-----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, K9ISJPb9bP6bNpeG6HhR9AM1tYdnfSIPKwIX5licln8ZZUAUXQD6iggCGQEQlwE6 WQEcc9O2nocC4dfkrLlZgA== 0000009779-99-000014.txt : 19990506 0000009779-99-000014.hdr.sgml : 19990506 ACCESSION NUMBER: 0000009779-99-000014 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990505 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD CORP CENTRAL INDEX KEY: 0000009779 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 340728587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 99611057 BUSINESS ADDRESS: STREET 1: 45025 AVIATION DR STREET 2: STE 300 CITY: DULLES STATE: VA ZIP: 20166 BUSINESS PHONE: 7034785800 MAIL ADDRESS: STREET 1: 45025 AVIATION DRIVE STREET 2: SUITE 300 CITY: DULLES STATE: VA ZIP: 20166 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): May 5, 1999 (April 20, 1999) Commission File Number 1-6560 THE FAIRCHILD CORPORATION (Exact name of Registrant as specified in its charter) Delaware 34-0728587 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 45025 Aviation Drive, Suite 400 Dulles, VA 20166 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (703) 478-5800 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On April 20, 1999, The Fairchild Corporation acquired all of the shares of stock of Kaynar Technologies, Inc. ("KTI") from KTI's shareholders, for approximately $222 million. A merger agreement for the transaction was entered into on December 26, 1998, and was approved by KTI's shareholders on March 24, 1999. The merger consideration was determined as follows: (1) each share of KTI common stock (other than shares owned by Fairchild or its subsidiaries) was converted into the right to receive $28.75 per share; (2) each share of KTI preferred stock (other than shares owned by Fairchild or its subsidiaries) was converted into the right to receive $22.09 per share; and (3) all outstanding stock options to acquire KTI common stock were converted into the right to receive $28.75 per stock option share, less the exercise price for such stock option shares. In addition to the merger consideration, Fairchild paid KTI's only preferred stockholder $28 million for a ten year covenant not to compete, and assumed and refinanced approximately $103 million of KTI debt. The merger consideration was financed by the following: (1) Fairchild's cash resources; (2) The sale of $225 million of Fairchild's 10 3/4% Senior Subordinated Notes Due 2009, to qualified investors under Rule 144A; and (3) A new credit facility with Citicorp USA, Inc. and NationsBank, NA as Administrative Agents. KTI designs, develops, and manufactures specialty fastener components and tooling systems, with manufacturing facilities in the United States, Australia and Hungary. Fairchild presently intends to continue such operations, subject however to cost savings to be achieved by integrating KTI's operations with Fairchild's existing fastener operations. Additional information is indicated in Fairchild's press release issued on April 20, 1999, which is included as Exhibit 99.1 to this Report. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) FINACIAL STATEMENTS OF BUSINESS ACQUIRED. The audited financial statements required by Item 7 (a) of Form 8-K are being filed as an exhibit to this Report and are incorporated herein by reference. (b) PRO FORMA CONSOLIDATED FINACIAL INFORMATION. The KTI Acquisition On April 20, 1999, we completed the acquisition of all of Kaynar Technologies, Inc. ("KTI") capital stock for approximately $222 million and assumed approximately $103 million of KTI's existing debt. In addition, the purchase price included $28 million for a covenant not to compete from KTI's largest shareholder. The acquisition was financed with existing cash, the sale of $225 million of 10 3/4% senior subordinated notes (the "Notes") and a new bank credit facility. The Banner Merger On April 8, 1999, we acquired the remaining 15% of the outstanding common and preferred stock of Banner not already owned by us, through the merger (the ''Banner Merger'') of Banner with one of our subsidiaries. Under the terms of the Banner Merger, each share of Banner's preferred stock was converted into the right to receive one share of Banner common stock and each share of Banner common stock (other than those owned by Fairchild) was converted into the right to receive .7885 shares of our Class A common stock. Banner is now our wholly-owned subsidiary. Solair Divestiture On December 31, 1998, Banner consummated the sale of Solair, Inc., Banner's largest subsidiary in its rotables group, to Kellstrom Industries, Inc. in exchange for approximately $57.0 million in cash and a warrant to purchase 300,000 shares of common stock of Kellstrom. Hardware Business Disposition On January 13, 1998, Banner completed the disposition of substantially all of the assets and certain liabilities of its hardware companies and PacAero unit (the ''Hardware Business'') to subsidiaries of AlliedSignal in exchange for AlliedSignal common stock with an aggregate value equal to approximately $369.0 million. New Credit Facility Simultaneously with the consummation of the KTI Acquisition and the sale of the Notes, we entered into a new $325.0 million credit facility (the ''New Credit Facility'') which consists of a $225.0 million term loan, and a $100.0 million revolving credit facility of which approximately $22.0 million was drawn upon consummation of the acqusition of KTI (excluding approximately $19.0 million of outstanding letters of credit). Use of Proceeds The proceeds from the offering, together with borrowings under the New Credit Facility and certain other cash available to us, was utilized to consummate the KTI Acquisition, to repay all amounts outstanding under our existing credit facilities and to repay substantially all indebtedness of KTI. The KTI Acquisition, the Banner Merger, the sale of the Notes, the sale of Solair and Banner's Hardware Business, entering into the New Credit Facility and refinancing of the existing credit facilities and certain KTI indebtedness, together with the payment of related fees and expenses, are collectively referred to in this Form 8-K as the ''Transactions.'' UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY The following unaudited pro forma consolidated financial statements are based on our historical financial statements and the historical financial statements of KTI, in addition to those of certain other entities KTI or we acquired in the respective periods presented. The following sets forth our unaudited pro forma statements of earnings for the twelve months ended June 30, 1998 and the six months ended December 27, 1998. The unaudited pro forma statements of earnings give effect to each of the Transactions as if such Transactions occurred on July 1, 1997 and July 1, 1998, respectively. The unaudited pro forma balance sheet as of December 27, 1998 gives effect to each of the Transactions as if they had occurred on such date. The pro forma financial statements are presented for informational purposes only and are not intended to be indicative of either future results of operations or results that might have been achieved had the Transactions actually occurred on the dates specified. The summary unaudited consolidated pro forma financial statements are qualified by and should be read in conjunction with the financial statements and notes thereto included in our June 30, 1998 Annual Report on Form 10-K and the consolidated financial statements of KTI, included as an exhibit to this Form 8-K. THE FAIRCHILD CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS For The Six Months Ended December 27, 1998 (In thousands, except per share data)
