<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1998
REGISTRATION NO. 333-41939
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STELLEX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3971931
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
</TABLE>
and subsidiary guarantors
TSMD ACQUISITION CORP.
STELLEX MICROWAVE SYSTEMS, INC.
KII HOLDING CORP.
KII ACQUISITION CORP.
STELLEX AEROSPACE
BANDY MACHINING INTERNATIONAL
PARAGON PRECISION PRODUCTS
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
GENERAL INSPECTION LABORATORIES, INC.
(Exact name of registrants as specified in their respective charters)
<TABLE>
<S> <C>
DELAWARE 13-3964808
CALIFORNIA 77-0465876
DELAWARE 13-3954446
DELAWARE 13-3954445
CALIFORNIA 95-4172476
CALIFORNIA 95-4294446
CALIFORNIA 95-2882883
CALIFORNIA 95-4172314
CALIFORNIA 95-3972454
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
3559
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
------------------------
<TABLE>
<S> <C>
WILLIAM L. REMLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STELLEX INDUSTRIES, INC.
3333 HILLVIEW AVE. 3333 HILLVIEW AVE.
PALO ALTO, CALIFORNIA 94304-1223 PALO ALTO, CALIFORNIA 94304-1223
(650) 493-4141 (650) 493-4141
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL NUMBER,
EXECUTIVE OFFICE) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
COPY TO:
ROBERT W. ERICSON
DANIEL A. NINIVAGGI
WINSTON & STRAWN
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 294-6885
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the Securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STELLEX INDUSTRIES, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NUMBER ITEM LOCATION IN PROSPECTUS
- ------ ------------------------------------------ --------------------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front Cover Page; Outside Back
Cover Page
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other
Information............................. Summary; Risk Factors; Selected Historical Financial Data; Pro
Forma Consolidated Financial Data
4. Terms of the Transaction.................. Outside Front Cover Page; Summary; Description of Notes; The
Exchange Offer; Certain U.S. Federal Income Tax
Considerations
5. Pro Forma Financial Information........... Pro Forma Consolidated Financial Data
6. Material Contracts with the Company Being
Acquired................................ Inapplicable
7. Additional Information Required........... Inapplicable
8. Interests of Named Experts and
Counsel................................. Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Inapplicable
10. Information with Respect to S-3
Registrants............................. Inapplicable
11. Incorporation of Certain Information by
Reference............................... Inapplicable
12. Information with Respect to S-3 or S-2
Registrants............................. Inapplicable
13. Incorporation of Certain Information by
Reference............................... Inapplicable
14. Information with Respect to Registrants
other than S-3 or S-2 Registrants....... Outside Front Cover Page; Summary; Risk Factors;
Capitalization; Pro Forma Consolidated Financial Data;
Selected Historical Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain Transactions;
Principal Stockholders; Description of Certain Indebtedness;
Description of Notes
15. Information with Respect to S-3
Companies............................... Inapplicable
16. Information with Respect to S-3 or S-2
Companies............................... Inapplicable
17. Information with Respect to Companies
Other than S-3 or S-2 Companies......... Inapplicable
18. Information if Proxies, Consents or
Authorizations are to be Solicited...... Inapplicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................. Management; Principal Stockholders; Certain Transactions
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, DATED JANUARY 29, 1998.
PROSPECTUS
STELLEX INDUSTRIES, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
SERIES B 9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
9 1/2% SENIOR SUBORDINATED NOTES DUE 2007,
OF WHICH $100,000,000 PRINCIPAL AMOUNT IS OUTSTANDING
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED.
------------------------
Stellex Industries, Inc., a Delaware corporation ('Stellex,' and together
with its direct and indirect subsidiaries, the 'Company'), hereby offers (the
'Exchange Offer'), upon the terms and conditions set forth in this Prospectus
(the 'Prospectus') and the accompanying Letter of Transmittal (the 'Letter of
Transmittal'), to exchange $1,000 principal amount of its Series B 9 1/2% Senior
Subordinated Notes due 2007 (the 'New Notes'), registered under the Securities
Act of 1933, as amended (the 'Securities Act'), pursuant to a Registration
Statement of which this Prospectus is a part, for each $1,000 principal amount
of its outstanding 9 1/2% Senior Subordinated Notes due 2007 (the 'Old Notes'),
of which $100,000,000 principal amount is outstanding. The form and terms of the
New Notes are the same as the form and terms of the Old Notes (which they
replace), except that the New Notes will bear a Series B designation and will
have been registered under the Securities Act and, therefore, will not bear
legends restricting their transfer and will not contain certain provisions
relating to the payment of Liquidated Damages (as defined herein) which were
included in the terms of the Old Notes in certain circumstances relating to the
timing of the Exchange Offer. The New Notes will evidence the same debt as the
Old Notes (which they replace) and will be issued under and be entitled to the
benefits of the Indenture, dated as of October 31, 1997 (the 'Indenture'), among
Stellex, the Subsidiary Guarantors (as defined herein) and Marine Midland Bank,
as trustee (the 'Trustee'). The Old Notes and the New Notes are sometimes
referred to herein collectively as the 'Notes.' See 'The Exchange Offer' and
'Description of Notes.'
Interest on the New Notes will be paid semi-annually on May 1 and November 1
of each year, commencing on May 1, 1998. The New Notes will mature on November
1, 2007 unless previously redeemed. The New Notes will be redeemable, in whole
or in part, at the option of Stellex, at any time on or after November 1, 2002,
at the redemption prices set forth herein, plus accrued and unpaid interest, if
any, thereon, to the date of redemption. In addition, on or prior to November 1,
2000, Stellex may redeem, at any time and from time to time, up to 35% of the
aggregate principal amount of the Notes at a redemption price of 109.50% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon, to the date of redemption, with the net cash proceeds
from one or more Public Equity Offerings (as defined herein); provided, however,
that at least 65% of the aggregate principal amount of the Notes originally
issued remains outstanding following each such redemption. In addition, at any
time prior to November 1, 2002, Stellex may, at its option, redeem the Notes, in
whole but not in part, at a redemption price equal to 100% of the principal
amount thereof plus the applicable Make-Whole Premium (as defined herein). Upon
the occurrence of a Change of Control (as defined herein), each holder of Notes
may require Stellex to repurchase such holder's Notes, in whole or in part, at a
repurchase price of 101% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon, to the repurchase date.
See 'Description of Notes.' There can be no assurance that the Company will have
funds available to repurchase the Notes upon the occurrence of a Change of
Control. See 'Risk Factors--Limitation on Change of Control.'
The New Notes will be unsecured and will be subordinated in right of payment
to all existing and future senior indebtedness of Stellex. The New Notes will
rank pari passu with any future senior subordinated indebtedness of Stellex and
will rank senior to all other subordinated indebtedness of Stellex. The New
Notes will be fully and unconditionally guaranteed, jointly and severally, on an
unsecured, senior subordinated basis, by the Subsidiary Guarantors. The
Subsidiary Guarantees (as defined herein) will be general, unsecured obligations
of the Subsidiary Guarantors, subordinated in right of payment to all existing
and future senior indebtedness of the Subsidiary Guarantors. The New Credit
Facilities (as defined herein) are secured by substantially all of the Company's
assets. See 'Description of Certain Indebtedness--New Credit
Facilities--Security.' As of September 30, 1997, on a pro forma basis after
giving effect to the Transactions (as defined herein), the aggregate principal
amount of Stellex's outstanding senior indebtedness would have been
approximately $2.1 million (excluding unused commitments of approximately $47.9
million under the New Credit Facilities) and Stellex would have had no senior
subordinated indebtedness outstanding other than the Notes. As of the same date,
the aggregate principal amount of senior indebtedness of the Subsidiary
Guarantors outstanding would have been approximately $2.6 million (exclusive of
guarantees under the New Credit Facilities). As of September 30, 1997, on a pro
forma basis after giving effect to the Transactions, Stellex's total
consolidated indebtedness would have been approximately $106.5 million and its
ratio of total indebtedness to total capitalization would have been 91.4%. The
Indenture pursuant to which the New Notes will be issued permits Stellex and the
Subsidiary Guarantors to incur additional indebtedness, including senior
indebtedness, subject to certain limitations. See 'Description of Notes.'
(Continued on Next Page)
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE NEW NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR REGULATORY
AUTHORITY, NOR HAS ANY SUCH COMMISSION OR REGULATORY AUTHORITY
REVIEWED OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
(Continued from Cover Page)
Stellex will accept for exchange any and all Old Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time on , 1998,
unless extended by Stellex in its sole discretion (the 'Expiration Date'). See
'The Exchange Offer--Expiration Date; Extensions; Amendments.' Tenders of Old
Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration Date.
The Exchange Offer is subject to certain customary conditions.
The Old Notes were sold in an aggregate principal amount of $100.0 million
by Stellex on October 31, 1997 to Societe Generale Securities Corporation, BT
Alex. Brown Incorporated and Jefferies & Company, Inc. (the 'Initial
Purchasers') in a transaction not registered under the Securities Act in
reliance upon the private offering exemption under Section 4(2) of the
Securities Act (the 'Initial Offering'). The Initial Purchasers subsequently
placed the Old Notes with qualified institutional buyers in reliance upon Rule
144A under the Securities Act and with a limited number of accredited investors
(as defined in Rule 501(A)(1), (2), (3) or (7) under the Securities Act).
Accordingly, the Old Notes may not be reoffered, resold or otherwise transferred
in the United States unless registered under the Securities Act or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The New Notes are being offered hereunder in order to satisfy the
obligations of Stellex and the Subsidiary Guarantors under the Registration
Rights Agreement (as defined herein) entered into by Stellex and the Subsidiary
Guarantors in connection with the Initial Offering. See 'The Exchange Offer.'
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the 'Commission') to third parties, Stellex believes the
New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an 'affiliate' of Stellex within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. See 'The Exchange Offer--Resale of the New Notes.' Each
broker-dealer (a 'Participating Broker-Dealer') that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes, and in connection
with any such resale may be deemed to be an 'underwriter' within the meaning of
the Securities Act. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of marketmaking activities or other
trading activities. The Company has agreed that, for a period of 90 days after
the Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See 'Plan of
Distribution.'
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. Stellex will
pay all the expenses incurred by it incident to the Exchange Offer. See 'The
Exchange Offer.'
There has not previously been any public market for the Old Notes or the New
Notes. Stellex does not intend to list the New Notes on any securities exchange
or to seek approval for quotation through any automated quotation system. There
can be no assurance that an active market for the New Notes will develop. See
'Risk Factors--Lack of Public Market; Restrictions on Transferability.'
Moreover, to the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
could be adversely affected.
The New Notes will be available initially only in book-entry form and
Stellex expects that the New Notes issued pursuant to the Exchange Offer will be
issued in the form of a Global Note (as defined herein), which will be deposited
with, or on behalf of, The Depository Trust Company ('DTC') and registered in
its name or in the name of Cede & Co., its nominee. Beneficial interests in the
Global Note representing the New Notes will be shown on, and transfers thereof
will be effected through, records maintained by DTC and its participants. After
the initial issuance of the Global Note, New Notes in certificated form will be
issued in exchange for the Global Note only under the limited circumstances set
forth in the Indenture. See 'Description of Notes--Book-Entry, Delivery and
Form.'
<PAGE>
AVAILABLE INFORMATION
Stellex and the Subsidiary Guarantors have filed with the Commission a
Registration Statement on Form S-4 (the 'Exchange Offer Registration Statement,'
which term shall encompass all amendments, exhibits, annexes and schedules
thereto) pursuant to the Securities Act, and the rules and regulations
promulgated thereunder, covering the New Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Exchange Offer
Registration Statement. For further information with respect to the Company and
the Exchange Offer, reference is made to the Exchange Offer Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Exchange Offer Registration Statement, reference is made to the
exhibit for a more complete description of the document or matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
The Exchange Offer Registration Statement, including the exhibits thereto, can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the
Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, Stellex and the Subsidiary Guarantors will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the 'Exchange Act'), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
Stellex and the Subsidiary Guarantors to file periodic reports and other
information with the Commission will be suspended if the Notes are held of
record by fewer than 300 holders as of the beginning of any fiscal year of
Stellex and the Subsidiary Guarantors other than the fiscal year in which the
Exchange Offer Registration Statement is declared effective. Stellex has agreed
that, whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, it will furnish
to the holders of the Notes and file with the Commission (unless the Commission
will not accept such a filing) (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if Stellex were required to file such forms,
including a 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and, with respect to the annual information only, a
report thereon by Stellex's independent auditors and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if Stellex
were required to file such reports.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN 'FORWARD-LOOKING STATEMENTS' CONCERNING
THE COMPANY'S OPERATIONS, OPERATING PERFORMANCE AND FINANCIAL CONDITION, WHICH
ARE SUBJECT TO INHERENT UNCERTAINTIES AND RISKS, INCLUDING THOSE IDENTIFIED
UNDER 'RISK FACTORS.' ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THIS PROSPECTUS. WHEN USED IN THIS PROSPECTUS, THE WORDS
'ESTIMATE,' 'PROJECT,' 'ANTICIPATE,' 'EXPECT,' 'INTEND,' 'BELIEVE' AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by, and should be read in conjunction
with, the more detailed information and consolidated financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. As used in
this Prospectus, unless the context otherwise requires, 'Stellex' refers to
Stellex Industries, Inc. (successor to Kleinert Industries, Inc.), the issuer of
the Notes, and the 'Company' refers to Stellex and its direct and indirect
subsidiaries. On October 31, 1997, Stellex acquired the tactical subsystems and
microwave devices businesses of Watkins-Johnson Company (the 'W-J Acquisition').
The W-J Acquisition, the Kleinert Acquisition (as defined), the Initial Offering
and the application of the net proceeds therefrom, and the consummation of the
New Credit Facilities (as defined) and the incurrence of $2.1 million of
indebtedness thereunder to partially fund the transactions described under
'--The Initial Offering--Notes,' are hereinafter referred to as the
'Transactions.' Stellex is a holding company, all of whose operations are
conducted through its operating subsidiaries. All references to historical
financial information contained herein are references to financial information
as reported in the historical financial statements of TSMD (as defined) and
Kleinert (as defined), as the case may be. Unless otherwise specified, pro forma
financial information and references to the Company's business or operations
contained in this Prospectus give effect to the Transactions. See Appendix I for
a glossary of definitions of certain technical or industry terms used herein.
THE COMPANY
The Company, through its subsidiaries Stellex Microwave Systems, Inc.
('Stellex Microwave') and Stellex Aerospace ('Stellex Aerospace'), is a leading
provider of highly engineered subsystems and components for the aerospace,
defense and space industries. Stellex Microwave is a worldwide leader in the
design, manufacture and marketing of fully integrated and proprietary microwave
electronic subsystems for radar-guided tactical missile systems and a broad line
of high radio frequency and microwave frequency single function modules. Stellex
Microwave products are used in the generation, reception and translation of
communication, data and radar signals. Stellex Aerospace is a leader in the
machining of turbomachinery, aircraft hinges and other structural components for
the aerospace and space industries. For the year ended December 31, 1996 and the
nine months ended September 30, 1997, after giving pro forma effect to the
Transactions, the Company would have had sales of $113.5 million and $91.1
million, respectively, net income (loss) of ($9.4) million and $1.4 million,
respectively, and Adjusted EBITDA (as defined) of $15.2 million and $16.9
million, respectively. See Note (a) to 'Selected Historical Financial
Data--Stellex' for further information regarding EBITDA. For the year ended
December 31, 1996, after giving pro forma effect to the Transactions, the
Company's earnings would have been insufficient to cover fixed charges by
approximately $10.6 million; for the nine months ended September 30, 1997, after
giving pro forma effect to the Transactions, the Company's ratio of earnings to
fixed charges would have been 1.1x. As of September 30, 1997, after giving pro
forma effect to the Transactions, the Company would have had $99.8 million in
order backlog. A substantial amount of the Company's order backlog can be
canceled at any time without penalty, except, in some cases, the recovery of the
Company's actual committed costs and profit on work performed up until the date
of cancellation. See 'Risk Factors--Backlog.'
The Company's objective is to provide extensive engineering, low cost
manufacturing and systems integration to the consolidated base of original
equipment manufacturers ('OEMs') within its industries. The Company believes
that it is well positioned to benefit from certain trends in its markets
including increases in the production of high-priority platforms, airframes and
spare parts, the use of sophisticated electronics, the consolidation of OEM
suppliers, and the outsourcing of subsystems.
STELLEX MICROWAVE
Stellex Microwave is a worldwide leader in the design, manufacture and
marketing of proprietary microwave electronic subsystems for use in radar-guided
munitions and signal intelligence equipment. As the largest independent supplier
of microwave subsystems for tactical missiles, Stellex Microwave's products are
critical to the onboard navigation, communications and target location systems
of many of the highest priority missile systems developed by the United States
Department of Defense (the 'DoD'). The Company's proprietary products, low cost
manufacturing and extensive engineering capabilities have enabled it to become
the sole or primary source for the principal programs it supplies. These
programs include the Advanced Medium Range Air-to-Air Missile ('AMRAAM'), the
Patriot missile and the Standard Missile, the most widely used radar-guided
missiles of their type in the U.S. armed forces. In addition, the Company is
currently participating in
1
<PAGE>
production programs for the AEGIS radar system and the TARTAR fire control
system, and has been recently selected to participate in the program to produce
the Longbow Hellfire missile, one of the U.S. Army's most significant new
missile systems.
Stellex Microwave is also a leading manufacturer of multi-function modules
('MFMs') and of single function modules ('SFMs'), such as high radio frequency
mixers, amplifiers, tuners, converters, filters and oscillators, which are sold
to system designers and manufacturers. Stellex Microwave has provided the
intelligence, electronic warfare, space and communication markets with a broad
assortment of such devices since 1957. For the year ended December 31, 1996 and
the nine months ended September 30, 1997, Stellex Microwave had sales of $89.2
million and $67.9 million, respectively.
STELLEX AEROSPACE
Stellex Aerospace is a leading provider of high precision products and
services to certain niche markets within the aerospace and space industries.
Through Bandy Machining International ('Bandy'), Stellex Aerospace is the
world's leading contract manufacturer of commercial and military precision
aircraft hinges. Hinges manufactured by Bandy, some types of which are produced
exclusively by Bandy, are installed on every type of aircraft currently produced
by the leading aircraft OEMs, including The Boeing Company ('Boeing'), McDonnell
Douglas Corporation ('McDonnell Douglas'), Airbus Industrie ('Airbus'), Lockheed
Martin Corporation ('Lockheed Martin'), and Northrop Grumman Corporation
('Northrop Grumman'). Through Paragon Precision Products ('Paragon'), Stellex
Aerospace is a leader in the machining of complex turbomachinery. Paragon's
flexible manufacturing operations permit the production of both (i) highly
engineered, close tolerance prototype components, which are generally
manufactured from expensive, exotic alloys and are found in high performance gas
turbine engines and liquid fuel rocket engines, and (ii) higher volume standard
components used in aircraft and industrial power actuation systems and high
performance turbine engines. Through Scanning Electron Analysis Laboratories,
Inc. ('SEAL') and General Inspection Laboratories, Inc. ('GIL'), Stellex
Aerospace also provides a comprehensive range of services for testing of
sophisticated manufactured aerospace components. For the year ended December 31,
1996 and the nine months ended September 30, 1997 (collectively comprised of
Kleinert (predecessor) sales for the six months ended June 30, 1997 and Stellex
(successor) for the three months ended September 30, 1997), Stellex Aerospace
had sales of $24.3 million and $23.2 million, respectively.
COMPETITIVE STRENGTHS
The Company believes that its competitive position in the markets it serves
is based on superior product design and performance and a consistent record of
meeting rigorous DoD and OEM contract performance criteria. Specifically, the
Company believes that its position is primarily attributable to the following
competitive strengths:
Strong Partnering Relationships with Major OEMs. As an incumbent preferred
supplier on high-priority, long-term programs, the Company has over many years
solidified its relationships with major OEMs. The Company participates in
concurrent design, engineering and development of new programs and provides cost
and performance enhancement for existing programs. Stellex Microwave often
serves as the sole source supplier of mission-critical subsystems to Hughes
Missile Systems Company ('Hughes'), Raytheon Company ('Raytheon'), Rockwell
International Corporation ('Rockwell'), Boeing and Lockheed Martin. Stellex
Microwave was selected by Hughes as subcontractor of the year for each of 1994,
1995 and 1996. Paragon is a preferred supplier, often as a sole or primary
source, of a variety of turbomachinery and turbine engine components to such
OEMs as AlliedSignal, Inc. ('AlliedSignal'), Aerojet General Corporation
('Aerojet') (a subsidiary of GenCorp, Inc.) and the Rocketdyne division of
Boeing ('Rocketdyne'). Bandy also has received the highest quality awards from,
and is a preferred supplier to, many of its customers, including Boeing,
McDonnell Douglas, Airbus, Lockheed Martin, and Northrop Grumman.
Integration Leadership. Stellex Microwave has developed proprietary
technology, products and manufacturing processes which integrate the electronic
functions as well as the mechanical and packaging requirements of microwave
subsystems into 'snap-together' designs that eliminate the need for expensive
and less reliable external cables and connectors. The Company's proprietary
packaging and substrate materials and manufacturing processes were developed
over a period of many years and are instrumental in the superior
2
<PAGE>
performance of its integrated microwave subsystems. The Company believes that
the leading edge technology and manufacturing processes which it has developed
for high production volume missile subsystems will provide a significant
competitive advantage in developing integrated products for certain commercial
markets.
Low Cost Manufacturing. By following systematic design parameters that
balance the need for multi-functionality, cost reduction and reliability and by
using a modularized automated manufacturing process, the Company is able to
manufacture subsystems in high volume and achieve one of the highest percentages
of usable product in its industry. The Company believes that its manufacturing
processes enable it to reduce unit costs and shorten development and production
cycles, thereby providing the Company with a significant cost advantage in
competing for high volume subsystem programs.
Reputation for High Quality. The Company's individual microwave devices
are well known among designers of high performance electronic equipment, and the
catalogs used by Stellex Microwave have been standard reference materials since
1978. Paragon is one of five companies in the United States which competes for
and produces sophisticated, close tolerance machined prototypes of rotating
turbine components for use in aircraft jet engines and other components for use
in spacecraft rocket engines. Management believes that the 'Bandy' name is the
most recognized name in precision aircraft hinges in the world. GIL is one of
the leading independent, full-service non-destructive testing ('NDT')
laboratories in the United States. SEAL is one of three companies in the United
States approved by the National Aeronautics and Space Administration ('NASA') to
perform destructive physical analysis on high-reliability space electronic
components.
INDUSTRY TRENDS
United States defense budget appropriations are forecasted to remain
relatively constant or increase slightly in the near term, reversing the recent
decline in spending which precipitated the dramatic consolidation among prime
contractors. In order to enhance readiness and modernize their forces, military
agencies are expected to continue to maximize resources by modifying and
upgrading existing systems and platforms and relying upon sophisticated
electronic equipment for existing and new systems. In furtherance of their
objectives, agencies are expected to require enhanced performance and cost
reductions from their prime contractors. The Company believes that this cost and
technology pressure will cause continued consolidation of the defense industry's
supply base and cause prime contractors to (i) focus on the design and
manufacture of overall weapon systems and (ii) outsource the manufacture and
integration of subsystems to independent commercially-oriented suppliers. The
Company believes that the current procurement environment favors the Company's
proprietary design and manufacturing processes, which are characterized by
limited reliance on government funded research and development.
The Company believes that current trends in the aerospace industry are
favorable for both the consolidated OEMs and their preferred suppliers.
According to the Boeing Commercial Airplane Group 1997 Current Market Outlook
(the 'Boeing Report'), expenditures on new aircraft production, revenue
passenger miles and the worldwide fleet of aircraft have all increased in recent
years and are projected to grow further over the next five years. In addition,
military procurements for aircraft replacement parts and components are expected
to increase as a result of an aging fleet of aircraft and generally low
inventory levels. Management believes that these factors will benefit aerospace
industry preferred suppliers, such as the Company, that were able to withstand
the difficult operating environment of the early 1990s.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading supplier
of highly engineered subsystems and components to its customers in the
aerospace, defense and space industries and to expand its business to contiguous
commercial markets. The following are the key strategies the Company intends to
employ to achieve this objective:
Exploit Outsourcing Trend. The Company estimates that approximately 50% of
the subsystems used on all types of radar-guided missiles are still produced
internally by OEMs. The Company believes it is well positioned to compete
effectively for this remaining in-house production by capitalizing on its
proprietary products and low cost manufacturing processes. For example, Stellex
Microwave has increased its share of the individual microwave subsystems onboard
the AMRAAM from approximately 50% in 1992 to over 90% in 1997. Many of these
AMRAAM subsystems had previously been produced by the in-house microwave
component groups of
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Hughes and Raytheon. In addition, the design of one of the Company's subsystems
produced for the Standard Missile was incorporated in the 1997 Raytheon design
of the Advanced Sea Sparrow missile. Overall program costs of these missiles
were substantially reduced as a result of this outsourcing. The Company also
believes that it has opportunities to capture new business in the commercial
aerospace industry as a result of additional outsourcing.
Capture Share in Commercial Markets. The Company believes that its
experience and expertise in high frequency microwave subsystem integration
provide it with significant opportunities to develop integrated products for
commercial applications. The Company's current defense and aerospace customers
are also the world's largest manufacturers of satellites. These manufacturers
currently purchase subsystems for their defense platforms but only purchase SFMs
for space applications. Using its existing technologies, the Company intends
to modify and market MFMs and, eventually, entire microwave subsystems for space
applications to supplement or replace such SFM sales.
Leverage Prototype Expertise. The Company will seek to gain a larger share
of the production volume for turbomachinery parts for which it develops the
prototype. In response to customer requests, the Company has, and plans to
continue to, selectively increase its production capacity such that it can
manufacture efficiently at higher volumes.
Acquire Selected Businesses. The Company anticipates that the
consolidation of the historically fragmented aerospace component manufacturing
industry will provide opportunities for selective acquisitions. In addition, in
response to growing demand for microwave products, the Company will pursue
selective acquisitions that can broaden its microwave product offering or
provide it with enhanced technological or strategic capabilities. Such
acquisitions offer the opportunity to broaden the Company's product lines and
manufacturing capabilities, diversify its customer base, improve its absorption
of corporate overhead and enhance its attractiveness as a leading supplier to
OEMs in the aerospace, defense and space industries.
THE TRANSACTIONS
On July 1, 1997, KII Holding Corp. ('KII Holding'), through a wholly-owned
subsidiary, acquired (the 'Kleinert Acquisition') all of the issued and
outstanding capital stock of Kleinert Industries, Inc. ('Kleinert') (currently
Stellex Aerospace) for approximately $26.5 million (including the assumption of
$2.6 million of indebtedness and the issuance to the seller of a note for
approximately $1.75 million). The Company, which was formed in September 1997,
currently owns approximately 80% of the issued and outstanding common stock of
KII Holding, with Stellex Aerospace's management holding the remainder of its
outstanding common stock. See 'Certain Transactions--The Kleinert Acquisition.'
On October 31, 1997, the Company, through a wholly-owned subsidiary,
acquired (the 'W-J Acquisition' and, together with the Kleinert Acquisition, the
'Acquisitions') the tactical subsystems and microwave devices businesses of
Watkins-Johnson ('TSMD') for a net purchase price of approximately $82.2 million
(after giving effect to estimated purchase price adjustments). The W-J
Acquisition was consummated simultaneously with the consummation of the Initial
Offering. See 'Certain Transactions--The W-J Acquisition.'
In connection with the consummation of the Initial Offering, the Company
entered into the New Credit Facilities, which provide for borrowing
availability, subject to certain conditions, in an outstanding principal amount
of up to $50 million. A substantial portion of the net proceeds to the Company
from the Initial Offering, together with borrowings under the New Credit
Facilities, was used to fund the W-J Acquisition and refinance indebtedness
incurred in connection with the Kleinert Acquisition.
Mentmore Holdings Corporation ('Mentmore'), a privately-held investment and
management company, currently provides management services to the Company. See
'Certain Transactions.'
------------------
The Company's principal executive offices are located at 3333 Hillview
Avenue, Palo Alto, California 94304-1223. Its telephone number at that location
is (650) 493-4141. Stellex was incorporated in Delaware on September 5, 1997.
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THE INITIAL OFFERING
Notes
Pursuant to a Purchase Agreement dated as of October 23, 1997 (the
'Purchase Agreement'), the Company sold Old Notes in an aggregate principal
amount of $100.0 million to the Initial Purchasers on October 31, 1997. The
Initial Purchasers subsequently resold the Old Notes purchased from the Company
to qualified institutional buyers pursuant to Rule 144A under the Securities Act
and to certain accredited investors (as defined in Rule 501(A)(1), (2), (3) or
(7) under the Securities Act). A substantial portion of the net proceeds from
the Initial Offering, estimated to have been approximately $92.3 million after
deducting discounts to the Initial Purchasers and estimated expenses relating to
the consummation of the Transactions, together with initial borrowings under the
New Credit Facilities, were used to repay certain indebtedness incurred in
connection with the Kleinert Acquisition and to finance the W-J Acquisition.
Specifically, the Company used a portion of the net proceeds of the Initial
Offering to (i) repay $17.2 million of principal and $42,000 of accrued interest
under that certain Credit Agreement dated as of July 1, 1997 (the 'Prior Credit
Agreement') between KII Holding (as defined) and Societe Generale, under which
borrowings bore interest at an average rate of 7.7% per annum as of October 31,
1997; (ii) repay $2.5 million of principal and $20,000 of accrued interest under
the Trinity Note (as defined), under which borrowings bore interest at an
average rate of 10% per annum as of October 31, 1997; and (iii) finance the W-J
Acquisition for a net purchase price of approximately $82.2 million.
Registration Rights Agreement
Pursuant to the Purchase Agreement, the Company, the Subsidiary Guarantors
and the Initial Purchasers entered into a Registration Rights Agreement dated as
of October 31, 1997 (the 'Registration Rights Agreement'), which grants the
holders of the Old Notes certain exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
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Securities Offered........................ $100,000,000 aggregate principal amount of 9 1/2% Senior Subordinated
Notes due 2007 of the Company.
The Exchange Offer........................ $1,000 principal amount of New Notes in exchange for each $1,000
principal amount of Old Notes. As of the date hereof, $100,000,000
aggregate principal amount of Old Notes are outstanding. The Company
will issue the New Notes to holders on or promptly after the
Expiration Date.
Based on an interpretation by the staff of the Commission set forth
in no-action letters issued to third parties, the Company believes
that New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred
by any holder thereof (other than any such holder which is an
'affiliate' of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that
such New Notes are acquired in the ordinary course of such holder's
business and that such holder does not intend to participate and has
no arrangement or understanding with any person to participate in the
distribution of such New Notes. Each holder accepting the Exchange
Offer is required to represent to the Company in the Letter of
Transmittal that, among other things, the New Notes will be acquired
by the holder in the ordinary course of business and the holder does
not intend to participate and has no arrangement or understanding
with any person to participate in the distribution of such New Notes.
Any Participating Broker-Dealer that acquired Old Notes for its own
account as a result of market-making activities or other trading
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activities may be a statutory underwriter. Each Participating Broker-
Dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes, and in connection with
any such resale may be deemed to be an 'underwriter' within the
meaning of the Securities Act. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an 'underwriter'
within the meaning of the Securities Act. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resale of New Notes
received in exchange for Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Company has agreed that,
for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale. See 'Plan of Distribution.'
Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution
of the New Notes could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in the absence of an
exemption therefrom, must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any
resale transaction Failure to comply with such requirements in such
instance may result in such holder incurring liability under the
Securities Act for which the holder is not indemnified by the
Company.
Minimum Condition......................... The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered or accepted for
exchange.
Expiration Date........................... 5:00 p.m., New York City time, on , 1998 unless the
Exchange Offer is extended, in which case the term 'Expiration Date'
means the latest date and time to which the Exchange Offer is
extended. See 'The Exchange Offer--Expiration Date; Extensions;
Amendments.'
Conditions to the Exchange Offer.......... The Exchange Offer is subject to certain customary conditions, which
may be waived by the Company. See 'The Exchange Offer--Conditions.'
The Company reserves the right to terminate or amend the Exchange
Offer at any time prior to the Expiration Date upon the occurrence of
any such condition.
Procedures for Tendering Old Notes........ Each holder of Old Notes wishing to accept the Exchange Offer must
complete, sign and date the accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, or an Agent's Message (as defined) in
connection with a book entry transfer together with the Old Notes and
other required documentation to the Exchange Agent (as defined) at
the addresss set forth herein. By executing the Letter of
Transmittal, each holder will represent to the Company that, among
other things, the New Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business of the person
receiving such New Notes, whether
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or not such person is the holder, and that neither the holder nor any
such other person (i) has any arrangement or understanding with any
person to participate in the distribution of such New Notes, (ii) is
engaging or intends to engage in the distribution of such New Notes,
or (iii) is an 'affiliate,' as defined under Rule 405 of the
Securities Act, of the Company. See 'The Exchange Offer--Purpose and
Effect of the Exchange Offer' and '--Procedures for Tendering.'
Untendered Old Notes...................... Following the consummation of the Exchange Offer, holders of Old
Notes eligible to participate but who do not tender their Old Notes
will not have any further exchange rights and such Old Notes will
continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be
adversely affected.
Consequences of Failure
to Exchange............................. The Old Notes that are not exchanged pursuant to the Exchange Offer
will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to Rule 144A or Rule
144 under the Securities Act or pursuant to some other exemption
under the Securities Act, (iii) outside the United States to a
non-U.S. person pursuant to the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration
statement under the Securities Act. See 'The Exchange Offer--
Consequences of Failure to Exchange.'
Shelf Registration Statement.............. If (i) changes in the law or the applicable interpretations of the
staff of the Commission do not permit the Company to effect the
Exchange Offer or (ii) any holder (A) is not eligible to participate
in the Exchange Offer, (B) participates in the Exchange Offer and
does not receive freely transferable New Notes in exchange for
tendered Old Notes or (C) is a broker-dealer that holds Notes
acquired directly from the Company or one of its affiliates, the
Company and the Subsidiary Guarantors will (i) file a shelf
registration statement (the 'Shelf Registration Statement') on or
prior to the 30th day after such filing obligation arises to cover
resales of Transfer Restricted Securities (as defined) covering
resales of the Old Notes, (ii) use their respective reasonable best
efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act on or prior to 60 days after such
obligation arises and (iii) use their respective reasonable best
efforts to keep effective the Shelf Registration Statement until two
years after its effective date, subject to certain exceptions,
including suspending the effectiveness thereof for certain valid
business reasons. For purposes of the foregoing, 'Transfer Restricted
Securities' means each Note until the earliest to occur of (i) the
date on which such Note has been exchanged for a freely tradeable New
Note in the Exchange Offer, (ii) the date on which such Note has been
effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iii) the date on
which such Note is distributed to the public pursuant to Rule 144
under the Securities Act or is saleable pursuant to Rule 144(k) under
the Securities Act. A holder of the Old Notes that sells such Old
Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the
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civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a holder
(including certain indemnification obligations).
Special Procedures for Beneficial
Owners.................................. Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact such registered holder promptly
and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes,
either make appropriate arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may
take considerable time. The Company will keep the Exchange Offer open
for not less than twenty business days in order to provide for the
transfer of registered ownership.
Guaranteed Delivery Procedures............ Holders of Old Notes who wish to tender their Old Notes and whose Old
Notes are not immediately available or who cannot deliver their Old
Notes, the Letter of Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent (or comply with the
procedures for book-entry transfer) prior to the Expiration Date must
tender their Old Notes according to the guaranteed delivery
procedures set forth in 'The Exchange Offer-- Guaranteed Delivery
Procedures.'
Withdrawal Rights......................... Tenders may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
Acceptance of Old Notes and Delivery of
New Notes............................... The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New Notes issued pursuant to
the Exchange Offer will be delivered promptly following the
Expiration Date. See 'The Exchange Offer--Terms of the Exchange
Offer.'
Use of Proceeds........................... There will be no cash proceeds to the Company from the exchange
pursuant to the Exchange Offer.
Exchange Agent............................ Marine Midland Bank.
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THE NEW NOTES
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General................................... The form and terms of the New Notes are the same as the form and
terms of the Old Notes (which they replace) except that (i) the New
Notes bear a Series B designation, (ii) the New Notes have been
registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and (iii) the holders of
New Notes will not be entitled to certain rights under the
Registration Rights Agreement, including the provisions providing for
an increase in the interest rate on the Old Notes in certain
circumstances relating to the timing of the Exchange Offer, which
rights will terminate when the Exchange Offer is consummated. See
'The Exchange Offer--Purpose and Effect of the Exchange Offer.' The
New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture. See 'Description of
Notes.' The Old Notes and the New Notes are referred to collectively
herein as the 'Notes.'
Issuers................................... Stellex Industries, Inc., the issuer of the Notes, and TSMD
Acquisition Corp., Stellex Microwave Systems, Inc., KII Holding
Corp., KII Acquisition Corp., Stellex Aerospace, Bandy Machining
International, Paragon Precision Products, Scanning Electron Analysis
Laboratories, Inc. and General Inspection Laboratories, Inc., as
guarantors of the Notes. See 'Description of Notes-- Guarantees.'
Securities Offered........................ $100,000,000 principal amount of Series B 9 1/2% Senior Subordinated
Notes due 2007.
Maturity Date............................. November 1, 2007.
Interest Payment Dates.................... Interest will accrue on the New Notes from the most recent date to
which interest on the Notes has been paid or, if no interest has been
paid, from October 31, 1997, and will be payable semi-annually on
each May 1 and November 1, commencing May 1, 1998.
Optional Redemption....................... The New Notes will be redeemable, in whole or in part, at the option
of Stellex, at any time on or after November 1, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest,
if any, thereon, to the date of redemption. In addition, on or prior
to November 1, 2000, Stellex may redeem, at any time and from time to
time, up to 35% of the aggregate principal amount of the Notes at a
redemption price of 109.50% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon,
to the date of redemption, with the net cash proceeds of one or more
Public Equity Offerings (as defined); provided, however, that at
least 65% of the aggregate principal amount of the Notes originally
issued remains outstanding following each such redemption. In
addition, at any time prior to November 1, 2002, Stellex may, at its
option, redeem the Notes, in whole but not in part, at a redemption
price equal to 100% of the principal amount thereof plus the
applicable Make-Whole Premium (as defined). See 'Description of
Notes--Optional Redemption.'
Subsidiary Guarantees..................... The New Notes will be fully and unconditionally guaranteed, jointly
and severally (the 'Subsidiary Guarantees'), on an unsecured, senior
subordinated basis, by each of Stellex's Subsidiaries existing on the
date of issuance of the New Notes and by each Subsidiary of Stellex
(other than Unrestricted Subsidiaries and Foreign Subsidiaries (as
defined)) created or acquired thereafter (collectively, the
'Subsidiary Guarantors'). See 'Description of Notes--Guarantees.'
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Ranking................................... The New Notes will be unsecured and will be subordinated in right of
payment to all existing and future senior indebtedness of Stellex.
The New Notes will rank pari passu with any future senior
subordinated indebtedness of Stellex and will rank senior to all
other subordinated indebtedness of Stellex. The Subsidiary Guarantees
will be general, unsecured obligations of the Subsidiary Guarantors,
subordinated in right of payment to all existing and future senior
indebtedness of the Subsidiary Guarantors. As of September 30, 1997,
on a pro forma basis after giving effect to the Transactions, the
aggregate principal amount of Stellex's outstanding senior
indebtedness would have been approximately $2.1 million (excluding
unused commitments) and Stellex would have had no senior subordinated
indebtedness outstanding other than the Notes. As of the same date,
on a pro forma basis after giving effect to the Transactions, the
aggregate principal amount of senior indebtedness of the Subsidiary
Guarantors outstanding would have been approximately $2.6 million
(exclusive of guarantees of the New Credit Facilities, under which
the Company would have had approximately $47.9 million of total
borrowing availability and approximately $2.1 million outstanding).
See 'Description of Notes--Ranking and Subordination.'
Restrictive Covenants..................... The Indenture contains certain covenants pertaining to Stellex and
its Restricted Subsidiaries (as defined), including, but not limited
to, covenants with respect to the following matters: (i) limitations
on indebtedness and preferred stock; (ii) limitations on restricted
payments such as dividends, repurchases of Stellex's or subsidiaries'
stock, repurchases of subordinated obligations, and investments;
(iii) limitations on restrictions on distributions from subsidiaries;
(iv) limitations on sales of assets and of stock of subsidiaries; (v)
limitations on transactions with affiliates; (vi) limitations on
liens; and (vii) limitations on mergers, consolidations and transfers
of all or substantially all assets. However, all of these covenants
are subject to a number of important qualifications and exceptions.
See 'Description of Notes--Certain Covenants.'
Change of Control......................... Upon a Change of Control (as defined), each holder of New Notes may
require Stellex to repurchase any or all outstanding New Notes owned
by such holder at 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon, to the date of repurchase. See
'Description of Notes--Change of Control.' There can be no assurance
that the Company will have funds available to repurchase the Notes
upon the occurrence of a Change of Control. See 'Risk
Factors--Limitation on Change of Control.'
Registration Rights....................... Pursuant to the Registration Rights Agreement, Stellex and the
Subsidiary Guarantors agreed to (i) file, within 45 days of the
closing date of the Initial Offering, a registration statement (the
'Exchange Offer Registration Statement' and, together with the Shelf
Registration Statement, the 'Registration Statements') with respect
to an offer to exchange the Old Notes for New Notes of Stellex with
terms substantially identical to the Old Notes, (ii) cause such
Exchange Offer Registration Statement to be declared effective within
120 days after the closing date of the Initial Offering and (iii)
consummate the Exchange Offer within 165 days after the closing date
of the Initial Offering. In addition, under certain circumstances the
Company may be required to file a Shelf Registration Statement. In
the event that (i) the applicable
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Registration Statement is not filed with the Commission on or prior
to the specified date, (ii) the Exchange Offer Registration Statement
is not declared effective within 120 days after the closing date of
the Initial Offering or the Shelf Registration Statement is not
declared effective on or prior to the 60th day after the shelf filing
deadline, (iii) the Exchange Offer is not consummated on or prior to
165 days after the closing date of the Initial Offering, or (iv) the
Shelf Registration Statement is filed and declared effective on or
prior to the date specified for such effectiveness, but shall
thereafter cease to be effective (at any time that the Company is
obligated to maintain the effectiveness thereof) without being
succeeded within 45 days by an additional Registration Statement
filed and declared effective (each such event referred to in clauses
(i) through (iv), a 'Registration Default'), the Company will
generally be obligated to pay liquidated damages ('Liquidated
Damages') to each holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the
occurrence of the first Registration Default, in an amount equal to
$0.05 per week per $1,000 principal amount of the Notes constituting
Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed or declared effective, the
Exchange Offer is consummated or the Shelf Registration Statement
again becomes effective, as the case may be. The amount of Liquidated
Damages will increase by an additional $0.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a
maximum amount of Liquidated Damages of $0.20 per week per $1,000
principal amount of Notes. All accrued Liquidated Damages shall be
paid to holders in the same manner as interest payments on the Notes
on semi-annual payment dates which correspond to interest payment
dates for the Notes. Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease.
Transfer Restrictions; Absence of a
Public Market for the Notes............. The Notes have not been registered under the Securities Act and are
subject to restrictions on transferability and resale. In addition,
there is currently no established market for the Notes. If issued,
the New Notes will generally be freely transferable (subject to the
restrictions discussed elsewhere herein) but will be new securities
for which there will not initially be a market. Accordingly, there
can be no assurance as to the development or liquidity of any market
for the Notes or, if issued, the New Notes. The Notes have been
designated eligible for trading in the PORTAL market. The Initial
Purchasers have advised Stellex that they currently intend to make a
market in the Notes. However, the Initial Purchasers are not
obligated to do so, and any market making with respect to the Notes
may be discontinued at any time without notice. Stellex does not
intend to apply for a listing of the Notes, or, if issued, the New
Notes, on any securities exchange or on any automated dealer
quotation system.
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RISK FACTORS
Before investing in the New Notes offered hereby, investors should
carefully consider the information set forth under the caption 'Risk Factors'
and all other information set forth in this Prospectus.
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SUMMARY PRO FORMA FINANCIAL DATA
The following table sets forth the consolidated statements of operations
and other financial data of the Company on a pro forma basis for the year ended
December 31, 1996 and the nine months ended September 30, 1997. The pro forma
statements of operations data give effect to the Transactions as if they
occurred on January 1, 1996. The pro forma balance sheet data give effect to the
Transactions as if they had occurred on September 30, 1997. The pro forma
financial data are provided for informational purposes only, are unaudited and
are not necessarily indicative of future results or what the operating results
or financial condition of the Company would have been had the Transactions
actually been consummated on the dates assumed. The following table should be
read in conjunction with 'Capitalization,' 'Pro Forma Consolidated Financial
Data,' 'Selected Historical Financial Data,' 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and the historical
financial statements of Stellex (formerly Kleinert) and TSMD (Stellex
Microwave), and the accompanying notes thereto, included elsewhere in this
Prospectus.
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PRO FORMA CONSOLIDATED
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YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
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(DOLLARS IN THOUSANDS)
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STATEMENT OF OPERATIONS DATA:
Sales............................................ $ 113,507 $ 91,086
Cost of goods sold(a)............................ 89,617 67,297
-------- --------
Gross profit..................................... 23,890 23,789
Selling, general and administrative(a)(b)........ 18,809 11,894
Amortization of intangibles...................... 3,496 1,760
-------- --------
Income from operations........................... 1,585 10,135
Interest expense(c).............................. 10,984 8,527
Other expense, net............................... 40 73
-------- --------
Income (loss) before income taxes................ (9,439) 1,535
Income tax provision............................. -- 150
-------- --------
Net income (loss)................................ $ (9,439) $ 1,385
-------- --------
-------- --------
OTHER FINANCIAL DATA:
Cash flows from operating activities............. $ (5,859) $ 13,161
Cash flows from investing activities............. (2,748) (1,974)
Cash flows from financing activities............. 8,607 (11,187)
EBITDA(d)........................................ 12,259 16,923
Adjusted EBITDA(d)............................... 15,220 16,940
Depreciation and amortization.................... 10,725 6,868
Capital expenditures............................. 2,753 2,007
Ratio of Adjusted EBITDA to cash interest
expense(e)..................................... -- 2.1x
Ratio of total debt to Adjusted EBITDA(f)........ -- 4.7x
Ratio of earnings to fixed charges............... --(g) 1.1x
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
-------------------
<S> <C>
COMBINED BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................................. $ 18,980
Total assets..................................... 133,445
Long-term debt, including current maturities..... 106,519
Minority interest................................ 778
Stockholders' equity............................. 10,012
</TABLE>
- ------------------
(a) In connection with the W-J Acquisition, Stellex Microwave entered into a
sublease with Watkins-Johnson of the facilities used by TSMD at a rent
higher than the historical amounts charged to TSMD. Accordingly, for the
year ended December 31, 1996 and the nine months ended September 30, 1997,
cost of goods sold has been increased by $1.1 million and $810,000,
respectively, and selling, general and administrative expense has been
increased by $120,000 and $90,000, respectively.
(b) Selling, general and administrative expense for the year ended December 31,
1996 and the nine months ended September 30, 1997 includes $750,000 and
$563,000, respectively, of management fees that would have been paid to
Mentmore pursuant to the Management Agreement (as defined). Excludes
non-recurring charges of $450,000 of investment banking and financial
advisory fees that were paid to Mentmore in connection with the Kleinert
Acquisition and $1,000,000 of investment banking and financial advisory fees
paid to Mentmore in connection with the W-J Acquisition and the Initial
Offering. See 'Certain Transactions--Management Agreement with Mentmore.'
(c) Interest expense reflects an interest rate of 9.5% on the Notes and related
amortization of the estimated debt issuance costs of $5.0 million over the
ten year term of the Notes. Interest expense also reflects charges of
$580,000 and $347,000 for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, related to the ongoing
working capital requirements of Stellex Microwave that are expected to be
funded through borrowings under the New Credit Facilities assuming a 7.75%
interest rate on the balance of working capital items not acquired as part
of the W-J Acquisition.
(d) EBITDA represents income (loss) before income taxes plus interest expense,
depreciation and amortization less interest income of $11,600 and $6,500 for
the year ended December 31, 1996 and the nine months ended September 30,
1997. Adjusted EBITDA ('Adjusted EBITDA') for the year ended December 31,
1996 excludes a $1.5 million charge included in cost of goods sold for the
write-off of slow moving and excess inventory, a $700,000 charge included in
cost of goods sold for severance costs relating to a reduction in force of
operational and manufacturing employees at Stellex Microwave and the Stellex
Aerospace management stock compensation adjustment totaling $761,000.
Adjusted EBITDA for the nine months ended September 30, 1997 excludes the
Stellex Aerospace management stock compensation adjustment totaling $17,000.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to service indebtedness. However, EBITDA should not be
considered an alternative to operating income or cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity. Since all companies and
analysts do not necessarily calculate EBITDA in the same fashion, EBITDA as
presented in this Prospectus may not be comparable to similarly titled
measures reported by other companies. Funds depicted by EBITDA are generally
not presently available for management's discretionary use due primarily to
legal and functional requirements to conserve funds for capital replacement
and expansion, debt service and other commitments and uncertainties.
(e) Cash interest expense excludes $500,000 of annual expense relating to the
amortization of debt issuance costs.
(f) For purposes of this calculation, an annualized EBITDA was utilized, which
was derived by multiplying EBITDA for the nine months ended September 30,
1997 times 1.333.
(g) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing costs, whether expensed or
capitalized. Earnings were inadequate to cover fixed charges by $10,584,000
for the year ended December 31, 1996.
12
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus, before
tendering their Old Notes for the New Notes offered hereby, holders of the Old
Notes should carefully consider the following risk factors, which may be
generally applicable to the Old Notes as well as the New Notes.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged. At September 30, 1997, after giving pro
forma effect to the Transactions, the Company's total consolidated indebtedness
would have been $106.5 million, the Company's ratio of total indebtedness to
total capitalization would have been 91.4% and the Company would have had up to
an additional $47.9 million available to be borrowed under the New Credit
Facilities. In addition, subject to certain restrictions set forth in the New
Credit Facilities and the Indenture, the Company may incur additional
indebtedness, including Senior Indebtedness (as defined), in the future for
acquisitions, capital expenditures and other corporate purposes. For the year
ended December 31, 1996, the Company's pro forma earnings would have been
insufficient to cover fixed charges by approximately $10.6 million.
The Company's ability to make scheduled payments of the principal of, or
interest on, or to refinance its indebtedness (including the Notes) depends on
its future operating performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond its control. The
Company believes that, based on its current level of operations and anticipated
growth, its cash flow from operations, together with borrowings under the New
Credit Facilities, will be adequate to meet its anticipated requirements for
working capital, capital expenditures, interest payments and scheduled principal
payments over the next several years. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources.' There can be no assurance, however, that the Company's business will
generate cash flow at or above expected levels. If the Company is unable to
generate sufficient cash flow from operations in the future to service its debt
fund working capital requirements and make necessary capital expenditures, or if
its future earnings are insufficient to make all required principal payments out
of internally generated funds, the Company may be required to refinance all or a
portion of its existing debt, sell assets or obtain additional financing. There
can be no assurance that any such refinancing or asset sales would be possible
or that any additional financing could be obtained on terms acceptable to the
Company or at all, particularly in view of the Company's high level of debt.
The Company's high level of debt will have several important effects on its
future operations, including the following: (a) the Company will have
significant cash requirements to service debt (which, under current
circumstances, are projected to be approximately $11.0 million during the first
year following the Initial Offering and may be even greater depending on the
Company's results of operations, capital expenditure requirements and a variety
of other factors), reducing funds available for working capital, acquisitions,
capital expenditures and other corporate purposes and increasing the Company's
vulnerability to adverse general economic and industry conditions and (b) the
financial covenants and other restrictions contained in the New Credit
Facilities, the Indenture and other agreements relating to the Company's
indebtedness require the Company to meet certain financial tests, restrict its
ability to borrow additional funds and impose limitations on the disposition of
assets. In addition, although management believes that capital expenditures
above maintenance levels can be deferred to address cash flow or other
constraints, such initiatives cannot be deferred for extended periods without
adverse effects on the Company's business, results of operations and financial
position. The Company's continued growth depends, in part, on its ability to
maintain its facilities and technological capabilities, and, therefore, to the
extent it is unable to do so with internally generated cash, its inability to
finance capital expenditures through borrowed funds could have a material
adverse effect on the Company's financial position and results of operations.
13
<PAGE>
SUBORDINATION OF THE NOTES AND SUBSIDIARY GUARANTEES; UNSECURED STATUS OF THE
NOTES
Subordination
The payment of principal of, premium and interest on, and any other amounts
owing in respect of, the Notes is subordinated to the prior payment in full of
all existing and future Senior Indebtedness of the Company, including
indebtedness under the New Credit Facilities. Similarly, the Subsidiary
Guarantees of the Subsidiary Guarantors will be subordinated in right of payment
to all Guarantor Senior Indebtedness of the respective Subsidiary Guarantors. At
September 30, 1997, after giving pro forma effect to the Transactions, the
Company and the Subsidiary Guarantors would have had an aggregate of $4.8
million of Senior Indebtedness and Guarantor Senior Indebtedness outstanding and
up to $47.9 million of undrawn commitments available under the New Credit
Facilities. The Indenture limits, but does not prohibit, the incurrence by the
Company and the Subsidiary Guarantors of additional indebtedness which may
constitute Senior Indebtedness and Guarantor Senior Indebtedness. In the event
of the bankruptcy, liquidation, dissolution, reorganization or other winding up
of the Company, the assets of the Company will be available to pay obligations
on the Notes only after all Senior Indebtedness has been paid in full in cash,
and there may not be sufficient assets remaining to pay amounts due on any or
all of the Notes. In addition, under certain circumstances, the Company may not
pay principal of, premium or interest on, or any other amounts owing in respect
of, the Notes, or purchase, redeem or otherwise retire the Notes, if a payment
default or a non-payment default exists with respect to certain Senior
Indebtedness, and, in the case of a non-payment default, a payment blockage
notice has been received by the Trustee (as defined). See 'Description of
Notes--Ranking and Subordination.'
Unsecured Status of the Notes and Subsidiary Guarantees
The Notes and Subsidiary Guarantees are unsecured obligations of the
Company and the Subsidiary Guarantors, respectively. The Indenture permits the
Company to incur certain secured indebtedness, including indebtedness under the
New Credit Facilities, which is secured by a lien on substantially all of the
assets of the Company and the Subsidiary Guarantors. The holders of any secured
indebtedness will have a claim prior to the holders of the Notes with respect to
any assets pledged by the Company and the Subsidiary Guarantors as security for
such indebtedness. Upon an event of default under the New Credit Facilities, the
lenders thereunder would be entitled to foreclose on the assets of the Company
and the Subsidiary Guarantors. In such event, the assets of the Company and the
Subsidiary Guarantors remaining after repayment of such secured indebtedness may
be insufficient to satisfy the obligations of the Company and the Subsidiary
Guarantors with respect to the Notes and the Subsidiary Guarantees.
HOLDING COMPANY STRUCTURE
Stellex is a holding company with no independent operations. Stellex is
dependent on the earnings and cash flow of, and dividends and distributions or
advances from, its subsidiaries to provide the funds necessary to meet its debt
service obligations, including the payment of principal and interest on the
Notes. In particular, Stellex is heavily dependent on the earnings of Stellex
Microwave, which, on a pro forma basis, would have accounted for approximately
74.6% of the Company's sales for the nine months ended September 30, 1997. There
can be no assurance that Stellex's subsidiaries will generate sufficient cash
flow to dividend, distribute or advance funds to Stellex.
ABILITY TO SERVICE DEBT
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance which in turn will be subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to reduce or delay
planned expansion and capital expenditures, sell assets, obtain additional
equity capital or restructure its debt. There can be no assurance that the
Company's operating results, cash flow and capital resources will be sufficient
for payment of its indebtedness in the future. In the absence of such operating
results and resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the
14
<PAGE>
timing of such sales or the proceeds that the Company could realize therefrom.
In addition, because the Company's obligations under the New Credit Facilities
bear interest at floating rates, an increase in interest rates could adversely
affect, among other things, the Company's ability to meet its debt service
obligations. As of the date of this Prospectus, the Company has not entered into
interest rate swaps or other derivative arrangements but may consider doing so
in the future. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources' and 'Description of
Certain Indebtedness--New Credit Facilities.'
FRAUDULENT CONVEYANCE
The incurrence of indebtedness (such as the Notes) in connection with the
W-J Acquisition and the application of the proceeds thereof to consummate the
W-J Acquisition are subject to review under relevant federal and state
fraudulent conveyance statutes in a bankruptcy or reorganization case or a
lawsuit by or on behalf of creditors of the Company. Under these statutes, if a
court were to find that obligations (such as the Notes) were incurred with the
intent of hindering, delaying or defrauding present or future creditors or that
the Company received less than a reasonably equivalent value or fair
consideration for those obligations and, at the time of the occurrence of the
obligations, the obligor either (i) was insolvent or rendered insolvent by
reason thereof, (ii) was engaged or was about to engage in a business or
transaction for which its remaining unencumbered assets constituted unreasonably
small capital or (iii) intended to or believed that it would incur debts beyond
its ability to pay such debts as they matured or became due, such court could
void the Company's obligations under the Notes, subordinate the Notes to other
indebtedness of the Company or take other action detrimental to the holders of
the Notes.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at that time is greater than the then fair value of its assets or
if the fair saleable value of its assets at that time is less than the amount
that would be required to pay its probable liability on its existing debts as
they became absolute and mature. The Company believes that, after giving effect
to the Transactions, the Company was (i) neither insolvent nor rendered
insolvent by the incurrence of indebtedness in connection with the W-J
Acquisition and the Initial Offering, (ii) in possession of sufficient capital
to run its business effectively and (iii) incurring debts within its ability to
pay as the same mature or become due.
There can be no assurance, however, as to what standard a court would apply
to evaluate the parties' intent or to determine whether the Company was
insolvent at the time of, or rendered insolvent upon consummation of, the
Transactions or that, regardless of the standard, a court would not determine
that the Company was insolvent at the time of, or rendered insolvent upon
consummation of, the Transactions.
In addition, the Subsidiary Guarantees may be subject to review under
relevant federal and state fraudulent conveyance and similar statutes in a
bankruptcy or reorganization case or in a lawsuit by or on behalf of creditors
of any of the Subsidiary Guarantors. In such a case, the analysis set forth
above would generally apply, except that the Subsidiary Guarantees could also be
subject to the claim that, since the Subsidiary Guarantees were incurred for the
benefit of the Company (and only indirectly for the benefit of the Subsidiary
Guarantors), the obligations of the Subsidiary Guarantors thereunder were
incurred for less than reasonably equivalent value or fair consideration. A
court could avoid a Subsidiary Guarantor's obligation under its Subsidiary
Guarantee, subordinate the Subsidiary Guarantee to other indebtedness of such
Subsidiary Guarantor or take other action detrimental to the holders of the
Notes.
RESTRICTIONS UNDER DEBT AGREEMENTS
The Indenture contains covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries to incur additional
indebtedness, incur liens, pay dividends and make certain other restricted
payments, make investments, consummate certain asset sales, enter into certain
transactions with affiliates, sell stock of Restricted Subsidiaries, consolidate
or merge with any other person or transfer all or substantially all of the
assets of the Company. In addition, the New Credit Facilities contain
restrictive covenants which, generally, are more restrictive than those
contained in the Indenture, and limit the Company's ability to prepay its
subordinated indebtedness (including the Notes). The New Credit Facilities also
require the Company
15
<PAGE>
to maintain specified consolidated financial ratios and satisfy certain
consolidated financial tests. The Company's ability to meet those financial
ratios and financial tests can be affected by events beyond its control, and
there can be no assurance that the Company will meet those ratios and tests. See
'Description of Certain Indebtedness-- New Credit Facilities.'
Upon consummation of the Initial Offering and the W-J Acquisition, the
Company was in compliance with the covenants and restrictions contained in the
New Credit Facilities and in the Indenture. However, its ability to continue to
comply with such agreements may be affected by events beyond its control,
including prevailing economic, financial and industry conditions. The breach of
any of such covenants or restrictions could result in a default under the New
Credit Facilities and/or the Indenture, which would permit the senior lenders or
the holders of the Notes, as the case may be, to declare all amounts borrowed
thereunder to be due and payable, together with accrued and unpaid interest, and
the commitments of the senior lenders to make further extensions of credit under
the New Credit Facilities could be terminated. If the Company were unable to
repay its indebtedness to its senior lenders, such lenders could proceed against
the collateral securing such indebtedness as described under 'Description of
Certain Indebtedness--New Credit Facilities.'
LIMITATION ON CHANGE OF CONTROL
Upon a Change of Control (as defined under 'Description of Notes--Change of
Control'), the Company will be required to offer to purchase all of the
outstanding Notes at a price equal to 101% of the principal amount thereof to
the date of repurchase plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the date of repurchase. The Change of Control purchase
feature of the Notes may in certain circumstances discourage or make more
difficult a sale or takeover of the Company. In particular, a Change of Control
may cause an acceleration of, or require an offer to repurchase under, the New
Credit Facilities and certain other indebtedness, if any, of the Company and its
subsidiaries, in which case such indebtedness would be required to be repaid in
full before repurchase of the Notes. See 'Description of Certain
Indebtedness--New Credit Facilities' and 'Description of Notes--Change of
Control.' The inability to repay such indebtedness, if accelerated, and to
purchase all of the tendered Notes would constitute an event of default under
the Indenture. There can be no assurance that the Company will have funds
available to repurchase the Notes upon the occurrence of a Change of Control.
LACK OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange Offer,
there has not been any public market for the Old Notes. The Old Notes have not
been registered under the Securities Act and will be subject to restrictions on
transferability to the extent that they are not exchanged for New Notes by
holders who are entitled to participate in the Exchange Offer. The holders of
Old Notes (other than any such holder that is an 'affiliate' of the Company
within the meaning of Rule 405 under the Securities Act) who are not eligible to
participate in the Exchange Offer are entitled to certain registration rights,
and the Company and the Subsidiary Guarantors are required to file a Shelf
Registration Statement with respect to such Old Notes. The New Notes will
constitute a new issue of securities with no established trading market. The
Company does not intend to list the New Notes on any national securities
exchange or seek the admission thereof to trading in the National Association of
Securities Dealers Automated Quotation System. The Initial Purchasers have
advised the Company that they currently intend to make a market in the New
Notes, but they are not obligated to do so and may discontinue such market
making at any time. In addition, such market making activity will be subject to
the limits imposed by the Securities Act and the Exchange Act and may be limited
during the Exchange Offer and the pendency of the Shelf Registration Statement.
Accordingly, no assurance can be given that an active public or other market
will develop for the New Notes or as to the liquidity of the trading market for
the New Notes. If a trading market does not develop or is not maintained,
holders of the New Notes may experience difficulty in reselling the New Notes or
may be unable to sell them at all. If a market for the New Notes develops, any
such market may be discontinued at any time.
If a public trading market develops for the New Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and
16
<PAGE>
other factors, including the financial condition of the Company, the New Notes
may trade at a discount from their principal amount.
LACK OF STAND-ALONE OPERATING HISTORY
Prior to the consummation of the W-J Acquisition, Stellex Microwave
constituted an operating division of Watkins-Johnson. Throughout its history,
the business of Stellex Microwave benefited from its association with
Watkins-Johnson. Although pursuant to the terms of the W-J Acquisition Stellex
Microwave retained the right to sell its products through the 1997-98 device
catalog produced by Watkins-Johnson and to identify its products as 'formerly
made by Watkins-Johnson' until the expiration of Watkins-Johnson's 1999-2000
catalog, the ability of the Company to function as a stand-alone entity,
including its ability to develop name recognition for its products independent
of the 'Watkins-Johnson' name, is unproven. See 'Certain Transactions--The W-J
Acquisition' and 'Business--Sales and Marketing--Stellex Microwave--Microwave
Devices.' In addition, Watkins-Johnson corporate personnel formerly provided
management information, financial, treasury, tax, legal, cash management,
payroll processing and employee benefits assistance to the Stellex Microwave
business. Although the costs of these services were allocated to the business by
Watkins-Johnson for internal corporate accounting purposes, these costs may not
necessarily reflect accurately the costs that the business would have incurred
for those services as a stand-alone entity. Because these services are essential
to the effective operation of the Company's business, the failure by the Company
to establish and maintain its own capacity to provide these services, or to
obtain them from outside contractors, could have a material adverse effect on
the Company's financial condition and results of operations.
DEPENDENCE ON DEFENSE MARKET
A substantial portion of the Company's pro forma sales (approximately 62%
in 1996) would have been to the defense market. As a result, the Company's sales
could be materially adversely impacted by a decrease in defense spending by the
United States government because of defense spending cuts, general budgetary
constraints or otherwise. The United States defense budget declined
significantly in the early 1990s and, while appropriations are forecasted to
remain relatively constant during the next five years, there can be no assurance
that there will not be further reductions in defense spending generally or in
the procurement of weapon systems utilizing the Company's products. Fewer
available defense industry production programs, coupled with continued pricing
pressure on follow-on orders for programs in which the Company participates and
other factors, caused Stellex Microwave's defense-related sales, primarily
microwave subsystems and components, to decline from approximately $72.2 million
for the year ended December 31, 1995 to $62.4 million for the year ended
December 31, 1996. The Company expects to continue to derive a substantial
portion of its sales from these business segments and develop microwave products
for defense applications. Failure of the Company to replace sales attributable
to a significant defense program or contract at the end of that program or
contract, whether due to cancellation, spending cuts, budgetary constraints or
otherwise, could have a material adverse effect upon the Company's financial
position and results of operations. In addition, a large portion of the
Company's expenses are fixed and difficult to reduce, thus magnifying the
material adverse effect of any revenue shortfall. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'
DEPENDENCE ON CERTAIN CUSTOMERS
In December 1997, Raytheon, the Company's second largest customer based on
1996 pro forma sales, completed its acquisition of the defense business of
Hughes Aircraft Company, the Company's largest customer based on 1996 pro forma
sales. Combined pro forma sales to Raytheon and Hughes in 1996 and the nine
months ended September 30, 1997 accounted for approximately 34% and 37%,
respectively, of the Company's total pro forma sales in such periods. The
Company does not currently have a long-term contractual relationship with
Raytheon or Hughes, and historically has arranged sales to such customers
through purchase orders obtained through competitive bids or sole source awards.
While the Company has no reason to believe that it will be unable to continue
obtaining such purchase orders, no assurance can be given in this regard.
17
<PAGE>
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's future success is dependent in part upon its proprietary
technology and trade secrets, including manufacturing and scientific know-how.
There can be no assurance that other parties will not develop technologies that
are similar or superior to the Company's technology, duplicate the Company's
technology or design around the patents and other intellectual property owned by
the Company. There also can be no assurance that the steps taken by the Company
to protect its proprietary technology and trade secrets will prevent
misappropriation of its technology, including its manufacturing know-how. See
'Business--Technology' and '--Intellectual Property.'
The Company must also continually engage in effective research and
development efforts in order to provide innovative new products for
technologically-sophisticated customers and markets. There is an inherent risk
that advances in existing technology could have a material adverse impact on its
financial condition and results of operations. See 'Business--Competition.'
COMPETITION
Declining defense budgets in the early 1990s and increasing pressures for
cost reductions have precipitated a major consolidation in the defense industry.
In recent years, this consolidation has resulted in program cancellations, scope
reductions and delays in contract funding or awards. While it appears that the
rapid decline in U.S. defense spending has ceased, reduced funding has
contributed to significant price competition throughout the industry. In
addition, while Stellex Microwave faces competition in the subsystems markets in
which it competes from independent microwave equipment manufacturers which have
integration capabilities, management believes that its primary competition is
from the in-house manufacturing operations of OEMs and prime contractors, most
of whom have greater financial and technical resources than the Company. The
future success of Stellex Microwave, and the Company, is dependent on the extent
to which OEMs and prime contractors elect to purchase from outside sources
rather than manufacture and integrate their own MFMs and components. These
in-house manufacturers could also elect to enter the non-captive market for
microwave products and compete directly with Stellex Microwave's microwave
components. See 'Business--Competition.'
Approximately 62% of the Company's 1996 pro forma sales were derived from
contracts with the U.S. government and its prime contractors. The Company
encounters significant competition for a number of these contracts in most of
its business segments from other companies, some of which have financial,
technical, marketing, manufacturing, distribution and other resources
substantially greater than those of the Company. The Company's ability to
compete for these contracts depends to a large extent on the effectiveness and
innovativeness of its research and development programs, its ability to offer
better program performance than its competitors at a lower cost to the U.S.
government customer, and its readiness in facilities, equipment and personnel to
undertake the programs for which it competes.
Many of the markets in which the Company competes or intends to compete are
highly competitive and require a high level of service, extremely reliable
products and cost competitiveness. There can be no assurance that the Company
will continue to compete successfully for new program opportunities or otherwise
secure new business, or that new programs, if awarded, and other new business
will be profitable. In addition, even as to those defense programs which the
U.S. government or a prime contractor have historically awarded to the Company
on a sole-source basis, the U.S. government or prime contractor may in the
future determine to shift to a competitive bidding process. There can be no
assurance that the Company will continue to be successful in remaining the
sole-source contractor on various programs or, in competitive situations, in
having its bids accepted or, if accepted, that awarded contracts will generate
sufficient sales to result in profitability for the Company.
UNCERTAINTY ASSOCIATED WITH GOVERNMENT CONTRACTS
The Company's contracts with the U.S. government and its prime contractors
are subject to termination either upon default by the Company or at the
convenience of the U.S. government. Termination for convenience provisions
generally entitle the Company to recover costs incurred, settlement expenses and
profit on work completed prior to termination. In addition to the right of the
U.S. government to terminate U.S. government
18
<PAGE>
contracts, such contracts are conditioned upon the continuing availability of
congressional appropriations. Congress usually appropriates funds for a given
program on a fiscal year basis even though contract performance may take more
than one year. Consequently, at the outset of a major program, the contract is
usually partially funded, and additional monies are normally, incrementally,
committed to the contract by the procuring agency from appropriations made by
Congress for future fiscal years. See 'Business--Government Contracts and
Regulation.'
Because the Company contracts to supply goods and services to the U.S.
government and its prime contractors, it is also subject to other risks,
including contract suspensions, protests by disappointed bidders of contract
awards, which can result in the reopening of the bidding process, and changes in
government policies or regulations. In addition, licenses are required from U.S.
government agencies to export many of the weapon systems and other products for
which the Company supplies microwave subsystems and other components. See
'Business--Government Contracts and Regulation' and '--Sales to Foreign
Customers.'
Due to its business with the U.S. government and its prime contractors, the
Company may also be subject to 'whistle blower' suits brought by private
plaintiffs in the name of the U.S. government upon the allegation that the
Company submitted a false claim to the U.S. government, as well as to false
claim suits brought by the U.S. government. A judgment against the Company in a
'whistle blower' or false claim suit could cause the Company to be liable for
substantial damages and could carry penalties of suspension or debarment which
would make the Company ineligible to be awarded any U.S. government contracts
for a period of up to three years and, thereby, could potentially have a
material adverse effect on the Company's financial condition and results of
operations. See 'Business--Government Contracts and Regulation.'
U.S. GOVERNMENT CONTRACT CONSENTS AND NOVATIONS
Watkins-Johnson was a party to several contracts with various agencies of
the U.S. government which were transferred to the Company in connection with the
W-J Acquisition. These contracts generate a relatively small portion of the
Company's consolidated pro forma sales. The U.S. government may assert that, as
a result of the W-J Acquisition, the Company must enter into a novation
agreement with the U.S. government and Watkins-Johnson in order to continue to
be recognized as the contractor under its U.S. government contracts. A novation
agreement is typically entered between the U.S. government, a contractor who
transfers its assets (including its contracts) to a successor-in-interest, and
that successor-in-interest. If required, the novation process typically takes a
matter of weeks or months, and can require up to or more than a year, to
complete and in any event was not completed prior to the consummation of the W-J
Acquisition. Although the Company knows of no reason why it cannot successfully
complete the negotiation and execution of the novation agreements that may be
required, there can be no assurance that such agreements will ultimately be
obtained. Failure to obtain any novation agreement deemed to be required could
have a material adverse effect on the Company's financial condition and results
of operations.
A substantial portion of the Company's consolidated pro forma sales would
have been generated under subcontracts between Watkins-Johnson and prime
contractors of U.S. government agencies. The subcontracts cannot be transferred
to a successor-in-interest without the consent of the prime contractor. While
prime contractor approval has been obtained for the transfer of a substantial
number of material subcontracts, approval remains outstanding for a number of
material contracts with key prime contractors, representing expected revenues of
approximately $9.3 million through 1998 and $2.4 million thereafter through
1999, or approximately 8.2% and 2.1%, respectively, of the Company's total pro
forma sales in 1996. The U.S. government may assert that it also has the right
to approve the transfer of subcontracts. Such approval, if required, will be
sought. Although the Company knows of no reason why any required consent or
approval from U.S. government agencies and its prime contractors would not be
granted, there can be no assurance that any such consent or approval will
ultimately be obtained. Failure to obtain consent to the transfer of the
subcontracts from prime contractors or, if required, from the U.S. government
could have a material adverse effect on the Company's financial condition and
results of operation.
19
<PAGE>
CONTRACT PROFIT EXPOSURES
The Company's products are provided primarily through two types of
contracts: fixed-price and cost-reimbursable contracts. The Company would have
derived approximately 6% of its total pro forma sales during 1996 from
cost-reimbursable contracts under which the Company is reimbursed for all actual
costs incurred in performing the contract to the extent that such costs are
within the contract ceiling and allowable under the terms of the contract, plus
a fee or profit. A significant portion of the balance of the Company's total pro
forma sales in 1996 would have been attributable to fixed-price contracts with
durations typically ranging from several months to several years, which require
the Company to perform services under a contract at a stipulated price, subject
to periodic adjustments in some cases.
The Company assumes greater financial risk on fixed-price type contracts
than on cost-reimbursable contracts. The Company believes that an increasing
percentage of its contracts will be entered into on a fixed-price basis. Failure
to anticipate technical problems, estimate costs accurately or control costs
during performance of a fixed-price contract may reduce the Company's profit or
cause a loss.
CONTROLLING STOCKHOLDERS
The outstanding capital stock of Stellex is beneficially owned by two
trusts, the pool of contingent beneficiaries of which are (i) Richard L. Kramer
and certain members of his family and (ii) William L. Remley and certain members
of his family. As a result of their relationships with such trusts, Messrs.
Kramer and Remley may be deemed to beneficially own 90% and 100%, respectively,
of the outstanding capital stock of Stellex. Messrs. Kramer and Remley are
executive officers and directors of Mentmore and Stellex. The interests of
Mentmore, Mr. Kramer, Mr. Remley and their affiliates may differ from the
interests of holders of the Notes. See 'Principal Stockholders.'
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependent on the personal efforts and
abilities of senior management. The loss of services of key management
personnel, particularly the personnel identified in 'Management-- Directors,
Executive Officers and Key Employees,' could have a material adverse effect on
the Company. The Company's continued success also depends in large part on its
ability to recruit and retain the professional and technical personnel necessary
in connection with its operations. Competition for skilled personnel in the
electronics and aerospace industries is intense and increasing, and companies
often experience high attrition among their skilled employees. Excessive
attrition among its professional and technical personnel could increase the
Company's costs of performing its contractual obligations, reduce the Company's
ability to efficiently satisfy its clients' needs and seriously constrain the
Company's future growth potential. In addition, the Company must often comply
with provisions in government contracts that require employment of persons with
specified levels of education, work experience and security clearances. The loss
of any significant number of the Company's existing key professional and
technical personnel or the inability to attract and retain key employees in the
future could have a material adverse effect on the Company's financial condition
and results of operations. See 'Business--Employees' and 'Management.'
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive federal, state, and
local environmental laws and regulations that may change frequently and that (i)
impose limitations and prohibitions on the discharge of, and establish standards
for the use, disposal, and management of, certain materials, substances and
waste, and (ii) impose liability for the costs of investigating and cleaning up,
and certain damages resulting from, past spills, disposals or other releases of
hazardous substances or materials (together, 'Environmental Laws'). Management
cannot predict with any certainty whether and to what extent future events, such
as changes in existing laws and regulations or the discovery of conditions not
currently known to the Company, or contractual indemnification not providing the
Company with the protection it anticipates for certain known environmental
conditions, may affect the Company. Furthermore, actions by federal, state, and
local governments concerning environmental matters could result in laws or
regulations that could increase the costs of producing the Company's products or
otherwise adversely affect the demand for its products. Any such development
could result in a material adverse
20
<PAGE>
impact on the Company. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Environmental Matters' and
'Business--Government Contracts and Regulation.'
NATURAL DISASTERS
The geology and other natural conditions of the California area, in which
all of the Company's facilities are located, present particular risks of natural
disasters, including the risk of seismic activity. Future seismic activity in
California could cause significant damage to these facilities and could have a
material adverse effect on the Company's financial condition and results of
operations.
COMPANY GROWTH AND RISKS RELATED TO FUTURE ACQUISITIONS
A key element of the Company's business strategy is to selectively pursue
acquisitions of other companies in the aerospace and defense industries. There
can be no assurance that acquisition opportunities will continue to be available
or that if available, such acquisitions could be consummated on terms acceptable
to the Company, or that the Company, particularly in view of its high level of
debt, would be able to obtain financing on terms that it deems acceptable to
consummate any potential acquisition. See 'Risk Factors--Substantial Leverage'
and '-- Ability to Service Debt.' In addition, the Company's future performance
will depend, in part, on its ability to manage expanding operations and to adapt
its operational systems to such expansions. The failure of the Company to
effectively manage its growth or successfully integrate acquired companies or
assets into the Company's operations could have a material adverse effect on the
Company's financial condition and results of operations.
BACKLOG
The Company's order backlog is subject to fluctuations and is not
necessarily indicative of future sales. There can be no assurance that current
order backlog will necessarily lead to sales in any future period. The Company's
order backlog as of September 30, 1997 was approximately $99.8 million,
approximately 29.7% of which was attributable to commercial customers and
approximately 70.3% of which was attributable to defense customers. A
substantial amount (approximately $22.3 million as of September 30, 1997) of the
Company's order backlog can be canceled at any time without penalty, except, in
some cases, the recovery of the Company's actual committed costs and profit on
work performed up to the date of cancellation. Cancellations of pending purchase
orders or termination or reductions of purchase orders in progress from
customers of the Company could have a material adverse effect on the Company's
financial position and results of operations. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Backlog.'
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of the Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws, or pursuant to an exemption therefrom. Except under certain
limited circumstances, the Company does not intend to register the Old Notes
under the Securities Act. In addition, any holder of Old Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution of the New
Notes may be deemed to have received restricted securities and, if so, will be
required to comply with the registration and propectus delivery requirements of
the Securities Act in connection with any resale transaction. To the extent Old
Notes are tendered and accepted in the Exchange Offer, the trading market, if
any, for the Old Notes not so tendered could be adversely affected. See 'The
Exchange Offer.'
21
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of the Company at September 30, 1997, and as adjusted to give
effect to the Transactions, and should be read in conjunction with 'Pro Forma
Consolidated Financial Data,' 'Management's Discussion and Analysis of Financial
Condition and Results of Operations,' and the historical consolidated financial
statements of Stellex (successor to Kleinert), and the accompanying notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------
<S> <C> <C>
HISTORICAL PRO FORMA
---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents........................................ $ 730 $ 730
---------- -----------
---------- -----------
Short-term note payable(a)....................................... 4,000 --
---------- -----------
Long-term debt, including current maturities:
Prior Credit Facility.......................................... $ 17,250 $ --(b)
New Credit Facilities(c)....................................... -- 2,130
The Notes...................................................... -- 100,000
Trinity Note................................................... 2,500 --(d)
Other long-term debt, including current maturities(e).......... 4,369 4,389
---------- -----------
Total long-term debt, including current maturities........ 24,119 106,519
---------- -----------
Minority interest(f)............................................. 778 778
---------- -----------
Stockholders' equity:
Preferred Stock(g)............................................. -- 11,450
Common Stock(h)................................................ 50 50
Retained earnings.............................................. (256) (1,488)
---------- -----------
Total stockholders' equity.................................. (206) 10,012
---------- -----------
Total capitalization...................................... $ 28,691 $ 117,309
---------- -----------
---------- -----------
</TABLE>
- ------------------
(a) Consists of indebtedness outstanding under the Sunderland Note (as defined).
See 'Certain Transactions-- Relationship with Equity Investors.'
(b) Reflects the repayment of $17.2 million of principal and $42,000 of accrued
interest outstanding as of September 30, 1997 under the Prior Credit
Agreement. Substantially all of these borrowings were incurred to finance
the Kleinert Acquisition. Borrowings under the Prior Credit Agreement bore
interest at an average rate of 7.7% per annum as of September 30, 1997.
(c) In connection with the consummation of the Initial Offering, the Company
entered into the New Credit Facilities. As of September 30, 1997, on a pro
forma basis, the Company would have had up to $47.9 million of borrowing
availability under the New Credit Facilities, subject to the satisfaction of
certain conditions. See 'Description of Certain Indebtedness--New Credit
Facilities.'
(d) Reflects the repayment of $2.5 million of principal and $20,000 of accrued
interest outstanding as of September 30, 1997 under the Trinity Note (as
defined). See 'Certain Transactions--Trinity Note.' Borrowings under the
Trinity Note bore interest at a rate of 10% per annum as of September 30,
1997.
(e) Consists of indebtedness outstanding under the Paragon Note (as defined) and
the Kleinert Seller Note (as defined). See 'Description of Certain
Indebtedness--Paragon Note' and '--Kleinert Seller Note,' and Note 5 to the
consolidated financial statements of Stellex (successor to Kleinert)
included elsewhere in this Prospectus.
(f) Consists of 19.9% of the issued and outstanding common stock of KII Holding
which is held by its management, who have rights to sell such shares to KII
Holding under certain circumstances.
(g) Consists of Series A Preferred Stock with an aggregate stated value of
$11.45 million issued in connection with the consummation of the W-J
Acquisition and the Initial Offering to certain trusts and other entities
owned by such trusts and certain other trusts, the beneficiaries of which
are certain relatives of Richard L. Kramer and William L. Remley. See
'Certain Transactions--Relationship with Equity Investors.'
(h) Consists of Common Stock, without par value, of which 1,000 shares are
authorized and 1,000 shares are issued and outstanding.
22
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
On July 1, 1997, KII Holding, through a wholly-owned subsidiary, acquired
all of the issued and outstanding capital stock of Kleinert for approximately
$26.5 million (including the assumption of $2.6 million of indebtedness and the
issuance to the seller of a note for approximately $1.75 million). Stellex was
formed on September 5, 1997 and, as a result of an equity exchange transaction
between Stellex and KII Holding on September 12, 1997, owns approximately 80% of
the outstanding common stock of KII Holding, with Stellex Aerospace's management
holding the remainder.
On October 31, 1997, concurrently with the consummation of the Initial
Offering, Stellex, through a wholly-owned subsidiary, acquired the tactical
subsystems and microwave devices businesses of Watkins-Johnson for a net
purchase price of approximately $82.2 million (after giving effect to estimated
purchase price adjustments). In addition, on the same date the Company entered
into the New Credit Facilities to provide working capital and
acquisition-related borrowing availability of $25 million and $25 million,
respectively.
The unaudited pro forma consolidated financial statements have been
prepared to give effect to the application of the purchase method of accounting
for the Kleinert Acquisition and the W-J Acquisition, as well as the application
of proceeds from the Initial Offering and New Credit Facilities. The allocation
of the purchase price to the tangible and intangible assets and liabilities
acquired in connection with the Acquisitions reflected in these pro forma
consolidated financial statements are based on preliminary estimates of their
fair market values. The Company expects to finalize the allocation of the
purchase price in conjunction with the year-end closing and audit for 1997.
However, the Company does not expect that the effects of the final allocation
will differ materially from those set forth herein.
The unaudited pro forma consolidated balance sheet as of September 30, 1997
gives effect to the W-J Acquisition, the Initial Offering and the New Credit
Facilities as if they had occurred as of September 30, 1997.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1996 and the nine months ended September 30, 1997 give effect
to the Transactions as if they had occurred as of January 1, 1996, and include
estimated amounts for interest required to fund the working capital requirements
of Stellex Microwave during such periods. The pro forma consolidated statements
of operations exclude non-recurring charges directly related to the
Acquisitions, including (i) investment banking and financial advisory fees paid
and payable to Mentmore, (ii) increases in cost of sales arising from the
write-up of inventories at the date of the consummation of the Acquisitions to
fair market value and (iii) retention bonuses to be paid to certain employees of
TSMD; these amounts are estimated to be $1.5 million, $1.2 million, and $2.3
million, respectively, which are anticipated to be included in expenses in the
three months ended December 31, 1997.
The unaudited pro forma consolidated financial statements have been
prepared by management of the Company and do not necessarily represent the
results of the Company's operations which would have occurred if the
Transactions had actually taken place on the dates indicated, and may not be
indicative of the results of operations which may be obtainable in the future.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical consolidated financial statements of Stellex
(successor to Kleinert) and TSMD (Stellex Microwave) and the accompanying notes
thereto, 'Summary Pro Forma Financial Data,' 'Capitalization,' 'Selected
Historical Financial Data' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations,' which information is included
elsewhere in this Prospectus.
23
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING
AND
W-J NEW CREDIT STELLEX
STELLEX TSMD ACQUISITION FACILITIES CONSOLIDATED
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents.............................. $ 730 $ -- $ 730
Receivables....................................... 5,803 15,500 (15,200)(a) (50)(g) 6,053
Inventories....................................... 13,211 15,100 1,000(b) 29,311
Prepaid and other................................. 815 300 (300)(a) 815
Deferred taxes.................................... 486 3,000 (3,000)(a) 486
---------- ---------- ----------- ----------- ------------
Total current assets............................ 21,045 33,900 (17,500) (50) 37,395
Property and equipment............................ 13,767 4,300 17,600(b) 35,667
Favorable lease................................... -- -- 4,500(c) 4,500
Goodwill.......................................... -- -- 49,900(d) 49,900
Other assets...................................... 1,215 -- 5,000(f) 5,983
(232)(h)
---------- ---------- ----------- ----------- ------------
Total Assets.................................... $ 36,027 $ 38,200 $ 54,500 $ 4,718 $133,445
---------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ----------- ------------
LIABILITIES AND EQUITY
Bank line of credit............................... $ 1,230 $ -- 2,130(f) 2,130
(1,230)(g)
Notes payable..................................... 4,058 -- -- (4,000)(j) 58
Accounts payable.................................. 1,536 2,400 (2,400)(a) (2,700)(g) 1,536
2,700(e)
Accrued liabilities............................... 2,158 7,500 (4,000)(a) 5,658
Payable for W-J Acquisition....................... 82,200 (82,200)(g) --
Customer deposits................................. 233 4,800 5,033
---------- ---------- ----------- ----------- ------------
Total current liabilities....................... 9,215 14,700 78,500 (84,000) 18,415
Notes payable..................................... 18,581 -- (16,000)(g) 2,581
The Notes......................................... 100,000(f) 100,000
Other subordinated debt........................... 4,250 -- (2,500)(g) 1,750
Deferred compensation and pension liabilities..... 1,672 500 2,172
Deferred income taxes............................. 1,737 500 (500)(a) 1,737
---------- ---------- ----------- ----------- ------------
Total liabilities............................... 35,455 15,700 78,000 (6,500) 122,655
---------- ---------- ----------- ----------- ------------
Minority interest................................. 778 778
---------- ---------- ----------- ----------- ------------
Preferred stock................................... 4,000(j) 11,450
7,450(i)
Common stock...................................... 50 -- 50
Additional paid in capital........................ -- -- --
Invested equity................................... -- 22,500 (22,500)(a) --
Retained earnings................................. (256) -- (1,000)(e) (232)(h) (1,488)
---------- ---------- ----------- ----------- ------------
Total Shareholders' Equity...................... (206) 22,500 (23,500) 11,218 10,012
---------- ---------- ----------- ----------- ------------
Total............................................. $ 36,027 $ 38,200 $ 54,500 $ 4,718 $133,445
---------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ----------- ------------
</TABLE>
See notes to pro forma consolidated balance sheet.
24
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
The accompanying unaudited pro forma consolidated balance sheet as of September
30, 1997 gives effect to the W-J Acquisition, the Initial Offering and the New
Credit Facilities as if they had occurred as of September 30, 1997. Pro forma
adjustments are as follows:
<TABLE>
<S> <C>
As to the W-J Acquisition:
(a) Pursuant to the W-J Acquisition, the Company only purchased certain
assets and assumed certain liabilities of TSMD. Reflects an adjustment to
eliminate those assets not purchased and liabilities not assumed as part
of the W-J Acquisition, and the related invested equity account.
(b) Reflects an adjustment to increase the carrying values of property and
inventory acquired in connection with the W-J Acquisition to their
estimated fair market values (based on preliminary estimates).
(c) Reflects an adjustment to record the difference in contractual lease
costs on the Stellex Microwave leased facilities compared to estimated
fair market lease costs, to be amortized over three years.
(d) Reflects an adjustment to reflect the excess purchase price paid over
the fair value of the tangible and identified intangible assets purchased
and liabilities assumed (goodwill) in connection with the W-J Acquisition.
(e) Reflects an adjustment to record the investment banking and financial
advisory fees paid to Mentmore in connection with the W-J Acquisition and
the Initial Offering, and to accrue additional acquisition-related
expenses. See 'Certain Transactions--Management Agreement with Mentmore.'
As to the Initial Offering and the New Credit Facilities:
(f) Reflects adjustments to record the proceeds of the Initial Offering,
estimated debt issuance costs of $5,000,000 and the incurrence of
$2,130,000 of borrowings under the New Credit Facilities.
(g) Reflects the payment of the W-J Acquisition purchase price of $82,200,000
(after giving effect to estimated purchase price adjustments), payment of
related accrued costs for the W-J Acquisition, and the repayment of
$17,230,000 of debt under the Prior Credit Facility and $2,500,000 of debt
under the Trinity Note.
(h) Reflects an adjustment to write-off debt issuance costs recorded in
connection with the Kleinert Acquisition, as such debt was repaid with the
proceeds of the Initial Offering.
(i) Reflects the sale of preferred stock for an aggregate of $7,450,000.
(j) Reflects the exchange of a note payable to an affiliated company for
preferred stock of Stellex.
</TABLE>
25
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
W-J
ACQUISITION
AND
KLEINERT OFFERING COMPANY
KLEINERT ADJUST- TSMD ADJUST- CONSOLIDATED
HISTORICAL MENTS HISTORICAL MENTS PRO FORMA
------------- ----------- ------- ----------- ------------
(PREDECESSOR)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales......................... $24,307 $89,200 $113,507
Cost of sales................. 17,367 $ (204) (a) 65,900 $ 3,274 (i) 87,417
1,080 (j)
Inventory writedowns and staff
reductions.................. -- 2,200 2,200
------------- ----------- ------- ----------- ------------
Gross profit.................. 6,940 204 21,100 (4,354) 23,890
Selling, general and
administrative.............. 3,629 (47) (a) 14,600 246 (i) 18,809
761 (c) 120 (j)
(500) (k)
Amortization of intangibles... 31 (31) (a) -- 3,496 (i) 3,496
------------- ----------- ------- ----------- ------------
Income from operations........ 3,280 (479) 6,500 (7,716) 1,585
Interest expense.............. 856 140 (e) -- 10,000 (l) 10,984
(592) (f) 580 (m)
Other expense, net............ 47 (7) (g) -- 40
------------- ----------- ------- ----------- ------------
Income (loss) before taxes.... 2,377 (20) 6,500 (18,296) (9,439)
Provision (benefit) for income
taxes....................... 945 (8) (h) 2,500 (3,437) (n) --
------------- ----------- ------- ----------- ------------
Net income (loss)............. 1,432 (12) 4,000 (14,859) (9,439)
Preferred stock dividends..... -- -- (1,145) (o) (1,145)
------------- ----------- ------- ----------- ------------
Income (loss) applicable to
common stockholders......... $ 1,432 $ (12) $ 4,000 $ (16,004) $(10,584)
------------- ----------- ------- ----------- ------------
------------- ----------- ------- ----------- ------------
</TABLE>
See notes to pro forma consolidated statements of operations.
26
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS W-J
ENDED THREE MONTHS ACQUISITION
JUNE 30, ENDED KLEINERT/ AND
1997 SEPTEMBER 30, 1997 STELLEX OFFERING COMPANY
KLEINERT STELLEX ADJUST- TSMD ADJUST- CONSOLIDATED
HISTORICAL HISTORICAL MENTS HISTORICAL MENTS PRO FORMA
------------- ------------------ -------- ---------- ----------- ------------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales......................... $14,296 $ 8,890 $ 67,900 $ 91,086
Cost of sales................. 10,140 6,747 $ (131) (a) 47,900 $ 2,455 (i) 67,297
(624) (b) 810 (j)
------------- -------- -------- ---------- ----------- ------------
Gross profit.................. 4,156 2,143 755 20,000 (3,265) 23,789
Selling, general and
administrative.............. 1,783 1,571 (27) (a) 9,100 185 (i) 11,894
17 (c) 90 (j)
(450) (d) (375) (k)
Amortization of intangibles... 15 12 (15) (a) -- 1,748 (i) 1,760
------------- -------- -------- ---------- ----------- ------------
Income from operations........ 2,358 560 1,230 10,900 (4,913) 10,135
Interest expense.............. 376 508 70 (e) -- 7,500 (l) 8,527
(274) (f) 347 (m)
Other expense, net............ 98 20 (45) (g) -- 73
------------- -------- -------- ---------- ----------- ------------
Income before taxes........... 1,884 32 1,479 10,900 (12,760) 1,535
Provision (benefit) for income
taxes....................... 754 288 592 (h) 4,200 (5,684) (n) 150
------------- -------- -------- ---------- ----------- ------------
Net income.................... 1,130 (256) 887 6,700 (7,076) 1,385
Preferred stock dividends..... -- -- -- (859) (o) (859)
------------- -------- -------- ---------- ----------- ------------
Income applicable to common
stockholders................ $ 1,130 $ (256) $ 887 $ 6,700 $ (7,935) $ 526
------------- -------- -------- ---------- ----------- ------------
------------- -------- -------- ---------- ----------- ------------
</TABLE>
See notes to pro forma consolidated statements of operations.
27
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying pro forma consolidated statements of operations for the year
ended December 31, 1996 and the nine months ended September 30, 1997 give effect
to the Transactions as if they had occurred as of January 1, 1996. Pro forma
adjustments are as follows:
As to the Kleinert Acquisition:
(a) Reflects an adjustment to record the decrease in depreciation and
amortization expense as a result of the allocation of the purchase price to
the net assets of Kleinert (based on estimated lives of four to eight years
for equipment and 32.5 years for the buildings at Kleinert). These amounts
are based on appraised values of the tangible assets. No amounts were
ascribed to intangible assets or goodwill as the purchase price did not
exceed the fair value of the net tangible assets acquired.
(b) Reflects an adjustment to eliminate non-recurring expenses associated with
the writeoff of inventory fair value adjustments directly connected with
the Kleinert Acquisition.
(c) Reflects an adjustment to record the estimated increase in the value of the
shares of common stock of KII Holding held by management which may be sold
to KII Holding under certain circumstances, as well as the estimated value
of stock appreciation rights (SARs) held by Stellex Aerospace management.
(d) Reflects an adjustment to eliminate non-recurring investment banking and
financial advisory fees paid to Mentmore directly connected with the
Kleinert Acquisition.
(e) Reflects an adjustment to record interest expense on indebtedness under the
Kleinert Seller Note incurred in connection with the Kleinert Acquisition
and not repaid in connection with the Initial Offering.
(f) Reflects an adjustment to eliminate interest expense on indebtedness
refinanced in the Transactions.
(g) Reflects an adjustment to eliminate non-recurring expenses directly
connected with the Kleinert Acquisition.
(h) Reflects an adjustment to record the estimated tax effect of entries (a)
through (g) above.
As to the W-J Acquisition and the Initial Offering:
(i) Reflects an adjustment to record the increase in depreciation and
amortization expense as a result of the allocation of the purchase price to
net assets of TSMD (based on estimated lives of five years for equipment,
three years for a favorable rent agreement and 25 years for goodwill, and
straight-line depreciation and amortization). These amounts are based on
preliminary estimates of fair market values of the tangible assets
acquired.
(j) Reflects an adjustment for additional cash to be paid for facilities rent
based on agreements between the Company and Watkins-Johnson entered into in
connection with the W-J Acquisition.
(k) Reflects an adjustment to eliminate the Watkins-Johnson corporate expense
allocation to TSMD ($2,800,000 and $2,100,000 for the year ended December
31, 1996 and nine months ended September 30, 1997, respectively) and to
record the Company's estimated costs of corporate services on a separate
company basis, as well as the Mentmore management fees payable pursuant to
the Management Agreement.
(l) Reflects an adjustment to record interest on the Notes at an interest rate
of 9.5% per annum, and related amortization of the estimated debt issuance
costs of $5,000,000 over the ten-year expected term of the Notes.
(m) Reflects an adjustment to impute interest expense on the net working capital
requirements of TSMD. As business units of Watkins-Johnson, no interest
expense was allocated to TSMD for the invested equity of their operations.
The ongoing working capital requirements of TSMD are expected to be funded
through cash flow from operations and borrowings under the New Credit
Facilities. Interest was calculated at 7.75% per annum based on the balance
of working capital items which will require funding by the Company on an
ongoing basis and TSMD's cash flows subsequent to January 1, 1996.
(n) Reflects an adjustment to record the estimated tax effect of entries (i)
through (m). The goodwill incurred on the acquisition is expected to be
deductible under Section 197 of the Internal Revenue Code. The 1996 tax
benefit is limited due to limitations on the recognizability of a deferred
tax asset on the pro forma net loss of the combined companies.
(o) Reflects an adjustment to record the dividends relating to the $11,450,000
preferred stock issued by the Company in connection with the Initial
Offering and the W-J Acquisition.
28
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
STELLEX
The selected historical financial data of Stellex as of and for each of the
five years in the period ended December 31, 1996 have been derived from the
audited financial statements of its predecessor, Kleinert; such audited
financial statements for the years ended December 31, 1994, 1995 and 1996 are
included elsewhere in this Prospectus. The selected financial data for Stellex
as of and for the nine, six and three months ended September 30, 1996, June 30,
1997 and September 30, 1997, respectively, are unaudited and, with the exception
of the financial data for the three months ended September 30, 1997, have been
prepared on the same basis as the audited financial data and, in the opinion of
management of Stellex, contain all adjustments necessary for a fair presentation
of the results of operations for such periods. The selected historical financial
data for the successor company as of and for the three months ended September
30, 1997 reflect adjustments resulting from the application of the purchase
method of accounting in conjunction with the Kleinert Acquisition. The purchase
accounting adjustments relate primarily to the impact of write-ups of
inventories and property and equipment to their fair values and the addition of
acquisition debt. The results of operations for the 1997 interim periods
presented are not necessarily indicative of the results to be expected for the
full year. The data presented below should be read in conjunction with the
historical financial statements of Stellex (successor to Kleinert) and related
footnotes, 'Pro Forma Consolidated Financial Data,' and 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS THREE MONTHS
ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
------------------------------------------- ------------- ---------- -------------
1992 1993 1994 1995 1996 1996 1997 1997
------- ------- ------- ------- ------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS) (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................................ $25,620 $21,664 $17,808 $21,049 $24,307 $17,967 $ 14,296 $ 8,890
Cost of goods sold................... 18,220 16,239 13,121 15,083 17,367 12,872 10,140 6,747
------- ------- ------- ------- ------- ------------- ---------- -------------
Gross profit......................... 7,400 5,425 4,687 5,966 6,940 5,095 4,156 2,143
Selling, general and
administrative..................... 4,133 3,514 3,110 3,299 3,629 2,747 1,783 1,571
Amortization of intangibles.......... 629 533 416 282 31 23 15 12
------- ------- ------- ------- ------- ------------- ---------- -------------
Operating income..................... 2,638 1,378 1,161 2,385 3,280 2,325 2,358 560
Interest expense..................... 1,386 1,078 979 1,034 856 660 376 508
Interest income...................... (93) (73) (44) (5) (11) (7) (5) (2)
Other expense (income)............... 317 273 145 44 58 39 103 22
------- ------- ------- ------- ------- ------------- ---------- -------------
Income before income taxes........... 1,028 100 81 1,312 2,377 1,633 1,884 32
Income tax provision................. 377 42 50 525 945 657 754 288
------- ------- ------- ------- ------- ------------- ---------- -------------
Net income (loss).................... $ 651 $ 58 $ 31 $ 787 $ 1,432 $ 976 $ 1,130 $ (256)
------- ------- ------- ------- ------- ------------- ---------- -------------
------- ------- ------- ------- ------- ------------- ---------- -------------
OTHER FINANCIAL DATA:
Cash flows from operating
activities......................... $ 2,717 $ 3,172 $ 2,130 $ 1,866 $ 2,657 $ 1,571 $ 479 $ (56)
Cash flows from investing
activities......................... (245) (372) 285 (643) (1,048) (623) (835) (15,338)
Cash flows from financing
activities......................... (2,466) (2,858) (2,360) (1,432) (1,407) (695) 272 15,802
EBITDA(a)............................ $ 5,127 $ 3,831 $ 3,440 $ 4,291 $ 4,913 $ 3,539 $ 3,133 $ 1,987
Depreciation and amortization........ 2,806 2,726 2,424 1,950 1,691 1,253 878 375
Capital expenditures................. 542 389 288 657 1,053 623 868 539
Ratio of earnings to fixed
charges(b)......................... 1.74x 1.09x 1.08x 2.27x 3.78x 3.47x 6.01x 1.06x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital...................... $ 7,043 $ 6,751 $ 6,621 $ 6,802 $ 7,735 $ 21,600 $ 11,829
Total assets......................... 33,694 30,065 28,029 28,180 29,614 42,700 36,027
Long-term debt, including current
maturities......................... 15,237 12,650 10,021 7,824 5,682 -- 22,889
Stockholders' equity................. 12,652 11,927 11,958 12,745 14,178 25,100 (206)
</TABLE>
- ------------------
(a) EBITDA represents income (loss) before income taxes plus interest expense,
depreciation and amortization less interest income. EBITDA for the three
months ended September 30, 1997 excludes certain non-recurring costs
directly related to the Kleinert Acquisition which included investment
banking fees paid to Mentmore totaling $450,000 and non-cash amortization of
an acquisition accounting adjustment to fair value inventory totaling
$624,000. The definition of EBITDA as used herein differs in certain
respects from the definition of such term in the Indenture. See 'Description
of Notes--Certain Definitions.' EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service indebtedness.
However, EBITDA should not be considered an alternative to operating income
or cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity. Since all companies and analysts do not necessarily calculate
EBITDA in the same fashion, EBITDA as presented in this Prospectus may not
be comparable to similarly titled measures reported by other companies.
Funds depicted by EBITDA are generally not presently available for
management's discretionary use due primarily to legal and functional
requirements to conserve funds for capital replacement and expansion, debt
service and other commitments and uncertainties.
(b) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing costs, whether expensed or
capitalized.
29
<PAGE>
STELLEX MICROWAVE
The selected financial data of Stellex Microwave as of and for the years
ended December 31, 1995 and 1996 and as of September 30, 1997 and for the nine
month period then ended have been derived from the audited financial statements
of the tactical systems and microwave devices business ('TSMD') of
Watkins-Johnson Company included elsewhere in this Prospectus. Certain assets
and liabilities held by TSMD were acquired by the Company in connection with the
W-J Acquisition. The selected financial data for TSMD as of and for the year
ended December 31, 1994 and as of the nine months ended September 30, 1996 are
unaudited but have been prepared on the same basis as the audited financial data
of TSMD and, in the opinion of management of Stellex Microwave, contain all
adjustments necessary for a fair presentation of the results of operations for
such periods. TSMD was a division of Watkins-Johnson, and its results may not be
reflective of those that would have resulted had it operated as an independent
entity. The results of operations for the nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the full year.
The data presented below should be read in conjunction with the historical
financial statements and related footnotes, 'Pro Forma Consolidated Financial
Data,' and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
-------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................................................... $101,300 $97,600 $89,200 $61,300 $67,900
Cost of goods sold...................................... 72,300 65,200 68,100 45,400 47,900
-------- ------- ------- ------- -------
Gross profit............................................ 29,000 32,400 21,100 15,900 20,000
Selling, general and administrative..................... 22,400 17,300 14,600 11,000 9,100
-------- ------- ------- ------- -------
Income before income taxes.............................. 6,600 15,100 6,500 4,900 10,900
Income tax provision.................................... 2,600 5,900 2,500 1,900 4,200
-------- ------- ------- ------- -------
Net income.............................................. $ 4,000 $ 9,200 $ 4,000 $ 3,000 $ 6,700
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
OTHER FINANCIAL DATA:
Cash flows from operating activities.................... N/A $ 21 $ (3) $ 15
Cash flows from investing activities.................... N/A (2) (2) (1)
Cash flows from financing activities.................... N/A (19) 5 (14)
EBITDA(a)............................................... $ 9,300 $17,700 $ 8,800 $12,300
Adjusted EBITDA(a)...................................... 9,300 18,100 11,000 12,300
Depreciation and amortization........................... 2,700 2,600 2,300 1,400
Capital expenditures.................................... 3,000 2,200 1,700 600
BALANCE SHEET DATA (AT END OF PERIOD)(B):
Working capital......................................... $ 25,800 $16,900 $25,800 $19,200
Total assets............................................ 46,600 39,200 50,200 38,200
Long-term debt.......................................... -- -- -- --
Stockholders' equity.................................... 31,000 21,400 29,900 22,500
</TABLE>
- ------------------
(a) EBITDA represents income (loss) before income taxes, depreciation and
amortization. TSMD's historical results do not include interest expense or
interest income. Adjusted EBITDA for the year ended December 31, 1996
excludes a $1.5 million charge included in cost of goods sold for the
write-off of slow moving and excess inventory, and a $700,000 charge
included in cost of goods sold for severance costs relating to a reduction
in force of operational and manufacturing employees, of which $300,000 was
recorded in the nine months ended September 30, 1996. Adjusted EBITDA for
the year ended December 31, 1995 excludes a $400,000 charge included in
selling, general and administrative expenses for severance costs relating to
a reduction in force of operational and manufacturing employees. The
definition of EBITDA as used herein differs in certain respects from the
definition of such term in the Indenture. See 'Description of Notes--Certain
Definitions.' EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered an alternative to operating income or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of a company's operating performance or as a measure of liquidity. Since all
companies and analysts do not necessarily calculate EBITDA in the same
fashion, EBITDA as presented in this Prospectus may not be comparable to
similarly titled measures reported by other companies. Funds depicted by
EBITDA are generally not presently available for management's discretionary
use due primarily to legal and functional requirements to conserve funds for
capital replacement and expansion, debt service and other commitments and
uncertainties.
(b) Represents the historical assets of TSMD. In connection with the W-J
Acquisition, a subsidiary of the Company acquired only certain operating
assets and liabilities of TSMD. See 'Certain Transactions--The W-J
Acquisition.'
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries, Stellex Microwave and Stellex
Aerospace, is a leading provider of highly engineered subsystems and components
for the aerospace, defense and space industries. Stellex Microwave is a
worldwide leader in the design, manufacture and marketing of fully integrated
and proprietary microwave electronic subsystems for radar-guided tactical
missile systems and a broad line of high radio frequency and microwave frequency
single function modules. Stellex Microwave products are used in the generation,
reception and translation of communication, data and radar signals. Stellex
Aerospace is a leader in the machining of turbomachinery, aircraft hinges and
other structural components for the aerospace and space industries.
On July 1, 1997, KII Holding acquired Stellex Aerospace (formerly Kleinert
Industries, Inc.) from Kleinert Industrie Holding A.G. Stellex Aerospace
conducts its business through four operating subsidiaries--Paragon, Bandy, SEAL
and GIL. On September 5, 1997 Stellex was formed and thereafter acquired
approximately 80% of the common stock of KII Holding. The results of operations
of Stellex for the periods presented herein represent the results of operations
of Kleinert for such periods. See 'Certain Transactions--Kleinert Acquisition.'
In connection with the W-J Acquisition, the Company acquired the tactical
subsystems and microwave devices businesses ('TSMD') of Watkins-Johnson, which
was operated as a division of Watkins-Johnson and was not a separate legal
entity. The Company operates the TSMD business through Stellex Microwave. The
results of operations of Stellex Microwave for the periods presented herein
represent the results of operations of TSMD for such periods and its results may
not be reflective of those that would have resulted had it operated as an
independent entity. The income tax expense and other tax-related information of
Stellex Microwave for the periods presented (i) are presented as if TSMD had not
been eligible to be included in the consolidated tax returns of Watkins-Johnson
and (ii) have required certain assumptions, allocations and significant
estimates that management believes are reasonable in measuring the tax
consequences to TSMD as if it had been a stand-alone taxpayer separate from
Watkins-Johnson.
STELLEX AEROSPACE
The Company's sales to the aerospace industry are conducted primarily by
Stellex Aerospace. Stellex Aerospace's historical financial results have been
significantly influenced by both the cyclicality of the commercial aerospace
industry and the increased outsourcing of the production of components by OEMs
to outside suppliers. During the period from 1992 to 1994, the commercial
aerospace industry experienced a significant reduction in orders for new
aircraft and engines. In response, Stellex Aerospace significantly reduced its
costs by reducing its work force and rationalizing its production capacity. In
addition, Stellex Aerospace took steps to expand its business activity
throughout this period by increasing the number of customers for whom it
manufactured prototypes and by seeking contracts to produce higher volumes of
turbomachinery components. Since 1994, primarily as a result of the recovery in
overall aircraft orders and its success in gaining additional prototype and
production-oriented supply contracts, Stellex Aerospace has significantly
increased sales and profitability.
The Company believes that the recent increases in expenditures on new
aircraft production and revenue passenger miles will benefit aerospace industry
suppliers, such as the Company, that were able to withstand the difficult
operating environment and consolidation among suppliers of the early 1990's. See
'Business--Industry Overview.'
31
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 (COLLECTIVELY COMPRISED OF KLEINERT
(PREDECESSOR) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND STELLEX (SUCCESSOR) FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1997) COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Sales. Stellex Aerospace's sales increased by $5,218,900, or 29.0%, in the
nine months ended September 30, 1997 over the comparable period in the prior
year. The increase in sales was primarily attributable to increases in
commercial aircraft production by Boeing, strong spare parts demand and the
acceleration of the production schedule for the C-17 program which impacted
Bandy's business. In addition, Paragon experienced increases in spacecraft and
prototype work due to continuing strong demand for space shuttle parts.
Gross profit. Gross profit increased by $1,204,400, or 23.6%, in the nine
months ended September 30, 1997 over the comparable period in the prior year,
and gross profit margin decreased to 27.2% in the nine months ended September
30, 1997 from 28.4% in the comparable period in the prior year. Gross profit was
impacted during the three month period ended September 30, 1997 by the
amortization of a non-recurring purchase accounting adjustment totaling
approximately $624,000, resulting from the write-up of inventories to their fair
market value on the date of the Kleinert Acquisition. Ignoring the impact of
this write-up on gross profit margin would result in a 29.9% comparable amount.
Gross margin benefitted from an improvement in plant utilization and production
efficiencies at Bandy due to the installation of new Fadal milling machines.
These benefits were partially offset by increased outsourcing necessitated by
capacity constraints and raw material price increases on aluminum extrusions.
Additional milling capacity will be added at Bandy during the fourth quarter of
1997 to accommodate increasing demand.
Selling, general and administrative. Selling, general and administrative
expenses increased $606,700, or 22.1%, in the nine months ended September 30,
1997 over the comparable period in the prior year. The increase in selling,
general and administrative expenses was primarily due to a non-recurring charge
totaling $450,000 for investment banking and financial advisory fees related to
the Kleinert Acquisition. Excluding this non-recurring charge, selling, general
and administrative expenses as a percentage of sales decreased from 15.3% in the
nine months ended September 30, 1996 to 12.5% in the comparable period in 1997,
primarily because the increased sales volume and improved plant utilization
required a relatively small increase in selling, general and administrative
expenses. Additionally, employee benefit costs were reduced in the 1997 period
over the levels in the comparable period in the prior year when two deferred
compensation plans were established.
Amortization of intangible assets. Amortization expense relating to
intangible assets increased by $4,400, or 18.8%, in the nine months ended
September 30, 1997 over the comparable period in the prior year. The increase
was due to increased amortization of intangibles relating to the Kleinert
Acquisition.
Operating income. Operating income increased by $593,300, or 25.5%, in the
nine months ended September 30, 1997 over the comparable period in the prior
year. Operating income as a percentage of net sales decreased to 12.6% in the
nine months ended September 30, 1997 from 12.9% in the comparable period.
However, excluding non-recurring adjustments related to the Kleinert
Acquisition, operating income as a percentage of net sales would have increased
to 17.2%, primarily due to the factors outlined above.
Interest expense. Interest expense increased by $224,200, or 34.0%, in the
nine months ended September 30, 1997 over the comparable period in the prior
year. The increase in interest expense resulted from a net increase in total
outstanding debt of approximately $18,000,000, primarily to finance the Kleinert
Acquisition, offset partially by an interest rate reduction from 10.125% to
7.875% on a building mortgage, and lower outstanding debt during the first six
months of 1997.
Other expense (income). Other expense (income) increased by $86,300 in the
nine months ended September 30, 1997, over the comparable period in the prior
year. The increase in other (income) expense was primarily due to expenses
related to the Kleinert Acquisition and a vending machine contract dispute
settlement.
Income tax provision. The effective income tax rates for the nine months
ended September 30, 1997 and 1996 were 54.4% and 40.2%, respectively. The higher
effective income tax rate for 1997 was primarily due to the non-deductibility
for income tax purposes of certain purchase accounting adjustments relating to
the Kleinert Acquisition.
Net income. As a result of the factors described above, net income
decreased by $101,700, or 10.4%, during the period ended September 30, 1997 over
the comparable period in the prior year.
32
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Stellex Aerospace's sales increased by $3,257,800, or 15.5%, in
1996 over 1995. The increase in sales was primarily attributable to the
resurgence of new orders as a result of increases in aircraft production in
commercial and military aircraft markets, offset partially by $1.0 million in
lower sales resulting from a reduction in volume in Paragon's Titan program,
which is in the latter stages of its product life cycle.
Gross profit. Stellex Aerospace's gross profit increased by $974,500, or
16.3%, in 1996 over 1995. Gross profit margin increased to 28.6% in 1996 from
28.3% in 1995. The increase in gross profit was primarily the result of
increased sales. The slight improvement in gross margin was due primarily to
longer production runs and improved plant capacity utilization, which was almost
entirely offset by lower margins on a new power actuation contract,
industry-wide pricing pressures and lower volume on Paragon's higher margin
Titan program.
Selling, general and administrative. Selling, general and administrative
expenses increased by $330,700, or 10.0%, in 1996 over 1995. As a percentage of
sales, selling, general and administrative expenses decreased from 15.7% in
1995, to 14.9% in 1996 because the increased sales volume and improved plant
utilization did not require a comparable increase in selling or administrative
expenses. Additional administrative costs, however, were incurred in
establishing two deferred compensation plans.
Amortization of intangible assets. Amortization expense relating to
intangible assets decreased by $251,000, or 88.9%, in 1996 from 1995. The
decrease in amortization expense relating to intangible assets was due to the
expiration of a non-compete agreement during 1995.
Operating income. Operating income increased by $894,800, or 37.5%, in
1996 over 1995. Operating income as a percentage of net sales increased to 13.5%
in 1996 from 11.3% in 1995 primarily due to the factors outlined above.
Interest expense. Interest expense decreased by $178,600, or 17.3%, in
1996 from 1995. The decrease in interest expense resulted primarily from a
reduction of the mortgage interest rate on a building and lower outstanding
debt.
Other expense (income). Other expense (income) increased by $7,900, or
20.5%, in 1996 over 1995. The increase in other (income) expense was primarily
due to lower levels of gains on sale of fixed assets and expenses related to the
Kleinert Acquisition.
Income tax provision. The effective income tax rate was 39.7% and 40.0%,
in 1996 and 1995, respectively.
Net income. As a result of the factors described above, net income
increased by $645,400, or 82.0%, for the year ended December 31, 1996 over 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales. Stellex Aerospace's sales increased by $3,240,700, or 18.2%, in
1995 over 1994. The increase in sales was primarily attributable to production
orders from a new program for AlliedSignal for machine blades and vanes for a
new jet engine totaling approximately $2,500,000 and general improving strength
in the aerospace industry.
Gross profit. Stellex Aerospace's gross profit increased by $1,278,800, or
27.3%, in 1995 over 1994. Gross profit margin increased to 28.3% in 1995 from
26.3% in 1994. The increase in gross profit and gross profit margin was
primarily the result of higher margin orders, lower depreciation expense, longer
production runs and improved plant capacity utilization.
Selling, general and administrative. Selling, general and administrative
expenses increased by $189,300, or 6.1%, in 1995 over 1994. As a percentage of
sales, selling, general and administrative expenses decreased as a percentage of
sales from 17.5% in 1994 to 15.7% in 1995 because increased sales volume and
improved plant utilization did not require comparable increases in selling and
administrative expenses.
Amortization of intangible assets. Amortization expense relating to
intangible assets decreased by $133,900, or 32.2%, in 1995 over 1994. The
decrease in amortization expense related to the expiration of a non-compete
agreement established in conjunction with the Bandy acquisition in 1990.
Operating income. Operating income increased by $1,223,400, or 105.3%, in
1995 over 1994. Operating income as a percentage of net sales increased to 11.3%
in 1995 from 6.5% in 1994 primarily due to factors outlined above.
33
<PAGE>
Interest expense. Interest expense increased by $55,600, or 5.7%, in 1995
over 1994. The increase in interest expense resulted from greater working
capital needs and capital spending offset partially by lower interest rates
during the latter period.
Other expense (income). Other expense (income) decreased by $62,600, or
61.9%, in 1995 over 1994. The decrease in other expense (income) was primarily
due to lower severance costs, non-repeat of 1994 earthquake expenses, and lower
interest income.
Income tax provision. The effective income tax rate was 40.0% and 61.3%,
in 1995 and 1994, respectively.
Net income. As a result of the factors described above, net income
increased by $755,600 for the year ended December 31, 1995 over 1994.
STELLEX MICROWAVE
Since the consummation of the W-J Acquisition, the Company's sales to the
DoD and other government agencies and their prime contractors have been
conducted, in large part, by Stellex Microwave. Stellex Microwave's historical
financial results have been affected by a variety of factors which influence the
defense industry in general and Stellex Microwave in particular. Significant
factors include DoD budget appropriations, the level of production of high
priority platforms, the use of sophisticated electronics, the level of new
weapon development and procurement, the competition among OEM suppliers, and the
outsourcing of the manufacture and integration of subsystems to independent
commercially-oriented suppliers. United States defense budget appropriations are
forecasted to remain relatively constant or increase slightly in the near term,
reversing the recent decline in spending which precipitated the dramatic
consolidation among prime contractors. See 'Business--Industry Overview.'
Between 1994 and 1996, the number of AMRAAM missiles purchased by the DoD
decreased significantly and the number of sophisticated tuners purchased by the
DoD and various intelligence agencies also decreased significantly. This decline
was due primarily to reduced military force structures and signals intelligence
activity. In response to the decline of AMRAAM sales, management implemented
various initiatives to gain market share in the AMRAAM program and to support
other key tactical missile programs and thereby diversify and grow Stellex
Microwave's subsystem revenue base. As a result, the Company is the dominant
supplier of microwave subsystems for the AMRAAM program and is currently
supporting several key missile programs including Standard Missile, Longbow
Hellfire, Patriot PAC-3 and Sea Sparrow. As the majority of these programs have
been in initial development or low rate production, management expects to
further diversify Stellex Microwave's program revenues as these programs move to
high rate production.
In addition, during the past five years, significant management attention
and corporate resources of Watkins-Johnson were devoted to growing its
semiconductor equipment and low frequency telecommunications equipment
businesses. Also, in early 1995, Watkins-Johnson sold a business that shared
facilities and personnel with the businesses now conducted by Stellex Microwave.
In response to these factors, Stellex Microwave management initiated a program
to reduce its operations to a level more appropriate for the requirements of the
reduced military force structures and to increase its share of microwave
subsystems on those high priority military weapons systems on which the DoD is
expected to rely to equip its modernized force structure.
Beginning in 1994, Watkins-Johnson (i) divested a non-core business line
which shared production facilities with TSMD, (ii) consolidated manufacturing
operations into its Palo Alto facility, (iii) reduced and reconfigured its sales
force, and (iv) reduced its work force from approximately 900 to 560 people, a
38% reduction. As a result, in 1995 selling, general and administrative expenses
decreased by $5,100,000, or 22.8%, as compared to 1994. In conjunction with this
ongoing restructuring, severance costs were incurred in varying amounts in each
of the years from 1994 through 1996 and during the six months ended June 30,
1997. Management believes Stellex Microwave derived significant benefits from
its rationalization efforts throughout 1995 and 1996, and that its production
capacity and work force are of sufficient size to efficiently conduct its
current level of operations.
As part of its arrangements with certain OEMs, Stellex Microwave has from
time to time agreed to reduce prices in conjunction with receiving Value
Engineering ('VE') payments from such OEMs in advance of the ordering of single
or multiple year production requirements. This practice is designed to allow
Stellex Microwave to invest in process changes that result in lower production
costs. Beginning in 1995, in an attempt to improve operating efficiency by
increasing production volume, Stellex Microwave aggressively pursued VE payments
and
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increased volume from Raytheon, who at that time produced most of its microwave
subsystem requirements in-house. Stellex Microwave received a material VE
payment in December 1995. To win the production order, Stellex Microwave
redesigned the subsystem, reduced its average ship-set price, and gained the
sole source supplier position on three microwave subsystems previously produced
by Raytheon. This new supply contract was signed in June 1996 and Stellex
Microwave began shipping subsystems under the terms of the contract during the
fourth quarter of 1996. The contract was anticipated to cover shipments of
subsystems through the third quarter of 1997.
In addition to the effect of trends within the defense industry, operating
results of Stellex Microwave were materially impacted in 1996 and to a lesser
degree in the six months ended June 30, 1997 by operating difficulties
associated with the installation of a new materials and manufacturing management
software ('MRP') system. As a result of such difficulties, Stellex Microwave
failed to deliver a significant number of microwave component parts within time
frames specified by purchase orders and incurred significant additional labor
inefficiencies. In the third quarter of 1996, Stellex Microwave installed a new
manager for its higher volume microwave components business, retrained its
employees in the operation of the MRP system and aggressively monitored the
delivery status of its microwave components. As a result of such efforts, on
time delivery results began to improve in the six months ended June 30, 1997 and
management now believes that its materials management system is effective.
Nonetheless, management expects that the MRP difficulties experienced in 1996
will negatively impact sales of microwave component parts in the current year.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Sales. Sales increased by $6,600,000, or 10.8%, in the nine months ended
September 30, 1997 over the nine months ended September 30, 1996. The increase
in sales was primarily attributable to an increase in sales of integrated
subsystems. The increase in sales of integrated subsystems was primarily the
result of higher shipments of subsystems for the AMRAAM program to Raytheon,
partially offset by lower pricing on such subsystems.
Gross profit. Gross profit increased by $4,100,000, or 25.8%, for the nine
months ended September 30, 1997 over the comparable period in the prior year.
Gross profit margin increased to 29.5% for the nine months ended September 30,
1997 from 25.9% for the comparable period in the prior year. The increase in
gross profit and gross profit margin was primarily attributable to the increase
in sales and the improved manufacturing efficiencies in the current period
resulting from the resolution of operating difficulties associated with the MRP
system and higher production volumes. These positive factors were partially
offset by the price declines on AMRAAM as a result of the new contract with
Raytheon.
Selling, general and administrative expenses. Selling, general and
administrative expenses (which includes independent research and development
costs) decreased by $1,900,000, or 17.3%, during the nine months ended September
30, 1997 over the comparable period in the prior year. This decrease resulted
from a reduction in research and development costs of $500,000 and a reduction
in selling, general and administrative expenses of $800,000. The reduction in
research and development costs was a result of a decrease in the number of
projects authorized. The reduction in selling, general and administrative
expenses was primarily attributable to headcount reductions implemented as part
of Stellex Microwave's continuing effort to streamline its administrative
operations.
Income before income taxes. Income before income taxes increased by
$6,000,000, or 122%, for the nine months ended September 30, 1997 over the
comparable period in the prior year. The increase in income before income taxes
was primarily attributed to the factors outlined above.
Income tax provision. The effective income tax rate was 38.5% for both the
nine months ended September 30, 1997 and 1996, respectively.
Net income. As a result of the factors described above, net income
increased to $6,700,000 for the nine months ended September 30, 1997, an
increase of $3,700,000, or 108.8%, over the comparable period in the prior year.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Stellex Microwave's sales decreased by $8,400,000, or 8.6%, in 1996
over 1995. The decrease in sales was primarily due to lower sales volume on
integrated subsystems and, to a lesser extent, microwave devices. The decrease
in sales of integrated subsystems was due to an $8,000,000 decrease in product
sales related to the AMRAAM program, partially offset by increased sales of
subsystems for other missile programs. The decrease in sales for the AMRAAM was
primarily attributable to $4,700,000 of VE payments which were made in the
second half of 1995 relating to engineering design changes made that year for
production scheduled to begin in 1996. In addition, there was a reduction in the
number of AMRAAMs purchased by the DoD in 1996 and an even greater decrease in
the number purchased from Hughes, which is Stellex Microwave's primary subsystem
customer. Sales were also impacted by lower selling prices for Stellex
Microwave's AMRAAM-related products. These decreases were partially offset by
increased sales volume on AMRAAM subsystems to Raytheon under a supply contract
signed in June 1996. In addition, Stellex Microwave began shipping subsystems
for the upgraded Standard Missile-2, increased the production of the MFE, and
had an end-of-life sale of HARM subsystems. The decrease in sales of microwave
devices was caused by declines in the market for signals intelligence equipment
made for various intelligence agencies, partially offset by increased sales of
space-qualified and electronic warfare SFMs.
Gross profit. Gross profit decreased by $11,300,000, or 34.9%, in 1996
over 1995, and gross profit margin decreased to 23.7% in 1996 from 33.2% in
1995. The decrease in gross profit and gross profit margin resulted primarily
from the receipt of a substantial VE payment in December 1995 that related to
1996 and 1997 production, together with price reductions on AMRAAM-related
products. Additionally, (i) contract losses totaling $2,200,000 incurred on two
microwave tuner fixed price programs, (ii) obsolescence reserves on component
inventory totaling $1,500,000, (iii) severance costs aggregating $700,000
relating to purchasing, material handling and production labor reductions and
other labor inefficiencies, resulting primarily from the introduction of Stellex
Microwave's new MRP system and the continued automation and outsourcing of
production functions and (iv) continued focus on manufacturing process controls
and manufacturing inefficiencies resulting from implementation difficulties with
the new MRP system, all led to additional reductions in gross margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $2,700,000, or 15.6%, in 1996 over 1995.
This decrease resulted from a reduction of research and development costs of
$1,300,000 and a reduction in selling, general and administrative expenses of
approximately $1,400,000. The reduction in research and development spending
resulted from selective focus on higher probability production-worthy projects.
The reduction in selling, general and administrative costs represented a
continuation of a corporate strategy to streamline operations in response to the
contraction in defense spending as well as the significant level of
consolidation in its defense-related customer base.
Income before income taxes. Income before income taxes decreased by
$8,600,000, or 57.0%, in 1996 over 1995. The decrease in income before income
taxes resulted primarily from manufacturing inefficiencies resulting from the
implementation of the new MRP system, the receipt of a significant VE payment in
1995, a decrease in volume and pricing on the AMRAAM contract and non-recurring
losses incurred regarding certain loss contracts and inventory obsolescence
reserves. These costs were partially offset by reductions in selling, general
and administrative expenses.
Income tax provision. The effective tax rate for 1996 was 38.5%, while the
effective tax rate for 1995 was 39.1%.
Net income. As a result of the factors described above, net income
decreased to $4,000,000 in 1996, a decrease of $5,200,000, or 56.5%, over 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales. Sales decreased by $3,700,000, or 3.7%, in 1995 over 1994. The
decrease in sales was primarily attributable to a reduction in the sales of an
end-of-life product line and reduction in sales volume on certain missile
programs. Revenues from guided munitions programs remained constant as increases
in sales associated with the AMRAAM and other programs were offset by reduced
sales associated with the older HARM program.
Gross profit. Gross profit increased $3,400,000, or 11.7%, in 1995 over
1994, and gross profit margin increased to 33.2% in 1995 from 28.6% in 1994. The
increase in gross profit and gross profit margin was primarily due to a
reduction in direct labor and overhead expenses as a result of the consolidation
of plant
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facilities during April 1995. Successful development of a 'snap together' type
of subassembly fabrication technique was initiated during 1995 which, together
with the plant consolidation effort, reduced direct labor costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $5,100,000, or 22.8%, in 1995 from 1994.
The decrease in selling, general and administrative expenses consisted of a
reduction in selling, general and administrative expenses of $4,400,000 and a
reduction of research and development costs totaling $700,000. The reduction of
the above costs resulted from headcount reductions and consolidation of Stellex
Microwave's plant facilities in Palo Alto.
Income before income taxes. Income before income taxes increased
$8,500,000, or 128.8%, in 1995 over 1994. The increase in income before income
taxes resulted primarily from reductions in production costs due to development
of less labor intensive fabrication techniques, reductions in headcount and
consolidation of plant facilities.
Income tax provision. The effective tax rate for 1995 was 39.1%, while the
effective tax rate for 1994 was 39.4%.
Net income. As a result of the foregoing, net income increased to
$9,200,000 in 1995, an increase of $5,200,000, or 130.0%, over 1994.
LIQUIDITY AND CAPITAL RESOURCES
Historical
Stellex generated (used) cash flows from operations of $2,130,400,
$1,866,100 and $2,657,000 for 1994, 1995 and 1996, respectively, and $1,570,700
and $423,400 for the nine months ended September 30, 1996 and September 30,
1997, respectively. Cash flows over the periods presented reflect a consistent
increase in earnings offset, in part, by a gradual buildup of inventories
supporting the growing level of sales.
Stellex used (provided) cash flows in investing activities, excluding cash
flows used in connection with the Kleinert Acquisition of ($285,100), $643,100
and $1,048,000 during 1994, 1995 and 1996, respectively, and $622,500 and
$1,374,000 for the nine months ended September 30, 1996 and September 30, 1997,
respectively. During 1994, cash flows were generated from collection of a note
receivable totaling $548,000. During 1995, 1996 and the nine months ended
September 30, 1997, investments in machinery were made in order to accommodate a
rising level of production orders resulting from increasing levels of aircraft
manufacturing activity.
Stellex used (provided) cash flows in financing activities, excluding net
cash provided in connection with the Kleinert Acquisition, of $2,359,800,
$1,431,900 and $1,406,600 in 1994, 1995 and 1996, respectively, and $695,000 and
($687,000) for the nine months ended September 30, 1996 and September 30, 1997,
respectively. For the three years 1994 through 1996, Stellex repaid outstanding
long term indebtedness in excess of $2,000,000 in each of these three years. Net
borrowings on a line of credit totaling $169,300, $765,000 and $735,000 for
1994, 1995 and 1996, respectively, and $730,000 for the nine months ended
September 30, 1997 provided working capital primarily used to build inventories
to support the growing level of business.
On July 1, 1997, KII Holding, through a wholly-owned subsidiary, acquired
all of the issued and outstanding capital stock of Kleinert for approximately
$26.5 million (including the assumption of $2.6 million of indebtedness and the
issuance to the seller of a note for approximately $1.75 million). The Company
also entered into the Prior Credit Facility in connection with the Kleinert
Acquisition. In connection with the Initial Offering, the Company repaid all
indebtedness outstanding under the Prior Credit Facility, together with $2.5
million of other indebtedness incurred in connection with the Kleinert
Acquisition.
Stellex Microwave generated (required) cash flows from operations of
$21,000,000 and ($2,800,000) in 1995 and 1996, respectively, and $14,700,000 in
the nine months ended September 30, 1997. Cash flows for 1995 were impacted
primarily by favorable earnings and a significant reduction in inventories
representing final shipments on Lot 8 of the AMRAAM contract. Cash flows for
1996 were impacted primarily by the buildup of Lots 9 and 10 of the AMRAAM
contract and an increase in trade receivables resulting from system conversion
inefficiencies, offset partially by contract advances on the AMRAAM. Cash flows
for the nine months ended September 30, 1997 were favorably impacted by
increased collections on trade receivables primarily due to a more focused
effort on collections. This came in response to an unusually high level of
delinquent accounts which resulted from MRP system conversion inefficiencies
during 1996.
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Stellex Microwave used cash flows for property additions of $2,200,000 and
$1,700,000 in 1995 and 1996, respectively, and $600,000 in the nine months ended
September 30, 1997. Stellex Microwave is an engineering, design and assembly
oriented business which does not require significant capital expenditures on an
ongoing basis.
Following the Initial Offering
Upon the consummation of the Initial Offering and the W-J Acquisition, the
Company entered into the New Credit Facilities, which provide for borrowings in
a principal amount at any one time outstanding of up to $25.0 million under the
Revolving Credit Facility (as defined) and $25.0 million under the Acquisition
Facility (as defined), with initial available borrowing rates equal to (i) the
Eurodollar Rate (as defined therein) plus 2% or Societe Generale's base rate
plus 1% in the case of borrowings under the Revolving Credit Facility and (ii)
the Eurodollar Rate plus 2.25% or Societe Generale's base rate plus 1.25% in the
case of borrowings under the Acquisition Facility. See 'Description of Certain
Indebtedness--New Credit Facilities--Interest.' . The Company borrowed $2.5
million under the Revolving Credit Facility upon consummation of the W-J
Acquisition and the Initial Offering. Included in the initial borrowing under
the Revolving Credit Facility was a working capital advance totaling $370,000
for Stellex Microwave. The Company's borrowings under the Revolving Credit
Facility are subject to a borrowing base consisting of the aggregate sum of 85%
of eligible accounts receivable and 50% of eligible inventories, each as defined
in the Revolving Credit Facility. The computed borrowing base upon the
consummation of the Initial Offering and the W-J Acquisition totaled
approximately $16.0 million. Borrowings under the Acquisition Facility are
available to the Company to fund future acquisitions, subject to certain
specified conditions. The New Credit Facilities require prepayments in the
amount of 50% of Excess Cash Flow (as defined therein), 100% of net cash
proceeds from certain asset sales, and 100% of net cash proceeds from the
issuance of debt and/or equity securities. The New Credit Facilities mature in
2003. See 'Description of Certain Indebtedness--New Credit Facilities.'
Interest payments on the Notes together with interest and principal
payments on other existing indebtedness, including indebtedness under the New
Credit Facilities, represent significant cash requirements for the Company. The
Notes require semiannual interest payments of $4,750,000 commencing in May 1998.
Existing indebtedness consists of (i) the Kleinert Seller Note in the amount of
$1,750,000 bearing interest at 8% per annum and maturing in July 1999 and (ii)
the Paragon Note in the amount of $2,639,000 as of September 30, 1997 bearing
interest at 7.875% per annum and maturing in December 2001. See 'Description of
Certain Indebtedness.'
The Company's remaining liquidity demands will be for capital expenditures
and working capital needs. In connection with the W-J Acquisition, the Company
purchased certain assets exclusive of certain working capital accounts such as
trade receivables and trade payables. As a result, the Company has required
significant amounts of working capital particularly since the consummation of
the Initial Offering and additional amounts may be required to be borrowed under
the New Credit Facilities. For 1998, based on the Company's existing operations,
the Company expects to spend approximately $3,300,000 on capital projects
primarily to maintain its facilities and expand its production capacity in order
to take advantage of profitable market opportunities. Based on its existing
operations, the Company anticipates capital expenditures for the foreseeable
future to remain consistent with the level of capital expenditures projected for
1998, in order to continue to support facilities maintenance, production
capacity expansion and existing equipment upgrade programs. In connection with
the W-J Acquisition, Stellex Microwave entered into a Gallium Arsenide and Thin
Film Supply and Services Agreement, pursuant to which Stellex Microwave will
purchase gallium arsenide and thin film parts used in the manufacture of
microwave subsystems and modules. Pursuant to this agreement, Stellex Microwave
is responsible for certain product development and process costs associated with
the maintenance of Watkins-Johnson's gallium arsenide and thin film fabrication
facility. For 1998, the Company's total costs for parts, product development and
processes under such agreement will equal a minimum of approximately $5.8
million. See 'Business--Supply Contracts.' To the extent cash flow from
operations is insufficient to cover the Company's capital expenditure, debt
service, working capital and other capital requirements, it expects to utilize
its borrowing availability under the New Credit Facilities.
