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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 333-41939
STELLEX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3971931
(State or Other Jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1430 Broadway, 13th Floor
New York, New York 10018
(212) 391-1392
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
-----------------------------------
Securities registered pursuant to Section 12(b) of the Act:
none.
Securities registered pursuant to Section 12(g) of the Act:
none.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __X__
As of March 1, 1999, the number of shares outstanding of the registrant's
Common Stock, no par value, was 1,000 shares. There is no trading market for the
Common Stock. Accordingly, the aggregate market value of the Common Stock held
by non-affiliates of the registrant is not determinable. See Part II, Item 5 of
this Report.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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Page Number
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PART I
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ITEM 1. Business................................................................................................ 3
ITEM 2. Properties.............................................................................................. 19
ITEM 3. Legal Proceedings....................................................................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................... 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters................................... 21
ITEM 6. Selected Financial Data................................................................................. 22
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 23
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk..............................................
ITEM 8. Financial Statements and Supplementary Data.............................................................
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................
PART III
ITEM 10. Directors and Executive Officers of the Registrant......................................................
ITEM 11. Executive Compensation..................................................................................
ITEM 12. Security Ownership of Certain Beneficial Owners and Management..........................................
ITEM 13. Certain Relationships and Related Transactions..........................................................
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................
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PART I
As used in this Report, unless the context otherwise requires, "Stellex"
refers to Stellex Industries, Inc. (successor to Kleinert Industries, Inc.
("Kleinert")) and the "Company" refers to Stellex and its direct and indirect
subsidiaries. Stellex is a holding company, all of whose operations are
conducted through its operating subsidiaries. Stellex acquired the tactical
subsystems and microwave devices businesses of Watkins-Johnson Company ("TSMD")
(the "W-J Acquisition") on October 31, 1997 and acquired Monitor Aerospace
Corporation ("Monitor") (the "Monitor Acquisition") on May 29, 1998. The W-J
Acquisition, the Monitor Acquisition and the Kleinert Acquisition (as defined)
(collectively the "Acquisitions"), the offering of Stellex's 9 1/2% Senior
Subordinated Notes due 2007, which was consummated on October 31, 1997 (the
"Offering"), and related financing transactions under the Credit Agreement (as
defined) are hereafter collectively referred to as the "Transactions."
ITEM 1. BUSINESS
Overview
The Company is a leading provider of highly engineered subsystems and
components for the aerospace, defense and space industries. The Company operates
in two segments: Aerostructures, which is conducted through its subsidiary
Stellex Aerospace Holdings, Inc. ("SA Holdings"), and Electronics, which is
conducted through its subsidiary Stellex Microwave Systems, Inc. ("Stellex
Microwave"). 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. SA Holdings, through its two wholly-owned
subsidiaries, Monitor Aerospace Corporation ("Monitor") and KII Holding Corp.
("KII Holding"), is a leading full-service supplier of a broad range of complex
aerostructure components and subsystems for commercial, military and space
applications. For the years ended December 31, 1998 and 1997, after giving pro
forma effect to the Transactions, the Company would have had sales of $207.4
million and $198.8 million and net income (loss) of approximately $2.0 million
and $(0.3) million, respectively. For the year ended December 31, 1998 and the
six months ended December 31, 1997, the Company had actual sales of $169.3
million and $30.5 million and net loss of $0.9 million and $2.0 million,
respectively. As of December 31, 1998 and 1997, the Company had $197.9 million
and $92.6 million in purchase order backlog, respectively.
On March 1, 1999, the Company acquired all of the outstanding common stock
of Phoenix Microwave Corporation ("Phoenix"), a leading supplier of RF and
microwave components, of Telford, Pennsylvania. Phoenix will operate together
with Stellex Microwave Systems, Inc. in the RF/microwave component and
sub-assembly market for commercial, wireless, military and space applications.
Stellex has recently reached an agreement in principle to acquire the
assets of Precision Machining, Inc. and certain affiliated entities for an
aggregate purchase price of approximately $86.0 million. The acquisition is
subject to the finalization of definitive documentation, the receipt of
necessary governmental approvals and financing and certain other conditions.
Stellex expects to finance the acquisition through borrowings under senior
secured credit facilities and the issuance of $20 million of preferred stock.
The closing of the acquisition is anticipated to occur in April of 1999.
Precision Machining, located in Wellington, Kansas, is a leading manufacturer,
with high speed machining capabilities, specializing in the complex machining of
aerospace structures and components. Precision will join the existing Stellex
Aerostructures segment and will complement their existing high speed machining
capabilities and allow Stellex to better address the growing business jet
market.
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 (Electronics Segment)
Stellex Microwave is a worldwide leader in the design, manufacture and
marketing of proprietary microwave electronic subsystems and multi-function
microwave modules ("MFMs") for use in radar-guided munitions and platforms. As
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the largest independent supplier of microwave subsystems for tactical missiles,
Stellex Microwave's products are critical to the onboard navigation,
communications and target detection systems of many of the highest priority
missile systems developed by the United States Department of Defense ("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, the Standard
Missile, the Sparrow Missile, and the Longbow Hellfire Missile.
Stellex Microwave is also a leading manufacturer of single-function modules
("SFMs"), such as high radio frequency mixers, amplifiers, filters and
oscillators, which are sold to system designers and manufacturers. Stellex
Microwave has provided the defense, space and communication markets with a broad
assortment of such devices since 1957. For the year ended December 31, 1998,
Stellex Microwave had sales of $79.2 million.
SA Holdings (Aerostructures Segment)
SA Holdings operates through certain direct and indirect subsidiaries.
Stellex Aerospace, an indirect wholly-owned subsidiary of KII Holding, is a
leading provider of high precision products and services to certain niche
markets within the aerospace and space industries. Stellex Aerospace is a
holding company which directly and wholly owns four operating subsidiaries:
Bandy Machining International ("Bandy"), Paragon Precision Products ("Paragon"),
Scanning Electron Analysis Laboratories, Inc. ("SEAL"), and General Inspection
Laboratories, Inc. ("GIL"). Through its subsidiary 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 The Boeing Company ("Boeing"), Airbus
Industrie ("Airbus"), Lockheed Martin Corporation ("Lockheed Martin"), and
Northrop Grumman Corporation ("Northrop Grumman"). Through its subsidiary
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 its subsidiaries
SEAL and GIL, Stellex Aerospace also provides a comprehensive range of services
for testing of sophisticated manufactured aerospace components.
Monitor Aerospace Corporation, headquartered in Amityville, New York, is a
leading aerospace subcontractor principally engaged in the manufacture and
assembly of precision-machined structural aircraft components for
tolerance-critical applications. Monitor is one of the few companies in its
industry with a proficiency in 3- and 5-axis profile machining of very large,
highly complex aerospace structural components. Monitor is one of the world's
leading suppliers of large titanium components found in military and commercial
jet aircraft, and also produces other parts for both engine and airframe
applications, such as bulkheads, fittings and skins. Monitor's principal
competitive advantage is its ability to manufacture some of the most complex
machined structural aircraft parts in metals and exotic alloys to meet critical
tolerances. Monitor provides finished components directly to OEMs or to major
large system subcontractors. Monitor's largest customers include Boeing, B.F.
Goodrich (Rohr Inc.), Northrop Grumman and Pratt & Whitney. Monitor primarily
operates under long-term contracts and is generally the sole supplier of most of
its components. For the year ended December 31, 1998, SA Holdings had pro forma
sales totaling $128.2 million and actual sales totaling $90.1 million.
Acquisitions
On September 5, 1997, Stellex Holdings Corp. was incorporated as a Delaware
corporation, which on October 23, 1997 amended its article of incorporation to
change its name to Stellex Industries, Inc. ("Stellex"). On September 12, 1997,
Stellex issued 1,000 shares of its common stock to Greystoke Capital Management
Limited LDC in exchange for (i) 8,010 shares of common stock and 84 shares of
Series A preferred stock of KII Holding Corp. ("KII Holding"), (ii) $50,000 cash
and (iii) the assumption of a $4,000,000 promissory note. KII Holding had
previously been formed to effect the acquisition of Kleinert Industries and
subsidiaries ("Kleinert") on July 1, 1998, as described more fully below. As a
result of the September 12, 1997 transaction, Stellex acquired an 80.1% interest
in KII Holding; the remaining equity interests were held by certain members of
Kleinert management. These interests were acquired in 1998 (See Item 14(a)1.
Financial statements - Notes 8 and 9). The transaction was accounted for as a
reincorporation of KII Holding; accordingly, the financial statements of Stellex
reflect the results of its operations commencing with the acquisition of
Kleinert on July 1, 1997. Kleinert is the predecessor of Stellex, and financial
information for Kleinert is presented as of December 31, 1996 and for the six
months ended June 30, 1997 and the year ended December 31, 1996 in accordance
with the rules and regulations of the Securities and Exchange Commission. Since
its formation, Stellex has grown through strategic acquisitions which are
summarized below.
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The Kleinert Acquisition
On July 1, 1997, KII Acquisition Corp. ("Acquisition Corp."), an indirect
wholly-owned subsidiary of 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
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.
The foregoing summary of the material terms of the Kleinert 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
Kleinert Stock Purchase Agreement including the definitions of certain terms
therein and exhibits and schedules thereto.
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 $82.1 million (after giving
effect to purchase price adjustments). The closing of the W-J Acquisition
occurred on October 31, 1997. 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,
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(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 of 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 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 Part I, Item 1. "Supply
Contracts" and "Intellectual Property" and Part I, Item 2. "Business
Properties."
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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 Monitor Acquisition
On May 29, 1998, the Company acquired Monitor, a leading aerospace
subcontractor engaged in the manufacture and assembly of precision-machined
structural aircraft components and assemblies for tolerance-critical
applications, located in Amityville, New York.
The aggregate net purchase price for Monitor was $95.0 million, including
the assumption of approximately $26.5 million of debt, which was repaid at
closing, and excluding fees and expenses of approximately $5.9 million. The
Monitor Acquisition was financed through (i) borrowings of $95.7 million under
the Amended and Restated Credit Agreement dated as of May 29, 1998 (as amended,
supplemented or modified from time to time, the "Credit Agreement"), among the
Company, the financial institutions from time to time party thereto, Societe
Generale and First Union Commercial Corporation and (ii) Monitor's issuance of a
promissory note to certain former Monitor shareholders, in the principal amount
of approximately $5.2 million bearing interest at 8% per annum and maturing on
May 29, 2000. The Company has the right to offset indemnification claims it has
against the former shareholders of Monitor against principal and interest
payments due under the promissory note in accordance with procedures established
in the promissory note. Borrowings under the Credit Agreement were comprised of
term loans in an aggregate principal amount of $90.0 million and revolving loans
of $17.0 million, of which $11.3 million was drawn to refinance the existing
Company revolver and supply near term working capital requirements.
In connection with the Monitor Acquisition, the Company amended and
restated the Credit Agreement to, among other things, increase the maximum
revolving facility borrowing availability by $10 million to $35 million and
modify certain covenants. The Credit Agreement is comprised of a $115.0 million
term loan facility, of which $25 million remained undrawn as of December 31,
1998, and a $35.0 million revolving loan facility. The term loan facility
includes $30 million of tranche financing having a scheduled maturity of
December 31, 2003, and $60.0 million of tranche financing having a scheduled
maturity of December 31, 2005. The revolving loan facility has a scheduled
maturity of December 31, 2003.
The Phoenix Acquisition
On March 1, 1999, the Company acquired all of the outstanding common stock
of Phoenix Microwave Corporation ("Phoenix"), a leading supplier of RF and
microwave components, of Telford, Pennsylvania. Phoenix will operate together
with Stellex Microwave Systems, Inc. in the RF/microwave component and
sub-assembly market for commercial, wireless, military and space applications.
The aggregate purchase price for the acquisition of Phoenix was $14.0 million
plus contingent purchase price of up to $1.0 million payable by March 2000 based
on cash flow performance thresholds. The acquisition was financed using an
acquisition line of credit under the Company's existing Credit Agreement.
Industry
Defense Electronics and Commercial Telecommunications
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.
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
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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.
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. 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.
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. 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. 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 anticipated growth. The Company is currently a preferred supplier
to the Raytheon Company ("Raytheon") and Lockheed Martin's space and defense
businesses. 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 adaptations 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. Growth in this market is driven
specifically by the shift in high speed voice and data communications to
formerly restricted military bandwidths. The Company believes that the superior
transmission capacity of high frequency microwave equipment and the lower cost
of integrated systems can facilitate 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.
Aerospace Manufacturing
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. Although
annual deliveries of U.S. commercial aircraft are predicted to peak during 1999
at a level of approximately 600, future deliveries are expected to remain robust
over the next several years. According to a recent analyst report provided to
the Company, actual and projected deliveries of U.S. commercial aircraft
approximate 250, 550, 450, and 525 for the
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years ended 1995, 1998, 2000, and 2004, respectively. In addition, for the
period from 1996 through 2001, revenue passenger miles are expected to increase
from 1.6 trillion to 2.1 trillion, while the worldwide fleet of commercial
aircraft is expected to increase from 12,300 in 1997 to over 17,000 in 2007. The
Company believes that the following factors, among others, will contribute to
causing a more stable future production environment: (i) projected worldwide
airline traffic growth; (ii) projected cargo traffic growth; (iii) projected
increase in the load factor of aircraft currently in service; (iv) the aging of
the current commercial aircraft fleet; (v) the cost effectiveness of using new
aircraft; and (vi) the improved operating performance of airlines worldwide.
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. In addition,
military procurement of new aircraft such as the F-18 E/F and the C-17 military
transport have been revived as a result of recently approved military budget
increases.
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.
Monitor has developed a high level of expertise with 5-axis machining
technology, including the use of proprietary numerical control software and
unique cutting tool geometries. Monitor is one of the leading subcontractors in
the world for 5-axis machining of titanium components and is a key member of
Boeing's complex machining group. Boeing utilizes Monitor to qualify domestic
and international subcontractors to manufacture components for Boeing programs.
These activities benefit Boeing through cost and time savings and provide
Monitor with a variable cost-based source of incremental capacity and enable it
to offer offset credits to its customers. In addition, Monitor's revenue stream
is diversified across military and commercial aerospace programs, providing
stability during market cycles.
Products and Services
The following describes the Company's principal product and service lines,
the markets which these products and services serve, and the Company's principal
programs by product and service line.
Integrated Subsystems
Missile Subsystems. Stellex Microwave'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:
o AMRAAM. The AMRAAM is an air-to-air missile for which Stellex Microwave
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 9,000 AMRAAMs have been produced, and production is
expected to continue at 600-1,000 systems per year for the next five to
seven years.
The AMRAAM is currently produced by 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
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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, prior to the 1997 merger of Raytheon and Hughes, Raytheon
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 100% of the high frequency microwave subsystems on board
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 expected to run 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 is entering full-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 1998 as the program moved to low-rate
production. 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
destroy incoming advanced aircraft, tactical ballistic missiles and cruise
missiles.
Multi-Function Modules. The key to the success of Stellex's integrated
subsystem business is its unique multi-function module designs. 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,
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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.
Turbomachinery and Engine Components
The Company, through Paragon, specializes in sophisticated 5-axis machining
of turbomachinery components. Paragon's flexible manufacturing operations permit
the production of both (i) highly engineered, close tolerance prototype
components which are generally manufactured from expensive, exotic alloys and
are found in high performance gas turbine engines and liquid fuel rocket engines
and (ii) higher volume standard components used in aircraft and industrial power
actuation systems and high performance turbine engines. Paragon's turbomachinery
components include engine rotors, impellers, stators, valve bodies, actuator
housings and intricate blades and vanes used in jet engines. Paragon currently
produces eight different part numbers for the TFE-1042 turbofan engine
manufactured by AlliedSignal, Inc. ("AlliedSignal") and is a primary source
supplier for the Aerojet division of GenCorp., Inc. on its injector assembly
used on its second stage Delta rocket engines. Paragon is also a primary source
supplier for the Rocketdyne division of Boeing ("Rocketdyne") on several
projects, including six parts for its first stage Delta rocket engine and
numerous turbomachinery components for the space shuttle's main engine.
Structural Aerospace Parts
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 a variety of military aircraft, 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. Bandy is currently manufacturing over 100 parts for Boeing
for use on the C-17 aircraft.
Monitor is one of the world's leading suppliers of large titanium
components found in military and commercial aircraft, such as bulkheads, frames,
fittings and skins. Monitor, specializing in 3- and 5-axis profile machining,
manufactures some of the most complex large aerospace structural components in
the world from aluminum, titanium and other hard metal exotic alloys in order to
meet critical tolerances. Monitor manufactures products for numerous
high-profile aerospace programs, including all of Boeing's commercial aircraft
platforms, the 737 (Classic and NG), 747, 757, 767, 777 and MD-11, and military
programs such as the F-15, F-18, F-22 and C-17.
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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 National Aeronautics and Space Administration ("NASA") to conduct destructive
physical analysis for the space station and has been actively involved in the
testing of space shuttle components, commercial and military satellites and
liquid fuel tanks on several NASA rocket booster programs. SEAL provides
services through a staff of over 25 employees, which includes experts in the
fields of materials and metallurgical science, electronic components, failure
analysis, analytical techniques and related sciences. GIL is a full-service
inspection and metal treatment laboratory, specializing in non-destructive
testing and inspection of materials and manufactured components using advanced
analytical techniques and state-of-the-art equipment. GIL's testing processes,
including radiography, ultrasound, liquid and magnetic particle penetrant and
pressure testing, assist in determining internal or external flaws, fractures,
material containments or manufacturing defects in materials and/or component
parts to ensure component quality. GIL, which primarily services the aerospace
industry, is one of the leading independent, full-service non-destructive
testing ("NDT") laboratories in the United States.
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
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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. 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 Part I, Item 1. "Business - Markets,
Products and Services."
Since its acquisition on October 31, 1997, Stellex Microwave had
company-sponsored research and development expenses of $0.6 million and $5.1
million for the years ended December 31, 1997 and 1998, respectively; while
customer-sponsored research and development at Stellex Microwave totaled
approximately $2.4 million, and $9.1 million, respectively, for such periods.
Research and development expenses at SA Holdings 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 20,000 complex microwave
subsystems per year, 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.
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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.
The Company also uses offshore independent contractors to manufacture and test
microwave components.
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 in order to help ensure
the highest product quality and reliability and to maximize control over the
complete manufacturing cycle and costs. 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.
SA Holdings
Stellex Aerospace, through its direct operating subsidiaries, 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 4- and 5-axis machining centers, multiple spindle high volume
production machining centers, wire electrical discharge machining ("EDM")
machines and computer numerical control ("CNC") turning centers. Paragon's
computerized CNC machines interface with a sophisticated
computer-aided-design/computer-aided-manufacturing ("CAD/CAM") network. As a
contract manufacturer, Paragon does not typically design or own the products it
manufacturers. Bandy's manufacturing facility is geared toward high volume, low
cost production. Bandy has developed a high level of proprietary equipment and
automated manufacturing systems. A substantial portion of its equipment has been
redesigned, customized and/or upgraded in recent years to meet exacting
manufacturing requirements and to reduce production costs. Bandy combines the
use of numerical control equipment, vertical and universal milling machines and
custom-designed hinge equipment with other advanced, high production
manufacturing methods to produce standard or customized precision hinges and
machined parts. Bandy owns all of its own tooling, which historically has given
it a competitive advantage in obtaining spare and replacement part business.
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. Paragon received ISO-9002 certification in
November 1997, while Bandy is currently seeking ISO-9000 certification. Stellex
Aerospace has received numerous quality awards from its customers, including
Boeing and McDonnell Douglas Corporation ("McDonnell Douglas"), and the highest
quality designations from Lockheed Martin, Allegheny Teledyne Incorporated
("Teledyne") and Rohr Inc.
Monitor assembles large sub-assemblies, such as landing gear beams and
actuators, door latch mechanisms and engine pylons using numerically controlled
robotic drilling to ensure that sub-assemblies meet the critical interface
requirements necessary for aircraft construction. In recent years the assembly
of aerostructures has become an important part of Monitor's business. Monitor
has obtained new business and management expects this to continue as aircraft
OEMs recognize the benefits of outsourcing assembly functions to third party
contractors. By outsourcing assembly functions to companies such as Monitor,
OEMs can enjoy improved tracking procedures, simplified administrative
processing and cost and time savings related to managing fewer supplier
relationships.
Monitor operates out of a state-of-the art 228,000 square foot
manufacturing facility and maintains over 20 CNC 3-axis and 5-axis gantry and
bridge mills and over 30 CNC multi-spindle profiler machining centers and
robotic assembly cells. All major equipment is supported by a host of
conventional machines, complete tool design and fabrication and state-of-the-art
inspection facilities. Monitor provides a range of products and capabilities,
including complex machining of components through final assembly of complex
subsystems shipped directly to customers. Due to Monitor's specialization in
large and highly complex structural components with critical tolerance
requirements, its production activities are highly technical. Monitor's
engineering department uses the latest CAD/CAM technology to design the
necessary tooling as well as to define
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manufacturing methods. Monitor's engineers must design the proper geometry of
the cutting tools, select the most efficient machine tools, design the fixtures
to secure the raw material, and direct the testing process. Monitor has
developed its own software to operate the numerically-controlled machining
equipment. Manufacturing methods and programs utilized by Monitor are unique to
each component being produced, and must take into account the type of raw
material being used and the overall configuration of the product.
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 platforms. 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
platform 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 position
Stellex Microwave as the premier supplier of advanced microwave technology for
production volume tactical missiles and platforms.
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.
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 sales for the year ended
December 31, 1998. 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 have the right to identify its products as "formerly made by
Watkins-Johnson" until the expiration of the 1999-2000 catalog.
SA Holdings
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 turbomachinery 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
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development stage. Paragon strives to maximize these opportunities to become a
competitive and cost-effective producer of longer-term, higher-volume orders.
Bandy's sales effort entails 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.
Because Monitor's products are highly complex and are sold to a limited
number of customers, the focus of Monitor's marketing efforts is on developing
close working relationships between the Company personnel and their counterparts
at the major aircraft OEMs. Monitor's business is substantially dependent on
repeat business and on its ability to recognize and adapt to ever-changing
market needs. For example, during the 1980's, military contracts accounted for
approximately 85% of sales. As the world political situation changed, Monitor
redirected its orientation from military to domestic and international
commercial projects. For the year ended December 31, 1998, Monitor's military
customers accounted for approximately 16% of its total sales.
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 based on sales were Raytheon and Boeing, which together
accounted for approximately 38% and 51% of the Company's total sales pro forma
for the Acquisitions for the years ended December 31, 1998 and 1997,
respectively.
Stellex Microwave's sales, which accounted for 46.8% of the Company's total
sales in 1998, were derived from contracts with a limited number of prime
contractors, such as Raytheon, Lockheed Martin and Rockwell-Boeing, for the
tactical subsystems products and a broad range of government agencies and
civilian contractors for microwave components. SA Holdings, whose sales
accounted for approximately 53.2% of the Company's total sales in 1998, sells
primarily to aircraft OEMs, aircraft and rocket engine manufacturers and
government agencies. In 1998 and 1997, approximately 44% of total Company sales
were to government agencies and their prime contractors. Such sales are subject
to unique conditions and terms.
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 that 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.
SA Holdings
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
16
<PAGE>
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.
Monitor is one of the largest domestic aerostructure subcontractors. Of the
other significant independent suppliers of machined structural components,
relatively few are believed currently to have the range of machining and
assembly capabilities that would allow them to have machined structural
component and assembly sales comparable to Monitor's. The Company believes
that Monitor's competitive advantages are its long-standing relationships and
credibility with domestic customers, superior management, reputation for
quality, and delivery and price competitiveness.
Prime aerospace manufacturers have evolved into extremely sophisticated
engineering, final assembly, marketing, and finance organizations. Aerostructure
manufacturing is conducted primarily by a few large risk sharing partners and
many sub-contractors worldwide. Competition is based largely on quality, cost,
customer service and engineering and production expertise.
The Company's principal competitors for the manufacture of machined
structural components and assemblies are the OEM's themselves, making most of
the Company's customers also potential competitors. The Company's major
customers, including Boeing and Northrop Grumman, have made significant
investments in the manufacture of machined structural components. Nevertheless,
this capacity has existed for many years and, since the internal manufacture of
machined structural components and assemblies is increasingly seen as less
cost-effective than outsourcing, the Company does not believe that such capacity
poses a material threat to the Company.
The recovering market for commercial aerospace equipment has placed
capacity limitations on many prime contractors. Limited production capacity has
further motivated prime contractors to outsource production to qualified
subcontractors. The Company expects that demand for qualified subcontractors
will increase as traditional prime contractors refocus on low-cost design,
assembly and, to a lesser extent, component manufacturing.
Employees
As of March 1, 1999, the Company employed approximately 1,310 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
fixed-price type contracts. Under fixed-price type contracts, the contractor
benefits from or shares in cost savings but generally bears or shares the risk
of cost overruns.
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.
17
<PAGE>
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 and its prime
contractors in the future. 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.
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 Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Environmental Matters."
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, 1998 and the six months ended December 31,
1997, approximately $14.9 million and $4.4 million, or 8.8% and 14.3%,
respectively, of the Company's sales were attributable to foreign customers. 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 portion of the Company's sales to foreign governments involves
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 adversely affect the Company's sales.
Sources and Availability of Raw Materials
The Company's manufacturing operations require a wide variety of electronic
and mechanical components as well as raw material alloys including aluminum,
titanium and steel for which the Company has multiple commercial sources. The
Company has not experienced any significant delays in obtaining timely
deliveries of essential materials. While the market for certain raw material
commodities can be volatile based on the supply and demand of aircraft at a
given time, the Company will typically have price protection for abnormal
escalations included in its customer contracts.
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 configured from
one or more layers of gallium arsenide, on which is implemented one or more
transistors or diodes. A thin-film part is comprised of 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'). The GaAs Agreement will expire
on December 31, 2000, unless earlier terminated by the Company on one year's
notice by the Company.
18
<PAGE>
Under the GaAs Agreement, the Company must also pay certain research and
development and process costs associated with the maintenance of the GaAs
Facility. In 1998, the Company paid $2.2 million in process costs. The Company
must make quarterly payments for research and development totaling at least
$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 each
six-month period, 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.
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.
19
<PAGE>
ITEM 2. PROPERTIES
The Company and its subsidiaries have an aggregate of seven principal operating
facilities, five of which are located in California, one in Pennsylvania and
one in New York. 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 operating facilities located in southern California. The
following table sets forth certain information relating to the Company's
principal operating facilities.
<TABLE>
<CAPTION>
SQUARE OWNED/
LOCATION DESCRIPTION FOOTAGE LEASED
- - -------- ----------- ------- ------
<S> <C> <C> <C>
CORPORATE
New York, New York(1)........... Stellex Industries' administrative offices and corporate 30,000 Leased
headquarters
ELECTRONICS SEGMENT
Palo Alto, California .......... Stellex Microwave's manufacturing, engineering and testing 120,000 Leased
facility and administrative office
Telford, Pennsylvania........... Phoenix's manufacturing, engineering, and testing facility 24,000 Owned
and administrative office
AEROSTRUCTURES SEGMENT
Woodland Hills, California ..... Stellex Aerospace's administrative office 1,475 Leased
Valencia, California............ Paragon's manufacturing facility, machine shop and warehouse 54,000 Owned
Burbank, California............. Bandy's manufacturing facility, warehouse and office 48,000 Leased
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
Amityville, New York............ Monitor's manufacturing, engineering facility and 242,000 Owned
administrative office
</TABLE>
(1) The corporate office consists of shared facilities with Mentmore and
certain other affiliated entities and will be occupied in April of 1999.
(See Item 13. Related Transactions.)
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. On or prior to 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 five 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in lawsuits and is subject to certain contingencies
incidental to its business. While the ultimate results of these matters cannot
be predicted with certainty, management does not expect them to have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established trading market for any class of equity securities
of the Company.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data of the Company as of and for each of
the five years in the period ended December 31, 1998 have been derived from the
audited financial statements of its predecessor, Kleinert, through June 30,
1997, and of the Company, as of and for the six months ended December 31, 1997
and the year ended December 31, 1998. The selected historical financial data for
the Company as of and for the six months ended December 31, 1997 and the year
ended December 31, 1998 reflect the Kleinert and W-J Acquisitions in 1997 and
the Monitor Acquisition in 1998. The Acquisitions were accounted for under the
purchase method of accounting and reflect purchase accounting adjustments
related primarily to the impact of write-ups of inventories and property and
equipment to their fair values and the addition of acquisition debt. The data
presented below should be read in conjunction with the historical financial
statements of the Company and related footnotes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Report.
<TABLE>
<CAPTION>
Six Months Six Months Year
Ended Ended Ended
Year Ended December 31 June 30, December 31, December 31,
--------------------------------------- --------- ------------ ------------
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ------------ ------------
(Predecessor) (Successor)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Sales ................................... $ 17,808 $ 21,049 $ 24,307 $ 14,296 $ 30,536 $ 169,304
Costs of goods sold ..................... 13,121 15,083 17,367 10,140 24,732 122,263
--------- --------- --------- --------- --------- ---------
Gross profit ............................ 4,687 5,966 6,940 4,156 5,804 47,041
Selling, general and
administrative (a) ................. 3,110 3,299 3,629 1,783 5,669 26,763
Amortization of intangibles ............. 416 282 31 16 716 3,994
--------- --------- --------- --------- --------- ---------
Operating income (loss) ................. 1,161 2,385 3,280 2,357 (581) 16,284
Interest expense ........................ 979 1,034 856 376 2,577 16,639
Interest income ......................... (44) (5) (12) (5) (25) (69)
Other expense ........................... 145 44 58 103 14 73
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ....... 81 1,312 2,378 1,883 (3,147) (359)
Income tax provision (benefit) .......... 50 525 945 753 (1,170) 588
--------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item ................. $ 31 $ 787 $ 1,433 $ 1,130 (1,977) (947)
Extraordinary loss on early
extinguishment of debt
(net of income tax benefit
of $299 in 1997) ................... -- -- -- -- 448 --
--------- --------- --------- --------- --------- ---------
Net income (loss) ....................... $ 31 $ 787 $ 1,433 $ 1,130 $ (2,425) $ (947)
========= ========= ========= ========= ========= =========
Other Financial Data:
Cash flows provided by (used in)
operating activities ............... $ 2,130 $ 1,866 $ 2,657 $ 479 $ (4,548) $ 4,522
Cash flows provided by (used in)
investing activities ............... 285 (643) (1,048) (835) (99,195) (95,866)
Cash flows provided by (used in)
financing activities ............... (2,360) (1,432) (1,407) 272 106,725 89,445
EBITDA(b) ............................... 3,440 4,291 4,913 3,133 4,788 33,255
Investment banking fees ................. -- -- -- -- 1,450 1,000
Depreciation and amortization ........... 2,424 1,950 1,691 878 2,132 15,837
Capital expenditures .................... 288 657 1,053 868 1,289 5,436
Ratio of earnings to
fixed charges(c) ................... 1.08x 2.27x 3.22x 4.92x -- 1.10x
Balance Sheet Data (at end of
period):
Working capital ......................... $ 6,621 $ 6,802 $ 7,735 $ 8,975 $ 32,858 $ 59,483
Total assets ............................ 28,029 28,180 29,614 31,675 145,782 273,230
Long-term debt, including
current maturities ................. 10,021 7,824 5,682 5,654 112,322 211,734
Stockholders' equity .................... 11,958 12,745 14,178 15,308 8,884 9,827
</TABLE>
(Footnotes on next page)
22
<PAGE>
(Footnotes from previous page)
----------------
(a) Includes research and development expenses totaling $5,068,000 and
$588,000 for the year ended December 31, 1998 and the six months ended
December 31, 1997, respectively.
(b) EBITDA represents income (loss) before income taxes plus interest
expense, non-cash stock compensation charges, depreciation and
amortization less interest income. EBITDA for the year ended December
31, 1998 and for the six months ended December 31, 1997 includes
non-recurring investment banking fees paid to Mentmore Holdings
Corporation ("Mentmore") and excludes non-cash amortization of
acquisition accounting adjustments to the fair value of inventory
totaling $3,963,000 in 1998 (as a result of the Monitor acquisition and
W-J acquisition adjustments in 1998) and $2,951,000 in 1997 (as a
result of the Kleinert and W-J acquisitions in 1997.) 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
filing 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.
(c) 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 and estimated interest expense included in
rental payments. Earnings of the Company were inadequate to cover fixed
charges by $2,847,000 for the six months ended December 31, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company, through its subsidiaries, Stellex Microwave and SA
Holdings, is a leading provider of highly engineered subsystems and components
for the aerospace, defense and space industries. Stellex is a holding company
and has no independent operations. 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. SA Holdings, through its
two subsidiaries Monitor and KII Holding, is a leading full-service supplier of
a broad range of complex machined aerostructure components and subsystems for
both commercial and military and space applications.
On July 1, 1997, KII Holding Corp., through a wholly-owned subsidiary,
KII Acquisition Corp., acquired Stellex Aerospace (formerly Kleinert Industries,
Inc.) from Kleinert Industrie Holding A.G. (the "Kleinert Acquisition"). Stellex
Aerospace conducts its business through four operating subsidiaries - Paragon,
Bandy, SEAL and GIL. The results of operations of Stellex Aerospace for the
periods presented herein represent the results of operations of Kleinert
(predecessor) for such periods prior to and including June 30, 1997, and those
of Stellex Aerospace thereafter.
In connection with the W-J Acquisition, the Company acquired the
tactical subsystems and microwave devices businesses of Watkins-Johnson
("TSMD"), 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 Company's results of operations include the results of Stellex
Microwave following its acquisition on October 31, 1997.
On May 29, 1998, the Company acquired Monitor whose historical results
of operations presented herein incorporate the period from May 29, 1998, the
date of acquisition, to December 31, 1998.
23
<PAGE>
Results of Operations
Historical - Company
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The historical consolidated operating results for the years ended
December 31, 1998 and 1997 give effect to the W-J and Monitor Acquisitions whose
results are presented from their dates of acquisition on October 31, 1997 and
May 29, 1998, respectively (in thousands).
<TABLE>
<CAPTION>
Corporate Aerostructures Electronics Total
1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales - - $90,074 $31,873 $79,230 $12,959 $169,304 $44,832
Cost of goods sold - - 67,901 23,784 54,362 11,088 122,263 34,872
-------- -------- ------ ------ ------ ------ -------- -------
Gross profit - - 22,173 8,089 24,868 1,871 47,041 9,960
Gross margin - - 24.6% 25.4% 31.4% 14.4% 27.8% 22.2%
Selling, general, and
administrative expenses $1,042 - 11,124 4,860 9,529 2,004 21,695 6,864
Research & development
expenses - - - - 5,068 588 5,068 588
Amortization of intangibles - - 1,384 86 2,610 646 3,994 732
-------- -------- ------ ------ ------ ------ -------- -------
Income (loss) from
operations $(1,042) - $9,665 $3,143 $7,661 $(1,367) 16,284 1,776
Interest expense (16,639) (2,953)
Other expense (4) (87)
-------- -------
Net loss before income
taxes and extraordinary (359) (1,264)
item
Income tax provision
(benefit) 588 (417)
Net loss before
extraordinary item (947) (847)
Extraordinary item - (448)
-------- -------
Net loss $ (947) $(1,295)
======== =======
</TABLE>
Net Sales. Net sales for the Company were $169.3 million for the year
ended December 31, 1998 as compared to $44.8 million for 1997. The primary
reason for the increase in revenues is due to the W-J and Monitor Acquisitions
in late 1997 and mid-1998.
Net sales for the Aerostructures segment for the year ended December 31,
1998 were $90.1 million, an increase of $58.2 million or 183% over 1997. The
primary reason for the increase in sales was due to the Monitor Acquisition on
May 29, 1998. Net sales for Monitor for the seven months ended December 31, 1998
totaled $54.3 million. The remaining increase in net sales at Stellex Aerospace
over 1997 of $3.9 million, or 12%, resulted from continuing strong demand in the
commercial aviation market for new aircraft production, increases in
manufacturing requirements for military aircraft and increased deliveries of
turbo-machinery components.
Net sales for the Electronics segment for the year ended December 31,
1998 were $79.2 million, an increase of $66.3 million over 1997. Net sales for
1997 reflected only two months of operations subsequent to the W-J acquisition.
Net sales at Stellex Microwave for 1998 reflected the finalization of Lot 11 of
the AMRAAM contract, significant progress on MFE and DRO deliveries, increased
shipments on the Standard Missile program and a new award for the transmission
assembly program for the Longbow missile. In addition, follow-on contract orders
for Lots 12 through 15 under AMRAAM and electronic subsystem contracts
supporting the Standard Missile Program were awarded during January 1999
totaling over $100 million with scheduled deliveries through 2002.
Gross Margins. Gross margin for the Company was 27.8% for the year ended
December 31, 1998, compared to gross margin of 22.2% for 1997. The primary
reason for the improvement in 1998 was the amortization of non-recurring
purchase accounting inventory adjustments resulting from the Kleinert, W-J and
Monitor Acquisitions totaling $4.0 million and $3.0 million for 1998 and 1997,
respectively. Gross margin adjusted to exclude these non-recurring, non-cash
charges would total 30.1% and 28.9%, for 1998 and 1997, respectively. The
resulting improvement in margins after taking such non-recurring
24
<PAGE>
adjustments into effect resulted from favorable operating performance at both
Stellex Aerospace and Stellex Microwave offset by lower margins at Monitor.
Gross margin for the Aerostructures segment was 24.6% for the year ended
December 31, 1998, compared to gross margin of 25.4% for 1997. The decrease in
gross margin is partially attributable to lower gross margin at Monitor, which
was 20.8%. This lower margin was primarily attributable to the $2.9 million of
amortization of the inventory step up adjustment resulting from the purchase
accounting for the Monitor Acquisition. The lower margin was partially offset by
increased margins at Stellex Aerospace resulting from improved productivity due
to certain new equipment additions and increased volume. Gross margin for
Monitor for the period adjusted to exclude amortization of inventory step up
would have approximated 26.1%.
Gross margin for the Electronics segment was 31.4% for the year ended
December 31, 1998, compared to gross margin of 14.4% for 1997. Gross margin was
negatively impacted in 1997 by a non-recurring charge to cost of sales of $1.5
million resulting from the amortization of a purchase accounting adjustment
revaluing inventory in connection with the W-J Acquisition. Ignoring the impact
of this non-recurring, non-cash charge, gross margin would have been 26.0%. The
remainder of the gross margin improvement in 1998 at Stellex Microwave resulted
from improved productivity, lower manufacturing costs and improved profitability
on the completion of certain programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the Company increased $14.8 million for the year
ended December 31, 1998 as compared to 1997. The increase was due primarily to
increased expenses associated with the larger size of the Company as a result of
the W-J Acquisition ($7.5 million) and Monitor Acquisition ($3.8 million). In
addition, the Company incurred an incremental non-cash charge during 1998 of
$2.1 million related to the valuation of management ownership puts at Stellex
Aerospace, as well as a $1.0 million charge for investment banking and financial
advisory fees to Mentmore as a result of the Monitor Acquisition. Additional
incremental charges for corporate officer salaries, professional fees,
management fees to Mentmore, and corporate development charges at Bandy relating
to a computer upgrade and additional executive management comprised the balance
of the increase from 1997.
Research and Development. Research and development costs have increased
by $4.5 million in the year ended December 31, 1998, compared to in 1997 due
principally to fact that 1997 includes only two months of Stellex Microwave
operations while 1998 represents twelve months. An additional factor is the
expansion of engineering capabilities at Stellex Microwave during 1998 in order
to address new product introductions and cost reductions in manufacturing and
packaging operations.
Amortization of Intangibles. Amortization of intangible assets for the
Company increased $3.3 million, or 446%, over 1997 due to significant increases
in goodwill and other identifiable intangible assets, such as customer lists,
tradenames, and assembled workforce resulting from purchase accounting
allocations made for the W-J and Monitor Acquisitions. Goodwill and identifiable
intangible assets are being amortized over their estimated lives ranging from
one to thirty years.
Interest Expense. Interest expense for the Company increased to $16.6
million in 1998 from $3.0 million in 1997. The increase in interest expense
resulted primarily from increased debt service on the 9.5% Senior Subordinated
Notes totaling $100 million which were sold on October 31, 1997 and the Credit
Agreement which was amended in May 1998 to provide for a Term A Loan Facility
totaling $30 million, a Term B Loan Facility totaling $60 million and a
Revolving Loan Facility with an average outstanding balance of approximately
$12.6 million for 1998. The facilities under the Credit Agreement typically
utilize a LIBOR-based interest rate which has averaged approximately 7.9% for
1998.
Income Tax Provision (Benefit). The effective tax rates for the Company
for 1998 were impacted significantly by non-deductible differences for stock
compensation expense at KII Holding and goodwill at both Stellex Microwave and
Monitor. See Item 14(a)1, Financial Statements - Note 10.
Results for the Six Months Ended December 31, 1997
Net Sales. Net sales for the Aerostructures segment totaled
approximately $17.6 million for the six months ended December 31, 1997.
Continuing increases in demand for new aircraft production for both commercial
and military markets, as well as increased orders for aircraft replacement parts
in these markets coincided with positive worldwide economic activity.
Net sales for the Electronics segment totaled approximately $13.0
million for the two months ended December 31, 1997, representing the period from
its acquisition by the Company on October 31, 1997. AMRAAM sales were negatively
25
<PAGE>
impacted by lower pricing; however, future growth is anticipated in subsystems
business as a result of follow-on AMRAAM orders and a recently awarded
transmitter assembly program for the Longbow missile, along with an increased
emphasis being placed on marketing and engineering as it relates to growing the
microwave components business.
Gross Profit. Gross profit totaled approximately $3.9 million, or 22.4%
as a percentage of sales, for the Aerostructures segment for the six months
ended December 31, 1997. During the six-month period a non-recurring charge to
cost of sales totaled approximately $1.5 million resulting from the amortization
of a purchase accounting adjustment revaluing inventory coincident with the
Kleinert Acquisition. Ignoring the impact of this non-recurring charge, gross
margins would have totaled 30.6%. Stellex Aerospace has experienced an
improvement in gross margins during this recent period as a result of increased
manufacturing and laboratory operating efficiencies. These efficiencies are due
primarily to overall increased volume and the expansion of manufacturing
capacities and capabilities through the purchase of additional machinery and
equipment at both Paragon and Bandy.
Gross profit totaled approximately $1.9 million or 14.4% as a percentage
of sales for the Electronics segment for the two-month period ended December 31,
1997. During this two-month period a non-recurring charge to cost of sales
totaled $1.5 million resulting from the amortization of a purchase accounting
adjustment revaluing inventory coincident with the W-J Acquisition. Ignoring the
impact of this non-recurring charge, gross margins would have totaled 26.0%.
Gross margins during the period were primarily impacted by lower pricing on
AMRAAM deliveries.
Selling, General and Administrative. Selling, general and administrative
expenses for the Aerostructures segment totaled $2.8 million for the six months
ended December 31, 1997. Significant items impacting selling, general and
administrative expenses included a non-recurring charge totaling $450,000 for
investment banking and financial advisory fees to Mentmore as a result of the
Kleinert Acquisition, $150,000 in management fees paid to Mentmore in
conjunction with a management services agreement which became effective
subsequent to the Kleinert Acquisition. In addition to the aforementioned items,
the significance of the revenue growth currently experienced has led to
administrative support cost increases. These additional costs were not
unanticipated and provide the added infrastructure necessary to continue to grow
profitably.
Selling, general and administrative expenses for the Electronics segment
totaled $2.6 million for the two months ended December 31, 1997. Significant
items impacting selling, general and administrative expenses included a
non-recurring charge totaling $1.0 million for investment banking and financial
advisory fees of Mentmore and $75,000 in management fees paid to Mentmore in
conjunction with a management services agreement which became effective
subsequent to the W-J Acquisition. In addition, Stellex Microwave continues to
realize additional general and administrative cost savings primarily through
headcount reduction as part of its continuing effort to streamline its
administrative operations.
Selling, generally and administrative expenses for Stellex totaled
$300,000 for the six months ended December 31, 1997. This represented a
compensation charge incurred as a result of a put right associated with the
ownership of common stock in KII Holdings Corp. by members of management of
Stellex Aerospace.
Amortization of Intangibles. Amortization of intangibles includes
amortization of goodwill over 25 years and other identified intangibles such as
favorable lease arrangements, patents, technology and assembled workforce over
their estimated lives ranging from one to twenty years.
Interest Expense. The Company's interest expense of $2.6 million for the
six months ended December 31, 1997 reflects primarily the sum of two months of
interest on the $100.0 million of 9.5% Senior Subordinated Notes, four months of
interest on a $16.0 million variable rate senior credit facility with a bank and
a $2.5 million 10% note payable to an affiliate (both refinanced upon closing
the Offering), and six months of interest on a $2.6 million 7.875% mortgage note
and a $1.75 million 8% Seller note which originated upon closing the Kleinert
Acquisition.
Extraordinary Loss. An extraordinary loss from the early extinguishment
of senior debt associated with the Kleinert Acquisition occurred as a result of
the Offering. This loss totaled $747,000 and is shown net of the effect of
income taxes.
26
<PAGE>
Pro Forma Results of the Company for the Years Ended December 31, 1998 and 1997
The unaudited pro forma consolidated results for the years ended
December 31, 1998 and 1997 give effect to the Transactions. For purposes of the
pro forma results of operations, the W-J and Monitor Acquisitions are reflected
as if they occurred on January 1, 1997. Furthermore, the pro forma results of
operations set forth below include certain pro forma adjustments to the
predecessor operations of Stellex Aerospace for the six-month period ended June
30, 1997. The pro forma consolidated statements of operations exclude
non-recurring charges directly related to the Acquisitions and which would
affect expenses within the twelve months following the Transactions, including
(i) investment banking and financial advisory fees paid to Mentmore of $1.0
million in 1998 and $1.5 million in 1997, (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 of $4.0 million in 1998 and $3.0 million in
1997, and (iii) extraordinary losses due to early retirement of debt in 1997.
The unaudited pro forma information set forth below is included herein because
management believes it may be meaningful to investors. However, it should be
read in conjunction with the Company's historical consolidated financial
statements and the other information included in this Report.
The unaudited pro forma consolidated results 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 pro forma results are
presented in thousands of dollars.
<TABLE>
<CAPTION>
Corporate Aerostructures Electronics Total
1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales - - $128,160 $110,206 $79,230 $88,633 $207,390 $198,839
Cost of goods sold - - 95,020 84,284 53,304 66,626 148,324 150,910
--------- --------- -------- -------- ------- ------- -------- --------
Gross profit - - 33,140 25,922 25,926 22,007 59,066 47,929
Gross margin - - 25.9% 23.5% 32.7% 24.8% 28.5% 24.1%
Selling, general, and
administrative expenses $1,012 - 11,816 9,063 9,529 9,249 22,357 18,312
Research & development
expenses - - - - 5,068 2,388 5,068 2,388
Amortization of
intangibles 4,983 $ 5,108 4,983 5,108
--------- --------- -------- -------- ------- ------- -------- --------
Income (loss) from $(5,995) $(5,108) $21,324 $16,859 $11,329 $10,370 26,658 22,121
operations
Interest expense 20,529 20,736
Other income (expense) 104 (71)
-------- --------
Income (loss) before
income taxes 6,025 1,456
Provision for taxes 3,412 1,137
-------- --------
Net income $ 2,613 $ 319
======== ========
$ 42,193 $ 38,360
======== ========
</TABLE>
EBITDA
Net Sales. Net sales for the Company would have been $207.4 million and
$198.8 million for the years ended December 31, 1998 and 1997, respectively. Net
sales for the Aerostructures segment would have been $128.2 million and $110.2
million for the years ended December 31, 1998 and 1997, respectively. Net sales
at Stellex Aerospace for the year ended December 31, 1998 were $35.8 million, a
12.2% increase over 1997. Net sales grew at Stellex Aerospace as a result of the
strong demand in the commercial aviation market for new aircraft production,
increases in manufacturing requirements for military aircraft and increased
deliveries of turbo-machinery components. Net sales at Monitor would have been
$92.4 million for the year ended December 31, 1998, which was 18.0% higher than
net sales levels during 1997. This increase was due to the stronger commercial
aircraft market, increases in program part content and price increases partially
offset by lower service sales due to weakness in Asian markets.
Net sales for the Electronics segment for the year ended December 31,
1998 were $79.2 million, which was 10.6% below net sales levels which would have
been achieved during 1997. The decrease in sales for 1998 compared to 1997 was
due primarily to 1997 shipments of delinquent orders arising from production
planning problems associated with the poor implementation of a new production
planning software system in 1996 and lower 1998 shipments of receivers due to
the completion of certain non-recurring orders in 1997. In addition, during July
1998, Stellex Microwave reorganized its operations in response to the negative
trend experienced in microwave device orders over the past several months, which
resulted in a reduction of workforce of approximately 12%. For the tactical
subsystems business, a reduction in shipments of
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<PAGE>
AMRAAM subsystems during 1998, based on 1997 end-of-contract shipments under
certain contracted lots, was more than offset by increased shipments on the
Standard Missile, DRO and MFE programs.
Gross Margins. Gross margin for the Company would have been 28.5% for
the year ended December 31, 1998, compared to a gross margin of 24.1% for 1997.
Gross margin for the Aerostructures segment would have been 25.9% and 23.5% for
the years ended December 31, 1998 and 1997, respectively. Gross margin at
Stellex Aerospace was 30.5% for the year ended December 31, 1998, compared to a
gross margin of 30.4% for 1997. Gross margin for Monitor was 24.1% for the year
ended December 31, 1998, compared to a gross margin of 20.7% for 1997. Gross
margin at Monitor has increased as a result of increased volume, price
increases, and improved operating efficiencies and the closeout of certain
higher margin programs.
Gross margin for the Electronics segment was 32.7% for the year ended
December 31, 1998, compared to gross margin of 24.8% which would have been
achieved for 1997. Gross margin improvement at Stellex Microwave resulted from
improved productivity, lower manufacturing costs and improved profitability on
the completion of certain programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the Company would have increased by $4.0 million to
10.8% of net sales for the year ended December 31, 1998. The increase was due
primarily to an incremental non-cash charge of $2.1 million relating to the
increase in value of management ownership puts in Stellex Aerospace. Additional
incremental charges for corporate officer salaries, professional fees,
management fees paid to Mentmore, and corporate development charges at Bandy
relating to a computer upgrade and additional executive management comprised
the balance of the increase from 1997.
Research and Development. Research and development costs would have
increased by $2.7 million for the year ended December 31, 1998, compared to
1997, due principally to the expansion of engineering capabilities at Stellex
Microwave in order to address new product introductions and cost reductions in
manufacturing and packaging operations.
EBITDA. Earnings before interest, income taxes, depreciation,
amortization and non-cash charges ("EBITDA") totaled $42.2 million for the year
ended December 31, 1998, representing a 10.0% improvement over 1997. The
increase in EBITDA came primarily as a result of improved gross margin.
Historical - Predecessor
Six Months Ended June 30, 1997 Compared To Six Months Ended June 30, 1996
The following table summarizes Stellex Aerospace's (predecessor)
unaudited historical results of operations for the six months ended June 30,
1997 and 1996 (in thousands).
Six Months Ended
June 30,
--------
1997 1996
---- ----
Statement of Operations Data:
Sales...................................... $14,296 $11,650
Cost of Sales.............................. 10,140 8,291
------ ------
Gross Profit............................... 4,156 3,359
Selling, general and administrative........ 1,783 1,788
Amortization of intangibles................ 16 15
--- ---
Operating income........................... 2,357 1,556
Interest expense........................... 376 442
Other expense.............................. 98 24
--- ---
Income before taxes........................ 1,883 1,090
Provision for taxes........................ 753 436
---- ----
Net income................................. $ 1,130 $ 654
======= =====
Other Data:
EBITDA..................................... $ 3,133 $ 2,354
======= =======
Sales. Stellex Aerospace's sales increased by $2.6 million, or 22.7%, in
the six months ended June 30, 1997 over the comparable period in the prior year.
The increase in sales was primarily attributable to increases in commercial
aircraft production by Boeing, strong spare parts demand and the acceleration of
the production schedule for the C-17 program which
28
<PAGE>
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 $0.8 million, or 23.7%, in the
six months ended June 30, 1997 over the comparable period in the prior year, and
gross profit margin increased to 29.1% in the six months ended June 30, 1997
from 28.8% in the comparable period in the prior year. The increase in gross
profit was primarily due to the increase in Stellex Aerospace's sales. Gross
margin benefited from an improvement in plant utilization and production
efficiencies at Bandy due to the installation of new Fadal milling machines.
These benefits were almost entirely offset by increased outsourcing necessitated
by capacity constraints and raw material price increases on aluminum extrusions.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by $4,600, or 0.2%, in the six months ended June 30, 1997
over the comparable period in the prior year. As a percentage of sales, selling,
general and administrative expenses decreased from 15.5% in the six months ended
June 30, 1996 to 12.6% in the comparable period in 1997 because the increased
sales volume and improved plant utilization required no corresponding increase
in selling or administrative expenses. Additionally, employee benefit costs were
reduced over the levels in the comparable period in the prior year when two
deferred compensation plans were established.
Interest Expense. Interest expense decreased by $66,700, or 15.1%, in
the six months ended June 30, 1997, over the comparable period in the prior
year. The decrease in interest expense resulted primarily from an interest rate
reduction from 10.125% to 7.875% on a building mortgage and lower outstanding
debt during the current period.
Other Expense (Income). Other expense (income) increased by $75,000 in
the six months ended June 30, 1997, over the comparable period in the prior
year. The increase in other expense (income) was primarily due to expenses
related to the Kleinert Acquisition and a vending machine contract dispute
settlement.
Provision for Taxes. The effective income tax rate was 40.0% for both
the six months ended June 30, 1997 and 1996, respectively.
EBITDA. Earnings before interest, income taxes, depreciation,
amortization and non-cash charges ("EBITDA") totaled $3.1 million for the six
months ended June 30, 1997, which was 33.1% better than 1997. The increase in
EBITDA resulted primarily from increased volume coupled with stable
administrative costs.
Liquidity and Capital Resources
The Company provided (used) cash flows from operations of $4,522,000,
($4,548,000), $479,000, and $2,657,000 for the year ended December 31, 1998, the
six month periods ended December 31, 1997 and June 30, 1997 and the year ended
December 31, 1996, respectively. Cash flows from operations for the year ended
December 31, 1998 were primarily impacted by increased cash earnings offset by
the build-up in trade receivables and an increase in inventories which resulted
from overall increased sales activity and tooling investments for future program
deliveries at Monitor.
The Company used cash flows for investing activities, excluding cash
flows used in connection with the Kleinert Acquisition, the W-J Acquisition, and
the Monitor Acquisition, of $5,434,000, $1,289,100, $835,000, and $1,048,000 for
the year ended December 31, 1998, the six month periods ended December 31, 1997
and June 30, 1997 and the year ended December 31, 1996, respectively. Cash flows
utilized over the periods presented were primarily supporting investments in
machinery to accommodate a rising level of production orders resulting from
increasing levels of aircraft manufacturing activity.
