<PAGE>
---------------------------------------------------------------------------
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: June 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
Stellex Industries, Inc., 1430 Broadway, 13th Floor, New York, New York, 10018
(Former name and former address)
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 August 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.
-----------------------------------------------------------------------------
1
ITEM 1: Financial Statements
<TABLE>
<CAPTION>
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1999 1998
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,734 $ 1,405
Account receivables, net 31,741 28,452
Inventories 71,864 58,329
Prepaid and other assets 4,215 3,200
Deferred income taxes 3,403 3,318
------------- --------------
Total current assets 115,957 94,704
Property, plant and equipment, net 89,247 53,871
Goodwill, net 118,003 60,786
Other intangible assets, net 50,997 52,552
Deferred financing costs, net 13,927 9,033
Other assets 5,529 2,284
------------- --------------
Total assets $ 393,660 $ 273,230
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term obligations $ 8,517 $ 5,533
Accounts payable 10,716 11,639
Accrued liabilities 20,260 17,797
Advance billings and customer deposits 20,884 252
----------------- ---------------
Total current liabilities 60,377 35,221
9 1/2% senior subordinated notes 100,000 100,000
Long-term obligations, less current portion 184,926 106,201
Deferred employee benefits 2,233 1,952
Deferred income taxes 21,215 20,029
----------------- ---------------
Total liabilities 368,751 263,403
---------------- ---------------
13% Senior Cumulative Redeemable
Preferred Stock 18,950 -
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
(8,595) (4,727)
---------------- ---------------
Total stockholders' equity 5,959 9,
Total liabilities and stockholders' equity $ 393,660 $ 273,230
================ ===============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 58,721 $ 38,450 $ 108,334 $ 66,349
Cost of sales 44,457 27,812 80,879 49,763
Gross profit 14,264 10,638 27,455 16,586
Operating expenses:
Selling, general and administrative 5,948 12,916 10,076
Research and development 2,620 1,209 4,296 2,149
Amortization of intangibles 1,681 851 2,974 1,493
----- --- ----- -----
Total operating expenses 11,892 8,008 20,186 13,781
------ ----- ------ ------
Income from operations 2,372 2,630 7,269 2,868
----- ----- ----- -----
Other income (expense):
Interest income 32 25 84 58
Interest expense (6,533) (3,712) (11,349) (6,482)
Other 1 (70) (2) (133)
- ---- --- -----
Total other expense (6,500) (3,757) (11,267) (6,557)
------- ------- -------- -------
Loss before provision for income taxes (4,128) (1,127) (3,998) (3,689)
Benefit for income taxes (1,390) (246) (1,321) (1,018)
------- ----- ------- -------
Net loss (2,738) (881) (2,677) (2,671)
Preferred stock dividends 827 286 1,191 573
------- ---- ----- ------
Loss applicable to common stockholders $ (3,565) $ (1,167) $ (3,868) (3,244)
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,677) $ (2,671)
Reconciliation to net cash provided by (used in) operating activities:
Depreciation and amortization 8,945 4,922
Amortization of step-up in inventory 2,322 1,457
Gain on sale of property (6) (3)
Deferred income taxes (1,294) (1,027)
Stock compensation charge - 1,490
Changes in assets and liabilities (net of acquired assets and assumed
liabilities):
Accounts receivable 1,971 (3,010)
Inventories (957) (1,740)
Prepaid and other assets (2,165) 2,792
Accounts payable (2,531) (72)
Accrued liabilities (2,349) (1,919)
Advance billings and customer deposits 17,644 (935)
------ -------
Net cash provided (used) by operating activities 18,903 (716)
------ -------
Cash Flows from Investing Activities:
Additions to fixed assets (8,128) (2,212)
Proceeds from sale of fixed assets 16 24
Net cash used in acquisitions (102,497) (90,364)
--------- --------
Net cash used in investing activities (110,609) (92,552)
--------- --------
Cash Flows from Financing Activities:
Net borrowings under revolving line of credit 1,500 8,250
Payment of financing costs (5,634) (4,242)
Borrowings from Senior Term Loans 81,800 90,000
Net proceeds from issuance of Preferred Stock 18,950 -
Mandatory repayments under new Senior Term Loans (1,500) -
Repayments under capital lease obligations (48) (31)
Repayment of debt and notes payable (33) (31)
Net cash provided by financing activities
95,035 93,946
-------- -------
Net increase in cash and cash equivalents 3,329 678
Cash and cash equivalents, beginning of period 1,405 3,304
-------- -------
Cash and cash equivalents, end of period $ 4,734 $ 3,982
======== =======
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
STELLEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,695 $ 5,431
Income taxes 340 -
Supplemental schedule of non-cash investing and financing activities:
Capital lease agreements for equipment - 30
Note issued to Seller in conjunction with Monitor Acquisition - 5,180
Assets acquired and liabilities assumed in connection with the Acquisitions:
Fair value of assets acquired $ 117,416 $ 130,420
Fair value of liabilities assumed (7,581) (34,484)
------- --------
Cash paid 109,835 95,936
Less financing fees and expenses (5,634) (4,165)
Less cash acquired (1,704) (1,407)
------- --------
Net cash used for business acquisitions $ 102,497 $ 90,364
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<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 Holdings
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, Inc. 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.
