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File Pursuant To Rule 424 (B)(4)
Registration No. 333-18767
PROSPECTUS
2,200,000 Shares
SINTER METALS, INC.
CLASS A COMMON STOCK
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OF THE 2,200,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 1,760,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 440,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." ALL OF THE SHARES OF CLASS A COMMON STOCK
OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMPANY'S
CLASS A COMMON STOCK IS LISTED ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "SNM."
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SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE $24 A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.......................... $24.00 $1.38 $22.62
Total (3).......................... $52,800,000 $3,036,000 $49,764,000
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of 330,000
additional Shares of Class A Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions and
proceeds to the Company will be $60,720,000, $3,491,400 and $57,228,600,
respectively. See "Underwriters."
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The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Katten Muchin & Zavis, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about March 12, 1997 at the office of
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
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MORGAN STANLEY & CO.
Incorporated
SALOMON BROTHERS INC
McDONALD & COMPANY
SECURITIES, INC.
March 6, 1997
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE SHARES OF THE CLASS A COMMON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS".
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
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For investors outside of the United States: No action has been or will be
taken in any jurisdiction by the Company or any Underwriter that would permit a
public offering of the Class A Common Stock or possession or distribution of
this Prospectus in any jurisdiction where action for that purpose is required,
other than in the United States. Persons into whose possession this Prospectus
comes are required by the Company and the Underwriters to inform themselves
about and to observe any restrictions as to the offering of the Class A Common
Stock and the distribution of this Prospectus.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary....................... 3
Risk Factors............................. 7
The Company.............................. 13
Use of Proceeds.......................... 15
Capitalization........................... 16
Price Range of Common Stock.............. 17
Dividend Policy.......................... 17
Exchange Rates........................... 17
Unaudited Pro Forma Financial
Information............................ 18
Selected Historical Financial Data....... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
Industry................................. 33
Business................................. 35
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Management............................... 45
Executive Compensation................... 47
Principal Stockholders................... 50
Certain Transactions..................... 52
Description of Capital Stock............. 53
Shares Eligible For Future Sale.......... 56
Certain United States Federal Tax
Considerations for Non-U.S. Holders of
Class A Common Stock................... 57
Underwriters............................. 59
Legal Matters............................ 61
Experts.................................. 62
Available Information.................... 62
Index to Financial Statements............ F-1
</TABLE>
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Sinter and PMH report their consolidated financial statements in U.S.
dollars. Krebsoge reports its consolidated financial statements in German
Deutschemarks ("DM"). ALL DOLLAR AMOUNTS SET FORTH IN THIS PROSPECTUS ARE IN
U.S. DOLLARS, EXCEPT WHERE OTHERWISE INDICATED. In this Prospectus references to
"dollars" and "$" are to United States dollars, and the term "United States" or
"U.S." means the United States of America, its states, its territories, its
possessions and all areas subject to its jurisdiction. For the convenience of
the reader, certain financial information contained in this Prospectus has been
translated into U.S. Dollars ($ or US$) from German Deutschemarks using, for
assets and liabilities, exchange rates at the end of the period for which the
relevant statements are prepared and, for revenues and expenses, the weighted
average rates for the period. These translations should not be construed as
representations that the German Deutschemark amounts actually represent such
U.S. dollar amounts or could be converted into U.S. dollars at the rate
indicated or at any other rate. See "Exchange Rates" for information regarding
the rates of exchange between the German Deutschemark and the U.S. dollar from
January 1, 1993 to December 31, 1996. See "Risk Factors -- Risk of International
Operations."
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) and pro forma
financial information appearing elsewhere in this Prospectus. As used in this
Prospectus, "Sinter" refers to Sinter Metals, Inc. and its subsidiaries and
their combined operations on a historical basis prior to the acquisition of PMH
and Krebsoge; "PMH" refers to Powder Metal Holding, Inc. and its subsidiaries
and their combined operations on a historical basis; "Krebsoge" refers to
Krebsoge Sinterholding GmbH and its subsidiaries and their combined operations
on a historical basis; and the "Company" refers to Sinter, PMH and Krebsoge on a
combined basis after consummation of Sinter's acquisition of PMH and Krebsoge.
Except as otherwise indicated herein, the information contained in this
Prospectus assumes that the U.S. Underwriters' over-allotment option is not
exercised. Certain capitalized terms which are used but not defined in this
summary are defined elsewhere in this Prospectus. Prospective investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
The Company is the world's largest independent manufacturer of precision
pressed powder metal parts. With its recent acquisitions of Krebsoge and PMH
(the "Acquisitions"), the Company manufactures and markets over 4,000 different
pressed powder metal parts for use principally in the automotive industry in
North America and Europe and, to a lesser extent, for use in the lawn and
garden, power tool and home appliance industries in North America and Europe.
The Company has completed eight acquisitions since 1991, which, together with
internally generated growth, have resulted in net sales of the Company growing
at a compound annual rate of approximately 49% from $50.8 million in 1991 to
$372.8 million in 1996 on the pro forma basis described herein. See "Unaudited
Pro Forma Financial Information."
Approximately 74% of the Company's net sales in 1996 were made to the
automotive industry. Management believes that the Company is the largest
supplier of pressed powder metal parts to Ford, Chrysler, Volkswagen, BMW and
Daimler Benz and the second largest supplier of such parts to General Motors.
Management believes that a substantial majority of the Company's sales to
automotive customers are made on a sole source basis. Management believes that
automotive customers seek suppliers, such as the Company, who are able to
provide broad product lines, higher value-added products, low costs, reliable
service and, increasingly, global distribution capability. As these customers
continue to reduce the number of suppliers, the Company's ability to meet their
requirements is becoming an increasingly important competitive advantage.
The Company operates 18 manufacturing facilities in the United States,
Germany, Sweden and Canada. At these facilities, the Company uses powder
metallurgy to transform metal alloys in powdered form into durable high quality
metal parts such as gears, bearings and sprockets. Pressed powder metal parts
are increasingly being substituted for metal parts manufactured using more
traditional technologies such as forging and casting, particularly in the
automotive industry. The Company believes the reasons for this trend are: (i)
pressed powder metal parts can be produced at a lower per unit cost due to the
elimination or significant reduction in secondary machining and raw material
waste as well as lower material costs; (ii) pressed powder metal parts have
performance attributes comparable to parts produced through other metalworking
processes; and (iii) powder metallurgy can manufacture parts with complex shapes
and dimensional tolerances that would be impractical or impossible to produce
using other metalworking processes.
According to the Metal Powder Industries Federation ("MPIF"), the North
American shipments of pressed powder metal have increased from approximately
315,000 tons in 1992 to approximately 434,000 tons in 1995 (the most recent year
for which data is available), representing a compound annual growth rate of
11.3%. This growth is primarily attributable to increased demand for pressed
powder metal parts by the North American automotive industry and occurred even
though the sales of light vehicles over this same period grew at a compound
annual rate of only approximately 3.0%. Management believes that the amount of
pressed
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powder metal parts contained in the typical North American automobile increased
from approximately 20 pounds in 1990 to approximately 30 pounds in 1996.
According to the European Powder Metallurgy Association (the "EPMA"), the
European shipments of pressed powder metal have increased from approximately
109,000 tons in 1992 to approximately 129,000 tons in 1995 (the most recent year
for which data is available), representing a compound annual growth rate of
5.8%. This growth is due primarily to increased demand from the automotive
sector as a result of the introduction of new pressed powder metal parts for use
in automobiles, and increased demand for such parts.
The Company believes that the current trend of substitution of pressed
powder metal parts for cast or forged parts will continue both in North America
and Europe. Based on industry sources, the Company believes that the current
average pressed powder metal parts content in Ford's cars will rise from 40
pounds in 1996 to 50 pounds by the year 2000, and that the annual growth in the
pressed powder metal part content of General Motors' cars will be 5 to 10%
through 2001.
The Company attributes its leading position in the manufacture of precision
pressed powder metal parts to the following competitive strengths: (i) broad
geographic scope and manufacturing capabilities; (ii) technological and
engineering expertise; (iii) a broad, stable customer base; (iv) access to
financial resources; and (v) a proven management team with a successful track
record. The Company believes that these competitive strengths, together with its
growth strategy will enable it to continue to grow in the pressed powder metal
parts industry.
GROWTH STRATEGY
The Company's business objective is to enhance its leadership position in
the pressed powder metal parts industry. To achieve this objective, the Company
will continue to pursue a growth strategy based on the following elements:
- Expanding and Penetrating its Customer Base. The Company believes that
there are significant growth opportunities in the pressed powder metal
parts industry driven principally by (i) the increasing use of pressed
powder metal parts by automotive and other industrial manufacturers and
(ii) the automotive industry's trend towards supplier consolidation and
globalization. The Company also believes that since no supplier controls
a significant share of the pressed powder metal parts market in either
North America or Europe, the Company has a significant opportunity to
increase its market share because of its geographic scope, technical
expertise, broad range of products and financial resources. To capitalize
on the Acquisitions, the Company intends to leverage its relationships
with Ford, Chrysler and General Motors to increase Krebsoge's sales to
American manufacturers in Europe. Similarly, the Company intends to
leverage Krebsoge's relationships with Volkswagen, Daimler Benz and other
European manufacturers to improve the Company's business in North America
with these European manufacturers. The Company also believes that its
broad geographic scope should enable it to increase its customer base as
it integrates its newly acquired foreign operations and increases its
marketing presence in new geographic regions.
- Expanding Product Lines. Since 1995, the Company has expanded its
traditional product line of over 4,000 pressed powder metal parts by
introducing more than 100 new pressed powder metal parts into the market.
As a result of the Company's continued emphasis on innovative research
and development, a number of its recent product introductions have
targeted markets in high growth areas such as completed integrated
sub-assemblies. Through the Acquisitions, the Company has expanded its
product line to include powder metallurgical applications such as filters
made of highly porous sintered metals, powder forged parts, highspeed
steel and highly engineered plastics and composites. Furthermore, new
product lines are currently being introduced by the Company, which are
based upon powder metal injection molding, friction materials and high
performance aluminum alloys. The Company believes that there are
significant growth opportunities associated with these additional product
lines.
- Improving Operating Efficiencies. Based on its experience with
integrating prior acquisitions, the Company believes that significant
opportunities exist to increase the operating efficiency of both PMH and
Krebsoge. The Company also believes that the Acquisitions will allow it
to increase the operating
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efficiency of the Company as a result of the significant increase in the
scale of the Company's operations, both geographically and in terms of
equipment, products lines, customer base and financial resources. As part
of integrating the Acquisitions, the Company intends to implement changes
in its operations, including restructuring its management information
systems, modifying Krebsoge's and PMH's production processes to more
closely resemble Sinter's, centralizing its marketing and purchasing
departments and coordinating its research and development activities. The
Company intends to facilitate communication and share best practices
among its world-wide operations so that research and development ideas
and accumulated knowledge is shared among such operations. The Company
also intends to continue to foster an environment of continuous
improvement by benchmarking the attributes of its products and processes
to those of its competitors and customers in terms of quality, cost,
efficiency and delivery. The Company uses the results of such
benchmarking to make adjustments necessary to continue to be a leader in
the manufacture, marketing and distribution of pressed powder metal
parts.
- Pursuing Strategic Acquisitions. The pressed powder metal parts industry
is highly fragmented in North America and Western Europe with over 250
participants, most of which have annual sales of less than $50 million.
The pressed powder metal parts industry has undergone and is continuing
to undergo consolidation as evidenced by the Acquisitions and Sinter's
recent acquisition of the Powder Metal Forge Unit of Delco Remy America,
Inc. The Company intends to take advantage of such opportunities by
selectively pursuing additional acquisitions in its existing as well as
new markets.
- Achieving Cost Reductions. The Company has historically been able to
achieve cost reductions through the integration of its acquisitions.
Integrating the Acquisitions will enable the Company to eliminate
duplicative functions currently being performed by each of Sinter, PMH
and Krebsoge in the areas of administration, finance, sales, marketing,
purchasing, technical and field services and management information
systems. Management believes that pre-tax cost savings of at least $4.5
million can be achieved annually through eliminating duplicative
facilities as well as research and development and engineering personnel.
The Company is in the process of identifying additional cost savings,
such as purchasing, marketing and processing synergies that would
increase potential savings.
THE OFFERING
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Class A Common Stock offered(1)
U.S. offering.............................. 1,760,000 shares
International offering..................... 440,000 shares
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Total.............................. 2,200,000 shares
Common Stock to be outstanding after the
Offering:(2)
Class A Common Stock....................... 7,211,247 shares
Class B Common Stock....................... 2,543,381 shares
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Total.............................. 9,754,628 shares
Use of Proceeds.............................. To repay certain outstanding indebtedness
incurred under the New Credit Facility in
connection with the Acquisitions. See "Use of
Proceeds."
NYSE Symbol.................................. SNM
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(1) Assumes no exercise of the U.S. Underwriters' over-allotment option. See
"Underwriters."
(2) Excludes 337,467 shares of Class A Common Stock issuable upon exercise of
employee stock options outstanding as of January 31, 1997, of which 102,833
were exercisable.
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following sets forth selected summary historical financial data for
Sinter as of December 31, 1996 and for the three years ended December 31, 1996,
and selected pro forma data for the Company for the year ended December 31,
1996. The selected summary historical financial data for the year ended December
31, 1996 includes financial data of PMH and Krebsoge from the date of the
Acquisitions. The comparability of the historical consolidated financial data
reflected in this financial data has been significantly impacted by
acquisitions. The information presented below is qualified in its entirety by,
and should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma Financial
Information," "Selected Historical Financial Data," and the Consolidated
Financial Statements and the Notes thereto for each of Sinter, PMH and Krebsoge
included elsewhere in this Prospectus.
The selected pro forma statement of operations data for the year ended
December 31, 1996 gives effect to the Acquisitions, the New Credit Facility (as
defined herein) and the offering of 2.2 million shares of Class A Common Stock
by the Company (the "Offering") as if they occurred on January 1, 1996. The
selected pro forma data does not purport to present the actual results of
operations of the Company as if the transactions assumed therein had in fact
occurred on the date specified, nor is it necessarily indicative of the results
of operations that may be achieved in the future. The selected pro forma
financial data is based on certain assumptions and adjustments described in the
notes to the Unaudited Pro Forma Financial Information and should be read in
conjunction therewith. The summary unaudited pro forma financial information is
subject to a number of assumptions, limitations and qualifications.
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YEAR ENDED DECEMBER 31,
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1994 1995 1996
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HISTORICAL PRO
---------- FORMA(1)
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Net sales.................................................... $82,479 $94,310 $ 111,888 $372,824
Cost of sales................................................ 64,765 73,245 86,176 301,437
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Gross profit............................................... 17,714 21,065 25,712 71,387
Selling, general and administrative expenses................. 8,212 7,698 10,289 38,926
Amortization of intangible assets............................ 302 332 415 3,399
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Income from operations..................................... 9,200 13,035 15,008 29,062(2)
Interest expense............................................. 1,956 287 456 13,962
Other expense (income), net.................................. 166 111 (153) (573)
------- ------- -------- --------
Income before income taxes and extraordinary charge........ 7,078 12,637 14,705 15,673
Provision for income taxes................................... 2,900 4,750 5,350 6,394
------- ------- -------- --------
Net income before extraordinary charge..................... 4,178 7,887 9,355 9,279(2)
Extraordinary charge, net of tax............................. (580) -- -- --
------- ------- -------- --------
Net income................................................. 3,598 7,887 9,355 9,279
Preferred dividends.......................................... (202) -- -- --
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Net income applicable to Common Stock........................ $ 3,396 $ 7,887 $ 9,355 $ 9,279
======= ======= ======== ========
Net income per share......................................... $ .61 $ 1.05 $ 1.24 $ .95
OTHER FINANCIAL DATA:
Depreciation and amortization................................ $ 3,759 $ 4,272 $ 5,025 $ 24,004
Capital expenditures......................................... 4,160 4,301 11,035 24,848
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AS OF DECEMBER 31, 1996
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Working capital................................................................ $ 17,410 $ 17,410
Total assets................................................................... 399,480 399,480
Short-term debt................................................................ 13,367 7,463
Long-term debt................................................................. 232,918 190,558
Stockholders' equity........................................................... 50,561 98,825
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(1) The selected pro forma data includes the operating results of Sinter for the
year ended December 31, 1996, the operating results of PMH for the period
from January 1, 1996 to November 22, 1996, which corresponds with the
audited financial statements of PMH included elsewhere herein, and the
operating results of Krebsoge for the period January 1, 1996 to December 19,
1996, which corresponds with the audited financial statements of Krebsoge
included elsewhere herein. All references in this Prospectus to the year
ended 1996 refer to the period from January 1, 1996 to November 22, 1996
with respect to PMH, and the period from January 1, 1996 to December 19,
1996 with respect to Krebsoge.
(2) Pro forma income from operations and net income include the effects of $5.3
million pre-tax ($3.1 million after tax) in non-recurring charges
principally related to the Acquisitions. Without giving effect to these
charges, pro forma income from operations and pro forma net income would
have been $34.4 million and $12.4 million, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Pro Forma Year Ended December 31, 1996 Compared to Historical Year Ended
December 31, 1996."
(3) As adjusted to give effect to the Offering and the application of net
proceeds thereof as set forth in "Use of Proceeds."
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RISK FACTORS
Prospective investors should consider, in addition to the information set
forth elsewhere in this Prospectus, the following matters in evaluating the
Company and the Class A Common Stock offered hereby.
RISKS OF INTEGRATING ACQUISITIONS
On a pro forma basis, the Acquisitions increased the Company's net sales in
1996 from $111.9 million to $372.8 million. Integration of the operations of
Krebsoge and PMH with those of Sinter will place a strain upon the Company's
financial and managerial resources. There can be no assurance that the Company
will be able to integrate these operations successfully. The full benefits of
the business combination of Sinter with Krebsoge and PMH will require the
integration of administrative, finance, purchasing, engineering, sales and
marketing organizations; the coordination of production efforts; and the
implementation of appropriate operational, financial and management systems and
controls. Such benefits will also be dependent, in part, upon an increase in the
productivity of the work force of PMH and Krebsoge and the ability to meet
performance requirements under specific contracts, each of which require
substantial attention from the senior management of the Company. Additionally,
the Company's management must also address concerns related to the integration
of the "corporate cultures" of PMH and Krebsoge with that of Sinter. If the
Company fails to successfully integrate PMH and Krebsoge, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, the Unaudited Pro Forma Financial Information
contains adjustments relating to the integration of PMH and Krebsoge with
Sinter. Although these adjustments are based upon available information and
certain assumptions the Company considers reasonable as of the date of this
Prospectus, actual amounts could differ from those set forth therein. Moreover,
no assurance can be given that the anticipated impact of the integration of PMH
and Krebsoge with Sinter upon the Company's financial condition and results of
operations as presented in such pro forma information will be as presented. See
"Unaudited Pro Forma Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON AUTOMOTIVE INDUSTRY; AUTOMOTIVE INDUSTRY CYCLICALITY
The automotive industry is the primary end-user of pressed powder metal
parts, and in 1995 (the most recent year for which data is available) accounted
for approximately 67% of the North American and 77% of the European pressed
powder metal parts industry's aggregate production. Sinter's sales to the
automotive industry have increased as a percentage of total sales over the last
decade and accounted for approximately 63% of Sinter's net sales during 1996.
Giving effect to the Acquisitions, the Company's sales to the automotive
industry accounted for approximately 74% of the Company's net sales during 1996.
The automotive industry is highly cyclical, dependent on consumer spending and
subject to the impact of domestic and international economic conditions and
international trade. The Company also sells its products to customers in other
industries that experience cyclicality in demand for products, such as the home
appliance industry. Economic factors adversely affecting automotive production
and consumer spending could have an adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Customers."
RELIANCE ON SIGNIFICANT CUSTOMERS
General Motors and Chrysler accounted for approximately 27% and 10%,
respectively, of Sinter's 1996 net sales, and its top five customers accounted
for approximately 50% of its 1996 net sales. Giving effect to the Acquisitions,
in 1996 Ford, General Motors and Chrysler would have accounted for approximately
17.3%, 10.9% and 8.3%, respectively, of the Company's net sales, and the top
five customers of the Company would have accounted for approximately 46% of the
Company's net sales. Although the Company has had long-standing relationships
with each of Ford, General Motors and Chrysler and sells a wide variety of
products to each company, there can be no assurance that sales to these
customers will continue; further, continuation of these relationships is
dependent on the customers' on-going satisfaction with the price, quality and
delivery of the Company's products. Moreover, while the Company has long-term
supply arrangements with many of its customers, such supply arrangements do not
require such customers to purchase minimum amounts of products. Thus, a
significant decrease or interruption in business from Ford, General Motors or
Chrysler, or a
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loss of any of the Company's other significant customers, could have a material
adverse effect on the Company's financial condition, liquidity and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Customers."
RISKS OF ACQUISITION STRATEGY
The Company intends to pursue further growth through the opportunistic
acquisition of assets or companies involved in the pressed powder metal parts
industry and routinely reviews such acquisition opportunities. While the Company
believes that currently there are available a number of potential acquisition
candidates that would be complementary to its business, the Company currently
has no agreements, understandings or arrangements to acquire any specific
business or other material assets. The Company cannot predict whether it will be
successful in pursuing such acquisition opportunities or what the consequences
of any such acquisition would be. Future acquisitions may involve the
expenditure of significant funds and management time. Depending upon the nature,
size and timing of future acquisitions, the Company may be required to raise
additional financing. There is no assurance that such additional financing will
be available to the Company on acceptable terms.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
Giving effect to the Acquisitions and the Offering, the Company's total
indebtedness on December 31, 1996 would have been $198.0 million, and the
percentage of total long-term debt to total capitalization as of December 31,
1996 would have been approximately 65.8%. The consequences of such leverage
include, but are not limited to, the following: (i) possible impairment of the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, product innovations, enhanced
marketing programs, refinancing of outstanding indebtedness and general
corporate purposes; (ii) significantly increased cash requirements for debt
service; (iii) covenants and operating restrictions imposed by the terms of the
New Credit Facility requiring the Company to meet certain financial tests and
limiting, among other things, its ability to borrow additional funds or to
dispose of assets; (iv) putting the Company at a competitive disadvantage
against less leveraged competitors; and (v) increasing the impact that a
downturn in the Company's business will have on its results of operations. The
Company's scheduled principal payments after giving effect to the Offering will
total $7.5 million in 1997, $10.5 million in 1998 and $12.8 million in 1999.
Accordingly, even after giving effect to the Offering, the Company will be
required to make substantial principal payments in respect of indebtedness or to
refinance indebtedness in succeeding years. Additionally, the Company's
obligations under the New Credit Facility are secured by liens on substantially
all of its assets. Accordingly, if the Company is in default under the New
Credit Facility, the lenders thereunder could foreclose upon their collateral,
which would have a material adverse effect upon the Company. The Company's
ability to meet its debt service obligations will depend upon its ability to
execute its business plan, which includes successfully integrating the
businesses of PMH and Krebsoge with existing operations and other factors, many
of which are not within its control, including fluctuating interest rates and
general economic conditions. See "-- Risks of Integrating Acquisitions," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON CONTINUOUS IMPROVEMENT OF CRITICAL TECHNOLOGIES; PRODUCT CYCLES
The ability of the Company to continue to meet customer specifications in
respect of performance, cost, quality and service will be dependent upon the
ability of the Company to sustain the competitive technological advantages that
management believes the Company currently possesses. The Company's business may
therefore require from time to time significant additional capital expenditures
and investment in the areas of research and development, manufacturing and
management information systems. There can be no assurance that the Company will
be successful in this effort or that it will have the capital or other resources
available to meet this continuing challenge. The inability of the Company to
continuously improve and sustain its competitive technological advantages could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Competitive Strengths."
8
<PAGE> 11
The Company's products are subject to obsolescence as the Company's
customers introduce new or redesigned products. The Company competes for new
business principally at the beginning of the development of new products, which
generally begins two to four years prior to full scale production, and the
redesign of existing products by its major customers, which typically involve
long lead times as well. Although the Company has been successful in the past in
obtaining such new business, there can be no assurance that the Company will
continue to be able to obtain such new business in the future. The failure of
the Company to obtain new business when its customers introduce new or
redesigned products could lead to product obsolescence, and thus have a material
adverse effect on the Company's business, financial condition and results of
operations.
RECENT FINANCIAL PERFORMANCE OF PMH
PMH, which was organized in 1989 and in which Sinter acquired a 30% equity
interest in 1993, experienced substantial operating losses in each of its fiscal
years prior to 1994, had a stockholders' deficit of approximately $45.1 million
as of December 31, 1993, and had to renegotiate debt arrangements in 1990, 1991
and 1993. In 1993, PMH's management commenced a restructuring of its
manufacturing operations and product lines in an attempt to improve its
financial performance. PMH's earnings increased in 1994, 1995 and 1996, reducing
the stockholders' deficit to $26.3 million as of November 22, 1996. As part of
its integration of PMH, the Company intends to, among other things, lower PMH's
overhead and other costs. However, even if such cost-saving measures are
implemented, there can be no assurance that PMH's future financial performance
will improve. If PMH's financial performance does not so improve, the Company's
business, financial condition and results of operations may be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations: PMH" and the Consolidated
Financial Statements of PMH, included elsewhere in this Prospectus.
COMPETITION
The Company operates in a highly competitive, fragmented industry. The
Company competes with other manufacturers of pressed powder metal parts, certain
of which may have greater financial and other resources than the Company, on the
basis of product quality and performance attributes, customer service, price,
new product innovation and timely delivery. The Company also competes with
companies using wrought steel or casting technologies, since the Company's
technological advancements are increasing the instances in which the Company's
parts may be substituted for wrought steel or iron parts. There can be no
assurance that the Company's business will not be adversely affected by
increased competition in the markets in which it operates. See
"Business -- Competition."
RISK OF INTERNATIONAL OPERATIONS
Giving effect to the Acquisitions, international sales accounted for
approximately 46% of the Company's 1996 net sales and international assets
accounted for approximately 38% of the Company's assets as of December 31, 1996.
International sales are subject to numerous risks, including political and
economic instability in foreign markets, restrictive trade policies of foreign
governments, economic conditions in local markets, the imposition of product
tariffs and the burdens of complying with a wide variety of international and
U.S. export laws. Additionally, a significant portion of the Company's revenues
and expenses are denominated in currencies other than U.S. dollars. Changes in
exchange rates therefore may have a significant effect on the Company's
business, financial condition and results of operations.
RELIANCE ON MANAGEMENT TEAM
The Company's continued success will depend largely on the efforts,
abilities and services of its current management team, which includes members of
Krebsoge's former management team. If for any reason any member of the
management team leaves the Company, the Company could be adversely affected. In
addition, the Company believes future growth will require the hiring of
additional managerial personnel and there can
9
<PAGE> 12
be no assurances that the Company will be able to attract and retain such
personnel when necessary. See "Management -- Directors and Executive Officers"
and "-- Other Significant Employees of the Company."
SUPPLY AND PRICE OF POWDER METAL
The Company's principal raw material is powder metal, which is produced
primarily from scrap metal. Currently there are a limited number of producers of
high quality powder metal. The Company obtains its powder metal requirements
from a number of powder metal producers, including Hoeganaes Corporation in the
United States ("Hoeganaes U.S."), Mannesmann AG, Hoganas AB in Sweden ("Hoganas
Sweden"), Quebec Metal Powder and Kobelco. In 1995 (the most recent year for
which data is available), Hoeganaes U.S. and Quebec Metal supplied Sinter with
approximately 45% and 30%, respectively, of its powder metal requirements,
Hoeganaes U.S. supplied PMH with substantially all of its powder metal
requirements and Mannesmann AG and Hoganas Sweden supplied Krebsoge with
approximately 36% and 50%, respectively, of its powder metal requirements. The
Company typically enters into two-year contracts with its suppliers which either
fix the price for powder metal or provide for adjustments in the price of powder
metal depending upon the price of scrap metal. In September 1996, Sinter entered
into a new two-year supply agreement with Hoeganaes U.S., which contains certain
minimum purchase requirements as well as a firm commitment to supply powder
metal. None of the Company's contracts with other major suppliers provide for
minimum purchase requirements or firm commitments to supply powder metal. Except
for a brief period in 1993 during which Sinter experienced difficulty in
obtaining a particular blend of powder metal, the Company has generally been
able to obtain sufficient supplies of powder metal for its operations. The price
of powder metal is subject to change as the price paid by powder metal producers
for scrap metal changes. An interruption in the Company's supply of powder metal
or a substantial increase in its price, which the Company is generally unable to
pass-through to its customers, or a reduction in the Company's need for powder
metal below the minimum purchase requirement from Hoeganaes U.S., could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Suppliers and Raw Materials."
LABOR RELATIONS
Approximately 54% of the Company's employees are covered by collective
bargaining or similar agreements which expire at various times over the next
several years. The Company's employees located in Germany are represented by the
National Metal Workers Union under a series of regional contracts that run one
to two years. The Company's employees in Sweden are members of a Swedish labor
union. The Company's collective bargaining agreement with its employees at its
St. Thomas, Ontario facility expires May 17, 1998. The Company anticipates that
new agreements on satisfactory terms will be reached as these existing
agreements expire. The Company's collective bargaining agreement with its
employees at its Van Wert, Ohio facility expired March 1, 1997 without the
Company and such employees reaching agreement on the terms of a new collective
bargaining agreement. The Van Wert employees have not taken a strike vote, but
they did formally reject the Company's initial proposal for a new collective
bargaining agreement. Currently, the Company and the employees at Van Wert are
engaged in ongoing negotiations with respect to a new collective bargaining
agreement. There can be no assurance, however, that a new agreement will be
reached at Van Wert or at any of the Company's other facilities when they expire
without a work stoppage or strike or will be reached on terms satisfactory to
the Company. A prolonged work stoppage or strike at Van Wert or any of the
Company's other manufacturing facilities could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Employees."
ENVIRONMENTAL CONSIDERATIONS
Pressed powder metal parts manufacturers such as the Company are subject to
increasingly stringent environmental standards imposed by federal, state and
local environmental laws and regulations. The Company has made, and will
continue to make, expenditures to comply with such environmental standards. The
Company regularly reviews its procedures and policies for compliance with
environmental laws. However, current conditions and future events, such as
changes in existing laws and regulations, may give rise to additional compliance
costs that could have a material adverse effect on the Company's business,
financial
10
<PAGE> 13
condition, or results of operations. Historical groundwater and soil
contamination has been identified at PMH's St. Thomas, Ontario and Van Wert,
Ohio facilities. Moreover, as the Company integrates the operations of PMH and
Krebsoge, additional environmental issues may be discovered and, as a result,
the Company may incur additional expenditures to address such issues. No
assurance can be given that such additional environmental issues will not
adversely impact the Company's financial condition, liquidity or results of
operations. See "Business -- Environmental Matters."
CONTROL BY CERTAIN EXISTING STOCKHOLDERS; STOCKHOLDERS' AGREEMENT; ANTI-TAKEOVER
PROVISIONS
Upon completion of the Offering, Citicorp Venture Capital, Ltd. ("CVC") and
certain members of the Company's management will beneficially own approximately
25% of the outstanding shares of the Class A Common Stock (the only voting
securities of the Company) and CVC will own all the outstanding shares of Class
B Common Stock (which are convertible into Class A Common Stock on a one-for-one
basis at the option of the holder). The Company and certain of its significant
stockholders, who in the aggregate will hold after the Offering approximately
24% of the Class A Common Stock and all of the shares of Class B Common Stock,
have agreed to vote their respective shares to elect certain persons to the
Company's Board of Directors. As a result, these stockholders may significantly
impact the direction of the affairs of the Company. See "Principal
Stockholders -- Stockholders' Agreement" and "Description of Capital Stock."
Certain provisions of the Company's Restated Certificate of Incorporation
and Restated By-laws, as well as certain provisions of the Delaware General
Corporation Law, could have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately upon consummation of the Offering, the Company will have
outstanding 7,211,247 shares of Class A Common Stock, (7,541,247 if the U.S.
Underwriters exercise in full their over-allotment option). 4,750,000 of such
shares (5,080,000 if the U.S. Underwriters exercise in full their over-allotment
option) will have been sold in the Offering or the Company's initial public
offering in October 1994 and will be freely transferable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for such shares owned at any time by an "affiliate" of
the Company within the meaning of Rule 144 under the Securities Act, which sales
will be subject to the volume limitations and certain other restrictions set
forth in Rule 144. CVC and certain other stockholders have the right, subject to
certain restrictions and limitations, to participate in future registered sales
of Class A Common Stock by the Company. No prediction can be made as to the
effect, if any, that future sales of shares of Class A Common Stock, or the
availability of shares of Class A Common Stock for future sales, will have on
the market price of shares of Class A Common Stock prevailing from time to time.
The sale of any substantial number of shares of Class A Common Stock following
the Offering, or the perception that such sales could occur, could have a
material adverse impact on the market price of the Class A Common Stock. See
"Shares Eligible for Future Sale."
LIMITED TRADING HISTORY AND MARKET FOR COMMON STOCK
The Company's Class A Common Stock has been traded on the New York Stock
Exchange ("NYSE") since October 1994, although prior to the Offering only
approximately 51% of the Company's outstanding Class A Common Stock was listed
for trading. After the Offering, approximately 66% of the Company's outstanding
Class A Common Stock will be listed for trading on the NYSE. The average daily
trading volume in the Class A Common Stock in 1996 was approximately 10,500
shares per day. Accordingly, the prices at which such trades have been made may
not reflect the prices that would have prevailed had there been a more active
market. Furthermore, there can be no assurance that the trading price for the
Class A Common Stock will approximate the price of the Class A Common Stock
prior to the Offering. The public offering price for the Class A Common Stock
offered hereby has been determined by negotiations between the Underwriters and
the Company in light of recent sale prices of the Class A Common Stock as
reported on the NYSE. There can be no assurance that an active public market for
the Class A Common Stock will develop or be sustained
11
<PAGE> 14
after the Offering or that the public offering price corresponds to the price at
which the Class A Common Stock will trade in the public market subsequent to the
Offering. See "Price Range of Common Stock."
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements contained herein that are not historical facts, including
but not limited to, the Company's integration plans, are based on current
expectations. These statements are forward looking in nature and involve a
number of risks and uncertainties. Actual results may vary materially. The
factors that could cause actual results to vary materially include but are not
limited to those items identified under "Risk Factors" and other risks described
from time to time in the Company's reports filed with the Securities and
Exchange Commission (the "Commission"). The Company cautions potential investors
not to place undue reliance on any such forward looking statements, which
statements are made pursuant to the Private Securities Litigation Reform Act of
1995, and as such, speak only as of the date made.
12
<PAGE> 15
THE COMPANY
HISTORICAL OVERVIEW
Sinter was organized in December 1991 to acquire all of the outstanding
capital stock of Pennsylvania Pressed Metals, Inc. ("PPM") from a subsidiary of
the Gleason Corporation. PPM had been engaged since 1965 in the design,
engineering and production of precision pressed powder metal parts for use
principally in the automotive, home appliance, lawn and garden and power tool
industries. Since 1991, Sinter has completed eight acquisitions, increasing its
net sales from $50.8 million in 1991 to $372.8 million in 1996, on the pro forma
basis described herein:
- In August 1992, Sinter purchased certain assets of American Powder
Metals for $2.2 million and established a manufacturing facility in
Conover, North Carolina that provided Sinter with technology in the
production of aluminum alloy metal parts and broadened Sinter's
geographical scope into the southeastern United States.
- In November 1993, Sinter purchased a 30% interest in PMH, one of the
largest manufacturers of pressed powder metal parts in the United
States, offering products primarily to the United States automotive
industry.
- In July 1994, Sinter acquired Midwest Sintered Products Corporation
("Midwest") for approximately $3.1 million, which provided Sinter
with a strategically-located production facility near certain major
customers as well as additional production technology in the
production of stainless steel pressed powder metal parts.
- In June 1995, Sinter acquired Kolsva Sinterteknik Atkiebolag AB, a
Swedish corporation ("Sinterteknik"), for approximately $3.8 million
and 100,000 shares of Class A Common Stock, which expanded Sinter's
geographical scope into Europe and introduced Sinter to the
Scandinavian automotive industry.
- In July 1996, Sinter acquired SinterForm Incorporated ("SinterForm")
for approximately $8.6 million and 5,000 shares of Class A Common
Stock, which provided Sinter with a strategically-located facility
producing pressed powder metal parts for use primarily in the
automotive industry.
- In December 1996, Sinter acquired Delco Remy America, Inc.'s Powder
Metal Forge Unit. This acquisition provided Sinter with additional
technology and increased the breadth of its product offerings.
THE ACQUISITIONS
On October 7, 1996, Sinter and MAAG Holding AG ("MAAG") entered into
agreements whereby Sinter agreed to buy the remaining 70% interest in PMH not
already owned by Sinter and 98.22% of the outstanding capital stock of Krebsoge.
Before the Acquisitions, PMH was the second largest pressed powder metal parts
manufacturer in North America, based upon 1996 sales (through November 22, 1996)
of approximately $101.7 million. Krebsoge, which offers pressed powder metal
parts for use principally in the European automotive, machine, power tool and
home appliance industries, is among the leading pressed powder metal parts
manufacturers in Europe, and the largest pressed powder metal parts producer in
Germany. Krebsoge had 1996 sales of approximately $159.3 million.
