UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
☒ QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
ARC Group Worldwide, Inc.
(Exact name of registrant as specified in its charter)
Utah
(State or other jurisdiction of incorporation or organization)
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001-33400 |
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87-0454148 |
(Commission File Number) |
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(IRS Employer Identification Number) |
810 Flightline Blvd.
Deland, FL 32724
(Address of principal executive offices including zip code)
(303) 467-5236
(Registrant’s telephone number, including area code)
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 ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 7, 2016, the Registrant had 18,795,509 shares outstanding of its $.0005 par value common stock.
ARC Group Worldwide, Inc.
PART I — FINANCIAL INFORMATIO N
ARC Group Worldwide, Inc.
Unaudited Condensed Consolidated Statements of Operation s
(in thousands, except for share and per share amounts)
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For the three months ended |
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October 2, 2016 |
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September 27, 2015 |
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Sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative |
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(Loss) income from operations |
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Other (expense) income, net |
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Interest expense, net |
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Loss on extinguishment of debt |
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— |
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Loss before income taxes |
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Income tax benefit |
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Net loss from continuing operations |
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Gain on sale of subsidiary and net income from discontinued operations, net of tax |
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Net income (loss) |
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Net income attributable to non-controlling interests: |
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Continuing operations |
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Discontinued operations |
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Net income attributable to non-controlling interests |
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Net income (loss) attributable to ARC Group Worldwide, Inc. |
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$ |
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$ |
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Net (loss) income per common share, basic and diluted: |
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Continuing operations |
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$ |
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$ |
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Discontinued operations |
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$ |
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$ |
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Attributable to ARC Group Worldwide, Inc. |
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$ |
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$ |
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Weighted average common shares outstanding: |
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Basic and diluted |
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
ARC Group Worldwide, Inc.
Unaudited Condensed Consolidated Balance Sheet s
(in thousands, except share data)
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October 2, 2016 |
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June 30, 2016 |
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ASSETS |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Deferred income tax assets |
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— |
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Prepaid expenses and other current assets |
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Current assets of discontinued operations |
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— |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Other |
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Long-term assets of discontinued operations |
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— |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Deferred revenue |
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Bank borrowings, current portion of long-term debt, net of unamortized deferred financing costs |
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Capital lease obligations, current portion |
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Accrued escrow obligations, current portion |
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Current liabilities of discontinued operations |
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— |
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Total current liabilities |
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Long-term debt, net of current portion and unamortized deferred financing costs |
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Deferred income tax liabilities |
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Capital lease obligations, net of current portion |
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Accrued escrow obligations, net of current portion |
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Other long-term liabilities |
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Long-term liabilities of discontinued operations |
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— |
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Total liabilities |
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Commitments and contingencies (Note 12) |
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Equity: |
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Preferred stock, $0.001 par value, 2,000,000 shares authorized, no shares issued and outstanding |
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— |
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— |
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Common stock, $0.0005 par value, 250,000,000 shares authorized; 18,803,910 shares issued and 18,795,509 shares issued and outstanding at October 2, 2016 and June 30, 2016 |
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Treasury stock, at cost; 8,401 shares at October 2, 2016 and June 30, 2016 |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total ARC Group Worldwide, Inc. stockholders' equity |
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Non-controlling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
ARC Group Worldwide, Inc.
Unaudited Condensed Consolidated Statements of Cash Flow s
(in thousands)
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For the three months ended |
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October 2, 2016 |
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September 27, 2015 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Share-based compensation expense |
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— |
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Gain on sale of discontinued operations |
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— |
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Bad debt expense and other |
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Deferred income taxes |
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Changes in working capital: |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other assets |
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Accounts payable |
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Accrued expenses |
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Deferred revenue |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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Proceeds from sale of subsidiary |
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— |
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Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Proceeds from debt issuance |
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— |
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Repayments of long-term debt and capital lease obligations |
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Net cash used in financing activities |
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Effect of exchange rates on cash |
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Net increase (decrease) in cash |
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Cash, beginning of period |
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Cash, end of period |
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$ |
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$ |
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes, net of refunds |
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$ |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
5
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 – Nature of Operations and Basis of Presentation
Nature of Operations
ARC Group Worldwide, Inc. (the “Company” or “ARC”) is a leading, global advanced manufacturer offering a full suite of products and services to its customers, including: (i) metal injection molding (“MIM”); (ii) 3D metal and plastic printing (also referred to as “Additive Manufacturing”); (iii) precision metal stamping; (iv) traditional and clean room plastic injection molding; and (v) advanced rapid and conformal tooling. Through the Company’s diverse product offering, ARC provides its customers with a holistic prototyping and full-run production solution for both precision metal and plastic fabrication. The Company further differentiates itself from its competitors by providing innovative, custom capabilities, which improve high-precision manufacturing efficiency and speed-to-market for its customers.
ARC’s mission is to accelerate the adoption of key technologies, such as automation, robotics, production software, and 3D printing, in traditional manufacturing, thereby benefiting from the elimination of inefficiencies currently present in the global supply chain. Further, ARC seeks to create innovative ways to streamline and improve the overall manufacturing process, including offering instant online quoting, in-house rapid and advanced conformal tooling, and a full suite of prototype-to-production capabilities.
Basis of Presentation
The Company’s fiscal year begins July 1 and ends June 30, and the quarters for interim reporting consist of thirteen weeks; therefore, the quarter end will not always coincide with the date of the calendar month-end.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The consolidated balance sheet as of June 30, 2016, was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP. As such, this quarterly report should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016. The Company follows the same accounting policies for preparing quarterly and annual reports.
Principles of Consolidation
The Consolidated Financial Statements include the amounts of ARC and its controlled subsidiaries. All material intercompany transactions have been eliminated in consolidation.
NOTE 2 – Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 reported amounts of revenue and expenses during the reporting period. Due to the inherent uncertainties in making estimates, actual results could differ from those estimates and such differences may be material to the consolidated financial statements.
6
Non-Controlling Interests
In connection with the acquisitions of FloMet LLC and Tekna Seal LLC, the Company obtained a majority interest in the subsidiaries and control of the subsidiaries' boards of directors. During the first quarter of fiscal 2016, the Company purchased approximately 1.9% of the outstanding non-controlling membership interests of Tekna Seal LLC. On September 30, 2016, the Company sold Tekna Seal LLC, which included 95.7% owned by the Company and 4.3% held by minority stakeholders (see Note 3, Discontinued Operations, for more information). On October 2, 2016 and September 27, 2015, third party investors owned approximately 3.8% of the outstanding membership interests of FloMet LLC. The Company has recognized the carrying value of the non-controlling interests as a component of stockholders’ equity for the applicable periods presented.
Comprehensive Income
For each of the quarters ended October 2, 2016 and September 27, 2015, there were no material differences between net income (loss) and comprehensive income (loss).
Accounting Pronouncements Adopted in the Current Period
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-17, Balance Sheet Classification of Deferred Taxes. This update requires an entity to classify deferred tax assets and liabilities as non-current within a classified statement of financial position. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016, but early adoption is permitted. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted the provisions of ASU 2015-17 on a prospective basis as of July 1, 2016; therefore, the prior period was not retrospectively adjusted. The adoption of ASU 2015-17 did not have an impact on our consolidated results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs to ASC Topic 835, Interest - Imputation of Interest (“ASU 2015-03”). ASU 2015-03 requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. ASU 2015-03 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.
The Company adopted the provisions of ASU 2015-03 on July 1, 2016, which required retroactive application and represented a change in accounting principle. The deferred financing costs of approximately $1.3 million associated with a portion of our outstanding debt, which were previously included in prepaid expenses and other current assets and other assets on the consolidated balance sheet as of June 30, 2016, are reflected as a reduction to the carrying liability of the Company’s outstanding debt. As a result of this change in accounting principle, the consolidated balance sheet as of June 30, 2016 was adjusted as follows (in thousands):
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June 30, 2016 |
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Previously |
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Effect of Adoption of |
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Reported |
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Accounting Principle |
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As Adjusted |
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Assets: |
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Prepaid expenses and other current assets |
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$ |
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$ |
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$ |
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Other assets |
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$ |
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$ |
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$ |
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Total assets |
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$ |
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$ |
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$ |
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Liabilities: |
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Bank borrowings, current portion of long-term debt |
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$ |
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$ |
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$ |
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Long-term debt, net of current portion |
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$ |
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$ |
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$ |
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Total liabilities |
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$ |
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$ |
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$ |
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Recent Accounting Pronouncements
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by GAAP and thereby reduce the diversity in practice. ASU
7
2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. This guidance is applicable to the Company's fiscal year beginning July 1, 2018. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases: Topic 842 (“ASU 2016-02”), to supersede nearly all existing lease guidance under GAAP. ASU 2016-02 requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases. ASU 2016-02 also requires qualitative disclosures along with specific quantitative disclosures and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. The Company is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on its consolidated financial position, results of operations and cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 which defers the effective date for one year beyond the originally specified effective date. ASU 2014-09 is effective in the Company’s first quarter of fiscal 2019 and may transition to the standard using either the full retrospective approach or retrospectively with a cumulative effect of initially applying the amendments recognized at the date of initial application. The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements.
NOTE 3 – Discontinued Operations
On September 30, 2016, the Company sold its non-core subsidiary, Tekna Seal LLC (“Tekna Seal”), to Winchester Electronics Corporation (“Winchester”) pursuant to a Membership Interests Purchase Agreement for $10.5 million in cash. The sale to Winchester covered all of the membership interests of Tekna Seal, including 95.7% owned by the Company and 4.3% held by the Tekna Seal minority stakeholders. The proceeds of the sale, after giving effect to any working capital adjustments, will be allocated among the Company and the minority sellers proportionate to their respective ownership of pre-closing membership interests. The Company used the net cash proceeds of the sale to repay principal outstanding under the Company’s revolving loan.
Below is a summary of the gain on sale of discontinued operations (in thousands):
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Gross proceeds |
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$ |
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Less: |
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Property and equipment, net |
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Accounts receivable |
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Inventory |
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Other current assets |
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Accounts payable and accrued expenses |
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Total net assets disposed |
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Goodwill |
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Transaction costs |
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Minority interests |
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Gain on sale of discontinued operations, before income taxes |
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$ |
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8
In connection with the sale, the Company recorded a pre-tax gain of approximately $5.6 million, which includes a non-cash charge of $3.4 million related to goodwill associated with Tekna Seal, and transaction costs of approximately $0.4 million. The income from operations of Tekna Seal attributable to the Company was approximately $0.1 million and $0.2 million for the three months ended October 2, 2016 and September 27, 2015, respectively.
The condensed consolidated statements of operations for the three months ended October 2, 2016 include the results of operations of Tekna Seal through the sale date of September 30, 2016 and the gain on the sale of Tekna Seal. Financial information for discontinued operations for the three months ended October 2, 2016 and September 27, 2015 is as follows (in thousands):
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For the three months ended |
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October 2, 2016 |
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September 27, 2015 |
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Sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative |
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Income from discontinued operations, before income taxes |
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Gain on sale of discontinued operations |
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— |
Total income from discontinued operations, before income taxes |
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Income tax expense on discontinued operations |
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— |
Income from discontinued operations, net of tax |
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$ |
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$ |
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The following table presents the carrying amount as of June 30, 2016, of the major classes of assets and liabilities held for sale in the condensed consolidated balance sheet (in thousands):
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June 30, 2016 |
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Current assets: |
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Accounts receivable |
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$ |
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Inventory |
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Other assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Total assets of discontinued operations |
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$ |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
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Capital lease obligations |
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Total current liabilities |
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Capital lease obligations |
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Total liabilities of discontinued operations |
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$ |
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Cash flows from Tekna Seal for the three months ended October 2, 2016 and September 27, 2015 are combined with the cash flows from operations within each of the categories presented on the condensed consolidated statements of cash flows. There were no significant operating or investing activities from discontinued operations during the three months ended October 2, 2016 and September 27, 2015.
9
NOTE 4– Inventory
Inventories consisted of the following (in thousands):
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October 2, |
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June 30, |
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2016 |
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2016 |
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Raw materials and supplies |
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$ |
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$ |
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Work-in-process |
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Finished goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for obsolescence |
|
|
|
|
|
|
|
Inventory of discontinued operations |
|
|
— |
|
|
|
|
|
|
$ |
|
|
$ |
|
|
NOTE 5 – Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable Life |
|
October 2, |
|
June 30, |
|
||||
|
|
(in years) |
|
2016 |
|
2016 |
|
||||
Land |
|
|
— |
|
|
$ |
|
|
$ |
|
|
Building and improvements |
|
7 |
- |
40 |
|
|
|
|
|
|
|
Machinery and equipment |
|
3 |
- |
12 |
|
|
|
|
|
|
|
Office furniture and equipment |
|
3 |
- |
10 |
|
|
|
|
|
|
|
Construction-in-process |
|
|
— |
|
|
|
|
|
|
|
|
Assets acquired under capital lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization on capital leases |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment of discontinued operations |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
Depreciation expense totaled $1.5 million for the three months ended October 2, 2016 and September 27, 2015.
NOTE 6 – Goodwill and Intangible Assets
Goodwill
The following table summarizes the activity in the Company's goodwill account by segment during the three months ended October 2, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precision Components Group |
|
3DMT Group |
|
Flanges and Fittings Group |
|
Consolidated |
|
||||
Balance, June 30, 2016 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Sale of subsidiary (1) |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
Balance, October 2, 2016 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
(1) |
|
During the three months ended October 2, 2016, the Company sold its majority interest in Tekna Seal LLC and recorded a reduction of goodwill of $3.4 million, which is included in income from discontinued operations, net of tax on the condensed consolidated statement of operations (see Note 3, Discontinued Operations, for more information). |
10
Intangible Assets
The following table summarizes the Company's intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2016 |
|
June 30, 2016 |
|
||||||||||||||
|
|
Gross |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
||
|
|
Carrying |
|
Accumulated |
|
Net Carrying |
|
Carrying |
|
Accumulated |
|
Net Carrying |
|
||||||
Intangible assets: |
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
|
||||||
Patents and tradenames |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Intangible assets are being amortized using the straight-line method over estimated useful lives ranging from five to fifteen years. Amortization expense totaled $0.8 million for identifiable intangible assets for the three months ended October 2, 2016 and September 27, 2015. Estimated future amortization expense for the next five years as of October 2, 2016, is as follows (in thousands):
|
|
|
|
|
Fiscal Years |
|
Amount |
|
|
Remainder of 2017 |
|
$ |
|
|
2018 |
|
|
|
|
2019 |
|
|
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
There were no impairments of long-lived assets during the three months ended October 2, 2016 and September 27, 2015.
NOTE 7 – Accrued Escrow Obligations
On April 7, 2014, the Company acquired the membership interests of Advance Tooling Concepts, LLC (“ATC”) for approximately $24.3 million, of which: (i) $21.9 million was paid in cash and (ii) $2.4 million, consisting of 233,788 newly issued shares of common stock of the Company, was to be held in escrow for a period of 12 months (“ATC Escrow”) to satisfy certain working capital adjustments and/or indemnification obligations. In July 2014, the ATC Escrow was reduced by $0.7 million following the completion of a working capital adjustment. In October 2015, the Company entered into an agreement to settle and terminate the ATC Escrow in cash. The cash settlement has been accrued in current and long-term liabilities. The ATC Escrow shares were returned to the Company and retired in February 2016.