The Company used cash flows from financing activities, excluding cash
flows used in connection with the Kleinert Acquisition, the W-J Acquisition, and
the Monitor Acquisition of $4,061,000, $7,924,300, $272,000, and $1,407,000 for
the year ended December 31, 1998, the six month periods ended December 31, 1997
and June 30, 1997 and the year ended December 31, 1996, respectively. During
1998 and 1997, cash flows from financing activities were primarily impacted by
borrowings under the Revolving Loan Facility to fund working capital due
primarily to the exclusion of the trade receivables as part of the assets
purchased in the WJ Acquisition coupled with investments in tooling for future
program deliveries at Monitor. During 1996, the Company repaid outstanding long
term indebtedness in excess of $2,000,000, offset by a consistent level of
borrowings approximating $750,000 under existing lines of credit primarily for
the purpose of building inventories to support the growing levels of new
aircraft production and replacement parts requirements.
29
<PAGE>
In connection with the Monitor Acquisition, the Company amended and
restated the Credit Agreement to, among other things, increase the maximum
revolving credit borrowing availability thereunder by $10 million to $35 million
and modify certain covenants. The Credit Agreement is comprised of a $115
million Term Loan Facility and a $35 million Revolving Loan Facility. The Term
Loan Facility includes a $30 million term loan (the "Term A Loan") having a
final scheduled maturity of December 31, 2003, a $60 million term loan (the
"Term B Loan") having a final scheduled maturity of December 31, 2005, and an
acquisition term loan facility (the "Acquisition Term Loan") of $25 million
having a final scheduled maturity of December 31, 2003. The Revolving Loan
Facility has a scheduled maturity of December 31, 2003.
Borrowings under the Revolving Loan Facility may be either base rate
loans, which bear interest at Societe Generale's ("lender") base rate plus a
margin of between 0.75% and 1.50% depending on the Company's leverage ratio or
Eurodollar rate loans, which bear interest at the lender's Eurodollar rate plus
a margin of between 1.75% and 2.50% depending on the Company's leverage ratio.
Borrowings under the Revolving Loan Facility are limited to 85% of eligible
accounts receivable and 50% of eligible inventories, and are available through
December 31, 2005. The outstanding balance under the revolving loan facility was
$13,500,000 at December 31, 1998. As a result of a significant customer advance
received in January 1999, the Company repaid the existing balance outstanding
under the Revolving Loan Facility.
The Term A Loan is payable in 22 consecutive quarterly installments
(payments escalate from $750,000 to $2,250,000) from September 1998 through
December 2003. At the option of the Company, the interest rate on the loans is
based on the lender's base rate plus a margin of between 0.75% and 1.50%
depending on the Company's leverage ratio, or Eurodollar rate plus a margin of
between 1.75% and 2.50% depending on the Company's leverage ratio. The average
interest rate for the year was 8.0%. At December 31, 1998, the interest rate was
7.5%. The outstanding balance under the Term A Loan was $28,500,000 at December
31, 1998.
The Term B Loan is payable in 30 consecutive quarterly installments
(payments escalate from $150,000 to $7,700,000) from September 1998 through
December 2005. At the option of the Company, the interest rate on the loans is
based on the lender's base rate plus a margin of between 1.50% and 2.00%
depending on the Company's leverage ratio, or Eurodollar rate plus a margin of
between 2.50% and 3.00% depending on the Company's leverage ratio. The average
interest rate for the year was 8.5%. The outstanding balance under the Term Loan
B was $59,700,000 at December 31, 1998. At December 31, 1998, the interest rate
was 8.0%.
The Credit Agreement is collateralized by substantially all of the
assets of the Company and is guaranteed, on a full and unconditional basis, by
all of the subsidiaries of Stellex. The Credit Agreement requires the Company to
maintain a minimum fixed charges coverage ratio and interest coverage ratio, as
defined, minimum net worth and a maximum leverage ratio. The Credit Agreement
also restricts the Company's ability to incur additional indebtedness, pay
dividends or other significant activities without approval of the lenders. The
Company was in compliance with these covenants at December 31, 1998.
The Company's primary liquidity demands will be for capital expenditures
and working capital needs. During 1999, based on the Company's existing
operations, the Company expects to spend approximately $8.0 million on capital
projects, primarily to maintain its facilities and expand and improve 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 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. See Part I, Item 1. "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
Credit Agreement.
During March 1999, the Company borrowed approximately $16 million
against the Credit Agreement in order to effect the purchase of Phoenix
Microwave including acquisition related expenses, in addition to providing
funds for the subsequent purchase of Phoenix Microwave's operating facilities.
The Company's management believes that, based on its current level of
operations and anticipated growth, its anticipated cash flow from operations and
available borrowings under the Credit Agreement, its level of liquidity will be
30
<PAGE>
adequate to meet its anticipated requirements for working capital, capital
expenditures, interest payments and any scheduled principal payments in the
foreseeable future. The Company will, however, require additional financing to
complete the pending acquisition of Precision Machining which is expected to
occur in April 1999. The Company anticipates that such financing will consist of
a combination of equity and debt financing, although no assurances can be given
that such financing will be available or that the Precision Machining
acquisition will be completed on the terms disclosed or at all.
Inflation and Changing Prices
Inflation has not been material to the Company's operations for the
periods presented.
Backlog
The Company's backlog of purchase orders as of December 31, 1998 was
$197.9 million ($99.5 million of which was related to products for the defense
industry) and on a pro forma basis including Monitor as of December 31, 1997 was
$208.9 million ($91.4 million of which was related to products for the defense
industry), respectively. Backlog broken down by segment for the Aerostructures
segment totals $121.4 million and $138.4 million as of December 31, 1998 and
1997, respectively, and for the Electronics segment totals $76.5 million and
$70.5 million for the same periods, 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 being cancelable at any time without penalty. In the event
of cancellation, the Company, in most cases, can recover actual committed costs
and profit on work performed up to the date of cancellation.
Environmental Matters
The Company and its operations are subject to extensive federal, state,
and local Environmental Laws that may change frequently. The Company can be
expected to incur capital and operating expenses to maintain compliance with and
to meet new applicable Environmental Laws. Based upon the underlying facts
giving rise to its environmental regulatory obligations and technical reports
prepared on the Company's facilities, the Company does not anticipate that any
such capital or operating expenses will have a material adverse effect on the
Company's results of operations. There can be no assurance, however, that
unanticipated, future Environmental Laws or previously unidentified
environmental conditions will not result in 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 April 1998 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities," which is effective for years beginning after December 15,
1998. This SOP establishes accounting standards for start-up costs and requires
that they generally be expensed as incurred. This SOP will be implemented as of
January 1, 1999, and is not expected to have a significant impact on the
Company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 is effective for the Company in fiscal 2000. Management anticipates that
accounting for transactions under SOP 98-1 will not have a material impact on
the financial position of the Company or its results of operations.
31
<PAGE>
In June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which defines derivatives,
requires that all derivatives be carried at fair value and provides for hedging
accounting when certain conditions are met. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management has
not fully assessed the implications of this new statement, but believes adoption
of this statement will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
The Year 2000 Issue
The Year 2000 issue concerns the inability of information systems to
recognize properly and process date-sensitive information beyond January 1,
2000. The critical areas for the Company are viewed as: (1) compliance of
products manufactured by the Company (primarily Stellex Microwave), (2)
readiness of internal information and business systems, and (3) readiness of key
suppliers of products and services.
State of readiness: During 1997 and 1998, the Company initiated an
assessment of the impact of the Year 2000 issue on its internal operations and
began the development of a plan to bring all of its computer systems into
compliance. This focus has been on all systems potentially impacted by the Year
2000 issue, including information technology ("IT") systems and non-IT systems,
such as those with embedded chips and factory floor systems. Each operating
company has responsibility for its own assessment and correction activities with
teams in place at each operating unit. These activities have been periodically
monitored by both local and corporate management. At the present time all of the
Company's subsidiaries existing as of December 31, 1998 have substantially
completed their internal IT and non-IT systems reviews for Year 2000 compliance.
The remaining procedures in each company's assessment of the Year 2000 issue on
its operations involve the completion of compliance testing. Significant vendors
and customers have been contacted and queried and have substantially responded
on their current status favorably. The Company's subsidiaries will continue to
pursue other vendors and customers who have yet to respond. A year 2000
compliant upgrade to the IT systems of Stellex Microwave is substantially
complete with only certain workstations and operating software requiring
upgrade, the upgrade of which is expected to be completed during the second
quarter of 1999.
Year 2000 compliance assessments have already begun on the newly
acquired Phoenix Microwave business, and in conjunction with due diligence
activities relating to the intended acquisition of Precision Machining.
Preliminary assessments of internal IT and non-IT systems indicate that no
significant system hardware or software upgrades will be required.
Completion of compliance testing and implementation of any required fixes
is scheduled for completion by September 1999.
Costs to address Year 2000 issues: To date, costs to implement and the
timeframe contemplated by management to be Year 2000 compliant are based on
management's best estimates. The types of expenditures made and expected to be
made include hardware and software upgrades, conversion costs, and compliance
assessment reviews. Costs incurred to date are approximately $1,354,000. The
remaining estimated costs, which will include the evaluation and correction of
deficiencies at Precision and Phoenix, are expected to total approximately
$350,000 and will be incurred substantially during the first half of 1999.
Risks associated with Year 2000 issue: The Company believes there is low
risk of any internal critical system, embedded system, or other critical asset
not being Year 2000-ready by the end of 1999. The Company continues to assess
its risk exposure attributable to external factors, suppliers and customers.
With respect to outside parties who have responded to requests for information
concerning their state of readiness for Year 2000 compliance, they have
indicated that their hardware, software, and related non-IT systems are
currently or will be Year 2000 compliant within the 1999 calendar year.
Evaluations of these issues is continuing and there can be no assurance that
additional issues, not presently known to the Company, will be discovered which
could present a material risk of disruption to the Company's operations. Such
disruptions could result in delays in the delivery or sale of products.
Contingency plans: A complete contingency plan for suppliers, customers
and mission critical systems impacted by Year 2000 issues is currently under
development and is being evaluated in light of worst-case scenarios. One of the
greatest areas of exposure is considered to be the ability for vendors to supply
critical materials and services. The contingency plan addresses this concern
through means such as double and triple sourcing certain critical products and
services and evaluation of stockpiling of critical inventory prior to the year
2000 to assure uninterrupted manufacturing.
32
<PAGE>
Forward Looking Statements
Certain statements in this Annual Report contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Investors are cautioned that any forward-looking statements, including
statements regarding the intent, belief, or current expectations of the Company
or its management, are not guarantees of future performance as they involve
known and unknown risks and uncertainties. Actual results may differ materially
from those in the forward-looking statements as a result of various factors
including, but not limited to: changes in the competitive marketplace, changes
in the overall pricing environment, changes in global economic conditions, the
risks associated with the Company's dependence on a limited number of large
customers, the risk of loss of certain significant military programs, and the
risks associated with the consolidation, restructuring, and changes in ownership
in the defense and aerospace industry.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is that of interest rate risk
associated with its various debt instruments. The Company has not entered into
any derivative financial instruments to manage its interest rate risks to date.
At December 31, 1998, the Company's total outstanding debt was comprised
of fixed interest rate obligations of $109,491,000 and variable interest rate
obligations of $102,243,000.
The table below provides information (in thousands of dollars) about the
Company's maturity schedule and fair values of its outstanding debt:
<TABLE>
<CAPTION>
Variable Rate Debt Fixed Rate Debt
------------------ ---------------
Senior
Year ending Term Loan Term Loan Revolving Subordinated Sellers
December 31, A B Loan Facility Other Notes Notes Other
------------ - - ------------- ----- ----- ----- -----
<C> <C> <C> <C> <C> <C> <C> <C>
1999 $ 3,000 $ 600 - $214 - $ 1,750 -
2000 3,750 600 - 116 - - -
2001 5,250 600 - 107 - 5,180 -
2002 7,500 600 - 97 - - $ 2,561
2003 9,000 600 - 9 - - -
Thereafter - 56,700 $ 13,500 - $ 100,000 - -
------- ------- ---------- ---- ---------- ------- -------
Total $28,500 $59,700 $ 13,500 $543 $ 100,000 $ 6,930 $ 2,561
======= ======= ========== ==== ========== ======= =======
Fair Market Value $28,500 $59,700 $ 13,500 $543 $ 86,250 $6,930 $2,561
======= ======= ========== ==== ========== ======= =======
</TABLE>
Based upon the Company's current level of variable rate debt, a 1%
increase or decrease in interest rates will cause an approximate $1.0 million
increase or decrease in annual interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information that
are required to be included pursuant to this Item 8 are listed in Item 14 of
this Report under the caption "(a)1." and follow Item 14. The financial
statements and supplementary financial information specifically referenced in
such list are incorporated in this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 2, 1998, the Board of Directors of Stellex Industries, Inc.
and subsidiaries resolved to (i) engage Deloitte & Touche LLP as the independent
accountants for all of Stellex Industries, Inc. and subsidiaries for the year
ended December 31, 1998 and (ii) dismiss PricewaterhouseCoopers as independent
accountants of KII Holding Corp. and subsidiaries, a significant consolidated
subsidiary of Stellex Industries, Inc. and subsidiaries.
PricewaterhouseCoopers LLP had audited the consolidated balance sheets
of KII Holdings Corp. and subsidiaries (formerly Kleinert Industries, Inc.), as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for the six-month period ended
December 31, 1997 (successor) and June 30, 1997 (predecessor) and the years
ended December 31, 1996 and 1995 (predecessor).
33
<PAGE>
During the years ended December 31, 1997 and 1996 and the subsequent
interim period through December 2, 1998, (i) there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to its satisfaction would have caused it to make
reference in connection with its report to the subjective matter of the
disagreement, and (ii) PricewaterhouseCoopers LLP has not advised the registrant
of any reportable events as defined in paragraph (A) through (D) of Regulation
S-K Item 304 (a) (1) (v).
The independent auditors' report of PricewaterhouseCoopers LLP on the
consolidated financial statement of KII Holdings Corp. and subsidiaries as of
and for the years ended December 31, 1997 and 1996 did not contain any adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principles.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors, Executive Officers and Key Employees
The following table sets forth information with respect to the
directors, executive officers and other key employees of the Company. All
directors and officers of the Company hold office until the annual meeting of
stockholders next following their election, or until their successors are
elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Richard L. Kramer........ 49 Chairman of the Board of Directors and Director of Stellex
Industries, Inc.
William L. Remley........ 48 Vice Chairman, President, Chief Executive Officer,
Treasurer and Director of Stellex Industries, Inc.
P. Roger Byer............ 53 Chief Financial Officer of Stellex Industries, Inc.
Keith D. Gilbert......... 56 President and Chief Executive Officer of Stellex Microwave
Systems, Inc.
Bradley C. Call.......... 55 President and Chief Executive Officer of Stellex Aerospace
and Stellex Aerospace Holdings, Inc.
R. Bruce Andrews......... 56 President and Chief Executive Officer of Monitor Aerospace
Corporation
Paul Dudek............... 48 Chief Financial Officer of Stellex Microwave
Julius E. Hodge.......... 48 Chief Financial Officer of Stellex Aerospace
Lawrence R. Smith........ 53 President of Paragon Precision Products
John Barriatua........... 63 President of General Inspection Laboratories, Inc.
Roland H. Marti.......... 53 President of Scanning Electron Analysis Laboratories, Inc.
Thomas B. Fulton......... 50 President of Bandy Machining International
Constantinos Kamnitsis... 55 President of Phoenix Microwave Corporation
</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, CPT
Holdings. Inc., a manufacturer of specialty structural steel profiles, Weldotron
Corporation, a packaging equipment manufacturer, Orion Acquisition Corp. II, an
investment 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. Mr.
Kramer is a non-employee director of Stellex and does 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.
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 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 1998, shortly after its formation. Prior to joining the Company, Mr.
Byer was Vice President of Finance at General Aquatics (successor to KDI
Corporation) since its formation in 1995. Prior to General Aquatics Mr. Byer
held the position of Vice President of Finance with KDI Corporation from 1987 to
1995. Mr. Byer spent nine years in the New York office of Arthur Andersen, where
he functioned as an Audit Manager. After leaving Arthur Andersen, Mr. Byer
worked at various firms in the capacity of Assistant Controller and Director of
Auditing until 1976 when he joined the Keene Corporation, initially as Assistant
Controller and later as Vice President of Finance.
35
<PAGE>
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 1998, respectively, until the consummation of the W-J
Acquisition. Prior to this time, Mr. Gilbert was employed 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 and of Stellex Aerospace Holdings, Inc. in June
1998. 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 and Pacificare Health Systems.
R. Bruce Andrews joined Monitor in 1994 and has over 30 years experience
in the aerospace and nuclear industries. He had previously held senior
management posts at UNC, Inc., a publicly listed aviation services company which
was acquired by General Electric. Mr. Andrews is responsible for the day to day
operations and has been the major catalyst in Monitor's repositioning itself as
an entity totally committed and responsive to the commercial marketplace.
Paul Dudek became Chief Financial Officer of Stellex Microwave in
January 1998. Prior to joining Stellex Microwave, Mr. Dudek was employed by
AlliedSignal Aerospace as Vice President, Finance of Aerospace Equipment Systems
from November 1994 until December 1998. Prior to this time, Mr. Dudek was
employed by General Electric Capital Corporation from November 1991 until
November 1994 as the Senior Vice President and Chief Financial Officer for the
Modular Space and Transportation Equipment Financing divisions.
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 1998.
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 from April 1995 until November 1997, and served as its President
since January 1996. Prior to this time, Mr. Fulton was employed by Kade
Composites from July 1986 until April 1995, and served as its President from
February 1988 until April 1995.
Constantinos Kamnitsis has held the position as President and Chief
Executive Officer of Phoenix Microwave Corporation since its inception in 1989.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth the compensation paid by the Company or
its predecessor to (i) the Company's current Chief Executive Officer and (ii)
the four next most highly compensated individuals serving as executive officers
of the Company whose annual compensation exceeded $100,000 in 1998 and 1997 (the
"named executive officers".)
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Other Annual All Other
Salary Bonus Compensation Compensation
Name and Principal Position Year ($) ($) ($) ($)
- - --------------------------- ---- --- --- --- ---
<S> <C> <C> <C> <C> <C>
William L. Remley,
Chief Executive Officer of Stellex 1998 150,000 150,000 - -
Industries, Inc.(a)................ 1997 - - - -
P. Roger Byer
Chief Financial Officer of Stellex 1998 150,000 75,000 - -
Industries, Inc.(b)................ 1997 - - - -
Keith D. Gilbert,
President and Chief Executive 1998 257,000 125,000 - 7,600
Officer of Stellex Microwave(c).... 1997 24,960 63,898 1,575
Bradley C. Call,
President and Chief Executive 1998 273,895 80,000 - 9,990(e)
Officer of Stellex Aerospace(d).... 1997 222,784 80,000 - 739,276(f)
R. Bruce Andrews,
President and Chief Executive 1998 262,500 186,861 - 13,791(h)
Officer of Monitor(g).............. 1997 - - - -
</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, strategic planning, and
other services in exchange for an annual management fee. See Part III, Item
13. "Certain Relationships and Related Transactions -Management Agreement
with Mentmore." The amounts reflected for Mr. Remley do not include
payments to Mentmore under the Management Agreement.
(b) Mr. Byer is an officer of Mentmore, which, pursuant to the Management
Agreement (as defined), provides the Company with general management,
advisory, consulting, strategic planning, and other services in exchange
for an annual management fee. See Part III, Item 13. "Certain Relationships
and Related Transactions - Management Agreement with Mentmore." The amounts
reflected for Mr. Byer do not include payments to Mentmore under the
Management Agreement.
(c) Mr. Gilbert's compensation for 1997 reflects the compensation earned from
November 1, 1997 to December 31, 1997 following the W-J Acquisition on
October 31, 1997. All Other Compensation in 1998 reflects 401(k) employer
contribution of $7,600 and 1997 consists of a management incentive bonus
plan award of $1,575.
(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 for 1997 relates to such employment.
Subsequent to July 1, 1997, Mr. Call was employed as President and Chief
Executive Officer of Stellex Aerospace, and $114,109 of the salary
presented for 1997 relates to such employment from July 1, 1997 to December
31, 1997.
(e) Reflects 401(k) employer contribution of $4,800 and term life insurance
premiums of $5,190.
37
<PAGE>
(f) Mr. Call received $730,132 from Kleinert Industries, Inc. in connection
with the consummation of the Kleinert Acquisition. See Part III, Item 13.
"Certain Relationships and Related Transactions - The Kleinert
Acquisition." All other compensation also includes 401(k) employer
contributions of $4,800 and term life insurance premiums of $4,344. Fifty
percent of each of such amounts relate on a pro rata basis to each of the
periods of Mr. Call's employment described in footnote (d) above.
(g) Mr. Andrews' compensation represents salary received between May 29, 1998
and December 31, 1998 as President and Chief Executive Officer of Monitor
subsequent to the date of acquisition of Monitor.
(h Consists of insurance premiums paid for the benefit of Mr. Andrews and an
automobile allowance.
Option Grants and Exercises and Long-Term Incentive Awards in Last Fiscal Year
The following table provides information, with respect to the named
executive officers of the Company, concerning the grant of options as KII
Holding, a wholly-owned subsidiary of Stellex, during the fiscal year ended
December 31, 1998, and the potential value of unexercised options on an
aggregated basis.
<TABLE>
<CAPTION>
Option Grants in the Last Fiscal Year
Number of
Securities % of Total
Underlying Options Potential Realizable Value
Options Granted to Exercise at Assumed Annual Rates of
Granted Employees in Price Expiration Stock Price Appreciation
Name (#)(1) Fiscal Year ($/Share) Date for Option Term
---- ------ ----------- --------- ---- ---------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Bradley C. Call 521.3 42% $391 July 1, 2007 $457,000 $826,000
(1) The Options are exercisable for shares of Class A Common Stock of KII
Holding Corp., a wholly-owned subsidiary of Stellex. See "- KII Holding
Corp. 1998 Option Plan." These options together with other options granted
to employees of KII Holding represent approximately 11% of the outstanding
common stock of KII Holding on a fully diluted basis.
The following table provides information with respect to the named
executive officer holding options at KII Holding, a wholly-owned subsidiary of
Stellex, concerning the exercise of options during the year ended December 31,
1998 and unexercised options as at December 31, 1998.
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Shares Value of Unexercised
Acquired on Value Number of Unexercised In-the-Money Options at
Exercise Realized Options at December 31, 1998 December 31, 1998(1)
---------------------------- --------------------
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- --- --- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Bradley C. Call - - 0/521.3 0/$212,000
</TABLE>
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. The Board
of Directors of Stellex consists of Messrs. Kramer and Remley.
Mr. Remley is the Chief Executive Officer of Stellex.
38
<PAGE>
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. Mr.
Gilbert is also 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.
SA Holdings is a party to an employment agreement with Bradley C. Call,
pursuant to which Mr. Call serves as President and Chief Executive Officer of SA
Holdings and Stellex Aerospace. Mr. Call's employment agreement commenced as of
June 1, 1998 and will expire on June 30, 2002, unless sooner terminated. Under
such agreement, Mr. Call receives a base salary of $300,000 per annum, subject
to annual increases at the discretion of the board of directors of SA Holdings.
Beginning with SA Holdings' fiscal year 1998, Mr. Call will also be entitled to
receive an annual incentive bonus of up to 60% of his base salary based upon SA
Holdings' attainment of certain targeted levels of annual EBITDA (as defined in
his agreement). Under the terms of his employment agreement, Mr. Call is
entitled to participate in all savings and retirement, welfare benefit and
fringe benefit plans, practices, policies and programs to the extent applicable
generally to other peer executives of Stellex Aerospace. In addition, Mr. Call
is entitled to certain special allowances and benefits, four weeks paid vacation
per year, and reimbursement for all reasonable expenses incurred by him in the
discharge of his duties.
Mr. Call's employment agreement may be terminated by SA Holdings at any
time, with or without cause (as defined in his agreement). In the event Mr.
Call's employment agreement is terminated by SA Holdings for cause, or Mr. Call
terminates his own employment, SA Holdings will pay Mr. Call his base salary
through the date of termination plus any compensation previously deferred by him
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the "Accrued
Obligations"). In the event Mr. Call's employment agreement is terminated by SA
Holdings due to Mr. Call's death or disability (as defined in his agreement), SA
Holdings will pay Mr. Call, or his legal representatives, as the case may be,
(i) the Accrued Obligations plus (ii) any amounts due pursuant to the terms of
any applicable welfare benefit plans plus (iii) any incentive bonus earned for
the prior fiscal year to the extent not theretofore paid (the "Accrued Bonus").
In the event Mr. Call's employment agreement is terminated by SA Holdings other
than for cause or Mr. Call's death or disability, SA Holdings will pay Mr. Call
(i) the Accrued Obligations plus (ii) the Accrued Bonus plus (iii) his base
salary for the lesser of the remainder of the term of his employment agreement
or one year plus (iv) a $5,000 lump sum payment in lieu of benefits
continuation. For a period of one year following the termination of his
employment, Mr. Call will be subject to provisions prohibiting his (i)
solicitation or diversion of customers of SA Holdings or any of its subsidiaries
or affiliates and (ii) solicitation of and (in the event Mr. Call's employment
agreement is terminated by SA Holdings for cause or Mr. Call's disability)
employment with certain significant employees of SA Holdings or any of its
subsidiaries or affiliates. Mr. Call's employment agreement also contains
provisions relating to (i) non-competition with SA Holdings or any of its
subsidiaries or affiliates, (ii) non-disclosure of proprietary information of SA
Holdings or any of its subsidiaries or affiliates and (iii) the assignment to SA
Holdings of ownership of certain intellectual property conceived by Mr. Call
during his employment.
39
<PAGE>
Monitor is a party to an employment agreement with R. Bruce Andrews,
pursuant to which Mr. Andrews serves as President and Chief Executive Officer of
Monitor. Mr. Andrews' employment agreement commenced as of May 29, 1998 and will
expire on December 31, 2002, unless sooner terminated. Under such agreement, Mr.
Andrews receives a base salary of $450,000 per annum, subject to annual
increases, and, pursuant to a separate agreement, a supplemental payment towards
his retirement of $60,000 per annum. Beginning with Monitor's fiscal year 1998,
Mr. Andrews will also be entitled to receive an annual incentive bonus of up to
$500,000 based upon Monitor's attainment of certain targeted levels of annual
EBITDA (as defined in his agreement). Under the terms of his employment
agreement, Mr. Andrews is entitled to participate in all retirement, insurance
and other employee benefit programs generally available to salaried employees of
Monitor, subject to applicable eligibility requirements. In addition, Mr.
Andrews is entitled to certain special allowances and benefits, four weeks paid
vacation per year, and reimbursement for all reasonable expenses incurred by him
in the discharge of his duties.
Mr. Andrews' employment agreement may be terminated by Monitor at any
time, with or without cause (as defined in his agreement). In the event Mr.
Andrews' employment agreement is terminated by Monitor for cause or Mr. Andrews'
death or disability (as defined in his agreement), or Mr. Andrews terminates his
own employment without good reason (as defined in his agreement), Monitor will
pay Mr. Andrews his base salary through the date of termination plus any
compensation previously deferred by him (together with any accrued interest or
earnings thereon) and any accrued and unused vacation pay, in each case to the
extent not theretofore paid, plus any amounts due pursuant to the terms of any
of Monitor's applicable retirement, life insurance or other programs (the
"Accrued Obligations"). In the event Mr. Andrews' employment agreement is
terminated by Monitor other than for cause or Mr. Andrews' death or disability,
or Mr. Andrews terminates his own employment with good reason, Monitor will (i)
pay Mr. Andrews the Accrued Obligations plus his base salary for six months,
(ii) continue for up to six months Mr. Andrews' coverage under applicable life,
health and other insurance programs and (iii) reimburse Mr. Andrews up to $5,000
for certain relocation expenses. During the term of his agreement and for a
period of one year following the termination of his employment, Mr. Andrews will
be subject to provisions prohibiting his (i) solicitation or diversion of
customers of Monitor or any of its subsidiaries or affiliates and (ii)
competition with Monitor or any of its subsidiaries or affiliates in certain
lines of business. Mr. Andrews' employment agreement also contains provisions
relating to (i) non-solicitation of certain significant employees of Monitor for
a period of one year following the termination of his employment, (ii)
non-disclosure of proprietary information of Monitor or any of its subsidiaries
or affiliates and (iii) the assignment to Monitor of ownership of certain
intellectual property conceived by Mr. Andrews during his employment.
KII Holding Corp. 1998 Option Plan
Pursuant to an Agreement entered into in connection with the Kleinert
Acquisition (the "Stellex Aerospace Investor Agreement"), KII Holding, a
subsidiary of Stellex, granted stock appreciation rights ("SARs") to certain
members of KII Holding's management. Effective December 31, 1998, KII Holding
exchanged the outstanding SARs for options to purchase up to an aggregate of
1,238.1 shares of common stock of KII Holding (the "Option Plan"). Seventeen and
one-half percent of the KII Holding Options granted vested on the date of grant
and the remainder vest in equal installments between December 31, 1999 and
December 31, 2002. The exercise price of the KII Holding Options is $391 per
share, and the options generally become exercisable upon the earliest to occur
of an initial public offering by KII Holding, SA Holdings, or Stellex
Industries, a Corporate Transaction (which is defined in the Option Plan to
generally mean a change of control of Stellex or KII Holding, a sale of all or
substantially all of the assets of Stellex or KII Holding or the adoption of a
plan of liquidation for Stellex Industries or KII Holding) or May 1, 2007. If
the exercise event is an initial public offering by SA Holdings, Stellex
Industries, the Board of Directors of Stellex may convert the KII Holding
Options into options to purchase Stellex's Common Stock pursuant to a conversion
formula set forth in the Option Plan.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of Stellex's Common Stock as of March 1, 1999 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. See also, Item 13...with respect to the current and former ownership
of certain equity and debt securities of the Company and its subsidiaries.
Common Stock
Beneficially
Owned
Beneficial owner Shares %
Cottingham Trust (1996)(a)............................ 892 89.2
Askrigg Trust (1996)(b)............................... 99 9.9
Richard L. Kramer..................................... 892(c) 89.2
William L. Remley..................................... 991(d) 99.1
P. Roger Byer......................................... - -
Keith D. Gilbert...................................... - -
Bradley C. Call....................................... - -
R. Bruce Andrews...................................... - -
Paul Dudek............................................ - -
Julius E. Hodge....................................... - -
Lawrence R. Smith..................................... - -
John Barriatua........................................ - -
Roland H. Marti....................................... - -
Thomas B. Fulton...................................... - -
Constantinos Kamnitsis................................ - -
---- -----
Total Executive Officers and Directors as a Group..... 991 99.1
(a) The pool of contingent beneficiaries of Cottingham Trust (1996)
("Cottingham") is comprised of Richard L. Kramer and certain members of his
family. The trustee of Cottingham, William L. Remley, exercises all powers
with respect to investment or voting of securities owned by Cottingham and
the selection and removal of the beneficiaries of Cottingham. The
administrative office address of Cottingham is c/o Greenberg, Traurig,
Hoffman, Lipoff, Rosen & Quentel, 200 Park Avenue, New York, New York
10016, Attn: Jay I. Gordon, Esq. Mr. Kramer, the Chairman of the Board of
Directors and a director of Stellex and the Subsidiary Guarantors, with the
exception of Stellex Microwave of which Mr. Kramer is the Vice Chairman,
and Mr. Remley, Vice Chairman, Chief Executive Officer and a director of
Stellex and Vice Chairman and a director of the Subsidiary Guarantors, with
the exception of Stellex Microwave of which Mr. Remley is the Chairman, 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
trustee of Askrigg, Gary R. Siegel, exercises all powers with respect to
investment or voting of securities owned by Askrigg and the selection and
removal of the beneficiaries of Askrigg. The administrative office address
of Askrigg is c/o Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, 200
Park Avenue, New York, New York 10016, Attn: Jay I. Gordon, Esq. and an
address of Mr. Siegel is c/o Mentmore Holdings Corporation, 1430 Broadway,
13th Floor, New York, NY 10018-3308. Mr. Remley, Vice Chairman, Chief
Executive Officer and a director of Stellex and Vice Chairman and a
director of the Subsidiary Guarantors, with the exception of Stellex
Microwave of which Mr. Remley is the Chairman, is an executive officer and
director of Mentmore, which provides management services to the Company.
(c) Comprised of 892 shares of Stellex's Common Stock held of record by
Cottingham, as to which Mr. Kramer disclaims beneficial ownership. See
footnote (a) above.
41
<PAGE>
(d) Comprised of 892 and 99 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Trinity Note
In connection with the Kleinert Acquisition, KII Holding issued a
promissory note (the "Trinity Note") in the principal amount of $2,500,000 to
Trinity Investment Corp. ("Trinity"). Richard L. Kramer and William L. Remley
are executive officers and directors of Trinity, which is a subsidiary of
entities owned by trusts established for the benefit of certain relatives of
Messrs. Kramer and Remley. The outstanding principal and accrued interest on the
Trinity Note was repaid with a portion of the proceeds of the 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 May 29, 1998 (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
$1.0 million, which is payable monthly, plus, from and after January 1, 1999,
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 Transactions, Mentmore received investment
banking and financial advisory fees of $0.45 million, $1.0 million, and $1.0
million, respectively, in addition to the reimbursement of certain expenses. For
the years ended December 31, 1998 and December 31, 1997, the Company paid an
additional $1.0 million and $0.2 million in fees to Mentmore under the
Management Agreement. 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 is determined based upon a tax sharing
agreement (the "Tax Sharing Agreement") entered into among Stellex and its
subsidiaries. Under the Tax Sharing Agreement, Stellex and its subsidiaries are
generally 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 are allocated to Stellex
and its subsidiaries based on similar principles.
Relationship with Equity Investors
In connection with the consummation of the Kleinert Acquisition, the W-J
Acquisition and the Offering, 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
42
<PAGE>
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.
The Kleinert Acquisition Transactions
Pursuant to Stellex Aerospace Investor Agreement, six senior members of
Stellex Aerospace's management team (the "Buyers") purchased 19.9% of the
issued and outstanding shares of common stock of 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.
Effective December 31, 1998, certain of the Buyers exchanged their shares of
KII Holding common stock for warrants to purchase Class B Common Stock
of KII Holding (the "KII Warrants"), initially representing
approximately 17% of the outstanding common stock of KII Holding on a
fully-diluted basis. The exercise price of the KII Warrants is $.01 per
share, and the KII Warrants generally become exercisable upon an initial
public offering of Stellex, SA Holdings or KII Holding, a Corporate Transaction
(which is defined in the Option Plan to generally mean a change of control of
Stellex or KII Holding, a sale of all or substantially all of the assets of
Stellex or KII Holding or the adoption of a plan of liquidation for Stellex
Industries or KII Holding) or May 1, 2007. Upon an initial public offering by
SA Holdings or Stellex, the Board of Directors of the SA Holdings may require
the holders of the KII Warrants to exercise their KII Warrants and exchange the
shares of KII Holding's Class B Common Stock issuable thereunder for shares of
SA Holdings or Stellex's Common Stock pursuant to a conversion formula set forth
in the agreement governing the Warrants.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
1. The financial statements listed on page F-1 are filed as part of
thisReport.
2. Financial Statement Schedules:
All schedules are omitted because they are not applicable, not required or
the information is included elsewhere in the Consolidated Financial
Statements or Notes thereto.
3. List of Exhibits:
Exhibit
Number Description
*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.
43
<PAGE>
*3.17 Certificate 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.
3.21 Certificate of Incorporation of Stellex Aerospace Holdings, Inc.
3.22 Bylaws of Stellex Aerospace Holdings, Inc.
3.23 Certificate of Incorporation of Monitor Aerospace Corporation.
3.24 Bylaws of Monitor Aerospace Corporation.
3.25 Certificate of Incorporation of Monitor Aerospace International Corp.
3.26 Bylaws of Monitor Aerospace International Corp.
3.27 Certificate of Incorporation of Monitor Marine Products, Inc.
3.28 Bylaws of Monitor Marine Products, 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.
4.4 Supplemental Indenture No. 1, dated as of May 29, 1998 to 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., General Inspection Laboratories, Inc., Stellex
Aerospace Holdings, Inc., Monitor Aerospace Corporation, Monitor
Aerospace International Corp., and Monitor Marine Products, Inc., and
Marine Midland Bank, as trustee.
4.5 Supplemental Indenture No. 2, dated as of March 2, 1999 to 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., General Inspection Laboratories, Inc., Stellex
Aerospace Holdings, Inc., Monitor Aerospace Corporation, Monitor
Aerospace International Corp., Monitor Marine Products, Inc., PMC
Acquisition Corporation, Phoenix Microwave, Ltd. and Phoenix Microwave
Corporation and Marine Midland Bank, as trustee.
*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.
**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.
*10.3 Stock Purchase Agreement dated as of May 23, 1997, by and among KII
Acquisition Corp. and Kleinert Industrie Holding AG.
*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.
44
<PAGE>
*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.
*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 Agreement and Plan of Merger dated as of April 28, 1998, by and among
Stellex Aerospace Holdings, Inc., Soze Corp., and Monitor Aerospace
Corporation.
***10.13 Amended and Restated Credit Agreement dated as of May 29, 1998, among
the Company, the financial institutions from time to time party
thereto, Societe Generale and First Union Commercial Corporation.
10.14 Waiver dated as of December 14, 1998, by and among Stellex Industries,
Inc., the financial institutions from time to time parties to the
Amended and Restated Credit Agreement dated as of May 29, 1998, among
the Company, the financial institutions from time to time party
thereto, Societe Generale and First Union Commercial Corporation.,
Societe Generale in its capacity as administrative agent and First
Union Commercial Corporation, in its capacity as collateral agent.
10.15 Amended and Restated Management Advisory Services Agreement effective
as of May 29, 1998 by and between Mentmore Holdings Corporation and
Stellex Industries, Inc. and its subsidiaries.
10.16 First Amendment to the Tax Allocation and Indemnity Agreement dated as
of May 29, 1998 by and among Stellex Industries, Inc., TSMD
Acquisition Corp., Stellex Microwave Systems, Inc., KII Holding Corp,
KII Acquisition Corp, Stellex Aerospace and its direct subsidiaries.
10.17 Employment Agreement by and between Stellex Microwave Systems, Inc.
and Keith Gilbert, dated as of November 1, 1997.
10.18 Employment Agreement by and between Stellex Aerospace Holdings, Inc.
and Bradley C. Call, dated as of June 1, 1998.
10.19 Employment Agreement by and between Monitor Aerospace Corporation and
R. Bruce Andrews, dated as of May 29, 1998.
10.20 Salary Continuation Agreement dated as of November 17, 1997 by and
between Monitor Aerospace Corporation and R. Bruce Andrews
10.21 KII Holding Corp. 1998 Stock Option Plan.
10.22 Form of Option Agreement under the KII Holding Corp. 1998 Stock Option
Plan
10.23 Form of Warrant Purchase Agreement
10.24 Form of Warrant Certificate
****10.25 Stock Purchase Agreement dated March 1, 1999 by and between PMC
Acquisition Corporation, Phoenix Microwave Corporation, Constantinos
Kamnitsis, as Representative and the sellers party thereto.
12.1 Computation of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrants.
45
<PAGE>
27.1 Financial Data Schedule.
* Filed with Registration Statement No. 333-41939 and incorporated
herein by reference.
** Confidential treatment requested for a portion of this exhibit
previously filed with Registration Statement No. 333-41939 and
incorporated herein by reference.
*** Filed with Form 8-K Current Report dated as of May 29, 1998 and
incorporated herein by reference.
**** Filed with Form 8-K Current Report dated as of March 1, 1999 and
incorporated herein by reference.
(b) Reports on Form 8-K:
On May 29, 1998, the Company reported to the Securities and Exchange
Commission, under Item 2, Acquisition or Disposition of Assets, that
on May 29, 1998, the Company acquired Monitor Aerospace Corporation
("Monitor"), a leading aerospace subcontractor engaged in the
manufacture and assembly of precision-machined structural aircraft
components and assemblies for tolerance-critical applications located
in Amityville, New York. The Company's acquisition of Monitor was
effected pursuant to the Agreement and Plan of Merger dated as of
April 28, 1998, by and among Stellex Aerospace Holdings, Inc., a
subsidiary of the Company, Soze Corp., a wholly-owned subsidiary of
Holdings, and Monitor.
On December 8, 1998, the Company reported to the Securities and
Exchange Commission under Item 4, Change in Registrant's Certifying
Accountant, that on December 2, 1998, the Company resolved to (i)
engage Deloitte & Touche LLP as the independent accountants for all of
Stellex Industries, Inc. and subsidiaries for the year ended December
31, 1998 and (ii) dismiss PricewaterhouseCoopers as independent
accountants of KII Holding Corp. and subsidiaries, a significant
consolidated subsidiary of Stellex Industries, Inc. and subsidiaries.
(c) Exhibits:
See (a)(3) above for a listing of Exhibits filed as a part of this
Report.
(d) Additional Financial Statement Schedules:
None.
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act
Neither an annual report covering the Registrant's last fiscal year nor
proxy materials with respect to any annual or other meeting of security holders
have been sent to security holders.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Stellex Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Stellex
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1998 and the six-month period
ended December 31, 1997. We did not audit the financial statements of KII
Holding Corp. (a consolidated subsidiary) which statements reflect total assets
constituting 26% of consolidated total assets at December 31, 1997 and total
revenues constituting 58% of consolidated total revenues for the six-month
period then ended. Those statements were audited by other auditors, whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for KII Holding Corp. as of such date and for such period, is based
solely on the report of such other auditors. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Stellex Industries, Inc. and subsidiaries as of December
31, 1998 and 1997, and the results of their operations and their cash flows for
the year ended December 31, 1998 and the six-month period ended December 31,
1997 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted a new accounting basis effective July 1, 1997 in connection with a
change of ownership and recorded net assets as of that date at the new owner's
acquisition cost. Accordingly, the book values of assets and related
depreciation and amortization charges in the accompanying consolidated financial
statements as of December 31, 1997 are not comparable to those of earlier
periods presented.
DELOITTE & TOUCHE LLP
San Jose, California
March 4, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors and Shareholder of
KII Holding Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of KII Holding
Corp. and Subsidiaries (formerly Kleinert Industries, Inc. and Subsidiaries), a
majority-owned subsidiary of Stellex Industries, Inc., as of December 31, 1997
and the consolidated statements of income, shareholder's equity, and cash flows
for the six months ended December 31, 1997 (successor) and June 30, 1997
(predecessor) and the year ended December 31, 1996 (predecessor). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KII Holding Corp.
and Subsidiaries (formerly Kleinert Industries, Inc. and Subsidiaries) as of
December 31, 1997, and the consolidated results of their operations and their
cash flows for the six months ended December 31, 1997 (successor) and June 30,
1997 (predecessor) and the year ended December 31, 1996 (predecessor) in
conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Los Angeles, California
March 6, 1998
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------------
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................................. $ 1,405 $ 3,304
Accounts receivable, less allowance for doubtful accounts
($373 in 1998 and $92 in 1997) ......................................................... 28,452 15,232
Inventories ............................................................................... 58,329 27,884
Prepaid and other assets .................................................................. 3,200 3,753
Deferred income taxes ..................................................................... 3,318 2,173
--------- ---------
Total current assets ...................................................................... 94,704 52,346
Property, plant and equipment, net ........................................................... 53,871 31,506
Goodwill, net of accumulated amortization of $2,155
in 1998 and $253 in 1997 .................................................................. 60,786 42,920
Other intangible assets, net of accumulated amortization of $2,803
in 1998 and $394 in 1997 .................................................................. 52,552 12,595
Deferred financing costs, net of accumulated amortization of $938
in 1998 and $91 in 1997 ................................................................... 9,033 5,356
Other assets ................................................................................. 2,284 1,059
--------- ---------
Total assets .............................................................................. $ 273,230 $ 145,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes and capital lease obligations .................................... $ 5,533 $ 140
Accounts payable .......................................................................... 11,639 4,638
Accrued liabilities ....................................................................... 17,797 12,031
Advance billings and customer deposits .................................................... 252 2,679
--------- ---------
Total current liabilities ................................................................. 35,221 19,488
9 1/2% senior subordinated notes ............................................................. 100,000 100,000
Long-term obligations, less current portion .................................................. 106,201 12,182
Deferred employee benefits ................................................................... 1,952 1,704
Deferred income taxes ........................................................................ 20,029 2,446
Minority interest in KII Holding Corp. ....................................................... -- 1,078
--------- ---------
Total liabilities ......................................................................... $ 263,403 $ 136,898
--------- ---------
Commitments and contingencies (Notes 12, 15 and 16)
Stockholders' equity:
Common stock, no par value, 1,000 shares authorized and outstanding ....................... 50 50
Preferred stock, no par value: 500 shares authorized,
229 shares issued and outstanding ...................................................... 11,450 11,450
Additional paid-in capital ................................................................ 3,054 --
Accumulated deficit ....................................................................... (4,727) (2,616)
--------- ---------
Total stockholders' equity ................................................................ 9,827 8,884
--------- ---------
Total liabilities and stockholders' equity ................................................ $ 273,230 $ 145,782
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Six Months Ended Six Months Ended Year
Ended December 31, December 31, June 30, Ended December 31,
1998 1997 1997 1996
--------- --------- --------- ---------
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Sales ................................................. $ 169,304 $ 30,536 $ 14,296 $ 24,307
Cost of sales ......................................... 122,263 24,732 10,140 17,367
--------- --------- --------- ---------
Gross profit .......................................... 47,041 5,804 4,156 6,940
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative ................... 21,695 5,081 1,783 3,629
Research and development .............................. 5,068 588 -- --
Amortization of noncompete covenants,
goodwill and other intangible costs ................ 3,994 716 16 31
--------- --------- --------- ---------
Total operating expenses .............................. 30,757 6,385 1,799 3,660
--------- --------- --------- ---------
Income (loss) from operations ......................... 16,284 (581) 2,357 3,280
--------- --------- --------- ---------
Other income (expense):
Interest income .................................... 69 25 5 12
Interest expense ................................... (16,639) (2,577) (376) (856)
Other .............................................. (73) (14) (103) (58)
--------- --------- --------- ---------
Total other expense ................................... (16,643) (2,566) (474) (902)
--------- --------- --------- ---------
Income (loss) before provision for income
taxes and extraordinary loss ....................... (359) (3,147) 1,883 2,378
--------- --------- --------- ---------
Provision (benefit) for income taxes .................. 588 (1,170) 753 945
--------- --------- --------- ---------
Income (loss) before extraordinary loss ............... (947) (1,977) 1,130 1,433
Extraordinary loss on early extinguishment
of debt (net of income tax benefit of
$299 in 1997) ...................................... -- (448) -- --
--------- --------- --------- ---------
Net income (loss) ..................................... (947) (2,425) 1,130 1,433
Preferred stock dividends ............................. (1,164) (191) -- --
--------- --------- --------- ---------
Income (loss) applicable to common
stockholders ....................................... $ (2,111) $ (2,616) $ 1,130 $ 1,433
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Preferred Stock Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
------ ------ ------ ------ -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor:
Balance, January 1, 1996 .......................... 10,000 $ 10,000 -- -- $ 1,953 $ 792 $ 12,745
Net income ........................................ -- -- -- -- -- 1,433 1,433
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 ........................ 10,000 10,000 1,953 2,225 14,178
Net income ........................................ -- -- -- -- -- 1,130 1,130
-------- -------- -------- -------- -------- -------- --------
Balance, June 30, 1997 ............................ 10,000 $ 10,000 -- -- $ 1,953 $ 3,355 $ 15,308
======== ======== ======== ======== ======== ======== ========
The Company:
Issuance of stock ................................. 1,000 $ 50 229 $ 11,450 -- -- $ 11,500
Net loss .......................................... -- -- -- -- -- (2,425) (2,425)
Dividends declared on preferred stock ............. -- -- -- -- -- (191) (191)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1997 ........................ 1,000 50 229 11,450 -- (2,616) 8,884
Issuance of warrants and options in exchange for
minority interest ............................ -- -- -- -- 3,054 -- 3,054
Net loss .......................................... -- -- -- -- -- (947) (947)
Dividends declared on preferred stock ............. -- -- -- -- -- (1,164) (1,164)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1998 ........................ 1,000 $ 50 229 $ 11,450 $ 3,054 $ (4,727) $ 9,827
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Six Months Year
Ended Ended Six Months Ended Ended
December 31, December 31, June 30, December 31,
1998 1997 1997 1996
---- ---- ---- ----
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) ................................................ $ (947) $ (2,425) $ 1,130 $ 1,433
Reconciliation to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................... 15,837 2,132 878 1,691
Gain on sale of property .................................... (1) (1) (4) (2)
Deferred income taxes ....................................... 583 (1,182) 125 254
Stock compensation .......................................... 2,146 300 -- --
Extraordinary loss on extinguishment
of debt .................................................. -- 448 -- --
Changes in assets and liabilities
(net of acquisitions):
Accounts receivable ...................................... (3,979) (10,500) (978) (389)
Inventories .............................................. (7,238) 3,007 (1,078) (1,074)
Prepaid and other assets ................................. (33) (2,754) (108) (275)
Accounts payable ......................................... 609 2,554 559 358
Accrued liabilities ...................................... (2,018) 3,873 18 530
Advance billings and customer deposits ................... (437) -- (3) 134
Income taxes payable ..................................... -- -- (60) (3)
-------- -------- -------- --------
Net cash provided by (used in) operating activities ... 4,522 (4,548) 479 2,657
-------- -------- -------- --------
Cash Flows From Investing Activities
Net cash paid for acquisitions ................................... (90,432) (97,906) -- --
Additions to property, plant and equipment ....................... (5,436) (1,289) (868) (1,053)
Proceeds from sale of assets and other ........................... 2 -- 33 5
-------- -------- -------- --------
Net cash (used in) investing activities ............... (95,866) (99,195) (835) (1,048)
-------- -------- -------- --------
</TABLE>
52
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
Year Six Months Year
Ended Ended Six Months Ended Ended
December 31, December 31, June 30, December 31,
1998 1997 1997 1996
---- ---- ---- ----
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities
Issuance of senior subordinated notes,
net of issuance costs .................................. $ -- $ 94,552 $ -- $ --
Net borrowings on line of credit .......................... 6,000 7,500 300 735
Net borrowings on notes payable ........................... -- 430 (28) (2,142)
Proceeds from borrowings in
connection with Kleinert Acquisition ................... -- 19,300 -- --
Proceeds from term loans, net of
financing costs ........................................ 85,384 -- -- --
Repayment of term loans ................................... (1,800) -- -- --
Proceeds from sales of stock .............................. -- -- --
(including minority interest) .......................... 12,278
Repayments under capital lease
obligations ............................................ (76) (5) -- --
Repayment of other liabilities ............................ (63) -- -- --
Repayment of debt and notes payable in
conjunction with Kleinert acquisition .................. -- (27,330) -- --
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities ............................... 89,445 106,725 272 (1,407)
--------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents ................................... (1,899) 2,982 (84) 202
Cash and cash equivalents, beginning of year ................... 3,304 322 406 204
--------- --------- --------- ---------
Cash and cash equivalents, end of
year ...................................................... $ 1,405 $ 3,304 $ 322 $ 406
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ............................................... $ 15,380 $ 750 $ 378 $ 864
Income taxes, net ...................................... $ -- $ 369 $ 633 $ 694
Transactions in connection with the acquisition
of Monitor in 1998 and Kleinert in 1997
Note issued to seller .................................. $ 5,180 $ 1,750 $ -- $ --
Mortgage note assumed .................................. $ -- $ 2,600 $ -- $ --
Non-cash exchange of common stock and
vested SARs by certain members of KII
Holding management into warrants and
options of Common Stock of KII Holding
(See Note 9) ............................................ $ 3,054
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Formation of Stellex Industries, Inc. - On September 5, 1997, Stellex
Holdings Corp. was incorporated as a Delaware corporation, which on October 23,
1997 amended its article of incorporation to change its name to Stellex
Industries, Inc. ("Stellex"). On September 12, 1997, Stellex issued 1,000 shares
of its common stock to Greystoke Capital Management Limited LDC in exchange for
(i) 8,010 shares of common stock and 84 shares of Series A preferred stock of
KII Holding Corp. ("KII Holding"), (ii) $50,000 cash and (iii) the assumption of
a $4,000,000 promissory note. KII Holding had previously been formed to effect
the acquisition of Kleinert Industries and subsidiaries ("Kleinert") on July 1,
1998, as described more fully below. As a result of the September 12, 1997
transaction, Stellex acquired an 80.1% interest in KII Holding; the remaining
equity interests were held by certain members of Kleinert management. These
interests were acquired in 1998 (See Note 8). The transaction was accounted for
as a reincorporation of KII Holding; accordingly, the financial statements of
Stellex reflect the results of its operations commencing with the acquisition of
Kleinert on July 1, 1997. Kleinert is the predecessor of Stellex, and financial
information for Kleinert is presented as of December 31, 1996 and for the six
months ended June 30, 1997 and the year ended December 31, 1996 in accordance
with the rules and regulations of the Securities and Exchange Commission.
References to the "Company" include both Stellex and its predecessor, Kleinert.
Kleinert Acquisition - On July 1, 1997, KII Holding through a wholly-owned
subsidiary (KII Acquisition Corp., a Delaware company) acquired all of the
outstanding capital stock of Kleinert from Kleinert Industries Holding AG. The
acquisition was 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) was 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 of the net
assets acquired in connection with the acquisition. Kleinert's corporate name
was subsequently changed to Stellex Aerospace. Kleinert commenced operations in
1988, and provided 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").
PPP specializes in the manufacture of precision aerospace components. GIL
provides 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 hinges assemblies for both aerospace and industrial applications.
TSMD Acquisition - 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. ("Stellex Microwave"), which comprised
the operations of the Tactical Subsystems and Microwave Devices Sectors ("TSMD")
of the Watkins-Johnson Company ("Watkins-Johnson"), for a net purchase price of
approximately $82.1 million. The acquisition was accounted for using the
purchase method of accounting with estimated fair value being assigned to the
assets acquired and liabilities assumed. This allocation resulted in
approximately $43.2 million being assigned to goodwill which is being amortized
over 25 years. The purchase was financed primarily with the net proceeds from
an offering of senior subordinated notes totaling $92.3 million (see Note 7).
Stellex Microwave designs, markets and manufactures 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. Stellex's 1997 consolidated financial statements include the
results of operations of Stellex Microwave from the acquisition date.
Monitor Acquisition - On May 29, 1998, the Company acquired Monitor
Aerospace Corporation ("Monitor"), a leading aerospace subcontractor engaged in
the manufacture and assembly of precision-machined structural aircraft
components and assemblies for tolerance critical applications, located in
Amityville, New York. Monitor has two wholly-owned subsidiaries, Monitor
Aerospace International Corporation and Monitor Marine Products Inc. The
acquisition was accounted for using the purchase method of accounting with
estimated fair value being allocated to the assets acquired and liabilities
assumed. This allocation resulted in approximately $19.6 million being assigned
to goodwill which is being amortized over 30 years. Stellex's consolidated
financial statements herein include the results of operations of Monitor from
the acquisition date.