Fairchild KTI KTI Fairchild Adjusted Adjusted Acquisition Refinancing Pro Forma (a) (b) (c) Sales $271,401 $103,877 $ - $ - $ 375,278 Costs and expenses: Cost of sales 205,320 72,753 (500)(d) - 277,573 Selling, general & administrative 48,932 15,566 - 64,498 Amortization of goodwill 2,826 792 3,520 - 7,138 257,078 89,111 3,020 - 349,209 Operating income 14,323 14,766 (3,020) - 26,069 Net interest expense (14,147) (3,774) (5,908)(d) (23,829) Investment income, net 834 (1,476)(e) (642) Earnings (loss) before taxes 1,010 10,992 (3,020) (7,384) 1,598 Income tax (provision) benefit (414) (4,546) 315(f) 2,585(f) (2,060) Equity in earnings of affiliates 1,689 - 1,689 Earnings (loss) from continuing operations $ 2,285 $ 6,446 $(2,705) $ (4,799) $ 1,227 Earnings per share from continuing operations: Basic $ 0.09 $ 0.05 Diluted 0.09 0.05 Weighted average shares outstanding: Basic 25,111 25,111 Diluted 26,490 26,490
THE FAIRCHILD CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS For The Twelve Months Ended June 30, 1998 (In thousands, except per share data)
Fairchild KTI KTI Fairchild Adjusted Adjusted Acquistion Refinancing Pro Forma (a) (b) (c) Sales $ 556,652 $ 227,985 $ - $ - $ 784,637 Costs and expenses: Cost of sales 420,778 157,448 (1,000)(d) - 577,226 Selling, general & administrative 96,805 31,300 - 128,105 Amortization of goodwill 5,740 1,632 7,040 - 14,412 523,323 190,380 6,040 - 719,743 Operating income 33,329 37,605 (6,040) - 64,894 Net interest expense (32,394) (6,857) (8,626)(d) (47,877) Investment loss, net (3,362) (1,475)(e) (4,837) Earnings before taxes (2,427) 30,748 (6,040) (10,101) 12,180 Income tax (provision) benefit 2,406 (12,704) 630(f) 3,535(f) (6,133) Equity in earnings of affiliates 3,956 - 3,956 Earnings (loss) from continuing operations $3,935 $18,044 $(5,410) $(6,566) $ 10,003 Earnings per share from continuing operations: Basic $ 0.17 $ 0.44 Diluted 0.16 0.41 Weighted average shares outstanding: Basic 22,531 22,531 Diluted 24,239 24,239
THE FAIRCHILD CORPORATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET December 27, 1998 (In thousands)
Fairchild Banner Fairchild KTI KTI Fairchild Historical Merger Adjusted Historical Acquisition Refinancing Pro Cash (d) (e) $16,063 $(1,101) $14,962 $ 1,893 $(276,904) $276,904 $ 16,855 Short-term investments (f) 216,260 216,260 50 (200,659) 15,652 Net accounts receivable 95,435 95,435 30,421 125,856 Inventory 174,682 174,682 52,778 227,460 Net current assets of 1,670 1,670 1,670 Discontinued operations Prepaid and other current assets 52,870 52,870 4,115 56,985 Total current assets 556,980 (1,101) 555,879 89,257 (276,904) 76,245 444,477 Net fixed assets 124,446 124,446 61,583 186,029 Net assets held for sale 20,794 20,794 20,794 Net noncurrent assets of 10,945 10,945 10,945 discontinued operations Goodwill (c) 167,262 19,061 186,323 47,958 169,596 403,877 Investment in affiliates 28,416 28,416 28,416 Prepaid pension assets 62,246 62,246 62,246 Deferred loan costs (g) 5,879 5,879 429 4,762 11,070 Long-term investments (h) 36,398 36,398 (18,623) 17,775 Other assets (c) 70,275 70,275 132 28,000 98,407 Total Assets $1,083,641$17,960$1,101,601 $199,359 $(97,931) $81,007 $1,284,036 Bank notes & current debt (i)$25,287 $25,287 $ 17,334 $(16,950) $ 25,671 Accounts payable 36,511 36,511 8,017 - 44,528 Other accrued expenses (j) (k) 100,214 100,214 15,989 (8,822) (4,547) 102,834 Total current liabilities 162,012 162,012 41,340 (8,822) (21,497) 173,033 Long-term debt, less current 278,229 278,229 80,818 106,600 465,647 debt (i) Other long-term liabilities 24,707 24,707 24,707 Retiree health care liabilities 43,127 43,127 43,127 Noncurrent income taxes 107,871 107,871 4,477 112,348 Minority interest in subsidiaries 28,075(28,066) 9 9 Total liabilities 644,021(28,066)615,955 126,635 (8,822) 85,103 818,871 Class A common stock 2,671 298 2,969 2,969 Class B common stock 262 262 262 Paid-in capital 195,291 45,728 241,019 241,019 Retained earnings (l) (m) 294,222 294,222 72,724 (85,827) (4,096) 277,023 Cumulative other comprehensive 21,183 21,183 (3,282) 17,901 income (h) Treasury stock, at cost (74,009) (74,009) (74,009) Total stockholders' 439,620 46,026 485,646 72,724 (89,109) (4,096) 465,165 equity Total liabilities & equity $1,083,641 $17,960$1,101,601$199,359 $(97,931) $81,007$1,284,036
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS (a) The following two tables set forth the derivation of the ''Fairchild Adjusted'' unaudited pro forma results, representing the impact of the Banner Merger (completed in April 1999), Special-T Acquisition (effective January 1998), Solair Divestiture (completed in December 1998), and the Hardware Group Divestiture (completed January 13, 1998), as if these transactions had occurred at the beginning of each period presented: For The Six Months Ended December 27, 1998 (In thousands, except per share data)
Fairchild Banner Solair Fairchild Historical Merger (2) Divestiture(1) Adjusted Sales $ 299,720 $ (28,319) $271,401 Costs and expenses: Cost of sales 246,986 (41,666) 205,320 Selling, general & administrative 54,677 (5,745) 48,932 Amortization of goodwill (3) 2,638 238 (50) 2,826 304,301 (47,461) 257,078 Operating income (4,581) (238) 19,142 14,323 Net interest expense (14,147) (14,147) Investment income, net 834 834 Earnings (loss) before taxes (17,894) (238) 19,142 1,010 Income tax (provision) benefit 6,433 (6,847) (414) Equity in earnings of affiliates 1,689 1,689 Minority interest (5) 2,135 445 (2,580) - Earnings (loss) from continuing operations $ (7,637) $ 207 $ 9,715 $ 2,285 Earnings (loss) per share from continuing operations: Basic $ (0.35) $ 0.09 Diluted (0.35) 0.09 Weighted average shares outstanding: Basic 22,129 2,982 2,511 Diluted 22,129 3,855 26,490
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued For The Twelve Months Ended June 30, 1998 (In thousands, except per share data)
Hardware Banner AirRights Special-T Solair Group Hardwar Fairchild Merger Liquid- Acquis- Dives- Dives- Historical ation ition ture ture Fairchild (2) (8) (7) (1) (6) Adjusted Sales $ 741,176 $ $ $ 15,317 $(78,939)$(120,902)$556,652 Costs and expenses: Cost of sales 554,670 5,943 (63,645) (76,190) 420,778 Selling, general & administrative 135,594 4,395 5,399 (14,973) (33,610) 96,805 Amortization of goodwill (3) 5,469 477 269 (100) (375) 5,740 695,733 477 4,395 11,611 (78,718) (110,175) 523,323 Operating income 45,443 (477) (4,395) 3,706 (221) (10,727) 33,329 Net interest expense (42,7150 (937) 11,258 (32,394) Investment loss, net (3,362) (3,362) Nonrecurring income (4) 124,028 (124,028) Earnings before taxes 123,394 (477) (4,395) 2,769 (221) (123,497) (2,427) Income tax (provision) benefit (48,659) 1,538 (1,290) 163 50,654 2,406 Equity in earnings of affiliates 3,956 3,956 Minority interest (5) (26,292) 2,244 10 24,038 Earnings from continuing operations $ 52,399 $1,767 $(2,857) 1,479 $(48) $(48,805) $ 3,935 Earnings per share from continuing operations: Basic $2.78 $0.17 Diluted 2.66 0.16 Weighted average shares outstanding: Basic 18,834 2,982 715 22,531 Diluted 19,669 3,855 715 24,239