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.
6
<PAGE>
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. 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.
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.
Precision Acquisition - On April 22, 1999, the Company, through Stellex
Precision Machining, Inc. ("Precision"), a wholly-owned subsidiary of Stellex
Aerostructures, Inc. 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 $9.6 million. 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 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. 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 representing up to 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):
Six Months Ended
June 30,
1999 1998
---- ----
Net sales $ 120,795 $ 127,783
Gross profit 35,990 35,703
Net income (loss) 654 989
7
<PAGE>
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 June 30, 1999
and the consolidated statements of operations and consolidated statements of
cash flows for the periods ended June 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 Phoenix and Precision
as of June 30, 1999 represent management's best estimates. Phoenix's results of
operations presented herein are from the date of acquisition on March 1, 1999,
to June 30, 1999. Precision's results of operations are from the date of
acquisition on April 22, 1999, to June 30, 1999. The comparative financial
statements for the quarter ended June 30, 1998 include the accounts of Stellex
Aerospace, Monitor Aerospace from the date of acquisition on May 29, 1998 to
June 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):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Raw materials $ 21,010 $15,470
Work-in-process 30,793 25,782
Finished goods 10,458 7,994
Production tooling 9,603 9,083
------ ------
Total $ 71,864 $58,329
====== ======
3. Long-Term Obligations
Long-term obligations consisted of the following (in thousands):
June 30, December 31,
1999 1998
(Unaudited)
Term Loan A $ 58,750 28,500
Term Loan B 109,750 59,700
Revolving line of credit 15,000 13,500
7.785% Mortgage notes payable 2,528 2,561
Sellers notes payable 6,930 6,930
Obligations under capital leases 395 446
Other long term obligations 90 97
------- -------
193,443 111,734
Less current portion
8,517 5,533
------- -------
Total $ 184,926 $106,201
======= =======
</TABLE>
8
<PAGE>
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 believes that there are no lawsuits that will have a material affect
on the Company's financial position.
5. 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 during either the second quarter of 1999 or during
the subsequent period. These option plans are structured such that option strike
prices will be set at or above fair market value on the date of grant.
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 common stock of Precision. 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. 1998 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 common stock of Microwave (the "Microwave Option
Plan").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 common
stock of Monitor. 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.
9
<PAGE>
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 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 are the condensed consolidating financial
information of the guarantor subsidiaries as of June 30, 1999 and for the three
and six 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
(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>
Cash and cash equivalents $ 1,075 $ 1,891 $ 559 $ 522 $ 687 $ - $ 4,734
Accounts receivable, net - 12,938 5,169 10,129 3,505 - 31,741
Inventories - 22,442 15,914 25,299 8,209 - 71,864
Other current assets 3,993 3,581 1,195 3,119 1,308 (5,578) 7,618
----- ----- ----- ----- ----- ------- -----
Total current assets 5,068 40,852 22,837 39,069 13,709 (5,578) 115,957
Property, plant and equipment, net 1,680 20,722 16,290 23,289 27,266 - 89,247
Goodwill and intangibles, net - 60,731 - 59,766 48,503 - 169,000
Investment in & advances to
subsidiaries 308,617 - - - - (308,617) -
Other assets 3,638 7,335 2,246 9,686 5,767 (9,216) 19,456
------- ------- ------ ------- ------ -------- ------
Total assets 319,003 129,640 41,373 131,810 95,245 (323,411) 393,660
======= ======= ====== ======= ====== ========= =======
Current liabilities 7,490 32,141 6,928 8,416 2,166 3,236 60,377
9 1/2% senior subordinated 100,000 - - - - - 100,000
notes
Intercompany notes 1,689 97,041 21,917 59,972 63,818 (244,437) -
Term Loans - long term 183,500 - - - - (6,625) 176,875
Other long-term liabilities - 4,616 6,378 29,437 152 (9,084) 31,499
Redeemable Preferred Equity 18,950 - - - - - 18,950
Stockholders' equity
(deficit) 7,374 (4,158) 6,150 33,985 29,109 (66,501) 5,959
----- ------- ----- ------ ------ -------- -------
Total liabilities and
stockholders' equity 319,003 129,640 41,373 131,810 95,245 (323,411) 393,660
======= ======= ====== ======= ====== ========= =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Condensed Financial Information of Stellex and its Subsidiaries (Continued)
Condensed Consolidating Statement of Operations For The Three Months Ended June 30, 1999
(in thousands)
Stellex Stellex Stellex Adjustments Stellex
(Parent Only) Microwave Aerospace Monitor Precision & Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ - $ 24,788 $ 7,851 $ 18,843 $ 7,239 $ - $ 58,721
Cost of sales - 17,439 5,858 14,405 6,755 - 44,457
Operating expenses 224 6,088 1,292 967 1,727 (87) 10,211
Amortization of intangibles - 900 - 593 313 (125) 1,681
