Positioned for Dynamic Growth

Positioned for Dynamic Growth

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Brought to you by Global Reports

R e s u l t s a t a G l a n c e

H i g h l i g h t s

T a b l e o f C o n t e n t s

With a dedicated team of seasonedprofessionals, building on more than

60 years of experience and a reputation for delivering quality service— we are strongly positioned to be a leader in the aviation repairand overhaul industry around the globe.

Revenue $122.5 million

Net Earnings $7.9 million

Cash flow $11.1 million

Chairman’s message 1President’s Message 4Industry Profile 6Vector Operations 8Product Line Profile 12Management’s Discussion and Analysis 13Financial Statements 17Investor Information 31Corporate Information 32

(in thousands of Canadian dollars, except per share data)

Operating Summary (for the period from June 25 to December 31, 1998)Revenue $ 122,491Net earnings 7,929 EBITDA 16,294Cash flow from operations (before change in non-cash

working capital) 11,094

Financial Position (at December 31, 1998)Working capital 92,323 Total assets 215,214 Long-term debt 34,955Shareholders’ equity 93,701Long-term debt to equity ratio 0.4:1

Per ShareAverage number of common shares outstanding 27,505Net earnings 0.29 EBITDA 0.59Cash flow from operations (before change in

non-cash working capital) 0.40


1

C h a i r m a n ’ s M e s s a g e

This, the first annual report of Vector

Aerospace details the solid results we

have produced since our initial public

offering in June 1998. The first six

months of operation were a busy and

exciting period and I am proud of all we

have accomplished in that short time.

We began by bringing together three

sound businesses — Atlantic Turbines,

ACRO Aerospace, and the recently

acquired Sigma Aerospace — into a corporation focused on gas turbine engine and

dynamic component repair and overhaul (R&O). We established a lean andefficient corporate office. We organized a management teamof results-oriented individuals. We secured financing tocover our existing businesses and to fund growth. We reorganized

the divisions along product lines and we implemented a program to improve our operational

systems and deliver even higher quality service.

We accomplished these changes while delivering on our commitment to produce strong net

earnings. For the period June 25 to December 31, 1998 Vector Aerospace produced net

earnings of $7.9 million ($0.29 per share), exceeding market expectations. President and

Chief Operating Officer Paul Conway will expand on these results in his report.

Engine repair and overhaul is the most consistently profitable segment of the R&O

market and this market is growing. The world supply of aircraft continues to grow at a strong

pace. Flight hours continue to grow year over year. In addition, world airlines and militaries

are outsourcing more of their aircraft maintenance.

dynamic opportunities


Board of Directors and Senior Officers

Back row (l to r) Basile E. Papaevangelou Maxwell Parsons The Honourable David R. Peterson

Middle row James A. Good The Honourable Frank D. Moores David E. Roffey

Front row Paul J. Conway Mark D. Dobbin


To service this evolving market, which

now demands strong independent R&O

providers, the industry is consolidating.

The number of independent service

centres has decreased by 30% since

1990. The share structure and balance

sheet of Vector Aerospace position us

to actively participate in this process. To that end we are

aggressively pursuing top quality companies that have

strong earnings potential and the capacity to strengthen

Vector’s position within our core business.

Free of the ownership restrictions that limit licensed

air carriers’ ability to operate worldwide, VectorAerospace is able to seize profitablegrowth opportunities within ourindustry around the globe. We willmake the right acquisitions at theright price and under the rightconditions. Since June, 1998 we have evaluated

many opportunities and are

regularly evaluating new

ones as they arise. Every

transaction must add value

for our customers and for

our shareholders.

The opportunities for growth are strong and Vector

Aerospace has the people to deliver — on the shop

floor and in the boardroom. My sincere thanks go out to

all my fellow employees. Your commitment to providing

the highest quality service is setting a new standard of

excellence for the industry. I would also like to extend

my thanks to our Board of Directors who share in

our commitment to success and our commitment to

profitable growth.

Vector Aerospace is a new public company but our

history is long and proud. It is from this strong base that

we have positioned ourselves for dynamic growth as

a leading independent service provider in the global

aviation repair and overhaul market.

Mark DobbinChairman and Chief Executive Officer

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P r e s i d e n t ’ s M e s s a g e

In just six months Vector Aerospace hasimplemented a dynamic internal growth strategy

in support of our goal to become a recognizedleader in the global aviation repair and overhaul

industry. We mandated our

people to increase their market

share and steps were taken to spur

dynamic growth.

Since June 1998 we introduced a

business cell concept at our multiple-

line facilities — ACRO and Sigma —

resulting in greater accountability and

improving margins. A lean, knowledgeable

corporate group was assembled at

the new head office. We instituted an

information technology improvement

program that will enhance our systems

far beyond what is required to address Y2K issues. And we demonstrated our

ability to manage acquisitions with the seamless integration of the newly acquired

Sigma Aerospace.

We generated net earnings of $7.9 million ($0.29 per share) on revenue of

$122.5 million for the six-month period ending December 31, 1998. Cash flow

before interest, taxes, and changes in working capital (EBITDA) was strong at

$16.3 million ($0.59 per share). Our balance sheet is also strong. Working

capital at December 31, 1998 was $92.3 million and the long-term debt

to equity ratio stood at 0.4:1. A solid performance and we expect that

operating results for 1999 will be even better.

4


business dynamics

Customer satisfaction is the basis for these impressive

results. With a disciplined management team at each

location, Vector is generating an increasing stream

of earnings. By marketing current services to new

customers, cross-selling to existing customers and

expanding product lines, Vector Aerospace has proven

its ability to add customer value while building on our

international portfolio of customers. With more than 60

years in the business and facilities on two continents,

Vector is successfully meeting the needs of a growing

number of international commercial and military clients.

