SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 1, 1999
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BORG-WARNER AUTOMOTIVE, INC.
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(Exact Name of Registrant as Specified in Charter)
Delaware 1-12162 13-3404508
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(State or Other (Commission File Number) IRS Employer
Jurisdiction of Identification
Incorporation) Number
200 South Michigan Avenue, Chicago, Illinois 60604
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
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Page 1 of 4
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Item 2. Acquisition or Disposition of Assets.
On March 1, 1999, Borg-Warner Automotive, Inc. ("Borg-Warner
Automotive") completed the acquisition of Kuhlman Corporation ("Kuhlman")
pursuant to the Agreement and Plan of Merger dated as of December 17, 1998 among
Borg-Warner Automotive, BWA Merger Corp., a wholly owned subsidiary of
Borg-Warner Automotive ("Merger Sub"), and Kuhlman (the "Merger Agreement").
Pursuant to the Merger Agreement, Merger Sub was merged (the "Merger") with and
into Kuhlman, with Kuhlman surviving as a wholly owned subsidiary of Borg-Warner
Automotive. As a result of the Merger, each outstanding share of Kuhlman common
stock, par value $1.00 per share ("Kuhlman Common Stock"), has been converted
into the right to receive either (i) $39.00 in cash, without interest, or (ii)
.85545 of a share of Borg-Warner Automotive common stock, par value $.01 per
share ("Borg-Warner Automotive Common Stock"). In the aggregate, Borg-Warner
Automotive is issuing approximately 3,286,596 shares of Borg-Warner Automotive
Common Stock in exchange for approximately 22% of the Kuhlman Common Stock and
paying approximately $533 million for the remaining 78% of the Kuhlman Common
Stock. The financial terms of the Merger were determined by negotiations between
Borg-Warner Automotive and Kuhlman.
Borg-Warner Automotive obtained the funds required to pay the
cash portion of the merger consideration and related fees and expenses from (i)
the sale to the public of $200 million principal amount of 6 1/2% Senior Notes
due 2009 and $200 million principal amount of 7 1/8% Senior Notes due 2029,
completed on February 22, 1999, and (ii) borrowings under Borg-Warner
Automotive's credit facility with a group of commercial banks.
Kuhlman is a diversified, industrial manufacturing company
that currently operates in two product segments: industrial products and
electrical products. Through its Schwitzer Group, which comprises Kuhlman's
industrial products business, Kuhlman is a leading worldwide manufacturer of
proprietary engine components, including turbochargers, fans and fan drives,
fuel tanks, instrumentation, heating/ventilation/air conditioning systems, and
other products used primarily in commercial transportation products and
industrial equipment. Kuhlman's electrical products businesses include the
manufacture of transformers and other products for electrical utilities and
industrial users, as well as electrical and electronic wire and cable products
for use in consumer, commercial and industrial applications. Borg-Warner
Automotive intends to sell Kuhlman's electrical products businesses.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following consolidated financial statements of Kuhlman and
independent auditors' report are set forth as Exhibit 99.1 and are incorporated
herein by reference:
Independent Auditors' Report.
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995.
Page 2 of 4
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Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
The following condensed consolidated financial statements of
Kuhlman are set forth as Exhibit 99.2 and are incorporated herein by reference:
Consolidated Statements of Income for the nine months ended September
30, 1998 and 1997 (unaudited).
Consolidated Balance Sheets as of September 30, 1998 and December 31,
1997 (unaudited).
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited).
Consolidated Statements of Shareholders' Equity for the nine months
ended September 30, 1998 (unaudited).
Notes to Consolidated Financial Statements (unaudited).
(b) Pro Forma Financial Information.
The following pro forma financial information of Borg-Warner
Automotive, giving effect to the merger with Kuhlman, are set forth as Exhibit
99.3 and are incorporated herein by reference:
Unaudited Pro Forma Consolidated Financial Statements - Introduction.
Unaudited Pro Forma Consolidated Balance Sheet as of September 30,
1998.
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1997.
Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1998 and 1997.
Notes to Unaudited Pro Forma Consolidated Financial Statements.
Page 3 of 4
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(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of December 17, 1998,
among Borg-Warner Automotive, Inc. and Kuhlman Corporation
(filed as exhibit 2.1 to Registration Statement of Borg-Warner
Automotive on form S-4 (Registration No. 333-70941) and
incorporated herein by reference)
23.1 Consent of Arthur Andersen LLP
99.1 Audited financial statements of Kuhlman Corporation for the
years ended December 31, 1997 and 1996
99.2 Unaudited financial statements of Kuhlman Corporation for the
nine-month period ended September 30, 1998
99.3 Unaudited pro forma consolidated financial statements related
to potential acquisition of Kuhlman Corporation
SIGNATURE
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Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 15, 1999
BORG-WARNER AUTOMOTIVE, INC.
By /s/ Vincent M. Lichtenberger
-----------------------------------
Name: Vincent M. Lichtenberger
Title: Assistant Secretary
Page 4 of 4
EXHIBIT 23.1
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent publc accountants, we hereby consent to the use of our
report dated February 2, 1998 included in this Form 8-K. It should be noted that
we have not audited any financial statements of the Company subsequent to
December 31, 1998 or performed any audit procedures subsequent to the date of
our report on such financial statements which is dated February 10, 1999.
/s/Arthur Andersen LLP
Louisville, Kentucky
March 12, 1999
EXHIBIT 99.1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Kuhlman Corporation:
We have audited the accompanying consolidated balance sheets
of Kuhlman Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Kuhlman
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Louisville, Kentucky
February 2, 1998
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
KUHLMAN CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
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In thousands, except per share amounts
<S> <C> <C> <C>
Net sales $ 643,440 $ 456,465 $ 425,384
Cost of goods sold 495,220 355,530 341,277
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Gross profit 148,220 100,935 84,107
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Operating expenses:
Selling, engineering, general and administrative expenses 88,068 60,755 53,610
Intangible amortization 3,004 1,769 1,336
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Total operating expenses 91,072 62,524 54,946
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OPERATING PROFIT 57,148 38,411 29,161
Other income (expense):
Interest expense, net (8,637) (6,981) (7,066)
Merger expenses -- -- (4,510)
Other, net (2,009) (2,087) 493
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Total other income (expense), net (10,646) (9,068) (11,083)
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Income before taxes and extraordinary item 46,502 29,343 18,078
Taxes on income 18,573 12,007 8,034
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Income before extraordinary item 27,929 17,336 10,044
Extraordinary item (net of tax effect of $1,175) -- -- (1,861)
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NET INCOME $ 27,929 $ 17,336 $ 8,183
============================================================= ===================== ==================== ====================
PER SHARE AMOUNTS:
Basic:
Income before extraordinary item $ 1.84 $ 1.29 $ 0.76
Extraordinary item -- -- (0.14)
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NET INCOME $ 1.84 $ 1.29 $ 0.62
============================================================= ===================== ==================== ====================
Diluted:
Income before extraordinary item $ 1.75 $ 1.25 $ 0.75
Extraordinary item, net of tax -- -- (0.14)
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NET INCOME $ 1.75 $ 1.25 $ 0.61
============================================================= ===================== ==================== ====================
Average shares outstanding
Basic 15,160 13,389 13,178
Diluted 15,929 13,858 13,475
The Notes to Consolidated Financial Statements should be read in conjunction with these statements.
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
KUHLMAN CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1997 1996
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In thousands
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,529 $ 2,209
Accounts receivable, less reserves of $3,726 and $2,344 at December 31, 1997 and
1996, respectively 104,190 70,079
Inventories 71,282 52,530
Deferred income taxes 13,540 7,810
Prepaid expenses and other current assets 4,726 3,502
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Total current assets 200,267 136,130
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Plant and equipment
Land 4,130 3,075
Buildings and leasehold improvements 47,744 39,138
Machinery, fixtures and equipment 173,300 122,655
Construction in progress 5,720 2,825
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230,894 167,693
Less - accumulated depreciation and amortization (105,368) (89,829)
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Plant and equipment - net 125,526 77,864
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Intangible assets, net of amortization of $7,445 and $4,441 at December 31, 1997 and
1996, respectively 123,616 58,326
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Other assets 11,909 5,096
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$ 461,318 $ 277,416
====================================================================================== ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,475 $ 2,295
Accounts payable 50,913 35,410
Accrued liabilities 87,814 43,833
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Total current liabilities 140,202 81,538
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Long-term debt 116,257 92,302
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Accrued postretirement benefits 19,573 8,859
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Other long-term liabilities 10,833 3,143
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Total liabilities 286,865 185,842
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Shareholders' equity
Preferred stock, par value $1.00, 2,000 shares authorized, none issued; junior
participating preferred stock, Series A, no par value, 200 shares authorized, -- --
none issued
Common stock, par value $1.00, 20,000 shares authorized, 16,601 and 13,803 shares
issued at December 31, 1997 and 1996, respectively 16,601 13,803
Additional paid-in capital 103,543 32,749
Retained earnings 57,777 47,272
Foreign currency translation adjustments (1,364) (640)
Minimum pension liability (1,184) (690)
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175,373 92,494
Less -- treasury stock at cost (72 shares in 1997 and 1996) (920) (920)
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Total shareholders' equity 174,453 91,574
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$ 461,318 $ 277,416
====================================================================================== ============= ============
The Notes to Consolidated Financial Statements should be read in conjunction with these balance sheets.
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
KUHLMAN CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
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In thousands
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,929 $ 17,336 $ 8,183
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary item, net -- -- 1,861
Merger expenses -- -- 4,510
Depreciation and amortization 19,916 12,470 11,320
Deferred income taxes (1,100) (25) 3,501
Provision for losses on accounts receivable 472 685 1,211
Non-cash charges and other, net 2,794 (217) 67
Changes in operating assets and liabilities: (1)
Accounts receivable (4,976) (4,780) (885)
Inventories (1,765) (1,300) (2,057)
Prepaid expenses and other current assets (87) 274 2,240
Accounts payable 2,266 3,915 1,049
Accrued liabilities 9,203 9,325 (2,869)
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Net cash provided by operating activities 54,652 37,683 28,131
================================================================================== ============= ============= =============
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,966) (10,980) (15,200)
Acquisition of businesses, net of cash acquired (104,744) (39,863) --
Proceeds from sales of assets 437 126 7,248
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Net cash used for investing activities (124,273) (50,717) (7,952)
================================================================================== ============= ============= =============
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving loan facility (67,016) (21,572) (4,160)
Proceeds from issuance of long-term debt 90,000 39,439 25,016
Repayment of long-term debt (1,939) (1,850) (32,108)
Dividends paid (8,676) (7,967) (5,814)
Stock options exercised 2,561 2,000 933
Cash proceeds from stock issuance 68,187 4,905 --
Redemption of warrants (9,139) -- --
Repurchase of common stock -- -- (920)
Payments for merger and related expenses -- -- (5,612)
Other (12) (534) (23)
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Net cash provided by (used for) financing activities 73,966 14,421 (22,688)
================================================================================== ============= ============= =============
Effect of exchange rate changes on cash and cash equivalents (25) 241 54
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 4,320 1,628 (2,455)
Cash and cash equivalents, beginning of year 2,209 581 3,036
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Cash and cash equivalents, end of year $ 6,529 $ 2,209 $ 581
================================================================================== ============= ============= =============
(1) Net of the effects of acquisitions and foreign currency translation, where applicable. See Note 9 for
information on non-cash investing and financing activities.
