<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 29, 1998
STELLEX INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
333-41939 13-3971931
(Commission File Number) (IRS Employer Identification No.)
1430 Broadway, 13th Floor
New York, New York 10018
(Address of Principal Executive Offices) (Zip Code)
(212) 391-1392
(Registrant's Telephone Number, Including Area Code)
None
(Former name or former address, if changed since last report.)
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
Attached are the financial statements as required by Item 7
of Form 8-K. The sole purpose of this Form 8-K/A filing of the acquired
business is to provide the financial statements which were excluded from the
Form 8-K filing dated June 15, 1998, pursuant to Item 7(a)(4) of Form 8-K:
(1) Monitor Aerospace Corporation and Subsidiary
Report on Audits of Consolidated Financial Statements
for the Years Ended May 31, 1997 and 1996 and
Independent Auditors' Report
(2) Monitor Aerospace Corporation and Subsidiary
Consolidated Financial Statements as of and for the Nine
Months Ended February 28, 1998 and Independent Auditors'
Report
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STELLEX INDUSTRIES, INC.
Date: August 13, 1998 By: /s/ William L. Remley
--------------------------
William L. Remley
President and
Chief Executive Officer
2
<PAGE>
MONITOR AEROSPACE CORPORATION
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997 AND 1996
CONTENTS
Page
----
FINANCIAL STATEMENTS:
Independent auditors' report F-1
Consolidated balance sheets as of May 31, 1997 and 1996 F-2
Consolidated statements of income for the
years ended May 31, 1997 and 1996 F-3
Consolidated statement of stockholders' equity
for the years ended May 31, 1997 and 1996 F-4
Consolidated statements of cash flows for the
years ended May 31, 1997 and 1996 F-5
Notes to financial statements F-6 - F-14
<PAGE>
Independent Auditors' Report
Board of Directors
Monitor Aerospace Corporation
Amityville, New York
We have audited the consolidated balance sheets of Monitor Aerospace
Corporation and Subsidiary as of May 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Monitor
Aerospace Corporation and Subsidiary at May 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Holtz Rubenstein & Co., LLP
Melville, New York
July 30, 1997
F-1
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
May 31,
------------------------
ASSETS 1997 1996
------ -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 265 $ 100
Accounts receivable, net 7,738 10,635
Inventories, net of progress billings 24,812 20,753
Prepaid expenses and other current assets 910 715
-------- --------
Total current assets 33,725 32,203
PROPERTY, PLANT AND EQUIPMENT, net 14,573 13,908
OTHER ASSETS 383 523
-------- --------
$ 48,681 $ 46,634
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,747 $ 6,887
Billings in excess of costs and estimated
earnings on uncompleted contracts 875 --
Income taxes payable 310 383
Accrued compensation and related expenses 2,435 1,379
Accrued expenses and other current liabilities 1,325 836
Current portion of long-term debt 1,925 2,075
Deferred income taxes 291 104
-------- --------
Total current liabilities 11,908 11,664
-------- --------
LONG-TERM DEBT 23,448 24,214
-------- --------
DEFERRED INCOME TAXES 3,064 2,314
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 2,200 shares authorized;
1,023.4 and 1,025.2 shares issued, respectively 147 147
Additional paid-in capital 2,255 1,958
Unearned compensation (359) (516)
Retained earnings 8,218 6,853
-------- --------
10,261 8,442
-------- --------
$ 48,681 $ 46,634
======== ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Years Ended
May 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
NET SALES $ 58,915 $ 44,932
-------- --------
COSTS AND EXPENSES:
Cost of sales 46,741 36,405
General and administrative 6,323 3,930
-------- --------
53,064 40,335
-------- --------
INCOME FROM OPERATIONS 5,851 4,597
-------- --------
OTHER INCOME (EXPENSE):
Other income 142 193
Interest expense (2,865) (2,606)
-------- --------
(2,723) (2,413)
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,128 2,184
INCOME TAX PROVISION 1,584 1,352
-------- --------
NET INCOME $ 1,544 $ 832
======== ========
NET INCOME PER SHARE $ 1,408 $ 665
======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 1,096.6 1,251.3
======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock
2,200 Shares
Authorized
No Par Value
---------------------- Additional
Stated Paid-in Unearned Retained
Total Shares Amount Capital Compensation Earnings
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 $ 9,783 1,232.7 $ 176 $ 1,785 $ (461) $ 8,283
Stock compensation arrangements 121 17.6 3 173 (55) --
Common stock redemption and retirement (2,294) (225.1) (32) -- -- (2,262)
Net income 832 -- -- -- -- 832
-------- ------- -------- -------- -------- --------
Balance, May 31, 1996 8,442 1,025.2 147 1,958 (516) 6,853
Stock compensation arrangements 318 14.7 2 159 157 --
Common stock redemption and retirement (181) (16.5) (2) -- -- (179)
Income tax benefit from stock redemption 138 -- -- 138 -- --
Net income 1,544 -- -- -- -- 1,544
-------- ------- -------- -------- -------- --------
Balance, May 31, 1997 $ 10,261 1,023.4 $ 147 $ 2,255 $ (359) $ 8,218
======== ======= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts expressed in thousands)
<TABLE>
<CAPTION>
Years Ended
May 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,544 $ 832
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,427 1,328
Deferred income taxes 937 940
Stock bonus plan compensation 318 121
Tax benefit from redemption of stock 138 --
Gain on sale of investment of affiliate -- (193)
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 2,897 (4,445)
Inventories (4,059) (2,169)
Prepaid expenses and other current assets (195) 290
Other assets 22 (49)
Increase (decrease) in liabilities:
Accounts payable (2,140) 2,231
Billings in excess of costs and estimated
earnings on uncompleted contracts 875 --
Income taxes payable (73) 306
Accrued compensation and related expenses 1,056 (111)
Accrued expenses and other current liabilities 489 272
------- -------
Net cash provided by (used in) operations 3,236 (647)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (130) (378)
Proceeds from sale of interest in affiliate -- 300
------- -------
Net cash used in investing activities (130) (78)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments/borrowings under line of credit (590) 2,550
Proceeds from issuance of long-term debt -- 3,806
Repayments of long-term debt (2,170) (5,692)
Redemption of common stock (181) (498)
------- -------
Net cash (used in) provided by financing activities (2,941) 166
------- -------
Net increase (decrease) in cash and cash equivalents 165 (559)
Cash and cash equivalents at beginning of year 100 659
------- -------
Cash and cash equivalents at end of year $ 265 $ 100
======= =======
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997 AND 1996
1. Nature of Operations:
Monitor Aerospace Corporation (the "Company") is a manufacturer of
machined parts and structural sub-assembly components used in the aerospace
industry. In 1996 the Company formed a wholly-owned subsidiary, Monitor
Aerospace International, Corp., which provides consulting, engineering,
manufacturing and technical support services to overseas customers in the
aerospace industry.
