-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CX4ZI1v1vnUzzl7z7fG48uy0waPiSIAo/+3aQIoTXQMXF6NKUFSZmZxK7LkV+lSX SoFlsbjNqZ0LafF4pFcx3A== 0000912057-97-015704.txt : 19970507 0000912057-97-015704.hdr.sgml : 19970507 ACCESSION NUMBER: 0000912057-97-015704 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970506 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAYNAR TECHNOLOGIES INC CENTRAL INDEX KEY: 0000917193 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 330591091 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22345 FILM NUMBER: 97596015 BUSINESS ADDRESS: STREET 1: 800 S STATE COLLEGE BLVD CITY: FULLERTON STATE: CA ZIP: 92634 FORMER COMPANY: FORMER CONFORMED NAME: KAYNAR HOLDINGS INC DATE OF NAME CHANGE: 19970205 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1997 REGISTRATION NO. 333-22345 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ KAYNAR TECHNOLOGIES INC. (Exact name of Registrant as specified in its charter) DELAWARE 3452 33-0591091 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
500 N. STATE COLLEGE BLVD. ORANGE, CALIFORNIA 92868 (714) 712-4900 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) MR. DAVID A. WERNER EXECUTIVE VICE PRESIDENT KAYNAR TECHNOLOGIES INC. 500 N. STATE COLLEGE BLVD. ORANGE, CALIFORNIA 92868 (714) 712-4900 (Name and address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: C. JAMES LEVIN, ESQ. JOHN R. LIGHT, ESQ. O'MELVENY & MYERS LLP LATHAM & WATKINS 400 SOUTH HOPE STREET 633 WEST FIFTH STREET LOS ANGELES, CALIFORNIA 90071-2899 LOS ANGELES, CALIFORNIA 90071-2007 (213) 669-6000 (213) 485-1234
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - -------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - -------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS 2,000,000 SHARES [LOGO] [LOGO] COMMON STOCK ---------------- Of the 2,000,000 shares of Common Stock offered hereby (the "Offering"), 1,800,000 shares are being sold by Kaynar Technologies Inc. (together with its consolidated subsidiaries, the "Company") and 200,000 shares are being sold by the Selling Stockholder (as defined herein). Prior to the completion of the Offering, the Selling Stockholder owns approximately 79.5% of the outstanding shares of the Company on a fully-converted basis due to its holdings of the Company's Series C Convertible Preferred Stock. Proceeds of the Offering will be used, among other things, to repay approximately $18 million in debt owed by the Company to the Selling Stockholder. See "Principal Stockholders and Selling Stockholder." The Company will not receive any proceeds from the sale of shares by the Selling Stockholder. Prior to the Offering, there has been no public market for the Common Stock of the Company. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "KTIC." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions(1) Company(2) Stockholder Per Share.......................... $14.50 $1.015 $13.485 $13.485 Total(3)........................... $29,000,000 $2,030,000 $24,273,000 $2,697,000
(1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting estimated expenses of $675,000 payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 300,000 shares of Common Stock on the same terms as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholder will be $33,350,000, $2,334,500, $28,318,500 and $2,697,000, respectively. See "Underwriting." --------------------- The shares of Common Stock offered by this Prospectus are offered severally by the Underwriters subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the shares of Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York on or about May 9, 1997. --------------------- LEHMAN BROTHERS PAINEWEBBER INCORPORATED May 6, 1997 [IMAGE MATERIAL: PICTURES OF VARIOUS END-PRODUCTS USING THE COMPANY'S PRODUCTS: BOEING 747; BOEING 777; AIRCRAFT JET TURBINE ENGINE; AIRBUS A340; FRENCH HIGH-SPEED TGV RAILWAY LOCOMOTIVE; LOCKHEED F-117 STEALTH FIGHTER; M-1 ABRAMS MAIN BATTLE TANK.] [IMAGE MATERIAL: PICTURES OF VARIOUS AIRCRAFT AND AUTOMOBILE ASSEMBLY FACILITIES; PICTURES OF VARIOUS PRODUCTS OF THE COMPANY'S KAYNAR, K-FAST, MICRODOT, AND RECOIL BUSINESS UNITS.] Certain persons participating in this Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Such transactions may include the purchase of shares of Common Stock following the pricing of the Offering to cover a syndicate short position in the Common Stock or for the purpose of maintaining the price of the Common Stock and the imposition of penalty bids. For a description of these activities, see "Underwriting." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, AND NOTES THERETO, APPEARING ELSEWHERE IN THE PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THE PROSPECTUS (I) ASSUMES THAT IMMEDIATELY PRIOR TO THE OFFERING, KAYNAR TECHNOLOGIES INC. (THE "OPERATING COMPANY") WILL BE MERGED WITH AND INTO ITS PARENT, KAYNAR HOLDINGS INC. (SOMETIMES REFERRED TO HEREIN AS "HOLDINGS"), WHICH, AS THE CORPORATION SURVIVING THE MERGER, WILL BE RENAMED KAYNAR TECHNOLOGIES INC. (SEE "THE REORGANIZATION" FOR MORE INFORMATION REGARDING THE MERGER), (II) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF HOLDINGS' CAPITAL STOCK INTO ADDITIONAL SHARES OF COMMON STOCK OR SHARES OF SERIES C PREFERRED STOCK AS DESCRIBED IN "THE REORGANIZATION" AND (III) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. UNLESS OTHERWISE INDICATED, THE TERM "COMPANY" AS USED HEREIN SHALL MEAN HOLDINGS, AS THE CORPORATION SURVIVING THE MERGER, TOGETHER WITH EACH OF HOLDINGS' CONSOLIDATED SUBSIDIARIES. THE COMPANY The Company is a leading manufacturer of specialty fasteners, fastening systems and related components primarily used by original equipment manufacturers ("OEMs") and their subcontractors in the production of commercial aircraft and defense products. In addition, the Company also manufactures other specialty fasteners and related products for sale in the automotive, electronic and other industrial markets, and their associated after-markets. The Company designs and manufactures a substantial majority of its fasteners to its customers' specifications and in a wide range of specialty metals, alloys and composites. The Company supplies products to virtually all major airframe and aircraft engine OEMs, including Boeing Co. ("Boeing"), General Electric Company ("GE"), the Pratt & Whitney Aircraft business of United Technologies Corporation ("Pratt & Whitney"), Airbus Industries ("Airbus"), Lockheed Martin Corporation ("Lockheed Martin"), McDonnell Douglas Corporation ("McDonnell Douglas") and Rolls Royce PLC ("Rolls Royce"), as well as to a global network of distributors. Direct sales to Boeing, GE and Pratt & Whitney, the Company's three largest OEM customers, accounted for approximately 18%, 12%, and 8% of the Company's 1996 net sales, respectively. Since the beginning of the commercial aircraft industry's recovery in 1994, the Company has experienced significant increases in sales and profitability. During this period, the Company's net sales have increased nearly 80%, from $55.1 million in 1994 to $99.0 million in 1996, and its operating income has increased approximately 160%, from $5.0 million in 1994 to $12.8 million in 1996. The Company's backlog of orders deliverable within 12 months has also increased during this period, from approximately $21 million as of January 3, 1994 to approximately $60 million as of December 31, 1996. The Company offers a broad line of fasteners, fastening systems and related components. The Company's Kaynar and Microdot business units manufacture precision, self-locking, internally threaded nuts and inserts and precision, threaded studs. Kaynar and Microdot fasteners are engineered for a variety of harsh, demanding environments and often require high tensile strength, toughness, durability, corrosion resistance and resistance to metal fatigue and creep. Kaynar's fasteners, which include wrenchable nuts, anchor nuts, gang channels, shank nuts, barrel nuts, clinch nuts and stake nuts, are used in airframe construction to fasten together various aircraft components, including the fuselage, wings and horizontal and vertical stabilizers. These fasteners also serve a similar function in the construction of aircraft jet and turboprop engines and related components. Recoil, acquired by the Company in August 1996, manufactures helically-wound wire thread inserts and thread repair kits, which are similar in design to certain Microdot products, but are sold to the automotive, electronic and other industrial markets, and their associated after-markets. The Company's K-Fast business unit produces and markets tools that are leased or sold to OEMs and are designed to allow operators to install the Company's and other manufacturers' fasteners rapidly and in restricted and hard-to-reach areas, while still maintaining precision torque control. The Company's goal is to sustain long-term, profitable growth by (i) enhancing its position as a leading supplier of specialty fasteners to the commercial aircraft and defense industries, (ii) expanding the array of fastener products and services it offers to current customers, (iii) continuing to focus on higher 3 value-added specialty products, (iv) leveraging its core capabilities in engineering, materials technology, manufacturing and business processes to develop additional business with both new and existing customers, (v) increasing its international marketing and penetration of foreign markets and (vi) pursuing selected opportunities for acquisitions and strategic alliances. The Company believes that it possesses a number of competitive strengths. First, the Company has established itself as a market leader in the engineering and manufacture of precision, self-locking internally threaded nuts and inserts and precision, threaded studs used in the commercial aircraft and defense industries. Products made by the Company have been "designed into" nearly all major airframes and aircraft engines manufactured in the U.S. and Europe. Second, cross-functional design and engineering teams and manufacturing expertise allow the Company to respond rapidly to customer requirements. Third, while many OEMs have significantly reduced the number of qualified suppliers of a particular part to a core group of only two or three, the Company continues to be a qualified supplier to virtually all major airframe and aircraft engine OEMs. Fourth, the Company is a "source delegation supplier" to many of its customers, including Boeing, GE and Pratt & Whitney. A source delegation supplier's products are designed, shipped and installed without the OEM undertaking further testing that it might otherwise perform before installation. Fifth, the Company has benefited from ongoing programs designed to improve operating efficiency and customer service, while maintaining or improving quality control. INDUSTRY OVERVIEW AND TRENDS. The Company's primary market for fasteners, the commercial aircraft industry, is experiencing a strong increase in demand from airlines ordering new and replacement aircraft. During the early 1990's, most airlines significantly decreased their aircraft purchase orders due to reduced profitability and excess capacity. Since that time, however, a rebounding world economy and increased passenger air traffic have returned many airlines to profitability, resulting in renewed demand for new and replacement aircraft. In 1996, for example, Boeing and Airbus, the two largest commercial aircraft manufacturers, reported increases in announced aircraft orders of 107% and 208% over 1995, respectively. Increased demand for new and replacement aircraft has led to an increase in the demand for fasteners and fastening systems, such as those manufactured by the Company. While there can be no assurance that demand for new and replacement aircraft will not be adversely affected by business cycle fluctuations or declines in airline profitability, the Company believes that long-term industry trends are favorable. For example, in its 1997 Current Market Outlook report, Boeing projects that during the period from 1996 to 2006, world air travel will grow by nearly 75%. Boeing also projects that during this period domestic and international airlines will lease or purchase over 7,000 new aircraft, thereby increasing the worldwide commercial fleet from approximately 11,500 aircraft at the end of 1996 to approximately 17,000 aircraft (net of retirements) at the end of 2006. In addition, as airlines seek to serve a growing number of air travelers with existing restrictions on arrival and departure slots, airport gates and ramp capacity, commercial aircraft OEMs are experiencing increased orders for heavier, widebodied aircraft of intermediate size. Widebodied aircraft generally require a greater number of fasteners than smaller aircraft. RECENT ACQUISITIONS. The Company acquired one business and one additional product line in 1996. In August 1996, the Company purchased the businesses of Recoil Pty Ltd, an Australian corporation (the acquired businesses are collectively referred to herein as "Recoil"). For a description of the Recoil business unit see "Business--Products and Services--Industrial Products and Services." In the period from the Company's purchase of Recoil to December 31, 1996, and for the twelve months ended on that date, Recoil's net sales were $3.9 million and $9.9 million, respectively. In February 1996, the Company purchased the KELOX product line from the Fastening Systems division of Emhart Fastening Teknologies. The KELOX product line complements various Microdot inserts. COMPANY ORGANIZATION. The Company was formed in 1993 for the purpose of acquiring substantially all of the assets of the Aerospace Fastening Systems Group ("AFSG") of Microdot Inc., a Delaware corporation that commenced a voluntary bankruptcy proceeding on June 10, 1993 ("Old Microdot"). The acquisition was structured as a management buyout financed substantially by the General Electric Capital 4 Corporation ("GECC" or the "Selling Stockholder"). See "The Company" for additional information regarding the AFSG acquisition. THE OFFERING Common Stock offered by the Company...... 1,800,000 shares Common Stock offered by the Selling Stockholder............................ 200,000 shares Total Common Stock offered........... 2,000,000 shares Common Stock and Common Stock equivalents to be outstanding after the Offering(1)............................ 8,600,000 shares Use of proceeds.......................... Proceeds to the Company will be used to repay certain indebtedness and for working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............ KTIC
- ------------------------ (1) Includes 5,206,000 shares of Series C Convertible Preferred Stock (the "Series C Preferred Stock") owned by the Selling Stockholder. The Series C Preferred Stock is convertible into shares of Common Stock at a one-to-one conversion rate, subject to adjustment in certain circumstances. See "Description of Capital Stock--Series C Preferred Stock." RISK FACTORS Prior to making an investment in the Common Stock offered hereby, prospective purchasers of the Common Stock should take into account the specific considerations set forth in "Risk Factors" as well as other information set forth in the Prospectus. 5 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION The summary consolidated financial and operating information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto, and other financial information included elsewhere in the Prospectus. The Company was incorporated in October 1993 and began operations on January 3, 1994 when it acquired substantially all of the assets of AFSG. See "The Company--Formation of the Company." The summary consolidated financial and operating information for the years ended December 31, 1994, 1995 and 1996 is derived from the Consolidated Financial Statements of the Company that have been audited by Arthur Andersen LLP, independent public accountants. The summary consolidated financial and operating information of AFSG for the years ended December 31, 1992 and 1993 is derived from the unaudited financial statements of AFSG, the Company's predecessor for financial reporting purposes, and, in the opinion of the Company's management, reflects all adjustments necessary to present the financial results of AFSG fairly and on a basis consistent with the Company's financial statements. The information for AFSG is presented to "Operating income" because the borrowing arrangements and tax position of Old Microdot are not meaningful to the Company. The unaudited summary consolidated financial and operating information for AFSG is provided for informational purposes only.
AFSG COMPANY -------------------- ------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996(1) --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA) INCOME STATEMENT DATA: Net sales....................................................... $ 52,510 $ 46,378 $ 55,117 $ 68,781 $ 99,023 Cost of sales................................................... 38,975 35,933 41,117 51,940 72,924 --------- --------- --------- --------- --------- Gross profit.................................................. 13,535 10,445 14,000 16,841 26,099 Selling, general and administrative expenses(2)................. 8,194 8,239 9,048 10,018 13,263 --------- --------- --------- --------- --------- Operating income.............................................. 5,341 2,206 4,952 6,823 12,836 Interest expense, net........................................... 2,304 2,935 4,011 --------- --------- --------- Income before income taxes.................................... 2,648 3,888 8,825 Provision for income taxes...................................... 1,129 1,577 3,530 --------- --------- --------- Net income.................................................... $ 1,519 $ 2,311 $ 5,295 --------- --------- --------- --------- --------- --------- Earnings per share(3)........................................... $ 0.22 $ 0.34 $ 0.78 --------- --------- --------- --------- --------- --------- Weighted average number of shares outstanding(3)................ 6,800 6,800 6,800 --------- --------- --------- --------- --------- --------- PRO FORMA INCOME STATEMENT DATA(4): Pro forma earnings per share, as adjusted....................... $ 0.78 --------- --------- Pro forma shares used in computing pro forma earnings per share, as adjusted................................................... 8,173
DECEMBER 31, 1996 ---------------------- AS ACTUAL ADJUSTED(5) --------- ----------- (IN THOUSANDS) BALANCE SHEET DATA (AT PERIOD END): Working capital......................................................................... $ 30,188 $ 40,942 Total assets............................................................................ 73,689 83,697 Total long-term debt, excluding capital leases.......................................... 46,633 33,789 Stockholders' equity.................................................................... 10,626 34,224
- ------------------------ (1) The Company acquired one business and one additional product line in 1996. In August 1996, the Company purchased its Recoil business unit for approximately $12.2 million and the assumption of certain liabilities. See "Business--Products and Services--Industrial Products and Services." The 6 Recoil acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results of Recoil have been included in the Company's results of operations since mid-August 1996. In February 1996, the Company purchased the KELOX product line from the Fastening Systems division of Emhart Fastening Teknologies for $441,000 in cash. (2) Selling, general and administrative expenses of AFSG represent direct expenses and do not include an allocation of corporate overhead or expenses related to certain functions performed on a corporate-wide basis by Old Microdot, such as risk management services, tax reporting and similar corporate administrative functions. (3) Earnings per share are computed based on the weighted average number of shares of Common Stock and Common Stock equivalents outstanding. The outstanding shares of Series C Preferred Stock are included as Common Stock equivalents on an "as-if-converted" basis. See "Description of Capital Stock--Series C Preferred Stock." (4) Pro forma income statement data reflect the historical results for the year ended December 31, 1996, adjusted to reflect (i) the sale of 1,373,000 shares of Common Stock offered by the Company hereby at an initial public offering price of $14.50 per share and (ii) the application of approximately $18 million of the net proceeds to the reduction of certain indebtedness of the Company as if such debt reduction occurred at January 1, 1996. The pro forma results do not reflect 427,000 shares of Common Stock attributable to estimated proceeds in excess of the amount to be used to repay debt owed to the Selling Stockholder. (5) As adjusted to reflect (i) the sale of 1,800,000 shares of Common Stock offered by the Company hereby at an initial public offering price of $14.50 per share and (ii) the application of approximately $13.6 million of the net proceeds to the reduction of certain indebtedness of the Company as if such debt reduction occurred at December 31, 1996. The Company anticipates that as of the date of the Offering, it will have increased its borrowings under its revolving line-of-credit to approximately $4.9 million. Accordingly, the total amount of the net proceeds that will be applied to the reduction of certain indebtedness of the Company will approximate $18 million. See "Use of Proceeds." 7 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION INCLUDED ELSEWHERE IN THE PROSPECTUS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. CERTAIN STATEMENTS IN THE PROSPECTUS ARE FORWARD-LOOKING IN NATURE AND, ACCORDINGLY, WHETHER THEY PROVE TO BE ACCURATE IS SUBJECT TO MANY RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS THAT THE COMPANY ACHIEVES MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THE PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES, INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND THOSE CONTAINED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE PROSPECTUS. COMMERCIAL AIRCRAFT INDUSTRY CYCLICALITY The primary market for the Company's products is the commercial aircraft industry. Historically, demand from this industry has been subject to cyclical fluctuations, with orders from original equipment manufacturers ("OEMs") and other customers for the Company's products typically increasing or decreasing in advance of corresponding changes in the deliveries of new aircraft. The demand for new aircraft historically has been closely related to the financial performance of the airlines, which in turn has been closely related to general economic conditions and changes in business cycles. In the early 1990s, decreases in air passenger traffic, coupled with deliveries of previously purchased aircraft, created excess capacity for the airlines. Accordingly, airlines and aircraft leasing companies deferred or cancelled their purchases of new aircraft. These deferrals and cancellations adversely affected the volume and price of orders placed for products used to manufacture commercial aircraft and aircraft engine components, including the fasteners and fastening systems manufactured by the Company. Although (i) the U.S. airline industry reported profits in 1994, 1995 and 1996, (ii) excess capacity has been reduced and (iii) orders for new aircraft to be produced by major aircraft manufacturers have increased, there can be no assurance that this improved operating performance will continue or that deliveries of commercial aircraft will not decline in the future. Changes in the commercial aircraft market resulting in a reduction in the rate of future aircraft deliveries, including cancellations or deferrals of scheduled deliveries, could have a material adverse effect on the Company. CUSTOMER CONCENTRATION AND INDUSTRY CONSOLIDATION A significant portion of the Company's business is dependent upon a limited number of large manufacturers of commercial aircraft and defense products. Direct sales to Boeing Co. ("Boeing"), General Electric Company ("GE") and the Pratt & Whitney Aircraft business of United Technologies Corporation ("Pratt & Whitney"), for example, accounted for approximately 18%, 12% and 8% of the Company's 1996 net sales, respectively. In addition, the Company believes that a significant portion of the products that it sells to independent distributors and other customers is ultimately resold to these three OEMs, as well as other major commercial aircraft and defense product manufacturers. The commercial aircraft and defense industries are also currently undergoing a process of consolidation, as evidenced most recently by the pending merger of Boeing and McDonnell Douglas Corporation ("McDonnell Douglas"). Such continuing consolidation may lead to further concentration in the number of airframe and aircraft engine OEMs that purchase the Company's products. The loss of one or more significant customers would have a material adverse effect on the Company. In addition, because of the relatively small number of customers for certain of the Company's products, such customers may be able to influence the Company's prices and other terms of sale. LOSS OF QUALIFIED SUPPLIER STATUS The Company works directly with its customers to design and manufacture products based on the customers' own specifications. See "Business--Engineering and Product Development." Once a fastener has been "designed into" a particular airframe or engine component, the OEM will generally designate the Company as a qualified supplier and rely on the Company to provide the fastener for the entire production cycle of the airframe or engine, which could last a decade or more. From time to time, other suppliers of 8 fasteners to the aerospace industry have lost their qualified supplier status with one or more OEMs by reason of, among other things, problems with product quality, manufacturing processes or documentation. Although the Company has no reason to believe that it will lose its qualified supplier status with respect to any product or customer, there can be no assurance that such an event will not occur. If a significant customer were to terminate the Company's qualified supplier status with respect to one or more parts, it could have a material adverse effect on the Company. CONCENTRATION OF STOCK OWNERSHIP Upon completion of the Offering, General Electric Capital Corporation (together with its affiliates, "GECC" or the "Selling Stockholder") will beneficially own 5,206,000 shares of the Company's Series C Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), which will constitute all issued and outstanding Series C Preferred Stock at that time. As long as the outstanding Series C Preferred Stock represents 25% or more of the Company's Fully Diluted Shares (as defined below), the Series C Preferred Stock is entitled to vote as a separate class on certain matters affecting the Company, including, among other things, (i) the creation of any other class or series of preferred stock, (ii) any issuance of authorized shares of any class of capital stock, (iii) any merger or consolidation resulting in shares of Common Stock or Series C Preferred Stock being converted into other securities or the right to receive cash or other property and (iv) any amendments to the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and Amended and Restated By-laws (the "By-laws") that adversely affect the holders of the Series C Preferred Stock. See "Description of Capital Stock--Series C Preferred Stock." "Fully Diluted Shares" means, at any given time, the sum of (i) the outstanding Common Stock and (ii) the shares of Common Stock issuable upon conversion or exercise of all outstanding convertible securities, options and warrants convertible into, or exercisable for, Common Stock at that time or within sixty days thereafter. In addition, as long as the outstanding Series C Preferred Stock represents 40% or more of the Fully Diluted Shares, the holder thereof will have the right, pursuant to a Stockholders Agreement, dated May 6, 1997, among the Company and its existing stockholders (the "New Stockholders Agreement"), to designate two individuals that the Company will nominate for election to the Board of Directors each year. As long as the Series C Preferred Stock represents 25% or more (but less than 40%) of the Fully Diluted Shares, the holder thereof will have the right to designate one individual that the Company will nominate for election to the Board of Directors each year. The Selling Stockholder, in its sole discretion and at any time, may convert each share of Series C Preferred Stock into one share of Common Stock, subject to certain adjustments. In addition, upon any transfer of Series C Preferred Stock by the Selling Stockholder to a non-affiliate, the Series C Preferred Stock will automatically convert into Common Stock at a one-to-one conversion ratio, subject to certain adjustments. If all of the Series C Preferred Stock currently outstanding were converted into Common Stock, the Selling Stockholder would beneficially own approximately 60.5% of the Common Stock upon consummation of the Offering, assuming the Underwriters' over-allotment option is not exercised, or approximately 58.5% assuming full exercise of the Underwriters' over-allotment option. As a result of (i) the special voting rights granted to the Series C Preferred Stock, (ii) the rights granted to the Selling Stockholder under the New Stockholders Agreement and (iii) the possibility that the Selling Stockholder could convert its Series C Preferred Stock into Common Stock at any time, the Selling Stockholder may be able to exercise substantial influence over many matters affecting the Company, including the composition of the Board of Directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of either causing or delaying or preventing a change in control of the Company. See "Description of Capital Stock--Certain Anti-Takeover Effects." DEPENDENCE ON KEY PERSONNEL The success of the Company depends to a significant degree on the efforts of the Company's senior management. The Company's operations may be adversely affected if one or more members of senior management ceases to be active in the Company. The Company currently has employment agreements 9 with Jordan A. Law, Chief Executive Officer; David A. Werner, Executive Vice President; Robert L. Beers, Senior Vice President, Marketing and Business Development; LeRoy A. Dack, Division President, Kaynar; Joseph M. Varholick, Division President, Microdot; Kenneth D. Jones, Group Chief Executive Officer, Recoil; and Imre Berecz, Vice President, Product Research and Development, and Managing Director, K.T.I. Femipari KFT. See "Management--Employment Contracts and Termination of Employment and Change-In-Control Arrangements." AVAILABILITY AND COST OF RAW MATERIALS Commercial deposits of certain metals, such as titanium and nickel, that are required for the manufacture of several of the Company's products are only found in certain parts of the world. The availability and prices of these metals may be influenced by private or governmental cartels, changes in world politics, unstable governments in exporting nations or inflation. Similarly, supplies of steel and other, less exotic metals used by the Company may also be subject to variation in availability and pricing. Shortages of, and price increases for, certain raw materials used by the Company have occurred in the past and may occur in the future. Although to date the Company has been able to obtain such supplies of all necessary raw materials, there can be no assurance that the Company will always be able to obtain adequate supplies at reasonable prices. Future shortages or price fluctuations in raw materials could have a material adverse effect on the Company. If, for example, demand for titanium products in other industries continues to increase, it is possible that supplies of titanium could become limited or that prices could increase substantially, or both. As a result, the Company's material costs could rise accordingly. If the Company is unable to recover its increased costs through product price increases, it could have a material adverse effect on the Company. See "Business--Manufacturing and Raw Materials." COMPETITION Numerous companies manufacture fasteners, fastening systems and related components that compete with the Company's products. Certain of these competitors have greater financial resources than the Company. There can be no assurance that competitive pressures in any of the markets to which the Company supplies products will not have a material adverse effect on the Company. See "Business-- Competition." POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES The Company's facilities and manufacturing processes are engaged in activities regulated by extensive federal, state and local environmental and worker safety and health laws and regulations, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination caused by the release of hazardous substances. The Company uses significant quantities of substances that are considered hazardous or toxic under such laws and regulations. The Company's operations thus pose a risk of accidental releases of, and worker exposure to, hazardous or toxic substances. The Company also faces risks that governmental environmental requirements may become more stringent in the future and that the Company may be subject to legal proceedings brought by private parties or governmental agencies with respect to environmental matters. For example, the degreasing operations at the Company's manufacturing facilities currently use perchloroethylene, a toxic solvent that has been subject to increasing regulation. Although the Company believes that it is in material compliance with all applicable environmental laws and regulations, including those relating to perchloroethylene, there can be no assurance that the Company will remain in compliance or that the failure to comply with such laws and regulations will not result in liabilities that are material to the Company. The Company is currently seeking to have a maximum usage restriction removed from an environmental permit for its cadmium-plating line. The Company was previously granted a variance to exceed this restriction. There can be no assurance, however, that this restriction will be removed or that another 10 variance from the restriction will be granted. If the restriction is not removed and another variance is not granted, it could have a material adverse effect on the Company. See "Business--Environmental Matters." BENEFITS TO SELLING STOCKHOLDER The existing stockholders of the Company will receive certain benefits from the sale of the Common Stock offered hereby. The Offering will establish a public market for the Common Stock and provide increased liquidity to the existing stockholders for the shares of Common Stock and Series C Preferred Stock (which is convertible into Common Stock) that they will own after the Offering, subject to certain limitations. See "Shares Eligible For Future Sale." The Company intends to use approximately $18 million of the net proceeds from the Offering to repay certain indebtedness owed to the Selling Stockholder. See "Use of Proceeds." The Selling Stockholder will sell 200,000 shares of Common Stock in the Offering and will receive $2.7 million in net proceeds, based upon an initial public offering price of $14.50 per share, after deducting the Selling Stockholder's proportionate share of the estimated underwriting discounts and commissions. REDUCED GOVERNMENT PURCHASES; GOVERNMENT REGULATION The Company is a direct supplier and subcontractor to several manufacturers of airframes and engines used by the defense industry. Direct sales to the U.S. government constituted approximately 6% of the Company's 1996 net sales. Many of the Company's other customers are also government contractors and subcontractors who may use the Company's fasteners for military applications. As a result, future reductions in defense budgets or military aircraft procurement could adversely affect the Company. See "Business--Industry Overview and Trends--Defense Market." In particular, the government could seek to terminate any of its contracts with the Company or with any of the airframe and engine manufacturers to which the Company supplies fasteners. Direct purchase orders from the government are typically for spare or repair needs. In such cases, funding is generally available at the time the purchase order is placed, and the products are delivered on an "as soon as possible" time frame. In addition, as a supplier and subcontractor to the U.S. government, the Company is directly and indirectly subject to various federal rules, regulations and orders applicable to government contracts. Although the Company believes that is in material compliance with all such laws, any future violation could result in civil liability, cancellation or suspension of existing contracts or ineligibility for future contracts or subcontracts funded in whole or in part with federal funds. A reduction in governmental purchases of the Company's products, or a violation by the Company of any laws applicable to government contracts, could have a material adverse effect on the Company. PRODUCT LIABILITY; CLAIMS EXPOSURE The Company's products may expose it to liabilities resulting from the failure of an airframe or aircraft engine manufactured with fasteners supplied by the Company. While the Company maintains liability insurance to protect it from such liabilities, and while no material claims have ever been made against the Company, no assurance can be given that claims will not arise in the future or that such insurance coverage will be adequate. Additionally, there can be no assurance that insurance coverage can be maintained in the future at an acceptable cost. Any such liability not covered by insurance, or for which third party indemnification is not available, could have a material adverse effect on the Company. NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the Offering. The initial public offering price will be determined by negotiation between the Company and the Representatives (as defined in "Underwriting") based upon several factors. The market price of the Common Stock may be volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the 11 Company or its competitors, changes in financial estimates by securities analysts, or other events or factors beyond the Company's control, including events affecting the commercial aircraft and defense industries generally. These broad market fluctuations may adversely affect the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following the Offering could adversely affect the market price for the Common Stock. The Company, its executive officers and directors and the Selling Stockholder, who will beneficially own 6,600,000 shares of Common Stock in the aggregate following the Offering (including 5,206,000 shares receivable upon conversion of all outstanding Series C Preferred Stock), have agreed not to offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock or any other capital stock of the Company, for a period of 180 days, after the date of the Prospectus without prior written consent of Lehman Brothers Inc. Upon the expiration of this period, however, the 6,600,000 shares of Common Stock (including 5,206,000 shares receivable upon conversion of all outstanding Series C Preferred Stock) held by the current holders may be eligible for sale in the public market, subject to compliance with the volume, holding period and other applicable limitations of Rule 144 ("Rule 144") promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or pursuant to a registration statement meeting the requirements of the Securities Act. Also upon the expiration of this period, the Selling Stockholder will have certain rights, pursuant to the New Stockholders Agreement, to require the Company to register the shares of Common Stock into which the Series C Preferred Stock may be converted. See "Description of Capital Stock -- The New Stockholders Agreement." In addition, the shares of Common Stock sold in the Offering will be freely tradeable without restriction under the Securities Act, except for any shares purchased by an "affiliate" of the Company (as that term is defined under the rules and regulations of the Securities Act), which shares will be subject to the resale limitations of Rule 144. See "Shares Eligible for Future Sale" and "Description of Capital Stock." DILUTION At an initial public offering price of $14.50 per share, investors participating in the Offering will incur an immediate dilution of $11.43 per share in the net tangible book value of the Common Stock, determined as of December 31, 1996. See "Dilution." 12 THE COMPANY The Company is a leading manufacturer of specialty fasteners, fastening systems and related components primarily used by OEMs and their subcontractors in the production of commercial aircraft and defense products. In addition, the Company also manufactures other specialty fasteners and related products for sale in the automotive, electronic and other industrial markets, and their associated after-markets. The Company supplies products to virtually all major airframe and aircraft engine OEMs, including Boeing, GE, Pratt & Whitney, Airbus Industries ("Airbus"), Lockheed Martin Corporation ("Lockheed Martin"), McDonnell Douglas and Rolls Royce PLC ("Rolls Royce"), as well as to a global network of distributors. The Company offers a broad line of fasteners, fastening systems and related components. The Company's Kaynar and Microdot business units manufacture precision, self-locking, internally threaded nuts and inserts and precision, threaded studs. Kaynar and Microdot fasteners are engineered for a variety of harsh, demanding environments and often require high tensile strength, toughness, durability, corrosion resistance and resistance to metal fatigue and creep. Kaynar's fasteners, which include wrenchable nuts, anchor nuts, gang channels, shank nuts, barrel nuts, clinch nuts and stake nuts, are used in airframe construction to fasten together various aircraft components, including the fuselage, wings and horizontal and vertical stabilizers. These fasteners also serve a similar function in the construction of aircraft jet and turboprop engines and related components. Recoil, acquired by the Company in August 1996, manufactures helically-wound wire thread inserts and thread repair kits, which are similar in design to certain Microdot products, but are sold to the automotive, electronic and other industrial markets, and their associated after-markets. The Company's K-Fast business unit produces and markets tools that are leased or sold to OEMs and are designed to allow operators to install the Company's and other manufacturers' fasteners rapidly and in restricted and hard-to-reach areas, while still maintaining precision torque control. The principal executive offices of the Company are located at 500 N. State College Blvd., Orange, California 92868, and its telephone number is (714) 712-4900. FORMATION OF THE COMPANY. As described below in "The Reorganization," Kaynar Technologies Inc. ("Operating Company") is merging with and into the Company immediately prior to the Offering. Operating Company, which was originally called MKQ Acquisition Corp., was formed as a Delaware corporation on October 22, 1993, for the purpose of acquiring substantially all of the assets of the Aerospace Fastening Systems Group ("AFSG") of Microdot Inc., a Delaware corporation that commenced a voluntary bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code on June 10, 1993 ("Old Microdot"). The Company, which was known as Kaynar Holdings Inc. prior to the Reorganization, was also incorporated in Delaware on October 22, 1993 to serve as the parent company of Operating Company. GECC was a creditor of Old Microdot and provided the Company and Operating Company with financing for the AFSG asset acquisition, which was completed on January 3, 1994. As consideration for the AFSG assets, GECC claims against Old Microdot in the amount of $25.4 million were cancelled, and Operating Company assumed certain of Old Microdot's liabilities. The Company and Operating Company also paid approximately $1.2 million in cash to Old Microdot's British affiliate for selected assets. As part of the acquisition financing, GECC purchased all of the issued and outstanding shares of Series A Convertible Preferred Stock, par value $.01 per share, of the Company ("Series A Preferred Stock") and all of the issued and outstanding shares of Series B Preferred Stock, par value $.01 per share, of the Company ("Series B Preferred Stock"). Members of the Company's management purchased the remaining equity interests in the Company. See "Principal Stockholders and Selling Stockholder." The Company intends to use the proceeds of the Offering to discharge certain debt owed to GECC. See "Use of Proceeds." THE REORGANIZATION In order to facilitate the Offering, immediately prior to the effectiveness of the Offering, Operating Company is merging with and into the Company, with the Company as the surviving corporation (the "Reorganization"). Immediately following the Reorganization, the surviving corporation will be renamed 13 "Kaynar Technologies Inc." Unless otherwise indicated, the term "Company" as used herein shall mean the corporation surviving the merger, together with each of its consolidated subsidiaries. In connection with the Reorganization, (i) each outstanding share of Common Stock, par value $.01 per share, of Operating Company will be cancelled and Operating Company will cease to exist, (ii) each outstanding share of Common Stock, par value $.01 per share, of the Company (the "Common Stock") will be exchanged for 68 shares of Common Stock, (iii) each outstanding share of Series A Preferred Stock will be exchanged for 9.953 shares of Common Stock and 58.047 shares of Series C Preferred Stock and (iv) each outstanding share of Series B Preferred Stock will be exchanged for 68 shares of Series C Preferred Stock. For further descriptions of the Common Stock and Series C Preferred Stock, see "Description of Capital Stock." Subsequent to the Reorganization and immediately prior to the Offering, GECC will own 200,000 shares of Common Stock and all 5,206,000 issued and outstanding shares of Series C Preferred Stock, which is convertible into Common Stock at a one-to-one conversion rate, subject to adjustment in certain circumstances. GECC will sell all of its 200,000 shares of Common Stock in the Offering. For the purposes of the Prospectus, all discussion of the Company and its ownership, business and operations and the number of shares of Common Stock outstanding, except as otherwise indicated, are discussed on a pro forma basis, giving effect to the Offering and the transactions described above. USE OF PROCEEDS At an initial public offering price of $14.50 per share, the net proceeds to the Company from the sale of the Common Stock offered hereby will be $23.6 million ($27.6 million if the Underwriters' over-allotment option is exercised in full), after deducting estimated underwriting discounts and commissions and expenses. The Company will not receive any proceeds from the sale of shares by the Selling Stockholder. The Company intends to use approximately $7.0 million, $6.0 million and $4.9 million of the net proceeds from the Offering to discharge its obligations to GECC under fixed rate loans, variable rate loans and a revolving credit facility, respectively. At December 31, 1996, this indebtedness bore interest at a weighted average interest rate of 10.4%. Amounts owed under the fixed rate and variable rate loans are due and payable on January 3, 1999, which is the same date that the revolving credit facility expires. Amounts repaid under the revolving credit facility may be reborrowed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Certain Transactions." The remainder of the net proceeds will be used for general corporate purposes, including capital expenditures and working capital. A portion of the net proceeds may also be used to acquire other companies or divisions of other companies. The Company, however, currently has no agreements, commitments or understandings with respect to any acquisitions, nor can there be any assurance that the Company will make any such acquisition in the future. Pending any of these uses, the Company intends to invest the net proceeds of the Offering in short-term, investment grade, interest-bearing securities, certificates of deposit or direct or guaranteed obligations of the United States. DIVIDEND POLICY The Company currently intends to retain earnings, if any, to support the development of its business and does not anticipate paying cash dividends on the Common Stock for the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's earnings, financial condition, operating results and current and anticipated cash needs, as well as such other conditions as the Board of Directors may deem relevant. Furthermore, the payment of dividends will be subject to the terms of the Company's outstanding financing arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 14 CAPITALIZATION The following table sets forth, as of December 31, 1996, the capitalization of the Company (i) giving effect to the Reorganization as if it had occurred on that date and (ii) as adjusted to reflect the Offering and use of proceeds therefrom. The table should be read in conjunction with "Selected Consolidated Financial and Operating Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in the Prospectus.
