be bound
by the terms of the letter of transmittal;
and, either
- a timely confirmation of book-entry transfer of your
outstanding notes into the exchange agent's account at
DTC pursuant to the procedure for book-entry transfers
described in this prospectus under the headings "The
Exchange Offer-- Procedures for Tendering Outstanding
Notes," and "The Exchange Offer--Book-Entry Transfer;"
or
- the documents necessary for compliance with the
guaranteed delivery procedures described below, must be
received by the Exchange Agent on or prior to the
expiration date.
By executing the letter of transmittal, each holder will
represent to us that, among other things:
- the notes to be issued in the exchange offer are being
obtained in the ordinary course of business of the
person receiving such notes whether or not such person
is the holder;
- neither the holder nor any such other person has an
arrangement or understanding with any person to
participate in the distribution of such notes; and
- neither the holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities
Act, of Compass.
Special Procedures for If you are the beneficial owner of outstanding notes and
Beneficial Owners............ 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 the person in whose name
your notes are registered promptly and instruct that person
to tender on your behalf. If you are a beneficial owner and
you wish to tender your outstanding notes on your own
behalf you must, prior to completing and executing the
letter of transmittal and delivering your outstanding
notes, either make appropriate arrangements to register
ownership of the outstanding notes in your name or obtain a
properly completed bond power from the registered holder.
The transfer of record ownership may take considerable
time.
9
Guaranteed Delivery If you wish to tender your notes and time will not permit
Procedures................... 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 Subject to various conditions, including those summarized
and Delivery of Series B above in "Termination of the Exchange Offer" and described
Notes........................ more fully under the heading "The Exchange
Offer--Termination," we will accept for exchange any and
all outstanding notes which are properly tendered in the
exchange offer prior to 5:00 p.m., New York City time, on
the expiration date. The notes issued pursuant to the
exchange offer will be delivered promptly following the
expiration date.
Federal Income Tax We believe the exchange of the Series B notes for the
Consequences................. 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.
The facsimile for the exchange agent is (212) 858-2611.
10
SUMMARY DESCRIPTION OF THE SERIES B NOTES
The terms of the outstanding notes and the Series B notes are identical in
all material respects, except that the outstanding notes are subject to various
transfer restrictions and have registration rights that the Series B notes do
not.
Notes Offered................... $110.0 million aggregate principal amount of 10 1/8%
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 Series B notes will be unsecured senior subordinated
obligations and will be subordinated to all our existing
and future senior indebtedness. The Series B notes will
rank senior to or equal to all our future subordinated
indebtedness. Because the Series B notes are subordinated,
in the event of bankruptcy, liquidation or dissolution,
holders of the Series B notes will not receive any payment
until holders of senior indebtedness have been paid in
full. The terms "senior indebtedness" and "subordinated
indebtedness" are defined in the "Description of the
Series B Notes--Subordination" and "Description of the
Series B Notes--Definitions" sections of this prospectus.
At May 31, 1999 we had outstanding $85.1 million of senior
indebtedness which will rank senior to the Series B notes
and $110.0 million of senior subordinated indebtedness.
Guarantees...................... The Series B notes will be jointly and severally, fully,
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 March 31, 1999 our
subsidiaries had $5.1 million of indebtedness outstanding.
Optional Redemption............. We may redeem the Series B notes, in whole or in part, at
any time on or after April 15, 2002, at the redemption
prices set forth in this prospectus. You should read the
discussion under the heading "Description of the Series B
Notes--Optional Redemption" for more information on the
optional redemption of the notes.
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 of the
redeemed notes, plus accrued interest, if at least 65% of
the aggregate principal amount of the notes originally
issued remains outstanding after such redemption. You
should read the discussion under the heading "Description
of the Series B Notes--Optional Redemption" for more
information on the optional redemption of the notes.
11
Change of Control............... Upon a change of control event, each holder of Series B
notes may require us to repurchase all or a portion of its
Series B notes at a purchase price equal to 101% of the
principal amount of the repurchased notes, plus accrued
interest. You should read the discussions under the
headings "Description of the Series B Notes--Covenants"
and "Description of the Series B Notes-- Definitions" for
the a more complete definition of "Change of Control."
Certain Covenants............... The indenture governing the Series B notes contains
covenants that, among other things, will limit our ability
and the ability of our restricted subsidiaries to:
- incur additional indebtedness,
- issue some kinds of capital stock,
- pay dividends or make other distributions with
respect to our capital stock,
- create liens,
- sell assets,
- sell the capital stock of our subsidiaries,
- engage in transactions with affiliates, and
- effect consolidations or mergers.
These covenants are subject to important exceptions and
qualifications, which are described under the heading
"Description of the Series B Notes" in this prospectus.
Exchange Offer; Registration
Rights........................ In connection with the offering of the outstanding notes,
we entered into a registration rights agreement with
Donaldson, Lufkin & Jenrette Securities Corporation,
BancBoston Securities Inc. and Libra Investments, Inc., as
the initial purchasers of the outstanding notes. Under the
registration rights agreement, we agreed to register new
notes and exchange them for the outstanding notes. Upon
completion of this exchange offer, the Series B notes and
the remaining outstanding notes will not be entitled to
the benefits of the registration rights granted under the
registration rights agreement. You should read the
discussion under the heading "The Exchange
Offer--Conditions of the Exchange Offer" for further
information about these registration rights.
12
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, the date of incorporation through December 31, 1997 and for the year
ended December 31, 1998. These financial statements have been audited by Ernst &
Young LLP, independent auditors. We have also included data from the unaudited
consolidated financial statements of Compass as of and for the three months
ended March 31, 1998 and 1999.
When you read this summary historical consolidated financial data, it is
important that you read along with it the historical consolidated financial
statements and the related notes thereto, as well as the sections titled
"Unaudited Pro Forma Financial Data," "Selected Historical Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this prospectus.
COMPASS
--------------------------------------------------------
YEAR 36 DAYS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1998 1997 1999 1998
------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Income Statement Data:
Revenues............................................ $ 96,547 $ 3,057 $ 34,392 $ 8,555
Gross profit........................................ 26,137 671 9,814 1,806
Operating income.................................... 11,600 267 3,552 751
Net income (loss)................................... 915 74 (1,092) 238
Other Data:
Cash flow provided by (used in):
operating activities.............................. $ (6,677) $ 269 $ 4,705 $ 196
investing activities.............................. (172,117) (23,456) (688) (727)
financing activities.............................. 186,222 23,630 (1,838) 801
Net increase in cash................................ $ 7,428 $ 443 $ 2,179 $ 270
EBITDA(1)........................................... $ 20,550 $ 486 $ 7,601 $ 1,366
EBITDA margin....................................... 21.3% 15.9% 22.1% 16.0%
Depreciation and amortization....................... $ 8,440 $ 219 $ 4,374 $ 615
Capital Expenditures................................ 5,701 25 689 727
Balance Sheet Data (at period end):
Cash and Cash Equivalents........................... $ 7,871 $ 443 $ 10,050 $ 713
Total Assets........................................ 255,505 33,789 251,053 35,274
Long-term obligations (including current
portion)(2)....................................... 196,968 20,585 195,130 21,386
Stockholders' Equity................................ 29,955 9,074 28,863 9,312
- ------------------------
(1) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under generally accepted accounting principles ("GAAP") and
should not be construed as an alternative to operating income or cash flows
from operating activities as determined by GAAP. EBITDA data is presented
because such data is used by some investors to determine Compass' ability to
meet debt service requirements and is used in some debt covenant
calculations required under the indenture and Compass' existing credit
agreement. 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. Furthermore, EBITDA as reported by Compass
may not be comparable to EBITDA reported by other companies.
(2) Long-term obligations include long-term debt, including the current portion,
and capital leases.
13
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.
COMPASS FOR THE
BRITTAIN MACHINE FOR
-------------------- ---------------------------------------------------------------
YEAR ENDED THE PERIOD FROM
DECEMBER 31, JULY 1, 1997 THE YEARS ENDED JUNE 30,
-------------------- THROUGH --------------------------------------------
1998 1997 APRIL 21, 1998 1997 1996 1995 1994
--------- --------- ----------------- --------- --------- ----- ---------
(UNAUDITED)
Ratio of earnings to fixed charges(1)........ 1.3x 1.5x 20.6x 14.6x 10.9x -- 10.4x
COMPASS FOR THE
--------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
------------------- -----------------
(UNAUDITED)
Ratio of earnings to fixed charges(1)........ -- 1.9x
- ------------------------------
(1) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges, by fixed charges. Fixed
charges consist of interest expense and 33% of operating rental expense,
which management believes is representative of the interest component of
rental expense. Earnings were insufficient to cover fixed charges for the
year ended June 30, 1995 and the three months ended March 31, 1999 by $0.4
million and $2.0 million, respectively.
14
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the notes.
COMPASS BEGAN OPERATIONS IN NOVEMBER 1997 AND WE MAY NOT HAVE THE RESOURCES TO
SUCCESSFULLY INTEGRATE AND MANAGE OUR COMBINED ENTITY
We began operations in November 1997. Between November 1997 and January
1999, we acquired eight operating companies. Prior to our acquisition of our
subsidiaries, each of our subsidiaries operated independently. 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. In addition, 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 our
eight prior and any future acquisitions and to achieve operating and cost
efficiencies. Any failure by us to effectively oversee the combined entity could
have a material adverse effect on our business, financial condition, or results
of operations.
WE ARE DEPENDENT ON A KEY CUSTOMER AND COULD SUFFER FINANCIAL HARM IF WE WERE TO
LOSE THAT CUSTOMER'S BUSINESS
Our largest customer is Boeing, which directly accounted for approximately
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, and
may stop producing other models for which we produce parts. In addition, under
some circumstances, Boeing may enforce alternative economic terms pursuant to
such contracts, in which case the contracts could become less commercially
favorable to us. Alternatively, we may elect to terminate the applicable portion
of such contracts. We cannot assure you that Boeing will not terminate its
contracts with us, or that we will be able to maintain our current level of
sales to Boeing and Boeing's suppliers. 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.
Boeing recently entered into negotiations with the union representing
approximately 30% of its employees. If negotiations are unsuccessful, the union
employees could strike after the union contract expires on September 1, 1999.
Boeing may cancel orders or delay shipping dates if the union employees strike.
The loss of all or a substantial portion of our revenues from Boeing during a
union strike could have a material adverse effect on our business, financial
condition or results of operations.
RESTRICTIVE COVENANTS IN OUR INDENTURE AND OUR CREDIT AGREEMENT COULD CAUSE US
TO DEFAULT AND ACCELERATE OUR INDEBTEDNESS UNDER THE CREDIT AGREEMENT
If we fail to meet various restrictive covenants in the indenture governing
our notes or in our credit agreement, we could default and our payments could be
accelerated. In such an event, sufficient funds may not be available to pay the
noteholders. The restrictive covenants, among other things, restrict us and our
subsidiaries from:
- incurring additional indebtedness;
- incurring liens;
15
- paying dividends;
- making some types of other restricted payments or investments;
- consummating some types of asset sales;
- entering into some types of transactions with affiliates;
- merging or consolidating with another entity;
- disposing of all or substantially all of our assets; and
- prepaying the notes, except in a few specific circumstances.
The credit agreement also requires us to maintain specified financial ratios
and satisfy various financial tests. At March 31, 1999 we failed to meet three
of the financial covenants under our credit agreement. We have retroactively
amended the credit agreement effective March 31, 1999 such that we are deemed to
have been in compliance on March 31, 1999 and we are in compliance with the
financial covenants at this time. We cannot assure you that we will be able to
continue to meet such tests. Our ability to meet such financial ratios and tests
may be affected by events beyond our control. A breach of any of these covenants
could result in an event of default under the credit agreement. If such an event
of default occurs, the lenders could accelerate our indebtedness to them under
the credit agreement. We cannot assure you that our assets would be sufficient
to repay our indebtedness in full, including the notes. You should read the
discussions under the headings "Description of the Notes-- Covenants" and
"Description of Credit Agreement" for more details about our indebtedness.
WE ARE DEPENDENT ON THE COMMERCIAL AIRCRAFT INDUSTRY WHICH HAS HISTORICALLY BEEN
HIGHLY CYCLIC AND COULD SUFFER FINANCIALLY IF A DOWNWARD CYCLE CONTINUED TOO
LONG.
Changes in the rate of future aircraft deliveries, including cancellations
or deferrals of scheduled deliveries, could have a material adverse effect on
our business, financial condition or results of operations because our principal
customers are commercial aircraft manufacturers. Our business is closely related
to the financial performance of the commercial airlines, which has historically
been highly cyclical and competitive. Consequently, demand from the aircraft
industry has historically been subject to cyclical fluctuations and has been
adversely affected in the past by a number of factors, including, but not
limited to, increased fuel and labor costs and intense price competition.
Several domestic and foreign commercial airlines have in the past encountered
significant financial difficulties, resulting in several airlines delaying
aircraft orders, canceling their options to purchase aircraft, or seeking
protection under bankruptcy laws. Deferrals or cancellations in aircraft orders
could adversely affect the volume and price of orders placed for products used
to manufacture commercial aircraft, including the individual parts and
sub-assemblies, manufacturing kits and structural components we manufacture. You
should read the discussion under the heading "Business--Industry Overview and
Trends" for more information on the commercial aircraft industry.
In particular, Boeing has developed a large backlog of aircraft sales to
customers in Asia. Recent financial turmoil in Asia, including currency
devaluations affecting Boeing's Asian customers, has resulted in Boeing
announcing that it will adjust its production schedule over the next several
years to adjust for delays or cancellations of orders. One Boeing customer, the
People's Republic of China, has announced that it will seek to postpone
deliveries of approximately 25 aircraft from Boeing presently scheduled for
delivery in 2000 and 2001. Boeing has announced that it will decrease production
rates from approximately 620 aircraft in 1999 to 480 aircraft in 2000. Boeing's
changes in its production schedules may reduce Boeing's demand for our products
and could thus have a material adverse effect on our business, financial
condition or results of operations.
16
WE ARE DEPENDENT ON CUSTOMER CERTIFICATION OF OUR MANUFACTURING FACILITIES WHICH
COULD BE TERMINATED RESULTING IN FINANCIAL LOSS
We manufacture parts to exact specifications provided by our aerospace
customers in engineering drawings. You should read the discussions under the
headings "Business--Operations--Certification" and "Business--Sales and
Marketing" for more information on our manufacturing and operations. Our
customers require us to perform quality standards testing and certification
procedures on all manufactured parts and provide detailed records to ensure
traceability of each part. Our customers typically certify our manufacturing
facilities as meeting their quality standards. Such customer certification is
necessary for us to manufacture parts for our aerospace customers. From time to
time, other aerospace industry subcontractors have lost their customer
certifications by reason of, among other things, problems with product quality,
manufacturing processes or documentation. We have no reason to believe that any
of our certified manufacturing facilities will lose any of their customer
certifications, but we cannot assure you that such an event will not occur. If a
significant customer were to terminate our facility certification at one or more
of our facilities, it could have a material adverse effect on our business,
financial condition or results of operations.
YOU MAY NOT BE ABLE TO RELY ON FORWARD LOOKING STATEMENTS BECAUSE UNEXPECTED
CIRCUMSTANCES COULD ALTER CONDITIONS AND HARM OUR BUSINESS
This prospectus contains forward looking statements which involve risks and
uncertainties. Those statements appear in a number of places in this prospectus.
We have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties, and assumptions about us, including, among other things:
- Our anticipated growth strategies,
- Our expected internal growth,
- Our intention to produce integrated parts,
- Technological advances in our industry,
- Anticipated trends and conditions in our industry,
- The on-going needs of our existing customers, especially Boeing
- Our ability to integrate acquired businesses,
- Our ability to expand our customer base,
- Our future capital needs,
- Our future operating performance,
- Our ability to compete, including internationally, and
- Our ability to implement a Year 2000 readiness program.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this prospectus might not occur. You should be aware that
any such forward looking statements are not guarantees of future performance and
that actual results may differ from those in the forward looking statements as a
result of various factors. The accompanying information contained in this
prospectus identifies important factors that could cause such differences.
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
17
acquisitions, we may not be able to achieve the goals we have articulated in
this prospectus. 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. Unlike older,
established companies, we have acquired six new operating companies in 1998. We
are in the process of integrating these companies. Any delays or unexpected
costs incurred in connection with the integration of the acquired companies
could have a material adverse effect on our business, financial condition or
results of operations.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT WHICH LIMITS OUR FLEXIBILITY AND INCREASES
OUR VULNERABILITY TO A DECREASE IN REVENUES OR CASH FLOW AND WHICH MAY AFFECT
OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES
At March 31, 1999 we had approximately $195.1 million of consolidated
indebtedness outstanding, approximately $10.1 million of cash, approximately
$251.1 million of total assets, approximately $132.1 million of total tangible
assets and approximately $28.9 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 equal to 3.6 times pro
forma combined 1998 EBITDA. You should read the discussions under the headings
"Capitalization," "Management's Discussion and Analysis of Consolidated
Financial Condition and Consolidated Results of Operations" and "Unaudited Pro
Forma Financial Data" for further information on the financial results of
Compass.
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 a decrease in revenues or cash flow
because a greater portion of our resources must be dedicated to servicing
our debt obligations and we may have fewer resources available to assist us
in maintaining our business operations during adverse conditions; and
- increasing our vulnerability to interest rate increases because borrowings
under our bank credit facilities are at variable interest rates.
Pro forma interest expense for the year ended December 31, 1998 was $19.4
million which was $37.0% of pro forma EBITDA for the year ended December 31,
1998. Interest expense for the three months ended March 31, 1999 was $5.1
million which was 67.0% of EBITDA for the three months ended March 31, 1999.
Our ability to pay interest on the notes and to satisfy our other debt
obligations will depend upon, among other things, our future operating
performance and our ability to refinance indebtedness when necessary. Each of
these factors is to a large extent dependent on economic, financial, competitive
and other factors beyond our control. If, in the future, we cannot generate
sufficient cash from operations to make scheduled payments on the notes or to
meet our other obligations we will need to refinance, obtain additional
financing or sell assets. We cannot assure you that our business will generate
cash flow, or that we will be able to obtain funding sufficient to satisfy our
debt service requirements.
18
OUR CONTRACTS ASSOCIATED WITH OUR BACKLOG COULD BE TERMINATED, WHICH WOULD
DECREASE OUR FUTURE REVENUE
Our backlog and bookings are subject to fluctuations and are not necessarily
indicative of future revenues. Our contracts typically contain contingency
provisions permitting termination by the customer at any time without penalty.
We cannot assure you that backlog will be completed and booked as revenue.
Cancellations of pending contracts or terminations or reductions of contracts in
progress could have a material adverse effect on our business, financial
condition or results of operations. You should read the discussion under the
heading "Business--Backlog" for more information on how backlog affects our
business.
WE MAY BE EXPOSED TO ENVIRONMENTAL RISKS AT OUR MANUFACTURING FACILITIES AND ARE
SUBJECT TO ENVIRONMENTAL REGULATION
We are subject to federal, state, local and foreign laws, regulations and
ordinances establishing health and environmental quality standards, and may be
subject to liabilities or penalties for violations of those standards. We are
also subject to laws and regulations governing remediation of contamination at
facilities currently or formerly owned or operated by us or to which we have
sent hazardous substances or wastes for treatment, recycling or disposal. We
acquire, and expect to continue to acquire, pre-existing businesses that have
historical and ongoing operations. We have and will have limited information
about the past activities of those businesses and their operations on the
acquired properties. We have acquired at least one leased property that is
currently under investigation by governmental authorities for groundwater
contamination and we have been asked to conduct additional investigations. We
have also been named a defendant in an action filed by an owner of property
adjacent to property we lease. At this time, we cannot determine, in either
case, what cleanup activities, if any, will be required. Soil and groundwater
contamination may also exist on our other properties as a result of current or
former operations on our properties, or operations on other properties. We may
be subject to future liabilities or obligations as a result of new or more
stringent interpretations of existing laws and regulations. In addition, we may
have liabilities or obligations in the future if we discover any environmental
contamination or liability at any of our facilities, or at facilities we may
acquire. Such matters may have a material adverse effect on our business,
financial condition or results of operations.
WE MAY BE REQUIRED TO PAY OUT OF POCKET COSTS IF AVIATION-RELATED OR PRODUCT
LIABILITY CLAIMS EXCEED INSURANCE COVERAGE
We currently carry aviation products insurance. To date, we have not
experienced any significant uninsured or insured aviation-related claims or any
material product liability claims. However, we cannot assure you that our
existing insurance coverage will be adequate to cover future claims that may
arise or we will be able to renew such coverage at commercially reasonable
rates.
FRAUDULENT TRANSFER STATUTES MAY LIMIT YOUR RIGHTS AS A NOTE HOLDER TO RECEIVE
PAYMENTS ON THE NOTES
Each of our 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
19
whether a guarantor received less than fair consideration for incurring its
obligations under its guarantee, and whether:
- a guarantor was insolvent at the time it entered into the guarantee or was
rendered insolvent by entering into the guarantee;
- a guarantor's remaining unencumbered assets constituted sufficient capital
for the conduct of the guarantor's business or operations; and
- a guarantor intended to incur or believed it would incur debts beyond its
ability to pay as such debts matured.
A court could also avoid a guarantor's guarantee if it found that the
guarantor entered into the guarantee with the actual intent to hinder, delay or
defraud its creditors.
If a guarantor's liability under its guarantee exceeds the amount the
guarantor directly benefits from the proceeds of the notes, a court is likely to
find that it did not receive fair consideration or reasonably equivalent value
for its guarantee.
A court will use a different measure of insolvency for purposes of the
foregoing depending on the law of the jurisdiction being applied. Generally,
however, an entity would be considered insolvent if the sum of its debts is
greater than all of its property at a fair valuation or if the present fair
market value of its assets is less than the amount that will be required to pay
its probable liability on its existing debts as they become absolute and mature.
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 March
31, 1999 we had outstanding $80.0 million of senior indebtedness and $110.0
million of senior subordinated indebtedness and our subsidiaries had $5.1
million in outstanding indebtedness. We may also incur additional senior
indebtedness consistent with the terms of our debt agreements, such as
borrowings in connection with future acquisitions.
In the event of our default in any payment due on our senior indebtedness,
or our bankruptcy, liquidation or dissolution, our assets would be available to
pay obligations on the notes only after all payments had been made on our senior
indebtedness. As a result, the lenders under our credit facility may receive
more ratably, and note holders may receive less ratably, than our other
creditors and may receive no compensation of any kind in the event of
bankruptcy, liquidation, reorganization, or a similar proceeding. You should
read the discussion under the heading "Description of Notes-- Subordination" for
more information on the ranking of the notes in relation to other indebtedness.
We are a holding company whose material assets consist primarily of the
capital stock of our subsidiaries. Consequently, we are dependent upon the legal
and contractual ability of our subsidiaries to pay dividends in order to make
payments on the notes and satisfy any repurchase obligations relating to the
notes, as a result of a Change of Control or a sale or other disposition of
various assets. You should read the discussion under the heading "--Fraudulent
Transfer Considerations" and "Description of the Series B Notes" for more
information on our dependence on subsidiaries. We cannot assure you that our
subsidiaries will make sufficient dividend payments to enable us to meet our
obligations under the notes.
20
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE
Upon the occurrence of some specific kinds of change of control events, we
will be required by the indenture to offer to repurchase all outstanding notes.
However, it is possible that we will not have sufficient funds at the time of
the change of control to make the required repurchase of notes or that
restrictions in our credit agreement will not allow such repurchases. Our
failure to repurchase the notes could result in a default under the indenture
and could also result in a default under our credit agreement, thus restricting
our ability to make payments to the holders of the notes. If we default on our
obligations under the indenture, including the obligation to repurchase the
notes upon a change in control, holders of the notes would be entitled to
exercise remedies under the indenture. You should read the discussion under the
heading "Description of the Series B Notes--Events of Default and Remedies" for
more information on the remedies which may be available to you if we are unable
to repurchase the notes upon a change in control.
WE MAY NOTE BE REQUIRED TO MAKE A CHANGE OF CONTROL OFFER IF WE SELL OR TRANSFER
OUR ASSETS TO ANOTHER PARTY
The ability of a holder of notes to require Compass to repurchase such notes
as a result of a sale or transfer of less than all of the assets of Compass and
the Guarantors to another person or group may be uncertain. The definition of
change of control includes a phrase relating to the direct or indirect sale or
transfer of "all or substantially all" of the assets of Compass on a
consolidated basis. Although there is a limited body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. The interpretation of the phrase "substantially
all" will be dependent upon particular facts and circumstances. You should read
the discussion under the heading "Description of the Series B
Notes--Covenants--Repurchase of Notes at the Option of the Holder Upon a Change
of Control" for more information on your ability to require Compass to
repurchase notes upon a change of control.
NO PUBLIC TRADING MARKET FOR THE NOTES EXISTS AND YOU MAY NOT BE ABLE TO SELL
THEM
There has not been an established trading market for the notes. Although two
of the initial purchasers have told us they currently make a market in the
outstanding notes, and, if issued, intend to make a market in the Series B 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 Series
B 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.
21
OUTSTANDING NOTES THAT ARE NOT EXCHANGED WILL CONTINUE TO BE SUBJECT TO TRANSFER
RESTRICTIONS
Untendered outstanding notes that are not exchanged for Series B 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 will 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 various
representations and agreements relating to the transfer of the outstanding
notes. If such transfer is for an aggregate principal amount of
outstanding notes less than $250,000, the holder must deliver to us, if we
so request, an opinion of counsel acceptable to us that the transfer is in
compliance with the Securities Act; and
- a holder of outstanding notes who desires to sell or otherwise dispose of
all or any part of its outstanding notes under specific exemptions to the
Securities Act must deliver to us, upon our request, an opinion of counsel
satisfactory to us that such exemption is available.
22
CAPITALIZATION
The following table sets forth the consolidated cash and consolidated
capitalization of Compass at March 31, 1999. 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 MARCH 31,
1999
--------------------
(UNAUDITED)
(DOLLARS IN
THOUSANDS)
CASH AND CASH EQUIVALENTS................................................................... $ 10,050
DEBT (INCLUDING CURRENT PORTION):
Notes..................................................................................... $ 110,000
Term Loan A............................................................................... 34,125
Term Loan B............................................................................... 44,888
Acquisition Line.......................................................................... 1,000
Capital leases and other.................................................................. 5,117
--------
Long-term obligations (including current portion) (1)................................... $ 195,130
STOCKHOLDERS' EQUITY:
Common stock.............................................................................. 248
Additional paid-in capital................................................................ 28,718
Retained earnings......................................................................... (103)
--------
TOTAL STOCKHOLDERS' EQUITY.............................................................. 28,863
--------
TOTAL CAPITALIZATION.................................................................... $ 223,993
--------
--------
- ------------------------
(1) Long-term obligations include long-term debt, including the current portion,
and capital leases.
23
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.
1998 ACQUISITIONS
FROM COMPASS
COMPASS JANUARY 1, 1998 COMPASS PRO FORMA
YEAR ENDED THROUGH COMBINED WITH YEAR ENDED
DECEMBER 31, THE DATE OF 1998 DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998(1) ACQUISITION(2) ACQUISITIONS(3) ADJUSTMENTS(4) 1998(5)
- ------------------------------------- ------------- ----------------- ------------------- --------------- -------------
(UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA:
Revenues............................. $ 96,547 $ 86,897 $ 183,444 $ -- $ 183,444
Cost of sales........................ 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(6).... 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):
operating activities............... $ (6,677) $ 14,179 $ 7,502 $ 760 $ 8,262
EBITDA(7).......................... 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 N/A 255,505 N/A 255,505
Long-term obligations (including
current portion) (8)............... 196,968 N/A 196,968 N/A 196,968
Stockholders' equity (deficit)....... 29,955 N/A 29,955 N/A 29,955
- ------------------------
(1) Reflects the results of operations of Brittain Machine, Wichita
Manufacturing, Barnes Machine, Sea-Lect and Pacific Hills for the period
from each of their dates of acquisition by Compass through December 31,
1998. Also reflects the operations of Compass, Aeromil and Western Methods
for the year ended December 31, 1998.
24
(2) Reflects the results of operations of: (a) Brittain Machine, Wichita
Manufacturing and Barnes Machine for the period from January 1, 1998 through
April 21, 1998, (b) Sea-Lect for the period from January 1, 1998 through May
11, 1998, (c) Pacific Hills for the period from January 1, 1998 through
November 20, 1998, and (d) Modern for the year ended December 31, 1998.
