<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
[ ] 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.
(Exact name of Registrant as specified in its charter)
Delaware 11-2809189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
903 Industrial Drive, Murfreesboro, Tennessee 37129
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number:(615) 890-1700
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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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes No X
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of September 21, 1998 there were 5,679,207 shares of common stock
outstanding and the aggregate value of the shares of common stock held by
non-affiliated shareholders (based upon available over the counter pricing on
October 12, 1998) was $2,826,821.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-K 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
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<PAGE> 2
CAUTIONARY STATEMENTS
This annual report on Form 10-K 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-K with respect to the Company, the
words "estimate", "project", "intend", "anticipate", "expect", "foresee",
"believe", "potential", 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.
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<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
SETECH, 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 it's
primary operations as well as it's four subsidiary corporations:
Southeastern Technology, Inc. ("Southeastern")
Lewis Supply Company, Inc. ("Lewis")
S.E.T.C. de Mexico
CETECH de Mexico
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 Services, Inc. ("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.
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).
The Company acquired Lewis Supply Company, Inc. ("Lewis") as a wholly
owned subsidiary in June of 1997. On February 5, 1998, the Company caused its
wholly owned subsidiary, Titan, to merge with and into the Company. In addition,
the Company created two Mexican subsidiaries in October 1997 for the operation
of Lewis sites in Mexico. These actions were taken as part of the Company's
continuing efforts to focus its operations on integrated supply. All operations
formerly conducted under the Titan name have continued under the SETECH name,
while Lewis has continued to operate under its own name.
Southeastern is a Tennessee corporation and Lewis is incorporated under
Delaware law.
SETECH
SETECH'S OPERATIONS
SETECH ("SETECH" is used in reference to the direct integrated supply
operations of the Company, versus the consolidated operations referenced as "The
Company".) provides "integrated supply" services to the manufacturing industry.
"Integrated supply" is the forming of long term relationships with manufacturing
customers to provide all of their maintenance, repair, and operating ("MRO")
supplies. Presently, SETECH delivers its services primarily to the automotive
industry through facilities located in Tennessee, Michigan, and Indiana. SETECH
provides procurement, engineering and maintenance/repair services for machined
spare parts, original equipment manufacturer ("OEM") spare parts and inventory
management services. Major manufacturers to supplement and enhance in-house
capabilities and control costs are increasingly utilizing these types of
services. The providing of MRO products to the customer at cost, the
reimbursement of direct site operating expenses and the charging of inventory
management and cost savings fees generates revenues for this operation. Cost of
sales consists of the direct product costs and direct expenses at the customer's
site.
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COMPETITION
SETECH operates in an industry known as "integrated supply." SETECH has
encountered competing firms, and integrated suppliers operate in a highly
competitive market. Additionally, SETECH may in the future encounter presently
unforeseen competition.
MAJOR CUSTOMERS
SETECH operates under five contracts as a source supplier of purchasing
and inventory control functions for General Motors and related subsidiary
operations at plants located in Tennessee, Michigan, and Indiana. SETECH has
received several major awards from General Motors in recognition of its high
level of performance for this manufacturer. Additional agreements with this
manufacturer were added in April and May 1998, which, if substantially
implemented, should increase revenues in fiscal year 1999. Contracts with this
manufacturer account for virtually all of SETECH's revenues and approximately
24% of the Company's revenues.
PRINCIPAL SUPPLIERS
SETECH acquires machining services and parts from a wide variety of
machine shops. OEM spare parts are purchased from the original manufacturer.
SETECH purchases approximately 2% of its parts from its subsidiary Southeastern.
LEWIS SUPPLY SUBSIDIARY
LEWIS' OPERATIONS
Lewis provides integrated supply support to 9 key customers through
direct management of the maintenance, repair, and operating supply function and
tool crib management at over 15 sites. This activity generates approximately
half of Lewis' revenues, and approximately 31% of the Company's revenues. The
revenues and cost of sales for these operations are accounted for in a manner
similar to SETECH's operations. The Company created two wholly-owned Mexican
subsidiaries, S.E.T.C. de Mexico and CETECH de Mexico, in October 1997, to
manage the Mexican integrated supply operations for one of Lewis' customers.
In addition, Lewis is a general line industrial distributor. Lewis
delivers its distribution services through the operation of five distribution
warehouses in Tennessee, Mississippi, Arkansas, and Missouri. These operations
deliver industrial supply products to over 1,000 customers via company owned
trucks and common carrier. These operations provide the other half of Lewis'
revenues. Revenues and cost of sales are accounted for similar to traditional
distribution basis.
Effective September 1, 1998, Mr. Michael S. Burnham resigned as
President of Lewis. Responsibilities have been reassigned on an interim basis,
pending a search for his replacement.
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. Industrial suppliers are consolidating to achieve economies of scale
and increase efficiencies; this 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.
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In the component of their operations known as "integrated supply",
Lewis has encountered competing integrated supply firms, and continues to
operate in a highly competitive market. Lewis may in the future encounter
presently unforeseen integrated supply competition.
MAJOR CUSTOMERS
Lewis had three customers which accounted for 11%, 9% and 7%,
respectively, of Lewis' sales during its year ended June 30, 1998, and 7%, 6%,
and 4% of the Company's revenues, respectively. Because the Lewis acquisition
was contemporaneous with the close of the Company's fiscal year ending June 30,
1997, none of Lewis' revenues are reflected on the Company's Statements of
Operations included in this Form 10-K for that year (See Note 2 of the June 30,
1998 financial statements included in this Form 10-K 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 suppliers has not been of concern to
Lewis' management. Lewis has over 4,000 suppliers nationwide.
SOUTHEASTERN TECHNOLOGY SUBSIDIARY
SOUTHEASTERN'S OPERATIONS
Southeastern is a job shop machining and engineering organization,
serving a variety of industries including aerospace, automotive and medical.
Southeastern continues 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.
Revenues and the cost of sales in this operation are accounted for similar to a
job-cost manufacturing environment.
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.
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
evenly across the aerospace, automotive and medical industries. None of the
customers of Southeastern account for 10% or more of the Company's revenues.
SUPPLIERS
Historically, the availability of raw materials has not been of concern
to Southeastern whose management foresees no significant acquisition of
materials impediment to production or production scheduling. Principal suppliers
to Southeastern include various metal suppliers and machine die manufacturers.
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EMPLOYEES OF COMPANY AND SUBSIDIARIES
As of June 30, 1998, the Company and its four subsidiaries had 251
full-time employees, including 5 executive personnel and 8 part-time employees.
The employees are apportioned among the businesses as follows: SETECH (59
full-time, including 3 executives, 4 part-time); Lewis (142 full-time, including
1 executive, 1 part time); Southeastern (50 full-time, including 1 executive, 3
part-time).
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, $15,420 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.
SETECH conducts its operations from three rented facilities, one each
located: (1) in Murfreesboro, Tennessee; (2) near its automotive manufacturing
customer in Tennessee, with a lease expiring March, 2001; and (3) adjacent to
its automotive manufacturing customer in Michigan. In addition, integrated
supply customers provide space for SETECH and Lewis operations within their
manufacturing facilities.
Southeastern conducts its operations from a facility located at 905
Industrial Drive Murfreesboro, Tennessee that is leased under a non-cancelable
operating lease expiring July 31, 2008.
ITEM 3. LEGAL PROCEEDINGS.
There are no current material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders, in the
quarter ending June 30, 1998.
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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):
<TABLE>
<CAPTION>
COMMON STOCK
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High Low
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<S> <C> <C>
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
1998 (Fiscal)
First Quarter 2 1 1/4
Second Quarter 2 1 5/8
Third Quarter 1 3/4 1 3/4
Fourth Quarter 2 1/2 1 3/4
</TABLE>
(b) Holders - There were approximately 180 holders of record of
the Company's common stock as of October 12, 1998, 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.
(d) See Item 13: Certain Relationships and Related Transactions
for related party sales of stock in the last three fiscal
years.
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<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FY 1998 FY 1997 FY 1996 FY 1995 FY 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues $88,920 $35,168 $34,468 $14,492 $ 9,098
Net income from continuing operations $ 55 $ 514 $ 1,403 $ 273 $ 82
Basic income from continuing operations
Per share $ 0.01 $ 0.10 $ 0.27 $ 0.05 $ 0.02
Diluted income from continuing operations
Per share $ 0.01 $ 0.09 $ 0.24 $ 0.05 $ 0.02
Dividends paid per share $ -- $ -- $ -- $ -- $ --
Weighted average number of
Shares outstanding 5,506 5,261 5,159 5,414 4,656
Working Capital $25,975 $19,832 $ 4,124 $ 2,439 $ 1,559
Total assets $47,836 $37,272 $22,143 $14,703 $13,408
Long-term debt obligations $27,168 $20,512 $ 1,332 $ 665 $ 517
Stockholders' equity $ 7,758 $ 7,668 $ 6,599 $ 5,538 $ 5,266
</TABLE>
Footnotes:
1) 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. The periods
prior to this date have been adjusted to retroactively reflect this
action.
2) 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. The results of
operations prior to this date have been adjusted to eliminate amounts
attributable to these entities, and accounted for as a separate line
item called "Discontinued Operations" in the Company's Statements of
Operations.
3) 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. The
acquisition had no effect on the revenue and net income accounts
presented for fiscal year l997, but the acquired assets are reflected
in the balance sheet for that year.
4) The increase in revenues in fiscal year 1998 is provided by the
acquisition of Lewis Supply on June 26, 1997. See Note 2 of the June
30, 1998 financial statements included in this Form 10-K for unaudited
pro forma information combining the consolidated results of the
Company and Lewis as if the Acquisition had occurred on July 1, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
PLAN OF OPERATION
With the acquisition of Lewis (the "Acquisition") and the disposition
of its Government Services Group, and restructuring the Company under the SETECH
name, 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 SETECH and Lewis, there can
be no assurance that such synergies will be realized. In fiscal 1998 these two
companies were operated as separate entities.
In recent months, the Company has expanded its integrated supply
business with its 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.
FISCAL YEAR ENDING JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDING JUNE 30, 1997
Revenues for fiscal year 1998 were $88.9 million, versus $35.2 million
in fiscal 1997, an increase of $53.7 million, or 153%. The increase in revenues
resulted from the addition of Lewis, which was acquired on June 26, 1997, and
provided no revenues in the 1997 fiscal year. Revenues of operations other than
Lewis decreased $746,000, driven by an increase of $2.3 million dollars in
revenue from Southeastern and a decrease of $3.0 million in product revenues for
SETECH. The decline in product revenues by SETECH has minimal impact on overall
results due to all product sales being at cost. (See Item 1: Business).
In May 1998, a contract was signed with an existing SETECH customer to
establish eight additional sites, with potential annual revenues of up to $30
million. In June 1998, an additional six sites were agreed upon, but not
contracted for, with potential additional revenues of up to $125 million on an
annual basis, when fully implemented. Partial implementation of these sites will
occur in fiscal 1999, but no guarantee of future revenues is certain. This
increase in operations will require a substantial increase in working capital
(see Liquidity and Capital Resources section of this item). Please refer to the
"Cautionary Statements" presented on page 2 of this annual report on Form 10-K,
regarding the risks and uncertainties related to these forward looking
statements.
Gross profit for fiscal 1998 was $6.3 million (7.1% of sales), versus
$3.7 million (10.4% of sales) for fiscal 1997. Of the $2.6 million increase in
gross profit, approximately $1.7 million was provided by the operations of
Lewis. Of the remaining amount, increased SETECH fees provided approximately
$896,000, with the remainder from the increased sales of Southeastern, albeit at
a lower gross profit as a percentage of revenues. Gross profit as a percentage
of sales declined due to gross margin as a percentage of sales for Lewis being
lower than the preacquisition percentages. This was impacted in the fourth
quarter by adjustments identified as part of the year-end close, which reduced
margins in the operation of Lewis' integrated supply sites. As the nature of the
consolidated business shifts from traditional distribution and machine shop
operations to more industrial supply, the gross profit as a percentage of
revenues will continue to decline as profit from product sales, which are sold
at cost, is replaced with profit from fees.
