UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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): May 5, 1999 (April 20,
1999)
Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
34-0728587
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (703) 478-5800
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 20, 1999, The Fairchild Corporation acquired all of the
shares of stock of Kaynar Technologies, Inc. ("KTI") from KTI's
shareholders, for approximately $222 million. A merger agreement for the
transaction was entered into on December 26, 1998, and was approved by
KTI's shareholders on March 24, 1999.
The merger consideration was determined as follows:
(1) each share of KTI common stock (other than shares owned by
Fairchild
or its subsidiaries) was converted into the right to receive $28.75
per
share;
(2) each share of KTI preferred stock (other than shares owned by
Fairchild or its subsidiaries) was converted into the right to receive
$22.09 per share; and
(3) all outstanding stock options to acquire KTI common stock were
converted into the right to receive $28.75 per stock option share,
less the
exercise price for such stock option shares.
In addition to the merger consideration, Fairchild paid KTI's only
preferred stockholder $28 million for a ten year covenant not to compete,
and assumed and refinanced approximately $103 million of KTI debt.
The merger consideration was financed by the following:
(1) Fairchild's cash resources;
(2) The sale of $225 million of Fairchild's 10 3/4% Senior Subordinated
Notes Due 2009, to qualified investors under Rule 144A; and
(3) A new credit facility with Citicorp USA, Inc. and NationsBank, NA
as
Administrative Agents.
KTI designs, develops, and manufactures specialty fastener components
and tooling systems, with manufacturing facilities in the United States,
Australia and Hungary. Fairchild presently intends to continue such
operations, subject however to cost savings to be achieved by integrating
KTI's operations with Fairchild's existing fastener operations.
Additional information is indicated in Fairchild's press release
issued on April 20, 1999, which is included as Exhibit 99.1 to this Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINACIAL STATEMENTS OF BUSINESS ACQUIRED.
The audited financial statements required by Item 7 (a) of Form 8-K
are being filed as an exhibit to this Report and are incorporated herein by
reference.
(b) PRO FORMA CONSOLIDATED FINACIAL INFORMATION.
The KTI Acquisition
On April 20, 1999, we completed the acquisition of all of Kaynar
Technologies, Inc. ("KTI") capital stock for approximately $222 million and
assumed approximately $103 million of KTI's existing debt. In addition, the
purchase price included $28 million for a covenant not to compete from
KTI's largest shareholder. The acquisition was financed with existing cash,
the sale of $225 million of 10 3/4% senior subordinated notes (the "Notes")
and a new bank credit facility.
The Banner Merger
On April 8, 1999, we acquired the remaining 15% of the outstanding
common and preferred stock of Banner not already owned by us, through the
merger (the ''Banner Merger'') of Banner with one of our subsidiaries.
Under the terms of the Banner Merger, each share of Banner's preferred
stock was converted into the right to receive one share of Banner common
stock and each share of Banner common stock (other than those owned by
Fairchild) was converted into the right to receive .7885 shares of our
Class A common stock. Banner is now our wholly-owned subsidiary.
Solair Divestiture
On December 31, 1998, Banner consummated the sale of Solair, Inc.,
Banner's largest subsidiary in its rotables group, to Kellstrom Industries,
Inc. in exchange for approximately $57.0 million in cash and a warrant to
purchase 300,000 shares of common stock of Kellstrom.
Hardware Business Disposition
On January 13, 1998, Banner completed the disposition of substantially
all of the assets and certain liabilities of its hardware companies and
PacAero unit (the ''Hardware Business'') to subsidiaries of AlliedSignal in
exchange for AlliedSignal common stock with an aggregate value equal to
approximately $369.0 million.
New Credit Facility
Simultaneously with the consummation of the KTI Acquisition and the
sale of the Notes, we entered into a new $325.0 million credit facility
(the ''New Credit Facility'') which consists of a $225.0 million term loan,
and a $100.0 million revolving credit facility of which approximately $22.0
million was drawn upon consummation of the acqusition of KTI (excluding
approximately $19.0 million of outstanding letters of credit).
Use of Proceeds
The proceeds from the offering, together with borrowings under the New
Credit Facility and certain other cash available to us, was utilized to
consummate the KTI Acquisition, to repay all amounts outstanding under our
existing credit facilities and to repay substantially all indebtedness of
KTI. The KTI Acquisition, the Banner Merger, the sale of the Notes, the
sale of Solair and Banner's Hardware Business, entering into the New Credit
Facility and refinancing of the existing credit facilities and certain KTI
indebtedness, together with the payment of related fees and expenses, are
collectively referred to in this Form 8-K as the ''Transactions.''
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
The following unaudited pro forma consolidated financial statements are
based on our historical financial statements and the historical financial
statements of KTI, in addition to those of certain other entities KTI or we
acquired in the respective periods presented. The following sets forth our
unaudited pro forma statements of earnings for the twelve months ended June
30, 1998 and the six months ended December 27, 1998. The unaudited pro
forma statements of earnings give effect to each of the Transactions as if
such Transactions occurred on July 1, 1997 and July 1, 1998, respectively.
The unaudited pro forma balance sheet as of December 27, 1998 gives effect
to each of the Transactions as if they had occurred on such date. The pro
forma financial statements are presented for informational purposes only
and are not intended to be indicative of either future results of
operations or results that might have been achieved had the Transactions
actually occurred on the dates specified. The summary unaudited
consolidated pro forma financial statements are qualified by and should be
read in conjunction with the financial statements and notes thereto
included in our June 30, 1998 Annual Report on Form 10-K and the
consolidated financial statements of KTI, included as an exhibit to this
Form 8-K.