The Company believes that, based on its current level of operations and
anticipated growth, its cash flow from operations, together with borrowings
available under the New Credit Facilities, will be adequate to meet its
anticipated requirements for working capital, capital expenditures, interest
payments and any scheduled principal payments in the foreseeable future.
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INFLATION AND CHANGING PRICES
Inflation has not been material to the Company's operations for the periods
presented.
BACKLOG
The Company's pro forma backlog of orders as of September 30, 1997 and
December 31, 1996 was $99.8 million ($70.1 million of which was related to
products for the defense industry) and $89.8 million ($72.8 million of which was
related to products for the defense industry), respectively. The Company
includes in its backlog only those orders for which it has accepted purchase
orders. However, backlog is not necessarily indicative of future sales. A
substantial amount of the Company's backlog can be canceled at any time without
penalty, except, in most cases, for the recovery of the Company's actual
committed costs and profit on work performed up to the date of cancellation. A
substantial portion of the purchase orders comprising backlog at September 30,
1997 include product specifications not yet achieved by the Company. A failure
to develop products meeting such specifications could lead to a cancellation of
the related purchase orders. See 'Risk Factors--Backlog.'
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive federal, state, and
local Environmental Laws that may change frequently. See 'Risk
Factors--Environmental Matters.' The Company can be expected to incur capital
and operating expenses to maintain compliance with and to meet new applicable
Environmental Laws. Based upon the underlying facts giving rise to its
environmental regulatory obligations and technical reports prepared on the
Company's facilities, the Company does not anticipate that any such capital or
operating expenses will have a material adverse effect on the Company's results
of operations. There can be no assurance, however, that unanticipated, future
Environmental Laws or previously unidentified environmental conditions will not
result in the Company having to incur material capital or operating expenses.
In connection with the W-J Acquisition, the Company entered into a
three-year sublease agreement with Watkins-Johnson for two buildings and a
portion of a third building located at the Stanford Research Park in Palo Alto,
California. Groundwater contamination was discovered in or about 1982 at the
real property upon which these buildings are located. Watkins-Johnson has been
remediating the groundwater under a portion of the property subleased by the
Company pursuant to an order issued in 1990 by the California Department of
Toxic Substances Control of the California Environmental Protection Agency (the
'DTSC'). Furthermore, Watkins-Johnson and other potentially responsible parties
have entered into another order with the DTSC pursuant to which they are
remediating a regional groundwater contamination problem on the Palo Alto
property (the 'Hillview-Porter Site') that also underlies a portion of the
property that the Company subleases. Under the terms of the W-J Stock Purchase
Agreement (as defined) and the sublease agreement, Watkins-Johnson has generally
retained liability for contamination at the property that (i) occurred on or
prior to the consummation of the W-J Acquisition and (ii) occurs during the term
of the sublease agreement which is not caused primarily by the Company, and has
agreed to indemnify the Company in connection therewith. While management
believes the Company will not incur material costs or liability in connection
with such contamination, there can be no assurance that it will not.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 130, 'Reporting
Comprehensive Income'. The standard establishes guidelines for the reporting and
display of comprehensive income and its components in financial statements.
Disclosure of comprehensive income and its components will be required beginning
with the Company's fiscal year ending 1998.
Also in June 1997, the FASB issued SFAS No. 131, 'Disclosures About
Segments of an Enterprise and Related Information'. The standard requires that
companies disclose 'operating segments' based on the way management
disaggregates the company for making internal operating decisions. The new rules
will be effective for the Company's 1998 fiscal year end. The Company has not
evaluated the impact, if any, of the new standard.
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BUSINESS
OVERVIEW
The Company, through its subsidiaries Stellex Microwave and Stellex
Aerospace, is a leading provider of highly engineered subsystems and components
for the aerospace, defense and space industries. Stellex Microwave is a
worldwide leader in the design, manufacture and marketing of fully integrated
and proprietary microwave electronic subsystems for radar-guided tactical
missile systems and a broad line of high radio frequency and microwave frequency
single function modules. Stellex Microwave products are used in the generation,
reception and translation of communication, data and radar signals. Stellex
Aerospace is a leader in the machining of turbomachinery, aircraft hinges and
other structural components for the aerospace and space industries. For the year
ended December 31, 1996 and the nine months ended September 30, 1997, after
giving pro forma effect to the Transactions, the Company would have had sales of
$113.5 million and $91.1 million, respectively, net income (loss) of ($9.4)
million and $1.4 million, respectively, and Adjusted EBITDA of $15.2 million and
$16.9 million, respectively. See Note (a) to 'Selected Historical Financial
Data--Stellex' for further information regarding EBITDA. For the year ended
December 31, 1996, after giving pro forma effect to the Transactions, the
Company's earnings would have been insufficient to cover fixed charges by
approximately $10.6 million; for the nine months ended September 30, 1997, after
giving pro forma effect to the Transactions, the Company's ratio of earnings to
fixed charges would have been 1.1x. As of September 30, 1997, after giving pro
forma effect to the Transactions, the Company would have had $99.8 million in
order backlog. A substantial amount of the Company's order backlog can be
canceled at any time without penalty, except, in some cases, the recovery of the
Company's actual committed costs and profit on work performed up until the date
of cancellation. See 'Risk Factors--Backlog' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Backlog.'
The Company's objective is to provide extensive engineering, low cost
manufacturing and systems integration to the consolidated base of OEMs within
its industries. The Company believes that it is well positioned to benefit from
certain trends in its markets including increases in the production of
high-priority platforms, airframes and spare parts, the use of sophisticated
electronics, the consolidation of OEM suppliers, and the outsourcing of
subsystems.
Stellex Microwave
Stellex Microwave is a worldwide leader in the design, manufacture and
marketing of proprietary microwave electronic subsystems for use in radar-guided
munitions and signal intelligence equipment. As the largest independent supplier
of microwave subsystems for tactical missiles, Stellex Microwave's products are
critical to the onboard navigation, communications and target location systems
of many of the highest priority missile systems developed by the DoD. The
Company's proprietary products, low cost manufacturing and extensive engineering
capabilities have enabled it to become the sole or primary source for the
principal programs it supplies. These programs include the AMRAAM, the Patriot
missile and the Standard Missile, the most widely used radar-guided missiles of
their type in the U.S. armed forces. In addition, the Company is currently
participating in production programs for the AEGIS radar system and the TARTAR
fire control system, and has been recently selected to participate in the
program to produce the Longbow Hellfire missile, one of the U.S. Army's most
significant new missile systems.
Stellex Microwave is also a leading manufacturer of MFMs and SFMs, such as
high radio frequency mixers, amplifiers, tuners, converters, filters and
oscillators, which are sold to system designers and manufacturers. Stellex
Microwave has provided the intelligence, electronic warfare, space and
communication markets with a broad assortment of such devices since 1957. For
the year ended December 31, 1996 and the nine months ended September 30, 1997,
Stellex Microwave had sales of $89.2 million and $67.9 million, respectively.
Stellex Aerospace
Stellex Aerospace is a leading provider of high precision products and
services to certain niche markets within the aerospace and space industries.
Through Bandy, Stellex Aerospace is the world's leading contract manufacturer of
commercial and military precision aircraft hinges. Hinges manufactured by Bandy,
some of which are produced exclusively by Bandy, are installed on every type of
aircraft currently produced by the leading aircraft OEMs, including Boeing,
McDonnell Douglas, Airbus, Lockheed Martin, and Northrop Grumman. Through
Paragon, Stellex Aerospace is a leader in the machining of complex
turbomachinery. Paragon's flexible manufacturing operations permit the
production of both (i) highly engineered, close tolerance
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prototype components, which are generally manufactured from expensive, exotic
alloys and are found in high performance gas turbine engines and liquid fuel
rocket engines, and (ii) higher volume standard components used in aircraft and
industrial power actuation systems and high performance turbine engines. Through
SEAL and GIL, Stellex Aerospace also provides a comprehensive range of services
for testing of sophisticated manufactured aerospace components. For the year
ended December 31, 1996 and the nine months ended September 30, 1997
(collectively comprised of Kleinert (predecessor) sales for the six months ended
June 30, 1997 and Stellex (successor) for the three months ended September 30,
1997), Stellex Aerospace had sales of $24.3 million and $23.2 million,
respectively.
COMPETITIVE STRENGTHS
The Company believes that its competitive position in the markets it serves
is based on superior product design and performance and a consistent record of
meeting rigorous DoD and OEM contract performance criteria. Specifically, the
Company believes that its position is primarily attributable to the following
competitive strengths:
Strong Partnering Relationships with Major OEMs. As an incumbent preferred
supplier on high-priority, long-term programs, the Company has over many years
solidified its relationships with major OEMs. The Company participates in
concurrent design, engineering and development of new programs and provides cost
and performance enhancement for existing programs. Stellex Microwave often
serves as the sole source supplier of mission-critical subsystems to Hughes,
Raytheon, Rockwell, Boeing and Lockheed Martin. Stellex Microwave was selected
by Hughes as subcontractor of the year for each of 1994, 1995 and 1996. Paragon
is a preferred supplier, often as a sole or primary source, of a variety of
turbomachinery and turbine engine components to such OEMs as AlliedSignal,
Aerojet and Rocketdyne. Bandy also has received the highest quality awards from,
and is a preferred supplier to, many of its customers, including Boeing,
McDonnell Douglas, Airbus, Lockheed Martin, and Northrop Grumman.
Integration Leadership. Stellex Microwave has developed proprietary
technology, products and manufacturing processes which integrate the electronic
functions as well as the mechanical and packaging requirements of microwave
subsystems into 'snap-together' designs that eliminate the need for expensive
and less reliable external cables and connectors. The Company's proprietary
packaging and substrate materials and manufacturing processes were developed
over a period of many years and are instrumental in the superior performance of
its integrated microwave subsystems. The Company believes that the leading edge
technology and manufacturing processes which it has developed for high
production volume missile subsystems will provide a significant competitive
advantage in developing integrated products for certain commercial markets.
Low Cost Manufacturing. By following systematic design parameters that
balance the need for multi-functionality, cost reduction and reliability and by
using a modularized automated manufacturing process, the Company is able to
manufacture subsystems in high volume and achieve one of the highest percentages
of usable product in its industry. The Company believes that its manufacturing
processes enable it to reduce unit costs and shorten development and production
cycles, thereby providing the Company with a significant cost advantage in
competing for high volume subsystem programs.
Reputation for High Quality. The Company's individual microwave devices
are well known among designers of high performance electronic equipment, and the
catalogs used by Stellex Microwave have been standard reference materials since
1978. Paragon is one of five companies in the United States which competes for
and produces sophisticated, close tolerance machined prototypes of rotating
turbine components for use in aircraft jet engines and other components for use
in spacecraft rocket engines. Management believes that the 'Bandy' name is the
most recognized name in precision aircraft hinges in the world. GIL is one of
the leading independent, full-service NDT laboratories in the United States.
SEAL is one of three companies in the United States approved by NASA to perform
destructive physical analysis on high-reliability space electronic components.
INDUSTRY OVERVIEW
Defense Industry
United States defense budget appropriations are forecasted to remain
relatively constant or increase slightly in the near term, reversing the recent
decline in spending which precipitated the dramatic consolidation among prime
contractors. In order to enhance readiness and modernize their forces, military
agencies are expected to continue to maximize resources by modifying and
upgrading existing systems and platforms and relying upon
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sophisticated electronic equipment for existing and new systems. In furtherance
of their objectives, agencies are expected to require enhanced performance and
cost reductions from their prime contractors. The Company believes that this
cost and technology pressure will cause continued consolidation of the defense
industry's supply base and cause prime contractors to (i) focus on the design
and manufacture of overall weapon systems and (ii) outsource the manufacture and
integration of subsystems to independent commercially-oriented suppliers. The
Company believes that the current procurement environment favors the Company's
proprietary design and manufacturing processes, which are characterized by
limited reliance on government funded research and development.
Historically, many microwave systems for defense, intelligence and space
applications were assembled on a component by component basis. Prime contractors
integrated these components with cables, connectors and older packaging
technologies. The inherent manufacturing inefficiencies and reliability issues
of this process have led OEMs and prime contractors to require increased
integration and functionality from their suppliers. In addition to improved
reliability, such integration has reduced the cost of microwave subsystems to
the prime contractor and of the overall program to the DoD. Management believes
that the benefits made apparent by the trend toward subsystem integration in the
defense market will lead to a similar trend in a variety of commercial
applications.
Aerospace Industry
The commercial aircraft industry experienced severe difficulties in the
early 1990s. Airplane deliveries as a percentage of the world airline fleet
peaked at 9% in 1991 and fell to 4.7% by 1994. However, since 1994, the
commercial aerospace market has shown significant signs of recovery. According
to the Boeing Report, annual deliveries of commercial aircraft will increase
from approximately 400 in 1996 to more than 600 in 1997 and will be between 700
and 800 in 1998. In addition, for the period from 1996 through 2000, revenue
passenger miles are expected to increase from 1.6 trillion to 2.1 trillion and
the worldwide fleet of aircraft are expected to increase from 11,500 at the end
of 1996 to approximately 14,000 at the end of 2001 (net of approximately 1,375
retirements). The Company believes that the following factors, among others, are
causing this increase in new aircraft orders: (i) projected worldwide airline
traffic growth of 5.5% per year over the next decade (including growth of 6.7%
per year in the Southeast Asia region and 11.8% per year in China); (ii)
projected cargo traffic growth of 6.6% per year; (iii) projected increase in the
load factor of aircraft currently in service; (iv) the aging of the current
commercial aircraft fleet; (v) the cost effectiveness of using new aircraft; and
(vi) the improved operating performance of airlines worldwide.
In the military segment of the aerospace market, demand for aircraft
components declined significantly in the early 1990's, largely as a result of
reductions in defense budgets. The DoD and other government agencies responded
to decreases in their budgets by utilizing substantial built-up inventories of
replacement parts, which in many cases satisfied existing demand for several
years. The Company believes that current inventories of military aircraft
replacement parts and components are at the lowest levels in several decades and
that increased purchasing is likely over the next several years.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading supplier
of highly engineered subsystems and components to its customers in the
aerospace, defense and space industries and to expand its business to contiguous
commercial markets. The following are the key strategies the Company intends to
employ to achieve this objective:
Exploit Outsourcing Trend. The Company estimates that approximately 50% of
the subsystems used on all types of radar-guided missiles are still produced
internally by OEMs. The Company believes it is well positioned to compete
effectively for this remaining in-house production by capitalizing on its
proprietary products and low cost manufacturing processes. For example, Stellex
Microwave has increased its share of the individual microwave subsystems onboard
the AMRAAM from approximately 50% in 1992 to over 90% in 1997. Many of these
AMRAAM subsystems had previously been produced by the in-house microwave
component groups of Hughes and Raytheon. In addition, the design of one of the
Company's subsystems produced for the Standard Missile was incorporated in the
1997 Raytheon design of the Advanced Sea Sparrow missile. Overall program costs
of these missiles were substantially reduced as a result of this outsourcing.
The Company also believes that it has opportunities to capture new business in
the commercial aerospace industry as a result of additional outsourcing.
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Capture Share in Commercial Markets. The Company believes that its
experience and expertise in high frequency microwave subsystem integration
provide it with significant opportunities to develop integrated products for
commercial applications. The Company's current defense and aerospace customers
are also the world's largest manufacturers of satellites. These manufacturers
currently purchase subsystems for their defense platforms but only purchase SFMs
for space applications. Using its existing technologies, the Company intends to
modify and market MFMs and, eventually, entire microwave subsystems for space
applications to supplement or replace such SFM sales.
Leverage Prototype Expertise. The Company will seek to gain a larger share
of the production volume for turbomachinery parts for which it develops the
prototype. In response to customer requests, the Company has, and plans to
continue to, selectively increase its production capacity such that it can
manufacture efficiently at higher volumes. The Company is a member of the
Strategic Advisory Council of the Satellite Communications Division of Motorola,
Inc. ('Motorola').
Acquire Selected Businesses. The Company anticipates that the
consolidation of the historically fragmented aerospace component manufacturing
industry will provide opportunities for selective acquisitions. In addition, in
response to growing demand for microwave products, the Company will pursue
selective acquisitions that can broaden its microwave product offering or
provide it with enhanced technological or strategic capabilities. Such
acquisitions offer the opportunity to broaden the Company's product lines and
manufacturing capabilities, diversify its customer base, improve its absorption
of corporate overhead and enhance its attractiveness as a leading supplier to
OEMs in the aerospace, defense and space industries.
MARKETS, PRODUCTS AND SERVICES
The following is a description of the principal markets served by the
Company as well as the products and services the Company delivers for those
markets.
Markets
Guided Munitions. With advances in radar technology increasing the
likelihood that launching platforms will be detected and destroyed, military
forces are demanding that future missiles be longer-range than present models
and contain more sophisticated guidance systems. Because radar-guided missiles
are able to engage targets at a greater distance than other tactical weapons,
the radar-guided missile has become the tactical weapon of choice of the world's
military forces. The Electronic Industries Association estimates that the value
of guided missiles manufactured in the U.S. for sale throughout the world, as
well as the electronic content of such missiles, will increase from 1996 to
2001. This increase in value is expected to result from sales to the governments
of the U.S. and foreign nations. Sales to foreign governments are primarily
driven by the sales of U.S. manufactured warplanes and the increased willingness
of the U.S. government to permit the foreign sale of more sophisticated
weaponry. As the world's largest merchant supplier of integrated microwave
subsystems for radar-guided tactical missiles, Stellex Microwave has been
recognized as a leader in designing and manufacturing high-performance,
fully-integrated guidance, communications and fusing subsystems for defense
applications which strive to meet these evolving requirements. Subsystems such
as these are produced in high volume, since combat aircraft carry eight to ten
missiles each, and are continually upgraded, since guided missiles act as
cost-effective force multipliers by defending significantly more expensive
aircraft and ships. Approximately 50% of the $450 million guided munitions
microwave electronics market is held captive at the large missile prime
contractors, and in light of the industry trend toward outsourcing and Stellex
Microwave's competitive position, the Company believes it can significantly
increase its estimated current 25-30% market share.
Electronic Warfare and Radar. Military forces worldwide are dependent on
sophisticated electronic equipment. Military aircraft and naval vessels
generally contain extensive electronic countermeasure equipment for defense
against enemy missile and radar systems. These systems typically provide
protection for the aircraft or the ship from incoming enemy missiles by jamming
the missiles' tracking systems through various high radio frequency and
microwave signal processing techniques. According to industry sources,
electronic warfare spending will increase both domestically and internationally
as forces seek greater protection for their smaller fleets of combat systems
from the proliferation of increasingly lethal threat systems. The Company
addresses the electronic warfare and radar market through a combination of
catalog microwave devices and electronic equipment in which these devices are
integrated.
Space Applications. Commercial revenues in the global space industry
exceeded government expenditures for the first time in 1996. For the period from
1996 to 2000, Via Satellite, an industry publication, estimates that
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the value of the launched satellites will increase from approximately $9 billion
to $14.5 billion and that revenues generated by the manufacture and operation of
ground equipment, including receivers and transmitters, will increase from
approximately $22 billion to $27 billion. The largest commercial space
companies, including Hughes Aircraft Company, Lockheed Martin, and Loral Space
Systems, are expanding their commercial space activities to take advantage of
this anticipated growth.
The Company is currently a preferred supplier to Hughes and Lockheed
Martin's space businesses as well as their defense businesses. The Company is
also a member of the Strategic Advisory Council of Motorola's Satellite
division. Management believes that major space system integrators, which
currently purchase the majority of their microwave equipment on a component by
component basis from a fragmented supply base, will seek lower costs by moving
from the purchase of individual components to integrated subsystems. The Company
believes that it can develop MFMs and, eventually, entire subsystems for space
applications similar to those for its guided munitions markets and use these
products to increase its space-related market share.
The Company presently addresses the space market with products from its
microwave devices product line, principally amplifiers and mixers for use in
military and commercial satellites. Most of its products currently sold in this
market are customized, space-level quality adaptions of the Company's standard
microwave devices.
Commercial Applications. The global subscriber base of wireless telephony
users is expected to continue its rapid growth, having increased due primarily
to increasing competition among service providers, decreasing prices for
handsets, a more favorable regulatory environment and greater availability of
services and radio frequency spectrum. The growth in wireless communications has
required substantial investment by service providers in infrastructure
equipment. According to industry sources, spending by wireless service providers
on infrastructure equipment was approximately $26 billion in 1996 and will
increase to approximately $42 billion in 2001.
The Company believes that the superior transmission capacity of high
frequency microwave equipment and the lower cost of integrated systems can
facilitate the large increases in wireless and PCS transmission volume and the
cost effective construction of communication infrastructures. The Company
therefore expects increased use of integrated microwave technology for many
infrastructure applications.
The Company's current commercial products include a combination of catalog
microwave devices and electronic equipment in which these devices are
integrated. The Company's components are used in commercial products such as
microwave frequency test equipment, communications equipment such as amplifiers
in fiber-optic transmission systems, and avionics products.
Intelligence Applications. The Company's broadband microwave tuners and
signal-analysis equipment are used by military and other governmental agencies
to perform range-monitoring, frequency-measurement, signal localization and
interference-analysis functions, often in complex, high-signal-density
environments. Stellex Microwave continues to sustain its technological and
marketing leadership in this market through Company-funded design and
development efforts producing advanced receivers and related equipment featuring
the small-size, light-weight and low-power-consumption characteristics demanded
by its customers at competitive prices.
Niche Aerospace Manufacturing. Stellex Aerospace's niche manufacturing
operations have focused on discrete, growth-oriented markets in the aerospace
industry having limited competition and which utilize the Company's
sophisticated machining capabilities. Over the past two decades, Paragon has
applied its machining and production expertise to three distinct business
segments: spacecraft and prototype components, engine airfoil components and
engine and power actuation components. Bandy markets standard hinges, custom
hinges, and access doors and panels to four main business segments in the
aircraft market, commercial OEM production, commercial spare parts, military OEM
production and military spare parts.
Testing and Engineering Services. Through GIL and SEAL the Company
performs a broad range of material defect testing and analysis on a variety of
materials used in the aerospace, plastics and other industries. The Company is
actively involved in research and development and general engineering services
for new product development, the improvement of existing products and
value-added engineering services. The Company's services to the aerospace
industry include destructive physical analysis for the space station, the
testing of space shuttle components and space satellites and non-destructive
testing of materials used in commercial and military aircraft.
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Products and Services
The following chart provides summary information regarding the Company's
principal product and service lines, the markets which these products and
services serve, and the Company's principal programs and customers by product
and service line.
<TABLE>
<CAPTION>
PRINCIPAL
PRODUCT/SERVICE LINE* PRINCIPAL MARKETS PROGRAMS/CUSTOMERS
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
INTEGRATED SUBSYSTEMS
(38% OF PRO FORMA SALES)
Missile Subsystems Guided munitions AMRAAM/Hughes and Raytheon
Standard Missile/Hughes and
Raytheon
Longbow Hellfire/Lockheed Martin
Patriot PAC-3/Boeing
Intelligence Subsystems Intelligence applications JASA tuner/TRW, Inc.
Multi-Function Modules** Space applications Potential to integrate components in
('MFMs') space and other applications/
Motorola, Hughes and Boeing
MICROWAVE DEVICES
(36% OF PRO FORMA SALES)
Modular Components Space applications, electronic ICO/Hughes
warfare and radar, commercial Transmission amplifiers/Northern
applications Telecom Limited
Single Function Modules Electronic warfare and radar, guided F/A-18 radar/Hughes
('SFMs') munitions, commercial applications AEGIS/Raytheon
Test equipment/Marconi Instruments,
Ltd.
Electronic Equipment Intelligence applications, Intelligence tuners/U.S. and
electronic warfare and radar foreign government agencies
TARTAR/Raytheon
TURBOMACHINERY AND ENGINE COMPONENTS Commercial and military aviation, X-33 Space Plane/Rocketdyne
(9% OF PRO FORMA SALES) satellite and space station Space Shuttle/Rocketdyne
Titan/Aerojet
Atlas/Pratt & Whitney
TFE-1042/AlliedSignal
Delta/Aerojet and Rocketdyne
STRUCTURAL AEROSPACE PARTS Niche aerospace manufacturing, 737, 747, 757, 767 and 777/Boeing
(10% OF PRO FORMA SALES) including hinges and door assemblies A300 and A310/Airbus
F-15, F-18, C-17, MD-80, MD-90 and
MD-11/McDonnell Douglas
F-16 and C-130/Lockheed Martin
TESTING AND ENGINEERING SERVICES Aerospace, plastics, medical devices Space station/NASA
(7% OF PRO FORMA SALES) Testing/All major OEMs
</TABLE>
- ------------------
* All pro forma sales information is for the nine months ended September 30,
1997.
** Not currently sold as a separate product.
Integrated Subsystems
Missile Subsystems. The Company's core business is the manufacture and
marketing of fully operational and proprietary integrated microwave subsystems
for tactical radar guided missiles. In recent years the microwave content of
complete missile systems has remained fairly stable at approximately 10% even as
microwave subsystems have continued to become more integrated to achieve higher
performance. Representative programs for which the Company produces missile
subsystems include:
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o AMRAAM. The AMRAAM is an air-to-air missile for which the Company
produces the operational signal generator, target detection devices and
pilot/missile data link. AMRAAM is a next-generation weapon for fighter
aircraft, capable of being launched from beyond visual range, in day or
at night and in all weather. The most significant difference between
AMRAAM and earlier radar-guided missiles is that earlier missiles homed
to the radar emissions sent from the launching aircraft and reflected by
the target, whereas AMRAAM has an active radar of its own and can guide
itself to the target during the terminal phase of flight. This
'fire-and-forget' radar guidance system allows the pilot to break away
immediately after launch, enhancing survivability and acting as a force
multiplier by permitting engagement of other targets. AMRAAM is
operational with the U.S. military's front-line fighters and has been
procured by fourteen countries. To date more than 8,000 AMRAAMs have been
produced, and production is expected to continue at 500-1,000 systems per
year for the next five to seven years.
The AMRAAM is currently produced by Hughes and Raytheon. Stellex
Microwave has been involved with the AMRAAM since its inception in 1978,
when it was invited to become a member of the Hughes AMRAAM development
team based on its pioneering development of integrated microwave
subsystem technology. Stellex Microwave initially developed and produced
two of the AMRAAM's four microwave subsystems for Hughes. In 1985,
Stellex Microwave partnered with Hughes on an Air Force-funded value
engineering program which resulted in the capture by Stellex Microwave of
the remaining two subsystems for Hughes. In 1996 Raytheon, the AMRAAM
second source, elected to reduce costs by outsourcing the manufacture of
all but one of the AMRAAM's microwave subsystems to Stellex Microwave.
Today Stellex Microwave produces more than 90% of the microwave
subsystems onboard the AMRAAM.
o Standard Missile. Standard Missile is a ship-launched missile for which
the Company produces the antenna receiver assembly, the rear receiver and
the data link. Standard Missile, an all-weather, medium-to long-range
missile, is the primary surface-launched, area air-defense weapon for the
U.S. Navy and many allied countries, offering protection from airborne
threats for an entire fleet area at a range of nearly 80 miles. The
next-generation Standard Missile, the SM-2 Block IV, is now entering
low-rate initial production, with full production typically running
between 200 and 300 units per year.
Stellex Microwave has been active on the Standard Missile program since
the 1970s, when it began supplying the prime contractor with SFMs. When
Raytheon was selected as an alternate source for the Block IV version of
the Standard Missile in 1986, it chose Stellex Microwave to develop the
missile's complex antenna receiver assembly. The prime contractor
unsuccessfully attempted to produce this subsystem in-house, and Stellex
Microwave is now the sole source supplier of this subsystem.
o Longbow Hellfire. Longbow Hellfire is an air-to-ground missile for which
the Company produces the GaAs MIMIC millimeter wave transmitter. Longbow
Hellfire provides an autonomous 'fire-and-forget' capability in
adverse-weather and high obscurant environments and features a
state-of-the-art tandem shaped-charge warhead, providing highly effective
lethality against current and projected reactive tank armors. Longbow
Hellfire, the first 'fire-and-forget' missile mounted on a helicopter, is
the principal air-to-ground weapon for the Apache helicopter, is
qualified on the Kiowa Warrior and Cobra helicopters and is cleared for
flight on the Blackhawk helicopter. Longbow Hellfire is entering low-rate
production, with over 13,000 U.S. Army units planned.
Lockheed Martin initially selected TRW, Inc. ('TRW') as vendor for the
Longbow Hellfire transmitter assembly, largely based on TRW's GaAs chip
manufacturing capability. Based on its ability to manufacture reliably
the volumes required by the procurement contract, Stellex Microwave was
selected as the new vendor in July 1997 as the program moved to low-rate
production. Today, Stellex Microwave is moving into a dominant position
as the only qualified vendor for the transmitter subsystem, with a firm
backlog of more than $8.8 million as of September 30, 1997. As the
program enters full production, the Company anticipates material
increases in production rates.
o Patriot PAC-3. Patriot is the cornerstone of the U.S. Army's integrated
air defense system, for which the Company produces the Ka band down
converter. The Patriot surface-launched air defense missile system is a
long range, all altitude, all weather system which recorded an historic
first wartime intercept of a tactical ballistic missile during Operation
Desert Storm. The new Patriot Advanced Capability (PAC-3) kinetic energy,
high-altitude anti-missile missile has no warhead and uses 'hit-to-kill'
technology to
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destroy incoming advanced aircraft, tactical ballistic missiles and
cruise missiles. To date, approximately 9,000 Patriot missiles have been
delivered.
At the outset of the Patriot missile program, the prime contractor
initially selected a subsidiary of another major prime contractor as
vendor for the Ka band down converter. After this manufacturer failed to
produce the converter after a development period of several years,
Stellex Microwave, at the invitation of the prime contractor, produced a
working prototype in six months. Stellex Microwave is now the sole source
supplier of the Ka band converter for the Patriot missile.
Intelligence Subsystems. The Company builds miniature broadband microwave
tuners with high quality phase noise performance to pick up signals that are
transmitted with more advanced, high-data modulation techniques. The Company's
intelligence subsystems, which feature Stellex Microwave's unique MFM and
subsystem manufacturing technologies, employ highly integrated 'snap-together'
packaging to create size and weight advantages over competitors. These products
are used in intelligence applications requiring sophisticated technology, such
as the Joint Airborne SIGINT Architecture program which monitors electronic
transmission over a wide range of frequency.
Multi-Function Modules ('MFMs'). MFMs combine mixers, amplifiers,
limiters, switches, and oscillators in a single hermetic package. In their
manufacture the Company uses patented packaging technology to optimize its
time-to-market and manufacturing cost advantages. Although MFMs are not
currently marketed as stand-alone products, the Company integrates multiple MFMs
with control circuiting and mechanical interface housings to produce subsystems.
In addition, the Company is developing plans to configure MFMs for specific
space satellite applications. Management believes that Stellex Microwave's
record of high-reliability and first pass qualification testing of its MFM
design methodology provides the Company with significant opportunities to
satisfy the requirements of its targeted space customers.
Microwave Devices
Modular Components. The Company's modular components, produced for a
variety of microwave applications, consist primarily of single function mixers,
amplifiers and frequency doublers, as well as custom designs, operating in a
frequency range from DC to 44 Ghz. These products are built to inventory with
published specifications and sell for prices ranging from approximately $20 to
several hundred dollars each. Because of the inherent high levels of quality of
these products, they are often used for high-reliability and space-qualified
applications such as satellites. For these applications, requirements for parts
traceability and extensive screening result in superior product quality and
reliability, often at a premium price when compared to the standard catalog
version of the same part.
Single Function Modules ('SFMs'). The Company's SFMs consist primarily of
connectorized components such as frequency converters, VCOs, YIG devices and
microwave amplifiers for use in older applications or where minimized size and
weight are not critical. Representative programs for which the Company produces
SFMs include:
o APG-73 Radar System. The APG-73, utilized in the F/A-18 Hornet, is a
pulse-doppler radar for which the Company produces the frequency
converter used in the radar receiver. The APG-73 is an all-weather
search-and-track sensor that uses programmable digital processors to
provide the features and flexibility needed for both air-to-air and
air-to-surface missions. Doppler radar permits a pilot to identify
targets against the ground clutter to intercept low flying targets. The
APG-73 radar supports multi-target tracking which enables the launch and
support of several AMRAAM missiles simultaneously.
o AEGIS SPY Radar System. The AEGIS SPY is an automatic detect and track,
multi-function phased-array radar system for which the Company produces a
frequency converter. This high powered (four megawatt) radar is able to
protect an entire aircraft carrier group by performing search, track and
missile guidance functions simultaneously with a track capacity of over
100 targets. Its computer-based command and decision interface makes the
AEGIS combat system capable of simultaneous operation against a multi-
mission threat involving anti-air, anti-surface and anti-submarine
warfare. The combat-proven, shock-capable, and reliable SPY missile
protection radar is operational aboard all 27 cruisers and 16 destroyers
in the U.S. Navy's AEGIS fleet.
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Electronic Equipment
Electronic equipment combines the Company's microwave devices with operator
interface, digital commands and control electronics. Because the devices are
typically interconnected using cables, these products are larger in size and
weight than those built using modular subsystem technology. These larger
products continue to be used for many older systems, especially those based on
land and ships. Management believes that over time the Company's electronic
equipment products will incorporate more sophisticated MFM and subsystem design
technology. Representative programs for which the Company produces electronic
equipment include:
o Microwave Receivers. The W-J8969 2-18 GHz microwave receiver has been
selected by several U.S. and international intelligence agencies to
monitor both communications and electronic intelligence signals. In
production since 1989, this receiver features high sensitivity and low
phase distortion.
o TARTAR. The MK-74 TARTAR, the U.S. Navy's first line of defense against
anti-ship cruise missiles, is a fire control system for which the Company
produces the mast-mounted phase coherent five-channel receiver assembly.
There are over 70 MK-74 systems operational around the world.
Turbomachinery and Engine Components
The Company, through Paragon, specializes in sophisticated five-axis
machining of turbomachinery components. Paragon's flexible manufacturing
operations permit the production of both (i) highly engineered, close tolerance
prototype components which are generally manufactured from expensive, exotic
alloys and are found in high performance gas turbine engines and liquid fuel
rocket engines and (ii) higher volume standard components used in aircraft and
industrial power actuation systems and high performance turbine engines.
Paragon's turbomachinery components include engine rotors, impellers, stators,
valve bodies, actuator housings and intricate blades and vanes used in jet
engines. Paragon currently produces eight different part numbers for the
TFE-1042 turbofan engine manufactured by AlliedSignal and is the sole source
provider of twelve parts for Aerojet's Titan engines. Paragon is also a primary
source supplier for Rocketdyne on several projects including six parts for its
first stage Delta rocket engine and numerous turbomachinery components for the
space shuttle's main engine.
Structural Aerospace Parts
The Company, through Bandy, manufactures precision hinges, access doors and
panels, specialty machined structural and interior aircraft components, and
other custom machined parts. Bandy produces more than 20,000 different hinge
designs ranging from one inch to more than 40 feet in length for such
applications as aircraft galleys, access, cargo and passenger doors, flaps,
racks, ramps, cases, landing gear, seats and lavatories. Bandy's 'special' or
'custom' hinges are used extensively on aircraft, helicopters, jet engine
systems, missiles and many other commercial, industrial and military
applications ranging from the space shuttle to nuclear submarines. Bandy's door
products range in size from two inches up to 36 inches in length and are made
for the F-16 airplane, among others, as well as missiles, unmanned aerial
vehicles, torpedoes, precision instrument housings and many other applications
to provide inspection visibility and servicing access. Bandy's specialty
machined components include spars, stringers, support rails, posts and related
items for aircraft.
Testing and Engineering Services
Stellex Aerospace performs testing and engineering services through SEAL
and GIL. SEAL offers a comprehensive range of material defect testing and
analysis, utilizing electron microscopy, residual gas analysis and other highly
sophisticated processes, on a variety of materials used in the aerospace,
plastics, medical device and other industries. In addition, SEAL is actively
involved in research and development and general engineering services for new
product development, the improvement of existing products and value-added
engineering services. SEAL is one of only three engineering companies approved
by NASA to conduct destructive physical analysis for the space station and has
been actively involved in the testing of space shuttle components, commercial
and military satellites and liquid fuel tanks on several NASA rocket booster
programs. SEAL provides services through a staff of over 50 employees, which
includes experts in the fields of materials and metallurgical science,
electronic components, failure analysis, analytical techniques and related
sciences.
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GIL is a full-service inspection and metal treatment laboratory,
specializing in non-destructive testing and inspection of materials and
manufactured components using advanced analytical techniques and
state-of-the-art equipment. GIL's testing processes, including radiography,
ultrasound, liquid and magnetic particle penetrant and pressure testing, assist
in determining internal or external flaws, fractures, material containments or
manufacturing defects in materials and/or component parts to ensure component
quality. GIL, which primarily services the aerospace industry, is one of the
leading independent, full-service NDT laboratories in the United States.
TECHNOLOGY
Microwaves are electromagnetic waves with wavelengths in the centimeter
range and frequencies ranging from 300 MHz to 40 Ghz. The high frequency nature
of microwaves is preferred in many electronic equipment applications because it
permits the design of smaller equipment, provides for high-speed data
transmission and accurate positioning information, and operates under all
weather conditions. As a result, microwave transmission technology has been used
for many years in the defense, space, intelligence and telecommunications
markets for various purposes, including missile guidance, identification of
targets or other aircraft, navigation, radar, electronic countermeasures and
high volume point to point communications.
A representative example of the application of microwave technology is the
microwave assembly subsystem of the AMRAAM. The microwave assembly's function is
to generate the microwave signals that are used by the missile's onboard
navigation, communications and target location microwave subsystems. The
individual components of the microwave assembly which permit it to perform its
signal generation function include the oscillators, which create the signals,
the amplifiers which set the proper power level, switches for channeling the
signals and mixers which are used for frequency conversion. The microwave
assembly is typical of a high-performance subsystem, in that it includes many of
the typical building blocks for a microwave system. In addition to those found
within the microwave assembly, individual components used in a system might
include filters, couplers and isolators. These types of components are the
building blocks of complex MFMs and subsystems used in a variety of
applications.
Historically, many microwave systems were assembled on a component by
component basis. Prime contractors integrated these components with cables,
connectors and older packaging techniques. The resulting inefficiencies and
reliability issues of this process led to increased integration in certain
applications. A fully integrated subsystem refers to a collection of MFMs
packaged together on a mechanical mounting structure and integrated with control
and power conditioning electronics. Each MFM is a hermetically sealed structure
containing a custom substrate base, which is used as a transmission medium,
along with active chips such as diodes and transistors. The single integrated
subsystem performs all of the functions otherwise performed by up to 20
individual electronic components. The development of integrated subsystems has
resulted in microwave systems which, relative to assembled components, provide
the OEM with a product which is:
o Physically smaller and lighter. The elimination of connectors, cables and
extraneous packaging allows the size and weight of the system to be
significantly reduced.
o More reliable during operation. Subsystem packaging is better suited for
heat dissipation and meeting shock and vibration requirements. In
addition, because fewer individual packages and components are used, the
number of interconnects and hermetic seals are greatly reduced.
Connectors and seals are the source of a large percentage of performance
failures in microwave subsystems.
o Easier for the OEM to test and assemble. Because the system is fully
functional when received from the supplier, the OEM only needs to test
one system instead of a series of components, and because the system is
fully assembled and a single system performs many functions, the OEM only
needs to fit it into the application instead of assembling a series of
packages with fewer functions.
o Less expensive. More reliable manufacturing processes produce greater
yields, which reduce costs for the manufacturer.
o More functional. The elimination of cables and connectors directly
results in the improvement of key performance parameters such as phase
and amplitude stability.
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The manufacture of integrated subsystems affords the supplier several
advantages when competing for high volume, high performance microwave subsystem
supply contracts. Strict adherence to a rigorous set of proven design rules
results in faster product development times and greater yields when programs
move from the development phase into high volume production. Because this design
methodology has been proven in many applications, a high rate of first-pass
qualification testing is often achieved. In addition, technologies developed
during the design of a particular system are often useful in follow-on
applications.
The level of integration in certain applications, particularly in the space
segment of the aerospace industry, remains relatively low. Management believes
that the same benefits which led to the integration of microwave products for
the guided munitions market are achievable in other commercial markets such as
space satellites and certain high-frequency microwave equipment used for
telecommunications infrastructures. See '--Markets, Products and Services.'
Stellex Microwave had company-sponsored research and development expenses
of $5.5 million, $4.8 million and $3.5 million for the years ended December 31,
1994, 1995 and 1996, respectively; customer-sponsored research and development
at Stellex Microwave was estimated to be approximately $7.6 million, $10.4
million and $8.0 million, respectively, for such periods. Research and
development expenses at Stellex Aerospace for such periods were not significant.
MANUFACTURING
Stellex Microwave
Stellex Microwave designs, manufactures and tests microwave subsystems and
components at its manufacturing facilities located in Palo Alto, California.
Stellex Microwave's integrated subsystem factory consists of a 6,000 square foot
modern 'clean room' facility which contains highly automated manufacturing and
testing equipment. This facility currently produces 400 complex microwave
subsystems per week, employs a flexible manufacturing line process capable of
thin-film and solder assembly as well as full microwave testing and data
analysis. High reliability and space qualified microwave components are also
produced at the Company's Palo Alto facility. In addition, Stellex Microwave
utilizes contract manufacturers in the Philippines, Thailand and China for high
volume, labor intensive microwave components such as cascadable amplifiers and
mixers.
The subsystem approach to microwave system design seeks improved
performance at lower cost by transferring to the microwave supplier the
responsibility for the inter-operability of the individual microwave components.
Beginning in the mid-1970's, numerous suppliers have claimed this capability.
However, the design and manufacture of subsystems has posed several key
challenges to suppliers. For example, a broad range of microwave component
capabilities is required to address subsystem engineering requirements. Most
suppliers lack extensive component expertise, especially in the area of
frequency converters. In addition, while many suppliers have solved electrical
problems associated with subsystem development and production, few have been
effective in addressing mechanical issues such as substrate attachment. Finally,
many suppliers have focused on satisfying subsystem functional requirements
without adequate attention to manufacturing requirements, leading to a lack of
manufacturing standardization, costly design changes and high manufacturing
costs.
Stellex Microwave has successfully addressed many of the problems facing
microwave subsystem suppliers. Stellex Microwave has maintained a broad
capability of microwave component design. The technology leadership of Stellex
Microwave mixers is particularly important, as the components are vital to
low-distortion frequency conversion. In addition, Stellex Microwave's Mechanical
Design Department has created a uniform packaging methodology that solved
mechanical issues and led to high-yield manufacturing. The management of Stellex
Microwave enforces the use of this design methodology. All new product designs
utilize qualified design techniques and can be manufactured in a
highly-automated factory. For example, despite their different geometric shapes
and electronic designs, modules for AMRAAM, Standard Missile and Longbow
Hellfire are all assembled on the same line, using common processes.
An example of the successful implementation of the Company's integrated
design methodology and advanced manufacturing techniques can be seen in Stellex
Microwave's experience in supplying the microwave
50
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subsystems for the AMRAAM missile. The AMRAAM missile program began in 1980,
with Stellex Microwave working in close technical partnership with Hughes, the
primary supplier of the missile to the DoD. Since 1992, the Company has been the
sole source supplier to Hughes of four parts for the AMRAAM. Since the inception
of the program, Stellex Microwave has been able to integrate various functions
into increasingly smaller modules. For example, the missile's radio frequency
processor, which was originally comprised of 11 separate modules, is now
contained in one fully-integrated subsystem. This one subsystem provides
significant benefits to the missile's performance due to its increased
functionality, smaller size and greater reliability. Moreover, while increasing
functionality, Stellex Microwave has also been able to significantly reduce
costs through the use of a variety of proprietary processes. For example,
Stellex Microwave has developed a metal injection molding process for the
production of microwave subassembly housings used in the AMRAAM microwave
subsystem. Housings can require dimensional tolerances of less than a thousandth
of an inch and, therefore, constitute one of the largest cost components of the
subsystem. Traditionally, the housing had been manufactured by machine cutting,
which was expensive and time-consuming. The metal injection molding process has
dramatically reduced the cost of manufacturing the housing and shortened
production cycles. Raytheon, which is the second source supplier of the AMRAAM
and which originally had manufactured the missile's microwave assemblies
internally, now outsources most of its microwave requirements for the missile to
Stellex Microwave.
As a result of the Company's integrated design approach and manufacturing
capabilities, management believes that Stellex Microwave is well-positioned to
participate in the further integration of microwave components and modules both
in existing and future programs and in various commercial applications. Further,
because the Company's processes have been developed over a number of years and
are generally proprietary, management believes that they would be relatively
difficult to replicate by competitors.
Stellex Microwave produces its microwave devices in a separate facility
that is configured to support the wide variety of microwave components that it
manufactures. It is staffed by experienced manufacturing personnel, many of whom
are certified in multiple processes. The factory has been qualified to meet
rigorous reliability requirements imposed by the Company's customers and
government agencies, including requirements relating to satellite applications.
In an effort to increase the profitability of the microwave devices business,
the Company intends to increase its use of offshore independent contractors to
manufacture and test microwave components. Management believes that the
outsourcing of these responsibilities will significantly reduce labor costs and
increase production capabilities, without negatively affecting the quality of
its products or delivery requirements. In addition, by utilizing multiple
sources the Company can be assured of competitive rates and sufficient capacity.
For microwave devices that are required to meet high-reliability or
space-qualified standards, the Company intends to continue to conduct testing to
ensure compliance with these standards at its facilities in the United States.
In 1996, Stellex Microwave received ISO-9001 certification for its
microwave products manufacturing facilities. The Company's offshore independent
contractors have also received ISO-9001 certification. ISO-9001 is a standard
established by the International Organization for Standardization that provides
a methodology by which manufacturers can obtain quality certification. Although
this certification is not currently required by any of its customers, the
Company believes that it will be beneficial to the acquisition of future
business, particularly as the consolidation and outsourcing trends in the
defense industry continue. To help ensure the highest product quality and
reliability and to maximize control over the complete manufacturing cycle and
costs, the Company seeks to achieve vertical integration in the manufacturing
process wherever appropriate.
Stellex Aerospace
Stellex Aerospace manufactures turbomachinery components for rocket booster
engines, precision aircraft hinges, structural and interior aircraft components,
access door assemblies, door panels and hinges for special industrial
applications. Stellex Aerospace's manufacturing facilities are highly automated
and incorporate a variety of quality control systems.
Paragon manufactures both highly sophisticated, close tolerance prototype
components, often machined from expensive metal alloys, as well as higher volume
standard components. As a result of the variety of products it manufactures,
Paragon's manufacturing operations are flexible and generally adaptable to a
variety of applications. It employs advanced machinery, including four and five
axis machining centers, multiple spindle
51
<PAGE>
high volume production machining centers, wire electrical discharge machining
('EDM') machines and computer numerical control ('CNC') turning centers.
Paragon's computerized CNC machines interface with a sophisticated
computer-aided-design/computer-aided-manufacturing ('CAD/CAM') network. As a
contract manufacturer, Paragon does not typically design or own the products it
manufacturers.
Bandy's manufacturing facility is geared toward high volume, low cost
production. Bandy has developed a high level of proprietary equipment and
automated manufacturing systems. A substantial portion of its equipment has been
redesigned, customized and/or upgraded in recent years to meet exacting
manufacturing requirements and to reduce production costs. Bandy combines the
use of numerical control equipment, vertical and universal milling machines and
custom-designed hinge equipment with other advanced, high production
manufacturing methods to produce standard or customized precision hinges and
machined parts. Bandy owns all of its own tooling, which historically has given
it a competitive advantage in obtaining spare and replacement part business.
Certain customers of Stellex Aerospace have developed their own design,
product performance, manufacturing process and quality standards and require
their suppliers, including Stellex Aerospace, to comply with such standards. As
a result, Stellex Aerospace has developed and implemented comprehensive quality
system policies and procedures which meet or exceed the requirements of its
customers. In addition, the Company is currently seeking ISO-9000 certification
for Stellex Aerospace's manufacturing facilities. In recognition of its high
quality standards, Stellex Aerospace has received numerous quality awards from
its customers, including Boeing and McDonnell Douglas, and the highest quality
designations from Lockheed Martin, Teledyne and Rohr.
SALES AND MARKETING
The Company employs distinctly different sales and marketing approaches in
each of its businesses, which are tailored to the needs of its customers. The
Company markets its products through its own sales force and a network of
independent sales representatives and distributors in the United States and
certain foreign countries. The Company's sales managers are responsible for
coordinating the efforts of the independent sales representatives and for
staying abreast of government and commercial programs in their respective
regions. They also keep the Company's engineering, manufacturing and management
personnel advised of possible future trends and requirements of customers.
Stellex Microwave--Tactical Subsystems
The Company's tactical subsystems are sold to a limited number of prime
contractors based on anticipated program funding of identified tactical missile
and intelligence systems. Marketing for tactical subsystems relies on extensive
direct interaction between Company personnel and their counterparts at prime
contractors and government agencies which comprise the tactical missile and
intelligence markets. Stellex Microwave uses a team-based sales approach to
facilitate close management by Company personnel of relationships at multiple
levels of the customer's organization, including management, engineering and
purchasing personnel. Trade shows and advertising are oriented to positioning
Stellex Microwave as the premier supplier of advanced microwave technology for
production volume tactical missiles and intelligence systems.
Sales of tactical subsystems begin with the identification of tactical
missile and intelligence programs that are expected to require medium to high
volume production of integrated microwave subassemblies. Stellex Microwave
focuses on those programs with a high probability of obtaining production
funding as targets for new business. Stellex Microwave avoids contracts for
one-of-a-kind products and limited production programs.
Once a program is identified as a target, Stellex Microwave typically works
closely with the customer during the product design and qualification phase.
Stellex Microwave also regularly becomes involved after initial product design
and development when a customer has encountered pre-production problems. Each
program is bid with a price proposal. New programs then enter a developmental
phase where Stellex Microwave's subassemblies are developed and tested and then
integrated into the missile system for further evaluation and testing. Upon
completion of the development phase, Stellex Microwave develops a proposal for
the production phase of the program. Existing production programs, such as
AMRAAM, frequently move through product update cycles which are rapidly
engineered and moved into production.
52
<PAGE>
Stellex Microwave--Microwave Devices
The Company's microwave devices are sold to a broad range of government
agencies and civilian contractors worldwide. Stellex Microwave sells and
distributes microwave devices worldwide using an internal sales force, sales
representatives and independent distributors. Stellex Microwave typically
processes more than 5,000 purchase orders a year from more than 400 different
customers. Marketing for microwave devices includes trade shows and advertising
focused on positioning Stellex Microwave as the highest quality supplier with
the broadest selection of microwave components. The Company uses a 500-page
parts catalog which is revised every two years. Catalog sales accounted for a
significant portion of the Company's microwave device pro forma sales for the
year ended December 31, 1996 and the nine months ended September 30, 1997. In
order to capitalize on its reputation developed under the Watkins-Johnson name,
pursuant to the terms of the W-J Acquisition, Stellex Microwave will retain the
right to sell its products through the 1997-98 device catalog produced by
Watkins-Johnson and will also have the right to identify its products as
'formerly made by Watkins-Johnson' until the expiration of the 1999-2000
catalog.
Stellex Aerospace
The Company believes that Paragon is one of only five companies in the
United States with the expertise to compete for and produce highly
sophisticated, close tolerance prototype component parts. As a result of recent
marketing efforts to broaden its customer base, Paragon now has approximately 20
active prototype customers. Although prototype work is normally associated with
short-term, low-volume work, Paragon is often able to secure a preferred
position for future production requirements by establishing a strong
relationship with the customer during the early prototype development stage.
Paragon intends to maximize these opportunities to become a competitive and
cost-effective producer of longer-term, higher-volume orders.
Bandy's sales effort was recently reorganized into a dedicated,
single-contact sales representative system. Previously, Bandy operated a pool
system whereby a customer's call to place an order or obtain information was
referred to the first available salesperson. The new system provides Bandy's
sales representatives with the opportunity to become more familiar with the
special and unique requirements of their particular accounts as well as ensure
that orders are properly processed and schedules maintained. Additional benefits
of the new system include a more even distribution of salesperson workload as
well as a reduction in the time required to process orders and respond to
requests. Bandy employs four persons in-house to answer sales questions and
process orders and uses outside sales agents to serve its international
customers.
CUSTOMERS
The Company's customers include many of the world's largest defense
contractors, aircraft OEMs and aircraft component manufacturers. The Company's
largest customers in 1996 based on sales were Hughes and Raytheon, which
together accounted for approximately 34% of the Company's total pro forma sales.
In December 1997, Raytheon completed its acquisition of the defense business of
Hughes. See 'Risk Factors-- Dependence on Certain Customers.'
The vast majority of the Company's tactical subsystem sales, which
accounted for 39% of the Company's total pro forma sales in 1996, are derived
from contracts with a limited number of tactical missile and
intelligence/reconnaissance prime contractors, such as Raytheon, Hughes, Litton,
Lockheed Martin, Rockwell-Boeing and TRW. Microwave component sales, which
accounted for approximately 40% of the Company's total pro forma sales in 1996,
are made to a broad range of government agencies and civilian contractors.
Stellex Aerospace, whose sales accounted for approximately 21% of the Company's
total pro forma sales in 1996, sells primarily to aircraft OEMs, aircraft and
rocket engine manufacturers and government agencies. In 1996, approximately 62%
of the Company's pro forma sales were to government agencies and their prime
contractors. Such sales are subject to unique conditions and terms. See 'Risk
Factors--Uncertainty Associated with Government Contracts.'
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COMPETITION
Stellex Microwave
The markets for Stellex Microwave's microwave subsystems are characterized
by rapid technological change, new product development, product obsolescence and
evolving industry standards. In addition, as a result of significant development
costs associated with integration techniques and designs, these markets have
significant barriers to entry. Management believes that competition within the
microwave subsystem market is driven primarily by the ability to design and
deliver high performance and price competitive products in sufficient quantities
in a timely manner. Competition is also affected by the quality of technical
support and the ability to design customized products that address each
customer's particular requirements. Stellex Microwave faces competition in the
subsystems markets in which it competes from independent microwave equipment
manufacturers which have integration capabilities, but management believes that
its primary competition is from in-house manufacturing operations of OEMs and
prime contractors, many of whom are customers of the Company. Management
believes that Stellex Microwave's proprietary materials and manufacturing
techniques allow it to produce highly sophisticated, cost-effective and reliable
microwave subsystems that are not easily replicated. However, Stellex
Microwave's future success is dependent upon the extent to which OEMs and prime
contractors, many of which have greater financial and technical resources than
the Company, elect to purchase from outside sources rather than manufacture and
integrate their own subsystems, MFMs and components. See 'Risk
Factors--Competition.'
Stellex Aerospace
The narrowly defined niche markets within the aircraft industry served by
Stellex Aerospace are relatively fragmented, with few competitors for each of
the products provided by Stellex Aerospace. In the markets for the spacecraft
and prototype components which it produces, Paragon's competition is generally
limited to only two or three companies, due primarily to high entry costs and
significant technical requirements. In the markets for engine airfoil components
and power actuation components, Paragon faces numerous competitors including, in
many cases, the in-house manufacturing operations of its customers. In addition,
as airfoils represent a substantial cost component of aerospace engines,
customers are increasingly focused on reducing costs and increasing competition.
Paragon's major customers are intensely price competitive with each other, and
this price competition increases their incentives to reduce costs from their
suppliers.
Bandy faces competition in its hinge market business from a limited number
of international independent manufacturers and the in-house operations of
aircraft OEMs. Bandy also competes with small machine shops for specialty
machined components. As a result of recent economic and structural contraction
in the commercial and military hinge markets, the number of direct machine shops
dedicated to the production of hinges has been significantly reduced. The
Company believes that the key competitive factors in this changed market include
not only product quality and machining tolerance requirements, but also customer
relationships established over many years. The Company believes that Bandy's
reputation for high quality products and superior manufacturing capabilities
have made it the market share leader of the worldwide aircraft hinge market.
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PROPERTIES
The Company and its subsidiaries have an aggregate of six principal
operating facilities, all of which are located in California. Stellex
Microwave's facility is leased under a sub-lease from Watkins-Johnson entered
into in connection with the W-J Acquisition. Stellex Aerospace has five
facilities located in southern California. The following table sets forth
certain information relating to the Company's principal operating facilities.
<TABLE>
<CAPTION>
SQUARE
LOCATION DESCRIPTION FOOTAGE OWNED/LEASED
- --------------------------- ------------------------------------------------- ------- ------------------------
<S> <C> <C> <C>
Palo Alto, California Stellex Microwave's manufacturing, engineering 120,000 Leased
and testing facility and office
Woodland Hills, California Stellex Aerospace's office 1,475 Leased
Valencia, California Paragon's manufacturing facility, machine shop 54,000 Owned
and warehouse
Burbank, California Bandy's manufacturing facility, warehouse and 48,000 Leased
office
El Segundo, California SEAL's laboratory, testing facility and office 20,600 Leased
Cudahy, California GIL's laboratory, testing facility and office 32,400 Leased
</TABLE>
The Company believes that its properties are adequate to support its
operations for the foreseeable future. In connection with the W-J Acquisition,
Stellex Microwave entered into a sub-lease with Watkins-Johnson for its facility
in Palo Alto, California. Upon the termination of such sub-lease in October,
2000, Stellex Microwave will be required to relocate. The Company is in the
process of reviewing alternate sites for Stellex Microwave, and intends to
minimize any disruption caused by such relocation. All of the Company's other
leases, other than the lease relating to the Woodland Hills facility, which is
month-to-month, have remaining terms generally ranging from one to six years.
Substantially all of such leases contain renewal options pursuant to which the
Company may extend the lease terms in increments of five to ten years. The
Company does not anticipate any difficulties in renewing any of these leases as
they expire.
EMPLOYEES
As of September 30, 1997, the Company employed approximately 825 persons.
Virtually all of the Company's employees reside in the United States and none
are covered by collective bargaining agreements. The Company considers its
relations with its employees to be good.
GOVERNMENT CONTRACTS AND REGULATION
A substantial portion of the Company's sales result from contracts with the
U.S. government and its prime contractors. These contracts are generally
cost-reimbursement or fixed-price type contracts. Cost-reimbursement type
contracts provide for the payment of actual allowable costs, plus a fee. Under
fixed-price type contracts, the contractor benefits from or shares in cost
savings but generally bears or shares the risk of cost overruns. Cost-
reimbursement type contracts are normally priced to realize lower margins than
fixed-price type contracts. For the year ended December 31, 1996, approximately
6.3% of the Company's pro forma sales were derived from cost-reimbursement
contracts. A significant portion of the balance of the Company's pro forma sales
for the year ended December 31, 1996 were derived from fixed-price type
contracts.
Contracts with the U.S. government and its prime contractors contain
standard provisions for termination at the convenience of the U.S. government or
such prime contractor, pursuant to which the Company is generally entitled to
recover costs incurred, settlement expenses and profit on work completed prior
to termination. Contracts with the U.S. government do not provide for
renegotiation of profits.
Companies supplying products and services directly or indirectly to the
U.S. government are subject to other risks such as contract suspensions, changes
in policies or regulations and availability of funds. Any of these factors could
adversely affect the Company's business with the U.S. government in the future.
See 'Risk Factors--Uncertainty Associated with Government Contracts.'
55
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All of the Company's operations are subject to compliance with regulatory
requirements of federal, state and municipal authorities, including regulations
concerning employment obligations and affirmative action, workplace safety and
protection of the environment. While compliance with applicable regulations has
not adversely affected the Company's operations in the past, there can be no
assurance that the Company will continue to be in compliance in the future or
that these regulations will not change. See 'Risk Factors--Environmental
Matters,' and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Environmental Matters.'
In particular, the Company must comply with detailed government procurement
and contracting regulations and with United States government security
regulations, certain of which carry substantial penalty provisions for
nonperformance or misrepresentation in the course of negotiations. Failure of
the Company to comply with its government procurement, contracting or security
obligations could result in penalties or suspension of the Company from
government contracting, which could have a material adverse effect on the
Company's financial position and results of operations.
The Company is required to maintain a United States government facility
clearance at certain of its locations. This clearance could be suspended or
revoked if the Company were found not to be in compliance with applicable
security regulations. Any such revocation or suspension would delay the
Company's delivery of its products to customers. Although the Company has
adopted policies directed at ensuring its compliance with applicable
regulations, there can be no assurance that the approved status of the Company
facilities will continue without interruption. United States government
regulations require a license for the export of advanced weapons systems.
Changes in United States government policies towards the export of these systems
may impact the Company's international business.
SALES TO FOREIGN CUSTOMERS
For the year ended December 31, 1996, approximately $18.0 million, or 16%,
of the pro forma sales of the Company were attributable to sales where the
end-user was a foreign customer. The principal customers are governments of
those countries in Western Europe, the Middle East and the Pacific Rim region
which are generally deemed to be friendly to the government of the United States
and to have relatively stable governments. A substantial portion of the
Company's sales where the end-user is a foreign government involve weapon and
intelligence systems. These sales are generally subject to U.S. government
regulation and licensing. A change in U.S. government policy toward foreign
governments with whom the Company, directly or indirectly, conducts business
could affect the Company's sales. Although the loss of all of the Company's
foreign business could have a materially adverse impact on the Company's results
of operations and financial condition, it is management's opinion that this risk
is remote and that the loss of any single contract involving a foreign
government would not be material.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's manufacturing operations require a wide variety of electronic
and mechanical components for which the Company has multiple commercial sources.
The Company's manufacturing operations also require raw materials which are
purchased in the open market and are normally available from a number of
suppliers. The Company has not experienced any significant delays in obtaining
timely deliveries of essential materials.
SUPPLY CONTRACTS
In connection with the W-J Acquisition, the Company and Watkins-Johnson
entered into a Gallium Arsenide and Thin Film Supply and Services Agreement (the
'GaAs Agreement'). Stellex Microwave depends on a steady supply of gallium
arsenide and thin film parts. These parts, and the technology associated with
these parts, are used in the manufacture of microwave subsystems and modules for
a variety of applications, including virtually every integrated subsystem
manufactured by Stellex Microwave. A gallium arsenide part is a wafer, die or
dice comprising one or more layers of gallium arsenide, on which is implemented
one or more transistors or diodes. A thin-film part is a part component,
interconnect, wafer, substrate, die or dice comprising one or more layers of
thin-film material such as tantalum nitride or gold deposited on a ceramic.
In the GaAs Agreement, Watkins-Johnson agreed to sell, and the Company
agreed to buy, parts manufactured in Watkins-Johnson's gallium arsenide and thin
film fabrication facility (the 'GaAs Facility').
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<PAGE>
The GaAs Agreement will expire on December 31, 2000, unless earlier terminated
by the Company on one year's notice by the Company.
Under the GaAs Agreement, prices for parts are guaranteed through January
1, 1999. Thereafter, prices may be adjusted by no more than 10 percent. The
Company must also pay certain research and development and process costs
associated with the maintenance of the GaAs Facility. The Company must make
quarterly payments for research and developmment totalling at least $800,000 in
1998, $400,000 in 1999, and $300,000 in 2000. The share of process costs is
determined by a formula that measures the Company's use of the GaAs Facility.
For 1998, the Company will pay at least $2.2 million in process costs. For each
six month period thereafter, the Company's share will be recalculated based on
actual usage rates, but the Company's share of process costs will not change by
more than 10 percent from the Company's share six months before the
recalculation. For 1998, the Company's total payments for parts, research and
development, and process costs must equal at least $5.8 million.
In connection with the W-J Acquisition, Watkins-Johnson transferred to the
Company a Metal Injection Molding, Glass Seal and Hybrid Assembly facility (the
'MIM Facility'). The Company agreed to supply Watkins-Johnson with products and
services from the MIM Facility at prices specified in a supply agreement. This
supply agreement will run until December 31, 2000, unless earlier terminated on
one year's notice by Watkins-Johnson.
INTELLECTUAL PROPERTY
The Company owns patents on packaging and substrate materials,
manufacturing processes and other microwave technology which are significant in
the performance of its integrated microwave subsystems. The Company's
significant patents have terms expiring from 2000 to 2014. In addition, the
Company is a party to patent and other intellectual property licensing
agreements with various parties, including Watkins-Johnson.
In addition to the Company's patented and licensed technology, management
believes that the Company's research, development and engineering skills, as
well as its scientific and technical know-how, are instrumental to the Company's
business. The U.S. government typically receives royalty-free licenses on
inventions arising from government contracts, with each contractor retaining all
commercial rights with respect to such inventions.
In connection with the W-J Acquisition, the Company entered into a patent
cross license with Watkins-Johnson whereby patents transferred in connection
with the W-J Acquisition are licensed, on a royalty-free basis, to
Watkins-Johnson. In addition, pursuant to this cross license, Watkins-Johnson
licenses the patents it retains, other than specifically excluded patents, on a
royalty-free basis to the Company. Watkins-Johnson does not have license rights
relating to the Company's patents for microwave devices and electronic equipment
for the defense and space industries. The Company is not licensed to
Watkins-Johnson's patents to manufacture gallium arsenide parts for third
parties.
Intellectual property rights, including trade secrets and know how,
associated with the business of Stellex Microwave, were transferred or licensed
to the Company in connection with the consummation of the W-J Acquisition. These
intellectual property rights include the rights associated with gallium arsenide
and thin film parts and the MIM Facility.
Stellex Microwave is party to approximately 95 separate nondisclosure
agreements. Each of these agreements was entered into to restrict or prohibit
the disclosure of proprietary information shared with Stellex Microwave by other
companies in connection with certain proposed business relationships.
LEGAL PROCEEDINGS
The Company is involved in lawsuits and is subject to certain contingencies
incidental to its business. While the ultimate results of these matters cannot
be predicated with certainty, management does not expect them to have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information with respect to the directors,
executive officers and other key employees of the Company. All directors and
officers of the Company hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Richard L. Kramer.................................... 48 Chairman of the Board of Directors and Director of
Stellex Industries, Inc.
William L. Remley.................................... 47 Vice Chairman, President, Chief Executive Officer,
Treasurer and Director of Stellex Industries, Inc.
P. Roger Byer........................................ 52 Chief Financial Officer of Stellex Industries, Inc.
Keith D. Gilbert..................................... 55 President and Chief Executive Officer of Stellex
Microwave Systems, Inc.
Bradley C. Call...................................... 54 President and Chief Executive Officer of Stellex
Aerospace
Timothy L. Boland.................................... 59 Vice President, Tactical Subsystems of Stellex
Microwave Systems, Inc.
John L. Martin....................................... 58 Vice President, Microwave Devices of Stellex
Microwave Systems, Inc.
Kevin R. Hunter...................................... 37 Vice President, Systems Engineering of Stellex
Microwave Systems, Inc.
Eric F. Richardson................................... 36 Vice President, Design Engineering of Stellex
Microwave Systems, Inc.
Julius E. Hodge...................................... 46 Chief Financial Officer of Stellex Aerospace
Lawrence R. Smith.................................... 52 President of Paragon Precision Products
John Barriatua....................................... 62 President of General Inspection Laboratories, Inc.
Roland H. Marti...................................... 52 President of Scanning Electron Analysis Laboratories,
Inc.
Thomas B. Fulton..................................... 49 President of Bandy Machining International
</TABLE>
- ------------------
Richard L. Kramer became the Chairman of the Board of Directors and a
director of the Company in September 1997, shortly after its formation. Mr.
Kramer is also Chairman and a director of Mentmore Holdings Corporation, Texfi
Industries Inc., a textile and apparel manufacturing firm, CPT Holdings. Inc., a
manufacturer of specialty structural steel profiles, Weldotron Corporation, a
packaging equipment manufacturer, Orion Acquisition Corp. II, an investment
company, MC Equities, Inc., an insurance holding company, Precise Technology,
Inc., a full-service, custom injection molder of precision plastic products, and
Republic Properties Corporation. Mr. Kramer is a director of J&L Structural,
Inc., Precise Holding Corporation, Trinity Investment Corp. and Sunderland
Industrial Holdings Corporation.
William L. Remley became the Vice Chairman, Chief Executive Officer and a
director of the Company in September 1997, shortly after its formation. Mr.
Remley is also President, Chief Executive Officer and a director of Mentmore
Holdings Corporation and Weldotron Corporation, Vice-Chairman, Chief Executive
Officer and a director of Texfi Industries Inc., President and a director of CPT
Holdings Inc., Orion Acquisition Corp. II and MC Equities, Inc. and Vice
Chairman, Treasurer and a director of Precise Technology, Inc., a full-service,
custom injection molder of precision plastic products. Mr. Remley is a director
of J&L Structural, Inc., Republic Properties Corporation, Precise Holding
Corporation, Trinity Investment Corp. and Sunderland Industrial Holdings
Corporation.
P. Roger Byer became the Chief Financial Officer of the Company in
September 1997, shortly after its formation. Prior to joining the Company, Mr.
Byer was employed by General Aquatics Corporation, and its predecessor, KDI
Corporation, as Chief Financial Officer from June 1986 until May 1997. Mr. Byer
is also Chief Operating Officer of Mentmore Holdings Corporation.
Keith D. Gilbert became the President and Chief Executive Officer of
Stellex Microwave in October 1997 upon consummation of the W-J Acquisition.
Prior to joining Stellex Microwave, Mr. Gilbert held the positions of Executive
Vice President of Watkins-Johnson from November 1995 and acting President of
TSMD from April 1997, respectively, until the consummation of the W-J
Acquisition. Prior to this time, Mr. Gilbert was employed
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by Watkins-Johnson for 31 years in a variety of positions, including President
of the Electronics Group from March 1993 until February 1995 and Vice President
of the Defense Group from 1990 until March 1993. Mr. Gilbert currently provides
consulting services to Watkins-Johnson.
Bradley C. Call became the President and Chief Executive Officer of Stellex
Aerospace in July 1997. Prior to joining Stellex Aerospace, Mr. Call was
employed by Kleinert as Chairman, President and Chief Executive Officer from
September 1988 until the consummation of the Kleinert Acquisition in July 1997.
Mr. Call has also held the position of President of Bandy from January 1994
until November 1997. Mr. Call is a director of Unihealth Pacificare Health
Systems.
Timothy L. Boland became the Vice President, Tactical Subsystems of Stellex
Microwave in October 1997 upon consummation of the W-J Acquisition. Prior to
joining Stellex Microwave, Mr. Boland held the position of Vice President,
Tactical Subsystems Sector of Watkins-Johnson from October 1993 until the
consummation of the W-J Acquisition. Prior to this time, Mr. Boland was employed
by Hughes Aircraft Company for 24 years in a variety of positions, including
Manager of AMRAAM Advanced Programs from January 1990 until October 1993.
John L. Martin became the Vice President, Microwave Devices of Stellex
Microwave in October 1997 upon consummation of the W-J Acquisition. Prior to
joining Stellex Microwave, Mr. Martin had been employed by Watkins-Johnson as
Vice President, Microwave Devices Sector and Acting Sales Director from October
1996 and June 1997, respectively, until the consummation of the W-J Acquisition.
In addition, Mr. Martin had been employed by Watkins-Johnson as Manager of
Product Assurance, Manager of Safety and Security and Department Manager of the
Integrated Assemblies Department from January 1992 until the consummation of the
W-J Acquisition.
Kevin R. Hunter became the Vice President, Systems Engineering of Stellex
Microwave in October 1997 upon consummation of the W-J Acquisition. Prior to
joining Stellex Microwave, Mr. Hunter held the position of Director, Tactical
Subsystems Engineering of Watkins-Johnson from July 1997 until the consummation
of the W-J Acquisition. Prior to this time, Mr. Hunter was employed by
Watkins-Johnson in a variety of positions, including Manager of the Tactical
Engineering Department from March 1995 until July 1997, Section Head of the
Subsystems Design Section from September 1993 until March 1995, Head of Missile
Subsystems Design from January 1993 until September 1993, and Head of Product
Development from March 1992 until January 1993.
Eric F. Richardson became the Vice President, Design Engineering of Stellex
Microwave in October 1997 upon consummation of the W-J Acquisition. Prior to
joining Stellex Microwave, Mr. Richardson held the position of Director,
Engineering of Watkins-Johnson from September 1995 until the consummation of the
W-J Acquisition. Prior to this time, Mr. Richardson was employed by
Watkins-Johnson in a variety of positions, including Manager of the Mechanical
Engineering Department from March 1992 until September 1995.
Julius E. Hodge became the Chief Financial Officer of Stellex Aerospace in
July 1997. Prior to joining Stellex Aerospace, Mr. Hodge was employed by
Kleinert as Chief Financial Officer from May 1989 until the consummation of the
Kleinert Acquisition in July 1997.
Lawrence R. Smith has held the position of President of Paragon since
November 1990. Prior to this time, Mr. Smith was employed by Rogerson Kratos,
Inc. as President from April 1985 until June 1990.
John Barriatua has held the position of President of GIL since June 1985.
Prior to this time, Mr. Barriatua was employed by GIL for 26 years in a variety
of positions.
Roland H. Marti has held the position of President of SEAL since February
1989. Prior to this time, Mr. Marti was employed by Kevex Instruments as
Director of Sales from 1984 until 1989, Director, Western Area for Princeton
Gamma-Tech from 1983 until 1984 and Worldwide Sales Manager for Bausch & Lomb
from 1980 until 1983.
Thomas B. Fulton has held the position of President of Bandy since November
1997. Prior to joining Bandy, Mr. Fulton was employed by Kaiser Compositek as
President from April 1995 until November 1997. Prior to this time, Mr. Fulton
was employed by Kade Composites as President from July 1986 until April 1997.
DIRECTORS
Messrs. Kramer and Remley are non-employee directors of Stellex and do not
receive compensation for acting in such capacity other than reimbursement for
out-of-pocket expenses incurred to attend meetings of the Board of Directors and
visit the Company's offices or other locations on behalf of the Company for any
special purpose. Messrs. Kramer and Remley are the sole executive officers and
directors of Mentmore Holdings
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Corporation, which provides management services to the Company. See 'Certain
Transactions--Management Agreement with Mentmore.'
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company's
predecessor and/or Watkins-Johnson to (i) the Company's current Chief Executive
Officer and (ii) each of the individuals currently serving as executive officers
of the Company whose annual compensation exceeded $100,000 in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($)
- ---------------------------------------------------------- ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
William L. Remley,
Chief Executive
Officer of Stellex (a)..................................
1997 -- -- -- --
Keith D. Gilbert,
President and Chief
Executive Officer of
Stellex Microwave (b)...................................
1997 213,644 63,898 -- 1,575(c)
Bradley C. Call,
President and Chief
Executive Officer of
Stellex Aerospace (d)...................................
1997 222,784 810,132 -- 9,144(e)
</TABLE>
- ------------------
(a) Mr. Remley is an executive officer and director of Mentmore, which, pursuant
to the Management Agreement (as defined), provides the Company with general
management, advisory, consulting and other services in exchange for an
annual management fee. See 'Certain Transactions--Management Agreement with
Mentmore.'
(b) Mr. Gilbert was employed from January 1, 1997 to October 31, 1997 as
Executive Vice President of Watkins-Johnson and acting President of TSMD,
and $188,684 of the salary and all of the bonus and all other compensation
presented relates to such employment. Mr. Gilbert was employed from November
1, 1997 to December 31, 1997 as President and Chief Executive Officer of
Stellex Microwave, and $24,960 of the salary presented relates to such
employment.
(c) Consists of a management incentive bonus plan award.
(d) Mr. Call was employed from January 1, 1997 to July 1, 1997 as Chairman,
President and Chief Executive Officer of Kleinert (predecessor to Stellex),
and $108,675 of the salary presented relates to such employment. Mr. Call
was employed from July 1, 1997 to December 31, 1997 as President and Chief
Executive Officer of Stellex Aerospace, and $114,109 of the salary presented
relates to such employment. Bonuses and all other compensation of $40,000
and $4,572, respectively, relate on a pro rata basis to each of such
periods. Mr. Call also received a bonus of $730,132 from Kleinert Industries
Holding AG in connection with the consummation of the Kleinert Acquisition.
See 'Certain Transactions--The Kleinert Acquisition.'
(e) Consists of a 401(k) matching contribution of $4,800 and term life insurance
premiums of $4,344. Fifty percent of each of such amounts relate on a pro
rata basis to each of the periods of Mr. Call's employment described in
footnote (d) above.
EMPLOYEE BENEFIT ARRANGEMENTS
The Company has retained the firm of McDaniel & Associates, an employee
benefit consulting firm, to advise it in structuring an appropriate employee
compensation program for the officers and employees of Stellex Microwave and
Stellex Aerospace. The Company anticipates adopting a formal program in the near
future. In addition, the Company will seek to enter into employment agreements
with certain of its executive officers and key employees. The Company expects
that the terms of such employment agreements, as well as the terms of the
overall compensation program adopted by the Board of Directors of Stellex, will
be comparable to the compensation packages offered to officers and employees of
the Company under prior ownership and will be competitive with compensation
programs offered by other companies in the Company's industry.
Pursuant to the Stellex Aerospace Investor Agreement (as defined), certain
Management Members (as defined) were granted stock appreciation rights ('SARs')
by KII Holding. A portion of the SARs vest over a five year period. The vesting
of the remaining SARs is generally conditioned upon Stellex Aerospace meeting
certain targeted levels of annual and cumulative EBITDA (as defined therein)
over a five year period. See 'Certain Transactions--The Kleinert Acquisition.'
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's compensation policies are determined and executive officer
compensation decisions are made by the Board of Directors of Stellex.
EMPLOYMENT AND OTHER AGREEMENTS
Stellex Microwave is a party to an employment agreement with Keith D.
Gilbert, President and Chief Executive Officer of Stellex Microwave. Mr.
Gilbert's employment agreement commenced as of November 1, 1997 and will expire
on December 31, 2000, unless sooner terminated. Under such agreement, Mr.
Gilbert receives a base salary of $250,000 per annum, subject to annual
increases at the discretion of Stellex Microwave's board of directors. Beginning
with Stellex Microwave's fiscal year 1998, Mr. Gilbert will also be entitled to
receive an annual incentive bonus of up to 75% of his base salary based upon
Stellex Microwave's attainment of certain targeted levels of annual EBITDA (as
defined in his agreement). Under the terms of his employment agreement, Mr.
Gilbert is eligible to participate in all incentive, deferred compensation,
savings and retirement, welfare benefit and fringe benefit plans, practices,
policies and programs to the extent applicable generally to other peer
executives of Stellex Microwave. In addition, Mr. Gilbert is entitled to four
weeks paid vacation per year and reimbursement for all reasonable expenses
incurred by him in the discharge of his duties.
Mr. Gilbert's employment agreement may be terminated by Stellex Microwave
at any time, with or without cause, upon 120 days' written notice, and upon his
death or disability. In the event Mr. Gilbert's employment agreement is
terminated for cause or Mr. Gilbert terminates his own employment, Stellex
Microwave will pay Mr. Gilbert his base salary through the date of termination
to the extent not theretofore paid plus any compensation previously deferred by
him (the 'Accrued Obligations'). In the event of Mr. Gilbert's death or
disability, Stellex Microwave will pay Mr. Gilbert, or his estate, as the case
may be, the Accrued Obligations plus any amounts due pursuant to the terms of
any applicable welfare benefit plans. In the event Mr. Gilbert's employment
agreement is terminated other than for cause or death or disability, Stellex
Microwave will pay Mr. Gilbert the Accrued Obligations plus his base salary for
the lesser of the remainder of the term of his employment agreement or one year.
For a period of two years following the termination of his employment, Mr.
Gilbert will be subject to provisions prohibiting his employment with certain
significant employees of Stellex Microwave and solicitation of such employees or
Stellex Microwave's customers. Mr. Gilbert's employment agreement also contains
provisions relating to non-disclosure of Stellex Microwave's proprietary
information and the assignment to Stellex Microwave of ownership of certain
intellectual property conceived by Mr. Gilbert during his employment.
RETENTION PLANS
In anticipation of the divestiture of its tactical subsystems and microwave
devices business units, Watkins-Johnson implemented an enhanced profit sharing
program designed to foster retention of employees of the business pending and
following the W-J Acquisition. This program provides for the doubling of
benefits payable under Watkins-Johnson's pre-existing profit sharing bonus plan
to all employees of the business who remain employed by Watkins-Johnson or are
employed by Stellex Microwave at the end of 1997 (the additional bonus amounts
being payable in March of 1998). Watkins-Johnson has estimated that the total
amount that will be payable to employees under this plan is approximately
$800,000.
Certain key employees of the business are also eligible for additional
individual retention bonuses, some of which are fixed dollar amounts and others
of which are based on the financial results of the business during 1997.
Watkins-Johnson has estimated that the total amount that will be payable to
these employees under these plans is approximately $1.5 million.
Pursuant to the W-J Stock Purchase Agreement, Stellex Microwave agreed to
assume Watkins-Johnson's obligation to make retention payments to employees of
the business and deposited into an escrow account an amount projected to be
sufficient to defray the costs of all such payments and related payroll taxes
and such amount was credited against the purchase price paid at the closing of
the W-J Acquisition.
EMPLOYEE LOANS
Stellex Microwave is the holder of a promissory note made by Timothy L.
Boland, Stellex Microwave's Vice President, Tactical Subsystems, which was in
the original principal amount of $100,000 (of which $58,654 has been forgiven
and $41,346 remains outstanding). This note was made in connection with loans
for relocation assistance.
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CERTAIN TRANSACTIONS
THE W-J ACQUISITION
On August 29, 1997, a wholly owned subsidiary of Stellex, TSMD Acquisition
Corp. (the 'Buyer'), entered into a Stock Purchase Agreement (the 'W-J Stock
Purchase Agreement') with Watkins-Johnson and
W-J TSMD Inc. ('W-J TSMD'), pursuant to which Watkins-Johnson agreed to
contribute certain assets and liabilities relating to its tactical subsystems
and microwave devices businesses (collectively the 'Business') to W-J TSMD, and
the Buyer agreed to purchase all of the issued and outstanding capital stock of
W-J TSMD (the 'Stellex Microwave Stock') for a net purchase price of
approximately $82.2 million (after giving effect to estimated purchase price
adjustments). The closing of the W-J Acquisition occurred on October 31, 1997
concurrently with the consummation of the Initial Offering. In connection with
the consummation of the W-J Acquisition, the corporate name of W-J TSMD was
changed to Stellex Microwave Systems, Inc.
The W-J Stock Purchase Agreement contains representations and warranties
typical of agreements of like nature, including, without limitation, those
relating to corporate organization and capitalization, the valid authorization,
execution, delivery and enforceability of all transaction documents, the
financial statements, the absence of material adverse changes in the Business,
the absence of material undisclosed liabilities, tax matters, material
contracts, the quality and title of the property comprising the Business,
litigation and employee matters, governmental authorizations, licenses and
permits, insurance, compliance with laws, employee benefit plans, customers and
suppliers, compliance with environmental and other laws, and compliance with the
terms of government contracts. Generally, the representations and warranties of
Watkins-Johnson expire on the second anniversary of the closing date except that
(i) those relating to the corporate organization and capitalization of Stellex
Microwave, title to the Stellex Microwave Stock and its assets and the absence
of brokers remain in full force and effect indefinitely, (ii) those concerning
environmental matters generally survive until the tenth anniversary of the
closing date, (iii) certain representations regarding the good repair and
adequacy of the material tangible properties of the Business terminate on the
date which is six months following the closing date, (iv) certain
representations and warranties regarding the merchantability and quality of
inventory included in the Business terminate upon the final determination of the
Adjustment Amount (as defined in the W-J Stock Purchase Agreement) and (v) those
relating to tax matters generally survive until the expiration of the applicable
statute of limitations.
Pursuant to the W-J Stock Purchase Agreement, Watkins-Johnson agreed to
indemnify the Buyer and Stellex Microwave for all liabilities and other losses
arising from, among other things, any breach of its representations, warranties
or covenants contained in the W-J Stock Purchase Agreement, the Excluded
Liabilities (as defined in the W-J Stock Purchase Agreement), third party claims
or demands regarding conduct of the Business prior to the closing date,
violations of law that occur prior to the closing date and certain environmental
conditions. The Buyer agreed to indemnify Watkins-Johnson for all liabilities
and other losses arising from, among other things, any breach of its
representations, warranties or covenants contained in the W-J Stock Purchase
Agreement, the Assumed Obligations (as defined in the W-J Stock Purchase
Agreement), third party claims or demands regarding conduct of the Business
following the closing date and violations of law that occur after the closing
date. With certain exceptions, neither Watkins-Johnson nor the Buyer is required
to indemnify any other person for breaches of certain representations and
warranties unless the aggregate of all amounts for which indemnity would
otherwise be payable exceeds $500,000 and, in such event, the indemnifying party
will be responsible only for the amount in excess of $500,000. In addition, the
indemnification obligations for breaches of representations and warranties of
each of Watkins-Johnson and the Buyer are generally limited to a maximum of $20
million, except that there is no limit on Watkins-Johnson's obligations with
respect to breaches of certain representations and warranties, including those
relating to the corporate organization and capitalization of Stellex Microwave,
certain tax matters, title to the Stellex Microwave Stock and its assets, the
absence brokers and certain environmental matters. There is also no limit on
indemnification by Watkins-Johnson for specified pending claims and litigation.
The W-J Stock Purchase Agreement also contains non-competition and
non-solicitation agreements binding on Watkins-Johnson, the Buyer and Stellex
Microwave. Watkins-Johnson, on behalf of itself and its Affiliates (as defined
in the W-J Stock Purchase Agreement), agreed for a period of four years after
the date of such agreement that it will not, directly or indirectly participate
in the ownership, management or control of, or the financing of, or be employed
by, or consult for or otherwise render services to, or allow its name or
reputation to be used in or by any other present or future business enterprise
in the defense or space industries or that otherwise compete with the Business
or its products in each state of the United States and in each foreign
jurisdiction in which the
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Business is conducted or its products are sold as of the closing date; provided
that the foregoing provision expressly does not apply to certain intelligence
systems manufactured by Watkins-Johnson that are designed to monitor or
intercept communication signals, products for the telecommunications market
currently manufactured or in development by Watkins-Johnson and
Watkins-Johnson's ability to act as an outside GaAs foundry for third parties.
In addition, Watkins-Johnson generally agreed to refrain from soliciting
employees of Stellex Microwave for a period of four years from the closing date.
Similarly, the Buyer, on behalf of itself and its Affiliates, agreed for a
period of four years after the date of the W-J Stock Purchase Agreement that it
will not (i) manufacture Gallium Arsenide parts for third parties, (ii) disclose
to third parties confidential process and design rule information related to the
manufacture of Gallium Arsenide parts except as necessary for the manufacture of
parts solely for the Buyer and its Affiliates and (iii) manufacture for the
telecommunications market products that duplicate, in whole or with minor
modifications, the proprietary designs of products currently manufactured or in
development by Watkins-Johnson, including, without limitation, cellular and PCS
base station subsystems, wireless local loop customer premise equipment,
repeater subsystems for point to multi-point and medium power amplifiers. In
addition, the Buyer and Stellex Microwave generally agreed to refrain from
soliciting employees of Watkins-Johnson for a period of four years from the
closing date.
In connection with the W-J Acquisition, Watkins-Johnson and the Company
entered into a variety of ancillary agreements to accommodate the separation of
the Business from the businesses retained by Watkins-Johnson. Stellex Microwave
entered into a sub-lease with Watkins-Johnson for the facilities currently used
by the Business that allows the Company to continue to conduct the Business at
its existing site for a maximum of three years. In addition, Watkins-Johnson and
Stellex Microwave entered into a supply agreement that allows Stellex Microwave
to purchase from Watkins-Johnson, at agreed upon rates, products used in
connection with the Business from Watkins-Johnson's gallium arsenide foundry and
thin-film production substrate facility. Stellex Microwave also entered into an
agreement to furnish Watkins-Johnson, at agreed upon rates, with metal injection
molding services through a facility purchased from Watkins-Johnson in connection
with the W-J Acquisition. Finally, Watkins-Johnson and Stellex Microwave entered
into a license agreement covering certain common technology used in the
operation of the Business and the businesses being retained by Watkins-Johnson.
See 'Business--Properties,' '--Supply Agreements' and '--Intellectual Property.'
The foregoing summary of the material terms of the W-J Stock Purchase
Agreement and related matters does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all of the provisions of the
W-J Stock Purchase Agreement, including the definitions of certain terms therein
and the exhibits and schedules thereto.
THE KLEINERT ACQUISITION
On July 1, 1997, KII Acquisition Corp. ('Acquisition Corp.'), approximately
80% of the common stock of which is indirectly owned by Stellex, acquired all of
the issued and outstanding capital stock of Kleinert (currently known as Stellex
Aerospace) from Kleinert Industries Holding AG (the 'Seller'), for a purchase
price of approximately $26.5 million (including the assumption of $2.6 million
of indebtedness and the issuance by Acquisition Corp. to the Seller of a
promissory note (the 'Kleinert Seller Note') in the principal amount of
$1,750,000). The Kleinert Seller Note matures on July 1, 1999 and bears interest
at a rate of 8%. The Kleinert Seller Note is guaranteed by Stellex Aerospace and
each of its subsidiaries.
The Stock Purchase Agreement entered into in connection with the Kleinert
Acquisition (the 'Kleinert Stock Purchase Agreement') contains representations
and warranties typical of agreements of like nature, including, without
limitation, those relating to corporate organization and authorization, good
title to Kleinert's capital stock, violations of law and defaults under material
contracts, third party consents, Kleinert's financial statements, tax,
environmental and intellectual property matters, the absence of undisclosed
liabilities, title to and condition of assets, litigation, compliance with laws,
insurance, employee benefit plans, inventory and required permits and licenses.
Pursuant to the Kleinert Stock Purchase Agreement, the Seller agreed to
indemnify Acquisition Corp. for all liabilities and other losses arising from,
among other things, any breach of the representations, warranties or covenants
of the Seller or Kleinert contained in the Kleinert Stock Purchase Agreement.
Indemnification claims must be brought by Acquisition Corp. prior to June 30,
1999, except with respect to breaches of certain representations relating to tax
matters, which may be brought any time prior to the applicable statute of
limitations. Acquisition Corp. has agreed to indemnify the Seller for all
liabilities (including without limitation liabilities for Taxes), and other
losses arising from, among other things, the operation or conduct of Stellex
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Aerospace's business after the Closing Date and the breach of any
representation, warranty or covenant of Acquisition Corp. contained in the
Kleinert Stock Purchase Agreement. Indemnification claims brought by the Seller
generally must be made prior to June 30, 1999. With certain limited exceptions
(e.g., fraud), neither the Seller nor Acquisition Corp. is required to indemnify
any other person unless the aggregate of all amounts for which indemnity would
otherwise be payable exceeds $100,000 (the 'Basket Amount') and, in such event,
the indemnifying party shall be responsible for all Indemnified Losses,
including those comprising the Basket Amount. In addition, the indemnification
obligations of each Acquisition Corp. and the Seller are generally limited to a
maximum of $1,750,000. Pursuant to the Kleinert Seller Note, and subject to
certain conditions and procedures, Acquisition Corp. may offset amounts due
under the Kleinert Seller Note by indemnification claims and other amounts owing
by the Seller to Acquisition Corp. under the Kleinert Stock Purchase Agreement.
Pursuant to an Agreement entered into in connection with the Kleinert
Acquisition (the 'Stellex Aerospace Investor Agreement'), six senior members of
Stellex Aerospace's management team (the 'Buyers,' and together with a member of
management who received SARs as described below, the 'Management Members')
purchased 19.9% of the issued and outstanding shares of KII Holding Corp. ('KII
Holding'), the parent holding company of Stellex Aerospace, for approximately
$800,000. In addition, an entity beneficially owned by trusts established for
the benefit of Messrs. Kramer and Remley and certain members of their families
purchased KII Holding's remaining common stock for approximately $3.1 million
and 84 shares of KII Holding's Series A Preferred Stock, having a stated value
of $10,000 per share (the 'Series A Preferred Stock'), for $840,000. Pursuant to
the Stellex Aerospace Investor Agreement, the Buyers also agreed to purchase
shares of KII Holding's Series B Preferred Stock with the net bonus payments
received by the Buyers under their respective participation plan agreements with
the Seller.
Pursuant to the Stellex Aerospace Investor Agreement, KII Holding granted
SARs to certain Management Members. KII Holding has the right to redeem (the
'Redemption Right') all, but not less than all, of any common stock held by any
Management Member and to cause a liquidation and termination of any SAR held by
him to KII Holding upon the occurrence of certain events, including the death,
disability or termination of the Management Member, and for any reason after
July 1, 2002. Moreover, the Stellex Aerospace Investor Agreement gives each
Management Member the right to cause KII Holding to purchase all, but not less
than all, of any common stock of KII Holding held by him and/or to cause KII
Holding to liquidate and terminate any SARs held by him (hereinafter referred to
as the 'Put Right') upon the occurrence of certain events, including such
Management Member's death, disability, termination Without Cause (as defined in
the Stellex Aerospace Investor Agreement) or scheduled retirement, and for any
reason after July 1, 2002. The applicable purchase price to be received by a
Management Member upon the exercise of a Redemption Right or Put Right is based
upon a formula set forth in the Stellex Aerospace Investor Agreement. To the
extent KII Holding is prohibited under the terms of its existing indebtedness
from making payment to any Management Member for any shares of its common stock
or vested SARs purchased or liquidated pursuant to the Stellex Aerospace
Investor Agreement, then it is required to issue a promissory note to such
Management Member for the amount owing. Such note shall be payable when and to
the extent KII Holding is permitted to make such payment and bear interest at a
rate of 10% per annum. Such note shall also be unsecured and subordinated to all
other indebtedness of KII Holding, including KII Holding's Guarantee of the
Notes.
The Stellex Aerospace Investor Agreement further provides that subsequent
to the closing of the Kleinert Acquisition, each Management Member will enter
into a five year employment agreement with KII Holding or one of its
subsidiaries. The Company has engaged an employee benefits firm to advise it in
structuring its overall compensation program and anticipates implementing such
program and entering into the employment agreements with the Management Members
at its earliest opportunity.
The foregoing summary of the material terms of the Kleinert Stock Purchase
Agreement, the Stellex Aerospace Investor Agreement and related matters does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Kleinert Stock Purchase Agreement and
the Stellex Aerospace Investor Agreement, including the definitions of certain
terms therein and exhibits and schedules thereto.
TRINITY NOTE
In connection with the Kleinert Acquisition, KII Holding issued a
promissory note (the 'Trinity Note') in the principal amount of $2,500,000 to
Trinity Investment Corp. ('Trinity'). Richard L. Kramer and William L. Remley
are executive officers and directors of Trinity, which is a subsidiary of
entities owned by trusts
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established for the benefit of certain relatives of Messrs. Kramer and Remley.
The outstanding principal and accrued interest on the Trinity Note was repaid
with a portion of the proceeds of the Initial Offering.
MANAGEMENT AGREEMENT WITH MENTMORE
Mentmore provides management services to Stellex and the Subsidiary
Guarantors pursuant to the Amended and Restated Management Advisory Services
Agreement effective as of November 1, 1997 (the 'Management Agreement'), between
Stellex, the Subsidiary Guarantors and Mentmore. Pursuant to the Management
Agreement, Mentmore provides Stellex and the Subsidiary Guarantors with general
management, advisory, consulting and other services with respect to the
Company's business, including, without limitation, strategic planning, financial
planning, accounting and financial reporting, consulting and assistance with
respect to traditional treasury functions, general business development
services, and oversight and review of tax preparation, planning and audits.
Under the terms of the Management Agreement, Mentmore receives customary
indemnification, reimbursement of certain costs and an annual management fee of
$750,000, which is payable monthly, plus, after the first anniversary of the
consummation of the Initial Offering, the amount by which 1% of the Company's
total consolidated sales in any fiscal year exceeds such fee. The Management
Agreement has a term of 10 years and is automatically extended for one
additional year as of December 31 of each year during the term of the agreement
unless either party shall have previously notified the other in writing on or
before September 30 of its desire not to further extend the term. In addition,
Mentmore may terminate the Management Agreement at any time upon 90 days prior
written notice to the other parties thereto, and such parties may terminate the
Management Agreement 'for cause' (as defined in the Management Agreement). The
sole executive officers and directors of Mentmore are Richard L. Kramer and
William L. Remley.
In connection with the Kleinert Acquisition, Mentmore received investment
banking fees of $450,000, and reimbursement for certain expenses. Mentmore
received total fees of $1,000,000 and the reimbursement of certain expenses in
connection with financial advisory and other services rendered to the Company in
connection with the W-J Acquisition and the Initial Offering. In addition,
Michael D. Schenker Co. L.P.A., whose principal is an officer of Mentmore,
received customary fees in connection with services rendered in connection with
the Transactions.
TAX SHARING AGREEMENT
The Company's liability for taxes will be determined based upon a tax
sharing agreement (the 'Tax Sharing Agreement') entered into among Stellex and
the Subsidiary Guarantors. Under the Tax Sharing Agreement, Stellex and its
subsidiaries will generally be responsible for federal taxes based upon the
amount that would be due if Stellex and its subsidiaries filed federal tax
returns as a separate affiliated group of corporations rather than as part of
Stellex's consolidated federal tax returns. The combined state tax liabilities
will be allocated to Stellex and its subsidiaries based on similar principles.
RELATIONSHIP WITH EQUITY INVESTORS
In connection with the consummation of the Transactions, certain equity
investments in the Company were made by trusts or other entities owned by
trusts, the beneficiaries of which are relatives of Richard L. Kramer and
William L. Remley. Such investments consisted of the purchase for cash of shares
of the Company's Series A Preferred Stock for an aggregate consideration of
$7,450,000 and its Common Stock for an aggregate consideration of $50,000. In
addition, a $4,000,000 promissory note (the 'Sunderland Note') issued to
Sunderland Industrial Holdings Corporation ('Sunderland') in connection with the
Kleinert Acquisition was exchanged, in connection with the consummation of the
Transactions, for shares of the Company's Series A Preferred Stock having an
aggregate stated value of $4,000,000. The Company's Series A Preferred Stock is
not mandatorily redeemable at the option of the holder, and dividends thereunder
are payable in cash or in kind at the option of the Company's Board of
Directors, subject to restrictions under the Indenture. Richard L. Kramer and
William L. Remley are the principal executive officers and directors of
Sunderland, whose outstanding capital stock is held by trusts, the beneficiaries
of which are certain relatives of Messrs. Kramer and Remley.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of Stellex's Common Stock as of December 1, 1997 by (i) each person
known to the Company to own beneficially more than 5% of Stellex's outstanding
Common Stock, (ii) by each director, executive officer and key employee of the
Company and (iii) all such directors, executive officers and key employees as a
group. All shares are owned with sole voting and investment power, unless
otherwise indicated.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY
OWNED
-------------
BENEFICIAL OWNER SHARES %
- ------------------------------------------------------------------------------- ------ ---
<S> <C> <C>
Cottingham Trust (1996)(a)..................................................... 900 90
Askrigg Trust (1996)(b)........................................................ 100 10
Richard L. Kramer.............................................................. 900 (c) 90
William L. Remley.............................................................. 1,000 (d) 100
P. Roger Byer.................................................................. -- --
Keith D. Gilbert............................................................... -- --
Bradley C. Call................................................................ -- --
Timothy L. Boland.............................................................. -- --
John L. Martin................................................................. -- --
Kevin R. Hunter................................................................ -- --
Eric F. Richardson............................................................. -- --
Julius E. Hodge................................................................ -- --
Total Executive Officers and Directors as a Group.............................. 1,000 100
</TABLE>
- ------------------
(a) The pool of contingent beneficiaries of Cottingham Trust (1996)
('Cottingham') is comprised of Richard L. Kramer and certain members of his
family. The trustees of Cottingham are Alhambra Holdings (Trustees) Inc.
('Alhambra') and William L. Remley. All powers with respect to investment or
voting of securities owned by Cottingham are exercisable by Mr. Remley. All
powers with respect to selection and removal of the beneficiaries of
Cottingham are exercisable by Alhambra. The administrative office address of
Cottingham and Alhambra is 2 Alhambra Plaza, Suite 1202, Coral Gables, FL
33134. Mr. Kramer, the Chairman of the Board of Directors and a director of
Stellex and the Subsidiary Guarantors, and Mr. Remley, Vice Chairman, Chief
Executive Officer and a director of Stellex and Vice Chairman and a director
of the Subsidiary Guarantors, are the sole executive officers and directors
of Mentmore, which provides management services to the Company.
(b) The pool of contingent beneficiaries of Askrigg Trust (1996) ('Askrigg') is
comprised of William L. Remley and certain members of his family. The
trustees of Askrigg are Richard L. Kramer and Gary R. Siegel. All powers
with respect to investment or voting of securities owned by Askrigg are
exercisable by Mr. Siegel. All powers with respect to selection and removal
of the beneficiaries of Askrigg are exercisable by Mr. Kramer. The
administrative office address of Askrigg is 201 Crandon Blvd., Apt. 643, Key
Biscayne, FL 33149, and an address of Mr. Siegel is c/o Mentmore Holdings
Corporation, 1430 Broadway, 13th Floor, New York, NY 10018-3308. Mr. Kramer,
the Chairman of the Board of Directors and a director of Stellex and the
Subsidiary Guarantors, and Mr. Remley, Vice Chairman, Chief Executive
Officer and a director of Stellex and Vice Chairman and a director of the
Subsidiary Guarantors, are the sole executive officers and directors of
Mentmore, which provides management services to the Company.
(c) Comprised of 900 shares of Stellex's Common Stock held of record by
Cottingham, as to which Mr. Kramer disclaims beneficial ownership. See
footnote (a) above.
(d) Comprised of 900 and 100 shares of Stellex's Common Stock held of record by
Cottingham and Askrigg, respectively, as to which Mr. Remley disclaims
beneficial ownership. See footnotes (a) and (b) above.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITIES
Upon consummation of the Initial Offering, Stellex and its direct and
indirect subsidiaries (each a 'Borrower' and collectively, the 'Borrowers')
entered into a credit agreement (the 'New Credit Facilities') with Societe
Generale, as administrative agent (the 'Agent') for a syndicate of financial
institutions (the 'Lenders'). The following summary, which sets forth the
expected material terms of the New Credit Facilities, does not purport to be
complete and is subject to, and qualified by reference to, all of the provisions
of the New Credit Facilities, including all of the definitions therein of terms
not defined in this Prospectus.
General. The New Credit Facilities provide for borrowings in a principal
amount at any one time outstanding of up to $25.0 million under a revolving
credit facility (the 'Revolving Credit Facility') and $25.0 million under an
acquisition facility (the 'Acquisition Facility'). Borrowings under the
Revolving Credit Facility may be used to provide for working capital and other
general corporate purposes. Borrowings under the Acquisition Facility may be
used to fund future acquisitions on terms and conditions satisfactory to the
Lenders. Borrowings under the New Credit Facilities are collectively referred to
herein as the 'Loans.' See 'Capitalization' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
Interest. For purposes of calculating interest, the Loans can be, at the
election of the relevant Borrower, Base Rate Loans or Eurodollar Rate Loans or a
combination thereof. Base Rate Loans under the Revolving Credit Facility bear
interest at Societe Generale's base rate plus 1%, and Eurodollar Rate Loans
under the Revolving Credit Facility bear interest at Societe Generale's
Eurodollar Rate plus 2%. Base Rate Loans under the Acquisition Facility bear
interest at Societe Generale's base rate plus 1.25%, and Eurodollar Rate Loans
under the Acquisition Facility bear interest at Societe Generale's Eurodollar
Rate plus 2.25%. The foregoing interest rates are effective through June 30,
1998, and thereafter are subject to adjustment based upon the Leverage Ratio (as
defined in the New Credit Facilities). Interest is payable monthly for Base Rate
Loans and at the end of each interest payment period, but not less frequently
than quarterly, for Eurodollar Rate Loans.
Availability and Repayment. Subject to the provisions of the New Credit
Facilities, the Borrowers may, from time to time, borrow, repay and reborrow
under the Revolving Credit Facility, subject to a borrowing base consisting of
the aggregate sum of 85% of eligible accounts receivable and 50% of eligible
inventories. Subject to the provisions of the New Credit Facilities, borrowings
under the Acquisition Facility may be made up to the full amount available
thereunder until the second anniversary of the closing of the New Credit
Facilities, subject to certain financial and non-financial conditions
satisfactory to the Lenders. At the second anniversary of the Closing Date (as
defined in the New Credit Facilities), all amounts borrowed under the
Acquisition Facility will convert to a term loan which will be repayable in 15
substantially equal quarterly installments of 4.17% of the outstanding Term Loan
Amount (as defined in the New Credit Facilities) commencing on February 1, 1999
and continuing through and including August 1, 2003, followed by a final payment
of all remaining unpaid amounts on the Maturity Date (as defined in the New
Credit Facilities). Borrowings under the Acquisition Facility will permanently
reduce by such amount the availability for further borrowings under the
Acquisition Facility, and amounts repaid under the Acquisition Facility may not
be reborrowed. The New Credit Facilities require, subject to certain exceptions,
prepayments in the amount of 50% of Excess Cash Flow (as defined in the New
Credit Facilities), 100% of net cash proceeds from certain asset sales, and 100%
of net cash proceeds from offerings of debt and/or equity securities, with such
prepayments to be applied pro rata to the remaining maturities of acquisition
loans. The entire unpaid balance under the New Credit Facilities is payable on
the sixth anniversary of the closing thereof.
Security. Borrowings under the New Credit Facilities are secured, for the
ratable benefit of the Lenders, by (i) a first priority perfected security
interest in favor of First Union Commercial Corporation, as collateral agent
(the 'Collateral Agent'), in (a) all of the capital stock of the Company's
direct and indirect subsidiaries owned by the Company and (b) all present and
future tangible and intangible property and interests in property of the Company
and its direct and indirect subsidiaries (other than certain real property owned
by Paragon (the 'Paragon Real Estate')) and (ii) a second priority perfected
mortgage on the Paragon Real Estate in favor of the Collateral Agent.
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<PAGE>
Guarantees. Each Borrower's payment obligations under the New Credit
Facilities is jointly and severally guaranteed, on a senior secured basis, by
each other Borrower and Stellex's future direct and indirect subsidiaries.
Covenants. The New Credit Facilities contain financial covenants pursuant
to which the Company and its direct and indirect subsidiaries must, on a
consolidated basis, maintain (i) a Minimum Fixed Charge Coverage Ratio (as
defined in the New Credit Facilities); (ii) a Minimum Interest Coverage Ratio
(as defined in the New Credit Facilities); (iii) a Minimum Net Worth (as defined
in the New Credit Facilities) and (iv) a Maximum Leverage Ratio (as defined in
the New Credit Facilities).
In addition, the New Credit Facilities contain covenants pertaining to the
management and operation of the Company and its subsidiaries. These covenants
include, among others, requirements that each of the Company and its
subsidiaries (i) preserve its corporate existence and not amend its charter or
by-laws; (ii) maintain adequate insurance coverage; (iii) maintain its
properties and all necessary licenses, permits and intellectual property; (iv)
perform its obligations under leases, related documents, material contracts and
other agreements; and (v) comply with applicable laws and regulations, including
those related to tax, employee, pension and environmental matters.
The New Credit Facilities also subject the Company and its subsidiaries to
significant limitations on indebtedness, guarantees, capital expenditures, liens
or encumbrances, mergers, consolidations, divestitures, acquisitions,
investments, capital contributions, joint ventures, partnerships, creation of
new subsidiaries, changes of business, loans and advances, dividends and other
stock payments, repurchases or redemptions of equity, asset sales or transfers,
leases, voluntary prepayments or repurchases or redemptions of debt,
transactions with affiliates, management fees, and changes in accounting
treatment.
Events of Default. The New Credit Facilities provide for events of default
customarily found in facilities of this type, including: (i) failure to pay
principal or interest or fees when due; (ii) any representation or warranty
proving to have been materially incorrect when made; (iii) failure to perform or
observe covenants after any applicable grace period; (iv) cross-defaults to
other material indebtedness; (v) bankruptcy defaults; (vi) material judgment
defaults; (vii) change of control; (viii) ERISA defaults; (ix) any loan document
ceasing to be in full force and effect and (x) any interest created by the
related security documents ceasing to be enforceable and of the same effect and
priority purported to be created thereby.
KLEINERT SELLER NOTE
In connection with the Kleinert Acquisition, KII Acquisition Corp.
('Acquisition Corp.'), an indirect 80% owned subsidiary of Stellex, issued the
Kleinert Seller Note to Kleinert Industrie Holding AG, the former owner of
Stellex Aerospace. The principal amount of the Kleinert Seller Note is
$1,750,000, it matures on July 1, 1999 and it bears interest at a rate of 8%.
The Kleinert Seller Note is guaranteed by Stellex Aerospace and each of its
subsidiaries. Subject to certain conditions, Acquisition Corp. may offset
amounts due under the Kleinert Seller Note by indemnification claims and other
amounts owing by the Seller to Acquisition Corp. under the Kleinert Stock
Purchase Agreement. Interest on the principal amount of the Kleinert Seller
Note, as adjusted by any offset permitted thereunder, is payable annually in
arrears.
PARAGON NOTE
Paragon is the obligor under a promissory note (the 'Paragon Note') payable
to Farm Bureau Life Insurance Company in the original principal amount of
$2,850,000. The Paragon Note matures on December 1, 2001 and bears interest at a
rate of 7.875% per annum. The Paragon Note is secured by a security interest in
certain real property, and related fixtures and personal property, located at
Paragon's facility in Valencia, California. The Paragon Note is guaranteed on a
secured basis by Stellex Aerospace.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company to the Initial Purchasers
pursuant to the Purchase Agreement. The Initial Purchasers subsequently resold
the Old Notes to qualified institutional buyers in reliance on Rule 144A under
the Securities Act and to a limited number of accredited investors (as defined
in Rule 501(A)(1), (2), (3) or (7) under the Securities Act). As a condition to
the Purchase Agreement, the Company and the Subsidiary Guarantors entered into
the Registration Rights Agreement with the Initial Purchasers pursuant to which
the Company and the Subsidiary Guarantors have agreed, for the benefit of the
holders of the Old Notes, at the Company's cost, to (i) file the Exchange Offer
Registration Statement within 45 days after the date of the original issue of
the Old Notes with the Commission with respect to the Exchange Offer for the New
Notes; (ii) use their reasonable best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act within
120 days after the date of the original issuance of the Old Notes and (iii)
unless the Exchange Offer would not be permitted by applicable law or Commission
policy, commence the Exchange Offer and use their reasonable best efforts to
issue as soon as practicable, but in any event prior to 165 days after the date
of the original issue of the Old Notes, New Notes in exchange for all Old Notes
tendered prior thereto in the Exchange Offer. Upon the Exchange Offer
Registration Statement being declared effective, the Company will offer the New
Notes in exchange for surrender of the Old Notes. The Company will keep the
Exchange Offer open for not less than 20 business days (or longer if required by
applicable law) after the date on which notice of the Exchange Offer is mailed
to the holders of the Old Notes. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Note will receive a New
Note having a principal amount equal to that of the surrendered Old Note. Each
New Note will bear interest from its issuance date. Holders of Old Notes that
are accepted for exchange will receive, in cash, accrued interest thereon to,
but not including, the issuance date of the New Notes. Such interest will be
paid with the first interest payment on the New Notes. Interest on the Old Notes
accepted for exchange will cease to accrue upon issuance of the New Notes.
Under existing interpretations of the staff of the Commission contained in
the 'Exxon Capital Holdings Corporation' line of no-action letters to third
parties, the New Notes will in general be freely tradeable after the Exchange
Offer without further registration under the Securities Act. However, any
purchaser of Old Notes who is an 'affiliate' of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New Notes
(i) will not be able to rely on the interpretation of the staff of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Old Notes,
unless such sale or transfer is made pursuant to an exemption from such
requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging, and does not intend to engage, in a distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an 'affiliate' of
the Company within the meaning of Rule 405 under the Securities Act, and (v) the
holder or any such other person acknowledges that if such holder or any other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action letters. Each Participating
Broker-Dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such Participating Broker-Dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See 'Plan of Distribution.'
Upon the effectiveness of the Exchange Offer Registration Statement, the
Company will offer to the holders of Transfer Restricted Securities who are able
to make certain representations the opportunity pursuant to the Exchange Offer
to exchange their Transfer Restricted Securities for New Notes. If (i) any
change in law or
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<PAGE>
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer or (ii) any Holder (A) is not eligible to
participate in the Exchange Offer, (B) participates in the Exchange Offer and
does not receive freely tradeable New Notes in exchange for tendered Old Notes
or (C) is a broker-dealer and owns Old Notes acquired directly from the Company
or an affiliate of the Company, the Company will file with the Commission a
Shelf Registration Statement on or prior to the 30th day after such filing
obligation arises to cover resales of Transfer Restricted Securities by the
Holders thereof who satisfy certain conditions relating to, among other things,
the provision of information in connection with the Shelf Registration
Statement. The Company will use its reasonable best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, 'Transfer Restricted
Securities' means each Note until the earliest to occur of (i) the date on which
such Note has been exchanged by a person other than a broker-dealer for a New
Note in the Exchange Offer, (ii) the date on which such Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iii) the date on which such Note is
distributed to the public pursuant to Rule 144 under the Securities Act or is
saleable pursuant to Rule 144(k) under the Securities Act.
The Company will, in the event of the filing of the Shelf Registration
Statement, provide to each holder of Old Notes covered thereby copies of the
prospectus which is a part of the Shelf Registration Statement, notify each such
holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resale of the Old
Notes. A holder of the Old Notes that sells such Old Notes pursuant to the Shelf
Registration Statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations).
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 45
days after the closing date of the Initial Offering (the 'Closing Date'), (ii)
the Company will use its reasonable best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 120
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Company will commence the
Exchange Offer and use its reasonable best efforts to issue as soon as
practicable, but in any event prior to 165 days after the Closing Date, New
Notes in exchange for all Old Notes tendered prior thereto in the Exchange Offer
and (iv) if obligated to file the Shelf Registration Statement, the Company will
use its reasonable best efforts to file the Shelf Registration Statement with
the Commission on or prior to 30 days after such filing obligation arises and to
cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to 60 days after such obligation arises. If (a) the
Company fails to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) the Exchange Offer Registration Statement is not declared effective within
120 days after the Closing Date or the Shelf Registration Statement is not
declared effective on or prior to the 60th day after the shelf filing deadline,
(c) the Exchange Offer is not consummated on or prior to 165 days after the
Closing Date or (d) the Shelf Registration Statement is filed and declared
effective on or prior to the date specified for such effectiveness, but shall
thereafter cease to be effective (at any time that the Company is obligated to
maintain the effectiveness thereof) without being succeeded within 45 days by an
additional Registration Statement filed and declared effective (each such event
referred to in clauses (a) through (d) above, a 'Registration Default'), then
the Company will pay liquidated damages ('Liquidated Damages') to each Holder of
Transfer Restricted Securities, with respect to the first 90-day period
immediately following the occurrence of the first Registration Default in an
amount equal to $.05 per week per $1,000 principal amount of Notes that
constitute Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed or declared effective, the Exchange
Offer is consummated or the Shelf Registration Statement again becomes
effective. The amount of the Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount of Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $.20 per week per $1,000 principal
amount of Notes. All accrued Liquidated Damages will be paid by the Company in
the same manner as interest payments on the Notes on semi-annual payment dates
which correspond to interest payment dates for the Notes. Following the cure of
all Registration Defaults, the accrual of Liquidated Damages will cease.
Notwithstanding the foregoing, the Company may issue a notice that the Shelf
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Registration Statement is no longer effective or that the Prospectus included
therein is unusable pending the announcement of a material corporate transaction
and, in the event that the aggregate number of days in any consecutive
twelve-month period for which all such notices are issued and effective does not
exceed 45 days in the aggregate, then Liquidated Damages will not be payable as
described above as a result of such suspension.
Holders of Old Notes will be required to make certain representations (as
described in the Registration Rights Agreement) in order to participate in the
Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement, which contains the material terms relating to the registration rights
and related obligations of Holders of Old Notes, does not purport to be complete
and is subject to, and is qualified in its entirety by, all the provisions of
the Registration Rights Agreement, a copy of which is filed as an exhibit to the
Exchange Offer Registration Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of Old Notes accepted in the
Exchange Offer. Holders may tender some or all of their Old Notes pursuant to
the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the New Notes will not be entitled
to certain rights under the Registration Rights Agreement, including the
provisions providing for the payment of Liquidated Damages in certain
circumstances relating to the timing of the Exchange Offer, all of which rights
will terminate when the Exchange Offer is terminated. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes were outstanding. The Company has fixed the close of business on
, 1998 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See '--Fees and Expenses.'
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term 'Expiration Date' shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company in its sole discretion extends the
Exchange Offer, in which case the term 'Expiration Date' shall mean the latest
date and time to which the Exchange Offer is extended, which in no event shall
be more than days after the date of this Prospectus.
In order to extend the Exchange Offer, the Company will issue a notice of
such extension by press release or other public announcement prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
The Company reserves the right, in its sole discretion, prior to the
Expiration Date (i) to delay accepting any Old Notes, to extend the Exchange
Offer or to terminate the Exchange Offer if any of the conditions set forth
below under 'Conditions' shall not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent or
(ii) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. To be tendered effectively,
the Old Notes, Letter of Transmittal or an Agent's Message in connection with a
book-entry transfer and other required documents must be completed and received
by the Exchange Agent at the address set forth below under 'Exchange Agent'
prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery of the
Old Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the Exchange Agent prior to the Expiration Date.
The term 'Agent's Message' means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant in
such book-entry transfer facility tendering the Notes that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal, each holder will make the
representations set forth above in the third paragraph under the heading
'--Purpose and Effect of the Exchange Offer.'
Each Participating Broker-Dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See 'Plan of Distribution.'
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALER, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
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registered holder to tender on such beneficial owner's behalf. See 'Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner' included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined) unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled 'Special Registration Instructions' or
'Special Delivery Instructions' on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of the Medallion System (an
'Eligible Institution').
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account with respect to
the Old Notes in accordance with DTC's procedures for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee and all other
required documents must in each case be transmitted to and received or confirmed
by the Exchange Agent at its address set forth below on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to DTC does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand
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<PAGE>
delivery) setting forth the name and address of the holder, the certificate
number(s) of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Old Notes (or a confirmation of book-entry
transfer of such Notes into the Exchange Agent's account at DTC), and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at DTC), and
all other documents required by the Letter of Transmittal are received by
the Exchange Agent upon three New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
'Depositor'); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the DTC to be credited); (iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Any Old Notes which have been tendered but which are not accepted
for exchange will be returned to the holder thereof without cost to such holder
as soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under '--Procedures for Tendering' at any
time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein prior to the
Expiration Date, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
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(c) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
above conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw such
Old Notes (see '--Withdrawal of Tenders') or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Mail: By Overnight Courier:
MARINE MIDLAND BANK MARINE MIDLAND BANK
140 Broadway--Level A 140 Broadway--Level A
New York, New York 10005-1180 New York, New York 10005-1180
Attention: Corporate Trust Services Attention: Corporate Trust Services
(registered or certified mail recommended)
By Hand: Facsimile Transmission:
MARINE MIDLAND BANK (212) 658-2292
140 Broadway--Level A Confirm by Telephone:
New York, New York 10005-1180 (212) 658-5931
Attention: Corporate Trust Services
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
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CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, (iii) in accordance with
Rule 144 under the Securities Act, or pursuant to another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company), (iv) outside the United States to
a foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (v) pursuant to an effective registration under the
Securities Act, in each case in accordance with any applicable securities laws
of any state of the United States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives New Notes, whether
or not such person is the holder (other than a person that is an 'affiliate' of
the Company within the meaning of Rule 405 under the Securities Act) who
receives New Notes in exchange for Old Notes in the ordinary course of business
and who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the distribution
of the New Notes, will be allowed to resell the New Notes to the public without
further registration under the Securities Act and without delivering to the
purchasers of the New Notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act. However, if any holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such holder cannot rely on the position of the
staff of the Commission enunciated in such no-action letters or any similar
interpretive letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, unless an exemption from registration is otherwise available.
Further, each Participating Broker-Dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder or the person receiving such New Notes, whether or not
such person is the holder, in the ordinary course of business, (ii) the holder
or any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging, and does not intend to engage, in the distribution of
the New Notes, (iii) the holder of any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an 'affiliate' of
the Company within the meaning of Rule 405 under the Securities Act, and (v) the
holder of any such other person acknowledges that if such holder or other person
participates in the Exchange Offer for the purpose of distributing the New Notes
it most comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the New Notes and cannot rely on
those no-action letters. As indicated above, each Participating Broker-Dealer
that receives a New Note for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see 'Plan of Distribution.'
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DESCRIPTION OF NOTES
GENERAL
The New Notes are to be issued under an Indenture, dated as of October 31,
1997 (the 'Indenture'), between the Company, the Subsidiary Guarantors and
Marine Midland Bank, as Trustee (the 'Trustee').
The form and terms of the New Notes are the same as the form and terms of
the Old Notes (which they replace) except that (i) the New Notes bear a Series B
designation, (ii) the New Notes have been registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof, and
(iii) the holders of New Notes will not be entitled to certain rights under the
Registration Rights Agreement, including the provisions providing for an
increase in the interest rate on the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights will terminate when the
Exchange Offer is consummated.
The following summary of the material provisions of the Indenture and the
New Notes does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
TIA. The New Notes are subject to all such terms, and holders of the New Notes
are referred to the Indenture and the TIA for a statement of them. A copy of the
Indenture has been filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part. See 'Available Information.'
Capitalized terms used herein and not otherwise defined have the meanings set
forth under '--Certain Definitions.' For purposes of this summary, the term
'Company' refers only to Stellex Industries, Inc. and not to any of its
Subsidiaries. The Old Notes and the New Notes are sometimes referred to herein
collectively as the 'Notes.'
Principal of, premium, if any, and interest and Liquidated Damages, if any,
on the Notes will be payable, and the Notes may be exchanged or transferred, at
the office or agency of the Company in the Borough of Manhattan, The City of New
York (which initially shall be the corporate trust office of the Trustee, at 140
Broadway--Level A, New York, New York 10005-1180), except that, at the option of
the Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the registered holders of the Notes at their registered
addresses.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The definition of 'Restricted Subsidiary' in the Indenture excludes any
'Unrestricted Subsidiary' and, as a result, Unrestricted Subsidiaries generally
will not be bound by the restrictive provisions of the Indenture and will not be
Subsidiary Guarantors. As of the Issue Date, all of the Company's Subsidiaries
were Restricted Subsidiaries.
TERMS OF THE NOTES
The Notes will be unsecured, senior subordinated obligations of the
Company, will be guaranteed on a senior subordinated basis by the Subsidiary
Guarantors, will be limited to $100 million aggregate principal amount and will
mature on November 1, 2007. Each Note will bear interest at a rate of 9 1/2% per
annum from the most recent date to which interest has been paid or provided for
or, if no interest has been paid or provided for, from the date of original
issuance. Interest is payable semi-annually in arrears on May 1 and November 1,
commencing May 1, 1998, to holders of record of the Notes at the close of
business on the immediately preceding April 15 and October 15, respectively.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time on or after November 1, 2002, and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed as a
percentage of principal amount), plus accrued and unpaid interest and Liquidated
Damages, if any, to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
November 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ----------------------------------------------------------------------- ----------
<S> <C>
2002................................................................... 104.750%
2003................................................................... 103.167%
2004................................................................... 101.583%
2005 and thereafter.................................................... 100.000%
</TABLE>
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In addition, at any time and from time to time prior to November 1, 2000,
the Company may redeem in the aggregate up to 35% of the aggregate principal
amount of the Notes originally issued, with the proceeds of one or more Public
Equity Offerings at a redemption price (expressed as a percentage of principal
amount thereof) of 109.50% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the redemption
date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least 65% of the aggregate principal amount of the Notes originally
issued remains outstanding after each such redemption.
In addition, at any time prior to November 1, 2002, the Company may, at its
option, redeem the Notes, in whole but not in part, at a redemption price equal
to 100% of the principal amount thereof plus the applicable Make-Whole Premium.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount will be
redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
GUARANTEES
Each Subsidiary Guarantor fully and unconditionally guarantees, jointly and
severally, to each Holder and the Trustee, on a senior subordinated basis, the
full and prompt payment of principal of and interest on the Notes, and of all
other obligations of the Company under the Indenture.
The Indebtedness evidenced by each Subsidiary Guarantee (including the
payment of principal of, premium, if any, and interest on the Notes) will be
subordinated to Guarantor Senior Indebtedness on the same basis as the Notes are
subordinated to Senior Indebtedness. As of September 30, 1997, on a pro forma
basis after giving effect to the Transactions, there would have been
approximately $2.6 million of Guarantor Senior Indebtedness (exclusive of the
guarantees of the New Credit Facility). Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company's
Restricted Subsidiaries, including the Subsidiary Guarantors, may incur, under
certain circumstances the amount of such Indebtedness could be substantial and,
in any case, such Indebtedness may be Guarantor Senior Indebtedness. See
'--Ranking and Subordination' and 'Certain Covenants--Limitation on Indebtedness
and Preferred Stock' below.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
guarantees under the New Credit Facility) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law.
No Subsidiary Guarantor may consolidate with or merge with or into any
Person other than the Company or any other Subsidiary Guarantor or sell
substantially all of its assets unless: (i) subject to the provisions of the
following paragraph, the entity formed by or surviving any such consolidation or
merger (if other than the Subsidiary Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation organized
and existing under the laws of the United States or any State thereof or the
District of Columbia; (ii) subject to the provisions of the following paragraph,
such entity assumes by supplemental indenture all of the obligations of the
Subsidiary Guarantor under the Indenture and the Subsidiary Guarantee; (iii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (iv) immediately after giving
pro forma effect to such transaction either (A) the Company would have been able
to incur $1.00 of additional Indebtedness pursuant to paragraph (a) of the
covenant 'Limitation on Indebtedness and Preferred Stock' or (B) the Company's
Consolidated Coverage Ratio would be no less than such Consolidated Coverage
Ratio immediately prior to such transaction. Notwithstanding the foregoing, each
Subsidiary Guarantor may consolidate with or merge into or sell its assets to
the Company or another Subsidiary Guarantor.
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Upon (i) the release by the lenders under the New Credit Facility, related
documents and future refinancings thereof of all guarantees of a Subsidiary
Guarantor and all Liens on the property and assets of such Subsidiary Guarantor
relating to such guarantees, or (ii) the sale or other disposition of all of the
assets of any Subsidiary Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the Capital Stock of any
Subsidiary Guarantor, in each case in accordance with the terms of the
Indenture, then such Subsidiary Guarantor (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all the
Capital Stock of such Subsidiary Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of such Subsidiary Guarantor) shall be deemed released from
all of its obligations under the Indenture and the Subsidiary Guarantee;
provided that the Net Available Cash from such sale or other disposition is
applied in accordance with the applicable provisions of the Indenture. See
'--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock.'
RANKING AND SUBORDINATION
The payment of the principal of, premium (if any), and interest and
Liquidated Damages, if any, on the Notes is subordinated in right of payment, as
set forth in the Indenture, to the prior payment in full in cash of all Senior
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
incurred. However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust described under 'Defeasance' below is
not subordinate to any Senior Indebtedness or subject to the restrictions
described herein. As of September 30, 1997, on a pro forma basis after giving
effect to the Transactions, the outstanding Senior Indebtedness of the Company
would have been approximately $2.1 million (exclusive of unused commitments).
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may constitute Senior Indebtedness. See 'Certain Covenants--Limitation on
Indebtedness and Preferred Stock' below.
'Senior Indebtedness' is defined, whether outstanding on the Issue Date or
thereafter incurred, as (i) all Indebtedness of the Company under the New Credit
Facility, including, without limitation, obligations to pay principal and
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law),
reimbursement obligations under letters of credit, fees, expenses and
indemnities, and all Hedging Obligations with respect to Indebtedness under the
New Credit Facility, including, without limitation, Hedging Obligations entered
into with any lender under the New Credit Facility, whether outstanding on the
date of the Indenture or thereafter incurred, (ii) the principal of, premium, if
any, and interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other Obligations with respect to, any other
Indebtedness of the Company permitted to be incurred by the Company under the
terms of the Indenture, whether outstanding on the date of the Indenture or
thereafter incurred, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with, or subordinated in
right of payment to, the Notes and (iii) all Obligations of the Company with
respect to the foregoing; provided, however, that Senior Indebtedness will not
include (1) any obligation of the Company to any Subsidiary, (2) any liability
for Federal, state, foreign, local or other taxes owed or owing by the Company,
(3) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities) or (4) any Indebtedness, Guarantee or obligation of
the Company that is expressly subordinate or junior in right of payment to any
other Indebtedness, Guarantee or obligation of the Company, including any Senior
Subordinated Indebtedness and any Subordinated Obligations.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not incur, directly or indirectly, any Indebtedness that is subordinate or
junior in ranking in any respect to Senior Indebtedness unless such Indebtedness
is Senior Subordinated Indebtedness or is contractually subordinated in right of
payment to Senior Subordinated Indebtedness. In addition, no Subsidiary
Guarantor shall incur any Indebtedness if such Indebtedness is subordinate or
junior in ranking in any respect to any Guarantor Senior Indebtedness of such
Subsidiary Guarantor unless such Indebtedness is Guarantor Senior Subordinated
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Indebtedness of such Subsidiary Guarantor or is contractually subordinated in
right of payment to Guarantor Senior Subordinated Indebtedness of such
Subsidiary Guarantor. Unsecured Indebtedness is not deemed to be subordinate or
junior to Secured Indebtedness merely because it is unsecured.
The Company and the Subsidiary Guarantors may not make any payment upon or
in respect of the Notes (except in Permitted Junior Securities or from the trust
described under 'Defeasance' below) and may not make any deposit pursuant to the
provisions described under 'Defeasance' below or otherwise purchase or retire
any Notes for cash or property (collectively, 'pay the Notes') if (i) a default
in the payment when due of Designated Senior Indebtedness occurs and is
continuing beyond any applicable period of grace or (ii) any other default on
Designated Senior Indebtedness occurs and is continuing with respect to
Designated Senior Indebtedness that permits the holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a 'Payment Blockage Notice') from the
holders of any Designated Senior Indebtedness unless the default has been cured
or waived and any such Payment Blockage Notice has been rescinded or such Senior
Indebtedness has been paid in full in cash. Payments on the Notes may and shall
be resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived in writing and (b) in the case of a nonpayment
default, the earlier of the date on which such nonpayment default is cured or
waived in writing and 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated. No new Payment Blockage Notice may be sent
(irrespective of the number of defaults with respect to Designated Senior
Indebtedness at such time) unless and until 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such nonpayment default shall have been waived
for a period of not less than 90 days (it being acknowledged that any subsequent
action, or any breach of any financial covenants for a period commencing after
the date of delivery of any Payment Blockage Notice, which, in either case,
would give rise to a default pursuant to any provision under which a default
previously existed or was continuing shall constitute a new default for this
purpose). Each Holder by his acceptance of a Note irrevocably agrees that if any
payment or payments shall be made pursuant to the Indenture and the amount or
total amount of such payment or payments exceeds the amount, if any, that such
Holder would be entitled to receive upon the proper application of the
subordination provisions of the Indenture, the payment of such excess amount
shall be deemed null and void, and the Holder agrees that it will be obliged to
turnover the amount of the excess payment to the holders of such Senior
Indebtedness.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization or bankruptcy of or
similar proceeding relating to the Company or the Subsidiary Guarantors or their
respective property, the holders of Senior Indebtedness will be entitled to
receive payment in full in cash of the Senior Indebtedness before the holders of
the Notes are entitled to receive any payment of any kind or character with
respect to the Notes, and until the Senior Indebtedness is paid in full in cash
or cash equivalents, any payment or distribution to which holders of the Notes
would be entitled but for the subordination provisions of the Indenture will be
made to holders of the Senior Indebtedness as their interests may appear (except
that Holders of Notes may receive Permitted Junior Securities and payments made
from the trust described under '--Defeasance' below). If a distribution is made
to holders of the Notes that, due to the subordination provisions, should not
have been made to them, such holders are required to turnover such amount to the
holders of Senior Indebtedness as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company and the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders or
the Representative of the Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company and the Subsidiary Guarantors
who are holders of Senior Indebtedness may recover more, ratably, than the
Noteholders, and creditors of the Company and the Subsidiary Guarantors who are
not holders of Senior Indebtedness or of Senior Subordinated Indebtedness
(including the Notes) may recover less, ratably, than holders of Senior
Indebtedness.
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CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a 'Change of
Control') with respect to the Company, each Holder will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase (subject to the right of Holders of record on
the relevant record date to receive interest due on the related interest payment
date):
(i)(A) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
'person' (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of the Company and (B) the Permitted Holders 'beneficially
own' (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of the Company than such other person and do not
have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors of the
Company;
(ii) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors;
(iii) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, the
assets of the Company and its Restricted Subsidiaries taken as a whole to
any 'person' or group of 'persons' for purposes of Section 13(d) of the
Exchange Act (other than to any Wholly Owned Subsidiary of the Company or
to one or more Permitted Holders); or
(iv) the adoption of a plan of liquidation of the Company.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase any or all of such Holder's Notes at a purchase price in cash equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase (subject to the right of Holders of record on a
record date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control; (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with this covenant, that a Holder must follow in order to
have its Notes purchased by the Company. Notwithstanding the occurrence of a
Change of Control, the Company shall not be obligated to repurchase the Notes
upon a Change of Control if the Company has irrevocably elected to redeem all of
the Notes under the provisions described under '--Optional Redemption' above,
provided that the Company does not default in its redemption obligations
pursuant to such election.
The phrase 'all or substantially all,' as used with respect to a sale of
assets in the definition in the Indenture of 'Change of Control,' varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (the law governing the Indenture)
and is subject to judicial interpretation. Accordingly, in certain
circumstances, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of 'all or substantially all'
of the assets of a Person and therefore it may be unclear whether a Change of
Control has occurred.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company could decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase
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the amount of indebtedness outstanding at such time or otherwise affect the
Company's capital structure or credit rating.
