10-K 1 pr2001-10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 333-33438 PRECISION PARTNERS, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-3639336 --------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 100 Village Court Suite 301 Hazlet, New Jersey 07730 ------------------------- (Address of principal executive offices) (732) 335 - 3300 Securities to be filed pursuant to Section 12(b) of the Act: Title of Class Name of Each Exchange on Which Registered -------------- ----------------------------------------- None. None. Securities to be registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether 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 X NO ---- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The number of shares outstanding of the Registrant's Common Stock, $.01 par value, was 100 as of March 15, 2002. PRECISION PARTNERS, INC. TABLE OF CONTENTS PAGE NO. -------- Disclosure Concerning Forward Looking Statements 3 Part I ------ Item 1. Business 4 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Part II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7a. Quantitative and Qualitative Disclosures About Market Risk 35 Item 8. Financial Statements and Supplementary Data 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36 Part III -------- Item 10. Directors and Executive Officers 37 Item 11. Executive Compensation 39 Item 12. Security Ownership of Certain Beneficial Owners and Management 44 Item 13. Certain Relationships and Related Transactions 46 Part IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 48 Signatures 2 DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS With the exception of the historical information contained in this report, the matters described herein contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "intend," "project," "will be," "will likely continue," "will likely result," or words or phrases of similar meaning including, statements concerning: o our liquidity and capital resources, o our debt levels and ability to obtain financing and service debt, o competitive pressures and trends in the precision-machined parts, tooling and assembly industry, o prevailing interest rates, o legal proceedings and regulatory matters, o general economic and business conditions, and o other factors discussed under "Other Considerations" in Item 7. Forward-looking statements involve risks and uncertainties (including, but not limited to, economic, competitive, governmental and technological factors outside of our control) that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties may include the ability of management to implement its business strategy; our ability to comply with the covenants in our financing agreements and to service the related debts; the highly competitive nature of the precision tooling industry and the intense competition from other makers of precision-machined metal parts, tooling and assemblies; our dependence on certain key customers; our ability to consummate suitable acquisitions; our ability to effectively integrate acquisitions or implement new production programs; our dependence on certain executive officers; and changes in environmental and other government regulations. We operate in a very competitive environment in which new risks can emerge from time to time. It is not possible for management to predict all such risks, nor can it assess the impact of all such risks on our business or the extent to which any risk, or a combination of risks, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements. 3 PART I ITEM 1. BUSINESS THE COMPANY Precision Partners, L.L.C. ("LLC") was formed on September 9, 1998 for the purpose of acquiring and operating companies in the business of manufacturing and supplying precision-machined parts, tooling and assemblies for original equipment manufacturers. On September 30, 1998, investors contributed approximately $32 million of capital to LLC which was then contributed by LLC to two wholly-owned subsidiaries, Mid State Acquisition Corp. and Galaxy Acquisition Corp., which were established to acquire all of the outstanding capital stock of Mid State Machine Products ("Mid State") and Galaxy Industries Corporation ("Galaxy Industries") on September 30, 1998 (Mid State and Galaxy, collectively the "1998 Acquisitions"). The purchase price, including transaction expenses, was approximately $54,725,000 and was financed by the proceeds of the contributed capital and borrowings under LLC's credit facilities. The purchase price was allocated to the estimated fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting. In February 1999, Precision Partners, Inc. (hereinafter referred to as "we", "our", "Precision" or the "Company") was formed as a wholly-owned subsidiary of Precision Partners Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of LLC. On March 19, 1999, as part of a reorganization, LLC contributed to Precision, through Holdings, its investments and related assets in Galaxy Industries, Mid State and Precision Partners Management Corporation ("Management Corporation"), which comprised substantially all of the assets of LLC ("the 1999 Reorganization"). Simultaneous with this reorganization, Precision issued $100,000,000 of 12% Senior Subordinated Notes (the "Notes") in order to purchase all of the issued and outstanding capital stock of Certified Fabricators, Inc. and its sister company Calbrit Design, Inc. (together, "Certified") and to purchase substantially all of the assets and assume certain liabilities of General Automation, Inc. ("General Automation") and Nationwide Precision Products Corp. ("Nationwide"). Also, on September 1, 1999, Precision purchased all of the issued and outstanding capital stock of Gillette Machine & Tool Co., Inc. ("Gillette") using existing cash and borrowings under Precision's then outstanding credit facilities. The acquisitions of Certified, General Automation, Nationwide, and Gillette are referred to collectively as the "1999 Acquisitions." The 1999 Acquisitions were financed through the net proceeds of the issuance of the Notes, together with borrowings under Precision's then outstanding credit facilities, an equity contribution of approximately $10,000,000 and available cash. The total purchase price, including transaction expenses, was approximately $116,593,000. The purchase price was allocated to estimated fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting. In connection with certain transactions described in Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, capital contributions of $6.0 million were made to LLC by investors in 2000 bringing the aggregate capital contributed to $48.1 million. LLC contributed this capital through Holdings to Precision. We are a leading supplier of precision-machined metal parts, tooling and assemblies for original equipment manufacturers. Our operating companies consist of Mid State, Nationwide, General Automation, Gillette, Certified, Galaxy Industries and Galaxy Precision Products Corp. (Galaxy Industries and Galaxy Precision Products Corp., together referred to as "Galaxy"). Our operating 4 companies service customers across a wide range of industries and pursue new customers and business in industries where we believe the potential for strong growth exists. Our customers include industry leaders such as General Electric Power Systems, New Venture Gear (a joint venture of General Motors and DaimlerChrysler), Kodak, Boeing, Caterpillar, TRW, Bosch and Dana. Precision has earned "Preferred" or "Qualified" supplier status with many of our customers. The manufacturing capabilities and engineered processes of our operating companies allow us to meet the critical specifications of our customers. Our manufacturing expertise includes precision machining such as milling, turning, boring, drilling, broaching and grinding, as well as value-added services such as prototyping, assembly, forming and welding. We manufacture parts, ranging in size from approximately 1 ounce to over 100,000 pounds, to extremely close tolerances maintaining tight tolerances across flat sheets and surfaces with multiple contours. Our operating companies work with traditional materials such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to machine materials such as titanium, inconel, and invar. In addition, we can provide design assistance, process and product engineering support and quality testing. The industries we serve and the related precision-parts, assemblies and tooling we machine and manufacture include: o Power Generation Industry - specialty alloy turbine wheels and spacers, shrouds and nozzles; o Business Machines Industry - bases and internal components for high and low volume printers and digital imaging machines; o Space and Satellite Industries - adapter rings, thrust rings, casting chambers and handling and transport aids; o Commercial and Military Aerospace Industry - precision tooling including bond jigs, assembly jigs, mill fixtures and aircraft wing assemblies and structural supports; o Agriculture and Construction Equipment Industries - machined engine blocks; and o Transportation Industry - piston valves used primarily for automatic braking systems in light trucks and sport utility vehicles, transmission housings, machined engine blocks, manifolds and connecting rods, and heavy truck axles and related parts. CUSTOMERS We currently service customers across a wide range of industries including the power generation, business machines, space and satellite, agriculture and construction equipment, commercial and military aerospace, medical and transportation industries. We have focused on developing solid relationships with customers that are leaders in their respective industries such as General Electric Power Systems, New Venture Gear, Ford Motor Company, Mannesmann (Rexroth), TRW, Boeing, DaimlerChrysler, Bosch, Caterpillar, Kodak and Dana. Our largest customer, General Electric Power Systems, accounted for approximately 43%, 36% and 39% of our net sales in 2001, 2000 and 1999, respectively, and our top ten customers represented approximately 82%, 77% and 67% of our net sales in 2001, 2000 and 1999, respectively. We have earned "Preferred" or "Qualified" supplier status with many of our customers. Our customer relationships, coupled with the important nature of many of the complex, close tolerance products we manufacture, have enabled us to obtain long-term contracts from certain key customers including General Electric Power Systems. 5 MARKETING AND DISTRIBUTION We market our parts and manufacturing capabilities through an internal sales force and outside representatives. Most of our sales personnel have worked with the same customers for many years. We maintain sales forces or outside sales representation at each of our subsidiaries in order to promote customer service and expertise. Additionally, in 2001 we created a corporate sales and marketing department so that we can offer our broad operating capabilities to our customers and potential customers. We believe this better positions Precision to pursue a number of cross-selling opportunities that we believe exist between the complementary customer bases of our subsidiaries. MANUFACTURING Our manufacturing expertise includes precision machining capabilities such as turning, milling, boring, drilling, broaching and grinding, as well as value-added services such as prototyping, forming, fabrication, welding, tapping and assembly. By highly engineering the manufacturing process, we are able to utilize general-purpose machines with computer numerically controlled capabilities to manufacture very complex and difficult to machine parts in many different configurations with a high degree of accuracy. Through data feedback, we systematically test for quality throughout the manufacturing process. We are also able to manufacture complex and difficult to machine parts by customizing our tooling and equipment. We are able to do this by capitalizing on our experience with a wide variety of part styles and sizes, our knowledge of various cutting tools and our skilled workforce. COMPETITION We operate in an industry that is highly fragmented and competitive. A variety of suppliers with different subsets of our manufacturing capabilities compete to supply the stringent demands of large original equipment manufacturers. Competition is generally based on price, quality, timeliness of delivery, design and engineering support and service and, in some instances, on our ability to deliver assemblies or sub-assemblies rather than individual parts. To an extent, the original equipment manufacturers are able to compete with their suppliers, since they can often produce their own components and assemblies if they so choose. However, during the past several years, original equipment manufacturers have been increasingly outsourcing component manufacturing functions and, in some cases, eliminating their in-house machining capabilities, in an effort to reduce costs, increase efficiency, improve quality and shorten product development cycles. A large number of actual or potential competitors exist, including the internal component operations of the original equipment manufacturers as well as independent suppliers, some of which are larger and have greater financial and other resources than we do. In addition, our business is becoming increasingly competitive due to supplier consolidation, the increased use of the Internet by buyers of precision-machined parts to solicit bids from vendors and the implementation of policies by original equipment manufacturers to manage their suppliers and strengthen their supply base. These policies include designating a limited number of suppliers as "Preferred" or "Qualified" suppliers and, in some cases, encouraging new suppliers to begin to supply selected product groups. We compete for new business at the beginning of the development of new products and upon the redesign of existing products by our major customers. We are also actively engaged in retaining existing business. Because of the large investment by original equipment manufacturers in tooling and the long lead-time required to commence production, original equipment manufacturers generally do not change a supplier during a program. If, however, a customer becomes dissatisfied with 6 our prices, quality, timeliness of delivery or perceives risks in our ability to satisfy future commitments, it could, in some cases, award future business or move existing business to another supplier. SUPPLIERS, SUBCONTRACTORS AND RAW MATERIALS Raw materials we use consist of traditional materials such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to machine materials such as titanium, inconel and invar. These materials are typically delivered in the form of bar stock, precision forgings, castings and flat sheets. A portion of the raw materials we use are supplied by our customers on consignment. Raw materials not supplied by our customers are purchased from several suppliers, and we do not believe that we are dependent on a limited number of suppliers. All of these materials were available in adequate quantities to meet our production demands in 2001. We may subcontract certain of our manufacturing or services such as heat-treating, plating or painting, among others, to third parties. We use a limited number of subcontractors based on their ability to deliver high quality parts or services on a cost-effective basis. We have not experienced any difficulty obtaining necessary subcontractor services. BACKLOG Backlog at December 31, 2001 decreased 1.6% to $136.6 million from $138.8 million at December 31, 2000. Backlog represents the sales price of all undelivered products for which we have customer purchase orders or contractual commitments that are expected to be delivered within the next 12 months. Our backlog is subject to price renegotiations, termination or rescheduling at the customer's convenience. ENVIRONMENTAL AND SAFETY REGULATION Our equipment, facilities and operations are subject to increasingly complex and stringent federal, state and local laws and regulations pertaining to the protection of human health and the environment. These include, among other things, the discharge of contaminants into the environment and the handling and disposition of wastes (including industrial, solid and hazardous wastes). In addition, we are required to obtain and maintain regulatory approvals in the United States in connection with our operations. Many environmental laws and regulations provide for substantial fines and criminal sanctions for violations. Based on the results of Phase I environmental site assessments that were performed at each of our facilities prior to and since their acquisition, we believe that we are in material compliance with applicable environmental laws and regulations. Capital expenditures for environmental control projects were insignificant in 2001 and, based on current information, we expect them to be insignificant in 2002. It is difficult to predict the future development of such laws and regulations or their impact on future earnings and operations. The timing and magnitude of costs related to environmental compliance may vary and we cannot assure you that material costs or liabilities will not be incurred. Certain environmental laws provide for strict, joint and several liability for investigation and remediation of spills and other releases of hazardous materials. These laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials. Persons who arrange (as defined under these laws) for the disposal or treatment of hazardous materials also may be liable for the costs of investigation, removal or remediation of such materials at the disposal or treatment site, regardless of whether the affected site is owned or operated by them. 7 Because we own and operate a number of facilities, and because we arrange for the disposal of hazardous materials at many disposal sites, we may incur costs for investigation, removal and remediation, as well as capital costs associated with compliance with environmental laws and regulations. Although such environmental costs have not been material in the past and are not expected to be material in the future, changes in environmental laws and regulations or unexpected investigations and clean-up costs could have a material adverse effect on our business, financial condition or results of operations. EMPLOYEES As of December 31, 2001, we had approximately 900 employees as compared to approximately 1,000 at December 31, 2000. None of our employees are represented by a union or covered by a collective bargaining agreement. We believe our relations with our employees are good. 8 ITEM 2. PROPERTIES In addition to our corporate office, we operate nine manufacturing facilities. Leases expire at various times through April 2007 and we generally have extension options. The following table summarizes the locations of our manufacturing facilities and their approximate size: APPROXIMATE TYPE OF LOCATION SQUARE FOOTAGE INTEREST -------- -------------- -------- PROPERTIES: Buena Park, California (1) 34,000 Leased Buena Park, California 42,000 Leased Canton, Michigan (2) 29,000 Leased Canton, Michigan 66,000 Leased Skokie, Illinois (3) 78,000 Leased Winslow, Maine 105,000 Leased Rochester, New York 66,000 Leased Rochester, New York 140,000 Leased Rochester, New York 70,000 Leased CORPORATE OFFICE: Hazlet, New Jersey 3,000 Leased (1) Represents two adjacent facilities. We expect to close these facilities during the second quarter of 2002. See Management's Discussion and Analysis of Financial Condition and Results of Operations - General. (2) This facility is currently vacant due to consolidation of operations. See Management's Discussion and Analysis of Financial Condition and Results of Operations - General. (3) We entered into a sale - leaseback transaction during the first quarter of 2002 for this facility. We owned this facility prior to this transaction. See Management's Discussion and Analysis of Financial Condition and Results of Operations - General. ITEM 3. LEGAL PROCEEDINGS We are a party to various litigation matters that are incidental to our business. We do not believe that the outcome of any of these legal proceedings will have a material adverse effect on our business, financial condition, results of operations, or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not Applicable. ITEM 6. SELECTED FINANCIAL DATA In February 1999, Precision was formed as a wholly-owned subsidiary of Precision Partners Holdings Company, a wholly-owned subsidiary of Precision Partners, L.L.C. On March 19, 1999, as part of a reorganization, LLC contributed to Precision, through Holdings, its investments and related assets in Galaxy, Mid State and Precision Partners Management Corp., which comprised substantially all of the assets of LLC. Prior to the acquisitions of Mid State and Galaxy in September 1998, LLC had substantially no operations and, prior to the completion of the 1999 reorganization and the acquisitions of Certified, Nationwide and General Automation in March 1999 and the acquisition of Gillette in September 1999, we had substantially no operations. For financial statement presentation purposes, the 1999 reorganization is accounted for as if it had occurred in September 1998 and we are treated as having commenced operations at that time similar to as if it were a pooling of interest. See Note 1 to our consolidated financial statements included elsewhere in this report. 10 The selected historical financial information should be read in conjunction with our consolidated financial statements, including the notes thereto, included elsewhere in this report, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7.

~~PAGE~~Precision NOPartners, Inc. Mid State (Predecessor) ------------------------------------------------------ ~~Disclosure~~-------------------------- ~~Concerning~~September ~~Forward~~9, ~~Looking~~January ~~Statements.........................~~1, 31998 ~~PART~~1998 Ithrough ~~Item~~through 1.December ~~Business....................................................~~31, 3September ~~Item~~30, 2.(In ~~Properties..................................................~~thousands) 72001 ~~Item~~2000 3.1999 ~~Legal~~1998 ~~Proceedings...........................................~~1998 71997 ~~Item~~--------- 4.--------- ~~Submission~~--------- of-------------- ~~Matters~~------------- to--------- aOPERATING ~~Vote~~DATA: Net sales $ 181,203 $ 169,976 $ 123,188 $ 12,602 $ 24,106 $ 33,870 Cost of ~~Security~~sales ~~Holders.........~~151,279 7135,671 ~~PART~~93,434 II9,090 ~~Item~~16,326 24,581 Restructuring and impairment of long-lived assets 5.,219 ~~Market~~4,270 ~~for~~-- ~~Registrant's~~-- ~~Common~~-- ~~Equity~~-- ~~and~~--------- ~~Related~~--------- 8--------- ~~Stockholder~~--------- ~~Matters.........................................~~--------- ~~Item~~--------- 6.Gross ~~Selected~~profit ~~Financial~~24,705 ~~Data.....................................~~30,035 829,754 ~~Item~~3,512 7.,780 ~~Management's~~9,289 ~~Discussion~~Selling, general and ~~Analysis~~administrative ofexpenses ~~Financial~~28,941 ~~Condition~~31,960 924,840 3,134 3,374 4,571 Restructuring and ~~Results~~impairment of ~~Operations...................................~~long-lived ~~Item~~assets ~~7A.~~1,315 ~~Quantitative~~2,501 ~~and~~-- ~~Qualitative~~-- ~~Disclosures~~-- ~~About~~-- ~~Market~~--------- 24--------- ~~Risk........................................................~~--------- ~~Item~~--------- --------- --------- Operating (loss) income (5,551) (4,426) 4,914 378 4,406 4,718 Interest (expense) income, net (17,394) (16,526) (12,567) (526) 66 1,112 Other (expense) income, net (346) (737) 8. ~~Financial~~(138) ~~Statements~~(91) ~~and~~23 ~~Supplementary~~Benefit ~~Data.................~~(provision) 24for ~~Item~~income 9.taxes ~~Changes~~-- in4,790 ~~and~~2,130 ~~Disagreements~~(109) ~~with~~(1,677) ~~Accountants~~(2,310) on--------- ~~Accounting~~--------- 24--------- ~~and~~--------- ~~Financial~~--------- ~~Disclosure....................................~~--------- ~~PART~~Net ~~III~~(loss) ~~Item~~income ~~10.~~$ ~~Directors~~(23,291) $ (16,899) $ (5,515) $ (395) $ 2,704 $ 3,543 ========= ========= ========= ========= ========= ========= OTHER FINANCIAL DATA: Depreciation and ~~Executive~~amortization ~~Officers............................~~$ 2519,017 ~~Item~~$ 16,695 $ 11.,906 ~~Executive~~$ ~~Compensation......................................~~1,105 27$ ~~Item~~806 $ 1,052 EBITDA (1) $ 13,466 $ 12.,269 ~~Security~~$ ~~Ownership~~16,820 of$ ~~Certain~~1,483 ~~Beneficial~~$ ~~Owners~~5,212 $ 5,770 Non-cash impairment and 30other ~~Management..................................................~~charges ~~Item~~(2), ~~13.~~(3) ~~Certain~~10,047 ~~Relationships~~10,154 ~~and~~-- ~~Related~~-- ~~Transactions..............~~-- 32-- ~~PART~~--------- IV--------- ~~Item~~--------- --------- --------- --------- Adjusted EBITDA (1), (2),(3) $ 23,513 $ 22,423 $ 16,820 $ 1,483 $ 5,212 $ 5,770 ========= ========= ========= ========= ========= ========= Cash flow from operating activities $ 14.,462 ~~Exhibits~~$ 12,815 ~~Financial~~$ ~~Statement~~5,398 ~~Schedules~~$ 2,574 $ 8,238 $ (244) BALANCE SHEET DATA (AT END OF PERIOD): Cash and ~~Reports~~cash onequivalents ~~Form~~$ 3311,444 8$ -~~K.........................................................~~- ~~Signatures~~$ 313 $ 963 $ 40 $ 2,638 Total assets $ 185,670 $ 207,351 $ 206,391 $ 63,321 $ 11,574 $ 20,119 Long-term debt $ 148,645 $ 141,860 $ 131,937 $ 23,000 $ 403 $ 686 Total debt $ 149,950 $ 149,835 $ 134,548 $ 23,000 $ 403 $ 686 Stockholders' equity $ 1,976 $ 25,247 $ 36,132 $ 31,605 $ 8,265 $ 17,094