The Notes to Consolidated Financial Statements should be read in conjunction with these statements.
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
KUHLMAN CORPORATION AND SUBSIDIARIES
FOREIGN
FOR THE YEARS ENDED ADDITIONAL CURRENCY MINIMUM
DECEMBER 31, 1997, 1996 COMMON COMMON PAID-IN RETAINED TRANSLATION PENSION TREASURY
AND 1995 SHARES(1) STOCK CAPITAL EARNINGS ADJUSTMENT LIABILITY STOCK TOTAL
========================== ========= ========== ============ ========== ============= ========== ========== ========
in thousands
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 13,100 $13,100 $25,300 $36,672 $(1,813) $ (43) -- $73,216
1994
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
Net income -- -- -- 8,183 -- -- -- 8,183
Cash dividends declared (6,867)
($0.60 per share) (2) -- -- -- -- -- -- (6,867)
Exercise of stock options 127 127 806 -- -- -- -- 933
Issuance of common stock 16 16 176 -- -- -- -- 192
Repurchase of common (72) -- -- -- -- -- (920) (920)
stock
Minimum pension liability -- -- -- -- -- (339) -- (339)
Currency translation
adjustment -- -- -- -- (98) -- -- (98)
Other (3) (3) (65) -- -- -- (68)
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
Balance - December 31, 13,168 $13,240 $26,217 $37,988 $(1,911) $(382) $(920) $74,232
1995
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
Net income -- -- -- 17,336 -- -- -- 17,336
Cash dividends declared
($0.60 per share) -- -- -- (8,052) -- -- -- (8,052)
Exercise of stock options 223 223 1,777 -- -- -- -- 2,000
Issuance of common 340 340 4,755 -- -- -- -- 5,095
stock(3)
Minimum pension liability -- -- -- -- -- (308) -- (308)
Currency translation
adjustment -- -- -- -- 1,271 -- -- 1,271
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
Balance - December 31, 13,731 $13,803 $32,749 $47,272 $ (640) $(690) $(920) $91,574
1996
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
Net income -- -- -- 27,929 -- -- -- 27,929
Cash dividends declared
($.060 per share) -- -- -- (9,095) -- -- -- (9,095)
Issuance of common 2,638 2,638 69,203 -- -- -- -- 71,841
stock(4)
Exercise of stock options 160 160 2,401 -- -- -- -- 2,561
Redemption of warrants -- -- (810) (8,329) -- -- --
(9,139)
Minimum pension liability -- -- -- -- -- (494) -- (494)
Currency translation
adjustment -- -- -- -- (724) -- -- (724)
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
BALANCE - DECEMBER 31, 16,529 $16,601 $103,543 $57,777 $(1,364) $(1,184) $(920) $174,453
1997
- -------------------------- --------- ---------- ------------ ---------- ------------- ---------- ---------- --------
(1) Common shares outstanding exclude 72 treasury shares in 1997, 1996 and 1995, respectively.
(2) Dividends per share have not been restated to reflect the Schwitzer merger.
(3) Includes $4,905 associated with the acquisition of Web Wire Products, Inc.
(4) Includes $68,187, net of expenses, associated with the Company's stock offering and $3,510 of stock issued under the
Company's Long-Term Incentive Plan.
The Notes to Consolidated Financial Statements should be read in conjunction with these statements.
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
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PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Kuhlman
Corporation and all majority owned subsidiaries (the "Company"). Investments of
50% or less in affiliated companies are accounted for under the equity method.
All significant intercompany transactions have been eliminated. The consolidated
statements of income include the results of acquired businesses accounted for
under the purchase method of accounting from the date of acquisition. Further
information pertaining to the acquisitions is presented in Note 3, "Acquisitions
and Divestiture."
On May 31, 1995, the Company merged Schwitzer, Inc. ("Schwitzer") with a
wholly-owned subsidiary of the Company. The merger was accounted for as a
pooling of interests. The consolidated financial statements for all periods
prior to the merger have been restated to present the results of operations of
both companies as if the merger had been in effect for all periods presented.
The consolidated statements of shareholders' equity reflect the accounts of the
Company as if the additional common stock had been issued during all periods
presented. Further information pertaining to the merger is presented in Note 2,
"Merger."
Certain amounts in the Company's 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates as changes in
estimates do and will continue to occur due to changes in available relevant
data and consummation of the events and transactions.
REVENUE RECOGNITION
The Company recognizes sales of its products when the products are shipped to
customers.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with an original maturity of three
months or less to be cash equivalents, which are reflected at their approximate
fair value.
INVENTORIES
Inventories are stated at the lower of cost or market and are determined by
either the last-in, first-out (LIFO) or first-in, first-out (FIFO) method for
domestic inventories. Inventories of foreign operations are determined
principally by the first-in, first-out (FIFO) method. Approximately 70% and 62%
of the inventories at December 31, 1997 and 1996, respectively, were determined
using the LIFO method. Inventory costs include material, labor and manufacturing
overhead.
PLANT AND EQUIPMENT
Plant and equipment are carried at cost and are depreciated over their estimated
useful lives, ranging from 3 to 40 years, using principally the straight-line
method for financial reporting purposes and accelerated methods for tax
reporting purposes. Plant and equipment obtained through the acquisition of a
company are recorded at estimated fair value as of the date of acquisition. All
additions subsequent to the acquisition date are recorded at cost.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill related to the acquisition of
businesses. Goodwill is being amortized on a straight-line basis over a period
not to exceed forty years. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the related
operation's undiscounted cash flows over the remaining life of goodwill in
measuring whether or not the goodwill is recoverable. Other intangible assets
are amortized to expense using the straight-line method over three to six years.
LONG-LIVED ASSETS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). The new standard, under
certain circumstances, requires the business to recognize an impairment. SFAS
No. 121 requires that an impairment for long-lived assets and long-lived assets
to be disposed of be based on the fair value of the asset or the fair value less
the cost to sell, respectively. Application of this standard did not impact the
financial position or results of operations of the Company during any of the
periods presented.
ENGINEERING
Engineering expenses include activities associated with product development, the
application of products to specific customer needs, and ongoing efforts to
refine and enhance existing products. These costs are expensed as incurred and
totaled approximately $11,733,000, $7,009,000 and $6,745,000 in 1997, 1996 and
1995, respectively.
ENVIRONMENTAL REMEDIATION
AND COMPLIANCE
Environmental liabilities for remediation costs are accrued based on estimates
of known environmental remediation exposures. The measurement of environmental
liabilities is based on an evaluation of currently available facts with respect
to each individual site and considers factors such as existing technology,
presently enacted laws and regulations, and prior experience in remediation of
contaminated sites. Liabilities are recognized for remedial activities,
including direct and indirect costs, when they can be reasonably estimated.
Environmental compliance costs, which include maintenance and operating costs
with respect to pollution control equipment, cost of ongoing monitoring programs
and similar costs, are expensed as incurred. Environmental costs are capitalized
if the costs increase the value of the property and/or mitigate or prevent
contamination from future operations.
FOREIGN CURRENCY TRANSLATION
The Company has foreign subsidiaries located in the United Kingdom ("U.K."),
Wales and Brazil. Financial data of the U.K. and Wales subsidiaries are
translated into U.S. dollars at current exchange rates and translation
adjustments are accumulated as a separate component of shareholders' equity.
Foreign currency transaction gains and losses for these subsidiaries are
credited or charged to income as they occur. The Brazilian subsidiary operated
in a hyperinflationary economy for all periods presented. Accordingly, financial
data stated in Brazilian currencies are remeasured into U.S. dollars at both
current (monetary items) and approximated historical (non-monetary items)
exchange rates and the resulting transaction adjustments are charged or credited
to income. These charges were not significant for the periods shown.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
FINANCIAL INSTRUMENTS
AND HEDGING
Certain financial instruments are used to hedge risk caused by fluctuating
commodity prices, foreign currencies and interest rates. The Company enters into
futures or option contracts to hedge price fluctuations for commodities used in
the manufacture of its products and in currencies to hedge certain import or
export transactions. The terms of the contracts are consistent with the terms of
the underlying transaction they are designed to hedge. As a result, gains or
losses on the transactions included in the Company's results of operations
offset losses and gains of the underling transactions being hedged.
In addition, the Company uses interest rate swap agreements to manage interest
costs and risks associated with changing interest rates. The differential to be
paid or received under these agreements is accrued as interest rates change and
is recognized in interest expense consistent with the terms of the agreements.
The counterparty to each interest rate swap agreement is a major financial
institution. The possibility of credit loss from counterparty non-performance is
remote and not anticipated.
STOCK BASED COMPENSATION
During 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). The Company has
applied APB Opinion No. 25 and related interpretations in accounting for its
stock-based compensation plans, and has adopted the disclosure option related to
SFAS No. 123. See Note 13, "Stock Based Compensation Plans," for related
disclosures.
PER SHARE INFORMATION
In March 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128"). The Company's historical
earnings per share have been adjusted to comply with the disclosure requirements
of SFAS No. 128. Under the provisions of SFAS No. 128, basic earnings per share
are computed by dividing net income by the weighted average shares outstanding
for the period. Diluted earnings per share includes the dilutive effects of
common stock equivalents, including options and warrants, in the weighted
average shares outstanding. Dilutive shares used in the per share calculation in
1997, 1996 and 1995 included approximately 769,000, 469,000 and 297,000 shares,
respectively, resulting from the dilutive effects of common stock equivalents.
NOTE 2. MERGER
- -------------------------------------------------------
On May 31, 1995, the Company merged Schwitzer, a New York Stock Exchange listed
company, with a wholly-owned subsidiary of the Company. The merger was accounted
for under the pooling of interests method of accounting. As provided for in the
merger agreement, each share of Schwitzer common stock was converted into 0.9615
share of the Company's common stock, resulting in the Company issuing
approximately 6,980,000 shares of stock. Transaction expenses and other charges
related to the merger totaled approximately $5,600,000 net of tax ($0.43 per
share), including $1,861,000 related to refinancing of substantially all of
Schwitzer's domestic debt ("Merger expenses").