<TABLE>
THE FAIRCHILD CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
For The Six Months Ended December 27, 1998
(In thousands, except per share data)
<CAPTION>
Fairchild KTI KTI Fairchild
Adjusted Adjusted Acquisition Refinancing Pro Forma
(a) (b) (c)
<S> <C> <C> <C> <C> <C>
Sales $271,401 $103,877 $ - $ - $ 375,278
Costs and expenses:
Cost of sales 205,320 72,753 (500)(d) - 277,573
Selling, general &
administrative 48,932 15,566 - 64,498
Amortization of
goodwill 2,826 792 3,520 - 7,138
257,078 89,111 3,020 - 349,209
Operating income 14,323 14,766 (3,020) - 26,069
Net interest expense (14,147) (3,774) (5,908)(d) (23,829)
Investment income, net 834 (1,476)(e) (642)
Earnings (loss) before
taxes 1,010 10,992 (3,020) (7,384) 1,598
Income tax (provision)
benefit (414) (4,546) 315(f) 2,585(f) (2,060)
Equity in earnings of
affiliates 1,689 - 1,689
Earnings (loss) from
continuing operations $ 2,285 $ 6,446 $(2,705) $ (4,799) $ 1,227
Earnings per share from continuing operations:
Basic $ 0.09 $ 0.05
Diluted 0.09 0.05
Weighted average shares
outstanding:
Basic 25,111 25,111
Diluted 26,490 26,490
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
For The Twelve Months Ended June 30, 1998
(In thousands, except per share data)
<CAPTION>
Fairchild KTI KTI Fairchild
Adjusted Adjusted Acquistion Refinancing Pro Forma
(a) (b) (c)
<S> <C> <C> <C> <C> <C>
Sales $ 556,652 $ 227,985 $ - $ - $ 784,637
Costs and expenses:
Cost of sales 420,778 157,448 (1,000)(d) - 577,226
Selling, general &
administrative 96,805 31,300 - 128,105
Amortization of
goodwill 5,740 1,632 7,040 - 14,412
523,323 190,380 6,040 - 719,743
Operating income
33,329 37,605 (6,040) - 64,894
Net interest expense
(32,394) (6,857) (8,626)(d) (47,877)
Investment loss,
net (3,362) (1,475)(e) (4,837)
Earnings before taxes (2,427) 30,748 (6,040) (10,101) 12,180
Income tax (provision)
benefit 2,406 (12,704) 630(f) 3,535(f) (6,133)
Equity in earnings of
affiliates 3,956 - 3,956
Earnings (loss) from
continuing operations $3,935 $18,044 $(5,410) $(6,566) $ 10,003
Earnings per share from
continuing operations:
Basic $ 0.17 $ 0.44
Diluted 0.16 0.41
Weighted average shares
outstanding:
Basic 22,531 22,531
Diluted 24,239 24,239
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 27, 1998
(In thousands)
<CAPTION>
Fairchild Banner Fairchild KTI KTI Fairchild
Historical Merger Adjusted Historical Acquisition Refinancing Pro
<S> <C> <C> <C> <C> <C> <C> <C>
Cash (d) (e) $16,063 $(1,101) $14,962 $ 1,893 $(276,904) $276,904 $ 16,855
Short-term
investments (f) 216,260 216,260 50 (200,659) 15,652
Net accounts
receivable 95,435 95,435 30,421 125,856
Inventory 174,682 174,682 52,778 227,460
Net current
assets of 1,670 1,670 1,670
Discontinued
operations
Prepaid and other
current assets 52,870 52,870 4,115 56,985
Total current
assets 556,980 (1,101) 555,879 89,257 (276,904) 76,245 444,477
Net fixed
assets 124,446 124,446 61,583 186,029
Net assets held
for sale 20,794 20,794 20,794
Net noncurrent
assets of 10,945 10,945 10,945
discontinued
operations
Goodwill (c) 167,262 19,061 186,323 47,958 169,596 403,877
Investment in
affiliates 28,416 28,416 28,416
Prepaid pension
assets 62,246 62,246 62,246
Deferred loan
costs (g) 5,879 5,879 429 4,762 11,070
Long-term
investments (h) 36,398 36,398 (18,623) 17,775
Other assets (c) 70,275 70,275 132 28,000 98,407
Total Assets $1,083,641$17,960$1,101,601 $199,359 $(97,931) $81,007 $1,284,036
Bank notes &
current debt (i)$25,287 $25,287 $ 17,334 $(16,950) $ 25,671
Accounts payable
36,511 36,511 8,017 - 44,528
Other accrued
expenses (j)
(k) 100,214 100,214 15,989 (8,822) (4,547) 102,834
Total current
liabilities 162,012 162,012 41,340 (8,822) (21,497) 173,033
Long-term debt,
less current 278,229 278,229 80,818 106,600 465,647
debt (i)
Other long-term
liabilities 24,707 24,707 24,707
Retiree health
care liabilities 43,127 43,127 43,127
Noncurrent income
taxes 107,871 107,871 4,477 112,348
Minority interest
in subsidiaries 28,075(28,066) 9 9
Total
liabilities 644,021(28,066)615,955 126,635 (8,822) 85,103 818,871
Class A common
stock 2,671 298 2,969 2,969
Class B common
stock 262 262 262
Paid-in capital
195,291 45,728 241,019 241,019
Retained earnings
(l) (m) 294,222 294,222 72,724 (85,827) (4,096) 277,023
Cumulative other
comprehensive 21,183 21,183 (3,282) 17,901
income (h)
Treasury stock,
at cost (74,009) (74,009) (74,009)
Total
stockholders' 439,620 46,026 485,646 72,724 (89,109) (4,096) 465,165
equity
Total liabilities
& equity $1,083,641 $17,960$1,101,601$199,359 $(97,931) $81,007$1,284,036
</TABLE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS
(a) The following two tables set forth the derivation of the ''Fairchild
Adjusted'' unaudited pro forma results, representing the impact of the
Banner Merger (completed in April 1999), Special-T Acquisition (effective
January 1998), Solair Divestiture (completed in December 1998), and the
Hardware Group Divestiture (completed January 13, 1998), as if these
transactions had occurred at the beginning of each period presented:
<TABLE>
For The Six Months Ended December 27, 1998
(In thousands, except per share data)
<CAPTION>
Fairchild Banner Solair Fairchild
Historical Merger (2) Divestiture(1) Adjusted
<S> <C> <C> <C> <C>
Sales $ 299,720 $ (28,319) $271,401
Costs and expenses:
Cost of sales
246,986 (41,666) 205,320
Selling, general &
administrative 54,677 (5,745) 48,932
Amortization of goodwill
(3) 2,638 238 (50) 2,826
304,301 (47,461) 257,078
Operating income (4,581) (238) 19,142 14,323
Net interest expense (14,147) (14,147)
Investment income, net 834 834
Earnings (loss) before taxes
(17,894) (238) 19,142 1,010
Income tax (provision)
benefit 6,433 (6,847) (414)
Equity in earnings of
affiliates 1,689 1,689
Minority interest (5)
2,135 445 (2,580) -
Earnings (loss) from
continuing operations $ (7,637) $ 207 $ 9,715 $ 2,285
Earnings (loss) per share
from continuing operations:
Basic $ (0.35) $ 0.09
Diluted
(0.35) 0.09
Weighted average shares
outstanding:
Basic 22,129 2,982 2,511
Diluted 22,129 3,855 26,490
</TABLE>
<TABLE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued
For The Twelve Months Ended June 30, 1998
(In thousands, except per share data)
<CAPTION>
Hardware
Banner AirRights Special-T Solair Group Hardwar
Fairchild Merger Liquid- Acquis- Dives- Dives-
Historical ation ition ture ture Fairchild
(2) (8) (7) (1) (6) Adjusted
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 741,176 $ $ $ 15,317 $(78,939)$(120,902)$556,652
Costs and expenses:
Cost of sales
554,670 5,943 (63,645) (76,190) 420,778
Selling, general
& administrative 135,594 4,395 5,399 (14,973) (33,610) 96,805
Amortization of
goodwill (3) 5,469 477 269 (100) (375) 5,740
695,733 477 4,395 11,611 (78,718) (110,175) 523,323
Operating income
45,443 (477) (4,395) 3,706 (221) (10,727) 33,329
Net interest expense
(42,7150 (937) 11,258 (32,394)
Investment loss, net
(3,362) (3,362)
Nonrecurring income
(4) 124,028 (124,028)
Earnings before taxes
123,394 (477) (4,395) 2,769 (221) (123,497) (2,427)
Income tax
(provision)
benefit (48,659) 1,538 (1,290) 163 50,654 2,406
Equity in earnings of
affiliates 3,956 3,956
Minority interest (5)
(26,292) 2,244 10 24,038
Earnings from
continuing
operations $ 52,399 $1,767 $(2,857) 1,479 $(48) $(48,805) $ 3,935
Earnings per share
from continuing
operations:
Basic
$2.78 $0.17
Diluted
2.66 0.16
Weighted average
shares outstanding:
Basic
18,834 2,982 715 22,531
Diluted
19,669 3,855 715 24,239
</TABLE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued
(1) Represents the elimination of Solair's operating results for all
periods presented.
