UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 333-5411
HAYNES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1185400
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1020 West Park Avenue, Kokomo, Indiana 46904-9013
(Address of principal executive offices) (Zip Code)
(765) 456-6000
(Registrant's telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
by Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any Amendment to this
Form 10-K. [X]
The registrant is a privately held corporation. As such, there is no practicable
method to determine the aggregate market value of the voting stock held by
non-affiliates of the registrant.
The number of shares of Common Stock, $.01 par value, of Haynes International,
Inc. outstanding as of December 23, 1999 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 70.
Total pages: 74
1
<PAGE>
TABLE OF CONTENTS
Part I Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 55
Part III
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 68
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 68
2
<PAGE>
Part I
Item 1. 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
("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. The Company produces its high
performance alloy products primarily in sheet, coil and plate forms, which in
the aggregate represented approximately 67% of the Company's net revenues in
fiscal 1999. 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 per pound, compared to the average selling price of
other metals, such as carbon steel sheet, stainless steel sheet and aluminum.
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 32% of its fiscal
1999 net revenues from products that are protected by United States patents and
approximately 19% of its net revenues from sales of products that are not
patented, but for which the Company has limited or no competition.
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. The percentages of the
Company's total product revenue and volume presented in this section are based
on data which include revenue and volume associated with sales by the Company to
its foreign subsidiaries, but exclude revenue and volume associated with sales
by such foreign subsidiaries to their customers. Management believes, however,
that the effect of including revenue and volume data associated with sales by
its foreign subsidiaries would not materially change the percentages presented
in this section. In fiscal 1999, HTA and CRA products accounted for
approximately 64% and 36%, respectively, of the Company's net revenues.
HTA products are used primarily in manufacturing components for 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 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.
3
<PAGE>
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, the Company believes this industry continues to
represent 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>
<S> <C> <C>
Alloy and Year Introduced End Markets and Applications (1) Features
- ------------------------- -------------------------------- --------
HAYNES HR-160 (1990) (2) Waste incineration/CPI-boiler tube Good resistance to sulfidation at high
shields temperatures
HAYNES 242 (1990) (2) Aero-seal rings High strength, low expansion and good
fabricability
HAYNES HR-120 (1990) (2) LBGT -cooling shrouds Good strength-to-cost ratio as compared
to competing alloys
HAYNES 230 (1984) (2) Aero/LBGT-ducting, combustors 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) (2) Aero-burner cans, after-burner High strength, oxidation resistant
components cobalt-based alloys
HAYNES 625 (1964) Aero/CPI-ducting, tanks, vessels, Good fabricability and general
weld overlays corrosion resistance
HAYNES 263 (1960) Aero/LBGT-components for gas Good ductility and high strength at
turbine hot gas exhaust pan temperatures up to 1600EF
HAYNES 718 (1955) Aero-ducting, vanes, nozzles Weldable high strength alloy with good
fabricability
HASTELLOY X (1954) Aero/LBGT-burner cans, transition Good high temperature strength at
ducts relatively low cost
HAYNES Ti 3-2.5 (1950) Aero-aircraft hydraulic and fuel Light weight, high strength
systems components titanium-based alloy
HAYNES 25 (1925) Aero-gas turbine parts, bearings, Excellent strength good oxidation
and various industrial applications resistance to 1800(degree)F
<FN>
(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.
</FN>
</TABLE>
The higher volume HTA products, including HAYNES 625, HAYNES 718 and
HASTELLOY X, are generally considered industry standards, especially in the
manufacture of jet aircraft engines and LBGT. These products have been used in
such applications since the 1950's and because of their widespread use have been
most subject to competitive pricing pressures. In fiscal 1999, sales of these
HTA products accounted for approximately 23% of the Company's net revenues.
4
<PAGE>
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 25 are the most widely used of
the Company's cobalt-based products and accounted for approximately 15% of the
Company's net revenues in fiscal 1999. Three of the more recently introduced HTA
products, HAYNES 242, HAYNES 230 and HAYNES 214, initially developed for the
aerospace and LBGT markets, are still patent-protected and together accounted
for approximately 7% of the Company's net revenues in fiscal 1999. These newer
alloys are continuing to gain 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 waste incineration and industrial heat treating applications,
respectively. HAYNES HR-160 is a higher priced cobalt-containing 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 are also less effective.
Recently, HAYNES HR-120 has been specified for a significant ring application
for a major land-based gas turbine manufacturer. In fiscal 1999, these two
alloys accounted for approximately 3% 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 1999, sales of these
products accounted for approximately 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>
<S> <C> <C>
Alloy and Year Introduced End Markets and Applications(1) Features
- ------------------------- ------------------------------- --------
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, valves Wear and corrosion resistant
nickel-based alloy
HASTELLOY G-50 (1989) 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, mixers, Broad resistance to many environments
piping
<FN>
(1) "CPI" refers to the chemical processing industry; "FGD" refers to flue gas
desulfurization industry.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
</FN>
</TABLE>
During fiscal 1999, sales of the CRA alloys HASTELLOY C-276, HASTELLOY C-22
and HASTELLOY C-4 accounted for approximately 25% of the Company's net revenues.
HASTELLOY C-276, introduced by the Company in 1968, is 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-4 is specified in many chemical processing
applications in Germany and is sold almost exclusively to that market.
5
<PAGE>
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. HASTELLOY B-3 was developed for the same applications and
has 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
super phosphoric 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 8% of the Company's net revenues in fiscal 1999.
The Company's patented alloy, 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's latest Ni-Cr-Mo alloy, HASTELLOY C-2000, combines many of the
corrosion resistant properties of existing Ni-Cr-Mo alloys, such as HASTELLOY
C-22 and HASTELLOY C-276, making it the most versatile of those alloys. It can
be used in both oxidizing and reducing environments and is expected to be used
extensively in the chemical processing industry and the flue gas desulfurization
(FGD) markets.
End Markets
Aerospace. The Company has manufactured HTA products for the aerospace
market since it entered the market in the late 1930s, and has developed numerous
proprietary alloys for this market. 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 driven by demand for key
end use industries such as automobiles, housing, health care, agriculture, and
metals production. CRA products supplied by the Company have been used in the
chemical processing industry since the early 1930s.
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.
6
<PAGE>
Land-Based Gas Turbines. The LBGT industry continues to be 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. The demand for land-based gas turbines is also growing rapidly for
use in power barges with mobility and as temporary base-load-generating units
for countries that have numerous islands and a large coast line. Further demand
growth is generated by natural gas pipeline construction which requires gas
turbines to drive the compressor stations.
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 of 1990, as amended (the "Clean Air Act"), mandates a two-phase program
aimed at significantly reducing sulfur dioxide (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.
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. 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.
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. Market development professionals 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 provides an advantage
over other manufacturers in the high performance industry. This activity allows
the Company to obtain direct insight into customers' alloy needs and allows the
Company to develop proprietary alloys that provide solutions to customers'
problems.
7
<PAGE>
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.
Effective January, 1999, the Company transferred its Kokomo, Indiana service
center to a leased site in Lebanon, Indiana. This new facility has water jet
cutting capability and specialized cutting equipment to service the Company's
customers more efficiently. Effective December, 1999, the Company organized a
wholly-owned subsidiary in Singapore to enhance the sale of its products in the
Pacific Rim. Approximately 81% of the Company's net revenues in fiscal 1999 was
generated by the Company's direct sales organization. The remaining 19% of the
Company's fiscal 1999 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 30 years. The following table sets forth
the approximate percentage of the Company's fiscal 1999 net revenues generated
through each of the Company's distribution channels.
DOMESTIC FOREIGN TOTAL
-------- ------- -----
Company sales office/direct.................. 29% 8% 37%
Company-owned service centers................ 21% 23% 44%
Independent distributors/sales agents........ 12% 7% 19%
---- ---- ----
Total.................................... 62% 38% 100%
==== ==== ====
The top twenty customers not affiliated with the Company accounted for
approximately 41% of the Company's net revenues in fiscal 1999. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 10% of the Company's net revenues in fiscal
1999. No other customer of the Company accounted for more than 10% of the
Company's net revenues in fiscal 1999.
The Company's foreign and export sales were approximately $81.5 million,
$100.4 million, and $83.1 million for fiscal 1997, 1998 and 1999, respectively.
Additional information concerning foreign operations and export sales is set
forth in Note 14 of the Notes to Consolidated Financial Statements appearing
elsewhere herein.
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. This results in more cycles of rolling, annealing and
pickling compared to 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 before they achieve the specifications
required by a customer. The Company manufactures products in sheet, plate,
tubular, billet, bar and wire forms, which represented 45%, 29%, 7%, 13%, 3% and
3%, respectively, of total volume sold in fiscal 1999 (after giving effect to
the conversion of billet to bar by the Company's U.K. subsidiary).
8
<PAGE>
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 provides the Company an advantage over its
major competitors in obtaining smaller specialty orders.
Backlog
As of September 30, 1999, the Company's backlog orders aggregated
approximately $41.8 million, compared to approximately $40.2 million at
September 30, 1998, and approximately $60.6 million at September 30, 1997.
Substantially all orders in the backlog at September 30, 1999 are expected to be
shipped within the twelve months beginning October 1, 1999. 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. The historical and current backlog
amounts shown in the following table are also indicative of relative demand over
the past few years.
<TABLE>
<CAPTION>
THE COMPANY'S BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
----- ----- ----- ----- -----
1st $49.7 $61.2 $63.8 $60.8 $45.7
2nd $64.8 $61.9 $65.4 $56.2 $46.8
3rd $55.8 $57.5 $55.5 $51.0 $44.5
4th $49.9 $53.7 $60.6 $40.2 $41.8
</TABLE>
Raw Materials
Nickel is the primary material used in the Company's alloys. Each pound of
alloy contains, on average, 0.48 of a pound 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.
9
<PAGE>
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 averages approximately 30 days, 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. Effective October 1,
1998, the Company ceased its hedging activities for nickel due to the low
sustained levels of nickel prices at that time. The following table sets forth
the average per pound price for nickel as reported by the London Metals Exchange
for the fiscal years indicated.
Year Ended
September 30, Average Price
------------- -------------
1988............................................... $4.12
1989............................................... 5.77
1990............................................... 4.29
1991............................................... 4.21
1992............................................... 3.48
1993............................................... 2.53
1994............................................... 2.54
1995............................................... 3.66
1996............................................... 3.56
1997............................................... 3.22
1998............................................... 2.40
1999............................................... 2.29
Research and Technical Development
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. As of September 30, 1999, the research and technical
development staff consisted of 42 persons, 16 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 mainly to efforts to
develop new proprietary alloys, to improve current or develop new manufacturing
methods, to provide technical service to customers, to provide technical support
to the commercial and manufacturing groups and to provide metallurgical training
to engineer and non-engineer employees. The Company spent approximately $3.9
million, $3.9 million and $3.8 million for research and technical development
activities for fiscal 1999, 1998 and 1997, respectively.
During fiscal 1999, exploratory alloy development projects were focused on
new high temperature alloy products for gas turbine and industrial heat service.
Engineering projects include new manufacturing process development, specialized
test data development and application support for large volume projects
involving power generation and radioactive waste containment. The Company is
continuing to develop an extensive database storage and retrieval system to
better manage its corrosion, high temperature and mechanical property data.
10
<PAGE>
Over the last ten years, the Company's technical programs have yielded nine
new proprietary alloys and 14 United States patents, with an additional two
United States patent applications pending. The Company currently maintains a
total of about 31 United States patents and approximately 200 foreign
counterpart patents and applications targeted at countries with significant or
potential markets for the patented products. In fiscal 1999, approximately 32%
of the Company's net revenues was derived from the sale of patented products and
an additional approximately 40% 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. Six of the alloys
considered by management to be of future commercial significance, HASTELLOY
G-30, HAYNES 230, HASTELLOY C-22, HAYNES HR-120, HAYNES 242 and ULTIMET, are
protected by United States patents that continue until the years 2001, 2002,
2002, 2008, 2008 and 2009, respectively.
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 Special
Metals, Allegheny Ludlum Corporation, a subsidiary of Allegheny Teledyne, Inc.
and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stahl AG. Prior to fiscal
1994, this competition, coupled with declining demand in several of the
Company's key markets, 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.
Employees
As of September 30, 1999, the Company had approximately 1,037 employees.
All eligible hourly employees at the Kokomo plant and Lebanon Service Center are
covered by a collective bargaining agreement with the United Steelworkers of
America ("USWA") which was ratified on June 11, 1999, and which expires on June
11, 2002. As of September 30, 1999, 533 employees of the Kokomo and Lebanon
facilities were covered by the collective bargaining agreement. The Company has
not experienced a strike at the Kokomo plant since 1967. None of the employees
of the Company's Arcadia, Louisiana or Openshaw, England plants are represented
by a labor union. Management considers its employee relations in each of the
facilities to be satisfactory.
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. Expenses
related to environmental compliance were approximately $1.3 million for fiscal
1999 and are expected to be approximately $1.6 million for fiscal year 2000.
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.
11
<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, record keeping requirements relating to, and handling of,
polychlorinated biphenyls and violations of record keeping and notification
requirements relating to industrial waste water discharge. Additions and
improvements may be required at the Kokomo, Indiana Wastewater Treatment
Facility based on proposed restrictions of the local sewer use ordinance.
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. As of September 30,1999,
capital expenditures of approximately $120,000 and $525,000 were budgeted for
wastewater treatment improvements and for air pollution control improvements,
respectively.
The Company has received permits from the Indiana Department of
Environmental Management ("IDEM") and the U.S. Environmental Protection Agency
("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 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 closure certification was received in
fiscal 1999. The Company is 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 the post-closure permits, the Company must provide and
maintain assurances to IDEM and EPA of the Company's capability to satisfy
closure and post-closure ground water monitoring requirements, including
possible future corrective action as necessary.
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 and the IDEM review 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 the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("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 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
site, the large number of PRPs and the prior payments made by the Company,
management does not expect the Company's involvement in this site 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.
12
<PAGE>
In November 1988, the EPA approved start-up of a new waste water treatment
plant at the Arcadia, Louisiana facility, which discharges treated industrial
waste water to the municipal sewage system. After the Company exceeded 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.
Item 2. Properties
The Company's owned facilities, 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.
Zurich, Switzerland - all product forms.
The Kokomo plant, the primary production facility, is located on
approximately 230 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,
drawbenches, annealing furnaces and pickling facilities.
The United States facilities are subject to a mortgage which secures the
Company's obligations under the Company's Revolving Credit Facility. See Note 6
of the Notes to Consolidated Financial Statements.
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 conducted at the facility require
hot rotary forges, bar mills and miscellaneous straightening, turning and
cutting equipment.
The Zurich warehouse consists of over 50,000 square feet of building on a
single site.
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.
13
<PAGE>
Item 3. Legal Proceedings
A Federal Grand Jury is investigating possible violations of federal
anti-trust laws in the nickel alloy industry. The Company, along with other
companies in this industry, is responding to the Government's request. The
Company has engaged outside legal counsel to represent its interest in the
investigation. Certain costs incurred by the Company in connection with the
investigation have been accounted for as selling and administrative and charged
against income in the period. For the year ended September 30, 1999, these costs
were approximately $3.5 million, of which $2.8 million is included in other
accrued expenses.
While the outcome of the investigation cannot be predicted with certainty,
in the opinion of management there will be no liability incurred in this matter
other than ongoing legal expenses in its defense.
The Company is also involved as the defendant in other various 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, management does not believe that such costs will have a
material effect on the Company's financial position, results of operations or
liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the common stock of the Company.
As of December 23, 1999 there was one holder of the common stock of the
Company.
There have been no cash dividends declared on the common stock for the two
fiscal years ended September 30, 1999 and 1998.
The payment of dividends is limited by terms of certain debt agreements to
which the Company is a party. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and Note 6 of the Notes to Consolidated Financial Statements of the Company
included in this Annual Report in response to Item 8.
(Remainder of page intentionally left blank.)
14
<PAGE>
Item 6. Selected Consolidated Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except ratio data)
The following table sets forth selected consolidated financial data of the
Company. The selected consolidated financial data as of and for the years ended
September 30, 1995, 1996, 1997, 1998 and 1999 are derived from the audited
consolidated financial statements of the Company.
These selected financial data are not covered by the auditors' report and
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 Form 10-K.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended September 30,
-----------------------------------------------------------------------------
Statement of Operations Data: 1995 1996 1997 1998 1999
---------- ------------- ----------- ------------ -----------
Net revenues $ 201,933 $ 226,402 $235,760 $246,944 $208,986
Cost of sales 167,196 181,173 180,504 191,849 164,349
Selling and administrative expenses 15,475 19,966(1) 18,311 18,166 25,201(2)
Recapitalization expense -- -- 8,694(3) -- --
Research and technical expenses 3,049 3,411 3,814 3,939 3,883
Operating income 16,213 21,852 24,437 32,990 15,553
Other cost, net 1,767 590 276 952 707
Terminated acquisition costs -- -- -- 6,199(4) 388(4)
Interest expense, net 19,904 21,102(1) 20,456 21,066 20,213
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (6,771) (1,780) 36,315(5) 2,456 564
Extraordinary item, net of tax benefit (7,256)(1) -- -- --
Cumulative effect of change in accounting
principle (net of tax benefit) -- -- -- (450)(6) --
---------- ------------- ----------- ------------ -----------
Net income (loss) (6,771) (9,036) 36,315 2,006 564
========== ============= =========== ============ ===========
September 30,
-----------------------------------------------------------------------------
Balance Sheet Data: 1995 1996 1997 1998 1999
---------- ------------- ----------- ------------ -----------
Working capital(7) $ 62,616 $ 57,307 $ 57,063 $ 66,974 $ 56,622
Property, plant and equipment, net 36,863 31,157 32,551 29,627 32,572
Total assets 151,316 161,489 216,319 207,263 221,237
Total debt 152,477 169,097 184,213 175,877 183,879
Accrued post-retirement benefits 94,830 95,813 96,201 96,483 97,662
Stockholder's equity (Capital deficiency) (121,909) (130,341) (94,435) (90,938) (90,052)
September 30,
-----------------------------------------------------------------------------
Other Financial Data: 1995 1996 1997 1998 1999
---------- ------------- ----------- ------------ -----------
Depreciation and amortization(8) $ 9,000 $ 9,042 $ 8,197 $ 8,148 $ 5,388
Capital expenditures 1,934 2,092 8,863 5,919 8,102
EBITDA(9) 23,446 32,141 41,302 40,186 25,446
Ratio of EBITDA to interest expense 1.18x 1.52x 2.02x 1.91x 1.26x
Ratio of earnings before fixed charges to fixed
charges(10) -- 1.01x 1.17x 1.22x --
Net cash provided from (used in) operating
activities $ (2,883) $ (5,343) $ (6,596) $ 14,584 $ (509)
Net cash used in investment
activities................................. (1,895) (2,025) (8,830) (5,750) (7,951)
Net cash provided from (used in) financing
activities........... 3,912 7,116 14,185 (8,562) 8,570
15
<PAGE>
<FN>
(1) During fiscal 1996, the Company successfully refinanced its debt with the
issuance of $140,000 Senior Notes due 2004 and an amendment to its
Revolving Credit Facility with Congress Financial Corporation ("Congress").
As a result of this refinancing effort, certain non-recurring charges were
recorded as follows: (a) $7,256 was recorded as the aggregate of
extraordinary items which represents the extraordinary loss on the
redemption of the Company's 11 1/4% Senior Secured Notes due 1998, and 13
1/2% Senior Subordinated Notes due 1999 (collectively, the "Old Notes") and
is comprised of $3,911 of prepayment penalties incurred in connection with
the redemption of the Old Notes and $3,345 of deferred debt issuance costs
which were written off upon consummation of the redemption of the Old
Notes; (b) $1,837 of Selling and Administrative Expense which represents
costs incurred with a terminated initial public offering of the Company's
common stock; and (c) $924 of Interest Expense which represents the net
interest expense (approximately $1,500 interest expense, less approximately
$600 interest income) incurred during the period between the issuance of
the Senior Notes and the redemption of the Old Notes.
(2) During fiscal 1999, the Company recorded approximately $3,462 in connection
with a Federal Grand Jury investigation of the nickel alloy industry. These
costs have been accounted for as Selling and administrative expenses and
charged against income during the period. Also, the Company recorded
approximately $1,750 in connection with the resignation of the Company's
former Chief Executive Officer, and the appointment of the Company's new
Chief Executive. Those costs were accounted for as Selling and
administrative expenses and charged against income in the period.
(3) On January 29, 1997, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, had effected the recapitalization of
the Company and Holdings pursuant to which Blackstone Capital Partners II
Merchant Banking Fund L.P. and two of its affiliates ("Blackstone")
acquired 79.9% of Holdings' outstanding shares (the "Recapitalization").
Certain fees, totaling $6,237, paid by the Company in connection with the
Recapitalization were accounted for as recapitalization expenses and
charged against income in the period. Also in connection with the
recapitalization, the Company recorded $2,457 of non-cash stock
compensation expense, also included as recapitalization expenses,
pertaining to certain modifications to management stock option agreements
which eliminated put and call rights associated with the options.
(4) Terminated acquisition costs of approximately $6,199 and $388 were recorded
in fiscal 1998 and 1999 in connection with the abandoned attempt to acquire
Inco Alloys International by Holdings. These costs previously had been
deferred.
(5) The Company recorded profit before tax of $3,705 and net income of $36,315.
During the third quarter of fiscal 1997, the Company reversed its deferred
income tax valuation allowance of approximately $36,431. See Note 5 of the
Notes to Consolidated Financial Statements of the Company included in this
Annual Report in response to Item 8.
(6) On November 20, 1997, the Financial Accounting Standards Board's Emerging
Issues Task Force ("EITF") issued a consensus ruling which requires that
certain business process reengineering and information technology
transformation costs be expenses as incurred. The EITF also consented that
if such costs were previously capitalized, then any remaining unamortized
portion of those identifiable costs should be written off and reported as a
cumulative effect of a change in accounting principle in the first quarter
of fiscal 1998. Accordingly, the Company recorded the cumulative effect of
this accounting change, net of tax, of $450, resulting from a pre-tax
write-off of $750 related to reengineering charges involved in the
implementation of an information technology project.
(7) Reflects the excess of current assets over current liabilities as set forth
in the Consolidated Financial Statements.
(8) Reflects (a) depreciation and amortization as presented in the Company's
Consolidated Statement of Cash Flows and set forth in Note (11) below, plus
or minus (b) 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 postretirement benefit costs, minus amortization of
debt issuance costs, all as set forth in Note (9) below.
(9) Represents for the relevant period net income plus expenses recognized for
interest, taxes, depreciation, amortization and other non-cash charges, (i)
plus the refinancing costs set forth in Note (1), part (a) and (b) for
fiscal 1996, (ii) plus recapitalization costs outlined in Note (3), and
$250 of failed acquisition costs for fiscal 1997, and (iii) plus terminated
acquisition costs outlined in Note (4), and $450 of business process
reengineering costs outlined in Note (6) for fiscal 1998, and (iv) plus the
Grand Jury investigation costs and executive transition costs discussed in
Note (2), and terminated acquisition costs outlined in Note (4) for fiscal
1999. In addition to net interest expense as listed in the table, the
following charges are added to net income (loss) to calculate EBITDA:
</FN>
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
-------- -------- --------- -------- --------
Provision for (benefit from) income taxes $ 1,313 $ 1,940 $(32,610) $ 2,317 $(6,319)
Depreciation 8,188 7,751 7,477 8,029 5,145
Amortization:
Debt issuance costs 1,444 4,698 1,144 1,247 1,246
Prepaid pension costs (benefit) 130 308 333 (163) (938)
-------- -------- --------- -------- --------
1,574 5,006 (23,656) 11,430 (866)
SFAS 106 postretirement benefits 682 983 387 282 1,181
Amortization of debt issuance costs (1,444) (4,698) (1,144) (1,247) (1,246)
-------- -------- --------- -------- --------
Total $10,313 $10,982 $(24,413) $10,465 $ (931)
======== ======== ========= ======== ========
<FN>
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.
(10) For purposes of these computations, earnings before fixed charges consist
of income (loss) before provision for (benefit from) income taxes,
extraordinary item and cumulative effect of a change in accounting
principle, plus fixed charges. Fixed charges consist of interest on debt,
amortization of debt issuance costs and estimated interest portion of
rental expense. Earnings were insufficient to cover fixed charges by $5,458
and $5,850 for fiscal 1995 and 1999, respectively.
</FN>
</TABLE>
(Remainder of page intentionally left blank.)
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report 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 Report 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 and other
matters, and (iii) industry trends affecting the Company's financial condition
or results of operations. Readers 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, many of which are
beyond the control of the Company.
Company Background
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 64% and 36%, respectively, of the Company's net revenues in
fiscal 1999. Based on available industry data, the Company believes that it is
one of three principal 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 1999, flat products accounted for 70% of
shipments and 67% 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 18.5 million pounds in fiscal 1998, to a low of 16.3
million pounds in fiscal 1995. The Company is not currently capacity
constrained. 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. Effective January, 1999, the Company transferred
its Kokomo, Indiana service center to a leased site in Lebanon, Indiana. This
new facility has water jet cutting capability and specialized cutting equipment
to service the Company's customers more efficiently. Effective December, 1999,
the Company organized a wholly owned subsidiary in Singapore to enhance the sale
of its products in the Pacific Rim. Approximately 81% of the Company's net
revenues in fiscal 1999 was generated by the Company's direct sales
organization. The remaining 19% of the Company's fiscal 1999 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 30 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 1999, sales to customers outside the United States accounted for
approximately 40% of the Company's net revenues.
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 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.
In fiscal 1999, proprietary products represented approximately 32% of the
Company's net revenues. In addition to these patent-protected alloys, several
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 1999, these other alloys represented
approximately 19% of the Company's net revenues.
18
<PAGE>
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 lead times from order to shipment are approximately 15
to 18 weeks.
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: (Note: Markets prior to 1997 have been reclassified due to improved
identification techniques implemented in 1997 by the Company.)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
% OF % OF % OF % OF % OF
SALES (DOLLARS IN MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ----- ----- ------ ----- ------ -----
Aerospace $ 68.2 33.8% $95.3 42.1% $111.2 47.2% $111.9 45.3% $87.3 41.8%
Chemical processing 74.1 36.7 77.9 34.4 69.3 29.4 79.7 32.3 71.0 34.0
Land-based gas turbines 14.3 7.1 17.4 7.7 17.2 7.4 17.5 7.1 24.1 11.5
Flue gas desulfurization 6.6 3.3 8.3 3.7 6.7 2.7 8.4 3.4 4.1 2.0
Oil and gas 4.5 2.2 4.3 1.9 7.8 3.3 5.9 2.4 1.2 .6
Other markets 30.9 15.3 19.6 8.6 20.1 8.5 19.8 8.0 16.4 7.8
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total product 198.6 98.4 222.8 98.4 232.3 98.5 243.2 98.5 204.1 97.7
Other revenue(1) 3.3 1.6 3.6 1.6 3.5 1.5 3.7 1.5 4.9 2.3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net revenues $201.9 100.0% $226.4 100.0% $235.8 100.0% $246.9 100.0% $209.0 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
U.S. $122.3 $142.0 $154.3 $146.5 $125.9
Foreign $ 79.6 $84.4 $81.5 $100.4 $83.1
SHIPMENTS BY MARKET
(MILLIONS OF POUNDS)
Aerospace 4.8 29.4% 6.6 40.2% 8.3 45.9% 7.6 41.1% 6.2 36.7%
Chemical processing 6.4 39.3 6.0 36.6 5.7 31.9 6.7 36.2 6.8 40.2
Land-based gas turbines 1.3 8.0 1.5 9.2 1.4 8.1 1.6 8.7 2.3 13.6
Flue gas desulfurization 0.9 5.5 1.0 6.1 0.7 3.8 1.1 5.9 .5 3.0
Oil and gas 0.5 3.1 0.3 1.8 0.7 3.8 0.5 2.7 .1 .6
Other markets 2.4 14.7 1.0 6.1 1.2 6.5 1.0 5.4 1.0 5.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Shipments 16.3 100.0% 16.4 100.0% 18.0 100.0% 18.5 100.0% 16.9 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
AVERAGE SELLING PRICE
PER POUND
Aerospace $14.21 $14.44 $13.40 $14.72 $14.08
Chemical processing 11.58 12.98 12.16 11.90 10.44
Land-based gas turbines 11.00 11.60 12.29 10.94 10.48
Flue gas desulfurization 7.33 8.30 9.57 7.64 8.20
Oil and gas 9.00 14.33 11.14 11.80 12.00
Other markets 12.88 19.60 16.75 19.80 16.40
All markets $12.18 $13.59 $12.91 $13.15 $12.08
<FN>
(1) Includes toll conversion and royalty income.
</FN>
</TABLE>
Fluctuations in net revenues and volume from fiscal 1995 through fiscal
1999 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.
19
<PAGE>
The Company experienced growth beginning in fiscal 1995 due to the
aerospace recovery providing the stimulus for demand improvement. As a result of
increased new aircraft production and maintenance requirements, the Company's
net revenues from sales to the aerospace supply chain peaked in fiscal 1998
having grown 64.1% from the fiscal 1995 base period.
Sales to the aerospace market in fiscal 1999 declined as the commercial
aircraft production by the major manufacturers reached its peak while projecting
fewer deliveries in the future. This condition reduced direct demand and caused
the supply chain to consume excess inventory. However, the Company expects the
impact of aircraft production deferrals and cancellations on the product
requirements will be completed by the end of calendar 1999 establishing a firmer
demand pattern, although there can be no assurance as to these facts.
A consistent stream of Haynes product requirements from the maintenance
and repair of installed engines and the requirements for existing engine "hush
kits" to bring them into Stage III noise compliance would add to the demand.
Chemical Processing. Demand for the Company's products in the chemical
processing industry tends to track overall economic activity and is driven by
maintenance requirements of chemical processing facilities and the expansion of
existing chemical processing facilities or the construction of new facilities.
In fiscal 1999, shipments of the Company's products to the chemical processing
industry declined from those in fiscal 1998. Indicators were that capital
projects would increase during fiscal 1999 but this activity failed to
materialize. The basic elements are still present that drive the increased use
of the Company's products, but the high level of mergers, spin-offs, and
divestment of facilities combined to push out many major projects. 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.
While some indicators are forecasting a small upturn in the chemical
processing industry in fiscal 2000 the Company expects demand for its products
in the chemical processing industry will continue at similar levels to fiscal
1999. In addition, the Company's key proprietary CRA products, including
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 to the Company's activity in this
market, although there can be no assurance that this will be the case.
Chemical processing markets are only expected by the Company to see small
growth in export markets and specific industry sectors (agricultural chemicals
and pharmaceuticals). The chemicals sector comprises both specialty and basic
organic and inorganic chemicals. Mergers and acquisitions of chemical companies
continue as companies make strategic acquisitions and divestitures in efforts to
enhance their global competitiveness.
The agricultural chemical sector is benefitting from changes in U.S.
agricultural programs that now place fewer limits on farmers' ability to plant
crops they want on the acreage they want; however, falling grain prices are
offsetting this trend. Growth in the pharmaceutical sector is being spurred by
continuing advances in both traditional drug research and the fast growing
biotech sector.
Land-Based Gas Turbines. The Company has leveraged its metallurgical
expertise to develop LBGT applications for alloys it had historically sold to
the aerospace industry. Land-based gas turbines are favored in electric
generating facilities due to low capital cost at installation, low cycle
installation time, flexibility in use of alternative fuels, and fewer sulfur
dioxide ("SO2") emissions than traditional fossil fuel-fired facilities. In
addition to power generation, land-based gas turbines are required as mechanical
drivers primarily for production and transportation of oil and gas, as well as
emerging applications in commercial marine propulsion and micro turbines for
standby/emergency power systems. The Company believes these factors are
primarily responsible for creating demand for its products in the LBGT industry.
20
<PAGE>
Prior to the enactment of the Clean Air Act, land-based gas turbines were
used primarily to satisfy peak power requirements. The Company believes that
land-based gas turbines are the clean, low-cost alternative to fossil fuel-fired
electric generating facilities. In the early 1990's when Phase I of the Clean
Air Act was being implemented, selection of land-based gas turbines to satisfy
electric utilities demand firmly established this power source. The Company
believes that the mandated 2002 compliance with Phase II of the Clean Air Act
will further contribute to demand for its products.
The Company's revenue from sales to the land-based gas turbine industry
have nearly doubled in the past five years. The Company believes the demand for
Haynes products based on industry projections should continue to increase over
the next several years.
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. The Company anticipates
limited sales opportunities in the FGD market as deadlines for Phase II of the
Clean Air Act approach in 2000 due to the over compliance with Phase I
requirements as discussed below.
The Clean Air Act addresses numerous air quality problems in the United
States that are not entirely covered in earlier legislation. One of these
problems is acid rain caused by SO2 and nitrogen oxides ("NOx") emissions from
fossil-fueled electric power. Title IV of the Clean Air Act created a two-phased
plan to reduce acid rain in the U.S. Phase I runs from 1995 through calendar
year 1999, and Phase II, which is more stringent than Phase I, begins in 2000.
The acid rain program allocated emission allowances to Phase I units,
authorizing them to emit one ton of SO2 for each allowance. Some utilities
obtained additional allowances from three auctions and from bonus provisions in
the Act. During Phase I, utilities that reduced emissions below specified limits
could sell the excess reduction as an allowance to another utility. The cost for
these allowances was generally below the cost of scrubbing. The price for SO2
allowances from 1985 to 1990 was about $100/ton; the cost for scrubbing during
this same time frame was $250/ton. Therefore, many utilities opted to buy annual
allowances rather than add environmental equipment. Under Phase II, there will
be fewer allowances due to the further reduction in sulfur emissions. This has
driven the price for allowances upward. In addition, the price for scrubbers has
also been reduced over the last few years. Currently, the price of SO2
allowances is about $225/ton while the scrubbing cost have also dropped to
around $225/ton. These two trends result in scrubber prices currently being
equivalent to buying allowance. In addition, the price of allowances is expected
to increase further. This should translate into increased equipment purchases
over the next several years.
For Phase II, more than 2,000 operating units will be affected. While many
utilities have not finalized their plans to comply with the more stringent Phase
II requirements, several projects have been announced as in the planning stages
during the last quarter of fiscal 1999.
Increased competition has caused the electric utility industry to make
major changes in the way it is structured. On April 26, 1996, the Federal Energy
Regulatory Commission ("FERC") issued a final rule, Order No. 888, in response
to provisions of the Energy Policy Act ("EPACT") of 1992. Order No. 888 opens
wholesale electric power sales to competition and requires each utility that
owns transmission lines to allow buyers and sellers of power the same access to
these lines as the utility provides for its own generation.
In a noncompetitive, regulated environment, state regulators allowed
electric utilities to pass on costs of pollution control requirements to
consumers. In a competitive environment, however, utilities with higher rates
due to environmental controls would be at a relative disadvantage, while those
with lower costs could increase market share. With increasing competition and
with Phase II of the Clean Air Act slated for implementation on January 1, 2000,
utilities are showing less interest in making capital investments in expensive
pollution control equipment, are uncertain about cost recovery, and want to be
more competitive.
21
<PAGE>
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. 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 out
source 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. The gas
drilling rate remains steady as is the rig count in both the Gulf of Mexico and
inland areas. Demand for natural gas is expected to grow moderately over the
next several years.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1999 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. The automotive and industrial heat treating markets
are highly cyclical and very competitive. However, continual growth
opportunities exist in automotive due to new safety, engine controls, and
emission systems technologies. Also, increasing requirements for improved
materials performance in industrial heating are expected to increase demand for
the Company's products. Waste incineration presents opportunities for the
Company's alloys as landfill space is diminishing and government concerns over
pollution, chemical weapon stockpiles, and chemical and nuclear waste handling
are increasing. 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.
(Remainder of page intentionally left blank.)
22
<PAGE>
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>
<S> <C> <C> <C>
Year Ended September 30,
-------------------------------------------------
1997 1998 1999
-------- --------- -------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 76.6 77.7 78.6
Selling and administrative expenses 7.8 7.4 12.1
Recapitalization expense 3.7(1) -- --
Research and technical expenses 1.6 1.6 1.9
-------- -------- --------
Operating income 10.3 13.3 7.4
Other cost, net 0.1 0.4 0.3
Terminated acquisition costs -- 2.5(2) 0.2(2)
Interest expense 8.7 8.6 9.7
Interest income (0.1) (0.1) (0.1)
Income (loss) before provision for (benefit from)
income taxes and cumulative effect of a change in
accounting principle 1.6 1.9 (2.7)
Provision for (benefit from) income taxes (13.8) 0.9 (3.0)
Cumulative effect of a change in accounting -- (0.2)(3) --
principle, net of tax benefit
Net income 15.4% .8% .3%
<FN>
(1) On January 29, 1997, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, had effected the recapitalization of
the Company and Holdings pursuant to which Blackstone Capital Partners II
Merchant Banking Fund L.P. and two of its affiliates ("Blackstone")
acquired 79.9% of Holdings' outstanding shares. Certain fees totaling
approximately $6.2 million paid by the Company in connection with the
Recapitalization have been accounted for as recapitalization expenses, and
charged against income in the period. Also in connection with the
Recapitalization, the Company recorded approximately $2.5 million of
non-cash stock compensation expense, also included as recapitalization
expenses, pertaining to certain modifications to management stock option
agreements which eliminated put and call rights associated with the
options.
(2) Terminated acquisition costs of approximately $6.2 million and $388,000
were recorded in fiscal 1998 and 1999, respectively, in connection with the
abandoned attempt to acquire Inco Alloys International by Holdings. These
costs previously had been deferred.
(3) On November 20, 1997, the Financial Accounting Standards Board's Emerging
Issues Task Force ("EITF") issued a consensus ruling which requires that
certain business process reengineering and information technology
transformation costs be expenses as incurred. The EITF also consented that
if such costs were previously capitalized, then any remaining unamortized
portion of those identifiable costs should be written off and reported as a
cumulative effect of a change in accounting principle in the first quarter
of fiscal 1998. Accordingly, the Company recorded the cumulative effect of
this accounting change, net of tax, of $450,000, resulting from a pre-tax
write-off of $750,000 related to reengineering charges involved in the
implementation of an information technology project.
</FN>
</TABLE>
23
<PAGE>
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Net Revenues. Net revenues decreased approximately $37.9 million, or
15.4%, to approximately $209.0 million in fiscal 1999 from approximately $246.9
million in fiscal 1998, primarily as a result of an 8.6% decrease in shipments,
from approximately 18.5 million pounds in fiscal 1998 to approximately 16.9
million pounds in fiscal 1999, and an 8.1% decrease in average selling prices,
from approximately $13.15 per pound in fiscal 1998 to approximately $12.08 per
pound in fiscal 1999.
Sales to the aerospace industry for fiscal 1999 decreased to approximately
$87.3 million from approximately $111.9 million for fiscal 1998. The significant
decrease can be attributed to a 17.1% decline in volume to approximately 6.3
million pounds in fiscal 1999 from approximately 7.6 million pounds in fiscal
1998. The lower volume is due to the reduced demand for all product forms in all
geographic sectors by the airframe component fabricators and the gas turbine
manufacturers as the commercial aviation industry adjusts to declining aircraft
build schedules. Also contributing to the decline in sales are lower average
selling prices per pound, falling to approximately $14.08 in fiscal 1999 from
approximately $14.72 in fiscal 1998. This decrease is the result of a reduced
volume of high value cobalt-containing alloys and titanium tubulars.
Sales to the chemical processing industry during fiscal 1999 decreased by
10.9% to approximately $71.0 million from approximately $79.7 million for fiscal
1998. Volume shipped to the chemical processing industry during fiscal 1999
increased by 1.5% to approximately 6.8 million pounds, compared to 6.7 million
pounds in fiscal 1998. The increase in volume can be attributed to increased
project activity in the domestic and European markets which has partially offset
the lower demand in the Asian market. The increase in volume was not sufficient
to offset a 12.0% decline in the average selling price from $11.90 per pound in
fiscal 1998 to $10.44 per pound in fiscal 1999. The decline in the average
selling price per pound is attributable to a higher proportion of lower priced
plate products, compared to sales of higher priced sheet and tubular products.
Sales to the LBGT Industry during fiscal 1999 increased 37.1% to
approximately $24.1 million from approximately $17.5 million in fiscal 1998.
Volume increased by 43.8% to approximately 2.3 million pounds, compared to 1.6
million pounds in fiscal 1998, while average selling prices decreased 4.2%. The
volume increase is primarily attributable to improved sales of one of the
Company's proprietary alloys, HAYNES HR-120(R) alloy, for a major gas turbine
manufacturer. The decrease in average selling price is a result of higher sales
of lower cost, lower priced product forms for the export market.
Sales to the FGD industry decreased 51.2% to approximately $4.1 million in
fiscal 1999 from approximately $8.4 million in fiscal 1998. Volume decreased
57.5% while average selling price per pound increased 7.3% reflecting the highly
cyclical and competitive nature of this market.
Sales to the oil and gas industry decreased 79.7% to approximately $1.2
million for fiscal 1999 from approximately $5.9 million in fiscal 1998 as a
result of lower activity in production of deep sour gas. These are typically
large projects and may vary in number significantly from year to year.
Sales to other industries decreased 17.2% in fiscal 1999 to approximately
$16.4 million from approximately $19.8 million for the same period a year ago.
Volume remained relatively flat compared to fiscal 1998, while the average
selling price per pound decreased to $16.40 in fiscal 1999 from $19.80 per pound
in fiscal 1998, a decline of 17.2%. The decline in the average selling price can
be attributed to proportionately higher sales of lower cost, lower priced
nickel-based alloys relative to sales of higher cost, higher priced cobalt-based
alloys.
Cost of Sales. Cost of sales as a percentage of net revenues increased to
78.6% in fiscal 1999 compared to 77.7% in fiscal 1998. The higher cost of sales
percentage in fiscal 1999 compared to fiscal 1998 resulted from higher
distribution costs associated with the new Midwest Service Center and lower
volumes of higher value added sheet and seamless product forms which were
partially offset by lower raw material costs.
24
<PAGE>
Selling and Administrative Expenses. Selling and administrative expenses
increased approximately $7.0 million to approximately $25.2 million for fiscal
1999 from approximately $18.2 million in fiscal 1998 primarily as a result of
expenses related to the Company's response to the Department of Justice's grand
jury investigation into the nickel industry, the transition costs associated
with the change in the Company's executive management and increased domestic and
export selling costs.
Research and Technical Expenses. Research and technical expenses remained
relatively flat at approximately $3.9 million in fiscal 1999 and 1998.
Operating Income. As a result of the above factors, the Company recognized
operating income for fiscal 1999 of approximately $15.6 million, approximately
$4.1 million of which was contributed by the Company's foreign subsidiaries. For
fiscal 1998, operating income was approximately $33.0 million, of which
approximately $5.9 million was contributed by the Company's foreign
subsidiaries.
Other. Other cost, net, decreased approximately $245,000, from
approximately $952,000 in fiscal 1998, to approximately $707,000 for fiscal
1999, primarily as a result of foreign exchange gains realized in fiscal 1999,
as compared to foreign exchange losses experienced during fiscal 1998.
Terminated Acquisition Costs. Terminated acquisition costs of
approximately $388,000 were recorded in fiscal 1999, compared with $6.2 million
for fiscal 1998, in connection with the abandoned attempt by Holdings to acquire
Inco Alloys International.
Interest Expense. Interest expense decreased approximately $900,000, to
approximately $20.3 million for fiscal 1999 from approximately $21.2 million for
fiscal 1998. Lower revolving credit balances and lower interest rates during
fiscal 1999 contributed to the decrease.
Income Taxes. The benefit from income taxes of approximately $6.3 million
for fiscal 1999 decreased by approximately $8.6 million from tax expense of
approximately $2.3 million for fiscal 1998 due to an adjustment of deferred
income taxes for certain foreign earnings that will not be remitted to the
United States.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1999 of approximately $564,000, compared to net income of
approximately $2.0 million for fiscal 1998.
(Remainder of page intentionally left blank.)
25
<PAGE>
Year Ended September 30, 1998 Compared To Year Ended September 30, 1997
Net Revenues. Net revenues increased approximately $11.2 million, or 4.7%,
to approximately $246.9 million in fiscal 1998 from approximately $235.8 million
in fiscal 1997, primarily as a result of a 2.8% increase in shipments, from
approximately 18.0 million pounds in fiscal 1997 to approximately 18.5 million
pounds in fiscal 1998, and a 1.9% increase in average selling prices, from
approximately $12.91 per pound in fiscal 1997 to approximately $13.15 per pound
in fiscal 1998.