On December 19, 1996 (the "Closing Date"), the Acquisitions were
consummated for aggregate consideration of approximately $210.3 million. On
December 30, 1996, the Company acquired the remaining 1.78% of the outstanding
capital stock of Krebsoge not already owned for $1.4 million, from a senior
executive officer of Krebsoge.
As a result of the Acquisitions, the Company is the world's largest
independent pressed powder metal parts manufacturer, based on net sales. The
Company believes that the Acquisitions have strengthened its core business,
expanded its product line and expanded its customer base, particularly in
Europe. Moreover, the
13
<PAGE> 16
Company expects to have an increased ability to bid on contracts for new
business areas that draw upon the complementary capabilities and customer
relationships of PMH and Krebsoge. Additionally, the Company expects to achieve
significant operating efficiencies and cost savings resulting from the
consolidation of facilities, staff reductions, process improvements and
elimination of duplicative costs. See "Business -- Competitive Strengths" and
"-- Growth Strategy."
In October 1994, Sinter completed an initial public offering of
approximately 2.5 million primary shares of Class A Common Stock. The Company
used the net proceeds of approximately $14.7 million to repay certain
outstanding indebtedness and to redeem the Company's then outstanding preferred
stock.
The Company's executive offices are located at 50 Public Square, Suite
3200, Cleveland, Ohio 44113, telephone (216) 771-6700, fax (216) 344-7631,
internet address http://sinter-metals.com. The Company's website and the
information contained in this site shall not be deemed a part of this
Prospectus.
14
<PAGE> 17
USE OF PROCEEDS
The Offering. The net proceeds to be received by the Company from the sale
of the 2.2 million shares of Class A Common Stock in the Offering (after
deduction of estimated underwriting discounts and commissions and expenses
payable by the Company) are estimated to be approximately $48.3 million ($55.7
million if the U.S. Underwriters' over-allotment option is exercised in full).
The net proceeds to be received by the Company from the Offering will be used to
retire $48.3 million of the U.S. Term Facilities on a pro rata basis. Interest
on the U.S. Term Facilities is based on either the LIBOR Rate or the Alternate
Base Rate, which is the highest of the Prime Rate, Federal Funds Effective Rate
plus 1/2 of 1% and the Base CD Rate plus 1% (in each case, as defined in the New
Credit Facility), in each case plus an applicable margin. The U.S. Term
Facilities currently bear interest at a weighted average of 8.41% per annum and
mature, in the case of the Tranche A Term Loan Facility, on June 30, 2003, and
in the case of the Tranche B Term Loan Facility, on June 30, 2005.
Financing the Acquisitions. In order to (i) fund the Acquisitions,
including the repayment of certain PMH and Krebsoge indebtedness, (ii) refinance
Sinter's then outstanding debt of $11.3 million, and (iii) pay related costs and
expenses of approximately $6.8 million, Sinter entered into a $275.0 million
credit facility with a syndicate of financial institutions (the "New Credit
Facility"). Under the New Credit Facility, the lenders have provided the Company
with (i) three senior secured term loan facilities in the aggregate principal
amount of up to $225.0 million, allocated between (a) a Tranche A Term Loan
Facility in an aggregate principal amount of $30.0 million, (b) a Tranche B Term
Loan Facility in the aggregate principal amount of $115.0 million (together with
the Tranche A Term Loan Facility, the "U.S. Term Facilities"), and (c) a German
Term Facility (the "German Term Facility") in the aggregate principal amount of
DM 124.5 million (approximately $80.0 million), (ii) a senior secured revolving
credit facility in an aggregate amount equal to $30.0 million, of which up to
$20.0 million is available in the form of standby letters of credit and (iii) a
senior secured revolving credit facility in an aggregate amount of DM 30 million
(approximately $19.3 million), of which DM 10 million (approximately $6.4
million) is available in the form of standby letters of credit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Certain Transactions" and
"Underwriters." The U.S. dollar translations set forth above are based on the
December 19, 1996 exchange rate of 1.55 DMs per U.S. dollar.
The following sets forth the sources and uses of funds provided by the New
Credit Facility and the Offering.
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
Gross proceeds from the Offering...................................... $ 52,800
Gross proceeds from the New Credit Facility
Revolving Credit Facility........................................... 4,763
Tranche A Facility.................................................. 30,000
Tranche B Facility.................................................. 115,000
German Term Loan.................................................... 80,000
--------
Total sources............................................... $282,563
========
USES OF FUNDS:
Consideration for equity of Krebsoge and PMH.......................... $ 82,938
Repayment of PMH indebtedness......................................... 53,900
Repayment of Krebsoge indebtedness.................................... 74,832
Refinance existing Sinter bank debt................................... 11,289
Fees and expenses of New Credit Facility.............................. 6,804
Repayment of Tranche A Facility....................................... 8,951
Repayment of Tranche B Facility....................................... 34,313
Repayment of Revolving Credit Facility................................ 5,000
Estimated fees and expenses of Offering............................... 4,536
--------
Total uses.................................................. $282,563
========
</TABLE>
15
<PAGE> 18
CAPITALIZATION
The following sets forth the short-term debt and capitalization of the
Company on an actual basis as of December 31, 1996 and as adjusted to reflect
the Offering and the application of the net proceeds therefrom to the repayment
of indebtedness. See "Use of Proceeds." This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Financial Information" and the Consolidated
Financial Statements of each of Sinter, Krebsoge and PMH and the Notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
SHORT-TERM DEBT:
Current portion of long-term debt........................ $ 13,367 $ 7,463
========= =========
LONG-TERM DEBT, NET OF CURRENT MATURITY:
New Credit Facility...................................... $212,505 $ 175,145
Term Loans............................................... 3,760 3,760
Revolving Credit Facility................................ 6,750 1,750
Capital Lease Obligation................................. 2,708 2,708
Industrial Development Bond.............................. 7,195 7,195
--------- ---------
Total long-term debt................................ 232,918 190,558
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock, authorized 5,000,000 shares; none issued
and outstanding....................................... -- --
Class A Common Stock, par value $.001 per share;
authorized 20,000,000 shares; issued and outstanding
5,009,747 shares, and 7,209,747 shares on a pro forma
basis(1).............................................. 5 7
Class B Common Stock, par value $.001 per share;
authorized 5,000,000 shares; issued and outstanding
2,543,381 shares...................................... 2 2
Additional paid-in capital............................... 27,924 76,186
Retained earnings........................................ 22,641 22,641
Other equity............................................. (11) (11)
--------- ---------
Total stockholders' equity.......................... 50,561 98,825
--------- ---------
Total capitalization............................. $283,479 $ 289,383
========= =========
</TABLE>
- ---------------
(1) Excludes 338,967 shares of Class A Common Stock issuable upon exercise of
employee stock options outstanding as of December 31, 1996, of which 103,000
were exercisable.
16
<PAGE> 19
PRICE RANGE OF COMMON STOCK
The Class A Common Stock has traded on the NYSE since October 26, 1994
under the symbol "SNM." The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Class A Common Stock as
reported on the NYSE:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
PRICE
---------------------
HIGH LOW
---- ----
<S> <C> <C>
1994
Fourth Quarter (since October 26, 1994).......... $10 3/8 $ 9
1995
First Quarter.................................... 10 8 1/2
Second Quarter................................... 10 1/2 8 7/8
Third Quarter.................................... 11 1/4 10
Fourth Quarter................................... 12 3/8 9 7/8
1996
First Quarter.................................... 15 1/2 11 5/8
Second Quarter................................... 19 1/8 13 5/8
Third Quarter.................................... 22 1/2 16 3/4
Fourth Quarter................................... 30 1/4 20
1997
First Quarter (through March 6, 1997)............ 29 5/8 23 7/8
</TABLE>
As of December 31, 1996 there were approximately 99 holders of record of
Class A Common Stock and one holder of record of Class B Common Stock. The
Company believes that it has significantly more than 99 beneficial holders of
its Class A Common Stock. CVC is the sole holder of Class B Common Stock. See
"Principal Stockholders" and "Description of Capital Stock."
DIVIDEND POLICY
The Company has not declared or paid any dividends on its Common Stock
since its incorporation. The Company currently intends to retain earnings to
support its growth strategy and does not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion. In addition, the payment of
dividends by the Company on its Common Stock is subject to limitations under the
New Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, certain
information concerning the exchange rate for the German Deutschemark against the
U.S. dollar, based on the Noon Buying Rate. For a discussion of the effects of
currency fluctuations on the Company's operations, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
<TABLE>
<CAPTION>
DM PER US $1.00
--------------------------------------------
AT END AVERAGE
CALENDAR YEAR OF PERIOD RATE (1) HIGH LOW
- --------------------------------------------- --------- -------- ------ ------
<S> <C> <C> <C> <C>
1993......................................... 1.7263 1.6533 1.7480 1.5655
1994......................................... 1.5488 1.6228 1.7670 1.4860
1995......................................... 1.4335 1.4331 1.5653 1.3455
1996......................................... 1.5415 1.5050 1.5730 1.4306
</TABLE>
- ---------------
(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
17
<PAGE> 20
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information (the "Unaudited Pro
Forma Financial Information") is based on the historical financial statements of
Sinter, PMH and Krebsoge and has been prepared to illustrate the effects of the
Acquisitions, the New Credit Facility and the Offering.
The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 1996 give effect to each of these transactions as if
such transactions had been completed as of January 1, 1996.
The Acquisitions have been accounted for using the purchase method of
accounting. The total purchase cost of the Acquisitions has been allocated to
the tangible and intangible assets acquired and liabilities assumed based upon
their respective fair values. As indicated in Note 3 to the audited Consolidated
Financial Statements of Sinter included elsewhere herein, the cash purchase
price for the Acquisitions is final but the purchase price allocation at
December 31, 1996 is preliminary. The final allocation of the purchase price is
contingent upon the receipt of the final appraisals of certain acquired assets
and final determination of assumed liabilities, and is not expected to differ
materially from the preliminary allocation.
The Unaudited Pro Forma Financial Information does not purport to represent
the actual results of operations of the Company had the transactions and events
assumed therein in fact occurred on the date specified, nor is it necessarily
indicative of the results of operations that may be achieved in the future. The
Unaudited Pro Forma Financial Information is based on certain assumptions and
adjustments described in the notes hereto and should be read in conjunction
therewith. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Consolidated Financial Statements and the Notes
thereto for each of Sinter, PMH and Krebsoge, included elsewhere in this
Prospectus.
18
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
HISTORICAL (1) PRO FORMA
------------------------------ --------------------------
SINTER KREBSOGE PMH ADJUSTMENTS CONSOLIDATED
-------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $111,888 $159,265 $101,671 $ -- $372,824
Cost of sales....................... 86,176 125,439 90,730 (908)(2) 301,437
-------- -------- -------- ------- --------
Gross profit...................... 25,712 33,826 10,941 908 71,387
Selling, general and administrative
expenses.......................... 10,289 24,470 6,167 (2,000)(3) 38,926
Amortization of intangible assets... 415 6,315 -- (3,331)(4) 3,399
-------- -------- -------- ------- --------
Income from operations............ 15,008 3,041 4,774 6,239 29,062
Interest expense.................... 456 5,379 2,314 5,813(5) 13,962
Other expense/(income).............. (153) (670) 250 -- (573)
-------- -------- -------- ------- --------
Income before income tax
expense........................ 14,705 (1,668) 2,210 426 15,673
Income tax expense.................. 5,350 499 38 507(6) 6,394
-------- -------- -------- ------- --------
Net income/(loss)................... $ 9,355 $ (2,167) $ 2,172 $ (81) $ 9,279
======== ======== ======== ======= ========
Weighted average common shares
outstanding....................... 7,550 9,750
Net income per share................ $ 1.24 $ 0.95
OTHER FINANCIAL DATA:
Depreciation and amortization....... $ 5,025 $ 15,024 $ 5,812 $(1,857) $ 24,004
Capital expenditures................ 11,035 6,763 7,050 24,848
</TABLE>
- ---------------
(1) Reflects the historical financial statements of the companies. The 1996
statement of operations for PMH includes only the results for the period
from January 1, 1996 to November 22, 1996, which corresponds with the
audited financial statements of PMH included elsewhere herein. The 1996
statement of operations for Krebsoge includes the results of operations for
the period January 1, 1996 to December 19, 1996, which corresponds with the
audited financial statements of Krebsoge included elsewhere herein. All
references in this Prospectus to the year ended 1996 refer to the period
from January 1, 1996 to November 22, 1996 with respect to PMH, and the
period from January 1, 1996 to December 19, 1996 with respect to Krebsoge.
The consolidated statement of income for 1996 included in the audited
financial statements of Krebsoge included elsewhere herein was prepared in
accordance with German GAAP but has been converted into U.S. GAAP for
purposes of this pro forma presentation. See Note 26 to the audited
financial statements of Krebsoge for discussion of the primary differences
between German GAAP and U.S. GAAP. Krebsoge's results of operations were
converted to U.S. dollars using the average exchange rate for 1996 of 1.50
DMs per U.S. dollar.
19
<PAGE> 22
(2) Represents the adjustment to cost of sales resulting from:
<TABLE>
<S> <C>
Increased depreciation as a result of the step-up in value of
property, plant and equipment................................ $ 617
Reversal of step-up in finished goods inventory................ 800
Reduced raw material costs by purchasing under existing Sinter
contracts.................................................... (1,000)
Elimination of operating lease as a result of property
acquisition.................................................. (1,325)
--------
$ (908)
========
</TABLE>
(3) Represents the cost reductions that result directly from the Acquisitions,
summarized as follows:
<TABLE>
<S> <C>
Reduced administrative headcount from closing duplicative
facilities................................................... $ 1,700
Elimination of other duplicative costs......................... 300
--------
$ 2,000
========
</TABLE>
(4) Represents the net reduction in goodwill amortization, as follows:
(a) Pro forma amortization of goodwill and other intangible assets
recognized as a result of the Acquisitions:
<TABLE>
<CAPTION>
ANNUAL
VALUE AMORTIZATION
-------- ------------
<S> <C> <C>
Goodwill recognized after identification of all
other assets.................................. $117,015 $2,925
Intangible assets identified during purchase
price allocation.............................. 1,000 59
-------- ------
$118,015 $2,984
======== ======
</TABLE>
Consistent with the historical accounting policies of Sinter, and
the expected cash flows from these investments, goodwill is being
amortized over 40 years.
(b) The results of operations for Krebsoge include goodwill associated
with prior acquisitions. Since there is a new basis of accounting as
a result of the Acquisitions, the historical amortization is
reversed, as follows:
<TABLE>
<S> <C>
Goodwill amortization reflected in Krebsoge historical
results of operations (U.S. GAAP)......................... $ (6,315)
Pro forma goodwill amortization (per Note (a) above)......... 2,925
Pro forma intangible asset amortization...................... 59
--------
$ (3,331)
========
</TABLE>
(5) Represents the adjustment to reflect (i) interest expense of $12,874 on
$177,608 of borrowings under the New Credit Facility to complete the
Acquisitions and repay a portion of Sinter's debt, after application of the
net proceeds from the Offering, (ii) amortization expense representing the
New Credit Facility costs of $6,936, amortized over the eight year life of
the facility and (iii) the interest expense related to a capital lease
obligation recorded in the application of purchase accounting of $230. In
the aggregate, such adjustments equate to a pro forma consolidated interest
expense of $13,962 for the period ended December 31, 1996. The interest on
the borrowings under the New Credit Facility was calculated using the rates
in effect on December 31, 1996, as adjusted for the reduced interest rate
based upon a reset leverage ratio, as defined in the New Credit Facility, as
a result of the application of the net proceeds of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company may qualify for
a further reduction in the interest rate if the U.S. Underwriters'
over-allotment option is exercised in full.
(6) Represents the estimated tax effects of the adjustments, including the
reversal of the utilization of operating loss carryforwards of PMH and
Krebsoge that will be limited as a result of the Acquisitions.
20
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
SINTER
The selected consolidated financial data for Sinter presented below for,
and as of the end of each of the years in the five-year period ended December
31, 1996, is derived from Sinter's Consolidated Financial Statements which have
been audited by Arthur Andersen LLP, independent accountants. The consolidated
financial statements at December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 and the auditors' report thereon are
included elsewhere in this Prospectus. The consolidated financial statements at
and for the years ended December 31, 1992 and 1993 and at the year ended
December 31, 1994 are not included in this Prospectus. This selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations: Pro Forma and Historical Sinter" and
Sinter's Consolidated Financial Statements and related Notes, included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $57,778 $68,584 $82,479 $94,310 $111,888
Cost of sales................................... 45,606 54,061 64,765 73,245 86,176
------- ------- ------- ------- --------
Gross profit.................................... 12,172 14,523 17,714 21,065 25,712
Selling, general and administrative expenses.... 4,963 6,442 8,212 7,698 10,289
Amortization of intangible assets............... 319 308 302 332 415
------- ------- ------- ------- --------
Income from operations.......................... 6,890 7,773 9,200 13,035 15,008
Interest expense................................ 2,769 5,107 1,956 287 456
Other expense (income), net..................... 44 11 166 111 (153)
------- ------- ------- ------- --------
Income before income taxes and extraordinary
charge........................................ 4,077 2,655 7,078 12,637 14,705
Provision for income taxes...................... 1,875 2,370 2,900 4,750 5,350
------- ------- ------- ------- --------
Net income before extraordinary charge.......... 2,202 285 4,178 7,887 9,355
Extraordinary charge, net....................... -- -- (580) -- --
------- ------- ------- ------- --------
Net income...................................... 2,202 285 3,598 7,887 9,355
Preferred dividends............................. (242) (242) (202) -- --
------- ------- ------- ------- --------
Net income applicable to Common Stock......... $ 1,960 $ 43 $ 3,396 $ 7,887 $ 9,355
======= ======= ======= ======= ========
PER SHARE DATA:
Income before extraordinary charge.............. $ .47 $ .01 $ .72 $ 1.05 $ 1.24
Extraordinary charge............................ -- -- (.11) -- --
Net income...................................... .47 .01 .61 1.05 1.24
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 1,272 $ (180) $ 2,130 $ 9,128 $ 17,410
Total assets.................................... 44,894 47,086 53,335 65,220 399,480
Short-term debt................................. 1,910 2,187 28 267 13,367
Long-term debt.................................. 21,127 20,013 2,736 4,432 232,918
Stockholders' equity............................ 5,038 5,599 32,244 41,462 50,561
Cash dividends paid on common stock............. -- -- -- -- --
</TABLE>
21
<PAGE> 24
KREBSOGE
The selected consolidated financial data for and as of the end of each of
the two years in the period ended December 31, 1995 and for and as of the end of
the period from January 1, 1996 to December 19, 1996, are derived from
Krebsoge's Consolidated Financial Statements which have been audited for fiscal
year 1995 and 1996 by Price Waterhouse GmbH, independent accountants, and for
the year ended December 31, 1994 by BDO Grunewalder Treuhand GmbH, independent
accountants. The Consolidated Financial Statements at December 31, 1995 and
December 19, 1996 and for each of the two years in the period ended December 31,
1995 and for the period from January 1, 1996 to December 19, 1996 and the
auditors' reports thereon are included elsewhere in this Prospectus. The balance
sheet data as of December 31, 1994 is derived from audited statements not
included herein. This selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations: Krebsoge" and Krebsoge's
Consolidated Financial Statements and related Notes, included elsewhere in this
Prospectus.
The selected consolidated financial data presented below (unless otherwise
indicated) and Krebsoge's Consolidated Financial Statements included elsewhere
in this Prospectus are prepared in accordance with German GAAP and are presented
in DMs. German GAAP differs in certain significant respects from U.S. GAAP. For
a discussion of the significant differences between German GAAP and U.S. GAAP as
they relate to Krebsoge, see Note 26 to Krebsoge's Consolidated Financial
Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER FOR THE
31, PERIOD ENDED
---------------------- DECEMBER 19,
1994 1995 1996
--------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................. DM178,936 DM224,798 DM245,438
Net income............................................ 4,416 7,782 6,401
Net (loss) in accordance with U.S. GAAP............... (7,378) (6,569) (3,262)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------- DECEMBER 19,
1994 1995 1996
--------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets, including cumulative loss in excess of
equity.............................................. DM167,220 DM178,211 DM183,688
Total debt............................................ 130,734 123,107 110,443
Stockholders' deficit, classified as cumulative loss
in excess of equity................................. (66,274) (54,905) (48,382)
Stockholders' deficit in accordance with U.S. GAAP.... (1,154) (1,206) (4,346)
</TABLE>
22
<PAGE> 25
PMH
The selected financial data for and as of the end of each of the two years
in the period ended December 31, 1995 and the period from January 1, 1996 to
November 22, 1996 are derived from PMH's Consolidated Financial Statements which
have been audited by Deloitte & Touche LLP, independent auditors. The
Consolidated Financial Statements at December 31, 1995 and November 22, 1996 and
for each of the two years in the period ended December 31, 1995 and the period
from January 1, 1996 to November 22, 1996 and the auditors' report thereon are
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1994 are derived from audited financial statements not presented herein. This
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations: PMH" and PMH's Consolidated Financial
Statements and related Notes, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
--------------------- JANUARY 1, 1996 TO
1994 1995 NOVEMBER 22, 1996
-------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................................... $107,803 $106,473 $ 101,671
Income from operations.............................. 7,002 11,793 4,774
Income before accounting change..................... 5,394 8,798 2,172
Cumulative effect of accounting change.............. -- 770 --
Net income.......................................... 5,394 9,568 2,172
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------- AS OF
1994 1995 NOVEMBER 22, 1996
-------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $ 54,148 $ 56,276 $ 58,944
Total debt............................................ 50,926 53,804 54,192
Capital leases........................................ 249 208 155
Stockholders' deficit................................. (39,815) (29,082) (26,331)
</TABLE>
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Overview and Liquidity and Capital Resources sections give effect to
the Acquisitions, the New Credit Facility and the Offering. This discussion
should be read in conjunction with Unaudited Pro Forma Financial Information and
Notes thereto set forth elsewhere in this Prospectus.
OVERVIEW
The Company is the world's largest independent manufacturer of precision
pressed powder metal parts. The Company manufactures and markets over 4,000
different pressed powder metal parts for use principally in the automotive
industries in North America and Europe and, to a lesser extent, the lawn and
garden, power tool and home appliance industries in North America and Europe.
Sinter was organized in 1991 to facilitate the stock acquisition of PPM. Since
then, the Company has grown considerably through its eight additional
acquisitions, including Sinterteknik in June 1995, and SinterForm, the
Acquisitions and the Powder Metal Forge Unit of Delco Remy America, Inc. in
1996. Sinter accounted for all of these acquisitions under the purchase method
of accounting where the purchase price is allocated between identified tangible
and intangible assets purchased and liabilities assumed. Unallocated purchase
price is treated as goodwill and amortized over 40 years.
In October 1994, Sinter completed an initial public offering of its Class A
Common Stock, raising net proceeds of approximately $14.7 million. Sinter used
these net proceeds together with borrowings of approximately $2.0 million under
the Company's revolving credit facility to repay all of its then outstanding
senior and subordinated indebtedness and to redeem its then outstanding
preferred stock.
Net Sales. The Company's net sales are affected by numerous factors,
including automotive production schedules and North American and European
economic conditions. The Company's sales are also dependent on its ability to
provide highly engineered powder metal parts at competitive prices, and are
subject to fluctuation based on the production cycles of the major automotive
original equipment manufacturers ("OEMs"). Once an automotive OEM designates the
Company to supply pressed powder metal parts for a new vehicle program, the OEM
will usually continue to purchase those parts from the Company for the life of
the program, although not necessarily for a redesign. As a result, the life
cycle for a typical pressed powder metal part for use by an automotive OEM is
about five to ten years, although the exact time period may vary based on the
particular part or the success of the OEM platform of which it is a part. The
Company believes that a substantial majority of the Company's automotive sales
are made on a sole source basis. On a pro forma basis, net sales to the
automotive industry accounted for approximately 74% of the Company's net sales
in 1996, reflecting PMH's and Krebsoge's relatively high concentration of sales
to the automotive industry. Without the effect of the Acquisitions, Sinter's
sales to the automotive industry accounted for approximately 63% of 1996 net
sales.
The Company expects the percentage of automotive sales to increase as it
expands its ability to offer global service and based on the forecasted increase
in pressed powder metal part content per automobile. Before the Acquisitions,
substantially all of the Company's sales were made in North America. Giving
effect to the Acquisitions, international sales accounted for approximately 46%
of the Company's 1996 net sales. The Company expects sales in Western Europe to
account for an increasing percentage of the Company's total sales. A significant
portion of the Company's revenues and expenses are denominated in currencies
other than U.S. dollars. Changes in exchange rates therefore may have a
significant effect on the Company's results of operations and financial
condition.
Cost of Sales. The principal elements of cost of sales are direct labor,
raw materials and manufacturing overhead. The Company's costs are affected by
fluctuating raw material costs, but the impact of such fluctuation is partially
mitigated because the Company does not maintain long-term fixed price contracts
with its customers and is able to buy raw materials at competitive prices due to
the size of its purchases. Due to the capital-intensive nature of the Company's
business, plant utilization is a significant factor in determining the Company's
profitability. The Company manufactures over 4,000 parts with varying gross
margins. Accord-
24
<PAGE> 27
ingly, the Company's overall gross margin is impacted by its product mix, raw
material costs and plant utilization rates.
Selling, general and administrative expenses. Selling, general and
administrative expenses include the costs associated with selling, general
corporate overhead and other related administrative functions. Integrating the
Acquisitions will enable the Company to eliminate duplicative functions
currently being performed by each of Sinter, PMH and Krebsoge in the areas of
administration, finance, sales, marketing, purchasing, technical and field
services and management information systems.
Income taxes. Income taxes consist of the consolidation of the tax
provisions, computed on a separate company basis, in each country in which the
Company has an established presence. In 1994 and 1995, the effective tax rate
was affected by the favorable difference in statutory tax rates between Sweden
and the United States and the utilization of certain net operating loss
carryforwards relating to PMH and Krebsoge.
RESULTS OF OPERATIONS: PRO FORMA AND HISTORICAL SINTER
The following table sets forth, for each of the periods indicated, certain
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
PRO FORMA
1994 1995 1996 1996
----- ----- ----- ---------
<S> <C> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Gross profit............................................. 21.5 22.3 23.0 19.1
Selling, general and administrative expenses............. 10.0 8.2 9.2 10.4
Amortization of intangible assets........................ .4 .3 .4 .9
Income from operations................................... 11.2 13.8 13.4 7.8
Interest expense......................................... 2.4 .3 .4 3.7
Provision for income taxes............................... 3.5 5.0 4.8 1.7
Extraordinary charge..................................... .7 -- -- --
Net income............................................... 4.4% 8.4% 8.4% 2.5%
</TABLE>
PRO FORMA YEAR ENDED DECEMBER 31, 1996 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1996
Net Sales. Net sales increased $260.9 million, from $111.9 million to
$372.8 million, as the result of the inclusion of the sales of PMH and Krebsoge
for the full year 1996.
Gross Profit. Gross profit increased $45.7 million, from $25.7 million to
$71.4 million, primarily as a result of the Acquisitions. As a percentage of net
sales, pro forma gross profit was 19.1% compared to 23.0% on an historical
basis. This difference in gross profit is a result of higher personnel costs and
less efficient manufacturing processes at Krebsoge and PMH. Also impacting gross
profit, and reflected in the pro forma results, was the increased depreciation
that will be recognized as a result of the property step-up recognized in
purchase accounting in the amount of $0.6 million, offset by the reversal of
historical lease expense as a result of acquiring the leased property in the
amount of $1.3 million. These results also reflect a decrease in the gross
margin of PMH from 13.3% in 1995 to 10.8% in 1996. This decline in gross margin
is attributable to (i) the addition of approximately $1.1 million of lease
expense relating to a new lease, (ii) a SFAS No. 106 change of approximately
$0.8 million as opposed to a credit in 1995 of $0.7 million, and (iii) a change
in product mix toward lower margin products.
Selling, General and Administrative Expenses. Pro forma selling, general
and administrative expenses increased $28.6 million, from $10.3 million on a
historical basis to $38.9 million. As a percentage of net sales, pro forma
selling, general and administrative expenses were 10.4% as compared to 9.2% on a
historical basis. This difference in pro forma selling, general and
administrative expenses is a result of higher personnel costs at Krebsoge and
PMH, offset by cost reductions related primarily to headcount reduction already
implemented of $2.0 million.
25
<PAGE> 28
Amortization of Intangible Assets. Amortization of intangible assets
increased $3.0 million, from $0.4 million on a historical basis to $3.4 million,
as a result of the Acquisitions. The additional amortization is the result of
amortizing the goodwill generated by the Acquisitions and the amortization of
other intangible assets recognized as part of purchase accounting.
Income from Operations. Income from operations increased $14.1 million,
from $15.0 million on a historical basis to $29.1 million, as a result of the
factors noted above. Income from operations as a percentage of sales was 7.8% on
a pro forma basis as compared to historical Sinter of 13.4%. Pro forma income
from operations reflected certain pre-tax non-recurring charges relating to the
Acquisitions totalling $5.3 million, as follows: (i) the reversal of the step-up
of finished goods inventory in the purchase price allocation of $0.8 million;
(ii) an inventory write-down at Krebsoge of $0.6 million; (iii) payments by PMH
and Krebsoge to MAAG of $1.4 million; (iv) costs incurred by PMH and Krebsoge
associated with the Acquisitions of $1.4 million; and (v) a restructuring charge
of $1.1 million incurred by Krebsoge as a result of personnel reductions.
Without giving effect to these non-recurring charges, pro forma income from
operations would have been $34.4 million or 9.2% of pro forma net sales.
Interest Expense. Interest expense increased $13.5 million, from $0.5
million on a historical basis to $14.0 million, as a result of the increased
borrowings to finance the Acquisitions, repay existing Sinter debt and for
future working capital purposes. Interest expense was partially offset by the
application of the net proceeds from the Offering.
Income Taxes. The provision for income taxes reflects a pro forma
effective income tax rate of 41% reflecting the higher statutory rate in
Germany, offset in part by the lower U.S. federal income tax rate and the
Swedish income tax rate. The effective income tax rate has been negatively
impacted as a result of limitations on the use of acquired net operating loss
carryforwards.
Net Income. Net income decreased by $0.1 million, from $9.4 million to
$9.3 million on a pro forma basis for the reasons set forth above. Without
giving effect to the non-recurring charges discussed above, pro forma net income
would have been higher by $3.1 million, from $9.3 million to $12.4 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased by $17.6 million, or 18.6%, to $111.9
million in 1996 from $94.3 million in 1995. Approximately $5.8 million of this
increase is primarily the result of including the results of SinterForm for the
second half of 1996. The balance of the increase is primarily due to the
increased penetration into the automotive market. The Company's sales to the
automotive industry increased by 9% in 1996 even though automotive production in
the United States increased less than 1% in the same period. The increase in net
sales for the period was partially offset by work stoppages at one of the
Company's major automotive customers.
Gross Profit. Gross profit increased by $4.6 million, or 22%, to $25.7
million in 1996 from $21.1 million in 1995. The gross profit margin increased
from 22.3% in 1995 to 23.0% in 1996, reflecting higher sales and corresponding
economies of scale, the continued improvement in operating efficiencies,
favorable changes in product mix and a marginal decline in raw material pricing.
The operating efficiencies were primarily the result of increased volume at the
Company's domestic facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.6 million, to $10.3 million or 9.2% of
sales in 1996, compared to $7.7 million, or 8.2% of sales in 1995. The increase
in selling, general and administrative expenses in 1996 is primarily
attributable to an increase in research and development expense, additional
management personnel hired in anticipation of the Acquisitions and the inclusion
of the results of Sinterteknik for a full year as compared to five months in
1995. Sinterteknik historically reports higher selling, general and
administrative expenses as a percentage of sales as compared to the Company's
U.S. operations.
Income from Operations. Income from operations increased by $2.0 million
to $15.0 million, or 13.4% of net sales in 1996, as compared to $13.0 million,
or 13.8% of net sales in 1995, reflecting the increase in net
26
<PAGE> 29
sales and gross profit, partially offset by the increase in selling, general and
administrative expenses discussed above.
Interest Expense. Interest expense increased from $0.3 million in 1995 to
$0.5 million in 1996, as a result of the increased borrowings to finance the
acquisition of SinterForm and borrowings under the industrial revenue bond
issued for plant expansion at a domestic facility. These increased borrowings
were offset by reductions in indebtedness as a result of cash flows generated
from operations during 1996.
Income Taxes. The provision for income taxes was $5.4 million in 1996,
reflecting an increase of $0.6 million from the 1995 provision of $4.8 million.
The effective tax rate remained relatively constant between years.
Net Income. Net income increased by $1.5 million in 1996, from $7.9
million in 1995 to $9.4 million in 1996 for the reasons set forth above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased $11.8 million, or 14.3% to $94.3 million in
1995 from $82.5 million in 1994. The increase in net sales reflects increased
penetration in the automotive market, the partial year impact of the
Sinterteknik acquisition in June 1995, accounting for approximately $4.6 million
of the increase, and the full year impact of the Midwest acquisition in July
1994. Due to the increased utilization of powder metal parts by the automobile
industry, Sinter posted a 9% increase in automotive sales for the year,
excluding the Sinterteknik acquisition. This increase was primarily attributable
to Sinter's introduction of nearly 60 new parts in the last half of 1995. The
sales improvement was also partially the result of an increase in average
selling price per pound. The average selling price per pound, excluding
Sinterteknik, increased 9.5% in 1995. The increase in selling price per pound is
a reflection of a change in product mix, and an increase in Sinter's secondary
finishing operations.
Gross Profit. Gross profit increased by $3.4 million, or 18.9%, to $21.1
million in 1995 from $17.7 million in 1994. The gross profit margin increased
modestly from 21.5% in 1994 to 22.3% in 1995, reflecting a change in product mix
and the impact of improved operating efficiencies. The improvement in operating
efficiencies offset an increase in raw material prices of approximately 5.6% in
1995 and an increase in Sinter's outside secondary operations of 24.1%. The
increase in outside secondary costs is attributable to an increase in both
volume and price.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined from the 1994 level of $8.2 million or 10.0% of
net sales to $7.7 million or 8.2% of net sales in 1995. The decline was
primarily attributable to the $2.4 million charge to compensation expense in
1994 resulting from the award of common stock to certain members of management
under Sinter's Management Incentive Stock Compensation Plan (the "Stock
Incentive Plan"). The Stock Incentive Plan was terminated at the time of
Sinter's initial public offering.
Income From Operations. Income from operations increased by $3.8 million
to $13.0 million, or 13.8% of net sales in 1995, as compared to $9.2 million, or
11.2% of net sales in 1994, reflecting the increase in net sales, the increase
in gross profit and gross profit percentage as well as the decline in selling,
general and administrative expenses.
Interest Expense. Interest expense decreased $1.7 million from $2.0
million in 1994 to $0.3 million in 1995. The decrease is the result of Sinter's
repayment of long-term indebtedness in 1994 from the proceeds of Sinter's
initial public offering. While Sinter's long-term debt increased in 1995 due to
the acquisition of Sinterteknik, the amount of the indebtedness was reduced in
the last half of the year from cash flow generated by Sinter.
Income Taxes. The provision for income taxes was $4.8 million in 1995
reflecting an increase of $1.9 million from the 1994 provision of $2.9 million.
The effective tax rate in 1995 declined modestly from 1994 due to the lower
effective tax rate of Sinterteknik.
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<PAGE> 30
Net Income. For all the reasons set forth above as well as an
extraordinary charge of $0.6 million in 1994 related to the early retirement of
debt, net income in 1995 increased by $4.3 million, from $3.6 million in 1994 to
$7.9 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund its working
capital, purchase capital equipment and fund potential acquisitions. In
addition, the Company's capital requirements will be affected by the substantial
indebtedness the Company incurred in connection with the financing of the
Acquisitions, which increases the Company's cash requirements for debt service
and imposes various operating restrictions. Historically, Sinter has used income
generated by operations as well as borrowings available under long-term credit
agreements to fund these capital needs.
For the years ended December 31, 1994, 1995 and 1996, Sinter's cash flow
from operations was $10.2 million, $8.7 million and $15.1 million; cash used by
investing activities was $7.2 million, $8.3 million and $244.0 million; and cash
(used) provided by financing activities was $(3.0) million, $1.0 million and
$236.3 million, respectively. The primary sources of cash provided by operating
activities are net income and non-cash charges for depreciation and amortization
expense. Fluctuations between periods in cash flows used for investing
activities are attributable to the levels of acquisition activity and fixed
asset additions. Fluctuations between periods in cash flows from financing
activities are attributable to the levels of borrowings required to fund that
portion of investing activities not funded by cash flows from operations.