11 (1) EBITDA is defined as operating income plus depreciation and amortization, excluding amortization of debt issue costs. Adjusted EBITDA is defined as EBITDA plus non-cash impairment and other charges (See (2) and (3) below). EBITDA and Adjusted EBITDA are not measures of performance under generally accepted accounting principles. While EBITDA and Adjusted EBITDA should not be used in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity, management believes that they may be used by certain investors as supplemental information to evaluate a company's financial performance. In addition, the definition of EBITDA and Adjusted EBITDA used in this report may not be comparable to the definition of EBITDA and Adjusted EBITDA used by other companies. (2) EBITDA for the year ended December 31, 2001 includes non-cash restructuring, impairment and other charges of approximately $10.0 million consisting of restructuring charges of $1.2 million, impairment of property, plant and equipment of $5.3 million and inventory adjustments of $3.5 million (3) EBITDA for the year ended December 31, 2000 includes non-cash impairment and other charges of $10.2 million consisting of goodwill impairment of $2.3 million, equipment impairment of $4.5 million, and other asset write-offs of $3.4 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Prior to the consummation of the 1999 reorganization and the acquisitions of Certified, Nationwide and General Automation in March 1999 and the acquisition of Gillette in September 1999, we had substantially no operations. For purposes of historical financial statement presentation, and for purposes of the following discussion, the 1999 reorganization is accounted for as if it occurred on September 9, 1998 and we are treated as having commenced operations at that time. See Note 1 to our consolidated financial statements. For this reason, the following management's discussion and analysis relates to the financial condition and results of operations of: o a combination of Precision for the period from January 1, 1999 through December 31, 1999 on a consolidated basis, including Certified, Nationwide, and General Automation from March 19, 1999 to December 31, 1999, LLC from January 1, 1999 to March 19, 1999 and Gillette from September 1, 1999 to December 31, 1999; and o the consolidated results of Precision for the years ended December 31, 2000 and 2001. YEAR ENDED DECEMBER 31, 2001 Due to continuing losses at Galaxy and Certified following the completion of reorganization plans announced in the third quarter of 2000, management has approved and begun to implement plans to further restructure these operations. Management has determined that it will consolidate the operations into one facility for each of Galaxy and Certified and dispose of excess equipment. Galaxy closed one of its two plants in the fourth quarter of 2001. The equipment that was located in the plant that closed was moved prior to year-end. Substantially all of the equipment that was retained was moved to Galaxy's other operating plant, but several machines were moved to other Precision subsidiaries. The following summarizes charges recorded during 2001 in connection with the restructuring of Galaxy (in thousands): 12 Impairment of long-lived assets to be abandoned or disposed $ 2,308 Future rent and taxes on plant to be eliminated 622 Provision for terminating equipment leases 165 Employee termination costs 50 -------- Total restructuring and impairment charges - Galaxy $ 3,145 ======== During the fourth quarter of 2001, $48,000 was paid and charged against the above noted accruals. Additionally, management incurred pre-tax cash costs of approximately $85,000 in the first quarter of 2002 to move equipment in connection with the restructuring of Galaxy. Management expects that cash will be expended against the above noted accruals as follows (in thousands): Year ending December 31, 2002 $ 358 Year ending December 31, 2003 $ 176 Year ending December 31, 2004 $ 180 Year ending December 31, 2005 $ 75 Certified intends to consolidate its operations into one of its current operating facilities during the first and second quarters of 2002. Equipment to be retained will be relocated from two other operating facilities, both of which are leased. Certified has begun to market equipment which will become excess as a result of this restructuring and has sold a portion of it in the first quarter of 2002. The following summarizes charges recorded during 2001, primarily during the third quarter, in connection with the restructuring of Certified (in thousands): Impairment of long-lived assets to be abandoned or disposed $ 2,128 Future rent and taxes on plants to be eliminated 353 ------- Total restructuring and impairment charges - Certified $ 2,481 ======== Additionally, management expects to incur pre-tax cash costs of approximately $0.6 million in the first and second quarters of 2002 to move equipment in connection with the restructuring of Certified. Management expects that cash will be expended against the above noted accruals as follows (in thousands): Year ending December 31, 2002 $ 223 Year ending December 31, 2003 $ 105 Year ending December 31, 2004 $ 25 Also during the third quarter of 2001, management determined that General Automation would dispose of certain under-utilized production equipment in order to make better use of its available production floor space. An impairment charge of $0.7 million was recorded in the third quarter of 2001. The Company entered into a contract for the sale and leaseback of General Automation's land and building during the fourth quarter of 2001. This transaction closed on March 12, 2002. An impairment charge of $0.2 million was recorded in the fourth quarter of 2001 for the estimated loss on the sale of the plant. 13 Of the restructuring charges and impairment of long-lived assets recorded in 2001 as noted above, $5.2 million is included in cost of sales, and $1.3 million is included in selling, general and administrative expenses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations". As a result of the recognition of the impairment charges, management estimates an annual reduction of $1.6 million in depreciation expense, offset in part by an estimated increase in annual facility lease expense at General Automation of $0.3 million. All impaired assets discussed above have been classified as assets held for sale in the December 31, 2001 consolidated balance sheet included elsewhere in this report. 14 In addition to the charges noted above, Gillette, General Automation and Galaxy recorded adjustments to reduce inventory balances in the aggregate by $3.5 million. These adjustments, which are recorded in cost of sales, resulted from the performance of physical inventory procedures and the identification of obsolete items. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations". YEAR ENDED DECEMBER 31, 2000 Significant adverse changes in Galaxy's and Certified's business environments, as well as historical, current and projected cash flow losses led management to evaluate the operations of these two businesses in the third quarter of 2000. As a result of this evaluation, management concluded that goodwill and machinery and equipment were impaired, and in accordance with Precision's accounting policies, impairment losses of $2.3 million relating to goodwill and $4.5 million relating to machinery and equipment at Galaxy and Certified were recognized in 2000. Of these amounts, $4.3 million is included in cost of sales and $2.5 million is included in selling, general and administrative expenses. The Company also incurred $1.1 million of cash charges related to the reorganization. As a result of the recognition of these impairment charges, an annual reduction of approximately $0.1 million in goodwill amortization and $0.9 million in depreciation expense have been realized. Further, based on the results of that assessment, adjustments of $3.0 million, $0.4 million and $0.7 million are included in cost of sales, selling, general and administrative expenses, and other expense, respectively in 2000. The adjustments relate to the write-off of certain inventory, accounts receivable, and machinery and equipment no longer in use. In addition, as part of the settlement agreement with a former president of one of Precision's subsidiaries, additional amortization expense of $0.6 million relating to a non-compete agreement previously entered into with this individual is included in selling, general, and administrative expenses in 2000. This additional amortization expense reflects the change in the termination date of that former president's covenant not to compete agreement from August 31, 2004 to December 31, 2000. This discussion and analysis should be read in conjunction with our audited financial statements, including the notes thereto, included elsewhere in this report. HISTORICAL RESULTS OF OPERATIONS 2001 COMPARED TO 2000 NET SALES Net sales increased 6.6% to $181.2 million in the year ended December 31, 2001 compared to $170.0 million in the year ended December 31, 2000. The increase is primarily due to growth in power generation component sales at Mid State, where sales increased 20.0%, and the first-time full year inclusion of sales of heavy construction and off-road diesel engine blocks and heavy truck axle components at Galaxy and Nationwide, respectively. These increases were offset in part by weakness in aerospace shipments at Certified, lower business machine and medical diagnostic equipment components sales at Gillette and lower sales volume in automotive and light truck components at Galaxy, General Automation and Nationwide. As noted above, the sale of power generation components provided a substantial portion of our sales growth in 2001. Based on current industry conditions and sales volumes as of the date of this filing, we currently expect that sales at Mid State in the first quarter and full year 2002 will be significantly less than in the comparable periods of 2001. Mid State is pursuing alternative sources of revenue to offset this expected decline. COST OF SALES Cost of sales increased 11.5% to $151.3 million in the year ended December 31, 2001 compared to $135.7 million in the year ended December 31, 2000. The year ended December 31, 2001 included inventory adjustments of $3.5 million as compared to adjustments of $3.0 million in 2000. Excluding these adjustments, cost of sales increased 11.3% to $147.8 million primarily related to the increase in sales. See discussion of Gross Profit below. RESTRUCTURING AND IMPAIRMENT CHARGES AFFECTING GROSS PROFIT During 2001, management approved restructuring plans for its Galaxy and Certified operations. In connection with these plans, Precision recorded restructuring and impairment charges that affected gross profit in the amount of $4.3 million. Also during 2001, management determined that General Automation would dispose of certain under-utilized production equipment resulting in an impairment charge of $0.7 million. A contract for the sale of General Automation's land and building was executed in December 2001 resulting in an impairment charge of $0.2 million. In connection with reorganization plans implemented during 2000, management concluded that machinery and equipment was impaired at Galaxy and Certified and recorded an impairment loss of $4.3 million that affected gross profit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - General". GROSS PROFIT Gross profit decreased 17.7% to $24.7 million in the year ended December 31, 2001 compared to $30.0 million in 2000. Excluding the restructuring and 15 impairment charges and the inventory adjustments discussed above, gross profit decreased 10.2% to $33.4 million. Gross margin, also excluding these items, decreased to 18.5% in 2001 from 21.9% in 2000. Strength in the power generation market and the absence of start-up costs incurred in late 2000 related to our heavy equipment engine block plant were more than offset by the impact of lower sales volume in automotive, light truck and aerospace, business machine and medical diagnostic equipment and engine components. Higher than expected start-up costs at Nationwide's truck axle component facility and cost overruns on certain aerospace jobs also negatively impacted gross profit in 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses decreased 9.4% to $28.9 million in the year ended December 31, 2001 compared to $32.0 million in 2000. This decrease is primarily related to Galaxy and Certified significantly lowering their selling, general and administrative costs offset in part by higher costs, primarily employee performance incentive costs, at Mid State relating to its strong growth. Additionally, severance and other costs related to the corporate management transition that occurred in 2000 were not incurred in 2001. Also, in the year ended December 31, 2000, the Company recorded additional amortization expense of $0.6 million to reflect the acceleration of the termination date of a former employee's non-compete agreement. Further, Galaxy incurred bad debt expense related to a customer dispute of $0.4 million in the year ended December 31, 2000. RESTRUCTURING AND IMPAIRMENT CHARGES NOT AFFECTING GROSS PROFIT During 2001, management approved restructuring plans for its Galaxy and Certified operations. In connection with these plans, Precision recorded restructuring and impairment charges that affected operating loss, but not gross profit in the amount of $1.3 million. In connection with reorganization plans implemented during the 2000, management concluded that goodwill and machinery and equipment was impaired at Galaxy and Certified and recorded an impairment loss of $2.5 million that affected operating loss, but not gross profit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - General". OPERATING LOSS As a result of all of the foregoing, operating loss increased to $5.6 million in the year ended December 31, 2001 from a loss of $4.4 million in 2000. Excluding the restructuring and impairment charges and other adjustments discussed above, operating income for 2001 was $4.5 million, as compared to $5.7 million for 2000. NET INTEREST EXPENSE For the year ended December 31, 2001, net interest expense increased 5.3% to $17.4 million from $16.5 million for 2000. The increase is primarily attributable to higher average outstanding debt partially offset by lower borrowing rates in 2001 versus 2000. Higher average debt balances were due to the refinancing and restructuring which occurred in the fourth quarter of 2000 and higher average outstanding borrowings under the Company's revolving line of credit. 16 OTHER (EXPENSE) INCOME, NET Other expense, net decreased 53.1% to $0.3 million in the year ended December 31, 2001 compared to $0.7 million in 2000. This is primarily related to fluctuations in losses on disposals of equipment. INCOME TAXES The tax provision for 2001 and the tax benefit for 2000 were each impacted by permanent differences between pre-tax loss for financial reporting purposes and tax reporting purposes resulting primarily from non-deductible goodwill generated by the stock acquisitions. Further, in accordance with Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, the Company recorded a valuation allowance against its net deferred income tax asset due to uncertainty regarding the ultimate recovery of such deferred income tax asset. Precision did not incur federal or state income tax obligations in 2001. Accordingly, Precision has recognized no provision or benefit in 2001, as compared to a tax benefit of $4.8 million in 2000. NET LOSS Net loss was $23.3 million in 2001 compared to $16.9 million in 2000 due to the aforementioned reasons. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased 13.9% to $19.0 million in the year ended December 31, 2001 compared to $16.7 million in 2000. The increase is primarily due to increased depreciation expense related to the significant expenditures on capital equipment in 2000 that supported new customer contracts; specifically for heavy construction and off-road diesel engine blocks and heavy truck axle components at Galaxy and Nationwide, respectively, and increased capacity for higher volumes in power generation components. This was offset in part by lower depreciation on assets impaired during the third quarter of 2000 and the third and fourth quarters of 2001. 2000 COMPARED TO 1999 NET SALES Net sales increased 38.0% to $170.0 million for the year ended December 31, 2000 compared to $123.2 million in 1999. The increase is primarily due to the first full year inclusion of Certified, General Automation, Nationwide, and Gillette which were acquired in 1999, as well as growth in power generation, light truck parts, medical diagnostic equipment component and business machine component sales partially offset by continuing declines in aerospace and other automotive component sales. COST OF SALES Cost of sales increased 45.2% to $135.7 million in the year ended December 31, 2000 compared to $93.4 million in the year ended December 31, 1999 primarily due to the increase in sales noted above. The year ended December 31, 2000 included adjustments of $3.0 million to write-down certain inventory and equipment no longer in use. Excluding these adjustments, cost of sales increased 42.1% to $132.8 million primarily related to the increase in sales. See discussion of Gross Profit below. 17 RESTRUCTURING AND IMPAIRMENT CHARGES AFFECTING GROSS PROFIT In connection with reorganization plans implemented during 2000, management concluded that machinery and equipment was impaired at Galaxy and Certified and recorded an impairment loss of $4.3 million that affected gross profit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - General". GROSS PROFIT Gross profit increased to $30.0 million for the year ended December 31, 2000 compared to $29.8 million in the same period in 1999. This increase is primarily due to the first full year inclusion of the companies noted above as well as increased power generation, light truck parts, medical diagnostic equipment components and business machine component sales. This was mostly offset by the impairment and other charges of $4.3 million recognized in the third quarter of 2000 related to the carrying value of intangible assets at Galaxy and long-lived assets at Certified and an adjustment of $3.0 million recorded in the third quarter of 2000 related to the write-down in value at Galaxy of certain inventory and of certain machinery and equipment no longer in use. Excluding these charges, gross margins declined due to increased labor and material costs and changes in product mix. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses increased to $32.0 million for the year ended December 31, 2000 compared to $24.8 million in 1999. The increase is primarily attributable to the first full year inclusion of Certified, General Automation, Nationwide, and Gillette that were acquired in 1999. An increase in the allowance for doubtful accounts relating to disputed receivables, increases in professional fees, severance costs relating to management changes and reorganizations, and the acceleration of amortization on a non-compete agreement also contributed to the period over period increase. RESTRUCTURING AND IMPAIRMENT CHARGES NOT AFFECTING GROSS PROFIT In connection with reorganization plans implemented during 2000, management concluded that goodwill and machinery and equipment was impaired at Galaxy and Certified and recorded an impairment loss of $2.5 million that affected operating loss, but not gross profit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - General". OPERATING LOSS For the year ended December 31, 2000, the Company generated operating losses of $4.4 million compared to operating income of $4.9 million for the year ended December 31, 1999 due to the aforementioned reasons. NET INTEREST EXPENSE For the year ended December 31, 2000, net interest expense increased 31.5% to $16.5 million from $12.6 million in 1999. The increase is primarily attributable to higher average outstanding debt in 2000 versus 1999 mainly due 18 to the fact that our $100 million senior subordinated notes were outstanding for a full year compared to approximately nine months in 1999. Additionally, we had increased borrowings for capital expenditures, which among other things, supported new projects for Caterpillar and Dana and increased orders from General Electric Power Systems. OTHER (EXPENSE) INCOME, NET Other expense, net was $0.7 million in the year ended December 31, 2000 compared to less than $0.1 million of other income, net in 1999. This is primarily related to losses on disposal of equipment in 2000. INCOME TAXES We recorded an income tax benefit of $4.8 million in 2000 compared to an income tax benefit of $2.1 million in 1999. Our effective tax benefit rate was 22.1% in 2000 compared to 27.9% for 1999. Tax benefits for the years ended December 31, 2000 and 1999 were impacted by permanent differences between pre-tax loss for financial reporting purposes and taxable losses resulting primarily from non-deductible goodwill generated by stock acquisitions. NET LOSS Net loss for the year ended December 31, 2000 was $16.9 million compared to a net loss of $5.5 million in the year ended December 31, 1999 due to the aforementioned reasons. DEPRECIATION AND AMORTIZATION Depreciation and amortization for 2000 was $16.7 million as compared to $11.9 million in 1999. The primary components are depreciation of $11.7 million and $8.5 million, respectively in 2000 and 1999, and amortization of goodwill of $4.0 million and $3.3 million, respectively in 2000 and 1999. The increases are primarily due to the first full year inclusion of depreciation and goodwill amortization related to acquisitions made in 1999. Depreciation also increased due to capital expenditures incurred in 2000. Also included are amortization costs related to a covenant not to compete, including a $0.6 million charge in 2000 that was recognized for the acceleration of amortization expense relating to the change in length of a covenant not to compete with a former president of one of Precision's subsidiaries. IMPACT OF NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. The Company, as required, will apply SFAS No. 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of the SFAS No. 142 is expected to result in a reduction of amortization expense of approximately $4.0 million in 2002. The Company will test goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of impairment, if any. The Company expects to perform the first of the required 19 impairment tests of goodwill as of January 1, 2002 by June 30, 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. Based on the reduction in earnings at certain of our operations since their acquisition, it is possible that impairments will exist when these operations are evaluated under the new guidance of SFAS No. 142. However, the Company has not yet completed its initial testing and therefore has not yet determined what the effect of these tests will be on its earnings and financial position. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. The statement requires companies to record a liability for asset retirement obligations in the period in which they are incurred, which typically could be upon the completion of construction or shortly thereafter. This statement is not expected to have a material effect on the Company. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting Results of Operations for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS No. 144 as of January 1, 2002 and it has not determined the effect, if any, the adoption of the Statement will have on the Company's financial position or results of operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. ACCOUNTS RECEIVABLE We are required to estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer. Further, we have certain customers that account for a significant portion of our revenue. Should they not pay amounts due to us, it may have a significant negative effect on our financial condition and results of operations. INVENTORY We are required to state our inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and selling prices and compare them with current inventory levels. As discussed elsewhere, we have recorded significant adjustments to inventory. There can be no assurances that adjustments to inventory will not be required in the future. 20 GOODWILL IMPAIRMENT We have significant amounts of goodwill. We periodically evaluate our businesses for potential impairment indicators, a process that involves subjective evaluation. If such indicators exist, we evaluate whether impairment has occurred, making assumptions regarding estimated future undiscounted cash flows and the fair value of the related assets. During the year ended December 31, 2001, the Company did not record any impairment losses related to goodwill although it did record such charges in 2000. The Company is required to adopt Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002 and will be required to analyze its goodwill for impairment issues during 2002, and on a periodic basis thereafter. If an impairment loss is required, the charge would be non-cash in nature but could have an adverse impact on the Company's reported stockholder's equity and results of operations. RESTRUCTURING AND IMPAIRMENT During 2001, we recorded significant impairments and accruals in connection with our restructuring of Galaxy and Certified as well as impairments at General Automation. These charges include estimates pertaining to the fair value of equipment to be disposed of and future costs at facilities that have been or will be closed. Although we do not anticipate significant changes, the actual amounts may differ from these estimates. DEFERRED TAX ASSETS We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. CONTINGENCIES From time to time, we are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. PRO FORMA FINANCIAL INFORMATION The unaudited pro forma consolidated financial information for the year ended December 31, 1999 gives effect to the 1999 acquisitions of Certified, Nationwide, General Automation and Gillette as if each transaction had occurred on January 1, 1999. For purposes of the unaudited pro forma consolidated financial information, the historical financial information of General Automation and Nationwide has been adjusted to eliminate the effect of certain assets not acquired and certain liabilities not assumed in the acquisition by 21 our company, in accordance with the terms of the purchase agreement relating to such acquisitions. The unaudited pro forma consolidated financial information should be read in conjunction with the historical financial statements of Precision, including the notes thereto, included elsewhere in this report. Management believes that the adjustments necessary to fairly present this pro forma consolidated financial information have been made based on available information and in the opinion of management are reasonable. The pro forma consolidated financial information should not be considered indicative of actual results that would have been achieved had the transactions been consummated on the dates indicated and do not purport to indicate results of operations as of any future date or for any future period. We cannot assure you that the assumptions used in the preparation of the pro forma consolidated financial information will prove to be correct. Although not required by Regulation S-X, due to the significance of the 1999 acquisitions, Precision is presenting this pro forma consolidated financial information to provide meaningful comparisons for the years ended December 31, 2001, 2000 and 1999. The following table sets forth certain consolidated financial information for the years ended December 31, 2001 and 2000 and selected pro forma consolidated financial information for year ended December 31, 1999:

~~APPROXIMATE~~Precision ~~LOCATION~~Partners, ~~SQUARE~~Inc. ~~FOOTAGE~~--------------------------------------------------- ~~TYPE~~Unaudited OFPro ~~INTEREST~~Forma (In thousands) 2001 2000 1999 -------- -------------- ----------------------------- ~~PROPERTIES~~OPERATING DATA: ~~Buena~~Net ~~Park~~sales $ 181,203 ~~California.........................~~$ 34169,~~000~~976 ~~Leased~~$ ~~Buena~~149,749 ~~Park~~Cost of sales 151,279 ~~California.........................~~135,671 42113,~~000~~509 ~~Leased~~Restructuring ~~Cerritos~~and impairment of long-lived assets 5,219 ~~California...........................~~4,270 -- --------- --------- --------- Gross profit 24,705 30,035 36,240 Selling, general and administrative expenses 28,~~000~~941 ~~Leased~~31,960 ~~Plymouth~~25,516 ~~Michigan.............................~~Restructuring 30and impairment of long-lived assets 1,~~000~~315 ~~Owned~~2,501 ~~Plymouth~~-- --------- --------- --------- Operating (loss) income (5,551) ~~Michigan.............................~~(4,426) 2910,~~000~~724 ~~Owned~~Interest ~~Canton~~(expense) income, ~~Michigan...............................~~net 23(17,~~000~~394) ~~Leased~~(16,526) ~~Canton~~(15,671) ~~Michigan...............................~~Other 66(expense) income,~~000~~ ~~Leased~~net ~~Skokie~~(346) (737) 136 Benefit for income taxes -- 4,790 ~~Illinois...............................~~1,073 78--------- --------- --------- Net (loss) $ (23,~~000~~291) ~~Owned~~$ ~~Winslow~~(16,899) ~~Maine.................................~~$ ~~105~~(3,~~000~~738) ~~Leased~~========= ~~Rochester~~========= ========= OTHER FINANCIAL DATA: Depreciation and amortization $ 19,017 ~~New~~$ ~~York............................~~16,695 66$ 15,~~000~~420 ~~Leased~~EBITDA ~~Rochester~~(1) $ 13,466 ~~New~~$ ~~York............................~~12,269 ~~140~~$ 26,~~000~~144 ~~Leased~~Non-cash ~~Rochester~~impairment and other charges (2), ~~New~~(3) ~~York............................~~10,047 7010,~~000~~154 ~~Leased~~-- ~~CORPORATE~~--------- ~~OFFICE:~~--------- ~~Hazlet,~~--------- ~~New~~Adjusted ~~Jersey.............................~~EBITDA (1), (2),(3) $ 23,~~000~~513 ~~Leased~~$ 22,423 $ 26,144 ========= ========= =========