Sales to the aerospace industry for fiscal 1998 increased slightly to
approximately $111.9 million from approximately $111.2 million for fiscal 1997.
The increase in revenue can be attributed to a 9.9% increase in average selling
prices per pound to approximately $14.72 in fiscal 1998 from approximately
$13.40 in fiscal 1997. This increase was due to proportionately more sales of
the higher-priced, cobalt-based alloys and higher value added forms. This price
increase offset an 8.4% decline in volume caused by some slackening in demand
exacerbated by some unplanned production outages. The drop in demand during the
last six months of fiscal 1998 apparently was the result of inventory
corrections by commercial aircraft and component suppliers.
Sales to the chemical processing industry during fiscal 1998 increased by
15.0% to approximately $79.7 million from approximately $69.3 million for fiscal
1997. Volume shipped to the chemical processing industry during fiscal 1998
increased by 17.5% to approximately 6.7 million pounds, compared to 5.7 million
pounds in fiscal 1997. The increase in volume stemmed from higher sales to
export markets including project sales through the Company's foreign
subsidiaries. Average selling prices per pound were lower in fiscal 1998
reflecting heightened competition, lower raw material costs, and a higher
percentage of project versus maintenance business.
Sales to the LBGT industry during fiscal 1998 increased 1.7% to
approximately $17.5 million from approximately $17.2 million in fiscal 1997.
Volume increased by 14.3% to approximately 1.6 million pounds, compared to 1.4
million pounds in fiscal 1997 while average selling prices decreased 11.0% The
volume increase was primarily attributable to improved sales during the fourth
quarter of the Company's proprietary alloys (HAYNES(R) 230(R) alloy and HAYNES
HR-120(R) alloy) for a major gas turbine manufacturer. The decrease in average
selling price was a result of higher sales of lower cost, lower priced
iron-based alloys.
Sales to the FGD industry increased 25.4% to approximately $8.4 million in
fiscal 1998 from approximately $6.7 million in fiscal 1997. Volume increased
57.1% while average selling price per pound decreased 20.2% reflecting the
highly cyclical and competitive nature of this market.
Sales to the oil and gas industry decreased 24.4% to approximately $5.9
million for fiscal 1998 from approximately $7.8 million in fiscal 1997 as a
result of lower activity in the production of deep sour gas. These are typically
large projects and may vary in number significantly from year to year.
Sales to other industries decreased 1.5% in fiscal 1998 to approximately
$19.8 million from approximately $20.1 million for the same period a year ago,
as a result of a volume decrease of 16.7% partially offset by an 18.2% increase
in average selling price. The decrease in volume can be attributed to lower
sales for automotive applications. The increase in the average selling price per
pound stemmed from a better mix of higher priced products during fiscal 1998
compared to fiscal 1997.
Cost of Sales. Cost of sales as a percentage of net revenues increased to
77.7% in fiscal 1998 compared to 76.6% in fiscal 1997. Volume in the higher
priced, higher value added sheet and coil forms decreased in fiscal 1998 in part
due to unplanned outages in sheet and coil production equipment. This decrease
was partially offset by reduced material costs, primarily nickel, during fiscal
1998 compared to fiscal 1997.
Selling and Administrative Expenses. Selling and administrative expenses
decreased approximately $100,000 to approximately $18.2 million for fiscal 1998
from approximately $18.3 million in fiscal 1997 primarily as a result of lower
benefit related costs partially offset by increased headcount.
26
<PAGE>
Research and Technical Expenses. Research and technical expenses increased
approximately $100,000, to approximately $3.9 million in fiscal 1998 from
approximately $3.8 million in fiscal 1997, primarily as a result of salary
increases.
Operating Income. As a result of the above factors, the Company recognized
operating income for fiscal 1998 of approximately $33.0 million, approximately
$5.9 million of which was contributed by the Company's foreign subsidiaries. For
fiscal 1997, operating income was approximately $24.4 million, of which
approximately $4.1 million was contributed by the Company's foreign
subsidiaries.
Other Costs (Income). Other cost (income), net increased approximately
$676,000, from approximately $276,000 in fiscal 1997 to approximately $952,000
for fiscal 1998, primarily as a result of foreign exchange losses realized in
fiscal 1998, as compared to foreign exchange gains experienced during fiscal
1997.
Terminated Acquisition Costs. Terminated acquisition costs of
approximately $6.2 million were recorded in fiscal 1998 in connection with the
abandoned attempt by Holdings to acquire Inco Alloys International. These costs
previously had been deferred.
Interest Expense. Interest expense increased approximately $600,000, to
approximately $21.2 million for fiscal 1998 from approximately $20.6 million for
fiscal 1997. Higher revolving credit balances during the first nine months of
fiscal 1998 compared to the same period in fiscal 1997 and higher debt issuance
cost amortization in fiscal 1998 contributed to this increase.
Income Taxes. The provision for income taxes of approximately $2.3 million
for fiscal 1998 was primarily due to taxes on higher foreign earnings. The
benefit from income taxes of approximately $32.6 million for fiscal 1997 was due
primarily to the Company's reversal of its deferred tax valuation allowance.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1998 of approximately $2.0 million, compared to net income of
approximately $36.3 million for fiscal 1997.
(Remainder of page intentionally left blank.)
27
<PAGE>
Liquidity and Capital Resources
The Company's near-term future cash needs will be driven by working
capital requirements and planned capital expenditures. Capital expenditures were
approximately $8.1 million in fiscal 1999. Capital expenditures were
approximately $8.9 million and $5.9 million for fiscal 1997 and 1998,
respectively. The largest capital item for fiscal 1999 was $2.6 million for the
Company's flat product production areas, including the four-high mill and cold
finishing areas. Planned fiscal 2000 capital spending is primarily targeted for
the Company's coil inspection of cold finishing products, a tube reducing mill
for the Arcadia tubular facility, the completion of information technology
projects, and an upgrade on the Openshaw rotary forge equipment. The Company
does not expect such capital expenditures will have a material adverse effect on
its long-term liquidity. The Company expects to fund its working capital needs
and capital expenditures with cash provided from operations, supplemented by
borrowings under its Revolving Credit Facility. The Company believes these
sources of capital will be sufficient to fund planned capital expenditures and
working capital requirements over the next 12 months and on a long-term basis,
although there can be no assurance that this will be the case.
Net cash used in operating activities in fiscal 1999 was approximately
$509,000, as compared to net cash provided by operating activities of
approximately $14.6 million for fiscal 1998. The cash used in operating
activities for fiscal 1999 was primarily the result of an increase of
approximately $9.7 million in inventories, an increase of approximately $7.2
million in the deferred income tax asset, a decrease of approximately $5.3
million in accounts and notes receivable, an increase of approximately $5.7
million in accounts payable and accrued expenses and non-cash depreciation and
amortization expenses of approximately $6.4 million and other adjustments. Cash
used for investing activities increased from approximately $5.8 million in
fiscal 1998 to approximately $8.0 million in fiscal 1999, almost entirely due to
increased capital expenditures. Cash provided from financing activities for
fiscal 1999 was approximately $8.6 million due primarily to increased borrowings
under the Revolving Credit Facility. Cash for fiscal 1999 decreased
approximately $144,000, resulting in a September 30, 1999, cash balance of
approximately $3.6 million. Cash in fiscal 1998 increased approximately $439,000
from fiscal 1997, resulting in a cash balance of approximately $3.7 million at
September 30, 1998.
The Company amended its existing Revolving Credit Facility, which
expired on August 23, 1999, by extending the term of the loan agreement to
November 22, 1999. On November 22, 1999, the Company refinanced the Revolving
Credit Facility with Fleet Capital Corporation ("Fleet Revolving Credit
Facility"). The Fleet Revolving Credit Facility's term is three years and the
maximum amount available under the Revolving Line of Credit is $72.0 million.
The terms and conditions of the Fleet Revolving Credit Facility are similar to
the prior facility. The Company also has $140,000 of 11 5/8% Senior Notes due
2004 ("Senior Notes"). See Note 6 of the Notes to Consolidated Financial
Statements for a description of the terms of the Senior Notes and the Revolving
Credit Facility in place at September 30, 1999, and Exhibit 10.30 in Part IV,
Item 14, for a description of the Fleet Revolving Credit Facility.
The Senior Notes and the revolving credit facilities 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 EPA. If the EPA or 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 PRP at one
waste disposal site. Based on current information, the Company believes that its
involvement at this site will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity although there
can be no assurance with respect thereto. Expenses related to environmental
compliance were $1.3 million for fiscal 1999 and are expected to be
approximately $1.6 million for fiscal 2000. 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 pending
against the Company is reasonably likely to have a material adverse effect on
the Company's operations or liquidity. See "Business--Environmental Matters."
28
<PAGE>
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.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
recording of a valuation allowance when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. This statement
further states that forming a conclusion that a valuation allowance is not
needed may be difficult, especially 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. During the third quarter of fiscal
1997, the Company reversed its deferred income tax valuation allowance of
approximately $36.4 million. This reversal was due to the Company's assessment
of past earnings history and trends (exclusive of non-recurring charges), sales
backlog, budgeted sales and earnings, stabilization of financial condition, and
the periods available to realize the future tax benefits. During the second
quarter of 1999, the Company recorded a deferred income tax benefit associated
with the undistributed earnings of two foreign affiliates. The Company has
concluded that the earnings of these two affiliates will be permanently invested
overseas for the foreseeable future.
Year 2000
The Company has recognized that the Year 2000 will affect certain business
systems currently being used and has taken steps to (1) protect the ability of
the Company to do business, (2) minimize the risk to the Company from Year 2000
exposure and (3) enhance or expand capabilities as exposures are eliminated. The
areas of exposure include the Company's computer systems and certain
non-Information Technology ("IT") equipment. The Company's products are not date
sensitive.
Areas considered "critical" to fix are the current mainframe computer in
Kokomo, Indiana, the Argon-Oxygen Decarburization ("AOD") software and the least
cost melt software in the melt area, the four-high Steckel mill computer and
automatic gauge controls in the hot rolling production area, the power
consumption system, the computer in the Electro-slag remelt area, the gauge
controls for one cold rolling mill, the engineering test lab computer, the
telephone system, and the payroll system.
Areas which present a "slight to negligible" exposure if not fixed include
various non-IT program logic controllers, lab collection computers, various
gauges, various test equipment, electronic scales, desktop software, voice mail,
faxes, copiers, and printers.
The Company has already devoted significant amounts of time to ensure all
exposures are eliminated by December 1999, or sooner. In fiscal 1995, the
Company began its upgrade of the current IBM mainframe and an IBM System/36 used
for the Company's primary business system and received board approval in early
fiscal 1996 for a $4.4 million new integrated information system to replace the
mainframe (of which approximately $4.0 million had been spent through September
30, 1999, including $750,000 of business process reengineering costs). This
project includes new IBM AS/400 equipment and an enterprise level software
package called BPCS(TM), by System Software and Associates, which is Year 2000
compliant and was successfully installed December 1, 1999, and is functional and
operating as intended. Moreover, the mill systems and controls that could have
an impact on production have all been tested and verified. The costs for
upgrading the stand-alone manufacturing and lab equipment controls were budgeted
for fiscal 1999 as part of the spending or capital expenditure budgets. The
payroll system became Year 2000 compliant in October, 1998.
29
<PAGE>
Over 150 surveys have been completed for the Company's customers and the
Company has sent surveys to its critical suppliers (generally $100,000 in
purchases and above) to assess their Year 2000 readiness. Currently there is no
indication that our customers or suppliers will not be Year 2000 ready.
The total estimated costs as of September 30, 1999 for Year 2000
compliance (other than the $4.4 million integrated information system mentioned
above) is currently estimated at approximately $600,000 for some critical and
all non-critical exposures and $1.65 million for capital expenditures related to
critical exposures. The Company intends to use its cash availability under its
revolving credit facility to finance these expenditures.
The Company believes that its most reasonably likely worst-case Year 2000
scenario would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. Because the Company has
less control over assessing and remediating the Year 2000 problems of third
parties, the Company believes the risks are greatest with electricity supply and
telecommunications. Failure of an electricity grid or an uneven supply of power
over a prolonged period of time could have a detrimental effect on the Company's
ability to produce and ship material in a timely and reliable manner. The
Company is not in a position to identify or to avoid all possible scenarios;
however, the Company is taking steps to mitigate the impacts of various
scenarios if they were to occur.
Recapitalization
The Company announced on January 29, 1997 that the Recapitalization had
been effected, and that in connection therewith Holdings had completed a stock
purchase transaction with Blackstone Capital Partners II Merchant Banking Fund
L.P. and two of its affiliates ("Blackstone") and a stock redemption transaction
with MLGA Fund II, L.P. and MLGAL Partners L.P., the principal investors in
Holdings prior to the Recapitalization. As part of the Recapitalization,
Holdings redeemed approximately 79.9% of its outstanding shares of common stock
at $10.15 per share in cash and Blackstone purchased a like number of shares at
the same price. Due to this change in ownership, the Company's ability to
utilize its U.S. net operating loss carryforwards will be limited in the future.
Terminated Acquisition by Holdings
In June 1997 Inco Limited ("Inco") and Blackstone jointly announced the
execution of a definitive agreement for the sale by Inco of 100% of its Inco
Alloy International ("IAI") business unit to Holdings. On March 3, 1998,
Blackstone and Holdings abandoned their attempt to purchase IAI after the
Department of Justice announced its intention to challenge the proposed
acquisition. Certain fees paid and accrued by the Company in connection with the
Acquisition have been accounted for as terminated acquisition costs and charged
against income in fiscal 1998 and 1999.
Accounting Pronouncements
On November 20, 1997, the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force ("EITF") issued a consensus ruling which requires
that certain business process reengineering and information technology
transformation costs be expensed as incurred. The EITF also consented that if
such costs were previously capitalized, then any remaining unamortized portion
of those identifiable costs should be written off and reported as a cumulative
effect of a change in accounting principle. Accordingly, the Company recorded
the cumulative effect of this accounting change, net of tax, of $450,000
resulting from a pre-tax write-off of $750,000 related to reengineering charges
involved in the implementation of an information technology project.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", effective October 1, 1998. SFAS No.
130 requires that changes in the Company's foreign currency translation
adjustment be shown in the financial statements. All prior year financial
statements have been reclassified for comparative purposes.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which will be effective for fiscal year 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. Management has not yet quantified the effect of
this new standard on the consolidated financial statements.
30
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 1999, the Company's primary market risk exposure was
foreign currency exchange rate risk with respect to forward contracts entered
into by the Company's foreign subsidiaries located in England and France. Prior
to September 30, 1998, the Company also had commodity price risk with respect to
nickel forward contracts, but closed out all existing contracts at September 30,
1998, due to the low sustained levels of nickel prices at that time. The nickel
contracts closed were settled in fiscal 1999 at a loss of approximately $68,000.
If the Company decides to hedge its nickel price exposure in the future, Board
of Director approval will be obtained prior to entering into any contracts.
The foreign currency exchange risk exists primarily because the two
foreign subsidiaries need U.S. dollars in order to pay for their intercompany
purchases of high performance alloys from the Company's U.S. locations. The
foreign subsidiaries manage their own foreign currency exchange risk. Any U.S.
dollar exposure aggregating more than $500,000 requires approval from the
Company's Vice President of Finance. Most of the currency contracts to buy U.S.
dollars are with maturity dates less than six months.
At September 30, 1999, the unrealized gain (loss) on these foreign
currency exchange contracts was not material to the future results of the
Company (see Note 1 of Item 8. Financial Statements and Supplementary Data).
[Remainder of page intentionally left blank.]
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
Board of Directors
Haynes International, Inc.
Kokomo, Indiana
We have audited the accompanying consolidated balance sheets of Haynes
International, Inc., a wholly-owned subsidiary of Haynes Holdings, Inc., as of
September 30, 1999, and 1998, and the related consolidated statements of
operations, comprehensive income and cash flows for the years then ended. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1999 and 1998 consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of September 30, 1999 and 1998, and the results of their operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic 1999 and 1998 consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed
its method of accounting for certain business process reengineering costs
effective October 1, 1997.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
November 5, 1999
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Haynes International, Inc.
We have audited the 1997 consolidated financial statements and the
financial statement schedules listed in item 14(a) of this Form 10-K of Haynes
International, Inc. (the Company), a wholly owned subsidiary of Haynes Holdings,
Inc. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, Haynes International, Inc. consolidated results of
operations and cash flows for the year ended September 30, 1997, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
PricewaterhouseCoopers, LLP
Ft. Wayne, Indiana
November 3, 1997
33
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<S> <C> <C>
September 30, September 30,
1998 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,720 $ 3,576
Accounts and notes receivable, less allowance for 45,974 40,241
doubtful accounts of $662 and $876, respectively
Inventories 81,861 91,012
---------- ----------
Total current assets 131,555 134,829
---------- ----------
Property, plant and equipment, net 29,627 32,572
Deferred income taxes 36,549 44,137
Prepayments and deferred charges, net 9,532 9,699
---------- ----------
Total assets $ 207,263 $ 221,237
========== ==========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 20,823 $ 27,966
Accrued postretirement benefits 4,500 4,200
Revolving credit facility 35,273 44,051
Notes payable 1,055 208
Income taxes payable 1,731 263
Deferred income taxes 1,199 1,519
---------- ----------
Total current liabilities 64,581 78,207
---------- ----------
Long-term debt, net of unamortized discount 139,549 139,620
Accrued postretirement benefits 91,983 93,462
---------- ----------
Total liabilities 296,113 311,289
---------- ----------
Redeemable common stock of parent company 2,088
Capital deficiency:
Common stock, $.01 par value (100 shares authorized,
issued and outstanding)
Additional paid-in capital 49,087 51,175
Accumulated deficit (143,000) (142,436)
Accumulated other comprehensive income 2,975 1,209
---------- ----------
Total capital deficiency (90,938) (90,052)
---------- ----------
Total liabilities and capital deficiency $ 207,263 $ 221,237
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Net revenues $235,760 $246,944 $208,986
Cost of sales 180,504 191,849 164,349
Selling and administrative 18,311 18,166 25,201
Recapitalization expense 8,694
Research and technical 3,814 3,939 3,883
--------- --------- ---------
Operating income 24,437 32,990 15,553
Other costs, net 276 952 707
Terminated acquisition costs 6,199 388
Interest expense 20,608 21,171 20,348
Interest income (152) (105) (135)
--------- --------- ---------
Income (loss) before provision for (benefit from)
income taxes and cumulative effect of a change in
accounting principle 3,705 4,773 (5,755)
Provision for (benefit from) income taxes (32,610) 2,317 (6,319)
--------- --------- ---------
Income before cumulative effect of a change in
accounting principle $ 36,315 2,456 564
Cumulative effect of a change in accounting
principle, net of tax benefit (450)
--------- --------- ---------
Net income $ 36,315 $ 2,006 $ 564
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Net income $36,315 $2,006 $564
Other comprehensive income (loss), net of
tax:
Foreign currency translation
adjustment (1,494) 1,474 (1,766)
-------- ------ --------
Other comprehensive income (loss) (1,494) 1,474 (1,766)
-------- ------ --------
Comprehensive income (loss) $34,821 $3,480 ($1,202)
======== ====== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 36,315 $ 2,006 $ 564
Adjustments to reconcile net income
to net cash provided from (used in)
operating activities:
Cumulative effect of a change in accounting
principle 750
Depreciation 7,477 8,029 5,145
Amortization 1,144 1,247 1,246
Deferred income taxes (35,718) 19 (7,217)
Gain on disposition of property and equipment (39) (105) (138)
Non-cash stock option expense 2,457
Change in assets and liabilities:
Accounts and notes receivable 1,053 (7,086) 5,348
Inventories (20,527) 12,856 (9,676)
Prepayments and deferred charges (97) 327 (1,206)
Accounts payable and accrued expenses 608 (3,915) 5,744
Income taxes payable 344 174 (1,553)
Accrued postretirement benefits 387 282 1,234
--------- --------- --------
Net cash provided from (used in) operating
activities (6,596) 14,584 (509)
--------- --------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (8,863) (5,919) (8,102)
Proceeds from disposals of property, plant,
and equipment 33 169 151
--------- --------- --------
Net cash used in investing activities (8,830) (5,750) (7,951)
--------- --------- --------
Cash flows from financing activities:
Net additions (reductions) of revolving credit 14,567 (10,392) 8,778
Borrowings of long-term debt 1,813
Payment of long-term debt (208)
Payment of debt issuance costs (676)
Capital contribution from parent company of
proceeds from exercise of stock options 294 17
--------- --------- --------
Net cash provided from (used in) financing
activities 14,185 (8,562) 8,570
--------- --------- --------
Effect of exchange rates on cash (166) 167 (254)
--------- --------- --------
Increase (decrease) in cash and cash equivalents (1,407) 439 (144)
Cash and cash equivalents:
Beginning of year 4,688 3,281 3,720
--------- --------- --------
End of year $ 3,281 $ 3,720 $ 3,576
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 20,968 $ 19,924 $19,102
========= ========= ========
Income taxes $ 3,040 $ 1,832 $ 2,336
========= ========= ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
37
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
(dollars in thousands)
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation and Nature of Operations
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. The Company develops, manufactures and markets technologically
advanced, high performance alloys primarily for use in the aerospace and
chemical processing industries worldwide. The Company has manufacturing
facilities in Kokomo, Indiana; Arcadia, Louisiana; and Openshaw, England;
with distribution service centers in Lebanon, Indiana; Anaheim, California;
Houston, Texas; Windsor, Connecticut; Paris, France and Zurich,
Switzerland.
B. Cash and Cash Equivalents
The Company considers all highly liquid investment instruments, including
investments with original 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.
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 with
depreciation 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. Long-Lived Assets
The Company regularly evaluates whether events and circumstances have
occurred which may indicate that the carrying amount of intangible or other
long-lived assets warrant revision or may not be recoverable. When factors
indicate that an asset or assets should be evaluated for possible
impairment, an evaluation would be performed whereby the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to market value is
required. As of September 30, 1998 and 1999, management considered the
Company's intangible and other long-lived assets to be fully recoverable.
F. Foreign Currency Exchange
The Company's foreign operating entities' financial statements are stated
in the functional currencies of each respective country, which are the
local currencies. Substantially all assets and liabilities are translated
to U.S. dollars using exchange rates in effect at the end of the year; and
revenues and expenses are translated at the weighted average rate for the
year. Translation gains or losses are recorded as a separate component of
comprehensive income and transaction gains and losses are reflected in the
consolidated statement of operations.
38
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
G. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in years in which those
temporary differences are expected to be recovered or settled. 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.
H. Deferred Charges
Deferred charges consist primarily of debt issuance costs which are
amortized over the terms of the related debt using the effective interest
method. Accumulated amortization at September 30, 1998 and 1999 was $1,995
and $2,968, respectively.
I. Financial Instruments and Concentrations of Risk
The Company enters into forward currency exchange contracts on a continuing
basis and nickel future contracts on a periodic basis for periods
consistent with contractual exposures. The effect of this practice is to
minimize the variability in the Company's operating results arising from
foreign exchange rate and nickel price movements. The Company does not
engage in foreign currency or nickel futures speculation. Gains and losses
on these contracts are reflected in the statement of operations in the
month the contracts are settled.
At September 30, 1998 and 1999, the Company had $6,800 and $1,400 of
foreign currency exchange contracts, respectively, outstanding, with a
combined net unrealized loss of $295 and $5. With respect to the
consolidated statements of cash flows, contracts accounted for as hedges
are classified in the same category as the items being hedged.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and
accounts receivable. At September 30, 1999, and periodically throughout the
year, the Company has maintained cash balances in excess of federally
insured limits.
During 1997, 1998 and 1999, sales to one group of affiliated customers
approximated $24,854, $23,517, and $19,839 respectively, or 11%, 10% and
10% of net revenues, respectively. The Company generally does not require
collateral and credit losses have been within management's expectations.
The Company does not believe it is significantly vulnerable to the risk of
a near-term severe impact from business concentrations with respect to
customers, suppliers, products, markets or geographic areas.
J. Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The Company does not believe that it has assets, liabilities or
contingencies that are particularly sensitive to changes in estimates in
the near term.
39
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
K. Change in Accounting Principle
On November 20, 1997, the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force ("EITF") issued a consensus ruling which
requires that certain business process reengineering and information
technology transformation costs be expensed as incurred. The EITF also
consented that if such costs were previously capitalized, then any
remaining unamortized portion of those identifiable costs should be written
off and reported as a cumulative effect of a change in accounting
principle. Accordingly, the Company recorded the cumulative effect of this
accounting change, net of tax, of $450, resulting from a pre-tax write-off
of $750 related to reengineering charges involved in the implementation of
an information technology project.
L. New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", effective October 1, 1998. SFAS
No. 130 requires that changes in the Company's foreign currency translation
adjustment be shown in the financial statements. All prior year financial
statements have been reclassified for comparative purposes.
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for derivative Instruments and Hedging Activities," which
will be effective for fiscal year 2001. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure
those instruments at fair value. Management has not yet quantified the
effect of this new standard on the consolidated financial statements.
M. Reclassifications
Certain amounts in prior year consolidated financial statements have been
reclassified to conform with current year presentation.
40
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 2: INVENTORIES
The following is a summary of the major classes of inventories:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30,
1998 1999
------------- -------------
Raw materials $ 3,535 $ 4,883
Work-in-process 35,215 38,876
Finished goods 31,752 41,243
Other 837 952
Amount necessary to increase certain net inventories
to the LIFO method 10,522 5,058
------- -------
$81,861 $91,012
======= =======
</TABLE>
Inventories valued using the LIFO method comprise 73% and 77% % of consolidated
inventories at September 30, 1998 and 1999, respectively.
Note 3: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the major classes of property, plant, and
equipment:
September 30, September 30,
1998 1999
------------- -------------
Land and land improvements $ 3,144 $ 3,050
Buildings 8,449 8,466
Machinery and equipment 85,586 92,784
Construction in process 2,565 3,224
--------- ---------
99,744 107,524
Less accumulated depreciation (70,117) (74,952)
--------- ---------
$ 29,627 $ 32,572
========= =========
41
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of the major classes of accounts payable and accrued
expenses:
September 30, September 30,
1998 1999
------------- -------------
Accounts payable, trade $12,078 $16,662
Employee compensation 2,762 2,521
Taxes, other than income taxes 2,178 2,235
Interest 1,417 1,356
Other 2,388 5,192
------- -------
$20,823 $27,966
======= =======
[Remainder of page intentionally left blank.]
42
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
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>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Income (loss) before provision for (benefit
from) income taxes and cumulative effect of
a change in accounting principle
U.S. $ (677) $(1,110) $(9,880)
Foreign 4,382 5,883 4,125
--------- -------- --------
Total $ 3,705 $ 4,773 $(5,755)
========= ======== ========
Income tax provision (benefit):
Current:
U.S. Federal $ 1,401 $ 793 $ 19
Foreign 1,285 1,599 869
State 422 (94) 10
--------- -------- --------
Current total 3,108 2,298 898
--------- -------- --------
Deferred:
U. S. Federal (30,294) (42) (6,384)
Foreign (498) 104 199
State (4,926) (43) (1,032)
--------- -------- --------
Deferred total (35,718) 19 (7,217)
--------- -------- --------
Total provision for (benefit from) income
taxes $(32,610) $ 2,317 $(6,319)
========= ======== ========
</TABLE>
43
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
The provision for (benefit from) income taxes applicable to results of
operations before cumulative effect of a change in accounting principle differed
from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Statutory federal tax rate 34% 34% 34%
Tax provision at the statutory rate $ 1, 260 $1,623 $(1,957)
Foreign tax rate differentials (202) (606) (334)
Utilization of alternative minimum tax credit (534)
Utilization of net operating loss (2,705)
Withholding tax on undistributed earnings of
foreign subsidiary 155 225 113
Provision for state taxes, net of federal tax
benefit 422 (49)
Exercise of stock options of parent company (167)
U.S. tax on distributed and undistributed
earnings of foreign subsidiary 1,097 1,443 895
Reversal of U.S. tax on undistributed earnings
of foreign subsidiaries (5,025)
Decrease in valuation allowance related
to continuing operations (31,923)
Other (13) (319) (11)
--------- ------- --------
Provision (benefit) at effective tax rate $(32,610) $2,317 $(6,319)
========= ======= ========
</TABLE>
44
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Deferred income tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30,
1998 1999
------------- -------------
Current deferred income tax assets (liabilities):
Inventory capitalization $ 769 $ 771
Postretirement benefits other than pensions 1,778 1,659
Accrued expenses for vacation 636 573
Inventory profit reserve 909 667
Other 720 733
--------- --------
Gross current deferred tax asset 4,812 4,403
--------- --------
Inventory purchase accounting adjustment (5,744) (5,744)
Mark to market reserve (267) (178)
--------- --------
Gross current deferred tax liability (6,011) (5,922)
--------- --------
Total net current deferred tax liability (1,199) (1,519)
--------- --------
Noncurrent deferred income tax assets (liabilities):
Property, plant and equipment, net (3,120) (2,488)
Prepaid pension costs (1,957) (2,328)
Investment in subsidiary (475)
Other foreign related (1,242) (938)
Undistributed earnings of foreign subsidiaries (6,062) (2,506)
--------- --------
Gross noncurrent deferred tax liability (12,856) (8,260)
--------- --------
Postretirement benefits other than pensions 35,702 36,286
Executive compensation 825 825
Investment in subsidiary 604
Net operating loss carryforwards 11,700 14,711
Alternative minimum tax credit carryforwards 534 534
Other 40 41
--------- --------
Gross noncurrent deferred tax asset 49,405 52,397
--------- --------
Total net noncurrent deferred tax asset 36,549 44,137
--------- --------
Total $ 35,350 $42,618
========= ========
</TABLE>
As of September 30, 1999, the Company had net operating loss carryforwards
for regular tax purposes of approximately $39,141 (expiring in fiscal years 2007
to 2019), of which approximately $32,441 are available for alternative minimum
tax.
During fiscal 1997, the Company reversed its deferred income tax valuation
allowance of approximately $36,431. This reversal was due to the Company's
assessment of past earnings history and trends (exclusive of non-recurring
charges), sales backlog, budgeted sales and earnings, stabilization of financial
condition, and the periods available to realize the future tax benefits.
During fiscal 1999, the Company reversed approximately $4,460 of its
deferred tax liability associated with the undistributed earnings of two foreign
affiliates. The Company has concluded that the cumulative earnings from these
two affiliates, $12,222, will be permanently invested overseas for the
foreseeable future.
45
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 6: DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30,
1998 1999
------------- -------------
Revolving Credit Facility, due November 22, 1999 $ 35,273 $ 44,051
======== ========
Senior Notes, 11.625%, due in 2004, net of $2,191 and
$1,918, respectively, unamortized discount (effective
rate of 12.0%) $137,809 $138,082
5 Year Mortgage Note, 4.50%, due in 2003 (Swiss
Subsidiary) 1,813 1,605
Other 982 141
-------- --------
140,604 139,828
Less amounts due within one year 1,055 208
-------- --------
$139,549 $139,620
======== ========
</TABLE>
Bank Financing
On January 24, 1997, the Company amended its working capital facility (the
"Revolving Credit Facility") with Congress Financial Corporation ("Congress") by
increasing the maximum credit from $50,000 to $60,000. The amount available for
revolving credit loans equals the difference between the $60,000 total facility
amount, less any letter of credit reimbursement obligations incurred by the
Company, which are subject to a sub limit of $10,000. The total availability may
not exceed the sum of 85% of eligible accounts receivable (generally, accounts
receivable of the Company from domestic and export customers that are less than
60 days outstanding), plus 60% of eligible inventories consisting of finished
goods and raw materials, plus 45% of eligible inventories consisting of
work-in-process and semi-finished goods calculated at the lower of cost or
current market value, minus any availability reserves established by Congress.
Unused line of credit fees during the revolving credit loan period are .375% of
the amount by which $48,000 exceeds the average daily principal balance of the
outstanding revolving loans and letter of credit accommodations.
On August 23, 1999, the Company amended its Revolving Credit Facility by
extending the term of the loan agreement to November 22, 1999. The Company is
negotiating a line of credit with terms and conditions similar to the Revolving
Credit Facility. Management anticipates the new line of credit will be in place
upon expiration of the Revolving Credit Facility.
The Revolving Credit Facility bears interest at a fluctuating per annum
rate equal to a combination of prime rate plus 0.50% and London Interbank
Offered Rates ("LIBOR") plus 2.50%. At September 30, 1999, the effective
interest rates for revolving credit loans were 7.88% for $33,000 of the
Revolving Credit Facility, and 8.75% for the remaining $11,051. At September 30,
1998, the effective interest rates for revolving credit loans were 8.09% for
$29,000 of the Revolving Credit Facility, and 9.0% for the remaining $6,273. As
of September 30, 1999, $3,045 in letter of credit reimbursement obligations have
been incurred by the Company. The availability for revolving credit loans at
September 30, 1999 was $4,123.
46
<PAGE>
The Revolving Credit Facility contains covenants common to such agreements
including the maintenance of certain net worth levels and limitations on capital
expenditures, investments, incurrence of debt, impositions of liens,
dispositions of assets and payments of dividends and distributions. The
Revolving Credit Facility is collateralized by first priority security interests
on 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.
The carrying value of the Company's Revolving Credit Facility approximates
fair value.
Senior Notes Due 2004
The Senior Notes are uncollateralized obligations of the Company and are
effectively subordinated in right of payment to obligations under the Revolving
Credit Facility. Interest is payable semi-annually on March 1 and September 1.
The notes are redeemable, in whole or in part, at the Company's option at
any time on or after September 1, 2000, at redemption prices ranging from
105.813% to 100% plus accrued interest to the date of redemption. The Senior
Notes limit the incurrence of additional indebtedness, restricted payments,
mergers, consolidations and asset sales.
The estimated fair value, based upon an independent market quotation, of
the Company's Senior Notes was approximately $149,800 and $119,000 at September
30, 1998 and 1999, respectively.
Other
In addition to the aforementioned debt, the Company's UK affiliate (Haynes
International, Ltd.) has an overdraft banking facility with Midland Bank that
provides for availability of 550 Pounds Sterling ($906) collateralized by the
assets of the affiliate. This overdraft banking facility was available in its
entirety on September 30, 1999, as a means of financing the activities of the
affiliate including payments to the Company for intercompany purchases. The
Company's French affiliate (Haynes International, SARL) has an overdraft banking
facility of 12,000 French Francs ($1,956) and utilized 859 French Francs ($141)
of the facility as of September 30, 1999. The Company's Swiss affiliate
(Nickel-Contor AG) has an overdraft banking facility of 3,500 Swiss Francs
($2,340) all of which was available on September 30, 1999.
[Remainder of page intentionally left blank.]
47
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 7: CAPITAL DEFICIENCY
The following is a summary of changes in stockholder's equity (capital
deficiency):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Accumulated
------------ Additional Other Total
No. of At Paid in (Accumulated Comprehensive Capital
Shares Par Capital Deficit) Income Deficiency
------ --- ---------- ------------ ------------- ----------
Balance at
October 1, 1996 100 0 $47,985 $(181,321) $ 2,995 $(130,341)
- ---------------
Year ended September 30, 1997:
Net income 36,315 36,315
Capital contribution from
parent company on exercise
of stock option 294 294
Reclassification of 791 791
redeemable common stock
Other comprehensive income
(loss) (1,494) (1,494)
--- - ------- ---------- -------- ----------
Balance at 100 0 49,070 (145,006) 1,501 (94,435)
September 30, 1997
- ------------------
Year ended September 30, 1998:
Net income 2,006 2,006
Capital contribution from parent
company on exercise of stock
option 17 17
Other comprehensive income
(loss) 1,474 1,474
--- - ------- ---------- -------- ----------
Balance at 100 0 49,087 (143,000) 2,975 (90,938)
September 30, 1998
- ------------------
Year ended September 30, 1999:
Net income 564 564
Reclassification of redeemable 2,088 2,088
common stock
Other comprehensive income
(loss) (1,766) (1,766)
--- - ------- ---------- -------- ----------
Balance at
September 30, 1999 100 0 $51,175 $(142,436) $ 1,209 $ (90,052)
- ------------------ === = ======= ========== ======== ==========
</TABLE>
48
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
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 using actuarial
and economic assumptions designed to achieve adequate funding of benefit
obligations.
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 retiree
health care and life insurance benefits was recognized as expense upon payment
of claims or insurance premiums.
The status of employee pension benefit plans and other postretirement
benefit plans at September 30 are summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pension Benefits Other Benefits
1998 1999 1998 1999
--------- --------- --------- ---------
Change in Benefit Obligation:
Projected benefit obligation at beginning of year $107,347 $123,481 $ 70,261 $ 74,207
Service cost 2,355 2,579 1,265 1,861
Interest cost 7,256 7,115 4,785 4,738
Plan changes 4,247 (4,222) 1,169
(Gains)/losses 13,994 (24,795) 6,315 (10,430)
Benefits paid (7,471) (7,469) (4,197) (3,967)
--------- --------- --------- ---------
Projected benefit obligation at end of year $123,481 $105,158 $ 74,207 $ 67,578
========= ========= ========= =========
Change in Plan Assets:
Fair value of plan assets at beginning of year $143,577 $141,061
Actual return on assets 4,955 14,990
Employer contributions $ 4,197 $ 3,967
Benefits paid (7,471) (7,469) (4,197) (3,967)
--------- --------- --------- ---------
Fair value of plan assets at end of year $141,061 $148,582
========= =========
Funded Status of Plan:
Funded status $ 17,580 $43,424 $(74,207) $(67,578)
Unrecognized actuarial gain (15,330) (44,223) (8,653) (19,082)
Unrecognized prior service cost 2,705 6,692 (13,623) (11,002)
--------- --------- --------- ---------
Net amount recognized $ 4,955 $ 5,893 $(96,483) $(97,662)
========= ========= ========= =========
</TABLE>
The Company follows SFAS No. 106, "Employers Accounting for Postretirement
Benefits Other Than Pensions," which requires the cost of post retirement
benefits to be accrued over the years employees provide service to the date of
their full eligibility for such benefits. The Company's policy is to fund the
cost of claims on an annual basis. Operations were charged approximately $3,869,
$4,479, and $5,147 for these benefits during fiscal 1997, 1998 and 1999,
respectively.
Net periodic pension cost (benefit) on a consolidated basis was $767, $252,
and $(265) for the years ended September 30, 1997, 1998 and 1999, respectively.
49
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
The components of net periodic pension cost (income) and other
postretirement benefit cost for the years ended September 30, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Pension Benefits Other Benefits
1997 1998 1999 1997 1998 1999
-------- -------- --------- -------- -------- --------
Service cost $ 2,156 $ 2,355 $ 2,579 $ 1,130 $ 1,265 $ 1,861
Interest cost 7,370 7,256 7,116 4,653 4,785 4,738
Expected return on assets (9,332) (9,605) (10,892)
Amortization of unrecognized net gain (82) (390) (823) (480)
Amortization of unrecognized prior
service cost 221 221 259 (1,091) (1,091) (1,452)
-------- -------- --------- -------- -------- --------
Net periodic cost (income) $ 333 $ (163) $ (938) $ 3,869 $ 4,479 $ 5,147
======== ======== ========= ======== ======== ========
</TABLE>
An 8.6% annual rate of increase for ages under 65 and an 8.3% annual rate
of increase for ages over 65 in the costs of covered health care benefits was
assumed for 1999, gradually decreasing for both age groups to 5.30% by the year
2008. Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percentage-point change in
assumed health care cost trend rates would have the following effects in fiscal
1999:
<TABLE>
<CAPTION>
<S> <C> <C>
1-Percentage Point 1-Percentage Point
Increase Decrease
------------------ ------------------
Effect on total of service and interest cost components $1,225 $(947)
Effect on accumulated postretirement benefit obligation $11,099 $(8,868)
</TABLE>
Assumptions used to develop the net periodic pension cost (income) and
other postretirement benefit cost and to value pension obligations as of
September 30 were as follows:
1997 1998 1999
----- ----- -----
Discount rate 7.00% 6.25% 7.75%
Expected return on plan assets 8.25% 7.50% 9.00%
Weighted average rate of increase in
future compensation levels 5.25% 5.25% 4.50%
The Company sponsors certain profit sharing 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, 1999. The
Company sponsors a defined contribution plan for substantially all U.S.
employees. Expenses associated with this plan for the year ended September 30,
1999 totaled $132.
50
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
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 $1,768, $1,691, and $2,107 for the
years ended September 30, 1997, 1998, and 1999, respectively. Rent expense
includes income from sub-lease rentals totaling $431, $44, and $106 for the
years ended September 30, 1997, 1998, and 1999, respectively. Future minimum
rental commitments under non-cancelable leases in effect at September 30, 1999,
are as follows:
2000 $1,833
2001 1,610
2002 1,215
2003 777
2004 and thereafter 447
------
$5,882
======
Future minimum rental commitments under non-cancelable leases have not been
reduced by minimum sub-lease rentals of $717 due in the future.
Note 10: OTHER
Other costs, net, consists of net foreign currency transaction (gains) and
losses in the amounts of $(524), $84, and $(310) for the years ended September
30, 1997, 1998 and 1999, respectively, and miscellaneous costs.
A Federal Grand Jury is investigating possible violations of federal
anti-trust laws in the nickel alloy industry. The Company, along with other
companies in this industry, is responding to the Government's request. The
Company has engaged outside legal counsel to represent its interest in the
investigation. Certain costs incurred by the Company in connection with the
investigation have been accounted for as selling and administrative and charged
against income in the period. For the year ended September 30, 1999, these costs
were approximately $3,462, of which $2,777 is included in other accrued
expenses.
While the outcome of the investigation cannot be predicted with certainty,
in the opinion of management there will be no liability incurred in this matter
other than ongoing legal expenses in its defense.
The Company is also involved as the defendant in other various 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, management does not believe that such costs will have a
material effect on the Company's financial position, results of operations or
liquidity.
51
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 11: RELATED PARTY
On January 29, 1997, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, had effected a recapitalization of the
Company and Holdings pursuant to which Blackstone Capital Partners II Merchant
Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of
Holdings' outstanding shares (the "Recapitalization"). As part of the
Recapitalization, Blackstone agreed to provide financial support and assistance
to the Company. Fees totaling $6,237 paid by the Company to Blackstone and other
unrelated parties in connection with the Recapitalization have been accounted
for as recapitalization expenses and charged against income in the period. Also
in connection with this transaction, the Company recorded $2,457 of non-cash
stock compensation expense, also included as recapitalization expenses,
pertaining to certain modifications to management's stock options agreements,
which eliminated put and call rights associated with the options. As a result of
the Recapitalization, all outstanding unexercised options were immediately
vested as part of the change in control provisions of the Plan. In addition, the
Company has agreed to pay Blackstone an annual monitoring fee of $500, and not
to exceed $2,500 in the aggregate, which is included in selling and
administrative expenses, and of which $833 is included in other accrued expenses
at September 30, 1999. Due to this change in ownership, the Company's ability to
utilize its U.S. federal net operating loss carryforwards will be limited in the
future.
Note 12: TERMINATED ACQUISITION COSTS
On March 3, 1998, the Company announced that Holdings and Blackstone had
abandoned their attempt to acquire Inco Alloys International, a 100% owned
business unit of Inco Limited. Approximately $6,199 and $388 of deferred
acquisition costs were charged to operations for the years ended September 30,
1998 and 1999, respectively.
Note 13: STOCK-BASED COMPENSATION
Holdings has a stock option plan ("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 915,880 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.
52
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Due to modifications to management's stock option agreements, redeemable
common stock of $2,088 was converted to additional paid in capital during 1999.