During the year Vector Aerospaceundertook initiatives to expand ourproduct lines and increase ourrework capabilities. ACRO won the contract

for the assembly, inspection, and test of the GE-T700

engines being installed in the Cormorant, Canada’s

new search and rescue helicopter, and has also been

awarded the overhaul rights for these engines. In

addition, our ACRO team began construction of a PT6

engine test cell to increase its level of customer service

and competitiveness related to this engine line.

Atlantic Turbines expanded its facility to accommodate

additional PW100 engines and provide for additional

product lines. We also adapted our marketing strategy

to recognize that the PW100 customer profile is in

transition from a small number of larger fleet operators

to a large number of smaller fleet operators. The total

PW100 market continues to grow and Atlantic Turbines

is well positioned to capture this business.

Sigma Aerospace undertook an innovative and

aggressive reorganization of both its facilities and

organizational structure. The new management team is

building on its traditional strong standing in the military

R&O market while at the same time directing a greater

focus towards commercial opportunities. Sigma is

a highly customer-focused operation with improved

facilities, reorganized business processes, and a

restructured team that puts the right people in place

to deliver superior performance.

Thank you to everyone in the company for your

dedication in making 1998 such a success. Together we

met the challenge of ensuring that our internal growth

plan remained focused on adding value for both our

customers and our shareholders. Our challenge in 1999

is to continue delivering exceptional services while

maintaining our focus on growing the company within

this dynamic industry.

Paul ConwayPresident and Chief Operating Officer

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OEMs 40%

I n d u s t r y P r o f i l e

Industry sources estimate the commercial

aviation engine repair and overhaul (R&O)

market at US$8 billion with strong

annual growth. Independent

service providers such as

Vector Aerospace account for

25% of that market while

in-house airline shops

handle 35%. The remain-

ing 40% is serviced

by original equipment

manufacturers (OEMs).

6

Market Share by Service Provider

Independent Service Providers 25%

Airlines 35%


The profile of this fragmented industry is changing.

The number of independent R&O shops has decreased

by 30% since 1990 as OEMs expand and the

independents consolidate. While the industry

consolidates, airlines and militaries are outsourcing

an increasing percentage of their maintenance. The

beneficiaries of this trend are the larger third-party R&O

facilities such as those operated by Vector Aerospace.

The number of aircraft in operation is projected to

continue growing at a strong pace. The demand for

air transport is increasing in North America, in Europe

and in the developing world where air traffic is now on

a steep upward growth curve. The adoption of just-in-

time manufacturing practices by many industries is

fueling an increased demand for air cargo.

In light of this combination of industryconsolidation and market growth,Vector Aerospace is dynamicallypositioned to become a major playerin the aviation repair and overhaulmarket. Operators in the strictly regulated aviation

industry are required to abide by compulsory

maintenance schedules for their aircraft. The frequency

of gas turbine engine and dynamic component repair

and overhaul is based primarily on the number of flight

hours. This requirement for prescribed maintenance

translates into a predictable and regular stream of

revenue for service providers like Vector Aerospace.

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industry dynamics


Through our three locations we are well positioned to service a significant and growing

proportion of the world’s gas turbine engines and dynamic components.

From our ACRO Aerospace facility at Vancouver International Airport we provide comprehensive

R&O services that add value for hundreds of customers, principally in the helicopter industry.

Helicopter manufacturers Bell, Sikorsky and Eurocopter have authorized us to repair and

maintain their dynamic components and airframes. We are approved by manufacturers to

service the following engines: Rolls-Royce Allison 250, Turbomeca Arriel, General Electric

T58/CT58. ACRO is also approved by Transport Canada for the overhaul of the popular Pratt

& Whitney PT6 engine. During 1999 we will make the necessary test cell and tooling

investments to support PT6 and GE T700 engine overhauls and to provide for additional

engine lines in the future.

Atlantic Turbines overhauled its first engine in the spring of1992. Today it is the leading independent PW100 R&O shopin the world. Located in Prince Edward Island on Canada’s east coast, the team at

this Vector Aerospace facility is actively

pursuing additional engine lines to

complement their world class service for

an expanding customer base.

In business since 1935, Sigma

Aerospace has an impressive reputation.

From our facility in Croydon, England,

we service a significant military and

commercial market in Europe, the Middle

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serv

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dyna

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sV e c t o r O p e r a t i o n s


East, and around the world. Our service includes

repair and overhaul for Rolls-Royce’s Conway and

Dart engines and the Rolls-Royce Allison T56/501. We

also provide test cell services for the Allied Signal

502/507 engine. Sigma uses its extensive rework

capabilities to support these engine lines. As part

of the Vector Aerospace team,

Sigma is pursuing growth

opportunities by increasing its

emphasis in the commercial

sector and expanding the number

of military customers.

In addition to meetingthe stringent requirements set downby industry regulators and originalequipment manufacturers, all ofVector Aerospace’s facilities haveembraced the ISO 9000 standard.Atlantic Turbines and Sigma Aerospace have achieved

ISO 9000 certification and ACRO will achieve ISO

certification by mid-1999.

9


At Atlantic Turbines, ACRO Aerospace and

Sigma Aerospace we maintain the highest

international standards. Atlantic Turbines

consistently meets the demands of its

customers by achieving fast turnaround

times on gas turbine engine repair and

overhaul. ACRO Aerospace responds to

our customers’ requirements with a

comprehensive program of products

and services supported by a substantial

investment in spare parts and exchange

components that keeps our customers flying. To provide customers with cost-effective

overhauls on a timely basis, Sigma Aerospace has developed extensive rework capabilities.

People are our most important asset. To achieve continued success we need the best people.

That is why Vector Aerospace is committed to continuous development through ongoing

training and education. Our managers enthusiastically embracechange. That ability contributed to the seamless integrationof our three founding divisions into a single corporate entity.Together we have the knowledge and experience to effectively

chart a successful course in this dynamic growth environment.