54
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
1. Organization and Description of Business - (Continued)
The purchase price for Monitor was approximately $95.0 million including
the assumption of approximately $26.5 million of debt and excluding transaction
and financing fees and expenses of approximately $5.9 million. The Monitor
Acquisition was financed through (i) borrowings of $95.7 million under a credit
agreement as of May 29, 1998 ("Credit Agreement") and (ii) Monitor's issuance of
a promissory note to certain former Monitor shareholders, in the principal
amount of $5.2 million. Borrowings under the Credit Agreement were comprised of
term loans in an aggregate principal amount of $90.0 million and revolving loans
of approximately $17.0 million, of which $11.3 million was used to refinance the
existing Company revolver and supply near term working capital requirements.
Pro Forma Financial Information - The following unaudited pro forma
financial information gives effect to the acquisition of Stellex Microwave and
Monitor ("Acquisitions") which were acquired on October 31, 1997 and May 29,
1998 respectively. For purposes of the pro forma results of operations, the
Acquisitions are reflected as of January 1, 1997. Furthermore, the pro forma
results of operations below include certain pro forma adjustments to the
predecessor operations of Stellex Aerospace for the six-month period ended June
30, 1997. The pro forma consolidated statements of operations exclude
non-recurring charges directly related to the Acquisitions and which would
affect expenses within the twelve months following the transactions, including
(i) investment banking and financial advisory fees of $1.5 million in 1997 and
$1.0 million in 1998 paid to Mentmore Holdings Corporation, an affiliate, and
(ii) increases in cost of sales arising from the write-up of inventories of $3.0
million in 1997 and $4.0 million in 1998 at the date of consummation of the
Acquisitions to fair market value.
The unaudited pro forma consolidated results 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 Acquisitions had actually
taken place on the date indicated, and may not be indicative of the results of
operations which may be obtainable in the future (in thousands):
Year Ended
December 31,
------------
1998 1997
---- ----
Sales ............................................ $207,390 $198,839
Income from operations ........................... 26,658 22,121
Net income ....................................... 2,613 319
Income applicable to common stockholders ......... 1,449 128
2. Summary of Significant Accounting Policies
Basis of Presentation - Stellex is a holding company, which has no
operations or assets separate from its investments in its subsidiaries. The
consolidated financial statements include the accounts of Stellex Microwave and
SA Holdings. SA Holdings consists of its wholly-owned subsidiaries, Monitor
Aerospace and KII Holding. KII Holding includes Stellex Aerospace and its
wholly-owned subsidiaries (collectively, "Stellex Aerospace"). All significant
intercompany transactions have been eliminated in consolidation.
The financial statements of Kleinert (the predecessor of Stellex) include
the accounts of Kleinert Industries, Inc. and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
The Company adopted a new accounting basis effective July 1, 1997 in
connection with the change in ownership of Kleinert described in Note 1 and
recorded net assets as of that date at the new owner's acquisition cost.
Accordingly, the book value of assets and related depreciation and amortization
charges in the consolidated financial statements subsequent to July 1, 1997 are
not comparable to the earlier periods presented.
Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investment instruments purchased with a maturity of three months or less.
Inventories - Inventories are stated at the lower of cost or market.
Inventories at Stellex Microwave and Stellex Aerospace are valued using the
first-in, first-out method. Inventories at Monitor are valued using the
weighted-average method and include direct production costs, manufacturing and
engineering overhead and production tooling costs.
Production tooling costs at Monitor are charged to expense over the
estimated number of product deliveries based on the estimated life of the
program. Monitor reevaluates its estimates regularly for all significant
contracts and aircraft programs. Changes in estimates are reflected in the
period in which they occur.
In accordance with industry practice, certain inventories at Stellex
Aerospace and Monitor are classified as current even though they are not
expected to be realized in one year.
55
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment - Property, plant and equipment are stated at
cost, and are depreciated over the estimated useful lives of the assets, using
the straight-line method of depreciation. Estimated useful lives are as follows:
Building and improvements 20-40 years
Leasehold improvements The lesser of the useful life or the
remaining lease term
Machinery and equipment. 3-20 years
Office furniture and fixtures. 3-15 years
Office equipment and computers 4-5 years
Autos and trucks 3-5 years
Expenditures for maintenance and repairs are charged to expense as
incurred. Major renewals or betterments which substantially extend the useful
live of the assets are capitalized.
Long-Lived Assets - 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 on-going
basis and recognizes an impairment when the estimated future undiscounted cash
flows from operations are less than the carrying value of the related long-lived
assets.
Goodwill and Other Intangible Assets - Other intangible assets represent
specifically identified intangible assets--favorable lease arrangements,
customer lists, tradenames, patents, technology and assembled
workforce--associated with the acquisitions of Stellex Microwave and Monitor
Aerospace. These assets are being amortized over their estimated lives ranging
from one to 30 years. Goodwill is being amortized over periods of 25 to 30
years. Goodwill of Kleinert was being amortized over 40 years prior to the
Kleinert acquisition on July 1, 1997.
Revenue Recognition and Receivables - Revenues, other than long-term
contracts, and the related cost of sales 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 ratio of costs incurred to total
estimated costs to complete the contract. Any anticipated losses on contracts
are charged to earnings when identified. Government contracts have provisions
for audit, price redetermination and other profit and cost limitations.
Contracts may also 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.
Research and Development (R&D) - Company sponsored R&D costs are expensed
as incurred and included in operating expenses. Cost associated with
customer-funded R&D are included in costs of sales.
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.
56
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
2. Summary of Significant Accounting Policies - (Continued)
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.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of trade
receivables. The Company had two significant customers that, in aggregate,
accounted for 49% and 33% of gross accounts receivable at December 31, 1998 and
1997, respectively. The Company's customer base principally includes the
commercial aviation, defense, and aerospace industries. Management believes that
factors associated with credit risk are relatively low based upon previous
collections experience and the relative financial strength of its customers.
The Company is directly affected by national and international economic
conditions in the aerospace and defense industries. Additionally, the Company
participates in a dynamic high technology industry and believes that changes in
any of the following areas could have a material adverse effect on the Company's
future financial position or results of operations: advances and trends in new
technologies and industry standards; competitive pressures resulting from new
product introductions or price reductions on current products; changes in
product mix; changes in the overall demand for products and services offered by
the Company; changes in certain strategic partnerships or customer
relationships; litigation or claims against the Company based on intellectual
property, patent, product, regulatory or other factors; risk associated with
changes in domestic and international economic and/or political conditions or
regulations; availability of necessary raw material components; risks associated
with Year 2000 compliance; and the Company's ability to attract and retain
employees necessary to support its growth.
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. Significant assumptions and estimates include
allowance for bad debts, inventory obsolescence, percentage of completion on
long-term contracts and warranty provisions. Actual results could differ from
those estimates.
Comprehensive Income - Effective January 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This statement requires that all items recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as the other basic
financial statements. This Statement also requires that an entity classify items
of other comprehensive income by their nature in an annual financial statement.
The Company had no items of comprehensive income (loss) other than net income
(loss) during the years ended December 31, 1998, 1997 and 1996.
Recently Issued Accounting Standards - In April 1998, the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-5, "Reporting on the Costs of Start-up Activities," which is effective
for years beginning after December 15, 1998. This SOP establishes accounting
standards for start-up costs and requires that they generally be expensed as
incurred. This SOP will be implemented as of January 1, 1999, and is not
expected to have a significant impact on the financial position or results of
operations of the Company.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for the Company in fiscal 2000. Management anticipates that accounting
for transactions under SOP 98-1 will not have a material impact on the financial
position or results of operations of the Company.
In June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which defines derivatives,
requires that all derivatives be carried at fair value and provides for hedging
accounting when certain conditions are met. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management has
not fully assessed the implications of this new statement, but believes adoption
of this statement will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
Reclassification - The accompanying financial statements have been
reclassified to conform to the 1998 presentation.
57
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. Inventories
Inventories consist of the following at December 31:
1998 1997
---- ----
(in thousands)
Raw materials .............................. $ 15,470 $ 8,088
Work-in-process ............................ 34,865 12,957
Finished goods ............................. 7,994 6,839
-------- --------
Total ...................................... $ 58,329 $ 27,884
======== ========
4. Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
1998 1997
---- ----
(in thousands)
Land ....................................... $ 6,465 $ 1,000
Building and improvements .................. 9,949 2,100
Leasehold improvements ..................... 103 95
Machinery and equipment .................... 40,239 28,080
Office furniture and fixtures .............. 65 449
Office equipment and computers ............. 3,074 817
Projects in progress ....................... 493 306
-------- --------
60,388 32,847
Accumulated depreciation and amortization .. (6,517) (1,341)
-------- --------
Total ...................................... $ 53,871 $ 31,506
======== ========
5. Other Intangible Assets
Other intangible assets consists of the following at December 31:
1998 1997
---- ----
(in thousands)
Patents .................................... $ 4,058 $ 4,058
Tradename .................................. 4,500 --
Existing technology ........................ 3,513 3,513
Assembled workforce ........................ 6,228 3,639
Computer systems ........................... 740 --
Customer List .............................. 34,930 --
Favorable rent ............................. 1,779 1,779
-------- --------
55,748 12,989
Accumulated amortization ................... (3,196) (394)
-------- --------
Total ...................................... $ 52,552 $ 12,595
======== ========
58
<PAGE>
6. Accrued Liabilities
Accrued liabilities consist of the following at December 31:
1998 1997
---- ----
(in thousands)
Bonuses payable ...................................... $ 2,387 $ 2,892
Interest payable ..................................... 2,083 1,762
Accrued workers' holiday and vacation liability ...... 2,468 1,672
Provision for losses on contracts .................... 1,325 1,644
Dividends payable .................................... 1,355 191
Accrued acquisition costs ............................ 2,427 2,563
Other ................................................ 5,752 1,307
------- -------
Total ................................................ $17,797 $12,031
======= =======
7. Financing Arrangements
Lines of Credit
Simultaneously with the acquisition of Monitor, the Company amended its
Credit Agreement under the Amended and Restated Credit Agreement dated as of May
29, 1998 ("Credit Agreement"). The credit agreement is comprised of a $35.0
million revolving loan facility, a $90.0 million term loan facility, of which
$1.8 million was repaid during 1998, and a $25.0 million acquisition loan
facility which was unused at December 31, 1998. (See Note 1.)
Borrowings under the revolving loan facility may be either base rate loans,
which bear interest at Societe Generale's ("lender") base rate plus a margin of
between 0.75% and 1.50% depending on the Company's leverage ratio, or
Eurodollar rate loans, which bears interest at the lender's Eurodollar rate plus
a margin of between 1.75% and 2.50% depending on the Company's leverage ratio.
Borrowings under the revolving loan facility are limited to 85% of eligible
accounts receivable and 50% of eligible inventories, and are available through
December 31, 2005. The outstanding balance under the revolving loan facility
was $13,500,000 at December 31, 1998. As a result of a significant customer
advance received in January 1999, the Company repaid the existing balance
outstanding under the revolving loan facility.
The total term loan facility is comprised of a Term A and a Term B Loan.
The Term A Loan is payable in 22 consecutive quarterly installments (payments
escalate from $750,000 to $2,250,000) beginning September 1998 through December
2003. At the option of the Company the interest rate on the loans is based on
lender's base plus a margin of between 0.75% and 1.50% depending on the
Company's leverage ratio or Eurodollar plus a margin of between 1.75% and 2.50%
depending on the Company's leverage ratio. As of December 31, 1998, the
interest rate was 7.5% and the effective interest rate for the year was 8.0%.
The outstanding balance under the Term A Loan was $28,500,000 at December 31,
1998.
The Term B Loan is payable in 30 consecutive quarterly installments
(payments escalate from $150,000 to $7,700,000) beginning September 1998 through
December 2005. At the option of the Company the interest rate on the loans is
based on lender's base rate plus a margin of between 1.50% and 2.00% depending
on the Company's leverage ratio or Eurodollar plus a margin of betwen 2.50% and
3.00% depending on the Company's leverage ratio. As of December 31, 1998, the
interest rate was 8.0% and the effective interest rate for the year was 8.5%.
The outstanding balance under the Term Loan B was $59,700,000 at December 31,
1998.
The Credit Agreement is collateralized by all of the assets of the Company
and is guaranteed, on a full and unconditional basis, by all the subsidiaries of
Stellex including Stellex Microwave, Stellex Aerospace and Monitor Aerospace.
The Credit Agreement contains certain covenants including a minimum fixed
charges coverage ratio and an interest coverage ratio, as defined, minimum net
worth of $2,500,000 and a maximum leverage ratio. The Credit Agreement also
restricts the Company's ability to incur additional indebtedness, pay dividends
or other significant activities without approval of the lender. The Company was
in compliance with its bank covenants at December 31, 1998.
59
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. Financing Arrangements - (Continued)
9 1/2% Senior Subordinated Notes
On October 23, 1997, Stellex issued $100 million principal amount 9 1/2%
senior subordinated notes. The notes require semiannual interest payments and
are due November 1, 2007. The notes are unsecured and are subordinated in right
of payment to all existing and future indebtedness of Stellex. The notes are
guaranteed, jointly and severally and fully and unconditionally, on an
unsecured, senior subordinated basis, by each of Stellex's subsidiaries
including all acquisitions subsequent to October 23, 1997. The indenture under
which the notes were issued contains certain covenants that limit the ability of
Stellex to incur additional indebtedness, to issue preferred stock, to make
dividend payments or other distributions to stockholders, and to sell assets or
stock of its subsidiaries. At December 31, 1998 the Company was in compliance
with these covenants. Upon a change in control, as defined, the holders of the
notes have the right to require Stellex to repurchase the notes at 101% of their
principal amount, plus any accrued interest. Stellex may redeem the notes prior
to 2007 at a premium, which declines over time. Debt issuance costs relating to
the offering are included in long-term assets and are amortized to interest
expense over the life of the debt. Seperate financial statements of the
subsidiaries of Stellex that guarantee the notes are not presented because
management has determined that they would not be material to investors.
Long-Term Obligations
Long-term obligations consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Revolving line of credit ..................................................................... $ 13,500 $ 7,500
Term Loan A.................................................................................. 528,500 --
Term Loan B .................................................................................. 59,700 --
7.785% Note payable, first deed of trust on PPP land and building
with a net book value of $2,968,000; principal and interest payments
of $22,000 due monthly with the balance of $2,363,000 due December 2001 ...................... 2,561 2,624
8% Note payable to Kleinert Industries Holding AG in connection with
the Kleinert acquisition, interest payable annually and principal due
July 1, 1999; guaranteed by Stellex Aerospace and each of its subsidiaries ................... 1,750 1,750
8% Note payable to the sellers of Monitor in connection with the
Monitor acquisition, interest payable quarterly and principal due
May 29, 2000; guaranteed by Monitor .......................................................... 5,180 --
Obligations under capital leases ............................................................. 446 448
Other liabilities ............................................................................ 97 --
-------- --------
Total ........................................................................................ 111,734 12,322
Less current portion ......................................................................... 5,533 140
-------- --------
Long-term portion ............................................................................ $106,201 $ 12,182
======== ========
</TABLE>
60
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. Financing Arrangements - (Continued)
On October 31, 1997, Stellex paid off on behalf of KII Holding with the
proceeds of the senior subordinated debt certain external debt consisting of:
$16,000,000 term note issued in connection with the acquisition of Kleinert
payable to Societe Generale and maturing in 2004; a $2,500,000 promissory note
also issued in connection with the acquisition payable to Trinity Investment
Corp. maturing in 2005; and $1,230,000 of revolving credit borrowings under a
bank credit facility. As a result, the Company recorded a loss comprised of
unamortized debt issuance cost of $747,000 which has been reflected, net of
income taxes, in the Company's consolidated statement of operations for 1997 as
an extraordinary item.
Maturities of long-term debt and capital leases (excluding the revolving
line of credit) are as follows as of December 31, 1998:
Long-term Capital
Debt Leases
---- ------
(In Thousands)
1999 .................................... $ 5,433 $ 142
2000 .................................... 9,617 141
2001 .................................... 8,284 132
2002 .................................... 8,114 118
2003 .................................... 9,613 9
Thereafter .............................. 156,727 --
--------- ---------
Total ................................... $ 197,788 $ 542
---------
Less amount representing interest ....... (96)
---------
Total ................................... $ 446
=========
8. Minority Interest
Pursuant to an agreement entered into in connection with the Kleinert
acquisition in 1997, certain members of Stellex Aerospace's management ("SA
Management") purchased 19.9% of the common shares of KII Holding for $778,100.
KII Holding had the right to redeem (the "Redemption Right") all, but not
less than all, of any common stock of KII Holding held by SA Management upon the
occurrence of certain events, including the death, disability or termination of
SA Management, and for any reason after July 1, 2002. In addition, SA Management
had the right to cause KII Holding to purchase all, but not less than all, of
any common stock of KII Holding held by SA Management under similar conditions
(the "Put Right"). The applicable purchase price to be received by SA Management
upon the exercise of a Redemption Right or Put Right was based upon a formula
set forth in the Stellex Investor Agreement. In addition, KII Holding granted SA
Management the right to receive the net appreciation associated with an
additional 10% of equity ownership in KII Holding. The value of these stock
appreciation rights ("SARs") was computed under the same formula used for the
Redemption Right and Put Right on the minority interests, and was payable under
similar conditions. The minority interest for 1997 and 1998 was initially
recorded in the financial statements at the amount paid by management and was
adjusted for changes in value based on the underlying formulas for the minority
interests and SARs, with a corresponding charge to compensation expense. This
resulted in an expense of $300,000 for the six months ended December 31, 1997
and $2,146,000 for the year ended December 31, 1998.
Effective December 31, 1998, certain members of SA Management exchanged
their shares of KII Holding common stock for warrants to purchase Class B Common
Stock of KII Holding and exchanged their SARs for stock options in Class A
Common Stock of KII Holding. Neither the KII Holding Warrants nor the KII
Holding 1998 Stock Options are subject to a Put Right. (See Note 9). In
addition, the Company redeemed shares of common stock of KII Holding and vested
SARs in equity of KII Holding owned by one member of SA Management for
approximately $170,000 effective December 31, 1998. At December 31, 1998, there
were no SARs outstanding and 100% of the common stock of KII Holdings was owned
by Stellex.
61
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. Shareholders' Equity
Preferred Stock
In October 1997, the Company issued 229 shares of preferred stock for total
gross proceeds of $11,450,000. Each holder of preferred stock is entitled to one
vote for each share of preferred stock outstanding. When declared by the Board
of Directors, the preferred stock holders are entitled to receive cumulative
dividends at a rate of 10% per annum of the sum of the liquidation preference
and any dividends which may be in arrears. Dividends of $1,354,900 and $191,000
had been declared but not paid on December 31, 1998 and 1997, respectively. In
the event of liquidation, dissolution or winding up of the Company, the
preferred stockholders shall receive a liquidation preference of $50,000 per
share. The preferred stock is redeemable at the election of the Company at a
price equal to the liquidation preference plus an amount equal to all dividends
accrued and unpaid.
Options and Warrants
Pursuant to an Agreement entered into in connection with the Kleinert
Acquisition (the "Stellex Aerospace Investor Agreement"), KII Holding, a
subsidiary of Stellex, granted stock appreciation rights ("SARs") to certain
members of KII Holding's management. Effective December 31, 1998, KII Holding
exchanged the outstanding SARs for options to purchase up to an aggregate of
1,238.1 shares of Class A common stock of KII Holding (the "Option Plan").
Seventeen and one-half per cent of the KII Holding options granted vested on
the date of grant and the remainder vest in equal installments between December
31, 1999 and December 31, 2002. The exercise price of the KII Holding options
is $391 per share, and the options generally become exercisable upon the
earliest to occur of an initial public offering by KII Holding, SA Holdings or
Stellex Industries, a Corporate Transaction (which is defined in the Option
Plan to generally mean a change of control of Stellex or KII Holding, a sale of
all or substantially all of the assets of Stellex or KII Holding or the
adoption of a plan of liquidation of Stellex Industries or KII Holding) or May
1, 2007. If the exercise event is an initial public offering by SA Holdings or
Stellex Industries, the Board of Directors of Stellex may convert the KII
Holding options into options to purchase Stellex's Common Stock pursuant to a
conversion formula based upon fair value set forth in the Option Plan.
Pursuant to the Stellex Aerospace Investor Agreement, six senior members of
Stellex Aerospace's management team (the "Buyers") purchased 19.9% of the issued
and outstanding shares of common stock of KII Holding, the parent holding
company of Stellex Aerospace, for approximately $780,000. Effective December 31,
1998, certain of the Buyers exchanged their shares of KII Holding common stock
for warrants to purchase Class B Common Stock of KII Holding (the "KII
Warrants"), initially representing approximately 17% of the outstanding common
stock of KII Holding on a fully-diluted basis. The exercise price of the KII
Warrants is $.01 per share, and the KII Warrants generally become exercisable
upon an initial public offering of Stellex, SA Holdings or KII Holding, a
Corporate Transaction (which is defined to generally mean change of control of
Stellex or KII Holding, a sale of all or substantially all of the assets of
Stellex or KII Holding or the adoption of a plan of liquidation of Stellex
Industries or KII Holding) or May 1, 2007. Upon an initial public offering by
Stellex or SA Holdings, the Board of Directors of SA Holdings may require the
holders of the KII Warrants to exercise their KII Warrants and exchange the
shares of KII Holding's Class B Common Stock issuable thereunder for shares of
SA Holdings or Stellex's Common Stock, respectively, pursuant to a conversion
formula based upon fair value set forth in the agreement governing the KII
Warrants.
62
<PAGE>
10. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Six Months Six Months Year
Ended Ended Ended Ended
December 31, December 31, June 30, December 31,
1998 1997 1997 1996
---- ---- ---- ----
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Current: (In Thousands)
Federal ............................... $ -- $ -- $ 492 $ 515
State ................................. 5 12 136 176
------- ------- ------- -------
5 12 628 691
------- ------- ------- -------
Deferred:
Federal ............................... 251 (1,163) 85 203
State ................................. 332 (19) 40 51
------- ------- ------- -------
583 (1,182) 125 254
------- ------- ------- -------
Total .................................... $ 588 $(1,170) $ 753 $ 945
======= ======= ======= =======
</TABLE>
Deferred taxes are primarily the result of the use of accelerated
depreciation for tax purposes, accrued expenses not currently deductible, and
net operating loss and tax credit carryforwards.
The Company's tax credit carryforwards for federal and state tax purposes
were approximately $1,029,000 and $490,000, respectively; the credits begin to
expire in 2012 for federal purposes. The carryovers may be limited under section
382 of the Internal Revenue Code as a result of the change in ownership.
The Company's net operating loss carryforwards for federal and state tax
purposes were approximately $16,464,000 and $12,084,000, respectively. The
losses will begin to expire in 2012 for federal and 2002 for state purposes. The
carryovers may be limited under section 382 of the Internal Revenue Code as a
result of the change in ownership.
The net deferred tax assets and liabilities at December 31 consist of the
following:
1998 1997
------- -------
(In Thousands)
Current:
Deferred tax assets ................... $ 3,318 $ 2,173
Deferred tax liabilities .............. -- --
------- -------
Net deferred tax asset ............. $ 3,318 $ 2,173
======= =======
Long-term:
Deferred tax liabilities .............. $20,029 $ 3,127
Deferred tax assets ................... -- 681
------- -------
Net deferred tax liability ......... $20,029 $ 2,446
======= =======
63
<PAGE>
The differences between the effective income tax rates and the
statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
Year Six Months Six Months Year
Ended Ended Ended Ended
December 31, December 31, June 30, December 31,
1998 1997 1997 1996
---- ---- ---- ----
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Statutory federal tax rate .................... (35.0)% (35.0)% 35.0% 35.0%
State taxes, net of federal benefit ........... (0.6)% (6.0)% 6.1% 6.3%
Non-deductible goodwill amortization .......... 37.1% -- -- --
Change in value of minority interest .......... 177.4% 2.3% -- --
Other ......................................... (15.1)% 1.6% (1.1)% (1.6)%
----- ----- ----- -----
Effective rate ................................ 163.8% (37.1)% 40.0% 39.7%
===== ===== ===== =====
</TABLE>
11. Employee Benefit Plans
Unfunded Pension Benefits - The Company sponsors a defined benefit plan
which covers four employees of Stellex Aerospace. The balance of unfunded
pension benefits ($314,000 and $298,000 at December 31, 1998 and 1997,
respectively) represents the net present value of estimated future payments
based on actuarially determined life expectancies and discount rates of 6.50%
and 7.75% at 1998 and 1997, respectively.
Deferred Compensation Agreements - The Company has individual deferred
compensation agreements with certain members of management. 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 predecessor 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, 1998 and 1997, the deferred compensation liability was
$1,638,000 and $1,406,000, 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 annual
discount rates of 6.50% and 7.75% for 1998 and 1997, respectively. The related
expense for the year ended December 31, 1998, the six months ended December 31,
1997, the six months ended June 30, 1997, and for the year ended December 31,
1996 was $232,000, $56,000, $57,000, and $210,000, respectively.
Defined Contribution Plans - The Company sponsors two defined contribution
plans which conform to the requirements of the Employee Retirement Income
Security Act of 1974 (ERISA) and the Internal Revenue Code as qualified defined
contribution plans. Under the Stellex Microwave and Stellex Aerospace Plans, the
Company matches employees' 401(k) salary deferrals up to 3% of eligible employee
compensation. Total Company contributions were $1,408,000, $229,000, $133,000,
and $223,000 for the year ended December 31, 1998, the six months ended December
31, 1997 and June 30, 1997 and for the year ended December 31, 1996,
respectively. 12. 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.
64
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. Lease Commitments - (Continued)
Watkins-Johnson has agreed to sublease space to Stellex Microwave in Palo
Alto, California until October 31, 2000. Such facilities are subject to an
environmental remediation plan being monitored by various regulatory agencies.
Under the terms of the Stellex Microwave 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 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.
Minimum annual rentals on facility and equipment leases are as follows (in
thousands):
Minimum Annual
Rentals
-------
1999 ............................................. $4,464
2000 ............................................. 3,139
2001 ............................................. 298
2002 ............................................. 289
2003 ............................................. 143
Thereafter ....................................... 14
------
Total ............................................ $8,347
======
<TABLE>
<CAPTION>
Year Six Months Six Months Year
Ended Ended Ended Ended
December 31, December 31, June 30, December 31,
1998 1997 1997 1996
---- ---- ---- ----
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Rent expense............................... $ 3,788 $ 839 $350 $723
</TABLE>
The minimum annual rentals of $8,347,000 excludes minimum rentals for a new
lease for the corporate headquarters. During 1998, Stellex and Mentmore entered
into a lease for a new corporate headquarters. Under the terms of the lease,
Mentmore and Stellex are tenants, jointly and severally, for a lease term of
fifteen and a half years which expires March 15, 2014. The gross annual minimum
rental obligations are $1,351,000 per year for years one through six, $1,483,000
per year for years seven through eleven, and $1,616,000 per year thereafter.
Rent expense is allocated, under a rent sharing agreement, based upon historical
income statement criteria for Stellex, Mentmore, and affiliates of Mentmore.
Additionally, as a result of this lease, the Company is subject to a commitment
for a letter of credit of $1,500,000 as a security deposit for the property.
13. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate
the fair value for each class of its financial instruments.
The fair value of cash and cash equivalents, accounts receivable and
accounts payable approximates carrying value based upon their relative liquidity
and their short-term nature.
65
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. Fair Value of Financial Instruments - (Continued)
The fair value of the outstanding debt for the Revolving Line of Credit and
the Term Loans approximates carrying value based upon the nature of the interest
rate which is variable and consistent with a rate that would be made to the
Company based upon current market conditions.
The fair value of the outstanding notes payable approximates carrying value
and is determined by discounting the future cash flows based upon the maturity
date, interest rates that would be appropriate in similar current transactions,
and other market conditions.
The fair value of the 9-1/2% Senior Subordinated Notes is determined based
upon quoted market prices for the same and similar issues. The carrying value of
these notes is $94,552,300 (net of issuance costs) and the fair value is
$86,250,000 at December 31, 1998. The carrying value approximated fair value at
December 31, 1997.
14. Segments and Related Information
Stellex is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in two segments:
Aerostructures and Electronics. The Aerostructures segment was the first segment
created when Stellex was formed in July 1997, concurrent with the acquisition of
Kleinert Industries, Inc. On May 29, 1998, Stellex acquired Monitor Aerospace
and included it in the Aerostructures segment based upon similarities in the
products and customers. The Electronics segment was created on October 31, 1997,
concurrent with the acquisition of the tactical subsystems and microwave devices
businesses of Watkins-Johnson Company.
The Aerostructures segment is a leading supplier of a broad range of
complex aerostructure components and subsystems for both commercial and military
aviation and space applications. Its customers are comprised of most of the
major aircraft/space OEMs. Aerostructures products vary from the production of
prototypes, small and large parts and complex assemblies. Examples of such
products include hinges, door assemblies, bulkheads, drag strut assemblies,
fittings and skins.
The Electronics segment is a worldwide leader in the design, manufacture
and marketing of highly integrated, multi-function microwave and millimeter wave
subsystems for tactical missiles, electronic warfare, intelligence, and
communications applications. Electronics products include missile subsystems,
single function modules, and multi-function modules. These products are used in
the generation, reception and translation of RF, microwave and millimeter wave
signals used in radar, signal intelligence and data communication applications.
The products also include a variety of modular components for microwave
applications including, signal function mixers, amplifiers, and frequency
doublers, as well as customer designs.
66
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. Segments and Related Information (Continued)
Relevant segment information (expressed in thousands of dollars) for the
year ended December 31, 1998, the six month periods ended December 31, 1997 and
June 30, 1997 and the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Aerostructures Electronics
Segment Segment Corporate Total
------- ------- --------- -----
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Sales $90,074 $79,230 $ -- $169,304
Gross Profit 22,173 24,868 -- 47,041
Income (loss) from operations 9,665 7,661 (1,042) 16,284
Depreciation and Amortization 8,151 7,686 -- 15,837
Total Assets 165,938 106,391 901 273,230
Capital Expenditures 3,337 1,574 525 5,436
Six Months ended December 31, 1997
Sales $17,577 $12,959 $ -- $ 30,536
Gross Profit 3,933 1,871 -- 5,804
Income from operations 1,086 (1,367) (300) (581)
Depreciation and Amortization 884 1,248 -- 2,132
Total Assets 37,365 107,460 957 145,782
Capital Expenditures 1,233 56 -- 1,289
Six Months ended June 30, 1997 (Predecessor)
Sales $14,296 -- -- $ 14,296
Gross Profit 4,156 -- -- 4,156
Income from operations 2,357 -- -- 2,357
Depreciation and Amortization 878 -- -- 878
Capital Expenditures 868 -- -- 868
Year ended December 31, 1996 (Predecessor)
Sales $24,307 -- -- $ 24,307
Gross Profit 6,940 -- -- 6,940
Income from operations 3,280 -- -- 3,280
Depreciation and Amortization 1,691 -- -- 1,691
Total Assets 29,614 -- -- 29,614
Capital Expenditures 1,053 -- -- 1,053
</TABLE>
Stellex has two significant customers. One customer of the Electronics
segment accounted for 23% and 20% of total enterprise sales for the year ended
December 31, 1998 and the six months ended December 31, 1997, respectively. The
other, an Aerostructures customer, accounted for 24% and 11% of total enterprise
sales for the year ended December 31, 1998 and the six months ended December 31,
1997, respectively.
Stellex derives a significant amount of revenue from government agencies
and prime contractors of government agencies. Total sales to government agencies
and prime contractors amounted to 44% of total sales for the year ended December
31, 1998 and the six months ended December 31, 1997.
All of Stellex's assets are maintained domestically. Stellex derives a
majority of its revenues from customers in the United States. Sales to foreign
customers were 9% and 14% of total enterprise sales for the year ended December
31, 1998 and the six months ended December 31, 1997. Sales were not significant
to customers in any single foreign country.
67
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. Supply Contracts
In connection with the TSMD 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. 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"). 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, the Company must also pay certain research and
development and process costs associated with the maintenance of the GaAs
Facility. In 1998, the Company paid $2.2 million in process costs. The Company
must make quarterly payments for research and development totaling at least
$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 each
six-month period, 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.
16. Related Party Transactions
Coincident with the Monitor Acquisition, Stellex amended its Management
Agreement with Mentmore Holdings. Under the terms of the Agreement (as amended),
Mentmore receives reimbursement of certain costs and an annual management fee of
$1,000,000, which is payable monthly, plus from and after January 1, 1999, the
amount by which 1% of the Company's total consolidated sales in any fiscal year
exceeds such fee. For the years ended December 31, 1998 and 1997, the total
management fee paid to Mentmore was $1,000,000 and $225,000, respectively. As of
December 31, 1998, accrued liabilities included amounts due to Mentmore of
$111,950.
In connection with the Kleinert and TSMD Acquisitions, Mentmore received
investment banking fees of $1,450,000 and reimbursement for certain expenses.
Such fees are included in selling, general and administrative expenses for the
six months ended December 31, 1997. In 1998, Mentmore received $1,000,000 in
investment banking fees and reimbursement for certain expenses in connection
with the Monitor Acquisition which are included in selling, general and
administrative expenses for the year ended December 31, 1998.
17. Subsequent Event
On March 1, 1999, the Company acquired all of the outstanding common stock
of Phoenix Microwave Corporation ("Phoenix"), a leading supplier of RF and
microwave components, of Telford, Pennsylvania. Phoenix will operate together
with Stellex Microwave Systems, Inc. in the RF/microwave component and
sub-assembly market for commercial, wireless, military and space applications.
The aggregate purchase price for the acquisition of Phoenix was $14.0 million
plus contingent purchase price of up to $1.0 million payable by March 2000 based
on cash flow performance thresholds. The acquisition was financed with an
acquisition term loan drawn under the Company's existing Credit Agreement.
68
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
18. Condensed Financial Information of Stellex and Its Subsidiaries
The $100 million principal amount 9 1/2% senior subordinated notes and the
term and revolving loans are fully guaranteed, on a full and unconditional
basis, by all wholly and majority owned subsidiaries of Stellex including
Stellex Microwave, Stellex Aerospace and Monitor Aerospace. There are no
significant contractual restrictions on the ability of the Company's
subsidiaries to transfer funds to the Company. Set forth below are the condensed
consolidating financial information of the guarantor subsidiaries as of December
31, 1998 and the year then ended:
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
(Dollars in Thousands)
Stellex Stellex KII Monitor Eliminations & Stellex
(Parent Only) Microwave Holdings Aerospace Adjustments Consolidated
------------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ............ $ 17 $ 1,104 $ 272 $ 12 -- $ 1,405
Accounts receivable .................. -- 13,934 5,275 9,243 -- 28,452
Inventories .......................... -- 15,958 14,978 27,393 -- 58,329
Other current assets ................. 461 2,404 964 2,854 $ (165) 6,518
--------- --------- --------- --------- --------- ---------
Total current assets ................. 478 33,400 21,489 39,502 (165) 94,704
Property, plant and equipment ........ 525 16,017 14,931 22,398 -- 53,871
Goodwill and intangibles ............. -- 51,823 -- 60,953 562 113,338
Investment in & advances to
subsidiaries ...................... 214,638 -- -- -- (214,638) --
Other assets ......................... -- 5,770 2,175 4,553 (1,181) 11,317
--------- --------- --------- --------- --------- ---------
Total assets ......................... $ 215,641 $ 107,010 $ 38,595 $ 127,406 $(215,422) $ 273,230
========= ========= ========= ========= ========= =========
Current liabilities .................. $ 7,975 $ 12,940 $ 6,753 $ 12,695 $ (5,142) $ 35,221
9 1/2% senior subordinated
notes ............................. 100,000 -- -- -- -- 100,000
Intercompany notes ................... -- 96,039 18,900 58,250 (173,189) --
Term Loans (non-current) ............. 84,600 -- -- -- -- 84,600
Other long-term liabilities .......... 13,500 754 6,685 22,723 (80) 43,582
Stockholders' equity ................. 9,566 (2,723) 6,257 33,738 (37,011) 9,827
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity .............. $ 215,641 $ 107,010 $ 38,595 $ 127,406 $ 215,422 $ 273,230
========= ========= ========= ========= ========= =========
</TABLE>
69
<PAGE>
STELLEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. Condensed Financial Information of Stellex and its Subsidiaries -
(Continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
(Dollars in Thousands)
Stellex Stellex KII Monitor Eliminations & Stellex
(Parent Only) Microwave Holdings Aerospace Adjustments Consolidated
------------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales.................................... $ -- $ 79,230 $ 35,757 $ 54,317 $ -- $ 169,304
Cost of Sales ........................... -- 54,362 24,855 43,046 -- 122,263
Operating Expenses ...................... 1,042 14,597 7,294 3,830 -- 26,763
Amortization of Intangibles ............. -- 2,610 -- 1,384 -- 3,994
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ........... (1,042) 7,661 3,608 6,057 -- 16,284
Interest Expense ........................ (15,101) (9,270) (2,431) (5,334) 15,497 (16,639)
Other Income (expense) .................. 15,521 (16) (55) 43 (15,497) (4)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ....... (622) (1,625) 1,122 766 -- (359)
Provision (benefit) for income taxes .... -- (619) 1,176 528 (497) 588
--------- --------- --------- --------- --------- ---------
Net income .............................. (622) (1,006) (54) 238 497 (947)
Preferred stock dividend ................ (1,164) -- -- -- -- (1,164)
--------- --------- --------- --------- --------- ---------
Loss applicable to common
shareholders ......................... $ (1,786) $ (1,006) $ (54) $ 238 $ 497 $ (2,111)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Stellex Stellex KII Monitor Eliminations & Stellex
(Parent Only) Microwave Holdings Aerospace Adjustments Consolidated
------------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) ....................... $ (622) $ (1,006) $ (54) $ 238 $ 497 $ (947)
Depreciation and amortization ........... -- 7,686 1,865 6,286 -- 15,837
Deferred taxes and other ................ -- (619) 202 (38) 1,038 583
Changes in operating assets
and liabilities ...................... (1,215) (7,130) 1,450 (2,521) (1,535) (10,951)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
operations ........................... (1,837) (1,069) 3,463 3,965 -- 4,522
Fixed asset additions ................... (525) (1,574) (2,163) (1,174) -- (5,436)
Cash used in acquisitions ............... (91,749) (443) -- -- 1,760 (90,432)
Proceeds from sale of fixed assets ...... -- -- 2 -- -- 2
-------- -------- -------- -------- -------- --------
Cash used in investing activities ....... (92,274) (2,017) (2,161) (1,174) 1,760 (95,866)
Proceeds from borrowings under
term loans ........................... 90,000 -- -- -- 90,000
Repayment of term loans ................. (1,800) -- -- -- -- (1,800)
Net borrowing under revolver ............ 6,000 -- -- -- -- 6,000
Intercompany loans, net ................. (1,028) 3,071 (2,043) (4,186) 4,186 --
Other ................................... -- (77) (139) -- (4,539) (4,755)
-------- -------- -------- -------- -------- --------
Cash provided by (used in)
financing activities ................. 93,172 2,994 (2,182) (4,186) (353) 89,445
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash ......... $ (939) $ (92) $ (880) $ (1,395) $ 1,407(1) $ (1,899)
-------- -------- -------- -------- -------- --------
</TABLE>
(1) relates to cash on hand at Monitor
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, as of March 31, 1999.
STELLEX INDUSTRIES, INC.
By: /s/ William L. Remley
-----------------------------------------
William L. Remley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and as of the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard L. Kramer Chairman of the Board of Directors and Director of March 31, 1999
- - -----------------------
Richard L. Kramer Stellex Industries, Inc
/s/ William L. Remley Vice Chairman, President, Chief Executive Officer, March 31, 1999
- - -----------------------
William L. Remley Treasurer and Director of Stellex Industries, Inc.
/s/ P. Roger Byer Chief Financial Officer of Stellex Industries, March 31, 1999
- - -------------------
P. Roger Byer Inc.(principal financial and accounting officer)
</TABLE>
71
<PAGE>
CERTIFICATE OF INCORPORATION
OF
STELLEX AEROSPACE HOLDINGS, INC.
a Delaware corporation
FIRST. The name of the corporation is Stellex Aerospace Holdings, Inc.
SECOND. The address of the corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is Corporation Service Company.
THIRD. The nature of the business of or purpose to be conducted or promoted
by the corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH. The Corporation shall have authority to issue 1,000 shares of
Common Stock, without par value, and 500 shares of Serial Preferred Stock,
without par value.
A. Serial Preferred Stock
The Board of Directors is hereby empowered to cause the Serial Preferred
Stock of the Corporation to be issued in series with such of the variations
permitted by clauses (1) - (8) of this paragraph A as shall have been fixed and
determined by the Board of Directors with respect to any series prior to the
issue of any shares of such series.
The shares of the Serial Preferred Stock of different series may vary as
to:
(1) the number of shares constituting such series and the designation
of such series, which shall be such as to distinguish the shares thereof
from the shares of all other series and classes;
(2) the rate of dividend, the time of payment and, if cumulative, the
dates from which dividends shall be cumulative, the extent of participation
rights, if any, and the priority in payment of dividends;
(3) any right to vote with holders of shares of any other series or
class and any right to vote as a class, either generally or as a condition
to specified corporate acts;
<PAGE>
(4) the price at and the terms and conditions on which shares may be
redeemed;
(5) the amount payable upon shares and the priority of payment in
event of involuntary liquidation;
(6) the amount payable upon shares and the priority of payment in
event of voluntary liquidation;
(7) any sinking fund provisions for the redemption or purchase of
shares; and
(8) the terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion.
The shares of all series of Serial Preferred Stock shall be identical
except as, within the limitations set forth above in this Section A, shall have
been fixed and determined by the Board of Directors prior to the issuance
thereof. Except as specifically set forth in any Certificate of Serial
Designation filed with the Secretary of State of the State of Delaware or as
required by the Delaware General Corporation Law, none of these shares of any
series of Serial Preferred Stock shall have any right to vote on any matters.
B. Common Stock.
(1) Dividends. When and if declared by the Board of Directors, the holders
of the Common Stock shall only be entitled to receive cash dividends and
dividends payable in property other than securities of the Corporation at such
time as all dividends on the Serial Preferred Stock through the record date of
any such Common Stock dividend have been paid in full.
(2) Liquidation. In the event of the voluntary or involuntary liquidation,
dissolution, distribution of assets or winding-up of the Corporation, after
distribution in full to the holders of Serial Preferred Stock of their preferred
liquidation payments, the holders of Common Stock shall be entitled to receive
the remaining assets of the Corporation.
(3) Voting Rights. Except as may be otherwise required by law or the
Certificate of Incorporation of the Corporation, as amended, each share of
Common Stock shall have one (1) vote on all matters voted upon by the
stockholders.
<PAGE>
FIFTH. The name and mailing address of the sole incorporator is:
Name: Mailing Address:
Janelle Telesford c/o Winston & Strawn
200 Park Avenue
New York, NY 10166-4193
SIXTH. In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the corporation is expressly authorized to
adopt, amend or repeal the by-laws of the corporation.
SEVENTH. Elections of directors need not be by written ballot unless the
by-laws of the corporation so provide.
EIGHTH. To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, a director
of the corporation shall not be liable to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. The corporation
shall indemnify, in accordance with and to the full extent now or hereafter
permitted by law, any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including, without
limitation, an action by or in the right of the corporation), by reason of such
person's acting as a director of the corporation (and the corporation, in the
discretion of the board of directors, may so indemnify a person by reason of the
fact that such person is or was an officer or employee of the corporation or is
or was serving at the request of the corporation in any other capacity for or on
behalf of the corporation) against any liability or expense actually or
reasonably incurred by such person in respect thereof. Any repeal or
modification of this EIGHTH Article shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification. Such indemnification is not exclusive of any other right of
indemnification provided by law, agreement or otherwise.
I, the undersigned, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my actual deed and that the facts stated herein are true, and
accordingly have hereunto set my hand this 27th day of April, 1998.
/s/ Janelle Telesford
----------------------
Janelle Telesford
Sole Incorporator
<PAGE>
BY-LAWS
OF
STELLEX AEROSPACE HOLDINGS, INC.
a Delaware corporation
ARTICLE I
Offices
Section 1.1 Registered Office. The registered office of the Corporation in
the State of Delaware shall be located at 1209 Orange Street, Wilmington,
Delaware, County of New Castle. The name of the Corporation's registered agent
at such address shall be The Corporation Trust Company.
Section 1.2 Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
Stockholders
Section 2.1 Annual Meetings. An annual meeting of stockholders shall be
held each year for the election of directors at such date, time and place either
within or without the State of Delaware as shall be designated by the Board of
Directors. Any other proper business may be transacted at the annual meeting of
stockholders.
Section 2.2 Special Meetings. Special meetings of stockholders may be
called at any time by the Board of Directors, the Chairman, if any, the Vice
Chairman, if any, or the President and shall be called by the Chairman or the
Secretary at the request, in writing, stating the purpose or purposes of the
meeting, of stockholders who hold a majority of the outstanding shares of each
class of capital stock entitled to vote at the meeting. Each special meeting
shall be held at such date, time and place either within or without the State of
Delaware as shall be designated by the person or persons calling such meeting at
least ten days prior to such meeting.
Section 2.3 Notice of Meeting. Unless otherwise provided by law, whenever
stockholders are required or permitted to take any action at a meeting, a
written notice of the meeting shall be given which shall state the date, time
and place of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. Unless otherwise provided by law, the
written notice of any meeting shall be given not less than ten nor more than
sixty days before the
<PAGE>
date of the meeting to each stockholder entitled to vote at the meeting. If
mailed, notice is given when deposited in the United States mail, postage
prepaid, directed to the stockholder at his address as it appears on the records
of the Corporation.
Section 2.4 Adjournments. Any meeting of stockholders, annual or special,
may adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 2.5 Quorum. Unless otherwise provided by law or the certificate of
incorporation, at each meeting of stockholders, the presence in person or
representation by proxy of the holders of a majority of the outstanding shares
of each class of capital stock entitled to vote at the meeting shall constitute
a quorum for the transaction of business. For purposes of the foregoing, two or
more classes or series of capital stock shall be considered a single class if
the holders thereof are entitled to vote together as a single class at the
meeting. In the absence of a quorum, the stockholders so present and represented
may, by vote of the holders of a majority of the shares of capital stock of the
Corporation so present and represented, adjourn the meeting from time to time
until a quorum shall attend, and the provisions of Section 2.4 of these by-laws
shall apply to each such adjournment. Shares of its own capital stock belonging
on the record date for the meeting to the Corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held, directly or indirectly, by the Corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the Corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
Section 2.6 Organization. Meetings of stockholders shall be presided over
by the Chairman, if any, or in his absence by the Vice Chairman, if any, or in
his absence by the President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.7 Voting; Proxies. Unless otherwise provided by the certificate
of incorporation, each stockholder entitled to vote at any meeting of
stockholders shall be entitled to one vote for each share of capital stock held
by him which has voting power on the subject matter submitted to a vote at the
meeting. Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by proxy, but no such proxy
shall be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy
-2-
<PAGE>
which is not irrevocable by attending the meeting and voting in person or by
filing an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date with the Secretary before the proxy is voted. Unless
otherwise required by law, voting of stockholders for the election of directors
need not be by written ballot. Voting of stockholders for all other matters need
not be by written ballot unless so determined at a stockholders meeting by the
vote of the holders of a majority of the outstanding shares of each class of
capital sock present in person or represented by proxy at the meeting and
entitled to vote on the subject matter submitted to a vote at the meeting.
Unless otherwise provided by law or the certificate of incorporation, the vote
of the holders of a majority of the shares of capital stock of the Corporation
present in person or represented by proxy at a meeting at which a quorum is
present and entitled to vote on the subject matter submitted to a vote at the
meeting shall be the act of the stockholders.
Section 2.8 Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of such meeting, more than ten days after
the date upon which the resolution fixing the record date with respect to the
taking of corporate action by written consent without a meeting is adopted by
the Board of Directors, nor more than sixty days prior to any other action. If
no record date is fixed: (a) the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; (b) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed; (c) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when prior action by the Board of Directors is
required, shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action; and (d) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 2.9 List of Stockholders Entitled to Vote. The Secretary shall
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at
-3-
<PAGE>
the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present.
Section 2.10 Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided by the certificate of incorporation, any action required by law to be
taken at any annual or special meeting of stockholders of the Corporation, or
any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
ARTICLE III
Board of Directors
Section 3.1 Powers; Number; Qualifications. Unless otherwise provided by
law or the certificate of incorporation, the business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors. Unless otherwise provided by the certificate of incorporation, the
Board of Directors shall consist of such number of directors as the Board of
Directors shall from time to time designate. Unless otherwise provided by the
certificate of incorporation, directors need not be stockholders.
Section 3.2 Election; Term of Office; Resignation; Removal; Vacancies. Each
director shall hold office until his successor is elected and qualified or until
his earlier resignation or removal. Any director may resign at any time upon
written notice to the Corporation directed to the Board of Directors or the
Secretary. Such resignation shall take effect at the time specified therein, and
unless otherwise specified therein no acceptance of such resignation shall be
necessary to make it effective. Any director or the entire Board of Directors
may be removed, with or without cause, by the vote of the holders of a majority
of shares of capital stock then entitled to vote at an election of directors.
Whenever the holders of shares of any class or series of capital stock are
entitled to elect one or more directors by the provisions of the certificate of
incorporation, the provisions of the preceding sentence shall apply, in respect
to the removal without cause of a director or directors so elected, to the vote
of the holders of the outstanding shares of that class or series of capital
stock and not to the vote of the holders of the outstanding shares of capital
stock as a whole. Unless otherwise provided by the certificate of incorporation,
vacancies and newly created directorships resulting from any increase in the
authorized number of directors elected by all of the stockholders having a right
to vote as a single class may be filled by the vote of a majority of the
directors then in office, although less than a quorum, or by the vote of the
sole remaining director. Whenever the holders of shares of any class or classes
of capital stock or series thereof are entitled to elect one or more directors
by the provisions of the certificate of incorporation, vacancies and newly
created
-4-
<PAGE>
directorships of such class or classes or series thereof may be filled
by the vote of a majority of the directors elected by such class or classes or
series thereof then in office, or by the vote of the sole remaining director so
elected.
Section 3.3 Regular Meetings. Regular meetings of the Board of Directors
shall be held at such dates, times and places either within or without the State
of Delaware as the Board of Directors shall from time to time determine.
Section 3.4 Special Meetings. Special meetings of the Board of Directors
may be called at any time by the Chairman, if any, the Vice Chairman, if any,
the President or by any two members of the Board of Directors. Each special
meeting shall be held at such date, time and place either within or without the
State of Delaware as shall be fixed by the person or persons calling the
meeting.
Section 3.5 Notice of Meetings. Written notice of each meeting of the Board
of Directors shall be given which shall state the date, time and place of the
meeting. The written notice of any meeting shall be given at least twenty-four
hours in advance of the meeting to each director. Notice may be given by letter,
telegram, telex or facsimile and shall be deemed to have been given when
deposited in the United States mail, delivered to the telegraph company or
transmitted by telex or facsimile, as the case may be.
Section 3.6 Telephonic Meetings Permitted. Members of the Board of
Directors or any committee designated by the Board of Directors may participate
in a meeting of the Board of Directors or of such committee by means of
conference telephone or similar communication equipment by means of which all
persons participating in the meeting can hear each other, and participation in
the meeting pursuant to this by-law shall constitute presence in person at such
meeting.
Section 3.7 Quorum; Vote Required for Action. Unless otherwise required by
law, at each meeting of the Board of Directors, the presence of one-third of the
total number of directors shall constitute a quorum for the transaction of
business. The vote of a majority of the directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors, unless the vote
of a greater number is required by law or the certificate of incorporation. In
case at any meeting of the Board of Directors a quorum shall not be present, the
members of the Board of Directors present may by majority vote to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall attend.
Section 3.8 Organization. Meetings of the Board of Directors shall be
presided over by the Chairman, if any, or in his absence by the Vice Chairman,
if any, or in his absence by the President, or in their absence by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
-5-
<PAGE>
Section 3.9 Action by Directors Without a Meeting. Unless otherwise
provided by the certificate of incorporation, any action required or permitted
to be taken at any meeting of the Board of Directors or any committee designated
by the Board of Directors may be taken without a meeting if all members of the
Board of Directors or of such committee consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or such committee.
Section 3.10 Compensation of Directors. Unless otherwise provided by the
certificate of incorporation, the Board of Directors shall have the authority to
fix the compensation of directors, which compensation may include the
reimbursement of expenses incurred in connection with meetings of the Board of
Directors or a committee thereof.
ARTICLE IV
Committees
Section 4.1 Committees. The Board of Directors may, by resolution passed by
a majority of the whole Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member of such
committee at any meeting thereof. In the absence or disqualification of a member
of a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member.
Section 4.2 Power of Committees. Any committee designated by the Board of
Directors, to the extent provided in a resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority to take any
action which by law may only be taken by the Board of Directors or to take any
action with reference to: amending the certificate of incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors,
fix the designation and any of the preferences or rights of such shares relating
to dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of dissolution, removing or
indemnifying directors or amending these by-laws; and, unless a resolution of
the Board of Directors expressly so provides, no such committee
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shall have the power or authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law of the State of Delaware.
Section 4.3 Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may adopt, amend
and repeal rules for the conduct of its business. In the absence of a resolution
by the Board of Directors or a provision in the rules of such committee to the
contrary, the presence of a majority of the total number of members of such
committee shall constitute a quorum for the transaction of business, and the
vote of a majority of the members present at a meeting at which a quorum is
present shall be the act of such committee.
ARTICLE V
Officers
Section 5.1 Officers; Elections. As soon as practicable after the annual
meeting of stockholders in each year, the Board of Directors shall elect from
its membership or outside thereof a President and a Secretary. The Board of
Directors may also elect from its membership a Chairman of the Board of
Directors (herein called "Chairman") and a Vice Chairman of the Board of
Directors (herein called "Vice Chairman"), and from its membership or outside
thereof one or more Vice Presidents, one or more Assistant Vice Presidents, one
or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers
and such other officers or agents as it may determine. Unless otherwise provided
by the certificate of incorporation, any number of offices may be held by the
same person.
Section 5.2 Term of Office; Resignation; Removal; Vacancies. Except as
otherwise provided by the Board of Directors when electing any officer, each
officer shall hold office until the first meeting of the Board of Directors
after the annual meeting of stockholders next succeeding his election, or until
his successor is elected and qualified or until his earlier resignation or
removal. Any officer may resign at any time upon written notice to the
Corporation directed to the Board of Directors and the Secretary. Such
resignation shall take effect at the time specified therein, and unless
otherwise specified therein no acceptance of such resignation shall be necessary
to make it effective. The Board of Directors may remove any officer or agent
with or without cause at any time. Any such removal shall be without prejudice
to the contractual rights of such officer or agent, if any, with the
Corporation, but the election of an officer or agent shall not of itself create
any contractual rights. Any vacancy occurring in any office of the Corporation
by death, resignation, removal or otherwise may be filled for the unexpired
portion of the term by the Board of Directors.