Pertinent information covering the Plan is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Weighted
Number Fiscal Average
of Option Price Year of Shares Exercise
Shares Per Share Expiration Exercisable Prices
------- ------------ ----------- ----------- --------
Outstanding at September 30, 1996 554,114 $ 2.28-3.24 2000 - 2005 279,794 $2.54
Granted 133,000 8.00 8.00
Exercised (106,114) 2.28 - 3.24 2.70
Canceled --
---------
Outstanding at September 30, 1997 581,000 2.50 - 8.00 2000 - 2007 581,000 3.76
Granted 24,632 10.15 10.15
Exercised (7,000) 2.50 2.50
Canceled (4,000) 8.00 8.00
---------
Outstanding at September 30, 1998 594,632 2.50-10.15 2000 - 2008 574,926 4.01
Granted --
Exercised (40,000) 2.50 2.50
Canceled (44,000) 2.50 - 8.00 3.00
---------
Outstanding at September 30, 1999 510,632 2.50 - 10.15 2000 - 2008 495,853 4.22
=========
Options Outstanding at
September 30, 1999 consist of: 125,000 $8.00 125,000
361,000 2.50 361,000
24,632 10.15 9,853
--------- -------
510,632 495,853
========= =======
</TABLE>
Effective October 1, 1996, the Company adopted the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the existing stock
option plan under the provisions of this pronouncement as the Company accounts
for stock options under the provisions of Accounting Principles Board Opinion
("APB") No. 25. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in accordance
with the provisions of SFAS No. 123, net income would have been reduced by $167,
net of $112 deferred tax benefit, in fiscal 1997, and $7, net of $5 deferred tax
benefit in 1998. These pro forma adjustments were calculated using the minimum
value method to value all stock options granted since October 1, 1995, using the
following assumptions:
1997 1998 1999
------- ------- -------
Risk free interest rate 6.27% 5.53% 5.88%
Expected life of options 5 years 5 years 5 years
53
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 14: SEGMENT REPORTING
The Company operates in one business segment: the design, manufacture and
distribution of technologically advanced, high performance metal alloys for use
in the aerospace and chemical processing industries. The Company has operations
in the United States and Europe, which are summarized below. Sales between
geographic areas are made at negotiated selling prices.
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Sales
United States $154,403 $146,574 $129,494
Europe 68,003 87,633 69,727
Other 13,354 12,737 9,765
-------- -------- --------
Net revenues $235,760 $246,944 $208,986
======== ======== ========
Long-lived assets
United States $ 31,557 $ 26,212 $ 29,057
Europe 994 3,415 3,515
-------- -------- --------
Total long-lived assets $ 32,551 $ 29,627 $ 32,572
======== ======== ========
54
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
[Remainder of page intentionally left blank.]
55
<PAGE>
Part III
Item 10. Directors & Executive Officers of the Registrant
The following table sets forth certain information concerning the persons
who served as the directors and executive officers of the Company as of
September 30, 1999. Except as indicated in the following paragraphs, the
principal occupations of these persons have not changed during the past five
years.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Francis J. Petro............................ 60 President and Chief Executive Officer; Director
John H. Tundermann.......................... 59 Executive Vice President
Joseph F. Barker............................ 52 Chief Financial Officer; Executive Vice President, Finance; & Treasurer
F. Galen Hodge.............................. 61 Vice President, Marketing
Michael F. Rothman.......................... 53 Vice President, Engineering & Technology
Charles J. Sponaugle........................ 51 Vice President, Sales
August A. Cijan............................. 44 Vice President, Operations
Stanton D. Kirk............................. 45 Vice President & General Manager, Republic Engineered Steels
Theodore T. Brown........................... 41 Controller; Chief Accounting Officer
Robert I. Hanson............................ 56 General Manager, Arcadia Tubular Products
R. Steven Linne............................. 56 General Counsel and Secretary
Richard C. Lappin........................... 54 Director
Chinh E. Chu................................ 33 Director, Member Audit Committee
Marshall A. Cohen........................... 64 Director, Member Compensation Committee
Eric Ruttenberg............................. 43 Director, Member Audit Committee
</TABLE>
Mr. Petro was elected President, Chief Executive Officer and a director of
the Company in January 1999. From 1995 to the time he joined Haynes, Mr. Petro
was President and CEO of Inco Alloys International, a nickel alloy products
manufacturer owned by The International Nickel Company Of Canada.
Mr. Tundermann was elected Executive Vice President of the Company in March
1999. From 1995 to the time he joined Haynes, Mr. Tundermann was Vice President,
Research and Technology of Inco Alloys International, a nickel alloy products
manufacturer owned by The International Nickel Company of Canada.
Mr. Barker was elected Vice President, Finance, 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, Marketing, in June 1998 after having
served as Vice President of International since 1994. He had served as Vice
President, Technology, since September 1989 and in various technical and
production positions with the Company and its predecessors since 1970.
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, in June 1998 after having
served as Vice President Sales and Marketing since October 1994. He had served
in various quality control and marketing positions since 1985.
56
<PAGE>
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 Steel Corporation, a mini hot strip mill owned by
British Steel PLC, from 1987 until he joined the Company in 1993.
Mr. Kirk was elected Vice President and General Manager, Republic
Engineered Steels, Specialty Steels Division, in April 1999. From March 1999
until June 1999 Mr. Kirk was Director of Flat Products management at Special
Metals. From June 1998 until Mach 1999 Mr. Kirk was Director of Sales at Inco
Alloys International.
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. Linne was elected General Counsel and Secretary of the Company in
October 1996 after having served as a patent and trademark attorney in private
practice and for the Company and its predecessors since 1989.
Mr. Lappin is currently a Senior Managing Director of The Blackstone Group
L.P., which he joined in 1990. Prior to joining Blackstone, Mr. Lappin served as
President of Farley Industries. Mr. Lappin was elected as a Director of Haynes
International, Inc. in March 1999.
Mr. Chu is currently a Managing Director of The Blackstone Group L.P.,
which he joined in 1990. Prior to joining The Blackstone Group L.P., Mr. Chu was
a member of the Mergers and Acquisitions Group of Salomon Brothers, Inc. from
1988 to 1990. He currently serves on the Boards of Directors of Haynes
International, Inc., Prime Succession and Rose Hills Company.
Mr. Cohen was elected as a director of Haynes International, Inc. in June
1998. He has served as counsel to Cassels, Brock & Blackwell in Toronto, Canada
since October 1996. From November 1988 to September 1996, Mr. Cohen was
President and Chief Executive Officer of The Molson Companies Limited. He
currently serves on the Boards of Directors of American International Group,
Inc., Lafarge Corporation, Speedy Muffler King Inc., The Goldfarb Corporation,
and The Toronto-Dominion Bank.
Mr. Ruttenberg was elected as a director of Haynes International, Inc. in
June 1998. He is a General Partner of Tinicum, a Ruttenberg family investment
company. He is also a Director of SPS Technologies and Environmental Strategies
Corporation and a Trustee of Mount Sinai Medical Center.
The Amended Stockholder's Agreement by and among Holdings and certain
investors, including Blackstone, adopted on January 31, 1997 (the "Agreement"),
imposes certain transfer restrictions on Holdings' common stock, including
provisions that (i) Holdings common stock may be transferred only to those
persons agreeing to be bound by the Agreement except if such transfer is
pursuant to a public offering or made following a public offering, or made in
compliance with the Securities Act of 1933, as amended (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
Blackstone Investors (as defined) 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;
and (iv) a majority in interest of the Blackstone Investors may compel all other
such investors to sell their shares under certain circumstances. The Agreement
also contains a commitment on the part of Holdings to register the shares under
the Securities Act upon request by the Blackstone Investors, subject to certain
conditions and limitations. The Stockholder Agreement terminates on the tenth
anniversary of its effective date.
57
<PAGE>
The By-Laws of Haynes International, Inc. ("By-Laws") authorize the board
of directors to designate the number of directors to be not less than three nor
more than eleven. The board currently has five directors. 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. Petro, to the
terms of his employment contract. See "Executive Compensation--Petro Employment
Agreement."
The board has established an Audit Committee and a Compensation Committee.
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 Item
11.
(Remainder of page intentionally left blank.)
58
<PAGE>
Item 11. Executive Compensation
The following table sets forth certain information concerning the
compensation paid by the Company to all individuals serving as its Chief
Executive Officer during the last completed fiscal year and each of the
Company's four other most highly compensated Executive Officers, who served as
executive officers as of September 30, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C>
Long-Term
Compensation
Awards
Annual Compensation (1)
Name Other
and Annual All Other
Principal Fiscal Salary Bonus Compensation Options Compensation
Position Year $ $ $ # $ (2)
--------- ------ ------ ----- ------------- ------- ------------
Francis J. Petro 1999 257,144 120,000 -- -- 22,439
President and Chief
Executive Officer
Michael D. Austin 1999 120,000 -- -- -- 10,688
President and Chief 1998 414,000 42,869 -- -- 8,663
Executive Officer 1997 387,000 81,497 -- -- 9,000
Joseph F. Barker 1999 178,200 -- -- -- 2,440
Executive Vice President 1998 176,275 18,189 -- -- 2,713
Finance; Treasurer 1997 166,625 35,089 -- -- 2,575
Charles J. Sponaugle 1999 154,000 -- -- -- 1,965
Vice President, Sales 1998 152,500 15,719 -- -- 2,079
1997 148,000 30,458 -- -- 1,371
August A. Cijan 1999 157,200 -- -- -- 776
Vice President, 1998 154,700 16,045 -- -- 840
Operations 1997 149,400 31,117 -- -- 812
F. Galen Hodge 1999 154,300 -- -- -- 5,827
Vice President, 1998 149,875 15,749 -- -- 5,116
Marketing 1997 143,500 30,541 -- -- 3,371
<FN>
(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) Premium payments to the group term life insurance plan, gainsharing
payments and relocation reimbursements which were made by the Company.
</FN>
</TABLE>
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 (as amended) 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 915,880 shares of Holdings' common stock. As of
September 30, 1999, options to purchase 510,632 shares were outstanding under
the Existing Stock Option Plan. Fifty thousand two hundred three (50,203)
options are 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 Existing 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 in no compensation being charged to operations.
59
<PAGE>
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;
(ii) ten years and two days after the date of grant; or (iii) at a longer time
as may be determined by the Board of Directors. 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.
No options were granted in fiscal 1999. On October 22, 1996, 133,000
options were granted to certain key management personnel with exercise prices of
$8.00 per share. On June 1, 1998, a total of 24,632 options were granted to
Marshall A. Cohen, Director, at an exercise price of $10.15 per share.
The following table sets forth certain information with respect to stock
options held by the persons named in the Summary Compensation Table. No persons
named in the Summary Compensation Table were granted or exercised stock options
during fiscal 1998.
Stock Option Exercises and Fiscal Year-End Holdings
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at Options at
Fiscal Year End Fiscal Year End (1)
---------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
Michael D. Austin 160,000 -- $240,000 --
Joseph F. Barker 40,000 -- $ 60,000 --
Charles J. Sponaugle 33,000 -- $ 49,500 --
August A. Cijan 40,000 -- $ 60,000 --
F. Galen Hodge 40,000 -- $ 60,000 --
<FN>
(1) Because there is no market for Holdings common stock, the value of
unexercised "in the money" options is based on the most recent value of
Holdings common stock determined by the Holdings Board of Directors
($4.00).
</FN>
</TABLE>
60
<PAGE>
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, 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.
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 Holdings or upon the merger, consolidation, sale of all or
substantially all of the assets or liquidation of the Company or Holdings.
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.
61
<PAGE>
Employment Agreements
On January 13, 1999, Michael D. Austin resigned from the Company and
Holdings, pursuant to an agreement between the Company and Mr. Austin which
provided for (1) certain severance payments and other benefits, (2) certain
consulting services to be performed by Mr. Austin on behalf of the Company, (3)
certain payments to be made to Mr. Austin in the event of the occurrence of
certain change in control transactions affecting the Company or Holdings, (4)
the termination of Mr. Austin's employment agreement and severance agreement
with the Company, and the release by Mr. Austin of all obligations of the
Company and Holdings pursuant to those agreements, and (5) resignations by Mr.
Austin from all positions with the Company, including as a member of the Board
of Directors of those entities. Mr. Austin was replaced as President and Chief
Executive Officer by Francis J. Petro. In addition, John H. Tundermann was hired
as Executive Vice President.
The Company has agreements with Mr. Petro and Mr. Tundermann pursuant to
which they will be paid an annual base salary of $360,000 and $170,000,
respectively, for calendar year 1999 with certain increases for the next two
years. The Company intends to provide certain standard benefits and other
perquisites to Mr. Petro and Mr. Tundermann.
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,
except those employed pursuant to a written agreement which provides that the
employee shall not be eligible for any retirement plan benefits, 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 June 11, 1999 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) 1.31% 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 Social Security covered compensation multiplied
by years of credited service up to 35 years, or (ii) the employee's accrued
benefit as of March 31, 1987.
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 five or more 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 generally paid beginning at or after age 55; however, benefits may be paid
earlier in the event of disability, death, or completion of 30 years of service
prior to 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
1999. The maximum annual benefit permitted for 1999 under Section 415(b) of the
Code is $125,000.
62
<PAGE>
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ANNUAL
REMUNERATION
<S> <C> <C> <C> <C> <C>
15 20 25 30 35
-- -- -- -- --
$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, 1999 are as follows:
CREDITED
SERVICE
--------
Francis J. Petro................................. < 1
F. Galen Hodge................................... 30
Joseph F. Barker................................. 19
Charles J. Sponaugle............................. 18
August A. Cijan.................................. 6
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. Combined Profit
Sharing and Savings Plan ("Profit Sharing Plan") to provide retirement,
tax-deferred savings for eligible employees and their beneficiaries.
The board of directors has sole discretion to determine the amount, if any,
to be contributed by the Company as discretionary Profit Sharing. No Company
contributions were made to the Profit Sharing Plan for the fiscal years ended
September 30, 1997, 1998 and 1999. The Profit Sharing Plan is 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 Plan.
63
<PAGE>
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 Company's annual
allocation, if any, to the Profit Sharing Plan 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 Plan, in amounts
up to 20% of their plan compensation. Effective June 14, 1999, the Company
agreed to match 50% of an employee's contribution to the Plan up to a maximum
contribution of 3% of the employees' salary. Elective salary reduction
contributions may be withdrawn subject to the terms of the Profit Sharing Plan.
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 1997, the Company awarded and paid management bonuses of
approximately $200,000 pursuant to a board resolution. The January bonuses were
calculated based on the Company's fiscal 1996 performance. Additionally, the
Company adopted a management incentive plan effective for fiscal 1997 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 fiscal 1997, the Company accrued approximately $925,000 for fiscal
1997 which was paid to all domestic employees meeting certain service
requirements on November 12, 1997.
For fiscal 1998, the Board again approved an incentive plan similar to the
1997 plan subject to higher targets. Based on results for fiscal 1998 the
Company accrued $315,000 for fiscal 1998, which was paid to certain domestic
salaried employees meeting specific service requirements on November 18, 1998.
Haynes International, Ltd. Plan
In fiscal 1995, the Company's affiliate Haynes International, Ltd.
instituted a gainsharing plan. For fiscal 1995 and 1996, the Company made
gainsharing payments pursuant to this plan of approximately $269,000 and
$266,000, respectively. In fiscal 1997 and 1998, Haynes International, Ltd. made
incentive payments similar to the domestic incentive plan of approximately
$115,000 and $98,000, respectively.
Director Compensation
The directors of the Company 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. Cohen has a consulting agreement with Holdings under
which he has received 24,632 shares of Holdings common stock.
Compensation Committee Interlocks and Insider Participation
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.
Report of the Compensation Committee
The Compensation Committee of the Board of Directors is responsible for
administering the Existing Stock Option Plan, determining executive compensation
policies and administering compensation plans and salary programs. The Committee
is currently comprised solely of non-employee directors. The following report is
submitted by the members of the Compensation Committee.
* * *
64
<PAGE>
The Company's executive compensation program is designed to align executive
compensation with the financial performance, business strategies and objectives
of the Company. The Company's compensation philosophy is to ensure that the
delivery of compensation, both in the short- and long-term, is consistent with
the sustained progress, growth and profitability of the Company and acts as an
inducement to attract and retain qualified individuals. Under the guidance of
the Company's Compensation Committee, the Company has developed and implemented
an executive compensation program to achieve these objectives while providing
executives with compensation opportunities that are competitive with companies
of comparable size in related industries.
The Company's executive compensation program has been designed to implement
the objectives described above and is comprised of the following fundamental
three elements:
- - a base salary that is determined by individual contributions and sustained
performance within an established competitive salary range. Pay for
performance recognizes the achievement of financial goals and
accomplishment of corporate and functional objectives of the Company.
- - an annual cash bonus, based upon corporate and individual performance
during the fiscal year.
- - grants of stock options, also based upon corporate and individual
performance during the fiscal year, which focus executives on managing the
Company from the perspective of an owner with an equity position in the
business.
Base Salary. The salary, and any periodic increase thereof, of the
President and Chief Executive Officer was and is determined by the Board of
Directors of the Company based on recommendations made by the Compensation
Committee. The salaries, and any periodic increases thereof, of the Executive
Vice President, the Executive Vice President, Finance, and Treasurer, the Vice
President, Engineering and Technology, the Vice President, Sales, the Vice
President, Operations, the Vice President and General Manager, Republic
Engineered Steels, and the Vice President, Marketing, were and are determined by
the Board of Directors based on recommendations made by the President and Chief
Executive Officer and approved by the Committee.
The Company, in establishing base salaries, levels of incidental and/or
supplemental compensation, and incentive compensation programs for its officers
and key executives, assesses periodic compensation surveys and published data
covering the industry in which the Company operates and other industries. The
level of base salary compensation for officers and key executives is determined
by both their scope and responsibility and the established salary ranges for
officers and key executives of the Company. Periodic increases in base salary
are dependent on the executive's proficiency of performance in the individual's
position for a given period, and on the executive's competency, skill and
experience.
Compensation levels for fiscal 1999 for the President and Chief Executive
Officer, and for the other executive officers of the Company, reflected the
accomplishment of corporate and functional objectives in fiscal 1999.
Bonus Payments. Bonus awards are determined by the Board of Directors of
the Company based on recommendations made by the Compensation Committee. Bonus
awards for fiscal 1997 and 1998 reflected the accomplishment of corporate and
functional objectives in fiscal 1997 and 1998, respectively.
Stock Option Grants. Stock options under the Existing Option Plan are
granted to key executives and officers based upon individual and corporate
performance and are determined by the Board of Directors of the Company based on
recommendations made by the Compensation Committee. On October 22, 1996, 133,000
options were granted to certain key management personnel with exercise prices of
$8.00 per share. On June 1, 1998, a total of 24,632 options were granted to
Marshall A. Cohen, Director, at an exercise price of $10.15 per share.
SUBMITTED BY THE COMPENSATION COMMITTEE
65
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
All of the outstanding capital stock of the Company is owned by Holdings.
The only stockholders of record at September 30, 1999, known to be owning more
than five percent of Holdings' outstanding Common Stock were: Blackstone Capital
Partners II Merchant Banking Fund L.P.; Blackstone Offshore Capital Partners II
L.P.; and Blackstone Family Investment Partnership II L.P. (collectively, "The
Blackstone Partnerships"), all of which are limited partnerships duly organized
and existing in good standing under the laws of the State of Delaware, the
Cayman Islands and the State of Delaware, respectively.
The following table sets forth the number and percentage of shares of
Common Stock of Holdings owned by (i) The Blackstone Partnerships, (ii) each of
the executive officers named in the Summary Compensation Table, and (iii) all
directors and executive officers of the Company as a group, as of September 30,
1999. The address of The Blackstone Partnerships is 345 Park Avenue, 31st Floor,
New York, NY 10154. The address of Mr. Austin is 7611 Lake Road South, Building
1000, Mobile, AL 36609. The address of Messrs. Barker, Cijan, Hodge and
Sponaugle is 1020 W. Park Avenue, P.O. Box 9013, Kokomo, IN 46904-9013.
Shares Beneficially Owned (1)
------------------------------
Name Number Percent
------ -------
The Blackstone Partnerships 5,323,799 73.0
Michael D. Austin 160,000(1) 2.2
Joseph F. Barker 40,000(1) (2)
August A. Cijan 40,000(1) (2)
F. Galen Hodge 40,000(1) (2)
Charles J. Sponaugle 38,000(3) (2)
All directors and executive officers
of the Company as a group 447,264(1) 6.1
- -----------------------------
(1) Represents shares of Common Stock underlying options exercisable at any
time which are deemed to be beneficially owned by the holders of such
options. See Item 11 - "Executive Compensation - Stock Option Plans."
(2) Less than 1%.
(3) Includes 33,000 shares of Common Stock underlying options exercisable at
any time which are deemed to be beneficially owned by Mr. Sponaugle. See
Item 11 - "Executive Compensation - Stock Option Plans."
Agreements Among Stockholders
The Amended Stockholder's Agreement imposes certain transfer restrictions
on the Holdings common stock, including provisions that (i) Holdings common
stock may be transferred only to those person agreeing to be bound by the
Stockholder Agreement except if such transfer is pursuant to a public offering
or made following a public offering, or made in compliance with 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 Blackstone Investors 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;
and (iv) a majority in interest of the Blackstone Investors may compel all other
such investors to sell their shares under certain circumstances. The
Stockholders' Agreement also contains a commitment on the part of Holdings to
register the shares under the Securities Act upon request by the Blackstone
Investors, subject to certain conditions and limitations. The Stockholder
Agreement terminates on the tenth anniversary of its effective date.
66
<PAGE>
Item 13. Certain Relationships and Related Transactions
The Company is required to pay a monitoring fee to Blackstone Management
Partners L.P. in the amount of $500,000 annually on each anniversary of the
recapitalization date with the aggregate amount not to exceed $2.5 million. On
June 1, 1998, a total of 24,632 shares of Holdings shares were issued to
Marshall A. Cohen, Director, for consulting services and 24,632 options were
granted at an exercise price of $10.15 per share.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report.
1. Financial Statements:
Included as outlined in Item 8 of Part II of this report.
Report of Independent Auditors.
Consolidated Balance Sheet as of September 30, 1998 and September 30,
1999.
Consolidated Statements of Operations for the Years Ended September
30, 1997, 1998 and 1999.
Consolidated Statements of Comprehensive Income for the Years Ended
September 30, 1997, 1998 and 1999.
Consolidated Statements of Cash Flows for the Years Ended September
30, 1997, 1998 and 1999.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Included as outlined in Item 8 of Part II of this report.
Schedule II - Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted as they are not
required, are not applicable, or the information is shown in the Notes
to the Consolidated Financial Statements.
(b) Reports on Form 8-K. None.
(c) Exhibits. See Index to Exhibits.
67
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1999
-------------- -------------- --------------
Balance at beginning of period $ 900 $ 657 $ 662
Provisions (6) 221 235
Write-Offs (251) (287) (136)
Recoveries 14 71 115
------ ------ ------
Balance at end of period $ 657 $ 662 $ 876
====== ====== ======
</TABLE>
[Remainder of page intentionally left blank.]
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HAYNES INTERNATIONAL, INC.
(Registrant)
By:/s/Francis J. Petro
----------------------------
Francis J. Petro, President
Date: December 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Capacity Date
- --------- -------- ----
/s/ Francis J. Petro President and Director December 23, 1999
- ----------------------------------------- (Principal Executive Officer)
Francis J. Petro
Executive Vice President, Finance;
/s/ Joseph F. Barker Treasurer December 23, 1999
- ----------------------------------------- (Principal Financial Officer)
Joseph F. Barker
/s/ Theodore T. Brown Controller December 23, 1999
- ----------------------------------------- (Principal Accounting Officer)
Theodore T. Brown
/s/ Richard C. Lappin Director December 23, 1999
- -----------------------------------------
Richard C. Lappin
/s/ Chinh E. Chu Director December 23, 1999
- -----------------------------------------
Chinh E. Chu
/s/ Marshall A. Cohen Director December 23, 1999
- -----------------------------------------
Marshall A. Cohen
/s/ Eric Ruttenberg Director December 23, 1999
- -----------------------------------------
Eric Ruttenberg
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C> <C>
Sequential
Number Numbering
Assigned In System Page
Regulation S-K Number of
Item 601 Description of Exhibit Exhibit
- -------------- ---------------------- -----------
(2) 2.01 Stock Purchase Agreement, dated as of January 24, 1997,
among Blackstone Capital Partners II Merchant Banking
Fund L.P., Blackstone Offshore Capital Partners II
Merchant Banking Fund L.P., Blackstone Family
Investment Partnership L.P., Haynes Holdings, Inc. and
Haynes International, Inc. (Incorporated by reference
to Exhibit 2.01 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.02 Stock Redemption Agreement, dated as of January 24,
1997, among MLGA Fund II, L.P., MLGAL Partners, L.P.
and Haynes Holdings, Inc. (Incorporated by reference to
Exhibit 2.02 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.03 Exercise and Repurchase Agreement, dated as of January
24, 1997, among Haynes Holdings, Inc. and the holders
as listed therein. (Incorporated by reference to
Exhibit 2.03 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.04 Consent Solicitation and Offer to Redeem, dated January
30, 1997. (Incorporated by reference to Exhibit 2.04 to
Registrant's Form 8-K Report, filed February 13, 1997,
File No. 333-5411.)
2.05 Letter of Transmittal, dated January 30, 1997.
(Incorporated by reference to Exhibit 2.05 to
Registrant's Form 8-K Report, filed February 13, 1997,
File No. 333-5411.)
(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 Indenture, dated as of August 23, 1996, between Haynes
International, Inc. and National City Bank, as Trustee,
relating to the 11 5.8% Senior Notes Due 2004, table of
contents and cross-reference sheet. (Incorporated by
reference to Exhibit 4.01 to the Registrant's Form 10-K
Report for the year ended September 30, 1996, File No.
333-5411.)
4.02 Form of 11 5/8% Senior Note Due 2004. (Incorporated by
reference to Exhibit 4.02 to the Registrant's Form 10-
K Report for the year ended September 30, 1996, File
No. 333-5411.)
(9) No Exhibit.
70
<PAGE>
(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 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.)
10.03 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.)
10.04 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.)
10.05 Fifth Amendment to Stock Subscription Agreement, dated
as of January 29, 1997, among Haynes Holdings, Inc.,
Haynes International, Inc. and the persons on the
signature pages thereof. (Incorporated by reference to
Exhibit 4.02 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
10.06 Termination of Stock Subscription Agreement, dated
March 31, 1997. (Incorporated by reference to Exhibit
10.06 to Registrant's Form 10-Q Report, filed May 15,
1997, File No. 333-5411.)
10.07 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.)
10.08 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.)
71
<PAGE>
10.09 Amended Stockholders Agreement, dated as of January
29, 1997, among Haynes Holdings, Inc. and the investors
listed therein. (Incorporated by reference to Exhibit
4.01 to Registrant's Form 8-K Report, filed February
13, 1997, File No. 333-5411.)
10.10 First Amendment to the Amended Stockholders'
Agreement, dated March 31, 1997. (Incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-Q
Report, filed may 15, 1997, File No. 33-5411.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 Amendment to Employment Agreement, dated as of July
15, 1996 by and among Haynes International, Inc.,
Haynes Holdings, Inc. and Michael D. Austin
(Incorporated by reference to Exhibit 10.15 to
Registration Statement on S-1, Registration No.
333-05411).
10.17 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.)
72
<PAGE>
10.18 First Amendment to the Haynes Holdings, Inc. Employee
Stock Option Plan, dated March 31, 1997. (Incorporated
by reference to Exhibit 10.18 to Registrant's Form 10-Q
Report, filed May 15, 1997, File no. 333-5411.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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.)
10.23 Form of March 1997 Amendment to holdings Option
Agreements. (Incorporated by reference to Exhibit 10.23
to Registrant's Form 10-Q Report, filed May 15, 1997,
File No. 333-5411).
10.24 March 1997 Amendment to Amended and Restated holdings
Option Agreement, dated March 31, 1997. (Incorporated
by reference to Exhibit 10.24 to Registrant's Form 10-Q
Report, filed May 15, 1997, File No. 333-5411.)
10.25 Amended and Restated Loan and Security 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
International, Inc., as Borrower. (Incorporated by
reference to Exhibit 10.19 to the Registrant's Form
10-K Report for the year ended September 30, 1996, File
No. 333-5411).
73
<PAGE>
10.26 Amendment No. 1 to Amended and Restated Loan and
Security 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 International, Inc., as
Borrower. (Incorporated by reference to Exhibit 10.01
to Registrant's Form 8-K Report, filed January 22,
1997, File No. 333-5411.)
10.27 Amendment No. 2 to Amended and Restated Loan and
Security Agreement, dated January 29, 1997, among
CoreStates Bank, N.A. and Congress Financial
Corporation (Central), as Lenders, Congress Financial
Corporation (Central), as Agent for Lenders, and Haynes
International, Inc. (Incorporated by reference to
Exhibit 10.01 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
10.28 Facility Management Agreement by and between Republic
Engineered Steels, Inc. and Haynes International, Inc.,
dated April 15, 1999. (Incorporated by reference to
Exhibit 10.18 to Registrant's Form 10-Q Report filed
May 14, 1999, File No. 333-5411)
10.29 Amendment No. 3 to Amended and Restated Loan and
Security Agreement, dated August 23, 1999, by and among
CoreStates Bank, N.A. and Congress Financial
Corporation (Central), as Lenders, Congress Financial
Corporation (Central) as Agent for Lenders, and Haynes
International, Inc., as Borrower.
10.30 Credit Agreement by and among Institutions from time
to time party hereto, as Lenders, Fleet Capital
Corporation, as Agent for Lenders, and Haynes
International, Inc., as Borrower.
(11) No Exhibit.
(12) 12.01 Statement re: computation of ratio of earnings before
fixed charges to fixed charges.
(13) No Exhibit.
(16) No Exhibit.
(18) No Exhibit.
(21) 21.01 Subsidiaries of the Registrant. (Incorporated by
Reference to Exhibit 21.01 to Registration Statement on
Form S-1, Registration No. 333-05411.)
(22) No Exhibit.
(23) No Exhibit.
(24) No Exhibit.
(27) 27.01 Financial Data Schedule.
(28) No Exhibit.
(99) No Exhibit.
</TABLE>
AMENDMENT NO. 3 TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AMENDMENT, dated as of August 23, 1999 by and among First Union National
Bank, a national banking association, as successor by merger with CoreStates
Bank, N.A. ("First Union"), Congress Financial Corporation (Central), an
Illinois corporation ("Congress", and together with First Union, each
individually, a "Lender" and, collectively, "Lenders"), Congress as agent for
Lenders (in such capacity, "Agent") and Haynes International, Inc., a Delaware
corporation ("Borrower").
WITNESSETH
WHEREAS, Borrower has entered into financing arrangements with Agent and
Lenders pursuant to which Lenders may make loans and provide other financial
accommodations to Borrower as set forth in the Amended and Restated Loan and
Security Agreement dated August 23, 1996 by and among First Union National Bank,
a national banking association, as successor by merger with CoreStates Bank,
N.A. ("First Union"), Congress Financial Corporation (Central), an Illinois
corporation ("Congress", and together with First Union, each individually, a
"Lender" and collectively, "Lenders"), Congress as agents for Lenders (in such
capacity, "Agent") and Haynes International, Inc., a Delaware corporation
("Borrower") (as the same now exists and is amended hereby and may hereafter be
further amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement") and the other agreements, documents and
instruments referred to therein or at anytime executed and/or delivered in
connection therewith or related thereto, including this Amendment (all of the
foregoing, together with the Loan Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements");
WHEREAS, Borrower has requested that Lenders agree to extend the term of
the Financing Agreements and Lenders are willing to agree to such extension,
subject to the terms and conditions contained herein; and
WHEREAS, by this Amendment, Borrower and Lender intend to evidence such
extension.
NOW, THEREFORE, in consideration of the foregoing, and the agreements and
covenants contained herein, the parties hereto agree as follows:
<PAGE>
1. Definitions.
1.1 Interpretation. For purposes of this Amendment, unless otherwise
defined herein, all terms used herein, including, but not limited to, those
terms used and/or defined in the recitals above, shall have the respective
meanings assigned to such terms in the Loan Agreement.
1.2 CoreStates. All references to CoreStates Bank, N.A. or "CoreStates" in
the Financing Agreements are hereby deemed references to First Union National
Bank (the successor by merger to CoreStates).
2. Renewal Date. The first two sentences of Section 14.1(a) of the Loan
Agreement are hereby deleted in their entirety and the following substituted
therefor:
"(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on November 22, 1999
(the "Renewal Date") unless sooner terminated pursuant to the terms
hereof."
3. Early Termination Fee. Section 14.1(c)(iii) of the Loan Agreement is
hereby deleted in its entirety and the following substituted therefor:
"(iii) One-half of one (1/2%) percent From August 24, 1998 to
of the Maximum Credit and including November 21, 1999"
4. Extension Fee. Borrower hereby agrees to pay to Agent, for the benefit
of Lenders, as an extension fee equal to the amount of $25,000 (the "Extension
Fee"), which Extension Fee shall be fully earned as of and payable on the date
hereof.
5. Representations, Warranties and Covenants. Borrower represents, warrants
and covenants with and to Agent and Lenders as follows, which representations,
warranties and covenants are continuing and shall survive the execution and
delivery hereof, the truth and accuracy of, or compliance with each, together
with representations, warranties and covenants in the other Financing
Agreements, being a continuing condition of the making or providing of any Loans
or Letter of Credit Accommodations by Lenders to Borrower.
5.1 This Amendment has been duly authorized, executed and delivered by
Borrower, and the agreements and obligations of Borrower contained herein
constitute legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with its terms.
5.2 Neither the execution and delivery of this Amendment, or any other
agreements, documents or instruments in connection herewith, nor the
consummation of the transactions herein or therein contemplated, nor compliance
with the provisions hereof or thereof (a) are in contravention of any law or
regulation or any order or decree of any court or governmental instrumentality
applicable to Borrower in any respect, or (b) conflicts with or result in the
breach of, or constitutes a default in any respect under any mortgage, deed of
trust, security agreement, agreement or instrument to which Borrower is a party
or may be bound, or (c) violates any provision of the Certificate of
Incorporation or By-Laws of Borrower.
<PAGE>
5.3 After giving effect to the provisions of this Amendment, no Event of
Default or act, condition or event which with notice or passage or time or both
would constitute an Event of Default, exists or has occurred and is continuing.
6. Conditions Precedent. The effectiveness of the terms and conditions of
this Amendment shall be subject to the receipt by Agent (on behalf of Lenders)
of the following, each in form and substance satisfactory to Lender:
(a) an original of this Amendment, duly authorized, executed and
delivered by Borrower; and
(b) the Extension Fee.
7. General.
7.1 Effect of this Amendment. Except as modified pursuant hereto, no other
changes or modifications to the Financing Agreements are intended or implied and
in all other respects the Financing Agreements are hereby specifically ratified,
restated and confirmed by all parties hereto as of the date hereof. To the
extent of conflict between the terms of this Agreement and the Financing
Agreements, the terms of this Amendment shall control.
7.2 Further Assurances. The parties hereto shall execute and deliver such
additional documents and take such additional action as may be necessary to
effectuate the provisions and purposes of this Amendment.
7.3 Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of Illinois (without giving effect to
principles of conflict of laws).
7.4 Binding Effect. This Amendment is binding upon and shall inure to the
benefit of Lender and Borrower and their respective successors and assigns.
7.5 Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original
but all of which when taken together shall constitute one and the same
instrument. In making proof of this Amendment, it shall not be necessary to
produce or account for more than one counterpart thereof signed by each of the
parties hereto.
<PAGE>
IN WITNESS WHEREOF, Agent, Lenders and Borrower have caused this Amendment
to be duly executed as of the day and year first above written.
HAYNES INTERNATIONAL, INC.
By: /s/
--------------------------------------
Title:
-----------------------------------
CONGRESS FINANCIAL
CORPORATION (CENTRAL), in its individual
capacity and as Agent
By: /s/
--------------------------------------
Title:
-----------------------------------
FIRST UNION NATIONAL BANK, (as
successor by merger to CORESTATES
BANK, N.A.)
By: /s/
--------------------------------------
Title:
-----------------------------------
CREDIT AGREEMENT
Dated as of November 22, 1999
among
HAYNES INTERNATIONAL, INC.,
THE INSTITUTIONS FROM TIME TO TIME
PARTY HERETO AS LENDERS
and
FLEET CAPITAL CORPORATION,
as Administrative Agent
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
ARTICLE I: DEFINITIONS
1.1 Certain Defined Terms 1
1.2 Supplemental Disclosure 28
ARTICLE II: THE REVOLVING LOAN FACILITIES
2.1 Revolving Loans 29
2.2 Rate Options for all Advances 29
2.3 Optional Payments; Mandatory Prepayments 29
2.4 Reduction of Commitments 30
2.5 Method of Borrowing 30
2.6 Method of Selecting Types and Interest Periods for Advances 31
2.7 Minimum Amount of Each Advance 31
2.8 Method of Selecting Types and Interest Periods for Conversion
and Continuation of Advances 31
2.9 Default Rate 32
2.10 Method of Payment 32
2.11 Notes 32
2.12 Telephonic Notices 32
2.13 Promise to Pay; Interest, Commitment Fees and Termination Fees;
Interest Payment Dates; Interest and Fee Basis; Taxes; Loan and
Control Accounts 33
2.14 Notification of Advances, Interest Rates, Prepayments and
Aggregate Revolving Loan Commitment Reductions 38
2.15 Lending Installations 38
2.16 Non-Receipt of Funds by the Administrative Agent 38
2.17 Termination Date 39
2.18 Replacement of Certain Lenders 39
2.19 Collection Account Arrangements 40
ARTICLE III: THE LETTER OF CREDIT FACILITY
3.1 Obligation to Issue 40
3.2 Types and Amounts 41
3.3 Conditions 41
3.4 Procedure for Issuance of Letters of Credit 41
3.5 Letter of Credit Participation 42
3.6 Reimbursement Obligation 42
3.7 Letter of Credit Fees 43
3.8 Issuing Bank Reporting Requirements 43
3.9 Indemnification; Exoneration 43
3.10 Cash Collateral 44
ARTICLE IV: CHANGE IN CIRCUMSTANCES
<PAGE>
4.1 Yield Protection 45
4.2 Changes in Capital Adequacy Regulations 46
4.3 Availability of Types of Advances 46
4.4 Funding Indemnification 47
4.5 Lender Statements; Survival of Indemnity 47
ARTICLE V: CONDITIONS PRECEDENT
5.1 Initial Advances and Letters of Credit 48
5.2 Each Advance and Letter of Credit 49
ARTICLE VI: REPRESENTATIONS AND WARRANTIES
6.1 Organization; Corporate Powers 50
6.2 Authority 50
6.3 No Conflict; Governmental Consents 50
6.4 Financial Statements 51
6.5 No Material Adverse Change 51
6.6 Taxes 51
6.7 Litigation; Loss Contingencies and Violations 51
6.8 Subsidiaries 53
6.9 ERISA 53
6.10 Accuracy of Information 54
6.11 Securities Activities 54
6.12 Material Agreements 54
6.13 Assets and Properties 54
6.14 Statutory Indebtedness Restrictions 55
6.15 Insurance 55
6.16 Labor Matters 55
6.17 Year 2000 Issues. 55
ARTICLE VII: COVENANTS
7.1 Reporting 55
7.2 Affirmative Covenants 61
7.3 Negative Covenants 64
7.4 Financial Covenants 72
ARTICLE VIII: DEFAULTS
8.1 Defaults 72
ARTICLE IX: ACCELERATION, DEFAULTING LENDERS; WAIVERS, AMENDMENTS AND REMEDIES
9.1 Termination of Commitments; Acceleration 75
9.2 Defaulting Lender 75
<PAGE>
9.3 Amendments 77
9.4 Preservation of Rights 78
ARTICLE X: GENERAL PROVISIONS
10.1 Survival of Representations 78
10.2 Governmental Regulation 78
10.3 Performance of Obligations 78
10.4 Headings 79
10.5 Entire Agreement 79
10.6 Several Obligations; Benefits of this Agreement 79
10.7 Expenses; Indemnification 79
10.8 Numbers of Documents 81
10.9 Accounting 81
10.10 Severability of Provisions 81
10.11 Nonliability of Lenders 81
10.12 GOVERNING LAW 81
10.13 CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL 82
ARTICLE XI: THE ADMINISTRATIVE AGENT
11.1 Appointment; Nature of Relationship 82
11.2 Powers 83
11.3 General Immunity 83
11.4 No Responsibility for Loans, Creditworthiness, Recitals, Etc. 83
11.5 Action on Instructions of Lenders 83
11.6 Employment of Administrative Agents and Counsel 84
11.7 Reliance on Documents; Counsel 84
11.8 The Administrative Agent's Reimbursement and Indemnification 84
11.9 Rights as a Lender 84
11.10 Lender Credit Decision 85
11.11 Successor Administrative Agent 85
11.12 Collateral Documents 85
ARTICLE XII: SETOFF; RATABLE PAYMENTS
12.1 Setoff 86
12.2 Ratable Payments 86
12.3 Application of Payments 86
12.4 Relations Among Lenders 87
ARTICLE XIII: BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
13.1 Successors and Assigns 88
13.2 Participations 88
13.3 Assignments 89
<PAGE>
13.4 Confidentiality 90
13.5 Dissemination of Information 91
ARTICLE XIV: NOTICES
14.1 Giving Notice 91
14.2 Change of Address 91
ARTICLE XV: COUNTERPARTS 91
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS AND SCHEDULES
Exhibits
<S> <C> <C>
EXHIBIT A -- Commitments
(Definitions)
EXHIBIT B -- Form of Revolving Note
(Definitions)
EXHIBIT C -- Form of Borrowing Base Certificate
(Definitions)
EXHIBIT D -- Form of Borrowing Notice (Section 2.6)
EXHIBIT E -- Form of Request for Letter of Credit (Section 3.3)
EXHIBIT F -- Form of Assignment and Acceptance Agreement
(Sections 2.18 and 13.3)
EXHIBIT G -- Forms of Borrower's and Parent's Counsels' Opinions
(Section 5.1)
EXHIBIT H -- List of Closing Documents
(Section 5.1)
EXHIBIT I -- Form of Officer's Certificate
(Sections 5.2 and 7.1(A)(iv))
EXHIBIT J -- Form of Compliance Certificate
(Sections 5.2 and 7.1(A)(iv))
<PAGE>
Schedules
Schedule 1.1.1 -- Permitted Existing Indebtedness (Definitions)
Schedule 1.1.2 -- Permitted Existing Investments (Definitions)
Schedule 1.1.3 -- Permitted Existing Liens (Definitions)
Schedule 1.1.4 -- Eligible Foreign Account Debtors (Definitions)
Schedule 1.1.5 -- Locations of Inventory held by Eligible Foreign Subsidiaries
(Definitions)
Schedule 6.3 -- Conflicts; Governmental Consents (Section 6.3)
Schedule 6.7 -- Litigation; Loss Contingencies; Environmental Matters (Section 6.7)
Schedule 6.8 -- Subsidiaries (Section 6.8)
Schedule 6.9 -- ERISA (Section 6.9)
Schedule 6.15 -- Insurance (Sections 6.15 and 7.2(E))
Schedule 7.3(B) -- Permitted Real Property Sales (Section 7.3(B))
Schedule 7.3(G) -- Transactions with Shareholders and Affiliates (Section 7.3(G))
</TABLE>
<PAGE>
CREDIT AGREEMENT
This Credit Agreement dated as of November 22, 1999 is entered into among
Haynes International, Inc., a Delaware corporation, as the Borrower, the
institutions from time to time parties hereto as Lenders, whether by execution
of this Agreement or an Assignment Agreement pursuant to Section 13.3, and Fleet
Capital Corporation, as a Lender and as Administrative Agent. The parties hereto
agree as follows:
ARTICLE I: DEFINITIONS
1.1 Certain Defined Terms. In addition to the terms defined above, the
following terms used in this Agreement shall have the following meanings,
applicable both to the singular and the plural forms of the terms defined.
As used in this Agreement:
"Acquisition" means any transaction, or any series of related transactions,
consummated on or after the date of this Agreement, by which the Borrower or any
of its respective Subsidiaries (i) acquires any ongoing business or all or
substantially all of the assets of any firm, corporation or division thereof,
whether through purchase of assets, merger or otherwise or (ii) directly or
indirectly acquires (in one transaction or as the most recent transaction in a
series of transactions) at least a majority (in number of votes) of the
securities of a corporation which have ordinary voting power for the election of
directors (other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage of voting power) of the
outstanding equity interests of another Person.
"Account(s)" means and includes all of the Borrower's and the Eligible
Foreign Subsidiaries' presently existing and hereafter arising or acquired
accounts, accounts receivable, and all present and future rights of the Borrower
and the Eligible Foreign Subsidiaries to payment for goods sold or leased or for
services rendered (except those evidenced by instruments or chattel paper),
whether or not they have been earned by performance, and all rights in any
merchandise or goods which any of the same may represent, and all rights, title,
security and guaranties with respect to each of the foregoing, including,
without limitation, any right of stoppage in transit.
"Administrative Agent" means Fleet in its capacity as contractual
representative for itself and the Lenders pursuant to Article XI hereof and any
successor Administrative Agent appointed pursuant to Article XI hereof.