Upon consummation of the Offering, the Company's primary sources of
liquidity will be cash flow from operations and borrowings under the New Credit
Facility. Under the New Credit Facility, the lenders have provided the Company
and its subsidiaries with (i) the U.S. Term Facilities and (ii) (a) a U.S.
dollar-denominated senior secured revolving credit facility (the "U.S. Revolving
Facility" and, together with the U.S. Term Facilities, the "U.S. Facilities") in
an aggregate principal amount equal to $30.0 million, of which up to $20.0
million is available in the form of standby and trade letters of credit and (b)
a DM-denominated senior secured revolving credit facility (the "German Revolving
Facility" and, together with the German Term Facility, the "German Facilities")
in an aggregate principal amount equal to DM 30.0 million, of which up to DM
10.0 million may be used for standby and trade letters of credit. All
obligations of the Company under the U.S. Facilities are guaranteed by each
domestic subsidiary of the Company and are secured by substantially all the
assets of the Company and each of its domestic subsidiaries. All obligations
under the German Facilities are guaranteed by (i) German subsidiaries of the
Company (other than the German subsidiary borrower thereunder) and (ii) the
Company, and are secured by (i) substantially all the assets of the Company and
(ii) pledges of 65% of the shares of Sinter Metals GmbH and Sinterteknik and
collateral assignments of certain intercompany obligations. On the Closing Date,
the Company used substantially all of the funds available under the Term
Facilities and approximately $3.4 million under the U.S. Revolving Facility to
finance the Acquisitions and related costs (including repayment of related
indebtedness and refinancing of certain Sinter indebtedness). The net proceeds
of the Offering will be used to repay a portion of the indebtedness outstanding
under the U.S. Term Facilities. See "Use of Proceeds." Amounts repaid under the
Term Facilities may not be reborrowed. The New Credit Facility requires the
Company to comply with certain financial covenants (including a maximum debt to
consolidated EBITDA ratio, a minimum fixed charge coverage ratio, a minimum
consolidated EBITDA to consolidated interest expense ratio, minimum levels of
annualized consolidated EBITDA and minimum levels of net worth). The New Credit
Facility also contains operating covenants and restrictions that, among other
things, limit the ability of the Company and its subsidiaries to incur
additional indebtedness, create liens, pay dividends and make other restricted
payments, make capital expenditures, make certain investments, transact with
affiliates, and consolidate, merge or transfer assets.
Under the U.S. Facilities, the Company may elect to borrow at either the
LIBOR Rate (for dollar deposits) or the Alternate Base Rate ("ABR"), while the
borrowings under the German Facilities are at the DIBOR Rate (the LIBOR Rate for
DM deposits), or a German Prime Rate, in each case plus an additional spread
(the "Interest Rate Spread"). The Interest Rate Spread varies based upon the
underlying interest rate election, the facility under which funds were borrowed,
and the Company's leverage ratio (the ratio of
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<PAGE> 31
indebtedness to EBITDA). In the absence of a default under the New Credit
Facility, the maximum Interest Rate Spreads for the various combinations of
interest rate elections and facilities are as follows: 1.00% for U.S. Revolving
Loans at the ABR; 2.00% for U.S. Revolving Loans at the LIBOR Rate; 1.50% for
Tranche A Term Loans at the ABR; 2.00% for Tranche B Term Loans at the ABR;
2.50% for Tranche A Term Loans at the LIBOR Rate; 3.00% for Tranche B Term Loans
at the LIBOR Rate; 1.00% for German Term Loans at the German Prime Rate; 2.50%
for German Term Loans at the DIBOR Rate; and 2.00% for German Revolving Loans at
the DIBOR Rate. The Company's initial borrowings under the New Credit Facility
were made at the LIBOR Rate (in the case of the U.S. Facilities) and DIBOR Rate
(in the case of the German Facilities), supplemented in all cases by the highest
applicable Interest Rate Spreads. After the application of the net proceeds of
the Offering, the Company will qualify for reduced Interest Rate Spreads based
upon an improved leverage ratio.
The Company's aggregate capital expenditures for 1994, 1995 and 1996 were
$14.2 million, $15.9 million and $24.9 million, respectively. Management
anticipates that the total capital expenditures of the Company for fiscal 1997
will be approximately $23.0 million, which will be used for the Company's
previously announced plant expansions, required improvements in PMH's operations
and other customary expenditures for a capital-intensive business. Management
plans to fund these capital expenditures from cash flow from operations, and, if
necessary, borrowings under the New Credit Facility. As of the date of this
Prospectus, the Company has no material capital expenditures for environmental
control facilities planned for either 1997 or 1998.
Based upon current and anticipated levels of operations and plans for
integrating the Acquisitions, the Company believes that its cash on hand and
cash flow from operations, combined with borrowings available under the New
Credit Facility after application of the net proceeds from the Offering, will be
sufficient to enable the Company to meet its current and anticipated cash
operating requirements, including scheduled interest and principal payments,
capital expenditures and working capital needs for the next 12 months. However,
actual capital requirements may change, particularly as a result of any
acquisitions which the Company may make. The ability of the Company to meet its
current and anticipated operating requirements will be dependent upon the future
performance of the Company and its subsidiaries which, in turn, will be subject
to general economic conditions and to financial, business and other factors,
including factors beyond the Company's control. Depending on the nature, size
and timing of future acquisitions, the Company may be required to raise
additional financing. There can be no assurances that such additional financing
will be available to the Company on acceptable terms. Substantially all of the
debt of the Company bears interest at floating rates; therefore, its liquidity
and financial condition is and will continue to be affected by changes in
prevailing interest rates.
ACCOUNTING STANDARDS CHANGES
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121) and Statement of Financial Accounting Standard No. 123, "Stock-Based
Compensation" (SFAS 123) became effective for fiscal years beginning after
December 15, 1995. The Company has elected to adopt the disclosure only method
allowed by SFAS 123 for 1996. The implementation of SFAS 121 in 1996 did not
have a material effect on the results of operations or financial position of the
Company.
EFFECT OF INFLATION
Inflation generally affects the Company by increasing the interest expense
of floating rate indebtedness and by increasing the cost of labor, equipment and
raw materials. The Company does not believe that inflation has had any material
effect on its business over the past three years.
BACKLOG
The Company has long-term supplier relationships with virtually all of its
customers and believes it supplies a substantial majority of its products to its
automotive customers on a sole source basis under blanket
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<PAGE> 32
purchase orders. A majority of the Company's shipments of products are made
pursuant to releases from blanket purchase orders and to meet the customers'
requirements for the following 90 days. At December 31, 1996, the Company's
backlog of firm sales releases amounted to approximately $90.4 million, compared
to approximately $70.0 million at December 31, 1995. The Company believes that
substantially all of its backlog of firm sales releases existing on December 31,
1996 will be shipped before March 31, 1997.
SEASONALITY
The Company typically experiences slightly lower revenues, gross profits
and operating income during the third and fourth quarters as compared to the
first and second quarters. Third and fourth quarter results are affected by
scheduled plant shut-downs for vacations and holidays at many of the Company's
customers, as well as manufacturers' changeovers in production lines.
RESULTS OF OPERATIONS: KREBSOGE
Sintermetallwerk Krebsoge GmbH was established in 1943 when Schweimer
Eisenwerke diversified into the production of self-lubricating bronze bearings
and soft iron materials. Between 1987 and 1995, Krebsoge made various
acquisitions in North America and the former East Germany, and invested in
smaller companies in China and India. In March of 1995, Krebsoge made a major
acquisition by purchasing the powder metal plant of a competitor, Ringsdorff
Sinter GmbH, with its operations in Bonn, Germany.
This discussion should be read in conjunction with Krebsoge's Consolidated
Financial Statements and related Notes thereto, which are presented on a German
GAAP basis. Such financial statements differ significantly from U.S. GAAP. For a
discussion of the principal differences between German GAAP and U.S. GAAP, see
Note 26 to Krebsoge's Consolidated Financial Statements.
The following table sets forth, for each of the periods indicated, certain
income statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996(1)
----- ----- -------
<S> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0%
===== ===== =====
Gross profit................................... 71.9 71.2 70.6
Personnel expenses............................. 44.4 46.9 47.4
Other operating expenses....................... 11.8 13.3 12.6
Financial expense.............................. 5.7 3.9 3.4
Taxes on income................................ 1.3 0.7 0.8
Net income..................................... 2.5% 3.5% 2.6%
</TABLE>
- ---------------
(1) Period ended December 19, 1996, the date of the Acquisitions.
PERIOD ENDED DECEMBER 19, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased DM 20.6 million, or 9.2%, to DM 245.4
million in 1996 from DM 224.8 million in 1995. The increase in net sales relates
primarily to the full year inclusion of the results of the former Ringsdorff
Sinter GmbH ("Bonn"), increased demand for existing parts and the introduction
of certain new parts, which more than offset a significant decrease in the sales
of airbag safety parts due to design changes from certain airbag producers.
Gross Profit. Gross profit increased by DM 13.1 million, or 8.2%, to DM
173.2 million in 1996 from DM 160.1 million in 1995. In the same period, gross
margin declined by 0.6% to 70.6% in 1996 from 71.2% in 1995. The decline in
gross margin is the result of the full year impact of Bonn, which consistently
reports lower gross margins due to the fact it has a mature product line subject
to heightened price competition.
Personnel Expenses. Personnel expenses increased DM10.8 million to DM
116.2 million in 1996 from DM 105.4 in 1995. As a percentage of sales, these
expenses increased by 0.5% from 46.9% in 1995 to 47.4% in
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<PAGE> 33
1996. The increase in personnel expenses relates primarily to increased
commissions as a result of the increased sales levels.
Other Operating Expenses. Other operating expenses increased by DM 1.0
million from DM 29.9 million in 1995 to DM 30.9 million in 1996. As a percentage
of sales, other operating expenses declined from 13.3% in 1995 to 12.6% in 1996,
reflecting increased expense resulting from the inclusion of Bonn for a full
year, offset by the increase in sales.
Taxes on Income. The effective income tax rate increased from 16.7% in
1995 to 22.2% in 1996. The 1995 effective rate was favorably affected by the
utilization of net operating loss carryforwards related to Bonn and another
subsidiary. These carryforwards were used to a lesser extent in 1996. Without
the effects of these carryforwards, the effective tax rate in 1996 would have
approximated the level of 1994.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased DM 45.9 million, or 25.6%, to DM 224.8
million in 1995 from DM 178.9 million in 1994. The increase in net sales relates
primarily to the inclusion of the results of Bonn since April 1, 1995 and
Sintermetallwerk Krebsoge GmbH, which experienced a DM 8.1 million increase in
"pressed metal forging" sales and a general increase in conventional pressed
metal sales due to improved economic conditions. The increase in net sales from
acquisitions was offset in part by a slight decrease in sales due to design
changes from producers of airbag safety parts, reduced volumes, and lower
prices.
Gross Profit. Gross profit increased by DM 31.3 million, or 24.3%, to DM
160.1 million in 1995 from DM 128.8 million in 1994. Gross margin declined by
.7% to 71.2% in 1995 from 71.9% in 1994. The decline in gross margin is a result
of the lower margins experienced at Bonn due to the fact it has a mature product
line subject to heightened price competition. Without the effect of Bonn,
Krebsoge had a gross margin of 71.9%.
Personnel Expenses. Personnel expenses increased by DM 26.0 million, from
DM 79.4 million in 1994 to DM 105.4 million in 1995. The increase in personnel
expenses relates primarily to wage increases at Bonn due to collective
bargaining agreements and increased overtime and headcount.
Other Operating Expenses. Other operating expenses increased by DM 8.6
million, from DM 21.3 million in 1994 to DM 29.9 million in 1995. The increase
in other operating expenses relates primarily to increased commissions, freight
and professional fees as a result of the inclusion of Bonn and the increased
sales levels.
Taxes on Income. The taxes on income declined from 33.4% of pre-tax income
in 1994 to 16.7% of pre-tax income in 1995 as a result of the utilization of tax
loss carryforwards related to Bonn. Without the effect of these carryforwards,
the provisions would have remained relatively constant.
RESULTS OF OPERATIONS: PMH
PMH was established in 1989 for the purpose of forming ICM/Krebsoge, a
Delaware partnership (the "Partnership"), between Amplex Van Wert Corporation
("Amplex"), and Krebsoge Powder Metal, Inc., a subsidiary of PMH. In 1991,
Amplex sold its equity interest in the Partnership to American PM, Inc., a
Delaware corporation and newly formed subsidiary of PMH. In 1993, a 30% equity
interest in PMH was sold to Sinter and Sinter acquired the remaining 70% in
connection with the Acquisitions.
This discussion should be read in conjunction with PMH's Consolidated
Financial Statements and related Notes thereto, included elsewhere herein.
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<PAGE> 34
The following table sets forth, for each of the periods indicated, certain
income statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1,
DECEMBER 31, 1996
--------------- THROUGH
1994 1995 NOVEMBER 22, 1996
----- ----- -----------------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
----- ----- -----
Gross profit................................................ 11.6 13.3 10.8
Selling, general and administrative expenses................ 8.1 7.2 6.1
Restructuring (gain)........................................ (3.1) (4.9) --
Income from operations...................................... 6.5 11.1 4.7
Interest expense............................................ 1.5 2.9 2.3
Income tax credit........................................... -- 0.2 --
Cumulative effect of accounting change...................... -- (0.7) --
Net income.................................................. 5.0% 9.0% 2.1%
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales decreased $1.3 million, or (1.2)%, to $106.5 million
from $107.8 million. The decrease in net sales is the result of an overall
decline in North American light vehicle production in 1995 of approximately 3%.
The decline in automotive production was partially offset by the introduction of
new parts by PMH and the ramp-up of new parts introduced in previous years.
Pricing of PMH's products remained relatively stable during 1995 compared to
1994.
Gross Profit. Gross profit increased by $1.8 million, or 14.1% to $14.2
million in 1995. As a percentage of sales, gross margin increased from 11.6% to
13.3% in 1994 and 1995, respectively. The increase in gross margin is
attributable to a cost reduction plan implemented by PMH in 1995, which resulted
in reductions of direct and indirect labor, plant overtime and maintenance
expense, offset in part by raw material price increases during the first half of
1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined from the 1994 level of $8.8 million, or 8.1% of
net sales, to $7.7 million, or 7.2% of net sales in 1995. The decrease was also
a result of the cost reduction plan implemented in 1995, particularly general
and administrative cost declines at plant locations.
Restructuring Reserve. Income recorded as a result of reversing the
restructuring reserve increased $2.0 million to $5.3 million in 1995 from $3.3
million in 1994. The reversal of the restructuring reserve was the result of
PMH's decision to retain its Canadian facility, which PMH's management had
previously determined to close. See Note 8 to the Consolidated Financial
Statements of PMH for a discussion of this reversal.
Income from Operations. Income from operations increased by $4.8 million
to $11.8 million, or 11.1% of sales in 1995, as compared to $7.0 million, or
6.5% of net sales in 1994. This increase reflects the improved gross margin,
reduced selling and administrative expenses, and the reversal of the
restructuring reserve as discussed above.
Interest Expense. Interest expense increased $1.5 million from $1.6
million in 1994 to $3.1 million in 1995. The increase is the result of an
overall increase in outstanding indebtedness, an increase in the letters of
credit outstanding and a general rate increase on the revolving loan. See Note 2
to the Consolidated Financial Statements of PMH for a discussion of PMH's
accounting treatment for the debt and interest forgiven by the lender in 1993.
Cumulative Effect of Accounting Change. Effective January 1, 1995, PMH
changed its method of recognizing actuarial gains and losses related to its U.S.
union and nonunion postretirement plans from the defer and amortize method
prescribed in Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," to a method of
immediately recognizing the gains or losses at the measurement date. The
cumulative effect of this change as of January 1, 1995 was approximately $1.2
million, or approximately $.8 million after tax.
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<PAGE> 35
INDUSTRY
OVERVIEW
The pressed powder metal parts industry in North America and Europe is
highly fragmented, with over 250 participants, most of which have annual sales
of less than $50 million. The Company believes that it is the only participant
in the pressed powder metal parts industry in either North America or Western
Europe with a market share of over 5%. Pressed powder metal parts are
principally sold to automobile manufacturers and, to a lesser extent, other
industrial manufacturers.
Automotive Industry. The automotive industry is the largest purchaser of
pressed powder metal parts in North America and Europe, accounting for over 70%
of the total combined sales of pressed powder metal parts in these markets in
1995 (the most recent year in which data is available). In Europe, sales of
pressed powder metal parts to automotive manufacturers accounted for over 77% of
total industry sales in 1995. Furthermore, sales to automotive manufacturers
continue to increase as a percentage of total pressed powder metal parts sales.
For example, in 1994, sales to automotive manufacturers accounted for 64% of
total pressed powder metal parts sales in North America, while in 1995 sales to
automotive manufacturers accounted for approximately 67% of such sales.
According to the MPIF, the North American shipments of pressed powder metal
have increased from approximately 315,000 tons in 1992 to approximately 434,000
tons in 1995, representing a compound annual growth rate of 11.3%. According to
the EPMA, the European shipments of pressed powder metal have increased from
approximately 109,000 tons in 1992 to approximately 129,000 tons in 1995,
representing a compound annual growth rate of 5.8%. This growth is due primarily
to increased demand from the automotive sector as a result of the introduction
of new pressed powder metal parts and the increased use of existing vehicle
parts.
Other Industrial Manufacturers. Sales of pressed powder metal parts to
non-automobile manufacturers, such as John Deere, Frigidaire and Electrolux,
represent an important part of the pressed powder metal parts industry in North
America and Europe. The customer base in this sector is highly fragmented, with
pressed powder metal parts being used by traditional industrial manufacturers
and increasingly by manufacturers of recreational and electronic products. The
pressed powder metal parts sold to these sectors are generally less
technologically advanced than those sold to automotive manufacturers because the
parts are generally less complex and require lower tolerances. However, the
average product life cycles in this sector (e.g., 20 to 25 years) are generally
longer than the average product life cycles in the automotive industry (e.g., 5
to 10 years). Sales in this sector tend to be cyclical in nature and are driven
by general economic conditions such as consumer durable goods spending and new
housing starts. Also, many sales in the lawn and garden category tend to be
seasonal and may also be affected by weather.
CURRENT INDUSTRY TRENDS
The key trends affecting the pressed powder metal parts industry include:
(i) increased substitution of pressed powder metal parts for cast or forged
parts in the automotive and non-automotive markets; (ii) globalization and
consolidation of the automotive OEM supplier base; and (iii) consolidation of
the pressed powder metal parts industry. The Company believes that these trends
have had and will continue to have a significant impact on its future
profitability and growth prospects.
Increased Substitution of Pressed Powder Metal Parts for Cast or Forged
Parts. The technology associated with the manufacture of pressed powder metal
parts has advanced significantly over the last decade. As a result, larger,
stronger, more structurally complex pressed powder metal parts have been
developed, which are being substituted more frequently for metal parts
manufactured using more traditional technologies, particularly in the automotive
industry. This trend has been driven principally by the cost advantages offered
by powder metal technology, which allow parts to be manufactured faster with
less labor and with reduced material waste than conventional forged or cast
technology.
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<PAGE> 36
The Company believes that the current trend of substitution of pressed
powder metal parts for cast or forged parts will continue both in North America
and Europe. Based on industry sources, the Company believes that the current
average pressed powder metal parts content in Ford's cars will rise from 40
pounds in 1996 to 50 pounds by the year 2000, and that the annual growth in the
pressed powder metal part content of General Motors' cars will be 5 to 10%
through 2001.
Globalization and Consolidation of OEM Supplier Base. Since the 1980s, in
response to competitive pressures to improve quality and reduce costs, Ford,
Chrysler, General Motors and other OEMs have been actively reducing their
supplier base to focus on key suppliers who can meet increasingly strict
standards for product quality, on-time delivery and manufacturing costs. In
addition, these OEMs have also increasingly required their suppliers to maintain
manufacturing facilities capable of producing parts or components with
consistent quality on a world-wide basis. As a result, the automotive OEMs are
more frequently awarding long-term sole source supply arrangements to suppliers
which are able to offer broad product lines, higher value-added innovative
products, low costs, reliable service and global manufacturing capability. The
Company believes that this trend should continue in the foreseeable future and
should provide the Company with an opportunity, based on its competitive
strengths, to expand its customer base and increase its market penetration with
current customers.
Consolidation of Pressed Powder Metal Parts Industry. The pressed powder
metal parts industry in North America and Europe has undergone and is continuing
to undergo consolidation due to the trend in the automotive industry toward
long-term contracts with sole-source suppliers who can provide global
manufacturing and distribution capabilities, increasing customer demands for a
broad product line and the increasing financial resources needed to satisfy the
stringent quality and performance specifications of many customers, particularly
in the automotive industry. The Company believes that this trend towards
consolidation will continue and presents the Company with the opportunity to
make strategic acquisitions.
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<PAGE> 37
BUSINESS
The Company is the world's largest independent manufacturer of precision
pressed powder metal parts. With the Acquisitions, the Company manufactures and
markets over 4,000 different pressed powder metal parts for use principally in
the automotive industry in North America and Europe and, to a lesser extent, for
use in the lawn and garden, power tool and home appliance industries in North
America and Europe. The Company has completed eight acquisitions since 1991,
which, together with internally generated growth, have resulted in net sales of
the Company growing at a compound annual rate of approximately 49% from $50.8
million in 1991 to $372.8 million in 1996 on the pro forma basis described
herein. See "Unaudited Pro Forma Financial Information."
Approximately 74% of the Company's net sales in 1996 were made to the
automotive industry. Management believes that the Company is the largest
supplier of pressed powder metal parts to Ford, Chrysler, Volkswagen, BMW and
Daimler Benz and the second largest supplier of such parts to General Motors.
The Company believes, based on its experience in the industry and the nature of
its relationships with its customers, that a substantial majority of the
Company's sales to automotive customers are made on a sole source basis.
Management believes that automotive customers seek suppliers, such as the
Company, who are able to offer broad product lines, higher value-added
innovative products, low costs, reliable service and, increasingly, global
distribution capability. As these customers continue to reduce the number of
suppliers, the Company's ability to meet their requirements becomes an
increasingly important competitive advantage.
The Company operates 18 manufacturing facilities in the United States,
Germany, Sweden and Canada. At these facilities, the Company uses powder
metallurgy to transform metal alloys in powdered form into high quality metal
parts such as gears, bearings and sprockets. Pressed powder metal parts are
increasingly being substituted for metal parts manufactured using more
traditional technologies such as forging and casting, particularly in the
automotive industry. The reasons for this trend are: (i) pressed powder metal
parts can be produced at a lower per unit cost due to the elimination or
significant reduction in secondary machining and raw material waste as well as
lower material costs; (ii) pressed powder metal parts have performance
attributes comparable to parts produced through other metalworking processes;
and (iii) powder metallurgy can manufacture parts with complex shapes and
dimensional tolerances that would be impractical or impossible to produce using
other metalworking processes.
COMPETITIVE STRENGTHS
The Company believes that it is a leading manufacturer of pressed powder
metal parts in North America and Europe and attributes this position and its
continued opportunities for growth and profitability to the following
competitive strengths:
- Broad Geographic Scope and Manufacturing Capabilities. The Company is
the world's largest independent pressed powder metal parts manufacturer
with a significant manufacturing presence in both North America and
Europe. Due to the opportunity for improved product quality and
consistency and cost savings, the trend among automotive OEMs has been to
consolidate their number of suppliers and require their suppliers to
manufacture parts or components in multiple geographic markets. The
Company believes that its geographic scope, which includes ten
manufacturing facilities in North America and eight in Europe, is unique
in the highly fragmented pressed powder metal parts industry and that it
is well-positioned to capitalize on these trends. As a result, the
Company believes that it should be able to increase its sales and profits
from the automotive industry even without long-term growth in this
industry. Furthermore, the Company believes that its broad geographic
scope should enable it to better withstand the effect of cyclical
downturns in any individual automotive market. Additionally, the Company
believes that the scope of its manufacturing facilities also allows it to
reduce or eliminate delays in satisfying customer orders because of
equipment problems and provides it with an opportunity to increase
capacity in the future without incurring significant additional capital
expenditures.
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<PAGE> 38
- Technological and Engineering Expertise. The Company is an industry
leader in the development of engineering systems, processes and
technologies which allow the manufacturing of more complex and larger
pressed powder metal parts that have higher densities, wear resistance
and strength than parts produced by more traditional powder metallurgical
processes. The Company's technological and engineering capabilities have
allowed it to develop new, higher value added products for its customers,
improve production processes to reduce per unit costs and achieve the
quality and reliability required by its major automotive customers. Such
capabilities enhance the Company's ability to win sole source contracts,
reduce operating costs and improve margins. For example, the Company was
the first pressed powder metal parts manufacturer to introduce a new
processing technology, known as HPP processing, which expands the range
of densities for pressed powder metal parts that the Company can produce,
while reducing the per product unit cost than has been historically
possible with other available processes. To maintain and enhance its
reputation as a technological leader, the Company has made substantial
investments in research and development.
- Broad, Stable Customer Base. The Company is a leading supplier of
pressed powder metal parts in North America and Europe to most major
automotive OEMs and a significant supplier of such parts to
non-automotive industrial manufacturers such as Frigidaire, John Deere
and Electrolux. The Company believes that its commitment to quality,
innovation, service and just-in-time delivery has enabled it to build and
maintain strong and stable customer relationships. In particular, the
Company believes that its strong relationships with its automotive OEM
customers allow it to identify business opportunities and customer needs
at the early stages of vehicle part design. Once an automotive OEM
designates the Company to supply pressed powder metal parts for a
specific program, the OEM usually will continue to purchase those parts
from the Company for the life of the program. The Company believes that
its broad customer base should also enable it to withstand the effects of
any downturn in business with any particular customer.
- Financial Resources. The pressed powder metal industry is
capital-intensive, requiring significant financial resources in order to
make the investments in facilities, equipment and technology necessary to
satisfy increasingly stringent customer demands for quality, global
manufacturing capability, reliability and cost control. With the
completion of the New Credit Facility and the Offering, together with
cash flow from operations, the Company believes that it will be able to
maintain and enhance its leadership position in the pressed powder metal
parts industry compared to smaller competitors with more limited
resources and capabilities.
- Proven Management Team With Successful Track Record. The Company's
senior management team has consistently increased sales and operating
profitability since 1991 by recognizing and acting on growth and
consolidation opportunities in the pressed powder metal parts industry,
introducing higher value added products, improving manufacturing
processes, reducing overhead and administrative costs and effecting and
integrating strategic acquisitions. The Company's senior management team
(Messrs. Carreras, LeVault and Kestner) collectively own 777,406 shares
of Class A Common Stock on a fully diluted basis as of December 31, 1996
(7.7% of total shares outstanding giving effect to the Offering).
GROWTH STRATEGY
The Company's business objective is to enhance its leadership position in
the pressed powder metal parts industry. To achieve this objective, the Company
will continue to pursue a growth strategy based on the following elements:
- Expanding and Penetrating its Customer Base. The Company believes that
there are significant growth opportunities in the pressed powder metal
parts industry driven principally by (i) the increasing use of pressed
powder metal parts by automotive and other industrial manufacturers and
(ii) the automotive industry's trend towards supplier consolidation and
globalization. The Company also believes that since no supplier controls
a significant share of the pressed powder metal parts market in
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<PAGE> 39
either North America or Europe, the Company has a significant opportunity
to increase its market share because of its geographic scope, technical
expertise, broad range of products and financial resources. To capitalize
on the Acquisitions, the Company intends to leverage its relationships
with Ford, Chrysler and General Motors to increase Krebsoge's sales to
American manufacturers in Europe. Similarly, the Company intends to
leverage Krebsoge's relationships with Volkswagen, BMW, Daimler Benz and
other European manufacturers to improve the Company's business in North
America with these European manufacturers. The Company also believes that
its broad geographic scope should enable it to increase its customer base
as it integrates its newly acquired foreign operations and increases its
marketing presence in new geographic regions.
- Expanding Product Lines. Since 1995, the Company has expanded its
traditional product line of over 4,000 pressed powder metal parts by
introducing more than 100 new pressed powder metal parts into the market.
As a result of the Company's continued emphasis on innovative research
and development, a number of its recent product introductions have
targeted markets in high growth areas such as completed integrated
subassemblies. Through the Acquisitions, the Company has expanded its
product lines to include powder metallurgical applications such as
filters made of highly porous sintered metals, powder forged parts,
high-speed steel and highly engineered plastics and composites.
Furthermore, the Company is introducing new product lines, which are
based upon powder metal injection molding, friction materials and high
performance aluminum alloys. The Company believes that there are
significant growth opportunities associated with these additional product
lines.
- Improving Operating Efficiencies. Based on its experience with
integrating prior acquisitions, the Company believes that significant
opportunities exist to increase the operating efficiency of both PMH and
Krebsoge. The Company also believes that the Acquisitions will allow it
to increase the operating efficiency of the Company as a result of the
significant increase in the scale of the Company's operations, both
geographically and in terms of equipment, product lines, customer base
and financial resources. As part of integrating the Acquisitions, the
Company intends to implement changes in its operations, including
restructuring its management information systems, modifying Krebsoge's
and PMH's production processes to more closely resemble Sinter's,
centralizing its marketing and purchasing departments and coordinating
its research and development activities. The Company intends to
facilitate communication and share best practices among its world-wide
operations so that research and development ideas and accumulated
knowledge is shared among such operations. The Company also intends to
continue to foster an environment of continuous improvement by
benchmarking the attributes of its products and processes to those of its
competitors and customers in terms of quality, cost, efficiency and
delivery. The Company uses the results of such benchmarking to make
adjustments necessary to continue to be a leader in the manufacture,
marketing and distribution of pressed powder metal parts.
- Pursuing Strategic Acquisitions. The pressed powder metal parts industry
is highly fragmented in North America and Western Europe with over 250
participants, most of which have annual sales of less than $50 million.
The pressed powder metal parts industry has undergone and is continuing
to undergo consolidation as evidenced by the Acquisitions and Sinter's
most recent acquisition of the Powder Metal Forge Unit of Delco Remy
America, Inc. The Company intends to take advantage of such opportunities
by selectively pursuing additional acquisitions in its existing as well
as new markets.
- Achieving Cost Reductions. The Company has historically been able to
achieve cost reductions through the integration of its acquisitions.
Integrating the Acquisitions will enable the Company to eliminate
duplicative functions currently being performed by each of Sinter, PMH
and Krebsoge in the areas of administration, finance, sales, marketing,
purchasing, technical and field services and management information
systems. Management believes that pre-tax cost savings of at least $4.5
million can be achieved annually through eliminating duplicative
facilities as well as research and development and engineering personnel.
The Company is in the process of identifying additional cost savings,
such as purchasing, marketing and processing synergies that would
increase potential savings. There can be no assurance that any such cost
savings will, in fact, be realized.
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<PAGE> 40
PRODUCTS
The Company manufactures and markets over 4,000 different pressed powder
metal parts and has introduced over 100 new parts since 1995. The Company
focuses on the manufacture of large, complex pressed powder metal parts that
have higher-densities, wear resistance and strength than parts produced by
traditional powder metallurgical processes.
Pressed Powder Metal Parts. The Company produces a wide variety of pressed
powder metal parts for use primarily in engines, transmissions and other drive
mechanisms. These parts include gears, sprockets, bearings, clutch mechanisms,
oil pump gears and rotors, pulleys, sensor rings and other structural parts
suitable for high-stress applications. The Company focuses on manufacturing
pressed powder metal parts suitable for such high-stress applications because
such parts generally provide higher margins and involve less competition than
traditional high volume, undifferentiated pressed powder metal parts, which
typically require less engineering and less sophisticated production techniques.
Pressed powder metal parts can typically be manufactured at a lower per
unit cost as compared to similar parts produced using wrought steel or iron
technologies due to (i) a reduction in the amount of additional capital, labor,
energy and overhead costs required and (ii) the reduction or elimination of raw
material scrap or waste that is inherent in secondary manufacturing processes.
In addition to cost savings, powder metallurgy permits the manufacture of parts
to close dimensional tolerances and of complex or unique shapes which would be
impractical or impossible to produce using other metalworking processes.
Additional Products. The Company has expanded its traditional product line
to include powder metallurgical applications such as filters made of highly
porous sintered metals, powder forged parts, high-speed steel and highly
engineered plastics and composites. The Company is also introducing new product
lines to the market which are based upon powder metal injection molding,
friction materials and high performance aluminum alloys.
- Sintered Filters. Highly porous filters, primarily for use in the
chemical and processing industries, are manufactured using pressed metal
technology and either bronze, stainless steel fibers or powders, nickel
based alloys or titanium.
- Powder Forging. Powder forging adds a forging step to a pre-formed
pressed powder metal part resulting in a product that is comparable to a
conventionally forged steel part.
- Plastics and Composites. Precision parts made of high thermo-set
material which are corrosion resistant, light weight and provide wide
design flexibility.
- Powder Metal Injection Molding. Metal injection molding involves a
mixture of metal powder and plastic binder which is injection molded and
sintered, and enables the Company to manufacture small pressed powder
metal parts in intricate shapes with tight tolerances.
- Aluminum Alloys. Aluminum parts are manufactured using substantially the
same procedure as conventional pressed powder metal parts, except the
sintering process is performed at a lower temperature.
The Company believes that there are significant growth opportunities
associated with these additional product lines.
Product Cycles. In the automotive market, the Company principally competes
for new business at the beginning of the development of new products, which
generally begins two to five years prior to full scale production, and the
redesign of existing products which also involves long lead times. During this
pre-production period, the Company usually works with its customers to develop
the parts and tooling required to meet the customers' specifications. Once the
parts are developed, they are subjected to rigorous customer testing to confirm
that such parts meet its specifications and quality standards. Because of the
time and costs involved in developing and testing new parts, once an automotive
OEM designates the Company to supply
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<PAGE> 41
pressed powder metal parts for a new vehicle program, the OEM will usually
continue to purchase those parts from the Company for the life of the program,
although not necessarily for a redesign. As a result, the life cycle for a
typical pressed powder metal part for use by an automotive OEM is about five to
ten years, although the exact time period may vary based on the particular part
or the success of the specific OEM platform. The Company believes that it has
developed strong relationships with its automotive OEMs which allow it to
identify business opportunities and customer needs at early stages of vehicle
design and has helped the Company develop a significant backlog of business.
The pre-production phase for the Company's non-automotive parts is
typically shorter than for automotive parts, while the production phase for
non-automotive parts generally runs significantly longer, in some cases as long
as twenty to twenty-five years. However, because there are fewer start-up costs
and shorter lead times involved, non-automotive parts are generally more
price-sensitive and do not create as much customer loyalty as do automotive
parts.
MANUFACTURING
The Company uses powder metallurgy to transform powdered metal alloys into
high quality pressed powder metal parts using the following three steps:
- MIXING/COMPOUNDING: Elemental or alloyed metal powders, lubricants and
certain other additives are blended together according to formulas, many
of which are proprietary, designed to produce specific performance
characteristics. The Company often collaborates with pressed powder metal
suppliers, equipment manufacturers and customers in developing new
mixtures that will produce pressed powder metal parts with greater
strength, hardness and durability.
- MOLDING/COMPACTING: A specific amount of the powder formulation is
automatically fed into a cavity within a precision die in a molding
press. The material is then compacted under pressures up to 60 tons per
square inch. This produces a "green part" of the size and shape of the
finished component when ejected from the die but requires sintering to
bond the materials together.
- SINTERING: After compacting, the green part is sent through a controlled
atmosphere furnace where it is heated to a specific temperature which
metallurgically bonds the metal powders while retaining the shape of the
compacted part. The sintering process hardens and strengthens the pressed
powder metal part.
In certain circumstances, the pressed powder metal part undergoes
additional processing operations to attain customer specifications for tighter
dimensional tolerances, greater density, increased hardness or corrosion
resistance. These operations include heat treatment, coining, turning, drilling,
grinding or applying a corrosion resistant coating. These additional processing
operations are typically performed by the Company or, in certain instances, are
subcontracted to outside processors.
The Company's manufacturing capabilities are enhanced by its expertise in
the development, engineering and production of precision tools and dies for use
in its own production operations, which enables the Company to produce
higher-quality, low cost pressed powder metal parts while minimizing down time
and accelerating turnaround time in production. For example, the Company is
often able to design a die that minimizes the need for additional machining of a
particular product, which in turn lowers the overall production costs associated
with such products. The Company also maintains state-of-the-art technology to
improve its tool and die capabilities and has computerized most of the design
and engineering portions of its tool and die production process.
SALES AND MARKETING
The Company's sales are handled through a combination of independent sales
representatives and in-house account representatives and technical advisors. The
independent sales representatives' primary responsibility is to develop new
business by understanding each customer's product development plans to involve
the Company in the development stage of new products and to suggest replacements
for competitors' products. In
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<PAGE> 42
addition, the independent sales representatives serve each account after the
sale has been made to ensure continued customer satisfaction. The Company's
in-house account representatives, together with the Company's technical
advisors, provide technical expertise and advice needed in the development stage
of new products and serve as troubleshooters for customers with respect to
existing products. As of December 31, 1996, the Company had 35 independent sales
representatives and 30 in-house account representatives.
The Company intends to restructure its sales and marketing department in
order to centralize its world-wide sales and marketing efforts. As part of this
restructuring, the Company established the position of director of marketing to
take responsibility for, among other things, coordinating and enhancing the
sales and marketing efforts of the Company's in-house and independent sales
representatives. The Company has decided to use its in-house sales
representatives principally for its automotive customers in North America, and
its independent sales representatives for its non-automotive customers in North
America. These changes are intended to better align the Company's sales force
with the needs of its customers. In Europe, the Company intends to continue
using a combination of in-house and independent sales representatives to market
its products.