On June 25, 2014, the Company acquired substantially all of the assets of Kecy Corporation and 411 Munson Holding, LLC for approximately $26.8 million, of which: (i) $24.2 million was paid in cash; and (ii) $2.6 million, consisting of 172,450 newly issued shares of common stock of the Company, was to be held in escrow for a period of 18 months (“Kecy Escrow”) to satisfy certain working capital adjustments and/or indemnification obligations. The Company has determined the common stock issued is mandatorily redeemable and has therefore recorded $2.6 million as a current liability in the accompanying balance sheets. In August 2015, and in connection with the decline in the Company’s stock price since the date of acquisition, the Company issued 499,176 additional shares for security of the escrow. The Company is in the process of finalizing the settlement of the Kecy Escrow.
11
NOTE 8 – Debt
Long-term debt payable consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
||||
|
|
October 2, 2016 |
|
June 30, 2016 |
|
||
Senior secured revolving loan |
|
$ |
|
|
$ |
|
|
Senior secured mortgage-based term loans |
|
|
|
|
|
|
|
Senior secured term loan |
|
|
— |
|
|
|
|
Senior secured delayed draw term loan |
|
|
— |
|
|
|
|
Subordinated term loan |
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
|
|
Unamortized deferred financing costs |
|
|
|
|
|
|
|
Total debt, net |
|
|
|
|
|
|
|
Current portion of long-term debt, net of unamortized deferred financing costs |
|
|
|
|
|
|
|
Long-term debt, net of current portion and unamortized deferred financing costs |
|
$ |
|
|
$ |
|
|
New Senior Credit Agreement
On September 29, 2016, the Company and certain of its subsidiaries, entered into a new senior asset-based lending credit agreement with Citizens Bank, N.A. (the “Senior ABL Credit Facility”).
The Senior ABL Credit Facility provides the Company with the following extensions of credit and loans: (1) a Revolving Commitment in the principal amount of $25.0 million (the “Revolving Loan”) and (2) a mortgage-based Term Loan Commitment in the principal amount of $17.5 million (the “Term Loan”). The loans under the Senior ABL Credit Facility are secured by liens on substantially all domestic assets of the Company and guaranteed by the Company’s domestic subsidiaries who are not borrowers under the Senior ABL Credit Facility.
The aggregate amount of revolving loans permitted under the Senior ABL Credit Facility may not exceed a borrowing base consisting of: (i) the sum of 85% of certain eligible accounts receivable, plus (ii) the lesser of 65% of the value of certain eligible inventory and 85% of the net orderly liquidation value of certain eligible inventory, plus (iii) an amount not to exceed $4.2 million, which amount will be adjusted based on the face amount of certain letters of credit issued to Citizens Bank, N.A. in connection with certain operating leases and capitalized leases, minus (iv) reserves for any amounts which the lender deems necessary or appropriate.
Borrowings under the Senior ABL Credit Facility may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate loans will bear interest at the fluctuating rate per annum equal to (i) the highest of (a) the Federal Funds Rate plus 1/2 of 1.00%, (b) Citizens own prime rate; and (c) the adjusted Eurodollar rate on such day for an interest period of one (1) month plus 1.00%; and (ii) plus the Applicable Rate, as described below. Eurodollar Rate Loans will bear interest at the rate per annum equal to (i) the ICE Benchmark Administration LIBOR Rate; plus (ii) the Applicable Rate. The “Applicable Rate” will be (a) 2.50% with respect to Base Rate Loans that are Term Loans and 3.50% with respect to Eurodollar Rate Loans that are Term Loans, and (b) 2.50% with respect to Base Rate Loans that are Revolving Loans and 3.50% with respect to Eurodollar Rate Loans that are Revolving Loans, in each case until December 31, 2016, and thereafter the Applicable Rate will be adjusted quarterly, responsive to the Company’s Quarterly Average Availability Percentage, ranging from 1.25% to 1.75% with respect to Base Rate Loans that are Revolving Loans and from 2.25% to 2.75% with respect to Eurodollar Rate Loans that are Revolving Loans. In addition to interest payments on the Senior ABL Credit Facility loans, the Company will pay commitment fees to the lender of 0.375% per quarter on undrawn Revolving Loans. The Company will also pay other customary fees and reimbursements of costs and disbursements to the lender.
The Maturity Date with respect to the Revolving Loan and the Term Loan is August 11, 2019, provided, however, upon repayment of Company subordinated indebtedness the maturity date will automatically extend to five years after the Closing Date for Revolving Loans and Revolving Commitments, and with respect to the Term Loans, the earlier of the date that is (i) ten years after the Closing Date and (ii) the maturity date of the Revolving Loans. The Senior ABL Credit Facility contains certain mandatory prepayment provisions, including mandatory prepayments due in respect of sales of assets, sales of equity securities, events of default and other customary events, with exceptions for non-core business dispositions.
12
The Senior ABL Credit Facility contains customary covenants and negative covenants regarding operation of the Company’s business, including maintenance of certain financial ratios, as well as restrictions on dispositions of Company assets.
In connection with the Senior ABL Credit Facility, the Company and the Borrowers together with certain subsidiaries (collectively, the “Guarantors”), have entered into an Amended and Restated Guarantee and Collateral Agreement with Citizens Bank, N.A. dated as of September 29, 2016, which secures all of the loans and credits drawn from the Senior ABL Credit Facility by the Borrowers. The security interests established under the Amended and Restated Guarantee and Collateral Agreement include senior secured liens on substantially all of the assets of the Guarantors. The Guarantors have agreed to guarantee the unconditional payment and performance to the lender of all obligations of the Borrowers under the Senior ABL Credit Facility.
As of October 2, 2016, the Company was in compliance with its debt covenants under the Senior ABL Credit Facility.
Prior Amended & Restated Credit Agreement
On September 29, 2016, the Company refinanced all of the existing long-term debt obligations with Citizens Bank, N.A. into the Senior ABL Credit Facility described above. The Company accounted for the refinancing as an extinguishment of debt and wrote off $0.7 million of previously deferred financing fees.
Subordinated Term Loan Credit Agreement
On November 10, 2014, the Company and certain of its subsidiaries entered into a $20.0 million, five-year Subordinated Term Loan Credit Agreement (“Subordinated Loan Agreement”) with McLarty Capital Partners SBIC, L.P. (“McLarty”), which bears interest at 11% annually . Upon an event of default under the Subordinated Loan Agreement, the interest rate increases automatically by 2.00% annually. The proceeds were used to repay certain outstanding loans under the Company’s previous credit facility. McLarty is indirectly a related party to one of the officers and directors of the Company; therefore, the Board of Directors appointed a special committee consisting solely of independent directors to assure that the Subordinated Loan Agreement is fair and reasonable to the Company and its shareholders.
On April 20, 2016, the Company entered into a second amendment to the Subordinated Loan Agreement (“McLarty Second Amendment”), as previously amended on December 29, 2014, to modi fy certain terms including:
|
(1) |
|
Allows for the exclusion from the fixed charge coverage ratio $1.3 million of certain federal and state taxes paid related to prior years, effective March 27, 2016; |
|
(2) |
|
Modifies the minimum fixed charge coverage ratio and maximum total leverage ratio in line with the Company’s current financial expectations, effective March 27, 2016; and |
|
(3) |
|
Establishes mandatory prepayments that will be required upon the completion of asset sales or sale-leaseback transactions, with the amount of the prepayments to be determined based upon achievement of certain leverage ratios. |
The Subordinated Loan Agreement has been subordinated to the Senior ABL Credit Facility pursuant to a First Lien Subordination Agreement. The Subordinated Loan Agreement contains customary representations and warranties, events of default, affirmative covenants, negative covenants, and prepayment terms that are similar to those contained in the Senior ABL Credit Facility described above.
As of October 2, 2016, the Company was in compliance with its debt covenants under the Subordinated Credit Facility.
Loan Contract
On March 23, 2016, AFT-Hungary Kft. (“AFT Hungary”), a wholly owned subsidiary of the Company, entered into a Loan Contract with Erste Bank Hungary Zrt. in an amount equal to €4.0 million (“Loan Contract”). The initial funding of €4.0 million drawn on the Loan Contract occurred on March 31, 2016. Approximately $3.0 million of the net proceeds from the Loan Contract were used to partially repay obligations outstanding under the Amended & Restated Credit Agreement, with the remaining net proceeds to be used for capital expenditures and other investments to facilitate the export of goods and services provided by AFT Hungary.
13
The loan matures on March 7, 2021, and bears interest at a fixed rate of 0.98% per annum. The Company is required to make semi-annual principal payments in an amount equal to approximately €400,000 along with monthly interest payments. The Loan Contract is secured by certain of AFT Hungary’s assets, including the real estate and selected machinery and equipment located in Retsag, Hungary.
Future Debt Payments
The following schedule represents the Company’s future debt payments as of October 2, 2016 (in thousands):
|
|
|
|
|
2017 (1) |
|
$ |
|
|
2018 |
|
|
|
|
2019 |
|
|
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
Total |
|
$ |
|
|
|
(1) |
|
Represents long-term debt principal payments for the nine month period ending June 30, 2017. |
NOTE 9 – Income Taxes
The balance of income taxes receivable was $0 and $1.6 million at October 2, 2016 and June 30, 2016, respectively. The decrease in the income taxes receivable during the three months ended October 2, 2016, was primarily associated with the receipt of a federal income tax refund of approximately $0.9 million related to the carryback of the Company’s 2015 net operating loss. The remaining income taxes receivable has been netted to reflect a current period taxes payable of $0.5 million due primarily to the gain on the sale of Tekna Seal. The Company had unrecognized tax benefits for uncertain tax positions of $1.1 million and $1.0 million on October 2, 2016 and June 30, 2016, respectively, which are included in other long-term liabilities.
NOTE 10 – Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income available to common stockholders by the diluted weighted-average shares of common stock outstanding during each period. In connection with the acquisitions of ATC and Kecy, the Company issued a total of 905,414 shares of common stock, which were placed in escrow to satisfy certain working capital adjustments and/or indemnification obligations. As these escrow shares are expected to be returned to the Company, the escrow shares have been excluded from the basic and diluted earnings per share computations. In February 2016, the 233,788 shares of common stock previously issued for the ATC acquisition were returned to the Company and retired.
As a result of the Company’s net loss from continuing operations for the three months ended October 2, 2016, potentially dilutive stock options of approximately 134,927 were considered anti-dilutive and were excluded from the computation of diluted earnings per share. For the three months ended September 27, 2015, the Company had no outstanding equity awards or other potentially dilutive securities; therefore, there was no computation of dilutive securities.
14
NOTE 11 – Share-Based Compensation
In November 2015, the Company’s stockholders approved the ARC Group Worldwide, Inc. 2015 Equity Incentive Plan (“2015 Plan”), which is administered by the Compensation Committee (“Committee”) of the Board of Directors. The 2015 Plan reserves for issuance a total of 950,000 shares of common stock, which may be in the form of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, or other types of awards as authorized under the plan. As of October 2, 2016, there were 7,125 shares of common stock available to be granted under the 2015 Plan. In the case of stock options, the exercise price of the stock options granted may not be less than the fair market value of a share of common stock at the date of grant. The Committee determines the vesting conditions of awards; however, the performance period for an award subject to the satisfaction of performance measures may not exceed five years. The 2015 Plan will terminate ten years after its adoption, unless terminated earlier by the Company’s Board of Directors.
A summary of stock option activity under the 2015 Plan as of October 2, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted Average |
|
|
|
|
|
|
Average Exercise |
|
Remaining Contractual |
|
|
|
|
Shares |
|
Price |
|
Term (in years) |
|
|
Outstanding as of June 30, 2016 |
|
|
|
$ |
|
|
|
|
Granted |
|
|
|
$ |
|
|
|
|
Forfeited |
|
|
|
$ |
|
|
|
|
Outstanding as of October 2, 2016 |
|
|
|
$ |
|
|
|
|
Vested and exercisable as of October 2, 2016 |
|
|
|
$ |
|
|
|
|
Vested and expected to vest as of October 2, 2016 |
|
|
|
$ |
|
|
|
|
Stock options granted during the three month period ending October 2, 2016 have contractual lives of seven years. The weighted-average grant date fair value of stock options granted during the three months ended October 2, 2016 was $1.46 per share. The total fair value of shares vested during the three months ended October 2, 2016 was $0.5 million.
Determining Fair Value
The Company estimates the fair value of stock options granted using the Black-Scholes method. The assumptions used to determine the value of the Company’s stock options granted to employees during the three month period ended October 2, 2016 were as follows:
|
|
|
|
|
|
|
|
Expected term |
|
|
|
- |
|
years |
|
Expected volatility |
|
|
% |
- |
|
% |
|
Expected dividend yield |
|
- |
% |
|
|
|
|
Risk-free interest rate |
|
|
% |
- |
|
% |
|
Expected Term – The expected term represents the period of time the options are expected to be outstanding. The Company uses the simplified method, as permitted by the SEC, to calculate the expected term, as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected life in years. The simplified method is calculated as the average of the time-to-vesting and the contractual life of the options.
Expected Volatility – Expected volatility is based on the historical volatility of the Company’s common stock, which we believe will be indicative of future experience.
Expected Dividends – The Company has never paid dividends on its common stock and currently does not intend to do so in the near term, and accordingly, the dividend yield percentage is zero.
Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant with a term equal to the expected term of the stock option granted.
Share-Based Compensation Expense
Compensation expense recognized during the three month period ended October 2, 2016 was $0.3 million, and is included in selling, general and administrative expense. As of October 2, 2016, there was $0.4 million of total
15
unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of 3.3 years. The Company estimated expected forfeitures and is recognizing compensation expense only for those option grants expected to vest. The Company’s estimate of forfeitures may be adjusted throughout the requisite service period based on the extent to which actual forfeitures differ, or are likely to differ, from the Company’s previous estimates. At the end of the service period compensation cost will have been recognized only for those awards for which the employee has provided the requisite service.
Employee Stock Purchase Plan
Under the terms of the Company’s employee stock purchase plan ("ESPP"), eligible employees may authorize payroll deductions up to 5% of their base pay to purchase shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each six-month purchase period. A total of 750,000 shares were authorized under the ESPP. The purchase period began on August 1, 2016; therefore, no shares have been purchased under the Company’s ESPP as of October 2, 2016.
NOTE 12 – Commitments and Contingencies
The Company leases land, facilities, and equipment under various non-cancellable operating lease agreements expiring through August 31, 2024, which contain various renewal options. The Company also leases equipment under non-cancellable capital lease agreements expiring through June 30, 2024. The capital leases have interest rates ranging from 3.0% to 5.8%.
From time to time, the Company is a party to various litigation matters incidental to the conduct of its business. As of October 2, 2016, the Company is not presently a party to any legal proceedings, the resolution of which, management believes, would have a material adverse effect on its business, operating results, financial condition, or cash flows.