"Advance" means a borrowing hereunder consisting of the aggregate amount of
the Loans made by the Lenders to the Borrower of the same Type and, in the case
of Eurodollar Rate Advances, for the same Interest Period.
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"Affected Lender" is defined in Section 2.18 hereof.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person is the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of greater than ten percent (10%) or more of any class of voting
securities (or other voting interests) of the controlled Person or possesses,
directly or indirectly, the power to direct or cause the direction of the
management or policies of the controlled Person, whether through ownership of
Capital Stock, by contract or otherwise.
"Aggregate Revolving Loan Commitment" means the aggregate of the Revolving
Loan Commitments of all the Lenders, as reduced from time to time pursuant to
the terms hereof. The initial Aggregate Revolving Loan Commitment is Seventy-Two
Million and 00/100 Dollars ($72,000,000.00).
"Agreement" means this Credit Agreement, as it may be amended, restated or
otherwise modified and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect as of the date of this Agreement, applied in a manner
consistent with that used in preparing the financial statements referred to in
Section 6.4(B)(1) hereof; provided, however, that with respect to the
calculation of financial ratios and other financial tests required by this
Agreement, "Agreement Accounting Principles" means generally accepted accounting
principles as in effect as of the date of this Agreement, applied in a manner
consistent with that used in preparing the financial statements referred to in
Section 6.4(A) hereof; provided, further, that if the Borrower notifies the
Administrative Agent that the Borrower wishes to amend any such financial ratios
or financial tests or any related definition to eliminate the effect of any
change in Agreement Accounting Principles occurring after the date of this
Agreement on the operation of such ratio or test (or if the Administrative Agent
notifies the Borrower that the Required Lenders wish to amend such financial
ratios or financial tests or any related definition for such purpose), then the
Borrower and the Administrative Agent shall negotiate in good faith to amend
such financial ratios or financial tests or definitions.
"Alternate Base Rate" means, the higher of (i) the annual rate of interest
announced or quoted from time to time by Fleet as its prime rate for commercial
loans, whether or not such rate is the lowest rate charged by Fleet to its most
preferred borrowers, and (ii) one-half of one percent (1/2%) above the Federal
Funds Effective Rate.
"Applicable Eurodollar Margin" means, as at any date of determination, the
rate per annum then applicable to Eurodollar Rate Loans determined in accordance
with the provisions of Section 2.13(D)(ii) hereof.
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<PAGE>
"Applicable Floating Margin" means, as at any date of determination, the
rate per annum then applicable to Floating Rate Loans determined in accordance
with the provisions of Section 2.13(D)(ii) hereof.
"Applicable L/C Fee Percentage" means, as at any date of determination, a
rate per annum equal to the Applicable Eurodollar Margin in effect on such date.
"Assignment Agreement" shall mean an assignment and acceptance agreement
entered into in connection with an assignment pursuant to Section 13.3 hereof in
substantially the form of Exhibit F.
"Asset Sale" means, with respect to any Person, the sale, lease,
conveyance, disposition or other transfer by such Person of any of its assets
(including by way of a sale-leaseback transaction and including the sale or
other transfer of any of the Equity Interests of any Subsidiary of such Person).
"Authorized Officer" means, with respect to the Borrower, any of the
President, Chief Financial Officer, or Vice President thereof, acting singly.
"Availability Reserve" means, on any date of calculation, the sum of (i)
the Senior Note Reserve plus (ii) the excess of that portion of the Borrowing
Base related to the sum of (x) Eligible Inventory of the Eligible Foreign
Subsidiaries and (y) Net Amount of Eligible Accounts of the Eligible Foreign
Subsidiaries over $12,000,000 plus (iii) the Fixed Charge Reserve plus (iv) the
aggregate balance of all trade payables owed by the Borrower and any Subsidiary
if, in the reasonable credit judgment of the Administrative Agent (which credit
judgment shall be exercised in a manner that is not arbitrary or capricious and
is consistent with the standards of eligibility and credit judgment generally
applied by the Administrative Agent to other borrowers similarly situated), such
trade payables are materially past due; provided, however, that the
Administrative Agent shall not consider any trade payable materially past due
unless such trade payable is at least thirty days past due; provided, further,
that any trade payable the payment of which is the subject of a dispute being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted by the Borrower or the applicable Subsidiary shall not be
considered by the Administrative Agent materially past due.
"Benefit Plan" means a defined benefit plan (as defined in Section 3(35) of
ERISA) subject to Title IV of ERISA (other than a Multiemployer Plan) in respect
of which the Borrower or any other member of the Controlled Group is an
"employer" as defined in Section 3(5) of ERISA.
"Blackstone Affiliates" means Blackstone Capital Partners II Merchant
Banking Fund L.P., a Delaware limited partnership, Blackstone Offshore Capital
Partners II L.P., a Delaware limited partnership, Blackstone Family Investment
Partnership L.P., a Delaware limited partnership, Blackstone Capital Partners
III Merchant Banking Fund L.P., a Delaware limited partnership, each of their
respective Affiliates that is not an operating company or controlled by an
operating company and each general partner of any of them who is a partner or
employee of The Blackstone Group L.P. and their families, related trusts, and
controlled entities.
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<PAGE>
"Blackstone Monitoring Fees" means the management, consulting, monitoring
and advisory fees paid to the Blackstone Affiliates by the Borrower.
"Borrower" means Haynes International, Inc., a Delaware corporation,
together with its respective successors and permitted assigns, including any
debtor-in-possession on behalf thereof.
"Borrowing Base" means, as of any date of calculation, an amount, as set
forth on the most current Borrowing Base Certificate delivered to the
Administrative Agent, equal to the sum of (i) up to eighty-five percent (85%) of
the Net Amount of Eligible Accounts plus (ii) the lesser of (x) $50,000,000 and
(y) up to sixty percent (60%) of Eligible Inventory related to the Borrower
consisting of finished goods and raw materials for such finished goods plus up
to forty-five percent (45%) of Eligible Inventory related to the Borrower
consisting of work-in-process and semi-processed goods plus (iii) up to sixty
percent (60%) of Eligible Inventory related to the Eligible Foreign Subsidiaries
consisting of finished goods and raw materials for such finished goods plus up
to forty-five percent (45%) of Eligible Inventory related to the Eligible
Foreign Subsidiaries consisting of work-in-process and semi-processed goods
minus (iv) the Availability Reserve.
"Borrowing Base Certificate" means the certificate, in substantially the
same form as Exhibits C attached hereto and made a part hereof, setting forth
the Borrowing Base and the component calculations thereof.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.6 hereof.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Loans bearing interest at the Eurodollar Rate, a day on which (x)
dealings may be effected in deposits of Dollars in the London interbank foreign
currency deposits market, (y) the Administrative Agent is conducting business
and (z) banks may conduct business in London, England, Chicago, Illinois, and
New York, New York and (ii) for all other purposes, any day that is not a
Saturday, a Sunday or a day on which banks are required or permitted to be
closed either in the State of Illinois or the State of Indiana.
"Capital Expenditures" means, for any period, the aggregate of all
expenditures (whether paid in cash or accrued as liabilities and including
Capitalized Leases and Permitted Purchase Money Indebtedness) by the Borrower
and its Subsidiaries during that period that, in conformity with Agreement
Accounting Principles, are required to be included in or reflected by the
property, plant, equipment or similar fixed asset accounts reflected in the
consolidated balance sheet of the Borrower and its Subsidiaries; provided,
however, that Capital Expenditures for the Borrower and its Subsidiaries shall
not include (i) expenditures to the extent they are made with the proceeds of
the issuance of Capital Stock of the Parent after the Closing Date or with funds
that constitute Net Cash Proceeds but are not required to be used to repay
permanently the Obligations in accordance with Section 2.3(B), (ii) expenditures
of proceeds of insurance settlements, condemnation awards and other settlements
in respect of lost, destroyed, damaged or condemned assets, equipment or other
property to the extent such expenditures are made to replace or repair such
lost, destroyed, damaged or condemned assets, equipment or other property or
otherwise to acquire assets or properties useful in the business of the Borrower
and its Subsidiaries within 12 months after receipt of such proceeds, (iii)
interest capitalized during such period, (iv) expenditures that are accounted
for as capital expenditures of such person and that actually are paid for by a
third party (excluding the Parent or any Subsidiary thereof) and for which
neither the Parent nor any Subsidiary thereof has provided or is required to
provide or incur, directly or indirectly, any consideration or obligation to
such third party or any other person (whether before, during or after such
period), (v) the book value of any asset owned by such person prior to or during
such period to the extent that such book value is included as a capital
expenditure during such period as a result of such person reusing or beginning
to reuse such asset during such period without a corresponding expenditure
actually having been made in such period, or (vi) expenditures during such
period related to any lease financing entered into between the Borrower and any
financial institution; provided, however, that any amount described in this
clause (vi) in excess of $10,000,000 with respect to such expenditures shall be
included in calculations of Capital Expenditures hereunder.
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<PAGE>
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, share capital, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Capitalized Lease" of a Person means any lease of property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be capitalized
on a balance sheet of such Person prepared in accordance with Agreement
Accounting Principles.
"Cash Equivalents" means (i) marketable direct obligations issued or
unconditionally guaranteed by the United States government and backed by the
full faith and credit of the United States government; (ii) domestic and
Eurodollar certificates of deposit and time deposits, bankers' acceptances and
floating rate certificates of deposit issued by any commercial bank organized
under the laws of the United States, any state thereof, the District of
Columbia, any foreign bank, or its branches or agencies (fully protected against
currency fluctuations for any such deposits with a term of more than ninety (90)
days); (iii) shares of money market, mutual or similar funds having assets in
excess of $100,000,000 and the investments of which are limited to investment
grade securities (i.e., securities rated at least Baa by Moody's Investors
Service, Inc. or at least BBB by Standard & Poor's Ratings Group, a division of
The McGraw-Hill Companies, Inc.); and (iv) commercial paper of United States and
foreign banks and bank holding companies and their subsidiaries and United
States and foreign finance, commercial industrial or utility companies which, at
the time of acquisition, are rated A-1 (or better) by Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Inc. or P-1 (or better) by
Moody's Investors Service, Inc.; provided that the maturities of such Cash
Equivalents shall not exceed 365 days.
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<PAGE>
"Change" is defined in Section 4.2 hereof.
"Change of Control" means (a) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all of the assets of the Borrower and its Subsidiaries; or (b) a majority of the
Board of Directors of the Borrower or of any direct or indirect holding company
thereof shall consist of Persons who are not Continuing Directors of the
Borrower; or (c) the acquisition by any Person, other than the Blackstone
Affiliates, of the power, directly or indirectly, to vote or direct the voting
of securities having more than 35% of the ordinary voting power for the election
of directors of the Borrower or of any direct or indirect holding company
thereof.
"Closing Date" means November 22, 1999.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Collateral" means all property and interests in property now owned or
hereafter acquired by the Parent, the Borrower or any of its respective
Subsidiaries in or upon which a security interest, lien or mortgage is granted
to the Administrative Agent, for the benefit of the Holders of Secured
Obligations under any of the Collateral Documents or under any of the other Loan
Documents. Notwithstanding the foregoing, Collateral shall not include any
property or assets to the extent that the treatment of such property or assets
as Collateral would violate the indenture under which the Senior Notes are
issued.
"Collateral Documents" means all agreements, instruments and documents
executed in connection with this Agreement, including, without limitation, the
Security Agreement, the Parent Pledge Agreement, the Collection Account
Agreements, and all other security agreements, loan agreements, notes,
mortgages, guarantees, pledges, powers of attorney, consents, assignments,
contracts, fee letters, notices, leases, financing statements and all other
written matter whether heretofore, now, or hereafter executed by or on behalf of
the Parent, the Borrower, or any Subsidiary thereof, and delivered to the
Administrative Agent or any of the Lenders, together with all agreements and
documents referred to therein or contemplated thereby.
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<PAGE>
"Collection Account" means each lock-box and blocked depository account
maintained by the Borrower, subject to a Collection Account Agreement, for the
collection of Accounts and other proceeds of Collateral.
"Collection Account Agreement" means a written agreement among the
Borrower, the Administrative Agent, and, as applicable, each of the banks at
which the Borrower maintains a Collection Account in a form reasonably
acceptable to the Administrative Agent.
"Commission" means the Securities and Exchange Commission and any Person
succeeding to the functions thereof.
"Commitment" means, for each Lender, collectively, such Lender's Revolving
Loan Commitment.
"Consolidated Assets" means the total assets of the Borrower and its
Subsidiaries on a consolidated basis, calculated in accordance with Agreement
Accounting Principles.
"Contaminant" means any waste, pollutant, hazardous substance, toxic
substance, hazardous waste, special waste, petroleum or petroleum-derived
substance or waste, asbestos, polychlorinated biphenyls ("PCBs"), or any
constituent of any such substance or waste that is, in each case, regulated
under any Environmental, Health or Safety Requirements of Law, and includes but
is not limited to these terms as defined in Environmental, Health or Safety
Requirements of Law.
"Continuing Director" of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of this Agreement or (ii) was nominated for election or elected to the
Board of Directors of such Person with the affirmative vote of a majority of the
Continuing Directors of such Person who were members of such Board of Directors
at the time of such nomination or election.
"Contractual Obligation", as applied to any Person, means any provision of
any equity or debt securities issued by that Person or any indenture, mortgage,
deed of trust, security agreement, pledge agreement, guaranty, contract,
undertaking, agreement or instrument, in any case in writing, to which that
Person is a party or by which it or any of its properties is bound, or to which
it or any of its properties is subject.
"Controlled Group" means the group consisting of (i) any corporation which
is a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Borrower; (ii) a partnership or other trade
or business (whether or not incorporated) which is under common control (within
the meaning of Section 414(c) of the Code) with the Borrower; and (iii) solely
for purposes of the funding requirements under Section 412 of the Code and the
tax imposed for failure to meet the minimum funding standards under Section 4971
of the Code, a member of the same affiliated service group (within the meaning
of Section 414(m) of the Code) as the Borrower, any corporation described in
clause (i) above or any partnership or trade or business described in clause
(ii) above.
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"Controlled Subsidiary" of any Person means a Subsidiary of such Person (i)
90% or more of the total Equity Interests or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more wholly-owned Subsidiaries of such Person and (ii) of
which such Person possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies, whether through the ownership
of voting securities, by agreement or otherwise.
"Conversion/Continuation Notice" is defined in Section 2.8(D) hereof.
"Cure Loan" is defined in Section 9.2(iii) hereof.
"Customary Permitted Liens" means:
(i) Liens (other than Environmental Liens and Liens in favor of the
IRS or the PBGC) with respect to the payment of taxes, assessments or
governmental charges in all cases which are not yet due or (if foreclosure,
distraint, sale or other similar proceedings shall not have been commenced)
which are being contested in good faith by appropriate proceedings properly
instituted and diligently conducted and with respect to which adequate
reserves or other appropriate provisions are being maintained in accordance
with Agreement Accounting Principles;
(ii) statutory Liens of landlords and Liens of suppliers, mechanics,
carriers, materialmen, warehousemen or workmen and other similar Liens
imposed by law for amounts not yet due or which are being contested in good
faith by appropriate proceedings properly instituted and diligently
conducted and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with Agreement Accounting
Principles;
(iii) Liens (other than Environmental Liens and Liens in favor of the
IRS or the PBGC) incurred or deposits made in the ordinary course of
business in connection with worker's compensation, unemployment insurance
or other types of social security benefits or to secure the performance of
bids, tenders, sales, contracts (other than for the repayment of borrowed
money), surety, appeal and performance bonds; provided that (A) all such
Liens do not in the aggregate materially detract from the value of the
Borrower's or its respective Subsidiary's assets or property taken as a
whole or materially impair the use thereof in the operation of the
businesses taken as a whole and (B) all Liens securing bonds to stay
judgments or in connection with appeals do not secure at any time an
aggregate amount exceeding $2,000,000;
(iv) Liens arising with respect to zoning restrictions, easements,
licenses, reservations, covenants, rights-of-way, utility easements,
building restrictions and other similar charges or encumbrances on the use
of real property which do not in any case materially detract from the value
of the property subject thereto or interfere in any material respect with
the ordinary conduct of the business of the Borrower or any of its
Subsidiaries;
(v) Liens of attachment or judgment with respect to judgments, writs
or warrants of attachment, or similar process against the Borrower or any
of its respective Subsidiaries which do not constitute a Default under
Section 8.1(H) hereof;
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<PAGE>
(vi) any interest or title of the lessor in the property subject to
any operating lease entered into by the Borrower or any of its respective
Subsidiaries in the ordinary course of business;
(vii) licenses of intellectual property granted in the ordinary course
of business;
(viii) leases or subleases of any real property owned or held by the
Borrower;
(ix) Liens incurred in the ordinary course of business pursuant to
construction upon or improvement of the Borrower's real property, provided
that such Liens shall be discharged within one-hundred twenty days (120)
after the completion of the construction upon or improvement of the
above-mentioned real property;
(x) Liens incurred under any Collateral Document; and
(xi) Liens in favor of any regulatory agency within the United States
where such agency controls the payment of duties upon goods imported into
the United States by the Borrower.
"Default" means an event described in Article VIII hereof.
"DOL" means the United States Department of Labor and any Person succeeding
to the functions thereof.
"Dollar" and "$" means dollars in the lawful currency of the United States.
"EBITDA" means, for any period, for the Borrower and its Subsidiaries on a
consolidated basis, the sum of the amounts for such period, without duplication,
of (i) Net Income, plus (ii) Interest Expense, plus (iii) charges against income
for foreign, federal, state and local taxes to the extent deducted in computing
Net Income, plus (iv) depreciation expense to the extent deducted in computing
Net Income, plus (v) amortization expense, including, without limitation,
amortization of goodwill and other intangible assets to the extent deducted in
computing Net Income, plus (vi) other non-cash charges classified as long-term
deferrals in accordance with Agreement Accounting Principles to the extent
deducted in computing Net Income, plus (vii) to the extent deducted in computing
Net Income, (x) other extraordinary or non-recurring cash charges, to the extent
that such extraordinary or non-recurring cash charges during such period do not
exceed $3,000,000 (the "Initial Cash Charges") and (y) other extraordinary or
non-recurring cash or non-cash charges, to the extent that such extraordinary or
non-recurring cash or non-cash charges during such period do not exceed, when
taken together with the Initial Cash Charges, $5,000,000, plus (viii) legal fees
and expenses related to any antitrust litigation to the extent that such fees
and expenses do not exceed $3,000,000 during the applicable four (4) fiscal
quarter period plus (ix) any fees, expenses or charges related to any equity
offering, investments permitted hereunder, acquisition or recapitalization or
Indebtedness permitted to be incurred hereunder (whether or not successful) and
fees, expenses or charges related to the transactions contemplated by this
Agreement (including fees to the Blackstone Affiliates), plus (x) the Blackstone
Monitoring Fees, to the extent that such fees do not exceed $1,000,000 during
the applicable four (4) fiscal quarter period. For the purposes of calculating
EBITDA for any period of four (4) consecutive fiscal quarters (each, a
"Reference Period"), if during such Reference Period the Borrower or any
Subsidiary shall have made a "Material Acquisition" (as defined below), EBITDA
for such Reference Period shall be calculated after giving pro forma effect
thereto as if such Material Acquisition occurred on the first day of such
Reference Period. As used in this definition, "Material Acquisition" means any
Acquisition involving the payment of consideration by the Borrower, the Borrower
or any Subsidiary in excess of $1,000,000. Pro forma calculations shall be
determined in good faith by an Authorized Officer of the Borrower and may
include, with the consent of the Administrative Agent, which consent shall not
unreasonably be withheld, adjustments to (i) reflect operating expense
reductions and synergies reasonably expected to result from any acquisition,
merger, or asset disposition, or (ii) eliminate the effect of any extraordinary
accounting event with respect to any acquired person or assets on Net Income.
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"Eligible Accounts" means Accounts created by the Borrower or any Eligible
Foreign Subsidiary in the ordinary course of its business arising out of the
sale of goods or rendition of services by the Borrower or such Eligible Foreign
Subsidiary, which Accounts are and at all times shall continue to meet standards
of eligibility from time to time established in accordance with this Agreement.
Standards of eligibility will be established by the Administrative Agent in its
reasonable credit judgment and may be revised from time to time by the
Administrative Agent in its reasonable credit judgment (which credit judgment
shall be exercised in a manner that is not arbitrary or capricious and is
consistent with the standards of eligibility and credit judgment generally
applied by the Administrative Agent to other borrowers similarly situated) and
shall be based on risks that the Administrative Agent reasonably believes may
have a material adverse effect on categories of Eligible Account. In general,
without limiting the foregoing, the following Accounts are not Eligible
Accounts:
(i) Accounts originated by the Borrower which remain unpaid ninety (90)
days after the date of the original applicable invoice, unless such Accounts
result from the sale of Inventory to a non-U.S. account debtor, in which case
such Accounts remain unpaid for one-hundred twenty (120) days after the date of
the original applicable invoice, or sixty (60) days after the due date,
whichever is earlier, and Accounts originated by any Eligible Foreign Subsidiary
which remain unpaid one-hundred twenty (120) days after the date of the original
applicable invoice or sixty (60) days after the due date, whichever is earlier;
(ii) all Accounts owing by a single account debtor if fifty percent (50%)
of the balance owing by such account debtor, calculated without taking into
account any credit balances of such account debtor, remains unpaid (x) if the
Borrower originated such Account, ninety (90) days after the date of the
original applicable invoice unless such Account results from the sale of
Inventory to a non-U.S. account debtor, in which case such Account remains
unpaid for one-hundred twenty (120) days after the date of the original
applicable invoice and (y) if an Eligible Foreign Subsidiary originated such
Account, one-hundred twenty days after the date of the original applicable
invoice, or, in either case, sixty (60) days after the due date, whichever is
earlier;
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<PAGE>
(iii) Accounts with respect to which the account debtor is a director,
officer, employee, Subsidiary or Affiliate of the Borrower or an Eligible
Foreign Subsidiary (other than portfolio companies of The Blackstone Group
L.P.);
(iv) if the Administrative Agent, in its discretion, elects to treat such
Accounts originated by the Borrower or such Eligible Foreign Subsidiary as
ineligible Accounts with respect to which the account debtor is any federal
governmental authority, the United States of America or any department or agency
thereof, unless with respect to any such Account, the Borrower or such Eligible
Foreign Subsidiary has complied to the Administrative Agent's satisfaction with
the provisions of the Federal Assignment of Claims Act or other applicable
statutes, including, without limitation, executing and delivering to the
Administrative Agent all statements of assignment and/or notification which are
in form and substance acceptable to the Administrative Agent and which are
deemed necessary by the Administrative Agent to effectuate the assignment to the
Administrative Agent of such Accounts;
(v) with respect to Accounts originated by the Borrower, Accounts not
denominated in (x) Dollars or (y) pounds sterling, Swiss francs, euro or any
other currency acceptable to the Administrative Agent, provided, that the
aggregate balance of Accounts denominated in those currencies permitted under
this clause (y) does not exceed the equivalent of Three Million Dollars
(US$3,000,000);
(vi) with respect to Accounts originated by any Eligible Foreign
Subsidiary, Accounts not denominated in Dollars, pounds sterling, Swiss francs,
euro or any other currency acceptable to the Administrative Agent;
(vii) with respect to Accounts originated by the Borrower, Accounts where
the account debtor party thereto is not a resident of the United States, unless
such account debtor (x) has supplied the Borrower with an irrevocable letter of
credit issued by a financial institution satisfactory to the Administrative
Agent sufficient to cover such Account in form and substance satisfactory to the
Administrative Agent or (y) is one of the account debtors set forth on Schedule
1.1.4 hereto; provided, however, that the Borrower may request that the
Administrative Agent add additional account debtors to Schedule 1.1.4; provided,
further, that the Administrative Agent may, in its reasonable discretion, remove
any account debtor from Schedule 1.1.4;
(viii) Accounts with respect to which the account debtor has (a) asserted a
counterclaim, (b) a right of setoff, or (c) a receivable owing from the Borrower
or such Eligible Foreign Subsidiary but only to the extent of such counterclaim,
setoff or receivable;
(ix) Accounts originated by the Borrower with respect to which the
Administrative Agent does not have a first and valid fully perfected and
enforceable security interest for which notice has been provided to the
Borrower;
(x) Accounts with respect to which the account debtor is the subject of
bankruptcy or a similar insolvency proceeding or has made an assignment for the
benefit of creditors or whose assets have been conveyed to a receiver, trustee
or assignee for the benefit of creditors;
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(xi) Accounts with respect to which the account debtor's obligation to pay
the Account is conditional upon the account debtor's approval or is otherwise
subject to any contractual repurchase obligation or return right, as with sales
made on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval
(except with respect to Accounts in connection with which account debtors are
entitled to return Inventory on the basis of the quality of such Inventory) or
consignment basis;
(xii) Accounts with respect to which the account debtor is located in
Minnesota or New Jersey (or any other jurisdiction which adopts a statute or
other requirement with respect to which any Person that obtains business from
within such jurisdiction or is otherwise subject to such jurisdiction's tax law
requiring such Person to file a business activity report or make any other
required filings in a timely manner in order to enforce its claims in such
jurisdiction's courts or arising under such jurisdiction's laws); provided,
however, such Accounts shall nonetheless be eligible if the Borrower has filed a
business activity report (or other applicable report or filing) with the
applicable state office by the time required or is qualified to do business in
such jurisdiction and, at the time the Account was created, was qualified to do
business in such jurisdiction or had on file with the applicable state office a
current business activity report (or other applicable report or filing);
(xiii) Accounts with respect to which the account debtor's obligation does
not constitute its legal, valid and binding obligation, enforceable against it
in accordance with its terms;
(xiv) Accounts with respect to which the Borrower or such Eligible Foreign
Subsidiary has not yet shipped the applicable goods, performed the applicable
service or issued the applicable invoice;
(xv) Accounts in connection with which the Borrower or any other party to
such Account is in default in the performance or observance of any of the terms
thereof in any material respect;
(xvi) Accounts for which the prospect of payment or performance by the
account debtor is or will be impaired as determined by the Administrative Agent
in the exercise of its reasonable credit judgment (which credit judgment shall
not be exercised in a manner that is arbitrary or capricious);
(xvii) any Account arising from a long-term contract or progressive billing
arrangement where such contract or billing arrangement permits the account
debtor to withhold any portion of the regularly scheduled payments due under
such Account;
(xviii) any Account owing to the Borrower or any Eligible Foreign
Subsidiary by an Affiliate thereof;
(xix) any Account created by the sale, transfer or assignment of "slag"
metal by-products; and
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(xx) any Account for which a deposit with respect to payment thereof has
been made by the account debtor to the extent of such deposit.
Notwithstanding the foregoing, (i) Accounts of the Borrower or an Eligible
Foreign Subsidiary which are acquired pursuant to a Permitted Acquisition or
created from a line of business acquired pursuant to a Permitted Acquisition
shall not be deemed Eligible Accounts unless and until the Administrative Agent,
after concluding any due diligence it reasonably deems necessary (which the
Administrative Agent agrees to undertake as soon as reasonably practicable after
the Borrower or such Eligible Foreign Subsidiary has provided it with access to
the information and/or Persons necessary to conduct such due diligence), shall
be satisfied as to the condition thereof, that such Accounts are of the same
general collateral value as the Borrower's or such Eligible Foreign Subsidiary's
Accounts prior to such Acquisition and that such Accounts would otherwise meet
the standards of eligibility set forth herein (including, without limitation,
with respect to Accounts acquired by the Borrower, perfection of the
Administrative Agent's security interests in such Accounts), but for the fact
that such Accounts were acquired by the Borrower or such Eligible Foreign
Subsidiary outside of the ordinary course of business; and (ii) Accounts
acquired pursuant to such Permitted Acquisition or created from a line of
business acquired pursuant to such Permitted Acquisition may be deemed Eligible
Accounts from and after such Permitted Acquisition if the foregoing
determinations have been made to the Administrative Agent's satisfaction. To the
extent that the Administrative Agent's due diligence reveals the existence of
facts which indicate that such acquired Accounts are not of similar collateral
value as the Accounts of the Borrower or such Eligible Foreign Subsidiary
analyzed in connection with establishing the initial Borrowing Base percentages,
the Administrative Agent shall have the option, in lieu of treating such
Accounts as ineligible, to set a lower Borrowing Base percentage for such
Accounts, it being understood and agreed that before doing so, the
Administrative Agent will discuss its analysis with the Borrower and, if
applicable, such Eligible Foreign Subsidiaries and confirm such percentages to
the Lenders in writing.
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"Eligible Foreign Subsidiaries" means Haynes International, Limited, a
corporation formed under the laws of the United Kingdom, Nickel-Contor, AG, a
corporation formed under the laws of Switzerland, and Haynes International,
S.A.R.L., a corporation organized under the laws of France, each of which is a
wholly-owned Subsidiary of the Borrower.
"Eligible Inventory" means Net Inventory valued at cost determined on a
first-in-first-out basis (determined in accordance with Agreement Accounting
Principles, consistently applied) minus the value of reserves which have been
recorded by the Borrower or the Eligible Foreign Subsidiaries with respect to
obsolete, slow-moving or excess Inventory and such other reserves as the
Administrative Agent elects to establish in accordance with its reasonable
credit judgment (which credit judgment shall be exercised in a manner that is
not arbitrary or capricious and is consistent with the standards of eligibility
and credit judgment applied generally by the Administrative Agent to other
borrowers similarly situated) and shall be based on risks that the
Administrative Agent reasonably believes may have a material adverse effect on
categories of Eligible Inventory.
"Environmental, Health or Safety Requirements of Law" means all applicable
Requirements of Law derived from or relating to federal, state and local laws or
regulations relating to or addressing pollution or protection of the
environment, or protection of worker health or safety, including, but not
limited to, the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. ss. 9601 et seq., the Occupational Safety and Health Act of 1970,
29 U.S.C. ss. 651 et seq., and the Resource Conservation and Recovery Act of
1976, 42 U.S.C. ss. 6901 et seq., in each case including any amendments thereto,
any successor statutes, and any regulations or legally binding guidance
promulgated thereunder, and any state or local equivalent thereof.
"Environmental Lien" means a lien in favor of any Governmental Authority
for (a) any liability under Environmental, Health or Safety Requirements of Law,
or (b) damages arising from, or costs incurred by such Governmental Authority in
response to, a Release or threatened Release of a Contaminant into the
environment.
"Environmental Property Transfer Act" means any applicable requirement of
Environmental, Health or Safety Requirements of Law that conditions, restricts,
prohibits or requires any notification or disclosure triggered by the closure of
any property or the transfer, sale or lease of any property or deed or title for
any property for environmental reasons, including, but not limited to, any
so-called "Industrial Site Recovery Act" or "Responsible Property Transfer Act."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time including (unless the context otherwise requires) any
final rules or regulations promulgated thereunder.
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"Eurodollar Base Rate" means, for any Interest Period with respect to a
Eurodollar Rate Loan, the rate (rounded upwards, if necessary, to the next
higher 1/16 of 1%) at which deposits in Dollars in an amount comparable to the
amount of such Eurodollar Rate Loan are offered to the Administrative Agent by
prime banks in the London interbank foreign currency deposits market at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, for delivery on the first day of such
Interest Period.
"Eurodollar Rate" means, with respect to a Eurodollar Rate Loan for the
relevant Interest Period, the Eurodollar Base Rate applicable to such Interest
Period plus the then Applicable Eurodollar Margin. The Eurodollar Rate shall be
rounded to the next higher multiple of 1/16 of 1% if the rate is not such a
multiple.
"Eurodollar Rate Advance" means an Advance which bears interest at the
Eurodollar Rate.
"Eurodollar Rate Loan" means a Loan, or, if less than a whole Loan, the
portion thereof, which bears interest at the Eurodollar Rate.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for on such day on such transactions
received by Fleet from three Federal funds brokers of recognized standing
selected by Fleet.
"Fee Letter" means that certain letter agreement, dated as of November 22,
1999, between the Borrower and the Administrative Agent on behalf of the
Lenders, as the same may be amended, restated, supplemented or otherwise
modified from time to time.
"Financing" means, with respect to any Person, the issuance or sale by such
Person of any Equity Interests of such Person or any Indebtedness, other than
Indebtedness permitted under Section 7.3(A), consisting of debt securities of
such Person.
"Fixed Charge Coverage Ratio" is defined in Section 7.4(A) hereof.
"Fixed Charge Reserve" means (i) the Standard Fixed Charge Reserve at any
time the Fixed Charge Coverage Ratio equals or exceeds 1.0 to 1.0, (ii)
$2,500,000 plus the Standard Fixed Charge Reserve at any time the Fixed Charge
Coverage Ratio equals or exceeds 0.85 to 1.0 but is less than 1.0 to 1.0, and
(iii) $5,000,000 plus the Standard Fixed Charge Reserve at any time the Fixed
Charge Coverage Ratio equals or exceeds 0.75 to 1.0 but is less than 0.85 to
1.0.
"Fleet" means Fleet Capital Corporation, a Rhode Island corporation, and
its successors and assigns.
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"Floating Rate" means, for any day for any Revolving Loan, a rate per annum
equal to the Alternate Base Rate for such day, changing and as the Alternate
Base Rate changes, plus the then Applicable Floating Margin.
"Floating Rate Advance" means an Advance which bears interest at the
Floating Rate.
"Floating Rate Loan" means a Loan, or, if less than a whole Loan, the
portion thereof, which bears interest at the Floating Rate.
"Foreign Subsidiaries" means each of the Eligible Foreign Subsidiaries,
Haynes International, S.R.L., a corporation formed under the laws of Italy, and
Haynes Foreign Sales Corporation, a corporation formed under the laws of
Barbados.
"Governmental Acts" is defined in Section 3.9(A) hereof.
"Governmental Authority" means any nation or government, any federal,
state, local or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Gross Negligence" means recklessness, the absence of the slightest care or
the complete disregard of consequences. Gross Negligence does not mean the
absence of ordinary care or diligence or an inadvertent act or inadvertent
failure to act. If the term "gross negligence" is used with respect to the
Administrative Agent or any Lender or any indemnitee in any of the other Loan
Documents, it shall have the meaning set forth herein.
"Hedging Obligations" of a Person means any and all obligations of such
Person, whether absolute or contingent and howsoever and whensoever created,
arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (i) any and all
agreements, devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, commodity prices,
exchange rates or forward rates applicable to such party's assets, liabilities
or exchange transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (ii) any and all
cancellations, buy backs, reversals, terminations or assignments of any of the
foregoing.
"Holders of Secured Obligations" means the holders of the Secured
Obligations from time to time and shall include their respective successors,
transferees and assigns.
"Indebtedness" of any Person means, without duplication, such Person's (a)
obligations for borrowed money, (b) obligations representing the deferred
purchase price of property or services (other than payables which are payable on
terms customary in the trade or due within one year), (c) obligations, whether
or not assumed, secured by Liens on property or assets now or hereafter owned or
acquired by such Person, (d) obligations which are evidenced by notes,
acceptances or other instruments, (e) Capitalized Lease Obligations, (f)
obligations with respect to letters of credit, (g) net Hedging Obligations and
(h) Off Balance Sheet Liabilities. The amount of Indebtedness of any Person at
any date shall be without duplication, in the case of Indebtedness of others
secured by a Lien to which the property or assets owned or held by such Person
is subject, the lesser of the fair market value at such date of any asset
subject to a Lien securing the Indebtedness of others and the amount of the
Indebtedness secured.
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"Indemnified Matters" is defined in Section 10.7(B) hereof.
"Indemnitees" is defined in Section 10.7(B) hereof.
"Interest Coverage Ratio" means, for any period, the ratio of (i) EBITDA to
(ii) Interest Expense, for the Borrower and its consolidated Subsidiaries.
"Interest Expense" means, for any period, the total interest expense (net
of interest income) of the Borrower and its consolidated Subsidiaries, whether
paid or accrued (including the interest component of Capitalized Leases,
commitment and letter of credit fees), but excluding interest expense not
payable in cash (including amortization of discount), all as determined in
conformity with Agreement Accounting Principles.
"Interest Period" means, with respect to a Eurodollar Rate Loan, a period
of one (1), two (2), three (3), or six (6) months commencing on a Business Day
selected by the Borrower pursuant to this Agreement. Such Interest Period shall
end on (but exclude) the day which corresponds numerically to such date one (1),
two (2), three (3), or six (6) months thereafter; provided, however, that if
there is no such numerically corresponding day in such next, second, third, or
sixth succeeding month, such Interest Period shall end on the last Business Day
of such next, second, third, or sixth succeeding month. If an Interest Period
would otherwise end on a day which is not a Business Day, such Interest Period
shall end on the next succeeding Business Day, provided, however, that if said
next succeeding Business Day falls in a new calendar month, such Interest Period
shall end on the immediately preceding Business Day.
"Interest Rate Agreements" is defined in Section 7.3(P) hereof.
"Inventory" shall mean any and all goods, including, without limitation,
goods in transit, wheresoever located, whether now owned or hereafter acquired
by the Borrower or the Eligible Foreign Subsidiaries, which are held for sale or
lease, furnished under any contract of service or held as raw materials, work in
process or supplies, and all materials used or consumed in the business of the
Borrower or the Eligible Foreign Subsidiaries, and shall include all right,
title and interest of the Borrower or the Eligible Foreign Subsidiaries in any
property the sale or other disposition of which has given rise to Accounts and
which has been returned to or repossessed or stopped in transit by the Borrower
or the Eligible Foreign Subsidiaries.
"Investment" means, with respect to any Person, (i) any purchase or other
acquisition by that Person of any Indebtedness or Equity Interests, or of a
beneficial interest in any Indebtedness or Equity Interests, issued by any other
Person, (ii) any purchase by that Person of all or substantially all of the
assets constituting a business unit of another Person, and (iii) any loan,
advance (other than deposits with financial institutions available for
withdrawal on demand, prepaid expenses, accounts receivable, advances to
employees and similar items made or incurred in the ordinary course of business)
or capital contribution by that Person to any other Person, including all
Indebtedness to such Person arising from a sale of property by such Person other
than in the ordinary course of its business.
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"IRS" means the Internal Revenue Service and any Person succeeding to the
functions thereof.
"Issuing Bank" means Fleet Capital Corporation for the purpose of issuing
Letters of Credit, and its respective successors, in the case of each issuance
in Fleet Capital Corporation's separate capacity as an issuer of Letters of
Credit pursuant to Section 3.1. The designation of any Lender other than Fleet
as an Issuing Bank after the date hereof shall be subject to the prior written
consent of the Administrative Agent and the Borrower.
"L/C Draft" means a draft drawn on the Issuing Bank pursuant to a Letter of
Credit.
"L/C Interest" shall have the meaning ascribed to such term in Section 3.5
hereof.
"L/C Obligations" means, without duplication, an amount equal to the sum of
(i) the aggregate of the amount then available for drawing under each of the
Letters of Credit, (ii) the face amount of all outstanding L/C Drafts
corresponding to the Letters of Credit, which L/C Drafts have been accepted by
the Issuing Bank, and (iii) the aggregate outstanding amount of all
Reimbursement Obligations at such time.
"Lenders" means the lending institutions listed on the signature pages of
this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to the Lender or the
Administrative Agent, any office, branch, subsidiary or affiliate of the Lender
or the Administrative Agent.
"Letter of Credit" means the letters of credit to be issued by the Issuing
Bank pursuant to Section 3.1 hereof.
"Lien" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance or security
agreement of any kind or nature whatsoever (including, without limitation, the
interest of a vendor or lessor under any conditional sale, Capitalized Lease or
other title retention agreement).
"Loan(s)" means, with respect to a Lender, such Lender's portion of any
Advance made pursuant to Section 2.1 hereof, whether made, continued as, or
converted to Floating Rate Loans or Eurodollar Rate Loans.
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"Loan Account" is defined in Section 2.13(F) hereof.
"Loan Documents" means this Agreement, the Notes, the Fee Letter, the
License Agreement, any agreement memorializing any Hedging Obligations, and all
other documents, instruments and agreements executed in connection therewith or
contemplated thereby, as the same may be amended, restated or otherwise modified
and in effect from time to time.
"Margin Stock" shall have the meaning ascribed to such term in Regulation
U.
"Material Adverse Effect" means a material adverse effect upon (a) the
business, condition (financial or otherwise), operations, performance or
properties of the Borrower and its Subsidiaries, taken as a whole, (b) the
ability of the Borrower or any of its respective Subsidiaries to perform their
respective obligations under the Loan Documents in any material respect, or (c)
the ability of the Lenders or the Administrative Agent to enforce, in any
material respect, the Obligations.
"Multiemployer Plan" means a "Multiemployer Plan" as defined in Section
4001(a)(3) of ERISA which is contributed to by either the Borrower or any member
of the Controlled Group.
"Net Amount of Eligible Accounts" means the outstanding face amount of
Eligible Accounts, less the sum of (i) all finance charges, late fees and other
fees that are unearned, (ii) the value of all accruals which have been recorded
by the Borrower or the relevant Eligible Foreign Subsidiary with respect to
downward price adjustments, and (iii) such other reserves as the Administrative
Agent elects to establish in accordance with its reasonable credit judgment
(which credit judgment shall be exercised in a manner that is not arbitrary or
capricious and is consistent with the standards of eligibility and credit
judgment generally applied by the Administrative Agent to other borrowers
similarly situated) and shall be based on risks that the Administrative Agent
reasonably believes may have a material adverse effect on categories of Eligible
Accounts.
"Net Cash Proceeds" from an Asset Sale means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Sale) therefrom in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, foreign and local taxes
required to be paid or accrued as a liability as a consequence of such Asset
Sale, (ii) all distributions and other payments required to be made to any
Person owning a beneficial interest in assets subject to sale or minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Sale or required to be made to any creditor as a result of such Asset Sale,
(iii) the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with Agreement Accounting Principles, against any
liabilities associated with the assets disposed of in such Asset Sale; provided,
however, that upon any reduction in such reserves (other than to the extent
resulting from payments of the respective reserved liabilities), Net Cash
Proceeds shall be increased by the amount of such reduction to reserves, and
retained by the Borrower or any Subsidiary of the Borrower after such Asset Sale
and (iv) any portion of the purchase price from an Asset Sale placed in escrow
(whether as a reserve for adjustment of the purchase price, for satisfaction of
indemnities in respect of such Asset Sale or otherwise in connection with such
Asset Sale); provided, however, that upon the termination of such escrow, Net
Cash Proceeds shall be increased by any portion of funds therein released to the
Borrower or its Subsidiaries.
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"Net Income" means, for any period, the net earnings (or loss) after taxes
of the Borrower and its consolidated Subsidiaries for such period taken as a
single accounting period determined in conformity with Agreement Accounting
Principles.
"Net Inventory" means Inventory of the Borrower or the Eligible Foreign
Subsidiaries which is owned by the Borrower or the Eligible Foreign Subsidiaries
and held for sale or lease by the Borrower or the Eligible Foreign Subsidiaries
or any party contractually obligated to share or handle the same on behalf of
the Borrower or the Eligible Foreign Subsidiaries in the ordinary course of
business or furnished under any contract of service by the Borrower or the
Eligible Foreign Subsidiaries which continues to meet standards of eligibility
from time to time established in accordance with this Agreement. Standards of
eligibility will be established by the Administrative Agent in its reasonable
credit judgment and may be revised from time to time by the Administrative Agent
in its reasonable credit judgment (which credit judgment shall be exercised in a
manner that is not arbitrary or capricious and is consistent with the standards
of eligibility and credit judgment applied generally by the Administrative Agent
to other borrowers similarly situated) and shall be based on risks that the
Administrative Agent reasonably believes may have a material adverse effect on
categories of Inventory. In general, without limiting the foregoing, the
following inventory is not Net Inventory:
(i) Inventory which is obsolete, not in good condition, not either
currently usable or currently saleable in the ordinary course of the Borrower's
or the applicable Eligible Foreign Subsidiary's business or does not meet all
material standards imposed by any governmental authority having regulatory
authority over such item of Inventory, its use or its sale;
(ii) Inventory consisting of packaging material or supplies;
(iii) Inventory which (a) is consigned to a third party for sale or (b) is
on consignment from a third party to the Borrower or the Eligible Foreign
Subsidiaries, for sale; provided, however, that this clause (iii) shall not
apply to consigned Inventory in which the Administrative Agent has a valid and
perfected first priority security interest;
(iv) Inventory which consists of goods in transit which has been sold to a
dealer or distributor of the Borrower or the Eligible Foreign Subsidiaries, and
is in the process of being delivered to that dealer or distributor; provided,
however, that this clause (iv) shall not apply to sales by the Borrower to an
Eligible Foreign Subsidiary or by an Eligible Foreign Subsidiary to the
Borrower;
(v) Inventory which is subject to a Lien in favor of any Person other than
the Administrative Agent (other than Liens permitted under this Agreement which
do not have priority);
(vi) with respect to the Borrower, Inventory with respect to which the
Administrative Agent does not have a first and valid fully-perfected security
interest;
(vii) Inventory which is not located either (a) on the Borrower's owned
premises in the United States listed on Schedule 1 to the Security Agreement or
on the Eligible Foreign Subsidiaries' premises set forth on Schedule 1.1.5
hereto or (b) with respect to the Borrower's Inventory, in other owned or leased
premises, warehouses or with bailees in the United States not listed on Schedule
2 to the Security Agreement permitted to be established under such Security
Agreement, in each case in connection with which the Administrative Agent shall
have received landlord, mortgagee, bailee and/or warehousemen's access and lien
waiver agreements, or other contractual agreements determined by the
Administrative Agent, in its reasonable discretion, to be necessary to protect
the Lien of the Administrative Agent with respect to the Borrower's Inventory,
in each case in form and substance acceptable to the Administrative Agent; and
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(viii) Inventory which is evidenced by an Account.