The 1998 results of operations for each of these companies for the period
prior to acquisition is as follows:
BRITTAIN MACHINE BARNES MACHINE SEA-LECT PACIFIC HILLS MODERN
FROM FROM FROM FROM FROM
JANUARY 1, 1998 JANUARY 1, 1998 JANUARY 1, 1998 JANUARY 4, 1998 JANUARY 1, 1998
THROUGH THROUGH THROUGH THROUGH THROUGH
(DOLLARS IN THOUSANDS) APRIL 21, 1998 APRIL 21, 1998 MAY 11, 1998 NOVEMBER 20, 1998 DECEMBER 31, 1998
- --------------------------- ----------------- ----------------- ----------------- ------------------- -------------------
(UNAUDITED)
Income Statement Data:
Revenues................... $ 21,344 $ 5,854 $ 5,369 $ 28,282 $ 26,048
Cost of sales.............. 14,121 3,795 4,474 10,687 17,461
------- ------ ------ ------- -------
Gross profit............... 7,223 2,059 895 17,595 8,587
Selling, general and
administrative
expenses................. 4,901 185 772 7,389 3,969
------- ------ ------ ------- -------
Operating income........... 2,322 1,874 123 10,206 4,618
Interest expense, net...... 114 34 66 -- 503
Other expense (income)..... (123) -- (4) -- 1,339
------- ------ ------ ------- -------
Income before income
taxes.................... 2,331 1,840 61 10,206 2,776
Income taxes............... 936 645 -- -- 480
------- ------ ------ ------- -------
Net income................. $ 1,395 $ 1,195 $ 61 $ 10,206 $ 2,296
------- ------ ------ ------- -------
------- ------ ------ ------- -------
Other Data:
Net cash flow provided by
(used) in operating
activities............... $ 2,739 $ (55) $ (138) $ 10,789 $ 844
EBITDA..................... 2,935 1,950 203 10,386 5,104
EBITDA margin.............. 13.8% 33.3% 3.8% 36.7% 19.6%
Depreciation and
amortization............. $ 613 $ 76 $ 80 $ 180 $ 486
(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 Manufacturing,
Barnes Machine, Sea-Lect, and Pacific Hills.
The purchase price for each company acquired by Compass in 1998 was as
follows:
- Brittain Machine--$46.9 million
- Wichita Manufacturing--$8.0 million
- Barnes Machine--$15.0 million
- Sea-Lect (including J&J Leasing, Inc., acquired as a subsidiary of
Sea-Lect and merged into Sea-Lect in March 1999)--$12.2 million
- Pacific Hills--$73.7 million
- Modern--$23.1 million
25
The purchase price for each of Compass' subsidiaries was allocated as
follows:
BARNES BRITTAIN WICHITA PACIFIC
MACHINE MACHINE MANUFACTURING SEA-LECT HILLS
----------- ----------- --------------- ----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 687 $ 971 $ 631 $ -- $ --
Accounts receivable................................ 2,035 7,093 1,732 2,246 2,258
Inventories........................................ 1,584 7,043 1,803 2,584 2,662
Prepaid expenses and other' current assets......... 13 36 25 -- 34
----------- ----------- ------- ----------- ---------
Total current assets................................. 4,319 15,143 4,191 4,830 4,954
Property and equipment, net.......................... 6,712 19,329 4,488 4,587 1,584
Other Assets......................................... 133 637 -- -- --
Goodwill............................................. 6,768 19,258 2,359 4,155 67,920
----------- ----------- ------- ----------- ---------
Total assets......................................... $ 17,932 $ 54,367 $ 11,038 $ 13,572 $ 74,458
----------- ----------- ------- ----------- ---------
----------- ----------- ------- ----------- ---------
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable................................... $ 1,162 $ 1,191 $ 1,596 $ 1,169 510
Accrued expenses................................... 242 1,917 272 240 276
Income taxes payable............................... 489 (644) 222 -- --
Current portion of long term debt.................. -- 55 -- -- --
----------- ----------- ------- ----------- ---------
Total current liabilities............................ 1,893 2.519 2,090 1,409 786
Deferred tax liability............................... 1,050 4,282 976 -- --
Other debt, less current portion..................... -- 645 -- -- --
Stockholders' equity:
Paid-in-capital...................................... 14,989 46,921 7,972 12,163 73,672
----------- ----------- ------- ----------- ---------
Total stockholders' equity........................... 14,989 46,921 7,972 12,163 73,672
----------- ----------- ------- ----------- ---------
Total liabilities and stockholders' equity........... $ 17,932 $ 54,367 $ 11,038 $ 13,572 $ 74,458
----------- ----------- ------- ----------- ---------
----------- ----------- ------- ----------- ---------
MODERN
-----------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 1,590
Accounts receivable................................ 1,294
Inventories........................................ 6,632
Prepaid expenses and other' current assets......... 358
-----------
Total current assets................................. 9,874
Property and equipment, net.......................... 6,782
Other Assets......................................... --
Goodwill............................................. 8,664
-----------
Total assets......................................... $ 25,320
-----------
-----------
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable................................... 892
Accrued expenses................................... 296
Income taxes payable............................... --
Current portion of long term debt.................. --
-----------
Total current liabilities............................ 1,188
Deferred tax liability............................... 1,037
Other debt, less current portion..................... --
Stockholders' equity:
Paid-in-capital...................................... 23,095
-----------
Total stockholders' equity........................... 23,095
-----------
Total liabilities and stockholders' equity........... $ 25,320
-----------
-----------
(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. Goodwill is amortized on a straight-line
basis over a period of 20 years.
- Reduced expense of $0.2 million to eliminate the cost associated with
discontinued lease payments by the acquired company to an affiliate of the
former owner(s) of the acquired businesses.
26
- Reduced expense of $3.8 million related to one-time non-recurring bonus
payments by the former owner(s) of acquired companies to employees of
acquired businesses. The former owners are no longer in the employ of
Compass or the acquired businesses. Compass is under no obligation and
does not intend 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) The pro forma adjustment to interest expense assumes that the $81.0 million
of senior debt and the $110.0 million of senior subordinated debt was
incurred as of January 1, 1998. The pro forma adjustment to interest expense
consists of:
- Interest expense on the senior subordinated debt of $110.0 million at
10 1/8% for the period from January 1, 1998 through April 20, 1998 of
approximately $3.4 million.
- Interest expense on the senior debt of $81.0 million at 9 1/4% for the
period from January 1, 1998 through December 31, 1998, less actual
interest on senor debt incurred during the period November 20,1998 through
December 31, 1998, of approximately $6.7 million.
The effect on interest expense of a 1/4% change in interest rate of our
variable rate debt would be approximately $0.2 million.
(7) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under GAAP and should not be construed as an alternative to
operating income or cash flows from operating activities as determined by
GAAP. EBITDA data is presented because such data is used by some investors
to determine Compass' ability to meet debt service requirements and is used
in some debt covenant calculations required under the indenture and Compass'
existing credit agreement. 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. Furthermore, EBITDA as reported
by Compass may not be comparable to EBITDA reported by other companies.
(8) Long-term obligations include long-term debt, including the current portion,
and capital leases.
27
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 Compass for the three months ended March
31, 1999 are derived from unaudited financial statements included elsewhere in
this prospectus. The consolidated financial statements of Brittain Machine as of
and for the period from July 1, 1997 through April 21, 1998 and 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.
28
BRITTAIN
MACHINE COMPASS
FOR THE FOR THE
COMPASS COMPASS PERIOD THREE
FOR THE FOR THE FROM MONTHS
YEAR 36 DAYS JULY 1, BRITTAIN MACHINE FOR THE YEARS ENDED
ENDED ENDED 1997 THROUGH ENDED JUNE 30, -----------
DECEMBER 31, DECEMBER 31, APRIL 21, ------------------------------------------ MARCH 31,
(DOLLARS IN THOUSANDS) 1998 1997 1998 1997 1996 1995 1994 1999
- ---------------------- ------------- ------------- ------------- --------- --------- --------- --------- -----------
(UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA:
Revenues.............. $ 96,547 $ 3,057 $ 49,682 $ 35,481 $ 26,892 $ 19,244 $ 20,788 $ 34,392
Cost of sales......... 70,410 2,386 34,640 25,656 19,076 16,708 14,729 24,578
------------- ------------- ------------- --------- --------- --------- --------- -----------
Gross profit.......... 26,137 671 15,042 9,825 7,816 2,536 6,059 9,814
Selling, general and
administrative
expenses............ 14,537 404 6,798 3,229 2,953 2,654 2,632 6,262
------------- ------------- ------------- --------- --------- --------- --------- -----------
Operating income
(loss).............. 11,600 267 8,244 6,596 4,863 (118) 3,427 3,552
Interest expense,
net................. 8,493 166 386 398 403 359 293 5,074
Other (income)
expense............. 670 (16) (20) 84 77 (63) (20) 512
------------- ------------- ------------- --------- --------- --------- --------- -----------
Income (loss) before
taxes............... 2,437 117 7,878 6,114 4,383 (414) 3,154 (2,034)
Income taxes.......... 1,522 43 2,901 2,208 1,637 (194) 1,282 (942)
------------- ------------- ------------- --------- --------- --------- --------- -----------
Net income (loss)..... $ 915 $ 74 $ 4,977 $ 3,906 $ 2,746 $ (220) $ 1,872 $ (1,092)
------------- ------------- ------------- --------- --------- --------- --------- -----------
------------- ------------- ------------- --------- --------- --------- --------- -----------
OTHER DATA:
Net cash flow provided
by (used in):
operating
activities........ $ (6,677) $ 269 $ 7,978 $ (155) $ 2,381 $ 1,027 $ 2,858 $ 4,706
investing
activities........ (172,117) (23,456) (3,535) (1,244) (1,619) (2,293) (1,198) (689)
financing
activities........ 186,222 23,630 (3,215) 1,763 (835) 1,331 (1,234) (1,838)
------------- ------------- ------------- --------- --------- --------- --------- -----------
Net increase
(decrease) in
cash................ $ 7,428 $ 443 $ 1,228 $ 364 $ (73) $ 65 $ 426 $ 2,179
------------- ------------- ------------- --------- --------- --------- --------- -----------
------------- ------------- ------------- --------- --------- --------- --------- -----------
EBITDA(1)............. $ 20,550 $ 486 $ 9,755 $ 8,265 $ 6,255 $ 1,185 $ 4,544 $ 7,601
EBITDA margin......... 21.3% 15.9% 19.6% 23.3% 23.3% 6.2% 21.9% 22.1%
Depreciation and
amortization........ $ 8,440 $ 219 $ 1,511 $ 1,669 $ 1,392 $ 1,303 $ 1,117 $ 4,374
Capital
expenditures........ 5,701 25 3,559 1,072 1,519 2,575 1,056 689
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents......... $ 7,871 $ 443 $ 1,683 $ 455 $ 91 $ 164 $ 589 $ 10,050
Total assets.......... 255,505 33,789 $ 32,776 28,602 22,095 17,290 15,110 251,053
Long-term obligations
(including current
portion) (2)........ 196,968 20,585 $ 3,775 3,950 4,495 5,131 3,957 195,130
Stockholders'
equity.............. 29,955 9,074 20,243 15,266 11,360 8,614 8,834 28,863
MARCH 31,
(DOLLARS IN THOUSANDS) 1998
- ---------------------- -----------
INCOME STATEMENT DATA:
Revenues.............. $ 8,555
Cost of sales......... 6,749
-----------
Gross profit.......... 1,806
Selling, general and
administrative
expenses............ 1,055
-----------
Operating income
(loss).............. 751
Interest expense,
net................. 361
Other (income)
expense............. --
-----------
Income (loss) before
taxes............... 390
Income taxes.......... 152
-----------
Net income (loss)..... $ 238
-----------
-----------
OTHER DATA:
Net cash flow provided
by (used in):
operating
activities........ $ 196
investing
activities........ (727)
financing
activities........ 801
-----------
Net increase
(decrease) in
cash................ $ 270
-----------
-----------
EBITDA(1)............. $ 1,366
EBITDA margin......... 16.0%
Depreciation and
amortization........ $ 615
Capital
expenditures........ 727
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents......... $ 713
Total assets.......... 35,274
Long-term obligations
(including current
portion) (2)........ 21,386
Stockholders'
equity.............. 9,312
- ------------------------
(1) EBITDA is defined as operating income plus depreciation, goodwill
amortization and management fees paid to an affiliate. EBITDA is not a
defined term under GAAP and should not be construed as an alternative to
operating income or cash flows from operating activities as determined by
GAAP. EBITDA data is presented because such data is used by some investors
to determine Compass' ability to meet debt service requirements and is used
in some debt covenant calculations required under the indenture and Compass'
existing credit agreement. 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. Furthermore, EBITDA as reported
by Compass may not be comparable to EBITDA reported by other companies.
(2) Long-term obligations include long-term debt, including the current portion,
and capital leases.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical Consolidated Financial Data, "Unaudited Pro Forma Financial Data" and
the consolidated financial statements and notes related thereto of Compass and
its predecessor, Brittain Machine, and other more detailed financial data
appearing elsewhere in this prospectus.
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 Manufacturing 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 more sub-assemblies, manufacturing kits and
structural components. 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 THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1998.
REVENUES. Revenues increased $25.8 million to $34.4 million for the three
months ended March 31, 1999 from $8.6 million for the three months ended March
31, 1998. Combined revenues of Western Methods and Aeromil for the three months
ended March 31, 1999 decreased by $0.9 million, a decrease of 10.6%, as compared
to the three months ended March 31, 1998 as a result of lower Boeing
requirements in 1999 as compared to 1998. Consolidated revenues increased as a
result of the acquisitions of Brittain Machine, Barnes Machine, Wichita
Manufacturing, Sea-Lect, Pacific Hills and Modern.
COST OF SALES. Cost of sales increased $17.9 million to $24.6 million for
the three months ended March 31, 1999 from $6.7 million for the three months
ended March 31, 1998. 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 71.5% for the three months ended March 31, 1999 from
78.9% for the three months ended March 31, 1998. This percentage decrease was
primarily attributable to the acquisitions completed by Compass in 1998 which
provided a higher level of average margins.
30
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.2 million to $6.3 million for the three
months ended March 31, 1999 from $1.1 million for the three months ended March
31, 1998. 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 18.2% for the three months ended March 31, 1999 from 12.3% for the
three months ended March 31, 1998. Selling, general and administrative expenses
as a percentage of revenues for Western Methods and Aeromil was 11.2% for the
three months ended March 31, 1999 as compared to 9.4% for the three months ended
March 31, 1998. Selling, general and administrative expenses as a percentage of
revenues for the three months ended March 31, 1999 for the companies acquired by
Compass in 1998 was 13.4%. Corporate office selling, general and administrative
expenses, including management fees, was $1.8 million for the three months ended
March 31, 1999 as compared to $0.3 million for the three months ended March 31,
1998. The increase in selling, general and administrative expenses as a
percentage of revenues for the three months ended March 31, 1999 is primarily
attributable to the overall growth of Compass and the development of the
corporate office.
OPERATING INCOME. Operating income increased $2.8 million to $3.6 million
for the three months ended March 31, 1999 from $0.8 million for the three months
ended March 31, 1998. The increase in operating income was primarily
attributable to the acquisitions completed by Compass in 1998 which provided an
additional $3.0 million of operating income in 1999, partly offset by lower
operating income of $0.2 million for the acquisitions completed in 1997.
Operating income as a percentage of revenues increased to 10.3% for the three
months ended March 31, 1999 from 8.8% for the three months ended March 31, 1998
as a result of increased gross profit margins, partly offset by increased
selling, general and administrative expenses as a percentage of sales.
INTEREST EXPENSE. Interest expense increased $4.7 million to $5.1 million
for the three months ended March 31, 1999 from $0.4 million for the three months
ended March 31, 1998. $2.8 million of the increase in interest expense is
attributable to the issuance of the senior subordinated notes by Compass in
April 1998, $1.7 million of the increase is attributable to increased bank
borrowings by Compass in November 1998 and to a full year of borrowings in
connection with the acquisitions completed by Compass in 1997 and $0.2 million
of the increase is attributable to interest on operating leases.
NET INCOME. Net income decreased $1.3 million to a net loss of $1.1 million
for the three months ended March 31, 1999 from net income of $0.2 million for
the three months ended March 31, 1998. The decrease in net income was primarily
attributable to increased operating income of $2.8 million, offset by increased
interest expense of $4.7 million, increased amortization of deferred financial
fees of $0.5 million and a decrease in income tax expense of $1.1 million.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash flow
from operating activities increased $4.5 million to $4.7 million for the three
months ended March 31, 1999 from $0.2 million for the three months ended March
31, 1998. The increase in net cash flow provided by operating activities during
the three months ended March 31, 1999 was primarily attributable to depreciation
and amortization expense and lower accounts receivable during the three months
ended March 31, 1999 compared to the three months ended March 31, 1998, partly
offset by lower net income and accounts payable.
NET CASH FLOW USED IN INVESTING ACTIVITIES. Net cash flow used in investing
activities was related to the purchase of property, plant and equipment and was
$0.7 million for the three months ended March 31, 1999 and for the three months
ended March 31, 1998.
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash flow
used in financing activities was $1.8 million for the three months ended March
31, 1999 as compared to net cash flow
31
provided by financing activities of $0.8 million for the three months ended
March 31, 1998. The decrease in net cash flow provided by financing activities
for the three months ended March 31, 1999 was primarily attributable to
increased principal payments on debt and lower bank borrowings.
EBITDA. EBITDA increased $6.2 million to $7.6 million for the three months
ended March 31, 1999 from $1.4 million for the three months ended March 31, 1998
as a result of the acquisitions completed by Compass in 1998. EBITDA as a
percentage of revenues increased to 22.1% for the three months ended March 31,
1999 from 16.0% for the three months ended March 31, 1998. The increase in
EBITDA was primarily attributable to increased operating income of $2.8 million,
an increase in depreciation and amortization of $3.3 million and an increase in
management fees of $0.1 million.
HISTORICAL RESULTS OF OPERATIONS OF COMPASS FOR THE YEAR ENDED DECEMBER 31, 1998
COMPARED TO PRO FORMA RESULTS OF OPERATIONS OF COMPASS FOR THE YEAR ENDED
DECEMBER 31, 1998
REVENUES. Historical revenues were $96.5 million for the year ended
December 31, 1998 compared to pro forma revenues of $183.4 million for the same
period. The difference was primarily attributable to the timing of the
acquisitions by Compass in 1998 of Brittain Machine, Barnes Machine, Wichita
Manufacturing, Sea-Lect and Pacific Hills.
COST OF SALES. Historical cost of sales was $70.4 million for the year
ended December 31, 1998 compared to pro forma cost of sales of $121.8 million
for the same period. The difference was primarily attributable to the
acquisitions completed by Compass in 1998 and to pro forma adjustments which
increased pro forma cost of sales $0.9 million. Historical cost of sales as a
percentage of historical revenues was 73.0% for the year ended December 31, 1998
as compared to pro forma cost of sales as a percentage of pro forma revenues of
66.4% for the same period. The difference was primarily attributable to the
acquisitions by Compass in 1998 of Brittain Machine, Barnes Machine, Wichita
Manufacturing, Sea-Lect and Pacific Hills which provided a higher level of
average margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Historical selling, general
and administrative expenses were $14.5 million for the year ended December 31,
1998 compared to pro forma selling, general and administrative expenses of $24.7
million for the same period. The difference was primarily attributable to the
acquisitions completed by Compass in 1998 and to pro forma adjustments which
reduced pro forma selling, general and administrative expenses by $7.0 million.
Historical selling, general and administrative expenses as a percentage of
historical revenues was 15.0% for the year ended December 31, 1998 compared to
pro forma selling, general and administrative expenses as a percentage of pro
forma revenues of 13.5% for the same period.
OPERATING INCOME. Historical operating income was $11.6 million for the
year ended December 31, 1998 compared to pro forma operating income of $36.9
million for the same period. The difference was primarily attributable to the
acquisitions completed by Compass in 1998 and to pro forma adjustments which
increased pro forma operating income by $6.2 million. Historical operating
income as a percentage of historical revenues was 12.0% for the year ended
December 31, 1998 compared to pro forma operating income as a percentage of pro
forma revenues of 20.0% for the same period. The difference was primarily
attributable to the acquisitions completed by Compass in 1998 of Brittain
Machine, Barnes Machine, Wichita Manufacturing, Sea-Lect and Pacific Hills which
provided a higher level of operating income.
INTEREST EXPENSE. Historical interest expense was $8.5 million for the year
ended December 31, 1998 compared to pro forma interest expense of $19.4 million
for the same period. The difference was primarily attributable to pro forma
adjustments to increase interest expense related to increased borrowings
required to reflect the acquisitions completed by Compass in 1998 as if they had
occurred on January 1, 1998.
32
NET INCOME. Historical net income was $0.9 million for the year ended
December 31, 1998 compared to pro forma net income of $8.2 million for the same
period. The difference was primarily attributable to the acquisitions completed
by Compass in 1998 and pro forma adjustments.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Historical net
cash flow used in operating activities was $6.7 million for the year ended
December 31, 1998 compared to pro forma net cash flow provided by operating
activities of $8.3 million for the same period. The difference was primarily
attributable to the acquisition completed by Compass in 1998 which increased pro
forma net cash flow offset by increased pro forma working capital requirements.
EBITDA. Historical EBITDA was $20.6 million for the year ended December 31,
1998 compared to pro forma EBITDA of $52.6 million for the same period. The
difference was primarily attributable to the acquisitions completed by Compass
in 1998 and to higher margins of the acquired companies. Historical EBITDA as a
percentage of historical revenues was 21.3% for the year ended December 31, 1998
compared to pro forma EBITDA as a percentage of pro forma revenues of 28.7% for
the same period.
BRITTAIN MACHINE FOR THE PERIOD FROM JULY 1, 1997 THROUGH APRIL 21, 1998
COMPARED TO THE YEAR ENDED JUNE 30, 1997.
REVENUES. Revenues increased $14.2 million to $49.7 million for the period
from July 1, 1997 through April 21, 1998 from $35.5 million for the year ended
June 30, 1997. The increase was primarily attributable to a further increase in
capacity by the addition of two high-speed, three-spindle five-axis gantry mills
and two machining centers, as well as increased shipments to both Boeing and
Northrop Grumman Corporation.
COST OF SALES. Cost of sales increased $8.9 million to $34.6 million for
the period from July 1, 1997 to April 21, 1998 from $25.7 million for the year
ended June 30, 1997. Cost of sales increased primarily as a result of the
increase in sales. Cost of sales as a percentage of revenues decreased to 69.7%
for the period from July 1, 1997 to April 21, 1998 from 72.3% for the year ended
June 30, 1997. This decrease was primarily attributable to a reduction in the
level of start up costs encountered in the previous period as well as improved
productivity gains.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.6 million to $6.8 million for the period
from July 1, 1997 to April 21, 1998 from $3.2 million for the year ended June
30, 1997. Selling, general and administrative expenses for the period from July
1, 1997 to April 21, 1998 include $3.8 million of non-recurring management and
employee bonuses paid in connection with the sale of Brittain Machine 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 9.1% for the year ended June 30, 1997. Excluding non-recurring bonuses,
selling, general and administrative expenses as a percentage of revenues for the
period from July 1, 1997 to April 21, 1998 was 6.0%.
OPERATING INCOME. Operating income increased $1.6 million to $8.2 million
for the period from July 1, 1997 through April 21, 1998 from $6.6 million for
the year ended June 30, 1997 as a result of an increase in revenues. Operating
income as a percentage of revenues decreased to 16.6% for the period from July
1, 1997 through April 21, 1998 from 18.6% for the year ended June 30, 1997.
NET INCOME. Net income increased $1.1 million to $5.0 million for the
period from July 1, 1997 through April 21, 1998 from $3.9 million for the year
ended June 30, 1997. The increase in net income was primarily attributable to
increased revenues and higher gross profit margins.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash flow
provided by operating activities increased $8.2 million to $8.0 million for the
period from July 1, 1997 through April 21, 1998
33
from net cash flow used in operating activities of $0.2 million for the year
ended June 30, 1997. The primary sources of cash during the period from July 1,
1997 through April 21, 1998 related to increases in net income, accounts payable
and accrued expenses, and a decrease in inventories.
NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash flow
used in investing activities was primarily related to purchases of property and
equipment. Net cash flow used in investing activities was $3.5 million for the
period from July 1, 1997 through April 21, 1998 and $1.2 million for the year
ended June 30, 1997.
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash flow
used in financing activities increased $5.0 million to net cash flow used in
financing activities of $3.2 million for the period from July 1, 1997 through
April 21, 1998 from $1.8 million of net cash flow provided by financing
activities for the year ended June 30, 1997. The increase in net cash flow used
in financing activities was primarily attributable to the repayments of
outstanding lines of credit and principal payments on debt.
EBITDA. EBITDA increased $1.5 million to $9.8 million for the period from
July 1, 1997 through April 21, 1998 from $8.3 million for the year ended June
30, 1997. The increase was primarily the result of an increase in revenues.
EBITDA as a percentage of revenues decreased to 19.6% for the period from July
1, 1997 through April 21, 1998 from 23.3% for the year ended June 30, 1997,
primarily as a result of increased selling, general and administrative expense
related to non-recurring bonuses above paid in connection with the sale of
Brittain Machine to 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
Next-Generation 737 and increased sales of fabricated tooling and fixtures.
COST OF SALES. Cost of sales increased $6.6 million to $25.7 million for
the year ended June 30, 1997 from $19.1 million for the year ended June 30,
1996. Cost of sales as a percentage of revenues increased to 72.3% for the year
ended June 30, 1997 from 70.9% for the year ended June 30, 1996. The increase in
cost of sales was primarily attributable to the high percentage of new work
undertaken during the year ended June 30, 1997, requiring higher start up costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million to $3.2 million for the year
ended June 30, 1997 from $3.0 million for the year ended June 30, 1996. Selling,
general and administrative expense as a percentage of revenues decreased to 9.1%
for the year ended June 30, 1997 from 11.0% for the year ended June 30, 1996.
The increase in selling, general and administrative expense was primarily
attributable to increased selling activity.
OPERATING INCOME. Operating income increased $1.7 million to $6.6 million
for the year ended June 30, 1997 from $4.9 million for the year ended June 30,
1996 as a result of an increase in revenues. Operating income as a percentage of
revenues increased to 18.6% for the year ended June 30, 1997 from 18.1% for the
year ended June 30, 1996.
NET INCOME. Net income increased $1.2 million to $3.9 million for the year
ended June 30, 1997 from $2.7 million for the year ended June 30, 1996. The
increase in net income was primarily attributable to the increase of revenues.
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES. Net cash flow
provided by operating activities decreased $2.6 million to net cash flow used in
operating activities of $0.2 million for the year
34
ended June 30, 1997 from $2.4 million of net cash flow provided by operating
activities for the year ended June 30, 1996. The primary uses of cash during the
year ended June 30, 1997 related to an increase in inventories partly offset by
an increase in net income.
NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES. Net cash flow
used in investing activities was primarily related to purchases of property and
equipment. Net cash flow used in investing activities was $1.2 million for the
year ended June 30, 1997 compared to $1.6 million for the year ended June 30,
1996.
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES. Net cash flow
provided by financing activities increased $2.6 million to $1.8 million for the
year ended June 30, 1997 from $0.8 million net cash flow used in financing
activities for the year ended June 30, 1996. The increase in net cash flow
provided by financing activities was primarily attributable to increased short
term borrowings.
EBITDA. EBITDA increased $2.0 million to $8.3 million for the year ended
June 30, 1997 from $6.3 million for the year ended June 30, 1996 as a result of
an increase in revenues. EBITDA as a percentage of revenues was 23.3% for the
years ended June 30, 1997 and June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
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 March 31, 1999 Compass had cash of approximately $10.1 million, working
capital of approximately $38.4 million and total debt, including the current
portion of long term debt, of approximately $195.1 million.
On April 21, 1998, Compass completed the private offering of $110.0 million
of 10 1/8% senior subordinated notes. After fees and expenses of $3.3 million,
the net cash proceeds of $106.7 million from the issuance and sale of the
outstanding notes were used to repay existing bank debt, to finance acquisitions
and for 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, as amended further on June 7, 1999, with
BankBoston, N.A. as Agent, NationsBank, N.A. as Co-Agent, the lenders named
therein, including BankBoston as a lender, Royal Bank of Canada as Syndication
Agent, General Electric Capital Corporation as Documentation Agent and
BancBoston Robertson Stephens Inc., an affiliate of BankBoston, as arranger,
providing for borrowing availability of up to $140.0 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 June 7, 1999 amendment to the credit agreement
retroactively amended some of these covenants effective as of March 31, 1999,
particularly covenants based on EBITDA targets and EBITDA ratios, to enable
Compass to maintain compliance with the terms of the credit agreement, as
amended. The June 7, 1999 amendment also increased interest rates by 0.25% and
increased some fees which are based on leverage ratios. You should read the
discussions under the headings "Risk Factors--Restrictive Covenants In Our
Indenture And Our Credit Agreement Could Cause Us To Default And Accelerate Our
Indebtedness Under The Credit Agreement" and "The Credit Agreement" for further
information on restrictive covenants contained in the credit agreement and the
amendment to the credit agreement.
