U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________________ to
______________________________
Commission file number 1-10310
SETECH, INC.
(Name of small business issuer in its charter)
DELAWARE 11-2809189
(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
905 INDUSTRIAL DRIVE, MURFREESBORO, TENNESSEE 37129
(Address of principal executive offices) (Zip Code)
Issuer's telephone number:(615) 890-1700
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of Class
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirement for the past
90 days. Yes X No ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will 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-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for the most recent fiscal year $35,167,717
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days. (See definition of affiliate in Rule 12b-2 of the
Exchange Act). $1,015,278
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 5,669,003
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB into which the
document is incorporated: (1) any annual report to security holders; (2)
any proxy or information statement; and (3) any prospectus filed pursuant
to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The list documents should be clearly described for identification purposes.
None
Transitional Small Business Disclosure Format (check one):
Yes ____ No X
CAUTIONARY STATEMENTS
This annual report on Form 10-KSB contains statements relating to the
future of SETECH, Inc (the "Company") (including certain projections and
business trends) that are "forward looking statements" as defined by
Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, as amended. These forward looking
statements include statements regarding the intent, belief or current
expectations of the Company and its management and involve risks and
uncertainties that may cause the Company's actual results to differ
materially from the results discussed in the forward looking statements.
When used in this Form 10-KSB with respect to the Company, the words
"estimate," project," "intend," "anticipate," "expect," "foresee,"
"believe" and similar expressions are intended to identify forward looking
statements. Readers are cautioned not to place undue reliance on these
forward looking statements, which speak only as of the date hereof. The
risks and uncertainties relating to the forward looking statements include,
but are not limited to, changes in political, economic and/or labor
conditions; changes in the regulatory environment; the Company's ability to
integrate its acquisitions; competitive production and pricing pressures;
as well as other risks and uncertainties.
PART I
ITEM 1. BUSINESS.
GENERAL
SETECH, INC., formerly named Aviation Education Systems, Inc., is a
Delaware corporation (the "Company") formed in 1987. The Company is engaged
in the businesses of providing "integrated supply"/inventory management
services, general line industrial distribution services, as well as job
shop machining, engineering products and services, to a variety of
industries including automotive, aviation, and medical through its three
subsidiary corporations:
Titan Services, Inc. ("Titan").
Southeastern Technology, Inc. ("Southeastern")
Lewis Supply Company, Inc. ("Lewis")
In August 1996, the Company changed its name from "Aviation Education
Systems, Inc." to "SETECH, INC." to better reflect its diversified business
operations.
The Company acquired Titan and Southeastern in September 1993 upon the
acquisition of their parent corporation, SEtech, Incorporated. The Company
caused SEtech, Incorporated to be merged into the Company, resulting in
Titan and Southeastern becoming direct and separate subsidiaries of the
Company. The Company acquired Lewis Supply Company, Inc. in June of 1997.
Titan and Southeastern are Tennessee corporations; Lewis is incorporated
under Delaware law.
On January 30, 1997, the Company sold all of the stock of two of its
wholly owned subsidiaries, Barton ATC, Inc. ("BARTON") and Barton ATC
International, Inc. ("BARTON Intn'l") (sometimes referred to collectively
in the Company's public filings as the "Government Services Group") to
Serco Group, Inc., a wholly-owned subsidiary of Serco Group plc, a British
publicly traded company. (For a more detailed description of the Company's
sale of its Government Services Group, please see the Company's Form 10-QSB
for the quarterly period ended December 31, 1996, filed with the Commission
February 14, 1997).
TITAN
TITAN'S OPERATIONS
Titan operates in a business segment offering "integrated supply"
services to the manufacturing industry. Presently, Titan delivers its
services primarily to the automotive industry through facilities located in
Tennessee and Michigan. Titan provides procurement, engineering and
maintenance/repair services for machined spare parts, original equipment
manufacturer ("OEM") spare parts and inventory management services. These
types of services are increasingly being utilized by major manufacturers to
supplement and enhance in-house capabilities and control costs.
COMPETITION
Titan operates in the segment of industry known as "integrated
supply." Titan has encountered competing firms, and integrated suppliers
operate in a highly competitive market. Additionally, Titan may in the
future encounter presently unforeseen competition.
MAJOR CUSTOMERS
Titan operates under three contracts as a source supplier of
purchasing and inventory control functions for General Motors Corporation
at three automotive plants, located in Tennessee and Michigan. Titan has
received several major awards in recognition of its high level of
performance from General Motors. Contracts with this single customer
account for virtually all of Titan's revenues.
PRINCIPAL SUPPLIERS
Titan acquires machining services and parts from a wide variety of
machine shops. OEM spare parts are purchased from the original
manufacturer. Titan purchases approximately 3% of its parts from its co-
subsidiary Southeastern.
SOUTHEASTERN
SOUTHEASTERN'S OPERATIONS
Southeastern is a job shop machining and engineering organization,
serving a variety of industries including aerospace, automotive and
medical. Southeastern continues its expansion in the manufacturing and
sale of medical and surgical devices for major medical manufacturers, to
their specifications. Management believes, based upon recent growth in this
area, that the medical field will continue to become a more significant
source of machine work in the future.
COMPETITION
Southeastern operates in a highly competitive environment and
confronts competition from both generalized and specialized job shop
machining and engineering businesses. Southeastern is equipped with
sophisticated computer aided design and manufacturing equipment.
Southeastern engineers utilize state-of-the-art equipment and systems which
are designed to enable them to meet stringent customer requirements and
generate innovative solutions to consistently emerging manufacturing
impediments resulting from cost containment programs.
<PAGE>
MAJOR CUSTOMERS
Five customers account for 80% of Southeastern's revenues, little of
which is based on long-term contracts. Southeastern's business is
concentrated in approximately equal numbers among the aerospace, automotive
and medical industries.
SUPPLIERS
Historically, the availability of raw materials has not been of
concern to Southeastern whose management foresees no significant material
related impediment to production or production scheduling. Principal
suppliers to Southeastern include: Fry Steel; Tennessee Die Supply;
Jorgensen Steel; Wyman Gordon; and Loftis Metals.
LEWIS
LEWIS' OPERATIONS
Lewis is a general line industrial distributor with a strong
integrated supply presence. Presently, Lewis delivers its services to
customers in Tennessee, Mississippi, Arkansas, Alabama, Kentucky and
Missouri.
COMPETITION
The industrial distribution industry is highly competitive and
features numerous distribution channels, including national, regional and
local distributors; direct mail suppliers; large warehouse chains; hardware
stores; and manufacturers' own sales forces. Many of Lewis' competitors in
industrial distribution are small enterprises who sell to customers in a
limited geographic area, but Lewis also competes against several large
distributors that have significantly greater resources than Lewis. As
customers increasingly seek low-cost alternatives to traditional methods of
purchasing and sources of supply, they are, among other things, reducing
the number of their industrial suppliers. Also, industrial suppliers are
consolidating to achieve economies of scale and increase efficiencies,
which consolidation trend could cause the industry to become more
competitive. In addition, new competitors may emerge. Certain of Lewis'
competitors sell identical products for prices lower than those offered by
Lewis. Moreover, Lewis also competes on the basis of responsiveness to the
needs of customers for quality service, product diversity, and
availability. There can be no assurance that Lewis will be able to compete
successfully under such conditions.
Additionally, like Titan, Lewis operates in the segment of industry
known as "integrated supply." Lewis has encountered competing integrated
supply firms, and integrated suppliers operate in a highly competitive
market. Lewis may in the future encounter presently unforeseen integrated
supply competition.
<PAGE>
MAJOR CUSTOMERS
Lewis had three customers which accounted for 14%, 11% and 9%,
respectively, of Lewis' sales during its year ended January 31, 1997. In
addition, Lewis supplies integrated supply services under six contracts
which together account for 35% of Lewis' revenues. Because the Lewis
acquisition was contemporaneous with the close of the Company's fiscal
year, none of Lewis' revenues are reflected on the Company's Statements of
Operations included in this Form 10-KSB. (See Note 2 of the June 30, 1997
financial statements included in this Form 10-KSB for unaudited pro forma
information combining the consolidated results of the Company and Lewis as
if the Acquisition had occurred on July 1, 1995.)
PRINCIPAL SUPPLIERS
Historically, the availability of supplies has not been of concern to
Lewis' management. Lewis has over 4500 suppliers nationwide.
EMPLOYEES OF COMPANY AND SUBSIDIARIES
As of June 30, 1997, the Company and its three subsidiaries had 211
full-time employees, including 5 executive personnel and 6 part-time
employees. The employees are apportioned among the businesses as follows:
SETECH (2, both of whom are executives); Titan (39 full-time, including 1
executive, 1 part-time); Southeastern (47 full-time, including 1 executive,
5 part-time); Lewis (123 full-time, including 1 executive).
ITEM 2. PROPERTIES.
Among the Company and its subsidiaries, only Lewis owns any real
property.
Lewis purchased the property at 477 South Main Street in Memphis
Tennessee in November of 1986. Currently, $66,942 remains outstanding on
Lewis' mortgage. This Memphis location serves as the headquarters of
Lewis' operations. In addition, Lewis leases buildings, equipment, and
vehicles under non cancelable operating leases.
Titan conducts its operations from three rented facilities, one each
located: (1) in Murfreesboro, Tennessee; (2) near its automotive
manufacturing customer in Tennessee; and (3) adjacent to its automotive
manufacturing customer in Michigan. None of the three lease terms expires
after 1998.
Southeastern conducts its operations from facilities located at 905
Industrial Drive Murfreesboro, Tennessee that are leased under a non-
cancelable, operating lease expiring July 31, 1998.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company has settled the lawsuit it filed on October 20, 1992,
against its former officials, James E. Turner, the Company's former
President, Chief Executive Officer, Treasurer, Chairman and a member of the
Board of Directors; Donna M. Turner, the Company's former Secretary and a
Director; and Paul F. Caviglia, Jr., the former Chief Financial Officer,
and subsequently amended to add as defendants the Company's prior
attorneys, Blau, Kramer, Wactler, Lieberman and Satin, P. C., David
Lieberman and Richard Satin. The Company has agreed to accept $45,000 in
settlement of its claim against the former attorneys, and $25,000 in
settlement of its claim against James E. Turner.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
On April 8, 1997, a majority of the shareholders of the Company
consented to an amendment to the Company's Articles of Incorporation to
reduce the number of authorized shares from 400,000,000 to 10,000,000. In
accordance with Delaware law, the remaining shareholders were promptly
notified of this action.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Marketing Information - There is only a limited and sporadic
trading market for the Company's common stock, currently trading over the
counter, which has historically been thinly traded with limited market
maker participation.
The following table, prepared from information supplied by the
National Quotation Bureau, sets forth the range of high and low bid prices
for the Company's common stock for the fiscal periods indicated (which
reflects inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions) (prices
for 1996 have been adjusted to give effect to the June 30, 1996 reverse
stock split):
<PAGE>
COMMON STOCK
High Low
1996 (Fiscal)
First Quarter 1.90 .40
Second Quarter 2.0 .40
Third Quarter 2.20 2.00
Fourth Quarter 2.20 1.20
1997 (Fiscal)
First Quarter N/A N/A
Second Quarter 1 3/4 1 5/8
Third Quarter 1 11/16 1 1/2
Fourth Quarter 1 9/16 1 1/32
(b) Holders - There were approximately 180 holders of record of the
Company's common stock as of June 30, 1997, inclusive of those brokerage
firms and/or clearing houses holding the Company's securities for their
clientele (with each such brokerage house and/or clearing house being
considered as one holder).
(c) Dividends - The Company has not paid or declared any dividends
upon its common stock since its inception and, by reason of its present
financial status and its contemplated financial requirements, does not
contemplate or anticipate paying any dividends upon its common stock in the
foreseeable future.
Effective as of June 30, 1996, the Company effectuated a twenty-to-one
reverse stock split which reduced the number of shares of the Company's
single class of common stock. As a result of the twenty-to-one reverse
stock split, the price per share of the Company's common stock increased by
a multiple of 20.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
PLAN OF OPERATION
With the acquisition of Lewis (the "Acquisition") and the disposition
of its Government Services Group, the Company is increasing its focus on
integrated supply. While the Company believes that it will realize certain
long-term synergies through the combination of the integrated supply
capacities of Titan and Lewis, there can be no assurance that such
synergies will be realized. Nonetheless, Management believes that the
assimilation of Lewis following the Acquisition is going smoothly.
The Company believes that a strategic opportunity exists during the
short and near-term to expand its integrated supply business with Titan's
existing automotive manufacturing customer. The Company will also seek to
market its integrated supply services to other manufacturing businesses.
Company management constantly considers the most advantageous utilization
of its financial, personnel and tangible resources, including appropriate
acquisitions and dispositions.
RESULTS OF OPERATIONS
For the fiscal year ended June 30, 1997, the Company posted net
revenues of $35,167,717, compared to $34,468,123 for the previous fiscal
year. (Please see Note 1 of the June 30, 1997 financial statements included
with this Form 10-KSB relating to "Reclassification of Financial Statement
Presentation," where it indicates that amounts received from customers for
the cost of inventory acquired and sold under inventory procurement and
management contracts, which were previously recorded as a reduction in cost
of revenues, have been reclassified as revenues.) The Company realized an
income from continuing operations before income taxes for the fiscal year
ended June 30, 1997, of $941,599 compared to $709,868 for the fiscal year
ended June 30, 1996, an increase of 32.6%. These revenue and income figures
do not reflect amounts attributable to the Government Services Division,
sold by the Company January 31, 1997, and accounted for as a separate line
item called "Discontinued Operations" in the Company's Statements of
Operations included in the June 30, 1997 financial statements included in
this Form 10-KSB. (See Note 16 of these financial statements for further
explanation.) Nor do these revenue and income figures reflect amounts
attributable to Lewis, acquired by the Company June 26, 1997. (Please see
Note 2 of the June 30, 1997 financial statements included in this Form 10-
KSB for unaudited pro forma information combining the consolidated results
of the Company and Lewis as if the Acquisition had occurred on July 1,
1995.)
In accordance with FASB Statement 109, the Company's statement of
operations for the fiscal year ended June 30, 1997 reflects an income tax
provision of $428,026. Please see Note 9 of the June 30, 1997 financial
statements included in this Form 10-KSB for detailed analysis and
explanation.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's current assets exceeded its current
liabilities by approximately $19,829,912. Please note that the assets and
liabilities of Lewis are reflected in the 1997 numbers on the June 30,
1997, balance sheet included in this Form 10-KSB, while amounts
attributable to the Government Services Division are not included. (Please
see Notes 1, 2 and 16 of the June 30, 1997 financial statements included in
this Form 10-KSB.)
The Company maintains a secured revolving line of credit with a
banking institution in the maximum amount of the lesser of $25 million or
the total of eligible accounts receivable and inventory as defined in the
revolving line of credit agreement. (Please see Exhibit 4.1 and Note 7 of
the June 30, 1997 financial statements included in this Form 10-KSB for a
description of the terms and maturities of this loan.)