2. Summary of Significant Accounting Policies:
a. Principles of consolidation
The accompanying consolidated financial statements include the
accounts of Monitor Aerospace Corporation and its wholly-owned subsidiary.
Upon consolidation, all intercompany accounts and transactions are eliminated.
b. Inventories
Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
Inventoried costs relate primarily to work-in-process under
fixed-price-type contracts. They represent accumulated contract costs less the
portion of such costs allocated to delivered items. Accumulated contract costs
include direct production costs, manufacturing and engineering overhead,
production tooling costs and general and administrative expenses related to
military contracts.
Production tooling costs are charged to deliveries over the
estimated number of product deliveries. The Company reevaluates its estimates
regularly for all significant contracts and aircraft programs. Changes in
estimates are reflected in the current and future periods.
In accordance with industry practice, inventoried costs and related
billings in excess of such costs are classified as current assets or
liabilities even though a portion is not expected to be realized in one year.
c. Depreciation and amortization
Depreciation and amortization is computed using the straight-line
method based on the estimated useful lives of the related assets.
d. Employee benefit plans
The Company has a defined benefit pension plan and a combined
non-contributory profit sharing plan and 401(k) Savings Plan covering
substantially all employees. The Company's policy is to fund pension costs as
accrued.
F-6
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
e. Revenue recognition
For the majority of its operations, revenues are recognized upon
shipment or upon inspection and acceptance by a customer's representative at
the Company's plant. Billings in excess of contract costs arise when customers
prepay amounts in excess of related inventory costs, prior to the point at
which revenues would normally be recognized.
Revenues and earnings from long-term engineering and consulting
contracts are recognized using the percentage-of-completion method. Contract
costs incurred to date are compared with total estimated contract costs.
Changes to total estimated contract costs or losses, if any, are recognized in
the period they are determined. Amounts received from customers in excess of
revenues recognized to date are classified as current liabilities.
f. 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.
g. Income taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
h. Impairment accounting
In fiscal 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". This Statement
requires that certain assets be reviewed for impairment and, if impaired,
remeasured at fair value, whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The adoption of
SFAS No. 121 had no material impact on the Company's financial position or
results of operations.
i. Stock-based compensation
The Company applies APB Opinion No. 25 and related interpretations
in accounting for stock-based compensation to employees.
j. Net income per share
Net income per share has been computed by dividing net income by the
weighted average number of common stock and common stock equivalents
outstanding during each period. All outstanding stock options have been
considered common stock equivalents.
F-7
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
k. New Pronouncements
In February 1997, the FASB issued Statement 128, "Earnings Per
Share" ("Statement 128"), which simplifies the standards for computing
earnings per share previously used and makes them comparable to international
standards. The Statement is effective for financial statements issued for
periods ending after December 15, 1997, and earlier application is not
permitted. The Company does not believe that the adoption of this Statement
will have a material effect to its financial statements.
l. Statement of cash flows
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
3. Inventories:
Inventories consist of the following:
May 31,
--------------------------
1997 1996
--------- ---------
(In Thousands)
Work in process:
Production costs $ 21,622 $ 18,120
General and administrative costs 330 330
Less progress billings (210) (426)
Raw materials 3,070 2,729
--------- ---------
$ 24,812 $ 20,753
========= =========
Under contractual arrangements by which progress payments are received
from the Government and certain commercial contracts where raw material is
consigned to the Company by its customer, title to inventories identified with
related contracts is vested in the customer.