The Company currently markets and sells its products domestically,
principally in the Northeast, Midwest and Southeast, and internationally,
principally in Germany and Sweden. International sales accounted for
approximately 46% of the Company's net sales in 1996 on a pro forma basis.
CUSTOMERS
Sales to the automotive industry have historically constituted a
substantial portion of the net sales of the Company. The majority of the
Company's remaining sales are distributed among the lawn and garden, home
appliance and power tool industries. In 1996, on a pro forma basis, sales to the
automotive industry accounted for approximately 74% of the net sales of the
Company with Ford, General Motors, Chrysler and Volkswagen accounting for
approximately 17.3%, 10.9%, 8.3% and 5.0% of the Company's net sales,
respectively. No other customer accounted for over 5% of the Company's net sales
in 1996 on a pro forma basis. The Company's top five customers accounted for
approximately 46% of its net sales in 1996 giving effect to the Acquisitions. No
single part sold to a customer accounted for more than 5% of Sinter's or, giving
effect to the Acquisitions, the Company's net sales in 1996. Over the past ten
years, the Company has not lost any customer accounting for over 5% of net sales
on a pro forma basis.
The Company works closely with its major customers during the development
and redesign stages of their products. The Company believes that its commitment
to quality, service and just-in-time delivery has enabled it to build and
maintain strong and stable customer relationships. In addition, the Company has
received preferred supplier awards from many of its customers, including General
Motors, Ford and Chrysler.
SUPPLIERS AND RAW MATERIALS
The basic raw materials required for the Company's pressed powder metal
operations are ferrous and nonferrous powder metals. The Company obtains these
powder metals from a number of powder metal producers, including Hoeganaes U.S.,
Hoganas Sweden, Mannesmann AG and Quebec Metal Powder. Giving effect to the
Acquisitions, Hoeganaes U.S. and Quebec Metal Powder supplied the Company with
approximately 45% and 30%, respectively, of its powder metal requirements in the
United States in 1995, while Hoganas Sweden and Mannesmann AG supplied the
Company with approximately 50% and 36%, respectively, of its powder metal
requirements in Europe in 1995. The Company believes that it is one of the
largest customers of Hoeganaes U.S., Hoganas Sweden and Mannesmann.
The Company typically enters into purchase contracts with its principal
suppliers which generally have two-year terms. In North America, these contracts
provide for adjustments in the prices paid by the Company depending upon the
price of scrap metal. In Europe, the price paid by the Company for powder metal
is fixed at the time the contract is executed. In September 1996, Sinter entered
into a two-year supply minimum purchase contract with Hoeganaes U.S. which also
provides for a firm commitment on the part of Hoeganaes U.S. to supply powder
metal. None of the Company's contracts with other major suppliers provide for
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<PAGE> 43
minimum purchase requirements or firm commitments to supply powder metal. The
Company has generally been able to obtain adequate supplies of powder metal for
its operations.
In an effort to ensure a continued source of supply of powder metal at
competitive prices, the Company concentrates on developing relationships with
its suppliers and becoming an important customer to such suppliers. In many
instances, the Company works in close consultation with its suppliers in the
development of new combinations of powder metal. The Company believes that its
relationships with its suppliers are good.
TECHNOLOGY AND QUALITY CONTROL
The Company believes that it is an industry leader in the development of
engineering systems, processes and technologies to allow the manufacturing of
more complex and larger pressed powder metal parts that have higher densities,
wear resistance and strength than parts produced by more traditional powder
metallurgical processes. In many instances, the Company works with its suppliers
and customers, as well as with others, to develop new processes and
technologies. The Company was the first pressed powder metal parts manufacturer
to introduce a new pressed powder metal processing technology, known as HPP
processing, which expands the range of densities for pressed powder metal parts
that the Company can produce, at a lower cost per product unit than has been
possible to date with other available processes. In addition, Sinter has
considerable production experience in pressed aluminum and stainless steel
technologies, which allow reductions in weight of parts when substituted for
steel products. Krebsoge has successfully developed a proprietary powder forging
process, which has been an important contributor to its growth, and powder metal
injection molding.
General Motors and Chrysler have each indicated that beginning in 1997 they
will not award new or additional business to companies that are not QS 9000
certified or actively working toward QS 9000 certification. As a result of
Sinter's efforts with respect to quality control, in December 1995, Sinter
received QS 9000 and ISO 9002 standard certifications at the Company's Emporium,
Pennsylvania facilities. The Company's facility in Sweden has also achieved ISO
9002 certification. Krebsoge's five main facilities have achieved ISO 9001
certification, while PMH's Salem, Indiana, Van Wert, Ohio and St. Thomas,
Ontario facilities have achieved ISO 9002 and QS 9000 certification. The Company
focuses substantial effort on quality control. Its Quality Control Department
has helped the Company virtually eliminate product failures in parts delivered
to customers. In order to produce parts that need minimal machining, the Company
relies on quality control systems that provide a high degree of measurement
consistency and precision. The Company uses a variety of equipment, such as an
electronic measuring system and computer controlled testing machines to ensure
tight tolerances. In addition, the Company uses statistical process controls as
an integral part of its quality control systems. The computerized statistical
processes provide for real time feedback through each of the manufacturing
processes.
COMPETITION
The Company operates in a highly competitive, fragmented industry, with no
participant other than the Company having greater than a 5% market share in
North America or Western Europe. Competition is based largely on product quality
and performance attributes, customer service, price, new product innovation and
timely delivery. The Company competes with a number of local and regional
competitors both in North America and in Europe, most of which have annual sales
of less than $50 million. However, as the pressed powder metal parts industry
continues to consolidate, the Company will increasingly compete against larger
companies like itself, which have the financial resources, national and
international manufacturing presence and high quality products that are required
by major customers, such as automobile OEMs. In addition, the Company competes
with companies using wrought steel or casting technologies since the Company's
technological advancements are increasing the instances in which the Company's
parts may be substituted for wrought steel and iron parts. Also, a number of
large industrial manufacturers, particularly in Japan, produce pressed powder
metal parts for their internal use. Some or all of these manufacturers may have
greater financial resources than the Company. Although such manufacturers do not
currently market their pressed powder metal parts in North America or Europe, no
assurance can be given that such manufacturers will not do so in the future.
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ENVIRONMENTAL MATTERS
The Company's operations are subject to frequently changing environmental
laws and related regulations applicable in the jurisdiction of their respective
locations. This extensive regulatory framework imposes significant compliance
burdens and risks on the Company. Notwithstanding these requirements, the
Company believes that it is in material compliance with all laws and regulations
governing its present operations. Based upon the Company's experience to date,
the cost of compliance with environmental laws (including costs associated with
its St. Thomas, Ontario and Van Wert, Ohio facilities) has not had and is not
expected to have a material adverse effect on the Company's financial condition,
liquidity or results of operations. However, future events, such as changes in
existing laws and regulations, may give rise to additional compliance costs that
could have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
In the United States, the Company is subject to, among other requirements,
the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery
Act, the Safe Drinking Water Act, and similar federal, state or local laws
regulating air emissions, water discharges, and solid and hazardous waste
generation, treatment, storage and disposal. The Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and similar state laws can
impose joint and several liability for releases of hazardous substances into the
environment, without regard to fault or the lawfulness of the original activity.
Categories of potentially responsible parties under CERCLA include current or
former owners and operators of a contaminated site and companies that generated
waste at or sent waste to a site. The Company believes that it is in material
compliance with the U.S. laws and regulations described above.
With respect to its facilities located in Germany, the Company is subject
to, among other requirements, the following acts and regulations: the federal
Pollution Control Act (including Technical Instructions Air, Noise, and Waste
regulations), the Water Resources Management Act and the Waste Act. Pursuant to
such acts and regulations, the authorities are entitled to inspect production
sites every one to three years. Furthermore, the Company's German facilities
must comply with the Plant Security Act, Employment Security Act, Regulations
for the Prevention of Accidents and the Toxic Substances Control Act, which
includes the technical regulations on hazardous substances and the Dangerous
Chemicals Ordinance. The Company believes that it is in material compliance with
the German laws and regulations described above.
Prior to the consummation of the Acquisitions, the Company conducted a
Phase I environmental review of each of PMH's facilities. Based upon the results
of these Phase I reviews, the Company anticipates that it will incur
expenditures at the St. Thomas, Ontario facility to address historical
environmental issues associated with groundwater and soil contamination. The
source of contamination has not been positively identified and may be related to
either past facility operations or off-site origins. As the successor to PMH,
the Company could be required to expend funds under Ontario's Environmental
Protection Act to address the soil and groundwater contamination at this
facility. The Company also anticipates that it may be required to make capital
expenditures to improve the St. Thomas facility's environmental performance to
ensure compliance with sewer use by-law criteria, air emission criteria and PCB
disposal.
The Company has also been informed of the existence of historical soil and
groundwater contamination at PMH's Van Wert, Ohio facility. Under the terms of
an October 31, 1988 indemnity agreement, Chrysler Corporation has assumed
responsibility for all contamination at the site in existence prior to October
31, 1988, for which it receives notice by October 31, 1998. Pursuant to this
indemnity agreement, Chrysler has performed a risk assessment concerning the
known soil and groundwater contamination at the facility, and has concluded that
no threat to human health or the environment exists. To date, the Ohio
Environmental Protection Agency has not formally concurred with Chrysler's
conclusions. In the event remediation of this historical contamination is
required under Ohio law or under CERCLA, Chrysler would be liable for the cost
of such remediation under the indemnity agreement. If Chrysler defaults in its
indemnification obligations, the Company could incur liability under CERCLA for
the remediation of the contamination based upon the Company's status as the
owner of the property.
The Company is indemnified by MAAG for certain environmental liabilities
with respect to PMH and Krebsoge under the respective purchase agreements.
However, the Company's indemnification rights under
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the PMH purchase agreement are subject to certain limitations, and therefore no
assurances can be made that such indemnification will be sufficient to address
the Company's potential liability with respect to the St. Thomas or Van Wert
facilities. Furthermore, there can be no assurance that additional environmental
issues will not be discovered which were not brought to light by the Phase I
site assessments referred to above or which come to light as the operations of
PMH and Krebsoge become integrated with Sinter's operations. As a result, over
time the Company may incur additional expenditures at these and its other
facilities to improve their environmental performance and to address historical
contamination.
EMPLOYEES
As of December 31, 1996, the Company had approximately 3,250 employees,
1,800 of which were located in North America and 1,450 of which were located in
Europe. All of the Company's operations are non-union except for operations
located in Sweden; Germany; Van Wert, Ohio; and St. Thomas, Ontario. The
Company's employees located in Germany are represented by the National Metal
Workers Union under a series of regional contracts that run one to two years.
The Company's employees at Sinterteknik are members of a Swedish labor union
whose contract expires in February 1998. The collective bargaining agreement
covering the Company's employees at St. Thomas expires May 17, 1998. The Company
anticipates that new agreements on satisfactory terms will be reached as these
existing agreements expire. The Company's collective bargaining agreement with
its employees at its Van Wert, Ohio facility expired March 1, 1997 without such
employees reaching agreement on the terms of a new collective bargaining
agreement. The Van Wert employees have not taken a strike vote, but they did
formally reject the Company's initial proposal for a new collective bargaining
agreement. Currently, the Company and the employees at Van Wert are engaged in
ongoing negotiations, with respect to a new collective bargaining agreement. See
"Risk Factors -- Labor Relations."
LEGAL PROCEEDINGS
The Company presently is involved in various lawsuits which are incidental
to the ordinary conduct of its business. In management's opinion, the outcome of
these matters will not have a material adverse effect on the Company's business,
financial condition or results of operations.
PROPERTIES
The Company operates 18 manufacturing facilities in the United States,
Germany, Sweden and Canada, with a total floor space of approximately 1.8
million square feet. Of this footage approximately 1.6 million square feet are
owned and approximately 180,000 square feet are leased. In addition, the Company
owns a tooling facility located in Indianapolis, Indiana.
The Company's corporate headquarters are located in Cleveland, Ohio and
occupy approximately 6,000 square feet of leased office space under a lease
expiring in April 2006. The Company has begun consolidating operations at PMH's
former Livonia, Michigan headquarters. The Company anticipates that this
consolidation will be completed in the first quarter of 1997.
The Company believes that substantially all of its property and equipment
is in good condition and that it has sufficient capacity to meet its current and
projected operational needs in the foreseeable future. All of the
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Company's owned facilities currently are pledged as collateral under the New
Credit Facility. The following table describes the Company's manufacturing
facilities as of December 31, 1996:
<TABLE>
<CAPTION>
OWNED OR EXPIRATION
LOCATION LEASED OF LEASE SQUARE FEET
- --------- -------- --------------- -----------
<S> <C> <C> <C>
SINTER
Emporium, Pennsylvania (3 facilities).............. Owned -- 289,000
Conover, North Carolina............................ Leased 8/11/97 63,000
Richton Park, Illinois(1).......................... Owned -- 64,000
Riverdale, Illinois(1)............................. Leased 7/19/99 28,000
Zeeland, Michigan.................................. Owned -- 67,000
Kolsva, Sweden..................................... Owned -- 64,000
PMH
Salem, Indiana..................................... Owned -- 152,000
Van Wert, Ohio..................................... Owned -- 206,000
St. Thomas, Ontario................................ Owned -- 185,000
KREBSOGE
Radevormwald, Germany (3 facilities)............... Owned -- 398,000
Bad Bruckenau, Germany............................. Owned -- 127,000
Lubeck, Germany.................................... Owned -- 25,000
Bad Langensalza, Germany........................... Owned -- 37,000
Bonn, Germany...................................... Leased One year term; 89,000
renews annually
Terryville, Connecticut............................ Owned -- 25,000
</TABLE>
- ---------------
(1) In January 1997, the Company commenced manufacturing operations at its
Richton Park, Illinois facility and terminated manufacturing operations at
its Riverdale, Illinois facility. The Riverdale facility is currently used
for distribution.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, current principal position or employment of each director
and executive officer of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Joseph W. Carreras............. 43 Chairman of the Board and Chief Executive Officer
Donald L. LeVault.............. 61 President, Chief Operating Officer, Director and Secretary
Michael T. Kestner............. 42 Vice President, Chief Financial Officer and Secretary
E. Joseph Hochreiter(1)(2)..... 50 Director
Mary Lynn Putney(1)(2)......... 49 Director
William H. Roj (1)(2).......... 47 Director
Charles E. Volpe............... 59 Director
David Y. Howe.................. 32 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Executive officers are elected by and serve at the discretion of the Board
of Directors until their successors are duly elected and qualified. There are no
family relationships between or among any Directors or executive officers of the
Company.
JOSEPH W. CARRERAS has been Chairman of the Board of the Company since
June 1993, Chief Executive Officer since January 1994 and a Director since the
Company's formation in December 1991. Prior to December 1993, Mr. Carreras was a
Vice President with CVC, one of the principal stockholders of the Company. Mr.
Carreras joined CVC in 1984 and held various executive positions in addition to
Vice President.
DONALD L. LEVAULT has been the President and a Director of the Company
since its formation in December 1991. From 1981 to 1989, Mr. LeVault served as
Vice President and General Manager of Ajay Enterprises Corporation, a division
of Fuqua Corporation. Mr. LeVault also serves as a director of Omega
Pultrusions, Inc., a manufacturer of specialized fiberglass products.
MICHAEL T. KESTNER has been the Vice President and Chief Financial Officer
of the Company since January 1995. Prior to joining the Company and since 1992,
Mr. Kestner was a Vice President of Banc One Capital Partners. From 1988 to
1992, Mr. Kestner served as a financial executive of Wolfensohn Ventures, L.P.
Mr. Kestner is a certified public accountant.
E. JOSEPH HOCHREITER has been a Director of the Company since its
formation in December 1991. Mr. Hochreiter is currently the Chairman, President
and Chief Executive Officer of Lanxide Precision, Inc., which designs, engineers
and manufactures microprecision metal matrix composite components and
assemblies, and Chairman of National Recovery Systems, an on-site metal oxide
recovery company. Prior to August 1994, Mr. Hochreiter was the President, Chief
Operating Officer and director of Fisher & Porter Company, a manufacturer of
process control systems and equipment. From 1987 to 1991, Mr. Hochreiter was the
President of HMA Investments, a private investment firm of which he was the
principal founder.
DAVID Y. HOWE has been a Director of the Company since November 1994. Mr.
Howe is currently a Vice President of CVC, where he has been employed since
1993. From 1990 to 1993, Mr. Howe was employed by Butler Capital Corporation, a
private investment company. Mr. Howe serves on the Board of Directors of Pen-Tab
Holdings, Inc., Aetna Industries, Inc., Cable Systems International, Inc.,
Brake-Pro Inc., Copes-Vulcan, Inc., Milk Specialties Company and American
Italian Pasta Company.
MARY LYNN PUTNEY has been a Director of the Company since December 1994.
Ms. Putney is currently a Managing Director of Citibank, N.A., in its global
investment group. Ms. Putney has been employed by Citibank, which is the parent
corporation of CVC, for 27 years.
45
<PAGE> 48
WILLIAM H. ROJ has been a Director of the Company since February 1994. Mr.
Roj was a partner in the law firm of Jones, Day, Reavis & Pogue from 1983 until
December 31, 1995. Mr. Roj is currently the President of ERICO International
Corporation, a construction machinery manufacturing company. Mr. Roj is also a
director of DNX Corporation, which conducts research, develops therapeutic
products and provides biological testing services on transgenic animals.
CHARLES E. VOLPE has been a Director of the Company since November 1994.
Until 1996, Mr. Volpe was an Executive Vice President, Chief Operating Officer
and director of KEMET Electronics Corporation and its parent, KEMET Corporation,
which manufactures tantalum and ceramic capacitors. Mr. Volpe has served as a
director of KEMET Electronics Corporation since April 1987 and serves as a
director of Encad, Inc.
OTHER SIGNIFICANT EMPLOYEES OF THE COMPANY
Other significant employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ---------------------------------------------------
<S> <C> <C>
Lars-Erik Dahlgren............ 55 Managing Director -- Sinterteknik
Dr. Ing. Lothar
Albano-Muller............... 57 President and Chief Executive Officer -- Krebsoge
Dr. Manfred Weber............. 47 Director of Central Sales and Marketing -- Krebsoge
Dr. Volker Arnhold............ 48 Director of Research and Development -- Krebsoge
Ronald G. Campbell............ 35 Treasurer and Assistant Secretary -- Sinter
Alex Garcia................... 49 Vice President -- Operations -- Sinter
Ian B. Hessel................. 31 Vice President -- Controller -- Sinter
</TABLE>
LARS-ERIK DAHLGREN has been the Managing Director of Sinterteknik since
1981. Prior to joining Sinterteknik, Mr. Dahlgren headed the finance division of
Swedbank, Stockholm. From 1975 to 1981, Mr. Dahlgren was Managing Director for
Scandinavian Operations of Tenneco-Automotive. From 1981 to 1984, Mr. Dahlgren
was Managing Director, European Operations for the Walker division of Tenneco.
DR. ING. LOTHAR ALBANO-MULLER has been the President and Chief Executive
Officer of Krebsoge since 1979. Dr. Albano-Muller also has served as Manager of
Research and Development and Marketing and Director of R&D of Krebsoge. Dr.
Albano-Muller is currently the President of the Board, German Association of
Powder Metallurgy and President, European Powder Metal Association.
DR. MANFRED WEBER has been the Director of Central Sales and Marketing of
Krebsoge since 1990. Dr. Weber also serves as Vice President Technology of MWU
and deputy Vice President of two major facilities. Dr. Weber has been with
Krebsoge since 1984.
DR. VOLKER ARNHOLD has been the Director of Research and Development of
Krebsoge since 1987. Dr. Arnhold also serves as Quality Management
Representative and Vice President Technology of Metallwerk Langensalza GmbH and
Pressmetall Krebsoge GmbH. Dr. Arnhold has been with Krebsoge since 1981.
RONALD G. CAMPBELL has been the Treasurer of the Company since December
1996 and Assistant Secretary of the Company since February 1996. Mr. Campbell
had previously been Assistant Treasurer since May 1995. Prior to joining the
Company and since 1991, Mr. Campbell was Director-Corporate Finance for PT
Unggul Indah Corporation, a chemical manufacturer in Jakarta, Indonesia. From
1984 to 1991, Mr. Campbell was with Citicorp/Citibank in the United States and
Singapore, where he specialized in leveraged and structured transactions and
held various executive positions in addition to Vice President.
ALEX GARCIA has been the Vice President-Operations of the Company since
August 1996. Prior to joining the Company and since 1987, Mr. Garcia was with
the Forming Technologies operations of Masotech Forming Technologies. Since
1994, he was Director of Operations of Masotech.
IAN B. HESSEL has been the Vice President-Controller of the Company since
October 1996. Prior to joining the Company and since 1989, Mr. Hessel was with
Arthur Andersen LLP. Mr. Hessel is a certified public accountant.
46
<PAGE> 49
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below provides information relating to compensation for the
Company's last three fiscal years for the Chief Executive Officer and the other
named executive officers of the Company who received compensation in excess of
$100,000 in those years (collectively, the "Named Executive Officers"). The
amounts shown include compensation for services in all capacities that were
provided to the Company and its subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
--------------------------------------
ANNUAL COMPENSATION (1) RESTRICTED SECURITIES
-------------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) AWARDS(3) OPTIONS COMPENSATION
- ------------------------------ ---- -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph W. Carreras(5)......... 1996 $258,461 $300,000 65,000 $ 10,600(4)
Chairman of the Board 1995 249,995 125,000 -- -- --
and Chief Executive Officer 1994 200,000 -- -- 65,000 --
Donald L. LeVault............. 1996 179,440 95,000 20,000 $ 9,518(4)
President 1995 173,857 85,000 -- -- 10,894(6)(7)
1994 168,000 80,000 $1,032,245 25,000 7,500(7)
Michael T. Kestner............ 1996 129,232 85,000 25,000 8,300(4)
Vice President, 1995 120,200 50,000 -- 25,000 36,079(6)
Chief Financial Officer 1994 -- -- -- -- --
and Secretary
</TABLE>
- ---------------
(1) Unless otherwise indicated, no executive officer named in the Summary
Compensation Table received personal benefits or perquisites in excess of
the lesser of $50,000 or 10% of his aggregate salary and bonus.
(2) Represents cash bonuses received by the applicable executive officers in
February 1997, March 1996 and February 1995, as a result of the operating
performance of the Company in 1996, 1995 and 1994, respectively.
(3) Represents the estimated fair market value at the time of grant of shares of
Class B Common Stock (which were converted into shares of Class A Common
Stock) awarded to Mr. LeVault under the Company's Management Incentive Stock
Plan (the "Stock Plan"). The Stock Plan was terminated at the time of the
Company's initial public offering. Fair market value was determined by the
Company to be equal to book value at the time of grant with respect to the
awards in January 1994 and April 1993 and the initial public offering price
with respect to the award in November 1994. An aggregate of 31,187
restricted shares issued to Mr. LeVault under the Stock Plan are fully
vested. At the end of the Company's last completed fiscal year, Mr. LeVault
held an aggregate of 93,474 shares of restricted stock, which had an
estimated fair market value of approximately $2,780,852 at such time. Mr.
LeVault's restricted shares are scheduled to vest on January 1, 1998.
(4) The combined distributions for deferred contribution and deferred
compensation plans for Messrs. Carreras, Kestner and LeVault in 1996 were
$10,600, $8,300 and $9,518, respectively.
(5) Pursuant to the terms of a consulting agreement, Mr. Carreras received
annual compensation of $200,000 for serving as the Company's Chairman of the
Board in fiscal 1994. The consulting agreement was terminated, effective
January 1, 1995, and Mr. Carreras now serves as a full-time employee of the
Company.
(6) The Company paid $3,394 and $36,079 for the moving expenses of Mr. LeVault
and Mr. Kestner, respectively.
(7) The amount listed for 1994 was contributed by the Company to the Company's
qualified profit sharing plan, as profit sharing and matching contributions
relating to before-tax contributions made by Mr. LeVault. In 1995, the
Company contributed $7,500 to the Company's qualified profit sharing
retirement plan, as profit sharing and matching contributions relating to
before-tax contributions made by Mr. LeVault.
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<PAGE> 50
1994 KEY EMPLOYEE STOCK INCENTIVE PLAN
The Company's 1994 Key Employee Stock Incentive Plan (the "Plan")
authorized grants to officers and other key employees of the Company and its
subsidiaries of (i) stock options that are intended to qualify as "incentive
stock options" within the meaning of the Internal Revenue Code and (ii)
nonqualified stock options. The Plan authorizes the granting of stock options
for up to an aggregate of 474,705 shares of Class A Common Stock, subject to
adjustments upon the occurrence of certain events to prevent dilution. Incentive
stock options are exercisable for up to ten years at an option price either more
than, less than or equal to the fair market value of such shares, as determined
by the Board of Directors. Nonqualified stock options may be granted for up to
ten years at such exercise price and upon such terms and conditions as the Board
of Directors or the Compensation Committee may determine at the time of grant.
Options are exercisable for up to ten years from the date of grant. As of
January 31, 1997, Sinter had granted stock options for an aggregate of 338,967
shares of Class A Common Stock to 21 employees, with Messrs. Carreras, Kestner
and LeVault holding stock options for an aggregate of 130,000, 50,000 and 45,000
shares of Class A Common Stock, respectively. These stock options have an
exercise price equal to the fair market value of the Class A Common Stock on the
date such options were granted.
EMPLOYMENT AGREEMENTS
Donald L. LeVault. Pursuant to an employment agreement with the Company,
Mr. LeVault has agreed to serve as President of the Company through April 1997,
subject to an annual, automatic one-year extension unless either party elects to
discontinue such extensions. Mr. LeVault has indicated to the Company that he
will continue to serve as President of the Company through April 1998. Mr.
LeVault receives an annual base salary of at least $150,000, or a higher amount
determined by the Board of Directors, which was $173,875 for 1995 and $179,440
for 1996, plus an annual bonus as determined by the Board of Directors of the
Company based upon the operating performance of the Company. Under the terms of
the agreement, Mr. LeVault may not engage in any competitive business while he
is employed by the Company or for a period of one year thereafter.
Dr. Albano-Muller. Pursuant to an employment agreement with Krebsoge, Dr.
Albano-Muller serves as a managing director of Krebsoge until December 31, 1997,
subject to an automatic one-year extension unless either party terminates the
employment agreement upon twelve months' notice. Dr. Albano-Muller receives an
annual base salary of DM 315,000 plus an annual discretionary bonus. The bonus
is based on the operating performance of Krebsoge and the personal efforts of
Dr. Albano-Muller. Under the terms of the agreement Dr. Albano-Muller may not
engage in any competitive business while he is employed by Krebsoge and for a
period of two years thereafter. Dr. Albano-Muller also entered into employment
agreements with two subsidiaries of Krebsoge, Sintermetallwerk Krebsoge GmbH and
Metallwerk Unterfranken GmbH, where he also serves as a managing director. He
does not receive additional compensation for his services under these
agreements.
Dr. Manfred Weber. Pursuant to an employment agreement with Krebsoge, Dr.
Weber serves as a president of the area "Central Sales and Marketing" of
Krebsoge until December 31, 1997, subject to an automatic one-year extension
unless either party terminates the employment agreement upon twelve months'
notice. Dr. Weber received an annual base salary of DM 246,000 in 1996, which
was increased to DM 280,000 effective as of January 1, 1997, and an annual
discretionary bonus. The bonus is based on the operating performance of Krebsoge
and the personal efforts of Dr. Weber. Under the terms of the agreement, Dr.
Weber may not engage in any competitive business while he is employed by
Krebsoge and for a period of two years thereafter. Dr. Weber also entered into
employment agreements with two subsidiaries of Krebsoge, Sintermetallwerk
Krebsoge GmbH and Metallwerk Unterfranken GmbH, where he also serves as a
managing director. He does not receive additional compensation for his services
under these agreements.
Dr. Volker Arnhold. Pursuant to an employment agreement with Krebsoge, Dr.
Arnhold directs the Research and Development and the Quality Management
Departments of Krebsoge until December 31, 1997, subject to an automatic
one-year extension unless either party terminates the employment agreement upon
twelve months' notice. Dr. Arnhold receives an annual base salary of DM 183,600
plus an annual discretionary
48
<PAGE> 51
bonus. The bonus is based on the performance of Krebsoge and the personal
efforts of Dr. Arnhold. Under the terms of the agreement, Dr. Arnhold may not
engage in any competitive business while he is employed by Krebsoge or for a
period of two years thereafter. Dr. Arnhold also serves as a managing director
of two subsidiaries of Krebsoge, Pressmetall Krebsoge GmbH and Metallwerk
Langensalza GmbH. He does not receive additional compensation for his services
for the subsidiaries.
STOCK OPTION HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning the unexercisable stock options held as of
December 31, 1996. There were no stock options exercised during the last fiscal
year of the Company. Sinter granted additional stock options to certain
employees, including the Named Executive Officers, in September 1996. See
"Executive Compensation -- 1994 Key Employee Stock Incentive Plan."
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
----------------- ----------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------------- ----------------
<S> <C> <C>
Joseph W. Carreras................... 43,333/86,667 $855,824/$996,676
Donald L. LeVault.................... 16,667/28,333 $329,176/$339,574
Michael T. Kestner................... 16,667/33,333 $329,176/$383,324
</TABLE>
49
<PAGE> 52
PRINCIPAL STOCKHOLDERS
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND OTHER EXECUTIVES
Except as otherwise indicated, the following table sets forth information
as of December 31, 1996, regarding the beneficial ownership of Class A Common
Stock and Class B Common Stock by (i) those persons known to the Company to be
the beneficial owners of more than 5% of the outstanding shares of Class A
Common Stock and Class B Common Stock, (ii) each of the Company's directors and
the Named Executive Officers and (iii) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK (1)(2) COMMON STOCK (1)
---------------------- ----------------------
DIRECTORS, EXECUTIVE OFFICERS NUMBER OF PERCENT NUMBER OF PERCENT
AND 5% STOCKHOLDERS SHARES OF CLASS SHARES OF CLASS
- ------------------------------------------------ --------- -------- --------- --------
<S> <C> <C> <C> <C>
Stockholders' Agreement Group (3)(4)............ 1,756,684 35.1% 2,543,381 100.0%
c/o Sinter Metals, Inc.
50 Public Square, Suite 3200
Cleveland, Ohio 44113
Citicorp Venture Capital Ltd. (4)............... 903,325 18.0 2,543,381 100.0
399 Park Avenue, 14th Floor
New York, New York 10043
Joseph W. Carreras.............................. 528,585 10.6 -- --
50 Public Square, Suite 3200
Cleveland, Ohio 44113
Skyline Asset Management, L.P. (6).............. 375,200 7.5 -- --
311 South Wacker Drive, Suite 4500
Chicago, Illinois 60606
Wellington Management Company (7)............... 312,500 6.2 -- --
75 State Street
Boston, Massachusetts 02109
T. Rowe Price Associates, Inc. (8).............. 275,000 5.5 -- --
100 E. Pratt Street
Baltimore, Maryland 21202
Cumberland Associates (5)....................... 250,000 5.0 -- --
1114 Avenue of the Americas
New York, New York 10036
Donald L. LeVault............................... 219,380 4.4 -- --
E. Joseph Hochreiter............................ 30,323 * -- --
David Y. Howe................................... -- * -- --
Mary Lynn Putney................................ 3,250 * -- --
William H. Roj.................................. 1,000 * -- --
Charles E. Volpe................................ 5,000 * -- --
Michael T. Kestner.............................. 29,441 * -- --
All Directors and executive officers as a group
(8 persons)................................... 816,979 16.3 -- --
</TABLE>
- ---------------
* Less than one percent.
(1) The Class A Common Stock is the only voting security of the Company and
entitles the holder thereof to one vote per share. The Class B Common Stock
is nonvoting and is convertible on a one-for-one basis into Class A Common
Stock at the option of each holder thereof.
(2) Includes with respect to each of the following individuals and groups the
following number of shares of Common Stock which may be acquired upon
exercise of options within 60 days of December 31, 1996:
50
<PAGE> 53
Stockholders Agreement Group (61,333 shares); Joseph W. Carreras (43,333);
Donald L. LeVault (16,667 shares); Michael T. Kestner (16,667 shares); and
all directors and executive officers as a group (76,667 shares).
(3) The Company, CVC, Richard A. McLean and Messrs. Carreras and LeVault have
entered into a stockholders' agreement relating to the shares of Common
Stock owned by each of them (the "Stockholders' Agreement"). See "Principal
Stockholders -- Stockholders' Agreement." As a result, the parties to the
Stockholders' Agreement may be deemed to have acquired beneficial ownership
of all the shares of Common Stock subject to the Stockholders' Agreement, an
aggregate of 4,300,065 shares, as a "group" as defined under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Each of the parties
to the Stockholders' Agreement disclaims any beneficial ownership with
respect to shares of Common Stock held by the other parties to the
Stockholders' Agreement. The number of shares of Common Stock shown for each
of the parties to the Stockholders' Agreement named separately in the table
does not include shares that may be deemed to be beneficially owned by such
individuals solely as a result of the Stockholders' Agreement.
(4) Assuming the conversion of each share of Class B Common Stock held by CVC
into one share of Class A Common Stock in accordance with Rule 13d-3(d)
under the Exchange Act, CVC would beneficially own 3,446,706 shares of Class
A Common Stock, which represents approximately 45.7% of the outstanding
Class A Common Stock. CVC is subject to certain banking regulations that
limit the amount of the Company's voting securities it can hold.
(5) Cumberland Associates ("Cumberland') reported sole voting power with respect
to 207,500 shares of Class A Common Stock and shared voting power with
respect to 42,500 shares of Class A Common Stock. In addition, Cumberland
reported sole dispositive power with respect to 207,500 of such shares and
shared dispositive power with respect to 42,500 of such shares. This
information was obtained by the Company from Cumberland's Schedule 13D filed
with the Commission on November 12, 1996. No additional information with
respect to Cumberland's holdings of Class A Common Stock was available as of
the date of this Prospectus.
(6) Skyline Asset Management, L.P. ("Skyline") reported, as of June 30, 1996,
shared voting and dispositive power with respect to these shares of Class A
Common Stock, which are held by Skyline as investment advisor to certain
client accounts over which Skyline exercises discretion. This information
was obtained by the Company from Skyline's Schedule 13F filed with the
Commission in November 1996. No additional information with respect to
Skyline's holdings of Class A Common Stock was available as of the date of
this Prospectus.
(7) Wellington Management Company ("Wellington") reported, as of December 31,
1995, shared voting power with respect to 72,500 shares of Class A Common
Stock and shared dispositive power with respect to 312,500 shares of Class A
Common Stock. Wellington is an investment advisor, and the 312,500 shares of
Class A Common Stock are held by numerous investment clients. This
information was obtained by the Company from Wellington's Schedule 13F filed
with the Commission on February 14, 1997 and Wellington's Schedule 13G filed
with the Commission on January 24, 1997. No additional information with
respect to Wellington's holdings of Class A Common Stock was available as of
the date of this Prospectus.
(8) These securities are owned by various individual and institutional investors
including T. Rowe Price Small Cap Value Fund, Inc., which T. Rowe Price
Associates, Inc. ("Price Associates") serves as investment advisor with
power to direct investments and/or sole power to vote the securities. For
purposes of the reporting requirements of the Exchange Act, Price Associates
is deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner of
such securities. This information was obtained by the Company from Price
Associate's Schedule 13G filed with the Commission in February 1997. No
additional information with respect to Price Associates' holdings of Class A
Common Stock was available as of the date of this Prospectus.
51
<PAGE> 54
STOCKHOLDERS' AGREEMENT
The Company, CVC, Richard A. McLean and Messrs. Carreras and LeVault
entered into the Stockholders' Agreement on October 18, 1994. The Stockholders'
Agreement provides that each of the parties thereto will not vote their
respective shares of Class A Common Stock in favor of any proposal to change the
number of members of the Board of Directors from its current size of seven
persons. In addition, the Stockholders' Agreement provides that each of the
parties will vote their respective shares of Class A Common Stock in favor of
the election of Directors for (i) one individual designated by CVC, provided
that CVC continues to own 10% or more of the Company's outstanding Common Stock,
(ii) an additional individual designated by CVC, provided that CVC continues to
own at least 25% of the Company's outstanding Common Stock, (iii) Messrs.
Carreras and LeVault, so long as each serves as an officer of the Company, and
(iv) three Directors (two of whom will not be affiliates or employees of the
Company) nominated by the Directors then in office. Further, the Company granted
the parties thereto certain "piggyback" registration rights to participate in
future registrations of equity securities of the Company. The parties have
agreed, however, not to otherwise effect any public or private sale of the
Company's equity securities during or following any public offerings by the
Company upon the written request of the Company for a period determined by the
Company. The Stockholders' Agreement provides that the Company will pay all
expenses incurred in connection with any such registrations other than any
underwriting discounts and commissions with respect to the shares sold for such
stockholder's account and for the costs for any counsel retained by such
stockholder. Under the Stockholders' Agreement, holders of approximately 4.3
million shares of Common Stock have been granted "piggyback" registration
rights. The holders of such "piggyback" registration rights have agreed to waive
such rights with respect to the Offering.