--- --- -- --- --- ----- -----
Income (loss) from operations (224) 361 701 2,878 (1,556) 212 2,372
Interest expense (5,864) (2,318) (620) (1,579) (1,138) 4,986 (6,533)
Other income (expense) 4,607 12 (12) 9 4 (4,587) 33
----- -- ---- - - ------- --
Income (loss) before income taxes (1,481) (1,945) 69 1,308 (2,690) 611 (4,128)
Provision (benefit) for income taxes (592) (1,014) 9 482 (1,019) 744 (1,390)
----- ------- - --- ------- --- -------
Net income (loss) (889) (931) 60 826 (1,671) (133) (2,738)
Preferred stock dividend 827 - - - - - 827
Income (loss) applicable to
common shareholders $ (1,716) $ (931) $ 60 $ 826 (1,671) (133) (3,565)
======= ===== == === ======= ===== =======
Condensed Consolidating Statement of Operations For The Six Months Ended June 30, 1999
(in thousands)
Stellex Stellex Stellex Adjustments & Stellex
(Parent Only) Microwave Aerospace Monitor Precision Eliminations Consolidated
Sales $ - $ 45,079 $ 15,123 $ 40,893 $ 7,239 $ - 108,334
Cost of sales - 31,680 11,416 31,028 6,755 - 80,879
Operating expenses 405 10,393 2,533 2,154 1,727 - 17,212
Amortization of intangibles - 1,600 - 1,186 313 (125) 2,974
- ----- -- ----- --- ----- -----
Income (loss) from operations (405) 1,406 1,174 6,525 (1,556) 125 7,269
Interest expense (10,154) (4,446) (1,198) (3,016) (1,138) 8,603 (11,349)
Other income (expense) 8,651 16 (13) 22 4 (8,598) 82
----- -- ---- -- - ------- --
Income (loss) before income taxes (1,908) (3,024) (37) 3,531 (2,690) 130 (3,998)
Provision (benefit) for income
taxes (763) (1,332) (33) 1,320 (1,019) 506 (1,321)
----- ------- ---- ----- ------- --- -------
Net income (loss) (1,145) (1,692) (4) 2,211 (1,671) (376) (2,677)
Preferred stock dividend 1,191 - - - - - 1,191
----- - - - - - -----
Income (loss) applicable to
common shareholders (2,336) (1,692) (4) 2,211 (1,671) (376) (3,868)
======= ======= === ===== ======= ===== =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Condensed Financial Information of Stellex and its Subsidiaries (Continued)
Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 1999
(in thousands)
Stellex Stellex Stellex Adjustments & Stellex
(Parent Microwave Aerospace Monitor Precision Eliminations Consolidated
Only)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (1,145) $ (1,692) $ (4) $ 2,211 $ (1,671) $ (376) $ (2,677)
Depreciation and amortization 405 4,811 1,021 2,336 792 1,902 11,267
Deferred taxes and other - - (1) (117) (298) (878) (1,294)
Change in operating assets
and liabilities (1,366) 16,706 (1,336) (3,818) (401) 1,822 11,607
------- ------ ------- ------- ----- ----- ------
Net cash provided by (used (2,106) 19,825 (320) 612 (1,578) 2,470 18,903
in) operations
Fixed asset additions (1,199) (2,843) (2,331) (1,736) (19) - (8,128)
Cash used in acquisitions - (15,198) - - (85,122) (2,177) (102,497)
Proceeds from sale of fixed assets - - 3 13 - - 16
----- ------ - -- - - --
Net cash used in investing (1,199) (18,041) (2,328) (1,723) (85,141) (2,177) (110,609)
activities
Mandatory term loan (1,500) - - - - - (1,500)
repayments
Net borrowing under revolver 1,500 - - - - - 1,500
Borrowings under term loans 81,800 - - - - - 81,800
Net proceeds from issue of 18,950 - - - - - 18,950
preferred stock
Intercompany loans and (98,858) (997) 3,016 1,621 91,282 3,936 -
investments
Other
2,471 - (81) - (3,876) (4,229) (5,715)
----- - ---- - ------- ------- -------
Cash provided by (used in)
financing 4,363 (997) 2,935 1,621 87,406 (293) 95,035
activities
Net increase in cash $ $ $ $ $ $ $
1,058 787 287 510 687 - 3,329
</TABLE>
12
<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 space industries. The Electronics segment consists of
Stellex Microwave and its wholly-owned subsidiary, Phoenix. 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 June 30, 1999 Compared to the Three Months Ended
June 30, 1998
The historical consolidated operating results for the three months ended June
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 $ $ - $ 33,933 $ 17,818 $ 24,788 $ 20,632 $ 58,721 $ 38,450
- -
Cost of goods sold 27,018 13,210 17,439 14,602 44,457 27,812
---------- ---------- -------- --------- --------- --------- --------- ---------
- -
Gross profit - - 6,915 4,608 7,349 6,030 14,264 10,638
Gross margin - - 20.4% 25.9% 29.6% 29.2% 24.3% 27.7%
Selling, general, and
administrative expenses 137 8 3,986 3,467 3,468 2,473 7,591 5,948
Research & development
expenses - - - - 2,620 1,209 2,620 1,209
Amortization of intangibles (125) - 907 210 899 641 1,681 851
------ ------ ------- -------- ---------- ----------- ------------ -----------
Income (loss) from operations (12) (8) 2,022 931 362 1,707 2,372 2,630
Interest expense (6,533) (3,712)
Other income (expense)
33 (45)
-- ----
Net loss before income taxes (4,128) (1,127)
Income tax benefit (1,390)
-------
(246)
Net loss
(2,738) (881)
</TABLE>
Net Sales. Net sales for Stellex totaled $58.7 million and $38.5
million for the three months ended June 30, 1999 and 1998, respectively. Net
sales for the Electronics segment totaled $24.8 million and $20.6 million for
the three months ended June 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, partially offset by lower commercial sales at Stellex
Microwave resulting primarily from the completion during the three 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. Net sales for Phoenix for the three months ended June 30,
1999 totaled $4.9 million. Tactical subsystem sales for Stellex Microwave
increased slightly compared to the prior year, as new programs such as the
Longbow program ramped to full rate production levels.
