AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1996
REGISTRATION NO. 333-5411
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
HAYNES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3356 06-118540
(State or other jurisdiction (Primary S.I.C. Code Number) (I.R.S. Employer
of incorporation or Identification No.)
organization)
</TABLE>
-------------------
1020 WEST PARK AVENUE
KOKOMO, INDIANA 46904-9013
(317) 456-6000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-------------------
MICHAEL D. AUSTIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HAYNES INTERNATIONAL, INC.
1020 WEST PARK AVENUE
KOKOMO, INDIANA 46904-9013
(317) 456-6000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
STEPHEN J. HACKMAN, ESQ. WINTHROP B. CONRAD, JR., ESQ.
ICE MILLER DONADIO & RYAN DAVIS POLK & WARDWELL
ONE AMERICAN SQUARE, BOX 82001 450 LEXINGTON AVENUE
INDIANAPOLIS, INDIANA 46282-0002 NEW YORK, NEW YORK 10017
(317) 236-2100 (212) 450-4000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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: / /
-------------------
CALCULATION OF REGISTRATION FEE
[CAPTION]
<TABLE>
PROPOSED MAXIMUM
TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING PRICE REGISTRATION FEE
REGISTERED REGISTERED PER UNIT (1) (2)
<S> <C> <C> <C> <C>
% Senior Notes due 2004 $130,000,000 % $130,000,000 $44,828
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $34,483 previously paid.
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 SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 16, 1996
[HAYNES INTERNATIONAL LOGO]
PROSPECTUS
$130,000,000
HAYNES INTERNATIONAL, INC.
% SENIOR NOTES DUE 2004
-------------------
Interest on the % Senior Notes due 2004 (the "Notes") of Haynes
International, Inc. (the "Company") will be payable semiannually on and
of each year, commencing on , 1997. On or after , 2000, the Notes
will be redeemable at the Company's option, in whole or in part, at the
redemption prices set forth herein, together with accrued and unpaid interest,
if any, to the redemption date. At any time on or prior to , 1999, the
Company, at its option, may redeem up to 35% of the initial aggregate principal
amount of the Notes from the net proceeds of one or more Public Equity Offerings
(as defined) by the Company, at a redemption price of % of the principal
amount thereof, together with accrued and unpaid interest, if any, to the
redemption date; provided that after giving effect to such redemption, at least
$85.0 million in aggregate principal amount of the Notes remains outstanding
following such redemption. In addition, upon the occurrence of a Change in
Control (as defined), each holder of the Notes will have the right to require
the Company to repurchase, in whole or in part, such holder's Notes at a cash
purchase price equal to 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the repurchase date. In addition, the
Notes will be redeemable, at the option of the Company, in whole or in part,
after a Change in Control at a redemption price calculated pursuant to a formula
described herein. See "Description of the Notes."
The Notes will be senior unsecured indebtedness of the Company and will be
subordinated in right of payment to the Existing Senior Notes (as defined) prior
to their redemption approximately thirty days after the closing of the offering
made hereby (the "Offering"), and all other existing and future secured
indebtedness of the Company, including indebtedness under the New Credit
Facility (as defined), and will rank pari passu in right of payment with the
Existing Subordinated Notes (as defined) prior to their redemption approximately
thirty days after the closing of the Offering and all other existing and future
senior indebtedness of the Company. The Notes will also be effectively
subordinated to indebtedness of the Company's subsidiaries. Under the terms of
the Indenture (as defined), the Company will be permitted, upon the satisfaction
of certain conditions, to incur additional secured indebtedness. As of June 30,
1996, the Company had outstanding approximately $156.1 million of indebtedness.
Assuming the Offering had occurred on that date, and prior to the redemption of
the Existing Senior Notes and the Existing Subordinated Notes (which is expected
to occur approximately thirty days after the closing of the Offering), the
Company would have had approximately $66.1 million of indebtedness senior to the
Notes and approximately $90.0 million of indebtedness ranking pari passu with
the Notes. See "The Refinancing." After giving effect to the Refinancing (as
defined), on a pro forma basis as of June 30, 1996, there would have been
outstanding approximately $36.6 million of secured indebtedness ranking senior
to the Notes, and no indebtedness ranking pari passu with the Notes.
Concurrently with the Offering, the Company will replace its Existing Credit
Facility (as defined) with the New Credit Facility (as defined) that will have a
maximum commitment of $50.0 million. The New Credit Facility will be secured by
a first priority security interest in the Company's accounts receivable,
inventories and fixed assets. The establishment of the New Credit Facility is
conditioned upon and is a condition to the consummation of the Offering. See
"The Refinancing."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
-------------------
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.
[CAPTION]
<TABLE>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) COMMISSION(2) COMPANY(1)(3)
<S> <C> <C> <C>
Per Note............................... % % %
Total.................................. $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
-------------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if issued to and accepted by them, and subject to approval of certain legal
matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Notes
will be made in New York, New York on or about , 1996.
-------------------
MERRILL LYNCH & CO. PAINEWEBBER INCORPORATED
-------------------
The date of this Prospectus is , 1996.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
Picture of a commercial aircraft with inset diagram showing a jet engine.
Picture of a reactor vessel, lined with Hastelloy B-2, producing acetic acid.
Picture of flue gas desulfurization unit lined with Hastelloy C-22.
Picture of industrial gas turbine using a variety of the Company's alloy
products.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OF THE
COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
"HAYNES," "HASTELLOY," "ULTIMET," "HR-160," "G-50," "G-30" AND "C-22" ARE
ALL REGISTERED TRADEMARKS OF THE COMPANY, AND "HR-120," "D-205," "214," "242"
AND "230" ARE TRADEMARKS OF THE COMPANY.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. All references to fiscal years in this Prospectus refer to the
Company's fiscal years which, for all periods presented, ended on September 30.
As used in this Prospectus, the term the "Company" includes, when the context so
requires, Haynes International, Inc. and its consolidated subsidiaries.
Investors should carefully consider the information set forth under the heading
"Risk Factors."
THE COMPANY
The Company develops, manufactures and markets technologically advanced,
high performance alloys primarily for use in the aerospace and chemical
processing industries. The Company's products are high temperature alloys
("HTA") and corrosion resistant alloys ("CRA"). The Company's HTA products are
used by manufacturers of equipment that is subjected to extremely high
temperatures, such as jet engines for the aerospace industry, gas turbine
engines used for power generation, and waste incineration and industrial heating
equipment. The Company's CRA products are used in applications that require
resistance to extreme corrosion, such as chemical processing, power plant
emissions control and hazardous waste treatment. Based on available industry
data, the Company believes that it is one of three leading worldwide producers
of high performance alloy products in sheet, coil and plate forms, which in the
aggregate represented approximately 64% of the Company's net revenues in fiscal
1995. In addition, the Company produces its alloy products as seamless and
welded tubulars, and in bar, billet and wire forms.
High performance alloys are characterized by highly engineered, often
proprietary, metallurgical formulations primarily of nickel, cobalt and other
metals with complex physical properties. The complexity of the manufacturing
process for high performance alloys is reflected in the Company's relatively
high average selling price of approximately $12.18 per pound for fiscal 1995,
compared to the average selling price of other metals such as carbon steel
sheet, stainless steel sheet and aluminum, which currently range from $0.17 to
$1.25 per pound. Demanding end-user specifications, a multi-stage manufacturing
process and the technical sales, marketing and manufacturing expertise required
to develop new applications combine to create significant barriers to entry in
the high performance alloy industry. The Company derived approximately 30% of
its fiscal 1995 net revenues from products that are protected by United States
patents and derived an additional approximately 15% of its fiscal 1995 net
revenues from sales of products that are not patented, but for which the Company
has limited or no competition.
Core Competencies
Based upon its customer relationships in the aerospace and chemical
processing industries, the Company believes it has a leadership position in the
high performance alloy industry and has a strong reputation for quality and
reliability. The Company's core competencies include the following:
. Metallurgical expertise. With over 50 years of product research and
development in the high performance alloy industry, the Company believes
it is a leader in the development and manufacturing technology of nickel-
and cobalt-based alloys. Over the last seven years, the Company's
technical programs have yielded seven new proprietary alloys, five of
which are protected by United States patents. Three additional United
States patents regarding the new proprietary alloys are pending. The
Company currently maintains a total of 43 United States patents and
approximately 180 foreign counterpart patents targeted at countries with
significant existing or potential markets for the patented products. As a
result of the Company's research and development efforts, Chemical
Processing magazine recognized the Company's products five times in the
last twelve years as having made significant contributions to the chemical
processing industry.
3
<PAGE>
. Technical marketing support. Through the combined efforts of the Company's
direct sales organization, including its four domestic Company-owned
service centers and its research and development group, the Company works
closely with its customers in order to identify, develop and support
diverse applications for its alloys and to anticipate customers' future
materials requirements. The Company believes this integrated approach is
unique in the high performance alloy industry.
. Flexible manufacturing capabilities. The Company's four-high Steckel mill,
in conjunction with its sophisticated, multi-stage, melting and refining
operation, produces a broad array of sheet, coil and plate products made
to exacting specifications. The Company also operates a three-high mill
and a two-high mill that enable the Company to produce small batch orders
that generally are not practical or economical for competitors to
manufacture.
Business Strategy
The Company intends to capitalize on its core competencies to implement its
business strategy, which includes the following principal elements:
Develop new applications for existing alloys. The Company actively seeks to
develop new applications and new market segments for its existing products. The
sales force, in coordination with the research and development staff, works
closely with end-users to identify applications for the Company's existing
products that address its customers' specialized needs. Management believes that
new product applications represent a significant opportunity for revenue growth.
The Company has identified and is pursuing new applications for its alloys,
including applications for the automotive, medical and instrumentation
industries.
Continue customer-driven new product development. The Company emphasizes
customer contact and an awareness of customer needs in its product development
process. The Company believes that new opportunities in end-markets are best
identified through close contact with customers. This approach allows the
Company to focus its research and development efforts and enables the Company's
products to be specified for use in the production of customers' products.
Expand export sales. The Company believes there are significant
opportunities to increase its sales in international markets. In fiscal 1995,
approximately 39% of the Company's net revenues were outside the United States,
primarily in European markets where the Company has established sales and
manufacturing facilities. In addition, the Company is pursuing significant
growth opportunities in other regions, particularly the Pacific Rim.
Increase productivity through strategic equipment investment. The Company
believes that future investment in plant and equipment will allow it to increase
capacity and produce higher quality products at reduced costs. Continuing
improved market conditions are expected to enable the Company to increase its
investment in plant and equipment above the amounts expended in recent years.
During fiscal 1996 through 1998, the Company anticipates investing approximately
$16.4 million in new plant and equipment and approximately $3.2 million in new
integrated information systems. The principal benefits of these investments are
expected to be (i) the expansion of annual production capacity by 25% from
approximately 20.0 million pounds to approximately 25.0 million pounds, based on
the current product mix, (ii) improved production quality resulting in lower
internal rejection rates and rework costs and (iii) improved coordination among
sales, marketing and manufacturing personnel resulting in more efficient pricing
practices.
The Company experienced a significant decline in demand for its products
from fiscal 1992 through fiscal 1994. This decline resulted from a confluence of
major economic events, including a decline in military aerospace procurement in
the aftermath of the Persian Gulf War and the collapse of the Soviet Union, a
major inventory correction by jet engine manufacturers following cancellations
and deferrals of orders for new commercial aircraft as a consequence of the 1990
to 1991 recession and a delay in spending on maintenance and repair in the
chemical processing industry. From fiscal 1991 to fiscal 1994, the Company's
shipments declined by 21% from approximately 16.9 million pounds to
approximately 13.3 million pounds, while net revenues decreased 33% from
approximately $225.4 million in
4
<PAGE>
fiscal 1991 to approximately $150.6 million in fiscal 1994. During the same
period, the Company's net loss increased from approximately $0.7 million in 1991
to approximately $140.5 million in 1994; fiscal 1994 included non-cash charges
of approximately $79.6 million and approximately $37.1 million relating to an
accounting change for post-retirement benefits and a write-off of goodwill,
respectively. For the same period, earnings before interest, taxes, depreciation
and amortization decreased from approximately $39.0 million in fiscal 1991 to
approximately $10.7 million in fiscal 1994.
Since fiscal 1994, demand for the Company's products has increased in its
primary end markets, aerospace and chemical processing, reflecting improved
market conditions. The Company's shipments to the aerospace industry, which
represented 33% of net revenues in fiscal 1995, increased 42% from 3.3 million
pounds in fiscal 1994 to 4.7 million pounds in fiscal 1995, and 23% in the first
nine months of fiscal 1996 to approximately 4.3 million pounds from
approximately 3.5 million pounds in the corresponding period of fiscal 1995. The
Company's shipments to the chemical processing industry, which represented 36%
of net revenues in fiscal 1995, increased 22% in fiscal 1995 over fiscal 1994
from approximately 5.0 million pounds to approximately 6.1 million pounds and
increased 2.8% in the first nine months of fiscal 1996 over the corresponding
period in fiscal 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company owns and operates manufacturing facilities in Kokomo, Indiana;
Arcadia, Louisiana; and Openshaw, England. The Kokomo plant is the main
production facility for all HTA and CRA products and most product forms,
including sheet, coil, plate, bar, billet and wire. The Arcadia plant is the
primary facility for the production of welded and seamless tubing and piping
using nickel- and cobalt-based alloys and seamless titanium tubing. The Openshaw
plant produces HTA and CRA products in bar and billet form for the European
market.
THE REFINANCING
Concurrently with this Offering, the Company will replace its existing
revolving credit facility, which has a maximum commitment of $25.0 million (the
"Existing Credit Facility"), with a new revolving credit facility that will have
a maximum commitment of $50.0 million, to be secured by a first priority
security interest in the Company's accounts receivable, inventories and fixed
assets (the "New Credit Facility"). The establishment of the New Credit Facility
is conditioned upon and is a condition to the consummation of the Offering.
Borrowings under the New Credit Facility will bear interest initially at the
lower of the prime rate plus 0.75% or LIBOR plus 2.75%, which would have
resulted in a borrowing rate of approximately 8.3% per annum at July 1, 1996.
The interest rates will be reduced by 0.25% per annum for any quarter ending on
or after September 30, 1996, provided that the Company exceeds $34.0 million of
EBITDA for the four consecutive fiscal quarters ending immediately prior to the
beginning of such quarter. See "Description of New Credit Facility." Amounts
outstanding under the New Credit Facility will be due at maturity, which will be
three years after the date of closing unless extended or terminated. The Company
will use the net proceeds from the Offering and borrowings under the New Credit
Facility to refinance its existing indebtedness consisting of $50.0 million of
11 1/4% Senior Secured Notes due 1998 (the "Existing Senior Notes"), $90.0
million of 13 1/2% Senior Subordinated Notes due 1999 (the "Existing
Subordinated Notes" and, with the Existing Senior Notes, the "Existing Notes")
and the indebtedness outstanding under the Existing Credit Facility
(collectively, the "Existing Indebtedness"). As of June 30, 1996, there were
outstanding revolving borrowings under the Existing Credit Facility of
approximately $16.1 million. The Company will repay the amounts outstanding
under the Existing Credit Facility immediately following the closing of the
Offering. The redemption of the Existing Notes (the "Redemption") will occur
approximately thirty days after the closing of the Offering. Following the
closing of the Offering and prior to the Redemption, the Company would have had
approximately $66.1 million of indebtedness senior to the Notes and
approximately $90.0 million of indebtedness ranking pari passu with the Notes.
See "The Refinancing." The Offering, the establishment of the New Credit
Facility, the repayment of amounts outstanding under the Existing Credit
Facility and the Redemption are collectively referred to herein as the
"Refinancing." See "The Refinancing," "Use of Proceeds" and "Capitalization."
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Notes Offered................ $130,000,000 aggregate principal amount of % Senior Notes
due 2004 (the "Notes").
Maturity Date................ , 2004.
Interest Payment Dates....... and of each year, commencing , 1997.
Optional Redemption.......... The Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after , 2000,
at the redemption prices set forth herein, together with
accrued and unpaid interest to the date of redemption. In
addition, prior to , 1999, in the event one or more
Public Equity Offerings (as defined) are consummated after
the issue date of the Notes, the Company may redeem in the
aggregate up to a maximum of 35% of the initial aggregate
principal amount of Notes with the net proceeds thereof at a
redemption price equal to % of the principal amount
thereof plus accrued and unpaid interest to the redemption
date; provided that, after giving effect thereto, at least
$85.0 million aggregate principal amount of Notes remains
outstanding.
Change of Control............ Upon a Change of Control (as defined), each holder of Notes
may require the Company to purchase all or a portion of such
holder's Notes at a purchase price in cash equal to 101% of
the principal amount thereof, together with accrued and
unpaid interest to the date of repurchase. In addition, the
Notes will be redeemable, at the option of the Company, in
whole or in part, after a Change of Control at a redemption
price equal to the sum of (i) the principal amount thereof
plus (ii) accrued and unpaid interest, if any, to the
redemption date plus (iii) the greater of (x) 1.0% of the
then outstanding principal amount of such Notes and (y) the
excess of (A) the present value of the required interest and
principal payments due on such Notes, computed using a
discount rate equal to the Treasury Rate (as defined) plus
the Applicable Spread (as defined), over (B) the principal
amount of such Notes.
Ranking...................... The Notes will be unsecured senior obligations of the
Company, ranking pari passu in right of payment with the
Existing Subordinated Notes (prior to their redemption
approximately thirty days after the closing of the Offering)
and all other existing and future senior indebtedness of the
Company. The Notes will be effectively subordinated to
secured indebtedness, including the Company's indebtedness
under the New Credit Facility and initially to the Existing
Senior Notes (prior to their redemption approximately thirty
days after the closing of the Offering). As of June 30,
1996, giving effect to the transactions described under "The
Refinancing," including the redemption of the Existing
Notes, $36.6 million of senior secured indebtedness would
have been outstanding under the New Credit Facility, all of
the Company's existing indebtedness (including the Existing
Senior Notes) would have been repaid and the Company would
have had no other senior indebtedness outstanding, other
than the Notes offered hereby. Although the Notes and the
obligations under the New Credit Facility will be senior
obligations of the Company, the lender under
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
the New Credit Facility (and any other indebtedness secured
by assets of the Company) will have a claim ranking prior to
that of the holders of the Notes with respect to the
distribution of the assets and the proceeds thereof securing
the Company's obligations thereunder.
Certain Covenants............ The Indenture (as defined) will contain certain covenants,
including, but not limited to, covenants with respect to the
following matters: (i) limitation on indebtedness; (ii)
limitation on restricted payments; (iii) limitation on
transactions with affiliates; (iv) limitation on liens; (v)
limitation on sale of assets; (vi) limitation on issuance
and sale of preferred stock of subsidiaries; (vii)
limitation on dividends and other payment restrictions
affecting subsidiaries; and (viii) restrictions on
consolidations, mergers and the transfer of all or
substantially all of the assets of the Company to another
person.
Use of Proceeds.............. The net proceeds from the Offering will be approximately
$125.1 million. Such net proceeds, together with borrowings
under the New Credit Facility of approximately $36.6
million, will be utilized to repay the Existing Indebtedness
pursuant to the Refinancing.
Absence of Public Market for
the Notes.................... There is no public market for the Notes and the Company does
not intend to apply for listing of the Notes on any national
securities exchange or for quotation of the Notes on the
Nasdaq National Market. The Company has been advised by the
Underwriters that, following the completion of the Offering,
the Underwriters presently intend to make a market in the
Notes; however, they are under no obligation to do so and
may discontinue any market-making activities at any time
without notice. No assurance can be given as to the
liquidity of the trading market for the Notes or that an
active public market for the Notes will develop or, if
developed, will continue. If an active public market does
not develop or is not maintained, the market price and
liquidity of the Notes may be adversely affected.
</TABLE>
RISK FACTORS
Prior to making an investment in the Notes, prospective purchasers should
consider all of the information set forth in this Prospectus and should evaluate
the information set forth in "Risk Factors" herein.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT RATIO AND OPERATING DATA)
The following summary financial, operating and pro forma data were derived
from the Consolidated Financial Statements of the Company, including the notes
thereto, as well as the selected financial, operating and pro forma information
included elsewhere in this Prospectus. The information set forth below should be
read in conjunction with the Consolidated Financial Statements included
elsewhere herein, "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
-------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $225,386 $169,344 $162,454 $150,578 $201,933 $ 149,973 $170,386
Cost of sales (1).............. 175,176 152,911(2) 137,102 171,957(3) 167,196 125,305 136,711
Selling and administrative
expenses....................... 20,762 19,641(2) 14,569 15,039 15,475 11,604 12,966
Research and technical
expenses....................... 4,578 3,894 3,603 3,630 3,049 2,286 2,529
Operating income (loss)........ 24,870 (7,102) 7,180 (40,048) 16,213 10,778 18,180
Other cost, net................ 324 882(2) 400 816 1,767 578 413
Interest expense, net.......... 23,167 20,107 18,497 19,582 19,904 14,938 15,138
Income (loss) before cumulative
effect of change in accounting
principle...................... (675) (16,771) (8,275) (60,866) (6,771) (5,353) 1,600
Cumulative effect of change in
accounting principle (net of
tax benefit).................. -- -- -- (79,630 (4) -- -- --
Net income (loss).............. (675) (16,771) (8,275) (140,496) (6,771) (5,353) 1,600
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (6)............ $ 69,312 $ 48,804
Property, plant and equipment,
net............................ 31,779 31,779
Total assets................... 164,669 166,344
Total debt..................... 156,131 166,639
Accrued post-retirement
benefits....................... 95,291 95,291
Stockholder's equity
(deficit)...................... (121,453) (130,286)
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
-------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Depreciation and amortization
(7)............................ $ 14,458 $ 16,484 $ 13,766 $ 51,555(3) $ 9,000 $ 6,168 $ 6,534
Capital expenditures........... 4,567 821 56 771 1,934 1,465 801
EBITDA (8)..................... 39,004 8,500 20,546 10,691 23,446 16,368 24,301
Ratio of EBITDA to interest
expense........................ 1.68x 0.42x 1.11x 0.55x 1.18x 1.10x 1.61x
Ratio of earnings before fixed
charges to fixed charges
(9)............................ 1.06x -- -- -- -- -- 1.17x
Net cash provided from (used
in) operations................ $ 22,270 $ 19,850 $ 5,711 $(12,801) $ (2,883) $ (1,522) $ (2,983)
Net cash provided from (used
in) investment activities..... (4,521) (757) 318 746 (1,895) (1,438) (744)
Net cash provided from (used
in) financing activities...... (18,640) (16,440) (2,014) 7,102 3,912 1,609 3,654
PRO FORMA DATA (10):
Interest expense............... $ 17,750 $ 13,294 $ 13,481
Net income (loss).............. (4,338) (3,509) 3,514
EBITDA......................... 23,446 16,368 24,301
Ratio of earnings before fixed
charges to fixed charges
(9)............................ -- -- 1.34x
Ratio of EBITDA to interest
expense........................ 1.32x 1.23x 1.80x
OPERATING DATA:
Shipments by markets (millions of
pounds):
Aerospace..................... 5.7 3.4 3.3 3.3 4.7 3.5 4.3
Chemical processing........... 5.3 4.6 5.2 5.0 6.1 4.6 4.7
Other markets................. 5.9 5.9 6.8 5.0 5.5 4.5 3.3
-------- -------- -------- -------- -------- --------- -------
Total....................... 16.9 13.9 15.3 13.3 16.3 12.6 12.3
-------- -------- -------- -------- -------- --------- -------
-------- -------- -------- -------- -------- --------- -------
Average selling price per
pound.......................... $ 13.26 $ 12.04 $ 10.48 $ 11.17 $ 12.18 $ 11.73 $ 13.63
Employees (end of period)...... 1,074 898 896 854 872 860 925
</TABLE>
(footnotes on following page)
8
<PAGE>
- ------------
(1) The Company was acquired by Morgan Lewis Githens & Ahn and its affiliates
("MLGA") and the management of the Company in August 1989 (the "1989
Acquisition"). For financial statement purposes, the 1989 Acquisition was
accounted for as a purchase transaction effective September 1, 1989;
accordingly, inventories were adjusted to reflect estimated fair market
values at that date. This adjustment to inventories was amortized to cost
of sales as inventories were reduced from the base layer. Non-cash charges
for this adjustment included in cost of sales were $3,361, $5,210, $3,686
and $488 for fiscal 1991, 1992, 1993 and 1994, respectively; no charges
have been recognized since fiscal 1994.
(2) Includes costs related to the implementation of cost reduction measures,
the implementation of a just-in-time and total quality management program
and the renegotiation of the terms of the 1989 Acquisition credit
agreement. In fiscal 1992, these charges were reflected in cost of sales,
selling and administrative expenses, and other cost, net in the amounts of
$6,937, $1,156 and $603, respectively.
(3) Reflects the write-off of $37,117 of goodwill created in connection with
the 1989 Acquisition remaining at September 30, 1994. See Note 10 of the
Notes to Consolidated Financial Statements.
(4) During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" ("SFAS 106"). The Company elected to immediately recognize
the transition obligation for benefits earned as of October 1, 1993,
resulting in a non-cash charge of $79,630, net of a $10,580 tax benefit,
representing the cumulative effect of the change in accounting principles.
The tax benefit recognized was limited to then existing net deferred tax
liabilities. See Note 8 of the Notes to Consolidated Financial Statements.
(5) Adjusted to reflect the consummation of the Offering, anticipated
borrowings under the New Credit Facility and the application of the net
proceeds of the Offering and such borrowings as described under "Use of
Proceeds."
(6) Reflects the excess of current assets over current liabilities as set forth
in the Consolidated Financial Statements. Historical and adjusted current
liabilities include amounts outstanding under the Existing Credit Facility
and amounts to be outstanding under the New Credit Facility, respectively.
(7) Reflects (i) depreciation and amortization as presented in the Company's
Consolidated Statement of Cash Flows and set forth in note (8) below, plus
(ii) other non-cash charges, including the amortization of prepaid pension
costs (which is included in the change in other asset category) and the
amortization of inventory costs as described in note (1) above, minus
amortization of debt issuance costs, all as set forth in note (8) below.
(8) Represents for the relevant period net income plus expenses recognized for
interest, taxes, depreciation, amortization and other non-cash charges
(excluding any non-cash charges which require accrual or reserve for cash
charges for any future period), as such amounts are calculated in
accordance with the terms of the indenture for the Notes. In addition to
net interest expense as listed in the table, the following charges are
added to net income to calculate EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Provision for (benefit from)
income taxes................. $ 2,054 $(11,320) $(3,442) $ 420 $ 1,313 $ 615 $ 1,029
Depreciation.................. 8,710 8,752 8,650 8,208 8,188 6,127 5,844
Amortization:
Debt issuance costs........ 1,401 1,333 2,120 1,680 1,444 1,086 1,035
Goodwill................... 1,434 1,490 1,487 38,607 -- -- --
Inventory (see note (1)
above)........................ 3,361 5,210 3,686 488 -- -- --
Prepaid pension costs...... 953 1,032 (57) 314 130 188 229
------- -------- ------- ------- ------- ------- -------
7,149 9,065 7,236 41,089 1,574 1,274 1,264
SFAS 106 Post-retirement -- -- -- 3,938 682 (147) 461
Amortization of debt issuance
costs......................... (1,401) (1,333) (2,120) (1,680) (1,444) (1,086) (1,035)
------- -------- ------- ------- ------- ------- -------
Total......................... $16,512 $ 5,164 $10,324 $51,975 $10,313 $ 6,783 $ 7,563
------- -------- ------- ------- ------- ------- -------
------- -------- ------- ------- ------- ------- -------
</TABLE>
EBITDA should not be construed as a substitute for income from operations,
net earnings (loss) or cash flows from operating activities determined in
accordance with Generally Accepted Accounting Principles ("GAAP"). The
Company has included EBITDA because it believes it is commonly used by
certain investors and analysts to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a
company's ability to service debt. Because EBITDA is not calculated in the
same manner by all entities, EBITDA as calculated by the Company may not
necessarily be comparable to that of the Company's competitors or of other
entities.
(9) For purposes of these computations, earnings before fixed charges consist
of income (loss) before provision for (benefit from) income taxes and
cumulative effect of change in accounting principle plus fixed charges.
Fixed charges consist of interest on debt and amortization of debt issuance
costs. Earnings were insufficient to cover fixed charges by $28,091,
$11,717, $60,446 and $5,458 for fiscal 1992, 1993, 1994 and 1995,
respectively, and by $4,738 for the first nine months of fiscal 1995 and,
on a pro forma basis, by $2,975 and $2,856 for fiscal 1995 and the first
nine months of fiscal 1995, respectively.
(10) Assumes the transactions described under "The Refinancing" were effected as
of October 1, 1994, resulting in a reduction in interest expense, net of
tax, of $2,433, $1,844 and $1,914 for the fiscal year ended September 30,
1995, the nine months ended June 30, 1995 and the nine months ended June
30, 1996, respectively. Actual interest savings may differ from pro forma
amounts due to differences in interest rates and borrowing levels.
9
<PAGE>
RISK FACTORS
Prospective investors in the Notes offered hereby should consider the
specific Risk Factors set forth below as well as the other information contained
in this Prospectus. This Prospectus contains statements that constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Those statements appear in a number of places in this
Prospectus and may include statements regarding the intent, belief or current
expectations of the Company or its officers with respect to (i) the Company's
strategic plans, (ii) the policies of the Company regarding capital
expenditures, financing or other matters, and (iii) industry trends affecting
the Company's financial condition or results of operations. Prospective
investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties and that
actual results may differ materially from those in the forward looking
statements as a result of various factors including the Risk Factors set forth
below.
INDUSTRY CYCLICALITY; FLUCTUATIONS IN OPERATING RESULTS. The Company's
principal customers are manufacturers and fabricators of machinery, parts and
equipment for highly specialized applications. In many instances, the Company's
products pass through a series of fabricators prior to sale to the manufacturer
of the end product. Demand for the Company's products is dependent upon and
derived from the level of demand for the machinery, parts and equipment produced
by these customers, which in turn is often dependent upon and derived from the
demand for the products of the Company's customers. Over the past several years,
certain of the markets in which the Company competes, particularly the
aerospace, flue gas desulfurization ("FGD") and oil and gas industries, have
experienced wide demand fluctuations. Because of the comparatively high level of
fixed costs associated with the Company's manufacturing processes, in recent
years significant declines in those markets have resulted in disproportionately
adverse impacts on the Company's operating results. In 1992, the Company
suffered significant downturns in its two largest markets. If similar downturns
were to occur in the future and continue for a significant period of time, the
Company's operations would be materially adversely affected. Furthermore, the
Company's operations may in the future be subject to substantial
period-to-period fluctuations as a consequence of industry cyclicality, domestic
and foreign economic conditions and other factors. There can be no assurance
that such factors will not have a material adverse effect on the Company's
business, operating results or financial condition. See "-- Leverage and Debt
Service Obligations; Restrictive Debt Covenants; Ability to Meet Fixed Charges."
LEVERAGE AND DEBT SERVICE OBLIGATIONS; RESTRICTIVE DEBT COVENANTS; ABILITY
TO MEET FIXED CHARGES. The Company is highly leveraged and will continue to be
highly leveraged following the Refinancing. For the past three years, the
Company's earnings have been inadequate to cover fixed charges. See "--Net
Losses in Recent Years; Stockholders' Deficit." As of June 30, 1996, the Company
had approximately $156.1 million of consolidated indebtedness. On a pro forma
basis, giving effect to the Refinancing as of June 30, 1996, the Company would
have had approximately $166.6 million of consolidated indebtedness. The degree
to which the Company is leveraged could affect its ability to make debt service
payments and restrict the Company's activities, including its ability to make
capital expenditures, to respond efficiently to market conditions, to take
advantage of business opportunities and to obtain additional financing and could
force the Company to restructure or refinance its indebtedness or seek
additional equity capital. Over the past several years, the Company's financial
condition and liquidity constraints have limited its ability to make capital
expenditures. Additional capital expenditures will be necessary in the future to
maintain and increase production capacity, improve quality and productivity and
meet anticipated competitive requirements. Failure of the Company to generate
sufficient internal funds to meet its capital expenditure needs or to obtain
financing for these expenditures on acceptable terms could have a material
adverse effect on the Company.
Unexpected declines in demand for the Company's products, fluctuations in
raw material prices, increases in costs or the inability to borrow additional
funds to cover shortfalls could impair the
10
<PAGE>
Company's ability to meet its debt service obligations and, therefore, could
have a material adverse effect on the Company's financial condition and future
prospects. No assurance can be given that additional debt or equity financing
will be available when needed to cover shortfalls, or, if available, will be
obtainable on terms that are acceptable to the Company. In addition, borrowings
under the New Credit Facility will bear interest at variable rates. Increases in
interest rates on such borrowings could materially adversely affect the
Company's financial condition and results of operations and the Company's
ability to meet its debt service obligations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company's earnings were inadequate to cover fixed charges in fiscal
1993, 1994 and 1995 by approximately $11.7 million, $60.4 million and $5.5
million, respectively. The failure by the Company to cover fixed charges in the
future could result in a failure to meet the Company's debt service obligations,
restrictions on the Company's activities or other material adverse effects on
the Company's financial condition and results of operations.
Although the Notes will be senior obligations of the Company, they will be
unsecured. Accordingly, the Notes will be effectively subordinated to borrowings
under the New Credit Facility and to any future secured indebtedness of the
Company, to the extent of the value of the collateral securing such borrowings
or indebtedness. The Notes will also be effectively subordinated to indebtedness
of the Company's subsidiaries to the extent that the assets of a particular
subsidiary are available to satisfy its liabilities.
The indenture under which the Notes will be issued (the "Indenture") and the
New Credit Facility will contain a number of covenants, including covenants that
restrict the ability of the Company and its subsidiaries to (i) incur additional
indebtedness, (ii) make certain restricted payments, (iii) engage in
transactions with affiliates, (iv) create liens on assets, (v) sell assets, (vi)
issue and sell preferred stock of subsidiaries, (vii) make dividend payments and
(viii) engage in consolidations, mergers and transfers. In addition, under the
terms of the New Credit Facility, the Company will be required to maintain its
net worth (as defined in the New Credit Facility) above a specified level. The
covenants described in the two foregoing sentences represent all the covenants
which are material to investors to be contained in the Indenture and the New
Credit Facility. The Company's ability to continue to comply with the covenants
and restrictions in the agreements governing its indebtedness, and to otherwise
meet the obligations under its indebtedness generally, will be dependent upon
future performance, which will be subject to demand for the Company's products,
prevailing economic and competitive conditions and other factors, including
factors beyond the control of the Company. See "Description of the Notes."
The breach of any covenants or restrictions under any of the Company's
indebtedness could result in a default under the existing agreements and
indentures and the new agreements and/or the Indenture, which would permit the
lenders or noteholders, as the case may be, to declare all amounts borrowed
thereunder to be due and payable together with accrued and unpaid interest, and
the commitments of bank and other lenders to make further loans under the new
agreements could be terminated. If the Company were unable to repay its
indebtedness to bank and other lenders or noteholders, those lenders or
noteholders could proceed against the collateral securing that indebtedness, if
any, which includes the Company's inventories, accounts receivable and fixed
assets. A default under either the Indenture or the New Credit Facility will
cause a default under both agreements. Upon such a default, the right of the
holders of the Notes to repayment would be effectively subordinated to the
ability of the lender under the New Credit Facility or any other holder of
Senior Indebtedness to enforce its rights against any applicable debtor.
NET LOSSES IN RECENT YEARS; STOCKHOLDERS' DEFICIT. The Company has incurred
substantial net losses in recent years, resulting from high interest expenses
incurred due to significant leverage, certain special charges and declines in
demand and prices for products in certain of the Company's principal markets
through fiscal 1994. The Company's net losses for fiscal 1993, 1994 and 1995
were $8.3 million,
11
<PAGE>
$140.5 million and $6.8 million, respectively. Over the same three-year period,
stockholders' equity decreased from approximately $22.9 million in fiscal 1993
to a deficit of approximately $116.0 million in fiscal 1994 and to a deficit of
approximately $121.9 million in fiscal 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Although the Company has taken steps over the past several years to increase
revenues, reduce costs and improve efficiency, resulting in the Company
recognizing net income for the first nine months of fiscal 1996, there can be no
assurance that the Company will be able to sustain profitability. The Company's
ability to sustain profitability is dependent upon a number of factors,
including the continued successful implementation of its product development,
manufacturing improvement and cost reduction efforts, as well as various factors
beyond the Company's control, such as the impact of raw material price
fluctuations and the demand for high performance alloys. The failure of the
Company to sustain profitability could hinder its ability to make debt service
payments, to respond efficiently to market conditions, to make capital
expenditures and to take advantage of business opportunities, the failure to
perform any one of which could have a material adverse effect on the Company's
financial condition and results of operations. Future sustained losses by the
Company could have a material adverse effect on the Company's operations.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly
revenues and operating results have varied significantly in the past and may
continue to do so in the future. Quarterly revenues and operating results may
fluctuate as a result of significant fluctuations in the cost of raw materials,
changes in demand for the Company's products, changes in the level of operating
expenses, timing of inventory adjustments, competitive conditions and general
economic conditions. In addition, the results of any quarterly period may not be
indicative of the results to be expected for a full fiscal year. It is possible
that the Company's operating results in certain future quarters may be below the
expectations of market analysts and investors.
DEPENDENCE ON KOKOMO FACILITY. The Company's principal assets are located at
its primary integrated production facility in Kokomo, Indiana and at its
production facilities in Arcadia, Louisiana and Openshaw, England. The Arcadia
and Openshaw plants rely to a significant extent upon feedstock produced at the
Kokomo facility. Any production failures, shutdowns or other significant
problems at the Kokomo facility could have a material adverse effect on the
Company's financial condition and results of operations. The Company believes
that it maintains adequate property damage insurance to provide for
reconstruction of damaged equipment, as well as business interruption insurance
to mitigate losses resulting from any production shutdown caused by an insured
loss; however, there can be no assurance that such insurance will be adequate to
cover such losses. See "Business--Properties."
Although the Company believes that its facilities are generally in good
operating condition, the Company expects that significant maintenance and repair
of its facilities will be required on a continuing basis. Maintenance and repair
of the Company's facilities will require shutdowns of specific pieces of
equipment. Extended interruptions in the Company's production capabilities could
adversely affect the Company's results of operations.
GROWTH DEPENDENT UPON NEW APPLICATIONS AND NEW PRODUCTS. The Company's
performance depends materially on its ability to offer products that have equal
or better performance characteristics than competing products at competitive
prices. The Company's future growth will depend, in large part, on its ability
to address the increasingly demanding needs of its customers by enhancing the
properties of its existing alloys, by timely developing new applications for its
existing products, and by timely developing and introducing new products. There
can be no assurance that the Company will be successful in these efforts or that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of these products, or that its new
products and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. See "Business--Research and Technical
Development."
12
<PAGE>
COMPETITION. The high performance alloy market is a highly competitive
market in which eight to ten producers participate in various product forms. The
Company faces strong competition from domestic and foreign manufacturers of both
the Company's high performance alloys and other competing metals. Some of the
Company's current competitors have and future competitors may have greater
financial resources than the Company. Prior to fiscal 1994, this competition,
coupled with declining demand in several of the Company's key markets, had led
to significant erosion in the price for certain of the Company's products. The
Company may face additional competition in the future to the extent new
materials are developed, such as plastics or ceramics, that may be substituted
for the Company's products. There can be no assurance that the Company will be
able to compete effectively in the future or that competition will not
significantly depress the price of the Company's products in the future. See
"Business--Competition."
