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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER: 333-41939-01
KII HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 13-3954446
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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1430 BROADWAY, 13TH FLOOR
NEW YORK, NEW YORK 10018
(212) 391-1392
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /x/
Indicate 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 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. /x/
As of January 1, 1999, the number of shares outstanding of the registrant's
Common Stock, no par value, was 10,000 shares. There is no trading market for
the Common Stock. Accordingly, the aggregate market value of the Common Stock
held by non-affiliates of the registrant is not determinable. See Part II, Item
5 of this Report.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE NUMBER
OR REFERENCE
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PART I
ITEM 1. Business............................................................... 3
ITEM 2. Properties............................................................. 8
ITEM 3. Legal Proceedings...................................................... 8
ITEM 4. Submission of Matters to a Vote of Security Holders.................... 8
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters... 8
ITEM 6. Selected Financial Data................................................. 9
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 10
ITEM 8. Financial Statements and Supplementary Data............................. 17
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 17
PART III
ITEM 10. Directors and Executive Officers of the Registrant...................... 17
ITEM 11. Executive Compensation............................... 19
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....... .. 21
ITEM 13. Certain Relationships and Related Transactions....... .................. 22
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 25
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PART I
As used in this Report, unless the context otherwise requires, the "Company"
refers to KII Holding Corp., a holding company, and its direct and indirect
subsidiaries and "Stellex Aerospace" refers to Stellex Aerospace, the subsidiary
holding company through which the Company conducts its operations. All
references to historical financial information contained herein are references
to financial information as reported in the historical financial statements of
Kleinert Industries, Inc. ("Kleinert").
ITEM 1. BUSINESS
OVERVIEW
The Company is an 80.1% owned consolidated subsidiary of Stellex Industries,
Inc. ("Stellex"). Stellex acquired the Company (formerly Kleinert Industries,
Inc.) on July 1, 1997. The remaining 19.9% of the Company's common stock is held
by certain members of the Company's management. The Company conducts its
business through four operating subsidiaries--Paragon, Bandy, SEAL and GIL
(each, as defined below.) The results of operations of the Company for the
periods presented herein represent the results of operations of Kleinert
(predecessor) for such periods prior to and including June 30, 1997, and those
of the Company thereafter.
The Company is a leading provider of highly precision machined products and
services to certain niche markets within the aerospace and space industries.
Through Bandy Machining International ("Bandy"), the Company is the world's
leading contract manufacturer of commercial and military precision aircraft
hinges. Hinges manufactured by Bandy, some of which are produced exclusively by
Bandy, are installed on every type of aircraft currently produced by the leading
aircraft original equipment manufacturers ("OEMs"), including The Boeing Company
("Boeing"), Airbus Industrie ("Airbus"), Lockheed Martin Corporation ("Lockheed
Martin"), and Northrop Grumman Corporation ("Northrop Grumman"). Through Paragon
Precision Products ("Paragon"), the Company is a leader in the machining of
complex turbomachinery. Paragon's flexible manufacturing operations permit the
production of both (i) highly engineered, close tolerance prototype components,
which are generally manufactured from expensive, exotic alloys and are found in
high performance gas turbine engines and liquid fuel rocket engines, and (ii)
higher volume standard components used in aircraft and industrial power
actuation systems and high performance turbine engines. Through Scanning
Electron Analysis Laboratories, Inc. ("SEAL") and General Inspection
Laboratories, Inc. ("GIL"), the Company also provides a comprehensive range of
services for testing of sophisticated manufactured aerospace components. For the
year ended December 31, 1997 (collectively comprised of Kleinert (predecessor)
sales for the six months ended June 30, 1997 and the Company (successor) for the
six months ended December 31, 1997), the Company had sales of $31.9 million.
INDUSTRY
AEROSPACE INDUSTRY
The commercial aircraft industry experienced severe difficulties in the early
1990s. Airplane deliveries as a percentage of the world airline fleet peaked at
9% in 1991 and fell to 4.7% by 1994. However, since 1994, the commercial
aerospace market has shown significant signs of recovery. According to the
Boeing Commercial Airplane Group 1998 Current Market Outlook (the "Boeing
Report"), annual deliveries of commercial aircraft are expected to increase from
approximately 400 in 1996 to approximately 550 in 1998. In addition, for the
period from 1996 through 2001, revenue passenger miles are expected to increase
from 1.6 trillion to 2.0 trillion and the worldwide fleet of aircraft is
expected to increase from 11,500 at the end of 1996 to approximately 14,000 at
the end of 2001 (net of approximately 1,375 retirements). The Company believes
that the following factors, among others, are causing this increase in new
aircraft orders: (i) projected worldwide airline traffic growth; (ii) projected
cargo traffic growth; (iii) projected increase in the load factor of aircraft
currently in service; (iv) the aging of the current commercial aircraft fleet;
(v) the cost effectiveness of using new aircraft; and (vi) the improved
operating performance of airlines worldwide.
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In the military segment of the aerospace market, demand for aircraft components
declined significantly in the early 1990's, largely as a result of reductions in
defense budgets. The Department of Defense ("DOD") and other government agencies
responded to decreases in their budgets by utilizing substantial built-up
inventories of replacement parts, which in many cases satisfied existing demand
for several years. The Company believes that current inventories of military
aircraft replacement parts and components are at the lowest levels in several
decades and that increased purchasing is likely over the next several years.
MARKETS, PRODUCTS AND SERVICES
The following is a description of the principal markets served by the Company as
well as the products and services the Company delivers for those markets.
MARKETS
Niche Aerospace Manufacturing. The Company's niche manufacturing operations have
focused on discrete, growth-oriented markets in the aerospace industry having
limited competition and which utilize the Company's sophisticated machining
capabilities. Over the past two decades, Paragon has applied its machining and
production expertise to three distinct business segments: spacecraft and
prototype components, engine airfoil components and engine and power actuation
components. Bandy markets standard hinges, custom hinges, and access doors and
panels to four main business segments in the aircraft market: commercial OEM
production, commercial spare parts, military OEM production and military spare
parts.
Testing and Engineering Services. Through GIL and SEAL, the Company performs a
broad range of material defect testing and analysis on a variety of materials
used in the aerospace, plastics and other industries. The Company is actively
involved in research and development and general engineering services for new
product development, the improvement of existing products and value-added
engineering services. The Company's services to the aerospace industry include
destructive physical analysis for the space station, the testing of space
shuttle components and space satellites and non-destructive testing of materials
used in commercial and military aircraft.
PRODUCTS AND SERVICES
The following describes the Company's principal product and service lines, the
markets which these products and services serve, and the Company's principal
programs by product and service line.
TURBOMACHINERY AND ENGINE COMPONENTS
The Company, through Paragon, specializes in sophisticated five-axis machining
of turbomachinery components. Paragon's flexible manufacturing operations permit
the production of both (i) highly engineered, close tolerance prototype
components which are generally manufactured from expensive, exotic alloys and
are found in high performance gas turbine engines and liquid fuel rocket engines
and (ii) higher volume standard components used in aircraft and industrial power
actuation systems and high performance turbine engines. Paragon's turbomachinery
components include engine rotors, impellers, stators, valve bodies, actuator
housings and intricate blades and vanes used in jet engines. Paragon currently
produces eight different part numbers for the TFE-1042 turbofan engine
manufactured by AlliedSignal, Inc. ("AlliedSignal") and is the sole source
provider of twelve parts for the Titan engines produced by Aerojet General
Corporation ("Aerojet") (a subsidiary of GenCorp, Inc.). Paragon is also a
primary source supplier for the Rocketdyne division of Boeing ("Rocketdyne") on
several projects including six parts for its first stage Delta rocket engine and
numerous turbomachinery components for the space shuttle's main engine.
STRUCTURAL AEROSPACE PARTS
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The Company, through Bandy, manufactures precision hinges, access doors and
panels, specialty machined structural and interior aircraft components, and
other custom machined parts. Bandy produces more than 20,000 different hinge
designs ranging from one inch to more than 40 feet in length for such
applications as aircraft galleys, access, cargo and passenger doors, flaps,
racks, ramps, cases, landing gear, seats and lavatories. Bandy's "special" or
"custom" hinges are used extensively on aircraft, helicopters, jet engine
systems, missiles and many other commercial, industrial and military
applications ranging from the space shuttle to nuclear submarines. Bandy's door
products range in size from two inches up to 36 inches in length and are made
for the F-16 airplane, among others, as well as missiles, unmanned aerial
vehicles, torpedoes, precision instrument housings and many other applications
to provide inspection visibility and servicing access. Bandy's specialty
machined components include spars, stringers, support rails, posts and related
items for aircraft.
TESTING AND ENGINEERING SERVICES
The Company performs testing and engineering services through SEAL and GIL. SEAL
offers a comprehensive range of material defect testing and analysis, utilizing
electron microscopy, residual gas analysis and other highly sophisticated
processes, on a variety of materials used in the aerospace, plastics, medical
device and other industries. In addition, SEAL is actively involved in research
and development and general engineering services for new product development,
the improvement of existing products and value-added engineering services. SEAL
is one of only three engineering companies approved by National Aeronautics and
Space Administration ("NASA") to conduct destructive physical analysis for the
space station and has been actively involved in the testing of space shuttle
components, commercial and military satellites and liquid fuel tanks on several
NASA rocket booster programs. SEAL provides services through a staff of over 50
employees, which includes experts in the fields of materials and metallurgical
science, electronic components, failure analysis, analytical techniques and
related sciences. GIL is a full-service inspection and metal treatment
laboratory, specializing in non-destructive testing and inspection of materials
and manufactured components using advanced analytical techniques and
state-of-the-art equipment. GIL's testing processes, including radiography,
ultrasound, liquid and magnetic particle penetrant and pressure testing, assist
in determining internal or external flaws, fractures, material containments or
manufacturing defects in materials and/or component parts to ensure component
quality. GIL, which primarily services the aerospace industry, is one of the
leading independent, full-service non-destructive testing ("NDT") laboratories
in the United States.
MANUFACTURING
The Company manufactures turbomachinery components for rocket booster engines,
precision aircraft hinges, structural and interior aircraft components, access
door assemblies, door panels and hinges for special industrial applications. The
Company's manufacturing facilities are highly automated and incorporate a
variety of quality control systems.
Paragon manufactures both highly sophisticated, close tolerance prototype
components, often machined from expensive metal alloys, as well as higher volume
standard components. As a result of the variety of products it manufactures,
Paragon's manufacturing operations are flexible and generally adaptable to a
variety of applications. It employs advanced machinery, including four and five
axis machining centers, multiple spindle high volume production machining
centers, wire electrical discharge machining ("EDM") machines and computer
numerical control ("CNC") turning centers. Paragon's computerized CNC machines
interface with a sophisticated computer-aided-design/computer-aided-
manufacturing ("CAD/CAM") network. As a contract manufacturer, Paragon does not
typically design or own the products it manufacturers.
Bandy's manufacturing facility is geared toward high volume, low cost
production. Bandy has developed a high level of proprietary equipment and
automated manufacturing systems. A substantial portion of its equipment has been
redesigned, customized and/or upgraded in recent years to meet exacting
manufacturing requirements and to reduce production costs. Bandy combines the
use of numerical control equipment, vertical and universal milling machines and
custom-designed hinge equipment with other advanced, high production
manufacturing methods to produce standard or customized precision hinges and
machined parts. Bandy owns all of its own tooling, which historically has given
it a competitive advantage in obtaining spare and replacement part business.
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Certain customers of the Company have developed their own design, product
performance, manufacturing process and quality standards and require their
suppliers, including the Company, to comply with such standards. As a result,
the Company has developed and implemented comprehensive quality system policies
and procedures. Paragon received ISO-9002 certification in November 1997, while
Bandy is currently seeking ISO-9000 certification. The Company has received
numerous quality awards from its customers, including Boeing and McDonnell
Douglas Corporation ("McDonnell Douglas"), and the highest quality designations
from Lockheed Martin, Allegheny Teledyne Incorporated ("Teledyne") and Rohr Inc.
SALES AND MARKETING
The Company employs distinctly different sales and marketing approaches in each
of its businesses, which are tailored to the needs of its customers. The Company
markets its products through its own sales force and a network of independent
sales representatives and distributors in the United States and certain foreign
countries. The Company's sales managers are responsible for coordinating the
efforts of the independent sales representatives and for staying abreast of
government and commercial programs in their respective regions. They also keep
the Company's engineering, manufacturing and management personnel advised of
possible future trends and requirements of customers.
The Company believes that Paragon is one of only five companies in the United
States with the expertise to compete for and produce highly sophisticated, close
tolerance prototype component parts. As a result of recent marketing efforts to
broaden its customer base, Paragon now has approximately 20 active prototype
customers. Although prototype work is normally associated with short-term,
low-volume work, Paragon is often able to secure a preferred position for future
production requirements by establishing a strong relationship with the customer
during the early prototype development stage. Paragon intends to maximize these
opportunities to become a competitive and cost-effective producer of
longer-term, higher-volume orders.