13
<PAGE>
Net sales for the Aerostructures segment totaled $33.9 million and
$17.8 million for the three months ended June 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 three months
ended June 30, 1999 totaled $18.8 million compared to $7.9 million for the
period from acquisition May 29, 1998 to June 30, 1998. Net sales for Precision
from the date of acquisition on April 22, 1999 to June 30, 1999 totaled $7.2
million. The decrease in net sales at Stellex Aerospace during the second
quarter of 1999 of $2.0 million, or 20.6% compared to the same period in 1998,
resulted from weak demand from OEMs in the commercial aviation market resulting
primarily from Boeing-related inventory management issues and 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 in comparison to the prior year. The
significance of any further delays is difficult to predict. However, recent
order activity at Boeing as well as an increase in proposal activity at Stellex
Aerostructures suggest that the situation is beginning to stabilize.
Gross Margins. Gross margin for Stellex was 24.3% and 27.7% for the
three months ended June 30, 1999 and 1998, respectively. Gross margin for the
Electronics segment was 29.6% and 29.2% for the three months ended June 30, 1999
and 1998, respectively. The increase in gross margin for the Electronics segment
was primarily due to productivity improvements at Stellex Microwave offset by a
non-recurring acquisition charge at Phoenix relating to the amortization of the
purchase accounting adjustment for profits in inventory which totaled $0.8
million.
Gross margin for the Aerostructures segment was 20.4% and 25.9% for the
three months ended June 30, 1999 and 1998, respectively. The decrease in gross
margin was partially attributable to the impact of the newly acquired operations
of Precision as of April 22, 1999, which delivered a gross margin of 6.7% for
the period of ownership. The low gross margin at Precision was the result of a
non-recurring acquisition charge relating to the amortization of the purchase
accounting adjustment for profits in inventory totaling $1.3 million and a one
time non-recurring employee retention bonus award of $1.0 million. Stellex
Aerospace's gross margin totaled 25.4% for the quarter, which was significantly
lower compared to the prior year as a result of lower volume and higher than
normal start-up costs on new programs. Gross margin at Monitor was 23.6% for the
quarter compared to 18.3% for the comparable period in 1998. This increase in
gross margin was due to a nonrecurring acquisition charge which impacted the
second quarter of 1998 coupled with productivity improvements on certain
programs and a more favorable product mix. The non-recurring charge at Monitor
during 1998 related to the amortization of the purchase accounting adjustment
for profits in inventory totaled $0.4 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Stellex totaled $7.6 million and $5.9 million, or
12.9% and 15.5% stated as a percentage of net sales, for the three months ended
June 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, Phoenix and Precision, 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 $0.8 million. As a result of the acquisitions of Monitor and
Precision, selling general and administrative expenses in the second quarter of
1999 include non-recurring charges of $1.3 million for Precision and $1.0
million for Monitor in the comparable quarter 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 $2.6 million and $1.2 million for the three months ended
June 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
three months ended June 30, 1999, increased $0.8 million, or 97.6%, 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. Other intangible assets are being amortized
over their estimated useful lives ranging from one to thirty years. Goodwill is
being amortized over fifteen to thirty years.
Interest Expense. Interest expense for the Company increased to $6.5
million for the three months ended June 30, 1999 compared to $3.7 million during
the same period in 1998. The increase in interest expense resulted primarily
from the incurrence of indebtedness to finance the Monitor, Precision and
Phoenix acquisitions. The borrowings under the senior secured credit facilities
generally bear interest at an interest rate based on the Eurodollar rate. The
average interest rate on such borrowings for the three months June 30, 1999 was
approximately 8.3%.
Income Tax Provision (Benefit). The effective tax rates for the Company
for the three months ended June 30, 1999 were impacted primarily by
non-deductible goodwill amortization at Monitor and Phoenix.