General and administrative expenses for fiscal 1998 were $4.2 million
(4.7% of revenues), versus $2.1 million (5.9% of revenues) in fiscal 1997. Of
the $2.1 million increase, approximately $1.2 million resulted from the addition
of Lewis' operations. Operations of Southeastern resulted in a reduction in
general and administrative expenses of approximately $76,000. The remaining $1.0
million increase resulted from increased expenses in the marketing and site
implementations areas, including salaries, and travel. The funds were expended
in the acquisition of new integrated supply contracts that were signed late in
the fiscal year and provided no revenues.
Interest expense for fiscal 1998 was $2.1 million, versus $769,000 in
fiscal 1997. Of the $1.3 million increase, $733,000 was attributable to Lewis,
$18,000 to Southeastern, and the remainder to SETECH. The increase in SETECH is
attributable to increased borrowing for inventories and receivables. The
increase in interest expense was partially offset by a $670,000 increase in
interest income, substantially driven by interest charges to customers of Lewis.
Income tax provision in fiscal 1998 was $116,000, versus $428,000 in
fiscal 1997. The effective rate for fiscal 1998 was 67.8% as compared to 45.5%
in fiscal 1997. The difference in the rate is due to the impact of goodwill
amortization and travel and entertainment expenses which are not deductible for
taxes (Please see Notes 2 and 8 of the June 30, 1998 financial statements for
further explanation).
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FISCAL YEAR ENDING JUNE 30,1997 COMPARED TO FISCAL YEAR ENDING JUNE 30, 1996
This discussion does not reflect amounts attributable to the Government
Services Division, sold by the Company on 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. Nor
does it include amounts attributable to Lewis, acquired by the Company June 26,
1997. (Please see Note 2 of the June 30, 1998 financial statements included in
this Form 10-K for unaudited pro forma information combining the consolidated
results of the Company and Lewis as if the Acquisition had occurred on July 1,
1995.)
Revenues for fiscal 1997 were $35.2 million, versus $34.5 million for
fiscal 1996, an increase of $700,000 or 2.0%. (Please see Note 1 of the June 30,
1998 financial statements included with Form 10-K 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.) This
increase represents a $961,000 increase in Southeastern revenues and a $261,000
decline in SETECH revenues. The decline in product revenues by SETECH has
minimal impact on overall results due to all product sales being at cost. (See
Item I: Business).
Gross profit for fiscal 1997 was $3.7 million (10.4% of sales), versus
$3.0 million (8.6% of sales) for fiscal 1996. Approximately $208,000 of the
increased margin was derived from Southeastern, and the remainder from SETECH.
General and administrative expenses for fiscal 1997 were $2.1 million
(5.9% of revenues), versus $1.8 million (5.2% of revenues) in fiscal 1996. Of
the $291,000 increase, approximately $55,000 resulted from the increase in
Southeastern's revenues, with the remainder in SETECH. The increase at SETECH
was incurred in the initial increases in marketing costs for the expansion of
the integrated supply operations.
Interest expense for fiscal 1997 was $769,000, versus $558,000 in
fiscal 1996. Of the $211,000 increase, $79,000 was attributable to Southeastern,
and the remaining to SETECH. The increase at SETECH is attributable to higher
interest rates and increased borrowings for inventories and receivables.
Income tax expense in fiscal 1997 was $428,000, versus a benefit of
$693,000 in fiscal 1996. Please see Note 8 of the June 30, 1998 financial
statements included in this Form 10-K for detailed analysis and explanation.
SEASONALITY AND QUARTERLY INFORMATION
Historically, neither SETECH nor the two domestic subsidiaries are
impacted by any significant seasonality issues in earnings, profits, or
statement of financial position.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity in the recent past has been
borrowings under its revolving credit facility. Net cash used by operating
activities was $6.3 million in fiscal 1998 due to the significant growth in
inventories for the integrated supply operations, as compared to net cash used
in operating activities of $35,000 in fiscal 1997. Net cash used in investing
activities in fiscal 1998 was $919,000, as compared to $4.3 million used in the
prior fiscal year, primarily due to the acquisition of Lewis. Net cash from
financing activities, primarily the revolving credit facility, was $6.4 million
in fiscal 1998, as compared to $4.7 million in the prior fiscal year. This
increase was primarily driven by utilization of the facility for financing of
inventories for integrated supply operations. At June 30, 1998, the Company's
current assets exceeded its current liabilities by approximately $25.9 million.
The Company maintains a secured revolving line of credit with a banking
institution in the maximum amount of the lesser of $35 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 6 of the June 30, 1998
financial statements included in this Form 10-K for a description of the terms
and maturities of this loan.)
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<PAGE> 11
See Item 13, "Certain Relationships and Related Transactions," of this
Annual Report on Form 10-K for a description of the sale (and use of proceeds
thereof) of certain securities of the Company during the fiscal years ended June
30, 1997.
The potential expansion of operations with a current customer, noted
above, have created a requirement for significant investment in inventories, up
to $150 million, to support that customer. Discussions are currently underway
for the expansion of the revolving credit line and potential acquisition of
subordinated debt. 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 and future operations, but the Company will be
required to seek external financing sources to support this 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.
YEAR 2000 ISSUE
The Company operates two primary information systems, one for Lewis and
one for both SETECH and Southeastern Technology. The Lewis system is currently
compliant with year 2000 issues, and the SETECH/Southeastern system is being
updated with a new release of its application software that is compliant with
year 2000. The costs of this update are not material and the activities should
be completed by December 31, 1998. The key customers of the Company are
performing their own year 2000 reviews and, to the knowledge of Company
management, are committed to timely completion of those efforts. Vendors from
which the Company purchases products are diverse and varied, providing numerous
alternatives. Key vendors of the Company are performing their own year 2000
reviews and, to the knowledge of Company management, are committed to timely
completion of those efforts.
IMPACTS OF INFLATION
Due to the nature of the operations of the Company, management believes
the impacts of inflation are not material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Securities and Exchange Commission release 34-38223 (January 31,
1997), the disclosure requirement contemplated by Item 305 of Regulation S-K in
response to this item is not currently mandated for the Company.
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<PAGE> 12
ITEM 8. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 796 $ 1,634
Accounts receivable, less allowance for doubtful accounts of $157
and $111, respectively 10,856 8,450
Inventories 26,079 17,305
Deferred tax asset 440 520
Prepaid expenses and other current assets 204 505
-------- --------
Total current assets 38,375 28,414
-------- --------
PROPERTY AND EQUIPMENT, NET 2,584 1,747
NONCURRENT DEFERRED TAX ASSET - 31
COST IN EXCESS OF NET ASSETS ACQUIRED, NET OF ACCUMULATED AMORTIZATION OF
$842 AND $560, RESPECTIVELY 6,792 6,954
OTHER ASSETS 85 126
-------- --------
Total assets $ 47,836 $ 37,272
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 413 $ 412
Current portion of capital lease obligations 208 95
Accounts payable 9,851 5,974
Accrued expenses 1,928 2,015
Income taxes payable - 86
-------- --------
Total current liabilities 12,400 8,582
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION 26,609 20,100
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 559 412
-------- --------
27,168 20,512
-------- --------
COMMITMENTS AND CONTINGENCIES - -
PUTTABLE STOCK 530 510
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000 shares authorized,
5,679 and 5,669 shares issued, respectively 57 57
Additional paid-in capital 11,932 11,917
Accumulated deficit (4,043) (4,098)
Treasury stock (208) (208)
-------- --------
7,738 7,668
-------- --------
Total liabilities and stockholders' equity $ 47,836 $ 37,272
======== ========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
Page 12 of 42
<PAGE> 13
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES $ 88,920 $ 35,168 $ 34,468
COST OF REVENUES 82,574 31,501 31,510
-------- -------- --------
Gross profit 6,346 3,667 2,958
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,155 2,056 1,765
-------- -------- --------
Operating income 2,191 1,611 1,193
-------- -------- --------
OTHER INCOME (EXPENSE):
Other income 33 100 75
Interest expense (2,053) (769) (558)
-------- -------- --------
(2,020) (669) (483)
-------- -------- --------
Income from continuing operations before income taxes 171 942 710
INCOME TAX BENEFIT (PROVISION) (116) (428) 693
-------- -------- --------
Income from continuing operations 55 514 1,403
-------- -------- --------
DISCONTINUED OPERATIONS:
Operating income (loss), net of applicable tax provision
of $ -0-, $133, and $113, respectively - 112 (4)
Loss on disposal, net of applicable tax provision
of $ - 0 - , $311, and $ - 0 -, respectively - (112) -
-------- -------- --------
Loss from discontinued operations - - (4)
-------- -------- --------
NET INCOME $ 55 $ 514 $ 1,399
======== ======== ========
NET INCOME PER SHARE:
Basic -
Income from continuing operations $ 0.01 $ 0.10 $ 0.27
Loss from discontinued operations 0.00 0.00 0.00
-------- -------- --------
Net income per share $ 0.01 $ 0.10 $ 0.27
======== ======== ========
Diluted -
Loss from continuing operations $ 0.01 $ 0.09 $ 0.24
Income from discontinued operations 0.00 0.00 0.00
-------- -------- --------
Net income per share $ 0.01 $ 0.09 $ 0.24
======== ======== ========
Weighted average shares - basic 5,506 5,261 5,159
======== ======== ========
Weighted average shares - diluted 5,506 6,153 6,106
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 13 of 42
<PAGE> 14
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
<TABLE>
<CAPTION>
TREASURY STOCK COMMON STOCK ADDITIONAL
------------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE (DEFICIT), at June 30, 1995 - $ - 5,414 $54 $11,496 $(6,011) $ 5,539
Purchase of treasury stock 1,018 (1,264) - - - - (1,264)
Sales of treasury stock (732) 909 - - 16 - 925
Net income - - - - - 1,399 1,399
----- ------- ----- --- ------- ------- -------
BALANCE (DEFICIT), at June 30, 1996 286 $ (355) 5,414 $54 $11,512 $(4,612) $ 6,599
Sales of treasury stock (122) 147 - - 24 - 171
Issuance of stock for Lewis,
net of amounts redeemable
under put option - - 255 3 381 - 384
Net income - - - - - 514 514
----- ------- ----- --- ------- ------- -------
BALANCE (DEFICIT), at June 30, 1997 164 $ (208) 5,669 $57 $11,917 $(4,098) $ 7,668
Issuance of stock for Lewis,
net of amounts redeemable
under put option - - 10 - 15 - 15
Net income - - - - - 55 55
----- ------- ----- --- ------- ------- -------
BALANCE (DEFICIT), at June 30, 1998 164 $ (208) 5,679 $57 $11,932 $(4,043) $ 7,738
===== ======= ===== === ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 14 of 42
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 55 $ 514 $ 1,403
Adjustments to reconcile income from continuing operations
to net cash used in continuing operations:
Depreciation and amortization 656 315 344
Bad debt 46 - (6)
Deferred income taxes 111 385 (567)
Gain on disposal of equipment (12) - (4)
Changes in operating assets and liabilities:
Accounts receivable (2,452) 1,262 (3,076)
Inventories (8,774) (1,592) (3,047)
Prepaid expenses and other assets 342 (90) (25)
Accounts payable 3,877 (989) 2,150
Accrued expenses (52) 121 71
Income taxes payable (86) 39 (129)
--------- -------- -------
Net cash used in continuing operations (6,289) (35) (2,886)
--------- -------- -------
Discontinued operations:
Income (loss) from discontinued operations - 112 (4)
Loss on disposal of discontinued operations - (112) -
Changes in net assets of discontinued operations - (91) 4
--------- -------- -------
Net cash used in discontinued operations - (91) -
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 12 - 4
Proceeds from sale of business - 2,150 -
Consideration paid for Lewis - (6,306) -
Purchase of equipment (931) (122) (54)
--------- -------- -------
Net cash used in investing activities (919) (4,278) (50)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) short-term debt - (7,794) 3,165
Proceeds from long-term debt 90,385 13,012 1,000
Payments on long-term debt (83,875) (1,254) (470)
Payments on capital lease obligations (140) (88) -
Proceeds from sale of treasury stock, less related
receivable - 171 264
Collection of stock subscriptions receivable - 662 -
Purchase of treasury stock - - (1,264)
--------- -------- -------
Net cash provided by financing activities 6,370 4,709 2,695
--------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (838) 305 (241)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,634 1,329 1,570
--------- -------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 796 $ 1,634 $ 1,329
========= ======== =======
</TABLE>
(continued)
Page 15 of 42
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
SUPPLEMENTARY INFORMATION:
Cash paid from continuing operations during the year for:
Interest $ 2,326 $ 747 $ 573
========= ======== =======
Income taxes $ 467 $ 48 $ 38
========= ======== =======
Non-cash transactions:
Notes payable issued to former shareholders of Lewis
in connection with acquisition $ - $ 750 $ -
========= ======== =======
Stock issued for acquisition of Lewis $ - $ 883 $ -
========= ======== =======
Additional shares of stock to be issued for acquisition
of Lewis $ (35) $ 107 $ -
========= ======== =======
Long-term capital leases entered into $ 400 $ 363 $ 252
========= ======== =======
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
Page 16 of 42
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT NUMBERS OF SHARES AND PER SHARE DATA)
1. THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SETECH, Inc. (the "Company", formerly named Aviation Education Systems,
Inc.) 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 15).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SETECH, Inc.
and its wholly-owned subsidiaries Lewis Supply Company, Inc. ("Lewis"),
S.E.T.C. de Mexico, CETECH de Mexico, and Southeastern Technology, 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.