Notwithstanding the foregoing, (i) Inventory of the Borrower or any Eligible
Foreign Subsidiary which is acquired pursuant to a Permitted Acquisition or
created from a line of business acquired pursuant to a Permitted Acquisition
shall not be deemed Eligible Inventory unless and until the Administrative
Agent, after concluding any due diligence it reasonably deems necessary (which
the Administrative Agent agrees to undertake as soon as reasonably practicable
after the Borrower or such Eligible Foreign Subsidiary has provided it with
access to the information and/or Persons necessary to conduct such due
diligence), shall be satisfied as to the condition thereof, that such Inventory
is of the same general collateral value as the Borrower's or such Eligible
Foreign Subsidiary's Inventory prior to a Permitted Acquisition and that such
Inventory would otherwise meet the standards of eligibility set forth herein
(including, without limitation, with respect to Inventory acquired by the
Borrower, perfection of the Administrative Agent's security interests in such
Inventory) but for the fact that such Inventory was acquired by the Borrower or
such Eligible Foreign Subsidiary outside of the ordinary course of business and
(ii) Inventory acquired pursuant to a Permitted Acquisition or created from a
line of business acquired pursuant to such Permitted Acquisition may be deemed
Eligible Inventory from and after such Permitted Acquisition if the foregoing
determinations have been made to the Administrative Agent's satisfaction. To the
extent that the Administrative Agent's due diligence reveals the existence of
facts which indicate that the acquired Inventory in a Permitted Acquisition is
not of similar collateral value as the Inventory of the Borrower or such
Eligible Foreign Subsidiary analyzed in connection with establishing the initial
Borrowing Base percentages, the Administrative Agent shall have the option, in
lieu of treating such Inventory as ineligible, to set a lower Borrowing Base
percentage for such Inventory, it being understood and agreed that before doing
so, the Administrative Agent will discuss its analysis with the Borrower and, if
applicable, such Eligible Foreign Subsidiary.
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"Non Pro Rata Loan" is defined in Section 9.2 hereof.
"Notes" means the Revolving Notes.
"Notice of Assignment" is defined in Section 13.3(B) hereof.
"Obligations" means all Loans, advances, debts, liabilities, obligations,
covenants and duties owing by the Borrower to the Administrative Agent, any
Lender, any Affiliate of the Administrative Agent or any Lender, or any
Indemnitee, of any kind or nature, present or future, arising under this
Agreement, the Notes or any other Loan Document, whether or not evidenced by any
note, guaranty or other instrument, whether or not for the payment of money,
whether arising by reason of an extension of credit, loan, guaranty,
indemnification, or in any other manner, whether direct or indirect (including
those acquired by assignment), absolute or contingent, due or to become due, now
existing or hereafter arising and however acquired. The term includes, without
limitation, all interest, charges, expenses, fees, attorneys' fees and
disbursements, paralegals' fees, and any other sum chargeable to the Borrower
under this Agreement or any other Loan Document.
"Off Balance Sheet Liabilities" of a Person means (a) any repurchase
obligation or liability of such Person or any of its Subsidiaries with respect
to accounts or notes receivable sold by such Person or any of its Subsidiaries,
(b) any liability under any sale and leaseback transactions which do not create
a liability on the consolidated balance sheet of such Person, (c) any liability
under any financing lease or so-called "synthetic" lease transaction, or (d) any
obligations arising with respect to any other transaction which is the
functional equivalent of or takes the place of borrowing but which does not
constitute a liability on the consolidated balance sheet of such Person and its
Subsidiaries.
"Other Taxes" is defined in Section 2.13(E)(ii) hereof.
"Parent" means Haynes Holdings, Inc., a Delaware corporation, together with
its successors and permitted assigns.
"Parent Pledge Agreement" means that certain Pledge Agreement of even date
herewith executed by Parent in favor of the Administrative Agent for the benefit
of the Holders of the Secured Obligations, as the same way be amended, restated
or otherwise modified from time to time pledging all of the Capital Stock and
Equity Interests of the Borrower owned by Parent.
"Participants" is defined in Section 13.2(A) hereof.
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"Payment Date" means the first day of each month.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Permitted Acquisition" is defined in Section 7.3(F) hereof.
"Permitted Existing Indebtedness" means the Indebtedness of the Borrower
and its Subsidiaries identified as such on Schedule 1.1.1 to this Agreement.
"Permitted Existing Investments" means the Investments of the Borrower and
its Subsidiaries identified as such on Schedule 1.1.2 to this Agreement.
"Permitted Existing Liens" means the Liens on assets of the Borrower and
its Subsidiaries identified as such on Schedule 1.1.3 to this Agreement.
"Permitted Purchase Money Indebtedness" is defined in Section 7.3(A)(v)
hereof.
"Permitted Refinancing Indebtedness" means any replacement, renewal,
refinancing or extension of any Indebtedness permitted by this Agreement that
(i) does not exceed the aggregate principal amount (plus accrued interest and
any applicable premium and associated fees and expenses) of the Indebtedness
being replaced, renewed, refinanced or extended, (ii) does not have a Weighted
Average Life to Maturity at the time of such replacement, renewal, refinancing
or extension that is less than the Weighted Average Life to Maturity of the
Indebtedness being replaced, renewed, refinanced or extended, (iii) does not
rank at the time of such replacement, renewal, refinancing or extension senior
in right of payment to the Indebtedness being replaced, renewed, refinanced or
extended, and (iv) does not contain terms (including, without limitation, terms
relating to security, amortization, interest rate, premiums, fees, covenants,
events of default and remedies) in the aggregate materially less favorable to
the Borrower or to the Lenders than those applicable to the Indebtedness being
replaced, renewed, refinanced or extended.
"Person" means any individual, corporation, firm, enterprise, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, limited liability company or other entity of any kind, or any
government or political subdivision or any agency, department or instrumentality
thereof.
"Plan" means an employee benefit plan defined in Section 3(3) of ERISA in
respect of which the Borrower or any member of the Controlled Group is an
"employer" as defined in Section 3(5) of ERISA.
"Pro Rata Share" means, with respect to any Lender, the percentage obtained
by dividing (A) such Lender's Commitment at such time (in each case, as adjusted
from time to time in accordance with the provisions of this Agreement) by (B)
the Aggregate Revolving Loan Commitment at such time; provided, however, if all
of the Commitments are terminated pursuant to the terms of this Agreement, then
"Pro Rata Share" means the percentage obtained by dividing (x) the sum of such
Lender's Revolving Loans, by (y) the aggregate amount of all Revolving Loans.
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"Reimbursement Obligation" is defined in Section 3.6 hereof.
"Release" means any release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migration of any
Contaminant into the indoor or outdoor environment, including the movement of
Contaminants through or in the air, soil, surface water or groundwater.
"Rentals" of a Person means the aggregate fixed amounts payable by such
Person under any lease of real or personal property but does not include any
amounts payable under Capitalized Leases of such Person.
"Replacement Lender" is defined in Section 2.18 hereof.
"Reportable Event" means a reportable event as defined in Section 4043(c)
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days after
such event occurs; provided, however, that a failure to meet the minimum funding
standards of Section 412 of the Code and of Section 302 of ERISA shall be a
Reportable Event regardless of the issuance of any such waiver of the notice
requirement in accordance with either Section 4043(a) of ERISA or Section 412(d)
of the Code.
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"Required Lenders" means Lenders whose Pro Rata Shares, in the aggregate,
are greater than 50.1%; provided, however, (x) that, at any time there are two
or more Lenders party hereto, at no time shall any action be taken by the
Required Lenders hereunder or under any other Loan Documents unless at least two
(2) of such Lenders have consented thereto, (y) that, if any of the Lenders
shall have failed to fund its Pro Rata Share of any Revolving Loan requested by
the Borrower, which such Lenders are obligated to fund under the terms of this
Agreement and any such failure has not been cured, then for so long as such
failure continues, "Required Lenders" means Lenders (excluding all Lenders whose
failure to fund their respective Pro Rata Shares of such Revolving Loans has not
been so cured) whose Pro Rata Shares represent greater than 50.1% of the
aggregate Pro Rata Shares of such Lenders, and (z) that, if the Commitments have
been terminated pursuant to the terms of this Agreement, "Required Lenders"
means Lenders (without regard to such Lenders' performance of their respective
obligations hereunder) whose aggregate ratable shares (stated as a percentage)
of the aggregate outstanding principal balance of all Loans and L/C Obligations
are greater than 50.1%.
"Requirements of Law" means, as to any Person, the charter and by-laws or
other organizational or governing documents of such Person, and any law, rule or
regulation, or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of its
property or to which such Person or any of its property is subject including,
without limitation, the Securities Act of 1933, the Securities Exchange Act of
1934, Regulations T, U and X, ERISA, the Fair Labor Standards Act, the Worker
Adjustment and Retraining Notification Act, Americans with Disabilities Act of
1990, and any certificate of occupancy, zoning ordinance, building,
environmental or land use requirement or permit or environmental, labor,
employment, occupational safety or health law, rule or regulation, including
Environmental, Health or Safety Requirements of Law.
"Reserves" shall mean the maximum reserve requirement, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) with respect
to "Eurocurrency liabilities" or in respect of any other category of liabilities
which includes deposits by reference to which the interest rate on Eurodollar
Rate Loans is determined or category of extensions of credit or other assets
which includes loans by a non-United States office of any Lender to United
States residents.
"Restricted Payment" means (i) any dividend or other distribution, direct
or indirect, on account of any Equity Interests of the Borrower now or hereafter
outstanding, (ii) any redemption, retirement, purchase or other acquisition for
value, direct or indirect, of any Equity Interests of the Borrower or any of its
Subsidiaries now or hereafter outstanding, (iii) any payments of principal or
interest on or any redemption, purchase, retirement, defeasance, prepayment or
other acquisition for value, direct or indirect, of the Senior Notes or
subordinated indebtedness, and (iv) any payment of a claim for the rescission of
the purchase or sale of, or for material damages arising from the purchase or
sale of, any Indebtedness (other than the Obligations or Permitted Refinancing
Indebtedness) or any Equity Interests of the Borrower or any of the Borrower's
Subsidiaries, or of a claim for reimbursement, indemnification or contribution
arising out of or related to any such claim for damages or rescission.
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"Revolving Credit Availability" means, at any particular time, the amount
by which the lesser of the Aggregate Revolving Loan Commitment or the Borrowing
Base at such time exceeds the Revolving Credit Obligations at such time.
"Revolving Credit Obligations" means, at any particular time, the sum of
(i) the outstanding principal amount of the Revolving Loans at such time, plus
(ii) the L/C Obligations at such time.
"Revolving Loan" is defined in Section 2.1 hereof.
"Revolving Loan Commitment" means, for each Lender, the obligation of such
Lender to make Revolving Loans and to purchase participations in Letters of
Credit not exceeding the amount set forth on Exhibit A to this Agreement
opposite its name thereon under the heading "Revolving Loan Commitment" or the
signature page of the Assignment Agreement by which it became a Lender, as such
amount may be modified from time to time pursuant to the terms of this Agreement
or to give effect to any applicable assignment.
"Revolving Loan Termination Date" means November 22, 2002.
"Revolving Note" means a promissory note, in substantially the form of
Exhibit B hereto, duly executed by the Borrower and payable to the order of a
Lender in the amount of its Revolving Loan Commitment, including any amendment,
restatement, modification, substitution, renewal or replacement of such
Revolving Note.
"Risk-Based Capital Guidelines" is defined in Section 4.2 hereof.
"Secured Obligations" means, collectively, (i) the Obligations and (ii) all
Hedging Obligations owing under Interest Rate Agreements to any Lender or any
affiliate of any Lender.
"Security Agreement" means that certain Security Agreement of even date
herewith executed by the Borrower in favor of the Administrative Agent for the
benefit of the Holders of Secured Obligations, as the same may be amended,
restated or otherwise modified from time to time.
"Senior Note Reserve" means (x) on any date on which the Borrower is
required to make a regularly scheduled interest payment (such payment, a
"Scheduled Senior Note Payment") pursuant to the terms of the Senior Notes (such
date, the "Applicable Interest Date"), immediately prior to the Borrower's
tender of such Scheduled Senior Note Payment, an amount equal to accrued and
unpaid interest on the Senior Notes for the period beginning with the date
immediately preceding such Applicable Interest Date on which the Borrower made
its last Scheduled Senior Note Payment (such date, the "Previous Interest Date")
and ending on the date immediately preceding such Applicable Interest Date and
(y) on any other day (the "Test Day"), an amount equal to accrued and unpaid
interest during the period beginning on the applicable Previous Interest Date
and ending on the last day of the month immediately preceding the month in which
such Test Day occurs.
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"Senior Notes" means those certain 11.625% Senior Notes due in 2004 issued
by the Borrower in the aggregate original principal amount of $140,000,000.
"Single Employer Plan" means a Benefit Plan maintained by the Borrower or
any member of the Controlled Group for employees of the Borrower or any member
of the Controlled Group.
"Standard Fixed Charge Reserve" means $2,000,000.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, association, joint venture or similar business
organization more than 50% of the ownership interests having ordinary voting
power of which shall at the time be so owned or controlled. Unless otherwise
expressly provided, all references herein to a "Subsidiary" shall mean a
Subsidiary of the Borrower.
"Taxes" is defined in Section 2.13(E)(i) hereof.
"Termination Date" means the earlier of (a) the Revolving Loan Termination
Date, and (b) the date of termination of the Aggregate Revolving Loan Commitment
pursuant to Section 2.4 hereof or the Commitments pursuant to Section 9.1
hereof.
"Termination Event" means (i) a Reportable Event with respect to any
Benefit Plan; (ii) the withdrawal of the Borrower or any member of the
Controlled Group from a Benefit Plan during a plan year in which the Borrower or
such Controlled Group member was a "substantial employer" as defined in Section
4001(a)(2) of ERISA or the cessation of operations which results in the
termination of employment of twenty percent (20%) of Benefit Plan participants
who are employees of the Borrower or any member of the Controlled Group; (iii)
the imposition of an obligation on the Borrower or any member of the Controlled
Group under Section 4041 of ERISA to provide affected parties written notice of
intent to terminate a Benefit Plan in a distress termination described in
Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to
terminate a Benefit Plan; (v) any event or condition which could reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Benefit Plan; or (vi) the
partial or complete withdrawal of the Borrower or any member of the Controlled
Group from a Multiemployer Plan.
"Transferee" is defined in Section 13.5 hereof.
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"Type" means, with respect to any Loan, its nature as a Floating Rate Loan
or a Eurodollar Rate Loan.
"Unfunded Liabilities" means (i) in the case of Single Employer Plans, the
amount (if any) by which the present value of all vested nonforfeitable benefits
under all Single Employer Plans exceeds the fair market value of all such Plan
assets allocable to such benefits, all determined as of the then most recent
valuation date for such Plans, and (ii) in the case of Multiemployer Plans, the
withdrawal liability that would be incurred by the Controlled Group if all
members of the Controlled Group completely withdrew from all Multiemployer
Plans.
"Unmatured Default" means an event which, but for the lapse of time or the
giving of notice, or both, would constitute a Default.
"Weighted Average Life to Maturity" means when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Year 2000 Issues" means any anticipated costs, problems and uncertainties
associated with the inability of certain computer applications to effectively
handle data, including dates, on and after January 1, 2000, as it affects the
business, operations and financial condition of the Borrower or any of its
Subsidiaries.
The foregoing definitions shall be equally applicable to both the singular
and plural forms of the defined terms. Any accounting terms used in this
Agreement which are not specifically defined herein shall have the meanings
customarily given them in accordance with generally accepted accounting
principles in existence in the United States as of the date hereof.
1.2 Supplemental Disclosure. At any time at the request of the
Administrative Agent and at such additional times as the Borrower determines,
the Borrower shall supplement each schedule or representation herein or in the
other Loan Documents with respect to any matter hereafter arising which, if
existing or occurring at the date of this Agreement, would have been required to
be set forth or described in such schedule or as an exception to such
representation or which is necessary to correct any information in such schedule
or representation which has been rendered inaccurate thereby. Unless any such
supplement to such schedule or representation discloses the existence or
occurrence of events, facts or circumstances which are not prohibited by the
terms of this Agreement or any other Loan Documents, such supplement to such
schedule or representation shall not be deemed an amendment thereof unless
expressly consented to in writing by Administrative Agent, and no such
amendments, except as the same may be consented to in a writing which expressly
includes a waiver, shall be or be deemed a waiver by the Administrative Agent or
any Lender of any Default disclosed therein.
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ARTICLE II: THE REVOLVING LOAN FACILITIES
2.1 Revolving Loans. Upon the satisfaction of the conditions precedent set
forth in Sections 5.1 and 5.2, from and including the date of this Agreement and
prior to the Termination Date, each Lender severally and not jointly agrees, on
the terms and conditions set forth in this Agreement, to make revolving loans to
the Borrower from time to time, in Dollars, in an amount not to exceed such
Lender's Pro Rata Share of Revolving Credit Availability at such time (each
individually, a "Revolving Loan" and, collectively, the "Revolving Loans");
provided, however, at no time shall the Revolving Credit Obligations exceed the
Aggregate Revolving Loan Commitment or the Borrowing Base. Subject to the terms
of this Agreement, any Borrower may borrow, repay and reborrow Revolving Loans
at any time prior to the Termination Date. The Revolving Loans made on the
Closing Date shall initially be Floating Rate Loans and thereafter may be
continued as Floating Rate Loans or converted into Eurodollar Rate Loans in the
manner provided in Section 2.8 and subject to the other conditions and
limitations therein set forth and set forth in this Article II. On the
Termination Date, the Borrower shall repay in full the outstanding principal
balance of the Revolving Loans. Each Advance under this Section 2.1 shall
consist of Revolving Loans made by each Lender ratably in proportion to such
Lender's respective Pro Rata Share.
2.2 Rate Options for all Advances. The Revolving Loans may be Floating Rate
Advances or Eurodollar Rate Advances, or a combination thereof, selected by the
Borrower in accordance with Section 2.8, but subject to the limitation in
Section 2.1 with respect to Revolving Loans made on the Closing Date. The
Borrower may select, in accordance with Section 2.8, Rate Options and Interest
Periods applicable to portions of the Revolving Loans; provided that there shall
be no more than four (4) Interest Periods in effect with respect to all of the
Loans at any time.
2.3 Optional Payments; Mandatory Prepayments.
(A) Optional Payments. The Borrower may from time to time repay or prepay,
without penalty or premium all or any part of outstanding Floating Rate
Advances. Eurodollar Rate Advances may be voluntarily repaid or prepaid prior to
the last day of the applicable Interest Period, subject to the indemnification
provisions contained in Section 4.4; provided, that the Borrower may not so
prepay Eurodollar Rate Advances unless it shall have provided at least three (3)
Business Days' written notice to the Administrative Agent of such prepayment.
(B) Mandatory Prepayments.
(i) Mandatory Prepayments of Revolving Loans. If at any time and for any
reason the Revolving Credit Obligations are greater than the Aggregate Revolving
Loan Commitment or the Borrowing Base, the Borrower shall immediately make a
mandatory prepayment of the Obligations in an amount equal to such excess.
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(ii) Upon the consummation of any Asset Sale or any Financing by the
Borrower or any Subsidiary of the Borrower, other than (1) Asset Sales permitted
pursuant to Section 7.3(B)(i) and (ii); (2) equity contributions, the Net Cash
Proceeds of which are used to fund all or a portion of the consideration in
connection with a Permitted Acquisition; (3) Financings consisting of the
issuance of Equity Interests to the extent the proceeds thereof are used to pay
Permitted Refinancing Indebtedness or are used to effect Permitted Acquisitions;
and (4) proceeds from Indebtedness permitted pursuant to Section 7.3(A), and
except to the extent that the Net Cash Proceeds of such Asset Sale or Financing,
when combined with the Net Cash Proceeds of all such Asset Sales and Financing
during the immediately preceding twelve-month period, do not exceed $2,000,000,
the Borrower shall make a mandatory prepayment of the Loans in an amount equal
to one hundred percent (100%) of such Net Cash Proceeds or such proceeds
converted from non-cash to cash or Cash Equivalents.
(iii) Nothing in this Section 2.3(B) shall be construed to constitute the
Lenders' consent to any transaction referred to in paragraph (ii) above which is
not expressly permitted by the terms of this Agreement.
(iv) Each mandatory prepayment required by paragraphs (i) and (ii) of this
Section 2.3(B) shall be referred to herein as a "Designated Prepayment."
Designated Prepayments shall be allocated and applied to the Obligations
according to Section 12.3 herein.
(v) Subject to the preceding provisions of this Section 2.3(B), all of the
mandatory prepayments made under this Section 2.3(B) shall be applied first to
Floating Rate Loans and to any Eurodollar Rate Loans maturing on such date and
then to subsequently maturing Eurodollar Rate Loans in order of maturity.
2.4 Reduction of Commitments. The Borrower may permanently reduce the
Aggregate Revolving Loan Commitment in whole, or in part ratably among the
Lenders, in an aggregate minimum amount of $500,000 and integral multiples of
$500,000 in excess of that amount (unless the Aggregate Revolving Loan
Commitment is reduced in whole), upon at least one (1) Business Day's written
notice to the Administrative Agent, which notice shall specify the amount of any
such reduction; provided, however, that the amount of the Aggregate Revolving
Loan Commitment may not be reduced below the aggregate principal amount of the
outstanding Revolving Credit Obligations. All accrued commitment fees shall be
payable on the effective date of any termination of the obligations of the
Lenders to make Loans hereunder.
2.5 Method of Borrowing. Not later than 12:00 p.m. (Chicago time) on each
Borrowing Date, each Lender shall make available its Pro Rata Share of the
subject Revolving Loans, in funds immediately available to the Administrative
Agent in Chicago, Illinois at its address specified pursuant to Article XIV. The
Administrative Agent will promptly make the funds so received from the Lenders
available to the Borrower at the Administrative Agent's aforesaid address.
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2.6 Method of Selecting Types and Interest Periods for Advances. The
Borrower shall select the Type of Advance and, in the case of each Eurodollar
Rate Advance, the Interest Period applicable to each Advance from time to time.
The Borrower shall give the Administrative Agent irrevocable notice in
substantially the form of Exhibit D hereto (a "Borrowing Notice") not later than
11:00 a.m. (Chicago time) (a) on the Borrowing Date of each Floating Rate
Advance and (b) by 10:00 a.m. (Chicago time) on the day that is three (3)
Business Days before the Borrowing Date for each Eurodollar Rate Advance,
specifying: (i) the Borrowing Date (which shall be a Business Day) for such
Advance; (ii) the aggregate amount of such Advance; (iii) the Type of Advance
selected; and (iv) in the case of each Eurodollar Rate Advance, the Interest
Period applicable thereto. The Borrower shall select Interest Periods so that,
to the best of the Borrower's knowledge, it will not be necessary to prepay all
or any portion of any Eurodollar Rate Advance prior to the last day of the
applicable Interest Period or the Revolving Loan Termination Date in order to
make mandatory prepayments as required pursuant to the terms hereof. Each
Floating Rate Advance and all Obligations other than Loans shall bear interest
from and including the date of the making of such Advance to (but not including)
the date of repayment thereof at the Floating Rate, changing when and as such
Floating Rate changes. Changes in the rate of interest on that portion of any
Advance maintained as a Floating Rate Loan will take effect simultaneously with
each change in the Alternate Base Rate. Each Eurodollar Rate Advance shall bear
interest from and including the first day of the Interest Period applicable
thereto to (but not including) the last day of such Interest Period at the
interest rate determined as applicable to such Eurodollar Rate Advance.
2.7 Minimum Amount of Each Advance. Each Eurodollar Rate Advance (other
than a Eurodollar Rate Advance to repay a Reimbursement Obligation) shall be in
the minimum amount of $1,000,000 (and in multiples of $500,000 if in excess
thereof). Any Floating Rate Advance may be in any minimum amount. No Advance may
exceed the Revolving Credit Availability on the Borrowing Date therefor.
2.8 Method of Selecting Types and Interest Periods for Conversion and
Continuation of Advances.
(A) Right to Convert. The Borrower may elect from time to time, subject to
the provisions of Section 2.2 and this Section 2.8, to convert all or any part
of a Loan of any Type into any other Type or Types of Loans; provided that any
conversion of any Eurodollar Rate Advance shall be made on, and only on, the
last day of the Interest Period applicable thereto.
(B) Automatic Conversion and Continuation. Floating Rate Loans shall
continue as Floating Rate Loans unless and until such Floating Rate Loans are
converted into Eurodollar Rate Loans. Eurodollar Rate Loans shall continue as
Eurodollar Rate Loans until the end of the then applicable Interest Period
therefor, at which time such Eurodollar Rate Loans shall be automatically
converted into Floating Rate Loans unless the Borrower shall have given the
Administrative Agent notice in accordance with Section 2.8(D) requesting that,
at the end of such Interest Period, such Eurodollar Rate Loans continue as
Eurodollar Rate Loans.
(C) No Conversion Post-Default or Post-Unmatured Default. Notwithstanding
anything to the contrary contained in Section 2.8(A) or Section 2.8(B), Loans
may be converted into or continued as Eurodollar Rate Loans after the occurrence
and continuation of a Default or and Unmatured Default until such time as the
Administrative Agent notifies the Borrower that such conversions and
continuations may no longer occur.
(D) Conversion/Continuation Notice. The Borrower shall give the
Administrative Agent irrevocable notice (a "Conversion/Continuation Notice") of
each conversion of a Floating Rate Loan into a Eurodollar Rate Loan or
continuation of a Eurodollar Rate Loan not later than 11:00 a.m. (Chicago time)
three (3) Business Days prior to the date of the requested conversion or
continuation, specifying: (1) the requested date (which shall be a Business Day)
of such conversion or continuation; (2) the amount and Type of the Loan to be
converted or continued; and (3) the amount of Eurodollar Rate Loan(s) into which
such Loan is to be converted or continued and the duration of the Interest
Period applicable thereto.
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2.9 Default Rate. After the occurrence and during the continuance of a
Default, at the option of the Administrative Agent or at the direction of the
Required Lenders, the Obligations shall bear interest at a per annum rate equal
to the Floating Rate plus two percent (2.0%) and the fees payable under Section
3.7 with respect to Letters of Credit shall be increased by two percent (2.0%)
per annum above the Floating Rate.
2.10 Method of Payment. All payments of principal, interest, and fees
hereunder shall be made, without setoff, deduction or counterclaim, in
immediately available funds to the Administrative Agent at the Administrative
Agent's address specified pursuant to Article XIV, or at any other Lending
Installation of the Administrative Agent specified in writing by the
Administrative Agent to the Borrower, by 12:00 p.m. (Chicago time) on the date
when due and shall be made ratably among the Lenders (unless such amount is not
to be shared ratably in accordance with the terms hereof). Each payment
delivered to the Administrative Agent for the account of any Lender shall be
delivered promptly by the Administrative Agent to such Lender in the same type
of funds which the Administrative Agent received at its address specified
pursuant to Article XIV or at any Lending Installation specified in a notice
received by the Administrative Agent from such Lender. The Borrower authorizes
the Administrative Agent to charge the account of the Borrower maintained with
Fleet for each payment of principal, interest and fees as it becomes due
hereunder.
2.11 Notes. Each Lender is authorized to record the principal amount of
each of its Loans and each repayment with respect to its Loans on the schedule
attached to its respective Notes; provided, however, that the failure to so
record shall not affect each Borrower's obligations under any such Note.
2.12 Telephonic Notices. The Borrower authorizes the Lenders and the
Administrative Agent to extend Advances, effect selections of Types of Advances
and to transfer funds based on telephonic notices made by any person or persons
the Administrative Agent or any Lender in good faith believes to be acting on
behalf of the Borrower. The Borrower agrees to deliver promptly to the
Administrative Agent a written confirmation, signed by an Authorized Officer, if
such confirmation is requested by the Administrative Agent or any Lender, of
each telephonic notice. If the written confirmation differs in any material
respect from the action taken by the Administrative Agent and the Lenders, (i)
the telephonic notice shall govern absent manifest error and (ii) the
Administrative Agent or the Lender, as applicable, shall promptly notify the
Authorized Officer who provided such confirmation of such difference.
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2.13 Promise to Pay; Interest, Commitment Fees and Termination Fees;
Interest Payment Dates; Interest and Fee Basis; Taxes; Loan and Control
Accounts.
(A) Promise to Pay. The Borrower unconditionally promises to pay when due
the principal amount of each Loan and all other Obligations incurred by the
Borrower, and to pay all unpaid interest accrued thereon, in accordance with the
terms of this Agreement and the Notes.
(B) Interest Payment Dates. Interest accrued on each Floating Rate Loan
shall be payable in arrears on each Payment Date, commencing with the first such
date to occur after the Closing Date, and at maturity (whether by acceleration
or otherwise). Interest accrued on each Eurodollar Rate Loan shall be payable on
the last day of its applicable Interest Period, on any date on which the
Eurodollar Rate Loan is prepaid, whether by acceleration or otherwise, and at
maturity. Interest accrued on the principal balance of all other Obligations
shall be payable in arrears (i) on the first day of each calendar month,
commencing on the first such day following the incurrence of such Obligation,
(ii) upon repayment thereof in full or in part, and (iii) if not theretofore
paid in full, at the time such other Obligation becomes due and payable (whether
by acceleration or otherwise).
(C) Commitment Fees. (i) The Borrower shall pay to the Administrative
Agent, for the account of the Lenders in accordance with their Pro Rata Shares,
from and after the Closing Date until the date on which the Aggregate Revolving
Loan Commitment shall be terminated in whole, a commitment fee accruing at the
rate of (x) one-half of one percent (0.5%) if the then applicable Interest
Coverage Ratio is less than 1.5 to 1.0 or (y) three-eighths of one percent
(0.375%) if the then applicable Interest Coverage Ratio is equal to or greater
than 1.5 to 1.0 on the amount by which (A) the Aggregate Revolving Loan
Commitment in effect from time to time exceeds (B) the Revolving Credit
Obligations in effect from time to time. All such commitment fees payable under
this clause (C) shall be payable monthly in arrears on the first day of each
month occurring after the Closing Date (with the first such payment being
calculated for the period from the Closing Date and ending on November 30,
1999), and, in addition, on the date on which the Aggregate Revolving Loan
Commitment shall be terminated in whole.
(ii) The Borrower agrees to pay to the Administrative Agent for the sole
account of the Administrative Agent (unless otherwise agreed between the
Administrative Agent and any Lender) the fees set forth in the Fee Letter,
payable at the times and in the amounts set forth therein.
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(D) Interest and Fee Basis; Applicable Eurodollar Margin and Applicable
Floating Margin.
(i) Interest and fees shall be calculated for actual days elapsed on the
basis of a 360-day year. Interest shall be payable for the day an Obligation is
incurred but not for the day of any payment on the amount paid, if payment is
received prior to 12:00 p.m. (Chicago time) at the place of payment designated
in this Agreement. If any payment of principal of or interest on a Loan or any
payment of any other Obligations shall become due on a day which is not a
Business Day, such payment shall be made on the next succeeding Business Day
and, in the case of a principal payment, such extension of time shall be
included in computing interest in connection with such payment.
(ii) The Applicable Floating Margin and the Applicable Eurodollar Margin
shall be determined from time to time by reference to the table set forth below,
on the basis of the then applicable Interest Coverage Ratio as calculated on a
quarterly basis as of the end of each of the Borrower's fiscal quarters using
EBITDA and Interest Expense for such fiscal quarter:
Interest Applicable Floating Applicable Eurodollar
Coverage Ratio Margin for Margins for
Revolving Loans Revolving Loans
Less than 1.25 to 1.0 0.75% 2.75%
Less than 1.5 to 1.0 but equal 0.50% 2.50%
to or greater than 1.25 to 1.0
Less than 2.0 to 1.0 but equal
to or greater than 1.5 to 1.0. 0.25% 2.25%
Equal to or greater than 2.0 to
1.0 0% 2.00%
Upon receipt of each quarterly report provided for in Section 7.1(A)(ii),
the Applicable Floating Margin and the Applicable Eurodollar Margin shall be
adjusted, any such adjustment being effective three (3) Business Days following
the Administrative Agent's receipt of such financial statements and the
compliance certificate required to be delivered in connection therewith pursuant
to Section 7.1(a)(iv); provided, that if the Borrower shall not have timely
delivered its financial statements in accordance with Section 7.1(A)(ii), then
commencing on the date upon which such financial statements should have been
delivered and continuing until such financial statements are actually delivered,
it shall be assumed for purposes of determining the Applicable Floating Margin
and Applicable Eurodollar Margin that the Interest Coverage Ratio was less than
1.5 to 1.0. Notwithstanding anything herein to the contrary, from the Closing
Date through the date of delivery of the quarterly financial statement due on
June 30, 2000, the Applicable Floating Margin and the Applicable Eurodollar
Margin shall be determined based upon an assumption that the Interest Coverage
Ratio is less than 1.5 to 1.0 but equal or greater than 1.25 to 1.0.
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(E) Taxes.
(i) Any and all payments by the Borrower hereunder shall be made free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings or any liabilities with respect
thereto including those arising after the date hereof as a result of the
adoption of or any change in any law, treaty, rule, regulation, guideline or
determination of a Governmental Authority or any change in the interpretation or
application thereof by a Governmental Authority but excluding, in the case of
each Lender and the Administrative Agent, such taxes (including income taxes,
franchise taxes and branch profit taxes) as are imposed on or measured by such
Lender's or Administrative Agent's, as the case may be, net income by the United
States of America or any Governmental Authority of the jurisdiction or any
political subdivision of or taxing authority therein under the laws of which
such Lender or Administrative Agent, as the case may be, is organized or
maintains a Lending Installation (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings, and liabilities which the Administrative
Agent or a Lender determines to be applicable to this Agreement, the other Loan
Documents, the Revolving Loan Commitments, the Loans or the Letters of Credit
being hereinafter referred to as "Taxes"). If the Borrower shall be required by
law to deduct any Taxes from or in respect of any sum payable hereunder or under
the other Loan Documents to any Lender or the Administrative Agent, (i) the sum
payable shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 2.13(E)) such Lender or the Administrative Agent (as the case may
be) receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, and (iii)
the Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law. If a withholding
tax of the United States of America or any other Governmental Authority shall be
or become applicable (y) after the date of this Agreement, to such payments by
the Borrower made to the Lending Installation or any other office that a Lender
may claim as its Lending Installation, or (z) after such Lender's selection and
designation of any other Lending Installation, to such payments made to such
other Lending Installation, such Lender shall use reasonable efforts to make,
fund and maintain its Loans through another Lending Installation of such Lender
in another jurisdiction so as to reduce the Borrower's liability hereunder, if
the making, funding or maintenance of such Loans through such other Lending
Installation of such Lender does not, in the judgment of such Lender, otherwise
adversely affect such Loans, or obligations under the Revolving Loan Commitments
or such Lender.
(ii) In addition, the Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges, or similar
levies which arise from any payment made hereunder, from the issuance of Letters
of Credit hereunder, or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement, the other Loan Documents, the
Revolving Loan Commitments, the Loans or the Letters of Credit (hereinafter
referred to as "Other Taxes").
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(iii) The Borrower indemnifies each Lender and the Administrative Agent for
the full amount of Taxes and Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed by any Governmental Authority on amounts payable
under this Section 2.13(E)) paid by such Lender or the Administrative Agent (as
the case may be) and any liability for penalties, interest, and reasonable
expenses arising therefrom or with respect thereto, whether or not such Taxes or
Other Taxes were correctly or legally asserted. This indemnification shall be
made within thirty (30) days after the date such Lender or the Administrative
Agent (as the case may be) makes written demand therefor. A certificate as to
any additional amount payable to any Lender or the Administrative Agent under
this Section 2.13(E) submitted to the Borrower and the Administrative Agent (if
a Lender is so submitting) by such Lender or the Administrative Agent shall show
in reasonable detail the amount payable and the calculations used to determine
such amount and shall, absent manifest error, be final, conclusive and binding
upon all parties hereto.
(iv) Within thirty (30) days after the date of any payment of Taxes or
Other Taxes by the Borrower, the Borrower shall furnish to the Administrative
Agent the original or a certified copy of a receipt evidencing payment thereof,
and such other certificates, receipts and other documents as may be required (in
the judgment of such Lender or the Administrative Agent) to establish any tax
credit to which the Lender or the Administrative Agent may be entitled.
(v) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 2.13(E) shall survive the payment in full of the Secured
Obligations, the termination of the Letters of Credit and the cancellation or
termination of this Agreement.
(vi) Without limiting the obligations of the Borrower under this Section
2.13(E), each Lender that is not created or organized under the laws of the
United States of America or a political subdivision thereof shall deliver to the
Borrower and the Administrative Agent on or before the Closing Date, or, if
later, the date on which such Lender becomes a Lender pursuant to Section 13.3,
a true and accurate certificate executed in duplicate by a duly authorized
officer of such Lender, in a form satisfactory to the Borrower and the
Administrative Agent, to the effect that such Lender is capable under the
provisions of an applicable tax treaty concluded by the United States of America
(in which case the certificate shall be accompanied by two executed copies of
Form W-8BEN of the IRS) or under Section 1442 of the Code (in which case the
certificate shall be accompanied by two copies of W-8ECI of the IRS) of
receiving payments of interest hereunder without deduction or withholding of
United States federal income tax. Each such Lender further agrees to deliver to
the Borrower and the Administrative Agent from time to time a true and accurate
certificate executed in duplicate by a duly authorized officer of such Lender
substantially in a form satisfactory to the Borrower and the Administrative
Agent, before or promptly upon the occurrence of any event requiring a change in
the most recent certificate previously delivered by it to the Borrower and the
Administrative Agent pursuant to this Section 2.13(E)(vi). Further, each Lender
which delivers a certificate accompanied by W-8BEN of the IRS covenants and
agrees to deliver to the Borrower and the Administrative Agent within fifteen
(15) days prior to the third anniversary of such dates, and every third
anniversary of such date thereafter on which this Agreement is still in effect,
another such certificate and two accurate and complete original signed copies of
W-8BEN (or any successor form or forms required under the Code or the applicable
regulations promulgated thereunder), and each Lender that delivers a certificate
accompanied by W-8ECI of the IRS covenants and agrees to deliver to the Borrower
and the Administrative Agent within fifteen (15) days prior to the beginning of
each subsequent taxable year of such Lender during which this Agreement is still
in effect, another such certificate and two accurate and complete original
signed copies of IRS W-8ECI (or any successor form or forms required under the
Code or the applicable regulations promulgated thereunder). Each such
certificate shall certify as to one of the following:
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(a) that such Lender is capable of receiving payments of interest
hereunder without deduction or withholding of United States of America
federal income tax;
(b) that such Lender is not capable of receiving payments of interest
hereunder without deduction or withholding of United States of America
federal income tax as specified therein but is capable of recovering the
full amount of any such deduction or withholding from a source other than
the Borrower and will not seek and will not be entitled to any such
recovery from the Borrower; or
(c) that, as a result of the adoption of or any change in any law,
treaty, rule, regulation, guideline or determination of a Governmental
Authority or any change in the interpretation or application thereof by a
Governmental Authority after the date such Lender became a party hereto,
such Lender is not capable of receiving payments of interest hereunder
without deduction or withholding of United States of America federal income
tax as specified therein and that it is not capable of recovering the full
amount of the same from a source other than the Borrower.
Each Lender shall promptly furnish to the Borrower and the Administrative Agent
such additional documents as may be reasonably required by the Borrower or the
Administrative Agent to establish any exemption from or reduction of any Taxes
or Other Taxes required to be deducted or withheld and which may be obtained
without undue expense to such Lender.
(F) Loan Account. Each Lender shall maintain in accordance with its usual
practice an account or accounts (a "Loan Account") evidencing the Obligations of
the Borrower to such Lender owing to such Lender from time to time, including
the amount of principal and interest payable and paid to such Lender from time
to time hereunder and under the Notes.
(G) Control Account. The Register maintained by the Administrative Agent
pursuant to Section 13.3(C) shall include a control account, and a subsidiary
account for each Lender, in which accounts (taken together) shall be recorded
(i) the date and amount of each Advance made hereunder, the type of Loan
comprising such Advance and any Interest Period applicable thereto, (ii) the
effective date and amount of each Assignment Agreement delivered to and accepted
by it and the parties thereto pursuant to Section 13.3, (iii) the amount of any
principal or interest due and payable or to become due and payable from the
Borrower to each Lender hereunder or under the Notes, (iv) the amount of any sum
received by the Administrative Agent from the Borrower hereunder and each
Lender's share thereof, and (v) all other appropriate debits and credits as
provided in this Agreement, including, without limitation, all fees, charges,
expenses and interest.
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(H) Entries Binding. The entries made in the Register and each Loan Account
shall be conclusive and binding for all purposes, absent manifest error, unless
the Borrower objects to information contained in the Register and each Loan
Account within thirty (30) days after the Borrower's receipt of such
information.
2.14 Notification of Advances, Interest Rates, Prepayments and Aggregate
Revolving Loan Commitment Reductions. Promptly after receipt thereof, the
Administrative Agent will notify each Lender of the contents of each Aggregate
Revolving Loan Commitment reduction notice, Borrowing Notice,
Continuation/Conversion Notice, and repayment notice received by it hereunder.
The Administrative Agent will notify each Lender of the interest rate applicable
to each Eurodollar Rate Loan promptly upon determination of such interest rate
and will give each Lender prompt notice of each change in the Alternate Base
Rate.
2.15 Lending Installations. Each Lender may book its Loans at any Lending
Installation selected by such Lender and may change its Lending Installation
from time to time. All terms of this Agreement shall apply to any such Lending
Installation and the Notes shall be deemed held by each Lender for the benefit
of such Lending Installation. Each Lender may, by written or facsimile notice to
the Administrative Agent and the Borrower, designate a Lending Installation
through which Loans will be made by it and for whose account Loan payments are
to be made.
2.16 Non-Receipt of Funds by the Administrative Agent. Unless the Borrower
or a Lender, as the case may be, notifies the Administrative Agent prior to the
date on which it is scheduled to make payment to the Administrative Agent of (i)
in the case of a Lender, the proceeds of a Loan or (ii) in the case of the
Borrower, a payment of principal, interest or fees to the Administrative Agent
for the account of the Lenders, that it does not intend to make such payment,
the Administrative Agent may assume that such payment has been made. The
Administrative Agent may, but shall not be obligated to, make the amount of such
payment available to the intended recipient in reliance upon such assumption. If
such Lender or the Borrower, as the case may be, has not in fact made such
payment to the Administrative Agent, the recipient of such payment shall, on
demand by the Administrative Agent, repay to the Administrative Agent the amount
so made available together with interest thereon in respect of each day during
the period commencing on the date such amount was so made available by the
Administrative Agent until the date the Administrative Agent recovers such
amount at a rate per annum equal to (i) in the case of payment by a Lender, the
Federal Funds Effective Rate for such day or (ii) in the case of payment by the
Borrower, the interest rate applicable to the relevant Loan.
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2.17 Termination Date. This Agreement shall be effective until the
Termination Date. Notwithstanding the termination of this Agreement on the
Termination Date, until all of the Obligations (other than contingent indemnity
obligations) shall have been fully and indefeasibly paid and satisfied and all
of the Letters of Credit shall have expired, been cancelled or terminated, all
of the rights and remedies of the Administrative Agent, the Lenders, and the
Issuing Bank under this Agreement and the other Loan Documents shall survive.