RAW MATERIAL PRICE FLUCTUATIONS. The raw materials used by the Company,
primarily nickel, cobalt and molybdenum, all have experienced significant
fluctuations in price. In fiscal 1995, average prices per pound for nickel,
cobalt and molybdenum increased 44%, 37% and 202%, respectively, over the
averages for fiscal 1994. Raw material costs account for approximately one-half
of the total cost of sales. Approximately one-half of the raw material costs is
for nickel. The Company attempts to mitigate the effects of fluctuations in the
price of nickel by purchasing forward contracts with respect to approximately
one-half of its uncovered future commitments. However, there can be no assurance
that such hedging transactions will adequately protect the Company in the event
of significant fluctuations in the price of nickel or that the Company will not
incur a loss on such transactions. Generally, the Company has passed significant
raw material price increases through to its customers, but there can be no
assurance it will be able to do so in the future. Furthermore, the Company
maintains a policy of pricing its products at the time of order shipment. As a
result, rapidly escalating raw material costs during the period between the time
the Company receives an order and the time the Company purchases the raw
materials used to fill such order, which has averaged approximately 30 days in
recent months, can negatively affect profitability. In addition, the Company
obtains certain raw materials from only one or two sources, some of which are
located in foreign countries. Although to date the Company has been able to
obtain an adequate supply of these materials, there can be no assurance that the
Company will be able to obtain adequate supplies of these raw materials in the
future. In the event that the Company is unable to obtain adequate supplies of
raw materials in a timely fashion or that raw material price increases occur
that the Company is unable to pass on to its customers, the Company's business,
financial condition and operating results will be materially adversely affected.
See "Business-- Raw Materials."
POTENTIAL COSTS OF ENVIRONMENTAL COMPLIANCE. The Company's facilities are
subject to certain foreign, federal, state and local laws, regulations, permits
and consent agreements relating to the protection of human health and the
environment, and the Company has made, and will continue to make, expenditures
to comply with such provisions. Expenses and capital expenditures related to
environmental compliance are expected to be approximately $3.9 million for
fiscal 1996 through fiscal 1998. There can be no assurance that these planned
expenditures will be adequate to ensure compliance with environmental laws and
regulations. Pursuant to certain environmental laws, if a release of hazardous
substances occurs on or from the Company's properties or any associated off-site
disposal location, the Company may be held liable, and there can be no assurance
that the amount of such liability will not be material. The Company is currently
conducting groundwater monitoring and post-closure maintenance in connection
with certain disposal areas, and the Company is aware of certain contaminants in
the groundwater. In addition, the Company has completed an investigation of
eight specifically identified solid waste management units located at the Kokomo
facility. The Company is aware of elevated levels of certain contaminants in the
groundwater, some of which contaminants may have migrated from a nearby
superfund site. If corrective action is required in connection with these
disposal areas or solid waste management units, there can be no assurance that
the costs of such corrective action will not have a material adverse effect on
the Company's financial condition, results of
13
<PAGE>
operations or liquidity. In addition, the Company has been named as one of many
potentially responsible parties ("PRPs") at two waste disposal sites. The
Comprehensive Environmental Response, Compensation and Liability Act, as amended
("CERCLA"), imposes strict, joint and several liability for investigatory and
cleanup costs upon all PRPs. To date, the Company has contributed approximately
$212,000 toward investigatory and cleanup costs for the two sites at which it
has been named as a PRP. PRPs are jointly and severally liable for required
remediation costs, which as of June 30, 1996 aggregated approximately $78.6
million at these two sites. Since environmental laws are becoming increasingly
stringent, the Company's environmental capital expenditures and costs for
environmental compliance may increase in the future. In addition, due to the
possibility of unanticipated regulatory or other developments and the
possibility that regulators may pursue enforcement of applicable environmental
laws and regulations more vigorously, the amount and timing of future
environmental expenditures may vary substantially from those currently
anticipated. See "Business--Environmental Matters."
FRAUDULENT TRANSFER CONSIDERATIONS. Under applicable provisions of the
United States Bankruptcy Code (the "Bankruptcy Code") and similar provisions of
applicable state fraudulent transfer or conveyance law, if the Company, at the
time it issued the Notes, (a) incurred such indebtedness with the actual intent
to hinder, delay or defraud creditors, or (b)(i) received less than reasonably
equivalent value or fair consideration in exchange for the incurrence of such
indebtedness and (ii)(A) was insolvent at the time of such incurrence, (B) was
rendered insolvent by reason of such incurrence (and the application of the
proceeds thereof), (C) was engaged or was about to engage in a business or
transaction for which the assets remaining with the Company constituted
unreasonably small capital to carry on its business, or (D) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they become due, then, in each such case, a court of competent jurisdiction
could avoid, in whole or in part, the Notes or, in the alternative, subordinate
the Notes to existing and future indebtedness of the Company. The measure of
insolvency for purposes of the foregoing would likely vary depending upon the
law applied in each case. Generally, however, the Company would be considered
insolvent if the sum of its debts, including contingent liabilities, was greater
than all of its assets at a fair market valuation, or if the present fair
salable value of its assets was less than the amount that would be required to
pay the probable liabilities on its existing debts, including contingent
liabilities, as such debts become liquidated and become due. Management of the
Company believes that, for purposes of the Bankruptcy Code and state fraudulent
transfer or conveyance laws, the Notes are being issued without the intent to
hinder, delay or defraud creditors and for proper purposes and in good faith,
that the Company will receive reasonably equivalent value or fair consideration
therefor, and that after the issuance of the Notes and the application of the
net proceeds therefrom, the Company will be solvent, will not be left with such
unreasonably small capital as to prevent the Company from carrying on its
business and will be able to pay its debts as they become due. However, there
can be no assurance that a court passing on such issues would agree with the
determination of the Company's management. Furthermore, other jurisdictions may
have laws relating to bankruptcy, receivership, insolvency, fraudulent transfer
and conveyance and creditors' rights generally that may be applicable to the
Company.
INCOME TAX AUDIT. On October 19, 1995, at the conclusion of an audit by the
Internal Revenue Service (the "IRS") of the Company's tax returns for the five
taxable years ending September 30, 1993 (the "Years in Issue"), the IRS proposed
to disallow approximately $5.5 million in deductions claimed by the Company
during the Years in Issue. These deductions represent the amortization of a
portion of certain loan fees in the original amount of approximately $10.4
million incurred in connection with the 1989 Acquisition. The Company claimed
similar deductions for such amortization in its 1994 and 1995 tax years, and
will deduct the remaining balance upon consummation of the Redemption. The
Company filed a formal protest to the IRS' proposed disallowance with the IRS
Appeals Office on March 25, 1996, and intends to challenge the IRS with respect
to the proposed disallowance. Until the issue is finally resolved, there can be
no assurance that the Company's position will ultimately be sustained. If
14
<PAGE>
the Company's position is not sustained, the Company's available NOLs would be
reduced by up to approximately $10.4 million (the total amount of loan fees
which could otherwise be deducted by the Company). Reductions in the amount of
the Company's available NOLs may accelerate the date on which the Company is
required to pay federal income tax and may increase the Company's federal income
tax liability for its current tax year and any future tax years in which NOLs
resulting from the disallowed deductions are used to offset taxable income.
Depending upon the timing of the final resolution of this issue, it is possible
that the entire increased tax liability, including interest thereon, would be
payable in the fiscal quarter in which the issue is finally resolved.
VOTING CONTROL; CHANGE OF CONTROL. All of the outstanding Common Stock of
the Company is owned by Haynes Holdings, Inc., a Delaware corporation
("Holdings"). MLGA Fund II, L.P., an investment limited partnership ("Fund II"),
and its affiliates own approximately 93.7% of the outstanding Common Stock of
Holdings on a fully-diluted basis. As a result, Fund II and its affiliates are
able to control the outcome of the vote on all matters submitted to a vote of
the stockholder of the Company and the stockholders of Holdings subject to
certain commitments relating to the election of directors of both the Company
and Holdings and certain other matters included in the agreements among
Holdings' Stockholders. See "Principal Stockholders--Agreements Among
Stockholders." An affiliate of MLGA is the general partner of Fund II. See "The
Company" and "Principal Stockholders."
Transfers of shares of Common Stock of Holdings by Fund II to a person or a
group of persons may cause a Change of Control giving each holder of Notes the
right to require the Company to purchase all or a portion of such holder's Notes
at a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase. A change of control will also
constitute a default under the New Credit Facility, and thereby cause a default
under the Notes. Upon such default, the rights of the holders of the Notes to
repayment would be effectively subordinated to the ability of the lender under
the New Credit Facility or any other holder of Senior Indebtedness to enforce
its rights against any applicable debtor. See "--Leverage and Debt Service
Obligations; Restrictive Debt Covenants; Ability to Meet Fixed Charges." There
can be no assurance that in the event of a Change in Control the Company would
have the ability to satisfy any or all of its mandatory redemption obligations
in connection therewith. Fund II is under no obligation to the Company to
restrict its transfers of Common Stock so as to avoid a Change of Control. See
"Principal Stockholders" and "Description of the Notes."
DEPENDENCE ON KEY MANAGEMENT. The Company's ability to maintain its
competitive position is dependent upon the management and leadership skills of
Michael D. Austin, the Company's President and Chief Executive Officer, and
other members of the Company's senior management team. The loss of any of these
individuals or an inability to attract and retain additional qualified personnel
could adversely affect the Company. There can be no assurance that the Company
will be able to retain its existing senior management personnel or to attract
additional qualified personnel. See "Management."
ADVERSE EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS. In fiscal 1995,
international sales represented approximately 39% of the Company's net revenues,
and the Company expects that international sales will continue to account for a
significant portion of its net revenues in the future. The Company's policy is
to denominate all export shipments from the United States, including those to
its foreign operations, in U.S. dollars. The foreign operations generally sell
products in local or other foreign currencies, creating the risk that currency
exchange rate fluctuations could adversely affect their earnings. The managers
of each of the foreign operations are responsible for assessing this risk and
for hedging against possible foreign currency fluctuations as they deem
appropriate, subject to a Company policy requiring any foreign affiliate that
desires to enter into a hedging contract that would cause it to have aggregate
open currency hedging positions in excess of $500,000 to first obtain the
approval of the Company's Chief Executive Officer or Chief Accounting Officer.
The maximum aggregate notional amount of hedged positions at any time during the
past three fiscal years was approximately $3.2 million. As of September 30,
1995, there were foreign currency exchange contracts outstanding in the amount
of
15
<PAGE>
approximately $1.7 million with no unrealized gain or loss. During fiscal 1995,
sales by the Company's foreign operations totaled approximately $41.3 million,
or 53% of total international sales, and the foreign operations recorded
expenses of approximately $200,000 due to currency exchange fluctuations.
Since the Company's foreign operations also have assets and liabilities
denominated in foreign currencies, there is a risk that fluctuations in exchange
rates could adversely affect the Company's equity balance. Exchange gains or
losses on balance sheet items are taken directly to equity as a separate
component of stockholders' deficit. The Company has not historically engaged in
activities to mitigate the effects foreign currency fluctuations may have on
these items. At both September 30, 1995 and June 30, 1996, the foreign
operations had approximately $7.5 million in assets net of liabilities
denominated in foreign currencies and the Company's balance sheet at September
30, 1995 and June 30, 1996 reflected accumulated foreign currency translation
gains of approximately $4.1 million and $2.9 million, respectively, in the
stockholders' deficit section.
There can be no assurance that any current or future efforts to mitigate the
possible adverse effects of foreign currency fluctuations on the Company's
foreign operations and on the Company's overall results of operations will be
successful. Furthermore, in addition to the risk of currency exchange
fluctuations, the complexity of futures contracts and hedging programs also
generally creates the risk of loss in such hedging transactions. The Company's
foreign operations may also be subject to certain economic and market risks,
including longer payment cycles, greater difficulties in accounts receivable
collection, the necessity of paying import and export duties and the requirement
of complying with a wide variety of foreign laws. In addition, the Company's
foreign operations are affected by general economic conditions in the
international markets in which the Company does business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business-- Sales and Marketing."
ABSENCE OF PUBLIC MARKET FOR THE NOTES. There is no public market for the
Notes, and the Company does not intend to apply for listing of the Notes on any
national securities exchange or for quotation on Nasdaq. The Company has been
advised by the Underwriters that they presently intend to make a market in the
Notes after the consummation of the Offering, although they are not obligated to
do so and may discontinue any market-making activities with respect to the Notes
at any time without notice. Accordingly, no assurance can be given as to the
liquidity of the trading market for the Notes or that an active public market
for the Notes will develop or, if developed, will continue. If an active public
market for the Notes does not develop or is not maintained, the market price and
liquidity of the Notes may be adversely affected.
16
<PAGE>
THE COMPANY
The Company develops, manufactures and markets technologically advanced,
high performance alloys primarily for use in the aerospace and chemical
processing industries. The Company's products are high temperature alloys and
corrosion resistant alloys. The Company's HTA products are used by manufacturers
of equipment that is subjected to extremely high temperatures, such as jet
engines for the aerospace industry, gas turbine engines used for power
generation, and waste incineration and industrial heating equipment. The
Company's CRA products are used in applications that require resistance to
extreme corrosion, such as chemical processing, power plant emissions control
and hazardous waste treatment. Based on available industry data, the Company
believes that it is one of three leading worldwide producers of high performance
alloy products in sheet, coil and plate forms, which in the aggregate
represented approximately 64% of the Company's net revenues in fiscal 1995. In
addition, the Company produces its alloy products as seamless and welded
tubulars, and in bar, billet and wire forms.
The business of the Company was founded in 1912 as Haynes Stellite Works.
Haynes Stellite Works was acquired by Union Carbide Corp. in 1920, and sold to
Cabot Corporation ("Cabot") in 1970. Cabot incorporated the business in 1986 and
continued as its principal owner until August 1989. Control of the Company was
acquired in August 1989 by certain affiliates of MLGA and management of the
Company in a leveraged buyout for an aggregate purchase price of approximately
$223.0 million. As a result of the 1989 Acquisition, the Company became a
wholly-owned subsidiary of Holdings. In connection with the 1989 Acquisition,
the Company issued $100.0 million principal amount of Existing Subordinated
Notes. In February 1990, the Company became a reporting company under section
15(d) of the Exchange Act of 1934, as amended (the "Exchange Act"). In 1993, the
Company issued $50.0 million aggregate principal amount of Existing Senior Notes
and used a portion of the proceeds therefrom to redeem $10.0 million of the
Existing Subordinated Notes. The Company's Exchange Act reporting obligations
extended to the Existing Senior Notes. Holdings unconditionally guaranteed the
Existing Senior Notes. Registration of Holdings' guarantee of the Existing
Senior Notes caused Holdings to become a reporting company under section 15(d)
of the Exchange Act. In 1994, the Company's and Holdings' reporting obligations
under the Exchange Act terminated.
The Company was incorporated under the laws of Delaware on December 1, 1986.
The Company's executive offices are located at 1020 West Park Avenue, Kokomo,
Indiana 46904-9013, and its telephone number is (317) 456-6000.
THE REFINANCING
The Offering is part of a refinancing plan that the Company is implementing
to reduce its interest costs, improve its financial flexibility and enhance its
competitive position. The components of the Refinancing are (i) the Offering,
(ii) the establishment of the New Credit Facility and (iii) the redemption of
the Existing Notes and repayment of amounts outstanding under the Existing
Credit Facility. On a pro forma basis, giving effect to the Refinancing as of
October 1, 1994, for the fiscal year ended September 30, 1995 (a) the Company's
net loss would have decreased from approximately $6.8 million to approximately
$4.3 million, (b) the Company's interest expense would have decreased from
approximately $20.2 million to approximately $17.8 million, (c) the Company's
ratio of EBITDA to interest expense would have improved from 1.18x to 1.32x and
(d) the Company's ratio of earnings before fixed charges to fixed charges would
have improved from 0.73x (a deficiency of approximately $5.5 million) to 0.83x
(a deficiency of approximately $2,975). On a pro forma basis, giving effect to
the Refinancing as of October 1, 1994, for the nine months ended June 30, 1996
(a) the Company's net income would have increased from approximately $1.6
million to approximately $3.5 million, (b) the Company's interest expense would
have decreased from approximately $15.4 million to approximately $13.5 million,
(c) the Company's ratio of EBITDA to interest expense would have improved from
1.61x to 1.80x, and (d) the Company's ratio of earnings before fixed charges to
fixed charges would have improved from 1.17x to 1.34x. See "Selected
Consolidated Financial Data."
17
<PAGE>
The New Credit Facility. In connection with the Offering, the Company will
enter into an agreement with Congress Financial Corporation (Central) as agent
for itself and CoreStates Bank, N.A. (the "Lenders") to provide the New Credit
Facility in the amount of $50.0 million. Borrowings under the New Credit
Facility will bear interest at the lower of the prime rate plus 0.75% or LIBOR
plus 2.75%, which would have resulted in a borrowing rate of approximately 8.3%
per annum at July 1, 1996, and will be secured by a first priority security
interest in the Company's accounts receivable, inventories and fixed assets. The
interest rates will be reduced by 0.25% per annum for any quarter ending on or
after September 1996, provided that the Company exceeds $34.0 million of EBITDA
for the four consecutive fiscal quarters ending prior to the beginning of such
quarter. See "Description of New Credit Facility." Amounts outstanding under the
New Credit Facility will be due at maturity, which will be three years after the
date of closing unless extended or terminated. The New Credit Facility will
contain several covenants that, among other things, require the Company to
maintain a specified level of net worth (as defined therein). See "Description
of New Credit Facility." The Lender's obligation to enter into the New Credit
Facility will be conditioned upon, among other things, consummation of the
Offering. Consummation of the Offering is conditioned upon the establishment of
the New Credit Facility.
Redemption of the Existing Notes and repayment of the Existing Credit
Facility. The Company will use the net proceeds of the Offering and borrowings
under the New Credit Facility to redeem the Existing Notes (the "Redemption")
and repay amounts outstanding under the Existing Credit Facility. The Existing
Senior Notes and Existing Subordinated Notes bear interest at 11 1/4% and 13
1/2% per annum, respectively, and borrowings under the Existing Credit Facility
bear interest at a fluctuating per annum rate equal to the prime rate plus
1.75%. The Redemption will require the Company to pay a prepayment premium to
the holders of the Existing Subordinated Notes of approximately $1.5 million.
The Company will also be required to pay a prepayment premium to the holders of
the Existing Senior Notes to the extent that (i) the present value of all
remaining principal and interest payments on the Existing Senior Notes,
determined using a discount rate equal to the yield on U.S. Government
Obligations (as defined in the governing indenture) having a term approximately
equal to the remaining term of the Existing Senior Notes, plus 2.0%, is greater
than (ii) the principal amount of the Existing Senior Notes, plus accrued
interest thereon to the date of redemption. Assuming the Redemption had occurred
on July 31, 1996, the prepayment premium on the Existing Senior Notes would have
been approximately $3.3 million. The Company will mail redemption notices to the
holders of the Existing Notes immediately after the close of the Offering, and
the Existing Notes will be redeemed approximately thirty days thereafter. In the
quarter in which the Redemption occurs, the Company will record a charge against
earnings, reflecting the prepayment premiums and a non-cash charge for
accelerated amortization of the cost of issuing the Existing Notes. Assuming the
Redemption had occurred as of July 31, 1996, those amounts would have been
approximately $5.2 million and $3.6 million, respectively. The Company will also
incur charges of approximately $400,000 in connection with the termination of
and repayment of amounts outstanding under the Existing Credit Facility. During
the period following the consummation of the Offering and prior to the date of
the Redemption, the Company will incur interest expense on the Existing Notes
and the Notes, which will exceed the interest income earned on the proceeds from
the Offering designated for the Redemption by approximately $1.2 million.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $125.1 million. The Company intends to use the net proceeds
from the Offering, together with the amounts available under the New Credit
Facility, to redeem the Existing Notes and to repay amounts outstanding under
the Existing Credit Facility. See "The Refinancing."
The following is a description of sources and uses of proceeds, giving
effect to the Refinancing as of June 30, 1996 (in thousands):
<TABLE>
<S> <C>
SOURCES:
New Credit Facility (1)....................................... $ 36,639
Notes Offering................................................ 130,000
--------
$166,639
--------
--------
USES:
Repayment of Existing Credit Facility......................... $ 16,131
Redemption of Existing Senior Notes........................... 50,000
Redemption of Existing Subordinated Notes..................... 90,000
Estimated redemption and repayment premiums on Existing
Indebtedness (2)................................................ 5,250
Estimated fees and expenses related to the Refinancing (3).... 5,258
--------
$166,639
--------
--------
</TABLE>
- ------------
(1) The New Credit Facility will have a maximum availability of $50.0 million.
(2) Represents an estimated prepayment premium of $3.3 million related to the
redemption of the Existing Senior Notes, a prepayment premium of $1.5
million related to the redemption of the Existing Subordinated Notes, and a
payment of approximately $400,000 in connection with the termination of and
repayment of amounts outstanding under the Existing Credit Facility. The
maturity date of the Existing Senior Notes, which bear interest at 11 1/4%,
is June 15, 1998. The maturity date of the Existing Subordinated Notes,
which bear interest at 13 1/2%, is August 15, 1999, subject to partial
mandatory redemption on each of August 15, 1997 and August 15, 1998 in the
amounts of $23.3 million and $33.3 million, respectively, of the principal
amount of the Existing Subordinated Notes. See "The Refinancing."
(3) Includes underwriting discounts and commissions related to the Offering and
expenses payable by the Company in connection with the Refinancing.
19
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of the
Company as of June 30, 1996 and as adjusted to give effect to the Refinancing.
See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (1):
Existing Credit Facility........................................... $ 16,131 $ --
New Credit Facility................................................ -- 36,639
--------- -----------
Total short-term debt.......................................... 16,131 36,639
Long-term debt:
Existing Senior Notes.............................................. 50,000 --
Existing Subordinated Notes........................................ 90,000 --
Notes offered hereby............................................... -- 130,000
--------- -----------
Total long-term debt........................................... 140,000 130,000
--------- -----------
Total debt..................................................... 156,131 166,639
Redeemable common stock of parent company (2)........................ 1,427 1,427
Stockholders' deficit:
Common Stock, $.01 par value, 100 shares authorized and issued..... -- --
Additional paid-in capital......................................... 46,306 46,306
Accumulated deficit (3)............................................ (170,685) (179,518)
Foreign currency translation adjustment............................ 2,926 2,926
--------- -----------
Total stockholders' deficit.................................... (121,453) (130,286)
--------- -----------
Total capitalization........................................... $ 36,105 $ 37,780
--------- -----------
--------- -----------
</TABLE>
- ------------
(1) Amounts outstanding under the Existing Credit Facility are, and amounts to
be outstanding under the New Credit Facility will be, treated for accounting
purposes as short-term debt. However, because of the longer term of the
facilities under which this debt is issued (three years with respect to the
New Credit Facility), the Company considers debt under these credit
facilities to be part of its total capitalization and, accordingly, has
included them in this table.
(2) Represents the estimated liability to be funded by the Company on behalf of
its sole stockholder, Holdings, in connection with the put and call rights
associated with certain options granted pursuant to the Haynes Holdings,
Inc. Employee Stock Option Plan (the "Existing Stock Option Plan") and the
Stock Subscription Agreement among Holdings and the investors specified
therein (the "Stock Subscription Agreement"). See "Management--Stock Option
Plans", "Principal Stockholders--Agreements Among Stockholders" and Note 11
of the Notes to Consolidated Financial Statements.
(3) The increase in the accumulated deficit as adjusted to give effect to the
Refinancing is due to the write-off of deferred debt issuance costs of
approximately $3.6 million and the recognition of prepayment premiums
related to the redemption of the Existing Indebtedness of approximately $5.2
million.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIO AND OPERATING DATA)
The following table sets forth selected consolidated financial, operating and
pro forma data of the Company. The selected consolidated financial data as of
and for the years ended September 30, 1991, 1992, 1993, 1994 and 1995 are
derived from the audited consolidated financial statements of the Company. The
selected consolidated financial data as of and for the nine months ended June
30, 1995 and 1996 have been derived from financial statements that are not
audited, but, in the opinion of management, such financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations as of
such dates and for such periods. Results of operations for the nine months ended
June 30, 1996 are not necessarily indicative of results for the full fiscal
year. Pro forma data may not be indicative of future results.
These selected financial data are qualified in their entirety by reference
to, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------------------------------------------ -----------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................... $225,386 $169,344 $162,454 $150,578 $201,933 $149,973 $170,386
Cost of sales (1)................ 175,176 152,911(2) 137,102 171,957(3) 167,196 125,305 136,711
Selling and administrative
expenses......................... 20,762 19,641(2) 14,569 15,039 15,475 11,604 12,966
Research and technical
expenses......................... 4,578 3,894 3,603 3,630 3,049 2,286 2,529
Operating income (loss).......... 24,870 (7,102) 7,180 (40,048) 16,213 10,778 18,180
Other cost, net.................. 324 882(2) 400 816 1,767 578 413
Interest expense, net............ 23,167 20,107 18,497 19,582 19,904 14,938 15,138
Income (loss) before cumulative
effect of change in accounting
principle........................ (675) (16,771) (8,275) (60,866) (6,771) (5,353) 1,600
Cumulative effect of change in
accounting principle (net of tax
benefit)......................... -- -- -- (79,630)(4) -- -- --
Net income (loss)................ (675) (16,771) (8,275) (140,496) (6,771) (5,353) 1,600
<CAPTION>
SEPTEMBER 30, JUNE 30, 1996
------------------------------------------------------------ -----------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED (5)
-------- -------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (6).............. $ 97,805 $ 39,344 $ 72,131 $ 60,182 $ 62,616 $ 69,312 $ 48,804
Property, plant and equipment,
net.............................. 68,792 60,700 51,676 43,119 36,863 31,779 31,779
Total assets..................... 256,142 214,585 194,200 145,723 151,316 164,669 166,344
Total debt....................... 169,000 142,194 140,180 148,141 152,477 156,131 166,639
Accrued post-retirement
benefits......................... -- -- -- 94,148 94,830 95,291 95,291
Stockholders' equity (deficit)... 37,630 35,162 22,938 (116,029) (121,909) (121,453) (130,286)
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------------------------------------------ -----------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Depreciation and amortization
(7).............................. $ 14,458 $ 16,484 $ 13,766 $ 51,555(3) $ 9,000 $ 6,168 $ 6,534
Capital expenditures............. 4,567 821 56 771 1,934 1,465 801
EBITDA (8)....................... 39,004 8,500 20,546 10,691 23,446 16,368 24,301
Ratio of EBITDA to interest
expense.......................... 1.68x 0.42x 1.11x 0.55x 1.18x 1.10x 1.61x
Ratio of earnings before fixed
charges to fixed charges (9).... 1.06x -- -- -- -- -- 1.17x
Net cash provided from (used in)
operations....................... $ 22,270 $ 19,850 $ 5,711 $(12,801) $ (2,883) $ (1,522) $ (2,983)
Net cash provided from (used in)
investment activities............ (4,521) (757) 318 746 (1,895) (1,438) (744)
Net cash provided from (used in)
financing activities............ (18,640) (16,440) (2,014) 7,102 3,912 1,609 3,654
PRO FORMA DATA (10):
Interest expense................. $ 17,750 $ 13,294 $ 13,481
Net income (loss)................ (4,338) (3,509) 3,514
Ratio of earnings before fixed
charges to fixed charges (9).... -- -- 1.34x
EBITDA........................... $ 23,446 $ 16,368 $ 24,301
Ratio of EBITDA to interest
expense.......................... 1.32x 1.23x 1.80x
OPERATING DATA:
Shipments by markets (millions of
pounds):
Aerospace....................... 5.7 3.4 3.3 3.3 4.7 3.5 4.3
Chemical processing............. 5.3 4.6 5.2 5.0 6.1 4.6 4.7
Other markets................... 5.9 5.9 6.8 5.0 5.5 4.5 3.3
-------- -------- -------- -------- -------- -------- -------
Total......................... 16.9 13.9 15.3 13.3 16.3 12.6 12.3
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
Average selling price per
pound............................ $ 13.26 $ 12.04 $ 10.48 $ 11.17 $ 12.18 $ 11.73 $ 13.63
Employees (end of period)........ 1,074 898 896 854 872 860 925
</TABLE>
(footnotes on following page)
21
<PAGE>
- ------------
(1) The Company was acquired by MLGA and the management of the Company in
August 1989. For financial statement purposes, the 1989 Acquisition was
accounted for as a purchase transaction effective September 1, 1989;
accordingly, inventories were adjusted to reflect estimated fair values at
that date. This adjustment to inventories was amortized to cost of sales as
inventories were reduced from the base layer. Non-cash charges for this
adjustment included in cost of sales were $3,361, $5,210, $3,686 and $488
for fiscal 1991, 1992, 1993 and 1994, respectively; no charges have been
recognized since fiscal 1994.
(2) Includes costs related to the implementation of certain cost reduction
measures, the implementation of a just-in-time and total quality management
program and the renegotiation of the terms of the 1989 Acquisition credit
agreement. In fiscal 1992, these charges were reflected in cost of sales,
selling and administrative expenses, and other cost, net in the amounts of
$6,937, $1,156 and $603, respectively.
(3) Reflects the write-off of $37,117 of goodwill created in connection with
the 1989 Acquisition remaining at September 30, 1994. See Note 10 of the
Notes to Consolidated Financial Statements.
(4) During fiscal 1994, the Company adopted SFAS 106. The Company elected to
immediately recognize the transition obligation for benefits earned as of
October 1, 1993, resulting in a non-cash charge of $79,630, net of a
$10,580 tax benefit, representing the cumulative effect of the change in
accounting principles. The tax benefit recognized was limited to then
existing net deferred tax liabilities. See Note 8 of the Notes to
Consolidated Financial Statements.
(5) Adjusted to reflect the consummation of the Offering, anticipated
borrowings under the New Credit Facility and the application of the net
proceeds of the Offering and such borrowings as described under "Use of
Proceeds."
(6) Reflects the excess of current assets over historical and adjusted current
liabilities as set forth in the Consolidated Financial Statements.
Historical and adjusted current liabilities include amounts outstanding
under the Existing Credit Facility and amounts to be outstanding under the
New Credit Facility, respectively.
(7) Reflects (i) depreciation and amortization as presented in the Company's
Consolidated Statement of Cash Flows and set forth in note (8) below, plus
(ii) other non-cash charges, including the amortization of prepaid pension
costs (which is included in the change in other asset category) and the
amortization of inventory costs as described in note (1) above, minus
amortization of debt issuance costs, all as set forth in note (8) below.
(8) Represents for the relevant period net income plus expenses recognized for
interest, taxes, depreciation, amortization and other non-cash charges
(excluding any non-cash charges which require accrual or reserve for cash
charges for any future period), as such amounts are calculated in
accordance with the terms of the Indenture. In addition to net interest
expense as listed in the table, the following charges are added to net
income to calculate EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Provision for (benefit from) income
taxes................................... $ 2,054 $(11,320) $(3,442) $ 420 $ 1,313 $ 615 $ 1,029
Depreciation............................ 8,710 8,752 8,650 8,208 8,188 6,127 5,844
Amortiation:
Debt issuance costs.................. 1,401 1,333 2,120 1,680 1,444 1,086 1,035
Goodwill............................. 1,434 1,490 1,487 38,607 -- -- --
Inventory (see note (1) above)....... 3,361 5,210 3,686 488 -- -- --
Prepaid pension costs................ 953 1,032 (57) 314 130 188 229
------- -------- ------- ------- ------- ------- -------
7,149 9,065 7,236 41,089 1,574 1,274 1,264
SFAS 106-Post-retirement -- -- -- 3,938 682 (147) 461
Amortization of debt issuance costs..... (1,401) (1,333) (2,120) (1,680) (1,444) (1,086) (1,035)
------- -------- ------- ------- ------- ------- -------
Total................................... $16,512 $ 5,164 $10,324 $51,975 $10,313 $ 6,783 $ 7,563
------- -------- ------- ------- ------- ------- -------
------- -------- ------- ------- ------- ------- -------
</TABLE>
EBITDA should not be construed as a substitute for income from operations, net
earnings (loss) or cash flows from operating activities determined in accordance
with Generally Accepted Accounting Principles ("GAAP"). The Company has
included EBITDA because it believes it is commonly used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance, leverage and liquidity and to determine a company's ability to
service debt. Because EBITDA is not calculated in the same manner by all
entities, EBITDA as calculated by the Company may not necessarily be
comparable to that of the Company's competitors or of other entities.
(9) For purposes of these computations, earnings before fixed charges consist of
income (loss) before provision for (benefit from) income taxes and
cumulative effect of change in accounting principle plus fixed charges.
Fixed charges consist of interest on debt and amortization of debt issuance
costs. Earnings were insufficient to cover fixed charges by $28,091,
$11,717, $60,446, and $5,458 for fiscal 1992, 1993, 1994 and 1995,
respectively, and by $4,738 for the first nine months of fiscal 1995 and, on
a pro forma basis, by $2,975 and $2,856 for fiscal 1995 and the first nine
months of fiscal 1995, respectively.
(10) Assumes the transactions described under "The Refinancing" were effected as
of October 1, 1994, resulting in a reduction in interest expense, net of
tax, of $2,433, $1,844 and $1,914 for the year ended September 30, 1995,
the nine months ended June 30, 1995 and the nine months ended June 30,
1996, respectively. Actual interest savings may differ from pro forma
amounts due to differences in interest rates and borrowing levels.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 55% and 45%, respectively, of the Company's net revenues in
fiscal 1995. Based on available industry data, the Company believes that it is
one of three leading worldwide producers of high performance alloys in flat
product form, which includes sheet, coil and plate forms, and also produces its
alloys in round and tubular forms. In fiscal 1995, flat products accounted for
70% of shipments and 64% of net revenues.
The Company's annual production capacity varies depending upon the mix of
alloys, forms, product sizes, gauges and order sizes. Based on the current
product mix, the Company estimates that its annual production capacity, which
has been unchanged for the past five years, is approximately 20.0 million
pounds. As a result of changes in the Company's primary markets, sales volume
has ranged from a high of 16.9 million pounds in fiscal 1991, to a low of 13.3
million pounds in fiscal 1994. The Company is not currently capacity
constrained, but has planned capital expenditures of approximately $19.5 million
from fiscal 1996 through fiscal 1998, one of the principal benefits of which
will be to increase annual capacity by approximately 25% to approximately 25.0
million pounds. See "--Liquidity and Capital Resources."
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers, three
wholly-owned European subsidiaries and sales agents serving the Pacific Rim who
operate on a commission basis. Approximately 73% of the Company's net revenues
in fiscal 1995 was generated by the Company's direct sales organization. The
remaining 27% of the Company's fiscal 1995 net revenues was generated by
independent distributors and licensees in the United States, Europe and Japan,
some of whom have been associated with the Company for over 25 years.
The proximity of production facilities to export customers is not a
significant competitive factor, since freight and duty costs per pound are minor
in comparison to the selling price per pound of high performance alloy products.
In fiscal 1995, sales to customers outside the United States accounted for
approximately 39% of the Company's net revenues. Sales of domestically-produced
products accounted for approximately 47% of the Company's foreign sales in
fiscal 1995, and the balance of foreign sales was derived from sales of products
produced overseas.
Virtually all export sales are denominated in U.S. dollars. The Company's
foreign subsidiaries generally sell products in local or other foreign
currencies, creating the risk that currency exchange rate fluctuations could
adversely affect earnings. Because the Company believes the managers of the
foreign operations are better able to monitor their respective operation's
exposure to currency fluctuations and assess the risk of currency exchange loss,
each of the foreign operations is responsible for hedging as its managers deem
appropriate. If a foreign operation desires to enter into a hedging contract
that would cause it to have open positions exceeding $500,000, Company policy
requires its managers to first obtain the consent of the Chief Financial Officer
or the Chief Accounting Officer of the Company. During fiscal 1995, sales by the
foreign operations totaled approximately $41.4 million, or 53% of total
international sales. As of the end of fiscal 1995, there were foreign currency
exchange contracts outstanding of approximately $1.7 million, with no unrealized
gain or loss. During fiscal 1995, the foreign operations recorded expenses of
approximately $200,000 due to currency exchange fluctuations. The maximum
aggregate notional amount of hedged positions at any time during the past three
fiscal years was approximately $3.2 million. See "Risk Factors--Adverse Effects
of Foreign Currency Fluctuations."
The high performance alloy industry is characterized by high capital
investment and high fixed costs, and profitability is therefore very sensitive
to changes in volume. The cost of raw materials is the
23
<PAGE>
primary variable cost in the high performance alloy manufacturing process and
represents approximately one-half of total manufacturing costs. Other
manufacturing costs, such as labor, energy, maintenance and supplies, often
thought of as variable, have a significant fixed element. Accordingly,
relatively small changes in volume can result in significant variations in
earnings. The Company's results in fiscal 1994 reflect this sensitivity. While
volume declined by 13% from fiscal 1993 to fiscal 1994, primarily due to
declines in demand for the Company's products in the oil and gas and FGD
markets, EBITDA declined 48%, despite a 7% increase in the average selling price
per pound of the Company's products, calculated as described in Note (8) to
Selected Consolidated Financial Data.
The Company strives to achieve premium pricing and margins in those alloys
where the opportunities exist. In fiscal 1995, proprietary products represented
approximately 30% of the Company's net revenues and 33% of gross margin. In
addition to these patent-protected alloys, nine other alloys manufactured by the
Company have little or no direct competition because they are difficult to
produce and require relatively small production runs to satisfy demand. In
fiscal 1995, these nine alloys represented approximately 15% of the Company's
net revenues and 23% of gross margin.
Order to shipment lead times can be a competitive factor as well as an
indication of the strength of the demand for high performance alloys. The
Company's current average manufacturing lead time for flat products is
approximately 10 to 12 weeks, although due to current backlog levels, lead times
from order to shipment are approximately 14 to 18 weeks. The Company believes
its lead times are consistent with those offered by its competitors.
24
<PAGE>
OVERVIEW OF MARKETS
A breakdown of sales, shipments and average selling prices to the markets
served by the Company for the last five fiscal years is shown in the following
table:
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
-------------- -------------- -------------- -------------- --------------
% OF % OF % OF % OF % OF
SALES (DOLLARS IN MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aerospace................... $83.6 37.1% $45.7 27.0% $46.7 28.7% $46.4 30.8% $66.4 32.9%
Chemical processing......... 64.5 28.6 52.8 31.2 52.2 32.1 50.1 33.3 72.2 35.8
Land-based gas turbines..... 8.6 3.8 10.7 6.3 12.6 7.8 17.0 11.3 14.3 7.1
Flue gas desulfurization.... 8.6 3.8 11.4 6.7 17.4 10.7 10.2 6.7 6.6 3.3
Oil and gas................. 30.9 13.7 18.8 11.1 11.0 6.8 4.2 2.8 4.5 2.2
Other markets............... 27.9 12.4 28.0 16.6 20.5 12.6 20.6 13.7 34.6 17.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total product............... 224.1 99.4 167.4 98.9 160.4 98.7 148.5 98.6 198.6 98.4
Other revenue (1)........... 1.3 0.6 1.9 1.1 2.1 1.3 2.1 1.4 3.3 1.6
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Net revenues................ $225.4 100.0% $169.3 100.0% $162.5 100.0% $150.6 100.0% $201.9 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S........................ $147.7 $116.4 $109.1 $94.8 $122.3
Foreign.................... $77.7 $52.9 $53.4 $55.8 $79.6
SHIPMENTS BY MARKET
(MILLIONS OF POUNDS)
Aerospace................... 5.7 33.7% 3.4 24.5% 3.3 21.6% 3.3 24.8% 4.7 28.8%
Chemical processing......... 5.3 31.4 4.6 33.1 5.2 34.0 5.0 37.6 6.1 37.4
Land-based gas turbines..... 0.7 4.2 1.3 9.4 1.2 7.8 1.6 12.0 1.3 8.0
Flue gas desulfurization.... 0.9 5.3 1.6 11.4 2.9 19.0 1.5 11.3 0.9 5.5
Oil and gas................. 2.3 13.6 1.3 9.4 1.1 7.2 0.4 3.0 0.5 3.1
Other markets............... 2.0 11.8 1.7 12.2 1.6 10.4 1.5 11.3 2.8 17.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total shipments............ 16.9 100.0% 13.9 100.0% 15.3 100.0% 13.3 100.0% 16.3 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
AVERAGE SELLING PRICE PER
POUND
Aerospace................... $14.67 $13.44 $14.15 $14.06 $14.13
Chemical processing......... 12.17 11.48 10.04 10.02 11.84
Land-based gas turbines..... 12.29 8.23 10.50 10.63 11.00
Flue gas desulfurization.... 9.56 7.13 6.00 6.80 7.33
Oil and gas................. 13.43 14.46 10.00 10.50 9.00
Other markets............... 13.95 16.47 12.81 13.73 12.36
All markets................ 13.26 12.04 10.48 11.17 12.18
</TABLE>
- ------------
(1) Includes toll conversion and royalty income.