NOTE 3. ACQUISITIONS AND DIVESTITURE
- -------------------------------------------------------
ACQUISITION OF KYSOR TRANSPORTATION PRODUCTS GROUP
On March 10, 1997, the Company purchased certain assets and assumed certain
liabilities of the Transportation Products Group ("Kysor") of Kysor Industrial
Corporation, a Michigan
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
Corporation traded on the New York Stock Exchange. The purchase price for Kysor
was $86,000,000 in cash plus the assumption of approximately $722,000 of debt.
The purchase of Kysor was financed from borrowings under the Company's existing
credit facilities.
The transaction is being accounted for as a purchase, and the goodwill
associates with the transaction is being amortized over 40 years. The purchase
price has been allocated to the assets based on their estimated fair market
value. The excess of the purchase price over the fair value of assets is
approximately $52,909,000. The results of operations for Kysor are included in
the consolidated financial statements of the Company from the date of
acquisition.
The following unaudited pro forma information for the Company for the periods
shown below gives effect to the Kysor acquisition as if it had occurred as of
the beginning of each period.
YEAR ENDED
IN THOUSANDS, EXCEPT DECEMBER 31,
PER SHARE DATA 1997 1996
- --------------------------------------------------------
Net sales $670,249 $592,619
Net income $ 28,747 $ 20,771
Diluted per share amounts:
Net Income $ 1.80 $ 1.50
The unaudited pro forma information assumes the acquisition of the net assets at
the beginning of the periods presented and accordingly includes adjustments for
goodwill amortization, interest expense, certain administrative costs and income
taxes. The unaudited pro forma financial data is presented for informational
purposes only and is not necessarily indicative of the results of operations
that actually would have been achieved had the acquisition of Kysor been
consummated at the beginning of the periods presented.
ACQUISITION OF
SNYDER TANK CORPORATION
On November 14, 1997, a subsidiary of the Company acquired all of the
outstanding stock of Snyder Tank Corp. ("Snyder Tank") for approximately
$20,000,000 in cash plus the assumption of approximately $1,200,000 of debt.
Snyder is a manufacturer of steel and aluminum fuel and air tanks for medium and
heavy duty trucks, and metal tanks for liquefied natural gas fuel systems. Net
sales of Snyder Tank for their fiscal year ended August 31, 1997 were
approximately $45,700,000. The impact on operations of this acquisition was not
significant for any of the periods presented and, therefore, pro forma amounts
are not presented giving effect to the transaction.
ACQUISITION OF WEB WIRE
On October 8, 1996, a subsidiary of the Company acquired substantially all of
the assets of Web Wire Products, Inc. ("Web Wire") in exchange for approximately
329,000 shares of the Company's common stock. Web Wire is a manufacturer of
battery cables, ignition wire sets and related accessories for the automotive
aftermarket. Net sales of Web Wire for the twelve months ended December 31, 1996
were approximately $6,300,000. The impact on operations of this acquisition was
not significant for any of the periods presented and, therefore, pro forma
amounts were not presented giving effect to the transaction.
ACQUISITION OF COMMUNICATION CABLE, INC.
On February 16, 1996, the Company, through a wholly-owned subsidiary, completed
a tender offer for the outstanding shares of Communication Cable, Inc. ("CCI"),
a North Carolina corporation, at $14.00 per share in cash. The purchase of the
tendered shares, which was consummated on February 21, 1996, along with
subsequent actions resulted in CCI
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
becoming a wholly-owned subsidiary of the Company as of June 28, 1996. The
aggregate total cost of the acquisition of the outstanding shares of CCI, which
was primarily funded through bank debt, was approximately $43,800,000. CCI
engineers, designs and manufactures a wide variety of low voltage electronic
wire and cable products. The impact on operations for the period January 1
through February 20, 1996 was not significant and, therefore, pro forma amounts
were not presented giving effect to the transaction for that period.
The transaction has been accounted for as a purchase and the excess purchase
price over the fair market value of the assets is being amortized over 40 years.
The results of operations of CCI are included in the consolidated financial
statements of the Company subsequent to February 21, 1996.
DIVESTITURE OF NEHRING
In the fourth quarter of 1995, Coleman Cable Systems, Inc. ("Coleman Cable")
sold the net assets of its subsidiary, Nehring Electrical Works Company
("Nehring"), for approximately book value. Coleman Cable received approximately
$6,509,000 in cash plus a $1,500,000 note for the net assets of Nehring. In
1995, Nehring had sales of approximately $41,800,000, minimal operating
earnings, and total assets of approximately $10,500,000.
NOTE 4. DEBT
- -------------------------------------------------------
On June 30, 1997, the Company amended its primary credit facilities with its
banks in order to, among others, enhance its financial flexibility, lower its
cost of borrowed funds and extend its facility for funding future acquisitions.
The Company's revolving credit facility, which was increased to $165,000,000
from $125,000,000, is used for general corporate purposes and is due on June 30,
2002. In addition, the Company's 364-day, $125,000,000 facility, which was
established primarily to fund future acquisitions, was extended to June 29,
1998, and amounts drawn under this facility, if any, would convert to a
four-year term loan with payments commencing on October 1, 1998 with equal
quarterly installments. There were no borrowings at December 31, 1997 under the
364-day facility. Interest rates on amounts borrowed under each facility are
based principally on the London Inter-Bank Offered Rate (LIBOR) plus an
applicable margin factor. The Company also pays a commitment fee on the unused
portion of each facility. The margin factor and the commitment fee rate are
determined based on the Company's leverage ratio (as defined in the credit
facility agreements). The Company's credit facilities are subject to various
covenants, including financial covenants, relating to minimum levels of net
worth, interest coverage and the leverage ratio. The Company was free of any
material restrictions as to the payment of dividends as of December 31, 1997.
The average interest rate as of December 31, 1997 under the Company's primary
credit facilities was 6.3%.
At December 31, 1997, the Company had unused availability under its domestic and
foreign revolving credit facilities of approximately $59,786,000, excluding the
364-day facility.
At December 31, 1997 and 1996, long-term debt consisted of the following:
IN THOUSANDS 1997 1996
- ---------------------------------------------------------
Variable rate notes supported $111,500 $87,500
by revolving credit agreement
with banks
Miscellaneous other log-term 6,232 7,097
debt, annual interest rates
up to 18%, payable through
2011
- ---------------------------------------------------------
117,732 94,597
- ---------------------------------------------------------
Less -- current portion (1,475) (2,295)
- ---------------------------------------------------------
$116,257 $92,302
- ---------------------------------------------------------
-5-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
The minimum scheduled principal payments on long-term debt outstanding at
December 31, 1997 are as follows:
In thousands
- --------------------------------------------------------
1998 $ 1,475
1999 1,105
2000 740
2001 445
2002 111,720
Thereafter 2,247
- --------------------------------------------------------
Total minimum scheduled principal payments $117,732
- --------------------------------------------------------
NOTE 5. INVENTORIES
- -------------------------------------------------------
Inventories at December 31, 1997 and 1996 consisted of the following:
In thousands 1997 1996
- --------------------------------------------------------
FIFO cost:
Raw materials $32,904 $24,648
Work-in-progress 17,270 9,790
Finished products 21,662 19,440
- --------------------------------------------------------
71,836 53,878
Excess of FIFO over LIFO cost (554) (1,348)
- --------------------------------------------------------
$71,282 $52,530
- --------------------------------------------------------
NOTE 6. ACCRUED LIABILITIES
- --------------------------------------------------------
Accrued liabilities at December 31, 1997 and 1996 consisted of the following:
In thousands 1997 1996
- --------------------------------------------------------
Salaries, wages and employee $31,513 $19,791
benefits
Product related accruals 17,075 7,720
Accrued income taxes 7,443 3,173
Workers compensation 5,856 2,100
Dividends payable 2,479 2,060
Other 23,438 8,989
- --------------------------------------------------------
$87,814 $43,833
- --------------------------------------------------------
NOTE 7. EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------
EMPLOYEE RETIREMENT PLANS
The Company has various employee retirement plans which provide pension benefits
to substantially all of its employees. Defined benefit plans provide benefits of
stated amounts based on an employee's years of service and, for certain plans,
compensation for a specified period of time before retirement.
The total expense under these plans amounted to approximately $2,004,000,
$1,767,000 and $1,556,000 in 1997, 1996 and 1995, respectively. Pension expense
for the defined benefit plans in 1997, 1996 and 1995 is comprised of the
following elements:
In thousands 1997 1996 1995
- --------------------------------------------------------
Current service cost $ 2,798 $1,803 $ 1,576
Interest on projected
benefit obligations 3,939 2,167 2,008
Return on assets (6,363) (3,322) (3,151)
Net amortization and 1,630 1,119 1,123
deferral
- --------------------------------------------------------
$ 2,004 $1,767 $ 1,556
- --------------------------------------------------------
The Company's funding policy is to make annual contributions required by
applicable regulations, which may, from time to time, exceed the Internal
Revenue Service deductibility limits by immaterial amounts. The Company annually
contributes to its defined benefit plans based on actuarially determined amounts
to provide the plans with sufficient assets to meet future benefit payments
requirements. Plan assets consist substantially of investments in pooled funds
which are comprised primarily of equity securities, U.S. Government securities,
corporate bonds and investments in short-term investment funds.
The following table summarizes the funded status of the Company's defined
benefit pension plans and the related amounts recognized in the Company's
consolidated balance sheets as of December 31, 1997 and 1996:
-6-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
1997 1996
------------------------------------------------------------
ASSETS ACCUMULAT ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
In thousands BENEFITS ASSETS BENEFITS ASSETS
------------------------------------------------------------
Actuarial present
value of benefit
obligations:
Vested $39,651 $7,747 $19,115 $3,839
Non-vested 5,372 51 1,760 817
------------------------------------------------------------
Accumulated
benefit
obligations 45,023 7,798 20,875 4,656
Effects of
salary
progression 12,193 -- 6,963 --
------------------------------------------------------------
Projected
benefit
obligations 57,216 7,798 27,838 4,656
Plan assets at
fair value 63,861 6,211 26,599 3,276
------------------------------------------------------------
Plan assets over
(under)
projected
benefit
obligations 6,645 (1,587) (1,239) (1,380)
Unrecognized
transition
(asset)
liability 932 (210) (124) (66)
Unrecognized net
(gain) or loss (1,342) 2,045 1,895 1,161
Unrecognized
prior service
cost (348) 925 599 510
Adjustment to
recognize
minimum
liability(1) -- (1,815) -- (1,145)
------------------------------------------------------------
(Accrued)
prepaid pension $5,887 $ (642) $1,131 $ (920)
expense
------------------------------------------------------------
(1) Net of the associated intangible asset.
