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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
_ ACT OF 1934 for the quarterly - period ended: September 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-41939
STELLEX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3971931
(State of Incorporation) (IRS Employer Identification No.)
680 Fifth Avenue, 8th Floor
New York, New York 10019
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (212) 931-5333
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
As of November 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.
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1
<PAGE>
ITEM 1: Financial Statements
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 284 $ 1,405
Account receivables, net 31,475 28,452
Inventories 74,788 58,329
Prepaid and other assets 5,273 3,200
Deferred income taxes 3,318 3,318
------------- -------------
Total current assets 115,138 94,704
Property, plant and equipment, net 89,393 53,871
Goodwill, net 117,601 60,786
Other intangible assets, net 50,213 52,552
Deferred financing costs, net 13,417 9,033
Other assets 5,306 2,284
------------- -------------
Total assets $ 391,068 $ 273,230
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term obligations $ 12,637 $ 5,533
Accounts payable 14,194 11,639
Accrued liabilities 20,675 17,797
Advance billings and customer deposits 15,638 252
------------- -------------
Total current liabilities 63,144 35,221
9 1/2% senior subordinated notes 100,000 100,000
Long-term obligations, less current portion 181,154 106,201
Deferred employee benefits 2,315 1,952
Deferred income taxes 20,597 20,029
------------- -------------
Total liabilities 367,210 263,403
------------- -------------
13% Senior Cumulative Redeemable
Preferred Stock 20,104 -
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 3,054
Accumulated deficit (10,800) (4,727)
-------- -------
Total stockholders' equity
3,754 9,827
----- -----
Total liabilities and stockholders' equity $ 391,068 $ 273,230
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Sales $ 57,433 $ 49,756 $ 165,767 $ 116,105
Cost of sales 41,269 35,908 122,147 85,671
-------------- -------------- --------------- --------------
Gross profit 16,164 13,848 43,620 30,434
Operating expenses:
Selling, general and administrative 6,198 5,676 19,116 15,752
Research and development 2,339 1,176 6,635 3,325
Amortization of intangibles 1,972 1,525 4,947 3,018
--------------- ---------------- --------------- --------------
Total operating expenses 10,509 8,377 30,698 22,095
--------------- ---------------- --------------- --------------
Income from operations 5,655 5,471 12,922 8,339
--------------- --------------- --------------- --------------
Other income (expense):
Interest income 55 31 138 88
Interest expense (7,359) (5,147) (18,709) (11,629)
Other (17) (81) (19) (214)
---------------- ---------------- --------------- ---------------
Total other expense (7,321) (5,197) (18,590) (11,755)
---------------- ---------------- --------------- ---------------
Income (loss) before provision
(benefit) for income taxes (1,666) 274 (5,668) (3,416)
Provision (benefit) for income taxes (456) 774 (1,776) (244)
---------------- ---------------- ---------------- ---------------
Net loss (1,210) (500) (3,892) (3,172)
Preferred stock dividends 991 286 2,181 858
---------------- ---------------- --------------- --------------
Loss applicable to common stockholders $ (2,201) $ (786) $ (6,073) $ (4,030)
===============- ================ ================ ==============
</TABLE>
See accompanying notes to unaudited consolidated
financial statements.
2
<PAGE>
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (3,892) $ (3,172)
Reconciliation to net cash provided by (used in) operating activities:
Depreciation and amortization 14,312 9,229
Amortization of step-up in inventory 4,284 2,258
Gain on sale of property 3 (3)
Deferred income taxes (1,897) (1,060)
Stock compensation charge - 2,265
Changes in assets and liabilities (net of acquired assets and assumed
Liabilities):
Accounts receivable 2,238 (2,923)
Inventories (7,629) (4,460)
Prepaid and other assets (4,822) 2,669
Accounts payable 737 450
Accrued liabilities (797) (1,073)
Advance billings and customer deposits 12,402 (1,886)
---------------- ----------------
Net cash provided by operating activities 14,939 2,294
---------------- ----------------
Cash Flows from Investing Activities:
Additions to fixed assets (10,149) (3,160)
Proceeds from sale of fixed assets 16 25
Net cash used in acquisitions (102,753) (90,833)
--------------- --------------
Net cash used in investing activities (112,886) (93,968)
--------------- --------------
Cash Flows from Financing Activities:
Net borrowings under revolving line of credit 4,800 6,000
Payment of financing costs (5,595) (4,424)
Borrowings from Senior Term Loans 81,800 90,000
Net proceeds from issuance of Preferred Stock 18,950 -
Mandatory repayments under Senior Term Loans (3,000) (900)
Repayments under other long-term obligations (129) (98)
------------------ --------------
Net cash provided by financing activities 96,826 90,578
------------------ --------------
Net increase in cash and cash equivalents (1,121) (1,096)
Cash and cash equivalents, beginning of period 1,405 3,304
------------------ --------------
Cash and cash equivalents, end of period $ 284 $ 2,208
================= ===============
</TABLE>
3
<PAGE>
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
<S> <C> <C>
Interest $ 12,077 $ 7,703
Income taxes 340 -
Supplemental schedule of non-cash investing and financing activities:
Equipment acquired under capital leases 348 30
Note issued to Seller in conjunction with Monitor Acquisition - 5,180
Elimination of note payable in connection with purchase price
adjustment attributed to the Kleinert Acquisition 1,750 -
Dividends payable on redeemable preferred stock 1,154 -
Assets acquired and liabilities assumed in connection with
the Acquisitions:
Fair value of assets acquired $ 120,101 128,425
Fair value of liabilities assumed (10,049) (31,842)
------------- ----------
Cash paid 110,052 96,583
Less financing fees and expenses (5,595) (4,343)
Less cash acquired (1,704) (1,407)
Net cash used for business acquisitions $ 102,753 90,833
============== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Formation of Stellex - On September 5, 1997, Stellex Holdings Corp. was
incorporated as a Delaware corporation, which on October 23, 1997 amended its
certificate of incorporation to change its name to Stellex Industries, Inc.
Subsequently, on April 6, 1999, the certificate of incorporation was amended to
change the Company's name to Stellex Technologies, Inc. ("Stellex" or the
"Company"). 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 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,
1997, 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 until
December 1998, when Stellex acquired the remaining equity interests. On April 6,
1999 the certificate of incorporation of KII Holding was amended to change its
name to Stellex Aerospace, Inc.
Kleinert Acquisition - On July 1, 1997, KII Holding, through a wholly-owned
subsidiary (KII Acquisition Corp., a Delaware corporation), 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 approximately $2.6 million of indebtedness and the issuance to
the seller of a note for $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. KII Holding's corporate name
was subsequently changed to Stellex Aerospace, Inc. ("Stellex Aerospace").
Kleinert commenced operations in 1988, and provided management services for its
wholly-owned subsidiaries - Paragon Precision Products ("Paragon"), General
Inspection Laboratories, Inc. ("GIL"), Scanning Electron Analysis Laboratories,
Inc. ("SEAL"), and Bandy Machining International ("Bandy"). On April 8, 1999,
KII Acquisition Corp. was merged into Stellex Aerospace. During April 1999, the
articles of incorporation of Paragon and Bandy were amended to change their
names to Stellex Paragon Precision, Inc. and Stellex Bandy Machining, Inc.,
respectively.
Under the terms of the Kleinert Acquisition Agreement, payment of the $1.75
million note was subject to the verification of certain representations
regarding the value of inventory. In July 1999, the Company determined that it
was not required to make such payment, accordingly the Company adjusted its
allocation of purchase price by $1.75 million.
Paragon 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. Bandy manufactures precision hinges, door
panels and hinge 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. The purchase was financed primarily
with the net proceeds from an offering of senior subordinated notes totaling
$92.3 million. 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. On April 6, 1999, the certificate of incorporation of
TSMD Acquisition Corp. was amended to change its name to Stellex Electronics,
Inc.
Monitor Aerospace Acquisition - On May 29, 1998, Stellex 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 had two wholly-owned subsidiaries, Monitor
Aerospace International Corporation and Monitor Marine Products, Inc. On April
13, 1999, these wholly-owned subsidiaries were merged into Monitor, which then
subsequently amended its certificate of incorporation to change its name to
Stellex Monitor Aerospace, Inc. 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 the Company's senior secured credit facility and (ii) Monitor's
issuance of a promissory note to certain former Monitor shareholders in the
principal amount of $5.2 million (the "Monitor Seller Note"). Borrowings under
the senior secured credit facility 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 used to refinance the existing Company revolver and supply
near term working capital requirements. The Monitor Seller Note matures on May
29, 2000.