Fluctuations in net revenues and volume from fiscal 1991 through fiscal 1995
are a direct result of significant changes in each of the Company's major
markets.
Aerospace. Demand for the Company's products in the aerospace industry is
driven by orders for new jet engines as well as requirements for spare parts and
replacement parts for jet engines. Demand for the Company's aerospace products
declined significantly from fiscal 1991 to fiscal 1992, as order rates for
commercial aircraft fell below delivery rates due to cancellations and deferrals
of previously placed orders. The Company believes that, as a result of these
cancellations and deferrals, engine manufacturers and their fabricators and
suppliers were caught with excess inventories. The draw down of these
inventories, and the implementation of just-in-time delivery requirements by
many jet engine manufacturers, exacerbated the decline experienced by suppliers
to these manufacturers, including the Company. Demand for products used in
manufacturing military aircraft and engines also dropped during this period as
domestic defense spending declined following the Persian Gulf War. These
conditions persisted through fiscal 1994.
25
<PAGE>
The Company began to see a recovery in the demand for its aerospace products
at the beginning of fiscal 1995. Reports prepared by The Boeing Co. and
McDonnell Douglas Corp. project that commercial aircraft production will remain
strong through 1998. The firm order backlog of The Boeing Co., McDonnell Douglas
Corp. and Airbus Industrie, as reported by The Airline Monitor, increased to
1,869 planes at December 31, 1995 from 1,742 planes at December 31, 1994.
Additionally, passenger miles flown world-wide, which increased from
approximately 1,500 billion in 1994 to 1,576 billion in 1995, are expected to
reach approximately 1,961 billion in 1999. Federal Aviation Administration
regulations mandate maintenance of aircraft engines based in part on the number
of miles flown and the number of takeoffs and landings. Increased air travel
therefore requires additional maintenance and repair of aircraft engines, which
in turn increases demand for HTA products. Reflecting increased aircraft
production and maintenance, the Company's net revenues to the aerospace industry
in the first nine months of fiscal 1996 increased 33.9% over the comparable
period in fiscal 1995.
Chemical Processing. Demand for the Company's products in the chemical
processing industry is driven primarily by maintenance requirements of chemical
processing facilities, and tends to track overall economic activity due to the
diverse nature of chemical products and their applications. Major projects
involving the expansion of existing chemical processing facilities or the
construction of new facilities periodically increase demand for CRA products in
the industry. Demand for the Company's products used in the chemical processing
industry declined in fiscal 1991 and fiscal 1992, but began to increase in late
fiscal 1993. In fiscal 1995, sales of the Company's products to the chemical
processing industry reached a five-year high, and the Company believes that the
outlook for sales of the Company's products to the chemical processing industry
continues to improve. Concerns regarding the reliability of chemical processing
facilities, their potential impact on the environment and the safety of their
personnel as well as the need for higher throughput should support demand for
more sophisticated alloys, such as the Company's CRA products.
The Company expects that growth in the chemical processing industry will
result from volume increases and selective price increases as a result of
increased demand. In addition, the Company's key proprietary CRA products, the
recently introduced Hastelloy C-2000, which the Company believes provides better
overall corrosion resistance and versatility than any other readily available
CRA product, and Hastelloy C-22, are expected to contribute substantially to the
Company's growth in this market, although there can be no assurance that this
will be the case.
Land-Based Gas Turbines. The Company leveraged its metallurgical expertise
to develop LBGT applications for alloys it had historically sold to the
aerospace industry. Electric generating facilities powered by land-based gas
turbines are less expensive to construct and operate and produce fewer sulfur
dioxide ("SO2") emissions than traditional fossil fuel-fired facilities. The
Company believes these factors are primarily responsible for creating demand for
its products in the LBGT industry. Prior to the enactment of the Clean Air Act
of 1990, as amended (the "Clean Air Act"), land-based gas turbines were used
primarily to satisfy peak power requirements. However, legislated standards for
lowering emissions from fossil fuel-fired electric utilities and cogeneration
facilities, such as the Clean Air Act, together with self-imposed standards,
contributed to increased demand for some of the Company's products in the early
1990s, when Phase I of the Clean Air Act was being implemented. The Company
believes that the outlook appears favorable for land-based gas turbines, since
they are gaining acceptance as a clean, low-cost alternative to fossil
fuel-fired electric generating facilities. The Company believes that compliance
with Phase II of the Clean Air Act, which begins in 2000, will further
contribute to demand for its products.
Flue Gas Desulfurization. The Clean Air Act is the primary factor
determining the demand for high performance alloys in the FGD industry. FGD
projects have been undertaken by electric utilities and cogeneration facilities
powered by fossil fuels in the United States, Europe and the Pacific Rim in
response to concerns over emissions. FGD projects are generally highly visible
and as a result are highly price competitive, especially when demand for high
performance alloys in other major markets is weak.
26
<PAGE>
The Company anticipates increasing sales opportunities in the FGD market as
deadlines for Phase II of the Clean Air Act approach in 2000.
Oil and Gas. The Company's participation in the oil and gas industry
consists primarily of providing tubular goods for sour gas production. Demand
for the Company's products in this industry is driven by the rate of development
of sour gas fields, which in turn is driven by the price of natural gas and the
need to commence production in order to protect leases. This market was very
active in fiscal 1991, especially in the offshore sour gas fields in the Gulf of
Mexico, but demand for the Company's sour gas tubular products has declined
significantly since that time. Due to the volatility of the oil and gas
industry, the Company has chosen not to invest in certain manufacturing
equipment necessary to perform certain intermediate steps of the manufacturing
process for these tubular products. However, the Company can outsource the
necessary processing steps in the manufacture of these tubulars when prices rise
to attractive levels. The Company intends to selectively take advantage of
future opportunities as they arise, but plans no capital expenditures to
increase its internal capabilities in this area.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1995 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. Many of the Company's lower volume proprietary
alloys are experiencing growing demand in these other markets. Markets capable
of providing growth are being driven by increasing performance, reliability and
service life requirements for products used in these markets, which could
provide further applications for the Company's products.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated
statements of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
--------------------------- ----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (1)........................... 84.4 89.6 82.8 83.6 80.2
Selling and administrative expenses......... 9.0 10.0 7.7 7.7 7.6
Research and technical expenses............. 2.2 2.4 1.5 1.5 1.5
Other cost, net............................. 0.3 0.5 0.9 0.4 0.2
Interest expense............................ 11.6 13.2 10.0 10.1 9.0
Interest income............................. (0.3) (0.2) (0.2) (0.2) (0.2)
Goodwill write-off.......................... -- 24.6(2) -- -- --
----- ----- ----- ----- -----
Income (loss) before provision for income
taxes and effect of change in accounting
principle................................... (7.2) (40.1) (2.7) (3.1) 1.7
Provision for (benefit from) income taxes... (2.1) 0.3 0.6 0.4 0.6
Cumulative effect of change in accounting
principle (net of tax benefit).............. -- (52.9)(3) -- -- --
----- ----- ----- ----- -----
Net income (loss)........................... (5.1)% (93.3)% (3.3)% (3.5)% 1.1%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- ------------
(1) For financial statement purposes, the 1989 Acquisition was accounted for as
a purchase transaction effective September 1, 1989; accordingly, inventories
were adjusted to reflect estimated fair values at that date. This adjustment
to inventories was amortized to cost of sales as inventories were reduced
from the base layer. Non-cash charges for this adjustment included in cost
of sales were approximately $3.7 million and $488,000 for fiscal 1993 and
1994, respectively; no charges have been recognized since fiscal 1994.
(2) Reflects the write-off of $37.1 million of goodwill created in connection
with the 1989 Acquisition remaining at September 30, 1994. See Note 10 of
the Notes to Consolidated Financial Statements.
(3) During fiscal 1994, the Company adopted SFAS 106. The Company elected to
immediately recognize the transition obligation for benefits earned as of
October 1, 1993, resulting in a non-cash charge of approximately $79.6
million net of an approximately $10.6 million tax benefit, representing the
cumulative effect of the change in accounting principle. The tax benefit
recognized was limited to then existing net deferred tax liabilities. See
Note 8 of the Notes to Consolidated Financial Statements.
27
<PAGE>
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Net revenues increased approximately $20.4 million, or 13.6%, to
approximately $170.4 million for the first nine months of fiscal 1996 from
approximately $150.0 million for the same period in fiscal 1995, as a result of
a 16.2% increase in the average selling price per pound, from $11.73 to $13.63.
The increase in average selling price was partially offset by a 2.4% decrease in
volume to 12.3 million pounds from 12.6 million pounds, as volume increases in
the aerospace, chemical processing and LBGT markets were more than offset by
lower volume in the FGD and other markets.
Sales to the aerospace market increased by 33.9% to approximately $64.0
million in the first nine months of fiscal 1996 from approximately $47.8 million
for the same period in fiscal 1995. Volume increased 20.7% and the average
selling price per pound increased 11.0%. Increased demand for the Company's
products in fiscal 1996 from the aerospace market was generated primarily by
domestic engine producers, as demand in Europe remained relatively flat.
Sales to the chemical processing industry, which achieved a five-year high
in fiscal 1995, increased 18.1% to approximately $61.6 million in the first nine
months of fiscal 1996 from approximately $52.2 million for the same period in
fiscal 1995. Volume increased 2.8% despite lower exports to the Pacific Rim. In
addition, the average selling price per pound increased 14.9% as a result of
higher demand from both the domestic and European markets.
Sales to the LBGT market increased 26.7% to approximately $13.4 million in
the first nine months of fiscal 1996 from approximately $10.5 million for the
corresponding period in fiscal 1995 as a result of a 22.7% increase in volume
and a 3.2% increase in the average selling price per pound. This reflected
strong demand for cleaner burning power generation from gas turbines. In
addition, the Company has been favorably impacted by its success in marketing
Haynes 230 to European turbine manufacturers as a replacement for competing
alloys.
Sales to the FGD market were unchanged at approximately $6.1 million in the
first nine months of fiscal 1996 and 1995. Volume decreased 20.0% as a result of
the absence of major orders from the Pacific Rim and Europe that were
experienced in the first half of fiscal 1995, but average selling price per
pound increased by 24.4%.
Sales to the oil and gas industry increased 57.6% to approximately $4.3
million in the first nine months of fiscal 1996 from sales of approximately $2.8
million for the first nine months of fiscal 1995. Sales to this market occurred
primarily in the third quarter for both fiscal years due to sour gas projects in
Mobile Bay off the coast of Alabama. Volume increased 14.8%, while average
selling price per pound increased 37.3% due primarily to a favorable product
mix.
Sales to other markets decreased by 35.1% to approximately $18.4 million for
the first nine months of fiscal 1996 from approximately $28.4 million in the
first nine months of fiscal 1995, as a result of a 53.1% decrease in volume,
which was only partially offset by a 38.3% increase in average selling price per
pound. The Company benefitted from a one-time order of approximately $3.5
million for a major waste treatment facility in Eastern Europe and a $6.1
million one-time order for defense-related recuperators on M-1 tanks in the
first nine months of fiscal 1995. Sales to the waste incineration market
increased as a result of greater use of the Company's products in high
temperature corrosion applications. In addition, increased use of Haynes HR-120
as a substitute for competing products (including stainless steels) in the
industrial heating market led to higher sales in that segment.
Cost of sales increased by approximately $11.4 million, or 9.1%, to
approximately $136.7 million for the first nine months of fiscal 1996 from
approximately $125.3 million in the same period in fiscal 1995. However, cost of
sales as a percent of net revenues decreased to 80.2% from 83.6% in the
respective periods as a result of higher average selling prices and a favorable
change in product mix. Although total volume declined in the first nine months
of fiscal 1996, volume in the higher-margin, high value-added product forms such
as sheet, wire and seamless tubulars increased in fiscal 1996 over fiscal 1995
levels. Increased capacity utilization in the higher-cost operations used to
manufacture these forms led to efficiencies that lowered the per unit cost.
Also, during the first nine months of fiscal 1995 raw material costs escalated,
thereby temporarily reducing margins until price increases could be fully
implemented. In the first nine months of fiscal 1996, these increased costs had
been fully passed through as reflected in higher selling prices.
28
<PAGE>
Selling and administrative expenses increased approximately $1.4 million, or
11.7%, to approximately $13.0 million for the first nine months of fiscal 1996
from approximately $11.6 million for the same period in fiscal 1995. However,
selling and administrative expenses declined as a percentage of net revenues
from 7.7% to 7.6%. The increase in absolute dollars was primarily a result of
salary increases and the payment of management bonuses of approximately $439,000
which were awarded for fiscal 1995 performance but paid in January 1996 and the
accrual of 1996 bonuses for which a similar accrual was not made in fiscal 1995.
In addition, sales and marketing personnel were hired as part of the Company's
effort to increase market coverage and customer contact.
Research and technical expenses increased approximately $243,000, or 10.6%,
to approximately $2.5 million for the first nine months of fiscal 1996 from
approximately $2.3 million for the same period in fiscal 1995, primarily as a
result of salary increases. Headcount increased as part of the Company's ongoing
commitment to technological leadership.
As a result of the above factors, the Company recognized operating income
for the first nine months of fiscal 1996 of approximately $18.2 million,
approximately $3.9 million of which was contributed by the Company's foreign
subsidiaries. For the first nine months of fiscal 1995, operating income was
approximately $10.8 million, of which approximately $3.2 million was contributed
by the Company's foreign subsidiaries.
Other costs, net decreased approximately $165,000, or 28.5%, to
approximately $413,000 for the first nine months of fiscal 1996 from
approximately $578,000 in the same period in fiscal 1995, primarily as a result
of foreign exchange gains in fiscal 1996 compared to foreign exchange losses in
fiscal 1995.
Interest expense increased approximately $219,000, or 1.4%, to approximately
$15.4 million for the first nine months of fiscal 1996 from approximately $15.2
million for the same period in fiscal 1995, due primarily to higher average
borrowings under the Existing Credit Facility.
The provision for income taxes of approximately $1.0 million for the first
nine months of fiscal 1996 increased by approximately $414,000 from
approximately $615,000 for the first nine months of fiscal 1995, due primarily
to taxes on foreign earnings against which the Company was unable to utilize its
U.S. federal income tax net operating loss carryforwards ("NOLs"). U.S.
operations generated taxable income of approximately $6.7 million during the
first nine months of fiscal 1996, which was offset by NOLs.
As a result of the above factors, the Company recognized net income for the
first nine months of fiscal 1996 of approximately $1.6 million, compared to a
net loss of approximately $5.4 million for the same period in fiscal 1995.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Net revenues increased approximately $51.3 million, or 34.1%, to
approximately $201.9 million in fiscal 1995 from approximately $150.6 million in
fiscal 1994, as a result of a 22.6% increase in volume to 16.3 million pounds
from approximately 13.3 million pounds and a 9.0% increase in average selling
price to $12.18 per pound from $11.17 per pound. Volume increases were due to
higher demand in the aerospace, chemical processing, waste incineration and
industrial heating industries. Alloy price increases were implemented in fiscal
1995 in response to rising raw material costs, which resulted in higher average
selling prices.
Sales to the aerospace market increased 43.0% to approximately $66.4 million
in fiscal 1995 from approximately $46.4 million in fiscal 1994 due to a 42.4%
increase in volume as reflected by the increased order backlog for commercial
aircraft and jet engines in fiscal 1995. In addition, the Company greatly
increased its sales to distributors serving the aerospace market by meeting
competitive prices for
29
<PAGE>
certain higher volume HTA products. Due to changes in product mix, the average
selling price per pound to the aerospace market in fiscal 1995 remained flat as
compared to fiscal 1994 despite generally higher alloy prices.
Sales to the chemical processing industry increased 44.1% to approximately
$72.2 million in fiscal 1995 from approximately $50.1 million in fiscal 1994 as
a result of higher spending in the United States and Europe for smaller
maintenance and improvement projects, as well as along the Pacific Rim for
certain large capacity expansion projects. Volume increased 22.0% and average
selling price per pound increased 18.2%. The large Pacific Rim projects were
very competitively bid upon, resulting in lower average selling prices per pound
for these projects as compared to other projects. The lower average selling
prices for these products were more than offset, however, by higher prices in
smaller projects. In addition, the Company was favorably impacted in fiscal 1995
by its shift from production of a low-priced duplex stainless steel that it had
manufactured for several years to other higher-priced, higher-margin products as
a result of stronger market demand for such products.
Sales to the LBGT market decreased 15.9% to approximately $14.3 million in
fiscal 1995 from approximately $17.0 million in fiscal 1994. During fiscal 1995,
a few of the larger LBGT manufacturers decreased purchases of alloys as they
reduced their inventories; as a result, the Company's volume decreased 18.8%.
Although Haynes 230 was gaining acceptance, especially in Europe, the Company
experienced temporary disruptions in sales of this product due to production and
delivery problems, and as a result the Company's fiscal 1995 average selling
price per pound was unchanged as compared to fiscal 1994.
Sales to the FGD market declined 35.3% to approximately $6.6 million in
fiscal 1995 from approximately $10.2 million in fiscal 1994 as a result of a
40.0% decrease in volume and a 7.7% increase in average selling price per pound.
Sharply lower domestic sales were partially offset by increased sales in Europe
and along the Pacific Rim. The weakness in domestic markets reflected lower
demand for wet scrubbing facilities for fossel fuel-fired electric generating
plants.
Demand in the oil and gas market has been weak and orders have been only
sporadic since fiscal 1992, when a major sour gas production project in the Gulf
of Mexico was completed. Sales increased 7.1% in fiscal 1995 as compared to
fiscal 1994 as a result of a 25.0% increase in volume, which was partially
offset by a 14.3% decrease in average selling price per pound.
Sales to other markets increased 69.4% to approximately $34.9 million in
fiscal 1995 from approximately $20.6 million in fiscal 1994 due primarily to a
shipment in fiscal 1995 to a large waste treatment project destined for
installation in Eastern Europe and the completion of a short-term contract in
support of the U.S. Army's M-1 tank program. These projects resulted in an 86.7%
increase in volume in fiscal 1995 as compared to fiscal 1994 and a 9.2% decrease
in average selling price per pound for the same periods.
Cost of sales decreased approximately $4.8 million, or 2.8%, to
approximately $167.2 million in fiscal 1995 from approximately $172.0 million in
fiscal 1994. Fiscal 1994 cost of sales included the write-off of goodwill as
discussed in Note 10 of the Notes to Consolidated Financial Statements. Cost of
sales as a percent of the Company's net revenues decreased to 82.8% from 89.6%
in the respective years, excluding the effect of the write-off of goodwill in
fiscal 1994 as discussed above. This was due primarily to increased capacity
utilization and increased profitability in the European subsidiaries. During the
first half of fiscal 1995, raw material costs escalated rapidly, resulting in
lower margins. As a result, the spread between average selling price and
material cost per pound was lower in fiscal 1995 than in fiscal 1994. This was
partially offset in the second half of fiscal 1995 as price increases for the
Company's alloys became effective. Higher volume reduced unit fixed costs and
led to improved operating efficiencies. In addition, the European subsidiaries
experienced improved volume and margins in fiscal 1995, reflecting improved
business conditions which further improved the Company's cost of sales as a
percent of net revenues.
30
<PAGE>
Selling and administrative expenses increased approximately $436,000, or
2.9%, to approximately $15.5 million in fiscal 1995 from approximately $15.0
million in fiscal 1994 primarily as a result of expenses which previously had
been reported as research and technology expenses in fiscal 1994 being
reclassified as selling and administrative expenses in fiscal 1995.
Research and technical expenses decreased approximately $581,000, or 16.0%,
to approximately $3.0 million in fiscal 1995 from approximately $3.6 million in
fiscal 1994 due in part to the reclassification of expenses noted above. In
addition, certain costs associated with engineering functions recorded as
manufacturing costs in fiscal 1995 were reported as research and technical
expenses in fiscal 1994.
As a result of the above factors, the Company recognized operating income in
fiscal 1995 of approximately $16.2 million as compared to an operating loss of
approximately $35.6 million in fiscal 1994. Operating loss in fiscal 1994 was
approximately $2.9 million prior to the write off of approximately $37.1 million
of goodwill as described in Note 10 of the Notes to Consolidated Financial
Statements. Operating income contributed by the Company's foreign subsidiaries
was approximately $5.3 million in fiscal 1995 and approximately $1.6 million in
fiscal 1994.
Other costs, net increased approximately $951,000, or 116.5%, to
approximately $1.8 million in fiscal 1995 from approximately $816,000 in fiscal
1994, primarily as a result of fluctuations in foreign exchange rates, which
accounted for approximately $150,000 of the increase, and approximately $478,000
in costs incurred associated with obtaining options to purchase certain of the
Company's Existing Subordinated Notes. The options expired in October 1995.
Interest expense increased approximately $317,000, or 1.6%, to approximately
$20.2 million in fiscal 1995 from approximately $19.9 million in fiscal 1994,
primarily as a result of higher average borrowings under the Existing Credit
Facility.
The provision for income taxes for fiscal 1995 was approximately $1.3
million compared to approximately $420,000 in fiscal 1994, due primarily to
taxes on foreign earnings against which the Company was unable to utilize its
NOLs.
As a result of the above factors, the Company reported a net loss of
approximately $6.8 million in fiscal 1995 compared to a net loss of
approximately $140.5 million in fiscal 1994, including SFAS 106 expense of
approximately $79.6 million.
YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO YEAR ENDED SEPTEMBER 30, 1993
Net revenues decreased approximately $11.9 million, or 7.3%, to
approximately $150.6 million in fiscal 1994 from approximately $162.5 million in
fiscal 1993 as a result of a 13.1% decrease in volume partially offset by a 6.6%
increase in average selling price per pound.
Sales to the aerospace market decreased 0.6% to approximately $46.4 million
in fiscal 1994 from approximately $46.7 million in fiscal 1993 despite slightly
higher domestic demand for jet engines. The Company did not benefit from the
higher domestic demand because of lost orders for generic alloys due to
uncompetitive pricing, as reflected by flat volume and average selling price per
pound. Sales to the European aerospace industry increased slightly in fiscal
1994 as a result of improved demand for jet engines in that market.
Sales to the chemical processing industry declined 4.0% to approximately
$50.1 million in fiscal 1994 from approximately $52.2 million in fiscal 1993.
This decrease was due to lower domestic sales partially offset by higher
European and Pacific Rim sales resulting from increased maintenance and process
improvement expenditures. Although the domestic market for chemical processing
was strong, the Company was negatively affected when one of its significant
distributors to this market outsourced a greater percentage of its purchases to
competing producers based on increased concern about the Company's financial
resources and its ability to maintain an uninterrupted supply of product.
31
<PAGE>
Sales to the LBGT market increased 34.9% to approximately $17.0 million in
fiscal 1994 from approximately $12.6 million in fiscal 1993 as a result of
higher global demand for this relatively inexpensive and clean source of
electric power and increased use of Haynes 230 as a replacement for other
competing materials in certain hot sections of the turbines. Consequently,
volume increased 33.3% and average selling price per pound increased 1.2%.
Sales for FGD applications decreased 41.4% to approximately $10.2 million in
fiscal 1994 from approximately $17.4 million in fiscal 1993 reflecting the
completion of many of the planned facilities built in response to Phase I Clean
Air Act requirements and a reduction in the number of utilities opting for wet
scrubbing of flue gases. However, increased sales along the Pacific Rim and in
Europe reflected increasing demand in those areas for wet scrubbing as a
response to more stringent environmental standards. Volume decreased 48.3%,
while average selling price per pound increased 13.3%.
Sales to the oil and gas industry decreased 61.8% to approximately $4.2
million in fiscal 1994 from approximately $11.0 million in fiscal 1993. Volume
decreased 63.6% due to reduced activity in sour gas production, while prices
increased 5.0%.
Sales to other markets increased 0.5% to approximately $20.6 million in
fiscal 1994 from approximately $20.5 million in fiscal 1993. Lower demand in
industrial heating applications was offset by increased demand in the waste
incineration market, particularly in Europe, where alloys were sold to a large
waste facility construction project. The average selling price per pound
increased 7.2%.
At September 30, 1994, the Company elected to write off the goodwill balance
from the 1989 Acquisition of approximately $37.1 million, as more fully
discussed in Note 10 to the Notes to Consolidated Financial Statements. Cost of
sales therefore increased approximately $34.9 million, or 25.4%, to
approximately $172.0 million in fiscal 1994 from approximately $137.1 million in
fiscal 1993. Cost of sales as a percent of the Company's net revenues, excluding
the write-off of goodwill, increased to 89.6% in fiscal 1994, compared to 84.4%
in fiscal 1993. Approximately 2.7% of this increase was due to the recognition
of additional non-cash charges pertaining to accrued post-retirement benefits,
with the remaining increase resulting from lower overall capacity utilization
and higher costs. Efforts to raise prices in fiscal 1994 resulted in a slight
improvement in the variable margin per pound of product sold, but the resulting
loss of volume more than offset this benefit.
Selling and administrative expenses increased approximately $470,000, or
3.2%, to approximately $15.0 million in fiscal 1994 from approximately $14.6
million in fiscal 1993, primarily because of higher salaries.
Research and technical expense was essentially flat in fiscal 1994 compared
to fiscal 1993, as a result of increases in salaries, offset by lower personnel
levels.
As a result of the above factors, the Company reported an operating loss in
fiscal 1994 of approximately $40.0 million, but generated operating loss of
approximately $2.9 million prior to the write-off of goodwill compared to
approximately $7.2 million of operating income in the prior year. The Company's
foreign subsidiaries contributed approximately $1.6 million and approximately
$2.0 million of operating income in fiscal 1994 and fiscal 1993, respectively.
Other cost, net increased approximately $416,000, or 104.0%, to
approximately $816,000 in fiscal 1994 from approximately $400,000 in fiscal
1993. This increase was primarily due to an increase in the provision for bad
debts.
Interest expenses increased approximately $1.0 million, or 5.3%, to
approximately $19.9 million in fiscal 1994 from approximately $18.9 million in
fiscal 1993 as a result of higher average borrowings under the Existing Credit
Facility and higher average interest rates.
32
<PAGE>
The provision for income taxes for fiscal 1994 was approximately $420,000
compared to a benefit from income tax of approximately $3.4 million in fiscal
1993. The provision for fiscal 1994 represents taxes on earnings generated from
the foreign subsidiaries. In connection with the Company's adoption of SFAS 106
and Statement of Financial Accounting Standards No. 109, "Accounting for Income
Tax" ("SFAS 109") effective October 1, 1993, the Company recognized a tax
benefit that eliminated the domestic deferred tax liabilities as of September
30, 1993. Due to the Company's net operating loss carryforward position as set
forth in the Consolidated Financial Statements, the Company was not able to
recognize any tax benefit resulting from the operating losses from domestic
operations incurred in fiscal 1994.
As a result of the above factors, the Company reported a net loss in fiscal
1994 before the effect of a change in accounting principle of approximately
$60.9 million (approximately $23.8 million before the goodwill write-off)
compared to a net loss of approximately $8.3 million in fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Refinancing, the Company will redeem the Existing
Notes, repay amounts outstanding under the Existing Credit Facility and pay the
related fees and expenses. The funds required to consummate the Refinancing will
be provided by the net proceeds to the Company from the Offering and borrowings
under the New Credit Facility. See "Use of Proceeds." The Company expects to
consummate the Refinancing during the fourth quarter of fiscal 1996. On a pro
forma basis, giving effect to the Refinancing as of June 30, 1996, total
indebtedness would have been approximately $166.6 million and stockholders'
deficit would have been approximately $130.3 million. The New Credit Facility
expires in 1999 if not renewed or extended. The Company will have no other
scheduled debt amortization payments until the Notes mature in 2004. Following
consummation of the Offering, the Company's principal source of liquidity, other
than funds generated from operations, will be the up to $50.0 million available
for revolving credit loans and letters of credit under the New Credit Facility.
The Company's near-term future cash needs will be driven by working capital
requirements, which are likely to increase, and planned capital expenditures.
Capital expenditures were approximately $801,000 in the first nine months of
fiscal 1996 and are expected to be approximately $1.5 million for all of fiscal
1996, approximately $7.0 million in fiscal 1997 and approximately $10.4 million
in fiscal 1998. Capital expenditures were approximately $56,000, $772,000 and
$1.9 million for fiscal 1993, 1994 and 1995, respectively. The increased capital
investments for fiscal 1997 and 1998 are designated for significant new
equipment additions and expenditures of approximately $3.2 million for new
integrated information systems. The primary benefits of this spending are
expected to be (i) the expansion of annual production capacity by 25% from
approximately 20.0 million pounds to approximately 25.0 million pounds, based on
the current product mix, (ii) improved production quality resulting in lower
internal rejection rates and rework costs and (iii) improved coordination among
sales, marketing and manufacturing personnel resulting in more efficient pricing
practices. The Company does not expect such capital expenditures to have a
material adverse effect on its long-term liquidity. Moreover, the Company does
not currently have any significant capital expenditure commitments. The Company
expects to fund its working capital needs and capital expenditures with cash
provided from operations, supplemented by borrowings under the New Credit
Facility. The Company believes these sources of capital will be sufficient to
fund these capital expenditures and working capital requirements, although there
can be no assurance that this will be the case. See "The Refinancing" and
"Description of New Credit Facility."
Net cash used in operations in the first nine months of fiscal 1996 was
approximately $3.0 million, as compared to approximately $1.5 million for the
same period in fiscal 1995. The negative cash flow from operations for the first
nine months of fiscal 1996 was primarily a result of increases of approximately
$14.1 million in inventories and approximately $5.8 million in accounts
receivable, which were offset by non-cash depreciation and amortization expenses
of approximately $6.9 million, positive
33
<PAGE>
net income of approximately $1.6 million, an increase in the accounts payable
and accrued expenses balance of approximately $9.3 million and other
adjustments. Cash used for investment activities declined from approximately
$1.4 million in the first nine months of fiscal 1995 to approximately $744,000
in the first nine months of fiscal 1996, primarily as a result of lower capital
expenditures. Cash provided by financing activities for the first nine months of
fiscal 1996 was approximately $3.7 million due to increased borrowings under the
Existing Credit Facility. Cash for the first nine months of fiscal 1996
decreased approximately $200,000, resulting in a June 30, 1996 cash balance of
approximately $4.8 million. Cash in the first nine months of fiscal 1995
decreased approximately $1.2 million, resulting in a cash balance of
approximately $4.5 million at June 30, 1995.
Net cash used in operations in fiscal 1995 was approximately $2.9 million,
as compared to approximately $12.8 million in fiscal 1994. Cash used in
operations in fiscal 1995 was primarily a result of a net loss of approximately
$6.8 million, an increase in accounts receivable of approximately $7.4 million
and an increase in inventories of approximately $6.5 million, offset by
depreciation and amortization of approximately $9.6 million, an increase in
accounts payable and accrued expenses of approximately $6.3 million and other
changes in working capital. The ending cash balance at September 30, 1995 was
approximately $5.0 million as compared to approximately $5.7 million at
September 30, 1994.
At June 30, 1996, the Company had net working capital of approximately $69.3
million as compared to approximately $62.6 million at September 30, 1995 and
approximately $60.2 million at September 30, 1994. The increase in working
capital of approximately $6.7 million in the first nine months of fiscal 1996
was a result of increases in accounts receivable and inventories of
approximately $5.8 million and $14.1 million, respectively, offset by an
increase of approximately $9.3 million in accounts payable and accrued expenses,
an increase of approximately $3.7 million in borrowings under the Existing
Credit Facility and a decrease of approximately $78,000 in income taxes payable.
The increase in working capital of approximately $2.4 million in fiscal 1995 is
a result of increases in accounts receivable and inventories of approximately
$7.6 million and $6.7 million, respectively, offset by an increase of
approximately $6.1 million in accounts payable and accrued expenses, an increase
of approximately $4.3 million in borrowings under the Existing Credit Facility
and an increase of approximately $752,000 in income taxes payable.
The Indenture and the New Credit Facility will contain a number of covenants
limiting the Company's access to capital, including covenants that restrict the
ability of the Company and its subsidiaries to (i) incur additional
Indebtedness, (ii) make certain restricted payments, (iii) engage in
transactions with affiliates, (iv) create liens on assets, (v) sell assets, (vi)
issue and sell preferred stock of subsidiaries, and (vii) engage in
consolidations, mergers and transfers.
The Company is currently conducting groundwater monitoring and post-closure
monitoring in connection with certain disposal areas, and has completed an
investigation of eight specifically identified solid waste management units, at
the Kokomo facility. The results of the investigation have been filed with the
U.S. Environmental Protection Agency ("EPA"). If the EPA or the Indiana
Department of Environmental Management ("IDEM") were to require corrective
action in connection with such disposal areas or solid waste management units,
there can be no assurance that the costs of such corrective action will not have
a material adverse effect on the Company's financial condition, results of
operations or liquidity. In addition, the Company has been named as a
potentially responsible party at two waste disposal sites. Although there can be
no assurance, based on current information, the Company believes that its
involvement at these two sites will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity. Expenses and
capital expenditures related to environmental compliance are expected to be
approximately $3.9 million for fiscal 1996 through fiscal 1998. See
"Business--Environmental Matters." Based on information currently available to
the Company, the Company is not aware of any information which would indicate
that litigation
34
<PAGE>
pending against the Company is reasonably likely to have a material adverse
effect on the Company's operations or liquidity. See "Business--Legal
Proceedings."
INFLATION
The Company believes that inflation has not had a material impact on its
operations.
INCOME TAX CONSIDERATIONS
For financial reporting purposes the Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. SFAS 109
requires a valuation allowance when it is more likely than not that some portion
or all of a deferred tax asset will not be realized. It further states that
forming a conclusion that a valuation allowance is not needed is difficult when
there is negative evidence such as cumulative losses in recent years. The
ultimate realization of all or part of the Company's deferred tax assets depends
upon the Company's ability to generate sufficient taxable income in the future.
At September 30, 1995, the Company had a net deferred tax asset
approximating $33.2 million consisting principally of temporary differences
relating to available NOLs and postretirement benefits other than pensions
offset by depreciation. Because of unfavorable operating results in recent
years, the Company has established a 100% valuation allowance to eliminate the
net deferred tax asset, resulting in a charge to operations and thereby reducing
equity. The Company will periodically evaluate its strategic and business plans
in light of evolving business conditions and actual operating results, and the
valuation allowance may be adjusted for future income expectations resulting
from that process.
As a result, the application of the SFAS 109 valuation allowance
determination process could result in recognition of significant income tax
provisions or benefits in a single interim or annual period due to actual
operating results and changes in future income expectations over several years.
Such tax provision or benefit effect could likely be material in the context of
the specific interim or annual financial reporting period in which changes in
judgment about extended future periods are reported. The SFAS 109 valuation
allowance determination process is a balance sheet oriented model and does not
have as its objective the periodic matching of pre-tax income or loss with the
related actual income tax effects.
If the Company's principal markets continue to exhibit improvement, and such
improvement is manifested in positive trends in the value and profitability of
customer orders and backlog, additional tax benefits may be reported in future
periods as the valuation allowance is reduced. Alternatively, to the extent that
the Company's future profit expectations remain static or are diminished, tax
provisions may be charged against pretax income. In either event, such valuation
allowance-related tax provisions or benefits should not necessarily be viewed as
recurring. Further, the amount of current taxes that the Company expects to pay
for the foreseeable future is minimal, and the Company's carryforward tax
attributes are viewed by management as a significant competitive advantage to
the extent that profits can be sheltered effectively from tax and re-employed in
the growth of the business.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," is
effective for the year ending September 30, 1996. In the opinion of management,
this statement will not impact the Company's financial position or results of
operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," is effective for the year ending September 30, 1997. The
Company has not decided how it intends to apply the accounting and disclosure
provisions of this statement.
35
<PAGE>
BUSINESS
GENERAL
The Company develops, manufactures and markets technologically advanced,
high performance alloys primarily for use in the aerospace and chemical
processing industries. The Company's products are high temperature alloys and
corrosion resistant alloys. The Company's HTA products are used by manufacturers
of equipment that is subjected to extremely high temperatures, such as jet
engines for the aerospace industry, gas turbine engines used for power
generation, and waste incineration and industrial heating equipment. The
Company's CRA products are used in applications that require resistance to
extreme corrosion, such as chemical processing, power plant emissions control
and hazardous waste treatment. Based on available industry data, the Company
believes that it is one of three leading worldwide producers of high performance
alloy products in sheet, coil and plate forms, which in the aggregate
represented approximately 64% of the Company's net revenues in fiscal 1995. In
addition, the Company produces its alloy products as seamless and welded
tubulars, and in bar, billet and wire forms.
High performance alloys are characterized by highly engineered, often
proprietary, metallurgical formulations primarily of nickel, cobalt and other
metals with complex physical properties. The complexity of the manufacturing
process for high performance alloys is reflected in the Company's relatively
high average selling price of approximately $12.18 per pound for fiscal 1995,
compared to the average selling price of other metals such as carbon steel
sheet, stainless steel sheet and aluminum, which currently range from $0.17 to
$1.25 per pound. Demanding end-user specifications, a multi-stage manufacturing
process and the technical sales, marketing and manufacturing expertise required
to develop new applications combine to create significant barriers to entry in
the high performance alloy industry. The Company derived approximately 30% of
its fiscal 1995 net revenues from products that are protected by United States
patents and derived an additional approximately 15% of its fiscal 1995 net
revenues from sales of products that are not patented, but for which the Company
has limited or no competition.
CORE COMPETENCIES
Based upon its customer relationships in the aerospace and chemical
processing industries, the Company believes it has a leadership position in the
high performance alloy industry and has a strong reputation for quality and
reliability. The Company's core competencies include the following:
. Metallurgical expertise. With over 50 years of product research and
development in the high performance alloy industry, the Company believes
it is a leader in the development and manufacturing technology of nickel-
and cobalt-based alloys. Over the last seven years, the Company's
technical programs have yielded seven new proprietary alloys, five of
which are protected by United States patents. Three additional United
States patents regarding the new proprietary alloys are pending. The
Company currently maintains a total of 43 United States patents and
approximately 180 foreign counterpart patents targeted at countries with
significant existing or potential markets for the patented products. As a
result of the Company's research and development efforts, Chemical
Processing magazine recognized the Company's products five times in the
last twelve years as having made significant contributions to the chemical
processing industry.
. Technical marketing support. Through the combined efforts of the Company's
direct sales organization, including its four domestic Company-owned
service centers and its research and development group, the Company works
closely with its customers in order to identify, develop and support
diverse applications for its alloys and to anticipate customers' future
materials requirements. The Company believes this integrated approach is
unique in the high performance alloy industry.