As Vector Aerospace we have mandated our people to increase

their market share. As part of that process we provide managers

with the resources to capitalize on opportunities in a rational

and focused way. At our multiple-line facilities — ACRO and

Sigma — we introduced a business cell concept to encourage

10

groupdynamics


g r e a t e r

accountability

and improve mar-

gins. We instituted

an information technology

improvement program at all our

facilities to enhance our systems far beyond

the requirements necessary to address Y2K issues.

These changes are working. Our margins are improving.

Adherence to core competence and sharing of

best practices among divisions are key to the

successful growth of Vector Aerospace. As a focused

R&O company we have the best professional teams

throughout the entire organization. It is the competence

of these teams that ensures best practices evolve.

We encourage company-wide initiatives to enhance

business processes.

Vector Aerospace has a

well-established portfolio

of international clients with

a broad spectrum of needs.

By cross selling divisional

services we position the company to add value for

customers across the scope of their requirements.

We are constantly developingadditional rework capabilities at eachlocation to improve our margins aswe reduce our customers’ costs andimprove turnaround times. This strategy

further positions Vector Aerospace as the preferred

service provider for existing and potential customers.

Vector Aerospace has implemented strong business

management systems and an efficient corporate

structure to accommodate growth without significantly

increasing overhead costs. Our company is well

positioned in an industry where the market is expanding

and the players are consolidating. We have the people,

the facilities, the corporate structure and the financial

strength to grow profitably in this dynamic environment.

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P r o d u c t L i n e P r o f i l e

12

OEM Model/Component Installed on Aircraft Type

Gas Turbine Engines

Pratt & Whitney PW118, 119, 120, deHavilland – Dash 8 Series 100, 200, 300 Canada 121, 123, 127 ATR (Regional) – Series 42, 72

Embraer 120; Dornier 328PT6T and Bell – 212, 412EP; deHavilland – DH6 Twin OtterPT6A Series Sikorsky – S-76B; Raytheon – King Air, Beech 99

Turbomeca Arriel 1 Sikorsky – S-76A, S-76C Eurocopter – AS-365-N-2, BK-117C-1, AS-350 Series Agusta – A109K2

General Electric T58 (military) Boeing – Labrador SAR; Sikorsky – Sea KingCT58 (civil) Sikorsky – S-61

Rolls-Royce Dart - RDa 7,8 Friendship FH227; Hawker Siddley – HS748 Gulfstream – G1; Fokker – F27

Conway BAe – VC10Allison 250 McDonnell Douglas – 500E, 520N, 600N, 500C, 500D

Bell – 206/407; Eurocopter – AS355/BO105 Sikorsky – S-76A

Allison T56 (military) Lockheed – C130 Hercules; P3 OrionAllison 501D (civil) Lockheed – L188 Electra, L100; Convair 580 Turbo-Liner

Dynamic Components

Sikorsky All drive train Sikorsky – S-61, S-76 & military derivatives Bell dynamic components Bell – 204, 205, 206, 206L, 212, 214, 407, 412 Eurocopter Eurocopter – AS350 (Astar/Ecuriel),

AS355 (TwinStar/Twin Ecuriel)

Airframe and Propeller Maintenance

Sikorsky Structures, Avionics, Sikorsky – S-61, S-76 & military derivatives Bell Wiring, Rotor Blades Bell – 204, 205, 206, 206L, 212, 214, 407, 412 Eurocopter Eurocopter – AS350 (Astar/Ecuriel),

AS355 (TwinStar/Twin Ecuriel)

Hamilton Standard 54H60 Propeller Lockheed – C130 Hercules

Dowty Rotol Various Propellers R193 – Fokker F27; R212 – Hawker Siddley HS748; R184 – Gulfstream G1; R257 – Friendship FH227


V e c t o r A e r o s p a c e C o r p o r a t i o n

13

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

On June 25, 1998 an initial public offering (“IPO”), by secondary offering, of the shares of Vector Aerospace

Corporation (“Vector” or the “Company”) was completed pursuant to a prospectus dated June 15, 1998.

Vector concurrently acquired the aviation repair and overhaul business segment of CHC Helicopter

Corporation (“CHC”). Prior to that date, Vector had no assets and did not carry on any business.

Vector continues this business on a worldwide basis through three locations - Sigma Aerospace Limited

(“Sigma”) in Croydon, England; Atlantic Turbines International Inc. (“ATI”) in Summerside, Prince Edward

Island; and ACRO Aerospace Inc. (“ACRO”) in Vancouver, British Columbia. The Company’s primary focus

is the repair and overhaul of gas turbine engines and dynamic components used on fixed wing (airplane)

and rotary wing (helicopter) aircraft.

Vector’s year-end is December 31 and its consolidated financial statements are for the period June 25, 1998

to December 31, 1998.

Prior to the date of Vector’s IPO, the operations acquired by it from CHC were not operated as a consolidated

entity. The businesses of ACRO and ATI were operated as the repair and overhaul division of CHC. Sigma

also operated as part of that division although it had only been acquired by CHC on March 13, 1998. Prior to

that it had operated as a division of another company. Interest expense and income taxes were not specifically

allocated to the operations of all three divisions. As such, complete consolidated financial information for

Vector for the corresponding prior period ended December 31, 1997 is not available.

Information relating to revenue and operating earnings has, however, been compiled from the historical

divisional information and is included in the following discussion to provide a limited degree of comparability

to the current period results.

Results of Operations

The Company generated revenues of $122.5 million during the current period as compared with the

$109.5 million that the business generated during the six month period ended December 31,1997 while

operating as divisions of prior owners.

All three locations generated higher period-over-period revenues. ACRO experienced the positive effects of

a very active year for helicopter operators. ACRO also attracted new customers, some of which were historically

unwilling to provide business to it because it was owned by a major helicopter operator. The focus at Sigma

on obtaining additional throughput at its facility in England resulted in increased business. New customers

for ATI strengthened its revenue base.

Overall, operating margins for the period ended December 31, 1998 were consistent with those achieved for the

comparable period ended December 31, 1997. Earnings before interest, taxes, depreciation and amortization

(“EBITDA”) were $16.3 million (13.3% of revenue) as compared with $14.3 million (13.1% of revenue).