NOTE 13 – Segment Information
The Company’s operations are classified into four reportable business segments: Precision Components Group, 3DMT Group, Flanges and Fittings Group, and Wireless Group.
|
· |
|
The Precision Components Group companies provide highly engineered fabricated metal components using processes consisting of metal injection molding and precision metal stamping. Industries served include aerospace, automotive, consumer durables, electronic devices, firearms and defense, and medical and dental devices. |
|
· |
|
The 3DMT Group consists of our tooling product line, 3DMT (our 3D printing and additive manufacturing operations), and ATC. |
|
· |
|
The Flanges and Fittings Group consists of General Flange & Forge LLC (“GF&F”). GF&F provides custom machining solutions and special flange facings. |
|
· |
|
The Wireless Group focuses on wireless broadband technology related to propagation and optimization. It designs and develops hardware, including antennas, radios, and related accessories, used in broadband, industrial, and other wireless networks. Products are sold to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers, and other original equipment manufacturers. |
16
The historical results of Tekna Seal, which were included in the Precision Components Group segment, have been reflected as discontinued operations; therefore, historical segment information has been restated. Summarized segment information for the three month periods ended October 2, 2016 and September 27, 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
||||
|
|
October 2, |
|
September 27, |
|
||
|
|
2016 |
|
2015 |
|
||
Sales: |
|
|
|
|
|
|
|
Precision Components Group |
|
$ |
|
|
$ |
|
|
3DMT Group |
|
|
|
|
|
|
|
Flanges and Fittings Group |
|
|
|
|
|
|
|
Wireless Group |
|
|
|
|
|
|
|
Consolidated sales |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Operating costs: |
|
|
|
|
|
|
|
Precision Components Group |
|
$ |
|
|
$ |
|
|
3DMT Group |
|
|
|
|
|
|
|
Flanges and Fittings Group |
|
|
|
|
|
|
|
Wireless Group |
|
|
|
|
|
|
|
Consolidated operating costs |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss): |
|
|
|
|
|
|
|
Precision Components Group |
|
$ |
|
|
$ |
|
|
3DMT Group |
|
|
|
|
|
|
|
Flanges and Fittings Group |
|
|
|
|
|
|
|
Wireless Group |
|
|
|
|
|
|
|
Corporate (1) |
|
|
|
|
|
|
|
Total segment operating (loss) income |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
— |
|
Other (expense) income, net |
|
|
|
|
|
|
|
Non-operating expense |
|
|
|
|
|
|
|
Consolidated loss before income taxes and non-controlling interest |
|
$ |
|
|
$ |
|
|
(1) Corporate expense includes compensation and benefits, insurance, legal, accounting, consulting, and board of director’s fees.
NOTE 14 – Significant Customers
The concentration of the Company’s business with a relatively small number of customers may expose it to a material adverse effect if one or more of these large customers were to experience financial difficulty or were to cease being a customer for non-financial related issues. The Company’s revenue concentrations of 5% or greater are as follows:
|
|
|
|
|
|
|
October 2, |
|
September 27, |
|
|
Customer |
2016 |
|
2015 |
|
|
1 (b) |
|
% |
|
% |
|
2 (a) |
|
% |
|
% |
|
3 (a) |
|
% |
|
% |
|
4 (a) |
|
% |
|
% |
|
Total |
|
% |
|
% |
|
|
(a) |
|
Revenue from this customer is generated through our Precision Components Group segment. |
|
(b) |
|
Revenue from this customer is generated through our 3DMT Group segment. |
17
The Company’s accounts receivable concentrations of 5% or greater for the above-listed customers are as follows:
|
|
|
|
|
|
|
|
|
|
Percentage of Receivables |
|
|
|
||
|
|
October 2, |
|
June 30, |
|
|
|
Customer |
|
2016 |
|
2016 |
|
|
|
1 |
|
|
% |
|
% |
|
|
2 |
|
|
% |
|
% |
|
|
3 |
|
|
% |
|
% |
|
|
4 |
|
|
% |
|
% |
|
|
Total |
|
|
% |
|
% |
|
|
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this report and the consolidated financial statements and notes in the ARC Group Worldwide, Inc. (“ARC,” “our,” “we,” or “us”) Annual Report on Form 10-K for the fiscal year ended June 30, 2016, as filed with the Securities and Exchange Commission (“SEC”).
Cautionary Statement Concerning Forward-Looking Statements
The information contained in this Quarterly Report (this “Report”) may contain certain statements about ARC that are or may be “forward-looking statements,” that is, statements related to future, not past, events, including forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management of ARC and are subject to uncertainty and changes in circumstances and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Factors that could cause our results to differ materially from current expectations include, but are not limited to, factors detailed in our reports filed with the SEC, including further but not limited to those discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2016. In addition, these statements are based on a number of assumptions that are subject to change. The forward-looking statements contained in this Report may include all other statements in this document other than historical facts. Without limitation, any statements preceded or followed by, or that include the words “targets,” “plans,” “believes,” “expects,” “aims,” “intends,” “will,” “may,” “anticipates,” “estimates,” “approximates,” “projects,” “seeks,” “sees,” “should,” “would,” “expect,” “positioned,” “strategy,” or words or terms of similar substance or derivative variation or the negative thereof, are forward-looking statements. Forward-looking statements include statements relating to the following: (1) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, losses, and future prospects; (2) business and management strategies and the expansion and growth of ARC; (3) the effects of government regulation on ARC’s business; and (4) our plans, objectives, expectations and intentions generally.
There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. Additional particular uncertainties that could cause our actual results to be materially different than those expressed in forward-looking statements include: risks associated with our international operations; significant movements in foreign currency exchange rates; changes in the general economy, as well as the cyclical nature of our markets; availability and cost of raw materials, parts and components used in our products; the competitive environment in the areas of our planned industrial activities; our ability to identify, finance, acquire and successfully integrate attractive acquisition targets; expected earnings of ARC; the amount of and our ability to estimate known and unknown liabilities; material disruption at any of our significant manufacturing facilities; the solvency of our insurers and the likelihood of their payment for losses; our ability to manage and grow our business and execution of our business and growth strategies; our ability and the ability our customers to access required capital at a reasonable costs; our ability to expand our business in our targeted markets; the level of capital investment and expenditures by our customers in our strategic markets; our financial performance; our ability to identify, address and remediate any material weakness in our internal control over financial reporting; our ability to achieve or maintain credit ratings and the impact on our funding costs and competitive position if we do not do so; and other risks. Other unknown or unpredictable factors could also cause actual results to differ materially from those in any forward-looking statement.
Due to such uncertainties and risks, readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. ARC undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing contained herein shall be deemed to be a forecast, projection or estimate of the future financial performance of ARC unless otherwise expressly stated.
19
Overview
ARC Group Worldwide, Inc. is a leading, global advanced manufacturer offering a full suite of products and services to our customers, including: (i) metal injection molding (“MIM”); (ii) 3D metal and plastic printing (also referred to as “Additive Manufacturing”); (iii) precision metal stamping; (iv) traditional and clean room plastic injection molding; and (v) advanced rapid and conformal tooling. Through our diverse product offering, we provide our customers with a holistic prototyping and full-run production solution for both precision metal and plastic fabrication. We further differentiate ourselves from our competitors by providing innovative, custom capabilities, which improve high-precision manufacturing efficiency and speed-to-market for our customers.
Our mission is to accelerate the adoption of key technologies, such as automation, robotics, production software, and 3D printing, in traditional manufacturing, thereby benefiting from the elimination of inefficiencies currently present in the global supply chain. Further, we seek to create innovative ways to streamline and improve the overall manufacturing process, including offering instant online quoting, in-house rapid and advanced conformal tooling, and a full suite of prototype-to-production capabilities.
More specifically, the two key pillars of our business strategy are centered on the following areas:
|
· |
|
Holistic Manufacturing Solution. The metal and plastic fabrication industries are highly fragmented sectors with numerous single-solution providers. Given the inefficiencies associated with working with these disjointed groups, many manufacturers seek to improve their supplier base by working with more scaled, holistic providers. Our strategy is to facilitate the consolidation and streamlining of global supply chains by offering a holistic solution to our customers’ manufacturing needs. In particular, ARC provides a “one-stop shop” solution to our customers by offering a spectrum of highly advanced products, processes, and services, thereby delivering highly-engineered precision components at efficient production yields. |
|
· |
|
Accelerating Speed-to-Market. The traditional prototype-to-production process is often subject to lengthy bottlenecks and is characterized by inefficient price quoting delays, time-consuming tooling procedures, and outdated production methodologies. To differentiate itself from competitors, ARC focuses on reducing inefficiencies in the development cycle by offering the seamless integration of a wide-variety of proprietary technologies in order to dramatically reduce the time and cost associated with new product development. Specifically, the Company has developed rapid and instant online quoting solutions, rapid prototype solutions, short-run production services, in-house rapid and advanced conformal tooling, and rapid full production capabilities. |
Separately, we believe that U.S. manufacturing is poised for a rejuvenation as global wage disparities mitigate and traditional labor-intensive processes are displaced by technology. We believe these macroeconomic trends may aid in the adoption of our business strategy.
Our key fundamental strengths are built upon core capabilities, including:
|
· |
|
Metal Injection Molding. We are a large and well-respected MIM provider. As a pioneer of MIM technology, and driven by our material science understanding, powder metallurgy experience, and established global facilities, we are one of the most advanced MIM operators in the marketplace. ARC provides high-quality, complex, precise net-shape metal components to market-leading companies in numerous sectors, including the medical and dental, firearm and defense, automotive, aerospace, consumer durable, and electronic device industries. Further, our process is highly automated, utilizing advanced robotics and automation to ensure high levels of quality and efficiency. |
20
|
· |
|
3D Printing. We offer a variety of 3D printing solutions, with an emphasis on: (i) metal 3D printing; and (ii) rapid and advanced conformal tooling. In general, given promising signs of growth and related barriers to entry, we believe the metal 3D printing sector to be one of the more attractive segments of the overall Additive Manufacturing industry. Furthermore, metal 3D printing, while a complex technology still in its early stages, shares several fundamental similarities with our MIM business, thereby helping to accelerate our research and development. Separately, our metal 3D printing capabilities enable ARC to offer a variety of new services, including rapid prototyping, rapid tooling and short-run production, helping our customers improve their product speed-to-market. Given our established customer base, diverse metallurgy background, and scalable injection molding capabilities, we believe we are well-positioned in the industrial metal 3D printing market. |
|
· |
|
Additional Metal and Plastic Fabrication Capabilities. We offer a number of additional specialty metal and plastic fabrication capabilities that enable us to provide our customers with a full suite of custom-component products. Our specialty capabilities include precision stamping, magnesium injection molding, computer numerical control machining, plastic injection molding (including medical clean room applications), and fitting and flange manufacturing. |
|
· |
|
Wireless. Our wireless business designs and develops hardware, including antennas, radios, and related accessories, used in broadband and other wireless networks. Products are sold to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value-added resellers, and other original equipment manufacturers (“OEM”). Further, we believe there is an opportunity to increase utilization of our wireless technology to wirelessly connect the manufacturing floor and industrial products/applications, as the world moves to a more wireless based framework. |
Our overall growth strategy is centered on:
|
· |
|
driving organic improvement through the expansion and cross-selling of our core services to existing clients; |
|
· |
|
accelerating the adoption of our technology by new customers in traditional manufacturing markets; |
|
· |
|
expanding our holistic service offerings through strategic vertical and horizontal acquisitions; and |
|
· |
|
improving financial and operational results from the implementation of operational best practices. |
Accordingly, all of our business divisions are managed consistently with this strategy in order to drive organic sales growth and operational efficiencies, while improving quality, speed, and service to our customers.
Results of Operations – Three Months Ended October 2, 2016 and September 27, 2015
The following tables summarize our sales and gross profit from continuing operations for the periods indicated, by reporting segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||||||
|
|
October 2, 2016 |
|
September 27, 2015 |
|
||||||
|
|
Amount |
|
Percent of total |
|
Amount |
|
Percent of total |
|
||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
Precision Components Group |
|
$ |
|
|
|
|
$ |
|
|
|
|
3DMT Group |
|
|
|
|
|
|
|
|
|
|
|
Flanges and Fittings Group |
|
|
|
|
|
|
|
|
|
|
|
Wireless Group |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
Precision Components Group |
|
$ |
|
|
|
|
$ |
|
|
|
|
3DMT Group |
|
|
|
|
|
|
|
|
|
|
|
Flanges and Fittings Group |
|
|
|
|
|
|
|
|
|
|
|
Wireless Group |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
$ |
|
|
|
|
21
Sales
For the Three Months Ended October 2, 2016 Compared to the Three Months Ended September 27, 2015
Sales from continuing operations during the three month period ended October 2, 2016, totaled $26.8 million, representing an increase of $3.2 million, or 13.6%, from $23.6 million during the three month period ended September 27, 2015. The change in sales by reportable segment was as follows:
|
· |
|
Precision Components Group sales were $19.3 million during the three month period ended October 2, 2016, representing an increase of approximately $2.2 million, or 12.9%, as compared with sales of $17.1 million in the prior year period. The increase in sales was primarily due to higher MIM sales of $2.1 million. MIM sales increased primarily as a result of higher sales to customers in the firearm and defense, and automotive industries. |
|
· |
|
3DMT Group sales were $6.1 million during the three month period ended October 2, 2016, representing an increase of approximately $1.0 million, or 19.6%, as compared with sales of $5.1 million in the prior year period. The increase in sales was primarily due to higher plastic injection molding sales of $1.8 million, partially offset by lower tooling sales of $0.7 million as more of the tool production is for internal ownership and use. |
|
· |
|
Flanges and Fittings Group sales were $1.1 million during the three month period ended October 2, 2016, representing a decrease of approximately $0.1 million, or 8.3%, as compared with sales of $1.2 million in the prior year period. The decrease was primarily due to lower sales to customers in the oil and gas industry and increased competition. |
|
· |
|
Wireless Group sales were $0.2 million during the three month period ended October 2, 2016 representing a decrease of approximately $0.1 million as compared with sales of $0.3 million in the prior year period. The decrease in sales is primarily due to increased competition in the frequency space and applications in which our products are used. |
Gross Profit
Gross profit is affected by a number of factors including product mix, cost of labor and raw materials, unit volumes, pricing, competition, new products and services, new customer programs, and capacity utilization. In the case of new customer programs, profitability normally lags revenue growth due to product start-up costs, lower manufacturing volumes in the start-up phase, operational inefficiencies, and under-absorbed overhead. Gross margin often improves as manufacturing volumes increase, which improves our utilization rates and overhead absorption. As a result of these various factors, our gross margin varies from period to period.
For the Three Months Ended October 2, 2016 Compared to the Three Months Ended September 27, 2015
On a consolidated basis gross profit from continuing operations was $5.0 million during the three month period ended October 2, 2016, representing an increase of approximately $0.9 million, or 22.0%, as compared with gross profit of $4.1 million in the prior year period. Gross margin increased to 18.6% in the three month period ended October 2, 2016, compared with 17.4% in the three month period ended September 27, 2015. Gross profit by reportable segment was as follows:
|
· |
|
Precision Components Group gross profit was $3.9 million during the three month period ended October 2, 2016, representing an increase of approximately $1.2 million, or 44.4%, as compared with gross profit of $2.7 million in the prior year period. Gross margin increased to 20.4% in the three month period ended October 2, 2016, compared with 15.8% in the three month period ended September 27, 2015. The primary reason for the increase in gross profit was due to higher production volume at our MIM facilities in Colorado. The primary reason for the increase in gross margin percentage was due to increased production and improved efficiency at our MIM facilities in Colorado. |
22
|
· |
|
3DMT Group gross profit was $0.7 million during the three month period ended October 2, 2016, representing a decrease of $0.2 million, or 22.2%, as compared with gross profit of $0.9 million in the prior year period. Gross margin decreased to 10.9% in the three month period ended October 2, 2016, compared with 17.8% in the three month period ended September 27, 2015. The primary reason for the decrease in gross profit was lower tooling sales as we are building more tools for internal ownership and use. Gross margin percentage decreased on tooling sales due to higher labor and contracting costs as we are building more complex products. |
|
· |
|
Flanges and Fittings Group gross profit was $0.3 million during the three month periods ended October 2, 2016 representing a decrease of $0.1 million, or 25.0%, as compared with gross profit of $0.4 million in the prior year period. The decrease in gross profit was due to certain non-recurring refunds of duties received in the prior year. |
|
· |
|
Wireless Group gross profit was $0.1 million during the three month periods ended October 2, 2016 and September 27, 2015. |
The following paragraphs discuss other items affecting the results of our operations for the three months ended October 2, 2016 and September 27, 2015.