DECEMBER 31, 1996 ------------------------- ACTUAL AS ADJUSTED(1) --------- -------------- (IN THOUSANDS) Revolving line-of-credit............................................................... $ 746 $ -- Long-term debt, including current portion: Variable rate loans.................................................................. 38,225 32,225 Fixed rate loans..................................................................... 8,408 1,564 Capital lease obligations............................................................ 465 465 --------- ------- Total long-term debt............................................................... 47,098 34,254 --------- ------- Stockholders' equity: Series C Convertible Preferred Stock, $.01 par value per share; 10,000,000 shares authorized, and 5,206,000 shares issued and outstanding actual and as adjusted..... 52 52 Common Stock, $.01 par value per share; 20,000,000 shares authorized, 1,594,000 shares issued and outstanding actual and 3,394,000 shares issued and outstanding as adjusted........................................................................... 16 34 Additional paid-in capital........................................................... 1,432 25,012 Retained earnings.................................................................... 8,838 8,838 Currency translation adjustment...................................................... 288 288 --------- ------- Total stockholders' equity......................................................... 10,626 34,224 --------- ------- Total capitalization............................................................. $ 57,724 $ 68,478 --------- ------- --------- -------
- ------------------------ (1) As adjusted to reflect (i) the sale of 1,800,000 shares of Common Stock offered by the Company hereby at an initial public offering price of $14.50 per share and (ii) the application of approximately $13.6 million of the net proceeds to the reduction of certain indebtedness of the Company as if such debt reduction occurred at December 31, 1996. The Company anticipates that as of the date of the Offering, it will have increased its borrowings under its revolving line-of-credit to approximately $4.9 million. Accordingly, the total amount of the net proceeds that will be applied to the reduction of certain indebtedness of the Company will approximate $18 million. See "Use of Proceeds." DILUTION The net tangible book value of the Company at December 31, 1996 was approximately $2.8 million, or $0.41 per share of Common Stock (after giving effect to the Reorganization), assuming the conversion by the Selling Stockholder of all shares of Series C Preferred Stock into shares of Common Stock as of such date. After giving effect to the Offering and the application of the estimated net proceeds from the Offering (with an initial public offering price of $14.50 per share), the Company's net tangible book value at December 31, 1996 would have been $26.4 million, or $3.07 per share. "Net tangible book value per share" is equal to the Company's total tangible assets less its total liabilities, divided by the total number of shares of Common Stock and Common Stock equivalents outstanding. This represents an immediate increase in net tangible book value of $2.66 per share to existing stockholders and an immediate dilution in 15 net tangible book value of $11.43 per share to new investors purchasing shares of Common Stock in the Offering. The following table illustrates this per share dilution: Initial public offering price per share of Common Stock...... $ 14.50 Net tangible book value per share at December 31, 1996... $ 0.41 Increase in net tangible book value per share attributable to new investors.......................... $ 2.66 --------- Net tangible book value per share after the Offering......... $ 3.07 --------- Dilution per share to new investors.......................... $ 11.43 ---------
The following table summarizes (assuming the conversion of all shares of Series C Preferred Stock into shares of Common Stock), as of December 31, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price paid per share by the existing stockholders and by new investors (at an initial public offering price of $14.50 per share and before deducting estimated underwriting discounts and commissions and expenses payable by the Company):
SHARES PURCHASED(1) TOTAL CONSIDERATION(1) ----------------------- -------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ----------- ------------- ----------- ------------- Existing stockholders............................... 6,800,000(2) 79.1% $ 1,500,000 5.4% $ 0.22 New investors....................................... 1,800,000 20.9 26,100,000 94.6 14.50 ---------- ----- ------------- ----- Total........................................... 8,600,000 100.0% $ 27,600,000 100.0% ---------- ----- ------------- ----- ---------- ----- ------------- -----
- ------------------------ (1) Assuming the Underwriters' over-allotment option is exercised in full, sales of Common Stock by the Company in the Offering will reduce the number of shares of Common Stock and Common Stock equivalents held by existing stockholders to 76.4% of the total shares of Common Stock and Common Stock equivalents to be outstanding after the Offering, and will increase the number of shares held by new investors to 23.6% of the total number of shares of Common Stock and Common Stock equivalents to be outstanding after the Offering. See "Principal Stockholders and Selling Stockholder." (2) Includes 5,206,000 shares of Series C Preferred Stock, which are convertible into shares of Common Stock at a one-to-one conversion rate, subject to adjustment in certain circumstances. See "Description of Capital Stock--Series C Preferred Stock." 16 SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION The selected consolidated financial and operating information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto, and other financial information included elsewhere in the Prospectus. The Company was incorporated in October 1993 and began operations on January 3, 1994 when it acquired substantially all of the assets of AFSG. See "The Company--Formation of the Company." The selected consolidated financial and operating information for the years ended December 31, 1994, 1995 and 1996 is derived from the Consolidated Financial Statements of the Company that have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial and operating information of AFSG for the years ended December 31, 1992 and 1993 is derived from the unaudited financial statements of AFSG, the Company's predecessor for financial reporting purposes, and, in the opinion of the Company's management, reflects all adjustments necessary to present the financial results of AFSG fairly and on a basis consistent with the Company's financial statements. The information for AFSG is presented to "Operating income" because the borrowing arrangements and the tax position of Old Microdot are not meaningful to the Company. The unaudited selected consolidated financial and operating information for AFSG is provided for informational purposes only.
AFSG COMPANY -------------------- ------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996(1) --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA) INCOME STATEMENT DATA: Net sales................................................ $ 52,510 $ 46,378 $ 55,117 $ 68,781 $ 99,023 Cost of sales............................................ 38,975 35,933 41,117 51,940 72,924 --------- --------- --------- --------- --------- Gross profit........................................... 13,535 10,445 14,000 16,841 26,099 Selling, general and administrative expenses (2)......... 8,194 8,239 9,048 10,018 13,263 --------- --------- --------- --------- --------- Operating income....................................... 5,341 2,206 4,952 6,823 12,836 Interest expense, net.................................... 2,304 2,935 4,011 --------- --------- --------- Income before income taxes............................. 2,648 3,888 8,825 Provision for income taxes............................... 1,129 1,577 3,530 --------- --------- --------- Net income............................................. $ 1,519 $ 2,311 $ 5,295 --------- --------- --------- --------- --------- --------- Earnings per share (3)................................... $ 0.22 $ 0.34 $ 0.78 --------- --------- --------- --------- --------- --------- Weighted average number of shares outstanding (3)........................................ 6,800 6,800 6,800 PRO FORMA INCOME STATEMENT DATA (4): Pro forma earnings per share, as adjusted................ $ 0.78 --------- --------- Pro forma shares used in computing pro forma earnings per share, as adjusted..................................... 8,173
17
DECEMBER 31, 1996 DECEMBER 31, ---------------------- -------------------- AS 1994 1995 ACTUAL ADJUSTED(5) --------- --------- --------- ----------- (IN THOUSANDS) BALANCE SHEET DATA (AT PERIOD END): Working capital................................................... $ 15,563 $ 18,991 $ 30,188 $ 40,942 Total assets...................................................... 35,051 43,336 73,689 83,697 Total long-term debt, excluding capital leases.................... 23,176 25,148 46,633 33,789 Stockholders' equity.............................................. 2,944 5,157 10,626 34,224
- ------------------------ (1) The Company acquired one business and one additional product line in 1996. In August 1996, the Company purchased its Recoil business unit for approximately $12.2 million and the assumption of certain liabilities. See "Business--Products and Services--Industrial Products and Services." The Recoil acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results of Recoil have been included in the Company's results of operations since mid-August 1996. In February 1996, the Company purchased the KELOX product line from the Fastening Systems division of Emhart Fastening Teknologies for $441,000 in cash. (2) Selling, general and administrative expenses of AFSG represent direct expenses and do not include an allocation of corporate overhead or expenses related to certain functions performed on a corporate-wide basis by Old Microdot, such as risk management services, tax reporting and similar corporate administrative functions. (3) Earnings per share are computed based on the weighted average number of shares of Common Stock and Common Stock equivalents outstanding. The outstanding shares of Series C Preferred Stock are included as Common Stock equivalents on an "as-if-converted" basis. See "Description of Capital Stock--Series C Preferred Stock." (4) Pro forma income statement data reflect the historical results for the year ended December 31, 1996, adjusted to reflect (i) the sale of 1,373,000 shares of Common Stock offered by the Company hereby at an initial public offering price of $14.50 per share and (ii) the application of approximately $18 million of the net proceeds to the reduction of certain indebtedness of the Company as if such debt reduction occurred at January 1, 1996. The pro forma results do not reflect 427,000 shares of Common Stock attributable to estimated proceeds in excess of the amount to be used to repay debt owed to the Selling Stockholder. (5) As adjusted to reflect (i) the sale of 1,800,000 shares of Common Stock offered by the Company hereby at an initial public offering price of $14.50 per share and (ii) the application of approximately $13.6 million of the net proceeds to the reduction of certain indebtedness of the Company as if such debt reduction occurred at December 31, 1996. The Company anticipates that as of the date of the Offering, it will have increased its borrowings under its revolving line-of-credit to approximately $4.9 million. Accordingly, the total amount of the net proceeds that will be applied to the reduction of certain indebtedness of the Company will approximate $18 million. See "Use of Proceeds." 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading manufacturer of specialty fasteners, fastening systems and related components primarily used by OEMs and their subcontractors in the production of commercial aircraft and defense products. In addition, the Company also manufactures other specialty fasteners and related products for sale in the automotive, electronic and other industrial markets, and their associated after-markets. The Company designs and manufactures a substantial majority of its fasteners to its customers' specifications and in a wide range of specialty metals, alloys and composites. The Company supplies products to virtually all major airframe and aircraft engine OEMs, including Boeing, GE, Pratt & Whitney, Airbus, Lockheed Martin, McDonnell Douglas and Rolls Royce, as well as to a global network of distributors. In 1996, approximately 65% of the Company's net sales were made directly to OEMs and subcontractors. Direct sales to Boeing, GE and Pratt & Whitney, the Company's three largest OEM customers, accounted for approximately 18%, 12% and 8% of the Company's 1996 net sales, respectively. The remaining 35% of the Company's 1996 net sales were made to a global network of thirty-five independent distributors, who sell the Company's products to OEMs, subcontractors and other customers. Often, the OEMs will determine whether the Company sells a product directly to the OEM or through an independent distributor. See "Business--Sales and Marketing." The Company generates a portion of its net sales from international customers. The Company's direct net sales to foreign customers represented approximately 9%, 10% and 14% of net sales for 1994, 1995 and 1996, respectively. Although most of the Company's international sales are invoiced in United States dollars, a portion is invoiced in foreign currencies. The Company does not actively manage its foreign currency exposure and foreign currency fluctuations may result in quarterly variations in the Company's net sales. The Company has historically mitigated the impact of exchange rate fluctuations by adjusting the prices of its products. There can be no assurance, however, that the Company will be able to mitigate future exchange rate fluctuations through the adjustment of product prices. The Company acquired one business and one additional product line in 1996. In August 1996, the Company purchased its Recoil business for approximately $12.2 million and the assumption of certain liabilities. See "Business--Products and Services--Industrial Products and Services." The Recoil acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results of Recoil have been included in the Company's results of operations since mid-August 1996. In February 1996, the Company purchased the KELOX product line from the Fastening Systems division of Emhart Fastening Teknologies for $441,000 in cash. The KELOX product line complements various Microdot inserts. In the last three years, the Company's financial objectives have focused on increasing sales and profitability. The Company's financial results over this period reflect a high degree of leverage resulting from debt incurred to finance the AFSG acquisition in January 1994 and to finance internal growth and subsequent acquisitions. Using the net proceeds of the Offering, the Company intends to reduce its leverage by retiring approximately $18 million of debt, thereby reducing annual interest expense by approximately $1.8 million. See "Use of Proceeds." 19 RESULTS OF OPERATIONS The following table is derived from the Company's Consolidated Statements of Income for the periods indicated and presents the results of operations as a percentage of net sales:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Net sales............................................................ 100.0% 100.0% 100.0% Cost of sales........................................................ 74.6 75.5 73.6 --------- --------- --------- Gross profit....................................................... 25.4 24.5 26.4 Selling, general and administrative expenses......................... 16.4 14.6 13.4 --------- --------- --------- Operating income................................................... 9.0 9.9 13.0 Interest expense, net................................................ 4.2 4.2 4.1 Provision for income taxes........................................... 2.0 2.3 3.6 --------- --------- --------- Net income......................................................... 2.8% 3.4% 5.3% --------- --------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales increased 43.9%, or $30.2 million, to $99.0 million in 1996 from $68.8 million in 1995. 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 expansion of existing product lines, the development of variations of existing products and the introduction of new products. The Company's acquisition of Recoil and its purchase of the KELOX product line accounted for approximately $5 million of the increase in net sales. GROSS PROFIT. Gross profit increased 55.4% to $26.1 million or 26.4% of net sales in 1996 from $16.8 million or 24.5% of net sales in 1995. This improvement in gross profit margin was primarily due to the increase in sales volume, which resulted in a greater absorption of fixed costs. Capital expenditures during the past three years for more efficient production equipment also contributed to the improvement in gross profit margin. In addition, gross profit margin in 1996 benefited from increased sales of Recoil and Microdot inserts and studs, which are generally higher margin products, and improved materials utilization. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 33.0% to $13.3 million in 1996 from $10.0 million in 1995. As a percentage of net sales, however, selling, general and administrative expenses decreased to 13.4% in 1996 from 14.6% in 1995. This decrease was primarily attributable to increased sales volumes. The $3.3 million increase in the absolute dollar amount of such expenses, however, was attributable primarily to (i) additional employee costs needed to support the increased sales volume and (ii) the selling, general and administrative expenses of Recoil, which, due to the nature of its business, tends to have higher selling, general and administrative expenses as a percentage of net sales than the Company's Kaynar and Microdot business units. INTEREST EXPENSE. The Company's average outstanding borrowings increased to $38.2 million in 1996 from $28.3 million in 1995. This increase related primarily to (i) increased working capital requirements to support the Company's growth, (ii) capital expenditures and (iii) the Recoil acquisition. The weighted average interest rate on these borrowings in 1996 was 10.2% (compared to 10.3% in 1995), resulting in a 37.9% increase in net interest expense, from $2.9 million in 1995 to $4.0 million in 1996. NET INCOME. The Company recorded net income of $5.3 million in 1996, or $0.78 per share, compared to $2.3 million, or $0.34 per share, in 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SALES. Net sales increased 24.8%, or $13.7 million, to $68.8 million in 1995 from $55.1 million in 1994. This growth was primarily the result of an increase in customer demand, which occurred as 20 commercial aircraft build rates increased. In addition, net sales growth was enhanced by the expansion of existing product lines, the development of variations of existing products and the introduction of new products. GROSS PROFIT. Gross profit increased 20.0% to $16.8 million or 24.5% of net sales in 1995 from $14.0 million or 25.4% of net sales in 1994. The decrease in gross profit as a percentage of net sales was the result of increased personnel costs incurred to increase capacity and increases in the cost of raw materials. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 11.1% to $10.0 million in 1995 from $9.0 million in 1994. As a percentage of net sales, however, selling, general and administrative expenses decreased to 14.6% in 1995 from 16.4% in 1994. This decrease was primarily attributable to increased sales volumes. INTEREST EXPENSE. The Company's average outstanding borrowings increased to $28.3 million in 1995 from $26.0 million in 1994. This increase related primarily to (i) increased working capital requirements to support the Company's growth and (ii) capital expenditures. The weighted average interest rate on these borrowings in 1995 was 10.3% (compared to 8.9% in 1994), resulting in a 26.1% increase in net interest expense, from $2.3 million in 1994 to $2.9 million in 1995. NET INCOME. The Company recorded net income of $2.3 million for 1995, or $0.34 per share, compared to $1.5 million, or $0.22 per share, in 1994. QUARTERLY RESULTS OF OPERATIONS The following table presents certain unaudited quarterly financial information for the eight fiscal quarters of the two years ended December 31, 1996 and such data expressed as a percentage of net sales for such periods. This information is derived from, and should be read in connection with, the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere in the Prospectus. In the opinion of management, these results contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the unaudited quarterly results of operations set forth herein. The Company's results of operations for any previous fiscal quarter of any year may not be comparable with its results of operations for the same quarter of any other year and are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------------------------- (UNAUDITED) APRIL 2, JULY 2, OCT. 1, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, 1995 1995 1995 1995 1996 1996 1996 ----------- --------- --------- ----------- ----------- ----------- ----------- (IN THOUSANDS) INCOME STATEMENT DATA: Net sales.......................... $ 14,626 $ 17,704 $ 18,041 $ 18,410 $ 20,662 $ 23,228 $ 26,013 Cost of sales...................... 11,478 13,197 13,821 13,444 15,192 17,178 19,440 ----------- --------- --------- ----------- ----------- ----------- ----------- Gross profit..................... 3,148 4,507 4,220 4,966 5,470 6,050 6,573 Selling, general and administrative expenses.......................... 2,279 2,509 2,626 2,604 2,785 2,994 3,503 ----------- --------- --------- ----------- ----------- ----------- ----------- Operating income................. 869 1,998 1,594 2,362 2,685 3,056 3,070 Interest expense, net.............. 684 726 751 774 823 846 1,082 Provision for income taxes(1)...... 75 516 342 644 745 884 795 ----------- --------- --------- ----------- ----------- ----------- ----------- Net income....................... $ 110 $ 756 $ 501 $ 944 $ 1,117 $ 1,326 $ 1,193 ----------- --------- --------- ----------- ----------- ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- ----------- DEC. 31, 1996 ----------- INCOME STATEMENT DATA: Net sales.......................... $ 29,120 Cost of sales...................... 21,114 ----------- Gross profit..................... 8,006 Selling, general and administrative expenses.......................... 3,981 ----------- Operating income................. 4,025 Interest expense, net.............. 1,260 Provision for income taxes(1)...... 1,106 ----------- Net income....................... $ 1,659 ----------- -----------
21
QUARTER ENDED ------------------------------------------------------------------------------------- (UNAUDITED) APRIL 2, JULY 2, OCT. 1, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, 1995 1995 1995 1995 1996 1996 1996 ----------- --------- --------- ----------- ----------- ----------- ----------- (IN THOUSANDS) AS A PERCENTAGE OF NET SALES: Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales...................... 78.5 74.5 76.6 73.0 73.5 74.0 74.7 ----------- --------- --------- ----------- ----------- ----------- ----------- Gross profit................... 21.5 25.5 23.4 27.0 26.5 26.0 25.3 Selling, general and administrative expenses.......................... 15.6 14.2 14.6 14.2 13.5 12.9 13.5 ----------- --------- --------- ----------- ----------- ----------- ----------- Operating income................. 5.9 11.3 8.8 12.8 13.0 13.1 11.8 Interest expense, net.............. 4.7 4.1 4.2 4.2 4.0 3.6 4.1 Provision for income taxes......... 0.5 2.9 1.9 3.5 3.6 3.8 3.1 ----------- --------- --------- ----------- ----------- ----------- ----------- Net income....................... 0.7% 4.3% 2.7% 5.1% 5.4% 5.7% 4.6% ----------- --------- --------- ----------- ----------- ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- ----------- DEC. 31, 1996 ----------- AS A PERCENTAGE OF NET SALES: Net sales.......................... 100.0% Cost of sales...................... 72.5 ----------- Gross profit................... 27.5 Selling, general and administrative expenses.......................... 13.7 ----------- Operating income................. 13.8 Interest expense, net.............. 4.3 Provision for income taxes......... 3.8 ----------- Net income....................... 5.7% ----------- -----------
The Company's net sales have increased in each of the eight fiscal quarters ended December 31, 1996 primarily due to increases in customer demand, which occurred as commercial aircraft build rates increased. In addition, net sales growth was enhanced by the expansion of existing product lines, the development of variations of existing products and the addition of new products. While the cost of sales has fluctuated, cost of sales as a percentage of net sales has generally declined over this period due to decreased unit costs associated with increased production. Selling, general and administrative expenses have generally increased over this period, but have generally decreased as a percentage of net sales, primarily as a result of increased sales volume. The Company's financial results have fluctuated from fiscal quarter to fiscal quarter and may continue to do so in the future. These variations have been due to a number of factors, including customer requirements, the timing of shipments, changes in the type and mix of products being sold, changes in manufacturing capacity, variations in the utilization of manufacturing capacity and variations in the number of working days in a given fiscal quarter. 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 GECC. 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 $30.2 million as of December 31, 1996, compared to $19.0 million as of December 31, 1995 and $15.6 million as of December 31, 1994. In December 1996, the Company amended its Credit Agreement with GECC (the "Credit Agreement") to provide for a $15.0 million revolving line-of-credit (the "Revolver"), the availability of which is limited by the lesser of a specified portion of qualified accounts receivable and $15.0 million. The Credit Agreement contains significant financial and operating covenants, including limitations on the Company's ability to incur additional indebtedness and restrictions on the payment of dividends. The Company currently is in compliance with all such financial ratios and covenants. At December 31, 1996, borrowings under the Revolver, which bear interest at the prime rate plus 1.5% (which was 9.75% as of December 31, 1996), totaled $746,000, and the amount available for borrowing thereunder was approximately $10 million. The Company anticipates that prior to the consummation of the Offering, it will have increased its borrowings under the Revolver to a total of approximately $4.9 million, principally to pay accrued, Company-wide annual employee bonuses and to fund working capital needs in connection with increases in net sales. The Company intends to use a portion of the net proceeds of the Offering to repay all amounts owed under the Revolver. See "Use of Proceeds." The Credit Agreement expires on January 3, 1999. From time to time, GECC has also made certain variable rate loans to the Company for use in connection with the AFSG and Recoil acquisitions and for working capital purposes and capital expenditures (collectively, the "Variable Rate Loans"). At December 31, 1996, the aggregate outstanding principal 22 under the Variable Rate Loans was $38.2 million. Interest on these loans is payable monthly at a rate equal to the prime rate plus 1.5% (which was 9.75% as of December 31, 1996). The Variable Rate Loans, which are subject to the same financial and operating covenants as the Revolver, are due and payable on January 3, 1999. The Company intends to use approximately $6.0 million of the net proceeds of the Offering to repay these loans. See "Use of Proceeds." In January 1994, in connection with the capitalization of the Company and the payment of dividends on the Series A and Series B Preferred Stock, the Company borrowed certain other amounts from GECC which accrued interest at the rate of 9.5% for the period from January 3, 1994 to December 31, 1995 and will accrue interest at the rate of 11.5% from January 1, 1996 until the loan is paid in full (collectively, the "Fixed Rate Loans"). Interest on the Fixed Rate Loans is payable quarterly and may be deferred and added to the outstanding principal balance. At December 31, 1996, approximately $6.8 million in principal and interest was outstanding under the Fixed Rate Loans, all of which will be repaid in full using the net proceeds of the Offering. See "Use of Proceeds." The Fixed Rate Loans are due and payable on January 3, 1999. For the year ended December 31, 1996, net cash provided by operating activities was $4.3 million, as compared to net cash used in operating activities of $150,000 for the year ended December 31, 1995 and net cash provided by operating activities of $1.7 million for the year ended December 31, 1994. The primary sources of cash from operations during 1996 included net income of $5.3 million, non-cash charges for depreciation and amortization of $2.6 million, an increase in accrued expenses of $3.2 million (which was primarily attributable to accrued, Company-wide annual employee bonuses) and an increase in accounts payable of $2.4 million, offset by increases in accounts receivable and inventories of $2.5 million and $6.9 million, respectively. The primary sources of cash from operations during 1995 included net income of $2.3 million, non-cash charges for depreciation and amortization of $1.8 million, an increase in accounts payable of $1.1 million and an increase in accrued expenses of $1.1 million (which was primarily attributable to accrued, Company-wide annual employee bonuses), offset by increases in accounts receivable and inventories of $3.5 million and $3.4 million, respectively. The Company's capital expenditures were $2.4 million, $3.3 million and $6.9 million in 1994, 1995 and 1996, respectively. In 1996, the Company also used $12.6 million in cash in connection with the Recoil acquisition and the purchase of the KELOX product line. The Company's net cash provided by financing activities in 1996 was $16.7 million, consisting entirely of net borrowings on long-term debt, as compared to borrowings of $3.1 million in 1995 and $542,000 in 1994. The Company expects to spend approximately $8.0 million for capital expenditures in 1997. These capital expenditures will relate principally to equipment purchases intended to expand capacity and enhance operating efficiency at the Company's existing facilities. The Company believes that the net proceeds from the Offering, internally generated cash flow and amounts that may be available under the Revolver 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. RECENT DEVELOPMENTS The Company recently completed its quarter ended March 31, 1997. For the quarter, the Company had net sales, operating income and net income of $32.2 million, $4.9 million and $2.2 million, respectively, representing increases of $11.5 million, $2.2 million and $1.1 million, respectively, over results for the same period in 1996. The increase in net sales was primarily due to increased customer demand. In the opinion of management, these results contain all adjustments necessary for a fair presentation of the unaudited quarterly results of operations. 