Amortization was $1.9 million for the current period as compared with $1.2 million for the prior period with

the increase primarily related to facilities expansions completed during the current period.


14


Results of Operations (cont’d)

Interest expense was $2.7 million and earnings before taxes were $11.7 million. There is no comparable

interest expense for the prior period as the business previously operated as divisions of other companies

with no debt being specifically attributed to the divisions.

Income tax expense for the period was $3.8 million. The Company's statutory income tax rate was

approximately 43% for 1998. The actual rate is less due to lower rates in certain operating jurisdictions (the

most significant of which being the United Kingdom) and due to the deductibility for income tax purposes of

goodwill recorded only for tax purposes.

Net earnings for the period were $7.9 million ($0.29 per share).

Liquidity and Capital Resources

The Company generated $16.3 million of operating cash flow (before interest and taxes) during the period.

Cash used to pay interest totalled $2.7 million and cash taxes were $2.5 million. The Company invested

$12.9 million in non-cash working capital during the period. This investment related partially to increased

business levels ($6.6 million) and to a $6.3 million build-up in receivables and work in progress as a result

of CHC becoming a third party customer. The net cash used in operations was $1.8 million.

The Company made long-term debt repayments of $3.2 million during the period. New financing associated

with facilities expansions totalled $0.6 million. During the period the Company arranged $20.0 million in

bank term financing to repay a short-term note that was owing to CHC on the closing of the IPO.

Capital expenditures of $6.2 million were incurred for the period ended December 31, 1998 relating primarily

to facilities expansions and the acquisition of tooling and equipment.

The Company did not pay dividends during the period.

The Company has in place a $30.0 million operating facility with a Canadian chartered bank and a

$16.6 million (£6.5 million) operating facility with a U.K. bank thereby giving the Company total credit lines

of $46.6 million.

The Company’s short-term borrowings under these lines increased by $10.5 million during the period to a

balance of $30.3 million at December 31, 1998. Outstanding letters of credit totalled $1.3 million. Availability

of these lines is based on percentages of certain receivables and inventory.

The Company also has in place a credit facility of $40.0 million to finance acquisitions. There were no drawings

under this facility at December 31, 1998.

At December 31, 1998 the Company had a working capital surplus of $92.3 million. Long-term debt (excluding

current portion) totalled $35.0 million and equity totalled $93.7 million. The long-term debt to equity ratio

was 0.4:1 at December 31, 1998.



15


Liquidity and Capital Resources (cont’d)

The terms of certain of the Company's debt agreements impose operating and financial limitations on

the Company. Such agreements limit, among other things, the Company's ability to increase additional

indebtedness, create liens, make capital expenditures, engage in mergers or acquisitions and sell assets.

These limitations have not hampered the Company's ability to conduct normal operations.

The Company's ability to comply with any of the foregoing operating and financial limitations and with its

loan repayment provisions will depend upon its future performance. This will be subject to prevailing

economic conditions and other factors, some of which may be beyond the Company's control. The Company

was in compliance with all its financial covenants at December 31, 1998.

The Company believes that normal operations will provide sufficient working capital and cash flow to meet

debt service requirements for the foreseeable future.

The Company is planning a $9.9 million capital expenditure program for 1999 that will be financed by cash flow

from operations. Included in this amount is capital for ACRO to complete test cell expansions and acquire the

necessary tooling to compete for business on two additional engine lines. Also included is capital for ATI to

acquire spare engines to support the new PW100 line added during 1998. As well, there is capital budgeted for

Sigma to improve its facilities and systems and for small tooling and shop equipment at all three locations.

Seasonality

The Company does not experience significant fluctuations in earnings due to seasonality. Reduced customer

requirements in the months of December to February and reduced work hours in December do, however,

tend to result in slightly lower first and fourth quarter earnings as compared with quarters two and three.

Foreign Currency

The Company prepares its consolidated financial statements (as described in Note 2(a) to the Consolidated

Financial Statements) in Canadian dollars.

In 1998, 54% of the Company’s revenue was denominated in U.S. dollars and 26% was denominated in

British Pounds. A significant portion of the Company’s expenditures is also denominated in these currencies

and hence a natural hedge exists for much of this exposure. However, there still exists net positive U.S. dollar

and British Pound cash flows that can impact earnings as the Canadian dollar exchange rate changes in

relation to these currencies. In 1999, it is estimated that a one-cent decrease in the value of the Canadian

dollar in relation to these currencies would increase net income by $0.3 million.

The Company does have a policy that permits the hedging of its net foreign currency cash flows. The overall

approach to managing these exposures includes identifying and quantifying the exposure position,

determining the desired exposure position, and designing an appropriate solution to reduce the exposure.

In designing these solutions the Company may, from time to time, use financial derivatives. The Company’s

derivative policy prohibits the use of derivative products for speculative purposes and contains provisions to

further limit their use and associated risk. There were no derivative products in use at December 31, 1998.


16


Impact of Year 2000 Issue

Management of the Company recognizes the potential for serious problems arising as a result of the inability

of certain computer systems to recognize the Year 2000. The Company has initiated a Year 2000 program

to assess and develop plans to resolve the issue both internally and externally. A project team has been

established with a goal to ensuring that these issues are resolved well in advance of the Year 2000.

In order to address Year 2000 issues, the Company is taking a number of steps, which include (1) identifying

specific areas where remedial measures are required in order to prevent a major business interruption; (2)

assigning members of senior management with technical, operational and financial expertise to assume

responsibility for assisting in the resolution of these issues; (3) assessing all software applications to determine

the specific potential impact of Year 2000 issues on each particular application; (4) completing, implementing

and testing the necessary changes to software applications; (5) testing existing building management and

communication systems; and (6) developing a contingency plan to address the possibility that a Year 2000

related problem occurs after December 31, 1999.