36
<PAGE>
. Flexible manufacturing capabilities. The Company's four-high Steckel mill,
in conjunction with its sophisticated, multi-stage, melting and refining
operation, produces a broad array of sheet, coil and plate products made
to exacting specifications. The Company also operates a three-high mill
and a two-high mill that enable the Company to produce small batch orders
that generally are not practical or economical for competitors to
manufacture.
BUSINESS STRATEGY
The Company intends to capitalize on its core competencies to implement its
business strategy, which includes the following principal elements:
Develop new applications for existing alloys. The Company actively seeks to
develop new applications and new market segments for its existing products. The
sales force, in coordination with the research and development staff, works
closely with end-users to identify applications for the Company's existing
products that address its customers' specialized needs. Management believes that
new product applications represent a significant opportunity for revenue growth.
The Company has identified and is pursuing new applications for its alloys,
including applications for the automotive, medical and instrumentation
industries.
Continue customer-driven new product development. The Company emphasizes
customer contact and an awareness of customer needs in its product development
process. The Company believes that new opportunities in end-markets are best
identified through close contact with customers. This approach allows the
Company to focus its research and development efforts and enables the Company's
products to be specified for use in the production of customers' products.
Expand export sales. The Company believes there are significant
opportunities to increase its sales in international markets. In fiscal 1995,
approximately 39% of the Company's net revenues were outside the United States,
primarily in European markets where the Company has established sales and
manufacturing facilities. In addition, the Company is pursuing significant
growth opportunities in other regions, particularly the Pacific Rim.
Increase productivity through strategic equipment investment. The Company
believes that future investment in plant and equipment will allow it to increase
capacity and produce higher quality products at reduced costs. Continuing
improved market conditions are expected to enable the Company to increase its
investment in plant and equipment above the amounts expended in recent years.
During fiscal 1996 through 1998, the Company anticipates investing approximately
$16.1 million in new plant and equipment and approximately $3.2 million in new
integrated information systems. The principal benefits of these investments are
expected to be (i) the expansion of annual production capacity by 25% from
approximately 20.0 million pounds to approximately 25.0 million pounds, based on
the current product mix, (ii) improved production quality resulting in lower
internal rejection rates and rework costs and (iii) improved coordination among
sales, marketing and manufacturing personnel resulting in more efficient pricing
practices.
PRODUCTS
The alloy market consists of four primary segments: stainless steel, super
stainless steel, nickel alloys and high performance alloys. The Company competes
exclusively in the high performance alloy segment, which includes HTA and CRA
products. The Company believes that the high performance alloy segment
represents less than 10% of the total alloy market. In fiscal 1995, HTA products
and CRA products accounted for 55% and 45%, respectively, of the Company's net
revenues.
HTA products are used primarily in manufacturing components used in the hot
sections of jet engines. Stringent safety and performance standards in the
aerospace industry result in development lead times typically as long as eight
to ten years in the introduction of new aerospace-related market
37
<PAGE>
applications for HTA products. However, once a particular new alloy is shown to
possess the properties required for a specific application in the aerospace
industry, it tends to remain in use for extended periods. HTA products are also
used in gas turbine engines produced for use in applications such as naval and
commercial vessels, electric power generators, power sources for offshore
drilling platforms, gas pipeline booster stations and emergency standby power
stations.
CRA products are used in a variety of applications, such as chemical
processing, power plant emissions control, hazardous waste treatment and sour
gas production. Historically, the chemical processing industry has represented
the largest end-user segment for CRA products. Due to maintenance, safety and
environmental considerations, management of the Company believes this industry
represents an area of potential long-term growth for the Company. Unlike
aerospace applications within the HTA product market, the development of new
market applications for CRA products generally does not require long lead times.
High Temperature Alloys. The following table sets forth information with
respect to certain of the Company's significant high temperature alloys:
<TABLE>
<CAPTION>
END MARKETS AND APPLICATIONS
ALLOY AND YEAR INTRODUCED (1) FEATURES
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Haynes HR-160 (1990) (2) Waste incineration/CPI-boiler Good resistance to
tube shields sulfidation at high
temperatures
Haynes 242 (1990) (2) Aero-seal rings High strength, low expansion
and good fabricability
Haynes HR-120 (1990) (2) Industrial Good strength-to-cost ratio
heating-heat-treating as compared to competing
baskets alloys
Haynes 230 (1984) (2) Aero/LBGT-ducting Good combination of strength,
stability, oxidation
resistance and fabricability
Haynes 214 (1981) (2) Aero-honeycomb seals Good combination of oxidation
resistance and fabricability
among nickel-based alloys
Haynes 188 (1968) Aero-burner cans, High strength, oxidation
after-burner components resistant cobalt-based alloy
Haynes 625 (1964) Aero/CPI-ducting, tanks, Good fabricability and
vessels, weld overlays general corrosion resistance
Haynes 263 (1960) Aero/LBGT-components for gas Good ductibility and high
turbine hot gas exhaust pan strength at temperatures up
to 1,600 deg. F
Haynes 718 (1955) Aero-ducting, vanes, nozzles Weldable high strength alloy
with good fabricability
Hastelloy X (1954) Aero/LBGT-burner cans, Good high temperature
transition ducts strength at relatively low
cost
Haynes Ti3-2.5 (1950) Aero-aircraft hydraulic and Light weight, high strength
fuel systems components titanium-based alloy
</TABLE>
- ------------
(1) "Aero" refers to aerospace; "LBGT" refers to land-based gas turbines; "CPI"
refers to the chemical processing industry.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
The higher volume HTA products, including Haynes 625, Haynes 718 and
Hastelloy X, are generally considered industry standards, especially in the
manufacture of aircraft and LBGT. These products have been used in such
applications since the 1950s and because of their widespread use have been most
subject to competitive pricing pressures. In fiscal 1995, sales of these HTA
products accounted for 22% of the Company's net revenues.
The Company also produces and sells cobalt-based alloys introduced over the
last three decades, which are more highly specialized and less price competitive
than nickel-based alloys. Haynes 188 and Haynes 263 are the most widely used of
the Company's cobalt-based products and accounted for 8% of the Company's net
revenues in fiscal 1995. Three of the more recently introduced HTA products,
38
<PAGE>
Haynes 242, Haynes 230 and Haynes 214, initially developed for the aerospace and
LBGT markets, are still patent-protected and together accounted for 6% of the
Company's net revenues in fiscal 1995. These newer alloys are gaining acceptance
for applications in industrial heating and waste incineration.
Haynes HR-160 and Haynes HR-120 were introduced in fiscal 1990 and targeted
for sale in industrial heat treating applications. Haynes HR-160 is a higher
priced cobalt-based alloy designed for use when the need for long-term
performance outweighs initial cost considerations. Potential applications for
Haynes HR-160 include use in key components in waste incinerators, chemical
processing equipment, mineral processing kilns and fossil fuel energy plants.
Haynes HR-120 is a lower priced, iron-based alloy and is designed to replace
competitive alloys not manufactured by the Company that may be slightly lower in
price but also less effective. In fiscal 1995, these two alloys accounted for 5%
of the Company's net revenues.
The Company also produces seamless titanium tubing for use as hydraulic
lines in airframes and as bicycle frames. During fiscal 1995, sales of these
products accounted for 4% of the Company's net revenues.
Corrosion Resistant Alloys. The following table sets forth information with
respect to certain of the Company's significant corrosion resistant alloys:
<TABLE>
<CAPTION>
END MARKETS AND APPLICATIONS
ALLOY AND YEAR INTRODUCED (1) FEATURES
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Hastelloy C-2000 (1995) (2) CPI-tanks, mixers, piping Versatile alloy with good
resistance to uniform
corrosion
Hastelloy B-3 (1994) (2) CPI-acetic acid plants Better fabrication
characteristics compared to
other nickel-molybdenum
alloys
Hastelloy D-205 (1993) (2) CPI-plate heat exchangers Corrosion resistance to hot
sulfuric acid
Ultimet (1990) (2) CPI-pumps, vales Wear and corrosion resistant
nickel-based alloy
Hastelloy G-50 (1989) (2) Oil and gas-sour gas tubulars Good resistance to down hole
corrosive environments
Hastelloy C-22 (1985) (2) CPI/FGD-tanks, mixers, piping Resistance to localized
corrosion and pitting
Hastelloy G-30 (1985) (2) CPI-tanks, mixers, piping Lower cost alloy with good
corrosion resistance in
phosphoric acid
Hastelloy B-2 (1974) CPI-acetic acid Resistance to hydrochloric
acid and other reducing
acids
Hastelloy C-4 (1973) CPI-tanks, mixers, piping Good thermal stability
Hastelloy C-276 (1968) CPI/FGD/oil and gas-tanks, Broad resistance to many
mixers, piping environments
</TABLE>
- ------------
(1) "CPI" refers to the chemical processing industry; "FGD" refers to flue gas
desulfurization.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
During fiscal 1995, sales of the CRA alloys Hastelloy C-276, Hastelloy C-22
and Hastelloy C-4 accounted for approximately 31% of the Company's net revenues.
Hastelloy C-276, introduced by the Company in 1968, is widely recognized as a
standard for corrosion protection in the chemical processing industry and is
also used extensively for FGD and oil and gas exploration and production
applications. Hastelloy C-22, a proprietary alloy of the Company, was introduced
in 1985 as an improvement on Hastelloy C-276 and is currently sold to the
chemical processing and FGD markets for essentially the same applications as
Hastelloy C-276. Hastelloy C-22 offers greater and more versatile corrosion
resistance and therefore has gained market share at the expense of the
non-proprietary Hastelloy C-276. Hastelloy C-22's improved corrosion resistance
has led to increased sales in semiconductor gas handling systems, pharmaceutical
manufacturing and waste treatment applications. Hastelloy C-4 is
39
<PAGE>
specified in many chemical processing applications in Germany and is sold almost
exclusively to that market.
The Company also produces alloys for more specialized applications in the
chemical processing industry and other industries. For example, Hastelloy B-2
was introduced in 1970 for use in the manufacture of equipment utilized in the
production of acetic acid and ethyl benzine and is still sold almost exclusively
for those purposes. Due to its limited use and difficult manufacturing process,
there is little competition for sales of this material. Hastelloy B-3 was
developed for the same applications and has superior properties, as well as
greater ease in fabrication. The Company expects Hastelloy B-3 to eventually
replace Hastelloy B-2. Hastelloy G-30 is used primarily in the production of
superphosphoric acid and fluorinated aromatics. Hastelloy G-50 has gained
acceptance as a lower priced alternative to Hastelloy C-276 for production of
tubing for use in sour gas wells. These more specialized products accounted for
approximately 10% of the Company's net revenues in fiscal 1995.
The Company's patented Ultimet is used in a variety of industrial
applications that result in material degradation by "corrosion-wear." Ultimet is
designed for applications where conditions require resistance to corrosion and
wear and is currently being tested in spray nozzles, fan blades, filters, bolts,
rolls, pump and valve parts where these properties are critical. Hastelloy
D-205, introduced in 1993, is designed for use in handling hot concentrated
sulfuric acid and other highly corrosive substances.
The Company believes that its most recently introduced alloy, Hastelloy
C-2000, which is designed to improve upon Hastelloy C-22, provides better
overall corrosion resistance and versatility than any other readily available
CRA. Hastelloy C-2000, which the Company expects will be used extensively in the
chemical processing industry, can be used in both oxidizing and reducing
environments.
END MARKETS
Aerospace. The Company has maintained a leading position in the aerospace
market for HTA products since it entered the market in the late 1930s, as
evidenced by the Company's development of numerous proprietary alloys for and
numerous customers in this market. The Company sold products to approximately
400 customers in this segment in fiscal 1995, and no one customer accounted for
more than 2% of the Company's net revenues. Representative aerospace customers
include General Electric Company, Rolls-Royce plc, Pratt & Whitney and SNECMA
Group.
Customers in the aerospace markets tend to be the most demanding with
respect to meeting specifications within very low tolerances and achieving new
product performance standards. Stringent safety standards and continuous efforts
to reduce equipment weight require close coordination between the Company and
its customers in the selection and development of HTA products. As a result,
sales to aerospace customers tend to be made through the Company's direct sales
force. Unlike the FGD and oil and gas production industries, where large,
competitively bid projects can have a significant impact on demand and prices,
demand for the Company's products in the aerospace industry is based on the new
and replacement market for jet engines and the maintenance needs of operators of
commercial and military aircraft. The hot sections of jet engines are subjected
to substantial wear and tear and accordingly require periodic maintenance and
replacement. This maintenance-based demand, while potentially volatile, is
generally less subject to wide fluctuations than demand in the FGD and sour gas
production industries.
Chemical Processing. The chemical processing industry segment represents a
large base of customers with diverse CRA applications. The Company sells its CRA
products to hundreds of chemical processing customers worldwide and no one
customer in this industry accounted for over 2% of the Company's net revenues in
fiscal 1995. Representative customers include E.I. DuPont de Nemours and Co.,
Alfa-Laval Thermal A.B. and Monsanto Company. CRA products supplied by the
Company have been used in the chemical processing industry since the early
1930s.
40
<PAGE>
Demand for the Company's products in this industry is based on the level of
maintenance, repair and expansion of existing chemical processing facilities as
well as the construction of new facilities. The Company believes the extensive
worldwide network of Company-owned service centers and independent distributors
is a competitive advantage in marketing its CRA products to this market. Sales
of the Company's products in the chemical processing industry tend to be more
stable than the aerospace, FGD and oil and gas markets. Increased concerns
regarding the reliability of chemical processing facilities, their potential
environmental impact and safety hazards to their personnel have led to an
increased demand for more sophisticated alloys, such as the Company's CRA
products.
Land-Based Gas Turbines. The LBGT industry represents a growing market, with
demand for the Company's products driven by the construction of cogeneration
facilities and electric utilities operating electric generating facilities.
Demand for the Company's alloys in the LBGT industry has also been driven by
concerns regarding lowering emissions from generating facilities powered by
fossil fuels. LBGT generating facilities are gaining acceptance as clean,
low-cost alternatives to fossil fuel-fired electric generating facilities.
Significant customers include ABB Asea Brown Boveri, A.G., General Electric
Company and Westinghouse Electric Corporation.
Flue Gas Desulfurization. The FGD industry has been driven by both
legislated and self-imposed standards for lowering emissions from fossil
fuel-fired electric generating facilities. In the United States, the Clean Air
Act mandates a two-phase program aimed at significantly reducing SO2 emissions
from electric generating facilities powered by fossil fuels by 2000. Canada and
its provinces have also set goals to reduce emissions of SO2 over the next
several years. Phase I of the Clean Air Act program affected approximately 100
steam-generating plants representing 261 operating units fueled by fossil fuels,
primarily coal. Of these 261 units, 25 units were retrofitted with FGD systems
while the balance opted mostly for switching to low sulfur coal to achieve
compliance. The market for FGD systems peaked in 1992 at approximately $1.1
billion, and then dropped sharply in 1993 to a level of approximately $174.0
million due to a curtailment of activity associated with Phase I. Phase II
compliance begins in 2000 and affects 785 generating plants with more than 2,100
operating units. Options available under the Clean Air Act to bring the targeted
facilities into compliance with Phase II SO2 emissions requirements include fuel
switching, clean coal technologies, purchase of SO2 allowances, closure of
facilities and off-gas scrubbing utilizing FGD technology. Significant FGD
customers include PSI Energy, Inc., Louisville Gas and Electric Company and
Houston Lighting and Power Company.
Oil and Gas. The Company also sells its products for use in the oil and gas
industry, primarily in connection with sour gas production. Sour gas contains
extremely corrosive materials and is produced under high pressure, necessitating
the use of corrosion resistant materials. The demand for sour gas tubulars is
driven by the rate of development of sour gas fields. The factors influencing
the development of sour gas fields include the price of natural gas and the need
to commence drilling in order to protect leases that have been purchased from
either the federal or state governments. As a result, competing oil companies
often place orders for the Company's products at approximately the same time,
adding volatility to the market. This market was very active in 1991, especially
in the offshore sour gas fields in the Gulf of Mexico, but demand for the
Company's products declined significantly thereafter. More recently there has
been less drilling activity and more use of lower performing alloys, which
together have resulted in intense price competition. Demand for the Company's
products in the oil and gas industry is tied to the global demand for natural
gas.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Other industries to which the Company
sells its HTA products include waste incineration, industrial heat treating,
automotive and instrumentation. Other industries to which the Company sells its
CRA products include automotive, medical and instrumentation. Demand in these
markets for many of the Company's lower volume proprietary alloys has grown in
recent periods. For example, incineration of municipal, biological, industrial
and hazardous waste products typically produces very corrosive conditions that
demand high performance alloys. Markets capable of providing growth are being
driven by increasing performance, reliability and service life requirements for
products used in these markets which could provide further applications for the
Company's products.
41
<PAGE>
SALES AND MARKETING
Providing technical assistance to customers is an important part of the
Company's marketing strategy. The Company provides analyses of its products and
those of its competitors for its customers. These analyses enable the Company to
evaluate the performance of its products and to make recommendations as to the
substitution of Company products for other products in appropriate applications,
enabling the Company's products to be specified for use in the production of
customers' products. The market development engineers, six of whom have doctoral
degrees in metallurgy, are assisted by the research and development staff in
directing the sales force to new opportunities. The Company believes its
combination of direct sales, technical marketing and research and development
customer support is unique in the high performance alloy industry. This activity
allows the Company to obtain direct insight into customers' alloy needs and
allows the Company to develop novel proprietary alloys that provide solutions to
customers' problems.
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers, three
wholly-owned European subsidiaries and sales agents serving the Pacific Rim who
operate on a commission basis. Approximately 73% of the Company's net revenues
in fiscal 1995 was generated by the Company's direct sales organization. The
remaining 27% of the Company's fiscal 1995 net revenues was generated by
independent distributors and licensees in the United States, Europe and Japan,
some of whom have been associated with the Company for over 25 years. The
following table sets forth the approximate percentage of the Company's fiscal
1995 net revenues obtained through each of the Company's distribution channels.
<TABLE>
<CAPTION>
DOMESTIC FOREIGN TOTAL
-------- ------- -----
<S> <C> <C> <C>
Company sales office/direct........................... 31% 13% 44%
Company-owned service centers......................... 12 17 29
Independent distributors/sales agents................. 18 9 27
-- --
-----
Total............................................. 61% 39% 100%
-- --
-- --
-----
-----
</TABLE>
A specific field sales person is assigned to maintain contact with each
account. Internal marketing and inside sales personnel support the field sales
organization and also maintain direct contact with customers. Sales management
personnel also retain some direct sales responsibility. Smaller orders that are
maintenance related are usually supplied from either the Company-owned service
centers or independent distributors. Such distributors usually have their own
sales staffs and, although some represent other suppliers, most purchase the
majority of their alloys from the Company. As with major accounts, a specific
sales representative is assigned to each major distributor. The Company believes
its sales force's extensive contact with its customers is more effective than
less direct marketing approaches.
The top twenty customers not affiliated with the Company accounted for
approximately 37% of the Company's net revenues in fiscal 1995. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for 11.7% of the Company's net revenues in fiscal 1995. No
other customer of the Company accounted for more than 10% of the Company's net
revenues in fiscal 1995.
The Company's foreign and export sales were approximately $53.4 million,
$55.7 million and $79.6 million for fiscal 1993, 1994 and 1995, respectively,
and approximately $64.8 million for the nine months of fiscal 1996. Additional
information concerning foreign operations and export sales is set forth in Note
12 of the Notes to Consolidated Financial Statements appearing elsewhere herein.
42
<PAGE>
MANUFACTURING PROCESS
High performance alloys require a lengthier, more complex melting process
and are more difficult to manufacture than lower performance alloys, such as
stainless steels. The alloying elements in high performance alloys must be
highly refined, and the manufacturing process must be tightly controlled to
produce precise chemical properties. The resulting alloyed material is more
difficult to process because, by design, it is more resistant to deformation.
Consequently, high performance alloys require that greater force be applied when
hot or cold working and are less susceptible to reduction or thinning when
rolling or forging, resulting in more cycles of rolling, annealing and pickling
than a lower performance alloy to achieve proper dimensions. Certain alloys may
undergo as many as 40 distinct stages of melting, remelting, annealing, forging,
rolling and pickling over a period of weeks before they achieve the
specifications required by a customer. The Company manufactures products in
sheet, plate, tubular, billet, bar and wire forms, which represented 46%, 24%,
13%, 11%, 4% and 2%, respectively, of total volume sold in fiscal 1995 (after
giving effect to the conversion of billet to bar by the Company's U.K.
subsidiary).
The manufacturing process begins with raw materials being combined, melted
and refined in a precise manner to produce the chemical composition specified
for each alloy. For most alloys, this molten material is cast into electrodes
and additionally refined through electroslag remelting. The resulting ingots are
then forged or rolled to an intermediate shape and size depending upon the
intended final product. Intermediate shapes destined for flat products are then
sent through a series of hot and cold rolling, annealing and pickling operations
before being cut to final size.
The Argon Oxygen Decarburization ("AOD") gas controls in the Company's
primary melt facility remove carbon and other undesirable elements, thereby
allowing more tightly-controlled chemistries which in turn produce more
consistent properties in the alloys. The AOD gas control system also allows for
statistical process control monitoring in real time to improve product quality.
The Company has a four-high Steckel mill for use in hot rolling material.
The four-high mill was installed in 1982 at a cost of approximately $60.0
million and is one of only two such mills in the high performance alloy
industry. The mill is capable of generating approximately 12.0 million pounds of
separating force and rolling plate up to 72 inches wide. The mill includes
integrated computer controls (with automatic gauge control and programmed
rolling schedules), two coiling Steckel furnaces and five heating furnaces.
Computer-controlled rolling schedules for each of the hundreds of combinations
of alloy shapes and sizes the Company produces allow the mill to roll numerous
widths and gauges to exact specifications without stoppages or changeovers.
The Company also operates a three-high rolling mill and a two-high rolling
mill, each of which is capable of custom processing much smaller quantities of
material than the four-high mill. These mills provide the Company with
significant flexibility in running smaller batches of varied products in
response to customer requirements. The Company believes the flexibility provided
by the three-high and two-high mills gives the Company an advantage over its
major competitors in obtaining smaller specialty orders.
BACKLOG
As of June 30, 1996, the Company's backlog orders aggregated approximately
$57.5 million, compared to approximately $49.9 million at September 30, 1995,
and approximately $41.5 million at September 30, 1994. The increase in backlog
orders is primarily due to an increase in orders for chemical processing and
aerospace products worldwide. Substantially all orders in the backlog at June
30, 1996 are expected to be shipped within the twelve months beginning July 1,
1996. Due to the cyclical nature of order entry experienced by the Company,
there can be no assurance that order entry will continue at current levels. See
"Risk Factors--Industry Cyclicality; Fluctuations in Operating
43
<PAGE>
Results" and "Risk Factors--Competition." The historical and current backlog
amounts shown in the following table are also indicative of relative demand over
the past few years.
HAYNES BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
[GRAPH]
1993 1994 1995 1996
---- ---- ---- ----
1ST $41.5 $29.5 $49.7 $61.2
2ND $38.9 $35.5 $64.8 $61.9
3RD $31.5 $38.0 $55.8 $57.5
4TH $31.1 $41.5 $49.9 $ -
RAW MATERIALS
Nickel is the primary material used in the Company's alloys. Each pound of
alloy contains, on average, 0.48 pounds of nickel. Other raw materials include
cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin raw
material, purchased scrap and internally produced scrap. The significant sources
of cobalt are the countries of Zambia, Zaire and Russia; all other raw materials
used by the Company are available from a number of alternative sources.
Since most of the Company's products are produced to specific orders, the
Company purchases materials against known production schedules. Materials are
purchased from several different suppliers, through consignment arrangements,
annual contracts and spot purchases. These arrangements involve a variety of
pricing mechanisms, but the Company generally can establish selling prices with
reference to known costs of materials, thereby reducing the risk associated with
changes in the cost of raw materials. The Company maintains a policy of pricing
its products at the time of order placement. As a result, rapidly escalating raw
material costs during the period between the time the Company receives an order
and the time the Company purchases the raw materials used to fill such order,
which has averaged approximately 30 days in recent months, can negatively affect
profitability even though the high performance alloy industry has generally been
able to pass raw material price increases through to its customers.
Raw material costs account for a significant portion of the Company's cost
of sales. The prices of the Company's products are based in part on the cost of
raw materials, a significant portion of which is nickel. The Company covers
approximately half its open market exposure to nickel price changes through
hedging activities through the London Metals Exchange. See "Risk Factors--Raw
Material
44
<PAGE>
Price Fluctuations." The following table sets forth the average per pound prices
for nickel as reported by the London Metals Exchange for the fiscal years
indicated.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, AVERAGE PRICE
- ---------------------------------------------- -------------
<S> <C>
1988....................................... $ 4.12
1989....................................... 5.77
1990....................................... 4.29
1991....................................... 4.21
1992....................................... 3.48
1993....................................... 2.53
1994....................................... 2.54
1995....................................... 3.66
</TABLE>
RESEARCH AND TECHNICAL DEVELOPMENT
The Company believes it is a leader in the development and manufacturing
technology of nickel-and cobalt-based alloys. As of June 30, 1996, the research
and technical development staff consisted of 37 persons, 15 of whom have
engineering or science degrees, including six with doctoral degrees, with the
majority of degrees in the field of metallurgical engineering.
Research and technical development costs relate to efforts to develop new
proprietary alloys, to improve current or develop new manufacturing methods, to
provide technical service to customers, to maintain quality assurance methods
and to provide metallurgical training to engineer and non-engineer employees.
The Company spent approximately $3.6 million, $3.6 million, $3.0 million and
$2.5 million for research and technical development activities for fiscal 1993,
1994 and 1995 and for the first nine months of fiscal 1996, respectively.
In the research area, exploratory alloy development projects are focused on
new CRA products for hydrofluoric and phosphoric acid service. The research and
technical group is also preparing for volume production of a new alloy,
Hastelloy C-2000, to be used as a construction material in the chemical
processing industry. Engineering projects include manufacturing process
development, welding development and application support for two large volume
projects involving the LBGT and steelmaking industries. The Company is also
developing a computerized database management system to better manage its
corrosion, high temperature and mechanical property data.
The Company's research facilities are located at the Company's Kokomo
facility and consist of 90,000 square feet of offices and laboratories, as well
as an additional 90,000 square feet of paved storage area. The Company has ten
fully equipped laboratories, including a mechanical test lab, a metallographic
lab, an electron microscopy lab, a corrosion lab and a high temperature lab,
among others. These facilities also contain a reduced scale, fully equipped melt
shop and process lab.
Over the last seven years, the Company's technical programs have yielded
seven new proprietary alloys and seven United States patents, with an additional
three United States patent applications pending. The Company currently maintains
a total of 43 United States patents and approximately 180 foreign counterpart
patents targeted at countries with significant or potential markets for the
patented products. In fiscal 1995, approximately 30% of the Company's net
revenues was derived from the sale of patented products and an additional 39%
was derived from the sale of products for which patents formerly held by the
Company had expired. While the Company believes its patents are important to its
competitive position, significant barriers to entry continue to exist beyond the
expiration of any patent period. Five of the alloys considered by management to
be of future commercial significance, Ultimet, Hastelloy C-22, Haynes 230,
Hastelloy G-30 and Hastelloy G-50, are protected by United States patents that
continue until the years 2008, 2002, 2001, 2000 and 1996, respectively.
45
<PAGE>
COMPETITION
The high performance alloy market is a highly competitive market in which
eight to ten producers participate in various product forms. The Company faces
strong competition from domestic and foreign manufacturers of both the Company's
high performance alloys and other competing metals. The Company's primary
competitors include Inco Alloys International, Inc., a subsidiary of Inco
Limited, Allegheny Ludlum Corporation and Krupp VDM GmbH. Prior to fiscal 1994,
this competition, coupled with declining demand in several of the Company's key
markets, had led to significant erosion in the price for certain of the
Company's products. The Company may face additional competition in the future to
the extent new materials are developed, such as plastics or ceramics, that may
be substituted for the Company's products. See "Risk Factors--Competition."
EMPLOYEES
As of June 30, 1996, the Company had approximately 925 employees. All
eligible hourly employees at the Kokomo plant are covered by a collective
bargaining agreement with the United Steelworkers of America ("USWA") which was
ratified on June 11, 1996 and which expires on June 11, 1999. As of June 30,
1996, 487 employees of the Kokomo facility were covered by the collective
bargaining agreement. The Company began to negotiate the terms of a new contract
with USWA in April 1996. The Company has not experienced a strike at the Kokomo
plant since 1967. None of the employees of the Company's Arcadia or Openshaw
plants are represented by a labor union. Management considers its employee
relations in each of the facilities to be satisfactory.
PROPERTIES
The Company's facilities, each of which is owned by the Company, and the
products provided at each facility, are as follows:
Kokomo, Indiana--all product forms, other than tubular goods.
Arcadia, Louisiana--welded and seamless tubular goods.
Openshaw, England--bar and billet for the European market.
The Kokomo plant, the primary production facility, is located on
approximately 236 acres of industrial property and includes over one million
square feet of building space. There are three sites consisting of a
headquarters and research lab; melting and annealing furnaces, forge press and
several hot mills; and the four-high mill and sheet product cold working
equipment, including two cold strip mills. All alloys and product forms other
than tubular goods are produced in Kokomo.
The Arcadia plant consists of approximately 42 acres of land and over
135,000 square feet of buildings on a single site. Arcadia uses feedstock
produced in Kokomo to fabricate welded and seamless alloy pipe and tubing and
purchases extruded tube hollows to produce seamless titanium tubing.
Manufacturing processes at Arcadia require cold pilger mills, weld mills, draw
benches, annealing furnaces and pickling facilities.
The Openshaw plant, located near Manchester, England, consists of
approximately 15 acres of land and over 200,000 square feet of buildings on a
single site. The plant produces bar and billet using billets produced in Kokomo
as feedstock. Additionally, products not competitive with the Company's products
are processed for third parties. The processes require hot rotary forges, bar
mills and miscellaneous straightening, turning and cutting equipment.
Although capacity can be limited from time to time by certain production
processes, the Company believes that its existing facilities will provide
sufficient capacity for current demand.
46
<PAGE>
LEGAL PROCEEDINGS
In Leslie Baxter, et. al. vs. Haynes International, Inc. and Haynes Group
Insurance Plan, filed July 6, 1995 in the U.S. District Court, Southern District
of Indiana, Indianapolis Division, retirees and the surviving spouse of a
retiree filed suit on behalf of themselves and similarly situated retirees and
surviving spouses for restoration of the retiree health insurance to benefit
levels prevailing before the reduction of those benefit levels on January 1,
1995 and to maintain the restored insurance benefit levels for the lives of the
covered retirees and their surviving spouses. The suit also seeks judgment in
damages for the benefits that have been lost as a result of the January 1, 1995
reductions in benefit levels and for the medical expenses, premiums paid and
other damages incurred, including reasonable attorneys' fees and costs of
maintaining the suit. This lawsuit is in the very early stages of discovery, and
the Company is not able at this time to assess the likelihood that or the extent
to which this lawsuit could have an impact on the Company's financial position
or operations. The Company intends to vigorously defend against the claims.
In addition to the foregoing proceeding, on October 19, 1995, at the
conclusion of an audit by the IRS of the Company's tax returns for the five
taxable years ending September 30, 1993 (the "Years in Issue"), the IRS proposed
to disallow deductions claimed by the Company during the Years in Issue in an
amount aggregating approximately $5.5 million. These deductions represent the
amortization of loan fees in the original aggregate amount of approximately
$10.4 million incurred in connection with the 1989 Acquisition. The loan fees
are being amortized over a 10-year period ending in 1999. In addition to
proposed disallowance of the deductions claimed during the Years in Issue, the
IRS' position, if sustained, would prohibit amortization deductions for the
years following the Years in Issue in an aggregate amount of approximately $4.9
million. The Company filed a formal protest to the IRS' proposed disallowance on
March 25, 1996, and intends to challenge the IRS with respect to the proposed
disallowance. Even if the deductions in question are disallowed, the Company
does not expect it will be required to pay any significant amount of additional
federal income tax with respect to the Years in Issue, although the Company's
NOLs as of September 30, 1995 would be reduced by approximately $7.6 million. In
addition, if the IRS' position with respect to the deductions at issue is
sustained, the Company's taxable income for its current taxable year and future
taxable years might be increased by up to approximately $10.4 million (the total
amount of loan fees which the Company would be prevented from deducting), in
which case the Company's federal income tax liability for those years would be
increased. See "Risk Factors--Income Tax Audit."
The Company also is involved in other routine litigation incidental to the
conduct of its business, none of which is believed by management to be material.
ENVIRONMENTAL MATTERS
The Company's facilities and operations are subject to certain foreign,
federal, state and local laws and regulations relating to the protection of
human health and the environment, including those governing the discharge of
pollutants into the environment and the storage, handling, use, treatment and
disposal of hazardous substances and wastes. Violations of these laws and
regulations can result in the imposition of substantial penalties and can
require facilities improvements. In addition, the Company may be required in the
future to comply with certain regulations pertaining to the emission of
hazardous air pollutants under the Clean Air Act. However, since these
regulations have not been proposed or promulgated, the Company cannot predict
the cost, if any, associated with compliance with such regulations. Capital
expenditures and other expenses related to environmental compliance are expected
to be approximately $3.9 million for fiscal year 1996 through fiscal year 1998.
Although there can be no assurance, based upon current information available to
the Company, the Company does not expect that costs of environmental
contingencies, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
47
<PAGE>
The Company's facilities are subject to periodic inspection by various
regulatory authorities, who from time to time have issued findings of violations
of governing laws, regulations and permits. In the past five years, the Company
has paid administrative fines, none of which has exceeded $50,000 for alleged
violations relating to environmental matters, including the handling and storage
of hazardous wastes, and record keeping requirements relating to, and handling
of, polychlorinated biphenyls ("PCBs"). Although the Company does not believe
that similar regulatory or enforcement actions would have a material impact on
its operations, there can be no assurance that violations will not be alleged or
will not result in the assessment of additional penalties in the future.
The Company has received permits from IDEM and EPA to close and to provide
post-closure monitoring and care for certain areas at the Kokomo facility used
for the storage and disposal of wastes, some of which are classified as
hazardous under applicable regulations. The closure project, essentially
complete, entailed installation of a clay liner under the disposal areas, a
leachate collection system and a clay cap and revegetation of the site.
Construction was completed in May 1994 and a closure certification has been
filed with IDEM. Thereafter, the Company will be required to monitor groundwater
and to continue post-closure maintenance of the former disposal areas. The
Company is aware of elevated levels of certain contaminants in the groundwater.
The Company believes that some or all of these contaminants may have migrated
from a nearby superfund site. If it is determined that the disposal areas have
impacted the groundwater underlying the Kokomo facility, additional corrective
action by the Company could be required. The Company is unable to estimate the
costs of such action, if any. There can be no assurance, however, that the costs
of future corrective action would not have a material effect on the Company's
financial condition, results of operations or liquidity. Additionally, it is
possible that the Company could be required to obtain permits and undertake
other closure projects and post-closure commitments for any other waste
management unit determined to exist at the facility.
As a condition of these closure and post-closure permits, the Company must
provide and maintain assurances to IDEM and EPA of the Company's financial
responsibility and capability to satisfy closure and post-closure requirements,
including possible future corrective action as necessary. On April 30, 1991,
IDEM issued a Notice of Inadequacy relating to the financial assurance
requirements for the former disposal areas. An Agreed Order dated July 2, 1992
was entered into between the Company and the IDEM in resolution of this Notice
of Inadequacy, and IDEM notified the Company on September 1, 1992 that it was in
compliance with the terms of that Agreed Order. The Company paid a civil penalty
of $50,000 provided for by the Agreed Order.
The Company has completed an investigation, pursuant to a work plan approved
by the EPA, of eight specifically identified solid waste management units at the
Kokomo facility. Results of this investigation have been filed with the EPA.
Based on the results of this investigation compared to Indiana's Tier II
clean-up goals, the Company believes that no further actions will be necessary.
Until the EPA reviews the results, the Company is unable to determine whether
further corrective action will be required or, if required, whether it will have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
The Company may also incur liability for alleged environmental damages
associated with the off-site transportation and disposal of its wastes. The
Company's operations generate hazardous wastes, and, while a large percentage of
these wastes are reclaimed or recycled, the Company also accumulates hazardous
wastes at each of its facilities for subsequent transportation and disposal
off-site by third parties. Generators of hazardous waste transported to disposal
sites where environmental problems are alleged to exist are subject to claims
under CERCLA, and state counterparts. CERCLA imposes strict, joint and several
liability for investigatory and cleanup costs upon waste generators, site owners
and operators and other "potentially responsible parties" ("PRPs"). Based on its
prior shipment of waste oil contaminated with PCBs, the Company is one of
approximately 700 PRPs in connection with the cleanup of PCB contamination at
the Rose Chemical site in Missouri. The Company has contributed over $130,000
toward the private cleanup currently being implemented by a group of many of
these
48
<PAGE>
PRPs, approximately $52,000 of which has been refunded, and does not anticipate
that further significant expenditures by the Company will be required in
connection with this site. Based on its prior shipment of certain hydraulic
fluid, the Company is one of approximately 300 PRPs in connection with the
proposed cleanup of the Fisher-Calo site in Indiana. The PRPs have negotiated a
Consent Decree implementing a remedial design/remedial action plan ("RD/RA") for
the site with the EPA. The Company has paid approximately $138,000 as its share
of the total estimated cost of the RD/RA under the Consent Decree. Based on
information available to the Company concerning the status of the cleanup
efforts at the Rose Chemical and Fisher-Calo sites, the large number of PRPs at
each site and the prior payments made by the Company in connection with these
sites, management does not expect the Company's involvement in these sites to
have a material adverse effect on the financial condition, results of operations
or liquidity of the Company. The Company may have generated hazardous wastes
disposed of at other sites potentially subject to CERCLA or equivalent state law
remedial action. Thus, there can be no assurance that the Company will not be
named as a PRP at additional sites in the future or that the costs associated
with those sites would not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
In November 1988, the EPA approved startup of a new waste water treatment
plant at the Arcadia, Louisiana facility, which discharges treated industrial
waste water to the municipal sewerage system. Following exceedances of certain
EPA effluent limitations in 1989, the EPA issued an administrative order in 1992
which set new effluent limitations for the facility. The waste water plant is
currently operating under this order and the Company believes it is meeting such
effluent limitations. However, the Company anticipates that in the future
Louisiana will take over waste water permitting authority from the EPA and may
issue a waste water permit, the conditions of which could require modification
to the plant. Reasonably anticipated modifications are not expected to have a
substantial impact on operations.
49
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the persons
who served as the directors and executive officers of the Company as of June 30,
1996. Except as indicated in the following paragraphs, the principal occupations
of these persons have not changed during the past five years.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Michael D. Austin......................... 56 President and Chief Executive Officer;
Director
Joseph F. Barker.......................... 49 Chief Financial Officer; Vice President,
Finance; Secretary; Treasurer; Director
F. Galen Hodge............................ 58 Vice President, International
Michael F. Rothman........................ 49 Vice President, Engineering & Technology
Charles J. Sponaugle...................... 47 Vice President, Sales and Marketing
Frank J. LaRosa........................... 36 Vice President, Human Resources and
Information Technology
August A. Cijan........................... 40 Vice President, Operations
Theodore T. Brown......................... 37 Controller; Chief Accounting Officer
Robert I. Hanson.......................... 52 General Manager, Arcadia Tubular Products
Perry J. Lewis............................ 58 Director, Chairman of the Board
Robert Egan............................... 65 Director, Vice Chairman of the Board
John A. Morgan............................ 65 Director
Thomas F. Githens......................... 68 Director
Sangwoo Ahn............................... 57 Director
Ira Starr................................. 37 Director
</TABLE>
Mr. Austin was elected President, Chief Executive Officer and a director of
the Company in September 1993. From 1987 to the time he joined the Company, Mr.