Phoenix Acquisition - On March 1, 1999, Stellex, through its subsidiary, Stellex
Microwave, acquired all of the outstanding common stock of Phoenix Microwave
Corporation ("Phoenix"), a leading supplier of RF and microwave components,
based in Telford, Pennsylvania. Subsequently, on May 27, 1999, Phoenix was
merged into Stellex Microwave and operates as a division. Phoenix, along with
Stellex Microwave, operate 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 $14.7 million of cash 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 previous senior secured credit
facility. At present goodwill is being amortized over 15 years.
Precision Acquisition - On April 22, 1999, the Company, through Stellex
Precision Machining, Inc. ("Precision"), an indirect wholly-owned subsidiary of
Stellex, acquired the assets of the aerostructures business of Precision
Machining, Inc. and certain related entities for an aggregate purchase price of
approximately $86.0 million, excluding transaction fees and expenses of
approximately $9.4 million. At present goodwill is being amortized over 25
years. Precision, located in Wellington, Kansas, is a leading manufacturer of
complex aerostructure components, serving the commercial, military and business
aviation segments of the aerospace industry. Precision specializes in high speed
five-axis machining of aluminum, titanium and other hard alloys. The acquisition
was financed through borrowings under the Company's current $235 million senior
secured credit facility and the issuance of $20 million of preferred stock (the
"Preferred Stock"). The current secured credit facility provides for a two
tranche term loan comprised of a $60 million Term A facility and a $110 million
Term B facility, in addition to a $65 million revolving loan facility. The Term
A facility has a six-year term with escalating quarterly principal payments
bearing interest at either the base rate plus a margin rate of up to 2.0% based
on a leverage ratio or the Eurodollar rate plus a margin rate of up to 3.0%
based on a leverage ratio. The Term B facility has a ninety-month term with
escalating quarterly principal payments bearing interest at either the base rate
plus a margin rate of 2.5% or the Eurodollar rate plus a margin rate of 3.5%.
The revolving credit facility has a six-year term bearing interest at either the
base rate plus a margin rate of up to 2.0% based on a leverage ratio or the
Eurodollar rate plus a margin rate of up to 3.0% based on a leverage ratio.
The Preferred Stock provides for cumulative dividends accruing at a rate of 13%
per annum. On or prior to August 31, 2004, Stellex may, at its option, pay
dividends either in cash or in additional shares of Preferred Stock. After
August 31, 2004, dividends may be paid only in cash. The Preferred Stock is
mandatorily redeemable on August 31, 2010 at a redemption price equal to 100% of
the aggregate liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of redemption. Stellex may, at its
option, redeem the outstanding shares of Preferred Stock on or before January 1,
2000 (or March 15, 2000 under certain circumstances) or after August 31, 2004 at
specified redemption prices together with accumulated and unpaid dividends, if
any, to the date of redemption. Under certain circumstances, Stellex may also
redeem the Preferred Stock with the proceeds of equity offerings. In connection
with the issuance of the Preferred Stock, Stellex granted to the purchaser of
the Preferred Stock warrants to purchase shares of common stock in an amount
equal to 1% of Stellex's issued and outstanding shares of common stock on the
date of grant. The warrants have an exercise price of $0.01 per share. On August
31, 1999, Stellex issued additional warrants to such purchaser such that the
purchaser's total warrants represented the right to purchase 3% of Stellex's
issued and outstanding shares of common stock. In the event Stellex is not able
to redeem the Preferred Stock on or before January 1, 2000 (or March 15, 2000
under certain circumstances), Stellex will be required to grant additional
warrants to the purchaser of the Preferred Stock such that the purchaser's total
warrants represent the right to purchase 5% of Stellex's issued and outstanding
shares of common stock.
Pro forma results of operations as if the Monitor, Phoenix and Precision
acquisitions had occurred as of January 1, 1998 are as follows (in thousands):
Nine Months Ended
September 30,
1999 1998
---- ----
Net sales $ 178,228 $ 190,952
Gross profit 54,116 55,828
Net income 706 2,416
2. Basis of Presentation
Stellex is a holding company that has no operations separate from its
investments in its subsidiaries. The consolidated balance sheet at September 30,
1999 and the consolidated statements of operations and consolidated statements
of cash flows for the periods ended September 30, 1999 include the accounts of
Stellex Microwave (including the Phoenix Microwave division) and Stellex
Aerostructures, Inc. ("Stellex Aerostructures") (formerly known as Stellex
Aerospace Holdings, Inc.). Stellex Aerostructures consists of three wholly-owned
subsidiaries, Monitor, Precision and Stellex Aerospace. The Company is in the
process of completing purchase accounting valuations of the assets acquired and
liabilities assumed in its recent acquisitions of Phoenix and Precision. These
valuations are not yet complete and therefore the balance sheets of the Company
as of September 30, 1999 reflects management's best estimates of the valuation
of the assets and liabilities acquired. Phoenix's results of operations
presented herein are from the date of acquisition (March 1, 1999) to September
30, 1999. Precision's results of operations are from the date of acquisition
(April 22, 1999) to September 30, 1999. The comparative financial statements for
the nine months ended September 30, 1998 include the accounts of Stellex
Aerospace, Monitor Aerospace from the date of acquisition (May 29, 1998) to
September 30, 1998 and Stellex Microwave. All significant intercompany
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation, which were of a normal and
recurring nature, have been included. The results of operations for any interim
period are not necessarily indicative of the results for the year. These
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 and
the Company's Reports on Form 8-K dated March 1, 1999 and April 22, 1999.
3. Inventories
Inventories consisted of the following (in thousands):
September 30, December 31,
1999 1998
(Unaudited)
Raw materials $ 25,216 $ 15,470
Work-in-process 30,441 25,782
Finished goods 9,129 7,994
Production tooling 10,002 9,083
------ -----
Total $ 74,788 $ 58,329
============ =============
4. Long-Term Obligations
Long-term obligations consisted of the following (in thousands):
September 30, December 31,
1999 1998
(Unaudited)
Term Loan A $ 57,500 $ 28,500
Term Loan B 109,500 59,700
Revolving line of credit 18,300 13,500
7.785% Mortgage notes payable 2,511 2,561
Sellers notes payable 5,180 6,930
Obligations under capital leases 714 446
Other long term obligations 86 97
----------- ----------
193,791 111,734
Less current portion 12,637 5,533
------ -----
Total $ 181,154 $ 106,201
=========== ===========
Under the terms of the Kleinert Acquisition Agreement, payment of the $1.75
million note was subject to the verification of certain representations
regarding the value of inventory. In July 1999, the Company determined that it
was not required to make such payment, accordingly the Company adjusted its
allocation of purchase price by $1.75 million.
5. Commitments and Contingencies
The Company is involved from time to time in lawsuits that arise in the normal
course of business. The Company actively and vigorously defends all lawsuits.
Management is not aware of any lawsuits that are expected to have a material
adverse affect on the Company's financial position.
6. Stock Options
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. Compensation cost
for stock options, if any, is measured as the excess of the fair market value of
the applicable company's stock at the date of grant over the option strike
price. The following non-qualified stock option plans have been adopted by
subsidiaries of the Company and are structured such that option strike prices
will be set at or above fair market value on the date of grant.
KII Holding Corp. 1998 Option Plan
Pursuant to an Agreement entered into in connection with the Kleinert
Acquisition (the "Stellex Aerospace Investor Agreement"), Stellex Aerospace,
granted stock appreciation rights ("SARs") to certain members of Stellex
Aerospace's management. Effective December 31, 1998, Stellex Aerospace exchanged
the outstanding SARs for options to purchase up to an aggregate of 1,238.1
shares of common stock of Stellex Aerospace (the "Option Plan"). Seventeen and
one-half percent of the Stellex Aerospace 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 Stellex Aerospace Options is $391
per share, and the options generally become exercisable upon the earliest to
occur of an initial public offering by Stellex Aerospace, or Stellex, a
Corporate Transaction (which is defined in the Option Plan to generally mean a
change of control of Stellex or Stellex Aerospace, a sale of all or
substantially all of the assets of Stellex or Stellex Aerospace or the adoption
of a plan of liquidation for Stellex or Stellex Aerospace) or May 1, 2007. If
the exercise event is an initial public offering by Stellex Aerospace or
Stellex, the Board of Directors of Stellex may convert the Stellex Aerospace
Options into options to purchase Stellex's Common Stock pursuant to a conversion
formula set forth in the Option Plan.