Recognizing the importance of ensuring that those parties with whom it conducts business have also taken

the necessary steps to address Year 2000 issues, the Company has surveyed its customers, suppliers,

and lenders as to the steps they have taken or will take in this regard. The Company also requires that all

new agreements it enters into will contain representations and warranties as to Year 2000 issues to the

extent appropriate.

The Company does not expect the costs directly associated with Year 2000 compliance will have a material

impact on the consolidated financial position or results of operations. The Company also does not expect

any significant disruption in operations in the event that any of its suppliers or customers fail to achieve Year

2000 compliance.

Outlook

The outlook for Vector’s business in 1999 is positive, in line with the outlook for the aviation industry in general.

The Company made operational changes during 1998 to improve efficiencies and these are expected to

improve results during 1999. As well, investments in facilities and equipment made in 1998 and to be made in

1999 are expected to improve operating results. The Company intends to pursue growth both in its existing

business base and through acquisitions when appropriate opportunities arise.



17

Management’s Responsibility for Financial Reporting

Management is responsible for the integrity and objectivity of the financial information presented in this

Annual Report. The consolidated financial statements have been prepared in accordance with generally

accepted accounting principles. The financial information presented elsewhere in this report is consistent

with that shown in the accompanying consolidated financial statements.

Management is also responsible for developing and maintaining the necessary systems of internal controls

to provide reasonable assurance that transactions are authorized, assets safeguarded and that the financial

records form a reliable base for the preparation of accurate and timely financial information.

The Board of Directors is responsible for ensuring management fulfills its responsibilities for financial

reporting and internal control. The Board carries out this responsibility principally through its Audit

Committee. The Audit Committee of the Board of Directors, which consists solely of non-management directors,

reviews the consolidated financial statements and recommends them to the Board for approval. The

shareholders’ auditors have full and unrestricted access to the Board of Directors and the Audit Committee

and meet periodically with them to discuss audit, financial reporting and related matters.

Paul Conway Maxwell Parsons, CA

President and Chief Operating Officer Vice President, Chief Financial Officer and Secretary

Audit Committee Report

To the Shareholders of Vector Aerospace Corporation

The Audit Committee oversees the financial reporting process on behalf of the Board of Directors. In order to

carry out this responsibility, the Committee, composed entirely of Directors independent of management,

meets quarterly to review the Company’s financial statements and recommends their approval to the Board

of Directors. The Audit Committee also reviews, on a continuing basis, any reports prepared by the

Company’s external auditors relating to its accounting policies and procedures, as well as its internal controls.

Financial information prepared for securities commissions and such regulatory bodies is also examined by

the Audit Committee before filing. The Committee meets independently with management and the external

auditors to review the involvement of each in the financial reporting process. These meetings are designed

to facilitate any private communication with the Committee desired by each party. The Audit Committee

recommends the appointment of the Company’s external auditors, who are elected annually by the

Company’s shareholders.

Basile E. Papaevangelou

Chairman of the Audit Committee


18

Consolidated Balance SheetsIncorporated under the laws of Canada (in thousands of Canadian dollars)

December 31, June 25,1998 1998

(See Note 1)Assets (Notes 4 and 5)Current assets

Receivables $ 41,958 $ 37,444Work in progress 40,819 33,285Inventory 89,798 80,844Prepaid expenses 1,006 1,447

173,581 153,020

Capital assets (Note 3) 41,633 37,105

$ 215,214 $ 190,125

LiabilitiesCurrent liabilities

Bank indebtedness (Note 4) $ 30,310 $ 19,835Payables and accruals 36,281 35,875Deferred revenue 3,680 705Income taxes payable 3,587 —Short-term note payable — 20,000Current portion of long-term debt (Note 5) 7,400 3,522

81,258 79,937

Long-term debt (Note 5) 34,955 20,300

Other credits (Note 6) 5,300 5,293

Shareholders’ equity (Note 7) 93,701 84,595

$ 215,214 $ 190,125

Commitments and contingent liabilities (Notes 14 and 16)

On Behalf of the Board

Director Director

See accompanying notes



19

Consolidated Statement of Earnings and Retained EarningsFor the period from June 25 to December 31(in thousands of Canadian dollars, except per share amounts)

1998

Revenue $ 122,491

Operating expenses 106,197

Earnings before undernoted items 16,294

Amortization 1,913

Earnings from operations 14,381

Interest expense (Note 5) 2,662

Earnings before income taxes 11,719

Income taxes (Note 10) 3,790

Net earnings, being retained earnings end of period $ 7,929

Net earnings per share (Note 11) $ 0.29


Auditor’s Report

To the Shareholders of Vector Aerospace Corporation

We have audited the consolidated balance sheets of Vector Aerospace Corporation as at December 31,1998 and June 25, 1998 and the consolidated statements of earnings and retained earnings and cash flowfor the period from June 25, 1998 to December 31, 1998. These financial statements are the responsibilityof the company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standardsrequire that we plan and perform an audit to obtain reasonable assurance whether the financial statementsare 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 financialstatement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financialposition of the company as at December 31, 1998 and June 25, 1998 and the results of its operations andthe changes in its financial position for the period from June 25, 1998 to December 31, 1998 in accordancewith generally accepted accounting principles.

St. John’s, Canada Chartered AccountantsFebruary 3, 1999.