Bandy's sales effort was reorganized during 1996 into a dedicated,
single-contact sales representative system. Previously, Bandy operated a pool
system whereby a customer's call to place an order or obtain information was
referred to the first available salesperson. The new system provides Bandy's
sales representatives with the opportunity to become more familiar with the
special and unique requirements of their particular accounts as well as ensure
that orders are properly processed and schedules maintained. Additional benefits
of the new system include a more even distribution of salesperson workload as
well as a reduction in the time required to process orders and respond to
requests. Bandy employs four persons in-house to answer sales questions and
process orders and uses outside sales agents to serve its international
customers.
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CUSTOMERS
The Company sells primarily to aircraft OEMs, aircraft and rocket engine
manufacturers and government agencies. The Company's customers include many of
the world's largest defense contractors, aircraft OEMs and aircraft component
manufacturers. The Company's largest customers in 1997 based on sales were
AlliedSignal and Boeing, which together accounted for approximately 58.5% of the
Company's total sales. In 1997, approximately 34.0% of the Company's sales were
to government agencies and their prime contractors. Such sales are subject to
unique conditions and terms.
COMPETITION
The narrowly defined niche markets within the aircraft industry served by the
Company are relatively fragmented, with few direct competitors for each of the
products provided by the Company. In the markets for the spacecraft and
prototype components which it produces, Paragon's competition is generally
limited to only two or three companies, due primarily to high entry costs and
significant technical requirements. In the markets for engine airfoil components
and power actuation components, Paragon faces numerous competitors including, in
many cases, the in-house manufacturing operations of its customers. In addition,
as airfoils represent a substantial cost component of aerospace engines,
customers are increasingly focused on reducing costs and increasing competition.
Paragon's major customers are intensely price competitive with each other, and
this price competition increases their incentives to reduce costs from their
suppliers.
Bandy faces competition in its hinge market business from a limited number of
international independent manufacturers and the in-house operations of aircraft
OEMs. Bandy also competes with small machine shops for specialty machined
components. As a result of recent economic and structural contraction in the
commercial and military hinge markets, the number of direct machine shops
dedicated to the production of hinges has been significantly reduced. The
Company believes that the key competitive factors in this changed market include
not only product quality and the satisfaction of machining tolerance
requirements, but also customer relationships established over many years.
EMPLOYEES
As of January 1, 1999, the Company employed approximately 380 persons. Virtually
all of the Company's employees reside in the United States and none are covered
by collective bargaining agreements. The Company considers its relations with
its employees to be good.
SALES TO FOREIGN CUSTOMERS
For the year ended December 31, 1997, approximately $5.0 million of sales of the
Company were attributable to products where the end-users were foreign
customers, located primarily in Japan and Western Europe. A change in U.S.
government policy toward foreign governments with whom the Company, directly or
indirectly, conducts business could adversely affect the Company's sales.
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SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's manufacturing operations require raw materials which are purchased
in the open market and are normally available from a number of suppliers. The
Company has not experienced any significant delays in obtaining timely
deliveries of essential materials.
ITEM 2. PROPERTIES
The Company has an aggregate of five principal operating facilities, all of
which are located in southern California. The following table sets forth certain
information relating to the Company's principal operating facilities.
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Location Description Square Footage Owned/Leased
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Woodland Hills, California The Company's 1,475 Leased
administrative office
Valencia, California Paragon's 54,000 Owned
manufacturing
facility, machine shop
and warehouse
Burbank, California Bandy's manufacturing 48,000 Leased
facility, warehouse
and office
El Segundo, California SEAL's laboratory, 20,600 Leased
testing facility and
office
Cudahy, California GIL's laboratory, 32,400 Leased
testing facility and
office
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The Company believes that its properties are adequate to support its operations
for the foreseeable future. The Company's leases, other than the lease relating
to the Woodland Hills facility, which is month-to-month, have remaining terms
ranging from one to six years. The leases contain renewal options pursuant to
which the Company may extend the lease terms in increments of five to ten years.
The Company does not anticipate any difficulties in renewing any of these leases
as they expire.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in lawsuits and is subject to certain contingencies
incidental to its business. While the ultimate results of these matters cannot
be predicted with certainty, management does not expect them to have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established trading market for any class of equity securities of the
Company.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data of the Company as of and for each of the
five years in the period ended December 31, 1997 have been derived from the
audited financial statements of the predecessor, Kleinert, through June 30,
1997, and of the Company for the six months ended December 31, 1997. The
selected historical financial data for the Company as of and for the year ended
December 31, 1997 reflect adjustments resulting from the application of the
purchase method of accounting in conjunction with the purchase of Kleinert. The
data presented below should be read in conjunction with the historical financial
statements of the Company and related footnotes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this filing.
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(DOLLARS IN THOUSANDS) SIX SIX
MONTHS MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1994 1995 1996 1997 1997
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(PREDECESSOR) (SUCCESSOR)
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INCOME STATEMENT DATA:
Sales................................. $21,664 $ 17,808 $ 21,049 $ 24,307 $14,296 $ 17,577
Costs of Goods Sold................... 16,239 13,121 15,083 17,367 10,140 13,644
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Gross Profit ......................... 5,425 4,687 5,966 6,940 4,156 3,933
Selling, general and administrative .. 3,514 3,110 3,299 3,629 1,783 3,077
Amortization of intangibles .......... 533 416 282 31 15 70
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Operating income ..................... 1,378 1,161 2,385 3,280 2,358 786
Interest expense ..................... 1,078 979 1,034 856 376 1,071
Interest income ...................... (73) (44) (5) (11) (5) (6)
Other expense......................... 273 145 44 58 103 24
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Income (loss) before income taxes .... 100 81 1,312 2,377 1,884 (303)
Income tax provision (benefit) ....... 42 50 525 945 754 (1)
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Net income (loss) before
extraordinary item ................. $ 58 $ 31 $ 787 $ 1,432 $ 1,130 (302)
Extraordinary loss on
extingishment of debt .............. -- -- -- -- -- 448
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Net income (loss) .................... $ 58 $ 31 $ 787 $ 1,432 $ 1,130 $ (750)
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OTHER FINANCIAL DATA:
Cash flows from operating activities . $ 3,172 $ 2,130 $ 1,866 $ 2,657 $ 479 $ 1,158
Cash flows from investing activities . (372) 285 (643) (1,048) (835) (16,032)
Cash flows from financing activities . (2,858) (2,360) (1,432) (1,407) 272 15,074
Depreciation and amortization ........ 2,726 2,424 1,950 1,691 878 884
Capital expenditures ................. 389 288 657 1,053 868 1,233
Ratio of earnings to fixed
Charges(a) ......................... 1.09x 1.08x 2.27x 3.78x 6.01x --
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ...................... $ 6,751 $ 6,621 $ 6,802 $ 7,735 $ 8,975 $ 16,779
Total assets ......................... 30,065 28,029 28,180 29,614 31,675 37,366
Notes Payable(b) ..................... 12,650 10,021 7,824 5,682 5,654 25,765
Shareholder's equity ................. 11,927 11,958 12,745 14,178 15,308 3,180
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NOTES
(a) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing costs, whether expensed or
capitalized. Earnings of the Company were inadequate to cover fixed charges
by $750,000 for the six months ended December 31, 1997.
(b) Long-Term debt at December 31, 1997 includes $20,943,000 of debt payable to
Stellex Industries, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leader in the machining of turbomachinery, aircraft hinges and
other structural components for the aerospace, defense and space industries. The
Company is a holding company and has no independent operations.
The Company is an 80.1% owned consolidated subsidiary of Stellex. Stellex
acquired the Company (formerly Kleinert Industries, Inc.) on July 1, 1997 from
Kleinert Industrie Holding A.G. The remaining 19.9% of the common stock of the
Company is held by certain members of the Company`s management. The Company
conducts its business through four operating subsidiaries--Paragon, Bandy, SEAL
and GIL. The results of operations of the Company for the periods presented
herein represent the results of operations of Kleinert (predecessor) for such
periods prior to and including June 30, 1997, and those of the Company
thereafter.
The Company's historical financial results have been significantly influenced by
both the cyclicality of the commercial aerospace industry and the increased
outsourcing of the production of components by OEMs to outside suppliers. During
the period from 1992 to 1994, the commercial aerospace industry experienced a
significant reduction in orders for new aircraft and engines. In response, the
Company significantly reduced its costs by reducing its work force and
rationalizing its production capacity. In addition, the Company took steps to
expand its business activity throughout this period by increasing the number of
customers for whom it manufactured prototypes and by seeking contracts to
produce higher volumes of turbomachinery components. Since 1994, primarily as a
result of the recovery in overall aircraft orders and its success in gaining
additional prototype and production-oriented supply contracts, the Company has
significantly increased sales and operating profitability.
RESULTS OF OPERATIONS
HISTORICAL - COMPANY
The Company commenced operations when it acquired Kleinert on July 1, 1997. The
acquisition is reflected in the results of operations of the Company from such
date and accounted for using the purchase method.
RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
Sales. The Company's sales totaled approximately $17.6 million for the six
months ended December 31, 1997. Continuing increases in demand for new aircraft
production in both commercial and military markets, as well as increased orders
for aircraft replacement parts in these markets, which translated into improved
performance during 1998.
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Gross Profit. Gross Profit totaled approximately $3.9 million, or 22.4% as a
percentage of sales for the six months ended December 31, 1997. During the six
month period a non-recurring charge to cost of sales totaled approximately $1.5
million resulting from the amortization of a purchase accounting adjustment
revaluing inventory coincident with the Kleinert acquisition Ignoring the impact
of this non-recurring charge, gross margins would have totaled 30.6%. The
Company experienced an improvement in gross margin during this recent period as
a result of increased manufacturing and laboratory operating efficiencies. These
efficiencies are due primarily to overall increased volume and the expansion of
manufacturing capacities and capabilities through the purchase of additional
machinery and equipment at both Paragon and Bandy.
Selling, General and Administrative. Selling, general, and administrative
expenses totaled $2.8 million for the six months ended December 31, 1997.
Significant items impacting selling, general and administrative expenses
included a non-recurring charge totaling $450,000 for investment banking and
financial advisory fees to Mentmore as a result of the Kleinert Acquisition and
$150,000 in management fees paid to Mentmore in conjunction with a management
services agreement which became effective subsequent to the Kleinert
Acquisition. In addition to the aforementioned items, the significance of the
revenue growth currently experienced has led to administrative support cost
increases. These additional costs were not unanticipated and provide the added
infrastructure necessary to continue to grow profitably.
Selling general and administrative expenses for the six months ended December
31, 1997 also included a compensation charge of $300,000 incurred as a result of
a put right associated with the ownership of common stock in KII Holding Corp.
by members of the management of Stellex Aerospace.
Interest Expense. Interest expense for the six months ended December 31, 1997
totaled $1,070,700 which resulted from debt payable to Stellex Industries, a
mortgage note, and a note payable to the Sellers that was incurred in
conjunction with the Kleinert Acquisition.
Extraordinary Loss. An extraordinary loss from the early extinguishment of
senior debt associated with the Kleinert Acquisition occurred as a result of the
Offering. This loss totaled $747,200 and is presented on the income statement
net of income tax benefits of $298,900.
PRO FORMA RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
The unaudited pro forma consolidated results for the years ended December 31,
1997 and 1996 give effect to the Kleinert Acquisition as if it had occurred as
of January 1, 1996. The pro forma consolidated statements of operations exclude
non-recurring charges directly related to the Kleinert Acquisition including (i)
investment banking and financial advisory fees paid to Mentmore ($450,000), (ii)
increases in cost of sales arising from the write-up of inventories at the date
of the consummation of the Kleinert Acquisition to fair market value ($1.5
million) and (iii) extraordinary losses due to early retirement of debt.
The unaudited pro forma consolidated results have been prepared by management of
the Company and do not necessarily represent the Company's operations which
would have occurred if the Kleinert Acquisition had actually taken place on
January 1, 1996, and they may not be indicative of the results of the operations
which may be obtainable in the future.
11
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ...................................... $31,873 $24,307
Costs of Goods Sold ........................ 22,199 17,163
------- ------
Gross Profit ............................... 9,674 7,144
Selling, general and administrative ........ 4,666 4,343
------- ------
Operating income ........................... 5,008 2,801
Interest expense ........................... 2,310 2,410
Other expense ............................. 76 40
------- ------
Income before income taxes ................. 2,622 351
Income tax provision ....................... 1,180 158
------- ------
Net income ................................. $ 1,442 $ 193
------- ------
------- ------
</TABLE>
Sales. Pro forma sales would have increased by $7.6 million, or 31.1%, in the
pro forma year ended December 31, 1997 over the pro forma year ended December
31, 1996. The increase in sales was primarily attributable to increases in
commercial aircraft production by Boeing, strong spare parts demand and the
acceleration of the production schedule for the C-17 program which impacted
Bandy's business. In addition, Paragon experienced increases in spacecraft and
prototype work due to continuing strong demand for space shuttle parts.
Gross Profit. Pro forma gross profit would have increased by $2.5 million, or
35.4%, in the pro forma year ended December 31, 1997 over the pro forma year
ended December 31, 1996. Pro forma gross profit margin would have increased to
30.4% in the pro forma year ended December 31, 1997 from 29.4% in the pro forma
year ended December 31, 1996. Pro forma gross profit and gross profit margin
benefited from increased manufacturing and laboratory operating efficiencies due
to the overall increased volume and the expansion of manufacturing capacities
and capabilities through the purchase of additional machinery and equipment at
both Paragon and Bandy. These benefits were partially offset by increased
outsourcing necessitated by capacity constraints and raw material price
increases on aluminum extrusions at Bandy.