Stellex Precision Machining, Inc. 1999 Stock Option Plan
On April 22, 1999, Precision adopted the Stellex Precision Machining, Inc. 1999
Stock Option Plan (the "Precision Option Plan") as an incentive program for
employees intended to promote the interests of the Company. The Precision Option
Plan has allocated 1,300 shares for issuance to eligible employees, which
includes all employees of Precision. Effective April 22, 1999, Precision issued
ten-year options (the "Precision Options") to purchase up to an aggregate of 800
shares of Class B common stock of Precision. The Class B common stock is
non-voting. One-third of the Precision Options granted vest on each December 31
beginning 1999 through and including 2001. The exercise price of the Precision
Options is $2 per share, and such options generally become exercisable upon the
earliest to occur of (i) an initial public offering by Precision, Stellex
Technologies, Inc. ("Parent") or a corporation in an unbroken chain of
corporations between Parent and Precision (an "Intermediate Corporation"), (ii)
a Corporate Transaction (which is defined in the Precision Option Plan to
generally mean a change of control of Parent or Precision, a sale of all or
substantially all of the assets of Parent or Precision or the adoption of a plan
of liquidation for Parent or Precision) or (iii) January 31, 2009. Upon an
initial public offering by Parent or an Intermediate Corporation, the
administrator of the Precision Option Plan may convert the Precision Options
into options to purchase common stock of such issuer as described in the
Precision Option Plan.
Stellex Microwave Systems, Inc. 1999 Stock Option Plan
On May 15, 1999, Microwave adopted the Stellex Microwave Systems, Inc. 1999
Stock Option Plan (the "Microwave Option Plan") as an incentive program for
employees intended to promote the interests of the Company. The Microwave Option
Plan has allocated 1,000,000 shares for issuance to eligible employees, which
includes all employees of Microwave. Effective May 15, 1999, Microwave issued
ten-year options (the "Microwave Options") to purchase up to an aggregate of
499,700 shares of Class B common stock of Microwave. The Class B common stock is
non-voting. One-fifth of the Microwave Options vested on the date of grant and
the remainder vest in equal installments on each November 1 beginning 1999
through and including 2002. The exercise price of the Microwave Options is $2.87
per share, and such options generally become exercisable upon the earliest to
occur of (i) an initial public offering by Microwave, Stellex Technologies, Inc.
("Parent") or a corporation in an unbroken chain of corporations between Parent
and Microwave (an "Intermediate Corporation"), (ii) a Corporate Transaction
(which is defined in the Microwave Option Plan to generally mean a change of
control of Parent or Microwave, a sale of all or substantially all of the assets
of Parent or Microwave or the adoption of a plan of liquidation for Parent or
Microwave) or (iii) September 2, 2007. Upon an initial public offering by Parent
or an Intermediate Corporation, the administrator of the Microwave Option Plan
may convert the Microwave Options into options to purchase common stock of such
issuer as described in the Microwave Option Plan.
Stellex Monitor Aerospace, Inc. 1999 Stock Option Plan
On July 26, 1999, Monitor adopted the Stellex Monitor Aerospace, Inc. 1999 Stock
Option Plan (the "Monitor Option Plan") as an incentive program for employees
intended to promote the interests of the Company. The Monitor Option Plan has
allocated 700 shares for issuance to eligible employees, which includes all
employees of Monitor. Effective July 26, 1999, Monitor issued ten-year options
(the "Monitor Options") to purchase up to an aggregate of 540 shares of Class B
common stock of Monitor. The Class B common stock is non-voting. Generally,
thirty-seven percent of the Monitor Options granted vest on December 31, 1999,
while sixty percent of the Monitor Options granted vest in equal installments on
each December 31 beginning 2000 through and including 2002 and the remainder
vest in equal installments on each December 31 beginning 2003 through and
including 2004. The exercise price of the Monitor Options is $10 per share, and
such options generally become exercisable upon the earliest to occur of (i) an
initial public offering by Monitor, Stellex Technologies, Inc. ("Parent") or a
corporation in an unbroken chain of corporations between Parent and Monitor (an
"Intermediate Corporation"), (ii) a Corporate Transaction (which is defined in
the Monitor Option Plan to generally mean a change of control of Parent or
Monitor, a sale of all or substantially all of the assets of Parent or Monitor
or the adoption of a plan of liquidation for Parent or Monitor) or (iii) March
16, 2009. Upon an initial public offering by Parent or an Intermediate
Corporation, the administrator of the Monitor Option Plan may convert the
Monitor Options into options to purchase common stock of such issuer as
described in the Monitor Option Plan. On September 7, 1999, additional Monitor
Options to purchase up to an aggregate of 60 shares of common stock of Monitor
were issued; two-fifths of such Monitor Options vest on June 30, 2000, with the
remainder vesting in equal installments on each June 30 beginning 2001 through
and including 2003.
7. 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 under the Company's senior secured credit facility are fully
guaranteed on a full and unconditional basis by all domestic subsidiaries of
Stellex, including Stellex Microwave, Stellex Aerospace, Monitor and Precision.
There are no significant contractual restrictions on the ability of the
Company's subsidiaries to transfer funds to the Company. Set forth below is the
condensed consolidating financial information of the guarantor subsidiaries as
of September 30, 1999 and for the three and nine month periods then ended. The
separate financial statements of the guarantor subsidiaries are not included
because the guarantor subsidiaries are jointly and severally liable under the
notes and management does not believe that the separate financial information
would be meaningful to investors.