The New Credit Facility prohibits the Company from repurchasing any Notes
and also provides that change of control events with respect to the Company
would constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from repurchasing Notes,
the Company could seek the consent of its lenders to the repurchase of Notes or
could attempt to refinance or repay the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from repurchasing Notes. In such
case, the Company's failure to repurchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a default
under the New Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes. Moreover, the exercise by the Holders of their right to require the
Company to repurchase the Notes could cause a default under such Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Company's ability to pay cash to
the Holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness and Preferred Stock. (a) (i) The Company
will not Incur, and will not permit any Restricted Subsidiary to Incur, any
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock
and (ii) the Company will not permit any of its Restricted Subsidiaries
that are not Subsidiary Guarantors to issue any shares of Preferred Stock;
provided, however, that the Company or any Subsidiary Guarantor may Incur
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock
if on the date thereof (and after giving effect to the application of
proceeds therefrom) the Consolidated Coverage Ratio would be greater than
1.85:1 if such Incurrence shall occur on or prior to December 31, 1998 and
greater than 2.0:1 if such Incurrence shall occur thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness and issue the
following Disqualified Stock: (i) Indebtedness (including, without
limitation, letters of credit and Guarantees) of the Company or any
Subsidiary Guarantor under the New Credit Facility with respect thereto in
an aggregate principal amount outstanding at any time not to exceed $50
million, less the aggregate amount of all proceeds from all Asset
Dispositions that have been applied since the Issue Date to permanently
reduce the outstanding amount of such Indebtedness pursuant to the covenant
'Limitation on Sale of Assets and Subsidiary Stock'; (ii) Indebtedness of
the Company owing to and held by any Subsidiary Guarantor or Indebtedness
of a Restricted Subsidiary owing to and held by the Company or any
Subsidiary Guarantor; provided, however, that any subsequent issuance or
transfer of any Capital Stock or any other event which results in any such
Subsidiary Guarantor ceasing to be a Subsidiary Guarantor or any subsequent
transfer of any such Indebtedness (except to the Company or a Subsidiary
Guarantor or a pledge or other transfer thereof intended to create a
security interest therein) will be deemed to constitute the Incurrence of
such Indebtedness by the issuer thereof; (iii) Indebtedness represented by
the Notes (including the Subsidiary Guarantees) and any Indebtedness or
Disqualified Stock of the Company or any Restricted Subsidiary (other than
the Indebtedness described in clauses (i) and (ii) above) outstanding on
the Issue Date; (iv) Indebtedness of a Subsidiary Guarantor outstanding on
or prior to the date on which such Subsidiary Guarantor was acquired by the
Company or a Subsidiary Guarantor (other than Indebtedness Incurred in
connection with, or in contemplation of, the transaction or series of
related transactions pursuant to which such Subsidiary Guarantor became a
Subsidiary Guarantor or was otherwise acquired by the Company or a
Subsidiary Guarantor); provided, however, that the aggregate principal
amount, accreted value or liquidation preference, as applicable, of such
Indebtedness does not exceed $5 million at any one time outstanding; (v)
Indebtedness (A) in respect of performance bonds, bankers' acceptances,
workers' compensation claims, surety or appeal bonds, payment obligations
in connection with self-insurance or similar obligations, and bank
overdrafts (and letters of credit in respect thereof) provided
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by the Company or any Subsidiary Guarantor in the ordinary course of its
business and which do not secure other Indebtedness and (B) under Currency
Agreements and Interest Rate Agreements Incurred which, at the time of
Incurrence, is in the ordinary course of business; provided that such
agreements are entered into for bona fide hedging purposes, are not for
speculation or trading purposes and are designed to protect against
fluctuations in interest rates or currency exchange rates, as the case may
be, and, in the case of Interest Rate Agreements, any such Interest Rate
Agreement has a notional amount corresponding to the Indebtedness being
hedged thereby; (vi) Indebtedness represented by Guarantees by the Company
of Indebtedness otherwise permitted to be Incurred pursuant to this
covenant and Indebtedness represented by Guarantees by a Subsidiary
Guarantor of Indebtedness of the Company or of another Restricted
Subsidiary otherwise permitted to be Incurred pursuant to this covenant;
(vii) Indebtedness incurred by the Company or any Subsidiary Guarantor and
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, from guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of the
Company or any Restricted Subsidiary pursuant to such agreements, in each
case incurred in connection with the purchase or sale of a business or
assets otherwise permitted by the Indenture; (viii) Indebtedness of the
Company or any Subsidiary Guarantor in an aggregate principal amount not to
exceed $5 million at any time outstanding incurred in connection with the
purchase, redemption, acquisition, cancellation or other retirement for
value of Subsidiary Management Equity Interests; (ix) the incurrence by the
Company or any Subsidiary Guarantor of Indebtedness represented by
Capitalized Lease Obligations, mortgage financings or purchase money
obligations, in each case incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary Guarantor, in an aggregate principal amount not to exceed the
principal amount of such Capitalized Lease Obligations outstanding on the
date hereof plus $10 million at any time outstanding; (x) the issuance by
KII Holding of Series B Preferred Stock having an aggregate liquidation
preference not to exceed $200,000 at any one time outstanding to its
officers and employees; (xi) (A) Indebtedness of the Company or a
Subsidiary Guarantor represented by Put/Call Promissory Notes and (B)
Disqualified Stock of the Company or a Subsidiary Guarantor represented by
Put/Call Preferred Stock, in each case incurred or issued in exchange for
Management Equity Interests, in an aggregate amount not to exceed the value
(calculated in accordance with the respective agreements pursuant to which
such Management Equity Interests were issued or exchanged) of the
Management Equity Interests so exchanged; (xii) the issuance by the Company
or any Subsidiary Guarantor of Refinancing Indebtedness in exchange for, or
the net proceeds which are used to refund, refinance or replace,
Indebtedness that was permitted by paragraph (a) or by clauses (iii), (iv)
and (viii) of this paragraph (b) to be incurred; and (xiii) other
Indebtedness of the Company or any Subsidiary Guarantor in an aggregate
principal amount at any one time outstanding not to exceed $12.5 million.
(c) Notwithstanding the foregoing, neither the Company nor any
Restricted Subsidiary shall Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company unless
such new Indebtedness shall be subordinated to the Notes to at least the
same extent as such Subordinated Obligations being Refinanced. No
Subsidiary Guarantor shall incur any Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used, directly or indirectly, to
Refinance any Guarantor Subordinated Obligation of such Subsidiary
Guarantor unless such Indebtedness shall be subordinated to the obligations
of such Subsidiary Guarantor under the Subsidiary Guarantee to at least the
same extent as such Guarantor Subordinated Obligation of such Subsidiary
Guarantor.
(d) The Company will not permit any Unrestricted Subsidiary to Incur
any Indebtedness other than Non-Recourse Debt, provided, however, if any
such Indebtedness ceases to be Non-Recourse Debt, such event shall be
deemed to constitute an Incurrence of Indebtedness by the Company or a
Restricted Subsidiary.
(e) For purposes of determining compliance with the foregoing
covenant, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, the Company
will classify (and may reclassify from time to time) such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (ii) an item of Indebtedness
may be divided and classified in more than one of the types of Indebtedness
described above.
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Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than Permitted Liens)
securing Indebtedness or trade payables on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, unless contemporaneously therewith effective provision
is made to secure the Notes equally and ratably with such Indebtedness or trade
payable for so long as such Indebtedness or trade payable is secured by a Lien.
Limitation on Layering. The Company shall not Incur any Indebtedness if
such Indebtedness is by its terms contractually subordinate or junior in ranking
in any respect to any Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is contractually subordinated in right of payment
to Senior Subordinated Indebtedness. No Subsidiary Guarantor shall Incur any
Indebtedness if such Indebtedness is by its terms subordinate or junior in
ranking in any respect to any Guarantor Senior Indebtedness of such Subsidiary
Guarantor unless such Indebtedness is Guarantor Senior Subordinated Indebtedness
of such Subsidiary Guarantor or is contractually subordinated in right of
payment to Guarantor Senior Subordinated Indebtedness of such Subsidiary
Guarantor.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) or in options, warrants or other rights to
purchase such Capital Stock and except dividends or distributions payable to the
Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
making such dividend or distribution is not wholly owned, to its other
shareholders on a pro rata basis), (ii) purchase, repurchase, redeem, retire or
otherwise acquire or retire for value any Capital Stock of the Company or any
Restricted Subsidiary held by Persons other than the Company or another
Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations (other than regular
scheduled payments of interest and the purchase, repurchase or other acquisition
of Subordinated Obligations in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of such purchase, repurchase or acquisition) or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement, payment or Investment being herein referred to as a 'Restricted
Payment') if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default or Event of Default shall have occurred and be
continuing (or would result therefrom); (2) the Company and its Restricted
Subsidiaries could not Incur at least $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under '--Limitation on Indebtedness and
Preferred Stock;' or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors of the Company) made
subsequent to the Issue Date (excluding Restricted Payments permitted by clauses
(i), (ii), (iv) and (vii) of the following paragraph), would exceed the sum of:
(A) 50% of the Consolidated Net Income with respect to the period (treated as
one accounting period) from the beginning of the fiscal quarter in which the
Issue Date occurs) to the end of the most recent fiscal quarter for which
internal financial statements are available ending at least 30 days prior to the
date of such Restricted Payment (or, in case such Consolidated Net Income is a
deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds
received by the Company from the issue or sale of Capital Stock (other than
Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary) and, without duplication, the aggregate amount of any other
capital contributions received by the Company in cash subsequent to the Issue
Date and on or prior to the date the Restricted Payment occurs; (C) the amount
by which Indebtedness of the Company is reduced on the Company's balance sheet
upon the conversion or exchange (other than by a Restricted Subsidiary)
subsequent to the Issue Date of any Indebtedness of the Company convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash or other property distributed by the Company upon
such conversion or exchange); and (D) the amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from (i) repayments of the
principal of loans or advances or other transfers of assets to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries or (iii)
the sale or liquidation of any Unrestricted Subsidiaries (valued in each case as
provided in the definition of 'Investment') not to exceed, in the case of any
Unrestricted
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Subsidiary, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary, which amount was
previously included in the calculation of the amount of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i)
any purchase, redemption, defeasance or other acquisition of Capital Stock of
the Company or Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary); provided, however, that (A) such purchase, redemption, defeasance
or other acquisition will be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above and (B) the
Net Cash Proceeds from such sale will be excluded from clause (3)(B) of
paragraph (a) above; (ii) any purchase, redemption, defeasance or other
acquisition of Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Subordinated Obligations of
the Company; provided, however, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount (or accreted value, if
applicable) of the Subordinated Obligations being so redeemed, repurchased,
defeased, acquired or retired for value (plus the amount of any premium required
to be paid under the terms of the instrument governing the Subordinated
Obligations being so redeemed, repurchased, defeased, acquired or retired and
related fees and expenses) (except to the extent such excess is a result of a
simultaneous incurrence of additional Indebtedness permitted to be incurred
under the Indenture), (B) such new Indebtedness is subordinated to the Notes on
terms substantially the same as those contained in the instrument or agreement
governing or evidencing such Subordinated Obligations so purchased, exchanged,
redeemed, repurchased, defeased, acquired or retired for value, (C) such new
Indebtedness has a final scheduled maturity date no earlier than the final
scheduled maturity date of such Subordinated Obligations (or, if earlier, the
Notes) purchased, exchanged, redeemed, repurchased, defeased, acquired or
retired for value and (D) such new Indebtedness has an Average Life equal to or
greater than the Average Life of such Subordinated Obligations purchased,
exchanged, redeemed, repurchased, defeased, acquired or retired for value;
provided further, however, that such purchase, redemption, defeasance or other
acquisition will be excluded in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above; (iii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; provided,
however, that the amount of such dividend will be included in the calculation of
the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iv) Investments in securities not constituting cash or Temporary Cash
Investments received in connection with an Asset Disposition made pursuant to
the provisions of the covenant described under '--Certain Covenants--Limitation
on Sales of Assets and Subsidiary Stock' below; provided that such amounts will
be excluded in the calculation of the amount of Restricted Payments pursuant to
clause (3) of paragraph (a) above; (v) the payment of scheduled dividends on, or
the scheduled or mandatory redemption, repurchase or retirement of, any
Disqualified Stock (other than Put/Call Preferred Stock) issued after the date
hereof in compliance with the provisions of the Indenture; provided that such
amounts will be included in the calculation of the amount of Restricted Payments
pursuant to clause (3) of paragraph (a) above; (vi) payments made with respect
to the repurchase, redemption or other acquisition or retirement for value of
Management Equity Interests (A) prior to the third anniversary of the Issue Date
in an aggregate principal amount not to exceed $500,000 in any twelve-month
period and (B) subsequent to the third anniversary of the Issue Date in an
aggregate principal amount not to exceed $2 million in any twelve month period;
provided that (1) subsequent to the third anniversary of the Issue Date, the
Company may make an additional $2 million of such payments in any such
twelve-month period if, after giving pro forma effect to all such payments, the
Consolidated Coverage Ratio would be greater than 2.5:1, and (2) to the extent
such Management Equity Interests have been exchanged for Put/Call Promissory
Notes or Put/Call Preferred Stock incurred or issued in accordance with clause
(xi) under 'Limitation on Indebtedness and Preferred Stock,' such amounts may be
applied toward the repurchase of or payment on such Put/Call Promissory Notes
and Put/Call Preferred Stock; and provided further that such amounts will be
included in the calculation of the amount of Restricted Payments pursuant to
clause (3) of paragraph (a) above; (vii) the repurchase of Management Equity
Interests in exchange for Put/Call Promissory Notes and Put/Call Preferred Stock
incurred or issued in accordance with clause (xi) under 'Limitation on
Indebtedness and Preferred Stock'; provided that such repurchase will be
excluded in the calculation of the amount of Restricted Payments pursuant to
clause (3) of paragraph (a) above; and (viii) other Restricted Payments in an
aggregate amount not to exceed $5 million; provided that such amounts will be
included in the
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calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above; provided, however, that at the time of, and after giving
effect to, any Restricted Payment permitted by clauses (v), (vi), and (viii) no
Default or Event of Default shall have occurred and be continuing. In addition,
payments and transactions permitted pursuant to clauses (v), (vi), (vii),
(viii), (ix) and (x) of paragraph (b) under 'Certain Covenants--Limitation on
Transactions with Affiliates' below shall not be deemed to be Restricted
Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its property or
assets to the Company or any Restricted Subsidiary, except: (1) any encumbrance
or restriction pursuant to an agreement in effect at or entered into on the
Issue Date (including pursuant to the New Credit Facility); (2) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Capital Stock of such Restricted Subsidiary or Indebtedness
Incurred by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company or a Restricted Subsidiary and
outstanding on such date (other than Indebtedness Incurred in connection with,
or in contemplation of, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company or a Restricted Subsidiary); (3) any encumbrance or
restriction contained in agreements or instruments with respect to purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired; (4) any encumbrance or restriction pursuant to an
agreement effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1), (2) or (3) of this covenant or contained in
any amendment to an agreement referred to in clause (1), (2) or (3) of this
covenant; provided, however, that the encumbrances and restrictions contained in
any such refinancing agreement or amendment are not, taken as a whole,
materially less favorable to the Noteholders than the encumbrances and
restrictions contained in any such agreement as determined in good faith by the
Company; (5) in the case of clause (iii), any encumbrance or restriction (A)
that restricts in a customary manner the subletting, assignment or transfer of
any property or asset that is subject to a lease, license or similar contract,
(B) by virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of the Company or any Restricted
Subsidiary not otherwise prohibited by the Indenture or (C) contained in
security agreements, mortgages or Capitalized Lease Obligations securing
Indebtedness of a Restricted Subsidiary to the extent such encumbrance or
restrictions restrict the transfer of the property subject to such security
agreements, mortgages or Capitalized Lease Obligations; (6) any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered into
for the sale or disposition of Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition; (7) any encumbrance
or restriction arising under or by reason of applicable law; (8) any encumbrance
or restriction contained in the Indenture; and (9) customary net worth
provisions contained in leases and other agreements entered into by a Restricted
Subsidiary in the ordinary course of business; and (10) customary restrictions
contained in any agreements or documentation governing Indebtedness issued
pursuant to clause (xiii) of paragraph (b) of the covenant described above under
the caption '--Certain Covenants--Limitation on Indebtedness and Preferred
Stock'; provided that such restrictions are no more restrictive, taken as a
whole, than those pursuant to the New Credit Facility.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Board of Directors of the
Company (including as to the value of all non cash consideration), of the shares
and assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Temporary Cash Investments and (iii) an amount equal to
100% of the Net Available Cash from such Asset Disposition is applied by the
Company or such Restricted Subsidiary, as the case may be, within 365 days from
the later of the date of such Asset Disposition or the receipt of such Net
Available Cash (A) first, to the extent the Company or any Restricted
Subsidiary, as the case may be, elects (or is required by the terms of the New
Credit Facility or any Senior Indebtedness), to prepay, repay or purchase
Indebtedness under the New Credit Facility or other Senior Indebtedness or
Indebtedness (other than Disqualified Stock) of a Wholly Owned Subsidiary (in
each case other than Indebtedness owed to the Company or an Affiliate of the
Company); (B) second to the extent of any remaining balance of Net Available
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Cash after any election in accordance with clause (A) (or in any combination
with clause (A)), to the extent the Company or such Restricted Subsidiary, as
the case may be, elects, to the investment by the Company or any Wholly Owned
Subsidiary in Additional Assets; (C) third to the extent of any remaining
balance of such Net Available Cash after any election in accordance with clauses
(A) and (B), to make an Offer (as defined below) to purchase Notes pursuant to
and subject to the conditions set forth in paragraph (b) of this covenant within
45 days from the 365th day after the later of the date of such Asset Disposition
and the receipt of such Net Available Cash; and (D) fourth to the extent of any
remaining balance of such Net Available Cash after election or application in
accordance with clauses (A), (B) and (C), to general corporate purposes;
provided, however, that in connection with any prepayment, repayment, purchase
or other acquisition of Indebtedness pursuant to clause (A) above, the Company
or such Restricted Subsidiary will retire such Indebtedness and will cause any
related loan commitment or availability (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions exceeds $2,000,000. The Company shall not be required to make
an Offer for Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (A) and (B))
is less than $5,000,000 (which lesser amounts shall be carried forward for
purposes of determining whether an Offer is required with respect to the Net
Available Cash from subsequent Asset Dispositions).
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption by the transferee of Indebtedness of the Company or any
Restricted Subsidiary (other than Indebtedness that is subordinated to the Notes
or the Subsidiary Guarantees) and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition, and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash or Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(C) of this covenant, the Company will be
required to purchase Notes tendered pursuant to an offer by the Company for the
Notes (the 'Offer') at a purchase price of 100% of their principal amount plus
accrued interest and Liquidated Damages, if any, to the date of purchase in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
Notes tendered pursuant to the Offer is less than the Net Available Cash
allotted to the purchase of the Notes, the Company will apply the remaining Net
Available Cash in accordance with clause (a)(iii)(D) above.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction or series of transactions (including the purchase,
sale, lease or exchange of any property, or rendering of any service) with any
Affiliate of the Company or a Restricted Subsidiary (an 'Affiliate Transaction')
unless (i) the terms of such transaction are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate; (ii) in the event such Affiliate Transaction
involves an aggregate amount in excess of $1,000,000, the terms of such
transaction shall have been approved by a majority of the members of the Board
of Directors of the Company (and such majority determines that such Affiliate
Transaction satisfies the criteria in clause (i) above) and (iii) in the event
such Affiliate Transaction involves an aggregate amount in excess of $5,000,000,
the Company has received a written opinion from a nationally recognized
independent investment banking, accounting or appraisal firm that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary from a
financial point of view.
(b) The foregoing shall not apply to (i) any Restricted Payment permitted
to be made pursuant to 'Limitation on Restricted Payments,' (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
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ownership plans approved by the Board of Directors of the Company, (iii) any
fees, indemnities, loans or advances to employees in the ordinary course of
business, (iv) any transaction between the Company and a Restricted Subsidiary
or between Restricted Subsidiaries, (v) any agreement in effect on the Issue
Date or any amendment thereto or transaction contemplated thereby (and any
replacement or amendment of any such agreement so long as any such amendment or
replacement thereof is not materially less favorable to the Holders than the
original agreement in effect on the Issue Date), (vi) payments by the Company or
any of its Restricted Subsidiaries to Mentmore and/or its Affiliates made for
any financial advisory, financing, underwriting or placement services or in
respect of other investment banking activities, including, without limitation,
in connection with acquisitions or divestitures, which payments are approved a
majority of the members of the Board of Directors of the Company in good faith;
(vii) payments under any tax sharing agreement to the extent such payments do
not otherwise exceed the tax liability the Company would have had were it not
party to such tax sharing agreement; (viii) any other payment or reimbursement
of reasonable and customary fees and expenses incurred by an Affiliate for
services rendered to the Company or any of its Restricted Subsidiaries not to
exceed $250,000 in any twelve-month period (without duplication for any amounts
paid pursuant to any other clause of this covenant); (ix) the application of the
proceeds of the Initial Offering and the transactions entered into in connection
therewith in the manner contemplated thereby; and (x) (A) payments under the
Management Agreement in an amount not to exceed $750,000 in any fiscal year and
(B) after the first anniversary of the Issue Date, additional payments under the
Management Agreement in an amount not to exceed 1% of the Company's total
consolidated sales in any fiscal year less any amount paid pursuant to the
preceding clause (A), provided, in the case of clause (B) above, that the
Company's Consolidated Coverage Ratio, after giving pro forma effect to such
payment, is equal to or greater than 2.25 to 1, in each case plus reasonable
expenses incurred in connection with and reimbursable under the Management
Agreement.
Limitation on Sales of Subsidiary Capital Stock. The Company (i) will not,
and will not permit any Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary) and (ii) will not permit any Restricted Subsidiary to issue any of
its Capital Stock (other than to management of such Restricted Subsidiary and,
if necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Subsidiary,
unless (a) after any such transfer, conveyance, sale, lease, disposition or
issuance, such Restricted Subsidiary continues to be a Restricted Subsidiary and
(b) the net cash proceeds from such transfer, conveyance, sale, lease,
disposition or issuance are applied in accordance with the covenant described
above under 'Limitation on Sales of Assets and Subsidiary Stock'; provided,
however, that this provision shall not prohibit the transfer, conveyance, sale,
lease or other disposition of all of the Capital Stock of any Restricted
Subsidiary or the retention of Preferred Stock which is not Disqualified Stock
in connection with any such transfer, conveyance, sale, lease or other
disposition.
SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company will file with the SEC (unless the SEC will not accept
such a filing) and provide the Trustee and Noteholders with the annual reports
and such information, documents and other reports which are specified in
Sections 13 and 15(d) of the Exchange Act. The Company also will comply with the
other provisions of TIA Section 314(a). Notwithstanding the foregoing, the
Company shall not be required to make any such filings prior to the date on
which the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1997 would have been required to be filed if, at the time such
filings would have been required to be made with the Commission, either (i) the
Company shall have provided to each Holder the information that would have been
required to be filed or (ii) the Exchange Offer Registration Statement has been
filed with the Commission but has not yet been declared effective and copies of
the Exchange Offer Registration Statement and any amendments thereto (to the
extent such registration statement and/or amendments contain additional
information not disclosed in the Offering Memorandum that would have been the
subject of a filing required to be made under Section 13 or 15(d) of the
Exchange Act) have been provided to each Holder, provided that any exhibits to
the Exchange Offer Registration Statement (or any amendments thereto) need not
be delivered to any Holder of the Notes, but sufficient copies thereto shall be
furnished to the Trustee as reasonably requested to permit the Trustee to
deliver any such exhibits to any Holder upon request. In addition, the Company
and the Subsidiary Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144(d)(4) under the Securities Act.
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Future Guarantors. The Company shall cause each new Subsidiary having
either net assets or stockholders' equity in excess of $50,000 (other than (i) a
new Subsidiary designated as an Unrestricted Subsidiary and (ii) Foreign
Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby
Guarantee the Notes on the terms and conditions set forth in the Indenture.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its consolidated assets to, any
Person, unless: (i) the resulting, surviving or transferee Person (the
'Successor Company') will be a corporation organized and existing under the laws
of the United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Company) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving pro forma effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Restricted Subsidiary as a result of such transaction
as having been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default or Event of Default will have
occurred and be continuing; (iii) immediately after giving pro forma effect to
such transaction, the Successor Company would be able to Incur an additional
$1.00 of Indebtedness under paragraph (a) of the covenant described under
'--Limitation on Indebtedness and Preferred Stock;' (iv) immediately after
giving effect to such transaction, the Successor Company will have a
Consolidated Net Worth in an amount which is not less than the Consolidated Net
Worth of the Company immediately prior to such transaction; and (v) the Company
will have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture, as set forth in the
Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a lease of all or substantially all its
assets will not be released from the obligation to pay the principal of and
interest on the Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on or Liquidated Damages, if any, with respect to, any Note
when due, and continuance of such default for a period of 30 days, whether or
not such payment is prohibited by the provisions described under 'Ranking and
Subordination' above (ii) a default in the payment of principal of any Note when
due at its Stated Maturity, upon optional redemption, upon required repurchase,
upon declaration or otherwise, whether or not such payment is prohibited by the
provisions described under 'Ranking and Subordination' above (iii) the failure
by the Company to comply with its obligations under '--Merger and
Consolidation,' (iv) the failure by the Company to comply for 30 days after
notice with any of its obligations under the covenants described under '--Change
of Control' or '--Certain Covenants' (in each case, other than a failure to
purchase Notes), (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Indenture, (vi) the failure by
the Company or any Significant Subsidiary of the Company to pay any interest or
principal of or premium on Indebtedness within any applicable grace period
provided in such Indebtedness after final maturity or the acceleration of any
such Indebtedness by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10 million or its
foreign currency equivalent (the 'cross acceleration provision'), (vii) certain
events of bankruptcy, insolvency or reorganization of the Company or any
Significant Subsidiary of the Company (the 'bankruptcy provisions'), (viii) any
final, non-appealable judgment or decree by a court of competent jurisdiction
for the payment of money in excess of $10 million is rendered against the
Company or any Significant Subsidiary of the Company and such judgment or decree
remains outstanding for a period of 60 day following such judgment and is not
discharged, waived or stayed (the 'judgment default provision') or (ix) except
as permitted by the Indenture, a Subsidiary Guarantee ceases to be in full force
and effect or a Subsidiary Guarantor denies or disaffirms its obligations under
its Subsidiary Guarantee.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
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However, a default under clauses (iv) or (v) of the first paragraph above
will not constitute an Event of Default until the Trustee or the Holders of 25%
in aggregate principal amount of the outstanding Notes notify the Company as
provided in the Indenture of the default and the Company does not cure such
default within the time specified in clauses (iv) and (v) hereof after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Notes by notice
in writing to the Company and the Trustee specifying the respective Event of
Default and that it is a notice of acceleration may declare the principal of and
accrued but unpaid interest on all the Notes to be due and payable; provided
that, so long as any Designated Senior Indebtedness shall be outstanding, such
acceleration shall not be effective until the earlier of (i) an acceleration of
any such Designated Senior Indebtedness and (ii) five Business Days after
receipt by the Company and the Representative of written notice of such
acceleration. Upon such a declaration, such principal and interest will be due
and payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued interest on all the Notes will become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the Holders of a
majority in aggregate principal amount of the outstanding Notes may rescind any
such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder shall
have previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in aggregate principal amount of the outstanding
Notes shall have requested the Trustee to pursue the remedy, (iii) such Holders
shall have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee shall not have complied with such
request within 60 days after the receipt of the request and the offer of
security or indemnity and (v) the Holders of a majority in principal amount of
the outstanding Notes shall not have given the Trustee a direction inconsistent
with such request within such 60-day period. Subject to certain restrictions,
the Holders of a majority in principal amount of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee will be entitled to indemnification satisfactory to it in
its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note, the Trustee may withhold notice if and so long as a committee of
its Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Company is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including, without limitation, consents obtained in connection with
the purchase of, or tender offer or exchange offer for, Notes) and any past
default or compliance with any provisions may be waived with the consent of the
Holders of a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with the
purchase of, or tender offer or exchange offer for, Notes). However, without the
consent of each Holder of an outstanding Note affected, no
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amendment may (with respect to any Notes held by a nonconsenting holder) (i)
reduce the amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the rate of or extend the time for payment of
interest on any Note, (iii) reduce the principal of or extend the Stated
Maturity of any Note, (iv) reduce the premium payable upon the redemption of any
Note or change the time at which any Note may be redeemed as described under
'--Optional Redemption,' (v) make any Note payable in money other than that
stated in the Note, (vi) impair the right of any Holder to receive payment of
principal of and interest on such Holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such Holder's Notes or (vii) make any change in the foregoing
amendment provisions which require each Holder's consent.
Without the consent of any Holder, the Company and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are as described in Section
163(f)(2)(B) of the Code), to add additional Guarantees with respect to the
Notes, to secure the Notes, to add to the covenants of the Company for the
benefit of the Noteholders or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
Holder and to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA. However, no amendment may be made
to the subordination provisions of the Indenture that adversely affects the
rights of any holder of Senior Indebtedness then outstanding unless the holders
of such Senior Indebtedness (or any group or representative thereof authorized
to give a consent) consent to such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
required by law or permitted by the Indenture, including any transfer tax or
other similar governmental charge payable in connection therewith. The Company
is not required to transfer or exchange any Note selected for redemption or to
transfer or exchange any Note for a period of 15 days prior to a selection of
Notes to be redeemed. The Notes will be issued in registered form and the
registered holder of a Note will be treated as the owner of such Note for all
purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ('legal defeasance'), except for certain obligations,
including those with respect to the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under 'Certain Covenants' and 'Change of Control' and thereafter any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Notes. In addition, the operation of the
cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
'--Defaults' and the limitations contained in clauses (iii) and (iv) under
'--Merger and Consolidation' will not be applicable ('covenant defeasance').
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in
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clause (iv), (v), (vi), (vii) (with respect only to Significant Subsidiaries) or
(viii) under '--Defaults' above or because of the failure of the Company to
comply with clause (iii) or (iv) under '--Merger and Consolidation.'
In order to exercise either defeasance option, the Company must irrevocably
deposit or cause to be deposited in trust (the 'defeasance trust') with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be sufficient to pay
principal and interest and Liquidated Damages, if any, when due on all the Notes
(except lost, stolen or destroyed Notes which have been replaced or repaid) to
maturity or redemption, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and defeasance and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
CONCERNING THE TRUSTEE
Marine Midland Bank is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
'Acquired Indebtedness' of any specified Person means Indebtedness of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including Indebtedness
Incurred in connection with, or in contemplation of, such other Person's
becoming a Restricted Subsidiary of such specified Person.
'Additional Assets' means (i) any property or assets (other than
Indebtedness and Capital Stock) used in connection with the business of the
Company or any of its Restricted Subsidiaries on the Issue Date or in a Related
Business or (ii) the Capital Stock of a Person that is a Restricted Subsidiary
prior to the acquisition of such Capital Stock or becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock by the Company
or another Restricted Subsidiary; provided, however, that, in the case of clause
(ii), such Restricted Subsidiary is primarily engaged in a Related Business.
'Affiliate' of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
'control' when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
'controlling' and 'controlled' have meanings correlative to the foregoing;
provided that the beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
'Asset Disposition' means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Restricted Subsidiary (other than directors' qualifying
shares), property or other assets, including by way of a Sale/Leaseback
Transaction (each referred to for the purposes of this definition as a
'disposition'), by the Company or any of its Restricted Subsidiaries, in each
case resulting in Net Available Cash of $1,000,000 or more (including any
disposition by means of a merger, consolidation or similar transaction, except
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
'--Change of Control' and/or the provisions described above under the caption
'--Merger and Consolidation' and not by the provisions of the covenant
'Limitation on Sales of Assets and Subsidiary Stock') other than (i) a
disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Restricted Subsidiary, (ii) a disposition of property
or assets in the ordinary course of business, (iii) dispositions of inventory in
the ordinary course of
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business, (iv) for purposes of the 'Limitation on Sales of Assets and Subsidiary
Stock' covenant only, a disposition that constitutes a Restricted Payment
permitted by the 'Limitation on Restricted Payments' covenant and (v)
dispositions of obsolete or worn-out equipment.
'Average Life' means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
'Bank Indebtedness' means any and all Obligations, whether outstanding on
the Issue Date or thereafter incurred, payable by the Company or its
Subsidiaries under or in respect of the New Credit Facility and any related
notes, collateral documents, letters of credit and guarantees, including,
without limitation, principal, premium (if any), interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company whether or not a claim for post filing
interest is allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees, indemnities and all other amounts payable thereunder or
in respect thereof.
'Board of Directors' means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board of
Directors or equivalent governing body.
'Business Day' means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
'Capitalized Lease Obligation' of a Person means an obligation of such
Person that is required to be classified and accounted for on the balance sheet
of such Person as a capitalized lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
'Capital Stock' of any Person means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person, in each case, including Preferred Stock.
'Code' means the Internal Revenue Code of 1986, as amended.
'Consolidated Coverage Ratio' as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which internal financial information is
available ending at least 30 days prior to the date of such determination to
(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that, without duplication, (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness (other than in the case of Indebtedness
arising under revolving credit borrowings, in which case Consolidated Interest
Expense shall be computed based upon the average daily balance of such
Indebtedness during the period) since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such Indebtedness
had been Incurred on the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (2) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Asset Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to the assets
which are the subject of such Asset Disposition for such period, or increased by
an amount equal to the EBITDA (if negative) directly attributable thereto for
such period and Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense directly attributable to
any Indebtedness of the Company or any Restricted Subsidiary repaid,
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repurchased, defeased or otherwise discharged with respect to the Company and
its continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (and, if the Capital Stock of any Restricted Subsidiary is sold,
the Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence or retirement of any
Indebtedness) as if such Investment or acquisition occurred on the first day of
such period and EBITDA for such period shall be calculated without giving effect
to clause (ii) set forth in the definition of Consolidated Net Income and (4) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset
Disposition or any Investment that would have required an adjustment pursuant to
clause (2) or (3) above if made by the Company or a Restricted Subsidiary during
such period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition or
Investment occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness).
'Consolidated Interest Expense' means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and debt
issuance cost (excluding the amortization of deferred financing fees), (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (vi) interest actually paid by the Company or any such
Restricted Subsidiary under any Guarantee of Indebtedness or other obligation of
any other Person, (vii) net costs associated with Hedging Obligations (including
amortization of fees), (viii) (A) Disqualified Stock dividends and (B) Preferred
Stock dividends of a Restricted Subsidiary that is not a Subsidiary Guarantor,
in each case other than dividends paid in Capital Stock (except Disqualified
Stock) and only in respect of such Disqualified Stock or Preferred Stock held by
Persons other than the Company or a Wholly Owned Subsidiary and (ix) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust; provided, however, that there shall be excluded therefrom
(A) any such interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary, (B) interest on Put/Call Promissory Notes and (C) dividends on
Put/Call Preferred Stock.
'Consolidated Net Income' means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A), subject to the
limitations contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted Subsidiary,
to the limitations contained in clause (iii) below) and (B) the Company's
equity in a net loss of any such Person (other than an Unrestricted
Subsidiary) for such period shall be included in determining such
Consolidated Net Income,
(ii) any net income (loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition,
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(iii) any net income of any Restricted Subsidiary to the extent such
Restricted Subsidiary is prohibited, directly or indirectly, from paying
dividends or distributions, directly or indirectly, to the Company or any
other Restricted Subsidiary, except that (A), subject to the exclusion
contained in clause (iv) below, the Company's equity in the net income of
any such Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to the Company
or another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend paid to another Restricted Subsidiary,
to the limitation contained in this clause) and (B) the Company's equity in
a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income,
(iv) any gain or loss realized upon the sale or other disposition of
any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person,
(v) any extraordinary gain or loss,
(vi) the cumulative effect of a change in accounting principles,
(vii) foreign currency exchange gains and losses, and
(viii) any income (loss) from discontinued operations.
Notwithstanding the foregoing, for the purpose of the covenant described
under 'Certain Covenants-- Limitation on Restricted Payments' only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
'Consolidated Net Worth' means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 30 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
'Continuing Directors' means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated by either of the Principals to
serve on such Board of Directors.
'Currency Agreement' means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement or arrangement as
to which such Person is a party or a beneficiary.
'Default' means any event which is, or after notice or passage of time or
both would be, an Event of Default.
'Designated Senior Indebtedness' means (i) the Bank Indebtedness in the
case of the Company, (ii) any Guarantee by a Subsidiary Guarantor of the Bank
Indebtedness in the case of such Subsidiary Guarantor and (iii) any other Senior
Indebtedness in the case of the Company or Guarantor Senior Indebtedness in the
case of such Subsidiary Guarantor which, at the date of determination, has an
aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to, at least $10
million and is specifically designated by the Company or such Subsidiary
Guarantor as 'Designated Senior Indebtedness' for purposes of the Indenture.
'Disqualified Stock' means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable automatically or at the option of the holder
thereof for Indebtedness or other Disqualified Stock or (iii) is redeemable at
the option of the holder thereof, in whole or in part, in each case on or prior
to the 91st day following the Stated Maturity of the Notes.
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'EBITDA' for any period means the Consolidated Net Income for such period,
plus the following (without duplication) to the extent deducted in calculating
such Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense (including
amortization of goodwill and other intangibles), (v) non-cash management
compensation expense, (vi) any increase in cost of sales resulting from the
write-up of inventory in accordance with Accounting Principles Board Opinion No.
16 (or a successor provision) and (vii) all other non-cash items reducing
Consolidated Net Income (excluding any non-cash item to the extent it requires
an accrual of or reserve for cash disbursements for any future period), in each
case for such period, (viii) any extraordinary, non-recurring or unusual loss
plus any net loss realized in connection with an asset disposition and (ix) all
premiums or prepayments of Indebtedness and minus (x) all non-cash items
increasing Consolidated Net Income.
'Exchange Act' means the Securities Exchange Act of 1934, as amended.
'Foreign Subsidiary' means any Subsidiary which is incorporated or
otherwise organized under the laws of any jurisdiction other than the United
States of America, any state thereof or the District of Columbia.
'GAAP' means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
'Guarantee' means a guarantee, direct or indirect, in any manner
(including, without limitation, letters of credit and reimbursement agreements
in respect thereof), of all or any part of any Indebtedness; provided, however,
that the term 'Guarantee' shall not include endorsements for collection or
deposit in the ordinary course of business. The term 'Guarantee' used as a verb
has a corresponding meaning.
'Guarantor Senior Indebtedness' means, with respect to a Subsidiary
Guarantor, whether outstanding on the Issue Date or thereafter incurred, (i) any
Guarantee of Indebtedness of the Company and its Subsidiaries under the New
Credit Facility, including, without limitation, obligations of the Company to
pay principal and interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law), reimbursement obligations under letters of credit, fees,
expenses and indemnities, and all Hedging Obligations entered into with any
lender under the New Credit Facility, whether outstanding on the date of the
Indenture or thereafter incurred, (ii) the principal of, premium, if any, and
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on, and all other Obligations with respect to, any other Indebtedness of such
Subsidiary Guarantor permitted to be incurred by such Subsidiary Guarantor under
the terms of the Indenture, whether outstanding on the date of the Indenture or
thereafter incurred, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in right
of payment to the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee and (iii) all Obligations of the Subsidiary Guarantor with respect to
the foregoing; provided, however, that Guarantor Senior Indebtedness shall not
include (1) any obligations of such Subsidiary Guarantor to the Company or any
other Subsidiary of the Company, (2) any liability for Federal, state, local or
other taxes owed or owing by such Subsidiary Guarantor, (3) any accounts payable
or other liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities) or (4)
any Indebtedness, Guarantee or obligation of such Subsidiary Guarantor that is
expressly subordinate or junior in right of payment to any other Indebtedness,
Guarantee or obligation of such Subsidiary Guarantor, including any Guarantor
Senior Subordinated Indebtedness and Guarantor Subordinated Obligations of such
Subsidiary Guarantor.
'Guarantor Senior Subordinated Indebtedness' means, with respect to a
Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee and any other Indebtedness of such Subsidiary Guarantor,
whether outstanding on the Issue Date or thereafter incurred, that specifically
provides that such Indebtedness is to rank pari passu in right of payment with
the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee and
is not subordinated by its terms in right of payment to any Indebtedness or
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other obligation of such Subsidiary Guarantor which is not Guarantor Senior
Indebtedness of such Subsidiary Guarantor.
'Guarantor Subordinated Obligation' means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter incurred) which is subordinate or junior in right
of payment to the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee pursuant to a written agreement.
'Hedging Obligations' of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
'Holder' or 'Noteholder' means the Person in whose name a Note is
registered on the Registrar's books.
'Incur' means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.
'Indebtedness' means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and, if any is due and payable at such time,
premium in respect of indebtedness of such Person for borrowed money,
(ii) the principal of and, if any is due and payable at such time,
premium in respect of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments,
(iii) all obligations of such Person in respect of unreimbursed
drawings under letters of credit or other similar instruments (including
reimbursement obligations with respect thereto) (other than letters of
credit securing obligations entered into in the ordinary course of business
to the extent any drawings thereunder are reimbursed no later than the
fifth Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Restricted Subsidiary that is not a Subsidiary
Guarantor, the aggregate liquidation preference of any Preferred Stock (but
excluding, in each case, any accrued dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness of such other Person,
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person,
(ix) to the extent not otherwise included in this definition, Hedging
Obligations and,
(x) Acquired Indebtedness.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above (or the
accreted value thereof, in the case of Indebtedness that does not require
current payments of interest) and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date. Indebtedness shall not include interest or commitment or other fees.
'Interest Rate Agreement' means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
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'Investment' in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person and advances
to employees of such Person and its Restricted Subsidiaries made in the ordinary
course of business) or other extension of credit (including by way of Guarantee
or similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition for consideration of
Capital Stock, Indebtedness or other similar instruments issued by such Person;
provided that if the sole consideration for any such investment is Capital Stock
of such Person or its Subsidiaries that is not Disqualified Stock, then such
investment shall not be deemed an Investment for purposes of the Indenture.
'Investment' shall exclude extensions of trade credit by the Company and its
Restricted Subsidiaries on commercially reasonable terms in accordance with such
Person's normal trade practices. For purposes of the definition of 'Unrestricted
Subsidiary' and the 'Limitation on Restricted Payments' covenant, (i)
'Investment' shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent 'Investment' in an Unrestricted Subsidiary in an amount (if
positive) equal to (x) the Company's 'Investment' in such Subsidiary at the time
of such original designation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time that such Subsidiary is so
re-designated a Restricted Subsidiary; and (ii) any property transferred to or
from an Unrestricted Subsidiary shall be valued at its fair market value at the
time of such transfer, in each case as determined in good faith by the Board of
Directors. For the purposes of calculating the amount of other 'Investments,'
including Permitted Investments, the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income.
'Issue Date' means the date on which the Notes are originally issued.
'KII Holding' means KII Holding Corp., a Restricted Subsidiary of the
Company on the Issue Date, and its successors and assigns.
'Kleinert' means Kleinert Industries, Inc., the predecessor to Stellex
Aerospace, Inc. and a Restricted Subsidiary of the Company on the Issue Date.
'Lien' means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
'Make-Whole Premium' means, with respect to a Note, an amount equal to the
greater of (i) 4.75% of the outstanding principal amount of such Note and (ii)
the excess of (a) the present value of the remaining interest, premium and
principal payments due on such Note as if such Note were redeemed on November 1,
2002, computed using a discount rate equal to the Treasury Rate plus 75 basis
points, over (b) the outstanding principal amount of such Note.
'Management Agreement' means the Management Advisory Services Agreement,
dated as of July 1, 1997, between the Company, certain of its Subsidiaries and
Mentmore, as it may be amended, modified, supplemented or restated from time to
time.
'Management Equity Interests' means shares of Capital Stock of the Company
or of a Subsidiary Guarantor, options, warrants or stock appreciation or similar
rights, in each case held by any current or former officer, employee or other
member of management (or their estates or beneficiaries under their estates) of
the Company or of such Subsidiary Guarantor pursuant to any management equity
subscription agreement, employment agreement, employee benefit plan, stockholder
agreement, stock option agreement or similar management investor agreement and
which may be required to be repurchased by the Company or such Subsidiary
Guarantor, or which may be repurchased at the option of the Company or such
Subsidiary Guarantor, in each case pursuant to the terms of any such agreement
under which such equity interests were issued.
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'Mentmore' means Mentmore Holdings Corporation and its successors.
'Net Available Cash' from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a Note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form) therefrom,
in each case net of (i) all legal, accounting, investment banking, financial
advisory, brokerage, consultant, title and recording tax expenses, commissions
and other fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be paid or accrued as a liability under
GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness which is secured by any assets subject to such Asset Disposition,
in accordance with the terms of any Lien upon such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition and (iv) the deduction of appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition, including,
without limitation, in respect of sales price adjustments, pension and other
post-employment benefit liabilities and liabilities related to indemnification
obligations associated with the assets sold or disposed of in such Asset
Disposition.
'Net Cash Proceeds', with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
'New Credit Facility' means that certain credit facility entered into on
the Issue Date among the Company, the Subsidiary Guarantors, Societe Generale,
and the lenders from time to time party thereto, including all collateral
documents, instruments and agreements executed in connection therewith, and the
term New Credit Facility shall also include any amendments, supplements,
modifications, extensions, renewals, restatements or refundings thereof and any
credit facilities or agreements that replace, refund or refinance any part of
the loans, other credit facilities or commitments thereunder, including any such
replacement, refunding or refinancing facility that increases the amount
borrowable thereunder or alters the maturity thereof.
'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any Guarantee or credit support of
any kind (including any undertaking, Guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise) and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.
'Obligations' means any principal, interest, penalties, fees, indemnities,
damages and other liabilities payable under the instruments governing, or under
agreements entered into in connection with, any Indebtedness.
'Permitted Holders' means (i) Richard L. Kramer and William L. Remley (the
'Principals'), (ii) any spouse or immediate family member of a Principal and any
child or spouse of any spouse or immediate family member of a Principal, (iii) a
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding, directly or
indirectly, a controlling interest of which consists of a Principal and/or such
other Persons referred to in the immediately preceding clause (ii) or (iv) the
trustees of any trust referred to in clause (iii).
'Permitted Investment' means an Investment by the Company or any Restricted
Subsidiary in (i) the Company or in a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
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provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel, relocation and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees made in the ordinary course of
business of the Company or such Restricted Subsidiary; (vii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; (viii) Guarantees permitted to be made pursuant to
the covenant 'Limitation on Indebtedness and Preferred Stock'; (ix) Investments
in securities of trade creditors received in settlement of obligations or
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of any trade creditors of customers, (x) Currency
Agreements and Interest Rate Agreements entered into in the ordinary course of
business; provided that such agreements are entered into for bona fide hedging
purposes, are not for speculation or trading purposes and are designed to
protect against fluctuations in interest rates, currency exchange rates or
commodity prices, as the case may be, and, in the case of Interest Rate
Agreements, any such Interest Rate Agreement has a notional amount corresponding
to the Indebtedness being hedged thereby, (xi) Investments made by the Company
or a Restricted Subsidiary in connection with an Asset Disposition made in
compliance with the covenant 'Limitation on Sales of Assets and Subsidiary
Stock,' (xii) any acquisition of assets solely in exchange for the issuance of
Capital Stock (other than Disqualified Stock) of the Company; (xiii) any
Investment existing on the date of the Indenture; and (xiv) other Investments in
any Person having an aggregate fair market value, when taken together with all
other Investments made pursuant to this clause (xiv) that are at the time
outstanding, not to exceed $5 million.
'Permitted Junior Securities' means (A) Capital Stock of the Company or (B)
debt securities that (i) are subordinated to all Senior Indebtedness (and any
debt securities issued in exchange for Senior Indebtedness) to substantially the
same extent as, or to a greater extent than, the Notes are subordinated to
Senior Indebtedness and (ii) have a Stated Maturity no earlier than one year
after the Stated Maturity of the New Credit Facility (or, if earlier, the
Notes).
'Permitted Liens' means (i) Liens securing Senior Indebtedness and
Guarantor Senior Indebtedness that was permitted by the terms of the Indenture
to be incurred; (ii) Liens in favor of the Company or any Restricted Subsidiary;
(iii) Liens on property of a Person existing at the time such Person becomes a
Subsidiary of the Company or is merged into or consolidated with the Company or
any Subsidiary of the Company; provided that such Liens were in existence prior
to the time such Person becomes a Subsidiary or the contemplation of such merger
or consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens to secure Indebtedness
(including Capital Lease Obligations) permitted by clause (ix) of the second
paragraph of the covenant entitle '--Limitation on Indebtedness and Preferred
Stock' covering only the assets acquired with such Indebtedness; (vii) Liens
existing on the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (ix)
statutory Liens or landlords', carriers', warehousemens', mechanics', suppliers'
or similar Liens incurred in the ordinary course of business of the Company or
any Subsidiary of the Company; (x) easements, minor title defects,
irregularities in title or other charges or encumbrances on property not
interfering in any material respect with the use of such property by the Company
or a Subsidiary of the Company; (xi) Liens incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (xii) liens securing
industrial revenue bonds or other tax-favored financing; (xiii) deposit
arrangements entered into in connection with acquisitions or in the ordinary
course of business; (xiv) other Liens securing obligations incurred in the
ordinary course of business which obligations do not exceed $2 million at any
one time outstanding; and (xv) any extensions, substitutions, replacements or
renewals of the foregoing.
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'Person' means any individual, corporation, partnership joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
'Preferred Stock', as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
'Public Equity Offering' means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
'Put/Call Preferred Stock' means preferred stock which may be issued by the
Company or a Subsidiary Guarantor to the holders of any Management Equity
Interests of the Company or such Subsidiary Guarantor in exchange for such
Management Equity Interests held by such holders; provided that (a) payments on
such preferred stock, including pursuant to any redemption, repurchase or
default provision, and payments of dividends on such preferred stock, in each
case in cash, may be made only to the extent Restricted Payments would then be
permitted to be made in accordance with the covenant 'Limitations on Restricted
Payments,' with any such payment being included in the calculation of the amount
of Restricted Payments pursuant to clause (3) of paragraph (a) of such covenant
and (b) no failure to pay such preferred stock or failure to comply with any
other provision of such preferred stock or of the instrument governing such
preferred stock shall cause a default or event of default under any Indebtedness
of the Company and its Restricted Subsidiaries.
'Put/Call Promissory Notes' means promissory notes which may be issued by
the Company or a Subsidiary Guarantor to the holders of any Management Equity
Interests of the Company or such Subsidiary Guarantor in exchange for such
Management Equity Interests held by such holders; provided that (a) such notes
and any guarantees thereof are expressly subordinated to the Notes or the
applicable Subsidiary Guarantee pursuant to the terms of the instrument
governing such notes, (b) such notes are not secured by any Lien or any property
or assets of the Company or any of its Restricted Subsidiaries, (c) payments of
principal on such notes, including pursuant to any guarantee, redemption,
repurchase or default provision, and payments of interest on such notes,
including pursuant to any guarantee, in each case in cash, may be made only to
the extent Restricted Payments would then be permitted to be made in accordance
with the covenant 'Limitation on Restricted Payments,' with any such payment
being included in the calculation of the amount of Restricted Payments pursuant
to clause (3) of paragraph (a) of such covenant and (d) no failure to pay such
notes or failure to comply with any other provision of such notes or of the
instrument governing such notes shall cause a default or event of default under
any Indebtedness of the Company and its Restricted Subsidiaries.
'Refinancing Indebtedness' means Indebtedness issued in exchange for, or
that refunds, refinances, replaces, renews, repays or extends (including
pursuant to any defeasance or discharge mechanism) (collectively, 'refinances,'
and 'refinanced' shall have a correlative meaning) any Indebtedness existing on
the date of the Indenture or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances other Refinancing Indebtedness; provided, however, that (i) the
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being refinanced (or, if earlier, the Notes), (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to or less than the sum of the
aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being refinanced
plus the amount of reasonable fees and expenses and prepayment premiums incurred
in connection with such refinancing; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary which
is not a Subsidiary Guarantor that refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Restricted Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary (unless such Unrestricted Subsidiary
is concurrently redesignated a Restricted Subsidiary).
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'Related Business' means the businesses of the Company and the Restricted
Subsidiaries on the date of the Indenture and any business related, ancillary or
complementary thereto, or which is an extension thereof, in each case as
determined by the Company in good faith.
'Representative' means any trustee, agent or representative (if any) of an
issue of Designated Senior Indebtedness.
'Restricted Subsidiary' means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
'Sale/Leaseback Transaction' means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person (other than to the Company or a Restricted
Subsidiary) and the Company or a Restricted Subsidiary leases it from such
Person.
'SEC' means the U.S. Securities and Exchange Commission.
'Secured Indebtedness' means any Indebtedness of the Company or a
Subsidiary Guarantor secured by a Lien.
'Senior Subordinated Indebtedness' means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Notes in right of payment and is not subordinated by
its terms in right of payment to any Indebtedness or other obligation of the
Company which is not Senior Indebtedness.
'Series B Preferred Stock' means Series B Preferred Stock of KII Holding
required to be issued to its officers and employees pursuant to the Agreement,
dated as of July 1, 1997, among KII Holding and the other parties thereto.
'Significant Subsidiary' means any Restricted Subsidiary that would be a
'Significant Subsidiary' of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
'Stated Maturity' means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
'Subordinated Obligation' means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
'Subsidiary' of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
'Subsidiary Guarantee' means the Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
'Subsidiary Guarantor' means each Subsidiary of the Company existing on the
Issue Date and each new Subsidiary (other than Foreign Subsidiaries and
Unrestricted Subsidiaries) that guarantees the Company's obligations with
respect to the Notes.
'Temporary Cash Investments' means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit, eurodollar
time deposits, bankers' acceptances and money market deposits maturing within
360 days of the date of acquisition thereof issued by a bank or trust company
which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of America having
capital, surplus and undivided profits aggregating in excess of $250,000,000 (or
the foreign currency equivalent thereof) and whose long-term debt is rated 'A'
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act), (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank
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meeting the qualifications described in clause (ii) above, (iv) investments in
commercial paper, maturing not more than 180 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of 'P-1' (or higher) according to
Moody's Investors Service, Inc. or 'A-1' (or higher) according to Standard &
Poor's Ratings Group, (v) investments in securities with maturities of six
months or less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least 'A' by
Standard & Poor's Ratings Group or 'A' by Moody's Investors Service, Inc. and
(vi) investment funds registered under the Investment Company Act of 1940, as
amended, investing at least 95% of their assets in securities of any of the
types described in clauses (i) through (v) above.
'TIA' means the Trust Indenture Act of 1939 (15 U.S.C.
SectionSection77aaa-77bbbb) as in effect on the date of the Indenture.
'Trade Payables' means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
'Unrestricted Subsidiary' means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $10,000 or less or (B) if such Subsidiary has consolidated assets greater
than $10,000, then such designation would be permitted under 'Limitation on
Restricted Payments.' The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under clause (a) of 'Limitation on Indebtedness and
Preferred Stock' and (y) no Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
'U.S. Government Obligations' means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
'Voting Stock' of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
'Wholly Owned Subsidiary' means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered Notes in global form without coupons (each a
'Global Note'). Each Global Note will be deposited upon issuance with, or on
behalf of, The Depository Trust Company (the 'Depository') and registered in the
name of Cede & Co., as nominee of the Depository, or will remain in the custody
of the Trustee pursuant to the FAST Balance Certificate Agreement between the
Depository and the Trustee.
New Notes that are issued in respect of Notes that were (i) originally
issued to or transferred to institutional 'accredited investors,' as defined in
Rule 501(a) (1), (3) or (7) under the Securities Act ('Institutional Accredited
Investors'), who are not QIBs or to any other persons who are not QIBs or (ii)
issued as described below under 'Certificated Securities,' will be issued in
registered definitive form without coupons (the 'Certificated Securities'). Upon
the transfer to a QIB of Certificated Securities, such Certificated Securities
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may, unless the Global Note has previously been exchanged for Certificated
Securities, be exchanged for an interest in the Global Note representing the
principal amount of Notes being transferred.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a 'clearing corporation' with the meaning
of the Uniform Commercial Code, as amended, and (iv) a 'Clearing Agency'
registered pursuant to Section 17A of the Exchange Act. The Depository was
created to hold securities for its participants (collectively, the
'Participants') and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers (including the Initial Purchasers), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the 'Indirect Participants') that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. QIBs may elect to hold Notes purchased by them through
the Depository. QIBs who are not Participants may beneficially own securities
held by or on behalf of the Depository only through Participants or Indirect
Participants. Persons that are not QIBs may not hold Notes through the
Depository.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Note, the Depository will credit the
accounts of Participants designated by the Exchange Agent with an interest in
the Global Note and (ii) ownership of such interests in the Global Note will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depository (with respect to the interest of
Participants), the Participants and the Indirect Participants. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes or to pledge the Notes as collateral
will be limited to such extent.
So long as the Depository or its nominee is the registered owner of the
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or Holder of the Notes represented by the Global Note
for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to giving of any directions, instruction or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in Notes represented by a Global Note to pledge such
interest to persons or entities that do not participate in the Depository's
system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each QIB owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such QIB is not a Participant
or an Indirect Participant, on the procedures of the Participant through which
such QIB owns its interest, to exercise any rights of a Holder under the
Indenture or such Global Note. The Company understands that under existing
industry practice, in the event the Company requests any action of holders or a
QIB that is an owner of a beneficial interest in a Global Note desires to take
any action that the Depository, as the Holder of such Global Note, is entitled
to take, the Depository would authorize the Participants to take such action and
the Participant would authorize QIBs owning through such Participants to take
such action or would otherwise act upon the instruction of such QIBs. Neither
the Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Notes by the
Depository, or for maintaining, supervising or reviewing any records of the
Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of the Depository
or its nominee on the applicable record date will be payable by the Trustee to
or at the direction of the Depository or its nominee in its capacity as the
registered Holder of the Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payment and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such
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amounts to beneficial owners of Notes (including principal, premium, if any, and
interest), or to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interest in the Global Note as shown on the
records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is
no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by the Depository of its Global Notes,
Certificated Securities will be issued to each person that the Depository
identifies as the beneficial owner of the Notes represented by the Global Note.
Upon any such issuance, the Trustee is required to register such Certificated
Securities in the name of such person or persons (or the nominee of any
thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the Depository
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the Notes to be issued).
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the Exchange Offer to a holder of the Old Notes that
is an individual citizen or resident of the United States or a United States
corporation (a 'U.S. Holder'). It is based on the Internal Revenue Code of 1986,
as amended to the date hereof (the 'Code'), existing and proposed Treasury
regulations, and judicial and administrative determinations, all of which are
subject to change at any time, possibly on a retroactive basis. The following
relates only to the Old Notes, and the New Notes received therefor, that are
held as 'capital assets' within the meaning of Section 1221 of the Code by U.S.
Holders. It does not discuss state, local or foreign tax consequences, nor does
it discuss tax consequences to categories of holders that are subject to special
rules, such as foreign persons, tax-exempt organizations, insurance companies,
banks, and dealers in stocks and securities. Tax consequences may vary depending
on the particular status of an investor. No rulings will be sought from the
Internal Revenue Service with respect to the federal income tax consequences of
the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE OLD NOTES
FOR NEW NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING
THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS
PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE OLD NOTES FOR NEW
NOTES.
THE EXCHANGE OFFER
The exchange of Old Notes pursuant to the Exchange Offer should be treated
as a continuation of the corresponding Old Notes because the terms of the New
Notes are not materially different from the terms of the Old Notes. Accordingly,
such exchange should not constitute a taxable event to U.S. Holders and,
therefore, (i) no gain or loss should be realized by a U.S. Holder upon receipt
of a New Note; (ii) the holding period of the New Note should include the
holding period of the Old Note exchanged therefor and (iii) the adjusted tax
basis of the New Note should be the same as the adjusted tax basis of the Old
Note exchanged therefor immediately before the exchange.
STATED INTEREST
Stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for federal
income tax purposes.
MARKET DISCOUNT
A U.S. Holder of a Note, other than an initial Holder, will be treated as
holding the Note at a market discount (a 'Market Discount Note') if the amount
for which such U.S. Holder purchased the Note is less than the Note's principal
amount, subject to a de minimis rule.
In general, any partial payment of principal on, or gain recognized on the
maturity or disposition of, a Market Discount Note will be treated as ordinary
income to the extent that such gain does not exceed the accrued market discount
on such Note. Alternatively, a U.S. Holder of a Market Discount Note may elect
to include market discount in income currently over the life of the Market
Discount Note. Such an election applies to all debt instruments with market
discount acquired by the electing U.S. Holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the Internal Revenue Service.
Market discount accrues on a straight-line basis, unless the U.S. Holder
elects to accrue such discount on a constant yield to a maturity basis. Such
election is applicable only to the Note with respect to which it is made and it
is irrevocable. A U.S. Holder of a Market Discount Note that does not elect to
include market discount in income currently, generally will be required to defer
deductions for interest on borrowings allocable to such Note, in an amount not
exceeding the accrued market discount on such Note, until the maturity or
disposition of such Note.
106
<PAGE>
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. Holder's tax basis in a Note generally will be its cost plus any
stated interest or market discount that has been recognized as income, but not
yet received in cash. A U.S. Holder generally will recognize gain or loss on the
sale, exchange or retirement of a Note in an amount equal to the difference
between the amount realized on the sale, exchange or retirement and the tax
basis of the Note. Gain or loss recognized on the sale, exchange or retirement
of a Note (excluding amounts received in respect of accrued interest, which will
be taxable as ordinary interest income) generally will be capital gain or loss
and will generally be subject to taxation at the most preferential capital gains
rate (that is, the maximum twenty percent (20%) rate) if the Note was held for
more than eighteen (18) months.
BACKUP WITHHOLDING
Under certain circumstances, a U.S. Holder of a Note may be subject to
'backup withholding' at a 31% rate with respect to payments of interest thereon
or the gross proceeds from the disposition thereof. This withholding generally
applies if the U.S. Holder fails to furnish his or her social security number or
other taxpayer identification number in the specified manner and in certain
other circumstances. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a credit against such U.S. Holder's
federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service. Corporations and certain other
entities described in the Code and Treasury regulations are exempt from backup
withholding if their exempt status is properly established.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale. Until , 1998 (90 days after the commencement of
the Exchange Offer), all dealers effecting transactions in the New Notes,
whether or not participating in this distribution, may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sales of the New Notes
by Participating Broker-Dealers. New Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such New Notes may
be deemed to be an 'underwriter' within the meaning of the Securities Act and
any profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an 'underwriter' within the meaning of
the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any broker-dealers and
will indemnify Holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
107
<PAGE>
LEGAL MATTERS
The validity of the issuance of the New Notes and the Subsidiary Guarantees
being offered hereby will be passed upon for the Company and the Subsidiary
Guarantors by Winston & Strawn, New York, New York.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1996 and the
consolidated statements of income, shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996 of Kleinert Industries,
Inc. and its subsidiaries, the predecessor of Stellex and Subsidiaries, in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing. The combined balance sheets as of December
31, 1995 and 1996 and September 30, 1997 and the combined statements of
operations and invested equity and of cash flows for the years ended December
31, 1995 and 1996 and the nine months ended September 30, 1997 of the Tactical
Systems and Microwave Devices Sectors of Watkins-Johnson Company included in
this Prospectus, have been included herein in reliance on the report of Deloitte
& Touche, LLP, independent accountants, given on the authority of that firm as
experts in accounting and auditing. The balance sheet of Stellex as of September
5, 1997 included in this Prospectus has been included herein in reliance on the
report of Deloitte & Touche, LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
108
<PAGE>
INDEX TO FINANCIAL STATEMENTS*
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STELLEX INDUSTRIES, INC.
Independent Auditors' Report............................................................................... F-2
Balance Sheet at September 5, 1997......................................................................... F-3
Notes to Balance Sheet..................................................................................... F-4
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES (FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
FINANCIAL STATEMENTS:
Report of Independent Accountants.......................................................................... F-5
Consolidated Balance Sheets at December 31, 1995 and 1996 and September 30, 1997 (unaudited)............... F-6
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 and six months ended June 30, 1997 (predecessor)(unaudited)
and the three months ended September 30, 1997 (successor) (unaudited).................................... F-7
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1994, 1995
and 1996 and the six months ended June 30, 1997 (predecessor)(unaudited) and the three months ended
September 30, 1997 (successor)(unaudited)................................................................ F-8
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1996 and six months ended June 30, 1997 (predecessor)(unaudited)
and the three months ended September 30, 1997 (predecessor)(unaudited)................................... F-9
Notes to Consolidated Financial Statements................................................................. F-10
FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts and Reserves................................................ S-1
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES SECTORS OF
WATKINS-JOHNSON COMPANY
Independent Auditors' Report............................................................................... F-18
Combined Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997............................ F-19
Combined Statements of Operations and Invested Equity for the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997................................................................. F-20
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997....................................................................................... F-21
Notes to Combined Financial Statements..................................................................... F-22
</TABLE>
- ------------------
* The New Notes are guaranteed by all direct and indirect subsidiaries of
Stellex, Stellex has no operations or assets separate from its investments in
its subsidiaries and the New Notes are guaranteed on a full and unconditional
and joint and several basis by the Subsidiary Guarantors. Accordingly, Stellex
has not presented separate financial statements and other disclosures
concerning each Subsidiary Guarantor because management has determined that
such information is not material to investors.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Stellex Industries, Inc.:
We have audited the accompanying balance sheet of Stellex Industries, Inc.
('Stellex') as of September 5, 1997. This balance sheet is the responsibility of
the management of Stellex. Our responsibility is to express an opinion on this
financial statement 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 statement is free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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, such balance sheet presents fairly, in all material respects,
the financial position of Stellex as of September 5, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
December 5, 1997
F-2
<PAGE>
STELLEX INDUSTRIES, INC.
BALANCE SHEET
SEPTEMBER 5, 1997
<TABLE>
<S> <C>
ASSETS............................................................. $ 0
----
----
Liabilities and Equity:
Total liabilities................................................ $ 0
----
Preferred stock; stated value $10,000 per share; 500 shares
authorized and 0 shares issued................................ 0
Common stock; no par value; 1,000 shares authorized and 0 shares
issued........................................................ 0
----
Total Liabilities and Equity..................................... $ 0
----
----
</TABLE>
See notes to balance sheet.
F-3
<PAGE>
STELLEX INDUSTRIES, INC.
NOTES TO BALANCE SHEET
SEPTEMBER 5, 1997
NOTE 1--FORMATION
On September 5, 1997, Stellex Holdings Corp. was incorporated as a Delaware
corporation which subsequently on October 23, 1997 amended its articles of
incorporation to change its corporate name to Stellex Industries, Inc.
('Stellex').
NOTE 2--SUBSEQUENT EVENTS
On September 12, 1997, Stellex issued 1,000 shares of its no par common
stock to Greystoke Capital Management Limited LDC ('Greystoke') in exchange for
(i) 8,010 shares of common stock of KII Holding Corp., (ii) 84 shares of Series
A Cumulative Preferred Stock of KII Holding Corp., (iii) $50,000 cash and (iv)
the assumption of a $4,000,000 promissory note. As a result, Stellex acquired an
80.1% interest in KII Holding Corp.
On October 31, 1997, Stellex, through a wholly-owned subsidiary, TSMD
Acquisition Corp., purchased 100% of the outstanding common stock of Stellex
Microwave Systems, Inc., representing the operations of the Tactical Subsystems
and Microwave Devices Sectors ('TSMD') of the Watkins-Johnson Company for a net
purchase price of approximately $82.2 million (after giving effect to estimated
purchase price adjustments). The purchase was financed with the net proceeds
from a simultaneous offering of senior subordinated notes totaling $92.3
million, borrowings of $2.5 million under a newly established $25.0 million
revolving credit facility and the sale of Series A Preferred Stock for an
aggregate consideration of $7,450,000. Existing indebtedness at certain of
Stellex's subsidiaries totaling $19.7 million plus accrued interest was also
repaid concurrently.
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Kleinert Industries, Inc.
We have audited the accompanying consolidated financial statements and the
financial statement schedule of Kleinert Industries, Inc. and Subsidiaries,
listed in the Index on page F-1 of this Registration Statement on Form S-4.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kleinert
Industries, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements as a whole, present fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
April 11, 1997, except for Note 10 as to which the date is July 1, 1997
F-5
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1995 1996 1997
----------- ----------- -------------
(PREDECESSOR) (UNAUDITED)
(SUCCESSOR)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 203,600 $ 406,000 $ 729,800
Trade accounts receivable, less allowance for doubtful
accounts ($61,300 in 1995 and $112,300 in 1996).................... 3,487,400 3,876,000 5,803,200
Inventories (Note 2)............................................... 10,473,600 11,547,700 13,210,800
Due from Parent.................................................... -- 55,600 --
Income taxes receivable............................................ -- -- 466,900
Prepaid and other assets........................................... 188,800 225,700 347,900
Deferred income taxes (Note 6)..................................... 351,000 486,000 486,000
----------- ----------- -------------
Total current assets............................................. 14,704,400 16,597,000 21,044,600
Property, plant and equipment, net (Note 3).......................... 11,775,400 11,165,400 13,766,900
Goodwill, net of accumulated amortization of $231,500 in 1995 and
$262,700 in 1996................................................... 1,017,300 986,100 --
Deferred financing cost.............................................. -- -- 232,200
Other assets......................................................... 683,200 865,900 983,700
----------- ----------- -------------
Total assets..................................................... $28,180,300 $29,614,400 $36,027,400
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank line of credit (Note 4)....................................... $ 3,565,000 $ 4,300,000 $ 1,230,000
Short term notes payable........................................... -- -- 4,000,000
Accounts payable................................................... 1,167,300 1,525,000 1,536,100
Accrued liabilities................................................ 943,300 1,261,400 2,158,300
Customer deposits.................................................. 43,500 177,900 233,100
Income taxes payable............................................... 43,000 39,600 --
Notes payable, current (Note 5).................................... 2,140,500 1,558,000 58,000
------------ ------------ -------------
Total current liabilities........................................ 7,902,600 8,861,900 9,215,500
Notes payable, less current portion (Note 5)......................... 5,683,000 4,123,900 22,830,900
Unfunded pension benefits (Note 7)................................... 305,000 307,800 307,800
Deferred compensation liability (Note 7)............................. 1,082,400 1,291,900 1,364,000
Deferred income taxes (Note 6)....................................... 462,200 851,300 1,737,000
------------ ------------ -------------
Total liabilities................................................ 15,435,200 15,436,800 35,455,200
------------ ------------ -------------
Minority interest.................................................... -- -- 778,100
Commitments and contingencies (Note 8)
Shareholder's equity:
Common stock, $1,000 par value; 1,000,000 shares authorized, 10,000
shares issued and outstanding at December 31, 1995 and 1996: no
par value; 1,000 shares authorized, issued and outstanding at
September 30, 1997............................................... 10,000,000 10,000,000 50,000
Preferred stock, no par value; 500 shares authorized, none issued
and outstanding at September 30, 1997............................ -- -- --
Additional paid-in capital......................................... 1,952,700 1,952,700 --
Retained earnings (Accumulated deficit)............................ 792,400 2,224,900 (255,900)
------------ ------------ -------------
Total shareholder's equity (Accumulated deficit)................. 12,745,100 14,177,600 (205,900)
------------ ------------ -------------
Total liabilities and shareholder's equity....................... $ 28,180,300 $ 29,614,400 $36,027,400
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(PREDECESSOR) FOR THE SIX
----------------------------------------- FOR THE NINE MONTHS FOR THE THREE
MONTHS ENDED ENDED JUNE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, 30, SEPTEMBER 30,
----------------------------------------- ------------- ----------- -------------
1994 1995 1996 1996 1997 1997
----------- ----------- ----------- ------------- ----------- -------------
(UNAUDITED) (UNAUDITED)
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C>
Sales...................... $17,808,400 $21,049,100 $24,306,900 $17,966,900 $14,296,000 $ 8,889,800
Cost of sales.............. 13,121,600 15,083,500 17,366,800 12,872,000 10,139,600 6,746,900
----------- ----------- ----------- ------------- ----------- -------------
Gross profit........... 4,686,800 5,965,600 6,940,100 5,094,900 4,156,400 2,142,900
----------- ----------- ----------- ------------- ----------- -------------
Operating expenses:
Selling and marketing.... 628,600 744,300 836,300 622,900 429,800 251,800
General and
administrative......... 2,480,600 2,554,200 2,792,900 2,124,100 1,353,300 1,318,800
Amortization of
noncompete covenants,
goodwill and
organization costs..... 416,100 282,200 31,200 23,400 15,600 12,200
----------- ----------- ----------- ------------- ----------- -------------
Total operating costs.. 3,525,300 3,580,700 3,660,400 2,770,400 1,798,700 1,582,800
----------- ----------- ----------- ------------- ----------- -------------
Income from
operations........... 1,161,500 2,384,900 3,279,700 2,324,500 2,357,700 560,100
----------- ----------- ----------- ------------- ----------- -------------
Other (income) expense:
Interest income.......... (43,500) (5,500) (11,600) (6,700) (4,500) (2,000)
Interest expense......... 978,800 1,034,400 855,800 659,500 375,700 508,000
Other.................... 144,700 44,100 58,100 39,000 102,900 22,400
----------- ----------- ----------- ------------- ----------- -------------
Total other expense.... 1,080,000 1,073,000 902,300 691,800 474,100 528,400
----------- ----------- ----------- ------------- ----------- -------------
Income before provision
for income taxes..... 81,500 1,311,900 2,377,400 1,632,700 1,883,600 31,700
----------- ----------- ----------- ------------- ----------- -------------
Provision for income taxes
(Note 6)................. 50,000 524,800 944,900 656,700 753,400 287,600
----------- ----------- ----------- ------------- ----------- -------------
Net income (loss)...... $ 31,500 $ 787,100 $ 1,432,500 $ 976,000 $ 1,130,200 $ (255,900)
----------- ----------- ----------- ------------- ----------- -------------
----------- ----------- ----------- ------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
---------------------- -------------------- PAID-IN RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS AMOUNT
------- ------------ ------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993...... 10,000 $ 10,000,000 -- -- $1,952,700 $ (26,200) $11,926,500
Net income (predecessor)........ -- -- -- -- -- 31,500 31,500
------- ------------ ------ ----------- ---------- ---------- -----------
Balance at December 31, 1994...... 10,000 10,000,000 -- -- 1,952,700 5,300 11,958,000
Net income (predecessor)........ -- -- -- -- -- 787,100 787,100
------- ------------ ------ ----------- ---------- ---------- -----------
Balance at December 31, 1995...... 10,000 10,000,000 -- -- 1,952,700 792,400 12,745,100
Net income (predecessor)........ -- -- -- -- -- 1,432,500 1,432,500
------- ------------ ------ ----------- ---------- ---------- -----------
Balance at December 31, 1996...... 10,000 10,000,000 -- -- 1,952,700 2,224,900 14,177,600
------- ------------ ------ ----------- ---------- ---------- -----------
Net income (unaudited)
(predecessor) for the six
months ended June 30, 1997.... -- -- -- -- -- 1,130,200 1,130,200
------- ------------ ------ ----------- ---------- ---------- -----------
Balance at June 30, 1997
(unaudited)..................... 10,000 $ 10,000,000 -- -- $1,952,700 $3,355,100 $15,307,800
------- ------------ ------ ----------- ---------- ---------- -----------
Stock sale in connection with
the Kleinert Acquisition...... (10,000) (10,000,000) -- -- (1,952,700) (3,355,100) --
Issuance of Stock............... 1,000 50,000 -- -- -- -- 50,000
Net loss (unaudited) (successor)
for the three months ended
September 30, 1997............ -- -- -- -- -- (255,900) (255,900)
------- ------------ ------ ----------- ---------- ---------- -----------
Balance at September 30, 1997
(unaudited)..................... 1,010 $ 50,000 -- $ -- -- ($ 255,900) ($ 205,900)
------- ------------ ------ ----------- ---------- ---------- -----------
------- ------------ ------ ----------- ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE NINE MONTHS
MONTHS ENDED ENDED JUNE FOR THE THREE
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, 30, MONTHS ENDED
-------------------------------------- ------------- ----------- SEPTEMBER 30,
1994 1995 1996 1996 1997 1997
----------- ----------- ---------- ------------- ----------- -------------
(UNAUDITED) (UNAUDITED)
---------------------------(PREDECESSOR)---------------------------- (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ 31,500 $ 787,100 $1,432,500 $ 976,000 $1,130,200 ($ 255,900)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................... 2,008,400 1,668,100 1,660,200 1,229,200 862,600 363,400
Amortization....................... 416,100 282,200 31,200 23,400 15,600 12,200
Gain on sale of property........... (11,000) (10,600) (2,200) -- (4,000 )
Deferred income taxes.............. 45,200 165,800 254,100 174,400 125,100 51,500
Changes in assets and liabilities:
Trade accounts receivable........ (11,800) (299,000) (388,600) (445,000) (978,200 ) (899,000)
Inventories...................... (841,400) (1,058,200) (1,074,100) (777,300) (1,078,300 ) 502,700
Income taxes receivable.......... -- -- -- -- -- 109,800
Prepaid and other assets......... 317,700 (8,400) (36,900) (99,400) (51,244 ) (91,400)
Due from Parent.................. -- -- (55,600) -- (2,100 ) --
Other assets..................... (160,800) (146,000) (182,700) (108,000) (74,500 ) (43,300)
Accounts payable................. 185,700 127,500 357,700 (32,900) 559,000 (549,000)
Accrued liabilities.............. 118,700 329,400 530,400 571,100 17,944 684,700
Customer deposits................ 9,100 8,200 134,400 13,000 (3,100 ) 58,300
Income taxes payable............. 23,000 20,000 (3,400) (19,600) (39,600 ) --
----------- ----------- ---------- ------------- ----------- -------------
Net cash provided by (used in)
operating activities......... 2,130,400 1,866,100 2,657,000 1,570,700 479,400 (56,000)
----------- ----------- ---------- ------------- ----------- -------------
Cash flows from investing activities:
Additions to fixed assets............ (288,000) (656,700) (1,052,500) (622,500) (868,500 ) (539,000)
Collections on notes receivable...... 548,000 1,600 -- -- -- --
Proceeds from sale of fixed assets... 25,100 12,000 4,500 -- 33,500 --
Net cash paid to the Seller for
acquisition of Kleinert............ -- -- -- -- -- (14,799,300)
----------- ----------- ---------- ------------- ----------- -------------
Net cash (used in) provided by
investing activities......... 285,100 (643,100) (1,048,000) (622,500) (835,000 ) (15,338,300)
----------- ----------- ---------- ------------- ----------- -------------
Cash flows from financing activities:
Net borrowings on line of credit..... 169,300 765,000 735,000 (35,000) 300,000 430,000
Repayment on notes payable........... (2,529,100) (2,196,900) (2,141,600) (730,000) (28,400 ) (14,600)
Proceeds from borrowings in
connection with Kleinert
Acquisition........................ -- -- -- -- -- 23,300,000
Repayment of debt in connection with
Kleinert Acquisition............... -- -- -- -- -- (7,600,000)
Acquisition related costs............ -- -- -- -- -- (313,300)
----------- ----------- ---------- ------------- ----------- -------------
Net cash used in financing
activities................... (2,359,800) (1,431,900) (1,406,600) (695,000) 271,600 15,802,100
----------- ----------- ---------- ------------- ----------- -------------
Net increase (decrease) in cash
and cash equivalents......... 55,700 (208,900) 202,400 353,200 (84,000 ) 407,800
Cash and cash equivalents, beginning of
year................................. 356,800 412,500 203,600 203,600 406,000 322,000
----------- ----------- ---------- ------------- ----------- -------------
Cash and cash equivalents, end of
year................................. $ 412,500 $ 203,600 $ 406,000 $ 456,800 $ 322,000 $ 729,800
----------- ----------- ---------- ------------- ----------- -------------
----------- ----------- ---------- ------------- ----------- -------------
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest........................... $ 976,500 $ 1,032,800 $ 863,900
Income taxes--net.................. $ (39,400) $ 339,000 $ 694,200
Note issued to seller in connection
with the accquisition of
Kleinert......................... 1,750,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General/Basis of Presentation
Kleinert Industries, Inc., a wholly owned subsidiary of Kleinert Industrie
Holding A.G., a Swiss company (the 'Parent') as of December 31, 1995 and 1996
and for the years ended December 31, 1994, 1995 and 1996, was organized under
the laws of the State of California on July 1, 1988, commenced operations on
September 1, 1988, and provides management services for its wholly owned
subsidiaries--Paragon Precision Products ('PPP'), General Inspection
Laboratories, Inc. ('GIL'), Scanning Electron Analysis Laboratories, Inc.
('SEAL'), and Bandy Machining International ('BMI').
Kleinert Acquisition (unaudited) -- On July 1, 1997, KII Holding Corp., a
Delaware company ('KII Holding'), through a wholly-owned subsidiary (KII
Acquisition Corp., a Delaware company), acquired all of the issued and
outstanding capital stock of Kleinert Industries, Inc. and Subsidiaries, a
California company (predecessor company and currently known as Stellex Aerospace
and Subsidiaries) from Kleinert Industries Holding AG. The acquisition has been
accounted for using the purchase method of accounting, and, accordingly, the net
purchase price of approximately $26.5 million (including the assumption of $2.6
million of indebtedness and the issuance to the seller of a note for
approximately $1.75 million) has been allocated to the assets purchased and the
liabilities assumed based upon the fair values at the date of acquisition. There
was no excess purchase price over the fair values on the net assets acquired in
connection with the acquisition. The acquisition was financed with a portion of
the proceeds from new borrowings totaling approximately $23.3 million. KII
Holding is owned by Stellex Industries, Inc., a Delaware company, which owns
approximately 80% of the issued and outstanding common stock of KII Holding,
with Stellex Aerospace's management holding the remainder of its outstanding
common stock. Stellex Industries, Inc., a holding company whose operations are
conducted through its operating subsidiaries, was formed and incorporated on
September 5, 1997. On September 12, 1997, Stellex Industries, Inc. ('Stellex')
sold 1,000 shares of its no par common stock to Greystoke Capital Management
Limited LDC ('Greystoke') for (i) 8,010 shares of common stock of KII Holding
Corp., (ii) 84 shares of Series A Cumulative Preferred Stock of KII Holding
Corp., (iii) $50,000 cash and (iv) assumption of a $4 million promissory note.
This transaction had the effect of exchanging stock for an 80.1% interest in KII
Holding Corp.
The accompanying consolidated financial statements for the years ended
1994, 1995, 1996 and through the acquisition on July 1, 1997 consist of Kleinert
Industries, Inc. and its wholly-owned subsidiaries. Subsequent to the
acquisition, the resultant entity consists of Stellex and its majority owned
subsidiaries: KII Holding, KII Acquisition Corp.; Kleinert Industries, Inc.
(renamed Stellex Aerospace); PPP; GIL; SEAL; and BMI. Prior to the acquisition,
the predecessor company is referred to as the 'Company' for the years ended
1994, 1995, 1996 and through June 30, 1997.
PPP specializes in the manufacture of precision aerospace components. GIL
provides a complete array of non-destructive testing services for inspecting
critical parts and manufactured components. SEAL specializes in materials
analysis and problem-solving for government and industry. BMI manufactures
precision hinges, door panels and hinged assemblies for both aerospace and
industrial applications.
TSMD Acquisition (unaudited) -- On October 31, 1997, Stellex, through a
wholly-owned subsidiary, TSMD Acquisition Corp., purchased 100% of the
outstanding common stock of Stellex Microwave Systems, Inc., representing the
operations of the Tactical Subsystems and Microwave Devices Sectors ('TSMD') of
the Watkins-Johnson Company, for a net purchase price of approximately $82.2
million (after giving effect to estimated purchase price adjustments). The
purchase was financed primarily with the net proceeds from a simultaneous
offering of senior subordinated notes totaling $92.3 million. The accompanying
consolidated financial statements as of September 30, 1997 do not include the
consolidated accounts of TSMD as this acquisition occurred subsequent to
September 30, 1997 (unaudited).
F-10
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Principles Of Consolidation
As of December 31, 1995 and 1996 and for the years ended December 31, 1994,
1995 and 1996, the consolidated financial statements include the accounts of
Kleinert Industries, Inc. and its wholly owned subsidiaries (the 'Company'). All
significant intercompany transactions have been eliminated in consolidation.
The accompanying consolidated financial statements include the accounts of
Stellex and its majority owned subsidiaries for the period July 1, 1997 through
September 30, 1997 and the consolidated accounts of the predecessor company
prior to the acquisition. All significant intercompany transactions have been
eliminated in consolidation.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash And Cash Equivalents
Cash and cash equivalents include all highly liquid investment instruments
purchased with a maturity of three months or less. The carrying amount
approximates fair value because of the short maturity of these instruments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant And Equipment
Property, plant and equipment are stated at the Company's allocated
acquisition cost for assets acquired through purchase acquisitions and at cost
for all new additions, and are being depreciated over the estimated useful lives
of the assets, using the straight-line method of depreciation. Estimated useful
lives are as follows:
<TABLE>
<S> <C>
Building and improvements..................... 40 years
Leasehold improvements........................ 3-10 years (based on the lesser of the useful
life of the assets or the remaining life of
the lease)
Machinery and equipment....................... 10 years
Office furniture and fixtures................. 10 years
Office equipment and computers................ 5 years
Autos and trucks.............................. 5 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred. Major renewals or betterments which substantially extend the useful
life of the assets are capitalized. Upon sale or disposition of assets, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income.
Goodwill
Goodwill is amortized over a period of 40 years on a straight-line basis.
F-11
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Long-Lived Assets
In fiscal year 1996, the Company adopted Statement of Financial Accounting
Standard No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of' ('SFAS'). The adoption of SFAS No. 121 had
no impact on the Company's financial position or on its results of operations.
In accordance with SFAS No. 121, long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
purposes of evaluating the recoverability of long-lived assets, the Company
evaluates the carrying value of its goodwill and property, plant and equipment
on an ongoing basis and recognizes an impairment when the estimated future
undiscounted cash flows from operations are less than the carrying value of the
related long-lived asset.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ('SFAS') No.109, 'Accounting for Income Taxes,'
which prescribes an asset and liability approach. The asset and liability method
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between tax bases and financial
reporting bases of assets and liabilities, using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The provision for income taxes includes federal and state income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities. Such temporary
differences primarily result from state franchise taxes, allowance for doubtful
accounts, and differences between the book and tax bases of property and
equipment. If necessary, valuation allowances are established to reduce deferred
tax assets to the amount expected to be realized.
Revenue Recognition
Sales and cost of the products sold are recorded at the time of shipment.
Interim Financial Information
The financial information as of September 30, 1997 and for the nine months
ended September 30, 1996, the six months ended June 30, 1997 and the three
months ended September 30, 1997 is unaudited but, in the opinion of management
of the Company, contains all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations and cash flows.
2. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
(PREDECESSOR) (SUCCESSOR)
DECEMBER 31, SEPTEMBER
-------------------------- 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Raw materials............................. $ 984,000 $ 1,151,500 $ 1,245,400
Work-in-process........................... 4,089,700 4,634,900 6,400,800
Finished goods............................ 5,399,900 5,761,300 5,564,600
----------- ----------- -----------
Total..................................... $10,473,600 $11,547,700 $13,210,800
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-12
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
(SUCCESSOR)
(PREDECESSOR) SEPTEMBER
DECEMBER 31, 30,
-------------------------- -----------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Land...................................................... $ 1,230,200 $ 1,230,200 $ 1,000,000
Building and improvements................................. 3,423,800 3,451,900 2,100,000
Leasehold improvements.................................... 203,200 209,700 94,900
Machinery and equipment................................... 19,851,700 20,556,200 10,356,800
Office furniture and fixtures............................. 571,000 574,300 52,400
Office equipment and computers............................ 1,164,700 1,344,000 229,800
Autos and trucks.......................................... 130,200 130,500 46,500
Projects in progress...................................... 254,500 317,800 250,400
----------- ----------- -----------
26,829,300 27,814,600 14,130,300
Less accumulated depreciation............................. (15,053,900) (16,649,200) (363,400)
----------- ----------- -----------
Total................................................ $11,775,400 $11,165,400 $13,766,900
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
4. BANK LINE OF CREDIT:
The Company has a $6,550,000 revolving line of credit with a California
commercial bank. The bank has a first priority security interest in
substantially all assets of the Company, except land and buildings. The line of
credit is scheduled for renewal on August 1, 1997. The line bears interest at
either .25% over the bank's prime rate or 1.5% over the London Interbank Offered
Rate ('LIBOR') or the Offshore Interbank Offered Rate ('IBOR'). At December 31,
1996, the effective interest rate was 7.165% (1995--7.1875%). The credit
agreement contains restrictive covenants on additional borrowings, capital
expenditures, acquisitions and dividend payments and requires that the Company
meet certain specified financial ratios. As of December 31, 1996, the Company
was in compliance with all of the covenants and financial ratios under its
credit agreement. Amounts outstanding under the facility at December 31, 1995
and 1996 were $3,565,000 and $4,300,000, respectively. The carrying amount
approximates fair value because of the short maturity of this instrument.
5. NOTES PAYABLE:
The balance of notes payable consists of the following:
<TABLE>
<CAPTION>
(PREDECESSOR) (SUCCESSOR)
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Note payable to the Parent with interest at 7.5% payable
trimesterly. The principal balance of $600,000 was paid on
August 31, 1996. Interest expense incurred was $77,900 and
$30,000 in 1995 and 1996, respectively.................... $ 600,000 -- --
</TABLE>
F-13
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. NOTES PAYABLE:--(CONTINUED)
<TABLE>
<CAPTION>
(PREDECESSOR) (SUCCESSOR)
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Note payable, first deed of trust on PPP land and building
in Valencia, California as collateral, with a net book
value of $4,037,700 (1995--$4,122,900), with interest at
7.875%; principal and interest payments of $22,264 are due
monthly with the unpaid balance of $2,362,700 due December
1, 2001................................................... $2,723,000 $2,681,900 $ 2,638,900
Uncollateralized note payable issued in connection with
acquisition of BMI payable to Credit Suisse, which
provides for interest at the borrower's preference of
either the bank's base prime rate, payable monthly or 1.5%
over LIBOR, payable the earlier of the maturity of the
borrowings for LIBOR or quarterly; the Company exercised
the later option. At December 31, 1996, effective interest
was 7.102% (1995--7.25%); annual principal payments of
$1,500,000 are due through September 1998; the note
becomes due upon a change in ownership of the Company..... 4,500,000 3,000,000 --
Various notes and contracts payable, relating to equipment
and other assets with varying rates of interest and
maturities................................................ 500 -- --
Term note payable issued in connection with acquisition of
Kleinert payable to Societe Generale, which provides for
interest at the borrower's preference of either the banks
prime rate plus 1%, payable on the first day of each
calendar month or 2% over LIBOR, payable at maturity of
the term note; principal amounts shall be payable in
eleven substantially equal semi-annual installments in the
principal amount of $1,300,000 on the second day of
January and July in each year commencing on January 2,
1999 through and including January 2, 2004 and one
installment in the principal amount of $1,700,000 on the
maturing date of June 30, 2004............................ -- -- 16,000,000
Promissory note issued in connection with the acquisition of
Kleinert with interest rate of 10% per annum due along
with the principal amount on June 30, 2005................ -- -- 2,500,000
Note payable to Kleinert Industrie Holding AG in connection
with the Kleinert acquisition with interest rate of 8%
payable annually and principal amount due at maturity,
July 1, 1999; the note is guaranteed by Stellex Aerospace
and each of its subsidiaries.............................. -- -- 1,750,000
---------- ---------- -------------
Total.................................................. 7,823,500 5,681,900 22,888,900
Less current portion...................................... 2,140,500 1,558,000 58,000
---------- ---------- -------------
Long-term portion...................................... $5,683,000 $4,123,900 $ 22,830,900
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-14
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. NOTES PAYABLE:--(CONTINUED)
Maturities of long-term debt as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $1,558,000
1998........................................................ 1,562,800
1999........................................................ 67,900
2000........................................................ 73,400
2001........................................................ 2,419,800
----------
Total.................................................. $5,681,900
----------
----------
</TABLE>
The fair value of the Company's long-term notes payable is based on either
quoted market prices or current rates for similar issues for debt of the same
remaining maturities. At December 31, 1996 and 1995, the fair value of the
Company's long-term notes payable approximated carrying value based on their
effective interest rates compared to current market rates.
6. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 24,000 $281,400 $514,800
State............................................................ (19,200) 77,600 176,000
-------- -------- --------
4,800 359,000 690,800
-------- -------- --------
Deferred:
Federal.......................................................... (2,800) 121,300 202,700
State............................................................ 48,000 44,500 51,400
-------- -------- --------
45,200 165,800 254,100
-------- -------- --------
Total......................................................... $ 50,000 $524,800 $944,900
-------- -------- --------
-------- -------- --------
</TABLE>
Deferred taxes are primarily the result of the use of accelerated
depreciation for tax purposes, the deferral of gain on property sold following a
tax-free exchange, accrued expenses not currently deductible, and net operating
loss and alternative minimum tax credit carryforwards.
The difference between the actual tax provision and the amount obtained by
applying the statutory federal income tax rate of 34% to the income before
income taxes is primarily attributable to the effect of state income taxes
(state tax rate of 9.3%) and nondeductible expenses relating to goodwill and
officers' life insurance.
The effective tax rate of 40% for the six months ended June 30, 1997
(unaudited) represents the Company's estimate of the annual tax rate. For the
three months ended September 30, 1997 (unaudited), the difference between the
actual tax provision and the amount obtained by applying the statutory federal
income tax rate of 34% to the income before income taxes is primarily
attributable to the effect of nondeductible expense relating to inventory
resulting from the acquisition of Kleinert.
At December 31, 1996, the Company's alternative minimum tax credits for
federal and state purposes are estimated to be $279,200 and $119,700,
respectively, which are available to reduce income taxes on an indefinite
carryforward basis.
F-15
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
6. INCOME TAXES:--(CONTINUED)
The net deferred tax assets and liabilities at December 31, consist of the
following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets--current.............................................. $ 376,000 $ 519,300
Deferred tax liabilities--current......................................... (25,000) (33,300)
----------- -----------
Net deferred tax asset--current......................................... $ 351,000 $ 486,000
----------- -----------
----------- -----------
Deferred tax liabilities--long-term....................................... ($1,998,900) ($2,006,000)
Deferred tax assets--long-term............................................ 1,536,700 1,154,700
----------- -----------
Net deferred tax liability--long-term................................... ($ 462,200) ($ 851,300)
----------- -----------
----------- -----------
</TABLE>
7. EMPLOYEE BENEFIT PLANS:
Defined Contribution Plan
The Company sponsors a defined contribution pension plan which covers
substantially all employees. Company contributions are determined at 1.5% of the
employees' gross compensation, plus an additional matching of 50% of the
employees' voluntary contribution. The maximum Company contribution is limited
to 3% of the employees' gross compensation. Total Company contributions were
$192,100, $200,500 and $223,300 in 1994, 1995 and 1996, respectively.
Unfunded Pension Benefits
The Company also sponsors a defined benefit plan which covers four
employees of a subsidiary of the Company. The balance of unfunded pension
benefits represents the net present value of estimated future payments based on
actuarially determined life expectancies and an 8% discount rate. No assets have
currently been provided for the plan.
Deferred Compensation Agreements
The Company has individual deferred compensation agreements with eight
management employees. These agreements provide for monthly payments to be made
to the individuals commencing upon their retirement and continuing for an
agreed-upon term as set forth in the agreements, generally fifteen years. The
amount of the payments is specified by each contract and is generally equal to
forty percent of the employee's average compensation for the last five years of
his employment as reduced by the amount of any company--provided benefits to
which the employee is entitled from any other Kleinert pension benefit plan. The
agreements also contain other provisions entitling the employees to
pre-retirement death benefits, disability benefits and survivor benefits.
The Company has in place individual life insurance policies on each of the
covered employees and intends to use the insurance benefits (accumulated cash
surrender value of the policies and the post-retirement death benefits) to fund
the benefit payments required under the agreements. The insurance policies are
designed such that the insurance benefits under the policies are expected, over
time, to be sufficient to pay all of the required benefits and reimburse the
Company for its costs of providing the insurance.
At December 31, 1995 and 1996, the deferred compensation liability was
$1,082,400 and $1,291,900, respectively. The estimated liability was calculated
based on actuarially determined estimates of compensation, mortality, retirement
dates and other relevant factors pertaining to the participants and a discount
rate of 8% per annum. The related expense for the years ended December 31, 1994,
1995 and 1996 was 77,200, $71,800 and $209,500, respectively. The expense for
1996 included the nonrecurring step-up of the liability for the implementation
of two additional agreements effective January 1, 1996.
F-16
<PAGE>
STELLEX INDUSTRIES, INC., AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1997
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
8. LEASE COMMITMENTS:
The Company leases office facilities and equipment under operating lease
agreements which expire at various dates through 2004. The facility leases have
renewal options. Certain leases provide for annual increases, at various dates,
based upon percentage changes in the Consumer Price Index.
Minimum annual rentals and sublease income on facility and equipment leases
are as follows:
<TABLE>
<CAPTION>
MINIMUM
ANNUAL
RENTALS
----------
<S> <C>
1997........................................................ $ 703,400
1998........................................................ 710,300
1999........................................................ 596,900
2000........................................................ 339,600
2001........................................................ 18,300
Thereafter.................................................. 26,300
----------
Total....................................................... $2,394,800
----------
----------
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Rent expense(a).................................................... $725,300 $740,200 $723,300
Sublease income.................................................... $ 24,000 $ 26,400 $ --
</TABLE>
- ------------------
(a) Includes $292,100, $309,500 and $290,000 in 1994, 1995 and 1996,
respectively, for facility rent paid to the former owner of BMI.
9. FINANCIAL INSTRUMENTS:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base principally includes the commercial aviation,
aerospace and defense industries. The Company is directly affected by national
and international economic conditions in the aerospace and defense industries.
Management believes that such factors are mitigated by the longevity of the
Company's relationships with its customers. For the year ended December 31,
1996, the Company derived approximately 53% of its sales from ten (10) customers
consisting of nineteen (19) separate operating divisions.
It is the policy of the Company to deposit its cash in federally insured
financial institutions. From time to time, deposits exceed Federal Deposit
Insurance Corporation limits.
10. SUBSEQUENT EVENTS:
On July 1, 1997, the Company's prior owner sold 100% of the outstanding
stock of the Company to KII Acquisition Corp., a subsidiary of KII Holding. In
connection with such sale, all indebtedness of the Company other than the
Company's building mortgage was repaid. As part of the closing of the sale,
certain members of management of the Company were paid a bonus totaling
approximately $1,460,000 as part of a management participation agreement with
the prior owner. Management is entitled to receive additional compensation from
the prior owner based on a percentage of the amount repaid under the $1,750,000
Kleinert Seller Note issued in connection with the sale.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Watkins-Johnson Company:
We have audited the accompanying combined balance sheets of the Tactical
Subsystems and Microwave Devices Sectors of Watkins-Johnson Company (the
'Sectors'), as of December 31, 1995 and 1996 and September 30, 1997 and the
related combined statements of operations and invested equity and of cash flows
for the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997. These combined financial statements are the responsibility
of the management of Watkins-Johnson Company. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Sectors as of
December 31, 1995 and 1996 and September 30, 1997 and the combined results of
their operations and their combined cash flows for the periods stated above in
conformity with generally accepted accounting principles.
The Sectors are business units of Watkins-Johnson Company; consequently, as
indicated in Note 1, these financial statements have been derived from the
consolidated financial statements and accounting records of Watkins-Johnson
Company, and reflect significant assumptions and allocations. Moreover, as
indicated in Note 1, the Sectors rely on Watkins-Johnson Company for
administrative, management and other services. The reported financial position,
results of operations and cash flows of the Sectors could differ from those that
would have resulted had the Sectors operated autonomously or as an entity
independent of Watkins-Johnson Company.
DELOITTE & TOUCHE LLP
San Jose, California
November 4, 1997
F-18
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Receivables, net........................................................... $16,800 $18,200 $15,200
Unbilled receivables....................................................... 800 4,300 300
Inventories................................................................ 12,700 18,900 15,100
Deferred tax asset......................................................... 2,900 3,400 3,000
Other...................................................................... 300 300 300
------- ------- -------------
Total current assets......................................................... 33,500 45,100 33,900
Property Plant and Equipment:
Machinery and equipment.................................................... 42,800 44,500 45,100
Accumulated depreciation and amortization.................................. (37,100) (39,400) (40,800)
------- ------- -------------
Property, plant and equipment, net........................................... 5,700 5,100 4,300
------- ------- -------------
Total Assets................................................................. $39,200 $50,200 $38,200
------- ------- -------------
------- ------- -------------
LIABILITIES AND INVESTED EQUITY
Current liabilities:
Accounts payable........................................................... $ 5,800 $ 2,400 $ 2,400
Advances on contracts...................................................... 1,900 7,500 4,800
Accrued salaries and profit sharing........................................ 1,900 2,100 1,500
Accrued vacation........................................................... 2,300 2,300 2,000
Provision for losses on contracts.......................................... 2,700 2,900 3,000
Accrued expenses--other.................................................... 2,000 2,100 1,000
------- ------- -------------
Total current liabilities.................................................... 16,600 19,300 14,700
Deferred tax liability....................................................... 200 500 500
Deferred compensation........................................................ 1,000 500 500
Commitments and contingencies (Note 4)
Invested equity.............................................................. 21,400 29,900 22,500
------- ------- -------------
Total liabilities and invested equity........................................ $39,200 $50,200 $38,200
------- ------- -------------
------- ------- -------------
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
COMBINED STATEMENTS OF OPERATIONS AND INVESTED EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1995 1996 1997
------------ ------------ -----------------
<S> <C> <C> <C>
Sales................................................................... $ 97,600 $ 89,200 $ 67,900
Cost of goods sold...................................................... 65,200 68,100 47,900
------------ ------------ -----------------
Gross profit....................................................... 32,400 21,100 20,000
Operating expenses:
Research and development.............................................. 4,800 3,500 1,600
Selling and administrative............................................ 10,000 8,300 5,600
Corporate allocations................................................. 2,500 2,800 1,900
------------ ------------ -----------------
Total operating expenses........................................... 17,300 14,600 9,100
------------ ------------ -----------------
Income before income taxes.............................................. 15,100 6,500 10,900
Income tax provision.................................................... 5,900 2,500 4,200
------------ ------------ -----------------
Net income......................................................... 9,200 4,000 6,700
Invested equity, beginning of period.................................... 31,000 21,400 29,900
Net advances to (from) the sectors...................................... (18,800) 4,500 (14,100)
------------ ------------ -----------------
Invested equity, end of period.......................................... $ 21,400 $ 29,900 $ 22,500
------------ ------------ -----------------
------------ ------------ -----------------
</TABLE>
See notes to combined financial statements.
F-20
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -----------------
1995 1996 1997
-------- ------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 9,200 $ 4,000 $ 6,700
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization of property, plant and
equipment.................................................... 2,600 2,300 1,400
Deferred taxes.................................................. (200) (200) 400
Net changes in operating assets and liabilities:
Receivables, net................................................ 2,500 (4,900) 7,000
Inventories..................................................... 5,000 (6,200) 3,800
Other current assets............................................ (100) -- --
Accrued expenses and payables................................... 2,300 (3,100) (2,000)
Advances on contracts........................................... (1,200) 5,600 (2,700)
Provisions for losses on contracts.............................. 800 200 100
Deferred compensation........................................... 100 (500) --
-------- ------- -----------------
Net cash provided by (used in) operating activities.................... 21,000 (2,800) 14,700
-------- ------- -----------------
Cash flows from investing activities:
Additions to property, plant and equipment........................... (2,200) (1,700) (600)
-------- ------- -----------------
Cash flows from financing activities:
Net advances to (from) the Sectors................................... (18,800) 4,500 (14,100)
-------- ------- -----------------
Net increase in cash................................................... -- -- --
Cash, beginning of period.............................................. -- -- --
-------- ------- -----------------
Cash, end of period.................................................... $ -- $ -- $ --
-------- ------- -----------------
-------- ------- -----------------
</TABLE>
See notes to combined financial statements.
F-21
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
The Tactical Subsystems and Microwave Devices Sectors ('TSMD' or the
'Sectors') are business units within the Microwave Products Group (the 'Group')
of Watkins-Johnson Company ('Watkins-Johnson' or the 'Company'). The Sectors
design, market and manufacture a broad range of microwave devices, modular
subsystems and electronic equipment operating over the RF and microwave
frequency bands for sale primarily for military and aerospace applications.
Basis of Presentation
As business units of Watkins-Johnson, the Company does not prepare separate
financial statements for the Sectors in accordance with generally accepted
accounting principles ('GAAP') in the normal course of operations. Accordingly,
the accompanying combined financial statements have been derived from the
consolidated assets, liabilities, revenues and expenses, and the accounting
records of Watkins-Johnson. The accompanying combined financial statements
reflect the assets, liabilities, revenue and expenses directly attributable to
the Sectors as well as allocations deemed reasonable by management to present
the financial position, results of operations and cash flows of the Sectors on a
stand-alone basis. Although management is unable to estimate the actual costs
that would have been incurred if the services performed by Watkins-Johnson had
been purchased from independent third parties, the allocation methodologies have
been described within the respective footnotes, where applicable, and management
considers the allocations to be reasonable. However, the financial position,
results of operations and cash flows of the Sectors may differ from those that
would have been achieved had the Sectors operated autonomously or as a combined
entity independent of Watkins-Johnson.
Revenue Recognition and Receivables
Revenues, other than long-term contracts, are recorded upon shipment or
completion of tasks as specified in the contract. Estimated product warranty
costs are accrued at the time of shipment; actual warranty costs have not
differed materially from these accrued estimates. Sales and allowable fees under
cost-reimbursement contracts are recorded as costs are incurred. Long-term
contract sales and cost of goods sold are recognized using the
percentage-of-completion method based on the actual physical completion of work
performed and the ratio of costs incurred to total estimated costs to complete
the contract. Any anticipated losses on contracts are charged to earnings when
identified.
Unbilled receivables represent revenue recognized for long-term contracts
not yet billable based on the terms of the contract. These amounts are billable
upon shipment of the product, achievement of milestones, or completion of the
contract. Unbilled receivables are expected to be billed and collected within
one year. Receivables representing retainage not collectible within one year are
not material. There are no significant billed or unbilled receivables subject to
future negotiation.
Government contracts have provisions for audit, price redetermination and
other profit and cost limitations. Contracts may be terminated without prior
notice at the government's convenience. In the event of such termination, the
Company may be compensated for the work performed, a reasonable allowance for
profit, and commitments at the time of termination. The right to terminate for
convenience has not had any significant effect on the Company's financial
position or results of operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to trade receivables is limited due to
the nature of the customers to which the Company's products are sold.
F-22
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories
Inventories are stated at the lower of cost, using first-in, first-out and
average-cost basis, or market. Cost of inventory items is based on purchase and
production cost. Long-term contract costs and selling and administrative
expenses are excluded from inventory. Progress payments are not netted against
inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Leases which at inception
assure the lessor full recovery of the fair market value of the property over
the lease term are capitalized. Provision for depreciation and amortization is
primarily based on the sum-of-the-years'-digits and straight-line methods.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, which established the accounting
and reporting requirements for recognizing and measuring impairment of
long-lived assets. The effect of adopting this standard did not have a material
effect on fiscal 1996 or the nine months ended September 30, 1997.
Accounts Payable and Accrued Expenses
Accounts payable and accrued liabilities records are maintained at the
Group level. For determining balance sheet amounts, accounts payable and other
accrued expenses have been allocated to the Sectors based on the ratio that the
total sales of the Sectors bears to the total sales of the Group. In the opinion
of management, the liabilities allocated to the Sectors as of December 31, 1995
and 1996 and September 30, 1997 are reasonable.
Deferred Compensation
The Company has deferred compensation plans covering selected members of
management and key technical employees. The purpose is to reward and encourage
talented employees to remain with the Company. Such amounts are payable in
accordance with various fixed payment schedules.
Stock-Based Compensation
The Sectors account for stock-based compensation under the intrinsic value
method as defined in Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees,' (APB 25).
Research and Development
Research and development (R&D) costs incurred by the Sectors are
accumulated on an identified project basis. Costs associated with
customer-funded R&D are included in cost of sales. Company-sponsored R&D
projects related to the Sectors is included in expense in the period incurred.
Allocated Expenses
Certain overhead, selling, administrative and corporate expenses represent
an allocation of the Group's operating expenses and include payroll and charges
for office space which the Sector shares with Watkins-Johnson. These costs have
been allocated to the Sectors based primarily on the allocation methodology
prescribed by government regulations pertaining to government contractors, which
management believes to be a reasonable allocation method.
Corporate support costs such as treasury, cash management, accounting,
financial management, legal, public relations, information systems, human
resources, telecommunications, and support services are allocated to the Group
based primarily on the ratio that the total cost of sales of the Group bears to
the total cost of sales of the Company, which management believes to be a
reasonable allocation method. However, such amounts may not be the same as would
have been incurred had the Sectors operated autonomously or as a combined entity
independent of Watkins-Johnson.
F-23
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In 1995, the Sectors incurred a charge of approximately $400,000, included
in sales and administrative expense, for a reduction in force of sales
employees. In 1996, the Sectors incurred a charge of approximately $700,000,
included in cost of sales, for a reduction in force of operational and
manufacturing employees.
Interest Expense
No interest expense has been charged to the Sectors on their invested
equity by Watkins-Johnson.
Income Taxes
The Sectors' results are included in the consolidated federal and state tax
returns of Watkins-Johnson and its affiliates. The Sectors have provided for
income taxes as if they were a separate taxpayer utilizing federal and state
statutory tax rates. The combined financial statements include provisions for
deferred income taxes using the liability method for transactions that are
reported in one period for financial accounting purposes and in another for
income tax purposes. Deferred tax assets have been recognized based on the
realizability determination of Watkins-Johnson.
Cash Flows
The Company does not maintain separate cash accounts for its Sectors, and
all cash receipts and disbursements are made at the Group level. For the
purposes of the statements of cash flows, the allocated assets and liabilities
of the Sectors have been used to calculate the cash flow statements.
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 at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. In addition to the allocation of corporate
and Group expenses described above, the most significant assumptions and
estimates relate to allowance for bad debts, inventory obsolescence, percentage
of completion on long-term contracts and warranty provisions. Actual results
could differ from those estimates.
2. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Trade.................................................... $16,300 $17,300 $15,100
Long-term contracts:
Billed................................................. 900 1,400 600
Unbilled............................................... 800 4,300 300
------- ------- -------------
Total.................................................... 1,700 5,700 900
------- ------- -------------
18,000 23,000 16,000
Less: allowance for doubtful accounts.................... 400 500 500
------- ------- -------------
Receivables, net......................................... $17,600 $22,500 $15,500
------- ------- -------------
------- ------- -------------
</TABLE>
F-24
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Finished goods........................................... $ 800 $ 900 $ 1,200
Work-in-progress......................................... 8,200 11,000 6,800
Raw materials............................................ 3,700 7,000 7,100
------- ------- -------------
$12,700 $18,900 $15,100
------- ------- -------------
------- ------- -------------
</TABLE>
In the fourth quarter of 1996, the Sectors incurred a charge of
approximately $1,500,000, included in cost of sales, for the writeoff of slow
moving and excess inventories.
4. FACILITIES
The Sectors operate in facilities owned or leased by Watkins-Johnson, and
are not included in the combined balance sheets of the Sectors. The Sectors are
allocated depreciation and lease costs based on an estimate of occupancy.
Such facilities are subject to an environmental remediation plan being
monitored by various regulatory agencies. Watkins-Johnson recorded a provision
for estimated remediation actions and cleanup costs related to these facilities
in 1991, and no additional provisions have been made by the Company, nor is any
charges relating to such remediation included in the Sectors' combined
statements of operations for the years ended 1995 and 1996 or the nine months
ended September 30, 1997. Management of Watkins-Johnson believes the accrual of
$8 million as of December 31, 1996 and $7 million as of September 30, 1997 (not
included in the accompanying combined balance sheets of the Sectors) remains
adequate based on facts known at that time. However, changes in environmental
regulations, improvements in cleanup technology and discovery of additional
information concerning this site could affect estimated costs in the future.
5. SHAREOWNERS' EQUITY
Stock Option Plans
Employees of the Sectors participate in the stock option plans of the
Company. The employee stock option plan provides for grants of nonqualifying and
incentive stock options to certain key employees and officers. Watkins-Johnson
may grant options to purchase up to 3,900,000 shares of common stock. The
options are granted at the market price on date of grant and expire on the tenth
anniversary date. One-third of the options granted are exercisable in each of
the third, fourth and fifth succeeding years. The plan allows those employees
who are subject to the insider trading restrictions certain limited rights to
receive cash in the event of a change in control.
As discussed in Note 1, the Company applies Accounting Principles Board
Opinion No. 25, 'Accounting for Stock Issued to Employees,' and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans, and
amortized over the vesting period of the awards consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
'Accounting for Stock-Based Compensation,' the Sectors' pro forma combined net
income for the years ended December 31, 1995 and 1996 and nine months ended
September 30, 1997 would have been $9,000,000, $3,800,000 and $6,600,000,
respectively. However, the impact of outstanding nonvested stock options granted
prior to 1995 has been excluded from the pro forma calculation; accordingly, the
1995, 1996 and 1997 pro forma adjustments are not indicative of future period
pro
F-25
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SHAREOWNERS' EQUITY--(CONTINUED)
forma adjustments, when the calculation will apply to all applicable stock
options. The weighted average fair value of options granted during 1995, 1996
and 1997 is calculated as $13.58, $5.94 and $6.81, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for the stock of Watkins-Johnson: dividend yield of 1.7% for
1995 grants, 1.5% for 1996 grants and 1.28% for 1997 grants; volatility, 37.5%
for 1995 and 1996 and 38% for 1997; risk-free interest rate at the time of grant
of 7.1% for 1995, 6.2% for 1996 and 6.0% for 1997; and an expected term to
exercise of approximately 3.5 months from the vest date for 1996 and 1995 and
4.5 months from the vest date for 1997. The Company's calculations are based on
a multiple option valuation approach, and forfeitures are recognized as they
occur.
6. INCOME TAXES
The provision for taxes on income from operations consists of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal........................................................ $4,900 $2,300 $3,100
State.......................................................... 1,200 400 800
------ ------ ------
Total current.................................................... 6,100 2,700 3,900
Deferred
Federal........................................................ (200) (200) 300
State.......................................................... -- -- --
------ ------ ------
Total deferred................................................... (200) (200) 300
------ ------ ------
Total............................................................ $5,900 $2,500 $4,200
------ ------ ------
------ ------ ------
</TABLE>
Deferred tax assets (liabilities) consist of the following at December 31,
1995 and 1996 and September 30, 1997 (in thousands):
<TABLE>
<S> <C> <C> <C>
Program accruals................................................. $1,000 $1,000 $1,000
Inventory reserves............................................... 800 1,500 1,100
Bad debt reserves................................................ 100 200 200
Compensation..................................................... 600 400 300
Uniform capitalization........................................... 100 200 200
State taxes...................................................... 200 -- 100
Worker's compensation reserve.................................... 100 100 100
------ ------ ------
Gross deferred tax assets........................................ 2,900 3,400 3,000
Deferred tax liabilities-depreciation............................ (200) (500) (500)
------ ------ ------
Net deferred tax assets.......................................... $2,700 $2,900 $2,500
------ ------ ------
------ ------ ------
</TABLE>
The differences between the effective income tax rate and the statutory
federal income tax rate are as follows:
<TABLE>
<S> <C> <C> <C>
Statutory federal tax rate....................................... 35.0% 35.0% 35.0%
Export sales benefit............................................. (1.0) (0.8) (1.2)
State taxes, net of federal benefit.............................. 5.1 4.3 4.7
------ ------ ------
Effective rate................................................... 39.1% 38.5% 38.5%
------ ------ ------
------ ------ ------
</TABLE>
The effective tax rate of 38.5% for the nine months ended September 30,
1997 represents the Company's estimate of the 1997 annual tax rate for the
Sectors.
F-26
<PAGE>
TACTICAL SUBSYSTEMS AND MICROWAVE DEVICES
SECTORS OF WATKINS-JOHNSON COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. EMPLOYEE BENEFIT PLANS
The Watkins-Johnson Employees' Investment Plan conforms to the requirements
of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal
Revenue Code as a qualified defined contribution plan. The Plan covers
substantially all employees of the Sectors and for 1995, 1996 and 1997 provided
that the Company match employees' 401(k) salary deferrals up to 3% of eligible
employee compensation. The amount charged to income was $897,000 in 1995,
$804,000 in 1996 and $528,000 for the nine months ended September 30, 1997.
The Employee Stock Ownership Plan (ESOP) was established to encourage
employee participation and long-term ownership of Company stock and covers
substantially all employees of the Sectors. The Board determines each year's
contribution depending on the performance and financial condition for the
Company. The Board approved a contribution equal to 1% of eligible employee
compensation for 1995, 1996 and the nine months ended September 30, 1997, which
resulted in charges to income of $244,000, $286,000 and $192,000, respectively.
The ESOP is a qualified defined contribution plan under ERISA.
8. SIGNIFICANT CUSTOMERS
The Sectors sell primarily to the defense market, and had sales of
$72,200,000 in 1995, $62,400,000 in 1996 and $47,200,000 in the nine months
ended September 30, 1997 to the U.S. government and its prime contractors.
Export sales were $15,000,000 in 1995, $13,700,000 in 1996 and $13,900,000 in
the nine months ended September 30, 1997.
Sales to individual customers representing greater than 10% of company
sales are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Hughes Aircraft Company.................................. $40,000 $30,000 $20,000
Raytheon Company......................................... 8,300 8,000 14,000
United States government................................. 13,000 4,000 3,000
</TABLE>
In October 1997, Raytheon Co. obtained government approval to acquire the
defense holdings of Hughes Aircraft Company in a merger. It is unknown what
effect, if any, such a merger may have on the Sectors at this time.
9. SALE OF TSMD OPERATIONS
On or prior to October 31, 1997, the Company contributed the operations of
TSMD, along with certain of the Sectors' assets and the transfer of certain
liabilities to its subsidiary, W-J TSMD, Inc., which was renamed Stellex
Microwave Systems, Inc. (Stellex Microwave). The stock of Stellex Microwave was
sold to TSMD Acquisition Corp. on October 31, 1997. The transaction was
completed under a previously announced Stock Purchase Agreement dated as of
August 29, 1997 (Stock Purchase Agreement).
Watkins-Johnson has agreed to sublease space to Stellex Microwave in Palo
Alto, California for three years. Under the terms of the Stock Purchase
Agreement and the sublease agreement, Watkins-Johnson has generally retained
liability for contamination of the property that (i) occurred on or prior to the
consummation of the sale and (ii) occurs during the term of the sublease
agreement not caused primarily by Stellex Microwave, and has agreed to indemnify
Stellex Microwave in connection therewith.
F-27
<PAGE>
APPENDIX I
GLOSSARY
Amplifier: A device which is used in a transmitter or receiver to increase the
power level of the signal to a useful range.
CNC: Computer Numerical Control. A manufacturing system which allows machinists
to use menu prompts on a computer screen to quickly program a machine tool to
produce complex parts.
Converter: A circuit that changes radio frequency signals from one frequency to
another.
Device: An electrical component or integrated circuit.
EDM: Electrical Discharge Machining. A cutting method by which materials are
machined without physical contact using an electrically charged wire that melts
a small portion of the work piece. Since no cutting forces are present, EDM is
ideal for delicate parts.
Filter: A circuit which selectively allows signals of desired frequencies to
pass while simultaneously rejecting signals of undesired frequencies.
Four and five axis machining: A machining method by which a CNC machine can
independently move four or five machine axes to generate taper cuts.
Frequency: The number of complete oscillations per second in an electromagnetic
wave.
GaAs: Gallium Arsenide. Substrate material used in the fabrication of high
frequency diodes, transistors, and integrated circuits.
High Radio Frequency: Nomenclature used to describe frequency ranges from 3
megahertz to 300 gigahertz.
High Reliability: See Space Qualified.
Integrated Subsystem: A collection of MFMs packaged together on a mechanical
mounting structure and integrated with control and power conditioning
electronics.
MFM: Multi-function module. A hermetically sealed structure containing a custom
substrate base, which is used as a transmission medium, along with active chips
such as diodes and transistors.
Microwave: Frequency band nomenclature used to characterize signals with a
wavelength between 30 and 1 centimeters in length.
Millimeter wave: Frequency band nomenclature used to characterize signals with a
wavelength below 1 centimeter in length.
Mixer: A device which converts radio frequency power at one frequency into power
at another frequency to facilitate signal processing.
Oscillator: A component that oscillates at a set frequency, thereby generating a
signal.
Output Transducer: A device which converts an electrical message signal to its
desired output form. For example, the output transducer for a voice
communication system can be a loudspeaker.
Processor: An electronic device that operates on data.
Receiver: A device which operates on the output signal from a transmission
channel in preparation for delivery to the output transducer.
SFM: Single Function Module. An enclosure which contains circuitry intended to
realize a single electrical function. These functions include amplifiers,
filters, oscillators and frequency converters.
Space Qualified: Electrical components which have been environmentally tested,
screened and documented to a level suitable for delivery and use in space based
applications. Also referred to as high reliability.
Substrate: The physical material on which a thin film or integrated circuit is
fabricated.
I-1
<PAGE>
Thin Film: A photolithography process used to deposit high definition metallized
traces on substrate materials.
Transceiver: An integrated device which incorporates the functions of a
transmitter and receiver in one package. Typically used in a communication
system in which the transmitter and receiver share a common antenna.
Transmitter: A device which processes an input signal to produce a transmitted
signal suited to the characteristics of the transmission channel.
Transmission Channel: The electrical medium that bridges the distance from
source to destination. The transmission channel can be a pair of wires, a
coaxial cable or a radio wave.
Tuner: A microwave device designed to search and collect communication and
non-communication signals, while maintaining all of the received signal's
characteristics.
VCO: Voltage Controlled Oscillator. A device which generates an output signal
whose operating frequency is determined and adjusted by a variable input direct
current (DC) voltage.
Wavelength: The distance between the peak cycles of a periodic electromagnetic
wave.
YIG: Yttrium-Iron Garnet. Magnetic insulators which resonate at a microwave
frequency when magnetized by a suitable direct magnetic field. Typically used in
tunable microwave filters and oscillators.
I-2
<PAGE>
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- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................... i
Prospectus Summary............................. 1
Risk Factors................................... 13
Capitalization................................. 22
Pro Forma Consolidated Financial Data.......... 23
Selected Historical Financial Data............. 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 31
Business....................................... 40
Management..................................... 58
Certain Transactions........................... 62
Principal Stockholders......................... 66
Description of Certain Indebtedness............ 67
The Exchange Offer............................. 69
Description of Notes........................... 77
Certain U.S. Federal Income Tax
Considerations............................... 106
Plan of Distribution........................... 107
Legal Matters.................................. 108
Experts........................................ 108
Index to Financial Statements.................. F-1
Glossary....................................... I-1
</TABLE>
Until , 1998 (90 days after the commencement of the Exchange Offer),
all dealers effecting transactions in the registered securities, whether or not
participating in the distribution, may be required to deliver a prospectus. This
delivery requirement is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$100,000,000
[LOGO]
OFFER TO EXCHANGE $1,000 IN PRINCIPAL
AMOUNT OF ITS SERIES B 9 1/2% SENIOR
SUBORDINATED NOTES DUE 2007 WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF ITS
9 1/2% SENIOR SUBORDINATED NOTES DUE 2007.
THE EXCHANGE AGENT FOR THE
EXCHANGE OFFER IS:
MARINE MIDLAND BANK
By Facsimile:
(212) 658-2292
Confirmation by Telephone:
(212) 658-5931
By Mail, Overnight Courier or Hand Delivery
140 Broadway -- Level A
New York, New York 10005-1180
Attention: Corporate Trust Services
------------------------
PROSPECTUS
------------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used but not defined in Part II have the meanings
ascribed to them in the Prospectus contained in this Registration Statement.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Stellex Industries, Inc. and its subsidiaries, TSMD Acquisition Corp., KII
Holding Corp. and KII Acquisition Corp. (collectively, the 'Delaware
Subsidiaries'), are Delaware corporations. Section 145 ('Section 145') of the
General Corporation Law of the State of Delaware (the 'DGCL') provides that a
Delaware corporation may indemnify any persons who were, are or are threatened
to be made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person is or was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any persons who are, were or are threatened
to be made, a party to any threatened, pending or completed action or suit by or
in the right of the corporation by reasons of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, provided that no indemnification is
permitted without judicial approval if the officer, director, employee or agent
is adjudged to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Certificate of Incorporation and/or Bylaws of each of Stellex and the
Delaware Subsidiaries provide for the indemnification of persons under the
circumstances described in Section 145 of the DGCL.
Stellex Microwave Systems, Inc., Stellex Aerospace, Bandy Machining
International, Paragon Precision Products, Scanning Electron Analysis
Laboratories, Inc. and General Inspection Laboratories, Inc. are California
corporations and their Articles of Incorporation and Bylaws provide for
indemnification of their officers and directors to the fullest extent permitted
by law. Section 204(10) of the California General Corporation Law (the 'CGCL')
eliminates the liability of a corporation's directors for monetary damages to
the fullest extent permissible under California law. Pursuant to Section 204(11)
of the CGCL, a California corporation may idemnify Agents (as defined in Section
317 of the CGCL), subject only to the applicable limits set forth in Section 204
of the CGCL with respect to actions for breach of duty to the corporation and
its shareholders.
As permitted by Section 317 of the CGCL, indemnification may be provided by
a California corporation of its Agents (as defined in Section 317 of the CGCL),
to the maximum extent permitted by the CGCL, in connection with any proceeding
arising by reason of the fact that such person is or was such a director or
officer, against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in any such proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<S> <C> <C>
*3.1 -- Certificate of Incorporation of Stellex Industries, Inc.
*3.2 -- Bylaws of Stellex Industries, Inc.
*3.3 -- Certificate of Incorporation of TSMD Acquisition Corp.
*3.4 -- Bylaws of TSMD Acquisition Corp.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
*3.5 -- Articles of Incorporation of Stellex Microwave Systems, Inc.
*3.6 -- Bylaws of Stellex Microwave Systems, Inc.
*3.7 -- Certificate of Incorporation of KII Holding Corp.
*3.8 -- Bylaws of KII Holding Corp.
*3.9 -- Certificate of Incorporation of KII Acquisition Corp.
*3.10 -- Bylaws of KII Acquisition Corp.
*3.11 -- Articles of Incorporation of Stellex Aerospace.
*3.12 -- Bylaws of Stellex Aerospace.
*3.13 -- Articles of Incorporation of Bandy Machining International.
*3.14 -- Bylaws of Bandy Machining International.
*3.15 -- Articles of Incorporation of Paragon Precision Products.
*3.16 -- Bylaws of Paragon Precision Products.
*3.17 -- Articles of Incorporation of Scanning Electron Analysis Laboratories, Inc.
*3.18 -- Bylaws of Scanning Electron Analysis Laboratories, Inc.
*3.19 -- Articles of Incorporation of General Inspection Laboratories, Inc.
*3.20 -- Bylaws of General Inspection Laboratories, Inc.
*4.1 -- Purchase Agreement dated as of October 23, 1997, by and among Stellex Industries, Inc., TSMD
Acquisition Corp., Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex
Aerospace, Bandy Machining International, Paragon Precision Products, Scanning Electron Analysis
Laboratories, Inc. and General Inspection Laboratories, Inc. and Societe Generale Securities
Corporation, BT Alex. Brown Incorporated and Jefferies & Company, Inc.
*4.2 -- Indenture dated as of October 31, 1997 by and among Stellex Industries, Inc., TSMD Acquisition Corp.,
Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace, Bandy
Machining International, Paragon Precision Products, Scanning Electron Analysis Laboratories, Inc.
and General Inspection Laboratories, Inc. and Marine Midland Bank, as trustee.
*4.3 -- Registration Rights Agreement dated as of October 31, 1997 by and among Stellex Industries, Inc.,
TSMD Acquisition Corp., Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp.,
Stellex Aerospace, Bandy Machining International, Paragon Precision Products, Scanning Electron
Analysis Laboratories, Inc. and General Inspection Laboratories, Inc. and Societe Generale Securities
Corporation, BT Alex. Brown Incorporated and Jefferies & Company, Inc.
*5.1 -- Opinion of Winston & Strawn.
10.1 -- Credit Agreement dated as of October 31, 1997 by and among Stellex Industries, Inc., TSMD Acquisition
Corp., Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace,
Bandy Machining International, Paragon Precision Products, Scanning Electron Analysis Laboratories,
Inc. and General Inspection Laboratories, Inc. and Societe Generale, as Agent.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
+10.2 -- Stock Purchase Agreement dated as of August 29, 1997 by and among TSMD Acquisition Corp.,
Watkins-Johnson Company and W-J TSMD Inc.
The following schedules to the Stock Purchase Agreement have been omitted. The Company hereby
undertakes to furnish supplementally a copy of any such omitted schedules to the Commission upon
request.
SCHEDULE TITLE
----------------- -----------------------------------------------------------------------
Schedule 2.4 -- Status of Tax Audits
Schedule 2.5(a) -- Customer Contracts
Schedule 2.5(b) -- Certain Supplier Contracts
Schedule 2.5(c) -- Government Contracts
Schedule 2.5(d) -- Certain Contracts over $250,000
Schedule 2.5(e) -- Certain Contracts in Excess of Three Years
Schedule 2.5(f) -- Substantially Dependent/Material Adverse Contracts
Schedule 2.5(m) -- Material Losses
Schedule 2.5(n) -- Offshore Production Contracts
Schedule 2.6(d) -- Government Furnished Items
Schedule 2.16 -- Employee Benefit Plan
Schedule 2.21 -- Key Customer/Supplier
Schedule 2.23(c) -- Government Contract Audit
Schedule 2.24 -- Backlog
Schedule 2.25 -- Clearances
Schedule 5.7 -- Warranty Principles
Schedule 5.10 -- Proration
Schedule 9.15 -- Knowledge
*10.3 -- Stock Purchase Agreement dated as of May 23, 1997, by and among KII Acquisition Corp. and Kleinert
Industrie Holding AG.
The following schedules to the Stock Purchase Agreement have been omitted. The Company hereby
undertakes to furnish supplementally a copy of any such omitted schedules to the Commission
upon request.
SCHEDULE TITLE
------------------- --------------------------------------------------------------------
Schedule 3.1.5 -- No Violation (Seller)
Schedule 3.1.6 -- Third Party Consents (Seller)
Schedule 3.1.7 -- No Litigation (Seller)
Schedule 3.2.2(a) -- Organization and Good Standing (Company)
Schedule 3.2.2(b) -- Organization and Good Standing (Subsidiaries)
Schedule 3.2.3(b) -- Outstanding Stock of Subsidiaries
Schedule 3.2.5 -- Title to Assets
Schedule 3.2.6(b) -- Absence of Certain Changes
Schedule 3.2.6(c) -- Undisclosed Liabilities
Schedule 3.2.8 -- Compliance with Laws
Schedule 3.2.11 -- No Violation (Company/Subsidiaries)
Schedule 3.2.12 -- Third Party Consents (Company/Subsidiaries)
Schedule 3.2.13 -- No Litigation
Schedule 3.2.14(a) -- Plans
Schedule 3.2.14(b) -- Health Benefits
Schedule 3.2.14(c) -- Claims Related to Plans
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
SCHEDULE TITLE
------------------- --------------------------------------------------------------------
Schedule 3.2.14(e) -- Plans in Compliance
Schedule 3.2.14(h) -- Plan Administration
Schedule 3.2.14(i) -- Funding
Schedule 3.2.14(j) -- Funding of Deferred Compensation Plans
Schedule 3.2.15A -- Owned and Leased Real Property
Schedule 3.2.15B -- Encumbrances, etc.
Schedule 3.2.16 -- Accounts Receivable
Schedule 3.2.17 -- Inventory
Schedule 3.2.18 -- Customers
Schedule 3.2.19 -- Product Warranty and Product Liability
Schedule 3.2.20 -- Insurance
Schedule 3.2.21 -- Machinery and Equipment
Schedule 3.2.22 -- Intellectual Properties
Schedule 3.2.23 -- Capital Projects and Expenditures
Schedule 3.2.24 -- Subsidiaries
Schedule 3.2.25(a) -- Hazardous Substances--Use, Storage & Disposal
Schedule 3.2.25(b) -- Hazardous Substances--Asbestos, etc.
Schedule 3.2.25(c) -- Hazardous Substances--Environmental Litigation
Schedule 3.2.25(d) -- Hazardous Substances--Compliance
Schedule 3.2.25(e) -- Hazardous Substances--Underground Storage Tanks
Schedule 3.2.26(b) -- Taxes--Returns Filed, Taxes Paid
Schedule 3.2.26(c) -- Taxes--Tax Reserves
Schedule 3.2.26(d) -- Taxes--Returns Furnished
Schedule 3.2.26(e) -- Taxes--Deficiencies, Audits, etc.
Schedule 3.2.27 -- Compensation, Vacation Time, etc.
Schedule 3.2.29 -- Bank Accounts, Investments
Schedule 3.2.30 -- Contracts, Other Agreements
Schedule 3.2.31 -- Permits and Licenses
Schedule 3.2.32 -- Indebtedness
Schedule 5.2.2 -- Capital Transactions
Schedule 5.2.3 -- Personal Property
Schedule 5.2.9 -- Noncompliance with Existing Indebtedness
Schedule 6.2.1 -- Elimination of Intercompany Accounts
Schedule 6.2.2 -- Intercompany Agreements
Schedule 7.1.6 -- Compliance with Law
Schedule 9.2 -- Inventory Reserve Amount
*10.4 -- Stellex Aerospace Investor Agreement dated as of July 1, 1997, by and among KII Holding Corp. and
Greystoke Capital Management Limited LDC, and Bradley C. Call, Julius E. Hodge, Lawrence R. Smith,
John Barriatua, Roland H. Marti, Arun Kumar and Louis A. Brown.
*10.5 -- Promissory Note dated as of July 1, 1997 by KII Acquisition Corp. to Kleinert Industrie Holding AG.
*10.6 -- Promissory Note dated September 6, 1991 by Paragon Precision Products to Farm Bureau Life Insurance
Company.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
*10.7 -- Amended and Restated Management Advisory Services Agreement, effective as of November 1, 1997, by and
between Mentmore Holdings Corporation, Stellex Industries, Inc., TSMD Acquisition Corp., Stellex
Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace, Bandy Machining
International, Paragon Precision Products, Scanning Electron Analysis Laboratories, Inc. and General
Inspection Laboratories, Inc.
*10.8 -- Tax Allocation and Indemnity Agreement dated as of October 31, 1997, and retroactively applied to the
calendar year ended December 31, 1997, by and among Stellex Industries, Inc., TSMD Acquisition Corp.,
Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace, Bandy
Machining International, Paragon Precision Products, Scanning Electron Analysis Laboratories, Inc.
and General Inspection Laboratories, Inc.
+10.9 -- Gallium Arsenide and Thin Film Supply and Services Agreement dated as of October 31, 1997 between
Stellex Industries, Inc. and Watkins-Johnson Company.
+10.10 -- Metal Injection Molding, Glass Seal and Hybrid Assembly Facility Agreement dated as of October 31,
1997 between Stellex Industries, Inc. and Watkins-Johnson Company.
+10.11 -- Cross License Agreement dated as of October 31, 1997 between Watkins-Johnson Company, Stellex
Microwave Systems, Inc. and TSMD Acquisition Corp.
*10.12 -- Employment Agreement dated as of November 1, 1997 between Stellex Microwave Systems, Inc. and Keith
Gilbert.
10.13 -- Commercial Sub-Sublease (Buildings 3/4/5), dated October 31, 1997, by and between Watkins-Johnson
Company and W-J TSMD Inc.
10.14 -- Commercial Sub-Sublease (Building 6), dated October 31, 1997, by and between Watkins-Johnson Company
and W-J TSMD Inc.
*12.1 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
*21.1 -- Subsidiaries of the Registrants.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Deloitte & Touche LLP.
*23.3 -- Consent of Winston & Strawn (included in Exhibit 5.1).
*24.1 -- Powers of Attorney.
*25.1 -- Statement of Eligibility of Trustee.
*27.1 -- Financial Data Schedule.
*99.1 -- Form of Letter of Transmittal.
*99.2 -- Form of Notice of Guaranteed Delivery.
*99.3 -- Form of Tender Instructions.
</TABLE>
- ------------------
* Previously filed.
+ Confidential treatment requested for a portion of this exhibit previously
filed. Such omitted confidential portion has been filed separately with the
Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES:
Schedule II--Valuation and Qualifying Accounts and Reserves
ITEM 22. UNDERTAKINGS.
Each undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
II-5
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424 (b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
'Calculation of Registration Fee' table in the effective
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
the time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) Each undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), the registrant
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of
the applicable form;
(5) Each registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii)
that purports to meet the requirements of Section 10(a)(3) of the
Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrants pursuant to the provisions
described under Item 20 or otherwise, the registrants have been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, each
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue;
(7) Each undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration
statement through the date of responding to the request; and
(8) Each undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement
when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, as of January 29, 1998.
STELLEX INDUSTRIES, INC.
By: /s/ William L. Remley
---------------------------------
William L. Remley
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman, President, Chief Executive January 29, 1998
- ------------------------------------------ Officer and Treasurer
William L. Remley
*P. Roger Byer Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
P. Roger Byer officer)
*By /s/ William L. Remley
------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, as of January 29, 1998.
TSMD ACQUISITION CORP.
By: /s/ William L. Remley
---------------------------------
William L. Remley
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley President and Treasurer January 29, 1998
- ------------------------------------------ (principal financial and accounting
William L. Remley officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto,
State of California, as of January 29, 1998.
STELLEX MICROWAVE SYSTEMS, INC.
By: /s/ Keith D. Gilbert
---------------------------------
Keith D. Gilbert
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ William L. Remley Chairman of the Board of Directors and January 29, 1998
- ------------------------------------------ Treasurer
William L. Remley
*Richard L. Kramer Vice Chairman January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ Keith D. Gilbert President and Chief Executive Officer and January 29, 1998
- ------------------------------------------ Director
Keith D. Gilbert
*P. Roger Byer Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
P. Roger Byer officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Woodland
Hills, State of California, as of January 29, 1998.