22 (1) EBITDA is defined as operating income plus depreciation and amortization, excluding amortization of debt issue costs. Adjusted EBITDA is defined as EBITDA plus non-cash impairment and other charges (See (2) and (3) below). EBITDA and Adjusted EBITDA are not measures of performance under generally accepted accounting principles. While EBITDA and Adjusted EBITDA should not be used in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity, management believes that they may be used by certain investors as supplemental information to evaluate a company's financial performance. In addition, the definition of EBITDA and Adjusted EBITDA used in this report may not be comparable to the definition of EBITDA and Adjusted EBITDA used by other companies. (2) EBITDA for the year ended December 31, 2001 includes non-cash restructuring, impairment and other charges of approximately $10.0 million consisting of restructuring charges of $1.2 million, impairment of property, plant and equipment of $5.3 million and inventory adjustments of $3.5 million (3) EBITDA for the year ended December 31, 2000 includes non-cash impairment and other charges of $10.2 million consisting of goodwill impairment of $2.3 million, equipment impairment of $4.5 million, and other asset write-offs of $3.4 million. PRO FORMA RESULTS OF OPERATIONS Although not required to do so, due to the significance of the 1999 acquisitions, Precision is presenting a discussion of its pro forma results to provide meaningful comparisons for the years ended December 31, 2000 and 1999. The pro forma consolidated financial information should not be considered indicative of actual results that would have been achieved had the transactions been consummated on the respective dates indicated and do not purport to indicate results of operations as of any future date or for any future period. We cannot assure you that the assumptions used in the preparation of the pro forma consolidated financial information will prove to be correct. Please note that no discussion of 2001 compared to 2000 is shown here as there are no pro forma adjustments in those years. For a comparison of historical results for 2001 to 2000, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Historical Results of Operations. 2000 COMPARED TO 1999 NET SALES Net sales increased 13.5% to $170.0 million for the year ended December 31, 2000, compared to $149.7 million in 1999. The increase was primarily due to increases at Mid State, Gillette, Galaxy, and Nationwide offset in part by a decrease at Certified. The increases resulted from improvement in power generation, medical diagnostic equipment, business machine components, heavy construction and light truck component sales. These sales were partially offset by lower sales at Certified, which declined due to volume and price reductions resulting from heavy competition in a soft defense and aerospace tooling market. COST OF SALES Cost of sales increased 19.5% to $135.7 million in the year ended December 31, 2000 compared to $113.5 million in the year ended December 31, 1999 primarily due to the increase in sales noted above. The year ended December 31, 23 2000 included adjustments of $3.0 million to write-down certain inventory and equipment no longer in use. Excluding these adjustments, cost of sales increased 17.0% to $132.7 million primarily related to the increase in sales. See discussion of Gross Profit below. RESTRUCTURING AND IMPAIRMENT CHARGES AFFECTING GROSS PROFIT In connection with reorganization plans implemented during 2000, management concluded that machinery and equipment was impaired at Galaxy and Certified and recorded an impairment loss of $4.3 million that affected gross profit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - General". GROSS PROFIT Gross profit decreased 17.1% to $30.0 million for the year ended December 31, 2000 compared to $36.2 million in the same period in 1999. This decrease is primarily due to the impairment and other charges of $4.3 million recognized in the third quarter of 2000 related to the carrying value of intangible assets at Galaxy and long-lived assets at Certified and an adjustment of $3.0 million recorded in the third quarter of 2000 related to the write-down in value at Galaxy of certain inventory and of certain machinery and equipment no longer in use. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses increased to $32.0 million for the year ended December 31, 2000 compared to $25.5 million in 1999. Costs related to increased net sales, increases in the allowance for doubtful accounts relating to disputed receivables, increases in professional fees, the acceleration of amortization on a non-compete agreement and severance costs relating to management changes contributed to the period over period increase. RESTRUCTURING AND IMPAIRMENT CHARGES NOT AFFECTING GROSS PROFIT In connection with reorganization plans implemented during 2000, management concluded that goodwill and machinery and equipment was impaired at Galaxy and Certified and recorded an impairment loss of $2.5 million that affected operating loss, but not gross profit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - General". OPERATING (LOSS) INCOME For the year ended December 31, 2000, we generated operating losses of $4.4 million compared to operating income of $10.7 million for the year ended December 31, 1999 due to the aforementioned reasons. NET INTEREST EXPENSE For the year ended December 31, 2000, net interest expense increased 5.5% to $16.5 million from $15.7 million in 1999. The increase is primarily attributable to higher average outstanding debt in 2000 versus 1999 mainly due 24 to increased borrowings for capital expenditures, which among other things, supported new projects for Caterpillar and Dana and increased orders from General Electric Power Systems. OTHER (EXPENSE) INCOME, NET Other expense, net was $0.7 million in the year ended December 31, 2000 compared to $0.1 million of other income, net in 1999. This is primarily related to losses on disposal of equipment in 2000. INCOME TAXES We recorded an income tax benefit of $4.8 million in 2000 compared to an income tax benefit of $1.1 million in 1999. Our effective tax benefit rate was 22.1% in 2000 compared to 22.3% for 1999. Tax benefits for the years ended December 31, 2000 and 1999 were impacted by permanent differences between pre-tax loss for financial reporting purposes and taxable losses resulting primarily from non-deductible goodwill generated by stock acquisitions. NET LOSS Net loss for the year ended December 31, 2000 was $16.9 million compared to a net loss of $3.7 million in the year ended December 31, 1999 due to the aforementioned reasons. DEPRECIATION AND AMORTIZATION Depreciation and goodwill amortization expense increased 8.3% in the year ended December 31, 2000 to $16.7 million from $15.4 million for the year ended December 31, 1999 due to capital expenditures during 2000 as well as the acceleration of amortization expense relating to the change in the length of a covenant not to compete agreement with a former president of one of Precision's subsidiaries. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the year ended December 31, 2001 increased to $14.5 million compared to $12.8 million for year ended December 31, 2000. Higher depreciation, the receipt of customer advances and decreases in inventories and accounts receivable in 2001 offset a larger net loss and a decrease in accounts payable. Net cash provided by operating activities for the year ended December 31, 2000 increased to $12.8 million compared to $5.4 million for the year ended December 31,1999. This increase primarily reflects a decrease in working capital and an increase in depreciation and amortization offset in part by a larger net loss. Net cash used in investing activities decreased to $2.4 million for the year ended December 31, 2001 from $32.7 million in 2000. This decrease relates to lower capital expenditures partially offset by proceeds from the sale of property and equipment related to Galaxy. Net cash used in investing activities decreased to $32.7 million for the year ended December 31, 2000 from $121.4 million in 1999. This decrease relates to the fact that there were no acquisitions of businesses in 2000 as compared to $111.3 million used for acquisitions in 1999, partially offset by an increase in capital expenditures primarily to support new contracts with Caterpillar and Dana and increased orders from General Electric Power Systems. 25 Net cash used in financing activities in the year ended December 31, 2001 was $0.9 million, primarily reflecting the incurrence of approximately $1.1 million of deposits and commitment fees related to the refinancing of Precision's credit facilities completed in February 2002. Net borrowings under our revolving credit facility were offset by repayments of the term loan in 2001. Net cash provided by financing activities in the year ended December 31, 2000 was $19.6 million, primarily reflecting the proceeds of a $20.8 million term loan and a $6.0 million capital contribution received from Precision's stockholder. The proceeds of the loan and the capital contribution were partially offset by repayment of borrowings under Precision's revolving credit facility, scheduled debt payments under Precision's bank term loan, and payment of financing costs to obtain the term loan and restructure the existing credit facilities during 2000. Net cash provided by financing activities was $115.4 million for the year ended December 31, 1999 primarily reflecting the issuance of Precision's outstanding senior subordinated notes, entering into new credit facilities and equity contributions received from our stockholder in March 1999 in connection with the acquisitions made in 1999, net of repayment of pre-existing debt and payments of fees relating to the issuance of Precision's outstanding senior subordinated notes. Precision's principal sources of liquidity are available borrowings under its revolving credit facility and cash flow from operations. Precision expects that its principal liquidity requirements will continue to be working capital, capital expenditures, debt service and required lease payments. Precision's credit facilities at December 31, 2001 consisted of a $16.4 million term loan and a $16.2 million revolving credit facility, each payable to a bank group maturing on March 31, 2005, and a $17.3 million equipment term loan maturing December 1, 2005. Collectively, these items comprised our senior debt. As of December 31, 2001, Precision had total debt of approximately $150.0 million, primarily consisting of the outstanding aggregate principal amount of our $100 million senior subordinated notes, the outstanding principal amount on our bank term loan, the outstanding principal amount of our equipment term loan and $16.2 million of outstanding borrowings under our revolving credit facility. Our cash balance at December 31, 2001 was $11.1 million. Our outstanding senior subordinated notes have a face value of $100 million, bear interest at a rate of 12% per annum and mature March 15, 2009. The notes are fully and unconditionally guaranteed by all of our subsidiaries on a joint and several basis. These subsidiary guarantees are unsecured and subordinated in right of payment to each subsidiary guarantor's senior debt. In the fourth quarter of 2001, we were unable to comply with certain financial covenants of our credit facilities and our master lease agreement. The lenders agreed to waive these covenant defaults through the completion of the refinancing discussed below. On February 1, 2002, Precision entered into a new credit agreement and a new master lease agreement (to be accounted for as a capital lease). Funding took place on February 4, 2002. A portion of the proceeds from the new credit agreement, along with available cash, were utilized to repay in full the senior debt previously outstanding and costs and expenses related to the refinancing, while the new master lease agreement was used to refinance all obligations under our previous master lease agreement (accounted for as an operating lease). The remainder of the proceeds and availability under the new credit agreement will be used as needed for working capital and other general corporate purposes. The new credit agreement consists of a $44.050 million term loan that has been fully drawn and a $25.0 million revolving credit facility. The term loan amortizes over 47 months with quarterly principal payments of 2.5% of the original principal amount in each of quarters three through twelve, 5.0% in each of quarters thirteen through fifteen and 60.0% in quarter sixteen. The first principal payment is due October 1, 2002. Interest on the term loan is payable at an annual rate of LIBOR plus a margin of 5.00%, subject to a minimum interest 26 rate of 10.00% through December 31, 2002, increasing to 11.00% through December 31, 2004 and to 12.00% thereafter. The revolving credit facility is for a term of 47 months. Borrowings under this facility are limited to 85% of eligible accounts receivable and 50% of eligible inventory, each as defined in the new credit agreement, and subject to other eligibility requirements and reserves as per the new credit agreement. In certain instances, borrowings under the revolving credit facility can be further restricted due to limitations on Permitted Indebtedness as defined in the indenture related to our senior subordinated notes. Interest on the revolving credit facility is payable at an annual rate of either LIBOR plus a margin of 3.25% or the lender's index rate plus a margin of 1.75%, at Precision's option. There is also an unused facility fee payable at an annual rate of 0.50% on any unused portion of the revolving credit facility. At closing, there were no funds drawn or borrowings outstanding under the revolving credit facility. The new master lease agreement has a principal balance of $5.950 million and amortizes over 47 months with principal and interest payable as described above for the new term loan. This lease will be accounted for as a capital lease. If Precision's Consolidated Senior Leverage Ratio (as defined in the new credit agreement) exceeds certain predetermined levels, then Precision's borrowing rate will increase 200 basis points on an in-kind basis over the otherwise applicable annual rate on the term loan and the revolving credit facility. Such in-kind amounts would be payable at the maturity date of the new credit agreement, so long as Precision is not otherwise in default. If Precision has a continuing Event of Default, as defined in the new credit agreement, our borrowing rate will increase 200 basis points over the otherwise applicable annual rates under both the new credit and master lease agreements. The lenders have the right to syndicate the revolving credit facility. The lenders also have the right to adjust the pricing and structure of the revolving credit facility whether or not it is eventually syndicated to a third party or held by one or both of the current lenders. Pricing changes of up to 300 basis points on inventory advances and up to 100 basis points on other advances are permitted. Changes to the structure could include, without limitation, adjusting advance rates, eligibility requirements and reserve requirements, going from a consolidated borrowing base to individual company borrowing bases and/or reducing the term of each of the credit facilities to three years. The lenders have a fully perfected first priority security interest in substantially all existing and after-acquired assets of Precision and its subsidiaries (other than intercompany debt). Precision and each of its principal subsidiaries are borrowers under the new credit agreement and each borrower guarantees the obligations of every other borrower. Precision's immediate parent, Precision Partners Holding Company, also guarantees the new credit agreement. Precision is subject to certain financial ratio covenants under the new credit and master lease agreements including, but not limited to, maximum Consolidated Senior Leverage Ratio, minimum Consolidated Senior Interest Coverage Ratio, minimum Consolidated Total Interest Coverage Ratio, minimum Consolidated Fixed Charge Coverage Ratio and maximum Capital Expenditures. There are mandatory repayment obligations related to certain asset dispositions, sales of equity and a portion of any excess cash flow, as defined. Under certain circumstances, prepayments on the term loan require prepayment premiums of 3.0%, 1.5%, 1.0% and 0.5% of the amounts prepaid in the first, second, third and fourth years, respectively. Costs and expenses related to the refinancing totaled $4.4 million and will be capitalized and amortized over the life of the related agreements. Unamortized deferred debt costs totaling $0.9 million related to the old credit agreement will be written off as an extraordinary item in the first quarter of 27 2002. Unamortized deferred lease costs totaling $0.1 million related to the old master lease agreement will be written off through cost of sales in the first quarter of 2002. The indenture related to the senior subordinated notes and our other financing agreements as discussed above impose limitations on Precision's ability to, among other things, incur indebtedness (including capital leases), incur liens, pay dividends or make other restricted payments, consummate certain asset sales, enter into transactions with affiliates, issue preferred stock, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of Precision's assets. In addition, the financing agreements limit our ability to enter into leases or sale and leaseback transactions, to make capital expenditures and to make acquisitions. Precision's amortization requirements are limited to the new term loan and capital lease obligations under the new master lease agreement. Considering the refinancing described above, our significant contractual obligations are as follows (in thousands):

~~PRECISION~~(In ~~PARTNERS,~~thousands) ~~INC.~~2002 ~~MID~~2003 ~~STATE~~2004 ~~(PREDECESSOR)~~2005 ~~---------------------------------------~~2006 Thereafter ----------~~-------------------------~~ ~~SEPTEMBER 9, JANUARY 1, 1998 1998 THROUGH THROUGH DECEMBER 31, SEPTEMBER 30, 2000 1999 1998 1998 1997 1996~~ -------- -------- --------~~----~~ --------~~-----~~ -------- --~~------~~ ~~(IN~~Long ~~THOUSANDS)~~term ~~OPERATING~~debt ~~DATA: Net sales.....................~~ $~~169,976~~ ~~$123~~1,~~188~~156 $~~12,602~~ ~~$24~~4,~~106~~416 $33 4,~~870~~405 $~~28,462~~ ~~Gross profit.................. 30,035 (1)(2) 29,754 3,512~~ 7,~~780~~709 ~~9,289~~$ 826,~~172~~430 ~~Operating income (loss)....... (4~~$100,~~426)(1)(2)~~000 ~~4,914~~Capital ~~378~~lease ~~4,406~~obligations ~~4,718~~$ ~~3,850~~149 ~~Interest expense, net......... 16,526 12,567 526 37 85 69 Net income (loss)............. (16,899)(3) (5,515) (395) 2,704 3,543 3,120 OTHER FINANCIAL DATA: Depreciation and amortization................~~ $ ~~16,695~~595 $ ~~11,906~~595 $ 1,~~105~~041 $ ~~806 $ 1~~3,~~052~~570 $ ~~884 EBITDA (4).................... 12,269 16,820 1,483 5,212 5,770 4,734 Non~~-~~cash impairment and other charges (5)................. 10,154~~ -- --Operating --lease --obligations --$ ~~-------- -------- ------- ------- ------- ------- Adjusted EBITDA (4)(5).......... 22~~3,~~423~~711 ~~16,820~~$ 13,~~483~~204 ~~5,212~~$ 52,~~770~~472 ~~4,734 BALANCE SHEET DATA (AT END OF PERIOD): Total assets..................~~ $~~207,351~~ ~~$206~~2,~~391~~199 $~~63,321~~ ~~$11~~1,~~574~~719 $~~20,119~~ 172,043 Long-term debt................ 141,860 131,937 23,000 403 686 591 Total debt.................... 149,835 134,548 23,000 403 686 591 Stockholders' equity.......... 25,247 36,132 31,605 8,265 17,094 13,751499

Precision's other debt service requirements over the next two years consist primarily of interest expense on those loans, on the senior subordinated notes and on borrowings under the revolving credit facility. Any amounts then outstanding under the new revolving credit agreement are due in 2006. Our other short-term cash needs are expected to consist primarily of working capital requirements and capital expenditures to maintain and expand Precision's manufacturing capabilities. Precision currently expects that its capital expenditures will be approximately $5.0 million in 2002, including capital expenditures to maintain current production capabilities, but excluding the assets related to the capital lease entered into as discussed above. However, Precision's capital expenditures will be affected by, and may be greater or less than currently anticipated depending upon, among other things, the size and nature of new business opportunities and bank credit limitations. The terms of the new credit agreement limit capital expenditures in 2002 to $5 million plus amounts for certain capital expenditure commitments entered into prior to 2002. Based upon current operations and the historical results of its subsidiaries, Precision believes that its cash flow from operations, together with available borrowings under its new revolving credit facility, will be adequate to meet its anticipated requirements for working capital, capital expenditures, scheduled lease payments, and scheduled debt service over the next 12 months. However, there can be no assurance that Precision will generate adequate cash flow. In addition, Precision's ability to repay outstanding debt at maturity may depend on the availability of refinancing. At March 19, 2002, Precision had $1.5 million outstanding under its new revolving credit facility and had a cash balance in its bank accounts of $0.7 million. Total unused availability at that date is approximately $15.6 million based on the borrowing base formula in the agreement and considering the limits on Permitted Indebtedness as defined and contained in the indenture related to our senior subordinated notes. In the fourth quarter of 2000, we were also unable to comply with certain covenants included in our bank credit facilities and master lease agreement then in effect. On December 8, 2000, Precision entered into an amendment and waiver 28 with respect to its bank credit facilities, an amended and restated master lease, and a new $20.8 million six-year equipment term loan facility. In connection with these transactions, Precision also received an equity contribution of $6.0 million. At closing, we used the entire $20.8 million term loan facility to refinance approximately $11.8 million of equipment previously leased under the master lease agreement, to repay approximately $2.9 million of advances under our revolving credit facility that were used to purchase equipment, and to pay approximately $6.1 million of outstanding invoices for new equipment. The $6.0 million equity contribution was used to pay the fees and expenses associated with these transactions and to repay advances under our revolving credit facility used to purchase new equipment. The total fees and expenses relating to these transactions were approximately $0.9 million. The amendment and waiver in respect of our bank credit facilities includes a waiver of all defaults that existed on or prior to December 8, 2000. All of the agreements discussed in this paragraph were refinanced on February 4, 2002 as discussed above. INFLATION We do not believe that inflation has had a significant impact on our cost of operations. OTHER CONSIDERATIONS PRECISION'S SUBSTANTIAL DEBT AND THE SIGNIFICANT DEMANDS ON ITS CASH RESOURCES COULD AFFECT ITS ABILITY TO MAKE PAYMENTS ON THE OUTSTANDING DEBT AND ACHIEVE ITS BUSINESS PLAN. Substantial Debt. Precision has incurred a substantial amount of indebtedness that requires significant interest payments. As of December 31, 2001, Precision had total consolidated debt of $150.0 million and net interest expense of approximately $17.4 million for the year then ended. In addition, as of the same date, Precision had operating leases outstanding under its master lease agreement for equipment with an unamortized cost of approximately $6.0 million. Precision refinanced its senior debt and master lease agreement on February 4, 2002. Subject to the limits contained in the indenture governing Precision's outstanding senior subordinated notes, the new credit and master lease agreements, Precision and its subsidiaries may incur additional indebtedness from time to time to finance capital expenditures, investments or for other general corporate purposes. As of March 19, 2002, $1.5 million was outstanding under the revolving credit facility and the Company had a cash balance in its bank accounts of approximately $0.7 million. Demands on Cash Resources. Precision has substantial demands on its cash resources in addition to operating expenses and interest expense on the senior subordinated notes, including, among others, interest and amortization payments under its new Credit and Master Lease Agreements. See "Liquidity and Capital Resources" above. Effects on Precision's Business Strategy. Precision's level of indebtedness and the corresponding demands on its cash resources could have important effects on Precision's business. For example these demands could, among other things,: o make it more difficult for Precision to satisfy its debt service obligations with respect to the senior subordinated notes and its secured indebtedness under its new credit and master lease agreements; 29 o require Precision to dedicate a substantial portion of its cash flow from operations to debt service, thereby reducing the amount of its cash flow available for working capital, capital expenditures, acquisitions and other general corporate purposes; o limit Precision's flexibility in planning for, or reacting to, changes in its industry (including the pursuit of its growth strategy); o place Precision at a competitive disadvantage compared to its competitors that have fewer debts and significantly greater operating and financing flexibility than Precision does; o limit, along with the financial and other restrictive covenants applicable to Precision's indebtedness, among other things, its ability to borrow additional funds even when necessary to maintain adequate liquidity; and o increase Precision's vulnerability to general adverse economic and industry conditions. Precision's ability to pay interest on its long-term indebtedness and to satisfy its other debt obligations will depend upon its future operating performance and may depend upon the availability of refinancing indebtedness, which will be affected by the instruments governing its indebtedness, including the indenture, the credit facilities and the master lease, prevailing economic conditions and financial, business and other factors, certain of which are beyond its control. If Precision is unable to service its indebtedness and fund its business, it may be forced to change its strategy. Such change may include: o further reducing or delaying capital expenditures; o seeking additional debt financing or equity capital; o further asset sales; or o restructuring or refinancing its indebtedness. There can be no assurance that any such strategy could be effected on terms satisfactory to Precision or at all. Effect of Additional Debt. Subject to and within the limits of Precision's debt instruments and the master lease, Precision may incur additional indebtedness from time to time to finance capital expenditures, investments and operations or for other purposes, including the borrowing of amounts repaid under its credit facilities. This could further exacerbate the risks described below. PRECISION'S DEBT INSTRUMENTS AND AGREEMENTS RESTRICT ITS ABILITY AND THE ABILITY OF ITS SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS. Indenture. The indenture governing Precision's outstanding senior subordinated notes restricts our ability and the ability of some of our subsidiaries to, among other things: o incur additional debt; o pay dividends on or redeem or repurchase capital stock; o issue or allow any person to own preferred stock of subsidiaries; o incur or permit to exist indebtedness senior to the senior subordinated notes, but subordinated to any of its other indebtedness; o in the case of non-guarantor subsidiaries, guarantee debt without also guaranteeing the Notes; o in the case of restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to Precision; o make investments; 30 o incur or permit to exist liens; o enter into transactions with affiliates; o merge, consolidate or amalgamate with another company; and o transfer or sell assets. Credit Facilities and Master Lease. Precision's credit facilities, and the master lease also contain similar covenants, as well as a restriction on acquisitions and a number of financial covenants requiring Precision to meet financial ratios and financial condition tests. Precision's ability to borrow under its revolving credit facility depends upon satisfaction of these covenants and borrowing base requirements. Precision's ability to meet these covenants and requirements can be affected by events beyond its control. There can be no assurance that Precision will meet these requirements. Effect of Future Breach. Precision's failure to comply with the obligations and covenants in the credit facilities, the master lease or the indenture could result in an event of default under one or more of those agreements that, if not cured or waived, could terminate its ability to borrow under the revolving credit facility, could permit acceleration of the relevant debt and acceleration of debt under other instruments and could permit foreclosure on any collateral granted. PRECISION IS STRUCTURED AS A HOLDING COMPANY AND IT DEPENDS ON ITS SUBSIDIARIES IN ORDER TO SERVICE ITS DEBT. Precision is structured as a holding company. Precision's only significant asset is the capital stock or other equity interests of Precision's operating subsidiaries. As a holding company, Precision conducts all of its business through its subsidiaries. Consequently, Precision's cash flow and ability to service its debt obligations are dependent upon the earnings of Precision's operating subsidiaries and the distribution of those earnings to Precision, or upon loans, advances or other payments made by these subsidiaries to Precision. The ability of Precision's subsidiaries to pay dividends or make other payments or advances to Precision will depend upon their operating results and will be subject to applicable laws and contractual restrictions contained in the instruments governing their indebtedness, including Precision's credit facilities and the indenture. Although the indenture limits the ability of these subsidiaries to enter into consensual restrictions on their ability to pay dividends and make other payments to Precision, these limitations are subject to a number of significant qualifications. There can be no assurance that the earnings of Precision's operating subsidiaries will be adequate for Precision to service its debt obligations. PRECISION'S SUCCESS DEPENDS ON ITS ABILITY TO SUCCESSFULLY OPERATE ITS SUBSIDIARIES ON A COMBINED BASIS. Precision's operating subsidiaries operate independently of one another and there can be no assurance that Precision will be able to effectively manage these operating companies on a combined basis. In addition, to the extent management time may be diverted to any one or more of the companies, the other operating companies may be adversely affected. A failure by Precision to operate these businesses profitably or to manage them effectively on a combined basis could have a material adverse effect on its results of operations and financial condition. Although Precision performs a due diligence investigation of each business that it acquires, there may be liabilities of acquired companies, including those previously acquired and those that may be acquired in the future, that Precision fails or is unable to discover during its due diligence investigation and for which it, as a successor owner, may be responsible. In connection with acquisitions, Precision generally seeks to minimize the impact of these liabilities by obtaining indemnities and warranties from the seller that may be 31 supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to their limited scope, amount, or duration, the financial limitations of the indemnitor or warrantor, or other reasons. THE SUCCESS OF PRECISION'S BUSINESS STRATEGY TO REALIZE A NUMBER OF CROSS SELLING OPPORTUNITIES COULD BE AFFECTED BY A NUMBER OF FACTORS BEYOND ITS CONTROL. As part of its business strategy, Precision intends to pursue and capitalize on a number of cross-selling opportunities it believes exist as a result of the complementary customer bases and manufacturing capabilities of its companies and to implement certain operating improvements. Precision's ability to implement and realize the benefits of this strategy could be affected by a number of factors beyond its control, such as operating difficulties, increased operating costs, regulatory developments, general economic conditions, increased competition, or the inability to obtain adequate financing for Precision's operations on suitable terms. In addition, Precision may decide to alter or discontinue certain aspects of this strategy. Any failure to implement aspects of Precision's strategy may adversely affect its results of operations, financial condition and ability to service debt. PRECISION'S INABILITY TO ACCESS ADDITIONAL CAPITAL COULD HAVE A NEGATIVE IMPACT ON ITS GROWTH STRATEGY. Precision's current business strategy will require additional capital investment. Capital will be required for, among other purposes, managing acquired companies, acquiring new equipment, maintaining the condition of Precision's existing equipment and completing new acquisitions. To the extent that cash generated internally and cash available, or permitted to be expended, under Precision's credit facilities is not sufficient to fund capital requirements, Precision will require additional debt and/or equity financing. There can be no assurance, however, that such financing will be available or, if available, will be permitted under our current financing agreements or available on terms satisfactory to Precision. Future debt financing, if available, may result in increased interest and amortization expense, increased leverage and decreased income available to fund further acquisitions and expansion, and may limit Precision's ability to withstand competitive pressures and render it more vulnerable to economic downturns. If Precision fails to obtain sufficient additional capital in the future, it could be forced to curtail its growth strategy by reducing or delaying capital expenditures and acquisitions, selling assets or restructuring or refinancing its indebtedness. A LOSS OF KEY EMPLOYEES AND HIGHLY SKILLED WORKERS COULD ADVERSELY AFFECT PRECISION'S BUSINESS. Some of Precision's executive officers are key to Precision's management and direction. Precision's future success will depend on its ability to retain and/or attract capable management. Although Precision believes it will be able to attract and retain talented personnel and that it could replace key management personnel should the need arise, the inability to attract or retain such personnel could have a material adverse effect on its business. In addition, because its products and processes are complex and require a high level of precision, Precision is generally dependent on an educated and trained workforce. Precision would be adversely affected by a shortage of skilled employees. FAILURE TO MAINTAIN RELATIONSHIPS WITH PRECISION'S LARGER CUSTOMERS AND FAILURE BY PRECISION'S CUSTOMERS TO CONTINUE TO PURCHASE EXPECTED QUANTITIES DUE TO CHANGES IN MARKET CONDITIONS COULD HAVE AN ADVERSE EFFECT ON ITS OPERATIONS. Precision's largest customer, General Electric Power Systems, accounted for approximately 43% of net sales in 2001, and its top ten customers accounted for approximately 82% of its sales during the same period. The termination by General Electric Power Systems or any one or more of Precision's other top 10 32 customers of their relationship with Precision or their failure to purchase expected quantities from Precision could have a material adverse effect upon Precision's business, financial condition and results of operations. PRECISION'S REVENUES AND OPERATING RESULTS MAY BE SUBJECT TO SIGNIFICANT FLUCTUATION. A significant portion of Precision's revenues is derived from new projects and contracts, the timing of which is subject to a variety of factors beyond Precision's control, including customer budgets and modifications in customer products. Precision cannot predict the degree to which these trends will continue. A portion of Precision's operating expenses is relatively fixed. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on our business, financial condition or results of operations. Additionally, Precision may periodically incur cost increases due to hiring and training of new employees in anticipation of future growth. The size, timing and integration of possible future acquisitions may also cause substantial fluctuations in operating results from quarter to quarter. As a result, operating results for any fiscal quarter may not be indicative of the results that may be achieved for any subsequent fiscal quarter or for a full fiscal year. SIGNIFICANT COMPETITION FOR PRECISION PART MANUFACTURING OUTSOURCED BY ORIGINAL EQUIPMENT MANUFACTURERS MAY AFFECT PRECISION'S ABILITY TO SUCCEED. Precision operates in an industry that is highly fragmented and competitive. A variety of suppliers with different subsets of Precision's manufacturing capabilities compete to supply the stringent demands of large original equipment manufacturers. In addition, Precision's customers are continually seeking to consolidate their business among one or more "Preferred" or "Qualified" suppliers. There can be no assurance that Precision will be able to successfully implement new production programs to supply products to original equipment manufacturers. If any customer becomes dissatisfied with Precision's prices, quality or timeliness of delivery, or perceives risks to our ability to comply with their requirements or execute in the future, among other things, it could award future business or move existing business to our competitors. There can be no assurance that Precision's products will continue to compete successfully with the products of its competitors, including original equipment manufacturers themselves, many of which are significantly larger and have greater financial and other resources than Precision does. THE CYCLICAL NATURE OF THE INDUSTRIES PRECISION CURRENTLY SERVES COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS. A majority of Precision's revenues are derived from customers that are in industries and businesses that are cyclical in nature and subject to change in general economic conditions, such as the power generation, construction, aerospace and automotive industries. General economic or industry specific downturns could have a material adverse effect on Precision and its business, results of operations and financial condition. PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED IF IT IS UNABLE TO OBTAIN RAW MATERIALS AND COMPONENTS FROM ITS SUPPLIERS ON FAVORABLE TERMS. Generally, Precision's major raw materials consist of traditional materials such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to machine materials such as titanium, inconel and invar. A portion of its raw materials are supplied by its customers on consignment. Raw materials not supplied by its customers are purchased from several suppliers. Although all of these materials have been available in adequate quantities to meet its production demands in the past, Precision can give you no assurance that such materials will be available in adequate quantities in the future. 33 Precision does not presently anticipate any raw material shortages that would significantly affect production. However, the lead times between the placement of orders for certain raw materials and actual delivery to Precision may vary significantly and Precision may from time to time be required to order raw materials in quantities and at prices less than optimal to compensate for the variability of lead times of delivery. Precision's business could be adversely affected if Precision is unable to obtain raw materials and components from suppliers on favorable terms. PRECISION'S BUSINESS COULD BE ADVERSELY AFFECTED TO THE EXTENT THE U.S. GOVERNMENT TERMINATED OR MODIFIED A CONTRACT WITH PRECISION OR ONE OF ITS CUSTOMERS. Precision is generally not a direct party to any contracts with the U.S. government. However, a portion of its sales are to customers who use the parts, assemblies or tooling that Precision supplies to them to fill orders under U.S. government contracts to which they are a party. U.S. government contracts have significant inherent risks, including: o the ability of the U.S. government to terminate a contract for convenience, in which case the other party could be limited to receiving only costs already incurred or committed; o modification of U.S. government contracts due to lack of Congressional funding or changes in such funds; and o an extensive and complex regulatory structure, which could subject the other party to contract termination, civil and criminal penalties and in some cases, suspension or disbarment from future U.S. government contracts. To the extent the U.S. government terminates or modifies a contract with one of Precision's customers, Precision could be adversely affected if the affected customer reduced its purchases from Precision as a result. In addition, in the few instances where Precision is a direct party to a U.S. government contract, the inherent risks described above, as well as risks associated with the competitive bidding atmosphere under which U.S. government contracts are awarded and unreimbursed cost overruns in fixed-price contracts, could have a material adverse effect on its results of operations and financial condition. PRECISION'S EQUIPMENT, FACILITIES AND OPERATIONS ARE SUBJECT TO NUMEROUS ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS THAT MAY BECOME MORE STRINGENT IN THE FUTURE AND MAY RESULT IN INCREASED LIABILITY AND INCREASED CAPITAL EXPENDITURES. Precision's equipment, facilities and operations are subject to increasingly complex and stringent federal, state and local laws and regulations pertaining to protection of human health and the environment. These include, among other things, the discharge of contaminants into the environment and the handling and disposition of wastes (including industrial, solid and hazardous wastes). In addition, Precision is required to obtain and maintain regulatory approvals in the United States in connection with its operations. Many environmental laws and regulations provide for substantial fines and criminal sanctions for violations. It is difficult to predict the future development of such laws and regulations or their impact on future earnings and operations, but Precision anticipates that these laws and regulations will continue to require increased capital expenditures because environmental standards will become more stringent. Precision cannot assure you that material costs or liabilities will not be incurred. Certain environmental laws provide for strict, joint and several liability for investigation and remediation of spills and other releases of hazardous materials. These laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous 34 materials. Persons who "arrange", as defined under these laws, for the disposal or treatment of hazardous materials also may be liable for the costs of investigation, removal or remediation of such materials at the disposal or treatment site, regardless of whether the affected site is owned or operated by them. Such liability is strict, and may be joint and several. Because Precision operates a number of facilities, and because it arranges for the disposal of hazardous materials at many disposal sites, it may incur costs for investigation, removal and remediation, as well as capital costs associated with compliance with environmental laws and regulations. Although such environmental costs have not been material in the past and are not expected to be material in the future, changes in environmental laws and regulations or unexpected investigations and clean-up costs could have a material adverse effect on Precision's business, financial condition or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Precision's term loan and capital lease program, as refinanced in February 2002, provide for interest to be charged at LIBOR plus a margin of 5%, subject to a minimum interest rate of 10.00% through December 31, 2002, increasing to 11.00% through December 31, 2004 and to 12.00% thereafter. Because LIBOR plus a margin of 5% is significantly below the floor of 10% currently in effect on the term loan and capital lease arrangement, a 100 basis point change in LIBOR would not currently have an impact on interest expense. However, should LIBOR increase to a point where LIBOR plus the 5% margin equaled or exceeded 10%, based on Precision's level of outstanding borrowings from its term loan and obligations under the capital lease arrangement at March 19, 2002, a 100 basis point increase in interest rate would result in a $0.5 million annual increase in interest expense. Precision's revolving line of credit provides for interest to be charged at either the LIBOR rate or a base rate plus, in each case, a margin determined in accordance with the credit agreement. Based on Precision's level of outstanding borrowings under its revolving line of credit as of March 19, 2002, a 100 basis point change in interest rates would result in less than a $0.1 million annual change in interest expense. The remainder of Precision's debt is at fixed interest rates. Our senior subordinated notes have a carrying value of $100 million, but we believe that the fair value of the senior subordinated notes is substantially below the carrying value. Because the notes are held by a limited number of institutional investors and are not actively traded among those investors or the general public, we are unable to accurately determine the current fair value of the notes. The last trade of the Notes known to management took place in June 2001 at approximately 47% of face value; however, other trades may have occurred that management is not aware of. Precision does not own nor is it obligated for other significant debt or equity securities that would be affected by fluctuations in market risk, and our exposure to foreign currency exchange rate risk and commodity price risk is not significant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and the report of our independent auditors thereon, are included in this Report beginning at page F-1. See the index included on page F-1. 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to our directors and executive officers as of March 1, 2002: NAME AGE POSITION ---- --- -------- John G. Raos 52 President and Chief Executive Officer, Director Frank R. Reilly 45 Executive Vice President and Chief Financial Officer Peter J. Statile 45 Executive Vice President and Chief Operating Officer Richard A. Buccarelli 47 Senior Vice President Corporate Development, General Counsel and Secretary Richard C. Rose 54 Vice President, Sales and Marketing Robert J. Vander 38 Vice President and Corporate Controller Meulen Robert R. Womack 64 Non-Executive Chairman of the Board John F. Megrue 43 Director William J. Gumina 31 Director Richard W. Detweiler 60 Director David W. M. Harvey 37 Director John G. Raos has been our President and Chief Executive Officer since July 2000. Prior to January 2000, Mr. Raos worked for the last five years with U.S. Industries, Inc., at the time a $3 billion building products and industrial company, holding positions including President, Chief Operating Officer and Director. Prior to joining U.S. Industries in 1995, Mr. Raos spent nearly 20 years with Hanson PLC, formerly a diversified UK industrial conglomerate with revenues at the time of over $15 billion. Mr. Raos was a Director of Hanson and was President, Chief Operating Officer and a Director of Hanson Industries Inc., the U.S. headquarters of Hanson PLC. During his career at Hanson, Mr. Raos held numerous executive positions including Senior Vice President of Operations, Chief Financial Officer and Treasurer. Mr. Raos presently serves on the Board of Directors of Numerex Corp. Frank R. Reilly has been our Executive Vice President and Chief Financial Officer since July 2000. Prior to joining Precision, Mr. Reilly was a consultant with The Sumner Group, a financial advisory and investment business that he founded in 1998. From 1995 to 1998, Mr. Reilly was Senior Vice President, Chief Financial Officer and a Director of U.S. Industries. From 1992 to 1994, Mr. Reilly served as Vice President and Chief Financial Officer of Marine Harvest International, Inc., formerly a publicly-traded international aqua-culture company with revenues of $145 million. Prior to 1992, Mr. Reilly served as a Director - Acquisitions at Hanson Industries. Peter J. Statile was promoted to Executive Vice President and Chief Operating Officer in July 2001. Prior to this he served as our Executive Vice President of Corporate Development and Operations since July 2000. Prior to joining Precision, Mr. Statile served as Executive Vice President - Operations of Strategic Industries, a division of U.S. Industries, a diversified business with revenues of approximately $850 million. Prior to joining Strategic Industries, Mr. Statile was President and Chief Executive Officer of Hanson North America and was an Associate Director of Hanson. During his 13-year tenure at Hanson, Mr. Statile also held numerous executive and financial positions. 37 Richard A. Buccarelli was promoted to Senior Vice President Corporate Development, General Counsel and Secretary in January 2002. Prior to this he served as our Vice President, General Counsel and Secretary since January 2001. Prior to joining Precision, Mr. Buccarelli was engaged in the private practice of law from 1998 until 2000. From 1997 to 1998, Mr. Buccarelli served as Vice President - Corporate Development for U.S. Industries, where he was also Vice-President - Property from 1995 until 1997. Prior to joining U.S. Industries, Mr. Buccarelli served in various positions with Hanson for approximately eight years including Chief Executive Officer of Hanson Properties North America from 1991 to 1995 and Assistant General Counsel of Hanson Industries. Richard C. Rose has been our Vice President, Sales and Marketing since October 2001. Prior to joining Precision, Mr. Rose spent 31 years in the computer industry, most recently as the Sr. Vice President of Sales for Interliant Corporation, and President of Telephonetics, a wholly-owned subsidiary of Interliant. From 1984 through 1996, Mr. Rose was CEO of Dataflex Corporation, a computer integrator and hardware provider for large, diversified end-users throughout the United States. From 1996 through 1998 Mr. Rose was a Vice President with Compucom, the company that purchased Dataflex. Robert J. Vander Meulen has been our Vice President since December 2000 and was named to the additional position of Corporate Controller in January 2001. Prior to joining Precision, Mr. Vander Meulen was with U.S. Industries, most recently as Corporate Controller of its Strategic Industries division. For the balance of the past five years, he served as the Assistant Treasurer and as the Assistant Corporate Controller for U.S. Industries. He has over 15 years of experience in corporate and public accounting and began his career with Ernst & Young. Robert R. Womack has served as our Chairman and as a director since April 26, 2000. Prior thereto, he served as Chairman and Chief Executive Officer of U.S. Industries Bath and Plumbing Products, a diversified manufacturer of plumbing, bath and HVAC products. From October 1994 to January 2000, Mr. Womack served as Chairman and Chief Executive Officer of Zurn Industries, a diversified manufacturing and engineering company. Mr. Womack has over 40 years of manufacturing and consulting experience. John F. Megrue has been a director since our formation. He also serves as Chairman of the Board and a director of Hibbett Sporting Goods, Inc., as Vice Chairman of the Board and a director of Dollar Tree Stores, Inc., and as a director of The Children's Place Retail Stores, Inc. Mr. Megrue has been a partner in Saunders Karp & Megrue since 1992. William J. Gumina has been a director since our formation. Mr. Gumina is a partner in Saunders Karp & Megrue and was previously an associate, a Vice President and a Principal there until January 2001 when he became a partner. Prior to his association with Saunders Karp & Megrue in March 1998, Mr. Gumina was an associate with Donaldson, Lufkin & Jenrette Merchant Banking Partners. Richard W. Detweiler has been a director since our formation. He also serves on the Board of Directors of TreeSource Industries, Inc. Mr. Detweiler has been a Managing Director with Carlisle since November 1996. Prior thereto he was Chairman and CEO of Precision Aerotech, Inc., a publicly traded, diversified manufacturing company. Mr. Detweiler has also held senior general management, financial and manufacturing positions with Caterpillar, Inc., Sundstrand Corporation and International Harvester (Navistar). 38 David W. M. Harvey has been a director since our formation in September 1998. Mr. Harvey is the President of Harvey & Company LLC, a merchant banking and advisory services firm, he founded in 1998. Prior thereto, he was a managing director of W.E. Myers & Co. BOARD OF DIRECTORS Currently, all directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of our board of directors. BOARD COMMITTEES We have established two standing committees of the board of directors, an audit committee and a compensation committee. The audit committee reviews the professional services provided by our independent accountants and the independence of such accountants from management. The audit committee also reviews the scope of the audit coverage and our annual financial statements and such other matters with respect to our accounting, auditing practices and procedures as it may find appropriate or as are brought to its attention. The members of the audit committee are Messrs. Detweiler (Chairman), Gumina, and Harvey. The compensation committee reviews and approves executive salaries and administers our bonus, stock option and incentive compensation plans. The compensation committee advises and consults with management regarding significant employee benefit and compensation policies and practices. The members of the compensation committee are Messrs. Womack (Chairman), Gumina, and Detweiler. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table provides information relating to compensation for our chief executive officer and our four other most highly compensated executive officers whose compensation is required to be disclosed by the rules and regulations of the Securities Exchange Act of 1934. The compensation information for all of the named executive officers for 2000 and 2001 is based on their compensation from us. None of the named executive officers received compensation from us in 1999.