CERTAIN TRANSACTIONS
In July 1996, Sinter acquired SinterForm. Prior to and subsequent to this
acquisition, SinterForm engaged Locke Bros. to act as a sales representative on
its behalf. Ted A. Mueller, a partner in Locke Bros., is the brother-in-law of
Michael T. Kestner, the Company's Vice President and Chief Financial Officer.
Total commissions to be paid to Locke Bros. by SinterForm are anticipated to
aggregate approximately $118,000 for 1996, of which $46,000 was paid subsequent
to Sinter's acquisition of SinterForm.
On December 16, 1996, the Company purchased the Powder Metal Forge Unit of
Delco Remy America, Inc. for an aggregate purchase price of $7.7 million. At the
closing, the Company paid $5.2 million in cash and issued a $2.5 million
promissory note payable on the earlier of June 1998 and the date on which
certain of the acquired assets are relocated to a newly-constructed facility in
Emporium, Pennsylvania and such facility commences operations. CVC, which owns
approximately 46% of the Company's Common Stock, owns 19.8% of the outstanding
Class A Common Stock and 86.5% of the outstanding Class B Common Stock of Delco
Remy America, Inc.
On December 19, 1996, the Company and a syndicate of banks, including
Citibank, N.A., London ("Citibank"), Citicorp, USA, Inc. ("Citicorp USA"),
Salomon Brothers Holding Company Inc. ("SBHC"), and Salomon Brothers Inc
("SBI"), entered into the New Credit Facility. CVC, an affiliate of Citibank and
Citicorp, owns approximately 46% of the outstanding shares of the Company's
Common Stock. SBI, which is acting as an underwriter of the Offering, acted as
arranger and syndication agent with respect to the New Credit Facility and
received a fee of $5.5 million from the Company in consideration of such
services. Citibank, Citicorp and SBHC are lenders under the New Credit Facility
and, respectively, provided loans and/or commitments to the Company. As lenders
under the Revolving Facility and German Revolving Facility, Citicorp and
Citibank received, on a pro rata basis with all other lenders under such
facilities, facility fees and letter of credit participation fees under the New
Credit Facility. The net proceeds of the Offering will be applied to prepay
approximately $9.0 million of the Tranche A facility; $34.3 million of the
Tranche B facility; and $5.0 million under the Revolving Facility. As a result,
Citicorp USA will receive approximately $1.7 million as a result of the
prepayment of the Tranche A facility and the Revolving Facility and SBHC will
receive approximately $3.0 million as a result of the prepayment of the Tranche
B facility.
52
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Class A Common Stock, par value $.001 per share; 5,000,000 shares of Class B
Common Stock, par value $.001 per share; and 5,000,000 shares of preferred
stock, par value $.01 per share (the "Serial Preferred Stock"). Upon completion
of the Offering, the Company will have (i) 7,211,247 shares of Class A Common
Stock issued and outstanding (7,541,247 if the U.S. Underwriters exercise their
over-allotment option); (ii) 2,543,381 shares of Class B Common Stock issued and
outstanding and; (iii) no shares of Serial Preferred Stock issued and
outstanding.
COMMON STOCK
The rights of holders of Class A Common Stock and Class B Common Stock are
identical except for voting and convertibility. The holders of Common Stock are
entitled to receive dividends when, if and as declared from time to time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock will be entitled to receive ratably the net assets of
the Company available after the payment of all debts and other liabilities and
subject to the prior rights of any holders of any outstanding Serial Preferred
Stock. The shares of Common Stock have no preemptive rights or conversion rights
(except as described herein) and are not subject to further calls or assessments
by the Company. There are no redemption or sinking fund provisions applicable to
the Common Stock. The holders of Class A Common Stock are entitled to one vote
per share on all matters to be voted upon by the stockholders. The holders of
Class B Common Stock are not entitled to vote, except as required by law. The
holders of Class A Common Stock do not have the right to vote cumulatively in
the election of Directors. Subject to certain limitations, the Class B Common
Stock is convertible on a one-for-one basis into Class A Common Stock at the
option of the holder thereof. The outstanding shares of Common Stock are, and
the shares of Class A Common Stock being offered hereby will be upon payment
therefor, fully paid and nonassessable. The rights, preferences and privileges
of the holders of Common Stock are subject to the rights of the holders of
shares of any Serial Preferred Stock.
SERIAL PREFERRED STOCK
Under the Company's Restated Certificate of Incorporation (the
"Certificate"), the Board of Directors are authorized, without further action by
the stockholders, to issue, from time to time, Serial Preferred Stock in one or
more series and to fix or alter the voting powers, designations, preferences and
relative, participating, optional or other special rights, if any, and
qualifications, limitations or restrictions thereof, including, without
limitation, dividend rights and whether dividends are cumulative, conversion
rights, if any, rights and terms of redemption, including sinking fund
provisions, if any, redemption price and liquidation preferences of any unissued
shares or wholly unissued series of Serial Preferred Stock. In addition, the
Board of Directors may establish the number of shares constituting any such
class or series and the designation thereof, and increase or decrease the number
of shares any such series subsequent to the issuance of shares of such series,
but not below the number of shares of such series. The issuance of Serial
Preferred Stock may adversely effect the voting rights and other rights of the
holders of Common Stock. The Company currently has no shares of Serial Preferred
Stock outstanding and has no present plans to issue any Serial Preferred Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Under the Company's Certificate, upon completion of the Offering, there
will be approximately 15.2 million shares of Common Stock and approximately 5
million shares of Serial Preferred Stock available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions.
One of the effects of the existence of unissued and unreserved Common Stock
and Serial Preferred Stock may be to enable the Board of Directors to issue
shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management.
53
<PAGE> 56
Such additional shares also could be used to dilute the stock ownership of
persons seeking to obtain control of the Company. Also, such additional shares
could have an adverse effect on the marketability of the Common Stock.
The Board of Directors is authorized without any further action by the
stockholders to determine the rights, preferences, privileges and restrictions
of the unissued Serial Preferred Stock. The purpose of authorizing the Board of
Directors to determine such rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The Board of Directors
may issue Serial Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock, and which
could, among other things, have the effect of delaying or deferring a change in
control of the Company.
The Company does not currently have any plans to issue additional shares of
Common Stock or Serial Preferred Stock other than shares of Common Stock which
may be issued upon the exercise of options which have been granted or which may
be granted in the future to the Company's employees or in conversion for other
shares of Common Stock.
CERTAIN CHARTER PROVISIONS AND DELAWARE LAW
The Company's Certificate and By-Laws, as amended, provide, in general,
that (i) stockholder action can be taken only at an annual or special meeting of
stockholders and not by written consent in lieu of a meeting; (ii) special
meetings of the stockholders may be called only by the Chairman of the Board,
the President or the Secretary of the Company, by a majority of the total number
of directors of the Company (assuming no vacancies) or by the holders of a
majority of the Company's voting stock; and (iii) the provisions of Section 203
of the Delaware General Corporation Law (as described below) are made part of
the Company's Certificate. The By-Laws also require that stockholders desiring
to bring any business, including nominations for directors, before an annual
meeting of stockholders deliver written notice thereof to the Secretary of the
Company not later than 60 days in advance of the meeting of stockholders;
provided, however, that in the event that the date of the meeting is not
publicly announced by the Company by press release or inclusion in a report
filed with the Commission or furnished to stockholders more than 75 days prior
to the meeting, notice by the stockholder to be timely must be delivered to the
Secretary of the Company not later than the close of business on the tenth day
following the day on which such announcement of the date of the meeting was so
communicated. The By-Laws further require that the notice by the stockholder set
forth a description of the business to be brought before the meeting and the
reasons for conducting such business at the meeting and certain information
concerning the stockholder proposing such business and the beneficial owner, if
any, on whose behalf the proposal is made, including their names and addresses,
the class and number of shares of the Company that are owned beneficially and of
record by each of them, and any material interest of either of them in the
business proposed to be brought before the meeting.
Under applicable provisions of Delaware law, the approval of a Delaware
corporation's board of directors, in addition to stockholder approval, is
required to adopt any amendment to the corporation's certificate of
incorporation, but a corporation's by-laws may be amended either by action of
its stockholders or, if the corporation's certificate of incorporation so
provides, its board of directors. The Company's Certificate and By-Laws provide
that the provisions summarized above may not be amended by the stockholders, nor
may any provision inconsistent therewith be adopted by the stockholders, without
the affirmative vote of the holders of at least 80% of the Company's voting
stock, voting together as a single class.
Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" between a Delaware corporation, whose stock generally is
publicly traded or held of record by more than 2,000 stockholders, and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless (i) the
business combination was approved by the board of directors of the corporation
before the other party to the business combination became an interested
stockholder, (ii) upon consummation of the transaction that made it an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers or
held in employee benefit plans
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<PAGE> 57
in which the employees do not have a confidential right to tender or vote stock
held by the plan); or (iii) the business combination was approved by the board
of directors of the corporation and ratified by holders of 66 2/3% of the voting
stock which the interested stockholder did not own. The three-year prohibition
also does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors.
The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as any stockholder who becomes the
beneficial owner of 15% or more of a Delaware corporation's voting stock.
It is possible that these provisions and the ability of the Board of
Directors to issue Serial Preferred Stock or additional shares of Common Stock
will discourage other persons from making a tender offer for or acquisitions of
substantial amounts of the Company's Common Stock, or may delay changes in
control or management of the Company.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Company's Certificate provides that Directors and officers, or each
person who is or was serving or who had agreed to serve at the request of the
Board of Directors or an officer of the Company as an employee or agent of the
Company or as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including the heirs,
executors, administrators or estate of such person), shall be indemnified by the
Company to the fullest extent permitted by the Delaware General Corporation Law
or any other applicable laws as presently or hereafter in effect. The Company is
authorized under the Certificate to enter into one or more agreements with any
person which provide for indemnification greater or different than that provided
under the Certificate.
In addition, the Certificate provides that, to the fullest extent permitted
by the Delaware General Corporation Law or any other applicable laws presently
or hereafter in effect, no director of the Company will be personally liable to
the Company or its stockholders for or with respect to any acts or omissions in
the performance of his or her duties as a director of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is
ChaseMellon Shareholder Services, New York, New York.
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<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,211,247 shares of
Class A Common Stock outstanding (assuming no exercise of the U.S. Underwriters'
over-allotment option) and 2,543,381 shares of Class B Common Stock outstanding.
Of these shares, 4,750,000 shares of Class A Common Stock will be freely
tradeable without further restriction or further registration under the
Securities Act. The remaining 2,461,247 shares of Class A Common Stock and all
of the shares of Class B Common Stock and any shares acquired in the Offering by
an "affiliate" of the Company (an "Affiliate") as the term is defined in Rule
144 under the Securities Act ("Rule 144"), are "restricted securities" as
defined in Rule 144, and may only be sold in the public market if such shares
are registered under the Securities Act or sold in accordance with Rule 144 or
another exemption from registration under the Securities Act.
In general, under Rule 144, a person (or group of persons whose shares are
aggregated) who has beneficially owned restricted securities for at least two
years, including persons who may be deemed "affiliates" of the Company, will be
entitled to sell within any three month period, a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of the Class A
Common Stock (approximately 72,112 shares immediately after the Offering) or
(ii) the average weekly reported volume of trading of the Class A Common Stock
on the NYSE during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company. A person
who has not been an "affiliate" of the Company for the 90 days preceding a sale
and who has beneficially owned restricted securities for at least three years
will be entitled to sell such restricted securities in the public market without
restriction. Restricted securities properly sold in reliance upon Rule 144 are
thereafter freely tradeable without restrictions or registration under the
Securities Act, unless thereafter held by an "affiliate" of the Company. The
Commission has reduced the two-year holding period to one year and the
three-year period to two years effective April 29, 1997.
In addition, under the Stockholders' Agreement, the Company has granted
certain "piggyback" registration rights to holders of approximately 4.3 million
shares of Common Stock. The Stockholders' Agreement generally provides the
parties thereto with a limited right to cause the Company to use its best
efforts to register in connection with an offering of its equity securities,
subsequent to the Company's initial public offering in October 1994, under the
Securities Act the shares of Common Stock owned by each such person. The Company
will pay all expenses in connection with the preparation and filing of the
registration statement. The selling stockholder is responsible for payment of
any underwriting discounts or commissions with respect to shares sold for its
account. The parties to the Stockholders' Agreement have agreed to waive their
respective "piggyback" registration rights with respect to the Offering.
The Company is unable to estimate the amount, timing or nature of future
sales of outstanding Class A Common Stock or Class B Common Stock. Although the
shares of Class A Common Stock offered hereby will trade separately from the
shares of Class B Common Stock, sales of substantial amounts of either Class A
or Class B Common Stock in the public market may have an adverse effect on the
market price of the Class A Common Stock. The Company and its executive
officers, directors and certain principal stockholders, including the parties to
the Stockholders' Agreement, have agreed that for a period of 90 days after the
date of this Prospectus they will not, without the prior written consent of the
representatives of the Underwriters, offer, sell, contract to sell or otherwise
dispose of any shares of Class A Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock, except pursuant to the
Underwriting Agreement. See "Underwriters."
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<PAGE> 59
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK
The following discussion concerns the material United States federal income
and estate tax consequences of the ownership and disposition of shares of Class
A Common Stock applicable to Non-U.S. Holders of such shares of Class A Common
Stock. In general a "Non-U.S. Holder" is any holder other than (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in the United States or under the law of the United States or any
State or (iii) an estate or trust whose income is includible in gross income for
United States federal income tax purposes regardless of its source. The
discussion is based on current law, which is subject to change retroactively or
prospectively, and is for general information only. The discussion does not
address all aspects of federal income and estate taxation and does not address
any aspects of state, local or non-U.S. tax laws. The discussion does not
consider any specific facts or circumstances that may apply to a particular
Non-U.S. Holder (including the fact that in the case of a Non-U.S. Holder that
is a partnership, the United States tax consequences of holding and disposing of
shares of Class A Common Stock may be affected by certain determinations made at
the partner level). Accordingly, prospective investors are urged to consult
their tax advisors regarding the United States federal, state, local and
non-U.S. income and other tax consequences of holding and disposing of shares of
Class A Common Stock.
Dividends. Dividends, if any (see "Dividend Policy"), paid to a Non-U.S.
Holder generally will be subject to United States withholding tax at a 30% rate
(or a lower rate as may be prescribed by an applicable tax treaty) unless the
dividends are effectively connected with a trade or business of the Non-U.S.
Holder within the United States. Dividends effectively connected with a trade or
business will generally not be subject to withholding (if the Non-U.S. Holder
properly files an executed United States Internal Revenue Service ("IRS") Form
4224 with the payor of the dividend) and generally will be subject to United
States federal income tax on a net income basis at regular graduated rates. In
the case of a Non-U.S. Holder which is a corporation, such effectively connected
income also may be subject to the branch profits tax (which is generally imposed
on a foreign corporation on the repatriation from the United States of
effectively connected earnings and profits). The branch profits tax may not
apply if the recipient is a qualified resident of certain countries with which
the United States has an income tax treaty. To determine the applicability of a
tax treaty providing for a lower rate of withholding dividends paid to a
stockholder's address of record in a foreign country are presumed, under the
current IRS positions to be paid to a resident of that country, unless the payor
has knowledge that such presumption is not warranted or an applicable tax treaty
(or United States Treasury Regulations thereunder) requires some other method
for determining a Non-U.S. Holder's residence. However, recently proposed U.S.
Treasury Regulations, if adopted, would modify the forms and procedures for this
certification.
Sale of Class A Common Stock. Generally, a Non-U.S. Holder will not be
subject to United States federal income tax on any gain realized upon the
disposition of such holder's shares of Class A Common Stock unless (i) the gain
is effectively connected with a trade or business carried on by the Non-U.S.
Holder with the United States (in which case the branch profits tax may apply);
(ii) the Non-U.S. Holder is an individual who holds the shares of Class A Common
Stock as a capital asset and is present in the United States for 183 days or
more in the taxable year of the disposition and to whom such gain is United
States source; (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of U.S. tax law applicable to certain former United States citizens
or residents; or (iv) the Company is or has been a "U.S. real property holding
corporation" for federal income tax purposes (which the Company does not believe
that it is or is likely to become) at any time during the five-year period
ending on the date of disposition (or such shorter period that such shares were
held) and, subject to certain exceptions, the Non-U.S. Holder held, directly or
indirectly, more than five percent of the Common Stock.
Estate Tax. Shares of Class A Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specifically defined for United
States federal estate tax purposes) of the United States at the time of death
may be subject to United States federal estate tax.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends. The Company must report annually to the IRS and to each
Non-U.S. Holder the amount of dividends paid to and the tax withheld, if any,
with respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced by an applicable tax treaty.
Copies of these information returns may also be available under the provisions
of a specific treaty or agreement with the tax authorities in the country in
which the Non-U.S. Holder resides. Dividends that are subject to United States
withholding tax at the 30% statutory rate or at a reduced tax treaty rate and
dividends that are effectively connected with the conduct of a trade or business
in the United States (if certain certification and disclosure requirements are
met) are exempt from backup withholding of U.S. federal income tax. In general,
backup withholding at a rate of 31% and information reporting will apply to
other dividends paid on shares of Class A Common Stock to holders that are not
"exempt recipients" and fail to provide in the manner required certain
identifying information (such as the holder's name, address and taxpayer
identification number). Generally, individuals are not exempt recipients,
whereas corporations and certain other entities generally are exempt recipients.
Dispositions of Class A Common Stock. The payment of the proceeds from the
disposition of shares of Class A Common Stock through the United States office
of a broker will be subject to information reporting and backup withholding
unless the holder, under penalties of perjury, certifies, among other things,
its status as a Non-U.S. Holder, or otherwise establishes an exemption.
Generally, the payment of the proceeds from the disposition of shares of Class A
Common Stock to or through a non-U.S. office of a broker will not be subject to
backup withholding and will not be subject to information reporting. In the case
of the payment of proceeds from the disposition of shares of Class A Common
Stock through a non-U.S. office of a broker that is a U.S. person or a
"U.S.-related person," existing regulations require information reporting (but
not backup withholding) on the payment unless the broker receives a statement
from the owner, signed under penalties of perjury, certifying, among other
things, its status as a Non-U.S. Holder, or the broker has documentary evidence
in its files that the owner is a Non-U.S. Holder and the broker has no actual
knowledge to the contrary. For tax purpose, a "U.S.-related person" is (i) a
"controlled foreign corporation" for United States federal income tax purposes
or (ii) a foreign person 50% or more of whose gross income from all sources for
the three year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of a
United States trade or business.
Any amount withheld from a payment to a Non-U.S. Holder under the backup
withholding rules will be allowed as a credit against such holder's United
States federal income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the IRS. Non-U.S. Holders
should consult their tax advisors regarding the application of these rules to
their particular situations, the availability of an exemption therefrom and the
procedures for obtaining such an exemption, if available.
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UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the U.S. Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Salomon Brothers Inc and McDonald & Company
Securities, Inc. are serving as U.S. Representatives, have severally agreed to
purchase and the International Underwriters named below, for whom Morgan Stanley
& Co. International Limited, Salomon Brothers International Limited and McDonald
& Company Securities, Inc. are serving as International Representatives
(collectively with the U.S. Representatives, the "Representatives"), have
severally agreed to purchase the respective number of shares of Class A Common
Stock that in the aggregate equal the number of shares set forth opposite the
names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------------------ ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..................................... 570,000
Salomon Brothers Inc.................................................. 570,000
McDonald & Company Securities, Inc. .................................. 60,000
Bear, Stearns & Co. Inc. ............................................. 60,000
BT Securities Corporation............................................. 60,000
Dean Witter Reynolds Inc. ............................................ 60,000
Donaldson, Lufkin & Jenrette Securities Corporation................... 60,000
Everen Securities, Inc. .............................................. 40,000
Freimark Blair & Company, Inc. ....................................... 40,000
Furman Selz LLC....................................................... 40,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................... 60,000
PaineWebber Incorporated.............................................. 60,000
Stifel, Nicolaus & Company Incorporated............................... 40,000
Wheat, First Securities, Inc.......................................... 40,000
---------
Subtotal...................................................... 1,760,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited............................ 209,000
Salomon Brothers International Limited................................ 209,000
McDonald & Company Securities, Inc.................................... 22,000
---------
Subtotal...................................................... 440,000
---------
Total....................................................... 2,200,000
=========
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Class A Common Stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions,
including the conditions that no stop order suspending the effectiveness of the
Registration Statement is in effect and no proceedings for such purpose are
pending before or threatened by the Commission and that there has been no
material adverse change or any development involving a prospective material
adverse change in the earnings, results of operations or financial condition of
the Company, taken as a whole, from that set forth in the Registration
Statement. The Underwriters are obligated to take and pay for all of the shares
of Class A Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions set
forth below, (i) it is not purchasing any U.S. Shares (as defined below) for the
account of anyone other than a United States or Canadian Person (as defined
below) and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any U.S. Shares or distribute any Prospectus relating to the U.S.
Shares (as defined below) outside the United States or Canada or to anyone other
than a United States or Canadian Person. Pursuant to the Agreement Between U.S.
and International Underwriters, each International Underwriter has represented
and agreed that, with certain
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exceptions set forth below, (a) it is not purchasing any International Shares
(as defined below) for the account of any United States or Canadian Person and
(b) it has not offered or sold, and will not offer or sell, directly or
indirectly, any International Shares or distribute any prospectus relating to
the International Shares within the United States or Canada or to any United
States or Canadian Person. The foregoing limitations do not apply to
stabilization transactions or to certain other transactions specified in the
Agreement Between U.S. and International Underwriters. As used herein, "United
States or Canadian Person" means any national or resident of the United States
or Canada or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside of the United
States and Canada of any United States or Canadian Person) and includes any
United States or Canadian branch of a person who is not otherwise a United
States or Canadian Person, and "United States" means the United States of
America, its territories, its possessions and all areas subject to its
jurisdiction. All shares of Class A Common Stock to be offered by the U.S.
Underwriters and International Underwriters under the Underwriting Agreement are
referred to herein as the "U.S. Shares" and the "International Shares,"
respectively.
Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and the International
Underwriters of any number of shares of Class A Common Stock to be purchased
pursuant to the Underwriting Agreement as may be mutually agreed. The per share
price and currency settlement of any shares of Class A Common Stock so sold
shall be the public offering price range set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Class A Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of such shares
in Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer is
made. Each U.S. Underwriter has further agreed to send to any dealer who
purchases from it any shares of Class A Common Stock a notice stating in
substance that, by purchasing such shares, such dealer represents and agrees
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares in Canada in contravention of the securities laws
of Canada or any province or territory thereof and that any offer of shares of
Class A Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province or territory of Canada in
which such offer is made, and that such dealer will deliver to any other dealer
to whom it sells any of such shares a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented that (i) it has not offered or sold
and will not offer or sell any shares of Class A Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 (the
"Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to such shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of such shares, if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995, or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered or
sold, and will not offer or sell, directly or indirectly, in Japan or to or for
the account of any resident thereof, any shares of Class A Common Stock acquired
in connection with the Offering, except for offers or sales of Japanese
International Underwriters or dealers and except pursuant to any exemption from
the registration requirements of the Securities and Exchange Law of Japan. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of
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<PAGE> 63
such shares of Class A Common Stock a notice stating in substance that such
dealer may not offer or sell any of such shares, directly or indirectly, in
Japan or to or for the account of any resident thereof, except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
of Japan, and that such dealer will send to any other dealer to whom it sells
any of such shares a notice to the foregoing effect.
The Underwriters propose to offer part of the shares of Class A Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price which
represents a concession not in excess of $.83 per share under the public
offering price. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $.10 per share to other Underwriters or to certain
other dealers. After the initial offering of the shares of Class A Common Stock,
the offering price and other selling terms may from time to time be varied by
the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional 330,000 shares of Class A Common
Stock at the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The U.S. Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
incurred in the sale of the shares of Class A Common Stock offered hereby. To
the extent such option is exercised, each U.S. Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such U.S.
Underwriters' name in the preceding table bears to the total number of shares of
Class A Common Stock offered hereby to the U.S. Underwriters.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
overallot in connection with the Offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover overallotments
or to stabilize the price of the Class A Common Stock, the Underwriters may bid
for, and purchase shares of the Class A Common Stock in the open market.
Finally, the underwriting syndicate may reclaim selling concessions allowed to
an underwriter or a dealer for distributing the Class A Common Stock in the
Offering, if the syndicate repurchases previously distributed Class A Common
Stock in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the Class A Common Stock above independent market levels. The
Underwriters are not required to engage in these activities, and may end any of
these activities at any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers and directors and certain stockholders of the
Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for a period of 90 days after the date of
this Prospectus without the prior consent of Morgan Stanley & Co. Incorporated.
The Company has agreed in the Underwriting Agreement that it will not, directly
or indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, offer, pledge for a period of 90 days from the date of this
Prospectus, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Class A Common Stock
or any securities convertible into or exchangeable for Class A Common Stock,
except under certain circumstances.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Certain legal
matters will be passed upon for the Underwriters by Katten Muchin & Zavis,
Chicago, Illinois.
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EXPERTS
The audited financial statements of Sinter as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 included
in this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of PMH as of December 31, 1995 and
November 22, 1996 and for the two years ended December 31, 1995 and the period
January 1, 1996 through November 22, 1996 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Krebsoge as of December 31, 1995
and December 19, 1996 and for the year and the period then ended, respectively,
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse GmbH, independent auditors, given on the authority of said firm
as experts in auditing and accounting.
The consolidated financial statements of Krebsoge as of December 31, 1994
and for the year then ended included in this Prospectus have been audited by BDO
Grunewalder Treuhand GmbH, independent auditors, as stated in their report
appearing in this Registration Statement and have been included in reliance upon
the reports of such firm given their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
Citicorp Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade, Suite 1300, New York, New York 10048. Copies of such
materials may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a World Wide Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that submit electronic filings to
the Commission. The Company's Class A Common Stock is listed on the New York
Stock Exchange, and reports, proxy and information statements and other
information concerning the Company may also be inspected at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Class A Common Stock
offered hereby (the "Registration Statement"). This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company and the
Class A Common Stock offered hereby. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete; and with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved and each such
statement shall be deemed qualified in its entirety by such reference.
62
<PAGE> 65
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 66
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SINTER METALS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants..................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996................. F-3
Consolidated Statements of Operations for the years ended December 31, 1994,
1995 and 1996............................................................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996.................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996............................................................. F-7
Notes to Consolidated Financial Statements................................... F-8
KREBSOGE SINTERHOLDING GMBH (GERMAN GAAP)
Report of Independent Auditors............................................... F-20
Report of Independent Auditors............................................... F-21
Consolidated Balance Sheets as of December 31, 1995 and December 19, 1996.... F-22
Consolidated Statements of Income for the years ended December 31, 1994 and
1995 and for the period ended December 19, 1996........................... F-23
Consolidated Statements of Cash Flows for the years ended December 31, 1994
and 1995 and for the period ended December 19, 1996....................... F-24
Notes to the Consolidated Financial Statements............................... F-25
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
Independent Auditors' Report................................................. F-48
Consolidated Balance Sheets as of December 31, 1995 and November 22, 1996.... F-49
Consolidated Statements of Income for the years ended December 31, 1994 and
1995 and the period January 1, 1996 through November 22, 1996............. F-50
Consolidated Statements of Shareholders' Deficit for the years ended December
31, 1994 and 1995 and the period January 1, 1996 through November 22,
1996...................................................................... F-51
Consolidated Statements of Cash Flows for the years ended December 31, 1994
and 1995 and the period January 1, 1996 through November 22, 1996......... F-52
Notes to Consolidated Financial Statements................................... F-53
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Sinter Metals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Sinter
Metals, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sinter Metals, Inc. and
Subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
January 27, 1997.
F-2
<PAGE> 68
SINTER METALS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 1,462 $ 8,845
Accounts receivable, net of allowance of $111 and $1,007,
respectively...................................................... 11,129 45,629
Inventories.......................................................... 10,194 47,074
Other current assets................................................. 643 2,755
-------- --------
Total current assets......................................... 23,428 104,303
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................. 586 8,806
Buildings & building improvements.................................... 6,251 65,461
Machinery & equipment................................................ 32,757 70,877
Construction-in-progress............................................. 1,113 16,822
-------- --------
40,707 161,966
Less-accumulated depreciation........................................ (12,024) (16,352)
-------- --------
Total property, plant and equipment.......................... 28,683 145,614
-------- --------
OTHER ASSETS:
Restricted cash...................................................... -- 3,493
Intangible assets, net............................................... 12,977 132,119
Other assets......................................................... 132 13,951
-------- --------
Total other assets........................................... 13,109 149,563
-------- --------
TOTAL ASSETS........................................................... $ 65,220 $399,480
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE> 69
SINTER METALS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
(DOLLARS IN
THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................................. $ 267 $ 13,367
Accounts payable...................................................... 7,068 35,114
Accrued payroll and vacation.......................................... 1,241 11,928
Accrued benefits...................................................... 3,080 7,982
Other accrued expenses................................................ 1,996 13,938
Income taxes payable.................................................. 648 4,564
------- --------
Total current liabilities..................................... 14,300 86,893
------- --------
LONG-TERM OBLIGATIONS:
Long-term debt........................................................ 2,291 226,168
Borrowings under revolving credit agreement........................... 2,141 6,750
Other liabilities..................................................... 1,000 14,189
Deferred income taxes................................................. 4,026 14,919
------- --------
Total long-term obligations................................... 9,458 262,026
------- --------
Total liabilities............................................. 23,758 348,919
------- --------
STOCKHOLDERS' EQUITY:
Common Stock --
Class A, par value $.001 per share -- Authorized 20,000,000 shares;
issued and outstanding, 5,004,747 and 5,009,747 shares,
respectively...................................................... 5 5
Class B, par value $.001 per share -- Authorized 5,000,000 shares;
issued and outstanding, 2,543,381 shares.......................... 2 2
Additional paid-in capital............................................ 27,838 27,924
Retained earnings..................................................... 13,286 22,641
Cumulative translation adjustment..................................... 331 (11)
------- --------
Total stockholders' equity.................................... 41,462 50,561
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $65,220 $399,480
======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-4
<PAGE> 70
SINTER METALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------- ------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NET SALES.................................................... $82,479 $94,310 $111,888
COST OF SALES................................................ 64,765 73,245 86,176
------- ------- --------
Gross Profit............................................... 17,714 21,065 25,712
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................. 8,212 7,698 10,289
AMORTIZATION OF INTANGIBLE ASSETS............................ 302 332 415
------- ------- --------
Income from Operations..................................... 9,200 13,035 15,008
INTEREST EXPENSE............................................. 1,956 287 456
OTHER EXPENSE (INCOME), NET.................................. 166 111 (153)
------- ------- --------
Income before income taxes and extraordinary charge........ 7,078 12,637 14,705
PROVISION FOR INCOME TAXES................................... 2,900 4,750 5,350
------- ------- --------
Income before extraordinary charge......................... 4,178 7,887 9,355
EXTRAORDINARY CHARGE, NET OF TAX............................. (580) -- --
------- ------- --------
Net Income................................................. 3,598 7,887 9,355
PREFERRED DIVIDENDS.......................................... (202) -- --
------- ------- --------
NET INCOME APPLICABLE TO COMMON STOCK........................ $ 3,396 $ 7,887 $ 9,355
======= ======= ========
PER SHARE DATA
Income before extraordinary charge......................... $ 0.72 $ 1.05 $ 1.24
Extraordinary charge, net of tax........................... (0.11) -- --
------- ------- --------
Net Income................................................. $ 0.61 $ 1.05 $ 1.24
======= ======= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................... 5,533 7,500 7,550
======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 71
SINTER METALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------ PAID-IN RETAINED TRANSLATION
CLASS A CLASS B CAPITAL EARNINGS ADJUSTMENTS TOTAL
------- ------- ---------- -------- ----------- -------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993....... $-- $ 4 $ 3,592 $ 2,003 $ -- $ 5,599
Issuance of 1,804,000 shares of
Class A common stock at $10
per share, net................ 2 14,760 14,762
Issuance of 303,725 shares of
Class A common stock under the
stock award plan valued at $10
per share..................... 3,036 3,036
Conversion of 1,764,761 shares of
Class B common stock to Class
A common stock................ 2 (2) --
Issuance of 541,986 shares of
Class A common stock upon
conversion of preferred stock
and subordinated notes........ 1 5,419 5,420
Repayment of employee loans...... 31 31
Preferred stock dividends payable
($6.60 per share)............. (202) (202)
Net income....................... 3,598 3,598
--- --- -------- -------- ----- -------
BALANCE AT DECEMBER 31, 1994....... 5 2 26,838 5,399 -- 32,244
Issuance of 100,000 shares of
Class A common stock at $10
per share..................... 1,000 1,000
Net income....................... 7,887 7,887
Translation adjustment........... 331 331
--- --- -------- -------- ----- -------
BALANCE AT DECEMBER 31, 1995....... 5 2 27,838 13,286 331 41,462
Issuance of 5,000 shares of Class
A common stock at $17.25 per
share......................... 86 86
Net income....................... 9,355 9,355
Translation adjustment........... (342) (342)
--- --- -------- -------- ----- -------
BALANCE AT DECEMBER 31, 1996....... $ 5 $ 2 $ 27,924 $ 22,641 $ (11) $50,561
=== === ======== ======== ===== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 72
SINTER METALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................... $ 3,598 $ 7,887 $ 9,355
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 3,759 4,272 5,025
Extraordinary charge on early extinguishment of
debt................................................ 580 -- --
Deferred income taxes................................. (1,188) 868 485
Compensation expense under the stock award plan....... 2,435 -- --
Other................................................. 251 134 (347)
Cash provided (used) by working capital items, net of
effects of acquisitions:
Accounts receivable, net.............................. (967) (670) (288)
Inventories........................................... (738) (1,477) (988)
Other assets.......................................... (30) (196) (96)
Accounts payable...................................... 1,390 (975) 115
Accrued payroll and benefits.......................... 420 321 955
Other accrued expenses................................ 255 (473) (377)
Income taxes payable.................................. 463 (962) 1,244
-------- ------- ---------
Net cash provided by operating activities........ 10,228 8,729 15,083
-------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............... (4,160) (4,301) (11,035)
Acquisitions of businesses, net of cash acquired......... (3,070) (4,043) (229,450)
Restricted cash.......................................... -- -- (3,493)
-------- ------- ---------
Net cash used by investing activities............ (7,230) (8,344) (243,978)
-------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Term debt borrowings..................................... -- 495 232,269
Term debt repayments..................................... (14,500) (37) (600)
(Decrease) increase in borrowings under revolving credit
agreement, net........................................ (586) (459) 4,609
Preferred stock and subordinated notes repurchase........ (2,238) -- --
Issuance of common stock................................. 14,762 1,000 --
Payment of preferred stock dividend...................... (444) -- --
-------- ------- ---------
Net cash (used) provided by financing activities...... (3,006) 999 236,278
-------- ------- ---------
Net (decrease) increase in cash and cash
equivalents......................................... (8) 1,384 7,383
Cash and cash equivalents, beginning of year............... 86 78 1,462
-------- ------- ---------
Cash and cash equivalents, end of year..................... $ 78 $ 1,462 $ 8,845
======== ======= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest............................... $ 2,134 $ 333 $ 436
======== ======= =========
Cash payments for income taxes........................... $ 3,291 $ 5,091 $ 3,890
======== ======= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE> 73
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION:
The Company's principal business consists of the engineering and production
of precision pressed metal parts for use primarily in the automotive, home
appliance, lawn and garden and power tool industries. The Company manufactures
over 4,000 different components such as gears, bearings and sprockets, for use
in engines, transmissions and other drive mechanisms.
In October 1994, the Company successfully completed an initial public
offering of its Class A common stock raising net proceeds of approximately $14.7
million after consideration of transaction expenses. The Company used the net
proceeds from the initial public offering together with borrowings of
approximately $2.0 million under the Company's revolving credit facility to
repay all of its then outstanding senior indebtedness, to repay a portion of its
subordinated indebtedness and to redeem a portion of its preferred stock. The
balance of the preferred stock and subordinated indebtedness was converted to
shares of Class A common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries Powder Metal Holding, Inc. (PMH), Sinter
Metals, Inc. -- Zeeland (formerly SinterForm, Inc.), Kolsva Sinterteknik AB, and
Sinter Metals GmbH, a newly formed German subsidiary that serves as a holding
company for Krebsoge Sinterholding GmbH (KSH) and Krebsoge USA, Inc. All
significant intercompany transactions and accounts have been eliminated in the
accompanying consolidated financial statements.
Cash Equivalents
The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates fair market value.