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued (1) Represents the elimination of Solair's operating results for all periods presented. (2) Represents the effects of the merger between Banner and Fairchild whereby Fairchild acquired the remaining 15% interest of Banner. Fairchild issued approximately 2,981 shares of Fairchild Class A Common Stock as a result of the merger, resulting in an increase in Fairchild's equity of $46,026. In addition, Fairchild will record approximately $19,061 of goodwill. (3) Represents additional amortization of goodwill related to the merger with Banner. (4) Represents the elimination of the Hardware Group nonrecurring gain that occurred in January 1998. (5) Reflects the impact on Fairchild's minority interest for each transaction impacting Banner. Minority interest is ultimately reduced to zero due to Fairchild obtaining a 100% interest in Banner. (6) Represents the elimination of the Hardware Group operating results from July 1, 1997 through the time of divestiture, January 13, 1998. (7) Represents the operating results of Special-T as if the acquisition occurred at the beginning of fiscal 1998. (8) Represents the elimination of non-recurring proceeds received from the involuntary conversion of air rights over a portion of the property Fairchild owns and is developing in Farmingdale, New York. NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued (b) The following two tables set forth the derivation of the ''KTI Adjusted'' unaudited pro forma results representing the results of operations that have been adjusted for the acquisition of Marson (acquired October 1998), M&M (acquired July 1998), Eagle (acquired May 1998), and APS (acquired February 1998) as if those transactions had occurred at the beginning of each period presented. For The Six Months Ended December 31, 1998 (In thousands)
KTI Marson M&M KTI Historical Acquisition Acquisition Adjusted Sales $ 93,333 $ 8,965 $ 1,579 $103,877 Costs and expenses: Cost of sales 65,555 6,169 1,029 72,753 Selling, general & administrative 14,115 1,342 109 15,566 Amortization of goodwill 492 263 37 792(1) 80,162 7,774 1,175 89,111 Operating income 13,171 1,191 404 14,766 Net interest expense (2,763) (891) (120) (3,774)(2) Earnings before taxes 10,408 300 284 10,992 Income tax (provision) benefit (4,164) (253) (129) (4,546) Earnings from continuing operations $ 6,244 $ 47 $ 155 $ 6,446
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued For The Twelve Months Ended June 30, 1998 (In thousands)
KTI Marson M&M Eagle APS KTI Histori Acquisi Acquisi Acquisi Acquisi Adjusted cal tion tion tion tion Sales $173,156 $28,032 $20,220 $ 2,134 $4,443$227,985 Costs and expenses: Cost of sales 118,875 20,033 13,581 1,558 3,401 157,448 Selling, general & administrative 24,494 4,277 1,342 371 816 31,300 Amortization of goodwill 369 796 448 - 19 1,632(1) 143,738 25,106 15,371 1,929 4,236 190,380 Operating income 29,418 2,926 4,849 205 207 37,605 Net interest expense (2,578) (2,739) (1,384) (42) (114) (6,857)(2) Earnings before taxes 26,840 187 3,465 163 93 30,748 Income tax (provision) benefit (10,726) (353) (1,505) (70) (50) (12,704) Earnings from continuing operations $ 16,114 $(166) $1,960 $ 93 $ 43 $18,044
(1) Includes the pro forma incremental goodwill amortization of $162 and $843 for the six months ended December 31, 1998 and twelve months ended June 30, 1998, respectively. (2) Includes the pro forma incremental interest expense of $637 and $2,648 for the six months ended December 31, 1998, and twelve months ended June 30, 1998, respectively. NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF EARNINGS--Continued (c) Represents the additional amortization of goodwill and intangible assets related to the acquisition of KTI by Fairchild. (d) Represents the net change in interest expense from the refinancing of certain debt facilities as follows:
Six Months Ended Twelve December Months 27, 1998 Ended June 30, 1998 New Financing: Term Loan $ 9,523 $19,045 Senior Subordinated 12,403 24,806 Notes Other Fees 1,574 3,146 Increase in interest 23,500 46,997 expense Retired Debt: Fairchild credit 10,752 13,290 facility Banner credit facility 3,925 - KTI revolving line-of- 209 226 credit KTI term loan 2,706 4,161 Retired public bonds in - 20,694 fiscal 1998 Reduction in interest 17,592 38,371 expense Net change in interest $ 5,908 $ 8,626 expense Interest expense under the new credit facility for the Term Loan is based on LIBOR plus 3.25%, along with amortization of debt financing fees. The pro forma adjustments assumed an effective rate of 8.46%. A variance of 1/8% in the interest rates would impact annual Term Loan interest expense by approximately $281. (e) Investment income was eliminated to the extent that marketable securities were assumed to be liquidated. Such marketable securities will be liquidated to consummate the KTI Acquisition. (f) Represents an income tax benefit assuming an effective rate of 35%. NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET (a) Represents the effects of the merger between Banner and Fairchild whereby Fairchild acquired the remaining 15% interest of Banner not already owned. Fairchild issued approximately 2,981 shares of Fairchild class A common stock as a result of the merger, resulting in an increase in Fairchild's equity of $46,026. In addition, Fairchild will record approximately $19,061 of goodwill. A $1,101 reduction in cash represents the estimated costs of the merger with Banner. An increase of $19,061 in goodwill represents the estimated excess of cost paid over fair value. The decrease in minority interest liability results from Fairchild acquiring all of the Banner common stock that Fairchild does not presently own. (b) Represents historical KTI balance sheet at December 31, 1998. (c) Reflects the acquisition of KTI as follows: December 27, 1998 Purchase price: Cash paid for KTI common stock, preferred stock and stock options, including Fairchild's original $13,574 investment $ 235,133 Cash paid for non-compete agreement 28,000 Transaction fees 7,187 KTI debt assumed 98,152 Total purchase price 368,472 Net tangible assets acquired, excluding $98,152 debt assumed 122,918 Excess purchase price over the preliminary estimated fair value of the net assets acquired $245,554 Preliminary allocation to non-compete agreement, amortized over 10 years $ 28,000 Preliminary allocation to goodwill, amortized over 40 years (includes KTI goodwill assumed of $47,958) $ 217,554 Elimination of KTI's goodwill assumed $ 47,958 Goodwill recorded in transaction $ 169,596 (d) Reflects a $247,011 payment for acquisition of KTI, capitalized transaction fees, expensed internal transaction costs, net of $1,893 cash acquired and $28,000 for the covenant not to compete. (e) Represents the net increase in cash as follows: December 27, 1998 Cash and proceeds from sale of investments $ 200,659 Net proceeds from issuance of senior subordinated notes 218,812 Net cash received from New Credit Facility 220,125 Reduction in Fairchild credit facility refinanced (222,750) Reduction in Banner credit facility (50,600) Reduction of KTI credit facilities (87,000) Payment of accrued interest (2,342) Net cash impact $276,904 (f) Reflects cash and the liquidation of $200,659 in short-term investments to provide a source of funds for the acquisition. (g) Represents additional deferred loan fees of $11,070 relating to the financing costs of the new credit facility and the Notes, net of the write- off of $6,308 related to deferred loan fees