~~PRECISION~~Long ~~PARTNERS,~~Term ~~INC.~~Compensation/Award --------------------- Annual Compensation Other Shares of Common ------------------------- ~~UNAUDITED~~Annual ~~UNAUDITED~~Stock ~~PRO~~Underlying ~~PRO~~All ~~FORMA~~Other ~~FORMA~~Salary ~~2000~~Bonus ~~1999~~Compensation ~~1998~~Options Compensation -------- --------- ------------------------------------------------------------------------ ~~(IN~~John ~~THOUSANDS)~~G. ~~OPERATING~~Raos ~~DATA:~~(1) ~~Net~~2001 ~~sales...................................~~ $~~169~~ 262,~~976~~500 $~~149~~ 130,~~749~~000 $~~147~~-- -- $ 18,~~078~~410 ~~Gross~~President ~~profit................................~~and 30Chief 2000 $ 119,~~035~~230 36$ 125,~~240~~000 37$-- 1,~~715~~920,726 ~~Operating~~$ ~~income~~22,345 ~~(loss)~~Executive Officer Frank R.~~....................~~ Reilly (~~4,426~~1) ~~10,724~~2001 16$ 226,~~155~~000 ~~Interest~~$ ~~expense~~80,000 ~~net.......................~~$-- 16244,~~526~~000 $ 15,~~671~~336 15Executive Vice President 2000 $ 104,~~557~~923 ~~Net~~$ ~~loss....................................~~80,000 ~~(16~~$-- 975,~~899)~~000 (3$ 4,~~738)~~800 and Chief Financial Officer Peter J. Statile (~~488~~1) ~~OTHER~~2001 ~~FINANCIAL~~$ ~~DATA:~~226,000 ~~Depreciation~~$ ~~and~~80,000 ~~amortization...............~~ $-- 16244,~~695~~000 $ 15,~~420~~336 Executive Vice President and 2000 $ 16104,~~556~~923 ~~EBITDA~~$ ~~(1).................................. 12~~80,~~269~~000 26$-- 975,~~144~~000 32$ 4,~~711~~800 ~~Non-cash~~Chief ~~impairment~~Operating ~~and~~Officer ~~other~~39 ~~charges~~Richard A. Buccarelli (2)~~...~~ 102001 $ 167,~~154~~596 $ 50,000 $-- 473,536 $ 6,561 Senior Vice President 2000 $ -- $ -- $-- -- $ -- Corporate Development, General Counsel and Secretary Robert J. Vander Meulen (3) 2001 $ 160,103 $ 25,000 $-- 417,211 $ 6,513 Vice President and Corporate 2000 $ -- $ -- $-- -- $ --~~----~~ ~~Adjusted EBITDA (1)(2)........................ 22,423 26,144 32,711~~Controller

(1) Messrs. Raos, Reilly, and Statile were hired in July 2000. As a result, compensation for 2000 represents five months and twenty-one days of compensation. Bonuses are listed in the year earned, but were paid in the following year. (2) Mr. Buccarelli was hired in January 2001. As a result, compensation for 2001 represents eleven months and 16 days of compensation. The bonus indicated and $6,000 of all other compensation was earned in 2001 and paid in 2002. (3) Mr. Vander Meulen was hired on December 30, 2000. No compensation was considered earned in 2000. The bonus indicated was earned in 2001 and paid in 2002. 40 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth select information on options granted for class A equity of LLC or purchase rights to investment units consisting of equal numbers of class A equity and preferred interests in LLC during the fiscal year 2001 pursuant to employment agreements with the executive officers named in the summary compensation table or option grants, approved by the Company's board of directors for the executive officers named in the summary compensation table.

~~NAME~~POTENTIAL ~~AGE~~REALIZABLE ~~POSITION~~VALUE AT ASSUMED ANNUAL RATES OF INDIVIDUAL GRANTS STOCK PRICE APPRECIATION FOR OPTION TERM ---- -------- ------------------------------------------------------------------------------------------------------------------------ ~~John~~PERCENT G.OF ~~Raos..............................~~NUMBER 51OF ~~President~~TOTAL ~~and~~OPTIONS ~~Chief~~SECURITIES ~~Executive~~GRANTED ~~Officer,~~TO ~~Director~~EXERCISE ~~Frank~~OF R.UNDERLYING ~~Reilly...........................~~EMPLOYEES 44IN ~~Executive~~BASE ~~Vice~~PRICE ~~President~~NAME ~~and~~OPTIONS ~~Chief~~GRANTED ~~Financial~~FISCAL ~~Officer~~YEAR(1) ~~Peter~~($/UNIT) J.EXPIRATION ~~Statile~~DATE 5% 10% ---- --------------------------------------------------------------------------------------------------- Frank R.~~.........................~~ 44Reilly ~~Executive~~Class ~~Vice~~A ~~President~~Equity(2) of244,000 ~~Corporate~~10.38% ~~Development~~$ ~~and~~0.3735 ~~Operations~~7/12/2011 ~~Robert~~$ 57,314 $145,244 Peter J. ~~Vander~~Statile ~~Meulen~~Class A Equity(2) 244,000 10.~~..................~~38% 37$ ~~Vice~~0.3735 ~~President~~7/12/2011 ~~and~~$ ~~Corporate~~57,314 ~~Controller~~$145,244 Richard A. Buccarelli Class A Equity(2) 154,561 6.58% $ 0.~~...................~~3735 467/12/2011 ~~Vice~~$ ~~President~~36,305 ~~General~~$ ~~Counsel~~92,004 ~~and~~Class ~~Secretary~~A ~~Robert~~Equity(3) R150,000 6.38% ~~Womack~~$ 0.~~.........................~~50 631/14/2011 ~~Non-Executive~~$ ~~Chairman~~47,167 of$119,531 ~~the~~Investment ~~Board~~Units(5) ~~John~~168,975 F7.19% ~~Megrue~~$ 1.~~...........................~~1265 426/30/2001 ~~Director~~N/A ~~William~~N/A Robert J. ~~Gumina~~Vander Meulen Class A Equity(2) 154,561 6.58% $ 0.~~.......................~~3735 307/12/2011 ~~Director~~$ ~~Richard~~36,305 W$ 92,004 Class A Equity(4) 150,000 6.38% ~~Detweiler~~$ 0.~~.....................~~50 5912/21/2010 ~~Director~~$ ~~David~~47,167 W.$119,531 MInvestment Units(5) 112,650 4.79% ~~Harvey~~$ 1.~~.......................~~1265 366/30/2001 ~~Director~~N/A N/A --------

------------------ 1. This percentage reflects each option grant as a percentage of the total options granted to employees in fiscal year 2001. Total options include options exercisable for class A investment units of LLC as described above and options exercisable for shares of class B common stock of Holdings. 2. These options were granted on July 12, 2001 and 50% of the options granted vest on a pro rata basis over a four-year period at a rate of 25.0% per year from the date of grant and 50% of the options granted vest at the end of seven years, subject to pro rata acceleration over a four-year period from the date of grant at a rate of 12.5%, 25.0%, 25.0%, and 25.0% for each of fiscal years 2001, 2002, 2003 and 2004, respectively, and at a rate of 12.5% for the six months ending June 30, 2005 if Precision and Holdings meet certain financial goals determined by Precision's board of directors. 3. These options were granted on January 14, 2001 and 50% of the options granted vest on a pro rata basis over a four-year period at a rate of 25.0% per year from the date of grant and 50% of the options granted vest at the end of seven years, subject to pro rata acceleration over a four-year period from the date of grant at a rate of 25.0% per year for each of fiscal years 2001, 2002, 2003 and 2004, respectively, if Precision and Holdings meet certain financial goals determined by Precision's board of directors. 4. These options were granted on December 31, 2000 and 50% of the options granted vest on a pro rata basis over a four-year period at a rate of 25.0% per year from the date of grant and 50% of the options granted 41 vest at the end of seven years, subject to pro rata acceleration over a four-year period from the date of grant at a rate of 25.0% per year for each of fiscal years 2001, 2002, 2003 and 2004, respectively, if Precision and Holdings meet certain financial goals determined by Precision's board of directors. 5. These options were granted pursuant to each of Mr. Buccarelli's and Mr. Vander Meulen's employment agreements and expired June 30, 2001. The options represented the right to purchase investment units of LLC, consisting of equal numbers of preferred interests and class A equity. Because they expired without being exercised, the potential price appreciation is shown as not applicable. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND LAST FISCAL YEAR-END OPTION VALUES The following table sets forth information on option exercises and exercisable options for class A equity of LLC for the year ended December 31, 2001, for each of the named executive officers.

~~LONG~~SHARES ~~TERM~~NUMBER ~~ANNUAL~~OF ~~COMPENSATION~~SECURITIES ~~COMPENSATION/AWARD~~VALUE OF ACQUIRED ON VALUE UNDERLYING UNEXERCISED UNEXERCISED NAME EXERCISE (#) REALIZED ($) OPTIONS AT FISCAL YEAR-END IN-THE-MONEY ---- ------------ ------------ ------ ~~OTHER SHARES OF COMMON ANNUAL STOCK UNDERLYING ALL OTHER SALARY BONUS COMPENSATION OPTIONS COMPENSATION~~ -------- -------- ----- OPTIONS AT EXERCISABLE UNEXERCISABLE FISCAL YEAR-END ------ ----- ------------- --------------- John G. Raos ~~(1).................~~--- ~~2000~~--- ~~$119~~713,~~230~~535 ~~$125~~1,~~000~~208,940 $ -- $ -- ~~$22,345 President and Chief Executive Officer~~ Frank R. Reilly ~~(1)..............~~Class ~~2000~~A ~~104,923~~Equity ~~$ 80,000~~ --- --- 4208,~~800~~625 ~~Executive~~510,375 ~~Vice~~--- ~~President and Chief Financial Officer....~~ Peter J. Statile ~~(1).............~~Class ~~2000~~A ~~104,923~~Equity ~~$ 80,000~~ --- --- 4208,~~800~~625 ~~Executive~~510,375 ~~Vice~~--- ~~President~~Richard ~~and~~A. ~~Chief~~Buccarelli ~~Operating~~Class ~~Officer~~A ~~James~~Equity E.--- ~~Ashton..................~~--- ~~2000 116~~56,~~724~~820 ~~112~~247,~~500~~741 -- -- ~~146,682~~Robert ~~Former~~J. ~~Chief~~Vander ~~Executive~~Meulen ~~1999~~Class ~~178,000~~A --Equity ~~7,868~~ --- --- ~~Officer (2) 1998 130~~56,~~000~~820 32247,~~500~~741 ~~2,368~~ -- --

PENSION PLAN Precision's pension plan is based upon contributions by employees. Precision matches 50% of its employees' contributions up to 5% of their annual wages. In any given year, employees may contribute up to 15% of their annual wages to the pension plan up to the maximum contributions allowed under current Internal Revenue Service regulations. Employees are eligible to participate in the pension plan after three months of employment with Precision. The pension plan makes no distinctions between executive officers and other employees and, once an employee becomes eligible, the terms of the pension plan do not vary as to time an employee has been with Precision. COMPENSATION OF DIRECTORS On April 13, 2000, our chairman, Mr. Womack was granted options to purchase 250,000 shares of class A equity in LLC as compensation for his services to our Board of Directors. Options to purchase 150,000 shares vested on April 13, 2001 with the remaining options vesting ratably on a monthly basis over a two-year 42 period through April 13, 2003. The options have exercise prices ranging from $0.3735 to $1.1206 per share. EMPLOYMENT AGREEMENTS Each of John G. Raos, President and Chief Executive Officer, Frank R. Reilly, Executive Vice President and Chief Financial Officer, Peter J. Statile, Executive Vice President and Chief Operating Officer, Richard A. Buccarelli, Senior Vice President Corporate Development, General Counsel and Secretary, and Robert J. Vander Meulen, Vice President and Corporate Controller, has entered into an employment agreement with Precision for a two year term. The two year terms are effective July 10, 2000 for each of Messers. Raos, Reilly and Statile, January 15, 2001 for Mr. Buccarelli and December 31, 2000 for Mr. Vander Meulen. The employment agreements provide for annual base salaries in the amount of $250,000, in the case of Mr. Raos, $220,000, for each of Mr. Reilly and Mr. Statile, $175,000 for Mr. Buccarelli and $160,000 for Mr. Vander Meulen which are each subject to annual review. Mr. Raos's employment agreement has been amended to, among other things, raise his annual base salary by $25,000 effective July 1, 2001. In addition, the employment agreements provide for annual cash bonuses of up to 100%, in the case of Mr. Raos, 65%, for each of Mr. Reilly and Mr. Statile, 50% for Mr. Buccarelli and 45% for Mr. Vander Meulen of the executive's then-current annual salary based on their respective performance under our annual bonus plan, the targets of which are adjusted annually by the Compensation Committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The members of the compensation committee are Messrs. Womack (Chairman), Gumina, and Detweiler. None of these members has served as an officer or employee of Precision or any of its subsidiaries. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION COMPENSATION COMMITTEE REPORT The Compensation Committee (the "Committee") of the Board of Directors of Precision Partners, Inc. (the "Company") sets forth its report on executive compensation below. The Committee report documents the components of the Company's executive compensation programs and describes the basis on which fiscal 2001 compensation determinations were made by the Committee with respect to the Company's executive officers, including the executive officers that are named in the compensation tables above. COMPENSATION PROGRAM COMPONENTS The Committee is responsible for setting and monitoring the effectiveness of the compensation provided to the Company's executive officers. In its decision-making, the Committee is guided by a compensation philosophy designed to reward employees for the achievement of business goals. Specific levels of pay and incentive opportunity are determined by the competitive market for executive talent, and, where appropriate, the need to invest in the future growth of the Company. The compensation program, which provides incentives for executive officers to achieve the short-term and long-term goals of the Company, comprises three components: base salary, annual incentive bonus and stock option awards. 43 BASE SALARY - Base pay levels are largely determined through comparisons with companies of similar size. Actual salaries are based on individual performance contributions for each position that is established through job evaluation and competitive comparisons. Each of the named executives has an employment agreement that provides for a minimum annual salary. ANNUAL INCENTIVE BONUS - On an annual basis, the Committee establishes target performance levels to be used as the basis for determining incentive bonuses. Each of the named executives has an employment agreement that provides for an annual cash bonus up to a certain percentage of their base salary based upon their performance under the Company's bonus plan. The Committee considers the attainment of pre-established performance targets and other circumstances in determining actual bonuses earned. STOCK OPTION AWARDS - The Committee strongly believes that by providing executives an opportunity to own shares of stock in affiliates of the Company, the best interests of shareholders and executives will be closely aligned. Therefore, all executives are eligible to receive stock options from time to time, giving them the right to purchase shares of common stock of the Company's direct parent, Precision Partners Holding Company, or its indirect parent, Precision Partners, L.L.C. at a specific price in the future. The employment agreements of each of the named executives also provides for stock option grants with vesting dependent on the passage of time and performance. Additional stock options granted to any one executive officer is determined at the discretion of the Committee based on the accomplishments of such executive, his length of service with the Company, the extent of prior awards received by such officer, the relative value as well as the exercise price of such awards, and competitive practices. DISCUSSION OF 2001 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER The Committee meets with the Chief Executive Officer to evaluate his performance. For fiscal 2001, Mr. Raos' incentive compensation was based on the Committee's evaluation regarding his overall performance based on both quantitative and qualitative objectives, as set by the Board at the start of the fiscal year, as well as other circumstances over the course of the year. The Compensation Committee of the Board of Directors has provided this report. Respectfully submitted, Robert R. Womack, Compensation Committee Chair Richard D. Detweiler, Compensation Committee Member William J. Gumina, Compensation Committee Member ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of our outstanding common stock is owned by Holdings. LLC owns approximately 99.73% of Holdings' common stock. The remaining Holdings' common stock is owned by current and former non-executive employees of our company. The following table sets forth information regarding beneficial ownership of the voting equity interests in LLC as of March 18, 2002 held by: o each person or group believed by us to beneficially own more than 5% of our common stock; o our directors, chief executive officer, and four other most highly compensated executive officers; and 44 o all our directors and executive officers as a group. Under the rules and regulations of Regulation S-K under the Securities Act, beneficial ownership is calculated in accordance with Rule 13d-1 under the Exchange Act. Under these rules, the term includes not only shares owned by a person or group, but also shares over which the person or group exercises voting and/or investment power. In accordance with these rules, for the purpose of computing the beneficial ownership of each person or group listed in this table, any shares not outstanding which are subject to options or warrants exercisable as of, or within 60 days after, March 18, 2002 have been deemed to be outstanding and owned by such person or group, but have not been deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by any other person. The applicable percentage ownership for LLC's voting equity interests set forth below is based on 43,783,611 Class A equity interests and 28,512,339 Class B equity interests outstanding as of March 18, 2001, each of which interests entitles the holder thereof to one vote. Except as otherwise noted, we believe that each of the holders listed below has sole voting and investment power over the shares beneficially owned by them and addresses are in care of our company.