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Consolidated Statement of Cash FlowFor the Period from June 25 to December 31(in thousands of Canadian dollars, except per share amounts)

1998

Operating activitiesEarnings from operations $ 14,381Item not involving cash

Amortization 1,913

Cash flow from operations before interest and income taxes 16,294

Interest expense (2,662)

Current income taxes (Note 10) (2,538)

Cash flow from operations before changes in non-cash working capital 11,094

Change in non-cash working capital (Note 12) (12,940)

(1,846)

Financing activitiesShort-term note repayment (20,000)Long-term borrowings 20,633Long-term debt repayments (3,162)Capital stock issuances 53

(2,476)

Investing activityCapital asset additions (6,153)

Change in bank indebtedness during the period (10,475)

Bank indebtedness, beginning of period (19,835)

Bank indebtedness, end of period $ (30,310)

Cash flow from operations per share (Note 11) $ 0.40




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Notes to the Consolidated Financial StatementsDecember 31, 1998 and June 25, 1998

(Tabular amounts in thousands)

1. Basis of presentation

Vector Aerospace Corporation (the “Company”) was incorporated on April 23, 1998 and was

inactive until June 25, 1998 when the Company acquired, for share consideration and a $20 million

60 day demand note payable, bearing interest at prime plus 0.5%, from its then parent, CHC Helicopter

Corporation (“CHC”), the net assets and business of: (i) CHC Airmotive Limited (now called Sigma

Aerospace), based in Croydon, England; (ii) Atlantic Turbines International Inc., based in Summerside,

Prince Edward Island; and (iii) ACRO Aerospace Inc., based in Vancouver, British Columbia. The transfer

was recorded at CHC’s historical cost of the net assets and business acquired. The net assets acquired and

the value assigned thereto are as set out on the June 25, 1998 accompanying balance sheet. Concurrently,

the Company and CHC completed an initial public offering, by secondary offering, of 80% of the shares of

the Company then held by CHC.

Concurrent with the acquisition, the Company contracted to provide CHC with repair and overhaul services

on a basis consistent with other customers and to provide information systems services to CHC for a term of

three years. Revenue related to the repair and overhaul and information services agreements was

$11,963,000 and $335,800 respectively for the period.

2. Summary of significant accounting policies

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

They have been prepared by management in accordance with generally accepted accounting principles.

The preparation of these consolidated financial statements requires management to make estimates and

assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses

during the reporting period. By their nature these estimates are subject to measurement uncertainty and the

effect on the financial statements of changes in such estimates in future periods could be material.

a) Translation of foreign currencies

Transactions denominated in foreign currencies are translated into Canadian dollars at the rate of exchange

in effect at the beginning of the month in which the transaction occurred. Monetary assets and liabilities are

translated into Canadian dollars at the year-end exchange rate. Non-monetary items are translated at

historical rates. All exchange gains and losses are included in earnings.

Sigma Aerospace is financially and operationally self-sustaining. Accordingly, its assets and liabilities are

translated into Canadian dollars at the year-end exchange rate and its revenue and expense items are

translated at average exchange rates. The resulting gain or loss is deferred as a separate component of

shareholders’ equity until realized.


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Notes to the Consolidated Financial StatementsDecember 31, 1998 and June 25, 1998

(Tabular amounts in thousands)

2. Summary of significant accounting policies (cont’d)

b) Inventory

Inventory, consisting primarily of aircraft parts, is valued at the lower of average or actual cost, and net

realizable value or replacement cost, as applicable. The cost of overhauled inventory includes the cost of

raw materials, direct labour and related overhead.

c) Capital assets

Capital assets are amortized over their estimated useful lives as follows:

Asset Method Rate

Equipment Declining balance 20%Buildings and test cells Declining balance 5%Leasehold improvements Straight-line Original lease term

plus one renewal

d) Provision for renewal of rental engines

Overhaul and maintenance costs associated with the renewal of rental engines are expensed using an overhaul

provision which accrues the estimated future cost of an overhaul over the service life of the engine based on

flight hours. Actual expenditures related to the renewal of the rental engines are charged against the provision.

e) Government assistance

Government assistance relating to the acquisition of facilities and equipment is recorded as a deferred

credit. These credits are amortized over the life of the assets to which they relate on the same basis as the

asset is amortized. Government assistance relating to operations is applied against the related expense at

the time earned.

f) Warranty provision

The estimated liability for costs to be incurred as a result of future warranty claims is recorded in the period

in which the revenue is recognized on the basis of warranty terms and historical experience.

g) Revenue recognition

Revenue, including revenue on contracts which are invoiced prior to work being performed, is recognized on the

percentage of completion basis and measured on the basis of the sales value of actual costs incurred and

work performed. Anticipated losses, if any, are fully provided for in the period in which they become apparent.



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Notes to the Consolidated Financial StatementsDecember 31, 1998 and June 25, 1998 (Tabular amounts in thousands)

2. Summary of significant accounting policies (cont’d)

h) Income taxes

The Company follows the deferral method of tax allocation accounting. Under this method deferred taxes

are recorded on timing differences between accounting and taxable income.

i) Pension costs and obligations

The Company has def ined contr ibut ion and def ined benefi t pension plans covering al l i ts

employees. In valuing pension obligations for its defined benefit plans, the Company uses the accrued

benefit actuarial method prorated on services and best estimate assumptions. Pension plan assets are

valued at current market values.

3. Capital assetsDecember 31, June 25,

1998 1998

EquipmentCost $ 38,191 $ 33,962Accumulated amortization (13,198) (11,562)Provision for renewal of rental engines (947) (713)

24,046 21,687

Buildings and test cellsCost 14,056 13,611Accumulated amortization (1,318) (1,112)

12,738 12,499

Leasehold improvementsCost 6,761 4,479Accumulated amortization (1,912) (1,560)

4,849 2,919

$ 41,633 $ 37,105


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4. Bank indebtednessDecember 31, June 25,

1998 1998

Canadian bank indebtedness bearing interestat BA + 0.625% $ 21,753 $ 10,000

Pound Sterling bank indebtedness bearinginterest at base rate + 1.0%(December 31 - £3.3 million; June 25 - £3.9 million) 8,557 9,835

$ 30,310 $ 19,835

The applicable variable interest rates at December 31, 1998 were: Banker’s Acceptance (“BA”) - 5.27%

(June 25 - 4.92%) and base rate - 6.25% (June 25 - 6.50%).