23 BUSINESS GENERAL The Company is a leading manufacturer of specialty fasteners, fastening systems and related components primarily used by OEMs and their subcontractors in the production of commercial aircraft and defense products. In addition, the Company also manufactures other specialty fasteners and related products for sale in the automotive, electronic and other industrial markets, and their associated after-markets. The Company designs and manufactures a substantial majority of its fasteners to its customers' specifications and in a wide range of specialty metals, alloys and composites. The Company's Kaynar and Microdot business units manufacture precision, self-locking, internally threaded nuts and inserts and precision, threaded studs. Kaynar and Microdot fasteners are engineered for a variety of harsh, demanding environments and often require high tensile strength, toughness, durability, corrosion resistance and resistance to metal fatigue and creep. Kaynar's fasteners, which include wrenchable nuts, anchor nuts, gang channels, shank nuts, barrel nuts, clinch nuts and stake nuts, are used in airframe construction to fasten together various aircraft components, including the fuselage, wings and horizontal and vertical stabilizers. These fasteners also serve a similar function in the construction of aircraft jet and turboprop engines and related components. Recoil, acquired by the Company in August 1996, manufactures helically-wound wire thread inserts and thread repair kits, which are similar in design to certain Microdot products, but are sold to the automotive, electronic and other industrial markets, and their associated after-markets. The Company's K-Fast business unit produces and markets tools that are leased or sold to OEMs and are designed to allow operators to install the Company's and other manufacturers' fasteners rapidly and in restricted and hard-to-reach areas, while still maintaining precision torque control. The Company's goal is to achieve long-term, profitable growth by (i) enhancing its position as a leading supplier of specialty fasteners to the commercial aircraft and defense industries, (ii) expanding the array of fastener products and services it offers to current customers, (iii) continuing to focus on higher value-added specialty products, (iv) leveraging its core capabilities in engineering, materials technology, manufacturing and business processes to develop additional business with both new and existing customers, (v) increasing its international marketing and penetration of foreign markets and (vi) pursuing selected opportunities for acquisitions and strategic alliances. INDUSTRY OVERVIEW AND TRENDS COMMERCIAL AIRCRAFT MARKET The Company's primary market for fasteners, the worldwide commercial aircraft industry, is experiencing a strong increase in demand from airlines ordering new and replacement aircraft. Many airlines, particularly U.S. carriers, incurred substantial losses during the early 1990s. Factors which led to these losses included (i) a slowdown in world economic growth, (ii) a decline in air passenger traffic and (iii) the delivery of a record number of previously purchased aircraft to the airlines, all of which created excess aircraft capacity. This excess capacity, coupled with the weakened financial condition of many airlines, significantly impacted their purchases of new and replacement aircraft. Beginning in 1994, a rebound in the world economy and an increase in air passenger traffic helped many airlines restore and increase their profitability. As a result, the airlines have also increased their purchases of new and replacement aircraft, contributing to a significant recovery in the worldwide commercial aircraft industry. In 1996, for example, Boeing and Airbus, the two largest commercial aircraft manufacturers, reported increases in announced aircraft orders of 107% and 208% over 1995 levels, respectively. Increased demand for new and replacement aircraft has led to an increase in the demand for fasteners and fastening systems, such as those manufactured by the Company. While there can be no assurance that demand for new and replacement aircraft will not be adversely affected by business cycle fluctuations or declines in airline profitability, the Company believes that long-term industry trends are favorable. For example, in its 1997 Current Market Outlook report, Boeing 24 projects that during the period from 1996 to 2006, world air travel will grow by nearly 75%. Boeing also projects that during this period domestic and international airlines will lease or purchase over 7,000 new aircraft, thereby increasing the worldwide commercial fleet from approximately 11,500 aircraft at the end of 1996 to approximately 17,000 aircraft (net of retirements) at the end of 2006. In addition, as airlines seek to serve a growing number of air travelers with existing restrictions on arrival and departure slots, airport gates and ramp capacity, commercial aircraft OEMs are experiencing increased orders for heavier, widebodied aircraft of intermediate size. Widebodied aircraft generally require a greater number of fasteners than smaller aircraft. DEFENSE MARKET The Company also directly and indirectly supplies fasteners and related components to manufacturers of airframes, aircraft engines, missiles and other products used for defense. Since the late 1980s, decreasing levels of defense procurement spending have reduced the size of the defense market, with contracts often reflecting lower build rates and extended production schedules. The U.S. military budget, in particular, has focused principally on operations and maintenance funding for the existing force structure rather than on procurement of new equipment. Due in part to these budget constraints, the defense industry has been consolidating, thereby reducing the overall number of customers available to the Company and other suppliers. The Company's products are primarily utilized on military aircraft, including fighters and transport aircraft. Although the number of fighter aircraft expected to be produced is likely to decrease through the year 2000, this decrease may be offset in part by increased production of military transport aircraft such as the C-130J and the C-17. In addition, a number of fighter and other aircraft programs may be implemented to modernize the air forces of the industrialized western nations and their allies. Such programs that are either under development or contemplated include the F/A-18E/F (an advanced variant of the existing F/A-18 fighter bomber), the F-22 (the next-generation advanced fighter) and the EFA (European Fighter Aircraft). The first two programs are in preliminary production stages in the United States. The military programs of the United Kingdom, Germany, Italy and Spain have committed to the EFA, which is scheduled to begin production in 2000. In addition, although there can be no assurance that the proposed fiscal 1998 U.S. military budget will be adopted as proposed, the budget proposed by the President projects an increase in procurement spending for aircraft. There can be no assurance, however, that the production of military transport aircraft will increase, that proposed aircraft programs under development or contemplated will be completed or that any projected increase in U.S. defense procurement spending will result in increased demand for the Company's products. PRODUCTS AND SERVICES The Company's fasteners, fastening systems and related components may be divided into two general categories: those used exclusively in the manufacture of commercial aircraft and defense products (see "--Commercial Aircraft and Defense Products") and those with applications in other industries (see "--Industrial Products and Services"). Within these two broad categories, the Company's products may also be grouped by business unit. The Company's Kaynar and Microdot business units manufacture fasteners and related products that are sold principally to the commercial aircraft and defense industries. The Company's recently-acquired Recoil business manufactures thread insert systems used in a broad range of markets, including high performance automotive and electronic components. The Company's K-Fast business unit produces, sells, leases and services a complete line of installation tools and tooling systems for the Kaynar, Microdot and Recoil product lines, as well as for fasteners and inserts produced by other manufacturers. COMMERCIAL AIRCRAFT AND DEFENSE PRODUCTS A substantial portion of the Company's net sales are made to the commercial aircraft and defense industries. Of the Company's net sales in 1996, approximately 40% were made to airframe OEMs and their subcontractors, and approximately 21% were made to producers of aircraft engines. In addition, the 25 Company sold approximately 31% of its production to independent distributors, who in turn are believed to have sold many of such products to commercial aircraft and defense OEMs and subcontractors. KAYNAR PRODUCTS Kaynar is a leading producer of precision, self-locking internally threaded nuts used in the manufacture of commercial aircraft and defense aerospace products. In 1996, sales of Kaynar products accounted for approximately 78% of the Company's net sales. The Kaynar product line is designed principally for use in harsh, demanding environments and includes wrenchable nuts, K-Fast nuts, anchor nuts, gang channels, shank nuts, barrel nuts, clinch nuts and stake nuts. Wrenchable nuts, which offer versatility in airframe construction, are designed for high-strength and vibration resistance and to ensure precision torquing of fastener assemblies. K-Fast nuts, which are lightweight, wrenchable nuts in various configurations, permit high-speed application using K-Fast installation tools. Anchor nuts, which may be riveted, welded or bonded to a structure, are especially useful in blind locations or in locations where an attached nut facilitates maintenance. Gang channel nut assemblies, which may be produced in either straight or radiused versions, are designed for applications that require multiple anchor-type nuts. Shank nuts, which are highly temperature resistant, are designed for jet and rocket engine flange assemblies, such as exhaust manifolds, afterburners and turbine flanges. Barrel nuts are high strength, self-locking nuts used in locations where wrenching space is not available. Clinch nuts and stake nuts are designed for blind applications where hexagonal nuts would be inaccessible for wrenching, or where conditions prevent the installation of an anchor nut. Kaynar produces fasteners in a wide variety of materials to accommodate each customer's specifications, from lightweight aluminum or titanium nuts for airframes, to high-strength, high-temperature tolerant engine nuts manufactured from materials such as A-286, Waspaloy-Registered Trademark-, Hastelloy-Registered Trademark- and Inconel-Registered Trademark-. Kaynar also produces the commercial aircraft and defense industries' broadest line of lightweight, non-metallic composite fasteners, which may be configured as wrenchable nuts, anchor nuts, gang channels or barrel nuts. These composite fasteners are used primarily for military aircraft and are designed to reduce radar visibility, enhance resistance to lightning strikes and provide galvanic corrosion protection. Kaynar offers a variety of coatings and finishes for its fasteners, including anodizing, cadmium plating, silver plating, aluminum plating, solid film lubricants and water-based cetyl and solvent-free lubricants. MICRODOT PRODUCTS Microdot, which accounted for approximately 14% of the Company's 1996 net sales, designs, engineers and manufactures threaded inserts and studs used principally in the commercial aircraft and defense industries. Microdot's threaded inserts, which are made of high-grade steel and other high-strength metals, are designed to be installed into softer metals, plastics and composite materials to create bolt-ready holes having strong internal threads within the softer parent material. Once a bolt is threaded into the installed insert, the overall strength of the fastening assembly is substantially enhanced. The Company's customers may also use Microdot inserts for thread repairs. When the existing internal threads on an airframe or engine component become stripped or are otherwise damaged, the customer will retap the hole and insert a Microdot insert, thereby recreating the internal threads. Microdot's K-Sert-Registered Trademark- Inserts include keys that are driven down through the threads of parent material, mechanically locking the insert in place to prevent rotation due to vibration and to resist torque-out. Microdot also produces Perma-Thread-Registered Trademark- Inserts and thin-wall inserts. Perma-Thread Inserts are helically-coiled inserts, precision formed from diamond shaped stainless steel wire wound into strong permanent thread. The Perma-Thread Inserts compress as they are inserted into an internally threaded hole to create a strong permanent thread inside the hole. Thin-wall inserts are designed for situations that require a smaller lightweight fastener but also demand a high degree of thread protection and fastening integrity. 26 In addition, Microdot produces K-Sert Studs, which are also made from steel and other high-strength metals. The keyed end of the stud is designed to be installed into parent material using a process similar to the insertion of K-Sert Inserts. The other end of the stud is threaded and protrudes from the parent material so that other components may be securely attached to the parent airframe or engine component. Like K-Sert Inserts, K-Sert Studs include locking keys that prevent rotation and provide resistance to torque-out. INDUSTRIAL PRODUCTS AND SERVICES The products designed and manufactured by the Company's recently acquired Recoil business unit have applications in a variety of industries, including the automotive and electronics markets. The Company's K-Fast products primarily serve the commercial aircraft and defense industries, but are also used in other industrial markets. Recoil, which the Company acquired in August 1996, and K-Fast each accounted for approximately 4% of the Company's 1996 net sales. For the four-month period ended December 31, 1996, Recoil accounted for approximately 8% of the Company's net sales. RECOIL PRODUCTS Recoil produces helically-wound wire thread inserts that increase the strength of a fastening assembly and assist in the reduction of thread wear, which is particularly important in cases where components are assembled and disassembled frequently or where vibrations are severe. Although Recoil inserts are similar in design to Microdot's Perma-Thread Inserts, Recoil serves a different customer base and sells a greater percentage of its products for use in thread repair, rather than original installation. Recoil inserts are used in the automotive, electronic and other industrial markets, and their associated after-markets. In addition to threaded inserts, Recoil also supplies both standard and customized thread repair kits, high speed steel taps and various electric and pneumatic, manual and semi-automatic insertion tools and related accessories. Recoil's distributors market thread repair kits to the public using custom-designed point-of-sale displays. Principal uses for the thread repair kits include automotive repair and the maintenance and repair of heavy machinery. Recoil products are designed and manufactured in stainless steel and a wide variety of other materials to meet customer specifications, including Inconel-Registered Trademark- for high temperature applications and phosphorous bronze for low permeability. Recoil inserts are often coated with finishes such as cadmium and silver to prevent corrosion, and dry film lubricants to prevent galling and binding. K-FAST PRODUCTS AND SERVICES K-Fast tools are primarily designed to install Kaynar, Microdot and Recoil fasteners and inserts, but can also be used to attach other wrenchable nuts, bolts and inserts. K-Fast tools allow customers to install fasteners rapidly and in restricted and hard-to-reach areas, while still maintaining precision torque control. K-Fast tools, which may be incorporated into a customer's automatic and semi-automatic application operations, also permit precise re-torquing of fasteners that have already been installed. K-Fast tools are ergonomically designed to reduce noise and operator fatigue. The Company outsources the production of motors for the K-Fast tools. Many OEMs lease K-Fast tools from the Company instead of purchasing them. The Company also services tools purchased or leased by its customers and trains its customers to use the tools. The Company currently has eleven service engineers located throughout North America and Europe, who are able to provide customers with on-site service of, and training for, K-Fast tools. The Company intends to continue to pursue opportunities on the service side of its tooling and tooling systems business. KEY COMPETITIVE STRENGTHS MARKET LEADER. The Company believes that it is the leading manufacturer of precision, self-locking internally threaded nuts sold to the commercial aircraft and defense aerospace industries, and a leading 27 manufacturer of other specialty fasteners, fastening systems and related components used in the manufacture of commercial aircraft and defense products. The Company also believes it offers customers one of the broadest arrays of fasteners, fastening systems and related services. Once a fastener manufactured by the Company has been "designed into" a particular airframe or engine component, the OEM will generally rely on the Company to provide the fastener for the entire production cycle of the airframe or engine, which could last a decade or more. This relationship with OEMs further enhances the Company's position as a market leader. RAPID CUSTOMER RESPONSE. The Company's product design and engineering capabilities and its manufacturing expertise give it the ability to respond rapidly to customer demands for new products and product modifications. Once a customer submits specifications for a product, the Company utilizes its forty-three person engineering and product design group to meet the customer's demands and expectations for product development and manufacturing, installation tooling development and application engineering. The Company's engineering and product design personnel are organized into cross-functional design teams to enhance the Company's responsiveness. Often customers will place multiple orders for short runs of different products. The Company has the expertise in complex manufacturing processes necessary to fill such orders within the timeframes required by its customers. CORE SUPPLIER. Many OEMs have reduced the number of suppliers for particular parts to a core group of two or three who have the size, expertise and capacity to meet the OEMs' needs. Such reductions allow an OEM to (i) reduce purchasing costs, (ii) streamline purchasing decisions, (iii) maintain greater control over quality and (iv) develop close supplier relationships. Participating in this trend, the Company continues to be a qualified supplier to virtually all major airframe and aircraft engine OEMs on the parts it designs and manufactures. In addition, the Company has never lost its qualified supplier status with respect to any product. The Company believes that as the OEMs have undertaken these reductions, the Company has often achieved incremental increases in its business. SOURCE DELEGATION SUPPLIER. The Company's experience and its strong, long-term relationships with OEMs, coupled with its customer-driven approach to quality control, engineering and production, have allowed it to qualify as a "source delegation supplier" to many of its customers, including Boeing, GE and Pratt & Whitney. See "--Customers." A source delegation supplier's products are designed, shipped and installed without the OEM undertaking further testing that it might otherwise perform before installation. An OEM will only designate a supplier as a source delegation supplier after the OEM has undertaken a rigorous review of both the supplier's products and its manufacturing processes. This review process often takes several years. EFFICIENCY AND QUALITY CONTROL. The Company has implemented a series of programs designed to improve operating efficiency while at the same time maintaining or improving quality control. As a result, the Company believes that since 1994 it has, among other things, significantly reduced its (i) new product design times, (ii) average lead times on production and (iii) rates of past due orders. Continuous improvement teams, re-engineering teams, Kaizen events (a self-directed process improvement program) and an incentive bonus plan that rewards all employees, other than Recoil personnel, based upon the return on capital employed by the Company's business units are among the quality improvement tools currently used by the Company in its efforts to reduce costs and improve customer service. The Company has also recently begun implementing an automated statistical process control ("SPC") system that will replace its current manual system for recording statistical information at each stage of the production process. The automated SPC system, which is already running in certain areas of the Company's business, should be fully operational by mid-1997. COMPANY STRATEGY The Company's goal is to sustain long-term profitable growth by focusing on the following areas: MAINTAINING KEY COMPETITIVE STRENGTHS. The Company intends to maintain and further develop its key competitive strengths, including its leading position in the market for specialty fasteners and fastening 28 systems used in the manufacture of commercial aircraft and defense products. See "--Key Competitive Strengths." EXPANDING FASTENER PRODUCTS AND SERVICES. The Company will continue to introduce new fastener products and services to the commercial aircraft, defense and other industrial markets. The Company also plans to continue augmenting its existing array of products and services by qualifying new fasteners and fastening systems, introducing new packaged thread repair kits in the automotive after-market and expanding its installation tooling products and repair services. FOCUSING ON HIGHER VALUE-ADDED PRODUCTS. Kaynar and Microdot, the Company's two largest business units, manufacture nuts, inserts and studs that are engineered for a variety of harsh, demanding environments and often require high tensile strength, toughness, durability, corrosion resistance and resistance to metal fatigue and creep. To meet these demands, the Company employs higher value-added manufacturing processes than would be required if the fasteners were designed for less demanding environments. These processes include manufacturing expertise in a wide range of specialty metals, alloys and composites. The Company intends to continue to focus on engineering and manufacturing such specialty products. LEVERAGING CORE CAPABILITIES. The Company intends to grow by leveraging its core capabilities in engineering, materials technology, manufacturing and business processes. The Company believes that with these capabilities, it can develop new business opportunities with current customers, beyond existing fastener applications. The Company will also use its core capabilities as a basis for moving into related markets that it does not currently address. INCREASING INTERNATIONAL MARKETING. The commercial aircraft industry is becoming increasingly international, as component and sub-assembly manufacturers overseas obtain significant contracts from major airframe and aircraft engine OEMs. The Company plans to continue to increase its international presence to capitalize on opportunities for growth in the expanding international commercial aircraft market. The Company's strategy includes continued penetration into foreign markets. The Company, for example, has recently placed an on-site sales engineer in Beijing, China and a direct salesperson in Mexico City, Mexico. See "--Sales and Marketing." GROWING THOUGH ACQUISITIONS AND STRATEGIC ALLIANCES. The Company selectively reviews opportunities to acquire other companies, assets and product lines that add to or complement its existing products and services. The Company successfully completed the Recoil acquisition and the purchase of the KELOX product line in 1996 and believes that other potentially complementary acquisitions may be possible as consolidation continues in the commercial aircraft and defense industries. The Company, however, currently has no agreements, commitments or understandings with respect to any acquisitions, nor can there be any assurance that the Company will make any such acquisitions in the future. CUSTOMERS In 1996, approximately 65% of the Company's net sales were made directly to OEMs and subcontractors. Direct sales to Boeing, GE and Pratt & Whitney, the Company's three largest OEM customers, accounted for approximately 18%, 12% and 8% of the Company's 1996 net sales, respectively. The remaining 35% of the Company's 1996 net sales were made to a global network of thirty-five independent distributors, who sell the Company's products to OEMs, subcontractors and other customers. See "--Sales and Marketing." The Company is currently a "source delegation supplier" of certain products to the following OEMs: Boeing, GE, Pratt & Whitney, Lockheed Martin, McDonnell Douglas, Air Supply (a unit of AlliedSignal Inc.), Ultra Electronics Ltd. and Williams International Co. A source delegation supplier's products are designed, shipped and installed without the OEM undertaking further testing that it might otherwise perform before installation. See "--Key Competitive Strengths--Source Delegation Supplier." In addition to its source delegation designations, the Company is also a qualified supplier under the preferred supplier programs of most other major airframe and aircraft engine OEMs and subcontractors, including Allison 29 Engine Co., Loral Vought Systems Corp., Northrop Grumman Corp., Rocketdyne (a unit of Rockwell International Corp.), Rohr Inc. and Rolls Royce. BACKLOG The Company's backlog at December 31, 1996 was approximately $65.5 million, approximately 92% of which is scheduled to be delivered during 1997. The Company's total backlog as of December 31, 1995 was approximately $41.2 million. The following chart shows the quarterly backlog orders believed by management to be deliverable within the twelve months following each quarter end: EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
QUARTER ENDED TWELVE MONTH BACKLOG 3-1994 $ 21,957 6 $ 23,794 9 $ 23,940 12 $ 24,421 3-1995 $ 28,940 6 $ 34,187 9 $ 33,524 12 $ 35,843 3-1996 $ 40,792 6 $ 44,997 9 $ 53,925 12 $ 60,189
ENGINEERING AND PRODUCT DEVELOPMENT The Company employs approximately 43 engineers and designers. At Kaynar and Microdot, these employees are assigned to cross-functional design teams, which work together to develop new products and improve existing products. Each design team includes personnel from the following functional areas: production design, tool design, manufacturing engineering and production engineering. The use of design teams is intended to reduce the overall time needed to bring products to market. The development of a new fastener generally begins when a customer submits specifications for the fastener to the Company. The design team then develops a computer-generated or physical model of the fastener based on the specifications and may work with the Company's research and development (R&D) group, which includes skilled tool and die makers and a machine development group, to produce a prototype of the product. Reliance on the Company's R&D personnel at this stage of the development process allows the Company to thoroughly test a new design and its requisite manufacturing process without interrupting the manufacture of existing products at the Company's facilities. Concurrent with the design and testing of a prototype, the design team also develops a plan for manufacturing the fastener in the most cost-effective manner and undertakes the steps necessary to implement that plan. PATENTS The Company currently holds a number of U.S. and international patents, covering a variety of products and processes. Although the Company believes patent protection to be valuable in certain circumstances, management does not believe that the termination, expiration or infringement of one or 30 more of the Company's patents would have a material adverse effect on the business or prospects of the Company. The Company has not been involved in patent infringement litigation, and the Company believes that its processes and products do not infringe on the intellectual property rights of others; however, there can be no assurance that an infringement claim will not be asserted against the Company in the future. The Company has from time to time asserted infringement claims by notice to third parties. Such claims, however, have been settled by the Company and have not resulted in litigation. MANUFACTURING AND RAW MATERIALS Each of the Company's fasteners is manufactured using one of three general methods of production: stamping, machining or forging. In each case, the production process begins with the purchase of raw materials: sheet metal in the case of stamping, bars in the case of machining and high grade wire in the case of forging. The fastener is then formed using the applicable processes. Subsequent steps in the production process include tapping, crimping, heat treating, plating, coating, assembly and final inspection. The Company manufactures fasteners for its commercial aircraft and defense customers based on the customers' orders and specifications and, except for certain Recoil products, the Company generally does not produce fasteners for its own inventory. The Company has the expertise in complex manufacturing processes necessary to produce products in multiple, short runs, which are often requested by its customers. See "--Key Competitive Strengths--Rapid Customer Response." The Company purchases raw materials, which include the various metals, composites and finishes used in production, from over twenty different suppliers. The Company believes that these raw materials would be available at competitive prices from various other suppliers as well. See "Risk Factors-- Availability and Cost of Raw Materials" for a discussion of the risks related to the Company's supply of raw materials. SALES AND MARKETING The Company's sales force consists of approximately 24 salespeople located throughout the world and 31 independent sales agents who work with the Company on a commission basis. The sales force sells products directly to OEMs and subcontractors and to a global network of 35 independent distributors, who, in turn, sell to OEMs, subcontractors and other customers. Often, the OEMs will determine whether the Company sells a product directly to the OEM or through an independent distributor. Each of the Company's four business units independently conducts sales and marketing efforts. In certain cases, however, the business units collaborate in cross-marketing efforts and, in some geographic regions, may use the same sales representative or agent. Each business unit's sales force and its respective officers are responsible for obtaining new customers and maintaining relationships with existing customers. EMPLOYEES As of December 31, 1996, the Company employed 1,111 employees. Approximately 73% of these employees are engaged in manufacturing, 22% are engaged in management, sales, marketing and general administration and 5% are engaged in engineering and product development. None of the Company's employees is represented by a union, and management considers its employee relations to be good. Each of the Company's employees (other than those in the Recoil business unit) is eligible for an annual bonus based on the return on capital employed of the particular business unit in which the employee works. 31 PROPERTIES As of March 31, 1997, the Company had nine principal facilities, consisting of an aggregate of approximately 282,500 square feet of space. The following table describes the principal facilities and indicates the location, function, approximate size and ownership of each:
APPROX. SQUARE LOCATION FUNCTION FOOTAGE OWNERSHIP - ------------------------------ --------------------------------- --------- ------------------------- Fullerton, CA................. Kaynar Division headquarters: 200,000 Leased (expires Administration, product October 31, 1999) development, engineering, manufacturing and distribution Placentia, CA................. Microdot Division headquarters: 40,000 Leased (expires Administration, product September 30, 2001) development, engineering, manufacturing and distribution Oakleigh, VIC, Australia...... Recoil Pty headquarters: 24,000 Leased (expires Administration, product August 1, 2000) development, engineering, manufacturing and distribution Nemesuamos, Hungary........... K.T.I. Femipari KFT: 6,200 Owned Manufacturing Orange, CA.................... The Company headquarters: 4,600 Leased (expires Administration April 1, 2003) Carmel, IN.................... Recoil (U.S.): 4,300 Leased (expires Sales and marketing of Recoil December 31, 1998) products Wolverhampton, U.K............ Recoil (Europe) Ltd.: 1,700 Leased (expires Sales and marketing of Recoil December 25, 2001) products Lutterworth, U.K.............. Kaynar Technologies Ltd. 1,000 Leased (expires headquarters: January 2, 2002) Kaynar and K-Fast sales office Aalst, Belgium................ Recoil Marketing BVBA: 700 Leased (expires Sales and marketing of Recoil April 20, 2003) products
The Company currently anticipates that its 6,200 square foot manufacturing facility in Nemesuamos, Hungary will be completed and operational by the end of the second quarter of 1997. The Company purchased the property on which the facility is being built in July 1996. When completed, the Hungarian facility will be responsible for certain machining and forging operations on a limited number of Kaynar and Microdot products. These products will be transported to the Company's U.S. facilities for final fabrication. The Company recently entered into a lease of office and administrative space in Orange, California, to which the Company has relocated its executive offices from Fullerton, California. 32 While the Company believes that its facilities are adequate to support its operations for the foreseeable future, the Company regularly reviews its need for additional facilities and could, in the future, lease or purchase one or more additional facilities or seek to expand its existing facilities. 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. COMPETITION The Company competes with a number of producers of aerospace fasteners and fastening systems, including three publicly-held companies, SPS Technologies Inc. ("SPS"), the Huck International Division of the Thiokol Corporation ("Thiokol") and The Fairchild Corporation ("Fairchild"), all of which have greater financial resources than the Company. SPS manufactures high-strength wrenchable nuts, gang channels, plate nuts and other products for certain of the same customers as the Company, including Boeing, Pratt & Whitney and GE. Thiokol produces fasteners and fastening systems that differ substantially from the Company's products in design, but nevertheless often serve comparable functions in airframe and engine construction. Fairchild produces threaded inserts and studs that compete with the Microdot product lines, as well as various nuts used by certain of the Company's customers, including GE. On February 27, 1997, Fairchild acquired a controlling interest in Simmonds, S.A. ("Simmonds"), a French corporation, which produces fasteners that compete with certain Kaynar products, particularly metric nuts and gang channels sold to European airframe and engine OEMs. Under the terms of the agreement, Fairchild acquired an 84.2% ownership interest in Simmonds. Fairchild has also announced its intent to tender immediately for the remaining ownership interests in Simmonds held by the public. The Company also competes with several smaller, privately-owned companies, which generally have lower sales volumes than the Company. The Company believes that competition for sales of fasteners and fastener systems to the commercial aircraft and defense industries is based on product design and quality, turnaround time and responsiveness to customer specifications, product availability and pricing. The Company believes that it competes favorably with respect to each of these factors. HeliCoil, a unit of Black & Decker Corp., is Recoil's primary competitor in the industrial markets for threaded inserts. The Company believes that competition for sales of threaded insets and thread repair kits to the markets served by Recoil is based on turnaround time and responsiveness to customer specifications, product availability and pricing. The Company believes that it competes favorably with respect to each of these factors. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local environmental laws and regulation by various governmental agencies. Among other matters, these regulatory authorities impose requirements that regulate the generation, emission, discharge, management, transportation and disposal of hazardous materials, pollutants and contaminants, govern public and private response actions to hazardous or regulated substances that may be or have been released into the environment, and require the Company to obtain and maintain licenses and permits in connection with its operations. This extensive regulatory framework imposes significant compliance burdens and risks on the Company. Although management believes that the Company's operations and its facilities are in material compliance with such laws and regulations, there can be no assurance that future changes in such laws, regulations or interpretations thereof or the nature of the Company's operations will not require the Company to make significant additional capital expenditures to ensure compliance in the future. 33 The Company anticipates that during the period from 1997 through 1998 it will incur a one-time capital expenditure of between $1 million and $2 million to reduce its reliance on degreasing operations that use perchloroethylene by switching to aqueous-based solvents whenever possible. Although these new operations will significantly reduce the Company's need to use perchloroethylene as a degreasing agent, the Company's principal reason for undertaking this expenditure is to increase manufacturing efficiency. Although the Company has not been notified by any environmental authority that its current degreasing operations are in violation of any applicable law or regulation, perchloroethylene has been detected in the soil beneath the Company's Fullerton, California facility. Environmental consultants retained by the Company have determined that this was not caused by existing degreasing operations. The Company anticipates that if remediation of the perchloroethylene at this site is required, it could be accomplished at a cost of approximately $200,000 over the course of two years. In connection with the AFSG acquisition in January 1994, the Company established reserves that management believes are sufficient to cover this possible remediation. The Company is required to maintain air quality permits for the operation of several of its plating lines. The permit required to run its cadmium-plating system currently includes a maximum annual usage restriction that is significantly below the Company's actual 1996 usage. In 1996, however, the Company obtained a variance from the applicable environmental control authority that permitted the Company to exceed the usage restriction. In 1997, the Company intends to install a new automated cadmium-plating system that includes improved emissions control features, which should result in removal of the usage restriction. If the restriction is not removed prior to the installation of the automated plating system, the Company expects that it will again be granted a usage variance. There can be no assurance, however, that a usage variance will be granted or that the failure to obtain a usage variance will not have a material adverse effect on the Company. 34 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information concerning the directors and executive officers of the Company. Each director holds office until the next annual meeting of stockholders, or until his successor has been elected and qualified. Officers are appointed by the Board of Directors.