4. Property, Plant and Equipment:
Property, plant and equipment, at cost, is summarized as follows:
May 31,
--------------------------
1997 1996
--------- ---------
(In Thousands)
Land $ 1,455 $ 1,455
Building 12,553 12,548
Machinery and equipment 39,158 37,206
Furniture and fixtures 1,658 1,641
Leasehold improvements 12 12
--------- ---------
54,836 52,862
Less accumulated depreciation and
amortization 40,263 38,954
--------- ---------
$ 14,573 $ 13,908
========= =========
F-8
<PAGE>
5. Long-Term Debt:
Long-term debt consists of the following:
May 31,
--------------------------
1997 1996
--------- ---------
(In Thousands)
Mortgage payable (a) $ 3,611 $ 4,375
Revolving line of credit (b) 10,330 10,920
Term notes payable (c) 2,821 3,527
New York JDA mortgage payable (d) 5,026 5,208
Notes payable, stock repurchase (e) 1,521 1,795
Lease obligations and equipment
financing loans (f) 1,982 373
Other 120 138
--------- ---------
25,411 26,336
Less unamortized discount 38 47
--------- ---------
25,373 26,289
Less current portion 1,925 2,075
--------- ---------
$ 23,448 $ 24,214
========= =========
The above indebtedness is secured by substantially all of the Company's
assets. Additionally, borrowings representing approximately $20 million at May
31, 1997 are secured by a personal guarantee by the majority stockholder and
wholly owned subsidiary.
The mortgages, term loans and revolving line of credit require, among
other things, the maintenance of a minimum capital base, debt to equity ratios
and limitations on capital expenditures.
a. Mortgage payable
In October 1996, the Company refinanced the mortgage secured by the
Company's factory and corporate headquarters with the same financial
institution. In March 1997, the Company amended the terms of this note. The
$3,675,000 note requires monthly payments of $32,000 plus interest at a fixed
rate of 10.125% through March 1999, at which time a balloon payment of
$2,907,000 becomes due.
b. Revolving line of credit
In March 1997, the Company restructured its revolving line of credit
which provides for borrowings up to $15 million through March 31, 1999 and
bears interest at the bank's prime rate of 8.5% at May 31, 1997 plus 1 1/2%.
Borrowings under the revolving credit facility, are limited to the sum of the
following:
- 85% of eligible accounts receivable, as defined.
- 50% of eligible inventory, as defined, with total inventory not
to exceed the "inventory cap." The "inventory cap," based on the
quarterly debt to equity ratio, ranges between $8.4 million to a
maximum of $10 million.
c. Term notes payable
This note bears interest at 9.08% and requires monthly principal
amortization of $46,991 through December 2000 and a balloon payment of
approximately $800,000 on January 1, 2001.
F-9
<PAGE>
5. Long-Term Debt: (Cont'd)
d. New York Job Development Authority mortgage payable
Mortgage payable bearing interest at 8 1/2% payable in 240 monthly
installments of principal and interest aggregating $48,598 through January
2013.
e. Notes payable, stock repurchase
In February 1996, the Company repurchased and retired 210 shares of
common stock. In connection with this repurchase, the Company issued two
unsecured notes aggregating $1,795,000 at interest rates of 8.5% and prime
less 1%. These notes, which are subordinate to senior debt, require annual
installments of $273,300 in fiscal 1998 and 1999, and equal installments of
$162,500 through 2005.
f. Lease obligations and equipment financing loans
Lease obligations and equipment financing loans represent various
obligations for equipment purchases which bear interest at rates from 6.07% to
18.78%.
Annual principal payments on all long-term debt are as follows:
Year Ending
May 31, Amount
------------- --------------
(In Thousands)
1998 $ 1,925
1999 12,166
2000 1,683
2001 2,181
2002 1,042
Thereafter 6,376
At May 31, 1997, the Company has outstanding letters of credit
approximating $300,000.
6. Sales:
The Company derives substantially all of its revenues from fixed
price aerospace subcontracts. Approximately 18% of net sales for 1997 and
1996, respectively, were derived from military projects and the balance from
commercial sources.
7. Income Taxes:
The provision (benefit) for income taxes consists of the following:
Years Ended
May 31,
------------------------------
1997 1996
-------- --------
(In Thousands)
Current:
Federal $ 620 $ 401
State 27 11
-------- --------
647 412
-------- --------
Deferred:
Federal 824 986
State 113 (46)
-------- --------
937 940
-------- --------
$ 1,584 $ 1,352
======== ========
F-10
<PAGE>
7. Income Taxes: (Cont'd)
The components of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
May 31,
------------------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Capital loss carryforward $ 178 $ 178
Accrued compensation and related benefits 852 669
Tax credit carryforwards 994 4,132
Other 39 71
-------- --------
Total deferred tax assets 2,063 5,050
Valuation allowance (198) (2,689)
-------- --------
Net deferred tax assets 1,865 2,361
-------- --------
Deferred tax liabilities:
Inventories (572) (279)
Pension benefits (288) (293)
Tax depreciation in excess of book depreciation (4,360) (4,207)
-------- --------
Total deferred tax liabilities (5,220) (4,779)
-------- --------
Net deferred tax liability $ (3,355) $ (2,418)
======== ========
</TABLE>
A reconciliation of the statutory U.S. Federal rate and the effective
income tax rate is summarized as follows:
Years Ended
May 31,
---------------------------
1997 1996
----- -----
Statutory U.S. federal rate 34.0% 34.0%
State taxes, net of federal benefit 5.5% 5.5%
Items without tax benefit 2.4% 4.0%
Increase in valuation allowance - 14.5%
Adjustment of prior years' accrual 8.0% -
Other 0.7% 3.9%
----- -----
50.6% 61.9%
===== =====
At May 31, 1997, the Company has capital loss carryforwards of $450,000
that expire in 2001. The Company has general business tax credit carryforwards
of approximately $85,000 which expire in 2000 through 2007. In addition, the
Company has an alternative minimum tax credit of approximately $370,000
available to reduce future federal liabilities for regular tax. For state tax
purposes, the Company has state credit carryforwards approximating $466,000
available to reduce future state income taxes. In addition, the Company has
state alternative minimum tax credits of approximately $76,000 available to
reduce future state liabilities for regular tax.