(2) Represents the effects of the merger between Banner and Fairchild
whereby Fairchild acquired the remaining 15% interest of Banner. Fairchild
issued approximately 2,981 shares of Fairchild Class A Common Stock as a
result of the merger, resulting in an increase in Fairchild's equity of
$46,026. In addition, Fairchild will record approximately $19,061 of
goodwill.
(3) Represents additional amortization of goodwill related to the merger
with Banner.
(4) Represents the elimination of the Hardware Group nonrecurring gain
that occurred in January 1998.
(5) Reflects the impact on Fairchild's minority interest for each
transaction impacting Banner. Minority interest is ultimately reduced to
zero due to Fairchild obtaining a 100% interest in Banner.
(6) Represents the elimination of the Hardware Group operating results
from July 1, 1997 through the time of divestiture, January 13, 1998.
(7) Represents the operating results of Special-T as if the acquisition
occurred at the beginning of fiscal 1998.
(8) Represents the elimination of non-recurring proceeds received from the
involuntary conversion of air rights over a portion of the property
Fairchild owns and is developing in Farmingdale, New York.
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued
(b) The following two tables set forth the derivation of the ''KTI
Adjusted'' unaudited pro forma results representing the results of
operations that have been adjusted for the acquisition of Marson (acquired
October 1998), M&M (acquired July 1998), Eagle (acquired May 1998), and APS
(acquired February 1998) as if those transactions had occurred at the
beginning of each period presented.
<TABLE>
For The Six Months Ended December 31, 1998
(In thousands)
<CAPTION>
KTI Marson M&M KTI
Historical Acquisition Acquisition Adjusted
<S> <C> <C> <C> <C>
Sales $ 93,333 $ 8,965 $ 1,579 $103,877
Costs and expenses:
Cost of sales
65,555 6,169 1,029 72,753
Selling, general &
administrative 14,115 1,342 109 15,566
Amortization of
goodwill 492 263 37 792(1)
80,162 7,774 1,175 89,111
Operating income
13,171 1,191 404 14,766
Net interest expense
(2,763) (891) (120) (3,774)(2)
Earnings before
taxes 10,408 300 284 10,992
Income tax (provision)
benefit (4,164) (253) (129) (4,546)
Earnings from continuing
operations $ 6,244 $ 47 $ 155 $ 6,446
</TABLE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued
<TABLE>
For The Twelve Months Ended June 30, 1998
(In thousands)
<CAPTION>
KTI Marson M&M Eagle APS KTI
Histori Acquisi Acquisi Acquisi Acquisi Adjusted
cal tion tion tion tion
<S> <C> <C> <C> <C> <C> <C>
Sales $173,156 $28,032 $20,220 $ 2,134 $4,443$227,985
Costs and expenses:
Cost of sales
118,875 20,033 13,581 1,558 3,401 157,448
Selling, general &
administrative 24,494 4,277 1,342 371 816 31,300
Amortization of
goodwill 369 796 448 - 19 1,632(1)
143,738 25,106 15,371 1,929 4,236 190,380
Operating income
29,418 2,926 4,849 205 207 37,605
Net interest expense
(2,578) (2,739) (1,384) (42) (114) (6,857)(2)
Earnings before
taxes 26,840 187 3,465 163 93 30,748
Income tax (provision)
benefit (10,726) (353) (1,505) (70) (50) (12,704)
Earnings from
continuing operations $ 16,114 $(166) $1,960 $ 93 $ 43 $18,044
</TABLE>
(1) Includes the pro forma incremental goodwill amortization of $162 and
$843 for the six months ended December 31, 1998 and twelve months ended
June 30, 1998, respectively.
(2) Includes the pro forma incremental interest expense of $637 and $2,648
for the six months ended December 31, 1998, and twelve months ended June
30, 1998, respectively.
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued
(c) Represents the additional amortization of goodwill and intangible
assets related to the acquisition of KTI by Fairchild.
(d) Represents the net change in interest expense from the refinancing of
certain debt facilities as follows:
<TABLE>
<CAPTION>
Six Months
Ended Twelve
December Months
27, 1998 Ended
June 30,
1998
New Financing:
Term Loan $ 9,523 $19,045
Senior Subordinated 12,403 24,806
Notes
Other Fees 1,574 3,146
Increase in interest 23,500 46,997
expense
Retired Debt:
Fairchild credit 10,752 13,290
facility
Banner credit facility 3,925 -
KTI revolving line-of- 209 226
credit
KTI term loan 2,706 4,161
Retired public bonds in - 20,694
fiscal 1998
Reduction in interest 17,592 38,371
expense
Net change in interest $ 5,908 $ 8,626
expense
Interest expense under the new credit facility for the Term Loan is
based on LIBOR plus 3.25%, along with amortization of debt financing
fees. The pro forma adjustments assumed an effective rate of 8.46%. A
variance of 1/8% in the interest rates would impact annual Term Loan
interest expense by approximately $281.
(e) Investment income was eliminated to the extent that marketable
securities were assumed to be liquidated. Such marketable securities will
be liquidated to consummate the KTI Acquisition.
(f) Represents an income tax benefit assuming an effective rate of 35%.
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
(a) Represents the effects of the merger between Banner and Fairchild
whereby Fairchild acquired the remaining 15% interest of Banner not already
owned. Fairchild issued approximately 2,981 shares of Fairchild class A
common stock as a result of the merger, resulting in an increase in
Fairchild's equity of $46,026. In addition, Fairchild will record
approximately $19,061 of goodwill. A $1,101 reduction in cash represents
the estimated costs of the merger with Banner. An increase of $19,061 in
goodwill represents the estimated excess of cost paid over fair value. The
decrease in minority interest liability results from Fairchild acquiring
all of the Banner common stock that Fairchild does not presently own.
(b) Represents historical KTI balance sheet at December 31, 1998.
(c)
Reflects the acquisition of KTI as follows:
December 27,
1998
Purchase price:
Cash paid for KTI common stock, preferred stock and
stock options, including Fairchild's original $13,574
investment $ 235,133
Cash paid for non-compete agreement 28,000
Transaction fees 7,187
KTI debt assumed 98,152
Total purchase price 368,472
Net tangible assets acquired, excluding $98,152 debt assumed
122,918
Excess purchase price over the preliminary estimated fair
value of the net assets acquired $245,554
Preliminary allocation to non-compete agreement,
amortized over 10 years $ 28,000
Preliminary allocation to goodwill, amortized over 40
years (includes KTI goodwill assumed of $47,958) $ 217,554
Elimination of KTI's goodwill assumed $ 47,958
Goodwill recorded in transaction $ 169,596
(d) Reflects a $247,011 payment for acquisition of KTI, capitalized
transaction fees, expensed internal transaction costs, net of $1,893 cash
acquired and $28,000 for the covenant not to compete.
(e) Represents the net increase in cash as follows:
December 27,
1998
Cash and proceeds from sale of investments $ 200,659
Net proceeds from issuance of senior
subordinated notes 218,812
Net cash received from New Credit Facility 220,125
Reduction in Fairchild credit facility refinanced (222,750)
Reduction in Banner credit facility (50,600)
Reduction of KTI credit facilities (87,000)
Payment of accrued interest (2,342)
Net cash impact $276,904
(f) Reflects cash and the liquidation of $200,659 in short-term
investments to provide a source of funds for the acquisition.