Selling, General and Administrative Expenses
Selling, general and administrative expense (“SG&A”) from continuing operations totaled $5.0 million, or 18.8% of sales, during the three month period ended October 2, 2016, compared with $4.0 million, or 17.0% of sales, during the three month period ended September 27, 2015. The increase in SG&A expense during the three month period ended October 2, 2016 was primarily due to higher labor related costs of $0.7 million, of which $0.3 million was related to stock based compensation, and higher outside service fees of $0.3 million.
Interest Expense, Net
Interest expense, net was $1.1 million during the three month periods ended October 2, 2016 and September 27, 2015. In connection with the refinancing of the Company’s senior secured credit facility and the retirement of debt resulting from proceeds from the sale of Tekna Seal, both in September 2016, the Company expects interest expense will decrease during the subsequent quarters in fiscal year 2017.
Loss on Extinguishment of Debt
During the three months ended October 2, 2016, approximately $0.7 million of unamortized deferred financing costs were expensed as a result of the extinguishment of our First Amended and Restated Credit Agreement.
Discontinued Operations
In September 2016, the Company sold its subsidiary Tekna Seal LLC pursuant to the terms and conditions of a Membership Interests Purchase Agreement. The sale covered all of the membership interests of Tekna Seal, including 95.7% owned by the Company and 4.3% held by the Tekna Seal minority stakeholders. As a result of this transaction, income from continuing operations excludes the income from discontinued operations, before tax of $0.1 million and the gain on disposition of this business, after tax of $4.2 million.
Income Tax Benefit
Income tax benefit from continuing operations was $1.3 million for the three month period ended October 2, 2016, compared to $0.4 million for the three month period ended September 27, 2015.
The primary reason for the increase in the tax benefit in the three month period ended October 2, 2016 was our net loss and the amortization of indefinite-lived intangible assets that were not available to offset existing deferred tax assets (termed a “naked credit”).
23
Liquidity and Capital Resources
As of October 2, 2016, we had cash and cash equivalents of $3.9 million. We anticipate our cash on hand and cash flows from operations will be sufficient to finance our operations for the next twelve months. In order to provide additional liquidity in the future and to help support our strategic goals, we have a senior secured revolving loan, with a current borrowing capacity of up to $25.0 million. After consideration of $3.1 million of borrowings outstanding, our remaining borrowing capacity was $21.9 million at October 2, 2016. Any additional borrowings under the senior secured revolving loan are subject to compliance with the terms of our Senior ABL Credit Facility.
Under the new Senior ABL Credit Facility with Citizens Bank, N.A., we will not maintain any cash on hand in our domestic bank accounts by design. Instead, we maintain a $25.0 million asset based revolver loan as part of our loan agreement that includes an automatic cash sweep feature that identifies any cash available in our bank accounts at the end of a banking business day and then applies that cash to reduce our outstanding revolver loan balance for that day to fund our continuing operations. The reduction serves to decrease our daily interest expense to the extent cash is available and swept over to reduce the revolver loan. Disbursements are paid daily from cash being made available under our revolver loan based on a borrowing base calculation.
Cash held in financial institutions outside the United States totaled $1.2 million and $1.6 million as of October 2, 2016 and June 30, 2016, respectively. Our Hungarian subsidiary, where these funds are held, is taxed in a similar manner to our domestic subsidiaries. Thus, we would not incur a material tax obligation should we decide to repatriate these funds.
Operating Activities
Cash provided by operating activities decreased $1.1 million to $0.4 million for the three months ended October 2, 2016, as compared to $1.5 million of cash provided by operating activities for the three months ended September 27, 2015, primarily due to the following:
|
· |
|
A pre-tax gain of $5.7 million recognized on the sale of our subsidiary, the cash from which is recognized as an investing activity; |
|
· |
|
Deferred income taxes decreased $1.0 million in the first quarter of fiscal year 2017 primarily due to applying an annualized effective tax rate to the quarter results of $0.5 million and a reduction in deferred taxes attributable to the subsidiary that was sold of $0.4 million; |
|
· |
|
The reductions in cash provided by operating activities were partially offset by an increase in net income of $4.1 million; and |
|
· |
|
An increase in cash provided by changes in working capital of $1.3 million. Cash provided by operations in fiscal year 2017 was due in part to cash received from income tax refunds of approximately $0.9 million. Increases in accounts receivable, inventory, accounts payable and accrued expenses were primarily due to higher sales volume. In addition, accrued expenses increased due to accruals for professional fees related to the sale of Tekna Seal and the refinancing of debt. |
Investing Activities
Cash provided by investing activities increased $9.8 million to $9.2 million for the three months ended October 2, 2016 as compared to net cash used in investing activities of $0.6 million for the three months ended September 27, 2015, primarily due to the following:
|
· |
|
Proceeds received from the sale of our subsidiary of $10.5 million; and |
|
· |
|
Partially offset by an increase in cash used to purchase property and equipment of $1.3 million. |
Financing Activities
Cash used in financing activities increased $7.8 million to $9.4 million in the three months ended October 2, 2016, as compared to cash used of $1.6 million in the three months ended September 27, 2015, primarily due to the following:
|
· |
|
Higher net principal payments on our long-term debt primarily due to cash received of $10.5 million from the sale of our subsidiary, which was applied against our debt, partially offset by borrowings. |
24
Debt and Credit Arrangements
For a discussion of our long-term debt, see Note 8, Debt, to our condensed consolidated financial statements in Part I, Item 1 to this Report incorporated herein by reference thereto. See Note 7, Debt, to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 for more information about our long-term debt.
The descriptions of the Senior ABL Credit Facility and the Subordinated Term Loan Agreement (together, our “Credit Facilities”) do not purport to be complete and are subject to, and are qualified in their entirety by, the full text of the respective documents.
Financial Ratio Covenants
The terms and conditions of the Credit Facilities require us to comply with a number of financial and other covenants, such as maintaining debt service coverage and leverage ratios in certain situations and maintaining insurance coverage. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default on the credit agreements or other debt instruments, our financial condition would be adversely affected.
Non-compliance by us with any of the covenants would constitute events of default under both of the Credit Facilities pursuant to cross-default provisions and could result in acceleration of payment obligations for all outstanding principal and interest for loans made under both of the Credit Facilities, unless such defaults were waived or subject to forbearance by the respective creditors.
Senior ABL Credit Facility Financial Ratios. Our Senior ABL Credit Facility contains a financial ratio covenant, summarized as follows:
Fixed Charge Coverage Ratio . We may not permit the Fixed Charge Coverage Ratio, as of the last day of any period of four consecutive fiscal quarters, to be less than the greater of (i) 1.10 to 1.00 and (ii) the maximum fixed charge coverage ratio or equivalent ratio permitted under the Subordinated Loan Agreement. The Fixed Charge Coverage Ratio is defined as the ratio of (a) Consolidated EBITDA minus the unfinanced portion of capital expenditures minus expense for taxes paid in cash; to (b) fixed charges, all calculated on a consolidated basis in accordance with GAAP.
The summary calculations of our Senior ABL Credit Facility Fixed Charge Coverage Ratio as of October 2, 2016 is as follows:
|
|
|
|
|
(in thousands, except ratio) |
|
Amount |
|
|
Consolidated EBITDA |
|
$ |
|
|
Less unfinanced portion of capital expenditures |
|
|
|
|
Less expense for taxes paid in cash |
|
|
|
|
Coverage Amount (a) |
|
$ |
|
|
Fixed Charges (b) |
|
$ |
|
|
Fixed Charge Coverage Ratio (a:b) |
|
|
1.54:1.00 |
|
25
Subordinated Loan Agreement Financial Ratios . Our Subordinated Loan Agreement contains the following financial ratio covenants, summarized as follows:
Minimum Fixed Charge Coverage Ratio . We may not permit the Minimum Fixed Charge Coverage Ratio, as of the last day of any fiscal quarter ending during any period set forth in the table below, to be less than the ratio set forth opposite such period in the table below. The Fixed Charge Coverage Ratio is defined as the ratio of (a) Consolidated EBITDA minus the unfinanced portion of capital expenditures minus expense for taxes paid in cash (other than certain federal and state taxes excluded under the McLarty Second Amendment); to (b) fixed charges, all calculated on a consolidated basis in accordance with GAAP.
|
|
|
Period |
|
Fixed Charge Coverage Ratio |
March 27, 2016 through September 24, 2016 |
|
1.00:1.00 |
September 25, 2016 through March 25, 2017 |
|
1.00:1.00 |
March 26, 2017 through September 23, 2017 |
|
1.05:1.00 |
September 24, 2017 through March 24, 2018 |
|
1.10:1.00 |
March 25, 2018 through September 29, 2018 |
|
1.15:1.00 |
September 30, 2018 and thereafter |
|
1.20:1.00 |
The summary calculation of our Subordinated Loan Agreement Fixed Charge Coverage Ratio as of October 2, 2016 is as follows:
|
|
|
|
|
(in thousands, except ratio) |
|
Amount |
|
|
Consolidated EBITDA |
|
$ |
|
|
Less unfinanced portion of capital expenditures |
|
|
|
|
Less expense for taxes paid in cash |
|
|
|
|
Coverage Amount (a) |
|
$ |
|
|
Fixed Charges (b) |
|
$ |
|
|
Fixed Charge Coverage Ratio (a:b) |
|
|
1.54:1.00 |
|
Maximum Total Leverage Ratio . We may not have a Total Leverage Ratio, as of the last day of any fiscal quarter ending during any period set forth in the table below, exceed the ratio set forth opposite such period in the table below. The Total Leverage Ratio means the ratio of (a) our funded indebtedness as of such date, to (b) Consolidated EBITDA for the Test Period ended as of such date.
|
|
|
|
Period |
|
Total Leverage Ratio |
|
March 27, 2016 through September 24, 2016 |
|
5.50:1.00 |
|
September 25, 2016 through December 24, 2016 |
|
5.00:1.00 |
|
December 25, 2016 through March 25, 2017 |
|
4.50:1.00 |
|
March 26, 2017 through June 29, 2017 |
|
4.25:1.00 |
|
June 30, 2017 through September 23, 2017 |
|
4.00:1.00 |
|
September 24, 2017 and thereafter |
|
3.50:1.00 |
|
The summary calculations of our Subordinated Loan Agreement Total Leverage Ratio as of October 2, 2016, is as follows:
|
|
|
|
|
(in thousands, except ratio) |
|
Amount |
|
|
Funded Indebtedness (a) |
|
$ |
|
|
Consolidated EBITDA (b) |
|
$ |
|
|
Maximum Total Leverage Ratio (a:b) |
|
|
3.91:1.00 |
|
Compliance with Financial Ratio Covenants
As of October 2, 2016, we were in compliance with our debt covenants under our Senior ABL Credit Facility and our Subordinated Loan Agreement.
26
GAAP to Non-GAAP Reconciliation
Fixed Charges and Consolidated EBITDA used in our debt covenant calculations are non-GAAP financial measures. We have provided this non-GAAP financial information to aid in better understanding of our financial ratios as used in our debt covenant calculation. The methodology used is defined in our debt agreements. Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Fixed Charges consist of interest payments, principal payments on our debt, and capital lease payments for the prior four quarters.
Consolidated EBITDA used in our debt covenant calculations is based on the sum of the prior four quarter actual amounts. The reconciliation of GAAP net income to Consolidated EBITDA to is as follows (in thousands):
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For the twelve months ended: |
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October 2, 2016 |
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Net income |
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$ |
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Share-based compensation |
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Interest expense, net |
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Income taxes |
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Depreciation and amortization |
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Transaction related expenses (1) |
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Restructuring and severance expenses |
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Pro-forma EBITDA adjustment to exclude discontinued subsidiary |
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Consolidated EBITDA (2) |
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$ |
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(1) |
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Transaction related expenses relate to legal fees incurred to amend certain debt agreements, loss on extinguishment of debt, charges related to the sale of our non-core subsidiary and costs incurred to relocate a facility. |
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(2) |
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Consolidated EBITDA excludes interest expense, net and income taxes because these items are associated with our capitalization and tax structures. Consolidated EBITDA excludes depreciation and amortization expense because these non-cash expenses reflect the impact of prior capital expenditure decisions which may not be indicative of future capital expenditure requirements. Share-based compensation, transaction related costs, restructuring and severance expenses, and pro-forma EBITDA adjustment to exclude discontinued subsidiary are adjustments made in accordance with our bank debt covenants. |
Off Balance Sheet Arrangements
We had no off-balance sheet arrangements that would have a material effect on our financial position, results of operations or cash flows as of October 2, 2016.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein, including estimates about the effects of matters or future events that are inherently uncertain. Policies determined to be critical are those that have the most significant impact on our financial statements and require management to use a greater degree of judgment and/or estimates. For a discussion of our critical accounting policies, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, in our Form 10-K for the fiscal year ended June 30, 2016.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to permissive authority under Regulation S-K, Rule 305, we have omitted Quantitative and Qualitative Disclosures About Market Risk.
27
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings with the SEC is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As of the end of the period covered by this Report, and under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, we have concluded that our disclosure controls and procedures were not effective as of October 2, 2016, at the reasonable assurance level due to weaknesses in our internal control over financial reporting.
We previously reported material weaknesses that were identified as of June 30, 2016. Our information technology and accounting infrastructure was inadequate, which could result in the failure to perform timely and effective reviews at a precision necessary to identify a material error.
Changes in Internal Control over Financial Reporting
To address the material weaknesses associated with our information technology and accounting infrastructure, remediation actions taken in fiscal year 2017 include:
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· |
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Upgrade to the latest version of the enterprise resource planning system used at AFT; and |
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· |
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Strengthen the documentation of processes, procedures, and the review and approval of our financial activities at our smaller facilities. |
During the first quarter of fiscal year 2017, we implemented the following changes in our internal control over financial reporting to address the previously reported material weakness and to enhance our overall financial control environment:
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· |
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We sold Tekna Seal, which was one of our smaller facilities. We are in the process of moving the accounting for GF&F to Kecy, which has a larger accounting staff with better segregation of duties. We are improving the documentation of process and procedures at 3DMT and Thixoforming. We have also enhanced our process to review and approve the financial records of ARC Wireless. |
The audit committee directed management to implement remediation measures and is monitoring their implementation. Certain remediation measures may extend into fiscal year 2018. In addition, under the direction of the audit committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.
Management believes the measures described above and other procedures that will be implemented will largely remediate the control deficiencies we have identified and strengthen our internal control over financial reporting. However, the implementation of certain mitigating processes and procedures is dependent on certain factors, including, but not limited to, our financial performance. Management is committed to continuous improvement of our internal control processes and will continue to evaluate and work to improve internal control over financial reporting.
Except as described above, there have been no changes in our internal control over financial reporting during the quarterly period ended October 2, 2016, that would have materially affected, or are reasonably likely to materially affect, our control over financial reporting.
28
There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.
EXHIBIT INDEX
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Exhibit Number |
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Description |
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2.1* |
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Membership Interest Purchase Agreement, dated September 30, 2016, between Quadrant Metals Technologies LLC, Doug McCarron and Dianna Quasha and Winchester Electronics Corporation. Schedules to the Membership Interest Purchase Agreement have been omitted pursuant to Item 601 (b)(2) of Regulation S-K. The Company will furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request. |
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10.1 |
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Second Amended and Restated Credit Agreement by and among ARC Group Worldwide, Inc. and certain of its subsidiaries as borrowers, and Citizens Bank, N.A., dated as of September 29, 2016, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on October 3, 2016. |
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10.2 |
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Amended and Restated Guarantee and Collateral Agreement by and among ARC Group Worldwide, Inc. and certain of its subsidiaries as guarantors, and Citizens Bank, N.A., dated September 29, 2016, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on October 3, 2016. |
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31.1* |
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Officers’ Certifications of Periodic Report pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
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31.2* |
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Officers’ Certifications of Periodic Report pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
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32.1& |
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Officers’ Certifications of Periodic Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
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101.INS* |
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XBRL Instance Document |
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101.SCH* |
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XBRL Taxonomy Schema |
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101.CAL* |
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XBRL Taxonomy Calculation Linkbase |
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101.DEF* |
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XBRL Taxonomy Definition Linkbase |
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101.LAB* |
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XBRL Taxonomy Label Linkbase |
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101.PRE* |
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XBRL Taxonomy Presentation Linkbase |
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* Filed with this Form 10-Q.