Condensed Consolidating Balance Sheet as of September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Stellex Stellex Stellex Adjustments & Stellex
(Parent Microwave Aerospace Monitor Precision Eliminations Consolidated
Only)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ (1,616) $ 1,098 $ 303 $ 387 $ 112 $ - $ 284
Accounts receivable, net - 13,402 5,076 8,022 4,975 - 31,475
Inventories - 22,463 14,654 32,052 5,619 - 74,788
Other current assets 6,674 2,966 1,172 2,785 1,005 (6,011) 8,591
----- ----- ----- ----- ----- ------- -----
Total current assets 5,058 39,929 21,205 43,246 11,711 (6,011) 115,138
Property, plant and 2,252 20,533 16,322 23,063 27,223 - 89,393
equipment, net
Goodwill and intangibles, net - 60,385 - 59,172 48,257 - 167,814
Investment in & advances to
Subsidiaries
311,063 - - - - (311,063) -
Other assets 4,807 8,498 2,225 9,385 5,743 (11,935) 18,723
----- ----- ----- ----- ----- -------- ------
Total assets $323,180 129,345 39,752 134,866 92,934 (329,009) 391,068
======= ======= ====== ======= ====== ========= =======
Current liabilities 17,834 28,732 5,109 14,735 3,798 (7,064) 63,144
9 1/2% senior subordinated notes 100,000 - - - - - 100,000
Intercompany notes 1,689 100,159 22,012 64,709 59,559 (248,128) -
Term Loans - long term 178,050 - - - - - 178,050
Other long-term liabilities 20,104 4,729 6,444 21,807 152 (7,116) 46,120
Stockholders'equity (deficit) 5,503 (4,275) 6,187 33,615 29,425 (66,701) 3,754
----- ------- ----- ------ ------ -------- -----
Total liabilities and
stockholders' equity 323,180 129,345 39,752 134,866 92,934 (329,009) 391,068
======= ======= ====== ======= ====== ========= =======
</TABLE>
5
<PAGE>
Condensed Financial Information of Stellex and its Subsidiaries (Continued)
Condensed Consolidating Statement of Operations For The
Three Months Ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Stellex Stellex Stellex Adjustments Stellex
(Parent Only) Microwave Aerospace Monitor Precision & Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ - $ 24,469 $ 7,547 $ 15,772 $ 9,645 $ - 57,433
Cost of sales - 15,955 5,462 12,307 7,545 - 41,269
Operating expenses 595 5,256 1,325 698 663 - 8,537
Amortization of intangibles - 1,004 - 593 500 (125) 1,972
----- ----- ----- --- --- ----- -----
Income (loss) from operations (595) 2,254 760 2,174 937 125 5,655
Interest expense (6,700) (2,601) (606) (1,648) (1,609) 5,805 (7,359)
Other income (expense)
5,828 13 (19) 12 9 (5,805) 38
----- ----- ----- ----- ----- ------- -----
Income (loss) before income (1,467) (334) 135 538 (663) 125 (1,666)
taxes
Provision (benefit) for income (587) (216) 72 202 (322) 395 (456)
taxes ----- ----- ---- ----- ----- ----- -----
Net income (loss) (880) (118) 63 336 (341) (270) (1,210)
Preferred stock dividend 991 - - - - - 991
----- ----- ----- ----- ----- ------- -----
Income (loss) applicable to
common shareholders (1,871) (118) 63 336 (341) (270) (2,201)
======= ===== ======= ======= ===== ===== =======
</TABLE>
Condensed Consolidating Statement of Operations For The
Nine Months Ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Stellex Stellex Stellex Adjustments & Stellex
(Parent Only) Microwave Aerospace Monitor Precision Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ - $ 69,548 $ 22,670 $ 56,665 $ 16,884 $ - $165,767
Cost of sales - 47,634 16,878 43,335 14,300 - 122,147
Operating expenses 1,000 15,650 3,858 2,852 2,391 - 25,751
Amortization of intangibles - 2,604 - 1,780 813 (250) 4,947
----- ----- ----- ----- ------ ----- -----
Income (loss) from operations (1,000) 3,660 1,934 8,698 (620) 250 12,922
Interest expense (16,854) (7,047) (1,804) (4,663) (2,747) 14,406 (18,709)
Other income (expense) 14,479 29 (32) 34 15 (14,406) 119
----- ----- ----- ----- ------ ----- -----
Income (loss) before income
taxes (3,375) (3,358) 98 4,069 (3,352) 250 (5,668)
Provision (benefit) for income
taxes (1,350) (1,548) 39 1,522 (1,341) 902 (1,776)
----- ----- ----- ----- ------ ----- -----
Net income (loss) (2,025) (1,810) 59 2,547 (2,011) (652) (3,892)
Preferred stock dividend 2,181 - - - - - 2,181
----- ----- ----- ----- ----- ----- -----
Income (loss) applicable to
common shareholders $ (4,206) $ (1,810) $ 59 $ 2,547 $ (2,011) (652) (6,073)
======= ======= ====== ====== ======= ===== =======
</TABLE>
6
<PAGE>
Condensed Financial Information of Stellex and its Subsidiaries (Continued)
Condensed Consolidating Statement of Cash Flows for the
Nine Months Ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Stellex Stellex Stellex Adjustments & Stellex
(Parent Microwave Aerospace Monitor Precision Eliminations Consolidated
Only)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (2,025) $ (1,810) $ 59 $ 2,547 $ (2,012) $ (651) $ (3,892)
Depreciation and amortization 674 6,972 1,579 4,508 5,113 (250) 18,596
Deferred taxes and other (1,351) (1,400) 2 (135) (392) 1,379 (1,897)
Change in operating assets
and liabilities (789) 12,842 53 (7,607) (139) (2,228) 2,132
----- ------ -- ------- ----- -------- -----
Net cash provided by (used (3,491) 16,604 1,693 (687) 2,570 (1,750) 14,939
in) operations
Fixed asset additions (1,858) (3,555) (2,903) (1,900) (281) 348 (10,149)
Cash used in acquisitions - (15,175) - - (87,578) - (102,753)
Proceeds from sale of fixed - - 3 13 - - 16
- - - -- - - ------
Net cash used in investing
activities (1,858) (18,730) (2,900) (1,887) (87,859) 348 (112,886)
Mandatory term loan repayments (3,000) - - - - - (3,000)
Net borrowing under revolver 4,800 - - - - - 4,800
Borrowings from senior term
loans 81,800 - - - - - 81,800
Net proceeds from issue of
preferred stock 18,950 - - - - - 18,950
Intercompany loans and (98,834) 2,119 3,112 2,607 90,996 - -
investments
Other
- - (1,874) 343 (5,595) 1,402 (5,724)
------- ------- ------- ------- ------- ------ ------
Cash provided by financing 3,716 2,119 1,238 2,950 85,401 1,402 96,826
activities
Net increase (decrease) in
cash $ (1,633) (7) 31 376 112 - (1,121)
</TABLE>
8. Subsequent Event
The Company's primary market risk exposure is that of interest rate risk
associated with its various debt instruments. On October 15, 1999, the Company
entered into a capped interest swap transaction with a bank as part of a dynamic
hedging strategy employed to manage its interest rate risk. Under the swap
transaction, the Company is obligated to pay the fixed rate of interest equal to
6.05% on a notional amount of $43.0 million for a period of 3 years in exchange
for a floating rate of interest based on 3-month LIBOR capped at 6.625% on the
same notional amount. Settlements on the swap arrangement will occur quarterly.
7
<PAGE>
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Stellex is a holding company and has no independent operations. The Company,
through its two operating segments, Aerostructures and Electronics, is a leading
provider of highly engineered subsystems and components for the aerospace,
defense and communications industries. The Electronics segment consists of
Stellex Microwave and Phoenix, a division of Stellex Microwave. The Company,
through its Electronics segment, 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. The Aerostructures segment operates
through Stellex Aerostructures and its three wholly owned subsidiaries, Monitor,
Precision and Stellex Aerospace. Stellex Aerostructures 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 March 1, 1999, Stellex acquired Phoenix, which currently
operates as a division of Stellex Microwave in the Electronics segment. On April
22, 1999, Stellex acquired the assets of Precision, which operates in the
Aerostructures segment.
Results of Operations
Historical - Company
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Corporate Aerostructures Electronics Total
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ - $ - $ 32,964 $ 31,824 $ 24,469 $ 17,932 $ 57,433 $ 49,756
Cost of goods sold 25,314 24,458 15,955 11,450 41,269 35,908
--------- --------- -------- --------- --------- --------- --------- ---------
Gross profit - - 7,650 7,366 8,514 6,482 16,164 13,848
Gross margin - - 23.2% 23.1% 34.8% 36.1% 28.1% 27.8%
Selling, general, and
administrative expenses 595 67 2,686 3,297 2,917 2,312 6,198 5,676
Research & development
expenses - - - - 2,339 1,176 2,339 1,176
Amortization of intangibles (125) - 1,093 878 1,004 647 1,972 1,525
---------- --------- ---------- -------- -------- --------- --------- ----------
Income (loss) from operations (470) (67) 3,871 3,191 2,254 2,347 5,655 5,471
Interest expense (7,359) (5,147)
Other income (expense)
38 (50)
------- ------
Net income (loss) before
income taxes (1,666) 274
Income tax (benefit)provision (456) 774
---------- --------
Net loss $ (1,210) $ (500)
=========== =========
</TABLE>
Net Sales. Net sales for Stellex totaled $57.4 million and $49.8
million for the three months ended September 30, 1999 and 1998, respectively.
Net sales for the Electronics segment totaled $24.5 million and $17.9 million
for the three months ended September 30, 1999 and 1998, respectively. The
increase in net sales for the Electronics segment was attributable to the
acquisition of Phoenix on March 1, 1999, an increase in tactical sales at
Stellex Microwave due to the ramp up of the Longbow program and new sales in the
broadband wireless communications market. Commercial component sales at Stellex
Microwave for the third quarter of 1999 remained constant with the comparable
period in 1998. Microwave's efforts in the broadband wireless communications
market are beginning to show results. Recent orders for a digital radio
synthesizer were secured totaling over $6 million, and field trials for outdoor
units (ODUs) supporting a significant telecommunication manufacturer will begin
this December. Net sales for Phoenix for the three months ended September 30,
1999 totaled $3.8 million.