Austin was President and Chief Executive Officer of Tuscaloosa Steel
Corporation, a mini hot strip mill owned by British Steel PLC with approximately
$200 million in annual revenue ("Tuscaloosa").
Mr. Barker was elected Vice President, Finance and a director of the Company
in September 1992 and Treasurer and Secretary in September 1993. Mr. Barker was
also elected Chief Financial Officer in May 1996. He had served as Controller of
the Company and its predecessors since November 1986.
Dr. Hodge was elected Vice President, International in June 1994 after
having served as Vice President of Technology since September 1989. He was
Marketing and Technical Manager for the European Sales and Distribution
operations from 1985 to 1987 and Director of Technology from 1987 to 1989.
Mr. Rothman was elected Vice President, Engineering and Technology in
October 1995 after having served as Marketing Manager since 1994. He previously
served in various marketing and technical positions since joining the Company in
1975.
Mr. Sponaugle was elected Vice President, Sales and Marketing in October
1994 after having served as Quality Control Manager and Total Quality Manager
since September 1992. He previously served as Marketing Manager from 1985 to
1992.
Mr. LaRosa was elected Vice President, Human Resources and Information
Technology in April 1996 after having served as Manager, Human Resources and
Information Technology from June 1994 to April 1996. From September 1993 until
June 1994, Mr. LaRosa served as Manager, Human Resources. From December 1990
until joining the Company in September 1993, he served in various management
capacities at Tuscaloosa.
Mr. Cijan was elected Vice President, Operations in April 1996. He joined
the Company in 1993 as Manufacturing Manager and was Manager, Maintenance and
Engineering for Tuscaloosa from 1987 until he joined the Company in 1993.
50
<PAGE>
Mr. Brown was elected Controller and Chief Accounting Officer of the Company
in May, 1996 after having served as General Accounting Manager since 1992. From
1988 to 1992 he served in various financial capacities with the Company.
Mr. Hanson was named General Manager, Arcadia Tubular Products Facility in
November 1994. He previously served the Company and its predecessors in various
technical, production and engineering capacities since October 1987.
Mr. Lewis has served as a general partner of MLGAL Partners L.P. ("MLGAL"),
a Connecticut limited partnership that is the general partner of Fund II, since
its formation in 1987. He was elected a director of the Company in 1989 and has
served as Chairman of the Board of the Company since October 1993. Mr. Lewis
also serves on the boards of directors of Aon Corporation, Evergreen Media
Corporation, Tyler Corporation, Quaker Fabric Corporation, Stuart Entertainment,
Inc. and ITI Technologies, Inc.
Mr. Egan was elected as a director and Vice Chairman of the Board of the
Company in December 1993. Mr. Egan is retired. He was formerly the Chairman and
Chief Executive Officer of Alloy Rods Corporation from 1985 to 1993. Mr. Egan
also serves on the board of directors of Robroy Inc.
Mr. Morgan has served as a general partner of MLGAL since its formation in
1987. He was elected a director of the Company in 1989. Mr. Morgan also serves
on the boards of directors of TriMas Corporation, Flight Safety International,
Mascotech, Inc., Masco Corp., Allied Digital Technologies, Inc. and McDermott
International Incorporated.
Mr. Githens has been a retired partner of MLGAL since January 1, 1993. From
1982 until his retirement, Mr. Githens was a partner in MLGAL, although he
ceased his active involvement in the operations of MLGAL in December 1991.
Mr. Ahn has served as a general partner of MLGAL since its formation in
1987. He was elected a director of the Company in 1989. Mr. Ahn also serves on
the boards of directors of Kaneb Services, Inc., Kaneb Pipe Line Partners, L.P.,
PAR Technology Corp., Quaker Fabric Corporation, Stuart Entertainment, Inc. and
ITI Technologies, Inc.
Mr. Starr has served as a general partner of MLGAL since 1994. Mr. Starr
served as Vice President of MLGAL from 1988 to 1994. He was elected a director
of the Company in 1989. Mr. Starr also serves on the boards of directors of
Quaker Fabric Corporation and Stuart Entertainment, Inc.
The Company, Holdings, Fund II and the investors in the Company who are
officers or directors of the Company or employees of MLGA or the Company entered
into the Stock Subscription Agreement, which requires certain persons be elected
to the board of directors. The same parties, together with certain institutional
investors, entered into a Stockholders Agreement dated August 31, 1989 (the
"Stockholder Agreement"). See "Principal Stockholders."
Each member of the board of directors is elected for a term of one year.
Except for Messrs. Austin, Barker and Egan, who were elected in September 1993,
September 1992 and October 1993, respectively, each of the directors has served
in that capacity since August 1989. Each of the directors is nominated and
elected pursuant to the terms of the Stock Subscription Agreement.
The Company's Certificate of Incorporation (the "Certificate") authorizes
the board of Directors to designate the number of directors. The board currently
has designated eleven directors, and there are three existing vacancies on the
board of directors, which the Company does not intend to fill in the near
future. Directors of the Company serve until their successors are duly elected
and qualified or until their earlier resignation or removal. Officers of the
Company serve at the discretion of the board of directors, subject, in the case
of Mr. Austin, to the terms of his employment contract. See "--Austin Employment
Agreement."
The board has established an Audit Committee and a Compensation Committee.
The Audit Committee consists of Messrs. Egan, Githens and Starr and the
Compensation Committee consists of
51
<PAGE>
Messrs. Lewis, Ahn and Egan. The Audit Committee is responsible for recommending
independent auditors, reviewing, in connection with the independent auditors,
the audit plan, the adequacy of internal controls, the audit report and
management letter and undertaking such other incidental functions as the board
may authorize. The Compensation Committee is responsible for administering the
Stock Option Plans, determining executive compensation policies and
administering compensation plans and salary programs, including performing an
annual review of the total compensation and recommended adjustments for all
executive officers. See "--Stock Option Plans."
COMPENSATION
The following tables and notes present the compensation provided by the
Company to its Chief Executive Officer and the Company's four other most highly
compensated executive officers, who served as executive officers as of September
30, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1) LONG-TERM
------------------------------ COMPENSATION
NAME AND PRINCIPAL FISCAL AWARDS/OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS (NUMBER OF SHARES) COMPENSATION (3)
- ------------------------------ ------ -------- -------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Michael D. Austin............. 1995 $314,167 -- -- $ 75,631
President and Chief 1994 314,167 $100,000(2) -- 5,520
Executive Officer 1993 27,100 -- 200,000] 444
Joseph F. Barker.............. 1995 130,500 -- 28,400 1,808
Vice President, Finance; 1994 130,500 -- -- 2,252
Secretary; Treasurer 1993 114,200 -- -- 1,842
F. Galen Hodge................ 1995 129,033 -- 23,000 3,651
Vice President, 1994 129,033 -- -- 2,580
International 1993 128,100 -- -- 2,096
August A. Cijan............... 1995 117,800 -- 40,000 55,677
Vice President, Operations 1994 106,893 -- -- 295
1993 -- -- -- --
Frank J. LaRosa............... 1995 116,000 -- 40,000 22,478
Vice President, Human 1994 106,466 -- -- 285
Resources and Information 1993 -- -- --
Technology
</TABLE>
- ------------
(1) Additional compensation in the form of perquisites was paid to certain of
the named officers in the periods presented; however, the amount of such
compensation was less than the level required for reporting.
(2) Mr. Austin was elected President and Chief Executive Officer of the Company
on September 2, 1993 and, under the terms of an Executive Employment
Agreement with the Company, Mr. Austin received a $100,000 bonus to cover
deferred compensation forfeited at his former employer. See "--Austin
Employment Agreement."
(3) Premium payments to the group term life insurance plan, gainsharing payments
and relocation reimbursements which were made by the Company.
52
<PAGE>
STOCK OPTION PLANS
In 1986, the Company adopted a stock incentive plan, which was amended and
restated in 1987, for certain key management employees (the "Prior Option
Plan"). The Prior Option Plan allowed participants to acquire restricted common
stock from the Company by exercising stock options (the "Prior Options") granted
pursuant to the terms and conditions of the Prior Option Plan. In connection
with the 1989 Acquisition, Holdings established the Haynes Holdings, Inc.
Employee Stock Option Plan (the "Existing Stock Option Plan"). The Existing
Stock Option Plan authorizes the granting of options to certain key employees
and directors of Holdings and its subsidiaries (including the Company) for the
purchase of a maximum of 905,880 shares of Holdings' Common Stock. As of June
30, 1996, options to purchase 820,045 shares were outstanding under the Existing
Stock Option Plan, leaving 85,835 options available for grant. Upon consummation
of the 1989 Acquisition, the holders of the Prior Options exchanged all of their
remaining Prior Options for options pursuant to the Stock Option Plan (the
"Rollover Options"). Except for the Rollover Options, the Compensation
Committee, which administers the Existing Stock Option Plan, is authorized to
determine which eligible employees will receive options and the amount of such
options. Pursuant to the Existing Stock Option Plan, the Compensation Committee
is authorized to grant options to purchase Common Stock at any price in excess
of the lower of Book Value (as defined in the Existing Stock Option Plan) or 50%
of the Fair Market Value (as defined in the Existing Stock Option Plan) per
share of Common Stock on the date of the award. However, actual options
outstanding under the Existing Stock Option Plan have been granted at the
estimated fair market value per share at the date of grant, resulting is no
compensation being charged to operations.
Subject to earlier exercise upon death, disability or normal retirement,
upon a change of control (as defined in the Existing Stock Option Plan) of
Holdings, upon the determination of the Compensation Committee in its
discretion, or upon the sale of all or substantially all of the assets of the
Company, options granted under the Existing Stock Option Plan (other than the
Rollover Options and options granted to existing Management Holders (as defined
in the Existing Stock Option Plan) that are immediately exercisable) become
exercisable on the third anniversary thereof unless otherwise provided by the
Compensation Committee and terminate on the earlier of (i) three months after
the optionee ceases to be employed by the Company or any of its subsidiaries or
(ii) ten years and two days after the date of grant. Options granted pursuant to
the Existing Stock Option Plan may not be assigned or transferred by an optionee
other than by last will and testament or by the laws of descent and
distribution, and any attempted transfer of such options may result in
termination thereof. The grant, holding or exercise of options granted pursuant
to the Existing Stock Option Plan may, in the Compensation Committee's
discretion, be conditioned upon the optionee becoming a party to the Stock
Subscription Agreement or the Stockholders Agreement entered into by the
investors in the Company at the time of the 1989 Acquisition. See "Principal
Stockholders."
In fiscal 1995, 322,900 options were granted by the Compensation Committee
pursuant to the Existing Stock Option Plan. No options were granted in the nine
months ended June 30, 1996. The following table sets forth the number of options
to purchase Common Stock granted to the persons named in the Summary
Compensation Table in fiscal 1995.
53
<PAGE>
OPTION GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED OPTION TERM(1)
UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION ----------------
NAME OPTIONS GRANTED IN FISCAL 1995 PRICE ($/SH) DATE 5%($) 10%($)
- ------------------------------- --------------- --------------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Joseph F. Barker............... 28,400 8.8% 2.50 12/07/04 44,651 113,154
F. Galen Hodge................. 23,000 7.1 2.50 12/07/04 36,160 91,638
August A. Cijan................ 40,000 12.4 2.50 12/07/04 62,890 159,375
Frank J. LaRosa................ 40,000 12.4 2.50 12/07/04 62,890 159,375
</TABLE>
- ------------
(1) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years). Stock price appreciation of 5% and
10% is based on the fair values at the time of grant and assumes that the
option is exercised at the exercise price and sold on the last day of its
term at the appreciated price, pursuant to rules promulgated by the
Securities and Exchange Commission. The potential realizable value does not
represent the Company's prediction of its stock price performance. This
table does not take into account any appreciation for the fair value of the
Common Stock from December 7, 1994, the date of grant, to date. There can
be no assurance that the actual stock price appreciation over the ten-year
option term will be at the assumed 5% or 10% level or at any other defined
level.
The options listed in the above table were originally granted in December
1994 with an exercise price of $5.00 per share. In order to provide a meaningful
incentive to management, in January 1996 the Company's board of directors
reduced the exercise price for the options listed in the table (and options to
purchase an additional 191,500 shares of Common Stock granted to other members
of the Company's management) to $2.50 per share, which the board of directors
determined was the fair market value at that time. The board of directors'
action was based on several factors. First, at the time of the repricing it was
uncertain whether the Company would be able to make a February 15, 1996 interest
payment of approximately $6.1 million on the Existing Subordinated Notes.
Second, although conditions in some of the major markets to which the Company
sells had begun to improve in the last two quarters of fiscal 1995, the extent
of the recovery was still unclear. Third, prior to the date of this prospectus,
there has been virtually no market for or trading in the Common Stock. Finally,
efforts to sell the Company, which began in May 1995, were unsuccessful. The
last offer the Company received from a potential acquiror was received in
December 1995 and reflected a price that was lower than the exercise price of
the Common Stock established by the board of directors in January 1996.
SEVERANCE AGREEMENTS
In connection with the events leading up to the acquisition of the Company
by Morgan Lewis Githens & Ahn and management of the Company in August 1989, the
Company entered into Severance Agreements with certain key employees (the "Prior
Severance Agreements"). In 1995, the Company determined that the provisions of
the Prior Severance Agreements were no longer appropriate for the key employees
who were parties thereto and that several other key employees who were employed
after 1989 should be entitled to severance benefits. Consequently, during and
after July 1995, the Company entered into Severance Agreements (the "Severance
Agreements") with Messrs. Austin, Barker, Cijan, Hodge, LaRosa and Sponaugle and
with certain other key employees of the Company (the "Eligible Employees"). The
Severance Agreements superseded in all respects the Prior Severance Agreements
that were then in effect.
54
<PAGE>
The Severance Agreements provide for an initial term expiring April 30,
1996, subject to one- year automatic extensions (unless terminated by the
Company or the Eligible Employee 60 days prior to May 1 of any year). The
Severance Agreements automatically terminate upon termination of the Eligible
Employee's employment prior to a Change in Control of the Company, as defined in
the Severance Agreements (a "Severance Change in Control"), unless the
termination of employment occurs as a result of action of the Company other than
for Cause (as defined in the Severance Agreements) within 90 days of a Severance
Change in Control. A Severance Change in Control occurs upon a change in
ownership of 50.0% or more of the combined voting power of the outstanding
securities of the Company or upon the merger, consolidation, sale of all or
substantially all of the assets or liquidation of the Company. A Severance
Change in Control will not occur upon the consummation of the Offering.
The Severance Agreements provide that if an Eligible Employee's employment
with the Company is terminated within six months following a Severance Change in
Control by reason of such Eligible Employee's disability, retirement or death,
the Company will pay the Eligible Employee (or his estate) his Base Salary (as
defined in the Severance Agreements) plus any bonuses or incentive compensation
earned or payable as of the date of termination. In the event that the Eligible
Employee's employment is terminated by the Company for Cause (as defined in the
Severance Agreements) within the six-month period, the Company is obligated only
to pay the Eligible Employee his Base Salary through the date of termination. In
addition, if within the six-month period the Eligible Employee's employment is
terminated by the Eligible Employee or the Company (other than for Cause or due
to disability, retirement or death), the Company must (among other things) (i)
pay to the Eligible Employee such Eligible Employee's full Base Salary and any
bonuses or incentive compensation earned or payable as of the date of
termination; (ii) continue to provide life insurance and medical and hospital
benefits to the Eligible Employee for up to 12 months following the date of
termination (18 months for Messrs. Austin and Barker); (iii) pay to the Eligible
Employee $12,000 for outplacement costs to be incurred, (iv) pay to the Eligible
Employee a lump sum cash payment equal to either (a) 150% of the Eligible
Employee's Base Salary in the case of Messrs. Austin and Barker, or (b) 100% of
the Eligible Employee's Base Salary in the case of the other Eligible Employees,
provided that the Company may elect to make such payments in installments over
an 18 month period in the case of Messrs. Austin or Barker or a 12 month period
in the case of the other Eligible Employees. As a condition to receipt of
severance payments and benefits, the Severance Agreements require that Eligible
Employees execute a release of all claims.
Pursuant to the Severance Agreements, each Eligible Employee agrees that
during his employment with the Company and for an additional one year following
the termination of the Eligible Employee's employment with the Company by reason
of disability or retirement, by the Eligible Employee within six months
following a Severance Change in Control or by the Company for Cause, the
Eligible Employee will not, directly or indirectly, engage in any business in
competition with the business of the Company.
AUSTIN EMPLOYMENT AGREEMENT
On September 2, 1993, the board of directors elected Michael D. Austin
President and Chief Executive Officer of the Company. The Company and Holdings
entered into an Executive Employment Agreement with Mr. Austin (the "Executive
Employment Agreement") which provides that, in exchange for his services as
President and Chief Executive Officer of the Company, the Company will pay Mr.
Austin (1) an annual base salary of not less than $325,000, subject to annual
adjustment at the sole discretion of the board of directors, and (2) incentive
compensation as determined by the board of directors based on the actual results
of operations of the Company in relation to budgeted results of operation of the
Company. In addition, Mr. Austin is entitled to receive vacation leave and to
participate in all benefit plans generally applicable to senior executives of
the Company and to receive fringe benefits as are customary for the position of
Chief Executive Officer.
55
<PAGE>
Under the terms of the Executive Employment Agreement, the Company agreed to
pay Mr. Austin the sum of $100,000 as compensation for deferred compensation
forfeited by Mr. Austin at his former employer. The Company also indemnified Mr.
Austin against any loss incurred in the sale of Mr. Austin's residence at his
prior location and paid certain financing costs incurred in connection with the
residence. The Company provided supplemental life, health, and accident coverage
for Mr. Austin until he was eligible to participate in the Company's benefit
plans.
Pursuant to the Executive Employment Agreement, Holdings also granted Mr.
Austin the option to purchase 200,000 shares of Common Stock of Holdings at a
purchase price of $5.00 per share under the Existing Stock Option Plan. In
January 1996, the purchase price for exercise of the option was reduced to $2.50
per share. These options vest at a rate of 40,000 shares on September 1 of each
year commencing September 1, 1994 until fully vested, so long as Mr. Austin
continues to be employed by the Company on such dates and provided that all
options would vest upon a "change in control" as defined in the Existing Stock
Option Plan or certain sales of assets as specified in the Existing Stock Option
Plan. Mr. Austin also became a party to the Stock Subscription Agreement and the
Stockholders Agreement. In the event of a change in control and the termination
of Mr. Austin's employment by the Company thereafter, the Company is also
obligated to pay the difference, if any, between the pension benefit payable to
Mr. Austin under the U.S. Pension Plan (as defined below) at the time of such
change in control and the pension benefit that would be payable under the U.S.
Pension Plan if Mr. Austin had completed 10 years of service with the Company.
On July 15, 1996, the Company, Holdings and Mr. Austin entered into an
amendment of the Executive Employment Agreement which extends its term to August
31, 1999 (with year to year continuation thereafter unless the Company or Mr.
Austin elects otherwise) and requires the Company to reimburse Mr. Austin for up
to $10,000 for estate or financial planning services. The amendment of the
Executive Employment Agreement also requires that in 1996 the Company review and
evaluate the existing bonus plans and consider, among other alternatives, a
deferred compensation plan for the management of the Company.
If Mr. Austin's employment is terminated by the Company prior to August 31,
1999 without "Cause," as defined in the Executive Employment Agreement, as
amended, Mr. Austin is entitled to continuation of his annual base salary until
the later of August 31, 1999 or 24 months following the date of termination.
Also, if the Company terminates Mr. Austin's employment without Cause after
August 31, 1999 or elects not to renew the Executive Employment Agreement on a
one-year basis, Mr. Austin is entitled to annual base salary continuation for a
period of 12 months following the date of termination of his employment. In the
event that Mr. Austin is entitled to termination benefits under the Severance
Agreement to which he is a party, he is not entitled to salary continuation or
benefits under the Executive Employment Agreement, as amended.
U.S. PENSION PLAN
The Company maintains for the benefit of eligible domestic employees a
defined benefit pension plan, designated as the Haynes International, Inc.
Pension Plan (the "U.S. Pension Plan"). Under the U.S. Pension Plan, all Company
employees completing at least 1,000 hours of employment in a 12-month period
become eligible to participate in the plan. Employees are eligible to receive an
unreduced pension annuity on reaching age 65, reaching age 62 and completing 10
years of service, or completing 30 years of service. The final option is
available only for union employees hired before July 3, 1988 or for salaried
employees who were plan participants on March 31, 1987.
For salaried employees employed on or after July 3, 1988, the normal monthly
pension benefit provided under the U.S. Pension Plan is the greater of (i) 1.2%
of the employee's average monthly earnings multiplied by years of credited
service, plus an additional 0.5% of the employee's average monthly earnings, if
any, in excess of the monthly Social Security covered compensation for each year
of credited service up to 35 years, or (ii) the employee's accrued benefit as of
March 31, 1987.
56
<PAGE>
There are provisions for delayed retirement benefits, early retirement
benefits, disability and death benefits, optional methods of benefit payments,
payments to an employee who leaves after a certain number of years of service
and payments to an employee's surviving spouse. Employees are vested and
eligible to receive pension benefits after completing five years of service.
Vested benefits are paid beginning at or after age 55. Early retirement benefits
are available after age 55.
The following table sets forth the range of estimated annual benefits
payable upon retirement for graduated levels of average annual earnings and
years of service for employees under the plan, based on retirement at age 65 in
1995. The maximum annual benefit permitted for 1995 under Section 415(b) of the
Code is $120,000.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ANNUAL ----------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------------------------------------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$100,000.................................. $ 23,800 $31,700 $39,700 $47,600 $55,500
$150,000.................................. 36,500 48,700 60,900 73,100 85,300
$200,000.................................. 49,300 65,700 82,200 98,600 115,000
$250,000.................................. 62,000 82,700 103,400 124,100 144,800
$300,000.................................. 74,800 99,700 124,700 149,600 174,500
$350,000.................................. 87,500 116,700 145,900 175,100 204,300
$400,000.................................. 100,300 133,700 167,200 200,600 234,000
$450,000.................................. 113,000 150,700 188,400 226,100 263,800
</TABLE>
The estimated credited years of service of each of the individuals named in
the Summary Compensation Table as of September 30, 1995 are as follows:
<TABLE>
<CAPTION>
CREDITED
SERVICE
--------
<S> <C>
Michael D. Austin................................................. 2
F. Galen Hodge.................................................... 26
Joseph F. Barker.................................................. 15
Frank J. LaRosa................................................... 2
August A. Cijan................................................... 2
</TABLE>
U.K. PENSION PLAN
The Company maintains a pension plan for its employees in the United Kingdom
(the "U.K. Pension Plan"). The U.K. Pension Plan is a contributory plan under
which eligible employees contribute 3% or 6% of their annual earnings. Normal
retirement age under the U.K. Pension Plan is age 65 for males and age 60 for
females. The annual pension benefit provided at normal retirement age under the
U.K. Pension Plan ranges from 1% to 1 2/3% of the employee's final average
annual earnings for each year of credited service, depending on the level of
employee contributions made each year during the employee's period of service
with the Company. The maximum annual pension benefit for employees with at least
10 years of service is two-thirds of the individual's final average annual
earnings. Similar to the U.S. Pension Plan, the U.K. Pension Plan also includes
provisions for delayed retirement benefits, early retirement benefits,
disability and death benefits, optional methods of benefit payments, payments to
employees who leave after a certain number of years of service, and payments to
an employee's surviving spouse. The U.K. Pension Plan also provides for payments
to an employee's surviving children.
PROFIT SHARING AND SAVINGS PLAN
The Company maintains the Haynes International, Inc. Profit Sharing and
Savings Plan and the Haynes International, Inc. Hourly Profit Sharing and
Savings Plan (the "Profit Sharing Plans") to provide retirement, tax-deferred
savings for eligible employees and their beneficiaries.
57
<PAGE>
The board of directors has sole discretion to determine the amount, if any,
to be contributed by the Company. No Company contributions were made to the
Profit Sharing Plans for the fiscal years ended September 30, 1995, 1994 and
1993.
The Profit Sharing Plans are qualified under Section 401 of the Code,
permitting the Company to deduct for federal income tax purposes all amounts
contributed by it to the Profit Sharing Plans.
In general, all salaried employees completing at least 1,000 hours of
employment in a 12-month period are eligible to participate after completion of
one full year of employment. Each participant's share in the annual allocation,
if any, to the Profit Sharing Plans is represented by the percentage which his
or her plan compensation (up to $260,000) bears to the total plan compensation
of all participants in the plan. Employees may also elect to make elective
salary reduction contributions to the Profit Sharing Plans, in amounts up to 10%
of their plan compensation. Elective salary reduction contributions may be
withdrawn subject to the terms of the Profit Sharing Plans.
Vested individual account balances attributable to Company contributions may
be withdrawn only after the amount to be distributed has been held by the plan
trustee in the profit sharing account for at least 24 consecutive calendar
months. Participants vest in their individual account balances attributable to
Company contributions at age 65, death, disability or on completing five years
of service.
INCENTIVE PLAN
In January 1996, the Company awarded and paid management bonuses of
approximately $439,000 pursuant to its management incentive program. The January
bonuses were calculated based on the Company's fiscal 1995 performance.
Additionally, the Company adopted a management incentive plan effective for
fiscal 1996 pursuant to which senior managers and managers in the level below
senior managers will be paid a bonus based on actual EBITDA compared to budgeted
EBITDA. Based on results for the first half of fiscal 1996, the Company believes
that management will be eligible for bonuses for fiscal 1996 and that it will
accrue additional expenses for management bonuses of approximately $900,000
during fiscal 1996.
HAYNES INTERNATIONAL, LTD PLAN
In fiscal 1995, the Company's affiliate Haynes International, LTD instituted
a gainsharing plan. For fiscal 1995, the Company made gainsharing payments
pursuant to this plan of approximately $269,000.
DIRECTOR COMPENSATION
The directors of the Company other than Thomas F. Githens and Robert Egan
receive no compensation for their services as such. The non-management members
of the board of directors are reimbursed by the Company for their out-of-pocket
expenses incurred in attending meetings of the board of directors. Mr. Githens
receives a director's fee of $3,000 per calendar quarter, $1,000 per board
meeting attended and $750 per board committee meeting attended. Mr. Egan
receives a director's fee of $2,000 per month plus an advisory fee of $2,000 per
month.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Sangwoo Ahn, Perry J. Lewis and Robert Egan served on the Compensation
Committee during fiscal 1995. None of the members of the Compensation Committee
are now serving or previously have served as employees or officers of the
Company or any subsidiary, and none of the Company's executive officers serve as
directors of, or in any compensation related capacity for, companies with which
members of the Compensation Committee are affiliated.
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CERTAIN TRANSACTIONS
A former officer and director of the Company, Aziz I. Asphahani, left the
Company's employ and resigned as a director of the Company effective January 24,
1994. In satisfaction of certain obligations of the Company under the Stock
Subscription Agreement, on October 11, 1994 the Company paid Dr. Asphahani
$449,894.50 to repurchase all of Dr. Asphahani's options to purchase Common
Stock, representing an aggregate option purchase price of $426,092.24 and
interest from March 10, 1994 to the purchase date totaling $23,802.26.
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PRINCIPAL STOCKHOLDERS
All of the outstanding capital stock of the Company is owned by Holdings.
The only stockholder of record of Holdings owning more than five percent of its
outstanding Common Stock at June 30, 1996 was MLGA Fund II, L.P. ("Fund II"), a
Connecticut limited partnership that is controlled by John A. Morgan, Perry J.
Lewis, Sangwoo Ahn, Ira Starr and William C. Ughetta, Jr., all principals of
MLGAL. The following table sets forth the number and percentage of shares of
Common Stock of Holdings owned by (i) Fund II, (ii) all affiliates of Fund II,
(iii) each of the directors of the Company and each of the executive officers
named in the Summary Compensation Table, (iv) all affiliates of Fund II as a
group and (v) all directors and executive officers of the Company as a group, as
of June 30, 1996. The address of Fund II, and of Messrs. Ahn, Lewis, Morgan,
Starr and Ughetta, is 2 Greenwich Plaza, Greenwich, Connecticut 06830. The
address of Messrs. Austin and Barker is 1020 West Park Avenue, Kokomo, Indiana
46904-9013. The address of Mr. Githens is 41 Crescent Place, Short Hills, New
Jersey 07078. The address of Mr. Egan is 4 Foxwood Drive, Pittsburgh,
Pennsylvania 15238.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
----------------------------
NAME NUMBER PERCENT(2)
- ------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Fund II............................................................ 5,759,894 90.6%
Sangwoo Ahn........................................................ 5,879,836(3)(4) 92.5
Perry J. Lewis..................................................... 5,879,836(3)(4) 92.5
John A. Morgan..................................................... 5,879,836(3)(4) 92.5
Ira Starr.......................................................... 5,854,251(3)(4) 92.1
William C. Ughetta, Jr............................................. 5,846,751(3)(4) 92.0
Thomas F. Githens.................................................. 54,799 (6)
Robert Egan........................................................ 0 --
Michael D. Austin.................................................. 80,000 1.3
F. Galen Hodge..................................................... 57,070(5) (6)
Joseph F. Barker................................................... 40,924(5) (6)
August A. Cijan.................................................... 8,000(5) (6)
Frank J. LaRosa.................................................... 8,000(5) (6)
All Fund II affiliates as a group.................................. 5,953,506 93.7
All directors and executive officers of the Company as a group..... 6,230,099(3) 94.8
</TABLE>
- ------------
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
(2) Includes 8,000 shares issued pursuant to the exercise of a stock option
effected on July 31, 1996.
(3) Includes the shares reported in the table as owned by Fund II and 86,857
shares owned by MLGAL.
(4) The named stockholder disclaims beneficial ownership of the shares held by
Fund II and MLGAL, except to the extent of his pecuniary interest therein
arising from his general partnership interest in MLGAL.
(5) Represents shares of Common Stock underlying options exercisable within 60
days of June 30, 1996 which are deemed to be beneficially owned by the
holders of such options. See "Management--Stock Option Plans."
(6) Less than 1%.
AGREEMENTS AMONG STOCKHOLDERS
Holdings, the Company, MLGA Fund II and the investors in Holdings who were
officers or directors of the Company or affiliates of MLGA Fund II or the
Company at the time of the 1989 Acquisition have entered into the Stock
Subscription Agreement and Holdings and all of the investors in Holdings have
entered into the Stockholder Agreement, both dated August 31, 1989 and amended
as of August 14, 1992 to add MLGAL as a party. The Stock Subscription Agreement
was further amended on March 16, 1993 to reduce the Company's purchase price for
Holdings common stock and stock options described below.
The Stock Subscription Agreement provides that each of the investors who is
a party to the agreement shall have a right of first refusal with respect to any
transfer by an investor of Holdings
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common stock unless the transfer complies with all applicable securities laws
and all other agreements made by the investors who are parties to the agreement,
or the transferee is Holdings or a person specified in the Stock Subscription
Agreement as a "Permitted Transferee", or the transfer is made pursuant to a
public offering of Holdings common stock. Investors who are management employees
of the Company or their Permitted Transferees (the "Management Holders") have
the right to sell their Holdings common stock or their options to purchase
Holdings common stock, in whole or in part, to Holdings at a price equal to (i)
6.3 multiplied by the Company's EBITDA (as defined in the Stock Subscription
Agreement) for the immediately preceding four fiscal quarters less the average
indebtedness of Holdings, the Company and its subsidiaries for the immediately
preceding four fiscal quarters, all to be determined on a consolidated basis
divided (ii) by the total number of fully diluted shares of Holdings common
stock outstanding (the "Fair Market Value") net of the applicable exercise
price, if any, within five years after termination of employment because of
disability, retirement or death, after which time the Holdings common stock and
options to purchase Holdings common stock may be called by Holdings for
redemption at the Fair Market Value. Additionally, upon the termination of
employment of any Management Holder other than for disability, retirement or
death, the Stock Subscription Agreement contains provisions for the purchase and
sale of Holdings common stock and options to purchase Holdings common stock at
prices based on formulas which take into account the reason for the termination.
The Stock Subscription Agreement contains voting requirements which provide
for the election as directors of Holdings and of the Company of six persons
(including the Chairman of the Board) designated by the Founding Investors and
of five persons designated by the Management Holders. A change in the number of
directors requires the approval of a majority of all the investors who are
parties to the agreement and a majority of the Management Holders. The Board of
Directors must approve all capital expenditures over $500,000, mergers,
adjustments to management's compensation, promotions of officers, incurrence of
debt, loans, sales of shares, and any disposal of substantially all the assets
of the Company. The Stock Subscription Agreement also requires that the
investors who are parties to the agreement vote to amend the Certificate of
Incorporation of Holdings if necessary to accommodate a public offering;
however, newly issued shares must be approved by a majority of the Management
Holders if the issuance price is below certain specified minimum prices. The
Stock Subscription Agreement terminates upon the earlier of an initial public
offering, the consent of a majority of all the investors who are parties to the
agreement and of a majority of the Management Holders, or the tenth anniversary
of the 1989 Acquisition.
The Stockholder Agreement imposes certain transfer restrictions on the
Holdings common stock, including provisions that (i) Holdings common stock may
be transferred only to those persons agreeing to be bound by the Stockholder
Agreement, and the Stock Subscription Agreement if the transferor is a party
thereto, except if such transfer is pursuant to a public offering or made
following a public offering in compliance with Rule 144 under the Securities
Act; (ii) the investors may not grant any proxy or enter into or agree to be
bound by any voting trust with respect to the Holdings common stock; (iii) if
the Founding Investors, the Management Holders or their permitted transferees
propose to sell any of their Holdings common stock, the other investors shall in
most instances have the right to participate ratably in the proposed sale or,
under certain circumstances, to sell all of their Holdings common stock in the
proposed sale; (iv) if a majority in interest of the investors propose to sell a
majority of the Holdings common stock or substantially all of the assets of
Holdings or the Company to a third party, the Management Holders shall have a
right to bid for such stock or assets; and (v) a majority in interest of the
investors may compel all other such investors to sell their shares under certain
circumstances. The Stockholder Agreement also contains a commitment on the part
of Holdings to register the shares under the Securities Act upon request by
investors holding at least 25% of the fully diluted shares of Holdings common
stock outstanding, or if Holdings otherwise proposes to register shares, subject
to certain conditions and limitations. The Stockholder Agreement terminates on
the earlier of the sale of 15% or more of the fully diluted stock pursuant to a
public offering and the qualification of the common stock for listing on the New
York Stock Exchange, the American Stock Exchange or Nasdaq, or upon the tenth
anniversary of the Acquisition.
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DESCRIPTION OF THE NOTES
The Notes offered hereby will be issued under an Indenture to be dated as of
, 1996 (the "Indenture") between the Company and National City Bank,
as trustee (the "Trustee"), a copy of the form of which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The Indenture
is subject to and is governed by the Trust Indenture Act. The following summary
of the material provisions of the Indenture does not purport to be complete, and
where reference is made to particular provisions of the Indenture, such
provisions, including the definitions of certain terms, are qualified in their
entirety by reference to all of the provisions of the Indenture and those terms
made a part of the Indenture by the Trust Indenture Act. For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions."
GENERAL
The Notes will mature on , 2004, will be limited to $130,000,000
aggregate principal amount, and will be unsecured senior obligations of the
Company. Each Note will bear interest at the rate set forth on the cover page
hereof from , 1996 or from the most recent interest payment date to
which interest has been paid, payable semiannually on and
each year, commencing , 1997, to the Person in whose
name the Note (or any predecessor Note) is registered at the close of business
on the or next preceding such interest payment date.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Company maintained for such purposes (which initially will be the Trustee);
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the Person entitled thereto as shown on the security
register.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Interest on overdue principal and (to the extent permitted by
law) on overdue installments of interest, will accrue at the rate of interest
borne by the Notes.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be represented by a single, permanent global certificate in
definitive, fully registered form (the "Global Note") and will be deposited
with, or on behalf of Cede & Co., as nominee for The Depository Trust Company
(together with its successors or assignees, "DTC") or will remain in the custody
of the Trustee pursuant to a FAST Balance Certificate Agreement between DTC and
the Trustee. The Notes will be issued without coupons in denominations of $1,000
and any integral multiples thereof.
At the option of the Holder, subject to the terms of the Indenture and the
limitations applicable to the Global Note, Notes will be exchangeable for other
Notes of any authorized denomination and of a like tenor and aggregate principal
amount. No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
If the Notes are to be redeemed in part, the Company will not be required to
(i) issue, register the transfer of or exchange any Note during a period
beginning at the opening of business 15 days before the day of mailing of notice
of redemption of any such Note that may be selected for redemption and ending at
the close of business on the day of such mailing or (ii) register the transfer
of or exchange any Note so selected for redemption, in whole or in part, except
the unredeemed portion of any such Note being redeemed in part.
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<PAGE>
RANKING
The Notes will be unsecured senior obligations of the Company, ranking pari
passu in right of payment with the Existing Subordinated Notes (prior to their
redemption approximately thirty days after the closing of the Offering) and all
other existing and future Senior Indebtedness of the Company. The Notes will be
effectively subordinated to secured Indebtedness, including the Company's
Indebtedness under the New Credit Facility and initially to the Company's
Existing Senior Notes (prior to their redemption) as described under "The
Refinancing." As of June 30, 1996 and after giving effect to the transactions
described under "The Refinancing," $36.6 million of Senior Indebtedness would
have been outstanding under the New Credit Facility, all of the Company's
existing Indebtedness (including the Existing Senior Notes) would have been
repaid and the Company would have had no other Senior Indebtedness outstanding,
other than the Notes offered hereby. Although the Notes and the obligations
under the New Credit Facility will be senior obligations of the Company, the
lender under the New Credit Facility (and any lender with respect to other
Indebtedness secured by assets of the Company) will have a claim ranking prior
to that of the holders of the Notes with respect to the distribution of assets
and the proceeds thereof securing the Company's obligations thereunder.
OPTIONAL REDEMPTION
The Notes will be subject to redemption at any time on or after
, 2000, at the option of the Company, in whole or in part, on not
less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an
integral multiple thereof at the following redemption prices (expressed as
percentages of the principal amount), if redeemed during the 12-month period
beginning on of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------------------------------------------------- ----------
<S> <C>
2000............................................................ %
2001............................................................ %
</TABLE>
and thereafter at 100% of the principal amount, in each case together with
accrued and unpaid interest, if any, to the redemption date (subject to the
right of holders of record on relevant record dates to receive interest due on
an interest payment date).
In addition, prior to , 1999, in the event one or more Public
Equity Offerings of the Company are consummated after the issue date, the
Company may redeem in the aggregate up to a maximum of 35% of the initial
aggregate principal amount of the Notes with the net proceeds thereof at a
redemption price equal to % of the principal amount thereof plus accrued and
unpaid interest to the redemption date; provided that, after giving effect
thereto, at least $85.0 million aggregate principal amount of Notes remains
outstanding.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable; provided that any redemption
pursuant to the provisions relating to a sale of the Common Stock of the Company
pursuant to one or more Public Equity Offerings shall be made on a pro rata
basis or on as nearly a pro rata basis as practicable (subject to any procedures
of DTC).
CHANGE OF CONTROL PROVISIONS
Purchase of Notes Upon a Change of Control. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash equal to 101% of the principal amount of such Notes, plus
accrued and unpaid interest, if any, to the date of purchase (the "Change of
Control Purchase Date"), pursuant to the offer described below (the "Change of
Control Offer") and the other procedures set forth in the Indenture.