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 $35 million acquisition line (the "Acquisition Line"). At March
31, 1999 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, subject to
35
approval by a majority of the lenders. You should read the discussion under the
heading "Description of Credit Agreement" for more information on the terms of
the credit agreement. The credit agreement replaced and terminated a $20.0
million senior secured revolving credit facility with BankBoston as lender and
administrative agent.
The 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 specific
financial ratios, and satisfy other financial condition tests prior to incurring
additional debt or making some payments. The terms of the notes and the credit
agreement include restrictive covenants that restrict Compass' ability to pay
dividends, sell some 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.
Operating activities provided $4.7 million of cash flow during the three
months ended March 31, 1999. Net cash used in investing activities during the
three months ended March 31, 1999 related to purchases of property and equipment
and was $0.7 million. Net cash used in financing activities during the three
months ended March 31, 1999 related to principal payments on long term debt and
was $1.8 million.
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. Compass used $6.7
million in net cash for operating activities for the year ended December 31,
1998. Net cash provided by financing activities was $186.2 million for the year
ended December 31, 1998. Net cash used for investing activities was $172.1
million for the year ended December 31, 1998.
Capital expenditures during the three months ended March 31, 1999 were
approximately $0.7 million for furniture and miscellaneous equipment. Capital
expenditures for the year ended December 31, 1998 were approximately $5.7
million. The capital expenditures were primarily for high-speed manufacturing
equipment. 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.
INDUSTRY TRENDS
Compass and other suppliers to Boeing have recently experienced a decrease
in the value and number of orders from Boeing for delivery in 1999 as compared
to 1998. We believe the reduction is due to changes in Boeing's purchasing
practices implemented as part of Boeing's strategy to reduce inventories and
increase its use of just-in-time manufacturing techniques. Boeing's stated goal
is to reduce its annual inventory turn rate, which is currently approximately
two, to an annual inventory turn rate of four. In addition, Boeing is
forecasting a reduction in its production of commercial aircraft to 480 aircraft
in 2000 relative to a projected production rate of 620 aircraft in 1999. Compass
is particularly experiencing a decline in the value of orders by Boeing for
delivery in 1999 at Brittain Machine and at Pacific Hills. Consolidated revenues
of Compass for the three months ended March 31,
36
1999 were $34.4 million, a decrease of approximately 37.0% from the combined
revenues of the eight operating subsidiaries of Compass during the same period
in 1998. Boeing orders could continue to decline and we cannot assure you that
Boeing orders will increase or return to the 1998 level in 1999. In addition,
Compass' results of operations in 1999 probably will not exceed 1998 pro forma
results.
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. You
should read the discussions under the section entitled "Risk Factors" for
further information on factors that may affect Compass' results of operations.
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 rates along the
entire interest rate yield curve would adversely affect the net fair value of
all interest sensitive financial instruments by $0.3 million for the three
months ended March 31, 1999. 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
some circumstances. You should read the discussion under the heading
"Description of the Series B Notes--Optional Redemption" for further information
regarding redemption of the notes.
INFLATION
Compass believes that inflation has not had a material impact on its results
of operations for the 36 days ended December 31, 1997, the year ended December
31, 1998 and the three months ended March 31, 1999.
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
37
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, Compass has
determined that some 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 March 31, 1999 Compass had spent an estimated $0.3 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 some 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,
38
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.
39
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The outstanding notes were sold by Compass on April 21, 1998 to Donaldson,
Lufkin & Jenrette, BancBoston Securities and Libra Investments as the initial
purchasers of the outstanding notes, pursuant to a purchase agreement dated
April 15, 1998 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 a registration rights
agreement on April 21, 1998. Pursuant to the registration rights agreement,
Compass agreed to:
- file with the Commission a registration statement under the Securities Act
with respect to the Series B notes within 240 days after the date of the
original issuance of the outstanding notes (the "Issue Date"),
- 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
- 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 at the rate of
$16,500 per week. The registration statement of which this prospectus is a part
is intended to satisfy the obligations of Compass under the registration rights
agreement. You should read the discussion under the heading "--Conditions of the
Exchange Offer" for further information regarding the registration rights
agreements.
TERMS OF THE EXCHANGE OFFER
Compass hereby offers, upon the terms and subject to the conditions set
forth in this prospectus and in the accompanying letter of transmittal, to
exchange $1,000 in principal amount of Series B notes for each $1,000 in
principal amount of the outstanding notes. Series B 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 their legal representative or attorney-in-fact,
as reflected on the records of the Trustee under the indenture governing the
notes are each eligible holders and may tender all or a portion of the
outstanding notes pursuant to the exchange offer.
The form and terms of the Series B notes under the indenture will be
identical in all material respects to the form and terms of the outstanding
notes. The Series B 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 Series B notes will bear interest
from their date of issuance at the same rate and upon the same terms as the
outstanding notes. You should read the discussion under the heading "Description
of the Series B notes" for more information on the form and terms of the Series
B notes. Accrued and unpaid interest on the outstanding notes accepted for
exchange for the period to but not including the exchange date, or date of
issuance of the Series B notes, will be paid to the registered holders of Series
B notes on the first interest payment date of the Series B 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.
40
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 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.
Compass shall be deemed to have accepted validly tendered outstanding notes
when, as, and if Compass has given oral or written notice to that effect to the
exchange agent. The exchange agent will act as agent for the tendering holders
of outstanding notes for the purposes of receiving the Series B notes from
Compass.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence of some other events described in this
prospectus or otherwise, any such unaccepted outstanding notes will be returned,
without expense, to the tendering holder 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 Series B notes
pursuant to the exchange offer. Compass will pay all charges and expenses, other
than some taxes which may be levied in the event of any transfer of ownership,
in connection with the exchange offer. You should read the discussion under the
heading "--Fees and Expenses" for more information on the allocation of fees.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The "expiration date" shall be 5:00 p.m., New York City time, on ,
1999, or, at 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. Compass may, however, in its sole discretion, extend
the exchange offer, in which case the "expiration date" shall be the latest date
and time to which the exchange offer is extended.
In order to extend the exchange offer, Compass will notify the exchange
agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
Compass reserves the right, in its sole discretion:
- to delay accepting any outstanding notes,
- to extend the exchange offer,
- to terminate the exchange offer if it is determined that the exchange
offer does not meet the conditions set forth in "Conditions of the
Exchange Offer" below, in each case by giving oral or written notice of
such delay, extension, or termination to the exchange agent, or
- to amend the terms of the exchange offer in any manner.
Any 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
41
amendment by means of a prospectus supplement that will be distributed to the
registered holders of outstanding notes. Compass will then extend the exchange
offer for a period of five to ten business days, depending upon the significance
of the amendment and the manner of disclosure to the registered holders, if the
exchange offer would otherwise expire during that five to ten business day
period.
Without limiting the manner in which 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 SERIES B NOTES
The Series B 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 Series B 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 Series B notes. Such accrued and unpaid
interest on the outstanding notes will be paid to registered holders of the
Series B notes with the first interest payment on the Series B notes. Interest
on the outstanding notes accepted for exchange will cease to accrue on the day
prior to the issuance of the Series B notes.
The Series B notes and the outstanding notes bear interest at a rate equal
to 10 1/8% per annum. Interest on the Series B notes is payable on each April 15
and October 15, commencing on October 15, 1999.
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. In the case of
a tender by guaranteed delivery, a holder who tenders outstanding notes via ATOP
will acknowledge the receipt of, and agree to be bound by, the Notice of
Guaranteed Delivery. Book-Entry Confirmation must be received by the exchange
agent by 5:00 p.m., New York City time, on the expiration date. Alternatively,
an eligible holder may accept the exchange offer by complying with the
guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
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.
42
Each signature on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution, unless the
outstanding notes surrendered for exchange pursuant thereof are tendered:
- by a registered holder of the 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
- by an eligible institution.
An eligible institution is a firm which is a member of a registered national
securities exchange or a member of the NASD, a commercial bank or trust company
having an office or correspondent in the United States or is otherwise an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act. If 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:
- be endorsed by the registered holder, with the signature thereon
guaranteed by an eligible institution, or
- be accompanied by a bond power, in satisfactory form as determined by
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 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, 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. Compass reserves 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 to that letter, 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 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. Unless waived by Compass, proper evidence
satisfactory to Compass of a person's authority to act in a fiduciary or
representative capacity must be submitted.
43
Any beneficial owner whose outstanding notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender outstanding notes in the exchange offer should contact such registered
holder promptly and instruct such registered holder to tender on the beneficial
owner's behalf. If a beneficial owner wishes to tender directly, the beneficial
owner must make appropriate arrangements to register ownership of the
outstanding notes in that beneficial owner's name prior to completing and
executing the letter of transmittal and tendering outstanding notes. Beneficial
owners should be aware that the transfer of registered ownership may take
considerable time.
Each eligible holder accepting the exchange offer is required to make the
representations to Compass described under "--Resales of the Series B 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. 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 of, and agree to be bound by, the terms of the letter of transmittal. In
the case of a tender by guaranteed delivery, the holder will expressly
acknowledge the receipt of, and agree to be bound by, the Notice of Guaranteed
Delivery.
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:
- the tender is made by or through an eligible institution,
- prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed letter of
transmittal or facsimile thereof and Notice of Guaranteed Delivery,
substantially in the form provided by Compass, by either facsimile
transmission, mail or hand delivery.
The letter and notice should set 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,
- the amount of outstanding notes tendered,
- a statement that the tender is being made thereby,
- a guarantee that within three business days after the date of execution of
the Notice of Guaranteed Delivery, the certificates for all physically
tendered 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
- 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
three business days after the date of execution of the Notice of Guaranteed
Delivery.
44
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:
- the tender is made by or through an eligible institution,
- the exchange agent receives confirmation from DTC of receipt by DTC of a
Notice of Guaranteed Delivery via ATOP, by which the tendering holder will
expressly acknowledge the receipt of, and agree to be bound by, the Notice
of Guaranteed Delivery, including guarantee that Book-Entry Confirmation
will be received by the exchange agent within three business days after
the date of the transmittal of the Notice of Guaranteed Delivery via ATOP,
and
- Book-Entry Confirmation is received by the exchange agent within three
business days after the date of the transmittal of the Notice of
Guaranteed Delivery via ATOP.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF SERIES B NOTES
Except as set forth under "--Conditions of the Exchange Offer" below,
Compass will accept, promptly after the expiration date, all outstanding notes
properly tendered and will issue the Series B 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 to that effect to the
exchange agent.
In all cases, issuances of Series B 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:
- specify the name of the person having tendered the outstanding notes to be
withdrawn,
- identify the outstanding notes to be withdrawn, including the principal
amount of such outstanding notes, and
- 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
45
notes, and otherwise comply with the procedures of DTC. All questions as to the
validity, form, eligibility and time of receipt of such notices will be
determined by Compass in its sole, reasonable discretion. This 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
without cost to the 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 Series B notes in
exchange for, any outstanding notes. Compass may terminate or amend the exchange
offer if, prior to the exchange of the Series B notes for the outstanding notes,
Compass determines, in its sole discretion, that any of the following situations
exist:
- there has been a commencement of any action, legal or governmental, with
respect to the exchange offer or which Compass reasonably determines would
make it inadvisable to proceed with the exchange offer,
- there has been a banking moratorium or similar event or international
calamity involving the United States,
- there has been a change in the business or prospects of Compass that may
have a material adverse effect on Compass, or
- the exchange offer violates any applicable law.
If Compass makes any of the foregoing determinations, Compass may:
- refuse to accept any outstanding notes and return all tendered outstanding
notes to the tendering holders, or
- extend the exchange offer, retain all outstanding notes tendered prior to
the expiration date, and use reasonable efforts to satisfy any such
condition, subject, however, to the rights of eligible holders to withdraw
such outstanding notes.
You should read the discussion under the heading "--Withdrawal Rights" for
further information regarding your rights to withdraw tendered notes. In
addition, Compass will not accept for exchange any outstanding notes tendered,
and no Series B 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 in effect on the date of the
indenture.
Holders of outstanding notes may have 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, during the first 90-day period
immediately following the occurrence of any of the events, 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 as liquidated damages, if, other than as a result of actions by
the holders of the outstanding notes:
- the registration statement was not filed by December 17, 1998,
- the registration statement filed with the Commission relating to the
exchange offer was not declared effective by the Commission by February
16, 1999, or
46
- the exchange offer has not been consummated within 30 days after the
registration statement is declared effective.
The amount of liquidated damages will increase by an additional $0.05 per
week or partial week, per $1,000 principal amount at the beginning of each
subsequent 90-day period to a maximum amount of liquidated damages of $0.50 per
week per $1,000 principal amount. Liquidated damages will continue to accrue
until the conditions noted above have been cured. Liquidated damages accrued as
of any interest payment date will be payable on that date. Because Compass did
not comply with some of these provisions, liquidated damages are currently
accruing at the rate of $16,500 per week.
TERMINATION OF CERTAIN RIGHTS
Eligible holders of the outstanding notes to whom this exchange offer is
made have rights under the registration rights agreement and purchase agreement
that will terminate upon the consummation of the exchange offer. These rights
include, without limitation the right to require Compass:
- to file with the Commission the exchange offer registration statement
under the Securities Act within 240 days after the outstanding notes were
originally issued;
- to use its best efforts to cause such registration statement to become
effective under the Securities Act within 300 days after the outstanding
notes were originally issued;
- to consummate the exchange offer within 30 days after the registration
statement covering the exchange offer is declared effective; and
- if some events described in the registration rights agreement occur, to:
- file a Shelf registration statement covering resales of the outstanding
notes,
- use its best efforts to cause such Shelf registration statement to be
declared effective under the Securities Act, and
- keep such Shelf registration statement effective for the period
described in the registration rights agreement.
The right to receive liquidated damages from Compass under specific
circumstances described in the registration rights agreement will also terminate
upon consummation of exchange offer.
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 as follows:
IF BY OVERNIGHT CARRIER OR BY IF BY REGISTERED OR CERTIFIED IF BY FACSIMILE:
HAND: MAIL: (212) 858-2611
IBJ Whitehall Bank & Trust IBJ Whitehall Bank & Trust CONFIRM BY TELEPHONE:
Company Company (212) 858-2103
One State Street P.O. Box 84
New York, New York 10004 Bowling Green Station
Att.: Securities Processing New York, New York 10274-0084
Window, Att.: Reorganization
Subcellar One, (SC-1) Department
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.
47
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. 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 will be payable
by the tendering holder, whether imposed on the registered holder or any other
persons. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Series B notes will be recorded at the same carrying value as the
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 Series B notes.
RESALES OF THE SERIES B NOTES
With respect to resales of Series B 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:
- an affiliate of Compass within the meaning of Rule 405 under the
Securities Act, or
- a broker-dealer, who exchanges outstanding notes for Series B 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 Series B notes,
will be allowed to resell the Series B notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Series B notes a prospectus that satisfies the requirements of Section 10
of the Securities Act. However, if any eligible holder acquires Series B notes
in the exchange offer for the purpose of distributing or participating in a
distribution of the Series B notes, that 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. In that case, the holder must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available.
48
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:
- any Series B notes are to be acquired in the ordinary course of business
of the person receiving such Series B notes,
- neither the holder of such outstanding notes nor any such other person
receiving such Series B notes is participating, intends to participate, or
has any arrangement or understanding with any person to participate, in
the distribution of the Series B notes, and
- 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 distributing the Series B notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale of the Series B notes and cannot rely on the no-action letters
discussed above.
Each broker-dealer that receives Series B notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Series B notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Series B 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 up to one
year after the expiration date. Compass has agreed to make this prospectus, as
it may be amended or supplemented from time to time, available to any broker-
dealer, at no charge, for use in connection with any such resale for a period of
up to one year after the expiration date, or for such shorter period that will
terminate when such broker-dealers have sold all of such Series B notes. You
should read the discussion under the heading "Plan of Distribution" for further
information on the continuing availability of this prospectus after the
expiration date.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding notes who do not exchange their outstanding notes for
Series B 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.
49
BUSINESS
COMPASS
Compass commenced operations in November 1997 with the simultaneous
acquisitions of two established precision machining subcontractors. In 1998 we
acquired six additional operating companies. Compass' acquisitions to date and
its principal manufacturing facilities are summarized in the following table.
YEAR DATE MANUFACTURING
BUSINESS BUSINESS CAPABILITIES/
BUSINESS ACQUIRED FOUNDED ACQUIRED LOCATION SPECIALITIES
- ------------------------------- ----------- ------------- ------------------- ------------------------
Aeromil........................ 1971 Nov. 1997 Santa Ana, CA Medium-sized machined
parts
Western Methods................ 1978 Nov. 1997 Gardena, CA Small to medium-sized
machined parts
Brittain Machine............... 1966 April 1998 Wichita, KS Small to large-sized
machined parts,
fabrication and tooling
Wichita Manufacturing.......... 1992 April 1998 Cerritos, CA Small to medium-sized
machined parts
Barnes Machine................. 1982 April 1998 Shelton, WA Small to medium-sized
machined parts
Sea-Lect(1).................... 1989 May 1998 Kent, WA Sheet metal and
extruded/machined parts,
assembly including
bonding/ riveting, tool
and die making
Pacific Hills.................. 1962 Nov. 1998 Valencia, CA Shim stock, laminated
Kent, WA shims,
stampings, flat patterns
Modern......................... 1966 Dec. 1998 Renton, WA Small to medium-sized
machined-parts
MAJOR
BUSINESS ACQUIRED CUSTOMERS(2)
- ------------------------------- -----------------------------
Aeromil........................ Boeing, Korean Airlines,
Hughes Aircraft,
Raytheon
Western Methods................ Boeing, Northrop,
Lockheed, NASA-JPL
Brittain Machine............... Boeing, Raytheon,
Hughes Aircraft, Cessna,
Shorts Brothers
Wichita Manufacturing.......... Boeing, Northrop,
Tolo
Barnes Machine................. Boeing, Northrop,
Kawasaki
Sea-Lect(1).................... Boeing, Japan Airlines, B.F.
Goodrich, Lucas Aerospace,
Mitsubishi, Kawasaki
Pacific Hills.................. Boeing, Rohr
Modern......................... Boeing, Hawker
- ------------------------
(1) Compass simultaneously acquired the assets of Sea-Lect and the stock of J&J
Leasing, Inc. as a subsidiary of Sea-Lect in May 1998. Subsequent to the
acquisition of these businesses, J&J, which 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., Hughes
Aircraft Company, Raytheon Aircraft Company, Lockheed Martin Corporation,
National Air Space Administration-Jet Propulsion Laboratory, Cessna Aircraft
Co., Japan Airlines Co., Ltd., B.F. Goodrich Aerospace, a division of The
B.F. Goodrich Company, Lucas Aerospace, a division of LucasVarity plc,
Mitsubishi
50
Heavy Industries Ltd., Kawasaki Heavy Industries, Ltd., Hawker de Havilland
Inc., Shorts Brothers PLC, Tolo Inc., a subsidiary of B.F. Goodrich and
Rohr, Inc., a subsidiary of B.F. Goodrich.
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
sub-assemblies, manufacturing kits and structural components 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 computer numerically-controlled 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.
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 various
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.
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 sub-assemblies, manufacturing kits and structural
components 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, decrease inventory levels 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.
51
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.
In addition, Compass is centralizing a number of administrative functions at
the corporate level including finance, accounting, purchasing, tax, sales and
marketing, payroll, employee benefits and insurance and other administrative
activities to realize economies of scale and reduce costs. Compass is updating
and consolidating its management information systems to improve internal
controls and coordinate operations and is consolidating some of the engineering
functions currently spread across its manufacturing facilities.
FOCUS ON SUPPLY CHAIN MANAGEMENT AND INCREASE PRODUCTION OF SUB-ASSEMBLIES,
MANUFACTURING KITS AND STRUCTURAL COMPONENTS
Compass intends to increase its production of sub-assemblies, manufacturing
kits and structural components 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 sub-assemblies, manufacturing kits and
structural components by more effective use of its broad, flexible manufacturing
capabilities without significant additional capital expenditures. Management
believes the ability to produce sub-assemblies, manufacturing kits and
structural components will become increasingly important as customers such as
Boeing reduce their inventories of individual parts. 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 additional production
contracts for sub-assemblies, manufacturing kits and structural components.
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 sub-assemblies, manufacturing kits and
structural components 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 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.
52
INCREASE OUTSOURCING
Compass utilizes small machine shops for some 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 sub-assemblies, manufacturing kits and structural components.
The machine shops will be pre-qualified by Compass, execute formal supply
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 sub-assemblies,
manufacturing kits and structural components, increase its operating
efficiencies and/or diversify its revenue mix.
INDUSTRY OVERVIEW AND TRENDS
In response to an increased demand for aircraft, the major aircraft
manufacturers are dramatically changing their manufacturing and purchasing
practices to increase production rates and reduce costs. More specifically,
aircraft manufacturers are increasing outsourcing and imposing increased
responsibilities, such as the production of more sub-assemblies, manufacturing
kits and structural components, just-in-time deliveries and quality control
inspections before shipping on a smaller number of qualified suppliers.
Outsourcing also reduces costs because subcontractors can produce parts at a
fraction of the cost of in-house manufacturing. At present, the aerospace
supplier industry is highly fragmented, consisting of a limited number of
well-capitalized companies which offer a broad range of products and services,
and a large number of smaller, specialized companies. As a result of the
aircraft manufacturers' new manufacturing and purchasing practices, the supplier
industry has been consolidating at an increasing pace in recent years and
management believes that such consolidation will continue.
Significant trends currently affecting the market for parts for aircraft
manufacturers include the following:
INCREASES IN AIR TRANSIT AND AIRCRAFT PRODUCTION
Boeing's 1999 Current Market Outlook projected that, through the year 2008,
global air travel will increase by 59% and that the number of passenger and
cargo delivery aircraft in service will increase by 52%, with approximately
8,900 new airplanes delivered worldwide through the year 2008. Airbus' 1999
Global Market Forecast projected that through the year 2018, the number of
aircraft in active service should increase by 91% and over 89% of the current
passenger jet fleet should be replaced, requiring approximately 14,768 new
passenger aircraft. At 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
53
delivered 270, 375 and 563 airplanes in 1996, 1997 and 1998, respectively. These
numbers include airplanes delivered by the former McDonnell Douglas Corporation,
which was acquired by Boeing in 1997. Boeing has publicly announced plans to
increase production rates to approximately 620 airplanes in 1999, followed by a
decrease in production rates to approximately 480 airplanes in 2000. At June 30,
1999 Boeing's unfilled announced order backlog was 1,577 aircraft. Boeing
delivered 313 commercial aircraft in the first half of 1999.
Compass believes that the following factors, among others, are contributing
to the historically high levels of new aircraft production:
- a turnaround in worldwide airline operating performance from substantial
operating losses in 1992 to approximately $12.0 billion and $15.5 billion
of operating profit in 1996 and 1997, respectively;
- projected worldwide airline traffic growth of 5.0% per year and projected
cargo traffic growth of 6.4% per year over the next decade;
- increased aircraft load factors during the 1990-96 period;
- increases in the average age of commercial aircraft during the 1990-96
period; and
- the increasing importance to the airline industry of city pair marketing
and flight frequencies.
Compass believes that over the longer term this trend will be driven, in
part, by the anticipated continued growth of carriers engaged in the air freight
and package delivery businesses and the expected commencement of new airlines,
especially in China and other Asian countries where air traffic was previously
limited. Further, retirement of aging aircraft and the anticipated removal of
approximately 1,000 airplanes domestically from the operating fleet to comply
with mandatory noise reduction standards by December 31, 1999 should contribute
to the increased demand for new aircraft production. The number of surplus
aircraft is expected to decline significantly while new aircraft production is
expected to increase over the next several years. The expected growth in air
transit and aircraft production should increase the demand for structural parts
from subcontractors as aircraft manufacturers increase outsourcing to reduce
costs and increase production rates.
REDUCTION IN THE NUMBER OF APPROVED SUBCONTRACTORS
In order to devote additional resources to their core competencies, reduce
operating and purchasing costs and streamline purchasing decisions while
retaining control over quality, aircraft manufacturers have been reducing the
number of approved subcontractors. Additionally, aircraft manufacturers have
established quality and operating criteria to ensure that approved
subcontractors 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.
54
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 FACILITY
SIZE
LOCATION PRODUCTS AND FUNCTION (SQ. FEET) OWNERSHIP
- ------------------------- ----------------------------- ----------------------- -----------
Long Beach, CA........... Corporate Headquarters 8,670
Santa Ana, CA............ Manufacturing 65,000 Leased(1)
Gardena, CA.............. Manufacturing 20,500 Leased
Wichita, KS.............. Manufacturing 153,000 Owned
Cerritos, CA............. Manufacturing 42,500 Leased
Shelton, WA.............. Manufacturing 50,000 Owned
Kent, WA................. Manufacturing 77,180 Leased
Valencia, CA............. Manufacturing 31,280 Leased
Kent, WA................. Manufacturing 10,450 Leased
Renton, WA............... Manufacturing 95,070 Owned
- ------------------------
(1) Compass leases its Santa Ana facility from a former Aeromil affiliate at a
fair market rent.
Compass has a large portfolio of complex machinery which cut, fold, form and
drill metals and other materials used during the manufacturing process,
including: sheet metal forming equipment, high-speed and conventional computer
numerically-controlled horizontal and vertical machining centers and
three-spindle five-axis gantry mills, conventional and gap lathes, stretch
presses, bladder presses, and brakes and shears. These machines 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 is also engaged 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
they 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.
55
SOURCES AND AVAILABILITY OF RAW MATERIALS
Compass uses a variety of metals in its manufacturing processes, including
aluminum, titanium and steel. Compass generally acquires these metals from third
party suppliers. The availability and prices of these materials may fluctuate.
Any delay in our ability to obtain necessary raw materials may affect our
ability to meet our customer's needs. In some instances, Boeing may supply
Compass with the metals Compass will use in manufacturing parts under a specific
purchase order. Boeing may also require Compass to acquire metals from some
third party suppliers identified by Boeing. If Boeing requires Compass to
acquire metals from third party suppliers, Boeing has agreed to reimburse
Compass for the actual cost of those metals.
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 specific quality standards, which
certification is necessary for Compass to submit bids and manufacture parts for
such customers. You should read the discussions under the headings "Risk
Factors-Certification" and "-Sales and Marketing" for more information on the
impact of certification on Compass.
Compass' manufacturing facilities have imposed quality control criteria on
their manufacturing processes and all of Compass' facilities have received
Boeing's D1-9000 certification. Boeing's D1-9000 certification is site specific
and certifies that a facility meets a number of specific customer satisfaction
requirements, including manufacturing parts that comply with specifications and
delivery of parts on time and at cost. Furthermore, seven out of eight of
Compass' facilities have received Boeing's D1-9000-A certification, which allows
the facility to produce more critical parts. Compass' Shelton, Washington
facility has received ISO 9002 certification, which indicates that the facility
has met quality standards set by an international bureau of quality standards.
Qualified suppliers often subcontract parts to other machine shops while
still remaining responsible for quality and delivery schedules. Several of
Compass' subsidiaries have been selected as Boeing-Wichita key suppliers, which
permits them to subcontract production without Boeing's supervision. Some 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 which 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 specific standards relating to the quality of its manufactured parts
and services. Compass' manufacturing facilities perform testing and
certification procedures on all manufactured parts and provide detailed records
to ensure
56
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 May 31, 1999 Compass
had a total revenue backlog of approximately $150.0 million, of which
approximately $70.0 million is deliverable in the remainder of 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. Boeing has announced that it
will decrease production rates from approximately 620 aircraft in 1999 to 480
aircraft in 2000. Boeing orders could decline as a result of such a reduction in
production rates. A decline in Boeing orders could have a material adverse
effect on our business, financial condition or results of operations. You should
read the discussions under the Headings "Risk Factors--We Are Dependent On A Key
Customer And Could Suffer Financial Harm If We Were To Lose That Customer's
Business" and "Management's Discussion And Analysis Of Consolidated Financial
Condition And Consolidated Results Of Operations--Industry Trends" for further
information on our dependence on Boeing as a key customer.
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.
57
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
sub-assemblies, manufacturing kits and structural components 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 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 sub-assemblies, manufacturing kits and structural components. Some of these
competitors have greater financial and other resources than Compass.
GOVERNMENT REGULATION
The aviation industry is highly regulated in the United States by the
Federal Aviation Administration and in other countries by similar agencies. The
FAA regulates commercial flight operations in the United States and requires
that aircraft components meet stringent standards. FAA regulations provide that
aircraft manufacturers must operate under one or more of several different FAA
authorizations. Manufacturers holding FAA production approvals are known as
production approval holders and may engage a supplier to manufacture all or a
portion of an authorized part. If the supplier manufactures complete parts, the
production approval holder must ensure that the parts are fabricated and
inspected under the production approval holder's FAA-approved quality control
system. 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 is, in general, an approval of a
manufacturing or modification facility's production quality control system. A
supplemental parts manufacturer approval authorizes the manufacture of a
particular part in accordance with the requirements of the corresponding FAA
production certificate. Compass is currently in the process of applying for a
parts manufacturer approval for some 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.