Accounts Receivable
Revenues are principally generated from the automotive, lawn and garden and
power tool industries. Due to the nature of these industries, a significant
portion of sales and related accounts receivable are concentrated in a
relatively low number of customers. In 1995, two customers accounted for 27% and
10% of net sales, respectively, while the top five customers accounted for 55%
of net sales. The same two customers accounted for approximately 27% and 10% of
the Company's 1996 net sales, and its top five customers accounted for
approximately 50% of its 1996 net sales. The automotive, lawn and garden and
power tool industries accounted for 61%, 8.1% and 7.1%, respectively, of
accounts receivable at December 31, 1995 and 77.1%, 1.9% and 6.5%, respectively,
of accounts receivable at December 31, 1996. Additionally, accounts receivable
from the Company's five largest customers aggregated approximately $4,960,000
and $20,753,150 at December 31, 1995 and 1996, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
through the use of the first-in, first-out (FIFO) method for a majority of
consolidated inventories: 18% and 78% at December 31, 1995 and
F-8
<PAGE> 74
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
1996, respectively. The last-in, first-out (LIFO) method is used to determine
the cost of remaining inventories. Inventory cost includes material, labor and
overhead.
Property, Plant and Equipment
Additions to property, plant and equipment are stated at cost. Expenditures
for replacements are capitalized, and repairs and maintenance costs are expensed
as incurred. When assets are sold or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in income.
Depreciation is computed, for financial reporting purposes, using the
straight-line method over estimated useful lives, which are as follows:
<TABLE>
<S> <C>
Building and building improvements.................................... 15-30 years
Machinery and equipment............................................... 5-10 years
</TABLE>
Depreciation expense was $3,175,000, $3,940,000 and $4,610,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
Intangible Assets
Intangible assets consist primarily of goodwill, which represents the
excess of cost over net assets acquired, and is being amortized on a
straight-line basis over 40 years.
Revenue Recognition
The Company recognizes revenues from the sale of products at the point of
passage of title, which is generally at the time of shipment.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, which requires the use of an asset and
liability method of accounting for current and expected future tax consequences
of events that have been recognized in the financial statements or tax returns.
No provision is made for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations.
Share Information
Per share computations are based upon the weighted average of the combined
Class A and Class B common shares outstanding of 5,533,000 in 1994, 7,500,000 in
1995, and 7,550,000 in 1996. Stock options outstanding at December 31, 1996 do
not have a significant dilutive effect on net income per share.
Foreign Currency Translation
For operations outside the United States that prepare financial statements
in currencies other than United States dollars, items of income and expense are
translated at average exchange rates during the period, and assets and
liabilities are translated at period end exchange rates, with the resulting
translation adjustments being included as a separate component of stockholders'
equity.
F-9
<PAGE> 75
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
Use of 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 the contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from the estimates.
Impairment of Long-Lived Assets
During 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
This statement requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The effect of adoption of this statement was not
material.
Reclassifications
Certain balances in 1994 and 1995 have been reclassified to conform to the
current year presentation.
3. ACQUISITIONS:
Certain Subsidiaries of MAAG Holding AG
As part of its business strategy, in 1993, the Company purchased a 30%
interest in PMH, a non-operating holding company that owns 100% of ICM/Krebsoge
(a domestic manufacturer of pressed powder metal parts). PMH was a subsidiary of
MAAG Holding AG, a Swiss corporation ("MAAG"). On December 19, 1996, the Company
acquired from MAAG (i) the remaining 70% of the common stock of PMH pursuant to
the Powder Metal Stock Purchase Agreement dated October 7, 1996, and (ii) 98.22%
of the outstanding shares of KSH pursuant to the Krebsoge Stock Purchase
Agreement dated October 11, 1996. On December 30, 1996, the Company purchased
the remaining 1.78% of the outstanding shares of KSH.
PMH is the second largest producer of precision pressed powder metal
components in North America with 1996 net sales of approximately $101.7 million.
KSH, which offers pressed powder metal parts for use principally in the European
automotive, machine, power tool and home appliance industries, is among the
leading pressed powder metal parts manufacturers in Europe, and the largest
pressed powder metal parts producer in Germany. KSH had 1996 net sales of
approximately DM 245.4 million, or approximately $159.3 million.
The Company paid approximately $211,700,000 for these acquisitions. In
order to fund these acquisitions, pay related costs and expenses, refinance the
Company's existing debt and provide a source for the Company's ongoing working
capital needs, the Company entered into a $275,000,000 credit facility with a
syndicate of financial institutions.
In connection with the acquisition and integration of the operations of PMH
and KSH, management has identified opportunities to consolidate certain
functions. Management has identified certain employees of PMH and KSH that will
either be terminated or relocated as a result of this integration. The
termination arrangements, including the type and amount of benefits to be
provided, have not yet been finalized. It is anticipated that the terminations
will be completed in 1997. Accordingly, the Company has recorded an aggregate
reserve of $4.5 million in purchase accounting for the estimated severance costs
associated with the employee terminations.
F-10
<PAGE> 76
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
Powder Metal Forge Unit of Delco Remy America, Inc.
Effective December 13, 1996, the Company purchased the powder metal forge
unit of Delco Remy America, Inc. The Company paid $5.2 million in cash and a
short-term note in the amount of $2.5 million. The cash portion of the
transaction was financed through the Company's revolving credit facility.
SinterForm, Inc.
Effective July 18, 1996, the Company purchased the stock of SinterForm,
Inc. (a domestic manufacturer of pressed powder metal parts) for a combination
of $8.5 million in cash and 5,000 shares of the Company's Class A common stock.
In addition, previously existing debt of SinterForm, in the amount of $1.1
million, was repaid by the Company at closing. The transaction was financed
through the Company's revolving credit facility.
Kolsva Sinterteknik AB
Effective June 26, 1995, the Company purchased the stock of Kolsva
Sinterteknik AB (a Swedish manufacturer of pressed powder metal parts) for a
combination of $3.8 million in cash and 100,000 shares of the Company's Class A
common stock. The cash portion of the transaction was financed through the
Company's revolving credit facility. As a part of the transaction, the Company
assumed long-term debt of Sinterteknik aggregating approximately $1.9 million.
These transactions were recorded utilizing the purchase method of
accounting and, accordingly, the gross purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed, based upon
their estimated fair values at the dates of acquisition. The purchase price
allocations related to the acquisition of PMH, KSH, Delco-Remy and SinterForm
remain preliminary at December 31, 1996. The final allocations of purchase price
for these acquisitions will be determined upon the receipt of the final
appraisals of certain acquired assets and final determination of assumed
liabilities. The final purchase price allocations are not expected to differ
materially from the preliminary allocations. The operating results of these
companies have been included in the accompanying consolidated financial
statements since the respective dates of acquisition.
Pro forma financial operating results as if these acquisitions had been
completed on January 1, 1995, are as follows (dollars in thousands, except per
share):
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------
1995 1996
-------- --------
<S> <C> <C>
Net sales.................................................... $372,227 $389,116
Gross profit................................................. 66,297 73,419
Income before taxes.......................................... 13,665 12,955
Net income applicable to common stock........................ 7,531 7,674
Net income per common share.................................. $ 1.00 $ 1.02
</TABLE>
F-11
<PAGE> 77
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
4. INVENTORIES:
The major components of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Raw materials.................................................. $ 2,945 $ 9,305
Work-in-process................................................ 4,481 21,632
Finished goods................................................. 3,105 16,416
------- -------
10,531 47,353
LIFO reserve................................................... (337) (279)
------- -------
$10,194 $47,074
======= =======
</TABLE>
5. INTANGIBLE ASSETS:
Goodwill of $14,228,000 and $131,411,000 at December 31, 1995 and 1996,
respectively, is included in intangible assets and represents costs in excess of
net assets acquired and is amortized on a straight-line basis over a 40-year
period. Accumulated amortization related to goodwill aggregated $1,251,000 and
$1,653,000 at December 31, 1995 and 1996, respectively. In addition, intangible
assets includes $2,361,000 related to software, licenses and other intellectual
property that was acquired as part of the acquisition of KSH. These assets are
being amortized over a period of three to seventeen years.
At each balance sheet date, the Company evaluates the realizability of
goodwill and other intangibles based upon expectations of undiscounted cash
flows and operating income of the related business unit. Based upon its most
recent analysis, the Company believes that no impairment of these assets exists
at December 31, 1996 and the amortization periods remain appropriate.
6. RESTRICTED CASH:
On April 10, 1996, the Company issued an industrial revenue bond
aggregating $7.2 million. The bond is a tax exempt floating interest rate bond
and is being used to fund the construction of a new plant facility in Chicago
and anticipated purchases of plant equipment. Proceeds of the bond are
restricted for such capital expenditures. Accordingly, the unused portion of the
proceeds are reflected in the accompanying balance sheet as Restricted Cash.
7. DEBT:
Long-term debt consisted of the following (dollars in thousands) :
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ --------
<S> <C> <C>
Term loans under new credit agreement............................ $ -- $225,073
Industrial revenue bond.......................................... -- 7,195
Term loan........................................................ 2,231 1,850
Capital lease obligations........................................ -- 2,708
Equipment loans.................................................. 327 2,709
------ --------
Total debt............................................. 2,558 239,535
Less current maturities of long-term debt........................ (267) (13,367)
------ --------
Long-term debt................................................... $2,291 $226,168
====== ========
</TABLE>
F-12
<PAGE> 78
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
Concurrent with the acquisition of PMH and KSH, the Company entered into a
new credit agreement ("Agreement") which is secured by substantially all the
assets of the Company. The Agreement provides the following (amounts in
thousands):
<TABLE>
<S> <C> <C>
U.S. Senior secured facilities:
Tranche A term loans..................................... $ 30,000
Tranche B term loans..................................... 115,000
Revolving credit facility................................ 30,000
German Senior secured facilities:
Term loans............................................... DM 124,500
Revolving credit facility................................ 30,000
</TABLE>
The Tranche A term loans and German term loans are payable in varying
quarterly installments commencing on March 31, 1997 and continuing through June
30, 2003. The Tranche B term loans are due in varying annual installments
commencing on December 31, 1997 and continuing through June 30, 2005. The
Tranche A and Tranche B term loans bear interest at LIBOR or the Alternate Base
Rate, as defined, plus a spread, as defined. The German term loans bear interest
at DIBOR or German prime, plus a spread, as defined. The interest rates in
effect at December 31, 1996 were 8.1%, 8.6% and 5.7% for the Tranche A, Tranche
B and German term loans, respectively.
The U.S. revolving credit facility had outstanding borrowings of $6,750,000
at December 31, 1996. Borrowings under this facility bear interest at varying
rates. The weighted average interest rate in effect at December 31, 1996 was
8.1%, plus a commitment fee of 0.5%. The German revolving credit facility bears
interest at varying rates and, as of December 31, 1996, was fully committed by a
letter of credit guaranteeing the bank overdraft facilities of KSH. Both the
U.S. and German facilities expire on June 30, 2003.
As part of the Agreement, the Company must comply with certain financial
and non-financial covenants including maintenance of a minimum consolidated net
worth, and achievement of certain interest coverage and fixed charge coverage
ratios. The Company is in compliance with all covenants at December 31, 1996.
On April 10, 1996, the Company issued an industrial revenue bond in the
amount of $7,195,000. Proceeds from this bond are being used to fund capital
expenditures at a domestic facility of the Company. The bond is a tax exempt
floating interest rate bond and matures on April 1, 2016.
The term loan was assumed in conjunction with the Company's acquisition of
Kolsva Sinterteknik. The debt is secured by a blanket lien on the assets in
Sweden. The interest rate on the term loan is fixed at 10.5% and is scheduled to
mature on September 30,1998. Contractual terms of the debt preclude prepayment.
Capital lease obligations represent the present value of future lease
payments under non-cancelable leases assumed as part of a current year
acquisition. The leases expire in 2001 and have been discounted at the Company's
incremental borrowing rate. The related leased property is included in machinery
and equipment in the accompanying consolidated balance sheet.
Equipment loans consist primarily of a note payable related to the purchase
of equipment and other production tools as part of a current year acquisition.
The note payable is due on June 30, 1998 but may be accelerated into 1997 based
on the occurrence of certain events as defined in the purchase agreement.
F-13
<PAGE> 79
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
Future maturities of long-term debt as of December 31, 1996, are summarized
as follows (dollars in thousands):
<TABLE>
<S> <C>
1997........................................................... $ 13,367
1998........................................................... 14,686
1999........................................................... 15,303
2000........................................................... 17,657
2001........................................................... 17,079
2002 and thereafter............................................ 161,443
--------
$239,535
========
</TABLE>
A portion of the Company's 12% subordinated notes were retired utilizing
the net proceeds from the Company's initial public offering in October 1994. The
balance of the subordinated notes and certain shares of preferred stock were
converted to Class A Common Stock. In conjunction with the repayments, the
unamortized loan discount and deferred financing costs aggregating $580,000 were
charged off and recognized, in the accompanying 1994 consolidated statement of
operations, as an extraordinary charge.
8. EMPLOYEE BENEFIT PLANS:
Profit Sharing Plan
The Company sponsors a defined contribution and profit sharing plan with
contributions based on years of service and level of compensation. The expense
pertaining to this plan was approximately $890,000, $896,000 and $1,040,000
during 1994, 1995 and 1996, respectively.
Defined Benefit Plans
KSH provides a range of defined benefit pension plans for members of
management, officers and employees, which are based on individually fixed
amounts. These benefit plans are unfunded and the obligations from the plans are
accrued for in the consolidated financial statements in accordance with SFAS No.
87, "Employers Accounting for Pensions".
PMH has four defined benefit pension plans covering substantially all of
its employees in the U.S. and Canada. The benefits are based on years of service
and the highest consecutive five-year average earnings prior to retirement. The
Company's policy is to fund the pension costs in accordance with applicable
regulatory guidelines.
The projected unit credit method is used to determine the funding
requirements of the plans. The tables below reconcile the funded status of the
Company's U.S. and foreign (German and Canadian) defined benefit pension plans
at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
FOREIGN PLANS U.S. PLANS
--------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits....................................... $15,055 $ 6,440
Nonvested benefits.................................... 156 406
------- -------
Accumulated benefit obligations......................... $15,211 $ 6,846
======= =======
Projected benefit obligations for services provided to
date.................................................. $15,326 $ 8,486
Plan assets at fair value............................... 2,673 7,625
------- -------
Accrued pension cost.................................... $12,653 $ 861
======= =======
</TABLE>
F-14
<PAGE> 80
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
As KSH and PMH were acquired on December 19, 1996, pension expense related
to their employee benefit plans was not material in 1996.
The discount rate used in determining the actuarial present value of the
projected benefit obligations for the U.S. plans was 7.23% at December 31, 1996.
The discount rate used in determining the actuarial present value of the
projected benefit obligations at December 31, 1996 for the Canadian and German
plans were 7.23% and 6.5%, respectively. The rate of increase in future
compensation levels for applicable U.S. employees was 4% at December 31, 1996,
and was 5.5% and 2.5% at December 31, 1996, respectively, for the Canadian and
German employees. The expected long-term rate of return on plan assets was 7.50%
and 8.25% in 1995 and 1996, respectively, for the U.S. and Canadian plans.
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company's PMH subsidiary maintains union and non-union benefit plans
that provide postretirement medical and life insurance benefits to retirees and
eligible dependents. These benefits are funded as incurred.
The table below displays the components of the Company's postretirement
benefit obligation as recognized in the consolidated balance sheet at December
31, 1996 (in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation(APBO):
Current retirees......................................................... $ 295
Fully eligible active plan participants.................................. 159
Other active plan participants........................................... 2,559
------
Accrued APBO..................................................... $3,013
======
</TABLE>
The following table summarizes the principle assumptions used in
determining the actuarial value of the APBO at December 31, 1996:
<TABLE>
<S> <C>
Weighted average discount rate............................................... 7.8%
Weighted average health care trend rate...................................... 5.0%
Ultimate sustained weighted average health care trend rate in 1997........... 5.0%
Expected long-term return on plan assets..................................... 8.25%
</TABLE>
The APBO would increase by $453,000 as a result of a one percentage point
increase in the weighted average health care trend rate.
PMH is the only subsidiary of the Company which has postretirement benefit
obligations other than pensions. As PMH was acquired on December 19, 1996,
non-pension postretirement benefit expense was not material to the Company's
1996 consolidated statement of operations.
F-15
<PAGE> 81
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
10. INCOME TAXES:
The provisions for income tax expense include current and deferred taxes as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
United States Federal
Current............................................... $3,271 $3,367 $3,738
Deferred.............................................. (950) 352 485
State................................................... 579 877 825
Foreign................................................. -- 154 302
------ ------ ------
Total......................................... $2,900 $4,750 $5,350
====== ====== ======
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the U.S. federal statutory rate as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Income tax at U.S. federal statutory rate............... $2,407 $4,297 $5,147
State tax, net.......................................... 425 579 536
Foreign income tax rate differential.................... -- (75) (92)
Other, net.............................................. 68 (51) (241)
------ ------ ------
Provision for income taxes.................... $2,900 $4,750 $5,350
====== ====== ======
</TABLE>
Components of deferred taxes consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
<S> <C> <C>
Accelerated depreciation...................................... $(5,063) $(17,899)
Other......................................................... (458) (859)
------- --------
Total tax deferred liabilities...................... (5,521) (18,758)
------- --------
Accrued expenses not deductible until paid.................... 1,680 3,492
Other......................................................... (185) 347
------- --------
Total tax deferred assets........................... 1,495 3,839
------- --------
Net deferred tax liabilities........................ $(4,026) $(14,919)
======= ========
</TABLE>
PMH has U.S. federal net operating loss carryforwards for tax purposes of
approximately $31 million at December 31, 1996. These net operating loss
carryforwards expire on various dates between the years 2004 and 2007.
Utilization of these pre-acquisition net operating losses will be limited to
approximately $700,000 per year pursuant to Internal Revenue Service
regulations. A Canadian subsidiary of PMH has approximately $18 million of loss
carryforwards for tax purposes at December 31, 1996. These loss carryforwards
expire on various dates between the years 2000 and 2001. Utilization of the U.S.
and Canadian net operating loss carryforwards will be dependent upon the ability
of PMH to generate taxable income at its U.S. and Canadian entities,
respectively. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. A valuation allowance
of approximately $16 million has been provided due to
F-16
<PAGE> 82
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
the uncertainties surrounding the Company's ability to realize the above loss
carryforwards. The income tax effect of the loss carryforwards and the valuation
allowance are included in other deferred tax assets in the table above. In the
future, to the extent that the Company determines that it is more likely than
not that the benefits associated with any portions of the acquired net operating
losses will be realized, the valuation allowance will be reduced accordingly and
goodwill associated with the acquisition will be adjusted.
11. COMMITMENTS AND CONTINGENCIES:
The Company is involved in various matters relating to contingencies and
other commitments, the principal items of which are as follows:
Environmental Matters
The Company is subject to various laws and regulations primarily involving
its property ownership and plant operations. The Company has made, and will
continue to make, expenditures to comply with such environmental regulations.
The Company routinely monitors and reviews its procedures and policies for
compliance with environmental laws.
The Company anticipates that it will incur expenditures at certain of the
facilities acquired from MAAG to address historical environmental issues. MAAG
has indemnified the Company for certain environmental liabilities with respect
to PMH and KSH under the respective purchase agreements. However, the Company's
indemnification rights under the PMH purchase agreement are subject to certain
limitations, and therefore no assurances can be made that such indemnification
will be sufficient to address the Company's potential liability.
Based upon present laws and regulations and the Company's experience to
date, the cost of compliance with environmental laws has not had, and is not
expected to have, a material adverse effect on the Company's financial condition
or results of operations. Future changes in laws and regulations could give rise
to additional environmental costs in future periods. The Company has established
a reserve that it believes is adequate to address its exposure for these items.
Litigation
In the ordinary course of business, the Company is involved in various
identified legal proceedings, including workers' compensation and personal
injury claims and product liability disputes. Management is of the opinion that
the ultimate resolution of these matters will not have a material adverse effect
on the results of operations or the financial position of the Company.
12. STOCKHOLDERS' EQUITY:
The holders of Class A common stock have the right to vote on all matters
to be voted on by the stockholders of the Company. No holder of Class B common
stock has voting rights. Each share of Class B common stock is convertible into
a share of Class A common stock on a share-for-share basis at the option of the
holder thereof. All of the outstanding Class B common stock is held by Citicorp
Venture Capital, Ltd.
Concurrent with the Company's initial public offering in 1994, the Company
increased the number of shares of authorized capital to 20,000,000 shares of
Class A common stock and 5,000,000 shares of Class B common stock. In addition,
the Company authorized 5,000,000 shares of preferred stock, none of which are
issued and outstanding. The Company also effected a stock split of 14.385 shares
to 1 and changed the par value of Common Stock to $.001 per share.
F-17
<PAGE> 83
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
13. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The Company's significant financial instruments are cash and cash
equivalents, long-term debt and borrowings under revolving credit agreements.
Due to their short maturity, the carrying value of cash and cash equivalents
approximates fair value at December 31, 1995 and 1996. Based on borrowing rates
currently available to the Company for loans of similar terms and maturities,
the fair values of long-term debt and borrowings under revolving credit
agreement are substantially the same as their carrying values at December 31,
1995 and 1996.
14. STOCK-BASED COMPENSATION:
Management Incentive Stock Plan
At December 31, 1991, the Company adopted a management incentive stock plan
for certain eligible employees. The Company reserved 405,038 shares of Class B
common stock to be issued over the five years of the plan. The Company achieved
the equity measurement requiring the maximum award level for 1993, and 60,805
shares were awarded. Concurrent with the Company's initial public offering, the
balance of the shares aggregating 303,725 shares was issued and the plan was
terminated. Compensation expense related to the plan aggregated $2,435,000 for
1994.
1994 Key Employee Stock Incentive Plan
Concurrent with the Company's initial public offering, the Company
established the Key Employee Stock Incentive Plan. Under this plan, the Company
may grant options to officers and other key employees to purchase an aggregate
of 474,505 shares of Class A Common Stock. During 1994, 1995 and 1996, the
Company granted stock options to purchase an aggregate of 149,000, 11,000 and
181,300 shares at exercise prices from $10.00, $10.13 to $10.63 and $14.38 to
$28.25 per share, the fair market values of such shares at the dates of grant.
These options vest ratably over a three year period. Options totaling 50,000 and
103,000 were exercisable at December 31, 1995 and December 31, 1996,
respectively. No options were exercised and 2,333 were forfeited during 1996.
During 1995, no options were exercised or forfeited.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been reflected in the accompanying
consolidated financial statements related to the stock options issued pursuant
to this plan. If the Company had elected to recognize compensation expense based
on the fair value at the grant dates for awards under this plan consistent with
the method prescribed by SFAS No. 123, net income and net income per share would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C> <C>
Net income As reported................... $7,887 $9,355
Pro forma..................... 7,882 9,256
Net income per share As reported................... $ 1.05 $ 1.24
Pro forma..................... 1.05 1.23
</TABLE>
F-18
<PAGE> 84
SINTER METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
================================================================================
The fair value of the options granted used to compute pro forma and net
income per share disclosures is the estimated present value at grant date using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Dividend yield.......................................... 0% 0%
Expected volatility..................................... 28.0% 31.9%
Risk free interest rate................................. 6.3% - 6.9% 6.5% to 6.9%
Expected average holding period......................... 5 years 5 years
</TABLE>
The weighted average fair value of stock options granted during 1995 and
1996 was $3.90 and $8.73, respectively. The following table summarizes status of
the options, outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
---------------------------------------- --------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- ------------------------------------- ------- ---------------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$10.00 - $14.38...................... 160,667 7.9 years $ 10.09 103,000 $ 10.00
$21.00 - $28.25...................... 178,300 9.7 years 21.41 -- --
------- -------
Total........................... 338,967 103,000
======= =======
</TABLE>
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
A summary of the quarterly results of operations for the years ended
December 31, 1996 and 1995 are as follows (dollars in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.............................................. $27,977 $27,562 $27,529 $28,820
Gross profit........................................... 6,425 6,387 6,051 6,849
Income from operations................................. 3,844 3,898 3,499 3,767
Net income........................................... 2,399 2,401 2,188 2,367
Share data:
Net income........................................ $ 0.32 $ 0.32 $ 0.29 $ 0.31
Weighted average shares outstanding............... 7,548 7,548 7,552 7,553
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.............................................. $24,624 $22,104 $22,664 $24,918
Gross profit........................................... 5,556 4,843 5,063 5,603
Income from operations................................. 3,573 3,108 3,063 3,291
Net income........................................... 2,112 1,870 1,833 2,072
Share data:
Net income........................................ $ 0.28 $ 0.25 $ 0.24 $ 0.27
Weighted average shares outstanding............... 7,448 7,454 7,548 7,548
</TABLE>
F-19
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
To the Board of Management and
Shareholders of Krebsoge Sinterholding GmbH
We have audited the consolidated balance sheets of Krebsoge Sinterholding
GmbH as of December 31, 1995 and December 19, 1996, and the related statements
of income and cash flows for the year ended December 31, 1995 and the period
ended December 19, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Germany, which are substantially the same as those followed in the
United States. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Krebsoge Sinterholding GmbH as of December 31, 1995 and December 19, 1996, and
the consolidated results of its operations and cash flows for the year ended
December 31, 1995 and the period ended December 19, 1996 in conformity with
generally accepted accounting principles in Germany.
Generally accepted accounting principles in Germany vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected the results of operations for the year ended December
31, 1995 and the period ended December 19, 1996, and shareholders' equity as of
December 31, 1995 and December 19, 1996 to the extent summarized in Note 26 to
the consolidated financial statements.
The consolidated financial statements of Krebsoge Sinterholding GmbH for
the year ended December 31, 1994 were audited by other independent auditors
whose report dated February 17, 1995 and December 12, 1996 expressed an
unqualified opinion on those statements.
Dusseldorf,
January 17, 1997
Price Waterhouse GmbH
Wirtschaftsprufungsgesellschaft
Dr. H. Schmick
Wirtschaftsprufer
F-20
<PAGE> 86
REPORT OF INDEPENDENT AUDITORS
To the Board of Management and
Shareholders of Krebsoge Sinterholding GmbH
We have audited the consolidated statements of income and cash flows of
Krebsoge Sinterholding GmbH for the year ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Germany, which are substantially the same as those followed in the
United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Krebsoge Sinterholding GmbH for the year ended December 31,
1994, in conformity with generally accepted accounting principles in Germany.
Dusseldorf,
February 17, 1995, except Note 27, Subsequent Event, as to which the date is
December 12, 1996
BDO GRUNEWALDER TREUHAND GMBH
Wirtschaftsprufungsgesellschaft
<TABLE>
<S> <C>
Dr. F. Nehles Dr. G. Kaulen
Wirtschaftsprufer Wirtschaftsprufer
</TABLE>
F-21
<PAGE> 87
KREBSOGE SINTERHOLDING GMBH
CONSOLIDATED BALANCE SHEETS
(in thousands of DM)
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
NOTE 1995 1996
------------ ------------
<S> <C> <C> <C>
ASSETS
Non-Current Assets
Intangible assets...................................... 2 1,706 1,583
Property, plant and equipment.......................... 3 55,754 54,036
Financial assets....................................... 4 485 751
------------ ------------
Total noncurrent assets.............................. 57,945 56,370
------------ ------------
Current Assets
Inventories............................................ 5 31,371 37,884
Receivables and other assets........................... 6 30,300 39,816
Cash................................................... 3,038 1,124
------------ ------------
Total current assets.............................. 64,709 78,824
------------ ------------
Prepaid expenses.......................................... 7 652 112
Cumulative loss in excess of equity....................... 8 54,905 48,382
------------ ------------
Total assets and cumulative loss in excess
of equity....................................... 178,211 183,688
========== ==========
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' Equity
Subscribed capital..................................... 33,700 33,700
Capital reserve........................................ 10,000 10,000
Cumulative translation adjustment...................... (329) (207)
Accumulated loss brought forward....................... (98,276) (91,875)
Cumulative loss in excess of equity.................... 54,905 48,382
------------ ------------
Total shareholders' equity........................ 8 -- --
------------ ------------
Accruals
Accruals for pensions.................................. 9 15,124 15,405
Tax accruals........................................... 10 2,949 4,242
Other accruals......................................... 11 10,508 11,425
------------ ------------
Total accruals.................................... 28,581 31,072
------------ ------------
Liabilities
Liabilities to banks................................... 68,801 58,384
Payments received on account of orders................. 567 9,064
Trade payables......................................... 9,739 14,783
Liabilities on bills accepted and drawn................ 2,070 645
Payable to affiliated enterprises...................... 53,672 51,621
Payable to associated enterprises...................... 634 438
Other liabilities...................................... 13,903 17,393
------------ ------------
Total liabilities................................. 12 149,386 152,328
------------ ------------
Deferred income........................................ 13 244 288
------------ ------------
Total shareholders' equity and liabilities........ 178,211 183,688
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE> 88
KREBSOGE SINTERHOLDING GMBH
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of DM)
<TABLE>
<CAPTION>
YEAR ENDED AT PERIOD
DECEMBER 31, ENDED
--------------------- DECEMBER 19,
NOTE 1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C> <C>
Net sales......................................... 16 178,936 224,798 245,438
Increase (decrease) in inventories of finished
products
and work in progress............................ (733) 1,614 560
Other self-manufactured items capitalized......... 1,420 1,448 1,408
-------- -------- ------------
Total output............................... 179,623 227,860 247,406
Other operating income............................ 17 3,028 4,231 2,959
Cost of materials................................. 18 (50,819) (67,738) (74,168)
Personnel expenses................................ 19 (79,366) (105,448) (116,228)
Depreciation and amortization..................... (12,207) (12,092) (12,194)
Other operating expenses.......................... 20 (21,272) (29,937) (30,904)
Financial income (expense)........................ 21 (10,127) (8,862) (8,435)
-------- -------- ------------
Result from ordinary business activities... 8,860 8,014 8,436
Extraordinary income (expense).................... 22 (1,850) 1,700 --
-------- -------- ------------
7,010 9,714 8,436
Taxes on income................................... 23 (2,340) (1,627) (1,869)
Other taxes....................................... (254) (305) (166)
-------- -------- ------------
Consolidated net income (loss)............. 4,416 7,782 6,401
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE> 89
KREBSOGE SINTERHOLDING GMBH
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of DM)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
AT DECEMBER 31, ENDED AT
---------------------- DECEMBER 19,
1994 1995 1996
-------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ 4,416 7,782 6,401
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization.................... 12,207 12,242 12,194
(Gain) loss on sale of fixed assets.............. (24) 20 (100)
(Gain) loss from waiver/reversal of waiver of
liability
to affiliated enterprise...................... 1,850 -- --
(Increase) decrease in receivables and other
assets........................................ (2,488) 4,310 (9,516)
(Increase) decrease in inventories............... 1,049 (2,385) (6,513)
(Increase) decrease in prepaid expenses.......... 243 62 540
Less gain due to merger.......................... -- (2,700) --
Increase (decrease) in accruals for pensions..... 262 191 281
Increase (decrease) in total liabilities......... 1,834 (7,345) 15,411
Increase (decrease) in accruals.................. 1,859 2,889 2,210
Other............................................ (33) 12 43
-------- --------- ------------
Total adjustments............................. 16,759 7,296 14,550
-------- --------- ------------
Cash provided by operating activities................... 21,175 15,078 20,951
-------- --------- ------------
Cash flows from investing activities:
Repayment of financial assets......................... 301 967 --
Proceeds from sales of tangible and intangible
assets............................................. 44 133 129
Capital expenditures.................................. (7,942) (12,092) (10,182)
-------- --------- ------------
Cash used by investing activities....................... (7,597) (10,992) (10,053)
-------- --------- ------------
Cash flows from financing activities:
Acquisition of financial assets....................... -- (420) (466)
Cash from merger...................................... -- 572 --
Net repayment of financial liabilities to banks....... (8,567) (5,272) (10,417)
Increase (decrease) in liabilities to affiliated
enterprises........................................ (3,150) -- (2,051)
-------- --------- ------------
Cash used by financing activities....................... (11,717) (5,120) (12,934)
Effect of foreign exchange rate changes................. 199 (112) 122
-------- --------- ------------
Net increase (decrease) in cash......................... 2,060 (1,146) (1,914)
Cash at beginning of the year........................... 2,124 4,184 3,038
-------- --------- ------------
Cash at end of period................................... 4,184 3,038 1,124
======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE> 90
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DM)
(1) SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Krebsoge Sinterholding GmbH ("KSH"
or "the Company") have been prepared in accordance with the German Commercial
Code ("HGB") which represents generally accepted accounting principles in
Germany ("German GAAP") using the significant accounting policies described
hereunder. German GAAP varies in certain significant respects from generally
accepted accounting principles in the United States ("US GAAP"). See Note 26 for
a discussion of the significant differences between German GAAP and US GAAP. The
accounting principles and valuation methods of the group have been consistently
applied, except that anniversary payments are accrued for the first time in
1996.
The consolidated financial statements of KSH as of and for the period ended
December 19, 1996 are based on the financial statements of the consolidated
group consistent with the prior years' presentation as of and for the year ended
December 31, 1996 adjusted for significant movements occurring during the period
December 20, 1996 and December 31, 1996.
Nature of Operations
The Company is engaged in designing, engineering and manufacturing
precision pressed powder metal components for use in the automotive, machine,
power tool and home appliance industries.
Organization
The Company is owned by MAAG Holding AG (87.24%), SGL Carbon AG (10.98%),
and Dr. Lothar Albano Muller (1.78%). SGL Carbon AG acquired its interest in the
Company by exchanging its 100% interest in Ringsdorff Sinter GmbH, Bonn, with
effect from April 1, 1995.
Consolidation Principles
The following subsidiary companies, in addition to KSH, have been included
in the group accounts applying the full consolidation method:
<TABLE>
<CAPTION>
PERCENTAGE
HOLDING
NAME AND LOCATION OF SUBSIDIARY (%)
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Sintermetallwerk Krebsoge GmbH, Radevormwald/Germany.............................. 100
Metallwerk Unterfranken GmbH, Bad Bruckenau/Germany............................... 100
Pressmetall Krebsoge GmbH, Radevormwald/Germany................................... 100
Sintermetallwerk Lubeck GmbH, Lubeck/Germany...................................... 100
Metallwerk Langensalza GmbH, Bad Langensalza/Germany.............................. 100
Krebsoge USA, Inc., Wilmington/USA................................................ 100
Newmet Krebsoge, Inc., Terryville/USA............................................. 100
</TABLE>
Results of operations for 1995 include the results of the former Ringsdorff
Sinter GmbH, Bonn, from the effective date, April 1, 1995 to December 31, 1995.
Ringsdorff Sinter GmbH was merged with KSH on April 1, 1995.
The 63% participation in Danyang Kaifuda Filters Co., Ltd., Jiangsu
Province/China, was not consolidated due to materiality considerations but
accounted for under the cost method.
The 51% participation in Krebsoge Excel Private Ltd., Ahmedabad/India, was
not consolidated due to materiality considerations but accounted for under the
cost method.
F-25
<PAGE> 91
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
The Company's 50% investment in PEAK Werkstoff GmbH, Velbert, is accounted
for as an associated enterprise according to the equity method.
The 26% participation in Sintered Metal Components (Pty.) Limited,
Bellville/South Africa, is accounted for according to the cost method due to
materiality considerations.
Capital consolidation for full consolidated subsidiaries has been performed
following the book value method under German GAAP. Under this method, the
purchase consideration for an acquisition is allocated to the assets and
liabilities acquired based on their book values. Any resulting excess of the
purchase consideration over the parent's interest in the book value of net
assets acquired is allocated to assets, liabilities or capitalized as goodwill.
In accordance with a transition rule of sec. 27 Implementation Law for German
Commercial Code ("EGHGB" in the case of Sintermetallwerk Krebsoge GmbH (SMK) and
Pressmetall Krebsoge GmbH (PMK)) the excess of the acquisition costs for shares
over the book value of net assets was allocated exclusively to goodwill rather
than to any hidden reserves in net assets. Goodwill is amortized over four years
in accordance with sec. 309 No. 1 HGB in the case of SMK and PMK, except for the
American and all other subsidiaries, which is amortized over its prospective 15
years useful life. See note 26 regarding German GAAP and U.S. GAAP
reconciliation.
Intra-group receivables and payables as well as revenues, income and
expense of transactions between consolidated entities have been eliminated.
Intangible Assets
Intangible assets consist mainly of purchased computer software and
goodwill. Purchased computer software is stated at cost and amortized over 3 to
5 years using the straight-line method. The treatment of goodwill is as
described above.
Property Plant and Equipment
Property plant and equipment is valued at acquisition or manufacturing
costs less accumulated depreciation. Taxable government grants have been
deducted from the purchase price of the assets, for which they were given.
Non-taxable government grants were taken to income in the year of the investment
for which they were received.
Depreciation is provided using the accelerated and straight-line method
generally over the following estimated useful lives: Buildings from 40 to 50
years, machinery from 2 to 20 years; furniture and equipment from 2 to 12 years.
Depreciation on additions during the first and second half of the year are
calculated using full or half-year rates, respectively.
Financial Assets
Financial assets are stated at lower of cost or market. Amortization is
provided as necessary for a permanent impairment of the value of assets.
Inventories
Raw materials and manufacturing supplies are stated at the lower of cost or
market, determined on a weighted average method. Work in progress and finished
products are valued at the lower of manufacturing cost or net realizable value,
and comprise direct material and labor and applicable manufacturing overheads
including depreciation charges.
F-26
<PAGE> 92
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
Receivables and Other Assets
Accounts receivable are presented net of allowances for doubtful accounts.