At December 31, 1998 the Company had in place lines of credit totalling $46.6 million (June 25 - $45.9 million)

including $16.6 million or £6.5 million denominated in Pound Sterling (June 25 - $15.9 million or

£6.5 million). Availability of these lines is based on percentages of certain receivables and inventory.

The Company also has in place a credit facility of $40.0 million to finance acquisitions. There were no drawings

under this facility as at December 31, 1998.

Outstanding borrowings and letters of credit totalled $31.6 million including $9.9 million (£3.9 million)

denominated in Pound Sterling at that date. As collateral for the Canadian bank indebtedness the Company

has made a general assignment of Canadian receivables and inventory. As collateral for the Pound Sterling

bank indebtedness and the Pound Sterling term loan (see Note 5) the Company has provided a charge over

specific freehold property and a floating charge debenture.



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5. Long-term debt December 31, June 25,1998 1998

Pound Sterling term loan bearing interest at base rate+ 1.0% maturing 2005 with quarterly principalrepayments of $912,600 (£357,100). (PoundSterling outstanding at December 31 -£8.9 million; June 25 - £10.0 million). $ 22,818 $ 23,583

Demand revolving capital loan bearing interest at BA + 1.0%, subject to annual review commencing May 1999. 13,000 —

Reducing term loan bearing interest at BA + 1.5%maturing 2000 with monthly principal repayments of $333,500. 5,666 —

Interest free loan maturing 2005 with monthly principalrepayments of $12,500 commencing June 1, 1999. 871 239

Total long-term debt 42,355 23,822

Less: Current portion 7,400 3,522

$ 34,955 $ 20,300

The Company has provided a general security agreement creating a first ranking security interest over certain

equipment, an assignment of insurance over equipment and an unlimited guarantee as collateral for the

demand revolving capital loan and the reducing term loan.

Interest on long-term debt totalled $1,466,000 for the period.

As at December 31, 1998 principal repayment requirements over the next five years are as follows:

1999 $ 7,400,000

2000 5,800,000

2001 3,800,000

2002 3,800,000

2003 3,800,000


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6. Other credits December 31, June 25,1998 1998

Deferred income taxes $ 203 $ —Deferred government assistance 2,947 3,293Supplementary retirement plan accrual (Note 15) 2,150 2,000

$ 5,300 $ 5,293

During the period from June 25 to December 31, 1998 the Company did not receive any government assistance

and amortized $346,400 to income.

7. Shareholders’ equity December 31, June 25,1998 1998

Retained earnings $ 7,929 $ —Capital stock (Note 8) 84,648 84,595Foreign exchange adjustment 1,124 —

$ 93,701 $ 84,595



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8. Capital stock

a) Authorized

Unlimited number of :Common sharesFirst preferred sharesSecond preferred shares

b) IssuedStated

Common shares Number Capital

Balance, June 25, 1998 (see Note 1) 27,500 $ 84,595Issued under employee share purchase

plans for cash 11 53

Balance, December 31, 1998 27,511 $ 84,648

c) Employee stock option and employee share purchase plans

The Company has reserved 2,750,000 common shares for the granting of options under an employee stockoption plan. Options to purchase 1,300,000 common shares at an exercise price of $8.50 have been grantedunder the plan and expire June 25, 2008. A further 1,363,662 common shares have been reserved under anemployee share purchase plan.

9. Financial instruments

The carrying values of the primary financial instruments of the Company, including long-term debt,

approximate fair values due to the short term maturities and normal trade credit terms of those instruments.

The Company provides services and sells its products to many customers across different geographic

areas. Although no customer accounts for more than 10% of the Company’s sales, three customers represent

24% of sales and trade accounts receivable as at December 31, 1998. Due to the long standing relationships

and contractual arrangements with these customers, the Company does not consider the credit risk related

to these customers to be unreasonable.

The Company operates under various licensing arrangements for the services it provides. Two product lines

are covered by licenses from third parties who act as the exclusive supplier of the related components and parts.

These product lines account for approximately 22% of operating expenses for the period ended December 31,

1998. One license extends to November, 1999 and is renewable at that date.


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10. Income taxes December 31,

1998

The Company’s provision for income taxes is comprised as follows:

Earnings before income taxes $ 11,719Combined federal and provincial statutory income tax rate 43%

Income tax calculated at statutory rates $ 5,040

Increase (decrease) in taxes resulting from:Lower tax rate on earnings of subsidiaries (957)Amortization of tax goodwill (770)Non-deductible expenses 230Large corporation tax 116Other 131

Provision for income taxes at effective rate of 32% $ 3,790

The provision includes:Current income taxes $ 2,538 Deferred income taxes 1,252

$ 3,790

11. Per share information

Net earnings and cash flow from operations per share have been calculated using the weighted

average number of common shares outstanding during the period.



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12. Change in non-cash working capital December 31,

1998

Receivables $ (3,438)Work in progress (7,535)Inventory (7,968)Prepaid expenses 611Payables and accruals (123)Deferred revenue 2,975Income taxes payable 2,538

$ (12,940)

13. Segmented information

The Company’s primary focus is the repair and overhaul of gas turbine engines and dynamic components used

on fixed wing and helicopter aircraft. As a result the Company has one reportable segment.

Geographic information December 31, 1998

CapitalRevenues Assets

Canada $ 31,852 $ 20,801United States 47,275 —United Kingdom 20,571 20,832Other foreign countries 22,793 —

Total $ 122,491 $ 41,633

Revenues are attributed to countries based on location of customer.

14. Commitments

The Company has commitments with respect to operating leases. As at December 31, 1998 the minimum lease

payments required under such leases were $24,720,000 payable as follows:

1999 $ 2,264,0002000 2,228,0002001 1,844,0002002 1,493,0002003 1,385,000and thereafter 15,506,000


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15. Employee pension plans and supplementary retirement plan agreements

a) The Company maintains a defined contribution pension plan for the majority of its employees.