The assumptions used as of December 31, 1997, 1996 and 1995 in determining
pension expense and funded status information shown above are as follows:
1997 1996 1995
- -------------------------------------------------------------
Discount rate 7.2% 7.5% 7.5%
Rate of salary progression 4.2% 4.2% 4.2%
Long-term rate of return on 9.7% 9.7% 9.7%
assets
In addition to providing pension benefits, the Company and certain operating
subsidiaries provide savings plans for management and other employees. The plans
provide for matching contributions based on the terms of such plans to the
accounts of plan participants. The Company and its operating subsidiaries
expensed approximately $1,472,000, $831,000 and $664,000 in the years ended
December 31, 1997, 1996 and 1995, respectively, related to these savings plans.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company charges the cost of postretirement benefits other than pensions to
earnings during the active service period of its employees.
Net periodic postretirement benefit cost for 1997, 1996 and 1995 included the
following components:
In thousands 1997 1996 1995
- ----------------------------------------------------------
Service cost - benefits
attributed to service
during the period $ 264 $ 126 $ 80
Interest cost on
accumulated
postretirement benefit
obligation 1,466 929 968
Net deferral and
amortization 86 133 26
- ----------------------------------------------------------
Net periodic
postretirement benefit
cost $1,816 $1,188 $1,074
- ----------------------------------------------------------
The amounts recognized in the Company's consolidated balance sheet at December
31, 1997 and 1996 were as follows:
In thousands 1997 1996
- ----------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $17,920 $10,492
Fully eligible active plan
participants 1,315 446
- ---------------------------------------------------------
Fully eligible 19,235 10,938
Other active plan participants 4,043 1,215
- ---------------------------------------------------------
Accumulated benefit obligation 23,278 12,153
Unrecognized net loss (1,802) (1,877)
- ---------------------------------------------------------
Postretirement liability
recognized in financial
statements 21,476 10,276
Less current portion (1,903) (1,417)
- ---------------------------------------------------------
$19,573 $ 8,859
- ---------------------------------------------------------
The accumulated postretirement obligation was determined using a discount rate
of approximately 7.2%. An increase of approximately 9% in per capita claims cost
was assumed for 1997. The assumption provides for this rate to decline
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
by approximately 1% per year through 2000 and then remain constant at 5.5% in
2001 and thereafter.
A 1% increase in the health care cost trend rate would increase the estimated
accumulated post-retirement benefit obligation as of December 31, 1997 by
approximately $1,007,000. The impact on net periodic cost is minimal. The
Company's postretirement benefit plans are unfunded.
NOTE 8. INCOME TAXES
- -------------------------------------------------------
Income before taxes and extraordinary item was as follows:
In thousands 1997 1996 1995
- ----------------------------------------------------------
Domestic $38,681 $26,190 $13,270
Foreign 7,821 3,153 4,808
- ----------------------------------------------------------
$46,502 $29,343 $18,078
- ----------------------------------------------------------
The provision for income taxes consisted of the following:
In thousands 1997 1996 1995
- ----------------------------------------------------------
Current:
Federal $15,173 $ 9,380 $3,784
State 1,928 1,732 630
Foreign 2,495 1,252 1,680
- ----------------------------------------------------------
$19,596 $12,364 $6,094
- ----------------------------------------------------------
Deferred:
Federal $ (906) $ (439) $1,738
State (106) (136) 204
Foreign (11) 218 (2)
- ----------------------------------------------------------
$(1,023) $ (357) $1,940
- ----------------------------------------------------------
Total $18,573 $12,007 $8,034
- ----------------------------------------------------------
The provision for income taxes includes Federal, state and foreign income taxes
currently payable and those deferred or prepaid because of temporary differences
between financial statement and tax bases of assets and liabilities. The Company
records income taxes under the liability method. Under this method, deferred
income taxes are recognized for the estimated future tax effects of differences
between the tax bases of assets and liabilities and their financial reporting
amounts based on enacted tax laws. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The significant components of the provision (benefit) for deferred income taxes,
resulting from differences in the timing of recognition of income and expenses
for income tax and financial reporting purposes, consist of the following:
In thousands 1997 1996 1995
- ----------------------------------------------------------
Net operating loss
carryforwards $ 177 $ 177 $ 425
Restructuring costs -- -- (326)
Depreciation 330 304 47
Employee compensation
and benefits (2,408) (1,025) 566
Postretirement
benefits 80 (53) 217
Other 798 240 1,011
- ----------------------------------------------------------
Total $(1,023) $ (357) $1,940
- ----------------------------------------------------------
The effective income tax provision differs from the amount calculated using the
statutory United States Federal income tax rate, principally due to the
following:
In thousands 1997 1996 1995
- ------------------------------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
INCOME INCOME INCOME
BEFORE BEFORE BEFORE
AMOUNT TAXES AMOUNT TAXES AMOUNT TAXES
- ------------------------------------------------------------------------
Statutory
United
States
Federal $16,276 35.0% $10,271 35.0% $6,147 34.0%
Income tax
State Income
taxes, net
of Federal
Income tax
effect 1,183 2.5 1,037 3.5 550 3.0
Amortization
of goodwill 543 1.2 479 1.6 332 1.8
Effect of
foreign
subsidiaries (253) (0.6) (70) (0.2) 75 0.4
Merger
expenses -- -- -- -- 949 5.3
Other 824 1.8 290 1.0 (19) (0.1)
- ------------------------------------------------------------------------
$18,573 39.9% $12,007 40.9% $8,034 44.4%
- ------------------------------------------------------------------------
The net deferred tax asset recognized in the consolidated statements of
financial position as of December 31, 1997 and 1996 consists of the following:
-8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
In thousands 1997 1996
- --------------------------------------------------------
Deferred tax assets:
Net operating loss
carryforwards $1,364 $1,469
Postretirement benefits 4,214 3,984
Employee compensation & benefits 9,503 4,144
Other 4,557 3,383
- --------------------------------------------------------
Total deferred tax assets 19,638 12,980
- --------------------------------------------------------
Deferred tax liabilities:
Depreciation (8,053) (6,975)
Prepaid expenses and other (2,624) (1,037)
- --------------------------------------------------------
Total deferred tax liabilities (10,677) (8,012)
- --------------------------------------------------------
Net deferred tax asset $8,961 $4,968
- --------------------------------------------------------
One of the Company's wholly-owned domestic subsidiaries has available net
operating losses which expire as follows:
IN THOUSANDS
- ----------------------------------------------
2005 $3,640
2006 31
- ----------------------------------------------
$3,671
- ----------------------------------------------
The application of these net operating loss carryforwards against future taxable
income is limited under the provisions of Internal Revenue Code Section 382 to
$455,000 per taxable period. Management expects that the full amount of these
carryforwards will be utilized over the next nine years.
Undistributed earnings of the Company's foreign subsidiaries are considered to
be indefinitely reinvested and, accordingly, no provision for United States
Federal and state income taxes has been provided thereon. If distribution of
those earnings in the form of dividends were to occur, the Company may be
subject to both United States income taxes and foreign withholding taxes.
Determination of the amount of unrecognized deferred United States income tax
liability is not reasonable determinable until such distribution actually occurs
because of the variability of factors associated with the tax liability
calculation, including reductions associated with any available foreign tax
credits.
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------------------
Cash payments for interest and net cash payments for income taxes are as
follows:
In thousands 1997 1996 1995
- ----------------------------------------------------------
Interest $9,248 $6,419 $6,743
Income taxes, net of $14,948 $9,758 $1,726
refunds
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1997, 1996, and 1995, the Company issued 5,646, 10,736 and 16,000 shares of
its common stock, respectively, under the 1993 Non-Employee Director's Stock
Plan in non-cash transactions. The fair market value of the stock at the time of
issuance was approximately $144,000, $192,000 and $192,000 in 1997, 1996 and
1995, respectively, and this amount was amortized to expense over the one-year
term of the grants.
See Note 3, "Acquisitions and Divestiture" and Note 13, "Stock Based
Compensation Plans," for additional supplemental information on non-cash
investing and financing activities.
NOTE 10. STOCK RELATED INFORMATION
- -------------------------------------------------------
PREFERRED STOCK PURCHASE RIGHTS
The Company has distributed one preferred stock purchase right for each
outstanding share of common stock. Each right initially entitles the holder to
purchase one one-hundredth (1/100) of a share of Junior Participating Preferred
Stock at a price of $80 per right. The rights, which do not have voting rights,
will become exercisable for common stock of the Company if a person or group,
without the Company's prior consent, acquires 15% or more of such common stock
or announces a tender offer which would result in such ownership of 15% or more
of such common stock.
-9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
In the event the rights become exercisable for common stock, each right will
entitle its holder to purchase, at the right's then-current exercise price,
common stock of the Company having a value of twice the exercise price of the
right. In the event the rights become exercisable for common stock and
thereafter the Company is acquired in a merger or other business combination,
each right will entitle its holder to purchase, at the right's then-current
exercise price, common stock of the acquiring company having a value of twice
the exercise price of the right.
The rights expire on April 30, 2007, and may be redeemed by the Company at a
price of $0.001 per right at any time before a 15% position has been acquired or
a tender offer has been announced.
STOCK OFFERING
On June 27, 1997 and July 8, 1977, the Company sold 2,350,000 and 150,000
shares, respectively, of its common stock at a per share price to the public of
$28.875. The total proceeds, net of expenses, were approximately $68,187,000 of
which approximately $59,100,000 was used to reduce the amounts outstanding under
the Company's credit facilities associated with the acquisition of Kysor, and
approximately $9,100,000 was used to redeem outstanding warrants held by a
former lender of Schwitzer as described below.
On a supplementary basis, assuming that the total offering and sale of 2,500,000
shares as described above had been completed as of January 1, 1996 and the
estimated net proceeds had been used to reduce the Company's indebtedness and
redeem the warrants, diluted earnings per share for the years ended December 31,
1997 and 1996 would have been approximately $1.70 and $1.21, respectively.
WARRANTS
The Company issued detachable warrants in 1992 to a former lender of Schwitzer.
The warrants gave the holder the right to purchase 480,750 shares, in the
aggregate, of the Company's common stock at an exercise price of $8.32 per
share, subject to certain conditions. The warrants were redeemed by the Company
in June 1997 at the request of the warrant holder.
NOTE 11. COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------
OPERATING LEASES
The Company leases certain of its buildings, machinery and equipment under
operating lease agreements which expire at various dates over the next six
years.