14
<PAGE>
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The historical consolidated operating results for the six months ended June 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 $ $ $ 63,255 $ 26,089 $ 45,079 $ 40,260 $ 108,334 $ 66,349
- -
Cost of goods sold 49,199 19,086 31,680 30,677 80,879 49,763
--------- ---------- ------ --------- --------- --------- ----------- ---------
- -
Gross profit - - 14,056 7,003 13,399 9,583 27,455 16,586
Gross margin - - 22.2% 26.8% 29.7% 23.8% 25.3% 25.0%
Selling, general, and
administrative expenses 405 30 6,415 5,380 6,096 4,666 12,916 10,076
Research & development
expenses - - - - 4,296 2,149 4,296 2,149
Amortization of intangibles (125) - 1,500 210 1,599 1,283 2,974 1,493
------- ------- --------- -------- --------- ----- ------- -------
Income (loss) from operations (280) (30) 6,141 1,413 1,408 1,485 7,269 2,868
Interest expense (11,349) (6,482)
Other income (expense)
82 (75)
Net loss before income taxes (3,998) (3,689)
Income tax benefit (1,321) (1,018)
------- ----------
Net loss
$(2,677) (2,671)
</TABLE>
Net Sales. Net sales for Stellex totaled $108.3 million and $66.3
million for the six months ended June 30, 1999 and 1998, respectively. Net sales
for the Electronics segment totaled $45.1 million and $40.3 million for the six
months ended June 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, 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. Net sales for Phoenix from the date of acquisition March 1, 1999 to
June 30, 1999 totaled $6.6 million. Tactical subsystem sales for Stellex
Microwave increased slightly compared to the prior year, as new programs such as
Longbow program ramped to full rate production levels.
Net sales for the Aerostructures segment totaled $63.3 million and
$26.1 million for the six months ended June 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 six months ended June
30, 1999 totaled $40.9 million compared to $7.9 million for the period from its
acquisition on May 29, 1998 to June 30, 1998. Net sales for Precision from its
date of acquisition on April 22, 1999 to June 30, 1999 totaled $7.2 million. The
decrease in net sales at Stellex Aerospace during the first half of 1999 of $3.0
million, or 16.7% as compared to the same period in 1998, resulted from weak
demand from OEMs in the commercial aviation market resulting primarily from
Boeing-related inventory management issues and 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. However, recent
order activity at Boeing as well as an increase in proposal activity at Stellex
Aerostructures suggest that the situation is beginning to stabilize.
Gross Margins. Gross margin for Stellex was 25.3% and 25.0% for the six
months ended June 30, 1999 and 1998, respectively. Gross margin for the
Electronics segment was 29.7% and 23.8% for the six months ended June 30, 1999
and 1998, respectively. Gross margin for the first half of 1999 and 1998 was
impacted by a $1.0 million and $1.1 million purchase accounting adjustment for
Phoenix and Stellex Microwave, respectively. These non-cash charges represent a
non-recurring acquisition charge relating to the amortization of the purchase
accounting adjustment for profits in inventory. In excluding this non-recurring
adjustment, the Electronics segment would have had a recasted gross margin of
32.3% for the six months ended June 30, 1999 compared to 28.2% for the
comparable period in 1998. This increase in gross margin for the Electronics
segment was primarily due to productivity improvements at Stellex Microwave and
a favorable product mix at Stellex Microwave, including the Phoenix division.
15
<PAGE>
Gross margin for the Aerostructures segment was 22.2% and 26.8% for
the six months ended June 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 6.7% for the period of
ownership. The low gross margin at Precision was impacted by a non-recurring
acquisition charge relating to the amortization of the purchase accounting
adjustment for profits in inventory totaling $1.3 million and a one time
non-recurring employee retention bonus award of $1.0 million. Stellex
Aerospace's gross margin totaled 22.2% for the first half of 1999, which was
significantly lower compared to the comparable period of 1998 as a result of
lower volume and higher than normal start-up costs on new programs. Gross margin
at Monitor was 24.1% for the first half of 1999 compared to 18.3% for the
comparable period in 1998. This increase in gross margin was due to a
nonrecurring acquisition charge, which impacted the first half of 1998 coupled,
with productivity improvements on certain programs and a more favorable product
mix during the six months ended June 30, 1999. The non-recurring charge at
Monitor during 1998 related to the amortization of the purchase accounting
adjustment for profits in inventory totaling $0.4 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Stellex totaled $12.9 million and $10.1 million, or
11.9% and 15.2% stated as a percentage of net sales, for the six months ended
June 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 $1.5 million. As a result of the acquisitions of Monitor, Phoenix
and Precision, selling general and administrative expenses for the first half 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 $4.3 million and $2.1 million for the six months ended June
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
six months ended June 30, 1999, increased $2.1 million, or 100.0%, 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. Other intangible assets are being amortized
over their estimated useful lives ranging from one to thirty years. Goodwill is
being amortized over fifteen to thirty years.
Interest Expense. Interest expense for the Company increased to $11.3
million for the six months ended June 30, 1999 compared to $6.5 million during
the same period in 1998. The increase in interest expense resulted primarily
from the incurrence of indebtedness to finance the Monitor, Precision and
Phoenix Acquisitions. The borrowings under the senior secured credit facilities
generally bear interest at an interest rate based on the Eurodollar rate. The
average interest rate on such borrowings for the six months June 30, 1999 was
approximately 8.1%.