& This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.
29
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.
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ARC GROUP WORLDWIDE, INC. |
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Date: November 10, 2016 |
/s/ Jason T. Young |
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Name: |
Jason T. Young |
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Title: |
Principal Executive Officer |
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Date: November 10, 2016 |
/s/ Drew M. Kelley |
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Name: |
Drew M. Kelley |
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Title: |
Principal Financial Officer and |
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Principal Accounting Officer |
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30
EXHIBIT 2.1
MEMBERSHIP INTERESTS PURCHASE AGREEMENT
by and among
Quadrant Metals Technologies LLC,
Doug McCarron, and
Dianna Quasha
As Sellers
and
Winchester Electronics Corporation
As Purchaser
Dated as of September 30, 2016
TABLE OF CONTENTS
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Page |
Section 1. |
Defined Terms. |
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1.1 |
Definitions |
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1.2 |
Additional Defined Terms |
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Section 2. |
Sale and Purchase of Interests. |
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2.1 |
Purchase and Sale of Interests |
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2.2 |
Purchase Price |
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2.3 |
Closing |
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2.4 |
Payment of Purchase Price |
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2.5 |
Working Capital Adjustment |
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2.6 |
Working Capital Adjustment Procedure |
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2.7 |
Allocation of Purchase Price |
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2.8 |
Reimbursement |
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Section 3. |
Representations and Warranties of Sellers Regarding the Company. |
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3.1 |
Good Standing and Limited Liability Company Power of the Company |
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3.2 |
Capitalization; Title to Interests |
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3.3 |
Subsidiary/Other Ownership Interest |
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3.4 |
Enforceability |
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3.5 |
No Conflicts |
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3.6 |
Governmental Approvals and Consents |
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3.7 |
Brokers |
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3.8 |
Compliance with Laws and Regulations; Permits |
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3.9 |
Financial Information |
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3.10 |
Indebtedness and Guarantees |
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3.11 |
Absence of Certain Changes or Events |
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3.12 |
Absence of Litigation |
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3.13 |
Employee Benefit Plans |
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3.14 |
Employment and Labor Matters |
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3.15 |
Real Property |
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3.16 |
Title to Assets; Sufficiency and Condition of Assets |
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3.17 |
Taxes |
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3.18 |
Environmental Matters |
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3.19 |
Intellectual Property |
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3.20 |
Contracts |
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3.21 |
Insurance |
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3.22 |
Warranties and Products Liability |
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3.23 |
Affiliate Transactions |
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3.24 |
Books and Records |
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3.25 |
Customers and Suppliers |
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Section 4. |
Representations and Warranties of Purchaser. |
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4.1 |
Good Standing and Corporate Power |
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i
4.2 |
Access |
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4.3 |
Authorization |
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4.4 |
No Conflicts |
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4.5 |
Governmental Approvals and Filings |
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4.6 |
Brokers |
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4.7 |
Acquisition of Interests |
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4.8 |
Non-Reliance of Purchaser |
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Section 5. |
Covenants of Both Parties |
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5.1 |
Confidentiality |
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5.2 |
Public Announcements |
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Section 6. |
Other Covenants. |
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6.1 |
Further Assurances |
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6.2 |
Access to Records After Closing |
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6.3 |
Tax Matters |
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6.4 |
Directors’ and Officers’ Indemnification and Insurance |
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6.5 |
Release |
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Section 7. |
Indemnification and Related Matters. |
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7.1 |
Indemnification by Sellers |
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7.2 |
Indemnification by Purchaser |
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7.3 |
Expiration of Representations, Warranties and Covenants |
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7.4 |
Indemnification Claims |
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7.5 |
Defense of Third Party Actions |
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7.6 |
Subrogation |
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7.7 |
Exclusivity |
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7.8 |
Characterization of Indemnification Payment |
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Section 8. |
Miscellaneous Provisions. |
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8.1 |
Expenses |
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8.2 |
Waiver |
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8.3 |
Disclosure Schedule |
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8.4 |
Exclusivity of Agreement |
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8.5 |
Inurement |
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8.6 |
Governing Law |
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8.7 |
Venue, Jurisdiction and Forum |
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8.8 |
Time of the Essence |
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8.9 |
Notices |
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8.10 |
Table of Contents and Headings |
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8.11 |
Assignment |
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8.12 |
Counterparts; Facsimile Signatures |
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8.13 |
Severability |
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8.14 |
Entire Agreement |
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8.15 |
Waiver |
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8.16 |
Amendments |
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8.17 |
Interpretation of Agreement |
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ii
Schedule A |
Membership Interests |
Schedule 1.1 |
Pro Forma Working Capital Calculation |
EXHIBIT A |
Employment Agreement |
EXHIBIT B |
Noncompete Agreements |
EXHIBIT C |
Transition Services Agreement |
Disclosure Schedule
iii
MEMBERSHIP INTERESTS PURCHASE AGREEMENT
THIS MEMBERSHIP INTERESTS PURCHASE AGREEMENT (this “ Agreement ”) is entered into as of September 30, 2016, by and among Quadrant Metals Technologies LLC, a Delaware limited liability company (“ Quadrant ”) a wholly-owned subsidiary of ARC Group Worldwide, Inc., a Utah corporation (“ Parent ”), Doug McCarron (“ McCarron ”) and Diana Quasha (“ Quasha ” and collectively with McCarron and Quadrant, “ Sellers ” and each individually, a “ Seller ”), and Winchester Electronics Corporation, a Delaware corporation (“ Purchaser ”).
R ECITALS
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A. Sellers own all of the membership interests (the “ Interests ”) of Tekna Seal LLC, a Florida limited liability company (the “ Company ”). |
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B. Purchaser wishes to acquire one hundred percent (100%) of the Interests from Sellers, in the respective amounts set forth on Schedule A attached hereto, on the terms set forth in this Agreement. |
Agreement
In consideration of the covenants and agreements contained herein and the other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Purchaser and Sellers agree as follows:
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1.1 Definitions. For purposes of this Agreement (including the Disclosure Schedule) the following terms have the meanings ascribed to them in this Section 1.1 : |
“ Affiliate ” means, with respect to a Person, any other Person who directly or indirectly owns or controls, or is owned or controlled by, or is under direct or indirect common ownership or control with such Person. Without limiting the generality of the foregoing, a Person shall be deemed to “own” another Person if it owns, directly or indirectly, more than 50% of the capital stock or other equity interest of such other Person.
“ Applicable Law ” means any federal, state, local, municipal, foreign or other law, statute, legislation, constitution, principle of common law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement, requirement, specification, determination, decision, opinion or interpretation that is, as of the date of this Agreement, issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise in effect by or under the authority of any Governmental Body.
1
“ Business ” means the business of the Company consisting of designing, manufacturing, marketing and selling of hermetically sealed glass-to-metal and ceramic-to-metal feedthroughs, connectors, headers and optical windows.
“ Business Day ” means any day other than a Saturday, Sunday or a day in which banks in Florida or Connecticut are not open for business.
“ Change of Control Obligation ” means any payment that is or becomes due or owing by the Company as a result of the consummation of the sale of the Interests, including, any change of control, retention bonus, severance or other special payments owed to any employees of the Company
“ Charter Documents ” with respect to any particular entity shall mean: (a) if a corporation, the articles or certificate of incorporation and the bylaws; (b) if a general partnership, the partnership agreement and any statement of partnership; (c) if a limited partnership, the limited partnership agreement and the certificate of limited partnership; (d) if a limited liability company, the certificate of formation or articles of organization and the limited liability company agreement or operating agreement; (e) if another type of Entity, any other charter or similar document adopted or filed in connection with the creation, formation or organization of an Entity; (f) all shareholders’ agreements, voting agreements, voting trust agreements, joint venture agreements, registration rights agreements or other agreements or documents relating to the organization, management or operation of any Entity, or relating to the rights, duties and obligations of the equity holders of any Entity; and (g) any amendment or supplement to any of the foregoing.
“ Claim Period ” means the twelve-month period until the first anniversary of the Closing Date.
“ Closing Date ” means the date of this Agreement.
“ Closing Date Tax Benefits ” means the Income Tax deductions of Sellers arising on or prior to the Closing Date from or relating to the payment of the Transaction Expenses of Sellers on or prior to the Closing Date, but only to the extent any such deductions are permitted under the Code or applicable U.S. Treasury Regulations for the tax period ending on the Closing Date.
“ Closing Indebtedness ” means all outstanding Indebtedness of the Company as of the Closing Date, other than Permitted Indebtedness.
“ Closing Indebtedness Payoff Amount ” means the aggregate amount of Closing Indebtedness.
“ Code ” means the Internal Revenue Code of 1986, as amended.
2
“ Confidential Information ” means any and all information, whether technical, business, proprietary, financial or otherwise, of or relating to a party, its Affiliates or its business that reasonably appears to be proprietary or confidential in nature because of legends or other markings, the nature of the information itself or the circumstances of disclosure, whether such information is disclosed in writing, through electronic media, orally, visually or in any other form.
“ Contemplated Transactions ” means the sale of the Interests and all other transactions and matters contemplated by this Agreement and the other Transaction Agreements.
“ Contract ” shall mean any contract, agreement, loan or credit agreement, note, bond, mortgage, indenture, deed of trust, license, franchise, Permit, lease, joint venture or other instrument, obligation, understanding, right or arrangement.
“ Damages ” means all actual out-of-pocket losses, damages (but excluding punitive damages, consequential damages, exemplary damages, incidental damages and any lost profits and decline in value), liabilities, claims, demands, settlements, judgment awards, fines, penalties, fees (including any reasonable attorneys’ fees), charges or costs. Notwithstanding the foregoing, for the purposes of computing the amount of Damages incurred by any Person: (a) there shall be deducted an amount equal to the amount of any net tax benefit directly or indirectly received or receivable by such Person or any of such Person’s Affiliates in connection with such Damages or the circumstances giving rise thereto; and (b) there shall be deducted an amount equal to the amount of any insurance proceeds, indemnification payments, contribution payments, or reimbursements directly or indirectly received or receivable by such Person or any of such Person’s Affiliates in connection with such Damages or the circumstances giving rise thereto.
“ Disclosure Schedule ” means the Disclosure Schedule attached to this Agreement. The contents of each of the contracts and other documents referred to in the Disclosure Schedule shall be deemed to be incorporated and referred to in the Disclosure Schedule as though set forth in full therein.
“ Due Inquiry ” means inquiry of Parent, Quadrant or Company employees having responsibility relating to the relevant matter.
“ Employee Plan ” means any plan, program, agreement, policy or arrangement, whether or not reduced to writing, and whether covering a single individual or a group of individuals, that is (a) a welfare plan within the meaning of Section 3(1) of ERISA, (b) a pension benefit plan within the meaning of Section 3(2) of ERISA, (c) a stock bonus, stock purchase, stock option, restricted stock, stock appreciation right, profit sharing or similar equity-based plan or agreement, or (d) any other deferred-compensation, retirement, severance, retention, change-in-control, leave, vacation, welfare-benefit, bonus, incentive or fringe-benefit plan, program, agreement or arrangement.
3
“ Employment Agreement ” means the employment agreement, substantially in the form attached hereto as Exhibit A , to be entered into by and between the Company and Doug McCarron.
“ Encumbrance ” means any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, equity, trust, equitable interest, claim, preference, right of possession, lease, tenancy, license, encroachment, covenant, infringement, interference, Order, proxy, option, right of first refusal, preemptive right, community property interest, legend, defect, impediment, exception, reservation, limitation, impairment, imperfection of title, condition or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset).
“ Environmental Law ” means all Applicable Laws relating to pollution or occupational health or safety or protection of human health or the environment.
“ Entity ” means any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, business, cooperative, foundation, society, political party, union, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.
“ ERISA ” means the federal Employee Retirement Income Security Act of 1974, as amended.
“ GAAP ” means generally accepted United States accounting principles in effect as of the Closing Date applied on a consistent basis with the past practice of the Company.
“ Government Contract ” means any contract or other legally binding commitment (excluding Government Contract Bids) with a Governmental Authority or any Person, including a prime contractor or a higher tier subcontractor to a Governmental Authority, for the manufacture or sale of products or the provision of services by the Company for or to a Governmental Authority.
“ Government Contract Bids ” means quotations, bids and proposals for awards of new Government Contracts applicable to the Business made by the Company for which no award has been made and for which the Company believes there is a reasonable prospect that such an award to the Company may yet be made.
“ Governmental Body ” means any nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; any federal, state, local, municipal, foreign or other government; any governmental or quasi-
4
governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or Entity and any court or other tribunal); any multi-national organization or body; or and individual, Entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature.
“ Hazardous Materials ” means those substances, whether waste materials, raw materials, finished products, co-products, byproducts or any other materials or articles or constituents thereof which (from use, handling, processing, storage, emission, disposal, spill, release or any other activity or for any other reason) are regulated by, form the basis of liability under, or are defined as a contaminant, pollutant, dangerous, designated or controlled substance product, solid or hazardous waste, hazardous substance, or toxic substance under any Environmental Law.
“ Income Tax ” means any federal, state, local, foreign or other Tax based on or measured by reference to net income.
“ Income Tax Return ” means any Tax Return relating to Income Tax.
“ Indebtedness ” of any Person means, without duplication, (a) all outstanding indebtedness of such Person for borrowed money or the deferred price (including earnout or similar obligations) of property or services (other than trade payables incurred in the Ordinary Course of Business which are not more than 90 days past due), (b) all outstanding indebtedness of such Person evidenced by a note, bond, debenture or similar instrument, (c) all unreimbursed amounts drawn under letters of credit issued for the account of such Person, (d) all capital lease obligations as determined in accordance with GAAP, (e) all issued but uncashed checks outstanding as of the Closing Date, (f) all fees, premiums, penalties or expenses associated with the prepayment of any indebtedness, including interest rate swap breakage costs, (g) interest accrued on any of the foregoing; (h) all guaranties of any of the foregoing, in each case constituting a Liability of the Company; and (i) obligations of the type referred to in clauses (a) through (g) of this definition with respect to other Persons secured by any Encumbrance on a property or asset of the Company.
“ Intellectual Property Rights ” means all of the rights arising from or in respect of the following, whether protected, created or arising under the Laws of the United States or any foreign jurisdiction: (a) patents and patent applications; (b) registered or unregistered trademarks, service marks, trade dress rights, trade names, Internet domain names, identifying symbols, logos, and including all goodwill associated with the foregoing; (c) copyrights, mask work rights, works of authorship and moral rights; and (d) confidential and proprietary information, or non-public processes, designs, specifications, technology, know-how, techniques, formulas, invention disclosures, inventions, concepts, trade secrets, discoveries, ideas, research and development, compositions, manufacturing and production
5
processes, technical data and information, customer lists, supplier lists, pricing and cost information, and business and marketing plans and proposals.