Selling, General and Administrative Expenses. The increase in pro forma selling,
general and administrative expenses is primarily due to providing additional
administrative personnel to support the increased sales volume offset partially
by lower employee benefit costs in 1997 over 1996 when two deferred compensation
plans were established.
HISTORICAL - PREDECESSOR
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
The following table summarizes unaudited historical results of operations of the
predecessor for the six months ended June 30, 1997 and 1996.
12
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS
ENDED JUNE 30,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ...................................... $14,296 $11,650
Costs of goods sold ........................ 10,140 8,291
------- ------
Gross profit ............................... 4,156 3,359
Selling, general and administrative ........ 1,798 1,803
------- ------
Operating income ........................... 2,358 1,556
Interest expense ........................... 376 442
Other expense .............................. 98 24
------- ------
Income before income taxes ................. 1,884 1,090
Income tax provision ....................... 754 436
------- ------
Net income ................................. $ 1,130 $ 654
------- ------
------- ------
</TABLE>
Sales. Sales increased by $2,646,000, or 22.7%, in the six months ended June 30,
1997 over the comparable period in the prior year. The increase in sales was
primarily attributable to increases in commercial aircraft production by Boeing,
strong spare parts demand and the acceleration of the production schedule for
the C-17 program which impacted Bandy's business. In addition, Paragon
experienced increases in spacecraft and prototype work due to continuing strong
demand for space shuttle parts.
Gross Profit. Gross profit increased by $797,400, or 23.7% in the six months
ended June 30, 1997 over the comparable period in the prior year. Gross profit
margin increased to 29.1% in the six months ended June 30, 1997 from 28.8% in
1996. The increase in gross profit was primarily the result of increased sales.
Gross margin benefited from an improvement in plant utilization and production
efficiencies at Bandy due to the installation of new Fadal milling machines.
These benefits were almost entirely offset by increased outsourcing necessitated
by capacity constraints and raw material price increases on aluminum extrusions.
Selling, General and Administrative. Selling, general and administrative
expenses were essentially flat between the six months ended June 30, 1997 and
comparable period in the prior year. As a percentage of sales, selling, general
and administrative expenses decreased from 15.5% in the six months ended June
30, 1996, to 12.6% comparable period in 1997 because the increased sales volume
and improved plant utilization did not require a comparable increase in selling
or administrative expenses. Additionally, employee benefit costs were reduced
from the levels in the comparable period in the prior year when two deferred
compensation plans were established.
Interest Expense. Interest expense decreased by $66,700, or 15.1%, in the six
months ended June 30, 1997 over the comparable period in the prior year. The
decrease in interest expense resulted primarily from a reduction of the interest
rate from 10.125% to 7.875% on a building mortgage and lower outstanding debt.
Other Expense. Other expense increased by $75,000 in the six months ended June
30, 1997 over the comparable period in the prior year. The increase was
primarily attributable to expenses related to the Kleinert Acquisition and a
vending machine contract dispute settlement.
Provision for Taxes. The effective income tax rate was 40.0%, for both the six
months ended June 30, 1997 and the six months ended June 30, 1996.
13
<PAGE>
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. The Company's sales increased by $3.3 million, or 15.5%, in 1996 over
1995. The increase in sales was primarily attributable to the resurgence of new
orders as a result of increases in aircraft production in commercial and
military aircraft markets, offset partially by $1.0 million in lower sales
resulting from a reduction in volume in Paragon's Titan program, which is in the
latter stages of its product life cycle.
Gross Profit. The Company's gross profit increased by $974,500, or 16.3%, in
1996 over 1995. Gross profit margin increased to 28.6% in 1996 from 28.3% in
1995. The increase in gross profit was primarily the result of increased sales.
The slight improvement in gross margin was due primarily to longer production
runs and improved plant capacity utilization, which was almost entirely offset
by lower margins on a new power actuation contract, industry-wide pricing
pressures and lower volume on Paragon's higher margin Titan program.
Selling, General and Administrative. Selling, general and administrative
expenses increased by $330,700, or 10.0%, in 1996 over 1995. As a percentage of
sales, selling, general and administrative expenses decreased from 15.7% in
1995, to 14.9% in 1996 because the increased sales volume and improved plant
utilization did not require a comparable increase in selling or administrative
expenses. Additional administrative costs, however, were incurred in
establishing two deferred compensation plans.
Amortization of Intangible Assets. Amortization expense relating to intangible
assets decreased by $251,000, or 88.9%, in 1996 from 1995. The decrease in
amortization expense relating to intangible assets was due to the expiration of
a non-compete agreement during 1995.
Interest Expense. Interest expense decreased by $178,600, or 17.3%, in 1996 from
1995. The decrease in interest expense resulted primarily from a reduction of
the mortgage interest rate on a building and lower outstanding debt.
Income Tax Provision. The effective income tax rate was 39.7% and 40.0%, in 1996
and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided cash from operations of $1,157,900, $479,400, $2,657,000
and $1,866,100 for the six month periods ended December 31, 1997 (successor
period) and June 30, 1997 (predecessor period) and for the years ended December
31, 1996 and 1995, respectively. Cash flows over the periods presented reflect a
consistent increase in earnings offset, in part, by a gradual buildup of
inventories supporting the growing level of sales.
The Company used cash flows in investing activities, excluding cash flows used
in connection with the Kleinert Acquisition, of $1,232,700, $835,000,
$1,048,000, and $634,100 for the six month periods ended December 31, 1997
(successor period) and June 30, 1997 (predecessor period) and for the years
ended December 31, 1996 and 1995, respectively. Cash flows utilized over the
periods presented were primarily supporting investments in machinery to
accommodate a rising level of production orders resulting from increasing levels
of aircraft manufacturing activity.
The Company used (provided) cash in financing activities, excluding net cash
provided in connection with the Kleinert Acquisition, of ($607,800), ($271,600),
$1,406,600, $1,431,900 for the six month periods ended December 31, 1997
(successor period) and June 30, 1997 (predecessor period) and for the years
ended December 31, 1996 and 1995, respectively. During 1995 and 1996, the
Company repaid outstanding long term indebtedness in excess of $2,000,000 per
annum, offset by a consistent level of borrowings of approximately $750,000 per
annum under existing lines of credit primarily for the purpose of building
inventories to support the growing levels of new aircraft production and
replacement parts requirements.
14
<PAGE>
<PAGE>
On July 1, 1997, the Company, through a wholly-owned subsidiary, acquired all of
the issued and outstanding capital stock of Kleinert for approximately $26.5
million (including the assumption of approximately $2.7 million of indebtedness
and the issuance to the seller of a note for $1.75 million). The acquisition was
financed in part from new borrowings totaling $19.3 million and the issuance of
common and preferred stock totaling $4.75 million.
On October 31, 1997, Stellex paid, on behalf of the Company, certain debt
consisting of (i) a $16.0 million term note payable issued in connection with
the Kleinert Acquisition, (ii) a $2.5 million promissory note also issued in
connection with the Kleinert Acquisition and (iii) approximately $1.2 million of
revolving credit borrowings under a credit facility. In return for paying off
the debt, the Company issued a note payable to Stellex in the principal amount
of $20.943 million, bearing interest at 9.5% per annum, which included a $1.0
million non-cash allocation of financing costs incurred by Stellex and
capitalized by the Company. Such costs, which were allocated to the Company,
were incurred by Stellex in connection with the issuance and registration of
$100.0 million aggregate principal amount of 9-1/2% Senior Subordinated Notes
due 2007 and the refinancing of Stellex's senior debt with a new credit facility
at Stellex consisting of a $25.0 million revolving credit facility and a $25.0
million acquisition facility. Available borrowing rates under these facilities
are equal to (i) the Eurodollar Rate (as defined therein) plus 2% or Societe
Generale's base rate plus 1% in the case of the revolving credit facility and
(ii) the Eurodollar Rate plus 2.25% or Societe Generale's base rate plus 1.25%
in the case of the borrowings under the acquisition facility. These financing
transactions at Stellex were consummated in connection with the restructuring of
Stellex to accommodate the acquisition of Stellex Microwave in October of 1997.
The Company believes that based on its current level of operations and
anticipated growth, its cash flow from operations, together with borrowings
available under Stellex's new credit facilities, will be adequate to meet its
anticipated requirements for working capital, capital expenditures, interest
payments and any scheduled principal payments in the foreseeable future.
INFLATION AND CHANGING PRICES
Inflation has not been material to the Company's operations for the periods
presented.
BACKLOG
The Company's backlog of orders as of December 31, 1997 and December 31, 1996
was $22.1 million and $15.8 million, respectively. Approximately 32% of 1997
backlog relates to products for the defense industry. The Company includes in
its backlog only those orders for which it has accepted purchase orders.
However, backlog is not necessarily indicative of future sales. A substantial
amount of the company's backlog can be canceled at any time without penalty,
except in most cases, for the recovery of the Company's actual committed costs
and profit on work performed up to the date of cancellation.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive federal, state, and
local Environmental Laws that may change frequently. The Company can be expected
to incur capital and operating expenses to maintain compliance with and to meet
new applicable Environmental Laws. Based upon the underlying facts giving rise
to its environmental regulatory obligations and technical reports prepared on
the Company's facilities, the Company does not anticipate that any such capital
or operating expenses will have a material adverse effect on the Company's
results of operations. There can be no assurance, however, that unanticipated,
future Environmental Laws or previously unidentified environmental conditions
will not result in a material adverse effect on the Company's financial position
or results of operations or in the Company having to incur material capital or
operating expenses.
15
<PAGE>
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". The standard establishes guidelines for the reporting and display of
comprehensive income and its components in financial statements. Disclosure of
comprehensive income and its components will be required beginning with the
Company's fiscal year ending 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. The new rules will be effective
for the Company's 1998 fiscal year end. The Company has not evaluated the
impact, if any, of the new standard.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirement for pensions and other postretirement benefits. The implementation
of SFAS No. 132 is not expected to have an impact on the Company's financial
statements. The standard will be effective for the Company for the year ended
December 31, 1998.
THE YEAR 2000 ISSUE
The Year 2000 problem concerns the inability of information systems to recognize
properly and process date-sensitive information beyond January 1, 2000. Each of
the Company's operating subsidiaries faces unique issues in its identification
and resolution of problems related to the Year 2000.
State of readiness: In November 1997, the Company initiated an assessment of the
impact of the Year 2000 issue on its internal operations and began the
development of a plan to bring all of its computer systems into compliance. This
focus has been on all systems potentially impacted by the Year 2000 issue,
including information technology ("IT") systems and non-IT systems. At the
present time, management is in the process of finalizing a new system
installation at Bandy which is Year 2000 compliant, and has completed its review
of Year 2000 readiness of other internal IT systems at Paragon, SEAL, GIL and
the corporate offices. The Company is in the process of completing its
assessment of the impact of Year 2000 on its non-IT systems, products and
significant vendors and customers. The initial assessment indicates that the
Year 2000 should not significantly affect these areas.
Costs to address Year 2000 issues: To date costs to implement and the timeframe
contemplated by management to be Year 2000 compliant are based on management's
best estimates. Cumulative costs to date have been insignificant. Estimated
costs to complete the process are not expected to have a material impact on the
Company's future financial results.
Risks associated with Year 2000 issue: The Company believes there is low risk of
any internal critical system, embedded system, or other critical asset not being
Year 2000-ready by the end of 1999. The Company continues to assess its risk
exposure attributable to external factors, suppliers and customers. With respect
to outside parties, those parties who have been contacted have indicated that
their hardware, software and related non-IT systems are currently or will be
Year 2000 complaint within the 1999 calendar year. Evaluations of these issues
are continuing and there can be no assurance that additional issues, not
presently known to the Company, will be discovered which could present a
material risk of disruption to the Company's operations. Such disruptions could
result in delays in the delivery or sale of products. Contingency plans for
suppliers, customers and mission critical systems impacted by Year 2000 issues
are currently under development and are expected to be completed in the first
quarter of 1999.
16
<PAGE>
<PAGE>
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in forward-looking statements as
a result of various factors including, but not limited to: (i) general economic
conditions in the markets in which the Company operates, (ii) cancellation of
specific aircraft programs due to defense spending or general budgetary
constraints or poor customer demand, (iii) success in hiring and retaining key
management and technical personnel.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information that are
required to be included pursuant to this Item 8 are listed in Item 14 of this
Report under the caption "(a)1." and follow Item 14. The financial statements
and supplementary financial information specifically referenced in such list are
incorporated in this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On December 2, 1998, the Board of Directors of Stellex Industries, Inc. and
subsidiaries resolved to (i) engage Deloitte & Touche LLP as the independent
accountants for all of Stellex Industries, Inc. and subsidiaries for the year
ended December 31, 1998 and (ii) dismiss PricewaterhouseCoopers as independent
accountants of the Company. There were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures. Refer to Form
8-K dated December 2, 1998, as filed by Stellex Industries, Inc. with the
Securities and Exchange Commission on December 8, 1998 and Exhibit 16 thereto.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information with respect to the directors,
executive officers and other key employees of the Company. All directors and
officers of the Company hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard L. Kramer........................ 49 Chairman of the Board of Directors, Director, and
Secretary of KII Holding Corp.