associated with the refinanced credit facilities. (h) Represents elimination of Fairchild's $18,623 investment in KTI as part of the acquisition, and subsequent consolidation, of KTI. The unrealized investment gains of $3,282, net of a $1,767 tax provision, included in cumulative other comprehensive income is eliminated. (i) Represents the net refinancing as follows: December 27, 1998 Senior Subordinated Notes $ 225,000 New Credit Facility term loan 225,000 Debt issued $ 450,000 Fairchild credit facility $ 222,750 Banner credit facility 50,600 KTI revolving line of credit 13,000 KTI term loan 74,000 Debt retired $ 360,350 Net debt issued $ 89,650 Short term net reduction $ (16,950) Long term net increase 106,600 (j) Represents (i) the reversal of $1,767 taxes accrued on unrealized holding gains associated with the Company's investment in KTI and (ii) tax benefits of $7,055 associated with estimated internal transaction costs that will be charged to earnings at closing. (k) Represents the payment and reduction of accrued interest associated with the retired debt and reduction of taxes payable associated with the refinancing expenses. (l) Reflects the $72,724 elimination of KTI's historical retained earnings and Fairchild's estimated internal transaction costs of $13,103, net of $7,055 tax benefit, that will be expensed at closing. (m) Represents the write-off of deferred financing costs, net of tax, associated with the retired debt. (c) EXHIBITS. The Exhibits to this Report are listed on the Exhibit Index, and are incorporated herein by reference. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: May 5, 1999 THE FAIRCHILD CORPORATION By: Colin M. Cohen Senior Vice President Chief Financial Officer EXHIBIT INDEX Exhibit No. Description 2.1 Agreement and Plan of Reorganization by and among The Fairchild Corporation, Dah Dah, Inc. and Kaynar Technologies Inc., dated as of December 26, 1998. (Incorporated by reference to Registrant's Report on Form 8-K, filed December 30, 1998.) 99.1 Press Release of The Fairchild Corporation, dated April 20, 1999. (Filed herewith.) 99.2 Financial statements, related notes thereto and Auditors' Report of Kaynar Technologies, Inc. for the years ended December 31, 1998, 1997 and 1996. Exhibit 99.1 The Fairchild Corporation [FA] Becomes Global Leader in Aerospace Fastening Devices as It Completes Acquisition of Kaynar Technologies Inc. [KTIC] Dulles, Virginia (April 20, 1999) - The Fairchild Corporation [NYSE: FA] today completed its acquisition of Kaynar Technologies Inc. (KTI) [NASDAQ: KTIC], creating the global industry leader in the manufacture and distribution of aerospace fasteners and fastening devices. Fairchild acquired KTI for approximately $261 million plus the assumption of debt. The purchase was financed by Fairchild's cash resources, the sale of $225 million of senior subordinated notes and a new bank credit facility. "The acquisition of KTI creates the leading global aerospace fastener company, offering the largest complementary product range to our worldwide customers" said Jeffrey J. Steiner, Chairman and CEO of Fairchild. "The combined company has annual revenues of nearly $800 million, with 17 plants in North America, Europe and Asia, enabling us to source product and service our customers from a local base," said Eric Steiner, President of Fairchild. "Our revenue base is comprehensive: 38% of our sales are to new aircraft and engine manufacturers, industrial and defense users provide 30%, and 32% originate from the aerospace aftermarket. This diversity of customers will reduce our exposure to cyclical trends in our industry." Exhibit 99.1 / PAGE 1 OF 2 Fairchild announced that the integration of the two companies would begin immediately. Fairchild expects to realize substantial benefits from operational synergies and cost savings as a result of the combination. "We are enthusiastic about the opportunity to meld the high productivity and quality standards of the two companies," said Eric Steiner, noting that KTI was selected as number eight on Forbes magazine's most recent list of the "200 Best Small Companies" in the United States. Both companies have made extensive investments in recent years, to improve plant and extend training. On April 8th Fairchild completed its merger with Banner Aerospace, Inc. [NYSE: BAR] acquiring the remaining 15 percent of Banner's capital stock it did not already own. Banner Aerospace, is an aftermarket distribution company. The senior subordinated notes have not been registered under the Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. This news release contains forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those set forth in the forward-looking statements as a result of the risks associated with the Company's business, changes in general economic conditions, and changes in the assumptions used in making such forward-looking statements. Exhibit 99.1 / PAGE 2 OF 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Kaynar Technologies Inc.: We have audited the accompanying consolidated balance sheets of Kaynar Technologies Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kaynar Technologies Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California February 5, 1999 Exhibit 99.2 / Page 1 of 24 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands, except per share data) 1998 1997 1996 Net sales (1) $185,512 $150,429 $99,023 Cost of sales 129,223 104,390 72,924 -------- -------- ------- Gross profit 56,289 46,039 26,099 Selling, general and administrative expenses 27,438 21,454 13,263 -------- -------- ------- Operating income 28,851 24,585 12,836 Interest expense, net 4,067 3,602 4,011 -------- -------- ------- Income before provision for income taxes 24,784 20,983 8,825 Provision for income taxes 9,914 8,393 3,530 -------- -------- ------- Net income $ 14,870 $ 12,590 $ 5,295 ======== ======== ======= Earnings per share Basic $ 3.39 $ 4.23 $ 3.26 Diluted $ 1.64 $ 1.54 $ 0.78 ======== ======== ======= Weighted average number of shares of common stock and common stock equivalents Basic 4,382 2,967 1,594 Diluted 9,085 8,173 6,800 ======== ======== ======= (1) Including $13,038, $12,961 and $11,437 in 1998, 1997 and 1996, respectively, to a related party (see Note 15) The accompanying notes are an integral part of these consolidated financial statements.
Exhibit 99.2 / Page 2 of 24 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ASSETS AS OF DECEMBER 31, 1998 AND 1997 (Dollars in thousands)
1998 1997 Current assets: Cash $ 1,893 $ 675 Marketable securities 50 3,079 Accounts receivable (1) 30,421 23,293 Inventories 52,778 34,231 Prepaid expenses and other current assets 1,430 647 Deferred tax asset 2,685 1,006 -------- -------- Total current assets 89,257 62,931 -------- -------- Property, plant and equipment, at cost 76,035 41,048 Less accumulated depreciation and amortization(14,452) (8,797) -------- -------- 61,583 32,251 -------- -------- Intangible assets, net of accumulated amortization of $1,104 and $480 at December 31, 1998 and 1997, respectively47,958 6,409 Other assets 561 65 -------- -------- Total assets $199,359 $101,656 ======== ======== (1) Including $--982 and $1,846 in 1998 and 1997, respectively, from a related party (see Note 15), net of allowance for doubtful accounts of $703 and $310 in 1998 and 1997, respectively The accompanying notes are an integral part of these consolidated financial statements.