See Item 12, "Certain Relationships and Related Transactions," of this
Annual Report on Form 10-KSB for a description of the sale (and use of
proceeds thereof) of certain securities of the Company during the fiscal
years ended June 30, 1996 and 1997.
Management believes, but can give no assurance, that these infusions
of debt and equity capital will result in sufficient capital to support the
Company's existing operations, but the Company may be required to seek
external financing sources to support expansion of its existing lines of
business. There can be no assurance that the Company would be able to
obtain such financing on reasonable or attractive terms, if at all.
LOSS CONTINGENCIES
None.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
SETECH, INC. and Subsidiaries:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996.
Consolidated Statements of Operations for the fiscal years ended June
30, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended June 30, 1997 and 1996.
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1997 and 1996.
Notes to Consolidated Financial Statements.
<PAGE>
SETECH, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Setech, Inc.:
We have audited the accompanying consolidated balance sheet of SETECH, INC. (a
Delaware Corporation and formerly Aviation Education Systems, Inc.) and
Subsidiaries as of June 30, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Setech, Inc. and
Subsidiaries as of June 30, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Nashville, Tennessee
August 29, 1997
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Aviation Education Systems, Inc.
Murfreesboro, Tennessee
We have audited the accompanying consolidated balance sheet of SETECH, INC. (a
Delaware Corporation and formerly Aviation Education Systems, Inc.) and
Subsidiaries as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aviation Education
Systems, Inc. and subsidiaries as of June 30, 1996 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Dempsey Wilson & Company, PC
Murfreesboro, Tennessee
August 19, 1996
<PAGE>
SETECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,633,559 $ 1,328,854
Accounts receivable, less allowance for
doubtful accounts of $110,689 and $1,665, 8,449,902 4,549,164
respectively
Inventories 17,305,262 9,302,796
Deferred tax asset 520,328 306,000
Stock subscriptions receivable - 661,500
Net assets of discontinued operation - 1,735,916
Prepaid expenses and other current assets 504,621 71,323
-------------- ---------------
Total current assets 28,413,672 17,955,553
PROPERTY AND EQUIPMENT, NET 1,746,551 587,347
NONCURRENT DEFERRED TAX ASSET 31,197 629,680
COST IN EXCESS OF NET ASSETS ACQUIRED, NET OF
ACCUMULATED AMORTIZATION OF $559,959 AND $413,883,
RESPECTIVELY 6,954,320 1,777,272
OTHER ASSETS 126,484 24,072
--------------- ---------------
Total assets $ 37,272,224 $ 20,973,924
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable-financial institutions $ - $ 7,794,044
Current portion of long-term debt 411,620 539,016
Current portion of capital lease obligations 95,129 58,189
Accounts payable 5,975,425 3,353,691
Accrued expenses 2,015,289 1,351,888
Income taxes payable 86,297 47,636
---------------- ---------------
Total current liabilities 8,583,760 13,144,464
---------------- ---------------
LONG-TERM DEBT, NET OF CURRENT PORTION 20,099,790 1,075,497
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 411,562 154,725
---------------- ---------------
20,511,352 1,230,222
---------------- ---------------
COMMITMENTS AND CONTINGENCIES
PUTTABLE STOCK 510,204 -
---------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 and
400,000,000 shares authorized, respectively;
5,669,003 and 5,413,901 shares issued, respectively 56,690 54,139
Additional paid-in capital 11,916,583 11,512,038
Accumulated deficit (4,098,166) (4,612,082)
Treasury stock (208,199) (354,857)
---------------- ----------------
7,666,908 6,599,238
---------------- ----------------
Total liabilities and stockholders' equity $ 37,272,224 $ 20,973,924
---------------- ----------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
<PAGE>
SETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES $ 35,167,717 $ 34,468,123
COST OF REVENUES 31,500,600 31,509,822
---------------- ---------------
Gross profit 3,667,117 2,958,301
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,055,716 1,765,263
---------------- --------------
Operating income 1,611,401 1,193,038
--------------- --------------
OTHER INCOME (EXPENSE):
Interest income 99,834 75,124
Interest expense (769,636) (558,294)
--------------- -------------
(669,802) (483,170)
--------------- -------------
Income from continuing operations before
income taxes 941,599 709,868
INCOME TAX BENEFIT (PROVISION) (428,026) 692,882
---------------- -------------
Income from continuing operations 513,573 1,402,750
---------------- --------------
DISCONTINUED OPERATIONS:
Operating income (loss), net of applicable tax
provision of $132,604 and $113,238, respectively 112,112 (3,511)
Loss on disposal, net of applicable tax provision
of $310,882 (111,769) -
---------------- ----------------
Income (loss) from discontinued operations 343 (3,511)
--------------- ----------------
NET INCOME $ 513,916 $ 1,399,239
----------------- ----------------
NET INCOME PER SHARE:
Primary -
Income from continuing operations $ 0.10 $ 0.27
Income from discontinued operations 0.00 0.00
---------- ------------
Net income per share $ 0.10 $ 0.27
Fully diluted -
Income from continuing operations $ 0.09 $ 0.24
Income from discontinued operations 0.00 0.00
----------- ------------
Net income per share $ 0.09 $ 0.24
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
SETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Treasury Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE (DEFICIT), AT JUNE 30, - $- 5,413,901 $54,139 $11,495,681 $(6,011,321) $5,538,499
1995
Purchase of treasury stock 1,018,410 (1,264,000) - - - - (1,264,000)
Sales of treasury stock (732,500) 909,143 - - 16,357 - 925,500
Net income - - - - - 1,399,239 1,399,239
--------------------------------------------------------------------------------------------------
BALANCE (DEFICIT), AT JUNE 30,
1996 285,910 (354,857) 5,413,901 54,139 11,512,038 (4,612,082) 6,599,238
SALES OF TREASURY STOCK (122,215) 146,658 - - 24,443 - 171,101
Issuance of stock for Lewis,
net of amounts redeemable
under put option - - 255,102 2,551 380,102 - 382,653
Net income - - - - - 513,916 513,916
---------------------------------------------------------------------------------------------------
BALANCE (DEFICIT), at June 30, 163,695 $(208,199) 5,669,003 $56,690 $11,916,583 $(4,098,166) $7,666,908
1997
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
SETECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 513,573 $ 1,402,750
Adjustments to reconcile income from continuing
operations to net cash used in continuing operations:
Depreciation and amortization 316,381 344,184
Bad debt - (5,835)
Deferred income taxes 384,968 (566,859)
Gain on disposal of equipment - (4,028)
Changes in operating assets and liabilities:
Accounts receivable 1,261,779 (3,075,982)
Inventories (1,591,748) (3,047,101)
Other assets (90,264) (24,914)
Accounts payable (988,864) 2,150,030
Accrued expenses 120,765 70,906
Income taxes payable 38,661 (129,318)
-------------- ---------------
Net cash used in continuing operations (34,749) (2,886,167)
-------------- ---------------
Discontinued operations:
Income (loss) from discontinued operations 112,112 (3,511)
Loss on disposal of discontinued operations (111,769) -
Changes in net assets of discontinued (90,748) 3,511
operations ------------ ---------------
Net cash used in discontinued operations (90,405) -
------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment - 4,028
Proceeds from sale of business 2,150,000 -
Consideration paid for Lewis (6,306,357) -
Purchase of equipment (122,079) (53,985)
--------------- -------------
Net cash used in investing activities (4,278,436) (49,957)
---------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) short-term debt (7,794,044) 3,165,607
Proceeds from long-term debt 13,011,940 1,000,000
Payments on long-term debt (1,254,098) (470,338)
Payments on capital lease obligations (88,104) -
Proceeds from sale of treasury stock, less related
receivable 171,101 264,000
Collection of stock subscriptions receivable 661,500 -
Purchase of treasury stock - (1,264,000)
-------------- --------------
Net cash provided by financing
activities 4,708,295 2,695,269
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 304,705 (240,855)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,328,854 1,569,709
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,633,559 $ 1,328,854
</TABLE>
(CONTINUED)
<PAGE>
SETECH, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
FOR THE YEARS ENDED
JUNE 30, 1997 AND
1996
(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
SUPPLEMENTARY INFORMATION:
Cash paid from continuing operations during the
year for:
Interest $ 747,337 $ 572,649
Income taxes 47,636 38,176
Non-cash transactions:
Notes payable issued to former shareholders of
Lewis in connection with acquisition 750,000 -
Stock issued for acquisition of Lewis 892,857 -
Additional shares of stock to be issued for
acquisition of Lewis 107,142 -
Long-term capital leases 363,386 251,623
</TABLE>
THE ACCOMPANYING
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
SETECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SETECH, Inc. (formerly Aviation Education Systems, Inc. and the "Company")
is a provider of integrated supply services specializing in the procurement
and management of tooling, supply and proprietary spare parts inventories
for the automotive and other manufacturing industries, as well as a provider
of sophisticated machining services primarily for aviation and medical
instrument manufacturing concerns.
Prior to January of 1997, the Company was also a provider of air traffic
control, weather observing and forecasting services under contracts with the
FAA and other federal, state and local governments and agencies through its
former subsidiaries Barton ATC, Inc. and Barton ATC International, Inc. In
January of 1997, the Company sold its stock in these subsidiaries (see Note
16).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SETECH, Inc.
and its wholly-owned subsidiaries Lewis Supply Company, Inc. ("Lewis"),
Southeastern Technology, Inc. and Titan Services, Inc. References to the
Company in these notes include SETECH, Inc. and its subsidiaries on a
consolidated basis. All significant intercompany balances and transactions
have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are generally stated at the lower of cost or market. Cost is
determined principally using the first-in, first-out (FIFO) method.
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a straight-
line basis over the estimated useful lives of the assets as follows:
vehicles and machinery and equipment - 3 to 7 years; furniture and fixtures
- 5 to 7 years; leasehold improvements - 7 to 15 years; building - 40 years.
Expenditures for maintenance and repairs are generally charged to expense as
incurred, whereas expenditures for improvements and replacements are
capitalized.
The cost and accumulated depreciation of assets sold or otherwise disposed
of are removed from the accounts and the resulting gain or loss is reflected
in the consolidated statements of operations.
Property and equipment obtained through purchase acquisitions are stated at
the estimated fair value determined on the respective dates of acquisitions.
INTANGIBLE ASSETS
The excess of the aggregate purchase price over the fair value of assets of
businesses acquired (goodwill) are being amortized on a straight-line basis
over a period of 15 to 40 years.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of its intangible assets may warrant revision or that
the remaining balance of such assets may not be recoverable. When factors
indicate that such assets should be evaluated for possible impairment, the
Company uses an estimate of the acquired operation's undiscounted cash flows
over the remaining life of the asset in measuring whether the asset is
recoverable.
REVENUE AND EXPENSE RECOGNITION
The Company maintains contracts with its customers to procure and manage
tooling, supply and proprietary spare parts inventories under various terms.
The Company's contracts are generally from three to five years in length
with renewal provisions for subsequent periods. Management expects to
renew the Company's existing contracts for periods consistent with the
remaining renewal options allowed by the contracts or other reasonable
extensions.
Revenues from procurement and inventory management services are recognized
as the related inventory items are delivered and as fixed fees and
incentives are earned.
CREDIT RISK AND CONCENTRATION OF ACTIVITIES
The Company grants credit terms in the normal course of business to its
customers. Credit limits, ongoing credit evaluation and account monitoring
procedures are utilized to minimize the risk of loss. Collateral is
generally not required.
<PAGE>
A significant number of the Company's customers are in the aviation,
automobile and medical instrument industries. Approximately 73% of the
Company's total revenues, for the 1997 and 1996 fiscal years, were to a
customer in the automobile industry. Trade accounts receivable at June 30,
1997 include approximately $2.3 million due from the same customer .
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the fiscal years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
employee stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25"), and related
Interpretations. Under APB Opinion No. 25, no compensation cost related to
employee stock options has been recognized because all options are granted
with exercise prices equal to or greater than the estimated fair market
value at the date of grant. See Note 11 for further discussion.
NET INCOME PER SHARE
Primary net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Fully
diluted net income per share reflects the effect of common shares
contingently issuable upon conversion of convertible debt securities in
periods in which such conversion would cause dilution and the effect on net
income of converting the debt securities.
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), has been issued effective for fiscal periods ending after
December 15, 1997, and establishes standards for computing and presenting
earnings per share. The Company is required to adopt the provisions of SFAS
128 in the second quarter of fiscal 1998. Adoption of SFAS 128 at June 30,
1997 would not have a material effect on the Company's financial statements,
taken as a whole.
<PAGE>
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Amounts received from customers for the cost of inventory acquired and sold
under inventory procurement and management contracts, which were previously
recorded as a reduction in cost of revenues, have been reclassified as
revenues in the accompanying consolidated statements of operations. This
reclassification conforms the Company's presentation to industry practice.
Certain additional reclassifications have been made to the 1996 financial
statements to conform with the 1997 presentation.
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 as well as the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
("SFAS 121"). This statement imposes criteria for evaluating the
recoverability of long-term assets at each balance sheet date. The Company
adopted SFAS 121 effective July 1, 1996. The Company did not experience a
material impact on its results of operations, financial condition or cash
flows as a result of adoption.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure"
("SFAS 129"). SFAS 129 establishes standards for disclosing information
about an entity's capital structure. The Company will be required to adopt
SFAS 129 in the second quarter of fiscal 1998. Management does not expect
the adoption to have a material impact on the Company's financial position,
results of operations or cash flows.
2. ACQUISITION
Effective June 26, 1997, the Company acquired Lewis in a purchase
transaction. The acquisition was consummated by the exchange of 255,102
shares of the Company's common stock, a commitment to issue an additional
30,612 shares of the Company's common stock, $5,952,500 cash and notes
payable totaling $750,000 for 100% of the outstanding shares of Lewis's
common stock. The principal shareholder and three employees of Lewis also
entered into an employment agreement and an agreement not to compete with
the Company (see Note 13).
<PAGE>
The 30,612 additional shares of the Company's common stock will be issued in
increments of 10,204 shares per year on June 1 of 1998, 1999 and 2000,
respectively. These shares have been valued as of the date of the
acquisition and recorded in the accompanying consolidated balance sheets as
an accrued expense.
The total purchase price, including costs associated with the acquisition,
was $8,056,356 which has been tentatively allocated to the assets acquired
and liabilities assumed based on their estimated fair values as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $11,898,815
Property and equipment 844,045
Goodwill 5,323,123
Other assets 119,866
Deferred tax assets, net 324,149
Current liabilities (4,046,092)
Long-term debt (6,407,550)
------------
$8,056,356
</TABLE>
The purchase price has been allocated to the assets acquired and liabilities
assumed based on information currently available as to their estimated fair
values. Should additional information indicate changes to this evaluation,
net additions or reductions in the fair values currently assigned will be
credited to or charged against amounts allocated to goodwill.