NAME AGE(*) PRINCIPAL POSITIONS WITH THE COMPANY - ------------------------------------ ----------- -------------------------------------------------------------------- Jordan A. Law....................... 54 Chairman of the Board of Directors, President and Chief Executive Officer David A. Werner..................... 44 Executive Vice President, Secretary and Director Robert L. Beers..................... 50 Senior Vice President, Marketing and Business Development LeRoy A. Dack....................... 52 Division President, Kaynar Joseph M. Varholick................. 45 Division President, Microdot Kenneth D. Jones.................... 52 Group Chief Executive Officer, Recoil Imre Berecz......................... 59 Vice President, Product Research and Development, and Managing Director, K.T.I. Femipari KFT Joseph F. Blomberg.................. 58 Director of Human Resources Norman A. Barkeley.................. 66 Director Burton J. Kloster, Jr............... 65 Director Richard P. Strubel.................. 57 Director
- ------------------------ * As of December 31, 1996. JORDAN A. LAW has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since October 1993. From July 1991 to January 1994, Mr. Law served as President of AFSG. DAVID A. WERNER has been Executive Vice President of the Company since December 1996 and Secretary and a Director of the Company since October 1993. From October 1993 to December 1996, Mr. Werner served as Vice President and Treasurer of the Company. From July 1990 to January 1994, Mr. Werner was Vice President and Chief Financial Officer of Old Microdot. Mr. Werner is also a director of Lumber Yard Supply, a privately-held corporation. Mr. Werner is a certified public accountant. ROBERT L. BEERS has been Senior Vice President, Marketing and Business Development, of the Company since December 1996. From January 1994 to December 1996, Mr. Beers served as Vice President, Sales and Marketing, of the Company. From June 1991 to January 1994, Mr. Beers was Vice President, Sales and Marketing, of AFSG. LEROY A. DACK has been President of the Company's Kaynar business unit since December 1996. From January 1994 to December 1996, Mr. Dack served as Vice President and General Manager of the Kaynar business unit. From May 1991 to January 1994, Mr. Dack was Vice President and General Manager of the Kaynar division of Old Microdot. JOSEPH M. VARHOLICK has been President of the Company's Microdot operating unit since December 1996. From January 1994 to December 1996, Mr. Varholick served as Vice President and General Manager of the Microdot business unit. From September 1993 to January 1994, Mr. Varholick was Vice President and General Manager of the Microdot Inserts division of Old Microdot. From May 1992 to September 1993, Mr. Varholick was Managing Director of Microdot Aerospace Limited (U.K.), a subsidiary of Old Microdot. Prior to May 1992, Mr. Varholick was the Director of Sales of the Kaynar division of Old Microdot. KENNETH D. JONES has been Group Chief Executive Officer of the Company's Recoil business unit since August 1996. From August 1994 to August 1996, Mr. Jones was the Group Chief Executive Officer of 35 Recoil Pty Ltd, the entity from which the Company purchased the Recoil business unit. Prior to August 1994, Mr. Jones served as Chief Executive Officer of Polycure Pty. Ltd., a manufacturer of specialty, high technology coatings. IMRE BERECZ has been Vice President, Product Research and Development, and Managing Director, K.T.I. Femipari KFT, since December 1996. From January 1994 to December 1996, Mr. Berecz was the Company's Vice President, Research and Development. From 1983 to January 1994, Mr. Berecz served as Vice President, Engineering of AFSG. JOSEPH F. BLOMBERG has been Director of Human Resources of the Company since January 1994. From June 1984 to January 1994, Mr. Blomberg served as Director of Human Resources of AFSG. NORMAN A. BARKELEY has been a Director of the Company since March 1997. Mr. Barkeley has been chairman of Ducommun Incorporated, an aerospace equipment manufacturer ("Ducommun"), since July 1988. Mr. Barkeley served as Chief Executive Officer of Ducommun from July 1988 to December 1996 and President of Ducommun from July 1988 to December 1995. Mr. Barkeley is also a director of Dames and Moore Inc., an engineering and consulting firm, Golden Systems, Inc., an electrical components manufacturer, and RHR International Co., a privately-held management consulting firm. BURTON J. KLOSTER, JR. has been a Director of the Company since March 1997. Mr. Kloster has been retired since September 1995. Prior to his retirement, Mr. Kloster had served as a Director of GECC since September 1989, Senior Vice President of GECC since October 1984 and Vice President, General Counsel and Secretary of GECC since March 1976. Pursuant to the New Stockholders Agreement, GECC designated Mr. Kloster as an individual to be nominated to the Board of Directors by the Company. RICHARD P. STRUBEL has been a Director of the Company since March 1997. Mr. Strubel has been Managing Director of Tandem Partners, Inc., a management services firm, since June 1990. From January 1984 to October 1994, Mr. Strubel served as President and Chief Executive Officer of Old Microdot. Mr. Strubel is a director of Children's Memorial Medical Center and Children's Memorial Hospital, both of which are located in Chicago, and a trustee of the University of Chicago. Mr. Strubel also is a trustee of 35 mutual funds for which Goldman, Sachs & Co. serves as investment adviser and 16 mutual funds for which The Northern Trust Company serves as investment adviser. Pursuant to the New Stockholders Agreement, GECC designated Mr. Strubel as an individual to be nominated to the Board of Directors by the Company. As discussed above, each of Messrs. Law, Werner, Beers, Dack, Varholick and Strubel served as an officer or key employee of Old Microdot. In June 1993, Old Microdot filed a petition under Chapter 11 of the federal bankruptcy laws. See "The Company--Formation of the Company." DIRECTORS COMPENSATION Prior to March 1997, members of the Company's Board of Directors did not receive any compensation for their services as directors. Commencing in March 1997, however, non-employee directors will be paid $10,000 per year plus $1,000 per meeting for attending meetings of the Board of Directors or meetings of any committee thereof not immediately preceding or following a meeting of the full Board. Non-employee directors may also participate in the Company's 1997 Stock Incentive Plan. See "--Stock Incentive Plan-- Non-Employee Director Options." Except as set forth below in "--Executive Compensation," directors who are employees of the Company will not be paid for their services as directors. All directors, however, are reimbursed for certain expenses in connection with attendance at Board of Directors and committee meetings. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established an Audit Committee and a Compensation Committee. As long as the outstanding Series C Preferred Stock represents 40% or more of the Fully Diluted Shares, each of these committees will include two directors that were designated by the holder of the Series C Preferred Stock for nomination to the Board of Directors. As long as the outstanding Series C Preferred Stock 36 represents 25% or more (but less than 40%) of the Fully Diluted Shares, each of these committees will include one director that was designated by the holder of the Series C Preferred Stock for nomination to the Board of Directors. See "Description of Capital Stock--The New Stockholders Agreement." The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company's independent auditors, the scope of annual audits, fees to be paid to auditors, the performance of the auditors and the accounting practices of the Company. The Audit Committee currently consists of Messrs. Kloster and Strubel. The Compensation Committee, which consists of Messrs. Barkeley, Kloster and Strubel, determines the salaries and incentive compensation of the Company's officers and provides recommendations for the salaries and incentive compensation of the other employees of, and any consultants to, the Company. The Compensation Committee also administers the Company's incentive compensation, stock and benefit plans. The By-laws of the Company provide that the Board of Directors may also establish other committees from time to time. EXECUTIVE COMPENSATION The following table sets forth a summary of all compensation awarded to, earned by, or paid to the Chief Executive Officer of the Company and each of the four most highly compensated executive officers of the Company (other than the Chief Executive Officer) whose total annual salary and bonus for the year ended December 31, 1996 was in excess of $100,000: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------------------- OTHER ANNUAL NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION - ------------------------------------------------------------------ ---------- ---------- -------------- Jordan A. Law .................................................... 1996 $ 175,000 $ 181,000 -- Chief Executive Officer 1995 164,000 123,000 -- 1994 156,000 81,000 -- David A. Werner .................................................. 1996 150,000 144,000 -- Executive Vice President 1995 139,000 98,000 -- 1994 132,000 66,000 -- Robert L. Beers .................................................. 1996 124,000 77,000 $ 4,769(1) Senior Vice President, Marketing and 1995 118,000 52,000 -- Business Development 1994 112,000 36,000 -- LeRoy A. Dack .................................................... 1996 122,000 80,000 -- Division President, Kaynar 1995 118,000 53,000 -- 1994 112,000 42,000 -- Joseph M. Varholick .............................................. 1996 110,000 67,000 -- Division President, Microdot 1995 101,000 39,000 -- 1994 96,000 23,000 3,504(2)
- ------------------------ (1) This amount compensated Mr. Beers for vacation time not taken. (2) This payment reimbursed Mr. Varholick for certain taxes incurred as a result of an overseas assignment undertaken at the request of the Company. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS In May 1997, the Company will enter into employment agreements with Messrs. Law, Werner, Dack, Beers, Varholick and Berecz. The agreements provide for annual base salaries of $190,000, $170,000, 37 $137,000, $136,000, $125,000 and $124,000, respectively, which are subject to discretionary increases and annual review. The duration of each agreement is one year (two years for Messrs. Law and Werner); however, each agreement contains an automatic renewal provision that takes effect every six months unless notice that the agreement will not be renewed is given at least 30 days prior to a renewal date. The agreements provide for participation in all annual bonus, incentive, savings and retirement and benefit plans offered generally to Company employees. If the Company terminates an agreement other than for cause or as a result of death or disability, the Company will make payments equal to the employee's annual base salary (two times annual base salary in the case of Messrs. Law and Werner). If a change in control of the Company occurs within one year, and either the Company terminates an agreement other than for cause or an employee terminates his agreement for good reason, the Company will pay an amount equal to the sum (or, for Messrs. Law and Werner, twice the sum) of (i) the highest annual base salary paid to the employee during the three most recent calendar years ending prior to the year the change in control occurs and (ii) the amount of the highest bonus or bonuses paid to the employee for any calendar year ending prior to the year the change in control occurs. In August 1996, the Company also entered into an employment agreement with Mr. Jones, which provides for a base salary of $184,000 (Australian dollars) per year, a contribution to a superannuation fund equaling 10% of base salary and certain fringe benefits. Mr. Jones will be entitled to a bonus equal to 1% of base salary for every 1% increase in Recoil's annual net profit before depreciation, interest and taxes from the previous twelve month period. Although the agreement is not limited in duration, either party may terminate the agreement by giving four months written notice; however, should his employment be terminated within the first three years after the commencement of the agreement, Mr. Jones will be entitled to an additional special payment equal to six months of his total compensation package. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In 1996, Messrs. Law and Werner were the only executive officers of the Company who participated in deliberations of the Company's Board of Directors concerning executive compensation. The Compensation Committee of the Board of Directors was not formed until March 1997. See "--Committees of the Board of Directors." STOCK INCENTIVE PLAN In May 1997, the Company adopted its 1997 Stock Incentive Plan (the "Plan"). The Plan provides an additional means to attract, motivate, retain and reward key employees (including executive officers), as well as outside consultants and advisors, of the Company and its subsidiaries and to attract, motivate, and retain experienced and knowledgeable independent directors. SHARES THAT MAY BE ISSUED UNDER THE PLAN. A maximum of 500,000 shares of Common Stock, or approximately 5.8% of the issued and outstanding shares of Common Stock (on a fully diluted basis), has been reserved for issuance as grants and awards under the Plan. The maximum number of shares that may be subject to options and stock appreciation rights ("SARs") granted to any participant in the Plan during any calendar year will not exceed 45,000. The number and kind of shares available under the Plan are subject to adjustment in the event of any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend), extraordinary dividend or other distribution with respect to the Common Stock, reverse stock split, reorganization, merger, combination, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company, or there shall occur any similar corporate transaction or event with respect to the Common Stock or a sale of substantially all assets of the Company. ADMINISTRATION AND ELIGIBILITY. The Plan will be administered by the Compensation Committee, each member of which must be an outside director as defined in Section 162(m) of the Internal Revenue Code (the "Code"). The Plan empowers the Compensation Committee, among other things, to interpret the Plan, to make all determinations deemed necessary or advisable for the administration of the Plan and to award to officers and other employees of the Company as well as other persons, such as significant 38 consultants and advisors, selected by the Compensation Committee (collectively, "Eligible Persons"), options (including incentive stock options ("ISOs")) as defined in the Code, SARs, performance shares, other awards valued by reference to Common Stock and such factors as the Compensation Committee deems relevant, and certain Cash-Based Awards (as defined in the Plan). The various types of awards under the Plan are collectively referred to as "Awards." It is expected that after the consummation of the Offering there will be approximately 50 officers and other employees eligible to participate in the Plan. TRANSFERABILITY. Generally speaking, Awards are not transferable other than by will or the laws of descent and distribution, are exercisable only by the participant and may be paid only to the participant or the participant's beneficiary or representatives. However, the Compensation Committee may establish conditions and procedures under which exercise by and transfers and payments to certain third parties are permitted, to the extent permitted by law. OPTIONS. An option is the right to purchase shares of Common Stock at a future date at a specified price. The option price is generally one hundred percent of the closing price for a share of Common Stock as reported on any national securities exchange ("fair market value") on the date of grant. An option may be granted as an ISO or a nonqualified stock option. An ISO may not be granted to a person who, at the time the ISO is granted, owns more than 10% of the total combined voting power of all classes of stock of the Company and its subsidiaries unless the option price is at least 110% of the fair market value of shares of Common Stock subject to the option and such option by its terms is not exercisable after expiration of five years from the date such option is granted. The aggregate fair market value of shares of Common Stock (determined at the time the option is granted) for which ISOs may be first exercisable by an option holder during any calendar year under the Plan or any other plan of the Company or its subsidiaries may not exceed $100,000. A nonqualified stock option is not subject to any of these limitations. SARS. The Plan authorizes the Compensation Committee to grant SARs independent of any other Award or concurrently (and in tandem) with the grant of options. An SAR granted in tandem with an option is only exercisable when and to the extent that the related option is exercisable. An SAR entitles the holder to receive upon exercise the excess of the fair market value of a specified number of shares of Common Stock at the time of exercise over the option price. This amount may be paid in Common Stock (valued at its fair market value on the date of exercise), cash or a combination thereof, as the Compensation Committee may determine. PERFORMANCE SHARE AWARDS. The Compensation Committee may, in its discretion, grant Performance Share Awards to Eligible Persons based upon such factors as the Compensation Committee deems relevant in light of the specific type and terms of the Award. The amount of cash or shares or other property that may be deliverable pursuant to these Awards will be based upon the degree of attainment, over a specified period of not more than ten years (a "performance cycle") as may be established by the Compensation Committee, of such measures of the performance of the Company (or any part thereof) or the participant as may be established by the Compensation Committee. The Compensation Committee may provide for full or partial credit, prior to completion of a performance cycle or the attainment of the performance achievement specified in the Award, in the event of the participant's death, retirement, or disability, a Change in Control Event (as defined in the Plan) or in such other circumstances as the Compensation Committee may determine. SPECIAL PERFORMANCE-BASED AWARDS. In addition to Awards granted under other provisions of the Plan, performance-based awards within the meaning of Section 162(m) of the Code ("Performance-Based Awards"), which depend on the achievement of pre-established performance goals, may be granted under the Plan. The specific performance goals will be selected by the Compensation Committee in its sole discretion and the specific targets will be pre-established so that their attainment is substantially uncertain at the time of establishment. The permitted performance goals under the Plan may include earnings per share, return on equity, cash flow and total stockholder return. However, the applicable performance measurement period may not be less than one nor more than ten years. 39 The eligible class of persons for Performance-Based Awards consists of the executive officers of the Company. The maximum number of shares of Common Stock that may be delivered as Performance-Based Awards to any participant in any calendar year shall not exceed 75,000 shares. Furthermore, the maximum amount of compensation to be paid to any participant in respect of any Cash-Based Awards that are granted in any calendar year may not exceed $200,000. Before any Performance-Based Award is paid, the Committee must certify that the material terms of the Performance-Based Award were satisfied. The Committee will have discretion to determine the restrictions or other limitations of the individual Awards. STOCK BONUSES. The Compensation Committee may grant a stock bonus to any Eligible Person to reward exceptional or special services, contributions or achievements in the manner and on such terms and conditions (including any restrictions on such shares) as determined from time to time by the Compensation Committee. The number of shares so awarded shall be determined by the Compensation Committee and may be granted independently or in lieu of a cash bonus. TERM AND EXERCISE PERIOD OF AWARDS. The Plan provides that awards may be granted for such terms as the Compensation Committee may determine but options to acquire Common Stock may not have terms greater than ten years after the date of the Award. The Plan also generally imposes a six-month minimum vesting period on Awards and vesting at a rate not in excess of 25% per year. The Compensation Committee will set forth in each Award the effect of termination of employment upon the rights and benefits conferred and may make distinctions based on the cause of termination. In the event of termination other than for cause, the Compensation Committee may, in its discretion, increase the portion of an Award otherwise available or extend the exercise period of such Award. For non-employee directors, if the director's service with the Company terminates by reason of death or disability, his or her options shall become immediately exercisable and may be exercised for a period of two years after the date of such termination or until the options expire, whichever occurs first. If a non-employee director is terminated for any other reason, his or her exercisable options will expire at the earlier of six months or the expiration of the stated term and options not exercisable will be terminated. Other than as specified in the Plan, the Committee has the authority to accelerate the exercisability of options or (within the maximum ten-year term) extend the exercisability periods. TERMINATION, AMENDMENT AND ADJUSTMENT. The Plan may be terminated by the Compensation Committee or by the Board of Directors at any time. In addition, the Compensation Committee or the Board may amend the Plan from time to time, without the authorization or approval of the Company's stockholders, unless that approval is required by the certificate of designation relating to the Series C Preferred Stock, any law or agreement or the rules of any exchange upon which the stock of the Company is listed. No Award may be granted under the Plan more than ten years after the effective date of the Plan, although Awards previously granted may thereafter be amended consistent with the terms of the Plan. Upon the occurrence of a change in control event, in addition to acceleration of vesting, an appropriate adjustment to the number and type of shares or other securities or property subject to an Award and the price thereof may be made in order to prevent dilution or enlargement of rights under Awards. Individual awards may be amended by the Compensation Committee in any manner consistent with the Plan, including amendments that effectively reprice options without changes to other terms. Amendments that adversely affect the holder of an Award, however, are subject to his or her consent. The Plan is not exclusive and does not limit the authority of the Board of Directors or the Compensation Committee to grant other awards, in stock or cash, or to authorize other compensation, under any other plan or authority. NON-EMPLOYEE DIRECTOR OPTIONS. The Plan provides for automatic initial and subsequent annual grants of non-qualified stock options, with five-year terms, to non-employee directors. Each person who becomes a non-employee director will receive an initial grant of options to purchase 1,000 shares of Common Stock. Under the subsequent automatic grant, each non-employee director then in office will be granted options to purchase 500 shares each January 31. Each non-employee director option will vest at 40 the rate of 25% per year commencing one year after the initial award date and each of the next three years thereof. Upon the occurrence of a change in control event, each non-employee director option will become immediately exercisable in full, provided that no option will be accelerated to a date prior to six months after its grant date. To the extent any non-employee director option is not exercised prior to (i) dissolution of the Company or (ii) a merger or other corporate event that the Company does not survive, and no provision is made for the assumption, conversion, substitution or exchange of such option, such option will terminate upon the occurrence of the change in control event. INITIAL GRANTS OF OPTIONS. The Company anticipates granting certain options or shares under the Plan within three-to-six months following the consummation of the Offering. Options to purchase approximately 100,000 shares are anticipated to be granted to all executive officers and employees as a group. These options are anticipated to have a term of five years and to vest in equal annual installments over four years. The options will have an exercise price at least equal to the then prevailing market price per share. CERTAIN TRANSACTIONS FINANCING ARRANGEMENTS The Company and Operating Company have entered into the following financing arrangements with GECC which, although not resulting from competitive bids, are believed by the Company to have been obtained on commercially reasonable terms: FIXED RATE LOANS TERM LOAN AGREEMENT. In January 1994, in connection with the capitalization of the Company, the Company and GECC entered into a Term Loan Agreement (the "Term Loan Agreement"), pursuant to which GECC loaned $4.8 million to the Company, which is due and payable on January 3, 1999 and secured by the stock of Operating Company. Interest on this term loan, which is payable quarterly and may be added to the original principal, accrued at the rate of 9.5% for the period from January 3, 1994 to December 31, 1995 and, pursuant to the terms of the Term Loan Agreement, will accrue at the rate of 11.5% from January 1, 1996 until the loan is paid in full. As of December 31, 1996, approximately $6.5 million in total principal and interest was outstanding under this term loan. Interest expense on the loan was approximately $476,000, $525,000, and $712,000 for 1994, 1995 and 1996 respectively. PAYMENT-IN-KIND (PIK) DIVIDEND NOTE AGREEMENT. In lieu of quarterly cash dividends on the Series A and Series B Preferred Stock, the Company has issued PIK Dividend Notes to GECC. As of December 31, 1996, principal and interest on twelve PIK Dividend Notes for each such series of Preferred Stock were outstanding in the aggregate amounts of $84,000 for the Series A Preferred Stock and $247,000 for the Series B Preferred Stock. Interest on the PIK Dividend Notes, which is payable quarterly and may be added to the original principal of a Note, accrued at the rate of 9.5% for the period from January 3, 1994 to December 31, 1995 and will accrue at the rate of 11.5% from January 1, 1996 until each PIK Dividend Note is paid in full. Total interest expense on all PIK Dividend Notes was approximately $5,000, $12,000, and $26,000 for 1994, 1995 and 1996, respectively. VARIABLE RATE LOANS CREDIT AGREEMENT. In January 1994, Operating Company entered into a separate Credit Agreement (the "Credit Agreement") with GECC, which contains both a term loan provision and the Revolver. The term loan under the Credit Agreement, which is secured by substantially all of the Company's assets, was initially issued in the amount of $15.8 million for use in connection with the AFSG acquisition. Amendments to the Credit Agreement in December 1994, August 1995, August 1996 and December 1996 increased that amount to $28.2 million, the proceeds of which have been used for working capital purposes and capital expenditures. Quarterly principal repayments commenced April 1, 1995 and are payable through the maturity date, January 3, 1999. Interest is payable monthly at a rate equal to the prime rate 41 plus 1.5% (which was 9.75% as of December 31, 1996). Interest expense on the loan was approximately $1.4 million, $1.9 million and $2.0 million, for 1994, 1995 and 1996, respectively. TERM LOAN AGREEMENT. In August 1996, GECC loaned an additional $4.0 million to the Company under the Term Loan Agreement for the Recoil acquisition. Interest on this loan is payable monthly at a rate equal to the prime rate plus 1.5% (which was 9.75% as of December 31, 1996). As of December 31, 1996, $4.0 million in total principal was outstanding under this loan. Interest expense on the loan was approximately $154,000 for 1996. RECOIL TERM LOAN AGREEMENT. Recoil Pty, an Australian subsidiary of the Company that was formed to acquire the Recoil business unit, entered a separate term loan agreement with GECC in August 1996 to finance the acquisition (the "Recoil Term Loan"). At December 31, 1996, the outstanding principal under the Recoil Term Loan, which is due and payable on January 3, 1999, was $6.0 million. Interest on the Recoil Term Loan is payable monthly at a rate equal to the prime rate plus 1.5% (which was 9.75% as of December 31, 1996). Interest expense on the Recoil Term Loan for 1996 was approximately $231,000. REVOLVING LINE-OF-CREDIT The Revolver is a $15.0 million revolving credit facility, the availability of which is limited by the lesser of a specified portion of qualified accounts receivable and $15.0 million. Interest is payable monthly, beginning at the date of advance, at a rate equal to the prime rate plus 1.5% (which was 9.75% as of December 31, 1996). The Revolver expires on January 3, 1999. A principal balance of approximately $746,000 was outstanding under the Revolver as of December 31, 1996, with availability of approximately $10 million as of such date. The average amount outstanding under the Revolver was approximately $5.1 million, $4.4 million and $6.9 million in 1994, 1995 and 1996, respectively. Interest expense on the Revolver was approximately $447,000, $462,000, $682,000 for 1994, 1995 and 1996, respectively. OTHER ARRANGEMENTS In the ordinary course of business, the Company supplies fasteners, inserts and other products to the Aircraft Engines Division of GE. GE is the indirect parent company of GECC. The Company made direct sales of approximately $8.0 million, $8.8 million and $11.4 million to the GE Aircraft Engines Division in 1994, 1995 and 1996, respectively, representing approximately 14.6%, 12.7% and 11.5% of the Company's net sales in such years, respectively. The Company believes that its sales to the GE Aircraft Engines Division have been conducted at competitive market rates. The Company believes that its financial transactions with GECC have not played a role in the bids or related negotiations with the GE Aircraft Engines Division. 42 PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock and Common Stock equivalents after giving effect to the Reorganization, and as adjusted to reflect the sale of the Common Stock offered hereby, by (i) each person or entity known to the Company to own beneficially more than 5% of the Common Stock or Common Stock equivalents following the Reorganization, (ii) each of the Company's directors and executive officers, (iii) the Selling Stockholder and (iv) all directors and executive officers as a group.
SHARES OF COMMON STOCK OR COMMON STOCK EQUIVALENTS SHARES OF COMMON STOCK BENEFICIALLY OWNED OR COMMON STOCK AFTER THE EQUIVALENTS REORGANIZATION, BUT BENEFICIALLY OWNED PRIOR TO THE AFTER THE OFFERING(2) OFFERING(2)(3) NAME AND ADDRESS OF ----------------------- ----------------------- BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT - ---------------------------------------------------------- ---------- ----------- --------- ---------- ----------- General Electric Capital Corporation(4)................... 5,406,000 79.5% 200,000 5,206,000 60.5% 201 High Ridge Road Stamford, CT 06927 Jordan A. Law............................................. 369,444 5.4% -- 369,444 4.3% David A. Werner........................................... 341,564 5.0% -- 341,564 4.0% Robert L. Beers........................................... 229,976 3.4% -- 229,976 2.7% LeRoy A. Dack............................................. 229,976 3.4% -- 229,976 2.7% Berecz Family Trust(5).................................... 139,400 2.1% -- 139,400 1.6% Joseph M. Varholick....................................... 55,760 * -- 55,760 * Blomberg Family Trust(6).................................. 27,880 * -- 27,880 * All directors and executive officers as a group (11 persons)................................................ 1,394,000 20.5% -- 1,394,000 16.2%
- ------------------------ * Less than 1%. (1) The address of each person other than GECC is 500 N. State College Blvd., Orange, California 92868. (2) The number of shares beneficially owned by each stockholder is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days after May 9, 1997. The inclusion herein of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity. (3) Assumes that the Underwriters' over-allotment option is not exercised. (4) Includes 5,206,000 shares of Series C Preferred Stock, which represent all issued and outstanding shares of Series C Preferred Stock. The Series C Preferred Stock is convertible at any time into Common Stock at a one-to-one conversion rate, subject to adjustment in certain circumstances. See "Description of Capital Stock--Series C Preferred Stock." (5) Imre Berecz, the Company's Vice President, Product Research and Development, and Managing Director, K.T.I. Femipari KFT, is the trustee of the Berecz Family Trust. (6) Joseph F. Blomberg, the Company's Director of Human Resources, is the trustee of the Blomberg Family Trust. 43 DESCRIPTION OF CAPITAL STOCK As of December 31, 1996, there were (i) 20,500 shares of Common Stock outstanding, held of record by seven holders, (ii) 20,094 shares of Series A Preferred Stock outstanding, held of record by one holder, (iii) 59,406 shares of Series B Preferred Stock outstanding, held of record by one holder and (iv) no options or warrants to purchase shares of Common Stock outstanding. After the Reorganization, the Company's authorized capital stock will consist of 20,000,000 shares of Common Stock and 10,000,000 shares of Series C Preferred Stock. As a result of the Reorganization, 1,594,000 shares of Common Stock, held of record by eight stockholders, 5,206,000 shares of Series C Preferred Stock, held of record by one stockholder and no options or warrants to purchase Common Stock will be outstanding. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferential rights with respect to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividends." In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding preferred stock. Common Stock has no preemptive or conversion rights or other subscription rights. The outstanding shares of Common Stock are, and the shares to be issued upon completion of the Offering will be, fully paid and non-assessable. SERIES C PREFERRED STOCK LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series C Preferred Stock will be entitled to receive out of the assets of the Company available for distribution to stockholders an amount equal to $0.22 per share, plus any accrued and unpaid dividends thereon, before any distribution is made to the holders of Common Stock. CONVERTIBILITY. Each share of Series C Preferred Stock is convertible at any time into one share of Common Stock (the "Conversion Rate"), with no payment due from the Selling Stockholder to the Company. Any shares of Series C Preferred Stock that the Selling Stockholder transfers to a non-affiliate will automatically convert to Common Stock at the Conversion Rate. The Conversion Rate is subject to certain anti-dilution adjustments that may be triggered any time the Company (i) issues rights or warrants to the holders of Common Stock entitling them to purchase Common Stock at below market price, (ii) effects any stock splits or reverse stock splits of the Common Stock, (iii) reclassifies the Common Stock into any other security or securities, (iv) is consolidated with, or merges into, another entity or (v) sells substantially all of its assets. Except as set forth above, the Conversion Rate will not be adjusted upon future issuances of Common Stock by the Company. VOTING RIGHTS. As long as the Selling Stockholder holds 25% or more of the Fully Diluted Shares, it is entitled to vote its Series C Preferred Stock as a separate class on (i) any liquidation, dissolution or winding-up of the Company, (ii) any amendment to the Company's Certificate of Incorporation or By-laws that, in any case, adversely affects any rights of the Series C Preferred Stock, (iii) the creation of any other class or series of preferred stock, (iv) the issuance of authorized shares of any class of capital stock, (v) any merger or consolidation resulting in shares of Common Stock or Series C Preferred Stock being converted into other securities or the right to receive cash or other property, (vi) the sale, lease or other conveyance of all or substantially of the Company's assets, whether in one transaction or a series of related transactions or (vii) any transaction, or related series of transactions, resulting in the redemption or repurchase of securities (other than Series C Preferred Stock) that aggregate 10% or more of the Fully Diluted Shares. DIVIDENDS. A holder of the Series C Preferred Stock will participate in any dividends paid on the Common Stock, whether in cash, securities or other property, as if such holder's Series C Preferred Stock had been converted into Common Stock at the Conversion Rate at that time. 44 OTHER PREFERRED STOCK The Board of Directors, with the approval of the holder of the Series C Preferred Stock (to the extent required), is authorized to issue additional series of Preferred Stock and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. Although the Company has no present plans to issue any shares of Preferred Stock following consummation of the Offering, the issuance of additional series of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of the Company without further action of the stockholders. The issuance of any Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. THE NEW STOCKHOLDERS AGREEMENT The New Stockholders Agreement provides that as long as the outstanding Series C Preferred Stock represents 40% or more of the Fully Diluted Shares, (i) the holder thereof will have the right to designate two individuals that the Company will nominate for election to the Board of Directors each year and (ii) each of the Audit Committee and the Compensation Committee will include two directors who were so designated by the holder of the Series C Preferred Stock. As long as the outstanding Series C Preferred Stock represents 25% or more (but less than 40%) of the Fully Diluted Shares, (i) the holder thereof will have the right to designate one individual that the Company will nominate for election to the Board of Directors each year and (ii) each of the Audit Committee and the Compensation Committee will include one director who was so designated by the holder of the Series C Preferred Stock. The New Stockholders Agreement also provides that, beginning 180 days after the Offering, the Selling Stockholder will have the right to request on two separate occasions that the Company file a registration statement under the Securities Act covering shares of Common Stock issued to the Selling Stockholder upon conversion of Series C Preferred Stock ("Demand Registration Rights"). The Selling Stockholder will be entitled to three additional Demand Registration Rights if the Company becomes eligible to file a Registration Statement on Form S-3. If, under certain other circumstances, the Company files a registration statement covering shares of Common Stock, the Selling Stockholder will be entitled to notice of such registration and, on two separate occasions, may include in the offering shares of Common Stock issued to the Selling Stockholder upon conversion of Series C Preferred Stock ("Piggyback Registration Rights"). The Selling Stockholder will receive additional Piggyback Registration Rights to the extent that such rights are granted to any other stockholder of the Company. The Company will pay the costs of any offering in which the Selling Stockholder exercises its Demand or Piggyback Registration Rights, except that the Selling Stockholder will pay its own legal fees and expenses and a proportionate share of any underwriting discounts and commissions. The Selling Stockholder will be entitled to additional Demand and Piggyback Registration Rights to the extent that it agrees to pay a pro rata share of all offering costs. THE OLD STOCKHOLDERS AGREEMENT The Company, the Selling Stockholder and each management stockholder are parties to a Stockholders Agreement, dated as of January 3, 1994 (the "Old Stockholders Agreement"). The Old Stockholders Agreement provides, among other things, for the manner of election of directors, certain preemptive rights of stockholders, and the treatment of shares held by the management of the Company. Upon the consummation of the Offering, however, the Old Stockholders Agreement and all provisions thereto will terminate. CERTAIN ANTI-TAKEOVER EFFECTS SPECIAL PROVISIONS FOR SPECIAL MEETINGS OF THE STOCKHOLDERS OR BOARD OF DIRECTORS. The Certificate of Incorporation provides that, if no one person beneficially owns securities representing 25% or more of the 45 Fully Diluted Shares, any action required or permitted to be taken by the stockholders of the Company at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting, with advance notice given to the Company, and may not be taken by written action in lieu of a meeting. The By-laws further provide that special meetings of the stockholders may only be called by the Chairman of the Board of Directors (or, if none, the President of the Company) or the holders of 25% or more of the outstanding Common Stock. The foregoing provisions could have the effect of delaying until the next stockholders meeting stockholder actions which are favored by the holders of a majority of the outstanding voting securities of the Company. These provisions may also discourage another person or entity from making a tender offer for the Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. DIRECTORS' EXCULPATION AND INDEMNIFICATION. The Certificate of Incorporation contains certain provisions permitted under the Delaware Law relating to the liability of directors. The provisions eliminate a director's liability for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. Further, the By-laws contain provisions to indemnify the Company's directors to the fullest extent permitted by the Delaware Law. The Company has also entered into indemnification agreements with each director. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. In addition, Mr. Kloster has entered into a separate indemnification agreement with the Selling Stockholder, pursuant to which the Selling Stockholder will indemnify Mr. Kloster to the extent his indemnifiable losses are not recoverable from the Company or any insurer of the Company. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is ChaseMellon Shareholder Services. Its telephone number is (213) 553-9700. SHARES ELIGIBLE FOR FUTURE SALE Assuming that the Underwriters' over-allotment option is not exercised, upon completion of the Offering, the Company will have outstanding 3,394,000 shares of Common Stock and 5,206,000 shares of Series C Preferred Stock, which is convertible into Common Stock at any time at a one-to-one conversion rate, subject to adjustment in certain circumstances. The 2,000,000 shares of Common Stock sold in the Offering (2,300,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restriction under the Securities Act, except for shares held by an "affiliate" of the Company, as such term is defined under Rule 144 of the Securities Act. The remaining 6,600,000 shares of Common Stock (including 5,206,000 shares receivable upon conversion of the outstanding Series C Preferred Stock) (the "Restricted Shares") were issued and sold by the Company in private transactions and may be publicly sold only if registered under the Securities Act or sold in accordance with an applicable exemption from registration, such as Rule 144. All of the shares of Common Stock held by existing stockholders, which were acquired in October 1993, are subject to lock-up agreements (as described below) which restrict their sale prior to 180 days from the date of the Prospectus. A total of approximately 1,394,000 shares of Common Stock (or 6,600,000 shares of Common Stock if all outstanding Series C Preferred Stock were converted) subject to these lock-up agreements will become eligible for sale beginning 180 days from the date of the Prospectus, or earlier in the discretion of Lehman Brothers Inc., upon expiration of these lock-up agreements, in accordance with certain restrictions of Rule 144. In general, under Rule 144 as currently in effect, beginning on the 91st day after the Offering (but subject to the lock-up agreements), a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares as to which two years have elapsed between the later of the date of acquisition of 46 the securities from the Company or from an affiliate of the Company, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then-outstanding number of shares of Common Stock (33,940 shares immediately after the Offering) or the average weekly trading volume of the Common Stock on the Nasdaq National Market System during the four calendar weeks preceding the sale. Sales under Rule 144 are subject to certain "manner of sale" provisions and notice requirements and to the availability of current public information about the Company. The Securities and Exchange Commission ("Commission") has adopted rule changes that will, effective April 29, 1997, reduce the Rule 144 holding period from two years to one. The Company and its officers and directors and the Selling Stockholder have agreed that, for a period of 180 days from the date of the Prospectus, they will not, without the prior written consent of Lehman Brothers Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any other capital stock of the Company. The Company is unable to estimate the number of shares that may be sold in the future by its existing stockholders or the effect, if any, that sales of shares by stockholders will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock by existing stockholders could adversely affect prevailing market prices. 47 UNDERWRITING The underwriters of the Offering named below (the "Underwriters"), for whom Lehman Brothers Inc. and PaineWebber Incorporated are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which the Prospectus is a part, to purchase from the Company and the Selling Stockholder, the aggregate number of shares of Common Stock set forth opposite their respective names below:
UNDERWRITERS NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Lehman Brothers Inc........................................................ 620,000 PaineWebber Incorporated................................................... 620,000 ABN AMRO Chicago Corporation............................................... 55,000 Bear, Stearns & Co. Inc.................................................... 55,000 Credit Suisse First Boston Corporation..................................... 55,000 A.G. Edwards & Sons, Inc................................................... 55,000 Everen Securities, Inc..................................................... 55,000 Goldman, Sachs & Co........................................................ 55,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated...................................................... 55,000 Morgan Stanley & Co. Incorporated.......................................... 55,000 Oppenheimer & Co., Inc..................................................... 55,000 Salomon Brothers Inc....................................................... 55,000 Crowell, Weedon & Co....................................................... 30,000 Fahnestock & Co. Inc....................................................... 30,000 First of Michigan Corporation.............................................. 30,000 Gabelli & Company, Inc..................................................... 30,000 Legg Mason Weed Walker, Incorporated....................................... 30,000 Pennsylvania Merchant Group Ltd............................................ 30,000 Sutro & Co. Incorporated................................................... 30,000 ----------------- Total.................................................................... 2,000,000 ----------------- -----------------
The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions, and that, if any of the foregoing shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all of the shares of Common Stock agreed to be purchased by the Underwriters pursuant to the Underwriting Agreement (other than those covered by the over-allotment option described below) must be so purchased. The Company and the Selling Stockholder have been advised that the Underwriters propose to offer the shares of Common Stock directly to the public initially at the public offering price set forth on the cover page of the Prospectus, and to certain selected dealers (who may include the Underwriters) at such public offering price less a selling concession not in excess of $0.57 per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $0.10 per share to certain brokers and dealers. After the initial public offering, the public offering price, the concession to selected dealers and the reallowance may be changed by the Representatives. Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase shares of Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), the 48 Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Representatives also may impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in the offering. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Company has granted to the Underwriters an option to purchase up to an additional 300,000 shares of Common Stock at the public offering price, less the aggregate underwriting discounts and commissions shown on the cover page of the Prospectus, solely to cover over-allotments, if any. The option may be exercised at any time up to 30 days after the date of the Underwriting Agreement. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Company has agreed that, without the prior written consent of Lehman Brothers Inc., it will not, subject to certain limited exceptions, directly or indirectly, offer, sell, contract to sell or otherwise issue or dispose of any shares of Common Stock or any other capital stock of the Company for 180 days after the date of the Prospectus. All of the stockholders of the Company, including the Selling Stockholder, have agreed that, without the prior written consent of Lehman Brothers Inc., they will not, subject to certain limited exceptions, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock or any other capital stock of the Company for a period of 180 days after the date of the Prospectus. GECC indirectly owns approximately 23% of PaineWebber Group, which is the holding company of PaineWebber Incorporated. As a result of the foregoing, the Selling Stockholder is deemed to be an affiliate of PaineWebber Incorporated, and the Offering is subject to the provisions of Rule 2720 of the National Association of Securities Dealers, Inc. (the "NASD"). Accordingly, the underwriting arrangements for the Offering will conform with the requirements set forth in Rule 2720. In particular, the public offering price of the Common Stock can be no higher than that recommended by a "qualified independent underwriter" meeting certain standards. In accordance with this requirement, Lehman Brothers Inc. will serve in such role and will recommend the public offering price in compliance with the requirements of Rule 2720. Lehman Brothers Inc., in its role as qualified independent underwriter, has performed due diligence investigations and reviewed and participated in the preparation of the Prospectus and the Registration Statement of which the Prospectus forms a part. Prior to the Offering, there has been no public market for the shares of Common Stock. There can be no assurance that an active trading market will develop for shares of the Common Stock or as to the price at which shares of the Common Stock may trade in the public market from time to time subsequent to the Offering. The initial public offering price was negotiated between the Company and the Representatives. Among the factors considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, were the Company's historical performance, capital structure, estimates of the business potential and earnings prospects of the Company and its industry in general, an 49 overall assessment of the Company, an assessment of the Company's management and the market prices of securities of companies engaged in businesses similar to that of the Company. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "KTIC." The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act and to contribute, under certain circumstances, to payments that the Underwriters may be required to make in respect thereof. Purchasers of the Common Stock offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page hereof. The Representatives have informed the Company that they do not intend to confirm sales of shares of Common Stock offered hereby to any accounts over which they exercise discretionary authority. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by O'Melveny & Myers LLP. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Latham & Watkins. EXPERTS The consolidated financial statements of the Company at December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, and the consolidated financial statements of Recoil Pty Ltd and subsidiaries as of June 30, 1996 and for the year then ended, appearing in the Prospectus and Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their reports with respect thereto, and are included in reliance upon the authority of such firm as experts in giving said reports. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. The Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in the Prospectus as to the contents of contracts or other documents are summaries of the material provisions thereof. Copies of each contract or document referred to herein are filed as exhibits to the Registration Statement. Copies of the Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., or obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60606. Copies of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site at http://www.sec.gov that contains reports, proxy information statements and other information regarding registrants, like the Company, that file electronically with the Commission. As long as the Common Stock is quoted and traded on the Nasdaq National Market, such reports, proxy and information statements and other information can also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company intends to furnish to its stockholders annual reports containing audited financial information and furnish quarterly reports containing condensed unaudited financial information for each of the first three quarters of each fiscal year. 50 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS KAYNAR TECHNOLOGIES INC.