Net sales for the Aerostructures segment totaled $33.0 million and
$31.8 million for the three months ended September 30, 1999 and 1998,
respectively. The reason for the increase in sales was due to the acquisition of
Precision on April 22, 1999, offset by reduced sales at both Stellex Aerospace
and Monitor. Net sales for Precision for the three months ended September 30,
1999 totaled $9.6 million. Net sales at Stellex Aerospace during the third
quarter of 1999 decreased $1.3 million, or 14.9%, compared to the same period in
1998 while net sales at Monitor decreased $7.2 million, or 31.3%, compared to
the third quarter of 1998. The decrease in sales at Stellex Aerospace and
Monitor was primarily the result of weak demand from OEMs in the commercial
aviation market resulting primarily from Boeing-related decreases in build rates
and inventory management issues, compounded by decreased demand from Asian
markets. In addition, sales at Stellex Aerospace were further impacted by
customer delays associated with initial deliveries on a significant new program.
As a result of continuing customer-directed delays in previously scheduled
orders, particularly at Monitor, we expect net sales to continue to be
negatively impacted in the fourth quarter of 1999 in comparison to the prior
year. The significance of any further delays is difficult to predict.
Gross Margins. Gross margin for Stellex was 28.1% and 27.8% for the
three months ended September 30, 1999 and 1998, respectively. Gross margin for
the Electronics segment was 34.8% and 36.1% for the three months ended September
30, 1999 and 1998, respectively. The decrease in gross margin for the
Electronics segment was primarily at Stellex Microwave due to low gross margins
on a start-up broadband wireless program, certain funded engineering projects,
and the expiration of a high volume subcontract manufacturing arrangement,
offset partially by gross margin improvement on certain long run tactical
subsystem programs.
Gross margin for the Aerostructures segment was 23.2% and 23.1% for
the three months ended September 30, 1999 and 1998, respectively. Gross margin
of 21.8% at Precision for the three months ended September 30, 1999 included a
non-recurring acquisition charge relating to the amortization of a purchase
accounting adjustment to profits in inventory totaling $2.0 million. Stellex
Aerospace's gross margin totaled 27.6% for the quarter, which was 2.3% lower
compared to the prior year quarter as a result of an unfavorable mix of new work
and higher than normal start-up costs on new programs. Gross margin at Monitor
was 22.0% for the quarter compared to 20.5% for the comparable period in 1998.
This increase in gross margin was due to a nonrecurring purchase accounting
adjustment to profits in inventory totaling $0.8 million, which impacted the
third quarter of 1998. In addition, gross margins at Monitor for the third
quarter of 1999 were affected by an unfavorable mix of new work and scheduling
inefficiencies resulting from sporadic program deceleration directives from
customers, which were offset by proactive adjustments to production manning
levels and a reduction in overhead spend.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Stellex totaled $6.2 million and $5.7 million, or
10.8% and 11.4% stated as a percentage of net sales, for the three months ended
September 30, 1999 and 1998, respectively. The increase in selling, general and
administrative expenses over the prior year period was due primarily to the
acquisitions of Phoenix and Precision, increases in corporate administrative
costs and additional marketing spending directed at strategic customers, offset
partially by a reduction in workforce and the elimination of a non-cash stock
compensation charge relating to the valuation of management ownership puts at
Stellex Aerospace of $0.8 million.
Research and Development Expenses. Research and development expenses
for Stellex totaled $2.3 million and $1.2 million for the three months ended
September 30, 1999 and 1998, respectively. The increase in research and
development expenses resulted from the expansion of engineering capabilities at
Stellex Microwave relating primarily to new product development in the
commercial and broadband wireless markets, in addition to incremental spending
resulting from the newly acquired Phoenix operations.
Amortization of Intangibles. Amortization of intangible assets for the
three months ended September 30, 1999, increased $0.4 million, or 29.4%,
compared to 1998 due to significant increases in goodwill resulting from
purchase accounting allocations made in connection with the Precision and
Phoenix Acquisitions.
Interest Expense. Interest expense for the Company increased to $7.4
million for the three months ended September 30, 1999 compared to $5.1 million
during the same period in 1998. The increase in interest expense resulted from
the incurrence of indebtedness to finance the Precision and Phoenix acquisitions
and increases in LIBOR rates over the prior year. The borrowings under the
senior secured credit facilities generally bear interest based on the Eurodollar
rate. The average interest rate on such borrowings for the three months ended
September 30, 1999 was approximately 8.8%.
Income Tax Provision (Benefit). The effective tax rates for the
Company for the three months ended September 30, 1999 was impacted primarily by
non-deductible goodwill amortization at Monitor and Phoenix.
8
<PAGE>
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
The historical consolidated operating results for the nine months ended
September 30, 1999 and 1998 give effect to the Monitor, Phoenix and Precision
Acquisitions, whose results are presented from their dates of acquisition on May
29, 1998, March 1, 1999 and April 22, 1999, respectively (in thousands).
<TABLE>
<CAPTION>
Corporate Aerostructures Electronics Total
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ - $ - $ 96,219 $ 57,913 $ 69,548 $ 58,192 $ 165,767 $116,105
Cost of goods sold - 74,513 43,544 47,634 42,127 122,147 85,671
-------- -------- -------- --------- --------- --------- ---------- ---------
Gross profit - - 21,706 14,369 21,914 16,065 43,620 30,434
Gross margin - - 22.6% 24.8% 31.5% 27.6% 26.3% 26.2%
Selling, general, and
administrative expenses 1,000 97 9,101 8,677 9,015 6,978 19,116 15,752
Research & development
expenses - - - - 6,635 3,325 6,635 3,325
Amortization of intangibles (250) - 2,593 1,088 2,604 1,930 4,947 3,018
-------- --------- -------- ---------- --------- --------- ----------- ----------
Income (loss) from operations (750) (97) 10,012 4,604 3,660 3,832 12,922 8,339
Interest expense (18,709) (11,629)
Other income (expense) 119 (125)
-------- ---------
Net loss before income taxes (5,668) (3,415)
Income tax benefit (1,776) (243)
------- --------
Net loss $ (3,892) $ (3,172)
========== ==========
</TABLE>
Net Sales. Net sales for Stellex totaled $165.8 million and $116.1
million for the nine months ended September 30, 1999 and 1998, respectively. Net
sales for the Electronics segment totaled $69.5 million and $58.2 million for
the nine months ended September 30, 1999 and 1998, respectively. The increase in
net sales for the Electronics segment was primarily due to the acquisition of
Phoenix on March 1, 1999, an increase in tactical sales at Stellex Microwave due
to the ramp up of the Longbow program and new sales in the broadband wireless
communications market, partially offset by lower commercial sector sales at
Stellex Microwave resulting primarily from the completion during the six months
ended June 30, 1998 of the "catch up" in delinquent commercial component order
backlog built up during 1997 relating to the start-up of the new production
planning software at that time. Microwave's efforts in the broadband wireless
communications market are beginning to show results. Recent orders for a digital
radio synthesizer were secured totaling over $6 million, and field trials for
outdoor units (ODUs) supporting a significant telecommunication manufacturer
will begin this December. Net sales for Phoenix from the date of its acquisition
on March 1, 1999 to September 30, 1999 totaled $10.5 million.
Net sales for the Aerostructures segment totaled $96.2 million and
$57.9 million for the nine months ended September 30, 1999 and 1998,
respectively. The primary reason for the increase in sales was due to the
acquisitions of Monitor on May 29, 1998 and Precision on April 22, 1999,
partially offset by reduced sales at Stellex Aerospace. Net sales for Monitor
for the nine months ended September 30, 1999 totaled $56.7 million compared to
$30.9 million for the period from its acquisition on May 29, 1998 to September
30, 1998. Net sales for Precision from the date of its acquisition on April 22,
1999 to September 30, 1999 totaled $16.9 million. The decrease in net sales at
Stellex Aerospace during the nine months ended September 30, 1999 of $4.3
million, or 16.1%, as compared to the same period in 1998, resulted from weak
demand from OEMs in the commercial aviation market resulting primarily from
Boeing-related decreases in build rates and inventory management issues,
compound by decreased demand from Asian markets. As a result of continuing
customer directed delays in previously scheduled orders, particularly at
Monitor, we expect net sales to continue to be negatively impacted during 1999
in comparison to the prior year. The significance of any further delays is
difficult to predict.
Gross Margins. Gross margin for Stellex was 26.3% and 26.2% for the
nine months ended September 30, 1999 and 1998, respectively. Gross margin for
the Electronics segment was 31.5% and 27.6% for the nine months ended September
30, 1999 and 1998, respectively. Gross margin for the first nine months of 1999
and 1998 was impacted by the amortization of purchase price adjustments to
inventories of $1.0 million and $1.1 million, respectively. In excluding this
non-recurring adjustment, the Electronics segment would have had a recasted
gross margin of 33.0% for the nine months ended September 30, 1999 compared to
29.6% for the comparable period in 1998. This increase in gross margin for the
Electronics segment was primarily due to the acquisition of Phoenix whose
business yields, on average, higher gross margins.