The following unaudited pro forma information combines the consolidated
results of the Company and Lewis as if the acquisition had occurred on July
1, 1995, after giving effect to amortization of goodwill and interest
expense on borrowings to finance the acquisition. The pro forma information
is not necessarily indicative of the results of operations which would have
been obtained during such periods. While the Company believes that it will
realize certain long-term synergies through the integration of certain
operating functions, there can be no assurances that such synergies can be
realized, and no amounts have been reflected in the pro forma adjustments to
reflect such anticipated synergies.
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30, 1997 June 30, 1996
(UNAUDITED)
<S> <C> <C>
Revenues from continuing operations $ 76,253,990 $ 72,605,297
-------------- ---------------
Net income from continuing operations $ 432,485 $ 1,414,078
-------------- ---------------
Net income from continuing operations per
share:
Primary $ 0.08 $ 0.26
--------------- --------------
Fully diluted $ 0.06 $ 0.21
</TABLE>
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Parts purchased under procurement contracts $15,586,937 $ 7,530,264
Specialty machining contracts in process 1,505,316 1,338,698
Raw materials 213,009 433,834
-------------- ------------------
$17,305,262 $ 9,302,796
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $28,717 $ -
Building 271,450 -
Machinery and equipment 2,719,651 2,341,478
Furniture and fixtures 595,790 52,950
Vehicles 39,534 39,535
Leasehold improvements 150,068 129,051
-------------- -------------
3,805,210 2,563,014
Less accumulated depreciation and
amortization (2,058,659) (1,975,667)
----------------- --------------
$1,746,551 $ 587,347
</TABLE>
Depreciation expense totaled $170,306 in 1997 and $198,108 in 1996.
Substantially all property and equipment is pledged as collateral on the
Company's revolving line of credit (See Note 7).
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Employees' compensation and benefits $906,057 $ 858,618
Other accrued expenses 950,112 135,326
Customer deposits 159,120 357,944
------------ ------------------
$2,015,289 $ 1,351,888
</TABLE>
<PAGE>
6. NOTES PAYABLE - FINANCIAL INSTITUTIONS
During 1996 and a portion of 1997, the Company maintained revolving
lines of credit with total borrowing capacity of $8,800,000 and interest
at variable rates. Amounts outstanding under these lines totaled
$7,794,044 at June 30, 1996. Substantially all of the Company's
accounts receivable, inventory and fixed assets were pledged as
collateral under the lines. The lines matured during 1997.
7. LONG-TERM DEBT
Long-term debt as of June 30, 1997 and 1996, consists of the following
balances:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revolving line of credit to bank, interest due
monthly at LIBOR plus 2.5% (8.5% at June 30, 1997).
Matures June 26, 2000. $17,806,182 $ -
Notes payable to former shareholders of Lewis,
due in annual installments of $250,000 principal plus
interest at 7.5%. Matures June 1, 2000. 750,000 -
Convertible subordinated debentures, due in
annual installments of principal of $750,000
beginning July 1, 1999. Interest payable
annually at 8.5%. Matures July 1, 2000.
Convertible to common stock in the event of
default at a rate of one common share for
each $3 of principal and interest
outstanding. 1,500,000 -
Convertible subordinated debentures, due in
annual installments of principal and interest
of $161,024 at 8.0%. Matures from June 30,
1999 to March 1, 2001. Convertible to
common stock in the event of default at
varying rates of one common share for each $1
to $1.06 of principal and interest
outstanding. 362,630 565,291
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Convertible subordinated debentures extinguished
during 1997. $- $ 1,000,000
Other notes payable 92,598 49,222
-------------- -----------------
20,511,410 1,614,513
Less current portion (411,620) (539,016)
---------------- -----------------
$20,099,790 $ 1,075,497
</TABLE>
The Company's debentures are payable to two of its stockholders and are
subordinated to all other indebtedness. Outstanding principal and accrued
interest is convertible to the Company's common stock only in the event of
default. The notes payable to former Lewis shareholders are subordinated to
the revolving line of credit facility.
Maximum borrowings available under the revolving line of credit are limited
to the lesser of $25 million or the total of eligible accounts receivable
and inventory as defined in the revolving line of credit agreement (the
"Agreement"). Additional borrowings available under the line at June 30,
1997 were approximately $1 million. In addition to customary provisions
related to events of default, the Agreement provides that an event of
default will occur upon the termination of any "eligible supply contract"
(as defined in the Agreement) or upon a change in control of the Company (as
defined in the Agreement). The revolving line of credit is secured by
substantially all assets of the Company and contains covenants regarding
certain financial statement amounts, ratios and activities of the Company
and its subsidiaries. At June 30, 1997, the Company was in compliance with
such covenants or had obtained appropriate waivers.
Annual maturities of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
1998 $411,620
1999 422,422
2000 18,882,583
2001 794,785
------------
$20,511,410
</TABLE>
<PAGE>
8. CAPITAL LEASE OBLIGATIONS
The Company leases certain manufacturing equipment under capital leases.
Related cost and accumulated depreciation of assets under capital leases at
June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Machinery and equipment $615,010 $251,624
Accumulated depreciation (80,626) (22,328)
------------- ---------------
$534,384 $229,296
</TABLE>
The future minimum lease payments required under the capital leases at June
30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Year
<S> <C>
1998 $167,756
1999 167,756
2000 114,023
2001 92,382
2002 70,564
---------
Total minimum lease obligations 612,481
Less: interest (105,790)
-------------
Present value of total minimum lease
obligations $ 506,691
</TABLE>
9. INCOME TAXES
Income tax expense (benefit) on income from continuing operations consisted
of the following for the fiscal years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current tax expense (benefit) $43,058 $ (64,370)
Deferred tax expense 391,675 440,836
Reduction in valuation allowance (6,707) (1,069,348)
----------------- ---------------------
$428,026 $ (692,882)
</TABLE>
<PAGE>
A reconciliation of the U.S. Federal statutory rate to the effective rate for
income tax expense (benefit) on income from continuing operations is as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
U.S. Federal statutory rate $320,144 $199,521
State taxes on income 37,664 18,224
Expenses not deductible 57,380 90,246
Other 19,545 68,475
Change in valuation allowance (6,707) (1,069,348)
------------ --------------
$428,026 $(692,882)
</TABLE>
Significant components of the Company's deferred tax liabilities and assets,
using a tax rate of 38%, are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current assets:
Reserves on assets $314,650 $ -
Liabilities not yet deductible 187,570 250,598
Other 18,108 55,402
------------ -------------
Net current asset 520,328 306,000
------------ -------------
Noncurrent assets (liabilities):
Net operating loss deductions 66,801 831,483
Other - (43,185)
Depreciation (35,604) (151,911)
------------- ------------
Noncurrent asset 31,197 636,387
Less valuation allowance - (6,707)
-------------- ------------
Net noncurrent asset 31,197 629,680
-------------- ------------
Total net deferred tax asset $551,525 $935,680
</TABLE>
SFAS 109 requires the Company to record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets
will not be realized." It further states that "forming a conclusion that a
valuation allowance is not needed is difficult when there is negative
evidence such as cumulative losses in recent years." In 1996, the Company
significantly reduced a previously recorded valuation allowance based upon
expected realization of tax benefits. The ultimate realization of deferred
income tax assets depends on the Company's ability to generate sufficient
taxable income in the future. If the Company is unable to generate
sufficient taxable income in the future through operating results or tax
planning opportunities, increases in the valuation allowance will be
required through a charge to expense (decreasing stockholders' equity).
At June 30, 1997, the Company had approximately $200,000 of net operating
loss carryforwards for federal income tax purposes available to offset
future taxable income, which begin expiring in 2003.
<PAGE>
10. PUTTABLE STOCK AND SHAREHOLDER AGREEMENT
In connection with the acquisition of Lewis, 255,102 shares of the Company's
common stock issued and 30,612 of the shares to be issued are subject to a
shareholder agreement. Under the terms of the agreement, the shareholder
has the option to require the Company to repurchase the shares at a price of
$2.00 per share if the Company has not effected a public offering of the
Company's common stock on a major stock exchange prior to April 30, 2000, or
in the event of a change in control of the Company (as defined in the
agreement). The agreement also requires the shareholder to grant the
Company a right of first refusal in certain circumstances (as defined in the
agreement) on any proposed sale of the Company's common stock by the
shareholder. The agreement expires on June 30, 2000.
11. STOCKHOLDERS' EQUITY
COMMON STOCK
During fiscal 1997, the Company decreased the number of authorized shares of
common stock from 400 million to 10 million.
On February 28, 1996, the Company repurchased 1,018,410 shares of the
Company's common stock held by a former executive for $1,264,000. The
Company subsequently reissued 732,500 of these treasury shares to certain
officers, affiliates and existing shareholders for $925,500. Stock
subscriptions receivable represent payments in transit on June 30, 1996 for
the reissuance of shares. During fiscal 1997, a director and certain
officers acquired 122,215 shares for $171,101.
STOCK OPTIONS
In August 1994, the Company approved stock option plans for officers, key
executives and directors, which provide for both non-qualified and qualified
incentive stock option grants for which options may be granted to "key
employees" as designated by the Board of Directors. These options will vest
over a period of four years and expire either three months after termination
of employment or ten years after date of grant. The Company reserved up to
250,000 shares of its common stock for future issuance under these plans.
At June 30, 1997, the Company had options for 29,556 shares outstanding
under the plan with an exercise price of $1.40. No options were outstanding
under the plan at June 30, 1996.
<PAGE>
In addition to the above plans, the Company issued options for 45,000 shares
to an employee and former shareholder of Lewis during 1997. The options
became exercisable upon issuance, have an exercise price of $3.50 per share
and expire one month after termination of the individual's employment with
the Company.
The Company accounts for options issued to employees under APB Opinion No.
25. All options are granted with exercise prices equal to or greater than
management's estimate of the fair value of the Company's common stock on the
date of grant. As a result, no compensation cost has been recognized.
Had compensation cost for the Company's employee stock option plans been
determined based on the fair value at the grant date for awards in 1997
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma
amounts for the 1997 fiscal year:
<TABLE>
<CAPTION>
1997
<S> <C> <C>
Net income: As reported $ 513,916
-----------
Pro forma $ 490,695
Net income per share:
Primary As reported $ 0.10
------------
Pro forma $ 0.09
Fully diluted As reported $ 0.09
------------
Pro forma $ 0.09
</TABLE>
The resulting pro forma compensation cost may not be representative of that
to be expected in future years.
The fair value of each option on its date of grant has been established for
pro forma purposes using the Black-Scholes option pricing model using the
following weighted average assumptions:
1997
Expected dividend yield 0.00%
Expected stock price volatility 0.00%
Risk free interest rate 6.05%
Expected life of options 5 years
<PAGE>
12. NET INCOME PER SHARE
The following table presents information necessary to calculate fully
diluted net income per share for the fiscal years ended June 30, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Income from continuing operations $513,573 $ 1,402,750
Plus interest on convertible debentures, net
of associated tax provision 62,048 47,207
----------- --------------------
Adjusted income from continuing
operations $575,621 $ 1,449,957
------------ ---------------------
Weighted average shares outstanding 5,261,008 5,158,850
Plus additional shares issuable upon
conversion of convertible debentures 891,883 947,025
------------ ---------------------
Adjusted weighted average shares
outstanding 6,152,891 6,105,875
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company rents certain facilities, primarily office and warehousing
facilities, under various operating leases which expire beginning March 1998
through December 31, 2006. Rent expense totaled $312,079 in 1997 and
$259,744 in 1996, respectively.
Minimum future lease payments are estimated as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
1998 $150,017
1999 11,690
2000 3,936
---------
$165,643
</TABLE>
EMPLOYMENT AND NONCOMPETE AGREEMENTS
Subsequent to its acquisition of Lewis, the Company entered into an
employment agreement with a former shareholder of Lewis. The agreement
contains certain severance benefits including one year of salary continuation
if the employee is terminated without cause or resigns as a result of a change
in control of the Company prior to the expiration of the agreement. The
agreement is for a term of three years and includes an agreement not to compete
with the Company for a period of one year after termination of the individual's
employment with the Company.
The Company also entered into employment agreements with three employees of
Lewis. The agreements contain certain severance benefits including one year
of salary continuation if the employees are terminated without cause prior to
the expiration of the agreements. The agreements are for terms of two years
and include an agreement not to compete with the Company for a period of one
year after termination of employment with the Company.
LITIGATION
The Company is a defendant in certain legal matters in the ordinary course
of business. Management believes that the resolution of such matters will not
have a material effect on the Company's financial condition or results of
operations.
14. WAGE DEFERRAL PLAN
The Company sponsors a 401(k) wage deferral plan (the SETECH, Inc. 401k Plan
and the "Plan"). All employees of the Company age 21 and older are eligible
to participate beginning either on April 1 or October 1 subsequent to hire
date. During 1997, employees could contribute up to the lesser of $9,500 or
15% of their salaries, subject to IRS limitations. All participant
contributions to the Plan are fully vested at the time of contribution.
Discretionary employer contributions vest ratably over five years of service
to the Company. During fiscal 1997 and 1996, the Company made discretionary
employer contributions to the Plan totaling $33,027 and $21,547,
respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments".
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
LONG-TERM DEBT
The carrying amount of long term debt approximates fair value as the
interest rates are predominantly variable which fluctuate with market
conditions.
<PAGE>
16. DISCONTINUED OPERATIONS
On January 31, 1997, the Company sold the net assets of Barton ATC, Inc. and
Barton ATC International, Inc., which represented its governmental services
industry segment in prior years, to Serco, Inc. for $2,150,000.
Accordingly, these operations are accounted for as discontinued operations,
and their assets, liabilities and results of operations are segregated in
the accompanying consolidated statements of operations, balance sheets and
statements of cash flows.
The net loss on the disposal includes additional tax provision which
resulted from the excess of the Company's book value of its investment in
the discontinued operations over the value of those operations for income
tax purposes. Income from discontinued operations for fiscal 1997 and 1996
includes amortization of goodwill which is not deductible for income tax
purposes.
Revenues associated with the discontinued operations were $6,727,072 and
$8,332,524 for the fiscal years ended June 30, 1997 and 1996, respectively.
Assets and liabilities for all periods presented have been reclassified for
amounts associated with the discontinued operations. Summarized balance
sheet data for the discontinued operations is as follows at June 30, 1996:
<TABLE>
<CAPTION>
1996
<S> <C>
Current assets $ 2,116,990
Property, plant and equipment, net 540,660
Goodwill 247,356
------------
Total assets 2,905,006
Current liabilities (1,067,406)
Other non-current liabilities (101,684)
-----------
Net assets $ 1,735,916
</TABLE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 27, 1997, the Company filed a Form 8-K relating to its change in
certifying accountant from Dempsey Wilson & Company, PC to Arthur Andersen LLP.
Accordingly, the disclosure called for by this Item has been previously
reported as that term is defined in Rule 12b-2 under the Exchange Act.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's directors and executive officers are as follows:
NAME, AGE AND POSITION BIOGRAPHICAL DATA
Mr. Thomas N. Eisenman (47)
President and CEO
Director
Mr. Eisenman was elected President and CEO of the Company in
February 1996. He is also the Chief Executive Officer of
Southeastern and Titan (since June 1995) and Lewis (since June
1997). He is a Director of the Company and all of its subsidiaries.