Section 5.3 Powers and Duties. The officers of the Corporation shall have
such powers and duties in the management of the Corporation as shall be stated
in these by-laws or in a resolution of the Board of Directors which is not
inconsistent with these by-laws and, to the extent not so stated, as generally
pertain to their respective offices, subject to the control of the Board of
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Directors. The Secretary shall have the duty to record in a book to be kept for
that purpose the proceedings of the meetings of the stockholders, the Board of
Directors and any committees designated by the Board of Directors.
Section 5.4 Other Officers; Security. The other officers, if any, of the
Corporation shall have such duties and powers as generally pertain to their
respective offices and such other duties and powers as the Board of Directors
shall from time to time delegate to each such officer. The Board of Directors
may require any officer, agent or employee to give security, by bond or
otherwise, for the faithful performance of his duties.
Section 5.5 Compensation of Officers. The compensation of each officer
shall be fixed by the Board of Directors and no officer shall be prevented from
receiving such compensation by virtue of his also being a director.
ARTICLE VI
Stock
Section 6.1 Certificates. Every holder of one or more shares of capital
stock of the Corporation shall be entitled to have a certificate signed by or in
the name of the Corporation by the Chairman or Vice Chairman, if any, or the
President or a Vice President, and by the Treasurer or an Assistant Treasurer,
if any, or the Secretary or an Assistant Secretary, certifying the number of
shares owned by him in the Corporation. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 6.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate of stock in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
ARTICLE VII
Indemnification of Directors and Officers
Section 7.1 Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a
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"proceeding"), by reason of the fact that he is or was a director or officer of
the Corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all reasonable expense, liability and loss (including, without
limitation, reasonable attorneys' fees, judgments, fines and amounts paid in
settlement) incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in Section 7.02 below with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. The right to indemnification conferred in this
ARTICLE VII shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that, if the Delaware General Corporation Law requires, an
advancement of expenses incurred by an indemnitee in his capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such indemnitee) shall be made only upon delivery to the corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee,
to repay all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter a
"final adjudication") that such indemnitee is not entitled to be indemnified for
such expenses under this ARTICLE VII or otherwise.
Section 7.2 Right of Indemnitee to Bring Suit. If a claim under Section
7.01 above is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be thirty days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (a) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that and
(b) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
the applicable standard of conduct set forth in the General Corporation Law of
the State of Delaware. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel or its stockholders) to have made
a determination prior to the commencement of such suit that
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indemnification of the indemnitee is proper in the circumstances because the
indemnitee has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent counsel or its stockholders) that
the indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this ARTICLE VII or
otherwise shall be on the Corporation.
Section 7.3 Non-Exclusivity of Rights under this ARTICLE. The rights to
indemnification and to the advancement of expenses conferred in this ARTICLE VII
shall not be exclusive of any other right which any person may have or hereafter
acquire under any statute, provision of the certificate of incorporation,
by-law, agreement, vote of stockholders or disinterested directors or otherwise.
Section 7.4 Insurance. The Corporation may purchase and maintain insurance
on its own behalf or on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss asserted against him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the General
Corporation Law of the State of Delaware.
Section 7.5 Indemnification of Employees and Agents. The Corporation may,
to the extent authorized at any time from time to time by the Board of
Directors, grant rights to indemnification and the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this ARTICLE VII with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.
ARTICLE VIII
Miscellaneous
Section 8.1 Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
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Section 8.2 Seal. The Corporation may have a corporate seal which shall
have the name of the Corporation inscribed thereon and shall be in such form as
may be approved from time to time by the Board of Directors.
Section 8.3 Waiver of Notice of Meetings of Stockholders, Directors and
Committees. Whenever notice is required to be given by law, the certificate of
incorporation or these by-laws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Unless otherwise provided by the certificate of incorporation, neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders, directors or members of a committee of directors
need be specified in any written waiver of notice.
Section 8.4 Interested Directors, Officers, Quorum. No contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because his or
their votes are counted for such purpose, if: (a) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (b) the material facts as to
his relationship or interest and as to the contract or transaction are disclosed
or are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (c) the contract or transaction is fair as to the Corporation as of the time
it is authorized, approved or ratified, by the Board of Directors, a committee
thereof or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
Section 8.5 Books and Records. The books and records of the Corporation may
be kept within or without the State of Delaware at such place or places as may
be designated from time to time by the Board of Directors. Any records
maintained by the Corporation in the regular course of its business, including
its stock ledger, books of account and minute books, may be kept on, or be in
the form of, punch cards, magnetic tape, photographs, microphotographs or any
other information storage device provided that the records so kept can be
converted into clearly legible form within a reasonable time. The Corporation
shall so convert any records so kept upon the request of any person entitled to
inspect the same.
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Section 8.6 Amendment of By-Laws. These By-laws may be amended or repealed,
and new by-laws adopted, by the Board of Directors, but the stockholders
entitled to vote may adopt additional by-laws and may amend or repeal any by-law
whether or not adopted by them.
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RESTATED CERTIFICATE OF INCORPORATION
OF
MONITOR AEROSPACE CORPORATION
a New York Corporation
Under Section 807 of the Business Corporation Law
THE UNDERSIGNED, Vice Chairman and Secretary of Monitor Aerospace
Corporation (the "Corporation") do hereby certify as follows:
1. The name of the Corporation is Monitor Aerospace Corporation. The
Corporation was formed under the name of Monitor Machinery Corp.
2. The Certificate of Incorporation of Monitor Machinery Corp. was
filed with the State of New York on May 26, 1948. The Corporation is the
surviving constituent corporation of a consolidation of Monitor Machinery
Corp., Monitor Properties Corp. and Boxart Machine Company, Inc., pursuant
to a certificate of consolidation filed with the Department of State of the
State of New York on May 31, 1963 pursuant to Section 86 of the Stock
Corporation Law of New York.
3. The Certificate of Incorporation is hereby amended to effect the
following amendments authorized by the Business Corporation Law:
a. Article FIRST of the Certificate of Incorporation is hereby
amended in its entirety to read as follows:
FIRST: The name of the corporation is Stellex Monitor
Aerospace, Inc.
b. Article SECOND of the Certificate of Incorporation is hereby
amended in its entirety to read as follows:
SECOND: The Corporation is formed for the following
purposes:
To engage in any lawful act or activity for which
corporations may be organized under the Business Corporation
Law, provided that the Corporation is not formed to engage
in any act or activity requiring the consent or approval of
any state official, department, board, agency or other body
without such consent or approval first being obtained.
c. Article THIRD of the Certificate of Incorporation is hereby
amended in its entirety to read as follows:
<PAGE>
THIRD: The total number of shares of stock which the
Corporation has authority to issue is 10,000 shares. All of such
shares are Common Stock without par value.
d. Article SIXTH of the Certificate of Incorporation is hereby
amended in its entirety to read as follows:
SIXTH: The Corporation shall indemnify any person to the
fullest extent permitted by the New York Business Corporation
Law, as amended from time to time, for all amounts (including,
without limitation, judgements, fines, settlement payments,
expenses and attorney's fees) incurred or paid in connection with
any action, suit, investigation or proceeding arising out of or
relating to the performance of services by such person for, or
acting as a director, officer or employee of, the Corporation or
any other person or enterprise at the Corporation's request, and
shall to the fullest extent permitted by the New York Business
Corporation Law, as amended from time to time, advance all
expenses incurred or paid by such person in connection with, and
until disposition of any action, suit, investigation or
proceeding arising out of or relating to the performance of
services by such person for, or acting as a director, officer or
employee of, the Corporation or any other person or enterprise at
the Corporation's request.
e. Article SEVENTH of the Certificate of Incorporation is hereby
amended in its entirety to read as follows:
SEVENTH: No director of the Corporation shall be personally
liable to the Corporation or its shareholders for damages for any
breach of duty in such capacity, provided that nothing contained
in this Article SEVENTH shall eliminate or limit the liability of
any director if a judgment or other final adjudication adverse to
him or her establishes that his or her acts or omissions were in
bad faith or involved intentional misconduct or a known violation
of law or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally
entitled or that his or her acts violated Section 719, or its
successor, of the New York Business Corporation Law.
f. A new Article EIGHTH is hereby added as follows:
EIGHTH: In furtherance and not in limitation of the powers
conferred by statute, the board of directors of the Corporation
is expressly authorized to adopt, amend or repeal the by-laws of
the Corporation.
g. A new Article NINTH is hereby added as follows:
NINTH: Elections of directors need not be by written ballot
unless the by-laws of the Corporation so provide.
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h. A new Article TENTH is hereby added as follows:
TENTH: No holder of any of the shares of any class of the
Corporation shall be entitled as of right to subscribe for,
purchase, or otherwise acquire any shares of any class of the
Corporation which the Corporation proposes to issue or any rights
or options which the Corporation proposes to grant for the
purchase of shares of any class of the Corporation or for the
purchase of shares, bonds, securities, or obligations of the
Corporation which are convertible into or exchangeable for, or
which carry any rights, to subscribe for, purchase, or otherwise
acquire shares of any class of the Corporation; and any and all
of such shares, bonds, securities, or obligations of the
Corporation, whether now or hereafter authorized or created, may
be issued, or may be reissued or transferred if the same have
been reacquired and have treasury status, and any and all such
rights and options may be granted by the Board of Directors to
such persons, firms, corporations, and associations, and for such
lawful consideration, and on such terms, as the Board of
Directors in its discretion may determine, without first offering
the same, or any thereof, to any said holder. Without limiting
the generality of the foregoing stated denial of any and all
preemptive rights, no holder of shares of any class of the
Corporation shall have any preemptive rights in respect of the
matters, proceedings, or transactions specified in subparagraphs
(1) to (6), inclusive, of paragraph (e) of Section 622 of the
Business Corporation Law.
i. A new Article ELEVENTH is hereby added as follows:
ELEVENTH: Corporation Service Company, 80 State Street, 6th
Floor, Albany, New York 12207-2543, is designated as registered
agent of the Corporation upon whom process against the
Corporation may be served.
4. The Certificate of Incorporation of the Corporation as amended
heretofore is hereby restated as further amended to read in its entirety as
follows:
CERTIFICATE OF INCORPORATION
OF
MONITOR AEROSPACE CORPORATION
a New York Corporation
FIRST: The name of the corporation is Stellex Monitor Aerospace, Inc.
SECOND: The Corporation is formed for the following purposes:
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<PAGE>
To engage in any lawful act or activity for which corporations may be
organized under the Business Corporation Law, provided that the Corporation
is not formed to engage in any act or activity requiring the consent or
approval of any state official, department, board, agency or other body
without such consent or approval first being obtained.
THIRD: The total number of shares of stock which the Corporation has
authority to issue is 10,000 shares. All of such shares are Common Stock without
par value.
FOURTH: The office of the Corporation in the State of New York is to be
located in the Town of Babylon, Village of Amityville, County of Suffolk.
FIFTH: The duration of the Corporation shall be perpetual.
SIXTH: The Corporation shall indemnify any person to the fullest extent
permitted by the New York Business Corporation Law, as amended from time to
time, for all amounts (including, without limitation, judgements, fines,
settlement payments, expenses and attorney's fees) incurred or paid in
connection with any action, suit, investigation or proceeding arising out of or
relating to the performance of services by such person for, or acting as a
director, officer or employee of, the Corporation or any other person or
enterprise at the Corporation's request, and shall to the fullest extent
permitted by the New York Business Corporation Law, as amended from time to
time, advance all expenses incurred or paid by such person in connection with,
and until disposition of any action, suit, investigation or proceeding arising
out of or relating to the performance of services by such person for, or acting
as a director, officer or employee of, the Corporation or any other person or
enterprise at the Corporation's request.
SEVENTH: No director of the Corporation shall be personally liable to the
Corporation or its shareholders for damages for any breach of duty in such
capacity, provided that nothing contained in this Article SEVENTH shall
eliminate or limit the liability of any director if a judgment or other final
adjudication adverse to him or her establishes that his or her acts or omissions
were in bad faith or involved intentional misconduct or a known violation of law
or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled or that his or her acts
violated Section 719, or its successor, of the New York Business Corporation
Law.
EIGHTH: In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
adopt, amend or repeal the by-laws of the Corporation.
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<PAGE>
NINTH: Elections of directors need not be by written ballot unless the
by-laws of the Corporation so provide.
TENTH: No holder of any of the shares of any class of the Corporation shall
be entitled as of right to subscribe for, purchase, or otherwise acquire any
shares of any class of the Corporation which the Corporation proposes to issue
or any rights or options which the Corporation proposes to grant for the
purchase of shares of any class of the Corporation or for the purchase of
shares, bonds, securities, or obligations of the Corporation which are
convertible into or exchangeable for, or which carry any rights, to subscribe
for, purchase, or otherwise acquire shares of any class of the Corporation; and
any and all of such shares, bonds, securities, or obligations of the
Corporation, whether now or hereafter authorized or created, may be issued, or
may be reissued or transferred if the same have been reacquired and have
treasury status, and any and all such rights and options may be granted by the
Board of Directors to such persons, firms, corporations, and associations, and
for such lawful consideration, and on such terms, as the Board of Directors in
its discretion may determine, without first offering the same, or any thereof,
to any said holder. Without limiting the generality of the foregoing stated
denial of any and all preemptive rights, no holder of shares of any class of the
Corporation shall have any preemptive rights in respect of the matters,
proceedings, or transactions specified in subparagraphs (1) to (6), inclusive,
of paragraph (e) of Section 622 of the Business Corporation Law.
ELEVENTH: Corporation Service Company, 80 State Street, 6th Floor, Albany,
New York 12207-2543, is designated as registered agent of the Corporation upon
whom process against the Corporation may be served.
[Signature Page Follows]
5
<PAGE>
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein are true under the penalties of perjury, this ___ day of
__________, 1999.
/s/ William L. Remley
_____________________________
William L. Remley
Vice Chairman
/s/ Richard L. Kramer
_____________________________
Richard L. Kramer
Secretary
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BY-LAWS
OF
MONITOR AEROSPACE CORPORATION
a New York Corporation
ARTICLE I
Shareholders
Section 1.1 Annual Meeting. A meeting of shareholders of the Corporation
shall be held annually at the principal office of the Corporation in the State
of New York on the first Monday in April or at such other place within or
without the State of New York, at such other time and on such date as may from
time to time be fixed by the Board of Directors, for the election of directors
and for the transaction of such other business as may come before the meeting.
Section 1.2 Special Meetings. Special meetings of shareholders of the
Corporation may be called by the Board of Directors or the President, and shall
be called by the Secretary upon the written request of shareholders of record
holding at least a majority in number of the issued and outstanding shares of
the Corporation entitled to vote at such meeting. Special meetings shall be held
at such place within or without the State of New York, at such time and on such
date as shall be specified in the call thereof. At any special meeting, only
such business may be transacted which is related to the purpose or purposes set
forth in the notice of such special meeting.
Section 1.3 Notice of Meetings. Written notice of each meeting of
shareholders stating the place, date and hour thereof and, unless it is an
annual meeting, the purpose or purposes for which the meeting is called and that
it is being issued by or at the direction of the person or persons calling the
meeting, shall be given personally or by mail, not less than ten nor more than
sixty days before the date of such meeting, to each shareholder entitled to vote
at such meeting. If mailed, such notice is given when deposited in the United
States mail, with postage thereon prepaid, directed to the shareholder at his or
her address as it appears on the record of shareholders or, if he or she shall
have filed with the Secretary a written request that notices to him or her be
mailed to some other address, then directed to him or her at such other address.
If, at any meeting, action is proposed to be taken which would, if taken,
entitle shareholders fulfilling the requirements of Section 623 of the Business
Corporation Law to receive payment for their share, the notice of such meeting
shall include a statement of that purpose and to that effect.
<PAGE>
Section 1.4 Waiver of Notice. Notice of any meeting of shareholders need
not be given to any shareholder who submits a signed waiver of notice, in person
or by proxy, whether before or after the meeting. The attendance of any
shareholder at a meeting in person or by proxy, without protesting prior to the
conclusion of the meeting the lack of notice of such meeting, shall constitute a
waiver of notice by him or her.
Section 1.5 Adjournment. When any meeting of shareholders is adjourned to
another time or place, it should not be necessary to give any notice of the
adjourned meeting if the time and place to which the meeting is adjourned are
announced at the meeting at which the adjournment is taken, and at the adjourned
meeting any business may be transacted that might have been transacted on the
original date of the meeting. However, if after such adjournment the Board of
Directors fixes a new record date for the adjourned meeting, a notice of the
adjourned meeting shall be given to each shareholder of record on the new record
date entitled to vote at such meeting.
Section 1.6 Quorum. Except as otherwise provided by law, the holders of a
majority of the shares entitled to vote at any meeting of shareholders, shall
constitute a quorum thereat for the transaction of any business. When a quorum
is once present to organize a meeting, it is not broken by the subsequent
withdrawal of any shareholders. The shareholders present may adjourn a meeting
despite the absence of a quorum.
Section 1.7 Proxies. Every shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
another person or persons to act for him or her by proxy. Every proxy must be
signed by the shareholder or his or her attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the shareholder executing it, except as otherwise provided by law.
Section 1.8 Voting. Every shareholder of record shall be entitled at every
meeting of shareholders to one vote for every share standing in his or her name
on the record of shareholders. Directors shall, except as otherwise required by
law, be elected by a plurality of the votes cast at a meeting of shareholders by
the holders of shares entitled to vote in such election. Whenever any corporate
action, other than the election of directors, is to be taken by vote of the
shareholders, it shall, except as otherwise required by law, be authorized by a
majority of the votes cast at a meeting of shareholders by the holders of shares
entitled to vote thereon.
Section 1.9 Action Without a Meeting. Any action required or permitted to
be taken by shareholders by vote may be taken without a meeting on written
consent, setting forth the action so taken, signed by the holders of all
outstanding shares entitled to vote thereon.
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Section 1.10 Record Date. The Board of Directors may fix, in advance, a
date, which date shall not be more than sixty nor less than ten days before the
date of any meeting of shareholders nor more than fifty days prior to any other
action, as the record date for the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action. When a determination of shareholders of record
entitled to notice of or to vote at any meeting of shareholders has been made as
provided herein, such determination shall apply to any adjournment thereof,
unless the Board of Directors fixes a new record date for the adjourned meeting.
ARTICLE II
Directors
Section 2.1 Number and Qualifications. The Board of Directors shall consist
of such numer of directors as the Board of Directors shall from time to time
designate, except that the Board of Directors shall at all time consists of one
or more members. Directors need not be shareholders of the Corporation. Each of
the directors shall be at least eighteen years of age.
Section 2.2 Election and Term of Office. At each annual meeting of
shareholders, directors shall be elected to hold office until the next annual
meeting of shareholders. Each director shall hold office until the expiration of
such term, and until his or her successor has been elected and qualified, unless
he or she sooner die, resign or be removed.
Section 2.3 Meetings. A meeting of the Board of Directors shall be held for
the election of officers and for the transaction of such other business as may
properly come before such meeting as soon as practicable after the annual
meeting of shareholders. other regular meetings of the Board of Directors may be
held at such times as the Board of Directors may from time to time determine.
Special meetings of the Board of Directors may be called at any time by the
President or by a majority of the directors then in office. Meetings of the
Board of Directors shall be held at the principal office of the Corporation in
the State of New York or at such other place within or without the State of New
York as may from time to time be fixed by the Board of Directors.
Section 2.4 Notice of Meetings; Adjournment. No notice need be given of the
first meeting of the Board of Directors after the annual meeting of shareholders
or of any other regular meeting of the Board of Directors, provided the time and
place of such meetings are fixed by the Board of Directors. Notice of each
special meeting of the Board of Directors and of each regular meeting the time
and place of which has not been fixed by the Board of Directors, specifying the
place, date and time thereof, shall be given personally, by mail or telegraphed
to each director at his or her address as such address appears upon the books of
the Corporation at least two business days (Saturdays, Sundays and legal
holidays not being considered business days for the
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purpose of these By-Laws) before the date of such meeting. Notice of any meeting
need not be given to any director who submits a signed waiver of notice, whether
before or after the meeting, or who attends the meeting without protesting,
prior thereto or at its commencement, the lack of notice to him or her. Notice
of any directors' meeting or any waiver thereof need not state the purpose of
the meeting. A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. Notice of any
adjournment of a meeting of the Board of Directors to another time or place
shall be given to the directors who were not present at the time of the
adjournment and, unless such time and place are announced at the meeting, to the
other directors.
Section 2.5 Quorum; Voting. At any meeting of the Board of Directors, a
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business or of any specified item of business. Except as
otherwise required by law, the vote of a majority of the directors present at
the time of the vote, if a quorum is present at such time, shall be the act of
the Board of Directors.
Section 2.6 Participation by Telephone. Any one or more members of the
Board of Directors or any committee thereof may participate in a meeting of the
Board of Directors or such committee by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation by such means shall
constitute presence in person at a meeting.
Section 2.7 Action Without a Meeting. Any action required or permitted to
be taken by the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board of Directors or such committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents thereto by the members of the Board of Directors or
such committee shall be filed with the minutes of the proceedings of the Board
of Directors or such committee.
Section 2.8 Committees. The Board of Directors, by resolution adopted by a
majority of the entire Board of Directors, may designate from among its members
an Executive Committee and other committees, each consisting of one or more
directors. Each such committee, to the extent provided in such resolution, shall
have all the authority of the Board of Directors, except that no such committee
shall have authority as to the following matters: (a) the submission to
shareholders of any action that needs shareholders, approval pursuant to law,
(b) the filling of vacancies in the Board of Directors or in any committee, (c)
the fixing of the compensation of the directors for serving on the Board of
Directors or on any committee, (d) the amendment or repeal of these By-Laws, or
the adoption of new By-Laws, or (e) the amendment or repeal of any resolution of
the Board of Directors which by its terms shall not be so amendable or
repealable. The Board of Directors may designate one or more directors as
alternate members of any such committee, who may replace any absent member or
members at any meeting of such committee. Each such committee shall serve at the
pleasure of the Board of Directors.
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Section 2.9 Removal; Resignation. Any or all of the directors may be
removed for cause or without cause by vote of the shareholders, and any of the
directors may be removed for cause by action of the Board of Directors. Any
director may resign at any time, such resignation to be made in writing and to
take effect immediately or on any future date stated in such writing, without
acceptance by the Corporation.
Section 2.10 Vacancies. Newly created directorships resulting from an
increase in the number of directors and vacancies occurring in the Board of
Directors for any reason may be filled by vote of the Board of Directors or by
vote of the shareholders. If any newly created directorship or vacancy is to be
filled by vote of the Board of Directors and the number of directors then in
office is less than a quorum, such newly created directorship or vacancy may be
filled by vote of a majority of the directors then in office. A director elected
to fill a vacancy, unless elected by the shareholders, shall hold office until
the next meeting of shareholders at which the election of directors is in the
regular order of business, and until his or her successor has been elected and
qualified, and any director elected by the shareholders to fill a vacancy shall
hold office for the unexpired term of his or her predecessor unless, in either
case, he or she shall sooner die, resign or be removed.
ARTICLE III
Officers
Section 3.1 Election; Qualifications. At the first meeting of the Board of
Directors and as soon as practicable after each annual meeting of shareholders,
the Board of Directors shall elect or appoint a President, one or more
Vice-Presidents, a Secretary and a Treasurer, and may elect or appoint at such
time and from time to time such other officers as it may determine. No officer
need be a director of the Corporation. Any two or more offices may be held by
the same person. When all of the issued and outstanding stock of the Corporation
is owned by one person, such person may hold all or any combination of offices.
Section 3.2 Term of Office; Vacancies. All officers shall be elected or
appointed to hold office until the meeting of the Board of Directors following
the next annual meeting of shareholders. Each officer shall hold office for such
term, and until his or her successor has been elected or appointed and qualified
unless he or she shall earlier resign, die, or be removed. Any vacancy occurring
in any office, whether because of death, resignation or removal, with or without
cause, or any other reason, shall be filled by the Board of Directors.
Section 3.3 Removal; Resignation. Any officer may be removed by the Board
of Directors with or without cause. Any officer may resign his or her office at
any time, such resignation to be made in writing and to take effect immediately
or on any future date stated in such writing, without acceptance by the
Corporation.
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Section 3.4 Powers and Duties of the President. The President shall be the
chief executive, operating and administrative officer of the Corporation and
shall have general charge and supervision of its business, affairs,
administration and operations. The President shall from time to time make such
reports concerning the Corporation as the Board of Directors may direct. The
President shall preside at all meetings of shareholders and the Board of
Directors. The President shall have such other powers and shall perform such
other duties as may from time to time be assigned to him or her by the Board of
Directors.
Section 3.5 Powers and Duties of the Vice-Presidents. Each of the
Vice-Presidents shall have such powers and shall perform such duties as may from
time to time be assigned to him or her by the Board of Directors.
Section 3.6 Powers and Duties of the Secretary. The Secretary shall record
and keep the minutes of all meetings of shareholders and of the Board of
Directors. The Secretary shall attend to the giving and serving of all notices
by the Corporation. The Secretary shall be the custodian of, and shall make or
cause to be made the proper entries in, the minute book of the Corporation and
such books and records as the Board of Directors may direct. The Secretary shall
be the custodian of the seal of the Corporation and shall affix or cause to be
affixed such seal to such contracts, instruments and other documents as the
Board of Directors may direct. The Secretary shall have such other powers and
shall perform such other duties as may from time to time be assigned to him or
her by the Board of Directors.
Section 3.7 Powers and Duties of the Treasurer. The Treasurer shall be the
custodian of all funds and securities of the Corporation. Whenever required by
the Board of Directors, the Treasurer shall render a statement of the
Corporation's cash and other accounts, and shall cause to be entered regularly
in the proper books and records of the Corporation to be kept for such purpose
full and accurate accounts of the Corporation's receipts and disbursements. The
Treasurer shall at all reasonable times exhibit the Corporation's books and
accounts to any director of the Corporation upon application at the principal
office of the Corporation during business hours. The Treasurer shall have such
other powers and shall perform such other duties as may from time to time be
assigned to him or her by the Board of Directors.
Section 3.8 Delegation. In the event of the absence of any officer of the
Corporation or for any other reason that the Board of Directors may deem
sufficient, the Board of Directors may at any time and from time to time
delegate all or any part of the powers or duties of any officer to any other
officer or officers or to any director or directors.
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ARTICLE IV
Shares
The shares of the Corporation shall be represented by certificates signed
by the President or any Vice-President and by the Secretary, an Assistant
Secretary, the Treasurer or an Assistant Treasurer, and may be sealed with the
seal of the Corporation or a facsimile thereof. Each certificate representing
shares shall state upon the face thereof (a) that the Corporation is formed
under the laws of the State of New York, (b) the name of the person or persons
to whom it is issued, (c) the number and class of shares which such certificate
represents and (d) the designation of the series, if any, which such certificate
represents.
ARTICLE V
Execution of Documents
All contracts, instruments, agreements, bills payable, notes, checks,
drafts, warrants or other obligations of the Corporation shall be made in the
name of the Corporation and shall be signed by such officer or officers as the
Board of Directors may from time to time designate.
ARTICLE VI
Seal
The seal of the Corporation shall contain the name of the Corporation, the
words "Corporate Seal," the year of its organization and the words "New York."
ARTICLE VII
Indemnification
The Corporation shall indemnify any person to the full extent permitted,
and in the manner provided, by the New York Business Corporation Law, as the
same now exists or may hereafter be amended.
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ARTICLE VIII
Fiscal Year
The fiscal year of the Corporation shall end on December 31 of each year or
on such other date as shall be determined by the Board of Directors.
ARTICLE IX
Amendment of By-Laws
Except as otherwise provided by law, these By-Laws may be amended or
repealed, and any new By-Law may be adopted, by vote of the holders of the
shares at the time entitled to vote in the election of any directors or by a
majority of the entire Board of Directors, but any by-law adopted by the Board
of Directors may be amended or repealed by the shareholders entitled to vote
thereon as herein provided.
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CERTIFICATE OF INCORPORATION
MONITOR AEROSPACE INTERNATIONAL CORP.
Under Section 402 of the Business Corporation Law.
The undersigned, for the purpose of forming a corporation pursuant to
Section 402 of the Business Corporation Law of the State of New York, does
hereby certify and set forth:
FIRST: The name of the corporation is MONITOR AEROSPACE INTERNATIONAL
CORP.
SECOND: The purposes for which the corporation is formed are:
To engage in any lawful act or activity for which corporations
may be organized under the business corporation law, provided that the
corporation is not formed to engage in any act or activity which
requires the act or approval of any state official, department, board,
agency or other body without such approval or consent first being
obtained.
To carry on a general mercantile, industrial, investing and
trading business in all its branches; to devise, invent, manufacture,
fabricate, assemble, install, service, maintain, alter, buy, sell,
import, export, license as licensor or licensee, lease as lessor or
lessee, distribute, job, enter into, negotiate, execute, acquire, and
assign contracts in respect of, acquire, receive, grant, and assign
licensing arrangements, options, franchises, and other rights in
respect of and generally deal in and with at wholesale and retail, as
principal, and as sales, business, special, or general agent,
representative, broker, factor, merchant, distributor, jobber,
advisor, or in any other lawful capacity, goods, wares, merchandise,
commodities, and unimproved, improved, finished, processed and other
real, personal and mixed property of any and all kinds, together with
the components, resultants, and by-products thereof.
To create, manufacture, contract for, buy, sell, import, export,
distribute, job and generally deal in and with, whether at wholesale
or retail, and as principal, agent, broker, factor, commission
merchant, licensor, licensee or otherwise, any and all kinds of goods,
wares, and merchandise, and in connection therewith or independent
thereof, to establish and maintain, by any manner or means, buying
offices, distribution centers, specialty and other shops, stores,
mail-order establishments, concessions, leased departments, and any
and all other departments, sites and locations necessary, convenient
or useful in the furtherance of any business of the corporation.
To develop, experiment with, manufacture, fabricate, produce,
assemble, buy, lease or otherwise acquire, hold, own, operate, use,
install, equip, maintain, service, process, possess, repossess,
remodel, recondition, transport, import, export, sell, lease or
otherwise dispose of and
<PAGE>
generally to deal in and with any and all kinds of raw materials,
products, manufactured articles and products, equipment, machinery,
devices, systems, parts, tools and implements, apparatus, and goods,
wares, merchandise and tangible property of every kind, used or
capable of being used for any purpose whatsoever, and wheresoever
located.
To acquire by purchase, subscription, underwriting or otherwise,
and to own, hold for investment, or otherwise, and to use, sell,
assign, transfer, mortgage, pledge, exchange or otherwise dispose of
real and personal property of every sort and description and
wheresoever situated, including shares of stock, bonds, debentures,
notes, scrip, securities, evidences of indebtedness, contracts or
obligations of any corporation or association, whether domestic or
foreign, or of any firm or individual or of the United States or any
state, territory or dependency of the United States or any state,
territory or municipality or local authority within or without the
United States, and also to issue in exchange therefor, stocks, bonds
or other securities or evidences of indebtedness of this corporation
and, while the owner or holder of any such property, to receive,
collect and dispose of the interest, dividends and income on or from
such property and to possess and exercise in respect thereto all of
the rights, powers and privileges of ownership, including all voting
powers thereon.
To construct, build, purchase, lease or otherwise acquire, equip,
hold, own, improve, develop, manage, maintain, control, operate,
lease, mortgage, create liens upon, sell, convey or otherwise dispose
of and turn to account, any and all plants, machinery, works,
implements and things or property, real and personal, of every kind
and description, incidental to, connected with, or suitable, necessary
or convenient for any of the purposes enumerated herein, including all
or any part or parts of the properties, assets, business and goodwill
of any persons, firms, associations or corporations.
The powers, rights and privileges provided in this certificate
are not to be deemed to be in limitation of similar, other or
additional powers, rights and privileges granted or permitted to a
corporation by the Business Corporation Law, it being intended that
this corporation shall have all rights, powers and privileges granted
or permitted to a corporation by such statute.
THIRD: The office of the corporation is to be located in the County of
Suffolk, State of New York.
FOURTH: The aggregate number of shares which the corporation shall
have the authority to issue is Two Hundred (200), all of which shall be
without par value.
FIFTH: The Secretary of State is designated as the agent of the
corporation upon whom process against it may be served. The post office
address to which the Secretary of State shall mail a copy of any process
against the corporation served on him is:
c/o Monitor Aerospace Corporation
1000 New Horizons Boulevard
<PAGE>
Amityville, New York 11701
SIXTH: The personal liability of directors to the corporation or its
shareholders for damages for any breach of duty in such capacity is hereby
eliminated except that such personal liability shall not be eliminated if a
judgment or other final adjudication adverse to such director establishes
that his acts or omissions were in bad faith or involved intentional
misconduct or a knowing violation of law or that he personally gained in
fact a financial profit or other advantage to which he was not legally
entitled or that his acts violated Section 719 of the Business Corporation
Law.
<PAGE>
INWITNESS WHEREOF, this certificate has been subscribed to this __________
day of __________, 1999 by the undersigned who affirms that the statements made
herein are true under the penalties of perjury.
/s/ Gerald Weinberg
______________________
GERALD WEINBERG
90 State Street
Albany, New York
<PAGE>
BY-LAWS
ARTICLE I
The Corporation
Section 1. Name. The legal name of this corporation (hereinafter called the
"Corporation") is MONITOR AEROSPACE INTERNATIONAL CORP.
Section 2. Offices. The Corporation shall have its principal all office in
the State of New York. The Corporation may also have offices at such other
places within and without the United States as the Board of Directors may from
time to time appoint or the business of the Corporation may require.
Section 3. Seal. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its organization and the words "Corporate Seal,
New York." One or more duplicate dies for impressing such seal may be kept and
used.
ARTICLE II
Meetings of Shareholders
Section 1. Place of Meetings. All meetings of the shareholders shall be
held at the principal office of the Corporation in the State of New York or at
such other place, within or without the State of New York, as is fixed in the
notice of the meeting.
Section 2. Annual Meeting. An annual meeting of the shareholders of the
Corporation for the election of directors and the transaction of such other
business as may properly come before the meeting shall be held on the last
Tuesday of September of each year if not a legal holiday, and if a legal
holiday, then on the next secular day following, at ten o'clock A.M., Eastern
Standard Time, or at such other time as is fixed in the notice of the meeting.
If for any reason any annual meeting shall not be held at the time herein
specified, the same may be held at any time thereafter upon notice. as herein
provided, or the business thereof may be transacted at any special meeting
called for the purpose.
Section 3. Special Meetings. Special meetings of shareholders may be called
by the President whenever he deems it necessary or advisable. A special meeting
of the shareholders shall be called by the President whenever so directed in
writing by a majority of the entire Board of Directors or whenever the holders
of one-third (1/3) of
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the number of shares of the capital stock of the Corporation entitled to vote at
such meeting shall, in writing, request the same.
Section 4. Notice of Meetings. Notice of the time and place of the annual
and of each special meeting of the shareholders shall be given to each of the
shareholders entitled to vote at such meeting by mailing the same in a postage
prepaid wrapper addressed to each such shareholder at his address as it appears
on the books of the Corporation, or by delivering the same personally to any
such shareholder in lieu of such mailing, at least ten (10) and not more than
fifty (50) days prior to each meeting. Meetings may be held without notice if
all of the shareholders entitled to vote thereat are present in person or by
proxy, or if notice thereof is waived by all such shareholders not present in
person or by proxy, before or after the meeting. Notice by mail shall be deemed
to be given when deposited, with postage thereon prepaid, in the United States
mail. If a meeting is adjourned to another time, not more than thirty (30 days
hence, or to another place, and if an announcement of the adjourned time or
place is made at the meeting, it shall not be necessary to give notice of the
adjourned meeting unless the Board of Directors, after adjournment fix a new
record date for the adjourned meeting. Notice of the annual and each special
meeting of the shareholders shall indicate that it is being issued by or at the
direction of the person or persons calling the meeting, and shall state the name
and capacity of each such person. Notice of each special meeting shall also
state the purpose or purposes for which it has, been called. Neither the
business to be transacted at nor the purpose of the annual or any special
meeting of the shareholders need be specified in any written waiver of notice.
Section 5. Record Date for Shareholders. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or other distribution or the allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion,
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than
fifty(5) days nor less than ten (10) days before the date of such meeting, nor
more than fifty (50) days prior to any other action. If no record date is fixed,
the record date for determining shareholders entitled to notice of or to vote at
a meeting of shareholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if no notice is given, the day
on which the meeting is held; the record date for determining shareholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed; and the record date for
determining shareholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of shareholders of record entitled to notice of or to
vote at any meeting of
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shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 6. Proxy Representation. Every shareholder may authorize another
person or persons to act for him by proxy in all matters in which a shareholder
is entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the shareholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after eleven months from its date unless such
proxy provides for a longer period. Every proxy shall be revocable at the
pleasure of the shareholder executing it, except as otherwise provided in
Section 608 of the New York Business Corporation Law.
Section 7. Voting at Shareholders' Meetings. Each share of stock shall
entitle the holder thereof to one vote. In the election of directors, a
plurality of the votes cast shall elect. Any other action shall be authorized by
a majority of the votes cast except where the New York Business Corporation Law
prescribes a different percentage of votes or a different exercise of voting
power. In the election of directors, and for any other action, voting need not
be by ballot.
Section 8. Quorum and Adjournment. Except for a special election of
directors pursuant to Section 603 of the New York Business Corporation Law, the
presence, in person or by proxy, of the holders of a majority of the shares of
the stock of the Corporation outstanding and entitled to vote thereat shall be
requisite and shall constitute a quorum at any meeting of the shareholders. When
a quorum is once present to organize a meeting, it shall not be broken by the
subsequent withdrawal of any shareholders. If at any meeting of shareholders
there shall be less than a quorum so present, the shareholders present in person
or by proxy and entitled to vote thereat, may adjourn the meeting from time to
time until a quorum shall be present, but no business shall be transacted at any
such adjourned meeting except such as might have been lawfully transacted had
the meeting not adjourned.
Section 9. List of Shareholders. The officer who has charge of the stock
ledger of the Corporation shall prepare, make and certify, at least ten (1) days
before every meeting of shareholders, a complete list of the shareholders, as of
the record date fixed for such meeting, arranged in alphabetical order, and
showing the address of each shareholder and the number of shares registered in
the name of each shareholder. Such list shall be open to the examination of any
shareholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city or other municipality or community where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any shareholder
who is present. If the right to vote at any meeting is challenged, the
inspectors of election, if
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any, or the person presiding thereat, shall require such list of shareholders to
be produced as evidence of the right of the persons challenged to vote at such
meeting, and all persons who appear from such list to be shareholders entitled
to vote thereat may vote at such meeting.
Section 10. Inspectors of Election. The Board of Directors, in advance of
any meeting, may, but need not, appoint one or more inspectors of election to
act at the meeting or any adjournment thereof. If an inspector or inspectors are
not appointed, the person presiding at the meeting may, and at the request of
any shareholder entitled to vote thereat shall, appoint one or more inspectors.
In case any person who may be appointed as an inspector fails to appear or act,
the vacancy may be filled by appointment made by the Board of Directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all shareholders. On request of
the person presiding at the meeting or any shareholder entitled to vote thereat,
the inspector or inspectors, if any, shall make a report in writing of any
challenge, question or matter determined by him or them and execute a
certificate of any fact found by him or them. Any report or certificate made by
the inspector or inspectors shall be prima facie evidence of the facts stated
and of the vote as certified by them.
Section 11. Action of the Shareholders Without Meetings. Any action which
may be taken at any annual or special meeting of the shareholders may be taken
without a meeting on written consent, setting forth the action so taken, signed
by the holders of all outstanding shares entitled to vote thereon. Written
consent thus given by the holders of all outstanding shares entitled to vote
shall have the same effect as a unanimous vote of the shareholders.
ARTICLE III
Directors
Section 1. Number of Directors. The number of directors which shall
constitute the entire Board of Directors shall be at least three, except that
where all outstanding shares of the stock of the Corporation are owned
beneficially and of record by less than three shareholders, the number of
directors may be less than three but not less than the number of shareholders.
Subject to the foregoing limitation, such number may be fixed
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from time to time by action of a majority of the entire Board of Directors or of
the shareholders at an annual or special meeting, or, if the number of directors
is not so fixed, the number shall be three or shall be equal to the number of
shareholders (determined as aforesaid), whichever is less. Until such time as
the corporation shall issue shares of its stock, the Board of Directors shall
consist of two persons. No decrease in the number of directors shall shorten the
term of any incumbent director.
Section 2. Election and Term. The initial Board of Directors shall be
elected by the incorporator and each initial director so elected shall hold
office until the first annual meeting of shareholders and until his successor
has been elected and qualified. Thereafter, each director who is elected at an
annual meeting of shareholders, arid each director who is elected in the interim
to fill a vacancy or a newly created directorship, shall hold office until the
next annual meeting of shareholders and until his successor has been elected and
qualified.
Section 3. Filling Vacancies, Resignation and Removal. Any director may
tender his resignation at any time. Any director or the entire Board of
Directors may be removed, with or without cause, by vote of the shareholders. In
the interim between annual meetings of shareholders or special meetings of
shareholders called for the election of directors or for the removal of one or
more directors and for the filling of any vacancy in that connection, newly
created directorships and any vacancies in the Board of Directors, including
unfilled vacancies resulting from the resignation or removal of directors for
cause or without cause, may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum or by the sole remaining
director.
Section 4. Qualifications and Powers. Each director shall be at least
eighteen years of age. A director need not be a shareholder, a citizen of the
United States or a resident of the State of New York. The business of the
Corporation shall be managed by the Board of Directors, subject to the
provisions of the Certificate of Incorporation. In addition to the powers and
authorities by these By-Laws expressly conferred upon it, the Board may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate-of Incorporation or by these By-Laws
directed or required to be exercised or done exclusively by the shareholders.
Section 5. Regular and Special Meetings of the Board. The Board of
Directors may hold its meetings, whether regular or special, either within or
without the State of New York. The newly elected Board may meet at such place
and time as shall be fixed by the vote of the shareholders at the annual
meeting, for the purpose of organization or otherwise, and no notice of such
meeting shall be necessary to the newly elected directors in order legally to
constitute the meeting, provided a majority of the entire Board shall be
present; or they may meet at such place and time
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as shall be fixed by the consent in writing of all directors. Regular meetings
of the Board may be held with or without notice at such time and place as shall
from time to time be determined by resolution of the Board. Whenever the time or
place of regular meetings of the Board shall have been determined by resolution
of the Board, no regular meetings shall be held pursuant to any resolution of
the Board altering or modifying its previous resolution relating to the time or
place of the holding of regular meetings, without first giving at least three
days written notice to each director, either personally or by telegram, or at
least five days written notice to each director by mail, of the substance and
effect of such new resolution relating to the time and place at which regular
meetings of the board may thereafter be held without notice. Special meetings of
the Board shall be held whenever called by the President, Vice-President, the
Secretary or any director in writing. Notice of each special meeting of the
Board shall be delivered personally to each director or sent by telegram to his
residence or usual place of business at least three days before the meeting, or
mailed to him to his residence or usual place of business at least five days
before the meeting. Meetings of the Board, whether regular or special, may be
held at any time and place, and for any purpose, without notice, when all the
directors are present or when all directors not present shall, in writing, waive
notice of and consent to the holding of such meeting. All or any of the
directors may waive notice of any meeting and the presence of the director at
any meeting of the Board shall be deemed a waiver of notice thereof by him. A
notice, or waiver of notice, need not specify the purpose or purposes of any
regular or special meeting of the Board.
Section 6. Quorum and Action. A majority of the entire Board of Directors
shall constitute a quorum except that when the entire Board consists of one
director, then one director shall constitute a quorum, and except that when a
vacancy or vacancies prevents such majority, a majority of the directors in
office shall constitute a quorum, provided that such majority shall constitute
at lease one-third of the entire Board. A majority of the directors present,
whether or not they constitute a quorum, may adjourn a meeting to another time
and place. Except as herein otherwise provided, and except as otherwise provided
by the New York Business Corporation Law, the vote of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board.
Section 7. Telephonic Meetings. Any member or members of the Board of
Directors, or of any committee designated by the Board, may participate in a
meeting of the Board, or any such committee, as the case may be, by means of
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time, and
participation in a meeting by such means shall constitute presence in person at
such meeting.
Section 8. Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting if all members of the Board or committee, as the case
may be, consent
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thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
Section 9. Compensation of Directors. By resolution of the Board of
Directors, the directors may be paid their expenses, if any, for attendance at
each regular or special meeting of the Board or of any committee designated by
the Board and may be paid a fixed sum for attendance at such meeting, or a
stated salary as director, or both. Nothing herein contained shall be construed
to preclude any director form serving the Corporation in any other capacity and
receiving compensation therefor; provided however that directors who are also
salaried officers shall not receive fees or salaries as directors.
ARTICLE IV
Committees
Section 1. In General. The Board of Directors may, by resolution or
resolutions passed by the affirmative vote therefore of a majority of the entire
Board, designate an Executive Committee and such other committees as the Board
may from time to time determine, each to consist of three or more directors, and
each of which, to the extent provided in the resolution or in the certificate of
incorporations or in the By-Laws, shall have all the powers of the Board, Except
that no such Committee shall have power to fill vacancies in the Board, or to
change the membership of or to fill vacancies in an Committee, or to make,
amend, repeal or adopt By-Laws of the Corporation, or to submit to the
shareholders any action that needs shareholder approval under these By-Laws or
the New York Business Corporation Law, or to fix the compensation of the
directors for serving on the Board or any committee thereof, or to amend or
repeal any resolution of the Board which by its terms shall not be so amendable
or repealable. Each committee shall serve at the pleasure of the Board. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Section 2. Executive Committee. Except as otherwise limited by the Board of
Directors or by these By-Laws, the Executive Committee, if so designated by the
Board of Directors, shall have and may exercise, when the Board is not in
session, all the powers of the Board of Director in the management of the
business and affairs of the Corporation, and shall have power to authorize the
seal of the Corporation to be affixed to al papers which may require it. The
Board shall have the power at any time to change the membership of the Executive
Committee, to fill vacancies in it, or to dissolve it. The Executive Committee
may make rules of the conduct of its business an may appoint such assistance as
it shall
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from time to time deem necessary. A majority of the members of the executive
committee, if more than a single member, shall constitute a quorum.
ARTICLE V
Officers
Section 1. Designation, Term and Vacancies. The officers of the Corporation
shall be a President, one or more Vice-Presidents, a Secretary, a Treasurer, and
such other officers as the Board of Directors may from time to time deem
necessary. Such officers may have and perform the powers and duties usually
pertaining to their respective offices, the powers and duties respectively
prescribed by law and by these By-Laws, and such additional powers and duties as
may from time to time be prescribed by the Board. The same person may hold any
two or more offices, except that the offices of President and Secretary may not
be held by the same person unless all the issued and outstanding stock of the
Corporation is owned by one person, in which instance such person may hold all
or any combination of offices,
The initial officers of the Corporation shall be appointed by the initial
Board of Directors, each to hold office until the meeting of the Board of
Directors following the first annual meeting of shareholders and until his
successor has been appointed and qualified. Thereafter, the officers of the
Corporation shall be appointed by the Board as soon as practicable after the
election of the Board at the annual meeting of shareholders, and each officer so
appointed shall hold office until the first meeting of the Board of Directors
following the next annual meeting of shareholders and until his successor has
been appointed and qualified. Any officer may be removed at any time, with or
without cause, by the affirmative vote therefor of a majority of the entire
Board of Directors. All other agents and employees of the Corporation shall hold
office during the pleasure of the Board of Directors. Vacancies occurring among
the officers of the Corporation shall be filled by the Board of Directors. The
salaries of all officers cf the Corporation shall be fixed by the Board of
Directors.
Section 2. President. The President shall preside at all meetings of the
shareholders and at all meetings of the Board of Directors at which he may be
present. Subject to the direction of the Board of Directors, he shall be the
chief executive officer of the Corporation, and shall have general charge of the
entire business of the Corporation. He may sign certificates of stock and sign
and seal bonds, debentures, contracts or other obligations authorized by the
Board, and may, without previous authority of the Board, make such contracts as
the ordinary conduct of the Corporation's business requires. He shall have the
usual powers and duties vested in the President of a corporation. He shall have
power to select and appoint all necessary officers and employees of the
Corporation, except those selected by the Board of Directors, and to
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remove all such officers and employees except those selected by the Board of
Directors, and make new appointments to fill vacancies. He may delegate any of
his powers to a Vice-President of the Corporation.
Section 3. Vice-President. A Vice-President shall have such of the
President's powers and duties as the President may from time to time delegate to
him, and shall have such other powers and perform such other duties as may be
assigned to him by the Board of Directors. During the absence or incapacity of
the President, the Vice-President, or, if there be more than one, the
Vice-President having the greatest seniority in office, shall perform the duties
of the President, and where so acting shall have all the powers and be subject
to all the responsibilities of the office of President.
Section 4. Treasurer. The Treasurer shall have custody of such funds and
securities of the Corporation as may come to his hands or be committed to his
care by the Board of Directors. Whenever necessary or proper, he shall endorse
on behalf of the Corporation, for collection, checks, notes, or other
obligations, and shall deposit the same to the credit of the Corporation in such
bank or banks or depositaries, approved by the Board of Directors as the Board
of Directors or President may designate. He may sign receipts or vouchers for
payments made to the Corporation, and the Board of Directors may require that
such receipts or vouchers shall also be signed by some other officer to be
designated by them. Whenever required by the Board of Directors, he shall render
a statement of his cash accounts and such other statements respecting the
affairs of the Corporation as may be required. He shall keep proper and accurate
books of account. He shall perform all acts incident to the office of Treasurer,
subject to the control of the Board.
Section 5. Secretary. The Secretary shall have custody of the seal of the
Corporation and when required by the Board of Directors, or when any instrument
shall have been signed by the President duly authorized to sign the same, or
when necessary to attest any proceedings of the shareholders or directors, shall
affix it to any instrument requiring the same and shall attest the same with his
signature, provided that the seal may be affixed by the President or
Vice-President or other officer of the Corporation to any document executed by
either of them respectively on behalf of the Corporation which does not require
the attestation of the Secretary. He shall attend to the giving and serving of
notices of meetings. He shall have charge of such books and papers as properly
belong to his office or as may be committed to his care by the Board of
Directors. He shall perform such other duties as appertain to his office or as
may be required by the Board of Directors.
Section 6. Delegation. In case of the absence of any officer of the
Corporation, or for any other reason that the Board of Directors may deem
sufficient, the Board may temporarily delegate the powers or duties, or any of
them, of such officer to any other officer or to any director.
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ARTICLE VI
Stock
Section 1. Certificates Representing Shares. All certificates representing
shares of the capital stock of the Corporation shall be in such form not
inconsistent with the Certificate of Incorporation, these By-Laws or the laws of
the State of New York and shall set forth thereon the statements prescribed by
Section 508, and where applicable, by Sections 505, 616, 620, 709 and 1002 of
the Business Corporation Law. Such shares shall be approved by the Board of
Directors, and shall be signed by the President or a Vice-President and by the
Secretary or the Treasurer and shall bear the seal of the Corporation and shall
not be valid unless so signed and sealed. Certificates countersigned by a duly
appointed transfer agent and/or registered by a duly appointed registrar shall
be deemed to be so signed and sealed whether the signatures be manual or
facsimile signatures and whether the seal be a facsimile seal or any other form
of seal. All certificates shall be consecutively numbered and the name of the
person owning the shares represented thereby, his residence, with the number of
such shares and the date of issue, shall be entered on the Corporation's books.
All certificates surrendered shall be canceled and no new certificates issued
until the former certificates for the same number of shares shall have been
surrendered and canceled, except as provided for herein.
In case any officer or officers who shall have signed or whose facsimile
signature or signatures shall have been affixed to any such certificate or
certificates, shall cease to be such officer or officers of the Corporation
before such certificate or certificates shall have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation, and may be issued and delivered as though the person or persons who
signed such certificates, or whose facsimile signature or signatures shall have
been affixed thereto, had not ceased to be such officer or officers of the
Corporation.
Any restriction on the transfer or registration of transfer of any shares
of stock of any class or series shall be noted conspicuously on the certificate
representing such shares.
Section 2. Fractional Share Interests. The Corporation, may, but shall not
be required to, issue certificates for fractions of a share. If the Corporation
does not issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
fractions are determined, or (3) issue scrip or warrants in registered or bearer
form which shall entitle the holder to receive a certificate for a full
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share upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share shall, but scrip or warrants shall not unless
otherwise provided therein, entitle the holder to exercise voting rights, to
receive dividends thereon, and to participate in any distribution of the assets
of the Corporation in the event of liquidation. The Board of Directors may cause
scrip or warrants to be issued subject to the conditions that they shall become
void if not exchanged for certificates representing full shares before a
specified date, or subject to the condition that the shares for which scrip or
warrants are exchangeable may be sold by the Corporation and the proceeds
thereof distributed to the holders of scrip or warrants, or subject to any other
conditions which the Board of Directors may impose.
Section 3. Addresses of Shareholders. Every shareholder shall furnish the
Corporation with an address to which notices of meetings and all other notices
may be served upon or mailed to him, and in default thereof notices may be
addressed to him at his last known post office address.
Section 4. Stolen, Lost or Destroyed Certificates. The Board of Directors
may in its sole discretion direct that a new certificate or certificates of
stock be issued in place of any certificate or certificates of stock theretofore
issued by the Corporation, alleged to have been stolen, lost or destroyed, and
the Board of Directors when authorizing the issuance of such new certificate or
certificates, may, in its discretion, and as a condition precedent thereto,
require the owner of such stolen, lost or destroyed certificate or certificates
or his legal representatives to give to the Corporation and to such registrar or
registrars and/or transfer agent or transfer agents as may be authorized or
required to countersign such new certificate or certificates, a bond in such sum
as the Corporation may direct not exceeding double the value of the stock
represented by the certificate alleged to have been stolen, lost or destroyed,
as indemnity against any claim that may be made against them or any of them for
or in respect of the shares of stock represented by the certificate alleged to
have been stolen, lost or destroyed.
Section 5. Transfers of Shares. Upon compliance with all provisions
restricting the transferability of shares, if any, transfers of stock shall be
made only upon the books of the Corporation by the holder in person or by his
attorney thereunto authorized by power of attorney duly filed with the Secretary
of the Corporation or with a transfer agent or registrar, if any, upon the
surrender and cancellation of the certificate or certificates for such shares
properly endorsed and the payment of all taxes due thereon. The Board of
Directors may appoint one or more suitable banks and/or trust companies as
transfer agents and/or registrars of transfers, for facilitating transfers of
any class or series of stock of the Corporation by the holders thereof under
such regulations as the Board of Directors may from time to time prescribe. Upon
such appointment being made all certificates of stock of such class or series
thereafter issued shall be countersigned by
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one of such transfer agents and/or one of such registrars of transfers, and
shall not be valid unless so countersigned.