The following is a summary of rent expense under all operating leases:
IN THOUSANDS 1997 1996 1995
- ----------------------------------------------------------
Minimum rentals $4,142 $3,248 $3,171
- ----------------------------------------------------------
Minimum future rental payments under noncancelable operating leases for each of
the next five years and in the aggregate are as follows:
IN THOUSANDS
- --------------------------------------------------------
1998 $3,266
1999 2,627
2000 2,196
2001 1,415
2002 220
Subsequent to 2002 235
- --------------------------------------------------------
Total minimum rental payments $9,959
- --------------------------------------------------------
- --------------------------------------------------------
CAPITAL LEASES
The Company leases various manufacturing, office and warehouse properties and
office equipment under capital leases which expire at various dates through
2009. The assets and liabilities under capital leases are recorded at
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
the lower of the present value of the minimum lease payments or the fair value
of the assets. The assets are depreciated over the shorter of their related
lease terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense.
At December 31, 1997 and 1996, property under capital leases included with plant
and equipment in the accompanying consolidated balance sheet is as follows:
IN THOUSANDS 1997 1996
- ------------------------------------------------------
Building and improvements $2,360 $2,360
Machinery and equipment 380 391
- ------------------------------------------------------
2,740 2,751
Less--accumulated
depreciation (1,039) (964)
- ------------------------------------------------------
Plant and equipment, net $1,701 $1,787
- ------------------------------------------------------
Minimum future lease payments under capital leases as of December 31, 1997 are
as follows:
IN THOUSANDS
- ---------------------------------------------------------
1998 $ 566
1999 474
2000 539
2001 407
2002 357
Subsequent to 2002 2,294
- ---------------------------------------------------------
Total minimum lease payments $ 4,637
Less--amounts representing interest (2,119)
- ---------------------------------------------------------
Present value of net minimum lease 2,518
Less--current portion (235)
- ---------------------------------------------------------
Long-term obligations under capital leases $ 2,283
- ---------------------------------------------------------
Obligations under capital leases are included with debt in the accompanying
consolidated balance sheet. Certain capital leases provide for purchase options.
Generally, purchase options are at prices representing the expected fair value
of the property at the expiration of the lease term.
LEGAL AND ENVIRONMENTAL MATTERS
The Company has accrued for various legal matters and certain investigatory and
non-capital environmental remediation costs consistent with the policy set forth
in Note 1, "Summary of Significant Accounting Policies." Estimates of these
costs have been made and accrued in the financial statements. Based on the
information currently available, management does not expect that sums that may
have to be paid in connection with these matters will exceed balances already
accrued in any material respects and, therefore, management does not expect that
the outcome of such matters will have a material effect on the consolidated
financial position or results of operations of the Company.
SEVERANCE AND CONTROL AGREEMENT
The Company maintains a severance policy applicable to certain of its executive
officers. The severance policy provides that if an executive officer's
employment is terminated, the executive's base pay, medical and dental coverage,
health and accident insurance, and disability and group life insurance will be
continued for a period of up to twenty-four months, subject to certain
conditions. The aggregate maximum commitment under the executive severance
policy should all four covered employees be terminated is up to approximately
$3,100,000.
The Company modified its existing severance policy for its executive officers
during 1996 to include change of control agreements ("Control Agreements").
Under the Control Agreements as presently stated, upon a change of control, as
defined, each such officer would be entitled to receive, among other things,
three times his current annual pay and three times his highest cash bonus in the
past three years. Each of the aforementioned would be adjusted for any resulting
income or excise tax
-11-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
liabilities to the officer. These Control Agreements are subject to amendment or
waiver by the Company's Board of Directors prior to any change of control, as
defined. Although the aggregate commitment of the Company pursuant to the
Control Agreements cannot be specifically determined until the occurrence of
such change of control event, such payments could have a material effect on the
consolidated financial position and results of operations of the Company. The
Control Agreements are designed to encourage the continuity of management.
NOTE 12. OTHER, NET
- -------------------------------------------------------
Other, net for the years ended December 31, 1997, 1996 and 1995 consisted of the
following:
IN THOUSANDS 1997 1996 1995
-----------------------------------------------------------
Non-operating
post-retirement $ (1,250) $(1,065) $ (815)
benefits
Settlement of
certain liabilities -- -- 1,586
Foreign currency
translation
adjustments, net 94 193 75
Miscellaneous (853) (1,215) (353)
-----------------------------------------------------------
$ (2,009) $(2,087) $ 493
-----------------------------------------------------------
NOTE 13. STOCK BASED COMPENSATION PLANS
- -------------------------------------------------------
STOCK AWARD PLANS
In 1996, the Board of Directors adopted the Long-Term Incentive Plan ("LTIP") in
order to better align stockholder and employee interests by encouraging employee
stock ownership in the Company and motivating employees with compensation
conditioned upon achievement of the Company's financial goals. The LTIP was
approved by the shareholders of the Company in April, 1997. Under the terms of
the LTIP, awards may be made of incentive and nonqualified stock options, stock
appreciation rights and restricted stock to eligible employees. In addition,
awards may also be made to eligible employees with a value tied to specific
performance goals. The value of these awards may be paid with Company common
stock or cash, or a combination of the two. The program specifies that a number
of awards equal to two and one-half percent of the outstanding shares of the
Company will be available for grant under the various award alternatives on
January 1 of each year subject to certain conditions and adjustments.
In August 1996, award levels were approved by the Board of Directors whereby
certain key employees would receive a payout after the attainment of price
thresholds for Kuhlman common stock of $23 and $27, subject to vesting
requirements and other factors. In April and May, 1997, performance award levels
were achieved for the attainment of the two share price targets of $23 and $27,
respectively. The payout to eligible participants, which consists of two-third
stock and one-third cash, is being made in four quarterly installments subject
to certain vesting requirements and other factors, commencing on May 1 and June
1, 1997, respectively. The estimated pre-tax expense of such awards is
approximately $7,000,000 with approximately $3,600,000 and $3,400,000 to be paid
for the $23 and $27 targets, respectively. Recognition of the related
compensation expense of such awards is based on the commencement date and the
vesting requirements. In 1997, the Company recognized approximately $4,500,000
of expense under the LTIP, of which two-thirds represents a non-cash charge for
the issuance of stock under the terms of the program. The expenses are included
in operating expenses as part of Corporate expenses. The remaining balance of
$2,500,000 will be expensed in the first and second quarter of 1998, in
accordance with the associated vesting requirements.
-12-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
In July, 1997, additional award levels were approved by the Board of Directors
whereby certain key employees would receive a payout after the attainment of
each of two share price thresholds within two years from the award date, subject
to vesting requirements and other factors. The stock price thresholds are $36
and $42 per share, and the pre-tax cost of the awards would be approximately
$4,450,000 each. The Company achieved the $36 threshold in October 1997 with
payouts and vesting to commencement in the second quarter of 1998.
In 1993, the Board of Directors adopted and the shareholders approved the 1993
Non-Employee Director's Stock Plan ("New Director's Plan"). Pursuant to the New
Director's Plan, each non-employee director receives annually a number of shares
equal to an aggregate fair market value of $24,000 concurrent with the meeting
of the Board of Directors held each year following the Annual Meeting of
Stockholders. Approximately 20,000 shares were available for grants as of
December 31, 1997.
STOCK APPRECIATION RIGHTS
In addition to the stock appreciation rights that may be issued pursuant to the
LTIP noted above, the Company has a 1994 Stock Appreciation Rights Plan (the
"SAR Plan"). The SAR Plan provides for discretionary grants to key employees of
cash-only stock appreciation rights in shares of the Company's common stock.
Each Stock Appreciation Right ("SAR") measures the change in value of a share of
the Company's common stock from the date of grant to the date of exercise. All
SARs vest and are automatically exercised on the earliest to occur of the fifth
anniversary of the grant or other circumstances, including a change in controls
as defined in the SAR Plan, of the Company. Unearned compensation, representing
changes in the market value of the SAR, has been charged to income in the period
incurred. Expenses of approximately $1,152,000 and $546,000 were recognized in
1997 and 1996, respectively, under the Company's SAR plans. As of December 31,
1997, 171,000 SARs with an average basis of $16.87 per SAR had been awarded and
were outstanding under the SAR Plan.
STOCK OPTIONS
The Company has various stock option plans for employees and non-employee
directors. These plans provide for the granting of options to purchase common
shares of the Company. All options under these plans are granted at prices equal
to the market value at the date of grant, become exercisable between six and
forty-eight months after the date of grant, and may be exercised up to ten years
from the grant date. As of December 31, 1997, there were approximately 132,000
and 74,000 options available for grant to employees and non-employee directors,
respectively, under the Company's option plans. Of the option grants available
to employees, approximately 94,000 could be used for any of the other types of
employee awards available under the LTIP.
The following is a summary of options outstanding as of December 31, 1997:
WEIGHTED
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE REMAINING
PRICE (000'S) PRICE LIFE
- ---------------------------------------------------------
$ 4.81 - $7.20 156 $ 5.72 3.2 yrs.
$ 7.20 - $10.80 188 8.86 4.0 yrs.
$ 10.80 - $16.20 786 13.84 6.7 yrs.
$ 16.20 - $27.88 680 19.96 8.1 yrs.
- ---------------------------------------------------------
1,810
- ---------------------------------------------------------
STOCK BASED COMPENSATION
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for awards under those plans, consistent
with the guidelines of SFAS No. 123, the Company's net income
-13-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
and earnings per share would have been reduced to the pro forma amounts listed
below:
IN THOUSANDS, EXCEPT PER SHARE 1997 1996
DATA
- -----------------------------------------------------------
Net income
As reported $27,929 $17,336
Pro forma $27,295 $17,068
Basic earnings per share
As reported $1.84 $1.29
Pro forma $1.80 $1.27
Diluted earnings per share
As reported $1.75 $1.25
Pro forma $1.71 $1.23
Because the method of accounting required by SFAS No. 123 has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
In accordance with SFAS No. 123, the Company measures compensation cost for
disclosure purposes using the Black-Scholes model with the following
assumptions: dividend yields ranging from 1.8% to 3.7%; an expected life of 4 to
6 years; expected volatility of approximately 32% and risk-free interest rates
ranging from approximately 5.9% to 7.5%.
The following table summarizes the transactions pursuant to the Company's stock
option plans for the three-year period ended December 31, 1997:
1997 1996 1995
- -------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
SHARES EXERCISE SHARES EXERCISE SHARE EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
- -------------------------------------------------------------------
Outstanding
at
beginning 1,521 $12.81 1,572 $12.08 1,549 $12.09
of year
Granted 449 21.40 310 14.14 382 12.21
Exercised (160) 12.98 (308) 9.82 (134) 7.70
Forfeited -- -- (24) 16.16 (219) 14.88
Expired -- -- (29) 16.90 (6) 12.32
- -------------------------------------------------------------------
Outstanding
at end 1,810 $14.92 1,521 $12.81 1,572 $12.08
of year
- -------------------------------------------------------------------
Exercisable
at end 1,762 $14.98 1,434 $13.03 1,420 $12.43
of year
- -------------------------------------------------------------------
Weighted
average
fair
value of
options $7.42 $3.97 $3.99
granted
- --------------------------------------------------------------------
NOTE 14. BUSINESS AND GEOGRAPHICAL SEGMENT INFORMATION
- -------------------------------------------------------
The Company's operations are organized into two business segments which are
defined as Electrical Products and Industrial Products. The Electrical Products
Segment manufactures and markets distribution, power and instrument transformers
primarily for domestic electrical utilities and certain industrial users; and
electrical and electronic wire and cable products for consumer, commercial and
industrial applications domestically. The Industrial Products Segment designs,
produces and markets proprietary engine components, fuel tanks and other
products used on light, medium and heavy duty trucks, and construction,
agricultural, mining, power generation and marine equipment. Approximately 70%
of the Industrial Products Segment's sales, excluding export sales from the
United States, are made to domestic customers with the balance sold throughout
the world.