Income Tax Provision (Benefit). The effective tax rate for the Company
for the six months ended June 30, 1999 was impacted primarily by non-deductible
goodwill amortization at Monitor and Phoenix.
Pro forma results of the Company for the three and six months ended
June 30, 1999 and 1998
The unaudited pro forma results of operations for the three and six
months ended June 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. 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 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. 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.
16
<PAGE>
Table 1: Pro forma Results for the Three Months Ended June 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 $ $ - $ 35,190 $ 42,599 $ 24,788 $ 23,977 $ 59,978 $66,576
-
Cost of goods sold 25,124 30,479 16,598 16,664 41,722 47,143
---------- ----------- --------- --------- --------- --------- --------- --------
- -
Gross profit - - 10,066 12,120 8,190 7,313 18,256 19,433
Gross margin - - 28.6% 28.5% 33.0% 30.5% 30.4% 29.2%
Selling, general, and
administrative expenses 137 - 2,900 3,758 3,468 3,011 6,505 6,769
Research & development
expenses - - - - 2,620 1,547 2,620 1,547
Amortization of intangibles (125) - 1,077 1,152 940 1,892 1,898
----- -------- ------- ---------- --------- ----- -----
Income (loss) from
operations (12) - 6,089 7,210 1,162 2,009 7,239 9,219
Interest expense (6,876) (6,961)
Other income (expense) 40 (44)
---------- ---------
Income before taxes 403 2,214
Provision for taxes 300 1,108
Net income $ 103 $1,106
========== ======
Table 2: Pro forma Results for the Six Months Ended June 30, 1999 and 1998
Corporate Aerostructures Electronics Total
1999 1998 1999 1998 1999 1998 1999 1998
Net sales $ - $ - $ 72,962 $ 80,489 $ 47,833 $ 47,294 $120,795 $127,783
Cost of goods sold - - 52,411 58,116 32,394 33,964 84,805 92,080
---------- ----------- ---------- --------- --------- --------- ------ --------
Gross profit - - 20,551 22,373 15,439 13,330 35,990 35,703
Gross margin - - 28.2% 27.8% 32.3% 28.2% 29.8% 27.9%
Selling, general, and
administrative expenses 405 - 5,926 7,298 6,236 5,802 12,567 13,100
Research & development
expenses - - - - 4,493 2,859 4,493 2,859
Amortization of intangibles (125) - 2,182 2,306 1,751 1,494 3,808 3,800
----- -------- ------- ---------- ---------- --------- ---------- ----------
Income (loss) from
operations (280) - 12,443 12,769 2,959 3,175 15,122 15,944
Interest expense (13,689) (13,922)
Other income (expense) 127 (60)
---------- ---------
Income before taxes
1,560 1,962
Provision for taxes 973
906
Net income $ 654 $ 989
========== =========
</TABLE>
17
<PAGE>
Net Sales. Pro Forma net sales for Stellex were $60.0 million and $120.8
million for the three and six months ended June 30, 1999, respectively,
representing a 9.9% and a 5.5% decrease over the comparable periods in 1998. Net
sales for the Electronics segment, which is comprised of Stellex Microwave and
Phoenix, totaled $24.8 million and $47.8 million for the three and six months
ended June 30, 1999, respectively, representing a 3.4% and a 1.1% increase over
the comparable periods in 1998. The increase in sales at the Electronics segment
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 Stellex Microwave, offset by lower commercial component sales at Stellex
Microwave. The second quarter of 1998 was the final quarter at Stellex Microwave
impacted by the "catch-up" of delinquent commercial component orders arising
from production planning problems associated with poor turnover of the
production planning software during 1996 and 1997 which resulted in higher sales
during the first two quarters of 1998.
Pro Forma net sales for the Aerostructures segment, which is comprised
of Stellex Aerospace, Monitor and Precision, totaled $35.2 million and $73.0
million for the three and six months ended June 30, 1999, respectively,
representing a 17.4% and a 9.4% decrease over the comparable periods in 1998.
The decrease in sales is 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 delays is difficult to predict. However, recent order activity at
Boeing as well as an increase in proposal activity suggests that the situation
is beginning to stabilize.
Gross Margin. Gross Margin for Stellex was 30.4% and 29.8% for the
three and six months ended June 30, 1999, respectively, compared to a gross
margin of 29.2% and 27.9% for the comparable periods in 1998. Gross margin for
the Electronics segment was 33.0% and 32.3% for the three and six months ended
June 30, 1999, respectively, compared to a gross margin of 30.5% and 28.2% for
the comparable periods in 1998. The increase in gross margin in the Electronics
segment was due primarily to productivity improvements on certain programs
coupled with a more favorable product mix.
Gross margin for the Aerostructures segment was 28.6% and 28.2% for the
three and six months ended June 30, 1999, respectively, compared to a gross
margin of 28.5% and 27.8% for the comparable periods in 1998. The Aerostructures
segment 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 spending. Certain pricing actions
recently negotiated with Boeing will put pressure on future gross margin levels.