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.
Page 17 of 42
<PAGE> 18
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful lives 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 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.
A significant number of the Company's customers are in the aviation,
automobile and medical instrument industries. Approximately 24%, 73% and
73% of the Company's total revenues, for the 1998, 1997 and 1996 fiscal
years, respectively, were to a customer in the automobile industry. Trade
accounts receivable at June 30, 1998 include approximately $2,400 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 10 for further discussion.
Page 18 of 42
<PAGE> 19
NET INCOME PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), establishes standards for computing and presenting earnings
per share. The Company adopted the provisions of SFAS 128 in the second
quarter of fiscal 1998 and restated net income per share for all
periods presented, such adoption did not have a material effect on the
Company's financial statements, taken as a whole. Basic income per share is
computed by dividing net income by the weighted average number of common
shares outstanding during the year. Diluted income per share reflects the
dilutive effect of stock options outstanding during the period and common
shares contingently issuable upon conversion of convertible debt securities
in periods in which such exercise would cause dilution and the effect on
net income of converting the debt securities.
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 for
fiscal year 1996. This reclassification conforms the Company's presentation
to industry practice.
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 February 1997, the Financial Accounting Standards Board (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 adopted SFAS 129 in the second quarter of fiscal 1998. Such
adoption did not have a material impact on the Company's financial
position, results of operations or cash flows.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards of reporting for comprehensive income and its
components in a full set of financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. Management does not expect
the adoption to have a material impact on the Company's results of
operations, financial condition or cash flows.
In June 1997, the FASB issued statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires public companies to report
financial and descriptive information about its reportable operating
segments in annual financial statements and in interim financial reports
issued to shareholders. The Company will be required to adopt the
provisions of this statement in the fourth quarter of fiscal year 1999.
Management is evaluating this standard and determining if the Company will
be required to revise its current methods of reporting financial data.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP
98-5 requires the costs of start-up activities and organizational costs, as
defined, to be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. Management does not expect the adoption
to have a material impact on the Company's results of operations, financial
condition or cash flows.
Page 19 of 42
<PAGE> 20
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, $5,953 cash and notes payable
totaling $750 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 12).
10,204 of the 30,612 additional shares of the Company's common stock were
issued in fiscal 1998 and the remaining additional shares will be issued in
increments of 10,204 shares per year on June 1 of 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 which has been allocated to the assets
acquired and liabilities assumed based on their estimated fair values as
follows:
<TABLE>
<S> <C>
Current assets $ 11,779
Property and equipment 844
Goodwill 5,443
Other assets 120
Deferred tax assets, net 324
Current liabilities (4,046)
Long-term debt (6,408)
----------
$ 8,056
==========
</TABLE>
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 realized 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 $ 76,254 $ 72,605
========== ==========
Net income from continuing operations $ 432 $ 1,414
========== ==========
Net income from continuing operations per share:
Basic $ 0.08 $ 0.26
========== ==========
Diluted $ 0.06 $ 0.21
========== ==========
</TABLE>
Page 20 of 42
<PAGE> 21
3. INVENTORIES
Inventories as of June 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Parts purchased under procurement contracts $24,540 $15,587
Specialty machining contracts in process 1,308 1,505
Raw materials 231 213
------- -------
$26,079 $17,305
======= =======
</TABLE>
Page 21 of 42
<PAGE> 22
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of June 30, 1998 and 1997 consist of
the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land $ 29 $ 29
Building 271 271
Machinery and equipment 4,300 2,720
Furniture and fixtures 243 596
Vehicles 81 40
Leasehold improvements 150 150
------- -------
5,074 3,806
Less accumulated depreciation and amortization (2,490) (2,059)
------- -------
$ 2,584 $ 1,747
======= =======
</TABLE>
Depreciation expense totaled $545, $170 and $198 in fiscal 1998, 1997 and
1996, respectively. Substantially all property and equipment is pledged as
collateral on the Company's revolving line of credit (See Note 6).
5. ACCRUED EXPENSES
Accrued expenses as of June 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Employees' compensation and benefits $ 1,626 $ 906
Other accrued expenses 302 950
Customer deposits - 159
------- -------
$ 1,928 $ 2,015
======= =======
</TABLE>
Page 22 of 42
<PAGE> 23
6. LONG-TERM DEBT
Long-term debt as of June 30, 1998 and 1997, consists of the following
balances:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revolving line of credit to bank, interest due monthly at
LIBOR plus 2.5% (8.5% at June 30, 1998). Matures
June 26, 2000. $ 24,775 $ 17,806
Notes payable to former stockholders of Lewis, due in
annual installments of $250 principal plus interest
at 7.5%. Matures June 1, 2000. 500 750
Convertible subordinated debentures, due in annual installments of
principal of $750 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 $3.00 of principal and interest outstanding. 1,500 1,500
Convertible subordinated debentures, due in annual installments of
principal and interest of $161 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 $1.00 to
$1.06 of principal and interest outstanding. 229 363
Other notes payable 18 93
-------- --------
27,022 20,512
Less current portion (413) (412)
-------- --------
$ 26,609 $ 20,100
======== ========
</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 stockholders are subordinated to
the revolving line of credit facility.
Maximum borrowings available under the revolving line of credit are limited
to the lesser of $35,000 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,
1998 were approximately $1,139. 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, 1998, the Company was in compliance with such
covenants.
Page 23 of 42
<PAGE> 24
Annual maturities of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
--------
<S> <C>
1999 $ 413
2000 25,822
2001 787
--------
$ 27,022
========
</TABLE>
7. 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Machinery and equipment $ 1,015 $ 615
Accumulated depreciation (200) (81)
------- -----
$ 815 $ 534
======= =====
</TABLE>
The future minimum lease payments required under the capital leases at June
30, 1998 are summarized as follows:
<TABLE>
<S> <C>
1999 $ 269
2000 215
2001 193
2002 172
2003 56
-----
Total minimum lease obligations 905
Less: interest (138)
-----
Present value of total minimum lease obligations $ 767
=====
</TABLE>
8. INCOME TAXES
Income tax benefit (provision) on income from continuing operations
consisted of the following for the fiscal years ended June 30, 1998, 1997,
and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -------
<S> <C> <C> <C>
Current tax benefit (provision) $ (4) $ (43) $ 65
Deferred tax provision (112) (392) (441)
Reduction in valuation allowance - 7 1,069
----- ----- -------
$(116) $(428) $ 693
===== ===== =======
</TABLE>
Page 24 of 42
<PAGE> 25
A reconciliation of the U.S. Federal statutory rate to the effective rate
for income tax benefit (provision) on income from continuing operations is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -------
<S> <C> <C> <C>
U.S. Federal statutory rate $ (58) $(320) $ (200)
State taxes on income (7) (38) (18)
Expenses not deductible (51) (57) (90)
Other - (20) (68)
Change in valuation allowance - 7 1,069
----- ----- -------
$(116) $(428) $ 693
===== ===== =======
</TABLE>
Significant components of the Company's deferred tax liabilities and
assets, using a tax rate of 38%, as of June 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets:
Reserves on assets $332 $314
Liabilities not yet deductible 146 188
Other (38) 18
---- ----
Net current asset 440 520
---- ----
Noncurrent assets (liabilities):
Net operating loss deductions - 67
Other - (36)
---- ----
Noncurrent asset - 31
Less valuation allowance - -
---- ----
Net noncurrent asset - 31
---- ----
Total net deferred tax asset $440 $551
==== ====
</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 fiscal 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).
9. PUTTABLE STOCK AND SHAREHOLDER AGREEMENT
Each of the Company's shares of common stock issued and to be issued in
connection with the acquisition of Lewis, is 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, and was not effected by the resignation
of the individual effective September 1, 1998 (See Note 12).
Page 25 of 42
<PAGE> 26
10. STOCKHOLDERS' EQUITY
COMMON STOCK
During fiscal 1997, the Company decreased the number of authorized shares
of common stock from 400,000,000 to 10,000,000.
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. In fiscal
1996, the Company reissued 732,500 of these treasury shares to certain
officers, affiliates and existing shareholders for $925. During fiscal
1997, a director and certain officers acquired 122,215 shares for $171.
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, 1998, the Company had options for 76,556 shares
outstanding under the plan with exercise prices ranging from of $1.40 to
$2.00 per share. 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. No options were vested as of
June 30, 1998.
In addition to the above plans, the Company issued options for 45,000
shares to an employee and former shareholder of Lewis during fiscal 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. This individual resigned effective September
1, 1998, which resulted in the expiration of his options on October 1,
1998.
Effective July 1, 1997, the Company established a stock option plan for
nonemployee directors in an effort to build proprietary interest among the
Company's nonemployee directors and thereby secure for the Company's
shareholders the benefits associated with common stock ownership by those
who will oversee the Company's future growth and success. These options
will vest over a period of six months and will expire ten years after date
of grant. The Company reserved up to 200,000 shares of its common stock for
future issuance under this plan. At June 30, 1998, the Company had options
for 17,600 shares outstanding under the plan with an exercise price of
$1.44 per share. Each nonemployee director who has received an initial
grant of an option shall automatically be granted an option to purchase an
additional 4,400 shares of Common Stock annually as long as they remain
directors.
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 1998 and
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 fiscal 1998 and 1997:
Page 26 of 42
<PAGE> 27
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net income: As reported $ 55 $ 514
=========== ===========
Pro forma $ 49 $ 491
=========== ===========
Net income per share:
=========== ===========
Basic As reported $ 0.01 $ 0.10
=========== ===========
Pro forma $ 0.01 $ 0.09
=========== ===========
Diluted As reported $ 0.01 $ 0.09
=========== ===========
Pro forma $ 0.01 $ 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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected dividend yield 0.00% 0.00%
Expected stock price volatility 0.00% 0.00%
Risk free interest rate 6.00% 6.05%
Expected life of option 6 years 5 years
</TABLE>
11. NET INCOME PER SHARE
The following table presents information necessary to calculate diluted net
income per share for the fiscal years ended June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Income from continuing operations $ 55 $ 514 $1,403
Plus interest on convertible
debentures, net of associated tax
provision - 62 47
------ ------ ------
Adjusted income from continuing
operations $ 55 $ 576 $1,450
====== ====== ======
Weighted average shares outstanding 5,506 5,261 5,159
Plus additional shares issuable upon
conversion of convertible debentures - 892 947
------ ------ ------
Adjusted weighted average shares
outstanding 5,506 6,153 6,106
====== ====== ======
</TABLE>
Page 27 of 42
<PAGE> 28
12. 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, 2001. Also certain equipment and vehicles are
operated under such leases. Rent expense totaled $443, $312 and $260 in
fiscal 1998, 1997 and 1996, respectively.
Minimum future lease payments are estimated as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999 $ 244
2000 195
2001 174
-----
$ 613
=====
</TABLE>
Page 28 of 42
<PAGE> 29
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
contained 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, for a term of three years, included an agreement
not to compete with the Company. Effective September 1, 1998, this employee
resigned and as part of this resignation, the agreement not to compete with
the Company was revised. While the individual can seek employment in
competitive firms after December 31, 1998, they may not solicit business
from the customers of Lewis, nor may they solicit employment of any Lewis
employees.
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.