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<PAGE>
Within 30 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes, by first-class mail, postage prepaid, at its address appearing in the
security register, stating, among other things, the Change of Control Purchase
Price and that the Change of Control Purchase Date shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed,
or such later date as is necessary to comply with requirements under the
Exchange Act; that any Note not tendered will continue to accrue interest; that,
unless the Company defaults in the payment of the purchase price, any Notes
accepted for payment of the Change of Control Purchase Price pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date; and certain other procedures that a holder of Notes must
follow to accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer and, accordingly, none of
the holders of the Notes may receive the Change of Control Purchase Price for
their Notes in the event of a Change of Control. The failure of the Company to
make or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due will give the Trustee and the holders of the Notes the
rights described under "--Events of Default."
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indenture and the Company elected to contest such election, there could be no
assurance as to how a court interpreting New York law would interpret the
phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The provisions of the Indenture may not afford holders of Notes the right to
require the Company to repurchase the Notes in the event of a highly leveraged
transaction or certain transactions with the Company's management or its
affiliates, including a reorganization, restructuring, merger or similar
transaction (including, in certain circumstances, an acquisition of the Company
by management or its affiliates) involving the Company that may adversely affect
holders of the Notes, if such transaction is not a transaction defined as a
Change of Control. Reference is made to "--Certain Definitions" for the
definition of "Change of Control." A transaction involving the Company's
management or its affiliates, or a transaction involving a recapitalization of
the Company, will result in a Change of Control if it is the type of transaction
specified by such definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
Optional Redemption Upon Change of Control. The Notes will be redeemable, at
the option of the Company, in whole or in part at any time within 180 days after
a Change of Control upon not less than 30 nor more than 60 days' prior notice to
each holder of Notes to be redeemed, at a redemption price equal to the sum of
(i) the then outstanding principal amount thereof plus (ii) accrued and unpaid
interest, if any, to the redemption date plus (iii) the Applicable Premium.
"Applicable Premium" with respect to the Notes is defined as the greater of
(i) 1.0% of the then outstanding principal amount of such Notes and (ii) the
excess of (A) the present value of the required interest and principal payments
due on such Notes, computed using a discount rate equal to the Treasury Rate
plus the Applicable Spread, over (B) the then outstanding principal amount of
such Notes.
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"Applicable Spread" is defined as 75 basis points.
"Treasury Rate" is defined as the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled by and published in the most recent Federal Reserve Statistical Release
H.15 (519) which has become publicly available at least two business days prior
to the date fixed for prepayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining Average Life of the Notes; provided, that if the
Average Life of the Notes is not equal to the constant maturity of a United
States Treasury security for which a weekly average yield is given, the Treasury
Rate shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of United States Treasury
securities for which such yields are given, except that if the Average Life of
the Notes is less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant maturity of one year
shall be used.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest and
liquidated damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note holder. With respect to
certificated securities, the Company will make all payments of principal,
premium, if any, interest and liquidated damages, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such holder's
registered address. The Notes represented by the Global Note are expected to
trade in DTC's Same Day Funds Settlement System, and any secondary trading
activity in the Notes will, therefore, be required to be settled in immediately
available funds. The Company expects that secondary trading in the certificated
securities will also be settled in immediately available funds.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any of its Subsidiaries to, create, issue, assume, guarantee, or otherwise in
any manner become directly or indirectly liable for or with respect to or
otherwise incur (collectively, "incur") any Indebtedness, including any Acquired
Indebtedness (other than Permitted Indebtedness); provided, however, and subject
to paragraph (b) below in the case of Indebtedness of any Subsidiary, the
Company and its Subsidiaries will be permitted to incur Indebtedness if the
Consolidated Fixed Charge Coverage Ratio for the Company for the four full
fiscal quarters immediately preceding the incurrence of such Indebtedness taken
as one period (and after giving pro forma effect to (i) the incurrence of such
Indebtedness and (if applicable) the application of the net proceeds therefrom,
including to refinance other Indebtedness, as if such Indebtedness was incurred,
and the application of such proceeds occurred, at the beginning of such four-
quarter period; (ii) the incurrence, repayment or retirement of any other
Indebtedness by the Company and its Subsidiaries since the first day of such
four-quarter period as if such Indebtedness was incurred, repaid or retired at
the beginning of such four-quarter period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average daily balance of such Indebtedness
during such four-quarter period); (iii) in the case of Acquired Indebtedness,
the related acquisition; and (iv) any acquisition or disposition by the Company
and its Subsidiaries of any company or any business or any assets out of the
ordinary course of business, or any related repayment of Indebtedness, in each
case since the first day of such four-quarter period, assuming such acquisition
or disposition and any such related repayment had been consummated on the first
day of such four-quarter period) is at least equal to 2.00 to 1.00 during the
period from the date
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hereof to the second anniversary of the date hereof, and 2.25 to 1.00 thereafter
(each such ratio defined herein as the "Applicable Coverage Ratio").
(b) The Company will not permit any of its Subsidiaries to incur any
Indebtedness other than Permitted Subsidiary Indebtedness.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire such Qualified Capital Stock;
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of the Capital Stock of the Company or any
Affiliate of the Company (other than the Capital Stock of any Wholly-Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary to any Person (other than the Company or any of its
Wholly-Owned Subsidiaries) or purchase, redeem or otherwise acquire or
retire for value any Capital Stock of any Subsidiary held by any Person
(other than the Company or any of its Wholly-Owned Subsidiaries);
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate of the Company (other than a Wholly-Owned Subsidiary of the
Company); or
(vi) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing payments described in clauses (i) through (vi) and not
excepted therefrom, collectively, "Restricted Payments") unless after giving
effect to the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined by the board of directors of the
Company, whose determination shall be conclusive and evidenced by a board
resolution), (1) no Default or Event of Default shall have occurred and be
continuing and such Restricted Payment shall not be an event which is, or after
notice or lapse of time or both, would be, an "event of default" under the terms
of any Indebtedness of the Company or its Subsidiaries; (2) immediately before
and immediately after giving effect to such transaction on a pro forma basis,
the Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of the "Limitation on Indebtedness" covenant
and (3) the aggregate amount of all such Restricted Payments declared or made
after the date of the Indenture does not exceed the sum of:
(A) 50% of the aggregate cumulative Consolidated Net Income of the
Company accrued on a cumulative basis during the period beginning on the
first day of the Company's fiscal quarter commencing prior to the date of
the Indenture and ending on the last day of the Company's last fiscal
quarter ending prior to the date of the Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss); plus
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Company as capital contributions to the Company (other than
from any of its Subsidiaries); plus
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of its
Subsidiaries) of its shares of Qualified Capital Stock or any options,
warrants or rights to purchase such shares of Qualified Capital Stock of the
Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Pari Passu or
Subordinated Indebtedness as set forth below); plus
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(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase shares of Qualified Capital
Stock of the Company; plus
(E) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from debt securities or Redeemable Capital Stock
that have been converted into or exchanged for Qualified Capital Stock of
the Company to the extent such debt securities or Redeemable Capital Stock
are originally sold for cash plus the aggregate Net Cash Proceeds received
by the Company at the time of such conversion or exchange.
(b) Notwithstanding the foregoing, and in the case of clauses (ii), (iii)
and (iv) below, as long as no Default shall have occurred and be continuing, the
foregoing provisions shall not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would be
permitted by the provisions of paragraph (a) above or paragraph (vi) below
and such payment shall be deemed to have been paid on such date of
declaration for purposes of the calculation required by paragraph (a) above;
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company in exchange for
(including any such exchange pursuant to the exercise of a conversion right
or privilege in connection with which cash is paid in lieu of the issuance
of fractional shares or scrip), or out of the Net Cash Proceeds of a
substantially concurrent issuance and sale for cash (other than to a
Subsidiary) of other shares of Qualified Capital Stock of the Company;
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from the calculations pursuant to
clause 3(C) of paragraph (a) above;
(iii) any repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness in
exchange for, or out of the net proceeds of a substantially concurrent
issuance and sale for cash (other than to any Subsidiary of the Company) of
any Qualified Capital Stock of the Company, provided that the Net Cash
Proceeds from the issuance of such shares of Qualified Capital Stock are
excluded from the calculations pursuant to clause (3)(C) of paragraph (a)
above;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing") through
the issuance of new Subordinated Indebtedness of the Company, provided that
any such new Subordinated Indebtedness (1) shall be in a principal amount
that does not exceed the principal amount so refinanced (or, if such
Subordinated Indebtedness provides for an amount less than the principal
amount thereof to be due and payable upon declaration or acceleration
thereof, then such lesser amount as of the date of determination), plus the
lesser of (I) the stated amount of any premium or other payment required to
be paid in connection with such a refinancing pursuant to the terms of the
Subordinated Indebtedness being refinanced or (II) the amount of premium or
other payment actually paid at such time to refinance the Subordinated
Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing; (2) has an Average Life to
Stated Maturity greater than the remaining Average Life to Stated Maturity
of the Notes; (3) has a Stated Maturity for its final scheduled principal
payment later than the Stated Maturity for the final scheduled principal
payment of the Notes; and (4) is expressly subordinated in right of payment
to the Notes at least to the same extent as the Subordinated Indebtedness to
be refinanced;
(v) the redemption by the Company of its Existing Notes within 45 days
after the date of the Indenture; and
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(vi) the declaration and payment of dividends on the Common Stock of up
to an amount equal to 6% of the proceeds (after underwriting discounts,
commissions, and issuance expenses) received at any time from any public
offering of Common Stock.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company (other than the Company or a
Wholly-Owned Subsidiary) unless (i) such transaction or series of transactions
is in writing on terms that are no less favorable to the Company or such
Subsidiary, as the case may be, than would be available in a comparable
transaction in arm's-length dealings with an unrelated third party and (ii) with
respect to any transaction or series of transactions involving aggregate
payments or value in excess of $1.0 million, the Company delivers an officers'
certificate to the Trustee certifying that such transaction or series of
transactions complies with clause (i) above and such transaction or series of
related transactions has been approved by a majority of the Disinterested
Directors of the board of directors of the Company. In addition to the
foregoing, with respect to a transaction or series of related transactions
involving aggregate payments or value equal to or greater than $2.5 million, the
Company must deliver to the Trustee a written opinion from an Independent
Financial Advisor stating that such transaction or series of transactions are
fair from a financial point of view. This covenant will not restrict the Company
from (a) redeeming or paying dividends in respect of its Capital Stock permitted
under the "Limitation on Restricted Payments" covenant, (b) making loans or
advances to officers of the Company for bona fide business purposes of the
Company not in excess of $1.0 million in the aggregate at any one time
outstanding, and (c) paying advisory and transaction fees to MLGA in amounts
that are in accordance with past practices and in the ordinary course of
business for the rendering of financial advice and services in connection with
acquisitions, dispositions and financings by the Company.
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, affirm or suffer to exist
any Lien of any kind upon any of its property or assets (including any
intercompany notes), now owned or acquired after the date of the Indenture, or
any income or profits therefrom, except if the Notes are directly secured
equally and ratably with (or prior to in the case of Liens with respect to
Subordinated Indebtedness) the obligation or liability secured by such Lien,
excluding, however, from the operation of the foregoing any of the following:
(a) Any Lien existing as of the date of the Indenture.
(b) Any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes not yet delinquent or which are being contested in good
faith; (3) security for payment of workers' compensation or other insurance;
(4) good faith deposits in connection with tenders, leases, contracts (other
than contracts for the payment of money); (5) zoning restrictions,
easements, licenses, reservations, title defects, rights of others for
rights of way, utilities, sewers, electric lines, telephone or telegraph
lines, and other similar purposes, provisions, covenants, conditions,
waivers, restrictions on the use of property or minor irregularities of
title (and with respect to leasehold interests, mortgages, obligations,
liens and other encumbrances incurred, created, assumed or permitted to
exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which materially
impairs the use of any parcel of property material to the operation of the
business of the Company or any Subsidiary or the value of such property for
the purpose of such business; (6) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds; or (7) operation of law
in favor of mechanics, materialmen, laborers, employees or suppliers,
incurred in the ordinary course of business for sums which are not yet
delinquent or are being contested in good faith or negotiations or by
appropriate proceedings which suspend the collection thereof.
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(c) Any Lien on property of the Company or any Subsidiary securing the
New Credit Facility.
(d) Any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Subsidiary.
(e) Any Lien to secure the performance of bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of business
of the Company or any Subsidiary.
(f) Any Lien securing Indebtedness permitted to be incurred pursuant to
clause (vi) of the definition of "Permitted Indebtedness" and which is not
prohibited to be incurred under the "Limitation on Indebtedness" covenant.
(g) Any Lien securing obligations under hedging agreements that the
Company enters into in the ordinary course of business for the purpose of
protecting its production against fluctuations in commodity prices.
(h) Any Lien securing Indebtedness permitted to be incurred under
Interest Rate Agreements or otherwise incurred to hedge interest rate risk.
(i) Any extension, renewal, refinancing or replacement, in whole or in
part, of any lien described in the foregoing clauses (a) through (h) so long
as no additional collateral is granted as security thereby.
Limitation on Sale of Assets. (a) The Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, consummate an Asset Sale
unless (i) at least 85% of the proceeds from such Asset Sale are received in
cash and (ii) the Company or such Subsidiary receives consideration at the time
of such Asset Sale at least equal to the Fair Market Value of the shares or
assets sold (as determined by the board of directors of the Company and
evidenced in a board resolution).
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Indebtedness under the New
Credit Facility then outstanding, the Company determines not to apply such Net
Cash Proceeds to the permanent prepayment of such Indebtedness under the New
Credit Facility or if no such Indebtedness under the New Credit Facility is then
outstanding, then the Company may within six months of the Asset Sale, invest
the Net Cash Proceeds in properties and assets that (as determined by the board
of directors) replace the properties and assets that were the subject of the
Asset Sale or in properties and assets that will be used in the businesses of
the Company or its Subsidiaries existing on the date of the Indenture or
reasonably related thereto. The amount of such Net Cash Proceeds neither used to
permanently repay or prepay Indebtedness under the New Credit Facility nor used
or invested as set forth in this paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals $5.0 million or
more, the Company shall within 20 business days apply the Excess Proceeds to the
repayment of the Securities and any Pari Passu Indebtedness required to be
repurchased under the instrument governing such Pari Passu Indebtedness as
follows: (a) the Company shall make an offer to purchase (an "Offer") from all
holders of the Notes in accordance with the procedures set forth in the
Indenture the maximum principal amount (expressed as a multiple of $1,000) of
Notes that may be purchased out of an amount (the "Security Amount") equal to
the product of such Excess Proceeds multiplied by a fraction, the numerator of
which is the outstanding principal amount of the Notes, and the denominator of
which is the outstanding principal amount of the Notes and such Pari Passu
Indebtedness (subject to proration in the event such amount is less than the
aggregate Offered Price (as defined herein) of all Notes tendered) and (b) to
the extent required by such Pari Passu Indebtedness to reduce permanently the
principal amount of such Pari Passu Indebtedness, the Company shall make an
offer to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a
"Pari Passu Offer") in an amount (the
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"Pari Passu Debt Amount") equal to the excess of the Excess Proceeds over the
Security Amount; provided that in no event shall the Pari Passu Debt Amount
exceed the principal amount of such Pari Passu Indebtedness plus the amount of
any premium required to be paid to repurchase such Pari Passu Indebtedness. The
offer price shall be payable in cash in an amount equal to 100% of the principal
amount of the Notes plus accrued and unpaid interest, if any, to the date (the
"Offer Date") such Offer is consummated (the "Offered Price"), in accordance
with the procedures set forth in the Indenture. To the extent that the aggregate
Offered Price of the Notes tendered pursuant to the Offer is less than the
Security Amount relating thereto or the aggregate amount of Pari Passu
Indebtedness that is purchased is less than the Pari Passu Debt Amount (the
amount of such shortfall, if any, constituting a "Deficiency"), the Company
shall use such Deficiency in the business of the Company and its Subsidiaries.
Upon completion of the purchase of all the Notes tendered pursuant to an Offer
and repurchase of the Pari Passu Indebtedness pursuant to a Pari Passu Offer,
the amount of Excess Proceeds, if any, shall be reset at zero.
(d) Whenever the Excess Proceeds received by the Company exceed $5.0
million, such Excess Proceeds shall, prior to the purchase of Notes or any Pari
Passu Indebtedness described in paragraph (c) above, be set aside by the Company
in a separate account pending (i) deposit with the depository or a paying agent
of the amount required to purchase the Notes or Pari Passu Indebtedness tendered
in an Offer or a Pari Passu Offer, (ii) delivery by the Company of the Offered
Price to the holders of the Notes or Pari Passu Indebtedness tendered in an
Offer or a Pari Passu Offer and (iii) application, as set forth above, of Excess
Proceeds in the business of the Company and its Subsidiaries. Such Excess
Proceeds may be invested in Temporary Cash Investments, provided that the
maturity date of any such investment made after the amount of Excess Proceeds
exceeds $5.0 million shall not be later than the Offer Date. The Company shall
be entitled to any interest or dividends accrued, earned or paid on such
Temporary Cash Investments, provided that the Company shall not withdraw such
interest from the separate account if an Event of Default has occurred and is
continuing.
(e) If the Company becomes obligated to make an Offer pursuant to clause (c)
above, the Notes shall be purchased by the Company, at the option of the holders
thereof, in whole or in part in integral multiples of $1,000, on a date that is
not earlier than 45 days and not later than 60 days from the date the notice is
given to holders, or such later date as may be necessary for the Company to
comply with the requirements under the Exchange Act, subject to proration in the
event that the Security Amount is less than the aggregate Offered Price of all
Notes tendered.
(f) The Company shall comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with an Offer.
(g) The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Indebtedness as in effect on the date of the Indenture as such
Indebtedness may be refinanced from time to time) that would materially impair
the ability of the Company to make an Offer to purchase the Notes or, if such
Offer is made, to pay for the Notes tendered for purchase.
Limitation on Issuance and Sale of Preferred Stock of Subsidiaries. The
Company will not permit (a) any Subsidiary of the Company to issue any Preferred
Stock (other than to the Company or any Wholly-Owned Subsidiary) or (b) any
Person (other than the Company or any Wholly-Owned Subsidiary) to own any
Preferred Stock of any Subsidiary.
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Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Subsidiary
of the Company to (i) pay dividends, in cash or otherwise, or make any other
distribution on its Capital Stock, (ii) pay any Indebtedness owed to the Company
or a Subsidiary of the Company, (iii) make any Investment in the Company or a
Subsidiary of the Company or (iv) transfer any of its properties or assets to
the Company or any Subsidiary, except (a) any encumbrance or restriction,
pursuant to an agreement in effect on the date of the Indenture and listed on a
schedule thereto; (b) any encumbrance or restriction, with respect to a
Subsidiary that is not a Subsidiary of the Company on the date of the Indenture,
in existence at the time such Person becomes a Subsidiary of the Company and, in
the case of clauses (a) and (b), not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary; and (c) any encumbrance or
restriction existing under any agreement that extends, renews, refinances or
replaces the agreements containing the encumbrances or restrictions in the
foregoing clauses (a) and (b), or in this clause (c), provided that the terms
and conditions of any such encumbrances or restrictions are not materially less
favorable to the holders of the Notes than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced.
Provision of Financial Statements. Whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act, the Company will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to such Section 13(a) or 15(d) if the
Company were so subject, such documents to be filed with the Commission on or
prior to the respective dates (the "Required Filing Dates") by which the Company
would have been required so to file such documents if the Company were so
subject. The Company will also in any event (x) within 15 days of each Required
Filing Date (i) transmit by mail to all holders of the Notes, as their names and
addresses appear in the Security Register, without cost to such holders of the
Notes and (ii) file with the Trustee copies of the annual reports, quarterly
reports and other documents which the Company would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if
the Company were subject to such Sections and (y) if filing such documents by
the Company with the Commission is not permitted under the Exchange Act,
promptly upon written request and payment of the reasonable cost of duplication
and delivery, supply copies of such documents to any prospective holder of Notes
at the Company's cost.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company shall not, in a single transaction or a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets to any Person or group of affiliated Persons, or
permit any of its Subsidiaries to enter into any such transaction or
transactions if such transaction or transactions, in the aggregate, would result
in a sale, assignment, conveyance, transfer, lease or disposition of all or
substantially all of the properties and assets of the Company and its
Subsidiaries on a consolidated basis to any other Person or group of affiliated
Persons, unless (i) either (a) the Company shall be the continuing corporation
or (b) the Person (if other than the Company) formed by such consolidation or
into which the Company is merged or the Person which acquires by sale,
assignment, conveyance, transfer, lease or disposition of all or substantially
all of the properties and assets of the Company and its Subsidiaries on a
consolidated basis (the "Surviving Entity") shall be a corporation duly
organized and validly existing under the laws of the United States of America,
any state thereof or the District of Columbia and such Person assumes by a
supplemental indenture in a form reasonably satisfactory to the Trustee all the
obligations of the Company under the Notes and the Indenture, and the Indenture
shall remain in full force and effect; (ii) immediately before and immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Consolidated Net Worth of the Company (or the Surviving
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Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction; (iv) immediately before and immediately after giving
effect to such transaction on a pro forma basis (on the assumption that the
transaction occurred on the first day of the four-quarter period immediately
prior to the consummation of such transaction with the appropriate adjustments
with respect to the transaction being included in such pro forma calculation),
the Company (or the surviving Entity if the Company is not the continuing
obligor under the Indenture) could incur $1.00 of additional Indebtedness under
the provisions of the "Limitation on Indebtedness" covenant (other than
Permitted Indebtedness); and (v) the Company shall have delivered, or caused to
be delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an officers' certificate and an opinion of counsel, each to the
effect that such consolidation, merger, transfer, lease or other transaction and
the supplemental indenture in respect thereto comply with the provisions
described herein and that all conditions precedent herein provided for relating
to such transaction have been complied with. Notwithstanding any provision to
the contrary contained herein or in the Indenture, the Company shall not be
prevented, restricted or limited in any way from merging with and into Holdings.
In the event of any consolidation, merger, transfer, sale, assignment, lease
or other transaction described in, and complying with, the conditions listed in
the immediately preceding paragraph in which the Company is not the continuing
corporation, the successor Person formed or remaining shall succeed to, and be
substituted for, and may exercise every right and power of, the Company, and the
Company would be discharged from all obligations and covenants under the
Indenture and the Notes, provided that, in the case of a transfer by lease, the
predecessor shall not be discharged from the obligation to make payments of
principal and interest on the Notes.
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any Note
when it becomes due and payable, and such default shall continue for a
period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Stated Maturity, upon redemption, upon
repurchase pursuant to a Change of Control Offer or an Offer in respect of
Excess Proceeds, upon acceleration or otherwise;
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company under the Indenture (other than a
default in the performance, or breach, of a covenant or agreement which is
specifically dealt with in clauses (i) or (ii) or in clauses (b), (c) and
(d) of this clause (iii)) and such default or breach shall continue for a
period of 30 days after written notice of such failure requiring the Company
to remedy the same shall have been given, (x) to the Company by the Trustee
or (y) to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Notes; (b) there shall be a
default in the performance or breach of the provisions described in
"--Consolidation, Merger, Sale of Assets"; (c) the Company shall have failed
to make or consummate an Offer in respect of Excess Proceeds in accordance
with the provisions of the "Limitation on Sale of Assets" covenant; or (d)
the Company shall have failed to make or consummate a Change of Control
Offer in accordance with the provisions of the "Purchase of Notes Upon a
Change of Control" covenant;
(iv) (a) any default in the payment of the principal, premium, if any,
or interest on any Indebtedness shall have occurred under any agreements,
indentures or instruments under which the Company or any Subsidiary then has
outstanding Indebtedness in excess of $5.0 million when the same shall
become due and payable and continuation of such default after any applicable
grace period or (b) an event of default as defined in any of the agreements,
indentures or instruments described in clause (a) of this paragraph (iv)
shall have occurred; and the Indebtedness thereunder,
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if not already matured at its final maturity in accordance with its terms,
shall have been accelerated;
(v) one or more judgments, orders or decrees for the payment of money in
excess of $2.5 million, either individually or in the aggregate (net of
amounts for which an insurance company has agreed in writing that it is
liable) shall be entered against the Company or any Subsidiary or any of
their respective properties and shall not be discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such judgment,
order or decree or (b) there shall have been a period of 90 consecutive days
during which a stay of enforcement of such judgment or order, by reason of
an appeal or otherwise, shall not be in effect;
(vi) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Material Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or (b) a decree or order adjudging the Company or
any Material Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or
any Material Subsidiary under any applicable Federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or any Material
Subsidiary or of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and any such decree or order for
relief shall continue to be in effect, or any such other decree or order
shall be unstayed and in effect, for a period of 90 consecutive days;
(vii) (a) the Company or any Material Subsidiary commences a voluntary
case or proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any
Material Subsidiary consents to the entry of a decree or order for relief in
respect of the Company or such Material Subsidiary in an involuntary case or
proceeding under any applicable Bankruptcy Law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, (c) the Company or
any Material Subsidiary files a petition or answer or consent seeking
reorganization or relief under any applicable Federal or state law, (d) the
Company or any Material Subsidiary (x) consents to the filing of such
petition or the appointment of, or taking possession by, a custodian,
receiver, liquidator, assignee, trustee, sequestrator, or similar official
of the Company or such Material Subsidiary of any substantial part of its
property, (y) makes an assignment for the benefit of creditors or (z) admits
in writing its inability to pay its debts generally as they become due or
(e) the Company or any Material Subsidiary takes any corporate action in
furtherance of any such actions in this paragraph (vii);
(viii) any holder or holders of at least $5.0 million in aggregate
principal amount of Indebtedness of the Company or any Subsidiary after a
default under such Indebtedness shall notify the Trustee of the intended
sale or disposition of any assets of the Company or any Subsidiary that have
been pledged to or for the benefit of such holder or holders to secure such
Indebtedness or shall commence proceedings, or take any action (including by
way of set-off), to retain in satisfaction of such Indebtedness or to
collect on, seize, dispose of or apply in satisfaction of Indebtedness,
assets of the Company or any Subsidiary (including funds on deposit or held
pursuant to lock-box and other similar arrangements); or
(ix) the Company shall fail to redeem the Existing Senior Notes and the
Existing Subordinated Notes within 45 days after the date of the original
issuance of the Notes.
If an Event of Default (other than as specified in clauses (vi) and (vii) of
the prior paragraph) shall occur and be continuing, the Trustee or the holders
of 25% in aggregate principal amount of the Notes then outstanding may declare
the Notes due and payable immediately at their principal amount together with
accrued and unpaid interest, if any, to the date the Notes become due and
payable and thereupon the Trustee may, at its discretion, proceed to protect and
enforce the rights of the holders of Notes by appropriate judicial proceeding.
If an Event of Default specified in clause (vi) or (vii) of the prior paragraph
occurs and is continuing, then all the Notes shall ipso facto become and be
immediately
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due and payable, in an amount equal to the principal amount of the Notes,
together with accrued and unpaid interest, if any, to the date the Notes become
due and payable, without any declaration or other act on the part of the Trustee
or any holder of the Notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of the Notes outstanding, by written
notice to the Company and the Trustee, may annul such declaration if (a) the
Company has paid or deposited with the Trustee a sum sufficient to pay (i) all
sums paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, (ii) all overdue interest on all Notes, and (iii) to the extent
that payment of such interest is lawful, interest upon overdue interest at the
rate borne by the Notes; and (b) all Events of Default, other than the
non-payment of principal of the Notes which have become due solely by such
declaration of acceleration, have been cured or waived.
The holders of not less than a majority in principal amount of the Notes
outstanding may on behalf of the holders of all the Notes waive any past
defaults under the Indenture, except a default in the payment of the principal
of, premium, if any, or interest on any Note, or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the holder of each outstanding Note that is affected by such
modification or amendment.
The Company is also required to notify the Trustee within five business days
of the occurrence of any Default.
The Trust Indenture Act contains limitations on the right of the Trustee,
should it become a creditor of the Company or any Guarantor, to obtain payment
of claims cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions, provided that if it acquires any conflicting interest it
must eliminate such conflict upon the occurrence of an Event of Default or else
resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("covenant defeasance") and any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Notes. In the event covenant defeasance
occurs, certain events (not including non-payment or bankruptcy and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of, premium,
if any, and interest on the outstanding Notes on the Stated Maturity (or on any
date after , 2000 if such Notes are to be redeemed on such date) (such date
being referred to as the "Defeasance Redemption Date"), if prior to electing to
exercise either defeasance or covenant defeasance, the Company has delivered to
the Trustee an
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irrevocable notice to redeem all of the outstanding Notes on the Defeasance
Redemption Date of such principal or installment of principal or interest; (ii)
in the case of defeasance, the Company shall have delivered to the Trustee an
opinion of independent counsel in the United States stating that (A) the Company
has received from, or there has been published by, the Internal Revenue Service
a ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel in the United States shall confirm that, the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of each defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (iii) in
the case of covenant defeasance, the Company shall have delivered to the Trustee
an opinion of independent counsel in the United States to the effect that the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit; (v) such defeasance or covenant
defeasance shall not cause the Trustee for the Notes to have a conflicting
interest with respect to any securities of the Company; (vi) such defeasance or
covenant defeasance shall not result in a breach or violation of, or constitute
a Default under, the Indenture or any other material agreement or instrument to
which the Company is a party or by which it is bound; (vii) the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States to the effect that the defeasance trust does not violate the Investment
Company Act of 1940 and after the passage of 123 days following the deposit the
trust fund will not be subject to the effect of sections 547 and 550 of the
United States Bankruptcy Code or section 15 of the New York Debtor and Creditor
Law; (viii) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of the Notes over the other creditors of the Company
with the intent of defecting, hindering, delaying or defrauding creditors of the
Company or others; (ix) no event or condition shall exist on the date of deposit
that would prevent the Company from making payments of the principal of,
premium, if any, and interest on the Notes on the date of such deposit or at any
time ending on the 123rd day after the date of such deposit; and (x) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
independent counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid and Notes for whose payment
funds have been deposited in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation (x) have become due and payable, (y) will become due and payable at
their Stated Maturity within one year or (z) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the expense, of the
Company and the Company has irrevocably deposited or caused to be deposited with
the Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of, premium, if any, and interest to the date of
deposit; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with and that such satisfaction and discharge will not result
in a breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company is a party or by
which the Company is bound.
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MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of at least 50% of the holders in aggregate
outstanding principal amount of the Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby: (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Note or waive a default in
the payment of the principal or interest on any Note or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the coin or currency in which any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment after the Stated Maturity thereof;
(ii) amend, change or modify the obligation of the Company to make and
consummate an Offer with respect to any Asset Sales or the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control or modify any of the provisions or definitions with respect
thereto; (iii) amend, change or modify the obligation or ability of the Company
to make and consummate an offer in accordance with "--Change of Control
Provisions-- Optional Redemption upon Change of Control," including amending,
changing or modifying any of the provisions or definitions with respect thereto;
(iv) reduce the percentage in principal amount of outstanding Notes, the consent
of whose holders is required for any such supplemental indenture, or the consent
of whose holders is required for any waiver; (v) modify any of the provisions
relating to supplemental indentures requiring the consent of holders or relating
to the waiver of past defaults or relating to the waiver of certain covenants,
except to increase the percentage of outstanding Notes required for such actions
or to provide that certain other provisions of the Indenture cannot be modified
or waived without the consent of the holder of each Note affected thereby; (vi)
except as otherwise permitted under "--Consolidation, Merger, Sale of Assets,"
consent to the assignment or transfer by the Company of any of its rights and
obligations under the Indenture; or (vii) amend or modify any of the provisions
of the Indenture in any manner which subordinates the Notes in right of payment
to other Indebtedness of the Company.
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Adjusted Consolidated Interest Expense" of any Person means, without
duplication, for any period, as applied to any Person, the sum of (a) the
interest expense of such Person and its Consolidated Subsidiaries for such
period, on a Consolidated basis, including without limitation, (i) amortization
of debt discount, (ii) the net cost under interest rate contracts (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation and (iv) accrued interest, plus (b) (i) the interest component of the
Capital Lease Obligations paid, accrued and/or scheduled to be paid, or accrued
by such Person during such period, and (ii) all capitalized interest of such
Person and its Consolidated Subsidiaries, in each case as determined in
accordance with GAAP consistently applied.
"Affiliate" means, (i) with respect to any specified Person, (A) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (B) any other Person that
owns, directly or indirectly, 5% or more of such Person's Capital Stock or any
officer or director of any such specified Person or other Person described in
clauses (A) or (B), or (ii) with respect to any natural Person, any person
having a relationship with such Person by
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blood, marriage or adoption not more remote than first cousin. For the purposes
of this definition, "control" when used with respect to any specified Person
means the power to direct the management and policies of such Person directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (a) any Capital Stock
of any Subsidiary; (b) all or substantially all of the properties or assets of
any division or line of business of the Company or its Subsidiaries; or (c) any
other properties or assets of the Company or any Subsidiary, other than in the
ordinary course of business; provided that the sale of any material portion of
the Company's facilities in Kokomo, Indiana, Arcadia, Louisiana or Openshaw,
England shall be deemed to be not in the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties and assets (A) that is governed by the provisions
described under "Consolidation, Merger, Sale of Assets," (B) that is of the
Company to any Wholly-Owned Subsidiary, or of any Subsidiary to the Company or
any Wholly-Owned Subsidiary in accordance with the terms of the Indenture or (C)
for which the Fair Market Value of any transferred properties or assets is less
than $1 million.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment; by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States Federal or State law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Capital Lease Obligation" of any Person means any obligations of such
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participation or other equivalents (however designated) of such Person's capital
stock.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all shares that such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50% of
the total outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company, was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company consolidates with, or merges with or into, another Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, the Company, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (a) the outstanding Voting Stock of the Company is converted
into or
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exchanged for (1) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (2) cash, securities and other property
in an amount which could be paid by the Company as a Restricted Payment under
the Indenture and (b) immediately after such transaction no "person" or "group"
(as such terms are used in Section 13(d) and 14(d) of the Exchange Act), other
than Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of the surviving or transferee corporation; or (iv) the Company is
liquidated or dissolved or adopts a plan of liquidation or dissolution other
than in a transaction which complies with the provisions described under
"Description of the Notes--Consolidation, Merger, Sale of Assets."
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Company" means Haynes International, Inc., a corporation incorporated under
the laws of Delaware, until a successor Person shall have become such pursuant
to the applicable provisions of the Indenture, and thereafter "Company" shall
mean such successor Person.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of EBITDA to the sum of Adjusted Consolidated Interest Expense
for such period and cash and non-cash dividends paid on any Preferred Stock of
such Person during such period; provided that (i) in making such computation,
the Adjusted Consolidated Interest Expense attributable to interest on any
Indebtedness shall be computed on a pro forma basis (calculated as described
under "--Certain Covenants-- Limitation on Indebtedness") and (A) where such
Indebtedness was outstanding during the period and bore a floating interest
rate, interest shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and (B) where
such indebtedness was not outstanding during the period for which the
computation is being made but which bears, at the option of the Company, a fixed
or floating rate of interest, shall be computed by applying at the option of the
Company, either the fixed or floating rate and (ii) in making such computation,
the Adjusted Consolidated Interest Expense of such Person attributable to
interest on any Indebtedness under a revolving credit facility computed on a pro
forma basis shall be computed based upon the average daily balance of such
Indebtedness during the applicable period.
"Consolidated Income Tax Expense" means for any period, as applied to any
Person, the provision for federal, state, local and foreign income taxes of such
Person and its Consolidated Subsidiaries for such period as determined in
accordance with GAAP consistently applied.
"Consolidated Net Income" of any Person means, for any period, the
consolidated net income (or loss) of such Person and its Consolidated
Subsidiaries for such period as determined in accordance with GAAP consistently
applied, adjusted, to the extent included in calculating such net income (loss),
by excluding, without duplication, (i) all extraordinary gains or losses (less
all fees and expenses relating thereto), (ii) the portion of net income (or
loss) of such Person and its Consolidated Subsidiaries allocable to minority
interests in unconsolidated Persons to the extent that cash dividends or
distributions have not actually been received by such Person or one of its
Consolidated Subsidiaries, (iii) net income (or loss) of any Person combined
with the Company or any of its Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iv) any gain or
loss, net of taxes, realized upon the termination of any employee pension
benefit plan, (v) net gains or losses (less all fees and expenses relating
thereto) in respect of dispositions of assets other than in the ordinary course
of business, (vi) the expenses recognized in connection with the payment of the
prepayment premiums related to the Redemption, (vii) the expenses recognized in
connection with the termination of and
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repayment of amounts outstanding under the Existing Credit Facility, (viii) the
expenses recognized related to amortization of fees and other charges in
connection with the 1989 Acquisition, (ix) an amount equal to the excess of (A)
the interest expense incurred on the Existing Notes and the Notes during the
period following the consummation of the Offering and prior to the date of the
Redemption, over (B) the interest income earned on the proceeds from the
Offerings designated for the Redemption during the same period, or (x) the net
income of any Subsidiary to the extent that the declaration of dividends or
similar distributions by that Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders.
"Consolidated Net Worth" of any Person means the Consolidated stockholders'
equity (excluding Redeemable Capital Stock) of such Person and its Subsidiaries,
as determined in accordance with GAAP consistently applied.
"Consolidated Non-Cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its consolidated subsidiaries for such period, as determined in accordance
with GAAP (excluding any non-cash charge that requires an accrual or reserve for
cash charges for any future period and all non-cash charges incurred in
connection with the valuation of inventory on a LIFO basis).
"Consolidation" means, with respect to the accounts of any Person, the
consolidation of such Person and each of its subsidiaries if and to the extent
the accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP consistently
applied. The term "Consolidated" shall have a similar meaning.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors who does not have any
material direct or indirect financial interest in or with respect to such
transaction or series of related transactions.
"EBITDA" means the sum of Consolidated Net Income, Adjusted Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges deducted in computing Consolidated Net Income in each case, for such
period, of the Company and its Subsidiaries on a Consolidated basis, all
determined in accordance with GAAP consistently applied.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the Indenture.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person (debtor) referred to in the definition of "Indebtedness"
below guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement (i)
to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to assure
the holder of such Indebtedness against loss, (iii) to supply funds to, or in
any other manner invest in, the debtor (including any agreement to pay for
property or services without requiring that such property be received or such
services be rendered), (iv) to maintain working capital or equity capital of the
debtor, or otherwise to maintain the net worth, solvency or other financial
condition of the
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debtor or (v) otherwise to assure a creditor against loss; provided that the
term "guarantee" shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities and in connection with any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, (iii)
all indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even if
the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under Interest Rate Agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien, upon or
with respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness, (vii) all Guaranteed Debt of such
Person, (viii) all Redeemable Capital Stock valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends, and (ix) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability of the types referred to in
clauses (i) through (viii) above. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on
any date on which Indebtedness shall be required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the fair market
value of such Redeemable Capital Stock, such fair market value to be determined
in good faith by the board of directors of the issuer of such Redeemable Capital
Stock.
"Independent Financial Advisor" means a nationally recognized investment
banking firm (i) which does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the Company
and (ii) which, in the judgment of the board of directors of the Company, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
"Investments" means, with respect to any Person, directly or indirectly, any
advance, loan, or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or other
securities issued or owned by any other Person.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Material Subsidiary" means a Subsidiary that is a "significant subsidiary"
of the Company as defined in Rule 1-02 of Regulation S-X under the Securities
Act and the Exchange Act.