ARTICLE VII
Dividends and Finance
Section 1 Dividends. The Board of Directors shall have power to fix and
determine and to vary, from time to time, the amount of the working capital of
the Corporation before declaring any dividends among its shareholders, and to
direct and determine the use and disposition of any net profits or surplus, and
to determine the date or dates for the declaration and payment of dividends and
to determine the amount of any dividend, and the amount of any reserves
necessary in their judgment before declaring any dividends among its
shareholder, and to determine the amount of the net profits of the Corporation
from time to time available for dividends.
Section 2. Fiscal Year. The fiscal year of the Corporation shall end on the
last day of the month of May in each year and shall begin on the next succeeding
day, or shall be for such other period as the Board of Directors may from time
to time designate with the consent of the Department of Taxation and Finance,
where applicable.
ARTICLE VIIl
Miscellaneous Provisions.
Section 1. Stock of Other Corporations. The Board of Directors shall have
the right to authorize any director, officer or other person on behalf of the
Corporation to attend, act and vote at meetings of the Shareholders of any
corporation in which the Corporation shall hold stock, and to exercise thereat
any and all rights and powers incident to the ownership of such stock, and to
execute waivers of notice of such meetings and calls therefor; and authority may
be given to exercise the same either on one or more designated occasions, or
generally on all occasions until revoked by the Board. In the event that the
Board shall fail to give such authority, such authority may be exercised by the
President in person or by proxy appointed by him on behalf of the Corporation.
Any stocks or securities owned by this Corporation may, if so determined by
the Board of Directors, be registered either in the name of this Corporation or
in the name of any nominee or nominees appointed for that purpose by the Board
of Directors.
Section 2. Books and Records. Subject to the New York Business Corporation
Law, the Corporation may keep its books and accounts outside the State of New
York.
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Section 3. Notices. Whenever any notice is required by these By-Laws to be
given, personal notice is not meant unless expressly so stated, and any notice
so required shall be deemed to be sufficient if given by depositing the same in
a post office box in a sealed postpaid wrapper, addressed to the person entitled
thereto at his last known post office address, and such notice shall be deemed
to have been given on the day of such mailing.
Whenever any notice whatsoever is required to be given under the provisions
of any law, or under the provisions of the Certificate of Incorporation or these
By-Laws a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
Section 4. Amendments. Except as otherwise provided herein, these By-Laws
may be altered, amended or repealed and By-Laws may be made at any annual
meeting of the shareholders or at any special meeting thereof if notice of the
proposed alteration, amendment or repeal or By-Law or By-Laws to be made be
contained in the notice of such special meeting, by the holders of a majority of
the shares of stock of the Corporation outstanding and entitled to vote thereat;
or by a majority of the Board of Directors at any regular meeting of the Board
of Directors, or at any special meeting of the Board of Directors, if notice of
the proposed alteration, amendment or repeal, or By-Law or By-Laws to be made,
be contained in the Notice of such Special Meeting.
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CERTIFICATE OF INCORPORATION
OF
MONITOR MARINE PRODUCTS INC.
Under Section 402 of the Business Corporation Law
The undersigned, a natural person of the age of eighteen years or over,
desiring to form a corporation pursuant to the provisions of the Business
Corporation Law of the State of New York, hereby certifies as follows:
FIRST: The name of the corporation is
MONITOR MARINE PRODUCTS INC.
hereinafter sometimes called "the corporation."
SECOND: The purpose for which it is formed are as follow:
The purpose for which this corporation is organized is to engage
in any lawful act or activity for which corporations may be formed
under the Business Corporation Law provided that the corporation is
not formed to engage in any act or activity which requires the consent
or approval of any state official, department, board, agency or other
body.
To manufacture, buy, sell, trade and generally deal in and with,
at wholesale and retail, import and export, boat parts of all types
and descriptions and to do all things necessary for and related to the
operation of such a business.
For the accomplishment of the aforesaid purposes, and in
furtherance thereof, the corporation shall have and may exercise all
of the powers conferred by the Business Corporation Law upon
corporations formed thereunder, subject to any limitations contained
in Article 2 of said law or in accordance with the provisions of any
other statute of the State of New York.
THIRD: The office of the corporation in the State of New York is to be
located in the Town of Babylon, County of Suffolk.
FOURTH: The aggregate number of shares which the corporation shall
have the authority to issue is 200, without par value.
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FIFTH: The Secretary of State is designated as the agent of the
corporation under whom process against the corporation may be served, and
the address to which the Secretary of State shall mail a copy of any
process against the corporation served upon him is 1000 New Horizons Blvd.
Amityville, NY 11701.
IN WITNESS WHEREOF, I hereunto sign my name and affirm that statements made
herein are true under the penalties of perjury this 2nd day of April 1984.
/s/ Denise L. Dooley
Incorporator: ______________________________
Denise L. Dooley
Address: 11 North Pearl Street
Albany, New York 12207
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BY-LAWS
OF
MONITOR MARINE PRODUCTS INC.
ARTICLE I. SHAREHOLDERS' MEETING
Section 1. - Annual Meeting.
The annual meeting of the shareholders shall be held within five months
after the close of the fiscal year of the Corporation, for the purpose of
electing directors, and transacting such other business as may properly come
before the meeting.
Section 2. - Special Meeting:
Special meetings of the shareholders may be called at any time by the Board
of Directors or by the President or the Secretary at the written request of the
holders of fifty per cent (50%) of the shares then outstanding and entitled to
vote thereat, or as otherwise required under the provisions of the Business
Corporation Law.
Section 3 - Place of Meetings:
All meetings of shareholders shall be held at the principal office of the
Corporation, or at such other places within or without the State of New York as
shall be designated in the notices or waivers of notice of such meetings.
Section 4 - Notice of Meetings:
(a) Written notice of each meeting of shareholders, whether annual or
special, stating the time when and place where it is to be held, shall be served
either personally or by mail, not less than ten or more than fifty days before
the meeting, upon each shareholder of record entitled to vote at such meeting,
and to any other shareholder to whom the giving of notice may be required by
law. Notice of a special meeting shall also state the purpose or purposes for
which the meeting is called, and shall indicate that it is being issued by, or
at the direction of, the person or persons calling the meeting. If, at any
meeting, action is proposed to be taken that would, if taken, entitle
shareholders to receive payment for their shares pursuant to the Business
Corporation Law, the notice of such meeting shall include a statement of that
purpose and to that effect. If mailed, such notice shall be directed to each
such shareholder at his address, as it appears on the records of the
shareholders of the Corporation, unless he shall have previously filed with the
Secretary of the Corporation a written
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request that notices intended for him be mailed to some other address, in which
case, it shall be mailed to the address designated in such request.
(b) Notice of any meeting need not be given to any person who may become a
shareholder of record after the mailing of such notice and prior to the meeting,
or to any shareholder who attends such meeting, in person or by proxy, or to any
shareholder who, in person or by proxy, submits a signed waiver of notice either
before or after such meeting. Notice of any adjourned meeting of shareholders
need not be given, unless otherwise required by statute.
Section 5 - Quorum:
(a) Except as otherwise provided herein, or by statute, or in the
Certificate of Incorporation (such Certificate and any amendments thereof being
hereinafter collectively referred to as the "Certificate of Incorporation"), at
all meetings of shareholders of the Corporation, the presence at the
commencement of such meetings in person or by proxy of shareholders holding of
record a majority of the total number of shares of the Corporation then issued
and outstanding and entitled to vote, shall be necessary and sufficient to
constitute a quorum for the transaction of any business. The withdrawal of any
shareholder after the commencement of a meeting shall have no effect on the
existence of a quorum, after a quorum has been established at such meeting.
(b) Despite the absence of a quorum at any annual or special meeting of
shareholders, the shareholders, by a majority of the votes cast by the holders
of shares entitled to vote thereon, may adjourn the meeting. At any such
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called if a quorum
had been present.
Section 6 - Voting:
(a) Except as otherwise provided by statute or by the Certificate of
Incorporation, any corporate action, other than the election of directors to be
taken by vote of the shareholders, shall be authorized by a majority of votes
cast at a meeting of shareholders by the holders of shares entitled to vote
thereon.
(b) Except as otherwise provided by statute or by the Certificate of
Incorporation, at each meeting of shareholders, each holder of record of stock
of the Corporation entitled to vote thereat, shall be entitled to one vote for
each share of stock registered in his name on the books of the Corporation.
(c) Each shareholder entitled to vote or to express consent or dissent
without a meeting, may do so by proxy; provided, however, that the instrument
authorizing such proxy to act shall have been executed in writing by the
shareholder himself, or by his attorney-in-fact thereunto duly authorized in
writing. No proxy shall be valid after the expiration of eleven months from the
date
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of its execution, unless the persons executing it shall have specified therein
the length of time it is to continue in force. Such instrument shall be
exhibited to the Secretary at the meeting and shall be filed with the records of
the Corporation.
(d) Any resolution in writing, signed by all of the shareholders entitled
to vote thereon, shall be and constitute action by such shareholders to the
effect therein expressed, with the same force and effect as if the same had been
duly passed by unanimous vote at a duly called meeting of shareholders and such
resolution so signed shall be inserted in the Minute Book of the Corporation
under its proper date.
ARTICLE II. DIRECTORS
Section 1. - Number.
The affairs and the business of the Corporation, except as otherwise
provided in the Certificate of Incorporation, shall be managed by the Board of
Directors. The number of the directors of the Corporation shall be five (5),
unless and until otherwise determined by vote of a majority of the entire Board
of Directors. The number of Directors shall not be less than three, unless all
of the outstanding shares are owned beneficially and of record by less than
three shareholders, in which event the number of directors shall not be less
than the number of shareholders.
Section 2. - How Elected.
At the annual meeting of shareholders, the persons duly elected by the
votes cast at the election held thereat shall become the directors for the
ensuing year.
Section 3. - Term of Office.
The term of office of each of the directors shall be until the next annual
meeting of shareholders and thereafter until a successor has been elected and
qualified.
Section 4. - Duties of Directors.
The Board of Directors shall have the control and general management of the
affairs and business of the Corporation unless otherwise provided in the
certificate of Incorporation. Such directors shall in all cases act as a Board
regularly convened by a majority, and they may adopt such rules and regulations
for the conduct of their meetings, and the management and business of the
Corporation as they may deem proper, not inconsistent with these By-Laws and the
Laws of the State of New York.
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Section 5. - Directors' Meetings.
Regular meetings of the Board of Directors shall be held immediately
following the annual meetings of the shareholders, and at such other times as
the Board of Directors may determine. Special meetings of the Board of Directors
may be called by the President at any time and must be called by the President
or the Secretary upon the written request of two Directors.
Section 6. - Notice of Special Meetings.
Notice of special meetings of the Board of Directors shall be served
personally or by mail addressed to each Director at his last known address no
less than five or more than twenty days prior to the date of such meeting. The
notice of such meeting shall contain a statement of the business to be
transacted thereat. No business other than that specified in the call for the
meeting shall be transacted at any such special meeting. Notice of special
meeting may be waived by any Director by written waiver or by personal
attendance thereat without protest of lack of notice to him.
Section 7 - Quorum.
At any meeting of the Board of Directors, except as otherwise provided by
the Certificate of Incorporation, or by these By-Laws, a majority of the Board
of Directors shall constitute a quorum. However, a lesser number when not
Constituting a quorum may adjourn the meeting from time to time until a quorum
shall be present or represented.
Section 8 - Voting.
Except as otherwise provided by statute, or by the Certificate of
Incorporation, or by these By-Laws, the affirmative vote of a majority of the
Directors present at any meeting of the Board of Directors at which a quorum is
present shall be necessary for the transaction of any item of business thereat.
Any resolution in writing, signed by all of the directors entitled to vote
thereon, shall be and constitute action by such directors to the effect therein
expressed, with the same force and effect as if the same had been duly passed by
unanimous vote at a duly called meeting of directors and such resolution so
signed shall be inserted in the Minute Book of the Corporation under its proper
date.
Section 9. - Vacancies.
Unless otherwise provided in the Certificate of Incorporation, vacancies in
the Board of Directors occurring between annual meetings of the shareholders
shall be filled for the unexpired portion of the term by a majority vote of the
remaining Directors, even though less than a quorum exists.
BL - 4
<PAGE>
Section 10. - Removal of Directors.
Any or all of the directors may be removed, either with or without cause at
any time by a vote of the shareholders at any meeting called for such purpose.
Section 11. - Resignation.
Any director may resign at any time by giving written notice to the Board
of Directors, the President or the Secretary of the Corporation. Unless
otherwise specified in such written notice, such resignation shall take effect
upon receipt thereof by the Board of Directors or Such officer, and the
acceptance of such resignation shall not be necessary to make it effective.
Section 12. - Salary.
No stated salary shall be paid to directors, as such, for their services,
but by resolution of the Board of Directors a fixed sum and expenses of
attendance, if any, may be allowed for attendance at each regular or special
meeting of the Board; provided, however, that nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
Section 13. - Contracts.
(a) No contract or other transaction between this Corporation and any other
Corporation shall be impaired, affected or invalidated, nor shall any director
be liable in any way by reason of the fact that any one or more of the directors
of this Corporation is or are interested in, or is a director or officer, or are
directors or officers of such other Corporation, provided that such facts are
disclosed or made known to the Board of Directors.
(b) Any director, personally and individually, may be interested in any
contract or transaction of this Corporation, and no director shall be liable in
any way by reason of such interest, provided that the fact of such interest be
disclosed or made known to the Board of Directors, and provided that the Board
of Directors shall authorize, approve or ratify such contract or transaction by
the vote (not counting the vote of any such director) of a majority of a quorum,
notwithstanding the presence of' any such director at the meeting at which such
action is taken. Such director or directors may be counted in determining the
presence of a quorum at such meeting. This Section shall not be construed to
impair or invalidate or in any way affect any contract or other transaction
which would otherwise be valid under the law (common, statutory or otherwise)
applicable thereto.
Section 14. - Committees;
BL - 5
<PAGE>
The Board of Directors, by resolution adopted by a majority of the entire
Board, may from time to time designate from among its members all executive
committee and such other committees, and alternate members thereof, as they deem
desirable, each consisting of three or more members, with such powers and
authority (to the extent permitted by law) as may be provided in such
resolution. Each such committee shall serve at[ the pleasure of the Board.
ARTICLE III. OFFICERS
Section 1 - Number of Officers.
(a) The officers of the Corporation shall consist of a President, a
Secretary, a Treasurer, and such other officers, including a Chairman of the
Board of Directors, and one or more Vice Presidents, as the Board of Directors
may from time to time deem advisable. Any officer other than the Chairman of the
Board of Directors may be, but is not required to be, a director of the
Corporation. Any officer may hold more than one office, except the same person
may not hold the office of President and Secretary.
Section 2. - Election of Officers.
Officers of the Corporation shall be elected at the first meeting of the
Board of Directors. Thereafter, and unless otherwise provided in the Certificate
of Incorporation, the officers of the Corporation shall be elected annually by
the Board of Directors at its meeting held immediately after the annual meeting
of shareholders and shall hold office for one year and until their successors
have been duly elected and qualified.
Section 3. - Removal of Officers.
Any officer elected by the Board of Directors may be removed, with or
without cause, and a successor elected, by vote of the Board of Directors,
regularly convened at a regular or special meeting. Any officer elected by the
shareholders may be removed, with or without cause, and a successor elected, by
vote of the shareholders, regularly convened at an annual or special meeting.
Section 4. - President.
The President shall be the chief executive officer of the Corporation and
shall have general charge of the business, affairs and property thereof, subject
to direction of the Board of Directors, and shall have general supervision over
its officers and agents. He shall, if present, preside at all meetings of the
Board of Directors in the absence of a Chairman of the Board and at all meetings
BL - 6
<PAGE>
of shareholders. He may do and perform all acts incident to the office of
President.
Section 5. - Vice-President.
In the absence of or inability of the President to act, the Vice-President
shall perform the duties and exercise the powers of the President and shall
perform such other functions as the Board of Directors may from time to time
prescribe.
Section 6. - Secretary.
The Secretary shall:
(a) Keep the minutes of the meetings of the Board of Directors and of
the shareholders in appropriate books.
(b) Give and serve all notice of all meetings of the Corporation.
(c) Be custodian of the records and of the seal of the Corporation and
affix the latter to such instruments or documents as may be authorized by
the Board of Directors.
(d) Keep the shareholder records in such a manner as to show at any
time the amount of shares, the manner and the time the same was paid for,
the names of the owners thereof alphabetically arranged and their
respective places of residence, or their Post Office addresses, the number
of shares owned by each of them and the lime at which each person became
owner, and keep such shareholder records available during during the usual
business hours at the office of the Corporation subject to the inspection
of any person duly authorized, as prescribed by law.
(e) Do and perform all other duties incident to the office of
Secretary.
Section 7. - Treasurer.
The Treasurer shall:
(a) Have the care and custody of and be responsible for all of the
funds and securities of the Corporation and deposit of such funds in the
name and to the credit of the Corporation in such a bank and safe deposit
vaults as the Directors may designate.
(b) Exhibit at all reasonable times his books and accounts to any
Director or shareholder of the Corporation upon application at the office
of the Corporation during business hours.
(c) Render a statement of the condition of the finances of the
Corporation at each stated
BL - 7
<PAGE>
meeting of the Board of Directors if called upon to do so, and a full
report at the annual meeting of shareholders. He shall keep at the office
of the Corporation correct books of account of all of its business and
transactions and such books of account as the Board of Directors may
require. He shall do and perform all other duties incident to the office of
Treasurer.
Section 8. - Duties of Officers May Be Delegated.
In the case of the absence of any officer of the Corporation, or for any
reason the Board may deem sufficient, the Board may, except as otherwise
provided in these By-Laws, delegate the powers or duties of such officers to any
other officer or any Director for the time being, provided a majority of the
entire Board concur therein.
Section 9. - Vacancies -How Filled.
Should any vacancy in any office occur by death, resignation or otherwise,
the same shall be filled, without undue delay, by the Board of Directors at its
next regular meeting or at a special meeting called for that purpose, except as
otherwise provided in the Certificate of Incorporation.
Section 10. - Compensation of Officers.
The officers shall receive such salary or compensation as may be fixed and
determined by the Board of Directors, except as otherwise provided in the
certificate of Incorporation.
ARTICLE IV. CERTIFICATES REPRESENTING SHARES
Section 1. - Issue of Certificates Representing Shares.
The President shall cause to be issued to each shareholder one or more
certificates, under the seal of the Corporation, signed by the President (or
Vice-President) and the Treasurer (or Secretary) certifying the number of shares
owned by him in the Corporation.
Section 2. - Lost or Destroyed Certificates.
The holder of any certificate representing shares of the Corporation shall
immediately notify the Corporation of any loss or destruction of the certificate
representing the same. The Corporation may issue a new certificate in the place
of any certificate theretofore issued by it, alleged to have been lost or
destroyed. On production of such evidence of loss or destruction as the Board of
BL - 8
<PAGE>
Directors in its discretion may require, the Board of Directors may, in its
discretion, require the owner of the lost or destroyed certificate, or his legal
representatives, to give the Corporation a bond in such sum as the Board may
direct, and with such surety or sureties as may be satisfactory to the Board, to
indemnify the Corporation against any claims, loss, liability or damage it may
suffer on account of the issuance of the new certificate. A new certificate may
be issued without requiring any such evidence or bond when, in the judgment of
the Board of Directors, it is proper so to do.
Section 3. - Transfers of Shares.
(a) Transfers of shares of the Corporation shall be made on the shares
records of the Corporation only by the holder of record thereof, in person or by
his duly authorized attorney, upon surrender for cancellation of the certificate
or certificates representing such shares, with an assignment or power of
transfer endorsed thereon or delivered therewith, duly executed, with such proof
of the authenticity of the signature and of authority to transfer and of payment
of transfer taxes as the Corporation or its agents may require.
(b) The Corporation shall be entitled to treat the holder of record of any
share or shares as the absolute owner thereof for all purposes and, accordingly,
shall not be bound to recognize any legal, equitable or other claim to, or
interest in, such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise expressly
provided by law.
ARTICLE V. SEAL
The seal of the Corporation shall be as follows:
ARTICLE VI. DIVIDENDS OR OTHER DISTRIBUTIONS
The Corporation, by vote of the Board of Directors, may declare and pay
dividends or make other distributions in cash or its bonds or its property on
its outstanding shares to the extent as provided and permitted by law, unless
contrary to any restriction contained in the Certificate of Incorporation.
BL - 9
<PAGE>
ARTICLE VII. NEGOTIABLE INSTRUMENTS
All checks, notes or other negotiable instruments shall be signed on behalf
of this Corporation by such of the officers, agents and employees as the Board
of Directors may from time to time designate, except as otherwise provided in
the certificate of Incorporation.
ARTICLE VIII. FISCAL YEAR
The fiscal year of the Corporation shall be determined by resolution of the
Board of Directors.
ARTICLE IX. AMENDMENTS
Section 1. - By Shareholders.
All by-laws of the Corporation shall be subject to alteration or repeal,
and new by-laws may be made, by a majority vote of the shareholders at the time
entitled to vote in the election of directors.
Section 2. - By Directors.
The Board of Directors shall have power to make, adopt, alter, amend and
repeal, from time to time, by-laws of the Corporation; provided, however, that
the shareholders entitled to vote with respect thereto as in this Article IX
above-provided may alter, amend or repeal by-laws made by the Board of
Directors, except that the Board of Directors shall have no power to change the
quorum for meetings of shareholders or of the Board of Directors, or to change
any provisions of the by-laws with respect to the removal of directors or the
filling of vacancies in the Board resulting from the removal by the
shareholders. If any by-law regulating an impending election of directors is
adopted, amended or repealed by the Board of Directors, there shall be set forth
in the notice of the next meeting of shareholders for the election of directors,
the by-law so adopted, amended or repealed, together with a concise statement of
the changes made.
ARTICLE X. OFFICES
BL - 10
<PAGE>
The offices of the Corporation shall be located in the City, County and
State designated in the Certificate of Incorporation. The Corporation may also
maintain offices at such other places within or without the United States as the
Board of Directors may, from time to time, determine.
These By-Laws have been adopted by the Incorporator at the organization
meeting of the Corporation held on April 10th, 1984.
BL - 11
<PAGE>
Supplemental Indenture
No. 1
to
Indenture dated as of October 31, 1997
Re:
9 1/2% Senior Subordinated Notes due 2007
<PAGE>
SUPPLEMENTAL INDENTURE No. 1, dated as of May 29, 1998 (this "Supplemental
Indenture"), among Stellex Industries, Inc., a Delaware corporation (the
"Company"), Stellex Aerospace Holdings, Inc., a Delaware corporation
("Holdings"), Monitor Aerospace Corporation, a New York corporation ("Monitor"),
Monitor Aerospace International Corp., a New York corporation ("International"),
Monitor Marine Products Inc., a New York corporation ("Marine", and together
with Holdings, Monitor and International, the "New Subsidiary Guarantors"), the
Subsidiary Guarantors (as defined below) and Marine Midland Bank, a New York
banking corporation and trust company, as trustee (the "Trustee") to the
Indenture dated as of October 31, 1997 (the "Indenture") among the Company, 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 (the "Subsidiary Guarantors"), and
the Trustee.
W I T N E S S E T H :
WHEREAS, Section 9.1 of the Indenture provides that the Company and the
Trustee may, among other things, amend the Indenture or the Securities without
notice to or consent of any Securityholder to add Guarantees with respect to the
Securities or to secure the Securities;
WHEREAS, Section 11.7 of the Indenture provides that any newly created or
acquired Subsidiary of the Company having either net assets or stockholders'
equity in excess of $50,000 (other than a Foreign Subsidiary or an Unrestricted
Subsidiary) must execute and deliver to the Trustee this Supplemental Indenture
pursuant to which such Subsidiary shall agree to be bound by the provisions of
Article XI of the Indenture; and
WHEREAS, the New Subsidiary Guarantors shall execute and deliver to the
Trustee this Supplemental Indenture.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used and not defined herein shall
have the meaning specified in or pursuant to the Indenture.
<PAGE>
2. Guarantee. The New Subsidiary Guarantors hereby agree to
unconditionally assume all the obligations of Subsidiary Guarantors under
the Indenture as described therein.
3. Trustee. The Trustee accepts the modification of the Indenture
effected by this Supplemental Indenture, but only upon the terms and
conditions set forth in the Indenture. Without limiting the generality of
the foregoing, the Trustee assumes no responsibility for the correctness of
the recitals herein contained, which shall be taken as the statements of
the Company. The Trustee makes no representation and shall have no
responsibility as to the validity and sufficiency of this Supplemental
Indenture.
4. Effect on Indenture. As supplemented by this Supplemental
Indenture, the Indenture is hereby ratified and confirmed in all respects.
5. Counterparts. This Supplemental Indenture may be executed in
counterparts, each of which when so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and
the same instrument.
6. Governing Law. This Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York.
[Signature Pages Follow]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the day and year first above written.
STELLEX AEROSPACE HOLDINGS, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: President
MONITOR AEROSPACE CORPORATION
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
MONITOR AEROSPACE INTERNATIONAL
CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
MONITOR MARINE PRODUCTS INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
MARINE MIDLAND BANK, as Trustee
By: /s/
------------------------------------
Name:
Title:
<PAGE>
STELLEX INDUSTRIES, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: President
KII HOLDING CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
TSMD ACQUISITION CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: President
KII ACQUISITION CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
STELLEX MICROWAVE SYSTEMS, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Chairman
STELLEX AEROSPACE
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
PARAGON PRECISION PRODUCTS
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
BANDY MACHINING INTERNATIONAL
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
<PAGE>
SCANNING ELECTRON ANALYSIS LABORATORIES,
INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
GENERAL INSPECTION LABORATORIES, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
<PAGE>
Supplemental Indenture
No. 2
to
Indenture dated as of October 31, 1997 as amended by
Supplemental Indenture No. 1 dated as of May 29, 1998
Re:
9 1/2% Senior Subordinated Notes due 2007
<PAGE>
SUPPLEMENTAL INDENTURE No. 2, dated as of March 2, 1999 (this "Supplemental
Indenture"), among Stellex Industries, Inc., a Delaware corporation (the
"Company"), PMC Acquisition Corporation, a Delaware corporation ("PMC
Acquisition"), Phoenix Microwave, Ltd., a Delaware corporation ("Phoenix
Limited"), Phoenix Microwave Corporation, a Pennsylvania corporation (Phoenix
Microwave", and together with PMC Acquisition and Phoenix Limited, the "New
Subsidiary Guarantors"), the Subsidiary Guarantors (as defined below) and Marine
Midland Bank, a New York banking corporation and trust company, as trustee (the
"Trustee") to the Indenture dated as of October 31, 1997 as amended by
Supplemental Indenture No. 1 dated as of May 29, 1998 (the "Indenture") among
the Company, 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, General Inspection
Laboratories, Inc., a California corporation, Stellex Aerospace Holdings, Inc.,
a Delaware corporation, Monitor Aerospace Corporation, a New York corporation,
Monitor Aerospace International Corp., a New York corporation, and Monitor
Marine Products Inc., a New York corporation (the "Subsidiary Guarantors"), and
the Trustee.
W I T N E S S E T H :
WHEREAS, Section 9.1 of the Indenture provides that the Company and the
Trustee may, among other things, amend the Indenture or the Securities without
notice to or consent of any Securityholder to add Guarantees with respect to the
Securities or to secure the Securities;
WHEREAS, Section 11.7 of the Indenture provides that any newly created or
acquired Subsidiary of the Company having either net assets or stockholders'
equity in excess of $50,000 (other than a Foreign Subsidiary or an Unrestricted
Subsidiary) must execute and deliver to the Trustee this Supplemental Indenture
pursuant to which such Subsidiary shall agree to be bound by the provisions of
Article XI of the Indenture; and
WHEREAS, the New Subsidiary Guarantors shall execute and deliver to the
Trustee this Supplemental Indenture.
<PAGE>
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used and not defined herein shall
have the meaning specified in or pursuant to the Indenture.
2. Guarantee. The New Subsidiary Guarantors hereby agree to
unconditionally assume all the obligations of Subsidiary Guarantors under
the Indenture as described therein.
3. Trustee. The Trustee accepts the modification of the Indenture
effected by this Supplemental Indenture, but only upon the terms and
conditions set forth in the Indenture. Without limiting the generality of
the foregoing, the Trustee assumes no responsibility for the correctness of
the recitals herein contained, which shall be taken as the statements of
the Company. The Trustee makes no representation and shall have no
responsibility as to the validity and sufficiency of this Supplemental
Indenture.
4. Effect on Indenture. As supplemented by this Supplemental
Indenture, the Indenture is hereby ratified and confirmed in all respects.
5. Counterparts. This Supplemental Indenture may be executed in
counterparts, each of which when so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and
the same instrument.
6. Governing Law. This Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York.
[Signature Pages Follow]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the day and year first above written.
PMC ACQUISITION CORPORATION
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: President
PHOENIX MICROWAVE CORPORATION
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
MARINE MIDLAND BANK, as Trustee
By: /s/ Robert A. Conrad
------------------------------------
Name: Robert A. Conrad
Title: Vice President
STELLEX INDUSTRIES, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: President
KII HOLDING CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
TSMD ACQUISITION CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: President
KII ACQUISITION CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
<PAGE>
STELLEX MICROWAVE SYSTEMS, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Chairman
STELLEX AEROSPACE
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
PARAGON PRECISION PRODUCTS
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
BANDY MACHINING INTERNATIONAL
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
SCANNING ELECTRON ANALYSIS LABORATORIES,
INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
GENERAL INSPECTION LABORATORIES, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
STELLEX AEROSPACE HOLDINGS, INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: President
<PAGE>
MONITOR AEROSPACE CORPORATION
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
MONITOR AEROSPACE INTERNATIONAL
CORP.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
MONITOR MARINE PRODUCTS INC.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
PHOENIX MICROWAVE, LTD.
By: /s/ William L. Remley
------------------------------------
Name: William L. Remley
Title: Vice Chairman
<PAGE>
EXHIBIT 10.14
WAIVER
Dated as of December 14, 1998
This WAIVER is entered into among STELLEX INDUSTRIES, INC., a Delaware
corporation (the "Borrower"), the financial institutions from time to time
parties to the Credit Agreement (defined below) (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 capacity as collateral agent for the Lenders (in such capacity, the
"Collateral Agent").
PRELIMINARY STATEMENTS:
The Borrower, the Lenders, the Administrative Agent and the Collateral
Agent have entered into an Amended and Restated Credit Agreement dated as of May
29, 1998 (the "Credit Agreement"). Unless otherwise defined herein, the terms
defined in the Credit Agreement shall be used herein as therein defined.
SECTION 1. Waiver. Effective as of the date hereof and subject to the
satisfaction of the conditions precedent set forth in Section 2 hereof, the
Lenders hereby waive delivery of the budget, business plan and projections for
the Fiscal Year ending December 31, 1999 which is required under Section 7.01(d)
of the Credit Agreement, during the period from the date hereof to February 15,
1999.
SECTION 2. Conditions of Effectiveness. This Waiver shall become effective
when the Administrative Agent shall have received counterparts of this Waiver
executed by the Borrower and the Requisite Lenders.
SECTION 3. Representations and Warranties of the Borrowers. The Borrower
represents and warrants as follows:
(a) 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.
(b) No Default or Event of Default shall have occurred and be
continuing.
SECTION 4. Reference to and Effect on the Loan Documents. (a) Except as
specifically waived above, the Credit Agreement and all other Loan Documents,
are and shall continue to be in full force and effect and are hereby in all
respects ratified and confirmed. Without limiting the generality of the
foregoing, the Loan Documents and all of the Collateral
<PAGE>
described therein do and shall continue to secure the payment of all obligations
of the Borrower under the Credit Agreement, the Notes and the other Loan
Documents.
(b) The execution, delivery and effectivenes of this Waiver shall not,
except as expressly provided herein, operate as a waiver of any right, power or
remedy of any Lender or any Agent under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documetns.
SECTION 5. Execution in Counterparts. This Waiver may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
SECTION 6. Governing Law. This Waiver shall be governed by, and construed
in accordance with, the laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
executed as of the date first above written.
STELLEX INDUSTRIES, INC.
By: /s/ William L. Remley
----------------------------------------
Title: President
SOCIETE GENERALE, as Administrative Agent
By: /s/ John M. Stack
----------------------------------------
Title: Director
FIRST UNION COMMERCIAL CORPORATION
as Collateral Agent
By: /s/ Jeffrey M. McGrath
----------------------------------------
Title: Vice President
SOCIETE GENERALE, as Lender
By: /s/ John M. Stack
----------------------------------------
Title: Director
FIRST UNION COMMERCIAL CORPORATION
as Lender
By: /s/ Jeffrey M. McGrath
----------------------------------------
Title: Vice President
<PAGE>
FLEET NATIONAL BANK, as Lender
By: /s/
----------------------------------------
Title:
GENERAL ELECTRIC CAPITAL CORPORATION,
as Lender
By: /s/
----------------------------------------
Title: Risk Manager
PARIBAS CAPITAL FUNDING LLC,
as Lender
By: /s/
----------------------------------------
Title:
ML CBO IV (CAYMAN), LTD., as Lender
By: Highland Capital Management, L.P.
as Collateral Manager
By: /s/ James Dondero
----------------------------------------
Title: President
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO, as Lender
By: Merrill Lynch Asset Management, L.P.
As Investment Advisor
By: /s/
----------------------------------------
Title:
<PAGE>
ML CLO XX PILGRIM AMERICA (CAYMAN) LTD.,
as Lender
By: Pilgrim America Invesments, Inc., as
its Investment Manager
By: /s/ Jeffrey A. Bakalar
----------------------------------------
Title: Vice President
KZH HIGHLAND-2 LLC, as Lender
By: /s/ Virginia Conway
----------------------------------------
Title: Authorized Agent
FIRST DOMINION FUNDING I
By: /s/
----------------------------------------
Title:
<PAGE>
EXHIBIT 10.15
AMENDED AND RESTATED MANAGEMENT ADVISORY SERVICES AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT ADVISORY SERVICES AGREEMENT
("Agreement"), effective as of the 29th day of May, 1998 (the "Effective Date"),
by and between MENTMORE HOLDINGS CORPORATION, a Delaware corporation
("Mentmore") and STELLEX INDUSTRIES, INC., a Delaware corporation, TSMD
ACQUISITION CORP., a Delaware corporation, STELLEX MICROWAVE SYSTEMS, INC.
(formerly W-J TSMD Inc.), a California corporation, STELLEX AEROSPACE HOLDINGS,
INC., a Delaware corporation, MONITOR AEROSPACE CORPORATION, a New York
corporation, MONITOR MARINE PRODUCTS, INC., a New York corporation, MONITOR
AEROSPACE INTERNATIONAL CORP., a New York corporation, KII HOLDING CORP., a
Delaware corporation, KII ACQUISITION CORP., a Delaware corporation, STELLEX
AEROSPACE (formerly KLEINERT INDUSTRIES, INC.), 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 (hereinafter, collectively, the
"Companies") amends and restates that certain Management Advisory Services
Agreement between Mentmore and certain of the Companies dated July 1, 1997, as
amended and restated November 1, 1997.
WHEREAS, the Companies are engaged in the aerospace, defense, and space
industries; and
WHEREAS, the Companies desire to engage Mentmore for the purpose of
providing certain staff and services, including management advisory, consulting
and other services and facilities to the Companies and Mentmore desires to
provide such staff, services and facilities upon the terms and conditions stated
herein.
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, do hereby agree as follows:
1. MANAGEMENT ADVISORY SERVICES.
A. The Companies hereby engage Mentmore to provide to the Companies
executive management advisory, consulting and other services including, but not
limited to:
<PAGE>
1) strategic planning, financial planning, accounting and financial
reporting services oversight and review, including expertise and assistance
in financial presentation and planning and such services as are reasonably
necessary for the Companies to comply with its financial reporting
obligations to third parties, including report preparation, compliance with
generally accepted accounting principles ("GAAP"), footnote disclosure,
compilation and review;
2) consulting, expertise and assistance with respect to traditional
treasury functions (including cash management and managing the Companies'
relationships with its lenders, monitoring the Companies' compliance with
current lender requirements, monitoring of debt covenants, negotiation of
waivers and exceptions, monitoring of cash flow and negotiations of lines
of credit and other credit facilities);
3) general business development services; and
4) oversight and review required for all federal, state and local tax
preparation, planning and audits.
B. Mentmore agrees to provide such services to the Companies through the
use of Mentmore employees or agents who Mentmore reasonably deems to be
qualified to provide such services. Mentmore shall have the right to determine
the manner in which it shall perform its responsibilities and provide the
services required hereunder.
2. COMPENSATION.
A. In consideration of the performance of such services as are contemplated
hereunder, the Companies agree to pay to Mentmore during the term of this
Agreement annual base compensation (hereinafter the "Base Compensation") in the
aggregate amount of (i) ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) per
annum, plus (ii) from and after January 1, 1999, an amount equal to one per cent
(1%) of the Companies' total consolidated sales in any fiscal year less the
amounts paid pursuant to (a), above.
B. The Base Compensation shall be payable by the Companies to Mentmore in
equal monthly installments payable on the 1st day of each calendar month during
the term hereof, the first monthly installment to be due and payable on June 1,
1998. That portion of the Base Compensation payable under 2, A(ii), above shall
be estimated by the parties for purposes of calculating the monthly installments
hereunder and adjustments paid to the appropriate party(ies) within ten (10)
days after the Companies' audited financial statements for each fiscal year are
prepared. All unpaid monthly installments of Base Compensation shall bear
interest compounded annually at the lesser of: (i) a per annum rate equal to the
Prime Rate adjusted on the first business day of each calendar quarter for so
long as any amounts remain unpaid hereunder, or (ii) the maximum rate allowed by
law until such time as such installment(s) are paid. The "Prime Rate" shall mean
the rate of interest reported as the prime rate from time to time in The Wall
Street
2
<PAGE>
Journal newspaper (or its successor in interest) in its "Money Rates" column;
provided, however, if more than one rate or a range of rates are reported as the
prime rate, then the higher or highest of such rates shall be considered the
Prime Rate.
C. The parties hereto agree to re-negotiate such annual rate of Base
Compensation in the event that, as a result of the acquisition by the Companies
of other companies or businesses, or otherwise, there is a material increase in
the level of services and responsibilities of Mentmore hereunder.
3. BUSINESS EXPENSES; WORKING FACILITIES.
A. During the term hereof, the Companies agree to pay or promptly reimburse
Mentmore for the aggregate of all direct and indirect costs which are incurred
or accrued by Mentmore or its employees or agents and which are, in the
reasonable business judgment of Mentmore, necessary for the performance of its
responsibilities and the rendering of the services required hereunder,
including, but not limited to:
1) all operating expenses (such as office costs, travel and
entertainment);
2) overhead costs (such as costs for office space and assets);
3) fees and other amounts paid to third parties;
4) any and all costs incurred or accrued in connection with the
termination or maintenance of any services or expenses incurred under this
Agreement that Mentmore in its business judgment no longer considers
appropriate or useful to the long term benefit of the Companies; and
5) an appropriate allocation for all costs incurred to acquire or
place in service and to thereafter utilize and maintain capital assets
(hereinafter, "Common Fixed Assets") that Mentmore uses in connection with
the performance of its responsibilities and the rendering of the services
required hereunder which capital assets are used for the common benefit of
the Companies as well as other companies or entities which are also managed
by Mentmore (individually an "Affiliated Corporation" and, collectively,
the "Affiliated Companies").
B. Examples of Common Fixed Assets contemplated by subparagraph (5) above
would include, but not be limited to, the purchase, use and maintenance of a
corporate airplane, corporate office(s) and apartment(s) or corporate
automobiles. The costs and expenses for Common Fixed Assets would be allocated
among the Affiliated Companies, as follows:
1) The cost to acquire or place in service a particular Common Fixed
Asset, together with the cost of all leasehold or other improvements
thereto,
3
<PAGE>
would be allocated among and paid by each of the Affiliated Companies,
including the Companies, based upon a fraction, the numerator of which is
the five-year moving average of revenues for each Affiliated Corporation
and the denominator of which is the aggregate of the five-year moving
averages of revenues for all of the Affiliated Companies.
2) In general, Common Fixed Asset related costs which are associated
with clearly identifiable usage by a particular Affiliated Corporation
would be billed to that Affiliated Corporation at a pre-determined fixed
rate. The fixed rate would be based upon incremental out-of-pocket costs.
The remaining costs for Common Fixed Assets (which arise both out of use
that is common (or indistinguishable as to a particular Affiliated
Corporation) as well as insufficient use to fully absorb all Common Fixed
Asset costs) would be allocated among all Affiliated Companies based upon
the formula described in subparagraph (1) above.
4. TERM AND TERMINATION.
A. The term of this Agreement (the "Term") shall commence as of the
Effective Date hereof and shall continue for an initial term expiring on
December 31, 2008, which Term shall be automatically extended for an additional
year as of December 31st of each year, commencing December 31, 1998, unless
either party shall have previously notified the other in writing, on or before
September 30th of any applicable year, that the Term of this Agreement shall not
be further extended, it being the intent of the parties that this Agreement
shall have a rolling "evergreen" term of not less than ten (10) years. To
illustrate, if neither party has notified the other in writing before September
30, 1998 that the Term of this Agreement shall not be further extended, as of
such date the Term of this Agreement shall continue until December 31, 2009. As
used herein, "term of this Agreement" shall include all extensions. Upon the
expiration of the final Term of this Agreement, all amounts owed or due and
owing to Mentmore shall be paid in full by the Companies.
B. Notwithstanding the terms of Section 4.A. above, Mentmore may terminate
this Agreement upon ninety (90) days' prior written notice to the Companies.
C. Notwithstanding the terms of Section 4.A. above, the Companies may
terminate this Agreement "for cause" upon the occurrence of: (i) the commission
of a felony, embezzlement, or any act of material dishonesty by any individual
providing services to the Companies hereunder on behalf of Mentmore which causes
material harm to the Companies, or (ii) a material failure of Mentmore to
provide the services contemplated hereunder and the failure of Mentmore to cure
the same within ninety (90) days following the date of receipt of written notice
thereof setting forth in detail the nature of such failure.
D. In the event of the termination of this Agreement by the Companies "for
cause," Mentmore shall receive payment in full of all amounts due and payable
hereunder
4
<PAGE>
through the effective date of such termination and during the period of any
judicial appeal of such termination, and in no event shall the effective date of
termination be earlier than the date of expiration of the ninety (90) day cure
period specified in Section 4.C. above. In the event of any termination of this
Agreement, amounts payable pursuant to Article 2 above shall be prorated based
upon the ratio of the number of days during the fiscal year during which
Mentmore shall be deemed hereunder to have provided such services to two hundred
fifty (250). All such amounts shall be paid by the Companies to Mentmore in cash
or its equivalent within a reasonable period of time, not to exceed thirty (30)
days, following such termination.
E. In the event of the termination of this Agreement, Mentmore will
cooperate and assist the Companies in order to effectuate a smooth and orderly
transition.
5. INDEPENDENT CONTRACTOR; INDEMNIFICATION.
A. Mentmore shall provide management advisory services to the Companies
hereunder only in the capacity as an independent contractor. Mentmore shall have
sole responsibility for the payment of all income, social security, employment
and related taxes with respect to amounts payable to Mentmore hereunder, and for
the provision of all welfare, pension and other employee benefits to the
employees of Mentmore.
B. With regard to the services to be provided and performed by Mentmore
pursuant to this Agreement, neither Mentmore nor its shareholders, directors,
officers, employees, agents or representatives shall be liable to the Companies
or any of its subsidiaries for any acts or omissions of Mentmore in the
provision or performance of such services, other than acts or omissions
resulting from the fraud, bad faith or gross negligence of Mentmore, its
shareholders, directors, officers, employees, agents or representatives. The
Companies shall hold harmless, defend and indemnify Mentmore, its shareholders,
directors, officers, employees, agents, representatives, successors and assigns
(the "Indemnified Parties") from and against any and all liabilities, costs,
damages, expenses and attorneys' fees resulting from or attributable to any and
all acts and omissions of the Indemnified Parties in providing or performing the
services required under this Agreement, other than acts or omissions resulting
from fraud, bad faith or gross negligence by any of the Indemnified Parties. To
the extent that any such liabilities, costs, damages, expenses and attorneys'
fees are compensated for by insurance purchased or arranged for by the
Companies, neither Mentmore nor any of the other Indemnified Parties shall be
required to reimburse the Companies on account thereof.
6. GENERAL PROVISIONS.
A. The construction and interpretation of this Agreement shall at all times
and in all respects be governed by the laws of the State of New York without
regard to its rules of conflicts of laws. The parties hereby consent to the
jurisdiction of the State of New York courts over disputes involving this
Agreement.
5
<PAGE>
B. All notices, requests, demands and other communications to be given by
the parties hereunder shall be in writing and shall be sent: (i) by United
States registered or certified mail, return receipt requested, postage prepaid,
(ii) by a recognized overnight commercial courier service, (iii) transmitted by
fax (confirmed by telephone), or (iv) delivered in person with a receipt
requested therefor to the following addresses or such other addresses of which
the other party hereto shall have been given notice pursuant to this Section
6.B.:
(1) If to the Companies:
President
Stellex Microwave, Inc.
Sanford Research Park
3333 Hillview Avenue
Palo Alto, CA 94304-1223
Fax: 650/813-2086
with copies to:
President
Stellex Aerospace
21550 Oxnard Street, Suite 570
Woodland Hills, CA 91367
Facsimile: 818/710-7807
President
Monitor Aerospace Corporation
1000 New Horizons Boulevard
Amityville, New York 11701
Facsimile: 516/957-1114
(2) If to Mentmore:
President
Mentmore Holdings Corporation
1430 Broadway, 13th Floor
New York, New York 10018
Facsimile:(212) 391-1393
All notices, requests, demands and other communications to be given by the
parties hereunder shall be effective (a) upon receipt or refusal if delivered
personally or by facsimile; (b) one (1) business day after depositing with such
an overnight courier service or (c) two (2) business days after deposit in the
mails, if mailed.
C. This Agreement shall be binding upon, and shall inure to the benefit of,
the Companies and Mentmore and their respective successors. The Companies shall
not assign this Agreement or any rights, duties or obligations hereunder.
6
<PAGE>
D. This Agreement contains the entire agreement and understandings by and
between the Companies and Mentmore with respect to the provision of management
advisory, consulting and other services, and no representations, promises,
agreements or understandings, written or oral, not contained herein shall be of
any force and effect. No change, modification or waiver of the effect of (or of
any breach or failure of) any term, condition or provision hereof shall be valid
or binding unless the same is in writing and signed by the party against whom
such change, modification or waiver is sought to be enforced; moreover, no valid
waiver of the effect of (or of any breach or failure of) any term, condition or
provision of this Agreement at any time shall be deemed to be a waiver of the
effect of (or of any breach or failure of) any other term, condition or
provision of this Agreement at such time or will be deemed a valid waiver of
such term, condition or provision at any other time. No failure to exercise, and
no delay in exercising, any right or power hereunder shall operate as a waiver
thereof.
E. Headings of the Articles of this Agreement are for the convenience of
the parties only, and shall be given no substantive or interpretive effect
whatsoever.
F. This Agreement may be executed in one (1) or more counterparts, all of
which together shall constitute one and the same instrument.
G. In case any one or more of the provisions contained in this Agreement
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision hereof, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective for all purposes and in all respects as of the day and year first
above written.
STELLEX INDUSTRIES, INC.
By: /s/ William L. Remley
-----------------------------------------
Its: President
-----------------------------------------
TSMD ACQUISITION CORP.
By: /s/ William L. Remley
-----------------------------------------
Its: President
-----------------------------------------
7
<PAGE>
STELLEX MICROWAVE SYSTEMS, INC.
By: /s/ Keith D. Gilbert
-----------------------------------------
Its: CEO
-----------------------------------------
STELLEX AEROSPACE HOLDINGS, INC.
By: /s/ William L. Remley
-----------------------------------------
Its: President
-----------------------------------------
MONITOR AEROSPACE CORPORATION
By: /s/ William L. Remley
-----------------------------------------
Its: Vice Chairman of the Board
-----------------------------------------
MONITOR MARINE PRODUCTS, INC.
By: /s/ William L. Remley
-----------------------------------------
Its: Vice Chairman of the Board
-----------------------------------------
MONITOR AEROSPACE INTERNATIONAL CORP.
By: /s/ William L. Remley
-----------------------------------------
Its: Vice Chairman of the Board
-----------------------------------------
KII HOLDING CORP.
By: /s/ William L. Remley
-----------------------------------------
Its: Vice Chairman of the Board
-----------------------------------------
KII ACQUISITION CORP.
By: /s/ William L. Remley
-----------------------------------------
Its: Vice Chairman of the Board
-----------------------------------------
8
<PAGE>
STELLEX AEROSPACE
By: /s/ Bradley C. Call
-----------------------------------------
Its: President
-----------------------------------------
PARAGON PRECISION PRODUCTS
By: /s/ Julius E. Hodge
-----------------------------------------
Its: CFO
-----------------------------------------
BANDY MACHINING INTERNATIONAL
By: /s/ Julius E. Hodge
-----------------------------------------
Its: CFO
-----------------------------------------
SCANNING ELECTRON ANALYSIS LABORATORIES, INC.
By: /s/ Julius E. Hodge
-----------------------------------------
Its: CFO
-----------------------------------------
GENERAL INSPECTION LABORATORIES, INC.
By: /s/ Julius E. Hodge
-----------------------------------------
Its: CFO
-----------------------------------------
MENTMORE HOLDINGS CORPORATION
By: /s/ William L. Remley
-----------------------------------------
Its: President
-----------------------------------------
9
<PAGE>
EXHIBIT 10.16
FIRST AMENDMENT TO THE
TAX ALLOCATION AND INDEMNITY AGREEMENT
Amendment, dated as of May 29, 1998, to revise and prospectively apply the
Affiliated Group, as defined in the Tax Allocation and Indemnity Agreement by
and among Stellex Industries, Inc., (formerly Stellex Holdings Corp.), a
Delaware corporation ("Parent"), TSMD Acquisition Corp., a Delaware corporation,
Stellex Microwave Systems, Inc. (formerly W-J TSMD Inc.), a California
corporation, (together "Stellex Microwave") KII Holding Corp., a Delaware
corporation, and KII Acquisition Corp., Stellex Aerospace (formerly Kleinert
Industries, Inc.), a California corporation, and its direct subsidiaries
(together "Stellex Aerospace") dated as of October 31, 1997.
It is the intent of the parties hereto that the Affiliated Group, as
defined, prospectively from the date hereof be amended to include the following:
Parent, Stellex Microwave, Stellex Aerospace, Stellex Aerospace
Holdings, Inc., a Delaware corporation, and Monitor Aerospace Corporation,
a New York corporation.
In WITNESS WHEREOF, the Parties hereto have caused this Amendment to be
executed by their duly authorized representatives as of the date first written
above.
Stellex Industries, Inc.
By: /s/ William L. Remley
-----------------------------------------
Its:
-----------------------------------------
TSMD Acquisition Corp.
By: /s/ William L. Remley
-----------------------------------------
Its:
-----------------------------------------
Stellex Microwave Systems, Inc.
By: /s/ William L. Remley
-----------------------------------------
Its:
-----------------------------------------
KII Holding Corp.
By: /s/ William L. Remley
-----------------------------------------
Its:
-----------------------------------------
KII Acquisition Corp.
By: /s/ William L. Remley
-----------------------------------------
Its:
-----------------------------------------
Stellex Aerospace
By: /s/ William L. Remley
-----------------------------------------
Its:
-----------------------------------------
<PAGE>
Paragon Precision Products
By: William L. Remley
-----------------------------------------
Its:
-----------------------------------------
Bandy Machining International
By: William L. Remley
-----------------------------------------
Its:
-----------------------------------------
Scanning Electron Analysis Laboratories, Inc.
By: William L. Remley
-----------------------------------------
Its:
-----------------------------------------
General Inspection Laboratories, Inc.
By: William L. Remley
-----------------------------------------
Its:
-----------------------------------------
Stellex Aerospace Holdings, Inc.
By: William L. Remley
-----------------------------------------
Its:
-----------------------------------------
Monitor Aerospace Corp.
By: William L. Remley
-----------------------------------------
Its:
-----------------------------------------
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
Stellex Microwave Systems, Inc. (the "Company") and Keith Gilbert ("Employee"),
as of the 1st day of November 1997.
I. EMPLOYMENT.
The Company hereby employs Employee and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth, from November
1, 1997, to and including December 31, 2000.
II. DUTIES.
A. Employee shall serve during the course of his employment as President
and Chief Executive Officer of the Company, and shall have such other duties and
responsibilities as the Board of Directors of the Company shall determine from
time to time. In the event that at any time during the term of this Agreement
Employee serves as a Director of the Company, Employee shall not participate as
a Director in any actions taken, determinations made, or instructions given by
the Board of Directors that relate to Employee's employment with the Company or
any aspect of this Agreement.
B. Employee shall perform all duties incident to the position of President
and Chief Executive Officer as may from time to time be requested by the Board
of Directors. At all times, Employee shall devote his full time and best
efforts, knowledge and experience
<PAGE>
to performing his duties hereunder, shall perform such duties in a diligent and
competent manner and shall act in conformity with the written and oral policies
of the Company and within the limits, budgets and business plans set by the
Company. Employee will at all times during the term of his employment with the
Company strictly adhere to and obey all of the rules and regulations in effect
from time to time relating to the conduct of employees of the Company. Employee
further agrees that to the best of his ability and experience he will at all
times loyally and conscientiously perform all duties and obligations whether
expressly or implicitly required of him by the terms of this Agreement.
C. For the term of this Agreement, Employee shall report to the Board of
Directors of the Company.
III. COMPENSATION.
A. The Company will pay to Employee a base salary at the rate of
$250,000.00 per year. Such salary shall be earned monthly and shall be payable
in periodic installments no less frequently than bi-weekly in accordance with
the Company's customary payroll practices. Amounts payable shall be reduced by
standard withholding and other authorized deductions. The Board of Directors
will review Employee's base salary annually and, in their sole discretion, may
increase such base salary.
B. Annual Incentive Bonus. Employee shall be eligible for an annual
incentive bonus, beginning with the Company's 1998 fiscal year, pursuant to the
terms set forth on Exhibit A hereto.
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<PAGE>
C. Incentive, Deferred Compensation, Savings and Retirement Plans. During
the term of this Agreement, Employee shall be entitled to participate in all
incentive, deferred compensation, savings and retirement plans, practices,
policies and programs applicable generally to other peer executives of the
Company.
D. Welfare Benefit Plans. Employee and/or his family, as the case may be,
shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by the Company
(including, without limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally to
other peer executives of the Company.
E. Expenses. Employee shall be entitled to receive prompt reimbursement for
all reasonable employment expenses incurred by him in accordance with the
policies, practices and procedures as in effect generally with respect to other
peer executives of the Company.
F. Fringe Benefits. Employee shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.
G. Vacation. Employee shall be entitled to four (4) weeks paid vacation per
year, subject to a maximum vacation accrual at any time of four (4) weeks.