He serves as a member of the Executive Committee of the Company's
Board of Directors. Mr. Eisenman founded and served as President of
Southeastern. He has also held the position of President of Titan
Services, Inc. and served on the Board of Directors of SEtech, Inc.
prior to the Company's acquisition in 1993 of SEtech. He worked with
Kennametal, Inc. in the area of Technical Representation, Technical
Sales, and Manufacturing Management. He also served as a
manufacturing engineer for Teledyne Firth Sterling. Mr. Eisenman
holds a Bachelor of Arts degree in Natural Sciences from Slippery
Rock University.
Cindy L. Rollins (33)
Secretary, Treasurer, Director
Vice President and CFO
Ms. Rollins is Vice President, Chief Financial Officer and a
Director of the Company and of each of its three subsidiaries. Ms.
Rollins became Secretary and Treasurer of the Company in July 1992.
She became Chief Financial Officer of the Company on September 1,
1993. Ms. Rollins was employed, in June 1986, by BARTON, where she
had various finance and accounting positions. Ms. Rollins has served
continuously as a member of the Board of Directors of the Company
since August 13, 1992. She is a member of the Executive Committee of
the Company's Board of Directors. Ms. Rollins holds a BBA in
Accounting from Middle Tennessee State University.
Mr. William J Ballard (55)
Director
Mr. Ballard was elected as a member of the Board of Directors of the
Company on April 25, 1996 by a vote of the Board to fill the vacancy
created by the resignation of Robert W. Lynch, Jr. Mr. Ballard is
the Chairman and Chief Executive Officer (since March 1993) of
Children's Comprehensive Services, Inc., a public company engaged in
the business of juvenile education and treatment. Previously, he
served as President of Paladin Capital and President of Major Safe
Company, Inc. Mr. Ballard holds a B.S. from Middle Tennessee State
University and an M.B.A. from the University of Chicago.
Mr. Hans R. Buser (49)
Director
Mr. Buser is a lawyer and certified accountant with degrees in Law
(1972) from the University of Basel, Switzerland; and in Accounting
(1982) from the Audit School of Basel, Switzerland. Mr. Buser has
held positions in the Swiss financial community and in the
government of Switzerland. He is presently serving as a Vice
President in the Audit Division of ATAG Ernst & Young of Basel,
Switzerland. Mr. Buser currently serves as a member of the
Environmental Committee of the City of Wallbach, Switzerland.
Mr. Peter Joss (54)
Director
Mr. Joss holds a Bachelor of Business Administration and a Masters
Degree in Economics from the St-Gall School of Economics,
Switzerland. From 1969 to 1971 Mr. Joss worked at the Institute of
Tourism and Transport at the St-Gall School of Economics and from
1971 to 1973 was responsible for transport and tourism matters in
the cantonal government of St-Gall. Mr. Joss held, from 1973 until
1980, a post with the Federal Transit Authority, in Bern, where he
was responsible for public finance of the Swiss railroad system.
Following that assignment, from 1980 until 1988, he served as the
Vice President, Finance, of the Swiss Federal Transit Authority.
Since 1988, Mr. Joss has served as the Chief Executive Officer of
Mittelthurgaubahn, a Swiss railroad, and as the Chairman of the
Board of Directors of both Reiseburo Mittelthurgau and Hotel
Thurgauerhof, Weinfelden. He is currently a member of the Board of
Directors of several Swiss and French companies.
Mr. Martin Oester (40)
Director
Mr. Oester is an economist with degrees in Economics from the
University of Neuchatel and in Education from the Teachers Training
College in Spiez, Switzerland. Mr. Oester has taught, both at the
secondary and post secondary levels; served the Swiss Railway Union
as an advisor in economic affairs and transportation policy and,
since 1989, has been Investment Manager for, and Vice President of,
Pensionskasse der ASCOOP, a Swiss pension fund. Pensionskasse der
ASCOOP is the largest single holder of the Company's capital stock.
The Board of Directors is authorized to have up to seven members; the
board currently consists of six Directors. The directors are annually elected
for a one year term by the stockholders. The Board of Directors is authorized
to fill any interim vacancy.
Messrs. Ballard, Buser, Joss and Oester comprise the four members of the
Compensation Committee of the Board of Directors of the Company.
Anthony Morriello serves as President of Southeastern. Richard Hulbert is
the President of Titan. Michael S. Burnham, Jr. is Corporate Leader of Lewis.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's officers, directors and 10% shareholders have disclosed
information pursuant to Section 16(a) relating to certain events and
transactions not formerly disclosed in Section 16 reports, though information
relating to beneficial ownership and certain transactions of officers,
directors and 10% shareholders has been disclosed in the Company's periodic
reports. Specifically, Section 16 reports have been filed relating to the
following: Mr. Eisenman - two acquisitions of stock not reported on Form 4 were
reported on Form 5; Mr. Ballard - one acquisition of stock not reported on Form
4 was reported on Form 5; Mr. Oester -his becoming a Director, not reported on
Form 3, and one acquisition of stock, not reported on Form 4, were reported on
Form 5; Mr. Joss - his becoming a Director, not reported on Form 3, and one
acquisition of stock, not reported on Form 4, were reported on Form 5; Mr.
Buser -his becoming a Director, not reported on Form 3, and two acquisitions of
stock, not reported on Form 4, were reported on Form 5.
Pensionskasse der ASCOOP (ASCOOP) - 5 transactions by 4 affiliates of
ASCOOP not reported on Form 4 (two Form 4's would have been needed to report
these transactions) were reported on Form 5 because the shares acquired by its
affiliates could be deemed to be indirectly beneficially owned by ASCOOP,
though ASCOOP disclaimed beneficial ownership on its Form 5. Spida
Ausgleichskassen (SPIDA) - 4 transactions by 2 affiliates of SPIDA not reported
on Form 4 (three Form 4's would have been needed to report these transactions)
were reported on Form 5 because the shares acquired by its affiliates could be
deemed to be indirectly beneficially owned by SPIDA, though SPIDA disclaimed
beneficial ownership on its Form 5. Also, three sales transactions by SPIDA not
reported on Form 4 (all of which would have been included on the same Form 4)
were reported on Form 5.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation paid for services
rendered in all capacities to the Company during its fiscal year ended June 30,
1997, to each executive officer of the Company whose cash compensation exceeded
$100,000 in such fiscal year.
<TABLE>
<CAPTION>
Annual Compensation
(in $)
<S> <C> <C> <C> <C>
Name and Capacity in which Securities
Remuneration was Received Year Salary Bonus Underlying Options
Thomas N. Eisenman 1997 123,461 36,190 7171 Shares
President and CEO 1996 94,846 27,900 -0-
1995 67,308 -0- -0-
Robert W. Lynch, Jr. (1) 1997 -0- -0- -0-
1996 87,500 -0- -0-
1995 150,000 -0- -0-
Richard Hulbert 1997 112,635 23,866 6277 Shares
President, Titan 1996 107,311 25,600 -0-
1995 94,574 16,093 -0-
</TABLE>
<PAGE>
(1) Mr. Lynch resigned as Chief Executive Officer and a Director of the
Company and all other offices with the Company and its four subsidiaries
on January 31, 1996. Compensation includes amounts received from July 1,
1995 through the date of his resignation.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of % of Total Options
Securities Granted to
Underlying Options Employees in Fiscal Exercise or Base
Granted Year Price ($/share) Expiration Date
Name
<S> <C> <C> <C> <C>
Thomas N. Eisenman
President and CEO 7171 24% $1.40 July 1, 2006
Richard R. Hulbert 6277 21% $1.40 July 1, 2006
President, Titan
</TABLE>
Messrs. Hulbert and Burnham and Ms. Rollins have employment agreements
with the Company or one of its three subsidiaries. The term of the employment
agreements for Rollins and Hulbert expires August 31, 1998. Mr. Burnham's
contract expires June 30, 2000.
Each member of the Board of Directors of the Company who are not employees
of the Company or any of its subsidiaries receives a quarterly director's fee
of $400.
See Item 12 (below), "Certain Relationships and Related Transactions," of
this Annual Report on Form 10-KSB for a description of the purchases of Company
common stock by Mr. Eisenman, Mr. Hulbert and certain members of the Board of
Directors during the fiscal years ended June 30, 1996 and 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of the Common Stock, as of the date hereof and giving effect to the June 30,
1996 reverse stock split, by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock,
(ii) each director and executive officer of the Company and (iii) all directors
and executive officers of the Company as a group. Unless otherwise indicated,
each of the stockholders listed below has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
Amount and
Name and Address NATURE OF BENEFICIAL OWNER
CLASS OF BENEFICIAL OWNER PERCENT OF CLASS
<S> <C> <C> <C>
Common William J Ballard 75,000 1.3%
805 South Church
Murfreesboro, Tennessee 37130
Common Michael S. Burnham, Jr. 255,102 4.5%
477 South Main St.
Memphis, Tennessee 38103
Common Hans R. Buser 135,000 (1) 2.4%
Aeschengraben 9
Postfach 2149
CH-40002, Basel, Switzerland
Common Thomas N. Eisenman 324,016 5.7%
905 Industrial Drive
Murfreesboro, Tennessee 37129
Common Richard R. Hulbert 320,265 5.6%
905 Industrial Drive
Murphreesboro, TN 37129
Common Peter Joss 75,000 1.3%
Schutzenstrasse 15
CH-8570, Weinfelden, Switzerland
Common Martin Oester 2,500 0.04%
Beundenfeldstrasse 5
Postfach 694, 3000 Bern, Switzerland
Common Cindy L. Rollins -0- 0.0%
905 Industrial Drive
Murfreesboro, Tennessee 37130
Common Pensionskasse der ASCOOP 2,600,045 (2) 45.9%
Beundenfeldstrasse 5
Postfach 694, 3000 Bern 25,
Switzerland
Common Spida-Ausgleichskassen 1,259,205 (3) 22.2%
Bergstrasse 21
8044 Z<u">rich, Switzerland
Common All officers and directors 1,186,883 20.9%
as a group (6 persons)(4)
</TABLE>
(1) Includes 10,000 shares owned by Mr. Buser's spouse.
(2) Does not include amounts owned by Mssrs. Oester, Joss and
Buser, each of whom has an affiliation with Pensionskasse der
ASCOOP.
(3) Does not include amounts owned by Mr. Buser, who is an
affiliate of Spida Ausgleichskassen.
(4) Excludes shares owned by Pensionskasse der ASCOOP, the
employer of Mr. Oester, a Director of the Company, and with whom Mr.
Joss and Mr. Buser have an affiliation; and excludes shares owned by
Spida-Ausgleichskassen with whom Mr. Buser, a Director, has an
affiliation.
See Item 12 (below), "Certain Relationships and Related Transactions," of
this Annual Report on Form 10-KSB for a description of the purchase by the
Company of all the Company's shares owned by its former chief executive
officer, Robert W. Lynch, Jr., in February 1996 and the sale (and use of
proceeds thereof) of certain securities of the Company during the fiscal years
ended June 30, 1996 and 1997 to certain members of its Board of Directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective January 31, 1996, Robert W. Lynch, Jr., resigned as the
President and Chief Executive Officer of the Company, and from all other
offices and positions with the Company and its subsidiaries. Pursuant to an
agreement between Mr. Lynch and the Company, the Company purchased all of Mr.
Lynch's stock ownership in the Company, aggregating 20,368,200 shares, for a
purchase price of $1,264,000. (Please note that, unless otherwise indicated,
descriptions of transactions in the Company's stock occurring prior to the
effectuation of the June 30, 1996 20-1 reverse stock split reflect "pre-split"
shares.)
In February 1996 the Company offered 10,000,000 shares of such stock at a
price of $.06 per share to key members of management. On February 28, 1996,
pursuant to the Company's offer, Mr. Eisenman acquired 2,200,000 shares for
$132,000 ($0.06 per share) and Richard Hulbert, the President of Titan, also
acquired 2,200,000 shares for $132,000. The Company utilized the $264,000 to
repurchase a portion of the shares held by Lynch and funded the balance of the
purchase of shares held by Lynch by the issuance to Pensionskasse der ASCOOP
and Spida-Ausgleichskassen, the Company's largest two shareholders, of $500,000
each in convertible subordinated debentures (convertible in the event of
default at $.06 per share of common stock) maturing in three years. These
debentures were paid January 31, 1997.
The Company in May 1996 registered up to 250,000 shares of its common
stock (giving effect to the June 30, 1996 reverse stock split) with the
Securities and Exchange Commission for future issuance in accordance with the
terms and conditions of two Employee Stock Option Plans (an incentive stock
option plan and a non-qualified stock option plan) disclosed in Note 11 of the
June 30, 1997 financial statements included in this Form 10-KSB. As of June 30,
1997, 29,556 options had been granted under the Plans. Copies of these Plans
are included in two Form S-8 registration statements filed by the Company with
the Commission in May 1996.
On June 28, 1996 (prior to the June 30, 1996 effectuation of the 20 - 1
reverse stock split) Directors Buser and Joss each purchased 1,500,000 shares
of the Company common stock at a price of $0.07 per share. Director Oester
purchased 50,000 shares at $0.07 per share. Peter Schuler, an affiliate of
Spida-Ausgleichskassen, and Jean-Claude Duby, an affiliate of Pensionskasse der
ASCOOP (the largest shareholder of the Company) also purchased 1,500,000 and
100,000 shares, respectively, of the Company common stock on June 28, 1996 at
the same price per share. On the same date Mr. Eisenman and Mr. Hulbert each
acquired 2,800,000 shares of the Company common stock at a price of $0.06 per
share. The aggregate price of these seven stock purchases equalled $661,500.
The Company will apply the proceeds of these stock sales to pay some of the
indebtedness incurred when it purchased in February 1996 all the shares of
Company common stock owned by Mr. Lynch.
In August 1996 (after effectuation of the reverse stock split) Director
William J Ballard purchased 75,000 shares of Company common stock at a price of
$1.40 per share (an aggregate purchase price of $105,000). The Company will
apply the proceeds to pay Company indebtedness. The Company has approved an
award of 30,000 shares (after effectuation of the reverse stock split)
preliminarily granted to Mr. Eisenman by the Company in the 1996 fiscal year as
additional compensation. As of September 25, 1997, these shares had not been
issued.
On November 16, 1996, the Company sold 47,215 shares of its Common Stock,
$.01 par value to the following Company employees: Kerry Simmons, Anthony
Morriello and Travis Pierson. The total price of $66,101 was paid in cash. The
sales were made pursuant to Rules 505 and 506 of Regulation D, based on the
fact that the aggregate offering price did not exceed $5,000,000 (Rule 505) and
the fact that there were fewer than 35 investors, each of whom the issuer
reasonably believed immediately prior to sale had such knowledge and experience
in financial and business matters that he was capable of evaluating the merits
and risks of the prospective investment.