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"Maturity" when used with respect to any Note means the date on which the
principal of such Note becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date, the
Change of Control Purchase Date or the redemption date and whether by
declaration of acceleration, Offer in respect of Excess Proceeds, Change of
Control, call for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. or any successor rating
agency.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof in the form of cash or cash equivalents including payments
in respect of deferred payment obligations when received in the form of, or
stock or other assets when disposed for, cash or cash equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Subsidiary) net of (i) brokerage commissions and other reasonable fees
and expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Subsidiary) owning a beneficial interest in the assets subject to
the Asset Sale and (v) appropriate amounts to be provided by the Company or any
subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Subsidiary, as the case may be, after such Asset Sale, including without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee and (b) with respect to any issuance or
sale of Capital Stock or options, warrants or rights to purchase Capital Stock,
or debt securities or Capital Stock that have been converted into or exchanged
for Capital Stock, as referred to in the "Limitation on Restricted Payments"
covenant, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations when
received in the form of, or stock or other assets when disposed for, cash or
cash equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Subsidiary), net of attorney's fees,
accountant's fees and brokerage, consultation, underwriting and other fees and
expenses actually incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
"New Credit Facility" means the Loan and Security Agreement, dated as of the
close of the Offering, among the Company, Congress Financial Corporation
(Central) ("Congress"), as agent, and Congress and CoreStates Bank, N.A., as
lenders, as such agreement may be amended, renewed, extended, substituted,
refinanced, restructured, replaced, supplemented or otherwise modified from time
to time, whether by the same or any other lender or group of lenders (including,
without limitation, any successive renewals, extensions, substitutions,
refinancings, restructurings, replacements, supplementations or other
modifications of the foregoing), so long as the collateral therein consists only
of accounts receivable, inventory and fixed assets or any combination thereof.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Notes.
"Permitted Holders" means MLGA Fund II, L.P., and any Affiliates thereof.
"Permitted Indebtedness" means the following:
(i) Indebtedness of the Company under the New Credit Facility, under
which the sum of (a) the aggregate principal amount of revolving loan
advances and (b) the aggregate stated amount of letters of credit issued
pursuant thereto, at any one time outstanding does not exceed the greater of
(x) $50.0 million and (y) an amount equal to (i) 60% of Eligible Inventory
consisting of finished goods and raw materials for such finished goods, plus
(ii) 45% of Eligible Inventory consisting of work-in-process and
semi-processed goods plus (iii) 85% of the Net Amount of Eligible Accounts
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minus (iv) any Availability Reserves, as each of the capitalized terms in
this clause (y) is defined in the New Credit Facility;
(ii) Indebtedness of the Company pursuant to the Notes;
(iii) Indebtedness of the Company evidenced by the Existing Senior Notes
and the Subordinated Notes to be redeemed pursuant to a notice of redemption
given on the date hereof;
(iv) Indebtedness of the Company owing to a Subsidiary, provided that
any Indebtedness of the Company owing to a Subsidiary is made pursuant to an
intercompany note and is subordinated in right of payment from and after
such time as the Notes shall become due and payable (whether at Stated
Maturity, acceleration or otherwise) to the payment and performance of the
Company's obligations under the Notes; provided, further, that any
disposition, pledge or transfer of any such Indebtedness to a Person (other
than the Company or another Subsidiary) shall be deemed to be an incurrence
of such Indebtedness by the Company not permitted by this clause (iv);
(v) obligations of the Company entered into in the ordinary course of
business pursuant to Interest Rate Agreements designed to protect the
Company or any Subsidiary against fluctuations in interest rates in respect
of Indebtedness of the Company or any of its Subsidiaries, which obligations
do not exceed the aggregate principal amount of such Indebtedness and
hedging arrangements that the Company enters into in the ordinary course of
business for the purpose of protecting its production against fluctuations
in commodity prices;
(vi) Indebtedness of the Company incurred (a) as a Purchase Money
Obligation, (b) under any Capital Lease Obligation, or (c) with respect to
letters of credit not otherwise permitted pursuant to clause (i) of this
definition of "Permitted Indebtedness" in a principal amount for clauses
(a), (b) and (c) in the aggregate not to exceed $10.0 million in any fiscal
year of the Company;
(vii) Indebtedness of the Company in addition to that described in
clauses (i) through (vi) of this definition of "Permitted Indebtedness," not
to exceed $10.0 million at any time outstanding in the aggregate; provided
that such amount shall be reduced by the amount, if any, of Permitted
Subsidiary Indebtedness then outstanding under clause (iii) of the
definition of "Permitted Subsidiary Indebtedness";
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "renewal/refinancing") of any Indebtedness
described in clauses (ii) and (vi) of this definition of "Permitted
Indebtedness," including any successive renewal/refinancings so long as the
aggregate principal amount of Indebtedness represented thereby is not
increased by such renewal/refinancing plus the lesser of (I) the stated
amount of any premium or other payment required to be paid in connection
with such renewal/refinancing pursuant to the terms of such Indebtedness or
(II) the amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of expenses of
the Company incurred in connection with such renewal/refinancing and, in the
case of Pari Passu Indebtedness or Subordinated Indebtedness, such
renewal/refinancing does not reduce the Average Life to Stated Maturity or
the Stated Maturity of such Indebtedness; and
(ix) Permitted Subsidiary Indebtedness that is permitted to be incurred
by a Subsidiary pursuant to clauses (ii) and (iii) under the definition of
"Permitted Subsidiary Indebtedness."
(x) Acquired Indebtedness that, after giving pro forma effect thereto,
and to the related acquisition as provided in "--Certain
Covenants--Limitation on Indebtedness," results in (x) the Consolidated
Fixed Coverage Ratio being less than the Applicable Coverage Ratio but
greater than or equal to 1.75 to 1.00 and (y) the Consolidated Fixed
Coverage Ratio increasing as a consequence of such incurrence.
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<PAGE>
"Permitted Investment" means (i) Investments in any Wholly-Owned Subsidiary;
(ii) Indebtedness of a Subsidiary described under clause (ii) of the definition
of "Permitted Subsidiary Indebtedness" or Indebtedness of the Company described
under clause (iv) of the definition of "Permitted Indebtedness;" (iii) Temporary
Cash Investments; (iv) Investments acquired by the Company or any Subsidiary in
connection with an Asset Sale permitted under the "Limitation on Sale of Assets"
covenant to the extent such investments are non-cash proceeds as permitted under
such covenant; and (v) other Investments in the aggregate not to exceed $5.0
million.
"Permitted Subsidiary Indebtedness" means:
(i) Acquired Indebtedness of any Subsidiary whose incurrence would be
permitted under the test set forth in paragraph (x) of the definition of
"Permitted Indebtedness" as if calculated for such Subsidiary;
(ii) Indebtedness of a Wholly-Owned Subsidiary owing to the Company or
another Wholly-Owned Subsidiary; provided that any such Indebtedness is made
pursuant to an intercompany note in the form attached as an exhibit to the
Indenture; provided, further, that (x) any disposition, pledge or transfer
of any such Indebtedness to a Person (other than the Company or a Wholly-
Owned Subsidiary and other than any pledge as security for the New Credit
Facility) shall be deemed to be an incurrence of such Indebtedness by the
obligor not permitted by this clause (ii) and (y) any transaction pursuant
to which any Wholly-Owned Subsidiary, which has Indebtedness owing to the
Company or any other Wholly-Owned Subsidiary, ceases to be a Wholly-Owned
Subsidiary shall be deemed to be the incurrence of Indebtedness by the
Company or such other Wholly-Owned Subsidiary that is not permitted under
this clause (ii);
(iii) Indebtedness of a Subsidiary in addition to that described in
clauses (i) and (ii) of this definition of "Permitted Subsidiary
Indebtedness," not to exceed $10.0 million at any time outstanding in the
aggregate; provided, that such amount shall be reduced by the amount, if
any, of Permitted Indebtedness then outstanding under clause (vii) of the
definition of "Permitted Indebtedness"; and
(iv) any renewals, extensions, substitutions, refinancings or
replacements (collectively, a "debt refinancing") of any Indebtedness
described in clause (i) of this definition of "Permitted Subsidiary
Indebtedness," including any successive debt refinancings thereof, so long
as any such new Indebtedness shall be in a principal amount that does not
exceed the principal amount so refinanced, plus an amount equal to the
lesser of (x) the stated amount of any premium required to be paid in
connection with any such debt refinancing and (y) the amount of premium
actually paid in connection with any such debt refinancing plus the amount
of expenses of such Subsidiary incurred in connection therewith.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of such
Person's preferred stock whether now outstanding, or issued after the date of
the Indenture, and including, without limitation, all classes and series of
preferred or preference stock.
"Public Equity Offering" means any underwritten public offering of common
stock of the Company pursuant to a registration statement filed pursuant to the
Securities Act which offering is consummated after the Issue Date.
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company or its Subsidiaries, and any
additions and accessions thereto, which are purchased by the Company or any
Subsidiary at any time after the Notes are issued; provided that (i)
83
<PAGE>
the security agreement or conditional sales or other title retention contract
pursuant to which the Lien on such assets described above is created
(collectively a "Purchase Money Security Agreement") shall be entered into
within 90 days after the purchase or substantial completion of the construction
of such assets and shall at all times be confined solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection with
the purchase of additions and accessions thereto and except in respect of fees
and other obligations in respect of such Indebtedness and (iii) (A) the
aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Purchase Money Security Agreement is entered into
exceed 100% of the purchase price to the Company or any Subsidiary of the assets
subject thereto or (B) the Indebtedness secured thereby shall be with recourse
solely to the assets so purchased or acquired, any additions and accessions
thereto and any proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of any event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Notes or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to any such Stated Maturity at the option of the
holder thereof.
"S&P" means Standard & Poor's Corporation or any successor rating agency.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Subsidiary sells or transfers
any property or asset in connection with the leasing, or the resale against
installment payments, of such property or asset to the Company or such
Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Indebtedness" means the Indebtedness of the Company other than
Subordinated Indebtedness.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company which is by
its terms expressly subordinated in right of payment to the Notes.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries; provided, that an Unrestricted Subsidiary shall not be
deemed a Subsidiary for purposes of the Indenture.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than two years after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof and guaranteed
fully as to principal, premium, if any, and interest by the United States of
America; (ii) any certificate of deposit, maturing not more than two years after
the date of acquisition, issued by, or time deposit of, a commercial banking
institution that is a member of the Federal Reserve System and that has combined
capital and surplus and undivided profits of not less than $500,000,000, whose
debt has a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P;
(iii) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an
84
<PAGE>
Affiliate or Subsidiary of the Company) organized and existing under the laws of
the United States of America with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's or "A-1"
(or higher) according to S&P; (iv) any money market deposit accounts issued or
offered by (a) a domestic commercial bank having capital and surplus in excess
of $500,000,000 or (b) a nationally recognized investment bank having capital
and surplus and undivided profits in excess of $150,000,000; (v) repurchase
obligations for underlying securities of the type described in clause (i) above
entered into with any financial institution designated as a "Primary Dealer" by
the Federal Reserve Bank of New York or any commercial banking institution that
satisfies the criteria set forth in clause (ii) of this definition of "Temporary
Cash Investments" as a counterparty; and (vi) Eurodollar certificates of
deposit, maturing not more than two years after the date of acquisition issued
by, or any time deposit of, a commercial banking institution outside the United
States having equity capital and surplus and undivided profits of not less than
$250,000,000 and foreign denominated money market deposit accounts issued by a
commercial banking institution outside the United States having equity capital
and surplus and undivided profits of not less than $250,000,000.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means any Subsidiary as to which all of the
following conditions apply: (a) neither the Company nor any of its Subsidiaries
provides credit support for any Indebtedness of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness); (b) such
Subsidiary is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness; (c) neither the
Company nor any of its Subsidiaries has made an Investment in such Unrestricted
Subsidiary unless such Investment was not prohibited by the provisions of the
"Limitation on Restricted Payments" covenant; and (d) the board of directors of
the Company, as provided below, shall have designated such Subsidiary to be an
Unrestricted Subsidiary. Any such designation by the board of directors shall be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complies with the foregoing conditions. The board of directors may
designate any Unrestricted Subsidiary as a Subsidiary; provided, that (i)
immediately after giving effect to such designation, the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the restrictions of the "Limitation on Indebtedness" covenants; and (ii) all
Indebtedness of such Unrestricted Subsidiary shall be deemed to be incurred on
the date such Unrestricted Subsidiary becomes a Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (a) as to which neither the Company
nor any Subsidiary is directly or indirectly liable (by virtue of the Company or
any such Subsidiary being the primary obligor on, guarantor of, or otherwise
liable in any respect to, such Indebtedness), and (b) which, upon the occurrence
of a default with respect thereto, does not result in, or permit any holder of
any Indebtedness of the Company or any Subsidiary to declare, a default on such
Indebtedness of the Company or any Subsidiary or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency).
"Wholly-Owned Subsidiary" means a Subsidiary all the Capital Stock (other
than directors' qualifying shares) of which is owned by the Company or another
Wholly-Owned Subsidiary.
85
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
In connection with the Refinancing, the Company will enter into a loan
agreement with Congress Financial Corporation (Central) as agent for itself and
CoreStates Bank, N.A. as lenders (the "Lenders"), to provide the New Credit
Facility, which will provide for a revolving loan facility in the aggregate
principal amount of up to $50.0 million, including a letter of credit facility
subject to a sublimit in the aggregate principal amount of up to $10.0 million.
Amounts outstanding under the New Credit Facility will be due at maturity, which
will be three years after the date of closing unless extended or terminated.
Revolving loans under the New Credit Facility will be limited, in the
aggregate, to the lesser of the $50.0 million commitment amount and a "borrowing
base" amount less, in each case, the principal amount of outstanding letters of
credit. The borrowing base will not exceed the sum of 85% of eligible accounts
receivable (generally, accounts receivable of the Company from domestic
customers that are current or past due 60 or fewer days) plus 60% of eligible
raw materials and finished goods inventories plus 45% of eligible
work-in-process inventory of the Company, such inventories to be calculated at
the lower of cost or current market value.
The New Credit Facility will contain certain covenants, including, without
limitation, maintenance of minimum net worth, and limitations on capital
expenditures, investments, incurrences of additional debt, impositions of liens,
dispositions of assets and payments of dividends and distributions. The New
Credit Facility will be secured by first priority security interests in all
accounts receivable and inventories (excluding all accounts receivable and
inventories of the Company's foreign subsidiaries) and fixed assets of the
Company and the proceeds therefrom.
Interest on revolving loans under the New Credit Facility will be payable
monthly in arrears at a per annum rate equal to 0.75% above the prime rate
announced by CoreStates Bank, N.A. from time to time or, at the Company's
option, 2.75% above LIBOR. In the event of a default, the interest rate will
increase to 2.75% over the then prevailing prime rate of CoreStates Bank, N.A.
The interest rates will be reduced by 0.25% per annum for any quarter ending on
or after September 1996, provided that the Company exceeds $34.0 million of
EBITDA for the four consecutive fiscal quarters ending prior to the beginning of
such quarter. In addition, the New Credit Facility will provide for a closing
fee of $375,000 and an unused line fee of 0.375% on the amount by which $40.0
million exceeds the average monthly balance of revolving loans and letters of
credit under the New Credit Facility. The New Credit Facility will also provide
for the payment of early termination fees in certain circumstances and certain
other fees payable by the Company to the Lenders.
The Lenders' obligation to enter into the New Credit Facility will be
conditioned upon, among other things, consummation of the Offering. In addition,
the Company anticipates that all of the loans and other credit accommodations
provided to the Company (other than the New Credit Facility) will be required to
be used exclusively to redeem or repay existing indebtedness, to make capital
expenditures, and for working capital of the Company.
86
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and each of Merrill Lynch, Pierce,
Fenner & Smith Incorporated and PaineWebber Incorporated (the "Underwriters"),
the Company has agreed to sell to each of the Underwriters and each of the
Underwriters has agreed to purchase from the Company the aggregate principal
amount of the Notes set forth opposite its respective name below. Pursuant to
the Purchase Agreement, the Underwriters will be obligated to purchase all of
the Notes if they purchase any of them.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ------------------------------------------------------------ ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................... $
PaineWebber Incorporated....................................
------------
Total............................................ $130,000,000
------------
------------
</TABLE>
The Underwriters propose to offer the Notes to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of % of the principal
amount of the Notes. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of % of the principal amount of the Notes to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
There is no public market for the Notes and the Company does not intend to
apply for listing of the Notes on any national securities exchange or for
quotation of the Notes on the Nasdaq National Market. The Company has been
advised by the Underwriters that they presently intend to make a market in the
Notes after the consummation of the Offering contemplated hereby, although they
are under no obligation to do so and may discontinue any market-making
activities at any time without any notice. No assurance can be given, however,
as to the liquidity of the trading market for the Notes or that an active public
market for the Notes will develop. If an active public market for the Notes does
not develop, the market price and liquidity of the Notes may be adversely
affected.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed, without prior consent of the Underwriters, that it
will not, for a period of 180 days after the date of this Prospectus, directly
or indirectly, issue, sell or offer to sell, grant any option for the sale of,
or otherwise dispose of, or register for sale by others, any debt securities,
other than the initial sale of the Notes, and the indebtedness under the New
Credit Facility.
The Offering is being conducted in accordance with Rule 2720, formerly
Schedule E (the "Rule"), to the By-laws of the National Association of
Securities Dealers, Inc. (the "NASD") which provides that, among other things,
when a NASD member participates in the offering of equity securities of a
company with whom such member has a "conflict of interest" (as defined in the
Rule), the initial public offering price can be no higher than that recommended
by a "qualified independent underwriter" (as defined in the Rule)(a "QIU"). The
NASD requires that a QIU (a) be a NASD member experienced in the securities or
investment banking business, (b) not be an affiliate of the issuer of the
securities and (c) agree to undertake the responsibilities and liabilities of an
underwriter under the Act. In accordance with this requirement, PaineWebber
Incorporated is serving as the QIU in the Offering and has recommended a price
in compliance with the requirements of the Rule. PaineWebber Incorporated has
performed due diligence investigations and reviewed and participated in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. PaineWebber Incorporated, in its capacity as QIU, will
receive no additional compensation as such in connection with the Offering.
87
<PAGE>
In addition, the Underwriters will not confirm sales to any discretionary
account without the prior specific written approval of the customer.
LEGAL MATTERS
The validity of the Notes being offered hereby and certain other legal
matters relating to the Offering will be passed upon for the Company by Ice
Miller Donadio & Ryan, Indianapolis, Indiana. Certain legal matters will be
passed upon for the Underwriters by Davis Polk & Wardwell.
EXPERTS
The consolidated balance sheet as of September 30, 1994 and 1995, and the
consolidated statements of operations and cash flows for each of the three years
in the period ended September 30, 1995 appearing in this Prospectus have been
incorporated herein in reliance on the report, which includes an emphasis of a
matter explanatory paragraph regarding the Company's liquidity, of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, of which
this Prospectus is a part, under the Securities Act with respect to the Notes
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits thereto. For further information
with respect to the Company and the Notes offered by this Prospectus, reference
is made to such Registration Statement and exhibits which have been filed with
the Commission through the Electronic Data Gathering, Analysis and Retrieval
system. Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission. Such information is publicly available through the Commission's
World Wide Web site (http:/www.sec.gov) or can be inspected and copied at the
office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at its regional offices located at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New
York, New York 10048. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
88
<PAGE>
HAYNES INTERNATIONAL, INC.
(A WHOLLY OWNED SUBSIDIARY OF HAYNES HOLDINGS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheet as of September 30, 1994 and 1995......................... F-3
Consolidated Statement of Operations for the years ended September 30, 1993, 1994,
and 1995........................................................................... F-4
Consolidated Statement of Cash Flows for the years ended September 30, 1993, 1994,
and 1995........................................................................... F-5
Notes to Consolidated Financial Statements........................................... F-6
Condensed Consolidated Balance Sheet as of September 30, 1995 and June 30, 1996
(Unaudited)........................................................................ F-21
Unaudited Condensed Consolidated Statement of Operations for the nine months ended
June 30, 1995 and 1996............................................................. F-22
Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended
June 30, 1995 and 1996............................................................. F-23
Notes to Unaudited Condensed Consolidated Financial Statements....................... F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Haynes International, Inc.
We have audited the accompanying consolidated balance sheet of Haynes
International, Inc. (the Company), a wholly owned subsidiary of Haynes Holdings,
Inc., as of September 30, 1994 and 1995, and the related consolidated statements
of operations and cash flows for each of the three years in the period ended
September 30, 1995. 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.
The Company's accumulated deficit at September 30, 1994 and 1995 includes
the effects of adopting SFAS No. 106 ($79.6 million) and a write-off of goodwill
($37.1 million) in 1994. The accumulated deficit, along with increased working
capital requirements due to higher sales levels in 1995, has resulted in
increased borrowings to fund the Company's operations. Management's plan for
meeting the Company's liquidity needs is summarized in Note 1 to the
consolidated financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Haynes
International, Inc. as of September 30, 1994 and 1995, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended September 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and postretirement
benefits during 1994.
Coopers & Lybrand, L.L.P.
Fort Wayne, Indiana
November 3, 1995
F-2
<PAGE>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1994 1995
--------- ---------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents.......................................... $ 5,690 $ 5,035
Accounts and notes receivable, less allowance for doubtful accounts
of $520 and $979, respectively................................... 30,496 38,089
Inventories........................................................ 53,543 60,234
--------- ---------
Total current assets............................................. 89,729 103,358
--------- ---------
Net property, plant and equipment.................................... 43,119 36,863
Prepayments and deferred charges, net................................ 12,875 11,095
--------- ---------
Total assets..................................................... $ 145,723 $ 151,316
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses.............................. $ 16,868 22,975
Accrued postretirement benefits.................................... 4,100 4,100
Revolving credit................................................... 8,141 12,477
Income taxes payable............................................... 438 1,190
--------- ---------
Total current liabilities........................................ 29,547 40,742
--------- ---------
Long-term debt....................................................... 140,000 140,000
Deferred income taxes................................................ 274 326
Accrued postretirement benefits...................................... 90,048 90,730
--------- ---------
Total liabilities................................................ 259,869 271,798
--------- ---------
Commitments and Contingencies
Redeemable common stock of Parent Company............................ 1,881 1,427
Stockholder's deficit:
Common stock, $.01 par value (100 shares authorized, issued and
outstanding)
Additional paid-in capital......................................... 46,276 46,306
Accumulated deficit................................................ (165,514) (172,285)
Foreign currency translation adjustment............................ 3,211 4,070
--------- ---------
Total stockholder's deficit...................................... (116,027) (121,909)
--------- ---------
Total liabilities and stockholder's deficit.................... $ 145,723 $ 151,316
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1993 1994 1995
-------- --------- --------
<S> <C> <C> <C>
Net revenues............................................... $162,454 $ 150,578 $201,933
Costs and expenses:
Cost of sales............................................ 137,102 134,840 167,196
Goodwill write-off....................................... 37,117
Selling and administrative............................... 14,569 15,039 15,475
Research and technical................................... 3,603 3,630 3,049
Other cost, net.......................................... 400 816 1,767
Interest expense......................................... 18,912 19,916 20,233
Interest income.......................................... (415) (334) (329)
-------- --------- --------
Total costs and expenses................................. 174,171 211,024 207,391
-------- --------- --------
Loss before provision for (benefit from) income taxes and
cumulative effect of change in accounting principle........ (11,717) (60,446) (5,458)
Provision for (benefit from) income taxes.................. (3,442) 420 1,313
-------- --------- --------
Loss before cumulative effect of change in accounting
principle.................................................. (8,275) (60,866) (6,771)
Cumulative effect of change in accounting principle, net of
tax benefit.............................................. (79,630)
-------- --------- --------
Net loss............................................... $ (8,275) $(140,496) $ (6,771)
-------- --------- --------
-------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1993 1994 1995
------- --------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(8,275) $(140,496) $(6,771)
Adjustments to reconcile net loss to net cash provided from
(used in) operations:
Depreciation................................................ 8,650 8,208 8,188
Amortization and goodwill write-off......................... 3,607 40,287 1,444
Deferred income taxes....................................... (4,432) (10,633) 2
(Gain) loss on property disposal............................ 56 (397) (37)
Change in assets and liabilities:
Accounts and notes receivable............................. 3,712 (3,028) (7,354)
Inventories............................................... 8,446 (951) (6,480)
Other assets.............................................. (3,932) (58) 347
Accounts payable and accrued expenses..................... (2,474) 4,291 6,322
Income taxes payable...................................... 353 (234) 774
Accrued postretirement benefits........................... 90,210 682
------- --------- -------
Net cash provided from (used in) operations............. 5,711 (12,801) (2,883)
------- --------- -------
Cash flows from investment activities:
Additions to property, plant and equipment.................. (56) (771) (1,934)
Proceeds from disposals of property, plant, and equipment... 374 1,517 39
------- --------- -------
Net cash provided from (used in) investment
activities.................................................... 318 746 (1,895)
------- --------- -------
Cash flows from financing activities:
Net additions (reductions) of revolving credit.............. (2,014) 7,960 4,337
Retirement of stock options................................. (858) (425)
------- --------- -------
Net cash provided from (used in) financing activities... (2,014) 7,102 3,912
------- --------- -------
Effect of exchange rates on cash.............................. (744) 129 211
------- --------- -------
Increase (decrease) in cash and cash equivalents.............. 3,271 (4,824) (655)
Cash and cash equivalents:
Beginning of year........................................... 7,243 10,514 5,690
------- --------- -------
End of year................................................. $10,514 $ 5,690 $ 5,035
------- --------- -------
------- --------- -------
Supplemental disclosures of cash flow information:
Cash paid (received) during period for:
Interest.................................................. $15,672 $ 17,891 $18,840
Income taxes.............................................. (1,805) 848 560
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Haynes
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances are
eliminated.
B. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments, including
investments with maturities of three months or less at acquisition, to be cash
equivalents, the carrying value of which approximates fair value due to the
short maturity of these investments. At September 30, 1994, $863 in cash was
restricted for property, plant, and equipment acquisition.
C. INVENTORIES
Inventories are stated at the lower of cost or market. The cost of domestic
inventories is determined using the last-in, first-out method (LIFO). The cost
of foreign inventories is determined using the first-in, first-out (FIFO) method
and average cost method.
D. PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost.
Depreciation of property, plant and equipment is calculated primarily by using
the straight-line method based on estimated economic useful lives. Buildings are
generally depreciated over 40 years and machinery and equipment are depreciated
over periods ranging from 5 to 14 years.
Expenditures for maintenance and repairs and minor renewals are charged to
expense; major renewals are capitalized. Upon retirement or sale of assets, the
cost of the disposed assets and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is credited or charged to
operations.
E. FOREIGN CURRENCY TRANSLATION
The Company's foreign operating entities' financial statements are expressed
in their functional currencies, which are their local currencies. Substantially
all assets and liabilities of the Company's foreign operations are translated to
U.S. dollars at year-end exchange rates and revenues and expenses are translated
at the weighted average rate for the year. Foreign currency gains and losses
arising from transactions are reflected in net losses. Balance sheet translation
gains and losses are reflected as a separate component of stockholders' deficit.
F. INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax
F-6
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
consequences of events that have been recognized in the Company's financial
statements or tax returns. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized (see Note 5). Previously, the Company used SFAS No. 96, "Accounting
for Income Taxes." Financial statements for the prior years have not been
restated and the cumulative effect of the accounting change was not material.
G. DEFERRED CHARGES
Deferred charges include debt issuance costs which are amortized over the
terms of the related debt using the effective interest method. Accumulated
amortization at September 30, 1994 and 1995 was $7,822 and $9,266, respectively.
H. FINANCIAL INSTRUMENTS
The Company enters into forward currency exchange contracts and nickel
futures contracts on a continuing basis for periods consistent with its
contractual exposures. The effect of this practice is to minimize the
variability in the Company's operating results arising from foreign exchange
rate movements and nickel price movements. These contracts are considered
short-term financial instruments, the carrying value of which approximates fair
value due to the relatively short duration of the contracts. The Company does
not engage in foreign currency or nickel futures speculation. Gains and losses
on these contracts are recognized in income in the month the contracts are
settled. At September 30, 1995, the Company had $1,700 of foreign currency
exchange contracts and $4,441 of nickel futures contracts outstanding with a net
unrealized loss of $103. With respect to the Consolidated Statement of Cash
Flows, contracts accounted for as hedges are classified in the same category as
the items being hedged.
I. RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified to
conform with current year presentation.
J. LIQUIDITY
At September 30, 1994 and 1995, the Company has an accumulated deficit of
$165,514 and $172,285 respectively, which includes the effects of adopting SFAS
No. 106 ($79.6 million--see Note 8) and a write-off of goodwill ($37.1
million--see Note 10) both of which occurred during 1994. The accumulated
deficit, along with increased working capital requirements due to higher sales
levels in 1995, has resulted in increased borrowings to fund the Company's
operations. In response to operating losses in 1993 and 1994, the Company
implemented cost reduction measures which, among other things, included wage and
hiring freezes, reductions in the Company's workforce by approximately 20%,
reorganization of the Company's Sales and Marketing function, healthcare cost
containment, and certain measures designed to reduce manufacturing costs and
enhance working capital management.
In 1995, the Company's sales volume and earnings before interest and taxes
improved significantly over prior years. Continued activity at current levels in
the markets served by the Company, along with
F-7
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
consistent monitoring of cost reduction measures as described above, should
contribute to improved financial results.
Due to sales volume increases, the Company has been required to invest in
increased working capital. As of September 30, 1995, $12,477 had been borrowed
pursuant to the Existing Credit Facility (see Note 6) and approximately $2,800
in letter of credit reimbursement obligations under the letter of credit
facility have been incurred by the Company. The Company believes that borrowing
available under the Existing Credit Facility are adequate to meet its
obligations as they come due and working capital requirements through at least
fiscal 1996, although there can be no assurance with respect thereto. The
Company's ability to operate with sufficient liquidity in fiscal 1996 will
depend upon the Company's ability to generate sufficient cash. Current programs
for reducing inventory levels and improving sales volume, if successful, should
improve the Company's liquidity.
K. ACCOUNTING PRONOUNCEMENTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," is effective for the year ending September
30, 1996. In the opinion of management, this statement will not impact the
Company's financial position or results of operations. SFAS No. 123, "Accounting
for Stock Based Compensation," is effective for the year ending September 30,
1997. The Company has not decided how it intends to apply the accounting and
disclosure provisions of this statement.
NOTE 2: INVENTORIES
The following is a summary of the major classes of inventories:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1994 1995
------- -------
<S> <C> <C>
Raw materials........................................... $ 3,395 $ 2,998
Work-in-process......................................... 29,677 38,488
Finished goods.......................................... 17,858 20,616
Other................................................... 961 2,428
Amount necessary to increase (decrease) certain
inventories to the LIFO method........................ 1,652 (4,296)
------- -------
Net inventories......................................... $53,543 $60,234
------- -------
------- -------
</TABLE>
Inventories valued using the LIFO method comprises 77% and 73% of
consolidated inventories before LIFO adjustment at September 30, 1994 and 1995,
respectively.
F-8
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the major classes of property, plant, and
equipment:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1994 1995
------- -------
<S> <C> <C>
Land and land improvements.............................. $ 1,920 $ 1,920
Buildings............................................... 6,621 6,623
Machinery and equipment................................. 73,621 74,951
Construction in process................................. 202 664
------- -------
82,364 84,158
Less accumulated depreciation........................... (39,245) (47,295)
------- -------
Net property, plant and equipment....................... $43,119 $36,863
------- -------
------- -------
</TABLE>
NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of the major classes of accounts payable and
accrued expenses:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1994 1995
------- -------
<S> <C> <C>
Accounts payable, trade................................. $ 8,853 $14,477
Employee compensation................................... 1,508 1,995
Taxes, other than income taxes.......................... 1,840 2,226
Interest................................................ 3,209 3,160
Landfill closure costs.................................. 37
Other................................................... 1,421 1,117
------- -------
$16,868 $22,975
------- -------
------- -------
</TABLE>
F-9
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5: INCOME TAXES
The components of income (loss) before provision for (benefit from) income
taxes and cumulative effect of a change in accounting principle consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Loss before provision for (benefit from) income taxes and
cumulative effect of a change in accounting principle
U.S....................................................... $(13,803) $(58,509) $(9,332)
Foreign................................................... 2,086 (1,937) 3,874
-------- -------- -------
Total................................................... $(11,717) $(60,446) $(5,458)
-------- -------- -------
-------- -------- -------
Provision for (benefit from) income taxes:
Current:
Foreign................................................... $ 951 $ 411 $ 1,284
State..................................................... 39 62 27
-------- -------- -------
Total................................................... 990 473 1,311
-------- -------- -------
Deferred:
U. S. Federal............................................. (3,945) 2
Foreign................................................... 152 (53)
State..................................................... (639)
-------- -------- -------
Total................................................... (4,432) (53) 2
-------- -------- -------
Total provision for (benefit from) income taxes......... $ (3,442) $ 420 $ 1,313
-------- -------- -------
-------- -------- -------
</TABLE>
The provision for (benefit from) income taxes applicable to results of
operations before the cumulative effect of a change in accounting principle
differed from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1993 1994 1995
------- ---------- -------
<S> <C> <C> <C>
Statutory federal tax rate.................................. 34% 34% 34%
Provision for (benefit from) income taxes at the statutory
rate........................................................ $(3,984) $ (20,552) $(1,856)
Foreign tax rate differentials.............................. 97 951 (162)
Goodwill amortization and write-off......................... 465 12,054
Provision for (benefit from) state taxes, net of federal
tax......................................................... (396) 62 27
U.S. tax on distributed and undistributed earnings of
foreign subsidiaries...................................... 491 1,735 980
Increase in valuation allowance related to continuing
operations.................................................. 5,639 2,057
Other....................................................... (115) 531 267
------- ---------- -------
Provision for (benefit from) income taxes at the effective
tax rate.................................................... $(3,442) $ 420 $ 1,313
------- ---------- -------
------- ---------- -------
</TABLE>
F-10
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5: INCOME TAXES--(CONTINUED)
Deferred income tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1994 1995
------- -------
<S> <C> <C>
Current deferred income tax assets (liabilities):
Inventory capitalization............................................. $ 842 $ 853
Postretirement benefits other than pensions.......................... 1,555 1,590
Vacation accrual..................................................... 356 446
Foreign tax credit carryforward...................................... 287
Other................................................................ 230 606
------- -------
Gross deferred tax assets........................................ 3,270 3,495
Less valuation allowance..................................... (1,907) (2,132)
------- -------
1,363 1,363
Inventory purchase accounting........................................ (5,743) (5,637)
------- -------
Total net current deferred tax liability..................... (4,380) (4,274)
------- -------
Noncurrent deferred income tax assets (liabilities):
Property, plant and equipment, net................................... (11,904) (9,344)
Prepaid pension costs................................................ (2,198) (2,107)
Investment in subsidiary............................................. (475) (466)
Other foreign related................................................ (274) (390)
Undistributed earnings of foreign subsidiaries....................... (1,739) (2,669)
------- -------
Gross non-current deferred tax liability......................... (16,590) (14,976)
------- -------
Other................................................................ 34
Postretirement benefits other than pensions.......................... 35,001 35,182
Executive compensation............................................... 564 553
Investment in subsidiary............................................. 563
Net operating loss carryforwards..................................... 13,633 13,283
Alternative minimum tax credit carryforwards......................... 414 414
------- -------
Gross non-current deferred tax asset............................. 49,646 49,995
Less valuation allowance......................................... (28,950) (31,071)
------- -------
20,696 18,924
------- -------
Total net noncurrent deferred tax asset...................... 4,106 3,948
------- -------
Total.................................................... $ (274) $ (326)
------- -------
------- -------
</TABLE>
The valuation allowance used to offset deferred tax assets is as follows:
<TABLE>
<CAPTION>
<S> <C>
Allowance at October 1, 1993..................................... $24,422
Increase in allowance............................................ 6,435
-------
Allowance at September 30, 1994.................................. 30,857
Increase in allowance............................................ 2,346
-------
Allowance at September 30, 1995.................................. $33,203
-------
-------
</TABLE>
As of September 30, 1995 the Company had net operating loss carryforwards
for regular tax purposes of approximately $36,800 (expiring in fiscal years 2005
to 2010), of which $15,200 are available for alternative minimum tax. The
Company has alternative minimum tax credit carryforwards of approximately $400
which are available to reduce federal regular income taxes, if any, over an
indefinite period.
F-11
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5: INCOME TAXES--(CONTINUED)
The Company recently completed an examination by the Internal Revenue
Service (IRS) for the five taxable years ending September 30, 1993. The IRS has
proposed to disallow aggregate deductions in the amount of $5.5 million relative
to the amortization of certain loan fees, totalling $10.4 million, incurred with
the 1989 acquisition of the Company. The Company claimed similar deductions in
1994 and 1995. The Company intends to vigorously protest disallowance of these
deductions. If the Company does not prevail in its defense, then the amount of
available net operating loss carryforwards would be reduced accordingly.
NOTE 6: DEBT
Long-term debt, consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Existing Subordinated Notes (due 1997-1999, 13.5%).... $ 90,000 $ 90,000
Existing Senior Notes (due 1998, 11.25%).............. 50,000 50,000
-------- --------
$140,000 $140,000
-------- --------
-------- --------
</TABLE>
BANK FINANCING
The Company has available a $16,000 working capital facility (the "Existing
Credit Facility") with Congress Financial Corporation ("Congress"). The amount
available for revolving credit loans equals the difference between the $16,000
total facility amount less any letter of credit reimbursement obligations
incurred by the Company. The total availability will not exceed the sum of 85%
of eligible accounts receivable (generally, accounts receivable of the Company
from domestic and export customers that are current or less than 60 days
outstanding) plus 60% of eligible inventories (defined to exclude work-in
process and semi-finished goods) calculated at the lower of cost or current
market value minus any availability reserves established by Congress. Loans
based on eligible inventories will be subject to a sublimit of $10,000. Unused
line fees during the revolving credit loan period are .375% of the amount by
which the $16,000 maximum credit exceeds the average daily principal balance of
the outstanding revolving loans and letter of credit accommodations. The
Existing Credit Facility also provides certain other fees payable by the
Company.
The Existing Credit Facility bears interest at a fluctuating per annum rate
equal to 1.75% plus prime rate. At September 30, 1995 the interest rate for
revolving credit loans was 10.50%. As of September 30, 1995, $2,775 in letter of
credit reimbursement obligations have been incurred by the Company. The total
amount available for borrowings at September 30, 1995 was $748.
The credit agreement contains covenants common to such agreements including
working capital and net worth requirements.
EXISTING SUBORDINATED NOTES
The Senior Subordinated Notes of the Company (the "Existing Subordinated
Notes") are uncollateralized obligations of the Company and are subordinated in
right of payment to obligations under
F-12
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6: DEBT--(CONTINUED)
the Existing Senior Notes (as defined below) and the Existing Credit Facility.
The Company must retire $23,333, $33,333, and $33,334 principal amount of the
Existing Subordinated Notes in 1997, 1998, and 1999, respectively. Interest is
payable semi-annually on February 15 and August 15.
The Existing Subordinated Notes are redeemable, in whole or in part, at the
Company's option at any time on or after August 14, 1992 at redemption prices
ranging from 108.4% to 100% plus accrued interest to the date of redemption.
The Senior Subordinated Notes limit the incurrence of additional
indebtedness, restricted payments, mergers, consolidations and asset sales.
EXISTING SENIOR NOTES
The Senior Secured Notes of the Company (the "Existing Senior Notes") are
collateralized by a first priority lien subject to certain permitted
encumbrances on substantially all of the Company's tangible and intangible
property other than accounts receivables and inventories and the proceeds
thereof. Interest is payable semi-annually on June 15 and December 15.
The Existing Senior Notes are redeemable at the option of the Company, in
whole or in part, and at any time prior to maturity at a price equal to the
greater of (i) the present value of all remaining interest and principal
payments plus 2.0%, or (ii) 100% of principal amount plus accrued interest to
the redemption date. Upon a change of control, each holder of the Existing
Senior Notes has the right to require the Company to purchase its Existing
Senior Notes at a price equal to 101% of principal amount plus accrued interest
to the purchase date. The Existing Senior Notes are not subject to mandatory
redemption prior to maturity.