58
Compass does not believe a parts manufacturer approval is necessary to operate
its business as it is currently being conducted. Management believes any delay
or failure to obtain the parts manufacturer approval 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
mandates general requirements for safe workplaces for all employees. In
addition, OSHA provides special procedures and measures for the handling of
hazardous and toxic substances. Specific safety standards have been promulgated
for workplaces engaged in the treatment, disposal or storage of hazardous waste.
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:
- govern activities or operations that may have adverse environmental
effects, such as discharges to air and water,
- establish handling and disposal practices for solid and hazardous wastes,
and
- impose liability for the clean-up costs of, and some of the damages
resulting from, past spills, disposal or other releases of hazardous
substances.
Compass' operations use some substances and generate some 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, some degree
of 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' 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. 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 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 ("CERCLA"), the Resource
Conservation and Recovery Act and similar state and local laws. Some of these
laws impose strict, and in some cases, joint and several liability, for the
cleanup of contamination resulting from past disposal of waste, including
disposal at off-site locations. A pre-existing business acquired by 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
59
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 829 employees at March 31, 1999 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
On May 28, 1999, Compass filed suit against Alinabal Holdings Corporation,
the former shareholder of Pacific Hills, and the three principal stockholders of
Alinabal, Samuel S. Bergami, Jr., Stephen G. Cerri and Kevin M. Conlisk, in U.S.
District Court of the Southern District of New York. The suit, which alleges
violations of federal securities laws, fraud and breach of contract, seeks
recision of the Amended and Restated Stock Purchase Agreement dated November 20,
1998 by and among Compass, Alinabal and the three stockholders of Alinabal
pursuant to which Compass acquired Pacific Hills, or in the alternative, $79.0
million in damages. On July 9, 1999 the defendants filed an answer and
counterclaim seeking, among other relief, release of $0.7 million from escrow.
At this preliminary stage of the proceedings, we cannot determine or predict the
outcome of this suit.
60
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth 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, a private investment company and President of Hayes Capital
Corporation, a private investment company since June 1997. From 1986 to June
1997, Mr. Hayes was a Managing Director of Donaldson, Lufkin & Jenrette
Securities Corporation. Mr. Hayes is a graduate of Dartmouth College and holds
an M.B.A. from the Harvard Business School. Mr. Hayes also serves on the board
of directors of GameTech International, Inc. and Reliance Steel & Aluminum Co.
ALEXANDER HOGG has been a Director and 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 and major systems such as landing gear, flight controls and complex
machine parts. From 1995 to 1997, Mr. Hogg was General Manager of Castle
Precision, Inc. and from 1992 to 1995, he held the position of Operating Officer
of Hydromil Co. Mr. Hogg's prior work experience includes, among other
positions, service as Vice President, General Manager of Menasco (Canada)
Aerospace, Director of Production Engineering for Boeing De Havilland and
Manager, Manufacturing Engineering, Canadair, Ltd. Mr. Hogg attended Boeing's
Senior Management Training Program and personally received Boeing's PRIDE IN
EXCELLENCE AWARD for his contributions to the 757 and 767 programs. Mr. Hogg is
a graduate of Heriot Watt University with a degree in Mechanical Engineering.
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,
61
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 Capital Corporation
since December 1998 and a Managing Director of Hayes Capital Corporation since
August 1997. From August 1997 to December 1998, Mr. Solomon served as a Senior
Vice President of Macluan Capital Corporation. Since 1992, Mr. Solomon has been
President of The Woodland Company, which provides financial advisory and
consulting services. Mr. Solomon was a Managing Director of The Chase Manhattan
Investment Bank from 1989 to 1991. Mr. Solomon is a graduate of the University
of California-Davis and holds an M.B.A. from the University of California-Los
Angeles.
HARALD H. LUDWIG has been a Director of Compass since November 1997. Mr.
Ludwig co-founded and has been President of Macluan Capital Corporation since
1985. He is a graduate of Simon Fraser University and holds an L.L.B. from
Osgoode Hall Law School. An entity controlled by Mr. Ludwig controls Compass
Holdings, LLC, which is the majority stockholder of Compass. Mr. Ludwig also
serves on the board of directors for Lions Gate Entertainment Corp. and for West
Fraser Timber Limited.
JAMES P. ANGUS has been a Director of Compass since March 1998. Mr. Angus is
a co-founder of Macluan Capital Corporation and has been President of Angroup
Holdings Limited, a private investment company with interests in marine
transportation, real estate development and other industries, since 1986. Mr.
Angus is a graduate of the University of Victoria and holds an M.B.A. from the
University of Western Ontario.
WILLIAM R. MONKMAN has been a Director of Compass since March 1998. Mr.
Monkman is also the Chief Executive Officer and President of Precision Aerospace
Corporation, which manufactures fuel control systems and carburetors for
aerospace customers and fuel control systems for industrial engines at plants in
Washington, California and Virginia. Mr. Monkman has been affiliated with
Precision Aerospace Corporation since 1981. Between 1981 and 1997 Mr. Monkman
was also affiliated with Suntree Industries Limited, most recently as Chief
Executive Officer. Mr. Monkman is a graduate of the University of Alberta and
holds an M.B.A. from the University of Western Ontario.
MICHAEL DRITZ has been a Director of Compass since March 1998. Mr. Dritz is
also the Chairman of Dritz Enterprises LLC which provides consulting services
for the financial industry, serving in that capacity since 1997. From 1995 to
1996, Mr. Dritz was a Managing Director for Merrill Lynch and Chairman of the
Smith Brothers International Advisory Division. Mr. Dritz was the President and
Chief Executive Officer of Smith New Court, Inc. and an Executive Director of
Smith New Court PLC from 1985 to 1995. Mr. Dritz is a graduate of Syracuse
University.
PHILIP J. OLSSON has been a Director of Compass since March 1999. Mr. Olsson
is also a Managing Director of Royal Bank Equity Partners Limited, having served
in such a capacity since 1997. From 1986 to 1997, Mr. Olsson served in various
positions at RBC Dominion Securities, including as Vice Chairman. Mr. Olsson is
a graduate of and holds an M.B.A. from Vanderbilt University. Mr. Olsson also
serves on the board of directors of Anchor Lamina, Inc.
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.
62
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.
You should read the discussion under the heading "Employment Agreements" for
further information on the terms and conditions of existing employment contracts
with Compass' executive officers. The Compensation Committee's responsibilities
also include administering the 1998 Stock Incentive Plan, including selecting
the officers and salaried employees to whom awards will be granted.
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 Corporation and
Dunhill Bank Caribbean Ltd., respectively, which are parties to a management
consulting agreement with Compass. You should read the discussion under
"--Certain Relationships and Related Party Transactions" for further information
on the terms of the management consulting agreement.
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers,
employees or consultants of Compass are entitled to receive an annual retainer
fee of $12,000, plus reimbursement of expenses for each Board of Directors'
meeting and each committee meeting that they attend in person.
63
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Compass to its Chief
Executive Officer and the two other most highly compensated executive officers
for the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-----------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) 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. You should read
the discussion under the heading "--Employment Agreement" for more
information on the terms of Mr. Hogg's employment.
(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. You should read the discussion under
the heading "-Employment Agreements" for more information on the terms of
Mr. DiGirolamo's employment.
(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 $150,000. You should read the discussion under the heading
"-Employment Agreements" for more information on the terms of Mr. Brost's
employment.
(4) Represents relocation expenses incurred by Mr. DiGirolamo and paid by
Compass.
OPTION/SAR GRANTS IN 1998
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ANNUAL RATES
NUMBER OF OPTIONS/ OF STOCK PRICE
SECURITIES SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OF OPTION TERM
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#) IN 1998 ($/SH) DATE 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
64
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 will be administered by the Compensation Committee of the
Board of Directors. All officers, directors, employees and independent
contractors of Compass are eligible for discretionary awards under the 1998
Stock Incentive Plan. The 1998 Stock Incentive Plan provides for stock-based
incentive awards, including incentive stock options, non-qualified stock options
and restricted stock. The 1998 Stock Incentive Plan permits the Compensation
Committee to select eligible persons to receive awards and to determine terms
and conditions of such awards, including the vesting schedule and exercise price
of each award, PROVIDED, that the option exercise price may not be less than 85%
of the fair market value per share of 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 specific events
affecting the capital structure of Compass.
EMPLOYMENT AGREEMENTS
Effective November 26, 1997 Compass entered into an employment agreement
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:
- any entity other than Compass Holdings, LLC 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
- 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 specific EBITDA targets. Mr. Hogg will also be entitled to receive his
base salary to the end of the term of the agreement if he is terminated without
cause.
Effective 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
65
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:
- 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
- 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 specific
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:
- 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
- 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 specific EBITDA
targets. Mr. Brost will also be entitled to receive up to six months of his then
current base salary if he is terminated without cause.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Compass is a party to a management consulting agreement with Dunhill Bank
Caribbean Ltd. and Hayes Capital Corporation, which provides for the payment of
management fees from Compass to Dunhill Bank Caribbean Ltd. and Hayes Capital
Corporation in an annual aggregate amount equal to $200,000 plus 1.5% of
Compass' EBITDA plus expenses, payable quarterly in arrears. 50% of this
management fee is payable to Dunhill Bank Caribbean Ltd. and 50% is payable to
Hayes Capital Corporation. Mr. Ludwig is the beneficial owner of Dunhill Bank
Caribbean Ltd. Mr. Hayes and Mr. Solomon are the President and a Managing
Director of Hayes Capital Corporation, respectively. Payment of the management
fee is subordinated to the notes and is subject to the limitation on restricted
payments set forth in the indenture governing the notes to the extent that such
fees exceed $500,000 in any fiscal year. You should read the discussion under
the heading "Description of Notes-Limitation on Restricted Payments" for further
information on the subordination of, and limitations on, the management fee
under the indenture. In addition to the management fee described above, Compass
typically also pays advisory fees to Dunhill Bank Caribbean Ltd. and Hayes
Capital Corporation in an amount equal to an aggregate of 1% of the
consideration paid for each business acquired by Compass. Compass believes that
the management fees and the advisory fees are on terms no less favorable to it
than those that could be obtained from independent third-parties in arms-length
negotiations.
BankBoston, a lender and the administrative agent under the credit
agreement, and BancBoston Robertson Stephens, the arranger under the credit
agreement, are affiliates of BancBoston Securities, an initial purchaser of the
outstanding notes, and are affiliates of BancBoston Ventures Inc. which holds
17.6% of Compass' voting common stock.
66
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Compass' capital stock as of the date of this prospectus of:
- each person known to Compass to beneficially own more than 5% of Compass'
voting securities;
- each director and each of the executive officers of Compass; and
- the directors and executive officers of Compass as a group.
PERCENTAGE OF
OWNERSHIP
NUMBER OF OF CLASS A
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES COMMON STOCK (1)
- --------------------------------------------------------------------------------- ------------ ---------------------
Compass Holdings, L.L.C. (2)..................................................... 15,000,000 77.6%
RBC Equity Investments, Inc. (3)................................................. 5,447,853 22.0%
BancBoston Ventures, Inc. (5).................................................... 3,404,908 17.6%
Douglas M. Hayes (4)(7).......................................................... 256,000 1.3%
Alexander Hogg (4)............................................................... 70,376 *
Pasquale DiGirolamo (4).......................................................... -- *
N. Paul Brost (4)................................................................ -- *
Douglas B. Solomon (4)........................................................... 256,000 1.3%
Harald H. Ludwig (2)(6).......................................................... 15,000,000 77.6%
James P. Angus (2)............................................................... -- *
William R. Monkman............................................................... -- *
Michael Dritz.................................................................... -- *
Philip J. Olsson................................................................. -- *
All directors and officers as a group............................................ 15,582,376 80.6%
- ------------------------
* Less than one percent.
(1) Compass has outstanding shares of non-voting Series B common stock. None of
the directors or officers of Compass is the beneficial owner of any Series B
common stock.
(2) The stockholder's address 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 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 Compass Holdings, LLC. Under the terms of the
Operating Agreement of Compass Holdings, Mr. Ludwig has sole voting power
and investment power with respect to the shares held by Compass Holdings.
Messrs. Hayes, Dritz, Monkman and Angus hold membership interests in Compass
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.
67
DESCRIPTION OF CREDIT AGREEMENT
Compass entered into the credit agreement consisting of a $140.0 million
senior revolving credit facility on November 20, 1998. The credit agreement was
amended and restated on February 11, 1999 and amended again on June 7, 1999. The
June 7, 1999 amendment included amendments to the covenants entitled "Minimum
Consolidated EBITDA." "Minimum Interest Coverage Ratio," "Maximum Leverage
Ratio," "Minimum Debt Service Coverage" and "Maximum Capital Expenditures." The
amendment also set the Acquisition Line to $35 million, increased some fees and
increased interest rates under the credit agreement. 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 $35 million Acquisition Line, a $35 million "Term
Loan A" and a $45 million "Term Loan B". Availability under the revolving credit
facility is limited to 85.0% of eligible accounts receivable, plus 50.0% of the
net book value of eligible inventory, plus 25.0% of the orderly liquidation
value of machinery and equipment, subject to reserves that may be established by
BankBoston from time to time. Availability under the Acquisition Line is subject
to approval by a majority of the lenders.
Each of the facilities other than Term Loan B will mature five years
following its inception. Term Loan B will mature on February 1, 2005. Amounts
outstanding under Term Loan A will bear interest at the agent bank's base rate
plus a margin between 1.00% and 1.75%, or the Eurocurrency rate plus a margin
between 2.50% and 3.25% based on the leverage ratio. Amounts outstanding under
Term Loan B will bear interest at the agent bank's base rate plus a margin
between 2.00% and 2.25%, or the Eurocurrency rate plus a margin between 3.50%
and 3.75% based on the leverage ratio. For the period from March 31, 1999
through June 30, 1999, the interest rate for Term Loan A, Term Loan B and the
revolving credit facility is fixed at the March 31, 1999 Eurocurrency rate of
5.00% plus a margin of 3.25% for Term Loan A, the Acquisition Line and the
revolving Credit facility and a margin of 3.75% for Term Loan B. 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.
68
DESCRIPTION OF THE SERIES B NOTES
You can find the definitions of some of the terms used in this description
under the subheading "Definitions." In this description, the word "Compass"
refers only to Compass Aerospace Corporation and not to any of its subsidiaries.
The outstanding notes were issued under an indenture dated as of April 21,
1998 by and among Compass, Western Methods, Aeromil, Brittain Machine, Barnes
Machine and IBJ Whitehall Bank & Trust Company, as trustee. Upon the issuance of
the Series B notes the indenture will be subject to and governed by the Trust
Indenture Act of 1939. The following description is a summary of the material
provisions of the indenture. It does not restate that agreement in its entirety.
We urge you to read the indenture because it, and not this description, defines
your rights as holders of the notes. Any outstanding notes that remain
outstanding after the consummation of the exchange offer, together with the
Series B notes, will be treated as a single class of securities under the
indenture. The outstanding notes and the Series B notes are collectively
referred to herein as the "notes."
BRIEF DESCRIPTION OF THE SERIES B NOTES AND THE SUBSIDIARY GUARANTEES
THE SERIES B NOTES
The Series B notes will be:
- senior subordinated, unsecured, general obligations of Compass ;
- limited in aggregate principal amount to $110.0 million;
- subordinated in right of payment to some other debt obligations of
Compass;
- senior or PARI PASSU in right of payment to all existing and future
subordinated indebtedness of Compass; and
- jointly and severally, fully, irrevocably and unconditionally guaranteed
on a senior subordinated basis by each of Compass' present and future
Subsidiaries, all of whom are guarantors of the notes.
THE SUBSIDIARY GUARANTEES
The Subsidiary guarantees of these notes will be:
- unsecured, general obligations of each of the guarantors;
- subordinated in right of payment to all senior debt of each of the
guarantors; and
- senior or PARI PASSU in right of payment to all existing and future
subordinated indebtedness of each of the guarantors.
The term "Subsidiaries" as used in this description of the Series B notes
does not include Unrestricted Subsidiaries. Our Unrestricted Subsidiaries will
not guarantee the notes. You should read the discussion under the heading
"--Bankruptcy Limitations" for further information regarding the guarantees.
PRINCIPAL, MATURITY AND INTEREST
The Series B notes will be issued solely in exchange for an equal principal
amount of outstanding notes pursuant to the exchange offer. The form and terms
of the Series B notes will be identical in all material respects to the form and
terms of the outstanding notes except that:
- the Series B notes will have been registered under the Securities Act, and
- the registration rights and liquidated damages applicable to the
outstanding notes will not be applicable to the Series B notes.
69
The Series B notes will be issued only in fully 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 10 1/8% per annum
from the date of issuance or from the most recent Interest Payment Date to which
interest has been paid or provided for. Interest will be payable semi-annually
on April 15 and October 15 of each year, commencing 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.
METHODS OF RECEIVING PAYMENT ON THE NOTES
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be presented for registration of transfer or exchange, at the
office or agency maintained by Compass for such purpose 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 with a transfer or exchange. Until
otherwise designated by Compass, Compass' office or agency will be the corporate
trust office of the trustee presently located in the Borough of Manhattan, The
City of New York.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the notes will
be subordinated to the prior payment in full of all senior debt of Compass and
each of the guarantors. At March 31, 1999 Compass and the guarantors had
outstanding an aggregate of approximately $85.1 million of secured senior debt.
If any of the senior debt of Compass or the guarantors has matured, the
holders of senior debt will be entitled to receive payment in full in cash or
cash equivalents of all obligations due in respect of senior debt before the
holders of the notes will be entitled to receive any payment, other than with
Junior Securities, with respect to the notes, including:
- the principal of, premium if any, or interest accrued on the notes;
- payments to repurchase any of the notes; or
- payments to redeem any of the notes.
Compass or a guarantor, as applicable, may also not make any payment with
respect to the notes, other than with Junior Securities, if:
- a payment default on senior debt of Compass or such guarantor occurs and
is continuing beyond any applicable grace period; or
- any other default occurs and is continuing on senior debt that permits the
holders of that senior debt to accelerate its maturity and Compass and the
trustee receive written notice of such default (a "Payment Notice") from
the holders of the senior debt.
Payments on the notes may and shall be resumed:
- in the case of a payment default, upon the date on which such default is
cured or waived; and
- in the case of a default other than a payment default, the earlier of the
date on which such default is cured or waived or 179 days after the date
on which the applicable Payment Notice is received (the "Payment Blockage
Period"), unless the maturity of the senior debt has been accelerated.
70
Any number of Payment Notices may be given, provided that :
- no more than one Payment Notice may be given within a period of any 360
consecutive days; and
- no default that existed upon the date of a Payment Notice or the
commencement of a Payment Blockage Period shall be made the basis for the
commencement of any other Payment Blockage Period.
Any subsequent action, or any subsequent breach of any financial covenant
for a period commencing after the expiration of a Payment Blockage Period that
would give rise to a new event of default, even though it is an event that would
also have been a separate breach pursuant to any provision under which a prior
event of default previously existed, shall constitute a new event of default.
In the event of any distribution of assets of Compass or the guarantors in:
- a total or partial liquidation, dissolution, winding up or reorganization
of Compass or a guarantor, whether voluntary or involuntary;
- a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Compass or its property;
- an assignment for the benefit or creditors; or
- any marshaling of Compass' assets or liabilities ;
the holders of all senior debts of Compass or the guarantors will be entitled to
receive payment in full in cash or Cash Equivalents of all amounts due in
respect of senior debt before the holders of notes will be entitled to receive
any payment, other than with Junior Securities, with respect to the notes.
Any payment or distribution of assets of Compass or any guarantor whether in
cash, property or securities other than Junior Securities to which the holders
or the trustee on behalf of the holders would be entitled except for the
subordination provisions in the indenture, will be paid by the liquidating
trustee or agent or other person making such a payment or distribution directly
to the holders of the senior debt or their representative to the extent
necessary to make payment in full on all the senior debt remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of the
senior debt.
In the event that any payment or distribution of assets of Compass or any
guarantor other than Junior Securities shall be received by the trustee or the
holders of the notes at a time when that payment or distribution is prohibited
by the foregoing provisions, such payment or distribution shall be held in trust
for the benefit of the holders of the senior debt. The payment shall be paid or
delivered by the trustee or the holders of the notes, as the case may be to the
holders of the senior debt remaining unpaid or to their representatives, or to
the trustee or trustees under any indenture pursuant to which any instruments
evidencing any of unpaid senior debt may have been issued. The payment or
distribution shall be paid to the holders of senior debt ratably according to
the aggregate principal amounts remaining unpaid on account of such senior debt.
The payment shall be applied to all unpaid senior debt to the extent necessary
to pay or to provide for the payment of all such senior debt in full after
giving effect to any concurrent payment or distribution to the holders of such
senior debt.
No provision contained in the indenture or the notes will affect the
obligation of Compass and the guarantors, which is absolute and unconditional,
to pay, when due, principal of, premium, if any, and interest on the notes. The
subordination provisions of the indenture and the notes will not prevent the
occurrence of any Default or Event of Default under the indenture or limit the
rights of the trustee or any holder to pursue any other rights or remedies with
respect to the notes.
As a result of these subordination provisions, holders of the notes may
receive ratably less than other creditors in the event of the liquidation,
bankruptcy, reorganization, insolvency, receivership or
71
similar proceeding or an assignment for the benefit of the creditors or Compass
or a marshalling of assets or liabilities of Compass. You should read the
discussion under the heading "Risk Factors-Subordination" for further
information on the risk that you may receive ratably less than other creditors
under some circumstances.
BANKRUPTCY LIMITATIONS
Compass is a holding company which conducts its business through its
Subsidiaries. The Subsidiaries have guaranteed or will guarantee Compass'
Obligations with respect to the notes. Compass' Unrestricted Subsidiaries will
not guarantee the notes. Holders of the notes will be direct creditors of each
guarantor by virtue of its guarantee. Nonetheless, in the event of the
bankruptcy or financial difficulty of a guarantor, such guarantor's obligations
under its guarantee may be subject to review and avoidance under state and
federal fraudulent transfer laws. Among other things, a guarantor may avoid its
obligations if a court concludes that the obligations were incurred for less
than reasonably equivalent value or fair consideration at a time when the
guarantor was insolvent, was rendered insolvent, or was left with inadequate
capital to conduct its business. A court would likely conclude that a guarantor
did not receive reasonably equivalent value or fair consideration to the extent
that the aggregate amount of its liability on its guarantee exceeds the economic
benefits it receives in the offering of the outstanding notes. The obligations
of each guarantor under its guarantee are limited in a manner intended to cause
it not to be a fraudulent conveyance under applicable law, although we cannot
assure you that a court would give the holder the benefit of such a provision.
You should read the discussion under the heading "Risk Factors-Fraudulent
Transfer Considerations" for further discussion of the risk that the guarantors
may avoid their obligations under their guarantees.
If the obligations of a guarantor under its guarantee were avoided, holders
of notes would have to look to the assets of any remaining guarantors for
payment. We cannot assure you that the assets of the remaining guarantors would
suffice to pay the outstanding principal and interest on the notes.
OPTIONAL REDEMPTION
At any time prior to April 15, 2001, upon an Initial Public Equity Offering
of common stock for cash, up to 35% of the aggregate principal amount of the
notes originally issued under the indenture may be redeemed at the option of
Compass with cash from the Net Cash Proceeds of the Initial Public Equity
Offering at a redemption price equal to 110.125% of principal; PROVIDED HOWEVER
that:
- immediately following such redemption not less than 65% of the original
aggregate principal amount of the notes remain outstanding;
- Compass must give at least 30 days, but no more than 60 days, notice to
each holder of notes to be redeemed; and
- the redemption must occur within 90 days of the Initial Public Equity
Offering.
Except pursuant to the preceding paragraphs, Compass may not redeem the
notes prior to April 15, 2002.
At any time on or after April 15, 2002, Compass may redeem all or a part of
the notes for cash upon not less than 30 days nor more than 60 days notice to
each holder of notes, at the following redemption prices, expressed as
percentages of the principal amount, if redeemed during the 12-month period
commencing April 15 of the years indicated below:
YEAR PERCENTAGE
- -------------------------------------------------------------------------------------- -----------
2002.................................................................................. 105.063%
2003.................................................................................. 102.531%
2004.................................................................................. 100.000%
72
Any optional redemption of the notes will in each case be subject to the
rights of holders of record on a Record Date to receive the interest due on an
Interest Payment Date corresponding to that Record Date that occurs prior to the
Redemption Date, together with accrued and unpaid interest on the notes prior to
the Redemption Date.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
shall select the notes for redemption on a PRO RATA basis, by lot or in such
other manner it deems appropriate and fair. The notes may be redeemed in part in
multiples of $1,000 only.
The notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days before the Redemption Date to each holder of notes to
be redeemed at the holder's registered address. If any note is to be redeemed in
part only, the notice of redemption that relates to that note must state the
portion of the principal amount that will not be redeemed and must state that on
and after the date of redemption, upon surrender of the note, a new note or
notes, in a principal amount equal to the unredeemed portion of the note will be
issued. On and after the date of redemption, interest will cease to accrue on
the notes or portions of them called for redemption, unless Compass defaults in
the payment thereof.
COVENANTS
There are covenants in addition to those described here, in the indenture.
You should read the indenture for more complete information.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
If a Change of Control occurs, each holder of notes has the right to require
Compass to repurchase all or any part of such holder's notes equal to $1,000 or
an aggregate amount thereof pursuant to a Change of Control Offer. In the Change
of Control Offer, Compass will offer a Change of Control Payment in cash equal
to 101% of the aggregate principal amount of notes repurchased plus accrued and
unpaid interest thereon, if any, to the date of purchase. Within 10 days
following any Change of Control, Compass will mail a notice to each holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase notes on the Change of Control Purchase Date which
must occur no later than 35 days after the occurrence of the Change of Control.
The Change of Control Offer must remain open for 20 business days after Compass
mails a Change in Control Offer to the holders of the notes (the "Change in
Control Offer Period").
Upon expiration of the Change of Control Offer Period, Compass promptly
shall purchase all notes properly tendered in response to the Change of Control
Offer.
On or before the Change of Control Purchase Date, Compass will:
- accept for payment notes or portions thereof properly tendered pursuant to
the Change of Control Offer;
- deposit with the Paying Agent cash sufficient to pay the Change of Control
Purchase Price, together with accrued and unpaid interest and liquidated
damages, if any, of all notes so tendered; and
- deliver to the trustee notes so accepted together with an Officers'
Certificate listing the notes or portions thereof being purchased by
Compass.
73
The Paying Agent will promptly pay the holders of notes so accepted an
amount equal to the Change of Control Purchase Price together with accrued and
unpaid interest and liquidated damages, if any. The trustee will promptly
authenticate and deliver to such holders a new note equal in principal amount to
any unpurchased portion of the note surrendered. Any notes not so accepted will
be delivered promptly by Compass to the holder thereof. Compass will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Purchase Date.
The Change of Control purchase feature of the notes may make more difficult
or discourage a takeover of Compass, and, thus, the removal of incumbent
management.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale or transfer of "all or substantially all" of the assets of
Compass on a consolidated basis. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. The interpretation of the phrase
"substantially all" will be dependent upon particular facts and circumstances.
As a result, the ability of a holder of notes to require Compass to repurchase
such notes as a result of a sale or transfer of less than all of the assets of
Compass and the guarantors to another person or group may be uncertain. In
addition, we cannot assure you 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 the indenture.
If the Change of Control Purchase Date is on or after an interest payment
Record Date and on or before the associated Interest Payment Date, any accrued
and unpaid interest, due on such Interest Payment Date will be paid to the
person in whose name a note is registered at the close of business on such
Record Date. Such interest will not be payable to holders who tender the notes
pursuant to the Change of Control Offer.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
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, or otherwise become responsible
for, contingently or otherwise, including as a result of an Acquisition, any
Indebtedness or any Disqualified Capital Stock including Acquired Indebtedness,
other than Permitted Indebtedness. Notwithstanding the foregoing, Compass may
incur such Indebtedness or Disqualified Capital Stock and the guarantors may
incur such Indebtedness, other than Disqualified Capital Stock, if:
- no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis to,
such incurrence of Indebtedness or Disqualified Capital Stock; and
- on the date of such incurrence (the "Incurrence Date"), the Consolidated
Coverage Ratio of Compass for the Reference Period immediately preceding
the Incurrence Date, after giving effect on a pro forma basis to such
incurrence of such Indebtedness or Disqualified Capital Stock and, as
defined in the Consolidated Coverage Ratio, the use of proceeds thereof,
would be at least 2.0 to 1 (as applicable, each the "Debt Incurrence
Ratio").