Net sales represent shipments to unaffiliated customers. Operating earnings for
each segment includes all costs and expenses directly related to the segment
before financing charges or corporate allocations. Corporate items principally
represent general and administrative costs and costs associated with the
Company's Long-Term Incentive Plan. Indentifiable assets are those used in the
operations of each business or geographic segment. Corporate assets consist
primarily of property, plant and equipment.
The Company's operations by business segment and geographic area for the years
ended December 31, 1997, 1996 and 1995, are as follows:
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
FINANCIAL DATA BY BUSINESS SEGMENT
IN THOUSANDS 1997 1996 1995
========================================================
NET SALES(1)
Electrical $297,087 $268,846 $243,761
Industrial 346,353 187,619 181,623
- --------------------------------------------------------
$643,440 $456,465 $425,384
========================================================
INCOME BEFORE TAXES AND EXTRAORDINARY ITEM
Electrical $ 21,165 $ 20,103 $ 13,639
Industrial 46,636 22,386 19,541
- --------------------------------------------------------
Operating earnings(2) 67,801 42,489 33,180
Corporate expenses(3) (12,662) (6,165) (4,156)
Interest expense, net (8,637) (6,981) (7,066)
Merger expenses -- -- (4,510)
Unallocated -- -- 630
- --------------------------------------------------------
$ 46,502 $ 29,343 $ 18,078
========================================================
IDENTIFIABLE ASSETS
Electrical $181,214 $182,468 $127,760
Industrial 270,493 91,353 84,145
Corporate/unallocated 9,611 3,595 2,997
$461,318 $277,416 $214,902
========================================================
CAPITAL EXPENDITURES
Electrical $ 5,564 $ 5,134 $ 4,287
Industrial 12,142 5,615 9,183
Corporate/unallocated 2,260 231 1,730
- --------------------------------------------------------
$ 19,966 $ 10,980 $ 15,200
========================================================
DEPRECIATION AND AMORTIZATION
Electrical $ 7,530 $ 6,643 $ 5,667
Industrial 11,963 5,633 5,606
Corporate/unallocated 423 194 47
- --------------------------------------------------------
$ 19,916 $ 12,470 $ 11,320
========================================================
FINANCIAL DATA BY GEOGRAPHIC SEGMENT
IN THOUSANDS 1997 1996 1995
========================================================
NET SALES(1)
United States $562,546 $397,393 $363,050
Europe 70,384 50,757 50,632
Other 10,510 8,315 11,702
- --------------------------------------------------------
$643,440 $456,465 $425,384
========================================================
INCOME BEFORE TAXES AND EXTRAORDINARY ITEM
United States $ 60,162 $ 39,077 $ 28,256
Europe 6,703 3,045 4,601
Other 936 367 323
- --------------------------------------------------------
Operating 67,801 42,489 33,180
earnings(2)
Corporate expenses(3) (12,662) (6,165) (4,156)
Interest expense, net (8,637) (6,981) (7,066)
Merger expenses -- -- (4,510)
Unallocated -- -- 630
- --------------------------------------------------------
$ 46,502 $ 29,343 $ 18,078
========================================================
IDENTIFIABLE ASSETS
United States $406,602 $236,441 $178,702
Europe 43,038 30,544 26,308
Other 2,067 6,836 6,895
Corporate 9,611 3,595 2,997
- --------------------------------------------------------
$461,318 $277,416 $214,902
========================================================
(1) IN 1977, 1996 AND 1995, SALES TO A LONG-TIME CUSTOMER OF THE COMPANY'S
INDUSTRIAL PRODUCTS SEGMENT REPRESENTED 8%, 9% AND 10%, RESPECTIVELY, OF
THE COMPANY'S NET SALES. NO OTHER CUSTOMER REPRESENTS MORE THAN 7% OF THE
COMPANY'S NET SALES.
(2) OPERATING EARNINGS IS DEFINED AS OPERATING PROFIT PLUS OTHER, NET DIRECTLY
ATTRIBUTABLE TO EACH SEGMENT.
(3) SEE NOTE 13, "STOCK BASED COMPENSATION PLANS" FOR ADDITIONAL INFORMATION ON
CORPORATE EXPENSES.
NOTE 15. FINANCIAL INSTRUMENTS
- -------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company has limited involvement with derivative financial instruments and
does not use them for speculation or trading purposes. The Company hedges the
effects of fluctuations in commodity prices, principally copper, through either
commodity futures contracts or forward purchase commitments. In addition, the
Company hedges currency fluctuations for certain international transactions
through various mechanisms, including futures contracts, and hedges interest
rates through interest rate swap agreements.
At December 31, 1997 and 1996, the Company had $2,315,000 and $750,000,
respectively, of currency hedging futures contracts outstanding for certain
foreign currencies. The maturities on the hedging contracts do not exceed four
months.
As of December 31, 1997, the Company had entered into two interest rate swap
agreements to reduce the risk of movements in interest rates on a portion of its
variable rate debt. The terms of the agreements, which have a combined notional
principal amount of $60,000,000, allow the Company to receive or make payments
on the difference between the stated LIBOR rate and current market rates. The
LIBOR rates are fixed at a weighted average rate of approximately 5.7%. The
agreements commenced on October 30, 1997 and mature on various dates, the latest
of which is
-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KUHLMAN CORPORATION AND SUBSIDIARIES
January 1, 1999, subject to one-year renewal options.
At December 31, 1997 and 1996 there were no significant futures hedging
contracts for commodities outstanding. At December 31, 1997 and 1996, the
Company had approximately $10,100,000 and $3,500,000, respectively, of forward
purchase commitments, principally for copper, at approximately fair market
value. The purchase commitments generally extend up to six months.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, trade receivables and trade
payables are considered to be representative of their respective fair values
because of the immediate or short-term maturity of these financial instruments.
The fair value of the Company's debt instruments approximated the book value
because a substantial portion of the underlying instruments are variable rate
notes which re-price frequently.
The fair value of the Company's futures contracts are estimated based on current
settlement values. The fair value of the interest rate swaps are based on
valuations from financial institutions. The fair value of the futures contracts
and swap agreements approximate the unrealized gain or loss on these
instruments. Realized gains or losses during 1997 and unrealized gains or losses
at December 31, 1997 on the commodity and currency futures contracts and
interest rate swaps were minimal.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of trade accounts receivable. While the
Company does have a concentration of accounts receivable with customers in the
commercial transportation industry, management believes that the risk of
collectibility is limited due to their individual financial strength and
dispersion across many different geographies, and because of the large number of
entities comprising the Company's customer base.
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------
The Company's quarterly results are summarized below for the years ended
December 31, 1997 and 1996.
1997
IN THOUSANDS, QUARTER
EXCEPT -------------------------------------
PER SHARE DATA FIRST SECOND THIRD FOURTH TOTAL
- -----------------------------------------------------------------
Net sales $134,148 $170,221 $164,364 $174,707 $643,440
Gross profit 29,742 38,514 39,134 40,830 148,220
Operating
profit 11,251 14,228 15,241 16,428 57,148
Net income 5,282 6,409 7,673 8,565 27,929
Earnings per
share:
Net income--
basic 0.38 0.46 0.47 0.53 1.84
Net income--
diluted 0.36 0.43 0.45 0.51 1.75
1996
IN THOUSANDS, QUARTER
EXCEPT --------------------------------------
PER SHARE DATA FIRST SECOND THIRD FOURTH TOTAL
- ------------------------------------------------------------------
Net sales $103,457 $112,200 $119,198 $121,610 $456,465
Gross profit 21,464 23,724 27,264 28,483 100,935
Operating
profit 7,742 8,502 11,241 10,926 38,411
Net income 3,418 3,732 5,129 5,057 17,336
Earnings per
share:
Net income--
basic 0.26 0.28 0.38 0.37 1.29
Net income--
diluted 0.25 0.27 0.37 0.36 1.25
-16-
EXHIBIT 99.2
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
KUHLMAN CORPORATION AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
1998 1997
---------------------- ------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales....................................................... $ 571,100 $ 468,733
Cost of goods sold.............................................. 439,631 361,343
----------- -----------
Gross profit.................................................... 131,469 107,390
----------- -----------
Operating expenses:
Selling, engineering, general and
administrative expenses..................................... 75,381 64,561
Intangible amortization..................................... 2,715 2,109
----------- -----------
Total operating expenses................................ 78,096 66,670
----------- -----------
Operating profit................................................ 53,373 40,720
----------- -----------
Other income (expense):
Interest expense, net....................................... (5,364) (6,848)
Other, net.................................................. (1,306) (1,340)
----------- -----------
Total other
income (expense), net................................. (6,670) (8,188)
----------- -----------
Income before taxes............................................. 46,703 32,532
Taxes on income................................................. 18,127 13,168
----------- -----------
Net income...................................................... $ 28,576 $ 19,364
=========== ===========
Per share amounts:
Net income - basic.......................................... $ 1.71 $ 1.32
----------- -----------
Net income - diluted........................................ $ 1.64 $ 1.25
----------- -----------
Average shares outstanding:
Basic....................................................... 16,704 14,698
=========== ===========
Diluted..................................................... 17,430 15,464
=========== ===========
The Notes To Consolidated Financial Statements
should be read in conjunction with these statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
KUHLMAN CORPORATION AND SUBSIDIARIES
In thousands SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 4,911 $ 6,529
Accounts receivable, less reserves of $3,473
and $3,726 at September 30, 1998 and
December 31, 1997, respectively........................... 120,262 104,190
Inventories................................................. 76,653 71,282
Deferred income taxes....................................... 13,045 13,540
Prepaid expenses and other current assets................... 5,430 4,726
----------- -----------
Total current assets.................................... 220,301 200,267
Plant and equipment, at cost:
Land, buildings and leasehold improvements.................. 53,023 51,874
Machinery and equipment..................................... 175,158 173,300
Construction in progress.................................... 11,897 5,720
240,078 230,894
Less - accumulated depreciation............................. (118,435) (105,368)
----------- -----------
121,643 125,526
----------- -----------
Intangible assets, net of amortization of
$10,160 and $7,445 at September 30, 1998
and December 31, 1997, respectively......................... 120,903 123,616
----------- -----------
Other assets.................................................... 12,461 11,909
----------- -----------
$ 475,308 $ 461,318
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................... $ 1,066 $ 1,475
Accounts payable............................................ 61,870 50,913
Accrued liabilities......................................... 80,999 87,814
----------- -----------
Total current liabilities............................... 143,935 140,202
----------- -----------
Long-term debt.................................................. 97,444 116,257
----------- -----------
Accrued postretirement benefits................................. 19,963 19,573
----------- -----------