PAGE --------- Report of Independent Public Accountants................................................................... F-2 Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996..................... F-3 Consolidated Balance Sheets as of December 31, 1995 and 1996............................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996....... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996................. F-7 Notes to Consolidated Financial Statements................................................................. F-8 RECOIL PTY LTD Report of Independent Public Accountants................................................................... F-18 Consolidated Statement of Income for the year ended June 30, 1996.......................................... F-19 Consolidated Balance Sheet as of June 30, 1996............................................................. F-20 Consolidated Statement of Stockholders' Equity for the year ended June 30, 1996............................ F-22 Consolidated Statement of Cash Flows for the year ended June 30, 1996...................................... F-23 Notes to Consolidated Financial Statements................................................................. F-24
F-1 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, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kaynar Technologies Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California May 6, 1997 F-2 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1995 1996 ------------ ------------ ------------ Net sales, including $8,046, $8,755 and $11,437 in 1994, 1995 and 1996, respectively, to a related party (see Note 13)........................ $ 55,117 $ 68,781 $ 99,023 Cost of sales........................................................... 41,117 51,940 72,924 ------------ ------------ ------------ Gross profit.......................................................... 14,000 16,841 26,099 ------------ ------------ ------------ Selling, general and administrative expenses............................ 9,048 10,018 13,263 ------------ ------------ ------------ Operating income...................................................... 4,952 6,823 12,836 Interest expense, net................................................... 2,304 2,935 4,011 ------------ ------------ ------------ Income before income taxes............................................ 2,648 3,888 8,825 Provision for income taxes.............................................. 1,129 1,577 3,530 ------------ ------------ ------------ Net Income............................................................ $ 1,519 $ 2,311 $ 5,295 ------------ ------------ ------------ ------------ ------------ ------------ Earnings per share of common stock and common stock equivalents outstanding........................................................... $ 0.22 $ 0.34 $ 0.78 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of shares of common stock and common stock equivalents outstanding............................................... 6,800,000 6,800,000 6,800,000 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1996 ASSETS (DOLLARS IN THOUSANDS)
1995 1996 --------- --------- Current assets: Cash...................................................................................... $ 52 $ 909 Accounts receivable, including $1,487 and $1,987 in 1995 and 1996, respectively, from a related party (see Note 13), net of allowance for doubtful accounts of $141 and $235 in 1995 and 1996, respectively............................................................. 11,382 15,392 Inventories............................................................................... 20,523 29,901 Prepaid expenses and other current assets................................................. 318 709 --------- --------- Total current assets.................................................................. 32,275 46,911 --------- --------- Property, plant and equipment, at cost...................................................... 13,994 24,160 Less accumulated depreciation and amortization............................................ (3,050) (5,451) --------- --------- 10,944 18,709 --------- --------- Intangible assets, net of accumulated amortization of $167 at December 31, 1996............. -- 7,815 Other assets................................................................................ 117 254 --------- --------- $ 43,336 $ 73,689 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-4 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1996 LIABILITIES AND STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
1995 1996 --------- --------- Current liabilities: Revolving line-of-credit, to a related party (see Note 13)................................ $ 4,306 $ 746 Current portion of long-term debt......................................................... 830 1,457 Current portion of capital lease obligations.............................................. 22 133 Accounts payable.......................................................................... 3,217 6,105 Accrued payroll and related expenses...................................................... 3,175 5,330 Other accrued expenses.................................................................... 1,306 2,664 Deferred income taxes..................................................................... 428 288 --------- --------- Total current liabilities............................................................. 13,284 16,723 --------- --------- Long-term debt, primarily to a related party (see Note 13).................................. 24,318 45,176 Capital lease obligations................................................................... 105 332 Deferred income taxes....................................................................... 472 832 --------- --------- 24,895 46,340 --------- --------- Commitments and contingencies (Notes 6 and 9) Stockholders' equity: Series C Convertible Preferred Stock,$0.01 par value; Authorized--10,000,000; issued and outstanding--5,206,000 shares........................................................... 52 52 Common stock, $.01 par value; Authorized--20,000,000 shares; issued and outstanding--1,594,000.................................................................. 16 16 Additional paid-in capital................................................................ 1,432 1,432 Retained earnings......................................................................... 3,639 8,838 Currency translation adjustment........................................................... 18 288 --------- --------- Total stockholders' equity............................................................ 5,157 10,626 --------- --------- $ 43,336 $ 73,689 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-5 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
PREFERRED STOCK SERIES C COMMON STOCK ADDITIONAL CURRENCY ----------------------- ----------------------- PAID-IN RETAINED TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ---------- ----------- ---------- ----------- ----------- ----------- ------------- (DOLLARS IN THOUSANDS) January 3, 1994................... 5,206,000 $ 52 1,594,000 $ 16 $ 1,432 $ -- $ -- Net income...................... -- -- -- -- -- 1,519 -- Dividends declared.............. -- -- -- -- -- (96) -- Currency translation adjustment.................... -- -- -- -- -- -- 21 ---------- --- ---------- --- ----------- ----------- ----- Balance, December 31, 1994........ 5,206,000 52 1,594,000 16 1,432 1,423 21 Net income...................... -- -- -- -- -- 2,311 -- Dividends declared.............. -- -- -- -- -- (95) -- Currency translation adjustment.................... -- -- -- -- -- -- (3) ---------- --- ---------- --- ----------- ----------- ----- Balance, December 31, 1995........ 5,206,000 52 1,594,000 16 1,432 3,639 18 Net income...................... -- -- -- -- -- 5,295 -- Dividends declared.............. -- -- -- -- -- (96) -- Currency translation adjustment.................... -- -- -- -- -- -- 270 ---------- --- ---------- --- ----------- ----------- ----- Balance, December 31, 1996........ 5,206,000 $ 52 1,594,000 $ 16 $ 1,432 $ 8,838 $ 288 ---------- --- ---------- --- ----------- ----------- ----- ---------- --- ---------- --- ----------- ----------- ----- TOTAL --------- January 3, 1994................... $ 1,500 Net income...................... 1,519 Dividends declared.............. (96) Currency translation adjustment.................... 21 --------- Balance, December 31, 1994........ 2,944 Net income...................... 2,311 Dividends declared.............. (95) Currency translation adjustment.................... (3) --------- Balance, December 31, 1995........ 5,157 Net income...................... 5,295 Dividends declared.............. (96) Currency translation adjustment.................... 270 --------- Balance, December 31, 1996........ $ 10,626 --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-6 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS)
1994 1995 1996 --------- --------- ---------- Cash flows from operating activities: Net income.................................................................... $ 1,519 $ 2,311 $ 5,295 Adjustments to reconcile net income to net cash provided by (used in) operating activities-- Depreciation and amortization............................................... 1,351 1,754 2,613 Loss on sale of property, plant and equipment................................. 30 -- 34 Changes in operating assets and liabilities-- Increase in accounts receivable............................................... (2,190) (3,528) (2,505) Increase in inventories....................................................... (1,095) (3,368) (6,867) (Increase) decrease in prepaid expenses....................................... (12) 37 (152) (Increase) decrease in other assets........................................... (35) (82) 181 Increase in accounts payable.................................................. 1,706 1,114 2,361 Increase in accrued expenses.................................................. 34 1,111 3,172 Increase in deferred income taxes............................................. 399 501 186 --------- --------- ---------- Net cash provided by (used in) operating activities......................... 1,707 (150) 4,318 --------- --------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment.................................... (2,423) (3,324) (6,850) Proceeds from sales of property, plant and equipment.......................... 5 169 43 Acquisition, net of acquired cash of $34...................................... -- -- (12,160) Increase in intangible assets................................................. -- -- (1,231) --------- --------- ---------- Net cash used in investing activities....................................... (2,418) (3,155) (20,198) --------- --------- ---------- Cash flows from financing activities: Net borrowings (payments) on line-of-credit, from a related party (see Note 13)......................................................................... (1,938) 1,244 (3,560) Borrowings on long-term debt, primarily from a related party (see Note 13).... 2,480 2,666 21,245 Payments on long-term debt, primarily to a related party (see Note 13)........ -- (789) (898) Principal payments on capital lease obligations............................... -- (6) (55) --------- --------- ---------- Net cash provided by financing activities................................... 542 3,115 16,732 --------- --------- ---------- Effect of exchange rate changes on cash......................................... -- -- 5 --------- --------- ---------- Net increase (decrease) in cash................................................. (169) (190) 857 Cash, beginning of period....................................................... 411 242 52 --------- --------- ---------- Cash, end of period............................................................. $ 242 $ 52 $ 909 --------- --------- ---------- --------- --------- ---------- Supplemental disclosures of cash flow information: Cash paid during the period for Interest.................................................................... $ 2,006 $ 2,968 $ 3,787 --------- --------- ---------- --------- --------- ---------- Income Taxes................................................................ $ 743 $ 722 $ 2,841 --------- --------- ---------- --------- --------- ---------- Noncash financing activities: Capital lease obligations assumed for the purchase of equipment............. $ -- $ 157 $ 355 --------- --------- ---------- --------- --------- ---------- Borrowings on long-term debt for preferred stock dividends.................. $ 96 $ 95 $ 96 --------- --------- ---------- --------- --------- ---------- Issuance of debt for purchase of assets of predecessor company.............. $ 25,695 $ -- $ -- --------- --------- ---------- --------- --------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-7 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. NATURE OF OPERATIONS AND FORMATION OF COMPANY Kaynar Technologies Inc. (the "Company") is a manufacturer of specialty fasteners, fastening systems and related components used primarily by original equipment manufacturers and their subcontractors in the production of commercial aircraft and defense products. In addition, the Company also manufactures other specialty fasteners and related products for sale in the automotive, electronic and other industrial markets, and their associated after-markets. The Company designs and manufactures a substantial majority of its fasteners to its customers' specifications and in a wide range of specialty metals, alloys and composites. The Company was originally incorporated (see Note 12) in Delaware in October 1993, and on January 3, 1994, purchased certain assets and assumed certain liabilities of Microdot Inc., a Delaware corporation, that filed for protection under Chapter 11 of the United States Bankruptcy Code and of Microdot Aerospace Ltd., a United Kingdom corporation, which had filed for liquidation under the laws of the United Kingdom. The net assets acquired totaled approximately $25,695. The purchase price was allocated to the net assets, based on the then fair market value (which approximated net book value) as follows: Current assets..................................................... $ 21,080 Property, plant and equipment...................................... 8,373 --------- Total assets....................................................... 29,453 Current liabilities................................................ 3,758 --------- Net assets..................................................... $ 25,695 --------- ---------
The acquisition was financed by the issuance of approximately $25,000 of debt to the lender referred to in Note 6 who was also a secured lender to Microdot Inc. On August 11, 1996, the Company acquired substantially all of the assets of Recoil Pty Ltd., an Australian corporation ("Recoil"). Recoil is a manufacturer and distributor of thread inserts used primarily in the automotive, electronic and other industrial markets, and their associated after-markets. The purchase price of $12,194 was paid in cash (primarily obtained under terms of various credit agreements, see Note 6). The total purchase price was allocated to the net assets, based on the then fair market value, as follows: Current assets..................................................... $ 4,245 Property, plant and equipment...................................... 3,044 Other noncurrent assets............................................ 300 Intangible assets.................................................. 6,687 --------- Total assets................................................... 14,276 Current liabilities................................................ 800 Noncurrent liabilities............................................. 1,282 --------- Net assets..................................................... $ 12,194 --------- ---------
F-8 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. NATURE OF OPERATIONS AND FORMATION OF COMPANY (CONTINUED) The following unaudited pro forma consolidated statements of income information present the results of the Company's operations for the years ended December 31, 1995 and 1996, as though the acquisition of Recoil had occurred as of the beginning of each respective fiscal year:
1995 1996 --------- ---------- Net sales.............................................................. $ 77,449 $ 105,015 --------- ---------- --------- ---------- Net income............................................................. $ 2,793 $ 5,432 --------- ---------- --------- ---------- Earnings per share..................................................... $ 0.41 $ 0.80 --------- ---------- --------- ----------
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place at the beginning of the fiscal year or the results that may occur in the future. Furthermore, the pro forma results do not give effect to cost savings or incremental costs which may occur as a result of the integration and consolidation of Recoil. The pro forma results include additional interest on borrowed funds and additional amortization of goodwill resulting from the acquisition. 2. 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 leasing of the Company's K-Fast tools, which are not significant, are recognized monthly over the term of the lease. D. CURRENCY TRANSLATION ADJUSTMENT Assets and liabilities of 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 insignificant. F-9 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. 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. F. PROPERTY, PLANT AND EQUIPMENT Depreciation is computed 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. G. 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 acquisition of Recoil. Intangibles are amortized using the straight-line method from the date of acquisition over the expected period to be benefited, currently estimated at 20 years. The Company assesses the recoverability of intangible assets in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." H. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable and accounts payable approximate their fair value as of December 31, 1995 and 1996. The carrying amounts of the line-of-credit and long-term debt approximate fair value because the obligations bear interest at rates that fluctuate with the market rate. The carrying amount of the term loans approximates fair value because the obligation compares favorably with fixed rate obligations that would be currently available to the Company. I. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards (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. J. EARNINGS PER SHARE Earnings per share are computed based on the weighted average number of shares of common stock and common stock equivalents outstanding. The outstanding Series C Convertible Preferred Stock are common share equivalents. F-10 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 3. INVENTORIES Inventories consist of the following at December 31, 1995 and 1996:
1995 1996 --------- --------- Finished goods.......................................................... $ 4,914 $ 8,781 Components.............................................................. 3,715 4,628 Work in progress........................................................ 6,482 9,151 Raw materials........................................................... 2,080 2,790 Supplies and small tools................................................ 3,332 4,551 --------- --------- $ 20,523 $ 29,901 --------- --------- --------- ---------
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at December 31, 1995 and 1996:
YEARS OF ESTIMATED USEFUL LIFE 1995 1996 ------------- --------- --------- Land..................................................... -- $ -- $ 30 Factory equipment........................................ 7 to 10 7,707 12,825 Equipment rented to others............................... 7 3,656 5,651 Office equipment......................................... 5 848 1,374 Leasehold improvements................................... Lease term 381 628 Construction in progress................................. -- 1,194 3,089 Equipment under capital lease............................ Lease term 208 563 --------- --------- 13,994 24,160 Accumulated depreciation and amortization................ (3,050) (5,451) --------- --------- $ 10,944 $ 18,709 --------- --------- --------- ---------
F-11 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 5. INCOME TAXES The components of the net accumulated deferred income tax liability at December 31, 1995 and 1996 are as follows:
1995 1996 --------- --------- Current deferred tax (asset) liability: Inventory reserves........................................................ $ 1,161 $ 818 Accrued vacation.......................................................... (232) (205) AMT credit................................................................ (472) -- Other..................................................................... (29) (325) --------- --------- $ 428 $ 288 --------- --------- --------- --------- Long-term deferred tax (asset) liability: Foreign income............................................................ $ 59 $ (48) Foreign tax credit........................................................ (53) -- Depreciation.............................................................. 466 880 --------- --------- $ 472 $ 832 --------- --------- --------- ---------
The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statements and tax bases 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, 1994, 1995 and 1996, consists of the following:
1994 1995 1996 --------- --------- --------- Current provision: Federal........................................................ $ 559 $ 854 $ 2,590 State.......................................................... 171 222 720 Deferred provision: Federal........................................................ 355 456 69 State.......................................................... 44 45 151 --------- --------- --------- $ 1,129 $ 1,577 $ 3,530 --------- --------- --------- --------- --------- ---------
The components of the Company's deferred income tax provision for the years ended December 31, 1994, 1995 and 1996, which arise from tax credits and timing differences between financial and tax reporting, are presented below:
1994 1995 1996 --------- --------- --------- Inventory reserves................................................. $ 1,109 $ 52 $ (343) Accrued vacation................................................... (57) (175) 27 AMT credit......................................................... (656) 184 472 Foreign income..................................................... -- 59 (107) Foreign tax credit................................................. -- (53) 53 Depreciation....................................................... 9 457 414 Other.............................................................. (6) (23) (296) --------- --------- --------- $ 399 $ 501 $ 220 --------- --------- --------- --------- --------- ---------
F-12 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 5. INCOME TAXES (CONTINUED) Variations from the federal statutory rate for the years ended December 31, 1994, 1995 and 1996, are as follows:
1994 1995 1996 ------------------------ ------------------------ ------------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE --------- ------------- --------- ------------- --------- -------------- Federal statutory rate.......................... $ 900 34.0% $ 1,322 34.0% $ 3,001 34.0% State income taxes, net of federal benefit...... 138 5.2 202 5.2 485 5.5 Foreign sales corporation benefit............... -- -- -- -- (141) (1.6) Other........................................... 91 3.4 53 1.4 185 2.1 --------- --- --------- --- --------- --- $ 1,129 42.6% $ 1,577 40.6% $ 3,530 40.0% --------- --- --------- --- --------- --- --------- --- --------- --- --------- ---
6. DEBT ARRANGEMENTS The Company has entered into Credit Agreements (the "Agreements") with General Electric Capital Corporation (the "Lender"), who is also a significant stockholder of the Company. The Agreements contain 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 Agreements also require the Company to be in compliance with certain financial ratios. In addition to the Agreements, the Company has entered into promissory notes with other lenders for the purchase of equipment. The following schedule summarizes the future annual minimum principal payments due under the variable rate term loans (the "Term Loans"), other fixed rate loans (the "Loans"), promissory notes (the "Notes") and Australian Trade Commission Loan (the "ATC Loan") as of December 31, 1996:
TERM LOANS THE LOANS THE NOTES ATC LOAN TOTAL --------- --------- --------- --------- --------- 1997.............................................................. $ 1,100 $ -- $ 249 $ 108 $ 1,457 1998.............................................................. 2,200 -- 273 216 2,689 1999.............................................................. 34,925 6,844 366 216 42,351 2000.............................................................. -- -- 27 109 136 --------- --------- --------- --------- --------- $ 38,225 $ 6,844 $ 915 $ 649 $ 46,633 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Debt arrangements are described as follows: A. TERM LOANS During the year ended December 31, 1996, the Company amended an existing Term Loan agreement, increasing the borrowing capacity of the Term Loan to $28,225, with principal payable quarterly. Additionally, the Company (in connection with its purchase of the net assets of Recoil, see Note 1) entered into new Term Loans of $10,000. Each of the aforementioned Term Loans is due and payable on January 3, 1999 and bears interest, payable monthly, at the prime rate plus one and one-half percent (which was 9.75% at December 31, 1996). At December 31, 1996, outstanding principal under the Term Loans totaled $38,225. Interest expense for December 31, 1994, 1995 and 1996 was F-13 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 6. DEBT ARRANGEMENTS (CONTINUED) approximately $1,384, $1,904 and $2,400, respectively. The Term Loans are secured by substantially all of the Company's assets. B. THE LOANS In association with its purchase of net assets from Microdot Inc. and Microdot Aerospace Ltd. (see Note 1) and payment of dividends to the preferred stockholder (see Note 13), the Company borrowed additional amounts under other fixed rate loan agreements with the Lender. The principal on the Loans is due and payable on January 3, 1999, while interest, which is payable quarterly and may be added to the outstanding principal balance, accrues at 11.5 percent. At December 31, 1996, there was approximately $6,844 in principal, interest and dividends outstanding related to these agreements. C. THE NOTES The Company has promissory notes with financing institutions which are secured by certain machinery and equipment. At December 31, 1996, the outstanding balance under the Notes was $915. The Notes bear interest at interest rates ranging from 8.9 percent to 10.5 percent per annum. Monthly payments are payable through June 2000. D. ATC LOAN The Company has a loan with the Australian Trade Commission which was assumed as part of the Recoil asset purchase (see Note 1). At December 31, 1996, outstanding principal under the ATC Loan was $649. Interest accrues on the outstanding principal balance at an effective interest rate of nine and three quarters percent. Principal and interest payments are due semi-annually beginning September 1997. E. LINE-OF-CREDIT The Line-of-Credit (LOC) is a $15,000 revolving credit facility, limited by the lesser of a specified portion of qualified accounts receivable and $15,000. Interest is payable monthly, at the prime rate plus one and one-half percent (which was 9.75% as of December 31, 1996). The LOC, which expires January 3, 1999, had approximately $746 outstanding at December 31, 1996. Interest expense for the years ended December 31, 1994, 1995 and 1996 was approximately $447, $462 and $682, respectively. The weighted average interest rate for all borrowings under the LOC was 8.6 percent, 10.3 percent and 9.8 percent at December 31, 1994, 1995 and 1996, respectively. 7. 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. F-14 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 7. SERIES C CONVERTIBLE PREFERRED STOCK (CONTINUED) In the event of any 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. 8. 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 14 percent of their annual compensation. The Company may make contributions to the Retirement Plan at its own discretion. The Company contributed approximately $236, $400 and $577 to the Retirement Plan in the years ended December 31, 1994, 1995 and 1996, respectively. 9. 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 amounted to approximately $1,097, $1,209 and $1,187 in the years ended 1994, 1995 and 1996, respectively. Minimum rental expenses on commitments for the years subsequent to December 31, 1996, are as follows:
Year ending December 31, 1997................................................................ $ 1,314 1998................................................................ 1,184 1999................................................................ 980 2000................................................................ 423 2001................................................................ 146 Thereafter.......................................................... 15 --------- $ 4,062 --------- ---------
F-15 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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, 1997................................................................ $ 139 1998................................................................ 133 1999................................................................ 125 2000................................................................ 107 2001................................................................ 36 --------- 540 Amounts representing interest....................................... (75) --------- 465 Current portion..................................................... (133) --------- $ 332 --------- ---------
C. 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. 10. SIGNIFICANT CUSTOMERS For the years ended December 31, 1994, 1995 and 1996, two customers accounted for approximately 13 and 15 percent, 15 and 13 percent and 18 and 12 percent of net sales, respectively. No other customer accounted for 10 percent or more of net sales in the years ended December 31, 1994, 1995 and 1996. Accounts receivable balances from these same two customers accounted for approximately 10 and 13 percent of accounts receivable at December 31, 1995 and 15 and 13 percent at December 31, 1996. No other customer represents 10 percent or more of the Company's gross accounts receivable at December 31, 1995 and 1996. F-16 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 11. GEOGRAPHIC SALES INFORMATION Net sales for the years ended December 31, 1994, 1995 and 1996 were made to geographic regions approximately as follows:
1994 1995 1996 ---------------------- ---------------------- ---------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE --------- ----------- --------- ----------- --------- ----------- United States............................... $ 50,346 91.4% $ 62,041 90.2% $ 85,069 85.9% Europe...................................... 2,800 5.1% 2,906 4.2% 8,378 8.5% Pacific Rim................................. 404 0.7% 1,379 2.0% 2,256 2.3% Other....................................... 1,567 2.8% 2,455 3.6% 3,320 3.3% --------- ----- --------- ----- --------- ----- $ 55,117 100.0% $ 68,781 100.0% $ 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, 1994, 1995 and 1996. 12. REORGANIZATION In May 1997, Kaynar Technologies Inc. (Operating Company) merged with and into Kaynar Holdings Inc. (Holding Company). The surviving corporation (Holding Company) changed its name to Kaynar Technologies Inc. In connection with the reorganization, each outstanding share of Common Stock of the Company was exchanged for 68 shares of Common Stock, each outstanding share of Series A Preferred Stock was exchanged for 9.953 shares of Common Stock and 58.047 shares of Series C Convertible Preferred Stock, par value .01 per share, and each outstanding share of Series B Preferred Stock was exchanged for 68 shares of Series C Preferred Stock. The effect of the reorganization and stock conversion has been retroactively reflected in the accompanying financial statements for all years presented. 13. RELATED PARTY MATTERS As discussed in Notes 1 and 6, the primary lender to the Company is General Electric Capital Corporation ("GECC"). Subsequent to the Reorganization and immediately prior to the Offering, GECC will own 12.5 percent of the outstanding Common Stock and 100 percent of the outstanding Series C Convertible Preferred Stock, which equates to 79.5 percent of the total outstanding Common Stock and Common Stock equivalents. As discussed in Note 1, this lender was also a secured primary lender to Microdot Inc. GECC is also an affiliated entity to a customer (the Aircraft Engines Division of GE) that accounted for approximately 12 percent of 1996 net sales and 13 percent of accounts receivable at December 31, 1996. F-17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Kaynar Technologies Inc.: We have audited the accompanying consolidated balance sheet of Recoil Pty Ltd (see Note 7) and Subsidiaries as of June 30, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Recoil Pty Ltd and Subsidiaries as of June 30, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Melbourne, Australia February 21, 1997 F-18 RECOIL PTY LTD AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1996 Net sales....................................................................... $9,707,335 Cost of sales................................................................... 4,218,327 --------- Gross profit.................................................................... 5,489,008 --------- Bad debts and provision for doubtful accounts................................... 9,847 Selling, general and administrative expenses.................................... 4,251,743 --------- Operating income................................................................ 1,227,418 Other expenses.................................................................. 60,348 Non-operating income............................................................ 147,355 Interest expense, net........................................................... 49,595 --------- Income before income taxes...................................................... 1,264,830 Provision for income taxes...................................................... 404,283 --------- Net income...................................................................... $ 860,547 --------- ---------
The accompanying notes form an integral part of these consolidated financial statements. F-19 RECOIL PTY LTD AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1996 ASSETS
Current Assets: Cash............................................................................ $ 105,459 Accounts receivable, including $56,228 from a related party, net of allowance for doubtful accounts of $32,996.............................................. 1,888,810 Inventories..................................................................... 2,295,380 Prepaid expenses and other current assets....................................... 120,120 --------- Total current assets............................................................ 4,409,769 --------- Property, plant and equipment, at cost.......................................... 2,276,343 Less accumulated depreciation and amortization.................................. (962,464) --------- 1,313,879 --------- Goodwill, net of accumulated amortization of $34,162............................ 37,134 Other assets.................................................................... 882 --------- Total non-current assets........................................................ 1,351,895 --------- Total assets.................................................................... $5,761,664 --------- ---------
The accompanying notes form an integral part of these consolidated financial statements. F-20 RECOIL PTY LTD AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1996 LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities: Lines of credit, secured by substantially all assets............................ $ 451,514 Current portion of capital lease obligations.................................... 14,900 Accounts payable................................................................ 802,923 Accrued expenses................................................................ 408,691 Income taxes payable............................................................ 365,236 --------- Total current liabilities....................................................... 2,043,264 --------- Long-term debt.................................................................. 649,481 Capital lease obligation........................................................ 33,384 --------- Total non-current liabilities................................................... 682,865 --------- Total liabilities............................................................... 2,726,129 --------- Commitments and contingencies (Note 5) Stockholders' Equity: Common stock, par value $0.24 Authorized--10,100,000 shares Issued and outstanding--1,372,968 shares...................................... 324,693 Common stock, par value $0.79 Authorized--5,000,000 shares Issued and outstanding--892,859 shares........................................ 703,841 Additional Paid-in Capital...................................................... 1,050,297 Retained earnings............................................................... 956,704 --------- Total stockholders' equity...................................................... 3,035,535 --------- Total liabilities and equity.................................................... $5,761,664 --------- ---------
The accompanying notes form an integral part of these consolidated financial statements. F-21 RECOIL PTY LTD AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1996
COMMON STOCK COMMON STOCK ADDITIONAL PAR VALUE PAR VALUE PAID-IN $0.24 $0.79 CAPITAL RETAINED EARNINGS TOTAL -------------- -------------- -------------- ----------------- ------------ Balance, June 30, 1995......... $ 324,693 $ 703,841 $ 1,050,297 $ 96,157 $ 2,174,988 Net income..................... -- -- -- 860,547 860,547 -------------- -------------- -------------- -------- ------------ Balance, June 30, 1996......... $ 324,693 $ 703,841 $ 1,050,297 $ 956,704 $ 3,035,535 -------------- -------------- -------------- -------- ------------ -------------- -------------- -------------- -------- ------------
The accompanying notes form an integral part of these consolidated financial statements. F-22 RECOIL PTY LTD AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1996 Cash Flows from Operating Activities: Net income....................................................................... $ 860,547 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................. 295,626 Loss on sale of property, plant and equipment.................................. (10,291) Decrease in accounts receivable................................................ 136,049 Increase in inventories........................................................ (679,772) Increase in prepaid expenses................................................... (84,570) Increase in other assets....................................................... (86,925) Decrease in accounts payable................................................... (240,066) Increase in accrued expenses................................................... 128,315 Decrease in deferred income taxes.............................................. (24,384) --------- Net cash provided by operating activities........................................ 294,529 --------- Cash Flows from Investing Activities: Purchases of plant and equipment................................................. (741,239) Proceeds from sales of property, plant and equipment............................. 250,811 --------- Net cash used in investing activities............................................ (490,428) --------- Cash Flows from Financing Activities: Net borrowings (payments) on line-of-credit...................................... 340,338 Dividends paid................................................................... (141,894) Principal payments on capital lease obligation................................... (22,103) Net cash provided by financing activities........................................ 176,341 Net increase/(decrease) in cash.................................................. (19,558) Cash, beginning of period........................................................ 125,017 --------- Cash, end of period.............................................................. $ 105,459 --------- --------- Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest....................................................................... $ 42,631 --------- --------- Income taxes................................................................... $ 348,633 --------- ---------
The accompanying notes form an integral part of these consolidated financial statements. F-23 RECOIL PTY LTD AND SUBSIDIARIES NOTES TO AND FORMING PART OF THE CONSOLIDATED ACCOUNTS FOR THE YEAR ENDED JUNE 30, 1996 NOTE 1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The company manufactures and distributes thread inserts and related products used primarily in the electronic, automotive and other industrial markets, and their associated after-markets. The company is headquartered in Oakleigh, Australia, which is outside Melbourne. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. (a) Principles of Consolidation The consolidated financial statements include the accounts of Recoil Pty Ltd and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. (b) Goodwill Goodwill is amortized on a straight line basis over 20 years. (c) Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation or amortization. The carrying amount of property, plant and equipment is reviewed annually to ensure it is not in excess of the recoverable amount from those assets. The recoverable amount is assessed on the basis of the expected net cash flows which will be received from the assets employment and subsequent disposal. The expected net cash flows have not been discounted to present values in determining recoverable amount. The depreciable amounts of all fixed assets, including capitalized leased assets, are depreciated over their estimated useful lives commencing from the time the asset is held ready for use. (d) Income Tax The company uses the liability method of tax-effect accounting whereby the income tax expense shown in the profit and loss account is based on the pre-tax accounting profit adjusted for any permanent differences. Temporary differences which arise due to the different accounting periods in which items of revenue and expense are included in the determination of operating profit before income tax and taxable income are recorded either as provision for deferred income tax or an asset described as future income tax benefit at the rate of income tax applicable to the period in which the benefit will be received or the liability will become payable. Future income tax benefits are not recorded unless realization of the asset is assured. The amount of benefits recorded which may be realized in the future is based on the assumption that no adverse change will occur in income taxation legislation, and the anticipation that the company will derive sufficient future taxable income and comply with the conditions of deductibility imposed by the law to permit a future income tax benefit to be obtained. The provision for income taxes is as follows: Tax at 36% statutory rate......................................... $ 455,339 Increase/(decrease) in income tax expense due to: Non-allowance items............................................. 869 Tax incentives and sundry items................................. (50,288) Net operating loss carry-forwards not realized.................. 42,034 Tax effect of intercompany profit in inventory.................. (41,391) Other........................................................... (2,280) --------- Income tax expense................................................ $ 404,283 --------- ---------
F-24 RECOIL PTY LTD AND SUBSIDIARIES NOTES TO AND FORMING PART OF THE CONSOLIDATED ACCOUNTS (CONTINUED) FOR THE YEAR ENDED JUNE 30, 1996 NOTE 1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) (e) Foreign Currency TRANSACTIONS Foreign currency transactions during the year are converted to the Australian dollar at rates of exchange applicable at the dates of the transactions. Amounts receivable and payable in foreign currencies at the balance sheet date are converted at the rates of exchange ruling at that date. The gains and losses from conversion of short-term assets and liabilities, whether realized or unrealized, are included in operating profit before income tax as they arise. TRANSLATION OF FINANCIAL STATEMENTS The Australian dollar is the functional currency. These financial statements have been translated into US dollars using the year-end exchange rate for the consolidated balance sheet and the average exchange rate for the year for the consolidated statement of income. (f) Inventories Inventories are measured at the lower of cost and net realizable value. Costs are assigned on a first-in, first-out basis and include direct materials, direct labor and an appropriate portion of variable and fixed overhead expenses. Inventories are composed of the following at June 30, 1996: Raw materials................................................... $ 380,123 Work in progress................................................ 71,304 Finished goods.................................................. 1,843,953 --------- $2,295,380 --------- ---------
NOTE 2. PROPERTY, PLANT AND EQUIPMENT Fixtures and fittings--at cost.................................. $ 156,662 Less: Accumulated depreciation.................................. (54,561) --------- 102,101 --------- Office equipment--at cost....................................... 486,264 Less: Accumulated depreciation.................................. (292,546) --------- 193,718 --------- Motor vehicles--at cost......................................... 132,492 Less: Accumulated depreciation (58,443) --------- 74,049 --------- Plant and equipment--at cost.................................... 1,324,363 Less: Accumulated depreciation.................................. (548,009) --------- 776,354 ---------
F-25 RECOIL PTY LTD AND SUBSIDIARIES NOTES TO AND FORMING PART OF THE CONSOLIDATED ACCOUNTS (CONTINUED) FOR THE YEAR ENDED JUNE 30, 1996 NOTE 2. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Capital equipment--work in progress............................. 134,569 --------- Leased motor vehicles........................................... 41,993 Less: Accumulated amortization.................................. (8,905) --------- 33,088 --------- $1,313,879 --------- ---------
NOTE 3. ACCRUED EXPENSES Other creditors................................................... $ 261,618 Wages and payroll related......................................... 147,073 --------- $ 408,691 --------- ---------
NOTE 4. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Loan--Government Agency (Australian Trade Commission)............. $ 649,481 ---------
This loan is unsecured and bears interest at an effective interest rate of 9.75% per annum. Principal and interest payments are due semi-annually beginning in September 1997. Principal repayments for the years ended December 31 are as follows: 1997.......................................................... $ 108,061 1998.......................................................... 216,062 1999.......................................................... 216,062 2000.......................................................... 109,296 --------- $ 649,481 --------- --------- Financing Arrangements The company has a finance facility of:........................ $ 945,960 --------- --------- At June 30, 1996 this facility was drawn upon in the amount of:......................................................... $ 451,514 --------- ---------
F-26 RECOIL PTY LTD AND SUBSIDIARIES NOTES TO AND FORMING PART OF THE CONSOLIDATED ACCOUNTS (CONTINUED) FOR THE YEAR ENDED JUNE 30, 1996 NOTE 5. LEASE COMMITMENTS (a) Capital Lease Commitments Payable: --not later than one year....................................... $ 16,390 --later than one year and not later than two years.............. 13,544 --later than two years and not later than five years............ 23,755 --------- Minimum lease payments.......................................... 53,689 Less: Future finance charges.................................... (5,405) --------- Total........................................................... $ 48,284 --------- --------- Representing: --Current....................................................... $ 14,900 --Non-Current................................................... 33,384 --------- $ 48,284 --------- (b) Operating Lease Commitments Payable: --not later than one year....................................... $ 175,492 --later than one year and not later than two years.............. 180,248 --later than two years and not later than five years............ 571,465 --------- Total operating lease commitments............................... $ 927,205 ---------
NOTE 6. SEGMENT REPORTING The economic entity operates in the manufacturing sector where it manufactures Recoil thread inserts in Australia and distributes its products throughout Australia, USA, UK and other international markets. NOTE 7. SUBSEQUENT EVENT In August 1996 the company sold a majority of its assets to Kaynar Technologies Inc., a US business involved in the manufacture and sale of specialty fasteners, fastening system and components, for approximately $12.2 million. Subsequent to the asset sale, the company changed its name to Scuba Pty Ltd. F-27 [IMAGE MATERIAL: PICTURE OF AIRCRAFT IN FLIGHT.] - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------------- TABLE OF CONTENTS
Page --- Prospectus Summary................................... 3 Risk Factors......................................... 8 The Company.......................................... 13 The Reorganization................................... 13 Use of Proceeds...................................... 14 Dividend Policy...................................... 14 Capitalization....................................... 15 Dilution............................................. 15 Selected Consolidated Financial and Operating Information........................................ 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 19 Recent Developments.................................. 23 Business............................................. 24 Management........................................... 35 Certain Transactions................................. 41 Principal Stockholders and Selling Stockholder....... 43 Description of Capital Stock......................... 44 Shares Eligible for Future Sale...................... 46 Underwriting......................................... 48 Legal Matters........................................ 50 Experts.............................................. 50 Additional Information............................... 50 Index to Consolidated Financial Statements........... F-1
--------------------- UNTIL MAY 31, 1997 (25 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,000,000 SHARES [LOGO] [LOGO] COMMON STOCK ------------------- PROSPECTUS May 6, 1997 --------------------- LEHMAN BROTHERS PAINEWEBBER INCORPORATED - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates, except the SEC registration fee and the NASD fee.