8. Retirement Plans:
The Company sponsors a defined benefit pension plan that covers
substantially all of its employees. The plan calls for benefits to be paid to
eligible employees at retirement based primarily upon years of service with
the Company and compensation rates near retirement. Contributions to the plan
reflect benefits attributed to employees' services to date, as well as
compensation expected to be earned in the future. Plan assets consist
primarily of equity investments and fixed rate group insurance contracts. The
Company uses the Projected Unit actuarial cost method for pension expense
purposes.
F-11
<PAGE>
8. Retirement Plans: (Cont'd)
Retirement plan expense consists of the following:
<TABLE>
<CAPTION>
Years Ended
May 31,
-----------------------------
1997 1996
-------- -------
(In Thousands)
<S> <C> <C>
Service cost of the current period $ 336 $ 366
Interest cost on the projected benefit obligation 526 482
Actual return on assets held in the plan (1,010) (782)
Net amortization of transition liability,
net gain and asset loss deferral 529 435
Curtailment income due to plan amendment
freezing accruals as of March 31, 1997 (142) -
-------- -------
Total defined benefit plan expense $ 239 $ 501
======== ========
The following sets forth the funded status of the plan as follows:
Actuarial present value of benefit obligations:
Vested benefits $ 5,160 $ 4,347
Non-vested benefits 1,014 870
-------- --------
Accumulated benefit obligation 6,174 5,217
Effect of anticipated future compensation
levels and other events - 1,109
-------- --------
Projected benefit obligation 6,174 6,326
Fair value of assets held in the plan 6,691 5,398
-------- --------
Assets in excess of projected benefit obligation $ 519 $ (928)
======== ========
Consisting of:
Unamortized net asset existing at date
of adoption of FAS No. 87 $ 66 $ 82
Unamortized prior service cost - 157
Unamortized net loss (88) (1,375)
Prepaid pension expense 541 208
--------- ---------
$ 519 $ (928)
========= =========
</TABLE>
The weighted average discount rates used to measure the projected
benefit obligation are 7.75% in 1997 and 8.0% in 1996. The rate of increase in
future compensation levels is 0.0% in 1997 and 4.0% in 1996, and the expected
long-term rate of return on assets is 9.5% in 1997 and 1996. The Company uses
the straight-line method of amortization for prior service cost and
unrecognized gains and losses.
In March 1997, the Company amended the plan, freezing accruals as of
March 31, 1997. In accordance with FAS No. 88, the Company recognized a
pre-tax curtailment gain of $142,000 and the entire prior service cost was
fully amortized. It is the Company's intention to terminate the defined
benefit plan when favorable economic conditions exist.
Included in the balance sheet at May 31, 1997, and May 31, 1996,
respectively, under the caption "prepaid expenses and other current assets",
is approximately $541,000 and $208,000 of prepaid pension expenses.
F-12
<PAGE>
8. Retirement Plans: (Cont'd)
The Company also maintains a qualified non-contributory profit sharing
plan with an integrated 401(k) Savings Plan covering substantially all of its
employees. The Plan provides for contributions to a trust at the discretion of
the Board of Directors. In April 1997, the Company commenced matching a
percentage of employee contributions to the 401(k) savings plan. In 1997, the
Company contributed $44,000 to the 401(k) plan and $217,000 to the profit
sharing plan. No contributions were made in 1996.
9. Stock Bonus Plan:
In 1983, the Board of Directors established a Stock Bonus Plan for
senior executives of the Company. In December 1995, the Company established an
additional stock bonus plan whereby it will issue through May 31, 1999,
additional shares of common stock each year equal to 1.43% of the number of
shares then outstanding not to exceed 10% of the total shares outstanding.
Included in the accompanying statements of income are charges to compensation
expense related to these plans of approximately $318,000 and $121,000 in 1997
and 1996, respectively.
10. Commitments:
The Company leases certain facilities and production equipment for
varying periods through 2002. Certain leases contain renewal options, and
require the payment of real estate taxes. Rent expense for the years ended
1997 and 1996 approximated $875,000 and $460,000, respectively.
Minimum rental commitments for the remaining term of the operating
leases are as follows:
Aggregate Net Minimum Rentals
(In Thousands)
Year Ending
May 31, Total Machinery Buildings
----------- ------- --------- ---------
1998 $ 720 $ 524 $ 196
1999 176 18 157
2000 85 7 79
Thereafter 5 5 -
------- ------- -----
$ 986 $ 554 $ 432
======= ======= ======
11. Fair Value of Financial Instruments:
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt,
including the current portions, was estimated using a discounted cash
flow analysis, based on the Company's assumed incremental borrowing
rates for similar types of borrowing arrangements. The carrying amount
of variable and fixed rate debt at May 31, 1997 and 1996 approximates
its fair value.
F-13
<PAGE>
12. Supplementary Information - Statement of Cash Flows:
Cash paid during the year for:
Years Ended
May 31,
------------------------------
1997 1996
-------- --------
(In Thousands)
Interest $ 2,812 $ 2,555
======== ========
Income taxes paid $ 583 $ 108
======== ========
The Company entered into capital lease obligations for the purchase
of equipment of approximately $1,812,000 and $125,000 during the years ended
May 31, 1997 and 1996, respectively.