Gross margin for the Aerostructures segment was 22.6% and 24.8% for
the nine months ended September 30, 1999 and 1998, respectively. The decrease in
gross margin was partially attributable to the impact of the newly acquired
operations of Precision, which delivered a gross margin of 15.3% for the period
of ownership. The gross margin at Precision was impacted by a non-recurring
acquisition charge relating to the amortization of the purchase accounting
adjustment to profits in inventory totaling $3.3 million and a one time
non-recurring employee retention bonus award of $1.0 million. Stellex
Aerospace's gross margin totaled 25.5% for the first nine months of 1999, which
was significantly lower than the 1998 result of 30.4% due to lower volume, an
unfavorable mix of product and higher than normal start-up costs on new
programs. Gross margin at Monitor was 23.5% for the first nine months of 1999
compared to 20.0% for the comparable period in 1998. This increase in gross
margin was due to a nonrecurring acquisition charge, which impacted the first
nine months of 1998 relating to the amortization of the purchase accounting
adjustment to profits in inventory totaling $1.2 million. On a recasted basis,
excluding the adjustment to profits in inventory and the non-recurring employee
retention bonus award for the first nine months of 1999 and 1998, gross margins
for the Aerostructures segment would have been 27.1% and 27.0%, respectively.
This slight decrease in gross margins on a recasted basis was due to scheduling
inefficiencies resulting from sporadic program deceleration directives from
customers, offset by productivity improvements on certain programs, and
proactive adjustments to production manning levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Stellex totaled $19.1 million and $15.8 million, or
11.5% and 13.6% stated as a percentage of net sales, for the nine months ended
September 30, 1999 and 1998, respectively. The increase in selling, general and
administrative expenses over the prior year period was due primarily to the
acquisitions of Monitor, Precision and Phoenix, increases in corporate
administrative overhead costs and additional marketing spending directed at
strategic customers, offset by the elimination of a non-cash stock compensation
charge relating to the valuation of management ownership puts at Stellex
Aerospace of $2.3 million. As a result of the acquisitions of Monitor, Phoenix
and Precision, selling, general and administrative expenses for the first nine
months of 1999 include non-recurring charges of $1.3 million for Precision and
$0.2 million for Phoenix and $1.0 million for Monitor in the comparable period
of 1998 for investment and financial advisory fees paid to Mentmore Holdings
Corporation, an affiliate of Stellex.
Research and Development Expenses. Research and development expenses
for Stellex totaled $6.6 million and $3.3 million for the nine months ended
September 30, 1999 and 1998, respectively. The increase in research and
development expenses resulted from the expansion of engineering capabilities at
Stellex Microwave relating to new product development in the commercial and
broadband wireless markets in addition to incremental spending resulting from
the newly acquired Phoenix operations.
Amortization of Intangibles. Amortization of intangible assets for the
nine months ended September 30, 1999, increased $1.9 million, or 64.0%, compared
to 1998 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 in connection with the
Monitor, Precision and Phoenix Acquisitions. Goodwill is being amortized over
fifteen to thirty years. Other intangible assets are being amortized over their
estimated useful lives ranging from one to thirty years.
Interest Expense. Interest expense for the Company increased to $18.7
million for the nine months ended September 30, 1999 compared to $11.6 million
during the same period in 1998. The increase in interest expense resulted from
the incurrence of indebtedness to finance the Monitor, Precision and Phoenix
Acquisitions and increases in LIBOR rates over the prior year. The borrowings
under the Company's senior secured credit facility generally bear interest based
on the Eurodollar rate. The average interest rate on such borrowings for the
nine months September 30, 1999 was approximately 8.4%.
Income Tax Provision (Benefit). The effective tax rate for the Company
for the nine months ended September 30, 1999 was impacted primarily by
non-deductible goodwill amortization at Monitor and Phoenix.
Pro forma results of the Company for the three and nine months ended September
30, 1999 and 1998
The unaudited pro forma results of operations for the three and nine
months ended September 30, 1999 and 1998 give effect to the acquisitions of
Monitor, Phoenix and Precision (the "Acquisitions") which were completed on May
29, 1998, March 1, 1999 and April 22, 1999, respectively, and to the refinancing
of the Company's senior debt facility. For purposes of the pro forma results of
operations, the Acquisitions are reflected as if they occurred simultaneously on
January 1, 1998. Certain non-recurring charges relating directly to the
Acquisitions and which effect expenses within the twelve months following the
transactions, such as investment banking fees to Mentmore Holdings Corporation,
a one time non-recurring employee retention bonus at Precision and the
amortization of the acquired profits in inventory, some of which resulted from
purchase accounting, have been excluded from the pro forma results. 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 herein and included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 and
the Company's Reports on Form 8-K dated March 1, 1999 and April 22, 1999. 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. The pro forma results are presented in thousands of
dollars.
Table 1: Pro forma Results for the Three Months Ended
September 30, 1999 and 1998
<TABLE>
<CAPTION>
Corporate Aerostructures Electronics Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1999 1998 1999 1998 1999 1998
Net sales $ - $ - $ 32,964 $ 41,492 $ 24,469 $ 21,677 $ 57,433 $63,169
Cost of goods sold - - 23,352 29,348 15,954 13,696 39,306 43,044
--------- ------- -------- --------- --------- --------- --------- --------
- -
Gross profit - - 9,612 12,144 8,515 7,981 18,127 20,125
Gross margin - - 29.2% 29.3% 34.8% 36.8% 31.6% 31.9%
Selling, general, and
administrative expenses 595 67 2,686 3,871 9,917 2,893 6,198 6,831
Research & development
expenses - - - - 2,339 1,554 2,339 1,554
Amortization of intangibles (125) - 1,093 1,158 1,005 747 1,973 1,905
----- -------- -------- --------- ---------- -------- ---------- ---------
Income (loss) from
operations (470) (67) 5,833 7,115 2,254 2,787 7,617 9,835
Interest expense (7,359) (6,961)
Other income (expense) 38 (20)
---------- ---------
Income before taxes 296 2,854
Provision for taxes 243 1,427
-------- --------
Net income $ 53 $1,427
========= ======
</TABLE>
Table 2: Pro forma Results for the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Corporate Aerostructures Electronics Total
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ $ - $105,926 $121,981 $ 72,302 $ 68,971 $178,228 $190,952
ost of goods sold 75,763 87,464 48,349 47,660 124,112 135,124
------- ------- --------- --------- --------- --------- --------- ---------
Gross profit - - 30,163 34,517 23,953 21,311 54,116 55,828
Gross margin - - 28.5% 28.3% 33.1% 30.9% 30.4% 29.2%
Selling, general, and
administrative expenses 1,000 67 8,612 11,169 9,153 8,695 18,765 19,931
Research & development
expenses - - - - 6,832 4,413 6,832 4,413
Amortization of intangibles
(250) - 3,275 3,464 2,756 2,241 5,781 5,705
----- -------- -------- ---------- ---------- --------- ---------- ----------
Income (loss) from
operations (750) (67) 18,276 19,884 5,212 5,962 22,738 25,779
Interest expense (21,048) (20,883)
Other income (expense) 165 (80)
---------- ---------
Income before taxes 1,855 4,816
Provision for taxes 1,149 2,400
--------- --------
Net income $ 706 $ 2,416
========== =========
</TABLE>
9
<PAGE>
Net Sales. Pro forma net sales for Stellex were $57.4 million and $178.2
million for the three and nine months ended September 30, 1999, respectively,
representing a 9.1% and a 6.7% decrease over the comparable periods in 1998. Pro
forma net sales for the Electronics segment totaled $24.5 million and $72.3
million for the three and nine months ended September 30, 1999, respectively,
representing a 12.9% and a 4.8% increase over the comparable periods in 1998.