In May, the Company also entered into an annual employment agreement with
one employee of SETECH. The agreement deals with various compensation and
benefits issues, and includes an agreement not to compete with the Company
for a period of two years 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.
13. 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 fiscal 1998, employees could contribute up to the
lesser of $9 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 1998, 1997 and 1996, the
Company made discretionary employer contributions to the Plan totaling $76,
$33 and $22, respectively.
14. 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 29 of 42
<PAGE> 30
15. 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.
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. Revenues associated with the discontinued
operations were $6,727 and $8,333 for the fiscal years ended June 30, 1997
and 1996, respectively.
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.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table of supplementary financial information presents
selected unaudited quarterly results of the Company's operations over the
last eight quarters:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
- - ------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 9,774 $ 8,864 $ 9,177 $ 7,353 $ 20,364 $ 22,351 $ 22,841 $ 24,364
Gross profit 913 1,129 1,112 513 2,069 1,885 2,165 227
Selling, general,
and administrative 543 610 729 174 1,152 1,100 1,307 596
Operating income 370 519 383 339 917 785 858 (369)
Income from continuing
operations 111 211 123 69 227 134 150 (456)
Net income 168 259 166 (79) 227 134 150 (456)
Basic earnings per share 0.03 0.05 0.03 (0.01) 0.04 0.02 0.03 (0.10)
Diluted earnings per Share 0.03 0.04 0.03 (0.01) 0.04 0.02 0.03 (0.10)
</TABLE>
Page 30 of 42
<PAGE> 31
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To Setech, Inc.:
We have audited the accompanying consolidated balance sheets of SETECH, INC. (a
Delaware corporation formerly named Aviation Education Systems, Inc.) and
Subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Setech, Inc. and
Subsidiaries as of June 30, 1998 and 1997 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II -- Valuation and Qualifying
Accounts listed in the index of financial statements is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, based on our audits and the reports of the other auditors,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Nashville, Tennessee
October 9, 1998 (except with
respect to Note 6, as to which
the date is October 21, 1998)
- - --------------------------------------------------------------------------------
The Board of Directors
SETECH, 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 SETECH, 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 Vantrease & Follis PLLC
Murfreesboro, Tennessee
August 19, 1996
Page 31 of 42
<PAGE> 32
ITEM 9. 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 10. 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 (48)
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 SETECH
(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.
Richard Eddinger (47)
Vice President and CFO
Mr. Eddinger is Vice President and Chief Financial Officer. He was
hired to supplement the management team in May of 1998. Previously he
served as Vice President of Finance, Chief Financial Officer and
Treasurer of the Ellett Brothers Inc. for seven years. During this
period he was involved in taking Ellett Brothers public and the
management of the finance, accounting and information systems.
Previously, he was Vice President of Information Resources, with Omni
Hotel Management Corporation where he headed its efforts in the
installation of telemarketing and electronic distribution systems. His
experience also includes several years with Marriott Corporation and
Arthur Andersen & Co. Mr. Eddinger holds a BSS in business from High
Point University and a M.B.A. from the University of North Carolina at
Chapel Hill.
Cindy L. Rollins (34)
Secretary, Treasurer, Director
Vice President
Ms. Rollins is Vice President, Secretary, Treasurer 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; however, with
the expected continued growth of the Company, a decision was made to
separate the position of Chief Financial Officer and Treasurer. Ms.
Rollins relinquished the Chief Financial Officer's position upon the
arrival of Mr. Eddinger. 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.
Page 32 of 42
<PAGE> 33
Mr. William J Ballard (56)
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 a
M.B.A. from the University of Chicago.
Mr. Hans R. Buser (50)
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 (55)
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 (41)
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.
Anthony Morriello serves as President of Southeastern. Richard Hulbert
is the President of Titan.
Section 16(a) Beneficial Ownership Reporting Compliance
See "Item 12, Security Ownership of Certain Benefical Owners and
Management," for a list of directors, officers, and 10% of the Company's common
stock. During the fiscal year, it was discovered that stock options acquired by
Mr. Eisenman, and Ms. Rollins as compensation on July 1, 1996 had not been
reported. Mr. Eisenman, and Ms. Rollins reported the acquisition of these
options on Form 5.
Page 33 of 42
<PAGE> 34
ITEM 11. 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,
1998, to each executive officer of the Company whose cash compensation exceeded
$100,000 in such fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
(IN $)
NAME AND CAPACITY IN RESTRICTED SECURITIES
WHICH REMUNERATION WAS STOCK UNDERLYING LTIP ALL OTHER
RECEIVED YEAR SALARY BONUS AWARDS OPTIONS PAYOUTS COMPENSATION
- - ---------------------- ---- ------ ----- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas N. Eisenman 1998 131,853 23,000 - 13,965 Shares - $2,603
President and CEO 1997 123,461 36,190 - 7,171 Shares -
1996 94,846 27,900 - -0- -
Richard Hulbert 1998 115,943 23,000 - 9,170 Shares - $5,413
Director, IS 1997 112,635 23,866 - 6,277 Shares -
1996 107,311 25,600 - -0- -
</TABLE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERM
UNDERLYING EMPLOYEES BASE PRICE ------------------
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% 10%
---- --------------- -------------- --------- --------------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Thomas N. Eisenman 13,965 30% $1.44 July 1, 2007 Note 1
President and CEO
Richard R. Hulbert 9,170 20% $1.44 July 1, 2007
Director. Info. Systems
</TABLE>
Note 1: There is only a limited and sporadic trading market for the Company's
common stock, currently trading over the counter, with historically
thinly traded with limited market maker participation. Therefore,
calculation of potential realizable value would not present meaningful
information and may be misleading.
Mr. Eddinger has an employment agreement with the Company which expires
May 17, 1999. Mr. Burnham had an employment agreement that was set to expire
June 30, 2000, however as of September 1, 1998 he resigned from his position.
The agreement related to this resignation is contained in Exhibit 10.3.
COMPENSATION OF DIRECTORS
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. Each director who is not an employee of the Company is
eligible to participate in the Company's Non-Employee Director Stock Option
Plan, which provides for each Non-Employee Director to receive an option to
purchase 4,400 shares of Common Stock annually, at the then fair market value of
the Common 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. The Board of Directors had a total of four meeting
during the fiscal year
Page 34 of 42
<PAGE> 35
ending June 30, 1998. No director attended fewer than 75% of the total of such
meeting and the meeting of the committees upon which they served during the
period for which they were a director.
Messrs. Ballard, Buser, Joss and Oester comprise the four members of
the Compensation Committee of the Board of Directors of the Company. This
Committee sets the salaries and other compensation of all officers and directors
of the Company. This committee met twice during the fiscal year ending June 30,
1998.
The Company's executive compensation program is designed to attract,
motivate and fairly reward people with the capabilities required for the Company
to achieve its objectives. It is the Company's belief that a program which
fulfills the financial and emotional needs of its executives is an important
means of retaining them. The Compensation Committee seeks to align executives'
performance objectives with the interests of shareholders, and to structure
compensation plans to reach a balance between achievement of short-term business
plans and long-term strategic goals. Compensation for executive officers,
therefore, is designed to be directly linked to the Company's performance. This
is accomplished through annual bonus programs, substantially dependent upon the
Company's financial performance, combined with stock options which provide
additional value to certain executives as the value of the Common Stock grows.
Each of these components has an integral role in the total executive
compensation program.
Compensation for each of the Company's associates, including the
executive officers, is based on the associate's responsibilities and performance
over a period of time. The Company's executive compensation program has four
principal components: base salary, annual variable incentive compensation, stock
options, and other compensation. The Committee believes these components combine
to provide a fair and competitive package, while helping the Company to achieve
its objectives, both short and long-term.
Base Salary: The salary of each executive is regularly reviewed against
comparable positions in other companies in the Company's industry. Each
executive's base salary is then determined based on that information as well as
the individual's performance over time. The Company believes that a position is
ultimately only worth a certain amount in base salary and that additional
compensation should be determined by incentives.
Annual Variable Incentive Compensation: The Company believes that, for
executives with the most influence on profitability, a meaningful portion of
compensation should be based on a direct link between pay and the Company's
results for the year. The Company has a bonus program that rewards its
executives and key managers based both on the Company's financial performance
during each year and the personal performance of the associate. The Compensation
Committee, following recommendations by Mr. Eisenman, determines the annual
bonus for all associates.
Stock Options and Restricted Stock: The Company's long-term incentive
compensation for executive officers is designed to focus management's attention
on the Company's future. Such long-term compensation is provided through grants
of restricted stock and stock options. The number of stock options granted is
based upon the executive's salary, performance and responsibilities. The
Compensation Committee, following recommendations by Mr. Eisenman, determines
all grants of Stock Options and Restricted Stock.
Other Compensation: Each executive officer also receives additional
compensation through standard benefit plans available to all associates
including, but not limited to, matching contributions pursuant to a 401(k) plan,
paid vacation, and group health, life, and disability insurance. The
Compensation Committee believes each of these benefits is an integral part of
the overall compensation program that helps to ensure that executive officers of
the Company receive competitive compensation.
PERFORMANCE GRAPH
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. While certain pricing is
available from information supplied by the National Quotation Bureau, historical
data is limited. There is not available any reasonable composite index of
trading and pricing of the Common stock. Any presentation of a performance graph
would be arbitrary, would not present meaningful information, and may be
misleading.
Page 35 of 42
<PAGE> 36
See Item 13 (below), "Certain Relationships and Related Transactions,"
of this Annual Report on Form 10-K 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, 1997 and 1998.
ITEM 12. 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 September 22, 1998 date hereof, 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
CLASS OF BENEFICIAL OWNER OWNER PERCENT OF CLASS
----- ------------------- ----- ----------------
<S> <C> <C> <C>
Common William J Ballard 79,400(1) 1.4%
805 South Church
Murfreesboro, Tennessee 37130
Common Hans R. Buser 139,400(1)(2) 2.5%
Aeschengraben 9
Postfach 2149
CH-40002, Basel, Switzerland
Common Thomas N. Eisenman 324,453 5.7%
905 Industrial Drive
Murfreesboro, Tennessee 37129
Common Richard R. Hulbert 320,265 5.6%
905 Industrial Drive
Murfreesboro, TN 37129
Common Peter Joss 79,400(1) 1.4%
Schutzenstrasse 15
CH-8570, Weinfelden, Switzerland
Common Martin Oester 6,900(1) 0.12%
Beundenfeldstrasse 5
Postfach 694, 3000 Bern, Switzerland
Common Cindy L. Rollins 438 0.01%
905 Industrial Drive
Murfreesboro, Tennessee 37130
Common Pensionskasse der ASCOOP 2,600,045(3) 45.8%
Beundenfeldstrasse 5
Postfach 694, 3000 Bern 25, Switzerland
</TABLE>
Page 36 of 42
<PAGE> 37
<TABLE>
<S> <C> <C> <C>
Common Spida-Ausgleichskassen 1,259,205(4) 22.2%
Bergstrasse 21
8044 Zurich, Switzerland
Common All officers and directors 950,256 16.7%
as a group (6 persons)(5)
</TABLE>
(1) Includes 4,400 shares subject to options, which are currently
exercisable.
(2) Includes 10,000 shares owned by Mr. Buser's spouse.
(3) Does not include amounts owned by Mssrs. Oester, Joss and
Buser, each of whom has an ffiliation with Pensionskasse der
ASCOOP.
(4) Does not include amounts owned by Mr. Buser, who is an
affiliate of Spida Ausgleichskassen.
(5) 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 13 (below), "Certain Relationships and Related Transactions,"
of this Annual Report on Form 10-K for a description of the sale (and
use of proceeds thereof) of certain securities of the Company during
the fiscal years ended June 30, 1997 and 1998 to certain members of its
Board of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 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 October 12, 1998, 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;
Page 37 of 42
<PAGE> 38
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;
Page 38 of 42
<PAGE> 39
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. Mr.
Burnham resigned effective September 1, 1998, which resulted in the expiration
of his options on October 1, 1998.
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 Note 10 to
the June 30, 1998 financial statements included in this Form 10-K 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 39 of 42
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements: See Item 8 of this report on Form 10-K.
Reports of Independent Public Accountants.
Consolidated Balance Sheets as of June 30, 1998 and June 30,
1997.