However, management feels that, based on current pricing data, the overall
impact to the Aerostructures business should not be significant considering
continuous improvement efforts in engineering and tooling as well as the impact
of machining efficiencies resulting from new equipment installations, primarily
at Precision.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for Stellex totaled $6.5 million and $12.6 million, or
10.8% and 10.4% stated as a percentage of net sales, for the three and six
months ended June 30, 1999, respectively. When adjusted for the elimination of
non-cash compensation expense relating to the valuation of management ownership
puts at Stellex Aerospace during 1998, selling, general and administration
expense would have been $6.0 million and $11.6 million, or 9.0% and 9.1% stated
as a percentage of net sales, for the three and six months ended June 30, 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. Research and development expenses
for Stellex totaled $2.6 million and $4.5 million for the three and six months
ended June 30, 1999, respectively, compared to $1.5 million and $2.9 million for
the comparable periods in 1998. The increase in research and development costs
resulted from the expansion of engineering capabilities at Stellex Microwave
relating to new product development in the commercial and broadband wireless
markets.
Liquidity and Capital Resources
The Company provided (used) cash flows from operations of $18.9 million
and $(0.8) million for the six months ended June 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.
18
<PAGE>
The Company used cash flows for investing activities totaling $8.1
million and $ 2.1 million, excluding cash flows used in connection with the
Phoenix and Precision acquisitions in 1999 and the Monitor acquisition in 1998,
for the six months ended June 30, 1999 and 1998, respectively. Capital
investments during 1999 were primarily comprised of expenditures totaling $2.8
million for the Electronics segment and $4.1 million for the Aerostructures
segment. The Electronics segment expenditures have related almost exclusively to
the development activities in commercial and broadband product applications.
Aerostructures segment expenditures represent upgrading activities relating to
CNC equipment and tooling design activities as well as various machine equipment
investments directly relating to significant contract awards such as the Boeing
C-17 program and other strategic initiatives. Approximately $15.2 million and
$87.3 million of cash proceeds were used to consummate the acquisitions of
Phoenix and Precision in March and April 1999, respectively and approximately
$90.4 million of cash was used to consummate the acquisition of Monitor in May
1998.
The Company used cash flows from financing activities totaling $95.0
million and $93.9 million for the six months ended June 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 previous
senior credit facilities. 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
totaling approximately $19.0 million from the issuance of $20.0 million of
Preferred Stock at closing.
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 June 30, 1999, approximately $183.5 million was outstanding under the senior
secured credit facility, including $15.0 million under the revolving loan
facility.
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 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. 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 representing up to 5% of Stellex's issued
and outstanding shares of common stock.
The Company's primary liquidity demands will be for capital
expenditures and working capital needs. During the remaining second half of
1999, based on the Company's existing operations, the Company expects to spend
approximately $4.0 million on 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 spend 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, the Company anticipates a level
of capital spending during the first half of 2000 totaling approximately $3.0
million. Further to the Company's efforts in developing new market opportunities
for the Electronics segment, consistent levels of research and development
spending are anticipated through 2000. Management has worked collectively to be
proactive in seeking development activities which have a high probability of a
profitable outcome with reasonable payback on development cost payback. Stellex
Microwave has a planned facilities relocation in the fall of 2000 from the Palo
Alto facilities to a location in San Jose which will require leasehold
improvements totaling approximately $4.5 million. These leasehold improvement
expenditures are expected to be realized ratably throughout calendar 2000.
Future capital spending for the Aerostructures segment is not predicted to be
significant, beyond normal maintenance related spending, based on excess levels
of machine capacity existing particularly at the Company's large structural
machining operations.
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 senior secured credit facility, its level of
liquidity will be adequate to meet its anticipated requirements for working
capital, capital expenditures, interest payments and any scheduled principal
payments in the foreseeable future.
19
<PAGE>
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, including newly acquired Phoenix and Precision, 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.
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
are expected to total approximately $0.1million 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 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.
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.
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,
requires that all derivatives be carried at fair value and provides for hedging
accounting when certain conditions are met. This statement will be effective for
the year ended December 31, 2000. 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.
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: 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, Year 2000
issues, and the risks associated with the consolidation, restructuring, and
changes in ownership in the defense and aerospace industry.
20
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Marketing 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 June 30, 1999, the Company's total outstanding debt was comprised of fixed
interest rate obligations of $109,458,000 and variable interest rate obligations
of $183,985,000.
