<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
[x] OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13
[ ] OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 000-22519
KAYNAR TECHNOLOGIES INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0591091
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 N. State College Blvd., Suite 1000, Orange, California 92868-1638
- ---------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 712-4900
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
-- --
The number of shares of common stock outstanding on October 15, 1998
was 5,068,276.
<PAGE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Statements of Income for the three months
and nine months ended September 27, 1998 (Unaudited) and
September 28, 1997 (Unaudited) 3
Condensed Consolidated Balance Sheets at September 27, 1998
(Unaudited) and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 27, 1998 (Unaudited) and September 28, 1997
(Unaudited) 6
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - Other Information
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales (1) $ 45,293 $ 37,884 $137,472 $107,336
Cost of sales 31,835 25,981 95,503 75,164
-------- -------- -------- --------
Gross profit 13,458 11,903 41,969 32,172
Selling, general and administrative expenses 6,699 5,592 19,530 15,014
-------- -------- -------- --------
Operating income 6,759 6,311 22,439 17,158
Interest expense, net 1,087 666 2,391 2,994
-------- -------- -------- --------
Income before provision for income taxes 5,672 5,645 20,048 14,164
Provision for income taxes 2,270 2,257 8,020 5,674
-------- -------- -------- --------
Net income $ 3,402 $ 3,388 $ 12,028 $ 8,490
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share
Basic $ 0.69 $ 0.92 $ 2.91 $ 3.11
Diluted $ 0.37 $ 0.38 $ 1.34 $ 1.07
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares of common stock
and common stock equivalents
Basic 4,956 3,694 4,137 2,715
Diluted 9,162 8,900 8,996 7,921
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1) Including $3,446 and $2,970 for the three months ended September 27, 1998
and September 28, 1997, respectively; and $10,461 and $10,128 for the nine
months ended September 27, 1998 and September 28, 1997, respectively, to a
related party.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
------
(Dollars in thousands)
<TABLE>
<CAPTION>
September 27, December 31,
1998 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,741 $ 675
Marketable securities 518 3,079
Accounts receivable (1) 29,636 23,293
Inventories 44,242 34,231
Prepaid expenses and other current assets 1,133 647
Deferred tax asset 1,014 1,006
-------- --------
Total current assets 79,284 62,931
-------- --------
Property, plant and equipment, at cost 65,779 41,048
Less accumulated depreciation and amortization (12,453) (8,797)
-------- --------
53,326 32,251
-------- --------
Intangible assets, net of accumulated amortization of $770 and
$480 at September 27, 1998 and December 31, 1997, respectively 21,881 6,409
Other assets 171 65
-------- --------
Total assets $154,662 $101,656
-------- --------
-------- --------
</TABLE>
(1) Including $1,806 and $1,846 at September 27, 1998 and December 31, 1997,
respectively, from a related party, net of allowance for doubtful
accounts of $387 and $310 at September 27, 1998 and December 31, 1997,
respectively.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
September 27, December 31,
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Revolving line-of-credit, to a related party $ 475 $ -
Current portion of long-term debt 3,066 1,021
Current portion of capital lease obligations 278 272
Accounts payable 7,119 9,969
Accrued payroll and related expenses 8,571 8,546
Other accrued expenses 5,532 4,423
-------- --------
Total current liabilities 25,041 24,231
-------- --------
Long-term liabilities:
Long-term debt, primarily to a related party 58,617 26,372
Capital lease obligations 266 484
Deferred tax liability 1,498 1,136
-------- --------
Total long-term liabilities 60,381 27,992
-------- --------
Commitments and contingencies
Stockholders' equity:
Series C Convertible Preferred stock; $0.01 par value;
Authorized--10,000,000; issued and outstanding-4,206,000 and 5,206,000
shares at September 27, 1998 and December 31, 1997, respectively 42 52
Common stock; $0.01 par value; Authorized--20,000,000 shares; issued
and outstanding--5,068,276 and 3,694,000 shares at September 27, 1998
and December 31, 1997, respectively 51 37
Additional paid-in capital 37,527 28,973
Retained earnings 33,422 21,394
Currency translation adjustment (1,802) (1,023)
-------- --------
Total stockholders' equity 69,240 49,433
-------- --------
Total liabilities and stockholders' equity $154,662 $101,656
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 27, 1998 September 28, 1997
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $12,028 $ 8,490
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 4,372 2,747
Provision for deferred income taxes 44 -
(Gain) loss on sale of property, plant and equipment (49) 155
Changes in operating assets and liabilities, net of acquisitions-
Increase in accounts receivable (1,409) (7,431)
Increase in inventories (5,274) (2,585)
(Increase) decrease in prepaid expenses and other current assets (455) 143
(Increase) decrease in other assets (79) 164
Increase (decrease) in accounts payable (4,565) 604