KII HOLDING CORP.
By: /s/ Bradley C. Call
---------------------------------
Bradley C. Call
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman and Treasurer January 29, 1998
- ------------------------------------------
William L. Remley
/s/ Bradley C. Call President and Director January 29, 1998
- ------------------------------------------
Bradley C. Call
*Julius E. Hodge Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
Julius E. Hodge officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Woodland
Hills, State of California, as of January 29, 1998.
KII ACQUISITION CORP.
By: /s/ Bradley C. Call
---------------------------------
Bradley C. Call
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman and Treasurer January 29, 1998
- ------------------------------------------
William L. Remley
/s/ Bradley C. Call President and Director January 29, 1998
- ------------------------------------------
Bradley C. Call
*Julius E. Hodge Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
Julius E. Hodge officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Woodland
Hills, State of California, as of January 29, 1998.
STELLEX AEROSPACE
By: /s/ Bradley C. Call
---------------------------------
Bradley C. Call
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman and Assistant Treasurer January 29, 1998
- ------------------------------------------
William L. Remley
/s/ Bradley C. Call President, Chief Executive Officer and January 29, 1998
- ------------------------------------------ Director
Bradley C. Call
*Julius E. Hodge Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
Julius E. Hodge officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Burbank,
State of California, as of January 29, 1998.
BANDY MACHINING INTERNATIONAL
By: /s/ Thomas B. Fulton
---------------------------------
Thomas B. Fulton
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman and Assistant Treasurer January 29, 1998
- ------------------------------------------
William L. Remley
/s/ Thomas B. Fulton President January 29, 1998
- ------------------------------------------
Thomas B. Fulton
*Bradley C. Call Director January 29, 1998
- ------------------------------------------
Bradley C. Call
*Julius E. Hodge Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
Julius E. Hodge officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Woodland
Hills, State of California, as of January 29, 1998.
PARAGON PRECISION PRODUCTS
By: /s/ Lawrence Smith
---------------------------------
Lawrence Smith
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman and Assistant Treasurer January 29, 1998
- ------------------------------------------
William L. Remley
*Bradley C. Call Director January 29, 1998
- ------------------------------------------
Bradley C. Call
/s/ Lawrence Smith President January 29, 1998
- ------------------------------------------
Lawrence Smith
*Julius E. Hodge Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
Julius E. Hodge officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of El Segundo,
State of California, as of January 29, 1998.
SCANNING ELECTRON
ANALYSIS LABORATORIES, INC.
By: /s/ Roland H. Marti
---------------------------------
Roland H. Marti
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman and Assistant Treasurer January 29, 1998
- ------------------------------------------
William L. Remley
*Bradley C. Call Director January 29, 1998
- ------------------------------------------
Bradley C. Call
/s/ Roland H. Marti President January 29, 1998
- ------------------------------------------
Roland H. Marti
*Julius E. Hodge Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
Julius E. Hodge officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cudahy,
State of California, as of January 29, 1998.
GENERAL INSPECTION LABORATORIES, INC.
By: /s/ John Barriatua
---------------------------------
John Barriatua
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
*Richard L. Kramer Chairman of the Board of Directors January 29, 1998
- ------------------------------------------
Richard L. Kramer
/s/ William L. Remley Vice Chairman and Assistant Treasurer January 29, 1998
- ------------------------------------------
William L. Remley
*Bradley C. Call Director January 29, 1998
- ------------------------------------------
Bradley C. Call
/s/ John Barriatua President January 29, 1998
- ------------------------------------------
John Barriatua
*Julius E. Hodge Chief Financial Officer January 29, 1998
- ------------------------------------------ (principal financial and accounting
Julius E. Hodge officer)
*By /s/ William L. Remley
-------------------------------------
William L. Remley
(Attorney-in-Fact)
</TABLE>
II-16
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
(FORMERLY KLEINERT INDUSTRIES, INC. AND SUBSIDIARIES)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
DEDUCTIONS--
UNCOLLECTIBLE
ADDITIONS ACCOUNTS
------------------------ WRITES OFF
BALANCE CHARGED NET OF RECOVERY
AT TO COSTS OF PREVIOUSLY BALANCE
BEGINNING AND FROM WRITTEN-OFF AT END
OF YEAR EXPENSES ACQUISITIONS ITEMS OF YEAR
--------- -------- ------------ ---------------- --------
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful accounts.............. $61,300 $ 39,200 $ -- $ 11,800 $112,300
--------- -------- ------ ---------------- --------
--------- -------- ------ ---------------- --------
1995
Allowance for doubtful accounts.............. $33,300 $ 30,100 $ -- $ (2,100) $ 61,300
--------- -------- ------ ---------------- --------
--------- -------- ------ ---------------- --------
1994
Allowance for doubtful accounts.............. $14,400 $ 13,500 $ -- $ 5,400 $ 33,300
--------- -------- ------ ---------------- --------
--------- -------- ------ ---------------- --------
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
*3.1 -- Certificate of Incorporation of Stellex Industries, Inc.
*3.2 -- Bylaws of Stellex Industries, Inc.
*3.3 -- Certificate of Incorporation of TSMD Acquisition Corp.
*3.4 -- Bylaws of TSMD Acquisition Corp.
*3.5 -- Articles of Incorporation of Stellex Microwave Systems, Inc.
*3.6 -- Bylaws of Stellex Microwave Systems, Inc.
*3.7 -- Certificate of Incorporation of KII Holding Corp.
*3.8 -- Bylaws of KII Holding Corp.
*3.9 -- Certificate of Incorporation of KII Acquisition Corp.
*3.10 -- Bylaws of KII Acquisition Corp.
*3.11 -- Articles of Incorporation of Stellex Aerospace.
*3.12 -- Bylaws of Stellex Aerospace.
*3.13 -- Articles of Incorporation of Bandy Machining International.
*3.14 -- Bylaws of Bandy Machining International.
*3.15 -- Articles of Incorporation of Paragon Precision Products.
*3.16 -- Bylaws of Paragon Precision Products.
*3.17 -- Articles of Incorporation of Scanning Electron Analysis Laboratories, Inc.
*3.18 -- Bylaws of Scanning Electron Analysis Laboratories, Inc.
*3.19 -- Articles of Incorporation of General Inspection Laboratories, Inc.
*3.20 -- Bylaws of General Inspection Laboratories, Inc.
*4.1 -- Purchase Agreement dated as of October 23, 1997, by and among Stellex Industries, Inc., TSMD
Acquisition Corp., Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex
Aerospace, Bandy Machining International, Paragon Precision Products, Scanning Electron Analysis
Laboratories, Inc. and General Inspection Laboratories, Inc. and Societe Generale Securities
Corporation, BT Alex. Brown Incorporated and Jefferies & Company, Inc.
*4.2 -- Indenture dated as of October 31, 1997 by and among Stellex Industries, Inc., TSMD Acquisition Corp.,
Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace, Bandy
Machining International, Paragon Precision Products, Scanning Electron Analysis Laboratories, Inc.
and General Inspection Laboratories, Inc. and Marine Midland Bank, as trustee.
*4.3 -- Registration Rights Agreement dated as of October 31, 1997 by and among Stellex Industries, Inc.,
TSMD Acquisition Corp., Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp.,
Stellex Aerospace, Bandy Machining International, Paragon Precision Products, Scanning Electron
Analysis Laboratories, Inc. and General Inspection Laboratories, Inc. and Societe Generale Securities
Corporation, BT Alex. Brown Incorporated and Jefferies & Company, Inc.
*5.1 -- Opinion of Winston & Strawn.
10.1 -- Credit Agreement dated as of October 31, 1997 by and among Stellex Industries, Inc., TSMD Acquisition
Corp., Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace,
Bandy Machining International, Paragon Precision Products, Scanning Electron Analysis Laboratories,
Inc. and General Inspection Laboratories, Inc. and Societe Generale, as Agent.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
+10.2 -- Stock Purchase Agreement dated as of August 29, 1997 by and among TSMD Acquisition Corp.,
Watkins-Johnson Company and W-J TSMD Inc.
The following schedules to the Stock Purchase Agreement have been omitted. The Company hereby
undertakes to furnish supplementally a copy of any such omitted schedules to the Commission upon
request.
SCHEDULE TITLE
----------------- -----------------------------------------------------------------------
Schedule 2.4 -- Status of Tax Audits
Schedule 2.5(a) -- Customer Contracts
Schedule 2.5(b) -- Certain Supplier Contracts
Schedule 2.5(c) -- Government Contracts
Schedule 2.5(d) -- Certain Contracts over $250,000
Schedule 2.5(e) -- Certain Contracts in Excess of Three Years
Schedule 2.5(f) -- Substantially Dependent/Material Adverse Contracts
Schedule 2.5(m) -- Material Losses
Schedule 2.5(n) -- Offshore Production Contracts
Schedule 2.6(d) -- Government Furnished Items
Schedule 2.16 -- Employee Benefit Plan
Schedule 2.21 -- Key Customer/Supplier
Schedule 2.23(c) -- Government Contract Audit
Schedule 2.24 -- Backlog
Schedule 2.25 -- Clearances
Schedule 5.7 -- Warranty Principles
Schedule 5.10 -- Proration
Schedule 9.15 -- Knowledge
*10.3 -- Stock Purchase Agreement dated as of May 23, 1997, by and among KII Acquisition Corp. and Kleinert
Industrie Holding AG.
The following schedules to the Stock Purchase Agreement have been omitted. The Company hereby
undertakes to furnish supplementally a copy of any such omitted schedules to the Commission
upon request.
SCHEDULE TITLE
------------------- --------------------------------------------------------------------
Schedule 3.1.5 -- No Violation (Seller)
Schedule 3.1.6 -- Third Party Consents (Seller)
Schedule 3.1.7 -- No Litigation (Seller)
Schedule 3.2.2(a) -- Organization and Good Standing (Company)
Schedule 3.2.2(b) -- Organization and Good Standing (Subsidiaries)
Schedule 3.2.3(b) -- Outstanding Stock of Subsidiaries
Schedule 3.2.5 -- Title to Assets
Schedule 3.2.6(b) -- Absence of Certain Changes
Schedule 3.2.6(c) -- Undisclosed Liabilities
Schedule 3.2.8 -- Compliance with Laws
Schedule 3.2.11 -- No Violation (Company/Subsidiaries)
Schedule 3.2.12 -- Third Party Consents (Company/Subsidiaries)
Schedule 3.2.13 -- No Litigation
Schedule 3.2.14(a) -- Plans
Schedule 3.2.14(b) -- Health Benefits
Schedule 3.2.14(c) -- Claims Related to Plans
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SCHEDULE TITLE
------------------- --------------------------------------------------------------------
Schedule 3.2.14(e) -- Plans in Compliance
Schedule 3.2.14(h) -- Plan Administration
Schedule 3.2.14(i) -- Funding
Schedule 3.2.14(j) -- Funding of Deferred Compensation Plans
Schedule 3.2.15A -- Owned and Leased Real Property
Schedule 3.2.15B -- Encumbrances, etc.
Schedule 3.2.16 -- Accounts Receivable
Schedule 3.2.17 -- Inventory
Schedule 3.2.18 -- Customers
Schedule 3.2.19 -- Product Warranty and Product Liability
Schedule 3.2.20 -- Insurance
Schedule 3.2.21 -- Machinery and Equipment
Schedule 3.2.22 -- Intellectual Properties
Schedule 3.2.23 -- Capital Projects and Expenditures
Schedule 3.2.24 -- Subsidiaries
Schedule 3.2.25(a) -- Hazardous Substances--Use, Storage & Disposal
Schedule 3.2.25(b) -- Hazardous Substances--Asbestos, etc.
Schedule 3.2.25(c) -- Hazardous Substances--Environmental Litigation
Schedule 3.2.25(d) -- Hazardous Substances--Compliance
Schedule 3.2.25(e) -- Hazardous Substances--Underground Storage Tanks
Schedule 3.2.26(b) -- Taxes--Returns Filed, Taxes Paid
Schedule 3.2.26(c) -- Taxes--Tax Reserves
Schedule 3.2.26(d) -- Taxes--Returns Furnished
Schedule 3.2.26(e) -- Taxes--Deficiencies, Audits, etc.
Schedule 3.2.27 -- Compensation, Vacation Time, etc.
Schedule 3.2.29 -- Bank Accounts, Investments
Schedule 3.2.30 -- Contracts, Other Agreements
Schedule 3.2.31 -- Permits and Licenses
Schedule 3.2.32 -- Indebtedness
Schedule 5.2.2 -- Capital Transactions
Schedule 5.2.3 -- Personal Property
Schedule 5.2.9 -- Noncompliance with Existing Indebtedness
Schedule 6.2.1 -- Elimination of Intercompany Accounts
Schedule 6.2.2 -- Intercompany Agreements
Schedule 7.1.6 -- Compliance with Law
Schedule 9.2 -- Inventory Reserve Amount
*10.4 -- Stellex Aerospace Investor Agreement dated as of July 1, 1997, by and among KII Holding Corp. and
Greystoke Capital Management Limited LDC, and Bradley C. Call, Julius E. Hodge, Lawrence R. Smith,
John Barriatua, Roland H. Marti, Arun Kumar and Louis A. Brown.
*10.5 -- Promissory Note dated as of July 1, 1997 by KII Acquisition Corp. to Kleinert Industrie Holding AG.
*10.6 -- Promissory Note dated September 6, 1991 by Paragon Precision Products to Farm Bureau Life Insurance
Company.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
*10.7 -- Amended and Restated Management Advisory Services Agreement, effective as of November 1, 1997, by and
between Mentmore Holdings Corporation, Stellex Industries, Inc., TSMD Acquisition Corp., Stellex
Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace, Bandy Machining
International, Paragon Precision Products, Scanning Electron Analysis Laboratories, Inc. and General
Inspection Laboratories, Inc.
*10.8 -- Tax Allocation and Indemnity Agreement dated as of October 31, 1997, and retroactively applied to the
calendar year ended December 31, 1997, by and among Stellex Industries, Inc., TSMD Acquisition Corp.,
Stellex Microwave Systems, Inc., KII Holding Corp., KII Acquisition Corp., Stellex Aerospace, Bandy
Machining International, Paragon Precision Products, Scanning Electron Analysis Laboratories, Inc.
and General Inspection Laboratories, Inc.
+10.9 -- Gallium Arsenide and Thin Film Supply and Services Agreement dated as of October 31, 1997 between
Stellex Industries, Inc. and Watkins-Johnson Company.
+10.10 -- Metal Injection Molding, Glass Seal and Hybrid Assembly Facility Agreement dated as of October 31,
1997 between Stellex Industries, Inc. and Watkins-Johnson Company.
+10.11 -- Cross License Agreement dated as of October 31, 1997 between Watkins-Johnson Company, Stellex
Microwave Systems, Inc. and TSMD Acquisition Corp.
*10.12 -- Employment Agreement dated as of November 1, 1997 between Stellex Microwave Systems, Inc. and Keith
Gilbert.
10.13 -- Commercial Sub-Sublease (Buildings 3/4/5), dated October 31, 1997, by and between Watkins-Johnson
Company and W-J TSMD Inc.
10.14 -- Commercial Sub-Sublease (Building 6), dated October 31, 1997, by and between Watkins-Johnson Company
and W-J TSMD Inc.
*12.1 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
*21.1 -- Subsidiaries of the Registrants.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Deloitte & Touche LLP.
*23.3 -- Consent of Winston & Strawn (included in Exhibit 5.1).
*24.1 -- Powers of Attorney.
*25.1 -- Statement of Eligibility of Trustee.
*27.1 -- Financial Data Schedule.
*99.1 -- Form of Letter of Transmittal.
*99.2 -- Form of Notice of Guaranteed Delivery.
*99.3 -- Form of Tender Instructions.
</TABLE>
- ------------------
* Previously filed.
+ Confidential treatment requested for a portion of this exhibit previously
filed. Such omitted confidential portion has been filed separately with
the Securities and Exchange Commission.
<PAGE>
EXECUTION COPY
CREDIT AGREEMENT
This CREDIT AGREEMENT dated as of October 31, 1997 (as
amended, supplemented or modified from time to time, the "Agreement") is
entered into among STELLEX INDUSTRIES, INC., a Delaware corporation ("Stellex"),
KII HOLDING CORP., a Delaware corporation ("Holding"), TSMD ACQUISITION CORP., a
Delaware corporation ("TSMD Acquisition"), KII ACQUISITION CORP., a Delaware
corporation ("KII Acquisition"), STELLEX MICROWAVE SYSTEMS, INC., a California
corporation ("MICROWAVE"), STELLEX AEROSPACE, a California corporation, PARAGON
PRECISION PRODUCTS, a California corporation, BANDY MACHINING INTERNATIONAL, a
California corporation, SCANNING ELECTRON ANALYSIS LABORATORIES, INC., a
California corporation, and GENERAL INSPECTION LABORATORIES, INC., a California
corporation (collectively, the "Borrowers", and individually, a "Borrower"), the
financial institutions from time to time parties hereto, whether by execution of
this Agreement or an Assignment and Acceptance (the "Lenders"), SOCIETE GENERALE
("SocGen"), in its capacity as administrative agent for the Lenders (in such
capacity, the "Administrative Agent"), and FIRST UNION COMMERCIAL CORPORATION
("First Union"), in its capacity as syndication agent for the Lenders (in such
capacity, the "Syndication Agent") and in its capacity as collateral agent for
the Lenders (in such capacity, the "Collateral Agent").
ARTICLE I
DEFINITIONS
1.01. Certain Defined Terms. The following terms used in this
Agreement shall have the following meanings, applicable both to the singular and
the plural forms of the terms defined:
"Accommodation Obligation" means any Contractual Obligation,
contingent or otherwise, of any Person with respect to any Indebtedness,
obligation or liability of another, if the primary purpose or intent thereof by
the Person incurring the Accommodation Obligation is to provide assurance to the
obligee of such Indebtedness, obligation or liability of another Person that
such Indebtedness, obligation or liability will be paid or discharged, or that
any agreements relating thereto will be complied with, or that the holders
thereof will be protected (in whole or in part) against loss in respect thereof
including, without limitation, direct and indirect guarantees, endorsements
(except for collection or deposit in the ordinary course of business), notes
co-made or discounted, recourse agreements, take-or-pay agreements, keep-well
agreements, agreements to purchase or repurchase such Indebtedness, obligation
or liability or any security therefor or to provide funds for the payment or
discharge thereof, agreements to maintain solvency, assets, level of
<PAGE>
income, or other financial condition, and agreements to make payment other than
for value received.
"Acquisitions" means, collectively, the Kleinert
Acquisition and the Watkins-Johnson Acquisition.
"Acquisition Agreements" means, collectively, the
Kleinert Acquisition Agreement and the Watkins-Johnson
Acquisition Agreement.
"Acquisition Documents" means, collectively, the
Kleinert Acquisition Documents and the Watkins-Johnson
Acquisition Documents.
"Administrative Agent" has the meaning ascribed to such
term in the preamble hereto.
"Administrative Agent's Account" means SocGen's account,
account number 9042229 (re: Stellex), maintained at the office of Societe
Generale, New York, New York, ABA #026004226, or such other account as the
Administrative Agent may from time to time specify in writing to the Borrowers
and the Lenders.
"Aerospace" means Stellex Aerospace, a California
corporation (formerly known as Kleinert Industries Inc.).
"Affiliate" means, as applied to any specified Person, any
other Person that directly or indirectly controls, is controlled by, or is under
common control with, such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as applied to any specified
Person, means the possession, directly or indirectly, of the power to vote ten
percent (10%) or more of the Securities having voting power for the election of
directors of such specified Person or otherwise to direct or cause the direction
of the management and policies of such specified Person, whether through the
ownership of voting Securities or by contract or otherwise.
"Agents" means, collectively, the Administrative Agent,
the Collateral Agent and the Syndication Agent.
"Agreement" has the meaning ascribed to such term in
the preamble hereto.
"Applicable Revolving Loan Base Rate Margin" means initially a
rate equal to 1.00% per annum during the period from the Closing Date until the
first day of the third fiscal quarter of 1998. Thereafter, such rate will
fluctuate quarterly on the first day of each fiscal quarter, commencing with the
third fiscal quarter of 1998, based upon the Leverage Ratio for the preceding
twelve-month period, calculated as of the last day of such preceding
twelve-month period, as set forth below:
-2-
<PAGE>
If the Leverage Applicable Revolving Loan
Ratio is: Base Rate Margin
--------------- -------------------------
Equal to or greater
than 5.0 1.000%
Less than 5.0 but equal to
or greater than 4.5 0.875%
Less than 4.5 but equal to
or greater than 4.0 0.750%
Less than 4.0 but equal to
or greater than 3.5 0.625%
Less than 3.5 but equal to
or greater than 3.0 0.500%
Less than 3.0 0.375%
"Applicable Term Loan Base Rate Margin" means initially a rate
equal to 1.25% per annum during the period from the Closing Date until the first
day of the third fiscal quarter of 1998. Thereafter, such rate will fluctuate
quarterly on the first day of each fiscal quarter, commencing with the third
fiscal quarter of 1998, based upon the Leverage Ratio for the preceding
twelve-month period, calculated as of the last day of such preceding
twelve-month period, as set forth below:
If the Leverage Applicable Term Loan
Ratio is: Base Rate Margin
--------------- --------------------
Equal to or greater
than 5.0 1.250%
Less than 5.0 but equal to
or greater than 4.5 1.250%
Less than 4.5 but equal to
or greater than 4.0 1.150%
Less than 4.0 but equal to
or greater than 3.5 1.000%
Less than 3.5 but equal to
or greater than 3.0 0.750%
Less than 3.0 0.625%
"Applicable Revolving Loan Eurodollar Rate Margin" means
initially a rate equal to 2.00% per annum during the period from the Closing
Date until the first day of the third fiscal quarter of 1998. Thereafter, such
rate will fluctuate quarterly on the first day of each fiscal quarter,
commencing with the third fiscal quarter of 1998, based upon the Leverage Ratio
for the preceding twelve-month period, calculated as of the last day of such
preceding twelve-month period, as set forth below:
If the Leverage Applicable Revolving Loan
Ratio is: Eurodollar Rate Margin
--------------- -------------------------
Equal to or greater
than 5.0 2.000%
-3-
<PAGE>
Less than 5.0 but equal to
or greater than 4.5 1.875%
Less than 4.5 but equal to
or greater than 4.0 1.750%
Less than 4.0 but equal to
or greater than 3.5 1.625%
Less than 3.5 but equal to
or greater than 3.0 1.500%
Less than 3.0 1.375%
"Applicable Term Loan Eurodollar Rate Margin" means initially
a rate equal to 2.25% per annum during the period from the Closing Date until
the first day of the third fiscal quarter of 1998. Thereafter, such rate will
fluctuate quarterly on the first day of each fiscal quarter, commencing with the
third fiscal quarter of 1998, based upon the Leverage Ratio for the preceding
twelve-month period, calculated as of the last day of such preceding
twelve-month period, as set forth below:
If the Leverage Applicable Term Loan
Ratio is: Eurodollar Rate Margin
--------------- ----------------------
Equal to or greater
than 5.0 2.250%
Less than 5.0 but equal to
or greater than 4.5 2.250%
Less than 4.5 but equal to
or greater than 4.0 2.150%
Less than 4.0 but equal to
or greater than 3.5 2.000%
Less than 3.5 but equal to
or greater than 3.0 1.750%
Less than 3.0 1.625%
"Applicable Lending Office" means, with respect to a
particular Lender, its Eurodollar Lending Office in respect of provisions
relating to Eurodollar Rate Loans and its Domestic Lending Office in respect of
provisions relating to Base Rate Loans.
"Asset Sale" means any sale, conveyance, transfer, lease or
other disposition of property of any Loan Party.
"Assignment and Acceptance" means an Assignment and Acceptance
substantially in the form of Exhibit A attached hereto and made a part hereof
(with blanks appropriately completed) delivered to the Administrative Agent in
connection with an assignment of a Lender's interest under this Agreement in
accordance with the provisions of Section 13.01.
"Availability" means, at any particular time, the amount by
which the Maximum Revolving Credit Amount at such time exceeds the Revolving
Credit Obligations at such time.
-4-
<PAGE>
"Base Rate" means, on any date, a fluctuating interest rate
per annum (rounded upward, if necessary, to the next highest 1/16 of 1%) equal
to the higher of:
(a) the rate of interest then most recently established by
SocGen in New York, New York as its base rate for Dollars loaned in the
United States, in effect on such date; and
(b) the Federal Funds Rate in effect on such date
plus 1/2 of 1%.
The Base Rate is not necessarily intended to be the lowest rate of interest
determined by SocGen in connection with extensions of credit.
"Base Rate Loans" means all Loans which bear interest at a
rate determined by reference to the Base Rate as provided in Section 4.01(a).
"Benefit Plan" means a defined benefit plan as defined in
Section 3(35) of ERISA (other than a Multiemployer Plan) which is subject to
Title IV of ERISA or Section 412 of the Code in respect of which any Loan Party
or any ERISA Affiliate is, or within the immediately preceding six (6) years
was, an "employer" as defined in Section 3(5) of ERISA.
"Board of Directors" means the board of directors or
equivalent governing body of a Person (or the general partner of such Person, as
the case may be,) or any committee thereof duly authorized to act on behalf of
such board of directors or equivalent governing body.
"Borrowers" has the meaning ascribed to such term in
the preamble hereto.
"Borrowing" means a borrowing consisting of Loans of the same
Type made on the same day by the Lenders.
"Borrowing Base" means, as of any date of determination, an
amount equal to the sum of (a) eighty-five percent (85%) of Eligible Receivables
less such reserves as the Administrative Agent reasonably deems appropriate plus
(B) fifty percent (50%) of Eligible Inventory less such reserves as the
Administrative Agent reasonably deems appropriate.
"Borrowing Base Certificate" means a certificate,
substantially in the form of Exhibit B attached hereto and made a part hereof.
"Business" means the businesses of Stellex and its
Subsidiaries on the date hereof and any business located in the
-5-
<PAGE>
United States or Canada related, ancillary or complementary thereto, or which is
an extension thereof.
"Business Day" means a day, in the applicable local time,
which is not a Saturday or Sunday or a legal holiday and on which banks are not
required or permitted by law or other governmental action to close (i) in New
York, New York or Los Angeles, California and (ii) in the case of Eurodollar
Rate Loans, in London, England.
"Capital Expenditures" means, for any period, the aggregate of
all expenditures (whether paid in cash or other assets or accrued as a liability
(but without duplication)) during such period that, in conformity with GAAP, are
required to be included in or reflected by a Loan Party's fixed asset account as
reflected in its balance sheets; provided, however, that Capital Expenditures
shall include, whether or not such a designation would be in conformity with
GAAP, (A) that portion of Capital Leases which is capitalized on the balance
sheet of such Loan Party and (B) expenditures for Equipment which is purchased
simultaneously with the trade-in of existing Equipment owned by such Loan Party
to the extent that the gross purchase price of the purchased Equipment exceeds
the book value of the Equipment being traded in at such time; provided, further,
that Capital Expenditures shall exclude, whether or not such a designation would
be in conformity with GAAP, (i) any expenditures made with the proceeds, damages
or awards under any policy of insurance with respect to any casualty or other
damage or defect or the proceeds of any taking by reason of any public
improvement or condemnation proceeding or transfer and (ii) any Permitted
Acquisition relating to an acquisition of assets.
"Capital Lease" means, as applied to any Person, any lease of
any property (whether real, personal or mixed) by that Person as lessee which,
in conformity with GAAP, is accounted for as a capital lease on the balance
sheet of that Person.
"Capital Stock" means, with respect to any Person, any capital
stock of such Person, regardless of class or designation, and all warrants,
options, purchase rights, conversion or exchange rights, voting rights, calls or
claims of any character with respect thereto.
"Cash Capital Expenditures" means, for any period, that
portion of Capital Expenditures which is paid in cash.
"Cash Collateral Account" means the account opened and
maintained at First Union National Bank which account shall be governed by the
terms of the Cash Collateral Pledge Agreement and shall be under the sole
dominion and control of the Collateral Agent.
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<PAGE>
"Cash Collateral Pledge Agreement" means the Cash Collateral
Pledge and Assignment Agreement, substantially in the form of Exhibit K attached
hereto and made a part hereof, made by the Borrowers in favor of the Collateral
Agent for the benefit of the Agents and the Lenders, as such Pledge Agreement
may be amended, supplemented or otherwise modified from time to time.
"Cash Equivalents" means (i) marketable direct obligations
issued or unconditionally guaranteed by the United States Government or issued
by an agency thereof and backed by the full faith and credit of the United
States, in each case maturing within one (1) year after the date of acquisition
thereof; (ii) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any public
instrumentality thereof maturing within ninety (90) days after the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation or Moody's
Investors Services, Inc. (or, if at any time neither Standard & Poor's
Corporation nor Moody's Investors Services, Inc. shall be rating such
obligations, then from such other nationally recognized rating services
reasonably acceptable to the Administrative Agent) and not listed in Credit
Watch published by Standard & Poor's Corporation; (iii) commercial paper, other
than commercial paper issued by any Loan Party or any of its Affiliates,
maturing no more than ninety (90) days after the date of creation thereof and,
at the time of acquisition, having a rating of at least A-1 or P-1 from either
Standard & Poor's Corporation or Moody's Investor's Service, Inc. (or, if at any
time neither Standard & Poor's Corporation nor Moody's Investors Service, Inc.
shall be rating such obligations, then the highest rating from such other
nationally recognized rating services reasonably acceptable to the
Administrative Agent); (iv) domestic and Eurodollar certificates of deposit or
time deposits or bankers' acceptances maturing within ninety (90) days after the
date of acquisition thereof issued by any commercial bank organized under the
laws of the United States of America or any state thereof or the District of
Columbia or Canada having combined capital and surplus of not less than
$250,000,000; (v) repurchase obligations of the type referred to in clauses (i)
through (iv) above; and (vi) money market and mutual funds substantially all of
whose assets are comprised of securities of the types described in clauses (i)
through (v) above.
"Cash Interest Expense" means, for any Financial Covenant
Period, total interest expense, whether paid or accrued (including the interest
component of Capital Leases, but excluding amortization of deferred financing
costs and interest paid on the Put/Call Promissory Notes) of Stellex and its
Subsidiaries on a consolidated basis, as determined in conformity with GAAP.
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"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. Sections 9601 et seq., any
amendments thereto, any successor statutes, and any regulations promulgated
thereunder.
"Change of Control" means the occurrence of one or more
of the following events:
(a) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act), other than one or more Permitted Holders, is
or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Securities Exchange Act), directly or indirectly, of more
than 35% of the total voting power of the Voting Securities of Stellex;
(b) the Permitted Holders "beneficially own" (as defined in
Rules 13d-3 and 13d-5 under the Securities Exchange Act), directly or
indirectly, in the aggregate less than 51% of the total voting power of
the Voting Securities of Stellex or do not have the right or ability by
voting power, contract or otherwise to elect or designate for election
a majority of the Board of Directors of Stellex; or
(c) the first day on which a majority of the members
of the Board of Directors of Stellex are not Continuing
Directors.
"Chief Financial Officer" means the chief financial officer or
vice president of finance of Stellex.
"Claim" means any claim or demand, by any Person, of
whatsoever kind or nature for any alleged Liabilities and Costs, whether based
in contract, tort, implied or express warranty, strict liability, criminal or
civil statute, Permit, ordinance or regulation, common law or otherwise.
"Closing Date" means the date on which all of the conditions
precedent in Sections 5.01 and 5.02 have been satisfied.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute and any regulations or guidelines
promulgated thereunder.
"Collateral" means all property and interests in property now
owned or hereafter acquired by any Loan Party in or upon which a Lien is granted
under any of the Loan Documents.
"Collateral Agent" has the meaning ascribed to such
term in the preamble hereto.
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"Collateral Documents" means, collectively, the Security
Agreements, the Pledge Agreements, the Intellectual Property Security Agreement
and the Cash Collateral Pledge Agreement.
"Commission" means the Securities and Exchange Commission and
any Person succeeding to the functions thereof.
"Commitment" means, with respect to any Lender, such Lender's
Revolving Loan Commitment and Term Loan Commitment, and as modified from time to
time pursuant to the terms of this Agreement or to give effect to any applicable
Assignment and Acceptance, and "Commitments" means the aggregate principal
amount of the Commitments of all the Lenders, the maximum amount of which shall
not exceed $50,000,000.
"Commitment Adjustment" means, as of any date of
determination, the amount, if any, by which the the Commitments exceed the
product of two multiplied by the EBITDA of Stellex and its Subsidiaries on a
consolidated basis for the immediately preceding Financial Covenant Period (and
if such Financial Covenant Period ends prior to December 31, 1998, such EBITDA
shall be multiplied by a fraction the numerator of which is 12 and the
denominator of which is the number of months in such Financial Covenant Period).
The amount of the Commitment Adjustment shall adjust the Term Loan Commitment,
if outstanding, and then adjust the Revolving Loan Commitment.
"Commitment Termination Date" means the day which is the
earliest of (A) October 31, 2003, (B) the termination of the Commitments
pursuant to Section 11.02(a) and (C) the date of termination in whole of the
Revolving Credit Commitments pursuant to Section 3.01(a)(ii).
"Commitment Triggering Event" means the occurrence of any
payment of principal under or with respect to the Subordinated Notes or any
repurchurse by or on behalf of Stellex of the Subordinated Notes.
"Compliance Certificate" has the meaning ascribed to
such term in Section 7.01(c).
"Contaminant" means any waste, pollutant (as that term is
defined in 42 U.S.C. Section 9601(33) or in 33 U.S.C. Section 1362(13)),
hazardous substance (as that term is defined in 42 U.S.C. Section 9601(14)),
hazardous chemical (as that term is defined by 29 CFR Section 1910.1200(c)),
toxic substance, hazardous waste (as that term is defined in 42 U.S.C. Section
6903(5)), radioactive material, petroleum, including crude oil or any
petroleum-derived substance, waste, or breakdown or decomposition product
thereof, as defined under federal, state or local laws or regulations, or any
constituent of any such substance or waste, including, but not limited to
polychlorinated biphenyls ("PCBs"), and asbestos.
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"Contractual Obligation" means, as applied to any Person, any
provision of any Securities issued by that Person or any indenture, mortgage,
deed of trust, security agreement, pledge agreement, guaranty, contract,
undertaking, agreement or instrument to which that Person is a party or by which
it or any of its properties is bound, or to which it or any of its properties is
subject.
"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors of Stellex who (i) was a member of such
Board of Directors on the Closing Date or (ii) was nominated by Richard L.
Kramer or William L. Remley to serve on such Board of Directors.
"Contribution Agreement" means the Contribution Agreement
dated as of the date hereof among the Loan Parties, as such agreement may be
further amended, supplemented or otherwise modified from time to time.
"Current Assets" means, as at any date of determination, the
total assets of Stellex and its Subsidiaries on a consolidated basis which may
properly be classified as current assets in conformity with GAAP.
"Current Liabilities" means, as at any date of determination,
the current liabilities of Stellex and its Subsidiaries on a consolidated basis
which may properly be classified as current liabilities in conformity with GAAP.
"Customary Permitted Liens" means
(i) Liens (other than Environmental Liens and Liens in favor
of the PBGC) with respect to the payment of taxes, assessments or
governmental charges or claims, in all cases which are not yet due or
are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves or other appropriate provisions are
being maintained in accordance with GAAP;
(ii) statutory Liens of landlords and Liens of suppliers,
mechanics, carriers, materialmen, warehousemen or workmen and other
Liens imposed by law created in the ordinary course of business in all
cases for amounts which are not yet due or are being contested in good
faith by appropriate proceedings and with respect to which adequate
reserves or other appropriate provisions are being maintained in
accordance with GAAP;
(iii) Liens (other than any Lien in favor of the PBGC)
incurred or deposits made in the ordinary course of business in
connection with worker's compensation, unemployment insurance or other
types of social security benefits or to secure the performance of bids,
tenders, sales, leases,
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contracts (other than for the repayment of borrowed money), surety,
appeal and performance bonds, in all cases for amounts not yet due or
which are being contested in good faith by appropriate proceedings and
with respect to which adequate reserves or other appropriate provisions
are being maintained in accordance with GAAP; and
(iv) zoning restrictions, easements, licenses, reservations,
covenants, rights-of-way, utility easements, building restrictions and
other similar charges or encumbrances on the use of Real Property
which do not materially interfere with the ordinary conduct of the
business of the Loan Parties and which do not materially adversely
affect the value of the Real Property.
"Debt" means, as applied to any Person at any time and without
duplication, all indebtedness, obligations or other liabilities of such Person
(i) for borrowed money or evidenced by debt securities, debentures, acceptances,
notes or other similar instruments (other than the Put/Call Promissory Notes),
(ii) under profit payment agreements or in respect of obligations to redeem,
repurchase or exchange any Securities of such Person or to pay dividends in
respect of any stock (other than the Put/Call Preferred Stock and management
investor agreements of the type referred to in the definition of "Management
Equity Interests" provided that such indebtedness, obligations or other
liabilities thereunder are only permitted to be paid if permitted under this
Agreement), (iii) with respect to letters of credit issued for such Person's
account (to the extent not accounted for in clause (i) above), (iv) to pay the
deferred purchase price of property or services, except accounts payable and
accrued expenses arising in the ordinary course of business, or (v) in respect
of Capital Leases.
"Default" means an event which, with the giving of notice or
the lapse of time, or both, would constitute an Event of Default.
"Default Rate" has the meaning ascribed to such term in
Section 4.01(d).
"DOL" means the United States Department of Labor and any
Person succeeding to the functions thereof.
"Dollars" and "$" mean the lawful money of the United States.
"Domestic Lending Office" means, with respect to any Lender,
such Lender's office, located in the United States, specified as the "Domestic
Lending Office" under its name on the signature pages hereof or on the
Assignment and Acceptance by which it became a Lender or such other United
States office of
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such Lender as it may from time to time specify by written notice to the
Borrowers and the Administrative Agent.
"EBITDA" means, for any Financial Covenant Period, (i) the Net
Income, determined on a consolidated basis for Stellex and its Subsidiaries, for
such Financial Covenant Period plus the following amounts (without duplication)
for such Financial Covenant Period to the extent deducted in calculating such
Net Income: (A) depreciation and amortization expense, (B) interest expense, (C)
federal, state, local and foreign income taxes, (D) extraordinary or unusual
losses, (E) non-cash portion of nonrecurring losses and charges, (F) non-cash
management compensation expense, (G) amounts paid with respect to the "Retention
Plan Payments" as defined in the Watkins-Johnson Acquisition Agreement and (H)
any increase in cost of sales resulting from the write-up of inventory in
accordance with Accounting Principles Board Opinion No. 16 (or successor
provision); minus (ii) the amount of extraordinary gains, each item in clauses
(i) and (ii) calculated pursuant to GAAP for such period.
"Eligible Assignee" means (i) a Lender or (ii) a commercial
bank, lending institution, finance company, insurance company, other financial
institution or fund reasonably acceptable to the Administrative Agent and
Stellex (which acceptance shall not be unreasonably withheld).
"Eligible Inventory" means Inventory that is reflected on the
balance sheet of a Borrower as inventory, and unbilled receivables that are
reflected on the balance sheet of a Borrower as unbilled receivables (but only
to the extent such unbilled receivables do not exceed $1,000,000), and each
valued in accordance with GAAP, with respect to which, when scheduled on a
Borrowing Base Certificate and at all times thereafter, the Collateral Agent has
a valid and perfected first priority security interest and there is no violation
of the negative or affirmative covenants or other provisions of this Agreement
or any other Loan Document specifically applicable to Inventory. No Inventory of
a Borrower shall be Eligible Inventory if such Inventory is located, stored,
used or held at the premises of a third party unless either (i) (A) the
Administrative Agent shall have received a bailee's or similar letter from such
third party in form and substance satisfactory to the Administrative Agent and
(B) an appropriate UCC-1 financing statement shall have been executed with
respect to such location or (ii) the Administrative Agent shall have otherwise
consented in writing.
"Eligible Receivables" means those Receivables, that are
reflected on the balance sheet of a Borrower and valued in accordance with GAAP,
with respect to which, when scheduled on a Borrowing Base Certificate and at all
times thereafter, the Collateral Agent has a valid and perfected first priority
security interest (but not including compliance with the
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Assignment of Claims Act of 1940 , as amended, with respect to Receivables where
the account debtor is the United States of America or any department, agency or
instrumentality thereof) and there is no violation of the negative or
affirmative covenants or other provisions of this Agreement or any other Loan
Document specifically applicable to Receivables. No Receivable of a Borrower
shall be an Eligible Receivable if:
(i) the Receivable is a non-dated Receivable which remains due
or unpaid more than one hundred twenty (120) days after the date of
original invoice issued by such Borrower with respect to the sale
giving rise thereto; or the Receivable is a dated Receivable which
remains due or unpaid more than one hundred twenty (120) days after the
date of the original invoice issued by such Borrower with respect to
the sale giving rise thereto; or
(ii) the Receivable arises out of a sale not made in the
ordinary course of such Borrower's business or is to a Person which is
an Affiliate or Subsidiary of such Borrower or controlled by an
Affiliate or Subsidiary of such Borrower; or
(iii) that portion of the Receivable that is in dispute or is
subject to any asserted claim of setoff; or
(iv) any warranty contained in this Agreement or any Loan
Document with respect to Eligible Receivables or such Receivable has
been breached; or
(v) the account debtor has filed a petition for bankruptcy or
any other petition for relief under the Bankruptcy Code, made an
assignment for the benefit of creditors, or if any petition or other
application for relief under the Bankruptcy Code has been filed against
the account debtor, or if the account debtor has failed, suspended its
business operations, become insolvent, or suffered a receiver or a
trustee to be appointed for all or a material portion of its assets or
affairs; or
(vi) the sale is to an account debtor located outside the
continental United States, unless such sale is on letter of credit or
acceptance terms acceptable to the Administrative Agent (which letter
of credit or acceptance has been assigned to the Collateral Agent in a
manner satisfactory to the Administrative Agent); or
(vii) the sale to such customer is on guaranteed sale, sale
and return, sale on approval, consignment or any other repurchase or
return basis (other than a repurchase or return pursuant to a
warranty); or
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(viii) the goods giving rise to such Receivable have not been
shipped or delivered to the account debtor or the services giving rise
to such Receivable have not been performed by such Borrower; or
(ix) any document or agreement executed or delivered in
connection with any Receivable, or any procedure used in connection
with any such document or agreement, fails in any respect to comply
with any requirements of applicable law, and such failure would, in the
reasonable determination of the Administrative Agent, (a) have a
material adverse effect upon the collectability of such Receivable or
(b) subject payments with respect to such Receivable to any claim for
recovery thereof after receipt by the Administrative Agent or the
Lenders.
In addition to the foregoing, no Receivables owing by a particular account
debtor shall be Eligible Receivables if twenty five percent (25%) or more of the
Receivables owing from such account debtor are ineligible for any reason.
"Environmental, Health or Safety Requirement of Law" means
Requirements of Law relating to or addressing the indoor or outdoor environment,
health or safety, including but not limited to any law, regulation, or order
relating to the use, handling, or disposal of any Contaminant, any law,
regulation, or order relating to Remedial Action, and any law, regulation, or
order relating to workplace or worker safety and health.
"Environmental Lien" means a Lien in favor of any Governmental
Authority for (i) any liability under federal or state environmental laws or
regulations, or (ii) damages arising from, or costs incurred by such
Governmental Authority in response to, a Release or threatened Release of a
Contaminant into the environment.
"Equipment" means all of each Loan Party's present and future
owned (i) equipment and fixtures, including, without limitation, machinery,
manufacturing, distribution, selling, computer system, data processing and
office equipment, assembly systems, tools, molds, dies, fixtures, appliances,
furniture, furnishings, vehicles, vessels, aircraft, aircraft engines, and trade
fixtures, (ii) other tangible personal property, and (iii) any and all
accessions, parts and appurtenances attached to any of the foregoing or used in
connection therewith, and any substitutions therefor and replacements, products
and proceeds thereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute.
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"ERISA Affiliate" means any (i) corporation which is a member
of the same controlled group of corporations (within the meaning of Section
414(b) of the Code) as any Loan Party, (ii) partnership, trade or business
(whether or not incorporated) which is under common control (within the meaning
of Section 414(c) of the Code) with a Loan Party and (iii) entity which is a
member of an "affiliated service group" (as defined in Section 414(m) of the
Code) with any other Loan Party.
"Eurodollar Affiliate" means, with respect to each Lender, the
Affiliate of such Lender (if any) set forth below such Lender's name under the
heading "Eurodollar Affiliate" on the signature pages hereof or on the
Assignment and Acceptance by which it became a Lender or such Affiliate of a
Lender as it may from time to time specify by written notice to the Borrowers
and the Administrative Agent.
"Eurodollar Interest Payment Date" means (i) with respect to
any Eurodollar Rate Loan, the last day of each Eurodollar Interest Period
applicable to such Loan and (ii) with respect to any Eurodollar Rate Loan having
a Eurodollar Interest Period in excess of three (3) calendar months, the last
day of each calendar quarter during such Eurodollar Interest Period.
"Eurodollar Interest Period" has the meaning set forth
in Section 4.02(b).
"Eurodollar Lending Office" means, with respect to any Lender,
the office or offices of such Lender (if any) set forth below such Lender's name
under the heading "Eurodollar Lending Office" on the signature pages hereof or
on the Assignment and Acceptance by which it became a Lender or such office or
offices of such Lender as it may from time to time specify by written notice to
the Borrowers and the Administrative Agent.
"Eurodollar Rate" means, with respect to any Eurodollar
Interest Period applicable to a Borrowing of Eurodollar Rate Loans, an interest
rate per annum obtained by dividing (i) the rate of interest per annum specified
by notice to the Administrative Agent by SocGen as the rate per annum at which
deposits in Dollars are offered by SocGen in London, England to major banks in
the London interbank market at approximately 11:00 a.m. (London time) on the
Interest Rate Determination Date for such Eurodollar Interest Period for a
period equal to such Eurodollar Interest Period and in an amount substantially
equal to the amount of the Eurodollar Rate Loan to be made by SocGen to be
outstanding during such Eurodollar Interest Period, by (ii) a percentage equal
to 100% minus the Eurodollar Reserve Percentage. The Eurodollar Rate shall be
adjusted automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage.
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"Eurodollar Rate Loans" means those Loans outstanding which
bear interest at a rate determined by reference to the Eurodollar Rate as
provided in Section 4.01(a).
"Eurodollar Reserve Percentage" means, for any day, that
percentage which is in effect on such day, as prescribed by the Federal Reserve
Board for determining the maximum reserve requirement (including, without
limitation, any emergency, supplemental or other marginal reserve requirement)
for a member bank of the Federal Reserve System in New York, New York with
respect to "Eurocurrency Liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Eurodollar Rate Loans is determined or any category of extensions of credit or
other assets which includes loans by a non-United States office of any bank to
United States residents).
"Event of Default" means any of the occurrences set forth in
Section 11.01 after the expiration of any applicable grace period and the giving
of any applicable notice, in each case as expressly provided in Section 11.01.
"Excess Cash Flow" means, for any Fiscal Year, EBITDA for such
Fiscal Year, minus cash interest paid during such Fiscal Year, minus Capital
Expenditures made during such Fiscal Year, minus principal payments made on
Funded Debt (excluding Revolving Loans) during such Fiscal Year, minus taxes
paid in cash during such Fiscal Year, plus the decrease or minus the increase in
Working Capital during such Fiscal Year.
"Excluded Proceeds" means (i) Net Cash Proceeds that are used
by a Loan Party within one year from the receipt of such Net Cash Proceeds by
such Loan Party on account of an Asset Sale to replace the asset with respect to
such Asset Sale or to consummate a Permitted Acquisition, provided that such Net
Cash Proceeds are deposited into the Cash Collateral Account upon receipt of
such Net Cash Proceeds by such Loan Party until the earlier of (A) such time as
such Loan Party replaces such asset or consummates the Permitted Acquisition or
(B) the first annual anniversary of the date such Net Cash Proceeds were
deposited into the Cash Collateral Account, (ii) Net Cash Proceeds on account of
one or more Asset Sales so long as such Net Cash Proceeds do not exceed $500,000
in the aggregate in any twelve month period, (iii) proceeds from the sales of
Inventory in the ordinary course of business, (iv) proceeds from the disposition
of Equipment if such Equipment is obsolete or no longer useful in the ordinary
course of such Loan Party's business and (v) proceeds received by a Wholly Owned
Subsidiary of a Loan Party as a result of an assignment, transfer, conveyance or
other disposition permitted pursuant to Section 9.02(v).
"Excluded Securities" means, with respect to any Loan Party,
(i) common or preferred stock issued by such Loan Party to
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a seller in connection with a Permitted Acquisition or management personnel in
connection with management compensation arrangements or a Permitted Acquisition,
(ii) Series B Preferred Stock issued by Holding having an aggregate liquidation
preference not to exceed $200,000 and (iii) any Securities issued by any
Subsidiary of Stellex to Stellex or another Subsidiary of Stellex, provided that
such Securities referred to in this clause (iii) are pledged to the Collateral
Agent, on terms and conditions, and pursuant to documentation, reasonably
satisfactory to the Administrative Agent, in a manner whereby the Collateral
Agent has a valid, perfected and first priority Lien therein.
"Farm Bureau" means Farm Bureau Life Insurance Company.
"Farm Bureau Consent" means a consent of Farm Bureau to the
Collateral Agent's Liens in the Collateral granted by Paragon Precision Products
and by Aerospace pursuant to the Loan Documents (including, without limitation,
a pledge by Aerospace of the Paragon Precision Products stock pursuant to the
Pledge Agreement executed and delivered by Aerospace), which consent shall be in
form and substance satisfactory to the Administrative Agent and shall have been
executed and delivered by Farm Bureau to the Administrative Agent.
"Farm Bureau Deed of Trust" means the Deed of Trust with
Assignment of Rents and Fixture Filing dated as of September 6, 1991 made by
Paragon Precision Products in favor of Farm Bureau, as such Deed of Trust may be
amended, supplemented and modified from time to time.
"Farm Bureau Guaranty" means the Guaranty dated as of
September 6, 1991 by and between Farm Bureau and Aerospace.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day in New York, New York, for the next
preceding Business Day) in New York, New York by the Federal Reserve Bank of New
York, or if such rate is not so published for any day which is a Business Day in
New York, New York, the average of the quotations for such day on such
transactions received by the Administrative Agent from three federal funds
brokers of recognized standing selected by the Administrative Agent.
"Federal Reserve Board" means the Board of Governors of the
Federal Reserve System or any Governmental Authority succeeding to its
functions.
"Fee Letters" means, collectively, the Fee Letters between
Stellex and each of the Agents.
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"Financial Covenant Period" means: (i) with respect to the
first fiscal quarter of 1998, the period commencing on the Closing Date and
ending on the last day of such fiscal quarter; (ii) with respect to the second
fiscal quarter of 1998, the period commencing on January 1, 1998 and ending on
the last day of such fiscal quarter; (iii) with respect to the third fiscal
quarter of 1998, the period commencing on January 1, 1998 and ending on the last
day of such fiscal quarter; (iv) with respect to the fourth fiscal quarter of
1998, the period commencing on January 1, 1998 and ending on the last day of
such fiscal quarter; and (v) with respect to each fiscal quarter thereafter, the
immediately preceding four fiscal quarter period.
"Fiscal Year" means the fiscal year of Stellex and its
Subsidiaries ending on December 31 of each calendar year.
"Fixed Charge Coverage Ratio" means, for any Financial
Covenant Period, the ratio of (i) EBITDA less Cash Capital Expenditures made
during such period to (ii) Cash Interest Expense plus the regularly scheduled
installments of Funded Debt payable during such period.
"Forfeiture Proceeding" means any action, proceeding or
investigation affecting any of the Loan Parties before any court, governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or the receipt of notice by any such party that any of them is a
subject of any governmental inquiry or investigation, which may result in an
indictment of any of them or the seizure or forfeiture of any of their property.
"Funded Debt" means Debt which matures more than one year from
the date of its creation or matures within one year from such date but is
renewable or extendible, at the option of the debtor, to a date more than one
year from such date or arises under a revolving credit or similar agreement
which obligates the lender or lenders to extend credit during a period of more
than one year from such date including, without limitation, all amounts of
Funded Debt required to be paid or prepaid within one year from the date of
determination.
"Funding Date" means the date of the funding of a Loan.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants Standards Board or in
such other statements by such other entity as may be in general use by
significant segments of the accounting profession as in effect on the date
hereof.
"General Intangibles" means all of each Loan Party's present
and future choses in action, causes of action and all other intangible personal
property of every kind and nature
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(other than Receivables), including without limitation general intangibles,
contracts, corporate or other business records, designs, patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names, tradestyles, trade secrets, operating certificates,
operating certificate applications, goodwill, registrations, copyrights,
licenses, franchises, permits, operating authorities, agent and owner/operator
contracts, certificates of public convenience, refunds or reversions from any
employee benefit plan or pension plan, covenants not to compete, blueprints and
other drawings, customer lists, tax refunds, tax refund claims, rights and
claims against carriers and shippers, and rights to indemnification.
"Governing Documents" means, with respect to any corporation,
(i) the articles/certificate of incorporation (or the equivalent organizational
documents) of such corporation, (ii) the by-laws (or the equivalent governing
documents) of the corporation and (iii) any document setting forth the
designation, amount and/or relative rights, limitations and preferences of any
class or series of such corporation's capital stock; and, with respect to any
general partnership, (i) the partnership agreement (or the equivalent
organizational documents) of such partnership and (ii) any document setting
forth the designation, amount and/or relative rights, limitations and
preferences of any of the partnership interests; and, with respect to any
limited partnership, (i) the partnership agreement (or the equivalent
organizational documents) of such partnership, (ii) a certificate of limited
partnership (or the equivalent organizational documents) and (iii) any document
setting forth the designation, amount and/or relative rights, limitations and
preferences of any of the partnership interests.
"Government" means the United States government or any
department, instrumentality or agency thereof, or any state government or any
department, instrumentality or agency thereof.
"Governmental Authority" means any nation or government, any
federal, state, local or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Government Contracts" means (i) written contracts between any
Borrower and the Government; and (ii) written subcontracts between any Borrower
and a prime contractor who is providing goods or services to the Government
pursuant to a written contract with the Government or its prime contractor, if
applicable (the "Prime Contract"), provided that the subcontract relates only to
goods or services being provided to the Government pursuant to the prime
contract.
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"Guarantors" means, collectively, the Borrowers and
each Subsidiary of Stellex.
"Guaranty" means the Guaranty, substantially in the form of
Exhibit J attached hereto and made a part hereof, referred to in the List of
Closing Documents set forth on Exhibit E attached hereto and made a part hereof.
"Holder" means any Person entitled to enforce any of the
Obligations, whether or not such Person holds any evidence of Indebtedness,
including, without limitation, each Agent and each Lender.
"Indebtedness" means, as applied to any Person at any time,
(a) all indebtedness, obligations or other liabilities of such Person (i) for
borrowed money or evidenced by debt securities, debentures, acceptances, notes
or other similar instruments, and any accrued interest, fees and charges
relating thereto, (ii) under profit payment agreements or in respect of
obligations to redeem, repurchase or exchange any Securities of such Person or
to pay dividends in respect of any stock, (iii) with respect to letters of
credit issued for such Person's account, (iv) to pay the deferred purchase price
of property or services, except accounts payable and accrued expenses arising in
the ordinary course of business, (v) in respect of Capital Leases or (vi) which
are Accommodation Obligations; (b) all indebtedness, obligations or other
liabilities of such Person or others secured by a Lien (other than a Customary
Permitted Lien) on any property of such Person, whether or not such
indebtedness, obligations or liabilities are assumed by such Person, all as of
such time; (c) all indebtedness, obligations or other liabilities of such Person
in respect of Interest Rate Contracts and foreign exchange contracts, net of
liabilities owed to such Person by the counterparties thereon; (d) all preferred
stock subject (upon the occurrence of any contingency or otherwise) to mandatory
redemption; and (e) all contingent Contractual Obligations with respect to any
of the foregoing.
"Indemnified Matters" has the meaning ascribed to such
term in Section 13.05.
"Indemnitees" has the meaning ascribed to such term in
Section 13.05.
"Information Package" means, with respect to each Permitted
Acquisition, an information package consisting of (i) a description of the
Business being acquired, (ii) historical financial statements (which may be
unaudited) for the respective Business for at least the two full fiscal years
most recently ended and the latest twelve-month period ended with the last day
of the fiscal quarter last ended, (iii) projections for the five years after the
respective Permitted Acquisition, (iv) an officer's certificate for the
twelve-month period ended on the
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date of the most recent delivery of quarterly financial statements pursuant to
Section 7.01(a) hereof indicating the compliance on a Pro Forma Basis with the
financial covenants contained in Schedule 5.03(B) hereof and (v) any other
information which Stellex in good faith determines should be furnished so that
the Information Package for the respective Business being acquired is, to the
best of Stellex's knowledge after reasonable investigation, true and correct in
all material respects and is not incomplete by omitting to state any fact
necessary to make the information (taken as a whole) contained therein not
misleading in any material respect.
"Intellectual Property Security Agreement" means the Patent
Security Agreement, substantially in the form of Exhibit N attached hereto and
made a part hereof, referred to in the List of Closing Documents set forth on
Exhibit E attached hereto and made a part hereof.
"Interest Coverage Ratio" means, with respect to any Financial
Covenant Period, the ratio of (i) EBITDA to (ii) Cash Interest Expense.
"Interest Rate Contracts" means interest rate exchange, swap,
collar, cap, hedging or similar agreements.
"Interest Rate Determination Date" has the meaning ascribed to
such term in Section 4.02(c).
"Inventory" means all of each Loan Party's present and future
(i) inventory, (ii) goods, merchandise and other personal property furnished or
to be furnished under any contract of service or intended for sale or lease, and
all goods consigned by such Loan Party to another Person and all other items
which have previously constituted Equipment but are then currently being held
for sale or lease in the ordinary course of such Loan Party's business, (iii)
raw materials, work-in-process and finished goods, (iv) materials and supplies
of any kind, nature or description used or consumed in such Loan Party's
business or in connection with the manufacture, production, packing, shipping,
advertising, finishing or sale of any of the property described in clauses (i)
through (iii) above, (v) goods in which such Loan Party has a joint or other
interest or right of any kind (including, without limitation, goods in which
such Loan Party has an interest or right as consignee), and (vi) goods which are
returned to or repossessed by such Loan Party; in each case whether in the
possession of such Loan Party, a bailee, a consignee, or any other Person for
sale, storage, transit, processing, use or otherwise, and any and all documents
for or relating to any of the foregoing.
"Investment" means, with respect to any Person, (i) any
purchase or other acquisition by that Person of Securities, or of a beneficial
interest in Securities, issued by any other Person,
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(ii) any purchase by that Person of all or substantially all of the assets of a
business conducted by another Person, and (iii) any direct or indirect loan,
advance (other than prepaid expenses, accounts receivable, advances to employees
and similar items made or incurred in the ordinary course of business as
presently conducted) or capital contribution by that Person to any other Person,
including all Indebtedness to such Person arising from a sale of property by
such Person other than in the ordinary course of its business. The amount of any
Investment shall be the original cost of such Investment, plus the cost of all
additions thereto less the amount of any return of capital or principal to the
extent such return is in cash with respect to such Investment without any
adjustments for increases or decreases in value or write-ups, write-downs or
write-offs with respect to such Investment.
"IRS" means the Internal Revenue Service and any Person
succeeding to the functions thereof.
"Kleinert Acquisition" means the transactions
contemplated by the Kleinert Acquisition Documents.
"Kleinert Acquisition Agreement" means the Stock Purchase
Agreement, dated as of May 23, 1997 by and among KII Acquisition as buyer,
Kleinert Industrie Holding AG, a Swiss corporation as seller, and Kleinert
Industries Inc.
"Kleinert Acquisition Documents" means, collectively, the
Kleinert Acquisition Agreement, the Seller Note, and all documents, instruments
and agreements delivered in connection therewith.
"Lender" has the meaning ascribed to such term in the
preamble hereto.
"Leverage Ratio" means, for any Financial Covenant Period, the
ratio of (i) the outstanding Funded Debt for Stellex and its Subsidiaries at the
end of such period, to (ii) EBITDA for such period, which EBITDA is multiplied
by a fraction the numerator of which is 12 and the denominator of which is the
number of months in such Financial Covenant Period.
"Liabilities and Costs" means all liabilities, obligations,
responsibilities, losses, damages, punitive damages, economic damages,
consequential damages, treble damages, costs and expenses (including, without
limitation, attorney, expert and consulting fees and costs of investigation,
feasibility or Remedial Action studies), fines, penalties and monetary
sanctions, interest, absolute or contingent, past, present or future.
"Lien" means any mortgage, deed of trust, pledge,
hypothecation, assignment, conditional sale agreement, deposit
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arrangement, security interest, encumbrance, lien (statutory or other),
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever in respect of any property of a Person, whether
granted voluntarily or imposed by law, and includes the interest of a lessor
under a Capital Lease or under any financing lease having substantially the same
economic effect as any of the foregoing and the filing of any financing
statement or similar notice (other than a financing statement filed by a "true"
lessor pursuant to Section 9-408 of the Uniform Commercial Code or with respect
to goods consigned to a Loan Party or inventory of a third person in the
possession of a Loan Party), naming the owner of such property as debtor, under
the Uniform Commercial Code or other comparable law of any jurisdiction.
"Loan Documents" means this Agreement, the Notes, the Fee
Letters, the Guaranties, the Contribution Agreement, the Collateral Documents,
any Interest Rate Contracts to which any Lender or any Affiliate of a Lender is
a party, any foreign exchange contracts to which any Lender or any Affiliate of
a Lender is a party, and all other instruments, agreements and written
Contractual Obligations between any Loan Party and any Agent or any Lender
delivered to either such Agent or such Lender pursuant to or in connection with
the transactions contemplated hereby.
"Loan Parties" means the Borrowers and the Guarantors.
"Loans" means the Revolving Loans and Term Loans.
"Management Agreement" means the Amended and Restated
Management Advisory Services Agreement dated November 1, 1997 among Mentmore
Holdings Corporation and the Loan Parties, as such agreement may be amended,
supplemented or modified from time to time.
"Management Equity Holder" means (i) a holder of a Put/Call
Promissory Note, (ii) the legal or beneficial owner of Put/Call Preferred Stock
or (iii) a holder of any Management Equity Interests.
"Management Equity Interests" means shares of Capital Stock of
Stellex or of a Subsidiary of Stellex, options, warrants or stock appreciation
or similar rights, in each case held, at the time of the issuance thereof, by
any then current or former officer, employee or other member of management (or
thereafter by their estates or beneficiaries under their estates) of Stellex or
of such Subsidiary pursuant to any management equity subscription agreement,
employment agreement, employee benefit plan, stockholder agreement, stock option
agreement or similar management investor agreement and which may be required to
be repurchased by Stellex or such Subsidiary, or which may be repurchased at the
option of Stellex or such Subsidiary, in each
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case pursuant to the terms of any such agreement under which such equity
interests were issued, including, without limitation, the Management
Participation Agreement.
"Management Participation Agreement" means that certain
Agreement dated as of July 1, 1997 by and among Holding, Greystoke Capital
Management Limited LDC, Bradley C. Call, Julius E. Hodge, Lawrence B. Smith,
Roland H. Marti, John Barriatua, Arun Kumar and Louis A. Brown, as such
agreement may be amended, supplemented and modified from time to time.
"Margin Stock" means "margin stock" as such term is defined in
Regulation U and Regulation G.
"Material Adverse Effect" means a material adverse effect upon
(i) the condition (financial or otherwise), operations, assets, business,
properties or performance of Stellex and its Subsidiaries, taken as a whole,
(ii) the ability of the Loan Parties to perform their respective obligations
under the Loan Documents, or (iii) the ability of the Lenders or any Agent to
enforce the Loan Documents.
"Material Contract" means any Government Contract in excess of
$1,000,000.
"Maturity Date" means October 31, 2003.
"Maximum Revolving Credit Amount" means, at any particular
time, the lesser of (i) the Revolving Loan Commitments at such time and (ii) the
Borrowing Base at such time.
"Multiemployer Plan" means an employee benefit plan as defined
in Section 4001(a)(3) of ERISA which is, or within the immediately preceding six
(6) years was, contributed to by either any Loan Party or any ERISA Affiliate.
"Net Cash Proceeds" means with respect to any Asset Sale or
issuance of Securities, an amount equal to the cash proceeds of such Asset Sale
or issuance, net of (i) reasonable attorneys' fees, accountants' fees,
brokerage, consultant and other customary fees, underwriting commissions and
other reasonable fees and expenses actually incurred in connection therewith,
(ii) taxes paid or reasonably estimated to be payable as a result thereof, (iii)
the amount of Indebtedness secured by a Lien on the asset being sold that has
been repaid with the proceeds of such Asset Sale and (iv) appropriate amounts
that must be set aside as reserves in accordance with GAAP.
"Net Income" means, for any period, the net earnings (or loss)
after taxes of Stellex and its Subsidiaries on a consolidated basis for such
period taken as a single accounting period determined in conformity with GAAP.
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"Net Worth" means the total assets of Stellex and its
Subsidiaries on a consolidated basis less total liabilities of Stellex and its
Subsidiaries on a consolidated basis (excluding liabilities with respect to the
Put/Call Promissory Notes, the Put/Call Preferred Stock and deferred
compensation arising in connection with management put/call rights), each
determined in accordance with GAAP, but without giving effect to the sale of
inventory written-up in accordance with Accounting Principles Board Opinion No.
16 (or successor provision).
"Notes" means the Revolving Loan Notes and the Term
Loan Notes.
"Notice of Borrowing" means a notice substantially in the form
of Exhibit C attached hereto and made a part hereof.
"Notice of Continuation/Conversion" means a notice
substantially in the form of Exhibit D attached hereto and made a part hereof.
"Obligations" means all Loans, advances, debts, liabilities,
obligations, covenants and duties owing by any Loan Party to any Agent, any
Lender, any Affiliate of any Agent or any Lender, or any Person entitled to
indemnification pursuant to Section 13.05 of this Agreement, of any kind or
nature, present or future, whether or not evidenced by any note, guaranty or
other instrument, whether arising under this Agreement, the Notes or any other
Loan Document, whether or not for the payment of money, whether arising by
reason of an extension of credit, loan, guaranty, indemnification, Interest Rate
Contract, foreign exchange contract or in any other manner, whether direct or
indirect (including those acquired by assignment), absolute or contingent, due
or to become due, now existing or hereafter arising and however acquired. The
term includes, without limitation, all interest, charges, expenses, fees,
attorneys' fees and disbursements and any other sum chargeable to any Loan Party
under this Agreement, the Notes or any other Loan Document.
"Officer's Certificate" means, with respect to any Person, a
certificate executed on behalf of such Person by (i) the chairman or
vice-chairman of such Person's board of directors or (ii) such Person's
president, any of its vice-presidents, its chief financial officer, vice
president of finance or its treasurer.
"Other Taxes" has the meaning ascribed to such term in
Section 3.03(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any
Person succeeding to the functions thereof.
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"Permits" means any permit, approval, authorization license,
variance, or permission required from a Governmental Authority under an
applicable Requirement of Law.
"Permitted Acquisition" means the acquisition by Stellex or
any of its corporate Subsidiaries of (i) assets constituting a business or
operation that is within the definition of Business and constitutes a line of
business of a Person (other than a Subsidiary of Stellex) or (ii) at least 75%
of the capital stock of a Person engaged in the Business; provided that such
acquisition is made in accordance with the provisions of this Agreement and the
conditions set forth in Section 5.03 have been satisfied (whether or not
proceeds from the Term Loans are being used with respect to such acquisition).
"Permitted Disposition" means an Asset Sale where (i) Stellex
or any Subsidiary receives consideration at the time of such Asset Sale at least
equal to the fair market value of the stock and/or assets subject to such Asset
Sale, as determined by (A) the Board of Directors of Stellex with respect to an
Asset Sale the value of which does not exceed $10,000,000 or (B) a fairness
opinion by an investment banking firm or valuation firm reasonably satisfactory
to the Administrative Agent with respect to an Asset Sale the value of which
equals or exceeds $10,000,000; (ii) at least 75% of the consideration thereof
received by Stellex or such Subsidiary is in the form of cash and 100% of the
Net Cash Proceeds from such Asset Sale is applied in accordance with Section
3.01(b)(i); and (iii) the consideration thereof that is not in the form of cash
is pledged to the Collateral Agent, on terms and conditions, and pursuant to
documentation, reasonably satisfactory to the Administrative Agent, in a manner
whereby the Collateral Agent has a valid, perfected and first priority Lien
therein.
"Permitted Existing Indebtedness" means the Indebtedness
identified as such on Schedule 1.01(A).
"Permitted Existing Liens" means the Liens on assets of any
Loan Party identified as such on Schedule 1.01(B).
"Permitted Holders" means (i) Richard L. Kramer and William L.
Remley, (ii) any spouse or immediate family member of any person named in clause
(i) hereof and any child or spouse of any spouse or immediate family member of
any such person, (iii) a trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding,
directly or indirectly, a controlling interest of which consist of any person
named in clause (i) hereof and/or such other Persons referred to in the
immediately preceding clause (ii) hereof, or (iv) the trustees of any trust
referred to in clause (iii) hereof.
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"Person" means any natural person, corporation, limited
partnership, general partnership, joint stock company, joint venture,
association, company, trust, bank, trust company, land trust, business trust,
limited liability company or other organization, whether or not a legal entity,
and any Governmental Authority.
"Plan" means an employee benefit plan defined in Section 3(3)
of ERISA (other than a Multiemployer Plan) in respect of which any Loan Party or
any ERISA Affiliate is, or within the immediately preceding six (6) years was,
an "employer" as defined in Section 3(5) of ERISA.
"Pledge Agreements" means, collectively, the Pledge
Agreements, substantially in the form of Exhibit M attached hereto and made a
part hereof, referred to in the List of Closing Documents set forth on Exhibit E
attached hereto and made a part hereof.
"Process Agent" has the meaning ascribed to such term in
Section 13.20(a).
"Pro Forma Basis" means, with respect to any Permitted
Acquisition, the calculation of the financial covenants set forth on Schedule
5.03(b) for Stellex and its Subsidiaries on a consolidated basis for the
immediately preceding twelve month period, and otherwise determined in
accordance with this Agreement, as if such Permitted Acquisition had been
effected on the first day of such twelve month period, provided that all such
calculations shall take into account the pro forma effect of all Permitted
Acquisitions that occur during such twelve month period and all Permitted
Acquisitions that occur after such twelve month period but on or prior to the
date of determination (including any Indebtedness assumed or acquired in
connection therewith and any Indebtedness incurred to finance such Permitted
Acquisition) as if they had occurred on the first day of such twelve month
period.
"Property" means any and all Real Property or personal
property, whether tangible or intangible, plant, building, facility, structure,
underground storage tank or unit, Equipment, Inventory, General Intangible,
Receivable, securities, account, deposit, claim, right or other asset owned, by
any Loan Party, as applicable, (including any surface water thereon and
subsurface matrix (including but not limited to soil, bedrock and groundwater)
thereunder).
"Pro Rata Share" means, with respect to any Lender, the
percentage obtained by dividing (i) such Lender's Commitment (or, if after the
Commitment Termination Date, the outstanding balances of such Lender's Loans) by
(ii) the aggregate amount of all Lenders' Commitments (or, if after the
Commitment Termination Date, the outstanding balances of all Loans).
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"Put/Call Preferred Stock" means preferred stock, having terms
and conditions satisfactory to the Requisite Lenders, which may be issued by
Stellex or a Subsidiary of Stellex to the holders of any Management Equity
Interests of Stellex or such Subsidiary in exchange for such Management Equity
Interests held by such holders; provided that such preferred stock provides that
any payment made pursuant to or in connection with the provisions of such
preferred stock or of the instrument governing such preferred stock, including
pursuant to any redemption, repurchase or default provision, and payments of
dividends on such preferred stock, in each case in cash, may be made only to the
extent Restricted Junior Payments would then be permitted to be made in
accordance with Section 9.06(iii) after giving effect to all other Restricted
Junior Payment made to any other Management Equity Holder prior to or
concurrently therewith.
"Put/Call Promissory Notes" means promissory notes, having
terms and conditions satisfactory to the Requisite Lenders, which may be issued
by Stellex or a Subsidiary of Stellex to the holders of any Management Equity
Interests of Stellex or such Subsidiary in exchange for such Management Equity
Interest held by such holders; provided that (a) such promissory notes are
expressly subordinated to the Notes, (b) such notes are not secured by any Lien
on any property or assets of Stellex or any of its Subsidiaries, (c) such
promissory notes provide that any payment that is to be made pursuant to or in
connection with the provisions of such promissory notes, including, without
limitation, payments of principal or interest on such notes, in each case in
cash, may be made only to the extent Restricted Junior Payments would then be
permitted to be made in accordance with Section 9.06(iii) after giving effect to
all other Restricted Junior Payment made to any other Management Equity Holder
prior to or concurrently therewith.
"Real Property" means all of each Loan Party's present and
future right, title and interest (including, without limitation, any leasehold
estate) in (i) any plots, pieces or parcels of land, (ii) any improvements,
buildings, structures and fixtures now or hereafter located or erected thereon
or attached thereto of every nature whatsoever (the rights and interests
described in clauses (i) and (ii) above being the "Premises"), (iii) all
easements, rights of way, gores of land or any lands occupied by streets, ways,
alleys, passages, sewer rights, water courses, water rights and powers, and
public places adjoining such land, and any other interests in property
constituting appurtenances to the Premises, or which hereafter shall in any way
belong, relate or be appurtenant thereto, (iv) all hereditaments, gas, oil,
minerals (with the right to extract, sever and remove such gas, oil and
minerals, and easements, of every nature whatsoever, located in or on the
Premises and (v) all other rights and privileges thereunto belonging or apper
taining and all extensions, additions, improvements, betterments,
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renewals, substitutions and replacements to or of any of the rights and
interests described in clauses (iii) and (iv) above.
"Receivables" means all of each Loan Party's present and
future (i) accounts, (ii) contract rights, chattel paper, instruments,
documents, deposit accounts, and other rights to payment of any kind, whether or
not arising out of or in connection with the sale or lease of goods or the
rendering of services, and whether or not earned by performance, (iii) any of
the foregoing which are not evidenced by instruments or chattel paper, (iv)
intercompany receivables, and any security documents executed in connection
therewith, (v) proceeds of any letters of credit or insurance policies on which
such Loan Party is named as beneficiary, (vi) claims against third parties for
advances and other financial accommodations and any other obligations whatsoever
owing to such Loan Party, (vii) rights in and to all security agreements,
leases, guarantees, instruments, securities, documents of title and other
contracts securing, evidencing, supporting or otherwise relating to any of the
foregoing, together with all rights in any goods, merchandise or Inventory which
any of the foregoing may represent, and (viii) rights in returned and
repossessed goods, merchandise and Inventory which any of the same may
represent, including, without limitation, any right of stoppage in transit.
"Register" has the meaning ascribed to such term in
Section 13.01(c).
"Regulation G" means Regulation G of the Federal Reserve Board
as in effect from time to time.
"Regulation U" means Regulation U of the Federal Reserve Board
as in effect from time to time.
"Regulation X" means Regulation X of the Federal Reserve Board
as in effect from time to time.
"Release" means release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the indoor or outdoor environment, including the movement of Contaminants
through or in the air, soil, surface water or groundwater.
"Remedial Action" means any action required to (i) clean up,
remove, treat or in any other way address Contaminants in the indoor or outdoor
environment; (ii) prevent the Release or threat of Release or minimize the
further Release of Contaminants so they do not migrate or endanger or threaten
to endanger public health or welfare or the indoor or outdoor environment; or
(iii) perform pre-remedial studies and investigations and post-remedial
monitoring and care.
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"Replacement Event" means, with respect to any Lender, the
appointment of, or the taking of possession by, a receiver, custodian,
conservator, trustee or liquidator of such Lender, or the declaration by the
appropriate regulatory authority that such Lender is insolvent.
"Replacement Lender" means a financial institution which is an
Eligible Assignee or is otherwise reasonably acceptable to the Administrative
Agent and Stellex (which acceptance shall not be unreasonably withheld) and
which is not a Loan Party or an Affiliate of a Loan Party.
"Reportable Event" has the meaning ascribed to such term in
Section 4043 of ERISA or regulations promulgated thereunder, other than an event
which is not subject to the thirty (30) day notice requirement of such
regulations.
"Requirements of Law" means, as to any Person, any law, rule
or regulation, or determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is subject
including, without limitation, the Securities Act, the Securities Exchange Act,
Regulations G, U and X, ERISA, the Fair Labor Standards Act and any certificate
of occupancy, zoning ordinance, building, environmental or land use requirement
or any permit, approval, authorization license, variance, or permission required
from a Governmental Authority or any environmental, labor, employment,
occupational safety or health law, rule or regulation.
"Requisite Lenders" means at least two Lenders whose Pro Rata
Shares, in the aggregate, are greater than fifty-one percent (51%); provided,
however, that, in the event that the Commitments have been terminated pursuant
to the terms of this Agreement, "Requisite Lenders" means at least two Lenders
whose aggregate ratable shares (stated as a percentage) of the aggregate
outstanding amount of the Obligations are greater than fifty-one percent (51%).
"Restricted Junior Payment" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class of
capital stock of, partnership interest of or other equity interest of, a Loan
Party now or hereafter outstanding, except a dividend payable solely in shares
of that class of stock or in any junior class of stock to the holders of that
class, (ii) any redemption, retirement, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, of any shares of
any class of capital stock of, partnership interest of or other equity interest
of, a Loan Party now or hereafter outstanding, (iii) any payment or prepayment
of principal of, premium, if any, or interest, fees or other charges on or with
respect to, and any redemption, purchase, retirement, defeasance, sinking fund
or similar payment and any claim for
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rescission with respect to, any permitted subordinated indebted ness and (iv)
any payment made to redeem, purchase, repurchase or retire, or to obtain the
surrender of, any outstanding warrants, options or other rights to acquire
shares of any class of capital stock of, partnership interest of or other equity
interest of, a Loan Party now or hereafter outstanding.
"Revolving Credit Obligations" means, at any particular time,
the outstanding principal amount of the Revolving Loans at such time.
"Revolving Loan" has the meaning ascribed to such term
in Section 2.01(a).
"Revolving Loan Commitment" means, with respect to any Lender,
the obligation of such Lender to make Revolving Loans pursuant to the terms and
conditions of this Agreement, and which shall not exceed the principal amount
set forth opposite such Lender's name under the heading "Revolving Loan
Commitment" on the signature pages hereof or the signature page of the
Assignment and Acceptance by which it became (or becomes) a Lender, as modified
from time to time pursuant to the terms of this Agreement or to give effect to
any applicable Assignment and Acceptance, and "Revolving Loan Commitments" means
the aggregate principal amount of the Revolving Loan Commitments of all the
Lenders, the maximum amount of which shall not at any time exceed a principal
amount of $25,000,000; provided, however, that on and after a Commitment
Triggering Event, the maximum amount of such Revolving Loan Commitments shall be
adjusted on the date that such Commitment Triggering Event shall occur and on
the forty-fifth day following the last date of each Financial Covenant Period
thereafter, by an amount equal to the Commitment Adjustment but only after such
Commitment Adjustment has adjusted any outstanding Term Loan Commitments.
"Revolving Loan Notes" has the meaning assigned thereto
in Section 2.03(a).
"Securities" means any stock, shares, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or any
certificates of interest, shares, or participations in temporary or interim
certificates for the purchase or acquisition of, or any right to subscribe to,
purchase or acquire any of the foregoing, but shall not include any evidence of
the Obligations.
"Securities Act" means the Securities Act of 1933, as amended
from time to time, and any successor statute.
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, and any successor statute.
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"Security Agreements" means, collectively, the Security
Agreements, substantially in the form of Exhibit L attached hereto and made a
part hereof, referred to in the List of Closing Documents set forth on Exhibit E
attached hereto and made a part hereof.
"Seller Note" means the promissory note made by Holdings in
favor of Kleinert Industrie Holding AG in the principal amount of $1,750,000,
delivered pursuant to the Kleinert Acquisition Agreement.
"SocGen" has the meaning ascribed to such term in the
preamble hereto.
"Solvent", when used with respect to any Person, means that at
the time of determination:
(i) the fair value of its assets is in excess of the
total amount of its liabilities (including, without
limitation, contingent liabilities); and
(ii) the present fair saleable value of its assets is greater
than its probable liability on its existing debts as such debts become
absolute and matured; and
(iii) it is then able and expects to be able to pay its debts
(including, without limitation, contingent debts and other commitments)
as they mature; and
(iv) it has not conducted nor proposes to conduct a business
for which its assets would constitute unreasonably small capital.
"Subordinated Note Documents" means, collectively, the
Subordinated Note Indenture and all documents, instruments and agreements
delivered in connection therewith.
"Subordinated Note Indenture" means the Indenture dated as of
October 31, 1997 between Stellex and Marine Midland Bank, as Trustee, pursuant
to which the Subordinated Notes were issued.
"Subordinated Notes" means the 9 1/2% Senior Subordinated
Notes due 2007 issued pursuant to the Subordinated Note Indenture.
"Subsidiary" means any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned or controlled by such Person, one
or more of the other subsidiaries of such Person or any combination thereof.
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"Syndication Agent" has the meaning ascribed to such
term in the preamble hereto.
"Taxes" has the meaning ascribed to such term in
Section 3.03(a).
"Term Loan Commitment" means, with respect to any Lender, the
obligation of such Lender to make Term Loans pursuant to the terms and
conditions of this Agreement, and which shall not exceed the principal amount
set forth opposite such Lender's name under the heading "Term Loan Commitment"
on the signature pages hereof or the signature page of the Assignment and
Acceptance by which it became (or becomes) a Lender, as modified from time to
time pursuant to the terms of this Agreement or to give effect to any applicable
Assignment and Acceptance, and "Term Loan Commitments" means the aggregate
principal amount of the Term Loan Commitments of all the Lenders, the maximum
amount of which shall not at any time exceed $25,000,000; provided, however,
that on and after a Commitment Triggering Event, the maximum amount of such Term
Loan Commitments shall be adjusted on the date that such Commitment Triggering
Event shall occur and on the forty-fifth day following the last date of each
Financial Covenant Period thereafter, by an amount equal to the Commitment
Adjustment.
"Term Loan Lender" means a Lender who has a Term Loan
Commitment.
"Term Loan Notes" has the meaning assigned thereto in
Section 2.03(b).
"Term Loans" has the meaning ascribed to such term in
Section 2.02(a)(i).
"Term Loan Termination Date" means the day which is the
earliest of (A) October 31, 1999, (B) the termination of the Commitments
pursuant to Section 11.02(a) and (C) the date of termination in whole of the
Commitments pursuant to Section 3.01(a)(ii).
"Termination Event" means (i) any Reportable Event with
respect to any Benefit Plan, (ii) the withdrawal of a Loan Party or an ERISA
Affiliate from a Benefit Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA, (iii) the occurrence of an
obligation arising under Section 4041 of ERISA of a Loan Party or an ERISA
Affiliate to provide affected parties with a written notice of an intent to
terminate a Benefit Plan in a distress termination described in Section 4041(c)
of ERISA, (iv) the institution by the PBGC of proceedings to terminate any
Benefit Plan, (v) any event or condition which constitutes grounds under Section
4042 of ERISA for the appointment of a Trustee to administer a Benefit
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Plan, or (vi) the partial or complete withdrawal of any Loan Party or any ERISA
Affiliate from a Multiemployer Plan.
"Transaction Documents" means, collectively, the Loan
Documents and the Acquisition Documents.
"Type" means, with respect to any Loan, its nature as a
Eurodollar Rate Loan or a Base Rate Loan.
"Uniform Commercial Code" means the Uniform Commercial Code as
enacted in the State of New York, as it may be amended from time to time.
"Unused Commitment Fee" has the meaning ascribed to
such term in Section 4.03(a).
"Voting Securities" means with respect to any Person,
Securities with respect to any class or classes of capital stock of such Person
entitling the holders thereof ordinarily to vote in the election of the members
of the board of directors of such Person.
"Watkins-Johnson Acquisition" means the transactions
contemplated by the Watkins-Johnson Acquisition Documents.
"Watkins-Johnson Acquisition Agreement" means the Stock
Purchase Agreement dated as of August 29, 1997 by and among TSMD Acquisition,
Watkins-Johnson Company and Microwave (formerly known as W-J TSMD, Inc.).
"Watkins-Johnson Acquisition Documents" means, collectively,
the Watkins-Johnson Acquisition Agreement and all documents, instruments and
agreements delivered in connection therewith.
"Wholly Owned Subsidiary" means a Subsidiary of Stellex all
the Capital Stock of which (other than directors' qualifying shares) is owned by
Stellex or another Wholly Owned Subsidiary.
"Working Capital" means, as at any date of determination, the
excess, if any, of Current Assets over Current Liabilities.
1.02. Computation of Time Periods. In this Agreement, in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding". Periods of days referred to in this Agreement shall be
counted in calendar days unless Business Days are expressly prescribed. Any
period determined hereunder by reference to a month or months or year or years
shall end on the day in the relevant calendar month in the relevant year, if
applicable, immediately preceding the date numerically corresponding to the
first day of such period,
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provided that if such period commences on the last day of a calendar month (or
on a day for which there is no numerically corresponding day in the calendar
month during which such period is to end), such period shall, unless otherwise
expressly required by the other provisions of this Agreement, end on the last
day of the calendar month.
1.03. Accounting Terms. For purposes of this Agreement, all
accounting terms not otherwise defined herein shall have the meanings assigned
to them in conformity with GAAP.
1.04. Other Terms. Terms not otherwise defined herein
which are defined in, or used in, Article 9 of the Uniform
Commercial Code shall have the respective meanings assigned to
such terms in Article 9 of the Uniform Commercial Code.
1.05 Knowledge. As used in this Agreement the phrases "to the
knowledge of," "known by" or phrases of similar import, when applied to any Loan
Party, shall mean that an individual holding any of the offices identified on
Schedule 1.05 attached hereto is actually aware of, or should be aware of in the
ordinary course of business, the fact or other matter.
ARTICLE II
AMOUNTS AND TERMS OF LOANS
2.01. Revolving Loan Facility.
(a) Availability. Subject to the terms and conditions set
forth in this Agreement, each Lender hereby severally agrees to make revolving
loans (each individually, a "Revolving Loan" and, collectively, the "Revolving
Loans") to the Borrowers from time to time during the period from the Closing
Date to the Business Day immediately preceding the Commitment Termination Date,
in an amount not to exceed such Lender's Pro Rata Share of the Availability at
such time; provided, however, that the initial Borrowing of Revolving Loans
shall not exceed $5,000,000. Each Base Rate Loan shall be for a minimum amount
of Two Hundred Thousand Dollars ($200,000) and in integral multiples of One
Hundred Thousand Dollars ($100,000) in excess of that amount. Each Eurodollar
Rate Loan shall be for a minimum amount of Five Hundred Thousand Dollars
($500,000) and in integral multiples of One Hundred Thousand Dollars ($100,000)
in excess of that amount. All Revolving Loans comprising the same Borrowing
under this Agreement shall be made by the Lenders simultaneously and
proportionately to their then respective Pro Rata Shares, it being understood
that no Lender shall be responsible for any failure by any other Lender to
perform its obligation to make a Revolving Loan hereunder nor shall the
Commitment of any Lender be increased or decreased as a result of any such
failure. Subject to the provisions of this Agreement, the Borrowers may repay
any outstanding Revolving Loan made to it on any day which
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is a Business Day and any amounts so repaid may be reborrowed in accordance with
the provisions of this Section 2.01(a).
(b) Notice of Borrowing. When the Borrowers desire to borrow
under this Section 2.01, the Borrowers shall deliver to each Lender a Notice of
Borrowing, signed by them, no later than 12:00 noon (New York time) (i) on the
proposed Funding Date, in the case of a Borrowing of Base Rate Loans, and (ii)
at least two (2) Business Days in advance of the proposed Funding Date, in the
case of a Borrowing of Eurodollar Rate Loans; provided that no Borrowing of
Eurodollar Rate Loans shall be made on the Closing Date. Such Notice of
Borrowing shall specify (i) the proposed Funding Date (which shall be a Business
Day), (ii) the amount of the proposed Borrowing, (iii) whether the proposed
Borrowing will be of Base Rate Loans or Eurodollar Rate Loans, and (iv) in the
case of Eurodollar Rate Loans, the requested Eurodollar Interest Period. In lieu
of delivering such a Notice of Borrowing, the Borrowers may give the
Administrative Agent telephonic notice of any proposed Borrowing by the time
required under this Section 2.01(b) if it confirms such notice by delivery of
the Notice of Borrowing to the Administrative Agent promptly, but in no event
later than 5:00 p.m. (New York time) on the same day. Any Notice of Borrowing
(or telephonic notice in lieu thereof) given pursuant to this Section 2.01(b)
shall be irrevocable.
(c) Making of Revolving Loans. (i) Each Lender shall deposit
an amount equal to its Pro Rata Share of the amount requested by the Borrowers
to be made as Revolving Loans in the Administrative Agent's Account at its
office in New York, New York, in immediately available funds, not later than
2:00 p.m. (New York time) on any Funding Date applicable thereto. Subject to the
fulfillment of the conditions precedent set forth in Sections 5.01 and 5.02, the
Administrative Agent shall make the proceeds of such amounts received by it
available to the Borrowers at the Administrative Agent's office in New York, New
York on such Funding Date (or on the date received if later than such Funding
Date). The failure of any Lender to deposit the amount described above with the
Administrative Agent on the applicable Funding Date shall not relieve any other
Lender of its obligations hereunder to make its Revolving Loan on such Funding
Date.
(ii) Unless the Administrative Agent shall have been notified
by any Lender no later than 1:00 p.m. (New York time) on the applicable Funding
Date in respect of any Borrowing of Revolving Loans that such Lender does not
intend to fund its Revolving Loan requested to be made on such Funding Date, the
Administrative Agent may assume that such Lender has funded its Revolving Loan
and is depositing the proceeds thereof with the Administrative Agent on the
Funding Date, and the Administrative Agent in its sole discretion may, but shall
not be obligated to, disburse a corresponding amount to the Borrowers on the
Funding Date. If the Revolving Loan proceeds corresponding to that
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amount are advanced to the Borrowers by the Administrative Agent but are not in
fact deposited with the Administrative Agent by such Lender on or prior to the
applicable Funding Date, such Lender agrees to pay, and in addition the
Borrowers agree to repay, to the Administrative Agent forthwith on demand such
corresponding amount, together with interest thereon, for each day from the date
such amount is disbursed to or for the benefit of the Borrowers until the date
such amount is paid or repaid to the Administrative Agent, (A) in the case of
the Borrowers, at the interest rate applicable to such Borrowing and (B) in the
case of such Lender, at the Federal Funds Rate for the first Business Day, and
thereafter at the interest rate applicable to such Borrowing. If such Lender
shall pay to the Administrative Agent the corresponding amount, the amount so
paid shall constitute such Lender's Revolving Loan, and if both such Lender and
the Borrowers shall pay and repay such corresponding amount, the Administrative
Agent shall promptly pay to the Borrowers such corresponding amount. This
Section 2.01(c)(ii) does not relieve any Lender of its obligation to make its
Revolving Loan on any Funding Date; nor does this Section relieve the Borrowers
of their obligation to pay or repay any Lender funding its Revolving Loan
pursuant to this Section interest on such Revolving Loan from such Funding Date
until the date on which such Revolving Loan is repaid in full.
(d) Repayment of Revolving Loans. The Revolving Loan
Commitments shall terminate, and all outstanding Revolving Loans
shall be paid in full, on the Commitment Termination Date.
2.02. Term Loan Facility.
(a) Amount of Loans. Subject to the terms and conditions set
forth in this Agreement, each Lender hereby severally agrees to make term loans
(each individually, a "Term Loan" and, collectively, the "Term Loans") to the
Borrowers from time to time during the period from the Closing Date to the
Business Day immediately preceding the Term Loan Termination Date in an amount
not to exceed such Lender's Pro Rata Share of the amount by which the Term Loan
Commitments exceed the outstanding Term Loans. Each Term Loan shall be a Base
Rate Loan on the Funding Date and be for a minimum amount of Two Million Five
Hundred Thousand Dollars ($2,500,000) and in integral multiples of One Hundred
Thousand Dollars ($100,000) in excess of that amount. All Term Loans shall be
made by the Lenders simultaneously and proportionately to their then respective
Pro Rata Shares, it being understood that no Lender shall be responsible for any
failure by any other Lender to perform its obligation to make a Term Loan
hereunder nor shall the Commitment of any Lender be increased or decreased as a
result of any such failure.
(b) Notice of Borrowing. When the Borrowers desire to borrow
under this Section 2.02, the Borrowers shall deliver to each Lender a Notice of
Borrowing, signed by them, no later than
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12:00 noon (New York time) at least one Business Day in advance of the proposed
Funding Date. Such Notice of Borrowing shall specify (i) the proposed Funding
Date (which shall be a Business Day) and (ii) the amount of the proposed
Borrowing with respect to the Term Loans. All Term Loans shall be Base Rate
Loans on the Closing Date but after the Closing Date may be converted to
Eurodollar Rate Loans pursuant to Section 4.01(c). Any Notice of Borrowing given
pursuant to this Section 2.02(b) shall be irrevocable.
(c) Making of Term Loans. (i) Each Lender shall deposit an
amount equal to its Pro Rata Share of the amount requested by the Borrowers
specified in such Notice of Borrowing to be made as Term Loans in the
Administrative Agent's Account at its office in New York, New York, in
immediately available funds, not later than 12:00 noon (New York time) on the
Funding Date. Subject to the fulfillment of the conditions precedent set forth
in Sections 5.01, 5.02 and 5.03, the Administrative Agent shall make the
proceeds of such amounts received by it available to the Borrowers at the
Administrative Agent's office in New York, New York on such Funding Date. The
failure of any Lender to deposit the amount described above with the
Administrative Agent on the Closing Date shall not relieve any other Lender of
its obligations hereunder to make its Term Loan on such Funding Date.
(ii) Unless the Administrative Agent shall have been notified
by any Lender no later than 1:00 p.m. (New York time) on the applicable Funding
Date in respect of any Borrowing of Term Loans that such Lender does not intend
to fund its Term Loan requested to be made on such Funding Date, the
Administrative Agent may assume that such Lender has funded its Term Loan and is
depositing the proceeds thereof with the Administrative Agent on the Funding
Date, and the Administrative Agent in its sole discretion may, but shall not be
obligated to, disburse a corresponding amount to the Borrowers on the Funding
Date. If the Term Loan proceeds corresponding to that amount are advanced to the
Borrowers by the Administrative Agent but are not in fact deposited with the
Administrative Agent by such Lender on or prior to the applicable Funding Date,
such Lender agrees to pay, and in addition the Borrowers agree to repay, to the
Administrative Agent forthwith on demand such corresponding amount, together
with interest thereon, for each day from the date such amount is disbursed to or
for the benefit of the Borrowers until the date such amount is paid or repaid to
the Administrative Agent, (A) in the case of the Borrowers, at the interest rate
applicable to such Borrowing and (B) in the case of such Lender, at the Federal
Funds Rate for the first Business Day, and thereafter at the interest rate
applicable to such Borrowing. If such Lender shall pay to the Administrative
Agent the corresponding amount, the amount so paid shall constitute such
Lender's Term Loan, and if both such Lender and the Borrowers shall pay such
corresponding amount, the Administrative Agent shall promptly pay to the
Borrowers such corresponding
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amount. This Section 2.02(c)(ii) does not relieve any Lender of its obligation
to make its Term Loan on any Funding Date; nor does this Section relieve the
Borrowers of their obligation to pay or repay any Lender funding its Term Loan
pursuant to this Section interest on such Term Loan from such Funding Date until
the date on which such Term Loan is repaid in full.
(d) Repayment of Term Loans. The principal amount of the Term
Loans outstanding on the Term Loan Termination Date (the "Outstanding Term Loan
Amount") shall be payable in fifteen (15) substantially equal consecutive
quarterly installments in the principal amount equal to 4.17% of the Outstanding
Term Loan Amount on the first day of February, May, August and November in each
year, commencing on February 1, 2000 through and including August 1, 2003 and
one (1) installment in the principal amount equal to 37.45% of the Outstanding
Term Loan Amount on the Maturity Date; provided, however, that the amount of the
last such installment shall be in the amount necessary to repay in full the
outstanding principal amount of the Term Loans.
2.03. Promise to Pay; Evidence of Debt. (a) The Borrowers
jointly and severally agree to pay when due the principal amount of each
Revolving Loan which is made to the Borrowers, and further agree to pay all
unpaid interest accrued thereon, in accordance with the terms of this Agreement
and the promissory notes evidencing the Revolving Loans owing to the Lenders.
The Borrowers shall execute and deliver to each Lender a promissory note to
evidence the Revolving Loans owing to such Lender and agrees to execute and
deliver to such Lender and any assignee of such Lender such promissory notes as
are necessary after giving effect to any assignment thereof pursuant to Section
13.01, each substantially in the form of Exhibit F-1 attached hereto and made a
part hereof (all such promissory notes and all amendments thereto, replacements
thereof and substitutions therefor being collectively referred to as the
"Revolving Loan Notes"; and "Revolving Loan Note" means any one of the Revolving
Loan Notes).
(b) The Borrowers jointly and severally agree to pay when due
the principal amount of each Term Loan which is made to the Borrowers, and
further agree to pay all unpaid interest accrued thereon, in accordance with the
terms of this Agreement and the promissory notes evidencing the Term Loans owing
to the Lenders. The Borrowers shall execute and deliver to each Lender a
promissory note to evidence the Term Loans owing to such Lender and agree to
execute and deliver to such Lender and any assignee of such Lender such
promissory notes as are necessary after giving effect to any assignment thereof
pursuant to Section 13.01, each substantially in the form of Exhibit F-2
attached hereto and made a part hereof (all such promissory notes and all
amendments thereto, replacements thereof and substitutions therefor being
collectively referred to as the "Term Loan Notes"; and "Term Loan Note" means
any one of the Term Loan Notes).
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2.04. Use of Proceeds of Loans. (a) The proceeds of the
Revolving Loans shall be used (i) to partially refinance certain existing
indebtedness of Aerospace and Microwave, (ii) to pay certain fees and expenses
incurred in connection with the Watkins-Johnson Acquisition and refinancing, and
(iii) to provide working capital in the ordinary course of business of Stellex
and its Subsidiaries and other general corporate purposes not prohibited
hereunder.
(b) The proceeds of the Term Loans shall be used to
fund Permitted Acquisitions.
2.05. Authorized Officers, Employees and Agents. On the
Closing Date and from time to time thereafter, the Borrowers shall deliver to
the Administrative Agent an Officer's Certificate setting forth the names of the
officers of each Borrower, employees and agents of such Borrower authorized to
request Loans on behalf of such Borrower and containing a specimen signature of
each such officer, employee or agent. The officers, employees and agents so
authorized shall also be authorized to act for such Borrower in respect of all
other matters relating to the Loan Documents. The Agents shall be entitled to
rely conclusively on such officer's, employee's or agent's authority to request
such Loan until the Agents receive written notice to the contrary. In addition,
the Agents shall be entitled to rely conclusively on any written notice sent to
it by telecopy. The Agents shall have no duty to verify the authenticity of the
signature appearing on, or any telecopy or facsimile of, any written Notice of
Borrowing or any other document, and, with respect to an oral request for such a
Loan, the Agents shall have no duty to verify the identity of any person
representing himself or herself as one of the officers, employees or agents
authorized to make such request or otherwise to act on behalf of any Borrower.
Neither any Agent nor any Lender shall incur any liability to any Borrower or
any other Person in acting upon any telecopy or facsimile or telephonic notice
referred to above which any Agent believes to have been given by a duly
authorized officer or other person authorized to borrow on behalf of any
Borrower.
ARTICLE III
PAYMENTS AND PREPAYMENTS
3.01. Prepayments; Reductions in Revolving Loan Commitments.
(a) Voluntary Prepayments/Reductions.
(i) The Borrowers may, at any time and from time to time,
prepay the Loans in whole or in part; provided, however, that any partial
prepayment of Eurodollar Rate Loans shall be in minimum amounts of $500,000 and
in multiples of $100,000 in
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excess thereof and that any partial prepayment of Base Rate Loans shall be in
minimum amounts of $200,000 and in multiples of $100,000 in excess thereof;
provided, further, that Eurodollar Rate Loans may only be prepaid (A) in whole
or in part on the expiration date of the then applicable Eurodollar Interest
Period, upon at least one (1) Business Day's prior written notice to the
Administrative Agent (which the Administrative Agent shall promptly transmit to
each Lender, it being agreed that the failure of the Administrative Agent to
give such notice shall not affect the Borrowers' right to prepay any Loan) or
(B) otherwise upon payment of the amounts described in Section 4.02(f). Any
notice of prepayment given to the Administrative Agent under this Section
3.01(a)(i) shall specify the Loans to be prepaid, the date (which shall be a
Business Day) of prepayment, and the aggregate principal amount of the
prepayment. Any prepayment of Term Loans shall be applied pro rata to the
remaining principal installments of the Term Loans. When notice of prepayment is
delivered as provided herein, the principal amount of the Loans specified in the
notice shall become due and payable on the prepayment date specified in such
notice.
(ii) The Borrowers, upon at least five (5) Business Days'
prior notice to the Administrative Agent (which the Administrative Agent shall
promptly transmit to each Lender), shall have the right, at any time and from
time to time, to terminate in whole or permanently reduce ratably in part the
unused portions of the Commitments. Any partial reduction of the Commitments
shall be in an aggregate minimum amount of One Million Dollars ($1,000,000) and
integral multiples of One Hundred Thousand Dollars ($100,000) in excess of that
amount, and shall reduce the Commitment of each Lender proportionately in
accordance with such Lender's Pro Rata Share. Any notice of termination or
reduction given to the Administrative Agent under this Section 3.01(a)(ii) shall
specify whether the termination or reduction is applicable to the Revolving Loan
Commitment or the Term Loan Commitment, the date (which shall be a Business Day)
of such termination or reduction and, with respect to a partial reduction, the
aggregate principal amount thereof.
(iii) The prepayments and payments in respect of reductions
and terminations described in clauses (i) and (ii) of this Section 3.01(a) may
be made without premium or penalty (except as provided in Section 4.02(f)).
(b) Mandatory Prepayments/Reductions.
(i) Immediately upon any Loan Party's receipt of any Net Cash
Proceeds on account of an Asset Sale (other than Excluded Proceeds), such Loan
Party shall make or cause to be made a mandatory prepayment of the Term Loans in
an amount equal to 100% of such Net Cash Proceeds. Each such prepayment of Term
Loans shall be applied pro rata to the remaining principal installments of the
Term Loans.
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(ii) Immediately upon any Loan Party's receipt of any Net Cash
Proceeds from the issuance of any Securities (other than Excluded Securities) by
such Loan Party (other than such Net Cash Proceeds that are used by such Loan
Party to consummate a Permitted Acquisition within one year from the date such
Net Cash Proceeds are received, provided that such Net Cash Proceeds are
deposited into the Cash Collateral Account upon receipt of such Net Cash
Proceeds by such Loan Party until the earlier of (A) the date such Loan Party
consummates a Permitted Acquisition in accordance with the provisions hereof or
(B) the date which is the first annual anniversary of the date of deposit
thereof), such Loan Party shall make or cause to be made a mandatory prepayment
of the Term Loans in an amount equal to 100% of such Net Cash Proceeds. Each
such prepayment of Term Loans shall be applied pro rata to the remaining
principal installments of the Term Loans.
(iii) On the 90th day following the last day of each Fiscal
Year, the Borrowers shall make or cause to be made a mandatory prepayment of the
Term Loans in an amount equal to the lesser of 50% of the Excess Cash Flow for
such Fiscal Year or the aggregate principal amount of the Term Loans outstanding
as of the last day of such Fiscal Year; provided, however, that no mandatory
prepayment shall be required hereunder if the Leverage Ratio of Stellex and its
Subsidiaries on a consolidated basis for such Fiscal Year is less than 3.25 to
1.00. Each such prepayment of Term Loans shall be applied pro rata to the
remaining principal installments of the Term Loans.
(iv) Immediately upon the Revolving Credit Obligations
exceeding the Maximum Revolving Credit Amount, the Borrowers shall make or cause
to be made a mandatory prepayment of the Revolving Credit Obligations in an
amount equal to such excess, such amount to be applied in accordance with the
provisions of Section 3.02(b).
(v) Nothing in this Section 3.01(b) shall be construed to
constitute the Lenders' consent to any transaction which is not expressly
permitted by Article IX.
3.02. Payments. (a) Manner and Time of Payment. All
payments of principal, interest, fees and other Obligations which are payable to
the Administrative Agent or any Lender shall be made without condition or
deduction for any counterclaim, defense, recoupment or set-off, in Dollars and
in immediately available funds, delivered to the Administrative Agent not later
than 1:00 p.m. (New York time) on the date due, by deposit of such funds to the
Administrative Agent's Account. The Administrative Agent shall thereafter cause
to be distributed to the Lenders their respective Pro Rata Shares of such
payments in accordance with the provisions of Section 3.02(b) if received prior
to 1:00 p.m. (New York time), and on the next succeeding
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Business Day, if received thereafter, by the Administrative Agent.
(b) Apportionment of Payments. (i) Subject to the provisions
of Sections 3.02(b)(ii), all payments of principal in respect of outstanding
Revolving Loans shall be applied by the Administrative Agent to the ratable
payment of the Revolving Loans owing to the Lenders, and all payments of
principal in respect of outstanding Term Loans shall be applied by the
Administrative Agent to the ratable payment of the Term Loans owing to the
Lenders. Payments relating to interest shall be applied to the payment of
interest owing to the Lenders in respect of the Loans on a ratable basis.
(ii) After the occurrence of an Event of Default and while the same
is continuing, the Administrative Agent shall apply all payments and prepayments
of any Obligations and all proceeds of Collateral in the following order:
(A) first, to pay principal of and interest on any Loans which
the Administrative Agent may have advanced on behalf of any Lender
pursuant to Section 2.01(c)(ii) or Section 2.02(c)(ii) for which the
Administrative Agent has not been reimbursed by such Lender or the
Borrowers;
(B) second, to pay Obligations in respect of any fees,
expense reimbursements or indemnities then due to the Administrative
Agent or the Lenders;
(C) third, to pay interest on the Loans;
(D) fourth, to pay the principal amount of the Loans
then outstanding in accordance with each Lender's Pro Rata Share; and
(E) fifth, to pay all other Obligations in such
order as the Administrative Agent may determine in its sole discretion.
The order of priority set forth in this Section 3.02(b)(ii) and the related
provisions of this Agreement are set forth solely to determine the rights and
priorities of the Administrative Agent and the Lenders as among themselves. If
sufficient funds are not available to fund all Obligations described in any of
the foregoing clauses (A) through (E), the available funds shall be allocated to
the Obligations described in such clause ratably.
(c) Payments on Non-Business Days. Whenever any payment to be
made by the Borrowers hereunder or under the Notes is stated to be due on a day
which is not a Business Day, the payment shall instead be due on the next
succeeding Business Day,
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and any such extension of time shall be included in the computation of the
payment of interest and fees hereunder.
3.03. Taxes. (a) Payments Free and Clear of Taxes. Any and all
payments by the Borrowers hereunder, under the Notes or under any other Loan
Document shall be made free and clear of and without deduction for any and all
present or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto, excluding, in the case of each Lender
and the Administrative Agent, taxes imposed on its income, capital, profits or
gains and franchise taxes imposed on it, in each case by (i) the United States
except withholding taxes contemplated pursuant to Section 3.03(e)(ii)(C), (ii)
the Governmental Authority of the jurisdiction in which such Lender's office is
located or (iii) the Governmental Authority in which such Person is organized,
managed, controlled or doing business, in each case including all political
subdivisions thereof (all such non-excluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
If the Borrowers shall be required by law to withhold or deduct any Taxes from
or in respect of any sum payable hereunder, under the Notes or under any other
Loan Document to any Lender or the Administrative Agent, (x) such sum payable
shall be increased as may be necessary so that after making all required
withholdings or deductions (including withholdings or deductions applicable to
additional sums payable under this Section 3.03) such Lender or the
Administrative Agent (as the case may be) receives an amount equal to the sum it
would have received had no such withholdings or deductions been made, (y) the
Borrowers shall make such withholdings or deductions, and (z) the Borrowers
shall pay the full amount withheld or deducted to the relevant taxation
authority or other authority in accordance with applicable law.
(b) Other Taxes. In addition, the Borrowers agree to pay any
present or future stamp, value-added or documentary taxes or any other excise or
property taxes, charges or similar levies which arise from and which relate
directly to (i) any payment made under any Loan Document or (ii) the execution,
delivery or registration of, or otherwise with respect to, this Agreement, the
Notes or any other Loan Document (hereinafter referred to as "Other Taxes").
(c) Indemnification. The Borrowers will indemnify each Lender
and each Agent against, and reimburse each on demand for, the full amount of all
Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes
imposed by any Governmental Authority on amounts payable under this Section 3.03
and any additional income or franchise taxes resulting therefrom) incurred or
paid by such Lender or such Agent (as the case may be) or any Affiliate of such
Lender and any liability (including penalties, interest, and out-of-pocket
expenses paid to third
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parties) arising therefrom or with respect thereto, whether or not such Taxes or
Other Taxes were correctly or lawfully payable. A certificate as to any amount
payable to any Person under this Section 3.03 submitted by such Person to the
Borrowers shall, absent manifest error, be final, conclusive and binding upon
all parties hereto. In determining such additional amount, such Person shall
take into account and reduce the amount otherwise payable by the Borrowers
pursuant to this Section 3.03 by an amount equal to the tax credits and other
tax benefits actually utilized (as determined by such Person in its reasonable
judgment). This indemnification shall be made within thirty (30) days from the
date such Person makes written demand therefor and within thirty (30) days after
the receipt of any refund of the Taxes or Other Taxes following final
determination that the Taxes or Other Taxes which gave rise to the
indemnification were not required to be paid, such Person shall repay the amount
of such paid indemnity to the Borrowers.
(d) Receipts. Within thirty (30) days after the date of any
payment of Taxes or Other Taxes by the Borrowers, the Borrowers will furnish to
the Administrative Agent, at its address referred to in Section 13.10, the
original or a certified copy of a receipt or other documentation reasonably
satisfactory to the Administrative Agent evidencing payment thereof. The
Borrowers will furnish to the Administrative Agent upon the Administrative
Agent's request from time to time an Officer's Certificate stating that all
Taxes and Other Taxes of which it is aware that are due have been paid and that
no additional Taxes or Other Taxes of which it is aware are due.
(e) Foreign Bank Certifications. (i) Each Lender that is not
created or organized under the laws of the United States or a political
subdivision thereof shall deliver to the Borrowers and the Administrative Agent
on or before the Closing Date or the date on which such Lender becomes a Lender
pursuant to Section 13.01 hereof a true and accurate certificate executed in
duplicate by a duly authorized officer of such Lender to the effect that such
Lender is eligible to receive payments hereunder and under the Notes without
deduction or withholding of United States federal income tax (A) under the
provisions of an applicable tax treaty concluded by the United States (in which
case the certificate shall be accompanied by two duly completed copies of IRS
Form 1001 (or any successor or substitute form or forms)) or (B) under Sections
1442(c)(1) and 1442(a) of the Internal Revenue Code (in which case the
certificate shall be accompanied by two duly completed copies of IRS Form 4224
(or any successor or substitute form or forms)) and IRS Form W-8 or W-9 and any
other form which the Borrowers or the Administrative Agent shall reasonably
request in connection therewith. In the event a Lender fails to deliver the
requisite forms in accordance with the preceding sentence, such Lender shall not
be entitled to the indemnification provided by Section 3.03(c).
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(ii) Each such Lender further agrees to deliver to the Borrowers
and the Administrative Agent from time to time, a true and accurate certificate
executed in duplicate by a duly authorized officer of such Lender before or
promptly upon the occurrence of any event requiring a change in the most recent
certificate previously delivered by it to the Borrowers and the Administrative
Agent pursuant to this Section 3.03(e). Each certificate required to be
delivered pursuant to this Section 3.03(e)(ii) shall certify as to one of the
following:
(A) that such Lender can continue to receive payments
hereunder and under the Notes without deduction or withholding of
United States federal income tax;
(B) that such Lender cannot continue to receive payments
hereunder and under the Notes without deduction or withholding of
United States federal income tax as specified therein but does not
require additional payments pursuant to Section 3.03(a) because it is
entitled to recover the full amount of any such deduction or
withholding from a source other than the Borrowers;
(C) that such Lender is no longer capable of receiving
payments hereunder and under the Notes without deduction or withholding
of United States federal income tax as specified therein by reason of a
change in law (including the Code or applicable tax treaty) after the
later of the Closing Date or the date on which a Lender became a Lender
pursuant to Section 13.01 and that it is not capable of recovering the
full amount of the same from a source other than the Borrowers; or
(D) that such Lender is no longer capable of receiving
payments hereunder without deduction or withholding of United States
federal income tax as specified therein other than by reason of a
change in law (including the Code or applicable tax treaty) after the
later of the Closing Date or the date on which a Lender became a Lender
pursuant to Section 13.01.
Each Lender agrees to deliver to the Borrowers and the Administrative Agent duly
completed copies of the above-mentioned IRS forms on or before the earlier of
(x) the date that any such form expires or becomes obsolete or otherwise is
required to be resubmitted as a condition to obtaining an exemption from
withholding from United States federal income tax and (y) fifteen (15) days
after the occurrence of any event requiring a change in the most recent form
previously delivered by such Lender to the Borrowers and the Administrative
Agent, unless any change in
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treaty, law, regulation, or official interpretation thereof which would render
such form inapplicable or which would prevent the Lender from duly completing
and delivering such form has occurred prior to the date on which any such
delivery would otherwise be required and the Lender promptly advises the
Borrowers and the Administrative Agent that it is not capable of receiving
payments hereunder or under the Notes without any deduction or withholding of
United States federal income tax. In the event a Lender fails to deliver the
requisite forms in accordance with this Section 3.03(e), such Lender shall not
be entitled to the indemnification provided by Section 3.03(c).
3.04. Increased Capital. If any Lender reasonably determines
that (i) the adoption or implementation of or any change in or in the
interpretation or administration of any law or regulation or any guideline or
request from any central bank or other Governmental Authority or
quasi-governmental authority exercising jurisdiction, power or control over such
Lender or banks or financial institutions generally (whether or not having the
force of law) effective after the date hereof, compliance with which affects or
would affect the amount of capital required or expected to be maintained by such
Lender or any corporation controlling such Lender and (ii) the amount of such
capital is increased by or based upon the making or maintenance by any Lender of
its Loans, any Lender's participation in or obligation to participate in the
Loans or other advances made hereunder or under the Notes or the existence of
any Lender's obligation to make Loans, then, in any such case, upon demand by
such Lender (with a copy of such demand to the Administrative Agent), the
Borrowers agree to immediately pay to the Administrative Agent for the account
of such Lender, from time to time as specified by such Lender, additional
amounts sufficient to compensate such Lender or such corporation therefor. Such
demand shall be accompanied by a statement as to the amount of such compensation
and include a brief summary of the basis for such demand. Such statement shall
be conclusive and binding for all purposes, absent manifest error.
ARTICLE IV
INTEREST AND FEES
4.01. Interest on the Loans and other Obligations.
(a) Rate of Interest. (i) All Revolving Loans and the
outstanding amount of all other Obligations (other than Term Loans) shall bear
interest on the unpaid amount thereof from the date such Loans are made and such
other Obligations are due and payable until paid in full, except as otherwise
provided in Section 4.01(d), as follows:
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(A) If a Base Rate Loan or other Obligation, at a rate per
annum equal to the sum of (I) the Base Rate as in effect from time to
time as interest accrues, plus (II) the Applicable Revolving Loan Base
Rate Margin in effect at such time; and
(B) If a Eurodollar Rate Loan, at a rate per annum equal to the
sum of (I) the Eurodollar Rate determined for the applicable Eurodollar
Interest Period, plus (II) the Applicable Revolving Eurodollar Rate
Margin in effect from time to time during such Eurodollar Interest
Period.
(ii) All Term Loans shall bear interest on the unpaid amount
thereof from the date such Loans are made until paid in full, except as
otherwise provided in Section 4.01(d), as follows:
(A) If a Base Rate Loan, at a rate per annum equal to the sum
of (I) the Base Rate as in effect from time to time as interest
accrues, plus (II) the Applicable Term Loan Base Rate Margin in effect
at such time; and
(B) If a Eurodollar Rate Loan, at a rate per annum equal to the
sum of (I) the Eurodollar Rate determined for the applicable Eurodollar
Interest Period, plus (II) the Applicable Term Loan Eurodollar Rate
Margin in effect from time to time during such Eurodollar Interest
Period.
(iii) The applicable basis for determining the rate of
interest on the Loans shall be selected by the Borrowers at the time a Notice of
Borrowing or a Notice of Conversion/Continuation is delivered by the Borrowers
to the Administrative Agent; provided, however, the Borrowers may not select the
Eurodollar Rate as the applicable basis for determining the rate of interest on
such a Loan if (x) such Loan is to be made on the Closing Date or (y) at the
time of such selection a Default or Event of Default would occur or has occurred
and is continuing. If on any day any Loan is outstanding with respect to which
notice has not been timely delivered to the Administrative Agent in accordance
with the terms hereof specifying the basis for determining the rate of interest
on that day, then for that day interest on that Loan shall be determined by
reference to the Base Rate.
(b) Interest Payments. (i) Interest accrued on each Base Rate
Loan shall be payable in arrears (A) on the first Business Day of each calendar
month, commencing on the first such day following the making of such Base Rate
Loan and (B) on the Commitment Termination Date.
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(ii) Interest accrued on each Eurodollar Rate Loan shall be
payable in arrears (A) on each Eurodollar Interest Payment Date applicable to
such Loan and (B) on the Commitment Termination Date.
(iii) Interest accrued on the balance of all other Obligations
shall be payable in arrears (A) on the first Business Day of each calendar
month, commencing on the first such day following the incurrence of such
Obligation and (B) on the Commitment Termination Date.
(c) Conversion or Continuation. (i) The Borrowers shall have
the option (A) to convert at any time all or any part of the outstanding Base
Rate Loans to Eurodollar Rate Loans; (B) to convert all or any part of
outstanding Eurodollar Rate Loans having Eurodollar Interest Periods which
expire on the same date to Base Rate Loans on such expiration date; or (C) to
continue all or any part of outstanding Eurodollar Rate Loans having Eurodollar
Interest Periods which expire on the same date as Eurodollar Rate Loans, and the
succeeding Eurodollar Interest Period of such continued Loans shall commence on
such expiration date; provided, however, no such outstanding Loan may be
continued as, or be converted into, a Eurodollar Rate Loan (i) if the
continuation of, or the conversion into, would violate any of the provisions of
Section 4.02 or (ii) if an Event of Default would occur or has occurred and is
continuing. Any conversion into or continuation of Eurodollar Rate Loans under
this Section 4.01(c) shall be in a minimum amount of Five Hundred Thousand
Dollars ($500,000) and in integral multiples of One Hundred Thousand Dollars
($100,000) in excess of that amount.
(ii) To convert or continue a Loan under Section 4.01(c)(i),
the Borrowers shall deliver a Notice of Conversion/Continuation to each Lender
no later than 12:00 noon (New York time) at least two (2) Business Days in
advance of the proposed conversion/continuation date. A Notice of
Conversion/Continuation shall specify (A) the proposed conversion/continuation
date (which shall be a Business Day), (B) the principal amount of the Loan to be
converted/continued, (C) whether such Loan shall be converted and/or continued
and (D) in the case of a conversion to, or continuation of, a Eurodollar Rate
Loan, the requested Eurodollar Interest Period. In lieu of delivering a Notice
of Conversion/Continuation, the Borrowers may give each Lender telephonic
notice of any proposed conversion/continuation by the time required under this
Section 4.01(c)(ii), and such notice shall be confirmed in writing delivered to
each Lender promptly (but in no event later than 5:00 p.m. (New York time) on
the same day). Any Notice of Conversion/Continuation for conversion to, or
continuation of, a Loan (or telephonic notice in lieu thereof) shall be
irrevocable, and the Borrowers shall be bound to convert or continue in
accordance therewith.
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(d) Default Interest. Notwithstanding the rates of interest
specified in Section 4.01(a) or elsewhere herein, effective immediately upon the
occurrence of any Event of Default and for as long thereafter as such Event of
Default shall be continuing, the principal balance of all Loans and of all other
Obligations, shall bear interest at a rate which is two percent (2.0%) per annum
in excess of the rate of interest applicable to such Obligations from time to
time (the "Default Rate").
(e) Computation of Interest. Interest on (i) Base Rate Loans
and all other Obligations shall be computed on the basis of the actual number of
days elapsed in the period during which interest accrues and a year of 360 days
and (ii) Eurodollar Rate Loans shall be computed on the basis of the actual
number of days elapsed in the period during which interest accrues and a year of
360 days. In computing interest on any Loan, the date of the making of the Loan
shall be included and the date of payment made in accordance with Section 3.02
shall be excluded; provided, however, if a Loan is repaid on the same day on
which it is made, one (1) day's interest shall be paid on such Loan.
(f) Changes; Legal Restrictions. If after the date hereof any
Lender reasonably determines that the adoption or implementation of or any
change in or in the interpretation or administration of any law or regulation or
any guideline or request from any central bank or other Governmental Authority
or quasi-governmental authority exercising jurisdiction, power or control over
any Lender or over banks or financial institutions generally (whether or not
having the force of law), compliance with which, in each case after the date
hereof:
(i) subjects a Lender (or its Applicable Lending Office) to
charges (other than Taxes) of any kind which is applicable to the
Commitments of the Lenders to make Eurodollar Rate Loans or changes the
basis of taxation of payments to that Lender of principal, fees,
interest, or any other amount payable hereunder with respect to
Eurodollar Rate Loans; or
(ii) imposes, modifies, or holds applicable, any reserve
(other than reserves taken into account in calculating the Eurodollar
Rate), special deposit, compulsory loan, FDIC insurance or similar
requirement against assets held by, or deposits or other liabilities
(including those pertaining to Letters of Credit) in or for the account
of, advances or loans by, commitments made, or other credit extended
by, or any other acquisition of funds by, a Lender or any Applicable
Lending Office or Eurodollar Affiliate of that Lender;
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and the result of any of the foregoing is to increase the cost to that Lender of
making, renewing or maintaining the Loans or its Commitments or to reduce any
amount receivable thereunder; then, in any such case, upon written demand by
such Lender (with a copy of such demand to the Administrative Agent), the
Borrowers shall immediately pay to the Administrative Agent for the account of
such Lender, from time to time as specified by such Lender, such amount or
amounts as may be necessary to compensate such Lender or its Eurodollar
Affiliate for any such additional cost incurred or reduced amount received. Such
demand shall be accompanied by a statement as to the amount of such compensation
and include a summary of the basis for such demand. Such statement shall be
conclusive and binding for all purposes, absent manifest error.
(g) Confirmation of Eurodollar Rate. Upon the request of the
Borrowers from time to time, the Administrative Agent shall promptly provide to
the Borrowers such information with respect to the applicable Eurodollar Rate as
may be reasonably requested.
4.02. Special Provisions Governing Eurodollar Rate
Loans. With respect to Eurodollar Rate Loans:
(a) Amount of Advance. Each Eurodollar Rate Loan shall be for
a minimum amount of Five Hundred Thousand Dollars ($500,000) and in integral
multiples of One Hundred Thousand Dollars ($100,000) in excess of that amount.
(b) Determination of Eurodollar Interest Period. By giving
notice as set forth in Section 2.01(b) or Section 2.02(b) (with respect to a
Borrowing of a Eurodollar Rate Loan) or Section 4.01(c) (with respect to a
conversion into or continuation of a Eurodollar Rate Loan), the Borrowers shall
have the option, subject to the other provisions of this Section 4.02, to select
an interest period (a "Eurodollar Interest Period") to apply to the Loans
described in such notice, subject to the following provisions:
(i) The Borrowers may only select, as to a particular
Borrowing of Eurodollar Rate Loans, a Eurodollar Interest Period of
either one, two, three or six months in duration;
(ii) In the case of immediately successive Eurodollar Interest
Periods applicable to a Borrowing of Eurodollar Rate Loans, each
successive Eurodollar Interest Period shall commence on the day on
which the next preceding Eurodollar Interest Period expires;
(iii) If any Eurodollar Interest Period would otherwise expire
on a day which is not a Business Day, such Eurodollar Interest Period
shall be extended to
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expire on the next succeeding Business Day if the next succeeding
Business Day occurs in the same calendar month, and if there shall be
no succeeding Business Day in such calendar month, such Eurodollar
Interest Period shall expire on the immediately preceding Business Day;
(iv) The Borrowers may not select a Eurodollar Interest Period
as to any Loan if such Eurodollar Interest Period terminates later than
the Commitment Termination Date or the Maturity Date;
(v) The Borrowers may not select a Eurodollar Interest Period
with respect to any portion of principal of a Loan which extends
beyond a date on which the Borrowers are required to make a scheduled
payment of such portion of principal; and
(vi) There shall be no more than six (6) Eurodollar Interest
Periods in effect at any one time.
(c) Determination of Interest Rate. As soon as practicable on
the second Business Day prior to the first day of each Eurodollar Interest
Period (the "Interest Rate Determination Date"), the Administrative Agent shall
determine (pursuant to the procedures set forth in the definition of "Eurodollar
Rate") the interest rate which shall apply to Eurodollar Rate Loans, for which
an interest rate is then being determined for the applicable Eurodollar Interest
Period and shall promptly give notice thereof (in writing or by telephone
confirmed in writing) to the Borrowers and to each Lender. The Administrative
Agent's determination shall be presumed to be correct, absent manifest error,
and shall be binding upon the Borrowers.
(d) Interest Rate Unascertainable, Inadequate or Unfair. In
the event that at least one (1) Business Day before the Interest Rate
Determination Date:
(i) the Administrative Agent reasonably determines that
adequate and fair means do not exist for ascertaining the applicable
interest rates by reference to which the Eurodollar Rate then being
determined is to be fixed;
(ii) the Requisite Lenders advise the Administrative Agent that
Dollar deposits in the principal amounts of the Eurodollar Rate Loans
comprising such Borrowing are not generally available in the London
interbank market for a period equal to such Eurodollar Interest Period;
or
(iii) the Requisite Lenders advise the Administrative Agent
that the Eurodollar Rate as determined by the
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Administrative Agent, after taking into account the adjustments for
reserves and increased costs provided for in Section 4.01(f), will not
adequately and fairly reflect the cost to such Lenders of funding Loans
of such Type;
then the Administrative Agent shall forthwith give notice thereof to the
Borrowers, whereupon (until the Administrative Agent notifies the Borrowers
that the circumstances giving rise to such suspension no longer exist) the right
of the Borrowers to elect to have Loans bear interest based upon the Eurodollar
Rate shall be suspended and each outstanding Loan of such Types shall be
converted into a Base Rate Loan on the last day of the then current Eurodollar
Interest Period therefor, and any Notice of Borrowing for which Revolving Loans
have not then been made shall be deemed to be a request for Base Rate Loans,
notwithstanding any prior election by the Borrowers to the contrary.
(e) Illegality. (i) If at any time any Lender determines
(which determination shall, absent manifest error, be final and conclusive and
binding upon all parties) that the making or continuation of any Eurodollar Rate
Loan has become unlawful or impermissible by compliance by that Lender with any
law, governmental rule, regulation or order of any Governmental Authority
(whether or not having the force of law and whether or not failure to comply
therewith would be unlawful or would result in costs or penalties), then, and in
any such event, such Lender may give notice of that determination, in writing,
to the Borrowers and the Administrative Agent, and the Administrative Agent
shall promptly transmit the notice to each other Lender.
(ii) When notice is given by a Lender under Section
4.02(e)(i), (A) the Borrowers' right to request from such Lender and such
Lender's obligation, if any, to make Eurodollar Rate Loans shall be immediately
suspended, and such Lender shall make a Base Rate Loan as part of any requested
Borrowing of Eurodollar Rate Loans and (B) if the affected Eurodollar Rate Loan
or Loans are then outstanding, the Borrowers shall immediately, or if permitted
by applicable law, no later than the date permitted thereby, upon at least one
(1) Business Day's prior written notice to the Administrative Agent and the
affected Lender, convert each such Loan into a Base Rate Loan.
(iii) If at any time after a Lender gives notice under Section
4.02(e)(i) such Lender determines that it may lawfully make Eurodollar Rate
Loans, such Lender shall promptly give notice of that determination, in writing,
to the Borrowers and the Administrative Agent, and the Administrative Agent
shall promptly transmit the notice to each other Lender. The Borrowers' right to
request, and such Lender's obligation, if any, to make Eurodollar Rate Loans
shall thereupon be restored.
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(f) Compensation. In addition to all amounts required to be
paid by the Borrowers pursuant to Section 4.01, the Borrowers shall compensate
each Lender, upon demand, for all losses, expenses and liabilities (including,
without limitation, any loss or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such Lender to fund or
maintain such Lender's Eurodollar Rate Loans to the Borrowers but excluding any
loss of the Applicable Eurodollar Rate Margin on the relevant Loans) which that
Lender may sustain (i) if for any reason a Borrowing, conversion into or
continuation of Eurodollar Rate Loans does not occur on a date specified
therefor in a Notice of Borrowing or a Notice of Conversion/Continuation given
by the Borrowers or in a telephonic request by it for borrowing or
conversion/continuation or a successive Eurodollar Interest Period does not
commence after notice therefor is given pursuant to Section 4.01(c), (ii) if for
any reason any Eurodollar Rate Loan is prepaid (including, without limitation,
mandatorily pursuant to Section 3.01(b)) on a date which is not the last day of
the applicable Eurodollar Interest Period, (iii) as a consequence of a required
conversion of a Eurodollar Rate Loan to a Base Rate Loan as a result of any of
the events indicated in Section 4.02(d) or (e) or (iv) as a consequence of any
failure by the Borrowers to repay Eurodollar Rate Loans when required by the
terms hereof. The Lender making demand for such compensation shall deliver to
the Borrowers concurrently with such demand a written statement in reasonable
detail as to such losses, expenses and liabilities, and this statement shall be
conclusive as to the amount of compensation due to that Lender, absent manifest
error.
(g) Affiliates Not Obligated. No Eurodollar Affiliate or other
Affiliate of any Lender shall be deemed a party hereto or shall have any
liability or obligation hereunder.
4.03. Fees. (a) Unused Commitment Fee. The Borrowers agree to
pay to the Administrative Agent, for the account of the Lenders in accordance
with their Pro Rata Shares, a fee (the "Unused Commitment Fee"), accruing on (i)
the average amount by which the Revolving Loan Commitments exceeds the amount of
the Revolving Credit Obligations for the period commencing on the Closing Date
and ending on the Commitment Termination Date, and (ii) the average amount by
which the Term Loan Commitments exceeds the outstanding Term Loans for the
period commencing on the Closing Date and ending on the Term Loan Termination
Date, at the rate of one-half of one percent (1/2 of 1%) per annum on such
aggregate amount payable quarterly, in arrears, on the first Business Day of
each calendar quarter and on the Commitment Termination Date.
(b) Computation of Fees. All of the above fees
payable on a per annum basis shall be computed on the basis of
the actual number of days elapsed in a year of 360 days. All
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such fees shall be payable in addition to, and not in lieu of, interest,
compensation, expense reimbursements, indemnification and other Obligations.
ARTICLE V
CONDITIONS TO LOANS
5.01. Conditions Precedent to the Initial Loans. The
obligation of each Lender on the Closing Date to make its initial
Loan requested to be made by it shall be subject to the
satisfaction of all of the following conditions precedent:
(a) Documents. The Administrative Agent (on behalf of itself
and the Lenders) shall have received on or before the Closing Date all of the
following:
(i) this Agreement, the Notes and all other agreements,
documents, instruments, certificates and opinions described in the List
of Closing Documents attached hereto and made a part hereof as Exhibit
E, each duly executed where appropriate and in form and substance
satisfactory to the Lenders and in sufficient copies for each of the
Lenders;
(ii) a pro-forma consolidated balance sheet of Stellex and its
Subsidiaries as of June 30, 1997 with adjustments as of the Closing
Date, giving effect to the transactions contemplated in the Transaction
Documents, certified by the Chief Financial Officer; and
(iii) such additional documentation as the Administrative
Agent or the Requisite Lenders may reasonably request.
(b) Perfection of Liens. All Uniform Commercial Code and other
filing and recording fees and taxes shall have been paid or duly provided for.
The Administrative Agent shall be satisfied that all Liens granted to the
Collateral Agent with respect to the Collateral are valid and effective and,
upon the filing of the duly executed Uniform Commercial Code financing
statements (or similar filings required by the applicable statutes of any
jurisdiction in which the Collateral Agent is being granted a Lien by any Loan
Party), will be perfected and of first priority, except as otherwise permitted
under this Agreement and except for compliance with the Assignment of Claims Act
of 1940, as amended, with respect to Receivables where the account debtor is the
United States of America or any department, agency or instrumentality thereof.
All certificates representing Capital Stock included in the Collateral shall
have been delivered to the Collateral Agent (with duly executed stock powers, as
appropriate) and all instruments included in the
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Collateral shall have been delivered to the Collateral Agent (duly endorsed to
the Collateral Agent).
(c) Watkins-Johnson Acquisition Agreement and Related Matters.
The Administrative Agent and the Lenders shall be satisfied that: (i) the
Watkins-Johnson Acquisition Documents which are to be entered into as of or
prior to the Closing Date shall have been duly approved and executed and
delivered by the parties thereto, (ii) all conditions precedent to closing under
the Watkins-Johnson Acquisition Agreement and the other Watkins-Johnson
Acquisition Documents have been met or waived and such documents are, or
simultaneously with the execution hereof, shall be, in full force and effect.
(d) Subordinated Notes and Related Matters. The
Administrative Agent and the Lenders shall be satisfied that: (i) the
Subordinated Note Documents are on terms and conditions satisfactory to the
Administrative Agent and the Lenders, (ii) all conditions precedent to closing
under the Subordinated Note Documents have been met or waived and such documents
are, or simultaneously with the execution hereof, shall be, in full force and
effect, and (iii) Stellex has received at least cash in an amount equal to
$100,000,000 less discounts and expenses in connection with its issuance of the
Subordinated Notes.
(e) Equity Contribution. The Administrative Agent and the
Lenders shall be satisfied that Stellex has received at least $7,500,000 in cash
equity.
(f) No Legal Impediments. No law, regulation, order, judgment
or decree of any Governmental Authority shall, and the Administrative Agent
shall not have received any notice that any action, suit, investigation,
litigation or proceeding is pending or threatened in any court or before any
arbitrator or Governmental Authority which (i) purports to enjoin, prohibit,
restrain or otherwise affect (A) the making of the Loans on the Closing Date or
(B) the consummation of the transactions contemplated pursuant to the
Transaction Documents or (ii) would be reasonably expected to impose or result
in the imposition of a Material Adverse Effect.
(g) Consents. Except as set forth on Schedule 5.01(A), each
Loan Party shall have received all consents and authorizations required pursuant
to any material Contractual Obligation with any other Person and shall have
obtained all consents and authorizations of, and effected all notices to and
filings with, any Governmental Authority, in each case, as may be necessary to
allow such Loan Party, lawfully and without risk of rescission, (i) to execute,
deliver and perform, in all material respects, its obligations under this
Agreement, the other Loan Documents to which it is, or is to be, a party and
each other agreement or instrument to be executed and delivered by it
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pursuant thereto or in connection therewith and (ii) to create and perfect or
continue the validity and perfection of the Liens on the Collateral to be owned
by it in the manner and for the purpose contemplated by the Loan Documents.
(h) No Change in Condition. No change in the condition
(financial or otherwise), business, performance, properties, assets or
operations of Stellex and its Subsidiaries, taken as a whole, shall have
occurred since December 31, 1996 which change will have or is reasonably likely
to have a Material Adverse Effect.
(i) No Default. No Default or Event of Default shall have
occurred and be continuing or would result from the making of the Loans.