William L. Remley........................ 48 Vice Chairman, Director and Treasurer of KII Holding
Corp.
Bradley C. Call.......................... 55 President and Director of KII Holding Corp.
Julius E. Hodge.......................... 48 Chief Financial Officer of KII Holding Corp.
Lawrence R. Smith........................ 53 President of Paragon Precision Products
John Barriatua........................... 63 President of General Inspection Laboratories, Inc.
Roland H. Marti.......................... 53 President of Scanning Electron Analysis Laboratories, Inc.
Arun Kumar............................... 51 Vice President and General Manager of Scanning Electron
Analysis Laboratories, Inc.
Thomas B. Fulton......................... 50 President of Bandy Machining International
</TABLE>
17
<PAGE>
<PAGE>
Richard L. Kramer became the Chairman of the Board of Directors and a director
of the Company in September 1997, shortly after its formation. Mr. Kramer is
also Chairman and a director of Mentmore Holdings Corporation, Stellex
Industries, Inc., Texfi Industries Inc., a textile and apparel manufacturing
firm, CPT Holdings. Inc., a manufacturer of specialty structural steel profiles,
Weldotron Corporation, a packaging equipment manufacturer, Orion Acquisition
Corp. II, an investment company, MC Equities, Inc., an insurance holding
company, Precise Technology, Inc., a full-service, custom injection molder of
precision plastic products, and Republic Properties Corporation. Mr. Kramer is a
director of J&L Structural, Inc., Precise Holding Corporation, Trinity
Investment Corp. and Sunderland Industrial Holdings Corporation.
William L. Remley became the Vice Chairman, Treasurer and a director of the
Company in September 1997, shortly after its formation. Mr. Remley is also
President, Chief Executive Officer and a director of Mentmore Holdings
Corporation, Stellex Industries, Inc. and Weldotron Corporation, Vice-Chairman,
Chief Executive Officer and a director of Texfi Industries Inc., President and a
director of CPT Holdings Inc., Orion Acquisition Corp. II and MC Equities, Inc.
and Vice Chairman, Treasurer and a director of Precise Technology, Inc., a
full-service, custom injection molder of precision plastic products. Mr. Remley
is a director of J&L Structural, Inc., Republic Properties Corporation, Precise
Holding Corporation, Trinity Investment Corp. and Sunderland Industrial Holdings
Corporation.
Bradley C. Call became the President and Chief Executive Officer of the Company
and Stellex Aerospace in July 1997. Prior to joining the Company, Mr. Call was
employed by Kleinert as Chairman, President and Chief Executive Officer from
September 1988 until the consummation of the Kleinert Acquisition in July 1997.
Mr. Call has also held the position of President of Bandy from January 1994
until November 1997. Mr. Call is a director of Unihealth and Pacificare Health
Systems.
18
<PAGE>
<PAGE>
Julius E. Hodge became the Chief Financial Officer of the Company and Stellex
Aerospace in July 1997. Prior to joining the Company, Mr. Hodge was employed by
Kleinert as Chief Financial Officer from May 1989 until the consummation of the
Kleinert Acquisition in July 1997.
Lawrence R. Smith has held the position of President of Paragon since November
1990. Prior to this time, Mr. Smith was employed by Rogerson Kratos, Inc. as
President from April 1985 until June 1990.
John Barriatua has held the position of President of GIL since June 1985. Prior
to this time, Mr. Barriatua was employed by GIL for 26 years in a variety of
positions.
Roland H. Marti has held the position of President of SEAL since February 1989.
Prior to this time, Mr. Marti was employed by Kevex Instruments as Director of
Sales from 1984 until 1989, Director, Western Area for Princeton Gamma-Tech from
1983 until 1984 and Worldwide Sales Manager for Bausch & Lomb from 1980 until
1983.
Arun Kumar has held the position of Vice President and General Manager of SEAL
since February 1989. Prior to this time, Mr. Kumar was employed by SEAL as
Manager of Metallurgical Services from 1980 until 1989.
Thomas B. Fulton has held the position of President of Bandy since November
1997. Prior to joining Bandy, Mr. Fulton was employed by Kaiser Compositek from
April 1995 until November 1997, and served as its President since January 1996.
Prior to this time, Mr. Fulton was employed by Kade Composites from July 1986
until April 1995, and served as its President from February 1988 until April
1995.
DIRECTORS
Messrs. Kramer and Remley are non-employee directors and Mr. Call is an employee
director of the Company. They do not receive compensation for acting in such
capacity other than reimbursement for out-of-pocket expenses incurred to attend
meetings of the Board of Directors and visit the Company's offices or other
locations on behalf of the Company for any special purpose.
Messrs. Kramer and Remley are the sole executive officers and directors of
Mentmore Holdings Corporation, which provides management services to the
Company. See Part III, Item 13. "Certain Relationships and Related
Transactions--Management Agreement with Mentmore."
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid by the Company to (i) the
Company's current Chief Executive Officer and (ii) the four next most highly
compensated individuals serving as executive officers of the Company whose
annual compensation exceeded $100,000 in 1997.
19
<PAGE>
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
OTHER ALL
ANNUAL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Bradley C. Call, 1997 222,784 80,000 __ 739,276(b)
President of KII Holding Corp. (a)
Roland H. Marti, 1997 124,538 14,797 __ 93,280(d)
President of Scanning Electron
Analysis Laboratories, Inc. (c)
Lawrence R. Smith, 1997 114,950 19,862 __ 239,306(f)
President of Paragon Precision
Products (e)
John Barriatua, 1997 109,692 16,052 __ 123,727(h)
President of General Inspection
Laboratories (g)
Julius E. Hodge, 1997 93,993 19,980 __ 238,922(j)
Chief Financial Officer of KII
Holding Corp. (i)
</TABLE>
(a) Mr. Call was employed from January 1, 1997 to July 1, 1997 as Chairman,
President and Chief Executive Officer of Kleinert (predecessor to Stellex),
and $108,675 of the salary presented relates to such employment. Mr. Call
was employed from July 1, 1997 to December 31, 1997 as President and Chief
Executive Officer of Stellex Aerospace, and $114,109 of the salary
presented relates to such employment.
(b) Mr. Call received $730,132 from Kleinert Industries, Inc. in
connection with the consummation of the Kleinert Acquisition.
See Part III, Item 13. "Certain Relationships and Related
Transactions--The Kleinert Acquisition." All other
compensation also includes 401(k) employer Contributions of
$4,800 and term life insurance premiums of $4,344. Fifty
percent of each of such amounts relate on a pro rata basis to
each of the periods of Mr. Call's employment described in
footnote (a) above.
(c) Mr. Marti was employed from January 1, 1997 to July 1, 1997
as President of Scanning Electron Analysis Laboratories, Inc.
(a wholly owned subsidiary of Kleinert Industries, Inc.) and
$60,750 of the salary presented relates to such employment.
Mr. Marti was employed from July 1, 1997 to December 31, 1997
as President of Scanning Electron Analysis Laboratories, Inc.
(a wholly owned subsidiary of Stellex Aerospace) and $63,788
of the salary presented relates to such employment.
(d) Mr. Marti received $87,616 from Kleinert Industries, Inc. in
connection with the consummation of the Kleinert Acquisition.
See Part III, Item 13. "Certain Relationships and Related
Transactions -- The Kleinert Acquisition." All other
compensation also includes 401(k) employer contribution of
$4,800 and term life insurance premiums of $864. Fifty
percent of each of such amounts relate on a pro rata basis to
each of the periods of Mr. Marti's employment described in
footnote (c) above.
(e) Mr. Smith was employed from January 1, 1997 to July 1, 1997
as President of Paragon Precision Products (a wholly owned
subsidiary of Kleinert Industries, Inc.) and $55,000 of the
salary presented relates to such employment. Mr. Smith was
employed from July 1, 1997 to December 31, 1997 as President
of Paragon Precision Products (a wholly owned subsidiary of
Stellex Aerospace) and $59,950 of the salary presented
relates to such employment.
(f) Mr. Smith received $233,642 from Kleinert Industries, Inc. in
connection with the consummation of the Kleinert Acquisition.
See Part III, Item 13. "Certain Relationships and Related
Transactions -- The Kleinert Acquisition." All other
compensation also includes 401(k) employer contribution of
$4,800 and term life insurance premiums of $864. Fifty
percent of each of such amounts relate on a
20
<PAGE>
<PAGE>
pro rata basis to each of the periods of Mr. Smith's employment
described in footnote (e) above.
(g) Mr. Barriatua was employed from January 1, 1997 to July 1,
1997 as President of General Inspection Laboratories, Inc. (a
wholly owned subsidiary of Kleinert Industries, Inc.) and
$53,508 of the salary presented relates to such employment.
Mr. Barriatua was employed from July 1, 1997 to December 31,
1997 as President of Paragon Precision Products (a wholly
owned subsidiary of Stellex Aerospace) and $56,184 of the
salary presented relates to such employment.
(h) Mr. Barriatua received $116,821 from Kleinert Industries,
Inc. in connection with the consummation of the Kleinert
Acquisition. See Part III, Item 13. "Certain Relationships
and Related Transactions -- The Kleinert Acquisition." All
other compensation also includes 401(k) employer contribution
of $4,800 and term life insurance premiums of $2,106. Fifty
percent of each of such amounts relate on a pro rata basis to
each of the periods of Mr. Barriatua's employment described
in footnote (g) above.
(i) Mr. Hodge was employed from January 1, 1997 to July 1, 1997
as Chief Financial Officer of Kleinert Industries, Inc. and
$45,850 of the salary presented relates to such employment.
Mr. Hodge was employed from July 1, 1997 to December 31, 1997
as Chief Financial Officer of KII Holding Corporation and
$48,143 of the salary presented relates to such employment.
1997 bonus paid in the amount of $19,980 (accrued in 1996)
relates to operating performance achieved in 1996.
(j) Mr. Hodge received $233,642 from Kleinert Industries, Inc. in
connection with the consummation of the Kleinert Acquisition.
See Part III, Item 13. "Certain Relationships and Related
Transactions -- The Kleinert Acquisition." All other
compensation also includes 401(k) employer contribution of
$4,800 and term life insurance premiums of $480. Fifty
percent of each of such amounts relate on a pro rata basis to
each of the periods of Mr. Hodge's employment described in
footnote (i) above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information concerning the beneficial ownership
of the Company's Common Stock as of January 1, 1999 by (i) each person known to
the Company to own beneficially more than 5% of the Company's outstanding Common
Stock, (ii) by each director, executive officer and key employee of the Company
and (iii) all such directors, executive officers and key employees as a group.
All shares are owned with sole voting and investment power, unless otherwise
indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNER SHARES %
---------------- ------ -------
<S> <C> <C>
Stellex Industries, Inc. (a) 8,010.0 80.1
Richard L. Kramer (a) 7,144.9 71.4
William L. Remley (a) 7,937.9 79.4
Bradley C. Call 995.0 9.9
Roland H. Marti 119.4 1.2
Lawrence R. Smith 318.4 3.2
John Barriatua 159.2 1.6
Julius E. Hodge 318.4 3.2
Arun Kumar 79.6 0.8
Thomas B. Fulton - -
Total Executive Officers and Directors as a Group 10,000 100.0
</TABLE>
21
<PAGE>
<PAGE>
(a) The beneficial ownership of Stellex Industries, Inc. is comprised of an
89.2% ownership by Cottingham Trust (1996) ("Cottingham") and 9.9%
ownership by Askrigg Trust (1996) ("Askrigg").
Cottingham's beneficial ownership of Stellex Industries, Inc. is comprised
of 892 shares. The pool of contingent beneficiaries is comprised of Richard
L. Kramer and certain members of his family. The trustees of Cottingham are
Alhambra Holdings (Trustees) Inc. ("Alhambra") and William L. Remley. All
powers with respect to investment or voting of securities owned by
Cottingham are exercisable by Mr. Remley. All powers with respect to
selection and removal of the beneficiaries of Cottingham are exercisable by
Alhambra. The administrative office address of Cottingham and Alhambra is 2
Alhambra Plaza, Suite 1202, Coral Gables, FL 33134.
Askrigg's beneficial ownership of Stellex Industries, Inc. is comprised of
99 shares. The pool of contingent beneficiaries is comprised of William L.
Remley and certain members of his family. The trustees of Askrigg are
Richard L. Kramer and Gary R. Siegel. All powers with respect to investment
or voting of securities owned by Askrigg are exercisable by Mr. Siegel. All
powers with respect to selection and removal of the beneficiaries of
Askrigg are exercisable by Mr. Kramer. The administrative office address of
Askrigg is 201 Crandon Blvd., Apt 643, Key Biscayne, FL 33129, and an
address of Mr. Siegel is c/o Mentmore Holdings Corporation, 1430 Broadway,
13th floor, New York, NY 10018-3308.
Mr. Kramer, the Chairman of the Board of Directors and a director of
Stellex Industries, Inc. and KII Holding Corp and subsidiaries, and Mr.