~~INDIVIDUAL~~NUMBER ~~GRANTS~~AND ~~----------------------------------------~~CLASS ~~PERCENT~~ OF ~~POTENTIAL~~VOTING ~~REALIZABLE~~PERCENT ~~VALUE AT NUMBER~~ OF ~~TOTAL~~VOTING ~~OPTIONS~~EQUITY ~~ASSUMED~~INTEREST ~~ANNUAL~~EQUITY ~~RATES~~INTERESTS NAME OF ~~STOCK~~BENEFICIAL ~~SECURITIES~~OWNER ~~GRANTED~~BENEFICIALLY TOOWNED ~~PRICE~~BENEFICIALLY ~~APPRECIATION~~OWNED ~~FOR OPTION TERM UNDERLYING EMPLOYEES EXERCISE OF~~ ------------------------~~-------------~~ ~~OPTIONS IN FISCAL BASE PRICE EXPIRATION NAME GRANTED YEAR(1) ($/UNIT) DATE 5% 10%~~ ---- ---------- ----~~---------~~ ----------- -------~~----~~ ~~----------~~DIRECTORS ~~----------~~AND EXECUTIVE OFFICERS: John G. Raos ~~Class A Equity~~(21)~~...........~~ ~~860~~3,~~000~~390,606 19Class A 4.706% $0Frank R.~~3735~~ ~~7/10/2010~~Reilly ~~$202,007~~(2) ~~$511~~208,~~926~~625 Class A ~~Equity~~* Peter J. Statile (32)~~...........~~ ~~860~~208,~~000~~625 ~~19.70%~~Class $0A * Richard A.~~3735~~ ~~7/10/2010~~Buccarelli ~~$202,007~~(2) ~~$511~~56,~~926~~820 Class A ~~Equity(4)...........~~* ~~100,363~~Robert 2J.~~30%~~ ~~$0.3735~~Vander ~~7/10/2010~~Meulen $(2) 2356,~~574~~820 ~~$ 59,742~~ Class A ~~Equity~~* John F. Megrue (53)~~...........~~ ~~100~~31,~~363~~077,272 2Class A 75.304% ~~$0.3735 7/10/2010 $~~ 23,~~574~~436,154 $Class ~~59,742~~B ~~Frank~~William RJ. ~~Reilly~~Gumina ~~Class~~-- A-- ~~Equity(2)...........~~Richard ~~237,500 5~~W.~~44%~~ ~~$0.3735~~Detweiler ~~7/10/2010~~(4) ~~$ 55~~7,~~787 $141~~422,~~375~~396 Class A ~~Equity(3)~~15.~~..........~~0% ~~237~~3,~~500~~432,154 ~~5.44%~~Class $0B Robert R.~~3735~~ ~~7/10/2010~~Womack $(5) 55218,~~787~~097 ~~$141,375~~Class ~~Investment~~A ~~Units(6).........~~* ~~500~~175,~~000~~517 ~~1.15%~~Class $B 1David W.00 ~~6/30/2001~~M. $Harvey 25(6) 388,000 $Class ~~50,000~~A ~~Peter~~* J.All ~~Statile~~directors ~~Class~~and Aexecutive ~~Equity(2)...........~~officers ~~237,500~~as ~~5.44%~~a ~~$0.3735~~group ~~7/10/2010~~(11 $persons) 5543,~~787 $141~~041,~~375~~206 Class A ~~Equity(3)~~95.~~..........~~0% ~~237~~27,~~500~~043,825 Class B 5~~.44~~% ~~$0.3735~~HOLDERS: ~~7/10/2010~~Precision $Partners ~~55,787~~Investment ~~$141~~Fund,~~375~~ ~~Investment Units(6)~~L.L.C.~~......~~ ~~500~~(3)(4) 38,~~000~~499,668 ~~1.15%~~Class $A 190.004% ~~6/30/2001 $ 25~~26,~~000~~868,308 $Class ~~50,000~~B

*Less than 1%. (1) Includes 713,535 shares issuable upon the exercise of options. (2) All of these executive officers' shares are issuable upon the exercise of options. (3) Includes (i) 30,370,511 Class A equity interests and 22,976,622 Class B equity interests beneficially owned by SKM Equity Fund II, L.P. and (ii) 706,761 Class A equity interests and 459,532 Class B equity interests beneficially owned by SKM Investment Fund II, in each case through Precision Partners Investment Fund, L.L.C. SKM Partners, L.P. is the general partner of each of these funds and Saunders Karp & Megrue Partners, L.L.C. is the general partner of SKM Partners, L.P. John F. Megrue, Thomas A. Saunders III and Allan W. Karp are the 45 members of the management committee of Saunders Karp & Megrue Partners, L.L.C. and therefore may be deemed to have beneficial ownership of the equity interests shown as being beneficially owned by SKM Equity Fund II, L.P. and SKM Investment Fund II. Messrs. Megrue, Saunders and Karp disclaim beneficial ownership of such equity interests, except to the extent that any of them has a limited partnership interest in SKM Investment Fund II. The address of the two SKM funds and Messrs. Megrue, Saunders and Karp is 262 Harbor Drive, Stamford, CT 08902. (4) Includes (i) 5,549,464 Class A equity interests beneficially owned by Carlisle Precision Partners I, L.P., (ii) 1,872,396 Class A equity interests and 3,432,156 Class B equity interests beneficially owned by Carlisle Precision Partners II, L.P. and (iii) a de minimus number of Class A equity interests, less than 1/1000 of 1%, beneficially owned by Carlisle Group, L.P., in each case through Precision Partners Investment Fund, L.L.C. Carlisle Group, L.P. is the general partner of Carlisle Precision Partners I, L.P. and Carlisle Enterprises, L.L.C. is the general partner of Carlisle Group, L.P. and Carlisle Precision Partners II, L.P. Dennis A. Dunn, James S. Carlisle, Richard W. Detweiler, David L. Canedo and Dale L. Ziegler are the members of Carlisle Enterprises L.L.C. and therefore may be deemed to have beneficial ownership of the equity interests owned by the three Carlisle funds. Messrs. Dunn, Carlisle, Detweiler, Canedo and Ziegler disclaim beneficial ownership of such equity interests, except to the extent that any of them has a limited partnership interest in any of the Carlisle funds. The address of the three Carlisle funds and Messrs. Dunn, Carlisle, Detweiler, Canedo and Ziegler is 7777 Fay Avenue, #200, La Jolla, CA 92037. (5) Includes 204,167 shares issuable upon the exercise of options. (6) Includes 388,000 Class A equity interests owned by Harvey Equity Partners, L.L.C. David W.M. Harvey is a member of Harvey Equity Partners, L.L.C. and therefore may be deemed to have beneficial ownership of these equity interests. Mr. Harvey disclaims beneficial ownership of such equity interests, except to the extent he has any membership interest in Harvey Equity Partners, L.L.C. The address of Harvey Equity Partners, L.L.C. and Mr. Harvey is 2020 Main Street, Suite 900, Irvine, CA 92614. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A majority of our directors are also principals of Saunders Karp & Megrue, Carlisle or Harvey and are therefore in positions involving possible conflicts of interest. However, our directors and officers and those of our subsidiaries are subject to fiduciary obligations to act in our and our subsidiaries' best interests, as the case may be. We maintain with a third party insurer, for the benefit of our and our subsidiaries' directors and officers, liability insurance against certain liabilities incurred by these directors and officers in such capacity. We may from time to time engage in certain transactions with related parties and affiliates that include, among other things: o business arrangements; o lease arrangements for certain manufacturing facilities and offices; and o the payment of fees or commissions for the transfer of manufacturing by one operating company to another. The indenture governing the outstanding notes generally requires that these types of transactions be on terms no less favorable to the applicable subsidiary or us than those that could be obtained on an arms' length basis from third parties. However, we cannot provide you with any assurance that such 46 transactions will not adversely affect our business, financial condition or results of operations. Precision, from time to time, pays fees and expenses incurred by Holdings or LLC in connection with Precision's operations. Such costs paid on behalf of Holdings and LLC for the year ended December 31, 2001 were immaterial. Precision Partners Holding Company, on behalf of itself and its affiliates including Precision, has agreed to pay Saunders Karp & Megrue and Carlisle, investors in LLC, an annual monitoring fee. Those monitoring fees totaled $0.3 million in each of 2000 and 1999. We pay certain business registration fees, taxes and other costs on behalf of Holdings and LLC. Such costs paid on behalf of Holdings and LLC for the year ended December 31, 2001 were approximately $16,000 and less than $1,000 respectively. 47 For the year ended December 31, 2000, Precision accrued $0.2 million of such fees on behalf of Holdings, and we have a receivable for that amount classified in other assets as of December 31, 2000. Such costs paid on behalf of LLC for the year ended December 31, 2000 were less than $1,000. In accordance with its advisory agreement with Harvey, Precision paid certain fees totaling $30,000 to Harvey in 2000 in connection with the performance of Mid State. The current terms of our credit facilities prohibit payments of fees to Saunders Karp & Megrue and Carlisle; however, the accrual of such fees is permitted. Such fees accrued in 2001 totaled $0.3 million. Amounts accrued and paid in both 2000 and 1999 were $0.3 million. In accordance with an Amended and Restated Lease between the Mid State and its president and his spouse dated September 30, 1998, Mid State leases its main plant, located in Winslow, Maine from its president and his spouse. The initial term of the lease expires September 30, 2003, but Mid State has the right and option to extend the lease for four 5-year extension terms. The monthly rent expense for the facility totals $23,688 and the amount paid to the president of Mid State and his spouse under this lease agreement was approximately $0.3 million in each of 2001, 2000 and 1999. In accordance with an Industrial Lease between Gillette and the Testamentary Trust of Frank P. Gillette ("Trust") dated August 31, 1999, Gillette leases its plant, located in Rochester, New York from the Trust of Frank P. Gillette. The father of Darren Gillette, an officer of certain of our subsidiaries, is a direct beneficiary of this trust. The initial term of lease expires August 31, 2009, but Gillette has the right and option to extend the lease for two 5-year extension terms. The monthly rent expense for this facility totals $23,536.50, and the amount paid to the Trust under this lease agreement in 2001, 2000 and 1999 was approximately, 0.3 million, 0.3 million and 0.1 million, respectively. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT Our financial statements, and the report of our independent auditors thereon, are included in this Report beginning at page F-1. See the index included on page F-1. (b) REPORTS ON FORM 8-K (i) Current Report on Form 8-K filed by Precision Partners, Inc. on December 20, 2001 reporting as to Item 5 and Item 7. (ii) Current Report on Form 8-K filed by Precision Partners, Inc. on January 9, 2002 reporting as to Item 5 and Item 7. (iii) Current Report on Form 8-K filed by Precision Partners, Inc. on January 14, 2002 reporting as to Item 5 and Item 7. (iv) Current Report on Form 8-K filed by Precision Partners, Inc. on February 6, 2002 reporting as to Item 5 and Item 7. (c) EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 2.1 Merger Agreement dated September 30, 1998 by and among Galaxy Industries Corporation, Kenneth Smith, Galaxy Holding Co., Inc., Robert H. Leidel Revocable Living Trust, Betty A. Leidel Revocable Living Trust, Michael Leidel, Cheryl Brooks, and Galaxy Acquisition, Inc. (filed as Exhibit 2.1 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 2.2 Redemption and Merger Agreement dated September 17, 1998 by and among Mid State Machine Products, S. Douglas Sukeforth, Mid State Holdings Co., Inc. and Mid State Acquisition Inc. (filed as Exhibit 2.2 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 2.3 Asset Purchase Agreement dated February 5, 1999 by and among General Automation, Inc., Max Starr, and Precision Partners Holding Company (filed as Exhibit 2.3 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 2.4 Asset Purchase Agreement dated February 11, 1999 by and among Nationwide Precision Products Corp., certain of its stockholders and Nationwide Acquisition Delaware, Inc. (filed as Exhibit 2.4 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 48 2.5 Stock Purchase Agreement dated February 19, 1999 by and among Certified Fabricators Inc., Calbrit Design, Inc., certain of their selling shareholders and Precision Partners, Inc. (filed as Exhibit 2.5 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 2.6 Stock Purchase Agreement dated August 27, 1999 by and among Gillette Machine & Tool Co., Inc., Gillette Machine & Equipment Company, certain of their selling shareholders and Precision Partners, Inc. (filed as Exhibit 2.6 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 2.7 Agreement of Merger dated as of May 28, 1999 by and among Certified Fabricators Inc., Calbrit Design, Inc., and Precision Partners, Inc. and filed with the Secretary of State of the State of California on July 7, 1999 (filed as Exhibit 2.7 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.1 Amended and Restated Certificate of Incorporation of Precision Partners, Inc. (filed as Exhibit 3.1 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.2 Bylaws of Precision Partners, Inc. (filed as Exhibit 3.2 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.3 Certificate of Incorporation of Nationwide (together with all amendments thereto) (filed as Exhibit 3.3 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.4 By-laws of Nationwide (filed as Exhibit 3.4 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.5 Certificate of Incorporation of Mid State (together with all amendments thereto) (filed as Exhibit 3.5 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.6 Amended and Restated By-laws of Mid State (filed as Exhibit 3.6 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.7 Articles of Incorporation of General Automation (together with all amendments thereto) (filed as Exhibit 3.7 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 49 3.8 By-laws of General Automation (filed as Exhibit 3.8 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.9 Articles of Incorporation of Certified (together with all amendments thereto) (filed as Exhibit 3.9 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.10 Amended and Restated By-laws of Certified (filed as Exhibit 3.10 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.11 Restated Certificate of Incorporation of Gillette (filed as Exhibit 3.11 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.12 By-laws of Gillette (filed as Exhibit 3.12 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.13 Articles of Incorporation of Galaxy (filed as Exhibit 3.13 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.14 Amended and Restated By-laws of Galaxy (filed as Exhibit 3.14 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 4.1 Indenture dated as of March 19, 1999 among Precision Partners, Inc., as Company, the Guarantors named therein and The Bank of New York, as trustee (filed as Exhibit 4.1 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 4.2 First Supplemental Indenture dated October 15, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee (filed as Exhibit 4.2 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 4.3 Second Supplemental Indenture dated October 29, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee (filed as Exhibit 4.3 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 50 10.1* Credit Agreement, dated as of February 1, 2002 among (a) Precision Partners, Inc., the guarantors and lenders named therein, General Electric Capital Corporation, a New York corporation (in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent for Lenders, General Electric Capital Corporation, as Revolving Credit Agent, Ableco Finance LLC, as Lender, and the other Lenders from time to time party hereto. 10.2* Master Lease Agreement, dated as of February 1, 2002 , between General Electric Capital Corporation, for itself as Lessor and as agent for Lessors, and Galaxy Industries Corporation, Mid State Machine Products, Nationwide Precision Products Corp., General Automation, Inc., an Illinois corporation, Certified Fabricators, Inc., Gillette Machine & Tool Co., Inc, Galaxy Precision Products Corp., and Precision Partners, Inc. 10.3* Guaranty (this "Guaranty"), dated as of February 1, 2002, by and between Precision Partners Holding Company, a Delaware corporation ("Guarantor"), and General Electric Capital Corporation, a New York corporation, individually and as agent (in such capacity, "Agent") for the lenders from time to time signatory to the Credit Agreement. 10.4* Security Agreement, dated as of February 1, 2002, by and between Precision Partners Inc., a Delaware corporation ("Precision"), its subsidiaries as identified in the Credit Agreement (the "Subsidiaries"); Precision Partners Holding Company (the "Guarantor"; together with Precision and the Subsidiaries, the "Grantors"), and General Electric Capital Corporation, a New York corporation, as agent (in such capacity, "Agent") for the lenders from time to time signatory to the Credit Agreement. 10.5* Stock Pledge Agreement, dated as of February 1, 2002 (together with all amendments, if any, from time to time hereto, this "Agreement") is between Precision Partners, Inc., a Delaware corporation (the "Pledgor") and General Electric Capital Corporation, in its capacity as agent (together with any successor thereto appointed pursuant to the Credit Agreement, as hereinafter defined, the "Agent") for the lenders from time to time party to the Credit Agreement. 10.6 General Electric Gas Turbine Systems Source Operation Agreement dated December 1, 1998 by and between General Electric and Mid State (filed as Exhibit 10.3 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 10.7 Purchase Agreement dated October 26, 1999 between Caterpillar Inc. and Galaxy (filed as Exhibit 10.4 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 10.8 Purchase Agreement dated February 1, 2000 between Dana Corporation -- Spicer Heavy Axle & Brake Division and Nationwide (filed as Exhibit 10.5 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 51 10.9 Employment Agreement dated as of July 10, 2000 between John G. Raos and Precision Partners, Inc. (incorporated by reference to exhibit 10.15 to the registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2000). 10.10 Amendment No. 1 to Employment Agreement dated as of July 10, 2000 between John G. Raos and Precision Partners, Inc. (incorporated by reference to exhibit 10.16 to the registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2000). 10.11 Amendment No. 2 to Employment Agreement dated as of July 10, 2000 between John G. Raos and Precision Partners, Inc. (incorporated by reference to exhibit 10.17 to the registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2000). 10.12* Amendment No. 3 to Employment Agreement dated as of July 10, 2000 between John G. Raos and Precision Partners, Inc. 10.13* Amendment No. 4 to Employment Agreement dated as of July 10, 2000 between John G. Raos and Precision Partners, Inc. 10.14 Employment Agreement dated as of July 10, 2000 between Frank R. Reilly and Precision Partners, Inc. (incorporated by reference to exhibit 10.18 to the registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2000). 10.15 Amendment No. 1 to Employment Agreement dated as of July 10, 2000 between Frank R. Reilly and Precision Partners, Inc. (incorporated by reference to exhibit 10.19 to the registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2000). 10.16 Employment Agreement dated as of July 10, 2000 between Peter J. Statile and Precision Partners, Inc. (incorporated by reference to exhibit 10.20 to the registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2000). 10.17 Amendment No. 1 to Employment Agreement dated as of July 10, 2000 between Peter J. Statile and Precision Partners, Inc. (incorporated by reference to exhibit 10.21 to the registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2000). 10.18* Employment Agreement dated as of January 15, 2001 between Richard A. Buccarelli and Precision Partners, Inc. 10.19* Amendment No. 1 to Employment Agreement dated as of January 15, 2001 between Richard A. Buccarelli and Precision Partners, Inc. 10.20* Employment Agreement dated as of December 31, 2000 between Robert J. Vander Meulen and Precision Partners, Inc. 10.21* Amendment No. 1 to Employment Agreement dated as of December 31, 2000 between Robert J. Vander Meulen and Precision Partners, Inc. 52 21.1 List of Subsidiaries of the Company (filed as Exhibit 21.1 to the Registration Statement on Form S-4 (file no. 333-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). --------------- * Filed herewith. 53 INDEX TO FINANCIAL STATEMENTS PAGE NO. CONSOLIDATED FINANCIAL STATEMENTS OF PRECISION PARTNERS, INC. Report of Independent Auditors, Ernst & Young LLP........................... F-2 Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000... F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999.............................. F-4 Consolidated Statements of Stockholder's Equity for the years ended December 31, 2001, 2000 and 1999.......................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.......................................... F-6 Notes to Consolidated Financial Statements.................................. F-7 F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Precision Partners, Inc. We have audited the accompanying consolidated balance sheets of Precision Partners, Inc. (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Precision Partners, Inc. as of December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. MetroPark, New Jersey /s/ ERNST & YOUNG LLP March 21, 2002 F-2 Precision Partners, Inc. Consolidated Balance Sheets (in thousands, except for share data) DECEMBER 31, ------------------------ 2001 2000 --------- --------- ASSETS Current assets Cash and cash equivalents $ 11,144 $ -- Trade accounts receivable less allowance for doubtful accounts of $739 at December 31, 2001 and $590 at December 31, 2000 18,465 22,043 Inventories 13,813 18,635 Deferred income taxes -- 1,634 Assets held for sale 2,825 -- Other current assets 696 1,078 --------- --------- TOTAL CURRENT ASSETS 46,943 43,390 Property, plant, and equipment, at cost, net 64,971 86,214 Goodwill, net 67,700 71,661 Other assets 6,056 6,086 --------- --------- TOTAL ASSETS $ 185,670 $ 207,351 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 13,929 $ 15,429 Accrued expenses 13,219 12,324 Income taxes payable 1,130 922 Customer advances 3,853 1,616 Current portion of long term debt 1,305 7,975 Other current liabilities 1,401 132 --------- --------- TOTAL CURRENT LIABILITIES 34,837 38,398 Long term debt, less current portion 148,645 141,860 Non-current deferred income taxes 212 1,846 Commitments and contingencies Stockholder's equity: Common stock, $.01 par value; 100 shares authorized, issued and outstanding -- -- Additional paid in capital 48,076 48,056 Accumulated deficit (46,100) (22,809) --------- --------- TOTAL STOCKHOLDER'S EQUITY 1,976 25,247 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 185,670 $ 207,351 ========= ========= See accompanying notes F-3 Precision Partners, Inc. Consolidated Statements of Operations (in thousands) YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31 DECEMBER 31, 2001 2000 1999 -------------- ------------ ------------- Net sales $ 181,203 $ 169,976 $ 123,188 Cost of sales 151,279 135,671 93,434 Restructuring charges and impairment 5,219 4,270 -- of long-lived assets --------- --------- --------- GROSS PROFIT 24,705 30,035 29,754 Selling, general and administrative 28,941 31,960 24,840 expenses Restructuring charges and impairment 1,315 2,501 -- of long-lived assets --------- --------- --------- OPERATING (LOSS) INCOME (5,551) (4,426) 4,914 Interest income 123 46 245 Interest expense (17,517) (16,572) (12,812) Other (expense) income, net (346) (737) 8 --------- --------- --------- LOSS BEFORE INCOME TAXES (23,291) (21,689) (7,645) Benefit for income taxes -- 4,790 2,130 --------- --------- --------- NET LOSS $ (23,291) $ (16,899) $ (5,515) ========= ========= ========= See accompanying notes F-4 Precision Partners, Inc. Consolidated Statements of Stockholder's Equity (in thousands)