(g) Represents additional deferred loan fees of $11,070 relating to the
financing costs of the new credit facility and the Notes, net of the write-
off of $6,308 related to deferred loan fees associated with the refinanced
credit facilities.
(h) Represents elimination of Fairchild's $18,623 investment in KTI as
part of the acquisition, and subsequent consolidation, of KTI. The
unrealized investment gains of $3,282, net of a $1,767 tax provision,
included in cumulative other comprehensive income is eliminated.
(i) Represents the net refinancing as follows:
December 27,
1998
Senior Subordinated Notes $ 225,000
New Credit Facility term loan 225,000
Debt issued $ 450,000
Fairchild credit facility $ 222,750
Banner credit facility 50,600
KTI revolving line of credit 13,000
KTI term loan 74,000
Debt retired $ 360,350
Net debt issued $ 89,650
Short term net reduction $ (16,950)
Long term net increase 106,600
(j) Represents (i) the reversal of $1,767 taxes accrued on unrealized
holding gains associated with the Company's investment in KTI and (ii) tax
benefits of $7,055 associated with estimated internal transaction costs
that will be charged to earnings at closing.
(k) Represents the payment and reduction of accrued interest associated
with the retired debt and reduction of taxes payable associated with the
refinancing expenses.
(l) Reflects the $72,724 elimination of KTI's historical retained earnings
and Fairchild's estimated internal transaction costs of $13,103, net of
$7,055 tax benefit, that will be expensed at closing.
(m) Represents the write-off of deferred financing costs, net of tax,
associated with the retired debt.
(c) EXHIBITS.
The Exhibits to this Report are listed on the Exhibit Index, and are
incorporated herein by reference.
SIGNATURE
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 hereunto duly authorized.
Dated: May 5, 1999
THE FAIRCHILD CORPORATION
By:
Colin M. Cohen
Senior Vice President
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
2.1 Agreement and Plan of Reorganization by and among The Fairchild
Corporation, Dah Dah, Inc. and Kaynar Technologies Inc., dated as
of December 26, 1998. (Incorporated by reference to Registrant's
Report on Form 8-K, filed December 30, 1998.)
99.1 Press Release of The Fairchild Corporation, dated April 20, 1999.
(Filed herewith.)
99.2 Financial statements, related notes thereto and Auditors' Report
of Kaynar Technologies, Inc. for the years ended December 31,
1998, 1997 and 1996.
Exhibit 99.1
The Fairchild Corporation [FA] Becomes Global Leader in Aerospace Fastening
Devices as It Completes Acquisition of Kaynar Technologies Inc. [KTIC]
Dulles, Virginia (April 20, 1999) - The Fairchild Corporation [NYSE:
FA] today completed its acquisition of Kaynar Technologies Inc. (KTI)
[NASDAQ: KTIC], creating the global industry leader in the manufacture and
distribution of aerospace fasteners and fastening devices. Fairchild
acquired KTI for approximately $261 million plus the assumption of debt.
The purchase was financed by Fairchild's cash resources, the sale of $225
million of senior subordinated notes and a new bank credit facility.
"The acquisition of KTI creates the leading global aerospace fastener
company, offering the largest complementary product range to our worldwide
customers" said Jeffrey J. Steiner, Chairman and CEO of Fairchild. "The
combined company has annual revenues of nearly $800 million, with 17 plants
in North America, Europe and Asia, enabling us to source product and
service our customers from a local base," said Eric Steiner, President of
Fairchild. "Our revenue base is comprehensive: 38% of our sales are to new
aircraft and engine manufacturers, industrial and defense users provide
30%, and 32% originate from the aerospace aftermarket. This diversity of
customers will reduce our exposure to cyclical trends in our industry."
Exhibit 99.1 / PAGE 1 OF 2
Fairchild announced that the integration of the two companies would
begin immediately. Fairchild expects to realize substantial benefits from
operational synergies and cost savings as a result of the combination. "We
are enthusiastic about the opportunity to meld the high productivity and
quality standards of the two companies," said Eric Steiner, noting that KTI
was selected as number eight on Forbes magazine's most recent list of the
"200 Best Small Companies" in the United States. Both companies have made
extensive investments in recent years, to improve plant and extend
training.
On April 8th Fairchild completed its merger with Banner Aerospace,
Inc. [NYSE: BAR] acquiring the remaining 15 percent of Banner's capital
stock it did not already own. Banner Aerospace, is an aftermarket
distribution company.
The senior subordinated notes have not been registered under the
Securities Act of 1933, as amended and may not be offered or sold in the
United States absent registration or an applicable exemption from the
registration requirements.
This news release contains forward-looking statements within the
meaning of Section 27-A of the Securities Act of 1933, as amended, and
Section 21-E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those set forth in
the forward-looking statements as a result of the risks associated with the
Company's business, changes in general economic conditions, and changes in
the assumptions used in making such forward-looking statements.
Exhibit 99.1 / PAGE 2 OF 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Kaynar Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Kaynar
Technologies Inc. (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kaynar
Technologies Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
February 5, 1999
Exhibit 99.2 / Page 1 of 24
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share data)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net sales (1) $185,512 $150,429 $99,023
Cost of sales 129,223 104,390 72,924
-------- -------- -------
Gross profit 56,289 46,039 26,099
Selling, general and administrative expenses 27,438 21,454 13,263
-------- -------- -------
Operating income 28,851 24,585 12,836
Interest expense, net 4,067 3,602 4,011
-------- -------- -------
Income before provision for income taxes 24,784 20,983 8,825
Provision for income taxes 9,914 8,393 3,530
-------- -------- -------
Net income $ 14,870 $ 12,590 $ 5,295
======== ======== =======
Earnings per share
Basic $ 3.39 $ 4.23 $ 3.26
Diluted $ 1.64 $ 1.54 $ 0.78
======== ======== =======
Weighted average number of shares of common stock and
common stock equivalents
Basic 4,382 2,967 1,594
Diluted 9,085 8,173 6,800
======== ======== =======
(1) Including $13,038, $12,961 and $11,437 in 1998, 1997 and 1996,
respectively, to a related party (see Note 15)
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Exhibit 99.2 / Page 2 of 24
<TABLE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - ASSETS
AS OF DECEMBER 31, 1998 AND 1997
(Dollars in thousands)
<CAPTION>
1998 1997
<S> <C> <C>
Current assets:
Cash $ 1,893 $ 675
Marketable securities 50 3,079
Accounts receivable (1) 30,421 23,293
Inventories 52,778 34,231
Prepaid expenses and other current assets 1,430 647
Deferred tax asset 2,685 1,006
-------- --------
Total current assets 89,257 62,931
-------- --------
Property, plant and equipment, at cost 76,035 41,048
Less accumulated depreciation and amortization(14,452) (8,797)
-------- --------
61,583 32,251
-------- --------
Intangible assets, net of accumulated amortization of $1,104 and
$480 at December 31, 1998 and 1997, respectively47,958 6,409
Other assets 561 65
-------- --------
Total assets $199,359 $101,656
======== ========
(1) Including $--982 and $1,846 in 1998 and 1997, respectively, from a
related party (see Note 15), net of allowance for doubtful accounts of
$703 and $310 in 1998 and 1997, respectively
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Exhibit 99.2 / Page 3 of 24