Consolidated Statements of Operations for the fiscal years
ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1998 and 1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts - Page 42
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, or are inapplicable, or the required information
is disclosed elsewhere, and therefore, has been omitted.
3. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
on page 45 are filed as part of this report.
(b) There were no reports filed on Form 8-K for the quarter ended June 30, 1998.
Page 40 of 42
<PAGE> 41
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: October 30, 1998
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: October 30, 1998
By: (Signature and Title) /s/ Richard M. Eddinger
------------------------------------------
Richard M. Eddinger, Vice President and
Chief Financial Officer
Date: October 30, 1998
By: (Signature and Title) /s/ Cindy L. Rollins
------------------------------------------
Cindy L. Rollins, Secretary, Vice
President, Director and Chief Accounting
Officer
Date: October 30, 1998
By: (Signature and Title) /s/ William J. Ballard
------------------------------------------
William J Ballard, Director
Date: October 30, 1998
By: (Signature and Title) /s/ Hans R. Buser
------------------------------------------
Hans R. Buser, Director
Date: October 30, 1998
By: (Signature and Title) /s/ Peter M. Joss
------------------------------------------
Peter M. Joss, Director
Date: October 30, 1998
By: (Signature and Title) /s/ Martin A. Oester
------------------------------------------
Martin A. Oester, Director
Date: October 30, 1998
Page 41 of 42
<PAGE> 42
SETECH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 & 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Cost/ Other End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Fiscal
1998 Allowance for Doubtful Accounts $ 111 $ 127(C) $ 16(B) $ 97(A) $ 157
====== ======= ====== ====== ======
Allowance for Obsolete Inventory $ 719 $ - $ - $ - $ 719
====== ======= ====== ====== ======
Fiscal
1997 Allowance for Doubtful Accounts $ - $ 93(C) $ 18(B) $ - $ 111
====== ======= ====== ====== ======
Allowance for Obsolete Inventory $ - $ 719(C) $ - $ - $ 719
====== ======= ====== ====== ======
Fiscal
1996 Allowance for Doubtful Accounts $ - $ - $ - $ - $ -
====== ======= ====== ====== ======
Allowance for Obsolete Inventory $ - $ - $ - $ - $ -
====== ======= ====== ====== ======
</TABLE>
- - ----------
The information above is provided in support of the financial statements as
further described in Note 2 to the financial statements.
(A) Represents actual write-off of uncollectible accounts.
(B) Recoveries.
(C) Reflected as cost of sales.
Page 42 of 42
<PAGE> 43
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- - -------------- -----------
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-4.6 First, Second, and Third Amendments to 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
EX-4.7 Shareholders' Agreement by and among SETECH, Inc., Michael S.
Burnham, Jr., and Thomas N. Eisenman, dated June 26, 1997
(incorporated by reference to Exhibit 10.4 of the Company's
Form 10-KSB for the fiscal year ended June 30, 1997, filed with
the Commission September 26, 1997)
EX-10.1 SETECH, Inc. Non-Employee Directors Stock Option Plan
(Incorporated by Reference to Form 10-QSBA for the quarter
ending September 30, 1997, filed with the commission on
February 19,1998, Commission file number 001-10310)
EX-10.2 Employment Agreement of Richard M. Eddinger
EX-10.3 Resignation Agreement of Michael Burnham
EX-21 Subsidiaries of the Registrant
EX-27 Financial Data Schedule (EDGAR version only)
<PAGE> 44
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> 1
Exhibit 4.6
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered into and
effective as of the 15th day of October 1997, by and among FIRST UNION
COMMERCIAL CORPORATION ("Lender"), a North Carolina corporation; SETECH, INC., a
Delaware corporation, formerly known as "Aviation Education Systems, Inc.,"
("Parent"); and the following Subsidiaries of Parent, to-wit: LEWIS SUPPLY
COMPANY, INC., a Delaware corporation ("Lewis"), SOUTHEASTERN TECHNOLOGY, INC.,
a Tennessee corporation ("Southeastern"), and TITAN SERVICES, INC., a Tennessee
corporation ("Titan") (Lewis, Southeastern and Titan herein called,
collectively, "Borrowers" and individually, a "Borrower");
W I T N E S S E T H:
WHEREAS, heretofore, Lender, Parent and Borrowers made and entered a Loan
and Security Agreement, dated as of June 26, 1997 (the "Agreement"), which
Lender, Parent and Borrowers now wish to amend in order to modify the definition
of "Tangible Net Worth" and the financial covenant corresponding thereto;
NOW, THEREFORE, for and in consideration of the sum of $10.00, the
foregoing premises and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions. (a) As used in this Amendment, all defined terms not
expressly defined herein shall have the same meanings as and when used in the
Agreement; provided, however, that henceforth, the term "Tangible Net Worth"
appearing in Section 1.1 of the Agreement shall be re-defined in its entirety to
read as follows:
"Tangible Net Worth" - the difference between: (i) total shareholders'
equity (including capital stock, additional paid-in capital and retained
earnings, after deducting treasury stock, but without deduction for any capital
stock subject to a put option on the part of a shareholder, so long as the
shareholder has subordinated all rights in regard thereto to Lender in a manner
satisfactory to Lender) of Parent and its Consolidated Subsidiaries; and (ii)
all intangible assets of such Persons, including, without limitation, any
General Intangibles.
2. Financial Covenants. Subsection (A) to Section 5.3 of the Agreement is
deleted in its entirety and the following revised subsection (A) is inserted in
lieu thereof:
(A) Tangible Net Worth. Maintain a Tangible Net Worth of not less than
the amount shown below at all times during the period corresponding thereto
(measured monthly at the end of each Fiscal Month):
<PAGE> 2
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Closing Date through June 30, 1998 $1,050,000
July 1, 1998 through June 30, 1999 $1,350,000
From and after July 1, 1999 $1,650,000
</TABLE>
3. Conditions Precedent. The following shall constitute express conditions
precedent to the effectiveness of this Amendment: None.
4. Restatement of Representations and Warranties. Each Borrower and Parent
hereby restates and renews each and every representation and warranty heretofore
made by it under or in connection with the execution and delivery of the
Agreement and the Loan Documents as fully as if made on date hereof and with
specific reference to this Amendment and all other Loan Documents executed
and/or delivered in connection herewith, except solely to the extent that the
subject of such representations and warranties has been altered or amended
hereby.
5. Effect of Amendment. Except as set forth hereinabove, all terms of the
Agreement and the Loan Documents shall be and remain in full force and effect,
and shall constitute the legal, valid, binding and enforceable obligations of
each Borrower and Parent to Lender.
6. Ratification. Each Borrower hereby restates, ratifies and reaffirms each
and every term, covenant and condition set forth in the Agreement and in the
Loan Documents, effective as of the date hereof, as modified by this Amendment.
7. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
8. Section References. Section title and references used in this Amendment
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreements among the parties hereto evidenced hereby.
9. No Default. To induce Lender to enter into this Amendment and to
continue to make advances to Borrowers pursuant to the Agreement, each Borrower
and Parent hereby acknowledges and agrees that, as of the date hereof, and after
giving effect to the terms hereof, there exists (i) no Event of Default (or any
event which, with the giving of notice or the passage of time, or both, would
constitute an Event of Default); and (ii) no right of offset, defense,
counterclaim, claim or objection in favor of any Borrower and Parent as against
Lender arising out of or with respect to any of the Obligations.
10. Further Assurances. Each Borrower and Parent agrees to take such
further actions as Lender shall reasonably request in connection herewith to
evidence the amendments herein contained to the Agreement.
2
<PAGE> 3
11. No Novation. This Amendment is not intended to be, nor shall it be
construed to create a novation or accord and satisfaction. Notwithstanding any
prior mutual temporary disregard of any of the terms of any of the Loan
Documents, the parties agree that the terms of each of the Loan Documents shall
be strictly adhered to on and after the date hereof, except as expressly
modified hereby or by amendments or modifications executed in conjunction
herewith.
12. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Georgia.
13. Loan Document. This Amendment shall constitute a Loan Document for all
purposes of the Agreement.
IN WITNESS WHEREOF, Parent, Borrowers and Lender have executed this
Amendment, through their duly authorized officers, under seal, on the date and
year first above written.
SETECH, INC.
By: /s/ Thomas n. Eisenman
----------------------------------------
Thomas N. Eisenman, President and
Chief Executive Officer
Attest: /s/ Cindy L. Rollins
------------------------------------
Cindy L. Rollins, Secretary and
Chief Financial Officer
LEWIS SUPPLY COMPANY, INC.
By: /s/ Michael S. Burnham Jr.
----------------------------------------
Michael S. Burnham, Jr., President
Attest: /s/ Cindy L. Rollins
------------------------------------
Cindy L. Rollins, Secretary
SOUTHEASTERN TECHNOLOGY, INC.
By: /s/ Thomas N. Eisenman
----------------------------------------
Thomas N. Eisenman, Chief Executive
Officer
3
<PAGE> 4
Attest: /s/ Cindy L. Rollins
------------------------------------
Cindy L. Rollins, Secretary
TITAN SERVICES, INC.
By: /s/ Thomas N. Eisenman
----------------------------------------
Thomas N. Eisenman, Chief Executive
Officer
Attest: /s/ Cindy L. Rollins
------------------------------------
Cindy L. Rollins, Secretary
FIRST UNION COMMERCIAL
CORPORATION
By: /s/ Robert L. Dean
----------------------------------------
Name: Robert L. Dean
--------------------------------------
Title: Vice President
-------------------------------------
4
<PAGE> 5
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered into
and effective as of the 5th day of February, 1998, by and among FIRST UNION
COMMERCIAL CORPORATION ("Lender"), a North Carolina corporation; SETECH, INC., a
Delaware corporation, formerly known as "Aviation Education Systems, Inc."
("Parent"); and the following Subsidiaries of Parent, to-wit: LEWIS SUPPLY
COMPANY, INC., a Delaware corporation ("Lewis"), and SOUTHEASTERN TECHNOLOGY,
INC., a Tennessee corporation ("Southeastern");
W I T N E S S E T H:
WHEREAS, heretofore, Lender, Parent, Lewis and Southeastern, together with
Titan Services, Inc., a Tennessee corporation ("Titan"), entered into a Loan and
Security Agreement, dated as of June 26, 1997 (which, as amended to date,
pursuant a certain First Amendment to Loan and Security Agreement, dated as of
October 15, 1997, among said parties, is herein called the "Agreement"); and
WHEREAS, effective this date, pursuant to Articles of Merger filed with the
Secretaries of State of the States of Delaware and Tennessee (herein, together
with any plan of merger, agreement of merger or like documents, called,
collectively, the "Merger Documents"), Parent has merged with Titan, with Parent
being the surviving corporation, assuming by operation of law all debts,
liabilities and obligations of Titan, including all those arising under the
Agreement (the aforesaid transaction herein called the "Titan Merger"); and
WHEREAS, pursuant to Section 5.2(A) of the Agreement, in order for the
Titan Merger not to constitute an Event of Default, Lender must give its written
consent thereto; and
WHEREAS, Lender is willing to give its written consent to the Titan Merger
pursuant hereto, subject, however, to the terms, covenants and conditions herein
contained, to which the Parent, Southeastern and Lewis, as remaining Obligors,
are agreeable;
NOW, THEREFORE, for and in consideration of the sum of $10.00, the
foregoing premises, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions. As used in this Amendment, all defined terms not expressly
defined herein shall have the same meanings as and when used in the Agreement;
provided, however, that henceforth, the term "Borrower," appearing in Section
1.1 of the Agreement, shall be re-defined, in its entirety, to read as follows:
"Borrower" - individually and collectively, each of Lewis, Southeastern and
Parent, as successor-by-merger to Titan. The term "Borrowers" may also be
used as a collective reference to each Borrower.
<PAGE> 6
and, provided, further, and, generally, that all references to "Titan," whether
appearing in the Agreement, or any other Loan Document, henceforth shall mean
and refer to, instead, Parent, as successor-by-merger to Titan.