The Existing Senior Notes rank senior in right of payment to all existing
and future subordinated indebtedness of the Company. The indenture contains
restrictive covenants including limitations on additional indebtedness, mergers,
consolidations, and asset sales.
The estimated fair value, based upon an independent market quotation, of the
Company's long-term debt was approximately $95,950 and $106,750 at September 30,
1994 and 1995, respectively. The carrying value of the Company's Existing Credit
Facility approximates fair value.
OTHER
In addition, the Company's UK Affiliate (Haynes International, Ltd.) has
recently entered into a revolving credit agreement with Midland Bank that
provides for availability of 1 million pounds sterling collateralized by the
assets of the Affiliate. This revolving credit agreement was available in its
entirety on September 30, 1995 as a means of financing the activities of the
Affiliate including payments to the Company for intercompany purchases.
F-13
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7: STOCKHOLDER'S EQUITY (DEFICIT)
The following is a summary of changes in stockholder's equity (deficit):
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN TOTAL
-------------------- ADDITIONAL CURRENCY STOCKHOLDER'S
NO. OF AT PAID IN ACCUMULATED TRANSLATION EQUITY
SHARES PAR CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
-------- -------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992..... 100 $ 0 $ 46,087 $ (16,743) $ 5,818 $ 35,162
Year ended September 30, 1993:
Net loss......................... (8,275) (8,275)
Foreign exchange................. (3,949) (3,949)
-------- -------- ---------- ----------- ----------- -------------
Balance at September 30, 1993..... 100 0 46,087 (25,018) 1,869 22,938
Year ended September 30, 1994:
Net loss......................... (140,496) (140,496)
Dividend to Parent Co. to
repurchase stock............... (83) (83)
Reclassification of redeemable
common stock................... 272 272
Foreign exchange................. 1,342 1,342
-------- -------- ---------- ----------- ----------- -------------
Balance at September 30, 1994..... 100 0 46,276 (165,514) 3,211 (116,027)
Year ended September 30, 1995:
Net loss......................... (6,771) (6,771)
Dividend to Parent Co. to
repurchase stock............... (70) (70)
Reclassification of redeemable
common stock................... 100 100
Foreign exchange................. 859 859
-------- -------- ---------- ----------- ----------- -------------
Balance at September 30, 1995..... 100 $ 0 $ 46,306 $(172,285) $ 4,070 $(121,909)
-------- -------- ---------- ----------- ----------- -------------
-------- -------- ---------- ----------- ----------- -------------
</TABLE>
F-14
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8: PENSION PLAN AND RETIREMENT BENEFITS
The Company has non-contributory defined benefit pension plans which cover
most employees in the United States and certain foreign subsidiaries.
Benefits provided under the Company's domestic defined benefit pension plan
are based on years of service and the employee's final compensation. The
Company's funding policy is to contribute annually an amount deductible for
federal income tax purposes based upon an actuarial cost method and actuarial
and economic assumptions designed to achieve adequate funding of benefit
obligations.
Net periodic pension cost on a consolidated basis was $447, $611, and $458
for the years ended September 30, 1993, 1994 and 1995, respectively.
For the domestic pension plan, net periodic pension cost was comprised of
the following elements:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Service cost................................. $ 1,864 $ 2,165 $ 1,713
Interest cost................................ 6,932 6,536 7,060
Actual return on plan assets................. (14,573) (639) (18,727)
Net amortization and deferral................ 5,719 (7,748) 10,084
-------- ------- --------
Net periodic pension cost (benefit).......... $ (58) $ 314 $ 130
-------- ------- --------
-------- ------- --------
</TABLE>
The following table sets forth the domestic pension plan's funded status:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1994 1995
-------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $76,740 and $86,227, respectively...... $ 80,385 $ 90,285
-------- ---------
-------- ---------
Projected benefit obligation for service rendered to
date................................................. $(91,864) $(103,149)
Plan assets at fair value (primarily debt
securities).......................................... 110,729 122,103
-------- ---------
Plan assets in excess of projected benefit
obligation........................................... 18,865 18,954
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions.......................................... (13,235) (13,459)
Unrecognized prior service costs..................... (66) (62)
-------- ---------
Prepaid pension cost recognized in the consolidated
balance sheet........................................ $ 5,564 $ 5,433
-------- ---------
-------- ---------
Assumptions:
Weighted average discount rate....................... 8.00% 7.00%
-------- ---------
-------- ---------
Average rate of increase in compensation levels...... 5.50% 5.25%
-------- ---------
-------- ---------
Expected rate of return on plan assets during year... 8.50% 7.50%
-------- ---------
-------- ---------
</TABLE>
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially all
domestic employees become eligible for these benefits if they reach normal
retirement age while working for the Company. Prior to 1994, the cost of
F-15
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8: PENSION PLAN AND RETIREMENT BENEFITS--(CONTINUED)
retiree health care and life insurance benefits was recognized as expense upon
payment of claims or insurance premiums. These costs were $4,298 for the period
ended September 30, 1993.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions" (SFAS 106) which requires companies to accrue the cost of
postretirement benefits over the years employees provide services to the date of
their full eligibility for such benefits. The Company's policy is to fund the
cost of benefits on an annual basis. The Company elected to immediately
recognize the transition obligation for benefits earned as of October 1, 1993,
resulting in a pre-tax, non-cash charge of $90,210 representing a cumulative
effect of the change in accounting principle. In addition, during fiscal 1994
and 1995, operations were charged approximately $7,997 and $4,671 for these
benefits.
Effective January 1, 1995, the Company amended its health care plan by
requiring retirees and surviving spouses to share in the cost of medical care by
paying a portion of the cost of continuing health care insurance protection. As
a result of this amendment, the accumulated postretirement benefit obligation
was reduced by $13,583 and will be amortized to operations over approximately
12.5 years.
Because of unfavorable operating results in recent years and the Company's
net operating loss carryforward position (see Note 5), the Company is able to
recognize only a partial tax benefit resulting from this charge to operations.
Therefore a valuation reserve has been established to offset the deferred tax
asset created by this charge to operations. If in the future the facts and
circumstances of the Company's financial position and operating performance
change, the valuation reserve will be adjusted accordingly. The effect of SFAS
106 and the establishment of the valuation reserve reduced net worth at
September 30, 1994 by $79,630.
The following sets forth the funded status of the plans in the aggregate
reconciled with amounts reported in the Company's statement of financial
position:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1994 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees and dependents............................... $59,907 $47,039
Active plan participants eligible to receive
benefits................................................ 8,286 6,941
Active plan participants not yet eligible to receive
benefits................................................ 18,087 15,823
------- -------
Total APBO.......................................... 86,280 69,803
Unrecognized prior service cost....................... 12,674
Unrecognized net gain................................. 7,868 12,353
------- -------
Accrued postretirement liability...................... $94,148 $94,830
------- -------
------- -------
</TABLE>
F-16
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8: PENSION PLAN AND RETIREMENT BENEFITS--(CONTINUED)
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------
<S> <C> <C>
1994 1995
------ ------
Service cost.............................................. $1,624 $1,036
Interest cost............................................. 6,373 5,126
Amortization of net gain.................................. (582)
Amortization of prior service cost........................ (909)
------ ------
Net periodic postretirement benefit cost.................. $7,997 $4,671
------ ------
------ ------
</TABLE>
An 11.98 percent annual rate of increase for ages under 65 and a 9.66
percent annual rate of increase for ages over 65 in the costs of covered health
care benefits was assumed for 1996, gradually decreasing for both age groups to
5.25 percent by the year 2009. Increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1995 by $10,257 and
increase the net periodic postretirement benefit cost for 1995 by $1,576. A
discount rate of 7.5 percent was used to determine the accumulated
postretirement benefit obligation at September 30, 1995 and 8.0 percent at
September 30, 1994.
The Company sponsors certain profit sharing and performance plans for the
benefit of employees meeting certain eligibility requirements. There were no
contributions for these plans for the three years in the period ended September
30, 1995.
NOTE 9: COMMITMENTS
The Company leases certain transportation vehicles, warehouse facilities,
office space and machinery and equipment under cancelable and non-cancelable
leases, most of which expire within 10 years and may be renewed by the Company.
Rent expense under such arrangements totaled $1,609, $1,567 and $1,431 for the
period ended September 30, 1993, 1994 and 1995, respectively. Future minimum
rental commitments under non-cancelable leases in effect at September 30, 1995
are as follows:
<TABLE>
<S> <C>
1996.............................................................. $1,826
1997.............................................................. 964
1998.............................................................. 718
1999.............................................................. 522
2000 and thereafter............................................... 1,026
------
$5,056
------
------
</TABLE>
NOTE 10: OTHER
Other costs, net consists of net foreign currency transaction losses in the
amounts of $54, $56 and $207 for the periods ended September 30, 1993, 1994 and
1995, respectively, and miscellaneous costs.
At September 30, 1994 the Company elected to write-off the remaining
goodwill balance of $37,117. The reason for the write-off was that excess
industry capacity, aggressive competitive activity, just-in-time inventory
management programs, and weakness in certain economic sectors of the economy
F-17
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10: OTHER--(CONTINUED)
have been adversely affecting the specialty corrosion and high-temperature alloy
industry operating conditions and the Company's operating results since 1992.
Accordingly, the Company revised its projections and determined that its
projected operating results would not support the future amortization of the
Company's remaining goodwill balance.
The methodology employed to assess the recoverability of the Company's
goodwill first involved the projection of operating results forward 25 years,
which approximated the remaining amortization period of goodwill as of September
30, 1994. The Company then evaluated the recoverability of goodwill on the basis
of this forecast of future operations. Based on this forecast, the cumulative
discounted net loss, before goodwill amortization and after interest expense,
was insufficient to recover the remaining goodwill balance and accordingly,
operations were charged for the entire unamortized balance.
The Company, like others in similar businesses, is involved as defendant in
several legal actions and is subject to extensive federal, state and local
environmental laws and regulations. Although Company environmental policies and
practices are designed to ensure compliance with these laws and regulations,
future developments and increasingly stringent regulation could require the
Company to make additional unforeseen environmental expenditures.
Although the level of future expenditures for environmental and other legal
matters cannot be determined with any degree of certainty, based on the facts
presently known to it, management does not believe that such costs will have a
material effect on the Company's financial position, results of operations or
liquidity.
NOTE 11: STOCK OPTION PLAN
The Company's parent has a stock option plan (the "Plan") which allows for
the granting of options to certain key employees and directors of the Company.
Under the Plan, options to purchase up to 905,880 shares of common stock may be
granted at a price not less than the lower of book value or 50% of fair market
value, as defined in the Plan. The options must be exercised within ten years
from the date of grant and become exercisable on a pro rata basis over a five
year period from the date of grant, subject to approval by the Board of
Directors.
All holders of options with exercise prices of $2.28 and $3.24 per share
have the right to redeem such options at a price equal to book value per share,
as defined in the Plan. Further, the Company has the right to call these options
at an amount equal to the greater of $10.00 per share or fair market value per
share, as defined in the Plan. The difference between the fair market value of
the stock on the last measurement date and the exercise price of these options
is classified as redeemable common stock. Due to the redemption of some of these
options, redeemable common stock was reduced by $1,046 and $454 during 1994 and
1995, respectively.
Certain holders of 320,000 options with exercise prices of $5.00 per share
have the right to redeem such options at a price equal to book value per share,
as defined in the Plan. Further, the Company has the right to call these options
at an amount equal to the greater of $5.00 per share (the estimated fair market
value on the last measurement date) or fair market value per share, as defined
in the Plan.
F-18
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 11: STOCK OPTION PLAN--(CONTINUED)
Pertinent information covering the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE FISCAL YEAR SHARES
SHARES PER SHARE OF EXPIRATION EXERCISABLE
--------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1992............. 636,058 $ 2.28-5.00 1999-2002 550,098
Granted..................................... 200,000 5.00
Redeemed.................................... -- --
Cancelled................................... -- --
---------
Outstanding at September 30, 1993............. 836,058 2.28-5.00 1999-2003 592,078
Granted..................................... 7,000 5.00
Redeemed.................................... (139,315) 2.28-3.24
Cancelled................................... (107,300) 5.00
---------
Outstanding at September 30, 1994............. 596,443 2.28-5.00 1999-2004 434,443
Granted..................................... 322,900 5.00
Redeemed.................................... (62,798) 2.28-3.24
Cancelled................................... (36,500) 5.00
---------
Outstanding at September 30, 1995........... 820,045 $ 2.28-5.00 1999-2005 377,145
--------- ------------ -----------
--------- ------------ -----------
Options Outstanding at September 30, 1995 consist of:
98,517 $2.28 98,517
98,528 3.24 98,528
623,000 5.00 180,100
--------- -----------
820,045 377,145
--------- -----------
--------- -----------
</TABLE>
F-19
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 12: FINANCIAL INFORMATION BY GEOGRAPHIC AREA
The Company develops, manufactures and markets high performance alloys
engineered to withstand hostile environments. During 1994, sales to a single
customer approximated $15,452 or 10% of net revenues. During 1995, sales to one
group of affiliated customers approximated $23,718 or 12% of net revenues.
Financial information by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Sales
United States............................................. $109,061 $ 94,830 $122,334
Export sales.............................................. 40,634 43,045 63,235
-------- -------- --------
149,695 137,875 185,569
Europe.................................................... 32,934 31,560 42,935
-------- -------- --------
182,629 169,435 228,504
Less: eliminations........................................ 20,175 18,857 26,571
-------- -------- --------
Net sales and operating revenue........................... $162,454 $150,578 $201,933
-------- -------- --------
-------- -------- --------
Operating income (loss) and other cost, net
United States............................................. $ 5,047 $(38,636) $ 10,825
Europe.................................................... 2,148 (1,894) 3,950
-------- -------- --------
Total operating income (loss) and other cost, net........... 7,195 (40,530) 14,775
Interest.................................................... 18,912 19,916 20,233
-------- -------- --------
Loss before provision for (benefit from) income taxes and
cumulative effect of a change in accounting principle....... $(11,717) $(60,446) $ (5,458)
-------- -------- --------
-------- -------- --------
Identifiable assets
United States............................................. $159,498 $115,251 $116,428
Europe.................................................... 23,758 24,490 29,649
General corporate assets*................................. 10,514 5,690 5,035
Equity in affiliates...................................... 430 292 204
-------- -------- --------
$194,200 $145,723 $151,316
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------
* General corporate assets include cash, temporary cash investments and income
tax receivables.
F-20
<PAGE>
HAYNES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents......................................... $ 5,035 $ 4,789
Accounts and notes receivable, less allowance for doubtful
accounts of $979 and $1,030, respectively....................... 38,089 43,886
Inventories....................................................... 60,234 74,294
------------- -----------
Total current assets.......................................... 103,358 122,969
------------- -----------
Net property, plant and equipment................................... 36,863 31,779
Prepayments and deferred charges, net............................... 11,095 9,921
------------- -----------
Total assets.................................................. $ 151,316 $ 164,669
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT:
Current liabilities:
Accounts payable and accrued expenses............................. $ 22,975 $ 32,314
Accrued postretirement benefits................................... 4,100 4,100
Revolving credit.................................................. 12,477 16,131
Income taxes payable.............................................. 1,190 1,112
------------- -----------
Total current liabilities..................................... 40,742 53,657
------------- -----------
Long-term debt...................................................... 140,000 140,000
Deferred income taxes............................................... 326 (153)
Accrued postretirement benefits..................................... 90,730 91,191
------------- -----------
Total liabilities............................................. 271,798 284,695
------------- -----------
Redeemable common stock of parent company........................... 1,427 1,427
Stockholder's deficit:
Common stock, $.01 par value (100 shares authorized, issued and
outstanding)........................................................
Additional paid-in capital........................................ 46,306 46,306
Accumulated deficit............................................... (172,285) (170,685)
Foreign currency translation adjustment........................... 4,070 2,926
------------- -----------
Total stockholder's deficit................................... (121,909) (121,453)
------------- -----------
Total liabilities and stockholder's deficit......................... $ 151,316 $ 164,669
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
HAYNES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Net revenues........................................................... $149,973 $170,386
Costs and expenses:
Cost of sales........................................................ 125,305 136,711
Selling and administrative........................................... 11,604 12,966
Research and technical............................................... 2,286 2,529
Other cost, net...................................................... 578 413
Interest expense..................................................... 15,176 15,395
Interest income...................................................... (238) (257)
-------- --------
Total costs and expenses............................................... 154,711 167,757
-------- --------
Income (loss) before provision for income taxes...................... (4,738) 2,629
Provision for income taxes............................................. 615 1,029
-------- --------
Net income (loss).................................................... $ (5,353) $ 1,600
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
HAYNES INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
------------------
1995 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $(5,353) $ 1,600
Depreciation........................................................... 6,127 5,844
Amortization........................................................... 1,086 1,035
Adjustments (net)...................................................... (3,382) (11,462)
------- -------
Net cash used in operating activities.................................. (1,522) (2,983)
------- -------
Cash flows from investment and other activities:
Additions to property.................................................. (1,465) (801)
Other investment activities............................................ 27 57
------- -------
Net cash used in investment activities................................. (1,438) (744)
------- -------
Cash flows from financing activities:
Net additions to revolving credit...................................... 2,034 3,654
Other financing activities............................................. (425) --
------- -------
Net cash provided from financing activities............................ 1,609 3,654
------- -------
Effect of exchange rates on cash......................................... 199 (173)
------- -------
Decrease in cash and cash equivalents.................................... (1,152) (246)
Cash and cash equivalents, beginning of period........................... 5,690 5,035
------- -------
Cash and cash equivalents, end of period................................. $ 4,538 $ 4,789
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest............................................................. $12,455 $12,729
Income taxes......................................................... 490 1,535
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The interim financial statements are unaudited and reflect all adjustments
(consisting solely of normal recurring adjustments) that, in the opinion of
management, are necessary for a fair presentation of results of the interim
periods presented. This report includes information in a condensed form and
should be read in conjunction with the audited consolidated financial statements
for the fiscal year ending September 30, 1995. The results of operations for the
nine months ended June 30, 1996 are not necessarily indicative of the results to
be expected for the full year or any other interim period.
NOTE 2. INVENTORIES
The following is a summary of the major classes of inventories:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------
(UNAUDITED)
<S> <C> <C>
Raw materials................................ $ 2,998 $ 5,974
Work-in-process.............................. 38,488 44,665
Finished goods............................... 20,616 28,941
Other, net................................... (1,868) (5,286)
-------- -------------
Net inventories.............................. $ 60,234 $74,294
-------- -------------
-------- -------------
</TABLE>
NOTE 3. DEBT
During February 1996, the Company increased the maximum amount available on
its Existing Credit Facility from $16,000 to $25,000.
NOTE 4. INCOME TAXES
The provision for income taxes for the nine months ended June 30, 1995 and
1996 differed from the U.S. federal statutory rate of 34% primarily due to taxes
on foreign earnings against which the Company was unable to utilize its U.S.
federal net operating loss carryforwards.
F-24
<PAGE>
Picture of four-high Steckel mill.
Picture of high temperature alloy testing.
Picture of high temperature alloy stress testing.
Picture of computer controlled four-high Steckel process.
<PAGE>
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN $130,000,000
THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE [HAYNES INTERNATIONAL LOGO]
MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HAYNES INTERNATIONAL, INC.
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THE
PROSPECTUS DOES NOT CONSTITUTE AN OFFER % SENIOR NOTES DUE 2004
TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 10 ---------------------
The Company.......................... 17 P R O S P E C T U S
The Refinancing...................... 17 ---------------------
Use of Proceeds...................... 19
Capitalization....................... 20
Selected Consolidated Financial Data. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................. 36
Management........................... 50
Certain Transactions................. 59
Principal Stockholders............... 60 MERRILL LYNCH & CO.
Description of the Notes............. 62
Description of New Credit Facility... 86
Underwriting......................... 87 PAINEWEBBER INCORPORATED
Legal Matters........................ 88
Experts.............................. 88
Additional Information............... 88
Index to Consolidated Financial
Statements...........................F-1
UNTIL , 1996, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED , 1996
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
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
EXPENSES AMOUNT
- --------------------------------------------------------------------------------- --------
<S> <C>
Securities and Exchange Commission registration fee.............................. $ 29,311
National Association of Securities Dealers, Inc. fee............................. 13,500
Printing and engraving expenses.................................................. 150,000
Legal fees and expenses.......................................................... 475,000
Accounting expenses and fees..................................................... 170,000
Transfer Agent and Registrar fees................................................ 9,000
Blue Sky fees and expenses (including fees of counsel)........................... 20,000
Miscellaneous.................................................................... 33,189
--------
Total........................................................................ $900,000
--------
--------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Registrant provides for the
indemnification by the Registrant of each individual who was or is made a party
or is threatened to be made a party to or is involved in an action, suit or
proceeding by reason of the fact that such individual, or an individual of whom
such individual is the legal representative, (i) is or was a director or officer
of the Registrant, (ii) is or was serving (at such time as such individual is or
was a director or officer of such Registrant) at the request of the Registrant
as a director, officer, partner, trustee, administrator, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans to the
fullest extent authorized by the Delaware General Corporations Law. Section 145
of the General Corporation Law of the State of Delaware provides that a
corporation organized under the laws of Delaware may indemnify directors,
officers, employees, and agents. Section 145 provides in pertinent part as
follows:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceedings, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or
II-1
<PAGE>
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of the corporation, or is or was
serving at the request of he corporation as a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section
145, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of Section 145 (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of Section
145. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative, or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized in Section 145. Such expenses (including attorneys' fees) incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of Section 145 shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
* * *
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has
II-2
<PAGE>
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The list of exhibits is incorporated herein by reference to the Index to
Exhibits on pages E-1 through E-5.
(b) Financial Statement Schedules:
All other financial statement schedules are omitted since the required
information is not applicable or is not present in amounts sufficient to require
submission of the schedules or because the information is included in the
Financial Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, 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 Act and is, therefore, unenforceable. In the event that a claim
for indemnification for 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, 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 Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liabilities under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus to be filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities 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 of
1933, 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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kokomo, State of Indiana,
on August 15, 1996.
HAYNES INTERNATIONAL, INC.
By: /s/ MICHAEL D. AUSTIN *
..................................
Michael D. Austin, President And
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
CAPACITY DATE
------------------------------- ----------------
<S> <C> <C>
/s/ MICHAEL D. AUSTIN * President and Chief Executive August 15, 1996
........................................ Officer (Principal Executive
Michael D. Austin Officer) and Director
/s/ PERRY J. LEWIS * Director August 15, 1996
........................................
Perry J. Lewis
/s/ JOHN A. MORGAN * Director August 15, 1996
........................................
John A. Morgan
/s/ THOMAS F. GITHENS * Director August 15, 1996
........................................
Thomas F. Githens
/s/ SANGWOO AHN * Director August 15, 1996
........................................
Sangwoo Ahn
/s/ IRA STARR * Director August 15, 1996
........................................
Ira Starr
/s/ ROBERT EGAN * Director August 15, 1996
........................................
Robert Egan
/s/ JOSEPH F. BARKER Vice President--Finance; August 15, 1996
........................................ Director (Principal Financial
Joseph F. Barker Officer)
/s/ THEODORE T. BROWN * Controller (Principal August 15, 1996
........................................ Accounting Officer)
Theodore T. Brown
*By: /s/ JOSEPH F. BARKER
....................................
Joseph F. Barker,
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBER NUMBERING
ASSIGNED IN SYSTEM PAGE
REGULATION S-K NUMBER OF
ITEM 601 DESCRIPTION OF EXHIBIT EXHIBIT
- --------------- -------------------------------------------------------------- -----------
<S> <C> <C> <C>
(1) 1.01 Form of Purchase Agreement, dated August , 1996, by and
among Haynes International, Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and PaineWebber Incorporated
relating to the sale of the % Senior Notes Due 2004.*
(2) 2.01 Form of Certificate of Ownership and Merger. (Incorporated by
reference to Exhibit 2.01 to Amendment No. 2 to Registration
Statement on Form S-1, Registration No. 333-5203). *(withdrawn)
(3) 3.01 Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to Exhibit 3.01 to Registration
Statement on Form S-1, Registration No. 33-32617.)
3.02 Bylaws of Registrant. (Incorporated by reference to Exhibit
3.02 to Registration Statement on Form S-1, Registration No.
33-32617.)
(4) 4.01 See Exhibits 3.01 and 3.02.
4.02 Indenture, dated as of August 31, 1989, between Haynes
Acquisition Corporation and The Connecticut National Bank,
relating to the 13 1/2% Senior Subordinated Notes Due 1999,
table of contents and cross-reference sheet. (Incorporated by
reference to Exhibit 4.02 to Registration Statement on Form
S-1, Registration No. 33-32617.)
4.03 First Supplement to Indenture, dated as of August 31, 1989,
among Haynes International, Inc., Haynes Acquisition
Corporation and The Connecticut National Bank. (Incorporated
by reference to Exhibit 4.03 to Registration Statement on Form
S-1, Registration No. 33-32617.)
4.04 Second Supplement to Indenture, dated as of February 5, 1990,
between Haynes International, Inc. and The Connecticut
National Bank. (Incorporated by reference to Exhibit 4.09 to
Amendment No. 1 to Registration Statement on Form S-1,
Registration No. 33-32617.)
4.05 Third Supplement to Indenture, dated as of February 9, 1995,
between Haynes International, Inc. and Shawmut Bank
Connecticut, National Association (formerly known as The
Connecticut National Bank.)*
4.06 Fourth Supplement to Indenture, dated as of January 31, 1996,
between Haynes International, Inc. and Fleet National Bank of
Connecticut (formerly known as Shawmut Bank Connecticut,
National Association, formerly known as The Connecticut
National Bank.)*
4.07 Indenture, dated as of July 1, 1993, among Haynes
International, Inc., Haynes Holdings, Inc. and Society
National Bank, Indiana, as Trustee, relating to the 11 1/4%
Senior Secured Notes Due 1998, table of contents and
cross-reference sheet. (Incorporated by reference to Exhibit
4.01 to the Registration Statement on Form S-4, Registration
No. 33-66346.)
</TABLE>
- ------------
* Previously filed.
E-1
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBER NUMBERING
ASSIGNED IN SYSTEM PAGE
REGULATION S-K NUMBER OF
ITEM 601 DESCRIPTION OF EXHIBIT EXHIBIT
- --------------- -------------------------------------------------------------- -----------
<S> <C> <C> <C>
4.08 Registration Rights Agreement, dated July 1, 1993, by and
among Haynes International, Inc., Haynes Holdings, Inc. and
Prudential Securities Incorporated. (Incorporated by reference
to Exhibit 4.03 to Registration Statement on Form S-4,
Registration No. 33-66346.)
4.09 Form of 11 1/4% Senior Secured Note Due 1998, Series B.
(Included as Appendix B to the Indenture filed as Exhibit
4.07.) (Incorporated by Reference to Exhibit 4.02 to the
Registration Statement on Form S-4, Registration No.
33-66346.)
4.10 Form of Indenture, dated as of August , 1996, among
Haynes International, Inc. and National City Bank, as Trustee,
relating to the % Senior Notes Due 2004, table of contents
and cross-reference sheet.*
4.11 Form of % Senior Note Due 2004.*
4.12 Description of Specimen Stock Certificate for Common Stock of
Haynes International, Inc. * (withdrawn).
(5) 5.01 Opinion of Ice Miller Donadio & Ryan as to the legality of the
Notes to be registered.*
(6) No Exhibit.
(7) No Exhibit.
(8) No Exhibit.
(9) No Exhibit.
(10) 10.01 Form of Severance Agreements, dated as of March 10, 1989,
between Haynes International, Inc. and the employees of Haynes
International, Inc. named in the schedule to the Exhibit.
(Incorporated by reference to Exhibit 10.03 to Registration
Statement on Form S-1, Registration No. 33-32617.)
10.02 Purchase Agreement, dated as of August 31, 1989, among Haynes
Acquisition Corporation, Haynes Holdings, Inc. and Purchasers
named on the signature pages relating to the sale of the 13
1/2% Senior Subordinated Notes Due 1999 and Common Stock of
Haynes Holdings, Inc. (Incorporated by reference to Exhibit
4.01 to Registration Statement on Form S-1, Registration No.
33-32617.)
10.03 Stock Subscription Agreement, dated as of August 31, 1989,
among Haynes Holdings, Inc., Haynes International, Inc. and
the persons listed on the signature pages thereto (Investors).
(Incorporated by reference to Exhibit 4.07 to Registration
Statement on Form S-1, Registration No. 33-32617.)
10.04 Amendment to the Stock Subscription Agreement To Add a Party,
dated August 14, 1992, among Haynes Holdings, Inc., Haynes
International, Inc., MLGA Fund II, L.P., and the persons
listed on the signature pages thereto. (Incorporated by
reference to Exhibit 10.17 to Registration Statement on Form
S-4, Registration No. 33-66346.)
</TABLE>
- ------------
* Previously filed.
E-2
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBER NUMBERING
ASSIGNED IN SYSTEM PAGE
REGULATION S-K NUMBER OF
ITEM 601 DESCRIPTION OF EXHIBIT EXHIBIT
- --------------- -------------------------------------------------------------- -----------
<S> <C> <C> <C>
10.05 Second Amendment to Stock Subscription Agreement, dated March
16, 1993, among Haynes Holdings, Inc., Haynes International,
Inc., MLGA Fund II, L.P., MLGAL Partners, Limited Partnership,
and the persons listed on the signature pages thereto.
(Incorporated by reference to Exhibit 10.21 to Registration
Statement on Form S-4, Registration No. 33-66346.)
10.06 Stockholders Agreement, dated as of August 31, 1989, among
Haynes Holdings, Inc. and the persons listed on the signature
pages thereto (Investors). (Incorporated by reference to
Exhibit 4.08 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.07 Amendment to the Stockholders Agreement To Add a Party, dated
August 14, 1992, among Haynes Holdings, Inc., MLGA Fund II,
L.P., and the persons listed on the signature pages thereto.
(Incorporated by reference to Exhibit 10.18 to Registration
Statement on Form S-4, Registration No. 33-66346.)
10.08 Investment Agreement, dated August 10, 1992, between MLGA Fund
II, L.P., and Haynes Holdings, Inc. (Incorporated by reference
to Exhibit 10.22 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.09 Investment Agreement, dated August 10, 1992, between MLGAL
Partners, Limited Partnership and Haynes Holdings, Inc.
(Incorporated by reference to Exhibit 10.23 to Registration
Statement on Form S-4, Registration No. 33-66346.)
10.10 Investment Agreement, dated August 10, 1992, between Thomas F.
Githens and Haynes Holdings, Inc. (Incorporated by reference
to Exhibit 10.24 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.11 Consent and Waiver Agreement, dated August 14, 1992, among
Haynes Holdings, Inc., Haynes International, Inc., MLGA Fund
II, L.P., and the persons listed on the signature pages
thereto. (Incorporated by reference to Exhibit 10.19 to
Registration Statement on Form S-4, Registration No.
33-66346.)
10.12 Retirement Agreement, dated as of May 21, 1993, between Haynes
International, Inc. and Paul F. Troiano. (Incorporated by
reference to Exhibit 10.02 to Registration Statement on Form
S-4, Registration No. 33-66346).
10.13 Purchase Agreement, dated June 30, 1993, by and among Haynes
International, Inc., Haynes Holdings, Inc. and Prudential
Securities Incorporated relating to the sale of 11 1/4% Senior
Secured Notes Due 1998, Series A. (Incorporated by reference
to Exhibit 10.20 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.14 Executive Employment Agreement, dated as of September 1, 1993,
by and among Haynes International, Inc., Haynes Holdings, Inc.
and Michael D. Austin. (Incorporated by reference to Exhibit
10.26 to the Registration Statement on Form S-4, Registration
No. 33-66346.)
</TABLE>
- ------------
* Previously filed.
E-3
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBER NUMBERING
ASSIGNED IN SYSTEM PAGE
REGULATION S-K NUMBER OF
ITEM 601 DESCRIPTION OF EXHIBIT EXHIBIT
- --------------- -------------------------------------------------------------- -----------
<S> <C> <C> <C>
10.15 Amendment to Employment Agreement, dated as of July 15, 1996
by and among Haynes International, Inc., Haynes Holdings, Inc.
and Michael D. Austin.*
10.16 Loan and Security Agreement, dated August 11, 1994, between
Congress Financial Corporation (Central) and Haynes
International, Inc.*
10.17 Amendment No. 1 to Loan and Security Agreement, dated February
9, 1995, by and between Congress Financial Corporation
(Central) and Haynes International, Inc.*
10.18 Amendment No. 2 to Loan and Security Agreement, dated February
12, 1996, by and between Congress Financial Corporation
(Central) and Haynes International, Inc.*
10.19 Haynes Holdings, Inc. Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10.08 to Registration
Statement on Form S-1, Registration No. 33-32617.)
10.20 Form of "New Option" Agreements between Haynes Holdings, Inc.
and the executive officers of Haynes International, Inc. named
in the schedule to the Exhibit. (Incorporated by reference to
Exhibit 10.09 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.21 Form of "September Option" Agreements between Haynes Holdings,
Inc. and the executive officers of Haynes International, Inc.
named in the schedule to the Exhibit. (Incorporated by
reference to Exhibit 10.10 to Registration Statement on Form
S-1, Registration No. 33-32617.)
10.22 Form of "January 1992 Option" Agreements between Haynes
Holdings, Inc. and the executive officers of Haynes
International, Inc. named in the schedule to the Exhibit.
(Incorporated by reference to Exhibit 10.08 to Registration
Statement on Form S-4, Registration No. 33-66346.)
10.23 Form of "Amendment to Holdings Option Agreements" between
Haynes Holdings, Inc. and the executive officers of Haynes
International, Inc. named in the schedule to the Exhibit.
(Incorporated by reference to Exhibit 10.09 to Registration
Statement on Form S-4, Registration No. 33-66346.)
10.24 Haynes International, Inc. 1996 Employee Stock Option Plan. *
(withdrawn)
10.25 Form of "Employee Option" Agreements between Haynes Holdings,
Inc. and the executive officers of Haynes Holdings, Inc.
named in the Schedule to the Exhibit.* (withdrawn)
10.26 Form of Underwriting Agreement, dated August __, 1996, by
and among Haynes International, Inc., Haynes Corp.,
PaineWebber Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and the Selling Stockholders relating to the
sale of the Common Stock, $.01 par value per share, of Haynes
International, Inc. * (withdrawn)
10.27 Form of Amended and Restated Loan Agreement by and among
CoreStates Bank, N.A. and Congress Financial Corporation
(Central), as Lenders, Congress Financial Corporation
(Central), as Agent for Lenders, and Haynes Corp., as
Borrower.*
(11) No Exhibit.
(12) 12.01 Statement re: computation of ratio of earnings to fixed
charges.
(14) No Exhibit.
(15) No Exhibit.
(16) No Exhibit.
(21) 21.01 Subsidiaries of the Registrant.*
</TABLE>
- ------------
* Previously filed.
E-4
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBER NUMBERING
ASSIGNED IN SYSTEM PAGE
REGULATION S-K NUMBER OF
ITEM 601 DESCRIPTION OF EXHIBIT EXHIBIT
- --------------- -------------------------------------------------------------- -----------
<S> <C> <C> <C>
(23) 23.01 Consent of Coopers & Lybrand, L.L.P. dated August 15, 1996.
23.02 Consent of Ice Miller Donadio & Ryan. (Included as part of
Exhibit 5.01.)*
(24) 24.01 Power of Attorney.*
(25) 25.01 Statement of Eligibility of The Connecticut National Bank, as
Trustee under the Indenture for 13 1/2% Senior Subordinated
Notes, Due 1999. (Incorporated by reference to Exhibit 26.01
to Registration Statement on Form S-1, No. 33-32617.)
25.02 Statement of Eligibility of Society National Bank, Indiana, as
Trustee under the Indenture for the 11 1/4% Senior Secured
Notes, Due 1998. (Incorporated by reference to Exhibit 25.01
to the Registration Statement on Form S-4, Registration No.
33-66346.)
25.03 Statement of Eligibility of National City Bank as Trustee
under the Indenture for % Senior Notes due 2004.*
(26) No Exhibit.
(27) 27.01 Financial Data Schedule.*
(28) No Exhibit.
(99) No Exhibit.
</TABLE>
- ------------
* Previously filed.
E-5
Exhibit 12.01
Haynes Holdings, Inc.
Ratio of Earnings Before Fixed Charges to Fixed Charges
<TABLE>
<CAPTION>
1991 1992 1993
---- ---- ----
<S> <C> <C> <C> <C>
Line 1 Income (loss) before income taxes and cumulative effect of change in
accounting principle $ 1,379 ($28,091) ($11,717)
Line 2 Interest on indebtedness 22,120 19,211 16,792
Line 3 Amortization of debt issuance costs 1,401 1,333 2,120
------- -------- ---------
Line 4 Total earnings before fixed charges (Line 1 plus Line 2 plus Line 3) $24,900 ($ 7,547) $ 7,195
----------------------------------------------------------------------
Line 5 Interest on indebtedness $22,120 $19,211 $16,792
Line 6 Amortization of debt issuance costs 1,401 1,333 2,120
------- ------- --------
Line 7 Total fixed charges (Line 5 plus Line 6) $23,521 $20,544 $18,912
Ratio of earnings before fixed charges to fixed charges (Line 4
divided by Line 7) 1.06 N/A* N/A*
<CAPTION>
9 months
1994 1995 1995
---- ---- ----
<S> <C> <C> <C> <C>
Line 1 Income (loss) before income taxes and cumulative effect of change in
accounting principle ($60,446) ($ 5,458) ($ 4,738)
Line 2 Interest on indebtedness 18,236 18,789 14,090
Line 3 Amortization of debt issuance costs 1,680 1,444 1,086
--------- -------- --------
Line 4 Total earnings before fixed charges (Line 1 plus Line 2 plus Line 3) ($40,530) $14,775 $10,438
----------------------------------------------------------------------
Line 5 Interest on indebtedness $18,236 $18,789 $14,090
Line 6 Amortization of debt issuance costs 1,680 1,444 1,086
-------- ------- -------
Line 7 Total fixed charges (Line 5 plus Line 6) $19,916 $20,233 $15,176
Ratio of earnings before fixed charges to fixed charges (Line 4
divided by Line 7) N/A* N/A* N/A*
<CAPTION>
Proforma Proforma Proforma
9 months Year 9 months 9 months
1996 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Line 1 Income (loss) before income taxes and cumulative effect of change in
accounting principle $ 2,629 $(2,975) $(2,856) $ 4,543
Line 2 Interest on indebtedness 14,360 16,998 12,730 12,917
Line 3 Amortization of debt issuance costs 1,035 752 564 564
------- ------- ------- -------
Line 4 Total earnings before fixed charges (Line 1 plus Line 2 plus Line 3) $18,024 $14,775 $10,438 $18,024
----------------------------------------------------------------------
Line 5 Interest on indebtedness $14,360 $16,998 $12,730 $12,917
Line 6 Amortization of debt issuance costs 1,035 752 564 564
------- ------- ------- -------
Line 7 Total fixed charges (Line 5 plus Line 6) $15,395 $17,750 $13,294 $13,481
Ratio of earnings before fixed charges to fixed charges (Line 4
divided by Line 7) 1.17 N/A* N/A* 1.34
* Earnings before fixed charges were insufficient to cover fixed charges.
</TABLE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report, which includes an emphasis of a matter explanatory paragraph
regarding the Company's liquidity, dated November 3, 1995 on our audits of the
financial statements of Haynes International, Inc. We also consent to the
reference to our firm under the caption "Experts."
/S/ COOPERS & LYBRAND L.L.P.
Fort Wayne, Indiana
August 15, 1996