13. Concentration of Credit Risk:
Substantially all of the Company's accounts receivable at May 31, 1997
are with major manufacturers of military and commercial aircraft. It is the
Company's practice not to require any collateral positions with its customers.
Sales to two customers approximated 51% and 15% of net sales for the year
ended May 31, 1997. Accounts receivable related to these customers at May 31,
1997 was approximately $3,803,000 and $792,000, respectively.
F-14
<PAGE>
Monitor Aerospace Corporation and Subsidiary
--------------------------------------------
Consolidated Financial Statements as of
and for the Nine Months Ended
February 28, 1998 and
Independent Auditors' Report
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
NINE MONTHS ENDED FEBRUARY 28, 1998:
Consolidated Balance Sheet 2
Consolidated Statement of Income 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-14
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Monitor Aerospace Corporation and Subsidiary
Amityville, New York
We have audited the accompanying consolidated balance sheet of Monitor
Aerospace Corporation and Subsidiary (the "Company") as of February 28, 1998,
and the related consolidated statements of income, stockholders' equity and
cash flows for the nine months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Monitor Aerospace Corporation and
Subsidiary as of February 28, 1998 and the results of their operations and
their cash flows for the nine months then ended in conformity with generally
accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
May 18, 1998
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1998
(In thousands, except share amounts)
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 271
Accounts receivable, net 14,065
Inventories, net 30,313
Prepaid expenses and other current assets 1,794
--------
Total current assets 46,443
PROPERTY, PLANT AND EQUIPMENT, net 14,441
OTHER ASSETS 1,353
--------
TOTAL ASSETS $ 62,237
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,705
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,154
Income taxes payable 1,196
Accrued compensation 2,743
Accrued expenses and other current liabilities 1,037
Current portion of long-term debt 3,536
--------
Total current liabilities 17,371
--------
LONG-TERM DEBT 27,813
--------
OTHER LIABILITIES 248
--------
DEFERRED INCOME TAXES 3,547
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock (no par value; 2,200 shares
authorized; 1,038 shares issued and outstanding) 149
Additional paid-in capital 3,092
Unearned compensation (496)
Retained earnings 10,513
--------
Total stockholders' equity 13,258
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,237
========
See notes to consolidated financial statements.
-2-
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED FEBRUARY 28, 1998
(In thousands)
- ------------------------------------------------------------------------------
NET REVENUES $62,157
-------
OPERATING EXPENSES:
Cost of sales 50,386
General and administrative expenses 5,859
-------
Total operating expenses 56,245
-------
OPERATING INCOME 5,912
INTEREST EXPENSE 2,133
-------
INCOME BEFORE INCOME TAXES 3,779
INCOME TAXES 1,484
-------
NET INCOME $ 2,295
=======
See notes to consolidated financial statements.
-3-
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED FEBRUARY 28, 1998
(In thousands, except share amounts)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-in Unearned Retained
Shares Stock Capital Compensation Earnings Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 1, 1997 1,023.4 $ 147 $ 2,255 $ (359) $ 8,218 $ 10,261
Stock compensation arrangements 14.6 2 837 (137) -- 702
Net income -- -- -- -- 2,295 2,295
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, FEBRUARY 28, 1998 1,038.0 $ 149 $ 3,092 $ (496) $ 10,513 $ 13,258
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 1998
(In thousands)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,295
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 980
Deferred income taxes 136
Stock compensation arrangements 702
Changes in operating assets and liabilities:
Accounts receivable (6,327)
Inventories (5,501)
Prepaid expenses and other current assets (688)
Other assets (143)
Accounts payable 2,906
Billings in excess of costs and estimated earnings on uncompleted contracts 279
Income taxes payable 886
Accrued expenses and other liabilities 320
------------
Net cash used in operating activities (4,155)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (343)
------------
Net cash used in investing activities (343)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank line of credit 6,150
Principal payments on long term debt (1,403)
Principal payments on capital lease obligations (243)
------------
Net cash provided by financing activities 4,504
------------
NET INCREASE IN CASH 6
CASH, BEGINNING OF PERIOD 265
CASH, END OF PERIOD $ 271
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,155
============
Income taxes $ 462
============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock related to stock compensation arrangements $ 2
============
Acquisition of property, plant and equipment through capital leases $ 1,436
============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
MONITOR AEROSPACE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 1998
(In thousands, except share amounts)
- ------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND DEPENDENCY ON MAJOR CUSTOMER
Monitor Aerospace Corporation and Subsidiary (the "Company") is a
manufacturer of machined parts and structural sub-assembly components
and provides various consulting services to the aerospace industry.
Approximately 14% of the Company's revenues are to the military segment
of the industry and the remainder to commercial customers. The Company's
manufacturing business is based in the United States.
In 1996, the Company formed a wholly-owned subsidiary, Monitor Aerospace
International Corp., which provides consulting, engineering,
manufacturing and technical support services to overseas customers in
the aerospace industry. A majority of the operations of this portion of
the Company's business is based in the Far East. Revenues from this
subsidiary represent approximately 6% of consolidated revenue for the
nine months ended February 28, 1998.
The Company derives substantially all of its revenues from fixed price
aerospace subcontracts. Sales to two customers approximated 53% and 20%
of net revenues. Approximately 74% of the Company's revenues are, either
directly or indirectly, from The Boeing Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company's fiscal year end is May 31. These
financial statements have been prepared on a basis consistent with the
Company's year-end financial statements and have been prepared in
anticipation of the Merger discussed in Note 11.