2.18 Replacement of Certain Lenders. In the event a Lender ("Affected
Lender") shall have: (i) failed to fund its Pro Rata Share of any Advance
requested by the Borrower, which such Lender is obligated to fund under the
terms of this Agreement and which failure has not been cured, (ii) requested
compensation from the Borrower under Sections 2.13(E), 4.1 or 4.2 to recover
Taxes, Other Taxes or other additional costs incurred by such Lender which are
not being incurred generally by the other Lenders, (iii) delivered a notice
pursuant to Section 4.3 claiming that such Lender is unable to extend Eurodollar
Rate Loans to any Borrower for reasons not generally applicable to the other
Lenders or (iv) has invoked Section 10.2, then, in any such case, the Borrower
or the Administrative Agent may make written demand on such Affected Lender
(with a copy to the Administrative Agent in the case of a demand by the Borrower
and a copy to the Borrower in the case of a demand by the Administrative Agent)
for the Affected Lender to assign, and such Affected Lender shall use its best
efforts to assign pursuant to one or more duly executed Assignments Agreements
five (5) Business Days after the date of such demand, to one or more financial
institutions that comply with the provisions of Section 13.3(A) which the
Borrower or the Administrative Agent, as the case may be, shall have engaged for
such purpose ("Replacement Lender"), all of such Affected Lender's rights and
obligations under this Agreement and the other Loan Documents (including,
without limitation, its Revolving Loan Commitment, all Loans owing to it, all of
its participation interests in existing Letters of Credit, and its obligation to
participate in additional Letters of Credit hereunder) in accordance with
Section 13.3. The Administrative Agent agrees, upon the occurrence of such
events with respect to an Affected Lender and upon the written request of the
Borrower, to use its reasonable efforts to obtain the commitments from one or
more financial institutions to act as a Replacement Lender. The Administrative
Agent is authorized to execute one or more of such assignment agreements as
attorney-in-fact for any Affected Lender failing to execute and deliver the same
within five (5) Business Days after the date of such demand. Further, with
respect to such assignment the Affected Lender shall have concurrently received,
in cash, all amounts due and owing to the Affected Lender hereunder or under any
other Loan Document, including, without limitation, the aggregate outstanding
principal amount of the Loans owed to such Lender, together with accrued
interest thereon through the date of such assignment, amounts payable under
Sections 2.13(E), 4.1, and 4.2 with respect to such Affected Lender and
compensation payable under Section 2.13(C) in the event of any replacement of
any Affected Lender under clause (ii) or clause (iii) of this Section 2.18;
provided that upon such Affected Lender's replacement, such Affected Lender
shall cease to be a party hereto but shall continue to be entitled to the
benefits of Sections 2.13(E), 4.1, 4.2, 4.4, and 10.7, as well as to any fees
accrued for its account hereunder and not yet paid, and shall continue to be
obligated under Section 11.8. Upon the replacement of any Affected Lender
pursuant to this Section 2.18, the provisions of Section 9.2 shall continue to
apply with respect to Loans which are then outstanding with respect to which the
Affected Lender failed to fund its Pro Rata Share and which failure has not been
cured.
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2.19 Collection Account Arrangements.
(a) Establishment of Collection Accounts. On the Closing Date, the Borrower
shall have entered into and shall thereafter maintain lock-box services
agreements, cash collection account arrangements and/or similar arrangements for
the collection of Accounts included in the Collateral and other proceeds of
Collateral into one or more Collection Accounts, in form and substance
reasonably acceptable to the Administrative Agent, and in connection with such
arrangements, the Borrower shall have entered into and shall thereafter maintain
in effect Collection Account Agreements for each of such Collection Accounts. On
the Closing Date, the Borrower shall put in place arrangements so that its
account debtors directly remit all payments on Accounts to the Collection
Accounts (or lock boxes established in connection therewith). Any of the
foregoing collections received by the Borrower and not deposited in the
Collection Accounts, shall be deemed to have been received by the Borrower as
the Administrative Agent's trustee and, upon the receipt thereof, the Borrower
shall promptly transfer all such amounts into a Collection Account in their
original form. All deposits in any Collection Account shall be remitted to the
Administrative Agent or as the Administrative Agent may direct, all in
accordance with the provisions of the Collection Account Agreements.
(b) Disbursement of Collections Held in the Collection Accounts; Credit for
Collections. (i) All payments received by the Administrative Agent in respect of
Collateral, all collection of Accounts received by the Administrative Agent and
all proceeds of other Collateral received by the Administrative Agent, whether
through payment or otherwise, will be the sole property of the Administrative
Agent for the benefit of the Holders of Secured Obligations and will be deemed
to be received by the Administrative Agent for application to the Obligations.
(ii) No collections deposited in any Collection Account and received by the
Administrative Agent shall be credited toward any payment by the Borrower of
interest, principal, fees or other expenses under the Loan Documents until such
Business Day as the Administrative Agent has determined, in its sole discretion,
that such collections constitute good collected funds. Prior to such
determination, such collections shall be held by the Administrative Agent on a
provisional basis.
ARTICLE III: THE LETTER OF CREDIT FACILITY
3.1 Obligation to Issue. Subject to the terms and conditions of this
Agreement and in reliance upon the representations, warranties and covenants of
the Borrower herein set forth, the Issuing Bank hereby agrees to issue for the
account of the Borrower through such Issuing Bank's branches as it and the
Borrower may jointly agree, one or more Letters of Credit denominated in Dollars
in accordance with this Article III, from time to time during the period,
commencing on the date hereof and ending on the Business Day prior to the
Termination Date.
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3.2 Types and Amounts. The Issuing Bank shall not have any obligation to
and shall not:
(i) issue any Letter of Credit if on the date of issuance, before or
after giving effect to the Letter of Credit requested hereunder, (a) the
Revolving Credit Obligations at such time would exceed the Aggregate
Revolving Loan Commitment or the Borrowing Base at such time, or (b) the
aggregate outstanding amount of the L/C Obligations would exceed
$15,000,000; or
(ii) issue any Letter of Credit which has an expiration date later
than the date which is the earlier of one (1) year after the date of
issuance thereof (unless otherwise agreed to by the Issuing Bank) or five
(5) Business Days immediately preceding the Termination Date.
3.3 Conditions. In addition to being subject to the satisfaction of the
conditions contained in Sections 5.1 and 5.2, the obligation of the Issuing Bank
to issue any Letter of Credit is subject to the satisfaction in full of the
following conditions:
(i) the Borrower shall have delivered to the applicable Issuing Bank
at such times and in such manner as such Issuing Bank may reasonably
prescribe, a request for issuance of such Letter of Credit in substantially
the form of Exhibit E hereto, duly executed applications for such Letter of
Credit, and such other documents, instructions and agreements as may be
required pursuant to the terms thereof, and the proposed Letter of Credit
shall be reasonably satisfactory to such Issuing Bank as to form and
content; and
(ii) as of the date of issuance no order, judgment or decree of any
court, arbitrator or Governmental Authority shall purport by its terms to
enjoin or restrain the Issuing Bank from issuing such Letter of Credit and
no law, rule or regulation applicable to such Issuing Bank and no request
or directive (whether or not having the force of law) from a Governmental
Authority with jurisdiction over such Issuing Bank shall prohibit or
request that such Issuing Bank refrain from the issuance of Letters of
Credit generally or the issuance of that Letter of Credit.
3.4 Procedure for Issuance of Letters of Credit. (a) Subject to the terms
and conditions of this Article III and provided that the applicable conditions
set forth in Sections 5.1 and 5.2 hereof have been satisfied, the Issuing Bank
shall, on the requested date, issue a Letter of Credit on behalf of the Borrower
in accordance with the Issuing Bank's usual and customary business practices
and, in this connection, the Issuing Bank may assume that the applicable
conditions set forth in Section 5.2 hereof have been satisfied unless it shall
have received notice to the contrary from the Administrative Agent or a Lender
or has knowledge that the applicable conditions have not been met.
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(b) The Issuing Bank shall give the Administrative Agent written or telex
notice, or telephonic notice confirmed promptly thereafter in writing, of the
issuance of a Letter of Credit; provided, however, that the failure to provide
such notice shall not result in any liability on the part of the Issuing Bank.
(c) The Issuing Bank shall not extend or amend any Letter of Credit unless
the requirements of this Section 3.4 are met as though a new Letter of Credit
was being requested and issued.
3.5 Letter of Credit Participation. Immediately upon the issuance of each
Letter of Credit hereunder, each Lender shall be deemed to have automatically,
irrevocably and unconditionally purchased and received from the Issuing Bank an
undivided interest and participation in and to such Letter of Credit, the
obligations of the Borrower in respect thereof, and the liability of the Issuing
Bank thereunder (collectively, an "L/C Interest") in an amount equal to the
amount available for drawing under such Letter of Credit multiplied by such
Lender's Pro Rata Share. The Issuing Bank will notify each Lender promptly upon
presentation to it of an L/C Draft or upon any other draw under a Letter of
Credit. On or before the Business Day on which the Issuing Bank makes payment of
each such L/C Draft or, in the case of any other draw on a Letter of Credit, on
demand by the Administrative Agent, each Lender shall make payment to the
Administrative Agent, for the account of the Issuing Bank, in immediately
available funds in an amount equal to such Lender's Pro Rata Share of the amount
of such payment or draw. The obligation of each Lender to reimburse the Issuing
Bank under this Section 3.5 shall be unconditional, continuing, irrevocable and
absolute. In the event that any Lender fails to make payment to the
Administrative Agent of any amount due under this Section 3.5, the
Administrative Agent shall be entitled to receive, retain and apply against such
obligation the principal and interest otherwise payable to such Lender hereunder
until the Administrative Agent receives such payment from such Lender or such
obligation is otherwise fully satisfied; provided, however, that nothing
contained in this sentence shall relieve such Lender of its obligation to
reimburse the Issuing Bank for such amount in accordance with this Section 3.5.
3.6 Reimbursement Obligation. The Borrower agrees unconditionally,
irrevocably and absolutely to pay immediately to the Administrative Agent, for
the account of the Lenders, the amount of each advance which may be drawn under
or pursuant to a Letter of Credit or an L/C Draft related thereto (such
obligation of the Borrower to reimburse the Administrative Agent for an advance
made under a Letter of Credit or L/C Draft being hereinafter referred to as a
"Reimbursement Obligation" with respect to such Letter of Credit or L/C Draft).
If the Borrower at any time fails to repay a Reimbursement Obligation pursuant
to this Section 3.6, the Borrower shall be deemed to have elected to borrow
Revolving Loans from the Lenders, as of the date of the advance giving rise to
the Reimbursement Obligation, equal in amount to the amount of the unpaid
Reimbursement Obligation. Such Revolving Loans shall be made as of the date of
the payment giving rise to such Reimbursement Obligation, automatically, without
notice and without any requirement to satisfy the conditions precedent otherwise
applicable to an Advance of Revolving Loans. Such Revolving Loans shall
constitute a Floating Rate Advance, the proceeds of which Advance shall be used
to repay such Reimbursement Obligation. If, for any reason, the Borrower fails
to repay a Reimbursement Obligation on the day such Reimbursement Obligation
arises and, for any reason, the Lenders are unable to make or have no obligation
to make Revolving Loans, then such Reimbursement Obligation shall bear interest
from and after such day, until paid in full, at the interest rate applicable to
a Floating Rate Advance plus any amount required under Section 2.9 herein.
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3.7 Letter of Credit Fees. The Borrower agrees to pay (i) monthly, in
arrears, to the Administrative Agent for the ratable benefit of the Lenders,
except as set forth in Section 9.2, a letter of credit fee at a rate per annum
equal to the Applicable L/C Fee Percentage on the average daily outstanding face
amount available for drawing under all Letters of Credit, (ii) monthly, in
arrears, to the Administrative Agent for the sole account of the Issuing Bank, a
letter of credit fronting fee of one-eighth of one percent (0.125%) per annum on
the average daily outstanding face amount available for drawing under all
Letters of Credit issued by the Issuing Bank, and (iii) to the Administrative
Agent for the benefit of the Issuing Bank, all customary fees and other
issuance, amendment, document examination, negotiation and presentment expenses
and related charges in connection with the issuance, amendment, presentation of
L/C Drafts, and the like customarily charged by the Issuing Bank with respect to
standby and commercial Letters of Credit, including, without limitation,
standard commissions with respect to commercial Letters of Credit, payable at
the time of invoice of such amounts.
3.8 Issuing Bank Reporting Requirements. In addition to the notices
required by Section 3.4(C), the Issuing Bank shall, no later than the tenth
Business Day following the last day of each month, provide to the Administrative
Agent, upon the Administrative Agent's request, schedules, in form and substance
reasonably satisfactory to the Administrative Agent, showing the date of issue,
account party, amount, expiration date and the reference number of each Letter
of Credit issued by it outstanding at any time during such month and the
aggregate amount payable by the Borrower during such month. In addition, upon
the request of the Administrative Agent, the Issuing Bank shall furnish to the
Administrative Agent copies of any Letter of Credit and any application for or
reimbursement agreement with respect to a Letter of Credit to which the Issuing
Bank is party and such other documentation as may reasonably be requested by the
Administrative Agent. Upon the request of any Lender, the Administrative Agent
will provide to such Lender information concerning such Letters of Credit.
3.9 Indemnification; Exoneration. (A) In addition to amounts payable as
elsewhere provided in this Article III, the Borrower hereby agrees to protect,
indemnify, pay and save harmless the Administrative Agent, the Issuing Bank and
each Lender from and against any and all liabilities and costs which the
Administrative Agent, the Issuing Bank or such Lender may incur or be subject to
as a consequence, direct or indirect, of (i) the issuance of any Letter of
Credit other than, in the case of the Issuing Bank, as a result of its Gross
Negligence or willful misconduct, or (ii) the failure of the Issuing Bank to
honor a drawing under a Letter of Credit as a result of any act or omission,
whether rightful or wrongful, of any present or future de jure or de facto
Governmental Authority (all such acts or omissions herein called "Governmental
Acts").
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(B) As among the Borrower, the Lenders, the Administrative Agent and the
Issuing Bank, the Borrower assumes all risks of the acts and omissions of, or
misuse of such Letter of Credit by, the beneficiary of any Letters of Credit. In
furtherance and not in limitation of the foregoing, subject to the provisions of
the Letter of Credit applications and Letter of Credit reimbursement agreements
executed by the Borrower at the time of request for any Letter of Credit,
neither the Administrative Agent, the Issuing Bank nor any Lender shall be
responsible (in the absence of Gross Negligence or willful misconduct in
connection therewith: (i) for the form, validity, sufficiency, accuracy,
genuineness or legal effect of any document submitted by any party in connection
with the application for and issuance of the Letters of Credit, even if it
should in fact prove to be in any or all respects invalid, insufficient,
inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any
instrument transferring or assigning or purporting to transfer or assign a
Letter of Credit or the rights or benefits thereunder or proceeds thereof, in
whole or in part, which may prove to be invalid or ineffective for any reason;
(iii) for failure of the beneficiary of a Letter of Credit to comply duly with
conditions required in order to draw upon such Letter of Credit; (iv) for
errors, omissions, interruptions or delays in transmission or delivery of any
messages, by mail, cable, telegraph, telex, or other similar form of
teletransmission or otherwise; (v) for errors in interpretation of technical
trade terms; (vi) for any loss or delay in the transmission or otherwise of any
document required in order to make a drawing under any Letter of Credit or of
the proceeds thereof; (vii) for the misapplication by the beneficiary of a
Letter of Credit of the proceeds of any drawing under such Letter of Credit; and
(viii) for any consequences arising from causes beyond the control of the
Administrative Agent, the Issuing Bank and the Lenders, including, without
limitation, any Governmental Acts. None of the above shall affect, impair, or
prevent the vesting of the Issuing Bank's rights or powers under this Section
3.9.
(C) In furtherance and extension and not in limitation of the specific
provisions hereinabove set forth, any action taken or omitted by the Issuing
Bank under or in connection with the Letters of Credit or any related
certificates shall not, in the absence of Gross Negligence or willful
misconduct, put the Issuing Bank, the Administrative Agent or any Lender under
any resulting liability to the Borrower or relieve the Borrower of any of its
obligations hereunder to any such Person.
(D) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 3.9 shall survive the payment in full of principal and interest
hereunder, the termination of the Letters of Credit and the termination of this
Agreement.
3.10 Cash Collateral. Notwithstanding anything to the contrary herein or in
any application for a Letter of Credit, after the occurrence and during the
continuance of Default, the Borrower shall, upon the Administrative Agent's
demand, deliver to the Administrative Agent for the benefit of the Lenders and
the Issuing Bank, cash, or other collateral of a type satisfactory to the
Required Lenders (but only to the extent permitted by the Senior Notes), having
a value, as determined by such Lenders, equal to the aggregate outstanding L/C
Obligations. Any such collateral shall be held by the Administrative Agent in a
separate account appropriately designated as a cash collateral account in
relation to this Agreement and the Letters of Credit and retained by the
Administrative Agent for the benefit of the Lenders and the Issuing Bank as
collateral security for the Borrower's obligations in respect of this Agreement
and each of the Letters of Credit and L/C Drafts. Such amounts shall be applied
to reimburse the Issuing Bank for drawings or payments under or pursuant to
Letters of Credit or L/C Drafts, or if no such reimbursement is required, to
payment of such of the other Obligations as the Administrative Agent shall
determine. If no Default shall be continuing, amounts remaining in any cash
collateral account established pursuant to this Section 3.10 which are not to be
applied to reimburse an Issuing Bank for amounts actually paid or to be paid by
the Issuing Bank in respect of a Letter of Credit or L/C Draft, shall be
returned to the Borrower (after deduction of the Administrative Agent's expenses
incurred in connection with such cash collateral account). The Administrative
Agent shall use its best efforts to invest such cash collateral in Permitted
Investments. Any proceeds or income resulting from such Permitted Investments
shall be property of the Borrower subject to the security interest of the
Administrative Agent. Any gain or loss resulting from such Permitted Investments
shall be for the account of the Borrower.
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ARTICLE IV: CHANGE IN CIRCUMSTANCES
4.1 Yield Protection. If any law or any governmental or quasi-governmental
rule, regulation, policy, guideline or directive (whether or not having the
force of law) adopted after the date of this Agreement and having general
applicability to all banks within the jurisdiction in which such Lender operates
(excluding, for the avoidance of doubt, the effect of and phasing in of capital
requirements or other regulations or guidelines passed prior to the date of this
Agreement), or any interpretation or application thereof by any Governmental
Authority charged with the interpretation or application thereof, or the
compliance of any Lender therewith,
(i) subjects any Lender or any applicable Lending Installation to any
tax, duty, charge or withholding on or from payments due from the Borrower
(excluding federal taxation of the overall net income of any Lender or
applicable Lending Installation), or changes the basis of taxation of
payments to any Lender in respect of its Loans, its L/C Interests, the
Letters of Credit or other amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, any Lender or
any applicable Lending Installation (other than reserves and assessments
taken into account in determining the interest rate applicable to
Eurodollar Rate Loans) with respect to its Loans, L/C Interests or the
Letters of Credit, or
(iii) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation of making,
funding or maintaining the Loans, the L/C Interests or the Letters of
Credit or reduces any amount received by any Lender or any applicable
Lending Installation in connection with Loans or Letters of Credit, or
requires any Lender or any applicable Lending Installation to make any
payment calculated by reference to the amount of Loans or L/C Interests
held or interest received by it or by reference to the Letters of Credit,
by an amount deemed material by such Lender;
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and the result of any of the foregoing is to increase the cost to that Lender of
making, renewing or maintaining its Loans, L/C Interests or Letters of Credit or
to reduce any amount received under this Agreement, then, within fifteen (15)
days after receipt by the Borrower of written demand by such Lender pursuant to
Section 4.5, the Borrower shall pay such Lender that portion of such increased
expense incurred or reduction in an amount received which such Lender determines
is attributable to making, funding and maintaining its Loans, L/C Interests,
Letters of Credit and its Revolving Loan Commitment.
4.2 Changes in Capital Adequacy Regulations. If a Lender determines (i) the
amount of capital required or expected to be maintained by such Lender, any
Lending Installation of such Lender or any corporation controlling such Lender
is increased as a result of a "Change" (as defined below), and (ii) such
increase in capital will result in an increase in the cost to such Lender of
maintaining its Loans, L/C Interests, the Letters of Credit or its obligation to
make Loans hereunder, then, within fifteen (15) days after receipt by the
Borrower of written demand by such Lender pursuant to Section 4.5, the Borrower
shall pay such Lender the amount necessary to compensate for any shortfall in
the rate of return on the portion of such increased capital which such Lender
determines is attributable to this Agreement, its Loans, its L/C Interests, the
Letters of Credit or its obligation to make Loans hereunder (after taking into
account such Lender's policies as to capital adequacy). "Change" means (i) any
change after the date of this Agreement in the "Risk-Based Capital Guidelines"
(as defined below) excluding, for the avoidance of doubt, the effect of any
phasing in of such Risk-Based Capital Guidelines or any other capital
requirements passed prior to the date hereof, or (ii) any adoption of or change
in any other law, governmental or quasi-governmental rule, regulation, policy,
guideline, interpretation, or directive (whether or not having the force of law)
after the date of this Agreement and having general applicability to all banks
and financial institutions within the jurisdiction in which such Lender operates
which affects the amount of capital required or expected to be maintained by any
Lender or any Lending Installation or any corporation controlling any Lender.
"Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in
effect in the United States on the date of this Agreement, including transition
rules, and (ii) the corresponding capital regulations promulgated by regulatory
authorities outside the United States implementing the July 1988 report of the
Basle Committee on Banking Regulation and Supervisory Practices Entitled
"International Convergence of Capital Measurements and Capital Standards,"
including transition rules, and any amendments to such regulations adopted prior
to the date of this Agreement.
4.3 Availability of Types of Advances. If (i) any Lender determines that
maintenance of its Eurodollar Rate Loans at a suitable Lending Installation
would violate any applicable law, rule, regulation or directive, whether or not
having the force of law, or (ii) the Required Lenders determine that (x)
deposits of a type and maturity appropriate to match fund Eurodollar Rate
Advances are not available or (y) the interest rate applicable to a Eurodollar
Rate Advance does not accurately reflect the cost of making or maintaining such
an Advance, then the Administrative Agent shall suspend the availability of the
affected Eurodollar Rate Advance and, in the case of any occurrence set forth in
clause (i) require any Eurodollar Rate Advance to be repaid.
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4.4 Funding Indemnification. If any payment of a Eurodollar Rate Advance
occurs on a date which is not the last day of the applicable Interest Period,
whether because of acceleration, prepayment, or otherwise, or a Eurodollar Rate
Advance is not made on the date specified by the Borrower for any reason other
than default by the Lenders, the Borrower indemnifies each Lender for any loss
or cost incurred by it resulting therefrom, including, without limitation, any
loss or cost in liquidating or employing deposits acquired to fund or maintain
the Eurodollar Rate Advance. In connection with any assignment by any Lender of
any portion of the Loans made pursuant to Section 13.3 and made during the
Syndication Period, and if, notwithstanding the provisions of Section 2.2, the
Borrower has requested and the Administrative Agent has consented to the use of
the Eurodollar Rate, the Borrower shall be deemed to have repaid all outstanding
Eurodollar Rate Advances as of the effective date of such assignment and
reborrowed such amount as a Floating Rate Advance and/or Eurodollar Rate Advance
(chosen in accordance with the provisions of Section 2.2) and the
indemnification provisions under this Section 4.4 shall apply.
4.5 Lender Statements; Survival of Indemnity. If reasonably possible, each
Lender shall designate an alternate Lending Installation with respect to its
Eurodollar Rate Loans to reduce any liability of the Borrower to such Lender
under Sections 4.1 and 4.2 or to avoid the unavailability of a Type of Advance
under Section 4.3, so long as such designation is not disadvantageous to such
Lender. Each Lender requiring compensation pursuant to Section 2.13(E) or to
this Article IV shall use its reasonable efforts to notify the Borrower and the
Administrative Agent in writing of any Change, law, policy, rule, guideline or
directive giving rise to such demand for compensation not later than ninety (90)
days following the date upon which the responsible account officer of such
Lender knows or should have known of such Change, law, policy, rule, guideline
or directive. Any demand for compensation pursuant to this Article IV shall be
in writing and shall state the amount due, if any, under Section 4.1, 4.2 or 4.4
and shall set forth in reasonable detail the calculations upon which such Lender
determined such amount and state that such calculation has been made in a manner
consistent with the treatment generally accorded other borrowers. Such written
demand shall be rebuttably presumed correct for all purposes. Determination of
amounts payable under such Sections in connection with a Eurodollar Rate Loan
shall be calculated as though each Lender funded its Eurodollar Rate Loan
through the purchase of a deposit of the type and maturity corresponding to the
deposit used as a reference in determining the Eurodollar Rate applicable to
such Loan, whether in fact that is the case or not. The obligations of the
Borrower under Sections 4.1, 4.2 and 4.4 shall survive payment of the
Obligations and termination of this Agreement.
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ARTICLE V: CONDITIONS PRECEDENT
5.1 Initial Advances and Letters of Credit. The Lenders shall not be
required to make the initial Loans or issue any Letters of Credit unless on or
prior to the Closing Date all of the following conditions precedent shall have
been fully satisfied:
(A) The Documents. Borrower shall have furnished to the Administrative
Agent each of the following, with sufficient copies for the Lenders, all in form
and substance satisfactory to the Administrative Agent and the Lenders:
(1) Copies of the Certificate of Incorporation of the Parent and the
Borrower, together with all amendments and certificates of good standing,
both certified by the appropriate governmental officer in its jurisdiction
of incorporation;
(2) Copies, certified by the Secretary or Assistant Secretary of each
of the Borrower and the Parent, of its respective By-Laws and of its
respective Board of Directors' resolutions (and resolutions of other
bodies, if any are deemed necessary by counsel for any Lender) authorizing
the execution of the Loan Documents;
(3) An incumbency certificate, executed by each of the Secretary or
Assistant Secretary of the Borrower and the Parent, which shall identify by
name and title and bear the signature of the officers of each of the
Borrower and the Parent authorized to sign the Loan Documents and to make
borrowings hereunder, upon which certificate the Lenders shall be entitled
to rely until informed of any change in writing by the Borrower;
(4) A certificate, in form and substance satisfactory to the
Administrative Agent, signed by the chief financial officer of the
Borrower, stating that on Closing Date no Default or Unmatured Default has
occurred and is continuing;
(5) A written opinion of the Borrower's and the Parent's counsel,
addressed to the Administrative Agent and the Lenders, addressing the
issues identified in Exhibit G hereto containing assumptions and
qualifications acceptable to the Administrative Agent and the Lenders;
(6) Notes payable to the order of each Lender;
(7) Such other documents as the Administrative Agent or any Lender or
its counsel may have reasonably requested, including, without limitation,
all of the documents reflected on the List of Closing Documents attached as
Exhibit H to this Agreement;
(8) Satisfactory evidence that the Borrower and its Subsidiaries have
made a full and complete assessment of the Year 2000 Issues and have a
realistic and achievable program for remediating the Year 2000 Issues;
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(9) Satisfactory evidence that all sums due and payable under Section
10.7(A) and the Fee Letter have been paid;
(10) Satisfactory evidence that the Borrower has complied with the
requirements of all applicable Environmental Property Transfer Acts; and
(11) Satisfactory evidence that the effectiveness of the Loan
Documents shall not result in the occurrence of an "Event of Default" under
the Senior Notes.
(B) The Administrative Agent shall have obtained satisfactory results of
its due diligence, including, without limitation, with respect to financial
information and assets of the Borrower and their Subsidiaries, material pending
and threatened litigation and other administrative or legal proceedings
affecting the Borrower and its Subsidiaries, environmental reports and
liabilities pertaining to or arising with respect to properties of the Borrower
and the Borrower's material contracts and Contractual Obligations.
(C) The Borrower's cash management system and agreements with respect
thereto shall be satisfactory to the Administrative Agent.
(D) The Revolving Credit Availability on the Closing Date shall equal
$7,500,000.
5.2 Each Advance and Letter of Credit. The Lenders shall not be required to
make any Advance or issue any Letter of Credit, unless on the applicable
Borrowing Date, or in the case of a Letter of Credit, the date on which the
Letter of Credit is to be issued:
(i) There exists no Default or Unmatured Default; and
(ii) The representations and warranties contained in Article VI are
true and correct in all material respects as of such Borrowing Date except
for changes in the Schedules to this Agreement reflecting transactions
permitted by this Agreement.
Each Borrowing Notice with respect to each such Advance and the letter of
credit application with respect to a Letter of Credit shall constitute a
representation and warranty by the Borrower that the conditions contained in
Sections 5.2(i) and (ii) have been satisfied. Any Lender may require an
officer's certificate in substantially the form of Exhibit I hereto and/or a
duly completed compliance certificate in substantially the form of Exhibit J
hereto as a condition to making an Advance.
ARTICLE VI: REPRESENTATIONS AND WARRANTIES
In order to induce the Administrative Agent and the Lenders to enter into
this Agreement and to make the Loans and the other financial accommodations to
the Borrower and to issue the Letters of Credit described herein, the Borrower
represents and warrants as follows to each Lender and the Administrative Agent
as of the Closing Date, and thereafter on each date as required by Section 5.2:
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6.1 Organization; Corporate Powers. The Borrower and each of its
Subsidiaries (i) is a corporation or other legal entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, (ii) is duly qualified to do business as a foreign corporation and
is in good standing under the laws of each jurisdiction in which failure to be
so qualified and in good standing could reasonably be expected to result in a
Material Adverse Effect, and (iii) has all requisite corporate power and
authority to own, operate and encumber its property and to conduct its business
as presently conducted and as proposed to be conducted.
6.2 Authority.
(A) The Borrower has the requisite corporate power and authority to
execute, deliver and perform each of the Loan Documents.
(B) The execution, delivery and performance of each of the Loan Documents
and the consummation of the transactions contemplated thereby have been duly
approved by the board of directors and, if necessary, the shareholders of the
Borrower, and such approvals have not been rescinded. No other corporate action
or proceedings on the part of each of the Borrower is necessary to consummate
such transactions.
(C) Each of the Loan Documents to which the Borrower is a party has been
duly executed and delivered by it and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms (except as
enforceability may be limited by bankruptcy, insolvency, or similar laws
affecting the enforcement of creditors' rights generally), and no unmatured
default, default or breach of any covenant by any such party exists thereunder.
6.3 No Conflict; Governmental Consents. The execution, delivery and
performance of the Loan Documents to which the Borrower is a party do not and
will not (i) conflict with the certificate of incorporation or by-laws of the
Borrower, (ii) with respect to the Loan Documents, constitute a tortious
interference with any Contractual Obligation of any Person or conflict with,
result in a breach of or constitute (with or without notice or lapse of time or
both) a default under any Requirement of Law (including, without limitation, any
Environmental Property Transfer Act) or Contractual Obligation of the Borrower,
or require termination of any Contractual Obligation, except such interference,
breach, default or termination which individually or in the aggregate could not
reasonably be expected to result in a Material Adverse Effect, (iii) result in
or require the creation or imposition of any Lien whatsoever upon any of the
property or assets of the Borrower or any Subsidiary, other than Liens permitted
by the Loan Documents, or (iv) require any approval of the Borrower's or any
Subsidiary's shareholders except such as have been obtained. Except as set forth
on Schedule 6.3 to this Agreement, the execution, delivery and performance of
each of the Loan Documents to which the Borrower or its respective Subsidiaries
is a party do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by any Governmental
Authority, including under any Environmental Property Transfer Act, except
filings, consents or notices which have been made, obtained or given, or which,
if not made, obtained or given, individually or in the aggregate could not
reasonably be expected to result in a Material Adverse Effect.
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6.4 Financial Statements. Complete and accurate copies of the following
financial statements and the following related information have been delivered
to the Administrative Agent: the consolidated balance sheet of the Borrower and
its Subsidiaries as at September 30, 1999 and the related combined statements of
income, changes in stockholders' equity and cash flows of the Borrower and its
Subsidiaries for the fiscal year then ended, and the audit report related
thereto.
6.5 No Material Adverse Change. Since September 30, 1999, there has
occurred no change in the business, properties, condition (financial or
otherwise) or results of operations of the Borrower and its Subsidiaries taken
as a whole or any other event which has had or could reasonably be expected to
result in a Material Adverse Effect.
6.6 Taxes.
(A) Tax Examinations. All deficiencies which have been asserted against the
Borrower or any of its Subsidiaries as a result of any federal, state, local or
foreign tax examination for each taxable year in respect of which an examination
has been conducted have been fully paid or finally settled or are being
contested in good faith, and as of the Closing Date no issue has been raised by
any taxing authority in any such examination which, by application of similar
principles, reasonably can be expected to result in assertion by such taxing
authority of a material deficiency for any other year not so examined which has
not been reserved for in the Borrower's and its Subsidiaries' consolidated
financial statements to the extent, if any, required by Agreement Accounting
Principles. Except as permitted pursuant to Section 7.2(D), neither the Borrower
nor any of its Subsidiaries anticipates any material tax liability with respect
to the years which have not been closed pursuant to applicable law.
(B) Payment of Taxes. All tax returns and reports of the Borrower and its
respective Subsidiaries required to be filed have been timely filed, and all
taxes, assessments, fees and other governmental charges thereupon and upon their
respective property, assets, income and franchises which are shown in such
returns or reports to be due and payable have been paid except those items which
are being contested in good faith and have been reserved for in accordance with
Agreement Accounting Principles. The Borrower has no knowledge of any proposed
tax assessment against it or any of its Subsidiaries that will result in or
could reasonably be expected to result in a Material Adverse Effect.
6.7 Litigation; Loss Contingencies and Violations. Except as set forth in
Schedule 6.7 to this Agreement, there is no action, suit, proceeding,
arbitration or (to the Borrower's knowledge) investigation before or by any
Governmental Authority or private arbitrator pending or, to the Borrower's
knowledge, threatened against the Borrower, or any of its Subsidiaries or any
property of any of them which will have or could reasonably be expected to
result in a Material Adverse Effect. Except as disclosed on Schedule 6.7, there
is no material loss contingency within the meaning of Agreement Accounting
Principles which has not been reflected in the consolidated financial statements
of the Borrower prepared and delivered pursuant to Section 7.1(A) for the fiscal
period during which such material loss contingency was incurred. The Borrower
and its Subsidiaries are in compliance with all Requirements of Law applicable
to them and their respective businesses, in each case where the failure to so
comply individually or in the aggregate could reasonably be expected to result
in a Material Adverse Effect. Such compliance includes, without limitation,
except as disclosed on Schedule 6.7 to this Agreement:
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(i) the operations of the Borrower and its respective Subsidiaries
complying in all material respects with Environmental, Health or Safety
Requirements of Law;
(ii) the Borrower and its respective Subsidiaries having all permits,
licenses or other authorizations required under Environmental, Health or
Safety Requirements of Law to conduct their respective operations as
currently conducted and being in material compliance with such permits;
(iii) none of the Borrower, its Subsidiaries, or any of their
respective present property or operations, or, to the best of Borrower's or
any Subsidiary's knowledge, any of their respective past property or
operations, being subject to or the subject of, any investigation known to
the Borrower or any of its respective Subsidiaries, any judicial or
administrative proceeding, order, judgment, decree, settlement or other
agreement respecting: (A) any material violation of Environmental, Health
or Safety Requirements of Law; (B) any remedial action required under
Environmental, Health or Safety Requirements of Law; or (C) any material
claims or liabilities arising from the Release or threatened Release of a
Contaminant into the environment;
(iv) there not being now, nor to the best of the Borrower's or any
Subsidiary's knowledge having ever been, other than in material compliance
with Environmental, Health or Safety Requirements of Law, on or in the
property of the Borrower or any Subsidiary any landfill, waste pile,
underground storage tanks, aboveground storage tanks, surface impoundment
or hazardous waste storage facility of any kind, any polychlorinated
biphenyls (PCBs) used in hydraulic oils, electric transformers or other
equipment, or any asbestos containing material; and
(v) Neither the Borrower nor any of its Subsidiaries having any
material contingent obligation in connection with any Release or threatened
Release of a Contaminant into the environment.
Neither the Borrower nor any of its Subsidiaries is subject to or in default
with respect to any final judgment, writ, injunction, restraining order or order
of any nature, decree, rule or regulation of any court or Governmental Authority
which will result in or could reasonably be expected to result in a Material
Adverse Effect.
(B) For purposes of this Section 6.7, with respect to any Environmental,
Health and Safety Requirements of Law, "material" means any noncompliance or
basis for liability which could reasonably be likely to subject the Borrower to
liability in excess of $3,000,000.
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6.8 Subsidiaries. Schedule 6.8 to this Agreement (i) contains a description
of the corporate structure of the Borrower, its Subsidiaries and any other
Person in which the Borrower or any of its Subsidiaries holds a material Equity
Interest (in chart form) as of the Closing Date; and (ii) accurately sets forth
(A) the correct legal name, the jurisdiction of incorporation and the
jurisdictions in which the Borrower and the direct and indirect Subsidiaries of
the Borrower are qualified to transact business as a foreign corporation as of
the Closing Date, (B) the authorized, issued and outstanding shares of each
class of Capital Stock of the Borrower and each of its Subsidiaries and the
owners of such shares (on a fully-diluted basis) as of the Closing Date, and (C)
a summary of the direct and indirect partnership, joint venture, or other Equity
Interests, if any, of the Borrower and the Subsidiaries of the Borrower in any
Person that is not a corporation as of the Closing Date. None of the issued and
outstanding Capital Stock of the Borrower or any of its Subsidiaries is subject
to any vesting, redemption, or repurchase agreement, and there are no warrants
or options outstanding with respect to such Capital Stock as of the Closing
Date, except as disclosed on Schedule 6.8. The outstanding Capital Stock of the
Borrower and each of its Subsidiaries is duly authorized, validly issued, fully
paid and nonassessable and is not Margin Stock. The Borrower has no Subsidiaries
other than Haynes Sour Gas Tubulars, Inc., a Delaware corporation, the Foreign
Subsidiaries, and any other Person permitted to be formed or acquired under this
Agreement.
6.9 ERISA. Except as disclosed on Schedule 6.9, no Benefit Plan has
incurred any accumulated funding deficiency (as defined in Sections 302(a)(2) of
ERISA and 412(a) of the Code) whether or not waived. No Borrower nor any member
of the Controlled Group has incurred any liability in excess of $3,000,000 to
the PBGC which remains outstanding other than the payment of premiums, and there
are no premium payments which have become due which are unpaid. Since December
31, 1998, there has been no material adverse change in the funding status or
financial condition of any Benefit Plan. Neither the Borrower nor any member of
the Controlled Group has (i) failed to make a required contribution or payment
to a Multiemployer Plan or (ii) made a complete or partial withdrawal under
Sections 4203 or 4205 of ERISA from a Multiemployer Plan, where in either event
the related liability would be in excess of $3,000,000. Except as provided on
Schedule 6.9, neither the Borrower nor any member of the Controlled Group has
failed to make a required installment or any other required payment under
Section 412 of the Code on or before the due date for such installment or other
payment and neither the Borrower nor any member of the Controlled Group is
required to provide security to a Benefit Plan under Section 401(a)(29) of the
Code due to a Plan amendment that results in an increase in current liability
for the plan year. Each Plan which is intended to be qualified under Section
401(a) of the Code as currently in effect has received a favorable determination
letter that such Plan and each trust related to such Plan is exempt from federal
income tax under Section 501(a) of the Code as currently in effect. The Borrower
and all of its Subsidiaries are in compliance with the responsibilities,
obligations and duties imposed on them by ERISA and the Code with respect to all
Plans except where the liability for noncompliance would not exceed $3,000,000.
Neither the Borrower nor any of its respective Subsidiaries nor any fiduciary of
any Plan has engaged in a nonexempt prohibited transaction described in Sections
406 of ERISA or 4975 of the Code which could reasonably be expected to subject
the Borrower to liability in excess of $3,000,000. Neither the Borrower nor any
member of the Controlled Group has taken or failed to take any action which
would constitute or result in a Termination Event, which action or inaction
could reasonably be expected to subject the Borrower to liability in excess of
$3,000,000. Neither the Borrower nor any member of the Controlled Group is
subject to any liability in excess of $3,000,000 under Sections 4063, 4064,
4069, 4204 or 4212(c) of ERISA.
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6.10 Accuracy of Information. As of the Closing Date, the information,
exhibits and reports furnished by or on behalf of the Borrower and any of its
Subsidiaries to the Administrative Agent or to any Lender in connection with the
negotiation of, or compliance with, the Loan Documents, the representations and
warranties of the Borrower and its Subsidiaries contained in the Loan Documents,
and all certificates and documents delivered to the Administrative Agent and the
Lenders pursuant to the terms thereof, taken as a whole, do not contain as of
the date furnished any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading.
6.11 Securities Activities. Neither the Borrower nor any Subsidiary thereof
are engaged in the business of extending credit for the purpose of purchasing or
carrying Margin Stock.
6.12 Material Agreements. Neither the Borrower nor any Subsidiary thereof
are a party to any Contractual Obligation or subject to any charter or other
corporate restriction which, if complied with or performed in accordance with
its terms, will have or could reasonably be expected to result in, individually
or in the aggregate, a Material Adverse Effect. Neither the Borrower nor any
Subsidiary thereof have received notice or has knowledge that (i) it is in
default in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any Contractual Obligation applicable to
it, or (ii) any condition exists which, with the giving of notice or the lapse
of time or both, would constitute a default with respect to any such Contractual
Obligation, in each case, except where such default or defaults, if any,
individually or in the aggregate will not result in or could not reasonably be
expected to result in a Material Adverse Effect.
6.13 Assets and Properties. The Borrower and each of its Subsidiaries have
good and marketable title to all of their material assets and properties
(tangible and intangible, real or personal) owned by them or a valid leasehold
interest in all of their material leased assets (except insofar as marketability
may be limited by any laws or regulations of any Governmental Authority
affecting such assets), and all such assets and property are free and clear of
all Liens, except Liens permitted under Section 7.3(C). Substantially all of the
material assets and properties owned by, leased to or used by the Borrower
and/or each such Subsidiary of the Borrower are in adequate operating condition
and repair, ordinary wear and tear excepted. Except for Liens granted to the
Administrative Agent for the benefit of the Administrative Agent and the Holders
of Secured Obligations, neither this Agreement nor any other Loan Document, nor
any transaction contemplated under any such agreement, will affect any right,
title or interest of the Borrower or its Subsidiaries in and to any of such
assets in a manner that would have or could reasonably be expected to result in
a Material Adverse Effect.
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6.14 Statutory Indebtedness Restrictions. Neither the Borrower nor any of
its Subsidiaries are subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, or the
Investment Company Act of 1940, or any other federal or state statute or
regulation which limits its ability to incur indebtedness or its ability to
consummate the transactions contemplated hereby.
6.15 Insurance. Schedule 6.15 to this Agreement accurately sets forth as of
the Closing Date all insurance policies and programs currently in effect with
respect to the respective properties and assets and business of the Borrower and
its Subsidiaries, specifying, for each such policy and program, (i) the amount
thereof, (ii) the risks insured against thereby, (iii) the name of the insurer
and each insured party thereunder, (iv) the policy or other identification
number thereof, (v) the expiration date thereof, (vi) the annual premium with
respect thereto, and (vii) any reserves relating to any self-insurance program
that is in effect. Such insurance policies and programs reflect coverage that is
reasonably consistent with prudent industry practice.
6.16 Labor Matters.
As of the Closing Date, no attempt to organize the employees of the
Borrower, and no labor disputes, strikes or walkouts affecting the operations of
the Borrower or any of its Subsidiaries, is pending, or, to the Borrower's
knowledge, threatened, planned or contemplated.
6.17 Year 2000 Issues. The Borrower and its Subsidiaries have made a full
and complete assessment of the Year 2000 Issues and have a realistic and
achievable program for remediating the Year 2000 Issues on a timely basis. Based
on this assessment and program, neither the Borrower nor any Subsidiary
reasonably anticipates any material adverse effect on its operations, business
or financial condition as a result of Year 2000 Issues.