H. The Company reserves the right to modify, suspend or discontinue any and
all of the plans, practices, policies and programs referred to in Sections C - F
above at any
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<PAGE>
time without recourse by Employee so long as such action is taken generally with
respect to other similarly situated peer executives and does not single out
Employee.
IV. TERMINATION.
A. Death or Disability. Employee's employment shall terminate automatically
upon Employee's death. If the Company determines that the Disability of Employee
has occurred (pursuant to the definition of Disability set forth below), it may
terminate Employee's employment by giving written notice in accordance with
Section XIX. For purposes of this Agreement, "Disability" shall mean a physical
or mental impairment which substantially limits a major life activity of
Employee and which renders Employee unable to perform the essential functions of
his position, with or without reasonable accommodation, for a period of 120
days. The Company reserves the right to make the determination of disability
under this Agreement based upon information supplied by Employee and/or his
medical personnel, as well as information from medical personnel (or others)
selected by the Company or its insurers.
B. Cause. The Company may terminate Employee's employment for Cause. For
purposes of this Agreement, "Cause" shall be determined by the Board of
Directors based upon the information then known to the Company, and shall mean
any of the following: (i) Employee's material breach of any provision of this
Agreement; (ii) Employee's material or repeated failure or neglect to perform
the duties of his position with the Company including, but not limited to,
failure to implement or achieve the Company's business plan; (iii) Employee's
development or pursuit of interests adverse to the
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<PAGE>
Company or any of its direct or indirect subsidiaries or parent companies or
their affiliates; (iv) Employee's insubordination; (v) Employee's willful
misconduct, dishonesty, gross negligence, theft, fraud or other illegal conduct;
(vi) Employee's conduct which reflects adversely upon, or remarks disparaging
of, the Company, its Board, officers, directors, advisors or employees or its
affiliates or subsidiaries; (vii) Employee's violation of any fiduciary duty or
duty of loyalty to the Company; or (viii) any other material reason which would
justify a reasonably prudent employer in terminating an employee's employment in
similar circumstances.
C. Other than Cause or Death or Disability. The Company may terminate
Employee's employment at any time, with or without cause, upon 120 days' written
notice.
D. Obligations of the Company Upon Termination.
1. Death or Disability. If Employee's employment is terminated by reason of
Employee's Death or Disability, this Agreement shall terminate without further
obligations to Employee or his legal representatives under this Agreement, other
than for (a) payment of the sum of (i) Employee's annual base salary through the
date of termination to the extent not theretofore paid and (ii) any compensation
previously deferred by Employee (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (i) and (ii) shall
be hereinafter referred to as the "Accrued Obligations"), which shall be paid to
Employee or his estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the date of
5
<PAGE>
termination; and (b) payment to Employee or his estate or beneficiary, as
applicable, any amounts due pursuant to the terms of any applicable welfare
benefit plans.
2. Cause. If Employee's employment is terminated by the Company for Cause,
this Agreement shall terminate without further obligations to Employee other
than for the timely payment of Accrued Obligations. If it is subsequently
determined that the Company did not have Cause for termination under this
Section IV-D-2, then the Company's decision to terminate shall be deemed to have
been made under Section IV-D-3 and the amounts payable thereunder shall be the
only amounts Employee may receive for his termination.
3. Other than Cause or Death or Disability. If the Company terminates
Employee's employment other than for Cause or for Death or Disability, this
Agreement shall terminate without further obligations to Employee other than (a)
the timely payment of Accrued Obligations and (b) continuation of Employee's
base salary for the lesser of (i) the remainder of the term of this Agreement or
(ii) one (1) year. The Company shall make any salary continuation payments to
Employee in the Company's normal payroll cycles and shall deduct standard
withholdings and other authorized deductions.
4. Termination By Employee. If Employee's employment is terminated by
Employee, this Agreement shall terminate without further obligations to Employee
other than for the timely payment of Accrued Obligations.
5. Exclusive Remedy. Employee agrees that the payments contemplated by this
Agreement shall constitute the exclusive and sole remedy for
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<PAGE>
any termination of his employment and Employee covenants not to assert or pursue
any other remedies, at law or in equity, with respect to any termination of
employment.
V. CONFIDENTIAL AND PROPRIETARY INFORMATION.
A. Employee, in the performance of Employee's duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential,
proprietary information, including but in no way limited to inventions,
improvements, technical developments, trademarks, designs, formulae, processes,
computer programs, know-how, techniques, data, trade secrets, discoveries,
copyrightable works, financial data, and other information or documents
regarding the business or technology of the Company, including but not limited
to drawings, computer programs or portions thereof, computer data, blueprints,
process specifications, customer lists, price data, relationships with
employees, manner of operations, business plans, and other Company documents
owned or at any time in the future developed, by the Company or its agents or
consultants, or used presently or at any time in the future in the course of its
business that is not otherwise part of the public domain (collectively, the
"Proprietary Information"). All such Proprietary Information is considered
secret and will be available to Employee in confidence. Except in the
performance of duties on behalf of the Company, Employee shall not, directly or
indirectly for any reason whatsoever, disclose or use any such Proprietary
Information, unless such Proprietary Information ceases (through no fault of
Employee's) to be confidential because it has become part of the public domain.
All records, files, drawings, documents, equipment
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<PAGE>
and other tangible items, wherever located, relating in any way to the
Proprietary Information or otherwise to the Company's business, which Employee
prepares, uses or encounters, shall be and remain the Company's sole and
exclusive property and shall be included in the Proprietary Information. Upon
termination of this Agreement by any means, or whenever requested by the
Company, Employee shall promptly deliver to the Company any and all of the
Proprietary Information, not previously delivered to the Company, that may be or
at any previous time has been in Employee's possession or under Employee's
control.
B. Employee hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Proprietary Information by any means
whatsoever and any time before, during or after Employee's employment with the
Company shall constitute Unfair Competition. Employee agrees that Employee shall
not engage in Unfair Competition either during the time employed by the Company
or any time thereafter.
VI. OWNERSHIP AND ASSIGNMENT OF PROPRIETARY INFORMATION.
A. Employee shall disclose to the Company all Proprietary Information which
he may conceive or make during his employment, either solely, jointly, or in
common with others, and which (1) are developed, either in whole or in part, by
use of the Company's equipment, supplies, facilities or Proprietary Information,
or (2) are related to the Company's business at the time of conception or
reduction to practice, or (3) are related to the Company's actual or
demonstrably anticipated research or development at the time of
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conception or reduction to practice, or (4) result from any work Employee
performs for the Company.
B. Employee agrees to assign to the Company complete ownership of all
Proprietary Information which he conceives under the circumstances listed in
Section VI(A) above, and as well as complete ownership of all patent
applications, patents, trademarks, and copyrights (United States and foreign)
which the Company may desire to secure with respect to such Proprietary
Information. Employee further agrees, both during his employment and thereafter,
to cooperate with the Company in procuring such patents, trademarks, and
copyrights, including execution of all documents necessary or incidental to such
processes.
C. Employee acknowledges that he has read the California Goggin Act
attached hereto as Exhibit B and understands that under its provisions Employee
may retain ownership of inventions that he may make entirely on his own time and
in a manner not described in Section VI(A) above. Employee agrees, however, to
disclose to the Company all inventions that he conceives during his employment,
including any invention which he desires to retain as his own property, so that
the Company may determine if such invention qualifies under the law for
retention as Employee's property. The Company will treat any such disclosed
information as confidential unless such information (1) was previously known to
the Company, (2) is disclosed in patents or other publications, (3) has been
imparted to the Company by third parties, or (4) is well known to the trade to
which it relates. Employee understands that this paragraph applies even if he
works outside of California.
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D. Employee agrees, during his employment and thereafter, to maintain and
make available to the Company, upon its request, complete and up-to-date written
records (including computer files, photographs, or drawings, where appropriate)
of all Proprietary Information which, during the course of his employment with
the Company, he has conceived or created, either in whole or in part.
VII. NON-COMPETITION.
Employee agrees that, during the term of this Agreement, he will not,
directly or indirectly, without the prior written consent of the Board of
Directors of the Company, provide consultative service with or without pay, own,
manage, operate, join, control, participate in, or be connected as a
stockholder, partner, or otherwise with, any business, individual, partner,
firm, corporation, or other entity which is then in competition with the
business of the Company or any present affiliate of the Company. Employee
further acknowledges and agrees that by virtue of his position and duties with
the Company, including his access to the Proprietary Information of the Company
in discharging such duties, Employee's employment or participation with any
entity in competition with the Company for a period of two (2) years after
termination of this Agreement would inevitably require Employee to use or
disclose the Company's Proprietary Information in violation of this Agreement.
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VIII. ANTISOLICITATION.
Employee promises and agrees that during the term of this Agreement, and
for a period of two (2) years after the termination of this Agreement, he will
not solicit or attempt to solicit customers of the Company or any of its present
or future subsidiaries or affiliates, either directly or indirectly, to divert
their business to any individual, partnership, firm, corporation or other entity
then in competition with the business of the Company, or any subsidiary or
affiliate of the Company.
IX. JOINING FORMER COMPANY EMPLOYEES.
Employee promises and agrees that for two (2) years following his
termination of employment other than pursuant to Section IV-C above or
Disability above or expiration of this Agreement, he will not enter business or
work with any person who was employed with the Company, and who earned annually
$25,000 or more as a Company employee during the last six months of his or her
own employment, in any business, partnership, firm, corporation or other entity
then in competition with the business of the Company or any subsidiary or
affiliate of the Company.
X. SOLICITING EMPLOYEES.
Employee promises and agrees that he will not, for a period of two (2)
years following termination of his employment or the expiration of this
Agreement, directly or indirectly solicit any of the Company employees who
earned annually $25,000 or more as a Company employee during the last six months
of his or her own employment to work for
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any business, individual, partnership, firm, corporation, or other entity then
in competition with the business of the Company or any subsidiary or affiliate
of the Company.
XI. REMEDIES.
It is expressly agreed that the Company will or would suffer irreparable
injury if Employee were to engage in any conduct or commit any act in violation
of Sections V - X above, and the Company would by reason of such violation be
entitled to injunctive relief in a court of appropriate jurisdiction. Employee
consents and stipulates to the entry of such injunctive relief in such a court
prohibiting him from engaging in any action in violation of this Agreement,
which relief shall be cumulative to other remedies at law or in equity and shall
not be construed as an exclusive remedy.
XII. SUCCESSORS.
A. This Agreement is personal to Employee and shall not, without the prior
written consent of the Company, be assignable by Employee.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
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XIII. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, nor shall be, a waiver of any other breach of this Agreement.
No waiver shall be binding unless in writing and signed by the party waiving the
breach.
XIV. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by Employee and the Board of Directors.
XV. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable. In the event that a court of competent jurisdiction determines that
any provision or portion of this Agreement is unreasonable, arbitrary, against
public policy or otherwise unenforceable, such court shall enforce such
provision to the extent the court determines reasonable or in accordance with
public policy and to the maximum extent enforceable by law.
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XVI. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and final
understanding concerning Employee's employment with the Company and the other
subject matters addressed herein between the parties. It is intended by the
parties as a complete and exclusive statement of the terms of their agreement.
It supersedes and replaces all prior negotiations and all agreements proposed or
otherwise, whether written or oral, concerning the subject matter hereof. Any
representation, promise or agreement not specifically included in this Agreement
shall not be binding upon or enforceable against either party. This is a fully
integrated agreement.
XVII. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with, and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XVIII. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
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XIX. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or if mailed
by registered or certified mail, postage prepaid, addressed to Employee at
Stellex Microwave Systems, Inc, Stanford Research Park, 3333 Hillview Avenue,
Palo Alto, CA 94304 or addressed to the Company at Stellex Microwave Systems,
Inc., c/o Stellex Industries, Inc., 1430 Broadway, 13th Floor, New York, NY
10018. Either party may change the address at which notice shall be given by
written notice given in the above manner.
XX. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
In witness whereof, the parties hereto have executed this Agreement as of
the date first above written.
"COMPANY" "EMPLOYEE"
STELLEX MICROWAVE SYSTEMS, INC.
/s/Keith D. Gilbert
----------------------------
By /s/William L. Remley
----------------------------------
Its Chairman
------------------------
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A-1
EXHIBIT A
ANNUAL INCENTIVE BONUS
Employee shall be eligible for an annual incentive bonus, beginning with
fiscal year 1998, based upon the Company's attainment of targeted annual EBITDA
pursuant to the following schedule:
Actual EBITDA Bonus as a
divided by Targeted Percentage of
EBITDA Base Salary
Less than 95% 0.0%
95% 25.0%
100% 50.0%
125% or greater 75.0%
[Interpolate between levels]
The target EBITDA shall be established annually by the Board of Directors no
later than January 1 of each fiscal year. As used herein, "EBITDA" shall mean,
for any period, determined for the Company in conformity with generally accepted
accounting principles consistently applied (i) the sum of the amounts for such
period of (A) net income (i.e., the net earnings or loss after taxes), (B)
depreciation and amortization expense, (C) interest expense, and (D) federal,
state, local, and foreign income taxes, minus (ii) extraordinary or
non-recurring gains. The Board of Directors may, in its sole discretion,
consider other appropriate adjustments to EBITDA. Within thirty (30) days after
completion of the Company's audited financial statements for the fiscal year,
the Board of Directors shall determine the eligibility and amount of any
Incentive Bonus and shall pay such bonus to Employee in a lump sum, less
standard withholdings and authorized deductions.
A-1
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B-2
EXHIBIT B
THE GOGGIN ACT
Sections 2870, 2871 and 2872 of the California Labor Code
2870. (a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either: (1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or (2) Result from any work
performed by the employee for the employer;
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
2871. No employer shall require a provision made void and unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment
B-1
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for disclosure, provided that any such disclosures be received in confidence, of
all of the employee's inventions made solely or jointly with others during the
term of his or her employment, a review process by the employer to determine
such issues as may arise, and for full title to certain patents and inventions
to be in the United States, as required by contracts between the employer and
the United States or any of its agencies.
2872. If an employment agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870. In any suit or action arising thereunder, the burden
of proof shall be on the employee claiming the benefits of its provisions.
B-2
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EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
Stellex Aerospace Holdings, Inc. (the "Company") and Bradley C. Call
("Employee"), as of the 1st day of June, 1998.
I. EMPLOYMENT.
The Company hereby employs Employee and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth, from June 1,
1998, to and including June 30, 2002.
II. DUTIES.
A. Employee shall serve during the course of his employment as President
and Chief Executive Officer of the Company and Stellex Aerospace, an indirect
subsidiary of the Company ("Stellex Aerospace") and shall have such other
duties, responsibilities, and titles on behalf of the Company or any of its
direct or indirect subsidiaries as the Board of Directors of the Company shall
determine from time to time. In the event that at any time during the term of
this Agreement Employee serves as a Director of the Company or any of its direct
or indirect subsidiaries, Employee shall not participate as a Director in any
actions taken, determinations made, or instructions given by the Board of
Directors that relate to Employee's employment with the Company or any aspect of
this Agreement.
B. Employee shall perform all duties incident to the position of President
and Chief Executive Officer as may from time to time be requested by the Board
of Directors. At all
<PAGE>
times, Employee shall devote his full time and best efforts, knowledge and
experience to performing his duties hereunder, shall perform such duties in a
diligent and competent manner and shall act in conformity with the written and
oral policies of the Company and within the limits, budgets and business plans
set by the Company. Employee will at all times during the term of his employment
with the Company strictly adhere to and obey all of the rules and regulations in
effect from time to time relating to the conduct of employees of the Company.
Employee further agrees that to the best of his ability and experience he will
at all times loyally and conscientiously perform all duties and obligations
whether expressly or implicitly required of him by the terms of this Agreement.
Nothing herein shall preclude Employee from participating as an advisor or board
member of an outside organization (whether corporate or other form of
organization) which is not in competition with the Company or its subsidiaries
or affiliates, as long as it does not materially detract from Employee's
performance of duties for the Company.
C. For the term of this Agreement, Employee shall report to the Board of
Directors of the Company.
III. COMPENSATION.
A. Base Salary. The Company will pay to Employee a base salary at the rate
of $300,000 per year effective as of June 1, 1998. Such salary shall be earned
monthly and shall be payable in periodic installments no less frequently than
monthly in accordance with the Company's customary payroll practices. Amounts
payable shall be reduced by standard withholding and other authorized
deductions. The Board of Directors will review Employee's
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<PAGE>
base salary annually and, in their sole discretion, may increase such base
salary as of the first day of January of each year during the term of this
Agreement. The Board of Directors may also, in their sole discretion, increase
Employee's base salary in the event Employee's responsibilities are
significantly increased by reason of changes in the Company's size and
complexity.
B. Annual Incentive Bonus. Employee shall be eligible for an annual
incentive bonus, beginning with the Company's 1998 fiscal year, pursuant to the
terms set forth on Exhibit A hereto.
C. Savings and Retirement Plans. During the term of this Agreement,
Employee shall be entitled to participate in all savings and retirement plans,
practices, policies and programs applicable generally to other peer executives
of Stellex Aerospace.
D. Welfare Benefit Plans. Employee and/or his family, as the case may be,
shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by Stellex
Aerospace (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of Stellex Aerospace.
E. Expenses. Employee shall be entitled to receive prompt reimbursement for
all reasonable employment expenses incurred by him in accordance with the
policies, practices and procedures as in effect generally with respect to other
peer executives of Stellex Aerospace.
F. Fringe Benefits. Employee shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of Stellex Aerospace.
3
<PAGE>
G. Special Allowances and Benefits. Employee shall be entitled to the
following special expense allowances and benefits:
1) Automobile. Reimbursement of up to $1,400 per month for automobile
expenses.
2) Country Club. Reimbursement of up to $600 per month for dues for
membership in a local country club of Employee's choice.
3) Deferred Compensation Plan. Employee shall continue to participate
in the Stellex Aerospace deferred compensation plan on substantially the
same terms as reflected in the Deferred Compensation Agreement and related
Insurance Agreement executed on June 29, 1988 and August 23, 1989,
respectively.
H. Vacation. Employee shall be entitled to four (4) weeks paid vacation per
calendar year, subject to a maximum vacation accrual at any time of two (2)
weeks as of the end of the calendar year.
I. The Company reserves the right to modify, suspend or discontinue any and
all of the plans, practices, policies and programs referred to in Sections III-C
through F above at any time without recourse by Employee so long as such action
is taken generally with respect to other similarly situated peer executives and
does not single out Employee.
IV. TERMINATION.
A. Death or Disability. Employee's employment shall terminate automatically
upon Employee's death. If the Company determines that the Disability of Employee
has occurred (pursuant to the definition of Disability set forth below), it may
terminate Employee's
4
<PAGE>
employment by giving written notice in accordance with Section XIX. For purposes
of this Agreement, "Disability" shall mean a physical or mental impairment which
substantially limits a major life activity of Employee and which renders
Employee unable to perform the essential functions of his position, with or
without reasonable accommodation, for a period of 120 consecutive days or for
successive periods aggregating more than 180 days in any twelve-month period.
The Company reserves the right to make the determination of disability under
this Agreement based upon information supplied by Employee and/or his medical
personnel, as well as information from medical personnel (or others) selected by
the Company or its insurers.
B. Cause. The Company may terminate Employee's employment for Cause. For
purposes of this Agreement, "Cause" shall be determined by the Board of
Directors based upon the information then known to the Company, and shall mean
any of the following: (i) Employee's material breach of any provision of this
Agreement; (ii) Employee's failure or neglect to perform the duties of his
position with the Company including, but not limited to, material or repeated
failure to implement or achieve the Company's reasonable business plan; (iii)
Employee's development or pursuit of interests adverse to the Company or any of
its direct or indirect subsidiaries or parent companies or their affiliates;
(iv) Employee's insubordination; (v) Employee's willful misconduct, dishonesty,
gross negligence, theft, fraud or other illegal conduct; (vi) Employee's conduct
which reflects adversely upon, or remarks disparaging of, the Company or its
affiliates or subsidiaries, or its or their Boards, officers, or directors;
(vii) Employee's violation of any fiduciary duty or duty of loyalty to the
Company; or (viii) any other material reason which would justify a reasonably
prudent employer in terminating an employee's employment in similar
circumstances. In the event of circumstances described in clause (i) or
5
<PAGE>
(viii) above, the Company will give Employee ten (10) days advance written
notice of the Company's intent to terminate Employee's employment due to
circumstances described in clause (i) or (viii) above, and offer Employee the
opportunity to meet with the Board of Directors to discuss whether such
circumstances justify termination.
C. Other than Cause or Death or Disability. The Company may terminate
Employee's employment at any time, with or without cause.
D. Obligations of the Company upon Termination.
1. Death or Disability. If Employee's employment is terminated by reason of
Employee's Death or Disability, this Agreement shall terminate without further
obligations to Employee or his legal representatives under this Agreement, other
than for (a) payment of the sum of (i) Employee's annual base salary through the
date of termination to the extent not theretofore paid and (ii) any compensation
previously deferred by Employee (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (i) and (ii) shall
be hereinafter referred to as the "Accrued Obligations"), which shall be paid to
Employee or his estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the date of termination; (b) payment to Employee or his estate
or beneficiary, as applicable, of any amounts due pursuant to the terms of any
applicable welfare benefit plans, and (c) payment to Employee or his estate or
beneficiary, as applicable, of any incentive bonus earned for the fiscal year
ending prior to the date of termination, to the extent not theretofore paid
("Accrued Bonus"), in a lump sum within the time specified in Exhibit A hereto.
6
<PAGE>
2. Cause. If Employee's employment is terminated by the Company for Cause,
this Agreement shall terminate without further obligations to Employee other
than for the timely payment of Accrued Obligations. If it is subsequently
determined that the Company did not have Cause for termination under this
Section IV-D-2, then the Company's decision to terminate shall be deemed to have
been made under Section IV-D-3 and the amounts payable thereunder shall be the
only amounts Employee may receive for his termination.
3. Other than Cause or Death or Disability. If the Company terminates
Employee's employment other than for Cause or for Death or Disability, this
Agreement shall terminate without further obligations to Employee other than (a)
the timely payment of Accrued Obligations, (b) continuation of Employee's base
salary for the lesser of (i) the remainder of the term of this Agreement or (ii)
one (1) year, (c) a lump sum payment in lieu of benefits continuation in the
amount of $5,000, to be paid to Employee within thirty (30) days of the date of
termination, and (d) the timely payment of any Accrued Bonus. The Company shall
make any salary continuation payments to Employee in the Company's normal
payroll cycles and shall deduct standard withholdings and other authorized
deductions.
4. Termination by Employee. If Employee's employment is terminated by
Employee, this Agreement shall terminate without further obligations to Employee
other than for the timely payment of Accrued Obligations.
5. Exclusive Remedy. Employee agrees that the payments contemplated by this
Agreement shall constitute the exclusive and sole remedy for any termination of
his
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employment and Employee covenants not to assert or pursue any other
remedies, at law or in equity, with respect to any termination of employment.
V. CONFIDENTIAL AND PROPRIETARY INFORMATION.
A. Employee, in the performance of Employee's duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential,
proprietary information, including but in no way limited to inventions,
improvements, technical developments, trademarks, designs, formulae, processes,
computer programs, know-how, techniques, data, trade secrets, discoveries,
copyrightable works, financial data, and other information or documents
regarding the business or technology of the Company and its subsidiaries and
affiliates, including but not limited to drawings, computer programs or portions
thereof, computer data, blueprints, process specifications, customer lists,
price data, relationships with employees, manner of operations, business plans,
and other documents owned or at any time in the future developed by the Company
or its subsidiaries or affiliates or its or their agents or consultants, or used
presently or at any time in the future in the course of its or their business
that is not otherwise part of the public domain (collectively, the "Proprietary
Information"). All such Proprietary Information is considered secret and will be
available to Employee in confidence. Except in the performance of duties on
behalf of the Company, Employee shall not, directly or indirectly for any reason
whatsoever, disclose or use any such Proprietary Information, unless such
Proprietary Information ceases (through no fault of Employee's) to be
confidential because it has become part of the public domain. All records,
files, drawings, documents, equipment and other tangible items, wherever
located, relating in any way to the Proprietary Information or otherwise to the
8
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Company's or its subsidiaries or affiliates' business, which Employee prepares,
uses or encounters, shall be and remain the Company's or its subsidiaries or
affiliates' sole and exclusive property and shall be included in the Proprietary
Information. Upon termination of this Agreement by any means, or whenever
requested by the Company, Employee shall promptly deliver to the Company any and
all of the Proprietary Information, not previously delivered to the Company,
that may be or at any previous time has been in Employee's possession or under
Employee's control.
B. Employee hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Proprietary Information by any means
whatsoever and any time before, during or after Employee's employment with the
Company shall constitute Unfair Competition. Employee agrees that Employee shall
not engage in Unfair Competition either during the time employed by the Company
or any time thereafter.
VI. OWNERSHIP AND ASSIGNMENT OF PROPRIETARY INFORMATION.
A. Employee shall disclose to the Company all Proprietary Information which
he may conceive or make during his employment, either solely, jointly, or in
common with others, and which (1) are developed, either in whole or in part, by
use of the Company's or its subsidiaries' or affiliates' equipment, supplies,
facilities or Proprietary Information, or (2) are related to the Company's or
its subsidiaries' or affiliates' business at the time of conception or reduction
to practice, or (3) are related to the Company's or its subsidiaries' or
affiliates' actual or demonstrably anticipated research or development at the
time of conception or reduction to
9
<PAGE>
practice, or (4) result from any work Employee performs for the Company or its
subsidiaries or affiliates.
B. Employee agrees to assign to the Company complete ownership of all
Proprietary Information which he conceives under the circumstances listed in
Section VI-A above, and as well as complete ownership of all patent
applications, patents, trademarks, and copyrights (United States and foreign)
which the Company may desire to secure with respect to such Proprietary
Information. Employee further agrees, both during his employment and thereafter,
to cooperate with the Company in procuring such patents, trademarks, and
copyrights, including execution of all documents necessary or incidental to such
processes.
C. Employee acknowledges that he has read the California Goggin Act
attached hereto as Exhibit B and understands that under its provisions Employee
may retain ownership of inventions that he may make entirely on his own time and
in a manner not described in Section VI-A above. Employee agrees, however, to
disclose to the Company all inventions that he conceives during his employment,
including any invention which he desires to retain as his own property, so that
the Company may determine if such invention qualifies under the law for
retention as Employee's property. The Company will treat any such disclosed
information as confidential unless such information (1) was previously known to
the Company, (2) is disclosed in patents or other publications, (3) has been
imparted to the Company by third parties, or (4) is well known to the trade to
which it relates. Employee understands that this paragraph applies even if he
works outside of California.
D. Employee agrees, during his employment and thereafter, to maintain and
make available to the Company, upon its request, complete and up-to-date written
records (including
10
<PAGE>
computer files, photographs, or drawings, where appropriate) of all Proprietary
Information which, during the course of his employment with the Company, he has
conceived or created, either in whole or in part.
VII. NON-COMPETITION.
Employee agrees that, during the term of this Agreement, he will not,
directly or indirectly, without the prior written consent of the Board of
Directors of the Company, provide consultative service with or without pay, own,
manage, operate, join, control, participate in, or be connected as a
stockholder, partner, or otherwise with, any business, individual, partner,
firm, corporation, or other entity which is then in competition with the
business of the Company or any subsidiary or affiliate of the Company. Employee
further acknowledges and agrees that by virtue of his position and duties with
the Company, including his access to the Proprietary Information of the Company
in discharging such duties, Employee's employment or participation with any
entity in competition with the Company or its subsidiaries or affiliates for a
period of one (1) year after termination of this Agreement would inevitably
require Employee to use or disclose the Company's Proprietary Information in
violation of this Agreement.
VIII. ANTISOLICITATION.
Employee promises and agrees that during the term of this Agreement, and
for a period of one (1) year after the termination or expiration of this
Agreement, he will not solicit or attempt to solicit customers of the Company or
any of its subsidiaries or affiliates, either directly or indirectly, to divert
their business to any individual, partnership, firm, corporation or other entity
11
<PAGE>
then in competition with the business of the Company, or any subsidiary or
affiliate of the Company.
IX. JOINING FORMER COMPANY EMPLOYEES.
Employee promises and agrees that for one (1) year following his
termination of employment other than pursuant to Section IV-C above or
Disability above or expiration of this Agreement, he will not enter into
business or work with any person who was employed with the Company or its
subsidiaries or affiliates, and who earned annually $25,000 or more as a Company
or subsidiary or affiliate employee during the last six months of his or her own
employment, in any business, partnership, firm, corporation or other entity then
in competition with the business of the Company or any subsidiary or affiliate
of the Company.
X. SOLICITING EMPLOYEES.
Employee promises and agrees that he will not, for a period of one (1) year
following termination of his employment or the expiration of this Agreement,
directly or indirectly solicit any of the Company or subsidiary or affiliate
employees who earned annually $25,000 or more as a Company or subsidiary or
affiliate employee during the last six months of his or her own employment to
work for any business, individual, partnership, firm, corporation, or other
entity then in competition with the business of the Company or any subsidiary or
affiliate of the Company.
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XI. REMEDIES.
It is expressly agreed that the Company will or would suffer irreparable
injury if Employee were to engage in any conduct or commit any act in violation
of Sections V - X above, and the Company would by reason of such violation be
entitled to injunctive relief in a court of appropriate jurisdiction. Employee
consents and stipulates to the entry of such injunctive relief in such a court
prohibiting him from engaging in any action in violation of this Agreement,
which relief shall be cumulative to other remedies at law or in equity and shall
not be construed as an exclusive remedy.
XII. SUCCESSORS.
A. This Agreement is personal to Employee and shall not, without the prior
written consent of the Company, be assignable by Employee.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
XIII. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, or shall be, a waiver of any other breach of this Agreement. No
waiver shall be binding unless in writing and signed by the party waiving the
breach.
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XIV. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by Employee and the Company and approved by the Board of
Directors.
XV. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable. In the event that a court of competent jurisdiction determines that
any provision or portion of this Agreement is unreasonable, arbitrary, against
public policy or otherwise unenforceable, such court shall enforce such
provision to the extent the court determines reasonable or in accordance with
public policy and to the maximum extent enforceable by law.
XVI. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and final
understanding concerning Employee's employment with the Company and the other
subject matters addressed herein between the parties. It is intended by the
parties as a complete and exclusive statement of the terms of their agreement.
It supersedes and replaces all prior negotiations and all agreements proposed or
otherwise, whether written or oral, concerning the subject matter hereof. Any
representation, promise or agreement not specifically included in this Agreement
shall not be binding upon or enforceable against either party. This is a fully
integrated agreement.
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XVII. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with, and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XVIII. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
XIX. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or if mailed
by registered or certified mail, postage prepaid, addressed to Employee at
Stellex Aerospace, 21550 Oxnard Street, Suite 570, Woodland Hills, CA 91367 or
addressed to the Company at Stellex Aerospace Holdings, Inc., c/o Stellex
Industries, Inc., 1430 Broadway, 13th Floor, New York, NY 10018. Either party
may change the address at which notice shall be given by written notice given in
the above manner.
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XX. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
XXI. EXTENSION.
Without in any manner obligating either party to extend the term of this
Agreement or to enter into a new employment agreement, the Company and Employee
agree that they will commence discussions respecting the possibility of
extending this Agreement on or about April 1, 2001, with a view toward resolving
their respective willingness to extend same and the terms of such extension, if
any, on or about June 30, 2001.
In witness whereof, the parties hereto have executed this Agreement as of
the date first above written.
"COMPANY" "EMPLOYEE"
STELLEX AEROSPACE HOLDINGS, INC.
/s/ Bradley C. Call
-------------------------------
By /s/ William L. Remley Bradley C. Call
-------------------------------
Its Vice Chairman
-------------------------------
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EXHIBIT A
ANNUAL INCENTIVE BONUS
Employee shall be eligible for an annual incentive bonus, beginning with
fiscal year 1998, based upon the Company's attainment of targeted annual EBITDA
pursuant to the following schedule:
Actual EBITDA Bonus as a
divided by Targeted Percentage of
EBITDA Base Salary (except as noted)
Less than 85% $40,000 Fixed Sum
Between 85% and 100% Prorated between (a) the percentage
derived by dividing 40,000 by
Base Salary at 85% of Target
EBITDA and (b) 40% of Base
Salary at 100% of Targeted
EBITDA
100% 40.0%
115% 50.0%
125% or greater 60.0%
[Interpolate between levels]
The target EBITDA shall be established annually by the Board of Directors no
later than January 1 of each fiscal year, subject to timely finalization of the
Company's and its subsidiaries' annual budget. As used herein, "EBITDA" shall
mean, for any period, determined for the Company in conformity with generally
accepted accounting principles consistently applied (i) the sum of the amounts
for such period of (A) net income (i.e., the net earnings or loss after taxes),
(B) depreciation and amortization expense, (C) interest expense, and (D)
federal, state, local, and foreign income taxes, minus (ii) extraordinary or
A-1
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non-recurring gains. The Board of Directors may, in its sole discretion,
consider other appropriate adjustments to EBITDA. Within thirty (30) days after
completion of the Company's (or Stellex Industries, Inc.'s) audited financial
statements for the fiscal year, the Board of Directors shall determine the
eligibility and amount of any Incentive Bonus and shall pay such bonus to
Employee in a lump sum, less standard withholdings and authorized deductions.
For purposes of determining the annual incentive bonus for fiscal year 1998,
Employee's base salary for the year shall be considered to be $300,000.00.
A-2
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EXHIBIT B
THE GOGGIN ACT
Sections 2870, 2871 and 2872 of the California Labor Code
2870. (a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either: (1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or (2) Result from any work
performed by the employee for the employer;
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
2871. No employer shall require a provision made void and unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to
B-1
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be in the United States, as required by contracts between the employer and the
United States or any of its agencies.
2872. If an employment agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870. In any suit or action arising thereunder, the burden
of proof shall be on the employee claiming the benefits of its provisions.
B-2
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EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This Agreement is made as of May 29, 1998 between MONITOR AEROSPACE
CORPORATION, a New York corporation ("Monitor"), located at 1000 New Horizons
Boulevard, Amityville, New York 11701 and R. BRUCE ANDREWS ("Executive").
RECITALS:
A. Monitor is engaged in the manufacture and sale of metal components to
the aircraft industry. Executive has served as its President and Chief Operating
Officer since September 28, 1995.
B. Monitor now desires to retain Executive's services as its President and
Chief Executive Officer ("CEO").
TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the mutual promises herein, it is
agreed as follows:
1. Employment and Duties.
(a) During the term of this Agreement, Executive shall serve as
Monitor's President and CEO reporting to Monitor's Chairman of the Board of
Directors ("Chairman") and the Board of Directors (the "Board") or its
designee. Executive shall serve as a member of the Board, and shall serve
on such committees of the Board to which he is nominated and elected.
However, any determinations by the Board under this Agreement affecting the
Executive may be made by the Board excluding the Executive.
(b) Executive shall devote substantially his full working time, skill,
diligence and loyalty to Monitor's business. Executive shall be responsible
for the daily management of Monitor and such other duties as are generally
commensurate with the position
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of President and CEO of comparable companies and as are assigned by the
Chairman or the Board. Executive shall comply with all federal, state and
local laws applicable to his duties.
(c) Executive's place of employment shall be at Monitor's
headquarters, presently in Amityville, New York. However, Executive shall
perform such travel as is reasonably necessary for the performance of his
duties.
2. Term. This Agreement shall be effective as of May 29, 1998 and shall
expire at the close of business on December 31, 2002.
3. Compensation. During the term of this Agreement, Monitor shall
compensate Executive as follows:
(a) Base Salary. Monitor shall pay to Executive a base salary in equal
monthly installments at the annual rate of $450,000, subject to adjustment
as provided in subsection (d) of this Section.
(b) Deferred Compensation. Monitor shall also pay to Executive an
annual supplemental payment toward his retirement of $60,000 on each
November 1 pursuant to the terms and conditions of that certain Salary
Continuation Agreement, dated November 17, 1997, between Monitor and
Executive.
(c) Annual Cash Bonus. Monitor shall pay to Executive an annual cash
bonus, if applicable, in which the amount of such bonus is based on the
attainment of a stated applicable percentage of the Management Plan EBITDA
Target for each fiscal year, as set forth below.
% of Management Plan EBITDA
Bonus Amount Target Attained
------------ ---------------
$0 Less than 110%
$150,000 110%
$500,000 125% or more
2
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If the applicable percentage of the Management Plan EBITDA Target attained by
Monitor for a fiscal year is greater than 110% but less than 125%, then
Executive's annual cash bonus for such fiscal year shall be equal to $150,000
plus $350,000 multiplied by a ratio whose numerator is the number difference
between the actual percentage of the Management Plan EBITDA Target attained by
Monitor for such fiscal year and 110%, and whose denominator is 15.
The bonus amount shall be prorated for fiscal year 1998 and such amount shall
equal seven twelfths (7/12) of the actual bonus amount attained for such fiscal
year.
Fiscal Year Ended Management Plan EBITDA Target
1998 $11,314,000 (for June 1 through December 31, 1998)
1999 }
2000 }
2001 } To be determined as set forth below
2002 }
For fiscal years ending 1999 through 2002, the applicable Management Plan EBITDA
Target for the relevant fiscal year shall be determined by the Board no later
than 30 days after approval by the Board of the budget, annual business plan,
and plan and financial forecast for such fiscal year.
As used herein, "EBITDA" shall mean, for any period, determined for Monitor
and its direct and indirect subsidiaries on a consolidated basis in conformity
with United States generally accepted accounting principles ("GAAP")
consistently applied (i) the sum of the amounts for such period of (A) net
income (i.e., the net earnings or loss after taxes), (B) depreciation and
amortization expense, (C) interest expense, (D) federal, state, local and
foreign income taxes, and (E) the management fees (exclusive of expenses) of
Mentmore
3
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Holdings Corporation paid by or allocated to the Corporation in excess of $1
million annually (for the fiscal year ending December 31, 1998 such $1,000,000
amount shall be deemed to be $583,333 for purposes of these calculations), minus
(ii) extraordinary items or non-recurring gains plus (iii) non-recurring losses.
EBITDA shall be determined after full accrual for all incentive and bonus
program amounts. The Board of Directors may, in its sole discretion, consider
other appropriate adjustments to EBITDA.
The Board shall review the amount of each annual cash bonus and, in its
sole discretion, may add to the bonus such discretionary amount as it may deem
appropriate.
The annual cash bonus shall be paid to Executive within 30 days after the
filing of the Stellex Industries, Inc. Form 10-K, but not later than 120 days
after the end of the applicable fiscal year.
(d) Review. Executive shall be entitled to annual progress reviews and a
compensation review prior to the end of each calendar year during the term of
this Agreement. Each increase in base salary, if granted, at the sole discretion
of Monitor, shall be substituted for the base salary provided in subsection (a)
of this Section. Executive's base salary shall not be reduced during the term of
this Agreement below the amount provided in subsection (a) of this Section, as
so adjusted, without Executive's written consent.
(e) Benefits and Perquisites. Executive shall be entitled to the general
employee benefits and perquisites furnished by Monitor to all of its officers
which shall include, without limitation, an office, secretarial services, and
professional association membership dues. Executive shall also be entitled to
participate in the retirement, insurance and other employee benefit programs
generally available to salaried employees of Monitor, provided that he meets the
general eligibility requirements for such programs. A schedule of such employee
benefit programs currently in effect is attached as Exhibit A to this Agreement.
Monitor agrees that the schedule of benefits will not be materially reduced as
to Executive during the term of this Agreement unless similar reductions are
made for Monitor's other
4
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executive officers generally. An executive officer shall mean the CEO,
President, any Executive Vice Presidents, and any Vice Presidents or other
officers having significant policy making functions.
(f) Vacation. Executive shall be entitled to paid vacation of four weeks
during each calendar year. Such vacation shall be taken at times consistent with
the proper performance by the Executive of his duties and responsibilities.
Vacation not taken in any calendar year shall not carry forward to any future
year unless such vacation is not taken due to Monitor's business needs.
(g) Travel. Monitor shall reimburse Executive for his ordinary and
necessary business class travel, entertainment and other business expenses upon
presentation of proper vouchers and receipts.
(h) Club Membership. Monitor shall reimburse Executive for his membership
dues in one golf club or similar athletic or social organization.
(i) Automobile. Executive is currently provided an automobile for business
use with a selling price under $100,000. Upon expiration of three (3) years from
the date of receipt of such automobile for business use by Executive, Executive
will be permitted at the termination of the lease at his cost to purchase the
automobile from the lessor, and to select a replacement automobile for business
use which has a selling price under $100,000. Monitor will lease same for
Executive's business use and shall pay all lease payments as well as expenses
for fuel, repairs and insurance. After three years of use, Executive will select
a similar replacement automobile.
(j) It is understood and agreed that certain benefits and the payment or
reimbursement of certain expenses by Monitor under this Section may constitute
additional compensation income to Executive subject to income tax, including
withholding tax, and that he will include any such income in his gross income
for income tax purposes without reimbursement from Monitor for the resulting
tax.
5
<PAGE>
4. Termination.
(a) Termination by Executive. Executive's employment shall terminate upon
voluntary resignation (including retirement) by Executive, or the Executive may
terminate his employment for Good Reason. "Good Reason" shall mean any of the
following: (1) the assignment of duties to the Executive inconsistent with that
of Chief Executive Officer and President of Monitor, (2) the changing of the
Executive's reporting responsibility from the Chairman of the Board of Monitor
to anyone other than a Senior Executive of another corporation controlled by or
affiliated with Monitor's parent corporation, (3) a material and permanent
increase or decrease in the Executive's duties and responsibilities from those
at the date hereof, (4) the change of the Executive's principal place of
business to a location other than in New York State, Connecticut or New Jersey
or (5) the Corporation's material breach of any of its obligations under this
Agreement.
(b) Death or Disability. Executive's employment shall terminate
automatically upon Executive's death. If the Board determines that the
Disability of Executive has occurred (pursuant to the definition of Disability
set forth below), it may terminate Executive's employment by giving written
notice. For purposes of this Agreement, "Disability" shall mean the disability
of the Executive such that he is, in the opinion of Monitor, as determined by a
resolution of the Board based upon the report of an independent medical expert
retained by the Board, physically or mentally incapacitated and thereby rendered
incapable of adequately performing the duties of his position with Monitor or
its direct or indirect subsidiaries, as applicable, for a period of 180
consecutive days.
(c) Cause. Monitor may terminate Executive's employment for Cause. For
purposes of this Agreement, "Cause" shall be determined by the Board based upon
the information then known to Monitor, and shall mean any of the following: (i)
Executive's material breach of any of his obligations under this Agreement; (ii)
Executive's development or pursuit of interests adverse to Monitor or any of its
direct or indirect subsidiaries;
6
<PAGE>
(iii) Executive's refusal to obey lawful written instructions given by Monitor's
Chairman of the Board or Monitor's Board as to the performance of Executive's
duties as CEO and President; (iv) Executive's willful misconduct, dishonesty,
gross negligence, theft, fraud or other illegal conduct; or (v) Executive's
violation of any fiduciary duty or duty of loyalty to Monitor; provided,
however, in the case of purported termination of the Executive's employment for
the reasons set forth in (i) or (iii) above, such termination shall not become
effective until the Executive has been given fifteen (15) days notice of such
termination and during such period be given an opportunity to cure the acts
giving rise to such termination.
(d) Other than Cause or Death or Disability. Monitor may terminate
Executive's employment at any time without cause.
(e) Obligations of Monitor Upon Termination.
(i) Termination by Executive. If Executive's employment is terminated by
Executive, other than for termination by the Executive for Good Reason this
Agreement shall terminate without further obligations to Executive other than
for (A) payment of the sum of (1) Executive's annual base salary through the
date of termination to the extent not theretofore paid and (2) any compensation
previously deferred by Executive (together with any accrued interest or earnings
thereon) and any accrued and unused vacation pay during the calendar year of
Executive's termination, in each case to the extent not theretofore paid, which
shall be paid to Executive or his estate or beneficiary, as applicable, in a
lump sum in cash within 30 days of the date of termination; and (B) payment of
benefits to Executive or his estate or beneficiary, if applicable, as may be
provided by the terms and conditions of Monitor's retirement, life insurance and
other programs in which Executive is participating on the date of his
termination and which have accrued and vested on or before such date and which
shall terminate on the date of such termination (the sum of the amounts
described in clauses (A) and (B) shall be hereinafter referred to as the
"Accrued Obligations").
7
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(ii) Death or Disability. If Executive's employment is terminated by reason
of Executive's death or Disability, this Agreement shall terminate without
further obligations to Executive or his legal representatives under this
Agreement, other than for timely payment of Accrued Obligations.
(iii) Cause. If Executive's employment is terminated by the Monitor for
Cause, this Agreement shall terminate without further obligations to Executive
other than for the timely payment of Accrued Obligations. If it is subsequently
determined that Monitor did not have Cause for termination under this Section,
then Monitor's decision to terminate shall be deemed to have been made under
Section 4(e)(iv) and the amounts payable thereunder shall be the only amounts
Executive may receive for his termination.
(iv) Other than Cause or Death or Disability or for Good Reason. If Monitor
terminates Executive's employment other than for Cause or for death or
Disability or if the Executive terminates his employment for Good Reason, this
Agreement shall terminate without further obligations to Executive other than
(A) the timely payment of Accrued Obligations; (B) continuation of Executive's
base salary for six (6) months; (C) continuation of coverage under Monitor's
life, health and other insurance programs in which he is participating on the
date of termination for six (6) months, but in no case beyond age 60; and (D)
the reimbursement of any out-of-pocket relocation costs which Executive may
incur up to a total of $5,000 if it should be necessary to relocate to obtain
new employment.
(v) Exclusive Remedy. Executive agrees that the payments contemplated by
this Agreement shall constitute the exclusive and sole remedy for any
termination of his employment and Executive covenants not to assert or pursue
any other remedies, at law or in equity, with respect to any termination of
employment.
8
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5. Confidentiality and Proprietary Information.
(a) Executive shall not disclose the existence or terms of this Agreement
to any persons except the Chairman and the Board and its chief financial
officer, auditors and counsel and to Executive's own personal financial advisor,
accountant, counsel and family.
(b) Executive, in the performance of Executive's duties on behalf of
Monitor, shall have access to, receive and be entrusted with confidential,
proprietary information, including but in no way limited to inventions,
improvements, technical developments, trademarks, designs, formulae, processes,
computer programs, know-how, techniques, data, trade secrets, discoveries,
copyrightable works, financial data, and other information or documents
regarding the business or technology of Monitor, including but not limited to
drawings, computer programs or portions thereof, computer data, blueprints,
process specifications, customer lists, price data, relationships with
employees, manner of operations, business plans, and other company documents
owned or at any time in the future developed, by Monitor or its agents or
consultants, or used presently or at any time in the future in the course of its
business that is not otherwise part of the public domain (collectively, the
"Proprietary Information"). All such Proprietary Information is considered
secret and will be available to Executive in confidence. Except in the
performance of duties on behalf of Monitor, Executive shall not, directly or
indirectly for any reason whatsoever, disclose or use any such Proprietary
Information, unless such Proprietary Information ceases (through no fault of
Employee's) to be confidential because it has become part of the public domain.
All records, files, drawings, documents, equipment and other tangible items,
wherever located, relating in any way to the Proprietary Information or
otherwise to Monitor's business, which Executive prepares, uses or encounters,
shall be and remain Monitor's sole and exclusive property and shall be included
in the Proprietary Information; provided, however, nothing herein shall be
deemed to prevent Executive from using his general experience and skills nor
9
<PAGE>
from using any information in the public domain after termination of his
employment. Upon termination of this Agreement by any means, or whenever
requested by Monitor, Executive shall promptly deliver to Monitor any and all of
the Proprietary Information, not previously delivered to Monitor, that may be or
at any previous time has been in Executive's possession or under Executive's
control.
(c) Executive hereby acknowledges that the sale or unauthorized use or
disclosure of any of Monitor's Proprietary Information by any means whatsoever
and any time before, during or after Executive's employment with Monitor shall
constitute "Unfair Competition." Executive agrees that Executive shall not
engage in Unfair Competition either during the time employed by Monitor or any
time thereafter.
6. Ownership and Assignment of Proprietary Information. The Proprietary
Information and any specific business opportunity, invention, improvement,
design, development or discovery conceived or developed during the term of this
Agreement by Executive, alone or with others, which is directly related to the
business or planned business of Monitor, whether or not patentable or
registrable and whether or not conceived or developed during normal working
hours or while using the facilities of Monitor shall, to the extent of
Executive's interest therein, be the sole and exclusive property of Monitor.
Executive shall disclose the same promptly and completely to Monitor and shall,
during the period of his employment and at any time and from time to time
thereafter (a) execute all documents required by Monitor for vesting in Monitor,
Executive's entire right, title and interest in and to the same, (b) execute all
documents requested by Monitor for filing and prosecuting such applications for
patents, trademarks and/or copyrights as Monitor may desire to prosecute, and
(c) give Monitor all assistance it reasonably requires, including the giving of
testimony in any suit, action or proceeding, in order to obtain, maintain and
protect Monitor's rights thereto.
7. Noncompetition. During the term of Executive's employment with Monitor,
Executive shall not engage directly or indirectly in any business in competition
with
10
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any business in which Monitor, or its subsidiaries or affiliates is engaged or
is planning to engage 1i and which business relates to the manufacture, design,
or assembly of structural or electronic components used by the
telecommunications, space, aerospace or defense industries (collectively, the
"Prohibited Business"). In addition, for one year after he ceases to be employed
by Monitor, Executive shall not engage directly or indirectly in any Prohibited
Business. Direct competition shall include, without limitation, any role as a
sponsor, consultant, employee or partner which aids or abets any Prohibited
Business. Executive further acknowledges that competitive activities in
violation of this Section could cause irreparable injury to Monitor, its
subsidiaries, or affiliates and that such injury would be difficult or
impossible to measure. Accordingly, Monitor shall be entitled to an injunction
and other equitable remedies for any violation, as further set forth in Section
9.
8. Antisolicitation.
(a) Executive promises and agrees that during the term of this Agreement,
and for a period of one (1) year after the termination of this Agreement, he
will not solicit or attempt to solicit customers of Monitor or any of its
present or future subsidiaries, affiliates or parent companies, either directly
or indirectly, to divert their business to any individual, partnership, firm,
corporation or other entity engaged in any Prohibited Business.
(b) Executive promises and agrees that he will not, for a period of one (1)
year following termination of his employment or the expiration of this
Agreement, directly or indirectly solicit any of Monitor's employees who earned
annually $50,000 or more as a Monitor employee during the last six months of his
or her own employment to work for any business, individual, partnership, firm,
corporation, or other entity engaged in any Prohibited Business.
9. Remedies. It is expressly agreed that Monitor will or would suffer
irreparable injury if Executive were to engage in any conduct or commit any act
in violation of
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Sections 5, 6, 7 and/or 8, and Monitor would by reason of such violation be
entitled to injunctive relief in a court of appropriate jurisdiction. Executive
consents and stipulates to the entry of such injunctive relief in such a court
prohibiting him from engaging in any action in violation of this Agreement,
which relief shall be cumulative to other remedies at law or in equity and shall
not be construed as an exclusive remedy.
10. Indemnification. Monitor shall indemnify the Executive against all
liability, costs and expenses actually and necessarily incurred by the Executive
in connection with any suit, action or claim in which the Executive is a party
or otherwise involved in any capacity (other than a suit, action or claim by or
in the right of Monitor and approved by its Board) by reason of his employment
or service as a director, officer or agent of Monitor, provided that (a)
Executive was not grossly negligent or reckless; (b) Executive had reasonable
cause to believe his conduct was lawful and in the best interests of Monitor;
and (c) Executive's actions were performed in the course of his employment
duties. Expenses incurred in appearing at or participating in any such suit,
action or claim, whether civil, criminal, administrative or investigative, shall
be paid or reimbursed by Monitor as incurred in advance of final disposition of
such suit, upon receipt of an unsecured written contractual undertaking by the
Executive to reimburse or repay such amount if it is determined that Executive
is not entitled to be indemnified by the terms of this Section.
11. Entire Agreement. This Agreement constitutes the entire agreement
between Monitor and Executive respecting the subject matter hereof and
supersedes any prior employment agreements respecting the subject matter hereof.
By execution of this Agreement, any and all prior employment agreements between
Executive and Monitor and its direct or indirect subsidiaries and affiliates, as
applicable, shall immediately be terminated, and Monitor and its direct and
indirect subsidiaries and affiliates, as applicable, shall have no further
obligations or liabilities under such prior employment agreements. No amendment
or
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modification hereof shall be valid or binding unless made in writing signed by
Monitor and Executive.
12. Notices. Any notice required, permitted or desired to be given pursuant
to this Agreement shall be deemed sufficiently given if delivered in person or
sent by certified mail, return receipt requested, postage and fees prepaid to
any party at their addresses stated in this Agreement. Notwithstanding the
above, notice to Monitor shall be sent c/o Mentmore Holdings Corporation, 1430
Broadway, 13th Floor, New York, New York 10018; and a copy of notice to the
Executive shall be sent to Steven J. Levitt, Esq. c/o Levitt & Cohen, 2 Hillside
Avenue, Building F, Williston Park, N.Y. 11596. Any of the parties may change
the address to which notice shall be sent by notice to the other parties given
under this Section. The date of the giving of any notice sent by mail shall be
two days after the date of the posting in the mail.
13. Assignment. This Agreement calls for personal performance by Executive.
Neither this Agreement nor the right to receive any payments hereunder may be
assigned by Executive without the prior written consent of Monitor and any
attempted assignment shall be void. This Agreement shall be binding upon
Executive and his heirs, successors, executors and administrators and upon
Monitor and successors and assigns.
14. Waiver. No course of dealing nor any delay in exercising any rights
hereunder shall operate as a waiver of any such rights. No waiver of any default
or breach shall be deemed a continuing waiver or a waiver of any other breach or
default.
15. Governing Law. The validity, interpretation, performance and
enforcement of this Agreement shall be governed by the internal law of the State
of New York, with the counties of Nassau and New York having exclusive
jurisdiction hereof.
16. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions of this
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<PAGE>
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. In the event that a court of competent jurisdiction
determines that any provision or portion of this Agreement is unreasonable,
arbitrary, against public policy or otherwise unenforceable, such court shall
enforce such provision to the extent the court determines reasonable or in
accordance with public policy and to the maximum extent enforceable by law.
17. Survival. The provisions of Sections 4(e)(iv) and (v), 5, 6, 7, 8, 9
and 10 shall survive the termination of this Agreement regardless of the reason
or reasons therefor.
18. Nothing herein shall affect or otherwise limit Executive's rights and
duties under the Agreement and Plan of Merger dated April 28, 1998 among Monitor
Aerospace Corporation, Stellex Aerospace Holdings, Inc. and Soze Corp. and the
agreements related thereto.
IN WITNESS WHEREOF, the parties have signed this Agreement on the day and
year first above written.