74
In addition, the foregoing limitations will not apply:
(1) to the incurrence by Compass or any guarantor of Purchase Money
Indebtedness, PROVIDED, that:
(a) the aggregate principal amount of such Indebtedness incurred on or after
the Issue Date and outstanding at any time pursuant to this paragraph
shall not exceed $2.0 million, including any Refinancing Indebtedness and
other Indebtedness issued to refinance, replace, defease or refund such
Indebtedness; and
(b) 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;
(2) 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 of up to $5.0 million, including Refinancing
Indebtedness and other Indebtedness incurred to refinance, replace, defease
or refund such Indebtedness;
(3) to the incurrence by 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 not to exceed in the aggregate $12.0 million, in each case
including any Refinancing Indebtedness and other Indebtedness incurred to
refinance, replace, defease or refund such Indebtedness; PROVIDED, THAT:
(a) in the case of Indebtedness pursuant to the credit agreement minus the
amount of any such Indebtedness retired with the Net Cash Proceeds from
any Asset Sale applied to permanently reduce the outstanding amounts or
the commitments with respect to such Indebtedness pursuant the covenant
"Limitation on Sale of Assets and Subsidiary Stock," or
(b) assumed by a transferee in an Asset Sale, and
(c) in the case of Mortgage Indebtedness such Indebtedness shall not
constitute more than 100% of the cost determined in accordance with GAAP
to 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 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.
Upon each incurrence of Indebtedness, Compass may designate under which
provision of this covenant such Indebtedness is being incurred. Such
Indebtedness will be deemed to have been incurred under that provision and no
other provision of this covenant, except as specifically provided otherwise.
LIMITATION ON RESTRICTED PAYMENTS
Compass and the guarantors will not, and will not permit any of their
Subsidiaries directly or indirectly to make any Restricted Payment if, after
giving effect to such Restricted Payment on a pro forma basis:
(1) a Default or an Event of Default shall have occurred and be continuing;
(2) 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
75
(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 that commences on the first day of the
first full fiscal quarter commencing after the Issue Date and continues
to and includes the last day of the fiscal quarter ended immediately
prior to the date of each such calculation, or, in the event Consolidated
Net Income for such period is a deficit, then minus 100% of such deficit;
plus
(b) the aggregate Net Cash Proceeds received by Compass from a Capital
Contribution or the sale of its Qualified Capital Stock, other than to a
Subsidiary of Compass, to the extent applied in connection with a
Qualified Exchange and to the extent credited in accordance with the
following paragraph, after the Issue Date, plus
(c) other than amounts credited pursuant to clauses 1 and 2 of the next
following paragraph, the net amount of any Restricted Investments not to
exceed the original amount of such Investment made after the Issue Date
that are returned to Compass or the guarantor that made such prior
Investment, without restriction in cash on or prior to the date of any
such calculation.
So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby, the preceding provisions will not prohibit:
(1) Restricted Investments in a Related Business, PROVIDED, that, after giving
pro forma effect to such Investment, the aggregate amount of all such
Investments made on or after the Issue Date that are outstanding at any time
does not exceed $4.0 million, after giving effect to any such Investments
that are returned to Compass or the Subsidiary guarantor that made such
prior Investment, without restriction, in cash on or prior to the date of
any such calculation, or
(2) repurchases of Capital Stock from 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.
Even if a Default or Event of Default shall have occurred and is continuing
or would be caused thereby, the preceding provisions against making Restricted
Payments will not apply to:
(3) a Qualified Exchange,
(4) the payment of any dividend on Qualified Capital Stock within 60 days after
the date of its declaration if such dividend could have been made on the
date of such declaration in compliance with the foregoing provisions, or
(5) Permitted Payments to Parent.
The full amount of any Restricted Payment made pursuant to the foregoing
clauses (1), (2), (4) and (5) of the immediately preceding sentences, however,
will be deducted in the calculation of the aggregate amount of Restricted
Payments available to be made.
In addition, 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, except for Permitted
Payments to Parent if, on a pro forma basis after giving effect to such
Management Fee Payments or similar payments, a Default or an Event of Default
shall have occurred and be continuing.
76
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
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:
(1) pay dividends or make other distributions to or on behalf of, or
(2) pay any obligation to or on behalf of, or
(3) otherwise to transfer assets or property to or on behalf of, or
(4) make or pay loans or advances to or on behalf of, Compass or any Subsidiary
of Compass.
However, the preceding restrictions will not apply to:
(1) 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, provided such restrictions
are no more restrictive than those imposed by the indenture and the notes;
(2) restrictions imposed by applicable law;
(3) existing restrictions under Indebtedness outstanding on the Issue Date,
including pursuant to the credit agreement;
(4) restrictions under any Acquired Indebtedness not incurred in violation of
the indenture or any agreement relating to any property, asset, or business
acquired by 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;
(5) any such restriction or requirement imposed by Indebtedness incurred under
the credit agreement pursuant to the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," provided such
restriction or requirement is no more restrictive than that imposed by the
credit agreement as of the Issue Date;
(6) restrictions with respect solely to a Subsidiary of 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;
(7) restrictions on transfer contained in Purchase Money Indebtedness or
Mortgage Indebtedness incurred pursuant to the covenant "Limitation on
Incurrence of Additional Indebtedness and
77
Disqualified Capital Stock," provided such restrictions relate only to the
transfer of the property acquired with the proceeds of such Purchase Money
Indebtedness or Mortgage Indebtedness, as applicable; and
(8) in connection with and pursuant to permitted Refinancings, replacements of
restrictions imposed pursuant to clauses (1), (3) or (4) of this paragraph
that are not more restrictive than those being replaced and do not apply to
any other person or assets than those that would have been covered by the
restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, neither:
- customary provisions restricting subletting or assignment of any lease
entered into in the ordinary course of business, consistent with industry
practice, nor
- Liens permitted under the terms of the indenture on assets securing senior
debt, Purchase Money Indebtedness, or Mortgage Indebtedness incurred in
accordance with the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock,"
shall in and of themselves be considered a restriction on the ability of the
applicable Subsidiary to transfer such agreement or assets.
LIMITATIONS ON LAYERING INDEBTEDNESS
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 guarantees,
as applicable.
LIMITATION ON LIENS SECURING INDEBTEDNESS
Unless Compass provides and causes its Subsidiaries to provide that the
notes are equally and ratably secured, 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, 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
- 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.
78
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
Compass and the guarantors will not, and will not permit any of their
Subsidiaries to convey, sell, transfer, assign or otherwise dispose of, directly
or indirectly, any of its property, business or assets, including by merger, or
consolidation of a Subsidiary of Compass and including any sale or other
transfer or issuance of any Equity Interests of any Subsidiary, whether by
Compass or a Subsidiary and including any sale and leaseback transaction (any of
the foregoing, an "Asset Sale"), unless:
(1) (a) the Net Cash Proceeds therefrom (the "Asset Sale Offer Amount") are
applied:
- within 270 days after the date of such Asset Sale to the optional
redemption of the notes in accordance with the terms of the
indenture and other Indebtedness of 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 of the notes
and such other Indebtedness then outstanding, or
- within 300 days after the date of such Asset Sale to the repurchase
of the notes and such other Indebtedness on a parity with the notes
and with similar provisions requiring Compass to make an offer to
purchase such Indebtedness with the proceeds for asset sales
pursuant to a cash offer pro rata in proportion to the respective
principal amounts of the notes and such other Indebtedness then
outstanding (the "Asset Sale Offer") at a purchase price of 100% of
principal amount (the "Asset Sale Offer Price") together with
accrued and unpaid interest and liquidated damages, if any, to the
date of payment, made within 270 days of such Asset Sale, or
(b) within 270 days following such Asset Sale, the Asset Sale Offer
Amount is:
- invested, or committed to be invested, and is invested, within an
additional 90 days in tangible assets and property other than
notes, bonds, obligations and securities which in the good faith
reasonable judgment of the Board will immediately constitute or be
a part of a Related Business of Compass or such Subsidiary
immediately following such transaction, or
- used to retire Purchase Money Indebtedness, Mortgage Indebtedness
or senior debt and, to permanently reduce the amount of such
Indebtedness, incurred under the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock,"
(c) at least 90% of the consideration for such Asset Sale or series of
related Asset Sales consists of cash or Cash Equivalents,
(d) no Default or Event of Default shall have occurred and be continuing
at the time of, or would occur after giving effect, on a pro forma basis,
to, such Asset Sale, and
(e) 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.
An acquisition of notes pursuant to an Asset Sale Offer may be deferred
until the accumulated Net Cash Proceeds from Asset Sales not applied to the uses
set forth in (1)(a) or (b) above (the "Excess Proceeds") exceeds $5.0 million.
Each Asset Sale Offer shall remain open for 20 Business Days following its
commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset Sale
Offer Period, 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 at the Asset Sale Offer Price,
together with accrued interest and liquidated damages, if any. The Asset Sale
Offer Amount shall be applied on a PRO RATA basis if the Asset Sale Offer Amount
is insufficient to
79
purchase all Indebtedness so tendered. To the extent that the aggregate amount
of notes and such other PARI PASSU Indebtedness tendered pursuant to an Asset
Sale Offer is less than the Asset Sale Offer Amount, Compass may use any
remaining Net Cash Proceeds for general corporate purposes as otherwise
permitted by the indenture. Following each Asset Sale Offer the Excess Proceeds
amount shall be reset to zero.
For purposes of determining the percentage of the consideration for the
Asset Sale received in cash or Cash Equivalents, total consideration received
means the total consideration received for such Asset Sales minus the amount of:
- Purchase Money Indebtedness or Mortgage Indebtedness secured solely by the
assets sold and assumed by a transferee, and
- property that within 30 days of such Asset Sale is converted into cash or
Cash Equivalents, PROVIDED that such cash and Cash Equivalents shall be
treated as Net Cash Proceeds attributable to the original Asset Sale for
which such property was received.
Notwithstanding, and without complying with, the provisions of this
covenant, Compass and its Subsidiaries may:
(1) in the ordinary course of business:
(a) convey, sell, transfer, assign or otherwise dispose of inventory and
other assets acquired and held for resale in the ordinary course of
business, and
(b) liquidate Cash Equivalents;
(2) convey, sell, transfer, assign or otherwise dispose of assets pursuant
to and in accordance with the covenant "Limitation on Merger, Sale or
Consolidation;"
(3) sell or dispose of damaged, worn out, scrap or other obsolete property
in the ordinary course of business so long as such property is no longer
necessary for the proper conduct of the business of Compass or such
Subsidiary, as applicable; and
(4) convey, sell, transfer, assign or otherwise dispose of assets to Compass
or any of its wholly owned guarantors;
(5) in the ordinary course of business, convey, sell, transfer, assign, or
otherwise dispose of assets or related assets in related transactions
with a fair market value of less than $250,000; and
(6) surrender or waive contract rights or settle, release or surrender of
contract, tort or other claims of any kind or grant Liens not prohibited
by the indenture.
All Net Cash Proceeds from an Event of Loss relating to a Material Facility
shall be invested, used for prepayment of Senior Indebtedness or used to
repurchase notes, all within the period and as otherwise provided above in
clauses (1)(a) or (b) of the first paragraph of this covenant plus 90 days.
In addition to the foregoing and notwithstanding anything herein to the
contrary, 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.
80
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest will be paid to the
person in whose name a note is registered at the close of business on such
Record Date, and such interest will not be payable to holders who tender notes
pursuant to such Asset Sale Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
Neither Compass nor any of its Subsidiaries will be permitted to enter into
or suffer to exist any contract, agreement, arrangement or transaction with any
Affiliate an "Affiliate Transaction", or any series of related Affiliate
Transactions, other than Exempted Affiliate Transactions, unless:
- it is determined that the terms of such Affiliate Transaction are fair and
reasonable to Compass, and no less favorable to Compass than could have
been obtained in an arm's length transaction with a non-Affiliate,
- if involving consideration to either party in excess of $1.0 million, the
Affiliate Transaction is evidenced by an Officers' Certificate addressed
and delivered to the trustee certifying that such Affiliate Transaction
has been approved by a majority of the members of the Board of Directors
that are disinterested in such transaction, and
- if involving consideration to either party in excess of $5.0 million,
Compass, prior to the consummation of an Affiliate Transaction, obtains a
written favorable opinion as to the fairness of the 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
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:
(1) Compass is the continuing entity;
(2) the resulting, surviving or transferee entity is a corporation organized
under the laws of the United States, any state thereof or the District of
Columbia and expressly assumes by supplemental indenture all of the
obligations of Compass in connection with the notes and the indenture;
(3) no Default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction; and
(4) unless such transaction is solely the merger of 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 be substituted
81
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. 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
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
All present and future Subsidiaries of Compass will jointly and severally,
fully, irrevocably and unconditionally guarantee all principal, premium, if any,
and interest on the notes on a senior subordinated basis. The term Subsidiary
does not include Unrestricted Subsidiaries.
RELEASE OF GUARANTORS
The indenture provides that no guarantor shall consolidate or merge with or
into another person, whether or not such guarantor is the surviving person,
unless:
- subject to the provisions of the following paragraph and other provisions
of the indenture, the person formed by or surviving any such consolidation
or merger, if other than such guarantor, assumes all the obligations of
such guarantor pursuant to a supplemental indenture in form reasonably
satisfactory to the trustee, pursuant to which such person shall
unconditionally guarantee, on a senior subordinated basis, all of such
guarantor's obligations under such guarantor's guarantee, on the terms set
forth in the indenture; and
- immediately before and immediately after giving effect to such transaction
on a pro forma basis, no Default or Event of Default shall have occurred
or be continuing.
A guarantor will be deemed released from its obligations under its guarantee
of the notes upon the sale or disposition, whether by merger, stock purchase,
asset sale or otherwise, of that guarantor or all of its assets to an entity
which is not a guarantor or the designation of a Subsidiary to become an
Unrestricted Subsidiary, which transaction is otherwise in compliance with the
indenture; PROVIDED, HOWEVER, that any such termination shall occur only in the
event that all obligations of that guarantor under all of its guarantees of and
under all of its pledges of assets or other security interests which secure any
Indebtedness of Compass or any other Subsidiary of Compass shall also terminate
upon such release, sale or transfer.
LIMITATION ON STATUS AS INVESTMENT COMPANY
Compass and its Subsidiaries may not be required to register as an
"investment company," as that term is defined in the Investment Company Act of
1940, or may not otherwise become subject to regulation under the Investment
Company Act.
82
REPORTS
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 within 15 days after the time period specified in the Securities and
Exchange Commission's rules and regulations:
- all annual and quarterly financial statements substantially equivalent to
financial statements that would have been included in reports filed with
the Commission on Forms 10-K and 10-Q, including, with respect to annual
information only, a report thereon by Compass' certified independent
public accountants as such would be required in such reports to the
Commission; and
- all current reports that would be required to be filed with the Commission
on Form 8-K if Compass were required to file such reports.
In each case, Compass shall include a management's discussion and analysis
of financial condition and results of operations which would be so required.
Unless the Commission will not accept such reports, Compass will 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
Each of the following is an Event of Default:
- 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;
- 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;
- 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 some 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;
- events of bankruptcy, insolvency or reorganization in respect of Compass
or any of its Significant Subsidiaries;
- 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
resulting from either the failure to pay principal at maturity or as a
result of which the maturity of such Indebtedness has been accelerated
prior to its stated maturity; and
- final unsatisfied judgments not covered by insurance aggregating in excess
of $5.0 million at any one time, rendered against Compass or any of its
Subsidiaries and not stayed, bonded or discharged within 60 days.
If a Default occurs and is continuing, the trustee must, within 90 days
after the occurrence of such default, give the holders notice of such default.
Other than an Event of Default resulting from events of bankruptcy,
insolvency or reorganization relating to Compass or any of its Significant
Subsidiaries, if an Event of Default occurs and is continuing, then in every
such case, either the trustee or the holders of at least 25% in aggregate
principal amount of the notes then outstanding, by notice in writing to 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. If any
83
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:
- 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
- the date of acceleration of any senior debt under the credit agreement.
If an Event of Default resulting from events of bankruptcy, insolvency or
reorganization relating to Compass or any of its Significant Subsidiaries
occurs, all principal and accrued interest and liquidated damages, if any,
thereon will be immediately due and payable on all outstanding notes without any
declaration or other act on the part of trustee or the holders. The holders of a
majority in aggregate principal amount of notes generally are authorized to
rescind such acceleration if all existing Events of Default have been cured or
waived, other than:
- the non-payment of the principal of, premium, if any, and interest on the
notes which have become due solely by such acceleration, and
- except on default with respect to any provision requiring a supermajority
approval to amend, which default may only be waived by such a
supermajority.
Prior to the declaration of acceleration of the maturity of the notes, the
holders of a majority in aggregate principal amount of the notes at the time
outstanding may waive on behalf of all the holders any default, except:
- a default with respect to any provision requiring a supermajority approval
to amend, which default may only be waived by such a supermajority,
- a default in the payment of principal of or interest on any note not yet
cured, or
- a default with respect to any covenant or provision which cannot be
modified or amended without the consent of the holder of each outstanding
note affected.
Subject to the provisions of the indenture relating to the duties of the
trustee, the trustee will be under no obligation to exercise any of its rights
or powers under the indenture at the request, order or direction of any of the
holders, unless such holders have offered to the trustee reasonable security or
indemnity. Subject to all provisions of the indenture and applicable law, the
holders of a majority in aggregate principal amount of the notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee, or exercising
any trust or power conferred on the trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
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:
- 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;
- 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;
- the rights, powers, trust, duties, and immunities of the trustee, and
Compass' obligations in connection therewith; and
- the Legal Defeasance provisions of the indenture.
84
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 some of the
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the notes. Covenant Defeasance will
not affect holders' rights with respect to non-payment, guarantees, bankruptcy,
receivership, rehabilitation and insolvency events.
In order to exercise either Legal Defeasance or Covenant Defeasance, Compass
must irrevocably deposit with the trustee, in trust, for the benefit of the
holders of the notes:
(1) U.S. legal tender, U.S. Government Obligations or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal
of, premium, if any, and interest on such notes on the stated date for
payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on such notes,
and
(2) the holders of notes must have a valid, perfected, exclusive security
interest in such trust;
(3) in the case of Legal Defeasance, 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
the holders of such notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred.
(4) in the case of Covenant Defeasance, 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;
(5) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit;
(6) Compass shall have delivered to the trustee an Officer's Certificate
acceptable to the trustee, 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;
(7) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the indenture or
any other material agreement or instrument to which Compass or any of its
Subsidiaries is a party or by which Compass or any of its Subsidiaries is
bound;
(8) 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;
85
(9) Compass shall have delivered to the trustee an Officers' Certificate
stating that the conditions precedent set forth above in the first eight
clauses of this paragraph have been complied with; and
(10) Compass shall have delivered to the trustee an opinion of counsel,
stating that the conditions precedent set forth above in the first clause
of this paragraph with respect to the validity and perfection of the
security interest, and in the second, third and fifth clauses of this
paragraph have been complied with.
If the funds deposited with the trustee to effect Covenant Defeasance are
insufficient to pay the principal of, premium, if any, and interest on the notes
when due, then 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
Compass, the guarantors and the trustee may enter into a supplemental
indenture for limited purposes without the consent of the holders. With the
consent of the holders of not less than a majority in aggregate principal amount
of the notes at the time outstanding, 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. No such modification may, however, without
the consent of holders of at least 66 2/3% in aggregate principal amount of
notes at the time outstanding, modify the provisions including the defined terms
used therein of the covenant "Repurchase of Notes at the Option of the Holder
Upon a Change of Control" in a manner adverse to the holders; and no such
modification may, without the consent of each holder affected thereby:
- change the Stated Maturity on any note;
- reduce the principal amount thereof or the rate or extend the time for
payment of interest thereon or any premium payable upon the redemption at
the option of Compass thereof;
- change the place of payment where, or the coin or currency in which, any
note or any premium or the interest thereon is payable;
- impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity thereof, or, in the case of redemption at
the option of Compass, on or after the Redemption Date;
- reduce the Change of Control Purchase Price or the Asset Sale Offer Price;
- alter the provisions, including the defined terms used therein, regarding
the right of Compass to redeem the notes as a right, or at the option of
Compass in a manner adverse to the holders;
- reduce the percentage in principal amount of the outstanding notes, the
consent of whose holders is required for any such amendment, supplemental
indenture or waiver provided for in the indenture; or
- modify any of the waiver provisions, except to increase any required
percentage or to provide that other specific provisions of the indenture
cannot be modified or waived without the consent of the holder of each
outstanding note affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
No past, present or future direct or indirect stockholder, employee, officer
or director, as such, of Compass, the guarantors or any successor entity shall
have any personal liability for any 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. This provision shall not limit the
obligation of any guarantor pursuant to any guarantee of the notes.
86
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:
(1) the sum of the products:
(a) of the number of years from the date of determination to the date or
dates of each successive scheduled principal or redemption payment of
such security or instrument and
(b) the amount of each such respective principal or redemption payment;
(2) by the sum of all such principal or redemption payments.
"BENEFICIAL OWNER" or "BENEFICIAL OWNER" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Issue Date, whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"BOARD OF DIRECTORS" means, with respect to any person, the board of
directors of such person or any committee of the Board of Directors of such
person authorized, with respect to any particular matter, to exercise the power
of the board of directors of such person.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITAL CONTRIBUTION" means any contribution to 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.
87
"CASH EQUIVALENT" means any of the following which matures within one year
after the date of acquisition:
- securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America
is pledged in support thereof);
- time deposits and certificates of deposit and commercial paper issued by
the parent corporation of any domestic commercial bank of recognized
standing having capital and surplus in excess of $500 million; or
- commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or at least P-2 or the equivalent
thereof by Moody's Investors Service, Inc.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) prior to consummation of an Initial Public Equity Offering, the Excluded
Persons shall cease to own beneficially and of record at least 51% of the
total voting power in the aggregate of all classes of Capital Stock of
Compass then outstanding normally entitled to vote in elections of
directors; or
(2) on or following the consummation of an Initial Public Equity Offering;
(a) any merger or consolidation of Compass with or into any person or any
direct or indirect sale, transfer or other conveyance, in one
transaction or a series of related transactions, of all or
substantially all of the assets of Compass, on a consolidated basis
if, immediately after giving effect to such transaction(s):
- any "person" or "group" as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, other than any of the
Excluded Persons, is or becomes the "beneficial owner," directly or
indirectly, of more than 35% of the total voting power in the
aggregate normally entitled to vote in the election of directors,
managers, or trustees of the transferee(s) or surviving entity or
entities; and
- any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting power,
than beneficially owned by the Excluded Persons;
(b) any "person" or "group" as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, other than any of the
Excluded Persons:
- is or becomes the "beneficial owner," directly or indirectly, of more
than 35% of the total voting power in the aggregate of all classes of
Capital Stock of Compass then outstanding normally entitled to vote
in elections of directors; and
- any such person or group becomes, directly or indirectly, the
beneficial owner of a greater percentage of such total voting power,
than beneficially owned by the Excluded Persons; or
(c) during any period of 12 consecutive months after the Issue Date,
individuals who at the beginning of any such 12-month period
constituted 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 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 then in office.
88
"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 pro forma basis, of:
(1) the aggregate amount of Consolidated EBITDA of such person attributable
to continuing operations and businesses (exclusive of amounts
attributable to operations and businesses permanently discontinued or
disposed of) for the Reference Period
(2) to the aggregate Consolidated Fixed Charges of such person (exclusive of
amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations
giving rise to such Consolidated Fixed Charges would no longer be
obligations contributing to such person's Consolidated Fixed Charges
subsequent to the Transaction Date) during the Reference Period;
PROVIDED, that for purposes of such calculation:
- Acquisitions which occurred during the Reference Period or subsequent to
the Reference Period and on or prior to the Transaction Date shall be
assumed to have occurred on the first day of the Reference Period;
- transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period;
- the incurrence of any Indebtedness or issuance of any Disqualified Capital
Stock during the Reference Period or subsequent to the Reference Period
and on or prior to the Transaction Date (and the application of the
proceeds therefrom to the extent used to refinance or retire other
Indebtedness) shall be assumed to have occurred on the first day of the
Reference Period; and
- the Consolidated Fixed Charges of such person attributable to interest on
any Indebtedness or dividends on any Disqualified Capital Stock bearing a
floating interest or dividend rate shall be computed on a pro forma basis
as if the average rate in effect from the beginning of the Reference
Period to the Transaction Date had been the applicable rate for the entire
period, unless such Person or any of its Subsidiaries is a party to an
Interest Swap or Hedging Obligation, which shall remain in effect for the
12-month period immediately following the Transaction Date, that has the
effect of fixing the interest rate on the date of computation, in which
case such rate, whether higher or lower, shall be used.
"CONSOLIDATED EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto,
to the extent deducted from net revenues in determining Consolidated Net Income,
without duplication:
(1) the sum of:
(a) Consolidated income tax expense,
(b) Consolidated depreciation and amortization expense, and
(c) Consolidated Fixed Charges,
(2) less the amount of all cash payments made by such person or any of its
Subsidiaries during such period to the extent such payments relate to
non-cash charges that were added back in determining Consolidated EBITDA
for such period or any prior period, provided that consolidated income
tax expense and depreciation and amortization of a Subsidiary that is a
89
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, determined in each case in accordance with GAAP and without
duplication, of:
(1) interest expensed or capitalized, paid, accrued, or scheduled to be paid
or accrued, including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations, of such person
and its Consolidated Subsidiaries during such period, including:
(a) original issue discount and non-cash interest payments or accruals on
any Indebtedness,
(b) the interest portion of all deferred payment obligations, and
(c) all commissions, discounts and other fees and charges owed with
respect to bankers' acceptances and letters of credit financings and
currency and Interest Swap and Hedging Obligations, in each case to
the extent attributable to such period, and
(2) the amount of dividends accrued or payable or guaranteed by such person
or any of its Consolidated Subsidiaries in respect of Preferred Stock,
other than by Subsidiaries of such person to such person or such person's
wholly owned Subsidiaries, except if such Preferred Stock is a
payment-in-kind ("PIK") security, issuance of such additional PIK
securities would not count as dividends for purposes of this definition.
For purposes of this definition:
- interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined in good faith by Compass to be the
rate of interest implicit in such Capitalized Lease Obligation in
accordance with GAAP, and
- interest expense attributable to any Indebtedness represented by the
guaranty by such person or a Subsidiary of such person of an obligation of
another person shall be deemed to be the interest expense attributable to
the Indebtedness guaranteed.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the net income or loss of such person and its Consolidated Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP and adjusted
to exclude, only to the extent included in computing such net income or loss and
without duplication:
- all gains, but not losses, which are either extraordinary, as determined
in accordance with GAAP, or are either unusual or nonrecurring, including
any gain from the sale or other disposition of assets outside the ordinary
course of business or from the issuance or sale of any capital stock;
- the net income, if positive, of any person, other than a Consolidated
Subsidiary, in which such person or any of its Consolidated Subsidiaries
has an interest, except to the extent of the amount of any dividends or
distributions actually paid in cash to such person or a Consolidated
Subsidiary of such person during such period, but in any case not in
excess of such person's PRO RATA share of such person's net income for
such period;
- the net income or loss of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition; and
- the net income, if positive, of any of such person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the
terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary.
90
"CONSOLIDATED SUBSIDIARY" means, for any person, each Subsidiary of such
person, whether now existing or hereafter created or acquired, the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"CREDIT AGREEMENT" means the credit agreement entered into by and among
Compass, its subsidiaries, various financial institutions and, BancBoston
Securities as arranger, BankBoston as a lender and administrative agent, and
Donaldson, Lufkin & Jenrette Capital Funding as documentation agent, providing a
revolving credit facility, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as such
credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time whether
or not with the same agent, trustee, representative lenders or holders, and
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of the foregoing, the term "Credit Agreement" shall
include agreements in respect of Interest Swap and Hedging Obligations with
lenders party to the credit agreement and shall also include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any credit agreement and all refundings, refinancings and
replacements of any credit agreement, including any agreement:
- extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
- adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of Compass and its Subsidiaries
and their respective successors and assigns,
- increasing the amount of Indebtedness incurred thereunder or available to
be borrowed thereunder, PROVIDED that on the date such Indebtedness is
incurred in accordance with the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," or
- otherwise altering the terms and conditions thereof in a manner not
prohibited by the terms of the indenture.