Effective June 26, 1997, the Company acquired all of the outstanding stock
of Lewis Supply Company, Inc. in a purchase transaction ("the Acquisition").
The Acquisition was consummated by the exchange of 255,102 shares of the
Company's common stock, a commitment to issue an additional 30,612 shares,
$5,952,500 cash and notes payable totaling $750,000 for 100% of the outstanding
shares of Lewis' stock. Michael S. Burnham, Jr., Corporate Leader of Lewis and
one of its largest shareholders, was a party to the Acquisition agreement and
various other agreements related thereto. (See below) Mr. Burnham and various
members of his family (see below) who were shareholders of Lewis received
consideration
in the Acquisition proportional to their ownership interests in Lewis.
Specifically, Mr. Burnham and his family received stock in the following
amounts:
Michael S. Burnham, Jr., 99,298 shares of SETECH, Inc. $.01 Par Value
Common Stock;
Michael S. Burnham, Jr. C/F Gregory Burnham UTMA TN, for 16,954 shares of
SETECH, Inc. $.01 Par Value Common Stock;
Michael S. Burnham, Jr. C/F Spencer Burnham UTMA TN, for 16,954 shares of
SETECH, Inc. $.01 Par Value Common Stock;
Elizabeth A. Harris (Mr. Burnham's spouse), 64,227 shares of SETECH, Inc.
$.01 Par Value Common Stock;
Elizabeth A. Harris, Trustee UA dated 4/23/90 FBO Gregory Burnham and
Spencer Burnham (Mr. Burnham's sons), Elizabeth Harris Trust I, for 19,223
shares of SETECH, Inc. $.01 Par Value Common Stock;
Elizabeth A. Harris, Trustee UA dated 4/23/90 FBO Gregory Burnham and
Spencer Burnham, Elizabeth Harris Trust II, for 19,223 shares of SETECH,
Inc. $.01 Par Value Common Stock;
Elizabeth A. Harris, Trustee UA dated 4/23/90 FBO Gregory Burnham and
Spencer Burnham, Elizabeth Harris Trust III, for 19,223 shares of SETECH,
Inc. $.01 Par Value Common Stock;
Mr. Burnham and his family received Promissory Notes in the following
amounts:
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Michael S.
Burnham, Jr. in the principal amount of $227,304, plus interest at the
rate of 7% per annum, payable in three annual installments of $75,768;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
Harris, in the principal amount of $147,021 plus interest at the rate of
7% per annum, payable in three annual installments of $49,007;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
Harris, Trustee U/A dated 4/23/90 FBO Gregory Burnham and Spencer Burnham
(Elizabeth Harris Trust I) in the principal amount of $44,007, plus
interest at the rate of 7% per annum, payable in three annual installments
of $14,669;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
Harris, Trustee U/A dated 4/23/90 FBO Gregory Burnham and Spencer Burnham
(Elizabeth Harris Trust II) in the principal amount of $44,007, plus
interest at the rate of 7% per annum, payable in three annual installments
of $14,669;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Elizabeth A.
Harris, Trustee U/A dated 4/23/90 FBO Gregory Burnham and Spencer Burnham
(Elizabeth Harris Trust III) in the principal amount of $44,007, plus
interest at the rate of 7% per annum, payable in three annual installments
of $14,669;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Michael J.
Burnham, Jr., Custodian for Spencer Burnham under TN UTMA in the principal
amount of $38,811, plus interest at the rate of 7% per annum, payable in
three annual installments of $12,937;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Michael J.
Burnham, Jr., Custodian for Gregory Burnham under TN UTMA in the principal
amount of $38,811, plus interest at the rate of 7% per annum, payable in
three annual installments of $12,937;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara Harris
in the principal amount of $87,714, plus interest at the rate of 7% per
annum, payable in three annual installments of $29,238;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara Harris,
Trustee U/A dated 4/23/90 FBO Joanna Gorodetzki and Alexander Gorodetzki
(Barbara Harris Trust I) in the principal amount of $26,106, plus interest
at the rate of 7% per annum, payable in three annual installments of
$8,702;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara Harris,
Trustee U/A dated 4/23/90 FBO Joanna Gorodetzki and Alexander Gorodetzki
(Barbara Harris Trust II) in the principal amount of $26,106, plus
interest at the rate of 7% per annum, payable in three annual installments
of $8,702;
Promissory Note, dated June 26, 1997, from SETECH, Inc. to Barbara Harris,
Trustee U/A dated 4/23/90 FBO Joanna Gorodetzki and Alexander Gorodetzki
(Barbara Harris Trust III) in the principal amount of $26,106, plus
interest at the rate of 7% per annum, payable in three annual installments
of $8,702;
Mr. Burnham and his family received cash in the following amounts:
Michael Burnham - $1,022,379; Elizabeth Harris - $661,263; Elizabeth
Harris Trust I -$197,927; Elizabeth Harris Trust II - $197,927; Elizabeth
Harris Trust III - $197,927; Gregory Burnham - $174,565; Spencer Burnham -
$174,565; Nancy Katz - $274,024; John Katz - $274,024; David Katz - $385,158;
Jared Katz - $385,158; Sara Katz $385,158; Barbara Harris -$651,658; Barbara
Harris Trust I - $193,944; Barbara Harris Trust II - $193,944; Barbara Harris
Trust III - $193,944; Joanna Gorodetzki - $129,191; Alex Gorodetzki - $129,191.
Additionally, Mr. Burnham entered into a three-year (beginning June 30,
1997) employment agreement with the Company under which he is entitled to
receive a base salary of $128,000 per year and by which he is entitled to an
option to purchase 45,000 shares of the Company's stock at $3.50 per share.
Also, Mr. Burnham, the Company and Mr. Eisenman are parties to a
Shareholders' Agreement under which Mr. Burnham has the option under certain
circumstances (defined in the agreement) to require the Company to repurchase
his shares at a price of $2.00 per share. Additionally, Mr. Burnham has
granted the Company a right of first refusal under certain circumstances
(defined in the agreement) on any proposed sale of stock by Mr. Burnham.
(Please see Exhibit 10.4 and Note 10 to the June 30, 1997 financial statements
included in this Form 10-KSB for a detailed description of the terms of this
agreement.)
In connection with the Acquisition, the Company issued $1,500,000 in
convertible subordinated debentures (convertible in the event of default at a
rate of one common share for each $3 of principal and interest outstanding) to
two of its major stockholders, Pensionskasse der ASCOOP and Spida
Ausgleichskassen. The debentures are to be repaid in annual installments of
principal of $750,000 plus interest at 8.5%. These debentures mature July 1,
2000.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit
Number Description
EX-2.1 Stock Purchase Agreement dated November 7, 1996, by and between
SETECH, INC. and Serco, Inc. ("Stock Purchase Agreement")
(incorporated by reference to Exhibit 2.1 of Form 10-QSB for
the quarterly period ended December 31, 1996, filed with the
Commission February 14, 1997)
EX-2.2 Letter Agreement dated November 22, 1996, amending Stock
Purchase Agreement (incorporated by reference to Exhibit 2.2 of
Form 10-QSB for the quarterly period ended December 31, 1996,
filed with the Commission February 14, 1997)
EX-2.3 Letter Agreement dated January 29, 1997, amending Stock
Purchase Agreement (incorporated by reference to Exhibit 2.3 of
Form 10-QSB for the quarterly period ended December 31, 1996,
filed with the Commission February 14, 1997)
EX-2.4 Letter Agreement dated January 29, 1997, amending Stock
Purchase Agreement (incorporated by reference to Exhibit 2.4 of
Form 10-QSB for the quarterly period ended December 31, 1996,
filed with the Commission February 14, 1997)
EX-2.5 Stock Purchase Agreement among SETECH, Inc. and the
Shareholders of Lewis Supply Company, Inc. dated June 26, 1997
(the "Acquisition Agreement") (incorporated by reference to
Exhibit 2.1 of Form 8-K filed with the Commission July 10,
1997)
.
Items 2.5(a) through 2.5(l) are schedules or attachments to the
Acquisition Agreement and will be provided to the Commission upon request,
pursuant to Item 601(b)(2) of Regulation S-B.
2.5(a) Disclosure Letter
2.5(b) Allocation of Purchase Price
2.5(c) Employment and Noncompetition Agreement
2.5(d) Non-negotiable Promissory Note
2.5(e) Burnham Employment and Noncompetition Agreement
2.5(f) Shareholder Agreement
2.5(g) Sellers' Representative Power of Attorney
2.5(h) Approved Inventory of Company
2.5(i) Tax Allocation
2.5(j) Opinion of Counsel to Sellers
2.5(k) Opinion of Counsel to Buyers
2.5(l) Addresses for Notice to Sellers
EX-3.(i) Articles of Incorporation, SETECH, INC.
EX-3.(ii) Amended and Restated By-Laws, SETECH, INC. (incorporated by
reference to Exhibit 3.(ii) of the Company's Form 10-KSB for
the fiscal year ended June 30, 1996, filed with the Commission
September 27, 1996)
EX-4.1 Loan and Security Agreement by and among First Union Commercial
Corporation, SETECH, Inc., Lewis Supply Company, Inc.,
Southeastern Technology, Inc., and Titan Services, Inc. dated
June 26, 1997 (incorporated by reference to Exhibit 4.1 of Form
8-K filed with the Commission July 10, 1997)
EX-4.2 Guaranty Agreement dated June 26, 1997, whereby SETECH, Inc.
guarantees subsidiary indebtedness obligations to First Union
Commercial Corporation (incorporated by reference to Exhibit
4.2 of Form 8-K filed with the Commission July 10, 1997)
EX-4.3 Revolver Note dated June 26, 1997 payable by Lewis Supply
Company, Inc. to First Union Commercial Corporation
(incorporated by reference to Exhibit 4.3 of Form 8-K filed
with the Commission July 10, 1997)1
EX-4.4 Revolver Note dated June 26, 1997 payable by Titan Services,
Inc. to First Union Commercial Corporation (incorporated by
reference to Exhibit 4.4 of Form 8-K filed with the Commission
July 10, 1997)
EX-4.5 Revolver Note dated June 26, 1997 payable by Southeastern
Technology, Inc. to First Union Commercial Corporation
(incorporated by reference to Exhibit 4.5 of Form 8-K filed
with the Commission July 10, 1997)
EX-10.1 Employment Agreement of Cindy L. Rollins (incorporated by
reference to Exhibit 10.1 of the Company's Form 10-KSB for the
fiscal year ended June 30, 1996, filed with the Commission
September 27, 1996)
EX-10.2 Employment Agreement of Richard R. Hulbert (incorporated by
reference to Exhibit 10.2 of the Company's Form 10-KSB for the
fiscal year ended June 30, 1996, filed with the Commission
September 27, 1996)
EX-10.3 Employment and Non-Compete Agreement of Michael S. Burnham,
Jr., dated June 26, 1997
EX-10.4 Shareholders' Agreement by and among SETECH, Inc., Michael S.
Burnham, Jr., and Thomas N. Eisenman, dated June 26, 1997
EX-10.5 Agreement between Company and Robert W. Lynch, Jr.
(incorporated by reference to Exhibit 10.5 of the Company's
Form 10-KSB for the fiscal year ended June 30, 1996, filed with
the Commission September 27, 1996)
EX-10.6 Incentive Stock Option Plan (Incorporated by Reference to Form
S-8 Registration Statement filed May 21,1996, effective June 9,
1996, Commission file number 333-04143)
EX-10.7 Non-qualified Stock Option Plan (Incorporated by Reference to
Form S-8 Registration Statement filed May 21,1996, effective
June 9, 1996, Commission file number 333-04147)
EX-21 Subsidiaries of the Registrant
EX-27 Financial Data Schedule (EDGAR version only)
b) On June 27, 1997, the Company filed Form 8-K relating to its
change in certifying accountant from Dempsey Wilson & Company, PC to Arthur
Andersen LLP.
On July 10, 1997, the Company filed Form 8-K relating to its acquisition
of Lewis Supply Company, Inc. On September 9, 1997, the Company filed Form 8-
K/A to provide audited financial statements of Lewis Supply Company, Inc., and
to provide pro forma financial information showing the results of the
acquisition.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
(Registrant) SETECH, INC.
By: (Signature and Title) /S/ THOMAS N. EISENMAN
Thomas N. Eisenman, President and CEO
Principal Executive Officer
Date: September 25, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: (Signature and Title) /S/ THOMAS N. EISENMAN
Thomas N. Eisenman, President, CEO and Director
Date: September 25, 1997
By: (Signature and Title) /S/ CINDY L. ROLLINS
Cindy L. Rollins, Secretary, Vice President, CFO and
Director
Chief Financial Officer and Chief Accounting Officer
Date: September 25, 1997
By: (Signature and Title) /S/ WILLIAM J BALLARD
William J Ballard, Director
Date: September 25, 1997
By: (Signature and Title) /S/ HANS R. BUSER
Hans R. Buser, Director
Date: September 25, 1997
By: (Signature and Title) /S/ PETER M. JOSS
Peter M. Joss, Director
Date: September 25, 1997
By: (Signature and Title) /S/ MARTIN A. OESTER
Martin A. Oester, Director
Date: September 25, 1997
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(D) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report with respect to the registrant's last fiscal year nor any
proxy material with respect to any annual or other meeting of security-holders
has been sent to security-holders.
<PAGE>
EXHIBIT 3.(I)
CERTIFICATE OF INCORPORATION
OF
HIGH POINT VENTURES, INC.
The undersigned, being of legal age, in order to form a corporation under
and pursuant to the laws of the State of Delaware, does hereby set forth as
follows:
FIRST: The name of the corporation is
HIGH POINT VENTURES, INC.
SECOND: The address of the initial registered office and registered
agent in this state is c/o United Corporate Services, Inc., 410 South State
Street, in the City of Dover, County of Kent, State of Delaware 19901 and the
name of the registered agent at said address is United Corporate Services, Inc.
THIRD: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the corporation laws
of the State of Delaware.
FOURTH: The corporation shall be authorized to issue the following
shares:
CLASS NUMBER OF SHARES PAR VALUE
COMMON 15,000,000 $.01
FIFTH: The name and address of the incorporator are as follows:
NAME ADDRESS
Ray A. Barr 9 East 40th Street
New York, New York 10016
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the corporation, and for further
definition, limitation and regulation of the powers of the corporation and its
directors and stockholders:
(1) The number of directors of the corporation shall be such as from
time to time shall be fixed by, or in the manner provided in the By-Laws.
Election of directors need not be by ballot unless the By-Laws so provide.
(2) The Board of Directors shall have power without the assent to
vote of the stockholders:
(a) To make, alter, amend, change, add to or repeal the By-Laws
of the corporation; to fix and vary the amount to be reserved for
any proper purpose; to authorize and cause to be executed mortgages
and liens upon all or any part of the property of the corporation;
to determine the use and disposition of any surplus or net profits;
and to fix the times for the declaration and payment of dividends.
(b) To determine from time to time whether, and to what times
and places, and under what conditions the accounts and books of the
corporation (other than the stockledger) or any of them, shall be
open to the inspection of the stockholders.