Remley, Vice Chairman, Chief Executive Officer and a director of Stellex
Industries, Inc. and director of KII Holding Corp. and subsidiaries, are
the sole executive officers of Mentmore, which provides management services
to the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE KLEINERT ACQUISITION
On July 1, 1997, KII Acquisition Corp. ("Acquisition Corp."), acquired all of
the issued and outstanding capital stock of Kleinert (currently known as Stellex
Aerospace) from Kleinert Industries Holding AG (the "Seller"), for a purchase
price of approximately $26.5 million (including the assumption of $2.6 million
of indebtedness and the issuance by Acquisition Corp. to the Seller of a
promissory note (the "Kleinert Seller Note") in the principal amount of
$1,750,000). The Kleinert Seller Note matures on July 1, 1999 and bears interest
at a rate of 8%. The Kleinert Seller Note is guaranteed by KII Holding Corp. and
each of its subsidiaries.
The Stock Purchase Agreement entered into in connection with the Kleinert
Acquisition (the "Kleinert Stock Purchase Agreement") contains representations
and warranties typical of agreements of like nature, including, without
limitation, those relating to corporate organization and authorization, good
title to Kleinert's capital stock, violations of law and defaults under material
contracts, third party consents, Kleinert's financial statements, tax,
environmental and intellectual property matters, the absence of undisclosed
liabilities, title to and condition of assets, litigation, compliance with laws,
insurance, employee benefit plans, inventory and required permits and licenses.
Pursuant to the Kleinert Stock Purchase Agreement, the Seller agreed to
indemnify Acquisition Corp. for all liabilities and other losses arising from,
among other things, any breach of the representations, warranties or covenants
of the Seller or Kleinert contained in the Kleinert Stock Purchase Agreement.
Indemnification claims must be brought by Acquisition Corp. prior to June 30,
1999, except with respect to breaches of certain representations relating to tax
matters, which may be brought any time prior to the applicable statute of
limitations. Acquisition Corp. has agreed to indemnify the Seller for all
liabilities (including without limitation liabilities for taxes), and other
losses arising from, among other things, the operation or conduct of Stellex
Aerospace's business after the Closing Date and the breach of any
representation, warranty or covenant of Acquisition Corp. contained in the
Kleinert Stock Purchase Agreement. Indemnification claims brought by
22
<PAGE>
<PAGE>
the Seller generally must be made prior to June 30, 1999. With certain limited
exceptions (e.g., fraud), neither the Seller nor Acquisition Corp. is required
to indemnify any other person unless the aggregate of all amounts for which
indemnity would otherwise be payable exceeds $100,000 (the "Basket Amount") and,
in such event, the indemnifying party shall be responsible for all Indemnified
Losses, including those comprising the Basket Amount. In addition, the
indemnification obligations of each Acquisition Corp. and the Seller are
generally limited to a maximum of $1,750,000. Pursuant to the Kleinert Seller
Note, and subject to certain conditions and procedures, Acquisition Corp. may
offset amounts due under the Kleinert Seller Note by indemnification claims and
other amounts owing by the Seller to Acquisition Corp. under the Kleinert Stock
Purchase Agreement.
Pursuant to an Agreement entered into in connection with the Kleinert
Acquisition (the "Stellex Aerospace Investor Agreement"), six senior members of
Stellex Aerospace's management team (the "Buyers," and together with a member of
management who received SARs as described below, the "Management Members")
purchased 19.9% of the issued and outstanding shares of KII Holding Corp., the
parent holding company of Stellex Aerospace, for approximately $800,000. In
addition, an entity beneficially owned by trusts established for the benefit of
Messrs. Kramer and Remley and certain members of their families purchased KII
Holding's remaining common stock for approximately $3.1 million and 84 shares of
KII Holding's Series A Preferred Stock, having a stated value of $10,000 per
share (the "Series A Preferred Stock"), for $840,000. Pursuant to the Stellex
Aerospace Investor Agreement, the Buyers also agreed to purchase shares of KII
Holding's Series B Preferred Stock with the net bonus payments received by the
Buyers under their respective participation plan agreements with the Seller.
Pursuant to the Stellex Aerospace Investor Agreement, KII Holding granted SARs
to certain Management Members. KII Holding has the right to redeem (the
"Redemption Right") all, but not less than all, of any common stock held by any
Management Member and to cause a liquidation and termination of any SAR held by
him to KII Holding upon the occurrence of certain events, including the death,
disability or termination of the Management Member, and for any reason after
July 1, 2002. Moreover, the Stellex Aerospace Investor Agreement gives each
Management Member the right to cause KII Holding to purchase all, but not less
than all, of any common stock of KII Holding held by him and/or to cause KII
Holding to liquidate and terminate any SARs held by him (hereinafter referred to
as the "Put Right") upon the occurrence of certain events, including such
Management Member's death, disability, termination Without Cause (as defined in
the Stellex Aerospace Investor Agreement) or scheduled retirement, and for any
reason after July 1, 2002. The applicable purchase price to be received by a
Management Member upon the exercise of a Redemption Right or Put Right is based
upon a formula set forth in the Stellex Aerospace Investor Agreement. To the
extent KII Holding is prohibited under the terms of its existing indebtedness
from making payment to any Management Member for any shares of its common stock
or vested SARs purchased or liquidated pursuant to the Stellex Aerospace
Investor Agreement, then it is required to issue a promissory note to such
Management Member for the amount owing. Such note shall be payable when and to
the extent KII Holding is permitted to make such payment and bear interest at a
rate of 10% per annum. Such note shall also be unsecured and subordinated to all
other indebtedness of KII Holding, including KII Holding's Guarantee of the
Notes.
The Stellex Aerospace Investor Agreement further provides that subsequent to the
closing of the Kleinert Acquisition, each Management Member will enter into a
five year employment agreement with KII Holding or one of its subsidiaries. The
Company engaged an employee benefits firm to advise it in structuring its
overall compensation program and to implementing such program and entered into
the employment agreements with the Management Members.
The foregoing summary of the material terms of the Kleinert Stock Purchase
Agreement, the Stellex Aerospace Investor Agreement and related matters does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Kleinert Stock Purchase Agreement and
the Stellex Aerospace Investor Agreement, including the definitions of certain
terms therein and exhibits and schedules thereto.
23
<PAGE>
<PAGE>
TRINITY NOTE
In connection with the Kleinert Acquisition, KII Holding issued a promissory
note (the "Trinity Note") in the principal amount of $2,500,000 to Trinity
Investment Corp. ("Trinity"). Richard L. Kramer and William L. Remley are
executive officers and directors of Trinity, which is a subsidiary of entities
owned by trusts established for the benefit of certain relatives of Messrs.
Kramer and Remley. The outstanding principal and accrued interest on the note
was repaid with a portion of the proceeds of the Offering.
MANAGEMENT AGREEMENT WITH MENTMORE
Mentmore provides management services to the Company pursuant to the Amended and
Restated Management Advisory Services Agreement effective as of November 1, 1997
(the "Management Agreement"), between Stellex Industries, Inc. and subsidiaries
(including KII Holding Corp.) and Mentmore. Pursuant to the Management
Agreement, Mentmore provides general management, advisory, consulting and other
services with respect to the Company's business, including, without limitation,
strategic planning, financial planning, accounting and financial reporting,
consulting and assistance with respect to traditional treasury functions,
general business development services, and oversight and review of tax
preparation, planning and audits. Under the terms of the Management Agreement,
Mentmore receives customary indemnification, reimbursement of certain costs and
an annual management fee of $750,000 from Stellex Industries, Inc. (which
allocates such fee to KII Holding Corp.), which is payable monthly, plus, after
the first anniversary of the consummation of the Offering, the amount by which
1% of the Company's total consolidated sales in any fiscal year exceeds such
fee. The Management Agreement has a term of 10 years and is automatically
extended for one additional year as of December 31 of each year during the term
of the agreement unless either party shall have previously notified the other in
writing on or before September 30 of its desire not to further extend the term.
In addition, Mentmore may terminate the Management Agreement at any time upon 90
days prior written notice to the other parties thereto, and such parties may
terminate the Management Agreement "for cause" (as defined in the Management
Agreement). The sole executive officers and directors of Mentmore are Richard L.
Kramer and William L. Remley.
In connection with the Kleinert Acquisition, Mentmore received investment
banking fees of $450,000, and reimbursement for certain expenses. In addition,
Michael D. Schenker Co. L.P.A., whose principal is an officer of Mentmore,
received customary fees in connection with services rendered in connection with
the transaction.
TAX SHARING AGREEMENT
The Company's liability for taxes will be determined based upon a tax sharing
agreement (the "Tax Sharing Agreement") entered into among Stellex Industries,
Inc. and its subsidiaries. Under the Tax Sharing Agreement, the subsidiaries are
generally responsible for federal taxes based upon the amount that would be due
if the subsidiaries filed federal tax returns as a separate affiliated group of
corporations rather than as part of Stellex Industries, Inc.'s consolidated
federal tax returns. The combined state tax liabilities are allocated to the
subsidiaries based on similar principles.
24
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) List of documents filed as part of this Report:
1. The financial statements listed on page F-1 are filed as part of this Report
2. Financial Statement Schedules:
All schedules are omitted because they are not applicable, not required or
the information is included elsewhere in the Consolidated Financial
Statements or Notes thereto.
3. List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
*3.1 -- Certificate of Incorporation of KII Holding Corp.
*3.2 -- Bylaws of KII Holding Corp.
*3.3 -- Certificate of Incorporation of KII Acquisition Corp.
*3.4 -- Bylaws of KII Acquisition Corp.
*3.5 -- Articles of Incorporation of Stellex Aerospace.
*3.6 -- Bylaws of Stellex Aerospace.
*3.7 -- Articles of Incorporation of Bandy Machining International.
*3.8 -- Bylaws of Bandy Machining International.
*3.9 -- Articles of Incorporation of Paragon Precision Products.
*3.10 -- Bylaws of Paragon Precision Products.
*3.11 -- Certificate of Incorporation of Scanning Electron Analysis
Laboratories, Inc.
*3.12 -- Bylaws of Scanning Electron Analysis Laboratories, Inc.
*3.13 -- Articles of Incorporation of General Inspection Laboratories, Inc.
*3.14 -- Bylaws of General Inspection Laboratories, Inc.
*4.1 -- Purchase Agreement dated as of October 23, 1997, by and among
Stellex Industries, Inc., TSMD Acquisition Corp., Stellex Microwave
Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex
Aerospace, Bandy Machining International, Paragon Precision
Products, Scanning Electron Analysis Laboratories, Inc. and General
Inspection Laboratories, Inc. and Societe Generale Securities
Corporation, BT Alex. Brown Incorporated and Jefferies & Company,
Inc.
*4.2 -- Indenture dated as of October 31, 1997 by and among Stellex
Industries, Inc., TSMD Acquisition Corp., Stellex Microwave Systems,
Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace,
Bandy Machining International, Paragon Precision Products, Scanning
Electron Analysis Laboratories, Inc. and General Inspection
Laboratories, Inc. and Marine Midland Bank, as trustee.
*4.3 -- Registration Rights Agreement dated as of October 31, 1997 by and
among Stellex Industries, Inc., TSMD Acquisition Corp., Stellex
Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp.,
Stellex Aerospace, Bandy Machining International, Paragon Precision
Products, Scanning Electron Analysis Laboratories, Inc. and General
Inspection Laboratories, Inc. and Societe Generale Securities
Corporation, BT Alex. Brown Incorporated and
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
<S> <C>
*10.1 -- Jefferies & Company, Inc. Credit Agreement dated as of October 31, 1997 by
and among Stellex Industries, Inc., TSMD Acquisition Corp., Stellex Microwave
Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace,
Bandy Machining International, Paragon Precision Products, Scanning
Electron Analysis Laboratories, Inc. and General Inspection
Laboratories, Inc. and Societe Generale, as Agent.
**10.2 -- Stock Purchase Agreement dated as of May 23, 1997, by and among KII
Acquisition Corp. and Kleinert Industrie Holding AG.
*10.3 -- Stellex Aerospace Investor Agreement dated as of July 1, 1997, by
and among KII Holding Corp. and Greystoke Capital Management Limited
LDC, and Bradley C. Call, Julius E. Hodge, Lawrence R. Smith, John
Barriatua, Roland H. Marti, Arun Kumar and Louis A. Brown.
*10.4 -- Promissory Note dated as of July 1, 1997 by KII Acquisition Corp. to
Kleinert Industrie Holding AG.
*10.5 -- Promissory Note dated September 6, 1991 by Paragon Precision
Products to Farm Bureau Life Insurance Company.
*10.6 -- Amended and Restated Management Advisory Services Agreement,
effective as of November 1, 1997, by and between Mentmore Holdings
Corporation, Stellex Industries, Inc., TSMD Acquisition Corp.,
Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition
Corp., Stellex Aerospace, Bandy Machining International, Paragon
Precision Products, Scanning Electron Analysis Laboratories, Inc.
and General Inspection Laboratories, Inc.
*10.7 -- Tax Allocation and Indemnity Agreement dated as of October 31, 1997,
and retroactively applied to the calendar year ended December 31,
1997, by and among Stellex Industries, Inc., TSMD Acquisition Corp.,
Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition
Corp., Stellex Aerospace, Bandy Machining International, Paragon
Precision Products, Scanning Electron Analysis Laboratories, Inc.
and General Inspection Laboratories, Inc.
*21.1 -- Subsidiaries of the Registrant.