MONITOR AEROSPACE CORPORATION
R. Bruce Andrews By: William L. Remley
- - ---------------------------- ---------------------------------
R. Bruce Andrews Name: William L. Remley
Title: Vice Chairman
14
<PAGE>
EXHIBIT A
SCHEDULE OF EMPLOYEE BENEFITS PROGRAMS
Executive Benefit Package:
Medical coverage: CIGNA Medical Executive Plan (MERPS)
100% medical/dental coverage
Group Life Insurance: $75,000
KeyMan Life Insurance: $600,000
Special Life Benefit: 2 years base salary payable over 5 years
(company funded) according to the Plan
adopted by the board of directors
Salary Continuance Income: Yes (6 mos. S.T. D.B. - company funded)
Group LTD: $3,500/MO
Individual LTD Policy: 40% of base compensation, less amounts
provided by social security benefits
401(k) Plan: To the extent available to other employees
15
<PAGE>
SALARY CONTINUATION AGREEMENT
This Agreement, made and entered into as of the 17th day of November, 1997,
by and between MONITOR AEROSPACE CORPORATION, a New York corporation, with
principal offices and place of business in the State of New York (hereinafter
referred to as the "Corporation") and R. BRUCE ANDREWS, (hereinafter referred to
as the "Employee").
WHEREAS, the Employee is employed by the Corporation; and
WHEREAS, the Corporation recognizes the value of the service performed by
the Employee and wishes to encourage his continued employment; and
WHEREAS, the Employee wishes to be assured that he will be entitled to a
certain amount of additional compensation for some definite period of time from
and after his retirement from active service with the Corporation and his
beneficiary will be entitled to a death benefit from and after the Employee's
death, either while in the employ of the Corporation or within ten (10) years
after his retirement from the service of the Corporation; and
WHEREAS, the parties hereto wish to provide the terms and conditions upon
which the Corporation shall pay such additional compensation to the Employee
after his retirement, or death benefits to his beneficiary after the Employee's
death; and
WHEREAS, the parties hereto intend that this Agreement be considered an
unfunded arrangement, maintained primarily to provide deferred compensation
benefits for the Employee, who is a member of a select group of management or
highly compensated employees of the Corporation, for purposes of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA");
NOW THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the parties hereto agree as follows:
<PAGE>
1. DEFINITION OF TERMS.
(i) Accrued Benefit: Upon a termination of employment with the Corporation
(x) for any reason other than death, the Employee's Accrued Benefit shall
be equal to the total cash value which would have accumulated in a variable
universal life insurance policy issued by Penn Mutual Life Insurance Company,
if:
(a) such policy had been issued on the life of the Employee on the
Effective Date;
(b) On November 17th of each year beginning on the Effective Date, the
Corporation had paid a premium of $60,000 on such policy until the earlier
of the Employee's (x) termination of employment or (y) attainment of age
65;
(c) the Corporation had kept the policy in full force and effect up to
the date of the Employee's termination of employment without any
withdrawals or loans from the policy by the Corporation; and
(d) the Corporation had liquidated the accumulated cash value of such
policy on the date of such termination of employment.
(y) on account of the Employee's death while in the employment of the
Corporation and prior to the commencement of retirement, disability or
termination benefits, the Employee's Accrued Benefit shall be equal to the total
proceeds which would have been paid on account of the Employee's death from a
variable life insurance policy issued by Penn Mutual Life Insurance Company
assuming:
(a) such policy had been issued on the life of the Employee on the
2
<PAGE>
Effective Date;
(b) on November 17th of each year beginning on the Effective Date, the
Corporation had paid a premium of $60,000 on such policy until the
Employee's death;
(c) the Corporation had kept the policy in full force and effect up to
the date of the Employee's death without any withdrawals or loans from the
policy by the Corporation; and
(d) the Corporation had received payment from the policy immediately
following such Employee's death.
(ii) Cause: Termination of the Employee's employment by the Corporation
shall constitute a termination for "Cause" only if such termination is for one
of the following reasons: (a) conviction of a felony punishable by a prison
sentence of more than one year; (b) habitual use of drugs without a prescription
or habitual use of alcohol to the extent that any of such uses materially
interferes with the Employee's performance of his duties; or (c) prior to a
change in the ownership of 50% or more of the outstanding common stock of the
Corporation pursuant to a merger, consolidation, sale of treasury or newly
issued shares or another transaction having a similar effect, the refusal or
failure by the Employee to perform or discharge duties and responsibilities
appropriate to his position as President which are properly assigned to him by
the Board of Directors of the Corporation, which refusal or failure amounts to
an extended and gross neglect of his duties to the Corporation, provided,
however, that in the case of this clause (c), notice of termination may only be
given after the Employee is given a statement in writing describing in detail
such refusal(s) or failures at least ten (10) days before a duly called meeting
of the Board of Directors of the Corporation at which meeting Employee is
offered the opportunity to be present, and if present, is given the opportunity
to respond to the same.
(iii) Disability: Disability means a physical or mental illness or
incapacity which renders the Employee incapable of performing the duties of the
Employee's employment and which
3
<PAGE>
can be expected to result in death or to be of long-continued duration, as
determined by the Board of Directors of the Corporation on the basis of evidence
furnished by a licensed physician acceptable to it.
(iv) Effective Date: November 17, 1997
(v) Vested Accrued Benefit: Before the Employee attains age 65, the
Employee's Vested Accrued Benefit shall be equal to the sum of: (1) one-third
(1/3) of his Accrued Benefit on his employment termination date (the "VAC
Amount"), plus (2) two-thirds (2/3) of his Accrued Benefit on his employment
termination date multiplied by his Vested Percentage at his employment terminate
date. Upon the Employee attaining age 65, the Employee will be fully vested in
his Accrued Benefit.
(vi) Vested Percentage. The Employee's Vested Percentage shall be
determined in accordance with the following schedule:
Completed Years
of Vesting Service Vested Percentage
------------------ -----------------
Less than 2 0%
2 10
3 20
4 55
5 100
(vii) Vesting Service: Vesting Service means the Employee's period(s) of
employment with the Corporation measured from the Effective Date to the date the
Employee retires or terminates employment with the Corporation. Vesting Service
shall include the period of any absence, including, but not limited to, a leave
of absence authorized by the Corporation, an absence due to Disability, or
military leave, prior to termination of his employment with the Corporation.
4
<PAGE>
2. BENEFIT PAYMENTS UPON TERMINATION OF EMPLOYMENT OR DEATH:
(i) Termination of Employment by Corporation Without Cause: In the
event that the Employee's employment is terminated by the Corporation
without Cause before the Employee has attained age 65, the Corporation
shall pay to the Employee the amount of the Employee's Benefit as of his
termination of employment, in equal monthly installments over a period of
ten (10) years, commencing in the Corporation's sole discretion, either (x)
on the last day of the month following the termination of the Employee's
employment, or (y) on the last day of the month following the Employee's
attainment of age 65, the balance of the Employees Accrued Benefit.
(ii) Termination of Employment by Employee Before Age 65: In the event
of the Employee's termination of employment with the Corporation before he
has attained age 65, for any reason other than Disability, death, by the
Corporation without Cause or for Cause, the Corporation shall pay the
amount of the Employee's Vested Accrued Benefit as of his termination of
employment, in (i) a lump sum within thirty (30) days after such
termination to the extent of the VAC Amount, and (ii) equal monthly
installments over a period of ten (10) years, commencing on the last day of
the month following the Employee's attainment of age 65, the balance of the
Employee's Vested Accrued Benefit.
(iii) Disability: If the Employee's employment with the Corporation is
terminated due to Disability, the Corporation shall pay to the Employee an
amount equal to the Employee's Accrued Benefit as of the date of his
termination of employment, commencing upon the last day of the month in
which the determination of Disability is made, in equal monthly
installments over a period of ten (10) years.
(iv) Retirement: If the Employee's employment with the Corporation is
terminated after the Employee attains age 65, the Corporation shall pay to
the Employee an amount equal to the Employee's Accrued Benefit as of the
date of his termination of employment, in equal monthly installments over a
period of ten (10) years, commencing on the last day of the month following
the termination of Employee's employment.
5
<PAGE>
(v) Termination of Employment by Corporation for Cause: If the
Employee's employment is terminated by the Corporation for Cause, the VAC
Amount shall be paid to the Employee in a lump sum within thirty (30) days
after such termination and no further benefit, whether vested or not
vested, will be payable to the Employee by the Corporation under this
Agreement.
(vi) Death of Employee Prior to Retirement: In the event of the
Employee's death while in the employment of the Corporation, the
Corporation shall pay the amount of the Employee's Accrued Benefit: (a) to
any beneficiary designated in writing by the Employee in accordance with
the provisions of paragraph 4 of this Agreement or, if no such designation
is effective; (b) to the Employee's spouse, provided that she survives the
Employee by at least 24 hours, or (c) if there be no such spouse, to the
Employee's estate. Any such payment(s) to a beneficiary so designated by
the Employee or to the Employee's spouse shall be made in equal monthly
installments over a ten (10) year period. Any such payment to the
Employee's estate shall be made in a lump sum. Once payment to a
beneficiary or spouse has begun, should such beneficiary or the Employee's
spouse die before receiving the full amount of the Employee's Accrued
Benefit, the remainder thereof shall be paid to the successor person or
persons so designated by the Employee in writing or, if no such designation
is effective, in a lump sum to the estate of such deceased beneficiary or
spouse, as the case may be.
(vii) Death of Employee After Payments Have Begun: In the event of the
Employee's death after benefit payments have begun, but prior to the
completion of all such payments due and owing hereunder, the Corporation
shall continue to make such payments in equal monthly installments over the
remainder of the ten (10) year period that would have been applicable had
the Employee survived. Such continuing payments shall be made: (a) to any
beneficiary designated in writing by the Employee in accordance with the
provisions of paragraph 4 of this Agreement or, if no such designation is
effective; (b) to the Employee's spouse, provided that she survives the
Employee by at least 24 hours, or if there be no such spouse; or (c) to the
Employee's estate. Anything herein to the contrary notwithstanding, any
such payment to the Employee's estate shall be made in a lump sum. Once
payments to a beneficiary or spouse have begun, should such
6
<PAGE>
beneficiary or the Employee's spouse die before receiving the full amount
of the Employee's benefit payments hereunder, the remainder thereof shall
be paid to the successor person or persons so designated by the Employee in
writing or, if no such designation is effective, in a lump sum to the
estate of such deceased beneficiary or spouse, as the case may be.
3. OFFSET FOR OBLIGATIONS TO CORPORATION AND WITHHOLDING.
If, at such time as the Employee or his designated beneficiary, spouse or
estate, becomes entitled to benefit payments hereunder, the Employee has any
debt, obligation or other liability owing to the Corporation, the Corporation
may offset the amount owing it against the amount of benefits otherwise
distributable hereunder. The Corporation shall withhold from payments made
hereunder, the amounts, if any, of federal, state and local withholding or other
taxes or withholding items as required by law.
4. BENEFICIARY DESIGNATION.
Subject to compliance with the provisions of ERISA to the extent
applicable, the Employee shall have the right, at any time, to submit a written
designation of primary and secondary beneficiaries to whom payment under this
Agreement shall be made in the event of his death prior to complete distribution
of the benefits due and payable under this Agreement. Each beneficiary
designation shall become effective only when receipt thereof is acknowledged in
writing by the Corporation.
5. NON-COMPETITION.
(a) In consideration of the foregoing agreements of the Corporation and of
the payments to be made by the Corporation pursuant thereto, the Employee hereby
agrees that during the term of Executive's employment with the Corporation and
for one year after he ceases to be employed by the Corporation, Employee shall
not engage directly in competition with the Corporation in any business in which
the Corporation, its subsidiaries or affiliates was engaged or
7
<PAGE>
planning to engage at the time when his employment terminated. Direct
competition shall include, without limitation, any role as a sponsor,
consultant, employee or partner which aids or abets any business to compete
directly or to prepare for direct competition with the Corporation, its
subsidiaries or affiliates in any business in which any of them is engaged or
planning to engage.
(b) In the event of any breach by the Employee of the agreements and
covenants contained herein, the Board of Directors of the Corporation shall
direct that any unpaid balance of any payments to the Employee under this
Agreement be suspended, and shall thereupon notify the Employee of such
suspension, in writing. Thereupon, if the Board of Directors of the Corporation
shall determine that said breach by the Employee has continued for a period of
one (1) month following notification of such suspension, all rights of the
Employee and his beneficiaries under this Agreement, including rights to further
payments hereunder, shall thereupon terminate. The exercise by the Corporation
of any right or remedy under this paragraph shall not be a waiver of or preclude
the exercise of any other right or remedy the Corporation may have against the
Employee, and any forbearance by the Corporation in exercising any right or
remedy hereunder shall not be a waiver of or preclude the later exercise of such
right or remedy.
6. NO TRUST CREATED. Nothing contained in this Agreement, and no action
taken pursuant to its provisions by either party hereto shall create, or be
construed to create, a trust of any kind, or a fiduciary relationship between
the Corporation and the Employee, his designated beneficiary, other
beneficiaries of the Employee or any other person.
7. BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS: UNSECURED GENERAL
CREDITOR STATUS QF EMPLOYEE.
a. The payments to the Employee or his designated beneficiary or any other
beneficiary hereunder shall be made from assets which shall continue, for all
purposes, to be a part of the general, unrestricted assets of the Corporation;
no person shall have any interest in any such assets by virtue of the provisions
of this Agreement. The Corporation's obligation hereunder shall be an unfunded
and unsecured promise to pay money in the future. To the extent that any person
8
<PAGE>
acquires a right to receive payments from the Corporation under the provisions
hereof, such right shall be no greater than the right of any unsecured general
creditor of the Corporation; no such person shall have nor require any legal or
equitable right, interest or claim in or to any property or assets of the
Corporation.
b. In the event that, in its discretion, the Corporation purchases an
insurance policy or policies insuring the life of the Employee (or any other
property), to allow the Corporation to recover the cost of providing benefits,
in whole or in part, hereunder, neither the Employee, his designated beneficiary
nor any other beneficiary shall have any rights whatsoever therein or in the
proceeds therefrom. The Corporation shall be the sole owner and beneficiary of
any such insurance policy and shall possess and may exercise all incidents of
ownership therein. No such policy, policies or other property shall be held in
any trust for the Employee or any other person nor as collateral security for
any obligation of the Corporation hereunder.
8. NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be construed
to be a contract of employment for any term of years, nor as conferring upon the
Employee the right to continue to be employed by the Corporation in his present
capacity, or in any capacity. It is expressly understood by the parties hereto
that this Agreement relates only to the payment of' deferred compensation for
the Employee's services, after termination of his employment with the
Corporation, and is not intended to be an employment contract. Employee and the
Corporation agree that the Employment Agreement dated as of December 1, 1995, as
amended, between the Corporation and the Employee remains in full force and
effect and that this Agreement effectuates, in part, the provisions of the
Employment Agreement.
9. BENEFITS NOT TRANSFERABLE. Except as expressly permitted herein, neither
the Employee, his designated beneficiary, nor any other beneficiary under this
Agreement shall have any power or right to transfer, assign, anticipate,
hypothecate or otherwise encumber any part or all of the amounts payable
hereunder. No such amounts shall be subject to seizure by any creditor of any
such beneficiary, by a proceeding at law or in equity, nor shall such amounts be
transferable by operation of law in the event of bankruptcy, insolvency or death
of the Employee, his designated
9
<PAGE>
beneficiary, or any other beneficiary hereunder. Any such attempted assignment
or transfer shall be void.
10. DETERMINATION OF BENEFITS.
(i) Claim: A person who believes that he is being denied a benefit to which
he is entitled under the Plan (hereinafter referred to as a "Claimant") may file
a written request for such benefit with the Corporation, setting forth his
claim. The request must be addressed to the President of the Corporation at its
then principal place of business.
(ii) Claim Decision: Upon receipt of a claim, the Corporation shall advise
the Claimant that a reply will be forthcoming within ninety (90) days and shall,
in fact, deliver such reply within such period. The Corporation may, however,
extend the reply period for an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Corporation shall adopt a
written opinion, using language calculated to be understood by the Claimant,
setting forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of this Agreement
on which such denial is based;
(c) A description of any additional material or information necessary
for the Claimant to perfect his claim and an explanation why such material
or such information is necessary.
(d) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review; and
10
<PAGE>
(e) The time limits for requesting a review under subsection (iii) and
for review under subsection (iv) hereof.
(iii) Request for Review: Within sixty (60) days after the receipt by the
Claimant of the written opinion described above, the Claimant may request in
writing that the Secretary of the Corporation review the determination of the
Corporation. Such request must be addressed to the Secretary of the Corporation,
at its then principal place of business. The Claimant or his duly authorized
representative may, but need not, review the pertinent documents and submit
issues and comments in writing for consideration by the Corporation. If the
Claimant does not request a review of the Corporation's determination by the
Secretary of the Corporation within such sixty (60) day period, the Claimant
shall be barred and estopped from challenging the Corporation's determination.
(iv) Review of Decision: Within sixty (60) days after the Secretary's
receipt of a request for review, he will review the Corporation's determination.
After considering all-materials presented by the Claimant, the Secretary will
render a written opinion, written in a manner calculated to be understood by the
Claimant, setting forth the specific reasons for the decision and containing
specific references to the pertinent provisions of this Agreement on which the
decision is based. If special circumstances require that the sixty (60) day time
period be extended, the Secretary will so notify the Claimant and will render
the decision as soon as possible, but no later than one hundred twenty (120)
days after receipt of the request for review.
11. AMENDMENT. The Corporation may terminate or amend this Agreement at any
time, except that no such termination or amendment shall adversely affect the
amount previously credited to the account of the Employee hereunder and the
rights of the Employee hereunder with respect to such account.
12. INUREMENT. This Agreement shall be binding upon and inure to the
benefit of the Corporation and its successors and assigns, and the Employee, his
successors, heirs, executors, administrators and beneficiaries. In addition, the
Corporation hereby covenants and agree that it will
11
<PAGE>
not merge, consolidate or reorganize with any other company or organization
unless and until the other company or organization agrees to assume all
obligations of the Corporation hereunder.
13. NOTICE. Any notice, consent or demand required or permitted to be given
under the provisions of this Agreement shall be in writing, and shall be signed
by the party giving or making the same. If such notice, consent or demand is
mailed to a party hereto, it shall be sent by United States certified mail,
postage prepaid, addressed to such party's last known address as show on the
records of the Corporation. The date of such mailing shall be deemed the date of
notice, consent or demand. Either party may change the address to which notice
is to be sent by giving notice of the change of address in the manner aforesaid.
14. GOVERNING LAW. This Agreement, and the rights of the parties hereunder,
shall be governed by and construed in accordance with the laws of the State of
New York.
12
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IN WITNESS WHEREOF, the parties have executed this Agreement, in duplicate,
as of the day and year first above written.
WITNESS: EMPLOYEE:
/s/ /s/ R. Bruce Andrews
- - ------------------------------- -------------------------------
R. BRUCE ANDREWS
- - -------------------------------
(type or print name)
MONITOR AEROSPACE CORPORATION
ATTEST: By: /s/
----------------------------
/s/ Title:
- - ------------------------------- -------------------------
Secretary
- - ------------------------------
<PAGE>
KII HOLDING CORP. 1998 STOCK OPTION PLAN
Section 1. Purpose of the Plan.
KII Holding Corp., a Delaware corporation (the "Corporation"), has
established this KII Holding Corp. 1998 Stock Option Plan. The Plan is intended
to promote the interests of the Corporation by giving eligible persons an Option
to purchase the Corporation's common stock as an incentive for them to remain in
the service of the Corporation. Capitalized terms will have the meanings
assigned to such terms in Section 18.
Section 2. Administration of the Plan.
(a) The Board shall administer the Plan. However, the Board may delegate
any or all of the administrative functions otherwise exercisable by the Board to
such person or persons as it shall designate from time to time. The Board may
also at any time terminate the functions of the person or persons so designated
and reassume all powers and authority previously delegated to such person or
persons.
(b) The Plan Administrator shall have full power and authority to establish
such rules and regulations as it deems appropriate for proper administration of
the Plan and to make such determinations under, and issue such interpretations
of, the Plan and any outstanding Options or stock issuances thereunder as it may
deem necessary or advisable. The Plan Administrator's decisions shall be final
and binding on all parties who have an interest in the Plan or any Option or
stock issuance thereunder.
Section 3. Stock Subject to the Plan; Conversion Feature.
(a) Under the Plan, the Plan Administrator may grant Options to purchase
shares of the Corporation's Class A Common Stock, no par value ("Option Stock").
The maximum number of shares of Option Stock that the Plan Administrator may
issue over the term of the Plan shall not exceed One Thousand Five Hundred
(1,500) shares, subject to adjustment in accordance with Section 10. No Optionee
may receive Options with respect to more than Seven Hundred (700) shares of
Option Stock, subject to adjustment in accordance with Section 10.
(b) In conjunction with an IPO by Stellex Industries, the Options for
Option Stock granted under the Plan may, at the option of the Plan
Administrator, be converted into Options for Common Stock in accordance with the
procedures set forth in paragraph (c) below.
(c) If the Plan Administrator should convert the Options for Option Stock
granted under the Plan into Options for Common Stock in conjunction with an IPO
by Stellex Industries pursuant to Section 3(b), the Plan Administrator will
apply the conversion formula set forth below. The Plan Administrator will
determine the number of shares of Common Stock each Optionee would be entitled
to receive upon exercise of his vested and unvested Options by multiplying the
number of shares of Option Stock covered by such Options by a fraction, the
numerator of which is the Fair Market Value of one share of the Option Stock on
the closing date of the Stellex Industries IPO, and the denominator of which is
the gross price at which one share of Common Stock is sold by Stellex Industries
in its IPO, as follows:
-1-
<PAGE>
Shares of x Fair Market Value of one share of Option Stock
Option Stock ----------------------------------------------
Per Share IPO Price of Common Stock
(d) If a separate IPO is undertaken by the Corporation prior to or
contemporaneously with an IPO by Stellex Industries, the Options granted under
the Plan will remain exercisable for Option Stock. In such event, the Plan
Administrator may make appropriate adjustments to outstanding Options to the
extent and in the manner deemed necessary by the Plan Administrator, whose
determination shall be final, binding and conclusive. Vesting will continue on
the same schedule.
(e) If a separate IPO is undertaken by a corporation in an unbroken chain
of corporations between Stellex Industries and the Corporation (an "Intermediate
Holding Company"), the Plan Administrator may translate unexercised Options into
options on the Intermediate Holding Company's common stock in a manner, and on
such terms and conditions, as the Plan Administrator deems appropriate. The Plan
Administrator's determination in this regard shall be final, binding and
conclusive.
(f) Shares of Option Stock subject to outstanding Options shall be
available for subsequent issuance under the Plan to the extent the Options
expire or terminate for any reason prior to exercise in full. All shares issued
under the Plan, whether or not the Corporation subsequently repurchases those
shares pursuant to its repurchase rights under the Plan, shall reduce on a
share-for-share basis the number of shares of Option Stock available for
subsequent issuance under the Plan.
Section 4. Eligibility.
All Employees of the Corporation are eligible to receive Options under the
Plan. The Plan Administrator, after taking into consideration the
recommendations of the Chief Executive Officer of the Corporation, shall have
full authority to determine which eligible Employees are to receive Option
grants, the time or times when such Option grants are to be made, the number of
shares to be covered by each such grant, the time or times at which each Option
is to become exercisable, the vesting schedule (if any) applicable to the Option
and the maximum term for which the Option is to remain outstanding.
Section 5. Option Terms.
Each Option shall be evidenced by one or more documents in the form
approved by the Plan Administrator, including an Option Agreement; provided,
however, that each such documents shall comply with the terms specified below.
(a) Exercise and Term of Options. The Optionee may exercise a Vested Option
upon the earliest to occur of: (i) a Corporate Transaction with respect to the
Corporation or Stellex Industries, (ii) an IPO by the Corporation or Stellex
Industries or (iii) the date which is 60 days prior to the expiration date of
such Option (as set forth in the Option Agreement relating thereto). Each Option
shall be exercisable at such time or times, during such period and for such
number of shares
-2-
<PAGE>
of Option Stock as the Plan Administrator shall determine and set forth in the
Option Agreement. However, no Option shall have a term in excess of ten (10)
years measured from the Option Grant Date.
(b) Exercise Price. The Plan Administrator will fix the exercise price per
share. The applicable Option Agreement will specify the Option exercise price.
The exercise price will be due upon exercise of the Option and will, subject to
the provisions of this Plan and the Option Agreement, be payable in cash or
check made payable to the Corporation. Should the Option Stock or Common Stock
be registered under Section 12(b) or 12(g) of the 1934 Act at the time the
Option is exercised, then the Optionee may also pay the exercise price as
follows:
(i) in shares of Option Stock or Common Stock, as applicable, held for
the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market Value
on the Exercise Date, or
(ii) through a special sale and remittance procedure pursuant to which
the Optionee concurrently provides irrevocable written instructions to (A)
a brokerage firm designated by the Corporation or Stellex Industries to
effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of
such exercise and (B) the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm to complete the sale.
Except to the extent the Optionee uses the sale and remittance procedure
described in this paragraph, the Optionee must pay the exercise price for the
purchased shares on the Exercise Date. The Corporation's obligation to deliver
purchased shares under the sale and remittance procedure described in this
paragraph shall be conditioned upon receiving sufficient funds to cover the
exercise price and tax withholding obligations described herein.
(c) Vesting. The Option Agreement will specify the vesting schedule
applicable to any Option. The Plan Administrator may provide in the Option
Agreement that Options become fully vested upon the Optionee's death or
Disability. Vesting will not accelerate upon an IPO as to either Stellex
Industries or the Corporation. "Vested Options" shall mean Options with respect
to which an Optionee's right to exercise have vested.
(d) Effect of Termination of Service. The following provisions shall govern
the exercise of any Options held by the Optionee at the time of cessation of
Service or death:
(i) Any Option outstanding at the time of the Optionee's cessation of
Service for any reason shall remain exercisable for such period of time
thereafter as the Plan Administrator shall determine and set forth in the
Option Agreement, but no such Option shall be exercisable after the
expiration of the Option term.
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(ii) Any Vested Options that were exercisable in whole or in part by
the Optionee at the time of death may be exercised subsequently by the
personal representative of the Optionee's estate or by the person or
persons to whom the Option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the Option
may not be exercised in the aggregate for more than the number of Vested
Options for which the Option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the applicable exercise period
or (if earlier) upon the expiration of the Option term, the Option shall
terminate and cease to be outstanding for any Vested Options for which the
Option has not been exercised. However, the Option shall, immediately upon
the Optionee's cessation of Service, terminate and cease to be outstanding
to the extent the Option is not otherwise at that time exercisable for
Vested Options.
(iv) All outstanding Options held by the Optionee, including Vested
Options, will terminate immediately and cease to be outstanding if the
Corporation terminates the Optionee's Service for Misconduct.
(v) The Plan Administrator may provide in the Option Agreement that
all outstanding Options held by the Optionee, including Vested Options,
will terminate immediately and cease to be outstanding if the Optionee
violates certain material conditions of his or her employment or if the
Optionee commits Misconduct, in each case as described in the Option
Agreement.
(e) Stockholder Rights. The holder of an Option shall have no stockholder
rights with respect to the shares subject to the Option until such person shall
have exercised the Option, paid the exercise price and become a holder of record
of the purchased shares.
(f) First Refusal Rights. Until the Common Stock or Option Stock is first
registered under Section 12(b) or 12(g) of the 1934 Act, the Corporation shall
have the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock or Option
Stock issued under the Plan (which right the Corporation may assign to Stellex
Industries). Such right of first refusal shall be exercisable in accordance with
the terms established by the Plan Administrator.
Section 6. Corporate Transaction.
(a) In the event of any Corporate Transaction, the Plan Administrator shall
have the discretion to provide that each outstanding Option shall either (i) be
assumed by the successor corporation (or parent thereof), (ii) be replaced with
a comparable Option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (iii) be replaced with a cash incentive program
of the successor corporation that preserves the spread (i.e., the difference
between the fair value of the underlying shares and the exercise price of such
Option) existing on the unvested Options at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to such Option, (iv) be terminated in exchange for
consideration equal to the difference between the Fair Market Value of a share
of Option Stock at
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the time of the Corporate Transaction and the exercise price per share under
such Option or (v) accelerate the exercisability of such Option. The Plan
Administrator shall determine Option comparability under clause (ii) above, and
its determination shall be final, binding and conclusive.
(b) Immediately following the consummation of the Corporate Transaction,
all outstanding Options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
(c) Each Option that is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities that would have been issuable to
the Optionee in connection with such Corporate Transaction had the Option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to (i) the number and class of securities
available for issuance under the Plan following the consummation of such
Corporate Transaction and (ii) the exercise price payable per share under each
outstanding Option, provided the aggregate exercise price payable for such
securities shall remain the same.
(d) Unless otherwise provided in the applicable Option Agreement, any
Options that are assumed or replaced in the Corporate Transaction and do not
otherwise accelerate at that time shall automatically accelerate and become
fully vested on the six month anniversary of the Corporate Transaction, but only
if (i) the new company still employs the Optionee on that anniversary date; or
(ii) the new company terminates the Optionee's Service by an involuntary
dismissal or discharge for reasons other than Misconduct prior to that
anniversary date. Any Options so accelerated shall remain exercisable until the
earlier of (x) the expiration of the Option term or (y) the expiration of the
one-year period measured from the effective date of the involuntary dismissal or
discharge.
(e) The Plan Administrator shall have the discretion, exercisable either at
the time the Option is granted or at any time while the Option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding Options upon the occurrence of a Corporate Transaction, whether or
not those Options are to be assumed or replaced in the Corporate Transaction.
The Plan Administrator shall also have the discretion to grant Options that do
not accelerate upon a Corporate Transaction.
(f) The grant of Options under the Plan shall in no way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
Section 7. Corporation's Repurchase of Purchased Shares.
(a) Upon (i) the termination of Optionee's employment for any reason, (ii)
the transfer or purported transfer of any Options or Purchased Shares to any
Person who is not at the time of transfer an employee of the Corporation or
(iii) the sale by the Corporation to a third party of the stock or all or
substantially all of the assets of the direct or indirect subsidiary of the
Corporation by which the Optionee is employed, the Corporation shall have the
option (the "Corporation Option"), exercisable at any time after such
termination of employment, transfer or sale, to purchase any or all Purchased
Shares and to terminate all Vested Options not terminated pursuant to Sections
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5 and 6. Each time that the Corporation exercises the Corporation Option, the
Redemption Value of the Optionee's Purchased Shares and Vested Options (less all
applicable Federal, state, local and foreign income and other withholding taxes)
with respect to which the Corporation Option is exercised shall be converted to
a Distribution Account on or before the Settlement Date, and distributed
according to the provisions of this Section. The provisions of this Section 7(a)
shall not apply if the Purchased Shares or the Common Stock or Option Stock, as
the case may be, into which the Vested Options are exercisable or convertible
are registered under Section 12(b) or 12(g) of the 1934 Act and such securities
are listed on a national securities exchange or traded in a national automated
quotation system.
(b) On the Settlement Date, Optionee shall deliver to the Corporation any
Purchased Shares being purchased by the Corporation pursuant to such exercise
free of any liens or encumbrances, and duly endorsed or with duly executed stock
powers.
(c) The Corporation will distribute the amount in a Optionee's Distribution
Account to the Optionee in cash, (i) (A) in thirty-six equal monthly installment
payments (or over such shorter period as may be approved by the Plan
Administrator in its sole discretion), if the amount in the Distribution Account
equals or exceeds $100,000; and (B) in one lump sum, if the amount in the
Distribution Account is less than $100,000; or (ii) over such longer period as
may be required under the terms of the agreements and instruments governing the
indebtedness of Stellex Industries and its Subsidiaries then in effect. Amounts
in the Distribution Account will bear interest from the applicable Settlement
Date until the date of distribution at a rate equal to the rate as of the
Settlement Date on U.S. treasury securities of a similar tenor and maturity, as
determined by the Plan Administrator from publicly available sources.
Notwithstanding the foregoing, the Corporation may, in its sole discretion, at
any time during the installment period, distribute the remaining amount of a
Optionee's Distribution Account in a single lump sum cash payment, plus interest
to the date of payment. The Corporation also may issue a promissory note
evidencing its obligation to pay amounts in the Distribution Account.
(d) Distribution of a Optionee's Distribution Account will commence no
later than 30 days after the Redemption Value has been determined.
(e) If a Optionee dies before complete distribution of his or her
Distribution Account, the remaining value of the Optionee's Distribution Account
will be distributed to the beneficiary designated by the Optionee over the same
period as distributions were being made to the Optionee; except that, the
Corporation may, in its sole discretion, determine to pay the remaining balance
of the deceased Optionee's Distribution Account to the designated beneficiary in
a single lump sum payment at any time. If a Optionee has not designated a
beneficiary under the Plan, or if no designated beneficiary is living on the
date of distribution hereunder, amounts distributable pursuant to this section
will be distributed to the Optionee's estate.
(f) The Corporation shall have the option, exercisable at any time on or
after the six month anniversary of the exercise of any Vested Options, to
purchase any or all Purchased Shares received as a result of such exercise at
the Fair Market Value thereof. The manner in which any such purchase shall be
effected shall be substantially in accordance with the procedures set forth in
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Section 7(b) through Section 7(e), with such changes as the Plan Administrator
shall approve in its sole discretion.
Section 8. Financing.
The Plan Administrator may permit any Optionee to pay the Option exercise
price for shares issued under the Plan by delivering a promissory note payable
in one or more installments. Any obligations arising under such promissory note
shall be full recourse to the Optionee and shall bear a market rate of interest,
determined by the Plan Administrator. The Plan Administrator will establish the
other terms of any such promissory note (including, without limitation, the
terms of repayment) in its sole discretion. The Plan Administrator may authorize
promissory notes with or without security or collateral. In all events, the
maximum credit available to the Optionee may not exceed the sum of (i) the
aggregate Option exercise price plus (ii) any Federal, state and local income
and employment tax liability incurred by the Optionee in connection with the
Option exercise.
Section 9. Effective Date and Term of the Plan.
The Plan shall become effective when adopted by the Board. The Plan shall
terminate upon the earliest of (i) the expiration of the ten-year period
measured from the date the Board adopts the Plan, (ii) the date on which all
shares available for issuance under the Plan shall have been issued pursuant to
the exercise of Options or the issuance of shares (whether vested or unvested)
under the Plan, or (iii) the termination of all outstanding Options in
connection with a Corporate Transaction. Upon such Plan termination, all Options
under the Plan shall continue to have full force and effect in accordance with
the provisions of the documents evidencing such Options or issuances.
Section 10. Adjustments.
Should any change be made to the Option Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Option Stock as a class without the
Corporation's receipt of consideration, the Board may make such adjustments to
(i) the maximum number and/or class of securities issuable under the Plan and
(ii) the number and/or class of securities and the exercise price per share in
effect under each outstanding Option as the Board determines are necessary or
appropriate in its sole discretion. The adjustments determined by the Board
shall be final, binding and conclusive.
Section 11. Amendment of the Plan.
The Board shall have complete and exclusive power and authority to amend or
modify the Plan in any or all respects. However, the Board shall not, without
the approval of the Corporation's stockholders, (i) increase the maximum number
of shares issuable under the Plan, except for permissible adjustments in the
event of certain changes in the Corporation's capitalization, (ii) materially
modify the eligibility requirements for Plan participation or (iii) materially
increase the benefits accruing to any Optionee.
Section 12. Limited Transferability of Options.
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During the lifetime of the Optionee, the Option shall be exercisable only
by the Optionee and shall not be assignable or transferable other than by will
or by the laws of descent and distribution following the Optionee's death. The
terms applicable to the transferred portion shall be the same as those in effect
for the Option immediately prior to such transfer and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.
Section 13. Use of Proceeds.
The Corporation shall use any cash proceeds it receives from the sale of
shares of Option Stock under the Plan for general corporate purposes.
Section 14. Withholding.
The Corporation's obligation to deliver shares of Common Stock or Option
Stock upon the exercise of any Options issued under the Plan or to make any
payment to an Optionee upon the exercise of the Corporation's options pursuant
to Section 7 or in connection with a Corporate Transaction pursuant to Section 6
shall be subject to the satisfaction of all applicable Federal, state, local and
foreign income and employment tax withholding requirements.
Section 15. Regulatory Approvals.
The implementation of the Plan, the granting of any Option under the Plan
and the issuance of any shares of Common Stock or Option Stock upon the exercise
of any Option shall be subject to the Corporation's procurement of all approvals
and permits required by regulatory authorities having jurisdiction over the
Plan, the Options granted under it and the shares of Common Stock or Option
Stock issued pursuant to it.
Section 16. Compliance with Securities Laws.
Unless the Common Stock or Option Stock issuable upon exercise of an Option
is registered under the Securities Act of 1933, as amended (the "Securities
Act"), and the securities laws of other appropriate jurisdictions, (1) the
obligation of Stellex Industries or the Corporation to issue Common Stock or
Option Stock upon exercise of an Option shall be subject to the receipt by the
Plan Administrator of an opinion of counsel to the Corporation that such
issuance would be in compliance with applicable securities laws and receipt from
the Option holder of a written representation to the effect that (A) the Option
holder is purchasing the shares of Common Stock or Option Stock, as applicable,
for his own account for investment, and not with a view to, or for resale in
connection with, the distribution thereof, and has no present intention of
distributing or reselling any thereof, (B) the Option holder has the financial
ability to bear the economic risks of his investment in the shares of Common
Stock or Option Stock to be purchased, (C) the Option holder has such knowledge
and experience in financial and business matters, and knowledge of and
experience with the Corporation, to be capable of evaluating the merits and
risks of the purchase of the shares of Common Stock or Option Stock to be
purchased by him, and (D) such other representations as are necessary or
appropriate to establish an exemption from registration and (2) such Common
Stock or Option Stock shall not be transferable unless an exemption from such
registration is available and, as appropriate, only with a written opinion of
counsel (which shall be satisfactory in form and
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substance to the Corporation) that an exemption from registration under the
Securities Act is available and that the transaction would not violate
applicable securities laws.
Section 17. No Employment or Service Rights.
Nothing in the Plan shall confer upon the Optionee any right to continue in
Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining such person) or of the Optionee, which rights are hereby
expressly reserved by each, to terminate such person's Service at any time for
any reason, with or without cause.
Section 18. Definitions.
The following definitions shall be in effect under the Plan:
Board means the Board of Directors of Stellex Industries or the
Compensation Committee thereof.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the common stock of Stellex Industries, par value $.01
per share.
Corporate Transaction means any of the following:
(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 1934
Act), other than a Subsidiary of Stellex Industries or one or more
Permitted Holders, is or becomes the beneficial owner (as defined in Rules
13d-3 and 13d-5 under the 1934 Act), directly or indirectly, of more than
50% of the total voting stock of the Corporation or Stellex Industries;
(b) any sale, lease exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, of the
assets of the Corporation or Stellex Industries to any "person" or group of
"persons" for purposes of Section 13(d) of the 1934 Act (other than to any
Subsidiary of Stellex Industries or to one or more Permitted Holders); or
(c) the adoption of a plan of liquidation of the Corporation or
Stellex Industries.
Corporation means KII Holding Corp., a Delaware corporation, and any
corporate successor to all or substantially all of the assets or voting
stock of KII Holding Corp. which shall by appropriate action adopt the
Plan.
Disability means the first to occur of the following: (i) the Optionee
satisfies the criteria for "disability" set forth in his or her employment
or similar agreement with the Corporation, if applicable; (ii) the Optionee
is entitled to benefits under the Corporation's group long-term
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disability plan; or (iii) the Plan Administrator, in its sole discretion,
determines that the Optionee is permanently and totally disabled.
Distribution Account means a book keeping account the Corporation
establishes any time that the Corporation exercises the Corporation Option
into which the Corporation credits the Redemption Value of the Optionee's
Purchased Shares and Vested Options (less the applicable Exercise Price for
Vested Options) with respect to which the Corporation Option is exercised.
Employee means any employee, director, consultant or other person who
provides substantial services to the Corporation, subject to the control
and direction of the Corporation as to both the work to be performed and
the manner and method of performance.
Exercise Date means the date on which the Corporation shall have received
written notice of the Option exercise.
Fair Market Value per share of Common Stock or Option Stock on any relevant
date shall be determined in accordance with the following provisions:
(a) If the Common Stock or Option Stock is at the time traded on the
NASDAQ National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock or Option Stock, as applicable on
the date in question, as such price is reported by the National Association
of Securities Dealers, Inc. on the NASDAQ National Market or any successor
system. If there is no closing selling price for the Common Stock or Option
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(b) If the Common Stock or Option Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock or Option Stock on the date in question on
the Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock or Option Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If there is
no closing selling price for the Common Stock or Option Stock on the date
in question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(c) If the Common Stock or Option Stock is at the time neither listed
on any Stock Exchange nor traded on the NASDAQ National Market, then the
Plan Administrator shall determine the fair market value of the Common
Stock or the Option Stock, taking into account a recent opinion thereon by
an Independent Financial Advisor and such other factors as the Plan
Administrator deems appropriate in good faith.
(d) If Stellex Industries sells all of the Corporation's common stock,
Fair Market Value of the Option Stock will be determined by the Plan
Administrator based on the per share net sale price for the common equity
in such sale, determined on a fully diluted basis (counting, for this
purpose, all Option Stock authorized for issuance under the Plan and all
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stock and stock-based awards authorized for issuance under any other plan
relating to the capital stock of the Corporation). The Plan Administrator
may also consider such other factors as it deems appropriate in good faith.
(e) If all or substantially all of the assets of the Corporation are
sold in a transaction or a series of related transactions (an "Asset Sale
Transaction"), the Plan Administrator will determine the common equity
value of the Corporation (on a fully diluted basis counting, for this
purpose, all Option Stock authorized for issuance under the Plan and all
stock and stock-based awards authorized for issuance under any other plan
relating to the capital stock of the Corporation) based on the net sales
price in such Asset Sale Transaction after deducting the total of the
Corporation's debt (including, without limitation, intra-company debt and
the allocable portion of any direct or indirect parent corporation debt and
other obligations and liabilities), preferred equity (including accumulated
dividends thereon) and other obligations and liabilities. The Plan
Administrator will determine the Fair Market Value of the Option Stock
based on the per share amount of such common equity value. The Plan
Administrator may also consider such other factors as it deems appropriate
in good faith.
For the purposes of determining the Fair Market Value per share of Option
Stock pursuant to clauses (c), (d) and (e) above, the Plan Administrator
shall treat all investments (whether in the form of loans, advances,
capital contributions, guarantees or otherwise) in the Corporation made by
Stellex Industries, or any other direct or indirect parent or shareholder
of the Corporation, whether made prior or subsequent to the date hereof, as
debt, unless the Board of Directors of Stellex Industries (or any successor
parent corporation) determines, pursuant to a written resolution, that such
investment shall be treated as something other than debt for purposes of
this Plan. The determination of the Board of Directors of Stellex
Industries pursuant to the preceding sentence shall be final and
conclusive, and shall be determinative notwithstanding the fact that
investments in the Corporation made by Stellex Industries, or any other
direct or indirect parent or shareholder of the Corporation, may be treated
differently for purposes other than the calculation of Fair Market Value
under the Plan.
Grant Date means the date of grant of the Option as specified in the Option
Agreement.
Independent Financial Advisor means a reputable accounting, appraisal or
investment banking firm that is, in the reasonable judgment of the Plan
Administrator, qualified to perform the task for which such firm has been
engaged.
IPO means an initial public offering, pursuant to a registration statement
filed under the Securities Act, of: (i) the Corporation's common stock;
(ii) the Common Stock of Stellex Industries; or (iii) the common stock of
an Intermediate Holding Company.
Misconduct means and shall mean any of the following: (i) Optionee's
material breach of any provision of the Plan or the Option Agreement; (ii)
Optionee's material or repeated failure or neglect to perform the duties of
his position with the Corporation; (iii) Optionee's development or pursuit
of interests adverse to the Corporation or any of its direct or indirect
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subsidiaries or parent companies or their affiliates; (iv) Optionee's
insubordination; (v) Optionee's willful misconduct, dishonesty, gross
negligence, theft, fraud or other illegal conduct; (vi) Optionee's conduct
that reflects adversely upon, or remarks disparaging of, the Corporation,
its Board, officers, directors, advisors or employees or its affiliates or
subsidiaries; (vii) Optionee's violation of any fiduciary duty or duty of
loyalty to the Corporation; (viii) Optionee's material breach of any
employment agreement, confidentiality, invention or disclosure agreement or
any other similar agreement to which he or she is a party with the
Corporation, Stellex Industries, or any of their respective affiliates;
(ix) Optionee's breach of any material policy or condition of employment of
which the Optionee has been notified by the Corporation; (x) Optionee's
violation of any security clearance requirements, confidentiality
requirements or government procedures or regulations in respect of the
foregoing; or (xi) any other material reason that would justify a
reasonably prudent employer in terminating an employee's employment in
similar circumstances. For purposes of this Plan, the Board shall determine
"Misconduct," based upon the information then known to the Board.
1934 Act means the Securities Exchange Act of 1934, as amended.
Option means an opportunity to purchase the Corporation's Class A Common
Stock, which may be converted into an option to purchase Common Stock of
Stellex Industries upon an IPO by Stellex Industries, under certain
circumstances. Options granted under the Plan are not intended to satisfy
the requirements of Code Section 422.
Option Agreement means the written agreement between the Corporation and
the Optionee, which, together with this Plan, contains the terms and
conditions applicable to the Option grant.
Optionee means any person to whom an Option is granted under the Plan.
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).
Plan means the Corporation's 1998 Stock Option Plan, as set forth in this
document.
Plan Administrator means either the Board or such other person or persons
to whom the Board has delegated the responsibility for the administration
of the Plan.
Purchased Shares means shares of Option Stock owned by the Optionee as a
result of his or her exercise of the Option.
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Redemption Value means, (i) as it relates to Purchased Shares, a per share
price of such Purchased Shares, and (ii) as it relates to Vested Options,
the difference between the Option exercise price per share and the per
share price of the Option Stock underlying the Vested Options (in each case
reflecting, for these purposes, all Option Stock authorized for issuance
under this Plan and all stock and stock-based awards authorized for
issuance under any other plan relating to the capital stock of the
Corporation) based on the Fair Market Value thereof determined as of the
date on which the Corporation exercises the Corporation Option.
Service means the provision of services to the Corporation (or any Parent
or Subsidiary) by a person in the capacity of an Employee, a non-employee
member of the board of directors or a consultant or independent advisor,
except to the extent otherwise specifically provided in the documents
evidencing the Option grant or stock issuance.
Settlement Date means a date within 30 days after the last day of the month
in which the Corporation exercises its Corporation Option.
Stellex Industries means Stellex Industries, Inc., a Delaware corporation
and the indirect parent of the Corporation on the effective date of the
Plan.
Stock Exchange means either the American Stock Exchange or the New York
Stock Exchange.
Subsidiary means any corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more total combined voting power of all classes of stock in one of
the other corporations in such chain.
Vested Options means rights to exercise the Option that have vested in an
Optionee pursuant to the Plan and the Option Agreement.
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FORM OF
OPTION AGREEMENT
UNDER THE
KII HOLDING CORP. 1998 STOCK OPTION PLAN
THIS AGREEMENT is dated as of December 31, 1998 (the "Grant Date"), and is
among KII Holding Corp., a Delaware corporation (the "Corporation"), Stellex
Industries, Inc., a Delaware corporation ("Stellex Industries"), and
________________ ("Optionee"), in accordance with the terms of the KII Holding
Corp. 1998 Stock Option Plan (the "Plan"). Capitalized terms used herein and not
otherwise defined shall have the meanings given to such terms in the Plan.
1. Grant of Option. Subject to the terms of this Agreement and the Plan,
the Corporation hereby grants to Optionee a nonstatutory stock option (the
"Option") to purchase _____ shares of the Corporation's Class A Common Stock, no
par value ("Option Stock"), at a price per share (the "Exercise Price") and in
the manner and subject to the conditions hereinafter provided. In conjunction
with an IPO by Stellex Industries, the Plan Administrator may, at its option,
convert the Option into an option to purchase Common Stock pursuant to the
conversion procedures set forth in Section 3 of the Plan.
2. Exercise Price. The Exercise Price shall be $______ per share. In the
event the Plan Administrator applies the conversion feature set forth in Section
3 of the Plan, the Exercise Price shall continue to apply as if the Option
remained exercisable for Option Stock.
3. Term of Option. The Option shall not be exercisable after July 1, 2007
(the "Expiration Date").
4. Vesting of Options. Optionee will become vested in the Option in
installments as follows:
(i) seventeen and one-half percent (17.5%) of the Option granted shall
vest on the date of this Agreement;
(ii) twenty and five-eighths percent (20.625%) of the Option granted
shall vest on December 31, 1999;
(iii) twenty and five-eighths percent (20.625%) of the Option granted
shall vest on December 31, 2000;
(iv) twenty and five-eighths percent (20.625%) of the Option granted
shall vest on December 31, 2001; and
(v) twenty and five-eighths percent (20.625%) of the Option granted
shall vest on December 31, 2002.
Notwithstanding the foregoing: (i) the Option (to the extent it has not
otherwise been terminated) will become fully vested upon the death or Disability
of the Optionee; and (ii) during any period of
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time when the Optionee is not actively at work due to a physical or mental
condition that may result in Disability, the passage of time toward the dates
specified in this Section 4 will be tolled under this Agreement and the Option
vesting schedule described above will be postponed by that period of time.
5. Time of Exercise of Option. The Optionee may exercise the portion of the
Option that has become Vested Options from time to time during the term of the
Option, but only after the earliest to occur of:
(a) an IPO by the Corporation,
(b) an IPO by Stellex Industries,
(c) after a Corporate Transaction, subject to Section 6 of the Plan, or
(d) the date that is 60 days prior to the Expiration Date.
Shares of Option Stock owned by Optionee as a result of his exercise of the
Option shall be referred to herein as "Purchased Shares."
6. Provisions Regarding the Vesting and Forfeiture of Options. Except as
provided below, the Option, except Vested Options, shall terminate upon
Optionee's employment termination for any reason (including, without limitation,
Optionee's resignation or retirement, or at the Corporation's election).
Notwithstanding the foregoing and any provisions of Section 4 to the contrary,
Optionee shall forfeit the Option, including Vested Options, if Optionee commits
Misconduct, effective on the date Optionee commits such Misconduct.
7. Cessation of Service. The option term specified in Section 3 shall
terminate (and the Option shall cease to be outstanding) prior to the Expiration
Date should any of the following provisions become applicable:
(a) Should Optionee cease to remain in Service for any reason (other
than death, Disability or Misconduct) while the Option is outstanding, then
Optionee shall have a period of three months (commencing with the later of
the date of such cessation of Service or the date on which such Option
becomes exercisable) during which to exercise the Vested Options, but in no
event shall the Option be exercisable at any time after the Expiration
Date.
(b) Should Optionee die while the Option is outstanding, then the
personal representative of Optionee's estate or the person or persons to
whom the Option is transferred pursuant to Optionee's will or in accordance
with the laws of descent and distribution shall have the right to exercise
the Option. Such right shall lapse and the Option shall cease to be
outstanding upon the one year anniversary of the later of the date of
Optionee's death or the date on which such Option becomes exercisable, but
in no event shall the Option be exercisable at any time after the
Expiration Date.
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(c) Should Optionee cease Service by reason of Disability while the
Option is outstanding, then Optionee shall have a period of twelve months
(commencing with the later of the date of such cessation of Service or the
date on which such Option becomes exercisable) during which to exercise the
Option. In no event shall the Option be exercisable at any time after the
Expiration Date.
(d) Should Optionee's Service be terminated for Misconduct, then the
Option shall terminate immediately and cease to remain outstanding.
(e) During the post-Service exercise period, the Option may not be
exercised in the aggregate for more than the number of shares of Option
Stock in which Optionee is, at the time of Optionee's cessation of Service,
vested in accordance with the Vesting Schedule. Upon the expiration of such
exercise period or (if earlier) upon the Expiration Date, the Option shall
terminate and cease to be outstanding for any Vested Options for which the
Option has not been exercised. To the extent Optionee is not vested in any
shares of Option Stock at the time of Optionee's cessation of Service, the
Option shall immediately terminate and cease to be outstanding with respect
to those shares.
(f) In the event of a Corporate Transaction, the provisions of Section
6 of the Plan shall govern the period for which the Option is to remain
exercisable following Optionee's cessation of Service and shall supersede
any provisions to the contrary in this paragraph.
8. The Plan. The terms of this Agreement shall be subject to the terms of
the Plan and the terms of any stockholder or voting agreement to which Optionee
is a party from time to time (the "Stockholders' Agreement"). In the case of any
conflict between the terms of this Agreement and the terms of the Plan or a
Stockholders' Agreement, the terms of the Plan or a Stockholders' Agreement
shall control. Capitalized terms will have the meanings assigned to such terms
in the Plan.
9. Conditions. Optionee shall not have any of the rights of a stockholder
with respect to shares until such shares shall be issued or transferred to
Optionee after the exercise of the Option. The following shall be conditions to
the Corporation's obligation to issue or transfer shares to Optionee after the
exercise of the Option: (a) Optionee has paid in full for the shares with
respect to which the Option was exercised; (b) Optionee shall execute an
agreement agreeing to be bound by all of the provisions of the Stockholders'
Agreement; and (c) Optionee shall agree that he is acquiring such shares for
investment with no intention at the time of reselling or otherwise disposing of
all or any part of the same unless the shares are registered under Section 12(b)
or 12(g) of the 1934 Act and are listed on a national securities exchange or
traded in a national automated quotation system.
10. Corporation's Repurchase of Purchased Shares.
(a) Upon (i) the termination of Optionee's employment for any reason, (ii)
the transfer or purported transfer of any Options or Purchased Shares to any
Person who is not at the time of transfer an employee of the Corporation or
(iii) the sale by the Corporation to a third party of the stock or all or
substantially all of the assets of the direct or indirect subsidiary of the
Corporation
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by which the Optionee is employed, the Corporation shall have the option (the
"Corporation Option"), exercisable at any time after such termination of
employment, transfer or sale, to purchase any or all Purchased Shares and to
terminate all Vested Options not terminated pursuant to Sections 6 and 7. Each
time that the Corporation exercises the Corporation Option, the Redemption Value
of the Optionee's Purchased Shares and Vested Options (less all applicable
Federal, state, local and foreign income and other withholding taxes) with
respect to which the Corporation Option is exercised shall be converted to a
Distribution Account on or before the Settlement Date, and distributed according
to the provisions of this Section. The provisions of this Section 10(a) shall
not apply if the Purchased Shares or the Common Stock or Option Stock, as the
case may be, into which the Vested Options are exercisable or convertible are
registered under Section 12(b) or 12(g) of the 1934 Act and such securities are
listed on a national securities exchange or traded in a national automated
quotation system.
(b) On the Settlement Date, Optionee shall deliver to the Corporation any
Purchased Shares being purchased by the Corporation pursuant to such exercise
free of any liens or encumbrances, and duly endorsed or with duly executed stock
powers.