Use of Estimates - The preparation of financial statements in accordance
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.
Basis of Accounting - The consolidated financial statements include the
accounts of Monitor Aerospace Corporation and its wholly-owned
subsidiary. All intercompany transactions and balances have been
eliminated.
Revenue Recognition - The Company's sales relating to manufactured parts
are primarily under fixed price contracts, requiring delivery of
products over several years and frequently provide the buyer with option
pricing for follow-on orders within a specified period. Sales to
commercial customers are primarily recognized upon shipment. Sales on
military contracts are primarily recognized upon inspection and
acceptance by a customer's representative at the Company's facility.
Sales relating to long-term engineering and consulting contracts are
recognized using the percentage-of-completion method. Contract costs
incurred to date are compared with total estimated contract costs.
-6-
<PAGE>
Changes to total estimated contract costs or losses, if any, are
recognized in the period they are determined. Amounts received from
customers in excess of revenues recognized to date are classified as
current liabilities.
Inventories - Inventories are valued using the weighted-average method.
Inventory includes direct production costs, manufacturing and
engineering overhead and production tooling costs.
The excess of production costs of delivered and in process units over
the estimated average cost is included in inventory as "excess over
average" inventory. Excess over average inventory costs arise due to
unit cost incurred in excess of the average unit cost estimated for the
contract. The Company determines the estimated costs and related margins
for a contract based on the units delivered to date, and on all units to
be delivered under the contract.
Production tooling costs are charged to expense over the estimated
number of product deliveries based on the estimated life of the program.
The Company reevaluates its estimates regularly for all significant
contracts and aircraft programs. Changes in estimates are reflected in
the current and future periods.
In the event that work-in-process inventory plus estimated costs to
complete a contract, or an appropriate combination of contracts, exceeds
the anticipated remaining sales value of such contract(s), such excess
is charged to current earnings, thus reducing inventory to estimated
realizable value.
In accordance with industry practice, inventoried costs are classified
as current even though a portion is not expected to be realized in one
year.
Under contractual arrangements by which progress payments are received
from the Government and certain commercial contracts where raw material
is consigned to the Company by its customer, title to certain
inventories is vested in the customer.
Property, Plant and Equipment - Property, plant and equipment is stated
at cost, less accumulated depreciation and amortization. Capitalized
values of property under leases are amortized over the life of the lease
or the estimated life of the asset, whichever is less. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives:
Asset Category Lives in Years
Building 20-40
Furniture and fixtures 3-15
Machinery and equipment 3-20
Vehicles 3-5
Leasehold improvements 5-6
Billing in Excess of Costs - Billings in excess of contract costs arise
when customers prepay amounts in excess of related inventory costs,
prior to the point at which revenues would normally be recognized.
Income Taxes - The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes ("SFAS 109"). SFAS 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the Company's consolidated financial
statements or tax returns. Under this method, deferred
-7-
<PAGE>
tax assets and liabilities are determined based on the differences
between the financial accounting and tax bases of assets and liabilities
using current enacted tax rates.
Impairment of Long-Lived Assets - In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS
121"), the Company reviews its long-lived assets, including property,
plant and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount
of the assets. Impairment is measured at fair value. SFAS 121 had no
effect on the Company's consolidated financial statements.
Stock Compensation Arrangements - The Company accounts for its stock
compensation arrangements under Accounting Principles Board Opinion 25,
"Accounting for Stock Issues to Employees," in the determination of
compensation expense.
Recent Accounting Pronouncements - Recent accounting pronouncements
issued by the Financial Accounting Standards Board which the Company is
not required to adopt at this time include Statement of Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
Statement of Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise" ("SFAS 131") and Statement of Accounting Standards No.
132, "Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"). The Company intends to comply with the disclosure
requirements of SFAS 130, SFAS 131 and SFAS 132 and does not expect
these pronouncements to have a material effect on the Consolidated
Financial Statements.
3. INVENTORIES
Raw materials $ 5,118
Work in Process:
Production costs 13,799
Production tooling costs 11,396
--------
$ 30,313
========
At February 28, 1998, excess over average inventory (see Note 2) is
approximately $1,168 and is included in production costs above.
-8-
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Land $ 1,456
Building 12,553
Machinery and equipment 39,620
Furniture and fixtures 1,639
Vehicles 292
Leasehold improvements 12
--------
55,572
Less accumulated depreciation and amortization (41,131)
--------
$ 14,441
========
As of February 28, 1998, property, plant and equipment and accumulated
depreciation and amortization include amounts associated with assets
held under capital leases of approximately $2,356 and $288,
respectively. Related amortization expense of approximately $145 has
been recorded for the nine months ended February 28, 1998.
5. LONG-TERM DEBT
Mortgage payable $ 3,323
Revolving line of credit 16,480
Term note 2,398
New York JDA mortgage payable 4,935
Notes payable, stock repurchase 1,248
Lease obligations and equipment financing loans 1,961
Other 1,004
--------
31,349
Less: Current portion 3,536
--------
$ 27,813
========
The mortgages, term loans and revolving line of credit require, among
other things, the maintenance of a minimum capital base, debt to equity
ratios, and limitations on capital expenditures. The Company is in
compliance with the covenants included in the agreements as of the
balance sheet date.
Mortgage Payable - The mortgage payable requires monthly payments of $32
plus interest at a fixed rate of 10.125% through March 1999, at which
time a balloon payment of $2,907 becomes due. The mortgage is secured by
the Company's factory and corporate headquarters and is senior to the
New York JDA mortgage payable.