ARTICLE VII : COVENANTS
The Borrower covenants and agrees that so long as any Commitments are
outstanding and thereafter until payment in full of all of the Obligations
(other than contingent indemnity obligations), unless the Required Lenders shall
otherwise give prior written consent:
7.1 Reporting. The Borrower shall:
(A) Financial Reporting . Furnish to the Lenders:
(i) Monthly Reports. As soon as practicable, and in any event within
forty-five (45) days after the end of each calendar month beginning with
the month ending October 31, 1999, the consolidated and consolidating
balance sheets of the Borrower and its Subsidiaries as at the end of such
period and the related consolidated and consolidating statements of income
and cash flows of the Borrower and its Subsidiaries for such calendar
month, certified by the chief financial officer of the Borrower as fairly
presenting the consolidated and consolidating financial position of the
Borrower and its Subsidiaries as at the dates indicated and the results of
their operations and cash flows for the calendar months indicated in
accordance with Agreement Accounting Principles, subject to normal year end
adjustments, and, in comparative form the corresponding figures for such
month set forth in the consolidated and consolidating financial budget for
the current fiscal year delivered pursuant to Section 7.1(A)(v) or in such
other form mutually acceptable to the Borrower and the Administrative
Agent.
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(ii) Quarterly Reports. As soon as practicable, and in any event
within forty-five (45) days after the end of each fiscal quarter for the
first three fiscal quarters in each fiscal year, the consolidated balance
sheet of the Borrower and its Subsidiaries as at the end of such period and
the related consolidated statements of cash flows of the Borrower and its
Subsidiaries for such fiscal quarter and for the period from the beginning
of the then current fiscal year to the end of such fiscal quarter,
certified by the chief financial officer of the Borrower on behalf of the
Borrower as fairly presenting the consolidated financial position of the
Borrower and its Subsidiaries as at the dates indicated and the results of
their operations and cash flows for the periods indicated in accordance
with Agreement Accounting Principles, subject to normal year end
adjustments, and in comparative form such corresponding consolidated
information as set forth in the consolidated financial budget for the
current fiscal year delivered pursuant to Section 7.1(A)(v), together with
the corresponding figures for such fiscal quarter during the previous
fiscal year or in a form otherwise mutually acceptable to the Borrower and
the Administrative Agent.
(iii) Annual Reports. As soon as practicable, and in any event within
ninety (90) days after the end of each fiscal year, (a) the consolidated
balance sheet of the Borrower and its Subsidiaries as at the end of such
fiscal year and the related consolidated statements of income,
stockholders' equity and cash flows of the Borrower and its Subsidiaries
for such fiscal year, and in comparative form, unless otherwise agreed to
by the Administrative Agent and the Borrower, the corresponding figures for
the previous fiscal year along with consolidating schedules in form and
substance sufficient to calculate the financial covenants set forth in
Section 7.4, and a schedule from the Borrower setting forth for each item
in clause (a) hereof, and the corresponding figures from the consolidated
financial budget for the current fiscal year delivered pursuant to Section
7.1(A)(v), and (c) an audit report on the items listed in clause (a) hereof
of independent certified public accountants of recognized national
standing, which audit report shall be unqualified and shall state that such
financial statements fairly present the consolidated and consolidating
financial position of the Borrower and its Subsidiaries as at the dates
indicated and the results of their operations and cash flows for the
periods indicated in conformity with Agreement Accounting Principles and
that the examination by such accountants in connection with such
consolidated and consolidating financial statements has been made in
accordance with generally accepted auditing standards. The deliveries made
pursuant to this clause (iii) shall be accompanied, within one-hundred
twenty (120) days after the end of each fiscal year by any management
letter prepared by the above-referenced accountants.
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(iv) Officer's Certificate. Together with each delivery of any
financial statement (a) pursuant to clauses(ii) and (iii) of this Section
7.1(A), an Officer's Certificate of the Borrower, substantially in the form
of Exhibit I attached hereto and made a part hereof, stating that no
Default or Unmatured Default exists, or if any Default or Unmatured Default
exists, stating the nature and status thereof and (b) pursuant to clauses
(ii) and (iii) of this Section 7.1(A), a compliance certificate,
substantially in the form of Exhibit J attached hereto and made a part
hereof, signed by the Borrower's chief financial officer or treasurer,
setting forth calculations for the period then ended for Section 2.3(B), if
applicable, which demonstrate compliance, when applicable, with the
provisions of Section 7.4.
(v) Borrowing Base Certificates. A Borrowing Base Certificate in a
form substantially similar to Exhibit C, (x) each calendar week, with such
Borrowing Base Certificate being delivered to the Administrative Agent on
the third Business Day following the last Business Day in such calendar
week, with respect to the Net Amount of Eligible Accounts related to the
Borrower and (y) each calendar month, with such Borrowing Base Certificate
being delivered to the Administrative Agent on the tenth Business Day
following the end of such month, with respect to all Eligible Inventory and
all Net Amount of Eligible Accounts, including, without limitation,
information regarding the agings of the accounts receivable in the
Borrowing Base, a list of all accounts receivable which do not constitute
Eligible Accounts, and any Inventory roll forwards. The Administrative
Agent may also request supporting documentation in connection with any
delivery of any Borrowing Base Certificate. Each such Borrowing Base
Certificate and any supporting documents related thereto shall be certified
by the chief financial officer of the Borrower as being true and correct on
the last day of the week or month subject to such Borrowing Base
Certificate. Notwithstanding the foregoing, upon the Administrative Agent's
request, the Borrower shall deliver Borrowing Base Certificates more often
than monthly or weekly, as applicable, and the Administrative Agent may at
any time request by telephone, facsimile or e-mail a verification by the
Borrower of the validity or outstanding balance of any Account subject to
the terms of this Agreement. The Borrower may update the Borrowing Base
Certificates and supporting documents more frequently than weekly or
monthly, as applicable, and the most recently delivered Borrowing Base
Certificates shall be the applicable Borrowing Base Certificates for
purposes of determining the Borrowing Base at any time;
(vi) Budgets; Business Plans; Financial Projections. As soon as
practicable and in any event not later than thirty (30) days after the
beginning of each fiscal year of the Borrower, a copy of the plan and
forecast (including a projected balance sheet, income statement and a
statement of cash flow) of the Borrower and their Subsidiaries for the
upcoming fiscal year of the Borrower on a monthly basis and for the
succeeding fiscal year in its entirety prepared in such detail as shall be
reasonably satisfactory to the Administrative Agent.
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(B) Notice of Default. Promptly upon any of the chief executive officer,
chief operating officer, chief financial officer, treasurer or controller of the
Borrower obtaining knowledge (i) of any condition or event which constitutes a
Default or Unmatured Default, or becoming aware that any Lender or
Administrative Agent has given any written notice with respect to a claimed
Default or Unmatured Default under this Agreement, or (ii) that any Person has
given any written notice to the Borrower or any Subsidiary of the Borrower or
taken any other action with respect to a claimed default or event or condition
of the type referred to in Section 8.1(E), deliver to the Administrative Agent
and the Lenders an Officer's Certificate specifying (a) the nature and period of
existence of any such claimed default, Default, Unmatured Default, condition or
event, (b) the notice given or action taken by such Person in connection
therewith, and (c) what action the Borrower has taken, is taking and propose to
take with respect thereto.
(C) Lawsuits. (i) Promptly upon the Borrower obtaining knowledge of the
institution of, or written threat of, any action, suit, proceeding, governmental
investigation or arbitration against or affecting the Borrower or any of its
Subsidiaries or any property of the Borrower or any of its Subsidiaries not
previously disclosed pursuant to Section 6.7, which action, suit, proceeding,
governmental investigation or arbitration exposes, or in the case of multiple
actions, suits, proceedings, governmental investigations or arbitrations arising
out of the same general allegations or circumstances which expose, in the
Borrower's reasonable judgment, the Borrower or any of its Subsidiaries to
liability in an amount aggregating $3,000,000 or more (exclusive of claims
covered by insurance policies of the Borrower or any of its Subsidiaries unless
the insurers of such claims have disclaimed coverage or reserved the right to
disclaim coverage on such claims and exclusive of claims covered by the
indemnity of a financially responsible indemnitor in favor of the Borrower or
any of its Subsidiaries unless the indemnitor has disclaimed or reserved the
right to disclaim coverage thereof), give written notice thereof to the
Administrative Agent and the Lenders and provide such other information as may
be reasonably available to enable each Lender and the Administrative Agent and
its counsel to evaluate such matters; and (ii) in addition to the requirements
set forth in clause (i) of this Section 7.1(C), upon request of the
Administrative Agent or the Required Lenders, promptly give written notice of
the status of any action, suit, proceeding, governmental investigation or
arbitration covered by a report delivered pursuant to clause (i) above and
provide such other information as may be reasonably available to it that would
not violate any attorney-client privilege by disclosure to the Lenders to enable
each Lender and the Administrative Agent and its counsel to evaluate such
matters.
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(D) ERISA Notices. Deliver or cause to be delivered to the Administrative
Agent and the Lenders, at the Borrower's expense, the following information and
notices as soon as reasonably possible, and in any event:
(i) (a) within ten (10) Business Days after the Borrower knows that a
Termination Event has occurred, a written statement of the chief financial
officer of the Borrower describing such Termination Event and the action,
if any, which the Borrower has taken, is taking or proposes to take with
respect thereto, and when known, any action taken or threatened by the IRS,
DOL or PBGC with respect thereto and (b) within ten (10) Business Days
after any member of the Controlled Group obtains knowledge that a
Termination Event has occurred which could reasonably be expected to
subject the Borrower to liability, individually or in the aggregate, in
excess of $3,000,000, a written statement of the chief financial officer of
the Borrower describing such Termination Event and the action, if any,
which the member of the Controlled Group has taken, is taking or proposes
to take with respect thereto, and when known, any action taken or
threatened by the IRS, DOL or PBGC with respect thereto;
(ii) within ten (10) Business Days after the Borrower or any of its
Subsidiaries obtains knowledge that a prohibited transaction (defined in
Sections 406 of ERISA and Section 4975 of the Code) has occurred which
could result individually or in the aggregate in liability in excess of
$3,000,000, a statement of the chief financial officer of the Borrower
describing such transaction and the action which the Borrower or such
Subsidiary has taken, is taking or proposes to take with respect thereto;
(iii) within ten (10) Business Days after the Borrower or any of its
Subsidiaries receives notice of any unfavorable determination letter from
the IRS regarding the qualification of a Plan under Section 401(a) of the
Code which could result in liability individually or in the aggregate in
excess of $3,000,000, copies of each such letter;
(iv) within fifteen (15) Business Days after a request by the Lender,
copies of the most recent annual report (form 5500 series), including
Schedule B thereto, filed with respect to each Benefit Plan;
(v) within fifteen (15) Business Days after the later of (A) a request
by the Lender or (B) receipt by the Borrower or any member of the
Controlled Group of each actuarial report for any Benefit Plan or
Multiemployer Plan and each annual report for any Multiemployer Plan,
copies of each such report;
(vi) within fifteen (15) Business Days after the filing thereof with
the IRS, a copy of each funding waiver request filed with respect to any
Benefit Plan and all communications received by the Borrower, the
Borrower's Subsidiaries, or a member of the Controlled Group with respect
to such request;
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(vii) within fifteen (15) Business Days after receipt by the Borrower
or any member of the Controlled Group of the PBGC's intention to terminate
a Benefit Plan or to have a trustee appointed to administer a Benefit Plan
which could result in liability individually or in the aggregate in excess
of $3,000,000, copies of each such notice;
(viii) within fifteen (15) Business Days after receipt by the
Borrower, the Borrower's Subsidiaries, or any member of the Controlled
Group of a notice from a Multiemployer Plan regarding the imposition of
withdrawal liability which could result in liability individually or in the
aggregate in excess of $3,000,000, copies of each such notice;
(ix) within ten (10) Business Days after the Borrower, any of
Borrower's Subsidiaries, or any member of the Controlled Group fails to
make a required installment or any other required payment under Section 412
of the Code on or before the due date for such installment or payment which
could result in liability individually or in the aggregate in excess of
$3,000,000, a notification of such failure; and
(x) within ten (10) Business Days the Borrower, the Borrower's
Subsidiaries, or any member of the Controlled Group knows or has reason to
know that (a) a Multiemployer Plan has been terminated, (b) the
administrator or plan sponsor of a Multiemployer Plan intends to terminate
a Multiemployer Plan, or (c) the PBGC has instituted or will institute
proceedings under Section 4042 of ERISA to terminate a Multiemployer Plan,
in each case where liability individually or in the aggregate could exceed
$3,000,000
For purposes of this Section 7.1(D), the Borrower, any of its Subsidiaries and
any member of the Controlled Group shall be deemed to know all facts known by
the Administrator of any Plan (other than a Multiemployer Plan) of which the
Borrower or any member of the Controlled Group or such Subsidiary is the plan
sponsor.
(E) Labor Matters. Notify the Administrative Agent and the Lenders in
writing, promptly upon the Borrower's learning thereof, of (i) any material
labor dispute to which the Borrower or any of its Subsidiaries may become a
party, including, without limitation, any strikes, lockouts or other disputes
relating to such Persons' plants and other facilities and (ii) any Worker
Adjustment and Retraining Notification Act liability incurred with respect to
the closing of any plant or other facility of the Borrower or any of its
Subsidiaries.
(F) Other Indebtedness. Deliver to the Administrative Agent (i) a copy of
each regular report, notice or communication regarding potential or actual
defaults (including any accompanying officer's certificate) delivered by or on
behalf of the Borrower or its Subsidiaries to the holders of funded Indebtedness
pursuant to the terms of the agreements governing such Indebtedness, such
delivery to be made at the same time and by the same means as such notice or
other communication is delivered to such holders, and (ii) a copy of each other
notice or other communication regarding potential or actual defaults received by
the Borrower or its Subsidiaries from the holders of the Senior Notes pursuant
to the terms of such Senior Notes, such delivery to be made promptly after such
notice or other communication is received by the Borrower or its Subsidiaries.
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(G) Other Reports. Deliver or cause to be delivered to the Administrative
Agent and the Lenders copies of all financial statements, reports and notices,
if any, sent or made available generally by the Borrower or its respective
Subsidiaries to the holders of the Senior Notes or filed with the Commission by
the Borrower or its respective Subsidiaries, all press releases made available
generally by the Borrower or its respective Subsidiaries to the public
concerning material developments in the business of the Borrower or any such
Subsidiary and all notifications received from the Commission by the Borrower or
its respective Subsidiaries pursuant to the Securities Exchange Act of 1934 and
the rules promulgated thereunder; provided, however, that the Borrower shall not
be required to provide copies of routine correspondence with the Commission
regarding filings under the Securities Act of 1933 or any comments of the
Commission with respect thereto or responses to any such comments.
(H) Environmental Notices. As soon as possible and in any event within ten
(10) days after receipt by the Borrower, a copy of (i) any notice or claim to
the effect that the Borrower or any of its Subsidiaries is or may be liable to
any Person as a result of the Release by the Borrower, any of its Subsidiaries,
or any other Person of any Contaminant into the environment, and (ii) any notice
alleging any violation of any Environmental, Health or Safety Requirements of
Law by the Borrower or any of its Subsidiaries if, in either case, such notice
or claim relates to an event which could reasonably be expected to subject the
Borrower or its Subsidiaries to liability, individually or in the aggregate, in
excess of $3,000,000.
(I) Year 2000. The Borrower and its Subsidiaries will take all actions
reasonably necessary to assure that the Year 2000 Issues will not result in a
Material Adverse Effect on the business operations or financial condition of the
Borrower or its Subsidiaries. The Borrower and its Subsidiaries will advise the
Lenders prior to the Closing Date of any reasonably anticipated Material Adverse
Effect as a result of Year 2000 Issues.
(J) Other Information. Promptly upon receiving a request therefor from the
Administrative Agent, prepare and deliver to the Administrative Agent and the
Lenders such other information with respect to the Borrower, any of its
Subsidiaries, or the Collateral, including, without limitation, schedules
identifying and describing the Collateral and any dispositions thereof or any
Asset Sale or Financing (and the use of the Net Cash Proceeds thereof), as from
time to time may be reasonably requested by the Administrative Agent.
7.2 Affirmative Covenants.
(A) Corporate Existence, Etc. The Borrower shall, and shall cause each of
its Subsidiaries to, at all times maintain their corporate existence and
preserve and keep, or cause to be preserved and kept, in full force and effect
their rights and franchises material to their businesses, unless failure to
maintain such existence or such rights and franchises could not reasonably be
expected to result in a Material Adverse Effect.
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(B) Corporate Powers; Conduct of Business. The Borrower shall, and shall
cause each of its Subsidiaries to, qualify and remain qualified to do business
in each jurisdiction in which the nature of its business requires it to be so
qualified and where the failure to be so qualified will have or could reasonably
be expected to result in a Material Adverse Effect.
(C) Compliance with Laws, Etc. The Borrower and its Subsidiaries shall
comply with all Environmental, Health or Safety Requirements of Law, except
where noncompliance will not have or is not reasonably likely to subject the
Borrower or any of its Subsidiaries to liability, individually or in the
aggregate, in excess of $3,000,000. In addition to the foregoing, the Borrower
shall, and shall cause its Subsidiaries to, (a) comply with all other
Requirements of Law and all restrictive covenants affecting such Person or the
business, properties, assets or operations of such Person, and (b) obtain as
needed all Permits necessary for their operations and maintain such Permits in
good standing, in each case unless failure to comply or obtain could not
reasonably be expected to result in a Material Adverse Effect.
(D) Payment of Taxes and Claims; Tax Consolidation. The Borrower shall pay,
and cause each of its Subsidiaries to pay, (i) all taxes, assessments and other
governmental charges imposed upon them or on any of their properties or assets
or in respect of any of their franchises, business, income or property before
any penalty or interest accrues thereon, and (ii) all claims (including, without
limitation, claims for labor, services, materials and supplies) for sums which
have become due and payable and which by law have or may become a Lien (other
than a Lien permitted by Section 7.3(C)) upon the Borrower's or any Subsidiary's
property or assets, prior to the time when any penalty or fine shall be incurred
with respect thereto; provided, however, that no such taxes, assessments and
governmental charges referred to in clause (i) above or claims referred to in
clause (ii) above (and interest, penalties or fines relating thereto) need be
paid if being contested in good faith by appropriate proceedings diligently
instituted and conducted and if such reserve or other appropriate provision, if
any, as shall be required in conformity with Agreement Accounting Principles
shall have been made therefor.
(E) Insurance. The Borrower shall maintain for itself and its Subsidiaries,
or shall cause each of their Subsidiaries to maintain in full force and effect,
the insurance policies and programs listed on Schedule 6.15 to this Agreement or
substantially similar policies and programs or other policies and programs as
reflect coverage that is reasonably consistent with prudent industry practice.
The Borrower shall deliver to the Administrative Agent endorsements (x) to all
"All Risk" physical damage insurance policies on all of the Borrower's tangible
real and personal property and assets and business interruption insurance
policies naming the Administrative Agent loss payee, and (y) to all general
liability and other liability policies naming the Administrative Agent an
additional insured. In the event the Borrower or any of its Subsidiaries at any
time or times hereafter shall fail to obtain or maintain any of the policies or
insurance required herein or to pay any premium in whole or in part relating
thereto, then the Administrative Agent, without waiving or releasing any
obligations or resulting Default hereunder, may at any time or times thereafter
(but shall be under no obligation to do so) obtain and maintain such policies of
insurance and pay such premiums and take any other action with respect thereto
which the Administrative Agent deems advisable. All sums so disbursed by the
Administrative Agent shall constitute part of the Obligations, payable as
provided in this Agreement.
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(F) Inspection of Property; Books and Records; Discussions. The Borrower
shall permit and cause each of its Subsidiaries to permit, any authorized
representative(s) designated by either the Administrative Agent or any Lender to
visit and inspect any of the properties of the Borrower or any of its
Subsidiaries, to examine and make copies of their respective financial and
accounting records, books, journals, orders, receipts and any correspondence and
other data relating to their respective businesses or the transactions
contemplated hereby (including, without limitation, in connection with
environmental compliance, hazard or liability), and to discuss their affairs,
finances and accounts with their officers and independent certified public
accountants, all upon reasonable notice and at such reasonable times during
normal business hours (subject to applicable confidentiality restrictions), as
often as may be reasonably requested. The Borrower shall keep and maintain, and
cause each of its Subsidiaries to keep and maintain, in all material respects,
proper books of record and account in which entries in conformity with Agreement
Accounting Principles shall be made of all dealings and transactions in relation
to their respective businesses and activities.
(G) RESERVED.
(H) Maintenance of Property. The Borrower shall cause all material property
useful and necessary in the conduct of its businesses or the businesses of any
of its Subsidiaries to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and shall cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Borrower may be necessary so that the
businesses carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that nothing in this Section 7.2(H)
shall prevent the Borrower from discontinuing the operation or maintenance of
any of such property if such discontinuance is, in the judgment of the Borrower,
desirable in the conduct of their businesses or the businesses of any of its
Subsidiaries and not disadvantageous in any material respect to the
Administrative Agent or the Lenders.
(I) Use of Proceeds. The Borrower shall use the proceeds of the Revolving
Loans to (i) repay existing Indebtedness and (ii) provide funds for the
additional working capital needs and other general corporate purposes of the
Borrower. The Borrower will not, nor will it permit any Subsidiary to, use any
of the proceeds of the Loans to purchase or carry any Margin Stock or to make
any Acquisition, other than a Permitted Acquisition.
(J) Maintenance of Intellectual Property. The Borrower shall exercise
commercially reasonable efforts to preserve, protect and, if appropriate, file
applications with the United States Patent and Trademark Office, to register its
existing and future material U.S. trademarks or to seek U.S. patent protection.
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7.3 Negative Covenants.
(A) Indebtedness. Neither the Borrower, nor any of its respective
Subsidiaries, shall directly or indirectly create, incur, assume or otherwise
become or remain directly or indirectly liable with respect to any Indebtedness,
except:
(i) the Obligations;
(ii) Indebtedness evidenced by the Senior Notes;
(iii) Permitted Existing Indebtedness and Permitted Refinancing
Indebtedness;
(iv) Indebtedness in respect of obligations secured by Customary
Permitted Liens and other Liens permitted under this Agreement;
(v) Indebtedness owed to the Lenders in respect of Hedging Obligations
permitted under Section 7.3(P);
(vi) secured or unsecured purchase money Indebtedness (including
Capitalized Leases) incurred by the Borrower or any of its Subsidiaries
after the Closing Date to finance the acquisition of fixed assets, if (1)
at the time of such incurrence, no Default or Unmatured Default has
occurred and is continuing or would result from such incurrence, (2) such
Indebtedness has a scheduled maturity and is not due on demand, (3) such
Indebtedness does not exceed the lower of the fair market value or the cost
of the applicable fixed assets on the date acquired, (4) such Indebtedness
does not exceed $15,000,000 in the aggregate outstanding at any time, and
(5) any Lien securing such Indebtedness is permitted under Section 7.3(C)
(such Indebtedness being referred to herein as "Permitted Purchase Money
Indebtedness");
(vii) Indebtedness (a) in respect of performance bonds and surety or
appeal bonds provided by the Borrower or any of its Subsidiaries to their
customers in the ordinary course of their business, (b) in respect of
performance bonds or similar obligations of the Borrower or any of its
Subsidiaries for or in connection with or to secure statutory, regulatory
or similar obligations, including obligations under health, safety or
environmental obligations and (c) arising from guarantees to suppliers,
lessors, licensees, contractors, franchises or customers of obligations
(other than Indebtedness) incurred in the ordinary course of business;
(viii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of the Borrower pursuant to such agreement, in
each case incurred in connection with the disposition of any business
assets of the Borrower (other than a guarantee or other obligation incurred
by a Person acquiring such assets for the purpose of financing such
purchase) in a principal amount not to exceed the gross proceeds actually
received by the Borrower or any of its Subsidiaries in connection with such
disposition; provided, however, that the principal amount of any
Indebtedness incurred pursuant to this clause, when taken together with all
Indebtedness incurred pursuant to this clause and then outstanding, shall
not exceed $2,000,000;
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(ix) Indebtedness (i) of the Borrower arising from the honoring by a
bank or other financial institution of a check, draft or similar instrument
issued by the Borrower drawn against insufficient funds in the ordinary
course of business in an amount not to exceed $250,000 at any time, and so
long as such Indebtedness is extinguished within two (2) Business Days of
its incurrence and (ii) Indebtedness of any Foreign Subsidiary arising from
the honoring by a bank or other financial institution of a check, draft or
similar instrument issued by such Foreign Subsidiary drawn against
insufficient funds in the ordinary course of business, provided that such
Indebtedness shall not secured by any Inventory or Accounts of the Borrower
or any Subsidiary;
(x) Indebtedness of a Subsidiary payable to the Borrower or any other
Subsidiary;
(xi) Indebtedness of the Borrower payable to any Subsidiary; provided,
however, that the aggregate of such Indebtedness shall not exceed
$5,000,000;
(xii) Indebtedness due and payable by the Borrower in favor the Parent
with respect to the Borrower's repurchase from its former employees of
Capital Stock of the Parent or options to purchase Capital Stock of the
Parent; provided, however that such Indebtedness in the aggregate shall not
exceed $1,000,000 at any time and the repayment of such Indebtedness shall
be subordinate to the repayment in full of the Secured Obligations;
(xiii) Indebtedness permitted pursuant to Section 7.3(F); and
(xiv) unsecured Indebtedness not described in clauses (i) - (xiii) of
this Section 7.3(A), so long as the aggregate of such Indebtedness does not
at any time exceed $10,000,000.
(B) Sales of Assets. Neither the Borrower nor any of its Subsidiaries shall
sell, assign, transfer, lease, convey or otherwise dispose of any property,
whether now owned or hereafter acquired, or any income or profits therefrom, or
enter into any agreement to do so, except:
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(i) sales of Inventory in the ordinary course of business;
(ii) the disposition in the ordinary course of business of property
that is obsolete, excess or no longer useful in the Borrower's or its
Subsidiaries' business or the sale of inventory in the ordinary course of
business;
(iii) sales, assignments, transfers, leases, conveyances or other
dispositions of other assets if such transaction (a) is for consideration
consisting at least 75% of cash, (b) is for not less than fair market
value, and (c) when combined with all such other transactions (each such
transaction being valued at book value) (i) during the immediately
preceding twelve-month period, represents the disposition of not greater
than ten percent (10%) of the Borrower's Consolidated Assets at the end of
the fiscal year immediately preceding that in which such transaction is
proposed to be entered into, and (ii) during the period from the Closing
Date to the date of such proposed transaction, represents the disposition
of not greater than twenty percent (20%) of the Borrower's Consolidated
Assets at the end of the fiscal year immediately preceding that in which
such transaction is proposed to be entered into; and
(iv) the sale, transfer or assignment of all or part of the real
property set forth on Schedule 7.3(B) hereto; provided, however, that the
Borrower shall not indemnify the purchaser, transferee or assignee of such
real property with respect to any environmental loss or claim not customary
for the sale, transfer or assignment of similar property.
(C) Liens. Neither the Borrower nor any of its Subsidiaries shall directly
or indirectly create, incur, assume or permit to exist any Lien on or with
respect to any of their respective property or assets except:
(i) Liens securing the Secured Obligations;
(ii) Permitted Existing Liens;
(iii) Customary Permitted Liens;
(iv) purchase money Liens (including the interest of a lessor under a
Capitalized Lease and Liens to which any property is subject at the time of
the Borrower's acquisition thereof) securing Permitted Purchase Money
Indebtedness; provided that such Liens shall not apply to any property of
the Borrower or its Subsidiaries other than that purchased or subject to
such Capitalized Lease;
(v) Liens securing Indebtedness assumed or incurred in connection with
a Permitted Acquisition; and
(vi) Liens not described in clauses (i) - (v) of this Section 7.3(C)
securing Indebtedness which Indebtedness in the aggregate does not exceed
$5,000,000 at any time.
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(D) Investments. Except to the extent permitted pursuant to paragraph (G)
below, neither the Borrower nor any of its Subsidiaries shall directly or
indirectly make or own any Investment except:
(i) Investments in Cash Equivalents;
(ii) Permitted Existing Investments in an amount not greater than the
amount thereof on the Closing Date;
(iii) Investments in trade receivables or received in connection with
the bankruptcy or reorganization of suppliers and customers and in
settlement of delinquent obligations of, and other disputes with, customers
and suppliers arising in the ordinary course of business;
(iv) Investments consisting of deposit accounts maintained by the
Borrower or its Subsidiaries;
(v) Investments consisting of non-cash consideration from a sale,
assignment, transfer, lease, conveyance or other disposition of property
permitted by Section 7.3(B);
(vi) Investments in Permitted Acquisitions;
(vii) Investments with respect to payments made by the Borrower to the
Parent for taxes due and payable;
(viii) Investments constituting loans or advances to employees of the
Borrower or its Subsidiaries for the relocation of such employees, travel
expenses incurred by such employees, or other ordinary course business
expenses incurred by such employees; provided, however, that the aggregate
amount of such Investments does not exceed $500,000 at any time;
(ix) Investments permitted by Section 7.3(A); and
(x) Investments, other than those Investments set forth in clauses (i)
- (ix) of this Section 7.3(D), which, in the aggregate, shall not exceed at
any time $1,000,000;
provided, however, that the Investments described in clause (vi) above shall not
be permitted if either a Default or an Unmatured Default shall have occurred and
be continuing on the date thereof or would result therefrom.
(E) Restricted Payments. Neither the Borrower nor any of its Subsidiaries
shall declare or make any Restricted Payment, except:
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(i) the defeasance, redemption or repurchase of any Indebtedness with
the Net Cash Proceeds of Permitted Refinancing Indebtedness;
(ii) mandatory payments of interest due on the Senior Notes in
accordance with repayment provisions in effect with respect to such
Indebtedness as of the Closing Date;
(iii) regular payments of the Blackstone Monitoring Fees;
(iv) dividends to purchase the Parent's common stock or common stock
options from present to former officers or employees of the Parent, the
Borrower, or any Subsidiary thereof, upon the death, disability, or
termination of employment of such officer or employee;
(v) dividends to the Parent to pay corporate overhead expenses
incurred in the ordinary course of business and any taxes that are due and
payable by the Parent and the Borrower as part of a consolidated group; and
(vi) any dividend to the Borrower by any Subsidiary;
provided, however, that the Restricted Payments described in clauses (ii) and
(iii) above shall not be permitted if either a Default or an Unmatured Default
shall have occurred and be continuing at the date of declaration or payment
thereof or would result therefrom.
(F) Conduct of Business; Subsidiaries; Acquisitions. Neither the Borrower
nor any of its Subsidiaries shall engage in any business other than the
businesses engaged in by the Borrower on the date hereof and any businesses or
activities which are substantially similar, related or incidental thereto. The
Borrower shall not make any Acquisition unless such Acquisition meets the
following requirements (each such Acquisition, a "Permitted Acquisition"):
(i) the business being acquired shall be substantially similar,
related or incidental to the businesses or activities engaged in by the
Borrower or a Subsidiary on the Closing Date; and
(ii) the Borrower, prior to any such Acquisition, shall have delivered
to the Administrative Agent pro forma projections, based on information
reasonably acceptable to the Agent, demonstrating that after giving effect
to such Acquisition, the Borrower would be in compliance with the terms of
this Agreement for the period beginning on the date such Acquisition is
consummated and ending on the first anniversary thereof; provided, however,
that the Borrower need not deliver any pro forma projections for any
Acquisition the purchase price of which is less than $7,500,000;
provided, however, that the Borrower shall not consummate any Permitted
Acquisition until such time as it has received from the Administrative Agent
written notice indicating that the Administrative Agent is satisfied that the
Year 2000 Issues will not have a Material Adverse Effect on the business
operations or financial condition of the Borrower or its Subsidiaries.
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(G) Transactions with Shareholders and Affiliates. Except for the
transactions listed on Schedule 7.3(G), neither the Borrower nor any of its
Subsidiaries shall directly or indirectly enter into or permit to exist any
transaction (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with any holder or
holders of any of the Equity Interests of the Borrower, or with any Affiliate of
the Borrower which is not its Subsidiary, on terms that are less favorable to
the Borrower or any of its Subsidiaries, as applicable, than those that might be
obtained in an arm's length transaction at the time from Persons who are not
such a holder or Affiliate, except for Restricted Payments permitted by Section
7.3(E); provided, however, that the foregoing restrictions shall not apply to
(i) payment of the Blackstone Monitoring Fees, so long as such fees do not
exceed $1,000,000 during any twelve month period and the payment thereof
complies with Section 7.3(E), (ii) fees related to the transactions contemplated
herein that are payable on the Closing Date, (iii) the indemnification of the
directors of the Parent, the Borrower and their respective Subsidiaries in
accordance with customary practice, (iv) loans or advances to employees in
accordance with Section 7.3(D), (v) any employment agreement entered into by any
of the Borrower or any of its Subsidiaries in the ordinary course of business,
(vi) payments by the Parent, the Borrower or any of their respective
Subsidiaries to a Blackstone Affiliate made for any financial advisory,
financing, underwriting or placement services or in respect of other investment
banking activities, including, without limitation, in connection with
acquisitions or divestitures; provided, however, that, with respect to this
clause (vi), the aggregate of such payments shall not exceed $3,000,000 at any
time, and (vii) any issuance of securities, or other payments, awards or grants
in cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the board of
directors of the Parent.
(H) Restriction on Fundamental Changes. Neither the Borrower nor any of its
Subsidiaries shall enter into any merger or consolidation, or liquidate, wind-up
or dissolve (or suffer any liquidation or dissolution), or convey, lease, sell,
transfer or otherwise dispose of, in one transaction or series of transactions,
all or substantially all of the Borrower's or any Subsidiary's business or
property, whether now or hereafter acquired, except (i) transactions permitted
under Sections 7.3(B) or 7.3(F) and (ii) the merger of the Borrower and any
Subsidiary provided that the surviving entity is subject to Collateral Documents
required by the Administrative Agent, and (iii) the merger of the Parent and the
Borrower provided that the surviving entity is subject to Collateral Documents
required by the Administrative Agent.
(I) Sales and Leasebacks. Neither the Borrower nor any of its respective
Subsidiaries shall become liable, directly, or by assumption, with respect to
any lease, whether an operating lease or a Capitalized Lease, of any property
(whether real or personal or mixed) (i) which they or one of their Subsidiaries
sold or transferred or is to sell or transfer to any other Person, or (ii) which
they or one of their Subsidiaries intends to use for substantially the same
purposes as any other property which has been or is to be sold or transferred by
them or one of their Subsidiaries to any other Person in connection with such
lease, unless in either case the sale involved is not prohibited under Section
7.3(B) and the lease involved is not prohibited under Section 7.3(A).
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(J) Margin Regulations. Neither the Borrower nor any of its Subsidiaries
shall use all or any portion of the proceeds of any credit extended under this
Agreement to purchase or carry Margin Stock.
(K) ERISA. The Borrower shall not
(i) engage, or permit any of its Subsidiaries to engage, in any
prohibited transaction described in Sections 406 of ERISA or 4975 of the
Code for which a statutory or class exemption is not available or a private
exemption has not been previously obtained from the DOL, which could
reasonably be expected to subject the Borrower to a liability in excess of
$3,000,000;
(ii) permit to exist any accumulated funding deficiency (as defined in
Sections 302 of ERISA and 412 of the Code), with respect to any Benefit
Plan, whether or not waived, which could reasonably be expected to subject
the Borrower to a liability in excess of $3,000,000;
(iii) fail, or permit any Controlled Group member to fail, to pay
timely required contributions or annual installments due with respect to
any waived funding deficiency to any Benefit Plan, which could reasonably
be expected to subject the Borrower to a liability in excess of $3,000,000;
(iv) terminate, or permit any Controlled Group member to terminate,
any Benefit Plan which would result in any liability of the Borrower or any
Controlled Group member under Title IV of ERISA, which could reasonably be
expected to subject the Borrower to a liability in excess of $3,000,000;
(v) fail to make any contribution or payment to any Multiemployer Plan
which the Borrower or any Controlled Group member may be required to make
under any agreement relating to such Multiemployer Plan, or any law
pertaining thereto, which could reasonably be expected to subject the
Borrower to a liability in excess of $3,000,000;
(vi) fail, or permit any Controlled Group member to fail, to pay any
required installment or any other payment required under Section 412 of the
Code on or before the due date for such installment or other payment, which
could reasonably be expected to subject the Borrower to a liability in
excess of $3,000,000; or
(vii) amend, or permit any Controlled Group member to amend, a Plan
resulting in an increase in current liability for the plan year such that
the Borrower or any Controlled Group member is required to provide security
to such Plan under Section 401(a)(29) of the Code, which could reasonably
be expected to subject the Borrower to a liability in excess of $3,000,000.
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(L) Corporate Documents. Neither the Borrower nor any of its Subsidiaries
shall amend, modify or otherwise change any of the terms or provisions in any of
their respective constituent documents as in effect on the date hereof in any
manner materially adverse to the interests of the Lenders, without the prior
written consent of the Required Lenders.
(M) Other Indebtedness. The Borrower shall not amend, supplement or
otherwise modify the terms of the Senior Notes in any way that would be
materially less advantageous to the Borrower or materially adverse to the
Lenders, including, without limitation, with respect to amount, maturity,
amortization, interest rate, premiums, fees, covenants, events of default,
remedies and dividend provisions.
(N) Fiscal Year. Neither the Borrower nor any of its consolidated
Subsidiaries shall change its fiscal year for accounting or tax purposes from a
period consisting of the 12-month period ending on the last day of September of
each year.
(O) Subsidiary Covenants. The Borrower shall not, and will not permit any
of its Subsidiaries to, create or otherwise cause to become effective any Lien
or restriction of any kind on the ability of any Subsidiary to pay dividends or
make any other distribution on its stock, or make any other Restricted Payment,
pay any Indebtedness or other Obligation owed to the Borrower or any other
Subsidiary, make loans or advances or other Investments in the Borrower or any
other Subsidiary, or sell, transfer or otherwise convey any of its property to
the Borrower or any other Subsidiary, except for such encumbrances or
restrictions existing under or by reason of (i) any restrictions existing under
the Loan Documents and (ii) any restrictions with respect to a Subsidiary
imposed pursuant to an agreement that has been entered into in connection with
the disposition of all or substantially all of the Capital Stock or assets of
such Subsidiary.
(P) Hedging Obligations. The Borrower shall not and shall not permit any of
its Subsidiaries to enter into any interest rate, commodity or foreign currency
exchange, swap, collar, cap or similar agreements evidencing Hedging
Obligations, other than interest rate, foreign currency or commodity exchange,
swap, collar, cap or similar agreements entered into by the Borrower or a
Subsidiary pursuant to which the Borrower or such Subsidiary has hedged its
actual interest rate, foreign currency or commodity exposure (such permitted
hedging agreements are sometimes referred to herein as "Interest Rate
Agreements").
(Q) Change of Deposit Accounts. Except to the extent permitted in Section
7.3(D)(iv), the Borrower shall not establish or maintain any deposit account
with any bank or other financial institution other than those which have entered
into a Collection Account Agreement in form and substance acceptable to the
Administrative Agent.
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(R) Limitation on Revolving Credit Availability. The Borrower shall not
permit the Revolving Credit Availability to be less than Seven Million Five
Hundred Thousand Dollars ($7,500,000) on the Closing Date.
7.4 Financial Covenants. The Borrower and its Subsidiaries on a
consolidated basis shall comply with the following:
(A) Minimum Fixed Charge Coverage Ratio. The Borrower and its Subsidiaries
on a consolidated basis shall maintain a ratio ("Fixed Charge Coverage Ratio")
of (i) the sum of the amounts of (a) EBITDA for the applicable period minus (b)
Capital Expenditures for the applicable period to (ii) the Interest Expense for
the applicable period of at least 0.75 to 1.0.
The Fixed Charge Coverage Ratio shall be determined as of the last day of each
fiscal quarter for the four fiscal quarter period ending on such day; provided,
however, that (x) for the first calculation made after the date of this
Agreement, such calculation shall be based upon the period commencing January 1,
2000 and ending March 31, 2000, (y) for the second calculation made after the
date of this Agreement, such calculation shall be based upon the period
commencing January 1, 2000 and ending June 30, 2000, and (z) for the third
calculation made after the date of this Agreement, such calculation shall be
based upon the period commencing January 1, 2000 and ending September 30, 2000.
(B) Capital Expenditures. The Borrower will not, nor will it permit any
Subsidiary to expend or be committed to expend for Capital Expenditures in any
fiscal year, in the aggregate for the Borrower and its Subsidiaries, in excess
of (i) in fiscal year 2000, $14,000,000, (ii) in fiscal year 2001, $16,000,000
plus an amount not in excess of $3,000,000 if such amount was permitted to be
expended in fiscal year 2000 but was not expended in fiscal year 2000, and (iii)
in fiscal year 2002, $18,000,000 plus an amount not in excess of $3,000,000 if
such amount was permitted to be expended in fiscal year 2001 but was not
expended in fiscal year 2001.
ARTICLE VIII: DEFAULTS
8.1 Defaults. Each of the following occurrences shall constitute a Default
under this Agreement:
(A) Failure to Make Payments When Due. The Borrower shall (i) fail to pay
when due any of the Obligations consisting of principal or interest with respect
to the Loans or (ii) shall fail to pay within three (3) Business Days of the
date when due any of the other Obligations under this Agreement or the other
Loan Documents.
(B) Breach of Certain Covenants. The Borrower shall fail duly and
punctually to perform or observe any agreement, covenant or obligation binding
on the Borrower under:
(i) Sections 7.1(A)(i), (v) and (vi);
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(ii) Sections 7.1(A)(ii) and (iii), and such failure shall continue
unremedied for fifteen (15) Business Days;
(iii) Section 7.2(E), and such failure shall continue unremedied for
five (5) Business Days;
(iv) Section 7.2(F), and such failure shall continue unremedied for
ten (10 ) Business Days;
(v) Each provision of Section 7.2 not set forth in clauses (iii) and
(iv) above, and such failure shall continue unremedied for thirty (30)
Business Days; or
(vi) Section 7.3 or 7.4.
(C) Breach of Representation or Warranty. Any representation or warranty
made or deemed made by the Borrower to the Administrative Agent or any Lender
herein or by the Borrower or any of its Subsidiaries in any of the other Loan
Documents or in any statement or certificate at any time given by any such
Person pursuant to any of the Loan Documents shall be false or misleading in any
material respect on the date as of which made (or deemed made).
(D) Other Defaults. The Borrower shall default in the performance of or
compliance with any term contained in this Agreement (other than as covered by
paragraphs (A), (B) or (C) of this Section 8.1), or the Borrower or any of its
Subsidiaries shall default in the performance of or compliance with any term
contained in any of the other Loan Documents, and such default shall continue
uncured or unwaived for thirty (30) days after the occurrence thereof.
(E) Default as to Other Indebtedness. The Borrower or any of its
Subsidiaries shall fail, within any applicable grace period, to make any payment
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) with respect to any Indebtedness the outstanding principal amount of
which Indebtedness is in excess of $5,000,000; or any breach, default or event
of default shall occur, or any other condition shall exist under any instrument,
agreement or indenture pertaining to any such Indebtedness, if the effect
thereof is to cause an acceleration, mandatory redemption, a requirement that
the Borrower offer to purchase such Indebtedness or other required repurchase of
such Indebtedness, or permit the holder(s) of such Indebtedness to accelerate
the maturity of any such Indebtedness or require a redemption or other
repurchase of such Indebtedness; or any such Indebtedness shall be otherwise
declared to be due and payable (by acceleration or otherwise) or required to be
prepaid, redeemed or otherwise repurchased by the Borrower or any of its
Subsidiaries (other than by a regularly scheduled required prepayment) prior to
the stated maturity thereof.
(F) Involuntary Bankruptcy; Appointment of Receiver, Etc.
(i) An involuntary case shall be commenced against the Borrower or any
of the Borrower's Subsidiaries and the petition shall not be dismissed,
stayed, bonded or discharged within sixty (60) days after commencement of
the case; or a court having jurisdiction in the premises shall enter a
decree or order for relief in respect of the Borrower or any of the
Borrower's Subsidiaries in an involuntary case, under any applicable
bankruptcy, insolvency or other similar law now or hereinafter in effect;
or any other similar relief shall be granted under any applicable federal,
state, local or foreign law.
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(ii) A decree or order of a court having jurisdiction in the premises
for the appointment of a receiver, liquidator, sequestrator, trustee,
custodian or other officer having similar powers over the Borrower or any
of the Borrower's Subsidiaries or over all or a substantial part of the
property of the Borrower or any of the Borrower's Subsidiaries shall be
entered; or an interim receiver, trustee or other custodian of the Borrower
or any of the Borrower's Subsidiaries or of all or a substantial part of
the property of the Borrower or any of the Borrower's Subsidiaries shall be
appointed or a warrant of attachment, execution or similar process against
any substantial part of the property of the Borrower or any of the
Borrower's Subsidiaries shall be issued and any such event shall not be
stayed, dismissed, bonded or discharged within sixty (60) days after entry,
appointment or issuance.