<TABLE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 1998 AND 1997
(Dollars in thousands)
<CAPTION>
1998 1997
<S> <C> <C>
Current liabilities:
Revolving line-of-credit, to a related party
(see Note 8) $ 13,000 $ -
Current portion of long-term debt 4,054 1,021
Current portion of capital lease obligations 280 272
Accounts payable 8,017 9,969
Accrued payroll and related expenses 8,115 8,546
Other accrued expenses 7,874 4,423
-------- --------
Total current liabilities 41,340 24,231
-------- --------
Long-term liabilities:
Long-term debt, primarily to a related
party (see Note 8) 80,624 26,372
Capital lease obligations 194 484
Deferred tax liability 4,477 1,136
-------- --------
Total long-term liabilities 85,295 27,992
-------- --------
Commitments and contingencies (see Notes 8 and 12)
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 December 31, 1998 and 1997, respectively42 52
Common stock; $0.01 par value; Authorized--20,000,000 shares; issued
and outstanding--5,090,142 and 3,694,000 shares at December 31, 1998
and 1997, respectively 51 37
Additional paid-in capital 37,821 28,973
Retained earnings 36,264 21,394
Accumulated other comprehensive income (1,454) (1,023)
-------- --------
Total stockholders' equity 72,724 49,433
-------- --------
Total liabilities and stockholders' equity $199,359 $101,656
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Exhibit 99.2 / Page 4 of 24
<TABLE>
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
<CAPTION>
Preferred Stock Accumlated
Stock Common Addi- Comp Comp
Series C Stock tional prehen prehen
Paid-In sive Retained sive
Shares Amt Shares Amt Capital Income Earnings In-
come Total
BALANCE, December 31, 1995
5,206 $52 1,594 $16 $ 1,432 $ 3,639 $18 $ 5,157
Comprehensive Income:
Net income $ 5,295 5,295 5,295
Currency Translation 270 270 270
Comprehensive Income $ 5,565
Dividends declared (96)
BALANCE, December 31,1996
5,206 52 1,594 16 1,432 8,838 288 10,626
Comprehensive Income:
Net income $12,590 12,590 12,590
Currency Translation (1,311) (1,311) (1,311)
Comprehensive Income $11,279
Common stock issuance 2,100 21 27,541 27,562
Dividends declared (34) (34)
BALANCE, December 31, 1997
5,206 52 3,694 37 28,973 21,394 (1,023) 49,433
Comprehensive Income:
Net income $14,870 14,870 14,870
Currency Translation (431) (431) (431)
Comprehensive Income $14,439
Conversion of Preferred
(1,000)(10) 1,000 10
Common stock issuance
- - 396 4 8,848 8,852
BALANCE, December 31, 1998
4,206 $42 5,090 $51 $37,821 $36,264 $(1,454) $72,724
The accompanying notes are an integral part of these consolidated financial
statements.
Exhibit 99.2 / Page 5 of 24
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $14,870 $12,590 $ 5,295
Adjustments to reconcile net income
to net cash provided by
operating activities-
Depreciation and amortization 6,772 3,818 2,613
Increase (decrease) in deferred income taxes 680 (990) 186
(Gain) loss on sale of property,
plant and equipment (124) 154 34
Changes in operating assets and
liabilities, net of acquisitions-
(Increase) decrease in accounts receivable 962 (7,990) (2,505)
Increase in inventories (7,190) (4,346) (6,867)
(Increase) decrease in prepaid expenses
and other current assets (112) 32 (152)
(Increase) decrease in other assets (211) 187 181
Increase (decrease) in accounts payable (5,657) 3,800 2,361
Increase (decrease) in accrued expenses (3,222) 4,946 3,172
------- ------- -------
Net cash provided by operating activities 6,768 12,201 4,318
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (18,322) (17,909) (6,850)
Proceeds from sales of property, plant and
equipment 403 92 43
Net redemptions (purchases) of marketable
securities 3,029 (3,079) -
Acquisitions, net of acquired cash
of $421 in 1998 (49,203) - (12,160)
(Increase) decrease in intangible assets (669) 638 (1,231)
------- ------- -------
Net cash used in investing activities (64,762) (20,258)(20,198)
------- ------- -------
Cash flows from financing activities:
Net borrowings (payments) on line-of-credit,
from a related party 13,000 (746) (3,560)
Borrowings on long-term debt, primarily from
a related party 52,882 501 21,245
Payments on long-term debt, primarily from
a related party (6,345) (20,263) (898)
Net principal (payments) borrowings on
capital lease obligations (303) 795 (55)
Net proceeds from issuance of common stock - 27,562 -
------- ------- -------
Net cash provided by financing activities 59,234 7,849 16,732
------- ------- -------
Effect of exchange rate changes on cash (22) (26) 5
------- ------- -------
Net increase (decrease) in cash 1,218 (234) 857
Cash, beginning of period 675 909 52
------- ------- -------
Cash, end of period $ 1,893 $ 675 $ 909
======= ======= =======
</TABLE>
Exhibit 99.2 / Page 6 of 24
<TABLE>
<CAPTION>
<S>
<C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,094 $ 3,943 $ 3,787
======= ======= =======
Income taxes $12,844 $ 8,395 $ 2,841
======= ======= =======
Noncash financing activities:
Capital lease obligations assumed for the
purchase of equipment $ - $ 507 $ 355
======= ======= =======
Borrowings on long-term debt for preferred
stock dividends $ - $ 34 $ 96
======= ======= =======
Common stock issued in connection with
acquisitions of businesses $ 8,852 $ - $ -
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
Exhibit 99.2 / Page 7 of 24
KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
1. Nature of Operations and Recent Developments
Kaynar Technologies Inc. (the "Company") is a leading precision fabricator
that designs, develops and manufactures a wide range of specialty
components and tooling systems and provides related services used primarily
by original equipment manufacturers ("OEM's") and their subcontractors to
produce aircraft and defense products. In addition, the Company serves the
automotive, electrical and other industrial markets and their associated
after-markets.
On December 26, 1998, the Company entered into a merger agreement with The
Fairchild Corporation ("Fairchild") in which the Company will become a
wholly owned subsidiary of Fairchild (the "Fairchild Merger"). Upon the
effectiveness of the Fairchild Merger, each outstanding share of the
Company's common stock, with the exception of shares held by stockholders
who properly exercise dissenters' rights under the Delaware General
Corporation Law and shares held by Fairchild, will be cancelled and
converted into the right to receive $28.75 in cash. The closing of the
Fairchild Merger is subject to certain conditions, including regulatory
approval, financing and approval of the Company's stockholders.
2. Business Combinations
On July 28, 1998, the Company acquired all of the issued and outstanding
common stock of
M & M Machine & Tool Company Co. ("M & M"). M & M, located in Huntington
Beach, California, specializes in the machining of structural components
and assemblies for aircraft which include pylons, flap hinges, struts, wing
fittings, landing gear parts, spars, and many others. As consideration for
this acquisition, the Company paid the M & M stockholders $12,441 in cash
and 376,142 shares of the Company's common stock valued at $8,294. In
addition, the Company will pay additional consideration of $2,000 (60% in
cash and 40% in shares of KTI common stock) based on M & M's recasted
earnings before interest, taxes and transaction costs related to the
acquisition for its fiscal year ended October 31, 1998 (which was accrued
for and included in other accrued expenses as of December 31, 1998). The
purchase price exceeded the fair value of the net assets by $17,850, which
is being allocated as goodwill and amortized using the straight-line method
over 40 years. The M & M acquisition has been accounted for under the
purchase method of accounting and, accordingly, the operating results of M
& M have been included in the Company's results of operations since late-
July 1998.