Increase in accrued expenses 267 2,427
------- -------
Net cash provided by operating activities 4,880 4,714
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (13,487) (11,585)
Proceeds from sales of property, plant and equipment 235 85
Net redemptions (purchases) of marketable securities 2,561 (1,396)
Acquisitions of businesses, net of cash acquired (15,890) -
Decrease in intangible assets 147 217
------- -------
Net cash used in investing activities (26,434) (12,679)
------- -------
Cash flows from financing activities:
Net borrowings (payments) on line-of-credit, from a related party 475 (558)
Borrowings on long-term debt, primarily from a related party 28,389 261
Payments on long-term debt, primarily from a related party (4,990) (19,665)
Net principal payments on capital lease obligations (234) (156)
Net proceeds from issuance of common stock - 27,610
------- -------
Net cash provided by financing activities 23,640 7,492
------- -------
Effect of exchange rate changes on cash (20) (33)
------- -------
Net increase (decrease) in cash 2,066 (506)
Cash, beginning of period 675 909
------- -------
Cash, end of period $ 2,741 $ 403
------- -------
------- -------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 27, 1998 September 28, 1997
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest $ 2,111 $ 3,329
------- -------
------- -------
Income taxes $ 9,549 $ 6,311
------- -------
------- -------
Noncash financing activities:
Capital lease obligations assumed for the purchase of equipment $ - $ 507
------- -------
------- -------
Borrowings on long-term debt for preferred stock dividends $ - $ 58
------- -------
------- -------
Common stock issued in connection with acquisitions of businesses $ 8,558 $ -
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
<PAGE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 27, 1998
------------------
(Dollars in thousands)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The accompanying condensed
consolidated financial statements have been prepared on the same basis as the
consolidated financial statements for the year ended December 31, 1997. These
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
The condensed consolidated financial statements include the
accounts of the Company and all of its subsidiaries after eliminating all
significant intercompany transactions and reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present a
fair statement of the financial position and results of operations for the
interim periods reported. The results of operations for the nine months ended
September 27, 1998 are not necessarily indicative of the results to be
expected for the full year.
The Company's fiscal quarters are on a 13 week basis ending on the
Sunday nearest to the calendar quarter end. The third fiscal quarters of 1998
and 1997 ended on September 27, 1998 and September 28, 1997, respectively.
(2) INVENTORIES
Inventories are stated at the lower of cost (FIFO) or market and
include the cost of material, labor and factory overhead. Inventories consist
of the following at September 27, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
September 27, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials $ 3,514 $ 2,593
Work in progress and components 21,429 16,337
Finished goods 12,457 9,550
Supplies and small tools 6,842 5,751
------- -------
$44,242 $34,231
------- -------
------- -------
</TABLE>
8
<PAGE>
(3) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This statement provides for the presentation of (i) "basic" earnings per
share, which is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding and (ii) "diluted"
earnings per share, which is computed by dividing net income by the weighted
average number of common shares outstanding plus the dilutive effect of other
securities. The Company's other securities are (i) Series C Convertible
Preferred stock and (ii) outstanding common stock options.
The table below details the components of the basic and diluted
earnings per share ("EPS") calculations:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 27, 1998 September 28, 1997
------------------------------- --------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $3,402 4,956 $3,388 3,694
Less: dividends on previously issued
preferred stock - - - -
------- ----- ------ -----
Income available to common stockholders 3,402 4,956 $ 0.69 3,388 3,694 $ 0.92
Effect of Dilutive Securities
Series C Convertible Preferred stock - 4,206 - 5,206
Common stock options - - - -
------- ----- ------ -----
Diluted EPS $3,402 9,162 $ 0.37 $3,388 8,900 $ 0.38
------- ----- ------ -----
------- ----- ------ -----
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 27, 1998 September 28, 1997
------------------------------- --------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $12,028 4,137 $8,490 2,715
Less: dividends on previously issued
preferred stock - - (34) -
------- ----- ------ -----
Income available to common stockholders 12,028 4,137 $2.91 8,456 2,715 $3.11
Effect of Dilutive Securities
Series C Convertible Preferred stock - 4,858 34 5,206
Common stock options - 1 - -
------- ----- ------ -----
Diluted EPS $12,028 8,996 $1.34 $8,490 7,921 $1.07
------- ----- ------ -----
------- ----- ------ -----
</TABLE>
<PAGE>
(4) INCOME TAXES
Income taxes are provided using the estimated effective tax rates
for the years ended December 31, 1998 and December 31, 1997.