The Company’s contributions to the plan are based upon percentages of gross salaries. During the

period, the Company’s contributions to the plan were $306,500.

b) Sigma Aerospace maintains a defined benefit pension plan for some of its employees. Based on an

actuarial valuation as of March 17, 1998 and extrapolations, the present value of the accrued pension

benefits under the plan at December 31, 1998 was estimated at $10,235,000 (£4,005,000) and the

market value of the assets was estimated at $10,312,000 (£4,035,000). During the period, the

Company’s contributions to the plan were $288,800 (£113,000).

c) The Company has unfunded supplementary retirement plan agreements for certain of its executives.

The estimated present value of the accrued pension benefits at December 31, 1998 was $2,414,500,

assuming a retirement age of 65 and a resulting estimated average remaining service life of 23 years.

As at the balance sheet date the Company has accrued $2,150,000 of which $150,000 was expensed

for the period June 25 to December 31, 1998.

16. Uncertainty Due to the Year 2000 Issue

The Year 2000 issue arises because many computerized systems use two digits rather than

four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date,

resulting in errors when information using year 2000 dates is processed. In addition, similar problems may

arise in some systems which use certain dates in 1999 to represent something other than a date. The

effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000 and, if not

addressed, the impact on operations and financial reporting may range from minor errors to significant

systems failure which could affect an entity’s ability to conduct normal business operations.

Management has developed and is implementing a plan designed to identify and address the expected

effects of the Year 2000 issue on the Company. As at December 31, 1998 the Company continues the

identification of computer systems that will require modification or replacement. An assessment of the

readiness of third parties, such as customers, suppliers and others, is ongoing.

It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those

related to the efforts of customers, suppliers, or other third parties, will be fully resolved.



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Investor Information

The Company’s common shares are listed on the Toronto Stock Exchange under the symbol RNO. The

following table sets forth the reported high, low and closing share prices, as well as volumes of the shares

traded for the periods indicated.

Toronto Stock Exchange1998 Fiscal Year High Low Close Volume

Quarter ended September 30* 8.50 3.75 4.00 6,359,865

Quarter ended December 31 6.00 3.50 5.75 6,264,249

* Prior to August 10, 1998 (Separation Date) the shares traded as part of a unit consisting of one common

share and one-quarter purchase warrant. The reported prices are for the unit (RNO.UN) prior to the

Separation Date, and for the common share (RNO) subsequent to the Separation Date.

Transfer Agent and Registrar:

Requests for information covering dividend payments, lost share certificates, address changes or other

shareholder information should be directed to:

Montreal Trust

1465 Brenton Street

Halifax, Nova Scotia

Canada, B3J 3B7

Telephone: (902) 420-3550

Facsimile: (902) 420-2764

Annual Meeting

The Annual Meeting of the Shareholders of Vector Aerospace Corporation will be held on Thursday,

April 29, 1999 at 4:00 p.m.:

Royal York Hotel, The Quebec Room

100 Front Street West

Toronto, Ontario


World Profile

Atlantic Turbines International Inc.

Headquarters:P. O. Box 150Hangar #8, Slemon ParkSummerside, Prince Edward IslandCanada, C1N 4P6

John MacDougall, PresidentTelephone: (902) 436-1333Facsimile: (902) 436-0777

ACRO Aerospace Inc.

Headquarters:4551 Agar DriveRichmond, British ColumbiaCanada, V7B 1A4

Michael Coughlin, PresidentTelephone: (604) 276-7600Facsimile: (604) 276-7675

Sigma Aerospace Limited

Headquarters:12 Imperial WayCroydon, Surrey, CR9 4LEUnited Kingdom

Stephen Jones, General ManagerTelephone: 011-44-181-688-7777Facsimile: 011-44-181-688-6603

Corporate Head Office

Vector Aerospace CorporationP. O. Box 458, Station “C”St. John’s, NewfoundlandCanada, A1C 5K5

Telephone: (709) 724-4500Facsimile: (709) 724-4544E-mail: [email protected]: www.vectoraerospace.ca

Corporate Information

Auditor: Board of Directors: Committee Members:

Ernst & Young LLP Mark D. Dobbin Audit:Chartered Accountants Chairman & CEO Basile E. Papaevangelou, ChairmanThe Fortis Building, 7th Floor Vector Aerospace Corporation James A. Good139 Water Street St. John’s, Newfoundland The Honourable David PetersonSt. John’s, NewfoundlandCanada, A1C 1B2 James A. Good Human Resources &

Principal Corporate Governance:Primary Bankers: Capital Canada Limited The Honourable Frank D. Moores

Toronto, Ontario ChairmanBank of Nova Scotia David E. Roffey245 Water Street The Honourable St. John’s, Newfoundland Frank D. Moores, LL.D.Canada, A1C 5B5 Chairman and CEO Officers:

SSF (Holdings) Inc.National Bank of Canada Elgin, Ontario Mark D. Dobbin200-555 Burrard Street Chairman and Chief Executive OfficerVancouver, British Columbia Basile E. PapaevangelouCanada, V7X 1M7 TEC (The Executive Committee) Paul J. Conway

Chairman President & Chief Operating OfficerBank of Scotland Oakville, Ontario110 St. Vincent Street Maxwell Parsons, CAGlasgow, GE 5EJ The Honourable Vice President, Chief Financial OfficerScotland David R. Peterson, P.C., Q.C., and Secretary

C.St.J., L.d’H., D.U., LL.D.Cassels Brock & Blackwell Jeannie M. French, CA

Transfer Agent: Toronto, Ontario Assistant Corporate Secretary

Montreal Trust David E. Roffey Rick Davis, CA1465 Brenton Street President & CEO Corporate ControllerHalifax, Nova Scotia Maple Partners Financial Group Inc.Canada, B3J 3B7 Toronto, Ontario

32


Vector Aerospace CorporationP.O. Box 458, Stn. “C”34 Harvey Road, St. John’sNewfoundlandA1C 5K5

Tel. 709 724-4500Fax 709 724-4544www.vectoraerospace.ca


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