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed with Registration Statement No. 333-41939 and incorporated herein
by reference.
** Confidential treatment requested for a portion of this exhibit
previously filed with Registration Statement No. 333-41939 and
incorporated herein by reference.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
See (a)(3) above for a listing of Exhibits filed as a part of this Report.
(d) Additional Financial Statement Schedules:
None.
26
<PAGE>
<PAGE>
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
Neither an annual report covering the Registrant's last fiscal year nor
proxy materials with respect to any annual or other meeting of security holders
have been sent to security holders.
27
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors and Shareholder of
KII Holding Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of KII Holding
Corp. and Subsidiaries (formerly Kleinert Industries, Inc. and Subsidiaries), a
majority-owned subsidiary of Stellex Industries, Inc., as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholder's
equity, and cash flows for the six months ended December 31, 1997 (successor)
and June 30, 1997 (predecessor) and the years ended December 31, 1996 and 1995
(predecessor). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KII Holding Corp.
and Subsidiaries (formerly Kleinert Industries, Inc. and Subsidiaries) as of
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for the six months ended December 31, 1997 (successor) and June
30, 1997 (predecessor) and the years ended December 31, 1996 and 1995
(predecessor) in conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers
Los Angeles, California
March 6, 1998
28
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,152,200 $ 406,000
Trade accounts receivable, less allowance for doubtful accounts 5,446,700
($91,600 and $112,300 in 1997 and 1996, respectively) 3,876,000
Inventories 12,817,100 11,547,700
Due from Parent - 55,600
Prepaid and other assets 262,300 225,700
Income taxes receivable 654,400 -
Deferred income taxes 531,800 486,000
----------- -----------
Total current assets 20,864,500 16,597,000
Property, plant and equipment, net 14,458,900 11,165,400
Goodwill, net of accumulated amortization of $262,700 in 1996 - 986,100
Deferred financing costs, net of accumulated amortization of
$16,800 in 1997 983,200 -
Other assets 1,059,100 865,900
----------- -----------
Total assets $37,365,700 $29,614,400
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current liabilities:
Bank line of credit - $ 4,300,000
Accounts payable $ 1,638,400 1,525,000
Accrued liabilities 2,148,500 1,261,400
Customer deposits 116,700 177,900
Preferred dividend payable 42,300 -
Income taxes payable - 39,600
Notes payable, current 62,800 1,558,000
Obligations under capital leases, current 76,900 -
----------- -----------
Total current liabilities 4,085,600 8,861,900
Notes payable, less current portion 25,254,200 4,123,900
Obligations under capital leases, less current portion 370,600 -
Unfunded pension benefits 298,300 307,800
Deferred compensation liability 1,405,700 1,291,900
Deferred income taxes 1,693,400 851,300
----------- -----------
Total liabilities 33,107,800 15,436,800
----------- -----------
Equity Put Rights on common stock 1,078,100 -
Commitments and contingencies - -
Shareholder's equity:
Common stock, $1,000 par value; 1,000,000 shares authorized,
10,000 shares issued and outstanding (predecessor) - 10,000,000
Common stock, no par value; 20,000 shares authorized, 3,131,900 -
10,000 shares issued and outstanding (successor)
Series A Preferred Stock, $10,000 stated value; 400 shares 840,000 -
authorized, 84 shares issued and outstanding (successor
Series B Preferred Stock, $10,000 stated value; 75 shares - -
Authorized, none issued and outstanding (successor)
Undesignated Preferred Stock, $10,000 stated value; 25 shares -
Authorized, none issued and outstanding (successor) -
Additional paid-in capital (predecessor) - 1,952,700
(Accumulated deficit) retained earnings (792,100) 2,224,900
----------- -----------
Total shareholder's equity 3,179,800 14,177,600
----------- -----------
Total liabilities and shareholder's equity $37,365,700 $29,614,400
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
29
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE YEAR
MONTHS ENDED FOR THE SIX ENDED ENDED
DECEMBER 31, MONTHS ENDED DECEMBER 31, DECEMBER 31,
1997 JUNE 30, 1997 1996 1995
---- ------------- ---- ----
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Sales $17,576,800 $14,296,000 $24,306,900 $21,049,100
Cost of sales 13,644,100 10,139,600 17,366,800 15,083,500
---------- ---------- ---------- ----------
Gross profit 3,932,700 4,156,400 6,940,100 5,965,600
--------- --------- --------- ---------
Operating expenses:
Selling and marketing 532,500 429,800 836,300 744,300
General and administrative 2,544,100 1,353,300 2,792,900 2,554,200
Amortization of non-compete covenants,
goodwill, deferred financing costs and
organization costs 70,200 15,600 31,200 282,200
--------- --------- --------- ---------
Total operating costs 3,146,800 1,798,700 3,660,400 3,580,700
--------- --------- --------- ---------
Income from operations 785,900 2,357,700 3,279,700 2,384,900
--------- --------- --------- ---------
Other (income) expense:
Interest income (6,200) (4,500) (11,600) (5,500)
Interest expense 1,070,700 375,700 855,800 1,034,400
Other 24,000 102,900 58,100 44,100
--------- --------- --------- ---------
Total other expense, net 1,088,500 474,100 902,300 1,073,000
--------- ---------- --------- ---------
(Loss) income before benefit (provision)
for income taxes and extraordinary loss (302,600) 1,883,600 2,377,400 1,311,900
Provision (benefit) for income taxes (1,100) 753,400 944,900 524,800
--------- --------- ---------- ---------
(Loss) income before extraordinary loss (301,500) 1,130,200 1,432,500 787,100
Extraordinary loss on early extinguishment of
debt (net of income tax benefit of $298,900) (448,300) - - -
--------- --------- ---------- ---------
Net (loss) income ($749,800) $1,130,200 $1,432,500 $787,100
======== ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
30
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
----------
<TABLE>
<CAPTION>
Common Stock Preferred "A" Preferred "B" Undesignated
Stock Stock Preferred Stock Additional
--------------- ----------------- --------------- ---------------- Paid-In Retained
Shares Amount Shares Amount Shares Amount Shares Amount Capital Earnings Total
------ ------ ------- ------- ------ ------- ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor:
- -----------
Balance, December 31, 1994 10,000 $10,000,000 - $ - - $ - - $ - $1,952,700 $ 5,300 $11,958,000
Net income - - - - - - - - - 787,100 787,100
------ ---------- ------ ------- ------- ------- ------- ------ ---------- --------- -----------
Balance, December 31, 1995 10,000 10,000,000 - - - - - - 1,952,700 792,400 12,745,100
Net income - - - - - - - - - 1,432,500 1,432,500
------ ---------- ------ ------- ------- ------- ------- ------ ---------- ---------- -----------
Balance, December 31, 1996 10,000 10,000,000 - - - - - - 1,952,700 2,224,900 14,177,600
Net income for the six
months ended June 30, 1997 - - - - - - - - - 1,130,200 1,130,200
------ ---------- ------ ------- ------- ------- ------- ------ ---------- ---------- -----------
Balance, June 30, 1997 10,000 $10,000,000 - $ - - $ - - $ - $1,952,700 $3,355,100 $15,307,800
====== ========== ====== ======= ======= ======= ======= ====== ========= ========== ==========
Successor:
- ----------
Issuance of common stock 10,000 $3,910,000 - $ - - $ - - $ - $ - $ - $3,910,000
Equity put rights on common
stock (1,990) (778,100) - - - - - - - - (778,100)
Issuance of cumulative non-
voting Preferred "A" Stock - - 84 840,000 - - - - - - 840,000
Dividends on Preferred "A"
Stock ($503.57 per share) - - - - - - - - - (42,300) (42,300)
Net loss for the six months
ended December 31, 1997 - - - - - - - - - (749,800) (749,800)
----- ---------- ------ ------- ------- ------- ------- ------- ------- --------- --------
Balance, December 31, 1997 8,010 $3,131,900 84.00 $840,000 - $ - - $ - $ - ($792,100) $3,179,800
======= ========== ===== ======== ====== ======= ======= ======== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
31
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FOR THE FOR THE
MONTHS ENDED SIX MONTHS YEAR ENDED YEAR ENDED
DECEMBER 31, ENDED DECEMBER 31, DECEMBER 31,
1997 JUNE 30, 1997 1996 1995
---- ------------- ---- ----
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)(PREDECESSOR)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($749,800) $1,130,200 $1,432,500 $787,100
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 813,500 862,600 1,660,200 1,668,100
Amortization of intangibles 70,200 15,600 31,200 282,200
Gain on sale of property (900) (4,000) (2,200) (10,600)
Extraordinary loss on early extinguishment
of debt 448,300 - - -
Deferred income taxes (593,900) 125,100 254,100 165,800
Compensation expense from put rights on
common stock 300,000 - - -
Changes in assets and liabilities:
Trade accounts receivable (592,500) (978,200) (388,600) (299,000)
Inventories 896,400 (1,078,300) (1,074,100) (1,058,200)
Income taxes receivable 221,200 - - -
Prepaid and other assets (124,500) (105,300) (219,600) (8,400)
Due from Parent - (2,100) (55,600) (146,000)
Accounts payable (445,600) 559,000 357,700 127,500
Accrued liabilities 973,600 18,000 530,400 329,400
Customer deposits (58,100) (3,100) 134,400 8,200
Income taxes payable - (60,100) (3,400) 20,000
---------- ---------- ----------- -----------
Net cash provided by operating activities 1,157,900 479,400 2,657,000 1,866,100
---------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,232,700) (868,500) (1,052,500) (656,700)
(excluding capital leasing)
Collections on notes receivable - - - 1,600
Proceeds from sale of property, plant and equipment - 33,500 4,500 12,000
Net cash paid to seller for the acquisition of
Kleinert (14,799,300) - - -
---------- ---------- ----------- -----------
Net cash used in investing activities (16,032,000) (835,000) (1,048,000) (643,100)
---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit - 300,000 735,000 765,000
Borrowings on notes payable 643,000 - - -
Repayment on notes payable (29,500) (28,400) (2,141,600) (2,196,900)
Proceeds from issuance of common and preferred stock 4,750,000 - - -
Repayment of debt in connection with Kleinert
Acquisition (7,600,000) - - -
Proceeds from borrowings in connection with
Kleinert Acquisition 19,300,000 - - -
Acquisition-related costs (1,353,500) - - -
Repayment on capital lease obligations (5,700) - - -
---------- ---------- ----------- -----------
Net cash provided by (used in) financing activities 15,704,300 271,600 (1,406,600) (1,431,900)
---------- ---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 830,200 (84,000) 202,400 (208,900)
CASH AND CASH EQUIVALENTS, beginning of period 322,000 406,000 203,600 412,500
---------- ------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $1,152,200 $ 322,000 $ 406,000 $203,600
========= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
32
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
Predecessor
Kleinert Industries, Inc. (predecessor) ("Kleinert") was a wholly owned
subsidiary of Kleinert Industrie Holding A.G., a Swiss company (the "Parent"),
and was organized under the laws of the State of California on July 1, 1988,
commencing operations on September 1, 1988, and which provided management
services for its wholly owned subsidiaries - Paragon Precision Products ("PPP"),
Bandy Machining International ("BMI"), Scanning Electron Analysis Laboratories,
Inc. ("SEAL"), and General Inspection Laboratories, Inc. ("GIL").
PPP specializes in the manufacture of precision aerospace components. BMI
manufactures precision hinges, door panels and hinged assemblies for both
aerospace and industrial applications. SEAL specializes in materials analysis
and problem-solving for government and industry. GIL provides a complete array
of non-destructive testing services for inspecting critical parts and
manufactured components.
Acquisition And Successor
On July 1, 1997, KII Holding Corp. (successor), a Delaware company ("KII
Holding") incorporated on July 1, 1997, through a wholly owned subsidiary (KII
Acquisition Corp., a Delaware corporation), acquired all of the issued and
outstanding capital stock of Kleinert and Subsidiaries (predecessor company and
currently known as Stellex Aerospace and Subsidiaries) from Kleinert Industrie
Holding A.G. (the "Seller"). The acquisition has been accounted for using the
purchase method of accounting, and, accordingly, the net purchase price of
approximately $26.5 million (including the assumption of $2.65 million of
mortgage indebtedness and the issuance to the Seller of a note for $1.75
million) has been allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. There was no excess
purchase price over the fair values on the net assets acquired in connection
with the acquisition. The acquisition was financed in part from new borrowings
totaling $19.3 million and the issuance of common and preferred stock totaling
$4.75 million. KII Holding is owned by Stellex Industries, Inc., a Delaware
corporation, which owns approximately 80% of the issued and outstanding common
stock of KII Holding, with Stellex Aerospace's management holding the remainder
of its outstanding common stock. KII Holding is a holding company whose
operations are conducted through its operating subsidiaries. References to the
"Company" include both KII Holding and its predecessor, Kleinert.