Exhibit 99.2 / Page 8 of 24
On October 27, 1998, the Company acquired all of the issued and outstanding
common stock of Marcliff Corporation which holds all of the issued and
outstanding capital stock of Marson Creative Fastener, Inc. ("Marson").
Located in Stoughton, Massachusetts, Marson designs, manufactures, and
markets a broad line of blind rivets, threaded inserts, and setting tools
primarily for industrial markets. As consideration for this acquisition,
the Company paid the Marson stockholders $34,000 in cash (of which $9,058
was used to pay off Marson's outstanding debt as of the acquisition date).
In addition, the Company will pay additional consideration of $1,111 based
on Marson's closing balance sheet as of the acquisition date (which was
accrued for and included in other accrued expenses as of December 31,
1998). The purchase price exceeded the fair value of the net assets by
$23,217, which is being allocated as goodwill and amortized using the
straight-line method over 40 years. The Marson acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
operating results of Marson have been included in the Company's results of
operations since late-October 1998.
3. Pro Forma Financial Information (unaudited)
The following unaudited pro forma consolidated statements of income
information present the results of the Company's operations for the years
ended December 31, 1998 and 1997 as though the acquisitions of M & M and
Marson had occurred as of the beginning of each respective calendar year:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>>
Net sales $220,374 $195,654
Net income 15,971 14,047
Earnings per share
Basic 3.42 4.16
Diluted 1.71 1.64
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place at the beginning of the fiscal year or the results
that may occur in the future. The pro forma results include additional
interest on borrowed funds, additional amortization of goodwill resulting
from the acquisitions and the change in salary and benefit costs of certain
officers of the acquired companies.
</TABLE>
Exhibit 99.2 / Page 9 of 24
4. Summary of Significant Accounting Policies
a. Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
b. Principles of Consolidation
The consolidated financial statements include the accounts of Kaynar
Technologies Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
c. Revenue Recognition
Sales and related costs are recorded by the Company upon shipment of
product. Revenues related to the rental of the Company's K-FAST
tools, which are not significant, are recognized monthly over the term
of the lease. Revenues related to the Company's APS business unit,
which are not significant, are recognized based on percentage of
completion.
d. Currency Translation Adjustment
Assets and liabilities of the Company's foreign subsidiaries are
translated into United States dollars at the year-end rate of
exchange. Income and expense items are translated at the average
rates of exchange for the period. Gains and losses resulting from
translating foreign currency financial statements are accumulated in a
separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in the consolidated
statements of income.
e. Marketable Securities
The Company invests excess cash in a money market fund that invests in
short term (maturities of 397 days or less) direct obligations of the
U.S. Treasury.
Exhibit 99.2 / Page 10 of 24
f. Inventories
Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) method and market based
upon the lower of replacement cost or estimated realizable value.
Inventory costs include material, labor and factory overhead.
g. Property, Plant and Equipment
Depreciation is computed principally on the straight-line method over
the estimated useful lives of the depreciable assets (ranging from five
to ten years). Cost and accumulated depreciation for property retired
or disposed of are removed from the accounts and any gains or losses
are reflected in operations. Major renewals and betterments that
extend the useful life of an asset are capitalized.
h. Intangible Assets
Intangible assets primarily represent the excess of purchase price
over fair value of net assets acquired and related acquisition costs
incurred in the acquisitions of Recoil, M & M and Marson. Intangibles
are amortized using the straight-line method from the date of
acquisition over the expected period to be benefited, currently
estimated between 20 and 40 years. The Company assesses the
recoverability of intangible assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
i. Fair Value of Financial Instruments
The carrying amounts of cash, marketable securities, accounts
receivable and accounts payable approximate their fair value as of
December 31, 1998 and 1997. The carrying amounts of the line-of-
credit and long-term debt approximate fair value as the obligations
bear interest at rates that fluctuate with the market rate. The
carrying amount of the term loans approximates fair value as the
obligation compares favorably with fixed rate obligations that would
be currently available to the Company.
j. Income Taxes
The Company accounts for income taxes under SFAS No. 109 "Accounting
for Income Taxes," which requires an asset and liability approach in
accounting for income taxes payable or refundable at the date of the
financial statements as a result of all events that have been
recognized in the financial statements and as measured by the
provisions of enacted laws.
Exhibit 99.2 / Page 11 of 24
k. Earnings per Share
Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share 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>
Years ended December 31,
1998 1997 1996
---------------- --------------- ----------------
Income Shares Income Shares Income Shares
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $14,870 4,382 $12,590 2,967 $5,295 1,594
Less: dividends on
previously issued
preferred stock (34) (96)
------- ----- ------- ----- ------ -----
Income available to
common stockholders 14,870 4,382 12,556 2,967 5,199 1,594
</TABLE>
Exhibit 99.2 / Page 12 of 24
Effect of Dilutive
Securities
Series C Convertible
Preferred stock- 4,688 34 5,206 96 5,206
Options and other- 15 - - - -
------- ----- ------- ----- ------ -----
Diluted EPS $14,870 9,085 $12,590 8,173 $5,295 6,800
======= ===== ======= ===== ====== =====
l. New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective for fiscal years beginning after June 15, 1999.
The Company does not believe the adoption of this standard will have a
material impact on the Company's results of operations.
5. Inventories. Inventories consist of the following at December 31,
1998 and 1997:
1998 1997
Raw materials $ 3,772 $ 2,593
Work in progress 14,245 11,012
Components 8,611 5,325
Finished goods 18,901 9,550
Supplies and small tools 7,249 5,751
------- -------
$52,778 $34,231
======= =======
6. Property, Plant and Equipment. Property, plant and equipment consists
of the following at December 31, 1998 and 1997:
Years of
Estimated
Useful Life 1998 1997
Land - $ 1,787 $ 32
Buildings 20 1,799 -
Machinery and equipment 5 to 10 49,911 20,083
Equipment rented to others 7 8,534 8,581
Leasehold improvements Lease term 5,432 1,315
Construction in progress - 8,572 11,037
------- -------
76,035 41,048
Accumulated depreciation and amortization (14,452) (8,797)
------- -------
$61,583 $32,251
======= =======
Exhibit 99.2 / Page 13 of 24
7. Income Taxes. The components of the net accumulated deferred income
tax (asset) liability at December 31, 1998 and 1997 are as follows:
1998 1997
Current deferred tax (asset) liability:
Inventory reserves $(1,369) $ (87)
Accrued vacation (706) (449)
Other (610) (470)
------- -------
$(2,685) $(1,006)
======= =======
Long-term deferred tax (asset) liability:
Depreciation $ 4,477 $ 1,136
======= =======
The provision for income taxes includes income taxes currently payable and
those deferred due to temporary differences between the financial
statements and tax basis of assets and liabilities. The provision differs
from the statutory rates primarily due to permanent differences. The
provision for income taxes for the years ended December 31, 1998, 1997 and
1996, consists of the following:
1998 1997 1996
Current provision:
Federal $7,083 $7,716 $2,590
State 1,500 1,400 720
Foreign 33 267 -
Deferred provision:
Federal 1,061 (707) 69
State 237 (283) 151
------ ------ ------
$9,914 $8,393 $3,530
====== ====== ======
Exhibit 99.2 / Page 14 of 24
Variations from the federal statutory rate for the years ended December 31,
1998, 1997 and 1996, are as follows:
1998 1997 1996
--------------- ------------ -----------
Amount Percent Amount Percent Amount Percent
[S] [C] [C] [C] [C] [C] [C]
Federal statutory rate $8,675 35.0% $7,344 35.0% $3,001 34.0%
State income taxes,
net of federal benefit 1,129 4.5 726 3.5 485 5.5
Foreign sales
corporation benefit (552) (2.2) (220) (1.0) (141) (1.6)
Foreign losses not currently
benefited 161 0.6 115 0.5 - -
Utilization of foreign
losses (26) (0.1) (114) (0.5) - -
Non-deductible expenses 212 0.9 173 0.8 94 1.1
Other 315 1.3 369 1.7 91 1.0
------ ----- ------ ----- ------ -----
$9,914 40.0% $8,393 40.0% $3,530 40.0%
====== ===== ====== ===== ====== =====
8. Debt Arrangements
The Company entered into a Third Restated and Amended Credit Agreement on
October 23, 1998 (the "Third Credit Agreement") with its primary lender
General Electric Capital Corporation ("GECC") which has a wholly owned
subsidiary, CFE, Inc. ("CFE"), that owned all of the outstanding shares of
the Company's Series C Preferred stock and one million shares of the
Company's common stock as of December 31, 1998. The Third Credit Agreement
contains significant financial and operating covenants, including
limitations on the ability of the Company to incur additional indebtedness
and restrictions on, among other things, the Company's ability to pay
dividends or take certain other corporate actions. The Third Credit
Agreement also requires the Company to be in compliance with certain
financial ratios. In addition to the Term Loan under the Third Credit
Agreement ("Term Loan"), the Company has entered into promissory notes with
other lenders for the purchase of certain property, machinery and equipment
("The Notes").