Revolving Line of Credit - In March 1997, the Company restructured its
revolving line of credit which provides for borrowings up to $15,000
through March 31, 1999 and bears interest at the bank's prime rate of
8.5% at May 31, 1997, plus 1.5%. In October 1997, the line of credit was
amended to allow for borrowings of up to $17,000 through May 31, 1998,
at which time the maximum borrowing levels would be reduced to $15,000
through March 31, 1999. The balance outstanding at year-end in excess of
$15,000 has been included in the current portion of long term debt.
-9-
<PAGE>
Borrowings under the line may be used for general corporate and working
capital purposes. Such borrowings may not exceed the sum of 85% of
eligible accounts receivable, as defined, and 50% of eligible inventory,
as defined, with total inventory not to exceed the "inventory cap". The
"inventory cap", based on the quarterly debt to equity ratio, ranges
from $8,400 to a maximum of $10,000. Certain financial covenants must be
satisfied by the Company or the debt automatically becomes due and
payable on demand. The credit facility is senior to all outstanding
obligations of the Company. The line of credit is guaranteed by the
Company's majority stockholder. Additionally, under the terms of the
agreement, the Company is restricted from the payment of dividends or
stock purchase transactions, except for certain defined transactions.
Under the revolving line of credit, the Company has the ability to issue
letters of credit up to $600 in the aggregate. At February 28, 1998, the
Company has two letters of credit outstanding totaling $300.
Term Note - This note bears interest at 9.08% and requires monthly
principal amortization of $47 through December 2000 and a balloon
payment of approximately $800 on January 1, 2001. The note is secured by
an interest in any and all equipment, machinery, furniture and fixtures
of the Company. This note is guaranteed by the Company's majority
stockholder.
New York JDA Mortgage Payable - This mortgage payable bears interest at
8.5% payable in 240 monthly installments of principal and interest
through January 2013. The loan is subordinate to the mortgage payable
described above. This mortgage is guaranteed by the Company's majority
stockholder.
Notes Payable, Stock Repurchase - In February 1996, the Company
repurchased and retired 210 shares of common stock. In connection with
this repurchase, the Company issued two unsecured notes at interest
rates of 8.5% and prime less 1.0%. These notes, which are subordinate to
senior debt, require a payment of $111 on February 1, 1999, and equal
annual installment payments of $163 on each February 1st from 1999
through 2005.
Lease Obligations and Equipment Financing Loans - Lease obligations and
equipment financing loans represent various obligations for equipment
purchases which bear interest at rates ranging from 2.68% to 18.78%.
Long-term debt (including capitalized lease obligations) of the Company
mature as follows:
Twelve months ending February 28,
1999 $ 3,536
2000 19,467
2001 2,183
2002 920
2003 684
Thereafter 4,559
--------
$ 31,349
========
Based upon the long-term debt borrowing rates currently available to the
Company with similar terms, the fair value of long-term debt at February
28, 1998 was $30,879, as compared to a carrying value of $31,349.
-10-
<PAGE>
6. INCOME TAXES
The following tables present the components of the provision for income
taxes, a reconciliation of the statutory U.S. federal income tax rate to
the effective tax rate, and the principal components of deferred taxes.
The components of income tax expense (benefit) are as follows:
Current:
Federal $ 1,260
State 88
-------
1,348
-------
Deferred:
Federal (38)
State 174
-------
136
-------
$ 1,484
=======
A reconciliation of the statutory U.S. federal rate and the effective
income tax rate is summarized as follows:
Statutory U.S. federal rate 34.0 %
Increase (decrease) in tax provision resulting from:
State taxes, net of federal benefit 4.6
Tax credits (0.6)
Other, net 1.3
---------
Effective income tax rate 39.3 %
=========
The tax effects of temporary differences which give rise to deferred
income taxes at February 28, 1998 are as follows:
Current Non-current
Deferred tax assets:
Capital loss carryforward $ -- $ 162
Accrued compensation and related liabilities 856
Other, net 92 --
Deferred tax liabilities:
Book/tax depreciation basis differences -- (3,547)
Book/tax inventory basis differences (607) --
Other, net (285) --
------- -------
56 (3,385)
Less: valuation allowance -- (162)
------- -------
Net deferred tax asset (liability) $ 56 $(3,547)
======= =======
The current deferred tax asset of $56 is included under the caption
"prepaid expenses and other current assets" in the accompanying
consolidated balance sheet.
-11-
<PAGE>
The valuation allowance relates to a capital loss carryforward which is
not likely to be realized. No other valuation allowances for deferred
tax assets are considered necessary due to the Company's history of
profitability and anticipated future profitability.
7. BENEFIT PLANS
Pension Plan - The Company sponsors a defined benefit pension plan (the
"Plan") that covers substantially all of its employees. The Plan calls
for benefits to be paid to eligible employees at retirement based
primarily upon years of service with the Company and compensation rates
near retirement. Contributions to the Plan reflect benefits attributed
to employees' services to date, as well as compensation expected to be
earned in the future. Plan assets consist primarily of equity
investments and fixed rate group insurance contracts. The Company uses
the Projected Unit actuarial cost method for pension expense purposes.