Allowances include a provision for general risks inherent in trade receivables.
Generally, the Company does not require collateral on sales.
Cash and Cash Equivalents
Cash equivalents represent short-term investments with a maturity of three
months or less when purchased.
Prepaid Expenses
Prepaid expenses consist mainly of loan premiums which are amortized over
the term of the loan.
Pension Obligations
Accruals and provisions for pensions are actuarially determined and based
on discounted amounts.
Liabilities and Other Accruals
Liabilities are presented at their repayment amounts. Other accruals,
including those for product warranty risks and losses on sales, are provided.
Revenue Recognition
Revenue is recognized when title passes or services are rendered, net of
discounts and rebates granted.
Research and Development
The Company engages in product development and incurs costs in this regard
which are expensed. These expenses totalled 5,039 in 1996, 4,367 in 1995, and
3,835 in 1994.
Foreign Currency Translation
The balance sheets of the American subsidiary have been translated at year
end to Deutsche Mark using exchange rates at the balance sheet date except for
equity which has been translated using historical rates. The income statements
have been translated at the average exchange rates for the years. Translation
adjustments have been recorded as a separate component of equity.
Foreign Currency Transactions
Foreign currency receivables and payables are recorded at historical rates
unless using the exchange rate at the fiscal year-end would result in an
unrealized foreign currency exchange loss. This results in unrealized losses
being recognized currently and unrealized gains being recognized when realized.
Earnings Per Share
The Company is a limited liability company under German law. Earnings per
share is not calculated due to the fact that a limited liability company
expresses ownership as a percentage of the subscribed capital.
F-27
<PAGE> 93
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
Total Cost Method of Presentation
The statements of income have been presented using the total cost (or type
of expenditure) method of presentation which is the most common German GAAP
method in use. In this format, production and all other expenses incurred during
the period are classified by type of expense. Sales for the period and the net
increase (decrease) in inventories of finished products and work in progress and
other work capitalized is classified as Total Output.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(2) INTANGIBLE ASSETS
<TABLE>
<CAPTION>
INTELLECTUAL
PROPERTY AND
(SIMILAR RIGHTS*) GOODWILL TOTAL
------------------ -------- --------
<S> <C> <C> <C>
ACQUISITION COSTS
Balance at January 1, 1995................................. 4,293 111,117 115,410
Additions due to merger.................................... 91 -- 91
Additions.................................................. 375 -- 375
Reclassifications.......................................... 1 -- 1
Disposals.................................................. (664) -- (664)
Currency translation....................................... (8) -- (8)
------ -------- --------
Balance at December 31, 1995............................... 4,088 111,117 115,205
------ -------- --------
Additions.................................................. 320 -- 320
Reclassifications.......................................... 1 -- 1
Disposals.................................................. (6) -- (6)
Currency translation....................................... 8 -- 8
------ -------- --------
Balance at December 19, 1996............................... 4,411 111,117 115,528
====== ======== ========
ACCUMULATED AMORTIZATION
at December 31, 1995....................................... (2,657) (110,842) (113,499)
====== ======== ========
at December 19, 1996....................................... (3,080) (110,865) (113,945)
====== ======== ========
AMORTIZATION FOR THE
year ended December 31, 1994............................... 529 23 552
====== ======== ========
year ended December 31, 1995............................... 385 23 408
====== ======== ========
period ended December 19, 1996............................. 425 23 448
====== ======== ========
NET BOOK VALUE
at December 31, 1995....................................... 1,431 275 1,706
====== ======== ========
at December 19, 1996....................................... 1,331 252 1,583
====== ======== ========
</TABLE>
- ------------------
* Industrial and similar rights and assets and licenses in such rights and
assets
F-28
<PAGE> 94
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
Intellectual property and similar rights are comprised of the following:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------- -------------
<S> <C> <C>
Software................................................ 850 828
Licences and intellectual property...................... 524 447
Other................................................... 57 56
----- -----
1,431 1,331
===== =====
</TABLE>
Software relates to purchased software. Licences and intellectual property
consist of 30 (prior year 41) purchased patent rights and 417 (prior year 483)
purchased technical production know how.
The Goodwill results from the consolidation and refers to the following
entities:
<TABLE>
<CAPTION>
ACQUISITION ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
----------- ----------- --------
<S> <C> <C> <C>
Sintermetallwerk Krebsoge GmbH....................... 108,792 108,792 --
Pressmetall Krebsoge GmbH............................ 1,982 1,982 --
Krebsoge USA, Inc.................................... 343 91 252
------- ------- ---
Total Goodwill at December 19, 1996............. 111,117 110,865 252
======= ======= ===
</TABLE>
F-29
<PAGE> 95
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(3) PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
OTHER ADVANCE
TECHNICAL EQUIPMENT, PAYMENTS
EQUIPMENT FACTORY AND AND
LAND AND AND OFFICE CONSTRUCTION
BUILDINGS MACHINES EQUIPMENT IN PROGRESS TOTAL
--------- --------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
ACQUISITION COSTS
Balance at January 1, 1995.................. 45,723 126,494 45,605 1,689 219,511
Additions due to merger..................... 0 14,556 2,204 4 16,764
Additions................................... 1,046 6,212 2,230 2,439 11,927
Reclassifications........................... 587 198 683 (1,469) (1)
Disposals................................... 0 (1,520) (1,928) (91) (3,539)
Currency translation........................ (198) (257) (28) -- (483)
Write-ups................................... 12 12 -- -- 24
------- -------- ------- ------ --------
Balance at December 31, 1995................ 47,170 145,695 48,766 2,572 244,203
------- -------- ------- ------ --------
Additions................................... 141 4,893 2,790 2,038 9,862
Reclassifications........................... 1,870 444 (2,315) (1)
Disposals................................... (2,234) (2,235) (5) (4,474)
Currency translation........................ 246 265 41 -- 552
------- -------- ------- ------ --------
Balance at December 19, 1996................ 47,557 150,489 49,806 2,290 250,142
------- -------- ------- ------ --------
ACCUMULATED DEPRECIATION
at December 31, 1995........................ (23,666) (123,331) (41,452) -- (188,449)
======= ======== ======= ====== ========
at December 19, 1996........................ (24,864) (128,643) (42,599) -- (196,106)
======= ======== ======= ====== ========
DEPRECIATION FOR THE
year ended December 31, 1994................ 1,085 6,965 3,605 -- 11,655
======= ======== ======= ====== ========
year ended December 31, 1995................ 1,110 7,032 3,542 -- 11,684
======= ======== ======= ====== ========
period ended December 19, 1996.............. 1,109 7,328 3,309 -- 11,746
======= ======== ======= ====== ========
NET BOOK VALUE
at December 31, 1995........................ 23,504 22,364 7,314 2,572 55,754
======= ======== ======= ====== ========
at December 19, 1996........................ 22,693 21,846 7,207 2,290 54,036
======= ======== ======= ====== ========
</TABLE>
F-30
<PAGE> 96
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(4) FINANCIAL ASSETS
<TABLE>
<CAPTION>
INVESTMENTS IN
NON INVESTMENTS IN LOANS TO THE
CONSOLIDATED ASSOCIATED ASSOCIATED OTHER OTHER
GROUP-COMPANIES ENTERPRISES ENTERPRISES INVESTMENTS LOANS TOTAL
--------------- -------------- ------------ ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
ACQUISITION COSTS
Balance at January 1, 1995....... -- 650 950 11 13 1,624
Additions due to merger.......... -- -- -- -- 61 61
Additions........................ 420 -- -- -- -- 420
Reclassifications................ -- -- -- -- -- --
Disposals........................ -- -- (950) -- (18) (968)
Currency translation............. -- -- -- -- -- --
--
---- ---- ---- --- -----
Balance at December 31, 1995..... 420 650 -- 11 56 1,137
--
---- ---- ---- --- -----
Additions........................ 466 -- -- -- -- 466
Disposals........................ -- -- -- -- (15) (15)
Balance at December 19, 1996..... 886 650 11 41 1,588
--
---- ---- ---- --- -----
ACCUMULATED AMORTIZATION
at December 31, 1995............. -- (650) -- -- (2) (652)
--
---- ---- ---- --- -----
at December 19, 1996............. (185) (650) -- -- (2) (837)
--
---- ---- ---- --- -----
AMORTIZATION FOR THE
year ended December 31, 1994..... -- -- -- -- -- --
==== ==== ==== == === =====
year ended December 31, 1995..... -- 150 -- -- -- 150
==== ==== ==== == === =====
period ended December 19, 1996... (185) -- -- -- -- 185
==== ==== ==== == === =====
NET BOOK VALUE
at December 31, 1995............. 420 150 -- 11 54 485
==== ==== ==== == === =====
at December 19, 1996............. 701 -- -- 11 39 751
==== ==== ==== == === =====
</TABLE>
The investments in non-consolidated group companies relate to 63%
participation in Danyang Kaifuda Filters Co., Ltd., Jiangsu Province/China,
according to a partnership agreement with Danyang Feida Industrial General
Corporation, Jiangsu Province/China. Total equity as of December 31, 1995
amounts to 897, and the loss for the year amounts to 38. Total equity as of
December 19, 1996 amounts to 1,075 and the loss for the period amounts to 212.
The write-down of 185 was recorded for permanent impairment of value.
The investments in non-consolidated group companies also relate to a 51%
participation in Krebsoge Excel Private Ltd., Ahmedabad/India, according to a
partnership agreement with Uniexcel Agencies & Services Pvt. Ltd.,
Ahmedabad/India. Total equity as of December 19, 1996 amounts to 133 and profit
for the period amounts to 3.
F-31
<PAGE> 97
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
Investment in associated enterprises relate to the participations held by
Sintermetallwerk Krebsoge GmbH, Radevormwald, in the following companies:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 19,
1995 1996
---------------- ----------------
(LOSS) (LOSS) AT DECEMBER 31, AT DECEMBER 19,
EQUITY INCOME EQUITY INCOME 1995 1996
------ ------- ------ ------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sintered Metal Components (Pty.),
Limited Bellville/South Africa
(26%).......................... 2,385 570 n/a n/a -- --
PEAK Werkstoff GmbH, Velbert
(50%).......................... 300 (1,269) 300 (876) -- --
---- ----
-- --
==== ====
</TABLE>
- ---------------
n/a = not available
The participation in PEAK Werkstoff GmbH was written off in full in the
amount of 150 in 1995 due to the permanent loss situation of the Company. Bank
loans of PEAK Werkstoff GmbH amount to 2,631 as of December 19, 1996.
Loans to the associated enterprises relate to a loan granted by
Sintermetallwerk Krebsoge GmbH to PEAK Werkstoff GmbH, Velbert. The loan was
repaid in full in 1995.
(5) INVENTORIES
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------- -------------
<S> <C> <C>
Raw materials......................................... 8,051 8,073
Work in progress...................................... 13,441 15,689
Finished goods and merchandise........................ 9,879 14,122
------- -------
31,371 37,884
======= =======
</TABLE>
(6) RECEIVABLES AND OTHER ASSETS
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------- -------------
<S> <C> <C>
Trade receivables..................................... 28,626 37,845
Less allowance for doubtful accounts.................. (893) (781)
------- -------
Trade receivables, net................................ 27,733 37,064
Receivables from affiliated enterprises............... 97 429
Receivables from associated enterprises............... 57 99
Receivables from shareholders......................... 171 196
Other assets.......................................... 2,242 2,028
------- -------
30,300 39,816
======= =======
</TABLE>
F-32
<PAGE> 98
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
Receivables from affiliated enterprises are composed as follows and relate
to trade:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
MAAG France S.A., Courbevoie/France......................... 97 --
Dayang Feida Industrial General Corporation,/
Jiangsu Province/China.................................... -- 19
Krebsoge Excel Private Ltd., Ahmedabad/India................ -- 410
--
---
97 429
== ===
</TABLE>
Receivables from associated enterprises relate to trade with equity
investments and are composed as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
PEAK Werkstoff GmbH, Velbert................................ 57 99
== ==
</TABLE>
Receivables from shareholders are composed as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
SGL Carbon AG, Wiesbaden.................................... 171 196
=== ===
</TABLE>
The receivables relate to trade tax of 171 for the former Ringsdorff Sinter
GmbH, Bonn, in the first quarter 1995, which is still the responsibility of the
seller, and to trade.
Other Assets are composed as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
Receivables from fiscal authorities......................... 837 888
Cash surrender value of life insurance contracts............ 702 766
Prepayments................................................. 347 8
Overpayments................................................ 148 78
Other....................................................... 208 288
----- -----
2,242 2,028
===== =====
</TABLE>
Life insurance contracts are provided to cover a portion of the pension
obligations for key employees.
(7) PREPAID EXPENSES
No loan origination costs included in prepaid expenses amounts in 1996
(prior year 523). The remaining balance relates to other accrued items such as
insurance.
F-33
<PAGE> 99
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(8) SHAREHOLDERS' EQUITY/CUMULATIVE LOSS IN EXCESS OF EQUITY
<TABLE>
<CAPTION>
CUMULATIVE ACCUMULATED CUMULATIVE
SHARE CAPITAL REVENUE TRANSLATION LOSS BROUGHT LOSS IN EXCESS
CAPITAL RESERVES RESERVES ADJUSTMENT FORWARD OF EQUITY TOTAL
------- -------- -------- ---------- ------------ -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994......... 30,000 10,000 11 (27) (110,485) 70,501 --
Release of revenue reserves........ -- -- (11) -- 11 -- --
Income of the year................. -- -- -- -- 4,416 (4,416) --
Currency translation............... -- -- -- (189) -- 189 --
------ ------ ---- ---- -------- ------ ----
BALANCE AT DECEMBER 31, 1994....... 30,000 10,000 -- (216) (106,058) 66,274 --
Income of the year................. -- -- -- -- 7,782 (7,782) --
Currency translation............... -- -- -- (113) -- 113 --
Capital increase................... 3,700 -- -- -- -- (3,700) --
------ ------ ---- ---- -------- ------ ----
BALANCE AT DECEMBER 31, 1995....... 33,700 10,000 -- (329) (98,276) 54,905 --
Income of the period............... -- -- -- -- 6,401 (6,401) --
Currency translation............... -- -- -- 122 -- (122) --
------ ------ ---- ---- -------- ------ ----
BALANCE AT DECEMBER 19, 1996....... 33,700 10,000 -- (207) (91,875) 48,382 --
====== ====== ==== ==== ======== ====== ====
</TABLE>
The cumulative loss in excess of equity is a result of the excess of the
purchase price over the net equity in the amount of 110,774 relating to the
purchase in 1986 of the investment of Sintermetallwerk Krebsoge GmbH and
Pressmetall Krebsoge GmbH which was treated as goodwill and amortized over four
years.
(9) ACCRUALS FOR PENSIONS
The Company operates a range of defined benefit pension plans for members
of the board of management, leading officers and employees which are based on
individually fixed DM amounts. The pension plans are unfunded and the
obligations from the plans are accrued for in the consolidated financial
statements. The accrual is determined based on the legal discount rate of 6%
using the entry age actuarial cost method. The plans are underaccrued by 387
(prior year 525) for German GAAP purposes.
(10) TAX ACCRUALS
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
Trade tax................................................... 2,223 3,606
Corporate income tax........................................ 658 603
Net assets tax.............................................. 68 33
----- -----
Tax accruals................................................ 2,949 4,242
===== =====
</TABLE>
F-34
<PAGE> 100
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(11) OTHER ACCRUALS
<TABLE>
<CAPTION>
AT DECEMBER AT DECEMBER
31, 19,
1995 1996
------------- -------------
<S> <C> <C>
Vacation pay............................................ 2,956 3,403
Severance and other salary payable...................... 1,578 701
Salary bonus............................................ 1,407 1,490
Anniversary payments.................................... -- 670
Product warranties...................................... 1,177 1,318
Workman's compensation.................................. 722 560
Outstanding invoices.................................... 698 1,481
Estimated future losses on sales........................ 536 519
Deferred maintenance accrual............................ 520 205
Audit fees.............................................. 287 304
Unemployment insurance.................................. 190 323
Commissions............................................. 93 21
Interest................................................ 167 110
Other................................................... 177 320
------ ------
10,508 11,425
====== ======
</TABLE>
Accruals for anniversary payments are actuarially determined and based on
discounted amounts and accrued in 1996 for the first time.
Severance and other salary payable includes a charge in 1995 of 1,000 for a
general manager of one of the group companies.
(12) LIABILITIES
<TABLE>
<CAPTION>
OF WHICH DUE
--------------------------------------
WITHIN IN ONE TO AFTER
TOTAL ONE YEAR FIVE YEARS FIVE YEARS
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1995
Liabilities to banks.............................. 68,801 49,778 13,976 5,047
Payments received on account of orders............ 567 567 -- --
Trade payables.................................... 9,739 9,719 20 --
Liabilities on bills accepted and drawn........... 2,070 2,070 -- --
Payable to affiliated enterprises................. 53,672 53,672 -- --
Payable to associated enterprises................. 634 634 -- --
Other liabilities................................. 13,903 13,345 272 286
------- ------- ------ -----
TOTAL LIABILITIES.......................... 149,386 129,785 14,268 5,333
======= ======= ====== =====
AT DECEMBER 19, 1996
Liabilities to banks.............................. 58,384 58,384 -- --
Payments received on account of orders............ 9,064 9,064 -- --
Trade payables.................................... 14,783 14,783 -- --
Liabilities on bills accepted and drawn........... 645 645 -- --
Payable to affiliated enterprises................. 51,621 51,621 -- --
Payable to associated enterprises................. 438 438 -- --
Other liabilities................................. 17,393 16,762 316 315
------- ------- ------ -----
TOTAL LIABILITIES.......................... 152,328 151,697 316 315
======= ======= ====== =====
</TABLE>
F-35
<PAGE> 101
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
Of total liabilities to banks (all DM denominated) none (prior year 62,141)
are secured by liens on land and buildings, investments in subsidiaries,
technical equipment and subordination of receivables from subsidiaries; 58,384
of the total relates to current overdrafts. Average interest rate was
approximately 6% for 1995 and 1996. Loan fees were capitalized as prepaid
expenses and are amortized over the term of the loan. The Company has a line of
credit amounting to 58,384.
Payables to affiliated enterprises are composed as follows:
<TABLE>
<CAPTION>
AT DECEMBER AT DECEMBER
31, 19,
1995 1996
------------- -------------
<S> <C> <C>
MAAG Overseas International N.V., Curacao/Netherland
Antilles, loans....................................... 53,613 51,563
MAAG France S.A., Courbevoie/France..................... 59 58
------ ------
53,672 51,621
====== ======
</TABLE>
The loans from MAAG Overseas International N.V. are cancellable by MAAG
after December 31, 1996 with three months notice and are as follows:
<TABLE>
<S> <C>
LOAN 1...................................................................... 16,000
LOAN 2...................................................................... 15,000
LOAN 3...................................................................... 20,000
------
51,000
Interest.................................................................... 563
------
51,563
======
</TABLE>
Interest is LIBOR plus 0.25%, but at least 5%.
Payables to associated enterprises in the amount of 438 (prior year 634)
relate to the assumption of the loss of the equity subsidiary PEAK Werkstoff
GmbH, Velbert, in 1996.
Other liabilities consist of:
<TABLE>
<CAPTION>
AT DECEMBER AT DECEMBER
31, 19,
1995 1996
------------ ------------
<S> <C> <C>
Loans from former shareholders (inclusive of accrued
interest)................................................ 4,847 4,831
Loan from a shareholder (inclusive of accrued interest).... 1,274 1,271
Taxes...................................................... 2,394 2,770
Social costs............................................... 2,159 2,550
Wages...................................................... 1,618 4,273
Loan from Albano-Muller Unterstutzungskasse e.V............ 627 711
Commissions payable........................................ 336 523
Government grants at risk.................................. 151 --
Other...................................................... 497 464
------ ------
13,903 17,393
====== ======
</TABLE>
The loans from former shareholders relate to outstanding debt in respect to
MAAG Holding AG's purchase of the company in 1986. The loan from a shareholder
relates to the loan granted from Dr. Lothar Albano-Muller, chairman of the
Krebsoge Sinterholding GmbH's Board of Management. The interest rate
F-36
<PAGE> 102
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
applicable to the loans from former shareholders and loan from a shareholder is
LIBOR plus 0.25% (at least 5%). The loans are renewed automatically on quarterly
basis.
The other liabilities contain a loan from the Albano-Muller
Unterstutzungskasse e.V. in the amount of 711 (prior year 627). The Company
transfers amounts to the staff benevolent fund to provide for pension and other
financial assistance liabilities. The transferred amounts are transferred back
to the Company in the form of a loan. This loan is repaid back by direct
payments made by the Company to the employees whose rights to pension or other
financial benefits are to be provided by the fund. The interest rate is the
German Federal Reserve Bank's discount rate (2.5% at December 19, 1996 and
December 31, 1995) plus 1%.
(13) DEFERRED INCOME
Deferred income refers to a payment in the amount of 750 received in 1983
from the Wupperverband electrical utility as compensation for non-compliance of
a contract according to which the Wupperverband had to provide electric energy
to the Company for several years under market price. The amount is being
released over 25 years. Current year income effect is 30.
(14) COMMITMENTS
The Company also leases certain facilities and machinery and equipment
under operating leases. Rent and minimum operating lease commitments in excess
of one year are as follows after December 19, 1996:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------ ------
<S> <C>
1997........................................................ 2,374
1998........................................................ 1,148
1999........................................................ 812
2000........................................................ 426
2001 and after.............................................. 93
-----
4,853
=====
</TABLE>
Rent expense was 1,510, 1,649 and 1,786 in 1994, 1995 and 1996.
Commitments from purchasing contracts amount to 5,298.
(15) CONTINGENCIES
In the normal course of business the Company has guaranteed approximately
2,306 of loans and investment grants.
Financial contingencies relate to the issuance and transfer of bills of
exchange in the amount of 315 (prior year: 367).
F-37
<PAGE> 103
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(16) SEGMENT SALES
Geographic composition
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD ENDED
------------------- DECEMBER 19,
1994 1995 1996
------- ------- --------------------
<S> <C> <C> <C>
Net sales:
Germany...................................... 126,396 151,941 169,823
Other countries.............................. 56,309 74,660 78,322
------- ------- -------
182,705 226,601 248,145
Less discounts............................... (3,769) (1,803) (2,707)
------- ------- -------
178,936 224,798 245,438
======= ======= =======
</TABLE>
Sales to one customer represented 13.9%, 11% and 12% of total net sales in
1994, 1995, and 1996, respectively.
(17) OTHER OPERATING INCOME
Other operating income is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, FOR THE PERIOD ENDED
--------------- DECEMBER 19,
1994 1995 1996
----- ----- --------------------
<S> <C> <C> <C>
Income from release of provisions................ 158 1,783 641
Governments grants............................... 1,220 920 670
Revenue from licenses............................ 422 473 133
Cafeteria sales.................................. 127 152 170
Investment allowances............................ 28 148 40
Reduction in allowances for doubtful accounts.... 257 98 118
Exchange rate gain............................... 71 55 146
Gain of disposal of fixed assets................. 24 -- 116
Credit notes..................................... 370 12 --
Other............................................ 351 590 925
----- ----- -----
3,028 4,231 2,959
===== ===== =====
</TABLE>
(18) COST OF MATERIALS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, FOR THE PERIOD ENDED
------------------- DECEMBER 19,
1994 1995 1996
------ ------ --------------------
<S> <C> <C> <C>
Raw materials, consumables, supplies
and merchandise.............................. 44,536 55,319 59,321
Purchased services............................. 6,283 12,419 14,847
------ ------ ------
50,819 67,738 74,168
====== ====== ======
</TABLE>
F-38
<PAGE> 104
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(19) PERSONNEL EXPENSES
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------ AT DECEMBER 19,
1994 1995 1996
------ ------- ---------------
<S> <C> <C> <C>
Wages and salaries................................. 66,328 88,234 96,875
Social security and pension expense (of which for
pensions 1,294 (1995: 1042)...................... 13,038 17,214 19,353
------ ------- -------
79,366 105,448 116,228
====== ======= =======
Employment (weighted average number of employees)
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- ------
<S> <C> <C> <C>
Wage earners...................................... 787 1,007 1,089
Salaried employees................................ 294 367 368
----- ----- -----
1,081 1,374 1,457
===== ===== =====
</TABLE>
(20) OTHER OPERATING EXPENSES
Other operating expenses are comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED FOR THE
DECEMBER 31, PERIOD ENDED
----------------- DECEMBER 19,
1994 1995 1996
------ ------ ------------
<S> <C> <C> <C>
Maintenance......................................... 4,555 6,925 5,830
Commissions......................................... 2,908 3,275 3,703
Freight expenses.................................... 1,615 2,713 2,673
Professional fees................................... 1,729 2,516 2,920
Rent and leasing.................................... 1,510 1,649 1,786
Insurance........................................... 1,105 1,174 1,168
Waste removal....................................... 772 1,050 1,149
Travel expenses..................................... 829 850 1,170
Advertising......................................... 398 620 304
Telephone postage................................... 561 558 564
Additional personnel costs.......................... 487 540 705
Exchange rate loss.................................. 250 257 52
Additions to accruals............................... 264 333 573
Additions to allowances for doubtful accounts....... 147 192 146
Other............................................... 4,142 7,285 8,161
------ ------ ------
21,272 29,937 30,904
====== ====== ======
</TABLE>
F-39
<PAGE> 105
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(21) FINANCIAL INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD ENDED
------------------ DECEMBER 31,
1994 1995 1996
------- ------ ------------
<S> <C> <C> <C>
Income from long-term loans........................ 82 11 --
Other interest and similar income.................. 310 50 57
Assumption of loss from associated enterprises..... (963) (634) (438)
Write-down of investment due to impairment......... -- (150) (185)
Interest and similar expenses...................... (9,556) (8,139) (7,869)
------- ------ ------
(10,127) (8,862) (8,435)
======= ====== ======
</TABLE>
Assumption of loss from associated enterprises relates to 50% net loss for
the year of the equity investment PEAK Werkstoff GmbH, Velbert.
The write-down of investment in 1995 due to permanent impairment relates to
the 50% equity investment in PEAK Werkstoff GmbH, Velbert. In 1996 the
write-down of investment due to permanent impairment relates to the 63%
investment in Danyang Kaifuda Filters Co., Ltd., Jiangsu Province/China.
(22) EXTRAORDINARY INCOME (EXPENSE)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER FOR THE
31, PERIOD ENDED
----------------- DECEMBER 19,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Extraordinary income............................... -- 2,700 --
Extraordinary expense.............................. (1,850) (1,000) --
------ ------ -----
(1,850) 1,700 --
====== ====== =====
</TABLE>
As of April 4, 1995 Krebsoge Sinterholding GmbH (KSH) acquired the shares
of Ringsdorff Sinter GmbH, Bonn, effective April 1, 1995 from SGL Carbon AG in
exchange for issuance of 11% shares in KSH (nominal value 3,700). As of November
14, 1995 Ringsdorff Sinter GmbH was merged with KSH retroactively effective as
of April 1, 1995. The nominal value of the shares issued (3,700) under the book
value of assets and liabilities (6,400) was recorded as an extraordinary gain of
2,700 for German GAAP purposes. This gain is non-taxable.
The 1,850 extraordinary expense relates to a receivable from MAAG Holding
AG which was forgiven in 1993 and recognized as extraordinary income, upon
conditions that if the business improved to a certain point the Company would
have to pay the amount back. This happened in 1994 and the Company recognized
the expense. Both aspects of this transaction were non-taxable.
(23) TAXES ON INCOME
The provision for income taxes follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER FOR THE
31, PERIOD ENDED
----------------- DECEMBER 19,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Municipal trade tax on income...................... 1,934 1,813 1,999
Foreign income tax................................. 44 26 --
Solidarity tax..................................... -- (8) --
Corporate income tax............................... 362 (204) (130)
------ ------ -----
2,340 1,627 1,869
====== ====== =====
</TABLE>
F-40
<PAGE> 106
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
A reconciliation of income taxes determined using the statutory federal
German rate of 45% to actual income taxes provided is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER FOR THE
31, PERIOD ENDED
----------------- DECEMBER 19,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Corporate rate at German federal statutory rate.... 3,040 4,411 3,795
Municipal trade taxes, net of federal tax
benefit.......................................... 1,064 1,177 896
Non-taxable extraordinary gain..................... -- (1,215) --
Net operating loss utilization..................... (2,968) (2,596) (2,934)
Net operating loss carryforward.................... 452 -- --
Nondeductible extraordinary loss................... 833 -- (656)
Nondeductible expenses............................. (41) 36 620
Other.............................................. (40) (186) 148
------ ------ ------
Provision for income taxes......................... 2,340 1,627 1,869
====== ====== ======
Effective rate..................................... 35% 18% 22%
====== ====== ======
</TABLE>
German Corporation tax law applies the imputation system to the income
taxation of a corporation and its shareholders. Upon distribution of retained
earnings in the form of a dividend, shareholders receive an income tax credit
for taxes previously paid by the corporation.
In general, corporate income is initially subject to a federal tax rate of
45%. Upon distribution of retained earnings to shareholders, the corporate tax
rate is adjusted to 30% by receiving a refund from the government for taxes
previously paid on income in excess of these rates (the distributed earnings
rate).
In addition, corporate income is subject to a municipal tax on income
varying in rates from 15% to 20% depending on municipality. Municipal tax on
income is deductible for corporate income tax purposes.
Corporate income tax loss carryforwards used in 1995 and 1996 of 11,629 of
former Ringsdorff Sinter GmbH are challenged by revenue agents with an
unpredictable outcome. There are additional tax loss carry forwards of 4,230 of
the former Ringsdorff Sinter GmbH which will be challenged as well. The net
operating loss carryforwards have an indefinite carryover period.
(24) RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER FOR THE
31, PERIOD ENDED
----------------- DECEMBER 19,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Interest expense on loans/amounts due parent....... 3,091 2,763 2,564
Management fees.................................... 1,270 1,601 2,014
Sales.............................................. -- 492 119
Purchases.......................................... -- 227 --
</TABLE>
Other related party transactions consist of the interest paid for the loans
from shareholders and former shareholders of 292 for 1996, and 263 in 1995.
Management fees are included in professional fees in Note 20 Other
Operating Expense. For further information on related party transactions refer
to Notes 6 and 12.
(25) INFORMATION ABOUT FINANCIAL INSTRUMENTS
The following information is presented in accordance with SFAS No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of
F-41
<PAGE> 107
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
Credit Risk", and SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments". These statements require the disclosure of off-balance-sheet
instruments and estimated fair values for all financial instruments.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business as a means of hedging its currency rate
exposure in regards to foreign currency trade receivables. Management does not
anticipate any material adverse effect on its financial position resulting from
its involvement in these instruments. The following is a summary of contract or
notional principal amounts outstanding at December 31, 1995 and December 19,
1996.
<TABLE>
<CAPTION>
NOTIONAL PRINCIPAL
AMOUNT
-------------------
1995 1996
----- -----
<S> <C> <C>
Forward foreign exchange contracts............................. 2,879 938
===== =====
</TABLE>
These instruments are executed with creditworthy financial institutions,
and all foreign currency contracts are denominated in currencies of major
industrial countries.
The fair value of forward exchange contracts was estimated based on
exchange rates at December 31, 1995 and December 19, 1996. The estimated fair
values of the Company's financial instruments at December 31, 1995 and December
19, 1996 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 19, 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Forward foreign exchange contracts............. 2,879 2,878 938 969
===== ===== ===== =====
</TABLE>
Gains are recorded when realized and losses are recorded currently.
(26) RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY AS DETERMINED USING
U.S. GAAP
German GAAP varies in certain significant respects from generally accepted
accounting principles in the United States (U.S. GAAP). Application of U.S. GAAP
would have affected net income for the year ended December 31, 1995 and the
period ended December 19, 1996 to the extent quantified below, as well as
shareholders' equity (deficit) at December 31, 1995 and December 19, 1996.
F-42
<PAGE> 108
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
RECONCILIATION OF NET INCOME TO U.S. GAAP
The following is a reconciliation of the significant adjustments necessary
to reconcile net income in accordance with U.S. GAAP to the amounts determined
under German GAAP, for the year ended December 31, 1995 and the period ended
December 19, 1996.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
Net income as reported in the consolidated profit and loss account
under German GAAP................................................ 7,782 6,401
Amortization of step-up -- MAAG purchase of KSH.................... (10,848) (9,091)
Amortization of step-up -- former Ringsdorff Sinter GmbH........... (220) (391)
Elimination of extraordinary gains on purchase of Ringsdorff....... (2,700) --
Pensions and similar obligations................................... (753) (1,431)
Non-taxable investment allowances.................................. 190 312
Reserves not required for U.S. GAAP................................ 370 (334)
Anniversary payments............................................... (204) 1,097
Depreciation....................................................... (580) (943)
Deferred taxes on U.S./German differences
Amortization of step-up of buildings............................. 167 167
Pensions and similar obligations................................. 324 615
Reserves not required for U.S. GAAP.............................. (159) 144
Anniversary payments............................................. 88 (170)
Depreciation..................................................... 249 405
Net operating loss carryforwards................................. (275) (44)
-------- -------
Net loss in accordance with U.S. GAAP.............................. (6,569) (3,262)
======== =======
</TABLE>
INCOME STATEMENT PRESENTATION UNDER U.S. GAAP
Certain items in the profit and loss account would be classified
differently under U.S. GAAP. These items include reversals for accrued expenses
and allowances to doubtful accounts that would generally be recorded as
reductions to the original expense line items under U.S. GAAP rather than as
income.
The extraordinary expenses reported under German GAAP would be classified
as an expense charged to income from ordinary business activities under U.S.
GAAP.
The following is a presentation of certain income statement information in
accordance with U.S. GAAP.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
Results from ordinary activities................................... (5,336) (2,511)
Loss before income taxes........................................... (5,336) (2,511)
Income taxes....................................................... (1,233) (751)
------ ------
Net loss in accordance with U.S. GAAP.............................. (6,569) (3,262)
====== ======
</TABLE>
F-43
<PAGE> 109
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
RECONCILIATION OF SHAREHOLDERS' DEFICIT TO U.S. GAAP
The following is a reconciliation of the significant adjustments necessary
to reconcile shareholders' equity (deficit) in accordance with U.S. GAAP to the
amounts determined under German GAAP, as of December 31, 1995 and December 19,
1996:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
Shareholders' equity (deficit) as reported in the consolidated
balance sheet under German GAAP.................................. -- --
Cumulative loss in excess of equity -- 1 January................... (54,905) (48,382)
Amortization of step-up -- MAAG purchase of KSH.................... 43,013 33,922
Amortization of step-up -- Ringsdorff Sinter GmbH.................. 2,711 2,318
Elimination of extraordinary gain on purchase of Ringsdorff........ (2,700) (2,700)
Pensions and similar obligations................................... (1,594) (3,025)
Non-taxable investment allowances.................................. (1,499) (1,187)
Reserves not required for U.S. GAAP................................ 1,648 1,314
Anniversary payments............................................... (1,097) --
Accumulated depreciation........................................... 25,147 24,204
Deferred taxes on U.S./German differences
Pensions and similar obligations................................. 685 1,301
Reserves not required for U.S. GAAP.............................. (709) (565)
Anniversary payments............................................. 472 302
Depreciation..................................................... (10,813) (10,408)
Net operating loss carryforwards................................. 1,604 1,560
Step-up of buildings............................................. (3,167) (3,000)
------- -------
Shareholders' deficit in accordance with U.S. GAAP................. (1,206) (4,346)
======= =======
</TABLE>
RECONCILIATION OF CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
Shareholders' deficit, beginning of year, in accordance with U.S.
GAAP............................................................. (1,154) (1,206)
Net loss in accordance with U.S. GAAP.............................. (6,569) (3,262)
Increase in share capital.......................................... 3,700 --
Increase in capital attributable to the purchase of Ringsdorff
Sinter GmbH...................................................... 2,930 --
Difference from currency translation............................... (113) 122
------ ------
Shareholders' deficit, end of period, in accordance with U.S.
GAAP............................................................. (1,206) (4,346)
====== ======
</TABLE>
CASH FLOW PRESENTATION UNDER U.S. GAAP
There are no material differences between the amounts or presentation of
the Statement of Cash Flows and FAS 95, except for, at December 19, 1996, the
difference in cash and cash equivalents results from an overdraft of DM4,166
which is classified as short term debt for U.S. GAAP purposes and a reduction to
cash for German GAAP purposes. The cash provided by financing activities under
U.S. GAAP would reflect an increase by a corresponding amount.
BALANCE SHEET PRESENTATION UNDER U.S. GAAP
Under U.S. GAAP, all receivables due after one year and all liabilities
payable after one year are classified as non-current.
F-44
<PAGE> 110
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
German GAAP does not require presentation of a classified balance sheet.