Exhibit 99.2 / Page 15 of 24
The following schedule summarizes the future annual minimum principal
payments due under the Term Loan and The Notes as of December 31, 1998:
Term The
Loan Notes Total
1999 $ 1,700 $ 2,354 $ 4,054
2000 1,700 2,178 3,878
2001 1,700 1,495 3,195
2002 1,700 1,177 2,877
2003 67,200 789 67,989
Thereafter- 2,685 2,685
------- ------- -------
$74,000 $10,678 $84,678
======= ======= =======
Debt arrangements are described as follows:
a. Term Loan
On October 23, 1998, the Company entered into the Third Credit
Agreement which amended its existing Term Loan with GECC, increasing
the borrowing capacity of the Term Loan to $74,000. The Term Loan
bears interest, payable every 30 to 90 days, at LIBOR rate plus one
and one-half percent (which was 6.8 percent at December 31, 1998).
Principal payments of $425 are due quarterly through October 1, 2002,
with a final payment of $67,200 due January 3, 2003. At December 31,
1998 and 1997, outstanding principal under the Term Loan totaled
$74,000 and $25,525, respectively. Interest expense on the Term Loan
for the years ended December 31, 1998, 1997 and 1996 was approximately
$2,712, $2,498 and $2,400, respectively. The Term Loan is secured by
substantially all of the Company's assets.
b. The Notes
The Company has promissory notes with financing institutions, which
are secured by certain property, machinery and equipment. At December
31, 1998 and 1997, the outstanding principal under the Notes was
$10,678 and $1,868, respectively. The Notes bear interest at interest
rates ranging from 4.9 percent to 10.5 percent per annum. Monthly
payments are payable through June 1, 2008.
c. Line-of-Credit
The line-of-credit with GECC (the "LOC") is a $25,000 revolving credit
facility, limited by the lesser of the sum of specified portions of
qualified accounts receivable and inventory, and $25,000.
Exhibit 99.2 / Page 16 of 24
Interest is payable every 30 to 90 days at LIBOR rate plus one and one-
half percent (which was 7.1 percent at December 31, 1998). The LOC,
which expires January 3, 2003, had $13,000 outstanding at December 31,
1998 and had no borrowings at December 31, 1997. Interest expense on
LOC for the years ended December 31, 1998, 1997 and 1996 was
approximately $497, $129 and $682, respectively.
9. Series C Convertible Preferred Stock
Each share of the Series C Preferred stock is convertible at any time into
one share of common stock. The conversion rate is subject to certain anti-
dilutive adjustments. The Series C Preferred stock will participate in any
dividends paid on the common stock as if the Series C Preferred stock had
been converted into common stock.
In the event of liquidation, dissolution or winding up of the Company, the
holders of the Series C Preferred stock will be entitled to receive a
liquidation preference out of the assets available for distribution in an
amount equal to $0.22 per share, plus any accrued and unpaid dividends,
before any distribution is made to the holders of the common stock.
On June 26, 1998, CFE elected to convert one million such shares into one
million shares of common stock of the Company in accordance with the terms
of the Series C preferred stock.
10. Stock Incentive Plan
In 1997, the Company adopted the Kaynar Technologies Inc. 1997 Stock
Incentive Plan (the "Plan") which authorized 500,000 stock option grants to
purchase the Company's common stock.
The Company has granted 115,400 options in 1997 and 147,900 options in 1998
with a weighted average exercise price of $24.77 and $11.71, respectively,
under the Plan (of which 9,200 options with an exercise price of $25.00
were cancelled during 1998). These options were issued at fair market
value at the time of grant. Option grants are made at the discretion of
the Board of Directors. Options vest at 25 percent per year (beginning one
year from the grant date), may be exercisable in whole or in installments,
and expire five years from the grant date. The weighted average exercise
price of options outstanding as of December 31, 1998 is $17.16. The
weighted average contractual life of options outstanding as of December 31,
1998 is 4.3 years. The weighted average exercise price of options
exercisable as of December 31, 1998 is $24.75.
Exhibit 99.2 / Page 17 of 24
Characteristics of options outstanding at December 31, 1998 are presented
in the table below:
Exercise Contractual Options Options
Price Life Outstanding Exercisable
$ 9.25 4.8 years 119,000 -
$14.50 3.3 years 3,000 750
$15.88 4.8 years 12,000 -
$19.00 4.6 years 3,000 -
$25.00 3.7 years 102,000 25,500
$26.75 4.1 years 1,500 -
$27.75 4.2 years 12,400 -
$29.50 3.8 years 1,200 300
254,100 26,550
The Company accounts for the Plan under APB Opinion No. 25. SFAS No. 123
"Accounting for Stock-Based Compensation" was issued by the FASB in 1995
and, if fully adopted, changes the methods for recognition of cost on plans
similar to those of the Company. Adoption of SFAS No. 123 is optional,
however pro forma disclosures as if the Company had adopted the cost
recognition method are required. Had compensation cost for stock options
awarded under the Plan been determined consistent with SFAS No. 123, the
Company's net income would have reflected the following pro forma amounts
as of December 31, 1998 and 1997:
1998 1997
Net Income: As Reported $14,870 $12,590
Pro Forma $14,417 $12,439
Basic EPS: As Reported $3.39 $4.23
Pro Forma $3.29 $4.18
Diluted EPS: As Reported $1.64 $1.54
Pro Forma $1.59 $1.52
For the above pro forma disclosures, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions: weighted average risk-free interest rate of
5.0 percent; a weighted average volatility of 56.5 percent; estimated
option life of 4 years; and no expected dividend yield. The weighted
average fair value of the Company's stock options granted in 1998 and 1997
was $5.68 and $12.02, respectively.