Other long-term liabilities..................................... 10,256 10,833
----------- -----------
Total liabilities....................................... 271,598 286,865
----------- -----------
Shareholders' equity:
Preferred stock, par value $1.00, authorized 2,000 shares, none issued;
Junior participating preferred stock, series A, no par
value, authorized 200 shares, none issued................. -- --
Common stock, par value $1.00, authorized
20,000 shares, issued 16,889 shares at
September 30, 1998 and 16,601 at
December 31, 1997, respectively........................... 16,889 16,601
Additional paid-in capital.................................. 110,844 103,543
Retained earnings........................................... 78,822 57,777
Accumulated other comprehensive income...................... (1,925) (2,548)
----------- -----------
204,630 175,373
Less - treasury shares at cost (72 shares at
September 30, 1998 and December 31, 1997)................. (920) (920)
----------- -----------
Total shareholders' equity............................. 203,710 174,453
----------- -----------
$ 475,308 $ 461,318
=========== ===========
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHOULD BE READ IN CONJUNCTION WITH THESE STATEMENTS.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
KUHLMAN CORPORATION AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
--------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 28,576 $ 19,364
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................... 19,218 14,759
Deferred income taxes, net.................................. 1,118 867
Provision for losses on accounts receivable................. 305 322
Other, net.................................................. 2,480 2,141
Changes in operating assets and liabilities: (1)
Accounts receivable..................................... (16,817) (9,020)
Inventories............................................. (5,662) 1,667
Prepaid expenses and other current assets............... (767) (1,410)
Accounts payable........................................ 11,015 5,666
Accrued liabilities..................................... (7,252) 6,939
----------- ----------
Net cash provided by operating activities 32,214 41,295
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (15,203) (13,317)
Acquisitions, net of cash acquired.......................... -- (85,375)
Proceeds from the sale of assets............................ 4,690 395
----------- ----------
Net cash used by investing activities................... (10,513) (98,297)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving loan facility....................... (17,991) (80,824)
Proceeds from issuance of long-term debt.................... 51 90,000
Repayments of long-term debt................................ (1,281) (1,668)
Dividends paid.............................................. (7,487) (6,204)
Stock offering proceeds, net of expenses.................... -- 68,187
Redemption of warrants...................................... -- (9,139)
Stock options exercised and other........................... 3,533 2,297
----------- ----------
Net cash provided (used) by financing activities........ (23,175) 62,649
----------- ----------
Effect of exchange rate changes on cash......................... (144) (460)
----------- ----------
Net increase (decrease) in cash and cash equivalents............ (1,618) 5,187
Cash and cash equivalents at beginning of period................ 6,529 2,209
----------- ----------
Cash and cash equivalents at end of period................. $ 4,911 $ 7,396
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 6,557 $ 7,168
----------- ----------
Income taxes, net of refunds............................ $ 13,647 $ 8,574
=========== ==========
(1) Net of the effects of acquisitions, where applicable.
The Notes To Consolidated Financial Statements
should be read in conjunction with these statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
KUHLMAN CORPORATION AND SUBSIDIARIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------
FOREIGN
CURRENCY
ADDITIONAL TRANS- MINIMUM COMPRE-
COMMON PAID-IN RETAINED LATION PENSION TREASURY HENSIVE
STOCK CAPITAL EARNINGS ADJ. LIAB. STOCK TOTAL INCOME
--------- ----------- --------- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997. $16,601 $103,543 $57,777 $(1,364) $(1,184) $(920) $174,453
Net income............ -- -- 28,576 -- -- -- 28,576 $28,576
Cash dividends declared
($0.45 per share).. -- -- (7,531) -- -- -- (7,531)
Foreign currency
translation adjustment -- -- -- 623 -- -- 623 623
Issuance of common stock
(1)................ 115 3,941 -- -- -- -- 4,056
Stock options exercised
and other ......... 173 3,360 -- -- -- -- 3,533
------- -------- ------- ------ ------- ------ -------- -------
Balance at September 30,
1998............... $16,889 $110,844 $78,822 $ (741) $(1,184) $(920) $203,710
======= ======== ======= ====== ======= ====== ======== =======
Total comprehensive income for the nine months
ended September 30, 1998.................................................................... $29,199
=======
(1) Represents shares issued under the Company's Long-Term Incentive Plan.
The Notes To Consolidated Financial Statements
should be read in conjunction with these statements.
</TABLE>
4
<PAGE>
KUHLMAN CORPORATION AND SUBSIDIARIES
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
1. Consolidated Financial Statements
The consolidated balance sheet at September 30, 1998 and the
related consolidated statements of income and cash flows for the three and nine
months ended September 30, 1998 and 1997, and the statement of shareholders'
equity for the nine months ended September 30, 1998, have been prepared by
Kuhlman Corporation (the "Company" or "Kuhlman") without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Company at September
30, 1998 and the results of operations and cash flows for the three and nine
months ended September 30, 1998 and 1997, and the shareholders' equity for the
nine months ended September 30, 1998 have been made. Certain amounts in the 1997
consolidated financial statements have been reclassified to conform with the
1998 presentation.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted from the accompanying financial
statements. These consolidated financial statements, including the notes
thereto, should be read in conjunction with the Company's audited consolidated
financial statements as of and for the three years in the period ended December
31, 1997 included in the Company's annual report on Form 10-K.
The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year 1998.
2. Earnings and Dividends Per Share
Basic earnings per share are computed by dividing net income
by the weighted average shares outstanding for the period. Diluted earnings per
share reflects the dilutive effects of common stock equivalents in the weighted
average shares outstanding. The following is a reconciliation of the weighted
average shares outstanding used in the computation of diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 16,807 16,425 16,704 14,698
-------- -------- -------- --------
Dilutive impact of stock options outstanding 586 708 726 766
-------- -------- -------- --------
Diluted average shares outstanding 17,393 17,133 17,430 15,464
======== ======== ======== ========
</TABLE>
5
<PAGE>
A cash dividend of $0.15 per share was declared during each of
the first three quarters of 1998 and 1997.
3. Inventories
Inventories consisted of the following, in thousands:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
FIFO cost:
Raw materials $ 34,825 $ 32,904
Work-in-process 16,529 17,270
Finished goods 25,240 21,662
----------- -----------
Total FIFO 76,594 71,836
Difference in FIFO
and LIFO cost 59 (554)
----------- -----------
Net inventories $ 76,653 $ 71,282
=========== ===========
6
EXHIBIT 99.3
- ------------
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial
statements consist of an unaudited pro forma consolidated balance sheet as of
September 30, 1998, and unaudited pro forma consolidated statements of
operations for the year ended December 31, 1997 and for the nine-month periods
ended September 30, 1998 and 1997. The pro forma statements combine the
historical financial statements of Borg-Warner Automotive, Inc. ("Borg-Warner
Automotive") and Kuhlman Corporation ("Kuhlman") as of and for the periods
indicated. The pro forma financial statements also reflect the following:
o The merger will be accounted for as a purchase. Borg-Warner
Automotive funded the transaction by issuing 3,286,596 shares of
Borg-Warner Automotive common stock and borrowing approximately
$533 million in cash. Subject to the provisions of the Agreement
and Plan of Merger among Borg-Warner Automotive, BWA Merger Corp.,
and Kuhlman, dated as of December 17, 1998, each outstanding share
of Kuhlman common stock was converted into the right to receive
(1) $39.00 in cash, without interest, or (2) $39.00 worth of
shares of Borg-Warner Automotive common stock.
o Borg-Warner Automotive refinanced Kuhlman's existing indebtedness
which was $98.4 million as of September 30, 1998 and $151 million
at the closing of the merger. In addition Borg-Warner Automotive
had planned to incur additional indebtedness for the settlement of
stock options and certain long-term incentive programs and
severance programs, which were estimated to be approximately $45
million, net of tax benefits. Substantially all of such payments
were made prior to closing, excluding the tax benefit, and are
included in the ending debt balance.
o Borg-Warner Automotive and Kuhlman will pay anticipated investment
banking, legal, accounting and regulatory fees and costs related
to the merger estimated to be $12 million.
Borg-Warner Automotive has not completed the analyses
necessary to determine the allocation of purchase price based on the fair values
of assets and liabilities acquired and, therefore, the excess of purchase price
over net assets acquired, except for the amount allocated to the electrical
products businesses as discussed below, is reflected as goodwill in these pro
forma financial statements.
Borg-Warner Automotive intends to sell Kuhlman's electrical
products businesses. In the pro forma balance sheet, Borg-Warner Automotive's
net investment in the electrical products businesses is reflected as an asset
held for sale in current assets. The investment includes a portion of the
goodwill related to the merger. The amount of goodwill was allocated based on
the relative historical performance of the electrical products businesses
compared with the total Kuhlman business. While the result is not certain,
Borg-Warner Automotive believes that the net investment in the electrical
products businesses is not greater than the amounts that
1
<PAGE>
Borg-Warner Automotive will receive upon sale of the businesses. Proceeds from
the sale will be used to repay merger indebtedness.
The pro forma consolidated financial statements should be read
in conjunction with the Borg-Warner Automotive and Kuhlman historical
consolidated financial statements and notes thereto. The pro forma consolidated
statements are presented for informational purposes only and do not purport to
be indicative of what the actual results would have been had the merger occurred
as described above for the periods presented. The pro forma consolidated
statements of operations should not be considered indicative of the results of
future operations of the merged companies.
The pro forma consolidated balance sheet was prepared assuming
the merger occurred on September 30, 1998, and the pro forma consolidated
statements of operations were prepared assuming that the merger took place on
January 1, 1998 and 1997, respectively. In addition to an accrual for
merger-related costs noted above, the pro forma consolidated statements include
the following:
o the effects of amortization of the goodwill related to the merger (which is
being amortized over a 40-year life),
o interest expense on borrowings incurred to finance the merger, but
excluding the portion of the interest expense allocated to the electrical
products businesses,
o the elimination of expenses related to Kuhlman's corporate headquarters
which will be closed,
o exclusion of revenues, costs and expenses for the electrical products
businesses, and
o tax effects of all the preceding adjustments.