"DISQUALIFIED CAPITAL STOCK" means:
- with respect to any person, Equity Interests of such person that, by its
terms or by the terms of any security into which it is convertible,
exercisable or exchangeable, is, or upon the happening of an event or the
passage of time or both would be, required to be redeemed or repurchased,
including at the option of the holder thereof, such person or any of its
Subsidiaries, in whole or in part, on or prior to the Stated Maturity of
the notes, and
- with respect to any Subsidiary of such person, including with respect to
any Subsidiary of 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:
- loss, destruction or damage of such property or asset or
- any condemnation, seizure or taking, by exercise of the power of eminent
domain or otherwise, of such property or asset, or confiscation or
requisition of the use of such property or asset.
"EXCLUDED PERSON" means 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.
91
"EXEMPTED AFFILIATE TRANSACTION" means:
- customary employee compensation arrangements approved by a majority of
independent members of the Board of Directors of Compass who are
independent with respect to such transactions;
- dividends permitted under the terms of the covenant discussed above under
"Limitation on Restricted Payments" above and payable, in form and amount,
on a pro rata basis to all holders of common stock of Compass;
- 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;
- Permitted Payments to Parent;
- transactions solely between Compass and any of its wholly owned
Consolidated Subsidiaries or solely among wholly owned Consolidated
Subsidiaries of Compass; and
- the payment of $750,000 to Parent for reimbursement of the nonrefundable
deposit against the purchase price for the acquisition of Barnes Machine.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"GUARANTOR" means each Subsidiary of Compass that executes a guarantee
guaranteeing the notes in accordance with the provisions of the indenture.
"INDEBTEDNESS" of any person means, without duplication
(1) all liabilities and obligations, contingent or otherwise, of such any
person, to the extent such liabilities and obligations would appear as a
liability upon the consolidated balance sheet of such person in
accordance with GAAP:
(a) in respect of borrowed money, whether or not the recourse of the
lender is to the whole of the assets of such person or only to a
portion thereof,
(b) evidenced by bonds, notes, debentures or similar instruments,
(c) representing the balance deferred and unpaid of the purchase price of
any property or services, except those incurred in the ordinary
course of its business that would constitute ordinarily a trade
payable to trade creditors, excluding accounts payable or other
obligations to trade creditors which have remained unpaid for greater
than 60 days past their original due date;
(2) all liabilities and obligations, contingent or otherwise, of such person
(a) evidenced by bankers' acceptances or similar instruments issued or
accepted by banks,
(b) relating to any Capitalized Lease Obligation, or
(c) evidenced by a letter of credit or a reimbursement obligation of such
person with respect to any letter of credit;
(3) all net obligations of such person under Interest Swap and Hedging
Obligations;
92
(4) all liabilities and obligations of others of the kind described in the
preceding clauses that such person has guaranteed or that is otherwise
its legal liability or which are secured by any assets or property of
such person and all obligations to purchase, redeem or acquire any Equity
Interests;
(5) any and all deferrals, renewals, extensions, refinancing and refundings,
whether direct or indirect, of, or amendments, modifications or
supplements to, any liability of the kind described in any of the
preceding clauses, or this clause, whether or not between or among the
same parties; and
(6) all Disqualified Capital Stock of such Person measured at the greater of
its voluntary or involuntary maximum fixed repurchase price plus accrued
and unpaid dividends.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be determined in good faith by the
board of directors or managing general partner of the issuer of such
Disqualified Capital Stock.
"INITIAL PUBLIC EQUITY OFFERING" means an initial underwritten offering of
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:
- the acquisition, whether by purchase, merger, consolidation or otherwise,
by such person, whether for cash, property, services, securities or
otherwise, of capital stock, bonds, notes, debentures, partnership or
other ownership interests or other securities, including any options or
warrants, of such other person or any agreement to make any such
acquisition;
- the making by such person of any deposit with, or advance, loan or other
extension of credit to, such other person, including the purchase of
property from another person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other person, or
any commitment to make any such advance, loan or extension, but excluding
accounts receivable, endorsements for collection or deposits arising in
the ordinary course of business;
- other than guarantees of Indebtedness of 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;
- the making of any capital contribution by such person to such other
person; and
- the designation by the Board of Directors of Compass of any person to be
an Unrestricted Subsidiary.
93
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 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:
- has a final maturity date occurring after the final maturity date of, all
senior debt outstanding under the credit agreement on the date of issuance
of such Qualified Capital Stock or Indebtedness,
- is unsecured,
- has an Average Life longer than the security for which such Qualified
Capital Stock or Indebtedness is being exchanged, and
- by their terms or by law are subordinated to senior debt outstanding under
the credit agreement on the date of issuance of such Qualified Capital
Stock or Indebtedness at least to the same extent as the notes.
"LIEN" means any mortgage, charge, pledge, statutory or other lien,
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"MANAGEMENT FEE PAYMENTS" means payments from Compass to Dunhill Bank
Caribbean Ltd. and Hayes Capital Corporation under a Management Consulting
Agreement, dated March 9, 1998, by and between Compass, Dunhill Bank Caribbean
Ltd. and Hayes Capital Corporation, in accordance with the terms and provisions
of such Management Consulting Agreement on the Issue Date, PROVIDED, HOWEVER,
that 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:
(1) 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;
(2) plus, in the case of an issuance of Qualified Capital Stock upon any
exercise, exchange or conversion of securities, including options,
warrants, rights and convertible or exchangeable debt of 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;
94
(3) less:
(a) in each case, the sum of all payments, fees, commissions and, in the
case of Asset Sales, reasonable and customary expenses, including,
without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses incurred in connection with such
Asset Sale or sale of Qualified Capital Stock, and
(b) in the case of an Asset Sale only, 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:
- 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;
- such Indebtedness is incurred 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 constitutes Refinancing
Indebtedness with respect to Indebtedness so incurred; and
- the Subject Assets are not existing assets and no existing assets or
proceeds from the sale, transfer or other disposition of existing assets
were used to acquire such Subject Assets.
"OBLIGATION" means any principal, premium or interest payment, or monetary
penalty, or damages, due by 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:
- 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;
- Compass and the guarantors, as applicable, may incur Refinancing
Indebtedness with respect to any Indebtedness or Disqualified Capital
Stock, as applicable, described in the foregoing clause of this definition
or incurred under the Debt Incurrence Ratio test of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock," or which is outstanding on the Issue Date, after giving
effect to the issuance of the outstanding notes, and $3.5 million of
Mortgage Indebtedness to be incurred in connection with the acquisition of
Brittain Machine and within six months after the Issue Date, which will be
considered outstanding on the Issue Date for purposes of this clause,
provided that in each case such Refinancing Indebtedness is secured only
by the assets that secured the Indebtedness so refinanced;
- 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
95
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;
- 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
- 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:
- Investments in any of the notes;
- Investments in Cash Equivalents;
- intercompany notes to the extent permitted under the definition of
"Permitted Indebtedness;" and
- any Investment by 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:
(1) Liens existing on the Issue Date;
(2) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with
respect thereto are maintained on the books of Compass in accordance with
GAAP;
(3) statutory liens of carriers, warehousemen, mechanics, material men,
landlords, repairmen or other like Liens arising by operation of law in
the ordinary course of business provided that:
(a) the underlying obligations are not overdue for a period of more than
30 days, or
(b) such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are maintained
on the books of Compass in accordance with GAAP;
(4) Liens securing the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(5) easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects which, singly or in the aggregate, do not
in any case materially detract from the value of the property, subject
thereto (as such property is used by Compass or any of its Subsidiaries)
or interfere with the ordinary conduct of the business of Compass or any
of its Subsidiaries;
(6) Liens arising by operation of law in connection with judgments, only to
the extent, for an amount and for a period not resulting in an Event of
Default with respect thereto;
(7) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(8) Liens securing the notes;
96
(9) 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;
(10) Liens arising from Purchase Money Indebtedness or Mortgage Indebtedness
permitted to be incurred pursuant to the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock"
PROVIDED such Liens relate solely to the property which is subject to
such Purchase Money Indebtedness or Mortgage Indebtedness, as applicable;
(11) Leases or subleases granted to other persons in the ordinary course of
business not materially interfering with the conduct of the business of
Compass or any of its Subsidiaries or materially detracting from the
value of the relative assets of Compass or any Subsidiary;
(12) 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;
(13) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse
to the holders of the notes than the terms of the Liens securing such
refinanced Indebtedness, and provided that the Indebtedness secured is
not increased and the lien is not extended to any additional assets or
property that would not have been security for the Indebtedness
refinanced; and
(14) Liens securing Indebtedness incurred under the credit agreement in
accordance with the terms of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
"PERMITTED PAYMENTS TO PARENT" means without duplication:
- payments to Parent in an amount sufficient to permit Parent to pay
reasonable and necessary operating expenses and other general corporate
expenses to the extent such expenses relate or are fairly allocable to
Compass and its Subsidiaries, provided such expenses do not exceed
$250,000 in any fiscal year; and
- payments to Parent to enable Parent to pay foreign, federal, state or
local tax liabilities ("Tax Payment"), not to exceed the amount of any tax
liabilities that would be otherwise payable by 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, notwithstanding the foregoing:
- in the case of determining the amount of a Tax Payment that is permitted
to be paid by Compass 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 shall be treated as a deductible expense of
Compass in the taxable year during which the obligation to make such
payment accrues; and
- any Tax Payments shall either be used by Parent to pay such tax
liabilities within 90 days of Parent's receipt of such payment or refunded
to the payee.
"PURCHASE MONEY INDEBTEDNESS" of any person means any Non-Recourse
Indebtedness of such person to any seller or other person incurred solely to
finance the acquisition (including in the case of a Capitalized Lease
Obligation, the lease) of any after acquired tangible property which, in the
reasonable good faith judgment of the Board of Directors of Compass, is directly
related to a Related
97
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.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock:
(1) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease,
refund, refinance, discharge or otherwise retire for value, in whole or
in part, or constituting an amendment, modification or supplement to, or
a deferral or renewal of (a "Refinancing"), any Indebtedness or
Disqualified Capital Stock in a principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, not to exceed the
lesser of the following, after deduction of reasonable and customary fees
and expenses incurred in connection with the Refinancing plus the amount
of any premium paid in connection with such Refinancing in accordance
with the terms of the documents governing the Indebtedness refinanced
without giving effect to any modification thereof made in connection with
or in contemplation of such refinancing:
(a) the principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, of the Indebtedness or Disqualified Capital
Stock so Refinanced, and
(b) if such Indebtedness being Refinanced was issued with an original
issue discount, the accreted value thereof, as determined in
accordance with GAAP, at the time of such Refinancing;
(2) PROVIDED, that:
(a) such Refinancing Indebtedness of any Subsidiary of Compass shall only
be used to Refinance outstanding Indebtedness or Disqualified Capital
Stock of such Subsidiary,
(b) such Refinancing Indebtedness shall not have an Average Life shorter
than the Indebtedness or Disqualified Capital Stock to be so
refinanced at the time of such Refinancing and in all respects, be no
less subordinated or junior, if applicable, to the rights of holders
of the notes than was the Indebtedness or Disqualified Capital Stock
to be refinanced,
(c) such Refinancing Indebtedness shall have a final stated maturity or
redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or
Disqualified Capital Stock to be so refinanced, and
(d) such Refinancing Indebtedness shall be secured, if secured, in a
manner no more adverse to the holders of the notes than the terms of
the Liens, if any, securing such refinanced Indebtedness, including,
without limitation, the amount of Indebtedness secured shall not be
increased.
"RELATED BUSINESS" means the business conducted, or proposed to be
conducted, by 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.
98
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than other Permitted Investments.
"RESTRICTED PAYMENT" means, with respect to any person:
- the declaration or payment of any dividend or other distribution in
respect of Equity Interests of such person or any parent or Subsidiary of
such person;
- any payment on account of the purchase, redemption or other acquisition or
retirement for value of Equity Interests of such person or any Subsidiary
or parent of such person;
- other than with the proceeds from the substantially concurrent sale of, or
in exchange for, Refinancing Indebtedness any purchase, redemption, or
other acquisition or retirement for value of, any payment in respect of
any amendment of the terms of or any defeasance of, any Subordinated
Indebtedness, directly or indirectly, by such person or a parent or
Subsidiary of such person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the case may
be, of such Indebtedness;
- any Restricted Investment by such person, and
- any Management Fee Payments or similar payments to any Affiliates other
than Subsidiaries in excess of an aggregate of $500,000 in any fiscal
year; PROVIDED, HOWEVER, that 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.
The term "Restricted Payment" shall not include:
- any dividend, distribution or other payment on or with respect to Equity
Interests of an issuer to the extent payable solely in shares of Qualified
Capital Stock of such issuer;
- any dividend, distribution or other payment to Compass, or to any of its
guarantors, by Compass or any of its Subsidiaries; or
- the payment of $750,000 to Parent for reimbursement for the down payment
on the purchase price of Barnes Machine.
"SENIOR DEBT" of 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:
- Indebtedness to any Subsidiary of Compass or any officer, director or
employee of Compass or any Subsidiary of Compass;
- Indebtedness incurred in violation of the terms of the indenture;
- Indebtedness to trade creditors;
- Disqualified Capital Stock;
- Capitalized Lease Obligations; and
- any liability for taxes owed or owing by 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
99
notes or such guarantee, as applicable, in any respect or has a stated maturity
after the Stated Maturity.
"SUBSIDIARY," with respect to any person, means:
- a corporation a majority of whose Equity Interests with voting power,
under ordinary circumstances, to elect directors is at the time, directly
or indirectly, owned by such person, by such person and one or more
Subsidiaries of such person or by one or more Subsidiaries of such person;
- any other person, other than a corporation, in which such person, one or
more Subsidiaries of such person, or such person and one or more
Subsidiaries of such person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest; or
- 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:
- such subsidiary shall not engage, to any substantial extent, in any line
or lines of business activity other than a Related Business;
- neither immediately prior thereto nor after giving pro forma effect to
such designation would there exist a Default or Event of Default; and
- immediately after giving pro forma effect thereto, 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:
- no Default or Event of Default is existing or will occur as a consequence
thereof; and
- immediately after giving effect to such designation, on a pro forma basis,
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 Series B notes will be issued in the form of one or more registered
global notes without interest coupons (collectively, the "Global Notes"). Upon
issuance, the Global Notes will be deposited with the trustee, as custodian for
DTC, in New York, New York, and registered in the name of DTC or its nominee for
credit to the accounts of DTC's Direct and Indirect Participants, as defined
below.
100
Beneficial interests in all Global Notes and all Certificated Notes, as
defined below, if any, will be subject to restrictions on transfer and will bear
a restrictive legend as described under "Notice to Investors." In addition,
transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
including, if applicable, those of Euroclear and CEDEL, which may change from
time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in limited
circumstances. Beneficial interests in the Global Notes may be exchanged for
notes in certificated form in limited circumstances. You should read the
discussion under the heading "--Transfer of Interests in Global Notes for
Certificated Notes" for further information regarding such an exchange.
Initially, the trustee will act as Paying Agent and Registrar. The notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITORY PROCEDURES
DTC has advised 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 various other organizations, including Euroclear and Cedel. Access to DTC's
system is also available to other entities that clear through or maintain a
direct or indirect, custodial relationship with a Direct Participant
(collectively, the "Indirect Participants").
DTC has also advised Compass that, pursuant to procedures established by it:
- upon deposit of the Global Notes for exchange, DTC will credit the
accounts of the Direct Participants with such portions of the principal
amount of the Global Notes as determined based on the portion of
outstanding notes deposited by such Direct Participant as designated by
the exchange agent, and
- DTC will maintain records of the ownership interests of such Direct
Participants in the Global Notes and the transfer of ownership interests
by and between Direct Participants.
DTC will not maintain records of the ownership interests of, or the transfer
of ownership interests by and between, Indirect Participants or other owners of
beneficial interests in the Global Notes. Direct Participants and Indirect
Participants must maintain their own records of the ownership interests of, and
the transfer of ownership interests by and between, Indirect Participants and
other owners of beneficial interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. All ownership interests in
any Global Notes may be subject to the procedures and requirements of DTC.
The laws of some states in the United States require that some persons take
physical delivery in definitive, certificated form, of securities that they own.
This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. You should read the
discussion under the heading "--Transfers of Interests in Global Notes for
Certificated Notes" for further information on other restrictions on the
transferability of the notes.
101
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, 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:
- any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's
or Indirect Participant's records relating to the beneficial ownership
interests in any Global Note, or
- any other matter relating to the actions and practices of DTC or any of
its Direct Participants or Indirect Participants.
DTC has advised 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. 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
102
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. You should read the discussion under
the heading "--Transfers of Interests in Global Notes for Certificated Notes"
for further information regarding such transfers.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among Direct Participants,
including Euroclear and CEDEL, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. None of 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.
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:
- DTC 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 DTC has ceased to be a clearing
agency registered under the Exchange Act,
- Compass, at its option, notifies the trustee in writing that it elects to
cause the issuance of Certificated Notes, or
- there shall have occurred and be continuing a Default or an Event of
Default with respect to the notes.
In any such case, 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
103
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 some circumstances, an opinion of
counsel confirming that, in connection with such transfer, it has complied with
the restrictions on transfer described under "Notice to Investors."
SAME DAY SETTLEMENT AND PAYMENT
Payments in respect of the notes represented by the Global Notes, including
principal, premium, if any, interest and Liquidated Damages, if any, shall be
made by wire transfer of immediately available same day funds to the accounts
specified by the holder of interests in such Global Note. With respect to
Certificated Notes, 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.
104
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material 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 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, including 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 these persons may be subject to tax rules that differ significantly from
those summarized below. In addition, this summary does not discuss any foreign,
state, or local tax considerations. This summary assumes that investors will
hold their notes as "capital assets" (generally, property held for investment)
under the United States Internal Revenue Code of 1986. 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 Series B notes under the terms of the
exchange offer should not constitute a taxable exchange. As a result:
- a holder should not recognize taxable gain or loss as a result of
exchanging outstanding notes for Series B notes under the terms of the
exchange offer,
- the holding period of the Series B notes should include the holding period
of the outstanding notes exchanged for the Series B notes, and
- the adjusted tax basis of the Series B notes should be the same as the
adjusted tax basis of the outstanding notes exchanged therefor immediately
before the exchange.
UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a summary of material 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, including 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.
105
All of these persons may be subject to tax rules that differ significantly from
those summarized below. In addition, this summary does not discuss any foreign,
state, or local tax considerations. This summary assumes that investors will
hold their notes as "capital assets" (generally, property held for investment)
under the United States Internal Revenue Code of 1986. 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:
- an individual who is a citizen or resident of the United States,
- a corporation, partnership, or other entity created or organized under the
laws of the United States or any state or political subdivision thereof,
- an estate that is subject to United States federal income taxation without
regard to the source of its income, or
- 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:
- such holder does not own, actually or constructively, 10 percent or more
of the total combined voting power of all classes of 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
- 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:
- United States federal income tax on interest that is effectively connected
with the conduct of such trade or business, and
- if the Non-U.S. Holder is a corporation, a United States branch profits
tax equal to 30% of its "effectively connected earnings and profits" as
adjusted for the taxable year, unless the holder qualifies for an
exemption from such tax or a lower tax rate under an applicable treaty.
GAIN ON DISPOSITION. A Non-U.S. Holder will generally not be subject to
United States federal income tax on gain recognized on a sale, redemption, or
other disposition of a note unless:
- the gain is effectively connected with the conduct of a trade or business
within the United States by the Non-U.S. Holder, or
- 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 other specific 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.
106
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:
- 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
- the interest accrued on the note was not effectively connected with the
conduct of a United States trade or business.
OWNER'S STATEMENT REQUIREMENT. Section 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 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, 2000, 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:
- 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
- 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, 2000, 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. However, 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 the first clause
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, 2000, 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, 2000, 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. Information reporting will be required if such broker is:
- a United States 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,
107
- in the case of payments made after December 31, 2000, 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 not be required if the broker has in its records
documentary evidence that the beneficial owner is not a United States person and
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.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Series B notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Series B notes received in exchange for 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 amended or supplemented, available to any broker-dealer for
use in connection with any such resales for a period of up to one year after the
expiration date, or for such shorter period that will terminate when such
broker-dealers have sold all of such Series B notes.
Compass will not receive any proceeds from any sale of Series B notes by
broker-dealers. Series B notes received by broker-dealers for their own accounts
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Series B 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 Series B notes. Any
broker-dealer that resells Series B notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such Series B notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Series B 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 two of the initial purchasers of the outstanding
notes that following completion of the exchange offer they intend to make a
market in the Series B notes to be issued in the exchange offer. However, such
entities are under no obligation to do so and any such market-making activities
with respect to the Series B notes may be discontinued at any time.
108
LEGAL MATTERS
The validity of the Series B 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 of Barnes Machine, the combined financial statements of
Sea-Lect and the consolidated financial statements of Y.F. Americas, Inc. and
Subsidiary appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, to the extent indicated in
their reports thereon also appearing elsewhere herein and in the registration
statement. Such financial statements have been included herein in reliance upon
such reports given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of 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.
109
COMPASS AEROSPACE CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
COMPASS AEROSPACE CORPORATION
For the three months ended March 31, 1999 and March 31, 1998
Consolidated Condensed Balance Sheets at March 31, 1999 (unaudited) and December 31, 1998................ F-3
Consolidated Condensed Statements of Income (unaudited).................................................. F-4
Consolidated Condensed Statements of Cash Flows (unaudited).............................................. F-5
Notes to Unaudited Interim Consolidated Condensed Financial Statements................................... F-6
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-8
Consolidated Balance Sheets.............................................................................. F-9
Consolidated Statements of Income........................................................................ F-10
Consolidated Statements of Stockholders' Equity.......................................................... F-11
Consolidated Statements of Cash Flows.................................................................... F-12
Notes to Consolidated Financial Statements............................................................... F-13
AEROMIL ENGINEERING COMPANY
For the period from January 1, 1997 through November 25, 1997
Report of Independent Auditors........................................................................... F-24
Balance Sheet............................................................................................ F-25
Statement of Operations and Retained Earnings............................................................ F-26
Statement of Cash Flows.................................................................................. F-27
Notes to Financial Statements............................................................................ F-28
BRITTAIN MACHINE, INC.
For the period from July 1, 1997 through April 21, 1998
Report of Independent Certified Public Accountants....................................................... F-34
Consolidated Balance Sheet............................................................................... F-35
Consolidated Statement of Earnings and Retained Earnings................................................. F-36
Consolidated Statement of Cash Flows..................................................................... F-37
Notes to Consolidated Financial Statements............................................................... F-38
For the years ended June 30, 1997 and June 30, 1996
Report of Independent Certified Public Accountants....................................................... F-45
Report of Independent Auditors........................................................................... F-46
Consolidated Balance Sheets.............................................................................. F-47
Consolidated Statements of Earnings and Retained Earnings................................................ F-49
Consolidated Statements of Cash Flows.................................................................... F-50
Notes to Consolidated Financial Statements............................................................... F-51
F-1
PAGE
---------
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-59
Balance Sheets........................................................................................... F-60
Statements of Income and Retained Earnings............................................................... F-61
Statements of Cash Flows................................................................................. F-62
Notes to Financial Statements............................................................................ F-63
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-68
Combined Balance Sheets.................................................................................. F-69
Combined Statements of Income............................................................................ F-70
Combined Statements of Shareholders' Equity.............................................................. F-71
Combined Statements of Cash Flows........................................................................ F-72
Notes to Combined Financial Statements................................................................... F-73
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-76
Balance Sheets........................................................................................... F-77
Statements of Income..................................................................................... F-78
Statements of Retained Earnings.......................................................................... F-79
Statements of Cash Flows................................................................................. F-80
Notes to Financial Statements............................................................................ F-81
Y.F. AMERICAS, INC. (now known as Modern Manufacturing, Inc.)
For the years ended December 31, 1998, December 31, 1997 and December 31, 1996
Report of Independent Auditors........................................................................... F-85
Consolidated Balance Sheets.............................................................................. F-86
Consolidated Statements of Income........................................................................ F-87
Consolidated Statements of Shareholders' Equity.......................................................... F-88
Consolidated Statements of Cash Flows.................................................................... F-89
Notes to Consolidated Financial Statements............................................................... F-90
F-2
COMPASS AEROSPACE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents............................................................ $ 10,050 $ 7,871
---------- ------------
---------- ------------
Accounts receivable, net............................................................. 15,406 19,553
Inventories.......................................................................... 32,749 32,631
Prepaid expenses and other current assets............................................ 3,924 3,407
---------- ------------
Total current assets................................................................... 62,129 63,462
---------- ------------
---------- ------------
Property and equipment, net............................................................ 57,216 58,914
Goodwill, net.......................................................................... 118,915 120,412
Other assets........................................................................... 12,793 12,717
---------- ------------
Total assets........................................................................... $ 251,053 $ 255,505
---------- ------------
---------- ------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable..................................................................... $ 8,669 $ 10,827
Accrued expenses..................................................................... 10,546 9,910
Current portion of long-term debt and capital leases................................. 4,511 4,632
---------- ------------
Total current liabilities.............................................................. 23,726 25,369
Deferred income taxes.................................................................. 7,845 7,845
Long-term debt and capital leases, less current portion................................ 190,619 192,336
Stockholders' equity:
Common stock......................................................................... 248 248
Paid-in capital...................................................................... 28,718 28,718
Retained earnings.................................................................... (103) 989
---------- ------------
Total stockholders' equity............................................................. 28,863 29,955
---------- ------------
Total liabilities and stockholders' equity............................................. $ 251,053 $ 255,505
---------- ------------
---------- ------------
See accompanying notes.
F-3
COMPASS AEROSPACE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(UNAUDITED)
Net sales.................................................................................... $ 34,392 $ 8,555
Cost of sales................................................................................ 24,578 6,749
--------- ---------
9,814 1,806
Selling, general and administrative expenses................................................. 4,765 600
Amortization of goodwill..................................................................... 1,497 455
--------- ---------
6,262 1,055
Operating income............................................................................. 3,552 751
Interest expense, net........................................................................ 5,074 361
Other expense................................................................................ 512
--------- ---------
Income (loss) before income taxes............................................................ (2,034) 390
Income tax expense (benefit)................................................................. (942) 152
--------- ---------
Net income (loss)............................................................................ $ (1,092) $ 238
--------- ---------
--------- ---------
See accompanying notes.
F-4
COMPASS AEROSPACE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(UNAUDITED)
Operating activities
Net income (loss)............................................................................. $ (1,092) $ 238
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization............................................................... 4,374 615
Changes in operating assets and liabilities:
Accounts receivable....................................................................... 4,147 (1,310)
Inventories............................................................................... (118) 43
Prepaid expenses and other assets......................................................... (1,083) 41
Accounts payable.......................................................................... (2,158) 1,108
Accrued expenses and other liabilities.................................................... 636 (539)
--------- ---------
Net cash (used in) provided by operating activities........................................... 4,706 196
Investing activities
Purchase of property and equipment............................................................ (689) (727)
--------- ---------
Net cash used in investing activities......................................................... (689) (727)
Financing activities
Proceeds from long-term debt.................................................................. -- 801
Principal payments on long-term debt.......................................................... (1,838) --
--------- ---------
Net cash (used in) provided by financing activities........................................... (1,838) 801
--------- ---------
Net increase in cash.......................................................................... 2,179 270
Cash and cash equivalents at beginning of period.............................................. 7,871 443
--------- ---------
Cash and cash equivalents at end of period.................................................... $ 10,050 $ 713
See accompanying notes.
F-5
COMPASS AEROSPACE CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for fair
presentation, with respect to the interim financial statements have been
included. The results of operations for the three-month period ended March 31,
1999 is not necessarily indicative of the results for the full year ending
December 31, 1999. For further information, refer to the Compass Aerospace
Corporation consolidated financial statements and footnotes thereto for the year
ended December 31, 1998.
The accompanying consolidated financial statements include the accounts of
Compass Aerospace Corporation and its wholly owned subsidiaries, Western Methods
Machinery Corporation, Aeromil Engineering Company, Barnes Machine, Inc.,
Brittain Machine, Inc., Wichita Manufacturing, Inc., Sea-Lect Products, Inc.,
Pacific Hills Manufacturing Co., and Modern Manufacturing, Inc. (collectively,
the Company). All significant intercompany accounts have been eliminated in
consolidation.
2. OTHER FINANCIAL INFORMATION
Earnings before interest, income taxes, depreciation, goodwill amortization
and management fees for the periods ended March 31, 1999 and March 31, 1998 are
as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(UNAUDITED)
Operating Income........................................................... $ 3,552 $ 751
Plus:
Depreciation............................................................. 2,387 455
Amortization............................................................. 1,497 160
Management Fees.......................................................... 165 --
--------- ---------
EBITDA..................................................................... $ 7,601 $ 1,366
--------- ---------
--------- ---------
3. YEAR 2000 COMPLIANCE
The Year 2000 issue concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000.
The Company has developed plans to address the possible impact of the Year
2000 issue on its computer systems. In 1998, the Company decided to replace its
Year 2000 non-compliant systems and install replacement systems. The
installation of the replacement systems is currently underway and the Company
believes it will complete its replacement program by September 30, 1999.