Exhibit 99.2 / Page 18 of 24
11. Savings and Retirement Plan
The Company sponsors a defined contribution plan (the "Retirement Plan"),
which provides benefits to all employees who have completed six months of
service. Employees may make contributions between one and 21 percent of
their annual compensation. The Company may make contributions to the
Retirement Plan at its discretion.
The Company contributed approximately $1,461, $988 and $577 to the
Retirement Plan in the years ended December 31, 1998, 1997 and 1996,
respectively.
12. Commitments and Contingencies
a. Operating Leases
The Company leases certain facilities and equipment under long-term
operating leases with varying terms. The leases generally provide
that the Company pay taxes, maintenance and insurance costs, and some
leases contain renewal and/or purchase options. Total rental expense
under operating leases totaled approximately $1,975, $1,231 and $1,187
in the years ended December 31, 1998, 1997 and 1996, respectively.
Minimum rental expenses on commitments for the years subsequent to
December 31, 1998, are as follows:
Year ending December 31,
1999 $ 2,125
2000 1,927
2001 1,696
2002 1,519
2003 1,006
Thereafter 2,108
-------
$10,381
=======
Exhibit 99.2 / Page 19 of 24
b. Capital Leases
The Company has entered into capital lease agreements for equipment.
Future lease payments due under the agreements are as follows:
Year ending December 31,
1999 $307
2000 163
2001 36
----
506
Amounts representing interest (32)
----
474
Current portion (280)
----
$194
====
c. Purchase Commitments
The Company has certain one-year purchase commitments which require
that all purchases of particular raw materials be purchased from
various vendors at a fixed price, none of which exceeded fair market
value as of December 31, 1998.
d. Contingencies
The Company is, from time to time, subject to claims and disputes for
legal, environmental and other matters in the normal course of its
business. While the results of such matters cannot be predicted with
certainty, management does not believe that the final outcome of any
pending matters will have a material effect on the consolidated
financial position and results of operations.
13. Significant Customers
For the years ended December 31, 1998, 1997 and 1996, two customers
accounted for approximately 20 and 7 percent, 24 and 9 percent and 18 and
12 percent of net sales, respectively. No other customer accounted for 10
percent or more of net sales in any of the three years ended December 31,
1998. Accounts receivable balances from these same two customers accounted
for approximately 10 and 7 percent of accounts receivable at December 31,
1998 and 14 and 8 percent of accounts receivable at December 31, 1997. No
other customer represents 10 percent or more of the Company's gross
accounts receivable at December 31, 1998 and 1997.
Exhibit 99.2 / Page 20 of 24
14. Geographic Sales Information
Net sales for the years ended December 31, 1998, 1997 and 1996 were made to
geographic regions as follows:
1998 1997 1996
---------------- ---------------- ------
- ----------
Amount Percent Amount Percent Amount Percent
United States $156,834 84.5% $126,845 84.4% $85,069 85.9%
Europe 16,487 8.9 13,255 8.8 8,378 8.5
Pacific Rim 6,683 3.6 5,219 3.4 2,256 2.3
Other 5,508 3.0 5,110 3.4 3,320 3.3
-------- ------ -------- ------ ------- ------
$185,512 100.0% $150,429 100.0% $99,023 100.0%
Sales for the Company's foreign operations represented less than 10 percent
of net sales during each of the years ended December 31, 1998, 1997 and
1996.
Exhibit 99.2 / Page 21 of 24
15. Related Party Matters
As discussed in Note 8, the primary lender to the Company is GECC which has
a wholly-owned subsidiary CFE. CFE owns 100 percent of the outstanding
Series C Convertible Preferred Stock and one million shares of the
Company's common stock.
GECC is also an affiliated entity to a customer (the Aircraft Engines
Division of General Electric Co.) that accounted for approximately 7, 9 and
12 percent of 1998, 1997 and 1996 net sales, respectively, and 7 and 8
percent of accounts receivable at December 31, 1998 and 1997, respectively.
Exhibit 99.2 / Page 22 of 24
16. Industry Segment Information
The Company is currently segmented into eight business units. The
Company's Kaynar, Microdot, M & M, Eagle, APS and K-FAST business units
design and manufacture products that are sold principally to the commercial
aircraft and defense industries. The Company's Recoil and Marson business
units design and manufacture inserts, blind rivets and related installation
tools used primarily in the automotive, electrical and other non-aerospace
industries. The following table illustrates the Company's financial data
by industry segment for the past three years.
<TABLE>
<CAPTION>
For the Years Ended December 31,
<S> <C> <C> <C>
Sales by Segment:
Commercial Aircraft
and Defense (2) $169,401 $137,889 $95,156
Industrial (1)(3) 16,111 12,540 3,867
-------- -------- -------
Total Sales $185,512 $150,429 $99,023
Operating Income by Segment:
Commercial Aircraft and
Defense (2) $ 30,192 $ 25,892 $13,464
Industrial (1)(3) 1,783 1,645 238
Corporate Expenses (3,124) (2,952) (866)
-------- -------- -------
Total Operating Income $ 28,851 $ 24,585 $12,836
Depreciation and Amortization by Segment:
Commercial Aircraft and
Defense (2) $ 5,822 $ 3,209 $ 2,304
Industrial (1)(3) 950 609 309
-------- -------- -------
Total Depreciation and
Amortization $ 6,772 $ 3,818 $ 2,613
Total Assets by Segment:
Commercial Aircraft and
Defense (2) $144,817 $ 86,571 $58,429
Industrial (1)(3) 54,542 15,085 15,260
-------- -------- -------
Total Assets $199,359 $101,656 $73,689
</TABLE>
Exhibit 99.2 / Page 23 of 24
(1) In August 1996, the Company purchased its Recoil business unit which
has been accounted for under the purchase method of accounting and,
accordingly, their operating results have been included in the results
of operations since mid-August 1996.
(2) In July 1998, the Company purchased its M & M business unit which has
been accounted for under the purchase method of accounting and,
accordingly, their operating results have been included in the results
of operations since late-July 1998.
(3) In October 1998, the Company purchased its Marson business unit which
has been accounted for under the purchase method of accounting and,
accordingly, their operating results have been included in the results
of operations since late-October 1998.
17. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Three months ended
1998 March 29 June 28 September 27December 31
<S> <C> <C> <C> <C>
Net sales $45,355 $46,824 $45,293 $48,040
Gross profit 13,881 14,630 13,458 14,320
Net income 4,275 4,351 3,402 2,842
Basic earnings per share 1.15 1.16 0.69 0.56
Diluted earnings per share 0.48 0.49 0.37 0.31
Stock price per share
High 29.50 34.50 24.00 27.50
Low 24.00 22.25 11.50 8.00
Three months ended
1997 March 30 June 29 September 28December 31
Net sales $32,202 $37,250 $37,884 $43,093
Gross profit 9,233 11,036 11,903 13,867
Net income 2,169 2,933 3,388 4,100
Basic earnings per share 1.35 1.03 0.92 1.11
Diluted earnings per share 0.32 0.36 0.38 0.46
Stock price per share
High - 19.87 30.25 34.12
Low - 14.50 18.50 24.50
</TABLE>
Exhibit 99.2 / Page 24 of 24