“ International Trade Law ” means any of the following (a) any Laws concerning the importation of merchandise, including but not limited to those administered by the U.S. Customs and Border Protection or the U.S. Department of Commerce, (b) any Laws concerning the exportation or re-exportation of products (including technology and services), including but not limited to those administered by the U.S. Department of Commerce’s Bureau of Industry and Security or the U.S. Department of State’s Directorate of Trade Controls, (c) any Laws concerning economic sanctions, including but not limited to those administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, (d) any Laws concerning anti-corruption or anti-bribery, including but not limited to the Foreign Corrupt Practices Act, or (e) any Law regulating a similar subject matter.
“ IRS ” means the Internal Revenue Service.
“ Knowledge of Sellers ” and “ To Sellers’ Knowledge ” and similar phrases mean to the actual knowledge of Doug McCarron or Glen Wedll after Due Inquiry.
“ Labor Matter ” means any organized labor strike, material dispute, material slowdown or material stoppage, or collective bargaining or unfair labor practice claim.
“ Liability ” means any obligation or liability of any nature (including any known, unknown, undisclosed, unaccrued, unasserted, contingent, indirect, conditional, implied, vicarious, derivative, joint, several or secondary liability), absolute or contingent, accrued or unaccrued, mature or unmatured, due or to become due, regardless of whether such debt, obligation, duty or liability is immediately due and payable.
“ Material Adverse Effect ” means any event, change, development or occurrence that, either individually or in the aggregate with all other such events, changes, developments or occurrences, has had a material adverse effect on the historical operations, business, financial condition, liabilities, properties or assets of the Company taken as a whole, other than any event, change, development or occurrence arising out of or relating to (a) the economy, political or financial markets in general; (b) changes in the industries in which the Company operates; (c) changes in Applicable Laws or GAAP; (d) the announcement of this Agreement or the Contemplated Transactions; (e) the taking of any actions contemplated by this Agreement or any other Transaction Agreement; or (f) acts of terrorism, war or other outbreak of hostilities. When determining whether a Material Adverse Effect exists with respect to the Company, the parties acknowledge that such determination shall be made from the perspective of a reasonable person in the Company’s position.
“ Material ” or “ Materially ” (whether or not capitalized throughout this Agreement) means with respect to the consequences of any fact or circumstance (including the
6
occurrence or non-occurrence of any event), that such fact or circumstance has caused, is causing, or may cause, directly, indirectly, or consequentially, singly or in the aggregate with other facts and circumstances, (i) any damages or losses in excess of Seventy Five Thousand Dollars ($75,000) or (ii) a right to obtain injunctive relief or Material Contract termination.
“ Matter ” means any claim, demand, dispute, action, suit, examination, audit, Proceeding, investigation, inquiry or other similar matter.
“ Net Working Capital ” means (a) the “current assets” of the Company, minus (b) the “current liabilities” of the Company; in each case calculated as set forth on Schedule 1.1 using accounting principles, methodologies and practices consistent with GAAP, unless otherwise consistent with classifications and methodologies used to prepare the Company’s audited financial statements, subject to an appropriate adjustment for the payment of all Closing Indebtedness and Transaction Expenses of the Company at Closing. Schedule 1.1 attached hereto is a pro forma example of the calculation of the Working Capital.
“ Noncompete Agreements ” mean separate confidentiality, non-solicit, non-hire, and non-competition agreements executed by (i) the Sellers other than Quasha and (ii) the Parent, in the forms attached as Exhibit B.
“ Order ” means any order, judgment, injunction, edict, decree, ruling, pronouncement, determination, decision, opinion, verdict, sentence, subpoena, writ or award that has been issued, made, entered, rendered or otherwise put into effect by or under the authority of any court, administrative agency or other Governmental Body or any arbitrator or arbitration panel; or any contract with any Governmental Body that has been entered into in connection with any Proceeding.
“ Ordinary Course of Business ” means the ordinary course of business of the Company consistent with past custom and practice (including with respect to quantity and frequency) and is taken in the ordinary course of the normal, day-to-day operations of the Company.
“ Permitted Indebtedness ” means that certain capital lease of the Company with Vision Equipment, as described in the Disclosure Schedule.
“ Permits ” means any permit, license, certificate, franchise, concession, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Applicable Law.
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“ Permitted Encumbrances ” means (a) Encumbrances imposed by Applicable Law related to the sale, transfer, pledge or other disposition of securities, (b) purchase money Encumbrances and Encumbrances securing rental or lease payments, (c) easements, covenants, conditions, reservations, rights of way, and restrictions of record, (d) any zoning or other governmentally established restrictions or encumbrances, (e) pledges or deposits to secure obligations under workers or unemployment compensation laws or similar legislation or to secure public or statutory obligations, (f) mechanic’s, materialman’s, supplier’s, vendor’s or similar Encumbrances arising or incurred in the Ordinary Course of Business, (g) Encumbrances existing with respect to any Permitted Indebtedness, and (h) other Encumbrances incurred in the Ordinary Course of Business and not incurred in connection with the borrowing of money.
“ Person ” means any individual, Entity or Governmental Body.
“ Pre-Closing Tax Period ” means a taxable year ending on or before the Closing Date and the portion of any Straddle Period ending on the Closing Date.
“ Proceeding ” means any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding and any informal proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation that has been commenced, brought, conducted or heard by or before, or that otherwise has involved any Governmental Body or any arbitrator or arbitration panel.
“ PTO ” means paid time off available to employees of the Company to any Company Benefit Plan, including vacation, sick leave or other paid time off.
“ PTO Excess ” means, with respect to each employee of the Company, an amount equal to the aggregate value of the accrued but unused PTO for such employee as of the Closing Date in excess of 40 hours.
“ Representatives ” of a Person shall include:
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(a) such Person’s Affiliates, shareholders, members, managers, directors, officers, employees, agents, attorneys, investment bankers, accountants and representatives; and |
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(b) all shareholders, directors, officers, employees, agents, attorneys, investment bankers, accountants and representatives of each of such Person’s Affiliates. |
“ Target Working Capital Amount ” means One Million One Hundred Thirty-Nine Thousand Six Hundred Ninety-Two Dollars ($1,139,692).
“ Tax ” or “ Taxes ” means (a) any and all federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium,
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windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar, including FICA), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind, whether direct or indirect and whether imposed by way of a withholding or a deduction for or on an account of tax, or any charge of any kind in the nature of (or similar to) taxes whatsoever, including any interest, penalty, or addition thereto, whether disputed or not and (b) any Liability for the payment of any amounts of the type described in clause (a) of this definition as a result of being a member of an affiliated, consolidated, combined or unitary group for any period, as a result of any tax sharing or tax allocation agreement, arrangement or understanding, or as a result of being liable for another Person’s taxes as a transferee or successor, by contract or otherwise.
“ Tax Return ” means any return, statement, form, declaration, report, disclosure, estimate, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
“ Transaction Agreements ” mean this Agreement, the Employment Agreement and the Noncompete Agreements.
“ Transaction Expenses ” means, with respect to Sellers, all fees, costs and expenses (including all legal fees and expenses incurred by Sellers, all fees and expenses payable by Sellers to any broker or finder, and all fees and expenses of any audit firm, investment banking firm or accountant, all to the extent incurred by Sellers) that have been incurred by Sellers in connection with the Contemplated Transactions on behalf of or for the benefit of Sellers.
“ Transition Services Agreement ” means the transition services agreement, substantially in the form attached hereto as Exhibit C, to be entered into by and between the Company and the Parent.
1.2 Additional Defined Terms . In addition to the definitions set forth in Section 1.1 , for purposes of this Agreement (including the Disclosure Schedule) the following terms have the meanings set forth in the Section referenced in the following table:
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Defined Term |
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Section |
Closing Date |
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2.3 |
Closing Balance Sheet |
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2.6(a) |
Closing Financial Statements |
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2.6(a) |
Company Benefit Plan |
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3.13 |
Company Insurance Policies |
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3.21 |
Current Government Contracts |
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3.20 |
Indemnification Cap |
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7.1(b) |
Indemnification Deductible |
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7.1(b) |
Indemnified Party |
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7.6 |
Indemnifying Party |
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7.5 |
Indemnitee |
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7.5 |
Indemnitor |
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7.6 |
Independent Accountants |
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2.6(b) |
Financial Information |
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3.9 |
Lease |
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3.15 |
Leased Real Property |
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3.15 |
Material Contracts |
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3.20 |
Post-Closing Decrease Amount |
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2.5(c) |
Post-Closing Increase Amount |
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2.5(b) |
Purchase Price |
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2.2 |
Purchaser |
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Introduction |
Reimbursement Amount |
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2.8 |
Sanctioned Country |
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3.8 |
Sanctioned Person |
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3.8 |
Sanctioned Program |
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3.8 |
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Securityholder Group |
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8.2 |
Sellers |
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Introduction |
Straddle Period |
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6.3(b) |
Tax Controversies |
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6.3(h) |
( Remainder of Page Left Intentionally Blank )
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(a) The Sellers shall each execute and deliver this Agreement to Purchaser, which shall be construed as the valid and binding assignment and transfer of all right, title and interest of each of the Sellers’ Interests to Purchaser as of the date hereof, |
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(b) Sellers shall deliver customary payoff letters and evidence reasonably satisfactory to Purchaser that the Encumbrances set forth on the Disclosure Schedules (other than any Permitted Encumbrances) shall have been released (or committed to be released pursuant to the payoff letters) and completed copies of UCC-3 termination statements related to such Encumbrances shall have been filed (or committed to be filed pursuant to payoff letters), |
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(c) Sellers shall deliver an estoppel certificate from the landlord of the Leased Real Property in form and substance reasonably satisfactory to Purchaser, |
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(d) Sellers shall deliver a written statement (the “ Seller Closing Statement ”) setting forth (i) the Closing Indebtedness, (ii) the Change of Control Obligations, (iii) the Transaction Expenses of the Company, and (iv) wire instructions for the payments to be made pursuant to Section 2.4 , |
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(e) Sellers shall deliver a certificate of insurance for “run-off” or “tail” D&O insurance policy with respect to claims arising out of or relating to events which occurred on or prior to the Closing Date (including in connection with the Transactions), |
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(f) Sellers shall deliver written resignations, effective as of the Closing Date, of all Company officers and the manager of the Company (but not as employees), |
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(g) Seller shall deliver a certificate of the Secretary of Company certifying, (i) as complete, accurate and in effect as of the Closing, (A) attached copies of Purchaser’s Charter Documents, and (B) a certificate of good standing or existence of the Company issued as of a date not more than thirty (30) days prior to the Closing Date by each of the Florida Secretary of State and the Minnesota Secretary of State, |
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(h) a certificate of the Secretary of Quadrant certifying, (i) as complete, accurate and in effect as of the Closing, (A) attached copies of Quadrant’s Charter Documents, (B) all requisite resolutions or actions of Quadrant’s board of directors approving the execution and delivery of this Agreement, the other Transaction Agreements and the consummation of the Contemplated Transactions, and (ii) as to the incumbency and signatures of the officers of Quadrant executing this Agreement and any other Transaction Document or other document, certificate or instrument relating to the Contemplated Transactions, |
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(i) a certificate of the Secretary of Purchaser certifying, (i) as complete, accurate and in effect as of the Closing, (A) attached copies of Purchaser’s Charter Documents, (B) all requisite resolutions or actions of Purchaser’s board of directors approving the execution and delivery of this Agreement, the other Transaction Agreements and the consummation of the Contemplated Transactions, and (ii) as to the incumbency and signatures of the officers of Purchaser executing this Agreement and any other Transaction Document or other document, certificate or instrument relating to the Contemplated Transactions |
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(j) Purchaser shall pay in full the Purchase Price by making the payments specified in Section 2.4 , |
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(k) The Buyer and Parent shall enter into the Transition Services Agreement, |
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(l) The appropriate parties shall enter into the Transaction Agreements, and |
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(m) The parties shall execute and deliver any other instruments, documents and certificates that are required to be delivered pursuant to this Agreement or as may be reasonably requested by either party to consummate the Contemplated Transactions. |
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(c) An amount equal to the Purchase Price less the amounts specified in clauses (a) and (b) of this Section 2.4 shall be delivered by Purchaser by wire transfer of immediately available funds for deposit in the accounts designated in writing by Sellers in the Seller Closing Statement. |
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(a) The Purchase Price shall be subject to adjustment following the Closing in accordance with this Section 2.5 and Section 2.6 . |
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may make inquiries and requests of Purchaser and its Representatives with respect to the preparation of the Closing Financial Statements, and Purchaser and its Representatives shall promptly respond to and cooperate with, and Purchaser shall use its commercially reasonable efforts to cause its Representatives to promptly respond to and cooperate with, such inquiries and requests.
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(c) If issues are submitted to the Independent Accountants for resolution, then: |
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(i) Sellers and Purchaser shall execute any agreement(s) required by the Independent Accountants to accept their engagement pursuant to this Section 2.6 ; |
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(ii) Sellers and Purchaser shall promptly furnish or cause to be furnished to the Independent Accountants such work papers and other documents and information relating to the disputed issues as the Independent Accountants may request and are available to that party or its accountants or other agents, and shall be afforded the opportunity to present to the Independent Accountants, with a copy to the other party, any written material relating to the disputed issues; |
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(iii) the determination by the Independent Accountants, as set forth in a written notice to be delivered by the Independent Accountants to both Sellers and Purchaser, of the Post-Closing Increase Amount or the Post-Closing Decrease Amount, as |
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applicable, shall be final, binding and conclusive on the parties as of the date of the determination notice sent by the Independent Accountants; and
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(iv) Sellers, on one hand, and Purchaser, on the other hand, shall each bear 50% of the fees and costs of the Independent Accountants for such determination, provided , however , that the engagement agreement(s) referred to in subpart (i) above may require the parties to be bound jointly and severally to the Independent Accountants for those fees and costs, and in the event Sellers or Purchaser pays to the Independent Accountants any amount in excess of 50% of the fees and costs of their engagement, the other party agrees to reimburse Sellers or Purchaser, as applicable, to the extent required to equalize the payments made by Sellers and Purchaser with respect to the fees and costs of the Independent Accountants. |
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2.8 Reimbursement. The parties acknowledge and agree that the amounts paid by the Company prior to the Closing and described in detail on Section 2.8 of the Disclosure Schedule shall, as and when reimbursed to the Company after the Closing Date, be forwarded to the agent of Sellers within five (5) business days after the date of receipt by the Company of such reimbursement (the “Reimbursement Amount”). For purposes of clarity, the Reimbursement Amount shall not be construed as an asset of the |
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Company as of the Closing Date for Net Working Capital or other purposes and shall not be deemed to satisfy any portion of the Purchase Price paid by the Purchaser to the Sellers at the Closing. The payment of the Reimbursement Amount to the Sellers shall not be subject to any deduction, discount, setoff, recoupment, indemnification right, commission, fee, charge or any other similar action and the Purchaser shall have no claim on the Reimbursement Amount as property of the Company at any time for any reason
Subject to the limitations set forth in Section 7 and elsewhere in this Agreement, Sellers, severally, in the proportions that each of their respective Interests bear to the total of all Interests, and not jointly, represent and warrant to Purchaser as of the Closing Date as follows, except as disclosed or otherwise referred to (i) in the Disclosure Schedule, and (ii) in any of the documents identified in the Disclosure Schedule.