Plan expense consists of the following:
Service cost of the current period $ 38
Interest cost on the projected benefit obligation 380
Actual return on assets held in the plan (1,289)
Net amortization of transition liability, net gain and
asset loss deferral 804
-------
Net defined benefit plan benefit $ (67)
=======
The following sets forth the funded status of the Plan as follows:
Actuarial present value of benefit obligations:
Vested benefits $ 5,902
Non-vested benefits 1,101
-------
Accumulated and projected benefit obligation 7,003
Fair value of assets held in the plan 7,423
-------
Assets in excess of projected benefit obligation 420
Unamortized net asset existing at date of
adoption of SFAS No. 87 (54)
Unamortized net loss 390
-------
Prepaid pension expense $ 756
=======
The weighted average discount rate used to measure the projected benefit
obligation is 7.75%. The rate of increase in future compensation levels
is assumed to be zero due to the status of the Plan as discussed below,
and the expected long-term rate of return on assets is 9.5%. The Company
uses the straight-line method of amortization for prior service cost and
unrecognized gains and losses.
The prepaid pension expense of $756 is included under the caption
"prepaid expenses and other current assets" in the accompanying
consolidated balance sheet.
-12-
<PAGE>
In March 1997, the Company amended the plan, freezing accruals as of
March 31, 1997. In accordance with SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," the Company recognized a pre-tax curtailment
gain of $142 and the entire prior service cost was fully amortized. On
March 17, 1998, the Company's Board of Directors elected to terminate
the Plan. The Company is in the process of completing all the necessary
filings to effect the termination as of May 31, 1998. The liability
associated with the termination of the Plan is currently estimated to be
approximately $11,000, resulting in a total unfunded liability of
$3,600, based on the fair value of the assets held in the Plan as of
February 28, 1998. This liability is based on the current plan of
termination to be carried out over the next year and actual settlement
amount may differ depending on the timing of the termination and the
distribution of the assets. It is anticipated that the unfunded
liability will be paid by the current shareholders from the proceeds of
the pending Merger discussed in Note 11.
Profit Sharing Plan and 401 (k) Savings Plan - The Company also
maintains a qualified non-contributory profit sharing plan (the "Profit
Sharing Plan") with an integrated 401(k) Savings Plan (the "Savings
Plan") covering substantially all of its employees. The Profit Sharing
Plan provides for contributions to a trust at the discretion of the
Board of Directors. In April 1997, the Company commenced matching a
percentage of employee contributions to the Savings Plan. For the nine
months ended February 28, 1998, the Company recorded expense of $161
related to the Profit Sharing Plan and $195 related to the Savings Plan.
Postretirement Benefits - The Company has executed early retirement
agreements with certain key employees. The total commitments remaining
on these agreements aggregated approximately $350 at February 28, 1998.
Employment and Consulting Agreements - The Company has executed
employment agreements with certain senior executives and consultants
with expiration dates ranging from 1998 through 2002 for which the
Company has a minimum commitment aggregating approximately $2,191 at
February 28, 1998.
8. COMMITMENTS AND CONTINGENCIES
Operating Lease Agreements - The Company has operating leases for
various machinery, vehicles and facilities. The annual aggregate rental
commitments required under these leases, except for those providing for
month-to-month tenancy, are as follows:
Twelve months ending February 28,
1999 $ 337
2000 162
2001 30
2002 28
2003 16
-----
Total $ 573
=====
Rent expense was approximately $573 for the nine months ended February
28, 1998.
-13-
<PAGE>
9. STOCKHOLDERS' EQUITY
In 1983, the Board of Directors established a Stock Bonus Plan for
senior executives of the Company. In December 1995, the Company
established an additional stock bonus plan whereby it will issue through
May 31, 2002, additional shares of common stock each year equal to 1.43%
of the number of shares then outstanding not to exceed 10% of the total
shares outstanding. Included in the accompanying statement of income are
charges to compensation expense related to these plans of approximately
$702 for the nine months ended February 28, 1998. Unearned compensation
is recorded to the extent that stock is issued before some or all of the
services are performed and is shown as a separate reduction of
stockholders' equity.
10. RELATED PARTY TRANSACTIONS
The Company has unsecured notes receivable of $121 from one former and
one current stockholder of the Company. These notes are expected to be
collected from the stockholders within the terms of the note. The notes
bear interest at rates ranging from 9.5% to 10.0%.
In addition, the Company has notes payable of $1,248 to a former
stockholder of the Company which were issued in connection with a stock
repurchase (see Note 5). The amounts are expected to be paid to the
stockholder within the terms of the note.
The majority stockholder has guaranteed certain long-term debt
borrowings of the Company. This stockholder is paid a fee based on the
amount of debt guaranteed. For the nine months ended February 28, 1998,
these fees approximated $120.
11. SUBSEQUENT EVENT
On April 28, 1998, the Company signed an Agreement and Plan of Merger
(the "Agreement") with Mentmore Holdings Corporation (the "Buyer"), a
privately-owned company, pursuant to which the Company would, through a
merger ("Merger") become a wholly-owned subsidiary of the Buyer. The
purchase price provided by the Agreement is $95,000 less certain
liabilities and expenses of the Company, as defined by the Agreement.
Simultaneously with the closing of the Merger, approximately $27,300 of
long-term debt will be repaid.
The Agreement and the Merger have been unanimously approved by the
Company's Board of Directors and the stockholders. The Agreement is
terminable by either the Buyer or the Company, under certain
circumstances. The Company expects the Merger to be completed by the end
of May 1998. The agreement states that certain conditions must be met by
the closing date.
In connection with the Merger, certain employment agreements will be
modified and the settlement of certain stock bonus plans will be
accelerated. The impact of these modifications is not reasonably
estimable at this time.
******