The table below provides information (in thousands of dollars) about the
Company's maturity schedule and fair values of its outstanding debt as of June
30, 1999:
<TABLE>
<CAPTION>
Variable Rate Debt Fixed Rate Debt
------------------ ---------------
Senior
Year ending Term Loan A Term Loan Revolving Subordinated Sellers
December 31, A B Loan Facility Other Notes Notes Other
- ------------ ----------- ---------- ------------- ----- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $ 2,500 $ 500 $ - $156 $ - $ 1,750 $ -
2000 6,875 1,000 - 116 - - -
2001 9,375 1,000 - 107 - 5,180 -
2002 10,000 1,000 - 97 - - $ 2,528
2003 11,875 1,000 - 9 - - -
2004 14,375 1,000 - - - - -
Thereafter 3,750 104,250 $15,000 $100,000
--------- -------- ------- ------- --------
- - -
Total $58,750 $109,750 $15,000 $485 $100,000 $6,930 $2,528
======= ======== ======= ==== ======== ====== ======
Fair Market Value $58,750 $109,750 $15,000 $485 $ 88,250 $6,930 $2,528
======= ======== ======= ==== ========= ====== ======
</TABLE>
Based upon the Company's current level of variable rate debt, a 1% increase or
decrease in interest rates will cause an approximate $1.84 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).
21
<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 action outstanding will not 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) Exhibits
Exhibit No. Description of Exhibit
10.1 First Amendment to Gallium Arsenide and Thin Film
Supply and Services Agreement dated as of May 17,
1999 by and among Watkins-Johnson Company, Stellex
Microwave Systems, Inc. and Stellex Electronics, Inc.
27 Financial Data Schedule.
(a) Reports on Form 8-K: A Form 8-K was filed on May 7, 1999,
describing the details of the Precision Acquisition, providing
historical financial information for Precision and pro forma
financial information for Stellex, inclusive of results for both
Phoenix and Precision.
22
<PAGE>
(b) 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 August 16, 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 August 16, 1999
- ------------------------
William L. Remley Officer, Treasurer and Director of Stellex
Technologies, Inc.
/s/ P. Roger Byer Chief Financial Officer of Stellex August 16, 1999
- --------------------
P. Roger Byer Technologies, Inc. (principal financial
and accounting officer)
</TABLE>
23
<PAGE>
Exhibit 10.1
FIRST AMENDMENT TO
GALLIUM ARSENIDE AND THIN FILM
SUPPLY AND SERVICES AGREEMENT
THIS FIRST AMENDMENT ("Amendment") is dated effective as of
May 17, 1999, and amends the GALLIUM ARSENIDE AND THIN FILM SUPPLY AND SERVICES
AGREEMENT ("Agreement"), dated as of October 31, 1997, by and among
WATKINS-JOHNSON COMPANY, a California Corporation ("Watkins-Johnson"); STELLEX
MICROWAVE SYSTEMS, INC., formerly known as W-J TSMD Inc., a California
corporation ("W-J TSMD"); and STELLEX ELECTRONICS, INC., formerly known as TSMD
Acquisition Corp. a Delaware corporation ("TSMD Acquisition").
1. Amendment to Section 3.6
Section 3.6 of the Agreement is hereby deleted and is replaced
with the following:
3.6 W-J TSMD Employees.
W-J TSMD may assign, subject to
Watkins-Johnson's reasonable approval, one or two individuals
to work with Watkins-Johnson employees in the Thin Film
facility on research and development projects described in a
SOW. The individuals designated by W-J TSMD shall have access
to the facility during normal business hours for three (3)
days during each workweek upon seven (7) days' notice from W-J
TSMD. Salary and benefits for these individuals will be paid
by W-J TSMD, but they shall work under the direction of
Watkins-Johnson management. The parties shall cooperate to
establish any reasonably required agreements or procedures for
such W-J TSMD employees.
2. Amendment to Section 6.2
Section 6.2 of the Agreement is hereby amended by adding the
following paragraph:
(iii) Notwithstanding any other provisions
of this Section 6.2, the parties agree that TSMD's Share of
Process Costs shall be (a) $1,210,000 for the six month period
beginning on January 1, 1999; (b) $1,240,250 for the six month
period beginning July 1, 1999; and (c) $2,572,762.50 for
calendar year 2000.
3. No other changes.
Except as expressly set forth herein, the parties do not
intend to modify any provision of the Agreement. The Agreement, as amended
hereby, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to
be executed as of __________________, 1999.
WATKINS-JOHNSON COMPANY
By: /s/_____________________________
Name: ________________________________
Title: ________________________________
STELLEX MICROWAVE SYSTEMS, INC.
By: /s/_____________________________
Name: ________________________________
Title: ________________________________
24
<PAGE>
STELLEX ELECTRONICS, INC.
By: ________________________________
Name: ________________________________
Title: ________________________________
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,734
<SECURITIES> 0
<RECEIVABLES> 31,010
<ALLOWANCES> 269
<INVENTORY> 71,864
<CURRENT-ASSETS> 115,957
<PP&E> 100,787
<DEPRECIATION> 11,540
<TOTAL-ASSETS> 393,660
<CURRENT-LIABILITIES> 60,377
<BONDS> 100,000
0
30,400
<COMMON> 50
<OTHER-SE> (5,541)
<TOTAL-LIABILITY-AND-EQUITY> 393,660
<SALES> 108,334
<TOTAL-REVENUES> 108,334
<CGS> 80,879
<TOTAL-COSTS> 101,065
<OTHER-EXPENSES> (82)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,349
<INCOME-PRETAX> (3,998)
<INCOME-TAX> (1,321)
<INCOME-CONTINUING> (2,677)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,677)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