(j) Representations and Warranties. All of the
representations and warranties contained in Section 6.01 and in the other Loan
Documents shall be true and correct in all material respects on and as of the
Closing Date.
(k) Fees and Expenses Paid. There shall have been paid or
there will, substantially concurrently with the closing hereunder, be paid to
the Administrative Agent and to the Lenders, all fees due and payable pursuant
to the Loan Documents on or before the Closing Date, and all expenses
(including, without limitation, reasonable legal fees and expenses) due and
payable pursuant to the Loan Documents on or before the Closing Date.
5.02. Conditions Precedent to All Loans. The obligation of
each Lender to make any Loan requested to be made by it on any Funding Date on
or after the Closing Date is subject to the following conditions precedent as of
each such date:
(a) Representations and Warranties. As of such date (unless
the representation and warranty expressly speaks of the Closing Date), both
before and after giving effect to the Loans to be made, all of the
representations and warranties contained in Section 6.01 and in the other Loan
Documents shall be true in all material respects.
(b) No Defaults. As of such date, no Default or Event of
Default shall have occurred and be continuing or would result from the making of
the requested Loan or the application of the proceeds therefrom.
(c) No Change in Condition. As of such date, no material
adverse change shall have occurred in the condition (financial or otherwise),
performance, properties or operations of Stellex and its Subsidiaries, taken as
a whole, since December 31, 1996.
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Each request by the Borrowers for a Loan, each submission by the Borrowers of a
Notice of Borrowing, each acceptance by the Borrowers of the proceeds of each
Loan made hereunder, shall constitute a representation and warranty by the
Borrowers as of the Funding Date in respect of such Loan that all the conditions
contained in this Section 5.02 have been satisfied.
5.03. Conditions Precedent to the Term Loans. The obligation
of each Lender to make any Term Loan requested to be made by it on any Funding
Date on or after the Closing Date is subject to the following conditions
precedent as of each such date:
(a) Certificate. The Administrative Agent and the Lenders
shall have received a Certificate from Chief Financial Officer of Stellex, which
certificate shall be in form and detail reasonably satisfactory to the
Administrative Agent, certifying (i) the specific uses to be made of the
proceeds of the Term Loans (broken down by Permitted Acquisition), (ii) the
information provided in the Information Package with respect to each Permitted
Acquisition is true and complete in all material respects, (iii) the
representations and warranties set forth on Schedule 5.03(A) are true in all
material respects, and (iv) Stellex and its Subsidiaries are in compliance with
the covenants set forth on Schedule 5.03(B).
(b) Liens. The Administrative Agent shall have received
documentation, in form and substance satisfactory to the Administrative Agent,
granting the Collateral Agent a Lien with respect to the assets and/or Capital
Stock relating to the Permitted Acquisition.
(c) Perfection. All Uniform Commercial Code and other filing
and recording fees and taxes shall have been paid or duly provided for. The
Administrative Agent shall be satisfied that all Liens granted to the Collateral
Agent with respect to the Collateral are valid and effective and, upon the
filing of the duly executed Uniform Commercial Code financing statements (or
similar filings required by the applicable statutes of any jurisdiction in which
the Collateral Agent is being granted a Lien by any Loan Party), will be
perfected and of first priority, except as otherwise permitted under this
Agreement and except for compliance with the Assignment of Claims Act of 1940,
as amended, with respect to Receivables where the account debtor is the United
States of America or any department, agency or instrumentality thereof. All
certificates representing Capital Stock included in the Collateral shall have
been delivered to the Collateral Agent (with duly executed stock powers, as
appropriate) and all instruments included in the Collateral shall have been
delivered to the Collateral Agent (duly endorsed to the Collateral Agent).
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(d) No Legal Impediments. No law, regulation, order, judgment
or decree of any Governmental Authority shall, and the Administrative Agent
shall not have received any notice that any action, suit, investigation,
litigation or proceeding is pending or threatened in any court or before any
arbitrator or Governmental Authority which (i) purports to enjoin, prohibit,
restrain or otherwise affect (A) the making of the Term Loans on the Funding
Date or (B) the consummation of the transactions contemplated pursuant to the
documentation relating to the Permitted Acquisition or (ii) would be reasonably
expected to impose or result in the imposition of a Material Adverse Effect.
(f) Consents. Stellex shall have received all consents and
authorizations required pursuant to any material Contractual Obligation with any
other Person in connection with such Permitted Acquisition and shall have
obtained all consents and authorizations of, and effected all notices to and
filings with, any Governmental Authority required in connection with such
Permitted Acquisition, in each case, as may be necessary to allow Stellex or a
Subsidiary of Stellex, lawfully and without risk of rescission, (i) to execute,
deliver and perform, in all material respects, its obligations under the
Collateral Documents and the other agreements to which it is, or is to be, a
party in connection with or relating to the Permitted Acquisition and each other
agreement or instrument to be executed and delivered by it in connection with or
relating to the Permitted Acquisition and (ii) to create and perfect or continue
the validity and perfection of the Liens on the Collateral to be owned by it in
the manner and for the purpose contemplated by the Loan Documents after giving
effect to the Permitted Acquisition.
Each request by Stellex for a Term Loan, each submission by Stellex of a Notice
of Borrowing, each acceptance by Stellex of the proceeds of each Term Loan made
hereunder, shall constitute a representation and warranty by Stellex as of the
Funding Date in respect of such Term Loan that all the conditions contained in
this Section 5.03 have been satisfied.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.01. Representations and Warranties of the Loan Parties. In
order to induce the Lenders to enter into this Agreement and to make the Loans,
each Loan Party hereby represents and warrants as follows:
(a) Organization; Powers. Each Loan Party (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California or the State of Delaware, as applicable, and (ii) has
all requisite power and
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authority to own, operate and encumber its assets and to conduct its business as
presently contemplated.
(b) Authority. (i) Each Loan Party has the requisite power
and authority to execute, deliver and perform each of the Transaction Documents
to which it is a party.
(ii) No other action or proceeding on the part of any Loan
Party is necessary to execute, deliver and perform each of the Transaction
Documents to which it is a party thereto or to consummate the transactions
contemplated thereby.
(iii) Each of the Loan Documents to which any Loan Party is a
party has been duly executed and delivered by such Loan Party and constitutes
the legal, valid and binding obligation of such Loan Party, enforceable against
such Loan Party in accordance with its terms.
(c) Ownership. Schedule 6.01(C) sets forth the ownership of
Stellex and its Subsidiaries. Each Loan Party has delivered to the
Administrative Agent true and complete copies of the Governing Documents for
such Loan Party. There exists no other agreement or understanding (written or
oral) affecting in any material respect the relative rights, obligations or
liabilities of such Loan Party other than said Governing Documents so delivered
and such Loan Party is in compliance in all material respects with all of its
Governing Documents.
(d) No Conflict. Except as set forth of Schedule 6.01(D), the
execution, delivery and performance by each Loan Party of each Transaction
Document to which it is a party and the consummation of the transactions
contemplated thereby do not and will not (i) conflict with the Governing
Documents of such Loan Party, (ii) violate any Requirements of Law or any
material Contractual Obligation of such Loan Party or require the termination
of such material Contractual Obligation by such Loan Party, (iii) to the best of
such Loan Party's knowledge, constitute a tortious interference with any
Contractual Obligation of any Person, or (iv) result in or require the creation
or imposition of any Lien whatsoever upon any of the property or assets of such
Loan Party, other than Liens contemplated by the Loan Documents.
(e) Governmental Consents. Except as set forth of Schedule
6.01(E), the execution, delivery and performance by each Loan Party of each
Transaction Document to which it is a party and the consummation of the
transactions contemplated thereby do not and will not require any registration
with, consent or approval of, or notice to, or other action to, with or by any
Governmental Authority, except (i) filings and acknowledgments thereof necessary
to create or perfect security interests in the Collateral or cause any security
interest in Receivables where
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the account debtor is the United States of America or any department, agency or
instrumentality thereof to be valid against the United States of America and
(ii) consents that have been obtained.
(f) Governmental Regulation. No Loan Party is limited in its
ability to incur indebtedness or its ability to consummate the transactions
contemplated by the Transaction Documents by reason of regulation under the
Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, or the Investment Company Act of 1940, or any other
federal or state statute or regulation.
(g) Subsidiaries. Stellex has no Subsidiaries or interests in
any joint venture or partnership of any other Person other than the Subsidiaries
set forth on Schedule 6.01(C).
(h) Financial Position. True and complete copies of the
following financial statements have been delivered to the Administrative Agent
and the Lenders: (i) the audited consolidated balance sheet as at the end of
fiscal year ended December 31, 1996 and the related consolidated statements of
income, cash flows and shareholders equity and the notes thereto of Kleinert
Industries, Inc. and its Subsidiaries for such fiscal year then ended and the
unaudited consolidated balance sheet as at June 30, 1997 and the related
consolidated statements of income, cash flow and shareholders equity of Kleinert
Industries, Inc. and its Subsidiaries for such period then ended; (ii) the
audited combined balance sheet as at the end of fiscal year ended December 31,
1996 and the related combined statements of operations and invested equity and
cash flows and the notes thereto of Tactical Subsystems and Microwave Devices
Sectors of Watkins-Johnson Company for such fiscal year then ended and the
unaudited combined balance sheet as at June 30, 1997 and the related combined
statements of operations and invested equity and cash flows and the notes
thereto of Tactical Subsystems and Microwave Devices Sectors of Watkins-Johnson
Company for such period then ended. The foregoing financial statements were
prepared in conformity with GAAP, except as otherwise noted therein, and fairly
present the financial positions and the results of operations, equity and cash
flows of Kleinert Industries, Inc. and its Subsidiaries and the Tactical
Subsystems and Microwave Devices Sectors of Watkins-Johnson Company for each of
the periods covered thereby as at the respective dates thereof. No Loan Party
has any Accommodation Obligation, contingent liability or liability for any
Taxes, long-term leases or commitments, not reflected in the foregoing financial
statements which will have or is reasonably likely to have a Material Adverse
Effect.
(i) Projections. Stellex and its Subsidiaries have delivered
to each Lender pursuant to Section 5.01(a) certain
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projected financial statements of Stellex and its Subsidiaries which have been
prepared in good faith.
(j) Litigation; Adverse Effects. Except as set forth in
Schedules 6.01(J-1) and 6.01(P), no Loan Party has received any notice of any
action, suit, proceeding, investigation or arbitration before or by any
Governmental Authority or private arbitrator pending nor, to the knowledge of
such Loan Party, threatened against such Loan Party or any of its assets (i)
challenging the validity or the enforceability of any of the Transaction
Documents or transactions contemplated thereby or (ii) which will or is
reasonably likely to result in any Material Adverse Effect. Except as set forth
in Schedule 6.01(J-2), there is no material loss contingency within the meaning
of GAAP which has not been reflected in the financial statements of Kleinert
Industries, Inc. and its Subsidiaries and the Tactical Subsystems and Microwave
Devices Sectors of Watkins-Johnson Company with respect to the financial
statements referred to in Section 6.01(h) nor in any financial statements of
Stellex and its Subsidiaries delivered hereunder. No Loan Party is subject to,
or in default with respect to, any final judgment, writ, injunction, restraining
order or order of any nature, decree, rule or regulation of any court or
Governmental Authority which will have or is reasonably likely to have a
Material Adverse Effect.
(k) No Material Adverse Effect. Since December 31, 1996,
there has occurred no event which has had or is reasonably likely to have a
Material Adverse Effect.
(l) Payment of Taxes. Except as set forth on Schedule 6.01(L),
all tax returns and reports to be filed by Stellex and its Subsidiaries have
been timely filed, and all taxes, assessments, fees and other governmental
charges shown on such returns have been paid when due and payable, except such
taxes, if any, as are reserved against in accordance with GAAP and are being
contested in good faith by appropriate proceedings.
(m) Performance. No Loan Party has received notice, or has
actual knowledge, that (i) it is in default in the performance, observance or
fulfillment of any material (singularly or in the aggregate) Contractual
Obligations applicable to it or (ii) any condition exists which, with the giving
of notice or the lapse of time or both, would constitute a default with respect
to any material (singularly or in the aggregate) Contractual Obligation.
(n) Disclosure. The representations and warranties of each
Loan Party contained in the Loan Documents and all certificates and other
documents delivered pursuant to the terms thereof and the representations and
warranties of each Loan Party contained in the Acquisition Documents and all
certificates and
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other documents delivered pursuant to the terms thereof, do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. No Loan Party has
intentionally withheld any fact from the Administrative Agent or the Lenders in
regard to any matter which will have or is reasonably likely to have a Material
Adverse Effect.
(o) Requirements of Law. No Loan Party is in violation of any
Requirement of Law applicable to it or its business which violation (singularly
or in the aggregate) will have or is reasonably likely to have a Material
Adverse Effect.
(p) Environmental Matters. To the best of each Loan Party's
knowledge, except as set forth in Schedule 6.01(P) hereto, (i) the operations of
such Loan Party comply in all material respects with all applicable
Environmental, Health or Safety Requirements of Law; (ii) such Loan Party has
obtained all material environmental, health and safety Permits necessary for its
operations, and all such Permits are in effect and such Loan Party is in
material compliance with all terms and conditions of such Permits; (iii) no Loan
Party nor its operations is subject to any order from or agreement with any
Governmental Authority or private party respecting any Environmental, Health or
Safety Requirements of Law or requiring Remedial Action; (iv) no Loan Party nor
its operations is subject to any Liabilities and Costs arising from the Release
or threatened Release of a Contaminant into the environment; (v) no Loan Party
has filed any notice under any Requirement of Law indicating treatment, storage
or disposal of a hazardous waste, as that term is defined under 40 CFR Part 261
or any applicable state equivalent; (vi) no Loan Party has filed any notice
under applicable Requirement of Law reporting a Release of a Contaminant into
the environment; (vii) there is not on or in the Real Property of any such Loan
Party nor has there been under such Loan Party's ownership or occupancy of such
Real Property: (A) any treatment, storage or disposal of any hazardous waste, as
that term is defined under 40 CFR Part 261 or any applicable state equivalent,
by such Loan Party, except in material compliance with all Environmental, Health
or Safety Requirements of Law, (B) any underground storage tanks or surface
impoundments, (C) any asbestos-containing material, or (D) any polychlorinated
biphenyls (PCB's) used in hydraulic oils, electrical transformers or other
equipment; (viii) no Loan Party has received any written notice or Claim to the
effect that it is or may be liable to any Person as a result of the Release or
threatened Release of a Contaminant into the environment; (ix) no Loan Party's
present Property or the Loan Party's past Property is listed or proposed for
listing on the National Priorities List pursuant to CERCLA ("NPL") or on the
Comprehensive Environmental Response Compensation Liability Information System
List ("CERCLIS") or any similar state list of
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sites requiring Remedial Action; and (x) no Environmental Lien has attached to
any Property of any Loan Party.
(q) ERISA. Neither any Loan Party nor any ERISA Affiliate
maintains or contributes to any Benefit Plan other than a Benefit Plan listed on
Schedule 6.01(Q). Except as set forth on Schedule 6.01(Q), each Plan which is
maintained or contributed to by any Loan Party which is intended to be a
qualified plan has been determined by the IRS to be qualified under Section
401(a) of the Code, and each trust related to any such Plan has been so
determined to be exempt from federal income tax under Section 501(a) of the
Code, and such Plan and trust are being operated in all material respects in
compliance with and will be timely amended as necessary in accordance with the
Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1987 as
interpreted by the regulations promulgated thereunder. Neither any Loan Party
nor any ERISA Affiliate, to the extent such ERISA Affiliate at any time has
joint and several liability with any Loan Party, maintains or contributes to any
employee welfare benefit plan within the meaning of Section 3(1) of ERISA, which
provides benefits to retirees (or their beneficiaries or dependents) other than
as may be required by the Consolidated Omnibus Reconciliation Act of 1985, as
amended and interpreted by regulations promulgated thereunder. Each Loan Party
is in compliance in all material respects with the responsibilities, obligations
or duties imposed on it by ERISA or regulations promulgated thereunder with
respect to all Plans. No material accumulated funding deficiency (as defined in
Section 302(a)(2) of ERISA and Section 412(a) of the Code) exists in respect to
any Benefit Plan. Except as set forth on Schedule 6.01(Q), neither any Loan
Party nor any ERISA Affiliate nor any fiduciary of any Plan has engaged in a
nonexempt "prohibited transaction" described in Section 406 of ERISA or Section
4975 of the Code. Neither any Loan Party nor any ERISA Affiliate nor any
fiduciary of any Plan has taken any action which would constitute or result in a
Termination Event with respect to any Plan such that the actions described in
the preceding sentence or this sentence, or both, would result in a Material
Adverse Effect. Neither any Loan Party nor any ERISA Affiliate has incurred any
material liability to the PBGC which remains outstanding other than the
liability to pay the PBGC insurance premiums for the current year. Schedule B to
the most recent annual report filed with the IRS with respect to each Benefit
Plan and furnished to the Administrative Agent is complete and accurate in all
material respects. Since the date of each such Schedule B, there has been no
material adverse change in the funding status or financial condition of the
Benefit Plan relating to such Schedule B which would result in a Material
Adverse Effect. Neither any Loan Party nor any ERISA Affiliate has failed to
make any required installment under subsection (m) of Section 412 of the Code
and any other payment required under Section 412 of the Code on or before the
due date for such installment or other payment which
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would in the aggregate have a Material Adverse Effect. Neither any Loan Party
nor any ERISA Affiliate is required to provide security to a Benefit Plan under
Section 401(a)(29) of the Code due to a Plan amendment that results in an
increase in current liability for the plan year. No Loan Party or ERISA
Affiliate is required to, or has contributed to in the past six years, a
Multiemployer Plan.
(r) Labor Matters. No Loan Party is a party to any labor
contract. There are no strikes, lockouts or other disputes relating to any
collective bargaining or similar agreement to which such Loan Party is a party
which would have or is reasonably likely to have a Material Adverse Effect.
(s) Securities Activities. No Loan Party is engaged in the
business of extending credit for the purpose of purchasing or carrying Margin
Stock.
(t) Solvency. After giving effect to the receipt and
application of the Loans in accordance with the terms of this Agreement, each
Loan Party is Solvent.
(u) Patents, Trademarks, Permits, etc.; Government Approvals.
(i) Except as set forth on Schedule 6.01(U), each Loan Party
owns, is licensed or otherwise has the lawful right to use all permits
and other governmental approvals, patents, trademarks, trade names,
copyrights, technology, know-how and processes used in or necessary for
the conduct of its business as currently conducted which are material
to its condition (financial or otherwise), operations or performance.
There are no claims pending or, to the best of such Loan Party's
knowledge, threatened that such Loan Party is infringing or otherwise
adversely affecting the rights of any Person with respect to such
permits and other governmental approvals, patents, trademarks, trade
names, copyrights, technology, know-how and processes, except for such
claims and infringements as do not, in the aggregate, give rise to any
liability on the part of such Loan Party which has or is reasonably
likely to have a Material Adverse Effect.
(ii) The consummation of the transactions contemplated by the
Transaction Documents will not impair such Loan Party's ownership of or
rights under (or the license or other right to use, as the case may be)
any permits and governmental approvals, patents, trademarks, trade
names, copyrights, technology, know-how or processes in any manner
which has or is reasonably likely to have a Material Adverse Effect.
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(v) Assets and Properties. Each Loan Party has good and
marketable title or leasehold interests, as applicable, to all of its assets and
property (tangible and intangible), and all such assets and property are free
and clear of all Liens except Liens securing the Obligations and Liens permitted
under Section 9.03. Substantially all of the assets and property owned by,
leased to or used by such Loan Party are in good operating condition and repair,
ordinary wear and tear excepted, are free and clear of any known defects except
such defects as do not substantially interfere with the continued use thereof in
the conduct of normal operations, and are able to serve the function for which
they are currently being used, except in each case where the failure of such
asset to meet such requirements would not have or is not reasonably likely to
have a Material Adverse Effect. Neither this Agreement nor any other Transaction
Document, nor any transaction contemplated under any Transaction Document, will
affect any right, title or interest of such Loan Party in and to any of such
assets in a manner that would have or is reasonably likely to have a Material
Adverse Effect.
(w) Insurance. Schedule 6.01(W) accurately sets forth all
insurance policies and programs currently in effect with respect to the property
and assets and business of each Loan Party, specifying for each such policy and
program, (i) the amount thereof and the amount of the deductible relating
thereto, (ii) the risks insured against thereby, (iii) the name of the insurer
and each insured party thereunder, (iv) the policy or other identification
number thereof and (v) the expiration date thereof.
(x) Material Adverse Agreements. After giving effect to this
Agreement, no Loan Party is a party to or subject to any Contractual Obligation
or other restriction contained in its Governing Documents which has or is
reasonably likely to have a Material Adverse Effect.
(y) Forfeiture Proceeding. No Loan Party is engaged in or
proposes to be engaged in the conduct of any business or activity which could
result in a Forfeiture Proceeding and no Forfeiture Proceeding against it is
pending or, to the best of each Loan Party's knowledge, threatened.
(z) Bank Accounts. Except as set forth on Schedule 6.01(Z),
no Loan Party maintains a bank account or deposits funds with any other
financial institution.
ARTICLE VII
REPORTING COVENANTS
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Each Loan Party covenants and agrees so long as any Commitment
is outstanding and thereafter until payment in full of the Obligations:
7.01. Financial Statements. Each Loan Party shall maintain a
system of accounting established and administered in accordance with sound
business practices to permit preparation of financial statements in conformity
with GAAP, and each of the financial statements described below shall be
prepared from such system and records. Stellex shall deliver or cause to be
delivered to the Administrative Agent:
(a) Quarterly Reports. As soon as practicable, and in any
event within forty-five (45) days after the end of the first three fiscal
quarters in each Fiscal Year, consolidated balance sheet of Stellex and its
Subsidiaries as at the end of such period and the related statements of income
and cash flow of Stellex and its Subsidiaries for such fiscal quarter, certified
by the Chief Financial Officer of Stellex as fairly presenting the financial
position of Stellex and its Subsidiaries as at the dates indicated and the
results of its operations and cash flow for the fiscal quarter indicated in
accordance with GAAP, subject to normal year end adjustments.
(b) Annual Reports. As soon as practicable, and in any event
within ninety (90) days after the end of each Fiscal Year, (i) the audited
consolidated (and unaudited consolidating) balance sheet of Stellex and its
Subsidiaries as of the end of such Fiscal Year and the related audited
consolidated (and unaudited consolidating) statements of income and cash flow of
Stellex and its Subsidiaries for such Fiscal Year, and (ii) a report thereon of
an independent certified public accounting firm reasonably acceptable to the
Administrative Agent, which report shall be unqualified and shall state that
such financial statements fairly present the financial position of Stellex and
its Subsidiaries as at the dates indicated and the results of its operations and
cash flow for the periods indicated in conformity with GAAP applied on a basis
consistent with prior years and that the examination by such accountants in
connection with such financial statements has been made in accordance with
generally accepted auditing standards.
(c) Certificates. (i) Together with each delivery of any
financial statement pursuant to paragraphs (a) and (b) of this Section 7.01, an
Officer's Certificate substantially in the form of Exhibit G attached hereto and
made a part hereof, stating that such officer has reviewed the terms of the Loan
Documents, and has made, or caused to be made under his supervision, a review in
reasonable detail of the transactions and consolidated financial condition of
Stellex and its Subsidiaries during the accounting period covered by such
financial statements, that such review has not disclosed the existence during or
at the end of
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such accounting period, and that such officer does not have knowledge of the
existence as at the date of such Officer's Certificate, of any condition or
event which constitutes an Event of Default or Default, or, if any such
condition or event existed or exists, specifying the nature and period of
existence thereof and what action the Borrowers have taken, are taking and
propose to take with respect thereto.
(ii) Together with each delivery of any financial statement
pursuant to paragraphs (a) and (b) of this Section 7.01, a certificate
substantially in the form of Exhibit H attached hereto (the "Compliance
Certificate"), signed by the Stellex's Chief Financial Officer, setting forth
calculations (with such specificity as the Lenders may reasonably request) for
the period then ended which demonstrate compliance, when applicable, with the
provisions of Article IX and Article X.
(d) Budgets; Business Plans; Financial Projections. As soon as
practicable after completion and in any event not later than fifteen (15) days
prior to the beginning of each Fiscal Year (i) a budget for such Fiscal Year;
(ii) an annual business plan for such Fiscal Year, accompanied by a report
reconciling all changes and departures from the business plan delivered to the
Administrative Agent for the preceding Fiscal Year; and (iii) a plan and
financial forecast, prepared in accordance with the Borrowers' normal accounting
procedures applied on a consistent basis, for such Fiscal Year and for the five
(5) succeeding Fiscal Years, but in no event for Fiscal Years later than 2003,
including, without limitation, (A) a forecasted balance sheet and changes in
financial position of Stellex and its Subsidiaries as at the end of such Fiscal
Year and (B) forecasted statements of income and cash flow of Stellex and its
Subsidiaries for such Fiscal Year and changes in financial position of Stellex
and its Subsidiaries as of the end of such Fiscal Year.
(e) Replacement Certificate. On June 30 and December 31 of
each Fiscal Year (and more often if so requested by the Administrative Agent),
Stellex shall provide the Administrative Agent with a replacement certificate
substantially in the form of Exhibit I attached hereto (the "Replacement
Certificate"), signed by Stellex's Chief Financial Officer, setting forth
calculations (with such specificity as the Lenders may reasonably request) for
the period then ended which demonstrate the Net Cash Proceeds that were used to
acquire replacement assets.
7.02. Borrowing Base Certificate. The Borrowers shall
provide the Administrative Agent and each Lender with a Borrowing Base
Certificate, certified as being true and correct by the Chief Financial Officer
of Stellex, on the thirtieth day following the last day of each month, or more
frequently if requested by the Administrative Agent. Each subsequent Borrowing
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Base Certificate shall be based upon, with respect to Receivables and Inventory,
information as of the last day of the immediately preceding month. Each such
Borrowing Base Certificate shall set forth Borrowing Base calculations since the
date of the last prior Borrowing Base Certificate and shall include a monthly
summary aging of Receivables and all Eligible Inventory that has become
ineligible, specifying the applicable category of ineligibility and such other
information as the Administrative Agent may request from time to time.
7.03. Other Financial Information. (a) The Borrowers shall
deliver or cause to be delivered to the Administrative Agent such other
information, reports, contracts, schedules, lists, documents, agreements and
instruments with respect to (i) the Collateral or (ii) the business, condition
(financial or otherwise), operations, performance or properties of any Loan
Party as the Administrative Agent or any Lender may, from time to time,
reasonably request. Each Loan Party hereby authorizes the Administrative Agent,
each Lender and their respective representatives to communicate directly with
the accountants and authorizes the accountants to disclose to the Administrative
Agent, such Lender and such representatives any and all financial statements and
other information of any kind, including copies of any management letter or the
substance of any oral information, that such accountants may have with respect
to the Collateral or the condition (financial or otherwise), operations,
properties and performance of Stellex and its Subsidiaries. Each Loan Party, on
or before the Closing Date, shall deliver a letter addressed to the accountants
instructing them to disclose such information in compliance with this Section
7.03(a).
(b) Stellex shall deliver or cause to be delivered to the
Administrative Agent copies of all financial statements, reports and notices, if
any, sent or made available generally by Stellex to the holders of its
publicly-held Securities or to a trustee under any indenture or filed with the
Commission, and of all press releases made available generally by Stellex to the
public concerning material developments in Stellex's business.
(c) The Borrowers shall deliver or cause to be delivered to
the Administrative Agent copies of any management reports delivered to any Loan
Party or to any officer or employee thereof by the accountants in connection
with the financial statements delivered pursuant to Section 7.01.
7.04. Events of Default. Promptly upon any Loan Party
obtaining knowledge (i) of any condition or event which constitutes a Default or
an Event of Default, (ii) that any Person has given any notice to any Loan Party
or taken any other action with respect to a claimed default or event or
condition of the type referred to in Section 11.01(e) or (iii) of any condition
or event which has or is reasonably likely to have a
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Material Adverse Effect or adversely affect the Collateral Agent's interest in
the Collateral or adversely affect the value of the Collateral in any material
respect, such Loan Party shall deliver to the Administrative Agent an Officer's
Certificate specifying (A) the nature and period of existence of any such
claimed default, Event of Default, Default, condition or event, (B) the notice
given or action taken by such Person in connection therewith and (C) what action
such Loan Party has taken, is taking and proposes to take with respect thereto.
7.05. Lawsuits. (a) Promptly upon any Loan Party obtaining
knowledge of the institution of, or written threat of, (i) (A) any action, suit,
proceeding or arbitration against or affecting such Loan Party or any asset of
such Loan Party not previously disclosed pursuant to Schedule 6.01(J) or
Schedule 6.01(P) involving an alleged liability or cost in excess of One Million
Dollars ($1,000,000) or any actions, suits, proceedings or arbitration which in
the aggregate involving money or property valued in excess of One Million
Dollars ($1,000,000), except where the same is fully covered by insurance (other
than applicable deductible), (B) any investigation or proceeding before or by
any Governmental Authority, the effect of which is reasonably likely to limit,
prohibit or restrict materially the manner in which such Loan Party currently
conducts its business or to declare any substance contained in such products
manufactured or distributed by it to be dangerous, except where the same is
fully covered by insurance (other than applicable deductible), or (C) any
Forfeiture Proceeding, such Loan Party shall give written notice thereof to the
Administrative Agent and provide such other information as may be reasonably
available to enable such Lender and the Administrative Agent and its counsel to
evaluate such matters; (ii) as soon as practicable and in any event within
forty-five (45) days after the end of each fiscal quarter, each Loan Party shall
provide the Administrative Agent with a litigation status report covering the
institution of, or written threat of, any action, suit, proceeding, governmental
investigation or arbitration reported pursuant to clause (i) above and shall
provide such other information at such time as may be reasonably available to
enable the Administrative Agent and its counsel to evaluate such matters; and
(iii) in addition to the requirements set forth in clauses (i) and (ii) of this
Section 7.05, each Loan Party upon request of the Administrative Agent or the
Requisite Lenders shall promptly give written notice to the Administrative Agent
of the status of any action, suit, proceeding, governmental investigation or
arbitration covered by a report delivered pursuant to clause (i) or (ii) above
and provide such other information as may be reasonably available to it to
enable the Administrative Agent and its counsel to evaluate such matters.
7.06. Insurance. As soon as practicable and in any
event by June 30 in each fiscal year, each Loan Party shall
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deliver to the Administrative Agent (i) an updated Schedule 6.01(W) in form and
substance reasonably satisfactory to the Administrative Agent and the Lenders
outlining all insurance policies and programs currently in effect with respect
to the property and assets and business of such Loan Party, insurance coverage
maintained as of the date of such report by such Loan Party and the loss payment
provisions of such coverage and (ii) evidence that all premiums with respect to
such coverage have been paid when due.
7.07. ERISA Notices. Each Loan Party shall deliver to
the Administrative Agent:
(i) As soon as possible, and in any event within ten (10)
Business Days after either a Loan Party or an ERISA Affiliate knows or
has reason to know that a Termination Event has occurred, a written
statement of the Chief Financial Officer of Stellex describing such
Termination Event and the action, if any, which such Loan Party or such
ERISA Affiliate has taken, is taking or proposes to take, with respect
thereto, and, when known, any action taken or threatened by the IRS,
the DOL or the PBGC with respect thereto;
(ii) as soon as possible, and in any event within ten (10)
Business Days, after either a Loan Party or an ERISA Affiliate knows or
has reason to know that a non-exempt prohibited transaction (defined in
Section 406 of ERISA and Section 4975 of the Code) has occurred, a
statement of the Chief Financial Officer of Stellex describing such
transaction;
(iii) within ten (10) days after the filing thereof with the
DOL, the IRS or the PBGC, copies of each annual report, including
Schedule B thereto, filed with respect to each Benefit Plan;
(iv) within ten (10) days after the filing thereof with the
IRS, a copy of each funding waiver request filed with respect to any
Benefit Plan and all communications received by either a Loan Party or
an ERISA Affiliate with respect to such request;
(v) within ten (10) days after the first to occur of an
amendment of any existing Benefit Plan which will result in an increase
in the benefits under such Benefit Plan or a notification of any such
increase, or the establishment of any new Benefit Plan or the
commencement of contributions to any Benefit Plan to which either a
Loan Party or an ERISA Affiliate was not previously contributing, a
copy of said amendment, notification or Benefit Plan;
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(vi) promptly upon, and in any event within ten (10) Business
Days after, receipt by either a Loan Party or an ERISA Affiliate of a
notice of the PBGC's intention to terminate a Benefit Plan or to have a
trustee appointed to administer a Benefit Plan, copies of each such
notice;
(vii) promptly upon, and in any event within ten (10) Business
Days after, receipt by either a Loan Party or an ERISA Affiliate of an
unfavorable determination letter from the IRS regarding the
qualification of a Plan under Section 401(a) of the Code, a copy of
said determination letter, if such disqualification would have a
Material Adverse Effect;
(viii) promptly upon, and in any event within ten (10)
Business Days after receipt by any Loan Party of a notice from a
Multiemployer Plan regarding the imposition of withdrawal liability, a
copy of said notice; and
(ix) promptly upon, and in any event within ten (10) Business
Days after, Stellex or any of its Subsidiaries fails to make a required
installment under subsection (m) of Section 412 of the Code or any
other payment required under Section 412 of the Code on or before the
due date for such installment or payment, a notification of such
failure, if such failure could result in either the imposition of a
Lien under said Section 412 or otherwise have a Material Adverse
Effect.
7.08. Environmental Notices. Each Loan Party shall notify the
Administrative Agent, in writing, promptly, and in any event within thirty (30)
days after such Loan Party's learning thereof, of any: (i) written notice or
written Claim to the effect that such Loan Party is or may be liable to any
Person as a result of the Release or threatened Release of any Contaminant into
the environment; (ii) written notice that such Loan Party is subject to
investigation by any Governmental Authority evaluating whether any Remedial
Action is needed to respond to the Release or threatened Release of any
Contaminant into the environment; (iii) written notice that any Property of such
Loan Party is subject to an Environmental Lien; (iv) written notice of violation
to such Loan Party of any Environmental, Health or Safety Requirement of Law,
which could have a Material Adverse Effect on such Loan Party; (v) commencement
or written threat of any judicial or administrative proceeding alleging a
violation of any Environmental, Health or Safety Requirement of Law; (vi)
written notice from a Governmental Authority of any changes to any existing
Environmental, Health or Safety Requirement of Law that could have a Material
Adverse Effect on the operations of
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such Loan Party; or (vii) any proposed acquisition of stock, assets, real estate
or leasing of property, or any other action by such Loan Party that could
subject such Loan Party to Liabilities and Costs that could have a Material
Adverse Effect. For purposes of clauses (i), (ii) and (iii), written notice
shall include other non-written communications given to an agent or employee of
such Loan Party with direct or indirect supervisory responsibility with respect
to the activity, if any, which is the subject of such communication, if the
subject of such communication could have a Material Adverse Effect.
7.09. Labor Matters. Each Loan Party shall notify the
Administrative Agent in writing, promptly, but in any event within ten (10) days
after learning thereof, of (i) any material labor dispute to which such Loan
Party may become a party, any strikes, lockouts or other disputes relating to
such Loan Party's plants and other facilities and (ii) any material liability
incurred with respect to the closing of any plant or other facility of such Loan
Party.
7.10. Other Information. Promptly upon receiving a request
therefor from the Administrative Agent or the Requisite Lenders, each Loan Party
shall prepare and deliver to the Administrative Agent such other information
with respect to such Loan Party or the Collateral, including, without
limitation, schedules identifying and describing the Collateral and any
dispositions thereof, as from time to time may be reasonably requested by the
Administrative Agent or the Requisite Lenders.
ARTICLE VIII
AFFIRMATIVE COVENANTS
Each Loan Party covenants and agrees so long as any Commitment
is outstanding and thereafter until payment in full of the Obligations:
8.01. Existence, etc. Except for those transactions permitted
under Section 9.09 of this Agreement, each Loan Party shall at all times
maintain its existence and preserve and keep, or cause to be preserved and kept,
in full force and effect its rights and franchises material to its businesses
except where the loss or termination of such rights and franchises does not have
or is not reasonably likely to have a Material Adverse Effect.
8.02. Powers; Conduct of Business. Each Loan Party shall
qualify and remain qualified to do business in each jurisdiction in which the
nature of its business requires it to be so qualified except for those
jurisdictions where failure to so qualify does not have or is not reasonably
likely to have a Material Adverse Effect.
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8.03. Compliance with Laws, etc. Each Loan Party shall, (a)
comply with all Requirements of Law and all restrictive covenants affecting
such Person or the business, property, assets or operations of such Person, and
(b) obtain as needed all Permits necessary for its operations and maintain such
Permits in good standing except in the case where noncompliance with either
clause (a) or (b) above does not have or is not reasonably likely to have a
Material Adverse Effect.
8.04. Payment of Taxes and Claims. Each Loan Party shall pay
(a) all taxes, assessments and other governmental charges imposed upon it or on
any of its properties or assets or in respect of any of its franchises,
business, income or property before any penalty or interest accrues thereon, the
failure to make payment of which will have or is reasonably likely to have a
Material Adverse Effect, and (b) all claims (including, without limitation,
claims for labor, services, materials and supplies) for sums which have become
due and payable prior to the same becoming subject to a Lien upon any of such
Person's properties or assets and prior to the time when any penalty or fine
shall be incurred with respect thereto; provided, however, that no such taxes,
assessments and governmental charges referred to in clause (a) above or claims
referred to in clause (b) above need be paid if being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and if
adequate reserves shall have been set aside therefor in accordance with GAAP.
8.05. Insurance. (a) Each Loan Party shall maintain insurance
against loss or damage of the kind customarily insured against by corporations
similarly situated with reputable insurers and with deductibles and on terms
customary for corporations similarly situated. All such policies and programs
shall be maintained with insurers reasonably satisfactory to the Administrative
Agent. Each certificate and policy relating to property damage, machinery and/or
business interruption coverage shall contain an endorsement, in form and
substance reasonably satisfactory to the Administrative Agent, showing loss
payable to the Collateral Agent, for the ratable benefit of the Lenders, and, if
required by the Administrative Agent, naming the Collateral Agent as an
additional insured under such policy. Each certificate and policy relating to
coverages other than the foregoing shall, if required by the Administrative
Agent, contain an endorsement naming the Collateral Agent as an additional
insured under such policy. Such endorsement or an independent instrument
furnished to the Administrative Agent shall provide that the insurance companies
will give the Collateral Agent at least thirty (30) days' written notice before
any such policy or policies of insurance shall be altered adversely to the
interests of the Collateral Agent and the Lenders or cancelled and that no act,
whether willful or negligent, or default of any Loan Party or any other Person
shall affect the right of the Collateral
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Agent to recover under such policy or policies of insurance in case of loss or
damage. In the event any Loan Party, at any time or times hereafter shall fail
to obtain or maintain any of the policies of insurance required herein or to pay
any premium in whole or in part relating thereto, then the Administrative Agent,
without waiving or releasing any obligation or resulting Event of Default
hereunder, may at any time or times thereafter (but shall be under no obligation
to do so) obtain and maintain such policies of insurance and pay such premiums
and take any other action with respect thereto which the Administrative Agent
deems advisable; provided, however, in the event that the Administrative Agent
decides to obtain and maintain such policies, the Administrative Agent will give
notice to the Borrowers, at least ten days prior to taking any such action, and
an opportunity for the Borrowers to cure such failure. All sums so disbursed by
the Administrative Agent shall be part of the Obligations hereunder, payable on
demand.
(b) Each Loan Party will appoint or designate a person, with
the approval of the Administrative Agent, to settle or adjust such claims
individually not in excess of Five Hundred Thousand Dollars ($500,000) per
occurrence or in the aggregate One Million Dollars ($1,000,000) during any
fiscal year without the consent of the Administrative Agent. In the event such
claims exceed the foregoing amounts, or claims individually or in the aggregate
have or are likely to have a Material Adverse Effect, such settlements and
adjustments thereof shall be made with the Administrative Agent's consent, which
consent shall not be unreasonably withheld. The Net Cash Proceeds of any such
insurance claim or settlement shall be applied, after deducting any expenses and
fees incurred by the Administrative Agent in the settlement and collection
thereof, as follows: (i) if no Default or Event of Default then exists and the
Administrative Agent receives a certification from the applicable Loan Party
contemporaneously with its receipt of such proceeds that such Loan Party intends
to use such proceeds to replace or repair such asset, such proceeds shall be
applied in accordance with Section 3.01(b)(i) hereof, (ii) if no Default or
Event of Default then exists and no certification is received by the
Administrative Agent, such proceeds shall be applied to the outstanding balance
of the Revolving Loans, and (iii) if a Default or Event of Default then exists,
such proceeds shall be applied to the Obligations in accordance with Section
3.02(b)(ii).
(c) So long as no Event of Default has occurred and is
continuing and all Obligations are paid when due, the proceeds received under
any business interruption insurance policy shall be remitted to the Loan Party
for a period of up to six months. Thereafter, the Administrative Agent shall be
entitled to receive such proceeds to apply against the Obligations.
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8.06. Inspection of Property; Books and Records; Discussions.
Each Loan Party shall permit any authorized representative(s) designated by
either any Agent or any Lender to visit and inspect any of the assets of such
Loan Party, to examine, audit, check and make copies of its financial and
accounting records, books, journals, orders, receipts and any correspondence and
other data relating to its businesses or the transactions contemplated by the
Loan Documents (including, without limitation, in connection with environmental
compliance, hazard or liability), and to discuss such Person's affairs, finances
and accounts with its officers and independent certified public accountants, all
upon reasonable notice and at such reasonable times during normal business
hours, as often as may be reasonably requested; provided, however, that upon the
occurrence and during the continuance of an Event of Default each Loan Party
shall permit any authorized representative(s) designated by any Agent or any
Lender to do all of the foregoing without notice, at any time and as often as
the Agents or the Lenders may request. Each such visitation and inspection (i)
by or on behalf of any Lender shall be at such Lender's expense and (ii) by or
on behalf of any Agent shall be at the Borrowers' expense; provided, however, so
long as no Event of Default exists, the Borrowers shall only pay the reasonable
expenses in connection with one inspection or audit per year. Each Loan Party
shall keep and maintain in all material respects proper books of record and
account in which entries sufficient to prepare financial statements in
conformity with GAAP shall be made of all dealings and transactions in relation
to its businesses and activities, including, without limitation, transactions
and other dealings with respect to the Collateral. If an Event of Default has
occurred and is continuing, each Loan Party, upon the Administrative Agent's
request, shall turn over copies of any such records to the Administrative Agent
or its representatives.
8.07. Tax Identification Numbers. Each Loan Party
shall provide the Administrative Agent in writing its tax
identification number promptly upon the availability thereof.
8.08. ERISA Compliance. Each Loan Party shall, and shall cause
each ERISA Affiliate to, establish, maintain and operate all Plans to comply in
all material respects with the provisions of ERISA, the Code, all other
applicable laws, and the regulations and interpretations thereunder and the
respective requirements of the governing documents for such Plans.
8.09. Maintenance of Property. Each Loan Party shall maintain
in all respects all of its owned and leased property in good, safe and insurable
condition and repair and in accordance with any applicable manufacturers'
specifications and recommendations, and not permit, commit or suffer any waste
(except in the ordinary course of business) or abandonment of any such property
and from time to time shall make or cause to be
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made all repairs, renewal and replacements thereof, except in the case where
noncompliance thereof, singularly or in the aggregate, does not have or is not
reasonably likely to have a Material Adverse Effect.
8.10. Condemnation. Immediately upon learning of the
institution of any proceeding for the condemnation or other taking of any of
the owned or leased Real Property of any Loan Party, such Loan Party shall
notify the Administrative Agent of the pendency of such proceeding, and permit
the Administrative Agent to participate in any such proceeding, and from time to
time will deliver to the Administrative Agent all instruments reasonably
requested by the Administrative Agent to permit such participation.
8.11. Maintenance of Licenses, Permits, etc. Each Loan Party
shall maintain in full force and effect all licenses, permits, governmental
approvals, franchises, authorizations or other rights necessary for the
operation of its business, except where the failure to obtain any of the
foregoing would not have or is not reasonably likely to have a Material Adverse
Effect; and notify the Administrative Agent in writing, promptly after learning
thereof, of the suspension, cancellation, revocation or discontinuance of or of
any pending or threatened action or proceeding seeking to suspend, cancel,
revoke or discontinue any such license, permit, governmental approval, franchise
authorization or right.
8.12. Post Closing Matters. The Loan Parties shall
cause each of the requirements set forth on Schedule 8.12 to be
satisfied on or before the date set forth opposite such
requirement.
ARTICLE IX
NEGATIVE COVENANTS
Each Loan Party covenants and agrees so long as any Commitment
is outstanding and thereafter until payment in full of the Obligations:
9.01. Indebtedness. The Loan Parties shall not, directly or
indirectly, create, incur, assume or otherwise become or remain liable with
respect to any Indebtedness, except:
(i) the Obligations;
(ii) trade payables in the ordinary course of business;
(iii) Permitted Existing Indebtedness;
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(iv) to the extent permitted by Section 9.13, Capital Leases
and purchase money Indebtedness incurred by the Loan Parties to finance
the acquisition of fixed assets in an aggregate principal amount
outstanding at any one time not to exceed Seven Million Five Hundred
Thousand Dollars ($7,500,000);
(v) Indebtedness owing by one Loan Party to another Loan
Party;
(vi) endorsements of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(vii) Interest Rate Contracts with respect to the Loans;
(viii) Indebtedness (other than the type of Indebtedness
referred to in clauses (i) through (vii) or clauses (ix) through (xiv)
of this Section 9.01) incurred in the ordinary course of business in an
aggregate principal amount of up to One Million Dollars ($1,000,000)
outstanding at any time;
(ix) extensions, substitutions, renewals, and replacements of
the Deed of Trust in favor of Farm Bureau Life Insurance Company
described in item 3 on Schedule 1.01(A), provided that the amount
extended, substituted, renewed or replaced does not exceed the
principal amount outstanding at such time and that such extension,
substitution, renewal or replacement is on terms and conditions no less
favorable to Paragon than such Deed of Trust;
(x) Indebtedness represented by the Subordinated Notes or any
instrument evidencing subordinated indebtedness that extends, renews or
replaces the Subordinated Notes, provided that (A) the terms and
conditions of such subordinated indebtedness (other than pricing) are
substantially similar to, or more favorable to the Lenders than, the
terms and conditions of the Subordinated Notes and (B) no Default or
Event of Default has occurred and is continuing either before or after
giving effect to the incurrence of such subordinated indebtedness;
(xi) subordinated indebtedness that has terms and conditions
(other than pricing) that are substantially similar to, or more
favorable to the Lenders than, the terms and conditions of the
Subordinated Notes, provided that (A) after giving effect to the
incurrence of such subordinated indebtedness the Loan Parties are in
compliance with the covenants contained in Article X, (B) no Default or
Event of Default has occurred and is continuing either before or after
giving effect to the incurrence of such subordinated
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indebtedness, and (C) the proceeds of such subordinated indebtedness
are applied in accordance with Section 3.01(b)(ii);
(xii) Indebtedness of Stellex or a Subsidiary represented by
Put/Call Promissory Notes or the Put/Call Preferred Stock, in each
case, incurred or issued in exchange for Management Equity Interests,
in an aggregate amount not to exceed the value (calculated in
accordance with the respective agreements pursuant to which such
Management Equity Interests were issued or exchanged) of the Management
Equity Interests exchanged so long as no Default or Event of Default
has occurred and is continuing at the time of such incurrence or
issuance or would occur after giving effect to the incurrence of such
Put/Call Promissory Note or the issuance of the Put/Call Preferred
Stock;
(xiii) Indebtedness of a Subsidiary outstanding on or prior to
the date on which such Subsidiary was acquired by Stellex or a
Subsidiary of Stellex (other than Indebtedness incurred in connection
with, or in contemplation of, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or
was otherwise acquired by Stellex or a Subsidiary of Stellex) and
Indebtedness assumed by Stellex or a Subsidiary of Stellex in
connection with a Permitted Acquisition which is outstanding on or
prior to the date of such Permitted Acquisition (other than
Indebtedness incurred in connection with, or in contemplation of, such
Permitted Acquisition; provided that the aggregate permitted amount,
accreted value or liquidation preference, as applicable, of all such
Indebtedness does not exceed Four Million Dollars ($4,000,000) at any
one time outstanding;
(xiv) Indebtedness evidenced by a subordinated note, held by a
seller in connection with a Permitted Acquisition, that has terms and
conditions that are satisfactory to the Administrative Agent, provided
that (A) after giving effect to the incurrence of such subordinated
indebtedness the Loan Parties are in compliance with the covenants
contained in Article X, (B) no Default or Event of Default has occurred
and is continuing either before or after giving effect to the
incurrence of such subordinated indebtedness, and (C) the aggregate
amount of such Indebtedness and the aggregate amount of the outstanding
Indebtedness permitted under Section 9.01(xiii) does not exceed Eight
Million Dollars ($8,000,000) in the aggregate; and
(xv) extensions, substitutions, renewals and replacements of
any Indebtedness described in clause (xiii) and (xiv) above, provided
that (A) the amount extended, substituted, renewed or replaced does not
exceed the
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principal amount outstanding at such time with respect to such
Indebtedness, (B) that such extension, substitution, renewal or
replacement is on terms (other than pricing) and conditions no less
favorable to the Loan Party and the Lenders than the terms and
conditions of the Indebtedness being extended, substituted, renewed or
replaced.
9.02. Sales of Assets. The Loan Parties shall not sell,
assign, transfer, lease, convey or otherwise dispose of any assets, whether now
owned or hereafter acquired, or any income or profits therefrom, or enter into
any agreement to do so, except:
(i) sales of Inventory in the ordinary course of business;
(ii) the disposition of Equipment if such Equipment is
obsolete or no longer useful in the ordinary course of such Loan
Party's business;
(iii) sales of assets with an aggregate book value not in
excess of Five Hundred Thousand Dollars ($500,000) in any Fiscal Year;
(iv) the disposition of Property by casualty or
condemnation;
(v) assignments, transfers, conveyances and other
dispositions from a Wholly Owned Subsidiary of a Loan Party to another
Wholly Owned Subsidiary of a Loan Party; provided, however, that until
the Farm Bureau Consent has been delivered to the Administrative Agent,
no assets may be assigned, transferred, leased or otherwise conveyed to
Paragon;
(vi) Permitted Dispositions, provided that no Permitted
Disposition may be made prior to the first annual anniversary of the
Closing Date, and provided, further, that no Permitted Disposition may
be made prior to the Term Loan Termination Date if any portion of the
Net Cash Proceeds therefrom will be used to purchase any portion of the
Subordinated Notes;
(vii) any Loan Party may enter into a license agreement
granting licenses in respect of patents and other rights and assets
with its suppliers on terms and conditions that are commercially
reasonable; and
(viii) all licenses granted in connection with the
Watkins-Johnson Acquisition.
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9.03. Liens. The Loan Parties shall not, directly or
indirectly, create, incur, assume or permit to exist any Lien on or with respect
to the Collateral, except:
(i) Liens created by the Loan Documents;
(ii) Permitted Existing Liens;
(iii) Customary Permitted Liens;
(iv) Liens securing Indebtedness permitted by Section
9.01(iv) covering only assets acquired with such Indebtedness and Liens
securing Indebtedness permitted by Section 9.01(ix) covering only the
assets subject to a Lien under the Deed of Trust; and
(v) a Lien with respect to a deposit made by a customer of
a Loan Party in connection with a purchase order placed by such
customer so long as such Lien is limited to the inventory covered by
such purchase order and such inventory is not scheduled on any
Borrowing Base Certificate;
(vi) Liens on property of a Person existing at the time such
Person becomes a Subsidiary of Stellex or of a Subsidiary of Stellex,
provided that such Liens were in existence prior to the time such
Person becomes a Subsidiary and do not extend to any other assets;
(vii) Liens on property existing at the time of acquisition
thereof by Stellex or a Subsidiary of Stellex, provided that such Liens
were in existence prior to the contemplation of such acquisition and do
not extend to any other assets; and
(viii) other Liens securing obligations incurred in the
ordinary course of business which obligations do not exceed Five
Hundred Thousand Dollars ($500,000) at any one time outstanding.
9.04. Investments. The Loan Parties shall not, directly or
indirectly, make or own any Investment, except:
(i) Investments in Cash Equivalents;
(ii) Investments by any Loan Party in its Subsidiaries;
(iii) Investments in Interest Rate Contracts permitted
pursuant to Section 9.01(vii);
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(iv) Investments received in connection with the bankruptcy
or reorganization of customers of any Loan Party or received in
settlement
of delinquent obligations of or disputes with such Loan Party's
customers in the ordinary course of business; and
(v) other Investments not otherwise permitted under this
Section 9.04 having an aggregate market value (measured on the date
that such Investment was made and without giving affect to subsequent
changes in value) not to exceed $2,500,000 outstanding at any time;
provided that the Collateral Agent has a first priority Lien with
respect to such Investments and such Investment does not violate
Section 9.09.
9.05. Accommodation Obligations. The Loan Parties shall not,
directly or indirectly, create or become or be liable with respect to any
Accommodation Obligation, except (i) recourse obligations resulting from
endorsement of negotiable instruments for collection in the ordinary course of
business, (ii) the Farm Bureau Guaranty, (iii) lease obligations in connection
with office space in New York, New York where Stellex and Mentmore Holding
Corporation will be joint tenants, (iv) Accommodation Obligations by one Loan
Party on behalf of another Loan Party (other than Paragon until the Farm Bureau
Consent has been delivered to the Administrative Agent) but only in connection
with Indebtedness permitted pursuant to Section 9.01(i), (ii), (iii) (iv), (v),
(vi), (vii), (viii), (x) or (xi), and (v) Accommodation Obligations by one Loan
Party that is the acquiror or the target in connection with a Permitted
Acquisition on behalf of another Loan Party that is the acquiror or the target
in connection with such Permitted Acquisition but only in connection with
Indebtedness permitted pursuant to Section 9.01(xiii) or (xiv).
9.06. Restricted Junior Payments. The Loan Parties
shall not declare or make any Restricted Junior Payments, except:
(i) dividends and other distributions made by any Loan Party
(other than Stellex) to Stellex or another Loan Party;
(ii) payments of interest on the Subordinated Notes or the
other subordinated indebtedness permitted pursuant to Section 9.01(xi)
or Section 9.01(xii), provided that such payments are made in
accordance with the provisions of the Subordinated Note Indenture or
such subordinated indebtedness;
(iii) Restricted Junior Payments made to a Management Equity
Holder pursuant to the Put/Call Promissory Notes, the Put/Call
Preferred Stock or to purchase Management Equity Interests, so long as
no Default or Event of Default has
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occurred and is continuing or would occur after giving effect to the
making of such Restricted Junior Payment; provided that (a) the
aggregate amount of such Restricted Junior Payments does not exceed
$500,000 during any Fiscal Year; provided, further, that, with respect
to any Fiscal Year after December 31, 2000, (A) if the Leverage Ratio
for Stellex and its Subsidiaries on a consolidated basis as of the last
day of the immediately preceding Fiscal Year is less than 4.0 to 1.0,
then the aggregate amount of such Restricted Junior Payments that may
be made during such Fiscal Year shall not exceed $2,000,000 and (B) if
the Leverage Ratio for Stellex and its Subsidiaries on a consolidated
basis as of the last day of the immediately preceding Fiscal Year is
less than 3.5 to 1.0, then the aggregate amount of such Restricted
Junior Payments that may be made during such Fiscal Year shall not
exceed $4,000,000; and
(iv) Restricted Junior Payments made by the issuance of
Put/Call Promissory Notes or Put/Call Preferred Stock, in each case, in
exchange for Management Equity Interests, in an aggregate amount not to
exceed the value (calculated in accordance with the respective
agreements pursuant to which such Management Equity Interests were
issued or exchanged) of the Management Equity Interests exchanged so
long as no Default or Event of Default has occurred and is continuing
at the time of such incurrence or issuance or would occur after giving
effect to the issuance of such Put/Call Promissory Note or such
Put/Call Preferred Stock.
9.07. Change in Nature of Business. The Loan Parties shall not
make any material change in the nature or conduct of its business from the
businesses carried on as of the Closing Date other than the Permitted
Acquisitions made in accordance with the provisions of this Agreement.
9.08. Transactions with Affiliates. None of the Loan Parties
shall, directly or indirectly, enter into or permit to exist any transaction
with any Affiliate of such Loan Party except for (i) transactions the terms of
which are in the ordinary course of business, in accordance with customary
practice, and not less favorable to such Loan Party than those that might be
obtained in an arm's length transaction at the time from a Person who is not an
Affiliate, (ii) reasonable salaries, bonuses and other compensation (including
deferred compensation, retirement, loan arrangements and severance benefits)
paid to current and former officers, directors and managers of such Loan Party
commensurate with salary, bonus and compensation levels of other companies
engaged in a similar business in similar circumstances, specifically including
those amount contemplated by the Management Participation Agreement as in effect
on the date hereof, (iii) transactions permitted under Sections 9.01(v),
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9.01(xiii), 9.04(ii), 9.05, 9.06, 9.09 and 9.17, (iv) the loan from Trinity
Investment Corp. in an amount of Two Million Five Hundred Thousand Dollars
($2,500,000) plus accrued and unpaid interest, which amount shall be paid to
Trinity Investment Corp. on the Closing Date and (v) tax-sharing arrangement
among the Loan Parties described in the Tax Sharing Agreement.
9.09. Restriction on Fundamental Changes. (a) No Loan Party
shall enter into any merger or consolidation, or liquidate, wind-up or dissolve
(or suffer any liquidation or dissolution), or convey, lease, sell, transfer or
otherwise dispose of, in one transaction or series of transactions, all or
substantially all of its business or assets, whether now or here after acquired,
except (i) Permitted Dispositions and (ii) any Wholly Owned Subsidiary of a Loan
Party may merge or consolidate into, or convey, lease, sell, transfer or
otherwise dispose of, in one transaction or a series of related transactions,
all or substantially all of its business or assets to, another Wholly Owned
Subsidiary of such Loan Party so long as the terms and conditions of any such
transaction and the documentation in connection therewith are in form and
substance satisfactory to Requisite Lenders and all assets remain subject to the
first priority Lien of the Collateral Agent under the Collateral Documents.
(b) No Loan Party shall acquire by purchase or otherwise all
or substantially all of the business property or assets of, or stock or other
evidence of beneficial ownership of, any Person; provided, however, that a Loan
Party may make a Permitted Acquisition if (i) such Loan Party acquires at least
75% of the equity interests (including 75% of the Voting Stock) of a Person in
connection with a Permitted Acquisition involving the acquisition of such
Person; (ii) the equity interests and/or assets acquired by such Loan Party with
respect to any such Permitted Acquisition are pledged by such Loan Party to the
Collateral Agent pursuant to agreements, substantially in the forms of the
Collateral Documents; (iii) any acquired Person guarantees the Obligations
pursuant to an agreement, substantially in the form of the Guaranty and becomes
a Loan Party under the Contribution Agreement; (iv) no Default or Event of
Default has occurred and is continuing; and (iv) all documentation (including,
without limitation, UCC financing statements, opinions of counsel, and
appropriate consents) in connection with such Permitted Acquisition is in form
and substance reasonably satisfactory to the Administrative Agent and the
Requisite Lenders.
(c) No Loan Party shall create any new Subsidiary, joint
venture or partnership; provided, however, that a Loan Party may create a new
corporate Subsidiary if (i) a Loan Party holds at least 75% of the equity
interests (including at least 75% of the Voting Stock) of such newly created
Subsidiary; (ii)
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all of the equity interests that a Loan Party has (whether as legal or
beneficial owner) are pledged to the Collateral Agent, on terms and conditions
satisfactory to the Administrative Agent and all of the assets of such new
Subsidiary are pledged to the Collateral Agent, on terms and conditions
satisfactory to the Administrative Agent; (ii) such new Subsidiary guarantees
the Obligations on terms and conditions satisfactory to the Administrative Agent
and becomes a Loan Party under the Contribution Agreement; (iii) no Default or
Event of Default has occurred and is continuing; and (iv) all documentation
(including, without limitation, security agreements, guarantees, pledge
agreements, UCC financing statements, opinions of counsel, and appropriate
consents) in connection with such new Subsidiary shall be in form and substance
reasonably satisfactory to the Administrative Agent and the Requisite Lenders.
(c) Except as permitted under this Agreement, no Loan Party
shall change its corporate, capital or legal structure.
9.10. Sales and Leasebacks. No Loan Party shall become liable,
by assumption or by Accommodation Obligation, with respect to any lease, whether
a Capital Lease or an operating lease, of any property (whether real or personal
or mixed) (i) which such Loan Party has sold or transferred or will sell or
transfer to any other Person or (ii) which such Loan Party intends to use for
substantially the same purposes as any other asset which it has sold or
transferred or will sell or transfer to any other Person in connection with such
lease.
9.11. Margin Regulations. No Loan Party shall use all or any
portion of the proceeds of any Loan made under this Agreement to purchase or
carry Margin Stock.
9.12. ERISA. No Loan Party shall, nor shall it permit any
ERISA Affiliate to, do any of the following to the extent that such act or
failure to act would result in the aggregate, after taking into account any
other such acts or failure to act, in a Material Adverse Effect:
(i) engage, or knowingly permit an ERISA Affiliate to engage,
in any prohibited transaction described in Sections 406 of ERISA or
4975 of the Code for which a class exemption is not available or a
private exemption has not been previously obtained from the DOL;
(ii) permit to exist any accumulated funding deficiency (as
defined in Sections 302 of ERISA or 412 of the Code), with respect to
any Benefit Plan, which has not been waived;
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(iii) fail, or permit any ERISA Affiliate to fail, to pay
timely required contributions or annual installments due with respect
to any waived funding deficiency to any Plan if such failure could
result in the imposition of a Lien or otherwise could have a Material
Adverse Effect;
(iv) terminate, or permit any ERISA Affiliate to terminate,
any Benefit Plan which would result in any liability of such Loan
Party, or any ERISA Affiliate under Title IV of ERISA or under such
Benefit Plan; or
(v) fail, or permit any ERISA Affiliate to fail, to pay any
required installment under section (m) of Section 412 of the Code or
any other payment required under Section 412 of the Code or Section 302
of ERISA on or before the due date for such installment or other
payment, if such failure could result in the imposition of a Lien or
otherwise could have a Material Adverse Effect.
9.13. Capital Expenditures. None of the Loan Parties shall
make or incur any Capital Expenditures (a) during the period from the Closing
Date to the end of Fiscal Year 1997 if, after giving effect to such Capital
Expenditures, the aggregate amount of all Capital Expenditures made by the Loan
Parties would exceed One Million Seven Hundred Thousand Dollars ($1,700,000) for
such period, and (b) during any Fiscal Year thereafter if, after giving effect
to such Capital Expenditures, the aggregate amount of all Capital Expenditures
made by the Loan Parties during such Fiscal Year would exceed Four Million
Dollars ($4,000,000) for such Fiscal Year; provided, however, the Loan Parties
may carry forward from one Fiscal Year (other than Fiscal Year 1997) to the next
Fiscal Year any Capital Expenditures permitted but not made or incurred in such
Fiscal Year.
9.14. Amendment of Governing Documents. No Loan Party (other
than Stellex) shall amend, supplement or otherwise change its Governing
Documents in any material respect, and Stellex shall not amend, supplement or
otherwise change its Governing Documents in any material respect which is
adverse to the interests of the Lenders.
9.15. Environmental Liabilities. Except as disclosed in
Schedule 6.01(P), no Loan Party shall become subject to any Liabilities and
Costs which exceed One Million Dollars ($1,000,000) in a particular instance or
Two Million Five Hundred Thousand Dollars ($2,500,000) in the aggregate, arising
out of or relating to (a) the Release or threatened Release at any location of
any Contaminant into the environment, or any Remedial Action in response thereto
or (b) any violation of any Environmental, Health or Safety Requirement of Law.
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9.16. No Activities Leading to Forfeiture. No Loan Party
shall engage in the conduct of any business or activity which could result in a
Forfeiture Proceeding.
9.17. Management Fees and Consulting Fees. The Loan Parties
shall not pay any management fee or consulting fee or transfer any assets to any
Affiliate, other than the following payments:
(i) the payment of management fees pursuant to the Management
Agreement in an amount not to exceed (A) Seven Hundred Fifty Thousand
Dollars ($750,000) during any Fiscal Year, exclusive of expenses, and
(B) after the first anniversary of the Closing Date, additional
payments in an amount not to exceed one percent (1%) of sales for
Stellex and its Subsidiaries on a consolidated basis during such Fiscal
Year less any amount paid pursuant to the preceding clause (A),
exclusive of expenses, provided, in the case of clause (B) above, that
the Interest Coverage Ratio for Stellex and its Subsidiaries on a
consolidated basis for the immediately preceding Fiscal Year, after
giving pro forma effect to such payment, is equal to or greater than
2.25 to 1.0; provided, further, that at the time of any such payment
and after giving effect to such payment no Default or Event of Default
shall have occurred and be continuing;
(ii) the reimbursement of reasonable business expenses
incurred in the ordinary course of business by an Affiliate on behalf
of any Loan Party, provided that the Loan Parties are in compliance
with Section 9.08;
(iii) the payment of investment banking fees by the Loan
Parties to Mentmore Holdings Corporation in connection with the
transactions contemplated by the Transaction Documents in an amount not
to exceed One Million Dollars ($1,000,000); and
(iv) the payment of investment banking fees by the Loan
Parties to Mentmore Holdings Corporation in connection with any
Permitted Acquisition in an amount not to exceed one percent (1%) of
the transaction value.
9.18. Farm Bureau Life Insurance Company. Aerospace shall not
assign or transfer any moneys, securities or other property to Farm Bureau, or
permit any moneys, securities or other property to be in the constructive or
actual possession of or on deposit with Farm Bureau, provided, however, that
Aerospace may make payments to Farm Bureau that are due and payable under the
Farm Bureau Guaranty.
9.19. Amendment of Subordinated Documents. No Loan Party
shall amend, supplement or otherwise change the provisions
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of the Subordinated Note Documents or any documents evidencing the subordinated
indebtedness referred to in Section 9.01(xii) in any material respect which
would be adverse to the interests of the Lenders.
ARTICLE X
FINANCIAL COVENANTS
Each Loan Party covenants and agrees so long as any Commitment
is outstanding and thereafter until payment in full of the Obligations:
10.01. Minimum Net Worth. The Net Worth of Stellex and its
Subsidiaries on a consolidated basis at the end of each fiscal quarter of each
Fiscal Year shall not be less than the sum of (i) $5,500,000 plus (ii) an amount
equal to 50% of Net Income since the Closing Date (excluding any losses).
10.02. Minimum Interest Coverage Ratio. The Interest
Coverage Ratio of Stellex and its Subsidiaries on a consolidated
basis at the end of each Financial Covenant Period set forth
below shall not be less than the ratio set forth opposite such
date:
Financial Covenant
Period Ending: Ratio
------------------ -----
March 31, 1998 1.60 to 1.00
June 30, 1998 1.60 to 1.00
September 30, 1998 1.60 to 1.00
December 31, 1998 1.70 to 1.00
March 31, 1999 1.70 to 1.00
June 30, 1999 1.70 to 1.00
September 30, 1999 1.70 to 1.00
December 31, 1999 2.00 to 1.00
March 31, 2000 2.00 to 1.00
June 30, 2000 2.00 to 1.00
September 30, 2000 2.00 to 1.00
December 31, 2000 2.50 to 1.00
March 31, 2001 2.50 to 1.00
June 30, 2001 2.50 to 1.00
September 30, 2001 2.50 to 1.00
December 31, 2001 2.75 to 1.00
March 31, 2002 2.75 to 1.00
June 30, 2002 2.75 to 1.00
September 30, 2002 2.75 to 1.00
December 31, 2002 3.00 to 1.00
March 31, 2003 3.00 to 1.00
June 30, 2003 3.00 to 1.00
September 30, 2003 3.00 to 1.00
December 31, 2003 3.00 to 1.00
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10.03. Minimum Fixed Charge Coverage Ratio. The Fixed Charge
Coverage Ratio of Stellex and its Subsidiaries on a consolidated basis at the
end of each Financial Covenant Period commencing with the Financial Covenant
Period ending March 31, 2000 shall not be less than 1.50 to 1.00.
10.04. Maximum Leverage Ratio. The Leverage Ratio of
Stellex and its Subsidiaries on a consolidated basis, at the end
of each Financial Covenant Period set forth below, shall not be
greater than the ratio set forth opposite such date:
Financial Covenant
Period Ending: Ratio
------------------ -----
March 31, 1998 6.00 to 1.00
June 30, 1998 6.00 to 1.00
September 30, 1998 6.00 to 1.00
December 31, 1998 6.00 to 1.00
March 31, 1999 6.00 to 1.00
June 30, 1999 6.00 to 1.00
September 30, 1999 6.00 to 1.00
December 31, 1999 4.75 to 1.00
March 31, 2000 4.75 to 1.00
June 30, 2000 4.75 to 1.00
September 30, 2000 4.75 to 1.00
December 31, 2000 4.25 to 1.00
March 31, 2001 4.25 to 1.00
June 30, 2001 4.25 to 1.00
September 30, 2001 4.25 to 1.00
December 31, 2001 3.50 to 1.00
March 31, 2002 3.50 to 1.00
June 30, 2002 3.50 to 1.00
September 30, 2002 3.50 to 1.00
December 31, 2002 3.25 to 1.00
March 31, 2003 3.25 to 1.00
June 30, 2003 3.25 to 1.00
September 30, 2003 3.25 to 1.00
December 31, 2003 3.25 to 1.00
ARTICLE XI
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
11.01. Events of Default. Each of the following
occurrences shall constitute an Event of Default under this
Agreement:
(a) Failure to Make Payments When Due. The Borrowers shall
fail to pay any principal of any Note when due, or shall fail to pay any
interest on any Note or any other Obligation within three (3) Business Days
after such interest or Obligation shall become due.
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(b) Breach of Representation or Warranty. Any representation
or warranty made or deemed to have been made by any Loan Party under, relating
to or in connection with this Agreement, the Notes, any of the other Loan
Documents or any certificate or statement furnished by any Loan Party pursuant
to or in connection with this Agreement shall be false or misleading in any
material respect when made.
(c) Breach of Certain Covenants. Any Loan Party shall fail
duly and punctually to perform or observe any agreement, covenant or obligation
binding on such Loan Party under Section 7.04, Section 8.01, Section 8.02,
Section 8.03, Section 8.06, Article IX or Article X of this Agreement or under
any section of any other Loan Document.
(d) Other Defaults. Any Loan Party shall fail duly and
punctually to perform or observe any term, covenant or obligation binding on
such Loan Party (i) under Section 7.01 or Section 7.02 of this Agreement and
such failure shall continue for ten (10) Business Days after the occurrence of
such failure or (ii) under this Agreement (other than as described in Sections
11.01(a), (c) or (d)(i)), and such failure shall continue for thirty (30) days
after any Loan Party knew of such failure.
(e) Default as to Other Indebtedness. Any Loan Party shall
fail to make any payment when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) with respect to any Indebtedness
(other than (i) an Obligation, (ii) the Seller Note or (iii) any Put/Call
Promissory Notes or the Put/Call Preferred Stock but only so long as such
Put/Call Promissory Notes or Put/Call Preferred Stock (or any payments
thereunder or failure to make payments thereunder) do not give rise to a default
or event of default under or in connection with any other Indebtedness) if the
aggregate amount of such other Indebtedness is One Million Dollars ($1,000,000)
or more; or any breach, default or event of default shall occur, or any other
condition shall exist under any instrument, agreement or indenture pertaining to
any such Indebtedness, if the effect thereof (with or without the giving of
notice or lapse of time or both) is to cause an acceleration, mandatory
redemption or other required repurchase of such Indebtedness or permit the
holder or holders of such Indebtedness to accelerate the maturity of any such
Indebtedness or require a redemption or other repurchase of such Indebtedness;
or any such Indebtedness shall be otherwise declared to be due and payable (by
acceleration or otherwise) or required to be prepaid, redeemed or otherwise
repurchased by any Loan Party (other than by a regularly scheduled required
prepayment) prior to the stated maturity thereof; or the holder or holders of
any Lien, in any amount, shall commence foreclosure of such Lien upon property
of any Loan Party having an aggregate value in excess of One Million Dollars
($1,000,000).
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(f) Involuntary Bankruptcy; Appointment of Receiver, etc. (i)
An involuntary case shall be commenced against any Loan Party and the petition
shall not be dismissed, stayed, bonded or discharged for a period of thirty (30)
days; or a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of any Loan Party in an involuntary case, under any
applicable bankruptcy, insolvency or other similar law now or hereinafter in
effect; or any other similar relief shall be granted under any applicable
federal, state, local or foreign law; or the board of directors of any Loan
Party (or any committee thereof) adopts any resolution or otherwise authorizes
any action to approve any of the foregoing.
(ii) A decree or order of a court having jurisdiction in the
premises for the appointment of a receiver, liquidator, sequestrator, trustee,
custodian or other officer having similar powers over any Loan Party or over all
or a substantial part of the assets of any Loan Party shall be entered and such
decree or order shall not be stayed, dismissed or discharged for a period of
thirty (30) days; or an interim receiver, trustee or other custodian of any Loan
Party or of all or a substantial part of the assets of any Loan Party shall be
appointed or a warrant of attachment, execution or similar process against any
substantial part of the assets of any Loan Party shall be issued and any such
event shall not be stayed, dismissed, bonded or discharged for a period of
thirty (30) days; or the board of directors of any Loan Party (or any committee
thereof) adopts any resolution or otherwise authorizes any action to approve any
of the foregoing.
(g) Voluntary Bankruptcy; Appointment of Receiver, etc. Any
Loan Party shall commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or shall consent to
the entry of an order for relief in an involuntary case, or to the conversion of
an involuntary case to a voluntary case, under any such law, or shall consent to
the appointment of or taking possession by a receiver, trustee or other
custodian for all or a substantial part of its assets; or any Loan Party shall
make any assignment for the benefit of creditors or shall be unable or fail, or
shall admit in writing its inability, to pay its debts as such debts become due,
or the board of directors of any Loan Party (or any committee thereof) adopts
any resolution or otherwise authorizes any action to approve any of the
foregoing.
(h) Judgments and Attachments. Any money judgment (other than
a money judgment covered by insurance as to which the insurance company has
acknowledged coverage), writ or warrant of attachment, or similar process
against any Loan Party or any assets of any Loan Party involving in any case an
amount in excess of One Million Dollars ($1,000,000) is entered and shall remain
undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days.
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(i) Dissolution. Any order, judgment or decree shall be
entered against any Loan Party decreeing its involuntary dissolution or split
up and such order shall remain undischarged and unstayed for a period of thirty
(30) days; or any Loan Party shall otherwise dissolve or cease to exist (except
as permitted under this Agreement).
(j) Loan Documents; Failure of Security. At any time, for any
reason, (i) any Loan Document ceases to be in full force and effect or any Loan
Party seeks to repudiate its obligations thereunder and the Liens intended to be
created thereby are, or any Loan Party seeks to render such Liens, invalid and
unperfected, or (ii) Liens in favor of the Collateral Agent and/or the Lenders
contemplated by the Loan Documents shall, at any time, for any reason, be
invalidated or otherwise cease to be in full force and effect, or such Liens
shall be subordinated or shall not have the priority contemplated by this
Agreement or the Loan Documents.
(k) ERISA Liabilities. Any Termination Event occurs which will
or is reasonably likely to subject either a Loan Party or an ERISA Affiliate to
a liability which will, or is reasonably likely to have, a Material Adverse
Effect.
(l) Waiver Application. The plan administrator of any Benefit
Plan applies under Section 412(d) of the Code for a waiver of the minimum
funding standards of Section 412(a) of the Code and the substantial business
hardship upon which the application for the waiver is based could subject either
any Loan Party or any ERISA Affiliate to liability which will or is reasonably
likely to have a Material Adverse Effect.
(m) Change of Control. A Change of Control shall have
occurred.
(n) Government Contracts. At any time, for any reason, (i) a
notice of debarment, notice of suspension or notice of termination for default
shall have been issued to any Borrower under or in connection with any
Government Contract which could reasonably result in a Material Adverse Effect;
(ii) a notice of debarment, notice of suspension or notice of termination for
default shall have been issued to any other party under a Government Contract as
a direct or indirect result of any Borrower's performance or malfeasance
thereunder which could reasonably result in a Material Adverse Effect; (iii) any
Borrower is barred or suspended from contracting with any Governmental
Authority; (iv) a Government investigation shall have been commenced in
connection with any Government Contract or any Borrower which could reasonably
result in criminal or civil liability, suspension, debarment or any other
adverse administrative action arising by reason of alleged fraud, willful
misconduct, neglect, default or other wrongdoing; (v) the actual
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termination of any Material Contract due to alleged fraud, willful misconduct,
neglect, default or other wrongdoing which could reasonably result in a Material
Adverse Effect; or (vi) a cure notice issued under any Government Contract shall
remain uncured beyond (A) the expiration of the time period available to such
Borrower pursuant to such Government Contract and/or such cure notice, to cure
the noticed default or (B) the date on which the other contracting party is
entitled to exercise its rights and remedies under the Government Contract as a
consequence of such default, which could reasonably result in a Material Adverse
Effect.
An Event of Default shall be deemed "continuing" until cured
or waived in writing in accordance with Section 13.09.
11.02. Rights and Remedies.
(a) Acceleration and Termination. Upon the occurrence of any
Event of Default described in Section 11.01(f) or 11.01(g), the Commitments
shall automatically and immediately terminate and the unpaid principal amount
of, and any and all accrued interest on, the Obligations and all accrued fees
shall automatically become immediately due and payable, without presentment,
demand, or protest or other requirements of any kind (including, without
limitation, valuation and appraisement, diligence, presentment, notice of intent
to demand or accelerate and of acceleration), all of which are hereby expressly
waived by the Borrowers, and the obligations of the Lenders to make Loans
hereunder shall thereupon terminate; and upon the occurrence and during the
continuance of any other Event of Default, the Administrative Agent shall, at
the request, or may with the consent, of the Requisite Lenders, declare (i) that
the Commitments are terminated, whereupon the Commitments shall immediately
terminate, and/or (ii) the unpaid principal amount of, and any and all accrued
interest on, the Obligations and all accrued fees to be, and the same shall
thereupon be, immediately due and payable, without presentment, demand, or
protest or other requirements of any kind (including, without limitation,
valuation and appraisement, diligence, presentment, notice of intent to demand
or accelerate and of acceleration, except as may be specifically provided for
herein), all of which are hereby expressly waived by the Borrowers.
(b) Enforcement. Each Loan Party acknowledges that in the
event any Loan Party fails to perform, observe or discharge any of its
respective obligations or liabilities under this Agreement or any other Loan
Document, any remedy of law may prove to be inadequate relief to the Agents and
the Lenders; therefore, the Loan Parties agree that the Agents and the Lenders
shall be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages.
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ARTICLE XII
THE AGENTS
12.01. Appointment. (a) Each Lender hereby designates and
appoints SocGen as the Administrative Agent of such Lender under this Agreement,
and each Lender hereby irrevocably authorizes the Administrative Agent to take
such action on its behalf under the provisions of this Agreement, the Notes and
the Loan Documents and to exercise such powers as are set forth herein or
therein together with such other powers as are reasonably incidental thereto. As
to any matters not expressly provided for by this Agreement or the other Loan
Documents, the Administrative Agent shall not be required to exercise any
discretion or take any action. Notwithstanding the foregoing, the Administrative
Agent shall be required to act or refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instructions of the
Requisite Lenders (unless the instructions or consent of all of the Lenders is
required hereunder or thereunder) and such instructions shall be binding upon
all Lenders; provided, however, the Administrative Agent shall not be required
to take any action which (i) the Administrative Agent believes will expose it to
personal liability unless the Administrative Agent receives an indemnification
satisfactory to it from the Lenders with respect to such action or (ii) is
contrary to this Agreement, the Notes, the other Loan Documents or applicable
law. The Administrative Agent agrees to act as such on the express conditions
contained in this Article XII.
(b) Each Lender hereby designates and appoints First Union as
the Syndication Agent and the Collateral Agent of such Lender under this
Agreement, and each Lender hereby irrevocably authorizes the Syndication Agent
and the Collateral Agent to take such action on its behalf under the provisions
of this Agreement, the Notes and the Loan Documents and to exercise such powers
as are set forth herein or therein together with such other powers as are
reasonably incidental thereto. As to any matters not expressly provided for by
this Agreement or the other Loan Documents, the Syndication Agent and the
Collateral Agent shall not be required to exercise any discretion or take any
action. Notwithstanding the foregoing, the Syndication Agent and the Collateral
Agent shall be required to act or refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instructions of the
Requisite Lenders (unless the instructions or consent of all of the Lenders is
required hereunder or thereunder) and such instructions shall be binding upon
all Lenders; provided, however, the Syndication Agent and the Collateral Agent
shall not be required to take any action which (i) the Syndication Agent and the
Collateral Agent believes will expose it to personal liability unless the
Syndication Agent and the Collateral Agent receives an indemnification
satisfactory
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to it from the Lenders with respect to such action or (ii) is contrary to this
Agreement, the Notes, the other Loan Documents or applicable law. The
Syndication Agent and the Collateral Agent agrees to act as such on the express
conditions contained in this Article XII.
(c) The provisions of this Article XII are solely for the
benefit of the Agents and the Lenders, and none of the Loan Parties shall have
any rights to rely on or enforce any of the provisions hereof (other than as
expressly set forth in Section 12.07). In performing its functions and duties
under this Agreement, the Agents shall act solely as agents of the Lenders and
does not assume and shall not be deemed to have assumed any obligation or
relationship of agency, trustee or fiduciary with or for any Loan Party. The
Agents may perform any of their respective duties hereunder, or under the Loan
Documents, by or through their respective agents or employees.
12.02. Nature of Duties. The Agents shall not have any duties
or responsibilities except those expressly set forth in this Agreement or in the
Loan Documents. The duties of the Agents shall be mechanical and administrative
in nature. The Agents shall not have by reason of this Agreement a fiduciary
relationship in respect of any Holder. Nothing in this Agreement or any of the
Loan Documents, expressed or implied, is intended to or shall be construed to
impose upon the Agents any obligations in respect of this Agreement or any of
the Loan Documents except as expressly set forth herein or therein. Each Lender
shall make its own independent investigation of the financial condition and
affairs of Stellex and the other Loan Parties in connection with the Loans
hereunder and shall make its own appraisal of the credit worthiness of Stellex
and the other Loan Parties initially and on a continuing basis, and the Agents
shall not have any duty or responsibility, either initially or on a continuing
basis, to provide any Holder with any credit or other information with respect
thereto (except for reports required to be delivered by the Agents under the
terms of this Agreement). If the Agents seek the consent or approval of the
Lenders to the taking or refraining from taking of any action hereunder, the
Agents shall send notice thereof to each Lender. The Agents shall promptly
notify each Lender at any time that the Lenders so required hereunder have
instructed the Agents to act or refrain from acting pursuant hereto.
12.03. Rights, Exculpation, etc. (a) Liabilities;
Responsibilities. None of the Agents, any Affiliate of any Agent, or any of
their respective officers, directors, employees, agents, attorneys or
consultants shall be liable to any Holder for any action taken or omitted by
them hereunder, under the Notes or under any of the Loan Documents, or in
connection therewith, except that no Person shall be relieved of any liability
imposed by law for gross negligence or willful
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misconduct. No Agent shall be liable for any apportionment or distribution of
payments made by it in good faith, and if any such apportionment or distribution
is subsequently determined to have been made in error the sole recourse of any
Holder to whom payment was due, but not made, shall be to recover from other
Holders any payment in excess of the amount to which they are determined to have
been entitled. The Agents shall not be responsible to any Holder for any
recitals, statements, representations or warranties herein or for the
execution, effectiveness, genuineness, validity, legality, enforceability,
collectability, or sufficiency of this Agreement, the Notes or any of the other
Loan Documents or the transactions contemplated thereby, or for the financial
condition of Stellex or any other Loan Party. None of the Agents are making any
representation and warranty in connection with, and shall not be required to
make any inquiry concerning, the Collateral, the performance or observance of
any of the terms, provisions or conditions of this Agreement, the Notes or any
of the Loan Documents, or the financial condition of Stellex or any other Loan
Party, or the existence or possible existence of any Default or Event of
Default.
(b) Right to Request Instructions. Any Agent may at any time
request instructions from the Lenders (and after all Obligations owing to the
Lenders have been paid in full, from the Holders) with respect to any actions or
approvals which by the terms of any of the Loan Documents such Agent is
permitted or required to take or to grant, and such Agent shall be absolutely
entitled to refrain from taking any action or to withhold any approval and shall
not be under any liability whatsoever to any Person for refraining from any
action or withholding any approval under any of the Loan Documents until it
shall have received such instructions from those Lenders or Holders, as the case
may be, from whom such Agent is required to obtain such instructions for the
pertinent matter in accordance with the Loan Documents. Without limiting the
generality of the foregoing, no Holder shall have any right of action whatsoever
against any Agent as a result of such Agent acting or refraining from acting
under the Loan Documents in accordance with the instructions of all Lenders or,
where required by the express terms of this Agreement, a lesser proportion of
the Lenders, or of all Holders (after the Obligations owing to the Lenders have
been paid in full).
12.04. Reliance. Each Agent shall be entitled to rely upon any
written notices, statements, certificates, orders or other documents or any
telephone message believed by it in good faith to be genuine and correct and to
have been signed, sent or made by the proper Person, and with respect to all
matters pertaining to this Agreement or any of the Loan Documents and its duties
hereunder or thereunder, upon advice of legal counsel, independent public
accountants and other experts selected by it.
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12.05. Indemnification. To the extent that the Agents are not
reimbursed and indemnified by the Borrowers, the Lenders will reimburse and
indemnify each Agent for and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, reasonable costs,
reasonable expenses or disbursements of any kind or nature whatsoever which may
be imposed on, incurred by, or asserted against it in any way relating to or
arising out of the Loan Documents or any action taken or omitted by such Agent
under the Loan Documents, in proportion to each Lender's Pro Rata Share;
provided that no Lender shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from such Agent's gross negligence or
willful misconduct. The obligations of the Lenders under this Section 12.05
shall survive the payment in full of the Loans and all other Obligations and the
termination of this Agreement. In the event that after payment and distribution
of any amount by the Administrative Agent to Lenders, any Lender or third party,
including any Loan Party, any creditor of any Loan Party or a trustee in
bankruptcy, recovers from the Administrative Agent any amount found to have been
wrongfully paid to the Administrative Agent or disbursed by the Administrative
Agent to Lenders, then Lenders, in proportion to their respective Pro Rata
Shares, shall reimburse the Administrative Agent for all such amounts.
12.06. The Agents Individually. With respect to the Loans made
by it, SocGen and First Union shall have and may exercise the same rights and
powers hereunder and is subject to the same obligations and liabilities as and
to the extent set forth herein for any other Lender. The terms "Lenders" or
"Requisite Lenders" or any similar terms shall, unless the context clearly
otherwise indicates, include SocGen and First Union in their respective
individual capacities as a Lender or one of the Requisite Lenders. Each of
SocGen and First Union and their respective Affiliates may accept deposits from,
lend money to, and generally engage in any kind of banking, trust or other
business with any Loan Party or any of its Affiliates as if it were not acting
as an Agent pursuant hereto.
12.07. Successor Agents. (a) Resignation. Any Agent may
resign from the performance of all its functions and duties hereunder at any
time by giving at least thirty (30) days' prior written notice to the Borrowers
and the Lenders. Such resignation shall take effect upon the acceptance by a
successor Agent of appointment pursuant to this Section 12.07.
(b) Appointment by Requisite Lenders. Upon any such notice of
resignation, the Requisite Lenders shall have the right to appoint a successor
Agent selected from among the Lenders, which appointment shall be subject to the
prior written approval of Stellex (which may not be unreasonably withheld, and
shall not
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be required upon the occurrence and during the continuance of an Event of
Default or Default).
(c) Appointment by Retiring Agent. If a successor Agent shall
not have been appointed within the thirty (30) day period provided in paragraph
(a) of this Section 12.07, the retiring Agent shall then appoint a successor
Agent who shall serve as such Agent until such time, if any, as the Requisite
Lenders appoint a successor Agent as provided above. Each Lender shall indemnify
and hold such Agent harmless for and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, reasonable
costs, reasonable expenses or disbursements of any kind or nature whatsoever
which may be imposed on, incurred by, or asserted against it in any way relating
to or arising out of the appointment of a successor Agent pursuant to the terms
of this paragraph (c).
(d) Rights of the Successor and Retiring Agents. Upon the
acceptance of any appointment hereunder as Administrative Agent, Collateral
Agent or Syndication Agent, as the case may be, by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under this Agreement.
After any retiring Agent's resignation hereunder as an Agent, the provisions of
this Article XII shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was such Agent under this Agreement.
12.08. Relations Among Lenders. Each Lender agrees that it
will not take any legal action, nor institute any actions or proceedings,
against any Loan Party or any other Loan Party or with respect to any
Collateral, without the prior written consent of the Requisite Lenders. Without
limiting the generality of the foregoing, no Lender may accelerate or otherwise
enforce its portion of the Obligations, except in accordance with Section
11.02(a).
12.09. Concerning the Collateral and the Loan Documents. (a)
Authority. Subject to the terms and conditions hereof, each Lender authorizes
and directs the Collateral Agent to enter into the Loan Documents relating to
the Collateral for the benefit of the Lenders. Each Lender agrees that any
action taken by any Agent or all Lenders (or, where required by the express
terms of this Agreement, a lesser proportion of the Lenders) in accordance with
the provisions of this Agreement or the other Loan Documents, and the exercise
by any Agent or all Lenders (or, where so required, such lesser proportion) of
the powers set forth herein or therein, together with such other powers as are
reasonably incidental thereto, shall be authorized and binding upon all of the
Lenders. Without limiting the generality of the foregoing, (i) the
Administrative Agent shall
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have the sole and exclusive right and authority to act as the disbursing and
collecting agent for the Lenders with respect to all payments and collections
arising in connection with this Agreement and the Loan Documents relating to the
Collateral and (ii) the Collateral Agent shall have the sole and exclusive right
and authority to execute and deliver each Loan Document relating to the
Collateral and accept delivery of each such agreement delivered by any Loan
Party; act as collateral agent for the Lenders for purposes of the perfection of
all security interests and Liens created by such agreements and all other
purposes stated therein; manage, supervise and otherwise deal with the
Collateral; take such action as is necessary or desirable to maintain the
perfection and priority of the security interests and Liens created or purported
to be created by the Loan Documents; and except as may be otherwise specifically
restricted by the terms of this Agreement or any other Loan Document, exercise
all remedies given to the Collateral Agent or the Lenders with respect to the
Collateral under the Loan Documents, applicable law or otherwise.
(b) Release of Collateral. (i) Each Lender hereby directs the
Collateral Agent to release or to subordinate any Lien held by the Agent for the
benefit of the Lenders (A) against all of the Collateral, upon payment in full
of the Obligations and termination of this Agreement or (B) against the
Collateral sold, assigned, transferred, conveyed or otherwise disposed of
pursuant to Sections 9.02(ii), (iii) and (vi) when the Collateral Agent receives
a certificate from the Borrowers pursuant to which the Borrowers represent and
warrant that the Collateral is being sold, assigned, transferred, conveyed or
otherwise disposed of in compliance with Section 9.02(ii), (iii) or (vi).
(ii) Each Lender hereby directs the Collateral Agent to
execute and deliver or file such termination and partial release statements and
do such other things as are necessary to release Liens to be released pursuant
to this Section 12.09(b) promptly upon the effectiveness of any such release.
Upon request by the Collateral Agent at any time, the Lenders will confirm in
writing the Collateral Agent's authority to release particular types or items as
Collateral pursuant to this Section 12.09.
(iii) Without in any manner limiting the Collateral Agent's
authority to act without any specific or further authorization or consent by the
Lenders (as set forth in Section 12.09(b)), each Lender agrees to confirm in
writing, upon request by Stellex, the authority to release or subordinate Liens
in the Collateral conferred upon the Collateral Agent under Section 12.09(b). So
long as no Event of Default or Default is then continuing, upon receipt by the
Collateral Agent of any such written confirmation from the Lenders of its
authority to release any particular items or types of Collateral, and upon at
least
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five (5) Business Days prior written request by Stellex, the Collateral Agent
shall (and is hereby irrevocably authorized by Lenders to) execute such
documents as may be necessary to evidence the release of the Liens granted to
the Collateral Agent for the benefit of Lenders herein or pursuant hereto upon
such Collateral; provided, that (A) the Collateral Agent shall not be required
to execute any such document on terms which, in the Collateral Agent's opinion,
would expose the Collateral Agent to liability or create any obligation or
entail any consequence other than the release of such Liens without recourse or
warranty, and (B) such release shall not in any manner discharge, affect or
impair the Obligations or any Liens upon (or obligations of the Borrowers in
respect of) all interests retained by the Loan Parties all of which shall
continue to constitute part of the Collateral.
(iv) The Collateral Agent shall have no obligation whatsoever
to the Lenders or to any other Person to assure that the Collateral exists or is
owned by any Loan Party or is cared for, protected or insured or has been
encumbered or that the Liens granted to the Collateral Agent pursuant to the
Loan Documents have been properly or sufficiently or lawfully created,
perfected, protected or enforced or are entitled to any particular priority, or
to exercise at all or in any particular manner or under any duty of care,
disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to the Collateral Agent in this
Section 12.09 or in any of the Loan Documents, it being understood and agreed
that in respect of the Collateral, or in any act, omission or event related
thereto, the Collateral Agent may act in any manner it may deem appropriate, in
its sole discretion, given its own interest in the Collateral as one of the
Lenders and that the Collateral Agent shall have no duty or liability whatsoever
to any Lender unless required to act or refrain from acting upon the
instructions of the Lenders and then only in accordance with Section 12.01.
ARTICLE XIII
MISCELLANEOUS
13.01. Assignments and Participations. (a) Assignments. No
assignment or participation of any Lender's rights or obligations under this
Agreement and the Notes shall be made except in accordance with this Section
13.01. Each Lender may assign to one or more Eligible Assignees all or a portion
of its rights and obligations under this Agreement and the Notes in accordance
with the provisions of this Section 13.01.
(b) Limitations on Assignments. Each assignment shall be
subject to the following conditions: (i) each assignment shall be of a
constant, and not a varying, ratable percentage of
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all of the assigning Lender's rights and obligations in respect of its interest
being assigned under this Agreement and its Note and, in the case of a partial
assignment, shall be in a minimum principal amount of Five Million Dollars
($5,000,000) except that such limitations shall not apply to an assignment by
any Lender of any portion of its rights and obligations to another Lender or an
assignment by any Lender of all of its rights or obligations to another Person,
(ii) each such assignment shall be to an Eligible Assignee, and (iii) the
parties to each such assignment shall execute and deliver to the Administration
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance, together with a processing and recordation fee of Three Thousand
Five Hundred Dollars ($3,500); provided, however, any Lender may assign any or
all of its rights and obligations under this Agreement to any of its Affiliates
without notice to or consent of the Borrowers or the Administrative Agent and
without being subject to the foregoing conditions. Upon such execution,
delivery, acceptance and recording in the Register, from and after the effective
date specified in each Assignment and Acceptance and accepted by the
Administrative Agent (which effective date shall not be any earlier than the
date on which the Administrative Agent so accepts and records the Assignment and
Acceptance in the Register), (x) the assignee thereunder shall, in addition to
any rights and obligations hereunder held by it immediately prior to such
effective date, if any, have the rights and obligations hereunder that have been
assigned to it pursuant to such Assignment and Acceptance and shall, to the
fullest extent permitted by law, have the same rights and benefits hereunder as
if it were an original Lender hereunder and (y) the assigning Lender shall, to
the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of such
assigning Lender's rights and obligations under this Agreement, the assigning
Lender shall cease to be a party hereto).
(c) The Register. The Administrative Agent shall maintain at
its address referred to in Section 13.09 a copy of each Assignment and
Acceptance delivered to and accepted by it and a register (the "Register") for
the recordation of the names and addresses of the Lenders and the Commitment of
each Lender from time to time and whether such Lender is an original Lender or
the assignee of another Lender pursuant to an Assignment and Acceptance. The
Administrative Agent shall incur no liability of any kind to any Loan Party, any
Lender or any other Person with respect to its maintenance of the Register or
the recordation of information therein. The Register shall be available for
inspection by the Borrowers or any Lender at any reasonable time and from time
to time upon reasonable prior notice. No assignment shall be effective unless
and until the Assignment and
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Acceptance has been accepted by the Administrative Agent and registered in the
Register.
(d) Fee. Upon its receipt of an Assignment and Acceptance
executed by the assigning Lender and an Eligible Assignee and a processing and
recordation fee of $3500 (payable by the assigning Lender or the assignee, as
shall be agreed between them), the Administrative Agent shall, if such
Assignment and Acceptance has been completed and is in compliance with this
Agreement and in substantially the form of Exhibit A hereto, (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in the
Register and (iii) give prompt notice thereof to the Borrowers and the other
Lenders.
(e) Participations. Each Lender may sell participations to
one or more commercial banks, lending institutions, finance companies, insurance
companies, other financial institutions or funds in or to all or a portion of
its rights and obligations under and in respect of any and all facilities under
this Agreement (including, without limitation, all or a portion of any or all of
its Commitments hereunder and the Loans owing to it); provided, however, that
(i) such Lender's obligations under this Agreement (including, without
limitation, its Commitments hereunder) shall remain unchanged, (ii) such Lender
shall remain solely responsible to the other parties hereto for the performance
of such obligations, (iii) the Borrowers, the Agents and the other Lenders shall
continue to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement and (iv) such participant's
rights to agree or to restrict such Lender's ability to agree to the
modification, waiver or release of any of the terms of the Loan Documents or to
the release of any Collateral covered by the Loan Documents, to consent to any
action or failure to act by any party to any of the Loan Documents or any of
their respective Affiliates, or to exercise or refrain from exercising any
powers or rights which any Lender may have under or in respect of the Loan
Documents or any Collateral, shall be limited to the right to consent to (A) the
increase in the Commitment of the Lender from whom such participant purchased a
participation, (B) the reduction of the principal of, or rate or amount of
interest on, the Loans subject to such participation (other than by the payment
or prepayment thereof), (C) the postponement of any date fixed for any payment
of principal of, or interest on, the Loan(s) subject to such participation
(except with respect to any modifications of the provisions relating to
prepayments of Loans and other Obligations) and (D) the release of any guarantor
of the Obligations or all or a substantial portion of the Collateral except as
provided in Section 12.09(b).
(f) Information Regarding the Borrowers. Any Lender may, in
connection with any assignment or participation or proposed assignment or
participation pursuant to this Section 13.01,
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disclose to the assignee or participant or proposed assignee or participant, any
information relating to the Borrowers furnished to such Lender by any Agent or
by or on behalf of the Borrowers; provided that, prior to any such disclosure,
such assignee or participant, or proposed assignee or participant, shall agree
to preserve in accordance with Section 13.23 the confidentiality of any
confidential information described therein.
(g) Payment to Participants. Anything in this Agreement to
the contrary notwithstanding, in the case of any participation, all amounts
payable by the Borrowers under the Loan Documents shall be calculated and made
in the manner and to the parties required hereby as if no such participation had
been sold.
(h) Lenders' Creation of Security Interests. Notwithstanding
any other provision set forth in this Agreement, any Lender may at any time
create a security interest in all or any portion of its rights under this
Agreement and its Notes (including, without limitation, Obligations owing to it
and the Notes held by it) in favor of any Federal Reserve Bank of the Federal
Reserve Board without notice to or consent of the Borrowers or the Agents.
13.02. Relations Among Lenders. Each Lender agrees
that it will not take any action, nor institute any actions or
proceedings, against the Borrowers with respect to the
Obligations or any Collateral, without the prior written consent
of Requisite Lenders.
13.03. Replacement of Lender. In the event that a Replacement
Event occurs and is continuing with respect to any Lender, the Borrowers may
designate a Replacement Lender to assume such Lender's Commitment hereunder, to
purchase the Loans and participations of such Lender and such Lender's rights
hereunder, without recourse to or representation or warranty by, or expense to,
such Lender for a purchase price equal to the outstanding principal amount of
the Loans payable to such Lender plus any accrued but unpaid interest on such
Loans and accrued but unpaid fees owing to such Lender, and upon such
assumption, purchase and substitution, and subject to the execution and delivery
to the Administrative Agent by the Replacement Lender of documentation
satisfactory to the Administrative Agent (pursuant to which such Replacement
Lender shall assume the obligations of such original Lender under this
Agreement), the Replacement Lender shall succeed to the rights and obligations
of such Lender hereunder and such Lender shall no longer be a party hereto or
have any rights hereunder provided that the obligations of the Borrowers to such
Lender under Section 13.05 hereof with respect to events occurring or
obligations arising before such replacement shall survive such replacement.
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13.04. Expenses.
(a) Generally. The Borrowers agree upon demand to pay, or
reimburse each Agent for, all of such Agent's reasonable audit, legal,
appraisal, valuation, filing, document duplication and reproduction and
investigation expenses and for all other out-of-pocket costs and expenses of
every type and nature (including, without limitation, the reasonable fees,
expenses and disbursements of legal counsel, auditors, accountants, appraisers,
printers, insurance and environmental advisers, and other consultants and
agents) incurred by such Agent in connection with (i) the preparation,
negotiation, and execution of this Agreement and the other Loan Documents; (ii)
the interpretation of this Agreement (including, without limitation, the
satisfaction or attempted satisfaction of any of the conditions set forth in
Article V), the other Loan Documents and the making of the Loans hereunder;
(iii) the creation, perfection or protection of the Liens under the Loan
Documents; (iv) the ongoing administration of this Agreement and the Loans,
including consultation with attorneys in connection therewith and with respect
to such Agent's rights and responsibilities under this Agreement and the other
Loan Documents and, to the extent provided under Section 8.06, such Agent's
periodic inspections and audits of the Borrowers; (v) the protection, collection
or enforcement of any of the Obligations or the enforcement of any of the Loan
Documents; (vi) the commencement, defense or intervention in any court
proceeding relating in any way to the Obligations, the assets of any Borrower,
this Agreement or any of the other Loan Documents; (vii) the response to, and
preparation for, any subpoena or request for document production with which such
Agent is served or deposition or other proceeding in which such Agent is called
to testify, in each case, relating in any way to the Obligations, the assets of
any Borrower, this Agreement or any of the other Loan Documents; and (viii) any
amendments, consents, waivers, assignments, restatements, or supplements to any
of the Loan Documents and the preparation, negotiation, and execution of the
same.
(b) After Default. The Borrowers further agree to pay or
reimburse each Agent and each Lender upon demand for all out-of-pocket costs and
expenses, including, without limitation, reasonable attorneys' fees incurred by
such Agent or such Lender after the occurrence of an Event of Default (i) in
enforcing any Loan Document or any of the Obligations or any security therefor
or exercising or enforcing any other right or remedy available by reason of such
Event of Default; (ii) in connection with any refinancing or restructuring of
the credit arrangements provided under this Agreement in the nature of a
"work-out" or in any insolvency or bankruptcy proceeding; (iii) in commencing,
defending or intervening in any litigation or in filing a petition, complaint,
answer, motion or other pleadings in any legal proceeding relating to the
Obligations, the Property, any
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Borrower and related to or arising out of the transactions contemplated hereby
or by any of the other Loan Documents; and (iv) in taking any other action in or
with respect to any suit or proceeding (bankruptcy or otherwise) described in
clauses (i) through (iii) above.
13.05. Indemnity. The Borrowers further agree to defend,
protect, indemnify, and hold harmless each Agent and each of the Lenders and
each of their respective Affiliates, and their respective officers, directors,
employees, attorneys and agents (including, without limitation, those retained
in connection with the satisfaction or attempted satisfaction of any of the
conditions set forth in Article V) (collectively, the "Indemnitees") from and
against any and all liabilities, obligations, losses (other than loss of
profits), damages, penalties, actions, judgments, suits, claims, costs, expenses
and disbursements of any kind or nature whatsoever (excluding any taxes and
including, without limitation, the reasonable fees and disbursements of counsel
for such Indemnitees in connection with any investigative, administrative or
judicial proceeding, whether or not such Indemnitees shall be designated a party
thereto), imposed on, incurred by, or asserted against such Indemnitees in any
manner relating to or arising out of (a) this Agreement, the Notes, the other
Loan Documents, or any act, event or transaction related or attendant thereto,
the making of the Loans, the management of such Loans, the use or intended use
of the proceeds of the Loans, or any of the transactions contemplated by the
Loan Documents, or (b) any Liabilities and Costs under federal, state or local
environmental, health or safety laws, regulations or common law principles
arising from or in connection with the past, present or future operations of any
Borrower or any of its predecessors in interest, or, the past, present or future
environmental condition of any Property of any Borrower, the presence of
asbestos-containing materials at any Property of any Borrower or the Release or
threatened Release of any Contaminant into the environment from any Property of
any Borrower (collectively, the "Indemnified Matters"); provided, however, the
Borrowers shall have no obligation to an Indemnitee hereunder with respect to
Indemnified Matters caused by or resulting from the willful misconduct or gross
negligence of such Indemnitee, as determined by a court of competent
jurisdiction in a final non-appealable judgment or order. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in the preceding
sentence may be unenforceable because it is violative of any law or public
policy, the Borrowers shall contribute the maximum portion which it is permitted
to pay and satisfy under applicable law, to the payment and satisfaction of all
Indemnified Matters incurred by the Indemnitees.
13.06. Change in Accounting Principles. If any change
in the accounting principles used in the preparation of the most
recent financial statements referred to in Section 7.01 are
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<PAGE>
hereafter required or permitted by the rules, regulations, pronouncements and
opinions of the Financial Accounting Standards Board or the American Institute
of Certified Public Accountants (or successors thereto or agencies with similar
functions) and are adopted by Stellex and its Subsidiaries with the agreement of
its independent certified public accountants and such changes result in a change
in the method of calculation of any of the covenants, standards or terms found
in Article IX and Article X, the parties hereto agree to enter into negotiations
in order to amend such provisions so as to equitably reflect such changes with
the desired result that the criteria for evaluating compliance with such
covenants, standards and terms by Stellex and its Subsidiaries shall be the same
after such changes as if such changes had not been made; provided, however, no
change in GAAP that would affect the method of calculation of any of the
covenants, standards or terms shall be given effect in such calculations until
such provisions are amended, in a manner satisfactory to the Requisite Lenders
and Stellex, to so reflect such change in accounting principles.
13.07. Setoff. In addition to any Liens granted under the Loan
Documents and any rights now or hereafter granted under applicable law, upon the
occurrence and during the continuance of any Event of Default, each Lender and
any Affiliate of any Lender is hereby authorized by each Borrower at any time
and from time to time, without notice to any Person (any such notice being
hereby expressly waived) to set off and to appropriate and to apply any and all
deposits (general or special, including, but not limited to, indebtedness
evidenced by certificates of deposit, whether matured or unmatured (but not
including tax, payroll and trust accounts)) and any other Indebtedness at any
time held or owing by such Lender or any of its Affiliates to or for the credit
or the account of such Borrower against and on account of the Obligations of the
Borrowers to such Lender or any of its Affiliates, including, but not limited
to, all Loans and all claims of any nature or description arising out of or in
connection with this Agreement or the Notes, irrespective of whether or not (i)
such Lender shall have made any demand hereunder or (ii) the Administrative
Agent, at the request or with the consent of the Requisite Lenders, shall have
declared the principal of and interest on the Loans and other amounts due
hereunder and under the Notes to be due and payable as permitted by Article XI
and even though such Obligations may be contingent or unmatured. Each Lender
agrees that it shall not, without the express consent of the Requisite Lenders,
and that it shall, to the extent it is lawfully entitled to do so, upon the
request of the Requisite Lenders, exercise its setoff rights hereunder against
any accounts of any Borrower now or hereafter maintained with such Lender or any
of its Affiliates.
13.08. Ratable Sharing. The Lenders agree among themselves
that (i) with respect to all amounts received by them
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which are applicable to the payment of the Obligations (excluding the fees
described in Sections 3.03, 3.04 and 4.01(e)) equitable adjustment will be made
so that, in effect, all such amounts will be shared among them ratably in
accordance with their Pro Rata Shares, whether received by voluntary payment, by
the exercise of the right of setoff or banker's lien, by counterclaim or
cross-action or by the enforcement of any or all of the Obligations (excluding
the fees and amounts described in Sections 3.03, 3.04 and 4.01(e)) or the
Collateral, (ii) if any of them shall by voluntary payment or by the exercise of
any right of counterclaim, setoff, banker's lien or otherwise, receive payment
of a proportion of the aggregate amount of the Obligations held by it, which is
greater than the amount which such Lender is entitled to receive hereunder, the
Lender receiving such excess payment shall purchase, without recourse or
warranty, an undivided interest and participation (which it shall be deemed to
have done simultaneously upon the receipt of such payment) in such Obligations
owed to the others so that all such recoveries with respect to such Obligations
shall be applied ratably in accordance with their Pro Rata Shares; provided,
however, that if all or part of such excess payment received by the purchasing
party is thereafter recovered from it, those purchases shall be rescinded and
the purchase prices paid for such participations shall be returned to such party
to the extent necessary to adjust for such recovery, but without interest except
to the extent the purchasing party is required to pay interest in connection
with such recovery. Each Borrower agrees that any Lender so purchasing a
participation from another Lender pursuant to this Section 13.08 may, to the
fullest extent permitted by law, exercise all its rights of payment (including,
subject to Section 13.07, the right of setoff) with respect to such
participation as fully as if such Lender were the direct creditor of such
Borrower in the amount of such participation.
13.09. Amendments and Waivers. Unless otherwise provided in
this Agreement, no amendment or modification of any provision of this Agreement
or the Notes shall be effective without the written agreement of the Requisite
Lenders and the Borrowers, and no termination or waiver of any provision of this
Agreement or the Notes, or consent to any departure by the Borrowers therefrom,
shall be effective without the written concurrence of the Requisite Lenders,
which the Requisite Lenders shall have the right to grant or withhold in their
sole discretion. Notwithstanding the foregoing, any amendment, modification,
termination, waiver or consent with respect to any of the following provisions
of this Agreement and the Notes shall be effective only by a written agreement,
signed by each Lender: (a) waiver of any of the conditions specified in Sections
5.01, 5.02 and 5.03 (except with respect to a condition based upon another
provision of this Agreement, the waiver of which requires only the concurrence
of the Requisite Lenders), (b) increase in the aggregate amount of the
Commitments or the Commitment of any
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Lender, (c) reduction of the principal of, rate or amount of interest on the
Loans or any fees or other amounts payable to such Lender (other than by the
payment or prepayment thereof), (d) postponement of the Commitment Termination
Date or any other date fixed for any payment of principal of, or interest on,
the Loans or any fees or other amounts payable to such Lender (except with
respect to any modifications of the provisions relating to prepayments of Loans
and other Obligations), (e) release of all or a substantial portion of the
Collateral (except as provided in Section 12.09(b)), (f) amendment of the
definition of "Requisite Lenders", or (g) amendment of Section 13.08 or this
Section 13.09. Any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which it was given. No notice to or
demand on the Borrowers in any case shall entitle the Borrowers to any other or
further notice or demand in similar or other circumstances. Notwithstanding
anything to the contrary contained in this Section 13.09, no amendment,
modification, waiver or consent shall affect the rights or duties of the Agents
under this Agreement or the other Loan Documents, unless made in writing and
signed by the Agents in addition to the Lenders required above to take such
action.
13.10. Notices. (a) Unless otherwise specifically provided
herein, any notice or other communication herein required or permitted to be
given shall be in writing and may be personally served, telecopied, telexed or
sent by courier service or United States certified mail and shall be deemed to
have been given when delivered in person or by courier service, upon receipt of
a telecopy or telex or four (4) Business Days after deposit in the United States
mail with postage prepaid and properly addressed. Notices to the Agents pursuant
to Articles II, III or XII shall not be effective until received by the Agents.
For the purposes hereof, the addresses of the parties hereto (until notice of a
change thereof is delivered as provided in this Section 13.10) shall be as set
forth below each party's name on the signature pages hereof or the signature
page of any applicable Assignment and Acceptance, or, as to each party, at such
other address as may be designated by such party in a written notice to all of
the other parties to this Agreement.
(b) The Borrowers agree to indemnify and hold harmless each
Indemnitee from and against any and all claims, damages, liabilities,
obligations, losses, penalties, actions, judgments, suits, costs, disbursements
and expenses of any kind or nature (including, without limitation, reasonable
fees and disbursements of counsel to any such Indemnitee) which may be imposed
on, incurred by or asserted against any such Indemnitee in any manner relating
to or arising out of any action taken or omitted by such Indemnitee in good
faith in reliance on any notice or other written communication in the form of a
telecopy or facsimile purporting to be from the Borrowers; provided that the
Borrowers shall have no obligation under this Section 13.10(b) to an
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<PAGE>
Indemnitee with respect to any indemnified matter caused by or resulting from
the gross negligence or willful misconduct of that Indemnitee, as determined by
a court of competent jurisdiction in a final non-appealable judgment or order.
13.11. Survival of Warranties and Agreements. All
representations and warranties made herein and all obligations of the Borrowers
in respect of taxes, indemnification and expense reimbursement shall survive the
execution and delivery of this Agreement and the other Loan Documents, the
making and repayment of the Loans and the termination of this Agreement and
shall not be limited in any way by the passage of time or occurrence of any
event and shall expressly cover time periods when any of the Agents or any of
the Lenders may have come into possession or control of any assets of any
Borrower.
13.12. Failure or Indulgence Not Waiver; Remedies Cumulative.
No failure or delay on the part of any Agent or any Lender in the exercise of
any power, right or privilege under this Agreement, the Notes or any of the
other Loan Documents shall impair such power, right or privilege or be construed
to be a waiver of any default or acquiescence therein, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing under this Agreement, the Notes and the other Loan Documents
are cumulative to and not exclusive of any rights or remedies otherwise
available.
13.13. Marshalling; Payments Set Aside. Neither any Agent nor
any Lender shall be under any obligation to marshall any assets in favor of any
Borrower or any other Person or against or in payment of any or all of the
Obligations. To the extent that the Borrowers make a payment or payments to the
Agents or the Lenders, or any of such Persons receives payment from the proceeds
of the Collateral or exercises its rights of setoff, and such payment or
payments or the proceeds of such enforcement or setoff or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, receiver or any other party, then to the
extent of such recovery, the obligation or part thereof originally intended to
be satisfied, and all Liens, right and remedies therefor, shall be revived and
continued in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.
13.14. Independence of Covenants. All covenants here
under shall be given independent effect so that if a particular action or
condition is not permitted by any of such covenants, the fact that it would be
permitted by an exception to, or be otherwise within the limitations of, another
covenant shall not
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<PAGE>
avoid the occurrence of an Event of Default or Default if such action is taken
or condition exists.
13.15. Severability. In case any provision in or obligation
under this Agreement, the Notes or the other Loan Documents shall be invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or of such provision
or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby.
13.16. Headings. Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement or be given any substantive effect.
13.17. Governing Law. THIS AGREEMENT SHALL BE INTERPRETED,
AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
13.18. Limitation of Liability. No claim may be made by any
Borrower, any Lender, any Agent or any other Person against any other Agent or
any other Lender or the Affiliates, directors, officers, employees, attorneys or
agents of any of them for any special, consequential or punitive damages in
respect of any claim for breach of contract or any other theory of liability
arising out of or related to the transactions contemplated by this Agreement or
the Notes or the other Loan Documents, or any act, omission or event occurring
in connection therewith; and each Borrower, each other Borrower, each Lender and
each Agent hereby waive, release and agree not to sue upon any such claim for
any such damages, whether or not accrued and whether or not known or suspected
to exist in its favor.
13.19. Successors and Assigns. This Agreement, the Notes and
the other Loan Documents shall be binding upon the parties thereto and their
respective successors and assigns and shall inure to the benefit of the parties
thereto and the successors and permitted assigns of the Lenders. The rights
hereunder of the Borrowers, or any interest therein, may not be assigned without
the written consent of all Lenders.
13.20. Certain Consents and Waivers.
(a) Personal Jurisdiction. (i) EACH OF THE AGENTS, THE
LENDERS, THE BORROWERS IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND
ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR
FEDERAL COURT SITTING IN NEW YORK, NEW YORK, AND ANY COURT HAVING JURISDICTION
OVER APPEALS OF MATTERS HEARD IN SUCH COURTS, IN ANY ACTION OR PROCEEDING
ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED AMONG THEM IN
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<PAGE>
CONNECTION WITH THIS AGREEMENT, WHETHER ARISING IN CONTRACT, TORT, EQUITY OR
OTHERWISE, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE
PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT
OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH STATE COURT
OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE BORROWERS
IRREVOCABLY DESIGNATES AND APPOINTS MENTMORE HOLDINGS CORPORATION, AS ITS AGENT
(THE "PROCESS AGENT"), WITH AN OFFICE LOCATED AT THE ADDRESS IN NEW YORK, NEW
YORK SET FORTH IN THE LETTER DATED AS OF THE DATE HEREOF BETWEEN THE
ADMINISTRATIVE AGENT AND THE PROCESS AGENT, FOR SERVICE OF ALL PROCESS IN ANY
SUCH PROCEEDING IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED TO BE
EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. EACH OF THE AGENTS, THE LENDERS
AND THE BORROWERS AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING
SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. EACH OF THE BORROWERS WAIVES IN
ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT
CONSIDERING THE DISPUTE.
(ii) EACH OF THE BORROWERS AGREES THAT EACH AGENT SHALL HAVE
THE RIGHT TO PROCEED AGAINST ANY BORROWER OR ITS PROPERTY IN A COURT IN ANY
LOCATION TO ENABLE THE AGENTS AND THE LENDERS TO REALIZE ON THE COLLATERAL OR
ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER ENTERED IN FAVOR OF ANY AGENT OR ANY LENDER. EACH OF THE BORROWERS AGREES
THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT
BY ANY AGENT OR ANY LENDER TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY
FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
ANY AGENT OR ANY LENDER. EACH OF THE BORROWERS WAIVES ANY OBJECTION THAT IT MAY
HAVE TO THE LOCATION OF THE COURT IN WHICH ANY AGENT OR ANY LENDER MAY COMMENCE
A PROCEEDING DESCRIBED IN THIS SECTION.
(b) Service of Process. EACH OF THE BORROWERS IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY
SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR
CERTIFIED MAIL, POSTAGE PREPAID, TO THE PROCESS AGENT OR SUCH BORROWER'S NOTICE
ADDRESS SPECIFIED BELOW, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER
SUCH MAILING. EACH OF THE BORROWERS IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING,
WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS
OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF
ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY
OTHER LOAN DOCUMENT IN ANY JURISDICTION SET FORTH ABOVE. NOTHING HEREIN SHALL
AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL
LIMIT THE RIGHT OF ANY AGENT OR ANY LENDER TO BRING
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PROCEEDINGS AGAINST ANY BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.
(c) Waiver of Jury Trial. EACH OF THE AGENTS, THE
LENDERS AND THE BORROWERS IRREVOCABLY WAIVES TRIAL BY JURY IN ANY
ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES OR
ANY OTHER LOAN DOCUMENT.
13.21. Counterparts; Effectiveness; Inconsistencies. This
Agreement and any amendments, waivers, consents, or supplements hereto may be
executed in counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same instrument. This Agreement shall become effective against each
Borrower, each Lender and each Agent on the date hereof when each such party
hereto executes and delivers this Agreement. This Agreement and each of the
other Loan Documents shall be construed to the extent reasonable to be
consistent one with the other, but to the extent that the terms and conditions
hereof are actually inconsistent with the terms and conditions of any other Loan
Document, this Agreement shall govern.
13.22. Entire Agreement. This Agreement, taken together with
all of the other Loan Documents, embodies the entire agreement and understanding
among the parties hereto and supersedes all prior agreements and understandings,
written and oral, relating to the subject matter hereof.
13.23. Confidentiality. The Lenders shall hold all nonpublic
information obtained pursuant to the requirements of this Agreement and
identified as such by the Borrowers in accordance with such Lender's customary
procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices and in any event may make
disclosure reasonably required by a bona fide offeree, transferee or participant
in connection with the contemplated transfer or participation or as required or
requested by any Governmental Authority or representative thereof or pursuant to
legal process and shall require any such offeree, transferee or participant to
agree (and require any of its offerees, transferees or participants to agree) to
comply with this Section 13.23. In no event shall any Lender be obligated or
required to return any materials furnished by the Borrowers; provided, however,
each offeree shall be required to agree that if it does not become a transferee
or participant it shall return all materials furnished to it by the Borrowers in
connection with this Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as
of the date first above written.
STELLEX INDUSTRIES, INC.
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
KII HOLDING CORP.
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
TSMD ACQUISITION CORP.
By: /s/ William L. Remley
--------------------------------
Title: President
-------------------------
KII ACQUISITION CORP.
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
STELLEX MICROWAVE SYSTEMS, INC.
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
STELLEX AEROSPACE
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
<PAGE>
PARAGON PRECISION PRODUCTS
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
BANDY MACHINING INTERNATIONAL
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
GENERAL INSPECTION LABORATORIES, INC.
By: /s/ William L. Remley
--------------------------------
Title: Vice Chairman
-------------------------
Notice address:
c/o Stellex Industries, Inc.
21550 Oxnard Street, Suite 570
Woodland Hills, CA 91367
Attn: Bradley C. Call, President
Telecopy: (818) 710-7807
with copies to:
Mentmore Holdings Corporation
1480 Broadway Ave., 13th Floor
New York, NY 10018
Attn: William L. Remley, President
Telecopy: (212) 391-1393
and
Winston & Strawn
200 Park Avenue
New York, NY 10166-4193
Attn: Jonathan Goldstein, Esq.
Telecopy: (212) 294-4700
<PAGE>
SOCIETE GENERALE,
as Administrative Agent
By: /s/ John M. Stack
---------------------------------
Title: Director
---------------------------
Notice address:
Societe Generale
1221 Avenue of the Americas
New York, NY 10020
Attn: John M. Stack, Director
Telecopy: (212) 278-6418
Societe Generale
1221 Avenue of the Americas
New York, NY 10020
Attn: General Counsel
Telecopy: (212) 278-7432
with copies to:
Sidley & Austin
875 Third Avenue
New York, NY 10022
Attn: Barbara A. Vrancik, Esq.
Telecopy: (212) 906-2021
<PAGE>
FIRST UNION COMMERCIAL CORPORATION,
as Syndication Agent and
Collateral Agent
By: /s/ Shaun Kelley
---------------------------------
Title: Vice President
--------------------------
Notice address:
1970 Chain Bridge Road
Mail Code VA1942
McLean, VA 22102
Attn: Barbara Boehm
Telecopy: (703) 760-6019
<PAGE>
Revolving Loan SOCIETE GENERALE, as Lender
Commitment
- --------------
$17,500,000
By: /s/ John M. Stack
Term Loan ---------------------------------
Commitment Title: Director
- ---------- ------------------------
$17,500,000
Notice address:
Societe Generale
1221 Avenue of the Americas
New York, NY 10020
Attn: John M. Stack, Director
Telecopy: (212) 278-6418
Societe Generale
1221 Avenue of the Americas
New York, NY 10020
Attn: General Counsel
Telecopy: (212) 278-7432
with copies to:
Sidley & Austin
875 Third Avenue
New York, NY 10022
Attn: Barbara A. Vrancik, Esq.
Telecopy: (212) 906-2021
<PAGE>
Revolving Loan
Commitment
- ----------
$7,500,000
Term Loan
Commitment
- ----------
$7,500,000
FIRST UNION COMMERCIAL CORPORATION,
as Lender
By: /s/ Shaun Kelley
---------------------------------
Title: Vice President
---------------------------
Notice address:
1970 Chain Bridge Road
Mail Code VA1942
McLean, VA 22102
Attn: Barbara Boehm
Telecopy: (703) 760-6019
<PAGE>
EXHIBIT A
Form of Assignment and Acceptance
ASSIGNMENT AND ACCEPTANCE
ASSIGNMENT AND ACCEPTANCE dated ____________ __, 199_, between
_______________________ (the "Assignor") and __________________________ (the
"Assignee").
PRELIMINARY STATEMENTS
A. Reference is made to the Credit Agreement dated as of October __, 1997
among Stellex Industries, Inc., KII Holding Corp., TSMD Acquisition Corp., KII
Acquisition Corp., Stellex Microwave Systems, Inc., Stellex Aerospace, Paragon
Precision Products, Bandy Machining International, Scanning Electron Analysis
Laboratories, Inc., and General Inspection Laboratories, Inc. (collectively, the
"Borrowers", and individually, a "Borrower"), the financial institutions from
time to time parties thereto as lenders (the "Lenders"), and Societe Generale,
in its capacity as administrative agent for the Lenders (in such capacity, the
"Administrative Agent"), and First Union Commercial Corporation, in its
capacities as collateral agent and syndication agent for the Lenders (together
with the Administrative Agent and the collateral agent, the "Agents") (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"). Terms defined in the Credit Agreement and not otherwise defined
herein are used herein with the meanings ascribed thereto in the Credit
Agreement.
B. The Assignor is a Lender under the Credit Agreement and desires to sell
and assign to the Assignee, and the Assignee desires to purchase and assume from
the Assignor, on the terms and conditions set forth below, a ___ percent (____%)
interest1 in the Assignor's Commitment (the "Assigned Percentage") together with
the Assignor's rights and obligations under the Credit Agreement with respect to
the Assigned Percentage.
NOW, THEREFORE, the Assignor and the Assignee hereby agree as follows:
- --------
1 Such percentage shall be in compliance with the minimum principal amount
permitted for a partial assignment under Section 13.01(b) of the Credit
Agreement.
-1-
<PAGE>
1. In consideration of the Assignee's payment to the Assignor of
$_____________, the Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, the Assigned
Percentage, together with the Assignor's rights and obligations under the Credit
Agreement with respect to such Assigned Percentage, including, without
limitation, the obligation to make Revolving Loans and Term Loans.
2. The Assignor (i) represents and warrants that as of the date hereof its
Pro Rata Share (without giving effect to assignments thereof which have not yet
become effective) is ____% and that such Pro Rata Share multiplied by the
aggregate Commitments is equal to $_____________; (ii) represents and warrants
that it has legal and beneficial title to the interests being assigned by it
hereunder free and clear of any claim adverse to such title; (iii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Credit Agreement, any of the other Loan
Documents, or any other instrument or document furnished pursuant thereto or
executed and delivered in connection therewith; (iv) makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of any Loan Party or the performance or observance by any Borrower of its
obligations under the Credit Agreement, any other Loan Document or any
instrument or document furnished pursuant thereto; and (v) attaches the
Revolving Loan Note[s] and the Term Loan Note[s] delivered to it under the
Credit Agreement and has requested that the Borrowers exchange such Notes for
the following new Notes:
Revolving Loan
Note Payable Revolving Loan
to the Order of: Note Amount
---------------- -----------
[Name of Assignor] $_________
[Name of Assignee] $_________
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<PAGE>
Term Loan
Note Payable Term Loan
to the Order of: Note Amount
---------------- -----------
[Name of Assignor] $_________
[Name of Assignee] $_________
3. The Assignee (i) represents and warrants that it is legally authorized
to enter into this Assignment and Acceptance; (ii) confirms that it has received
a copy of the Credit Agreement, together with copies of such other Loan
Documents, information, exhibits, reports, projections and forecasts which the
Assignee has deemed appropriate to make its own credit analysis and decision to
enter into this Assignment and Acceptance; (iii) agrees that it shall have no
recourse against the Assignor with respect to any matters relating to the Credit
Agreement, any other Loan Document or this Assignment and Acceptance (except
with respect to the representations and warranties made by the Assignor in
clauses (i) and (ii) of paragraph 2 above); (iv) agrees that it will,
independently and without reliance upon any of the Agents, the Assignor or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Credit Agreement and the other Loan Documents; (v)
appoints and authorizes each of the Agents to take such action as Agents on its
behalf and to exercise such powers under the Credit Agreement and the other Loan
Documents as are delegated to each of such Agents, respectively, by the terms
thereof, together with such powers as are reasonably incidental thereto; (vi)
agrees that it will perform in accordance with their terms all of the
obligations which by the terms of the Credit Agreement and the other Loan
Documents are required to be performed by it as a Lender; (vii) confirms that it
is an Eligible Assignee; and (viii) specifies as its address for notices the
address set forth beneath its name on the signature page hereof, together with
the name and address of its Domestic Lending Office and its Eurodollar Lending
Office.
4. The effective date for this Assignment and Acceptance shall be
___________ __, 199_ (the "Effective Date").2 Following the execution of this
Assignment and Acceptance, it will be delivered to the Administrative Agent for
acceptance by the
- --------
2 Such date shall be at least two (2) Business Days after the date of execution
of this Assignment and Acceptance by the Assignor and Assignee.
-3-
<PAGE>
Administrative Agent and for recording in the Register by the Administrative
Agent, together with a processing and recordation fee of $3,500 to be paid to
the Administrative Agent by the [Assignor][Assignee]3.
5. As of the Effective Date, provided that the Administrative Agent accepts
this Assignment and Acceptance, (i) the Assignee shall be a party to the Credit
Agreement and, to the extent provided in this Assignment and Acceptance, have
the rights and obligations of a Lender thereunder and (ii) the Assignor shall
relinquish its rights and be released from its obligations under the Credit
Agreement with respect to the Assigned Percentage.
6. From and after the Effective Date, provided that the Administrative
Agent accepts this Assignment and Acceptance, the Administrative Agent shall
make all payments under the Credit Agreement in respect of the Assigned
Percentage (including, without limitation, all payments of principal, interest
and fees with respect thereto) to the Assignee. The Assignor and Assignee shall
make all appropriate adjustments in payments under the Credit Agreement for
periods prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, intending to be legally bound, each of the undersigned
has caused this Assignment and Acceptance to be executed on its behalf by its
officer thereunto duly authorized, as of _________ __, 199_.
[NAME OF ASSIGNOR]
By______________________________
Name:_________________________
Title:________________________
New Pro Rata Share ______%
New Commitment $__________
- --------
3 Insert applicable selection.
-4-
<PAGE>
[NAME OF ASSIGNEE]
By______________________________
Name:_________________________
Title:________________________
Notice Address and
Domestic Lending Office:
Eurodollar Lending Office:
Pro Rata Share ______%
Commitment $____________
Agreed to and accepted this ___
day of ___________, 199_
SOCIETE GENERALE, as Administrative Agent
By____________________________
Each of the undersigned Borrowers hereby confirms its acceptance of the Assignee
as an Eligible Assignee.
STELLEX INDUSTRIES, INC.
By____________________________
Name:
Title:
KII HOLDING CORP.
By____________________________
Name:
Title:
TSMD ACQUISITION CORP.
By____________________________
Name:
Title:
-5-
<PAGE>
KII ACQUISITION CORP.
By____________________________
Name:
Title:
STELLEX MICROWAVE SYSTEMS, INC.
By____________________________
Name:
Title:
STELLEX AEROSPACE
By____________________________
Name:
Title:
PARAGON PRECISION PRODUCTS
By____________________________
Name:
Title:
BANDY MACHINING INTERNATIONAL
By____________________________
Name:
Title:
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By____________________________
Name:
Title:
-6-
<PAGE>
GENERAL INSPECTION
LABORATORIES, INC.
By____________________________
Name:
Title:
-7-
<PAGE>
EXHIBIT B
Form of Borrowing Base Certificate
BORROWING BASE CERTIFICATE
To: Societe Generale, in its capacity as administrative agent (the
"Administrative Agent") and First Union Commercial Corporation, in its
capacity as collateral agent (the "Collateral Agent") for the Lenders (as
defined below) under that certain Credit Agreement dated as of October 31,
1997 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement") among Stellex Industries, Inc., KII Holding Corp., TSMD
Acquisition Corp., KII Acquisition Corp., Stellex Microwave Systems, Inc.,
Stellex Aerospace, Paragon Precision Products, Bandy Machining
International, Scanning Electron Analysis Laboratories, Inc., and General
Inspection Laboratories, Inc. (each individually, a "Borrower", and
collectively, the "Borrowers"), the financial institutions from time to
time party thereto (the "Lenders"), the Administrative Agent, the
Collateral Agent, and First Union Commercial Corporation, as syndication
agent.
Pursuant to the provisions of the Credit Agreement, the undersigned hereby
certifies that:
1. I am the duly [elected] [appointed], qualified and acting [Chief
Financial Officer]1 of Stellex Industries, Inc.
2. Unless otherwise defined herein, terms are used herein as defined in the
Credit Agreement.
3. The information set forth below with respect to Inventory and
Receivables of the Borrowers as of the close of business on ________________ is
true, accurate and complete.
A. Inventory
Total Inventory: __________________
(less) non-Eligible Inventory: __________________
equals [Eligible Inventory: __________________]
[--------------------
--------------------
--------------------]
- --------
1 Insert title if being delivered by other office or member of management of
Stellex Industries, Inc. with significant responsibility for its financial
affairs.
<PAGE>
50% of Eligible Inventory: __________________ ("T1")
B. Receivables
Total Receivables: __________________
(less) [non-Eligible Receivables: __________________]
[--------------------
--------------------
--------------------]
equals Eligible Receivables: __________________
85% of Eligible Receivables: __________________ ("T2")
C. Borrowing Base (preliminary calculation)
Sum of T1 plus T2 (from above): _______________
4. I hereby certify that the information contained in this certificate is
true, complete and accurate, and acknowledge that the preliminary calculation of
the Borrowing Base is an accurate calculation and is based on the information
contained in this certificate.
STELLEX INDUSTRIES, INC.
By:_______________________
Name:
-2-
<PAGE>
EXHIBIT C
Form of Notice of Borrowing
NOTICE OF BORROWING
To: Societe Generale, in its capacity as administrative agent (with its
successors in such capacity, the "Administrative Agent") for the Lenders
(as defined below) under the Credit Agreement dated as of October __, 1997
(as amended, restated, supplemented or otherwise modified from time to
time, the "Credit Agreement")1 among Stellex Industries, Inc., a Delaware
corporation, KII Holding Corp., a Delaware corporation, TSMD Acquisition
Corp., a Delaware corporation, KII Acquisition Corp., a Delaware
corporation, Stellex Microwave Systems, Inc., a California corporation,
Stellex Aerospace, a California corporation, Paragon Precision Products, a
California corporation, Bandy Machining International, a California
corporation, Scanning Electron Analysis Laboratories, Inc., a California
corporation, and General Inspection Laboratories, Inc., a California
corporation (collectively, the "Borrowers", and individually, a
"Borrower"), the financial institutions from time to time parties thereto
as lenders (the "Lenders"), First Union Commercial Corporation, in its
capacities as collateral agent and syndication agent for the Lenders, and
the Administrative Agent.
Pursuant to Section [2.01(b)][2.02(b)] of the Credit Agreement, this Notice
of Borrowing (this "Notice") represents the request of all of the Borrowers to
borrow on [the date hereof] [_______________, 199__ ](the "Funding Date")from
the Lenders the principal amount of [Revolving Loans]2 [Term Loans]3
- --------
1 Unless otherwise defined herein, terms defined in the Credit Agreement
shall have the same meanings in this Notice.
2 For Borrowings of Revolving Loans, a Notice of Borrowing must be given (i)
no later than 12:00 P.M. (New York time) on the proposed Funding Date, in
the case of a Borrowing consisting of Base Rate Loans, and (ii) no later
than 12:00 P.M. (New York time) at least two (2) Business Days in advance
of the proposed Funding Date, in the case of a Borrowing consisting of
Eurodollar Rate Loans.
3 The request to borrow Term Loans must be given no later than 12:00 P.M.
(New York time) at least one (1) Business Day in advance of the proposed
Funding Date.
<PAGE>
of $______________ as [Base Rate Loans] [Eurodollar Rate Loans]4. [The Interest
Period for such Eurodollar Rate Loans is requested to be a [one, two, three, or
six] month period.] Proceeds of such Loans are to be deposited on the Funding
Date into the [insert name of appropriate account]. [The Availability as of the
date hereof is $_____________.]5
Each of the undersigned certifies that as of the Funding Date all of the
conditions precedent contained in [Sections 5.01,]6 5.02 [and 5.03]7 of the
Credit Agreement have been satisfied (or waived pursuant to Section 13.09 of the
Credit Agreement) and that all representations and warranties of the Borrowers
set forth in Section 6.01 of the Credit Agreement and the other Loan Documents
are true and correct in all material respects on the Funding Date (other than
representations and warranties which expressly speak as of another date).
