10-Q 1 a2030378z10-q.txt FORM-10Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934~~

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-75643 ------------------------ COMPASS AEROSPACE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-4659126 (State or other jurisdiction of incorporation or I.R.S. Employer Identification No. organization) 1501 HUGHES WAY, SUITE 400, LONG BEACH, CALIFORNIA 90810 (Address of principal executive offices) (Zip Code)

(310) 522-0600 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / / No /X/ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 31, 2000, there were outstanding 34,909,335 shares of common stock. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- COMPASS AEROSPACE CORPORATION FORM 10-Q INDEX

PART I--FINANCIAL INFORMATION COMPASS AEROSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT SHARE PER SHARE DATA)

See accompanying notes to consolidated financial statements. -2- PART I--FINANCIAL INFORMATION (CONTINUED) COMPASS AEROSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements. -3- PART I--FINANCIAL INFORMATION (CONTINUED) COMPASS AEROSPACE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements. -4- PART I--FINANCIAL INFORMATION (CONTINUED) COMPASS AEROSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) NOTE 1. BASIS OF PRESENTATION The consolidated balance sheets and consolidated statements of operations are unaudited as of and for the three months and nine months periods ended September 30, 2000 and September 30, 1999. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but these statements do not include all of the footnotes required by generally accepted accounting principles for complete financial statements. The financial information included in this quarterly report should be read in conjunction with the Company's consolidated financial statements and the related notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 1999. NOTE 2. FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign subsidiary is the local currency. Assets and liabilities of the foreign subsidiary are translated into U.S. dollars at the period end exchange rates, and revenues and expenses are translated at average rates prevailing during the periods presented. Translated adjustments are included in accumulated other comprehensive loss, a separate component of stockholders' equity. Transaction gains or losses arising from transactions denominated in a currency other than the functional currency of the entity involved, which have been insignificant, are included in the consolidated statements of operations. NOTE 3. COMPREHENSIVE LOSS The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. Comprehensive loss includes cumulative foreign currency translation adjustments. NOTE 4. LONG-TERM DEBT Long-term debt is summarized as follows:

On November 10, 2000, we made the interest payment due on October 15, 2000 on our outstanding 10 1/8% senior subordinated notes due 2005, including interest that had accrued on the interest payment from October 15, 2000. Our principal stockholder loaned us the funds for the interest -5- PART I--FINANCIAL INFORMATION (CONTINUED) COMPASS AEROSPACE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 4. LONG-TERM DEBT (CONTINUED) payment. The loan, in the principal amount of $4.7 million, bears interest at the same rate as loans under our existing credit agreement and may be repaid once outstanding debt under the credit agreement has been reduced by $46 million from the amount outstanding at September 14, 2000. At September 30, 2000 the Company failed to meet some of the financial covenants of its senior credit agreement. Under the terms of this agreement, noncompliance with the covenants constitutes an event of default, which could permit the Company's lenders to accelerate the Company's outstanding obligations under the credit agreement. In accordance with Statement of Financial Accounting Standards No. 78, "Classification of Obligations that are Callable by the Creditor," the Company has classified the entire outstanding balance under the senior credit agreement as a current liability. Effective September 29, 2000, the senior credit agreement was amended through December 29, 2000. The amendment, among other things, provides for a waiver of existing covenant violations, extends the expiration of the Company's revolving credit facility and defers previously scheduled principal payments until December 29, 2000. The amendment requires that obligations under the credit agreement be paid in full by December 29, 2000, with an extension to January 31, 2001 if certain conditions are met. The Company intends to repay the amounts outstanding under the credit agreement through the proceeds from an asset sale program and refinancing, if necessary. NOTE 5. COMMITMENTS AND CONTINGENCIES The Company leases certain machinery and equipment under capital leases expiring at various dates through 2007. The Company also leases office space under operating leases with terms expiring at various dates through 2008. During the ordinary course of business, the Company is involved in various legal proceedings. Management, in consultation with legal counsel, does not believe that the outcome of these lawsuits will have a material adverse effect on the financial position or future operating results of the Company. NOTE 6. SEGMENTS The Company has one segment which is the supply of original equipment parts, sub-assemblies, manufacturing kits, and structural components to aerospace manufacturers for use in structural frames and other metal aircraft components. The Company's operations are conducted domestically and internationally. The Company evaluates performance based on EBITDA, defined as profit before income taxes, interest, depreciation, goodwill amortization, and management fees paid to an affiliate. NOTE 7. LITIGATION SETTLEMENT On June 22, 2000, the Company entered into a settlement agreement with Alinabal Holdings Corporation and its principal stockholders to settle the Company's outstanding lawsuit against Alinabal and its stockholders. The settlement included the reimbursement of $2.5 million of legal costs incurred in connection with the litigation, $12.5 million of cash and $36.0 million of the Company's 10 1/8% Senior Subordinated Notes. The $12.5 million of cash received was used to reduce Term A, Term B and Acquisition Line senior debt. The settlement resulted in a $22.2 million reduction of goodwill and a gain of $26.9 million on the early extinguishment of the debt. -6- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 RESULTS OF OPERATIONS REVENUES: Consolidated revenues increased $5.2 million, or 15.1%, to $39.5 million for the three months ended September 30, 2000 from $34.3 million for the three months ended September 30, 1999. The increase was due to our acquisition of Trim Engineering Limited (Trim) in the third quarter of 1999. Trim, which has headquarters in the United Kingdom and operates six aerospace precision milling, metal treatments and casting units, had revenues of $12.3 million in the three months ended September 30, 2000 compared with $7.5 million in the three months ended September 30, 1999. Revenues from our domestic operations increased $0.4 million, or 1.5%, for the three months ended September 30, 2000 to $27.2 million. COST OF SALES: Cost of sales increased $9.2 million, or 37.6%, to $33.7 million for the three months ended September 30, 2000 from $24.5 million for same period of 1999. Cost of sales increased as a result of a number of factors. In January 2000, we incurred costs of $4.6 million in connection with a long-term agreement with our major customer. The carrying value associated with this agreement is amortized at the rate of $0.5 million per quarter through June 2001. The acquisition of Trim in the third quarter of 1999 increased cost of sales by $4.9 million. Exclud4ing the amortization of the cost incurred with our long-term agreement with our major customer and the acquisition of Trim, cost of sales was $23.5 million, or 86.4% of sales, in the three months ended September 30, 2000 compared to $19.7 million or 73.5% of sales for the same period in 1999. This increase in cost of sales in relation to sales was due to initially high production costs for new contracts and market pressure to reduce prices. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses increased $0.9 million, or 14.6%, to $5.5 million for the three months ended September 30, 2000 from $4.6 million for same period of 1999. This increase was attributable to higher legal, consulting, and employee search and relocation fees in the three months ended September 30, 2000 compared to the same period in 1999. NET INTEREST EXPENSE: Interest expense decreased $0.7 million, or 12.3%, to $5.0 million for the three months ended September 30, 2000 from $5.7 million for the same period of 1999. The decrease in interest expense was attributable to the extinguishment and pay down of debt resulting from the settlement of our suit against Alinabal Holdings Corporation and its principal stockholders, partly offset by increased interest rates. NET INCOME: Net income increased $20.4 million to $18.2 million in the three months ended September 30, 2000 from a net loss of $2.2 million for the same period of 1999. The increase in net income was due to a gain on the extinguishment of debt of $26.9 million offset by the increases in the cost of sales and selling, general and administrative expenses. RESULTS OF OPERATIONS: THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999. REVENUES: Consolidated revenues increased $14.1 million, or 13.9%, to $115.5 million for the nine months ended September 30, 2000 from $101.4 million for the same period in 1999. Excluding the Trim acquisition, revenues from our domestic operations decreased $13.8 million, or 14.7%, for the nine months ended September 30, 2000 to $80.1 million. Our decrease in revenues is partly a result of Boeing's initiative to reduce inventory. Additionally, we believe our lower revenues are the result of the reductions in production rates of certain Boeing commercial airplane programs and market pressure to reduce prices. -7- COST OF SALES: Cost of sales increased $31.1 million, or 43.0%, to $103.4 million for the nine months ended September 30, 2000 from $72.3 million for same period of 1999. Cost of sales increased as a result of a number of factors. In January 2000, we incurred $4.6 million of cost in connection with a long-term agreement with a major customer. As a result of specific events in the second quarter of 2000, the future benefits originally associated with this agreement were determined to have diminished and the carrying value associated with this agreement was reduced by $2.4 million with the remaining balance to be amortized at the rate of $0.5 million per quarter through the second quarter of 2001. A comprehensive review of inventories and the anticipated future requirements of our customers resulted in a reduction of $2.5 million in the carrying value of inventory in the second quarter of 2000. Excluding the above items and the acquisition of Trim, cost of sales was $70.3 million or 87.8% of sales in the nine months ended September 30, 2000 compared to $67.5 million or 71.9% for the same period in 1999. This increase in cost of sales in relation to sales was due to initially high production costs for new contracts, lower sales volume and market pressure to reduce prices. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses increased $3.4 million, or 21.5%, to $16.4 million for the nine months ended September 30, 2000 from $13.0 million for same period of 1999. This increase was attributable to the acquisition of Trim, with approximately $2.2 million of selling, general and administrative expenses in the nine month period ended September 30, 2000, compared to $1.3 million in the nine month period ended September 30, 1999 and approximately $2.1 million of employee recruitment, relocation and severance costs relating to senior management changes made during the nine months ending September 30, 2000. This increase was offset by $0.7 million related to the settlement of litigation, which included a $2.5 million reimbursement of legal costs incurred in connection with the litigation. NET INTEREST EXPENSE: Interest expense increased $1.3 million, or 8.3%, to $17.0 million for the nine months ended September 30, 2000 from $15.7 million for the same period of 1999. The increase in interest expense was attributable to the increase in borrowings associated with the acquisition of Trim, higher interest rates on variable rate debt, and increased borrowings under our revolving credit facility. The increase is partly offset by the extinguishment and reduction of debt from the settlement of our suit against Alinabal Holdings Corporation and the principal stockholders of Alinabal Holding Corporation. NET LOSS: Net loss was $4.1 million for the nine months ended September 30, 2000 and 1999. LIQUIDITY AND CAPITAL RESOURCES NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net cash used in operating activities during the nine months ended September 30, 2000 was $6.7 million compared to cash flows provided by operating activities of $9.2 million for the nine months ended September 30, 1999. The decrease in cash flow from operating activities was due to lower operating income. NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES: Net cash provided by investing activities was $12.2 million for the nine months ended September 30, 2000 and included $13.0 million related to the final settlement of an acquisition purchase price offset by $0.8 million related to the purchase of property, plant and equipment. Net cash used in investing activities for the nine months ended September 30, 1999 was $5.2 million for purchase of property, plant and equipment and $54.1 million for payment of acquisitions net of cash acquired. NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES: Net cash flow provided by financing activities was $7.1 million for the nine months ended September 30, 2000 as compared to $54.8 million for same period of 1999. The decrease in net cash flow provided by financing activities was attributable to the proceeds from long-term debt, note offerings and the sale of stock during the nine months ended -8- September 30, 1999, partly offset by a $9.0 million borrowing under our revolving credit facility during the nine months ended September 30, 2000. At September 30, 2000, we failed to meet some of the financial covenants of our senior credit agreement. Under the terms of this agreement, noncompliance with the covenants constitutes an event of default, which could permit our lenders to accelerate our outstanding obligations under the credit agreement. In accordance with Statement of Financial Accounting Standards No. 78, "Classification of Obligations that are Callable by the Creditor," we have classified the entire outstanding balance under the senior credit agreement as a current liability. FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Quarterly Report on Form 10-Q Report contains forward-looking statements which involve risks and uncertainties. Our future financial results could differ materially from our anticipated results due to dependence on conditions in the airline industry, the level of new commercial aircraft orders, competitive pricing pressures, technology and product development risks and uncertainties, product performance, increasing consolidation of customers and suppliers in the aerospace industry, availability of raw materials and components from suppliers, and other factors beyond our control. Because of these uncertainties you should not place undue reliance on these statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK: Our 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. We are also exposed to changes in interest rates primarily from our long-term debt issued at a fixed rate. Under our current policies we do 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 $0.7 million for the nine month period ended September 30, 2000. Based on the current holdings of debt, we do not believe our exposure to interest rate risk is material. Fixed rate debt obligations currently issued by us are callable prior to maturity under some circumstances. -9- PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION On November 10, 2000, we made the interest payment due on October 15, 2000 on our outstanding 10 1/8% senior subordinated notes due 2005, including interest that had accrued on the interest payment from October 15, 2000. Our principal stockholder loaned us the funds for the interest payment. The loan, in the principal amount of $4.7 million, bears interest at the same rate as loans under our existing credit agreement and may be repaid once outstanding debt under the credit agreement has been reduced by $46 million from the amount outstanding at September 14, 2000. Effective November 1, 2000, we appointed Paul Brost, formerly our Chief Financial Officer and Treasurer, as Chief Administrative Officer. Jerome David, formerly Vice President, Operations Finance, has been appointed Chief Financial Officer and Treasurer. James Storie, formerly Vice President, Operations, has been appointed Chief Operating Officer. In addition, Messrs. Brost, David and Storie will all remain Vice Presidents. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 27. Financial data Schedule (b) REPORTS ON FORM 8-K We have not filed any Report on Form 8-K during this reporting period. -10- \ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPASS AEROSPACE CORPORATION (REGISTRANT) By: /s/ JEROME C. DAVID ----------------------------------------- Jerome C. David SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER

Date: November 14, 2000 -11-

COMPASS AEROSPACE CORP 10-Q