2. The Titan Merger. (a) In order to induce Lender to give its written
consent to the Titan Merger, Parent does hereby certify to Lender that: (i) each
of Parent and Titan (herein sometimes called a "Merger Party") had the right and
power, and was duly authorized and empowered, to enter into, execute, deliver
and perform the Merger Documents to which it was a party; (ii) the execution,
delivery and performance of the Merger Documents were duly authorized by all
necessary corporate action on the part of each Merger Party and did not and will
not (A) require any consent or approval of any shareholders or directors of
either Merger Party which was not obtained; (B) contravene either Merger Party's
articles of incorporation or bylaws; (C) violate, or cause either Merger Party
to be in default under, any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award in effect having
applicability to either Merger Party; (D) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which either Merger Party was a party or by which it or
its Properties was bound or affected; or (E) result in, or require, the creation
or imposition of any Lien (other than Permitted Liens) upon or with respect to
any of the Properties of either Merger Party; (iii) the execution, delivery and
performance by each Merger Party of the Merger Documents to which it was a
party, and the consummation of the transactions contemplated therein, did not
require any filing or registration with, or consent or approval of, or notice
to, or other action to, with or by, any Governmental Authority which was not
made or obtained; (iv) the Titan Merger has been consummated, effective as of
the date of this Amendment, in accordance with the Merger Documents, with Parent
being the survivor of such merger; (iv) no event has occurred and no condition
exists as a result of the Titan Merger which (after giving effect to this
Amendment) would constitute a Default or an Event of Default; and (v) there
exists no actual or threatened termination, cancellation or limitation of, or
any material modification or change in, the business relationship between
Parent, as successor-by-merger to Titan, and any material supplier or any
customer or group of customers whose purchases individually or in the aggregate
are material to the business of Parent, as successor-by-merger to Titan,
including, particularly, any party which is party to an existing Supply Contract
formerly with Titan, and no present condition or state of facts or circumstances
will, after the consummation of the Titan Merger, have a Material Adverse Effect
or prevent Parent, as successor-by-merger to Titan, from conducting the business
formerly conducted by Titan in substantially the same manner in which it was
heretofore conducted by Titan;
(b) Further to induce Lender to give its written consent to the Titan
Merger, Parent, as a matter of contract, in addition to any of the following
which may have occurred by operation of law, hereby formally assumes and agrees
to be bound by all debts, liabilities and obligations of Titan arising (or
which, heretofore, have arisen) under the Loan Agreement and all other Loan
Documents, including all Obligations. To evidence, in part, the foregoing,
Parent hereby agrees to execute in favor of Lender, effective this date, a
Revolver Note, having terms substantially identical to those set
2
<PAGE> 7
forth in the Revolver Note heretofore executed by Titan, in replacement of, and
substitution for, such Note (herein, the "Replacement Revolver Note").
(c) In reliance on the foregoing certifications and covenants, Lender
hereby consents to the Titan Merger and waives any Event of Default which, but
for the giving of this consent, arose (or would have risen) therefrom.
3. Distributions. Clause (i) of Section 5.2(I) of the Agreement, concerning
cash Distributions payable to Parent by its Subsidiaries, shall be amended by
reducing the sum of "One Million Two Hundred Fifty Thousand Dollars
($1,250,000)" specified therein to "Nine Hundred Fifty Thousand Dollars
($950,000)."
4. Conditions Precedent. Receipt by Lender of the following, in form and
substance satisfactory to Lender shall constitute express conditions precedent
to the effectiveness of this Amendment: (i) copies, as signed and filed, of all
Merger Documents; (ii) the Replacement Revolver Note; (iii) a certificate from
Parent's and each other Borrowers' corporate secretary, certifying as to the
existence of resolutions authorizing entry into this Amendment and, in the case
of Parent, the Replacement Revolving Note; and (iv) an opinion of Parent's and
the other Borrower's counsel as to certain matters pertaining hereto.
5. Restatement of Representations and Warranties. Each Borrower and Parent
hereby restates and renews each and every representation and warranty heretofore
made by it under or in connection with the execution and delivery of the
Agreement and the Loan Documents as fully as if made on date hereof and with
specific reference to this Amendment and all other Loan Documents executed
and/or delivered in connection herewith, except solely to the extent that the
subject of such representations and warranties has been altered or amended
hereby.
6. Effect of Amendment. Except as set forth hereinabove, all terms of the
Agreement and the Loan Documents shall be and remain in full force and effect,
and shall constitute the legal, valid, binding and enforceable obligations of
each Borrower and Parent to Lender.
7. Ratification. Each Borrower hereby restates, ratifies and reaffirms each
and every term, covenant and condition set forth in the Agreement and in the
Loan Documents, effective as of the date hereof, as modified by this Amendment.
8. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
9. Section References. Section title and references used in this Amendment
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreements among the parties hereto evidenced hereby.
3
<PAGE> 8
10. No Default. To induce Lender to enter into this Amendment and to
continue to make advances to Borrowers pursuant to the Agreement, each Borrower
and Parent hereby acknowledges and agrees that, as of the date hereof, and after
giving effect to the terms hereof, there exists (i) no Event of Default (or any
event which, with the giving of notice or the passage of time, or both, would
constitute an Event of Default); and (ii) no right of offset, defense,
counterclaim, claim or objection in favor of any Borrower and Parent as against
Lender arising out of or with respect to any of the Obligations.
11. Further Assurances. Each Borrower and Parent agrees to take such
further actions as Lender shall reasonably request in connection herewith to
evidence the amendments herein contained to the Agreement.
12. No Novation. This Amendment is not intended to be, nor shall it be
construed to create a novation or accord and satisfaction. Notwithstanding any
prior mutual temporary disregard of any of the terms of any of the Loan
Documents, the parties agree that the terms of each of the Loan Documents shall
be strictly adhered to on and after the date hereof, except as expressly
modified hereby or by amendments or modifications executed in conjunction
herewith.
13. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Georgia.
14. Loan Document. This Amendment shall constitute a Loan Document for all
purposes of the Agreement.
IN WITNESS WHEREOF, Parent, Borrowers and Lender have executed this
Amendment, through their duly authorized officers, under seal, on the date and
year first above written.
SETECH, INC., individually and as
successor-by-merger to Titan Services,
Inc.
By: /s/ Thomas N. Eisenman
-------------------------------------
Thomas N. Eisenman, President and
Chief Executive Officer
Attest: /s/ Cindy L. Rollins
---------------------------------
Cindy L. Rollins, Secretary and
Chief Financial Officer
LEWIS SUPPLY COMPANY, INC.
By: /s/ Michael S. Burnham Jr.
-------------------------------------
Michael S. Burnham, Jr., President
4
<PAGE> 9
Attest: /s/ Cindy L. Rollins
---------------------------------
Cindy L. Rollins, Secretary
SOUTHEASTERN TECHNOLOGY, INC.
By: /s/ Thomas N. Eisenman
-------------------------------------
Thomas N. Eisenman, Chief Executive
Officer
Attest: /s/ Cindy L. Rollins
---------------------------------
Cindy L. Rollins, Secretary
FIRST UNION COMMERCIAL
CORPORATION
By: /s/ Robert L. Dean
-------------------------------------
Name: Robert L. Dean
-----------------------------------
Title: Vice President
----------------------------------
5
<PAGE> 10
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered into and
effective as of the 5th day of June, 1998, by and among FIRST UNION COMMERCIAL
CORPORATION ("Lender"), a North Carolina corporation; SETECH, INC., a Delaware
corporation, formerly known as "Aviation Education Systems, Inc." ("Parent"),
individually and as successor-by-merger to Titan Services, Inc., a Tennessee
corporation ("Titan"); and the following Subsidiaries of Parent, to-wit: LEWIS
SUPPLY COMPANY, INC., a Delaware corporation and SOUTHEASTERN TECHNOLOGY, INC.,
a Tennessee corporation ("Southeastern");
WITNESSETH:
WHEREAS, heretofore, Lender, Parent, Lewis and Southeastern, together with
Titan, entered into a Loan and Security Agreement, dated as of June 26, 1997
(which, as amended to date, pursuant to (i) a certain First Amendment to Loan
and Security Agreement, dated as of October 15, 1997, among said parties, and
(ii) a certain Second Amendment to Loan and Security Agreement, dated as of
February 5, 1998, among said parties (excluding Titan), is herein called the
"Agreement"); and
WHEREAS, effective on February 5, 1998, pursuant to Articles of Merger
filed with the Secretaries of State of the States of Delaware and Tennessee,
Parent merged with Titan, with Parent being the surviving corporation, assuming
by operation of law all debts, liabilities and obligations of Titan, including
all those arising under the Agreement, such that Parent became a co-Borrower
(replacing Titan) with Lewis and Southeastern under the Agreement (Parent, Lewis
and Southeastern sometimes collectively herein and in the Agreement the
"Borrowers"); and
WHEREAS, the Borrowers have proposed that Lender increase the amount of
credit made available to Borrowers under the Agreement and pen-nit the benefit
of such credit to extend to certain business operations of Borrowers located (or
to be located) in Mexico; and
WHEREAS, Lender is agreeable to the foregoing proposals, subject, however,
to certain terms, conditions and limitations, which are set forth hereinbelow,
to which Borrowers have agreed;
NOW, THEREFORE, for and in consideration of the sum of $ 10.00, in order to
memorialize the foregoing agreements, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Definitions; Increase in Borrowing Availability. As used in this
Amendment, all defined terms not expressly defined herein shall have the same
meanings as and when used in the Agreement; provided, however, that, in order to
provide for an increase, to Thirty-Five Million Dollars ($35,000,000), in the
Revolver Facility, clause (a) to the definition of Borrowing Base in Section 1.1
of the Agreement
<PAGE> 11
shall be redefined in its entirety, first, by deleting said clause (a) from the
existing definition of "Borrowing Base" appearing at Section 1.1, and, then,
substituting for it the following revised clause (a):
(a) an aggregate sum, not to exceed Thirty-Five Million Dollars
($35,000,000), subdivided per Borrower as follows: (1) as to Lewis,
Sixteen Million Dollars ($16,000,000); (ii) as to Southeastern, Three
Million Dollars ($3,000,000); and (iii) as to Parent, Sixteen Million
Dollars ($16,000,000),or such lesser or greater amounts in the
aggregate, or per Borrower, as Lender may impose or approve from time
to time; less, in each case, any Reserves applicable or allocable
thereto; or
In furtherance of the foregoing, the Borrowers shall execute and deliver new
Revolver Notes in the respective principal amounts presented above (one each per
Borrower) simultaneously with the execution and delivery of this Amendment
(herein, the "New Revolver Notes").
2. Mexican Venture. There shall be deemed added to Section 2 of the Loan
Agreement a new Section 2. 1 A, immediately following existing Section 2. 1, to
read in its entirety as follows:
2.1A Mexican Operations. Notwithstanding any contrary terms of
Section 2.1, or as contained in various definitions set forth in
Section 1.1, with specific reference to Lewis, a portion of its
Borrowing Base, not to exceed, however, One Million Five Hundred
Thousand Dollars ($1,500,000), may be derived from a Supply Contract
(the "Mexican Supply Contract"),' to be entered between Lewis and
Magnetek, (U.S.), in respect of a plant or production facility of
Magnetek, (U.S.), to be located in Mexico (the "Mexican Plant"),
subject, however, to the following terms, conditions and limitations
which must be met to Lender's sole and complete satisfaction, as
evidenced by its written notice to Lewis to such effect:
(i) the Mexican Supply Contract must be an Eligible
Supply Contract, with the following exceptions, limitations
and conditions: (A) the supplier under the Mexican Supply
Contract may be one or more Subsidiaries of Parent formed for
such purpose (the "Mexican Subsidiaries"), but, if so, Lewis
must be a party to the Mexican Supply Contract, and a
co-supplier thereunder or otherwise bind itself thereto in a
manner which Lender determines to be equally satisfactory; (B)
the manufacturer under the Mexican Supply Contract may be a
Mexican subsidiary or affiliate of Magnetek, (U.S.)