Dated this ___ day of ___________, 199_.
STELLEX INDUSTRIES, INC.
By:_________________________________
Title:___________________________
KII HOLDING CORP.
- --------
4 Term Loans may only be made as Base Rate Loans but may be converted to
Eurodollar Rate Loans pursuant to Section 4.01(c) of the Credit Agreement.
5 To be used for Revolving Loans.
6 To be used for Loans to be made on the Closing Date.
7 To be used for Term Loans.
-2-
<PAGE>
By:_________________________________
Title:___________________________
TSMD ACQUISITION CORP.
By:_________________________________
Title:___________________________
KII ACQUISITION CORP.
By:_________________________________
Title:___________________________
STELLEX MICROWAVE SYSTEMS, INC.
By:_________________________________
Title:___________________________
STELLEX AEROSPACE
By:_________________________________
Title:___________________________
PARAGON PRECISION PRODUCTS
-3-
<PAGE>
By:_________________________________
Title:___________________________
BANDY MACHINING INTERNATIONAL
By:_________________________________
Title:___________________________
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By:_________________________________
Title:___________________________
GENERAL INSPECTION LABORATORIES, INC.
By:_________________________________
Title:___________________________
-4-
<PAGE>
EXHIBIT D
Form of Notice of Conversion/Continuation
To: Societe Generale, in its capacity as administrative agent (with its
successors in such capacity, the "Administrative Agent") for the Lenders
(as defined below) under the Credit Agreement dated as of October __, 1997
(as amended, restated, supplemented or otherwise modified from time to
time, the "Credit Agreement") among Stellex Industries, Inc., a Delaware
corporation, KII Holding Corp., a Delaware corporation, TSMD Acquisition
Corp., a Delaware corporation, KII Acquisition Corp., a Delaware
corporation, Stellex Microwave Systems, Inc., a California corporation,
Stellex Aerospace, a California corporation, Paragon Precision Products, a
California corporation, Bandy Machining International, a California
corporation, Scanning Electron Analysis Laboratories, Inc., a California
corporation, and General Inspection Laboratories, Inc., a California
corporation (collectively, the "Borrowers", and individually, a
"Borrower"), the financial institutions from time to time parties thereto
as lenders (the "Lenders"), First Union Commercial Corporation, in its
capacities as collateral agent and syndication agent for the Lenders, and
the Administrative Agent.
Pursuant to Section 4.01(c)(ii) of the Credit Agreement, this Notice of
Conversion/Continuation (this "Notice") represents the election of the Borrowers
to:
[1. Convert $_____________1 in aggregate principal amount of Base Rate
Loans to Eurodollar Rate Loans on __________________, 199_.2 The initial
Interest Period for such Eurodollar Rate Loans is requested to be a [one, two,
three or six] month period.]
- --------
1/Must be in a principal amount of at least $500,000 and in integral multiples
of $100,000 in excess of that amount.
2/Must be a Business Day at least two (2) Business Days following the Business
Day on which the Notice of Conversion/Continuation is delivered to the
Administrative Agent.
<PAGE>
[2. Convert $_____________ in aggregate principal amount of outstanding
Eurodollar Rate Loans to Base Rate Loans on __________________, 199__.3]
[3. Continue as Eurodollar Rate Loans $________________4 in aggregate
principal amount of Revolving Loans consisting of Eurodollar Rate Loans with a
current Interest Period ending ________________, 199__. The succeeding Interest
Period for such Eurodollar Rate Loans is requested to be a [one, two, three or
six] month period.]
[Each of the Borrowers hereby certifies that (i) the proposed
[continuation] [conversion] would not violate any provisions of Section 4.02 of
the Credit Agreement, (ii) no Event of Default would occur or has occurred and
is continuing under the Credit Agreement and (iii) all representations and
warranties of the Borrowers set forth in Section 6.01 of the Credit Agreement
and the other Loan Documents are and will be true and correct in all material
respects on the date of the proposed [continuation] [conversion] (other than
representations and warranties which expressly speak as of the Closing Date).]5
- --------
3/Must be a Business Day at least two (2) Business Days following the Business
Day on which the Notice of Conversion/Continuation is delivered to the
Administrative Agent. Must also be the date of expiration of the relevant
Interest Period[s].
4/Must be a Business Day at least two (2) Business Days following the Business
Day on which the Notice of Conversion/Continuation is delivered to the
Administrative Agent. Must also be in a principal amount of at least $500,000
and in integral multiples of $100,000 in excess of that amount.
5/To be used for continuations of, and conversions into, Eurodollar Rate Loans.
-2-
<PAGE>
Unless otherwise defined herein, terms defined in the Credit Agreement
shall have the same meanings in this Notice.
Dated this ____ day of ______________, 199__.
STELLEX INDUSTRIES, INC.
By:_______________________________
Title:_________________________
KII HOLDING CORP.
By:_______________________________
Title:_________________________
TSMD ACQUISITION CORP.
By:_______________________________
Title:_________________________
KII ACQUISITION CORP.
By:_______________________________
Title:_________________________
STELLEX MICROWAVE SYSTEMS, INC.
By:_______________________________
Title:_________________________
-3-
<PAGE>
STELLEX AEROSPACE
By:_______________________________
Title:_________________________
PARAGON PRECISION PRODUCTS
By:_______________________________
Title:_________________________
BANDY MACHINING INTERNATIONAL
By:_______________________________
Title:_________________________
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By:_______________________________
Title:_________________________
GENERAL INSPECTION LABORATORIES, INC.
By:_______________________________
Title:_________________________
-4-
<PAGE>
EXHIBIT E
$50,000,000
SECURED CREDIT FACILITY
to
STELLEX INDUSTRIES, INC.
KII HOLDING CORP.
TSMD ACQUISITION CORP.
KII ACQUISITION CORP.
STELLEX MICROWAVE SYSTEMS, INC.
STELLEX AEROSPACE
PARAGON PRECISION PRODUCTS
BANDY MACHINING INTERNATIONAL
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
GENERAL INSPECTION LABORATORIES, INC.
LIST OF CLOSING DOCUMENTS(1)
A. Loan Documents
1. Credit Agreement, dated as of October 31, 1997 (the "Agreement") among
STELLEX INDUSTRIES, INC., a Delaware corporation, KII HOLDING CORP., a
Delaware corporation, TSMD ACQUISITION CORP., a Delaware corporation, KII
ACQUISITION CORP., a Delaware corporation, STELLEX MICROWAVE SYSTEMS, INC., a
California corporation, STELLEX AEROSPACE, a California corporation, PARAGON
PRECISION PRODUCTS, a California corporation, BANDY MACHINING INTERNATIONAL, a
California corporation, SCANNING ELECTRON ANALYSIS LABORATORIES, INC., a
California corporation, and GENERAL INSPECTION LABORATORIES, INC., a
California corporation (collectively, the "Borrowers", and individually, a
"Borrower"), the financial institutions from time to time parties thereto,
whether by execution of this Agreement or an Assignment and Acceptance (the
"Lenders"), SOCIETE GENERALE ("SocGen"), in its capacity as administrative
agent for the Lenders (in such capacity, the "Administrative Agent"), and
FIRST UNION COMMERCIAL CORPORATION, in its capacity as collateral agent (the
"Collateral Agent") and syndication agent (the "Syndication Agent",
collectively, with the Administrative Agent and the Collateral Agent the
"Agents"), evidencing a secured credit facility to be made available to the
Borrowers of up to $50,000,000 with the Exhibits and Schedules listed below
attached thereto:
- --------
1 Unless otherwise defined herein, capitalized terms used herein have
the meanings ascribed to them in the Agreement.
1
<PAGE>
EXHIBITS
Exhibit A -- Form of Assignment and Acceptance
Exhibit B -- Form of Borrowing Base Certificate
Exhibit C -- Form of Notice of Borrowing
Exhibit D -- Form of Notice of Conversion/Continuation
Exhibit E -- List of Closing Documents
Exhibit F-1 -- Form of Revolving Loan Note
Exhibit F-2 -- Form of Term Loan Note
Exhibit G -- Form of Officer's Certificate
Exhibit H -- Form of Compliance Certificate
Exhibit I -- Form of Replacement Certificate
Exhibit J -- Form of Guaranty
Exhibit K -- Form of Cash Collateral Pledge Agreement
Exhibit L -- Form of Security Agreement
Exhibit M -- Form of Pledge Agreement
Exhibit N -- Form of Patent Security Agreement
SCHEDULES
Schedule 1.01(A) -- Permitted Existing Indebtedness
Schedule 1.01(B) -- Permitted Existing Liens
Schedule 1.05 -- Knowledge
Schedule 5.01(A) -- Consents to be Obtained
Schedule 5.03(A) -- Representations and Warranties
Schedule 5.03(B) -- Covenants
Schedule 6.01(C) -- Ownership
Schedule 6.01(D) -- No Conflict
Schedule 6.01(E) -- Governmental Consents to be Sought
Schedule 6.01(J) -- Litigation; Adverse Effects
Schedule 6.01(L) -- Payment of Taxes
Schedule 6.01(P) -- Environmental Matters
Schedule 6.01(Q) -- ERISA Matters
Schedule 6.01(U) -- Governmental Permits
Schedule 6.01(W) -- Insurance
Schedule 6.01(Z) -- Bank Accounts
Schedule 8.12 -- Post-Closing Matters
2. Revolving Loan Notes made by the Borrowers in favor of
each Lender in the principal amount of such Lender's Revolving Loan
Commitment.
3. Term Loan Notes made by the Borrowers in favor of each
Lender in the principal amount of such Lender's Term Loan Commitment.
B. Collateral Documents
4. Guaranty made by the Borrowers in favor of the Agents and
the Lenders, pursuant to which each Borrower guaranties the obligations of
each other Borrower under the Agreement and under such Guaranty.
2
<PAGE>
5. Contribution Agreement executed by each Loan Party in
favor of each other Loan Party.
6. Security Agreement executed by Stellex Industries,
Inc. in favor of the Collateral Agent, for the benefit of the
Agents, the Lenders, and the other Holders, pursuant to which
Stellex Industries, Inc. grants to the Collateral Agent a
security interest in all of its personal property.
7. Security Agreement executed by KII Holding Corp. in favor
of the Collateral Agent, for the benefit of the Agents, the Lenders, and the
other Holders, pursuant to which KII Holding Corp. grants to the Collateral
Agent a security interest in all of its personal property.
8. Security Agreement executed by TSMD Acquisition Corp. in
favor of the Collateral Agent, for the benefit of the Agents, the Lenders, and
the other Holders, pursuant to which TSMD Acquisition Corp. grants to the
Collateral Agent a security interest in all of its personal property.
9. Security Agreement executed by KII Acquisition Corp. in
favor of the Collateral Agent, for the benefit of the Agents, the Lenders, and
the other Holders, pursuant to which KII Acquisition Corp. grants to the
Collateral Agent a security interest in all of its personal property.
10. Security Agreement executed by Stellex Microwave
Systems, Inc. in favor of the Collateral Agent, for the benefit of the Agents,
the Lenders, and the other Holders, pursuant to which Stellex Microwave
Systems, Inc. grants to the Collateral Agent a security interest in all of its
personal property.
11. Security Agreement executed by Stellex Aerospace in
favor of the Collateral Agent, for the benefit of the Agents, the Lenders, and
the other Holders, pursuant to which Stellex Aerospace grants to the
Collateral Agent a security interest in all of its personal property.
12. Security Agreement executed by Paragon Precision
Products in favor of the Collateral Agent, for the benefit of the Agents, the
Lenders, and the other Holders, pursuant to which Paragon Precision Products
grants to the Collateral Agent a security interest in all of its personal
property.
13. Security Agreement executed by Bandy Machining
International in favor of the Collateral Agent, for the benefit of the Agents,
the Lenders, and the other Holders, pursuant to which Bandy Machining
International grants to the Collateral Agent a security interest in all of its
personal property.
14. Security Agreement executed by Scanning Electron
Analysis Laboratories, Inc. in favor of the Collateral Agent, for
3
<PAGE>
the benefit of the Agents, the Lenders, and the other Holders,
pursuant to which Scanning Electron Analysis Laboratories, Inc.
grants to the Collateral Agent a security interest in all of its
personal property.
15. Security Agreement executed by General Inspection
Laboratories, Inc. in favor of the Collateral Agent, for the benefit of the
Agents, the Lenders, and the other Holders, pursuant to which General
Inspection Laboratories, Inc. grants to the Collateral Agent a security
interest in all of its personal property.
16. Patent Security Agreement executed by Stellex Microwave
Systems, Inc. in favor of the Collateral Agent, for the benefit of the Agents,
the Lenders, and the other Holders, pursuant to which Stellex Microwave
Systems, Inc. grants to the Collateral Agent a security interest in all of its
patents and patent licenses.
17. Patent Security Agreement executed by TSMD Acquisition
Corp. in favor of the Collateral Agent, for the benefit of the Agents, the
Lenders, and the other Holders, pursuant to which TSMD Acquisition Corp.
grants to the Collateral Agent a security interest in all of its patents and
patent licenses.
18. Cash Collateral Pledge Agreement executed by each of the
Borrowers in favor of the Collateral Agent, for the benefit of the Agents, the
Lenders and the other Holders, evidencing the pledge of the Cash Collateral
Account.
19. Pledge Agreement executed by Stellex Industries, Inc. in
favor of the Collateral Agent, for the benefit of the Agents, the Lenders and
the other Holders, evidencing the pledge of (i) all the promissory notes held
by Stellex Industries, Inc., together with such original promissory notes duly
endorsed and in transferable form; and (ii) all the issued and outstanding
capital stock of KII Holding Corp. owned by Stellex Industries, Inc. and all
the issued and outstanding capital stock of TSMD Acquisition Corp., together
with stock certificates and appropriate stock powers undated and endorsed in
blank.
20. Pledge Agreement executed by TSMD Acquisition Corp. in
favor of the Collateral Agent, for the benefit of the Agents, the Lenders and
the other Holders, evidencing the pledge of all the issued and outstanding
capital stock of Stellex Microwave Systems, Inc., together with stock
certificates and appropriate stock powers undated and endorsed in blank.
21. Pledge Agreement executed by KII Holding Corp. in favor
of the Collateral Agent, for the benefit of the Agents, the Lenders and the
other Holders, evidencing the pledge of all the issued and outstanding capital
stock of KII Acquisition Corp.,
4
<PAGE>
together with stock certificates and appropriate stock powers undated and
endorsed in blank.
22. Pledge Agreement executed by KII Acquisition Corp. in
favor of the Collateral Agent, for the benefit of the Agents, the Lenders and
the other Holders, evidencing the pledge of all the issued and outstanding
capital stock of Stellex Aerospace, together with stock certificates and
appropriate stock powers undated and endorsed in blank.
23. Pledge Agreement executed by Stellex Aerospace in favor
of the Collateral Agent, for the benefit of the Agents, the Lenders and the
other Holders, evidencing the pledge of all the issued and outstanding stock
of Bandy Machining International, Scanning Electron Analysis Laboratories,
Inc. and General Inspection Laboratories, Inc., together with stock
certificates and appropriate stock powers undated and endorsed in blank.
24. Consent of Watkins-Johnson Company
25. UCC Lien Search Reports of filings against each Borrower
in the offices with respect to each set forth on Schedule I hereto.
26. Tax Lien and Judgment Search Reports relating to each
Borrower in the offices with respect to each set forth on Schedule I hereto.
27. UCC-1 Financing Statements (the "UCC-1 Financing
Statements") to be filed against each Borrower in the offices with respect to
each set forth on Schedule III hereto.
28. UCC-3 Termination Statements (the "UCC-3 Termination
Statements") to be filed with respect to each of KII Acquisition Corp., KII
Holding Corp., Kleinert Industries, Inc., Paragon Precision Products, Bandy
Machining International, Scanning Electron Analysis Laboratories, Inc., and
General Inspection Laboratories, Inc. in the offices with respect to each set
forth on Schedule II hereto.
29. Loss Payable Endorsement(s) relating to insurance
policies covering the Collateral (with insurance certificate(s) attached).
C. Corporate Documents
30. Certificate of Incorporation of Stellex Industries, Inc.
together with all amendments thereto certified by the Secretary of State of
Delaware and Good Standing Certificates for Stellex Industries, Inc. from the
appropriate offices of the states set forth on Schedule IV hereto under the
heading "Stellex Industries, Inc. Good Standing Certificates".
5
<PAGE>
31. Certificate of Incorporation of KII Holding Corp.
together with all amendments thereto certified by the Secretary of State of
Delaware and Good Standing Certificates for KII Holding Corp. from the
appropriate offices of the states set forth on Schedule IV hereto under the
heading "KII Holding Corp.
Good Standing Certificates".
32. Certificate of Incorporation of TSMD Acquisition
Corp. together with all amendments thereto certified by the
Secretary of State of Delaware and Good Standing Certificates for
TSMD Acquisition Corp. from the appropriate offices of the states
set forth on Schedule IV hereto under the heading "TSMD
Acquisition Corp. Good Standing Certificates".
33. Certificate of Incorporation of KII Acquisition
Corp. together with all amendments thereto certified by the
Secretary of State of Delaware and Good Standing Certificates for
KII Acquisition Corp. from the appropriate offices of the states
set forth on Schedule IV hereto under the heading "KII
Acquisition Corp. Good Standing Certificates".
34. Certificate of Incorporation of Stellex Microwave
Systems, Inc. together with all amendments thereto certified by the Secretary
of State of California and Good Standing Certificates for Stellex Microwave
Systems, Inc. from the appropriate offices of the states set forth on Schedule
IV hereto under the heading "Stellex Microwave Systems, Inc. Good Standing
Certificates".
35. Certificate of Incorporation of Stellex Aerospace
together with all amendments thereto certified by the Secretary of State of
California and Good Standing Certificates for Stellex Aerospace from the
appropriate offices of the states set forth on Schedule IV hereto under the
heading "Stellex Aerospace Good Standing Certificates".
36. Certificate of Incorporation of Paragon Precision
Products together with all amendments thereto certified by the Secretary of
State of California and Good Standing Certificates for Paragon Precision
Products from the appropriate offices of the states set forth on Schedule IV
hereto under the heading "Paragon Precision Products Good Standing
Certificates".
37. Certificate of Incorporation of Bandy Machining
International together with all amendments thereto certified by the Secretary
of State of California and Good Standing Certificates for Bandy Machining
International from the appropriate offices of the states set forth on Schedule
IV hereto under the heading "Bandy Machining International Good Standing
Certificates".
38. Certificate of Incorporation of Scanning Electron
Analysis Laboratories, Inc. together with all amendments thereto
6
<PAGE>
certified by the Secretary of State of California and Good
Standing Certificates for Scanning Electron Analysis
Laboratories, Inc. from the appropriate offices of the states set
forth on Schedule IV hereto under the heading "Scanning Electron
Analysis Laboratories, Inc. Good Standing Certificates".
39. Certificate of Incorporation of General Inspection
Laboratories, Inc. together with all amendments thereto certified by the
Secretary of State of California and Good Standing Certificates for General
Inspection Laboratories, Inc. from the appropriate offices of the states set
forth on Schedule IV hereto under the heading "General Inspection
Laboratories, Inc. Good Standing Certificates".
40. Certificate of the Secretary of Stellex Industries,
Inc., certifying, among other things, (i) resolutions of the Board of
Directors authorizing the Agreement, the Notes and the Loan Documents to which
it is a party, (ii) the names and signatures of the officers of the Company
authorized on behalf of such company to execute the Agreement, the Notes and
the Loan Documents to which it is a party and the other instruments and
documents to be executed and delivered on behalf of such company, (iii) that
attached thereto is a true and correct copy of the Bylaws of such company as
in effect on the date of such certification, and (iv) that there have been no
changes in the Certificate of Incorporation of such company since the date of
the most recent certification thereof by the Secretary of State of Delaware.
41. Certificate of the Secretary of KII Holding Corp.,
certifying, among other things, (i) resolutions of the Board of Directors
authorizing the Agreement, the Notes and the Loan Documents to which it is a
party, (ii) the names and signatures of the officers of the Company authorized
on behalf of such company to execute the Agreement, the Notes and the Loan
Documents to which it is a party and the other instruments and documents to be
executed and delivered on behalf of such company, (iii) that attached thereto
is a true and correct copy of the Bylaws of such company as in effect on the
date of such certification, and (iv) that there have been no changes in the
Certificate of Incorporation of such company since the date of the most recent
certification thereof by the Secretary of State of Delaware.
42. Two Certificates of the Secretary of TSMD Acquisition
Corp., the first such certificate certifying, among other things, (i)
resolutions of the Board of Directors authorizing the Agreement, the Notes and
the Loan Documents to which it is a party, (ii) the names and signatures of
the officers of the Company authorized on behalf of such company to execute
the Agreement, the Notes and the Loan Documents to which it is a party and the
other instruments and documents to be executed and delivered on behalf of such
company, (iii) that
7
<PAGE>
attached thereto is a true and correct copy of the By-laws of such company as
in effect on the date of such certification, and (iv) that there have been no
changes in the Certificate of Incorporation of such company since the date of
the most recent certification thereof by the Secretary of State of Delaware,
and the second such certificate certifying resolutions of the Board of
Directors authorizing the Watkins-Johnson Acquisition Agreement and the
transaction contemplated thereby.
43. Certificate of the Secretary of KII Acquisition Corp.,
certifying, among other things, (i) resolutions of the Board of Directors
authorizing the Agreement, the Notes and the Loan Documents to which it is a
party, (ii) the names and signatures of the officers of the Company authorized
on behalf of such company to execute the Agreement, the Notes and the Loan
Documents to which it is a party and the other instruments and documents to be
executed and delivered on behalf of such company, (iii) that attached thereto
is a true and correct copy of the Bylaws of such company as in effect on the
date of such certification, and (iv) that there have been no changes in the
Certificate of Incorporation of such company since the date of the most recent
certification thereof by the Secretary of State of Delaware.
44. Two Certificates of the Secretary of Stellex Microwave
Systems, Inc., the first such certificate certifying, among other things, (i)
resolutions of the Board of Directors authorizing the Agreement, the Notes and
the Loan Documents to which it is a party, (ii) the names and signatures of
the officers of the Company authorized on behalf of such company to execute
the Agreement, the Notes and the Loan Documents to which it is a party and the
other instruments and documents to be executed and delivered on behalf of such
company, (iii) that attached thereto is a true and correct copy of the By-laws
of such company as in effect on the date of such certification, and (iv) that
there have been no changes in the Certificate of Incorporation of such company
since the date of the most recent certification thereof by the Secretary of
State of California, and the second such certificate certifying resolutions of
the Board of Directors authorizing the Watkins-Johnson Acquisition Agreement
and the transaction contemplated thereby.
45. Certificate of the Secretary of Stellex Aerospace,
certifying, among other things, (i) resolutions of the Board of Directors
authorizing the Agreement, the Notes and the Loan Documents to which it is a
party, (ii) the names and signatures of the officers of the Company authorized
on behalf of such company to execute the Agreement, the Notes and the Loan
Documents to which it is a party and the other instruments and documents to be
executed and delivered on behalf of such company, (iii) that attached thereto
is a true and correct copy of the Bylaws of such company as in effect on the
date of such certification, and (iv) that there have been no changes in the
8
<PAGE>
Certificate of Incorporation of such company since the date of the most recent
certification thereof by the Secretary of State of California.
46. Certificate of the Secretary of Paragon Precision
Products, certifying, among other things, (i) resolutions of the Board of
Directors authorizing the Agreement, the Notes and the Loan Documents to which
it is a party, (ii) the names and signatures of the officers of the Company
authorized on behalf of such company to execute the Agreement, the Notes and
the Loan Documents to which it is a party and the other instruments and
documents to be executed and delivered on behalf of such company, (iii) that
attached thereto is a true and correct copy of the Bylaws of such company as
in effect on the date of such certification, and (iv) that there have been no
changes in the Certificate of Incorporation of such company since the date of
the most recent certification thereof by the Secretary of State of California.
47. Certificate of the Secretary of Bandy Machining
International, certifying, among other things, (i) resolutions of the Board of
Directors authorizing the Agreement, the Notes and the Loan Documents to which
it is a party, (ii) the names and signatures of the officers of the Company
authorized on behalf of such company to execute the Agreement, the Notes and
the Loan Documents to which it is a party and the other instruments and
documents to be executed and delivered on behalf of such company, (iii) that
attached thereto is a true and correct copy of the Bylaws of such company as
in effect on the date of such certification, and (iv) that there have been no
changes in the Certificate of Incorporation of such company since the date of
the most recent certification thereof by the Secretary of State of California.
48. Certificate of the Secretary of Scanning Electron
Analysis Laboratories, Inc., certifying, among other things, (i) resolutions
of the Board of Directors authorizing the Agreement, the Notes and the Loan
Documents to which it is a party, (ii) the names and signatures of the
officers of the Company authorized on behalf of such company to execute the
Agreement, the Notes and the Loan Documents to which it is a party and the
other instruments and documents to be executed and delivered on behalf of such
company, (iii) that attached thereto is a true and correct copy of the By-laws
of such company as in effect on the date of such certification, and (iv) that
there have been no changes in the Certificate of Incorporation of such company
since the date of the most recent certification thereof by the Secretary of
State of California.
49. Certificate of the Secretary of General Inspection
Laboratories, Inc., certifying, among other things, (i) resolutions of the
Board of Directors authorizing the Agreement, the Notes and the Loan Documents
to which it is a
9
<PAGE>
party, (ii) the names and signatures of the officers of the Company authorized
on behalf of such company to execute the Agreement, the Notes and the Loan
Documents to which it is a party and the other instruments and documents to be
executed and delivered on behalf of such company, (iii) that attached thereto
is a true and correct copy of the By-laws of such company as in effect on the
date of such certification, and (iv) that there have been no changes in the
Certificate of Incorporation of such company since the date of the most recent
certification thereof by the Secretary of State of California.
D. Opinions
50. Opinion of counsel for the Borrowers, Winston & Strawn,
addressed to the Agents and the Lenders.
51. Opinion of the following Local Counsel for the Borrowers
in respect of personal property matters, addressed to the Agents and the
Lenders:
a. California
52. Opinion of Murray Devine & Co. addressed to the
Agents and the Lenders concerning the solvency of each Borrower
after giving effect to the transactions contemplated by the
Transaction Documents.
E. Acquisition Documents
53. a copy of the Stock Purchase Agreement, dated as of
August 29, 1997 by and among TSMD Acquisition Corp., Watkins- Johnson Company
and Stellex Microwave Systems, Inc. (formerly known as W-J TSMC, Inc.,
together with all schedules thereto, certified as a true and complete copy by
an officer of Stellex Industries, Inc.
F. Subordinated Note Documents
54. a copy of the Subordinated Note Indenture, together with
all schedules and exhibits thereto, certified as a true and complete copy by
an officer of Stellex Industries, Inc.
G. Other Agreements
55. a copy of the Management Participation Agreement.
56. a copy of the Management Agreement.
10
<PAGE>
57. a copy of the Tax Allocation and Indemnity
Agreement dated as of October 31, 1997 among Stellex Industries,
Inc. and its Subsidiaries named therein.
H. Miscellaneous
58. Publication Consent executed by each Borrower.
59. Notice of Borrowing for the Loans to be advanced on the
Closing Date.
60. Letter from Process Agent, Mentmore Holdings
Corporation, accepting an appointment in New York as agent for service for
service of process for each Borrower.
61. Insurance Certificates or other insurance information
satisfactory to the Collateral Agent.
62. Borrowing Base Certificate.
63. Funds Flow Memorandum outlining the flow of funds to
occur on the Closing Date.
64. Certificate of the Chief Financial Officer certifying as
to pro-forma consolidated balance sheets of Stellex Industries, Inc. and its
Subsidiaries as of June 30, 1997 with adjustments as of the Closing Date,
giving effect to the transactions contemplated in the Transaction Documents.
65. Officer's Certificate of Stellex Industries, Inc.
setting forth the names of persons authorized to request Loans.
G. Postclosing Matters
66. Post-Closing Lien Search Reports of filings against each
Borrower in the offices with respect to each set forth on Schedule V hereto.
11
<PAGE>
SCHEDULE I
Jurisdictions Searched
STELLEX INDUSTRIES, INC.
California
Secretary of State UCC, TL, PSJ
Los Angeles County UCC, FF, TL, PSJ
STELLEX HOLDING CORP.
California
Secretary of State UCC
KII HOLDING CORP.
New York
Secretary of State UCC, TL, PSJ
New York County UCC, FF, TL, PSJ
TSMD ACQUISITION CORP.
California
Secretary of State UCC, TL, PSJ
Santa Clara County UCC, FF, TL, PSJ
KII ACQUISITION CORP.
California
Secretary of State UCC, TL, PSJ
Los Angeles County UCC, FF, TL, PSJ
W-J TSMD Inc. (now known as Stellex Microwave Systems, Inc.)
California
Secretary of State UCC, TL, PSJ
Santa Clara County UCC, FF, TL, PSJ
STELLEX AEROSPACE
California
Secretary of State UCC, TL, PSJ
Los Angeles County UCC, FF, TL, PSJ
12
<PAGE>
RICHARDSON X-RAY, INC.
California
Secretary of State UCC
PARAGON PRECISION PRODUCTS
California
Secretary of State UCC, TL, PSJ
Los Angeles County UCC, FF, TL, PSJ
BANDY MACHINING INTERNATIONAL
California
Secretary of State UCC, TL, PSJ
Los Angeles County UCC, FF, TL, PSJ
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
California
Secretary of State UCC, TL, PSJ
Los Angeles County UCC, FF, TL, PSJ
GENERAL INSPECTION LABORATORIES, INC.
California
Secretary of State UCC, TL, PSJ
Los Angeles County UCC, FF, TL, PSJ
WATKINS-JOHNSON COMPANY
California
Secretary of State UCC, TL, PSJ
Santa Clara County UCC, FF, TL, PSJ
EXPLANATION:
UCC = UCC-1s, UCC-2s and UCC-3s of Record
FF = Fixture Filings
TL = Federal and State Tax Liens and Judgements
PSJ = Pending Suits and Judgments
13
<PAGE>
SCHEDULE II
Jurisdictions Where UCC-3 Termination Statements will be Filed
KII ACQUISITION CORP.
California
Secretary of State
Los Angeles County
KII HOLDING CORP.
New York
Secretary of State
New York County
KLEINERT INDUSTRIES, INC.
California
Secretary of State
Los Angeles County
PARAGON PRECISION PRODUCTS
California
Secretary of State
Los Angeles County
BANDY MACHINING INTERNATIONAL
California
Secretary of State
Los Angeles County
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
California
Secretary of State
Los Angeles County
GENERAL INSPECTION LABORATORIES, INC.
California
Secretary of State
Los Angeles County
14
<PAGE>
SCHEDULE III
Jurisdictions Where UCC-1 Financing Statements will be Filed
STELLEX INDUSTRIES, INC.
New York
Secretary of State
New York County
KII HOLDING CORP.
New York
Secretary of State
New York County
TSMD ACQUISITION CORP.
California
Secretary of State
Santa Clara County
KII ACQUISITION CORP.
California
Secretary of State
Los Angeles County
STELLEX MICROWAVE SYSTEMS, INC.
California
Secretary of State
Santa Clara County
STELLEX AEROSPACE
California
Secretary of State
Los Angeles County
PARAGON PRECISION PRODUCTS
California
Secretary of State
Los Angeles County
BANDY MACHINING INTERNATIONAL
California
Secretary of State
Los Angeles County
15
<PAGE>
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
California
Secretary of State
Los Angeles County
GENERAL INSPECTION LABORATORIES, INC.
California
Secretary of State
Los Angeles County
16
<PAGE>
SCHEDULE IV
Good Standing Certificates
STELLEX INDUSTRIES, INC.
Delaware
KII HOLDING CORP.
Delaware
TSMD ACQUISITION CORP.
Delaware
KII ACQUISITION CORP.
Delaware
STELLEX MICROWAVE SYSTEMS, INC.
California
STELLEX AEROSPACE
California
PARAGON PRECISION PRODUCTS
California
BANDY MACHINING INTERNATIONAL
California
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
California
GENERAL INSPECTION LABORATORIES, INC.
California
17
<PAGE>
SCHEDULE V
Post-Closing Lien Search Reports
STELLEX INDUSTRIES, INC.
New York
Secretary of State
New York County
KII HOLDING CORP.
New York
Secretary of State
New York County
TSMD ACQUISITION CORP.
California
Secretary of State
Santa Clara County
KII ACQUISITION CORP.
California
Secretary of State
Los Angeles County
STELLEX MICROWAVE SYSTEMS, INC.
California
Secretary of State
Santa Clara County
STELLEX AEROSPACE
California
Secretary of State
Los Angeles County
PARAGON PRECISION PRODUCTS
California
Secretary of State
Los Angeles County
BANDY MACHINING INTERNATIONAL
California
Secretary of State
Los Angeles County
18
<PAGE>
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
California
Secretary of State
Los Angeles County
GENERAL INSPECTION LABORATORIES, INC.
California
Secretary of State
Los Angeles County
19
<PAGE>
EXHIBIT F-1
Form of Revolving Loan Note
REVOLVING LOAN NOTE
$__________ October __, 1997
New York, New York
For value received, the undersigned, STELLEX INDUSTRIES, INC., a Delaware
corporation, KII HOLDING CORP., a Delaware corporation, TSMD ACQUISITION CORP.,
a Delaware corporation, KII ACQUISITION CORP., a Delaware corporation, STELLEX
MICROWAVE SYSTEMS, INC., a California corporation, STELLEX AEROSPACE, a
California corporation, PARAGON PRECISION PRODUCTS, a California corporation,
BANDY MACHINING INTERNATIONAL, a California corporation, SCANNING ELECTRON
ANALYSIS LABORATORIES, INC., a California corporation, and GENERAL INSPECTION
LABORATORIES, INC., a California corporation (each a "Borrower" and
collectively, the "Borrowers"), jointly and severally promise to pay to the
order of ______________ (the "Lender"), on the Commitment Termination Date (as
defined in the Credit Agreement referred to below), the lesser of (i) the
principal amount of __________________________ ($__________) or (ii) the unpaid
principal amount of all Revolving Loans made by the Lender to the Borrowers
under the Credit Agreement (referred to below).
The Borrowers also promise to pay interest on the unpaid principal amount
borrowed hereunder from the date advanced until paid at the rates (which shall
not exceed the maximum rate permitted by applicable law) and at the times
determined in accordance with the provisions of the Credit Agreement dated as of
October __, 1997 (as amended, restated, supplemented or otherwise modified from
time to time, the "Credit Agreement") among the Borrowers, the financial
institutions from time to time parties thereto as lenders (the "Lenders"),
Societe Generale, in its capacity as administrative agent for the Lenders (in
such capacity, the "Administrative Agent"), and First Union Commercial
Corporation, in its capacities as collateral agent and syndication agent for the
Lenders. Terms defined in the Credit Agreement and not otherwise defined herein
are used herein with the meanings so defined.
This Note is issued pursuant to, and is entitled to the benefits of, the
Credit Agreement, to which reference is hereby
<PAGE>
made for a more complete statement of the terms and conditions under which the
Revolving Loans evidenced hereby are made and are to be repaid. This Note is
secured by certain of the Loan Documents, and reference is made to such Loan
Documents for the terms and conditions governing the collateral security for the
Obligations of the Borrowers hereunder.
All payments of principal and interest in respect of Revolving Loans shall
be made to the Administrative Agent's Account not later than 1:00 p.m. (New York
time) on the date due in lawful money of the United States of America in
immediately available funds.
This Note may be prepaid at the option of the Borrowers as provided in
Section 3.01(a) of the Credit Agreement and must be prepaid as provided in
Section 3.01(b) of the Credit Agreement.
The Lender shall record in accordance with its usual practice the date and
amount of each Revolving Loan made hereunder and the date and amount of each
payment of principal; provided, however, that the failure to record any such
amount shall not limit or otherwise affect the obligation of the Borrowers to
repay to the Lender the outstanding principal amount evidenced by this Note
together with accrued interest thereon in accordance with the terms of the
Credit Agreement.
Upon the occurrence of any one or more of certain Events of Default, the
unpaid balance of the principal amount of this Note may become, and upon the
occurrence and continuation of any one or more of certain other Events of
Default, such unpaid balance may be declared to be due and payable in the
manner, upon the conditions and with the effect provided in the Credit
Agreement.
No reference herein to the Credit Agreement and no provisions of this Note,
the Credit Agreement or the other Loan Documents shall alter or impair the
obligation of the Borrowers, which is absolute and unconditional, to pay the
principal of and interest on this Note at the place, at the respective times,
and in the currency herein prescribed.
The Borrowers promise to pay all costs and expenses, including reasonable
attorneys' fees and disbursements incurred in the collection and enforcement of
this Note or any appeal of a judgment rendered thereon all in accordance with
the provisions of the Credit Agreement. The Borrowers hereby waive diligence,
presentment, protest, demand and notice of every kind except as required
pursuant to the Credit Agreement.
-2-
<PAGE>
The Credit Agreement and this Note shall be governed by, and shall be
construed and enforced in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the Borrowers have caused this Note to be executed and
delivered by their duly authorized officers, as of the day and year and at the
place first above written.
STELLEX INDUSTRIES, INC.
By:_________________________________
Title:___________________________
KII HOLDING CORP.
By:_________________________________
Title:___________________________
TSMD ACQUISITION CORP.
By:_________________________________
Title:___________________________
KII ACQUISITION CORP.
By:_________________________________
Title:___________________________
STELLEX MICROWAVE SYSTEMS, INC.
By:_________________________________
Title:___________________________
-3-
<PAGE>
STELLEX AEROSPACE
By:_________________________________
Title:___________________________
PARAGON PRECISION PRODUCTS
By:_________________________________
Title:___________________________
BANDY MACHINING INTERNATIONAL
By:_________________________________
Title:___________________________
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By:_________________________________
Title:___________________________
GENERAL INSPECTION LABORATORIES, INC.
By:_________________________________
Title:___________________________
-4-
<PAGE>
EXHIBIT F-2
Form of Term Loan Note
TERM LOAN NOTE
$__________ October __, 1997
New York, New York
For value received, the undersigned, STELLEX INDUSTRIES, INC., a Delaware
corporation, KII HOLDING CORP., a Delaware corporation, TSMD ACQUISITION CORP.,
a Delaware corporation, KII ACQUISITION CORP., a Delaware corporation, STELLEX
MICROWAVE SYSTEMS, INC., a California corporation, STELLEX AEROSPACE, a
California corporation, PARAGON PRECISION PRODUCTS, a California corporation,
BANDY MACHINING INTERNATIONAL, a California corporation, SCANNING ELECTRON
ANALYSIS LABORATORIES, INC., a California corporation, and GENERAL INSPECTION
LABORATORIES, INC., a California corporation, jointly and severally promise to
pay to the order of ______________________________ (the "Lender") the principal
amount of _______________ ($__________) in fifteen (15) substantially equal
consecutive quarterly installments in the principal amount equal to 4.17% of the
Outstanding Term Loan Amount (as defined in the Credit Agreement referred to
below) on the first day of February, May, August and November in each year,
commencing on February 1, 2000 through and including August 1, 2003 and one (1)
installment in the principal amount equal to 37.45% of the Outstanding Term Loan
Amount (as defined in the Credit Agreement referred to below) on October 31,
2003 (the "Maturity Date"); provided, however, that the amount of the last such
installment shall be in the amount necessary to repay in full the outstanding
principal amount of the Term Loan represented by this Note.
The Borrowers also promise to pay interest on the unpaid principal amount
borrowed hereunder from the date advanced until paid at the rates (which shall
not exceed the maximum rate permitted by applicable law) and at the times
determined in accordance with the provisions of the Credit Agreement dated as of
October __, 1997 (as amended, restated, supplemented or otherwise modified from
time to time, the "Credit Agreement") among the Borrowers, the financial
institutions from time to time parties thereto as lenders (the "Lenders"),
Societe Generale, in its capacity as administrative agent for the Lenders (in
such capacity, the "Administrative Agent"), and First Union Commercial
Corporation, in its capacities as collateral agent and syndication agent for the
Lenders. Terms defined in the Credit Agreement and not otherwise defined herein
are used herein with the meanings so defined.
<PAGE>
This Note is issued pursuant to, and is entitled to the benefits of, the
Credit Agreement, to which reference is hereby made for a more complete
statement of the terms and conditions under which the Term Loan evidenced hereby
is made and is to be repaid. This Note is secured by certain of the Loan
Documents, and reference is made to such Loan Documents for the terms and
conditions governing the collateral security for the Obligations of the
Borrowers hereunder.
All payments of principal and interest in respect of this Note shall be
made to the Administrative Agent's Account not later than 1:00 p.m. (New York
time) on the date due in lawful money of the United States of America in
immediately available funds.
This Note may be prepaid at the option of the Borrowers as provided in
Section 3.01(a) of the Credit Agreement and must be prepaid as provided in
Section 3.01(b) of the Credit Agreement.
The Lender shall record in accordance with its usual practice the date and
amount of each Term Loan made hereunder and the date and amount of each payment
of principal; provided, however, that the failure to record any such amount
shall not limit or otherwise affect the obligation of the Borrowers to repay to
the Lender the outstanding principal amount evidenced by this Note together with
accrued interest thereon in accordance with the terms of the Credit Agreement.
Upon the occurrence of any one or more of certain Events of Default, the
unpaid balance of the principal amount of this Note may become, and upon the
occurrence and continuation of any one or more of certain other Events of
Default, such unpaid balance may be declared to be due and payable in the
manner, upon the conditions and with the effect provided in the Credit
Agreement.
No reference herein to the Credit Agreement and no provisions of this Note,
the Credit Agreement or the other Loan Documents shall alter or impair the
obligation of the Borrowers, which is absolute and unconditional, to pay the
principal of and interest on this Note at the place, at the respective times,
and in the currency herein prescribed.
The Borrowers promise to pay all costs and expenses, including reasonable
attorneys' fees and disbursements incurred in the collection and enforcement of
this Note or any appeal of a judgment rendered thereon all in accordance with
the provisions of the Credit Agreement. The Borrowers hereby waive diligence,
presentment, protest, demand and notice of every kind except as required
pursuant to the Credit Agreement.
-2-
<PAGE>
The Credit Agreement and this Note shall be governed by, and shall be
construed and enforced in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the Borrowers have caused this Note
to be executed and delivered by their duly authorized officers, as of the day
and year and at the place first above written.
STELLEX INDUSTRIES, INC.
By:_________________________________
Title:___________________________
KII HOLDING CORP.
By:_________________________________
Title:___________________________
TSMD ACQUISITION CORP.
By:_________________________________
Title:___________________________
KII ACQUISITION CORP.
By:_________________________________
Title:___________________________
STELLEX MICROWAVE SYSTEMS, INC.
By:_________________________________
Title:___________________________
-3-
<PAGE>
STELLEX AEROSPACE
By:_________________________________
Title:___________________________
PARAGON PRECISION PRODUCTS
By:_________________________________
Title:___________________________
BANDY MACHINING INTERNATIONAL
By:_________________________________
Title:___________________________
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By:_________________________________
Title:___________________________
GENERAL INSPECTION LABORATORIES, INC.
By:_________________________________
Title:___________________________
-4-
<PAGE>
EXHIBIT G
Form of Officer's Certificate to Accompany Reports
OFFICER'S CERTIFICATE
To: Societe Generale, in its capacity as administrative agent (with its
successors in such capacity, the "Administrative Agent") for the Lenders
(as defined below) under the Credit Agreement dated as of October __, 1997
(as amended, restated, supplemented or otherwise modified from time to
time, the "Credit Agreement") among Stellex Industries, Inc., a Delaware
corporation, KII Holding Corp., a Delaware corporation, TSMD Acquisition
Corp., a Delaware corporation, KII Acquisition Corp., a Delaware
corporation, Stellex Microwave Systems, Inc., a California corporation,
Stellex Aerospace, a California corporation Paragon Precision Products, a
California corporation, Bandy Machining International, a California
corporation, Scanning Electron Analysis Laboratories, Inc., a California
corporation, and General Inspection Laboratories, Inc., a California
corporation (collectively, the "Borrowers", and individually, a
"Borrower"), the financial institutions from time to time party thereto as
lenders (the "Lenders"), the Administrative Agent, and First Union
Commercial Corporation, in its capacities as collateral agent and
syndication agent for the Lenders.
Pursuant to Section 7.01(c) of the Credit Agreement, the __________________
of Stellex Industries, Inc. (the "Parent") hereby certifies that:
1. Unless otherwise defined herein, terms defined in the Credit Agreement
shall have the same meanings in this Certificate.
2. The undersigned has reviewed the terms of the Loan Documents and has
made, or caused to be made under [his][her] supervision, a review in reasonable
detail of the transactions and consolidated financial condition of the Parent
and its Subsidiaries during the accounting period(s) covered by the financial
statements identified below. Such review [has] [has not] disclosed the existence
during or at the end of such accounting period(s), and as at the date hereof the
undersigned [does] [does not] have knowledge of, any condition or event which
constitutes an Event of Default or Default. [If such condition or event exists
or existed, specify (i) nature and period of such condition or event and (ii)
action being taken and/or proposed to be taken with respect thereto.]
<PAGE>
3. The financial statements, reports and copies of certain instruments and
documents attached hereto, namely,
A. ___________________, dated ______________
B. ___________________, dated ______________
C. ___________________, dated ______________
are true and complete copies of the aforesaid which constitute part of the
customary books and reports of the Parent and its Subsidiaries.
STELLEX INDUSTRIES, INC.
By:________________________________
Name:
Title:
-2-
<PAGE>
EXHIBIT I
FORM OF REPLACEMENT CERTIFICATE
To: Societe Generale, in its capacity as administrative agent (with its
successors in such capacity, the "Administrative Agent") for the Lenders
(as defined below) under the Credit Agreement dated as of October __, 1997
(as amended, restated, supplemented or otherwise modified from time to
time, the "Credit Agreement") among Stellex Industries, Inc., a Delaware
corporation, KII Holding Corp., a Delaware corporation, TSMD Acquisition
Corp., a Delaware corporation, KII Acquisition Corp., a Delaware
corporation, Stellex Microwave Systems, Inc., a California corporation,
Stellex Aerospace, a California corporation, Paragon Precision Products, a
California corporation, Bandy Machining International, a California
corporation, Scanning Electron Analysis Laboratories, Inc., a California
corporation, and General Inspection Laboratories, Inc., a California
corporation (collectively, the "Borrowers", and individually, a
"Borrower"), the financial institutions from time to time party thereto as
lenders (the "Lenders"), the Administrative Agent, and First Union
Commercial Corporation, in its capacities as collateral agent and
syndication agent for the Lenders.
Pursuant to Section 7.01(e) of the Credit Agreement,
______________________, the Chief Financial Officer of STELLEX INDUSTRIES, INC.
(the "Parent") hereby certifies, as of _________________ __, 199_, as follows:
1. Unless otherwise defined herein, terms defined in the Credit Agreement
shall have the same meanings in this Certificate.
2. During the period from _________, 199_ to _______, 199_, the Borrowers
received Net Cash Proceeds in the aggregate amount of $_____ as a result of
sales of assets, issuance of Securities or receipt of insurance proceeds as
follows:
[For each sale of assets, issuance of Securities or receipt of insurance
proceeds, (i) indicate amount of Net Cash Proceeds received and date
received, (ii) describe sale, issuance or nature of loss suffered, (iii)
describe replacement asset acquired or Permitted Acquisition consummated
and cost of such asset or Permitted Acquisition.]
3. For each such sale of assets, issuance of Securities or receipt of
insurance proceeds, Net Cash Proceeds
1
<PAGE>
received which were not spent as specifically indicated above have been applied
to repay Loans in accordance with the Credit Agreement.
STELLEX INDUSTRIES, INC.
By:_________________________
Name:
Title: Chief Financial Officer
2
<PAGE>
EXHIBIT J
Form of Guaranty
GUARANTY
This GUARANTY (as amended, supplemented or otherwise modified from time to
time, this "Guaranty") is made as of _______ __, 199_, by STELLEX INDUSTRIES,
INC., a Delaware corporation, KII HOLDING CORP., a Delaware corporation, TSMD
ACQUISITION CORP., a Delaware corporation, KII ACQUISITION CORP., a Delaware
corporation, STELLEX MICROWAVE SYSTEMS, INC., a California corporation, STELLEX
AEROSPACE, a California corporation, PARAGON PRECISION PRODUCTS, a California
corporation, BANDY MACHINING INTERNATIONAL, a California corporation, SCANNING
ELECTRON ANALYSIS LABORATORIES, INC., a California corporation, and GENERAL
INSPECTION LABORATORIES, INC., a California corporation (each individually, a
"Guarantor", and collectively, the "Guarantors"), in favor of the Agents and the
Lenders under that certain Credit Agreement referred to below.
W I T N E S S E T H
WHEREAS, each of the Guarantors is a Borrower under the Credit Agreement
dated as of October __, 1997 (as amended, supplemented or otherwise modified
from time to time, the "Credit Agreement") among such Guarantors, as borrowers
(the "Borrowers"), Societe Generale, as administrative agent (the
"Administrative Agent"), First Union Commercial Corporation, as collateral agent
(the "Collateral Agent") and syndication agent (the "Syndication Agent", and
collectively, with the Administrative Agent and the Collateral Agent, the
"Agents"), and the financial institutions party thereto (the "Lenders").
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Credit Agreement.
WHEREAS, the Lenders and the Agents have required as a condition, among
others, to entering into the Credit Agreement, that each Guarantor guarantee (x)
the Obligations of each other Guarantor as a Borrower under the Credit Agreement
and (y) the obligations of each such other Guarantor under this Guaranty (all
such Obligations and such obligations hereunder, the "Guaranteed Obligations");
NOW THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Guaranty. (i) For value received and in consideration of any loan,
advance or financial accommodation of any kind whatsoever heretofore, now or
hereafter made, given or
<PAGE>
granted to any Borrower by the Lenders, each Guarantor unconditionally
guarantees the full and prompt payment when due, whether at maturity or earlier,
by reason of acceleration or otherwise, and at all times thereafter, of all the
Guaranteed Obligations (including, without limitation, interest accruing
following the filing of a bankruptcy petition by or against any applicable
Borrower, at the applicable rate specified in the Credit Agreement, whether or
not such interest is allowed as a claim in bankruptcy).
(ii) At any time after the occurrence of an Event of Default, each
Guarantor shall pay to the Administrative Agent, for the ratable benefit of the
Agents and the Lenders, on demand and in immediately available funds, the full
amount of the Guaranteed Obligations. Each Guarantor further agrees to pay and
reimburse the Agents and the Lenders for, on demand and in immediately available
funds, (a) all reasonable fees, costs and expenses (including, without
limitation, all court costs and reasonable attorneys' fees, costs and expenses)
paid or incurred by such Person in: (1) endeavoring to collect all or any part
of the Guaranteed Obligations owing to such Person from, or in prosecuting any
action against, the applicable Borrower or Borrowers relating to the Credit
Agreement, this Guaranty or the transactions contemplated thereby; (2) taking
any action with respect to any security or collateral securing the Guaranteed
Obligations; and (3) preserving, protecting or defending the enforceability of,
or enforcing, this Guaranty or the Agents' or the Lenders' rights hereunder (all
such costs and expenses are hereinafter referred to as the "Expenses") and (b)
interest on the Expenses, from the date of demand under this Guaranty until paid
in full at the per annum rate of interest described in Section 4.01(d) of the
Credit Agreement. Each Guarantor hereby agrees that this Guaranty is an absolute
guaranty of payment and is not a guaranty of collection.
(iii) Notwithstanding anything contained in this Guaranty to the contrary,
the amount guaranteed by each Guarantor hereunder shall be limited to an
aggregate amount which, together with other amounts owing by such Guarantor to
the Agents and the Lenders, is equal to the largest amount that would not be
subject to avoidance under Section 548 of Title 11 of the United States Code (11
U.S.C. ss.ss. 101 et seq.) (the "Bankruptcy Code") or any applicable provisions
of any comparable state law.
2. Obligations Unconditional. Each Guarantor hereby agrees that its
obligations under this Guaranty shall be unconditional, irrespective of:
(i) the validity, enforceability, avoidance or subordination of any of
the Guaranteed Obligations or any of the Loan Documents;
(ii) the absence of any attempt by, or on behalf of, any of the Agents
or the Lenders to collect, or to take any other
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action to enforce, all or any part of the Guaranteed Obligations whether
from or against any applicable Borrower or any other Person;
(iii) the election of any remedy available under any Loan Document or
any applicable Requirement of Law by, or on behalf of, any of the Agents or
the Lenders with respect to all or any part of the Guaranteed Obligations;
(iv) the waiver, consent, extension, forbearance or granting of any
indulgence by, or on behalf of, any of the Agents or the Lenders with
respect to any provision of any Loan Document;
(v) the failure of any of the Agents or the Lenders to take any steps
to perfect and maintain its security interest in, or to preserve its rights
to, any security or collateral for the Guaranteed Obligations;
(vi) the election by, or on behalf of, any of the Agents or the
Lenders, in any proceeding instituted under Chapter 11 of the Bankruptcy
Code, of the application of Section 1111(b)(2) of the Bankruptcy Code;
(vii) any borrowing or grant of a security interest by any applicable
Borrower, as debtor-in-possession, under Section 364 of the Bankruptcy
Code;
(viii) the disallowance, under Section 502 of the Bankruptcy Code, of
all or any portion of the claims against any applicable Borrower held by
any of the Lenders or the Agents, for repayment of all or any part of the
Guaranteed Obligations or any Expenses; or
(ix) any other circumstance which might otherwise constitute a legal
or equitable discharge or defense of any applicable Borrower (other than
payment in full of the Guaranteed Obligations);
provided, however, that nothing contained in this Section 2 shall be deemed to
waive or modify any rights, defenses or claims which such Guarantor, in its
capacity as a Borrower under the Credit Agreement, as a Pledgor under a Pledge
Agreement or as a Grantor under a Security Agreement, may have and which it has
not expressly waived therein.
3. Enforcement; Application of Payments. Upon the occurrence and during the
continuance of an Event of Default, the Agents and/or the Lenders may proceed
directly and at once, without notice, against any Guarantor to obtain
performance of and to collect and recover the full amount, or any portion, of
the Guaranteed Obligations owing to such Person or Persons, without first
proceeding against any applicable Borrower or any other
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<PAGE>
Person, or against any security or collateral for the Guaranteed Obligations.
4. Waivers. (i) Each Guarantor hereby waives diligence, presentment, demand
of payment, filing of claims with a court in the event of receivership or
bankruptcy of any Borrower, protest or notice with respect to the Guaranteed
Obligations, all setoffs and all presentments, demands for performance, notices
of nonperformance, protests, notices of protest, notices of dishonor and notices
of acceptance of this Guaranty, and all other demands whatsoever (and shall not
require that the same be made on any Borrower as a condition precedent to such
Guarantor's obligations hereunder), and covenants that this Guaranty will not be
discharged, except by payment in full of the Guaranteed Obligations. Each
Guarantor further waives all notices of the existence, creation or incurring of
new or additional Indebtedness, arising either from additional loans extended to
any Borrower or otherwise, and also waives all notices that the principal
amount, or any portion thereof, and/or any interest on any instrument or
document evidencing all or any part of the Guaranteed Obligations is due,
notices of any and all proceedings to collect from the maker, any endorser or
any other guarantor of all or any part of the Guaranteed Obligations, or from
any other Person, and, to the extent permitted by law, notices of exchange,
sale, surrender or other handling of any security or collateral given to the
Collateral Agent or the Lenders to secure payment of all or any part of the
Guaranteed Obligations; provided, however, that nothing contained herein shall
be deemed to waive or modify any rights, defenses or claims which such
Guarantor, in its capacity as a Borrower under the Credit Agreement, as a
Pledgor under a Pledge Agreement or as a Grantor under a Security Agreement, may
have and which it has not expressly waived therein.
(ii) The Agents and/or the Lenders are hereby authorized, without notice or
demand and without affecting the liability of the Guarantors hereunder, from
time to time, (a) to renew, extend, accelerate or otherwise change the time for
payment of, or other terms relating to, all or any part of the Guaranteed
Obligations, or to otherwise modify, amend or change the terms of any of the
Loan Documents; (b) to accept partial payments on all or any part of the
Guaranteed Obligations; (c) to take and hold security or collateral for the
payment of all or any part of the Guaranteed Obligations, or any liabilities of
the Borrowers, (d) to exchange, enforce, waive and release any such security or
collateral; (e) to apply such security or collateral and direct the order or
manner of sale thereof as in its discretion it may determine; (f) to settle,
release, exchange, enforce, waive, compromise or collect or otherwise liquidate
all or any part of the Guaranteed Obligations, this Guaranty, or any other
guaranty, and any security or collateral for the Guaranteed Obligations or for
any such guaranty; provided, however, that nothing contained herein shall be
deemed to waive or modify any rights, defenses or claims which such Guarantor,
in its capacity as a Borrower under the Credit Agreement, as a Pledgor under a
Pledge Agreement or as
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<PAGE>
a Grantor under a Security Agreement, may have and which it has not expressly
waived therein. Any of the foregoing may be done in any manner, without
affecting or impairing the obligations of the Guarantors hereunder.
5. Setoff. Subject to Sections 13.07 and 13.08 of the Credit Agreement, at
any time after all or any part of the Guaranteed Obligations have become due and
payable (by acceleration or otherwise), the Lenders may, without notice to any
Guarantor and regardless of the acceptance of any security or collateral for the
payment hereof, appropriate and apply toward the payment of all or any part of
the Guaranteed Obligations owing to such Persons in accordance with the
provisions of Section 3.02(b)(ii) of the Credit Agreement (i) any Indebtedness
due or to become due from the Lenders to such Guarantor, and (ii) any moneys,
credits or other property belonging to such Guarantor, at any time held by or
coming into the possession of the Lenders or their respective affiliates.
6. Financial Information. Each Guarantor hereby assumes responsibility for
keeping itself informed of the financial condition of each Borrower (other than
such Guarantor) and any and all other endorsers and/or other guarantors of all
or any part of the Guaranteed Obligations, and of all other circumstances
bearing upon the risk of nonpayment of the Guaranteed Obligations, or any part
thereof, that diligent inquiry would reveal, and such Guarantor hereby agrees
that none of the Agents or the Lenders shall have any duty to advise any
Guarantor of information known to it regarding such condition or any such
circumstances. In the event any of the Agents or the Lenders, in its sole
discretion, undertakes at any time or from time to time to provide any
information to any Guarantor, such Agent or Lender shall be under no obligation
(i) to undertake any investigation not a part of its regular business routine,
(ii) to disclose any information which such Agent or Lender, pursuant to
accepted or reasonable commercial finance or banking practices, wishes to
maintain confidential or (iii) to make any other disclosures or updates relating
to such information or any other information to such Guarantor.
7. No Marshalling; Reinstatement. Each Guarantor consents and agrees that
none of the Agents or the Lenders or any Person acting for or on behalf of any
of them shall be under any obligation to marshall any assets in favor of any
Guarantor or against or in payment of any or all of the Guaranteed Obligations.
Each Guarantor further agrees that, to the extent that any Borrower (other than
such Guarantor) or any other guarantor of all or any part of the Guaranteed
Obligations makes a payment or payments to any Agent or Lender, or any Agent or
Lender receives any proceeds of Collateral, which payment, payments or proceeds,
or any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to any Borrower, any other
guarantor or any other Person, or their respective estates, trustees, receivers
or any other party,
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<PAGE>
including, without limitation, such Guarantor under any bankruptcy law, state or
federal law, common law or equitable cause, then, to the extent of such payment
or repayment, the part of the Guaranteed Obligations which has been paid,
reduced or satisfied by such amount shall be reinstated and continued in full
force and effect as of the time immediately preceding such initial payment,
reduction or satisfaction.
8. Subrogation. Until the Guaranteed Obligations shall have been paid in
full, each Guarantor hereby agrees that it (i) shall have no right of
subrogation with respect to such Guaranteed Obligations (under contract, Section
509 of the Bankruptcy Code or otherwise) or any other right of indemnity,
reimbursement or contribution, and (ii) hereby waives any right to enforce any
remedy which any of the Agents or the Lenders now have or may hereafter have
against any Borrower, any endorser or any other guarantor of all or any part of
the Guaranteed Obligations or any other Person, and each Guarantor hereby waives
any benefit of, and any right to participate in, any security or collateral
given to the Agents and the Lenders to secure the payment or performance of all
or any part of the Guaranteed Obligations or any other liability of the
Borrowers to the Agents and the Lenders.
9. Subordination. Each Guarantor agrees that any and all claims of such
Guarantor against the other Borrowers or any endorser or other guarantor of all
or any part of the Guaranteed Obligations, or against any of their respective
properties, shall be subordinated to all of the Guaranteed Obligations.
Notwithstanding any right of any Guarantor to ask for, demand, sue for, take or
receive any payment from any other Borrower, all rights and Liens of such
Guarantor, whether now or hereafter arising and howsoever existing, in any
assets of any other Borrower (whether constituting part of the Collateral or
otherwise) shall be and hereby are subordinated to the rights of the Agents or
the Lenders in those assets. Such Guarantor shall have no right to possession of
any such asset or to foreclose upon any such asset, whether by judicial action
or otherwise, unless and until all of the Guaranteed Obligations shall have been
paid in full and all of the Commitments have been terminated. If all or any part
of the assets of any Borrower, or the proceeds thereof, are subject to any
distribution, division or application to the creditors of such Borrower, whether
partial or complete, voluntary or involuntary, and whether by reason of
liquidation, bankruptcy, arrangement, receivership, assignment for the benefit
of creditors or any other action or proceeding, or if the business of any
Borrower is dissolved or if substantially all of the assets of any Borrower are
sold, then, and in any such event, any payment or distribution of any kind or
character, either in cash, securities or other property, which shall be payable
or deliverable upon or with respect to any Indebtedness of such Borrower to such
Guarantor ("Borrower Indebtedness") shall be paid or delivered directly to the
Lenders for application on the Guaranteed Obligations, due or to become due,
until such
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<PAGE>
Guaranteed Obligations shall have first been paid in full and all of the
Commitments have been terminated. Each Guarantor irrevocably authorizes and
empowers each of the Agents and the Lenders to demand, sue for, collect and
receive every such payment or distribution and give acquittance therefor and to
make and present for and on behalf of such Guarantor such proofs of claim and
take such other action, in such Agent's or Lender's own name or in the name of
such Guarantor or otherwise, as such Agent or Lender may deem reasonably
necessary or reasonably advisable for the enforcement of this Guaranty. After
the occurrence and during the continuance of an Event of Default, each Lender
may vote, with respect to the Guaranteed Obligations owed to it, such proofs of
claim in any such proceeding, receive and collect any and all dividends or other
payments or disbursements made thereon in whatever form the same may be paid or
issued and apply the same on account of any of the Guaranteed Obligations.
Should any payment, distribution, security or instrument or proceeds thereof be
received by any Guarantor upon or with respect to the Borrower Indebtedness
prior to the payment in full of all of the Guaranteed Obligations and the
termination of all of the Commitments, such Guarantor shall receive and hold the
same in trust, as trustee, for the ratable benefit of the Agents and the Lenders
and shall forthwith deliver the same to the Administrative Agent in precisely
the form received (accompanied by the endorsement or assignment of such
Guarantor where necessary), for application to the Guaranteed Obligations, due
or not due, and, until so delivered, the same shall be held in trust by such
Guarantor as the property of the Agents and the Lenders. After the occurrence
and during the continuance of an Event of Default, if any Guarantor fails to
make any such endorsement or assignment to the Agents or the Lenders, the Agents
or the Lenders or any of their officers or employees are hereby irrevocably
authorized to make the same. Each Guarantor agrees that until the Guaranteed
Obligations have been paid in full and all of the Commitments have been
terminated, such Guarantor will not assign or transfer to any Person any claim
such Guarantor has or may have against any other Borrower.
10. Enforcement; Amendments; Waivers. No delay on the part of any of the
Agents or the Lenders in the exercise of any right or remedy arising under this
Guaranty, the Credit Agreement, any of the other Loan Documents or otherwise
with respect to all or any part of the Guaranteed Obligations, the Collateral or
any other guaranty of or security for all or any part of the Guaranteed
Obligations shall operate as a waiver thereof, and no single or partial exercise
by any of the Agents or the Lenders of any such right or remedy shall preclude
any further exercise thereof. No modification or waiver of any of the provisions
of this Guaranty shall be binding upon any of the Agents or the Lenders, except
as expressly set forth in a writing duly signed and delivered by the Agents and
the Lenders. Failure by any of the Agents or the Lenders at any time or times
hereafter to require strict performance by any Borrower or any other guarantor
of all or any part of the Guaranteed Obligations or any other
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<PAGE>
Person of any of the provisions, warranties, terms and conditions contained in
any of the Loan Documents now or at any time or times hereafter executed by such
Persons and delivered to any of the Agents or the Lenders shall not waive,
affect or diminish any right of any of the Agents or the Lenders at any time or
times hereafter to demand strict performance thereof and such right shall not be
deemed to have been waived by any act or knowledge of any of the Agents or the
Lenders, or their agents, officers or employees, unless such waiver is contained
in an instrument in writing, directed and delivered to the Borrowers specifying
such waiver, and is signed by the Administrative Agent. No waiver of any Event
of Default by the Lenders shall operate as a waiver of any other Event of
Default or the same Event of Default on a future occasion, and no action by any
of the Agents or the Lenders permitted hereunder shall in any way affect or
impair any Agent's or Lender's rights and remedies or the obligations of the
Guarantors under this Guaranty. Any determination by a court of competent
jurisdiction of the amount of any principal and/or interest owing by the
Borrowers to the Agents and the Lenders shall be conclusive and binding on each
Guarantor irrespective of whether such Guarantor was a party to the suit or
action in which such determination was made.
11. Effectiveness; Termination. This Guaranty shall become effective
against any Guarantor upon its execution by such Guarantor and shall continue in
full force and effect and may not be terminated or otherwise revoked until the
Guaranteed Obligations have been paid in full in cash and all of the Commitments
have been terminated. If, notwithstanding the foregoing, any Guarantor shall
have any right under applicable law to terminate or revoke its obligations under
this Guaranty, such Guarantor agrees that such termination or revocation shall
not be effective until a written notice of such revocation or termination,
specifically referring hereto, signed by such Guarantor, is received by the
Agents and the Lenders. Such notice shall not affect the right and power of any
of the Agents or the Lenders to enforce rights arising prior to receipt thereof
by the Agents and the Lenders. If any of the Lenders grants loans or takes other
action after such Guarantor terminates or revokes its obligations under this
Guaranty but before the Agents and the Lenders receive such written notice, the
rights of such Lender with respect thereto shall be the same as if such
termination or revocation had not occurred.
12. Successors and Assigns. This Guaranty shall be binding upon each
Guarantor and upon the successors and permitted assigns of such Guarantor and
shall inure to the benefit of the Agents and the Lenders and their respective
successors and permitted assigns; all references herein to the Borrowers and to
the Guarantors shall be deemed to include their respective successors and
permitted assigns. The successors and permitted assigns of the Guarantors and
the Borrowers shall include, without limitation, their respective receivers,
trustees or
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debtors-in-possession. All references to the singular shall be deemed to include
the plural where the context so requires.
13. Governing Law. This Guaranty shall be construed and enforced and the
rights and duties of the parties shall be governed in all respects in accordance
with the law of the State of New York.
14. Consent to Jurisdiction and Service of Process. Each of the Guarantors
agrees that the terms of Section 13.20 of the Credit Agreement with respect to
consent to jurisdiction and service of process shall apply equally to this
Security Agreement.
15. Waiver of Jury Trial. EACH OF THE GUARANTORS WAIVES ANY RIGHT TO TRIAL
BY JURY IN ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG
ANY OF THE AGENTS, THE LENDERS OR THE GUARANTORS ARISING OUT OF OR RELATED TO
THIS GUARANTY OR ANY OTHER LOAN DOCUMENT. ANY SUCH PERSON MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
16. Waiver of Bond. Each Guarantor waives the posting of any bond otherwise
required of the Agents and the Lenders in connection with any judicial process
or proceeding to realize on the Collateral or any other security for the
Guaranteed Obligations, to enforce any judgment or other court order entered in
favor of the Agents and the Lenders, or to enforce by specific performance,
temporary restraining order, or preliminary or permanent injunction, this
Guaranty or any other agreement or document between the any Agent or any Lender
and such Guarantor.
16. Advice of Counsel. Each Guarantor represents and warrants to the
Administrative Agent that it has discussed this Guaranty and, specifically, the
provisions of Sections 13 through 15 hereof, with such Guarantor's lawyers.
17. Notices. All notices and other communications required or desired to be
served, given or delivered hereunder shall be in writing or by a
telecommunications device capable of creating a printed record and shall be
addressed to the party to be notified at the address indicated for each in
Section 13.10 of the Credit Agreement. All such notices and communications shall
be deemed to be validly served, given or delivered (i) ten (10) days following
deposit in the United States mails with proper postage prepaid; (ii) upon
delivery thereof if delivered by hand or by overnight courier service to the
party to be notified; or (iii) upon confirmation of receipt thereof if
transmitted by a telecommunications device.
18. Severability. Wherever possible, each provision of this Guaranty shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Guaranty shall be prohibited by or invalid under
such law,
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<PAGE>
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Guaranty.
19. Collateral. Each Guarantor hereby acknowledges and agrees that its
obligations under this Guaranty are secured pursuant to the terms and provisions
of the applicable Loan Documents to which it is a party.
20. Merger. This Guaranty represents the final agreement of each Guarantor
with respect to the matters contained herein and may not be contradicted by
evidence of prior or contemporaneous agreements, and/or subsequent oral
agreements, between such Guarantor and any Agent or any Lender.
21. Execution in Counterparts. This Guaranty may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
22. No Waiver Under Certain Other Loan Documents. Nothing contained herein
shall be deemed to waive or modify any rights, defenses or claims which such
Guarantor, in its capacity as a Borrower under the Credit Agreement, as a
Pledgor under a Pledge Agreement or as a Grantor under a Security Agreement, may
have and which it has not expressly waived therein.
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<PAGE>
IN WITNESS WHEREOF, this Guaranty has been duly executed by each Guarantor
as of the day and year first set forth above.
STELLEX INDUSTRIES, INC.
By____________________________
Name:
Title:
KII HOLDING CORP.
By____________________________
Name:
Title:
TSMD ACQUISITION CORP.
By____________________________
Name:
Title:
KII ACQUISITION CORP.
By____________________________
Name:
Title:
STELLEX MICROWAVE SYSTEMS, INC.
By____________________________
Name:
Title:
STELLEX AEROSPACE
By____________________________
Name:
Title:
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PARAGON PRECISION PRODUCTS
By____________________________
Name:
Title:
BANDY MACHINING INTERNATIONAL
By____________________________
Name:
Title:
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By____________________________
Name:
Title:
GENERAL INSPECTION
LABORATORIES, INC.
By____________________________
Name:
Title:
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<PAGE>
EXHIBIT K
EXECUTION COPY
CASH COLLATERAL
PLEDGE AND ASSIGNMENT AGREEMENT
THIS CASH COLLATERAL PLEDGE AND ASSIGNMENT AGREEMENT (as amended,
supplemented or otherwise modified from time to time, this "Agreement") dated as
of October 31, 1997, by and among STELLEX INDUSTRIES, INC., a Delaware
corporation, KII HOLDING CORP., a Delaware corporation, TSMD ACQUISITION CORP.,
a Delaware corporation, KII ACQUISITION CORP., a Delaware corporation, STELLEX
MICROWAVE SYSTEMS, INC., a California corporation, STELLEX AEROSPACE, a
California corporation, PARAGON PRECISION PRODUCTS, a California corporation,
BANDY MACHINING INTERNATIONAL, a California corporation, SCANNING ELECTRON
ANALYSIS LABORATORIES, INC., a California corporation, and GENERAL INSPECTION
LABORATORIES, INC., a California corporation,(each, individually, a "Pledgor"
and collectively, the "Pledgors") and FIRST UNION COMMERCIAL CORPORATION, in its
capacity as collateral agent (with its successors in such capacity, the
"Collateral Agent") for the Agents, the Lenders, and the other Holders, in each
case under and as defined in that certain Credit Agreement dated as of October
31, 1997 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement") among each of the Pledgors as borrowers (collectively, the
"Borrowers"), Societe Generale, as administrative agent (the "Administrative
Agent"), the Collateral Agent and First Union Commercial Corporation, as
syndication agent (the "Syndication Agent, and collectively with the
Administrative Agent and the Collateral Agent, the "Agents"), and the financial
institutions from time to time parties thereto (the "Lenders"). Capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings ascribed to such terms in the Credit Agreement.
PRELIMINARY STATEMENTS:
(1) The Pledgors have opened a special non- interest-bearing cash
collateral account (the "Account") with First Union National Bank at its office
at 1970 Chain Bridge Road, VA1942, McLean, VA 22102, Account No. _____________,
in the name of the Collateral Agent and under the sole control and dominion of
the Collateral Agent and subject to the terms of this Agreement.
(2) It is a condition precedent to the making of Loans by the Lenders under
the Credit Agreement that the Pledgors shall have made the pledge and assignment
contemplated by this Agreement.
NOW THEREFORE, in consideration of the premises and in order to induce the
Lenders to make the Loans under the Credit Agreement, each Pledgor hereby agrees
with the Collateral Agent
<PAGE>
for its benefit and the ratable benefit of the Lenders, the Agents and the other
Holders as follows:
SECTION 1. Pledge and Assignment. Each Pledgor hereby pledges and assigns
to the Collateral Agent for its benefit and the ratable benefit of the Lenders,
Agents and the other Holders, and grants to the Collateral Agent for its benefit
and the ratable benefit of the Lenders, the Agents and the other Holders a
security interest in, the following collateral (the "Collateral"):
(i) the Account, all funds held therein and all certificates and
instruments, if any, from time to time representing or evidencing the
Account;
(ii) all Investments (as hereinafter defined) from time to time, and
all certificates and instruments, if any, from time to time representing or
evidencing the Investments;
(iii) all notes, certificates of deposit, deposit accounts, checks and
other instruments from time to time hereafter delivered to or otherwise
possessed by the Collateral Agent for or on behalf of such Pledgor in
substitution for or in addition to any or all of the then existing
Collateral;
(iv) all interest, dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed in respect
of or in exchange for any or all of the then existing Collateral; and
(v) all proceeds of any and all of the foregoing Collateral.
SECTION 2. Security for Obligations. This Agreement secures the payment of
all Obligations and all obligations of the Pledgors now or hereafter existing
under this Agreement (all such obligations being the "Liabilities").
SECTION 3. Delivery of Collateral. All certificates or instruments, if any,
representing or evidencing the Collateral shall be delivered to and held by or
on behalf of the Collateral Agent pursuant hereto and shall be in suitable form
for transfer by delivery, or shall be accompanied by duly executed instruments
of transfer or assignment in blank, all in form and substance satisfactory to
the Collateral Agent. The Collateral Agent shall have the right, at any time in
its discretion and without notice to the Pledgor, to transfer to or to register
in the name of the Collateral Agent or any of its nominees any or all of the
Collateral. In addition, the Collateral Agent shall have the right at any time
to exchange certificates or instruments representing or evidencing Collateral
for certificates or instruments of smaller or larger denominations.
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<PAGE>
SECTION 4. Maintaining the Account. So long as any Lender has any
Commitment or any Note shall remain unpaid:
(a) The Pledgors will maintain the Account with First Union National
Bank.
(b) It shall be a term and condition of the Account, notwithstanding
any term or condition to the contrary in any other agreement relating to
the Account and except as otherwise provided by the provisions of Section 6
and Section 14, that no amount (including interest on the Account) shall be
paid or released to or for the account of, or withdrawn by or for the
account of, any Pledgor or any other person or entity from the Account.
The Account shall be subject to such applicable laws, and such applicable
regulations of the Board of Governors of the Federal Reserve System and of any
other appropriate banking or governmental authority, as may now or hereafter be
in effect.
SECTION 5. Investing of Amounts in the Account. If requested by the
Pledgors, the Collateral Agent will, subject to the provisions of Section 6 and
Section 14, from time to time (a) invest amounts on deposit in the Account in
such Cash Equivalents as the Pledgors may select and the Collateral Agent may
approve and (b) invest interest paid on the Cash Equivalents referred to in
clause (a) above, and reinvest other proceeds of any such Cash Equivalents which
may mature or be sold, in each case in such Cash Equivalents as the Pledgors may
select and the Collateral Agent may approve (the Cash Equivalents referred to in
clauses (a) and (b) above being collectively "Investments"), provided that all
such amounts (and all interest on such amounts) invested in Cash Equivalents
shall be available for and shall be deposited into the Account not later than
one year after such amounts were so invested. Interest and proceeds that are not
invested or reinvested in Investments as provided above shall be deposited and
held in the Account.
SECTION 6. Release of Amounts. So long as no Default or Event of Default
shall have occurred and be continuing, funds shall be released to the Pledgors
or their designee among the Loan Parties as follows:
(a) If the Collateral Agent receives a certificate, substantially in
the form of Exhibit A attached hereto, signed by any Pledgor that has
deposited Net Cash Proceeds into the Account on a Business Day within the
immediately preceding 365 day period (the "Deposited Amount"), the
Collateral Agent shall release the amount requested in such certificate to
such Pledgor.
(b) After the Commitments have been terminated and at the request of
the Pledgors, amounts of credit balance of the Account shall be released to
the Pledgors.
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<PAGE>
Each Pledgor authorizes the Collateral Agent to liquidate Investments if and as
necessary in order for the Collateral Agent to comply with clauses (a) and (b)
above.
SECTION 7. Payment of Amounts to Administrative Agent for Application. On
the first anniversary of the date on which each amount is deposited into the
Account, Investments shall be liquidated, if necessary, so that an amount equal
to such deposited amount, if such deposited amount has not previously been
released in accordance with the provisions of Section 6, shall be remitted by
the Collateral Agent to the Administrative Agent for application by the
Administrative Agent to outstanding Obligations in accordance with the
provisions of the Credit Agreement.
SECTION 8. Representations and Warranties. Each Pledgor represents and
warrants as follows:
(a) Such Pledgor is the legal and beneficial owner of the Collateral free
and clear of any lien, security interest, option or other charge or encumbrance
except for the security interest created by this Agreement.
(b) The pledge and assignment of the Collateral pursuant to this Agreement
creates a valid and perfected first priority security interest in the
Collateral, securing the payment of the Liabilities.
(c) No consent of any other person or entity and no authorization,
approval, or other action by, and no notice to or filing with, any governmental
authority or regulatory body is required (i) for the pledge and assignment by
such Pledgor of the Collateral pursuant to this Agreement or for the execution,
delivery or performance of this Agreement by such Pledgor, (ii) for the
perfection or maintenance of the security interest created hereby (including the
first priority nature of such security interest) or (iii) for the exercise by
the Collateral Agent of its rights and remedies hereunder.
SECTION 9. Further Assurances. Each Pledgor agrees that at any time and
from time to time, at the expense of the Pledgors, such Pledgor will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be necessary or desirable, or that the Collateral Agent may
reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable the Collateral Agent to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral.
SECTION 10. Transfers and Other Liens. Each Pledgor agrees that it will not
(i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or
grant any option with respect to, any of the Collateral, or (ii) create or
permit to exist any lien, security interest, option or other charge or
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<PAGE>
encumbrance upon or with respect to any of the Collateral, except for the
security interest under this Agreement.
SECTION 11. Collateral Agent Appointed Attorney-in-Fact. Each Pledgor
hereby appoints the Collateral Agent such Pledgor's attorney-in-fact, with full
authority in the place and stead of such Pledgor and in the name of such Pledgor
or otherwise, from time to time in the Collateral Agent's discretion to take any
action and to execute any instrument which the Collateral Agent may deem
necessary or advisable to accomplish the purposes of this Agreement, including,
without limitation, to receive, indorse and collect all instruments made payable
to such Pledgor or Pledgors representing any interest payment, dividend or other
distribution in respect of the Collateral or any part thereof and to give full
discharge for the same.
SECTION 12. Collateral Agent May Perform. If any Pledgor fails to perform
any agreement contained herein, the Collateral Agent may itself perform, or
cause performance of, such agreement, and the expenses of the Collateral Agent
incurred in connection therewith shall be payable by the Pledgors under Section
15.
SECTION 13. The Collateral Agent's Duties. The powers conferred on the
Collateral Agent hereunder are solely to protect its interest in the Collateral
and shall not impose any duty upon it to exercise any such powers. Except for
the safe custody of any Collateral in its possession and the accounting for
moneys actually received by it hereunder, the Collateral Agent shall have no
duty as to any Collateral, as to ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relative to
any Collateral, whether or not the Collateral Agent, any Lender or any other
Agent has or is deemed to have knowledge of such matters, or as to the taking of
any necessary steps to preserve rights against any parties or any other rights
pertaining to any Collateral. The Collateral Agent shall be deemed to have
exercised reasonable care in the custody and preservation of any Collateral in
its possession if such Collateral is accorded treatment substantially equal to
that which the Collateral Agent accords its own property.
SECTION 14. Remedies upon Default. If any Event of Default shall have
occurred and be continuing:
(a) The Collateral Agent may, without notice to the Pledgors except as
required by law and at any time or from time to time, charge, set-off and
otherwise apply all or any part of the Collateral in the Account against
the Liabilities or any part thereof.
(b) The Collateral Agent may also exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the
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<PAGE>
rights and remedies of a secured party on default under the Uniform
Commercial Code in effect in the State of New York at that time (the
"Code") (whether or not the Code applies to the affected Collateral), and
may also, without notice except as specified below, sell the Collateral or
any part thereof in one or more parcels at public or private sale, at any
of the Collateral Agent's offices or elsewhere, for cash, on credit or for
future delivery, and upon such other terms as the Collateral Agent may deem
commercially reasonable. Each Pledgor agrees that, to the extent notice of
sale shall be required by law, at least ten days' notice to the Pledgors of
the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification. The Collateral
Agent shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Collateral Agent may adjourn any
public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.
(c) Any cash held by the Collateral Agent as Collateral and all cash
proceeds received by the Collateral Agent in respect of any sale of,
collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Collateral Agent, be held by the
Collateral Agent as collateral for, and/or then or at any time thereafter
be applied (after payment of any amounts payable to the Collateral Agent
pursuant to Section 15) in whole or in part by the Collateral Agent for the
ratable benefit of the Agents, the Lenders and the other Holders against,
all or any part of the Liabilities in such order as the Collateral Agent
shall elect. Any surplus of such cash or cash proceeds held by the
Collateral Agent and remaining after payment in full of all the Liabilities
shall be paid over to the Pledgors.
SECTION 15. Expenses. The Pledgors will upon demand pay to the Collateral
Agent the amount of any and all reasonable expenses, including the reasonable
fees and expenses of its counsel and of any experts and agents, which the
Collateral Agent may incur in connection with (i) the administration of this
Agreement, (ii) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, (iii) the exercise or
enforcement of any of the rights of the Collateral Agent, the Lenders or the
other Agents hereunder or (iv) the failure by any Pledgor to perform or observe
any of the provisions hereof.
SECTION 16. Amendments, Etc. No amendment or waiver of any provision of
this Agreement, and no consent to any departure by any Pledgor herefrom shall in
any event be effective unless the same shall be in writing and signed by the
Collateral Agent, and then such waiver or consent shall be effective only in
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<PAGE>
the specific instance and for the specific purpose for which given.
SECTION 17. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable communication) and mailed, telecopied, telegraphed, telexed,
cabled or delivered to it, if to the Pledgors, at their respective addresses
specified in the Credit Agreement, and if to the Collateral Agent, at its
address specified in the Credit Agreement, or, as to either party, at such other
address as shall be designated by such party in a written notice to the other
party. All such notices and other communications shall, when mailed, telecopied,
telegraphed, telexed or cabled, be effective when deposited in the mails,
telecopied, delivered to the telegraph company, confirmed by telex answerback or
delivered to the cable company, respectively.
SECTION 18. Continuing Security Interest; Assignments under Credit
Agreement. This Agreement shall create a continuing security interest in the
Collateral and shall (i) remain in full force and effect until the later of (x)
the payment in full of the Liabilities and all other amounts payable under this
Agreement and (y) the Commitment Termination Date, (ii) be binding upon each
Pledgor, its successors and assigns, and (iii) inure to the benefit of, and be
enforceable by, the Collateral Agent, the other Agents, the Lenders, and the
other Holders, and each of their respective successors, transferees and assigns.
Without limiting the generality of the foregoing clause (iii), any Lender or any
Agent may assign or otherwise transfer all or any portion of its rights and
obligations under the Credit Agreement (including, without limitation, all or
any portion of its Commitment, the Loans owing to it and any Note held by it) to
any other person or entity, and such other person or entity shall thereupon
become vested with all the benefits in respect thereof granted to such Lender or
such Agent herein or otherwise. Upon the later of the payment in full of the
Liabilities and all other amounts payable under this Agreement and the
Commitment Termination Date, the security interest granted hereby shall
terminate and all rights to the Collateral shall revert to the Pledgors. Upon
any such termination, the Collateral Agent will, at the Pledgors' expense,
return to the Pledgors such of the Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof and execute and deliver to the
Pledgors such documents as the Pledgors shall reasonably request to evidence
such termination.
SECTION 19. Governing Law; Terms. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, except to the
extent that perfection of the security interest hereunder, or remedies
hereunder, in respect of any particular Collateral are governed by the laws of a
jurisdiction other than the State of New York. Unless otherwise defined herein
or in the Credit Agreement, terms
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<PAGE>
defined in Article 9 of the Code are used herein as therein defined.
-8-
<PAGE>
IN WITNESS WHEREOF, each Pledgor has caused this Agreement to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
STELLEX INDUSTRIES, INC.
By____________________________
Name:
Title:
KII HOLDING CORP.
By____________________________
Name:
Title:
TSMD ACQUISITION CORP.
By____________________________
Name:
Title:
KII ACQUISITION CORP.
By____________________________
Name:
Title:
STELLEX MICROWAVE SYSTEMS, INC.
By____________________________
Name:
Title:
STELLEX AEROSPACE
By____________________________
Name:
Title:
PARAGON PRECISION PRODUCTS
By____________________________
Name:
Title:
S-1
<PAGE>
BANDY MACHINING INTERNATIONAL
By____________________________
Name:
Title:
SCANNING ELECTRON ANALYSIS
LABORATORIES, INC.
By____________________________
Name:
Title:
GENERAL INSPECTION
LABORATORIES, INC.
By____________________________
Name:
Title:
Acknowledged and agreed to as of October 31, 1997.
FIRST UNION COMMERCIAL CORPORATION, as Collateral Agent
By:_____________________________________
Name: Shaun V. Kelley
Title: Vice President
S-2
<PAGE>
EXHIBIT A
FORM OF OFFICER'S CERTIFICATE
I, __________________, the duly [appointed] [elected] _____________1 of
[Name of Pledgor] (the "Pledgor"), do hereby certify as follows in connection
with the Cash Collateral Pledge Agreement and the Credit Agreement (each, as
defined below):
1. Reference is made to that certain Cash Collateral Pledge and Assignment
Agreement(as amended, supplemented or otherwise modified from time to time, the
"Cash Collateral Pledge Agreement") dated as of October 31, 1997, by and among
the Pledgors named therein and First Union Commercial Corporation, in its
capacity as collateral agent (with its successors in such capacity, the
"Collateral Agent") for the Agents, the Lenders, and the other Holders, in each
case under and as defined in that certain Credit Agreement dated as of October
31, 1997 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement") among each of the Pledgors as borrowers (collectively, the
"Borrowers"), Societe Generale, as administrative agent (the "Administrative
Agent"), the Collateral Agent, and First Union Commercial Corporation, as
syndication agent (the "Syndication Agent, and collectively with the
Administrative Agent and the Collateral Agent, the "Agents"), and the financial
institutions from time to time parties thereto (the "Lenders"). Capitalized
terms used in this Certificate and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Cash Collateral Pledge
Agreement.
2. The Pledgor is requesting that $__________ (the "Requested Amount") be
released to it or its designee among the Loan Parties on __________________ (the
"Release Date") from the Account.
3. The Requested Amount has been deposited by the Pledgor within the 365
day period immediately preceding the Release Date.
4. The Pledgor or its designee among the Loan Parties is using the
Requested Amount [to acquire an asset on the Release Date] or [to fund the
purchase price of a Permitted Acquisition on the Release Date] in accordance
with the provisions of the Credit Agreement.
5. No Default or Event of Default under the Credit Agreement has occurred
and is continuing.
- --------
1/Chief Financial Officer, or other officer of the Pledgor with significant
supervisory responsibility for the financial affairs of the Pledgor.
S-3
<PAGE>
6. All representatives and warranties of the Pledgor contained in the
Credit Agreement are true and correct as of today, other than those that
expressly speak as of a different date.
[5. All of the conditions precedent set forth in Section 5.03 of the Credit
Agreement have been satisfied or waived in writing by the Lenders.]2
WITNESS my hand this __ day of __________, 199_:
--------------------------
Name:
Title:
- --------
2/To be used if the Requested Amount is being requested in connection with a
Permitted Acquisition.
S-4
<PAGE>
EXHIBIT L
Form of Security Agreement
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (as amended, supplemented or otherwise modified
from time to time, this "Security Agreement") dated as of _______ __, 199_, by
and among [NAME OF GRANTOR] (with its successors and permitted assigns, the
"Grantor"), and FIRST UNION COMMERCIAL CORPORATION, in its capacity as
collateral agent (with its successors in such capacity, the "Collateral Agent")
for the Agents, the Lenders, and the other Holders, in each case under and as
defined in that certain Credit Agreement dated as of October __, 1997 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement") among the Grantor and the other borrowers named therein
(collectively, the "Borrowers"), Societe Generale, as administrative agent (the
"Administrative Agent"), the Collateral Agent, and First Union Commercial
Corporation, as syndication agent (the "Syndication Agent", and collectively
with the Administrative Agent and the Collateral Agent, the "Agents"), and the
financial institutions from time to time parties thereto (the "Lenders").
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Credit Agreement.
WITNESSETH:
WHEREAS, the Grantor is a party to the Credit Agreement, pursuant to which
the Lenders have agreed, subject to certain conditions precedent, to make loans
and other financial accommodations to the Borrowers from time to time;
WHEREAS, in order to secure the prompt and complete payment, observance and
performance of (i) all of the Obligations and (ii) all of the Grantor's
obligations and liabilities hereunder and in connection herewith (all the
Obligations and such obligations and liabilities hereunder being hereinafter
referred to collectively as the "Liabilities"), the Agents and the Lenders have
required as a condition, among others, to entering into the Credit Agreement
that the Grantor execute and deliver this Security Agreement;
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Defined Terms.
(a) Unless otherwise defined herein, each capitalized term used herein that
is defined in the Credit Agreement shall have the meaning specified for such
term in the Credit Agreement.
<PAGE>
Unless otherwise defined herein or in the Credit Agreement, all terms defined in
Article 8 and Article 9 of the Uniform Commercial Code in effect as of the date
hereof in the State of New York are used herein as defined therein as of the
date hereof.
(b) The words "hereby," "hereof," "herein" and "hereunder" and words of
like import when used in this Security Agreement shall refer to this Security
Agreement as a whole and not to any particular provision of this Security
Agreement, and section references are to this Security Agreement unless
otherwise specified.
(c) All terms defined in this Security Agreement in the singular shall have
comparable meanings when used in the plural, and vice versa, unless otherwise
specified.
2. Grant of Security Interest. To secure the prompt and complete payment,
observance and performance of all the Liabilities, the Grantor hereby grants to
the Collateral Agent for the ratable benefit of the Agents, the Lenders, and the
other Holders a security interest in all of the Grantor's rights, title and
interests in and to the following property, whether now owned or existing or
hereafter arising or acquired and wheresoever located (the "Collateral"):
(a) ACCOUNTS: All present and future accounts, accounts receivable and
other rights of the Grantor to payment for the sale or lease of goods or the
rendition of services (except those evidenced by instruments or chattel paper),
whether now existing or hereafter arising and wherever arising, and whether or
not they have been earned by performance (collectively, "Accounts");
(b) EQUIPMENT: All of the Grantor's present and future (i) equipment and
fixtures, including, without limitation, wherever located, all machinery,
manufacturing, distribution, selling, data processing and office equipment,
furniture, furnishings, assembly systems, tools, tooling, molds, dies,
appliances and vehicles, (ii) other tangible personal property (other than the
Grantor's Inventory) and (iii) any and all accessions, parts and appurtenances
attached to any of the foregoing or used in connection therewith, and any
substitutions therefor and replacements, products and proceeds thereof
(collectively, "Equipment");
(c) GENERAL INTANGIBLES: All of the Grantor's present and future general
intangibles, choses in action, causes of action, and all other intangible
personal property of every kind and nature including, without limitation,
corporate, partnership and other business books and records, inventions,
designs, patents, patent applications, trademarks, service marks, trademark
applications, service mark applications, trade names,
2
<PAGE>
trade secrets, goodwill, registrations, copyrights, licenses, franchises,
customer lists, computer programs, software and other computer materials, tax
refunds, tax refund claims, rights and claims against charters, carriers,
shippers, franchisees, lessors, and lessees, and rights to indemnification,
intercompany receivables, and any security documents executed in connection
therewith, deposit accounts (excluding tax, payroll and trust accounts),
proceeds of any letters of credit, indemnity, warranty or guaranty payable to
the Grantor from time to time with respect to the foregoing or proceeds of any
insurance policies on which the Grantor is named as beneficiary, claims against
third parties for advances and other financial accommodations and any other
obligations whatsoever owing to the Grantor, contract rights, customer and
supplier contracts, rights in and to all security agreements, security interests
or other security held by the Grantor to secure payment of the Grantor's
accounts, all right, title and interest under leases, subleases, and concessions
and other agreements relating to real or personal property (including, without
limitation, all rents, issues and profits related thereto), rights in and under
guarantees, instruments, securities, documents of title and other contracts
securing, evidencing, supporting or otherwise relating to any of the foregoing,
together with all rights in any goods, merchandise or Inventory (as defined
below) which any of the foregoing may represent (collectively, "General
Intangibles");
(d) INVENTORY: All of the Grantor's present and future (i) inventory, (ii)
goods, merchandise and other personal property furnished or to be furnished
under any contract of service or intended for sale or lease, and all goods
consigned by the Grantor and all other items which have previously constituted
Equipment but are then currently being held for sale or lease in the ordinary
course of the Grantor's business, (iii) raw materials, work-in-process and
finished goods, (iv) materials, components and supplies of any kind, nature or
description used or consumed in the Grantor's business or in connection with the
manufacture, production, packing, shipping, advertising, finishing or sale of
any of the Property described in clauses (i) through (iii) above, (v) goods in
which the Grantor has a joint or other interest to the extent of the Grantor's
interest therein or right of any kind (including, without limitation, goods in
which the Grantor has an interest or right as consignee), and (vi) goods which
are returned to or repossessed by the Grantor; in each case whether in the
possession of the Grantor, a bailee, a consignee, or any other Person for sale,
storage, transit, processing, use or otherwise, and any and all documents for or
relating to any of the foregoing (collectively, "Inventory");
(e) CHATTEL PAPER, INSTRUMENTS AND DOCUMENTS: All chattel paper, all
instruments (as defined in Article 9 of the Uniform Commercial Code) and
securities (as defined in Article 8 of the Uniform Commercial Code), all bills
of lading, warehouse receipts and other documents of title and documents, in
each
3
<PAGE>
instance whether now owned or hereafter acquired by the Grantor (collectively,
"Chattel Paper, Instruments and Documents");
(f) OTHER PROPERTY: To the extent not included in the foregoing (and except
to the extent expressly excluded from the foregoing), all property or interests
in property now owned or hereafter acquired by the Grantor, whether in the
possession, custody or control of any Agent, any Lender, or any other Holder, or
any agent or affiliate of any of them in any way or for any purpose (whether for
safekeeping, deposit, custody, pledge, transmission, collection or otherwise),
including, without limitation, all rights and interests of the Grantor, now
existing or hereafter arising and however and wherever arising, in respect of
any and all (v) investment property; (w) notes, drafts, letters of credit,
stocks, bonds, and debt and equity securities, whether or not certificated, and
warrants, options, puts and calls and other rights to acquire or otherwise
relating to the same; (x) money; (y) proceeds of loans, including, without
limitation, all the Loans made to the Grantor under the Credit Agreement; and
(z) insurance proceeds and books and records relating to any of the property
covered by this Security Agreement (collectively, "Other Property");
together with respect to each of the items set forth in paragraphs (a) through
(f) above with all accessions and additions thereto, substitutions therefor, and
replacements, proceeds and products thereof.
3. Continuing Liability. The Grantor hereby expressly agrees that,
notwithstanding anything set forth herein to the contrary, the Grantor shall
remain solely responsible under each contract, agreement, interest or obligation
as to which a Lien has been granted to the Collateral Agent hereunder for the
observance and performance of all of the conditions and obligations to be
observed and performed by the Grantor thereunder, all in accordance with and
pursuant to the terms and provisions thereof, and the exercise by the Collateral
Agent, any other Agent or any Lender of any rights under this Security
Agreement, the Credit Agreement or any other Loan Document shall not release the
Grantor from any of the Grantor's duties or obligations hereunder and under each
such contract, agreement, interest or obligation. None of the Collateral Agent,
any other Agent or any Lender shall have any duty, responsibility, obligation or
liability under any such contract, agreement, interest or obligation by reason
of or arising out of this Security Agreement or the assignment thereof by the
Grantor to the Collateral Agent or the granting by the Grantor to the Collateral
Agent of a Lien thereon or the receipt by the Collateral Agent, any other Agent
or any Lender of any payment relating to any such contract, agreement, interest
or obligation pursuant hereto, nor shall the Collateral Agent, any other Agent
or any Lender be required or obligated (nor to the extent prohibited by the
terms of such contract, agreement, interest or
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obligation or applicable law, rule or regulation, shall the Collateral Agent,
any other Agent or any Lender be permitted), in any manner, to (a) perform or
fulfill any of the obligations of the Grantor thereunder or pursuant thereto,
(b) make any payment, or to make any inquiry as to the nature or the sufficiency
of any payment received by the Grantor or the sufficiency of any performance by
any party under any such contract, agreement, interest or obligation, or (c)
present or file any claim, or take any action to collect or enforce any
performance or payment of any amounts which may have been assigned to the
Grantor, on which the Grantor has been granted a Lien to which the Grantor may
be entitled at any time or times.
4. Representations, Warranties and Covenants. The Grantor hereby
represents, warrants and covenants that as of the date of the execution of this
Security Agreement, and until the termination of this Security Agreement
pursuant to Section 14 below:
(a) All of the Equipment and Inventory (other than Inventory and
Equipment sold in accordance with the terms of the Credit Agreement,
Equipment being repaired or serviced, Inventory in transit or in the
possession and control of subcontractors of the Grantor or any other Person
for processing and vehicles) are located at the places specified in
Schedule 1 attached hereto and such location is an owned, leased, bailment
or other location as specified in Schedule 1 attached hereto. As of the
date hereof, the correct corporate name, the principal place of business,
the chief executive office, and the federal tax identification number of
the Grantor and the places where the Grantor's books and records concerning
the Collateral are currently kept are set forth in Schedule 2 attached
hereto and made a part hereof, and the Grantor will not change such
principal place of business or chief executive office or remove such
records without (i) providing the Collateral Agent with at least thirty
(30) days' prior written notice of such change, and (ii) making all filings
under the Uniform Commercial Code necessary or appropriate to preserve the
perfection of the security interests described herein to the extent such
security interest may be perfected by such filings. The Grantor will not
change its name, identity or corporate structure in any manner which might
make any financing statement filed hereunder misleading, unless the Grantor
shall have (A) given the Collateral Agent at least thirty (30) days' prior
written notice thereof (and received any consent that may be required under
the terms of the Credit Agreement), and (B) certified to the Collateral
Agent that all filings reflecting such new name, identity or structure have
been made which are necessary or appropriate to preserve the perfection of
the security interests described herein. The Grantor will hold and preserve
such records and chattel paper and will permit representatives of the
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Collateral Agent at any time during normal business hours to inspect and
make abstracts from such records and chattel paper.
(b) The Grantor has exclusive possession and control of the Equipment
and Inventory, except for (i) Inventory in the possession and control of a
bailee or warehouseman of the Grantor as specified in Schedule 1 attached
hereto; (ii) Inventory in the possession and control of subcontractors of
the Grantor or any other Person for processing; (iii) Equipment being
repaired or serviced; and (iv) Equipment and Inventory in transit with
common or other carriers.
(c) The Grantor is the legal and beneficial owner of the Collateral
free and clear of all Liens except as permitted under Section 9.03 of the
Credit Agreement. The Grantor has not, during the five (5) years preceding
the date hereof, been known as or used any other corporate or fictitious
name, except as disclosed on Schedule 3 hereto, nor acquired all or
substantially all the assets, capital stock or operating unit of any
Person, except as disclosed on Schedule 3 hereto and each predecessor in
interest of the Grantor during the five (5) years preceding the Closing
Date is disclosed on Schedule 3 hereto.
(d) This Security Agreement creates in favor of the Collateral Agent a
legal, valid and enforceable security interest in the Collateral, securing
the payment of the Liabilities. When financing statements have been filed
in the appropriate offices in the locations listed on Schedules 1 and 2
hereto, the Collateral Agent will have a fully perfected first priority
Lien on the Collateral to the extent such Lien may be perfected by Uniform
Commercial Code filings, except, in the case of priority, for Liens
permitted by Section 9.03 of the Credit Agreement.
5. Covenants. The Grantor covenants and agrees with the Collateral Agent
that from and after the date of this Secur ity Agreement and until the
termination of this Security Agreement pursuant to Section 14 below:
(a) At any time and from time to time, upon the Collateral Agent's
written request and at the expense of the Grantor, the Grantor will
promptly and duly execute and deliver any and all such further instruments
and documents and take such further action as the Collateral Agent
reasonably may deem desirable in order to perfect and protect any Lien
granted or purported to be granted hereby or to enable the Collateral Agent
to exercise and enforce its rights and remedies hereunder with respect to
the Collateral. Without limiting the generality of the foregoing, the
Grantor will: (i) upon the occurrence and
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during the continuance of an Event of Default, at the request of the
Collateral Agent, mark conspicuously each item of chattel paper included in
the Collateral and each related contract and, each of its records
pertaining to the Collateral, with a legend, in form and substance
satisfactory to the Collateral Agent, indicating that such document,
chattel paper, related contract or Collateral is subject to the security
interest granted hereby; (ii) if any Collateral shall be evidenced by a
promissory note or other instrument (other than checks or drafts received
in the ordinary course of the Grantor's business), deliver and pledge to
the Collateral Agent hereunder such note or instrument duly endorsed and
accompanied by duly executed instruments of transfer or assignment, all in
form and substance satisfactory to the Collateral Agent; and (iii) execute
and file such financing or continuation statements, or amendments thereto,
and such other instruments or notices as the Collateral Agent may request,
as may be necessary or desirable, in order to perfect and preserve the
security interest granted or purported to be granted hereby. The Grantor
hereby authorizes the Collateral Agent to file any such financing or
continuation statements without the signature of the Grantor to the extent
permitted by applicable law. The Grantor hereby agrees that a carbon,
photographic, photostatic or other reproduction of this Security Agreement
or of a financing statement is sufficient as a financing statement to the
extent permitted by applicable law.
(b) The Grantor shall keep the Equipment and Inventory (other than
Inventory and Equipment sold in accordance with the terms of the Credit
Agreement, Equipment being repaired or serviced, Inventory in transit or in
the possession and control of subcontractors of the Grantor or any other
person for Processing and vehicles) at the places specified in Schedule 1
hereto and deliver written notice to the Collateral Agent at least 30 days
prior to establishing any other location at which it reasonably expects to
maintain Inventory and/or Equipment (it being understood and agreed that
all action required by Section 5(a)(iii) hereof shall have been taken in
the relevant jurisdiction with respect to all such Equipment and/or
Inventory prior to the establishment of any such location). Upon the
establishment of any such location, and after notice thereof to the
Collateral Agent as required in the preceding sentence, Schedule 1 hereto
shall be deemed amended to add such location thereto without further action
by the Collateral Agent or the Grantor and the Grantor hereby authorizes
the Collateral Agent to substitute a new Schedule 1 hereto to reflect such
additional location(s).
(c) The Grantor will keep and maintain at the Grantor's own cost and
expense satisfactory and complete
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records of the Collateral in a manner reasonably acceptable to the
Collateral Agent, including, without limitation, a record of all payments
received and all credits granted with respect to such Collateral and a
record of the Collateral Agent's security interest in the Collateral. Upon
the occurrence and during the continuance of an Event of Default, the
Grantor shall, for the Collateral Agent's further security, deliver and
turn over to the Collateral Agent or the Collateral Agent's designated
representatives at any time upon three (3) days' notice from the Collateral
Agent or the Collateral Agent's designated representative, copies of any
such books and records (including, without limitation, subject to
limitations in applicable licensing or similar arrangements, any and all
computer tapes, programs and source codes relating to the Collateral or any
part or parts thereof).
(d) In any suit, proceeding or action brought by the Collateral Agent
under any account comprising part of the Collateral, the Grantor will save,
indemnify and keep the Collateral Agent and each Lender harmless from and
against all expense, loss or damages suffered by reason of any defense,
setoff, counterclaim, recoupment or reduction of liability whatsoever of
the obligor thereunder, arising out of a breach by the Grantor of any
obligation or arising out of any other agreement, indebtedness or liability
at any time owing to or in favor of such obligor or its successors from the
Grantor, and all such obligations of the Grantor shall be and shall remain
enforceable against and only against the Grantor and shall not be
enforceable against the Collateral Agent or any Lender; provided, however,
the Grantor shall have no obligation to the Collateral Agent with respect
to the matters indemnified pursuant to this subsection (d) resulting from
the willful misconduct or gross negligence of the Collateral Agent, as
determined in a final non-appealable judgment by a court of competent
jurisdiction.
(e) The Grantor will not create, permit or suffer to exist, and will
defend the Collateral against and take such other action as is necessary to
remove, any Lien on such Collateral, other than Liens permitted under
Section 9.03 of the Credit Agreement, and will defend the right, title and
interest of the Collateral Agent in and to the Grantor's rights to such
Collateral, including, without limitation, the proceeds and products
thereof, against the claims and demands of all Persons whatsoever other
than claims secured by liens permitted under Section 9.03 of the Credit
Agreement.
(f) The Grantor will not, without the Collateral Agent's prior written
consent, except in the ordinary course of business and for amounts which
are not material to the
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Grantor in the aggregate, (i) grant any extension of the time of payment of
any of the Collateral or compromise, compound or settle the same for less
than the full amount thereof; (ii) release, wholly or partly, any Person
liable for the payment thereof; or (iii) allow any credit or discount
whatsoever thereon other than trade discounts granted in the ordinary
course of business.
(g) The Grantor will advise the Collateral Agent promptly, in
reasonable detail, of (i) any material Lien or claim made by or asserted
against any or all of the Collateral (other than Liens existing on the
Closing Date and listed on Schedule 1.01(A) to the Credit Agreement and
Liens permitted under Section 9.03 of the Credit Agreement), and (ii) the
occurrence of any other event which would have a material adverse effect on
the aggregate value of the Collateral or on the Liens with respect to such
Collateral created hereunder.
6. Collections. Except as otherwise provided in this Section 6, the Grantor
shall continue to collect, at its own expense, all amounts due or to become due
to the Grantor under the Accounts. In connection with such collections, the
Grantor may take (and, after the occurrence of an Event of Default, at the
Collateral Agent's direction, must take) such action as the Grantor or, after
the occurrence and during the continuation an Event of Default, the Collateral
Agent may deem necessary or advisable to enforce collection of the Accounts;
provided, however, that the Collateral Agent shall have the right at any time,
upon the occurrence and during the continuance of an Event of Default, (i) to
require the Grantor to prepare notices of assignment for each government
contract to which the Grantor is a party and to file such notices of assignment
with the appropriate contracting officer of the United States Government and
(ii) to otherwise notify the account debtors or obligors under any Accounts of
the assignment of such Accounts to the Collateral Agent and to direct such
account debtors or obligors to make payment of all amounts due or to become due
to the Grantor thereunder directly to the Collateral Agent and, upon such
notification and at the expense of the Grantor, to enforce collection of any
such Accounts, and to adjust, settle or compromise the amount or payment
thereof, in the same manner and to the same extent as the Grantor might have
done. After receipt by the Grantor of notice from the Collateral Agent requiring
performance of any of the acts referred to in the proviso to the preceding
sentence, (i) all amounts and proceeds (including instruments) received by the
Grantor in respect of the Accounts shall be received in trust for the ratable
benefit of the Collateral Agent, the Lenders, and the other Holders hereunder,
shall be segregated from other funds of the Grantor and shall be forthwith paid
over to the Collateral Agent in the same form as so received (with any necessary
endorsement) to be applied to the Obligations in accordance with the Credit
Agreement (including,
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without limitation, Section 3.02(b)(ii) thereof) and (ii) the Grantor shall not
adjust, settle or compromise the amount or payment of any Account, release
wholly or partly any account debtor or obligor thereof, or allow any credit or
discount thereon.
7. Remedies, Application of Proceeds, Rights upon Event of Default.
(a) Upon the occurrence and during the continuance of an Event of Default,
the Collateral Agent may exercise in respect of the Collateral, in addition to
all other rights and remedies provided for herein or otherwise available to it,
all the rights and remedies provided for in the Credit Agreement and all the
rights and remedies of a secured party under the Uniform Commercial Code, and
all other applicable law as in effect in any relevant jurisdiction. In addition,
the Collateral Agent may, upon the occurrence and during the continuance of an
Event of Default:
(i) require the Grantor to, and the Grantor hereby agrees that it will
at its expense and upon request of the Collateral Agent, promptly assemble
all, or such part, of the Collateral as directed by the Collateral Agent
and make such Collateral available to the Collateral Agent at a place
designated by the Collateral Agent, which place shall be reasonably
convenient to the Collateral Agent, whether at the premises of the Grantor
or otherwise;
(ii) enter, with or without process of law and without breach of the
peace, any premises where any of the Collateral or the books and records of
the Grantor related thereto are or may be located and, without charge or
liability to the Collateral Agent, seize and remove such Collateral and
such books and records from such premises, or remain upon such premises and
use the same for the purpose of enforcing any and all rights and remedies
of the Collateral Agent under this Security Agreement, the Credit Agreement
or any of the other Loan Documents; and
(iii) without notice, except as specified below, sell, lease, assign,
grant an option or options to purchase or otherwise dispose of all or any
part of the Collateral in one or more parcels, at public or private sale or
sales, at any exchange, broker's board or at any of the Collateral Agent's
offices or elsewhere, at such prices as the Collateral Agent may deem best,
for cash, on credit or for future delivery, and upon such other terms as
the Collateral Agent may deem commercially reasonable; provided, however,
that the Grantor shall not be credited with the net proceeds of any such
credit sale, future delivery or lease of the Collateral until the cash
proceeds thereof are actually received by the Collateral Agent and
provided, further that
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any such sale, lease assignment, option to purchase or other disposition
(each a "disposition") shall be subject to any prohibition or restriction
thereon contained in any agreement, contract, interest or right comprising
a part of the Collateral subject to such disposition and any applicable
law, rule or regulation. The Grantor agrees that, to the extent notice of
sale shall be required by law, ten (10) or more Business Days' notice, or
such longer period as may be required by law, to the Grantor of the time
and place of any public sale, or the time after which any private sale is
to be made, shall constitute reasonable notification. No notification
required by law need be given to the Grantor if the Grantor has signed,
after the occurrence of an Event of Default, a statement renouncing any
right to notification of sale or other intended disposition. The Collateral
Agent shall not be obligated to make any sale of any of the Collateral
regardless of notice of sale having been given. The Collateral Agent may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned. The Collateral
Agent, each other Agent and each Lender shall have the right upon any such
public sale or sales and, to the extent permitted by law, upon any such
private sale or sales, to purchase the whole or any part of the Collateral
so sold, free of any right or equity of redemption in the Grantor, which
right or equity is hereby expressly waived and released. In the event of a
sale of any Collateral, or any part thereof, to a Lender, the Collateral
Agent or any other Agent upon the occurrence and during the continuance of
an Event of Default, such Lender or Agent shall not deduct or offset from
any part of the purchase price to be paid therefor any indebtedness owing
to it by the Grantor. Any and all proceeds received by the Collateral Agent
with respect to any sale of, collection from or other realization upon all
or any part of the Collateral, whether consisting of monies, checks, notes,
drafts, bills of exchange, money orders or commercial paper of any kind
whatsoever, shall be held by the Collateral Agent and distributed by the
Collateral Agent in accordance with the Credit Agreement (including,
without limitation, Section 3.02(b)(ii) thereof) and the Grantor shall
remain liable for any deficiency following the sale of the Collateral.
Subject to the terms of any applicable license agreement to which the
Grantor is a party, the Collateral Agent is hereby granted an irrevocable
license or other right to use, without charge, the Grantor's labels,
copyrights, patents, rights of use of any name, trade names, general
intangibles, trademarks and advertising matter, or any property of a
similar nature, in completing production of, advertising for sale and
selling any Collateral.
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(b) To the extent permitted by applicable law, the Grantor waives all
claims, damages and demands against the Collateral Agent, any other Agent or any
Lender arising out of the repossession, retention or sale of the Collateral, or
any part or parts thereof, except as provided in Section 9 hereof.
(c) The Grantor recognizes that in the event the Grantor fails to perform,
observe or discharge any of its obligations or liabilities under this Security
Agreement, no remedy at law will provide adequate relief to the Collateral Agent
and the Collateral Agent shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages.
(d) The rights and remedies provided under this Security Agreement are
cumulative and may be exercised singly or concurrently, and are not exclusive of
any rights and remedies provided by law or equity.
8. The Collateral Agent May Perform. If the Grantor fails to perform any
agreement contained herein, the Collateral Agent, after giving notice in
accordance with the Credit Agreement, may itself perform, or cause performance
of, such agreement, and the expenses of the Agent incurred in connection
therewith shall constitute an Obligation payable by the Grantor in accordance
with the terms of the Credit Agreement.
9. The Collateral Agent's Duty of Care. The Collateral Agent shall not be
liable for any acts, omissions, errors of judgment or mistakes of fact or law
including, without limitation, acts, omissions, errors or mistakes with respect
to the Collateral, except for those arising out of or in connection with the
Collateral Agent's (i) gross negligence or willful misconduct, or (ii) failure
to use reasonable care with respect to the safe custody of the Collateral in the
Collateral Agent's possession. Without limiting the generality of the foregoing,
the Collateral Agent shall be under no obligation to take any steps necessary to
preserve rights in the Collateral against any other parties but may do so at its
option. All expenses incurred in connection therewith shall be for the sole
account of the Grantor, and shall constitute part of the Liabilities secured
hereby.
10. Marshalling, Payments Set Aside; Collateral Agent Appointed
Attorney-in-Fact. The Collateral Agent shall be under no obligation to marshal
any assets in favor of the Grantor or against or in payment of any or all of the
Liabilities. To the extent that the Grantor makes a payment or payments to the
Collateral Agent or the Collateral Agent receives any payment or proceeds of the
Collateral for the ratable benefit of the Collateral Agent, any other Agent, any
Lender, or any other Holder, which payment(s) or proceeds or any part thereof
are subsequently invalidated, declared to be fraudulent or
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preferential, set aside and/or required to be repaid to a trustee, receiver or
any party under any bankruptcy law, state or federal law, common law or
equitable cause, then, to the extent of such payment or proceeds received, the
Liabilities or any part thereof intended to be satisfied shall be revived and
continue in full force and effect, as if such payment or proceeds had not been
received by the Collateral Agent.
The Grantor agrees, promptly upon all requests of the Collateral Agent, to
take any action and execute any instrument which the Collateral Agent may deem
necessary or advisable to accomplish the purposes of this Security Agreement.
The Grantor hereby irrevocably constitutes and appoints the Collateral Agent and
any officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full power and authority in the name of the
Grantor, or in its own name, from time to time in the Collateral Agent's
discretion, for the purpose of carrying out the terms of this Security
Agreement, to take any and all appropriate action and to execute any and all
documents and instruments which may be necessary or desirable to accomplish the
purposes hereof and, without limiting the generality of the foregoing, hereby
gives the Collateral Agent the power and right on behalf of the Grantor, without
notice to or assent by the Grantor, to the extent permitted by applicable law,
to do the following:
(i) to obtain and adjust insurance required to be paid to the
Collateral Agent subject to and in accordance with Section 8.05 of the
Credit Agreement;
(ii) upon the occurrence and during the continuance of an Event of
Default, ask, demand, collect, sue for, recover, compromise, receive and
give acquittance and receipt for monies due and to become due under or in
respect of any of the Collateral;
(iii) upon the occurrence and during the continuance of an Event of
Default, receive, take, endorse, assign and deliver any and all checks,
notes, drafts, acceptances, documents and other negotiable and
nonnegotiable instruments, documents and chattel paper taken or received by
the Collateral Agent in connection with this Security Agreement;
(iv) upon the occurrence and during the continuance of an Event of
Default, to commence, file, prosecute, defend, settle, compromise or adjust
any claim, suit, action or proceeding with respect to the Collateral;
(v) upon the occurrence and during the continuance of an Event of
Default, to sell, transfer, assign or otherwise deal in or with the
Collateral or any part thereof pursuant to the terms and conditions of this
Security Agreement; and
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(vi) upon the occurrence and during the continuance of an Event of
Default, to do, at its option and at the expense and for the account of the
Grantor, at any time or from time to time, all acts and things which the
Agent deems necessary to protect or preserve the Collateral and to realize
upon the Collateral.
11. Severability. If any provision of this Security Agreement is held to be
prohibited or unenforceable in any jurisdiction the substantive laws of which
are held to be applicable hereto, such prohibition or unenforceability shall not
affect the validity or enforceability of the remaining provisions hereof and
shall not invalidate or render unenforceable such provision in any other
jurisdiction.
12. Amendments, Waivers and Consents. None of the terms or provisions of
this Security Agreement may be waived, altered, modified or amended, and no
consent to any departure by the Grantor herefrom shall be effective, except by
or pursuant to an instrument in writing which (i) is duly executed by the
Grantor and the Collateral Agent and (ii) complies with the requirements of the
Credit Agreement. Any such waiver shall be valid only to the extent set forth
therein. A waiver by the Collateral Agent of any right or remedy under this
Security Agreement on any one occasion shall not be construed as a waiver of any
right or remedy which the Collateral Agent would otherwise have on any future
occasion. No failure to exercise or delay in exercising any right, power or
privilege under this Security Agreement on the part of the Collateral Agent
shall operate as a waiver thereof; and no single or partial exercise of any
right, power or privilege under this Security Agreement shall preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege.
13. Binding Effect; Successors and Assigns. This Security Agreement shall
be binding upon the Grantor and its successors, and upon any assign(s) of the
Grantor in accordance with Section 13.19 of the Credit Agreement, and shall
inure to the ratable benefit of the Collateral Agent, the other Agents, the
Lenders, and the other Holders, and their respective successors and assigns.
Nothing set forth herein or in any other Loan Document is intended or shall be
construed to give any other Person any right, remedy or claim under, to or in
respect of this Security Agreement, the Credit Agreement or any other Loan
Document or any Collateral. The Grantor's successors shall include, without
limitation, a receiver, trustee or debtor-in-possession of or for the Grantor.
14. Termination of this Security Agreement; Release of Collateral.
(a) The security interest granted by the Grantor under this Security
Agreement shall terminate against all the
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Collateral upon final payment in full in cash of the Liabilities and termination
of the Revolving Loan Commitments and of the Term Loan Commitments. Upon such
termination and at the written request of the Grantor, and at the cost and
expense of the Grantor, the Collateral Agent shall execute in a timely manner a
satisfaction of this Security Agreement and such instruments, documents or
agreements as are necessary or desirable to terminate and remove of record any
documents constituting public notice of this Security Agreement and the security
interests and assignments granted hereunder and shall assign and transfer or
cause to be assigned and transferred, and shall deliver or cause to be
delivered, to the Grantor all property, including all monies, instruments and
securities of the Grantor then held by the Collateral Agent.
(b) Notwithstanding anything in this Security Agree ment to the contrary,
the Grantor may, to the extent permitted by Section 9.02 of the Credit Agreement
sell, assign, transfer or otherwise dispose of any Collateral. In addition, the
Collateral shall be subject to release from time to time (with the Collateral
referred to in the immediately preceding sentence, the "Released Collateral") in
7accordance with Section 12.09(b) of the Credit Agreement. The Liens under this
Security Agreement shall terminate with respect to the Released Collateral upon
such sale, transfer, assignment, disposition or release, and upon the request of
the Grantor, the Collateral Agent shall execute and deliver such instrument or
document as may be necessary to release the Liens granted hereunder; provided,
however, that (i) the Collateral Agent shall not be required to execute any such
documents on terms which, in the Collateral Agent's opinion, would expose the
Collateral Agent to liability or create any obligation or entail any consequence
other than the release of such Liens without recourse or warranty, and (ii) such
release shall not in any manner discharge, affect or impair the Liabilities or
any Liens on (or obligations of the Grantor in respect of) all interests
retained by the Grantor, including without limitation, the proceeds of any sale,
all of which shall continue to constitute part of the Collateral unless and
until released strictly in accordance with the Loan Documents.
15. The Collateral Agent's Exercise of Rights and Remedies upon the
Occurrence and during the Continuance of an Event of Default. Notwithstanding
anything set forth herein to the contrary, it is hereby expressly agreed that
upon the occurrence and during the continuance of an Event of Default, the
Collateral Agent may, and upon the written direction of the Requisite Lenders
shall, exercise any of the rights and remedies provided in this Security
Agreement, the Credit Agreement and any of the other Loan Documents.
16. Notices. Any notice, demand, request or any other communication
required or desired to be served, given or delivered hereunder shall be in
writing and shall be served,
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given or delivered as provided in Section 13.10 of the Credit Agreement.
17. Section Headings. The section headings herein are for convenience of
reference only, and shall not affect in any way the interpretation of any of the
provisions hereof.
18. GOVERNING LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK,
EXCEPT FOR PERFECTION AND ENFORCEMENT OF SECURITY INTERESTS AND LIENS IN OTHER
JURISDICTIONS WHICH SHALL BE GOVERNED BY THE LAWS OF THOSE JURISDICTIONS.
19. Further Indemnification. The Grantor agrees to pay, and to save the
Collateral Agent and each Lender harmless from, any and all liabilities with
respect to, or resulting from any delay in paying, any and all excise, sales or
other taxes which may be payable or determined to be payable with respect to any
of the Collateral or in connection with any of the transactions contemplated by
this Security Agreement.
20. Counterparts. This Security Agreement may be executed in separate
counterparts, each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
21. Consent to Jurisdiction and Service of Process. The Grantor agrees that
the terms of Section 13.20 of the Credit Agreement with respect to consent to
jurisdiction and service of process shall apply equally to this Security
Agreement.
22. Waiver of Bond. The Grantor waives the posting of any bond otherwise
required of the Collateral Agent in connection with any judicial process or
proceeding to realize on the Collateral or any other security for the
Liabilities, to enforce any judgment or other court order entered in favor of
the Collateral Agent, or to enforce by specific performance, temporary
restraining order, or preliminary or permanent injunction, this Security
Agreement or any other agreement or document between the Collateral Agent and
the Grantor.
23. Advice of Counsel. The Grantor represents and warrants to the
Collateral Agent and the Lenders that it has discussed this Security Agreement
and, specifically, the provisions of Sections 18, 21, 22 and 25 hereof, with the
Grantor's attorneys.
24. Further Assurances. The Grantor agrees that it will cooperate with the
Collateral Agent and will execute and deliver, or cause to be executed and
delivered, all such other stock powers, proxies, instruments and documents, and
will take all such other actions, including, without limitation, the
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execution and filing of financing statements, as the Collateral Agent may
reasonably request from time to time in order to carry out the provisions and
purposes of this Security Agreement.
25. WAIVER OF JURY TRIAL. EACH OF THE GRANTOR AND THE COLLATERAL AGENT
WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN THE COLLATERAL AGENT AND THE GRANTOR ARISING OUT OF
OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS SECURITY AGREEMENT OR ANY
OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH. EITHER THE GRANTOR OR THE COLLATERAL AGENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECURITY AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement or caused this Security Agreement to be executed and delivered by
their duly authorized officers as of the date first set forth above.
[NAME OF GRANTOR]
By____________________________
Name:
Title:
FIRST UNION COMMERCIAL CORPORATION,
as Collateral Agent
By____________________________
Name:
Title:
18
<PAGE>
SCHEDULE 1
TO
SECURITY AGREEMENT
([Name of Grantor])
Dated as of October __, 1997
Locations of Inventory and Equipment
and Status
Location Status
<PAGE>
SCHEDULE 2
TO
SECURITY AGREEMENT
([Name of Grantor])
Dated as of October __, 1997
Locations of Books and Records
1. Correct Corporate Name
2. Chief Executive Office
3. Principal Place of Business
4. Federal Tax Identification Number
5. Location(s) of the Grantor's Books and Records Concerning the Collateral
<PAGE>
SCHEDULE 3
TO
SECURITY AGREEMENT
([Name of Grantor])
Dated as of October __, 1997
I. Previous Grantor Names
II. Acquisitions of all or substantially all of the assets, capital stock or
operating unit of any Person
III. Predecessor in interest of the Grantor during the five preceding years
<PAGE>
EXHIBIT M
Form of Pledge Agreement
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (as amended, supplemented or otherwise modified from
time to time, this "Pledge Agreement") dated as of _______ __, 199_, by and
among [NAME OF PLEDGOR] (with its successors and permitted assigns, the
"Pledgor"), and FIRST UNION COMMERCIAL CORPORATION, in its capacity as
collateral agent (with its successors in such capacity, the "Collateral Agent")
for the Agents, the Lenders, and the other Holders, in each case under and as
defined in that certain Credit Agreement dated as of October __, 1997 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement") among the Pledgor and the other borrowers named therein
(collectively, the "Borrowers"), Societe Generale, as administrative agent (the
"Administrative Agent"), the Collateral Agent, and First Union Commercial
Corporation, as syndication agent (the "Syndication Agent", and collectively
with the Administrative Agent and the Collateral Agent, the "Agents"), and the
financial institutions from time to time parties thereto (the "Lenders").
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Credit Agreement.
WITNESSETH:
WHEREAS, the Pledgor is a party to the Credit Agreement, pursuant to which
the Lenders have agreed, subject to certain conditions precedent, to make loans
and other financial accommodations to the Pledgor and the other Borrowers from
time to time;
WHEREAS, the Pledgor owns [(i)] the shares of capital stock described in
Exhibit A hereto and issued by the issuers named therein [and (ii) the
indebtedness described in Exhibit C hereto and issued by the obligors named
therein]1; and
WHEREAS, in order to secure the prompt and complete payment, observance and
performance of (i) the Obligations and (ii) all of the Pledgor's obligations and
liabilities hereunder and in connection herewith (all Obligations and such
obligations and liabilities hereunder being hereinafter referred to collectively
as the "Liabilities"), the Lenders have required, as a condition, among others,
to entering into the Credit Agreement
- --------
1 This and subsequent references to the Pledged Debt will be included in the
Stellex Industries, Inc. Pledge Agreement.
<PAGE>
with the Borrowers, that the Pledgor execute and deliver this Pledge Agreement;
NOW, THEREFORE, for and in consideration of the foregoing and of any
financial accommodations or extensions of credit (including, without limitation,
any loan or advance by renewal, refinancing or extension of the agreements
described hereinabove or otherwise) heretofore, now or hereafter made to or for
the benefit of the Borrowers pursuant to the Credit Agreement or any other
agreement, instrument or document executed pursuant to or in connection
therewith, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Pledgor and the Collateral
Agent hereby agree as follows:
1. Defined Terms.
(a) Unless otherwise defined herein, all terms defined in Article 8 and
Article 9 of the Uniform Commercial Code in effect as of the date hereof in the
State of New York are used herein as defined therein.
(b) The words "hereby," "hereof," "herein" and "hereunder" and words of
like import when used in this Pledge Agreement shall refer to this Pledge
Agreement as a whole and not to any particular provision of this Pledge
Agreement. Section references herein are to this Pledge Agreement unless
otherwise specified.
(c) All terms defined in this Pledge Agreement in the singular shall have
comparable meanings when used in the plural, and vice versa, unless otherwise
specified.
2. Pledge. The Pledgor hereby pledges to the Collateral Agent, for the
ratable benefit of the Agents, the Lenders and the other Holders (each
individually a "Secured Party", and collectively, the "Secured Parties"), and
grants to the Collateral Agent, for the ratable benefit of the Secured Parties,
a security interest in the following (collectively, the "Pledged Collateral"):
(a) The shares of the capital stock described in Exhibit A hereto, and
the certificates representing the shares of such capital stock, all options
and warrants for the purchase of shares of such capital stock held in the
name of the Pledgor (all of said capital stock, options and warrants and
all capital stock held in the name of the Pledgor as a result of the
exercise of such options or warrants being hereinafter collectively
referred to as the "Pledged Stock"), herewith delivered to the Collateral
Agent accompanied by stock powers in the form of Exhibit B hereto and made
a part hereof (the "Stock Powers") duly executed in
-2-
<PAGE>
blank, and all dividends, cash, instruments and other property from time to
time received, receivable or otherwise distributed in respect of, or in
exchange for, any or all of the Pledged Stock;
(b) All additional shares of stock of any issuer referred to in
Exhibit A hereto from time to time acquired by the Pledgor in any manner,
and all of the shares of the capital stock issued to the Pledgor by any
other wholly owned Subsidiary of the Pledgor which is organized under the
laws of the United States or any state or other political subdivision
thereof after the date hereof, and the certificates representing such
additional shares (any such additional shares shall constitute part of the
Pledged Stock and the Collateral Agent is irrevocably authorized to amend
Exhibit A from time to time to reflect such additional shares), and all
options, warrants, dividends, cash, instruments and other rights and
options from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of such shares;
[(c) The indebtedness of each issuer referred to in Exhibit C attached
hereto (the "Pledged Debt") and the instruments evidencing such Pledged
Debt, duly endorsed and in transferable form, all payments of principal
thereof and interest thereon, due and to become due thereunder, and all
books and records applicable thereto, herewith delivered to the Collateral
Agent;]
[(d) All additional instruments evidencing indebtedness which is from
time to time owed to the Pledgor by any Person, duly endorsed and in
transferable form, and all payments of principal thereof and interest
thereon, due and to become due thereunder, and all books and records
applicable thereto (such additional obligations shall constitute part of
the Pledged Debt and the Collateral Agent is irrevocably authorized to
amend Exhibit C from time to time to reflect such additional obligations);]
(e) The property and interests in property described in Section 4
below; and
(f) All proceeds of the foregoing.
3. Security for Obligations. The Pledged Collateral secures the prompt
payment, performance and observance of the Liabilities.
4. Pledged Collateral Adjustments. If, during the term of this Pledge
Agreement:
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<PAGE>
(a) Any stock dividend, reclassification, readjustment or other change
is declared or made in the capital structure of any issuer of Pledged
Stock, or any option included within the Pledged Collateral is exercised,
or both, or
(b) Any subscription warrants or any other rights or options shall be
issued to the Pledgor in connection with the Pledged Collateral, [or
(c) Any additional indebtedness owing to the Pledgor is incurred by
any of the obligors of the Pledged Debt,]
then all new, substituted and additional shares, warrants, rights, options,
notes or other securities, issued by reason of any of the foregoing, shall be
promptly delivered to and held by the Collateral Agent under the terms of this
Pledge Agreement and shall constitute Pledged Collateral hereunder; provided,
however, that nothing contained in this Section 4 shall be deemed to permit any
stock dividend, issuance of additional stock, warrants, rights or options,
reclassification, readjustment or other change in the capital structure of any
issuer of Pledged Stock which is prohibited in the Credit Agreement.
5. Subsequent Changes Affecting Pledged Collateral. The Pledgor represents
and warrants that it has made its own arrangements for keeping informed of
changes or potential changes affecting the Pledged Collateral (including, but
not limited to, rights to convert, rights to subscribe, payment of dividends,
reorganization or other exchanges, tender offers and voting rights), and the
Pledgor agrees that, subject to Section 22, none of the Secured Parties shall
have any obligation to inform the Pledgor of any such changes or potential
changes or to take any action or omit to take any action with respect thereto.
The Collateral Agent may, upon the occurrence and during the continuation of an
Event of Default, without notice and at its option, transfer or register the
Pledged Collateral or any part thereof into its or its nominee's name with or
without any indication that such Pledged Collateral is subject to the security
interest hereunder, and the Pledgor will cause each issuer of Pledged Stock to
cooperate with the Collateral Agent in effecting any such transfer or
registration. In addition, the Collateral Agent may at any time exchange
certificates or instruments representing or evidencing Pledged Collateral for
certificates or instruments of smaller or larger denominations and the Pledgor
will cause each issuer of Pledged Stock to cooperate with the Agent in effecting
any such exchange.
6. Representations and Warranties. The Pledgor represents and warrants as
follows:
(a) The Pledgor is the sole legal and beneficial owner of the
percentage of the issued and outstanding shares of
-4-
<PAGE>
capital stock of the respective issuers thereof listed on Exhibit A hereto,
free and clear of any Lien except for the security interest created by this
Pledge Agreement, and the Pledged Stock constitutes that percentage of the
issued and outstanding shares of capital stock of the respective issuers
thereof set forth in Exhibit A hereto;
[(b) The Pledgor is the sole legal and beneficial owner of the Pledged
Debt, free and clear of any Lien except for the security interest created
by this Pledge Agreement, and the Pledged Debt is a valid and binding
obligation of its obligor, enforceable in accordance with its terms;]
(c) The Pledgor has, as applicable, full corporate power and authority
to execute, deliver and perform this Pledge Agreement;
(d) There are no restrictions upon the voting rights associated with,
or upon the transfer of, any of the Pledged Collateral, other than pursuant
to this Pledge Agreement or as otherwise may be expressly permitted by any
of the other Loan Documents;
(e) The Pledgor has the right to vote, pledge and grant a security
interest in or otherwise transfer such Pledged Collateral free of any
Liens;
(f) No authorization, approval, or other action by, and no notice to
or filing with, any Governmental Authority or regulatory body is required
either (i) for the pledge of the Pledged Collateral pursuant to this Pledge
Agreement or for the execution, delivery or performance of this Pledge
Agreement by the Pledgor or (ii) for the exercise by the Collateral Agent
of the voting or other rights provided for in this Pledge Agreement or the
remedies in respect of the Pledged Collateral pursuant to this Pledge
Agreement (except as may be required in connection with such disposition by
laws affecting the offering and sale of securities generally);
(g) The pledge of the Pledged Collateral pursuant to this Pledge
Agreement creates a valid and perfected first priority security interest in
the Pledged Collateral, in favor of the Collateral Agent for the benefit of
the Secured Parties securing the payment and performance of the
Liabilities;
(h) The Stock Powers are duly executed and give the Agent the
authority they purport to confer; and
(i) The grant and perfection of the security interests in the Pledged
Collateral for the ratable benefit of the
-5-
<PAGE>
Secured Parties, in accordance with the terms herein, are not made in
violation of the registration requirements of the Securities Act of 1933
(the "Securities Act"), any applicable provisions of other federal
securities laws, state securities or "Blue Sky" law, foreign securities
law, or applicable general corporation law or any other applicable law.
7. Voting Rights. During the term of this Pledge Agreement, and except as
provided in this Section 7 below, the Pledgor shall have the right to vote the
Pledged Stock on all corporate questions in a manner not inconsistent with the
terms of this Pledge Agreement, the Credit Agreement and any other agreement,
instrument or document executed pursuant thereto or in connection therewith.
Upon the occurrence and during the continuance of an Event of Default, the
Collateral Agent may, at the Collateral Agent's option and following written
notice from the Collateral Agent to the Pledgor, exercise all voting powers
pertaining to the Pledged Collateral, including the right to take action by
shareholder consent.