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(b) The Interests were duly authorized and validly issued, fully paid and non-assessable, and were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The Interests have not been certificated. Sellers have good and valid title to the Interests, free and clear of any Encumbrances, except Permitted Encumbrances. On the Closing Date, Purchaser will acquire good title to the Interests free of any Encumbrances, except any Encumbrances created by or through Purchaser or any of Purchaser’s Representatives. |
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(c) There are no outstanding options, warrants, rights (including pursuant to conversion rights or preemptive rights) or agreements for the purchase or acquisition from the Company of any Interests. There are no agreements to which the Company is a party or by which it is bound with respect to the voting, registration or the sale or transfer of any equity securities of the Company |
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(a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Charter Documents of the Company or a Seller; |
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(b) violate or conflict with, or result (with or without notice, lapse of time or both) in a violation of or constitute a default (or give rise to any right of termination, cancellation or acceleration) under, result in any material payment becoming due under, result in the imposition of any Encumbrance on any of the properties or assets of the Company under, or otherwise give rise to any right on the part of any Person to exercise any remedy or obtain any relief under any Order or Contract to which the Company is a party or by which the Company is bound or subject, except to the extent such remedy or relief would not be material to the Company; or |
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(c) conflict with or result in a material violation or material breach of any term or provision of any Applicable Law or Order applicable to the Company or Sellers. |
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agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the Contemplated Transactions after the Closing.
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(b) The Company owns, holds or possesses all material Governmental Authorizations which are necessary to entitle the Company to own or lease, operate and |
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use the Assets and the Leased Real Property and to carry on and conduct the Business as currently conducted. Section 3.8(b) of the Disclosure Schedule sets forth a list of each material Governmental Authorization of the Company. Except as disclosed in Section 3.8(b) of the Disclosure Schedule, such Governmental Authorizations are valid and in full force and effect.
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substantially the same manner as conducted during the periods covered by the Financial Information.
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(a) Section 3.13 of the Disclosure Schedule lists all Employee Plans that the Company sponsors, maintains, contributes to or is obligated to contribute to, or with respect to which the Company has or may have any material Liability (each, a “ Company Benefit Plan ”). Neither the Company nor any organization, trade or business (whether or not incorporated) that is, or at any time in the prior seven years has been, considered a single employer with the Company pursuant to Section 414(b), (c), (m) or (o) of the Code (an “ ERISA Affiliate ”) maintains, participates in or contributes to, or has ever at any time within said period of time maintained, participated in or contributed to (i) a material plan subject to Title IV of ERISA; (ii) a multiemployer plan within the meaning of Section 3(37) of ERISA; or (iii) a plan subject to the minimum funding standards of Section 412 of the Code or Section 302 of ERISA. No Company Benefit Plan is (A) a multiple employer plan within the meaning of Section 413(c) of the Code or (B) a “multiple employer welfare arrangement” as defined in Section 3(40) of ERISA. Each Company Benefit Plan conforms to and has been operated and administered in material compliance with the Code and applicable Laws. No Company Benefit Plan is intended to qualify under Section 401(a) of the Code, and the Company has no related trust intended to be exempt under Section 501 of the Code. Each Company Benefit Plan that is subject to Section 409A of the Code has been operated in material compliance with such section and all applicable regulatory guidance (including notices, rulings and proposed and final regulations). The Company is not materially delinquent as to contributions or payments to, or in respect of, any of its Company Benefit Plans and all amounts due and payable on or prior to the Closing Date with respect to the portion of the plan year ending on the Closing Date have been paid as of the Closing Date. No event has occurred and no condition exists with respect to any Company Benefit Plan that has given rise to or may give rise to any fines, penalties, Encumbrances, Taxes or other Liabilities that would be material to the Company. |
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(b) Neither the Company nor any Company Benefit Plan has any obligation to make any material payment to or otherwise provide any material health, life insurance or other post-termination benefit coverage (whether or not insured) to employees, former employees, directors or consultants of the Company or other |
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individuals. Each Company Benefit Plan can be freely amended, terminated or otherwise discontinued after the Closing without the consent of participants and without Liability and the Company does not have any express or implied commitment, whether legally enforceable or not, to adopt any new Employee Plan or modify, change or terminate any existing Company Benefit Plan other than as may be required by ERISA or the Code. Except to the extent not material to the Company, each individual who has rendered services to the Company who has been classified as having the status of an independent contractor, leased employee, consultant or other status other than employee for any purpose is or has been properly characterized as such. No material claim, Proceeding or other action has been asserted, instituted or, to the Knowledge of Sellers, is threatened or anticipated against any of the Company Benefit Plans (other than routine claims for benefits), any trustee or fiduciaries thereof, the Company (including any subsidiary thereof), any ERISA Affiliate, any director, officer or employee thereof, or any of the assets of any trust of any of the Company Benefit Plans. No material filing, application or other matter is pending with the IRS, the United States Department of Labor or any other Governmental Authority with respect to any Company Benefit Plan.
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(c) Except as specifically set forth on Section 3.13 of the Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the Transactions, or any termination of employment or other event in connection therewith, will or may (i) entitle any current or former employee, director or consultant of the Company to any material payment or benefit (or result in the funding of any such payment or benefit) or result in any forgiveness of indebtedness with respect to any such persons, or (ii) accelerate the time of any material payment, funding or vesting of any compensation, equity award or other benefits, or increase the amount of compensation, equity award or other benefits due to any such employee or former employee, director or consultant. No material amounts payable (individually or collectively and whether in cash or capital stock of the Company) under any of the Company Benefit Plans could reasonably be expected to fail to be deductible for federal income tax purposes by virtue of Sections 404, 162(m) or 280G of the Code. |
21
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adversely affect the current or planned use of the Leased Real Property is threatened or contemplated.
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period for which a Tax Return has been filed, for which Tax Returns have not yet been filed or for which Taxes are not yet due and payable. The Company is not a party to any Contracts that, as a result in whole or in part of this Agreement or the Transactions, would result in any excise Tax on parachute payments under the Code, loss of deductibility of any payment for Tax purposes by reason of Section 280G of the Code (or any corresponding provision of state, local, or non-U.S. Tax Law), or imposition of any Tax withholding obligations under Section 4999 of the Code (or any corresponding provision of state, local, or non-U.S. Tax Law). All arrangements that would be considered “deferred compensation” for purposes of Section 409A of the Code are in material compliance with Section 409A of the Code.
24
conduct the Business in substantially the same manner in which the Business is currently being conducted. All of the rights of the Company in the Company Intellectual Property are valid and enforceable, except to the extent as would not be material. The use, practice or other commercial exploitation of the Company Intellectual Property by the Company and the operation of the Business does not infringe, violate, constitute an unauthorized use of or misappropriate any Intellectual Property Rights of any third Person or constitute unfair competition or trade practices under the Laws of any jurisdiction, except to the extent as would not be material. To the Knowledge of Sellers, no Person is infringing, violating, misappropriating or otherwise misusing any Company Intellectual Property, and the Company has not made any such claims against any Person (including employees and former employees of the Company). No material trade secret or any other non-public, proprietary information material to the Business as presently conducted has been authorized to be disclosed or has been actually disclosed by the Company to any employee or any third Person other than pursuant to a written confidentiality or written non-disclosure agreement restricting the disclosure and use of the Company Intellectual Property.
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(b) All Government Contracts included in the Material Contracts and for which final payment has not yet been received (the “ Current Government Contracts ”), were legally awarded, are binding on the Company, and are materially in full force and effect. The Current Government Contracts (or, where applicable, the prime Government Contracts under which the Current Government Contracts were awarded) are, to the Knowledge of Sellers, not currently the subject of bid or award protest Proceedings, and, to the Knowledge of Sellers, no such Current Government Contracts (or, where applicable, the prime Government Contracts under which the Current Government Contracts were awarded) are reasonably likely to become the subject of bid or award protest Proceedings. The representations, certifications and warranties made by the Company with respect to the Government Contracts or Government Contract Bids, including that the Company was a small business concern and/or was qualified for other preferential treatment status, were accurate in all material respects as of their effective dates. With respect to any multiple award schedule Government Contracts included in the Material Contracts, the Company (i) has not at any time charged the applicable Governmental Authority, prime contractor or higher tier subcontractor a price higher than its commercial customers for equivalent products and services with respect to each such multiple award schedule Government Contract; (ii) has complied in all material respects with the notice and pricing requirements of the price reduction clause in each such multiple award schedule Government Contract and, to the Knowledge of Sellers, there are no facts or circumstances that would reasonably be expected to result in a demand by the applicable Governmental Authority, prime contractor or higher tier subcontractor for a refund based upon the Company’s failure to comply with the price reductions clause, and (iii) has complied in all material respects with all payment requirements of the industrial funding fee in each such multiple award schedule Government Contract and, to the Knowledge of Sellers, there are no facts or circumstances that would reasonably be expected to result in a demand by the applicable Governmental Authority, prime contractor or higher tier subcontractor for additional payment(s) based upon the Company’s failure to comply with the industrial funding fee payments. |
26
timely manner any notice of any material claim that may be insured under any Company Insurance Policy and there are no outstanding material claims which have been denied or disputed by the insurer.
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Material Adverse Effect, or an increase in the price that any such supplier will charge for products or services sold to the Company that would have a Material Adverse Effect, or of the bankruptcy, liquidation, or change of control of any such customer or supplier. Each product manufactured, sold, leased or delivered and each service provided by the Company has, to the Knowledge of Sellers, been in material conformity with all applicable Contracts of the Company and all express and implied warranties, if any, granted by the Company.
Purchaser represents and warrants as of the date hereof and as of the Closing Date as follows:
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(a) Conflict with or result in a violation or breach of any of the terms, conditions or provisions of Purchaser’s Charter Documents; |
28
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(b) Conflict with or result in a violation or breach of any term or provision of any Applicable Law or Order applicable to Purchaser; or |
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(c) Conflict with or result in a violation or breach of, or constitute a default under, or require Purchaser to obtain any consent or approval under the terms of, any material contract or license to which Purchaser is a party or by which any of Purchaser’s assets or properties is bound. |
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(a) PURCHASER HEREBY ACKNOWLEDGES THAT SELLERS ARE NOT MAKING ANY REPRESENTATION OR WARRANTY OTHER THAN THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, PURCHASER HEREBY ACKNOWLEDGES THAT, EXCEPT TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLERS ARE NOT MAKING ANY REPRESENTATION OR WARRANTY WITH RESPECT TO (A) ANY FINANCIAL PROJECTION OR FORECAST RELATING TO THE COMPANY, (B) MERCHANTABILITY, (C) FITNESS FOR ANY PARTICULAR PURPOSE, (D) THE VIABILITY OR LIKELIHOOD OF SUCCESS OF THE BUSINESS OF THE COMPANY, OR (E) ANY OTHER INFORMATION MADE AVAILABLE, WHETHER PURSUANT TO ANY PRESENTATION MADE BY OR ON BEHALF OF THE COMPANY, PURSUANT TO ANY ELECTRONIC OR PHYSICAL DELIVERY OF DOCUMENTATION OR OTHER INFORMATION, OR OTHERWISE, TO PURCHASER, ITS AFFILIATES AND THEIR RESPECTIVE REPRESENTATIVES, AND PURCHASER EXPRESSLY DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY. |
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(b) In connection with Purchaser’s investigation of Sellers, the Company and the business conducted by the Company, Purchaser may have developed or received |
29
certain estimates, forecasts, plans and financial projections. Purchaser acknowledges that there are uncertainties inherent in attempting to make such estimates, forecasts, plans and financial projections, that Purchaser is familiar with such uncertainties, that Purchaser is taking full responsibility for making its own evaluation of the adequacy and accuracy of all estimates, forecasts, plans and financial projections so furnished to it (including the reasonableness of the assumptions underlying such estimates, forecasts, plans, and financial projections), and that Purchaser shall have no claim against Sellers or the Company or any of their Representatives or Affiliates with respect thereto. Purchaser acknowledges and agrees that Sellers makes no representation or warranty with respect to such estimates, forecasts, plans and financial projections (including any such underlying assumptions).
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(a) After the Closing Date, each of the parties shall hold, and shall use its best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents, as applicable, to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of Applicable Law, all Confidential Information concerning each of the parties, and, |
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(b) After the Closing Date, each of the Sellers shall hold in confidence, unless required to disclose by judicial or administrative process or by other requirements of Applicable Law, all Confidential Information regarding the Company, except to the extent that such Confidential Information can be shown to have been (i) previously known on a non-confidential basis by one or more Sellers; (ii) in the public domain through no fault of Sellers or any other Person other than Purchaser; (iii) independently developed by one or more Sellers without reliance on such Confidential Information; or (iv) received from a third party without breach of any duty of confidentiality by such third party; provided , that Parent, Sellers and the Company may disclose such Confidential Information to the Company’s officers, managers, employees, accountants, counsel, consultants, advisors and agents, as applicable, in connection with (i) the transactions contemplated by this Agreement so long as such Persons are informed by Parent, Sellers or the Company of the confidential nature of such Confidential Information and are directed by Parent, Sellers or the Company to treat such Confidential Information with due care in order to maintain such confidentially. |
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(c) In the event any party is required by judicial or administrative process or by other requirements of Applicable Law to disclose the Confidential Information, such party shall, before making such disclosure, give prompt notice thereof to each of the other parties and, to the extent reasonably practicable, provide such reasonable cooperation and assistance as each of the other parties may reasonably request (at such party’s expense) to obtain an appropriate protective order or other appropriate remedy. In the event that no |
30
such protective order or other remedy is obtained, such party shall furnish only that portion of the Confidential Information which it is advised by counsel is legally required to be furnished.
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(d) The obligation of each party to hold the Confidential Information shall be satisfied if it exercises the same care with respect to such Confidential Information as it would take to preserve the confidentiality of its own similar information, but in no event less than a reasonable degree of care. |
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(e) The obligations of each party under this Section 5.1 shall continue indefinitely following the date of disclosure of the Confidential Information. |
31
at such other party’s expense, to segregate and remove such books and records as such other party may select.
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(a) Sellers shall be liable and shall indemnify Purchaser for all Taxes imposed on or with respect to the Company or the Interests relating to any Pre-Closing Tax Period (including, the portion of any Straddle Period for a Pre-Closing Tax Period) for which Sellers are liable, but only to the extent such Taxes exceed the amount, if any, reserved as a liability for the specific type of Tax for such indemnity right as shown on the Closing Balance Sheet and taken into account as a liability for the specific type of Tax for such indemnity right for purposes of the Actual Working Capital Amount. |
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(c) The Sellers and Purchaser acknowledge and agree that (i) as a result of Purchaser’s acquisition of the Interests as contemplated by this Agreement, the Company shall terminate as a partnership for U.S. federal Income Tax purposes pursuant to Code Section 708(b)(1)(B) and Purchaser’s acquisition of the Interests shall be treated by Purchaser as an acquisition of the Company's assets and by the Sellers as the sale of the Interests in accordance with IRS Revenue Ruling 99-6 (Situation #2) for U.S. federal and, unless required by applicable Tax law, any applicable state and local Income Tax purposes. The Purchase Price will be allocated in accordance with Section 2.7. |
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(d) Sellers shall, at their own expense, prepare or cause to be prepared drafts of all Pre-Closing Tax Period Income Tax Returns with original due dates (without extension) after the Closing Date. Sellers shall deliver a draft of each such Pre-Closing Tax Period Income Tax Return to Purchaser not later than thirty (30) days prior to the due date (taking into account any extensions) of such Income Tax Return for Purchaser’s review and comment. Purchaser shall provide any comments Purchaser may have to such draft Income Tax Returns within ten (10) days of its receipt of such Income Tax Return. Sellers and Purchaser agree to consult and attempt to resolve in good faith any disputes they may have with respect to the contents of any such draft Income Tax Return. If Purchaser does not object in writing to any draft Income Tax Return within such ten (10) |
32
day period, then Purchaser shall be deemed to have agreed to such draft Income Tax Return and Sellers may file such Tax Return. If Sellers and Purchaser are unable to resolve any objection(s) by either party to any Income Tax Return for a Pre-Closing Tax Period within five (5) calendar days prior to the due date of the applicable Income Tax Return, then Sellers shall file or cause to be filed such Income Tax Returns on the basis determined by Sellers and engage the Independent Accountant to make a final determination with respect to the item(s) to which the parties do not agree. The Independent Accountant’s conclusions with respect to the item(s) shall be conclusive and, if applicable, Sellers shall amend the applicable Tax Return, modified for the items determined by the Independent Accountant that are not consistent with the Tax Return that was originally filed. The fees and expenses of the Independent Accountant shall be paid by the party whose Tax Return shows the largest discrepancy in Tax liability from the amount of Taxes due on the Tax Return as filed based on the Independent Accountant’s conclusions.