(3) The directors in their discretion may submit any contract or act
for approval or ratification at any annual meeting of the stockholders or
at any meeting of the stockholders called for the purpose of considering
any such act or contract, and any contract or act that shall be approved
or be ratified by the vote of the holders of a majority of the stock of
the corporation which is represented in person or by proxy at such meeting
and entitled to vote thereat (provided that a lawful quorum of
stockholders be there represented in person or by proxy) shall be as valid
and as binding upon the corporation and upon all the stockholders as
though it had been approved or ratified by every stockholder of the
corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors' interest, or for any other reason.
(4) In addition to the powers and authorities hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the corporation; subject, nevertheless, to the
provisions of the statutes of Delaware, of this certificate, and to any
By-Laws from time to time made by the stockholders; provided, however,
that no By-Laws so made shall invalidate any prior act of the directors
which would have been valid if such By-Law had not been made.
SEVENTH: No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law,
(3) liability under Section 174 of the Delaware General Corporation Law or (4)
a transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of
the corporation's directors to the corporation or its stockholders to the
fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law, as amended from time to time. The corporation shall indemnify
to the fullest extent permitted by Sections 102(b)(7) and 145 of the Delaware
General Corporation Law, as amended from time to time, each person that such
Sections grant the corporation the power to indemnify.
EIGHTH: Wherever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of Section 279 Title 8 of
the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths (3/4) in value of the creditors
or class of creditors, and/or of the stockholders or class of stockholders of
this corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of this corporation as consequence of such compromise
or arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this corporation, as the case may be,
and also on this corporation.
NINTH: The corporation reserves the right to amend, alter, change or
refusal any provision contained in this certificate of Incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this reserved
power.
IN WITNESS WHEREOF, the undersigned hereby executes this document and
affirms that the facts set forth herein are true under the penalties of perjury
this day of , 1987.
Ray A. Barr, Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HIGH POINT VENTURES, INC.
Under Section 242 of the
CORPORATION LAW OF THE STATE OF DELAWARE
HIGH POINT VENTURES, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by written unanimous
consent filed with the minutes of the board, adopted the following resolution
proposing and declaring advisable the following amendment to the Certificate of
Incorporation of said corporation:
"1. That Article FIRST of the Certificate of Incorporation be amended and,
as amended, read as follows:
'FIRST: The name of the corporation is AVIATION EDUCATION SYSTEMS, INC.'
SECOND: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of section 242 of the General Corporation Law of the
State of Delaware.
THIRD: Prompt notice of the taking of this corporate action is being given to
all stockholders who did not consent in writing, in"accordance with Section 228
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by Philip Wayne Elkins, its President, and attested by Louis Kelem, its
Secretary, this 21st day of August, 1987.
HIGH POINT VENTURES, INC.
By:
Philip Wayne Elkins, President
ATTEST:
By:
Louis Kelem, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
AVIATION EDUCATION SYSTEMS, INC.
Aviation Education Systems, Inc., a corporation organized and existing
under the laws of the State of Delaware, pursuant to Title 8. Section 242 of
the General Corporation Law of be State of Delaware does hereby certify:
FIRST: That the board of directors of the corporation by written consent
filed with the minutes of the board adopted the following resolution proposing
and declaring advisable the following amendment to the Certificate of
Incorporation of the corporation;
1. That article FOURTH of the Certificate of Incorporation be amended
and, as amended, read as follows:
FOURTH: The corporation shall be authorized to issue the following
shares:
CLASS NUMBER OF SHARES PAR VALUE
COMMON 30,000,000 $.01
SECOND: That the aforesaid amendment was duly adopted by the directors and
shareholders in accordance with the applicable provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Robert W. Lynch, Jr., its President, and attested by Cindy L.
Rollins, its Secretary, this 25th lay of November, 1992.
AVIATION EDUCATION SYSTEMS, INC.
By:
Robert W. Lynch, Jr., President
ATTEST:
By:
Cindy L. Rollins, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
AVIATION EDUCATION SYSTEMS, INC.
Aviation Education Systems, Inc., a corporation organized and existing
under the laws of the State of Delaware, pursuant to Title 8, Section 242 of
the General Corporation Law of the State of Delaware, does hereby certify:
FIRST: That the board or directors of the corporation, by written consent
filed with the minutes of the board adopted the following resolution proposing
and declaring advisable the following amendment to the Certificate of
Incorporation of the corporation:
1. That article FOURTH of the Certificate of Incorporation be amended
and, as amended, read as follows:
FOURTH: The corporation shall be authorized to issue the following
shares:
CLASS NUMBER OF SHARES PAR VALUE
COMMON 400,000,000 $.01
SECOND: That the aforesaid amendment was duly adopted by the directors and
shareholders in accordance with the applicable provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Robert W. Lynch, Jr., its President, and attested by Cindy L.
Rollins, its Secretary, this 24th day of June, 1993.
AVIATION EDUCATION SYSTEMS, INC.
By:
Robert W. Lynch, Jr., President
ATTEST:
By:
Cindy L. Rollins, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF AVIATION EDUCATION SYSTEMS, INC.
Under Section 242 of the Corporation
LAW OF THE STATE OF DELAWARE
AVIATION EDUCATION SYSTEMS, INC. (the "Corporation") a corporation
organized and existing under and by virtue of the General corporation Law of
the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, by written unanimous
consent filed with the minutes of the board, adopted the following resolution
proposing and declaring advisable the following amendment to the Certificate of
Incorporation of said corporation:
1. That Article FIRST of the Certificate of Incorporation, as
previously amended, be further amended to read as follows:
"FIRST: The name of the corporation is SETECH, INC."
SECOND: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General corporation Law of the
State of Delaware.
THIRD: Prompt notice of the taking of this corporate action is being given
to all stockholders who did not consent in writing, in accordance with Section
228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Thomas N. Eisenman, its President, and attested by Cindy L. Rollins,
its Secretary, this 9th day of August, 1996.
AVIATION EDUCATION SYSTEMS, INC.
By:
Thomas N. Eisenman, President
ATTEST:
By:
Cindy L. Rollins, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
SETECH, INC.
SETECH, Inc. (formerly known as Aviation Education Systems, Inc. ) a
corporation organized and existing under the laws of the State of Delaware,
pursuant to Title 8, Section 242 of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: That the board of directors of the corporation, by written consent
filed with the minutes of the board adopted the following resolution proposing
and declaring advisable the following amendment to the Certificate of
Incorporation of the corporation;
1. That article FOURTH of the Certificate of Incorporation be amended
and, as amended, read as follows:
FOURTH: The Corporation shall be authorized to issue the following
shares:
CLASS NUMBER OF SHARES PAR VALUE
COMMON 10,000,000 $.01
SECOND: That the aforesaid amendment was duly adopted by the directors
and shareholders in accordance with the applicable provisions of Section 242 of
the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Thomas N. Eisenman, its President, and attested by Cindy L. Rollins,
its Secretary, this day of , 1997.
SETECH, INC.
By:
Thomas N. Eisenman, President
ATTEST:
By:
Cindy L. Rollins, Secretary
<PAGE>
EX-10.3
EMPLOYMENT AND NON-COMPETE AGREEMENT
(Burnham)
THIS EMPLOYMENT AND NON-COMPETE AGREEMENT (this "Agreement"), has been
entered into as of the day of June, 1997, by and
among SETECH, INC., a Delaware corporation ("SETECH"), LEWIS SUPPLY CO., INC.
("Employer"), and MICHAEL S. BURNHAM, JR., an individual and resident of Shelby
County, Tennessee ("Employee").
RECITALS
WHEREAS, SETECH has entered into a Stock Purchase Agreement dated June
___, 1997 (the "Stock Purchase Agreement"), to purchase all of the shares of
capital stock of Employer, for which Employee is the chief executive officer;
WHEREAS, as a condition of the Stock Purchase Agreement, the parties
agreed to enter into certain employment and non-competition agreements;
WHEREAS, Employer desires to obtain the services of Employee, and Employee
desires to secure employment from the Employer upon the following terms and
conditions;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee as President of
Employer, and Employee hereby accepts and agrees to such employment, pursuant
and subject to the orders, advice and direction of the Chairman of the Board
and the Board of Directors of Employer. Employee shall perform such other
duties as are customarily performed by one holding such position in other, same
or similar businesses or enterprises as that engaged in by Employer. Employee
also shall render such services and duties as may be reasonably assigned to him
from time to time by the Chairman of the Board and the Board of Directors of
Employer. Employee shall report directly to the Chairman of the Board of
Employer.
2. BEST EFFORTS OF EMPLOYEE. Employee agrees that he will at all times
faithfully, industriously, and to the best of his ability, experience and
talents, perform all of the duties that may be reasonably required of and from
him pursuant to the express and implicit terms hereof, to the reasonable
satisfaction of Employer. Such duties shall be rendered at the office of
Employer in Memphis, Tennessee.
3. TERM OF EMPLOYMENT. The term of the employment of Employee shall be
for a period of three (3) years, commencing June 30, 1997 (the "Commencement
Date"), and terminating June 30, 2000 (the "Expiration Date"), and subject to
earlier termination as provided in Section 5 of this Agreement.
4. COMPENSATION OF EMPLOYEE. During the term of its employment of
Employee, Employer shall pay Employee, and Employee shall accept from Employer
in return for his services and the covenants contained herein, the following:
A. BASE COMPENSATION. Employer shall pay Employee, and Employee
shall accept from Employer, in payment of Employee's services hereunder,
annual base compensation of One Hundred and Twenty-Eight Thousand Dollars
($128,000.00) (less applicable payroll taxes), payable monthly in
accordance with the standard practices of the Employer ("Base
Compensation").
B. BONUS. In addition, Employee may also be paid, on an annual or
other basis, such bonus or other compensation ("Bonus") as is determined
in accordance with the SETECH, Inc. Executive Incentive Bonus Plan for a
Division President position, as such plan may be adopted by the Board of
Directors of SETECH from time to time (the "Plan"). Notwithstanding the
foregoing, the amount awarded to Employee under such Plan or any other
executive bonus compensation plan (including stock option plans or stock
appreciation rights) adopted by Employer in excess of Base Compensation,
shall be proportional to that received by Thomas N. Eisenman, in the
proportion that Thomas N. Eisenman's Base Compensation bears to the Base
Compensation of Employee.
C. STOCK OPTION. Immediately upon the closing of the Stock Purchase
Agreement, Employee is hereby granted an option to purchase Forty Five
Thousand (45,000) shares of common stock of SETECH ("Stock") at $3.50 per
share (the "Option"). Employee (or his personal representative) must
exercise this Option by delivery of a written instrument to Employer: (i)
during the term of his employment by Employer or within thirty (30) days
after such employment is terminated; or (ii) within sixty (60) days after
the date of Employee's death. For purposes of this Section, in the event
the Stock shall be subdivided into a greater number of shares of Stock,
the Option in effect immediately prior to each such subdivision,
simultaneously with the effectiveness of such subdivision, shall be
proportionately increased. In the event the Stock shall be combined into a
smaller number of shares of Stock, the Option in effect immediately prior
to each such combination, simultaneously with the effectiveness of such
combination, shall be proportionately decreased.
D. EMPLOYEE BENEFITS. Employee shall be entitled to receive the
normal health care benefits and such other employment benefits as are
generally available to senior officers and employees of Employer and
SETECH.
5. EARLY TERMINATION.
A. FOR CAUSE TERMINATION BY EMPLOYER. The Employer may terminate the
employment of Employee at any time for "Cause." For the purposes hereof,
the term "Cause" shall mean, without limitation: the conviction of
Employee of a felony, or a crime of moral turpitude designated as such
under the laws of the State of Tennessee; a breach of trust with funds of
Employer or any affiliate thereof; the failure of the Employee to carry
out the reasonable written instructions of the Chairman of the Board or
the Board of Directors of Employer; the inability of Employee, through
sickness or other incapacity, to perform his duties under this Agreement
for a period in excess of ninety (90) substantially consecutive days; or a
material breach of this Agreement. In the event of the termination of
Employee for Cause, Employer shall have no obligation to make any further
payments to Employee except for Base Compensation earned through the date
of termination, and Employee shall forfeit and lose his right to receive
any other form of compensation other than benefits currently vested with
Employee through any disability plan of the Employer or pursuant to stock
options granted to Employee which by their terms are exercisable after
termination of employment.
B. WITHOUT CAUSE TERMINATION BY EMPLOYER. The Employer also may
terminate this Agreement prior to the expiration of the initial or
successive term of this Agreement upon sixty (60) days prior written
notice to Employee. If Employer shall so terminate this Agreement other
than for Cause, Employee shall be entitled to:
(1) All compensation and benefits earned through the date of
termination;
(2) Base Compensation for one year from the date of termination
plus Termination Bonus, payable in monthly installments commencing
one month from the date of termination and ending one year from the
date of termination. For the purposes of this Agreement, the term
"Termination Bonus" shall mean as follows:
(a) If Employee is terminated less than six months from the
Commencement Date, Employee is not entitled to receive any
Termination Bonus;
(b) If Employee is terminated six months or more but less
than one year from the Commencement Date, Employee is entitled
to receive a Termination Bonus based on Employer's annualized
current fiscal year earnings (divided by the number of months in
the current fiscal year as of the date of termination and
multiplied by a factor of twelve) and determined in accordance
with the criteria of the Plan;
(c) If Employee is terminated one year or more but less
than eighteen months from the Commencement Date, Employee is
entitled to receive a Termination Bonus equal to the Bonus
received by Employee during the previous fiscal year;
(d) If Employee is terminated eighteen months or more but
less than two years from the Commencement Date, Employee is
entitled to receive a Termination Bonus based on Employer's
annualized current fiscal year earnings (divided by the number
of months in the current fiscal year as of the date of
termination and multiplied by a factor of twelve) and determined
in accordance with the criteria of the Plan;
(e) If Employee is terminated two years or more but less
than thirty months from the Commencement Date, Employee is
entitled to receive a Termination Bonus equal to the Bonus
received by Employee during the previous fiscal year; or
(f) If Employee is terminated thirty months or more from
the Commencement Date, Employee is entitled to receive a
Termination Bonus based on Employer's annualized current fiscal
year earnings (divided by the number of months in the current
fiscal year as of the date of termination and multiplied by a
factor of twelve) and determined in accordance with the criteria
of the Plan
(3) Assistance to Employee in securing replacement employment
from an executive search firm, the reasonable costs of which shall be
paid by Employer;
(4) Health Insurance coverage for Employee (and his family) for
the lesser period of one year from the date of termination or until
such time as Employee (and his family) becomes eligible for coverage
under a subsequent employer's health plan; and
(5) Coverage under any other benefit plans under which Employee
was covered prior to termination (excluding any 401(k) or other
deferred compensation plan, any bonus plans, stock option plans or
other compensation plans) for the period set forth in Section 5B(4).