Pursuant to the Kleinert Stock Purchase Agreement, the Seller agreed to
indemnify KII Acquisition Corp. for all liabilities and other losses arising
from, among other things, any breach of the representations, warranties or
covenants of the Seller or Kleinert contained in the Kleinert Stock Purchase
Agreement. KII Acquisition Corp. has agreed to indemnify the Seller for all
liabilities (including, without limitation, liabilities for taxes), and other
losses arising from, among other things, the operation or conduct of Stellex
Aerospace's business after the Closing Date and the breach of any
representation, warranty or covenant of KII Acquisition Corp. contained in the
Kleinert Stock Purchase Agreement. With certain limited exceptions (e.g.,
fraud), neither the Seller nor KII Acquisition Corp. is required to indemnify
any other person unless the aggregate of all amounts for which indemnity would
otherwise be payable exceeds
33
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$100,000 (the "Basket Amount") and, in such event, the indemnifying party shall
be responsible for all Indemnified Losses, including those comprising the Basket
Amount. In addition, the indemnification obligations of KII Acquisition Corp.
and the Seller are generally limited to a maximum of $1,750,000.
Pursuant to an agreement entered into in connection with the Kleinert
Acquisition (the "Stellex Aerospace Investor Agreement"), six senior members of
Stellex Aerospace's management team (the "Buyers," and together with a member of
management who received Stock Appreciation Rights ("SARs") as described below,
the "Management Members") purchased 19.9% of the issued and outstanding shares
of KII Holding for $778,090. As part of the closing of the sale, the six senior
members were paid $1,460,300 as part of a management participation plan
agreement with the prior owner which allowed them to purchase the 19.9%. In
addition, Stellex Industries purchased KII Holding's remaining common stock for
$3,131,910 and 84 shares of KII Holding's Series A Preferred Stock, having a
stated value of $10,000 per share (the "Series A Preferred Stock"), for
$840,000. Pursuant to the Stellex Aerospace Investor Agreement, the Buyers also
agreed to purchase shares of KII Holding's Series B Preferred Stock with any
other payments received by the Buyers under their respective management
participation plan agreements with the Seller.
Pursuant to the Stellex Aerospace Investor Agreement, KII Holding granted SARs
to certain Management Members. KII Holding has the right to redeem (the
"Redemption Right") all, but not less than all, of any common stock held by any
Management Member and to cause a liquidation and termination of any SAR held by
him to KII Holding upon the occurrence of certain events, including the death,
disability or termination of the Management Member, and for any reason after
July 1, 2002. Moreover, the Stellex Aerospace Investor Agreement gives each
Management Member the right to cause KII Holding to purchase all, but not less
than all, of any common stock of KII Holding held by him and/or to cause KII
Holding to liquidate and terminate any SARs held by him (hereinafter referred to
as the "Put Right") upon the occurrence of certain events, including such
Management Member's death, disability, termination Without Cause (as defined in
the Stellex Aerospace Investor Agreement) or scheduled retirement, and for any
reason after July 1, 2002. The applicable purchase price to be received by a
Management Member upon the exercise of a Redemption Right or Put Right is based
upon a formula set forth in the Stellex Aerospace Investor Agreement. To the
extent KII Holding is prohibited under the terms of its existing indebtedness
from making payment to any Management Member for any shares of its common stock
or vested SARs purchased or liquidated pursuant to the Stellex Aerospace
Investor Agreement, then it is required to issue a promissory note to such
Management Member for the amount owing. Such note shall be payable when and to
the extent KII Holding is permitted to make such payment and bear interest at a
rate of 10% per annum. Such note shall also be unsecured and subordinated to all
other indebtedness of KII Holding, including KII Holding's Guarantee of the
Notes.
The Stellex Aerospace Investor Agreement further provides that, subsequent to
the closing of the Kleinert Acquisition, each Management Member, except for one
who has a scheduled retirement, will enter into a five-year employment agreement
with KII Holding or one of its subsidiaries.
34
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles Of Consolidation
The accompanying consolidated financial statements dated prior to the
acquisition of Kleinert and Subsidiaries on July 1, 1997, include the accounts
of Kleinert and its wholly owned subsidiaries (the "Predecessor"). Financial
statements dated subsequent to the acquisition include the accounts of KII
Holding (the "Successor") and its wholly owned subsidiaries, KII Acquisition
Corp., Stellex Aerospace and Subsidiaries (PPP, BMI, SEAL and GIL). All
significant intercompany transactions have been eliminated in consolidation.
Use Of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash And Cash Equivalents
Cash and cash equivalents include all highly liquid investment instruments
purchased with a maturity of three months or less. The carrying amount
approximates fair value because of the short maturity of these instruments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property, Plant And Equipment
Property, plant and equipment are stated at the Company's allocated acquisition
cost for assets acquired through purchase acquisitions and at cost for all new
additions, and are being depreciated over the estimated useful lives of the
assets, using the straight-line method of depreciation. Estimated useful lives
for fixed assets are as follows:
<TABLE>
<S> <C>
Building and improvements 32 years
Leasehold improvements Based on the lesser of the useful life of the
assets or the remaining life of the lease
Machinery and equipment 8-10 years
Office furniture and fixtures 8-10 years
Office equipment and computers 4-5 years
Autos and trucks 4-5 years
</TABLE>
35
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expenditures for maintenance and repairs are charged to expense as incurred.
Major renewals or betterments which substantially extend the useful life of the
assets are capitalized. Upon sale or disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in income.
Goodwill
Goodwill relates to the excess of cost over the fair value of the net assets of
businesses acquired by the Predecessor and were being amortized over a period of
40 years on a straight-line basis.
Deferred Financing Costs
The costs related to the issuance of debt are capitalized and amortized on a
straight-line basis over the lives of the related debt.
Long-Lived Assets
In fiscal year 1996, the Company adopted 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." The adoption of SFAS No. 121 had
no impact on the Company's financial position or on its results of operations.
In accordance with SFAS No. 121, long-lived assets held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the Company evaluates the
carrying value of its goodwill and property, plant and equipment on an ongoing
basis and recognizes an impairment when the estimated future undiscounted cash
flows from operations are less than the carrying value of the related long-lived
assets.
Fair Value Of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
amounts due to and from affiliates are reflected in the consolidated financial
statements at fair value because of the short-term maturity of these
instruments. The fair value of long-term debt closely approximates its carrying
value. The Company uses quoted market prices, when available, or discounted cash
flows to calculate these fair values.
36
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which prescribes an asset and liability approach.
The asset and liability method requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between tax bases and financial reporting bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The provision for income taxes includes federal and state income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax bases of assets and liabilities. Such temporary
differences primarily result from state franchise taxes, allowance for doubtful
accounts, and differences between the book and tax bases of property and
equipment. If necessary, valuation allowances are established to reduce deferred
tax assets to the amount expected to be realized.
Equity Put Rights On Common Stock
Management of Stellex Aerospace owns 19.9% of the outstanding stock of KII
Holding. The amount reported in the December 31, 1997 balance sheet of KII
Holding as equity put rights on common stock reflects the redemption value of
such shares based on certain redemption and put rights associated with the
stock. Changes in the value of the equity put rights on common stock from the
original amounts paid by the minority shareholders are recorded as an adjustment
to compensation expense in the period.
Revenue Recognition
Sales and cost of the products sold are recorded at the time of shipment.
Impact Of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." The standard establishes guidelines for
the reporting and display of comprehensive income and its components in
financial statements. Disclosure of comprehensive income and its components will
be required beginning with the Company's fiscal year ending 1998. For the six
months ended December 31, 1997 and June 30, 1997, and the year ended December
31, 1996, the Company had no Comprehensive Income components as defined in SFAS
No. 130.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
Company for making internal operating decisions. The new rules will be effective
for the Company's 1998 fiscal year-end. Management believes that the adoption of
this standard will not have any material impact on the Company's reporting of
its segments.
37
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirement for pensions and other postretirement benefits. The implementation
of SFAS No. 132 is not expected to have an impact on the Company's financial
statements. The standard will be effective for the Company for the year ended
December 31, 1998.
3. INVENTORIES:
Inventories as of December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Raw materials $1,212,500 $1,151,500
Work-in-process 6,250,300 4,634,900
Finished goods 5,354,300 5,761,300
----------- -----------
Total $12,817,100 $11,547,700
=========== ===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, including computers and software held under
capital leases, as of December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Land $1,000,000 $1,230,200
Building and improvements 2,100,000 3,451,900
Leasehold improvements 94,900 209,700
Machinery and equipment 10,894,500 20,556,200
Office furniture and fixtures 56,400 574,300
Office equipment and computers 322,900 1,344,000
Autos and trucks 46,500 130,500
Projects in progress 308,800 317,800
Office computers and software held
under capital leases 447,500 -
----------- -----------
15,271,500 27,814,600
Less, Accumulated depreciation,
including $15,700 of accumulated
depreciation on leased assets as
of December 31, 1997 (812,600) (16,649,200)
----------- ------------
Total $14,458,900 $11,165,400
=========== ============
</TABLE>
38
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED LIABILITIES:
Accrued liabilities as of December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Bonuses payable $744,600 $510,400
Accrued workers' holiday and
vacation liability 489,300 430,800
Interest payable 430,500 2,900
Other 484,100 317,300
---------- ----------
$2,148,500 $1,261,400
========== ==========
</TABLE>
6. BANK LINE OF CREDIT:
The Company had a $6,550,000 revolving line of credit with a California
commercial bank. The bank had a first interest on substantially all assets of
the Company, except land and buildings. The line of credit was scheduled for
renewal on August 1, 1997. The line bore interest at either .25% over the bank's
prime rate or 1.5% over the London Interbank Offered Rate ("LIBOR") or the
Offshore Interbank Offered Rate ("IBOR"). At December 31, 1996, the effective
interest rate was 7.165%. The credit agreement contained restrictive covenants
on additional borrowings, capital expenditures, acquisitions and dividend
payments and required that the Company meet certain specified financial ratios.
As of December 31, 1996, the Company was in compliance with all of the covenants
and financial ratios under its credit agreement. Amount outstanding under the
facility at December 31, 1996 was $4,300,000. The carrying amount approximates
fair value because of the short maturity of this instrument. The outstanding
amount under the facility of $4,600,000 was paid on July 1, 1997 in connection
with the Kleinert Acquisition. This credit facility was not renewed since all
credit facilities are now maintained by Stellex Industries.
Stellex Industries has a credit facility which provides for a $25 million
revolving line of credit and a $25 million term line of credit. Borrowings are
collateralized by all of the assets of Stellex Industries and are jointly and
severally guaranteed by each of Stellex Industries' subsidiaries, including KII
Holding. The credit facility requires Stellex Industries to maintain a minimum
fixed charges coverage ratio and interest coverage ratio, as defined, minimum
net worth of $5,500,000 and a maximum leverage ratio. The credit facility also
restricts Stellex Industries' ability to incur additional indebtedness, pay
dividends or other significant activities without approval of the lender.
Stellex Industries was in compliance with the covenants at December 31, 1997. At
December 31, 1997, Stellex Industries had $7,500,000 outstanding under the
revolving line of credit in the form of base rate loans.
39
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT:
The balance of notes payable as of December 31, 1997 and 1996 consists
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Note payable to Stellex Industries with interest at 9.5%,
payable quarterly. Interest expense incurred was $342,700
for the period October 31, 1997 through December 31, 1997.
The principal balance on this note is due on demand.
Although the note payable to Stellex Industries is due on
demand, Stellex Industries has advised the Company that it
has no present intentions of calling the note during 1998. $20,943,000 -
Note payable, first deed of trust on PPP land and building
in Valencia, California, as collateral, with a net book
value of $2,967,700, with interest at 7.875%; principal and
interest payments of $22,264 are due monthly with the unpaid
balance of $2,362,700 due December 1, 2001. 2,624,000 $2,681,900
Uncollateralized note payable issued in connection with
acquisition of BMI payable to Credit Suisse, which provides
for interest at the borrower's preference of either the
bank's base prime rate, payable monthly or 1.5% over LIBOR,
payable the earlier of the maturity of the borrowings for
LIBOR or quarterly; the Company exercised the later option.
The principal balance of $3,000,000 was paid on July 1, 1997,
pursuant to the terms of the acquisition. - 3,000,000
Note payable to the Parent of the Predecessor (Kleinert
Industrie Holding, A.G.) in connection with the Kleinert
Acquisition that bears interest at 8%, payable annually, the
principal of which is due on July 1, 1999. Interest expense
incurred was $70,600 for the six months ended December 31, 1997.
The note is guaranteed by Stellex Aerospace and each of its
subsidiaries. 1,750,000 -
Capital lease obligations due in aggregate monthly installments
of $9,800 until August 4, 2000 and $8,300 thereafter, through
November 10, 2001, including interest ranging from 10% to 12%
per annum. 447,500 -
---------- ---------
Total 25,764,500 5,681,900
Less, Current portion 139,700 1,558,000
---------- ---------
Long-term portion $25,624,800 $4,123,900
========== =========
</TABLE>
40
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 31, 1997, Stellex Industries paid on behalf of the Company certain
debt consisting of: $16,000,000 term note payable issued in connection with the
acquisition of Kleinert and which was payable to Societe Generale and was to
mature on June 30, 2004; a $2,500,000 promissory note also issued in connection
with the acquisition and was payable to Trinity Investment Corp., a related
party, and was to mature on June 30, 2005; and $1,230,000 of revolving credit
borrowings under a credit facility. As a result, the Company recorded a loss
comprised of unamortized debt issuance cost of $747,200 which has been
reflected, net of income tax benefit, in the Company's consolidated statements
of income as an extraordinary item.