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(e) Purchaser shall, at its expense, prepare or cause to be prepared drafts of (i) all Pre‑Closing Tax Period Tax Returns of the Company that are filed after the Closing Date other than Pre-Closing Tax Period Income Tax Returns prepared by Seller pursuant to paragraph (d) above, and (ii) all Straddle Period Tax Returns of the Company; provided, however , that such draft Pre‑Closing Tax Period Tax Returns and Straddle Period Tax Returns shall be prepared in a manner consistent with Applicable Law. At least ten (10) days prior to the due date (taking into account any extensions) of such Pre‑Closing Tax Period Tax Returns or Straddle Period Tax Returns prepared by Purchaser, Purchaser shall deliver such draft Tax Returns to Sellers for review and comment. Sellers shall provide any comments Sellers may have to such draft Pre‑Closing Tax Period Tax Returns or Straddle Period Tax Returns, as applicable, within five (5) days of Sellers’ receipt of such draft Pre‑Closing Tax Period Tax Returns or Straddle Period Tax Returns, as applicable. If Sellers do not object in writing to any such draft Tax Return within such five (5) day period, then Sellers shall be deemed to have agreed to such draft Tax Return and Purchaser may file or cause to be filed such Tax Returns. Sellers and Purchaser agree to consult and attempt to resolve in good faith any disputes they may have with respect to the contents of any such Tax Return. If Sellers and Purchaser are unable to resolve any objection(s) by either party to any Tax Return for a Pre-Closing Tax Period or Straddle Period within five (5) calendar days prior to the due date of the applicable Tax Return, then Purchaser shall file or cause to be filed such Tax Returns on the basis determined by Purchaser and engage the Independent Accountant to make a final determination with respect to the item(s) to which the parties do not agree. The Independent Accountant’s conclusions with respect to the item(s) shall be conclusive and, if applicable, Purchaser shall amend the applicable Tax Return, modified for the items determined by the Independent Accountant that are not consistent with the Tax Return that was originally filed. The fees and expenses of the Independent Accountant shall be paid by the party whose Tax Return shows the largest discrepancy in Tax liability from the amount of Taxes due on the Tax Return as filed based on the Independent Accountant’s conclusions. |
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(f) Without the prior written consent of Sellers, neither Purchaser nor the Company shall amend any Tax Return of the Company for a Pre-Closing Tax Period (excluding Straddle Periods) or waive any limitations period with respect to such Tax Returns. |
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(g) Any Tax refunds that are received by the Company that are attributable to a Pre-Closing Tax Period shall be for the account of Sellers, and the Company shall pay such Tax refund to Sellers as soon as practicable after actual receipt, but only to the extent that such refund was not taken into account as an asset shown on the Closing Balance Sheet and taken into account as an asset for purposes of the Actual Working Capital Amount. |
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(j) Purchaser and Sellers shall cooperate with the other party, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide |
34
additional information and explanation of any material provided hereunder. Sellers and Purchaser agree to retain all books and records with respect to Tax matters pertinent to the Company relating to any taxable period beginning before the Closing Date until expiration of the statute of limitations (and, to the extent notified by Purchaser or Sellers, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority.
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(k) Purchaser and Sellers agree, upon written request of the other party, to use their reasonable efforts to obtain any certificate or other document from any Governmental Body or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including with respect to the transactions contemplated hereby). |
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(l) All transfer (including real estate transfer), documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with the transactions contemplated by this Agreement will be borne by Sellers, and the parties will cooperate to file or cause to be filed all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees if required by Applicable Law. |
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(a) From and after the Closing Date, Purchaser agrees that it will not amend the Charter Documents of the Company in existence on the date hereof and listed in Section 6.4 of the Disclosure Schedule for a period of six (6) years after the Closing Date as those Charter Documents relate the provisions regarding elimination of liability of directors and managers, indemnification of officers, directors, managers and employees. Quadrant will obtain as of the Closing Date a “run-off” or “tail” D&O insurance policy with respect to claims arising out of or relating to events which occurred on or prior to the Closing Date (including in connection with the Transactions). Such policy will have a claims period of six (6) years from the Closing Date and will provide for at least the same coverage and amounts as the current policy of D&O liability insurance maintained for the Company immediately prior to the Closing Date. |
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(b) If Purchaser or any of its successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving company or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then, and in each case, proper provisions shall be made so that the successors and assigns of Purchaser shall assume the obligation not to amend the Charter Documents set forth in this Section 6.4 . |
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6.5 Release. Effective as of the Closing , each Seller hereby releases, waives, and forever discharges the Company from any and all losses , damages, Liabilities , |
35
obligations, assessments, Proceedings , claims or demands, judgments, penalties, Encumbrances , actions or causes of action, including costs, expenses and fees ( including without limitation, reasonable attorneys’ fees and expert witness fees incurred in connection therewith) whatsoever, whether known or unknown, suspected or unsuspected, contingent or absolute, both at law and in equity, which Seller or such Equityholder now has, has ever had or may hereafter have against the Company arising contemporaneously with or prior to the Closing Date or on account of or arising out of any matter, cause or event occurring contemporaneously with or prior to the Closing Date . Notwithstanding anything herein to the contrary, nothing contained in this Section 6.5 will operate to discharge, release or waive the obligations, covenants and agreements of Purchaser arising under this Agreement and the Transaction Agreements contemplated hereby.
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(c) There shall be no indemnification obligations of Sellers under this Agreement other than as set forth in Section 7.1(a). |
36
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(a) All of the representations and warranties of Sellers except the Fundamental Representations and the Tax Representations set forth in this Agreement shall terminate and expire, and shall cease to be of any force or effect at 10:00 a.m. (New York time) upon the last day of the Claim Period, and all Liability of Sellers and Purchaser with respect to such representations and warranties shall thereupon be extinguished. |
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(b) The Tax Representations shall terminate and expire 60 days after expiration of the applicable statute of limitations taking into account any tolling periods and other extensions. |
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(c) The representations and warranties in Sections 3.3, 3.5, 3.6 and 3.7 shall survive until the third anniversary of the Closing Date. |
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(d) The representations and warranties in Sections 3.1, 3.2 and 3.4 shall survive indefinitely. |
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(e) Covenants contemplating or involving actions to be taken, or obligations in effect, after Closing, will survive the Closing and will continue in full force and effect after the Closing in accordance with their terms. |
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(f) If either party hereto delivers a Claim Notice based on a breach of or misrepresentation concerning a representation or warranty, then the applicable representation or warranty will survive until, but only for purposes of, the resolution of the matter covered by such notice. |
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(a) the specific representation and warranty or covenant alleged to have been breached by such other party; |
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(b) a detailed description of the facts and circumstances giving rise to the alleged breach of such representation and warranty or covenant; and |
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indemnification claim against Sellers within the meaning of this sentence, the limitations set forth in Section 7.1 shall not be taken into account. The timely delivery of such written notice by the Indemnitee to the Indemnifying Party shall be a condition precedent to any liability on the part of the Indemnifying Party under this Section 7 with respect to such Matter. The Indemnifying Party shall have the right, at its option, to assume the defense of any such Matter with its own counsel. If the Indemnifying Party elects to assume the defense of any such Matter, then:
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(a) notwithstanding anything to the contrary contained in this Agreement, the Indemnifying Party shall not be required to pay or otherwise indemnify the Indemnitee against any attorneys’ fees or other expenses incurred on behalf of the Indemnitee in connection with such Matter following the Indemnifying Party’s election to assume the defense of such Matter; |
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(b) the Indemnitee shall make available to the Indemnifying Party all books, records and other documents and materials that are under the direct or indirect control of the Indemnitee or any of the Indemnitee’s Representatives and that the Indemnifying Party considers necessary or desirable for the defense of such Matter; |
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(c) the Indemnitee shall execute such documents and take such other actions as the Indemnifying Party may reasonably request for the purpose of facilitating the defense of, or any settlement, compromise or adjustment relating to, such Matter; |
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(d) the Indemnitee shall otherwise fully cooperate as reasonably requested by the Indemnifying Party in the defense of such Matter; |
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(e) the Indemnitee shall not admit any Liability with respect to such Matter; and |
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(f) the Indemnifying Party shall have the exclusive right to settle, adjust or compromise such Matter, on such terms as it may deem appropriate, without the consent or approval of the Indemnitee or any other Person. |
If the Indemnifying Party elects not to assume the defense of such Matter, then the Indemnitee shall proceed diligently to defend such Matter with the assistance of counsel satisfactory to the Indemnifying Party; provided , however , that if the Indemnifying Party has agreed to accept Liability for the Matter, the Indemnitee shall not settle, adjust or compromise such Matter, or admit any Liability with respect to such Matter, without the prior written consent of the Indemnifying Party (which consents shall not be unreasonably withheld).
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to, any rights and remedies (including rights of indemnity, rights of contribution and other rights of recovery) that the Indemnified Party or any of the Indemnified Party’s Representatives may have against any other Person with respect to any Damages, circumstances or Matter to which such indemnification payment is directly or indirectly related. The Indemnified Party shall permit the Indemnitor to use the name of the Indemnified Party and the names of the Indemnified Party’s Representatives in any transaction or in any Proceeding involving any of such rights or remedies; and the Indemnified Party shall take such actions as the Indemnitor may reasonably request for the purpose of enabling the Indemnitor to perfect or exercise the Indemnitor’s right of subrogation hereunder.
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future in connection with any claims that may be made thereunder pursuant to this Agreement. W&G (or any successor) may serve as counsel to Securityholder Group in connection with any litigation, claim, or obligation arising out of or relating to this Agreement or the Contemplated Transactions and each of the parties hereto hereby consents thereto and waives any conflict of interest arising therefrom and each of such parties shall cause any Affiliate thereof to consent to waive any conflict of interest arising from such representation. Each of the parties hereto acknowledges that such consent and waiver is voluntary, has been carefully considered and the parties have consulted with counsel or been advised they should do so in this connection.
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8.6 Governing Law . This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of New York (without giving effect to principles of conflicts of law). |
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(a) expressly and irrevocably consents and submits to the personal jurisdiction of each state and federal court sitting in Borough of Manhattan, New York (and each appellate court located in the State of New York) in connection with any such legal proceeding; |
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(b) agrees that each state and federal sitting in Borough of Manhattan, New York shall be deemed to be a convenient forum; and |
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(c) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court sitting in Borough of Manhattan, New York, any claim that such party is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. |
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(or at such other address as the intended recipient shall have specified in a written notice given to the other party hereto):
if to Purchaser:
Winchester Electronics Corporation
c/o Kevin Perhamus
68 Water Street
Norwalk, CT 06854
email: k.perhamus@winchesterelectronics.com
with a copy to:
Parker Poe Adams & Bernstein LLP
301 Fayetteville Street, Suite 1400
Raleigh, North Carolina 27601
Attention: John J. Butler
e-mail: jaybutler@parkerpoe.com
if to Sellers:
Quadrant Metals Technologies LLC
810 Flightline Blvd.
Deland, FL 32724
Attention: Drew M. Kelley, Chief Financial Officer
Doug McCarron
c/o Quadrant Metals Technologies LLC
810 Flightline Blvd.
Deland, FL 32724
Attention: Drew M. Kelley, Chief Financial Officer
Diana Quasha
c/o Quadrant Metals Technologies LLC
810 Flightline Blvd.
Deland, FL 32724
Attention: Drew M. Kelley, Chief Financial Officer
42
with a copy to (which shall not constitute notice):
100 Wall Street, 10 th Floor
New York, NY 10005
Attention: Travis L. Gering, Esq.
e-mail: travis.gering@wg-law.com
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8.15 Waiver . No failure on the part of any party hereto to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any party |
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hereto in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver thereof; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
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8.16 Amendments . This Agreement may not be amended, modified, altered or supplemented except by means of a written instrument executed on behalf of Purchaser, the Company and Sellers. |
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(a) Each party hereto acknowledges that it has participated in the drafting of this Agreement, and any applicable rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in connection with the construction or interpretation of this Agreement. |
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(b) Whenever required by the context hereof, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. |
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(c) As used in this Agreement, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words “without limitation.” |
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(d) References herein to “Sections” and “Exhibits” are intended to refer to Sections of and Exhibits to this Agreement. |
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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This Agreement has been duly executed and delivered by Purchaser and Sellers as of the date set forth above.
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PURCHASER: |
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Winchester Electronics Corporation |
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By: |
/s/ Kevin Perhamus |
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Name: Kevin Perhamus |
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Title: President and CEO |
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SELLERS: |
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Quadrant Metals Technologies LLC |
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By: |
/s/ Drew M. Kelley |
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Name: Drew M. Kelley |
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Title: Chief Financial Officer |
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/s/ Doug McCarron |
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Doug McCarron |
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/s/ Diana Quasha |
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Diana Quasha |
Signature Page of Membership Interests Purchase Agreement
Membership Interests
Member |
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Units |
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Percentage of Membership
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Quadrant Metals Technologies LLC |
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% |
Doug McCarron |
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.39 |
% |
Diana Quasha |
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% |
TOTAL |
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% |
Schedule 1.1
Pro Forma Working Capital Calculation
[Attached]
EXHIBIT A
EMPLOYMENT AGREEMENT
[Attached]
EXHIBIT B
NONCOMPETE AGREEMENTS
[Attached]
EXHIBIT C
TRANSITION SERVICES AGREEMENT
[Attached]
The following schedules and similar attachments have been omitted from the filed Exhibit in reliance upon Regulation S-K 601(b)(2):
* The Issuer hereby undertakes and agrees to furnish supplementally a copy of any of the foregoing omitted schedules and similar attachments to the Commission upon request.
EXHIBIT 31.1
CERTIFICATIONS
I, Jason T. Young, certify that:
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1. |
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I have reviewed this Form 10-Q of ARC Group Worldwide, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
e |
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Date: November 10, 2016
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/s/ Jason T. Young |
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Name: |
Jason T. Young |
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Title: |
Principal Executive Officer |
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EXHIBIT 31.2
CERTIFICATIONS
I, Drew M. Kelley, certify that:
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1. |
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I have reviewed this Form 10-Q of ARC Group Worldwide, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
eb |
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Date: November 10, 2016
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/s/ Drew M. Kelley |
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Name: |
Drew M. Kelley |
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Title: |
Principal Financial Officer and Principal Accounting Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q (the “Report”) of ARC Group Worldwide, Inc. (the “Company”) for the quarter ended October 2, 2016, each of the undersigned, Jason T. Young, the Principal Executive Officer and Drew M. Kelley, Principal Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned knowledge and belief:
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(1) |
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the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
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the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Dated: November 10, 2016 |
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/s/ Jason T. Young |
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Name: |
Jason T. Young |
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Title: |
Principal Executive Officer |
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Dated: November 10, 2016 |
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/s/ Drew M. Kelley |
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Name: |
Drew M. Kelley |
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Title: |
Principal Financial Officer and |
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Principal Accounting Officer |