The Company is currently developing a plan to evaluate Year 2000 compliance
for all non-information technology systems such as telephone systems, fax
machines, security systems, etc. The Company expects to
F-6
COMPASS AEROSPACE CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
3. YEAR 2000 COMPLIANCE (CONTINUED)
complete its evaluation and remediation of non-compliant, non-information
technology systems by September 30, 1999.
The Company 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. The Company cannot ensure that all third parties significant to
the Company's operations will be compliant by December 31, 1999. The Company
believes a reasonably likely worst case scenario resulting from non-compliance
by certain of the Company's major customers or critical vendors could include
adverse effects on the Company's revenue collection, disbursements and
communications, as well as the scheduling and delivery of inventory resulting in
a material adverse effect on the Company's business, financial condition or
results of operations. In addition, loss of utility service resulting from
disruptions in power generation, transmission or distribution could adversely
affect the Company's manufacturing facilities, leading to delays in or the
inability to provide products to the Company's customers, resulting in a
material adverse effect on the Company's business, financial condition or
results of operations. If it appears likely that any major customer or critical
vendor will not be compliant, the Company intends to develop contingency plans,
if possible, to mitigate the impact of non-compliance.
F-7
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Compass Aerospace Corporation
We have audited the accompanying consolidated balance sheets of Compass
Aerospace Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related statements of income, stockholders' equity, and cash flows for the year
ended December 31, 1998 and the period October 21, 1997 (date of incorporation)
through December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 21(b). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Compass
Aerospace Corporation and subsidiaries at December 31, 1998 and 1997 and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1998 and the period October 21, 1997 (date of incorporation)
through December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presented fairly, in all material respects the information set forth
therein.
Long Beach, California
March 15, 1999
F-8
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-9
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
------------ ------
------------ ------
F-10
COMPASS AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------- ----------- ----------- ----------- ------------
COMMON STOCK
--------------------------
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-11
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-12
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Compass Aerospace Corporation and its wholly owned subsidiaries, Western Methods
Machinery Corporation (Western), Aeromil Engineering Company (Aeromil), Barnes
Machine, Inc. (Barnes), Brittain Machine Inc. (Brittain), Wichita Manufacturing
Inc. (Wichita), Sea-Lect Products Inc. (Sea-Lect), Lamsco West, Inc. (Lamsco),
and Modern Manufacturing, Inc. (formerly known as Y.F. Americas, Inc.) (Modern)
(collectively, the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
BUSINESS
The Company was founded in October 1997 to become a major supplier of
precision machined individual parts, and of higher value-added sub-assemblies,
manufacturing kits and structural components used by aerospace manufacturers in
structural frames and other metal aircraft components. Customers include
domestic and foreign entities.
The Company manufactures its products using various metals including
aluminum, titanium and steel through the use of precision computer numerically
controlled machine tools. The Company uses a variety of advanced techniques and
machinery including horizontal and vertical machining centers and
state-of-the-art high-speed precision machining equipment, as well as
three-spindle five-axis gantry mills.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions. The Company is
subject to risk for amounts in excess of federal deposit insurance limits.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company conducts a major portion of its business with a limited number of
customers. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent with those present throughout the
industry. Typically, the Company does not require collateral from customers.
Sales to the Boeing Company accounted for 72% and 77% of total consolidated
sales for the year ended December 31, 1998 and for the period October 21, 1997
through December 31, 1997, respectively.
F-13
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
Lease term or life of asset, whichever is
Leasehold improvements.......... 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-14
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-15
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS (CONTINUED)
revenues and expenses related to these entities since their respective closing
dates. The financial statements reflect the preliminary allocations of the
purchase price, though the purchase price allocation has not been finalized on
certain of the Company's business combinations.
During 1997, the Company funded the November 26, 1997 acquisitions of
Western and Aeromil under its then existing credit facility. The purchase prices
for Western and Aeromil were $16.8 million and $13.2 million, respectively.
During 1998, the Company paid down the debt related to the 1997 acquisitions and
funded its 1998 acquisitions through the proceeds provided by the $110 million
Offering and the $170 million Credit Agreement (see Notes 5 and 7).
Each of the businesses discussed below, acquired during 1998, manufactures
parts for aerospace customers, including precision machined parts from titanium,
aluminum, and steel.
On April 21, 1998, the Company acquired all of the outstanding common stock
of Barnes Machine, Inc., located in Shelton, Washington. The Company also
acquired certain land and buildings owned by the stockholders and used in the
operation of the business. The purchase price was $15.0 million. The Company
also retired debt of approximately $0.8 million upon acquisition.
On April 21, 1998, the Company acquired all of the outstanding stock of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita Manufacturing,
Inc. Brittain is located in Wichita, Kansas, and Wichita is located in Cerritos,
California. The purchase price was $54.9 million. The Company also retired debt
of approximately $3.0 million upon acquisition.
On May 11, 1998, the Company acquired certain assets and liabilities of
Sea-Lect Products, Inc. and all of the outstanding common stock of its affiliate
J&J Leasing (collectively Sea-Lect). Sea-Lect is located in Kent, Washington.
The purchase price was $12.2 million. The Company also retired debt of $0.9
million upon acquisition.
On November 20, 1998, the Company purchased all of the outstanding stock of
Lamsco West, Inc. Lamsco's operations are located in Santa Clarita, California,
and Kent, Washington. The purchase price was $73.7 million. At December 31,
1998, $2.5 million is held for the seller in escrow pending fulfillment of
provisions in the purchase agreement.
On December 31, 1998, the Company acquired all of the outstanding common
stock of Modern Manufacturing, Inc. (formerly Y.F. Americas, Inc.), located in
Renton, Washington. The purchase price was $23.1 million. At December 31, 1998,
$2.5 million is held in escrow for the seller pending fulfillment of certain
provisions in the purchase agreement.
The following unaudited consolidated supplemental pro forma information
includes the accounts of Compass Aerospace Corporation and its wholly owned
subsidiaries, Western, Aeromil, Barnes, Brittain, Wichita Manufacturing,
Sea-Lect, Lamsco and Modern. The pro forma information assumes that all the
acquisitions were consummated on January 1, 1997 (in thousands).
DECEMBER 31
----------------------
1998 1997
---------- ----------
Net sales............................................................. $ 183,444 $ 150,785
---------- ----------
---------- ----------
Net income............................................................ $ 8,188 $ 5,745
---------- ----------
---------- ----------
F-16
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 recorded as a deferred
charge and are amortized over the seven-year life of the Notes using the
straight-line method.
F-17
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. DEBT OFFERING (CONTINUED)
The Notes mature on April 15, 2005, unless redeemed prior to that time.
Interest on the Notes is payable semiannually on April 15 and October 15 of each
year, commencing October 15, 1998, to holders of record. The Notes will be
redeemable at the option of the Company, in whole or in part, on or after April
15, 2002 at the redemption price as defined in the agreement. In addition, on or
before April 15, 2001 the Company may redeem up to 35% of the Notes at a
redemption price of 110.125% of the principal amount with the net proceeds of
one or more public equity offerings as defined and provided for in the
agreement.
Under provisions of the indenture applicable to the Notes, the Company may,
under certain circumstances, be limited in its ability to incur additional
indebtedness or issue Disqualified Capital Stock (as defined), pay dividends or
make other distributions, create certain liens on assets, sell certain assets
and stock of subsidiaries, enter into certain transactions with affiliates, and
effect certain mergers and consolidations. The Company is also subject to
certain restrictive covenants and is required to maintain certain financial
ratios in connection with the Notes.
6. MEZZANINE DEBT
In connection with the acquisitions of Western Methods and Aeromil, the
Company entered into a subordinated note with its largest stockholder for $6
million bearing interest at 11%, payable quarterly. On March 18, 1998, the Note
and related accrued interest was exchanged for 6 million shares of the Company's
common stock.
7. BANK BORROWINGS
Long-term debt and capital leases consist of the following (dollars in
thousands):
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 agreement using the straight-line method. The credit agreement
accrues interest at variable rates based upon the bank's prime rate or
Eurocurrency rate and is payable quarterly. The interest rate in effect at
F-18
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. BANK BORROWINGS (CONTINUED)
December 31, 1998, was approximately 10.1%. The Revolver matures November 2003.
Term Loan A is payable in equal quarterly installments, totaling 10% of the
outstanding principal in 1999, 15% of the outstanding principal in 2000 and
2001, 23.75% of the outstanding principal in 2002, and the remainder in 2003.
Term Loan B is payable in equal quarterly installments totaling 1% of the
outstanding principal in 1999 through 2003, and 47.5% of the outstanding
principal in 2004 and 2005. Payments on the Acquisition Line begin at December
31, 2000 and are payable in 13 equal quarterly installments. The credit
agreement contains certain restrictive covenants and requires the maintenance of
certain financial ratios.
As prescribed by and defined in the credit agreement, availability under the
Revolver is limited to 85% of eligible accounts receivable, plus 50% of the net
book value of eligible inventory, plus 25% of the orderly liquidation value of
machinery and equipment, subject to reserves that may be established by the
lender. Subject to these provisions, the Company has $25 million available under
the Revolver and an initial availability of $35 million under the Acquisition
Line. The remaining $30 million of the Acquisition Line will become available
provided the Company raises one dollar of equity for every additional dollar of
borrowings over the initial $35 million of availability.
As of December 31, 1997, the Company had a note payable to a bank for $10.3
million. The note was secured by substantially all of the Company's assets and
accrued interest at 9.5%. Interest and principal payments were due monthly. The
note had a maturity date of November 2000. At December 31, 1997, the Company
also had outstanding an installment loan with a bank for $300,000 that was
payable monthly with 8.6% interest and an original maturity of October 2002.
Both of these loans were paid in full during 1998 and there are no outstanding
balances under either credit facility at the end of 1998.
Maturities of long-term debt, excluding capital lease payments (see Note 12)
as of December 31, 1998 are as follows (in thousands):
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-19
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-20
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 31, DECEMBER 31,
1998 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-21
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-22
COMPASS AEROSPACE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain machinery and equipment under capital leases
expiring at various dates through 2007. The Company also leases office spaces
under operating leases with terms expiring at various dates through 2008. Rent
expense for operating leases amounted to $1,125,000 and $53,000 for the year
ended December 31, 1998 and the period October 21 through December 31, 1997,
respectively.
Future minimum payments by year and in the aggregate under all
non-cancelable operating and capital leases with terms in excess of one year at
December 31, 1998 are as follows (in thousands):
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-23
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.
Long Beach, California
March 19, 1998
F-24
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-25
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-26
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-27
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-28
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-29
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-30
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-31
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-32
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-33
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-34
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-35
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-36
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-37
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-38
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
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-39
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
9. REVENUE RECOGNITION (CONTINUED)
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-40
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
9. REVENUE RECOGNITION (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-41
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
9. REVENUE RECOGNITION (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-42
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
9. REVENUE RECOGNITION (CONTINUED)
principal stockholders during the period July 1, 1997 through April 21, 1998 for
debarring services performed.
NOTE H--RETIREMENT PLAN
All employees who have completed one year of service and who have attained
21 years of age are eligible to participate in the Company's Profit Sharing
Retirement Plan. Contributions to the Plan are discretionary and made by the
Company for amounts that are determined by the Board of Directors based on a
percentage of each participant's annual compensation. Employees may also
contribute a portion of their compensation to the Plan. The Company charged
$864,000 to expense pursuant to the plan during the period July 1, 1997 through
April 21, 1998.
NOTE I--COMMITMENTS
The Company provides group medical insurance for its employees through a
self-insured medical plan. The Company has purchased a stop-loss insurance
policy that will pay claims in excess of $30,000 per year per individual and in
excess of annual aggregate claims of $420,000.
The Company is self-insured for workers' compensation claims. The Company
has purchased a stop-loss insurance policy that pays workers' compensation
claims in excess of $175,000 per occurrence and aggregate annual claims in
excess of $430,292. The Company has obtained a $655,000 letter of credit from a
bank in favor of the State of Kansas in connection with a self-insurance
program.
Wichita Manufacturing, Inc. leases its facility located in Cerritos,
California at a rental cost of $12,000 per month through October 31, 1998 for a
total commitment of $72,000.
NOTE J--CONTINGENCY
In January 1996, the Company was found liable in a civil action for, inter
alia, breach of contract and termination of joint venture/partnership associated
with a relationship the Company had with another entity. A judgment was recorded
against the Company in the amount of $600,000. The Company secured a $750,000
letter of credit in favor of the plaintiffs and filed a Notice of Appeal. The
plaintiffs filed a Notice of Cross-Appeal seeking damages of approximately
$1,500,000. Through April 21, 1998 the Company recorded a liability for the
$600,000 judgment plus $116,000 of post-judgment interest. On April 21, 1998,
the Company's principal owner assumed the liability. In connection with the
assumption of the liability, the Company transferred life insurance policies
with recorded cash surrender values of $614,000 to the principal owner. The
Company recorded a gain of $102,000 in connection with the transaction.
NOTE K--CONCENTRATION OF SALES
Substantially all of the Company's sales are made to a very few customers.
These customers are typically large companies in the aerospace industry. If the
Company were to lose one or more of these customers and were unable to find
replacement customers, sales would be adversely affected. Two customers
accounted for 73% and 13% of sales for the period July 1, 1997 through April 21,
1998. Amounts due from these customers accounted for 68% and 12% of total
accounts receivable at April 21, 1998.
F-43
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
9. REVENUE RECOGNITION (CONTINUED)
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-44
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-45
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Brittain Machine, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Brittain
Machine, Inc. and Subsidiary as of June 30, 1996, and the related consolidated
statements of earnings and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Brittain Machine, Inc. and Subsidiary at June 30, 1996, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Wichita, Kansas
September 3, 1996
F-46
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................. $ 455 $ 91
Accounts receivable
Trade accounts receivable........................................... 4,913 5,386
Other............................................................... 188 109
Income tax receivable................................................. 107 --
Inventories........................................................... 10,978 4,878
Note receivable from affiliate........................................ -- 207
Prepaid expenses and other............................................ 50 56
Deferred income taxes................................................. 694 608
--------- ---------
Total current assets................................................ 17,385 11,335
PROPERTY AND EQUIPMENT, AT COST
Land.................................................................. 201 199
Buildings............................................................. 3,603 2,812
Machinery and equipment............................................... 19,754 18,669
Vehicles.............................................................. 180 175
Office equipment...................................................... 775 679
Construction in progress.............................................. 99 6
--------- ---------
24,612 22,540
Less accumulated depreciation......................................... 14,007 12,357
--------- ---------
10,605 10,183
INVESTMENTS AND OTHER ASSETS
Funds held by trustee................................................. 56 52
Cash surrender value of life insurance................................ 520 486
Bond issuance costs................................................... 36 39
--------- ---------
612 577
--------- ---------
$ 28,602 $ 22,095
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-47
BRITTAIN MACHINE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving note payable to bank........................................ $ 3,855 $ 525
Accounts payable...................................................... 1,612 923
Accrued payroll and employee benefits................................. 1,719 1,388
Litigation judgment payable........................................... 672 600
Income taxes payable.................................................. -- 1,621
Other accrued liabilities............................................. 366 187
Current maturities of capital lease obligations....................... 285 156
Current maturities of long-term debt.................................. 741 972
Current maturities of industrial revenue bonds........................ 50 400
--------- ---------
Total current liabilities........................................... 9,300 6,772
LONG-TERM LIABILITIES
Capital lease obligations............................................. 1,203 507
Long-term debt........................................................ 971 1,710
Industrial revenue bonds.............................................. 700 750
Deferred income taxes................................................. 1,162 996
--------- ---------
4,036 3,963
STOCKHOLDERS' EQUITY
Common stock, Class A, voting, par value $1
Authorized--300,000 shares
Issued and outstanding--90,000 shares............................... 90 90
Common stock, Class B, nonvoting, par value $1
Authorized--300,000 shares
Issued and outstanding--90,000 shares............................... 90 90
Additional paid-in capital............................................ 55 55
Retained earnings..................................................... 15,031 11,125
--------- ---------
15,266 11,360
--------- ---------
$ 28,602 $ 22,095
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-48
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
Write off note receivable from affiliate................................ 386 --
Litigation expense...................................................... 73 600
--------- ---------
Earnings from operations................................................ 6,596 4,863
Other income (expense)
Interest income....................................................... 11 28
Interest expense...................................................... (409) (431)
Gain (loss) on sale of assets......................................... 5 (8)
Other............................................................... (89) (69)
--------- ---------
(482) (480)
--------- ---------
Earnings before income taxes............................................ 6,114 4,383
Income taxes............................................................ 2,208 1,637
--------- ---------
NET EARNINGS...................................................... 3,906 2,746
Retained earnings at beginning of year.................................. 11,125 8,379
--------- ---------
Retained earnings at end of year........................................ $ 15,031 $ 11,125
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-49
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 this statement.
F-50
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. BUSINESS ACTIVITY AND PRINCIPLES OF CONSOLIDATION
Brittain Machine, Inc. manufactures parts according to customer
specification primarily for use in the aerospace industry. The Company also
designs, manufactures and sells tooling, machinery and equipment for use in the
aerospace industry.
Wichita Manufacturing, Inc., a wholly-owned subsidiary, is located in
Cerritos, California, and is engaged in the same line of business as Brittain
Machine, Inc.
The consolidated financial statements include the consolidated accounts of
Brittain Machine, Inc. and its wholly-owned subsidiary, Wichita Manufacturing,
Inc. All significant intercompany accounts have been eliminated.
2. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
3. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. INVENTORIES
Inventories are stated at the lower of weighted average cost or net
realizable value.
5. PROPERTY AND EQUIPMENT
Land, buildings and equipment are carried at cost. Major additions and
betterments are charged to the property accounts while replacements, maintenance
and repairs which do not improve or extend the life of the respective assets are
expensed currently. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives are as follows:
10-30
Buildings....................................................... years
Machinery and equipment......................................... 7-10 years
Vehicles........................................................ 4-6 years
Office equipment................................................ 5-7 years
F-51
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
6. INCOME TAXES
The Company files a consolidated income tax return with its subsidiary.
Deferred income tax assets and liabilities are determined based on the
temporary differences between the financial accounting and tax basis of assets
and liabilities. Deferred tax assets or liabilities at the end of each period
are determined using the currently enacted tax rate expected to apply to taxable
income in the periods in which the deferred tax asset or liability is expected
to be realized or settled.
7. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company pays the premiums on certain life insurance policies insuring
the lives of two of its stockholders. The cumulative value of net premiums paid
by the Company on behalf of the beneficiary of such life insurance policies is
recorded as an asset as this amount is payable by the policy owner to the
Company upon death of the insured.
The cash surrender values of certain other life insurance contracts owned by
the Company are recorded as assets. The change in such cash surrender values is
accounted as an adjustment of premiums paid in determining the expense or income
to be recognized under the contract for the period.
8. SELF INSURANCE
The Company participates in various self-insurance programs for medical and
workers' compensation risks. In connection with these programs the Company has
mitigated its exposure through the purchase of stipulated stop-loss coverage
with insurance companies. The Company estimates its liability for the
self-insured portions of the risks covered by such programs and accrues
appropriate reserves.
9. CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with maturities of less than three
months to be cash equivalents.
10. REVENUE RECOGNITION
The Company's sales contracts are generally of a short-term nature and are
billed upon delivery. Revenue from such contracts is recognized upon passage of
title to the customer which, in most cases, coincides with shipments of the
related products to customers. Provisions for anticipated losses on contracts,
if any, are made currently as the amount of the loss is determinable.
F-52
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-53
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 2006. The principal and interest
(6% to 8%) on the bonds are serviced by biannual payments by the Company to a
trustee who then remits the funds to the City on the scheduled interest payment
and bond maturity dates. Certain of the proceeds from the bonds and the biannual
payments made by the Company have been and are deposited with the trustee.
F-54
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE F--INDUSTRIAL REVENUE BONDS (CONTINUED)
The total amount of bonds outstanding at June 30, 1997 and 1996 was $750,000
and $1,150,000, respectively. Aggregate annual maturities are as follows for the
years ended June 30 (dollars in thousands):
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
--------- ---------
--------- ---------
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
--------- ---------
--------- ---------
F-55
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
Depreciation expense for the property under lease was $242,474 and $16,398
for the years ended June 30, 1997 and 1996, respectively.
The following is a schedule by years of future minimum lease payments under
capital leases (dollars in thousands):
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.
The Company purchased goods from an entity controlled by the spouse of a
stockholder in the amount of $4,117,000 and $2,331,000 during 1997 and 1996,
respectively. Additionally, an amount of $502,000 and $285,000 was due to such
affiliate at June 30, 1997 and 1996, respectively, and was included in accounts
payable in the accompanying consolidated balance sheets. The Company also paid
to an individual related to the Company's principal stockholders $310,000 and
$186,000 during 1997 and 1996, respectively, for debarring services performed.
NOTE H--RETIREMENT PLAN
All employees who have completed one year of service and who have attained
age 21 years of age are eligible to participate in the Company's Profit Sharing
Retirement Plan. Contributions to the Plan are
F-56
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE H--RETIREMENT PLAN (CONTINUED)
made by the Company for amounts that are determined by the Board of Directors
based on a percentage of each participant's annual compensation. Employees may
also contribute a portion of their compensation to the Plan. During the years
ended June 30, 1997 and 1996, the Company charged $842,000 and $834,000 to
expense pursuant to the Plan.
NOTE I--COMMITMENTS
The Company provides group medical insurance for its employees through a
self-insured medical plan. The Company has purchased a stop-loss insurance
policy that will pay claims in excess of $30,000 per year per individual and in
excess of annual aggregate claims of $420,000.
The Company is self-insured for workers' compensation claims. The Company
has purchased a stop-loss insurance policy that pays workers' compensation
claims in excess of $175,000 per occurrence and aggregate annual claims in
excess of $430,292. The Company has obtained a $655,000 letter of credit from a
bank in favor of the State of Kansas in connection with a self-insurance
program.
Wichita Manufacturing, Inc. leases its facility located in Cerritos,
California at a rental cost of $12,000 per month through October 31, 1998. The
lease provides an option for an extension of a three-year period. Future
noncancelable lease commitments are as follows (dollars in thousands):
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 to estimate, the Company
recorded a provision during 1996 of $600,000 and believes that the ultimate
outcome will not have a material adverse effect on its financial position. An
additional provision of $72,500 was recorded in 1997 for post-judgment interest.
NOTE K--CONCENTRATION OF SALES
Nearly all of the Company's sales are made to a very few customers. These
customers are typically large companies in the aerospace industry. If the
Company were to lose one or more of these customers and were unable to find
replacement customers, sales would be adversely affected. One customer accounted
for 67% and 56% of sales for 1997 and 1996, respectively. Amounts due from this
customer accounted for 60% and 64% of total accounts receivable at June 30, 1997
and 1996, respectively.
F-57
BRITTAIN MACHINE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997 AND 1996
NOTE L--SUPPLEMENTAL CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
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-58
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.
Long Beach, California
August 12, 1998
F-59
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-60
BARNES MACHINE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
OCTOBER 1, 1997
TO YEAR ENDED
APRIL 21, 1998 SEPTEMBER 30, 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-61
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-62
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-63
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The provision for depreciation of property and equipment is generally
computed on the straight-line method over the following useful lives:
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-64
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, which is recorded at
cost (in thousands):
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-65
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
4. DEBT
The Company has a promissory note with Keybank National Association, payable
in monthly installments of $17,936 plus interest at 8.50% with a maturity date
of October 15, 2002. The promissory note is secured by a milling machine.
Maturities of long-term debt are as follows (in thousands):
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.
F-66
BARNES MACHINE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 21, 1998
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Company does not anticipate that there would be a material impact on the
results of operations or cash flows of the Company related to the Year 2000
issue. The Year 2000 issue addresses computer programs which have time-sensitive
software that recognizes a date using "00" as the year 1900 rather than the year
2000. The Company converted to a new computer system in 1998 and is currently
seeking a Year 2000 compliant certification from the Company's software vendor.
In addition, the Company has an ongoing program to test its systems for such
compliance. The major business systems of the Company are not vulnerable to
third parties failure to remediate their own Year 2000 issues, as the Company's
interface with third parties, including customers and vendors, does not involve
date-dependent computer communication systems. The Company believes that with
the conversions to new software and modifications to other existing software,
the Year 2000 issue will not pose significant operational problems for its
computer system. In the event the remaining conversions and modifications are
not made, or are not completed timely, the Year 2000 issue is not expected to
have a material impact on the operations of the Company, as the products sold by
the Company and the processing and delivery equipment used are not
date-dependent, minimizing the impact of any Year 2000 issues related to meeting
customer requirements.
As the Company has been incurring costs related to this project since 1997
and no significant additional costs have been identified, the Company does not
anticipate a material impact on the results of operations related to the Year
2000 issue.
F-67
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-68
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED BALANCE SHEETS
MAY 11, DECEMBER 31,
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-69
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF INCOME
PERIOD FROM
JANUARY 1,
1998
THROUGH YEAR ENDED
MAY 11, 1998 DECEMBER 31, 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-70
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-71
SEA-LECT PRODUCTS INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1,
1998
THROUGH YEAR ENDED
MAY 11, 1998 DECEMBER 31, 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-72
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-73
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:
DECEMBER 31,
MAY 11, 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-74
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:
BUILDING EQUIPMENT
(JV) (NON-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-75
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-76
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-77
LAMSCO WEST, INC.
STATEMENTS OF INCOME
PERIOD FROM
JANUARY 4, FISCAL YEAR ENDED
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-78
LAMSCO WEST, INC.
STATEMENTS OF RETAINED EARNINGS
PERIOD FROM FISCAL YEAR ENDED
JANUARY 4, 1998 ---------------------------------
TO JANUARY 3,
NOVEMBER 20, 1998 1998 DECEMBER 28, 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-79
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-80
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 ("Compass"). The Company is engaged in the manufacturing of shims
for the aerospace, defense and industrial markets. The Company's sales are
primarily to customers located throughout the United States to whom they extend
credit on an unsecured basis on terms it establishes for each individual
customer.
THESE STATEMENTS HAVE BEEN PREPARED ON A STAND-ALONE BASIS FOR THE COMPANY
AND THEREFORE INTERCOMPANY SALES TO OTHER AFFILIATES OF ALINABAL HAVE NOT BEEN
ELIMINATED.
ACCOUNTING PERIOD
The Company utilizes a fiscal year that ends on the Saturday nearest to
December 31. Fiscal years ended on January 3, 1998 ("fiscal year 1997") and
December 28, 1996 ("fiscal year 1996") included 53 weeks and 52 weeks of
activity, respectively. The accounting period, which ended on November 20, 1998,
began on January 4, 1998 and included 46 weeks of activity.
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
The Company provides its customers the right to return products that are damaged
or defective. The provision for such returns is estimated and current period
sales and cost of sales are adjusted accordingly.
INVENTORIES
Inventories, consisting principally of raw materials, are stated at the
lower of cost (first-in, first-out method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Depreciation is
provided primarily utilizing the straight-line method over the estimated useful
lives of the respective assets which range from four to ten years. Leasehold
improvements are amortized over the shorter of the remaining lease period or
useful life of the respective asset.
F-81
LAMSCO WEST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company participates in Alinabal's defined benefit pension plan. To be
eligible, an employee must have completed one year of service and attained the
age of twenty-one. The plan provides benefits based on years of service and the
employee's compensation during their last five years of employment.
PROFIT SHARING AND SAVINGS PLAN
Employees of the Company are included in Alinabal's 401(k) employee profit
sharing and savings plan. Participants can make salary reduction contributions
to the plan equal to the lesser of 15% of their earnings or the maximum
allowable by the Internal Revenue Code. Company contributions are discretionary
and determined annually.
INCOME TAXES
Through fiscal year 1996, the Company filed a consolidated tax return with
its Parent; accordingly, for fiscal year 1996, the Company recognized a
provision in lieu of income taxes for its proportionate share of the Parent's
income tax provision.
Effective December 29, 1996, the Parent elected to be taxed under provisions
of Subchapter S of the Internal Revenue Code (S Corporation Status), which
provides that, in lieu of corporate income taxes, the stockholders separately
account for their pro rata share of the income, deductions, losses and credits
of the Company. State income taxes are generally insignificant to the Company
due to state allocations and low tax rates. As a result, no provision for
federal or state income taxes is made in these financial statements for the
period from January 4, 1998 to November 20, 1998 and for fiscal year 1997.
When the Parent elected S Corporation Status, the Parent became contingently
liable for income taxes (built in gains tax) at the maximum corporate rate if
certain assets are sold at a gain for a ten year period following the election.
As a result of the sale of the Company, the Parent will be responsible for
approximately $3,300,000 of built-in gains tax.