In return for paying off debt, the Company issued a note payable to Stellex
Industries totaling $20,943,000 which included a $1,000,000 non-cash allocation
of new deferred financing costs incurred by Stellex Industries and capitalized
by the Company. Such costs, which were allocated to the Company, were incurred
by Stellex Industries in connection with the registration and exchange of
$100,000,000 aggregate principal amount of 9-1/2% Senior Subordinated Notes (the
"Notes") due November 1, 2007. The Notes are guaranteed by the Company and are
collateralized by the assets of the Company and other subsidiaries of Stellex
Industries. The Notes contain certain restrictive covenants and, in the event
that Stellex Industries was not in compliance with the terms of the Notes, the
Notes would become due and payable immediately by Stellex Industries and its
subsidiaries, including the Company. As a result, the note payable to Stellex
Industries would also become due and payable immediately. Although the note
payable to Stellex Industries is due on demand, Stellex Industries has advised
the Company that it has no present intentions of calling the note during 1998.
The fair value of the Company's long-term notes payable is based on either
quoted market prices or current rates for similar issues for debt of the same
remaining maturities. At December 31, 1997 and 1996, the fair value of the
Company's long-term notes payable approximated carrying value based on their
effective interest rates compared to current market rates.
Maturities of long-term debt and capital leases as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT CAPITAL LEASES
--------------- --------------
<S> <C> <C>
1998 $62,800 $121,100
1999 1,817,900 121,100
2000 73,400 119,900
2001 2,419,900 110,900
2002 - 100,200
Thereafter 20,943,000 -
---------- -------
Total 25,317,000 573,200
Less, Amount representing interest - (125,700)
---------- --------
$25,317,000 $447,500
========== ========
</TABLE>
41
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE FOR THE
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FOR THE SIX DECEMBER 31, DECEMBER 31,
----------- MONTHS ENDED ----------- -------------
1997 June 30, 1997 1996 1995
---- ---- ----
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Current:
Federal $448,500 $492,300 $514,800 $281,400
State 144,300 135,900 176,000 77,600
------- ------- ------- -------
592,800 628,200 690,800 359,000
------- ------- ------- -------
Deferred:
Federal (477,900) 85,100 202,700 121,300
State (116,000) 40,100 51,400 44,500
------- ------- ------- -------
(593,900) 125,200 254,100 165,800
------- ------- ------- -------
($1,100) $753,400 $944,900 $524,800
===== ======= ======= =======
Total
</TABLE>
The difference between the actual tax provision and the amount obtained by
applying the statutory federal income tax rate of 34% to the income before
income taxes is primarily attributable to the effect of state income taxes
(state tax rate of 9.3%), non-deductible expenses relating to goodwill and
officers' life insurance, and change in value of the put rights on common stock.
At December 31, 1997, the Company's alternative minimum tax credits for federal
and state purposes are estimated to be $87,600 and $90,300, respectively, which
are available to reduce income taxes on an indefinite carryforward basis.
42
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax assets and liabilities as of December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Current deferred income taxes:
Deferred tax assets:
Vacation accrual $211,900 $186,500
Bonus accrual 321,900 221,000
Other 41,000 111,800
------- -------
Total current deferred tax assets 574,800 519,300
Deferred tax liabilities:
Federal tax benefit of net deferred state taxes (43,000) (33,300)
------- -------
Net current deferred tax assets $531,800 $486,000
======= =======
Non-current deferred income taxes:
Deferred tax assets:
Unfunded pension benefits $129,200 $133,600
Deferred compensation liability 608,700 567,600
Federal tax benefit of net deferred state taxes 138,600 54,700
AMT credit carryforward 177,900 398,900
------- -------
Total non-current deferred tax assets 1,054,400 1,154,800
Deferred tax liabilities:
Property, plant and equipment (2,747,800) (2,006,100)
--------- ---------
Net non-current deferred tax liabilities ($1,693,400) ($851,300)
========== =======
</TABLE>
Deferred tax assets are expected to be realized against future taxable income
and have not been reduced by valuation allowance.
9. EMPLOYEE BENEFIT PLANS:
Defined Contribution Plan
The Company sponsors a defined contribution pension plan which covers
substantially all employees. Company contributions are determined at 1.5% of the
employees' gross compensation, plus an additional matching of 50% of the
employees' voluntary contribution. The maximum Company contribution is limited
to 3% of the employees' gross compensation. Total Company contributions were
$133,800, $133,400, $223,300 and $200,500 for the six months ended December 31,
1997, the six months ended June 30, 1997 and the years ended December 31, 1996
and 1995, respectively.
The Company also sponsors a defined benefit plan which covers four employees of
a subsidiary of the Company. The balance of unfunded pension benefits represents
the net present value of estimated future payments based on actuarially
determined life expectancies and an 7.75% discount rate. No assets have
currently been provided for the plan.
43
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation Agreements
The Company has individual deferred compensation agreements with eight
management employees. These agreements provide for monthly payments to be made
to the individuals commencing upon their retirement and continuing for an
agreed-upon term as set forth in the agreements, generally fifteen years. The
amount of the payments is specified by each contract and is generally equal to
forty percent of the employee's average compensation for the last five years of
his employment as reduced by the amount of any company - provided benefits to
which the employee is entitled from any other Company pension benefit plan. The
agreements also contain other provisions entitling the employees to
pre-retirement death benefits, disability benefits and survivor benefits.
The Company has in place individual life insurance policies on each of the
covered employees and intends to use the insurance benefits (accumulated cash
surrender value of the policies and the post-retirement death benefits) to fund
the benefit payments required under the agreements. The insurance policies are
designed such that the insurance benefits under the policies are expected, over
time, to be sufficient to pay all of the required benefits and reimburse the
Company for its costs of providing the insurance.
At December 31, 1997 and 1996, the deferred compensation liability was
$1,405,700 and $1,291,900, respectively. The estimated liability was calculated
based on actuarially determined estimates of compensation, mortality, retirement
dates and other relevant factors pertaining to the participants and a discount
rate of 7.75% per annum. The related expense for the six months ended December
31, 1997 and June 30, 1997, and for the years ended December 31, 1996 and 1995
was $56,900, $56,900, $209,500 and $71,800, respectively. The expense for 1996
included the non-recurring step-up of the liability for the implementation of
two additional agreements effective January 1, 1996.
10. LEASE COMMITMENTS:
The Company leases office facilities and equipment under operating lease
agreements which expire at various dates through 2004. The facility leases have
renewal options. Certain leases provide for annual increases, at various dates,
based upon percentage changes in the Consumer Price Index.
44
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum annual rentals on facility and equipment leases are as follows:
<TABLE>
<CAPTION>
Minimum Annual
Rentals
-------
<S> <C>
1998 $728,700
1999 591,200
2000 401,800
2001 12,600
2002 12,600
Thereafter 13,600
----------
Total $1,760,500
==========
</TABLE>
Rent expense for the six months ended December 31, 1997 and June 30,
1997, and for the years ended December 31, 1996 and 1995 was $352,600,
$349,700, $723,300 and $740,200, respectively, which includes $152,000,
$150,000, $290,000 and $309,500, respectively, for facility rent paid to
the former owner of BMI.
11. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customer base principally includes the
commercial aviation, aerospace and defense industries. The Company is
directly affected by national and international economic conditions in
the aerospace and defense industries. Management believes that such
factors are mitigated by the longevity of the Company's relationships
with its customers. For the six months ended December 31, 1997, the
Company derived approximately 53% of its sales from ten (10) customers
consisting of nineteen (19) separate operating divisions. In addition,
as of December 31, 1997, two customers accounted for approximately 28%
of the Company's trade accounts receivable balances.
It is the policy of the Company to deposit its cash in federally insured
financial institutions. From time to time, deposits exceed Federal
Deposit Insurance Corporation limits.
12. RELATED-PARTY TRANSACTIONS:
Mentmore Holdings Corporation, an affiliate, provides management
services to KII Holding and Subsidiaries pursuant to the Management
Advisory Services agreement dated July 1, 1997. Mentmore provides the
Company with general management, advisory, consulting, and other
services with respect to the Company's business, including strategic
planning, financial planning, accounting and financial reporting,
consulting and general business development. Total fees incurred by the
successor for services provided by Mentmore were $600,100 for the six
months ended December 31, 1997, including $450,100 for a non-recurring
charge for investment banking and financial advisory expenses.
45
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EQUITY PUT RIGHTS ON COMMON STOCK:
Pursuant to an agreement entered into in connection with the Kleinert
Acquisition, certain members of Stellex Aerospace's management (the
"Buyer(s)") purchased 19.9% of the common and preferred shares of KII
Holding for $778,090.
KII Holding has the right to redeem (the "Redemption Right") all, but
not less than all, of any common stock held by the Buyers upon the
occurrence of certain events, including the death, disability or
termination of the Buyer, and for any reason after July 1, 2002. In
addition, each Buyer has the right to cause KII Holding to purchase all,
but not less than all, of any common stock held by him under similar
conditions (the "Put Right"). The applicable purchase price to be
received by a Buyer upon the exercise of a Redemption Right or Put Right
is based upon a formula set forth in the Stellex Investor Agreement. In
addition, KII Holding granted the Buyers the right to receive the net
appreciation associated with an additional 10% of equity ownership in
KII Holding. The value of these SARs is computed under the same formula
used for the Redemption and Put Rights on the minority interests, and
may be paid under similar conditions. The equity put rights on common
stock are reported in the financial statements at the amount paid by
management as adjusted for changes in value based on the underlying
formulas for the equity put rights on common stock and SARs, with a
corresponding charge to compensation expense. This resulted in an
expense of $300,000 for the six months ended December 31, 1997.
14. SHAREHOLDER'S EQUITY:
The Company issued 84 shares of KII Holding's Series A Preferred Stock,
having a stated value of $10,000, for total gross proceeds of $840,000.
Each stockholder of preferred stock is entitled to one vote for each
share of preferred stock outstanding. When declared by the Board of
Directors, the preferred stockholders are entitled to receive cumulative
dividends at a rate of 10% per annum. At December 31, 1997, dividends of
$42,300 had been declared but not paid. The preferred stock is
redeemable, in cash, in whole or in part, at any time (or from time to
time) at the option of the Company, by resolution of the Board of
Directors at $10,000 per share plus any accrued and unpaid dividends.
46
<PAGE>
<PAGE>
KII HOLDING CORP. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUPPLEMENTAL CASH FLOWS INFORMATION:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE FOR THE
MONTHS ENDED FOR THE SIX YEAR ENDED YEAR ENDED
DECEMBER 31, MONTHS ENDED DECEMBER 31, DECEMBER 31,
1997 JUNE 30, 1997 1996 1995
---- ------------- ---- ----
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest $ 658,600 $ 377,800 $ 863,900 $ 1,032,800
Taxes 369,000 633,000 694,200 339,000
Non-cash financing and investing activities:
Note issued to Seller in
connection with the
Kleinert Acquisition $ 1,750,000 -- -- --
Capital lease obligations
Incurred 447,500 -- -- --
Dividends declared not
paid on Preferred "A" Stock 42,300 -- -- --
Issuance of note to Parent
in return for repayment of
certain external debt,
including a non-cash
allocation of deferred
financing cost totaling
$1,000,000 20,943,000 -- -- --
Details of Kleinert Acquisition:
Fair value of assets $ 35,541,200 -- -- --
Liabilities (1) (19,388,400) -- -- --
------------
Cash paid, including
acquisition-related costs $ 16,152,800 -- -- --
=============
</TABLE>
(1) Includes note to Seller of $1,750,000 and assumption of $2,653,500 mortgage
note.
47
<PAGE>
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, AS OF FEBRUARY 3, 1999.
KII HOLDING CORP.
By: /s/ William L. Remley
_______________________
William L. Remley
Vice Chairman and Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES
AND AS OF THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard L. Kramer Chairman of the Board of Directors, February 3, 1999
____________________________ Secretary and Director of KII Holding
Richard L. Kramer Corp.
/s/ William L. Remley Vice Chairman, Treasurer and Director February 3, 1999
____________________________ of KII Holding Corp.
William L. Remley
/s/ Bradley C. Call President of KII Holding Corp. February 3, 1999
____________________________
Bradley C. Call
/s/ Julius E. Hodge Chief Financial Officer of KII Holding February 3, 1999
____________________________ Corp.
Julius E. Hodge
</TABLE>
48
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1998
<CASH> 1,152
<SECURITIES> 0
<RECEIVABLES> 5,539
<ALLOWANCES> 92
<INVENTORY> 12,817
<CURRENT-ASSETS> 20,865
<PP&E> 15,272
<DEPRECIATION> 813
<TOTAL-ASSETS> 37,366
<CURRENT-LIABILITIES> 4,086
<BONDS> 0
0
840
<COMMON> 3,192
<OTHER-SE> (792)
<TOTAL-LIABILITY-AND-EQUITY> 37,366
<SALES> 31,873
<TOTAL-REVENUES> 31,873
<CGS> 23,784
<TOTAL-COSTS> 28,729
<OTHER-EXPENSES> 127
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,446
<INCOME-PRETAX> 1,581
<INCOME-TAX> 752
<INCOME-CONTINUING> 829
<DISCONTINUED> 0
<EXTRAORDINARY> (448)
<CHANGES> 0
<NET-INCOME> (380)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