8. Dividends and Other Distributions. (a) So long as no Event of Default
shall have occurred and be continuing:
(i) The Pledgor shall be entitled to receive and retain any and all
dividends, including dividends in connection with a reduction of capital,
capital surplus or paid-in surplus and interest paid in respect of the
Pledged Collateral, provided, however, that, except as otherwise provided
in the Credit Agreement, any and all
(A) dividends and interest paid or payable other than in cash
with respect to, and instruments and other property received,
receivable or otherwise distributed with respect to, or in exchange
for, any of the Pledged Collateral;
(B) dividends and other distributions paid or payable in cash
with respect to any of the Pledged Collateral on account of a partial
or total liquidation or dissolution; and
(C) cash paid, payable or otherwise distributed with respect to
principal of, or in redemption of, or in exchange for, any of the
Pledged Collateral;
shall be Pledged Collateral, and shall be forthwith delivered to the
Collateral Agent to hold, for the ratable benefit of the Secured Parties,
as Pledged Collateral and shall, if received by the Pledgor, be received in
trust for the Collateral Agent, for the ratable benefit of the Secured
Parties, and shall be segregated from the other property or
-6-
<PAGE>
funds of the Pledgor. All such Pledged Collateral so received in the form
of monies, checks, notes, drafts or funds shall be delivered promptly to
the Collateral Agent (with any necessary endorsement) as proceeds of
Collateral in accordance with the applicable provisions of the Credit
Agreement, and all other such Pledged Collateral so received shall be
delivered promptly to the Collateral Agent as Pledged Collateral in the
same form as so received (with any necessary endorsement); and
(ii) The Collateral Agent shall execute and deliver (or cause to be
executed and delivered) to the Pledgor all such proxies and other
instruments as the Pledgor may reasonably request for the purpose of
enabling the Pledgor to receive the dividends or interest payments which
the Pledgor is authorized to receive and retain pursuant to clause (i)
above.
(b) Upon the occurrence and during the continuance of an Event of Default:
(i) All rights of the Pledgor to receive the dividends and interest
payments which it would otherwise be authorized to receive and retain
pursuant to Section 8(a)(i) hereof shall cease, and all such rights shall
thereupon become vested in the Collateral Agent, for the ratable benefit of
the Secured Parties, which shall thereupon have the sole right to receive
and hold as Pledged Collateral such dividends and interest payments; and
(ii) All dividends and interest payments which are received by the
Pledgor contrary to the provisions of clause (i) of this Section 8(b) shall
be received in trust for the Collateral Agent, for the ratable benefit of
the Secured Parties, shall be segregated from other funds of the Pledgor
and shall be paid over immediately to the Collateral Agent as Pledged
Collateral in the same form as so received (with any necessary
endorsements);
(iii) The Pledgor shall, upon the request of the Collateral Agent, at
Pledgor's expense, execute and deliver all such instruments and documents,
and do or cause to be done all such other acts and things, as may be
reasonably necessary or, in the opinion of the Collateral Agent, the
Pledgor or either of their counsel, reasonably advisable to register the
applicable Pledged Collateral under the provisions of the Securities Act in
order to sell the same, and to exercise its best efforts to cause the
registration statement relating thereto to become effective and to remain
effective for such period as prospectuses are required by law to be
furnished, and to make all amendments and supplements thereto and to the
related prospectus which, in
-7-
<PAGE>
the opinion of the Collateral Agent, the Pledgor or either of their
counsel, are necessary or advisable, all in conformity with the
requirements of the Securities Act and the rules and regulations of the
Securities and Exchange Commission applicable thereto;
(iv) The Pledgor shall, upon the reasonable request of the Collateral
Agent, at Pledgor's expense, use its best efforts to qualify the Pledged
Collateral under state securities or "Blue Sky" laws and to obtain all
necessary governmental approvals for the sale of the Pledged Collateral, as
requested by the Collateral Agent;
(v) The Pledgor shall, upon the request of the Collateral Agent, at
the Pledgor's expense, make available to the holders of its securities, as
soon as practicable, earnings statements which will satisfy the provisions
of Section 11(a) of the Securities Act; and
(vi) The Pledgor shall, upon the request of the Collateral Agent, at
the Pledgor's expense, do or cause to be done all such other acts and
things as may be reasonably necessary to make such sale of the Pledged
Collateral or any part thereof valid and binding and in compliance with
applicable law.
The Pledgor will reimburse the Collateral Agent for all reasonable expenses
incurred by the Collateral Agent, including, without limitation, reasonable
attorneys' and accountants' fees and expenses, in connection with the foregoing.
Upon or at any time after the occurrence and during the continuance of an Event
of Default, if the Collateral Agent determines that, prior to any public
offering of any securities constituting part of the Pledged Collateral, such
securities should be registered under the Securities Act and/or registered or
qualified under any other federal or state law and such registration and/or
qualification is not practicable, then the Pledgor agrees that it will be deemed
commercially reasonable if a private sale, upon at least ten (10) Business Days'
notice to the Pledgor, is arranged so as to avoid a public offering, even though
the sales price established and/or obtained at such private sale may be
substantially less than prices which could have been obtained for such security
on any market or exchange or in any other public sale.
9. Transfers and Other Liens. The Pledgor agrees that it will not (i) sell
or otherwise dispose of, or grant any option with respect to, any of the Pledged
Collateral without the prior written consent of the Collateral Agent, other than
as permitted by the Credit Agreement, or (ii) create or permit to exist any Lien
upon or with respect to any of the Pledged
-8-
<PAGE>
Collateral, except for the security interest under this Pledge Agreement.
10. Remedies; Application of Proceeds. (a) The Collateral Agent shall have,
in addition to any other rights given under this Pledge Agreement or by law, all
of the rights and remedies with respect to the Pledged Collateral of a secured
party under the Uniform Commercial Code as in effect in the State of New York.
In addition, upon the occurrence and during the continuance of an Event of
Default, the Collateral Agent shall have such powers of sale and other powers as
may be conferred by applicable law. With respect to the Pledged Collateral or
any part thereof which shall then be in or shall thereafter come into the
possession or custody of the Collateral Agent or which the Collateral Agent
shall otherwise have the ability to transfer under applicable law, the
Collateral Agent may, in its sole discretion, without notice except as specified
below, after the occurrence of an Event of Default, sell or cause the same to be
sold at any exchange, broker's board or at public or private sale, in one or
more sales or lots, at such price as the Collateral Agent may reasonably deem
best, for cash or on credit or for future delivery, without assumption of any
credit risk, and the purchaser of any or all of the Pledged Collateral so sold
shall thereafter own the same, absolutely free from any claim, encumbrance or
right of any kind whatsoever. Any Secured Party may, in its own name, or in the
name of a designee or nominee, buy the Pledged Collateral at any public sale
and, if permitted by applicable law, buy the Pledged Collateral at any private
sale. In the event of a sale of any Collateral, or any part thereof, to a
Secured Party upon the occurrence and during the continuance of an Event of
Default, such Secured Party shall not deduct or offset from any part of the
purchase price to be paid therefor any indebtedness owing to it by the Pledgor.
The Pledgor will pay to the Collateral Agent all reasonable expenses (including,
without limitation, court costs and reasonable attorneys' and paralegals' fees
and expenses) of, or incidental to, the enforcement of any of the provisions
hereof. The Collateral Agent agrees to distribute any proceeds of the sale of
the Pledged Collateral in accordance with the Credit Agreement (including,
without limitation, Section 3.02 thereof) and the Pledgor shall remain liable
for any deficiency following the sale of the Pledged Collateral.
(b) Unless any of the Pledged Collateral threatens to decline speedily in
value or is or becomes of a type sold on a recognized market, the Collateral
Agent will give the Pledgor reasonable notice of the time and place of any
public sale thereof, or of the time after which any private sale or other
intended disposition is to be made. Any sale of the Pledged Collateral conducted
in conformity with reasonable commercial practices of banks, commercial finance
companies, insurance companies or other financial institutions disposing of
property
-9-
<PAGE>
similar to the Pledged Collateral shall be deemed to be commercially reasonable.
Notwithstanding any provision to the contrary contained herein, the Pledgor
agrees that any requirements of reasonable notice shall be met if such notice is
received by the Pledgor as provided in Section 23 below at least ten (10)
Business Days before the time of the sale or disposition; provided, however,
that the Collateral Agent may give any shorter notice that is commercially
reasonable under the circumstances. Any other requirement of notice, demand or
advertisement for sale is waived, to the extent permitted by law.
(c) In view of the fact that federal and state securities laws may impose
certain restrictions on the method by which a sale of the Pledged Collateral may
be effected after an Event of Default, the Pledgor agrees that upon the
occurrence and during the continuance of an Event of Default, the Collateral
Agent may, from time to time, attempt to sell all or any part of the Pledged
Collateral by means of a private placement restricting the bidders and
prospective purchasers to those who are qualified and will represent and agree
that they are purchasing for investment only and not for distribution. In so
doing, the Collateral Agent may solicit offers to buy the Pledged Collateral, or
any part of it, from a limited number of investors deemed by the Collateral
Agent, in its reasonable judgment, to be financially responsible parties who
might be interested in purchasing the Pledged Collateral. If the Collateral
Agent solicits and receives such offers from not less than four (4) such
investors, then the acceptance by the Collateral Agent of the highest offer
obtained therefrom shall be deemed to be a commercially reasonable method of
disposing of such Pledged Collateral; provided, however, that this Section does
not impose a requirement that the Collateral Agent solicit offers from four or
more investors in order for the sale to be commercially reasonable.
11. Collateral Agent Appointed Attorney-in-Fact. The Pledgor hereby
appoints the Collateral Agent its attorney-in-fact, with full authority, in the
name of the Pledgor or otherwise, upon the occurrence and during the continuance
of an Event of Default, from time to time in the Collateral Agent's sole
discretion, to take any action and to execute any instrument which the
Collateral Agent may deem reasonably necessary or reasonably advisable to
accomplish the purposes of this Pledge Agreement, including, without limitation
(subject to Section 8 hereof), to receive, endorse and collect all instruments
made payable to the Pledgor representing any dividend, interest payment or other
distribution in respect of the Pledged Collateral or any part thereof and to
give full discharge for the same and to arrange for the transfer of all or any
part of the Pledged Collateral on the books of each of the issuers of such
Pledged Stock to the name of the Collateral Agent or the Collateral Agent's
nominee.
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<PAGE>
12. Waivers. The Pledgor waives presentment and demand for payment of any
of the Obligations, protest and notice of dishonor or Event of Default with
respect to any of the Obligations and all other notices to which the Pledgor
might otherwise be entitled except as otherwise expressly provided herein or in
the Credit Agreement.
13. Termination of This Pledge Agreement; Release of Pledged Collateral.
The pledge made and the security interest granted by the Pledgor under this
Pledge Agreement shall terminate against all the Collateral upon final payment
in full in cash of the Obligations and termination of the Commitments. Upon such
termination (other than as a result of the sale of the Pledged Collateral) and
at the written request of the Pledgor or its successors or assigns, and at the
cost and expense of the Pledgor or its successors or assigns, the Collateral
Agent shall execute in a timely manner such instruments, documents or agreements
as are reasonably necessary or reasonably desirable to terminate the Collateral
Agent's security interest in the Pledged Collateral and deliver the Pledged
Stock and the Stock Powers, subject to any disposition made by the Collateral
Agent pursuant to the Pledge Agreement.
14. Successors and Assigns. This Pledge Agreement shall be binding upon the
Pledgor and its successors, and upon any assign(s) of the Pledgor, and shall
inure to the benefit of the Secured Parties and their respective successors and
assigns. Nothing set forth herein or in any other Loan Document is intended or
shall be construed to give any other Person any right, remedy or claim under, to
or in respect of this Pledge Agreement, the Credit Agreement or any other Loan
Document or any Pledged Collateral. The Pledgor's successors shall include,
without limitation, a receiver, trustee or debtor-in-possession of or for the
Pledgor.
15. APPLICABLE LAW. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS AND DECISIONS OF THE
STATE OF NEW YORK, EXCEPT FOR PERFECTION AND ENFORCEMENT OF SECURITY INTERESTS
AND LIENS IN OTHER JURISDICTIONS WHICH SHALL BE GOVERNED BY THE LAWS OF THOSE
JURISDICTIONS.
16. Consent to Jurisdiction and Service of Process. The Pledgor agrees that
the terms of Section 13.20 of the Credit Agreement with respect to consent to
jurisdiction and service of process shall apply equally to the Pledgor under
this Pledge Agreement.
17. WAIVER OF JURY TRIAL. EACH OF THE PLEDGOR AND THE COLLATERAL AGENT
WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN THE COLLATERAL AGENT AND THE PLEDGOR ARISING OUT OF
OR
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<PAGE>
RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH.
EITHER THE PLEDGOR OR THE COLLATERAL AGENT MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
18. Waiver of Bond. The Pledgor waives the posting of any bond otherwise
required of the Collateral Agent in connection with any judicial process or
proceeding to realize on the Pledged Collateral or any other security for the
Obligations, to enforce any judgment or other court order entered in favor of
the Collateral Agent, or to enforce by specific performance, temporary
restraining order, or preliminary or permanent injunction, this Pledge Agreement
or any other agreement or document between the Collateral Agent and the Pledgor.
19. Advice of Counsel. The Pledgor represents and warrants to the Secured
Parties that it has discussed this Pledge Agreement and, specifically, the
provisions of Sections 15 through 18 hereof, with the Pledgor's attorneys.
20. Severability. Whenever possible, each provision of this Pledge
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but, if any provision of this Pledge Agreement shall be held to
be prohibited or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Pledge Agreement.
21. Further Assurances. The Pledgor agrees that it will cooperate with the
Collateral Agent and will execute and deliver, or cause to be executed and
delivered, all such other stock powers, proxies, instruments and documents, and
will take all such other actions, including, without limitation, the execution
and filing of financing statements, as the Collateral Agent may reasonably
request from time to time in order to carry out the provisions and purposes of
this Pledge Agreement.
22. The Collateral Agent's Duty of Care. The Collateral Agent shall not be
liable for any acts, omissions, errors of judgment or mistakes of fact or law
including, without limitation, acts, omissions, errors or mistakes with respect
to the Pledged Collateral, except for those arising out of or in connection with
the Collateral Agent's (i) gross negligence or willful misconduct, (ii) material
breach of a material provision of this Pledge Agreement, or (iii) failure to use
reasonable care with respect to the safe custody of the Pledged Collateral in
the Collateral Agent's possession. Without limiting the generality of the
foregoing, the Collateral Agent shall be under no obligation to take any steps
necessary to preserve rights in the
-12-
<PAGE>
Pledged Collateral against any other parties but may do so at its option. All
reasonable expenses incurred in connection therewith shall be for the sole
account of the Pledgor, and shall constitute part of the Obligations secured
hereby.
23. Notices. All notices and other communications required or desired to
be served, given or delivered hereunder shall be in writing and shall be served,
given or delivered as provided in Section 13.10 of the Credit Agreement.
24. Amendments, Waivers and Consents. None of the terms or provisions of
this Pledge Agreement may be waived, altered, modified or amended, and no
consent to any departure by the Pledgor herefrom shall be effective, except by
or pursuant to an instrument in writing which (i) is duly executed by the
Pledgor and the Collateral Agent and (ii) complies with the requirements of
Section 13.09 of the Credit Agreement. Any such waiver shall be valid only to
the extent set forth therein. A waiver by the Collateral Agent of any right or
remedy under this Pledge Agreement on any one occasion shall not be construed as
a waiver of any right or remedy which the Collateral Agent would otherwise have
on any future occasion. No failure to exercise or delay in exercising any right,
power or privilege under this Pledge Agreement on the part of the Collateral
Agent shall operate as a waiver thereof; and no single or partial exercise of
any right, power or privilege under this Pledge Agreement shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
25. Section Titles. The section titles herein are for convenience of
reference only, and shall not affect in any way the interpretation of any of the
provisions hereof.
26. Execution in Counterparts. This Pledge Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
-13-
<PAGE>
IN WITNESS WHEREOF, the Pledgor and the Collateral Agent have executed this
Pledge Agreement as of the date set forth above.
[NAME OF PLEDGOR]
By:
Name:
Title:
FIRST UNION COMMERCIAL CORPORATION,
as Collateral Agent
By:
Name:
Title:
-14-
<PAGE>
FORM OF
ACKNOWLEDGMENT
The undersigned hereby acknowledges receipt of a copy of the foregoing
Pledge Agreement, agrees promptly to note on its books the security interests
granted under such Pledge Agreement, and waives any rights or requirement at any
time hereafter to receive a copy of such Pledge Agreement in connection with the
registration of any Pledged Collateral in the name of the Collateral Agent or
its nominee or the exercise of voting rights by the Collateral Agent.
[NAME OF ISSUER]
By:
Name:_______________________________
Title: _____________________________
-15-
<PAGE>
EXHIBIT A
to
PLEDGE AGREEMENT
([Name of Pledgor])
dated as of October __, 1997
Pledged Stock
<TABLE>
<CAPTION>
Percentage of Issued Percentage of Shares of Capital
and Outstanding Capital Stock owned Stock owned by
Capital Stock owned by the Pledgor the Pledgor
Stock Issuer by the Pledgor Subject to Pledge Subject to Pledge
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
100%
100%
100%
</TABLE>
<PAGE>
EXHIBIT B
to
PLEDGE AGREEMENT
([Name of Pledgor])
dated as of October __, 1997
Form of Stock Power
STOCK POWER
FOR VALUE RECEIVED, the undersigned does hereby sell, assign and transfer
to _____________________________________ ____ Shares of Common Stock of
____________________ represented by Certificate[s] No. _____ [and _____] (the
"Stock"), standing in the name of the undersigned on the books of said
corporation and does hereby irrevocably constitute and appoint
________________________ as the undersigned's true and lawful attorney, for and
in name and stead, to sell, assign and transfer all or any of the Stock, and for
that purpose to make and execute all necessary acts of assignment and transfer
thereof; and to substitute one or more persons with like full power, hereby
ratifying and confirming all that said attorney or substitute or substitutes
shall lawfully do by virtue hereof.
Dated: _______________
[NAME OF PLEDGOR]
By: _________________________
Name:
Title:
<PAGE>
[EXHIBIT C
to
PLEDGE AGREEMENT
([Name of Pledgor])
dated as of October __, 1997
Pledged Debt]
<PAGE>
EXHIBIT N
EXECUTION COPY
PATENT SECURITY AGREEMENT
THIS PATENT SECURITY AGREEMENT (as amended, supplemented or otherwise
modified from time to time, this "Agreement"), dated as of October 31, 1997, by
and among STELLEX MICROWAVE SYSTEMS, INC. (with its successors and permitted
assigns, the "Borrower"), and FIRST UNION COMMERCIAL CORPORATION, in its
capacity as collateral agent (with its successors in such capacity, the
"Collateral Agent") for the Agents, the Lenders, and the other Holders, in each
case under and as defined in that certain Credit Agreement dated as of October
31, 1997 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement") among the Borrower and the other borrowers named therein
(collectively, the "Borrowers"), Societe Generale, as administrative agent (the
"Administrative Agent"), the Collateral Agent, and First Union Commercial
Corporation, as syndication agent (the "Syndication Agent, and collectively with
the Administrative Agent and the Collateral Agent, the "Agents"), and the
financial institutions from time to time parties thereto (the "Lenders").
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower is a party to the Credit Agreement, pursuant to which
the Lenders have agreed, subject to certain conditions precedent, to make loans
and other financial accommodations to the Borrowers from time to time;
WHEREAS, the Borrower and the Collateral Agent are parties to that certain
Security Agreement of even date herewith (as the same may hereafter be amended,
restated, supplemented or otherwise modified from time to time, the "Security
Agreement"), pursuant to which the Borrower has granted a security interest in
certain of its assets to the Collateral Agent for the ratable benefit of the
Agents, the Lenders, and the other Holders; and
WHEREAS, in order to secure the prompt and complete payment, observance and
performance of (i) all of the Obligations and (ii) all of the Borrower's
obligations and liabilities hereunder and in connection herewith (all the
Obligations and such obligations and liabilities hereunder being hereinafter
referred to collectively as the "Liabilities"), the Agents and the Lenders have
required as a condition, among others, to entering into the Credit Agreement
that the Borrower execute and deliver this Agreement;
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other
<PAGE>
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms.
(a) Unless otherwise defined herein, each capitalized term used herein that
is defined in the Credit Agreement shall have the meaning specified for such
term in the Credit Agreement.
(b) The words "hereby," "hereof," "herein" and "hereunder" and words of
like import when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement, and section references
are to this Agreement unless otherwise specified.
(c) All terms defined in this Agreement in the singular shall have
comparable meanings when used in the plural, and vice versa, unless otherwise
specified.
2. Incorporation of Credit Agreement. The Credit Agreement and the terms
and provisions thereof are hereby incorporated herein in their entirety by this
reference thereto.
3. Incorporation of Premises. The premises set forth above are incorporated
into this Agreement by this reference thereto and are made a part hereof.
4. Security Interest in Patents. To secure the complete and timely payment,
performance and satisfaction of all of the Liabilities, the Borrower hereby
grants to the Collateral Agent, for the ratable benefit of the Agents, the
Lenders, and the other Holders, a security interest in, as and by way of a first
mortgage and security interest having priority over all other security
interests, with power of sale to the extent permitted by applicable law, all of
the Borrower's now owned and hereafter acquired:
(a) patents and patent applications, and the inventions and
improvements described and claimed therein, including, without limitation,
those patents and patent applications listed on Schedule A attached hereto
and made a part hereof, and (i)the reissues, divisions, continuations,
renewals, extensions and continuations-in-part thereof, (ii) all income,
royalties, damages and payments now and hereafter due and/or payable under
and with respect thereto, including, without limitation, payments under all
licenses entered into in connection therewith and damages and payments for
past or future infringements thereof, (iii) the right to sue for past,
present and future infringements thereof, (iv) all patented technology and
know-how, and (v) all of the Borrower's rights corresponding thereto
throughout the world (all of the foregoing patents and
2
<PAGE>
applications, together with the items described in clauses (i)-(v) in this
paragraph 4(a) are sometimes hereinafter individually and/or collectively
referred to as the "Patents"); and
(b) rights under or interest in any patent license agreements with any
other party, whether the Borrower is a licensee or licensor under any such
license agreement, including, without limitation, those patent license
agreements listed on Schedule B attached hereto and made a part hereof, in
each case to the extent assignable without violation thereof, and the right
to prepare for sale and sell any and all Inventory now or hereafter owned
by the Borrower and now or hereafter covered by such licenses (all of the
foregoing are hereinafter referred to collectively as the "Licenses").
The Borrower hereby authorizes the Collateral Agent to file this Agreement, or a
duplicate thereof, with the United States Patent and Trademark Office or with
any other authority the Collateral Agent deems appropriate, and the Borrower
agrees to cooperate with the Collateral Agent as the Collateral Agent may
request in order to effectuate such filing or filings.
5. Restrictions on Future Agreements. The Borrower agrees that it will not
take any action, and will use its best efforts not to permit any action to be
taken by others, including, without limitation, licensees, or fail to take any
action, which could reasonably be expected to have a material adverse effect on
the validity or enforcement of the rights collaterally assigned to the
Collateral Agent under this Agreement or the rights associated with any material
Patents or Licenses, and in particular, the Borrower will not permit to lapse or
become abandoned, any Patent or License if such lapse or abandonment could
reasonably be expected to have a Material Adverse Effect.
6. New Patents and Licenses. The Borrower represents and warrants that, as
of the Closing Date, to the best of its knowledge, after reasonable inquiry, (a)
the Patents listed on Schedule A include all of the patents and patent
applications now owned or held by the Borrower, (b) the Licenses listed on
Schedule B include all of the patent license agreements under which the Borrower
is the licensee or licensor which are material individually or in the aggregate
to the operation of the business of the Borrower and (c) other than the rights
of any party to the Licenses with respect to the Patents, no liens, claims or
security interests in such Patents and Licenses have been granted by the
Borrower to any Person other than the Collateral Agent. If, prior to the
termination of this Agreement, the Borrower shall (i) obtain rights to any new
patentable inventions, (ii) become entitled to the benefit of any patent, patent
application, license or any reissue, division, continuation, renewal,
3
<PAGE>
extension or continuation-in-part of any Patent or any improvement on any Patent
or License, or (iii) enter into any new patent license agreement where the
Borrower is the licensee, the provisions of paragraph 4 above shall
automatically apply thereto (but only to the extent such licenses are assignable
without violation thereof, it being understood and agreed that the Borrower
shall use commercially reasonable efforts to insure that such licenses are
assignable for security purposes). The Borrower shall give to the Collateral
Agent written notice of events described in clauses (i), (ii) and (iii) of the
preceding sentence not less frequently than on an annual basis. The Borrower
hereby authorizes the Collateral Agent to modify this Agreement unilaterally (i)
by amending Schedule A to include any future patents and patent applications
owned or held by the Borrower, and by amending Schedule B to include any patent
license agreements (A) to which the Borrower becomes a party and (B), which are
Patents or Licenses under paragraph 4 above or under this paragraph 6, and (ii)
by filing, in addition to and not in substitution for this Agreement, either a
duplicate original of, or a Notice of Amendment to, this Agreement containing on
Schedule A or B thereto, as the case may be, such future patents, patent
applications and license agreements.
7. Royalties. The Borrower hereby agrees that when an Event of Default has
occurred and is continuing the use by the Collateral Agent of the Patents and
Licenses as authorized hereunder in connection with the Collateral Agent's
exercise of its rights and remedies under paragraph 15 or pursuant to Section 7
of the Security Agreement shall be coextensive with the Borrower's rights
thereunder and with respect thereto and without any liability for royalties or
other related charges from the Collateral Agent, the Agents, the Lenders, or the
other Holders to the Borrower.
8. Further Assignments and Security Interests. Except as permitted under
Section 9.02 of the Credit Agreement, the Borrower agrees not to sell or assign
its respective interests in, or grant any license under, the Patents or the
Licenses without the prior and express written consent of the Collateral Agent.
9. Nature and Continuation of the Collateral Agent's Security Interest;
Termination of the Collateral Agent's Security Interest; Release of Collateral.
(a) This Agreement is made for collateral security purposes only. This
Agreement shall create a continuing security interest in the Patents and
Licenses and shall terminate only when the Liabilities have been paid in full in
cash and the Credit Agreement has been terminated. Upon such termination and at
the written request of the Borrower or its successors or assigns, and at the
cost and expense of the Borrower or its successors or assigns, the Collateral
Agent shall execute in a
4
<PAGE>
timely manner such instruments, documents or agreements as are necessary or
desirable to terminate the Collateral Agent's security interest in the Patents
and the Licenses, subject to any disposition thereof which may have been made by
the Collateral Agent pursuant to this Agreement or the Security Agreement.
(b) Notwithstanding anything in this Agreement to the contrary, the
Borrower may, to the extent permitted by Section 9.02 of the Credit Agreement
sell, assign, transfer or otherwise dispose of any Patents and any Licenses. In
addition, the Patents and Licenses shall be subject to release from time to time
(with the Patents and Licenses referred to in the immediately preceding
sentence, the "Released Collateral") in accordance with Section 12.09(b) of the
Credit Agreement. The Liens under this Agreement shall terminate with respect to
the Released Collateral upon such sale, transfer, assignment, disposition or
release, and upon the request of the Borrower, the Collateral Agent shall
execute and deliver such instrument or document as may be necessary to release
the Liens granted hereunder; provided, however, that (i) the Collateral Agent
shall not be required to execute any such documents on terms which, in the
Collateral Agent's opinion, would expose the Collateral Agent to liability or
create any obligation or entail any consequence other than the release of such
Liens without recourse or warranty, and (ii) such release shall not in any
manner discharge, affect or impair the Liabilities or any Liens on (or
obligations of the Borrower in respect of) all interests retained by the
Borrower, including without limitation, the proceeds of any sale, all of which
shall continue to constitute part of the Collateral.
10. Duties of the Borrower. The Borrower shall have the duty, to the extent
desirable in the normal conduct of the Borrower's business, to: (i) prosecute
diligently any material patent application that is part of the Patents pending
as of the date hereof or hereafter until the termination of this Agreement, and
(ii) make application on unpatented but patentable inventions. The Borrower
further agrees (i) not to abandon any Patent or License if such abandonment
could reasonably be expected to have a Material Adverse Effect without the prior
written consent of the Collateral Agent, and (ii) to use its reasonable best
efforts to obtain and maintain in full force and effect the Patents and the
Licenses that are or shall be necessary or economically desirable in the
operation of the Borrower's business. Any expenses incurred in connection with
the foregoing shall be borne by the Borrower. None of the Agents or the Lenders
shall have any duty with respect to the Patents and Licenses. Without limiting
the generality of the foregoing, none of the Agents or the Lenders shall be
under any obligation to take any steps necessary to preserve rights in the
Patents or Licenses against any other parties, but the Collateral Agent may do
so at its option from and after the occurrence of an Event of Default, and all
expenses incurred in connection therewith shall
5
<PAGE>
be for the sole account of the Borrower and shall be added to the
Liabilities secured hereby.
11. The Collateral Agent's Right to Sue. From and after the occurrence of
an Event of Default, the Collateral Agent shall have the right, but shall not be
obligated, to bring suit in its own name to enforce the Patents and the Licenses
and, if the Collateral Agent shall commence any such suit, the Borrower shall,
at the request of the Collateral Agent, do any and all lawful acts and execute
any and all proper documents required by the Collateral Agent in aid of such
enforcement. The Borrower shall, upon demand, promptly reimburse the Collateral
Agent for all costs and expenses incurred by the Collateral Agent in the
exercise of its rights under this paragraph 11 (including, without limitation,
reasonable fees and expenses of attorneys and paralegals for the Collateral
Agent).
12. Amendments, Waivers and Consents. None of the terms or provisions of
this Agreement may be waived, altered, modified or amended, and no consent to
any departure by the Borrower herefrom shall be effective, except by or pursuant
to an instrument in writing which (i) is duly executed by the Borrower and the
Collateral Agent and (ii) complies with the requirements of the Credit
Agreement. Any such waiver shall be valid only to the extent set forth therein.
A waiver by the Collateral Agent of any right or remedy under this Agreement on
any one occasion shall not be construed as a waiver of any right or remedy which
the Collateral Agent would otherwise have on any future occasion. No failure to
exercise or delay in exercising any right, power or privilege under this
Agreement on the part of the Collateral Agent shall operate as a waiver thereof;
and no single or partial exercise of any right, power or privilege under this
Agreement shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege.
13. Severability. If any provision of this Agreement is held to be
prohibited or unenforceable in any jurisdiction the substantive laws of which
are held to be applicable hereto, such prohibition or unenforceability shall not
affect the validity or enforceability of the remaining provisions hereof and
shall not invalidate or render unenforceable such provision in any other
jurisdiction.
14. Modification. This Agreement cannot be altered, amended or modified in
any way, except as specifically provided in paragraph 6 hereof or by a writing
signed by the parties hereto.
15. Cumulative Remedies; Power of Attorney. The Borrower hereby irrevocably
designates, constitutes and appoints the Collateral Agent (and all Persons
designated by the Collateral Agent in its sole and absolute discretion) as the
Borrower's true and lawful attorney-in-fact, and authorizes the
6
<PAGE>
Collateral Agent and any of the Collateral Agent's designees, in the Borrower's
or the Collateral Agent's name, to take any action and execute any instrument
which the Collateral Agent may deem necessary or advisable to accomplish the
purposes of this Agreement, including, without limitation, from and after the
occurrence of an Event of Default and the giving by the Collateral Agent of
notice to the Borrower of the Collateral Agent's intention to enforce its rights
and claims against the Borrower, to (i) endorse the Borrower's name on all
applications, documents, papers and instruments necessary or desirable for the
Collateral Agent in the use, prosecution or protection of the Patents or the
Licenses, (ii) assign, pledge, convey or otherwise transfer title in or dispose
of the Patents or the Licenses to anyone on commercially reasonable terms (but
subject to the terms thereof), (iii) grant or issue any exclusive or
nonexclusive license under the Patents or under the Licenses, to anyone on
commercially reasonable terms (but only, in the case of Licenses, to the extent
permitted under such Licenses) and (iv) take any other actions with respect to
the Patents or the Licenses as the Collateral Agent deems in its own best
interest or in the best interest of the Agents or the Lenders. The Borrower
hereby ratifies all that such attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and shall be
irrevocable until all of the Liabilities shall have been paid in full in cash
and the Credit Agreement shall have been terminated. The Borrower acknowledges
and agrees that this Agreement is not intended to limit or restrict in any way
the rights and remedies of the Collateral Agent, the other Agents or the Lenders
under the Loan Documents, but rather is intended to facilitate the exercise of
such rights and remedies.
The Collateral Agent shall have, in addition to all other rights and
remedies given it by the terms of this Agreement, all rights and remedies
allowed by law and the rights and remedies of a secured party under the Uniform
Commercial Code as enacted in any jurisdiction in which the Patents or the
Licenses may be located or deemed located. Upon the occurrence of an Event of
Default and the election by the Collateral Agent to exercise any of its remedies
under Section 9-504 or Section 9-505 of the Uniform Commercial Code with respect
to the Patents and Licenses, the Borrower agrees to assign, convey and otherwise
transfer title in and to the Patents and the Licenses to the Collateral Agent or
any transferee of the Collateral Agent and to execute and deliver to the
Collateral Agent or any such transferee all such agreements, documents and
instruments as may be necessary, in the Collateral Agent's sole discretion
exercised in a commercially reasonable manner, to effect such assignment,
conveyance and transfer. All of the Collateral Agent's rights and remedies with
respect to the Patents and the Licenses, whether established hereby, by the
Security Agreement, by any other agreements or by law, shall be cumulative and
may be exercised separately or concurrently. Notwithstanding anything set forth
herein to the contrary, it is hereby expressly agreed
7
<PAGE>
that upon the occurrence of an Event of Default, the Collateral Agent may
exercise any of the rights and remedies provided in this Agreement, the Security
Agreement and any of the other Loan Documents. The Borrower agrees that any
notification of intended disposition of any of the Patents and Licenses required
by law shall be deemed reasonably and properly given if given at least ten (10)
days before such disposition; provided, however, that the Collateral Agent may
give any shorter notice that is commercially reasonable under the circumstances.
16. Successors and Assigns. This Agreement shall be binding upon the
Borrower and its successors and assigns, and shall inure to the benefit of each
of the Agents and the Lenders, and each of all of their nominees, successors and
assigns. The Borrower's successors and assigns shall include, without
limitation, a receiver, trustee or debtor-in-possession of or for the Borrower;
provided, however, that the Borrower shall not voluntarily assign or transfer
its rights or obligations hereunder without the Collateral Agent's prior written
consent.
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND BE CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCEPT FOR
PERFECTION AND ENFORCEMENT OF SECURITY INTERESTS AND LIENS IN OTHER
JURISDICTIONS WHICH SHALL BE GOVERNED BY THE LAWS OF THOSE JURISDICTIONS.
18. Notices. Any notice, demand, request or any other communication
required or desired to be served, given or delivered hereunder shall be in
writing and shall be served, given or delivered as provided in Section 13.10 of
the Credit Agreement.
19. Section Headings. The section headings herein are for convenience of
reference only, and shall not affect in any way the interpretation of any of the
provisions hereof.
20. Counterparts. This Agreement may be executed in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which shall constitute one and the same agreement.
21. Consent to Jurisdiction and Service of Process. The Borrower agrees
that the terms of Section 13.20 of the Credit Agreement with respect to consent
to jurisdiction and service of process shall apply equally to this Agreement.
22. WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE COLLATERAL AGENT
WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN THE COLLATERAL AGENT AND THE BORROWER ARISING OUT OF
OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH.
EITHER THE BORROWER OR THE COLLATERAL AGENT
8
<PAGE>
MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS AGREEMENT WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
STELLEX MICROWAVE SYSTEMS, INC.
By: ______________________________
Name:
Title:
Accepted and agreed to as of the day and
year first above written.
FIRST UNION COMMERCIAL CORPORATION
as Collateral Agent
By:_______________________________
Name: Shaun V. Kelley
Title: Vice President
<PAGE>
SCHEDULE A
TO
PATENT SECURITY AGREEMENT
(STELLEX MICROWAVE SYSTEMS, INC.)
Dated as of October 31, 1997
Patents and Patent Applications
Serial/Patent
Project No/ No. Filing/
Status Title Inventor Issued Date
- ------ ----- -------- -----------
Pending Patent Disclosures
Case # Title Status
-11-
<PAGE>
SCHEDULE B
TO
PATENT SECURITY AGREEMENT
(STELLEX MICROWAVE SYSTEMS, INC.)
Dated as of October 31, 1997
License Agreements
LICENSES FROM THE BORROWER TO OTHER COMPANIES
Company Subject Term Royalties
- ------- ------- ---- ---------
LICENSES FROM OTHER COMPANIES TO THE BORROWER
Company Subject/Type Term Royalties
- ------- ------------ ---- ---------
-12-
<PAGE>
STATE OF ________ )
) SS
COUNTY OF ________ )
On the ___ day of October, 1997, before me personally came
________________, to me known, who being by me duly sworn, did depose and say
that he/she resides at _________________________________________________; that
he/she is a ____________________ of STELLEX MICROWAVE SYSTEMS, INC., the
corporation described in and which accepted and agreed to the foregoing
instrument; and that he/she signed his/her name thereto by authority of the
Board of Directors of said corporation.
----------------------------
Notary Public
<PAGE>
STATE OF NEW YORK )
) SS
COUNTY OF NEW YORK )
On the ___ day of October, 1997, before me personally came
________________, to me known, who being by me duly sworn, did depose and say
that he/she resides at ______________________ ______________________; that
he/she is a __________________ of First Union Commercial Corporation, the
corporation described in and which accepted and agreed to the foregoing
instrument; and that he/she signed his/her name thereto by authority of the
board of directors of said corporation.
-----------------------------
Notary Public
<PAGE>
SCHEDULE 1.01(A)
PERMITTED EXISTING INDEBTEDNESS
1. Note (the "Farm Bureau Note") Secured by Deed of Trust, dated
September 6, 1991, and First Loan Modification Agreement,
dated November 1, 1996, by Paragon Precision Products, Inc.
("Paragon") to Farm Bureau Life Insurance Company ("Farm
Bureau") in the original principal amount of $2,850,000.
2. Guaranty (including the subordination of rights to payment) of
Stellex Aerospace ("Aerospace"), formerly known as Kleinert
Industries, Inc., dated September 6, 1991, and Reaffirmation
of Guaranty, dated November 1, 1996, in favor of Farm Bureau
with respect to Paragon's obligation under the Farm Bureau
Note.
3. Guaranty of Lease by Aerospace, dated November 21, 1989, in
favor of Grand Nash Company (as lessor) with respect to the
performance by Scanning Electron Analysis Laboratories, Inc.
("SEAL") (as lessee) of its obligations under the Industrial
Real Estate Lease, dated September, 1989, by and between Grand
Nash Company and SEAL, as modified by certain Riders and by
certain amendments, dated June 19, 1990 and June 12, 1995,
respectively, for premises located at 250 North Nash Street,
El Segundo, California 90245.
4. Stellex Aerospace - Success Sharing Plan, dated June 1989.
5. Cost Per Copy Rental Agreement between SEAL and Astro Office
Products, Inc., dated June 29, 1994, for GP-55 and NP6030.
6. Management Incentive Plan (M.I.P.) Incentive Bonus Program.
7. The Promissory Note issued by KII Acquisition Corp. ("KII") in
favor of Kleinert Industries Holding AG in the principal
amount of $1,750,000.
8. In connection with and upon the consummation of the
acquisition of Stellex Microwave Systems, Inc., TSMD
Acquisition Corp. has agreed to adopt a 401(k) Plan.
9. Capital Lease for AS-400 computer and application software
with DKM.
10. Capital Lease for Catia-CADM Application Software and certain
hardware equipment with Dassault systems.
11. Various intercompany loans between the Borrowers as described
in the attached list.
<PAGE>
SCHEDULE 1.01(A)(11)
List of Intercompany Loans as of October 24, 1997
<TABLE>
<CAPTION>
OBLIGOR OBLIGEE AGGREGATE AMOUNT
<S> <C> <C>
Bandy Machining International Aerospace $ 11,654,800
("Bandy")
Paragon Aerospace $ 7,752,600
SEAL Aerospace $ 1,018,900
General Inspection Aerospace $ 1,046,200
Laboratories, Inc.
</TABLE>
<PAGE>
SCHEDULE 1.01(B)
PERMITTED EXISTING LIENS
1. Uniform Commercial Code Financing Statement No. 9710060886,
filed April 4, 1997 in favor of Machinery Sales Co., as
Secured Party, against Paragon, as Debtor, securing one
Charmilles Roboform 40 CNC Diesinking EDM machine with all
standard equipment wired 230/3/60 including Hi Inertia C- Axis
and 2 Ton Chiller and any additions, etc., as more
particularly described thereon. (The Chief Financial Officer
of Aerospace has advised that all payments have been made and
that a UCC termination statement has been requested of the
Secured Party.)
2. Deed of Trust with Assignment of Rents and Fixture Filing
dated September 6, 1991, in the original principal amount of
$2,850,000, by Paragon, as Maker, in favor of Farm Bureau,
filed for record on October 16, 1991 with the Los Angeles
County Registrar-Recorder/County Clerk as Instrument No. 91-
1635037 (the "Farm Bureau Deed of Trust").
3. Assignment of Leases and Rents dated September 6, 1991, by
Paragon in favor of Farm Bureau, filed for record on October
16, 1991 with the Los Angeles County Registrar-Recorder/County
Clerk as Instrument No. 91- 1635038.
4. Uniform Commercial Code Financing Statement No. 91233708,
filed October 30, 1991 in favor of Farm Bureau, as Secured
Party, against Paragon, as Debtor, as continued July 19, 1996,
securing goods which are located at Paragon's real property
and which are used in the operation or occupancy of the real
property (excepting any personal property, equipment and
fixtures which are used in the trade or business conducted on
the real property), general intangibles relating to the
development or use of the real property, documents of
membership, and proceeds and claims.
5. Cost Per Copy Rental Agreement between SEAL and Astro Office
Products, Inc., dated June 29, 1994, for GP-55 and NP6030.
6. The Guarantee, dated September 6, 1991, in favor of Farm
Bureau contains a provision granting Farm Bureau a lien upon
and right of set-off against all monies, securities and other
property of Aerospace now or hereafter in the actual or
constructive possession of Farm Bureau. To the knowledge of
Aerospace, Farm Bureau does not have possession of any monies,
securities or any other property of Aerospace.
<PAGE>
SCHEDULE 1.05
KNOWLEDGE
Chairman of Stellex Industries, Inc. ("Stellex")
Vice President of Stellex
President of Stellex
Chief Financial Officer of Stellex
President of each Borrower other than Stellex
<PAGE>
SCHEDULE 5.01(A)
CONSENTS
--------
The following are exceptions to the satisfaction of the conditions
precedent set forth in Section 5.01(g):
1. Non-compliance with the Assignment of Claims Act, as amended.
2. The following have not been obtained as of the date of this
Agreement, all in connection with the Watkins-Johnson Acquisition:
(a) U.S. Government approval of change of ownership of Stellex
Microwave Systems, Inc. re facility security clearance.
(b) Novation of all contracts with the U.S. Government
held by Stellex Microwave Systems, Inc.
(c) Consents to assignment, or new issuance, to Stellex
Microwave Systems, Inc., and, in addition, consents
to Liens in favor of the Collateral Agent, of
permits, licenses and other governmental
authorizations and approvals required or used in the
business, including the following:
Business Permits:
Business State of California; County of
Santa Clara
Facilities Permits:
Base Station (Facilities) Federal Communications
Commission
Base Station (Security) Federal Communications
Commission
Emergency generator State of California
Pressure vessels California Occupational Safety
and Health Administration
Propane tanks California Occupational Safety
and Health Administration
Elevator California Occupational Safety
and Health Administration
Boilers City of Palo Alto; Building
Department
Company Trucks California Department of Motor
Vehicles
Environmental and air permits are listed separately:
<PAGE>
BAAQMD AIR PERMITS
Facility ID: 944
<TABLE>
<CAPTION>
Schedule 3.19
Bldg. Location Source No. Exempt Description
- ------------ ---------------------------- --------------- ----------------- --------------------------------------------------
<S> <C> <C> <C> <C>
1 118 S-137 Non-Exempt Vapor Degreaser Baron Blakeslee (Model MLR-120)
1 B-1 Total S-135 Non-Exempt BLDG. 1-Solvent Clean., Wipe Cleaning (Dispenser)
1 Boiler Room, 73 S-111 Exempt Boiler
1 Boiler Room, 80 S-110 Exempt Boiler
1 MIM Assy., 115 S-113 Exempt MTGL/SEC, Hydrogen Annealing
1 MIM Assy., 115 GONE S-501 Exempt MTGL/SEC, Annealing, Nickel
1 MIM, 115D S-136 Non-Exempt Metal Injection Molding Operation
1 Paint Shop, 84 S-104 Non-Exempt Spray Booth
1 Paint Shop, 84 S-106 Non-Exempt Curing Oven
1 Paint Shop, 85 S-105 Non-Exempt Curling Oven
1 Paint Shop, 85 S-103 Non-Exempt Spray Booth
1 Paint Shop, 81 S-120 Non-Exempt Solvent Clean., Cold Cleaning, Tank #1
1 Plate Shop, 81 S-121 Non-Exempt Solvent Clean., Cold Cleaning, Tank #2
1 Plate Shop, 81 S-114 Exempt Misc. Chem., Electroplating Line
2 Boiler Room, 76 S-203 Exempt Boiler
2 stora S-402 Non-Exempt Vapor Degreaser Baron Blakeslee / / (Model MLR-
120)
<CAPTION>
Schedule 3.19
Bldg. Location Chemicals
- ------------ ---------------------------- ------------------------------------------
<S> <C> <C>
1 118 AMS Defluxer Solvent, HCFC-
225ca, HCFC-225cb
1 B-1 Total IPA, Acetone
1 Boiler Room, 73 None
1 Boiler Room, 80 None
1 MIM Assy., 115 Hydrogen
1 MIM Assy., 115 GONE Nickel
1 MIM, 115D Nickel Powder, Iron Powder,
Heptane
1 Paint Shop, 84 Paint, Primers
1 Paint Shop, 84 Paint, Primers
1 Paint Shop, 85 Paint, Primers
1 Paint Shop, 85 Paint, Primers
1 Paint Shop, 81 IPA
1 Plate Shop, 81 IPA
1 Plate Shop, 81 Gold ACR 414, Nickel Sulfate,
Copper, Nickel Sulfamate
2 Boiler Room, 76 None
2 stora AMS Defluxer Solvent, HCFC-
225ca, HCFC-225cb
</TABLE>
1
<PAGE>
BAAQMD AIR PERMITS
Facility ID: 944
<TABLE>
<CAPTION>
Schedule 3.19
Bldg. Location Source No. Exempt Description
- ------------ ---------------------------- --------------- ----------------- ---------------------------------------------------
<S> <C> <C> <C> <C>
3 Amp. Assy., 101A S-306 Non-Exempt BLDG.3-Solvent Clean., Cold Cleaner Bath
3 B-3 Total S-201 Non-Exempt BLDG.4-Solvent Clean., Wipe Cleaning
3 B-3 Total S-305 Non-Exempt BLDG.3-Solvent Clean., Wipe Cleaning (Dispenser)
3 Boiler Room, 70 S-307 Exempt Boiler
3 Prod. Assy., 108 S-309 Exempt Roller Coater, Roller Ink Drying Oven, Solvent
General
3 Prod. Assy., 108 S-310 Exempt Dryer Electric, Marker Ink Drying Oven
3 Prod. Assy., 108A S-301 Non-Exempt Vapor Degreaser Baron Blakeslee (Model MLR-120)
4 B-4 Total S-412 Non-Exempt Solvent Clean., Wipe Cleaning
4 B-6 Total S-608 Exempt Solvent Clean., Cold Cleaning
4 Boiler Room, 70 S-414 Exempt Boiler
4 Elect. Testing & Assy, S-413 Exempt Solvent Clean., Cold Cleaner dipping into beakers
ALL
4 YIG Assy., 102 S-602 Non-Exempt Vapor Degreaser Baron Blakeslee (Model # MLR-
120)
4 YIG Assy., 102 S-302 Non-Exempt Vapor Degreaser Branson Ultrasonic
4 YIG Assy., 102 S-134 Exempt Epoxy Heat Curing Ovens
4 YIG Assy., 102 S-133 Non-Exempt Silk Screen, Epoxy, Epoxy Missing Appl.
4 YIG Assy., 102 S-132 Exempt Misc. MTGL/SEC Solder Lead Flux
<CAPTION>
Schedule 3.19
Bldg. Location Chemicals
- ------------ ---------------------------- ------------------------------------------
<S> <C> <C>
3 Amp. Assy., 101A IPA
3 B-3 Total IPA, Acetone
3 B-3 Total IPA, Acetone
3 Boiler Room, 70 None
3 Prod. Assy., 108 Markem Inks
3 Prod. Assy., 108 Markem Inks
3 Prod. Assy., 108A AMS Defluxer Solvent, HCFC-
225ca, HCFC-225cb
4 B-4 Total IPA, Acetone
4 B-6 Total IPA, Acetone
4 Boiler Room, 70
4 Elect. Testing & Assy, IPA, Acetone
ALL
4 YIG Assy., 102 AMS Defluxer Solvent, HCFC-
225ca, HCFC-225cb
4 YIG Assy., 102 AMS Defluxer Solvent, HCFC-
225ca, HCFC-225cb
4 YIG Assy., 102
4 YIG Assy., 102 Epoxy Resins, Part A & B
4 YIG Assy., 102
</TABLE>
2
<PAGE>
BAAQMD AIR PERMITS
Facility ID: 944
<TABLE>
<CAPTION>
Schedule 3.19
Bldg. Location Source No. Exempt Description
- ------------ ---------------------------- --------------- ----------------- --------------------------------------------------
<S> <C> <C> <C> <C>
4 YIG Assy., 102 S-428 Non-Exempt Vapor Phase Solder Reflow System
4 YIG Assy., 108 S-127 Non-Exempt Dipping, Wire, Conformal Coating
4 YIG Sphere, 82 S-128 Non-Exempt MTGL/SEC Cleaning, Chem., Hydrocarbon
5 Crystal Growth, 91A S-502 Exempt Solvent Clean., Crystal Ingot Growing
6L B-6 Total S-607 Non-Exempt Solvent Clean., Wipe Cleaning (Dispenser)
6L Boiler Room S-610 Exempt Boiler for Space heat Only, 2800K BTU
6L Integration Test, 104 S-138 Non-Exempt Conformal Coating
6U Pressroom S-611 Exempt Offset Printers
Cafeter Boiler Room S-204 Exempt Boiler, Model #WGX - 1050, SN# A621331, BTU/HR
INPUT 1050000
<CAPTION>
Schedule 3.19
Bldg. Location Chemicals
- ------------ ---------------------------- ------------------------------------------
<S> <C> <C>
4 YIG Assy., 102 SF-21, FC70 Flourinert
4 YIG Assy., 108 Humiseal 1A33, 1B73, / /1500
Thinner
4 YIG Sphere, 82 IPA, Acetone, Diamond Slurry
5 Crystal Growth, 91A IPA
6L B-6 Total IPA, Acetone
6L Boiler Room
6L Integration Test, 104 Humiseal 1A33
6U Pressroom Inks
Cafeter Boiler Room None
</TABLE>
3
<PAGE>
OTHER ENVIRONMENTAL PERMITS
Schedule 3.19
HAZMAT PERMIT
AGENCY: PALO ALTO FIRE DEPT.
FD ID NUMBER 1818 B-1
- -----------------
FD ID NUMBER 1820 B-3
- -----------------
FD ID NUMBER 1821 B-4
- -----------------
FD ID NUMBER 1823 B-6
- -----------------
HAZWASTE PERMIT
AGENCY: SANTA CLARA COUNTY HEALTH DEPT, ENVIRONMENTAL DIV.
PERMIT NUMBER 9462-E
- --------------------
FOR ENTIRE FACILITY
WASTEWATER PERMIT
AGENCY: CITY OF PALO ALTO PUBLIC WORKS DEPT (REGIONAL WATER QUALITY
CONTROL PLANT)
#94121 ZERO DISCHARGE PERMIT
- ----------------------------
CAL FRAN WASTEWATER TREATMENT SYSTEM SUPPORTING PLATE SHOP
CALIFORNIA HAZWASTE ID
CAD061623229
- ------------
AGENCY: DTSC
PERMIT BY RULE (HAZWASTE)
AGENCY: DTSC
CONDITIONALLY AUTHORIZED TO CONDITIONALLY EXEMPT
WASTEWATER TREATMENT SYSTEM SUPPORTING PLATE SHOP
STORMWATER PERMIT
AGENCY: SAN FRANCISCO BAY REGIONAL WATER BOARD
WDID #2 43S006882
- -----------------
FOR ENTIRE FACILITY
<PAGE>
The following export licenses issued by the U.S. Department of State,
Office of Defense Trade Controls, are active for TSMD products:
<TABLE>
<CAPTION>
Product ID: Country License Number Expiration Date
<S> <C> <C> <C>
CV-951 Korea T-071529 Oct 26, 1997
CV-951 Saudi Arabia T-072294 Dec 08, 1997
CV-951 FE Bahrain T-071350 Oct 28, 1997
WJ-31200C Bahrain, Egypt, Kuwait, Saudi Arabia, UAE T-075444 Jan 24, 1999
WJ-31200C Australia T-078484 July 31, 1999
WJ-31200C Finland T-075413 July 31, 1999
WJ-31200C France, Germany, Italy T-078602 Aug 04, 1999
WJ-31200C Taiwan T-074689 Feb 02, 1999
WJ-31200C India 686121 Jan 14, 1001
WJ-31290-1 Brazil, Chile, Colombia, Mexico, Venezuela T-077384 May 04, 1999
WJ-31290-1 Egypt, Israel, Jordan, Kuwait, UAE, Bahrain T-077384 April 24, 1999
WJ-312900-1 Argentina T-077383 Jun 12, 1999
WJ-312900-1 Australia, New Zealand, United Kingdom T-074259 July 21, 1998
WJ-312900-1 Austria, Finland, Spain, Sweden T-076633 Feb 14, 1999
WJ-312900-1 France, Germany, Italy, Turkey T-076632 Feb 14, 1999
WJ-312900-1 Czech Rep, Hungary, Poland T-077385 Jun 06, 1999
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
WJ-312900-1 Indonesia, Malaysia T-076631 Feb 09, 1999
WJ-312900-1 Japan, Singapore, Thailand T-074258 Jul 28, 1999
WJ-312900-1 Saudi Arabia T-077388 Apr 24, 1999
WJ-312900-1 Taiwan T-076630 Feb 14, 1999
WJ-31410 Germany 683304 Aug 30 2000
WJ-31410 and Germany 697806 May 20 2001
WJ-31400
WJ-31410 Germany 672954 Aug 15, 2000
WJ-31410 Germany 705247 Apr 28, 2001
WJ-8969B Australia T-073411 May 04, 2000
WJ-8986B2 United Kingdom 664190 Feb 14, 2000
WJ-8986B-2 United Kingdom 588829 Jan 13, 1998
<CAPTION>
Technical Assistance Agreements:
Case # Country Customer Commodity Expiration
<S> <C> <C> <C> <C>
AG-479-96 India CABSEC Training Dec 31, 2005
AG-465-96 UK Hughes UK FMRAAM Proposal Dec 31, 2005
</TABLE>
<PAGE>
3. All Customer Contracts listed on Schedule 2.5(a) to the
Watkins-Johnson Acquisition Agreement (a copy of which is attached hereto)
require the consent of the other party to the grant of the Lien thereon to the
Collateral Agent. In addition, Supplier Contracts that require such a consent
are: Oracle software license (PO 22802), the Comdisco lease (PO 9726) and the
Sun Finance lease (PO 9602). In addition, the nondisclosure/teaming agreements
disclosed on Schedule 2.5(h) of the Watkins-Johnson Acquisition Agreement
require such a consent. None of such consents has been obtained as of the date
of this Agreement.
<PAGE>
SCHEDULE 2.5(a)
Customer Contracts
Exhibit A to Schedule 2.5(a) lists all Customer Contracts that provide for
payments to or performance by Seller or Company in excess of $250,000.
<PAGE>
Schedule 2.5(a)
EXHIBIT A
OPEN ORDERS OVER $250K
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C> <C> <C> <C> <C>
HUGHES MISSILE SYSTEMS 6-916799-R-A9-X 6/30/95 55,744,923.00 16,062,011.00 AMRAAM LOTS 8,
9, 10
MARYLAND PROCUREMENT MDA904-94-D-1501 3/31/94 11,925,893.90 1,403,641.00 WINDJAMMER
HUGHES MISSILE SYSTEMS 6-962271-R-A0-X 4/15/97 11,510,835.00 11,510,835.00 AMRAAM LOT 11
MARTIN MARIETTA MILLIMETER P87042 8/1/97 8,821,348.00 8,821,348.00
TECHNOLOGIES LONGBOW
HARRIS CORP 4916142 11/4/94 5,399,957.31 180,000.00 ICS
RAYTHEON TI SYSTEMS INC. 105936762 9/10/97 3,951,012.00 3,951,012.00 P102
HUGHES MISSILE SYSTEMS 8K-906504-7F4 9/28/93 3,429,487.00 49,227.00 AMRAAM
TEXAS INSTRUMENTS INC 100759015 6/18/96 3,183,346.00 2,191,812.00 P102
RAYTHEON CO 72-RY00-68-7552 4/4/97 2,798,778.00 0.00 AMRAAM LOT 11
RAYTHEON CO 72-RY00-68-7515 4/4/97 2,485,587.00 0.00 AMRAAM LOT 11
EDL COMMUNICATIONS LTD 07013 5/30/97 2,345,000.00 2,345,000.00 CLASSIFIED
MOTOROLA INC LETTER 12/19/95 2,245,186.00 91,858.00
SUBCONTRACT Q563 P94
RAYTHEON CO 72-11G5-68-0004 12/23/96 2,200,000.00 2,200,000.00 SM II BLK IVA
RAYTHEON CO 72-2082-68-0085 5/31/96 1,980,000.00 328,250.00 SM II BLK IV
RAYTHEON CO 72-55F6-68-0195 5/31/96 1,940,400.00 1,605,177.00 SM II BLK IV
</TABLE>
<PAGE>
OPEN ORDERS OVER $250K
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C> <C> <C> <C> <C>
RAYTHEON CO 72-RY01-68-2157 5/16/97 1,560,000.00 0.00 AMRAAM
E-SYSTEMS 4061SC09 12/19/95 1,446,127.00 411,711.00 RIVET JOINT
LOCKHEED MARTIN FEDERAL SYSTEMS 496643 3/18/94 1,371,168.00 229,376.00 STAR
HUGHES MISSILE SYSTEMS 6-936616-R-G2-X 12/21/95 1,310,026.00 297,594.00 SM II BLK IV
RAYTHEON CO 92-184H-G-0005 6/30/95 1,272,000.00 14,400.00 SLQ-32
NORTEL LTD NB03158 7/25/97 1,260,000.00 163,800.00
HUGHES AIRCRAFT CO B8-741647 4/1/97 1,243,818.00 1,217,778.00 ICO
SEOCAL INC 0013-A-5-02526 1/9/95 1,182,831.00 72,468.00 MELCO
HUGHES MISSILE SYSTEMS 6-965204-R-G2-X 8/3/97 1,070,786.00 1,070,786.00 SM2/ESSM
NORTEL LTD. NB03104 3/11/97 1,002,000.00 546,925.00 OC-48
HUGHES AIRCRAFT CO M2-637508-AJ7 6/25/96 1,000,000.00 531,250.00 F15 RDR SET MSIP
LITTON SYSTEMS INC C5065 3/19/97 932,120.00 682,110.00 E2C
HUGHES AIRCRAFT CO B8-741632 6/27/97 828,235.00 778,906.00 ICO
BOEING NORTH AMERICA V6CA650200F 12/5/95 751,107.00 48,000.00 PAC 3
LOCKHEED MARTIN FEDERAL SYSTEMS 152902 6/20/96 749,500.00 349,500.00 AV1
HUGHES MISSILE SYSTEMS 6-936623-R-A9-X 3/29/96 737,800.00 234,515.00 SM II BLK III
& IV
NORTEL LTD NB03943 9/10/97 729,000.00 729,000.00
</TABLE>
<PAGE>
OPEN ORDERS OVER $250K
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C> <C> <C> <C> <C>
NORTEL LTD NB03592 8/1/97 630,000.00 630,000.00
HUGHES AIRCRAFT CO B8-599658-FLS 11/2/95 535,359.00 699.00 MDR
IFR SYSTEMS INC 202008 3/8/95 535,009.00 14,668.00
TEXAS INSTRUMENTS INC 100759031 5/30/97 525,000.00 525,000.00 P3 I
RAYTHEON CO 92-227-H-G-2029 9/1/95 518,202.00 22,724.00 ALQ-184
LOCKHEED MARTN AEROSPACE KKM007288 12/23/92 515,000.00 181,405.00 SCAMP
HARRIS CORP 6943858 12/20/96 510,963.00 12,582.00 HT
RAYTHEON TI SYSTEMS INC 105936747 9/10/97 487,000.00 487,000.00 P102
HUGHES MISSILE SYSTEMS LSC 8K-858373-7G2 5/30/97 484,465.00 384,715.00 SM II
RAYTHEON CO 53-54G0-BR-0001 12/17/96 466,612.00 124,933.31 ESSM
HUGHES MISSILE SYSTEMS 8K-831170-7F3 3/31/95 443,361.17 36,170.59 AMRAAM
RAYTHEON CO 72-RY01-68-0112 5/22/97 443,300.00 393,250.00 SPARROW
ALCATEL NETWORK SYSTEMS 39300004041 5/28/96 442,210.00 158,630.00 ACES, MTSAT,
WORLDSTAR
MARYLAND PROCUREMENT MDA904-96-C-1373 9/27/96 420,549.00 53,505.00 WINDJAMMER
DEFENSE SUPPLY CENTER SP0970-94-D-C006/ 2/12/97 396,934.00 266,867.00
0004,0005,0006
U.S. AIR FORCE F09603-95-D-0908 10/28/95 390,607.00 223,530.00 ALQ-184
DO 0001/0002
</TABLE>
<PAGE>
OPEN ORDERS OVER $250K
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C> <C> <C> <C> <C>
RAYTHEON CO 72-RY02-68-4287 8/28/97 387,777.00 387,777.00 AMRAAM
IFR SYSTEMS INC 202005 2/28/95 380,794.82 2,114.00
RAYTHEON CO 72-RY01-68-3188 5/22/97 374,660.00 374,660.00 SPARROW
AIL SYSTEMS 120100-000 12/12/96 372,552.00 169,164.00 EA6B
HUGHES MISSILE SYSTEMS 6-907044-B-L6 5/21/93 370,820.00 47,371.00 AMRAAM
MARYLAND PROCUREMENT MDA904-96-C-1409 9/27/96 330,584.00 180,512.00 Z-GROUP
SAAB ERICSSON SPACE 53-6-1059 10/22/96 326,420.00 71,840.00
WAVETRON INC W951215010WJ 12/18/95 312,715.91 24,307.67
IFR SYSTEMS INC 202007 3/8/95 312,200.00 16,100.00
MOTOROLA INC 276057 5D 8/18/97 279,125.00 279,125.00 IRIDIUM
RAYTHEON CO 72-RY00-68-7760 4/4/97 273,735.00 0.00 AMRAAM LOT 11
RAYTHEON CO 72-RY02-68-6211 9/12/97 273,000.00 117,000.00 AMRAAM
U.S. NAVY N00383-97-C-B003 1/3/97 267,456.00 241,984.00 E2C
LOCKHEED MARTIN AEROSPACE KKM007316 8/25/93 259,000.00 45,313.00 SCAMP
GROUP TECHNOLOGIES 360000268 4/28/97 254,250.00 157,070.00 AMRAAM
</TABLE>
<PAGE>
SCHEDULE 2.5(a)
SUPPLEMENT TO EXHIBIT A
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C> <C> <C> <C> <C>
1. HMSC 6-916799-R-A9-K 6/30/95 $55,744,923 $16,062,011 AMRAAM Lots 8,
9,10
<CAPTION>
<S> <C>
(a) 8/25/94 Memorandum of Agreement (MOA) definitizes Lot 8 pricing at $16,193,931 and provides option pricing for
Lots 9 and 10. The MOA also provides discounts (Enterprise Cost Reduction Initiative--ECRI) to HMSC dependent on
the amount of business placed with WJC during 1995 and 1996.
(b) 9/21/94 Letter Subcontract with NTE of $16,193,931 (for Lot 8) with NTE options of $25,737,000--Lot 9 and
$23,912,000--Lot 10.
(c) 3/9/95 MOA amends 8/25/94 MOA, but still provides Lot 8 pricing at $16,193,931 and provides option pricing for
Lots 9 and 10. The MOA also provides discounts (ECRI) to HMSC dependent on amount of business placed with WJC
during 1995 and 1996.
(d) 6/29/95 Letter amendment for Lot 9 option at firm fixed price $14,214,755.
(e) 8/5/95 Letter amendment providing VE incentive payment of $1,053,218 for the DL/RF Processor for AMRAAM Lots 7
and 8.
(f) 9/28/95 Letter amendment for AMRAAM Lot 8 consideration amount of $1,460,118.
(g) Undated original PO #6-916799-R-A9-X (signed by WJC 10/3/95) at firm fixed price of $16,193,931 (for Lot 8).
Includes option pricing provisions for Lots 9 and 10.
(h) 11/2/95 Letter amendment for AMRAAM Lot 9 Value Engineering (VE) incentive payment in the amount of $1,448,951 for
DL/RF Processor.
(i) 12/6/95 Letter amendment for AMRAAM Lot 8 consideration amount of $1,460,118.
(j) 3/14/96 Letter amendment for AMRAAM Lot 8 spares in the amount of $346,416.
(k) 5/23/96 Change Letter OA amends original purchase order (PO) to a revised total of $35,985,723.
(l) 6/14/96 E-mail amendment for AMRAAM Lot 9 spares in the amount of $1,743,058.
(m) 6/28/96 Letter amendment exercising Lot 10 option in the amount $19,513,237.
(n) 8/26/96 Change Letter OB amends the original PO to a revised total of $55,498,960.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(o) 8/30/96 Letter amendment for AMRAAM Lot 7 and 8 VE incentive payment for RF Processor in the amount of $63,352.
(p) 8/30/96 Letter amendment for AMRAAM Lot 9 VE incentive for RF Processor in the amount of $49,349.
(q) 9/10/96 Change of Letter OC amends the original PO (but not in total dollar amount)-- still $55,498,960.
(r) Undated Preliminary Change Letter OD (stamped as received 9/25/96) amends the original PO to a revised total of
$55,611,661.
(s) Undated Preliminary Change Letter OD (stamped as received 12/11/96) amends the original PO to a revised total of
$53,479,049.
(t) Undated Preliminary Change Letter OD (stamped as received 12/20/96) amends the original PO to a revised total
of $55,744,923.
(u) 9/30/97 Letter Agreement between WJC and HMSC finalizing an ECRI agreement.
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C> <C> <C> <C> <C>
2. Maryland Procurement MDA904-94-D-1501 3/31/94 $11,925,893.90 $1,403,641 Windjammer
Office (MPO)
<CAPTION>
<S> <C>
(a) 3/31/94 Contract # MDA904-94-D-1501 for a total NTE amount of $29,579,848.02.
(b) 3/31/94 Delivery Order No. 0001 under Contract/Purchase Order No. MDA904-94-D-1501 for a total amount of
$6,824,350.02.
(c) 12/19/94 Amendment/Modification No. P00001 to Delivery Order No. 0001 under Contract No. MDA###-##-####
(no change in total contract amount).
(d) 12/27/94 Delivery Order No. 0002 under Contract/Purchase Order No. MDA904-94-D-1501 for a total amount of
$2,517,675.
(e) 1/13/95 Amendment/Modification No. P00002 to Contract No. MDA###-##-#### (no change in total contract amount).
(f) 2/09/95 Amendment/Modification No. P00001 to Delivery Order No. 0002 under Contract No. MDA###-##-#### (no change
in total contract amount).
(g) 3/29/95 Amendment/Modification No. P00003 to Contract No. MDA###-##-#### (no change in total contract amount).
(h) 5/17/95 Amendment/Modification No. P00004 to Contract No. MDA###-##-#### (no change in total contract amount).
(i) 8/4/95 Amendment/Modification No. P00005 to Contract No. MDA###-##-#### (increases the total NTE amount from
$29,579,848.02 to $30,048,549.02).
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(j) 8/04/95 Delivery Order No. 0003 under Contract/Purchase Order No. MDA904-94-D-1501 for a total amount of
$545,700.
(k) 9/29/95 Delivery Order No. 0004 under Contract/Purchase Order No. MDA904-94-D-1501 for a total amount of
$1,260,733.
(l) 11/27/95 Amendment/Modification No. P00001 to Delivery Order No. 0004 under Contract No. MDA###-##-#### (no change
to total contract amount).
(m) 1/4/96 Delivery Order No. 0005 under Contract/Purchase Order No. MDA904-94-D-1501 for a total amount of $682,740.
(n) 3/29/96 Delivery Order No. 0006 under Contract/Purchase Order No. MDA###-##-#### for a total amount of $149,386.
(o) 4/11/96 Amendment/Modification No. P0001 to Delivery Order No. 0005 under Contract No. MDA###-##-#### (no change
to total contract amount).
(p) 4/11/96 Amendment/Modification No. P00001 to Delivery Order No. 0006 under Contract No. MDA###-##-#### (no change
to total contract amount).
(q) 9/10/96 Amendment/Modification No. P00001 to Delivery Order No. 0003 under Contact No. MDA904-94-D-1501
(de-obligates Delivery Order No. 0003 for $545,700).
(r) 9/10/96 Amendment/Modification No. P00002 to Delivery Order No. 0005 under Contract No. MDA###-##-####
(de-obligates Delivery Order No. 0005 for $682,740).
(s) 9/10/96 Amendment/Modification No. P00006 to Contract No. MDA904-94-D-1501 (no change to total contract amount).
(t) 9/10/96 Amendment/Modification No. P00002 to Delivery Order No. 0004 under Contract No. MDA904-94-D-1501 (no
change to total contract amount).
(u) 9/11/96 Delivery Order No. 0007 under Contract No. MDA904-D-1501 for the amount of $1,173,750.
(v) 11/18/96 Amendment/Modification No. P00001 to Delivery Order No. 0007 under Contract No. MDA904-94-D-15010 (total
contract amount is unchanged).
(w) 9/25/97 Amendment/Modification No. P00007 to Contract No. MDA904-94-D-1501 (total contract amount is unchanged).
(x) SUMMARY: (b) + (d) + (j) + (k) + (m) + (n) - (q) - (r) + (u) = $11,925,894.
<CAPTION>
<S> <C> <C> <C> <C> <C>
3. HMSC 6-962271-R-A0-X 4/15/97 $11,510,835 $11,510,835 AMRAAM Lot 11
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(a) 4/14/97 Letter Subcontract in the amount $12,077,765 for AMRAAM Lot 11. (Note: booked at $11,510,835 for ECRI
reserve).
(b) 9/30/97 Letter Agreement between WJC and HMSC finalizing an ECRI agreement.
<CAPTION>
<S> <C> <C> <C> <C> <C>
4. Martin Marietta
Millimeter P87042 8/1/97 $8,821,348 $8,821,348 Longbow
Technologies (MMMTI)
<CAPTION>
<S> <C>
(a) 8/1/97 Letter Contract No. P87042 for the firm fixed price of $8,821,348 with option pricing.
(b) 9/16/97 Contract (total dollar amount sums to $8,821,348 with a series of options extending out to the year 2004
and performance incentives of up to $200,000) for the Longbow Hellfire Modular Missile System Program.
<CAPTION>
<S> <C> <C> <C> <C> <C>
5. Harris Corp 4916142 11/4/94 $5,399,957.31 $180,000 ICS
<CAPTION>
<S> <C>
(a) 10/28/94 Letter Subcontract # 4916142 with a NTE limitation of $2,777,172.
(b) 11/08/94 Change Order No. 1 to Letter Subcontract # 4916142 with a NTE limit of $2,777,172 which includes an
option for $730,288 for additional units.
(c) 1/30/95 Original PO # 4916142 is a definitive cost plus incentive fee subcontract for the total amount of
$2,439,774. There is also incremental funding of an additional $300,000.
(d) 3/22/95 Change Order No. 1 increases the "ceiling price" from $2,439,774 to $3,135,588 (the incremental funding
remains at $300,000).
(e) 4/7/95 Change Order No. 2 increases the ceiling price from $2,439,774 to $3,277,900 and increases the
incremental funding from $300,000 to $1,100,000.
(f) 6/30/95 Change Order No. 3 increases the ceiling price from $3,277,900 to $3,848,104 and increase the incremental
funding from $1,100,000 to $1,500,000.
(g) 8/16/95 Change Order No. 4 increases the ceiling price from $3,848,104 to $3,857,104 and increases the incremental
funding from $1,500,000 to $1,509,000.
(h) 10/19/95 Change Order No. 5 increases the incremental funding from $1,509,000 to $2,309,000 (the ceiling price is
not changed).
(i) 11/30/95 Change Order No. 6 increases the incremental funding from $2,309,000 to $3,109,000 (the ceiling price is
not changed).
(j) 2/7/96 Change Order No. 7 increases the incremental funding from $3,109,000 to $3,609,000 (the ceiling price
is not changed).
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(k) 2/19/96 Change Order No. 8 increases the ceiling price from $3,857,104 to $3,909,957 and increases the incremental
funding from $3,609,000 to $3,909,957.
(l) 1/3/97 Change Order No. 9 increases the total funding from $3,909,957 to $4,209,957 and provides for delivery
incentives of $1,500,000.
(m) 2/24/97 Change Order No. 10 does not change any of the totals from Change Order No. 9.
(n) 3/19/97 Change Order No. 11 does not change the total funding, but increases the incremental funding from
$4,209,957 to $4,909,957.
(o) 6/12/97 Change Order No. 12 increases the incremental funding from $4,909,957 to $5,409,957.
(p) The schedule amount should read $5,409,957 and the total open amount should be $240,000. The difference resulted
from a credit memo and a booking adjustment. The Oracle database will be adjusted to reflect the proper amounts.
<CAPTION>
<S> <C> <C> <C> <C> <C>
6. Raytheon TI
Systems (RTIS) 105936762 9/10/97 $3,951,012 $3,951,012 P102
<CAPTION>
<S> <C>
(a) 8/27/97 Memorandum of Agreement in the amount of $3,951,012.
(b) 9/4/97 Original PO # 105936762 for the firm fixed price of $3,951,012.
<CAPTION>
<S> <C> <C> <C> <C> <C>
7. HMSC 8K-906504-7F4 9/28/93 $3,429,487 $49,227 AMRAAM
<CAPTION>
<S> <C>
(a) 4/11/94 Original PO # 8K-906504-7F4 for the firm fixed price $928,654.
(b) 7/25/94 Memorandum of Agreement for the firm fixed price of $805,058 with an option for firm fixed pricing for
Phase III in the amount of $1,695,775.
(c) 9/29/94 Change Letter OA amends the original PO to a revised total of $3,429,487.
<CAPTION>
<S> <C> <C> <C> <C> <C>
8. Texas Instruments (TI) 100759015 6/18/96 $3,183,346 $2,191,812 P102
<S> <C>
(a) 6/12/96 Change A (this is the original PO) the total PO amount is listed at $3,183,346.
(b) 8/20/96 Change B to original PO (the total PO amount remains at $3,183,346).
(c) 8/20/96 Change B-C to original PO (the total PO amount remains at $3,183,346).
(d) 9/4/96 Change D-E to original PO (the total PO amount remains at $3,183,346).
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(e) 9/27/96 Change F to original PO (the total PO amount remains at $3,183,346).
(f) 3/31/97 Change G-J to original PO (the total PO amount remains at $3,183,346).
(g) 5/01/97 Change K to original PO (the total PO amount remains at $3,183,346).
(h) Undated (TI's approval date is 9/12/97) Change L to original PO (the total PO amount remains at $3,183,346).
<CAPTION>
<S> <C> <C> <C> <C> <C>
9. Raytheon Co. 72-RY00-68-7552 4/4/97 $2,798,778 $0 AMRAAM Lot 11
<CAPTION>
<S> <C>
(a) 4/4/97 Fax Turn-On PO # 72-RY00-68-7552 for the firm fixed price of $2,798,778.
(b) 4/15/97 Original PO # 72-RY00-68-7552 at the firm fixed price of $2,798,778.
<CAPTION>
<S> <C> <C> <C> <C> <C>
10. Raytheon Co. 72-RY00-68-7515 4/4/97 $2,485,587 $0 AMRAAM Lot 11
<CAPTION>
<S> <C>
(a) 4/4/97 Fax Turn-On PO # 72-RY00-68-7552 for the firm fixed price of $2,485,587.
(b) 4/15/97 Original PO # 72-RY00-68-7552 at the firm fixed price of $2,485,587.
<CAPTION>
<S> <C> <C> <C> <C> <C>
11. EDL Communications LTD 07013 5/30/97 $2,345,000 $2,345,000 Classified
<CAPTION>
<S> <C>
(a) 5/21/97 Original PO # 07013 for a total amount of $2,345,000 (with an option for an additional $33,400).
<CAPTION>
<S> <C> <C> <C> <C> <C>
12. Motorola Inc. Letter Subcontract 12/19/95 $2,245,186 $91,858 P94
Q563
<CAPTION>
<S> <C>
(a) 6/11/96 Letter Subcontract for $2,171,592.
(b) 7/1/96 Supplemental Agreement #1 revises the incremental funding from $2,171,592 to $2,192,497
(c) 8/15/96 Supplemental Agreement #2 revises the incremental funding from $2,192,497 to $2,217,320 fully
funded.
(d) 12/16/96 Supplemental Agreement #3 revises the incremental funding from $2,217,320 to $2,237,831.
(e) The difference between supplemental agreement #3 and the total order amount reflects unavailable documentation.
<CAPTION>
<S> <C> <C> <C> <C> <C>
13. Raytheon Co. 72-11G5-68-0004 12/23/96 $2,200,000 $2,200,000 SM II BLK IVA
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(a) 12/05/96 Original PO # 72-11G5-68-0004 with a total NTE amount of $2,376,000 but funded only to $530,000. This PO
was originally booked at $2,200,000 to reflect a possible reserve.
(b) 9/24/97 Change Order 1 to original PO which definitizes the pricing at $2,376,000. Subsequent to definitizing
this PO, the order has been booked at $2,376,000.
<CAPTION>
<S> <C> <C> <C> <C> <C>
14. Raytheon Co. 72-2082-68-0085 5/31/96 $1,980,000 $328,250 SM II BLK IV
<CAPTION>
<S> <C>
(a) 5/30/96 Original PO # 72-2082-68-0085 in the amount of $1,980,000.
<CAPTION>
<S> <C> <C> <C> <C> <C>
15. Raytheon Co. 72-55F6-68-0195 5/31/96 $1,940,400 $1,605,177 SM II BLK IV
<CAPTION>
<S> <C>
(a) 5/30/96 Original PO # 72-55F6-68-0195 in the amount of $1,940,400.
(b) 1/23/97 Change Order No. 1 amends the original PO (no change in total dollar amount).
(c) 6/02/97 Change Order No. 2 amends the original PO (no change in total dollar amount).
<CAPTION>
<S> <C> <C> <C> <C> <C>
16. Raytheon Co. 72-RY01-68-2157 5/16/97 $1,560,000 $0 AMRAAM
<CAPTION>
<S> <C>
(a) 5/14/97 Original PO # 72-RY01-68-2157 in the amount of $1,552,000.
(b) 5/20/97 Change Order 1 amends the original PO to a revised total amount of $1,560,000.
(c) 9/20/97 Change Order 2 (no change to total PO amount).
<CAPTION>
<S> <C> <C> <C> <C> <C>
17. E-Systems 4061SC09 12/19/95 $1,446,127 $411,711 Rivet Joint
<CAPTION>
<S> <C>
(a) 12/15/95 Subcontract # 4061SC09 for the firm fixed price of $1,446,127.
(b) 2/14/96 Modification S/A No. 1 (does not impact total subcontract amount).
<CAPTION>
<S> <C> <C> <C> <C> <C>
18. Lockheed Martin Federal 496643 3/18/94 $1,371,168 $229,376 Star
Systems
<CAPTION>
<S> <C>
(a) 3/18/94 MOA for the firm fixed price of $40,000 (which is dependent upon the actual amount of work performed) and
also provides an additional option pricing structure totalling $2,220,322.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(b) 3/30/94 Fax Turn-On exercising option 1 under the 3/18/94 MOA for the amount $40,000.
(c) 4/15/94 Original PO # 496643 for the firm fixed amount of $80,000 (which is dependent upon the actual amount of
work performed) and also provides an additional option pricing structure.
(d) 4/29/94 Alteration No. 1 to original PO # 496643 which exercises option 2 and increases the "commitment" from
$80,000 to $120,000.
(e) 5/27/94 Alteration No. 2 to original PO which exercises option 3 and increases the commitment from 120,000 to
$160,000.
(f) 6/29/94 Alternation No. 3 to original PO which exercises option 4 and increases the commitment amount from
$160,000 to $200,000.
(g) 7/28/94 Alteration No. 4 to original PO which exercises options 5-9 and increases the commitment amount from
$200,000 to $360,000.
(h) 1/20/95 Alteration No. 5 to original PO which exercises option 10 (for January) and increases
the commitment amount from $360,000 to $388,074.
(i) 2/7/95 Alteration No. 6 to original PO which exercises option 10 (for February) and increases the commitment
amount from $388,074 to $424,504.
(j) 3/1/95 Alteration No. 7 to original PO which exercises option 10 (for March) and increases the commitment amount
from $424,054 to $460,934.
(k) 4/3/97 Alteration No. 8 to original PO which exercises option 10 (for April) and increases the commitment amount
from $460,934 to $497,364.
(l) 5/1/95 Alteration No. 9 to original PO which exercises option 10 (for May) and increases the commitment amount
from $497,364 to $533,794.
(m) 5/31/95 Alteration No. 10 to original PO which exercises option 10 (for June and July) and increases the
commitment amount from $533,794 to $606,654.
(n) 7/31/95 Alteration No. 11 to original PO which exercises option 10 (for August and September) and increases the
commitment amount from $606,654 to $679,514.
(o) 10/12/95 Alteration No. 12 to original PO which exercises option 10 (for October, November and December) and
increases the commitment amount from $679,514 to $788,804.
(p) 12/1/95 Alteration No. 13 to original PO which exercises option 11 (for January and February) and increases the
commitment amount from $788,804 to $852,176.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(q) 2/20/96 Alteration No. 14 to original PO which exercises option 11 (for March - September) and increases the
commitment amount from $852,176 to $1,073,978.
(r) 8/19/96 Alteration No. 15 to original PO (with no change in the total amount).
(s) 10/18/96 Alteration No. 16 to original PO which exercises option 11 (for October 1996 - September 1997) and
increases the commitment amount from $1,073,978 to $1,371,168.
<CAPTION>
<S> <C> <C> <C> <C> <C>
19. HMSC 6-936616-R-G2-X 12/21/95 $1,310,026 $297,594 SM II BLK IV
<CAPTION>
<S> <C>
(a) 12/20/96 MOA for the firm fixed price of $1,460,026 ($150,000 of this MOA amount is assigned to PO #
6-957948-R-G2).
(b) 1/31/97 Original PO # 6-936616-R-G2-X for the firm fixed price of $1,310,026.
(c) 6/24/97 Change Letter OA to original PO (does not change the total PO amount--stays at $1,310,026).
(d) 9/16/97 Change Letter OB to original PO (does not change the total PO amount).
<CAPTION>
<S> <C> <C> <C> <C> <C>
20. Raytheon Co. 92-184H-G-0005 6/30/95 $1,272,000 $14,400 SLQ-32
<CAPTION>
<S> <C>
(a) 6/22/95 Original PO # 92-184H-G-0005 for the total amount of $1,248,000.
(b) 6/30/95 Fax Turn-On (references to PO # 92-184H-G-0005) for the total amount of $1,248,000.
(c) 10/16/95 Change Order No. 2 (total PO amount remains at $1,248,000).
(d) 12/09/95 Change Order No. 3 amends the original PO to a revised total amount of $1,272,000.
(e) 10/16/96 Change Order No. 5 (no change to total PO amount).
(f) 1/27/97 Change Order No. 7 (no change to total PO amount).
(g) Change Order No.'s 1, 4 and 6 are not in the folder. These Change Orders were issued internally at Raytheon and
not released to WJC.
<CAPTION>
<S> <C> <C> <C> <C>
21. Nortel Ltd. NB03158 7/25/97 $1,260,000 $163,800
<CAPTION>
<S> <C>
(a) 4/1/97 fax cover sheet cancelling PO # NB01522 and entering PO # NB03158 in the amount of $1,260,000 (no PO in
file).
<CAPTION>
<S> <C> <C> <C> <C>
22. Hughes Aircraft Co. B8-741647 4/1/97 $1,243,818 1,217,778 ICO
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(a) 6/12/97 Letter subcontract for $1,375,358.
(b) 8/28/97 Revision 1 to Letter Subcontract which provides for the firm fixed total contract amount of $1,247,198.
The Schedule amount ($1,243,818) will be adjusted to reflect the firm fixed contract amount ($1,247,198).
<CAPTION>
<S> <C> <C> <C> <C> <C>
23. Seocal Inc. 0013-A-5-02526 1/9/95 1,182,831 $72,468 MELCO
<CAPTION>
<S> <C>
(a) 8/31/95 Original PO # 0013-A-5-02526 for $1,249,997.
(b) 4/16/96 PO Revision #1 which decreases the total PO amount from $1,249,997 to $1,238,053.
(c) 5/28/96 PO Revision #3 which decreases the total PO amount from $1,238,053 to $1,231,411.
(d) Revision #2 not received by WJ. The difference between the Revision #3 total PO amount ($1,231,411) and the
Schedule amount ($1,182,831) reflects commissions which are taken against the total PO amount.
<CAPTION>
<S> <C> <C> <C> <C> <C>
24. HMSC 6-965204-R-G2-X 8/3/97 $1,070,786 $1,070,786 SM2/ESSM
<CAPTION>
<S> <C>
(a) 7/21/97 Original PO # 6-965204-R-G2-X for the total amount of $894,368 (also includes 1998 and 1999 option
pricing).
(b) 8/29/97 Change Letter OA amends the original PO to a revised total of $1,070,786 (includes the 1998 and 1999
options)
(c) 9/16/97 Change of letter OB amends the original PO (total PO amount remains at $1,070,786) (Change Letter OB
also includes the 1998 and 1999 options).
<CAPTION>
<S> <C> <C> <C> <C> <C>
25. Nortel Ltd. NB03104 3/11/97 $1,002,000 $546,925 OC-48
<CAPTION>
<S> <C>
(a) 3/11/97 Original PO # NB03104 for $1,002,000
<CAPTION>
<S> <C> <C> <C> <C> <C>
26. Hughes Aircraft Co. M2-637508-AJ7 6/25/96 $1,000,000 $531,250 F15 RDR SET MSIP
<CAPTION>
<S> <C>
(a) 6/7/96 Original PO # M2-637508-AJ7 for 1,000,000.
<CAPTION>
<S> <C> <C> <C> <C> <C>
27. Litton Systems, Inc. C5065 3/19/97 $932,120 $682,110 E2C
<CAPTION>
<S> <C>
(a) 3/14/97 Original PO # C00005065 for the total amount of $932,120.
<CAPTION>
<S> <C> <C> <C> <C> <C>
28. Hughes Aircraft Co. B8-741632 6/27/97 $828,235.00 $778,906 ICO
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(a) 6/12/97 Letter Subcontract for total proposed price of $909,201.
(b) 8/28/97 Revision 1 to Letter Subcontract which provides for the firm fixed total contract amount of $831,306. The
Schedule amount ($828,235) will be adjusted to reflect the firm fixed contract amount ($831,306).
<CAPTION>
<S> <C> <C> <C> <C> <C>
29. Boeing North America V6CA650200F 12/5/95 $751,107 $48,000 PAC 3
<CAPTION>
<S> <C>
(a) 11/10/95 Original PO # V6CA650200F for a NTE limit of $368,000.
(b) 12/07/95 Change Notice Number 1 to original PO # V6CA650200F (Definitized contract at firm fixed price of
$368,000).
(c) 12/15/95 Change Notice Number 2 (no change to total PO amount).
(d) 4/17/96 Change Notice Number 3 (no change to total PO amount).
(e) 5/30/96 Change Notice Number 4 (no change to total PO amount).
(f) 10/15/96 Change Notice Number 5 (no change to total PO amount).
(g) 2/07/97 Change Notice Number 6 (no change to total PO amount).
(h) 2/14/97 Change Notice Number 7 (no change to total PO amount).
(i) 2/19/97 Change Notice Number 8 (no change to total PO amount).
(j) 3/07/97 Change Notice Number 9 (no change to total PO amount).
(k) 4/22/97 Change Notice Number 10 (no change to total PO amount).
(l) 5/28/97 Change Notice Number 11 (no change to total PO amount).
(m) 7/02/97 Change Notice Number 12 (no change to total PO amount).
(n) 7/10/97 Change Notice Number 13 (no change to total PO amount).
(o) 7/31/97 Change Notice Number 14 increases the total PO amount to $751,107.
(p) 8/19/97 Change Notice Number 15 (no change to total PO amount).
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C> <C> <C> <C> <C>
30. Lockheed Martin Federal 152902 6/20/96 $749,500 $349,500 AV 1
Systems
<CAPTION>
<S> <C>
(a) 6/10/96 Letter Contract Number PO 686380 with a NTE limit $773,134 and a funding limit of $400,000.
(b) 8/8/96 PO # 152902 for the total firm fixed price of $715,000 (supersedes Letter Contract Number PO 686380).
(c) 10/1/96 authorization increases PO by $34,500 to $749,500.
(d) 12/4/96 PO # 152902 for the total amount of $749,500.
<CAPTION>
<S> <C> <C> <C> <C> <C>
31. HMSC 6-936623-R-A9-X 3/29/96 $737,800 $234,515 SM II BLK III & IV
<CAPTION>
<S> <C>
(a) 4/18/96 Original PO # 6-936623-R-G2-X for the firm fixed amount of $658,750.
(b) 5/30/96 Change Letter OA to original PO # 6-936623-R-G2-X which increases the total PO amount to $708,815.
(c) 9/05/96 Change Letter OB to original PO # 6-936623-R-G2-X which increases the total PO amount of $737,800.
(d) 6/03/97 Change Letter OC to original PO # 6-936623-R-G2-X (no change to total PO amount).
(e) 7/08/97 Change Letter OD to original PO # 6-936623-R-G2-X (no change to total PO amount).
(f) Note that the PO # was changed from 6-936623-R-A9-X to 6-936623-R-G2-X to reflect a change at HMSC in their own
internal buyer code.
<CAPTION>
<S> <C> <C> <C> <C>
32. Nortel Ltd. NB03943 9/10/97 $729,000 $729,000
<CAPTION>
<S> <C>
(a) 9/5/97 Original PO # NB03943 via fax 9/8/97 in the amount of $729,000.
<CAPTION>
<S> <C> <C> <C> <C>
33. Nortel Ltd. NB03592 8/1/97 $630,000 $630,000
<CAPTION>
<S> <C>
(a) 6/17/97 Original faxed PO # NB03592 in the amount of $630,000.
<CAPTION>
<S> <C> <C> <C> <C> <C>
34. Hughes Aircraft Co. B8-599658-FLS 11/2/95 $535,359 $699 MDR
<CAPTION>
<S> <C>
(a) 5/17/96 Original PO # N-B8-599658 for $467,233.
(b) 7/31/96 Revision 1 to PO # N-B8-599658 (no change to total PO amount).
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(c) 1/6/97 Revision 2 to PO # N-B8-599658 (no change to total PO amount).
(d) 3/4/97 Revision 3 to PO # N-B8-599658 which decreases the total PO amount from $467,233 to $462,549. The
difference between the Schedule amount ($535,359) and the Revision 3 amount ($462,549) reflects the following two
items: (i) a credit memo for $72,111 which was not reflected in the Schedule amount and (ii) a $699 line item
which was cancelled, but contained in the Schedule and total open amount. The schedule should reflect $462,549 and
the total open amount should be $0.
(e) This PO has subsequently been closed out the Oracle database properly updated.
<CAPTION>
<S> <C> <C> <C> <C>
35. IFR Systems Inc. 202008 3/8/95 $535,009 $14,668
<CAPTION>
<S> <C>
(a) 2/10/95 Requirements Purchase Agreement with Appendix A PO # 202008 for $656,200 (difference is due to incremental
ordering).
<CAPTION>
<S> <C> <C> <C> <C> <C>
36. Texas Instruments Inc. 100759031 5/30/97 $525,000 $525,000 P3 I
<CAPTION>
<S> <C>
(a) 5/29/97 Letter Subcontract (references to PO # 10075931) for the NTE amount of $730,000 ($650,000 of which applies
to PO # 100759031).
(b) 6/18/97 Original PO # 100759031 for the firm fixed amount of $450,000.
(c) 6/26/97 MOA for the amount of $605,000 ($525,000 of which applies to PO # 100759031).
(d) 6/26/97 Revision A to original PO # 100759031 which increases the total PO amount to $525,000.
<CAPTION>
<S> <C> <C> <C> <C> <C>
37. Raytheon Co. 92-227-H-G-2029 9/1/95 $518,202 $22,724 ALQ-184
<CAPTION>
<S> <C>
(a) 9/6/95 Original PO # 92-227H-G-2029 for the total amount of $490,360.
(b) 10/16/95 Change Order No. 1 to the original PO which increases the total PO amount to $518,202.
(c) 11/15/96 Change Order No. 2 (no change to total PO amount).
<CAPTION>
<S> <C> <C> <C> <C> <C>
38. Lockheed Martin
Aerospace KKM007288 12/23/92 $515,000 $181,405 SCAMP
<CAPTION>
<S> <C>
(a) 12/22/92 Letter Subcontract KKM007288 for a NTE limit of $515,000 funded to $150,000.
(b) 12/23/92 Original PO # KKM007288 funded to $150,000.
(c) 4/27/93 Amendment # PO1 to PO # KKM007288 which increases the total PO to a firm fixed price of $515,000.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(d) 3/04/94 Amendment # PO2 to PO # KKM007288 (no change to total PO amount).
(e) 7/27/94 Amendment # PO3 to PO # KKM007288 (no change to total PO amount).
(f) 8/25/94 Amendment # PO4 to PO # KKM007288 (no change to total PO amount).
(g) 9/06/94 Amendment # PO5 to PO # KKM007288 (no change to total PO amount).
(h) 10/18/94 Amendment # PO6 to PO # KKM007288 (no change to total PO amount).
(i) 10/26/94 Amendment # PO7 to PO # KKM007288 (no change to total PO amount).
(j) 10/27/94 Notice of Termination for Convenience of PO # KKM007288.
(k) 10/28/94 Confirms Notice of Termination providing additional instructions.
<CAPTION>
<S> <C> <C> <C> <C> <C>
39. Harris Corp. 6943858 12/20/96 $510,963 $12,582 HT
<CAPTION>
<S> <C>
(a) 3/7/97 Original PO # 6943858 for $510,963.
<CAPTION>
<S> <C> <C> <C> <C> <C>
40. Raytheon TI Systems Inc. 105936747 9/10/97 $487,000 $487,000 P102
<CAPTION>
<S> <C>
(a) 8/27/97 MOA includes pricing for two PO's ($3,951,012 for PO # 105936762 and $487,000 for PO # 105936747) and
additional option pricing.
(b) 9/3/97 Original PO # 105936747 for the total amount of $487,000.
<CAPTION>
<S> <C> <C> <C> <C> <C>
41. HMSC LSC 8K-858373-7G2 5/30/97 $484,465 $384,715 SM II
<CAPTION>
<S> <C>
(a) 5/29/97 Original PO # LSC 8K-858373-7G2 for an estimated final commitment NTE limit of $484,465 (includes option
pricing).
(b) 8/27/97 MOA for the firm fixed total of $484,465 (and also provides for option pricing).
(c) 9/26/97 Change Letter OA amends the original PO (lists total PO amount at $484,465) (Change Letter OA also
includes option pricing).
<CAPTION>
<S> <C> <C> <C> <C> <C>
42. Raytheon Co. 53-54G0-BR-0001 12/17/96 $466,612 $124,933.31 ESSM
<CAPTION>
<S> <C>
(a) 12/10/96 Original PO # 53-54G0-BR-0001 for the not to exceed amount $495,672.
(b) 4/14/97 Change Order No. 1 amends original PO # 53-54G0-BR-0001 to a revised firm fixed price of $466,612.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(c) 4/29/97 Change Order No. 2 (no change to total PO amount).
(d) 6/08/97 Change Order No. 3 (no change to total PO amount).
(e) 9/03/97 Change Order No. 4 (no change to total PO amount).
<CAPTION>
<S> <C> <C> <C> <C> <C>
43. HMSC 8K-831170-7F3 3/31/95 $443,361.17 $36,170.59 AMRAAM
<CAPTION>
<S> <C>
(a) 3/31/95 Original PO # 8K-831170-7F3 for the firm fixed total PO amount of $443,361.17.
<CAPTION>
<S> <C> <C> <C> <C> <C>
44. Raytheon Co. 72-RY01-68-0112 5/22/97 $443,300 $393,250 Sparrow
<CAPTION>
<S> <C>
(a) 5/20/97 Original PO # 72-RY01-68-0112 for a total PO amount of $465,500.
(b) 7/11/97 Change Order No. 1 to original PO # 72-RY01-68-0112 increases the total PO amount of $482,150 ($38,850 of
which is subsequently transferred to original PO # 72-5044-68-0565 dated 8/06/97).
<CAPTION>
<S> <C> <C> <C> <C> <C>
45. Alcatel Network Systems 39300004041 5/28/96 $442,210 $158,630 ACES, MTSAT,
Worldstar
<CAPTION>
<S> <C>
(a) 5/7/96 Original PO # 39300004041 for $442,960.
(b) 6/27/97 Amendment 1 which increases the total PO amount from $442,960 to $474,610. The Schedule and total open
amount should be increased by $32,400 to reflect the proper amount.
(c) The Oracle database has subsequently been updated to reflect the proper amount.
<CAPTION>
<S> <C> <C> <C> <C> <C>
46. Maryland Procurement
Office (MPO) MDA904-96-C-1373 9/27/96 $420,549 $53,505 Windjammer
<CAPTION>
<S> <C>
(a) 9/18/96 Contract No. MDA904-96-C-1373 for a total firm fixed price of $420,549.
<CAPTION>
<S> <C> <C> <C> <C>
47. Defense Supply Center SP0970-94-D- 2/12/97 $396,934 $266,867
C006/0004, 0005,
0006
<CAPTION>
<S> <C>
(a) 2/10/97 Original PO # SP0970-94-D-C00610004 for $104,900.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(b) 4/14/97 Original PO # SP0970-94-D-C00610005 for $104,900.
(c) 5/12/97 Original PO # SP0970-94-D-C00610006 for $187,143.
(d) SUMMARY: (a) + (b) + (c) = $396,943 (The Schedule contains a transposition difference of $9 and
should reflect $396,943).
<CAPTION>
<S> <C> <C> <C> <C> <C>
48. U.S. Air Force F09603-95-D-0908 10/28/95 $390,607 $223,530 ALQ-184
DO 0001/0002
<CAPTION>
<S> <C>
(a) 8/31/95 Award Letter for the estimated total amount of $287,671 (estimate is dependent upon amount of returned for
repair units from customer - - this is a repair contract).
(b) 9/21/95 Delivery Order No. 0001 under Contract/Purchase Order No. F09603-95-D-0908 for the total amount of
$314,688.
(c) 11/14/95 Amendment/Modification No. P00001 to Contract Purchase Order No. F09603-95-D-0908 (no change to total
contract amount).
(d) 6/26/96 Delivery Order No. 0002 under Contract/Purchase Order No. F09603-95-D-0908 for the total amount of
$75,919.
<CAPTION>
<S> <C> <C> <C> <C> <C>
49. Raytheon Co. 72-RY02-68-4287 8/28/97 $387,777 $387,777 AMRAAM
<CAPTION>
<S> <C>
(a) 9/6/97 Original PO # 72-RY02-68-4287 for a total PO amount of $387,777.
<CAPTION>
<S> <C> <C> <C> <C>
50. IFR System Inc. 202005 2/28/95 $380,794.82 $2,114
<CAPTION>
<S> <C>
(a) 2/10/95 Requirements Purchase Agreement with Appendix A PO # 202005 for $539,070 (difference due to incremental
ordering).
<CAPTION>
<S> <C> <C> <C> <C> <C>
51. Raytheon Co. 72-RY01-68-3188 5/22/97 $374,660 $374,660 Sparrow
<CAPTION>
<S> <C>
(a) 5/20/97 Original PO # 72-RY01-68-3188 for a total PO amount of $374,660.
<CAPTION>
<S> <C> <C> <C> <C> <C>
52. AIL Systems 120100-000 12/12/96 $372,552 $169,164 EA6B
<CAPTION>
<S> <C>
(a) 12/3/96 Original PO # 120100-000 for $372,552.
<CAPTION>
<S> <C> <C> <C> <C> <C>
53. HMSC 6-907044-B-L6 5/21/93 $370,820 $47,371 AMRAAM
<CAPTION>
<S> <C>
(a) 5/04/93 Letter Subcontract (for PO # 6-907044-B-L6) for a NTE value of $362,988.
(b) 12/23/94 Original MOA for a total amount of $1,035,520 ($370,820 of which relates to PO # 6-907044-B-L6).
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
DATE TOTAL ORDER TOTAL OPEN
CUSTOMER PURCHASE ORDER ENTERED AMOUNT AMOUNT PROGRAM NAME
<S> <C>
(c) 4/24/95 Amendment A to MOA revises the total MOA amount to $1,003,866.25 ($339,166 of which relates to PO #
6-907044-B-L6). Note: the PO amount on the Oracle system properly reflects the $339,166 amount. The manual change
from the Oracle report which is reflected in the final schedule was based on a prior report. The Schedule should
reflect $339,166.
<CAPTION>
<S> <C> <C> <C> <C> <C>
54. Maryland Procurement
Office (MPO) MDA904-96-C-1409 9/27/96 $330,584 $180,512 Z-Group
<CAPTION>
<S> <C>
(a) Undated (Signed by WJC on 9/18/96) Contract No. MDA904-96-C-1409 for a total firm fixed price of $330,584.
<CAPTION>
<S> <C> <C> <C> <C>
55. Saab Ericsson Space 53-6-1059 10/22/96 $326,420 $71,840
<CAPTION>
<S> <C>
(a) 10/16/96 fax from Saab Ericsson letter of intent for PO 53-6-1059 total value $326,420.
</TABLE>
17
<PAGE>
SCHEDULE 5.03(A)
1. Both before and after giving effect to the consummation of the
Permitted Acquisition, all of the representations and warranties contained in
Section 6.01 of the Credit Agreement and in the other Loan Documents shall be
true in all material respects, except that Schedules 6.01(D) and 6.01(E) may be
modified and amended to give effect to the status of the matters covered by
Sections 6.01(d) and (e) in respect of the Permitted Acquisition, and, as so
modified and amended, shall be reasonably satisfactory to the Requisite Lenders.
<PAGE>
SCHEDULE 5.03(B)
1. A Borrower has delivered written notice to the
Administrative Agent and the Lenders of its intention to make a Permitted
Acquisition and a copy of the Information Package no less than Fifteen (15)
Business Days prior to the proposed closing date for such Permitted Acquisition
that sets forth, among other things, information regarding liabilities and
obligations with respect to environmental matters to be incurred by the Borrower
or any other Loan Party (including, without limitation, the acquired Person in
the event of an acquisition of equity interests) as a result of such
acquisition, any indemnities afforded under the terms of such acquisition and
the scope and results of any environmental review undertaken by such Borrower in
connection therewith.
2. The consideration (including, without limitation, the
purchase price, any deferred purchase price and the amount of Indebtedness being
assumed) for such Permitted Acquisition does not exceed the fair market value of
the assets or the equity interests being acquired.
3. The Permitted Acquisition is made at a time when, after
giving effect to such Permitted Acquisition and the related financing thereof,
no Default or Event of Default exists and the acquiring Borrower would remain
Solvent.
4. Substantially all assets and equity interests acquired by
the acquiring Borrower are being pledged to the Collateral Agent, for the
ratable benefit of the Agents and the Lenders, in accordance with Section 9.09.
5. The Pro Forma Interest Coverage Ratio of Stellex and its
Subsidiaries on a consolidated basis calculated in accordance with GAAP after
giving effect to such Permitted Acquisition shall be equal to or greater than
(a) 1.75 to 1.00 in connection with any Permitted Acquisition consummated in
Fiscal Year 1998, (b) 1.90 to 1.00 in connection with any Permitted Acquisition
consummated in Fiscal Year 1999 and (c) 2.25 to 1.00 in connection with any
Permitted Acquisition consummated thereafter.
6. The Pro Forma Leverage Ratio of Stellex and its
Subsidiaries on a consolidated basis calculated in accordance with GAAP after
giving effect to such Permitted Acquisition shall not be greater than (a) 5.75
to 1.00 in connection with any Permitted Acquisition consummated prior to the
Term Loan Termination Date and (b) 4.50 to 1.00 in connection with any Permitted
Acquisition consummated thereafter.
For purposes of the covenants set forth in this Schedule
5.03(B), the following terms shall be defined as set forth below:
<PAGE>
"Pro Forma Interest Coverage Ratio" means the ratio of
Pro Forma EBITDA to Pro Forma Cash Interest Expense.
"Pro Forma Leverage Ratio" means the ratio of Pro Forma
Funded Debt to Pro Forma EBITDA.
"Pro Forma EBITDA" means the EBITDA for Stellex and its
Subsidiaries on a consolidated basis for the immediately preceding Financial
Covenant Period, which EBITDA is multiplied by a fraction the numerator of which
is 12 and the denominator of which is the number of months in such Financial
Covenant Period, plus the EBITDA for the acquired Person for the immediately
preceding four fiscal quarters multiplied by the percentage of such Person being
acquired.
"Pro Forma Cash Interest Expense" means the Cash Interest
Expense for Stellex and its Subsidiaries on a consolidated basis for the
immediately preceding Financial Covenant Period, which Cash Interest Expense is
multiplied by a fraction the numerator of which is 12 and the denominator of
which is the number of months in such Financial Covenant Period, plus the
arithmetic product of (a) the Pro Forma Acquisition Debt and (b) the Eurodollar
Rate for an interest period of 3 months plus the then current Applicable Term
Loan Eurodollar Rate Margin.
"Pro Forma Acquisition Debt" means, with respect to any
Permitted Acquisition, the Funded Debt to be incurred in connection with such
Permitted Acquisition as set forth in the Sources and Uses with respect thereto.
"Pro Forma Funded Debt" means the Funded Debt for Stellex and
its Subsidiaries on a consolidated basis for the immediately preceding four
fiscal quarter plus the Pro Forma Acquisition Debt.
<PAGE>
SCHEDULE 6.01(C)
OWNERSHIP
<TABLE>
<S> <C>
Borrowers Ownership
Stellex Industries, Inc. 10.0% of common stock by Askrigg Trust
90.0% of common stock by Cottingham Trust
100% of Series A Preferred Stock by
Sunderland Industrial Holdings Corporation
KII Holding Corp. 80.1% of common stock by Stellex Industries, Inc.
19.9% of common stock by Management Group
100% of Series A Preferred by Stellex Industries,
Inc.
Kll Acquisition Corp. 100% by Kll Holding Corp.
Stellex Aerospace 100% by Kll Acquisition Corp.
Paragon 100% by Stellex Aerospace
SEAL 100% by Stellex Aerospace
Bandy Machining International 100% by Stellex Aerospace
General Inspection Laboratories, Inc. 100% by Stellex Aerospace
TSMD Acquisition Corp. 100% by Stellex Industries, Inc.
Stellex Microwave Systems, Inc. 100% by TSMD Acquisition Corp.
</TABLE>
<PAGE>
SCHEDULE 6.01(D)
VIOLATIONS OF AND CONFLICTS WITH
GOVERNING DOCUMENTS, REQUIREMENTS
OF LAW OR MATERIAL CONTRACTUAL OBLIGATIONS
Reference is made to Schedule 5.01(A) with respect to:
(a) Consents, approvals, contract novations and assignments or new
issuances of various governmental permits that have not been
obtained, as of the date of this Agreement, in each case from
certain governmental authorities specified therein; and
(b) Consents that have not been obtained, as of the date of this
Agreement, under contracts and agreements referred to therein
from the other parties thereto, all in connection with the
consummation of the Watkins-Johnson Acquisition.
The operation by Stellex Microwave Systems, Inc. of its portion of the
Business without having obtained such consents, approvals, contract novations,
assignments and/or new issuances, and/or such consents from other parties to
contracts and agreements, may constitute a violation of certain Requirements of
Law and/or of certain material Contractual Obligations to which such matters
pertain.
<PAGE>
SCHEDULE 6.01(J)(i)
LITIGATION; ADVERSE EFFECTS
None
<PAGE>
SCHEDULE 6.01(J)(ii)
MATERIAL LOSS CONTINGENCIES
NOT REFLECTED IN FINANCIAL STATEMENTS
1. Reference is made to the letter dated September 30, 1997 from Hughes
Missile Systems Company to Watkins-Johnson Company, a copy of which is attached
hereto. The $566,000 item referred to in paragraph 1 thereof may constitute a
"material loss contingency," as such term is used in the second sentence of
Section 6.01(j) of the Agreement (an "MLC").
2. Reference is made to Schedule 2.5(m) of the Watkins-Johnson
Acquisition Agreement, a copy of which is attached hereto. The items set forth
therein may constitute MLC's.
3. The following projects of Stellex Microwave Systems, Inc. acquired
from Watkins-Johnson, may constitute MLC's:
<TABLE>
<CAPTION>
Projected Conservative
Additional Additional Provisional
Project # Project Provisional Loss Loss
--------- ------- ---------------- ----
<S> <C> <C> <C>
W06545000 MFE LRIP 3 $ (80,000) $ (200,000)
W06554000 Sparrow (80,000) (115,000)
W06558000 ELF NRE (25,000) (40,000)
</TABLE>
<PAGE>
[Letterhead of Hughes Aircraft Company]
30 September 1997
In Reply Refer To: WJ-097-DCR-003
Watkins-Johnson Company
3333 Hillview Avenue
Stanford Research Park
Palo Alto, CA 94304
Attention: Mr. Tim Boland
Subject: HMSC/WJ Enterprise Cost Reduction Initiatives (ECRI)
Reference: 1. Telecon between Tim Boland, WJ, and John Stenger, HMSC,
same subject, dated 29 September 1997.
2. AMRAAM Memorandum of Agreement, Ref. 400-RJT-5020,
dated 9 March 1995.
3. HMSC Letter 097-DCR-001, Same Subject, dated
11 August 1997.
Dear Tim,
This letter serves to formalize the agreement reached in Reference 1, whereby
Hughes Missile Systems Company (HMSC) and Watkins-Johnson (WJ) mutually agree to
the following regarding ECRIs:
o WJ will credit HMSC $1,000,000, as a result of business volume credits
earned in accordance with Reference 2, in accordance with the
following:
1. The AMRAAM Lot 11 purchase order price of $12,077,765
will be reduced by $566,000 to $11,511,765. HMSC will
incorporate this change on a percentage basis over
the four subassemblies in the final purchase order
which is anticipated to be completed on 30 October
1997.
<PAGE>
2. WJ will issue a check to HMSC in the amount of
$434,000, not later than 30 October 1997.
o The remaining $1,301,000 ECRI dollars delineated in Reference 3 will be
credited to WJ in support WJ activities relating to FOTT, Special
Access Program, Standard Missile C15, and AMRAAM.
o HMSC will finalize the FOTT purchase order for $250,000 not later than
30 October 1997 and release a second purchase order in the amount of
$90,000 for FOTT phase three not later than 30 October 1997.
The parties agree these actions represent the final completion and closure of
any and all ECRI obligations and commitments between the parties contemplated by
Reference 2. These actions also close out the remaining open items of Reference
2, and therefore the agreement is considered complete.
HMSC request WJ's acknowledgment of this agreement be returned to the
undersigned by 30 September 1997.
HUGHES MISSILE SYSTEMS COMPANY
/s/ D.C. Raby
- -----------------
D.C. Raby
WATKINS-JOHNSON ACKNOWLEDGMENT
/s/ Albert T. Isaacs
- ----------------------
Albert T. Isaacs
Director, New Business Development
Tactical Subsystems Sector
<PAGE>
SCHEDULE 6.01(L)
PAYMENT OF TAXES
1 . Paragon failed to file either a "top hat" notice or annual Form 5500
report with respect to certain income continuation agreements to which
Paragon is a party. In June, 1997, Paragon filed a Top Hat Plan
Notice, and tendered $2,500 with the required documentation in
satisfaction of any potential civil penalty relating to filing
obligations, pursuant to the U.S. Department of Labor's Delinquent
Filer Voluntary Compliance Program with respect thereto. The receipt
of such payment has been acknowledged.
2. Aerospace failed to file either a "top hat" notice or annual Form 5500
reports with respect to certain deferred compensation agreements to
which Aerospace is a party. In June, 1997, Aerospace filed a Top Hat
Plan Notice, and tendered $2,500 with the required documentation in
satisfaction of any potential civil penalty relating to filing
obligations, pursuant to the U.S. Department of Labor's Delinquent
Filer Voluntary Compliance Program with respect thereto. The receipt of
such payment has been acknowledged.
<PAGE>
SCHEDULE 6.01(P)
ENVIRONMENTAL MATTERS
1. All matters, including, but not limited to, compliance issues, orders,
agreements, violations or alleged violations, Remedial Actions,
Liabilities and Costs, Releases or threatened Releases, notices,
underground storage tanks, surface impoundments, asbestos-containing
materials (confirmed or suspected) and polychlorinated biphenyls
("PCBs"), disclosed in the following, all of which have been provided
to the Agent (collectively, the "Environmental Assessments"):
a. Draft Report Phase I Environmental Site Assessment, Seal
Laboratories, 250 North Nash Street, El Segundo, California,
Dames and Moore, dated October 21, 1996;
b. Draft Report Phase I Environmental Site Assessment and Phase
11 Limited Subsurface Investigation, General Inspection
Laboratories, 8427 Atlantic Avenue, Cudahy, California, Dames
and Moore, dated October 21, 1996;
c. Revised Environmental Compliance Assessment Findings, General
Inspection Laboratories, 8427 Atlantic Avenue, Cudahy,
California, Dames and Moore, dated December 12, 1996;
d. Draft Report Phase I Environmental Site Assessment, Paragon
Precision Products, Inc., 26150 West Technology Drive,
Valencia, California, Dames and Moore, dated October 18, 1996;
e. Draft Report Phase I Environmental Site Assessment and Phase
11 Limited Subsurface Investigation, Bandy Machining
International, Inc., 3400 San Fernando Boulevard and 3086 Avon
Street, Burbank, California, Dames and Moore, dated October
22, 1996;
f. Environmental Assessment of Subsidiaries of Stellex Aerospace,
ENSR Consulting and Engineering, dated May, 1997;
g. Memorandum (Additional Investigative Activities and Findings),
ENSR Consulting and Engineering, dated June 3, 1997;
h. Memorandum (Additional Investigative Activities re: Aerospace,
formerly known as Kleinert Industries, Inc.) ENSR Consulting
and Engineering, dated October 27, 1997;
<PAGE>
i. Commercial Sub-Sublease (Buildings 3/4/5) dated October 31,
1997 between W-J TSMD Inc., as Tenant and Watkins-Johnson
Company ("WJ"), as Landlord.
j. Commercial Sub-Sublease (Building 6) dated October 31, 1997
between W-J TSMD Inc., as Tenant and WJ, as Landlord.
k. An EPA Notification of Regulated Waste Activity (EPA Form
8700-12) has been filed with the EPA concerning the generation
and disposal of hazardous waste. No waste is to be stored in
excess of 90 days.
l. Information concerning ACMs and other matters as set forth in
Phase I Environmental Site Assessment and Compliance Audit of
WJ, Palo Alto, California dated October 1997 prepared by ENSR
under its Document Number 8713-095.
m. The following information has been obtained concerning the
leased property:
(i) The California EPA issued an order finding that WJ is
a responsible party for groundwater contamination
which flows through WJ's Palo Alto Plant site on the
site itself. A number of other companies in the area
as well as Stanford University, the land owner, have
been included in the order which required the
responsible parties to conduct an investigation into
the cause of the contamination. The order further
required the parties to submit recommendations on the
actions to remediate the contamination. This
regional order applies to what has been designated by
the State as the "Hillview/Porter site." The primary
sources of contamination were found to have migrated
onto WJ's property from off-site. Subsequent to a
mediation among the responsible parties to the
Hillview/Porter site, a formula for allocation of
costs for investigation and remediation based on a
determination of liability for such costs was
developed. The parties are in compliance with orders
relating to this cleanup effort.
In 1991 WJ established a reserve for expected costs
associated with this effort, and nothing has occurred
since that time which would cause WJ to change that
reserve.
(ii) The California EPA also ordered responsible or
potentially responsible parties to the
Hillview/Porter site, in addition to participating in
the total site remediation, to investigate and
remediate contamination that is specific to their
properties ("site specific"). The State has, in that
regard, ordered WJ to take necessary measures to
clean up certain contamination which the State
believes was caused by WJ and not by contaminants
flowing on-site from other sources. WJ has likewise
established a reserve for expected costs associated
with this effort,
<PAGE>
and nothing has occurred since that time which would
cause WJ to change that reserve.
n. Preliminary Site Assessment and Limited Site Characterization,
Pure Cote, Inc. and Paragon Precision Products, Pacoima,
California, Thorne Environmental, Inc., June 13, 1989.
o. The documents identified in Paragraph 2 of this Schedule
6.01(P) relating to the Pacoima Site (as defined below),
together with all matters disclosed in the reports, studies,
assessments, findings, filings, records and other data
referenced therein.
2. Prior to the purchase of either Paragon or Paragon's former site at
11035 Sutter Avenue, Pacoima, California (the "Pacoima Site") by
Aerospace, a brick-lined vault (the "Vault") located on the
southwestern side of the Pacoima Site was used for the disposal of
waste oils from the Pacoima Site's operation. During an environmental
audit conducted by Aerospace in 1989, soil impacted by hydrocarbons and
halogenated organic compounds was found at the Vault location.
Groundwater test results also showed that gasoline, aromatic volatile
compounds, and several halogenated organic compounds were present in
the groundwater.
The contamination was reported to the Los Angeles County Department of
Health Services ("DHS"), and, subsequently, to the California Regional
Water Quality Control Board ("RWQCB"), Los Angeles Region, which
assumed jurisdiction over the remediation of the Pacoima Site. A
remediation program consisting of vapor extraction of the volatile
compounds from the soils was proposed, approved by the RWQCB, and
implemented (the "Remediation Program"). The Remediation Program is
described further in the following documents:
a. Project Summary Report prepared by CET Environmental Services,
Inc. dated January, 1993;
b. The Soil Remediation Closure Report submitted to the RWQCB
dated May, 1993 (the "Closure Report"); and
c. A letter from the RWQCB dated August 30, 1993 (the "No Action
Letter").
Several years after Paragon sold the Pacoima Site to D&M Steel
("D&M") (a copy of the purchase agreement with D&M has been
provided to the Agent) and after the RWQCB issued the No
Action Letter, Aerospace learned that the California
Department of Toxic Substances Control ("DTSC"), acting under
the authority of the United States Environmental Protection
Agency ("U.S. EPA") contacted D&M for the purpose of
investigating whether a release of hazardous substances had
occurred at the Site which poses a threat to public health or
the environment (the "DTSC Investigation"). Although neither
Aerospace nor Paragon have been contacted by either
<PAGE>
DTSC or U.S. EPA concerning the DTSC Investigation, Aerospace
continues to receive telephone calls from D&M and has been
advised that DTSC recently inspected the Pacoima Site.
In connection with the prior use of the Vault and the
potential presence of discharges and releases caused by the
previous owners of the Pacoima Site, Aerospace and certain
affiliates filed a lawsuit against the prior owners in Los
Angeles County Superior Court (Case No. PCO07199X) (the
"Familian Litigation"). The Familian Litigation and various
claims associated with potential existing and future hazardous
materials claims relating to the Pacoima Site were settled
pursuant to a Settlement and Release Agreement dated on or
about July 5, 1994 by and among Aerospace, Paragon, Paragon
Tool, Die and Engineering, Novo-Paragon, Inc., Novo Leasing,
Ltd., Isadore Familian, Gary Familian, Arnold Familian, Marv
Smalley, Leonard Shapiro, Robert Wyser, Wyser Industries,
Inc., General Accident Insurance Company of America, Utica
Mutual Insurance Co., Allianz Insurance Co., Sentry Insurance
A Mutual Company, Fireman's Fund Insurance Co., Atlantic
Mutual Insurance Co., and The Travelers (a copy of the
Settlement and Release Agreement has been provided to the
Agent).
3. As reflected in the Draft Report Phase I Environmental Site Assessment,
Paragon Precision Products, Inc., 26150 West Technology Drive,
Valencia, California, prepared by Dames and Moore and dated October 18,
1996, the activated carbon filters used in the Remediation Program (as
defined above) were transported to Yakima, Washington for regeneration
and reprocessing. The filters allegedly were mishandled in the process
of regeneration and reprocessing by Cameron-Yakima, Inc.
("Cameron-Yakima"), the company responsible for regeneration and
reprocessing of the filters, resulting in a release of hazardous
materials on or near Cameron-Yakima's facility at Yakima. In August
1994, Paragon received a letter from Cameron-Yakima indicating that the
Washington State Department of Ecology had notified some of
Cameron-Yakima's customers that they may be potentially liable for
remediation costs associated with the release.
4. On or about January 27, 1993, SEAL received a letter from the
Sanitation Districts of Los Angeles County ("SDLAC") stating that
SEAL's metal etching and photographic wastestreams were both subject to
pretreatment standards for new sources in the EPA Metal Finishing Point
Source Category and that SEAL was required to apply for and obtain an
Industrial Waste Discharge Permit from SDLAC. SEAL submitted an
application for an Industrial Waste Discharge Permit to SDLAC on or
about July 13, 1993. On May 24, 1993 and again on July 15, 1993, SEAL
received notices of violation from SDLAC alleging that SEAL had failed
to submit self-monitoring reports required by SDLAC in relation to
SEAL's metal etching and photographic wastestreams. Following a
meeting between SEAL and SDLAC personnel in late 1993, SDLAC notified
SEAL in a letter dated February 9, 1994 that SEAL is not required to
obtain an Industrial Waste Discharge Permit.
<PAGE>
5. In 1994 or 1995, Aerospace received a letter addressed to G.W. Bandy,
Inc. ("G.W. Bandy"), the predecessor to Bandy Machining International
("Bandy"), indicating the existence of legal proceedings arising from
the failure of a hazardous materials transporter formerly used by G.W.
Bandy to transport and dispose of machine coolants. Apparently, the
transporter had illegally disposed of the coolants and other materials
handled by it, and had subsequently declared bankruptcy. The
transporter was engaged by G.W. Bandy during periods prior to
Aerospace's acquisition of Bandy and was not utilized by either
Aerospace or Bandy at any time subsequent to Aerospace's acquisition of
Bandy in 1990. The letter noticing the legal proceedings was forwarded
by Aerospace to G.W. Bandy, as it is Aerospace's view that any
liability arising from the proceedings would be the responsibility of
G.W. Bandy, as seller under the purchase agreement pursuant to which
Aerospace acquired Bandy (a copy of which has been provided to the
Agent). No copies of the letter noticing the legal proceedings were
retained by Aerospace and Aerospace has not received any subsequent
correspondence or other notices regarding this matter.
6. By copy of a letter dated February 26, 1992 to the Los Angeles County
Department of Public Works ("LADPVV"), the SDLAC notified Paragon that
Paragon was exempt from industrial waste permitting requirements under
SDLAC's then-current policy and, accordingly, Industrial Wastewater
Discharge Permit No. 12845 for Paragon's Valencia, California facility
was "void." Subsequently, sometime during the first-half of 1993, LADPW
conducted a survey of Paragon to determine if Paragon would be required
to obtain an Industrial Wastewater Discharge Permit from LADPW. During
the LADPW survey, LADPW advised Paragon that its non-destructive
penetrant inspection process could be considered a source of industrial
waste and that Paragon would be required to apply for an Industrial
Wastewater Discharge Permit. The process in question involves
application with a brush of a non-toxic penetrant dye on machined parts
and inspection of such parts under blacklight conditions for any
evidence of metal defects. Following the inspection, the dye is rinsed
under tap water in a conventional sink and flushed into the sanitary
sewer. Paragon was advised by the LADPW that as part of Paragon's
application for an Industrial Wastewater Discharge Permit, Paragon
would need to propose installation of a sampling box to test the pH of
the dye discharge on a periodic basis. On March 24, 1993, SDLAC issued
a temporary Industrial Waste Discharge Permit to Paragon.
On June 21, 1993 and again on November 4, 1993, Paragon received from
SDLAC notices of violation dated June 1, 1993 and October 12, 1993,
respectively, stating that Paragon was in violation of SDLAC's
Wastewater Ordinance by failing to submit an application for an
Industrial Wastewater Discharge Permit. Following several months of
discussions between Paragon and SDLAC personnel, on November 29, 1993
Paragon filed an application for an Industrial Wastewater Discharge
Permit with LADPW. By letter dated January 11, 1994 from LADPW,
Paragon's application was disapproved on the grounds that additional
information was required to process the application. Among other
things, the letter indicated that Paragon may be required to install a
gravity separation interceptor. Due to temporary dislocations caused by
the Northridge Earthquake on January 17, 1994, Paragon's revisions to
<PAGE>
the application were delayed and a notice of violation was issued by
LADPW on May 2, 1994 stating that Paragon had failed to supply the
additional information required by LADPW in its January 11, 1994
letter.
By letter to SDLAC dated June 30, 1994, Paragon requested an extension
to August 19, 1994 to complete its Industrial Wastewater Discharge
Permit application. In a response, by letter dated July 7, 1994, SDLAC
extended the application deadline to September 1, 1994. On or about
that date, Paragon sent a letter to LADPW requesting that Paragon be
permitted to install a sampling box in lieu of the gravity separation
interceptor requested by LADPW. After an initial request from LADPW for
some additional information, no further correspondence was received
from LADPW during 1994.
On February 10, 1995, Paragon received a letter dated February 8, 1995
from SDLAC notifying Paragon that its temporary Industrial Wastewater
Discharge Permit 12845 issued March 24, 1993 has been "voided" on the
grounds that Paragon's only industrial discharge is from zyglo dye
testing and the daily discharge volumes are less than 200 gallons.
Paragon assumed that this letter concluded the need for further
revisions to its Industrial Wastewater Discharge Permit application;
however, on September 6, 1995, Paragon received a final delinquency
notice from LADPW indicating that it must immediately file a revised
application. This application was filed on October 19, 1995 and was
disapproved with a request for additional information on November 9,
1995. The additional information requested did not include a request
for installation of a gravity separation interceptor. Paragon submitted
the additional information on December 12, 1995 along with a permit
fee. Since that time, Paragon has received no further correspondence
from either SDLAC or LADPW regarding this matter.
7. The respective Borrowers' facilities at El Segundo, Cudahy and Burbank,
California, were all constructed by third parties prior to the time
they were initially occupied by such Borrowers in the mid-1970's.
Although neither Aerospace nor the other Borrowers have any knowledge
of the presence of asbestos in these facilities, it is possible that,
because of their age, some or all of the facilities could have been
constructed using asbestos-based insulation or other materials. Please
refer to the Environmental Assessments for any recognized environmental
conditions associated with the presence of asbestos-containing
materials at these facilities.
8. A power transformer formerly used in connection with X-ray machines
formerly located at the General Inspection Laboratories ("GIL")
facility in Cudahy, California was found to contain PCBs. The
transformer, which is currently not in use, will be transported by a
licensed hazardous waste transporter for proper treatment and/or
disposal.
9. Bandy and GIL have each filed a Notification of Hazardous Waste
Activity under Section 3OlO of the federal Resource Conservation and
Recovery Act. GIL has filed an Onsite Hazardous Waste Treatment
Notification Renewal Form, dated April
<PAGE>
10, 1997, with the Los Angeles County Fire Department and the
California Department of Toxic Substances Control with respect to its
Haviland wastewater treatment equipment and process.
<PAGE>
SCHEDULE 6.01(Q)
ERISA
1. The Stellex Aerospace 401 (k) Profit Sharing Plan has not been
determined by the IRS to be qualified. Aerospace has relied upon the
favorable determination letter issued to the prototype plan sponsor,
401 (k) Plans, Inc. On October 16, 1997, the IRS requested additional
information. The IRS has indicated that once such additional
information has been received, a favorable determination letter will be
delivered.
<PAGE>
SCHEDULE 6.01(U)
OWNERSHIP OF ALL NECESSARY
GOVERNMENTAL PERMITS
Reference is made to Schedule 5.01(A) with respect to consents,
approvals, contract novations and assignments or new issuances of various
governmental permits that have not been obtained, as of the date of this
Agreement, in each case from certain governmental authorities specified therein.
The failure to have obtained such items, as of the date of this Agreement,
qualifies the first sentence of Section 6.01(u)(i) of this Agreement.
<PAGE>
SCHEDULE 6.01(W)
INSURANCE
1. See attached Insurance Summaries.
<PAGE>
Stellex Aerospace/Stellex Microwave Systems, Inc.
Schedule of Insurance
<TABLE>
<CAPTION>
INSURER EFFECTIVE
COVERAGE Policy Number DATES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Workers' Comp Stellex Aerospace 10/1/97 to 10/1/00
Employers Liability Stellex Microwave Systems, Inc. 10/31/97 to 10/1/00
Travelers-Indemnity Company of Illinois
---------------------------------------
Policy # UJ-UB-161D142-9-97
General Liability - Non Aviation Stellex Aerospace 10/1/97 to 10/1/98
Stellex Microwave Systems, Inc. 10/31/97 to 10/1/98
Travelers - Indemnity Company of Illinois
-----------------------------------------
Policy # UJ-GLSA-161D1466-TIL-97
General Liability - Aviation Products Stellex Aerospace 10/31/97 to 10/01/98
Stellex Microwave Systems, Inc.
USAIG
-----
Policy # TBD
Foreign Liability Package Stellex Microwave Systems, Inc. 10/31/97 to 10/01/98
General Liability CNA
---
Policy # TBD
Automobile Liability
Note: Limit for Owned, Non-Owned
& Hired Liability. Coverage is
DIC/Excess of either $10,000
SIR or local compulsory limits
Foreign Voluntary Workers'
Compensation / EL
<CAPTION>
INSURER
COVERAGE Policy Number LIMITS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Workers' Comp Stellex Aerospace $ 500,000 BI Each Accident
Employers Liability Stellex Microwave Systems, Inc. $ 500,000 BI Disease Policy Limit
Travelers-Indemnity Company of Illinois $ 500,000 BI Disease Each EB
---------------------------------------
Policy # UJ-UB-161D142-9-97 $ 100,000 Repatriation & Eodemic Disease
General Liability - Non Aviation Stellex Aerospace $ 5,000,000 General Aggregate (Non Aviation)
Stellex Microwave Systems, Inc. $ 1,000,000 Each Occurrence
Travelers - Indemnity Company of Illinois $ 1,000,000 Personal/Advertising Injury
-----------------------------------------
Policy # UJ-GLSA-161D1466-TIL-97 $ 1,000,000 Fire Damage/any one fire
$ 5,000 Medical Expense/per person
$ 1,000,000 Employee Benefits (claims made)
General Liability - Aviation Products Stellex Aerospace $ 25,000,000 Products Liability Aggregate
Stellex Microwave Systems, Inc.
USAIG
-----
Policy # TBD
Foreign Liability Package Stellex Microwave Systems, Inc. $ 5,000,000 General Aggregate
General Liability CNA $ 1,000,000 Each Occurrence
---
Policy # TBD $ 1,000,000 Products/Completed Ops. Occ/
Agg
$ 1,000,000 Personal/Advertising Injury
$ 1,000,000 Premises Damage / any one fire/
Agg
$ 10,000 Medical Expense / any one person
$ 20,000 Medical Expense / Aggregate
$ 1,000,000 Employee Benefits Liability
$ 1,000 Deductible
Automobile Liability $ 1,000,000 Combined Single Limit per
Occurrence
Note: Limit for Owned, Non-Owned $ 10,000 Medical Expense / each person
& Hired Liability. Coverage is
DIC/Excess of either $10,000 $ 20,000 Medical Expense / each accident
SIR or local compulsory limits
Hired Car Physical Damage
-------------------------
$ 1,000 Any one Accident
$ 10,000 Any one Policy Period
Foreign Voluntary Workers' $ 1,000,000 BI Each Accident
Compensation / EL $ 1,000,000 BI Disease Policy Limit
$ 1,000,000 BI Disease Each EE
$ 50,000 Repatriation & Eodemic Disease
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSURER EFFECTIVE
COVERAGE Policy Number DATES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobile Stellex Aerospace 10/1/97 to 10/1/98
Stellex Microwave Systems, Inc. 10/31/97 to 10/1/98
Travelers-Indemnity Company of Illinois
---------------------------------------
Policy # UI-CAP-161D1546-TTL-97
Umbrella/Excess Liability Stellex Aerospace 10/1/97 to 10/1/98
Stellex Microwave Systems, Inc. 10/31/97 to 10/1/98
American Home Assurace Company
------------------------------
Policy #309-46-01
Ocean Cargo/Marine Stellex Microwave Systems, Inc. 10/31/97 to 10/01/98
Fireman's Fund
--------------
Policy # TBD
Property Stellex Aerospace 10/1/97 to 10/1/98
Stellex Microwave Systems, Inc. 10/31/97 to 10/1/98
Kemper -American Protection Insurance Co.
-----------------------------------------
Policy #3ZG 005 484-00
<CAPTION>
INSURER
COVERAGE Policy Number LIMITS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Automobile Stellex Aerospace $ 1,000,000 Symbol 1 Liability Coverage
Stellex Microwave Systems, Inc. $ 1,000,000 Symbol 2 Uninsured/
Travelers-Indemnity Company of Illinois Underinsured Motorist
---------------------------------------
Policy # UI-CAP-161D1546-TTL-97 $ 5,000 Medical Expense Benefit
ACV Physical Damage
$ 50 day/30 days Rental Reimbursement
$ 50 Towing & Labor - e/ occurrence
$ 500 Deductible - Comprehensive/
Collision (each auto)
Umbrella/Excess Liability Stellex Aerospace $ 25,000,000 Each Occurrence
Stellex Microwave Systems, Inc. $ 25,000,000 General Aggregate per location
American Home Assurace Company $ 25,000,00 Completed Operation
------------------------------
Policy #309-46-01 Aggregate Limit
$ 10,000 SIR
Ocean Cargo/Marine Stellex Microwave Systems, Inc. $ 5,000,000 Any one Vessel or Aircraft
Fireman's Fund $ 5,000,000 Any one Truck or Rail Car (Intl.
--------------
Transit)
Policy # TBD $ 2,000,000 Domestic Transit
$ 2,000,000 Exhibition Liability - Strikes,
Riots, Civil Commotions, War
Risk
$ 10,000 Deductible
Property Stellex Aerospace $ 34,127,579 All Risk incl. Earth Movement
& Flood, Real and Personal Property
Stellex Microwave Systems, Inc. $ 71,000,000 All Risk incl. Earth Movement
Kemper-American Protection Insurance Co & Flood, Real and Personal Property
---------------------------------------
Policy #3ZG 005 484-00 $ 100,000,000 Per Occurrence/Aggregate - Flood (1)
$ 100,000,000 Per Occurence/Aggregate - Earth
Movement excl. California
$ 10,000,000 Newly Acquired Locations (180 days)
$ 10,000,000 Unnamed Locations
$ 10,000,000 Unintentional Errors & Ommissions
$ 1,000,000 Pollution - Annual Aggregate
$ 1,000,000 Contingent Business Interruption
$ 5,000,000 Extra Expense, Valuable Papers, A/R
Deductibles
$ 10,000 Property - Per Occurrence except
$ 500 Transit, Valuable Papers, A/R
$ 25,000 EQ - Outside CA
$ 25,000 Flood excl. Zone A
1% of Values Wind - Tier One Counties in the
state of FL subj. to $25,000
min.
</TABLE>
<PAGE>
Stellex Aerospace / Stellex Microwave Systems, Inc.