C. TERMINATION BY EMPLOYEE FOR CHANGE IN CONTROL. Upon sixty (60)
days prior written notice to Employer, the Employee may terminate this
Agreement upon a Change in Control of Employer or SETECH which is coupled
with a material dimunition in the responsibilities, position or authority
of Employee. As used in this Section C, the term "Change in Control" shall
have the same meaning as set forth in Section 3 of that certain
Shareholder Agreement by and between SETECH, Employee and Thomas N.
Eisenman dated as of June 30, 1997, as such Shareholder Agreement may be
amended from time to time. In the event of such termination under this
Section, Employee will be entitled to the same benefits and compensation
as set forth in Section 5B.
6. RESTRICTIVE COVENANTS. Employee covenants and agrees that, during
the term of his employment with Employer and for a period of one (1) year
thereafter, he shall be subject to the following restrictions:
A. COMPETITION. Employee will not, directly or indirectly, engage or
invest in, own, manage, operate, finance, control or participate in the
ownership, management, operation, financing or control of, be employed by,
associated with, or in any manner connected with, lend credit to, or
render services or advice to any business whose products, services or
activities are related to the integrated industrial supply industry,
anywhere within the United States of America; provided, however, that
Employee may purchase or otherwise acquire up to (but not more than) two
percent (2%) of any class of securities of any enterprise (but without
otherwise participating in the activities of such enterprise) if such
securities are listed on any national or regional securities exchange or
have been registered under Section 12(g) of the Securities Exchange Act of
1934.
B. CUSTOMER SOLICITATION. Employee will not in any way, directly or
indirectly, for himself or on behalf of or in conjunction with any person
or entity other than the Employer or its affiliates, including SETECH,
solicit, divert, take away, or attempt to take away any person or entity
(or their business or patronage) that has been a customer or client of the
Employer or its affiliates or whose business or patronage the Employer or
its affiliates have solicited or sought to obtain, during the term of his
employment with Employer. Notwithstanding the foregoing provisions of this
Section B, Employee may solicit such customers or clients if Employee is
presently engaged in a business which does not compete with Employer and
its affiliates.
C. EMPLOYEE SOLICITATION. Employee will not in any way, directly or
indirectly, for himself or on behalf of or in conjunction with any person
or business entity other than the Employer or its affiliates, including
SETECH, solicit the employment of any officers, directors, employees or
agents of the Employer or its affiliates.
D. CONFIDENTIAL INFORMATION.
(1) DEFINITION. For purposes of this Agreement, the term
"Confidential Information" shall mean information that the Employer
or its affiliates, including SETECH, own or possess, that they use or
is potentially useful in their businesses, that they treat as
proprietary, private, or confidential, and that is not generally
known to the public, including, but not limited to, information
relating to existing and contemplated businesses, sales, company
financial information, products, technology, manufacturing
techniques, engineering processes, chemical formulae, marketing,
sales methods, technical service expertise, employees, lists of
actual or potential customers, actual and potential customer usage
and requirements, new and existing programs or services, prices and
terms, pricing strategy, sources of supplies and materials, operating
and other cost data, trade secrets, inventions, patent applications,
and other proprietary information as may exist or be developed from
time to time by the Employer or its affiliates.
(2) INFORMATION ACCESS AND DISCLOSURE. Employee acknowledges
that he shall occupy a position of trust and confidence with the
Employer and will have access to and may develop Confidential
Information of actual or potential value to or otherwise useful to
Employer or its affiliates, including SETECH. Employee shall hold in
strictest confidence and not disclose, without express written
authorization from the Chairman of the Board or the Board of
Directors of Employer, to any person or entity, other than the
Employer or its affiliates and their officers and agents, or use in
whole or in part any Confidential Information that Employee may
acquire while employed by Employer.
(3) EMPLOYER PROPERTY RETURN. At the termination of Employee's
employment with Employer, or at any other time that Employer may
request, Employee shall promptly deliver to Employer all memoranda,
notes, records, reports, documents, sketches, plans, models,
compositions, formulations, computer data, and other tangible items
made or compiled by Employee or in Employee's possession concerning
or relating to the Employer or its affiliates, including SETECH, and
their businesses, operations or affairs and any Confidential
Information that the Employee may possess or have under his control
("Company Property").
E. EXTENSION OF TERM OF RESTRICTIVE COVENANTS. If Employee breaches
any of the foregoing restrictive covenants, the term of such covenant
shall be extended by the period of the duration of such breach.
F. EXPIRATION OF CERTAIN COVENANTS ON EXPIRATION DATE.
Notwithstanding the foregoing, if Employee remains employed by Employer
for the entire three-year term of employment and does not violate any of
the foregoing restrictive covenants during that time, the term of the
restrictive covenants against competition (Section 6(A)) and customer
solicitation (Section 6(B)) shall expire on the Expiration Date.
7. REMEDIES. Employee acknowledges that any violation of any of the
restrictive covenants contained in Section 6 of this Agreement will cause
continuing and irreparable harm to the Employer and its affiliates, including
SETECH, for which monetary damages would not be adequate compensation.
Employee, therefore, agrees that, if he violates or threatens to violate any of
these restrictive covenants, the Employer and its affiliates shall be entitled,
in addition to any other legal or equitable remedies available to it, to (a)
entry of an injunction, temporary and permanent, enjoining such breach and
securing specific performance of this Agreement, including requiring Employee
to return all Company Property; (b) monetary damages, insofar as they can be
determined; and (c) recovery of the reasonable attorney's fees and costs of
prosecuting any such action of Employer or its affiliates. The parties waive
the right to a jury trial with respect to any controversy or claim between or
among the parties hereto, including but not limited to those arising out of or
relating to this Agreement, as well as any claim based on or arising from an
alleged tort.
8. ARBITRATION. Any controversy or claim between or among the parties
hereto, including any claim arising out of or relating to this Agreement,
Employee's employment by Employer, or based on or arising from any alleged
tort, shall be determined by binding arbitration in accordance with the Federal
Arbitration Act (or, if not applicable, the applicable Tennessee law), the
rules of practice and procedure for the arbitration of commercial disputes of
the American Arbitration Association ("A.A.A."), and the "Special Rules" set
forth below. In the event of any inconsistency, the Special Rules shall
control. Judgment upon any arbitration award may be entered in any court
having jurisdiction. Any party to this Agreement may bring an action,
including a summary or expedited proceeding, to compel arbitration of any
controversy or claim to which this Agreement applies in any court having
jurisdiction over such action. All costs of arbitration, including the
reasonable attorney's fees and expenses incurred of the prevailing party, shall
be paid by the losing party in arbitration.
A. SPECIAL RULES. The arbitration shall be conducted in the City of
Nashville, Tennessee, and administered by A.A.A., who will appoint an
arbitrator. All arbitration hearings will be commenced within ninety (90)
days of the demand for arbitration; further, the arbitrator shall only,
upon a showing of cause, be permitted to extend the commencement of such
hearing for an additional sixty (60) days.
B. SPECIFIC PERFORMANCE. Nothing in Section 11 of this Agreement
shall be construed to preclude the Employer or its affiliates, successors
or assigns (including SETECH) from obtaining injunctive or equitable
relief to secure specific performance of this Agreement, including
requiring Employee to return all Company Property, or otherwise to prevent
a breach or contemplated breach of this Agreement by Employee. Employee
hereby consents and agrees that the State of Tennessee and any state or
federal court located therein has jurisdiction over Employee and that the
proper place of venue shall be the County of Rutherford, Tennessee.
9. ASSUMPTION BY SETECH. In the event Employer is dissolved, merged or
consolidated into another entity or otherwise ceases to exist, or in the event
Employer defaults under this Agreement, SETECH hereby agrees to assume the
remaining obligations of the Employer under this Agreement.
10. SEVERABILITY. Whenever possible, each provision and term of this
Agreement will be interpreted in a manner to be effective and valid; however,
if any provision or term of this Agreement is held to be prohibited or invalid,
then such provision or term will be ineffective only to the extent of such
prohibition or invalidity, without invalidating or affecting in any manner
whatsoever the remainder of such provision or term or the remaining provisions
or terms of this Agreement. More specifically, Employee acknowledges that the
restrictive covenants contained in Section 6 of this Agreement are reasonable
in scope, time and geographic area; however, if any of these covenants are held
to be unreasonable, arbitrary, or against public policy, such covenants will be
considered divisible with respect to scope, time, and geographic area, and in
such lesser scope, time and geographic area, will be effective, binding and
enforceable against the Employee.
11. SUCCESSORS AND ASSIGNS. This Agreement will be binding upon the
Employer and the Employee and will inure to the benefit of the Employer and its
affiliates, successors and assigns (including SETECH), as well as to the
Employee and his heirs. This Agreement is not assignable by the Employee,
except upon the written agreement of both parties.
12. WAIVER. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Agreement will operate as a waiver of
such right, power, or privilege, and no single or partial exercise of any such
right, power, or privilege will preclude any other or further exercise of such
right, power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no claim or
right arising out of this Agreement can be discharged by one party, in whole or
in part, by a waiver or renunciation of the claim or right unless in writing,
signed by the other party; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement.
13. GOVERNING LAW. This Agreement and all performance hereunder shall be
construed and governed by the laws of the State of Tennessee, without regard to
conflicts of laws principles.
14. CONSTRUCTION. The headings of Sections in this Agreement are
provided for convenience only and will not affect its construction or
interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms. All references
herein to the word "and" shall mean "and/or," and all references herein to the
word "or" shall mean "and/or." The parties, in acknowledgement that all of
them have been represented by counsel and that this Agreement has been
carefully negotiated, agree that the construction and interpretation of this
Agreement and other documents entered into in connection herewith shall not be
affected by the identity of the party or parties under whose direction or at
whose expense this Agreement and such documents were prepared or drafted.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter of this Agreement and
supersedes all prior written and oral agreements and understandings between
SETECH, Employer and Employee with respect to the subject matter of this
Agreement. This Agreement may not be amended except by a written agreement
executed by the party to be charged with the amendment.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
EMPLOYEE: EMPLOYER:
LEWIS SUPPLY CO., INC.
____________________________ By:________________________________
MICHAEL S. BURNHAM, JR.
Title:_____________________________
SETECH, INC.:
By:___________________________
Title:________________________
<PAGE>
EX-10.4
SHAREHOLDERS' AGREEMENT
This SHAREHOLDERS' AGREEMENT is made as of June , 1997 by and
among SETECH, Inc., a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware ("Corporation"), Michael S.
Burnham, Jr., a resident of Shelby County, Tennessee ("Burnham"), and Thomas N.
Eisenman, a resident of Davidson County, Tennessee ("Eisenman").
WHEREAS, pursuant to its Charter, the Corporation has authorized
capital stock consisting of Ten Million shares of Common Stock, $.01 par value
("Stock");
WHEREAS, the Corporation, in connection with the acquisition of Lewis
Supply Company, Inc. ("LSCI") pursuant to that certain Stock Purchase Agreement
among the Corporation, Burnham and others, dated as of the date hereof (the
"Stock Purchase Agreement"), has agreed to issue, in partial consideration for
the sale by Burnham of all his shares of the capital stock of LSCI, 285,714
shares of Stock to Burnham ("Burnham's Stock"), of which 225,102, shares have
been issued to Burnham concurrently herewith;
WHEREAS, Eisenman owns 324,016 shares of Stock ("Eisenman's Stock");
WHEREAS, the parties hereto believe that it is in their respective
and mutual best interests to make provision for certain matters concerning
Stock owned by Burnham and Eisenman; and
WHEREAS, the parties hereto desire to set forth in writing their
understandings and agreements.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises hereinafter set forth, and of other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound, hereby agree as follows:
Section 1. TERM OF AGREEMENT. This Agreement shall be effective as of
the date first above written and shall, except as otherwise expressly provided
herein, terminate on the earlier of:
(i) June 30, 2000; or
(ii) the unanimous written agreement of the parties hereto.
Sections 4 and and 5 hereof shall earlier terminate in the event of a closing
of a Public Offering.
Section 2. REGISTRATION RIGHTS.
(a) If after the date hereof the Corporation closes a Public Offering and
after such closing, but prior to June 30, 2000, proposes to register any of its
Stock under the Securities Act of 1933 (the "1933 Act") for sale to the public,
whether for its own account or for the account of other holders of Stock or
both, the Corporation will use its best efforts to cause Burnham's Stock to be
included in the securities to be covered by the registration statement proposed
to be filed by the Corporation, pro rata with any shares of Stock held by other
holders of Stock to be included in such registration. In connection with any
such registration, Burnham will furnish to the Corporation in writing such
information with respect to himself as shall be reasonably necessary in order
to assure compliance with federal and applicable state securities laws. Burnham
will indemnify and hold harmless the Corporation, its agents, officers and
directors, against all losses, claims, damages or liabilities, joint or
several, to which the Corporation or any such agent, officer or director may
become subject under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in a registration
statement under which shares of Burnham's Stock were registered pursuant to
this Section 2, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements not misleading; provided, however, that
Burnham will be liable hereunder if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with information pertaining to Burnham, furnished in
writing to the Corporation by Burnham specifically for use in such registration
statement. All expenses incurred in connection with the registration of
Burnham's Stock shall be paid by the Corporation, provided, however, that the
Corporation's obligation to pay attorney's fees for any counsel retained by
Burnham shall be limited to $2,500 of reasonable attorney's fees.
(b) Notwithstanding the provisions of Section 2(a),
(i) if no other outstanding Stock of any selling shareholder (other
than Burnham) of the Corporation is included in a registration
statement, the Corporation shall not be required to include
Burnham's Stock in the securities covered by such registration
statement if it is a form of registration statement which limits
the amount of securities which may be registered by the issuer
and/or selling security holders; and
(ii) if the offering being registered by the Corporation is
underwritten and if no other outstanding Stock of any selling
shareholder of the Corporation is included therein and if the
representative of the underwriters certifies in writing that the
inclusion therein of Burnham's Stock would materially and
adversely affect the sale by the Corporation of of Stock to be
issued and sold by the Corporation thereunder, the public
offering of Burnham's Stock included in such registration
statement shall be delayed for a period of 90 days after the
commencement of the underwritten public offering, provided that
the representative of the underwriters certifies in writing that
such delayed offering would not materially and adversely affect
the sale of the securities to be sold and issued by the
Corporation or, if the representative of the underwriters will
not so certify, Burnham shall not be permitted to participate in
the registration.
(iii) the Corporation shall not be required to effect a registration
of shares of Burnham's Stock under Section 2(a) of this
Agreement if in the written opinion of counsel to the
Corporation, which counsel and the opinion so rendered shall be
reasonably acceptable to Burnham, Burnham may sell without
registration under the 1933 Act all Burnham's Stock for which
Burnham requested registration under the provisions of the 1933
Act and in the quantity in which Burnham's Stock was proposed to
be sold.
For purposes of this SECTION 2, in the event that the Stock shall be
subdivided into a greater number of shares of Stock, the number of shares of
Burnham's Stock available for registration in effect immediately prior to each
such subdivision, simultaneously with the effectiveness of such subdivision,
shall be proportionately increased. Conversely, in the event that the Stock
shall be combined into a smaller number of shares of Stock, the number of
shares of Burnham's Stock available for registration in effect immediately
prior to each such combination, simultaneously with the effectiveness of such
combination, shall be proportionately reduced.