Exhibit 99.2 / Page 3 of 24 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY AS OF DECEMBER 31, 1998 AND 1997 (Dollars in thousands)
1998 1997 Current liabilities: Revolving line-of-credit, to a related party (see Note 8) $ 13,000 $ - Current portion of long-term debt 4,054 1,021 Current portion of capital lease obligations 280 272 Accounts payable 8,017 9,969 Accrued payroll and related expenses 8,115 8,546 Other accrued expenses 7,874 4,423 -------- -------- Total current liabilities 41,340 24,231 -------- -------- Long-term liabilities: Long-term debt, primarily to a related party (see Note 8) 80,624 26,372 Capital lease obligations 194 484 Deferred tax liability 4,477 1,136 -------- -------- Total long-term liabilities 85,295 27,992 -------- -------- Commitments and contingencies (see Notes 8 and 12) Stockholders' equity: Series C Convertible Preferred stock; $0.01 par value; Authorized--10,000,000; issued and outstanding-4,206,000 and 5,206,000 shares at December 31, 1998 and 1997, respectively42 52 Common stock; $0.01 par value; Authorized--20,000,000 shares; issued and outstanding--5,090,142 and 3,694,000 shares at December 31, 1998 and 1997, respectively 51 37 Additional paid-in capital 37,821 28,973 Retained earnings 36,264 21,394 Accumulated other comprehensive income (1,454) (1,023) -------- -------- Total stockholders' equity 72,724 49,433 -------- -------- Total liabilities and stockholders' equity $199,359 $101,656 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
Exhibit 99.2 / Page 4 of 24 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in thousands)
Preferred Stock Accumlated Stock Common Addi- Comp Comp Series C Stock tional prehen prehen Paid-In sive Retained sive Shares Amt Shares Amt Capital Income Earnings In- come Total BALANCE, December 31, 1995 5,206 $52 1,594 $16 $ 1,432 $ 3,639 $18 $ 5,157 Comprehensive Income: Net income $ 5,295 5,295 5,295 Currency Translation 270 270 270 Comprehensive Income $ 5,565 Dividends declared (96) BALANCE, December 31,1996 5,206 52 1,594 16 1,432 8,838 288 10,626 Comprehensive Income: Net income $12,590 12,590 12,590 Currency Translation (1,311) (1,311) (1,311) Comprehensive Income $11,279 Common stock issuance 2,100 21 27,541 27,562 Dividends declared (34) (34) BALANCE, December 31, 1997 5,206 52 3,694 37 28,973 21,394 (1,023) 49,433 Comprehensive Income: Net income $14,870 14,870 14,870 Currency Translation (431) (431) (431) Comprehensive Income $14,439 Conversion of Preferred (1,000)(10) 1,000 10 Common stock issuance - - 396 4 8,848 8,852 BALANCE, December 31, 1998 4,206 $42 5,090 $51 $37,821 $36,264 $(1,454) $72,724 The accompanying notes are an integral part of these consolidated financial statements. Exhibit 99.2 / Page 5 of 24 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in thousands) 1998 1997 1996 Cash flows from operating activities: Net income $14,870 $12,590 $ 5,295 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 6,772 3,818 2,613 Increase (decrease) in deferred income taxes 680 (990) 186 (Gain) loss on sale of property, plant and equipment (124) 154 34 Changes in operating assets and liabilities, net of acquisitions- (Increase) decrease in accounts receivable 962 (7,990) (2,505) Increase in inventories (7,190) (4,346) (6,867) (Increase) decrease in prepaid expenses and other current assets (112) 32 (152) (Increase) decrease in other assets (211) 187 181 Increase (decrease) in accounts payable (5,657) 3,800 2,361 Increase (decrease) in accrued expenses (3,222) 4,946 3,172 ------- ------- ------- Net cash provided by operating activities 6,768 12,201 4,318 ------- ------- ------- Cash flows from investing activities: Purchases of property, plant and equipment (18,322) (17,909) (6,850) Proceeds from sales of property, plant and equipment 403 92 43 Net redemptions (purchases) of marketable securities 3,029 (3,079) - Acquisitions, net of acquired cash of $421 in 1998 (49,203) - (12,160) (Increase) decrease in intangible assets (669) 638 (1,231) ------- ------- ------- Net cash used in investing activities (64,762) (20,258)(20,198) ------- ------- ------- Cash flows from financing activities: Net borrowings (payments) on line-of-credit, from a related party 13,000 (746) (3,560) Borrowings on long-term debt, primarily from a related party 52,882 501 21,245 Payments on long-term debt, primarily from a related party (6,345) (20,263) (898) Net principal (payments) borrowings on capital lease obligations (303) 795 (55) Net proceeds from issuance of common stock - 27,562 - ------- ------- ------- Net cash provided by financing activities 59,234 7,849 16,732 ------- ------- ------- Effect of exchange rate changes on cash (22) (26) 5 ------- ------- ------- Net increase (decrease) in cash 1,218 (234) 857 Cash, beginning of period 675 909 52 ------- ------- ------- Cash, end of period $ 1,893 $ 675 $ 909 ======= ======= =======
Exhibit 99.2 / Page 6 of 24
Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,094 $ 3,943 $ 3,787 ======= ======= ======= Income taxes $12,844 $ 8,395 $ 2,841 ======= ======= ======= Noncash financing activities: Capital lease obligations assumed for the purchase of equipment $ - $ 507 $ 355 ======= ======= ======= Borrowings on long-term debt for preferred stock dividends $ - $ 34 $ 96 ======= ======= ======= Common stock issued in connection with acquisitions of businesses $ 8,852 $ - $ - ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
Exhibit 99.2 / Page 7 of 24 KAYNAR TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (Dollars in thousands, except per share data) 1. Nature of Operations and Recent Developments Kaynar Technologies Inc. (the "Company") is a leading precision fabricator that designs, develops and manufactures a wide range of specialty components and tooling systems and provides related services used primarily by original equipment manufacturers ("OEM's") and their subcontractors to produce aircraft and defense products. In addition, the Company serves the automotive, electrical and other industrial markets and their associated after-markets. On December 26, 1998, the Company entered into a merger agreement with The Fairchild Corporation ("Fairchild") in which the Company will become a wholly owned subsidiary of Fairchild (the "Fairchild Merger"). Upon the effectiveness of the Fairchild Merger, each outstanding share of the Company's common stock, with the exception of shares held by stockholders who properly exercise dissenters' rights under the Delaware General Corporation Law and shares held by Fairchild, will be cancelled and converted into the right to receive $28.75 in cash. The closing of the Fairchild Merger is subject to certain conditions, including regulatory approval, financing and approval of the Company's stockholders. 2. Business Combinations On July 28, 1998, the Company acquired all of the issued and outstanding common stock of M & M Machine & Tool Company Co. ("M & M"). M & M, located in Huntington Beach, California, specializes in the machining of structural components and assemblies for aircraft which include pylons, flap hinges, struts, wing fittings, landing gear parts, spars, and many others. As consideration for this acquisition, the Company paid the M & M stockholders $12,441 in cash and 376,142 shares of the Company's common stock valued at $8,294. In addition, the Company will pay additional consideration of $2,000 (60% in cash and 40% in shares of KTI common stock) based on M & M's recasted earnings before interest, taxes and transaction costs related to the acquisition for its fiscal year ended October 31, 1998 (which was accrued for and included in other accrued expenses as of December 31, 1998). The purchase price exceeded the fair value of the net assets by $17,850, which is being allocated as goodwill and amortized using the straight-line method over 40 years. The M & M acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results of M & M have been included in the Company's results of operations since late- July 1998. Exhibit 99.2 / Page 8 of 24 On October 27, 1998, the Company acquired all of the issued and outstanding common stock of Marcliff Corporation which holds all of the issued and outstanding capital stock of Marson Creative Fastener, Inc. ("Marson"). Located in Stoughton, Massachusetts, Marson designs, manufactures, and markets a broad line of blind rivets, threaded inserts, and setting tools primarily for industrial markets. As consideration for this acquisition, the Company paid the Marson stockholders $34,000 in cash (of which $9,058 was used to pay off Marson's outstanding debt as of the acquisition date). In addition, the Company will pay additional consideration of $1,111 based on Marson's closing balance sheet as of the acquisition date (which was accrued for and included in other accrued expenses as of December 31, 1998). The purchase price exceeded the fair value of the net assets by $23,217, which is being allocated as goodwill and amortized using the straight-line method over 40 years. The Marson acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results of Marson have been included in the Company's results of operations since late-October 1998. 3. Pro Forma Financial Information (unaudited) The following unaudited pro forma consolidated statements of income information present the results of the Company's operations for the years ended December 31, 1998 and 1997 as though the acquisitions of M & M and Marson had occurred as of the beginning of each respective calendar year:
1998 1997 > Net sales $220,374 $195,654 Net income 15,971 14,047 Earnings per share Basic 3.42 4.16 Diluted 1.71 1.64 The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place at the beginning of the fiscal year or the results that may occur in the future. The pro forma results include additional interest on borrowed funds, additional amortization of goodwill resulting from the acquisitions and the change in salary and benefit costs of certain officers of the acquired companies.