The increase in pro forma sales at Electronics resulted primarily from increased
sales due to the ramp up of a new $13.0 million military program with Raytheon
at Phoenix and the Longbow program ramp up at Microwave, offset by lower
commercial component sales at Microwave. The second quarter of 1998 was the
final quarter at Microwave impacted by the "catch-up" of delinquent commercial
component orders arising from production planning problems associated with the
implementation of the production planning software during 1996 and 1997 which
resulted in higher sales during the first two quarters of 1998. Microwave's
efforts in the broadband wireless communications market are beginning to show
results. Recent orders for a digital radio synthesizer were secured totaling
over $6 million, and field trials for outdoor units (ODUs) supporting a
significant telecommunication manufacturer will begin this December.
Pro forma net sales for the Aerostructures segment totaled $33.0 million and
$105.9 million for the three and nine months ended September 30, 1999,
respectively, representing a 20.6% and a 13.2% decrease over the comparable
periods in 1998. The decrease in pro forma sales was due to weaker demand from
OEMs in the commercial aviation market resulting primarily from Boeing-related
inventory management issues compounded by decreased demand from Asian markets.
The significance of any further Boeing-related decelerations continues to be
difficult to predict. Business and regional jet program opportunities remain
robust, particularly at Precision, and have helped to partially offset the
decline in shipments and bookings from the commercial jet business.
Gross Margin. Pro forma gross margin for Stellex was 31.6% and 30.4% for the
three and nine months ended September 30, 1999, respectively, compared to a
gross margin of 31.9% and 29.2% for the comparable periods in 1998. Pro forma
gross margin for Electronics was 34.8% and 33.1% for the three and nine months
ended September 30, 1999, respectively, compared to a gross margin of 36.8% and
30.9% for the comparable periods in 1998. The decrease in pro forma gross margin
at Electronics for the quarter ended September 30, 1999 in comparison to the
previous year was due to low gross margins on a start-up broadband wireless
program and certain funded non-recurring engineering projects and the expiration
of a high volume subcontract manufacturing arrangement, offset partially by
gross margin improvement on certain long run tactical subsystem programs. Good
progress has been made toward dual sourcing of MMICs on the Longbow program.
Improvement in pro forma gross margins during the nine months ended September
30, 1999 compared to the prior year resulted primarily from improvement in
margins on the Longbow program and a high volume subcontract manufacturing
arrangement.
Pro forma gross margin for Aerostructures was 29.2% and 28.5% for the three and
nine months ended September 30, 1999, respectively, compared to a pro forma
gross margin of 29.3% and 28.3% for the comparable periods in 1998.
Aerostructures was successful in supporting its gross margin levels in spite of
lower volume, higher than normal start-up costs on certain new jobs and
scheduling inefficiencies resulting from sporadic program deceleration
directives from customers. Management made proactive adjustments to overall
production manning levels, while continuing to refine overhead spend. Certain
pricing actions recently negotiated with Boeing will put pressure on future
gross margin levels. However, management believes that, based on current pricing
data, the overall impact to the Aerostructures business should not be material
considering continuous improvement efforts in engineering and tooling as well as
the impact of machining efficiencies resulting from new equipment installations
primarily resident at Precision.
Selling, General and Administrative Expenses. Pro forma selling, general and
administrative expenses for Stellex totaled $6.2 million and $18.8 million, or
10.8% and 10.5% stated as a percentage of pro forma net sales, for the three and
nine months ended September 30, 1999 and 1998, respectively. When adjusted for
the elimination of non-cash compensation expense relating to the valuation of
management ownership puts at Aerospace during 1998, pro forma selling, general
and administration expense would have been $6.1 million and $17.7 million, or
9.7% and 9.3% stated as a percentage of pro forma net sales, for the three and
nine months ended September 30, 1999 and 1998, respectively. The increase is due
primarily to additional marketing spend directed at strategic customers in
existing markets and the expansion into the broadband wireless and CATV markets.
Research and Development Expenses. Pro forma research and development expenses
for Stellex totaled $2.3 million and $6.8 million for the three and nine months
ended September 30, 1999, respectively, compared to $1.6 million and $4.4
million for the comparable periods in 1998. The increase in pro forma research
and development costs resulted from the expansion of engineering capabilities at
Microwave relating to new product introductions in the commercial and broadband
wireless markets.
Liquidity and Capital Resources
The Company provided cash flows from operations of $14.9 million and
$2.3 million for the nine months ended September 30, 1999 and 1998,
respectively. The increase in cash flows was primarily due to a significant
customer advance received in January 1999 at Stellex Microwave.
The Company used cash flows for investing activities, excluding cash
flows used in connection with the Phoenix and Precision acquisitions in 1999 and
the Monitor acquisition in 1998, totaling $10.1 million and $ 3.1 million, for
the nine months ended September 30, 1999 and 1998, respectively. Capital
investments during 1999 were primarily comprised of expenditures totaling $3.6
million for the Electronics segment and $5.1 million for the Aerostructures
segment. The Electronics segment expenditures have related predominately to the
development activities in commercial and broadband product applications.
Aerostructures segment expenditures represent upgrading activities relating to
CNC equipment and tooling design software as well as various machine equipment
investments directly relating to significant contract awards and other strategic
initiatives. Approximately $15.2 million and $87.6 million of cash proceeds were
used to consummate the acquisitions of Phoenix and Precision in March and April
1999, respectively, and approximately $90.8 million of cash was used to
consummate the acquisition of Monitor in May 1998.
The Company provided cash flows from financing activities totaling
$96.8 million and $90.6 million for the nine months ended September 30, 1999 and
1998, respectively. Cash proceeds were used to fund the acquisitions of Phoenix
and Precision in 1999 and of Monitor in 1998. During 1999, the acquisition of
Phoenix was funded by a $16.0 million draw-down under the Company's then
existing senior credit facility. As a result of the Precision acquisition, the
senior credit facility was amended and restated to provide the necessary
incremental debt financing totaling approximately $76.0 million coupled with net
proceeds from the issuance of $20.0 million of Preferred Stock totaling
approximately $19.0 million.
The current senior secured credit facility provides for a two tranche
term loan comprised of a $60 million Term A facility and a $110 million Term B
facility, in addition to a $65 million revolving loan facility. The Term A
facility has a six-year term with escalating quarterly principal payments
bearing interest at either the base rate plus a margin rate of up to 2.0% based
on a leverage ratio or the Eurodollar rate plus a margin rate of up to 3.0%
based on a leverage ratio. The Term B facility has a ninety-month term with
escalating quarterly principal payments bearing interest at either the base rate
plus a margin rate of 2.5% or the Eurodollar rate plus a margin rate of 3.5%.
The revolving credit facility has a six-year term bearing interest at either the
base rate plus a margin rate of up to 2.0% based on a leverage ratio or the
Eurodollar rate plus a margin rate of up to 3.0% based on a leverage ratio. As
of September 30, 1999, approximately $185.3 million was outstanding under the
senior secured credit facility, including $18.3 million under the revolving loan
facility. Borrowing availability under the revolving loan facility is subject to
customary conditions, including compliance with the Company's other debt
instruments.
The Preferred Stock provides for cumulative dividends accruing at a
rate of 13% per annum. On or prior to August 31, 2004, Stellex may, at its
option, pay dividends either in cash or in additional shares of Preferred Stock.
After August 31, 2004, dividends may be paid only in cash. The Preferred Stock
is mandatorily redeemable on August 31, 2010 at a redemption price equal to 100%
of the aggregate liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of redemption. Stellex may, at its
option, redeem the outstanding shares of Preferred Stock on or before January 1,
2000 (or March 15, 2000 under certain circumstances) or after August 31, 2004 at
specified redemption prices together with accumulated and unpaid dividends, if
any, to the date of redemption. Under certain circumstances, Stellex may also
redeem the Preferred Stock with the proceeds of equity offerings. In connection
with the issuance of the Preferred Stock, Stellex granted to the purchaser of
the Preferred Stock warrants to purchase shares of common stock in an amount
equal to 1% of Stellex's issued and outstanding shares of common stock on the
date of grant. The warrants have an exercise price of $0.01 per share. On August
31, 1999, Stellex issued additional warrants to such purchaser such that such
purchaser's total warrants represented the right to purchase 3% of Stellex's
issued and outstanding shares of common stock. In the event Stellex is not able
to redeem the Preferred Stock on or before January 1, 2000 (or March 15, 2000
under certain circumstances), Stellex will be required to grant additional
warrants to the purchaser of the Preferred Stock such that such purchaser's
total warrants represent the right to purchase 5% of Stellex's issued and
outstanding shares of common stock.