AMOUNT TO BE PAID ---------- SEC registration fee.............................................................. $ 11,152 NASD fee.......................................................................... 21,970 Printing and engraving expenses................................................... 127,060 Legal fees and expenses........................................................... 200,000 Accounting fees and expenses...................................................... 200,000 Blue Sky qualification fees and expenses.......................................... 2,500 Transfer Agent and Registrar fees................................................. 2,000 Miscellaneous fees and expenses................................................... 110,318 ---------- Total......................................................................... $ 675,000 ---------- ----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Certificate of Incorporation, as amended, of the Company contains a provision eliminating the personal liability of the directors to the Company or its stockholders to the fullest extent set forth in Section 102(b)(7) of the Delaware General Corporation Law. The By-laws of the Company provide for indemnification of directors, officers, employees and agents of the Company consistent with the provisions of Section 145 of the Delaware General Corporation Law. The Company has also entered into indemnification agreements with each director and certain executive officers that provide for the maximum protection against liability permitted by law. The indemnification agreements also provide that, to the extent the Company purchases directors and officers insurance, the directors and officers who are parties to such agreements will be covered. The Company, however, has no obligation to purchase such insurance. Reference is also made to Section 9 of the Underwriting Agreement, contained in Exhibit 1 hereto, indemnifying officers and directors of the Company against certain liabilities. Burton J. Kloster, Jr., an outside director of the Company and the nominee of GECC, has entered into a separate indemnification agreement with GECC. Under the agreement, GECC will indemnify Mr. Kloster for losses, liabilities, damages and expenses incurred as a result of his acting properly on behalf of GECC, to the extent such amounts are not recoverable from the Company or any insurer of the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In connection with the Reorganization, the Company will issue shares of Common Stock and Series C Preferred Stock to the Selling Stockholder in exchange for the shares of Series A and Series B Preferred Stock held by the Selling Stockholder, as further described in "The Reorganization." The exchange of shares is exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - -------------- -------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement ***2.1 Agreement and Plan of Merger, dated May 5, 1997 *2.2 Asset Purchase Agreement, dated January 9, 1996, among Emhart Industries, Inc., Emhart, Inc. and Operating Company *2.3 (a) Australian Asset Sale Agreement, dated August 9, 1996, among the Vendors (as defined therein), Recoil Inc., RCL Pty. and Operating Company *2.3 (b) US Asset Sale Agreement, dated August 9, 1996, among Recoil Inc., Operating Company, Recoil Pty. Ltd., the Advent Group and the Price Interests (as defined therein) ***3.1 Amended and Restated Certificate of Incorporation of the Company ***3.2 Amended and Restated By-laws of the Company ***4.1 Specimen of Common Stock Certificate ***5.1 Opinion of O'Melveny & Myers LLP regarding the legality of the Common Stock to be issued *10.1 Amended and Restated Term Loan Agreement, dated August 12, 1996, between the Company and GECC *10.2 (a) Amended and Restated Credit Agreement, dated August 12, 1996, between Operating Company and GECC *10.2 (b) First Amendment, Consent, and Limited Waiver to Amended and Restated Credit Agreement, dated December 17, 1996, between Operating Company and GECC *10.3 Term Loan Agreement, dated August 12, 1996, between RCL Pty. and GECC *10.4 PIK Dividend Note Agreement, dated January 3, 1994, among the Company, GECC and certain other parties identified therein *10.5 Lease with The Prudential Insurance Co. of America regarding the Fullerton, California facility *10.6 Lease with West L.A. Properties regarding the Placentia, California facility *10.7 Lease with Enfield View Pty. Ltd. regarding the Oakleigh, VIC, Australia facility *10.8 (a) General Terms Agreement, dated September 20, 1996, between the Company and Boeing 10.8 (b) Special Business Provisions, dated September 20, 1996, between the Company and Boeing (portions omitted and filed separately with Commission pursuant to an application for confidential treatment) 10.9 (a) Contract Award Letter of Agreement, dated April 28, 1994, between the Company and Boeing (portions omitted and filed separately with Commission pursuant to an application for confidential treatment) ***10.9 (b) Boeing Commercial Airplane Group Purchase Order Terms and Conditions ***10.10 Stockholders Agreement, dated as of May 6, 1997 *21.1 List of Subsidiaries 23.1 Consent of Independent Auditors ***23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)
II-2
NUMBER DESCRIPTION - -------------- -------------------------------------------------------------------------------------------- *24.1 Powers of Attorney for Jordan A. Law, David A. Werner, and Robert M. Nelson **24.2 Powers of Attorney for Norman A. Barkeley, Burton J. Kloster, Jr., and Richard P. Strubel ***27.1 Financial Data Schedule *99.1 Form of 1997 Stock Incentive Plan of the Company *99.2 Form of Employment Agreement for Messrs. Law and Werner *99.3 Form of Employment Agreement for Messrs. Beers, Dack, Berecz and Varholick *99.4 Employment Agreement for Kenneth D. Jones *99.5 Form of Director Indemnification Agreement
(b) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Commission are provided in the Notes to the Consolidated Financial Statements included elsewhere in this Registration Statement or are not required under the applicable instructions or are inapplicable and therefore have been omitted. - ------------------------ * Previously filed with the initial Registration Statement on February 26, 1997. ** Previously filed with Pre-Effective Amendment No. 1 on April 1, 1997. *** Previously filed with Pre-Effective Amendment No. 4 on May 5, 1997. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment No. 6 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Orange, State of California on this 6th day of May, 1997. KAYNAR TECHNOLOGIES INC. By: /s/ JORDAN A. LAW -------------------------------------- Jordan A. Law Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 6 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ----------------------------------------------- ----------------------------------------------- ---------------- /s/ JORDAN A. LAW Chief Executive Officer and Chairman of the May 6, 1997 - ------------------------------------- Board Jordan A. Law (Principal Executive Officer) /s/ DAVID A. WERNER Executive Vice President and Director May 6, 1997 - ------------------------------------- (Principal Financial Officer) David A. Werner * Controller May 6, 1997 - ------------------------------------- (Principal Accounting Officer) Robert M. Nelson * Director May 6, 1997 - ------------------------------------- Norman A. Barkeley * Director May 6, 1997 - ------------------------------------- Burton J. Kloster, Jr. * Director May 6, 1997 - ------------------------------------- Richard P. Strubel *By: /s/ DAVID A. WERNER -------------------------------- David A. Werner Attorney-in-fact
II-4 EXHIBIT INDEX
NUMBER DESCRIPTION - -------------- -------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement ***2.1 Agreement and Plan of Merger, dated May 5, 1997 *2.2 Asset Purchase Agreement, dated January 9, 1996, among Emhart Industries, Inc., Emhart, Inc. and Operating Company *2.3 (a) Australian Asset Sale Agreement, dated August 9, 1996, among the Vendors (as defined therein), Recoil Inc., RCL Pty. and Operating Company *2.3 (b) US Asset Sale Agreement, dated August 9, 1996, among Recoil Inc., Operating Company, Recoil Pty. Ltd., the Advent Group and the Price Interests (as defined therein) ***3.1 Amended and Restated Certificate of Incorporation of the Company ***3.2 Amended and Restated By-laws of the Company ***4.1 Specimen of Common Stock Certificate ***5.1 Opinion of O'Melveny & Myers LLP regarding the legality of the Common Stock to be issued *10.1 Amended and Restated Term Loan Agreement, dated August 12, 1996, between the Company and GECC *10.2 (a) Amended and Restated Credit Agreement, dated August 12, 1996, between Operating Company and GECC *10.2 (b) First Amendment, Consent, and Limited Waiver to Amended and Restated Credit Agreement, dated December 17, 1996, between Operating Company and GECC *10.3 Term Loan Agreement, dated August 12, 1996, between RCL Pty. and GECC *10.4 PIK Dividend Note Agreement, dated January 3, 1994, among the Company, GECC and certain other parties identified therein *10.5 Lease with The Prudential Insurance Co. of America regarding the Fullerton, California facility *10.6 Lease with West L.A. Properties regarding the Placentia, California facility *10.7 Lease with Enfield View Pty. Ltd. regarding the Oakleigh, VIC, Australia facility *10.8 (a) General Terms Agreement, dated September 20, 1996, between the Company and Boeing 10.8 (b) Special Business Provisions, dated September 20, 1996, between the Company and Boeing (portions omitted and filed separately with the Commission pursuant to an application for confidential treatment) 10.9 (a) Contract Award Letter of Agreement, dated April 28, 1994, between the Company and Boeing (portions omitted and filed separately with the Commission pursuant to an application for confidential treatment) ***10.9 (b) Boeing Commercial Airplane Group Purchase Order Terms and Conditions ***10.10 Stockholders Agreement, dated as of May 6, 1997 *21.1 List of Subsidiaries 23.1 Consent of Independent Auditors ***23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1) *24.1 Powers of Attorney for Jordan A. Law, David A. Warner, and Robert M. Nelson **24.2 Powers of Attorney for Norman A. Barkeley, Burton J. Kloster, Jr., and Richard P. Strubel ***27.1 Financial Data Schedule *99.1 Form of 1997 Stock Incentive Plan of the Company *99.2 Form of Employment Agreement for Messrs. Law and Werner *99.3 Form of Employment Agreement for Messrs. Beers, Dack, Berecz and Varholick *99.4 Employment Agreement for Kenneth D. Jones *99.5 Form of Director Indemnification Agreement
- ------------------------ * Previously filed with the initial Registration Statement on February 26, 1997. ** Previously filed with Pre-Effective Amendment No. 1 on April 1, 1997. *** Previously filed with Pre-Effective Amendment No. 4 on May 5, 1997. EX-1.1 2 EX 1.1 2,000,000 KAYNAR TECHNOLOGIES INC. COMMON STOCK UNDERWRITING AGREEMENT May 5, 1997 LEHMAN BROTHERS INC. PAINEWEBBER INCORPORATED As Representatives of the several Underwriters named in Schedule 1, c/o Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Dear Ladies and Gentlemen: Kaynar Technologies Inc., a Delaware corporation (the "COMPANY"), and General Electric Capital Corporation, a New York corporation (the "SELLING STOCKHOLDER") propose to sell an aggregate of 2,000,000 shares (the "FIRM SHARES") of the Company's Common Stock, par value $.01 per share (the "COMMON STOCK") to the several Underwriters named in Schedule 1 hereto (the "UNDERWRITERS"). Of the 2,000,000 shares of the Firm Shares, 1,800,000 shares are being sold by the Company and 200,000 shares by the Selling Stockholder. In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 300,000 shares of the Common Stock on the terms and for the purposes set forth in Section 3 (the "OPTION SHARES"). The Firm Shares and the Option Shares, if purchased, are hereinafter collectively referred to as the "SHARES." The Company and the Selling Stockholder are hereinafter collectively referred to as the "SELLERS." Immediately prior to the First Delivery Date (as hereinafter defined), Kaynar Technologies Inc., a Delaware corporation ("KAYNAR"), shall be merged with and into its wholly-owned parent, Kaynar Holdings Inc., a Delaware corporation ("HOLDINGS"), with Holdings as the surviving corporation. Immediately following the merger, the surviving corporation shall be renamed Kaynar Technologies Inc. The foregoing transactions are collectively referred to herein as the "REORGANIZATION". Unless otherwise noted herein, the term "COMPANY" shall mean Holdings, as the corporation surviving the merger. This is to confirm the agreement concerning the purchase of the Shares from the Company and the Selling Stockholder by the Underwriters. 1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company represents, warrants and agrees that: (a) The Registration statement on Form S-1 (File No. 333-22345) with respect to the Shares has (i) been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations (the "RULE AND REGULATIONS") of the Securities and Exchange Commission (the "COMMISSION") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act or will become effective not later than 10:00 a.m., New York City time, on the date of this Agreement or at such later date and time as the Underwriters may approve. Copies of the Registration Statement have been delivered by the Company to each of you as the representatives (the "REPRESENTATIVES") of the Underwriters. As used in this Agreement, "EFFECTIVE TIME" means the date and the time as of which the Registration Statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "EFFECTIVE DATE" means the date of the Effective Time; "PRELIMINARY PROSPECTUS" means each prospectus included in such Registration Statement before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "REGISTRATION STATEMENT" means such registration statement, as amended at the Effective Time, including a registration statement (if any) filed pursuant to Rule 462(b) under the Securities Act and all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 6(a) hereof and deemed to be a part of the Registration Statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "PROSPECTUS" means such final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of the Registration Statement or any Preliminary Prospectus. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all material respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not (i) as of the Effective Date, as to the Registration Statement, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) as of the applicable filing date, as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. (c) The Company and each of its subsidiaries (as set forth on Schedule 2 hereto) has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as it is currently being conducted and as described in the Registration Statement and the Prospectus and to own, lease and operate it properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification. Except for Recoil, none of the subsidiaries of the Company is a "SIGNIFICANT SUBSIDIARY" as such term is defined in Rule 405 of the Rules and Regulations. (d) All the outstanding shares of capital stock or other securities evidencing equity ownership of the Company (including the Shares to be sold by the Selling Stockholder) have been and, after consummation of the Reorganization, will be duly authorized and validly issued and, after consummation of the Reorganization, will be fully paid, non-assessable and not subject to any preemptive or similar rights. The Shares to be issued and sold by the Company 2 hereunder have been duly authorized and, when issued and delivered to the Representatives for the account of each Underwriter against payment therefor as provided in this Agreement, will have been validly issued and will be fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. The authorized, issued and outstanding stock of the Company was as of December 31, 1996 and will be immediately after giving effect to the consummation of this Offering and the Reorganization, as set forth in the Registration Statement and the Prospectus under the captions "CAPITALIZATION" and "DESCRIPTION OF CAPITAL STOCK." After giving effect to the Offering, the Reorganization and the application of the proceeds thereof as described in the Registration Statement and the Prospectus under the caption "USE OF PROCEEDS," the Company's consolidated capitalization as of December 31, 1996 would have been as set forth under the "AS ADJUSTED" column under the caption "CAPITALIZATION." The table under the caption "CAPITALIZATION" sets forth the amount of all outstanding long-term indebtedness of the Company for monies borrowed and capital lease obligations, on a consolidated basis, prior to and after giving effect to the Offering and Reorganization. The authorized capital stock of the Company, including the Shares, conforms as to legal matters to the description thereof contained in the Registration Statement and the Prospectus. Except as set forth in the Registration Statement and the Prospectus, there are no outstanding rights, warrants, or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company. (e) This Agreement has been duly authorized, executed and delivered by the Company and is a legally valid and binding agreement of the Company, enforceable against it in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally (including laws relating to fraudulent transfers or conveyances), by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) and, as to rights of indemnification and contribution, by federal and state securities laws and principles of public policy. (f) The execution, delivery and performance of this Agreement, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby and as described in the Prospectus under the caption "REORGANIZATION" will not conflict with or constitute a breach or violation of any of the terms or provisions of, or constitute a default under, any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such actions conflict with or constitute a breach of any of the terms or provisions of, or constitute a default under, the charter or by-laws of the Company or any of its subsidiaries or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets; and except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required by the Company for the execution, delivery and performance of this Agreement by the Company and the issuance and sale of the Shares. 3 (g) Except as provided in the Stockholders Agreement by and between the Company, the Selling Stockholder and the Management Investors (as defined therein), there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a Registration Statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other Registration Statement filed by the Company under the Securities Act. (h) Except as described in the Prospectus, the Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act. (i) Neither the Company nor any of its subsidiaries has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, there has not been any material change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus. (j) The financial statements (including the related notes and supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. (k) Arthur Andersen LLP, who has certified certain financial statements of the Company, whose report appears in the Prospectus and who has delivered the initial letter referred to in Section 9(i) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations during the periods covered by the financial statements on which they reported contained in the Prospectus. (l) The Company and each subsidiary has (i) good and marketable title to all of the properties and assets necessary for the operation of its business as described in the Registration Statement and the Prospectus as owned by it, free and clear of all liens, charges, encumbrances and restrictions except such as are described in the Prospectus, including any Exhibits thereto, or such as do not materially affect the value of such property and do not materially interfere with the use of such property by the Company, (ii) peaceful and undisturbed possession under all leases to which it is party as lessee, (iii) all licenses, certificates, permits, authorizations, approvals, franchises and other rights from, and will have made all declarations and filings with, all federal, state and local authorities, all self-regulatory authorities and all courts or governmental agencies, bodies or administrative agencies or authorities (each an "AUTHORIZATION") necessary to engage in the business conducted by it in the manner described in 4 the Registration Statement and the Prospectus and] (iv) no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Authorization. All such Authorizations are valid and in full force and effect. The Company and each subsidiary is in compliance in all material respects with the terms and conditions of all such Authorizations and with the rules and regulations of the regulatory authorities having jurisdiction with respect thereto. All leases to which the Company and each subsidiary is a party are valid and binding and, to the knowledge of the Company, no default by the Company or any such subsidiary has occurred and is continuing thereunder and no defaults by the landlord are existing under any such lease. (m) The Company and its subsidiaries carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar businesses in similar industries. (n) The Company, together with its subsidiaries, owns and possesses all right, title and interest in and to, or has duly licensed or otherwise obtained from third parties, all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses or any other proprietary right ("TRADE RIGHTS") which are material to the business of the Company. Neither the Company nor any of its subsidiaries has received any notice of infringement, misappropriation or conflict from any third party as to such Trade Rights which has not been resolved or disposed of and to the knowledge of the Company and its subsidiaries, neither the Company nor any of its subsidiaries has infringed, misappropriated or otherwise conflicted with Trade Rights of any third parties. (o) There are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, would have a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company and its subsidiaries; and to the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (p) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations. (q) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus which is not so described. (r) There is (i) no significant unfair labor practice complaint pending or, to the knowledge of the Company, threatened against the Company or any subsidiary before the National Labor Relations Board, any state or local labor relations board of or any foreign labor relations board, and no significant grievance or significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending or, to the knowledge of the Company 5 and its subsidiaries, threatened against the Company or any subsidiary and (ii) no pending union representation question exists with respect to the employees of the Company or any subsidiary. To the knowledge of the Company and its subsidiaries, no union organizing activities are taking place. Neither the Company nor any subsidiary has violated in any material respect (A) any federal, state or local law, statute, rule or regulation or foreign law, statute rule or regulation relating to discrimination in hiring, promotion or pay of employees or (B) any applicable wage or hour laws. (s) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"). (t) The Company has filed all federal, state and local income and franchise tax returns required to be filed through the date hereof and has paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company or any of its subsidiaries which has had, nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company or any of its subsidiaries, would have, a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company and its subsidiaries. (u) Since the date of the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (v) The Company and each subsidiary (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (w) Neither the Company nor any of its subsidiaries (i) is in violation of its charter or by-laws or (ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a material default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject. (x) Neither the Company nor any of its subsidiaries, nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries, (i) has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (iii) violated or is in violation of any provision of the Foreign Corrupt Practices 6 Act of 1977 or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (y) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or any of its subsidiaries (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its subsidiaries or with respect to which the Company or any of its subsidiaries have knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries; and the terms "HAZARDOUS WASTES," "TOXIC WASTES," "HAZARDOUS SUBSTANCES" and "MEDICAL WASTES" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (z) Neither the Company nor any subsidiary is an "INVESTMENT COMPANY" or a company "CONTROLLED" by an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder (the "1940 ACT"). 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE SELLING STOCKHOLDER. The Selling Stockholder represents, warrants and agrees that: (a) The Selling Stockholder owns, and immediately prior to the First Delivery Date, the Selling Stockholder will own the Shares to be sold by the Selling Stockholder on such date free and clear of all adverse claims (within the meaning of Section 8-302 of the Uniform Commercial Code as in effect in the State of New York) and upon delivery of such Shares and payment therefor pursuant hereto, the several Underwriters will own such Shares, free and clear of all adverse claims assuming the Underwriters purchased such Shares pursuant to this Agreement in good faith and without notice of such adverse claim. (b) The Selling Stockholder has corporate power and authority to enter into this Agreement; the execution, delivery and performance of this Agreement by the Selling Stockholder and the consummation by the Selling Stockholder of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling 7 Stockholder is bound or to which any of the property or assets of the Selling Stockholder is subject, nor will such actions result in any violation of the charter or by-laws of the Selling Stockholder or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdictions over the Selling Stockholder or the property or assets of the Selling Stockholder, and, except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required by the Selling Stockholder for the execution, delivery and performance of this Agreement by the Selling Stockholder and the consummation by the Selling Stockholder of the transactions contemplated hereby. (c) To the extent that any statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by the Selling Stockholder in its capacity as Selling Stockholder expressly for use therein, such Preliminary Prospectus and the Registration Statement did not, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus, as of the applicable Effective Date and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto), will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) The Selling Stockholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. On the basis of the representations and warranties contained herein, and subject to the terms and conditions of this Agreement, the Company agrees to sell 1,800,000 shares of the Firm Shares and the Selling Stockholder hereby agrees to sell 200,000 shares of the Firm Shares to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of Firm Shares set forth opposite that Underwriter's name in Schedule 1 hereto. The respective purchase obligations of the Underwriters with respect to the Firm Shares shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine. In addition, the Company grants to the Underwriters an option to purchase up to 300,000 shares of Option Shares. Such option is granted solely for the purpose of covering over-allotments in the sale of Firm Shares and is exercisable as provided in Section 5 hereof. Shares of Option Shares shall be purchased severally for the account of the Underwriters in proportion to the number of shares of Firm Shares set forth opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of each Underwriter with respect to the Option Shares shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Option Shares other than in 100 share amounts. The price of both the Firm Shares and any Option Shares shall be $14.50 per share. 8 The Company and the Selling Stockholder shall not be obligated to deliver any of the Shares to be delivered on the First Delivery Date or the Option Delivery Date (as hereinafter defined), as the case may be, except upon payment for all the Shares to be purchased on such Delivery Date (as hereinafter defined) as provided herein. 4. OFFERING OF STOCK BY THE UNDERWRITERS. Upon authorization by the Representatives of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. It is understood that 96,515 shares of the Firm Shares will initially be reserved by the several Underwriters for offer and sale upon the terms and conditions set forth in the Prospectus and in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD") to employees who have heretofore delivered to the Representatives offers to purchase shares of Firm Shares in form satisfactory to the Representatives, and that any allocation of such Firm Shares among such persons will be made in accordance with timely directions received by the Representatives from the Company; PROVIDED, that except as otherwise provided herein, under no circumstances will the Representatives or any Underwriter be liable to the Company or to any such person for any action taken or omitted in good faith in connection with such offering to employees and persons having business relationships with the Company and its subsidiaries. It is further understood that any shares of such Firm Shares which are not purchased by such persons will be offered by the Underwriters to the public upon the terms and conditions set forth in the Prospectus. 5. DELIVERY OF AND PAYMENT FOR THE STOCK. Delivery of and payment for the Firm Shares shall be made at the office of O'Melveny & Myers LLP, 400 South Hope Street, 15th Floor, Los Angeles, California 90071, at 10:00 A.M., New York City time, on the third full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the "FIRST DELIVERY DATE." On the First Delivery Date, the Company and the Selling Stockholder shall deliver or cause to be delivered certificates representing the Firm Shares to the Representatives for the account of each Underwriter against payment to or upon the order of the Company and the Selling Stockholder of the purchase price by certified or official bank check or checks payable in New York Clearing House (same-day) funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Shares shall be registered in such names and in such denominations as the Representatives shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Shares, the Company and the Selling Stockholder shall make the certificates representing the Firm Shares available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. At any time, and from time to time, on or before the 30th day after the date of this Agreement, the option granted in Section 3 may be exercised, in whole or in part, by written notice to the Company by the Representatives. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised, the names in which the Option Shares are to be registered, the denominations in which the Option Shares are to be issued and the date and time, as determined by the Representatives, when the Option Shares are to be delivered; PROVIDED, HOWEVER, that this date and time shall not be (i) earlier than the First Delivery Date nor earlier than the third business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. The dates and times the Option Shares are delivered are sometimes 9 referred to as the "OPTION DELIVERY DATE" and the First Delivery Date and the Option Delivery Date are sometimes each referred to as a "DELIVERY DATE"). Delivery of and payment for the Option Shares shall be made at the place specified in the first sentence of the first paragraph of this Section 5 (or at such other place as shall be determined by agreement between the Representatives and the Company) at 10:00 A.M., New York City time, on the Option Delivery Date. On the Option Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Shares to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by certified or official bank check or checks payable in New York Clearing House (same-day) funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Shares shall be registered in such names and in such denominations as the Representatives shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Shares, the Company shall make the certificates representing the Option Shares available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the Option Delivery Date. 6. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal. (b) To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith. (c) To deliver promptly to the Representatives such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement and the computation of per share earnings) and (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented 10 Prospectus and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Shares or any other securities relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act to notify the Representatives and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance. (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the reasonable judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission. (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to the Representatives and counsel for the Underwriters and obtain the consent of the Representatives to the filing. (f) As soon as practicable after the Effective Date, to make generally available to the Company's security holders and to deliver to the Representatives an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158). (g) For a period of three years following the Effective Date, to furnish to the Representatives copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Common Stock may be listed pursuant to requirements of or agreements with such exchange or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder. (h) Promptly from time to time to take such action as the Representatives may reasonably request to qualify the Shares for offering and sale under the securities laws of such United States and Canadian jurisdictions as the Representatives may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares; PROVIDED that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction. (i) For a period of 180 days from the date of the Prospectus, not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (other than the Shares and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans 11 existing on the date hereof or pursuant to currently outstanding options, warrants or rights), or sell or grant options, rights or warrants with respect to any shares of Common Stock (other than the grant of options pursuant to option plans existing on the date hereof), without the prior written consent of Lehman Brothers Inc.; and to cause each executive officer and director of the Company to furnish to the Representatives, prior to the First Delivery Date, a letter or letters, in the form attached hereto as Exhibit A, pursuant to which each such person shall agree not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person during such 180-day period of) any shares of Common Stock for a period of 180 days from the date of the Prospectus, without the prior written consent of Lehman Brothers Inc. (j) Prior to the Effective Date, to apply for listing of the Shares on the NASDAQ National Market System and to use its best efforts to complete that listing, subject only to official notice of issuance and evidence of satisfactory distribution, prior to the First Delivery Date. (k) Prior to filing with the Commission any reports on Form SR pursuant to Rule 463 of the Rules and Regulations, to furnish a copy thereof to the counsel for the Underwriters and receive and consider its comments thereon, and to deliver promptly to the Representatives a signed copy of each report on Form SR filed by it with the Commission. (l) The Company will effect the Reorganization and will apply the net proceeds from the sale of the Shares being sold by the Company as set forth in the Prospectus. (m) To take such steps as shall be necessary to ensure that neither the Company nor any subsidiary shall become an "INVESTMENT COMPANY" or "CONTROLLED" by an "INVESTMENT COMPANY" within the meaning of the 1940 Act. 7. FURTHER AGREEMENTS OF THE SELLING STOCKHOLDER. The Selling Stockholder agrees: (a) For a period of 180 days from the date of the Prospectus, not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (other than the Shares), without the prior written consent of Lehman Brothers Inc. (b) That the Shares to be sold by the Selling Stockholder hereunder is subject to the interest of the Underwriters and that the obligations of the Selling Stockholder hereunder shall not be terminated by any act of the Selling Stockholder, by operation of law or the occurrence of any other event, except in accordance with the terms of this Agreement. 8. EXPENSES. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Shares and any taxes payable in that connection, (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto, (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement, (d) the costs of printing and distributing this Agreement and any other related documents in connection with the offering, purchase, sale and 12 delivery of the stock, (e) the filing fees incident to securing any required review by the NASD of the terms of sale of the Shares, (f) any applicable listing or other similar fees, (g) the reasonable fees and expenses of qualifying the Shares under the securities laws of the several jurisdictions as provided in Section 6(h) and of preparing, printing and distributing a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters in connection therewith), and (h) all other costs and expenses incident to the performance of the obligations of the Company and the Selling Stockholder under this Agreement; PROVIDED that, except as provided in this Section 8 and in Section 12, the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Shares which they may sell and the expenses of advertising any offering of the Shares made by the Underwriters, and the Selling Stockholder shall pay the fees and expenses of its counsel, and any transfer taxes payable in connection with the sale of its Shares to the Underwriters. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company and the Selling Stockholder contained herein, to the performance by the Company and the Selling Stockholder of their respective obligations hereunder, and to each of the following additional terms and conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on each Delivery Date with the same force and effect as if made on and as of such Delivery Date. (b) The Registration Statement shall have become effective not later than 10:00 a.m., New York City time, on the date of this Agreement or at such later date and time as the Representatives may approve; the Prospectus shall have been timely filed with the Commission in accordance with Section 6(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (c) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Latham & Watkins, counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (d) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Shares, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company and the Selling Stockholder shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (e) O'Melveny & Myers LLP shall have furnished to the Representatives its written opinion, as counsel to the Company, addressed to the Underwriters and dated such 13 Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) Each of the Company and its subsidiaries has been duly incorporated, and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation with corporate power to own its properties and carry on its business as described in the Registration Statement; (ii) The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, 10,000,000 shares of Series C Preferred Stock. The authorized capital stock of the Company, including the Shares, conforms as to legal matters to the description thereof contained in the Registration Statement and the Prospectus; (iii) The Shares have been duly authorized by all necessary corporate action on the part of the Company and, upon payment for and delivery of the Shares in accordance with the Agreement and the countersigning of the certificate or certificates representing the Shares by a duly authorized signatory of the registrar for the Company's Common Stock, the Shares will be validly issued, fully paid and non-assessable; (iv) Holders of the capital stock of the Company are not entitled to any preemptive right to subscribe to any additional shares of the Company's capital stock under the Company's Certificate of Incorporation or Bylaws; (v) The execution, delivery and performance of the Agreement have been duly authorized by all necessary corporate action on the part of the Company, and the Agreement has been duly executed and delivered by the Company; (vi) The execution and delivery by the Company of, and performance of its obligations on or prior to the date of this opinion under, the Agreement do not violate (i) the Company's Certificate of Incorporation or Bylaws or (ii) any California or federal statute or regulation that we have, in the exercise of customary professional diligence, recognized as applicable to the Company or to transactions of the type contemplated by the Agreement, except that we express no opinion regarding any federal securities laws, or Blue Sky or state securities laws or Section 10 of this Agreement except as otherwise expressly stated herein. (vii) No order, consent, permit or approval of any California or federal governmental authority is required on the part of the Company for the execution and delivery of the Agreement or for the issuance and sale of the Shares, except such as have been obtained under the Act and such as may be required under applicable Blue Sky or state securities laws; (viii) The execution, delivery and performance of the Merger Agreement have been duly authorized by all necessary corporate action on the part of the Company and Operating Company, and the Merger Agreement has been duly executed and delivered by the Company and Operating Company; 14 (ix) The performance by each of the Company and Operating Company of its obligations on or prior to the date of this opinion under the Merger Agreement do not violate (i) its Certificate of Incorporation or Bylaws or (ii) any statute, rule or regulation that we have, in the exercise of customary professional diligence, recognized as applicable to the Company or Operating Company or to transactions of the type contemplated by the Merger Agreement; (x) No order, consent, permit or approval of any California or federal governmental authority that we have, in the exercise of customary professional diligence, recognized as applicable to the Company or Operating Company or to transactions of the type contemplated by the Merger Agreement is required on the part of either the Company or Operating Company for the execution and delivery of, and performance of its obligations under, the Merger Agreement, except for such as have been obtained; (xi) We have not, since January 1, 1994 given substantive attention on behalf of the Company to, or represented the Company in connection with, any actions, suits or proceedings pending or threatened against the Company before any court, arbitrator or governmental agency, which (i) seek to affect the enforceability of the Agreement or (ii) seek damages in excess of $10,000. We call your attention to the fact that our engagement is limited to specific matters as to which we are consulted by the Company; (xii) The Registration Statement has been declared effective under the Act, and, no stop order suspending the effectiveness of the Registration Statement has been issued and, to the knowledge of such counsel, no proceeding for that purpose is pending or threatened by the Commission; (xiii) The Registration Statement, on the date it was filed, appeared on its face to comply in all material respects with the requirements as to form for registration statements on Form S-1 under the Act and the related rules and regulations in effect at the date of filing, except that we express no opinion concerning the financial statements and other financial information contained therein; (xiv) The statements set forth in the Prospectus under the headings "Risk Factors--Concentration of Stock Ownership; --Benefits of Offering to Existing Stockholders; --Anti-Takeover Provisions; --Shares Eligible for Future Sale," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Business--Properties; Environmental Matters," "Management," "Certain Transactions," "Principal Stockholders and Selling Stockholder," "Description of Capital Stock," "Shares Eligible for Future Sale," and Item 14 of the Registration Statement, insofar as such statements constitute a summary of the terms of legal matters, documents, 15 agreements or other instruments or governmental, regulatory or other legal proceedings, are fair and accurate in all material respects; (xv) Neither the Company nor any subsidiary is an "INVESTMENT COMPANY" within the meaning of the 1940 Act; (xvi) We do not know of any contract or other document of a character required to be filed as an exhibit to the Registration Statement which is not filed as required; (xvii) The Company's execution and delivery of, and performance of its obligations on or prior to the date of this opinion under, the Agreement do not (i) violate, breach, or result in a default under, any existing obligation of or restriction on the Company under any other agreement (the "Other Agreements") identified in the Company Certificate, or (iii) breach or otherwise violate any existing obligation of or restriction on the Company under any order, judgment or decree of any California or federal court or governmental authority binding on the Company identified in the Company Certificate; (xviii) To the best of such counsel's knowledge, except as provided in the Agreement and the Stockholders Agreement there are no contracts, agreements or understandings between the Company or any subsidiary and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a Registration Statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other Registration Statement filed by the Company under the Securities Act; and (xix) In connection with our participation in the preparation of the Registration Statement and the Prospectus, we have not independently verified the accuracy, completeness or fairness of the statements contained therein, and the limitations inherent in the examination made by us and the knowledge available to us are such that we are unable to assume, and we do not assume, any responsibility for such accuracy, completeness or fairness (except as otherwise specifically stated in paragraph 9(e)(x) above). However, on the basis of our review and participation in conferences in connection with the preparation of the Registration Statement and the Prospectus, and relying as to materiality to a large extent upon opinions of officers and other representatives of the Company, we do not believe that the Registration Statement as of its effective date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and we do not believe that the Prospectus on the date hereof, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. However, we express no opinion or belief as to the financial statements and other financial information contained in the Registration Statement or the Prospectus. 16 (f) Lyon, P.C. shall have furnished to the Representatives his written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company, together with its subsidiaries, owns and possesses all right, title and interest in and to, or has duly licensed or otherwise obtained from third parties, all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses or any other proprietary right ("TRADE RIGHTS") which are material to the business of the Company. Neither the Company nor any of its subsidiaries has received any notice of infringement, misappropriation or conflict from any third party as to such Trade Rights which has not been resolved or disposed of and to the knowledge of the Company and its subsidiaries, neither the Company nor any of its subsidiaries has infringed, misappropriated or otherwise conflicted with Trade Rights of any third parties; (g) The counsel for the Selling Stockholder (which may be an employee of the Selling Stockholder) shall have furnished to the Representatives its written opinion, as counsel to the Selling Stockholder, addressed to the Underwriters and dated the First Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) Selling Stockholder has corporate power and authority to enter into this Agreement; the execution, delivery and performance of this Agreement by the Selling Stockholder and the consummation by the Selling Stockholder of the transactions contemplated hereby will not result in any violation of the provisions of the charter or by-laws of the Selling Stockholder such Selling Stockholder, and, except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required by the Selling Stockholder for the execution, delivery and performance of this Agreement by Selling Stockholder and the consummation by the Selling Stockholder of the transactions contemplated hereby; (ii) This Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Stockholder; (iii) Immediately prior to the First Delivery Date, the Selling Stockholder owns the Shares, free and clear of all adverse claims (within the meaning of Section 8-302 of the Uniform Commercial Code as in effect in the State of New York) and has the full right, power and authority to sell, assign, transfer and deliver such Shares to the Underwriters; (iv) Upon delivery of the Shares to be sold by the Selling Stockholder under this Agreement to the several Underwriters, and payment therefor pursuant to this Agreement, the Underwriters will hold such Shares free and clear of all adverse claims (within the meaning of Section 8-302 of the Uniform Commercial Code 17 as in effect in the State of New York) assuming the Underwriters purchased such Shares pursuant to this Agreement in good faith and without notice of any such adverse claim. (h) The Representatives shall have received from Latham & Watkins, counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Shares, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (i) Arthur Andersen LLP shall have furnished to the Representatives a letter or letters in form and substance satisfactory to each of the Representatives, addressed to the Underwriters and dated the date hereof and such Delivery Date, containing statements and information of the type ordinarily included in accountants' "COMFORT LETTERS" with respect to the financial statements and financial information contained in the Registration Statement and the Prospectus. (j) The Company shall have furnished to the Representatives a certificate of the Company, dated such Delivery Date, signed by the Chairman of the Board, or the President and the principal financial or accounting officer of the Company, in their capacities or such, stating that: (i) The representations, warranties and agreements of the Company in Section 1 of this Agreement are true and correct as of the date of this Agreement and as of such Delivery Date and, the Company has complied with all the agreements and satisfied all the conditions on their part to be performed; (ii) They have carefully examined (A) the Registration Statement and, in the Company's opinion (1) as of the Effective Date, the Registration Statement did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (2) since the Effective Date no event has occurred which should have been set forth in an amendment to the Registration Statement and (B) the Prospectus and, in the Company's opinion (1) as of the Effective Date, the Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (2) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Prospectus. The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; and (iii) Since the date of the most recent financial statements included in the Registration Statement and the Prospectus (including any amendment or supplement thereto), there has been no material adverse change in the condition (financial or other), earnings, business, properties or prospects of the Company and its 18 subsidiaries, taken as a whole, from that set forth in the Registration Statement and the Prospectus, whether or not arising from transactions in the ordinary course of business, except as set forth in the Registration Statement and the Prospectus (exclusive of any amendment or supplement thereto). (k) The Selling Stockholder shall have furnished to the Representatives on the First Delivery Date a certificate, dated the First Delivery Date, signed by, or on behalf of, the Selling Stockholder stating that the representations, warranties and agreements of the Selling Stockholder contained herein are true and correct as of the First Delivery Date and that the Selling Stockholder has complied with all agreements contained herein to be performed by the Selling Stockholder at or prior to the First Delivery Date. (l) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute, otherwise than as set forth or contemplated in the Prospectus or (ii) since such date there shall not have been any material change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, having a material effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representatives, so material and adverse as to make it impracticable to proceed with the public offering or the delivery of the Shares being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (m) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Shares being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (n) The Company and the Selling Stockholder, respectively, shall not have failed at or prior to such Delivery Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company and the Selling Stockholder, respectively, at or prior to such Delivery Date. (o) All of the transactions contemplated by the Reorganization have been consummated. 19 (p) Each executive officer and director of the Company shall have furnished to the Representatives, prior to the First Delivery Date, a letter or letters, in form and substance satisfactory to counsel for the Underwriters, pursuant to which each such person shall agree not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person during the period set forth in Sections 6(i) and 7(a)) any shares of Common Stock or other capital stock of the Company owned by such person, without the prior written consent of Lehman Brothers Inc. (q) On or prior to such Delivery Date, the Company shall have furnished to the Underwriters such further information, certificates and documents as the Underwriters may reasonably request. (r) No action shall have been taken and no statute, rule or regulation or order shall have been enacted, adopted or issued by any governmental agency that would as of such Delivery Date prevent the issuance of the Shares; no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of such Delivery Date that would prevent the issuance of the Shares; and, on such Delivery Date no action, suit or proceeding shall be pending against or affect the Company or any of its subsidiaries, before any court or arbitrator or any governmental body, agency or official that, if adversely determined, would interfere with or adversely affect the issuance of the Shares or would, except as disclosed in the Registration Statement and the Prospectus, individually or in the aggregate have a material adverse effect on the transactions contemplated by the Reorganization or the Shares. (s) The Nasdaq National Market System shall have approved the Shares for listing, subject only to official notice of issuance and evidence of satisfactory distribution. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 10. INDEMNIFICATION AND CONTRIBUTION. (a) The Company shall indemnify and hold harmless each Underwriter, (including any Underwriter acting in its capacity as "QUALIFIED INDEPENDENT UNDERWRITER" pursuant to Rule 2720 of the NASD) its officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of the Shares), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement, the Prospectus or in any amendment or supplement thereto or (B) in any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) specifically for the purpose of qualifying any or all of the Shares under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a "BLUE SKY APPLICATION"), (ii) the omission or alleged omission to state in any 20 Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct), and shall reimburse each Underwriter and each officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, or in any Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any officer, employee or controlling person of that Underwriter. (b) The Selling Stockholder agrees, subject to the limitation set forth in Section 10(g), to indemnify and hold harmless each Underwriter, its officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of the Shares), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage or liability or action arise out of, or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement, the Prospectus or any amendment or supplement thereto or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus, or any amendment or supplement thereto, in conformity with information provided in writing by the Selling Stockholder to the Company specifically for use therein and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling persons in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, that the Selling Stockholder will not be liable in any such case to the extent that (i) any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with 21 written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use therein; or (ii) if such statement or omission was contained or made in any preliminary prospectus and corrected in the Prospectus and (1) any such loss, claim, damage or liability suffered or incurred by an Underwriter (or any person who controls any Underwriter) resulted from an action, claim or suit by any person who purchased Shares which are the subject thereof from such Underwriter in the offering and (2) such Underwriter failed to deliver or provide a copy of the Prospectus to such person at or prior to the confirmation of the sale of such Shares in any case where such delivery is required by the Securities Act. This indemnity agreement will be in addition to any liability which the Selling Stockholder may otherwise have. (c) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers and employees, each of its directors (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company), the Selling Stockholder and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, and shall reimburse the Company and any such director, officer, the Selling Stockholder or controlling person promptly upon demand for any legal or other expenses reasonably incurred by the Company or any such director, officer, the Selling Stockholder or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, employee, the Selling Stockholder or controlling person. (d) Promptly after receipt by an indemnified party under this Section 10 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 10, notify the indemnifying party in writing of the claim or the commencement of that action; PROVIDED, HOWEVER, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 10 except to the extent it has been materially prejudiced by such failure and, PROVIDED FURTHER, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 10. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified 22 party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 10 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; PROVIDED, HOWEVER, that the Representatives shall have the right to employ counsel to represent jointly the Representatives and those other Underwriters and their respective officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company or the subsidiary under this Section 10 if, (i) the Company has failed to provide counsel reasonably satisfactory to such indemnified party in a timely manner or (ii) counsel which has been provided by the Company reasonably determines that its representation of such indemnified party would present it with a conflict of interest, and in that event the fees and expenses of such separate counsel shall be paid by the Company or the subsidiary. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (e) If the indemnification provided for in this Section 10 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 10(a) or 10(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, the Selling Stockholder and the Underwriters, respectively, from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative faults of the Company, the Selling Stockholder and the Underwriters, respectively, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Stockholder and the Underwriters with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses) received by each of the Company and the Selling Stockholder, and the total underwriting discounts and commissions received by the Underwriters with respect to the Shares purchased under this Agreement, bear to the total gross proceeds from the offering of the Shares under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholder or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The 23 Company, the Selling Stockholder and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 10(e) were to be determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 10(e) shall be deemed to include, for purposes of this Section 10(e), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 10(e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 10(e) are several in proportion to their respective underwriting obligations and not joint. (f) The Underwriters severally confirm and the Company acknowledges that the statements with respect to the public offering of the Shares by the Underwriters set forth on the cover page of, the legend concerning over-allotments on the inside front cover page of and the concession and reallowance figures appearing under the caption "UNDERWRITING" in, the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. (g) Notwithstanding any of the provisions of this Section 10, the Selling Stockholder's liability to the Underwriters and/or the Company and their officers, employees and controlling persons, shall not exceed the net proceeds received by Selling Stockholders from the sale of the Shares being sold by the Selling Stockholder pursuant to this Agreement to the Underwriters, and in no event shall the Company have any right of contribution from the Selling Stockholder for liability which the Company may have to the Underwriters, their officers, employees and controlling persons pursuant to Section 10(a) hereof, except under the circumstances which give rise to liability by the Selling Stockholder under Section 10(b) hereof. 11. DEFAULTING UNDERWRITERS. If, on either Delivery Date, any Underwriter defaults in the performance of its obligations under this Agreement, the remaining non- defaulting Underwriters shall be obligated to purchase the Shares which the defaulting Underwriter agreed but failed to purchase on such Delivery Date in the respective proportions which the number of shares of the Firm Shares set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm Shares set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto; PROVIDED, HOWEVER, that the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Shares on such Delivery Date if the total number of Shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such date exceeds 9.09% of the total number of shares of the Shares to be purchased on such Delivery Date, and any remaining non- defaulting Underwriter shall not be obligated to purchase more than 110% of the number of shares of the Shares which it agreed to purchase on such Delivery Date pursuant to the terms of Section 3. If the foregoing 24 maximums are exceeded, the remaining non-defaulting Underwriters, or those other underwriters satisfactory to the Representatives who so agree, shall have the right, but shall not be obligated, to purchase, in such proportion as may be agreed upon among them, all the Shares to be purchased on such Delivery Date. If the remaining Underwriters or other underwriters satisfactory to the Representatives do not elect to purchase the shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date, this Agreement (or, with respect to the Option Delivery Date, the obligation of the Underwriters to purchase, and of the Company to sell, the Option Shares) shall terminate without liability on the part of any non-defaulting Underwriter or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 8 and 13. As used in this Agreement, the term "UNDERWRITER" includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 11, purchases Firm Shares which a defaulting Underwriter agreed but failed to purchase. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other underwriters are obligated or agree to purchase the Shares of a defaulting or withdrawing Underwriter, either the Representatives or the Company may postpone the Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. 12. TERMINATION. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company prior to delivery of and payment for the Firm Shares if, prior to that time, any of the events described in Section 9(l) or 9(n) shall have occurred or if the Underwriters shall decline to purchase the Shares for any reason permitted under Section 9 or Section 11. 13. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) the Company shall fail to tender the Shares for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled (other than the conditions set forth in subdivision (m) of Section 9 hereof), the Company will reimburse the Underwriters for all reasonable out- of-pocket expenses (including fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Shares, and upon demand the Company shall pay the full amount thereof to the Representatives. If this Agreement is terminated pursuant to Section 12 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 13. NOTICES, ETC. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588), with a copy, in the case of any notice pursuant to Section 10(d), to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285; (b) if to the Company, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Mr. David Warner (Fax: 714-712-4904); with a copy to C. James Levin, Esq., 25 O'Melveny & Myers LLP, 400 S. Hope Street, Los Angeles, California 90071 (Fax: 213-669-6407); and (c) If to the Selling Stockholder, shall be delivered or sent by mail, telex or facsimile transmission to General Electric Capital Corporation, 201 High Ridge Road, Stamford, CT, 06927, Attention: Paul Vitti, (Fax: 203-316-7894), with copies to General Electric Capital Corporation, 201 High Ridge Road, Stamford, CT 06927, Attention: Corporate Finance Group, Department Counsel (Fax: 203-316-7889), with a copy to Sidley & Austin, 555 West 5th Street, Los Angeles, CA, 90013, Attention: Edward D. Eddy, III (Fax: 213-896-6600). PROVIDED, HOWEVER, that any notice to an Underwriter pursuant to Section 10(d) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representatives, which address will be supplied to any other party hereto by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the Representatives. 15. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, the Selling Stockholder, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company, and the Selling Stockholder, contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the indemnity agreement of the Underwriters contained in Section 10(c) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 15, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 16. SURVIVAL. The respective indemnities, representations, warranties and agreements of the Company, the Selling Stockholder and the Underwriters contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Shares and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 17. DEFINITION OF THE TERMS "BUSINESS DAY." For purposes of this Agreement, (a) "business day" means any day on which the New York Stock Exchange, Inc. is open for trading. 18. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 19. COUNTERPARTS. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 26 20. HEADINGS. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. [SIGNATURE PAGES TO FOLLOW] 27 If the foregoing correctly sets forth the agreement among the Company, the Selling Stockholder and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, KAYNAR TECHNOLOGIES INC. By ------------------------------- Name Title GENERAL ELECTRIC CAPITAL CORPORATION By ------------------------------- Name Title S-1 Accepted: LEHMAN BROTHERS INC. PAINEWEBBER INCORPORATED. For themselves and as Representatives of the several Underwriters named in Schedule 1 hereto By LEHMAN BROTHERS INC. By -------------------------------- AUTHORIZED REPRESENTATIVE S-2 EXHIBIT A Lehman Brothers Inc. PaineWebber Incorporated c/o Lehman Brothers Inc. The World Financial Center New York, NY 10285 Ladies and Gentlemen: The undersigned understands that you and certain other firms propose to enter into an Underwriting Agreement (the "Underwriting Agreement") providing for the purchase by you and such other firms (the "Underwriters") of shares (the "Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of Kaynar Technologies Inc. (the "Company") and that the Underwriters propose to reoffer the Shares to the public. In consideration of the execution of the Underwriting Agreement by the Underwriters, and for other good and valuable consideration, the undersigned hereby irrevocably agrees that without the prior written consent of Lehman Brothers Inc. the undersigned will not sell, offer to sell, solicit an offer to buy, contract to sell, grant any option to purchase, or otherwise transfer or dispose of, any Shares of the Common Stock, or any securities convertible into or exercisable or exchangeable for the Common Stock, for a period of 180 days after the date of the final Prospectus relating to the offering of the Shares to the public by the Underwriters. The undersigned agrees that the provisions of this letter agreement shall be binding also upon the successors, assigns, heirs and personal representatives of the undersigned. In furtherance of the foregoing, the Company and ChaseMellon Shareholder Services, Inc., its Transfer Agent, are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this letter agreement. It is understood that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, you will release me from all obligations under this letter agreement. Very truly yours, ------------------------------ [Name of Signatory] Dated: May ___, 1997 SCHEDULE 1 Number of Underwriters Shares ------------ ---------- Lehman Brothers Inc.. . . . . . . . . . . . . . . . . . . 620,000 PaineWebber Incorporated. . . . . . . . . . . . . . . . . 620,000 ABN AMRO Chicago Corporation. . . . . . . . . . . . . . . 55,000 Bear, Stearns & Co. Inc.. . . . . . . . . . . . . . . . . 55,000 Credit Suisse First Boston Corporation. . . . . . . . . . 55,000 A.G. Edwards & Sons, Inc. . . . . . . . . . . . . . . . . 55,000 Everen Securities, Inc. . . . . . . . . . . . . . . . . . 55,000 Goldman, Sachs & Co.. . . . . . . . . . . . . . . . . . . 55,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . . . . . . . . . 55,000 Morgan Stanley & Co. Incorporated . . . . . . . . . . . . 55,000 Oppenheimer & Co., Inc. . . . . . . . . . . . . . . . . . 55,000 Salomon Brothers Inc. . . . . . . . . . . . . . . . . . . 55,000 Crowell, Weedon & Co. . . . . . . . . . . . . . . . . . . 30,000 Fahnestock & Co. Inc. . . . . . . . . . . . . . . . . . . 30,000 First of Michigan Corporation . . . . . . . . . . . . . . 30,000 Gabelli & Company, Inc. . . . . . . . . . . . . . . . . . 30,000 Legg Mason Wood Walker, Incorporated. . . . . . . . . . . 30,000 Pennsylvania Merchant Group Ltd . . . . . . . . . . . . . 30,000 Sutro & Co. Incorporated. . . . . . . . . . . . . . . . . 30,000 --------- Total . . . . . . . . . . . . . . . . . . . . 2,000,000 --------- --------- Sch-1 SCHEDULE 2 Jurisdiction Subsidiary of Incorporation - ---------- ---------------- Kaynar Technologies Ltd..................................................England K.T.I. Femipari Kft......................................................Hungary Kaynar Technologies International Sales Corp............................Barbados Recoil Holdings, Inc....................................................Delaware Recoil Australia Holdings, Inc..........................................Delaware Recoil Pty...................................................Victoria, Australia Recoil (Europe) Ltd...............................................United Kingdom Recoil Marketing BVBA.............................................Aalst, Belgium Sch-2 EX-10.8B 3 SPECIAL BUSINESS PROVISIONS SPECIAL BUSINESS PROVISIONS SPECIAL BUSINESS PROVISIONS between THE BOEING COMPANY and KAYNAR TECHNOLOGIES INCORPORATED Number STD-65751-025 ------------- * Confidential portions omitted and filed separately with the Commission. i SPECIAL BUSINESS PROVISIONS TABLE OF CONTENTS Section Item - ------- ---- 1.0 DEFINITIONS 2.0 PURCHASE ORDER NOTE 3.0 PRICES 3.1 Product Pricing 3.2 Manufacturing Configuration Baseline 3.3 Packaging 4.0 GOVERNING QUALITY ASSURANCE REQUIREMENT 5.0 APPLICABLE LAW JURISDICTION 6.0 PRODUCT ASSURANCE 6.1 Governing Document 7.0 PAYMENT 7.1 Recurring Price 7.2 Non-Recurring Price/Special Charges 8.0 ACCELERATION/DECELERATION AT NO COST 9.0 NOTICES 9.1 Addresses 10.0 OBLIGATION TO PURCHASE AND SELL 11.0 COST AND FINANCIAL PERFORMANCE VISIBILITY 12.0 CHANGES 12.1 Changes to the Statement of Work 12.2 Computation of Equitable Adjustment 12.3 Obsolescence 12.4 Change Absorption 12.5 Planning Schedule 12.6 Value Engineering 12.7 Reduction in Quantity to be Delivered 13.0 SPARES AND OTHER PRICING 13.1 Spares 13.2 Short Flow Production Requirements 13.3 Tooling ii SPECIAL BUSINESS PROVISIONS TABLE OF CONTENTS Section Item - ------- ---- 13.4 Pricing of Boeing's Supporting Requirements 13.5 Pricing of Requirements for Modification or Retrofit 13.6 Similar Pricing 14.0 STATUS REPORTS/REVIEWS 15.0 PROVISIONS FOR OFFSET/BUSINESS STRATEGIES FOREIGN PROCUREMENT REPORT 16.0 BOEING FURNISHED MATERIAL 17.0 ASSIGNMENT Attachment 1, 1A Work Statement and Pricing Attachment 2 Foreign Procurement Report Attachment 3 Rates and Factors Attachment 4 Boeing AOG Coverage Attachment 5 Boeing AOG/Critical Shipping Notification Attachment 6 Economic Price Adjustment for Titanium Seal Nuts iii SPECIAL BUSINESS PROVISIONS AMENDMENTS AMEND NUMBER DESCRIPTION DATE APPROVAL - ------ ----------- ---- -------- 1 Add BACN10JS part family to 12/3/96 see original Attachment 1, page 1 and 2. 2 Correct pricing to reflect 4 12/9/96 see original decimal places. 