Exhibit 99.2 / Page 9 of 24 4. Summary of Significant Accounting Policies a. Use of Estimates in Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b. Principles of Consolidation The consolidated financial statements include the accounts of Kaynar Technologies Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. c. Revenue Recognition Sales and related costs are recorded by the Company upon shipment of product. Revenues related to the rental of the Company's K-FAST tools, which are not significant, are recognized monthly over the term of the lease. Revenues related to the Company's APS business unit, which are not significant, are recognized based on percentage of completion. d. Currency Translation Adjustment Assets and liabilities of the Company's foreign subsidiaries are translated into United States dollars at the year-end rate of exchange. Income and expense items are translated at the average rates of exchange for the period. Gains and losses resulting from translating foreign currency financial statements are accumulated in a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in the consolidated statements of income. e. Marketable Securities The Company invests excess cash in a money market fund that invests in short term (maturities of 397 days or less) direct obligations of the U.S. Treasury. Exhibit 99.2 / Page 10 of 24 f. Inventories Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) method and market based upon the lower of replacement cost or estimated realizable value. Inventory costs include material, labor and factory overhead. g. Property, Plant and Equipment Depreciation is computed principally on the straight-line method over the estimated useful lives of the depreciable assets (ranging from five to ten years). Cost and accumulated depreciation for property retired or disposed of are removed from the accounts and any gains or losses are reflected in operations. Major renewals and betterments that extend the useful life of an asset are capitalized. h. Intangible Assets Intangible assets primarily represent the excess of purchase price over fair value of net assets acquired and related acquisition costs incurred in the acquisitions of Recoil, M & M and Marson. Intangibles are amortized using the straight-line method from the date of acquisition over the expected period to be benefited, currently estimated between 20 and 40 years. The Company assesses the recoverability of intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." i. Fair Value of Financial Instruments The carrying amounts of cash, marketable securities, accounts receivable and accounts payable approximate their fair value as of December 31, 1998 and 1997. The carrying amounts of the line-of- credit and long-term debt approximate fair value as the obligations bear interest at rates that fluctuate with the market rate. The carrying amount of the term loans approximates fair value as the obligation compares favorably with fixed rate obligations that would be currently available to the Company. j. Income Taxes The Company accounts for income taxes under SFAS No. 109 "Accounting for Income Taxes," which requires an asset and liability approach in accounting for income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements and as measured by the provisions of enacted laws. Exhibit 99.2 / Page 11 of 24 k. Earnings per Share Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of other securities. The Company's other securities are (i) Series C Convertible Preferred stock and (ii) outstanding common stock options. The table below details the components of the basic and diluted earnings per share ("EPS") calculations:
Years ended December 31, 1998 1997 1996 ---------------- --------------- ---------------- Income Shares Income Shares Income Shares (Amounts in thousands) Basic EPS Net income $14,870 4,382 $12,590 2,967 $5,295 1,594 Less: dividends on previously issued preferred stock (34) (96) ------- ----- ------- ----- ------ ----- Income available to common stockholders 14,870 4,382 12,556 2,967 5,199 1,594
Exhibit 99.2 / Page 12 of 24 Effect of Dilutive Securities Series C Convertible Preferred stock- 4,688 34 5,206 96 5,206 Options and other- 15 - - - - ------- ----- ------- ----- ------ ----- Diluted EPS $14,870 9,085 $12,590 8,173 $5,295 6,800 ======= ===== ======= ===== ====== ===== l. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. The Company does not believe the adoption of this standard will have a material impact on the Company's results of operations. 5. Inventories. Inventories consist of the following at December 31, 1998 and 1997: 1998 1997 Raw materials $ 3,772 $ 2,593 Work in progress 14,245 11,012 Components 8,611 5,325 Finished goods 18,901 9,550 Supplies and small tools 7,249 5,751 ------- ------- $52,778 $34,231 ======= ======= 6. Property, Plant and Equipment. Property, plant and equipment consists of the following at December 31, 1998 and 1997: Years of Estimated Useful Life 1998 1997 Land - $ 1,787 $ 32 Buildings 20 1,799 - Machinery and equipment 5 to 10 49,911 20,083 Equipment rented to others 7 8,534 8,581 Leasehold improvements Lease term 5,432 1,315 Construction in progress - 8,572 11,037 ------- ------- 76,035 41,048 Accumulated depreciation and amortization (14,452) (8,797) ------- ------- $61,583 $32,251 ======= ======= Exhibit 99.2 / Page 13 of 24 7. Income Taxes. The components of the net accumulated deferred income tax (asset) liability at December 31, 1998 and 1997 are as follows: 1998 1997 Current deferred tax (asset) liability: Inventory reserves $(1,369) $ (87) Accrued vacation (706) (449) Other (610) (470) ------- ------- $(2,685) $(1,006) ======= ======= Long-term deferred tax (asset) liability: Depreciation $ 4,477 $ 1,136 ======= ======= The provision for income taxes includes income taxes currently payable and those deferred due to temporary differences between the financial statements and tax basis of assets and liabilities. The provision differs from the statutory rates primarily due to permanent differences. The provision for income taxes for the years ended December 31, 1998, 1997 and 1996, consists of the following: 1998 1997 1996 Current provision: Federal $7,083 $7,716 $2,590 State 1,500 1,400 720 Foreign 33 267 - Deferred provision: Federal 1,061 (707) 69 State 237 (283) 151 ------ ------ ------ $9,914 $8,393 $3,530 ====== ====== ====== Exhibit 99.2 / Page 14 of 24 Variations from the federal statutory rate for the years ended December 31, 1998, 1997 and 1996, are as follows: 1998 1997 1996 --------------- ------------ ----------- Amount Percent Amount Percent Amount Percent [S] [C] [C] [C] [C] [C] [C] Federal statutory rate $8,675 35.0% $7,344 35.0% $3,001 34.0% State income taxes, net of federal benefit 1,129 4.5 726 3.5 485 5.5 Foreign sales corporation benefit (552) (2.2) (220) (1.0) (141) (1.6) Foreign losses not currently benefited 161 0.6 115 0.5 - - Utilization of foreign losses (26) (0.1) (114) (0.5) - - Non-deductible expenses 212 0.9 173 0.8 94 1.1 Other 315 1.3 369 1.7 91 1.0 ------ ----- ------ ----- ------ ----- $9,914 40.0% $8,393 40.0% $3,530 40.0% ====== ===== ====== ===== ====== ===== 8. Debt Arrangements The Company entered into a Third Restated and Amended Credit Agreement on October 23, 1998 (the "Third Credit Agreement") with its primary lender General Electric Capital Corporation ("GECC") which has a wholly owned subsidiary, CFE, Inc. ("CFE"), that owned all of the outstanding shares of the Company's Series C Preferred stock and one million shares of the Company's common stock as of December 31, 1998. The Third Credit Agreement contains significant financial and operating covenants, including limitations on the ability of the Company to incur additional indebtedness and restrictions on, among other things, the Company's ability to pay dividends or take certain other corporate actions. The Third Credit Agreement also requires the Company to be in compliance with certain financial ratios. In addition to the Term Loan under the Third Credit Agreement ("Term Loan"), the Company has entered into promissory notes with other lenders for the purchase of certain property, machinery and equipment ("The Notes"). Exhibit 99.2 / Page 15 of 24 The following schedule summarizes the future annual minimum principal payments due under the Term Loan and The Notes as of December 31, 1998: Term The Loan Notes Total 1999 $ 1,700 $ 2,354 $ 4,054 2000 1,700 2,178 3,878 2001 1,700 1,495 3,195 2002 1,700 1,177 2,877 2003 67,200 789 67,989 Thereafter- 2,685 2,685 ------- ------- ------- $74,000 $10,678 $84,678 ======= ======= ======= Debt arrangements are described as follows: a. Term Loan On October 23, 1998, the Company entered into the Third Credit Agreement which amended its existing Term Loan with GECC, increasing the borrowing capacity of the Term Loan to $74,000. The Term Loan bears interest, payable every 30 to 90 days, at LIBOR rate plus one and one-half percent (which was 6.8 percent at December 31, 1998). Principal payments of $425 are due quarterly through October 1, 2002, with a final payment of $67,200 due January 3, 2003. At December 31, 1998 and 1997, outstanding principal under the Term Loan totaled $74,000 and $25,525, respectively. Interest expense on the Term Loan for the years ended December 31, 1998, 1997 and 1996 was approximately $2,712, $2,498 and $2,400, respectively. The Term Loan is secured by substantially all of the Company's assets. b. The Notes The Company has promissory notes with financing institutions, which are secured by certain property, machinery and equipment. At December 31, 1998 and 1997, the outstanding principal under the Notes was $10,678 and $1,868, respectively. The Notes bear interest at interest rates ranging from 4.9 percent to 10.5 percent per annum. Monthly payments are payable through June 1, 2008. c. Line-of-Credit The line-of-credit with GECC (the "LOC") is a $25,000 revolving credit facility, limited by the lesser of the sum of specified portions of qualified accounts receivable and inventory, and $25,000. Exhibit 99.2 / Page 16 of 24 Interest is payable every 30 to 90 days at LIBOR rate plus one and one- half percent (which was 7.1 percent at December 31, 1998). The LOC, which expires January 3, 2003, had $13,000 outstanding at December 31, 1998 and had no borrowings at December 31, 1997. Interest expense on LOC for the years ended December 31, 1998, 1997 and 1996 was approximately $497, $129 and $682, respectively. 9. Series C Convertible Preferred Stock Each share of the Series C Preferred stock is convertible at any time into one share of common stock. The conversion rate is subject to certain anti- dilutive adjustments. The Series C Preferred stock will participate in any dividends paid on the common stock as if the Series C Preferred stock had been converted into common stock. In the event of liquidation, dissolution or winding up of the Company, the holders of the Series C Preferred stock will be entitled to receive a liquidation preference out of the assets available for distribution in an amount equal to $0.22 per share, plus any accrued and unpaid dividends, before any distribution is made to the holders of the common stock. On June 26, 1998, CFE elected to convert one million such shares into one million shares of common stock of the Company in accordance with the terms of the Series C preferred stock. 10. Stock Incentive Plan In 1997, the Company adopted the Kaynar Technologies Inc. 1997 Stock Incentive Plan (the "Plan") which authorized 500,000 stock option grants to purchase the Company's common stock. The Company has granted 115,400 options in 1997 and 147,900 options in 1998 with a weighted average exercise price of $24.77 and $11.71, respectively, under the Plan (of which 9,200 options with an exercise price of $25.00 were cancelled during 1998). These options were issued at fair market value at the time of grant. Option grants are made at the discretion of the Board of Directors. Options vest at 25 percent per year (beginning one year from the grant date), may be exercisable in whole or in installments, and expire five years from the grant date. The weighted average exercise price of options outstanding as of December 31, 1998 is $17.16. The weighted average contractual life of options outstanding as of December 31, 1998 is 4.3 years. The weighted average exercise price of options exercisable as of December 31, 1998 is $24.75. Exhibit 99.2 / Page 17 of 24 Characteristics of options outstanding at December 31, 1998 are presented in the table below: Exercise Contractual Options Options Price Life Outstanding Exercisable $ 9.25 4.8 years 119,000 - $14.50 3.3 years 3,000 750 $15.88 4.8 years 12,000 - $19.00 4.6 years 3,000 - $25.00 3.7 years 102,000 25,500 $26.75 4.1 years 1,500 - $27.75 4.2 years 12,400 - $29.50 3.8 years 1,200 300 254,100 26,550 The Company accounts for the Plan under APB Opinion No. 25. SFAS No. 123 "Accounting for Stock-Based Compensation" was issued by the FASB in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Adoption of SFAS No. 123 is optional, however pro forma disclosures as if the Company had adopted the cost recognition method are required. Had compensation cost for stock options awarded under the Plan been determined consistent with SFAS No. 123, the Company's net income would have reflected the following pro forma amounts as of December 31, 1998 and 1997: 1998 1997 Net Income: As Reported $14,870 $12,590 Pro Forma $14,417 $12,439 Basic EPS: As Reported $3.39 $4.23 Pro Forma $3.29 $4.18 Diluted EPS: As Reported $1.64 $1.54 Pro Forma $1.59 $1.52 For the above pro forma disclosures, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: weighted average risk-free interest rate of 5.0 percent; a weighted average volatility of 56.5 percent; estimated option life of 4 years; and no expected dividend yield. The weighted average fair value of the Company's stock options granted in 1998 and 1997 was $5.68 and $12.02, respectively. Exhibit 99.2 / Page 18 of 24 11. Savings and Retirement Plan The Company sponsors a defined contribution plan (the "Retirement Plan"), which provides benefits to all employees who have completed six months of service. Employees may make contributions between one and 21 percent of their annual compensation. The Company may make contributions to the Retirement Plan at its discretion. The Company contributed approximately $1,461, $988 and $577 to the Retirement Plan in the years ended December 31, 1998, 1997 and 1996, respectively. 