2
<PAGE>
<TABLE>
<CAPTION>
BORG-WARNER AUTOMOTIVE
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(DOLLARS IN MILLIONS)
Less:
Electrical Pro Forma
Borg-Warner Pro Forma Products Borg-Warner
Automotive Kuhlman Adjustments Businesses (1) Automotive
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash............................................. $ 4.5 $ 4.9 $ 0.2 $ 9.2
Short-term securities............................ 7.2 7.2
Receivables...................................... 192.0 120.3 48.2 264.1
Inventories...................................... 130.8 76.7 35.8 171.7
Deferred income tax asset........................ 8.5 13.0 5.6 15.9
Prepayments and other current assets............. 25.5 5.4 2.7 28.2
Investment in electrical products businesses $ 250.0 (1) 250.0
------------------------------------------------------------------------------
Total current assets........................ 368.5 220.3 250.0 92.5 746.3
Property, plant and equipment at cost............ 1,004.8 240.1 72.8 1,172.1
Less accumulated depreciation.................... (400.9) (118.5) (34.2) (485.2)
------------------------------------------------------------------------------
Net property, plant and equipment........... 603.9 121.6 38.6 686.9
Investments and advances......................... 122.6 122.6
Goodwill......................................... 527.7 120.9 511.9 (2) 176.3 984.2
Deferred income tax asset........................ 18.7 18.7
Other noncurrent assets.......................... 118.1 12.5 4.5 126.1
------------------------------------------------------------------------------
$ 1,759.5 $ 475.3 $ 761.9 $ 311.9 $ 2,684.8
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................... $ 46.2 $ 1.0 $ 0.5 $ 46.7
Accounts payable and accrued expenses............ 266.6 133.6 $ 57.0 (2) 50.5 406.7
Income taxes payable............................. 33.4 9.3 1.9 40.8
------------------------------------------------------------------------------
Total current liabilities................... 346.2 143.9 57.0 52.9 494.2
Long-term debt................................... 305.5 97.4 508.6 (2) 3.3 908.2
Long-term liabilities:
Retirement-related liabilities.............. 313.2 20.0 2.2 331.0
Other long-term liabilities................. 65.3 10.3 3.5 72.1
Common stock..................................... 0.2 16.9 (16.9) (2) 0.2
Other stockholders' equity....................... 729.1 186.8 213.2 (2) 250.0 879.1
------------------------------------------------------------------------------
Total stockholders' equity.................. 729.3 203.7 196.3 250.0 879.3
------------------------------------------------------------------------------
$ 1,759.5 $ 475.3 $ 761.9 $ 311.9 $ 2,684.8
==============================================================================
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
BORG-WARNER AUTOMOTIVE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Less: Pro Forma
Electrical Borg-Warner
Borg-Warner Pro Forma Products Automotive
Automotive Kuhlman Adjustments Businesses (1)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales............................................... $ 1,767.0 $ 643.4 $ 303.5 $ 2,106.9
Cost of sales........................................... 1,375.4 481.4 235.4 1,621.4
Depreciation............................................ 70.4 16.9 5.9 81.4
Selling, general and administrative expenses............ 132.0 85.3 $ (12.4) (3) 38.4 166.5
Minority interest in earnings........................... 3.2 3.2
Goodwill amortization................................... 16.7 3.0 12.8 (2) 4.8 27.7
Equity in affiliate earnings and other income........... (13.2) 1.0 0.3 (12.5)
-------------------------------------------------------------------------
Earnings before interest, finance
charges, and income taxes........................ 182.5 55.8 (0.4) 18.7 219.2
Interest expense and finance charges.................... 24.6 9.3 33.6 (2) 14.9 52.6
-------------------------------------------------------------------------
Earnings before income taxes....................... 157.9 46.5 (34.0) 3.8 166.6
Provision for income taxes.............................. 54.7 18.6 (7.9) (4) 3.8 61.6
-------------------------------------------------------------------------
Net earnings ...................................... $ 103.2 $ 27.9 $ (26.1) $ 0.0 $ 105.0
=========================================================================
Net earnings per share
Basic.............................................. $ 4.35 $ 1.84 $ 3.89
=========================== ================
Diluted............................................ $ 4.31 $ 1.75 $ 3.86
=========================== ================
Average shares outstanding (thousands)
Basic.............................................. 23,683 15,160 2,287 26,970
===================================== ================
Diluted............................................ 23,934 15,929 3,287 27,221
===================================== ================
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
BORG-WARNER AUTOMOTIVE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN MILLIONS, EXPECT PER SHARE DATA)
Less:
Electrical Pro Forma
Borg-Warner Pro Forma Products Borg-Warner
Automotive Kuhlman Adjustments Businesses (1) Automotive
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $1,347.6 $571.1 $228.1 $1,690.6
Cost of sales...................................... 1,058.6 426.1 169.7 1,315.0
Depreciation....................................... 57.5 16.5 4.8 69.2
Selling, general and administrative expenses....... 112.7 72.9 $(13.0) (3) 30.5 142.1
Minority interest in earnings...................... 2.4 2.4
Goodwill amortization.............................. 12.7 2.7 9.6 (2) 3.6 21.4
Equity in affiliate earnings and other income...... (8.9) 0.4 (8.5)
-----------------------------------------------------------------------------
Earnings before interest, finance
charges, and income taxes................... 112.6 52.5 3.4 19.5 149.0
Interest expense and finance charges............... 20.6 5.8 24.6 (2) 11.1 39.9
-----------------------------------------------------------------------------
Earnings before income taxes.................. 92.0 46.7 (21.2) 8.4 109.1
Provision for income taxes......................... 29.1 18.1 (3.7) (4) 5.4 38.1
-----------------------------------------------------------------------------
Net earnings ................................. $62.9 $28.6 $(17.5) $3.0 $71.0
=============================================================================
Net earnings per share
Basic......................................... $2.68 $1.71 $2.65
=========================== =================
Diluted....................................... $2.65 $1.64 $2.63
=========================== =================
Average shares outstanding (thousands)
Basic......................................... 23,509 16,704 3,287 26,796
========================================= =================
Diluted....................................... 23,690 17,430 3,287 26,977
========================================= =================
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
BORG-WARNER AUTOMOTIVE
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Less:
Electrical Pro Forma
Borg-Warner Pro Forma Products Borg-Warner
Automotive Kuhlman Adjustments Businesses (1) Automotive
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales................................................. $1,300.0 $ 468.7 $ 225.9 $ 1,542.8
Cost of sales............................................. 1,016.3 350.9 176.6 1,190.6
Depreciation.............................................. 51.5 12.7 4.5 59.7
Selling, general and administrative expenses.............. 95.5 62.5 $ (8.6) (3) 28.7 120.7
Minority interest in earnings............................. 1.8 1.8
Goodwill amortization..................................... 12.4 2.1 9.6 (2) 3.7 20.4
Equity in affiliate earnings and other income............. (11.7) 0.7 0.2 (11.2)
------------------------------------------------------------------------
Earnings before interest, finance charges, and
.....income taxes......................................... 134.2 39.8 (1.0) 12.2 160.8
Interest expense and finance charges...................... 19.0 7.3 24.9 (2) 11.2 40.0
------------------------------------------------------------------------
Earnings before income taxes......................... 115.2 32.5 (25.9) 1.0 120.8
Provision for income taxes................................ 39.2 13.1 (6.1) (4) 2.1 44.1
------------------------------------------------------------------------
Net earnings ........................................ $ 76.0 $ 19.4 $(19.8) $ (1.1) $ 76.7
========================================================================
Net earnings per share
Basic................................................ $ 3.21 $ 1.32 $ 2.84
========================= =============
Diluted.............................................. $ 3.17 $ 1.25 $ 2.82
========================= =============
Average shares outstanding (thousands)
Basic................................................ 23,692 14,698 3,287 26,979
======================================= =============
Diluted.............................................. 23,907 15,464 3,287 27,194
======================================= =============
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
6
<PAGE>
BORG-WARNER AUTOMOTIVE
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(1) The electrical products businesses include two businesses of Kuhlman,
one of which manufactures transformers and the other of which
manufactures wire and cable. Borg-Warner Automotive plans to sell the
electrical products businesses after the merger. The pro forma
consolidated balance sheet reflects the electrical products businesses
at net carrying value. This carrying value of $250 million includes
$121 million of the excess purchase price of the merger. Revenues,
costs and expenses of the electrical products businesses have been
deducted from the pro forma Borg-Warner Automotive column of the pro
forma consolidated financial statements. For purposes of the unaudited
pro forma consolidated statements of operations, a portion of interest
expense and amortization of goodwill relating to the merger has been
allocated to the electrical products businesses, and accordingly has
been deducted in arriving at the pro forma consolidated statement of
operations data. The goodwill amortization was based upon the goodwill
allocated to such businesses. Interest expense was allocated assuming
the businesses were responsible for the interest on $250 million in
acquisition indebtedness. The following chart shows the amounts of
goodwill amortization and interest expense allocated to the electrical
products businesses for each of the periods presented.
Goodwill Interest
Amortization Expense
--------------- -----------
Year ended December 31, 1997.............. $3.0 $14.9
Nine months ended
September 30, 1998................... 2.3 11.1
September 30, 1997................... 2.3 11.1
(2) The estimated purchase price for purposes of the calculation of goodwill is
as follows:
Purchase of Kuhlman common stock......................... $ 658.6
Payment for options, long-term incentives et al. ........ 45.0
Fees and expenses related to the merger.................. 12.0
--------
Subtotal 57.0
--------
Total purchase price................................ 715.6
Net book value of Kuhlman........................... 203.7
--------
Excess purchase price.................................... 511.9
Excess purchase price allocated to electrical
products businesses.................................... 120.9
--------
Goodwill................................................. $ 391.0
7
<PAGE>
The pro forma consolidated financial statements reflect issuance of
3,286,596 shares of Borg-Warner Automotive common stock issued in the
merger, corresponding to an average Borg-Warner Automotive common stock
price of $45.59.
Interest expense on acquisition borrowings has been calculated at rates
in effect for the periods presented in the pro forma consolidated
statements of operations. These rates were 6.8% for the year ended
December 31, 1997, 6.4% for the nine months ended September 30, 1998
and 6.8% for the nine months ended September 30, 1997.
(3) The adjustment to eliminate the Kuhlman corporate headquarters expense
reflects the cost of operating Kuhlman's executive and administrative
offices in Savannah, Georgia, which will be closed upon completion of
the merger. A one-time charge to close the headquarters office is
included in the aggregate purchase price.
(4) The tax effect adjustment accounts for the tax effects of the various
other adjustments, using a domestic marginal rate, where applicable.
Amortization of goodwill arising from the merger is not deductible for
U.S. income tax purposes.
8