("Magnetek, Mexico") but, if so, Magnetek, (U.S.) must either
be made
2
<PAGE> 12
party to the Mexican Supply Contract, and a co-manufacturer
thereunder, or otherwise bind itself thereto in a manner
which Lender determines to be equally satisfactory (which
shall include, in any event, an agreement by Magnetek (U.S.)
to honor its buy-back obligations with respect to all
inventory under such contract without requiring Lender first
to have exercised any right or remedy; e.g., repossession in
regard thereto; (C) the Inventory required to be delivered
under the Mexican Supply Contract may be delivered to the
Mexican Plant, subject, however, to the limitations set forth
in clause (ii) below;
(ii) the Inventory delivered under the Mexican Supply
Contract must be Eligible Inventory, with the following
exceptions, limitations and conditions: (A) a portion of such
Inventory may be located at a Mexican Plant, and be maintained
under the control of a Mexican Subsidiary, but the maximum
amount of such Inventory which shall be considered Eligible
Inventory for purposes of determining the Borrowing Base shall
not exceed (1) One Million Dollars ($1,000,000), initially,
for a period of one (1) year, beginning with the first day on
which such Inventory is considered Eligible Inventory
hereunder, and (2) Five Hundred Thousand Dollars ($500,000),
subsequent to the expiration of the one (1) year period
described in clause (1) above; (B) Lewis shall cause as much
of such Inventory as is to be delivered to the Mexican Plant
to be held in the name of, and be maintained under the control
of, Lewis at a Collateral Location, situated in the United
States; e.g., Texas, so long as it is practicable to do so
prior to its delivery to the Mexican Plant; and (C) the
Mexican Supply Contract must include provisions for the
mandatory purchase of the Inventory being held off-site by
Lewis, as prescribed in sub-clause (B) above, as well as, and
in addition to, any Inventory at the Mexican Plant;
(iii) the Accounts arising from the sale of Inventory
and the delivery of other services under the Mexican Supply
Contract must be Eligible Accounts, with the following
exceptions, limitations and conditions: (A) Accounts may be
billed to Magnetek, Mexico, but, if so, the maximum amount of
such Accounts which shall be considered Eligible Accounts for
purposes of determining the Borrowing Base of Lewis shall not
exceed Five Hundred Thousand Dollars ($500,000) at any time,
and the advance rate applied thereto shall be reduced from
eighty-five percent (85%) to seventy-five percent (75%); (B)
all such Accounts must be payable in
3
<PAGE> 13
United States Dollars; and (C) billings giving rise to such
Accounts shall be made at least once every two calendar weeks;
(iv) all issued and outstanding capital stock of each
of the Mexican Subsidiaries shall be pledged to Lender by
Parent as additional security for the payment of the
Obligations, with such pledge agreement to be in form and
substance satisfactory to Lender (the "Mexican Stock Pledge
Agreement");
(v) each of the Mexican Subsidiaries shall have
executed a Guaranty Agreement and, if required by Lender,
secured the performance of their respective obligations
thereunder by granting to Lender a first priority Lien on all
or a portion of their assets and property pursuant to one or
more security agreements acceptable to Lender (such Guaranty
Agreements, any such security agreements and the Mexican Stock
Pledge Agreement, together with all documents, instruments,
certificates and agreements to be executed and delivered in
connection therewith herein called the "Mexican Documents");
(vi) in connection with and to facilitate the
foregoing, and subject at all times to Lewis' continuing
compliance with clauses (i) through (v) above, Lewis may make
loans and advances to the Mexican Subsidiaries, in an
aggregate amount not to exceed at any time the amount which
Lewis itself may borrow in Revolver Loans in respect of the
Mexican Supply Contract, as set forth in clauses (i) through
(111) above, and the same shall constitute Permitted
Investments for Lewis, and Permitted Indebtedness of the
Mexican Subsidiaries.
3. Conditions Precedent to this Amendment. Receipt by Lender of a
nonrefundable amendment fee of $ 10,000, together with the following, each in
form and substance satisfactory to Lender, duly executed and delivered, as
appropriate, shall constitute express conditions precedent to the effectiveness
of this Amendment: (i) the New Revolver Notes; (ii) a certificate from each
Borrower's corporate secretary, certifying as to the existence of resolutions
authorizing entry into this Amendment and the New Revolving Notes and the
Mexican Documents to which each is party, as appropriate; and (v) an opinion of
Borrowers' legal counsel as to certain matters pertaining hereto.
4. Restatement of Representations and Warranties. Each Borrower hereby
restates and renews each and every representation and warranty heretofore made
by it under or in connection with the execution and delivery of the Agreement
and the Loan
4
<PAGE> 14
Documents as fully as if made on date hereof and with specific reference to this
Amendment and all other Loan Documents executed and/or delivered in connection
herewith, except solely to the extent that the subject of such representations
and warranties has been altered or amended hereby.
5. Effect of Amendment. Except as set forth hereinabove, all terms of the
Agreement and the Loan Documents shall be and remain in full force and effect,
and shall constitute the legal, valid, binding and enforceable obligations of
each Borrower to Lender.
6. Ratification. Each Borrower hereby restates, ratifies and reaffirms
each and every term, covenant and condition set forth in the Agreement and in
the Loan Documents, effective as of the date hereof, as modified by this
Amendment.
7. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
8. Section References. Section titles and references used in this Amendment
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreements among the parties hereto evidenced hereby.
9. No Default. To induce Lender to enter into this Amendment and to
continue to make advances to Borrowers pursuant to the Agreement, each Borrower
and Parent hereby acknowledges and agrees that, as of the date hereof, and after
giving effect to the terms hereof, there exists (i) no Event of Default (or any
event which, with the giving of notice or the passage of time, or both, would
constitute an Event of Default); and (ii) no right of offset, defense,
counterclaim, claim or objection in favor of any Borrower and Parent as against
Lender arising out of or with respect to any of the Obligations.
10. Further Assurances. Each Borrower and Parent agrees to take such
further actions as Lender shall reasonably request in connection herewith to
evidence the amendments herein contained to the Agreement.
11. No Novation. This Amendment is not intended to be, nor shall it be
construed to create a novation or accord and satisfaction. Notwithstanding any
prior mutual temporary disregard of any of the terms of any of the Loan
Documents, the parties agree that the terms of each of the Loan Documents shall
be strictly adhered to on and after the date hereof, except as expressly
modified hereby or by amendments or modifications executed in conjunction
herewith.
12. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Georgia.
13. Loan Document. This Amendment shall constitute a Loan Document for all
purposes of the Agreement.
5
<PAGE> 15
IN WITNESS WHEREOF, Borrowers and Lender have executed this Amendment,
through their duly authorized officers, under seal, on the date and year first
above written.
SETECH, INC., individually and as
successor-by-merger to Titan Services, Inc.
By: /s/ Thomas N. Eisenman
--------------------------------------
Thomas N. Eisenman, President and
Chief Executive Officer
Attest: /s/ Cindy L. Rollins
----------------------------------
Cindy L. Rollins, Secretary and
Chief Financial Officer
LEWIS SUPPLY COMPANY, INC.
By: /s/ Michael S. Burnham
--------------------------------------
Michael S. Burnham, Jr., President
Attest: /s/ Cindy L. Rollins
----------------------------------
Cindy L. Rollins, Secretary
SOUTHEASTERN TECHNOLOGY, INC.
By: /s/ Thomas N. Eisenman
--------------------------------------
Thomas N. Eisenman, Chief Executive
Officer
Attest: /s/ Cindy L. Rollins
----------------------------------
Cindy L. Rollins, Secretary
FIRST UNION COMMERCIAL
CORPORATION
By: /s/ Robert L. Dean
--------------------------------------
Name: Robert L. Dean
------------------------------------
Title: Vice President
-----------------------------------
6
<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") has been entered into as of
the 25th day of May, 1998, by and between SETECH, INC., a Delaware corporation
with principal offices in Murfreesboro, Tennessee ("Employer"), and RICHARD
EDDINGER, an individual and resident of the State of South Carolina
("Employee").
Recitals
WHEREAS, Employer desires to obtain the services of Employee, and Employee
desires to secure employment from the Employer upon the following terms and
conditions;
WHEREAS, it is intended by Employer and Employee that Employee shall
relocate his residence to middle Tennessee and serve as the Chief Financial
Officer of Employer at the principal offices of Employer in Murfreesboro,
Tennessee.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties agree as follows:
1. Employment. Employer hereby employs Employee as Chief Financial Officer
of Employer, and Employee hereby accepts and agrees to such employment, pursuant
and subject to the orders, advice and direction of the Chief Executive Officer
and 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 other and unrelated services and duties as may be assigned to him
from time to time by the Chief Executive Officer or Board of Directors of
Employer. Employee shall report directly to the Chief Executive Officer 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 required of him pursuant to the
express and implicit terms hereof, to the reasonable satisfaction of Employer.
Such duties shall be rendered at the principal offices of Employer in
Murfreesboro, Tennessee, and at such other place or places as Employer shall in
good faith require or as the interest, needs, business or opportunity of
Employer shall require.
3. Term of Employment. The initial term of employment of Employee by
Employer shall be for a period of one (1) year, commencing on May 18, 1998 (the
"Commencement Date") and terminating on May 17, 1999 (the "Expiration Date"),
and thereafter renewing for successive one (1) year terms, each such term to
commence on the successive anniversaries of the Expiration Date, unless either
party shall give notice of intention to terminate at least ninety (90) days
prior to the Expiration Date (or prior to
<PAGE> 2
expiration of any such successive term), 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, base
compensation of Ten Thousand Four Hundred Sixteen and 67/100 Dollars
($10,416.67) per month (less applicable payroll taxes and other amounts
required to be withheld or deducted under federal or state law), payable
monthly in accordance with the standard practices of the Employer ("Base
Compensation"). The Employer shall review the Base Compensation of Employee
on an annual basis, and the Employee may receive such increases in his Base
Compensation as established by the Employer, in its sole discretion,
considering, among other things, the performance of Employee, the business
and financial condition of the Employer and the operating results achieved.
b. Bonus. In addition, Employee shall receive, on an annual basis,
such bonus or other compensation as the Employer, in its sole discretion,
may determine to be reasonable supplemental compensation for Employee,
considering, among other things, the performance of Employee, the business
and financial condition of the Employer and the operating results achieved,
in an amount not less than Twenty Thousand and 0/100 Dollars ($20,000.00)
per year (less applicable payroll taxes and other amounts required to be
withheld or deducted under federal or state law).
c. Stock Options. Immediately upon the Employee's acceptance and
execution of this Agreement, Employee shall be granted an option to
purchase Five Thousand (5,000) shares of common stock of Employer ("Stock")
at Two Dollars ($2.00) per share (the "Options"), subject to the approval
by Employer's Compensation Committee. The Options shall be granted and
shall vest in accordance with Employer's incentive stock option plan (the
SETECH, Inc. Incentive Stock Option Plan) (the "Plan"). Only the currently
vested Options (the "Vested Options") shall be subject to exercise as
described herein, and any Options not vested upon Employee's death or
termination of employment shall be forfeited by Employee. Employee (or his
personal representative) must exercise any Vested Options in accordance
with the Plan, a copy of which shall be provided to Employee by Employer.
d. Employee Benefits. Employee shall be entitled to participate in and
receive all employee benefits or plans that may from time to time be
available to senior officers and employees of Employer; provided, however,
that Employer is not obligated to establish any such benefits, or plans not
already existing, and Employer expressly reserves the right to alter,
modify, amend or terminate any
2
<PAGE> 3
such benefits or plans, whether currently existing or hereafter adopted, at
any time and from time to time, and for any reason, during the term of
Employee's employment. Any and all such benefits shall terminate upon the
termination of Employee's employment, except as otherwise required by law.
More specifically:
(i) Medical and Life Insurance. Employee, as well as any
qualifying dependents of Employee, shall be eligible to participate in
the Employer's group medical and life insurance plans after sixty (60)
days of employment following the Commencement Date, in accordance with
such plans.
(ii) 401K. Employee shall be eligible to participate in the
Employer's 401K program after one (1) year of employment following the
Commencement Date.
(iii) Vacation. Employee shall receive a total of four (4) weeks
of vacation per calendar year; provided, however, that Employee shall
receive sixteen (16) calendar days of vacation during the 1997
calendar year. All such vacation time must be approved in advance by
the Chief Executive Officer of Employer. All such vacation time also
must be used in the calendar year in which it is accrued.
e. Relocation Expenses. Employer shall reimburse Employee for the
following expenses he incurs in relocating from South Carolina to the
middle Tennessee area upon sufficient proof thereof:
(i) Moving Expenses. Employer shall pay Employee for all
reasonable and necessary expenses incurred by Employee to move his
household goods from Chapin, South Carolina to the middle Tennessee
area, including any expenses incurred by Employee to store such goods
on a short-term basis for a period of time not exceeding three (3)
months after the date of this Agreement.