12. Commitments and Contingencies a. Operating Leases The Company leases certain facilities and equipment under long-term operating leases with varying terms. The leases generally provide that the Company pay taxes, maintenance and insurance costs, and some leases contain renewal and/or purchase options. Total rental expense under operating leases totaled approximately $1,975, $1,231 and $1,187 in the years ended December 31, 1998, 1997 and 1996, respectively. Minimum rental expenses on commitments for the years subsequent to December 31, 1998, are as follows: Year ending December 31, 1999 $ 2,125 2000 1,927 2001 1,696 2002 1,519 2003 1,006 Thereafter 2,108 ------- $10,381 ======= Exhibit 99.2 / Page 19 of 24 b. Capital Leases The Company has entered into capital lease agreements for equipment. Future lease payments due under the agreements are as follows: Year ending December 31, 1999 $307 2000 163 2001 36 ---- 506 Amounts representing interest (32) ---- 474 Current portion (280) ---- $194 ==== c. Purchase Commitments The Company has certain one-year purchase commitments which require that all purchases of particular raw materials be purchased from various vendors at a fixed price, none of which exceeded fair market value as of December 31, 1998. d. Contingencies The Company is, from time to time, subject to claims and disputes for legal, environmental and other matters in the normal course of its business. While the results of such matters cannot be predicted with certainty, management does not believe that the final outcome of any pending matters will have a material effect on the consolidated financial position and results of operations. 13. Significant Customers For the years ended December 31, 1998, 1997 and 1996, two customers accounted for approximately 20 and 7 percent, 24 and 9 percent and 18 and 12 percent of net sales, respectively. No other customer accounted for 10 percent or more of net sales in any of the three years ended December 31, 1998. Accounts receivable balances from these same two customers accounted for approximately 10 and 7 percent of accounts receivable at December 31, 1998 and 14 and 8 percent of accounts receivable at December 31, 1997. No other customer represents 10 percent or more of the Company's gross accounts receivable at December 31, 1998 and 1997. Exhibit 99.2 / Page 20 of 24 14. Geographic Sales Information Net sales for the years ended December 31, 1998, 1997 and 1996 were made to geographic regions as follows: 1998 1997 1996 ---------------- ---------------- ------ - ---------- Amount Percent Amount Percent Amount Percent United States $156,834 84.5% $126,845 84.4% $85,069 85.9% Europe 16,487 8.9 13,255 8.8 8,378 8.5 Pacific Rim 6,683 3.6 5,219 3.4 2,256 2.3 Other 5,508 3.0 5,110 3.4 3,320 3.3 -------- ------ -------- ------ ------- ------ $185,512 100.0% $150,429 100.0% $99,023 100.0% Sales for the Company's foreign operations represented less than 10 percent of net sales during each of the years ended December 31, 1998, 1997 and 1996. Exhibit 99.2 / Page 21 of 24 15. Related Party Matters As discussed in Note 8, the primary lender to the Company is GECC which has a wholly-owned subsidiary CFE. CFE owns 100 percent of the outstanding Series C Convertible Preferred Stock and one million shares of the Company's common stock. GECC is also an affiliated entity to a customer (the Aircraft Engines Division of General Electric Co.) that accounted for approximately 7, 9 and 12 percent of 1998, 1997 and 1996 net sales, respectively, and 7 and 8 percent of accounts receivable at December 31, 1998 and 1997, respectively. Exhibit 99.2 / Page 22 of 24 16. Industry Segment Information The Company is currently segmented into eight business units. The Company's Kaynar, Microdot, M & M, Eagle, APS and K-FAST business units design and manufacture products that are sold principally to the commercial aircraft and defense industries. The Company's Recoil and Marson business units design and manufacture inserts, blind rivets and related installation tools used primarily in the automotive, electrical and other non-aerospace industries. The following table illustrates the Company's financial data by industry segment for the past three years.
For the Years Ended December 31, Sales by Segment: Commercial Aircraft and Defense (2) $169,401 $137,889 $95,156 Industrial (1)(3) 16,111 12,540 3,867 -------- -------- ------- Total Sales $185,512 $150,429 $99,023 Operating Income by Segment: Commercial Aircraft and Defense (2) $ 30,192 $ 25,892 $13,464 Industrial (1)(3) 1,783 1,645 238 Corporate Expenses (3,124) (2,952) (866) -------- -------- ------- Total Operating Income $ 28,851 $ 24,585 $12,836 Depreciation and Amortization by Segment: Commercial Aircraft and Defense (2) $ 5,822 $ 3,209 $ 2,304 Industrial (1)(3) 950 609 309 -------- -------- ------- Total Depreciation and Amortization $ 6,772 $ 3,818 $ 2,613 Total Assets by Segment: Commercial Aircraft and Defense (2) $144,817 $ 86,571 $58,429 Industrial (1)(3) 54,542 15,085 15,260 -------- -------- ------- Total Assets $199,359 $101,656 $73,689
Exhibit 99.2 / Page 23 of 24 (1) In August 1996, the Company purchased its Recoil business unit which has been accounted for under the purchase method of accounting and, accordingly, their operating results have been included in the results of operations since mid-August 1996. (2) In July 1998, the Company purchased its M & M business unit which has been accounted for under the purchase method of accounting and, accordingly, their operating results have been included in the results of operations since late-July 1998. (3) In October 1998, the Company purchased its Marson business unit which has been accounted for under the purchase method of accounting and, accordingly, their operating results have been included in the results of operations since late-October 1998. 17. Quarterly Financial Data (unaudited)
Three months ended 1998 March 29 June 28 September 27December 31 Net sales $45,355 $46,824 $45,293 $48,040 Gross profit 13,881 14,630 13,458 14,320 Net income 4,275 4,351 3,402 2,842 Basic earnings per share 1.15 1.16 0.69 0.56 Diluted earnings per share 0.48 0.49 0.37 0.31 Stock price per share High 29.50 34.50 24.00 27.50 Low 24.00 22.25 11.50 8.00 Three months ended 1997 March 30 June 29 September 28December 31 Net sales $32,202 $37,250 $37,884 $43,093 Gross profit 9,233 11,036 11,903 13,867 Net income 2,169 2,933 3,388 4,100 Basic earnings per share 1.35 1.03 0.92 1.11 Diluted earnings per share 0.32 0.36 0.38 0.46 Stock price per share High - 19.87 30.25 34.12 Low - 14.50 18.50 24.50
Exhibit 99.2 / Page 24 of 24 -----END PRIVACY-ENHANCED MESSAGE-----