~~NUMBER~~ADDITIONAL OFCOMMON ~~SECURITIES~~PAID ~~UNDERLYING~~IN ~~UNEXERCISED~~ACCUMULATED ~~OPTIONS~~STOCK ATCAPITAL ~~VALUE~~DEFICIT OFTOTAL ~~FISCAL YEAR~~-~~END~~------------- ~~UNEXERCISED IN~~-~~THE~~------------- ~~SHARES ACQUIRED VALUE~~ -------------- --------------- ~~MONEY~~BALANCE ~~OPTIONS~~ AT ~~NAME~~JANUARY ON1, ~~EXERCISE~~1999 ~~(#)~~$ ~~REALIZED~~-- ($ 32,000 $ (395) ~~EXERCISABLE~~$ ~~UNEXERCISABLE~~31,605 ~~FISCAL~~Capital ~~YEAR-END~~contributions -- 10,042 -- 10,042 Net loss -- -- (5,515) (5,515) ------- ---- ---- -------- -------- BALANCE AT DECEMBER 31, 1999 -- 42,042 (5,910) 36,132 Capital contributions -- 6,014 -- 6,014 Net loss -- -- (16,899) (16,899) ------- -------- -------- -------- ~~John~~BALANCE G.AT ~~Raos................~~DECEMBER --31, 2000 -- ~~107~~48,~~500~~056 1(22,~~813~~809) 25,~~225~~247 Capital contributions -- ~~Frank~~20 R.-- ~~Reilly~~20 ~~Class~~Net Aloss ~~Equity............~~ -- -- 29(23,~~688~~291) ~~445~~(23,~~312~~291) -- ~~Investment Units..........~~ ----- -------- ~~500,000~~ -------- -------- ~~Peter~~BALANCE J.AT ~~Statile~~DECEMBER ~~Class~~31, A2001 ~~Equity............~~$ -- --$ 2948,~~688~~076 ~~445~~$(46,~~312~~100) --$ ~~Investment~~1,976 ~~Units..........~~======= --======== --======== ~~500,000 -- --~~========

See accompanying notes F-5 Precision Partners, Inc. Consolidated Statements of Cash Flows (in thousands)

~~NUMBER~~YEAR ~~AND~~ENDED ~~CLASS~~YEAR OFENDED ~~VOTING~~YEAR ~~PERCENT~~ENDED OFDECEMBER ~~VOTING~~31, ~~EQUITY~~DECEMBER ~~EQUITY~~31, ~~INTEREST~~DECEMBER ~~BENEFICIALLY~~31, ~~INTERESTS~~2001 ~~BENEFICIALLY~~2000 ~~NAME~~1999 ~~OF BENEFICIAL OWNER OWNED OWNED~~ ---------------- -------- ---------- ---------- OPERATING ACTIVITIES Net loss $ (23,291) $ (16,899) $ (5,515) Adjustments to reconcile net loss to net cash provided by provided by operating activities: operating activities: Depreciation 15,056 11,718 8,525 Amortization of goodwill 3,961 4,044 3,314 Amortization of debt issue costs 870 1,125 1,051 Amortization of covenant not to compete -- 933 67 Impairment of long-lived assets 5,344 6,771 -- Loss on disposal of fixed assets 391 877 -- Deferred income taxes -- (6,302) (1,510) Changes in operating assets and liabilities, net of acquisitions: Trade accounts receivable 3,578 1,570 (5,531) Inventories 4,822 (231) (4,345) Other current assets 382 838 (7,190) Other assets 240 5,842 -- Accounts payable (1,500) 7,726 1,551 Accrued expenses 895 918 7,553 Income taxes payable 208 (92) (192) Customer advances 2,237 (3,084) --- Other current liabilities 1,269 (2,939) 7,620 --------- --------- --------- ~~DIRECTORS~~NET ~~AND~~CASH ~~EXECUTIVE~~PROVIDED ~~OFFICERS:~~BY ~~John~~OPERATING G.ACTIVITIES ~~Raos(1)..............................~~14,462 12,815 5,398 INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 2,~~784~~541 618 -- Purchases of property,~~571~~ ~~Class~~plant Aand ~~3.9%~~equipment ~~Frank~~(4,914) R.(33,139) ~~Reilly~~(210,260)~~...........................~~ ~~529~~Acquisition of subsidiaries,~~688~~ ~~Class~~net Aof *cash ~~Peter~~-- J.(206) ~~Statile~~(2111,277)~~..........................~~ ~~529~~Proceeds from note receivable,~~688~~ ~~Class~~stockholder A-- *-- ~~James~~90 E.--------- ~~Ashton..............................~~--------- ~~419,495~~--------- ~~Class~~NET BCASH *USED ~~John~~IN F.INVESTING ~~Megrue~~ACTIVITIES (32,373)~~............................~~ 31(32,~~078~~727) (121,~~779~~447) ~~Class~~FINANCING AACTIVITIES ~~75.6%~~Proceeds 23from revolving line of credit 41,~~455~~682 60,~~143~~804 ~~Class~~14,300 BRepayment ~~William~~of J.borrowings ~~Gumina............................~~from --revolving --line ~~Richard~~of W.credit ~~Detweiler~~(432,936)~~......................~~ 7(64,~~427~~539) (3,~~968~~100) ~~Class~~Repayment Aof ~~15.2%~~long 3term debt (8,~~502~~631) (1,~~361~~817) ~~Class~~(250) BProceeds ~~Robert~~from R.long ~~Womack.............................~~term --debt -- ~~David~~20,771 W.100,000 M.Contribution ~~Harvey~~of capital 20 6,014 10,042 Payment of debt issue costs (51,080)~~........................~~ ~~388~~(1,~~000~~634) ~~Class~~(5,593) A--------- *--------- ~~All~~--------- ~~directors~~NET ~~and~~CASH ~~executive~~(USED ~~officers~~IN) asPROVIDED aBY 42FINANCING ACTIVITIES (945) 19,~~738~~599 115,~~694~~399 ~~Class~~--------- A--------- ~~95.7%~~--------- ~~group~~Net increase (decrease) in cash and cash equivalents 11,144 ~~persons~~(313)~~.........................~~ 27(650) Cash and cash equivalents,~~376~~ beginning of period -- 313 963 --------- --------- --------- CASH AND CASH EQUIVALENTS,~~999~~ ~~Class~~END BOF 5%PERIOD ~~HOLDERS~~$ 11,144 $ -- $ 313 ========= ========= ========= SUPPLEMENTARY INFORMATION FOR THE STATEMENT OF CASH FLOWS: ~~Precision~~Interest ~~Partners~~payments ~~Investment~~$ ~~Fund~~17,152 38$ 15,~~506,747~~005 ~~Class~~$ A7,897 ~~90.8%~~Income ~~L.L.C.~~tax (3refunds) payments $ (4208) 26$ 1,~~957,504~~604 ~~Class~~$ B547 Non-cash investing and financing activities - purchase of software under financing agreements $ -- $ 68 $ 344

See accompanying notes F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Precision Partners, L.L.C. ("LLC") was formed on September 9, 1998 for the purpose of acquiring and operating companies in the business of manufacturing and supplying precision-machined parts, tooling and assemblies for original equipment manufacturers. On September 30, 1998, investors contributed approximately $32 million of capital to LLC which was then contributed by LLC to two wholly-owned subsidiaries, Mid State Acquisition Corp. and Galaxy Acquisition Corp., which were established to acquire all of the outstanding capital stock of Mid State Machine Products ("Mid State") and Galaxy Industries Corporation ("Galaxy") on September 30, 1998 (Mid State and Galaxy, collectively the "1998 Acquisitions"). The purchase price, including transaction expenses, was approximately $54,725,000 and was financed by the proceeds of the contributed capital and borrowings under LLC's credit facilities. The purchase price was allocated to the estimated fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting. In February 1999, Precision Partners, Inc. ("Precision" or the "Company") was formed as a wholly-owned subsidiary of Precision Partners Holdings, Inc. ("Holdings"), a wholly-owned subsidiary of LLC. On March 19, 1999, as part of a reorganization, LLC contributed to Precision, through Holdings, its investments and related assets in Galaxy, Mid State and Precision Partners Management Corporation ("Management Corporation"), which comprised substantially all of the assets of LLC ("the 1999 Reorganization"). Simultaneous with this reorganization, Precision issued $100,000,000 of 12% Senior Subordinated Notes (the "Notes") in order to purchase all of the issued and outstanding capital stock of Certified Fabricators, Inc. and its sister company Calbrit Design, Inc. (together, "Certified") and to purchase substantially all of the assets and assume certain liabilities of General Automation, Inc. ("General Automation") and Nationwide Precision Products Corp. ("Nationwide"). Also, on September 1, 1999, Precision purchased all of the issued and outstanding capital stock of Gillette Machine & Tool Co., Inc. ("Gillette") using existing cash and borrowings under Precision's then outstanding credit facilities. The acquisitions of Certified, General Automation, Nationwide, and Gillette are referred to collectively as the "1999 Acquisitions." The 1999 Acquisitions were financed through the net proceeds of the issuance of the Notes, together with borrowings under Precision's then outstanding credit facilities, an equity contribution of approximately $10,000,000 and available cash. The total purchase price, including transaction expenses, was approximately $116,593,000. The purchase price was allocated to estimated fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting. The excess of the purchase price over the net fair value of the assets acquired in the 1998 Acquisitions and the 1999 Acquisitions was allocated to goodwill, which is being amortized over 20 years. In connection with certain transactions described in Note 6, capital contributions of $6.0 million were made to LLC by investors in 2000 bringing the aggregate capital contributed to $48.1 million. LLC contributed this capital through Holdings to Precision. Prior to the 1998 Acquisitions, LLC had substantially no operations, and prior to the reorganization and 1999 Acquisitions, Precision had substantially no operations. For financial statement presentation purposes, the reorganization F-7 is accounted for as if it had occurred on September 9, 1998, in a manner similar to a pooling of interests. The results of the 1999 Acquisitions, except for the acquisition of Gillette, which occurred September 1, 1999, are included from the date of acquisition in March 1999. Therefore, the Consolidated Statements of Operations and Cash Flows for the year ended December 31, 1999 include (i) the operations of Mid State and Galaxy for the year ended December 31, 1999, (ii) the operations of Certified, General Automation, Nationwide, and Precision's corporate office for nine months ended December 31, 1999, (iii) the operations of Gillette for the four months ended December 31, 1999, and (iv) expenses related to the Management Corporation from January 1, 1999 to March 19, 1999 (prior to the reorganization). All significant inter-company balances and transactions have been eliminated in consolidation. Audited financial information of the guarantor subsidiaries has been omitted because Precision's outstanding senior subordinated notes are fully, unconditionally and jointly and severally guaranteed by all direct and indirect subsidiaries of Precision. Precision has no operations or assets separate from its investments in its subsidiaries. The indenture governing the outstanding Notes as well as the agreements governing the credit facilities (described below) restrict the ability of Precision and its subsidiaries to make dividend payments. The Company's unaudited pro forma revenues and net loss for 1999, after giving effect to the 1999 Acquisitions, as if each such acquisition had occurred on January 1, 1999, were $149.7 million and $3.7 million, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the actual amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains any excess cash in bank demand deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company is dependent on a small group of customers. During the years ended December 31, 2001, 2000 and 1999, respectively, 58.1%, 49.6% and 40.7% of the Company's sales were to three customers. As of December 31, 2001 and 2000, F-8 the Company's receivables from these three customers were approximately $9.2 million and $6.9 million, respectively. The Company routinely assesses the financial strength of its customers. The Company does not require collateral or security for these receivables. However, in certain circumstances the Company receives advances from these customers. CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments with original maturities of 90 days or less which are readily convertible into cash. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments consisting of cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities are stated at expected settlement amounts which approximate fair value. The carrying amounts of debt under our credit facilities and capital lease obligations under our master lease agreement approximate fair value due to their variable rate interest features. The carrying amount of the Notes is $100 million, but we believe that the fair value of the Notes is substantially below the carrying value. Because the Notes are held by a limited number of institutional investors and are not actively traded among those investors or the general public, we are unable to accurately determine the current fair value of the Notes. The last trade of the Notes known to management took place in June 2001 at approximately 47% of face value; however, other trades may have occurred that management is not aware of. INVENTORIES Inventories are stated at the lower of cost or market under the first-in, first-out method. DEBT ISSUE COSTS The Company incurred costs related to obtaining debt financing. These costs have been capitalized and are being amortized over the term of the related debt. Precision has capitalized $7.6 million of costs related to the credit facilities outstanding as of December 31, 2001 and the issuance of the Notes. As of December 31, 2001, the accumulated amortization of those costs totaled $2.7 million. See note 6 for information regarding the refinancing of our credit facilities subsequent to December 31, 2001 and the related treatment of the debt issue costs. DEPRECIATION AND AMORTIZATION Buildings, machinery and equipment, and furniture and fixtures are depreciated using either the straight line or declining balance method over the estimated useful life of the individual asset. The lives are five to seven years on furniture and fixtures, five to ten years for machinery and equipment and forty years for buildings and improvements. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated service lives or the terms of the related leases. LONG-LIVED ASSETS The Company accounts for its long-lived assets under Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires impairment losses to be recognized for long-lived assets, including goodwill, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. Indicators of impairment may include, but are not limited to, continuing or forecasted operating or cash flow losses, a significant change in the manner an asset is used or a significant decrease in the market value of an asset. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. F-9 GOODWILL Goodwill represents the excess of cost over the fair market value of net assets acquired and is being amortized on a straight-line basis over 20 years. Accumulated amortization was $11.8 million and $7.8 million as of December 31, 2001 and 2000, respectively. See Note 7. SEGMENTS The Financial Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which the Company adopted during 1998. This statement changed the way that companies report information about operating segments in financial statements, and in accordance with this Statement, the Company determined that it has one reportable segment. ADVERTISING COSTS Advertising costs are expensed as incurred and amounted to approximately $0.3 million, $0.2 million and $0.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. INCOME TAXES The Company accounts for taxes under the liability method where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. REVENUE RECOGNITION Sales are recorded when products are shipped to customers. STOCK BASED COMPENSATION Precision has elected to account for stock-based compensation to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the exercise price. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. F-10 The Company, as required, will apply SFAS No. 142 beginning in the first quarter of 2002. Application of the nonamortization provisions of the SFAS No. 142 is expected to result in a reduction of amortization expense of approximately $4.0 million in 2002. The Company will test goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill as of January 1, 2002 by June 30, 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. Based on the reduction in earnings at certain of our operations since their acquisition, it is possible that impairments will exist when these operations are evaluated under the new guidance of SFAS No. 142. However, the Company has not yet completed its initial testing and therefore has not yet determined what the effect of these tests will be on its earnings and financial position. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. The statement requires companies to record a liability for asset retirement obligations in the period in which they are incurred, which typically could be upon the completion of construction or shortly thereafter. This statement is not expected to have a material effect on the Company. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting Results of Operations for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS No. 144 as of January 1, 2002 and it has not determined the effect, if any, the adoption of the Statement will have on the Company's financial position or results of operations. 3. INVENTORIES Inventories consist of the following at December 31: 2001 2000 -------------- -------------- (In thousands) Raw materials $ 4,608 $ 4,061 Work in process 6,309 10,443 Finished goods 3,407 4,350 --------------- -------------- 14,324 18,854 Less reserves for obsolescence 511 219 -------------- -------------- $ 13,813 $ 18,635 F-11 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, which are valued at cost, consists of the following at December 31: 2001 2000 ----------- ----------- (In thousands) Land, buildings and improvements $ --- $ 4,774 Leasehold improvements 962 2,139 Machinery and equipment 90,039 97,814 Furniture, fixtures and other 3,333 3,385 ----------- ----------- 94,334 108,112 Less accumulated depreciation and amortization 29,363 21,898 ----------- ----------- $64,971 $86,214 =========== =========== 5. ACCRUED EXPENSES Accrued expenses consist of the following at December 31: 2001 2000 ----------- ----------- (In thousands) Accrued interest $ 4,147 $ 4,662 Accrued bonuses 3,390 3,180 Accrued payroll and other employee expenses 1,771 1,785 Accrued trade payables 1,052 688 Accrued professional fees 839 583 Other 2,020 1,426 ----------- ----------- $13,219 $12,324 =========== =========== F-12 6. DEBT Long-term debt consists of the following at December 31:

~~EXHIBIT~~2001 ~~NUMBER~~2000 ~~DESCRIPTION OF EXHIBIT~~ --------------~~-------~~ ---------------~~---------------------------------------------~~ ~~2.1~~(In ~~Merger~~thousands) ~~Agreement~~Precision ~~dated September 30~~Partners, ~~1998~~Inc. by12% ~~and~~Senior ~~among~~Subordinated ~~Galaxy~~Notes ~~Industries~~due ~~Corporation~~2009, ~~Kenneth~~interest ~~Smith,~~due ~~Galaxy~~semiannually ~~Holding~~on ~~Co.,~~March ~~Inc.,~~15 ~~Robert~~and H.September ~~Leidel~~15 ~~Revocable~~commencing ~~Living~~on ~~Trust~~September 15, ~~Betty A~~1999. ~~Leidel~~$100,000 ~~Revocable Living Trust~~$100,000 ~~Michael~~Term ~~Leidel,~~loan ~~Cheryl~~payable ~~Brooks,~~to ~~and~~a ~~Galaxy~~bank ~~Acquisition~~group, ~~Inc.~~due ~~(filed~~in asquarterly ~~Exhibit~~principal ~~2.1~~installments toplus ~~the~~interest ~~Registration~~at ~~Statement~~a onvariable ~~Form~~rate ~~S-4~~ (~~file no~~10.63% ~~333-33438),~~ as ~~amended,~~of ~~originally~~December ~~filed~~31, on2001), maturing March 2831, ~~2000~~2005, ~~and~~secured ~~incorporated herein~~ by ~~reference).~~a ~~2.2~~first ~~Redemption~~priority ~~and~~lien ~~Merger~~in ~~Agreement~~all ~~dated~~assets ~~September~~and ~~17,~~property ~~1998~~of byPrecision and ~~among~~its ~~Mid~~subsidiaries, ~~State~~except ~~Machine~~those ~~Products,~~assets S.secured ~~Douglas~~by ~~Sukeforth,~~General ~~Mid~~Electric ~~State~~Capital ~~Holdings~~Corporation ~~Co.,~~in ~~Inc.~~which ~~and~~the ~~Mid~~bank ~~State~~group ~~Acquisition~~has ~~Inc.~~a ~~(filed~~second aspriority ~~Exhibit 2~~lien.2 toQuarterly ~~the~~principal ~~Registration~~installments ~~Statement~~of on$805,000 ~~Form~~began ~~S-4~~on ~~(file~~June ~~no.~~30, ~~333-33438)~~2000, asand ~~amended,~~increased ~~originally~~to ~~filed~~$920,000 on ~~March~~June 2830, ~~2000~~2001, and ~~incorporated~~will ~~herein~~increase byto ~~reference).~~$1,150,000 ~~2.3~~on ~~Asset~~June ~~Purchase~~30, ~~Agreement~~2002, ~~dated~~$1,380,000 ~~February~~on 5June 30, ~~1999~~2003, by and ~~among~~$1,495,000 ~~General~~on ~~Automation~~June 30, ~~Inc~~2004. 16,364 ~~Max Starr~~21,390 ~~and~~Revolving ~~Precision~~line ~~Partners~~of ~~Holding~~credit ~~Company~~with ~~(filed~~a aslimit ~~Exhibit~~of 2$16.32 tomillion ~~the~~payable ~~Registration~~to ~~Statement~~a onbank ~~Form~~group, ~~S-4~~maturing ~~(file~~March ~~no.~~31, ~~333-33438)~~2005, assecured ~~amended,~~by ~~originally~~a ~~filed~~first onpriority ~~March~~lien ~~28,~~in ~~2000~~all assets and ~~incorporated~~property ~~herein~~of byPrecision ~~reference).~~and ~~2.4~~its ~~Asset~~subsidiaries, ~~Purchase~~except ~~Agreement~~those ~~dated~~assets ~~February~~secured ~~11,~~by ~~1999~~General byElectric ~~and~~Capital ~~among~~Corporation ~~Nationwide~~in ~~Precision~~which ~~Products~~the ~~Corp.,~~bank ~~certain~~group ofhas ~~its~~a ~~stockholders~~second ~~and~~priority ~~Nationwide~~lien. ~~Acquisition~~Advances ~~Delaware,~~under ~~Inc.~~the ~~(filed~~line asare ~~Exhibit~~available ~~2.4~~based toupon ~~the~~85% ~~Registration~~of ~~Statement~~eligible onaccounts ~~Form~~receivable ~~S-4~~and ~~(file~~50% noof eligible inventories. ~~333-33438),~~Interest asis ~~amended,~~charged ~~originally~~at ~~filed~~a onvariable ~~March~~rate 28(8.44% as of December 31, ~~2000~~2001 and ~~incorporated~~there ~~herein~~is bya ~~reference).~~commitment 2fee of 0.5% ~~Stock~~per ~~Purchase~~year ~~Agreement~~based ~~dated~~on ~~February~~the ~~19,~~unused ~~1999~~portion byof ~~and~~the ~~among~~line, ~~Certified~~16,211 ~~Fabricators~~7,465 ~~Inc~~payable quarterly., ~~Calbrit~~Term ~~Design,~~loan ~~Inc.~~payable to General Electric Capital Corporation, ~~certain~~due in monthly principal installments of ~~their~~$288,484 ~~selling~~plus ~~shareholders~~interest ~~and~~at ~~Precision~~a ~~Partners,~~variable ~~Inc.~~rate (~~filed~~6.14% as ~~Exhibit~~of ~~2.5~~December to31, ~~the~~2001), ~~Registration~~maturing ~~Statement~~December on31, ~~Form~~2005, ~~S-4~~subject ~~(file~~to ~~no.~~a ~~333~~12-~~33438)~~month extension, asat ~~amended~~the Borrower's election, ~~originally~~if ~~filed~~no ondefault ~~March~~or ~~28,~~event ~~2000~~of ~~and~~default ~~incorporated~~has ~~herein~~occurred byor ~~reference).~~is ~~2.6~~continuous ~~Stock~~at ~~Purchase~~the ~~Agreement~~time ~~dated~~the ~~August~~extension 27becomes effective, ~~1999~~secured by ~~and~~a ~~among~~first ~~Gillette~~priority ~~Machine~~lien &in ~~Tool~~all ~~Co.,~~equipment ~~Inc.,~~financed ~~Gillette~~by ~~Machine~~the &term ~~Equipment~~loan ~~Company,~~and ~~certain~~a ofsecond ~~their~~priority ~~selling~~lien ~~shareholders~~in all other assets and property of Precision ~~Partners,~~and ~~Inc.~~its subsidiaries (~~filed~~other asthan ~~Exhibit~~Certified 2and Gillette).6 to17,309 ~~the~~20,771 ~~Registration~~Other ~~Statement~~66 on209 ~~Form~~-------------- S-4-------------- ~~(file~~149,950 ~~no. 333-33438)~~149,835 asLess ~~amended,~~current ~~originally~~portion ~~filed~~(after onrefinancing ~~March~~- 28see below) 1,305 ~~2000~~7,975 ~~and~~-------------- ~~incorporated~~--------------- ~~herein~~$148,645 by$ ~~reference).~~141,860 ============== ===============