Section 3. PUT RIGHT OF BURNHAM. Burnham shall have the right to
demand that the Corporation repurchase Burnham's Stock at a price of $2.00 per
share (subject to adjustment as set forth below); PROVIDED, HOWEVER, that
Burnham may exercise such right to demand repurchase only (i) upon a Change in
Control of the Corporation (as hereinafter defined), or (ii) after April 30,
2000 in the event that the Corporation has not made a Public Offering prior to
that date.
For purposes of this SECTION 3, in the event that the Stock shall be
subdivided into a greater number of shares of Stock, the purchase price in
effect immediately prior to each such subdivision, simultaneously with the
effectiveness of such subdivision, shall be proportionately reduced.
Conversely, in the event that the Stock shall be combined into a smaller number
of shares of Stock, the purchase price in effect immediately prior to each such
combination, simultaneously with the effectiveness of such combination, shall
be proportionately increased.
For purposes of this SECTION 3, "Change in Control" shall mean an event
not approved by Burnham in which:
(i) the Corporation effects any sale, lease, assignment, transfer, or
other conveyance of all or substantially all of the assets of the
Corporation; or
(ii) the Company effects any consolidation or merger involving the
Corporation; PROVIDED, HOWEVER, that in the event of a merger of any
entity into the Corporation or the acquisition by the Corporation of such
entity, no Change in Control shall occur so long as (a) the Corporation is
the surviving entity, and (b) the holders of voting stock of the
Corporation immediately prior to such merger or acquisition are the
holders of not less than a majority of the voting stock of the Corporation
immediately following such merger or acquisition; or
(iii) any person or group of persons acquires not less than thirty
five percent (35%) of the Corporation's voting securities without prior
approval of the Corporation's board of directors or, after completion of a
Public Offering, any person or group of persons acquires not less than
twenty percent (20%) of the Corporation's voting securities without prior
approval of the Corporation's board of directors; or
(iv) the current Board of Directors of the Corporation (including any
new members elected or reelected in the ordinary course of business at an
annual or special shareholders meeting) cease to comprise a majority of
the Board of Directors of the Corporation.
Notwithstanding the provisions of Section 1 hereof, the rights of Burnham
under this Section 3 shall not terminate June 30, 2000 and shall terminate the
earlier of:
(x) the completion hereafter of a Public Offering; or
(y) the termination for "cause" (as defined in that certain
Employment Agreement between the Corporation and Burnham of even date
herewith) of Burnham's employment with the Coroporation, in which
event Burnham may exercise the put right hereunder by written notice
to the Corporation delivered no later than 15 days following the date
of such termination and the Corporation shall make payment therefor
(upon delivery of the applicable stock certificates) no later than 15
days following delivery of such notice; or
(z) cessation of Burnham's employment with the Corporation for any
other reason (e.g., involuntary termination, death or permanent
disability), in which event Burnham may exercise the put right
hereunder by written notice to the Corporation delivered no later
than 180 days following the date of such employment cessation and the
Corporation shall make payment therefor (upon delivery of the
applicable stock certificates) no later than 180 days following
delivery of such notice.
Section 4. RIGHT OF FIRST REFUSAL.
(a) Burnham hereby agrees not to transfer, sell, convey, exchange,
pledge or otherwise dispose of any shares of Stock owned by him except in
compliance with this Section 4.
(b) If Burnham desires to transfer, sell, convey, exchange, pledge or
otherwise dispose of any shares of Stock other than:
(i) pursuant to Section 3; or
(ii) in connection with the registration of such shares in
accordance with the 1933 Act; or
(iii) to a Permitted Transferee (as defined in Section 9),
subject to the provisions of Section 4(d) and 9 hereto; or
(iv) in a "brokers' transaction" as presently defined in Rule
144 of the Securities and Exchange Commission (the "SEC");
or
(v) in any sale transaction in which Eisenman participates
pursuant to Section 5 hereof
Burnham shall first give written notice to the Corporation to the effect that
Burnham wishes to dispose of such Stock, stating the price at and other
material terms upon which Burnham wishes to dispose of such Stock and the
proposed transferee of such Stock, and offering to sell such Stock first to the
Corporation pursuant to this Section 4 at the price and on the other material
terms described in such notice.
The Corporation shall give written notice to Burnham within ten (10) days
of receipt of the notice described above as to whether it accepts such offer
with respect to all or a portion of the Stock.
(c) In the event that Burnham's offer under (b) to sell to the
Corporation has not been accepted by the Corporation as to all of the shares of
Stock offered in accordance with this Section 4, Burnham may agree to sell such
shares of Stock as to which the offer was not accepted by the Corporation at
not less than one hundred percent (100%) of the price, but otherwise on the
terms, stated in such Burnham's notice, at any time up to ninety (90) days
after such Burnham's notice, to the transferee specified in such notice.
Thereafter the provisions of this Section 4 shall again apply.
(d) Anything herein to the contrary notwithstanding, Burnham may
transfer, sell, convey, exchange, pledge or otherwise dispose of any Stock to a
Permitted Transferee (as defined in Section 9) provided that prior to such
transfer such spouse, child, parent or trust agrees to be bound by the
restrictions of this Section 4 of this Agreement.
Section 5. CO-SALE.
(a) Neither Burnham nor Eisenman will sell (the "selling shareholder")
any shares of Stock (other than: (x) to Permitted Transferee, in which event
any shares of Stock acquired by such Permitted Transferee shall remain subject
to the other shareholder's co-sale rights pursuant to this Section 5; (y) in a
registered public offering; or (z) in accordance with Rule 144 promulgated
under the 1933 Act), except to a transferee who is willing to purchase such
shares of Stock as part of a transaction in which a pro rata portion of the
aggregate number of shares of Stock being purchased by such transferee is being
purchased from other shareholder if he chooses to participate in such
transaction (such pro rata portion to be computed with respect to Burnham and
Eisenman by multiplying the aggregate number of shares of Stock to be purchased
by such transferee by a fraction (i) the numerator of which is the number of
shares of Stock held by the other shareholder, and (ii) the denominator of
which is the total number of shares of Stock held collectively by the selling
shareholder and the other shareholder).
(b) In the event that a selling shareholder proposes to consummate a sale
of shares of Stock that is subject to the other shareholder's co-sale rights,
he will give written notice (the "Co-Sale Notice") to the other shareholder,
stating the material terms of the offer. If the other shareholder wishes to
participate in such sale as to his pro rata portion, he shall give the selling
shareholder(s) notice to such effect within fifteen (15) days after receipt of
the Co-Sale Notice.
(c) Burnham's and Eisenman's co-sale rights shall terminate: (x) as to any
shares of shares of Stock sold by the other shareholder in a "brokers'
transaction" as presently defined in Rule 144 of the SEC; and (y) as to any
shares of Stock sold in a transaction in which other shareholder elected not to
exercise his co-sale rights under this Section 5.
Section 6. REPRESENTATIONS OF THE CORPORATION. The Corporation
represents and warrants to Burnham as follows:
(a) The financial statements and any accompanying notes contained in the
annual report of the Corporation filed with the SEC on Form 10-K for the fiscal
year ended June 30, 1996 and in the quarterly reports on Form 10-Q filed with
the SEC after the filing of the annual report fairly present in all material
respects the financial condition and the results of operations, changes in
stockholders' equity, and cash flow of the Corporation and its subsidiaries on
a consolidated basis as at the respective dates of and for the periods referred
to in such financial statements, all in accordance with GAAP, in all material
respects.
(b) The Corporation has fully provided Burnham with all the information
that Burnham has requested for deciding whether to acquire the shares of Stock
in partial consideration for the sale of his shares of the capital stock of
LSCI and all information that the Corporation believes is reasonably necessary
to enable Burnham to make such decision. To the Corporation's knowledge,
neither this Agreement, the Stock Purchase Agreement nor any other statements
or certificates made or delivered in connection herewith or therewith or in any
of the Corporation's filings with the SEC referenced in preceding subparagraph
(a) contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements herein or therein not
misleading, nor has there occurred since the date of such filings any material
adverse change (considered with respect to the entire business of the
Corporation and its subsidiaries) in the information contained therein,
including information under the caption "Titan's Operations" in the
Management's Discussion and Analysis or Plan of Operation.
(c) No officer or director of the Corporation is subject to a complaint or
proceeding by the SEC.
(d) Except with respect to the transactions which are the subject of the
Stock Purchase Agreement, the Corporation is not presently engaged in active
negotiations with any person or entity with respect to any merger or
acquisition of or by the Corporation with or into any other entity.
Section 7. REPRESENTATIONS AND WARRANTIES OF BURNHAM. Burnham hereby
represents and warrants to the Corporation that:
(a) He is acquiring the shares of Stock for investment and not with a view
to the resale or distribution of any part thereof, and that Burnham has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, Burnham further represents
that such Burnham does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the shares of Stock.
(b) He has had an opportunity to ask questions and receive answers from
the Corporation regarding the Stock and the business, properties, prospects and
financial condition of the Corporation.
(c) He can bear the economic risk of investment in the Stock, and has such
knowledge and experience in financial or business matters that he is capable of
evaluating the merits and risks of the investment in the Stock.
(d) He is an "accredited investor" within the meaning of SEC Rule 501 of
Regulation D, as presently in effect.
(e) The shares of Stock he is acquiring are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Corporation in a transaction not involving a public offering
and that under such laws and applicable regulations such securities may be
resold without registration under the 1933 Act, only in certain limited
circumstances. In this connection, he further represents that he is familiar
with Rule 144, as presently in effect, and understands the resale limitations
imposed thereby and by the 1933 Act.
Section 8. NOTICES. Any and all notices provided for herein shall be
sufficient if in writing and delivered personally, sent by certified or
registered mail, return receipt requested, first-class postage prepaid, sent by
overnight delivery service with proof of delivery, or sent by facsimile,
provided the facsimile is confirmed by certified or registered mail or
expedited delivery service in the manner previously described, to its principal
office if to the Corporation, and to its address as reflected in the stock
records of the Corporation if to Burnham, unless notice of a change of address
is furnished to all parties in the manner provided this SECTION 8. Any notice
shall be deemed to have been given either at the time of personal delivery or,
in the case of mail delivery service, as of the date of delivery, or in the
case of facsimile, upon receipt.
Section 9. MISCELLANEOUS.
A. No change or modification of this Agreement, including this
provision, shall be valid unless the same is in writing and signed by all
parties hereto. No waiver of any provision of this Agreement, including this
provision, shall be valid unless in writing and signed by the person against
whom sought to be enforced, The failure of any party at any time to insist
upon strict performance of any condition, promise, agreement, or understanding
set forth herein shall not be construed as a waiver or relinquishment of the
right to insist upon strict performance of the same condition, promise,
agreement, or understanding at a future time.
B. This Agreement sets forth all the promises, agreements,
conditions, understandings, warranties, and representations among the parties
hereto with respect to the shares of Stock, and there are no promises,
agreements, conditions, understandings, warranties, or representations, oral or
written, express or implied, among them with respect to the shares of Stock
other than as set forth herein. Any and all prior agreements with respect to
the shares of Stock of the Corporation are hereby revoked. This Agreement is,
and is intended by the parties to be, an integration of any and all prior
agreements or understandings, oral or written, with respect to the shares of
Stock and other matters addressed herein.
C. The rights of Burnham under Sections 2, 3 and 5 and the
rights of Eisenman under Section 5 hereof are personal to Burnham and Eisenman
and may not be assigned or transferred without the prior written consent of the
Corporation, except that such rights are transferable and assignable, upon and
with respect to a transfer and assignment by Burnham or Eisenman in increments
of not less than 1,000 shares (subject to adjustment as set forth above), to
any or all of his spouse, children or estate or a trust created by Burnham or
Eisenman exclusively for the benefit of any or all of his spouse, children or
estate ("Permitted Transferees").
D. For purposes of this Agreement, "Public Offering" means an
underwritten public offering of the Corporation's Common Stock yielding net
proceeds to the Corporation of at least $10,000,000 resulting in: (a) the
listing of the Corporation's Common Stock on the New York Stock Exchange or the
American Stock Exchange, (b) the designation or approval for designation (upon
notice of issuance) of the Corporation's Common Stock on NASDAQ/NMS; or (c)
listing or designation of the Corporation's Common Stock upon any other
exchange designated by order of the Commissioner of Insurance of the State of
Tennessee pursuant to Section 3(a)(9) of the Tennessee Securities Act of 1980.
E. The certificates evidencing shares of Burnham's Stock and
Eisenman's Stock shall bear a legend substantially as follows:
(a) "These securities have not been registered under the Securities
Act of 1933, as amended. These securities are subject to the terms and
conditions of that certain Shareholders' Agreement among the Corporation,
Thomas N. Eisenman and Michael S. Burnham, Jr. dated as of June ,
1997. They may not be sold, offered for sale, pledged or hypothecated in
the absence of a registration statement in effect with respect to the
securities under such Act or an opinion of counsel satisfactory to the
SETECH that such registration is not required or unless sold pursuant to
Rule 144 of such Act."
(b) Any legend required by the laws of the States of Tennessee or the
1933 Act.
E. This Agreement shall be construed and enforced in accordance
with the laws of the State of Tennessee.
IN WITNESS WHEREOF, the Corporation and Burnham have caused this
Agreement to be executed by their duly authorized officers, all as of the day
and year first above written.
CORPORATION:
SETECH, Inc.
By:
Thomas N. Eisenman, President
BURNHAM:
Michael S. Burnham, Jr.
EISENMAN:
Thomas N. Eisenman
<PAGE>
EX-21
SUBSIDIARIES OF SETECH, INC.
Titan Services, Inc., a Tennessee corporation
Southeastern Technology, Inc., a Tennessee corporation
Lewis Supply Company, Inc., a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Consolidated
Financial Statements as of June 30, 1997 and 1996 of SETECH, Inc. and
Subsidiaries together with Report of Independent Public Accountants and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,633,559
<SECURITIES> 0
<RECEIVABLES> 8,560,591
<ALLOWANCES> 110,689
<INVENTORY> 17,305,262
<CURRENT-ASSETS> 28,413,672
<PP&E> 3,805,210
<DEPRECIATION> 2,058,659
<TOTAL-ASSETS> 37,272,224
<CURRENT-LIABILITIES> 8,583,760
<BONDS> 1,862,630
0
0
<COMMON> 56,690
<OTHER-SE> 7,610,218
<TOTAL-LIABILITY-AND-EQUITY> 37,272,224
<SALES> 0
<TOTAL-REVENUES> 35,167,717
<CGS> 0
<TOTAL-COSTS> 31,500,600
<OTHER-EXPENSES> 2,055,716
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 769,636
<INCOME-PRETAX> 941,599
<INCOME-TAX> 428,026
<INCOME-CONTINUING> 513,573
<DISCONTINUED> 343
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 513,916
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