NOTE 2. MAJOR CUSTOMER
During the period from January 4, 1998 to November 20, 1998 and during
fiscal years 1997 and 1996, one customer accounted for approximately $20,807,000
(74%); $28,938,000 (86%); and $8,150,000 (75%), respectively, of the Company's
net sales and approximately $2,000,000 (89%); $3,921,000 (94%); and $1,066,000
(89%), of the Company's accounts receivable at November 20, 1998, January 3,
1998 and December 28, 1996, respectively. If the Company were to lose this
customer and was unable to find replacement customers, sales would be adversely
affected.
In March 1998, the Company signed an agreement in which the Company will be
the sole source supplier of certain defined parts, primarily shims, to this
customer in exchange for a 10% price reduction. The agreement contains certain
circumstances in which the customer can elect not to purchase from the Company.
F-82
LAMSCO WEST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1998
NOTE 3. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JANUARY 3,
NOVEMBER 30, 1998 1998 DECEMBER 28, 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-83
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 EVENTS
The Company's new parent, Compass Aerospace Corporation, is registering the
exchange of $110 million of debt securities with the Securities and Exchange
Commission. Effective November 20, 1998, the Company became a corporate
guarantor of these debt securities.
UNAUDITED EVENTS
Subsequent to November 20, 1998, sales to the major customer discussed in
Note 2 to the financial statements have decreased to approximately 40% of the
annualized sales occurring in the period ended November 20, 1998.
On May 28, 1999, Compass filed suit against Alinabal and the three primary
shareholders of Alinabal seeking recision of the Stock Purchase Agreement. The
ultimate outcome of this litigation is presently not determinable.
F-84
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Compass Aerospace Corporation
We have audited the accompanying consolidated balance sheets of YF Americas,
Inc. and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of YF Americas,
Inc. and Subsidiary at December 31, 1998 and 1997 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Long Beach, California
April 27, 1999
F-85
YF AMERICAS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31
--------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 1,590 $ 2,134
Accounts receivable less allowance for doubtful accounts of $117 in 1998
and $80 in 1997......................................................................... 1,294 2,002
Inventories............................................................................... 6,631 5,856
Deferred tax assets....................................................................... 397 1,051
Prepaid expenses and other assets......................................................... 185 148
--------- ---------
Total current assets........................................................................ 10,097 11,191
Property and equipment, net................................................................. 4,842 4,410
Goodwill, net of accumulated amortization of $364 in 1998 and $329 in 1997.................. 130 165
--------- ---------
Total assets................................................................................ $ 15,069 $ 15,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 892 $ 1,276
Accrued expenses.......................................................................... 382 470
Current portion of long-term debt and capital leases...................................... -- 158
Line of credit............................................................................ 1,389 2,189
--------- ---------
Total current liabilities................................................................... 2,663 4,093
Deferred tax liability...................................................................... 127 131
Payable to affiliate, long-term............................................................. -- 3,613
Long-term debt and capital leases, less current portion..................................... 2,329 3,458
Commitments and contingencies
Shareholder's equity:
Common stock, 1,000 shares authorized, issued and outstanding shares 94.4191 in 1998 and
100 in 1997, $.01 par value............................................................. -- --
Paid-in capital........................................................................... 11,726 8,100
Accumulated deficit....................................................................... (1,776) (3,629)
--------- ---------
Total shareholder's equity.................................................................. 9,950 4,471
--------- ---------
Total liabilities and shareholder's equity.................................................. $ 15,069 $ 15,766
--------- ---------
--------- ---------
See accompanying notes.
F-86
YF AMERICAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Net sales........................................................................ $ 26,967 $ 22,470 $ 11,401
Cost of sales.................................................................... 17,965 15,416 7,797
--------- --------- ---------
Gross profit..................................................................... 9,002 7,054 3,604
Selling, general and administrative expenses..................................... 5,679 3,729 2,094
--------- --------- ---------
Operating income................................................................. 3,323 3,325 1,510
Interest expense, net............................................................ 502 854 370
Other income..................................................................... -- -- (12)
--------- --------- ---------
Income before income taxes....................................................... 2,821 2,471 1,152
Income tax expense............................................................... 968 881 414
--------- --------- ---------
Net income....................................................................... $ 1,853 $ 1,590 $ 738
--------- --------- ---------
--------- --------- ---------
See accompanying notes.
F-87
YF AMERICAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- --------- ---------- ------------ -------------
Balance at January 1, 1996.......................... 100 $ -- $8,100 $ (5,957) $ 2,143
Net income........................................ -- -- -- 738 738
--------- --------- ---------- ------------ ------
Balance at December 31, 1996........................ 100 -- 8,100 (5,219) 2,881
Net income........................................ -- -- -- 1,590 1,590
--------- --------- ---------- ------------ ------
Balance at December 31, 1997........................ 100 -- 8,100 (3,629) 4,471
Conversion of debt to equity...................... -- -- 3,626 -- 3,626
Treasury stock transferred by shareholder to
Company and retired............................. (5.5809) -- -- -- --
Net income........................................ -- -- -- 1,853 1,853
--------- --------- ---------- ------------ ------
Balance at December 31, 1998........................ 94.4191 $ -- $11,726 $ (1,776) $ 9,950
--------- --------- ---------- ------------ ------
--------- --------- ---------- ------------ ------
See accompanying notes.
F-88
YF AMERICAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES
Net income......................................................................... $ 1,853 $ 1,590 $ 738
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation..................................................................... 457 375 359
Amortization..................................................................... 35 35 35
Deferred taxes................................................................... 650 846 414
Gain on sale of property and equipment........................................... (34) -- (102)
Changes in operating assets and liabilities:
Accounts receivable............................................................ 708 (682) (393)
Inventories.................................................................... (775) (915) (1,340)
Prepaid expenses and other assets.............................................. (37) (119) 22
Accounts payable............................................................... (384) 372 462
Accrued expenses and other liabilities......................................... (88) (132) 560
--------- --------- ---------
Net cash provided by operating Activities.......................................... 2,385 1,370 755
INVESTING ACTIVITIES
Proceeds from the sale of property and equipment................................... 100 -- 344
Purchases of property and equipment................................................ (953) (142) (103)
--------- --------- ---------
Net cash (used in) provided by investing activities................................ (853) (142) 241
FINANCING ACTIVITIES
Proceeds from long-term debt....................................................... -- 2,415 --
Payments on long-term debt and capital leases...................................... (1,287) (380) (206)
Net increase (decrease) in long-term payable to affiliate.......................... 11 (376) (97)
Net decrease in line of credit..................................................... (800) (2,171) --
--------- --------- ---------
Net cash used in financing activities.............................................. (2,076) (512) (303)
--------- --------- ---------
Net (decrease) increase in cash.................................................... (544) 716 693
Cash and cash equivalents at beginning of period................................... 2,134 1,418 725
--------- --------- ---------
Cash and cash equivalents at end of period......................................... $ 1,590 $ 2,134 $ 1,418
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest......................................................................... $ 547 $ 856 $ 678
--------- --------- ---------
--------- --------- ---------
Income taxes..................................................................... $ 480 $ 20 $ --
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Assets acquired under capital leases............................................... $ -- $ 325 $ 653
--------- --------- ---------
--------- --------- ---------
Conversion of debt to equity....................................................... $ 3,624 $ -- $ --
--------- --------- ---------
--------- --------- ---------
See accompanying notes.
F-89
YF AMERICAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Y.F. Americas, Inc. owns 100% of the shares of Modern Holdings, Inc., which
owns 100% of the shares of Modern Manufacturing, Inc. The accompanying
consolidated financial statements include the accounts of Y.F. Americas, Inc.,
Modern Holdings, Inc. and Modern Manufacturing, Inc. (collectively, Y.F.
Americas, Inc. and Subsidiary or the Company). All significant intercompany
balances and transactions have been eliminated in consolidation.
Y.F. Americas, Inc. is a Delaware corporation and is a wholly-owned
subsidiary of Y.F. International Ltd., a Hong Kong corporation. Modern Holdings,
Inc. and Modern Manufacturing, Inc. are Washington corporations.
Effective with the close of business on December 31, 1998, Y.F.
International Ltd. sold the Company to Compass Aerospace Corporation. The
accompanying financial statements have been prepared on a historical basis and,
as such, do not reflect any adjustments that may result from the sale of the
Company.
DESCRIPTION OF BUSINESS
The Company is located in Renton, Washington, and is a supplier of precision
machined small to medium-sized structural parts and structural components used
by aerospace manufacturers in structural frames and other metal aircraft
components. Customers include domestic and foreign entities.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are held by major financial institutions. The Company is subject to
risk for amounts in excess of federal deposit insurance limits.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company conducts a major portion of its business with a limited number of
customers. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent with those present throughout the
industry. Typically, the Company does not require collateral from customers.
Sales to the Boeing Company accounted for 82%, 83%, and 82% of total
consolidated sales for the years ended December 31, 1998, 1997 and 1996,
respectively. Trade accounts receivable from the Boeing Company accounted for
69% and 70% of total consolidated accounts receivable as of December 31, 1998
and 1997, respectively.
F-90
YF AMERICAS, INC. AND SUBSIDIARY
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 stated at the lower of cost or market using the first-in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The provision for depreciation
of property and equipment is generally computed on the straight-line method over
the following useful lives:
27.5-31.5
Buildings and improvements................................... years
Furniture and fixtures....................................... 5-7 years
Vehicles, machinery and equipment............................ 3-10 years
GOODWILL
Goodwill represents the excess of the purchase price over the estimated fair
value of the net assets acquired in connection with business combinations.
Amortization is provided on a straight-line basis over 14 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets are reviewed periodically and if
future cash flows are believed insufficient to recover the remaining carrying
value of the related assets, the carrying value is written down to its estimated
fair value in the period the impairment is identified.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
Customers typically have the right to return products that are damaged or
defective. Provisions are made currently for estimated returns.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after 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.
F-91
YF AMERICAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," which is effective for
fiscal years beginning after December 15, 1998. SOP 98-5 requires costs of
start-up activities, as defined in the Statement, to be expensed as incurred.
The Company believes that there will be no impact due to the adoption of SOP
98-5.
2. INVENTORIES
The following is a summary of inventories (in thousands):
DECEMBER 31
--------------------
1998 1997
--------- ---------
Raw materials.............................................................. $ 1,770 $ 1,608
Work in process............................................................ 2,137 2,338
Finished goods............................................................. 2,724 1,910
--------- ---------
$ 6,631 $ 5,856
--------- ---------
--------- ---------
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment (in thousands):
DECEMBER 31
--------------------
1998 1997
--------- ---------
Land....................................................................... $ 1,474 $ 1,474
Building and improvements.................................................. 2,421 2,421
Furniture and fixtures..................................................... 537 543
Vehicles, machinery and equipment.......................................... 3,927 3,128
Machinery under capital leases............................................. 1,340 1,340
--------- ---------
9,699 8,906
Less accumulated depreciation.............................................. 4,857 4,496
--------- ---------
$ 4,842 $ 4,410
--------- ---------
--------- ---------
4. LINE OF CREDIT
The Company has a revolving credit facility agreement with the Bank of China
for $3.5 million. The Company had availability of approximately $2.1 million at
December 31, 1998. Interest is due quarterly at prime (7.75% at December 31,
1998) plus 0.25%. The line of credit expires October 15, 1999, and is secured by
substantially all of the assets of the Company.
5. LONG-TERM DEBT
Long-term debt includes a note payable to the Bank of China. The note
totaled $2.5 million and $2.3 million as of December 31, 1998 and 1997,
respectively. Interest on the note is set at the London Inter-Bank Offered Rate
(5.2% at December 31, 1998) plus 2.25%, and is due monthly. The note matures
F-92
YF AMERICAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. LONG-TERM DEBT (CONTINUED)
in January 2003, at which time the principal is due in full. This loan is
secured by real property owned by the Company.
At December 31, 1997, the Company had a mortgage loan payable to U.S.
Bancorp Mortgage Company for $0.5 million. The Company had obligations under
capital lease agreements of approximately $0.8 million at December 31, 1997.
Though the original maturity dates under these agreements extended beyond 1998,
the Company paid these obligations in full during 1998.
6. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amount of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes to be
paid for the period and the change during the period in the deferred tax assets
and liabilities.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
DECEMBER 31
--------------------
1998 1997
--------- ---------
Deferred tax assets:
Net operating losses........................................................ $ -- $ 470
Inventory reserves.......................................................... 285 233
Management fees............................................................. -- 231
Accrued expenses not deductible for tax..................................... 112 51
Other....................................................................... -- 66
--------- ---------
Total deferred tax assets..................................................... 397 1,051
Deferred tax liabilities:
Depreciation and amortization............................................... 83 50
Other....................................................................... 44 81
--------- ---------
Total deferred tax liabilities................................................ 127 131
--------- ---------
Net deferred tax asset........................................................ $ 270 $ 920
--------- ---------
--------- ---------
Significant components of the provision for income taxes are as follows (in
thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Current:
Federal.......................................................... $ 318 $ 35 $ 20
Deferred:
Federal.......................................................... 650 846 394
--------- --------- ---------
$ 968 $ 881 $ 414
--------- --------- ---------
--------- --------- ---------
F-93
YF AMERICAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. INCOME TAXES (CONTINUED)
The reconciliation of income tax at the U.S. federal statutory rate to
income tax expense is as follows:
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Income tax at U.S. statutory rates.................................. 34.0% 34.0% 34.0%
Book expenses not deductible for tax purposes....................... 0.3 1.7 1.9
--- --- ---
34.3% 35.7% 35.9%
--- --- ---
--- --- ---
7. RELATED PARTY TRANSACTIONS
During 1998, the Company's parent, Y.F. International, Ltd., contributed
advances previously made to the Company totaling $3.6 million as additional
equity. This balance is recorded as additional paid-in capital at December 31,
1998.
8. CONTINGENCIES
During the normal course of business, the Company is involved in various
lawsuits and other legal matters. Management, in consultation with legal
counsel, does not believe that the outcome of these matters will have a
materially adverse impact on the financial position or future operations of the
Company.
9. SALARY DEFERRAL PLAN AND TRUST
The Company has a qualified retirement plan and trust covering substantially
all full-time employees with more than one year of service. Company
contributions to the defined contribution plan are made at the discretion of the
board of directors. During the years ended December 31, 1998, 1997, and 1996,
the Company charged $29,000, $31,000, and $16,000, respectively, to expense
pursuant to the Plans.
10. SUBSEQUENT EVENT
Modern Holdings, Inc. and Modern Manufacturing, Inc. merged with Y.F.
Americas, Inc. on January 15, 1999 and January 19, 1999, respectively, to form a
single corporation. After the mergers, Y.F. Americas, Inc. changed its name to
Modern Manufacturing, Inc.
11. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000.
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has completed converting critical data processing
systems. The Company substantially completed the project during 1999. The
Company does not expect the remaining project to have a significant effect on
operations. The Company will continue to implement systems with strategic value,
although some projects may be delayed due to resource constraints.
F-94
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ALTERNATE FRONT COVER FOR MARKET-MAKING PROSPECTUS]
SUBJECT TO COMPLETION DATED [ ], 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
COMPASS AEROSPACE CORPORATION
10 1/8% Series B Senior Subordinated Notes due 2005
------------------------
- The Series B notes were issued in exchange for our 10 1/8% senior
subordinated notes due 2005
- The Series B notes will mature on April 15, 2005
- Interest on the Series B notes is payable on April 15 and October 15 of
each year, commencing October 15, 1999
- We may redeem the Series B notes, in whole or in part, at any time on or
after April 15, 2002, at the redemption prices set forth on page [ ],
plus accrued interest
- Before April 15, 2001, we may redeem up to 35% of the aggregate principal
amount of the notes originally outstanding with the net proceeds of a
public equity offering at 110.125% of the principal amount of the redeemed
notes, plus accrued interest, if at least 65% of the aggregate principal
amount of the notes originally issued remains outstanding after such
redemption
- You have the right to require us to purchase the Series B notes upon the
occurrence of some change of control events at a purchase price equal to
101% of the principal amount of the repurchased notes, plus accrued
interest
- The Series B notes are unsecured senior subordinated obligations and rank
junior to all our existing and future senior indebtedness. The Series B
notes rank senior to or equal to all our future subordinated indebtedness
- The Series B notes are jointly and severally, fully, irrevocably and
unconditionally guaranteed on a senior subordinated basis by each of
Compass' present subsidiaries and rank junior to all existing and future
senior indebtedness of our subsidiaries
- We will not receive the proceeds of the sale of the notes
------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A
DISCUSSION OF SOME MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
This prospectus is to be used by broker-dealers in connection with offers
and sales in market-making transactions at negotiated prices related to
prevailing market prices. We do not intend to list the notes on any securities
exchange. Some broker-dealers have informed us that they intend to make a market
in the notes, however, they are under no obligation to do so and may stop at any
time.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the 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
[ALTERNATE RISK FACTOR FOR MARKET-MAKING PROSPECTUS]
THERE IS NO EXISTING TRADING MARKET FOR THE NOTES AND ANY MARKET-MAKING
ACTIVITIES MAY BE TERMINATED AT ANY TIME
There is no existing trading market for the notes. We cannot assure you that
any market for the notes will develop, or about your ability to sell the notes
or the price at which you may be able to sell them. If such a market were to
develop, the notes could trade at prices that may be higher or lower than their
initial offering price. That trading price could depend on many factors,
including prevailing interest rates, our operating results and the market for
similar securities. We have also been advised by some broker-dealers that,
subject to applicable laws and regulations, they currently intend to make a
market in the notes. However, they are under no obligation to do so and they may
discontinue or interrupt any such market-making at any time without notice.
One such broker-dealer who has notified us it intends to make a market in
the notes may be deemed to be our "affiliate" (as defined in the Securities Act)
and, as such, may be required to deliver a prospectus in connection with its
market-making activities in the notes. Pursuant to the registration rights
agreement we signed with the initial purchasers of the notes in connection with
our initial offering of the 10 1/8% senior subordinated notes, we have agreed to
use our best efforts to file and maintain a registration statement that would
allow a broker-dealer who may be deemed to be an affiliate of ours to engage in
market-making transactions in the notes for up to one year from the date on
which we consummate the offer to exchange the Series B notes for 10 1/8% senior
subordinated notes. We have agreed to bear substantially all the costs and
expenses related to that registration.
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the notes by a
broker-dealer in market-making transactions. We will not receive any of the
proceeds from such transactions.
[ALTERNATE SECTION FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This prospectus is to be used by broker-dealers in connection with offers
and sales of Series B notes in market-making transactions effected from time to
time. Compass has agreed that it will make this prospectus, as amended or
supplemented, available to any broker-dealer for a period of up to one year
after the date of issuance of the Series B notes.
Compass will not receive any proceeds from any sale of Series B notes by
broker-dealers. Series B notes received by broker-dealers for their own accounts
pursuant to market-making transactions may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Series B notes or a combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or negotiated prices. Any such sale may
be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any Series B notes. A broker-dealer may
act as a principal or agent for one party when acting as principal or as agent
for both parties, and may receive compensation in the form of discounts and
commissions, including from both parties when it acts as agent for both.
Compass has been advised by some broker-dealers that, subject to applicable
laws and regulations, they currently intend to make a market in the Series B
notes following completion of the exchange offer. However, no broker-dealer is
under any obligation to do so and they may discontinue or interrupt any such
market-making activities at any time without notice. Any such market-making
activity also will be subject to the limits imposed by the Securities Act and
the Securities Exchange Act of 1934, as amended. We cannot assure you that any
market for the notes will develop, or about your ability to sell the notes you
hold or the price at which you may be able to sell them.
[ALTERNATE BACK COVER FOR MARKET-MAKING PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$110,000,000
COMPASS AEROSPACE CORPORATION
[LOGO]
10 1/8% Series B Senior Subordinated Notes due 2005
---------------------
PROSPECTUS
, 1999
------------------------
UNTIL , 1999, 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 some civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.
THE GUARANTORS
The guarantors are incorporated under the laws of the States of California
(Pacific Hills, Western Methods and Wichita Manufacturing), Delaware (Aeromil,
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 Amended and Restated By-Laws of Compass
**3.3 Certificate of Incorporation of AOM Acquisition Co. (which later changed its name to "Aeromil
Engineering Company"), as amended to date.
**3.4 Amended and Restated By-laws of Aeromil Engineering Company
**3.5 Articles of Incorporation of Western Methods Machinery Corporation.
**3.6 Amended and Restated Bylaws of Western Methods Machinery Corporation.
**3.7 Articles of Incorporation of Brittain Machine, Inc.
**3.8 Amended and Restated Bylaws of Brittain Machine, Inc.
**3.9 Articles of Incorporation of Wichita Manufacturing, Inc.
**3.10 Amended and Restated Bylaws of Wichita Manufacturing, Inc.
**3.11 Articles of Incorporation of Barnes Machine, Inc.
**3.12 Amended and Restated 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 Restated Articles of Incorporation of Pacific Hills Manufacturing Co.
**3.16 Amended and Restated Bylaws of Pacific Hills Manufacturing Co.
**3.17 Certificate of Incorporation of W.S.I. Inc. (which later changed its name first to Y.F. Americas, Inc.,
and then to Modern Manufacturing, Inc.), as amended to date.
**3.18 By-Laws of W.S.I. Inc.
**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 "Series B 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. 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.
II-2
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
**4.4 Stock Pledge Agreement, dated as of November 20, 1998 by and among Compass, Brittain Machine, Inc.,
Sea-Lect Products, Inc. and BankBoston, N.A. as agent.
**4.5 Amendment No. 1 to Credit Agreement, dated as of June 7, 1999 by and among Compass, Bank Boston, N.A. as
Issuing Bank, as Agent and as a lender, NationsBank, N.A. as Co-Agent, the Lenders named therein, Royal
Bank of Canada as Syndication Agent, General Electric Capital Corporation as Documentation Agent.
*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 Statements regarding the computation of ratio of earnings to fixed charges for Compass.
**21.1 Subsidiaries of Compass.
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Grant Thornton LLP.
23.3 Consent of McGladrey & Pullen, LLP.
*23.4 Consent of Morgan, Lewis & Bockius LLP, counsel to Compass (included in Exhibit 5.1).
**24.1 Power of Attorney (included in signature page).
**25.1 Statement of Eligibility on Form T-1 of IBJ Whitehall Bank & Trust Company, as Trustee under the
Indenture relating to the Series B Notes.
**27.1 Financial Data Schedule.
**99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
**99.3 Form of Exchange Agency Agreement.
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because the information is not
applicable or is not material or because the information required is set forth
in the financial statements on the notes thereto.
II-3
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrants are foreign private issuers, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, PROVIDED, that
the registrants include in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the registrants
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the From F-3.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Registrants
pursuant to the foregoing provisions, or otherwise, the Registrants have
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of
expenses incurred or paid by a director, officer or controlling person of
the Registrants in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrants will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification
II-4
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(d) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrants hereby undertake to file, during any period in
which offers or sales are being made, a new registration statement if any
new guarantors of the Series B notes are added.
II-5
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 July 13, 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.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ DOUGLAS M. HAYES Chairman of the Board of July 13, 1999
- ------------------------------ Directors
Douglas M. Hayes
/s/ ALEXANDER HOGG* Director, President and July 13, 1999
- ------------------------------ Chief Executive Officer
Alexander Hogg
/s/ N. PAUL BROST* Vice President, Chief July 13, 1999
- ------------------------------ Financial Officer and
N. Paul Brost Treasurer (Principal
Financial and Accounting
Officer)
/s/ DOUGLAS B. SOLOMON Director and Secretary July 13, 1999
- ------------------------------
Douglas B. Solomon
/s/ JAMES P. ANGUS* Director July 13, 1999
- ------------------------------
James P. Angus
/s/ MICHAEL DRITZ* Director July 13, 1999
- ------------------------------
Michael Dritz
/s/ HARALD H. LUDWIG* Director July 13, 1999
- ------------------------------
Harald H. Ludwig
II-6
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ WILLIAM R. MONKMAN* Director July 13, 1999
- ------------------------------
William R. Monkman
/s/ PHILIP J. OLSSON* Director July 13, 1999
- ------------------------------
Philip J. Olsson
By /s/ DOUGLAS M. HAYES
-------------------------
Douglas M. Hayes
ATTORNEY-IN-FACT
II-7
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 July 13, 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.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ DOUGLAS M. HAYES Chairman of the Board of July 13, 1999
- ------------------------------ Directors of each
Douglas M. Hayes Additional Registrant
/s/ ALEXANDER HOGG* Director, and Chief July 13, 1999
- ------------------------------ Executive Officer of each
Alexander Hogg Additional Registrant
/s/ N. PAUL BROST* Vice President, Chief July 13, 1999
- ------------------------------ Financial Officer and
N. Paul Brost Treasurer (Principal
Financial and Accounting
Officer) of each
Additional Registrant
/s/ DOUGLAS B. SOLOMON Director and Secretary of July 13, 1999
- ------------------------------ each Additional
Douglas B. Solomon Registrant
/s/ HARALD H. LUDWIG* Director of each Additional July 13, 1999
- ------------------------------ Registrant
Harald H. Ludwig
*By /s/ DOUGLAS M. HAYES
-------------------------
Douglas M. Hayes
ATTORNEY-IN-FACT
II-8
COMPASS AEROSPACE CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES EXPENSES (1) PERIOD
- ---------------------------------------------------- ------------- --------------- ------------- ------------- -------------
ADDITIONS
As Compass Aerospace Corporation
YEAR ENDED DECEMBER 31, 1997
Reserve and allowance deducted from asset accounts
Allowance for uncollectible accounts................ $ -- $ -- $ 49 $ 18 $ 31
YEAR ENDED DECEMBER 31, 1998
Reserve and allowance deducted from asset accounts
Allowance for uncollectible accounts................ $ 31 $ 3 $ 776 $ 54 $ 756
As Brittain Machine, Inc.(2)
YEAR ENDED JUNE 30, 1996
Reserve and allowances deducted from asset accounts
Allowance for uncollectible accounts................ $ -- $ -- $ -- $ -- $ --
YEAR ENDED JUNE 30, 1997
Reserve and allowance deducted from asset accounts
Allowance for uncollectible accounts................ $ -- $ -- $ -- $ -- $ --
YEAR ENDED APRIL 21, 1998
Reserve and allowances deducted from asset accounts
Allowance for uncollectible accounts................ $ -- $ -- $ -- $ -- $ --
- ------------------------
(1) Net of recoveries.
(2) Brittain Machine, Inc. is included as the predecessor of Compass Aerospace
Corporation.
S-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
**3.1 Certificate of Incorporation of Compass Aerospace Corporation ("Compass"), as amended to date.
**3.2 Amended and Restated By-Laws of Compass
**3.3 Certificate of Incorporation of AOM Acquisition Co. (which later changed its name to "Aeromil
Engineering Company"), as amended to date.
**3.4 Amended and Restated By-laws of Aeromil Engineering Company
**3.5 Articles of Incorporation of Western Methods Machinery Corporation.
**3.6 Amended and Restated Bylaws of Western Methods Machinery Corporation.
**3.7 Articles of Incorporation of Brittain Machine, Inc.
**3.8 Amended and Restated Bylaws of Brittain Machine, Inc.
**3.9 Articles of Incorporation of Wichita Manufacturing, Inc.
**3.10 Amended and Restated Bylaws of Wichita Manufacturing, Inc.
**3.11 Articles of Incorporation of Barnes Machine, Inc.
**3.12 Amended and Restated 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
**3.15 Restated Articles of Incorporation of Pacific Hills Manufacturing Co.
**3.16 Amended and Restated Bylaws of Pacific Hills Manufacturing Co.
**3.17 Certificate of Incorporation of W.S.I. Inc. (which later changed its name first to Y.F. Americas, Inc.,
and then to Modern Manufacturing, Inc.), as amended to date.
**3.18 By-Laws of W.S.I. Inc.
**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 "Series B 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. 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.
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
**4.5 Amendment No. 1 to Credit Agreement, dated as of June 7, 1999 by and among Compass, Bank Boston, N.A. as
Issuing Bank, as Agent and as a lender, NationsBank, N.A. as Co-Agent, the Lenders named therein, Royal
Bank of Canada as Syndication Agent, General Electric Capital Corporation as Documentation Agent.
*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 Statements regarding the computation of ratio of earnings to fixed charges for Compass.
**21.1 Subsidiaries of Compass.
23.1 Consent of Ernst & Young, LLP.
23.2 Consent of Grant Thornton LLP.
23.3 Consent of McGladrey & Pullen, LLP.
*23.4 Consent of Morgan, Lewis & Bockius LLP, counsel to Compass (included in Exhibit 5.1).
**24.1 Power of Attorney (included in signature page).
**25.1 Statement of Eligibility on Form T-1 of IBJ Whitehall Bank & Trust Company, as Trustee under the
Indenture relating to the Series B Notes.
**27.1 Financial Data Schedule.
**99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
**99.3 Form of Exchange Agency Agreement.
- ------------------------
* To be filed by amendment.
** Previously filed.