Schedule of Insurance
<TABLE>
<CAPTION>
INSURER EFFECTIVE
COVERAGE POLICY NUMBER DATES LIMITS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Boiler & Machinery Stellex Aerospace 10/1/97 to 10/1/98 $ 34,127,579 Total Blanket Limit
Stellex Microwave Systems, Inc. 10/31/97 to 10/1/98 $ 71,000,000
Kemper - American Protection Insurance Co. Included Hazardous Substance
Policy #3ZG 005 484-00 Included Water Damage
$ 1,000,000 Ammonia Contamination
$ 1,000,000 Expediting Expense
$ 1,000,000 Consequential Damage
Deductibles
$ 10,000 Property Damage
1 X 100% Daily Value Time Element
Difference in
Conditions (DIC) Stellex Aerospace 8/29/97 to 8/29/98 $ 5,000,000 Per Occurrence
incl. EQ, Incl. Flood
$5MM xs $1MM Stellex Microwave Systems Inc. 10/31/97 to 8/29/98 $ 5,000,000 Annual Aggregate
Primary Pacific Insurance Company, Ltd.
Policy # ZG0009842
First Excess Layer Agricultural Insurance Company $ 5,000,000 XS of $5MM - Per
Policy # CPP1803792 Occurrence
$ 5,000,000 XS of $5MM - Annual
Aggregate
Deductibles
$ 50,000 Per Occurrence except
5% of Values at time &
place of loss - EQ
Directors & Officers Stellex Microwave Systems, Inc. 10/31/97 to 10/31/98 $ 10,000,000 Each Loss/Each Policy
Gulf Insurance Company Period
$ 50,000 Deductible
Fidelity/Crime $ 5,000,000 Each Loss/Each Policy
Period
$ 25,000 Deductible
Fiduciary $ 10,000,000 Each Loss/Each Policy
Period
$ 5,000 Deductible
Special Accident Coverage Available upon request
</TABLE>
(1) National Flood Insurance Program (NFIP) coverage will be placed at closing
for first $500,000 limit. Excess coverage remains the same.
<PAGE>
SCHEDULE 6.01(Z)
BANK ACCOUNTS
<TABLE>
<CAPTION>
ACCOUNT NUMBER BANK SIGNATORIES
<S> <C> <C>
Stellex Industries, Inc.
967-335272 Chase R. Kramer, W. Remley, G. Nolff
Manhattan
TSMD Acquisition Corp.
967-248892 Chase R. Kramer, W. Remley, G. Nolff
Manhattan
Stellex Microwave Systems, Inc.
12330-26244 Bank of America K. Gilbert, P. Roger Byer, E.
Richardson
12334-26242 Bank of America
12332-26243 Bank of America
12336-26241 Bank of America
Stellex Aerospace
1465550703 Bank of America* B. Call, J. Hodge
1465350704 Bank of America (2 signors if $10,000 or more)
Bandy Machining International
1465950706 Bank of America B. Call, L. Stacy, E. Marcale, J. Hodge
0217304809 Bank of America (2 signors if $1,500 or more)
1465550708 Bank of America
Paragon Precision Products
1465450713 Bank of America L. Smith, B. Dore, R. Bassett,
0092700289 Bank of America J. Hodge
</TABLE>
- --------
* All references to Bank of America are to: Bank of America,
Commercial Banking Office, 5945 Canoga Avenue, Woodland
Hills, CA 91367; Phone: 818.704.2329.
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT NUMBER BANK SIGNATORIES
- -------------- ---- -----------
<S> <C> <C>
1465250714 Bank of America (2 signors if $1500 or more)
General Inspection Laboratories, Inc.
1465350709 Bank of America J. Barriatua, L. Brown, J. Hodge
1465050710 Bank of America M. Keshani (2 signors)
Scanning Electron Analysis Laboratories, Inc.
1465850711 Bank of America R. Marti, A. Kumar, T. Tan, J. Hodge
1465650712 Bank of America (2 signors)
</TABLE>
<PAGE>
SCHEDULE 8.12
POST-CLOSING MATTERS(1)
1. Reliance Letter* regarding the opinion of O'Melveny & Myers
delivered pursuant to the Watkins-Johnson Acquisition Agreement.
2. Stock Certificate, Stock Power, Acknowledgment and Revised Schedule
I to Pledge Agreement of Stellex, all relating to the pledge by Stellex of all
the issued and outstanding capital stock of Paragon Precision Products.
3. Landlord Waivers* executed by the landlord leasing property to the
Borrower(s) at each of the following locations:
a. 3333 Hillview Ave., Palo Alto CA 94304
b. 3400 and 3420 N. San Fernando Blvd., Burbank, CA 91510
c. 3086 N. Avon St. Burbank, CA 91510
d. 250 N. Nash St., El Segundo, CA 90245
e. 8427 Atlantic Ave., Cudahy, CA 90301
4. Consents(2) from the following Persons:
a. U.S. Government, approving the change of ownership
of Stellex Microwave Systems, Inc. for purposes of all
facility security clearances referred to in item 2(a) of
Schedule 5.01(A) of the Agreement.
b. U.S. Government, approving the novation of all
contracts between it and Stellex Microwave Systems, Inc.
referred to in item 2(b) of Schedule 5.01(A) of the
Agreement.
c. U.S. Department of State, Office of Defense Trade Controls,
consenting to the assignment to Stellex Microwave Systems, Inc. of all
export licenses referred to in item 2(c) of Schedule 5.01(A) of the
Agreement.
- --------
(1) Unless otherwise indicated, each item on this Schedule 8.12 must be
delivered as soon as possible, and in any case within 60 days after the Closing
Date.
* With respect to each of these items, Stellex is obligated to make its best
efforts to obtain its delivery.
(2) Each of these Consents must be delivered within 180 days after the Closing
Date.
<PAGE>
d. Each Customer party to any of the Customer Contracts
referred to in item 3 of Schedule 5.01(A) of the Agreement which
involves remaining payments of $1,000,000 or more.
<PAGE>
COMMERCIAL SUB-SUBLEASE (BUILDINGS 3/4/5)
BETWEEN
W-J TSMD INC., as Tenant
and
WATKINS-JOHNSON COMPANY, as Landlord
SUMMARY INFORMATION (FOR CONVENIENCE ONLY; NOT PART OF THE LEASE)
Premises Address: 3333 Hillview Avenue
Palo Alto, California
Total Area of Premises: Approximately 57,000 square feet for the Main
Premises; approximately 0 square feet for the
Short Term Premises
Term: Thirty-Six (36) Months for the Main Premises;
Approximately five (5) Months for the Short
Term Premises
Commencement Date: October 31, 1997
Expiration Date: October 31, 2000 for the Main Premises; March
31, 1998 for the Short Term Premises
Options: None
Landlord Contact: Tenant Contact:
Treasurer TSMD Acquisition Corp.
Watkins-Johnson Company c/o Mentmore Holdings, Inc.
3333 Hillview Avenue 1430 Broadway, 13th Floor
Palo Alto, California 94304-1223 New York, NY 10018-3308
Telephone: (650) 813-2480 Attn: Michael D. Schenker, Esq.
Facsimile: (650) 813-2960 Facsimile: (212) 382-1559
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COMMERCIAL LEASE
TABLE OF CONTENTS
Page(s)
1. BASIC PROVISIONS...................................................... 2
1.1 Premises...................................................... 2
(a) Description........................................... 2
(b) Master Lease and Sublease............................. 2
(c) Termination of Greater Estates........................ 3
(d) Conditions Precedent.................................. 3
1.2 Term.......................................................... 3
1.3 Base Rent..................................................... 4
1.4 Permitted Use................................................. 4
1.5 Parking....................................................... 4
1.6 Exhibits And Addenda.......................................... 4
2. PREMISES.............................................................. 5
2.1 Letting....................................................... 5
2.2 Condition..................................................... 5
2.3 Compliance With Covenants, Restrictions
And Applicable Law.......................................... 5
2.4 Termination Option............................................ 6
2.5 Relocation Right.............................................. 6
3. [INTENTIONALLY OMITTED]............................................... 6
4. RENT.................................................................. 6
4.1 Base Rent..................................................... 6
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5. HAZARDOUS SUBSTANCES................................................... 7
5.1 Definition..................................................... 7
5.2 Landlord Representations....................................... 7
5.3 Landlord Indemnification....................................... 7
5.4 Tenant's Use................................................... 8
5.5 Environmental Communications................................... 9
5.6 Survival....................................................... 9
5.7 Inspection; Compliance......................................... 9
6. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE
FIXTURES AND ALTERATIONS........................................... 9
6.1 Tenant's Obligations........................................... 9
6.2 Landlord's Obligations......................................... 9
6.3 Utility Installations; Trade Fixtures;
Alterations.................................................. 10
(a) Definitions; Consent Required.......................... 10
(b) Consent................................................ 11
(c) Indemnification........................................ 11
6.4 Ownership; Surrender........................................... 11
(a) Ownership.............................................. 11
(b) Surrender.............................................. 12
7. INSURANCE; INDEMNITY................................................... 12
7.1 Landlord Insurance............................................. 12
7.2 Tenant Insurance............................................... 12
7.3 Insurance Policies............................................. 12
7.4 Waiver Of Subrogation.......................................... 12
7.5 Indemnity...................................................... 13
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8. DAMAGE OR DESTRUCTION.................................................. 13
8.1 Termination; Restoration....................................... 13
8.2 Waive Statutes................................................. 14
9. REAL PROPERTY TAXES.................................................... 14
9.1 Payment Of Taxes............................................... 14
10. UTILITIES............................................................. 14
10.1 Utilities..................................................... 14
10.2 Telephone Services............................................ 14
11. ASSIGNMENT AND SUBLETTING............................................. 15
11.1 Tenant's Right To Assign Or Sublet............................ 15
11.2 Tenant's Right To Assign for
Financing Purposes.......................................... 15
11.3 Consent of the Ground Lessor and the
Master Lessor............................................... 16
12. BREACH; REMEDIES...................................................... 16
12.1 Breach........................................................ 16
12.2 Remedies...................................................... 17
12.3 Breach By Landlord............................................ 18
13. CONDEMNATION.......................................................... 18
13.1 Termination; Restoration...................................... 18
13.2 Award......................................................... 19
13.3 Waive Statutes................................................ 19
14. BROKERS............................................................... 19
15. TENANCY STATEMENT..................................................... 19
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16. LANDLORD'S LIABILITY.................................................. 20
17. SEVERABILITY.......................................................... 20
18. INTEREST ON PAST-DUE OBLIGATIONS...................................... 20
19. TIME OF ESSENCE....................................................... 20
20. RENT DEFINED.......................................................... 21
21. NO PRIOR OR OTHER AGREEMENTS.......................................... 21
22. NOTICES............................................................... 21
23. WAIVERS............................................................... 22
24. RECORDING............................................................. 22
25. CUMULATIVE REMEDIES................................................... 22
26. BINDING EFFECT; CHOICE OF LAW......................................... 22
27. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE............................ 22
27.1 Subordination................................................. 22
27.2 Attornment.................................................... 22
27.3 Self-Executing................................................ 22
27.4 No Merger..................................................... 23
28. ATTORNEYS' FEES....................................................... 23
29. LANDLORD'S ACCESS..................................................... 23
30. SIGNS................................................................. 23
31. HOLDING OVER.......................................................... 24
32. QUIET POSSESSION...................................................... 24
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33. CONSENTS.............................................................. 24
34. PERFORMANCE UNDER PROTEST............................................. 24
35. AUTHORITY............................................................. 24
36. CONFLICT.............................................................. 24
37. OFFER................................................................. 25
38. AMENDMENTS............................................................ 25
39. WAIVER OF STATUTORY LIEN.............................................. 25
40. MULTIPLE PARTIES...................................................... 25
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COMMERCIAL SUB-SUBLEASE (BUILDING 3/4/5)
This Commercial Sub-Sublease (Buildings 3/4/5) ("Lease") dated, for
reference purposes only, October 31, 1997, is made by and between
WATKINS-JOHNSON COMPANY, a California corporation ("Landlord"), and W-J TSMD
INC., a California corporation and a wholly-owned subsidiary of Landlord
("Tenant"). Tenant and Landlord are referred to collectively as the "Parties,"
or individually as a "Party".
RECITALS
WHEREAS, Landlord, Tenant and TSMD Acquisition Corp., a Delaware
corporation ("TSMD Acquisition"), have entered into a Stock Purchase Agreement,
dated as of August 29, 1997 ("Purchase Agreement"), whereby TSMD Acquisition has
agreed to purchase, and Landlord has agreed to sell, all of the outstanding
stock of Tenant; and
WHEREAS, reference is made to that certain Lease dated as of November
1, 1959 (as amended to date, "Ground Lease") by and between The Board of
Trustees of the Leland Stanford Junior University, a body having corporate
powers under the laws of the State of California ("Ground Lessor"), and Kern
County Land Company, a California corporation, as predecessor in interest to
Taylor Woodrow Property Company (California), Inc., a California corporation
("Master Lessor"); and
WHEREAS, reference is made to that certain Lease and Agreement (as
amended to date, the "Master Lease") dated as of April 22, 1969, between Lindco
Properties Company, a limited partnership organized under the laws of the State
of California, as predecessor in interest to the Master Lessor, and Landlord, as
Sublessee thereunder; and
WHEREAS, pursuant to the Purchase Agreement, Landlord desires to
sub-sublet to Tenant a portion of the buildings commonly known as Building 3,
Building 4 and Building 5, which portion is shown on Exhibit A-1 which is
attached hereto, constituting a portion of the "Leased Premises" as defined in
the Master Lease, (as redefined in the Agreement Amending Ground Lease (Property
2) which constitutes a part of the Master Lease) (the "Main Premises"), together
with a different portion of the building commonly known as Building 4, for a
shorter term, which portion is shown on Exhibit A-2 which is attached hereto,
constituting a portion of the "Leased Premises" as defined in the Master Lease
(as redefined in the Agreement Amending Ground Lease (Property 2) which
constitutes a part of the Master Lease) (the "Short Term Premises"), with the
Main Premises and the Short Term Premises, to the extent the Short Term Premises
remains subject to this Lease under the provisions hereof at any point in time,
referred to collectively herein as the "Premises".
WHEREAS, TSMD Acquisition and Tenant desire that Tenant sub-sublet such
Premises from Landlord; and
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WHEREAS, the execution of this Agreement is a condition to the closing
of the purchase and sale of the outstanding stock of Tenant under the Purchase
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties agree as follows:
1. BASIC PROVISIONS.
1.1 Premises.
(a) Description. The Premises are located in
the City of Palo Alto, County of Santa Clara, State of California, on that
certain tract of real property (the "Land") more fully described on Exhibit A
hereto. A site plan is attached hereto as Exhibit A-1 setting forth the Main
Premises and as Exhibit A-2 setting forth the Short Term Premises, each as
outlined within the buildings containing the Premises (the "Buildings"). The
right to use and enjoy the Premises hereunder shall include a license in favor
of Tenant to use and enjoy the areas within the Buildings or on the Land
designed for common usage by tenants or other occupants of the Buildings (the
"Common Area"), including, but not limited to, sidewalks, entryways, parking
areas, elevators, common corridors and restroom facilities, for all reasonable
purposes, including, but not limited to, ingress, egress and loading, subject to
such rules and regulations as Landlord may reasonably establish with respect to
such usage.
(b) Master Lease and Sublease. Tenant
understands that this Lease is a lesser estate that exists under the leasehold
estates created by the Ground Lease and the Master Lease, and that, as a matter
of law, this Lease is subject to all the provisions of the Ground Lease and the
Master Lease. Notwithstanding the foregoing, the Parties agree, as between
themselves (this means that Landlord covenants the following to Tenant, but that
Tenant and Landlord acknowledge that such covenant will not limit the rights or
remedies of Ground Lessor or Master Lessor), that Landlord will continue to
satisfy all of the terms and conditions of the Master Lease and the Ground
Lease, as imposed upon the subtenant under the Master Lease, except as expressly
otherwise provided in this Lease. In addition to any consents or approvals of
Landlord that may be required under the provisions of this Lease (excepting only
the consents of the Ground Lessor and the Master Lessor, to this Lease, which
consents have been obtained by Landlord) Tenant understands that the approval of
the Ground Lessor or the Master Lessor may also be required under the provisions
of the Ground Lease or the Master Lease, as applicable. In such event, Landlord
will so advise Tenant at the time that Tenant seeks the consent or approval of
Landlord hereunder, and, to the extent that Landlord has granted its own consent
or approval under the provisions of this Lease, Landlord shall use reasonable
efforts to obtain the consent or approval of the Ground Lessor or the Master
Lessor under the Ground Lease or the Master Lease, as applicable.
Notwithstanding the foregoing, Tenant understands and acknowledges that those
actions that require the consent or approval of the Ground Lessor or the Master
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Lessor under the Ground Lease or the Master Lease, as applicable, cannot be
undertaken without such consent or approval, and if Landlord, despite its
reasonable efforts, is unable to obtain such consent or approval, Tenant shall
not undertake any such action. In addition, to the extent, at any time, Landlord
advises Tenant in writing that the Ground Lessor or the Master Lessor is then
alleging that any action undertaken by Tenant is in violation of the terms of
the Ground Lease or the Master Lease, as applicable, Tenant and Landlord shall
reasonably cooperate to remedy any actual violation in any manner that will
allow Tenant to continue the Business upon the Premises.
(c) Termination of Greater Estates. If
Landlord's interest in the Master Lease terminates for any reason, this Lease
shall also terminate. Notwithstanding such termination, the parties shall have
their rights and remedies as are available at law and in equity following any
such termination of this Lease, including, without limitation, for any breach of
the covenant of quiet possession set forth in Section 32 below (unless Tenant is
then in Breach under the terms of this Lease). If such termination of this Lease
does not result from either of the following two events, however, then Landlord
shall in no event be liable for any consequential damages or lost profits of
Tenant resulting from such termination: (i) the failure of Landlord to satisfy
its obligations under the Master Lease, including, without limitation, those
obligations under the Ground Lease which are imposed upon Landlord under the
provisions of the Master Lease (but expressly excluding any obligations that are
to be satisfied by Tenant under the provisions of this Lease), or (ii) the
expiration or termination of the term of the Master Lease because of Landlord's
consensual agreement with the Master Lessor or Landlord's failure to exercise
the second renewal option under the provisions of Section 4(b) of the Master
Lease.
(d) Conditions Precedent. A condition precedent
to the effectiveness of this Lease will be Landlord's obtaining any consent
hereto that may be required under the provisions of the Ground Lease or the
Master Lease. Landlord will use commercially reasonable efforts to obtain such
consents as quickly as possible. Landlord shall keep Tenant informed of its
efforts to obtain such consents. A further condition precedent to the
effectiveness of this Lease will be the closing of the transaction contemplated
by the Purchase Agreement.
1.2 Term. The term of this Lease with respect to the Main
Premises shall be thirty-six (36) months ("Lease Term"), commencing October 31,
1997 ("Commencement Date"), and ending October 31, 2000 ("Expiration Date"), or
on any such earlier date as this Lease may be terminated pursuant to its express
provisions. The term of this Lease with respect to Short Term Premises shall be
approximately (5) months commencing on the Commencement Date and ending on March
31, 1998, at which time the Short Term Premises and Building 4 in which the
Short Term Premises are located shall no longer be subject to the provisions of
this Lease, excepting only those provisions of this Lease which expressly
survive its termination. Landlord will deliver the Premises to Tenant in
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its currently existing condition on or before the Commencement Date. Tenant
shall have no right or option to extend the Lease Term.
1.3 Base Rent. The monthly base rent for the Lease Term shall
be the amount ("Base Rent") that is equal to the product of Two and Three
Hundredths Dollars ($2.03)--multiplied by the rentable square footage of the
Premises. Tenant shall pay the Base Rent applicable to the first full or partial
calendar month of the Lease Term to Landlord on the first day of the Lease Term.
Thereafter, the Base Rent shall be payable on the first (1st) calendar day of
each month. (See Article 4 for further provisions). Base Rent will remain fixed
throughout the Lease Term. To the extent that the first month of the Lease Term
or the last month of the Lease Term is a partial month, Base Rent for such month
shall be prorated based upon the actual number of days in such month. The
parties acknowledge that the Base Rent will be reduced at the expiration of the
Lease Term with respect to the Short Term Premises based upon the rentable
square footage of the Short Term Premises.
1.4 Permitted Use. The Premises are to be used by Tenant for
continuing to operate the Business (as defined in the Purchase Agreement,
together with any reasonable extensions thereof that are not prohibited under
the provisions of the Purchase Agreement), and for no other purpose. Tenant
understands that there are limitations on the permitted use of the leased
premises set forth in the Ground Lease and in the Master Lease. Therefore,
Tenant shall not change the nature of the Business (with the Business defined to
include any such reasonable extensions thereto as provided above) in any
material manner, to the extent that the Business is conducted upon the Premises.
Notwithstanding anything to the contrary in this Section 1.4, Landlord warrants
that the operation of the Business will not violate any of the provisions of
this Section 1.4.
1.5 Parking. Tenant and its employees, invitees and licensees
shall be entitled to common use of all of the parking areas on the Land
available for use by Landlord and its employees, invitees and licensees, but
subject to the same restrictions that apply to use of the parking areas by
Landlord and its employees, invitees and licensees (such as visitor parking
areas, van pool areas, and handicap parking areas).
1.6 Exhibits And Addenda. The following Exhibits and
Addenda are attached hereto and incorporated herein by reference:
Exhibit A -- The Land
Exhibit A-1 -- Site Plan (Main Premises)
Exhibit A-2 -- Site Plan (Short Term Premises)
Exhibit B -- Telephone Service
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2. PREMISES.
2.1 Letting. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, the Premises, for the Lease Term, at the rental,
and upon all of the terms, covenants and conditions set forth in this Lease.
Unless otherwise provided herein, any statement of square footage set forth in
this Lease, or that may have been used in calculating rental, is an
approximation which Landlord and Tenant agree is reasonable, and the rental
based thereon is not subject to revision whether or not the actual square
footage is more or less.
2.2 Condition. Landlord shall deliver the Premises to Tenant
clean and free of debris on or before the Commencement Date. Landlord warrants
to Tenant that the foundation, roof and other structural elements of the
Buildings, and the building systems, including, without limitation, existing
plumbing, fire sprinkler system, lighting, heating, ventilation, air
conditioning and loading doors, if any, in the Premises are suitable for, and
can support, the operation of the Business as of the date of this Lease.
Landlord has endeavored, prior to the date of this Lease, to reconfigure the
Buildings at Landlord's sole cost to permit the Business to be conducted within
the Premises. To the extent that further reconfigurations are required for the
conduct of the Business within the Premises (whether because of requirements of
Applicable Law existing as of this date or because the parties overlooked
requirements of the Business, but not merely for cosmetic effect), then Landlord
shall perform such additional reconfiguration at Landlord's cost as quickly as
commercially reasonably possible under the circumstances. To the extent that the
cost of any such additional reconfiguration can be achieved at material cost
savings by causing the work to occur over a longer period of time, Landlord and
Tenant shall reasonably cooperate to allow such longer period of time to be used
so long as allowing such additional period of time does not impair Tenant's
conduct of the Business within the Premises.
2.3 Compliance With Covenants, Restrictions And Applicable
Law. Landlord shall cause any alterations that are required to cause the
Premises to comply with all laws, rules, regulations, ordinances, statutes,
codes, directives, covenants, easements and restrictions of record, permits and
the reasonable requirements of any applicable fire insurance underwriter or
rating bureau (collectively, "Applicable Law") to be constructed at Landlord's
sole cost and expense. Landlord shall further comply with all Applicable Law
pertaining to the Buildings and the Land other than the specific compliance
obligations of Tenant with respect to the conduct of the Business. In addition,
Landlord shall perform its maintenance obligations under the provisions of
Section 6 of this Lease in such manner so as to comply with Applicable Law.
Tenant shall, at its cost and expense, comply with Applicable Law, whether or
not any such Applicable Law may involve a change of policy on the part of the
body enacting the same, to the extent related to Tenant's operation of the
Business.
2.4 Termination Option. Tenant shall have the right,
exercisable at any time during the Lease Term, to terminate this Lease in its
entirety, provided
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that Tenant delivers a written notice of termination to Landlord ("Termination
Notice") at least six (6) months prior to the date on which Tenant intends to
terminate this Lease (the "Termination Date"). If Tenant delivers a Termination
Notice pursuant to this Section 2.4, this Lease shall terminate effective as of
the Termination Date.
2.5 Relocation Right. Landlord may, at any time during the
term of this Lease, upon sixty (60) days prior written notice, relocate the
portion of the Main Premises that is located within Building 4 to some other
location within the Buildings or within the building commonly known as Building
6 on adjacent real property, provided that (i) the space to which Tenant is
relocated shall be comparable to the space from which Tenant is relocated and
(ii) such space shall be appropriate for Tenant's relocated operations, in
Tenant's reasonable discretion. Landlord shall pay Tenant's reasonable,
documented, out of pocket costs associated with any such relocation, and shall,
at Landlord's cost, reconfigure the replacement space as reasonably needed for
Tenant's continuation of the operations previously performed in the surrendered
space. In such event, this Lease shall be amended by the parties, effective as
of the date of such relocation, to (i) delete the space in Building 4 from which
Tenant is relocated from the definition of the Premises, at which time such
space shall no longer be subject to the provisions of this Lease, excepting only
those provisions of this Lease which expressly survive termination, (ii) add the
space to which Tenant is relocated to the definition of the Premises, and (iii)
to the extent that the replacement space is smaller (but not larger) than the
space from which Tenant is relocated, to adjust the Base Rent, based upon the
reduced square footage of the replacement space.
3. [INTENTIONALLY OMITTED]
4. RENT.
4.1 Base Rent. Subject to the terms of this Lease, Base Rent
and other rent or charges payable hereunder shall be paid to Landlord in lawful
money of the United States, without offset or deduction, except as expressly
otherwise provided in Section 12.3 hereof, when due under the terms of this
Lease, at Landlord's address stated herein or to such other persons or at such
other addresses as Landlord may from time to time designate in writing to
Tenant. Except as expressly otherwise provided in Section 10.2, Tenant shall not
be responsible for paying or reimbursing Landlord for any of the costs incurred
by or on behalf of Landlord in maintaining, operating, repairing or improving
the Premises, the Buildings or the Land, regardless of whether such costs are
incurred by or on behalf of Landlord in performing its maintenance, operation,
repair and improvement obligations under this Lease.
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5. HAZARDOUS SUBSTANCES.
5.1 Definition. "Hazardous Substance" means (but shall not be
limited to) substances that are defined or listed in, or otherwise classified
pursuant to, any Applicable Law as "hazardous substances," "hazardous
materials," "hazardous wastes" or "toxic substances," or any other formulation
intended to define, list or classify substances by reason of deleterious
properties such as ignitibility, corrosivity, reactivity, radioactivity,
carcinogenicity, reproductive toxicity or "EP toxicity," and petroleum and
drilling fluids, produced waters and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy.
5.2 Landlord Representations. Except as otherwise disclosed in
the Purchase Agreement, Landlord has not generated, used, transported, treated,
stored, released or disposed of, or suffered or permitted anyone else to
generate, use, transport, treat, store, release or dispose of any Hazardous
Substance in violation of any Applicable Law or at any location upon the Land or
the Buildings which could require investigation or remediation; (b) there has
not been any generation, use, transportation, treatment, storage, release or
disposal of any Hazardous Substance in connection with the conduct of the
Business or the use of any property or facility of Landlord (whether owned,
generated or used by Landlord) or to the knowledge of Landlord any nearby or
adjacent properties or facilities, which has created or might reasonably be
expected to create any liability under any Applicable Law or which would require
reporting to or notification of any governmental agency or which could have an
adverse impact on the operation of the Land or the Buildings; (c) no asbestos or
polychlorinated biphenyl or underground storage tank is contained in, on, under
or about the Buildings or the Land, and no Hazardous Substance is present on,
under or about the Land or the Buildings which could require investigation or
remediation by any governmental agency; (d) any Hazardous Substance handled or
dealt with in any way in connection with the Business, whether before or during
Landlord's ownership, has been and is being handled or dealt with in all
respects in compliance with Applicable Law; and (e) no condition exists in, on,
under or about the Land or the Buildings which is in violation of any Applicable
Law or for which any Applicable Law could require that corrective action be
taken. As used herein, the term "knowledge" with respect to Landlord shall be
limited as provided with respect to "Seller" in Section 9.15 of the Purchase
Agreement.
5.3 Landlord Indemnification. Subject to the limitations set
forth in Section 8.5 of the Purchase Agreement, Landlord agrees to indemnify,
defend and hold harmless Tenant and its directors, officers, employees,
affiliates and assigns from and against any and all Losses (as such term is
defined in the Purchase Agreement), whether incurred directly or indirectly, as
a result of, or based upon or arising from the generation, use, transportation,
treatment, storage, release or disposal, before the date of this Lease, of
Hazardous Substances by, or at any property or facility of Landlord. From and
after the date of this Lease, Landlord shall indemnify, defend and hold Tenant
harmless from
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and against any and all losses, costs, claims, causes of action, fines and
penalties, whether incurred directly or indirectly, as a result of, or based
upon or arising from the generation, use, transportation, treatment, storage,
release or disposal of Hazardous Substances in, on, under or about the Buildings
or the Land, which were not caused primarily by Tenant's operation.
5.4 Tenant's Use. Tenant shall have the right to store, use
and handle Hazardous Substances on the Premises, provided that (i) such
Hazardous Substances are used in the operation of the Business or are brought
onto the Premises in the ordinary course of the Business and used in compliance
with Applicable Law and Landlord's reasonable procedures for the acquisition,
use, storage, handling and disposal of Hazardous Substances, (ii) Tenant shall
not cause to be brought upon the Premises any Hazardous Substances that have not
been previously stored or used at the Premises without Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed, and (iii)
Landlord shall instruct Tenant on compliance procedures necessary to ensure that
such Hazardous Substances are stored, used, handled and disposed of in
compliance with Applicable Law. In connection with its oversight and
coordination of the compliance procedures, Landlord shall (x) have access to all
of Tenant's operations within the Premises at all times, following reasonable
notice (or in the case of emergency, without notice), for the purpose of
monitoring Tenant's compliance with Landlord's compliance procedures with
respect to Hazardous Substances, (y) have Tenant's reasonable cooperation in
complying with such procedures, and (z) promptly notify Tenant of any release or
discovery of Hazardous Substances at the Premises not in compliance with
Applicable Law and Landlord's procedures. Tenant shall indemnify, defend and
hold Landlord harmless from any and all losses, costs, claims, causes of action,
fines and penalties, whether incurred directly or indirectly, which relate to
events occurring during the Lease Term and which arise solely as a result of
Tenant's use of Hazardous Substances at the Premises during the Lease Term.
Further, notwithstanding anything to the contrary in this Lease, but without
limiting Tenant's monetary obligations under the foregoing indemnity, Tenant is
not permitted to maintain, repair, remediate or otherwise conduct work with
respect to the following portions of the Premises: (i) structural elements of
the Premises, the building systems and portions of the Buildings containing
insulation or fireproofing material on or in exterior walls, columns, beams,
ceilings, pipes, ducts and other similar elements of the Buildings; (ii) any
portion of the Premises more than six (6) feet below ground surface; or (iii)
any portions of the Premises, the Buildings or the Land that are contaminated
with Hazardous Substances, as of the Commencement Date, including, without
limitation, any and all portions of the Premises, the Buildings or the Land that
are subject to Regional Remedial Action Order HSA88/89016, Environmental Cleanup
Agreement dated January 11, 1992 and to State of California - Environmental
Protection Agency, Department of Toxic Substances Control Remedial Action Order
Nos. HSA88/89-016 dated 12/9/88, and HSA 89/90-012 dated 5/2/90 and amended
2/21/96.
5.5 Environmental Communications. Landlord and Tenant shall
promptly after receipt or transmittal thereof, deliver to the other copies of
all material written communications given to or received from any governmental
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agency, environmental consultant, or other person or entity relating to
Hazardous Substances in or removed from the Premises, including, without
limitation, copies of all claims, reports, complaints, notices, warnings or
asserted violations, relating in any way to Hazardous Substances in, on, under
or about the Premises.
5.6 Survival. The representations, warranties and agreements
of the Parties set forth in this Article 5 shall survive the expiration of the
Lease Term or the termination of this Lease for any other reason.
5.7 Inspection; Compliance. Landlord shall have the right to
enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times upon reasonable prior notice for the purpose of inspecting the
condition of the Premises and for verifying compliance by Tenant with this
Lease, the Ground Lease, the Master Lease and all Applicable Law. Any such
inspection shall not disrupt or disturb the ongoing operation of the Business.
Landlord may employ experts or consultants in connection therewith to advise
Landlord with respect to Tenant's activities, including but not limited to the
installation, operation, use, monitoring, maintenance or removal of any
Hazardous Substance or storage tank on or from the Premises. The cost and
expense of any such inspections shall be paid by Landlord, unless a Breach (as
defined in Section 12.1) of this Lease, a material violation of an Applicable
Law with respect to which Tenant is obligated to pay for the costs or compliance
under the terms of this Lease, or Landlord's reasonable rules and regulations
(provided that Tenant has received written notice of such rules and
regulations), or a material contamination caused by Tenant is found to exist.
6. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES
AND ALTERATIONS.
6.1 Tenant's Obligations. Tenant, at Tenant's sole cost and
expense, shall maintain, operate and repair any and all Trade Fixtures and
Tenant owned Alterations and/or Utility Installations (as such terms are defined
in Section 6.3(a)). Although Landlord will be providing normal janitorial
services as provided below, Tenant shall properly dispose of its own trash and
waste materials in waste receptacles designated by Landlord, and clean up any
extraordinary janitorial problems that it may cause in its conduct of the
Business. In addition, to the extent that Tenant or its employees or agents
damages any portion of the Premises or the Buildings by any negligent or
wrongful act or omission of such party, Tenant shall repair any such damage at
its sole cost and expense.
6.2 Landlord's Obligations. Except as otherwise provided in
Section 6.1 above, Landlord shall, at its sole cost and expense, maintain, in
good repair and condition, and service all portions of the Buildings and the
Premises including, but not limited to, the foundation, roof, ceilings, floor
coverings, downspouts, gutters, plumbing fixtures, utility lines, windows,
doors, plate glass,
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exterior, interior, and demising walls, and all systems in the Buildings,
including, but not limited to, heating, ventilating, air conditioning, and
electrical systems, elevators, lighting facilities, boilers, fired or unfired
pressure vessels, fire alarm and/or smoke detection systems and equipment and
any other Utility Installations that are not owned by Tenant. In addition,
Landlord shall perform or cause to be performed all maintenance, repair and
other services to the Common Areas and the Land, as and when the same are
reasonably necessary to maintain such areas in good condition and repair,
including, but not limited to, landscape maintenance, driveway and parking area
maintenance for the parking areas, any private streets and roadways serving or
providing access to the Buildings and the Land, exterior lighting maintenance,
waste removal, repair and maintenance of walkways, cleaning supplies,
miscellaneous building supplies, external painting for the Buildings, exterior
and interior Common Area maintenance, insect and pest extermination, security
guards or security system for the Buildings, signs for the Buildings and other
miscellaneous maintenance. In addition, Landlord shall accept from Tenant for
disposal (by Tenant's depositing such items for storage as specified by Landlord
in writing) Tenant's spent Hazardous Substances (in quantities generally
comparable with those generated by the Business as of the date of this Lease)
("Spent Materials") for disposal in accordance with Applicable Law. To the
extent that the third-parties who haul away such Spent Materials require that
the owner of such Spent Materials sign the manifest or other documentation,
Tenant shall sign such manifest or other documentation as the owner thereof.
Tenant shall reimburse Landlord for Landlord's actual, documented, third-party
costs incurred in having such Spent Materials hauled away from the Land and
Buildings in accordance with Applicable Law. Tenant shall pay any amounts owing
to Landlord under the preceding sentence within thirty (30) days following
Landlord's delivery of a written invoice, together with supporting
documentation, for any such amounts.
6.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term
"Utility Installations" is used in this Lease to refer to all floor coverings,
window coverings, air lines, power panels, electrical distribution, security,
fire protection systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing and non-demising walls in, on, under or about
the Premises. The term "Trade Fixtures" shall mean Tenant's machinery and
equipment, including, but not limited to computer systems, computer equipment,
storage facilities, fences, partitions and other similar items, that can be
removed without doing irreparable damage to the structural portions of the
Premises. The term "Alterations" shall mean any modification of the improvements
on the Premises from that which are provided by Landlord under the terms of this
Lease, other than Utility Installations or Trade Fixtures. Except as provided
elsewhere in this Lease, Tenant shall not make any Alterations or Utility
Installations in, on, under or about the Premises without (i) Landlord's prior
written consent, which consent shall not be unreasonably withheld or delayed and
(ii) the prior written consent of the Ground Lessor and the Master Lessor, to
the extent required under the provisions of the
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Ground Lease and the Master Lease, as applicable. As stated above, Landlord
shall use commercially reasonable efforts to obtain the consent of the Ground
Lessor and the Master Lessor, when required. Tenant shall not directly
communicate with the Ground Lessor or the Master Lessor.
(b) Consent. Any Alterations or Utility
Installations that Tenant shall desire to make, including, without limitation,
any initial tenant improvements that Tenant may desire, shall be presented to
Landlord in written form with proposed plans. All consents given by Landlord
shall be deemed conditioned upon: (i) Tenant's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing to Landlord of copies
of such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation prior to commencement of the work thereof;
and (iii) compliance by Tenant with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations made by Tenant
during the Lease Term shall be done in a good and workmanlike manner, with good
and sufficient materials, and in compliance with all Applicable Law. Tenant
shall promptly upon completion thereof furnish Landlord with as-built plans and
specifications therefor. Landlord may (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation (x)
that costs Fifty Thousand Dollars ($50,000) or more upon Tenant's providing
Landlord with a lien and completion bond in an amount equal to the estimated
cost of such Alteration or Utility Installation and (z) upon Tenant's written
undertaking to remove such Alteration or Utility Installation at the end of the
Lease Term.
(c) Indemnification. Tenant will not permit to
remain, and will promptly discharge at its cost and expense, all liens,
encumbrances and charges upon the Premises, or Buildings or Land, or part
thereof, arising out of the use or occupancy of the Premises by Tenant or by
reason of labor or materials furnished or claimed to have been furnished or any
construction, alteration, addition, repair or demolition of any part of the
Premises, or Buildings or Land, for or at the request of Tenant. Landlord is
hereby authorized to enter upon the Premises at any time to post any notices
which in its opinion shall be necessary to hold Landlord harmless from any claim
or liability arising out of any work done on the Premises.
6.4 Ownership; Surrender.
(a) Ownership. All Alterations and Utility
Installations made to the Premises by Tenant shall be the property of and owned
by Tenant, but considered a part of the Premises. At the expiration of the Lease
Term, all such Alterations and Utility Installations shall remain a part of the
Premises and be surrendered to Landlord with the Premises as provided below,
except with respect to any Alterations or Utility Installations which Tenant is
obligated to remove from the Premises under the provisions of Section 6.3(b)(z).
In removing any such Alterations and Utility Installations that Tenant is
obligated to remove hereunder, Tenant shall repair any material damage to the
Premises caused by
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such removal. Tenant's Trade Fixtures shall remain the property of Tenant at all
times and may be removed by Tenant at any time, and shall be removed by Tenant
at the expiration of the Lease Term, and Tenant shall repair any material damage
resulting from such removal.
(b) Surrender. Tenant shall surrender the Premises
by the end of the last day of the Lease Term or any earlier termination of this
Lease, in the condition existing as of the Commencement Date, reasonable wear
and tear and damage by casualty excepted, with all of the improvements and parts
and surfaces thereof clean and free of debris.
7. INSURANCE; INDEMNITY.
7.1 Landlord Insurance. Landlord shall maintain or cause to be
maintained at all times during the Lease Term all insurance required to be
maintained under the provisions of the Master Lease and Ground Lease. Landlord
shall cause Tenant to be named as an additional insured under its policy of
commercial general liability insurance.
7.2 Tenant Insurance. Tenant shall obtain and keep in force
during the Lease Term fire and extended coverage insurance on its Alterations,
Utility Installation and Trade Fixtures, and commercial general liability
insurance issued by insurers, with endorsements and in amounts customary in the
industry, naming the Ground Lessor, the Master Lessor and Landlord as additional
insureds thereunder.
7.3 Insurance Policies. Landlord and Tenant shall each cause
to be delivered to the other certificates evidencing the existence and amounts
of such insurance as required by this Lease. The certificates shall contain a
provision that the insurer will endeavor to provide the other with thirty (30)
days' prior written notice of cancellation. Landlord and Tenant shall each
endeavor to provide the other at least fifteen (15) days prior to the expiration
of such policies, with evidence of renewals or "insurance binders" evidencing
renewal thereof.
7.4 Waiver Of Subrogation. Without affecting any other
rights or remedies, Tenant and Landlord ("Waiving Party") each hereby releases
and relieves the other, the Ground Lessor and the Master Lessor (but Tenant only
does so with respect to the Ground Lessor and the Master Lessor to the extent
that each such party does so with respect to Tenant) and waives its entire right
to recover damages in tort against such parties, for loss of or damage to the
Waiving Party's property arising out of or incident to the perils required to be
insured against under this Article 7. The effect of such releases and waivers of
the right to recover damages shall not be limited to the amount of insurance
required to be carried hereunder nor by any customary deductibles applicable
thereto. The provisions of this Section 7.4 shall not apply if a Party breaches
a duty to insure hereunder.
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7.5 Indemnity. Tenant agrees to pay, and to protect, indemnify
and save harmless Landlord, from and against, any and all liabilities, losses,
damages, costs, expenses (including reasonable attorneys' fees and expenses of
Tenant and Landlord), causes of action, suits, claims (including, without
limitation, any claim of the Master Lessor or the Ground Lessor), demands or
judgments of any nature arising from (i) Tenant's use of the Premises or the
Land or operation of the Business or (ii) Tenant's failure to perform its
obligations under this Lease, except to the extent caused by Landlord's gross
negligence or wrongful acts or omissions. Landlord agrees to pay, and to
protect, indemnify and save harmless Tenant, from and against any and all
liabilities, losses, damages, costs, expenses (including reasonable attorneys'
fees and expenses of Landlord and Tenant), causes of action, suits, claims,
demands or judgments of any nature arising from (i) Landlord's use of the
portion of the Buildings that is for Landlord's exclusive use or performance of
its business operation within the Buildings and upon the Land or (ii) Landlord's
failure to perform its obligations under this Lease, except to the extent caused
by Tenant's gross negligence or wrongful acts or omissions. The agreements of
Tenant and Landlord under this Section 7.5 shall survive the termination of this
Lease and each party shall continue to be liable hereunder notwithstanding such
termination.
8. DAMAGE OR DESTRUCTION.
8.1 Termination; Restoration. In the event of any damage or
destruction of the Premises or the Buildings that results in the Ground Lessor
or the Master Lessor having any right to terminate the Ground Lease or the
Master Lease, as applicable, which termination right is in fact exercised by the
Ground Lessor or the Master Lessor, this Lease shall terminate as of the date of
such termination of the Ground Lease or the Master Lease, as applicable, with no
liability therefor on the part of Landlord. To the extent that neither the
Ground Lessor nor the Master Lessor is entitled to terminate or chooses to
terminate the Ground Lease or the Master Lease following any such damage or
destruction, Landlord shall not exercise any separate termination right that it
may have under the Ground Lease or the Master Lease without first obtaining the
prior written consent of Tenant, which Tenant may withhold in its sole
discretion. In the event that this Lease is not terminated following any damage
or destruction, Landlord shall proceed to satisfy its obligations to repair and
restore under the Master Lease and the Ground Lease, to a condition suitable for
Tenant's conduct of the Business, as diligently as possible, and this Lease
shall remain in full force and effect. Notwithstanding the foregoing, if as a
result of such damage or destruction, Tenant is unable to operate the Business
at the Premises and the necessary repair and restoration to permit business
operations cannot be completed within ninety (90) days after occurrence of such
damage or destruction, as reasonably determined by Tenant, Tenant shall have the
right to terminate this Lease by written notice delivered to Landlord within
thirty (30) days following the date of such damage or destruction. During any
period of time that
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Tenant is unable reasonably to conduct the Business in the Premises as a result
of any damage or destruction, Base Rent shall be abated.
8.2 Waive Statutes. Landlord and Tenant agree that the terms
of this Lease shall govern the effect of any damage to or destruction of the
Premises with respect to the termination of this Lease and hereby waive the
provisions of any present or future Applicable Law to the extent inconsistent
herewith.
9. REAL PROPERTY TAXES.
9.1 Payment Of Taxes. Landlord shall pay all real property
taxes, and special or general assessments that may be imposed upon the lessee
under the Master Lease during the Lease Term. Tenant shall not be responsible
for the payment of any real property taxes or special or general assessments
applicable to the Premises, the Buildings, or the Land. Tenant shall, however,
be responsible for and shall pay prior to delinquency all taxes imposed upon
Tenant's Alterations, Utility Installations and Trade Fixtures.
10. UTILITIES.
10.1 Utilities. Landlord shall pay for and, to the extent
commercially reasonably available, shall obtain and provide to Tenant, all
water, gas, heat, light, power, trash disposal and other utilities and services
reasonably necessary for the conduct of the Business, together with any taxes
thereon (collectively, the "Utility Charges"). Tenant shall not be responsible
for the payment of any Utility Charges applicable to the Premises, the
Buildings, or the Land. If, notwithstanding Landlord's commercially reasonable
efforts, water, gas, heat, light, power, trash disposal or any other utilities
or services previously supplied to the Premises become unavailable from the
public utility that provides them as of the date of this Lease, then Landlord
shall make available to Tenant, at Landlord's sole cost, any substitute
utilities or services that Landlord is able to procure for the conduct of its
own operations within the Buildings, on the same terms and conditions that apply
to Landlord's use thereof. Notwithstanding the foregoing, if such utilities and
services are unavailable to Tenant to a degree that, in Tenant's reasonable
discretion, prevents Tenant from conducting the Business for ten (10) or more
consecutive days, then Tenant may, by delivery of written notice to Landlord,
terminate this Lease. Such notice may be given at any time following such tenth
consecutive day and prior to the date that such utilities or services are
restored.
10.2 Telephone Services. Landlord shall make telephone service
available for Tenant's use within the Premises on the same basis as the other
utilities and services provided above (except with respect to reimbursement, as
provided below), and on the terms and subject to the conditions set forth in
Exhibit B hereto. Tenant shall reimburse Landlord for the cost of such service
as provided on Exhibit B, within thirty (30) days following Tenant's receipt of
Landlord's invoice therefor, together with supporting documentation.
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11. ASSIGNMENT AND SUBLETTING.
11.1 Tenant's Right To Assign Or Sublet. Tenant shall have no
right to assign its interest in this Lease or to sublet all or any portion of
its interest in the Premises, whether voluntarily, involuntarily or by operation
of law, without Landlord's prior written consent, which consent may be given or
withheld in Landlord's sole discretion. Notwithstanding the foregoing, Tenant
may assign its interest in this Lease for financing purposes as set forth in
Section 11.2 below and may assigns its interest in this Lease or sublet all or
any portion of the Premises to any Affiliate, as defined below. "Affiliate"
means a person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with
Tenant.
11.2 Tenant's Right To Assign for Financing Purposes.
Notwithstanding the provisions of Section 11.1, Tenant may, without Landlord's
consent, assign or encumber by mortgage or deed of trust, or other proper
instrument ("Leasehold Encumbrance"), its leasehold interest in the Premises and
Tenant's right, title and interest in this Lease, as security for any
indebtedness of Tenant or its Affiliates. The execution of any such mortgage, or
deed of trust, or other instrument, or the foreclosure thereof, or any sale
thereunder, either by judicial proceedings or by virtue of any power reserved in
such mortgage or deed of trust, or conveyance by Tenant to the holder of such
indebtedness, or the exercise of any right, power or privilege reserved in any
mortgage or deed of trust, shall not be held as a violation of any of the terms
or conditions hereof, or as an assumption by the holder of such indebtedness
personally of the obligations hereof. Any such Leasehold Encumbrance shall
expressly provide that any foreclosure thereof (or deed in lieu thereof) may be
undertaken only for the purpose of continuing the Business upon the Premises. No
such encumbrance, foreclosure, conveyance or exercise of right shall relieve
Tenant of its liability hereunder. The holder of any such mortgage, deed of
trust or other security instrument is herein referred to as a "Leasehold
Lender". If a Leasehold Lender shall have given Landlord written notice of the
creation of a Leasehold Encumbrance, Landlord shall give to such Leasehold
Lender a copy of each notice of any claimed default by Tenant prior to
exercising any remedies against Tenant, addressed to such Leasehold Lender at
the address last furnished to Landlord. Such Leasehold Lender shall thereupon
have a period of thirty (30) days, after service of such notice upon it, to
remedy the default or cause the same to be remedied. Such Leasehold Lender, in
case Tenant shall be in default hereunder, shall, within such period and
otherwise as herein provided, have the right to remedy such default, or cause
the same to be remedied. Landlord will accept performance by the Leasehold
Lender of any covenant, condition or agreement on Tenant's part to be performed
hereunder with the same force and effect as though performed by Tenant. No event
of default of Tenant with respect to the performance of work required to be
performed, or acts to be done, or conditions to be remedied, shall be deemed to
exist, so long as Leasehold Lender shall, in good faith, have commenced
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promptly to rectify and to prosecute the same to completion with diligence and
continuity. If Leasehold Lender cannot reasonably take the action required to
cure the default without being in possession of the Premises, the time of
Leasehold Lender to cure the default shall be deemed extended to include the
period of time reasonably required by such Leasehold Lender to obtain such
possession through a trustee's sale with due diligence; provided, however, that
during such period all other obligations of Tenant under this Lease, including
the payment of rent and other sums required to be paid by Tenant, are being duly
performed. No Leasehold Lender shall become liable under the provisions of this
Lease, unless and until such time as it becomes, and then only for as long as it
remains, the owner of the leasehold interest created by this Lease ("Leasehold
Estate").
11.3 Consent of the Ground Lessor and the Master Lessor.
Notwithstanding any other provision set forth in Sections 11.1 or 11.2 above, no
Leasehold Encumbrance or other assignment of Tenant's interest in this Lease or
subletting of all or any portion of the Premises shall be of any force or effect
unless and until any required consent of the Ground Lessor under the Ground
Lease or the Master Lessor under the Master Lease has been obtained. Landlord
will use reasonable efforts to obtain any required consent from the Ground
Lessor or the Master Lessor for any assignment or subletting that is otherwise
permitted under the provisions of Sections 11.1 or 11.2 above.
12. BREACH; REMEDIES.
12.1 Breach. As used in this Lease, a "Breach" is defined as a
failure by Tenant to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Tenant under this Lease following
written notice and opportunity to cure as set forth below. Where a grace period
for cure after notice is specified herein, the failure by Tenant to cure such
Breach prior to the expiration of the applicable grace period shall entitle
Landlord to pursue the remedies set forth in Section 12.2:
(a) The failure by Tenant to make any payment of
Base Rent or any other monetary payment required to be made by Tenant hereunder
as and when due, where any such failure continues for a period of five (5) days
following written notice thereof by or on behalf of Landlord to Tenant.
(b) The failure by Tenant to comply with the terms,
covenants, conditions or provisions of this Lease that are to be observed,
complied with or performed by Tenant, other than those described in Subsection
12.1 (a) above or (c) below, where such Breach continues for a period of thirty
(30) days after written notice thereof by or on behalf of Landlord to Tenant;
provided, however, that if the nature of Tenant's Breach is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach of this Lease by Tenant if Tenant commences such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion.
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(c) The occurrence of any of the following events:
(i) the making by Tenant of any general arrangement or assignment for the
benefit of creditors; (ii) Tenant's becoming a "debtor" as defined in 11 U.S.C.
ss. 101 or any successor statute thereto (unless, in the case of a petition
filed against Tenant, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
where possession is not restored to Tenant within sixty (60) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, where such
seizure is not discharged within sixty (60) days.
12.2 Remedies. In the event of a Breach of this Lease by
Tenant, as defined in Section 12.1, with or without further notice or demand,
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have by reason of such Breach, Landlord may:
(a) Terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. In
such event, Landlord shall be entitled to recover from Tenant: (i) the worth at
the time of the award of the unpaid Base Rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which the
unpaid Base Rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided; (iii) the worth at the time of the award of the amount
by which the unpaid Base Rent for the balance of the originally scheduled Lease
Term after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; and (iv) any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's failure
to perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including the cost of recovering
possession of the Premises, expenses of reletting and reasonable attorneys'
fees. The worth at the time of award of the amount referred to in provision
(iii) of the prior sentence shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%). The worth at the time of award of the amount referred to
in provisions (i) and (ii) of the second prior sentence shall be computed by
allowing interest at a rate equal to 10 percent per annum. Efforts by Landlord
to mitigate damages caused by Tenant's Breach of this Lease shall not waive
Landlord's right to recover damages under this Section. If termination of this
Lease is obtained through the provisional remedy of unlawful detainer, Landlord
shall have the right to recover in such proceeding the unpaid rent and damages
as are recoverable therein, or Landlord may reserve therein the right to recover
all or any part thereof in a separate suit for such rent and/or damages.
Notwithstanding any of the foregoing, in no event shall Landlord be entitled to
recover an amount greater than six (6) months of Base Rent.
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(b) Pursue any other remedy now or hereafter
available to Landlord under the laws or judicial decisions of the State in which
the Premises are located. However, Landlord shall have a duty to mitigate its
damages in connection with the pursuit of any such other remedy or the remedies
herein provided.
(c) The expiration or termination of this Lease
and/or the termination of Tenant's right to possession shall not relieve either
Party from liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the Lease Term.
12.3 Breach By Landlord. In addition to any other rights and
remedies Tenant may have under this Lease, under Applicable Laws or at equity,
if Landlord shall fail to perform any obligation on Landlord's part to be
performed hereunder for a period of thirty (30) days following the date of
Tenant's delivery of written notice to Landlord of such failure, or, if such
failure by its nature cannot be cured within a thirty-day period, than within
such longer period of time as may be reasonably required so long as Landlord
commences such cure of such failure within such thirty-day period and thereafter
diligently prosecutes such cure to completion, Tenant may, but shall have no
obligation to, after reasonable notice or without notice if in Tenant's judgment
an emergency shall exist, perform such obligation at Landlord's expense and
offset the cost thereof against the payment of rent hereunder, or, on written
notice to Landlord, Tenant may demand reimbursement therefor or part thereof
from Landlord, and Landlord shall promptly reimburse Tenant after receipt of
written notice, demand and documentation.
13. CONDEMNATION.
13.1 Termination; Restoration. If the Premises or the
Buildings, or any portion thereof are taken under power of eminent domain or
sold under the threat of the exercise of said power (all of which are herein
called ("Condemnation") that results in the Ground Lessor or the Master Lessor
having any right to terminate the Ground Lease or the Master Lease, as
applicable, which termination right is in fact exercised by the Ground Lessor or
the Master Lessor, this Lease shall terminate as of the date of such termination
of the Ground Lease or the Master Lease, as applicable, with no liability
therefor on the part of Landlord. To the extent that neither the Ground Lessor
nor the Master Lessor is entitled to terminate or chooses to terminate the
Ground Lease or the Master Lease following any such Condemnation, Landlord shall
not exercise any separate termination right that it may have under the Ground
Lease or the Master Lease without first obtaining the prior written consent of
Tenant, which Tenant may withhold in its sole discretion. In the event that this
Lease is not terminated following any Condemnation, Landlord shall proceed to
satisfy its obligations to repair and restore under the Master Lease and the
Ground Lease, to a condition suitable for Tenant's conduct of the Business, as
diligently as possible, and this Lease shall remain in full force and effect.
Notwithstanding the foregoing, if as a
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result of such Condemnation, Tenant is unable to operate the Business at the
Premises and the necessary repair and restoration to permit business operations
cannot be completed within ninety (90) days after occurrence of such
Condemnation, as reasonably determined by Tenant, Tenant shall have the right to
terminate this Lease by written notice delivered to Landlord within thirty (30)
days following the date of such Condemnation. During any period of time that
Tenant is unable reasonably to conduct the Business in the Premises, or any
portion thereof, as a result of any Condemnation, Base Rent shall be abated in
proportion to the degree to which Tenant's use of the Premises is impaired for
the entire period Tenant is unable to conduct its business at the Premises in
the ordinary course as a result of such Condemnation.
13.2 Award. The Award for any Condemnation action shall be
applied as provided in the Ground Lease and the Master Lease. Notwithstanding
the foregoing, Tenant may make its own separate claim for any award for its
Trade Fixtures (as well as any Alterations and Utility Installations that Tenant
owns and is required to remove from the Premises at the expiration of the Lease
under the provisions of Section 6.3(b)(z)) that may be taken and for its costs
of relocation.
13.3 Waive Statutes. Landlord and Tenant agree that the terms
of this Lease shall govern the effect of any Condemnation of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future Applicable Law to the extent inconsistent herewith.
14. BROKERS.
Tenant and Landlord each represents and warrants to the other
that it has had no dealings with any person, firm, broker or finder in
connection with the negotiation of this Lease and/or the consummation
of the transaction contemplated hereby, and that no broker or other
person, firm or entity is entitled to any commission or finder's fee in
connection with said transaction. Tenant and Landlord do each hereby
agree to indemnify, protect, defend and hold the other harmless from
and against liability for compensation or charges which may be claimed
by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses and attorneys' fees reasonably incurred with respect thereto.
15. TENANCY STATEMENT.
Each Party (as "Responding Party") shall within twenty-one
(21) days after written notice from the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party a
statement in writing specifying the term of this Lease, listing all of
the documents constituting this Lease (including any amendments
hereto), confirming whether this Lease is in full force and effect and
confirming whether any breaches have occurred hereunder and specifying
any defenses or offsets available to Tenant. Such statement shall also
specify the period through which rent and other charges
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have been paid and shall confirm whether any security deposit is held
by Landlord hereunder.
16. LANDLORD'S LIABILITY.
The term "Landlord" as used herein shall mean the owner or
owners at the time in question of tenant's interest in the Master
Lease. In the event of a transfer of Landlord's title or interest in
the Premises or in this Lease, Landlord shall deliver to the transferee
or assignee (in cash or by credit) any unused or unearned funds of
Tenant, if any, held by Landlord at the time of such transfer or
assignment, and the transferee or assignee shall be deemed to have
assumed the obligations of Landlord hereunder effective as of the date
of the transfer. The transferor shall remain obligated under this Lease
only for the period during which such entity owned the tenant's
interest in the Master Lease and not thereafter.
17. SEVERABILITY.
The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
18. INTEREST ON PAST-DUE OBLIGATIONS.
Any monetary payment due to one Party from the other
hereunder, other than late charges, not received within thirty (30)
days following the date on which it was due, shall bear interest from
the thirty-first (31st) day after it was due at the rate of ten percent
(10%) per annum, but not exceeding the maximum rate allowed by law.
19. TIME OF ESSENCE.
Time is of the essence with respect to the performance of all
obligations to be performed or observed by the Parties under this
Lease.
20. RENT DEFINED.
All monetary obligations of Tenant to Landlord under the terms
of this Lease are deemed to be rent.
21. NO PRIOR OR OTHER AGREEMENTS.
This Lease and the Purchase Agreement contain all agreements
between the Parties with respect to any matter mentioned herein, and no
other prior or contemporaneous agreement or understanding shall be
effective; provided that, to the extent any conflicts exist between the
Purchase Agreement, including all exhibits thereto, and this Lease,
this Lease shall control.
20
<PAGE>
22. NOTICES.
22.1 All notices required or permitted by this Lease shall be
in writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by certified or registered mail or by overnight courier
or mail service that guarantees next-day delivery and provides a receipt, with
postage prepaid, or by facsimile transmission, and shall be deemed sufficiently
given if served in a manner specified in this Article 22. The following are the
address(es) of the Parties for delivery or mailing of notice purposes:
If to Tenant: If to Landlord:
TSMD Acquisition Corp. WATKINS-JOHNSON COMPANY
c/o Mentmore Holdings, Inc. 3333 Hillview Avenue
1430 Broadway, 13th Floor Palo Alto, California
94304-1223 Attention: Treasurer
New York, NY 10018-3308
Attn: Michael D. Schenker, Esq.
Either Party may, by written notice to the other, specify a different address
for notice purposes. A copy of all notices required or permitted to be given to
Landlord hereunder shall be concurrently transmitted to such party or parties at
such addresses as Landlord may from time to time hereafter designate by written
notice to Tenant.
22.2 Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card or if no delivery date is shown, the postmark thereon. Notice
delivered by overnight courier that guarantees next day delivery and provides a
receipt shall be deemed given twenty-four (24) hours after delivery of the same
to the service or courier. If any notice is transmitted by facsimile
transmission or similar means, the same shall be deemed served or delivered upon
telephone confirmation of receipt of the transmission thereof, provided a copy
is also delivered via delivery or mail. If notice is received on a Saturday,
Sunday or legal holiday, or after normal business hours, it shall be deemed
received on the next business day.
23. WAIVERS.
No waiver by Landlord of the Breach of any term, covenant or
condition hereof by Tenant shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Breach by Tenant of
the same or of any other term, covenant or condition hereof.
24. RECORDING.
Neither Landlord nor Tenant shall record either this Lease or
any memorandum hereof in the Official Records of Santa Clara County,
California.
21
<PAGE>
25. CUMULATIVE REMEDIES.
No remedy or election hereunder shall be deemed exclusive but
shall, wherever possible, be cumulative with all other remedies at law
or in equity.
26. BINDING EFFECT; CHOICE OF LAW.
This Lease shall be binding upon the Parties, their personal
representatives, successors and assigns and be governed by the laws of
the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the County
in which the Premises are located.
27. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
27.1 Subordination. Subject to the provisions of Section 27.3
below, this Lease shall be subject and subordinate to the Ground Lease, the
Master Lease, and any mortgage, deed of trust, or other hypothecation or
security device (collectively, "Senior Lien"), now or hereafter placed by
Landlord upon the real property of which the Premises are a part, to any and all
advances made on the security thereof, and to all renewals, modifications,
consolidations, replacements and extensions thereof. If any Lender shall elect
to have this Lease superior to the lien of its Senior Lien and shall give
written notice thereof to Tenant, this Lease shall be deemed prior to such
Senior Lien, notwithstanding the relative dates of the documentation or
recordation thereof.
27.2 Attornment. Subject to the provisions of Section 27.3
below, Tenant agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Senior Lien.
27.3 Self-Executing. The agreements contained in this Article
27 shall be effective without the execution of any further documents. However,
upon written request from Landlord or a Lender in connection with a sale,
financing or refinancing of the Premises, Tenant and Landlord shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, or attornment agreement as is provided for
herein. Notwithstanding the foregoing, Tenant's subordination of this Lease
shall be subject to receiving customary non-disturbance protection from the
applicable holder of any Senior Lien to the effect that Tenant's possession and
this Lease will not be disturbed so long as Tenant is not in Breach hereof and
attorns to the record owner of the Premises, subject to any right of Tenant of
to cure such Breach.
27.4 No Merger. There shall be no merger of this Lease or the
Ground Lease or the Master Lease or of any leasehold or subleasehold estate
hereby or thereby created with the fee estate or the title to the Land or any
portion thereof or interest therein by reason of the fact that the same person
may acquire or hold, directly or indirectly, this Lease, the Ground Lease or the
Master
22
<PAGE>
Lease or any leasehold or subleasehold estate hereby or thereby created or any
interest in this Lease or in the Ground Lease or the Master Lease or in any such
leasehold or subleasehold estate as well as the fee estate in or title to the
Land or any portion thereof or interest therein.
28. ATTORNEYS' FEES.
If any Party brings an action or proceeding to enforce or
interpret the terms hereof or declare rights hereunder, the Prevailing
Party (as hereafter defined) in any such proceeding, action or appeal
thereon, shall be entitled to reasonable attorneys' fees, court costs
and fees of experts. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall
include, without limitation, a Party who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment or the abandonment by the other Party of its claim
or defense. The attorneys' fees awarded shall not be computed in
accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred.
29. LANDLORD'S ACCESS.
Landlord shall have the right to enter the Premises at any
time in the case of an emergency, and otherwise at reasonable times
upon reasonable notice, for the purpose of performing its obligations
hereunder.
30. SIGNS.
Tenant may install such signs as are reasonably required to
advertise Tenant's business and which are consistent with the existing
signage at the Premises that relates to the Business. Any such signage
shall be subject to Landlord's reasonable approval (as well as any
required approval from the Ground Lessor or the Master Lessor), subject
to Applicable Law. The installation of any sign on the Premises by or
for Tenant shall be subject to the provisions of Article 6
(Maintenance; Repairs; Utility Installations; Trade Fixtures And
Alterations).
31. HOLDING OVER.
If Tenant holds over after the expiration of the Lease Term,
Tenant shall pay Base Rent for each month that such hold over continues
at a rate equal to 100 percent of the Base Rent in effect immediately
prior to the expiration of the Lease Term. Additionally, Tenant shall
save, protect, defend, indemnify and hold Landlord harmless from and
against any and all Losses (as such term is defined in the Purchase
Agreement) suffered by Landlord as result of such hold over, including,
without limitation, lost revenue due to Landlord's inability to relet
the Premises.
23
<PAGE>
32. QUIET POSSESSION.
Upon payment by Tenant of the rent for the Premises and the
observance and performance of all of the covenants, conditions and
provisions on Tenant's part to be observed and performed under this
Lease, Tenant shall have quiet possession of the Premises for the
entire Lease Term.
33. CONSENTS.
Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party,
such consent shall not be unreasonably withheld or delayed. Landlord's
consent to any act, assignment of this Lease or subletting of the
Premises by Tenant shall not constitute an acknowledgment that no
Breach by Tenant of this Lease exists, nor shall such consent be deemed
a waiver of any then existing Breach, except as may be otherwise
specifically stated in writing by Landlord at the time of such consent.
34. PERFORMANCE UNDER PROTEST.
If at any time a dispute shall arise as to any amount or sum
of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall
survive the right on the part of said Party to institute suit for
recovery of such sum. If it shall be adjudged that there was no legal
obligation on the part of said Party to pay such sum or any part
thereof, said Party shall be entitled to recover such sum (with
interest from the date paid until the date repaid at the rate provided
in Article 18) or so much thereof as it was not legally required to pay
under the provisions of this Lease.
35. AUTHORITY.
If either Party hereto is a corporation, trust or general or
limited partnership, each individual executing this Lease on behalf of
such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. If either Party is a
corporation, trust or partnership, such Party shall, within thirty (30)
days after request by the other Party, deliver to such Party evidence
of such authority.
36. CONFLICT.
Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
24
<PAGE>
37. OFFER.
Preparation of this Lease by either Party and submission of
same to the other Party shall not be deemed an offer to lease. This
Lease is not intended to be binding until executed by all Parties
hereto.
38. AMENDMENTS.
This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification.
39. WAIVER OF STATUTORY LIEN.
Landlord shall not be entitled to any statutory lien or
security interest in any personal property or Tenant Owned Alterations,
Utility Installations or Trade Fixtures located on the Premises.
40. MULTIPLE PARTIES.
Except as otherwise expressly provided herein, if more than
one person or entity is named herein as either Landlord or Tenant, the
obligations of such multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Landlord
or Tenant.
The parties hereto have executed this Lease at the place and on the
dates specified above their respective signatures.
Executed at Executed at
------------------------ -----------------------------
on on
--------------------------------- --------------------------------------
by LANDLORD: by TENANT:
WATKINS-JOHNSON COMPANY, W-J TSMD INC.
a California corporation a California corporation
By: By:
-------------------------------- --------------------------------------
Name: Name:
------------------------------ ------------------------------------
Title: Title:
------------------------------ ------------------------------------
25
<PAGE>
EXHIBIT A
THE LAND
All of that certain real property situate in the City of Palo Alto,
County of Santa Clara, State of California described as follows:
PROPERTY TWO
BEGINNING at a concrete highway monument situate on the Southwesterly
line of El Camino Real (State Highway) opposite Engineer's Station
144+27.00, as surveyed by the California Division of Highways, as said
Southwesterly line was established by that certain Decree in
Condemnation, a certified copy of which Decree was filed for record in
the Office of the Recorder of the County of Santa Clara, State of
California, on July 7, 1930 in Book 520 of Official Records at page
571; said monument also marks the point of intersection of said
Southwesterly line with the Southeasterly line of that certain 1289
acre tract of land described in the Deed from Evelyn C. Crosby, et al,
to Leland Stanford, dated September 8, 1885, recorded September 8, 1885
in Book 80 of Deeds, at page 382, Santa Clara County Records; running
thence along said southeasterly line of that certain 1289 acre tract
and its Southwesterly prolongation, South 33(degree) 14' 40" West
4494.10 feet; thence South 56(degree) 45' 20" East 357.00 feet to the
most Southerly corner of that certain 3.268 acre Parcel leased by The
Board of Trustees of the Leland Stanford Junior University to the
Prudential Insurance Company of America, dated December 12, 1958, and
recorded December 31, 1958 in Book 4276 of Official Records at page 70
and to the true point of beginning of the said Property Two; thence
from said true point of beginning along the Southwesterly line of said
parcel so leased to the Prudential Insurance Company of America, North
56(degree) 45' 20" West 82.53 feet; thence leaving said line South
48(degree) 39' 32" West 628.80 feet to a point in the Northeasterly
line of Hillview Avenue (60.00 feet in width); thence on the arc of a
curve to the right, with a radius of 430.00 feet (a radial line at the
point of beginning of said curve bears South 69(degree) 27' 05" West)
along said line, through a central angle of 25(degree) 17' 35", an arc
distance of 189.82 feet; thence continuing along said line on the arc
of a compound curve to the right, with a radius of 5030.00 feet,
through a central angle of 2(degree) 14' 04", an arc distance of 196.15
feet; Thence leaving said Northeasterly line of Hillview Avenue South
85(degree) 10' 56" East 516.80 feet to a point in the Northwesterly
line of the lands of the Veterans Administration, described as Parcel B
in that Final Judgement entered in the District Court of the United
States in and for the Northern District of California, Southern
Division, entitled, "United States of America, Plaintiff, vs. The Board
of Trustees of the Leland Stanford Junior University, et al,
Defendants", Case No. 34478, a certified copy of which Judgement was
filed for record in the Office of the Recorder of the County of Santa
Clara, State of California, on March 15, 1956 in Book 3439 of Official
Records, page 182, Santa Clara County Records, said point also being
the center line of Matadero Creek; thence along
said center line and along the line of the lands of the Veterans
Administration, the following courses and distances:
North 22(degree) 59' 37" East 128.06 feet; North 17(degree) 00' 52"
East 250.02 feet; North 56(degree) 09' 37" East 64.01 feet; North
82(degree) 55' 52" East 36.48 feet; South 69(degree) 47' 38" East
135.66 feet; North 67(degree) 56' 49" East 69.95 feet; North 26(degree)
54' 37" East 31.21 feet; North 17(degree) 14' 53" West 84.50 feet;
North 29(degree) 37' 22" East 156.75 feet; North 60(degree) 34' 52"
East 63.66 feet; South 64(degree) 34' 08" East 109.39 feet; North
75(degree) 41' 07" East 72.92 feet; and North 60(degree) 51' 52" East
138.41 feet; thence South 75(degree) 30' 08" East 147.53 feet to the
Northeasterly line of the above described 1289 acre tract of land;
thence along said line North 56(degree) 39' 40" West 863.14 feet to the
most Easterly corner of the above described 3.268 acre parcel; thence
along the Southeasterly line thereof, South 33(degree) 14' 40" West
398.50 feet tot eh true point of beginning.
Containing 16.305 Acres, more or less.
<PAGE>
[GRAPHIC -- Plat to Accompany Legal Description]
<PAGE>
EXHIBIT A-1
SITE PLAN (MAIN PREMISES)
[GRAPHICS-- Building layouts of Buildings 3, 4 and 5 marked to
indicate areas of Stellex occupancy]
A-1-1
<PAGE>
EXHIBIT A-1
SITE PLAN (MAIN PREMISES)
[GRAPHICS-- Building layouts of Buildings 3, 4 and 5 marked to
indicate areas of Stellex occupancy]
A-1-2
<PAGE>
EXHIBIT A-1
SITE PLAN (MAIN PREMISES)
[GRAPHICS-- Building layouts of Buildings 3, 4 and 5 marked to
indicate areas of Stellex occupancy]
A-1-3
<PAGE>
EXHIBIT A-2
SITE PLAN (SHORT TERM PREMISES)
[GRAPHICS-- Building layouts of Building 4 marked to
indicate area of Stellex occupancy]
A-2-1
<PAGE>
EXHIBIT B
Telephone Services
Promptly following the date of this Lease, the Parties shall negotiate
in good faith to produce a replacement for this Exhibit B, setting forth the
precise telephone services that will be made available to Tenant and a
reasonable methodology for determining how Tenant will pay Landlord for such
telephone services. The methodology shall be based on the number of telephone
lines, the number of people using the telephone services or such other
reasonable methodology as may be agreed to by the Parties.
B
<PAGE>
COMMERCIAL SUB-SUBLEASE (BUILDING 6)
BETWEEN
W-J TSMD INC., as Tenant
and
WATKINS-JOHNSON COMPANY, as Landlord
SUMMARY INFORMATION (FOR CONVENIENCE ONLY; NOT PART OF THE LEASE)
Premises Address: 3333 Hillview Avenue
Palo Alto, California
Total Area of Premises: Approximately 63,000 square feet
Term: Thirty-Six (36) Months
Commencement Date: October 31, 1997
Expiration Date: October 31, 2000
Options: None
Landlord Contact: Tenant Contact
Treasurer TSMD Acquisition Corp.
Watkins-Johnson Company c/o Mentmore Holdings, Inc.
3333 Hillview Avenue 1430 Broadway, 13th Floor
Palo Alto, California 94304-1223 New York, NY 10018-3308
Telephone: (650) 813-2480 Attn: Michael D. Schenker, Esq.
Facsimile: (650) 813-2960 Facsimile: (212) 382-1559
<PAGE>
COMMERCIAL LEASE
TABLE OF CONTENTS
Page(s)
1. BASIC PROVISIONS.......................................................2
1.1 Premises.......................................................2
(a) Description...............................................2
(b) Master Lease and Sublease.................................2
(c) Termination of Greater Estates............................3
(d) Conditions Precedent......................................3
1.2 Term...........................................................3
1.3 Base Rent......................................................3
1.4 Permitted Use..................................................4
1.5 Parking........................................................4
1.6 Exhibits And Addenda...........................................4
2. PREMISES...............................................................4
2.1 Letting........................................................4
2.2 Condition......................................................4
2.3 Compliance With Covenants, Restrictions And Applicable Law.....5
2.4 Termination Option.............................................5
3. [INTENTIONALLY OMITTED]................................................5
4. RENT...................................................................5
4.1 Base Rent......................................................5
5. HAZARDOUS SUBSTANCES...................................................6
5.1 Definition.....................................................6
i
<PAGE>
5.2 Landlord Representations.......................................6
5.3 Landlord Indemnification.......................................7
5.4 Tenant's Use...................................................7
5.5 Environmental Communications...................................8
5.6 Survival.......................................................8
5.7 Inspection; Compliance.........................................8
6. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES
AND ALTERATIONS........................................................8
6.1 Tenant's Obligations...........................................8
6.2 Landlord's Obligations.........................................9
6.3 Utility Installations; Trade Fixtures; Alterations.............9
(a) Definitions; Consent Required.............................9
(b) Consent..................................................10
(c) Indemnification..........................................10
6.4 Ownership; Surrender..........................................11
(a) Ownership................................................11
(b) Surrender................................................11
7. INSURANCE; INDEMNITY..................................................11
7.1 Landlord Insurance............................................11
7.2 Tenant Insurance..............................................11
7.3 Insurance Policies............................................11
7.4 Waiver Of Subrogation.........................................12
7.5 Indemnity.....................................................12
8. DAMAGE OR DESTRUCTION.................................................12
8.1 Termination; Restoration......................................12
8.2 Waive Statutes................................................13
ii
<PAGE>
9. REAL PROPERTY TAXES...................................................13
9.1 Payment Of Taxes..............................................13
10. UTILITIES.............................................................13
10.1 Utilities.....................................................13
10.2 Telephone Services............................................14
11. ASSIGNMENT AND SUBLETTING.............................................14
11.1 Tenant's Right To Assign Or Sublet............................14
11.2 Tenant's Right To Assign for Financing Purposes...............14
11.3 Consent of the Ground Lessor and the Master Lessor............15
12. BREACH; REMEDIES......................................................15
12.1 Breach........................................................15
12.2 Remedies......................................................16
12.3 Breach By Landlord............................................17
13. CONDEMNATION..........................................................18
13.1 Termination; Restoration......................................18
13.2 Award.........................................................18
13.3 Waive Statutes................................................18
14. BROKERS...............................................................19
15. TENANCY STATEMENT.....................................................19
16. LANDLORD'S LIABILITY..................................................19
17. SEVERABILITY..........................................................19
18. INTEREST ON PAST-DUE OBLIGATIONS......................................20
iii
<PAGE>
19. TIME OF ESSENCE.......................................................20
20. RENT DEFINED..........................................................20
21. NO PRIOR OR OTHER AGREEMENTS..........................................20
22. NOTICES...............................................................20
23. WAIVERS...............................................................21
24. RECORDING.............................................................21
25. CUMULATIVE REMEDIES...................................................21
26. BINDING EFFECT; CHOICE OF LAW.........................................21
27. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE............................21
27.1 Subordination.................................................21
27.2 Attornment....................................................22
27.3 Self-Executing................................................22
27.4 No Merger.....................................................22
28. ATTORNEYS' FEES.......................................................22
29. LANDLORD'S ACCESS.....................................................23
30. SIGNS.................................................................23
31. HOLDING OVER..........................................................23
32. QUIET POSSESSION......................................................23
33. CONSENTS..............................................................23
34. PERFORMANCE UNDER PROTEST.............................................24
35. AUTHORITY.............................................................24
iv
<PAGE>
36. CONFLICT..............................................................24
37. OFFER.................................................................24
38. AMENDMENTS............................................................24
39. WAIVER OF STATUTORY LIEN..............................................24
40. MULTIPLE PARTIES......................................................25
v
<PAGE>
COMMERCIAL SUB-SUBLEASE (BUILDING 6)
This Commercial Sub-Sublease (Building 6) ("Lease") dated, for reference
purposes only, October 31, 1997, is made by and between WATKINS-JOHNSON COMPANY,
a California corporation ("Landlord"), and W-J TSMD INC., a California
corporation and a wholly-owned subsidiary of Landlord ("Tenant"). Tenant and
Landlord are referred to collectively as the "Parties," or individually as a
"Party".
RECITALS
WHEREAS, Landlord, Tenant and TSMD Acquisition Corp., a Delaware
corporation ("TSMD Acquisition"), have entered into a Stock Purchase Agreement,
dated as of August 29, 1997 ("Purchase Agreement"), whereby TSMD Acquisition has
agreed to purchase, and Landlord has agreed to sell, all of the outstanding
stock of Tenant; and
WHEREAS, reference is made to that certain Lease dated as of September 1,
1972 (as amended to date, "Ground Lease") by and between The Board of Trustees
of the Leland Stanford Junior University, a body having corporate powers under
the laws of the State of California ("Ground Lessor"), and Landlord, as
predecessor in interest to Morrco Properties Company., a California limited
partnership ("Master Lessor"); and
WHEREAS, reference is made to that certain Lease and Agreement (as amended
to date, the "Master Lease") dated as of October 31, 1975, between Master
Lessor, and Landlord, as Sublessee thereunder; and
WHEREAS, pursuant to the Purchase Agreement, Landlord desires to sub-
sublet to Tenant a portion, which portion is shown on Exhibit A-1 which is
attached hereto, of the "Leased Premises", as defined in the Master Lease (the
"Premises"); and
WHEREAS, TSMD Acquisition and Tenant desire that Tenant sub-sublet such
Premises from Landlord; and
WHEREAS, the execution of this Agreement is a condition to the closing of
the purchase and sale of the outstanding stock of Tenant under the Purchase
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties agree as follows:
1
<PAGE>
1. BASIC PROVISIONS.
1.1 Premises.
(a) Description. The Premises are located in the City of Palo
Alto, County of Santa Clara, State of California, on that certain
tract of real property (the "Land") more fully described on Exhibit A
hereto. A site plan is attached hereto as Exhibit A-1 setting forth
the Premises as outlined within the buildings containing the Premises
(the "Building"). The right to use and enjoy the Premises hereunder
shall include a license in favor of Tenant to use and enjoy the areas
within the Building or on the Land designed for common usage by
tenants or other occupants of the Building (the "Common Area"),
including, but not limited to, sidewalks, entryways, parking areas,
elevators, common corridors and restroom facilities, for all
reasonable purposes, including, but not limited to, ingress, egress
and loading, subject to such rules and regulations as Landlord may
reasonably establish with respect to such usage.
(b) Master Lease and Sublease. Tenant understands that this Lease
is a lesser estate that exists under the leasehold estates created by
the Ground Lease and the Master Lease, and that, as a matter of law,
this Lease is subject to all the provisions of the Ground Lease and
the Master Lease. Notwithstanding the foregoing, the Parties agree, as
between themselves (this means that Landlord covenants the following
to Tenant, but that Tenant and Landlord acknowledge that such covenant
will not limit the rights or remedies of Ground Lessor or Master
Lessor), that Landlord will continue to satisfy all of the terms and
conditions of the Master Lease and the Ground Lease, as imposed upon
the subtenant under the Master Lease, except as expressly otherwise
provided in this Lease. In addition to any consents or approvals of
Landlord that may be required under the provisions of this Lease
(excepting only the consent of the Ground Lessor to this Lease, which
consent has been obtained by Landlord), Tenant understands that the
approval of the Ground Lessor or the Master Lessor may also be
required under the provisions of the Ground Lease or the Master Lease,
as applicable. In such event, Landlord will so advise Tenant at the
time that Tenant seeks the consent or approval of Landlord hereunder,
and, to the extent that Landlord has granted its own consent or
approval under the provisions of this Lease, Landlord shall use
reasonable efforts to obtain the consent or approval of the Ground
Lessor or the Master Lessor under the Ground Lease or the Master
Lease, as applicable. Notwithstanding the foregoing, Tenant
understands and acknowledges that those actions that require the
consent or approval of the Ground Lessor or the Master Lessor under
the Ground Lease or the Master Lease, as applicable, cannot be
undertaken without such consent or approval, and if Landlord, despite
its reasonable efforts, is unable to obtain such consent or approval,
Tenant shall not undertake any such action. In addition, to the
extent, at any time, Landlord advises Tenant in writingthat the Ground
Lessor or the Master Lessor is then alleging that any action
undertaken by Tenant is in
2
<PAGE>
violation of the terms of the Ground Lease or the Master Lease, as
applicable, Tenant and Landlord shall reasonably cooperate to remedy
any actual violation in any manner that will allow Tenant to continue
the Business upon the Premises.
(c) Termination of Greater Estates. If Landlord's interest in the
Master Lease terminates for any reason, this Lease shall also
terminate. Notwithstanding such termination, the parties shall have
their rights and remedies as are available at law and in equity
following any such termination of this Lease, including, without
limitation, for any breach of the covenant of quiet possession set
forth in Section 32 below (unless Tenant is then in Breach under the
terms of this Lease). If such termination of this Lease does not
result from the following two events, however, then Landlord shall in
no event be liable for any consequential damages or lost profits of
Tenant resulting from such termination: (i) the failure of Landlord to
satisfy its obligations under the Master Lease, including, without
limitation, those obligations under the Ground Lease which are imposed
upon Landlord under the provisions of the Master Lease (but expressly
excluding any obligations that are to be satisfied by Tenant under the
provisions of this Lease), or (ii) the expiration or termination of
the term of the Master Lease because of Landlord's consensual
agreement with the Master Lessor.
(d) Conditions Precedent. A condition precedent to the
effectiveness of this Lease will be Landlord's obtaining any consent
hereto that may be required under the provisions of the Ground Lease
or the Master Lease. Landlord will use commercially reasonable efforts
to obtain such consents as quickly as possible. Landlord shall keep
Tenant informed of its efforts to obtain such consents. A further
condition precedent to the effectiveness of this Lease will be the
closing of the transaction contemplated by the Purchase Agreement.
1.2 Term. The term of this Lease shall be thirty-six (36) months
("Lease Term"), commencing October 31, 1997 ("Commencement Date"), and
ending October 31, 2000 ("Expiration Date"), or on any such earlier
date as this Lease may be terminated pursuant to its express
provisions. Landlord will deliver the Premises to Tenant in its
currently existing condition on or before the Commencement Date.
Tenant shall have no right or option to extend the Lease Term.
1.3 Base Rent. The monthly base rent for the Lease Term shall be
the amount ("Base Rent") that is equal to the product of Two and Three
Hundredths Dollars ($2.03)--multiplied by the rentable square footage
of the Premises. Tenant shall pay the Base Rent applicable to the
first full or partial calendar month of the Lease Term to Landlord on
the first day of the Lease Term. Thereafter, the Base Rent shall be
payable on the first (1st) calendar day of each month. (See Article 4
for further provisions). Base Rent will remain fixed throughout the
Lease Term. To the extent that the first month of the Lease Term
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or the last month of the Lease Term is a partial month, Base Rent for
such month shall be prorated based upon the actual number of days in
such month.
1.4 Permitted Use. The Premises are to be used by Tenant for
continuing to operate the Business (as defined in the Purchase
Agreement, together with any reasonable extensions thereof that are
not prohibited under the provisions of the Purchase Agreement), and
for no other purpose. Tenant understands that there are limitations on
the permitted use of the leased premises set forth in the Ground Lease
and in the Master Lease. Therefore, Tenant shall not change the nature
of the Business (with the Business defined to include any such
reasonable extensions thereto as provided above) in any material
manner, to the extent that the Business is conducted upon the
Premises. Notwithstanding anything to the contrary in this Section
1.4, Landlord warrants that the operation of the Business will not
violate any of the provisions of this Section 1.4.
1.5 Parking. Tenant and its employees, invitees and licensees
shall be entitled to common use of all of the parking areas on the
Land available for use by Landlord and its employees, invitees and
licensees, but subject to the same restrictions that apply to use of
the parking areas by Landlord and its employees, invitees and
licensees (such as visitor parking areas, van pool areas, and handicap
parking areas).
1.6 Exhibits And Addenda. The following Exhibits and Addenda are
attached hereto and incorporated herein by reference:
Exhibit A -- The Land
Exhibit A-1 -- Site Plan
Exhibit B -- Telephone Service
2. PREMISES.
2.1 Letting. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord, the Premises, for the Lease Term, at the rental,
and upon all of the terms, covenants and conditions set forth in this
Lease. Unless otherwise provided herein, any statement of square
footage set forth in this Lease, or that may have been used in
calculating rental, is an approximation which Landlord and Tenant
agree is reasonable, and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Landlord shall deliver the Premises to Tenant
clean and free of debris on or before the Commencement Date. Landlord
warrants to Tenant that the foundation, roof and other structural
elements of the Building, and the building systems, including, without
limitation, existing plumbing, fire sprinkler system, lighting,
heating, ventilation, air conditioning and loading doors, if any, in
the Premises are suitable for, and can support, the operation of the
Business as
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of the date of this Lease. Landlord has endeavored, prior to the date
of this Lease, to reconfigure the Building at Landlord's sole cost to
permit the Business to be conducted within the Premises. To the extent
that further reconfigurations are required for the conduct of the
Business within the Premises (whether because of requirements of
Applicable Law existing as of this date or because the parties
overlooked requirements of the Business, but not merely for cosmetic
effect), then Landlord shall perform such additional reconfiguration
at Landlord's cost as quickly as commercially reasonably possible
under the circumstances. To the extent that the cost of any such
additional reconfiguration can be achieved at material cost savings by
causing the work to occur over a longer period of time, Landlord and
Tenant shall reasonably cooperate to allow such longer period of time
to be used so long as allowing such additional period of time does not
impair Tenant's conduct of the Business within the Premises.
2.3 Compliance With Covenants, Restrictions And Applicable Law.
Landlord shall cause any alterations that are required to cause the
Premises to comply with all laws, rules, regulations, ordinances,
statutes, codes, directives, covenants, easements and restrictions of
record, permits and the reasonable requirements of any applicable fire
insurance underwriter or rating bureau (collectively, "Applicable
Law") to be constructed at Landlord's sole cost and expense. Landlord
shall further comply with all Applicable Law pertaining to the
Building and the Land other than the specific compliance obligations
of Tenant with respect to the conduct of the Business. In addition,
Landlord shall perform its maintenance obligations under the
provisions of Section 6 of this Lease in such manner so as to comply
with Applicable Law. Tenant shall, at its cost and expense, comply
with Applicable Law, whether or not any such Applicable Law may
involve a change of policy on the part of the body enacting the same,
to the extent related to Tenant's operation of the Business.
2.4 Termination Option. Tenant shall have the right, exercisable
at any time during the Lease Term, to terminate this Lease in its
entirety, provided that Tenant delivers a written notice of
termination to Landlord ("Termination Notice") at least six (6) months
prior to the date on which Tenant intends to terminate this Lease (the
"Termination Date"). If Tenant delivers a Termination Notice pursuant
to this Section 2.4, this Lease shall terminate effective as of the
Termination Date.
3. [INTENTIONALLY OMITTED]
4. RENT.
4.1 Base Rent. Subject to the terms of this Lease, Base Rent and
other rent or charges payable hereunder shall be paid to Landlord in
lawful money of the United States, without offset or deduction, except
as expressly otherwise provided in Section 12.3 hereof, when due under
the terms of this Lease, at Landlord's address stated herein or to
such other persons or at such
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other addresses as Landlord may from time to time designate in writing
to Tenant. Except as expressly otherwise provided in Section 10.2,
Tenant shall not be responsible for paying or reimbursing Landlord for
any of the costs incurred by or on behalf of Landlord in maintaining,
operating, repairing or improving the Premises, the Building or the
Land, regardless of whether such costs are incurred by or on behalf of
Landlord in performing its maintenance, operation, repair and
improvement obligations under this Lease.
5. HAZARDOUS SUBSTANCES.
5.1 Definition. "Hazardous Substance" means (but shall not be
limited to) substances that are defined or listed in, or otherwise
classified pursuant to, any Applicable Law as "hazardous substances,"
"hazardous materials," "hazardous wastes" or "toxic substances," or
any other formulation intended to define, list or classify substances
by reason of deleterious properties such as ignitibility, corrosivity,
reactivity, radioactivity, carcinogenicity, reproductive toxicity or
"EP toxicity," and petroleum and drilling fluids, produced waters and
other wastes associated with the exploration, development, or
production of crude oil, natural gas or geothermal energy.
5.2 Landlord Representations. Except as otherwise disclosed in
the Purchase Agreement, Landlord has not generated, used, transported,
treated, stored, released or disposed of, or suffered or permitted
anyone else to generate, use, transport, treat, store, release or
dispose of any Hazardous Substance in violation of any Applicable Law
or at any location upon the Land or the Building which could require
investigation or remediation; (b) there has not been any generation,
use, transportation, treatment, storage, release or disposal of any
Hazardous Substance in connection with the conduct of the Business or
the use of any property or facility of Landlord (whether owned,
generated or used by Landlord) or to the knowledge of Landlord any
nearby or adjacent properties or facilities, which has created or
might reasonably be expected to create any liability under any
Applicable Law or which would require reporting to or notification of
any governmental agency or which could have an adverse impact on the
operation of the Land or the Building; (c) no asbestos or
polychlorinated biphenyl or underground storage tank is contained in,
on, under or about the Building or the Land, and no Hazardous
Substance is present on, under or about the Land or the Building which
could require investigation or remediation by any governmental agency;
(d) any Hazardous Substance handled or dealt with in any way in
connection with the Business, whether before or during Landlord's
ownership, has been and is being handled or dealt with in all respects
in compliance with Applicable Law; and (e) no condition exists in, on,
under or about the Land or the Building which is in violation of any
Applicable Law or for which any Applicable Law could require that
corrective action be taken. As used herein, the term "knowledge" with
respect to Landlord shall be limited as provided with respect to
"Seller" in Section 9.15 of the Purchase Agreement.
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5.3 Landlord Indemnification. Subject to the limitations set
forth in Section 8.5 of the Purchase Agreement, Landlord agrees to
indemnify, defend and hold harmless Tenant and its directors,
officers, employees, affiliates and assigns from and against any and
all Losses (as such term is defined in the Purchase Agreement),
whether incurred directly or indirectly, as a result of, or based upon
or arising from the generation, use, transportation, treatment,
storage, release or disposal, before the date of this Lease, of
Hazardous Substances by, or at any property or facility of Landlord.
From and after the date of this Lease, Landlord shall indemnify,
defend and hold Tenant harmless from and against any and all losses,
costs, claims, causes of action, fines and penalties, whether incurred
directly or indirectly, as a result of, or based upon or arising from
the generation, use, transportation, treatment, storage, release or
disposal of Hazardous Substances in, on, under or about the Building
or the Land, which were not caused primarily by Tenant's operation.
5.4 Tenant's Use. Tenant shall have the right to store, use and
handle Hazardous Substances on the Premises, provided that (i) such
Hazardous Substances are used in the operation of the Business or are
brought onto the Premises in the ordinary course of the Business and
used in compliance with Applicable Law and Landlord's reasonable
procedures for the acquisition, use, storage, handling and disposal of
Hazardous Substances, (ii) Tenant shall not cause to be brought upon
the Premises any Hazardous Substances that have not been previously
stored or used at the Premises without Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed,
and (iii) Landlord shall instruct Tenant on compliance procedures
necessary to ensure that such Hazardous Substances are stored, used,
handled and disposed of in compliance with Applicable Law. In
connection with its oversight and coordination of the compliance
procedures, Landlord shall (x) have access to all of Tenant's
operations within the Premises at all times, following reasonable
notice (or in the case of emergency, without notice), for the purpose
of monitoring Tenant's compliance with Landlord's compliance
procedures with respect to Hazardous Substances, (y) have Tenant's
reasonable cooperation in complying with such procedures, and (z)
promptly notify Tenant of any release or discovery of Hazardous
Substances at the Premises not in compliance with Applicable Law and
Landlord's procedures. Tenant shall indemnify, defend and hold
Landlord harmless from any and all losses, costs, claims, causes of
action, fines and penalties, whether incurred directly or indirectly,
which relate to events occurring during the Lease Term and which arise
solely as a result of Tenant's use of Hazardous Substances at the
Premises during the Lease Term. Further, notwithstanding anything to
the contrary in this Lease, but without limiting Tenant's monetary
obligations under the foregoing indemnity, Tenant is not permitted to
maintain, repair, remediate or otherwise conduct work with respect to
the following portions of the Premises: (i) structural elements of the
Premises, the building systems and portions of the Building containing
insulation or fireproofing material on or in exterior walls, columns,
beams, ceilings, pipes,
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ducts and other similar elements of the Building; (ii) any portion of
the Premises more than six (6) feet below ground surface; or (iii) any
portions of the Premises, the Building or the Land that are
contaminated with Hazardous Substances, as of the Commencement Date,
including, without limitation, any and all portions of the Premises,
the Building or the Land that are subject to Regional Remedial Action
Order HSA88/89016 and the Environmental Cleanup Agreement dated
January 11, 1992.
5.5 Environmental Communications. Landlord and Tenant shall
promptly after receipt or transmittal thereof, deliver to the other
copies of all material written communications given to or received
from any governmental agency, environmental consultant, or other
person or entity relating to Hazardous Substances in or removed from
the Premises, including, without limitation, copies of all claims,
reports, complaints, notices, warnings or asserted violations,
relating in any way to Hazardous Substances in, on, under or about the
Premises.
5.6 Survival. The representations, warranties and agreements of
the Parties set forth in this Article 5 shall survive the expiration
of the Lease Term or the termination of this Lease for any other
reason.
5.7 Inspection; Compliance. Landlord shall have the right to
enter the Premises at any time in the case of an emergency, and
otherwise at reasonable times upon reasonable prior notice for the
purpose of inspecting the condition of the Premises and for verifying
compliance by Tenant with this Lease, the Ground Lease, the Master
Lease and all Applicable Law. Any such inspection shall not disrupt or
disturb the ongoing operation of the Business. Landlord may employ
experts or consultants in connection therewith to advise Landlord with
respect to Tenant's activities, including but not limited to the
installation, operation, use, monitoring, maintenance or removal of
any Hazardous Substance or storage tank on or from the Premises. The
cost and expense of any such inspections shall be paid by Landlord,
unless a Breach (as defined in Section 12.1) of this Lease, a material
violation of an Applicable Law with respect to which Tenant is
obligated to pay for the costs or compliance under the terms of this
Lease, or Landlord's reasonable rules and regulations (provided that
Tenant has received written notice of such rules and regulations), or
a material contamination caused by Tenant is found to exist.
6. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.
6.1 Tenant's Obligations. Tenant, at Tenant's sole cost and
expense, shall maintain, operate and repair any and all Trade Fixtures
and Tenant owned Alterations and/or Utility Installations (as such
terms are defined in Section 6.3(a)). Although Landlord will be
providing normal janitorial services as provided below, Tenant shall
properly dispose of its own trash and waste
8
materials in waste receptacles designated by Landlord, and clean up
any extraordinary janitorial problems that it may cause in its conduct
of the Business. In addition, to the extent that Tenant or its
employees or agents damages any portion of the Premises or the
Building by any negligent or wrongful act or omission of such party,
Tenant shall repair any such damage at its sole cost and expense.
6.2 Landlord's Obligations. Except as otherwise provided in
Section 6.1 above, Landlord shall, at its sole cost and expense,
maintain, in good repair and condition, and service all portions of
the Building and the Premises including, but not limited to, the
foundation, roof, ceilings, floor coverings, downspouts, gutters,
plumbing fixtures, utility lines, windows, doors, plate glass,
exterior, interior, and demising walls, and all systems in the
Building, including, but not limited to, heating, ventilating, air
conditioning, and electrical systems, elevators, lighting facilities,
boilers, fired or unfired pressure vessels, fire alarm and/or smoke
detection systems and equipment and any other Utility Installations
that are not owned by Tenant. In addition, Landlord shall perform or
cause to be performed all maintenance, repair and other services to
the Common Areas and the Land, as and when the same are reasonably
necessary to maintain such areas in good condition and repair,
including, but not limited to, landscape maintenance, driveway and
parking area maintenance for the parking areas, any private streets
and roadways serving or providing access to the Building and the Land,
exterior lighting maintenance, waste removal, repair and maintenance
of walkways, cleaning supplies, miscellaneous building supplies,
external painting for the Building, exterior and interior Common Area
maintenance, insect and pest extermination, security guards or
security system for the Building, signs for the Building and other
miscellaneous maintenance. In addition, Landlord shall accept from
Tenant for disposal (by Tenant's depositing such items for storage as
specified by Landlord in writing) Tenant's spent Hazardous Substances
(in quantities generally comparable with those generated by the
Business as of the date of this Lease) ("Spent Materials") for
disposal in accordance with Applicable Law. To the extent that the
third-parties who haul away such Spent materials require that the
owner of such Spent Materials sign the manifest or other
documentation, Tenant shall sign such manifest or other documentation
as the owner thereof. Tenant shall reimburse Landlord for Landlord's
actual, documented, third-party costs incurred in having such Spent
Materials hauled away from the Land and Building in accordance with
Applicable Law. Tenant shall pay any amounts owing to Landlord under
the preceding sentence within thirty (30) days following Landlord's
delivery of a written invoice, together with supporting documentation,
for any such amounts.
6.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all floor coverings,
window coverings, air lines, power panels, electrical distribution,
security, fire protection
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systems, lighting fixtures, heating, ventilating, and air conditioning
equipment, plumbing and non-demising walls in, on, under or about the
Premises. The term "Trade Fixtures" shall mean Tenant's machinery and
equipment, including, but not limited to computer systems, computer
equipment, storage facilities, fences, partitions and other similar
items, that can be removed without doing irreparable damage to the
structural portions of the Premises. The term "Alterations" shall mean
any modification of the improvements on the Premises from that which
are provided by Landlord under the terms of this Lease, other than
Utility Installations or Trade Fixtures. Except as provided elsewhere
in this Lease, Tenant shall not make any Alterations or Utility
Installations in, on, under or about the Premises without (i)
Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed and (ii) the prior written consent of
the Ground Lessor and the Master Lessor, to the extent required under
the provisions of the Ground Lease and the Master Lease, as
applicable. As stated above, Landlord shall use commercially
reasonable efforts to obtain the consent of the Ground Lessor and the
Master Lessor, when required. Tenant shall not directly communicate
with the Ground Lessor or the Master Lessor.
(b) Consent. Any Alterations or Utility Installations that Tenant
shall desire to make, including, without limitation, any initial
tenant improvements that Tenant may desire, shall be presented to
Landlord in written form with proposed plans. All consents given by
Landlord shall be deemed conditioned upon: (i) Tenant's acquiring all
applicable permits required by governmental authorities; (ii) the
furnishing to Landlord of copies of such permits together with a copy
of the plans and specifications for the Alteration or Utility
Installation prior to commencement of the work thereof; and (iii)
compliance by Tenant with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations made
by Tenant during the Lease Term shall be done in a good and
workmanlike manner, with good and sufficient materials, and in
compliance with all Applicable Law. Tenant shall promptly upon
completion thereof furnish Landlord with as-built plans and
specifications therefor. Landlord may (but without obligation to do
so) condition its consent to any requested Alteration or Utility
Installation (x) that costs Fifty Thousand Dollars ($50,000) or more
upon Tenant's providing Landlord with a lien and completion bond in an
amount equal to the estimated cost of such Alteration or Utility
Installation and (z) upon Tenant's written undertaking to remove such
Alteration or Utility Installation at the end of the Lease Term.
(c) Indemnification. Tenant will not permit to remain, and will
promptly discharge at its cost and expense, all liens, encumbrances
and charges upon the Premises, or Building or Land, or part thereof,
arising out of the use or occupancy of the Premises by Tenant or by
reason of labor or materials furnished or claimed to have been
furnished or any construction, alteration, addition, repair or
demolition of any part of the Premises, or Building or Land, for or at
the request of Tenant. Landlord is hereby authorized to enter upon the
Premises at
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any time to post any notices which in its opinion shall be necessary
to hold Landlord harmless from any claim or liability arising out of
any work done on the Premises.
6.4 Ownership; Surrender.
(a) Ownership. All Alterations and Utility Installations made to
the Premises by Tenant shall be the property of and owned by Tenant,
but considered a part of the Premises. At the expiration of the Lease
Term, all such Alterations and Utility Installations shall remain a
part of the Premises and be surrendered to Landlord with the Premises
as provided below, except with respect to any Alterations or Utility
Installations which Tenant is obligated to remove from the Premises
under the provisions of Section 6.3(b)(z). In removing any such
Alterations and Utility Installations that Tenant is obligated to
remove hereunder, Tenant shall repair any material damage to the
Premises caused by such removal. Tenant's Trade Fixtures shall remain
the property of Tenant at all times and may be removed by Tenant at
any time, and shall be removed by Tenant at the expiration of the
Lease Term, and Tenant shall repair any material damage resulting from
such removal.
(b) Surrender. Tenant shall surrender the Premises by the end of
the last day of the Lease Term or any earlier termination of this
Lease, in the condition existing as of the Commencement Date,
reasonable wear and tear and damage by casualty excepted, with all of
the improvements and parts and surfaces thereof clean and free of
debris.
7. INSURANCE; INDEMNITY.
7.1 Landlord Insurance. Landlord shall maintain or cause to be
maintained at all times during the Lease Term all insurance required
to be maintained under the provisions of the Master Lease and Ground
Lease. Landlord shall cause Tenant to be named as an additional
insured under its policy of commercial general liability insurance.
7.2 Tenant Insurance. Tenant shall obtain and keep in force
during the Lease Term fire and extended coverage insurance on its
Alterations, Utility Installation and Trade Fixtures, and commercial
general liability insurance issued by insurers, with endorsements and
in amounts customary in the industry, naming the Ground Lessor, the
Master Lessor and Landlord as additional insureds thereunder.
7.3 Insurance Policies. Landlord and Tenant shall each cause to
be delivered to the other certificates evidencing the existence and
amounts of such insurance as required by this Lease. The certificates
shall contain a provision that the insurer will endeavor to provide
the other with thirty (30) days' prior written notice of cancellation.
Landlord and Tenant shall each endeavor to
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provide the other at least fifteen (15) days prior to the expiration
of such policies, with evidence of renewals or "insurance binders"
evidencing renewal thereof.
7.4 Waiver Of Subrogation. Without affecting any other rights or
remedies, Tenant and Landlord ("Waiving Party") each hereby releases
and relieves the other, the Ground Lessor and the Master Lessor (but
Tenant only does so with respect to the Ground Lessor and the Master
Lessor to the extent that each such party does so with respect to
Tenant) and waives its entire right to recover damages in tort against
such parties, for loss of or damage to the Waiving Party's property
arising out of or incident to the perils required to be insured
against under this Article 7. The effect of such releases and waivers
of the right to recover damages shall not be limited to the amount of
insurance required to be carried hereunder nor by any customary
deductibles applicable thereto. The provisions of this Section 7.4
shall not apply if a Party breaches a duty to insure hereunder.
7.5 Indemnity. Tenant agrees to pay, and to protect, indemnify
and save harmless Landlord, from and against, any and all liabilities,
losses, damages, costs, expenses (including reasonable attorneys' fees
and expenses of Tenant and Landlord), causes of action, suits, claims
(including, without limitation, any claim of the Master Lessor or the
Ground Lessor), demands or judgments of any nature arising from (i)
Tenant's use of the Premises or the Land or operation of the Business
or (ii) Tenant's failure to perform its obligations under this Lease,
except to the extent caused by Landlord's gross negligence or wrongful
acts or omissions. Landlord agrees to pay, and to protect, indemnify
and save harmless Tenant, from and against any and all liabilities,
losses, damages, costs, expenses (including reasonable attorneys' fees
and expenses of Landlord and Tenant), causes of action, suits, claims,
demands or judgments of any nature arising from (i) Landlord's use of
the portion of the Building that is for Landlord's exclusive use or
performance of its business operation within the Building and upon the
Land or (ii) Landlord's failure to perform its obligations under this
Lease, except to the extent caused by Tenant's gross negligence or
wrongful acts or omissions. The agreements of Tenant and Landlord
under this Section 7.5 shall survive the termination of this Lease and
each party shall continue to be liable hereunder notwithstanding such
termination.
8. DAMAGE OR DESTRUCTION.
8.1 Termination; Restoration. In the event of any damage or
destruction of the Premises or the Building that results in the Ground
Lessor or the Master Lessor having any right to terminate the Ground
Lease or the Master Lease, as applicable, which termination right is
in fact exercised by the Ground Lessor or the Master Lessor, this
Lease shall terminate as of the date of such termination of the Ground
Lease or the Master Lease, as applicable, with no liability therefor
on the part of Landlord. To the extent that neither the Ground Lessor
nor the Master Lessor is entitled to terminate or chooses to terminate
the
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Ground Lease or the Master Lease following any such damage or
destruction, Landlord shall not exercise any separate termination
right that it may have under the Ground Lease or the Master Lease
without first obtaining the prior written consent of Tenant, which
Tenant may withhold in its sole discretion. In the event that this
Lease is not terminated following any damage or destruction, Landlord
shall proceed to satisfy its obligations to repair and restore under
the Master Lease and the Ground Lease, to a condition suitable for
Tenant's conduct of the Business, as diligently as possible, and this
Lease shall remain in full force and effect. Notwithstanding the
foregoing, if as a result of such damage or destruction, Tenant is
unable to operate the Business at the Premises and the necessary
repair and restoration to permit business operations cannot be
completed within ninety (90) days after occurrence of such damage or
destruction, as reasonably determined by Tenant, Tenant shall have the
right to terminate this Lease by written notice delivered to Landlord
within thirty (30) days following the date of such damage or
destruction. During any period of time that Tenant is unable
reasonably to conduct the Business in the Premises as a result of any
damage or destruction, Base Rent shall be abated.
8.2 Waive Statutes. Landlord and Tenant agree that the terms of
this Lease shall govern the effect of any damage to or destruction of
the Premises with respect to the termination of this Lease and hereby
waive the provisions of any present or future Applicable Law to the
extent inconsistent herewith.
9. REAL PROPERTY TAXES.
9.1 Payment Of Taxes. Landlord shall pay all real property taxes,
and special or general assessments that may be imposed upon the lessee
under the Master Lease during the Lease Term. Tenant shall not be
responsible for the payment of any real property taxes or special or
general assessments applicable to the Premises, the Building, or the
Land. Tenant shall, however, be responsible for and shall pay prior to
delinquency all taxes imposed upon Tenant's Alterations, Utility
Installations and Trade Fixtures.
10. UTILITIES.
10.1 Utilities. Landlord shall pay for and, to the extent
commercially reasonably available, shall obtain and provide to Tenant,
all water, gas, heat, light, power, trash disposal and other utilities
and services reasonably necessary for the conduct of the Business,
together with any taxes thereon (collectively, the "Utility Charges").
Tenant shall not be responsible for the payment of any Utility Charges
applicable to the Premises, the Building, or the Land. If,
notwithstanding Landlord's commercially reasonable efforts, water,
gas, heat, light, power, trash disposal or any other utilities or
services previously supplied to the Premises become unavailable from
the public utility that provides them as of the date of this Lease,
then Landlord shall make available to Tenant, at Landlord's sole cost,
any substitute utilities or services that Landlord is able to procure
for the conduct of
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its own operations within the Building, on the same terms and
conditions that apply to Landlord's use thereof. Notwithstanding the
foregoing, if such utilities and services are unavailable to Tenant to
a degree that, in Tenant's reasonable discretion, prevents Tenant from
conducting the Business for ten (10) or more consecutive days, then
Tenant may, by delivery of written notice to Landlord, terminate this
Lease. Such notice may be given at any time following such tenth
consecutive day and prior to the date that such utilities or services
are restored.
10.2 Telephone Services. Landlord shall make telephone service
available for Tenant's use within the Premises on the same basis as
the other utilities and services provided above (except with respect
to reimbursement, as provided below), and on the terms and subject to
the conditions set forth in Exhibit B hereto. Tenant shall reimburse
Landlord for the cost of such service as provided on Exhibit B, within
thirty (30) days following Tenant's receipt of Landlord's invoice
therefor, together with supporting documentation.
11. ASSIGNMENT AND SUBLETTING.
11.1 Tenant's Right To Assign Or Sublet. Tenant shall have no
right to assign its interest in this Lease or to sublet all or any
portion of its interest in the Premises, whether voluntarily,
involuntarily or by operation of law, without Landlord's prior written
consent, which consent may be given or withheld in Landlord's sole
discretion. Notwithstanding the foregoing, Tenant may assign its
interest in this Lease for financing purposes as set forth in Section
11.2 below and may assigns its interest in this Lease or sublet all or
any portion of the Premises to any Affiliate, as defined below.
"Affiliate" means a person or entity that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or
is under common control with Tenant.
11.2 Tenant's Right To Assign for Financing Purposes.
Notwithstanding the provisions of Section 11.1, Tenant may, without
Landlord's consent, assign or encumber by mortgage or deed of trust,
or other proper instrument ("Leasehold Encumbrance"), its leasehold
interest in the Premises and Tenant's right, title and interest in
this Lease, as security for any indebtedness of Tenant or its
Affiliates. The execution of any such mortgage, or deed of trust, or
other instrument, or the foreclosure thereof, or any sale thereunder,
either by judicial proceedings or by virtue of any power reserved in
such mortgage or deed of trust, or conveyance by Tenant to the holder
of such indebtedness, or the exercise of any right, power or privilege
reserved in any mortgage or deed of trust, shall not be held as a
violation of any of the terms or conditions hereof, or as an
assumption by the holder of such indebtedness personally of the
obligations hereof. Any such Leasehold Encumbrance shall expressly
provide that any foreclosure thereof (or deed in lieu thereof) may be
undertaken only for the purpose of continuing the Business upon the
Premises. No such encumbrance, foreclosure, conveyance or exercise of
right shall relieve Tenant of its liability hereunder. The holder of
any such mortgage, deed of trust
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or other security instrument is herein referred to as a "Leasehold
Lender". If a Leasehold Lender shall have given Landlord written
notice of the creation of a Leasehold Encumbrance, Landlord shall give
to such Leasehold Lender a copy of each notice of any claimed default
by Tenant prior to exercising any remedies against Tenant, addressed
to such Leasehold Lender at the address last furnished to Landlord.
Such Leasehold Lender shall thereupon have a period of thirty (30)
days, after service of such notice upon it, to remedy the default or
cause the same to be remedied. Such Leasehold Lender, in case Tenant
shall be in default hereunder, shall, within such period and otherwise
as herein provided, have the right to remedy such default, or cause
the same to be remedied. Landlord will accept performance by the
Leasehold Lender of any covenant, condition or agreement on Tenant's
part to be performed hereunder with the same force and effect as
though performed by Tenant. No event of default of Tenant with respect
to the performance of work required to be performed, or acts to be
done, or conditions to be remedied, shall be deemed to exist, so long
as Leasehold Lender shall, in good faith, have commenced promptly to
rectify and to prosecute the same to completion with diligence and
continuity. If Leasehold Lender cannot reasonably take the action
required to cure the default without being in possession of the
Premises, the time of Leasehold Lender to cure the default shall be
deemed extended to include the period of time reasonably required by
such Leasehold Lender to obtain such possession through a trustee's
sale with due diligence; provided, however, that during such period
all other obligations of Tenant under this Lease, including the
payment of rent and other sums required to be paid by Tenant, are
being duly performed. No Leasehold Lender shall become liable under
the provisions of this Lease, unless and until such time as it
becomes, and then only for as long as it remains, the owner of the
leasehold interest created by this Lease ("Leasehold Estate").
11.3 Consent of the Ground Lessor and the Master Lessor.
Notwithstanding any other provision set forth in Sections 11.1 or 11.2
above, no Leasehold Encumbrance or other assignment of Tenant's
interest in this Lease or subletting of all or any portion of the
Premises shall be of any force or effect unless and until any required
consent of the Ground Lessor under the Ground Lease or the Master
Lessor under the Master Lease has been obtained. Landlord will use
reasonable efforts to obtain any required consent from the Ground
Lessor or the Master Lessor for any assignment or subletting that is
otherwise permitted under the provisions of Sections 11.1 or 11.2
above.
12. BREACH; REMEDIES.
12.1 Breach. As used in this Lease, a "Breach" is defined as a
failure by Tenant to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Tenant under this Lease
following written notice and opportunity to cure as set forth below.
Where a grace period for cure after notice is specified herein, the
failure by Tenant to cure such Breach prior to the
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expiration of the applicable grace period shall entitle Landlord to
pursue the remedies set forth in Section 12.2:
(a) The failure by Tenant to make any payment of Base Rent or any
other monetary payment required to be made by Tenant hereunder as and
when due, where any such failure continues for a period of five (5)
days following written notice thereof by or on behalf of Landlord to
Tenant.
(b) The failure by Tenant to comply with the terms, covenants,
conditions or provisions of this Lease that are to be observed,
complied with or performed by Tenant, other than those described in
Subsection 12.1 (a) above or (c) below, where such Breach continues
for a period of thirty (30) days after written notice thereof by or on
behalf of Landlord to Tenant; provided, however, that if the nature of
Tenant's Breach is such that more than thirty (30) days are reasonably
required for its cure, then it shall not be deemed to be a Breach of
this Lease by Tenant if Tenant commences such cure within said thirty
(30) day period and thereafter diligently prosecutes such cure to
completion.
(c) The occurrence of any of the following events: (i) the making
by Tenant of any general arrangement or assignment for the benefit of
creditors; (ii) Tenant's becoming a "debtor" as defined in 11 U.S.C.
ss. 101 or any successor statute thereto (unless, in the case of a
petition filed against Tenant, the same is dismissed within sixty (60)
days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where possession is
not restored to Tenant within sixty (60) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease,
where such seizure is not discharged within sixty (60) days.
12.2 Remedies. In the event of a Breach of this Lease by Tenant,
as defined in Section 12.1, with or without further notice or demand,
and without limiting Landlord in the exercise of any right or remedy
which Landlord may have by reason of such Breach, Landlord may:
(a) Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant
shall immediately surrender possession of the Premises to Landlord. In
such event, Landlord shall be entitled to recover from Tenant: (i) the
worth at the time of the award of the unpaid Base Rent which had been
earned at the time of termination; (ii) the worth at the time of award
of the amount by which the unpaid Base Rent which would have been
earned after termination until the time of award exceeds the amount of
such rental loss that Tenant proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by
which the unpaid Base Rent for the balance of the originally scheduled
Lease Term after the time of award exceeds the amount of such rental
loss that Tenant proves could be
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reasonably avoided; and (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure
to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including the
cost of recovering possession of the Premises, expenses of reletting
and reasonable attorneys' fees. The worth at the time of award of the
amount referred to in provision (iii) of the prior sentence shall be
computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%). The worth at the time of award of the amount referred to
in provisions (i) and (ii) of the second prior sentence shall be
computed by allowing interest at a rate equal to 10 percent per annum.
Efforts by Landlord to mitigate damages caused by Tenant's Breach of
this Lease shall not waive Landlord's right to recover damages under
this Section. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Landlord shall have the right
to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lanlord may reserve therein the right to
recover all or any part thereof in a separate suit for such rent
and/or damages. Notwithstanding the foregoing, in no event shall
Landlord be entitled to recover an amount greater than six (6) months
of Base Rent.
(b) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the State in which
the Premises are located. However, Landlord shall have a duty to
mitigate its damages in connection with the pursuit of any such other
remedy or the remedies herein provided.
(c) The expiration or termination of this Lease and/or the
termination of Tenant's right to possession shall not relieve either
Party from liability under any indemnity provisions of this Lease as
to matters occurring or accruing during the Lease Term.
12.3 Breach By Landlord. In addition to any other rights and
remedies Tenant may have under this Lease, under Applicable Laws or at
equity, if Landlord shall fail to perform any obligation on Landlord's
part to be performed hereunder for a period of thirty (30) days
following the date of Tenant's delivery of written notice to Landlord
of such failure, or, if such failure by its nature cannot be cured
within a thirty-day period, than within such longer period of time as
may be reasonably required so long as Landlord commences such cure of
such failure within such thirty-day period and thereafter diligently
prosecutes such cure to completion, Tenant may, but shall have no
obligation to, after reasonable notice or without notice if in
Tenant's judgment an emergency shall exist, perform such obligation at
Landlord's expense and offset the cost thereof against the payment of
rent hereunder, or, on written notice to Landlord, Tenant may demand
reimbursement therefor or part thereof from Landlord, and Landlord
shall
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promptly reimburse Tenant after receipt of written notice, demand and
documentation.
13. CONDEMNATION.
13.1 Termination; Restoration. If the Premises or the Building,
or any portion thereof are taken under power of eminent domain or sold
under the threat of the exercise of said power (all of which are
herein called ("Condemnation") that results in the Ground Lessor or
the Master Lessor having any right to terminate the Ground Lease or
the Master Lease, as applicable, which termination right is in fact
exercised by the Ground Lessor or the Master Lessor, this Lease shall
terminate as of the date of such termination of the Ground Lease or
the Master Lease, as applicable, with no liability therefor on the
part of Landlord. To the extent that neither the Ground Lessor nor the
Master Lessor is entitled to terminate or chooses to terminate the
Ground Lease or the Master Lease following any such Condemnation,
Landlord shall not exercise any separate termination right that it may
have under the Ground Lease or the Master Lease without first
obtaining the prior written consent of Tenant, which Tenant may
withhold in its sole discretion. In the event that this Lease is not
terminated following any Condemnation, Landlord shall proceed to
satisfy its obligations to repair and restore under the Master Lease
and the Ground Lease, to a condition suitable for Tenant's conduct of
the Business, as diligently as possible, and this Lease shall remain
in full force and effect. Notwithstanding the foregoing, if as a
result of such Condemnation, Tenant is unable to operate the Business
at the Premises and the necessary repair and restoration to permit
business operations cannot be completed within ninety (90) days after
occurrence of such Condemnation, as reasonably determined by Tenant,
Tenant shall have the right to terminate this Lease by written notice
delivered to Landlord within thirty (30) days following the date of
such Condemnation. During any period of time that Tenant is unable
reasonably to conduct the Business in the Premises, or any portion
thereof, as a result of any Condemnation, Base Rent shall be abated in
proportion to the degree to which Tenant's use of the Premises is
impaired for the entire period Tenant is unable to conduct its
business at the Premises in the ordinary course as a result of such
Condemnation.
13.2 Award. The Award for any Condemnation action shall be
applied as provided in the Ground Lease and the Master Lease.
Notwithstanding the foregoing, Tenant may make its own separate claim
for any award for its Trade Fixtures (as well as any Alterations and
Utility Installations that Tenant owns and is required to remove from
the Premises at the expiration of the Lease under the provisions of
Section 6.3(b)(z)) that may be taken and for its costs of relocation.
13.3 Waive Statutes. Landlord and Tenant agree that the terms of
this Lease shall govern the effect of any Condemnation of the Premises
with
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respect to the termination of this Lease and hereby waive the
provisions of any present or future Applicable Law to the extent
inconsistent herewith.
14. BROKERS.
Tenant and Landlord each represents and warrants to the other that it
has had no dealings with any person, firm, broker or finder in
connection with the negotiation of this Lease and/or the consummation
of the transaction contemplated hereby, and that no broker or other
person, firm or entity is entitled to any commission or finder's fee
in connection with said transaction. Tenant and Landlord do each
hereby agree to indemnify, protect, defend and hold the other harmless
from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including
any costs, expenses and attorneys' fees reasonably incurred with
respect thereto.
15. TENANCY STATEMENT.
Each Party (as "Responding Party") shall within twenty-one (21)
days after written notice from the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party a
statement in writing specifying the term of this Lease, listing all of
the documents constituting this Lease (including any amendments
hereto), confirming whether this Lease is in full force and effect and
confirming whether any breaches have occurred hereunder and specifying
any defenses or offsets available to Tenant. Such statement shall also
specify the period through which rent and other charges have been paid
and shall confirm whether any security deposit is held by Landlord
hereunder.
16. LANDLORD'S LIABILITY.
The term "Landlord" as used herein shall mean the owner or owners
at the time in question of tenant's interest in the Master Lease. In
the event of a transfer of Landlord's title or interest in the
Premises or in this Lease, Landlord shall deliver to the transferee or
assignee (in cash or by credit) any unused or unearned funds of
Tenant, if any, held by Landlord at the time of such transfer or
assignment, and the transferee or assignee shall be deemed to have
assumed the obligations of Landlord hereunder effective as of the date
of the transfer. The transferor shall remain obligated under this
Lease only for the period during which such entity owned the tenant's
interest in the Master Lease and not thereafter.
17. SEVERABILITY.
The invalidity of any provision of this Lease, as determined by a
court of competent jurisdiction, shall in no way affect the validity
of any other provision hereof.
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18. INTEREST ON PAST-DUE OBLIGATIONS.
Any monetary payment due to one Party from the other hereunder,
other than late charges, not received within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of ten percent
(10%) per annum, but not exceeding the maximum rate allowed by law.
19. TIME OF ESSENCE.
Time is of the essence with respect to the performance of all
obligations to be performed or observed by the Parties under this
Lease.
20. RENT DEFINED.
All monetary obligations of Tenant to Landlord under the terms of
this Lease are deemed to be rent.
21. NO PRIOR OR OTHER AGREEMENTS.
This Lease and the Purchase Agreement contain all agreements
between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be
effective; provided that, to the extent any conflicts exist between
the Purchase Agreement, including all exhibits thereto, and this
Lease, this Lease shall control.
22. NOTICES.
22.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by certified or registered mail or by
overnight courier or mail service that guarantees next-day delivery
and provides a receipt, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a
manner specified in this Article 22. The following are the address(es)
of the Parties for delivery or mailing of notice purposes:
If to Tenant: If to Landlord:
TSMD Acquisition Corp. WATKINS-JOHNSON COMPANY
c/o Mentmore Holdings, Inc. 3333 Hillview Avenue
1430 Broadway, 13th Floor Palo Alto, California 94304-1223
New York, NY 10018-3308 Attention: Treasurer
Attn: Michael D. Schenker, Esq.
Either Party may, by written notice to the other, specify a
different address for notice purposes. A copy of all notices required
or permitted to be given to Landlord hereunder shall be concurrently
transmitted to such party or parties at
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such addresses as Landlord may from time to time hereafter designate
by written notice to Tenant.
22.2 Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown
on the receipt card or if no delivery date is shown, the postmark
thereon. Notice delivered by overnight courier that guarantees next
day delivery and provides a receipt shall be deemed given twenty-four
(24) hours after delivery of the same to the service or courier. If
any notice is transmitted by facsimile transmission or similar means,
the same shall be deemed served or delivered upon telephone
confirmation of receipt of the transmission thereof, provided a copy
is also delivered via delivery or mail. If notice is received on a
Saturday, Sunday or legal holiday, or after normal business hours, it
shall be deemed received on the next business day.
23. WAIVERS.
No waiver by Landlord of the Breach of any term, covenant or
condition hereof by Tenant shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Breach by Tenant of
the same or of any other term, covenant or condition hereof.
24. RECORDING.
Neither Landlord nor Tenant shall record either this Lease or any
memorandum hereof in the Official Records of Santa Clara County,
California.
25. CUMULATIVE REMEDIES.
No remedy or election hereunder shall be deemed exclusive but
shall, wherever possible, be cumulative with all other remedies at law
or in equity.
26. BINDING EFFECT; CHOICE OF LAW.
This Lease shall be binding upon the Parties, their personal
representatives, successors and assigns and be governed by the laws of
the State in which the Premises are located. Any litigation between
the Parties hereto concerning this Lease shall be initiated in the
County in which the Premises are located.
27. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
27.1 Subordination. Subject to the provisions of Section 27.3
below, this Lease shall be subject and subordinate to the Ground
Lease, the Master Lease, and any mortgage, deed of trust, or other
hypothecation or security device (collectively, "Senior Lien"), now or
hereafter placed by Landlord upon the real property of which the
Premises are a part, to any and all advances made on the security
thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof. If any Lender shall elect to have
this Lease superior to
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the lien of its Senior Lien and shall give written notice thereof to
Tenant, this Lease shall be deemed prior to such Senior Lien,
notwithstanding the relative dates of the documentation or recordation
thereof.
27.2 Attornment. Subject to the provisions of Section 27.3 below,
Tenant agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Senior Lien.
27.3 Self-Executing. The agreements contained in this Article 27
shall be effective without the execution of any further documents.
However, upon written request from Landlord or a Lender in connection
with a sale, financing or refinancing of the Premises, Tenant and
Landlord shall execute such further writings as may be reasonably
required to separately document any such subordination or non-
subordination, or attornment agreement as is provided for herein.
Notwithstanding the foregoing, Tenant's subordination of this Lease
shall be subject to receiving customary non-disturbance protection
from the applicable holder of any Senior Lien to the effect that
Tenant's possession and this Lease will not be disturbed so long as
Tenant is not in Breach hereof and attorns to the record owner of the
Premises, subject to any right of Tenant of to cure such Breach.
27.4 No Merger. There shall be no merger of this Lease or the
Ground Lease or the Master Lease or of any leasehold or subleasehold
estate hereby or thereby created with the fee estate or the title to
the Land or any portion thereof or interest therein by reason of the
fact that the same person may acquire or hold, directly or indirectly,
this Lease, the Ground Lease or the Master Lease or any leasehold or
subleasehold estate hereby or thereby created or any interest in this
Lease or in the Ground Lease or the Master Lease or in any such
leasehold or subleasehold estate as well as the fee estate in or title
to the Land or any portion thereof or interest therein.
28. ATTORNEYS' FEES.
If any Party brings an action or proceeding to enforce or
interpret the terms hereof or declare rights hereunder, the Prevailing
Party (as hereafter defined) in any such proceeding, action or appeal
thereon, shall be entitled to reasonable attorneys' fees, court costs
and fees of experts. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall
include, without limitation, a Party who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment or the abandonment by the other Party of its
claim or defense. The attorneys' fees awarded shall not be computed in
accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred.
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29. LANDLORD'S ACCESS.
Landlord shall have the right to enter the Premises at any time
in the case of an emergency, and otherwise at reasonable times upon
reasonable notice, for the purpose of performing its obligations
hereunder.
30. SIGNS.
Tenant may install such signs as are reasonably required to
advertise Tenant's business and which are consistent with the existing
signage at the Premises that relates to the Business. Any such signage
shall be subject to Landlord's reasonable approval (as well as any
required approval from the Ground Lessor or the Master Lessor),
subject to Applicable Law. The installation of any sign on the
Premises by or for Tenant shall be subject to the provisions of
Article 6 (Maintenance; Repairs; Utility Installations; Trade Fixtures
And Alterations).
31. HOLDING OVER.
If Tenant holds over after the expiration of the Lease Term,
Tenant shall pay Base Rent for each month that such hold over
continues at a rate equal to 100 percent of the Base Rent in effect
immediately prior to the expiration of the Lease Term. Additionally,
Tenant shall save, protect, defend, indemnify and hold Landlord
harmless from and against any and all Losses (as such term is defined
in the Purchase Agreement) suffered by Landlord as result of such hold
over, including, without limitation, lost revenue due to Landlord's
inability to relet the Premises.
32. QUIET POSSESSION.
Upon payment by Tenant of the rent for the Premises and the
observance and performance of all of the covenants, conditions and
provisions on Tenant's part to be observed and performed under this
Lease, Tenant shall have quiet possession of the Premises for the
entire Lease Term.
33. CONSENTS.
Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party,
such consent shall not be unreasonably withheld or delayed. Landlord's
consent to any act, assignment of this Lease or subletting of the
Premises by Tenant shall not constitute an acknowledgment that no
Breach by Tenant of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Breach, except as may be
otherwise specifically stated in writing by Landlord at the time of
such consent.
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34. PERFORMANCE UNDER PROTEST.
If at any time a dispute shall arise as to any amount or sum of
money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall
survive the right on the part of said Party to institute suit for
recovery of such sum. If it shall be adjudged that there was no legal
obligation on the part of said Party to pay such sum or any part
thereof, said Party shall be entitled to recover such sum (with
interest from the date paid until the date repaid at the rate provided
in Article 18) or so much thereof as it was not legally required to
pay under the provisions of this Lease.
35. AUTHORITY.
If either Party hereto is a corporation, trust or general or
limited partnership, each individual executing this Lease on behalf of
such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. If either Party is a
corporation, trust or partnership, such Party shall, within thirty
(30) days after request by the other Party, deliver to such Party
evidence of such authority.
36. CONFLICT.
Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
37. OFFER.
Preparation of this Lease by either Party and submission of same
to the other Party shall not be deemed an offer to lease. This Lease
is not intended to be binding until executed by all Parties hereto.
38. AMENDMENTS.
This Lease may be modified only in writing, signed by the Parties
in interest at the time of the modification.
39. WAIVER OF STATUTORY LIEN.
Landlord shall not be entitled to any statutory lien or security
interest in any personal property or Tenant Owned Alterations, Utility
Installations or Trade Fixtures located on the Premises.
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40. MULTIPLE PARTIES.
Except as otherwise expressly provided herein, if more than one
person or entity is named herein as either Landlord or Tenant, the
obligations of such multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such
Landlord or Tenant.
The parties hereto have executed this Lease at the place and on
the dates specified above their respective signatures.
Executed at Executed at
on on
by LANDLORD: by TENANT:
WATKINS-JOHNSON COMPANY, W-J TSMD INC.
a California corporation a California corporation
By: By:
------------------------------ -------------------
Name: Name:
------------------------------ -------------------
Title: Title:
------------------------------ -------------------
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EXHIBIT A
THE LAND
All of that certain real property situate in the City of Palo Alto, County
of Santa Clara, State of California, described as follows:
BEGINNING at a concrete highway monument situate on the Southwesterly line
of El Camino Real (State Highway) opposite Engineer's Station 144+27.00 as
surveyed by the California Division of Highways, as said Southwesterly line
was established by that certain Decree in Condemnation, a certified copy of
which Decree was filed for record in the Office of the Recorder of the
County of Santa Clara, State of California, on July 7, 1930 in Book 520 of
Official Records, at page 571, said monument also marks the point of
intersection of said Southwesterly line with the Southeasterly line of that
certain 1289 acre tract of land described in the Deed from Evelyn C.
Crosby, et al, to Leland Stanford dated September 8, 1885, recorded
September 8, 1885 in Book 80 of Deeds, at page 382, Santa Clara County
Records;
running thence along said line of said 1289 acre tract and its
Southwesterly prolongation, South 33(degree) 14' 44" West 4494.10 feet to
the most Westerly corner of that certain 3.268 acre parcel leased by The
Board of Trustees of The Leland Stanford Junior University to The
Prudential Insurance Company of America by that certain Agreement adding
additional lands to lease dated as of December 12, 1958, a memorandum of
which said Agreement was recorded December 31, 1958 in the office of the
Recorder of the County of Santa Clara, State of California, in Book 4276 of
Official Records, at page 70 and to the true point of beginning of the
parcel to be described;
thence from said true point of beginning along the Southwesterly line
of said parcel so leased to said The Prudential Insurance Company of
America, South 56(degree) 45' 20" East 274.47 feet to a point on the
Northwesterly boundary of that certain 16.242 acre parcel leased by The
Board of Trustees of The Leland Stanford Junior University to Kern County
Land Company by Lease dated as of November 1, 1959, a memorandum of said
Lease was recorded in the office of the Recorder of the County of Santa
Clara, State of California, on December 8, 1959 in Book 4630 of Official
<PAGE>
Records, at page 286;
thence along said Northwesterly line of said parcel so leased to said
Kern County Land Company, South 43(degree) 39' 32" West 628.80 feet to a
point on the Northeasterly line of Hillview Avenue, at which point a radial
line bears North 69(degree) 27' 05" East;
thence along said Northeasterly line of Hillview Avenue, Northwesterly
along the arc of a curve to the left, having a radius of 430.00 feet
through a central angle of 36(degree) 12' 25", a distance of 271.73 feet;
thence continuing along the Northeasterly line of Hillview Avenue,
56(degree) 45' 20" West 383.34 feet; thence along the arc of a tangent
curve to the right, having a radius of 40.00 feet, through a central angle
of 90(degree), a distance of 62.83 feet to a point on the Southeasterly
line of Hanover Street;
thence Northeasterly along said Southeasterly line, North 33(degree)
14' 40" East 329.54 feet to the most Westerly corner of that certain 22.669
acre parcel leased by The Board of Trustees of The Leland Stanford Junior
University to Lockheed Aircraft Corporation by Lease dated as of March 14,
1956 and recorded in the office of the Recorder of the County of Santa
Clara, State of California, on January 17, 1957 in Book 3709 of Official
Records, at page 453;
thence Southeasterly along the Southwesterly line of said 22.669 acre
parcel South 71(degree) 50' 13" East 590.33 feet to the true point of
beginning.
<PAGE>
EXHIBIT A-1
SITE PLAN
[GRAPHICS-- Building layouts of upper and lower Building 6 marked to
indicate areas of Stellex occupancy]
<PAGE>
EXHIBIT B
Telephone Services
Promptly following the date of this Lease, the Parties shall negotiate
in good faith to produce a replacement for this Exhibit B, setting forth
the precise telephone services that will be made available to Tenant and a
reasonable methodology for determining how Tenant will pay Landlord for
such telephone services. The methodology shall be based on the number of
telephone lines, the number of people using the telephone services or such
other reasonable methodology as may be agreed to by the Parties.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to Registration Statement
No. 333-41939 on Form S-4 of our report dated April 11, 1997 (except for Note
10, as to which the date is July 1, 1997), on our audits of the consolidated
financial statements and financial statement schedule of Kleinert Industries,
Inc. and Subsidiaries. We also consent to the reference to our firm under the
caption 'Experts'.
Coopers & Lybrand L.L.P.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
January 28, 1998
<PAGE>
EXHIBIT 23.2
We consent to the use in this Amendment No. 2 to Registration Statement No,
333-41939 of Stellex Industries, Inc. on Form S-4 of our report dated December
5, 1997 relating to the balance sheet of Stellex Industries Inc. as of September
5, 1997; our report dated November 4, 1997 relating to the financial statements
of the Tactical Subsystems and Microwave Devices Sectors of the Watkins-Johnson
Company; and to the references to us under the heading 'Experts.'
/s/ Deloitte & Touche LLP
San Jose, California
January 29, 1998