(5) COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income is
defined as the total of net income and all non-owner changes in equity. The
following table details the components of comprehensive income for the nine
months ended September 27, 1998 and September 28, 1997:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Sept. 27, Sept. 28,
1998 1997
------- -------
<S> <C> <C>
Net Income $12,028 $ 8,490
Foreign currency translation adjustment (779) (605)
------- -------
Comprehensive Income $11,249 $ 7,885
------- -------
------- -------
</TABLE>
(6) RECENT ACQUISITIONS
On July 28, 1998, the Company acquired all of the issued and
outstanding common stock of M & M Machine & Tool Company Co. ("M & M")(this
transaction being referred to herein as the "Acquisition"). As consideration
for the Acquisition, the Company paid the M & M stockholders of $12 million
in cash and 354,276 shares of the Company's common stock. Additionally, there
are two contingent adjustments to the purchase price that will be paid 60% in
cash and 40% in shares of the Company's common stock. The first contingency
will be a dollar-for-dollar adjustment to the purchase price if M & M's net
worth at closing exceeds or falls below $4.5 million. The second contingency
will be additional consideration of no less than zero and no more than $2
million which will be based on M & M's recasted earnings before interest and
taxes and transaction costs related to the Acquisition for its fiscal year
ended October 31, 1998. A registration rights agreement was also entered into
by the Company with M & M stockholders, permitting them to exercise up to two
demand registration rights per calendar year for offerings with an aggregate
price exceeding $1 million. The registration rights agreement also accorded
the M & M stockholders piggyback registration rights.
M & M, located in Huntington Beach, California specializes in the
machining of structural components and assemblies for aircraft. These
components and assemblies include pylons, flap hinges, struts, wing fittings,
landing gear parts, spars, and many others. M & M has current annualized
sales in excess of $20 million.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" includes forward-looking statements which are subject to certain
risks and uncertainties. The Company's actual future results and trends may
differ materially from those expressed or implied by such statements. Factors
that might cause such a difference include, but are not limited to, the
Company's dependence on conditions in the airline and aerospace industries,
commercial aircraft build rates (primarily Boeing and Airbus), the level of
defense spending, competitive pricing pressures, cost of material and labor,
and other risks described from time to time in the Company's registration
statements and reports filed with the Securities and Exchange Commission.
Summary
The following table sets forth certain items from the Company's
Condensed Consolidated Statements of Income for the periods indicated and
presents the results of operations as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.3% 68.6% 69.5% 70.0%
-------- -------- -------- --------
Gross profit 29.7% 31.4% 30.5% 30.0%
Selling, general and
administrative expenses 14.8% 14.7% 14.2% 14.0%
-------- -------- -------- --------
Operating income 14.9% 16.7% 16.3% 16.0%
Interest expense, net 2.4% 1.8% 1.7% 2.8%
Provision for income taxes 5.0% 6.0% 5.8% 5.3%
-------- -------- -------- --------
Net income 7.5% 8.9% 8.8% 7.9%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Three Months Ended September 27, 1998 Compared to the Three Months Ended
September 28, 1997
NET SALES. Net sales increased 19.5% or $7.4 million, to $45.3
million in the third quarter of 1998 from $37.9 million in the third quarter
of 1997. This growth was primarily the result of additional sales from
recently acquired businesses. In addition, net sales growth was enhanced by
increased customer demand (which occurred as commercial aircraft build rates
increased), the expansion of existing product lines, the development of
variations of existing products and the introduction of new products.