(ii) Relocation Allowance. Employer shall reimburse employee for
all reasonable and necessary temporary living expenses incurred by
Employee, not to exceed $1,000.00 per month (the "Maximum Monthly
Allowance"), before he sells his residence in Chapin, South Carolina
and establishes a permanent residence in the middle Tennessee area.
Upon the purchase of a residence in Tennessee, and so long as Employee
has not yet sold his South Carolina residence, Employee may continue
to receive the Maximum Monthly Allowance to defray the additional
mortgage expenses caused by owning two homes; provided, however, that
Employee shall not be entitled to receive more than $6,000.00 as the
total Relocation Allowance provided pursuant to this sub-section (ii).
Relocation are expenses to be adjusted for the tax impact at calendar
year-end to eliminate tax impact on the employee.
3
<PAGE> 4
(iii) Realtor Commissions. Employer shall reimburse Employee for
all realtor commissions incurred by Employee with respect to the sale
of his residence in Chapin, South Carolina, in an amount not greater
than Fifteen Thousand and 0/100 Dollars ($15,000.00) or Seven Percent
(7%) of the sales price of the residence, whichever is lesser.
(iv) Down Payment Advance. Employer shall advance Employee Ten
Thousand and 00/100 Dollars ($10,000) as a loan secured by the grant
of stock options described in Section 4. c. hereof to be used by the
Employee for the purposes of paying closing costs and the down payment
on the purchase of a home in Tennessee. The advance shall not bear
interest for a period of one (1) year, and if not then paid it shall
thereafter be evidenced by a note payable on demand, with interest
payable annually at a rate of 7% per annum.
(v) Travel Expenses. Employer shall reimburse Employee up to One
Thousand Five Hundred and 0/100 Dollars ($1,5000.00) per month for all
reasonable and necessary expenses incurred by Employee for purposes of
traveling between Chapin, South Carolina and the middle Tennessee area
before Employee sells his residence in Chapin, South Carolina and
establishes a permanent residence in the middle Tennessee area;
provided, however, that Employee shall not be reimbursed for such
expenses incurred or travel undertaken more than six (6) months after
the date of this Agreement.
5. Termination.
a. For Cause. 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 Chief Executive Officer 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's employment for
Cause, Employer shall have no obligation to make any further payments to
Employee except with respect to 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 vested with Employee
pursuant to stock options granted to Employee which by their terms are
exercisable after termination of employment.
4
<PAGE> 5
b. Without Cause. The Employee's employment by Employer may also be
terminated without Cause by either party upon sixty (60) days' prior
written notice to the other. In the event Employee's employment is so
terminated without Cause, Employee shall be entitled to all Base
Compensation earned through the date of termination, but shall forfeit and
lose his right to receive any other form of compensation other than
benefits vested with Employee pursuant to stock options granted to Employee
which by their terms are exercisable after termination of employment.
6. Restrictive Covenants. Employee covenants and agrees that, during the
term of his employment with Employer and for a period of two (2) years
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
compete in whole or in part with the products, services or activities of
the Employer or its affiliates, anywhere within the United States of
America; provided, however, that Employee may purchase or otherwise acquire
up to (but not more than) one percent (1%) 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, 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 whose business or patronage
the Employer has solicited or sought to obtain, during the term of his
employment with Employer.
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, solicit, entice, hire, employ,
or endeavor to employ any officers, directors, employees or agents of the
Employer.
d. Employee Representations. Employee represents to Employer that he
understands the nature of the foregoing restrictive covenants regarding his
employment, and that he has sufficient financial resources and personal
business skills to seek and obtain alternative employment that would not
violate the restrictions set forth in this Section 6 in the event that he
were to cease his employment with Employer for any reason. Employee
understands that this is a
5
<PAGE> 6
specific inducement to Employer to engage Employee in the capacity of Chief
Financial Officer.
7. Confidential Information. Employee covenants and agrees that, during the
term of his employment with Employer and for a period of ten (10) years
thereafter, he shall be subject to the following restrictions:
(a) Definition. For purposes of this Agreement, the term "Confidential
Information" shall mean information that the Employer owns or possesses,
that it uses or is potentially useful in its business, that it treats as
proprietary, private, or confidential, and that is not generally known to
the public, including, but not limited to, information relating to
Employer's 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.
(b) 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. Employee shall hold in
strictest confidence and not disclose, without express written
authorization from the Chief Executive Officer or Board of Directors of
Employer, to any person or entity, other than the Employer and 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.
(c) 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 and their businesses, operations or affairs and any Confidential
Information that the Employee may possess or have under his control
("Company Property").
8. Extension of Term of Restrictive Covenants. If Employee breaches any of
the foregoing restrictive covenants as are contained in the foregoing Sections
6. and 7, the term of such covenant shall be extended by the period of the
duration of such breach.
9. Remedies. Employee acknowledges that any violation of any of the
restrictive covenants contained in Sections 6 and 7 of this Agreement will cause
6
<PAGE> 7
continuing and irreparable harm to the Employer 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 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; (c) forfeiture of all accrued but unpaid (or unvested)
bonuses or stock options arising under this Agreement; and (d) recovery of
Employer's reasonable attorney's fees and costs of prosecuting any such action.
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.
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 Sections 6 and 7 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, 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.
7
<PAGE> 8
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 acknowledgment 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
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.
SETECH, INC.
/s/ Richard Eddinger By: /s/ Tom Eisenman
- - ----------------------------- ----------------------------
RICHARD EDDINGER
Title: President and CEO
-------------------------
8
<PAGE> 1
Exhibit 10.3
AGREEMENT
THIS AGREEMENT is made this the 13th day of August, 1998 by and among
SETECH, INC. ("Setech"), MICHAEL S. BURNHAM, JR. ("Burnham"), THOMAS N. EISENMAN
("Eisenman") and LEWIS SUPPLY CO., INC. ("Lewis Supply").
RECITALS:
A. Setech has previously entered into a Stock Purchase Agreement dated June
26, 1997 (the "Stock Purchase Agreement") pursuant to which it purchased all the
shares of the capital stock of Lewis Supply.
B. In connection with the Stock Purchase Agreement, Setech, Lewis Supply
and Burnham entered into that certain Employment and Non-Compete Agreement dated
June 26, 1997 (the "Employment Agreement").
C. In connection with the Stock Purchase Agreement, Setech, Burnham and
Eisenman executed that certain Shareholders' Agreement dated June 26, 1997 (the
"Shareholders' Agreement") in order to make provision for certain matters
concerning Stock owned by Burnham and Eisenman.
D. By mutual agreement, Burnham and Lewis Supply are desirous of
terminating his employment with Lewis Supply under the terms set forth herein,
and in connection therewith the parties to the Shareholders' Agreement are
modifying the Shareholders' Agreement as set forth herein.
E. Terms not otherwise defined herein shall have the meanings ascribed to
such terms in the Shareholders' Agreement and the Employment Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
1. Termination of Employment; Independent Contractor Services. The parties
hereto agree that the employment of Burnham pursuant to the Employment
Agreement is terminated as of September 1, 1998. Burnham hereby resigns as
a director of Lewis Supply effective September 1, 1998. Burnham will be
paid on August 31, 1998 for services rendered through such date, excluding
the Bonus under Section 4 hereof which will be paid in accordance with its
terms. Commencing September 1, 1998, Burnham shall render services
(devoting reasonable time at locations which are reasonable) to Lewis
Supply as an independent contractor in order to effect the management
transition. In exchange for such services, Lewis Supply shall pay Burnham
commencing September 15, 1998, an amount equal to $5,458.33 on the
fifteenth day of each calendar month and on the last day of each calendar
month in accordance with
<PAGE> 2
Lewis Supply's standard payroll procedures. In addition, Lewis Supply shall
pay all reasonable out of pocket expenditures incurred by Burnham in
rendering such services. The term of Burnham's employment as an independent
contractor under this Agreement shall expire on December 31, 1998. The
parties hereto agree and acknowledge that the early termination of
employment is not governed by the provisions of Section 5A, 5B or 5C of the
Employment Agreement.
2. Health Insurance. Lewis Supply agrees to continue existing health insurance
coverage through December 31, 1998 in the same manner as set forth under
Section 5.B(4) of the Employment Agreement, which are presently paid by
Lewis Supply.
3. Consulting Services. Commencing January 1, 1999, Burnham shall be paid
for consulting services (devoting reasonable time at locations which are
reasonable) requested by Lewis Supply or Setech at a rate equal to $250 per
hour. Consulting fees shall be invoiced by Burnham and shall be payable by
Lewis Supply or Setech within thirty (30) days following receipt of such
invoice. In addition, Lewis Supply and/or Setech shall pay all reasonable
out of pocket expenditures incurred by Burnham in connection with such
consulting services.
4. Bonus. The parties hereto agree and acknowledge that Burnham is fully
vested in his Bonus as set forth in Section 4.B of the Employment Agreement
for the fiscal year ending June 30, 1998. No amounts shall accrue to
Burnham under Section 4.B of the Employment Agreement for the period after
June 30, 1998.
5. Restrictive Covenants. The Employment Agreement is amended to the extent
that Section 6.A concerning "Competition" shall be effective through
December 31, 1998 and thereafter shall be null and void. All other
provisions of Section 6 of the Employment Agreement shall be in full force
and effect until September 1, 1999.
6. Shareholders' Agreement. The parties hereto agree that the Shareholders'
Agreement shall be modified and amended as follows:
(a) Right of Burnham. Burnham's put option under Section 3 of the
Shareholders' Agreement (unless exercised prior to expiration) shall expire
in accordance with the provisions of subsection (z) of such Section.
Notwithstanding the foregoing sentence, in the event Burnham exercises his
rights under Section 3 of the Shareholders' Agreement for shares in excess
of those issued to date, Setech will also repurchase those additional
shares to be issued under the Stock Purchase Agreement.
(b) The provisions of Sections 4(b)(v) and 5 of the Shareholders'
Agreement concerning "Co-Sale" are hereby deleted.
2
<PAGE> 3
7. Communications and Releases. The parties hereto acknowledge that the
termination of employment by Burnham was by mutual agreement of the parties
hereto. Each of the parties hereto shall refrain from making any
disparaging communications about the other to any third parties. The
parties hereto shall use their best efforts to consult with one another in
making any public announcements of the termination of Burnham's employment
with Lewis Supply.
8. Savings Clause. Except as set forth herein, the Shareholders' Agreement,
the Stock Purchase Agreement and those provisions of the Employment
Agreement which by their terms survive the termination of Burnham's
employment, shall remain unamended and in full force and effect.
9. Counterparts. This Agreement may be executed in one or more counterparts,
each of which will be deemed an original of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same
agreement.
IN WITNESS WHEREOF, the undersigned hereby execute this Agreement as of the
day and date first set forth above.
SETECH, INC.
By: /s/ Tom Eisenman
--------------------------------------
Title: President & CEO
-----------------------------------
/s/ Michael S. Burnham
-----------------------------------------
MICHAEL S. BURNHAM, JR.
/s/ Thomas N. Eisenman
-----------------------------------------
THOMAS N. EISENMAN
LEWIS SUPPLY CO., INC.
By: /s/ Michael S. Burnham
--------------------------------------
Title: President
-----------------------------------
3
<PAGE> 1
EX-21
SUBSIDIARIES OF SETECH, INC.
Southeastern Technology, Inc.
Lewis Supply Company, Inc.
S.E.T.C. de Mexico
CETECH de Mexico
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SETECH, INC. FOR THE TWELVE MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 796
<SECURITIES> 0
<RECEIVABLES> 11,013
<ALLOWANCES> 157
<INVENTORY> 26,079
<CURRENT-ASSETS> 38,375
<PP&E> 5,074
<DEPRECIATION> 2,490
<TOTAL-ASSETS> 47,836
<CURRENT-LIABILITIES> 12,400
<BONDS> 1,729
0
0
<COMMON> 57
<OTHER-SE> 7,681
<TOTAL-LIABILITY-AND-EQUITY> 47,836
<SALES> 0
<TOTAL-REVENUES> 88,920
<CGS> 0
<TOTAL-COSTS> 82,574
<OTHER-EXPENSES> 4,155
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 2,053
<INCOME-PRETAX> 171
<INCOME-TAX> 116
<INCOME-CONTINUING> 55
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