(G) Voluntary Bankruptcy; Appointment of Receiver, Etc. The Borrower or any
of the Borrower's Subsidiaries shall (i) commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, (ii) consent to the entry of an order for relief in an involuntary case,
or to the conversion of an involuntary case to a voluntary case, under any such
law, (iii) consent to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its property, (iv)
make any assignment for the benefit of creditors or (v) take any corporate
action to authorize any of the foregoing.
(H) Judgments and Attachments. Any money judgment(s) (other than a money
judgment covered by insurance as to which the insurance company has not
disclaimed or reserved the right to disclaim coverage), writ or warrant of
attachment, or similar process against the Borrower or any of its Subsidiaries
or any of their respective assets involving in any single case or in the
aggregate an amount in excess of $4,000,000 is or are entered and shall remain
undischarged, unvacated, unbonded or unstayed for a period of sixty (60) days or
in any event later than fifteen (15) days prior to the date of any proposed sale
thereunder.
(I) Dissolution. Any order, judgment or decree shall be entered against the
Borrower decreeing its involuntary dissolution or split up and such order shall
remain undischarged and unstayed for a period in excess of sixty (60) days; or
the Borrower shall otherwise dissolve or cease to exist except as specifically
permitted by this Agreement.
(J) Loan Documents. At any time, for any reason, any Loan Document as a
whole that materially affects the ability of the Administrative Agent, or any of
the Lenders to enforce the Obligations ceases to be in full force and effect.
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(K) Termination Event. Any Termination Event occurs which the Required
Lenders believe is reasonably likely to subject the Borrower to liability in
excess of $3,000,000.
(L) Waiver of Minimum Funding Standard. If the plan administrator of any
Plan applies under Section 412(d) of the Code for a waiver of the minimum
funding standards of Section 412(a) of the Code believes the substantial
business hardship upon which the application for the waiver is based could
reasonably be expected to subject the Borrower or any Controlled Group member to
liability which individually or in the aggregate could result in liability in
excess of $4,000,000.
(M) Change of Control. A Change of Control shall occur.
(N) Environmental Matters. The Borrower or any of its Subsidiaries shall be
the subject of any proceeding or investigation pertaining to (i) the Release by
the Borrower or any of its Subsidiaries of any Contaminant into the environment,
(ii) the liability of the Borrower or any of its Subsidiaries arising from the
Release by any other Person of any Contaminant into the environment, or (iii)
any violation of any Environmental, Health or Safety Requirements of Law which
by the Borrower or any of its Subsidiaries, which, in any case, has or is
reasonably likely to subject the Borrower or any of its Subsidiaries to
liability, individually and in the aggregate, in excess of $5,000,000.
A Default shall be deemed "continuing" until cured or until waived in
writing in accordance with Section 9.3.
ARTICLE IX: ACCELERATION, DEFAULTING LENDERS; WAIVERS, AMENDMENTS AND REMEDIES
9.1 Termination of Commitments; Acceleration. If any Default described in
Section 8.1(F) or 8.1(G) occurs with respect to the Borrower, the obligations of
the Lenders to make Loans hereunder and the obligation of the Administrative
Agent to issue Letters of Credit hereunder shall automatically terminate and the
Obligations shall immediately become due and payable without any election or
action on the part of the Administrative Agent or any Lender. If any other
Default occurs, the Required Lenders may terminate or suspend the obligations of
the Lenders to make Loans hereunder and the obligation of the Issuing Bank to
issue Letters of Credit hereunder, or declare the Obligations to be due and
payable, or both, whereupon the Obligations shall become immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which the Borrower expressly waives.
9.2 Defaulting Lender. In the event that any Lender fails to fund its Pro
Rata Share of any Advance requested or deemed requested by the Borrower, which
such Lender is obligated to fund under the terms of this Agreement (the funded
portion of such Advance being hereinafter referred to as a "Non Pro Rata Loan"),
until the earlier of such Lender's cure of such failure and the termination of
the Revolving Loan Commitments, the proceeds of all amounts thereafter repaid to
the Administrative Agent by the Borrower and otherwise required to be applied to
such Lender's share of all other Obligations pursuant to the terms of this
Agreement shall be advanced to the Borrower by the Administrative Agent on
behalf of such Lender to cure, in full or in part, such failure by such Lender,
but shall nevertheless be deemed to have been paid to such Lender in
satisfaction of such other Obligations. Notwithstanding anything in this
Agreement to the contrary:
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(i) the foregoing provisions of this Section 9.2 shall apply only with
respect to the proceeds of payments of Obligations and shall not affect the
conversion or continuation of Loans pursuant to Section 2.8;
(ii) any such Lender shall be deemed to have cured its failure to fund
its Pro Rata Share of any Advance at such time as an amount equal to such
Lender's original Pro Rata Share of the requested principal portion of such
Advance is fully funded to the Borrower, whether made by such Lender itself
or by operation of the terms of this Section 9.2, and whether or not the
Non Pro Rata Loan with respect thereto has been repaid, converted or
continued;
(iii) amounts advanced to the Borrower to cure, in full or in part,
any such Lender's failure to fund its Pro Rata Share of any Advance ("Cure
Loans") shall bear interest at the rate applicable to Floating Rate Loans
in effect from time to time, and for all other purposes of this Agreement
shall be treated as if they were Floating Rate Loans;
(iv) regardless of whether or not a Default has occurred or is
continuing, and notwithstanding the instructions of the Borrower as to its
desired application, all repayments of principal which, in accordance with
the other terms of this Agreement, would be applied to the outstanding
Floating Rate Loans shall be applied first, ratably to all Floating Rate
Loans constituting Non Pro Rata Loans, second, ratably to Floating Rate
Loans other than those constituting Non Pro Rata Loans or Cure Loans and,
third, ratably to Floating Rate Loans constituting Cure Loans;
(v) for so long as and until the earlier of any such Lender's cure of
the failure to fund its Pro Rata Share of any Advance and the termination
of the Revolving Loan Commitments, the term "Required Lenders" for purposes
of this Agreement shall mean Lenders (excluding all Lenders whose failure
to fund their respective Pro Rata Shares of such Advance have not been so
cured) whose Pro Rata Shares represent greater than 50.1% of the aggregate
Pro Rata Shares of such Lenders; and
(vi) for so long as and until any such Lender's failure to fund its
Pro Rata Share of any Advance is cured in accordance with Section 9.2(ii),
(A) such Lender shall not be entitled to any commitment fees with respect
to its Revolving Loan Commitment and (B) such Lender shall not be entitled
to any letter of credit fees, which commitment fees and letter of credit
fees shall accrue in favor of the Lenders which have funded their
respective Pro Rata Share of such requested Advance, shall be allocated
among such performing Lenders ratably based upon their relative Revolving
Loan Commitments, and shall be calculated based upon the average amount by
which the aggregate Revolving Loan Commitments of such performing Lenders
exceeds the sum of (I) the outstanding principal amount of the Loans owing
to such performing Lenders, plus (II) the outstanding Reimbursement
Obligations owing to such performing Lenders, plus (III) the aggregate
participation interests of such performing Lenders arising pursuant to
Section 3.5 with respect to undrawn and outstanding Letters of Credit.
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9.3 Amendments. Subject to the provisions of this Article IX, the Required
Lenders (or the Administrative Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding or modifying any provisions to the Loan Documents or changing
in any manner the rights of the Lenders or the Borrower hereunder or waiving any
Default hereunder; provided, however, that no such supplemental agreement shall,
without the consent of each Lender affected thereby:
(i) Postpone or extend the Revolving Loan Termination Date or any
other date fixed for any payment of principal of, or interest on, the
Loans, the Reimbursement Obligations or any fees or other amounts payable
to such Lender (except with respect to (a) any modifications of the
provisions relating to prepayments of Loans and other Obligations and (b) a
waiver of the application of the default rate of interest pursuant to
Section 2.9 hereof).
(ii) Reduce the principal amount of any Loans or L/C Obligations, or
reduce the rate or extend the time of payment of interest or fees thereon.
(iii) Reduce the percentage specified in the definition of Required
Lenders or any other percentage of Lenders specified to be the applicable
percentage in this Agreement to act on specified matters.
(iv) Increase the amount of the Revolving Loan Commitment of any
Lender hereunder.
(v) Permit the Borrower to assign its rights under this Agreement,
except in a transaction permitted hereby.
(vi) Release all or substantially all of the Collateral.
(vii) Amend any percentage set forth in the Borrowing Base.
(viii) Amend this Section 9.3.
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No amendment of any provision of this Agreement relating to the Administrative
Agent shall be effective without the written consent of the Administrative
Agent. The Administrative Agent may waive payment of the fee required under
Section 13.3(B) without obtaining the consent of any of the Lenders.
9.4 Preservation of Rights. No delay or omission of the Lenders or the
Administrative Agent to exercise any right under the Loan Documents shall impair
such right or be construed to be a waiver of any Default or an acquiescence
therein, and the making of a Loan or the issuance of a Letter of Credit
notwithstanding the existence of a Default or the inability of the Borrower to
satisfy the conditions precedent to such Loan or issuance of such Letter of
Credit shall not constitute any waiver or acquiescence. Any single or partial
exercise of any such right shall not preclude other or further exercise thereof
or the exercise of any other right, and no waiver, amendment or other variation
of the terms, conditions or provisions of the Loan Documents whatsoever shall be
valid unless in writing signed by the Lenders required pursuant to Section 9.3,
and then only to the extent in such writing specifically set forth. All remedies
contained in the Loan Documents or by law afforded shall be cumulative and all
shall be available to the Administrative Agent and the Lenders until the
Obligations have been paid in full.
ARTICLE X: GENERAL PROVISIONS
10.1 Survival of Representations. All representations and warranties of the
Borrower contained in this Agreement shall survive delivery of the Notes and the
making of the Loans herein contemplated.
10.2 Governmental Regulation. Anything contained in this Agreement to the
contrary notwithstanding, no Lender shall be obligated to extend credit to the
Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
10.3 Performance of Obligations. The Borrower agrees that the
Administrative Agent may, but shall have no obligation, after the occurrence and
during the continuance of a Default, to make any other payment or perform any
act required of the Borrower under any Loan Document. The Administrative Agent
shall use its reasonable efforts to give the Borrower notice of any action taken
under this Section 10.3 prior to the taking of such action or promptly
thereafter provided the failure to give such notice shall not affect the
Borrower's obligations in respect thereof. The Borrower agrees to pay the
Administrative Agent, upon demand, the principal amount of all funds advanced by
the Administrative Agent under this Section 10.3, together with interest thereon
at the rate from time to time applicable to Floating Rate Loans from the date of
such advance until the outstanding principal balance thereof is paid in full. If
the Borrower fails to make payment in respect of any such advance under this
Section 10.3 within one (1) Business Day after the date the Borrower receives
written demand therefor from the Administrative Agent, the Administrative Agent
shall promptly notify each Lender and each Lender agrees that it shall thereupon
make available to the Administrative Agent, in Dollars in immediately available
funds, the amount equal to such Lender's Pro Rata Share of such advance. If such
funds are not made available to the Administrative Agent by such Lender within
one (1) Business Day after the Administrative Agent's demand therefor, the
Administrative Agent will be entitled to recover any such amount from such
Lender together with interest thereon at the Federal Funds Effective Rate for
each day during the period commencing on the date of such demand and ending on
the date such amount is received. The failure of any Lender to make available to
the Administrative Agent its Pro Rata Share of any such unreimbursed advance
under this Section 10.3 shall neither relieve any other Lender of its obligation
hereunder to make available to the Administrative Agent such other Lender's Pro
Rata Share of such advance on the date such payment is to be made nor increase
the obligation of any other Lender to make such payment to the Administrative
Agent. All outstanding principal of, and interest on, advances made under this
Section 10.3 shall constitute Obligations.
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10.4 Headings. Section headings in the Loan Documents are for convenience
of reference only, and shall not govern the interpretation of any of the
provisions of the Loan Documents.
10.5 Entire Agreement. The Loan Documents embody the entire agreement and
understanding among the Borrower, the Parent, the Blackstone Affiliates, the
Administrative Agent and the Lenders and supersede all prior agreements and
understandings among the Borrower, the Parent, the Administrative Agent and the
Lenders relating to the subject matter thereof.
10.6 Several Obligations; Benefits of this Agreement. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or Administrative Agent of any other Lender (except to the
extent to which the Administrative Agent is authorized to act as such). The
failure of any Lender to perform any of its obligations hereunder shall not
relieve any other Lender from any of its obligations hereunder. This Agreement
shall not be construed so as to confer any right or benefit upon any Person
other than the parties to this Agreement and their respective successors and
assigns.
10.7 Expenses; Indemnification.
(A) Expenses. The Borrower shall reimburse the Administrative Agent for any
reasonable costs, internal charges and out-of-pocket expenses (including
reasonable attorneys' and paralegals' fees and time charges of attorneys and
paralegals for the Administrative Agent, which attorneys and paralegals may be
employees of the Administrative Agent) paid or incurred by the Administrative
Agent in connection with any of the preparation, negotiation, execution,
delivery, syndication, amendment, modification, and administration of the Loan
Documents. The Borrower also agree to reimburse the Administrative Agent and the
Lenders for any reasonable costs, internal charges and out-of-pocket expenses
(including attorneys' and paralegals' fees and time charges of attorneys and
paralegals for the Administrative Agent and the Lenders, which attorneys and
paralegals may be employees of the Administrative Agent or the Lenders) paid or
incurred by the Administrative Agent or any Lender in connection with the
collection of the Obligations and enforcement of the Loan Documents. In addition
to expenses set forth above, the Borrower agrees to reimburse the Administrative
Agent, promptly after the Administrative Agent's reasonable request therefor,
for each audit, or other business analysis performed by Administrative Agent for
the benefit of the Lenders (with the consent of the Borrower) i n connection
with this Agreement or the other Loan Documents in an amount equal to the
Administrative Agent's then customary charges for each person employed to
perform such audit or analysis, plus all reasonable costs and expenses
(including without limitation, travel expenses) incurred by the Administrative
Agent in the performance of such audit or analysis. The Administrative Agent
shall provide the Borrower with a detailed statement of all reimbursements
requested under this Section 10.7(A).
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(B) Indemnity. The Borrower further agrees to defend, protect, indemnify,
and hold harmless the Administrative Agent and each and all of the Lenders and
each of their respective Affiliates, and each of such Administrative Agent's,
Lender's, or Affiliate's respective officers, directors, employees, attorneys
and Administrative Agents (including, without limitation, those retained in
connection with the satisfaction or attempted satisfaction of any of the
conditions set forth in Article V) (collectively, the "Indemnitees") from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses of any kind or nature
whatsoever (including, without limitation, the fees and disbursements of counsel
for such Indemnitees in connection with any investigative, administrative or
judicial proceeding, whether or not such Indemnitees shall be designated a party
thereto), imposed on, incurred by, or asserted against such Indemnitees in any
manner relating to or arising out of:
(i) this Agreement, the other Loan Documents, or any act, event or
transaction related or attendant thereto or to the making of the Loans, and
the issuance of and participation in Letters of Credit hereunder, the
management of such Loans or Letters of Credit, the use or intended use of
the proceeds of the Loans or Letters of Credit hereunder, or any of the
other transactions contemplated by the Loan Documents; or
(ii) any liabilities, obligations, responsibilities, losses, damages,
personal injury, death, punitive damages, economic damages, consequential
damages, treble damages, intentional, willful or wanton injury, damage or
threat to the environment, natural resources or public health or welfare,
costs and expenses (including, without limitation, attorney, expert and
consulting fees and costs of investigation, feasibility or remedial action
studies), fines, penalties and monetary sanctions, interest, direct or
indirect, known or unknown, absolute or contingent, past, present or future
relating to violation of any Environmental, Health or Safety Requirements
of Law arising from or in connection with the past, present or future
operations of the Borrower, its Subsidiaries or any of their respective
predecessors in interest, or, the past, present or future environmental,
health or safety condition of any respective property of the Borrower or
its Subsidiaries, the presence of asbestos-containing materials at any
respective property of the Borrower or its Subsidiaries or the Release or
threatened Release of any Contaminant into the environment (collectively,
the "Indemnified Matters");
provided, however, the Borrower shall have no obligation with respect to
Indemnified Matters caused solely by or resulting solely from the willful
misconduct or Gross Negligence of an Indemnitee or breach of contract by an
Indemnitee with respect to the Loan Documents. If the undertaking to indemnify,
pay and hold harmless set forth in the preceding sentence may be unenforceable
because it is violative of any law or public policy, the Borrower shall
contribute the maximum portion which it is permitted to pay and satisfy under
applicable law, to the payment and satisfaction of all Indemnified Matters
incurred by the Indemnitees.
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(C) Waiver of Certain Claims; Settlement of Claims. The Borrower further
agrees to assert no claim against any of the Indemnitees on any theory of
liability for consequential, special, indirect, exemplary or punitive damages.
(D) Survival of Agreements. The obligations and agreements of the Borrower
under this Section 10.7 shall survive the termination of this Agreement.
10.8 Numbers of Documents. All statements, notices, closing documents, and
requests hereunder shall be furnished to the Administrative Agent with
sufficient counterparts so that the Administrative Agent may furnish one to each
of the Lenders.
10.9 Accounting. Except as provided to the contrary herein, all accounting
terms used herein shall be interpreted and all accounting determinations
hereunder shall be made in accordance with Agreement Accounting Principles.
10.10 Severability of Provisions. Any provision in any Loan Document that
is held to be inoperative, unenforceable, or invalid in any jurisdiction shall,
as to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of all Loan Documents are declared to be severable.
10.11 Nonliability of Lenders. The relationship among the Borrower and the
Lenders and the Administrative Agent shall be solely that of borrower and
lender. Neither the Administrative Agent nor any Lender shall have any fiduciary
responsibilities to the Borrower. Neither the Administrative Agent nor any
Lender undertakes any responsibility to the Borrower to review or inform the
Borrower of any matter in connection with any phase of the Borrower's business
or operations.
10.12 GOVERNING LAW. ANY DISPUTE BETWEEN THE BORROWER AND THE
ADMINISTRATIVE AGENT OR ANY LENDER ARISING OUT OF, CONNECTED WITH, RELATED TO,
OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH,
THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, AND WHETHER ARISING IN
CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE
LAWS (INCLUDING 735 ILCS SECTION 105/5-1 ET SEQ. BUT OTHERWISE WITHOUT REGARD TO
CONFLICT OF LAW PRINCIPLES) OF THE STATE OF ILLINOIS.
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10.13 CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL.
(A) NON-EXCLUSIVE JURISDICTION. EACH OF THE PARTIES HERETO AGREES THAT ALL
DISPUTES AMONG THEM ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO
THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR
ANY OF THE OTHER LOAN DOCUMENTS WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR
OTHERWISE, MAY BE RESOLVED NON-EXCLUSIVELY BY STATE OR FEDERAL COURTS LOCATED IN
CHICAGO, ILLINOIS, BUT THE PARTIES HERETO ACKNOWLEDGE THAT ANY APPEALS FROM
THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF CHICAGO,
ILLINOIS.
(B) VENUE. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING,
WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS
OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF
ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH
IN ANY JURISDICTION SET FORTH IN PARAGRAPH (A) ABOVE.
(C) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY
RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS
AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED
IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
ARTICLE XI: THE ADMINISTRATIVE AGENT
11.1 Appointment; Nature of Relationship. Fleet is appointed by the Lenders
as the Administrative Agent hereunder and under each other Loan Document, and
each of the Lenders irrevocably authorizes the Administrative Agent to act as
the contractual representative of such Lender with the rights and duties
expressly set forth herein and in the other Loan Documents. The Administrative
Agent agrees to act as such contractual representative upon the express
conditions contained in this Article XI. Notwithstanding the use of the defined
term "Administrative Agent," it is expressly understood and agreed that the
Administrative Agent shall not have any fiduciary responsibilities to any Lender
by reason of this Agreement and that the Administrative Agent is merely acting
as the representative of the Lenders with only those duties as are expressly set
forth in this Agreement and the other Loan Documents. In its capacity as the
Lenders' contractual representative, the Administrative Agent (i) does not
assume any fiduciary duties to any of the Lenders, (ii) is a "representative" of
the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code
and (iii) is acting as an independent contractor, the rights and duties of which
are limited to those expressly set forth in this Agreement and the other Loan
Documents. Each of the Lenders agrees to assert no claim against the
Administrative Agent on any agency theory or any other theory of liability for
breach of fiduciary duty, all of which claims each Lender waives.
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11.2 Powers. The Administrative Agent shall have and may exercise such
powers under the Loan Documents as are specifically delegated to the
Administrative Agent by the terms of each thereof, together with such powers as
are reasonably incidental thereto. The Administrative Agent shall have no
implied duties or fiduciary duties to the Lenders, or any obligation to the
Lenders to take any action hereunder or under any of the other Loan Documents
except any action specifically provided by the Loan Documents required to be
taken by the Administrative Agent.
11.3 General Immunity. Neither the Administrative Agent nor any of its
directors, officers, Administrative Agents or employees shall be liable to the
Borrower, the Lenders or any Lender for any action taken or omitted to be taken
by it or them hereunder or under any other Loan Document or in connection
herewith or therewith except to the extent such action or inaction arises from
the Gross Negligence or willful misconduct of such Person.
11.4 No Responsibility for Loans, Creditworthiness, Recitals, Etc. Neither
the Administrative Agent nor any of its directors, officers, Administrative
Agents or employees shall be responsible for or have any duty to ascertain,
inquire into, or verify (i) any statement, warranty or representation made in
connection with any Loan Document or any borrowing hereunder; (ii) the
performance or observance of any of the covenants or agreements of any obligor
under any Loan Document; (iii) the satisfaction of any condition specified in
Article V, except receipt of items required to be delivered solely to the
Administrative Agent; (iv) the existence or possible existence of any Default or
(v) the validity, effectiveness or genuineness of any Loan Document or any other
instrument or writing furnished in connection therewith. The Administrative
Agent shall not be responsible to any Lender for any recitals, statements,
representations or warranties herein or in any of the other Loan Documents, for
the perfection or priority of the Liens on any of the Collateral, or for the
execution, effectiveness, genuineness, validity, legality, enforceability,
collectibility, or sufficiency of this Agreement or any of the other Loan
Documents or the transactions contemplated thereby, or for the financial
condition of any guarantor of any or all of the Obligations, the Borrower or any
of its Subsidiaries.
11.5 Action on Instructions of Lenders. The Administrative Agent shall in
all cases be fully protected in acting, or in refraining from acting, hereunder
and under any other Loan Document in accordance with written instructions signed
by the Required Lenders, and such instructions and any action taken or failure
to act pursuant thereto shall be binding on all of the Lenders and on all
holders of Notes. The Administrative Agent shall be fully justified in failing
or refusing to take any action hereunder and under any other Loan Document
unless it shall first be indemnified to its satisfaction by the Lenders pro rata
against any and all liability, cost and expense that it may incur by reason of
taking or continuing to take any such action.
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11.6 Employment of Administrative Agents and Counsel. The Administrative
Agent may execute any of its duties as the Administrative Agent hereunder and
under any other Loan Document by or through employees, Administrative Agents,
and attorney-in-fact and shall not be answerable to the Lenders, except as to
money or securities received by it or its authorized Administrative Agent, for
the default or misconduct of any such Administrative Agent or attorneys-in-fact
selected by it with reasonable care. The Administrative Agent shall be entitled
to advice of counsel concerning the contractual arrangement between the
Administrative Agent and the Lenders and all matters pertaining to the
Administrative Agent's duties hereunder and under any other Loan Document.
11.7 Reliance on Documents; Counsel. The Administrative Agent shall be
entitled to rely upon any Note, notice, consent, certificate, affidavit, letter,
telegram, statement, paper or document believed by it to be genuine and correct
and to have been signed or sent by the proper person or persons, and, in respect
to legal matters, upon the opinion of counsel selected by the Administrative
Agent, which counsel may be employees of the Administrative Agent.
11.8 The Administrative Agent's Reimbursement and Indemnification. The
Lenders agree to reimburse and indemnify the Administrative Agent ratably in
proportion to their respective Revolving Loan Commitments (i) for any amounts
not reimbursed by the Borrower for which the Administrative Agent is entitled to
reimbursement by the Borrower under the Loan Documents, (ii) for any other
expenses incurred by the Administrative Agent on behalf of the Lenders, in
connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents and (iii) for any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Administrative Agent in any way relating to
or arising out of the Loan Documents or any other document delivered in
connection therewith or the transactions contemplated thereby, or the
enforcement of any of the terms thereof or of any such other documents, provided
that no Lender shall be liable for any of the foregoing to the extent any of the
foregoing is found in a final non-appealable judgment by a court of competent
jurisdiction to have arisen solely from the Gross Negligence or willful
misconduct of the Administrative Agent.
11.9 Rights as a Lender. With respect to its Revolving Loan Commitment,
Loans made by it, and the Notes issued to it, the Administrative Agent shall
have the same rights and powers hereunder and under any other Loan Document as
any Lender and may exercise the same as through it were not the Administrative
Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise
indicates, include the Administrative Agent in its individual capacity. The
Administrative Agent may accept deposits from, lend money to, and generally
engage in any kind of trust, debt, equity or other transaction, in addition to
those contemplated by this Agreement or any other Loan Document, with the
Borrower or any of their Subsidiaries in which such Person is not prohibited
hereby from engaging with any other Person.
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11.10 Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Administrative Agent or any other
Lender and based on the financial statements prepared by the Borrower and such
other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement and the other Loan
Documents. Each Lender also acknowledges that it will, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement and the other Loan Documents.
11.11 Successor Administrative Agent. The Administrative Agent may resign
at any time by giving written notice thereof to the Lenders and the Borrower.
Upon any such resignation, the Required Lenders shall have the right to appoint,
on behalf of the Borrower and the Lenders, a successor Administrative Agent. If
no successor Administrative Agent shall have been so appointed by the Required
Lenders and shall have accepted such appointment within thirty days after the
retiring Administrative Agent's giving notice of resignation, then the retiring
Administrative Agent may appoint, on behalf of the Borrower and the Lenders, a
successor Administrative Agent. Notwithstanding anything herein to the contrary,
each such successor Administrative Agent shall be subject to approval by the
Borrower, which approval shall not be unreasonably withheld. Such successor
Administrative Agent shall be a commercial bank having capital and retained
earnings of at least $500,000,000. Upon the acceptance of any appointment as the
Administrative Agent hereunder by a successor Administrative Agent, such
successor Administrative Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Administrative
Agent, and the retiring Administrative Agent shall be discharged from its duties
and obligations hereunder and under the other Loan Documents. After any retiring
Administrative Agent's resignation hereunder as Administrative Agent, the
provisions of this Article XI shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
the Administrative Agent hereunder and under the other Loan Documents.
11.12 Collateral Documents. Each Lender authorizes the Administrative Agent
to enter into each of the Collateral Documents to which it is a party and to
take all action contemplated by such documents. Each Lender agrees that no
Lender shall have the right individually to seek to realize upon the security
granted by any Collateral Document, it being understood and agreed that such
rights and remedies may be exercised solely by the Administrative Agent for the
benefit of the Holders of Secured Obligations upon the terms of the Collateral
Documents.
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ARTICLE XII: SETOFF; RATABLE PAYMENTS
12.1 Setoff. In addition to, and without limitation of, any rights of the
Lenders under applicable law, upon acceleration of payment of the Obligations
pursuant to the terms of this Agreement, any indebtedness from any Lender to the
Borrower (including all account balances, whether provisional or final and
whether or not collected or available) may be offset and applied toward the
payment of the Obligations owing to such Lender, whether or not the Obligations,
or any part hereof, shall then be due.
12.2 Ratable Payments. If any Lender, whether by setoff or otherwise, has
payment made to it upon its Loans (other than payments received pursuant to
Sections 4.1, 4.2 or 4.4) in a greater proportion than that received by any
other Lender, such Lender agrees, promptly upon demand, to purchase a portion of
the Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or otherwise, receives collateral for its Obligation or such amounts
which may be subject to setoff, such Lender agrees, promptly upon demand, to
take such action necessary such that all Lenders share in the benefits of such
collateral ratably in proportion to the obligations owing to them. In case any
such payment is disturbed by legal process, or otherwise, appropriate further
adjustments shall be made.
12.3 Application of Payments. Subject to the provisions of Section 9.2, the
Administrative Agent shall, unless otherwise specified at the direction of the
Required Lenders which direction shall be consistent with the last sentence of
this Section 12.3, apply all payments and prepayments in respect of any
Obligations and all proceeds of the Collateral in the following order:
(A) first, to pay interest on and then principal of any portion of the
Loans which the Administrative Agent may have advanced on behalf of any
Lender for which the Administrative Agent has not then been reimbursed by
such Lender or the Borrower and which is then past due;
(B) second, to pay interest on and then principal of any advance made
under Section 10.3 for which the Administrative Agent has not then been
paid by the Borrower or reimbursed by the Lenders;
(C) third, to pay Obligations in respect of any fees, expense
reimbursements or indemnities then due to the Administrative Agent and
which is then due;
(D) fourth, to pay Obligations in respect of any fees, expenses,
reimbursements or indemnities then due to the Lenders and the issuer(s) of
Letters of Credit;
(E) fifth, to pay interest due in respect of Loans and L/C
Obligations;
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<PAGE>
(F) sixth, to the ratable payment or prepayment of principal
outstanding on Loans, Reimbursement Obligations and Hedging Obligations
under Interest Rate Agreements owed to a Lender or an Affiliate thereof in
such order as the Administrative Agent may determine in its sole
discretion;
(G) seventh, to provide required cash collateral, if required pursuant
to Section 3.10 and
(H) eighth, to the ratable payment of all other Obligations.
Unless otherwise designated (which designation shall only be applicable prior to
the occurrence and during the continuation of a Default) by the Borrower, all
principal payments in respect of Loans shall be applied first, to repay
outstanding Floating Rate Loans, and then to repay outstanding Eurodollar Rate
Loans with those Eurodollar Rate Loans which have earlier expiring Interest
Periods being repaid prior to those which have later expiring Interest Periods.
The order of priority set forth in this Section 12.3 and the related provisions
of this Agreement are set forth solely to determine the rights and priorities of
the Administrative Agent, the Lenders, and the issuer(s) of Letters of Credit as
among themselves. The order of priority set forth in clauses (D) through (H) of
this Section 12.3 may at any time and from time to time be changed by the
Required Lenders with the consent of or approval by the Borrower, or any other
Person, in either case such consent or approval not to be unreasonably withheld.
The order of priority set forth in clauses (A) through (C) of this Section 12.3
may be changed only with the prior written consent of the Administrative Agent.
12.4 Relations Among Lenders.
(A) Except with respect to the exercise of set-off rights of any Lender in
accordance with Section 12.1, the proceeds of which are applied in accordance
with this Agreement, and except as set forth in the following sentence, each
Lender agrees that it will not take any action, nor institute any actions or
proceedings, against the Borrower or any other obligor hereunder or with respect
to any Loan Document, without the prior written consent of the Required Lenders
or, as may be provided in this Agreement or the other Loan Documents, at the
direction of the Administrative Agent.
(B) The Lenders are not partners or co-venturers, and no Lender shall be
liable for the acts or omissions of, or (except as otherwise set forth herein in
case of the Administrative Agent) authorized to act for, any other Lender. The
Administrative Agent shall have the exclusive right on behalf of the Lenders to
enforce on the payment of the principal of and interest on any Loan after the
date such principal or interest has become due and payable pursuant to the terms
of this Agreement.
ARTICLE XIII: BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
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<PAGE>
13.1 Successors and Assigns. The terms and provisions of the Loan Documents
shall be binding upon and inure to the benefit of the Borrower and the Lenders
and their respective successors and assigns, except that (i) the Borrower shall
not have the right to assign its rights or obligations under the Loan Documents,
other than an assignment made pursuant to Section 7.3(I) herein, and (ii) any
assignment by any Lender must be made in compliance with Section 13.3 hereof.
Notwithstanding clause (ii) of this Section 13.1, any Lender may at any time,
without the consent of the Borrower or the Administrative Agent, assign all or
any portion of its rights under this Agreement and its Notes to a Federal
Reserve Bank; provided, however, that no such assignment shall release the
transferor Lender from its obligations hereunder. The Administrative Agent may
treat the payee of any Note as the owner thereof for all purposes hereof unless
and until such payee complies with Section 13.3 hereof in the case of an
assignment thereof or, in the case of any other transfer, a written notice of
the transfer is filed with the Administrative Agent. Any assignee or transferee
of a Note agrees by acceptance thereof to be bound by all the terms and
provisions of the Loan Documents. Any request, authority or consent of any
Person, who at the time of making such request or giving such authority or
consent is the holder of any Note, shall be conclusive and binding on any
subsequent holder, transferee or assignee of such Note or of any Note or Notes
issued in exchange therefor.
13.2 Participations.
(A) Permitted Participants; Effect. Subject to the terms set forth in this
Section 13.2, any Lender may, in the ordinary course of its business and in
accordance with applicable law, at any time sell to one or more banks or other
entities ("Participants") participating interests in any Loan owing to such
Lender, any Note held by such Lender, any Revolving Loan Commitment of such
Lender, any L/C Interest of such Lender or any other interest of such Lender
under the Loan Documents on a pro rata or non-pro rata basis. Notice of such
participation to the Borrower and the Administrative Agent shall be required
prior to any participation becoming effective with respect to a Participant
which is not a Lender or an Affiliate thereof. In the event of any such sale by
a Lender of participating interests to a Participant, such Lender's obligations
under the Loan Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
such Lender shall remain the holder of any such Note for all purposes under the
Loan Documents, all amounts payable by the Borrower under this Agreement shall
be determined as if such Lender had not sold such participating interests, and
the Borrower and the Administrative Agent shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under the Loan Documents except that, for purposes of Article IV
hereof, the Participants shall be entitled to the same rights as if they were
Lenders. No Participant shall be entitled to receive any amount in excess of
such amount as the Lender from which such Participant purchased its
participating interest would have received with respect to such participating
interest.
(B) Voting Rights. Each Lender shall retain the sole right to approve,
without the consent of any Participant, any amendment, modification or waiver of
any provision of the Loan Documents other than any amendment, modification or
waiver with respect to any Loan or Revolving Loan Commitment in which such
Participant has an interest which forgives principal, interest or fees or
reduces the interest rate or fees payable pursuant to the terms of this
Agreement with respect to any such Loan or Revolving Loan Commitment, postpones
any date fixed for any regularly-scheduled payment of principal of, or interest
or fees on, any such Loan or Revolving Loan Commitment, or releases all or
substantially all of the Collateral, if any, securing any such Loan.
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<PAGE>
(C) Benefit of Setoff. The Borrower agrees that each Participant shall be
deemed to have the right of setoff provided in Section 12.1 hereof in respect to
its participating interest in amounts owing under the Loan Documents to the same
extent as if the amount of its participating interest were owing directly to it
as a Lender under the Loan Documents, provided that each Lender shall retain the
right of setoff provided in Section 12.1 hereof with respect to the amount of
participating interests sold to each Participant except to the extent such
Participant exercises its right of setoff; provided, however, that such
Participant shall not be permitted to exercise such right of setoff if the
related Lender already has done so. The Lenders agree to share with each
Participant, and each Participant, by exercising the right of setoff provided in
Section 12.1 hereof, agrees to share with each Lender, any amount received
pursuant to the exercise of its right of setoff, such amounts to be shared in
accordance with Section 12.2 as if each Participant were a Lender.
13.3 Assignments.
(A) Permitted Assignments. Any Lender may, in the ordinary course of its
business and in accordance with applicable law, at any time assign to one or
more banks or other entities ("Purchasers") all or a portion of its rights and
obligations under this Agreement (including, without limitation, its Revolving
Loan Commitment, all Loans owing to it, all of its participation interests in
existing Letters of Credit, and its obligation to participate in additional
Letters of Credit hereunder) in accordance with the provisions of this Section
13.3. Each assignment shall be of a constant, and not a varying, ratable
percentage of all of the assigning Lender's rights and obligations under this
Agreement. Such assignment shall be substantially in the form of Exhibit F
hereto and shall not be permitted hereunder unless such assignment is either for
all of such Lender's rights and obligations under the Loan Documents or, without
the prior written consent of the Administrative Agent, involves loans and
commitments in an aggregate amount of at least $10,000,000 (which minimum amount
may be waived by the Required Lenders after the occurrence of a Default or
Unmatured Event of Default). The consent of the Borrower, whose consent shall
not be unreasonably withheld absent the occurrence and continuation of a Default
and whose consent shall not be required during the occurrence and continuation
of a Default, and the Administrative Agent shall be required prior to an
assignment becoming effective with respect to a Purchaser which is not a Lender
or an Affiliate thereof.
(B) Effect; Effective Date. Upon (i) delivery to the Administrative Agent
of a notice of assignment, substantially in the form attached as Appendix I to
Exhibit F hereto (a "Notice of Assignment"), together with any consent required
by Section 13.3.(A) hereof, and (ii) payment of a $3,500 fee to the
Administrative Agent for processing such assignment, such assignment shall
become effective on the effective date specified in such Notice of Assignment.
The Notice of Assignment shall contain a representation by the Purchaser to the
effect that none of the consideration used to make the purchase of the
Commitment, Loans and L/C Obligations under the applicable assignment agreement
are "plan assets" as defined under ERISA and that the rights and interests of
the Purchaser in and under the Loan Documents will not be "plan assets" under
ERISA. On and after the effective date of such assignment, such Purchaser, if
not already a Lender, shall for all purposes be a Lender party to this Agreement
and any other Loan Documents executed by the Lenders and shall have all the
rights and obligations of a Lender under the Loan Documents, to the same extent
as if it were an original party hereto, and no further consent or action by the
Borrower, the Lenders or the Administrative Agent shall be required to release
the transferor Lender with respect to the percentage of the Aggregate Revolving
Loan Commitment, Loans and Letter of Credit participations assigned to such
Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to
this Section 13.3(B), the transferor Lender, the Administrative Agent and the
Borrower shall make appropriate arrangements so that replacement Notes are
issued to such transferor Lender and new Notes or, as appropriate, replacement
Notes, are issued to such Purchaser, in each case in principal amounts
reflecting their Revolving Loan Commitment, as adjusted pursuant to such
assignment.
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<PAGE>
(C) The Register. The Administrative Agent shall maintain at its address
referred to in Section 14.1 a copy of each assignment delivered to and accepted
by it pursuant to this Section 13.3 and a register (the "Register") for the
recordation of the names and addresses of the Lenders and the Revolving Loan
Commitment of and principal amount of the Loans owing to, each Lender from time
to time and whether such Lender is an original Lender or the assignee of another
Lender pursuant to an assignment under this Section 13.3. The entries in the
Register shall be conclusive and binding for all purposes, absent manifest
error, and the Borrower and each of its Subsidiaries, the Administrative Agent
and the Lenders may treat each Person whose name is recorded in the Register as
a Lender hereunder for all purposes of this Agreement. The Register shall be
available for inspection by the Borrower or any Lender at any reasonable time
and from time to time upon reasonable prior notice.
13.4 Confidentiality. Subject to Section 13.5, the Administrative Agent and
the Lenders shall hold all nonpublic information obtained pursuant to this
Agreement or otherwise obtained from the Borrower or an Affiliate thereof and
identified as such by the Borrower in accordance with such Person's customary
procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices and in any event may make
disclosure reasonably required by a prospective Transferee in connection with
the contemplated participation or assignment or as required or requested by any
Governmental Authority or representative thereof or pursuant to legal process
and shall require any such Transferee to agree (and require any of its
Transferees to agree) to comply with this Section 13.4. In no event shall the
Administrative Agent or any Lender be obligated or required to return any
materials furnished by the Borrower; provided, however, each prospective
Transferee shall be required to agree that if it does not become a participant
or assignee it shall return all materials furnished to it by or on behalf of the
Borrower in connection with this Agreement.
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<PAGE>
13.5 Dissemination of Information. The Borrower authorizes each Lender to
disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "Transferee") and any
prospective Transferee any and all information in such Lender's possession
concerning the Borrower and its Subsidiaries; provided that prior to any such
disclosure, such prospective Transferee shall agree to preserve in accordance
with Section 13.4 the confidentiality of any confidential information described
therein in an agreement which is reasonably satisfactory to the Borrower.
ARTICLE XIV: NOTICES
14.1 Giving Notice. Except as otherwise permitted by Section 2.12 with
respect to borrowing notices, all notices and other communications provided to
any party hereto under this Agreement or any other Loan Documents shall be in
writing or by telex or by facsimile and addressed or delivered to such party at
its address set forth below its signature hereto or at such other address as may
be designated by such party in a notice to the other parties. Any notice, if
mailed and properly addressed with postage prepaid, shall be deemed given when
received; any notice, if transmitted by telex or facsimile, shall be deemed
given when transmitted (answerback confirmed in the case of telexes).
14.2 Change of Address. The Borrower, the Administrative Agent and any
Lender may each change the address for service of notice upon it by a notice in
writing to the other parties hereto.
ARTICLE XV: COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute this Agreement by signing any such counterpart. This Agreement shall be
effective when it has been executed by the Borrower, the Administrative Agent
and the Lenders.
The remainder of this page is intentionally blank.
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<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Administrative Agent
have executed this Agreement as of the date first above written.
HAYNES INTERNATIONAL, INC.,
as the Borrower
By: /s/
---------------------------------
Name:
Title:
Address:
1020 West Park Avenue
Kokomo, Indiana 46904-9013
Attention: Chief Financial Officer
Facsimile No.: (765) 456-6965
<PAGE>
FLEET CAPITAL CORPORATION,
individually and as Administrative Agent
By: /s/
-------------------------------------
Name:
Title:
Address:
One South Wacker Drive
Suite 1400
Chicago, Illinois 60606
Attention: Loan Administration Manager
Facsimile: (312) 346-7038
Exhibit 12.01
<TABLE>
<CAPTION>
Haynes International, Inc.
Ratio of Earnings Before Fixed Charges to Fixed Charges
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---------- ------- ---------- ---------- ----------
Line 1 Income (loss) before income
taxes, extraordinary item and
cumulative effect of a change
in accounting principle $(5,458) $ 160 $ 3,705 $ 4,773 $(5,755)
Line 2 Interest on indebtedness 18,789 20,638 19,464 19,924 19,102
Line 3 Amortization of debt issuance
costs 1,444 1,353 1,144 1,247 1,246
Line 4 Estimated interest portion of
rental expense 477 464 589 564 702
---------- ------- ---------- ---------- ----------
Line 5 Total earnings before fixed
charges $15,252 $22,615 $24,902 $26,508 $15,295
Line 6 Interest on indebtedness $18,789 $20,638 $19,596(1) 19,934(1) 19,197(1)
Line 7 Amortization of debt issuance
costs 1,444 1,353 1,144 1,247 1,246
Line 8 Estimated interest portion of
rental expense 477 464 589 564 702
---------- ------- ---------- ---------- ----------
Line 9 Total fixed charges $20,710 $22,455 $21,329 $21,745 $21,145
Ratio of earnings before fixed N/A(2) 1.01 1.17 1.22 N/A(2)
charges to fixed charges
<FN>
(1) Includes $132, $10, and $95 for 1997, 1998 and 1999, respectively, of
capitalized interest expense.
(2) Earnings before fixed charges were insufficient to cover fixed charges.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated condensed financial statements of Haynes International, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 3,720 3,576
<SECURITIES> 0 0
<RECEIVABLES> 46,636 41,117
<ALLOWANCES> (662) (876)
<INVENTORY> 81,861 91,012
<CURRENT-ASSETS> 131,555 134,829
<PP&E> 99,744 107,524
<DEPRECIATION> (70,117) (74,952)
<TOTAL-ASSETS> 207,263 221,237
<CURRENT-LIABILITIES> 64,581 78,207
<BONDS> 139,549 139,620
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (90,938) (90,052)
<TOTAL-LIABILITY-AND-EQUITY> 207,263 221,237
<SALES> 246,944 208,986
<TOTAL-REVENUES> 246,944 208,986
<CGS> 191,849 164,349
<TOTAL-COSTS> 213,954 193,433
<OTHER-EXPENSES> 952 707
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,066 20,213
<INCOME-PRETAX> 4,773 (5,755)
<INCOME-TAX> 2,317 (6,319)
<INCOME-CONTINUING> 2,456 564
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (450) 0
<NET-INCOME> 2,006 564
<EPS-BASIC> 20,060 5,640
<EPS-DILUTED> 20,060 5,640
</TABLE>