In the fourth quarter of 2001, the Company was unable to comply with certain financial covenants of its credit facilities and master lease agreement. The lenders agreed to waive these covenant defaults through the completion of the refinancing discussed below. On February 1, 2002, Precision entered into a new credit agreement and a new master lease agreement (to be accounted for as a capital lease). Funding took place on February 4, 2002. A portion of the proceeds from the new credit agreement, along with available cash, were utilized to repay in full the senior debt previously outstanding and costs and expenses related to the refinancing, while the new master lease agreement was used to refinance all obligations under the Company's previous master lease agreement (accounted for as an operating lease). The remainder of the proceeds and availability under the new credit agreement will be used as needed for working capital and other general corporate purposes. The new credit agreement consists of a $44.050 million term loan that has been fully drawn and a $25.0 million revolving credit facility. The term loan amortizes over 47 months with quarterly principal payments of 2.5% of the F-13 original principal amount in each of quarters three through twelve, 5.0% in each of quarters thirteen through fifteen and 60.0% in quarter sixteen. The first principal payment is due October 1, 2002. Interest on the term loan is payable at an annual rate of LIBOR plus a margin of 5.00%, subject to a minimum interest rate of 10.00% through December 31, 2002, increasing to 11.00% through December 31, 2004 and to 12.00% thereafter. The revolving credit facility is for a term of 47 months. Borrowings under this facility are limited to 85% of eligible accounts receivable and 50% of eligible inventory, each as defined in the new credit agreement, and subject to other eligibility requirements and reserves as per the new credit agreement. In certain instances, borrowings under the revolving credit facility can be further restricted due to limitations on Permitted Indebtedness as defined in the indenture related to the Notes. Interest on the revolving credit facility is payable at an annual rate of either LIBOR plus a margin of 3.25% or the lender's index rate plus a margin of 1.75%, at Precision's option. There is also an unused facility fee payable at an annual rate of 0.50% on any unused portion of the revolving credit facility. At closing, there were no funds drawn or borrowings outstanding under the revolving credit facility. The new master lease agreement has a principal balance of $5.950 million and amortizes over 47 months with principal and interest payable as described above for the new term loan. This lease will be accounted for as a capital lease. If Precision's Consolidated Senior Leverage Ratio (as defined in the new credit agreement) exceeds certain predetermined levels, then Precision's borrowing rate will increase 200 basis points on an in-kind basis over the otherwise applicable annual rate on the term loan and the revolving credit facility. Such in-kind amounts would be payable at the maturity date of the new credit agreement, so long as Precision is not otherwise in default. If Precision has a continuing Event of Default, as defined in the new credit agreement, our borrowing rate will increase 200 basis points over the otherwise applicable annual rates under both the new credit and master lease agreements. The lenders have the right to syndicate the revolving credit facility. The lenders also have the right to adjust the pricing and structure of the revolving credit facility whether or not it is eventually syndicated to a third party or held by one or both of the current lenders. Pricing changes of up to 300 basis points on inventory advances and up to 100 basis points on other advances are permitted. Changes to the structure could include, without limitation, adjusting advance rates, eligibility requirements and reserve requirements, going from a consolidated borrowing base to individual company borrowing bases and/or reducing the term of each of the credit facilities to three years. The lenders have a fully perfected first priority security interest in substantially all existing and after-acquired assets of Precision and its subsidiaries (other than inter-company debt). Precision and each of its principal subsidiaries are borrowers under the new credit agreement and each borrower guarantees the obligations of every other borrower. Precision's immediate parent, Precision Partners Holding Company, also guarantees the new credit agreement. Precision is subject to certain financial ratio covenants under the new credit and master lease agreements including, but not limited to, maximum Consolidated Senior Leverage Ratio, minimum Consolidated Senior Interest Coverage Ratio, minimum Consolidated Total Interest Coverage Ratio, minimum Consolidated Fixed Charge Coverage Ratio and maximum Capital Expenditures. There are mandatory repayment obligations related to certain asset dispositions, sales of equity and a portion of any excess cash flow, as defined. Under certain circumstances, prepayments on the term loan require prepayment premiums of 3.0%, 1.5%, 1.0% and 0.5% of the amounts prepaid in the first, second, third and fourth years, respectively. F-14 The indenture related to the senior subordinated notes and our other financing agreements as discussed above impose limitations on Precision's ability to, among other things, incur indebtedness (including capital leases), incur liens, pay dividends or make other restricted payments, consummate certain asset sales, enter into transactions with affiliates, issue preferred stock, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of Precision's assets. In addition, the financing agreements limit our ability to enter into leases or sale and leaseback transactions, to make capital expenditures and to make acquisitions. During the fourth quarter of 2000, the Company was also unable to comply with certain covenants included in our bank credit facilities and master lease agreement then in effect. On December 8, 2000, Precision entered into an amendment and waiver with respect to its bank credit facilities, an amended and restated master lease, and a new $20.8 million six-year equipment term loan facility. In connection with these transactions, Precision also received an equity contribution of $6.0 million. At closing, the Company used the entire $20.8 million term loan facility to refinance approximately $11.8 million of equipment previously leased under the master lease agreement, to repay approximately $2.9 million of advances under its revolving credit facility that were used to purchase equipment, and to pay approximately $6.1 million of outstanding invoices for new equipment. The $6.0 million equity contribution was used to pay the fees and expenses associated with these transactions and to repay advances under the Company's revolving credit facility used to purchase new equipment. The total fees and expenses relating to these transactions were approximately $0.9 million. The amendment and waiver in respect to the Company's bank credit facilities includes a waiver of all defaults that existed on or prior to December 8, 2000. All of the agreements discussed in this paragraph were refinanced on February 4, 2002 as discussed above. Pursuant to the terms entered into in conjunction with the March 19, 1999 issuance of the Notes, the interest payable on the Notes increased from 12.00% to 12.50% on September 16, 1999, from 12.50% to 12.75% on December 16, 1999, and from 12.75% to 13.00% on March 14, 2000. This increase in the interest rate was a contractual obligation that arose because Precision did not file a registration statement with the SEC relating to an offer to exchange new notes for the Notes issued in March 1999, and because Precision did not have the registration statement declared effective and did not consummate the exchange within prescribed time periods. The exchange offer registration statement was filed and became effective on May 5, 2000 and the exchange offer was completed on June 7, 2000. Upon the completion of the exchange offer, the interest payable on the Notes reverted to 12.00%, the stated amount of interest payable on the face of the Notes. Aggregate future maturities of long-term debt, considering the refinancing described above, are as follows: Future (In thousands) Maturities ----------- ---------- 2002 $ 1,305 2003 5,011 2004 5,000 2005 8,750 2006 30,000 Thereafter 100,000 The Company has unamortized debt issue costs of $4.9 million at December 31, 2001 related to its outstanding debt obligations. The costs are being amortized over the life of the related debts. As required, the remaining unamortized debt issue costs relating to the obligations repaid via the refinancing will be written off as an extraordinary item in the first quarter of F-15 2002. Such write-off will total $0.9 million. Costs and expenses related to the refinancing totaled $4.4 million, of which $1.1 million had been incurred at December 31, 2001. These amounts will be capitalized and amortized over the life of the related agreements. 7. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES YEAR ENDED DECEMBER 31, 2001 Due to continuing losses at Galaxy and Certified following the completion of reorganization plans announced in the third quarter of 2000, management has approved and begun to implement plans to further restructure these operations. Management has determined that it will consolidate the operations into one facility for each of Galaxy and Certified and dispose of excess equipment. Galaxy closed one of its two plants in the fourth quarter of 2001. The equipment that was located in the plant that closed was moved prior to year-end. Substantially all of the equipment that was retained was moved to Galaxy's other operating plant, but several machines were moved to other Precision subsidiaries. The following summarizes charges recorded during 2001 in connection with the restructuring of Galaxy (in thousands): Impairment of long-lived assets to be abandoned or disposed $ 2,308 Future rent and taxes on plant to be eliminated 622 Provision for terminating equipment leases 165 Employee termination costs 50 ----------- Total restructuring and impairment charges - Galaxy $ 3,145 =========== During the fourth quarter of 2001, $48,000 was paid and charged against the above noted accruals. Additionally, management incurred pre-tax cash costs of approximately $85,000 in the first quarter of 2002 to move equipment in connection with the restructuring of Galaxy. Management expects that cash will be expended against the above noted accruals as follows (in thousands): Year ending December 31, 2002 $ 358 Year ending December 31, 2003 $ 176 Year ending December 31, 2004 $ 180 Year ending December 31, 2005 $ 75 F-16 Certified intends to consolidate its operations into one of its current operating facilities during the first and second quarters of 2002. Equipment to be retained will be relocated from two other operating facilities, both of which are leased. Certified has begun to market equipment which will become excess as a result of this restructuring and has sold a portion of it in the first quarter of 2002. The following summarizes charges recorded during 2001 in connection with the restructuring of Certified (in thousands): Impairment of long-lived assets to be abandoned or disposed $ 2,128 Future rent and taxes on plants to be eliminated 353 ----------- Total restructuring and impairment charges - Certified $ 2,481 =========== Additionally, management expects to incur pre-tax cash costs of approximately $0.6 million in the first and second quarters of 2002 to move equipment in connection with the restructuring of Certified. Management expects that cash will be expended against the above noted accruals as follows: Year ending December 31, 2002 $ 223 Year ending December 31, 2003 $ 105 Year ending December 31, 2004 $ 25 Also during the third quarter of 2001, management determined that General Automation would dispose of certain under-utilized production equipment in order to make better use of its available production floor space. An impairment charge of $0.7 million was recorded in the third quarter of 2001. The Company entered into a contract for the sale and leaseback of the General Automation's land and building during the fourth quarter of 2001. This transaction closed on March 12, 2002. An impairment charge of $0.2 million was recorded in the fourth quarter of 2001 for the estimated loss on the sale of the plant. Of the restructuring charges and impairment of long-lived assets recorded in 2001 as noted above, $5.2 million is included in cost of sales, and $1.3 million is included in selling, general and administrative expenses. As a result of the recognition of the impairment charges, management estimates an annual reduction of $1.6 million in depreciation expense, offset in part by an estimated increase in annual rental expense General Automation of $0.3 million. All impaired assets discussed above have been classified as assets held for sale in our consolidated financial statements. Accruals relating to the restructuring charges total $1.1 million at December 31, 2001 and are included in other current liabilities. In addition to the charges noted above, Gillette, General Automation and Galaxy recorded adjustments to reduce inventory balances in the aggregate by $3.5 million. These adjustments, which are recorded in cost of sales, resulted from the performance of physical inventory procedures and the identification of obsolete items. YEAR ENDED DECEMBER 31, 2000 Significant adverse changes in Galaxy's and Certified's business environments, as well as historical, current and projected cash flow losses led management to evaluate the operations of these two businesses in the third quarter of 2000. As a result of this evaluation, management concluded that goodwill and machinery and equipment were impaired, and in accordance with Precision's accounting policies, impairment losses of $2.3 million relating to goodwill and $4.5 million relating to machinery and equipment at Galaxy and Certified were recognized in 2000. Of these amounts, $4.3 million is included in F-17 cost of sales and $2.5 million is included in selling, general and administrative expenses. The Company also incurred $1.1 million of cash charges related to the reorganization. As a result of the recognition of these impairment charges, an annual reduction of approximately $0.1 million in goodwill amortization and $0.9 million in depreciation expense have been realized. Further, based on the results of that assessment, adjustments of $3.0 million, $0.4 million and $0.7 million are included in cost of sales, selling, general and administrative expenses, and other expense, respectively in 2000. The adjustments relate to the write-off of certain inventory, accounts receivable, and machinery and equipment no longer in use. In addition, as part of the settlement agreement with a former president of one of Precision's subsidiaries, additional amortization expense of $0.6 million relating to a non-compete agreement previously entered into with this individual is included in selling, general, and administrative expenses in 2000. This additional amortization expense reflects the change in the termination date of that former president's covenant not to compete agreement from August 31, 2004 to December 31, 2000. 8. INCOME TAXES The income tax provision (benefit) is as follows:

~~EXHIBIT~~Year ~~NUMBER~~ended ~~DESCRIPTION~~Year OFended ~~EXHIBIT~~Year ended December 31, December 31, December 31, (In thousands) 2001 2000 1999 ----------------~~-----~~ -------------- -------------- Current federal $ -- $ 590 $ -- Current state -- 922 303 ------- ------- -------~~-----~~ ~~2.7~~Total ~~Agreement~~current oftax ~~Merger~~provision dated as of May 28, 1999 by and among Certified Fabricators Inc., Calbrit Design, Inc., and Precision Partners, Inc. and filed with the Secretary of State of the State of California on July 7, 1999 (filed as Exhibit 2.7 to the Registration Statement on Form S-~~4 (file no. 333~~-~~33438),~~ ~~as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.~~1 ~~Amended and Restated Certificate of Incorporation of Precision Partners~~,512 ~~Inc.~~303 ~~(filed as Exhibit 3.1 to the Registration Statement on Form S~~-~~4 (file no. 333~~-~~33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.2 Bylaws of Precision Partners, Inc. (filed as Exhibit 3.2 to the Registration Statement on Form S~~-~~4 (file no. 333~~-33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.3 Certificate of Incorporation of Nationwide (together with all amendments thereto) (filed as Exhibit 3.3 to the Registration Statement on Form S-~~4 (file no. 333~~-~~33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.4 By~~-~~laws~~ ~~of Nationwide (filed as Exhibit 3.4 to the Registration Statement on Form S~~-4------ ~~(file no. 333~~-~~33438),~~------ asDeferred ~~amended,~~federal ~~originally filed on March 28, 2000 and incorporated herein by reference). 3.5 Certificate of Incorporation of Mid State~~ (~~together with all amendments thereto~~135) (~~filed as Exhibit 3.~~5 ~~to the Registration Statement on Form S-4 (file no. 333-33438)~~, ~~as amended, originally filed on March 28, 2000 and incorporated herein by reference~~990). ~~3.6 Amended and Restated By-laws of Mid State~~ (~~filed as Exhibit 3.6 to the Registration Statement on Form S-4 (file no. 333-33438)~~1, ~~as amended, originally filed on March 28, 2000 and incorporated herein by reference~~917). ~~3.7~~Deferred ~~Articles~~state of135 ~~Incorporation of General Automation~~ (~~together with all amendments thereto~~312) (~~filed~~516) ~~as Exhibit 3.7 to the Registration Statement on Form S~~-4------ ~~(file no. 333~~-~~33438),~~------ ~~as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.8 By~~-~~laws~~------ ofTotal ~~General~~deferred ~~Automation~~tax ~~(filed~~benefit ~~as Exhibit 3.8 to the Registration Statement on Form S~~-4- (~~file no. 333-33438)~~6, ~~as amended, originally filed on March 28, 2000 and incorporated herein by reference~~302). ~~3.9 Articles of Incorporation of Certified~~ (~~together with all amendments thereto~~2,433) ~~(filed as Exhibit 3.9 to the Registration Statement on Form S~~-~~4 (file no. 333~~-~~33438), as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.10 Amended and Restated By~~-~~laws of Certified (filed as Exhibit 3.10 to the Registration Statement on Form S~~-~~4 (file no. 333~~-~~33438),~~-- as amended, originally filed on March 28, 2000 and incorporated herein by reference). 3.11 Restated Certificate of Incorporation of Gillette (filed as Exhibit 3.11 to the Registration Statement on Form S-4------ ~~(file no. 333~~-~~33438),~~------ asTotal ~~amended,~~tax ~~originally~~benefit ~~filed~~$ ~~on March 28, 2000 and incorporated herein by reference). 3.12 By~~-~~laws~~- ~~of Gillette~~ $(~~filed as Exhibit 3.12 to the Registration Statement on Form S-~~4,790) $(~~file no. 333-33438)~~2,130) as======= ~~amended,~~======= ~~originally filed on March 28, 2000 and incorporated herein by reference).~~=======

F-18 The difference between the effective rate reflected in the income tax expense (benefit) and the amount determined by applying the statutory U.S. rate of 34% to income (loss) before income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999 is analyzed below:

~~EXHIBIT~~Year ~~NUMBER~~ended ~~DESCRIPTION~~Year OFended ~~EXHIBIT~~Year ended December 31, December 31, December 31, (In thousands) 2001 2000 1999 ---------------~~------~~ --------------- ---------------~~------------------------------~~ ~~3.13~~Income ~~Articles~~tax ofbenefit ~~Incorporation~~at ofstatutory ~~Galaxy~~rate $(~~filed~~7,919) ~~as Exhibit 3.13 to the Registration Statement on Form S-4~~ $(~~file no. 333-33438)~~7, ~~as amended, originally filed on March 28, 2000 and incorporated herein by reference~~374). ~~3.14 Amended and Restated By-laws of Galaxy~~ $(~~filed as Exhibit 3.14 to the Registration Statement on Form S-4 (file no. 333-33438)~~2,599) asPermanent ~~amended~~differences, ~~originally~~primarily ~~filed~~goodwill on742 ~~March 28, 2000 and incorporated herein by reference). 4.~~1 ~~Indenture dated as of March 19~~,548 ~~1999~~672 ~~among~~State ~~Precision~~income ~~Partners~~tax, ~~Inc.,~~net ~~as Company, the Guarantors named therein and The Bank~~ of ~~New~~federal ~~York,~~income astax ~~trustee~~benefit ~~(filed~~89 as403 ~~Exhibit 4.1 to the Registration Statement on Form S-4~~ (~~file no. 333-33438~~203), asChange ~~amended,~~in ~~originally~~valuation ~~filed~~allowance ~~on March 28~~7,318 2000 and incorporated herein by reference). 4.2 First Supplemental Indenture dated October 15, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee (filed as Exhibit 4.2 to the Registration Statement on Form S-~~4 (file no. 333~~-~~33438),~~ as amended, originally filed on March 28, 2000 and incorporated herein by reference). 4.3 Second Supplemental Indenture dated October 29, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee (filed as Exhibit 4.3 to the Registration Statement on Form S-~~4 (file no. 333~~-~~33438),~~ asOther ~~amended, originally filed on March 28, 2000 and incorporated herein by reference). 10.1 Credit Agreement~~ (~~the "Credit Agreement"~~230) ~~dated~~633 as of March 19, 1999 among Precision Partners, Inc., the guarantors and lenders named therein, Citibank, N.A., as Administrative Agent, Bank of America National Trust and Savings Association, as Syndication Agent, and Sun Trust Bank, Atlanta, as Documentation Agent (filed as Exhibit 10.1 to the Registration Statement on Form S-~~4 (file no. 333~~-~~33438),~~ as amended, originally filed on March 28, 2000 and incorporated herein by reference). 10.2 Waiver and Amendment to the Credit Agreement dated August 9, 1999 among Precision Partners, Inc., the guarantors and lenders named therein, and Citicorp U.S.A., Inc. (filed as Exhibit 10.2 to the Registration Statement on Form S-4------ ~~(file no. 333~~-~~33438),~~------ as amended, originally filed on March 28, 2000 and incorporated herein by reference). 10.3 Waiver and Amendment No. 2 to the Credit Agreement dated March 2, 2000 among Precision Partners, Inc., the guarantors and lenders named therein, and Citicorp U.S.A., Inc. (filed as Exhibit 99.1 to the Quarterly Report on Form 10-Q------ ~~filed~~Benefit ~~on August 14, 2000~~ for ~~the~~income ~~quarter~~taxes ~~ended~~$ June 30, 2000 and incorporated herein by reference). 10.4 Waiver and Amendment No. 3 to the Credit Agreement dated as of December 8, 2000 among Precision Partners, Inc., Precision Partners Holding Company, Mid State, Galaxy, Certified, General Automation, Nationwide, Gillette, the Lenders listed on the signature pages thereof and Citicorp U.S.A., Inc., as Administrative Agent for the Lenders (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q- ~~filed on December 11, 2000 for the quarter ended September 30, 2000 and incorporated herein by reference). 10.5 Loan, Security and Guaranty Agreement dated as of December 8, 2000 by and between~~ $(~~a) Galaxy~~4, ~~Mid State, Nationwide, General Automation (b~~790) ~~GECC, for itself and as agent for certain Participants~~ $(~~together with its successors and assigns~~2, ~~the Lender~~130); ~~and~~======= ~~(c)~~======= ~~the Company, as Guarantor (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on December 11, 2000 for the quarter ended September 30, 2000 and incorporated herein by reference).~~=======

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and (liabilities) are as follows:

~~EXHIBIT~~December ~~NUMBER~~31, ~~DESCRIPTION~~December OF31, ~~EXHIBIT~~(In thousands) 2001 2000 --------------~~-------~~ --------------~~----------------------------------------------~~ ~~10.6~~Net ~~Note~~operating ~~dated~~losses ~~December~~$ 815,867 ~~2000~~$ ~~executed by Galaxy~~6,556 ~~Mid~~Tax ~~State,~~credit ~~Nationwide~~carryforwards ~~and~~576 ~~General~~576 ~~Automation,~~Other asaccruals ~~Borrowers evidencing a promise to pay to the order of GECC~~1,457 ~~for itself and as agent for certain Participants~~1,614 ~~as Lender the principal sum of $20~~Property,~~770,826.00~~ ~~pursuant~~plant toand ~~the~~equipment ~~Loan Agreement~~ (~~filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on December 11~~7, ~~2000 for the quarter ended September 30, 2000 and incorporated herein by reference~~923). ~~10.~~(7 ~~Amended and Restated Master Lease Agreement dated as of December 8~~,717) ~~2000~~Inventories ~~between~~87 ~~GECC,~~20 ~~for~~Goodwill ~~itself~~amortization and asother ~~agent~~intangibles ~~for certain Participants, as Lessor, and Galaxy, Mid State, Nationwide, and General Automation, as Lesees~~ (~~filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on December 11, 2000 for the quarter ended September 30, 2000 and incorporated herein by reference~~580). 10.8 Final Schedule dated December 8, 2000 to Amended and Restated Master Lease Agreement dated as of December 8, 2000 between GECC, for itself and as agent for certain Participants, as Lessor, and Galaxy, Mid State, Nationwide, and General Automation, as Lessees (~~filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on December 11, 2000 for the quarter ended September 30, 2000 and incorporated herein by reference~~247). ~~10.9~~Deferred ~~Security~~tax ~~Agreement~~asset ~~dated~~valuation asallowance ~~of December 8, 2000 among Citicorp, as agent for GECC, for itself and as agent for certain Participants, and Precision Partners, Inc., Galaxy, Mid State, Nationwide, and General Automation~~ (~~filed as Exhibit 10.6 to the Quarterly Report on Form 10-Q filed on December 11~~9, ~~2000 for the quarter ended September 30, 2000 and incorporated herein by reference~~696). 10.10 Security Agreement dated as of December 8, 2000 among GECC, as agent for Citicorp in its capacity as Administrative Agent for certain lenders under the Credit Agreement and Galaxy, Mid State, Nationwide, and General Automation (~~filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q filed on December 11~~1, ~~2000 for the quarter ended September 30, 2000 and incorporated herein by reference~~014). 10.11 Intercreditor Agreement dated as of December 8, 2000 between Citicorp, as Administrative Agent for the Lenders under the Credit Agreement and GECC, for itself and as agent for certain Participants under the Loan, Security and Guaranty Agreement. 10.12 General Electric Gas Turbine Systems Source Operation Agreement dated December 1, 1998 by and between General Electric and Mid State (filed as Exhibit 10.3 to the Registration Statement on Form S-4------- ~~(file no. 333~~-~~33438),~~------- asNet ~~amended,~~deferred ~~originally~~tax ~~filed~~liability on$ ~~March 28, 2000 and incorporated herein by reference~~(212). ~~10.13~~$ ~~Purchase Agreement dated October 26, 1999 between Caterpillar Inc. and Galaxy~~ (~~filed~~212) as======== ~~Exhibit~~======== ~~10.4~~Net tonon-current ~~the~~deferred ~~Registration~~tax ~~Statement~~liability on$ ~~Form S-4~~ (~~file no. 333-33438~~212), as$ ~~amended~~(1, ~~originally filed on March 28, 2000 and incorporated herein by reference~~846). ~~10.14~~Net ~~Purchase~~current ~~Agreement~~deferred ~~dated~~tax ~~February~~asset -- 1,634 ~~2000~~-------- ~~between Dana Corporation~~ -------- ~~Spicer~~Net ~~Heavy~~deferred ~~Axle~~tax &liability ~~Brake~~$ ~~Division and Nationwide~~ (~~filed~~212) as$ ~~Exhibit 10.5 to the Registration Statement on Form S-4~~ (~~file no. 333-33438~~212), as======== amended, originally filed on March 28, 2000 and incorporated herein by reference). 10.15* Employment Agreement dated as of July 10, 2000 between John G. Raos and Precision Partners, Inc. 10.16* Amendment No. 1 to Employment Agreement dated as of July 10, 2000 between John G. Raos and Precision Partners, Inc.========

At December 31, 2001, the Company has federal and state net operating loss ("NOL") carryforwards of approximately $40.7 million and $2.0 million. The federal and state NOL carryforwards will begin to expire in 2020 and 2006, respectively. The Company's existing deferred tax assets as of December 31, 2001 and 2000 have been reduced by a valuation allowance due to uncertainty regarding the realization of the full amount of such deferred tax assets. 9. DEFINED CONTRIBUTION PLAN The Company sponsors a defined contribution plan covering substantially all employees. Company contributions related to this plan, which is based on partial matching of employee contributions, amounted to $0.6 million, $0.6 million and $0.7 million for the years ended December 31, 2001, 2000 and 1999, respectively. 10. COMMITMENT AND CONTINGENCIES As of December 31, 2001, Precision had funded approximately $6.0 million of its capital equipment needs with operating leases under a master lease agreement. As discussed in Note 6, the Company refinanced its senior debt and master lease agreement in February 2002. The terms of the new master lease agreement, which will be accounted for as a capital lease, are discussed in that note. Rent expense totaled approximately $5.2 million, $4.9 million and $2.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Minimum rental commitments under noncancellable operating leases, after giving effect to the refinancing of the master lease agreement noted above, are as follows: Minimum Rental (In thousands) Commitments -------------------- ------------------- 2002 $ 3,711 2003 $ 3,204 2004 $ 2,472 2005 $ 2,199 2006 $ 1,719 Thereafter $ 2,499 F-19 Precision or its subsidiaries are defendants from time to time in lawsuits and disputes arising in the normal course of business. Management believes that the ultimate outcome of those matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 11. STOCK OPTION PLAN In April 1999, Holdings approved an Incentive Stock Option Plan for certain employees including employees of Precision and Precision's wholly-owned subsidiaries for the issuance of up to 2,700,000 shares of Holdings common stock. These options vest over a period of four years. All options granted have an exercise price of $0.1875 per share. During 2000 and 2001, LLC issued options to purchase shares of its common stock to certain employees of Precision. These options were granted with exercise prices ranging from $0.3735 to $0.50 per share. Fifty percent of these options vest over four years and 50% vest over seven years, subject to acceleration so that they vest in no less than four years if certain performance criteria are met. During 2000 and 2001, LLC issued purchase rights to investment units consisting of equal numbers of class A equity and preferred interests in LLC with exercise prices ranging from $1.00 to $1.1265. The impact of accounting for the stock options noted above under the fair value method provided for under SFAS No. 123, Accounting for Stock-Based Compensation, is immaterial to the Company's financial statements. A summary of the stock option activity for LLC and Holdings as it relates to employees of Precision and its subsidiaries for the years ended December 31, follows:

~~EXHIBIT~~2001 ~~NUMBER~~2000 ~~DESCRIPTION~~1999 ~~OF EXHIBIT~~ --------------------- --------------------------------------------------------------------- 10.17*LLC ~~Amendment~~LLC ~~No.~~LLC 2Holdings toLLC ~~Employment~~Class ~~Agreement~~A ~~dated~~Holdings asHoldings ofInvestment ~~July~~Class ~~10,~~A ~~2000~~Class ~~between~~B ~~John~~Investment G.Common ~~Raos~~Class ~~and~~B ~~Precision~~Class ~~Partners,~~B ~~Inc.~~Unit 10.18*Common ~~Employment~~Stock ~~Agreement~~Common ~~dated~~Stock asUnit ofStock ~~July~~Common ~~10,~~Stock ~~2000~~Common ~~between~~Stock ~~Frank~~Options R.Options ~~Reilly~~Options ~~and~~Options ~~Precision~~Options ~~Partners,~~Options ~~Inc.~~Options 10.19*-------------------------------------- ~~Amendment~~----------------------------------- ~~No.~~------------ 1Outstanding toat ~~Employment~~beginning ~~Agreement dated as~~ of ~~July~~year 101,000,000 ~~2000~~3,438,475 ~~between~~1,366,804 ~~Frank~~-- R.-- ~~Reilly~~1,810,356 ~~and~~-- ~~Precision~~Granted ~~Partners~~281,625 ~~Inc.~~1,640,984 10.20*128,000 ~~Employment~~1,000,000 ~~Agreement~~3,438,475 ~~dated~~100,000 ~~as of July 10~~2,494,000 ~~2000~~Exercised ~~between~~-- ~~Peter~~-- J.(44,547) ~~Statile~~-- ~~and~~-- ~~Precision~~(79,219) ~~Partners~~(38,644) ~~Inc.~~Forfeited ~~10.21* Amendment No.~~ (1,281,625) to-- ~~Employment~~(350,257) ~~Agreement~~-- ~~dated~~-- as(464,333) of(645,000) ~~July~~-------------------------------------- ~~10,~~----------------------------------- ~~2000~~------------ ~~between~~Outstanding ~~Peter~~at J.end ~~Statile~~of ~~and~~year ~~Precision~~-- ~~Partners~~5,079,459 ~~Inc.~~1,100,000 ~~21.~~1,000,000 ~~List~~3,438,475 of1,366,804 ~~Subsidiaries~~1,810,356 of====================================== ~~the~~==================================== ~~Company~~============ ~~(filed~~Exercisable asat ~~Exhibit~~end ~~21.1~~of toyear ~~the Registration Statement on form S~~-4- ~~(file~~1,476,896 ~~no.~~716,730 ~~333-33438)~~1,000,000 as166,876 ~~amended~~633,973 ~~originally filed on March 28~~171,286 ~~2000~~====================================== ~~and~~==================================== ~~incorporated herein by reference).~~============

F-20 During 1999, no options for LLC Investment Units or for LLC Class A Common Stock Options were authorized, granted, exercised, or outstanding. 12. RELATED PARTY TRANSACTIONS Precision Partners Holding Company, on behalf of itself and its affiliates including Precision, has agreed to pay Saunders Karp & Megrue and Carlisle, investors in LLC, an annual monitoring fee. Those monitoring fees totaled $0.3 million in each of 2000 and 1999. We pay certain business registration fees, taxes and other costs on behalf of Holdings and LLC. Such costs paid on behalf of Holdings and LLC for the year ended December 31, 2001 were approximately $16,000 and less than $1,000, respectively. For the year ended December 31, 2000, Precision accrued $0.2 million of such fees on behalf of Holdings, and we have a receivable for that amount classified in other assets as of December 31, 2000. Such costs paid on behalf of LLC for the year ended December 31, 2000 were less than $1,000. In accordance with its advisory agreement with Harvey, Precision paid certain fees totaling $30,000 to Harvey in 2000 in connection with the performance of Mid State. The current terms of the credit facilities prohibit payments of fees to Saunders Karp & Megrue and Carlisle; however, the accrual of such fees is permitted. Such fees accrued in 2001 totaled $0.3 million. Amounts accrued and paid in both 2000 and 1999 were $0.3 million. Mid State leases its main plant, located in Winslow, Maine from its president and his spouse. The initial term of the lease expires September 30, 2003, but Mid State has the right and option to extend the lease for four 5-year extension terms. The monthly rent expense for the facility totals $23,688 and the amount paid to the president of Mid State and his spouse under this lease agreement was approximately $0.3 million in each of 2001, 2000 and 1999. In accordance with an Industrial Lease between Gillette and the Testamentary Trust of Frank P. Gillette ("Trust") dated August 31, 1999, Gillette leases its plant, located in Rochester, New York from the Trust of Frank P. Gillette. The father of Darren Gillette, an officer of certain of our subsidiaries, is a direct beneficiary of this trust. The initial term of lease expires August 31, 2009, but Gillette has the right and option to extend the lease for two 5-year extension terms. The monthly rent expense for this facility totals $23,536.50, and the amount paid to the Trust under this lease agreement in 2001, 2000 and 1999 was approximately, $0.3 million, $0.3 million and $0.1 million, respectively. F-21 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth our unaudited consolidated statements of operations for the quarterly periods in the years ended December 31, 2001 and 2000:

~~PAGE~~2001 ~~NO.~~2000 ------------------------------------------------ ~~CONSOLIDATED~~--------------------------------------------- ~~FINANCIAL~~(In ~~STATEMENTS~~thousands) OF1st ~~PRECISION~~Qtr ~~PARTNERS,~~2nd ~~INC.~~Qtr ~~(PRECISION)~~3rd ~~AND~~Qtr ~~MID~~4th ~~STATE~~Qtr ~~MACHINE~~1st ~~PRODUCTS~~Qtr ~~(PREDECESSOR)~~2nd ~~Report~~Qtr of3rd ~~Independent~~Qtr ~~Auditors,~~4th ~~Ernst~~Qtr &------------ ~~Young~~---------- ~~LLP...........~~----------- F-2-------- ~~Report~~---------- of---------- ~~Independent~~---------- ~~Auditors~~--------- OPERATING DATA: Net sales $ 49,481 ~~Ernst~~$ &47,393 ~~Young~~$ ~~LLP...........~~42,963 ~~F-3~~$ ~~Consolidated~~41,366 ~~Balance~~$ ~~Sheets~~44,887 as$ 43,188 $ 37,589 $ 44,312 Cost of ~~December~~sales 3139,657 ~~2000~~37,935 ~~and~~39,685 ~~December~~34,002 3133,768 ~~1999.........................................~~34,077 ~~F-4~~33,986 ~~Consolidated~~33,840 ~~Statements~~Restructuring and impairment of ~~Operations~~long-lived ~~for~~assets ~~the~~-- ~~years~~-- ~~ended~~5,150 ~~December~~69 31-- -- 4,270 ~~2000~~-- ~~and~~-------- ~~1999~~-------- ~~and~~-------- ~~the~~-------- ~~period~~-------- ~~from~~-------- ~~September~~-------- -------- Gross profit (loss) 9,824 ~~1998~~9,458 (~~Inception~~1,872) to7,295 ~~December~~11,119 319,111 ~~1998~~ (~~Precision~~667) 10,472 Selling, general and ~~the~~administrative ~~nine~~expenses ~~months~~8,015 ~~ended~~6,590 ~~September~~6,991 307,345 ~~1998~~7,534 ~~(Predecessor).............................................~~7,439 ~~F-5~~8,315 ~~Consolidated~~8,672 ~~Statements~~Restructuring and impairment of ~~Stockholder's~~long-lived ~~Equity~~assets ~~for~~-- ~~the~~-- ~~years~~1,315 ~~ended~~-- ~~December~~-- 31-- 2,501 ~~2000~~-- ~~and~~-------- ~~1999,~~-------- ~~the~~-------- ~~period~~-------- ~~from~~-------- ~~September~~-------- 9,-------- ~~1998~~-------- Operating income (~~Inception~~loss) to1,809 ~~December~~2,868 31(10,178) ~~1998~~(50) 3,585 1,672 (~~Precision~~11,483) ~~and~~1,800 ~~the~~Interest ~~nine~~income ~~months~~(expense), ~~ended~~net ~~September~~(4,533) 30(4,434) ~~1998~~(4,264) (~~Predecessor~~4,163)~~.............................................~~ ~~F-6~~(4,080) ~~Consolidated~~(4,234) ~~Statements~~(3,853) of(4,359) ~~Cash~~Other ~~Flows~~income ~~for~~(expense) ~~the~~(191) ~~years~~(119) ~~ended~~(16) ~~December~~(20) ~~31,~~20 ~~2000~~(71) ~~and~~(888) ~~1999,~~202 ~~the~~(Provision) ~~period~~benefit ~~from~~for ~~September~~income 9,taxes ~~1998~~(300) (~~Inception~~342) to642 ~~December~~-- ~~31, 1998~~ (~~Precision~~54) 818 3,920 ~~and~~106 ~~the~~-------- ~~nine~~-------- ~~months~~-------- ~~ended~~-------- ~~September~~-------- 30-------- -------- -------- Net loss (3,215) ~~1998~~(2,027) (~~Predecessor~~13,816)~~........~~ ~~F-7~~(4,233) ~~Notes~~(529) to(1,815) ~~Consolidated~~(12,304) ~~Financial~~(2,251) ~~Statements..................~~======== ~~F-9~~======== ======== ======== ======== ======== ======== ========

F-22 SIGNATURES Pursuant to the requirements of the Section 15(d) of the Securities Exchange Act of 1934, Precision Partners, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 22, 2002. PRECISION PARTNERS, INC. By: /s/ Frank R. Reilly --------------------------------------------- Frank R. Reilly Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 22, 2002. SIGNATURE TITLE --------- ----- /s/ John G. Raos President, Chief Executive -------------------------------------- Officer and Director John G. Raos (Principal Executive Officer) /s/ Frank R. Reilly Executive Vice President and Chief -------------------------------------- Financial Officer Frank R. Reilly (Principal Financial Officer) /s/ Robert J. Vander Meulen Vice President and Corporate Controller -------------------------------------- (Principal Accounting Officer) Robert J. Vander Meulen /s/ Robert R. Womack Chairman of the Board of Directors -------------------------------------- Robert R. Womack /s/ David W.M. Harvey Director -------------------------------------- David W.M. Harvey /s/ Richard Detweiler Director -------------------------------------- Richard Detweiler /s/ John F. Megrue Director -------------------------------------- John F. Megrue /s/ William J. Gumina Director -------------------------------------- William J. Gumina

DECEMBER 31, ------------------- 2000 1999 -------- -------- ASSETS Current Assets Cash and cash equivalents................................. $ -- $ 313 Trade accounts receivable less allowance for doubtful accounts of $590 at December 31, 2000 and $261 at December 31, 1999....................................... 22,043 23,613 Inventories............................................... 18,635 18,404 Deferred income taxes..................................... 1,634 1,303 Other current assets...................................... 1,078 1,916 -------- -------- Total current assets........................................ 43,390 45,549 Property, plant, and equipment, at cost, net................ 86,214 71,611 Goodwill, net............................................... 71,661 77,429 Non-compete agreement....................................... -- 933 Other assets................................................ 6,086 10,869 -------- -------- Total assets................................................ $207,351 $206,391 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 15,429 $ 7,703 Accrued expenses.......................................... 12,324 11,406 Income taxes payable...................................... 922 1,014 Deferred revenue.......................................... 1,616 4,700 Current portion of long term debt......................... 7,975 2,611 Other current liabilities................................. 132 3,071 -------- -------- Total current liabilities................................... 38,398 30,505 Long term debt, less current portion........................ 141,860 131,937 Non-current deferred income taxes........................... 1,846 7,817 Commitments and contingencies Stockholder's equity: Common stock, $.01 par value; 100 shares authorized, issued and outstanding.................................. -- -- Additional paid in capital................................ 48,056 42,042 Accumulated deficit....................................... (22,809) (5,910) -------- -------- Total stockholder's equity.................................. 25,247 36,132 -------- -------- Total liabilities and stockholder's equity.................. $207,351 $206,391 ======== ========

PRECISION PREDECESSOR ------------------------------------------ ------------- PERIOD FROM SEPTEMBER 9, 1998 NINE MONTH (INCEPTION) PERIOD YEAR ENDED YEAR ENDED THROUGH ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 2000 1999 1998 1998 ------------ ------------ ------------ ------------- Net sales.................................. $169,976 $123,188 $12,602 $24,106 Cost of sales.............................. 135,671 93,434 9,090 16,326 Impairment of long-lived assets............ 4,270 -- -- -- -------- -------- ------- ------- Gross profit............................... 30,035 29,754 3,512 7,780 Selling, general and administrative expenses................................. 31,960 24,840 3,134 3,374 Impairment of long-lived assets............ 2,501 -- -- -- -------- -------- ------- ------- Operating (loss) income.................... (4,426) 4,914 378 4,406 Interest income............................ 46 245 -- -- Investment income.......................... -- -- -- 103 Interest expense........................... (16,572) (12,812) (526) (37) Other income (expense)..................... (737) 8 (138) (91) -------- -------- ------- ------- (Loss) income before income taxes.......... (21,689) (7,645) (286) 4,381 (Benefit) provision for income taxes....... (4,790) (2,130) 109 1,677 -------- -------- ------- ------- Net (loss) income.......................... $(16,899) $ (5,515) $ (395) $ 2,704 ======== ======== ======= =======

CLASS A CLASS B COMMON COMMON RETAINED STOCK STOCK EARNINGS TOTAL -------- -------- -------- -------- PREDECESSOR: Balance at January 1, 1998............................. $25 $25 $ 17,044 $ 17,094 Net income............................................. -- -- 2,704 2,704 Redemption of shares................................... (6) (6) (11,521) (11,533) --- --- -------- -------- Balance at September 30, 1998.......................... $19 $19 $ 8,227 $ 8,265 === === ======== ========

ADDITIONAL COMMON PAID IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL -------- ---------- ----------- -------- PRECISION: Initial capitalization at September 9, 1998......... $ -- $32,000 $ -- $ 32,000 Net loss............................................ -- -- (395) (395) ---- ------- -------- -------- Balance at December 31, 1998........................ -- 32,000 (395) 31,605 Capital contributions............................... -- 10,042 -- 10,042 Net loss............................................ -- -- (5,515) (5,515) ---- ------- -------- -------- Balance at December 31, 1999........................ -- $42,042 $ (5,910) $ 36,132 Capital contributions............................... -- 6,014 -- 6,014 Net loss............................................ -- -- (16,899) (16,899) ---- ------- -------- -------- Balance at December 31, 2000........................ $ -- $48,056 $(22,809) $ 25,247 ==== ======= ======== ========

PRECISION PREDECESSOR ------------------------------------------- ------------- PERIOD FROM SEPTEMBER 9, 1998 (INCEPTION) NINE MONTH YEAR ENDED YEAR ENDED THROUGH PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 2000 1999 1998 1998 ------------ ------------ ------------- ------------- OPERATING ACTIVITIES Net (loss) income.......................... $(16,899) $ (5,515) $ (395) $ 2,704 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation............................. 11,718 8,525 658 806 Amortization of goodwill................. 4,044 3,314 447 -- Amortization of debt issue costs......... 1,125 1,051 -- -- Amortization of covenant not to compete................................ 933 67 -- -- Impairment of long-lived assets.......... 6,771 -- -- -- Loss on disposal of fixed assets......... 877 -- -- -- Loss on trading securities............... -- -- -- 200 Purchase of trading securities........... -- -- -- (3,382) Proceeds from the sale of trading securities............................. -- -- -- 9,564 Deferred income taxes.................... (6,302) (1,510) (22) (315) Changes in operating assets and liabilities, net of acquisitions: Trade accounts receivable.............. 1,570 (5,531) 772 (805) Inventories............................ (231) (4,345) 1,413 (1,623) Income taxes receivable................ -- -- -- 364 Other current assets................... 838 (7,190) (267) 4 Other assets........................... 5,842 -- -- -- Accounts payable....................... 7,726 1,551 385 87 Accrued expenses....................... 918 7,553 (130) 97 Income taxes payable................... (92) (192) (107) 354 Deferred revenue....................... (3,084) -- -- 183 Other current liabilities.............. (2,939) 7,620 -- -- -------- --------- -------- -------- Net cash provided by operating activities............................... 12,815 5,398 2,754 8,238

PRECISION PREDECESSOR ------------------------------------------- ------------- PERIOD FROM SEPTEMBER 9, 1998 (INCEPTION) NINE MONTH YEAR ENDED YEAR ENDED THROUGH PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 2000 1999 1998 1998 ------------ ------------ ------------- ------------- INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment................................ 618 -- -- -- Proceeds from sale of Sukee Arena.......... -- -- -- 260 Purchase of property, plant and equipment................................ (33,139) (10,260) (751) (623) Payment of deferred acquisition costs...... -- -- (342) -- Acquisition of subsidiaries, net of cash... (206) (111,277) (53,483) -- Payment for non-compete agreement.......... -- -- (1,000) -- Proceeds from available-for-sale securities............................... -- -- -- 500 Proceeds from maturities of held-to-maturity securities.............. -- -- -- 808 Proceeds from note receivable, stockholder.............................. -- 90 -- 175 -------- --------- -------- -------- Net cash (used in) provided by investing activities............................... (32,727) (121,447) (55,576) 1,120 FINANCING ACTIVITIES Repayment of borrowings from revolving line of credit................................ $(64,539) $ (3,100) $ -- $ -- Proceeds from revolving line of credit..... 60,804 14,300 -- -- Repayment of long term debt................ (1,817) (250) (595) (283) Proceeds from long term debt............... 20,771 100,000 23,000 -- Contribution of capital.................... 6,014 10,042 32,000 -- Payment of debt issue costs................ (1,634) (5,593) (660) -- Common stock redemption.................... -- -- -- (11,673) -------- --------- -------- -------- Net cash provided by (used in) financing activities............................... 19,599 115,399 53,745 (11,956) -------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents.............................. (313) (650) 923 (2,598) Cash and cash equivalents, beginning of period................................... 313 963 40 2,638 -------- --------- -------- -------- Cash and cash equivalents, end of period... $ -- $ 313 $ 963 $ 40 ======== ========= ======== ======== SUPPLEMENTARY INFORMATION FOR THE STATEMENT OF CASH FLOWS: Interest payments.......................... $ 15,005 $ 7,897 $ 548 $ 34 Income tax payments........................ $ 1,604 $ 547 $ 253 $ 1,276 Non-cash investing and financing activities -- purchase of software under financing agreements............................... $ 68 $ 344 $ -- $ --

2000 1999 -------- -------- (IN THOUSANDS) Raw materials............................................. $ 4,061 $ 2,575 Work in process........................................... 10,443 13,978 Finished goods............................................ 4,350 2,365 ------- ------- 18,854 18,918 Less reserves for obsolescence............................ 219 514 ------- ------- $18,635 $18,404 ======= =======

2000 1999 -------- -------- (IN THOUSANDS) Costs incurred on uncompleted contracts..................... $237 $ 9,510 Estimated earnings on uncompleted contracts................. 22 1,187 ---- ------- 259 10,697 Less net progress billings.................................. -- 7,893 ---- ------- Costs and estimated earnings on uncompleted contracts included in work in progress inventory.................... $259 $ 2,804 ==== =======

2000 1999 -------- -------- (IN THOUSANDS) Land, buildings and improvements.......................... $ 4,774 $ 4,799 Leasehold improvements.................................... 2,139 2,079 Machinery and equipment................................... 97,814 72,868 Furniture, fixtures and other............................. 3,385 2,567 ------- ------- 108,112 82,313 Less accumulated depreciation and amortization............ 21,898 10,702 ------- ------- $86,214 $71,611 ======= =======

2000 1999 -------- -------- (IN THOUSANDS) Accrued interest.......................................... $ 4,662 $ 3,932 Accrued bonuses........................................... 3,180 1,575 Accrued payroll and other employee expenses............... 1,785 1,651 Accrued trade payables.................................... 688 2,538 Other..................................................... 2,009 1,710 ------- ------- $12,324 $11,406 ======= =======

2000 1999 -------- -------- (IN THOUSANDS) Precision Partners, Inc. 12% Senior Subordinated Notes due 2009, interest paid semiannually on March 15 and September 15 commencing on September 15, 1999....................... $100,000 $100,000 Term loan payable to a bank group, due in quarterly principal installments plus interest at a variable rate (10.8% as of December 31, 2000), maturing March 31, 2005, secured by a first priority lien in all assets and property of Precision and its subsidiaries, except those assets secured by General Electric Capital Corporation in which the bank group has a second priority lien. Quarterly principal installments of $805,000 began on June 30, 2000, and increase to $920,000 on June 30, 2001, $1,150,000 on June 30, 2002, $1,380,000 on June 30, 2003, and $1,495,000 on June 30, 2004.......................................... 21,390 23,000 Revolving line of credit with a limit of $22.0 million payable to a bank group, maturing March 31, 2005, secured by a first priority lien in all assets and property of Precision and its subsidiaries, except those assets secured by General Electric Capital Corporation in which the bank group has a second priority lien. Advances under the line are available based upon 85% of eligible accounts receivable and 50% of eligible inventories. Interest is charged at a variable rate (12.5% as of December 31, 2000) and there is a commitment fee of 0.5% per year based on the unused portion of the line, payable quarterly......... 7,465 11,200 Term loan payable to General Electric Capital Corporation, due in monthly principal installments of $288,484 plus interest at a variable rate (11.7% as of December 31, 2000), maturing December 31, 2005, subject to a 12-month extension, at the Borrower's election, if no default or event of default has occurred or is continuous at the time the extension becomes effective, secured by a first priority lien in all equipment financed by the term loan and a second priority lien in all other assets and property of Precision and its subsidiaries (other than Certified and Gillette)................................... 20,771 -- Other....................................................... 209 348 -------- -------- 149,835 134,548 Less current portion........................................ 7,975 2,611 -------- -------- $141,860 $131,937 ======== ========

PRECISION PREDECESSOR ------------------------------------------- ------------- PERIOD FROM SEPTEMBER 9, 1998 NINE MONTH (INCEPTION) PERIOD YEAR ENDED YEAR ENDED THROUGH ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 2000 1999 1998 1998 ------------ ------------ ------------- ------------- (IN THOUSANDS) Current federal..................... $ 590 $ -- $ 40 $1,553 Current state....................... 922 303 91 439 ------- ------- ---- ------ Total current tax provision......... 1,512 303 131 1,992 ------- ------- ---- ------ Deferred federal.................... (5,990) (1,917) (28) (237) Deferred state...................... (312) (516) 6 (78) ------- ------- ---- ------ Total deferred tax provision (benefit)......................... (6,302) (2,433) (22) (315) ------- ------- ---- ------ Total tax provision (benefit)....... $(4,790) $(2,130) $109 $1,677 ======= ======= ==== ======

PRECISION PREDECESSOR ------------------------------------------- ------------- PERIOD FROM SEPTEMBER 9, 1998 NINE MONTH (INCEPTION) PERIOD YEAR ENDED YEAR ENDED THROUGH ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 2000 1999 1998 1998 ------------ ------------ ------------- ------------- (IN THOUSANDS) Income tax expense (benefit) at statutory rate.................... $(7,374) $(2,599) $(97) $1,489 Permanent differences, primarily goodwill.......................... 1,548 672 159 (46) State income tax, net of federal income tax benefit................ 403 (203) 47 239 Other............................... 633 -- -- (5) ------- ------- ---- ------ Total tax (benefit) provision....... $(4,790) $(2,130) $109 $1,677 ======= ======= ==== ======

PRECISION --------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (IN THOUSANDS) Net operating losses................................ $ 6,556 $ 1,097 Tax credit carryforwards............................ 576 576 Other accruals...................................... 1,614 1,806 Property, plant and equipment....................... (7,717) (9,041) Inventories......................................... 20 (176) Goodwill amortization and other intangibles......... (247) (433) Deferred tax asset valuation allowance.............. (1,014) (343) ------- ------- Net deferred tax liability.......................... $ (212) $(6,514) ======= ======= Net non-current deferred tax liability.............. $(1,846) $(7,817) Net current deferred tax asset...................... 1,634 1,303 ------- ------- Net deferred tax liability.......................... $ (212) $(6,514) ======= =======

2000 1999 ------------------------------------ ------------------------------------ LLC HOLDINGS LLC HOLDINGS LLC CLASS A CLASS B LLC CLASS A CLASS B INVESTMENT COMMON COMMON INVESTMENT COMMON COMMON UNIT STOCK STOCK UNIT STOCK STOCK OPTIONS OPTIONS OPTIONS OPTIONS LLC HOLDINGS ---------- ----------- --------- ---------- ----------- --------- Outstanding at beginning of year............... -- -- 1,734,657 -- -- -- Granted................. 1,100,000 3,187,525 95,000 -- -- 2,454,000 Exercised............... -- -- (43,520) -- -- (74,343) Forfeited............... -- -- (474,098) -- -- (645,000) --------- --------- --------- --- --- --------- Outstanding at end of year.................. 1,100,000 3,187,525 1,312,039 -- -- 1,734,657 ========= ========= ========= === === ========= Exercisable at end of year.................. 1,100,000 166,876 594,922 -- -- 171,286 ========= ========= ========= === === =========

SIGNATURE TITLE --------- ----- /s/ JOHN G. RAOS ------------------------------------------- President, Chief Executive Officer and John G. Raos Director (Principal Executive Officer) /s/ FRANK R. REILLY ------------------------------------------- Executive Vice President and Chief Financial Frank R. Reilly Officer (Principal Financial Officer) /s/ ROBERT J. VANDER MEULEN ------------------------------------------- Vice President and Corporate Controller Robert J. Vander Meulen (Principal Accounting Officer) /s/ ROBERT R. WOMACK ------------------------------------------- Chairman of the Board of Directors Robert R. Womack /s/ DAVID W.M. HARVEY ------------------------------------------- Director David W.M. Harvey /s/ RICHARD DETWEILER ------------------------------------------- Director Richard Detweiler /s/ JOHN F. MEGRUE ------------------------------------------- Director John F. Megrue /s/ WILLIAM J. GUMINA ------------------------------------------- Director William J. Gumina

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