3 Add exhibit 1A and 6 for TN 1/17/97 pricing. Add escalation for Attachment 1A to section 3.1. Modify section 10.0 to denote percent of requirements purchased for Attachment 1A. Modify sections: 3.1, 3.2, 3.3, 7.2, 10.0, 12.6.3, 13.1.3, 13.1.3.1, 13.1.3.2, 13.4, 13.5, and 17.0 to include Attachment 1A. iv SPECIAL BUSINESS PROVISIONS SPECIAL BUSINESS PROVISIONS THESE SPECIAL BUSINESS PROVISIONS are entered into as of September 20, 1996 by and between Kaynar Technologies Incorporated, a California corporation with its principal office in Fullerton, California ("Seller"), and The Boeing Company, a Delaware corporation with an office in Seattle, Washington acting by and through its division the Boeing Commercial Airplane Group ("Boeing"). RECITALS -------- A. Boeing and Seller entered into a General Terms Agreement GTA # BCA-65751-029 dated September 20, 1996, (the "Agreement") which is incorporated herein and made a part hereof by this reference, for the sale by Seller and purchase by Boeing of Products. B. Boeing and Seller desire to include these special business provisions ("SBP") relating to the sale by Seller and purchase by Boeing of Products. Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: PROVISIONS 1.0 DEFINITIONS The definitions used herein shall be the same as used in the Agreement. 2.0 PURCHASE ORDER NOTE The following note shall be contained in any Order to which these SBP are applicable: This Order is subject to and incorporates by this reference SBP STD-65751-025 between The Boeing Company and Kaynar Technologies Incorporated dated September 20, 1996. Each Order bearing such note shall be governed by and be deemed to include the provisions of these SBP. 3.0 PRICES 3.1 PRODUCT PRICING The prices and applicable period of performance of Products scheduled for delivery under this SBP are set forth in Attachment 1 and 1A. Prices are in United States dollars, F.O.B. Fullerton, California. Prices for Products in Attachment 1A shall be subject to escalation as set forth in Attachment 6. 1 SPECIAL BUSINESS PROVISIONS 3.2 MANUFACTURING CONFIGURATION BASELINE Unit pricing for each Product or part number shown in Attachment 1 and 1A are based on the latest revisions of the engineering drawings or specifications at the time of the signing of this SBP. 3.3 PACKAGING The prices shown in Attachment 1 and 1A include packaging costs and all materials and labor required to package Products identified in Attachment 1 and 1A. Packaging shall be furnished by the Seller in accordance with Document M6-1025, Volume II, "Supplier Part Protection Guide", Document D200-10038-2 "Supplier Packaging Requirements", or in accordance with instructions specified on individual Order as applicable. In the case of Products to be shipped directly to Customers, A.T.A. Specification 300 "Specification for Packaging of Airline Supplies" shall apply unless otherwise directed by Boeing. Bulk packaging is acceptable for Products shown on Attachment 1A. 4.0 GOVERNING QUALITY ASSURANCE REQUIREMENT All work performed under this SBP shall be in accordance with the following document which is incorporated herein and made a part hereof by this reference: Document D1-9000, "Advanced Quality System for Boeing Suppliers," as amended from time to time. 5.0 APPLICABLE LAW JURISDICTION Each Order, including all matters of construction, validity and performance, shall in all respects be governed by, and construed and enforced in accordance only with the law of the State of Washington as applicable to contracts entered into and to be performed wholly within such State between citizens of such State, without reference to any rules governing conflicts of law. Seller hereby irrevocably consents to and submits itself exclusively to the jurisdiction of the applicable courts of the State and the federal courts therein for the purpose of any suit, action or other judicial proceeding arising out of or connected with any Order or the performance or subject matter thereof. Seller hereby waives and agrees not to assert by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that (a) Seller is not personally subject to the jurisdiction of the above-named courts, (b) the suit, action or proceeding is brought in an inconvenient forum or (c) the venue of the suit, action or proceeding is improper. 6.0 PRODUCT ASSURANCE 6.1 GOVERNING DOCUMENT Seller acknowledges that Boeing and Customers must be able to rely on each Product performing as specified and that Seller will provide all required support. Accordingly, the following provisions and document(s) are incorporated herein and made a part hereof: Seller warrants to Boeing and Customers that Products shall: (a) conform in all respects to all the requirements of the Order; (b) be free from all defects in materials and workmanship; and (c) to the extent not manufactured pursuant to detailed designs furnished by Boeing, be free from all defects in design and be fit for the intended purposes. 2 SPECIAL BUSINESS PROVISIONS 7.0 PAYMENT 7.1 RECURRING PRICE Unless otherwise provided in the applicable Order, payment of the recurring price shall be made in accordance with Form X-27981 "Pay From Receipt - Additional Terms and Conditions Regarding Invoicing and Payment". Payment terms shall be net thirty (30) days except as otherwise agreed to by the parties. All payments are subject to adjustment for shortages, credits and rejections. 7.2 NON-RECURRING PRICE/SPECIAL CHARGES Unless otherwise provided in the applicable Order, any non-recurring price payable by Boeing under Attachment 1 or 1A shall be paid within the term discount period or thirty (30) calendar days (whichever is later) after receipt by Boeing of both acceptable Products and a correct invoice. 8.0 ACCELERATION/DECELERATION AT NO COST Notwithstanding GTA Section 10.0, Boeing may make changes in the delivery schedule without additional cost or change to the unit price stated in the applicable Order if (a) the delivery date of the Product under such Order is on or before the last date of contract, if applicable, and (b) Boeing provides Seller with written notice of such changes. 9.0 NOTICES 9.1 ADDRESSES Notices and other communications shall be given in writing by personal delivery, United States mail, telex, teletype, telegram, facsimile, cable or electronic transmission addressed to the respective party as follows: To Boeing: Attention: Buyer: Hugh McCormick, M/S 38-FW BOEING COMMERCIAL AIRPLANE GROUP MATERIEL DIVISION P.O. Box 3707 Seattle, Washington 98124-2207 To Seller: Attention: Paula Smith KAYNAR TECHNOLOGIES INCORPORATED 800 S. State Collage Blvd. Fullerton, CA 92634-3001 3 SPECIAL BUSINESS PROVISIONS 10.0 OBLIGATION TO PURCHASE AND SELL Boeing and Seller agree that in consideration of the prices set forth under Attachment 1 and 1A, Boeing shall issue Orders for Products from time to time to Seller for Boeing's requirements. For Product on Attachment 1A * of Boeing's requirements shall be purchased from Seller. If Seller maintains * performance for Product on Attachment 1A as measured by Boeing *. If Seller fails to maintain * for Product on Attachment 1A. Boeing *. Such Products shall be shipped at any scheduled rate of delivery, as determined by Boeing, and Seller shall see to Boeing Boeing's requirements of such Products, provided that, without limitation on Boeing's right to determine its requirements. Boeing shall not be obligated to issue any Orders for any given Product if: A. * B. Such Product is, in Boeing's reasonable judgment, not technologically competitive at any time, for reasons including but not limited to the * C. Boeing gives reasonable notice to Seller of a change in any of Boeing's aircraft which will result in Boeing no longer requiring such Product for such aircraft: D. Seller has materially defaulted in any of its obligations under any Order, whether or not Boeing has issued a notice of default to Seller pursuant to GTA Section 13.0; or, E. * Seller cannot support Boeing's requirements for Products in the amounts and within the delivery schedules Boeing requires. 11.0 COST AND FINANCIAL PERFORMANCE VISIBILITY Seller shall provide all necessary cost support data, source documents for direct and indirect costs, and assistance at the Seller's facility for cost performance reviews performed by Boeing pursuant to any Order. Furthermore, Seller shall provide financial data, on a quarterly basis, or as requested, to Boeing's Credit Office and Materiel Representative for credit and financial condition reviews. Said data shall include but not be limited to balance sheets, schedule of accounts payable and receivable, major lines of credit, creditors, income statements (profit and loss), cash flow statements, firm backlog, and headcounts. Copies of such data are to be made available within 72 hours of any written request by Boeing. This data is required in addition to the cost data provided pursuant to GTA Section 9.0. All such information shall be treated as confidential in accordance with GTA Section 20.0. * Confidential portions omitted and filed separately with the Commission. 4 SPECIAL BUSINESS PROVISIONS 12.0 CHANGES 12.1 CHANGES TO THE STATEMENT OF WORK Boeing may direct Seller within the scope of the applicable Order and in accordance with the provisions of GTA Section 10.0, to increase or decrease the work to be performed by the Seller in the manufacture of any Product. 12.2 COMPUTATION OF EQUITABLE ADJUSTMENT NOT APPLICABLE 12.3 OBSOLESCENCE Claims for obsolete or surplus material and work-in-process created by change orders issued pursuant to this Section shall be subject to the procedures set forth in GTA Section 12.0, except that Seller may not submit a claim for obsolete or surplus material resulting from an individual change order that has a total claim value of Twenty-Five Hundred Dollars ($2500.00) or less. Payment for obsolete or surplus materials shall be made by check deposited as first class mail to the address designated by Seller in SBP Section 9.1. Payment will be made on the tenth (10th) day of the month following the month of the obsolescence claim settlement. 12.4 CHANGE ABSORPTION 12.4.1 NON-RECURRING AND RECURRING CHANGE ABSORPTION NOT APPLICABLE 12.5 PLANNING SCHEDULE Any planning schedule or quantity estimate provided by Boeing shall be used solely for production planning. Boeing may purchase Products in different quantities and specify different delivery dates as necessary to meet Boeing's requirements. Such planning schedule and quantity estimate shall be subject to adjustment from time to time. Any such adjustment is not a change under GTA Section 10.0. 12.6 VALUE ENGINEERING Seller may from time to time submit proposals to Boeing to change drawings, designs, specifications or other requirements that: a. decrease Seller's performance costs; or b. produce a net reduction in the cost to Boeing of installation, operation, maintenance or production of the Product. Provided, that such change shall not impair any essential functions or characteristics of the Products or Tooling. 5 SPECIAL BUSINESS PROVISIONS 12.6.1 SUBMISSION OF PROPOSAL Proposals shall be submitted to Boeing's Materiel Representative. Boeing shall not be liable for any delay in acting upon a proposal. Boeing's decision to accept or reject any proposal shall be final. If there is a delay and the net result in savings no longer justifies the investment, Seller will not be obligated to proceed with the change. Seller has the right to withdraw, in whole or in part, any proposal not accepted by Boeing within the time period specified in the proposal. Seller shall submit, as a minimum, the following information with the proposal: a. description of the difference between the existing requirement and the proposed change, and the comparative advantages and disadvantages of each; b. the specific requirements which must be changed if the proposal is adopted; c. the cost savings and Seller's implementation costs; d. Each proposal shall include the need dates for engineering release and the time by which a proposal must be approved so as to obtain the maximum cost reduction. 12.6.2 ACCEPTANCE AND COST SHARING Boeing may accept, in whole or in part, any proposal by issuing a change order. Until such change has been issued, Seller shall remain obligated to perform in accordance with the terms and requirements of the original Order as written. Boeing and Seller shall share the savings as follows: * savings to Boeing; * savings to Seller. Seller shall include with each proposal verifiable cost records and other data as required by Boeing for proposal review and analysis. Each party shall be responsible for its own implementation costs, including but not limited to non-recurring costs. 12.6.3 COST SAVINGS COMPUTATION A change order shall be issued by Boeing and the unit price shall be reduced in an amount equal to the savings portion attributable to Boeing as set forth above. The applicable unit price as set forth in Attachment 1 or 1A Statement of Work shall be amended to reflect such change. EXAMPLE: Current Price: $600.00 Proposed Cost Savings: $100.00/unit Boeing's Percentage: * Seller's Percentage: * * Confidential portions omitted and filed separately with the Commission. 6 SPECIAL BUSINESS PROVISIONS 12.6.3 COST SAVINGS COMPUTATION (Continued) STEP BY STEP COMPUTATION: 1. $100.00 unit savings x * Boeing's percentage of savings = * Boeing savings. 2. $100.00 unit savings x * Seller's percentage of savings = * Seller savings. 3. Net affect to the unit cost = * New Unit Price For Units = * 12.6.4 WEIGHT REDUCTION PROPOSALS Seller is encouraged to submit proposals to Boeing that reduce the Product's weight without impairing any essential functions or characteristics of the Product. Seller shall submit such proposals in accordance with SBP Section 12.6.1 above. The amount of any costs or savings that result from a weight reduction proposal shall be agreed by Boeing and Seller. Seller shall include with each proposal verifiable cost records and other data as required by Boeing for proposal review and analysis. Boeing may accept in whole or in part, any such proposal by issuing a change order to the applicable Order. 12.7 REDUCTION IN QUANTITY TO BE DELIVERED NOT APPLICABLE 13.0 SPARES AND OTHER PRICING 13.1 SPARES For purposes of this Section, the following definitions shall apply: A. AIRCRAFT ON GROUND (AOG) - means the highest Spares priority. Seller will expend best efforts to provide the earliest possible delivery of any Spare designated AOG by Boeing. Such effort includes but is not limited to working twenty-four (24) hours a day, seven days a week and use of premium transportation. Seller shall specify the delivery date and time of any such AOG Spare within two (2) hours of receipt of an AOG Spare request. B. CRITICAL - means an imminent AOG work stoppage. Seller will expend best efforts to provide the earliest possible delivery of any Spare designated Critical by Boeing. Such effort includes but is not limited to working two (2) shifts a day, five (5) days a week and use of premium transportation. Seller shall specify the delivery date and time of any such Critical Spare within the same working day of receipt of a Critical Spare request. * Confidential portions omitted and filed separately with the Commission. 7 SPECIAL BUSINESS PROVISIONS 13.1 SPARES (Continued) C. EXPEDITE (CLASS I) - means a Spare required in less than Seller's normal lead-time. Seller will expend best efforts to meet the requested delivery date. Such effort includes but is not limited to working overtime and use of premium transportation. D. ROUTINE (CLASS III) - means a Spare required in Seller's normal lead-time. E. POA REQUIREMENT (POA) - means any detail component needed to replace a component on an End Item Assembly currently in Boeing's assembly line process. Seller shall expend best efforts feasible to provide the earliest possible delivery of any Spare designated as POA by Boeing. Such effort includes but is not limited to working twenty-four (24) hours a day, seven days a week and use of premium transportation. Seller shall specify the delivery date and time of any such POA within two (2) hours of an AOG Spare request. F. IN-PRODUCTION - means any Spare with a designation of AOG, Critical, Expedite, Routine, POA or End Item Assembly which is in the current engineering configuration for the Product and is used on a model aircraft currently being manufactured by Boeing. G. NON-PRODUCTION REQUIREMENTS - means any Spare with a designation of AOG, Critical, Expedite and Routine requirements which is used on model aircraft no longer being manufactured by Boeing (Post Production) or is in a non-current engineering configuration for the Product (Out of Production). H. BOEING PROPRIETARY SPARE - means any Spare which is manufactured (i) by Boeing, or (ii) to Boeing's detailed designs with Boeing's authorization or (iii) in whole or in part using Boeing's Proprietary Materials. 13.1.1 SPARES SUPPORT Seller shall provide Boeing with a written Spares support process describing Seller's plan for supporting AOG and Critical commitments and manufacturing support. The process must provide Boeing with the name and number of a twenty-four (24) hour contact for coordination of AOG and Critical requirements. Such contact shall be equivalent to the coverage provided by Boeing to its Customers as outlined in Attachment 4 "Boeing AOG Coverage" which is incorporated herein and made a part hereof by this reference. Seller shall notify Boeing as soon as possible via fax, telecon, or as otherwise agreed to by the parties of each AOG and Critical requirement shipment using the force identified in Attachment 5 "Boeing AOG and Critical Shipping Notification". Such notification shall include time and date shipped, quantity shipped, Order, pack slip, method of transportation and air bill if applicable. Seller shall also notify Boeing immediately upon the discovery of any delays in shipment of any requirement and identify the earliest revised shipment possible. 8 SPECIAL BUSINESS PROVISIONS 13.1.2 RECLASSIFICATION OR RE-EXERCISES Boeing may on occasion, instruct Seller to re-prioritize or reclassify an existing requirement in order to improve or otherwise change the established shipping schedule. Seller shall expend the effort required to meet the revised requirement as set forth above in the definitions of the requirements. Seller's commitment of a delivery schedule shall be given in accordance with that set forth above for the applicable classification but in no case shall it exceed twenty-four (24) hours from notification by Boeing. 13.1.3 SPARE PRICING Except as set forth in subsections 13.1.3.1 and 13.1.3.2 below, the price for Spare(s) shall *. 13.1.3.1 AIRCRAFT ON GROUND (AOG), CRITICAL SPARES AND POA REQUIREMENT The price for AOG and Critical Spares and POA requirements shall be the price for such Products listed on Attachment 1 or 1A. 13.1.3.2 EXPEDITE SPARE (CLASS 1) The price for Expedite Spares shall be the price for such Products listed on Attachment 1 and 1A. 13.1.4 SPECIAL HANDLING The price for all effort associated with the handling and delivery of Spare(s) is deemed to be included in the price for such Spare(s). Provided, that if Boeing directs delivery of Spares to an F.O.B. point other than Seller's plant, Boeing shall reimburse Seller for shipping charges, including insurance, paid by Seller from the plant to the designated F.O.B. point. Such charges shall be shown separately on all invoices. 13.2 SHORT FLOW PRODUCTION REQUIREMENTS Boeing shall pay no expedite charges for production requirements released less than Seller's current ROLT. Seller agrees to support Boeing's short flow requirements with its best effort. * Confidential portions omitted and filed separately with the Commission. 9 SPECIAL BUSINESS PROVISIONS 13.3 TOOLING 13.3.1 RESPONSIBLE PARTY Seller shall absorb all costs for Tooling manufactured and/or purchased by Seller necessary for the manufacture and delivery of the Products including but not limited to rework, repair and maintenance of the Tooling. 13.3.2 BOEING FURNISHED TOOLING In the event Boeing furnishes Tooling to Seller to support the delivery of Product(s), Seller shall comply with the Terms and Conditions applicable to the Blanket Tooling Purchase Control Order established with Seller who possess or controls Tooling. No repair, replacement or rework required shall be performed without Boeing's prior written consent. Boeing shall notify Seller of, what if any, action shall be required for all discrepant Tooling. 13.4 PRICING OF BOEING'S SUPPORTING REQUIREMENTS Any Products required to assist Boeing's supporting requirements, including but not limited to color and appearance samples, design studies, product qualification, Boeing-owned simulators, test requirements, factory support, flight test spares will be provided for not more than the applicable price as set forth in Attachment 1 or 1A. 13.5 PRICING OF REQUIREMENTS FOR MODIFICATION OR RETROFIT Any Products required by Boeing to support a modification or retrofit program shall be provided for *. 13.6 SIMILAR PRICING New Products ordered by Boeing that are similar to or within Product families of Products currently being manufactured by Seller shall be priced *. 14.0 STATUS REPORTS/REVIEWS When requested by Boeing, Seller shall update and submit, as a minimum, monthly status reports on data requested by Boeing using a method mutually agreed upon by Boeing and Seller. When requested by Boeing, Seller shall provide to Boeing a manufacturing milestone chart identifying the major purchasing, planning and manufacturing operations for the applicable Product(s). Upon request by Boeing, a program review may be held between the parties. The location of such review shall be mutually agreed to by the parties. The purpose of the review is to improve communication and understanding between the parties to ensure program success. * Confidential portions omitted and filed separately with the Commission. 10 SPECIAL BUSINESS PROVISIONS 15.0 PROVISIONS FOR OFFSET/BUSINESS STRATEGIES FOREIGN PROCUREMENT REPORT Seller agrees to cooperate with Boeing in identifying possible subcontractors for work under any Order that support Boeing's offset or business strategies. Prior to releasing any request for proposal to a subcontractor to support Boeing's offset or business strategy, Seller shall coordinate with Boeing. Seller shall document on Attachment 2 all offers to contract and executed contracts with such subcontractors including the dollars contracted. Seller shall provide to Boeing with an updated copy of Attachment 2 for the six-month periods ending June 30 and December 31 of each year. The reports shall be submitted on the 1st of August and the 1st of February respectively. 16.0 BOEING FURNISHED MATERIAL NOT APPLICABLE 17.0 ASSIGNMENT Boeing and Seller agree that Boeing may, in its discretion, assign, in part or in whole, its purchasing obligations under the Agreement or any Order, as applicable, at the prices set forth in Attachment 1 and 1A thereof. Boeing reserves the right to rescind its assignment at anytime. Boeing's assignment of purchasing obligation includes scheduling, issuance of Order(s), receival and inspection of Products, acceptance or rejection of Products, payment for accepted Products, and ensuring conformance to the quality assurance system requirements. Boeing shall retain all other rights and obligations pursuant to the applicable terms and conditions. In addition, Boeing reserves the right, where necessary, to coordinate with and mediate between Seller and any assignee regarding such assignment. EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY KAYNAR TECHNOLOGIES By and Through its Division INCORPORATED Boeing Commercial Airplane Group /s/ Hugh N. McCormick /s/ Robert L. Beers Name: Hugh N. McCormick Name: Robert L. Beers Title: Buyer Title: Vice President Sales and Marketing Date: January 20, 1997 Date: January 23, 1997 ---------------- ---------------- 11 SPECIAL BUSINESS PROVISIONS ATTACHMENT 1A TO SPECIAL BUSINESS PROVISIONS WORK STATEMENT AND PRICING All Items listed on attachment 1A are titanium seal nuts. The Re-order lead time (ROLT) for all items is expressed in weeks. Tolerances applicable to Orders placed under this contract are +1% -1% of the total Order quantity. The price for Products to be delivered on or before 12-31-2000, shall be as follows: Item # PART NUMBER UNIT PRICE LEAD TIME - ----------------------------------------------------------------------------- 1 2 * * * 3 * Confidential portions omitted and filed separately with the Commission. SPECIAL BUSINESS PROVISIONS ATTACHMENT 6 TO SPECIAL BUSINESS PROVISIONS ECONOMIC PRICE ADJUSTMENT FOR TITANIUM SEAL NUTS 1997 THROUGH 2000 1. This clause sets forth the method for adjusting base prices as a result of abnormal escalation for 1997 through 2000 provided that: A. An abnormal price increase shall be made to the base unit price only if the actual cumulative index exceeds the baseline cumulative forecast as defined in paragraph 5.B below. B. An abnormal price decrease shall be made to the base unit price only if the actual cumulative index is less than baseline cumulative forecast as defined in paragraph 5.C. below. 2. Adjustment will be determined by the following index: A. MATERIAL - Producer Price Index (PPI) Titanium Mill Shapes, Code P102505 as reported by the U.S. Bureau of Labor Statistics. B. CONTENT - Material content shall be * of the Contract unit prices listed in Attachment 1. 3. Baseline price is defined as the unit prices in Attachment 1A to the Special Business Provisions. 4. SPECIAL NOTES: In the event the U.S. Bureau of Labor Statistics discontinues or alters its current method of calculating the index specified above, both parties shall agree upon an appropriate substitution for or adjustment of the indices to be employed herein. * Confidential portions omitted and filed separately with the Commission. 1 SPECIAL BUSINESS PROVISIONS 5. BASELINE FORECAST: A. The cum baseline forecast is developed from the actual December 1996 index with an annual forecast through December 1999 as follows: 12/96 12/97 12/98 12/99 Code 102505 * * * * Composite Rate (+/-) * * * Therefore, the cumulative baseline band is as follows: B. ESCALATION INCREASE 12/96 12/97 12/98 12/99 Max * * * * C. ESCALATION DECREASE 12/96 12/97 12/98 12/99 Min * * * * 6. CALCULATION OF ADJUSTMENT ABNORMAL ESCALATION The general equation for the calculation of a price change for 1998 shall be: A = * Where CA = * A = Adjusted Price B = Base Price CA = Cum Actuals CB = Cum Baseline for December for the year preceding the re-price year as defined in 5B. & 5C. M1 = PPI Code P102505 - Actual index for the month of December of the year preceding the re-price year. * Confidential portions omitted and filed separately with the Commission. 2 SPECIAL BUSINESS PROVISIONS 7. ABNORMAL ESCALATION INCREASE EXAMPLE: If the actual indices are as noted below, the calculation of the 1999 price would be established by simply multiplying the base price by the ratio of the 1998 actual cum rate to the corresponding 1998 cum baseline rate. 12/96 12/97 12/98 12/99 Code P102505 Percent Change * * * * Cum Actuals Cum Baseline Example: 1999 Price = * If the base price = * Then base material, = * base non-material = * = * = * = * Then the 1999 Price = * 8. ABNORMAL ESCALATION DECREASE EXAMPLE If the actual indices are as noted below, the calculation of the 1999 price would be: 12/96 12/97 12/98 12/99 Code P102505 Percent Change * * * * Cum Actuals Cum Baseline Example: 1999 Price = * If the base price = * Then base material, = * base non-material = * = * = * = * Then the 1999 Price = * * Confidential portions omitted and filed separately with the Commission. 3 SPECIAL BUSINESS PROVISIONS 9. Assuming a price adjustment occurs for either 1998 or 1999, and the succeeding year's actual index line returns within the baseline parameters, as described in paragraphs 5.B and 5.C. above, then the price will also return to the base price level. 10. The unit prices listed in Attachment 1A to the Special Business Provisions are firm fixed for quantities ordered in 1997. Therefore, the beginning base for cumulative abnormal escalation is the actual index for December 1996 and any adjustment from the base prices will begin with the unit prices for 1998 if the actual cumulative index falls outside the baseline cumulative forecast band as defined in paragraphs 5.B and C. above. 4 EX-10.9A 4 CONTRACT AWARD LETTER OF AGREEMENT Exhibit A 6-5751-02-69 Ex. 10.9 SUBJECT: NAS1804, NAS1805, BACN1OHR NUT SERIES CONTRACT AWARD LETTER OF AGREEMENT Gentlemen: The Boeing Commercial Airplane Group, the Buyer, will place orders as noted in Exhibit B and referred to herein as the Procurement Package, with Kaynar, Division of Kaynar Technologies, Inc., the Seller. This Letter of Agreement states the provisions which apply to this Procurement Package and Subsequently Placed Orders. All other Boeing Companies, Divisions or Groups and Japan Aircraft Industry (JAI) may purchase to this Agreement at the same pricing and terms afforded to the Boeing Commercial Airplane Group. GENERAL The Seller agrees to accept Subsequently Placed Orders for unlimited quantities from Boeing Commercial Airplane Group at the same prices stated in Exhibit B and under the terms and conditions enclosed for the duration of this Agreement. In the event of short flow items, i.e. less than lead time away, the Seller shall be given the first opportunity to supply such parts at the contract price. Should the Seller be unable to supply items in quantities and schedule required, the Buyer reserves the right to purchase such items from other suppliers. Supplier shall reserve, at all times, at least five (5) percent of the next 12 months requirements in stock to accommodate short flow requirements. DURATION The duration of this agreement will extend from the signature date of this Letter of Agreement through August 15, 1999. Orders shall be entered with the Seller lead time away (as defined by Seller) and scheduled for delivery prior to November 13, 1999. In the event that the Seller fails to deliver prior to November 14, 1999 as scheduled, such delinquent shipments will continue to have the pricing and terms of the Procurement Package until delivery is made. * Confidential portions omitted and filed separately with the Commission. Exhibit A 6-5751-02-69 TERMS AND CONDITIONS The Boeing Commercial Airplane Group Terms and Conditions, form D1 4100 4045, Rev 5/92, Hill apply to all orders subsequently placed referencing this Letter of Agreement (see note A52). In the event conflict exists between the Terms and Conditions and this Letter of Agreement, the latter shall govern. ADDITIONAL PROVISIONS PER PURCHASE ORDER NOTES The Buyer and Seller have mutually agreed that the following purchase order notes will apply to all orders subsequently placed referencing this Letter of Agreement: A18 - Seller agrees not to make any change in materials or design details which would affect the part or any component part thereof with regard to (A) part number identification, (B) physical or functional changeability, and (C) repair and overhaul procedures and processes and material changes which affect these procedures without prior written approval of buyer, and without revising the part numbers and the originals of all drawings or data. (Seller will place the above clause in all its subcontracts for supplier identified purchased equipment whether such equipment is supplied to seller as an end item or as a component part of an end item.) A47 - The Seller shall at all times, keep adequate books and records relating to all work under this purchase order. Those records shall include rates and factors for direct labor (including labor hours), material costs, burden rates and subcontracts costs. Representatives of Boeing shall be accorded access to review, analyze and verify these books and records for the purpose of collecting information for negotiation of prices for future orders, buyer directed changes and termination claims. C28 - The pack slip is the document required for receipt/payment processing. In order to facilitate process of the receipt and subsequent payment, the following information (when applicable) must be referenced on every pack slip: 1. Suppliers name, address and phone number 2. Boeing purchase order number 3. Date parts shipped 4. Total quantity shipped and quantity in each container 5. Part number shown on the purchase order 6. Bill of Lading (Required on Direct Shipments) 7. Legible pack slip number Exhibit A 6-5751-02-69 8. Multiple boxes with same pack slip must reference 1 of 3, 2 of 3, etc. (if applicable) 9. Pack slip required on the outside of #1 box and inside each individual box 10. Description/Nomenclature 11. Boeing Purchase Order item number 12. Unit of Measure 13. Sold to and/or ship to as applicable 14. Warranty data and certification data as applicable 15. Rejection tag number if applicable Q06 - This order is subject to Document D1-8000A. Boeing reserves the right to conduct surveillance at seller's plant. Q09 - Seller certifies that material and/or finished parts shall be controlled and tested in accordance with, and will meet, specified order requirements, and that applicable records are on file subject to examination. Seller agrees to furnish certified copies of test and/or control data upon request from buyer. Q87 - This order is subject to Document D1-9000. Boeing reserves the right to conduct surveillance at seller's plant. S01 - Work under this order is subject to Boeing surveillance at Seller's plant. Boeing quality control representative may elect to conduct inspection either on a random basis or to the extent of 100 percent inspection. Seller will be notified if Boeing inspection is to be conducted on specific shipments. No shipments are to be held for Boeing inspection unless notification is received prior to, or at time of, material being ready for shipment. S68 - Representatives of the Buyer and/or Federal Aviation Administration (if non-domestic, equivalent government agency) may inspect and evaluate Seller's facilities' system, data, equipment, personnel and all completed articles manufactured for installation on Boeing commercial production airplanes. B39 - Strict adherence to the purchase order delivery schedule is required. Immediate written notice of shipment delays must be given by the supplier to the Boeing buyer. H57 - Seller agrees that, notwithstanding the provisions of the termination for convenience clause, any unshipped portion of this order may be terminated by buyer without any cost, charge or liability to buyer, provided, buyer notifies seller at least 120 days in advance of the shipping date specified in the order. L01 - Reschedule of the order will be at no charge Exhibit A 6-5751-02-69 ACCELERATION/DECELERATION NOTE Purchase order schedule accelerations/decelerations will be at no charge. PRICING The pricing applying to the orders making up the Procurement Package and all Subsequently Placed Orders referencing this Letter of Agreement is as listed on Exhibit B. This pricing, as listed, will be firm for unlimited quantities for orders placed from the date of this contract and scheduled for delivery prior to August 15, 1999. ACCEPTANCE This Order is Buyer's offer to Seller, and acceptance is strictly limited to its terms. Buyer shall not be bound by and specifically objects to any term or condition whatsoever which is different from, or in addition to, the provisions of this Agreement. Seller commencement or performance or acceptance of this Agreement, in any matter, shall conclusively evidence acceptance unless such term or condition is mutually agreed to by the parties in writing. Kaynar, Division of Kaynar Boeing Commercial Technologies, Inc. Airplane Group /s/ JORDAN LAW 4-28-94 /s/ KAE FARLEY 4-28-94 - --------------------------- -------------------------- Jordan Law Date Kae Farley Date President Buyer -------------------------- G.D. Neely Date Lead Buyer -------------------------- E.G. Beals Date Manager EXHIBIT B, 6-5751-02-69 CONTRACT UNIT PRICES NAS1804 ALLOY NUTS NAS1805 STAINLESS NUTS BACN10HR INCONEL NUTS KAYNAR, DIVISION OF KAYNAR TECHNOLOGIES, INC. FIVE YEARS - AUGUST 15, 1994 THROUGH AUGUST 15, 1999 - ---- ---- ----------------------------------------------- ----------- P/NS ITEM PART NUMBER UNIT PRICES - ---- ---- ----------------------------------------------- ----------- * * * * * Confidential portions omitted and filed separately with the Commission. BACN10, NAS1804, NAS1805 NUT PACKAGE KAYNAR/BOEING 5-YR CONTRACT DURATION 4/28/1994 THROUGH 8/15/1999
- ----------------------------------------------------------------------------------------------------------------------------- TOTAL KAYNAR KAYNAR EST. QTY EST. QTY EST. QTY EST. QTY EST. QTY ESTIMATED GROUP P/N PART NO. 12/93-11/94 12/94-11/95 12/95-11/96 12/96-11/97 12/97-11/98 QUANTITY PRICING EACH - ----------------------------------------------------------------------------------------------------------------------------- * * * * * * * * *
* Confidential portions omitted and filed separately with the Commission. BACN10, NAS1804, NAS1805 NUT PACKAGE KAYNAR/BOEING 5-YR CONTRACT DURATION 4/28/1994 THROUGH 8/15/1999
- ----------------------------------------------------------------------------------------------------------------------------- TOTAL KAYNAR KAYNAR EST. QTY EST. QTY EST. QTY EST. QTY EST. QTY ESTIMATED GROUP P/N PART NO. 12/93-11/94 12/94-11/95 12/95-11/96 12/96-11/97 12/97-11/98 QUANTITY PRICING EACH - ----------------------------------------------------------------------------------------------------------------------------- * * * * * * * * *
* Confidential portions omitted and filed separately with the Commission. EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS As independent public accountants, we hereby consent to all references to our firm and to the use of our reports in this Registration Statement (Form S-1) and Prospectus. ARTHUR ANDERSEN LLP Orange County, California May 6, 1997 -----END PRIVACY-ENHANCED MESSAGE-----