The Company's primary liquidity demands will be for debt service,
capital expenditures and working capital needs. During the remaining quarter of
1999, based on the Company's existing operations, anticipated capital
expenditures should total less than $2.0 million representing equipment upgrades
and maintenance capital spend. The Company enjoys a reputation as a high quality
supplier and will continue to support that reputation through appropriate levels
of capital expenditures as well as maintenance of its various continuous
improvement programs. Based on further positive progress on the commercial and
broadband wireless program opportunities now in development at the Electronics
segment, Stellex Microwave anticipates a level of capital spending during 2000
of approximately $6.0 million. Further to Stellex Microwave's efforts in
developing new market opportunities for the Electronics segment, consistent
levels of research and development spending are anticipated through 2000. In
addition, Stellex Microwave has a planned facilities relocation in the late
summer to early fall of 2000 from the Palo Alto facility to a location in San
Jose which may require significant capital spend on leasehold improvements.
Discussions with the building developer on leasing terms are currently underway.
Year 2000 capital spending for the Aerostructures segment is currently
under evaluation and could range from $7.0 to $10.0 million. Aerostructures
related capital spending would focus primarily on high priority equipment
refurbishment programs and additional high-speed machining capabilities to the
extent long-term program awards justify the investment.
Debt service requirements, including scheduled principal repayments,
over the next twelve months are estimated to total approximately $36.5 million,
assuming interest rates remain relatively stable. There can be no assurances
that the Company's substantial debt service requirements will not significantly
limit funds available for other purposes, including capital expenditures.
The Company is currently marketing certain of its owned facilities as
sale-leaseback arrangements in order to transfer that invested capital to
activities with a higher rate of return. However, no assurances can be given
that such sale-leaseback transactions will be consummated on commercially
reasonable terms, or at all. The Company's management believes that, based on
its current level of operations and projected growth potential, its anticipated
cash flow from operations in addition to anticipated proceeds from
sale-leaseback activities and borrowing availability will provide for an
adequate level of liquidity to meet its anticipated requirements for working
capital, capital expenditures, and debt service.
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. The problem is not limited to computer
systems. Year 2000 issues may also affect non-information technology systems
that have embedded microchips.
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, including newly acquired Phoenix and Precision, have
substantially completed their internal IT and non-IT systems reviews for Year
2000 compliance. The remaining procedures involve the completion of compliance
testing. Significant vendors and customers have been contacted and queried.
Based on the responses of such queries the Company is not aware of any
non-compliance issues which would present a material risk to the Company's
operations. The Company's subsidiaries will continue to pursue other vendors and
customers who have yet to respond.
Based on a review of the content of various Company products, it has
been determined that there exists no embedded calendar dependent data.
Year 2000 compliance assessments have been completed on the recently
acquired Phoenix Microwave and Precision Machining businesses. Assessments of
internal IT and non-IT systems indicate that no significant system hardware or
software upgrades are required. At present all subsidiaries are carrying out
compliance testing which will continue through the remainder of the year and
even into the Year 2000.
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 $1.5 million, and
we expect to incur additional costs of approximately $0.1 million for the
remainder of the year.
Risks associated with Year 2000 issue: The Company believes there is
low risk of any internal critical system, embedded system, or other critical
asset over which the Company has control not being Year 2000-ready by the end of
1999. The Company continues to assess its risk exposure attributable to external
factors, such as 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. Evaluation 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 has been developed and
is being re-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. However, the interruption of significant
materials or services would likely materially adversely affect the Company's
operations.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which defines derivatives and
requires that all derivatives be carried at fair value, but also provides for
hedging accounting when certain conditions are met. This statement will be
effective for fiscal years beginning after June 15, 2000. The Company has
recently entered into a capped interest swap arrangement with a bank which would
be classified as a cash flow hedge under SFAS 133. The accounting treatment for
a cash flow hedge, assuming it is an effective hedge, would require the
recognition of other comprehensive income or loss until the forecasted
transaction is actually realized, at which time, amounts previously recognized
in other comprehensive income would be reclassified to income. In addition, when
the cumulative change in the fair value of the derivative exceeds the cumulative
change in the fair value of the hedged item, the ineffective portion of the
derivative's change is recognized in income. Management has not fully assessed
the implications of this new statement on its financial statements, 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.
Forward Looking Statements
Certain statements in this 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: the risks associated with the Company's
dependence on a limited number of large customers, the risk of loss of certain
significant military programs, the Company's high degree of leverage, operating
restrictions contained in the Company's debt instruments, Year 2000 issues,
continued decelerations or cancellations of commercial aircraft component orders
and predatory pricing tactics within our industry segments.
10
<PAGE>
ITEM 3. 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. On October 15, 1999, the Company
entered into a capped interest swap transaction with a bank as part of a dynamic
hedging strategy employed to manage its interest rate risk. Under the swap
transaction, the Company is obligated to pay the fixed rate of interest equal to
6.05% on a notional amount of $43.0 million for a period of 3 years in exchange
for a floating rate of interest based on 3-month LIBOR capped at 6.625% on the
same notional amount. Settlements on the swap arrangement will occur quarterly.
At September 30, 1999, the Company's total outstanding debt was comprised of
fixed interest rate obligations of $108,492,000 and variable interest rate
obligations of $185,300,000.
The table below provides information (in thousands of dollars) about the
Company's maturity schedule and fair values of its outstanding debt as of
September 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt
Senior
Year ending Term Loan Term Loan Revolving Subordinated Seller
December 31, A B Loan Facility Notes Notes Other
- ----------- ------- --------- ------------ ----- ----- -----
1999 $ 1,250 $ 250 $ - $ - $ - 47
2000 6,875 1,000 - - 5,180 266
2001 9,375 1,000 - - - 2,609
2002 10,000 1,000 - - - 158
2003 11,875 1,000 - - - 90
2004 14,375 1,000 - - - 121
Thereafter 3,750 104,250 $18,300 $100,000 - 21
--------- -------- ------- -------- ------- -----
Total $57,500 $109,500 $18,300 $100,000 $ 5,180 $3,312
======= ======== ======= ======== ======= ======
Fair Market $57,500 $109,500 $18,300 $ 74,050 $ 5,180 $3,312
Value ======= ======== ======= ======== ======= ======
</TABLE>
Based upon the Company's current level of variable rate debt, a 100 basis points
increase or decrease in interest rates will cause an approximate $1.85 million
increase or decrease in annual interest expense.
The Company incurred an increase of approximately $75.7 million of variable debt
as a result of the Precision Acquisition on April 22, 1999 (See Note 1 to the
Notes to the Unaudited Consolidated Financial Statements).
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
The Company is involved in various legal action arising in the normal course of
business. While it is not possible to determine with certainty the outcome of
these matters, in the opinion of management, the eventual resolution of the
claims and actions outstanding are unlikely to have a material adverse effect on
the Company's financial position or operating results.
ITEM 2: Changes in Securities and Use of Proceeds
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K: None
12
<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 the 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 November 15, 1999.
STELLEX TECHNOLOGIES, 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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ William L. Remley Vice Chairman, President, Chief Executive November 15, 1999
- ------------------------
William L. Remley Officer, Treasurer and Director of Stellex
Technologies, Inc.
/s/ P. Roger Byer Chief Financial Officer of Stellex November 15, 1999
- --------------------
P. Roger Byer Technologies, Inc. (principal financial
and accounting officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 284
<SECURITIES> 0
<RECEIVABLES> 31,793
<ALLOWANCES> 318
<INVENTORY> 74,788
<CURRENT-ASSETS> 115,138
<PP&E> 101,901
<DEPRECIATION> 12,508
<TOTAL-ASSETS> 391,068
<CURRENT-LIABILITIES> 63,144
<BONDS> 100,000
20,104
11,450
<COMMON> 50
<OTHER-SE> (7,746)
<TOTAL-LIABILITY-AND-EQUITY> 391,068
<SALES> 165,767
<TOTAL-REVENUES> 165,767
<CGS> 122,147
<TOTAL-COSTS> 152,845
<OTHER-EXPENSES> 19
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,709
<INCOME-PRETAX> (5,668)
<INCOME-TAX> (1,776)
<INCOME-CONTINUING> (3,892)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,892)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