11
<PAGE>
GROSS PROFIT. Gross profit increased 13.5% to $13.5 million in the
third quarter of 1998 from $11.9 million in the third quarter of 1997;
however, as a percentage of net sales, gross profit decreased 1.7% to 29.7%
in the third quarter of 1998 from 31.4% in the third quarter of 1997. This
reduction in gross profit as a percentage of net sales was primarily due to
negative profit margins in specialty automation equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 19.6% to $6.7 million in the third quarter
of 1998 from $5.6 million in the third quarter of 1997, and were up 0.1% as a
percentage of net sales. The $1.1 million increase in these expenses was
attributable primarily to acquisitions of businesses as well as additional
employee costs needed to support the increased sales volume.
INTEREST EXPENSE. Interest expense increased 57.1% to $1.1 million
in the third quarter of 1998 from $0.7 million in the third quarter of 1997,
primarily as a result of additional debt incurred during the third quarter of
1998 to fund the acquisition of M & M Machine & Tool Co.
NET INCOME. Net income for the third quarter of 1998 remained stable
at $3.4 million or 37 cents per share compared to $3.4 million or 38 cents
per share for the same period in 1997.
BACKLOG. Backlog at September 27, 1998 increased 29.5% or $26.0
million, to $114.3 million from $88.3 million at September 28, 1997.
Nine Months Ended September 27, 1998 Compared to the Nine Months Ended
September 28, 1997
NET SALES. Net sales increased 28.2% or $30.2 million, to $137.5
million in the first nine months of 1998 from $107.3 million in the same
period of 1997. This growth was primarily the result of increased customer
demand, which occurred as commercial aircraft build rates increased. In
addition, net sales growth was enhanced by the acquisition of businesses, the
expansion of existing product lines, the development of variations of
existing products and the introduction of new products.
GROSS PROFIT. Gross profit increased 30.4% to $42.0 million or 30.5%
of net sales in the first nine months of 1998 from $32.2 million or 30.0% of
net sales in the same period of 1997. This improvement in gross profit margin
was primarily due to the increase in sales volume (which resulted in a
greater absorption of fixed costs) and improved productivity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 30% to $19.5 million in the first nine
months of 1998 from $15.0 million in the same period of 1997, and were up
0.2% as a percentage of sales. The $4.5 million increase in these expenses
was attributable primarily to acquisitions of businesses as well as
additional employee costs needed to support the increased sales volume.
INTEREST EXPENSE. Interest expense decreased 20% to $2.4 million in
the first nine months of 1998 from $3.0 million in the same period of 1997,
as a result of using proceeds received from the initial public offering in
May 1997 to decrease outstanding debt by $24.0 million.
NET INCOME. Net income for the first nine months of 1998 increased
to $12.0 million or $1.34 per share compared to $8.5 million or $1.07 per
share for the same period in 1997.
12
<PAGE>
Liquidity and Capital Resources
The Company's liquidity requirements consist primarily of working
capital needs, capital expenditures and scheduled payments of interest on its
indebtedness to General Electric Capital Corporation ("GECC"), which
beneficially holds a majority of the Company's common stock. The Company's
working capital requirements have increased as a result of higher accounts
receivable and higher inventory levels needed to support its growth in net
sales. The Company's working capital was $54.2 million as of September 27,
1998, compared to $38.7 million as of December 31, 1997. The increase in
working capital was primarily due the Company increasing its term loan with
GECC on July 27, 1998, by $24.7 million, of which $12.0 million was used to
fund the acquisition of M & M Machine & Tool Co. and the remaining $12.7
million was used to pay down the Company's revolving line-of-credit.
For the first nine months of 1998, net cash provided by operating
activities was $4.9 million, as compared to net cash provided by operating
activities of $4.7 million for the same period of 1997. The primary sources
of cash from operations during the first nine months of 1998 included net
income of $12.0 million and non-cash charges for depreciation and
amortization of $4.4 million, offset by increases in accounts receivable and
inventories of $1.4 million and $5.3 million, respectively, and a decrease in
accounts payable of $4.6 million. The primary sources of cash from operations
during the same period of 1997 included net income of $8.5 million, non-cash
charges for depreciation and amortization of $2.7 million, and an increase in
accrued expenses of $2.4 million, offset by increases in accounts receivable
and inventories of $7.4 million and $2.6 million, respectively.
The Company's net cash used in investing activities in the first
nine months of 1998 was $26.4 million, consisting primarily of $13.5 million
in capital expenditures and $15.9 million related to the acquisitions of
businesses, offset by $2.6 million in net redemptions of marketable
securities, as compared to net cash used in investing activities in the same
period of 1997 of $12.7 million, which consisted primarily of $11.6 million
in capital expenditures and $1.4 million in net purchases of marketable
securities.