(c) The Corporation will distribute the amount in a Optionee's Distribution
Account to the Optionee in cash, (i) (A) in thirty-six equal monthly installment
payments (or over such shorter period as may be approved by the Plan
Administrator in its sole discretion), if the amount in the Distribution Account
equals or exceeds $100,000; and (B) in one lump sum, if the amount in the
Distribution Account is less than $100,000; or (ii) over such longer period as
may be required under the terms of the agreements and instruments governing the
indebtedness of Stellex Industries and its Subsidiaries then in effect. Amounts
in the Distribution Account will bear interest from the applicable Settlement
Date until the date of distribution at a rate equal to the rate as of the
Settlement Date on U.S. treasury securities of a similar tenor and maturity, as
determined by the Plan Administrator from publicly available sources.
Notwithstanding the foregoing, the Corporation may, in its sole discretion, at
any time during the installment period, distribute the remaining amount of a
Optionee's Distribution Account in a single lump sum cash payment, plus interest
to the date of payment. The Corporation also may issue a promissory note
evidencing its obligation to pay amounts in the Distribution Account.
(d) Distribution of a Optionee's Distribution Account will commence no
later than 30 days after the Redemption Value has been determined.
(e) If a Optionee dies before complete distribution of his or her
Distribution Account, the remaining value of the Optionee's Distribution Account
will be distributed to the beneficiary designated by the Optionee over the same
period as distributions were being made to the Optionee; except that, the
Corporation may, in its sole discretion, determine to pay the remaining balance
of the deceased Optionee's Distribution Account to the designated beneficiary in
a single lump sum payment at any time. If a Optionee has not designated a
beneficiary under the Plan, or if no designated beneficiary is living on the
date of distribution hereunder, amounts distributable pursuant to this section
will be distributed to the Optionee's estate.
(f) The Corporation shall have the option, exercisable at any time on or
after the six month anniversary of the exercise of any Vested Options, to
purchase any or all Purchased Shares
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received as a result of such exercise at the Fair Market Value thereof. The
manner in which any such purchase shall be effected shall be substantially in
accordance with the procedures set forth in Section 10(b) through Section 10(e),
with such changes as the Plan Administrator shall approve in its sole
discretion.
11. No Guaranty of Employment. Nothing herein confers or shall confer on
Optionee any right to continue in the employment of the Corporation nor shall
interfere with the Corporation's right to terminate the employment of Optionee
at any time.
12. Certain Tax Consequences. Optionee acknowledges that the Option granted
hereby is not an incentive stock option for tax purposes and that both the award
of the Option and the exercise thereof may have various tax consequences under
federal and state law. Optionee has discussed such consequences with his
personal tax advisor. Optionee must report the grant of the Option to the
Internal Revenue Service (Internal Revenue Code Reg. ss. 1.61-15(c)) and he may
be required to report to state tax authorities under applicable state law. The
obligation of the Corporation or Stellex Industries to deliver shares of Common
Stock or Option Stock upon the exercise of any Options issued under the Plan, or
to make any payment to an Optionee upon the exercise of the Corporation's
options under Section 10 or in connection with a Corporate Transaction, shall be
subject to the satisfaction of all applicable Federal, state, local and foreign
income and employment tax withholding requirements.
13. Transferability. The Option may be transferred only to the extent
permitted by Section 12 of the Plan.
14. Successors and Assigns. Except to the extent otherwise provided in
Section 14 and Section 12 of the Plan, the provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and Optionee, Optionee's assigns and the legal representatives,
heirs and legatees of Optionee's estate.
15. Compliance with Laws and Regulations.
(a) The exercise of the Option and the issuance of the Common Stock or
Option Stock upon such exercise shall be subject to compliance by the
Corporation (and Stellex Industries) and Optionee with all applicable
requirements of law relating thereto and with all applicable regulations of any
stock exchange (or the NASDAQ National Market, if applicable) on which the
Option Stock or the Common Stock may be listed for trading at the time of such
exercise and issuance.
(b) The inability of the Corporation (or Stellex Industries) to obtain
approval from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Option Stock or Common Stock
pursuant to the Option shall relieve the Corporation of any liability with
respect to the non-issuance or sale of the Option Stock or the Common Stock as
to which such approval shall not have been obtained. The Corporation, however,
shall use its best efforts to obtain all such approvals.
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16. Amendment. The Board shall have complete and exclusive power and
authority to amend or modify the Plan or this Agreement in any or all respects;
provided, however, that no such amendment or modification shall adversely
affect, in any material respect, any rights of the Optionee with respect to
Options granted pursuant to this Agreement, unless the Optionee consents to such
amendment or modification. Notwithstanding the foregoing, the Board shall have
the power and authority to amend or modify the Plan or this Agreement in any
manner (including in a manner that adversely affects the rights of the Optionee
with respect to the Option) if such amendment or modification applies equally to
all holders of options granted under the Plan and is approved by holders of
options representing a majority of the shares of Option Stock or Common Stock
issuable pursuant to options granted under the Plan.
17. Governing Law. The Option shall be exercised in accordance with such
administrative regulations as the Board of Directors of Stellex Industries or
any duly authorized committee shall from time to time adopt. The Option and this
Agreement shall be construed, administered and governed in all respects under
and by the laws of the State of Delaware.
18. Counterparts. This Agreement may be executed in any number of
counterparts, which will individually and collectively constitute one agreement.
[Signature Page Follows]
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WITNESS the due execution hereof as of the date first above written.
OPTIONEE KII HOLDING CORP.
By:
- - ---------------------- ---------------------------------
Its: President
STELLEX INDUSTRIES, INC.
By:
---------------------------------
Its: President
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FORM OF
WARRANT PURCHASE AGREEMENT
WARRANT PURCHASE AGREEMENT (the "Agreement") dated as of December 31, 1998,
by and among KII HOLDING CORP., a Delaware corporation (the "Company"), STELLEX
AEROSPACE HOLDINGS, INC., a Delaware corporation ("Stellex Aerospace"), STELLEX
INDUSTRIES, INC., a Delaware corporation ("Stellex Industries"), and
_______________ (the "Holder").
W I T N E S S E T H:
WHEREAS, the Holder is the owner of ____ shares of the Common Stock, no par
value, of the Company; and
WHEREAS, the Company proposes to issue to the Holder common stock purchase
warrants ("Warrants") to purchase ____ shares of Class B Common Stock, no par
value, of the Company ("Class B Common Stock"), in exchange for the conveyance
to the Company of the ____ shares of Common Stock of the Company owned by the
Holder.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Holder and the
Company, intending to be legally bound, agree as follows:
Article I
Definitions
As used in this Agreement, the following terms shall have the following
respective meanings:
Act. The Securities Act of 1933, as amended.
Affiliate. With respect to any Person, a Person that, directly or
indirectly or through one or more intermediaries, controls, is controlled
by, or is under common control with, such Person. The term "control" as
used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
or policies of such Person, whether through the ownership of voting
securities, by contract, or otherwise.
Agreement. This term is defined in the preamble.
Asset Sale Transaction. This term is defined in the definition of Fair
Market Value.
Board. The Board of Directors of Stellex Industries.
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Business Day. Each day of the week except Saturdays, Sundays, and days on
which banking institutions are authorized by law to close in the State of
New York.
Class A Common Stock. The Class A Common Stock, no par value, of the
Company.
Class B Common Stock. This term is defined in the preamble. Each share of
Class B Common Stock shall be convertible into one share of Class A Common
Stock, subject to the terms and conditions set forth in the certificate of
incorporation of the Company.
Commission. The Securities and Exchange Commission or any successor federal
agency having similar powers.
Common Stock. The Class A Common Stock and/or the Class B Common Stock.
Company. KII Holding Corp. and its successors.
Company Option. This term is defined in Section 5.01.
Corporate Transaction. Any of the following:
(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 1934
Act), other than a Subsidiary of Stellex Industries or one or more
Permitted Holders, is or becomes the beneficial owner (as defined in Rules
13d- 3 and 13d-5 under the 1934 Act), directly or indirectly, of more than
50% of the total voting stock of the Company or Stellex Industries;
(b) any sale, lease exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, of the
assets of the Company or Stellex Industries to any "person" or group of
"persons" for purposes of Section 13(d) of the 1934 Act (other than to any
Subsidiary of Stellex Industries or to one or more Permitted Holders); or
(c) the adoption of a plan of liquidation of the Company or Stellex
Industries.
Distribution Account. A book keeping account the Company establishes any
time that the Company exercises the Company Option into which the Company
credits the Redemption Value of the Purchased Shares and Warrants (less the
applicable Exercise Price for Warrants) with respect to which the Company
Option is exercised.
Exercise Price. The price per share specified in Section 2.03, as adjusted
from time to time pursuant to the provisions of this Agreement.
Expiration Date. This term is defined in Section 2.04.
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Fair Market Value. On any relevant date, the Fair Market Value per Warrant
or share of Common Stock shall be determined in accordance with the
following provisions:
(a) If the Common Stock is at the time traded on the NASDAQ National
Market, then the Fair Market Value of the Common Stock shall be the closing
selling price per share of the Common Stock on the date in question, as
such price is reported by the National Association of Securities Dealers,
Inc. on the NASDAQ National Market or any successor system. If there is no
closing selling price for the Common Stock on the date in question, then
the Fair Market Value of the Common Stock shall be the closing selling
price on the last preceding date for which such quotation exists. If the
Common Stock is at the time traded on the NASDAQ National Market, the Fair
Market Value of a Warrant shall be the Fair Market Value of the Common
Stock underlying such Warrant (as determined pursuant to the preceding two
sentences) less the Exercise Price of such Warrant.
(b) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value of the Common Stock shall be the closing selling
price per share of the Common Stock on the date in question on the Stock
Exchange determined by the Board to be the primary market for the Common
Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value of the
Common Stock shall be the closing selling price on the last preceding date
for which such quotation exists. If the Common Stock is at the time listed
on any Stock Exchange, the Fair Market Value of a Warrant shall be the Fair
Market Value of the Common Stock underlying such Warrant (as determined
pursuant to the preceding two sentences) less the Exercise Price of such
Warrant.
(c) If the Common Stock is at the time neither listed on any Stock
Exchange nor traded on the NASDAQ National Market, then the Board shall
determine Fair Market Value of the Common Stock and the Warrants, taking
into account a recent opinion thereon by an Independent Financial Advisor
and such other factors as the Board deems appropriate in good faith. The
valuation shall be performed on a going concern basis.
(d) If Stellex Industries sells all of the Common Stock, the Fair
Market Value of the Warrants and the Common Stock will be determined by the
Board based on the per share net sale price for the common equity in such
sale, determined on a fully diluted basis (counting, for this purpose, all
Common Stock authorized for issuance and all stock and stock-based awards
authorized for issuance under any other plan relating to the capital stock
of the Company). The Board may also consider such other factors as it deems
appropriate in good faith.
(e) If all or substantially all of the assets of the Company are sold
in a transaction or a series of related transactions (an "Asset Sale
Transaction"), the Board will determine the common equity value of the
Company (on a fully diluted basis counting, for this purpose, all Warrants
authorized for issuance and all stock and stock-based awards authorized for
issuance under any other plan relating to the capital stock of the Company)
based on the net
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sales price in such Asset Sale Transaction after deducting the total of the
Company's debt (including, without limitation, inter-company debt and the
allocable portion of any direct or indirect parent corporation debt and
other obligations and liabilities), preferred equity (including accumulated
dividends thereon) and other obligations and liabilities. The Board will
determine the Fair Market Value of the Warrants and the Common Stock based
on the per share amount of such common equity value. The Board may also
consider such other factors as it deems appropriate in good faith.
The Fair Market Value of Other Securities will be determined by the Board
in a manner consistent with the principles outlined in paragraphs (a)
through (e) above.
For the purposes of determining the Fair Market Value per share of Common
Stock pursuant to clauses (c), (d) and (e) above, the Plan Administrator
shall treat all investments (whether in the form of loans, advances,
capital contributions, guarantees or otherwise) in the Corporation made by
Stellex Industries, or any other direct or indirect parent or shareholder
of the Corporation, whether made prior or subsequent to the date hereof, as
debt, unless the Board of Directors of Stellex Industries (or any successor
parent corporation) determines, pursuant to a written resolution, that such
investment shall be treated as something other than debt for purposes of
this Agreement. The determination of the Board of Directors of Stellex
Industries pursuant to the preceding sentence shall be final and
conclusive, and shall be determinative notwithstanding the fact that
investments in the Corporation made by Stellex Industries, or any other
direct or indirect parent or shareholder of the Corporation, may be treated
differently for purposes other than the calculation of Fair Market Value
under this Agreement. Notwithstanding the foregoing, the original
investment of $3,131,910 in Common Stock of the Company made by Greystoke
Capital Management Limited LDC, an affiliate of Stellex Industries, shall
continue to be treated as an investment in the Class A Common Stock for the
purposes hereof.
Holder. This term is defined in the preamble.
IPO. An initial public offering, pursuant to a registration statement filed
under the Act, of: (i) Common Stock; (ii) Stellex Stock; or (iii) the
common stock of an Intermediate Holding Company.
Independent Financial Advisor. A reputable accounting, appraisal or
investment banking firm that is, in the reasonable judgment of the Board,
qualified to perform the task for which such firm has been engaged.
Intermediate Holding Company. This term is defined in Section 2.01.
Material Adverse Effect. (i) A material adverse effect upon the business,
operations, properties, assets or condition (financial or otherwise) of the
Company and its Subsidiaries
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taken as a whole or (ii) the material impairment of the ability of the
Company to perform its obligations under this Agreement.
1934 Act. The Securities Exchange Act of 1934, as amended.
Other Securities. Any stock (other than Class B Common Stock) and other
securities of the Company or any other person (corporate or otherwise),
which the Holder at any time shall be entitled to receive, or shall have
received, upon exercise of the Warrants.
Permitted Holders. (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).
Person. This term will be interpreted broadly to include any individual,
sole proprietorship, partnership, joint venture, trust, unincorporated
organization, association, corporation, company, institution, entity,
party, or government (whether national, federal, state, county, city,
municipal, or otherwise, including, without limitation, any
instrumentality, division, agency, body, or department of any of the
foregoing).
Purchased Shares. Warrant Shares owned by the Holder as a result of his
exercise of a Warrant.
Redemption Value. (i) As it relates to Purchased Shares, a per share price
of such Purchased Shares, and (ii) as it relates to Warrants, the
difference between the Exercise Price per share and the per share price of
the Class B Common Stock underlying the Warrants (in each case reflecting,
for these purposes, all Common Stock authorized for issuance and all stock
and stock-based awards authorized for issuance under any benefit plan or
agreement relating to the capital stock of the Company) based on the Fair
Market Value thereof determined as of the date on which the Company
exercises the Company Option.
Registrable Securities. The Warrants and the Warrant Shares; provided that
a security shall cease to be a Registrable Security if and when (i) a
registration statement with respect to such security becomes effective
under the Act and such security is transferred pursuant to such effective
registration statement, (ii) such security is distributed to the public
pursuant to Rule 144 (or any similar provision then in force) under the
Act, (iii) such security is otherwise transferred, if a new certificate or
other evidence of ownership for such security not bearing a legend
restricting further transfer and not subject to any stop transfer order or
other restrictions on transfer is delivered by the Company and subsequent
disposition of such security does not require registration or qualification
of such security under the Act, or (iv) such security ceases to be
outstanding.
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Settlement Date. A date within 30 days after the last day of the month in
which the Company exercises its Company Option.
Stellex Industries. This term is defined in the preamble.
Stellex Stock. This term is defined in Section 2.01.
Subsidiary. Any corporation (other than the Company) in an unbroken chain
of corporations beginning with the Company, provided each corporation
(other than the last corporation) in the unbroken chain owns, at the time
of the determination, stock possessing fifty percent (50%) or more total
combined voting power of all classes of stock in one of the other
corporations in such chain.
Warrants. The warrants defined in the preamble and referred in Section
2.01, dated as of the date hereof, issued to the Holder, and all Warrants
issued upon the transfer or division of, or in substitution for, such
Warrants.
Warrant Shares. Shares of Common Stock or Other Securities issued or to be
issued upon exercise of the Warrants (including, without limitation, any
Class A Common Stock received by the Holder upon the conversion of any
Class B Common Stock issued upon exercise of the Warrants).
Article II
The Warrants
2.01 The Warrants.
(a) The Holder hereby agrees to purchase from the Company, and the Company
hereby agrees to issue to the Holder, Warrants in substantially the form
attached to this Agreement as Annex A to purchase ____ shares of Class B Common
Stock, all in accordance with the terms and conditions of this Agreement. In
consideration for the purchase of the Warrants described in the preceding
sentence, the Holder hereby agrees to convey to the Company a certificate
representing ____ shares of Common Stock of the Company owned beneficially and
of record by the Holder, together with appropriate instruments of transfer.
(b) In conjunction with IPO by Stellex Industries, the Board of Directors
of Stellex Aerospace (or other direct parent corporation of the Company) (the
"SAH Board") may, in its discretion, require the Holder to exercise his warrants
and exchange the shares of Class B Common Stock issued thereunder for shares of
common stock of Stellex Industries, par value $.01 per share ("Stellex Stock"),
in accordance with the procedures set forth in paragraph (c) below.
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(c) If the SAH Board, in its discretion, should require the Holder to
exercise his warrants and exchange the shares of Class B Common Stock issued
thereunder for shares of Stellex Stock in conjunction with an IPO by Stellex
Industries pursuant to Section 2.01(b), the SAH Board will apply the exchange
formula set forth below. The SAH Board will determine the number of shares of
Stellex Stock the Holder would be entitled to receive upon such exchange by
multiplying the number of shares of Class B Common Stock covered by such
exchange by a fraction, the numerator of which is the Fair Market Value of one
share of Class B Common Stock on the closing date of the Stellex Industries IPO,
and the denominator of which is the gross price at which one share of Stellex
Stock is sold by Stellex Industries in its IPO, as follows:
Number of x Fair Market Value of one share of Class B Stock
Shares of -----------------------------------------------
Class B Stock Per Share IPO Price of Stellex Stock
(d) If a separate IPO is undertaken by the Company prior to or
contemporaneously with an IPO by Stellex Industries, the Class B Common Stock
will not be exchangeable for shares of Stellex Stock.
(e) If a separate IPO is undertaken by a corporation in an unbroken chain
of corporations between Stellex Industries and the Company (an "Intermediate
Holding Company"), the SAH Board may require the Holder to exercise the Warrants
and exchange the shares of Class B Common Stock issued thereunder for shares of
the common stock of the Intermediate Holding Company in an equitable manner, and
on such terms and conditions, as the SAH Board deems appropriate. The SAH
Board's determination in this regard shall be final, binding and conclusive.
2.02 Legend. The Company shall deliver to the Holder one or more
certificates representing the Warrants purchased by the Holder pursuant to this
Agreement in such denominations as the Holder requests. Such certificates will
be issued in the Holder's name. It is understood and agreed that the
certificates evidencing the Warrants will bear the following legend:
"THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION
WITH THE DISTRIBUTION HEREOF. THIS WARRANT AND THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE
PLEDGED, SOLD, OFFERED FOR SALE, TRANSFERRED, OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF (A) REGISTRATION UNDER OR EXEMPTION FROM THE ACT AND ALL
APPLICABLE STATE SECURITIES LAWS, AND (B) UNDER CERTAIN CIRCUMSTANCES, IF
REQUESTED BY KII HOLDING CORP. (THE "COMPANY"), AN OPINION OF COUNSEL,
WHICH COUNSEL SHALL BE REASONABLY
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ACCEPTABLE TO THE COMPANY, TO THE EFFECT THAT SUCH TRANSFER DOES NOT
VIOLATE THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS."
"THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE SUBJECT
TO THE TERMS AND PROVISIONS (INCLUDING TRANSFER RESTRICTIONS) OF A WARRANT
PURCHASE AGREEMENT, DATED AS OF DECEMBER 31, 1998, BY AND AMONG THE
COMPANY, STELLEX AEROSPACE HOLDINGS, INC., STELLEX INDUSTRIES, INC. AND THE
HOLDER OF THIS CERTIFICATE (AS SUCH AGREEMENT MAY BE SUPPLEMENTED,
MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME, THE "AGREEMENT"). COPIES
OF THE AGREEMENT ARE AVAILABLE AT THE EXECUTIVE OFFICES OF THE COMPANY."
2.03 Exercise Price. The Exercise Price per share will be $.01 for each
share of Class B Common Stock covered by the Warrants.
2.04 Term of Warrant. The Warrants shall not be exercisable after July 1,
2007 (the "Expiration Date").
2.05 Exercise.
(a) Each of the Warrants may be exercised upon the earliest to occur of:
(i) a Corporate Transaction with respect to the Company or Stellex Industries,
(ii) an IPO by the Company, Stellex Industries or an Intermediate Holding
Company, (iii) the date which is 60 days prior to the Expiration Date. In order
to exercise any Warrant, in whole or in part, the Holder will deliver to the
Company at the address designated by the Company pursuant to Section 6.04, (i) a
written notice of the Holder's election to exercise such Warrant, which notice
will specify the number of Warrant Shares to be purchased pursuant to such
exercise, (ii) payment of the Exercise Price, in an amount equal to the
aggregate purchase price for all Warrant Shares to be purchased pursuant to such
exercise, and (iii) the Warrant. Upon receipt of such notice, the Company will,
as promptly as practicable, and in any event within ten (10) Business Days,
execute, or cause to be executed, and deliver to the Holder a certificate or
certificates representing the aggregate number of full shares of Class B Common
Stock and/or Other Securities issuable upon such exercise, as provided in this
Agreement. The stock certificate or certificates so delivered will be in such
denominations as may be specified in such notice and will be registered in the
name of the Holder. A Warrant will be deemed to have been exercised, such
certificate or certificates will be deemed to have been issued, and the Holder
will be deemed to have become a holder of record of such shares for all
purposes, as of the date that such notice, together with payment of the Exercise
Price and the Warrant, is received by the Company. If the Warrant has been
exercised in part, the Company will, at the time of delivery of such certificate
or certificates, deliver to the Holder a new Warrant evidencing the rights of
the Holder to purchase a number of Warrant Shares with respect to which the
Warrant has not been exercised, which new Warrant will, in all other respects,
be identical with the Warrants, or, at the request of
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the Holder, appropriate notation may be made on the Warrant and the Warrant
returned to the Holder.
(b) Payment of the Exercise Price will be made by company or individual
check or certified or official bank check.
2.06 Taxes. The Company's obligation to deliver shares of Class B Common
Stock or Other Securities upon the exercise of the Warrant or to make any
payment to the Holder upon the exercise of the Company Option pursuant to
Article V or in connection with a Corporate Transaction pursuant to Section 2.10
shall be subject to the satisfaction of all applicable Federal, state, local and
foreign income and employment tax withholding requirements.
2.07 Warrant Register. The Company will, at all times while any of the
Warrants remain outstanding, keep and maintain at its principal office a
register in which the registration, transfer, and exchange of the Warrants will
be provided for. The Company will not at any time, except upon the dissolution,
liquidation, or winding up of the Company, close such register so as to result
in preventing or delaying the exercise or transfer of any Warrant.
2.08 Restriction on Transfer. During the lifetime of the Holder, the
Warrant shall be exercisable only by the Holder and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following the Holder's death. The terms applicable to the transferred portion
shall be the same as those in effect for the Warrant immediately prior to such
transfer and shall be set forth in such documents issued to the assignee as the
Board may deem appropriate.
2.09 Adjustments. Should any change be made to the Common Stock by reason
of any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock
without the Company's receipt of consideration, the Board may make such
equitable adjustments to the number and/or class of securities and the Exercise
Price in effect under each outstanding Warrant as the Board determines are
necessary or appropriate in its sole discretion. The adjustments determined by
the Board shall be final, binding and conclusive.
2.10 Corporate Transaction.
(a) In the event of any Corporate Transaction, the Board shall have the
discretion to provide that each outstanding Warrant shall either (i) be assumed
by the successor corporation (or parent thereof), (ii) be replaced with a
comparable Warrant to purchase shares of the capital stock of the successor
corporation (or parent thereof), or (iii) be terminated in exchange for
consideration equal to the difference between the Fair Market Value of the
Warrants held by the Holder and the aggregate Exercise Price of such Warrants.
The Board shall determine Warrant comparability under clause (ii) above, and its
determination shall be final, binding and conclusive.
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(b) Immediately following the consummation of a Corporate Transaction, all
outstanding Warrants shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof).
(c) Each Warrant that is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities that would have been issuable to
the Holder in connection with such Corporate Transaction had the Warrant been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments, if any, shall also be made to the Exercise Price under each
outstanding Warrant, provided the aggregate Exercise Price payable for such
securities shall remain the same.
(d) The grant of Warrants hereunder shall in no way affect the right of the
Company or Stellex Industries to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
(e) If the Board approves a sale of the Common Stock held, directly or
indirectly, by Stellex Industries to a third party or an affiliated group of
third parties (other than one or more Permitted Holders) (whether by purchase,
merger, consolidation or otherwise), the Holder agrees to sell the Warrants and
any Common Stock or Other Securities owned by the Holder to such third parties,
upon receipt of the Fair Market Value thereof.
(f) In the event of a sale of all or substantially all of the assets of the
Company and its direct and indirect subsidiaries, on a consolidated basis, and
the resulting liquidation of the Company or in the event of a sale of the Common
Stock held, directly or indirectly, by Stellex Industries pursuant to Section
2.10(e) (in each case, other than a sale to one or more Permitted Holders), the
Holder shall receive in exchange for his Warrants, Common Stock and Other
Securities, if any, an amount equal to the Fair Market Value thereof.
2.11 First Refusal Rights. Until the Common Stock or Other Securities is
first registered under Section 12(b) or 12(g) of the 1934 Act, the Company shall
have the right of first refusal with respect to any proposed disposition by the
Holder (or any successor in interest) of any shares of Common Stock or Other
Securities (which right the Company may assign to Stellex Industries). Such
right of first refusal shall be exercisable in accordance with the terms
established by the Board.
2.12 Lost, Stolen, Mutilated, or Destroyed Warrants. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, mutilation,
or destruction of a Warrant, and, in the case of any such loss, theft, or
destruction, upon delivery of a bond of indemnity in such form and amount as is
reasonably satisfactory to the Company or, in the event of such mutilation upon
surrender and cancellation of a Warrant, the Company, without charge to the
Holder, will make and deliver a new Warrant of like tenor in lieu of such lost,
stolen, destroyed, or mutilated Warrant. The affidavit of the Holder setting
forth the fact of loss, theft, or destruction and of his ownership of the
Warrant at the time of such loss, theft, or destruction will be accepted as
satisfactory evidence, and no further indemnity will be required as a condition
to the execution and delivery of a new Warrant,
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other than a written agreement of the Holder (in form reasonably satisfactory to
the Company) to indemnify the Company.
2.13 Stock Legend. The Warrants and the Warrant Shares have not been
registered under the Act or qualified under applicable state securities laws.
Accordingly, unless there is an effective registration statement and
qualification respecting the Warrants and the Warrant Shares under the Act or
under applicable state securities laws at the time of exercise of a Warrant, any
stock certificate issued pursuant to the exercise of a Warrant will bear the
following (or substantially equivalent) legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH THE
DISTRIBUTION HEREOF. THE SHARES REPRESENTED BY THIS CERTIFICATE (A) HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE PLEDGED, SOLD, OFFERED
FOR SALE, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (I)
REGISTRATION UNDER OR EXEMPTION FROM THE ACT AND ALL APPLICABLE STATE
SECURITIES LAWS, AND (II) UNDER CERTAIN CIRCUMSTANCES, IF REQUESTED BY KII
HOLDING CORP. (THE "COMPANY"), AN OPINION OF COUNSEL, WHICH COUNSEL SHALL
BE REASONABLY ACCEPTABLE TO THE COMPANY, TO THE EFFECT THAT SUCH TRANSFER
DOES NOT VIOLATE THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS, AND (B)
ARE SUBJECT TO THE TERMS AND PROVISIONS (INCLUDING TRANSFER RESTRICTIONS)
OF A WARRANT PURCHASE AGREEMENT, DATED AS OF DECEMBER 31, 1998, BY AND
AMONG THE COMPANY, STELLEX AEROSPACE HOLDINGS, INC., STELLEX INDUSTRIES AND
THE HOLDER OF THIS CERTIFICATE (AS SUCH AGREEMENT MAY BE SUPPLEMENTED,
MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME, THE "AGREEMENT"). COPIES
OF THE AGREEMENT ARE AVAILABLE AT THE EXECUTIVE OFFICES OF THE COMPANY."
2.14 Compliance with Securities Laws. Unless the Class B Common Stock or
Other Securities issuable upon exercise of a Warrant is registered under the
Act, and the securities laws of other appropriate jurisdictions, (i) the
obligation of Stellex Industries or the Company to issue Class B Common Stock or
Other Securities upon exercise of a Warrant shall be subject to the receipt by
the Board of an opinion of counsel to the Company that such issuance would be in
compliance with applicable securities laws and receipt from the Holder of a
written representation to the effect that (A) the Holder is purchasing the
shares of Class B Common Stock or Other Securities, as applicable, for his own
account for investment, and not with a view to, or for resale in connection
with, the distribution thereof, and has no present intention of distributing or
reselling any thereof, (B) the Holder has the financial ability to bear the
economic risks of his investment in the shares of Class B Common Stock or Other
Securities to be purchased, (C) the Holder has such knowledge and experience in
financial and business matters, and knowledge of and experience with the
Company, to be capable of evaluating the merits and risks of the purchase of the
shares of Class B Common
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<PAGE>
Stock or Other Securities to be purchased by him, and (D) such other
representations as are necessary or appropriate to establish an exemption from
registration and (ii) such Class B Common Stock or Other Securities shall not be
transferable unless an exemption from such registration is available and, as
appropriate, only with a written opinion of counsel (which shall be satisfactory
in form and substance to the Company) that an exemption from registration under
the Act is available and that the transaction would not violate applicable
securities laws.
Article III
Representations and Warranties
3.01 Representations and Warranties of the Company. The Company represents
and warrants to the Holder that:
(a) The Company and each of its Subsidiaries is a corporation duly
organized and existing and in good standing under the laws of its state of
incorporation and is qualified or licensed to do business in all other
jurisdictions the laws of which require it to be so qualified or licensed
and where the failure to be so qualified or licensed would have a Material
Adverse Effect.
(b) The Company has, and at all times that this Agreement is in force
will have, the right and power, and is duly authorized, to enter into,
execute, deliver and perform this Agreement and the Warrants, and the
officers of Company executing and delivering this Agreement and the
Warrants are duly authorized to do so. This Agreement and the Warrants have
been duly and validly executed, issued, and delivered and constitute the
legal, valid, and binding obligations of the Company, enforceable in
accordance with their respective terms, except to the extent that such
enforceability may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforceability of creditors' rights generally or (b) general principles of
equity.
(c) The execution, delivery, and performance of this Agreement and the
Warrants will not, by the lapse of time, the giving of notice, or
otherwise, constitute a violation of any applicable provision contained in
the certificate of incorporation or bylaws of the Company or contained in
any material agreement, instrument or document to which the Company is a
party or by which it is bound.
(d) As of March 31, 1999, the authorized capital stock of the Company
consists of (i) 15,000 shares of Class A Common Stock, no par value, of
which 8,010 shares are issued and outstanding, (ii) 5,000 shares of Class B
Common Stock, no par value, of which 0 shares are issued and outstanding
and (iii) 500 shares of Preferred Stock, of which 84 shares are issued and
outstanding. 1,870.6 shares of Class B Common Stock are reserved for
issuance upon exercise of the Warrants. All such issued and outstanding
shares have been duly authorized and validly issued, are fully paid and
nonassessable, and have been offered, issued, sold, and delivered by
Company free from preemptive or similar rights and in compliance with
applicable federal and state securities laws.
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<PAGE>
(e) The shares of Class B Common Stock issuable upon exercise of the
Warrants have been duly and validly authorized and reserved for issuance
and, when issued in accordance with the terms of the Warrants, will be
validly issued, fully paid, and nonassessable and free of preemptive or
similar rights.
3.02 Representations and Warranties of the Holder. The Holder represents
and warrants to the Company:
(a) He has the full power and capacity to enter into and perform this
Agreement, and this Agreement constitutes the legal, valid and binding
obligation of the Holder, enforceable in accordance with its terms, except
to the extent that such enforceability may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforceability of creditors' rights generally or (ii) general principles of
equity.
(b) He (i) is an "accredited investor," as that term is defined in
Regulation D under the Act; (ii) has such knowledge, skill, and experience
in business and financial matters, based on actual participation, that he
is capable of evaluating the merits and risks of an investment in the
Company and the suitability thereof as an investment for the Holder and
(iii) has the financial ability to bear the economic risks of his
investment in the Warrants for an indefinite period of time.
(c) He understands that: (i) neither the Warrants nor the Class B
Common Stock issuable thereunder have been registered under the Act, the
California Corporate Securities Law of 1968, as amended ("California
Securities Law"), or any other applicable federal or state securities law;
(ii) the Company will permit transfers of the Warrants and the Class B
Common Stock purchased thereunder only: (1) in accordance with this
Agreement; and (2) when such securities have been registered under the Act
and any other applicable federal or state securities law or when the
proposed transfer does not require any such registration and the Company
has received an opinion of counsel (which opinion and counsel shall be
acceptable to the Company) to such effect; (iii) any transfer made or
purportedly made in violation of the foregoing restrictions shall be null
and void and the Company shall not register or record such attempted
transfer in its books and records.
(d) He is acquiring the Warrants and any securities issuable upon
exercise of the Warrant for investment for his own account and not with a
view to any distribution thereof in violation of applicable securities
laws.
(e) He agrees that the certificates representing the Warrants and any
Warrant Shares will bear the legends referenced in this Agreement, and such
Warrants or Warrant Shares, as the case may be, will not be offered, sold,
or transferred in the absence of registration or exemption under applicable
securities laws.
(f) He is the owner, of record and beneficially, of the ____ shares of
Common Stock being conveyed to the Company pursuant to this Agreement, free
and clear of all liens
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and encumbrances, and is not subject to or bound by any agreement, law or
order that would prevent or prohibit the conveyance of the KII Stock to the
Company in accordance with the terms of this Agreement.
Article IV
Registration Rights
4.01 Incidental Registration. (a) If the Company or Stellex Industries at
any time proposes to register any equity securities of the same class as any
Registrable Securities (other than debt securities which are convertible into
equity securities) under the Act on Forms S-1, S-2 or S-3 (but not Form S-4 or
S-8) or on any other form upon which may be registered securities similar to the
Registrable Securities, it will at each such time give written notice at least
thirty (30) days prior to the filing of the registration statement to the Holder
of its intention so to do. Such notice shall specify the proposed date of the
filing of the registration statement and advise the Holder of his right to
participate therein. Upon the written request of the Holder given not less than
ten (10) Business Days prior to the proposed date of filing set forth in such
notice, the Company will use its best efforts to cause each Registrable Security
which the Company has been requested to register by the Holder to be registered
under the Act, all to the extent required to permit the sale or other
disposition by the Holder of the Registrable Securities so registered.
(b) If, in the opinion of the underwriter or underwriters managing the
public offering which is the subject of a registration pursuant to paragraph (a)
of this Section 4.01 (or in the event that such distribution shall not be
underwritten, in the opinion of an investment banking firm of recognized
standing reasonably acceptable to the Company), the total amount of the
securities to be so registered, when added to the total amount of Registrable
Securities which the Holder has requested to be registered pursuant to paragraph
(a) of this Section 4.01, will exceed the maximum amount of securities of the
Company or Stellex Industries which can be successfully marketed (i) at a price
reasonably related to their then current market value, or (ii) without otherwise
materially and adversely affecting the entire offering, then the Company or
Stellex Industries, as applicable, shall have the right to exclude from such
registration such number of Registrable Securities which it would otherwise be
required to register pursuant to paragraph (a) of this Section 4.01 as is
necessary to reduce the total amount of securities to be so registered to the
maximum amount of securities which can, in the reasonable opinion of the
underwriter or such investment banking firm, be so successfully marketed.
Article V
Company's Repurchase of Purchased Shares.
5.01 Company's Repurchase of Purchased Shares. (a) Upon (i) the termination
of the Holder's employment with the Company or any other subsidiary of Stellex
Industries for any reason, (ii) the transfer or purported transfer of any
Warrants or Purchased Shares to any Person who is not at the time of transfer an
employee of the Company or any other subsidiary of Stellex Industries or (iii)
the sale by the Company to a third party of the stock or all or substantially
all of the assets of the direct or indirect subsidiary of the Company by which
the Holder is employed, the Company
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<PAGE>
shall have the option (the "Company Option"), exercisable at any time after such
termination of employment, transfer or sale, to purchase any or all Warrants or
Purchased Shares. Each time that the Company exercises the Company Option, the
Redemption Value of the Holder's Warrants and Purchased Shares (less all
applicable Federal, state, local and foreign income and other withholding taxes)
with respect to which the Company Option is exercised shall be converted to a
Distribution Account on or before the Settlement Date, and distributed according
to the provisions of this Section 5.01. The provisions of this Section 5.01
shall not apply if the Purchased Shares are registered under Section 12(b) or
12(g) of the 1934 Act and such securities are listed on a national securities
exchange or traded in a national automated quotation system.
(b) On the Settlement Date, the Holder shall deliver to the Company any
Warrants or Purchased Shares being purchased by the Company pursuant to such
exercise free of any liens or encumbrances, and duly endorsed or with duly
executed stock powers.
(c) The Company will distribute the amount in the Holder's Distribution
Account to the Holder in cash, (i) (A) in thirty-six equal monthly installment
payments (or over such shorter period as may be approved by the Board in its
sole discretion), if the amount in the Distribution Account equals or exceeds
$100,000; and (B) in one lump sum, if the amount in the Distribution Account is
less than $100,000; or (ii) over such longer period as may be required under the
terms of the agreements and instruments governing the indebtedness of Stellex
Industries and its subsidiaries then in effect. Amounts in the Distribution
Account will bear interest from the applicable Settlement Date until the date of
distribution at a rate equal to the rate as of the Settlement Date on U.S.
treasury securities of a similar tenor and maturity, as determined by the Board
from publicly available sources. Notwithstanding the foregoing, the Company may,
in its sole discretion, at any time during the installment period, distribute
the remaining amount of the Holder's Distribution Account in a single lump sum
cash payment, plus interest to the date of payment. The Company also may issue a
promissory note evidencing its obligation to pay amounts in the Distribution
Account.
(d) Distribution of the Holder's Distribution Account will commence no
later than 30 days after the Redemption Value has been determined.
(e) If the Holder dies before complete distribution of his Distribution
Account, the remaining value of the Holder's Distribution Account will be
distributed to the beneficiary designated by the Holder over the same period as
distributions were being made to the Holder; except that, the Company may, in
its sole discretion, determine to pay the remaining balance of the deceased
Holder's Distribution Account to the designated beneficiary in a single lump sum
payment at any time. If the Holder has not designated a beneficiary, or if no
designated beneficiary is living on the date of distribution hereunder, amounts
distributable pursuant to this Section will be distributed to the Holder's
estate.
(f) The Company shall have the option, exercisable at any time on or after
the six month anniversary of the exercise of any Warrants, to purchase any or
all Purchased Shares received as a result of such exercise at the Fair Market
Value thereof. The manner in which any such purchase
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shall be effected shall be substantially in accordance with the procedures set
forth in Section 5.01(b) through Section 5.01(e), with such changes as the Board
shall approve in its sole discretion.
Article VI
Miscellaneous
6.01 Integration. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and thereof and supersedes
all previous written, and all previous or contemporaneous oral, negotiations,
understandings, arrangements, and agreements. This Agreement may not be amended
or supplemented except by a writing signed by Company and the Holder.
6.02 Headings. The headings in this Agreement are for convenience and
reference only and are not part of the substance of this Agreement. References
in this Agreement to Sections and Articles are references to the Sections and
Articles of this Agreement unless otherwise specified.
6.03 Severability. The parties to this Agreement expressly agree that it is
not the intention of any of them to violate any public policy, statutory or
common law rules, regulations, or decisions of any governmental or regulatory
body. If any provision of this Agreement is judicially or administratively
interpreted or construed as being in violation of any such policy, rule,
regulation, or decision, the provision, section, sentence, word, clause, or
combination thereof causing such violation will be inoperative (and in lieu
thereof there will be inserted such provision, sentence, word, clause, or
combination thereof as may be valid and consistent with the intent of the
parties under this Agreement) and the remainder of this Agreement, as amended,
will remain binding upon the parties, unless the inoperative provision would
cause enforcement of the remainder of this Agreement to be inequitable under the
circumstances.
6.04 Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration, or other communication be given to or
served upon any of the parties by another, such notice, demand, request,
consent, approval, declaration, or other communication will be in writing and
will be deemed to have been validly served, given or delivered (and "the date of
such notice" or words of similar effect will mean the date) five (5) days after
deposit in the United States mails, certified mail, return receipt requested,
with proper postage prepaid, or upon receipt thereof (whether by non-certified
mail, telecopy, telegram, express delivery, or otherwise), whichever is earlier,
and addressed to the party to be notified as follows:
If to the Holder, at:
------------------------------------
c/o Stellex Aerospace Holdings, Inc.
21550 Oxnard Street, Suite 570
Woodland Hills, California 91367
Facsimile: (818) 710-7807
If to Stellex Aerospace or
the Company, at: c/o Mentmore Holdings Corporation
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1430 Broadway, 13th Floor
New York, New York 10018-3308
Attention: William L. Remley
Michael D. Schenker
Facsimile: (212) 391-1393
with courtesy copy to: Winston & Strawn
200 Park Avenue
New York, New York 10166
Attention: Daniel A. Ninivaggi, Esq.
Facsimile: (212) 294-4700
or to such other address as each party may designate for itself by like notice.
Failure or delay in delivering courtesy copies of any notice, demand,
request, consent, approval, declaration, or other communication to the persons
designated above to receive copies of the actual notice will in no way adversely
affect the effectiveness of such notice, demand, request, consent, approval,
declaration, or other communication.
No notice, demand, request, consent, approval, declaration or other
communication will be deemed to have been given or received unless and until it
sets forth all items of information required to be set forth therein pursuant to
the terms of this Agreement.
6.05 Stockholder Rights. The Holder shall have no stockholder rights with
respect to the shares subject to any Warrant until the Holder shall have
exercised such Warrant, paid the Exercise Price and become a holder of record of
the Purchased Shares.
6.06 Successors. This Agreement will be binding upon and inure to the
benefit of the parties and their respective successors and assigns.
6.07 Remedies. The failure of any party to enforce any right or remedy
under this Agreement, or promptly to enforce any such right or remedy, will not
constitute a waiver thereof, nor give rise to any estoppel against such party,
nor excuse any other party from its obligations under this Agreement. Any waiver
of any such right or remedy by any party must be in writing and signed by the
party against which such waiver is sought to be enforced.
6.08 Amendment. This Agreement and the Warrants may not be amended without
the consent of the Company, Stellex Aerospace, Stellex Industries and the
Holder; provided, however, that the Company, Stellex Aerospace and Stellex
Industries may amend this Agreement and/or the Warrants without the consent of
the Holder: (a) to cure any ambiguity, omission, defect or inconsistency; (b) to
make any change that does not adversely affect, in any material respect, the
rights of the Holder; or (c) to comply with applicable law.
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6.09 Counterparts. This Agreement may be executed in any number of
counterparts, which will individually and collectively constitute one agreement.
6.10 Compliance with Laws and Regulations.
(a) The exercise of the Warrants and the issuance of the Warrant Shares
upon such exercise shall be subject to compliance by the Company and/or Stellex
Industries and the Holder with all applicable requirements of law relating
thereto and with all applicable regulations of any Stock Exchange (or the NASDAQ
National Market, if applicable) on which the Warrant Shares may be listed for
trading at the time of such exercise and issuance.
(b) The inability of the Company, Stellex Aerospace or Stellex Industries
to obtain approval from any regulatory body having authority deemed by the
Company to be necessary to the lawful issuance and sale of any Warrant Shares
pursuant to the Warrants shall relieve the Company, Stellex Aerospace and
Stellex Industries of any liability with respect to the non-issuance or sale of
the Warrant Shares as to which such approval shall not have been obtained. The
Company, Stellex Aerospace and Stellex Industries, however, shall use their
respective best efforts to obtain all such approvals.
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6.11 Governing Law. THIS AGREEMENT AND THE WARRANTS SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF DELAWARE
WITHOUT GIVING EFFECT TO THE CHOICE-OF-LAW RULES THEREOF OR ANY OTHER PRINCIPLE
THAT COULD REQUIRE THE APPLICATION OF THE SUBSTANTIVE LAW OF ANY OTHER
JURISDICTION.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
KII HOLDING CORP.
By:
---------------------------------
Name:
-----------------------------
Title:
---------------------------
STELLEX AEROSPACE HOLDINGS, INC.
By:
---------------------------------
Name:
-----------------------------
Title:
---------------------------
STELLEX INDUSTRIES, INC.
By:
---------------------------------
Name:
-----------------------------
Title:
---------------------------
HOLDER:
By:
---------------------------------
Name:
-----------------------------
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ANNEX A
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ANNEX A
FORM OF WARRANT CERTIFICATE
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH THE
DISTRIBUTION HEREOF. THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE PLEDGED, SOLD, OFFERED
FOR SALE, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (A)
REGISTRATION UNDER OR EXEMPTION FROM THE ACT AND ALL APPLICABLE STATE SECURITIES
LAWS, AND (B) UNDER CERTAIN CIRCUMSTANCES, IF REQUESTED BY KII HOLDING CORP.
(THE "COMPANY"), AN OPINION OF COUNSEL, WHICH COUNSEL SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY, TO THE EFFECT THAT SUCH TRANSFER DOES NOT VIOLATE THE
ACT OR ANY APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE SUBJECT TO THE
TERMS AND PROVISIONS (INCLUDING TRANSFER RESTRICTIONS) OF A WARRANT PURCHASE
AGREEMENT, DATED AS OF DECEMBER 31, 1998, BY AND AMONG THE COMPANY, STELLEX
INDUSTRIES AND THE HOLDER OF THIS CERTIFICATE (AS SUCH AGREEMENT MAY BE
SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME, THE
"AGREEMENT"). COPIES OF THE AGREEMENT ARE AVAILABLE AT THE EXECUTIVE OFFICES OF
THE COMPANY.
WARRANT CERTIFICATE
KII HOLDING CORP.
No. WR- ____ Warrants
Date:
This Warrant Certificate certifies that ____________ or registered assigns,
is the registered holder of ____ Warrants. Each Warrant entitles the owner
thereof to purchase at any time on or after an Exercise Event and on or prior to
the Expiration Date, one (1) fully paid and nonassessable share of Class B
Common Stock, no par value per share (the "Common Stock"), of KII Holding Corp.,
a Delaware corporation (together with its successors, the "Company"), at an
Exercise Price (subject to adjustment) of $.01 per share upon presentation and
surrender of this Warrant Certificate with a form of election to purchase duly
executed and delivery to the Company of the payment of the Exercise Price in the
manner set forth in the Warrant Agreement (as defined below).
<PAGE>
The Warrants are issued pursuant to that certain Warrant Purchase Agreement
(as it may from time to time be amended or supplemented, the "Warrant
Agreement"), dated as of December 31, 1998, by and among the Company, Stellex
Aerospace Holdings, Inc., a Delaware corporation ("Stellex Aerospace"), Stellex
Industries, Inc., a Delaware corporation ("Stellex Industries"), and
____________ (the "Holder"), and are subject to all of the terms, provisions and
conditions thereof, which Warrant Agreement is hereby incorporated herein by
reference and made a part hereof and to which Warrant Agreement reference is
hereby made for a full description of the rights, obligations, duties and
immunities of the Company, Stellex Aerospace, Stellex Industries and the Holder.
Capitalized terms used, but not defined, herein have the respective meanings
ascribed to them in the Warrant Agreement.
The Exercise Price and the number of shares of Class B Common Stock that
may be purchased upon the exercise of the Warrants evidenced by this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment. In conjunction with an IPO by Stellex Industries, the Board of
Directors of Stellex Aerospace, may, in its discretion, require the Holder to
exercise the Warrants and exchange the shares of Class B Common Stock issuable
hereunder for shares of common stock of Stellex Industries, par value $.01 per
share ("Stellex Stock"), in accordance with the procedures set forth in the
Warrant Agreement. Except as otherwise set forth in, and subject to, the Warrant
Agreement, the effective date of this Warrant Certificate is December 31, 1998,
and the Expiration Date of this Warrant Certificate is July 1, 2007.
This Warrant Certificate shall be exercisable, at the election of the
Holder, either as an entirety or in part from time to time (but not, in the case
of any exercise in part, as to a fractional Warrant). If this Warrant
Certificate shall be exercised in part, the Holder shall be entitled to receive,
upon surrender hereof, another Warrant Certificate or Warrant Certificates for
the number of Warrants not exercised. This Warrant Certificate, with or without
other Warrant Certificates, upon surrender in the manner set forth in the
Warrant Agreement, may be exchanged for another Warrant Certificate or Warrant
Certificates of like tenor evidencing Warrants entitling the holder to purchase
a like aggregate number of shares of Common Stock as the Warrants evidenced by
the Warrant Certificate or Warrant Certificates surrendered shall have entitled
the Holder to purchase.
Except as expressly set forth in the Warrant Agreement, the Holder of this
Warrant Certificate shall not be entitled to vote or receive dividends or be
deemed for any purpose the holder of shares of Class B Common Stock or of Other
Securities of the Company or any other Person that may at any time be issued
upon the exercise hereof, nor shall anything contained in the Warrant Agreement
or herein be construed to confer upon the Holder, as such, any of the rights of
a holder of a share of Class B Common Stock of the Company or any other Person
or any right to vote upon any matter submitted to holders of shares of Class B
Common Stock at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of Securities, change of par value, consolidation, merger,
conveyance, or otherwise), or to receive dividends or subscription rights, or
otherwise, until the Warrant or Warrants evidenced by this Warrant Certificate
shall have been exercised as provided in the Warrant Agreement.
<PAGE>
THIS WARRANT CERTIFICATE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, AND THE RIGHTS OF THE COMPANY AND THE HOLDER HEREOF SHALL BE GOVERNED BY,
THE INTERNAL LAWS OF THE STATE OF DELAWARE.
[Signature Page Follows]
<PAGE>
WITNESS the signature of a proper officer of the Company as of the date
first above written.
KII HOLDING CORP.
By:
---------------------------------
Name:
Title:
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if
such holder desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED, ___________________________________hereby sells,
assigns and transfers unto
________________________________________________________________________
(Please print name and address of transferee.)
the accompanying Warrant Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint:
_________________________________________________________________________
attorney, to transfer the accompanying Warrant Certificate on the books of the
Company with full power of substitution.
Dated:
HOLDER
By: ___________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the accompanying Warrant Certificate or any prior
assignment thereof in every particular, without alteration or enlargement or any
change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the registered holder if
such holder desires to exercise the Warrant Certificate)
To: KII HOLDING CORP.:
The undersigned hereby irrevocably elects to exercise
______________________ Warrants represented by the accompanying Warrant
Certificate to purchase the shares of Common Stock issuable upon the exercise of
such Warrants and requests that certificates for such shares be issued in the
name of:
______________________________________________________________________
(Please print name and address.)
______________________________________________________________________
(Please insert social security or other identifying number.)
If such number of Warrants shall not be all the Warrants evidenced by the
accompanying Warrant Certificate, a new Warrant Certificate for the balance
remaining of such Warrants shall be registered in the name of and delivered to:
______________________________________________________________________
(Please print name and address.)
______________________________________________________________________
(Please insert social security or other identifying number.)
<PAGE>
The undersigned is paying the Exercise Price for the shares of Common Stock to
be issued on exercise of the foregoing Warrants. Payment of the Exercise Price
will be made by company or individual check or certified or official bank check.
Dated:
HOLDER
By _________________________
NOTICE
The signature to the foregoing Election to Purchase must correspond to the
name as written upon the face of the accompanying Warrant Certificate or any
prior assignment thereof in every particular, without alteration or enlargement
or any change whatsoever.
<PAGE>
EXHIBIT 12.1
STELLEX INDUSTRIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES/
DEFICIENCY IN THE COVERAGE OF FIXED CHARGES BY EARNINGS
BEFORE FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Successor
--------------------- ---------------------------
Six Months Six Months Year
Ended Ended Ended
Year Ended December 31, June 30, December 31, December 31,
---------------------------------- -------- ------------ ------------
1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings before fixed charges:
Income (loss) before income taxes .............. $ 81 $ 1,312 $ 2,377 $ 1,884 $ (3,147) $ (359)
Minority interest compensation charge .......... -- -- -- -- 300 2,146
Fixed charges .................................. 979 1,034 1,073 481 2,829 17,775
------- ------- ------- ------- ------- -------
Total earnings before fixed charges................ $ 1,060 $ 2,346 $ 3,450 $ 2,365 $ (18) $19,562
======= ======= ======= ======= ======= =======
Fixed charges:
Interest expense (a) ........................... $ 979 1,034 856 376 2,577 16,639
Estimated interest expense
included in rental payments .................. -- -- 217 105 252 1,136
------- ------- ------- ------- ------- -------
Total fixed charges ............................... $ 979 1,034 1,073 481 2,829 17,775
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges ................ 1.08x 2.27x 3.22x 4.92x -- 1.10x
======= ======= ======= ======= ======= =======
Deficiency ........................................ -- -- -- -- 2,847 --
</TABLE>
(a) Interest Expense includes the amortization of deferred financing costs
totaling $144,300 and $937,800 for the six months ended December 31, 1997 and
the year ended December 31, 1998, respectively.
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
TSMD Acquisition Corp.
Stellex Microwave Systems, Inc.
Stellex Aerospace Holdings, Inc.
Monitor Aerospace Corporation
Monitor Aerospace International
Monitor Marine Products, Inc.
KII Holding Corp.
KII Acquisition Corp.
Stellex Aerospace
Bandy Machining International
Paragon Precision Products
Scanning Electron Analysis Laboratories, Inc.
General Inspection Laboratories, Inc.
<PAGE>
STELLEX INDUSTRIES, INC. & SUBSIDIAIRIES EQUITY STRUCTURE
[CHART SHOWING STELLEX INDUSTRIES AND ITS SUBSIDIARIES]
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,405
<SECURITIES> 0
<RECEIVABLES> 28,825
<ALLOWANCES> 373
<INVENTORY> 58,329
<CURRENT-ASSETS> 94,704
<PP&E> 60,388
<DEPRECIATION> 6,517
<TOTAL-ASSETS> 273,230
<CURRENT-LIABILITIES> 35,221
<BONDS> 100,000
50
0
<COMMON> 11,450
<OTHER-SE> (1,673)
<TOTAL-LIABILITY-AND-EQUITY> 273,230
<SALES> 169,304
<TOTAL-REVENUES> 169,304
<CGS> 122,263
<TOTAL-COSTS> 30,757
<OTHER-EXPENSES> (4)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,639
<INCOME-PRETAX> (359)
<INCOME-TAX> 588
<INCOME-CONTINUING> (947)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (947)
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
</TABLE>