The Company's net cash provided by financing activities in the first
nine months of 1998 was $23.6 million, consisting of net borrowings of $23.6
million on debt, as compared to net cash provided by financing activities in
the same period of 1997 of $7.5 million, consisting of $27.6 million in net
proceeds from the initial public offering in May 1997, offset by net payments
of $20.1 million on debt.
The Company believes that internally generated cash flow and amounts
that may be available under the Company's revolving line-of-credit will
provide adequate funds to meet its working capital needs, planned capital
expenditures and debt service obligations. However, the Company's ability to
fund its operations, make planned capital expenditures and make scheduled
payments on, and refinance, its indebtedness depends on its future operating
performance and cash flow. Future operating performance and cash flow are, in
turn, subject to prevailing economic conditions and to financial, business
and other factors affecting the Company, some of which are beyond the
Company's control.
During the first nine months of 1998 and 1997, inflation has not had
a significant impact on the Company's operations.
13
<PAGE>
Other Developments
In connection with the acquisition of M & M (as discussed in Note 6
to the September 27, 1998 condensed consolidated financial statements), on
July 27, 1998, the Company entered into the Second Restated and Amended
Credit Agreement with GECC (the "Credit Agreement"). The Credit Agreement
increased the size of the Company's credit facility to a maximum of $65
million, including $50 million in term loans and a $15 million revolving
line-of-credit. The Credit Agreement contains sub-facilities for letters of
credit and swing line loans.
During the past several years, the Company's growth in net sales has
occurred primarily as a result of increased customer demand due to the
increases in commercial aircraft build rates. Boeing, a significant customer
of the Company, has announced that it has been experiencing production
difficulties affecting build rates. There can be no assurance that such
difficulties will not affect Boeing's demand for the Company's products.
Additionally, the aerospace industry has recently experienced a flattening of
commercial aircraft build rates which have and may continue to impact
incoming orders.
Year 2000 Compliance
The Company has in place detailed programs to address Year 2000
readiness in its internal computer systems and its key customers and
suppliers. The Company's Year 2000 readiness team includes both internal
personnel and external consultants. The team's activities are designed to
ensure that there will be no material adverse effects on the Company's
business operations and that transactions with customers, suppliers, and
financial institutions will be fully supported. The specific costs of
achieving Year 2000 compliance have been, and are expected to be, immaterial.
The Company has already converted its most significant manufacturing
facilities to new software systems which are Year 2000 compliant. The Company
expects that all other critical systems will be compliant by March 1999 and
fully tested by September 1999. The Company is also in the process of
ensuring that its significant suppliers, customers and financial institutions
have appropriate plans to ensure that they are Year 2000 compliant. Risk
assessment, readiness evaluation, action plans and contingency plans related
to third parties are expected to be completed during the first half of 1999.
While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that all internal
systems, as well as those of third parties on which the Company relies upon,
will be converted on a timely basis and will not have a material affect on
the Company's operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
14
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
During the ordinary course of business, the Company, from time to
time, is threatened with, or becomes a party to, legal actions and other
proceedings. Management is of the opinion that the outcome of currently known
legal actions and proceedings to which it is a party will not, singly or in
the aggregate, have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the acquisition of M & M Machine & Tool Co.
("M & M") on July 28, 1998, the Company issued 354,276 shares of common stock
to the M & M stockholders pursuant to Regulation D under the Securities
Exchange Act of 1933, as amended. These shares were valued based upon the
average closing price of the Company's publicly traded common stock, as quoted
on the NASDAQ National Market System for the 20 preceding trading days.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
third quarter of 1998.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On August 12, 1998, the Company filed a Current
Report on Form 8-K reporting the Company's acquisition of
M & M Machine & Tool Co.
On October 9, 1998, the Company filed Amendment No. 1
to the Current Report on Form 8-K which included the financial
statements and pro forma financial information previously
omitted from the Current Report on Form 8-K filed August 12,
1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Orange, State of
California on this 21st day of October, 1998.
KAYNAR TECHNOLOGIES INC.
/s/ David A. Werner
--------------------------------------
By: David A. Werner
Executive Vice President
/s/ Robert M. Nelson
--------------------------------------
By: Robert M. Nelson
Controller (Chief Accounting Officer)
16
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