Summarized balance sheet information measured and classified in accordance with
U.S. GAAP is as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 19,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ 3,038 5,290
Other current assets............................................. 62,323 77,812
------- -------
Total current assets..................................... 65,361 83,102
Noncurrent assets.................................................. 126,114 114,114
------- -------
Total assets............................................. 191,475 197,216
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. 26,913 41,693
Short-term debt and current portion of long-term debt............ 102,872 114,171
Accruals......................................................... 13,457 15,667
------- -------
Total current liabilities................................ 143,242 171,531
Noncurrent liabilities:
Long-term debt................................................... 19,601 631
Other noncurrent liabilities..................................... 29,838 29,400
------- -------
Total long-term liabilities.............................. 49,439 30,031
Shareholders' deficit:
Shareholders' deficit............................................ (1,206) (4,346)
------- -------
Total liabilities and shareholders' equity............... 191,475 197,216
======= =======
</TABLE>
A brief explanation of the most significant differences follows.
(a) Cumulative loss in excess of equity
Under German GAAP, the cumulative loss in excess of net equity is reflected
as an asset. This is not permitted in U.S. GAAP, as this amount resides in
equity.
(b) Amortization of step-up -- MAAG purchase of KSH
The acquisition of 74% and 24% of KSH by MAAG Holding AG on September 22,
1986 and August 19, 1993, respectively, did not impact the financial statements
for German GAAP purposes. For U.S. GAAP purposes the purchase price paid by MAAG
has been allocated to the fair value of the assets and liabilities acquired. The
excess of the price paid by MAAG over the fair value of the assets and
liabilities acquired has been allocated to goodwill and is being amortized over
10 years.
(c) Amortization of step-up -- former Ringsdorff Sinter GmbH
Elimination of extraordinary gain on purchase of Ringsdorff
As of April 4, 1995 Krebsoge Sinterholding GmbH (KSH) acquired the shares
of Ringsdorff Sinter GmbH, Bonn, from SGL Carbon AG in exchange for 11%
ownership of the subscribed capital in KSH with a nominal value 3,700. Under
German GAAP a nontaxable extraordinary gain of 2,700 was recorded for the
F-45
<PAGE> 111
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
excess of the net equity of 6,400 of the acquired company over the nominal value
of the consideration given. U.S. GAAP requires the acquiring company to record
an acquisition on the basis of the fair value of the consideration given (8,950)
or the fair value of the acquired net assets whichever is more readily
determinable. The excess of the purchase price over net book value is allocated
to machinery and equipment and is amortized over ten years.
(d) Pensions and similar obligations
The pension obligations of KSH are provided for by a range of defined
benefit pensions plans. The amount of the accrual was calculated in accordance
with German GAAP and tax legislation, which does not take inflation into account
and uses the discount rate according to the legislation. Under U.S. GAAP the
accrual has been calculated by an actuary applying the principles of SFAS 87.
For 1995 and 1996, the assumed discount rate and post-retirement pension
increases used in calculating the projected benefit obligation were 6.5% and
2.5%.
The Company adopted SFAS 87, Employers Accounting for Pensions effective
December 31, 1992 because it was not feasible to apply the statement
retroactively to the year ended December 31, 1989, the applicable adoption date
specified in the standard. The portion of the transition obligation applicable
to periods prior to 1992 was not considered material.
(e) Non-taxable investment allowances
Under German GAAP tax free investment allowances are accounted for under
the flow-through method (taken to income) of which treatment is not consistent
under U.S. GAAP.
(f) Reserves not required for U.S. GAAP
(i) Deferred maintenance accrual
As required by German GAAP, the costs of maintenance performed within three
months following the year end have been accrued as liabilities at year end.
Under U.S. GAAP, the cost of maintenance is recognized in the periods incurred.
(ii) Estimated losses on future contracts
As required by German GAAP, the expected loss to be incurred on future
delivery contracts have been accrued as liabilities at year end. Such loss
considers all internal costs, including indirect selling and administrative.
Under U.S. GAAP, allocation of indirect costs for purposes of determining
inventoriable costs is not permitted.
(iii) Allowance for doubtful accounts
Under German GAAP, an allowance for doubtful accounts has been accrued in
the amount of 3% of outstanding receivables less VAT. Under U.S. GAAP an
allowance of 2% would be more appropriate as this more clearly approximates past
experience.
(iv) Warranty expense
Under German GAAP, an accrual for warranty expense has been provided in the
amount of 0.5% of sales. Under U.S. GAAP an accrual of 0.25% would be more
appropriate as this more closely approximates past experience.
F-46
<PAGE> 112
KREBSOGE SINTERHOLDING GMBH
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DM)
(g) Anniversary payments
Prior to 1996 the Company expensed anniversary payments for long-term
service to the company as incurred under German GAAP; beginning in 1996 these
costs were accrued based on vesting, but are only tax deductible as paid. Under
U.S. GAAP these costs are accrued based on vesting.
(h) Depreciation
Under German GAAP, accelerated methods of depreciation as well as straight
line depreciation are used. Estimates of the difference between accelerated and
straight line methods of depreciation were prepared by the company based on
certain assumptions of average useful lives. Assumed average useful lives were
as follows:
<TABLE>
<S> <C>
Land and buildings......................................... 40 years
Machinery and equipment.................................... 10 years
Office equipment........................................... 5 years
</TABLE>
(i) Deferred taxes
Under German GAAP, deferred tax assets are generally provided for temporary
differences using the partial liability method. Deferred taxes are not provided
for differences that are not expected to reverse in the foreseeable future, nor
are they recognized for the effects of NOLs.
Under U.S. GAAP, deferred taxes are provided for all temporary differences
between the financial reporting and tax bases of assets and liabilities that
will reverse during future taxable periods, including deferred tax assets
relating to NOLs. Deferred taxes are also provided for the income tax effects of
differences between U.S. GAAP and German GAAP. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
OTHER MATTERS
Unrealized exchange gains
Under German GAAP, unrealized exchange gains are not recognized. Under U.S.
GAAP, unrealized exchange gains were not of a material amount.
(27) SUBSEQUENT EVENT
On October 11, 1996, Sinter Metals, Inc., Cleveland/USA (SMI), signed a
definitive purchase agreement with MAAG Holding AG to purchase the Company for
U.S. $150 million (exchange rate DM 1.50 = U.S. $1.00), less net indebtedness of
approximately DM 116 million; the agreement was consummated on December 19, 1996
and the Company was acquired by SMI and affiliates.
These financial statements are prepared using the historical cost basis,
and do not reflect any purchase accounting or other decisions taken or to be
taken by SMI in connection with the purchase of the Company.
(28) KREBSOGE SINTERHOLDING GMBH'S BOARD OF MANAGEMENT
Dr.-Ing. Lothar Albano-Muller, Schwelm (Chairman)
Dipl.- Wirtsch.-Ing. Eckhard Hirschfeld, Remscheid-Lennep (until December
31, 1995)
Total remuneration of the management was 472 (1995: 797).
F-47
<PAGE> 113
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Powder Metal Holding, Inc.:
We have audited the accompanying consolidated balance sheets of Powder Metal
Holding, Inc. and subsidiaries (the "Company") as of December 31, 1995 and
November 22, 1996, and and the related consolidated statements of income,
shareholders' deficit and cash flows for the years ended December 31, 1994 and
1995 and for the period January 1, 1996 through November 22, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of November 22, 1996
and December 31, 1995, and the results of its operations and its cash flows for
the period January 1, 1996 through November 22, 1996, and the years ended
December 31, 1994 and 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 2, effective January 1, 1995, the Company changed its
method of recognizing actuarial gains and losses related to its postretirement
benefit plans.
DELOITTE & TOUCHE LLP
Detroit, Michigan
December 19, 1996
F-48
<PAGE> 114
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND NOVEMBER 22, 1996
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 22,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 918 $ 905
Receivables:
Trade (net of allowance for doubtful accounts of $796 and
$384, respectively).................................... 13,256 15,758
Related party receivable (Note 2)........................ 444
Other (Note 2)........................................... 1,272 901
Inventories (Notes 2 and 3)................................. 9,114 7,930
Prepaid and other (Note 2).................................. 1,339 1,899
-------- --------
Total current assets................................ 25,899 27,837
PROPERTY, PLANT AND EQUIPMENT, NET (Notes 2 and 4)............ 29,683 31,086
OTHER ASSETS (Note 2)......................................... 482 21
ASSETS HELD FOR DISPOSITION (Note 8).......................... 212
-------- --------
TOTAL ASSETS (Note 6)......................................... $ 56,276 $ 58,944
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt (Note 6).................. $ 51,204 $ 51,592
Current portion of capital lease obligations (Note 7)....... 49 60
Accounts payable............................................ 9,479 11,139
Accrued liabilities (Note 5)................................ 4,890 5,274
-------- --------
Total current liabilities........................... 65,622 68,065
LONG-TERM DEBT (Note 6)....................................... 2,600 2,600
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Note 11)......... 2,728 2,925
PENSIONS (Note 10)............................................ 1,433 1,128
LONG-TERM CAPITAL LEASE OBLIGATIONS (Note 7).................. 159 95
DEBT AND ACCRUED INTEREST FORGIVEN BY LENDER, NET (Note 2).... 12,816 10,462
-------- --------
Total liabilities................................... 85,358 85,275
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' DEFICIT:
Class A common stock, par value $.01 per share; authorized
200,000 shares, issued and outstanding 10,000 shares
Class B common stock, par value $.01 per share; authorized
100,000 shares, issued and outstanding 6,334 shares
Additional paid-in capital.................................. 49,649 49,649
Accumulated deficit......................................... (79,607) (77,435)
Minimum pension liability adjustment (Note 10).............. (1,031) (461)
Accumulated translation adjustment.......................... 1,907 1,916
-------- --------
Total shareholders' deficit......................... (29,082) (26,331)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................... $ 56,276 $ 58,944
======== ========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE> 115
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
(In Thousands)
<TABLE>
<CAPTION>
JANUARY 1,
1996
DECEMBER 31, THROUGH
--------------------- NOVEMBER 22,
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
SALES (Notes 2 and 8).................................. $107,803 $106,473 $101,671
COST OF GOODS SOLD (Note 8)............................ (95,348) (92,263) (90,730)
--------- --------- ---------
GROSS MARGIN (Note 8).................................. 12,455 14,210 10,941
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note
8)................................................... (8,760) (7,677) (6,167)
RESTRUCTURING (Note 8)................................. 3,307 5,260
--------- --------- ---------
INCOME FROM OPERATIONS................................. 7,002 11,793 4,774
OTHER EXPENSES:
Interest (Note 6).................................... (1,602) (3,133) (2,314)
Other................................................ (6) (115) (250)
--------- --------- ---------
Total other expenses......................... (1,608) (3,248) (2,564)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.................................... 5,394 8,545 2,210
INCOME TAX (EXPENSE) CREDIT (Note 12).................. 253 (38)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 2)........ 770
--------- --------- ---------
NET INCOME............................................. $ 5,394 $ 9,568 $ 2,172
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE> 116
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
(In Thousands)
<TABLE>
<CAPTION>
UNREALIZED
ACCUMULATED
FOREIGN MINIMUM
CLASS A CLASS B ADDITIONAL CURRENCY PENSION
COMMON COMMON PAID-IN ACCUMULATED TRANSLATION LIABILITY
STOCK STOCK CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT TOTAL
------- ------- ---------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994............ -- -- $ 49,649 $ (94,569) None $ (170) $(45,090)
Net income........................ 5,394 5,394
Minimum pension liability
adjustment (Note 10)............ (119) (119)
---- ---- ------- --------- ------ -------- ---------
BALANCE, DECEMBER 31, 1994.......... -- -- 49,649 (89,175) None (289) (39,815)
Net income........................ 9,568 9,568
Reversal of recognition of
unrecognized accumulated foreign
currency translation adjustment
(Note 8)........................ 1,907 1,907
Minimum pension liability
adjustment (Note 10)............ (742) (742)
---- ---- ------- --------- ------ -------- ---------
BALANCE, DECEMBER 31, 1995.......... -- -- 49,649 (79,607) 1,907 (1,031) (29,082)
Net income........................ 2,172 2,172
Minimum pension liability
adjustment (Note 10)............ 570 570
Accumulated translation
adjustment...................... 9 9
---- ---- ------- --------- ------ -------- ---------
BALANCE, NOVEMBER 22, 1996.......... -- -- $ 49,649 $ (77,435) $ 1,916 $ (461) $(26,331)
==== ==== ======= ========= ====== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE> 117
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
(In Thousands)
<TABLE>
<CAPTION>
JANUARY 1,
1996
DECEMBER 31, THROUGH
----------------- NOVEMBER 22,
1994 1995 1996
------ ------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $5,394 $9,568 $2,172
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization......................... 5,622 5,622 5,812
Amortization of debt and accrued interest forgiven
(Note 2)............................................ (2,568) (2,568) (2,354)
Loss provision credit on restructuring (Note 8)....... (3,307) (5,260)
Loss (gain) on disposal of property, plant and
equipment........................................... (32) (169) (80)
Exchange (gain) loss on foreign currency transactions
(Note 2)............................................ 522 (107) (66)
Pension expense, net of cash contributions (Note
10)................................................. (298) (435) 268
Provision for postretirement benefits other than
pensions (Note 11).................................. 495 440 824
Cumulative effect of accounting change (Note 2)....... (770)
Changes in assets and liabilities that provided (used)
cash:
Receivables......................................... (1,625) (752) (2,093)
Inventories (Notes 2 and 3)......................... (2,431) (166) 1,232
Prepaid and other (Note 2).......................... (26) (99) (1,000)
Accounts payable.................................... 2,676 (2,264) 1,632
Accrued and other liabilities -- net................ 2,221 (224) (156)
Accrual for disposition of foreign operation (Note
8)............................................... (3,753) (1,133)
Other assets........................................ (468) 23 611
------- ------- -------
Net cash provided by operating activities........ 2,422 1,706 6,802
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................ (5,158) (3,195) (7,050)
Proceeds from disposal of property, plant and
equipment............................................. 92 528 80
------- ------- -------
Net cash used in investing activities............ (5,066) (2,667) (6,970)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) under line of credit (Note
6).................................................... 2,170 2,646 (1,721)
Proceeds from issuance of notes payable to related
party................................................. 2,000
Principal payments:
Long-term debt........................................ (1,000)
Capital lease obligations (Note 7).................... (71) (41) (40)
------- ------- -------
Net cash provided by financing activities........ 2,099 1,605 239
------- ------- -------
EFFECT OF CHANGE IN FOREIGN CURRENCY EXCHANGE RATES ON
CASH..................................................... (94) (83) (84)
------- ------- -------
NET INCREASE (DECREASE) IN CASH............................ (639) 561 (13)
CASH, BEGINNING OF PERIOD.................................. 996 357 918
------- ------- -------
CASH, END OF PERIOD........................................ $ 357 $ 918 $ 905
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE> 118
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
1. BASIS OF PRESENTATION
Powder Metal Holding, Inc. ("PMH"), a Delaware corporation, was formed in
1989 as a wholly-owned subsidiary of MAAG Holding AG ("MAAG") based in Zurich,
Switzerland. In November 1993 the role of PMH within MAAG's North American
operations was modified and limited to that of a holding company whose sole
business purpose became the 100% ownership of the shares of ICM/Krebsoge, Inc.,
a Delaware corporation, and its 100% owned Canadian subsidiary, ICM/Krebsoge
Canada, Ltd. PMH conducts no other business and has no other assets than the
shares of ICM/Krebsoge. PMH and ICM/Krebsoge, Inc. collectively (the "Company")
maintain operating facilities in the U.S. and Canada for the manufacture of
metal parts for the automotive industry using powder metal technology.
In November, 1993 Sinter Metals, Inc. ("SMI") acquired a 30% equity
interest in PMH.
On October 7, 1996 MAAG and SMI entered into a Powder Metal Stock Purchase
Agreement (the "Agreement") whereby SMI would purchase in December 1996 all of
MAAG's shares in PMH and substantially all of the shares in MAAG's German powder
metal parts manufacturing subsidiary, Krebsoge Sinterholding GmbH. The purchase
price for MAAG's shares in PMH was set at $65 million, less all indebtedness and
subject to certain further limited adjustments upon closing (Note 14.).
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of PMH and its wholly owned entity, ICM/Krebsoge, Inc. All
material amounts and balances have been eliminated in consolidation.
Operations -- The Company manufactures metal parts, mainly for the
automotive industry, using powdered metal technology. The Company maintains U.S.
operating facilities in Ohio, Indiana, and corporate headquarters in Michigan.
The Company's Canadian subsidiary, ICM/Krebsoge Canada, Ltd., has operating
facilities in St. Thomas, Ontario. In 1993, a plan was adopted to dispose of
ICM/Krebsoge Canada, Ltd. However, in 1995, the Company's management reversed
their decision to dispose of ICM/Krebsoge Canada, Ltd. Refer to Note 8 regarding
these Canadian operations. At December 31, 1995 and November 22, 1996,
ICM/Krebsoge Canada, Ltd.'s assets were approximately $12.4 million and $11.3
million, respectively. Sales of ICM/Krebsoge Canada, Ltd. were approximately
$23.4 million, $19.4 million and $15.4 for the years ended December 31, 1994 and
1995, and the period January 1, 1996 through November 22, 1996, respectively.
The net loss of ICM/Krebsoge Canada, Ltd. was approximately $5.1 million, $1.5
million and $1.4 million for the years ended December 31, 1994 and 1995, and the
period January 1, 1996 through November 22, 1996.
F-53
<PAGE> 119
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
Major Customers -- Sales to the Company's four major customers for the
years ended December 31, 1994 and 1995, and the period January 1, 1996 through
November 22, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1,
1996
DECEMBER 31, THROUGH
--------------------- NOVEMBER 22,
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
Chrysler Corporation............................ $ 24,303 $ 20,349 $ 20,575
Ford Motor Company.............................. 54,305 53,635 52,192
New Venture Gear................................ 12,153 13,484 13,247
General Motors Corporation...................... 7,670 11,782 9,995
Others.......................................... 9,372 7,223 5,662
-------- -------- --------
Total................................. $107,803 $106,473 $101,671
======== ======== ========
</TABLE>
Supplemental Cash Flows Disclosures -- Cash paid during the years ended
December 31, 1994 and 1995, and the period January 1, 1996 through November 22,
1996 was $2.9 million, $4.1 million and $4.5 million, respectively, for interest
(net of $227,000, $110,000 and $342,000, capitalized during the years ended
December 31, 1994 and 1995, and the period January 1, 1996 through November 22,
1996, respectively).
Concentrations of Credit Risk -- Financial instruments which subject the
Company to concentrations of credit risk consist principally of trade
receivables. Automobile manufacturers comprise a significant portion of the
Company's business customer base. The Company's four major automotive customers
accounted for approximately 90% of trade receivables at December 31, 1995 and
November 22, 1996. Although the Company's exposure to credit risk associated
with nonpayment by automotive manufacturers is affected by conditions or
occurrences within the automotive industry, trade receivables from the
automotive manufacturers were current at November 22, 1996.
Revenue Recognition -- The Company generally recognizes sales when products
are shipped to customers. An allowance for sales returns is accrued based on
historical experience.
Financial Instruments included in the consolidated balance sheets are
recorded at cost and such amounts approximate fair value.
Other Receivables -- Included in other receivables at December 31, 1995 and
November 22, 1996 is approximately $163,000 and $138,000, respectively, relating
to billed customer tooling costs.
Related Party Receivable -- Included in related party receivables is
$444,000 related to a receivable from MAAG for expenditures related to the
transfer of interest.
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Accounting Changes -- Effective January 1, 1995, the Company changed its
method of recognizing actuarial gains and losses related to its U.S. union and
nonunion postretirement plans from the defer and amortize method prescribed in
Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," to a method of
immediately recognizing the gains or losses at the measurement date if the
accumulated net gain or loss exceeds 10% of the greater of the accumulated
postretirement benefit obligation or the market-related value of plan assets.
The cumulative effect of this change as of January 1, 1995 was approximately
$1.2 million or approximately $.8 million after-
F-54
<PAGE> 120
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
tax (Note 12). On a pro forma basis, the Company's reported net income for 1994
would have been $6.027 million, if this accounting method had been elected in
1993 when the Company adopted SFAS No. 106.
Prepaid and Other Assets -- Included in prepaid and other assets at
December 31, 1995 and November 22, 1996 are unbilled tooling costs of $776,000
and $930,000, respectively, associated with the development of tooling to be
used in the manufacturing of new products.
Property, Plant and Equipment are stated at cost or, in the case of assets
under capital leases (Note 7), at the present value of future lease payments.
Depreciation is computed using the straight-line method over the useful lives of
the related assets, which range from 5 to 40 years. Amortization of leasehold
improvements and capital lease equipment is computed using the straight-line
method over the shorter of the lease term or the useful lives of the related
assets. Depreciation and amortization expense for the years ended December 31,
1994 and 1995 and the period January 1, 1996 through November 22, 1996 was
approximately $5.6 million, $5.6 million and $5.8 million, respectively.
Other Assets -- Included in the other assets balance at December 31, 1995
is a deposit of approximately $384,000 towards the purchase of machinery and
equipment which was delivered in 1996.
Foreign Currency Translation -- The accounts of the Company's Canadian
subsidiary are translated into U.S. dollars in the accompanying consolidated
financial statements. Exchange transaction losses/(gains) included in
consolidated operating results for the years ended December 31, 1994 and 1995
and the period ended November 22, 1996 were approximately $.5 million, $(.1)
million and $.1 million, respectively.
Debt and Accrued Interest Forgiven by Lender -- In 1993, the Company
amended and restated a loan agreement (the "Loan and Security Agreement") with
Heller Financial Inc. ("Heller"). The Company has accounted for this debt
restructuring under the provisions of Statement of Financial Accounting Standard
No. 15, "Troubled Debt Restructuring." As a result of the restated agreement,
Heller forgave unpaid principal and accrued interest of $17.9 million and
converted additional debt into the new Term Loans A and B and a revolving loan
facility. No gain was recognized for the $17.9 million, which was forgiven, as
the total gross future cash flows from the new Term Loans A and B exceeded the
carrying amount of the old loans. Accordingly, the $17.9 million is being
recognized over the seven year term of the restructured debt as a reduction of
future interest expense. Amortization of debt and interest forgiven by the
lender for the years ended December 31, 1994 and 1995 and the period January 1,
1996 through November 22, 1996 was approximately $2.6 million each period (Note
6).
Reclassifications -- Certain reclassifications have been made to the 1994
and 1995 consolidated financial statements to conform to the 1996 presentations.
Use of Estimates in the Preparation of the Financial Statements -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount 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.
F-55
<PAGE> 121
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
3. INVENTORIES
Inventories consist of the following at December 31, 1995 and November 22,
1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER NOVEMBER
31, 22,
1995 1996
----------- -----------
<S> <C> <C>
Raw materials............................................. $ 1,450 $ 1,020
Work-in-process........................................... 5,958 5,231
Finished goods............................................ 1,706 1,679
------- -------
Total inventory................................. $ 9,114 $ 7,930
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1995 and November 22, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER NOVEMBER
31, 22,
1995 1996
----------- -----------
<S> <C> <C>
Land and land improvements.................................. $ 992 $ 873
Buildings and leasehold improvements........................ 10,252 10,446
Machinery and equipment (including capital lease equipment
of $309 in 1995 and 1996)................................. 48,823 53,482
Furniture and fixtures...................................... 3,775 3,853
Office equipment............................................ 296 297
Company vehicles............................................ 159 162
Construction-in-progress.................................... 1,898 5,968
------- -------
Total............................................. 66,195 75,081
Less accumulated depreciation and amortization.............. 36,512 43,995
------- -------
Property and equipment -- net............................... $29,683 $31,086
======= =======
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 1995 and
November 22, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER NOVEMBER
31, 22,
1995 1996
----------- -----------
<S> <C> <C>
Salaries, wages, vacation, related benefits and taxes..... $ 2,269 $ 2,787
Other taxes, interest and bank charges.................... 997 1,011
Environmental............................................. 262 102
Bonuses (Note 9).......................................... 600 347
Other..................................................... 762 1,027
------- -------
Total accrued liabilities....................... $ 4,890 $ 5,274
======= =======
</TABLE>
F-56
<PAGE> 122
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
6. LONG-TERM DEBT
As discussed in Note 2, the Company entered into the Loan and Security
Agreement, as amended, with Heller in 1989. On November 19, 1993, the Company
amended the Loan and Security Agreement with Heller. Borrowings under the Loan
and Security Agreement are collateralized by substantially all assets of the
Company.
The Agreement between MAAG and SMI (Note 1) describes that on the date of
the transfer of interest, all Heller loans will be repaid (Note 14).
Descriptions and outstanding balances of each loan at December 31, 1995 and
November 22, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
HELLER
Term Loan A -- Payable in 21 quarterly installments, with final
payment due October 1, 2000. Interest is payable monthly at
prime, plus 1.5% per annum. The effective interest rates for
the year ended December 31, 1995 and the period January 1, 1996
through November 22, 1996 were approximately 1.0% (Note 2)..... $29,000 $26,875
Term Loan B -- Due October 1, 2000. Effective January 1, 1996,
interest is payable monthly at prime, plus 1.75% per annum. The
effective interest rates for the year ended December 31, 1995
and the period January 1, 1996 through November 22, 1996 were
approximately 1.0% (Note 2).................................... 12,177 12,286
Revolving Loan -- Heller may issue or guarantee letters of credit
or make advances to the Company up to approximately $17
million. Such outstanding letters of credit totaled
approximately $1.1 million at December 31, 1995 and November
22, 1996. Interest is equal to the base rate, as defined, plus
1.5% per annum. The effective interest rate for the year ended
December 31, 1995 and the period January 1, 1996 through
November 22, 1996 were approximately 8.4% and 9.1%,
respectively................................................... 10,027 10,431
OTHER NOTES PAYABLE
Industrial Revenue Bonds bearing interest at 6.72% per annum and
due in 2000, collateralized by a letter of credit drawn on
MAAG........................................................... 2,600 2,600
MAAG Subordinated Note with interest payable quarterly at prime,
plus 2% per annum; due on October 1, 2000. The effective rate
for the period January 1, 1996 through November 22, 1996 was
10%............................................................ 2,000
------- -------
Total.................................................. 53,804 54,192
Less current portion............................................. 51,204 51,592
------- -------
Long-term debt................................................... $ 2,600 $ 2,600
======= =======
</TABLE>
The Loan and Security Agreement requires the Company to maintain a minimum
earnings before interest debt amortization and taxes (EBIDAT, as defined) and a
minimum fixed charge coverage ratio as of various dates. The Loan and Security
Agreement restricts defined mergers and investments in any corporation, person
or entity, payments of dividends, transactions with affiliates, subordinated
indebtedness, additional liens on Company assets, the amount of capital
expenditures, aggregate restructuring charges and expenditures and
F-57
<PAGE> 123
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
various other transactions. Noncompliance with such restrictions or requirements
allow Heller to demand immediate payment of the debt. As of November 22, 1996,
the Company was in violation of the Loan and Security Agreement covenants. As a
result of this, the debt obligations with Heller have been classified as current
liabilities.
In addition to the principal payments required above, the Company is
required to make additional principal payments to Heller from the sale proceeds
of any property or equity interest in the Company, and insurance proceeds from
property loss or damage.
The Company is also required to make additional principal payments based on
a percentage of excess cash flow, as defined in the Loan and Security Agreement.
In 1996, MAAG issued to PMH a subordinated note with a face value of $2
million. Interest expense related to this note was $115,000 for the period
January 1, 1996 to November 22, 1996. This note will also be repaid as a result
of the transfer of interest. Refer to Note 14.
The following summarizes the future annual maturities of the Company's debt
obligations at November 22, 1996 (in thousands):
<TABLE>
<S> <C>
1997....................... $51,592
2000....................... 2,600
-------
Total...................... $54,192
=======
</TABLE>
7. CAPITAL AND OPERATING LEASE OBLIGATIONS
Equipment under capital leases, which expire in 1999, had a net book value
of approximately $211,000 and $168,000 at December 31, 1995 and November 22,
1996, respectively. The amortization expense relating to such assets for the
years ended December 31, 1994 and 1995 and the period January 1, 1996 through
November 22, 1996 is approximately $32,000, $40,000 and $44,000, respectively.
The Company leases other equipment and office facilities under
noncancelable operating leases which are in effect through 2000. Rent expense
for the years ended December 31, 1994 and 1995 and the period January 1, 1996
through November 22, 1996 is approximately $501,000, $696,000 and $505,000,
respectively.
Future minimum lease payments as of November 22, 1996 under noncancelable
capital and operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year Ending December 31:
1997............................................................ $ 95 $ 1,147
1998............................................................ 68 927
1999............................................................ 35 851
2000............................................................ 814
----- ------
Total minimum lease payments............................ 198 3,739
Less amount representing interest............................... (43)
----- ------
Present value of minimum lease payments........................... $ 155 $ 3,739
===== ======
</TABLE>
During 1995, the Company entered into an agreement for the sale and
leaseback of machinery and equipment. Under this agreement, the Company sold
machinery and equipment with a net book value of
F-58
<PAGE> 124
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
approximately $314,000 and leased the same machinery and equipment back, after
rebuild, under an operating lease. The historical cost and the accumulated
depreciation of the machinery and equipment of approximately $534,000 and
$220,000, respectively, have been removed from the appropriate balance sheet
accounts. Simultaneously, the Company entered into a lease agreement for new
machinery and equipment. The lease has also been classified as an operating
lease in accordance with SFAS No. 13, "Accounting for Leases." Payments under
the five-year lease agreements are approximately $1.5 million for the first year
and $.8 million annually thereafter, which commenced in October 1996.
8. DISPOSITION OF FOREIGN OPERATION
In 1993, the Company's management announced a decision to dispose of
ICM/Krebsoge Canada, Ltd. operations in order to curtail the large operating
losses stemming from that facility. Management's plan called for production of
certain products to be relocated to the Company's U.S. operating facilities.
A provision for plant disposal costs totaling approximately $20.1 million
was recorded in the consolidated statement of income for the year ended December
31, 1993. The provision included noncash and cash charges as follows (in
millions):
<TABLE>
<S> <C>
Noncash charges:
Estimated losses from the disposal of part of a line of business.......... $ 1.5
Writedown of property, plant and equipment to net realizable value........ 4.7
Inventory writedown....................................................... 0.3
Recognized foreign currency translation credit adjustment................. (1.9)
-----
Total noncash charges....................................................... $ 4.6
=====
Cash charges:
Equipment relocation...................................................... $ 2.9
Employee separation....................................................... 2.7
Estimated losses from disposal of a part of a line of business............ 2.4
Transition team........................................................... 2.0
Pension funding obligation................................................ 1.4
Other..................................................................... 4.1
-----
Total cash charges.......................................................... $15.5
=====
</TABLE>
In 1993, cash restructuring expenditures of approximately $3.4 million were
charged against the accrual for disposition of foreign operation leaving a
remaining accrual balance at December 31, 1993 of approximately $13.6 million.
In 1994, cash restructuring expenditures of approximately $6.0 million and
noncash restructuring costs of approximately $1.7 million were charged against
the accrual for disposition of foreign operation leaving a remaining accrual
balance at December 31, 1994 of approximately $5.9 million. In addition, the
Company recognized an additional noncash restructuring charge in 1994 of
approximately $.5 million related to the writedown of machinery and equipment to
its net realizable value. In 1995, cash restructuring expenditures of
approximately $1.1 million and noncash restructuring costs of approximately $.8
million were charged against the accrual for disposition of foreign operation
leaving a remaining balance of $4.0 million at December 31, 1995.
On December 31, 1995, the Company's management reversed their decision to
dispose of ICM/Krebsoge Canada, Ltd. due to unforeseen additional costs,
difficulties related to equipment logistics, a high risk of a supply
interruption to significant customers and capacity constraints that would result
from transferring several
F-59
<PAGE> 125
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
of the remaining product lines at St. Thomas to the Company's U.S. facilities as
originally planned. As a result of this decision, the Company has reversed the
remaining accrual of $4.0 million for the disposition of foreign operation with
a corresponding credit to restructuring provision as follows (in millions):
<TABLE>
<S> <C>
Equipment relocation................................................... $(1.0)
Employee separation.................................................... (1.1)
Pension funding obligation............................................. (1.0)
Other.................................................................. (0.9)
-----
Total.................................................................. $(4.0)
=====
</TABLE>
At December 31, 1995, the Company also reversed $3.2 million of the $4.7
million noncash charge included in 1993 restructuring provision for the
writedown of property, plant and equipment to net realizable value and the $1.9
million noncash credit included in the 1993 restructuring provision related to
the unrecognized foreign currency accumulated translation adjustment. As a
result of these reversals, property, plant and equipment -- net, and the
accumulated translation adjustment component of shareholders' equity have
increased approximately $3.2 million and $1.9 million, respectively. The noncash
charge and noncash credit previously recorded in 1993 were reversed as the
Company now intends to retain these assets and is not substantially liquidating
or disposing of its investment in ICM/Krebsoge Canada, Ltd. Management believes
the carrying value of these assets is recoverable from their use in the
Company's operations.
As a result of the reversals described in the two preceding paragraphs, the
Company recorded a net credit to the restructuring provision of approximately
$5.3 million for the year ended December 31, 1995.
Further, certain amounts in the Company's December 31, 1994 consolidated
statement of income have been reclassified to reflect management's decision to
retain ICM/Krebsoge Canada, Ltd., as follows -- $4.4 million of the $4.6 million
previously classified as assets held for disposition at December 31, 1994 has
been reclassified to property, plant and equipment -- net. The Company still
plans to dispose of the remaining balance of assets held for disposition.
9. RELATED PARTY TRANSACTIONS
PMH had recorded a bonus accrual of $600,000 as of December 31, 1995,
payable to International Consulting Management, Ltd., a corporation owned in
part by a director of the Company (Notes 5 and 13). PMH has a $444,000
receivable from MAAG at November 22, 1996 for expenditures incurred by PMH
related to the transfer of interest for which MAAG has agreed to reimburse PMH
(Note 2).
PMH has a note payable to MAAG of $2 million at November 22, 1996 (Note 6).
10. PENSIONS
The Company has four defined benefit pension plans covering substantially
all of its employees in the U.S. and Canada. The benefits are based on years of
service and the highest consecutive five-year average earnings prior to
retirement. The Company's policy is to fund the pension costs in accordance with
applicable regulatory guidelines.
The projected unit credit method is used to determine the funding
requirements of the plans. The tables below reconcile the funded status of the
Company's U.S. and Canadian defined benefit pension plans for
F-60
<PAGE> 126
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
which SFAS No. 87, "Employers' Accounting for Pensions," has been adopted with
amounts recognized in the consolidated balance sheets at December 31, 1995 and
November 22, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------
CANADIAN PLANS U.S. PLANS
------------------------- ---------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits......................... $ 748 $ 2,346 $ 3,729 $ 1,929
Nonvested benefits...................... 2 207 96
--------- --------- --------- ---------
Accumulated benefit obligations........... $ 748 $ 2,348 $ 3,936 $ 2,025
========= ========= ========= =========
Projected benefit obligations for services
provided to date........................ $ 840 $ 2,348 $ 5,639 $ 2,025
Plan assets at fair value................. 688 1,546 3,995 1,815
--------- --------- --------- ---------
Excess of projected benefit obligations
over plan assets........................ 152 802 1,644 210
Unrecognized prior service cost........... (190)
Unrecognized net loss..................... (169) (522) (1,375) (340)
Adjustment for unfunded pension
liability............................... 169 712 340
--------- --------- --------- ---------
Accrued pension cost recognized in
consolidated balance sheet.............. $ 152 $ 802 $ 269 $ 210
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 22, 1996
------------------------------
CANADIAN PLANS U.S. PLANS
-------------- -----------
ACCUMULATED ASSETS
BENEFITS EXCEED
EXCEED ACCUMULATED
ASSETS BENEFITS
-------------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits......................................... $2,881 $ 5,971
Nonvested benefits...................................... 2 376
------ ------
Accumulated benefit obligations........................... $2,883 $ 6,347
====== ======
Projected benefit obligations for services provided to
date.................................................... $2,971 $ 7,858
Plan assets at fair value................................. 2,042 7,655
------ ------
Excess of projected benefit obligations over plan
assets.................................................. 929 203
Unrecognized prior service cost........................... (177)
Unrecognized net loss..................................... (462) (4)
Adjustment for unfunded pension liability................. 639
------ ------
Accrued pension cost recognized in consolidated balance
sheet................................................... $ 929 $ 199
====== ======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations for the U.S. plans was 6.8% and 7.5% at December
31, 1995 and November 22, 1996, respectively. The discount rate used in
determining the actuarial present value of the projected benefit obligations for
the Canadian plans
F-61
<PAGE> 127
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
was 7.5% and 6.8% at December 31, 1995 and November 22, 1996. The rate of
increase in future compensation levels for applicable U.S. and Canadian
employees was 4% at December 31, 1995 and November 22, 1996. The expected
long-term rate of return on plan assets used in determining pension expense for
the U.S. and Canadian plans was 7.5% and 8.25% in 1995 and the period January 1,
1996 through November 22, 1996, respectively. The assumptions for the Canadian
plans were developed on a basis consistent with that for U.S. plans adjusted to
reflect prevailing economic conditions and interest rate environments.
The net periodic pension cost and total pension expense for the years ended
December 31, 1994 and 1995 and for the period January 1, 1996 through November
22, 1996 of U.S. plans and Canadian plans include the following components (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 NOVEMBER 22, 1996
------------------ -------------------- -------------------
CANADIAN U.S. CANADIAN U.S. CANADIAN U.S.
PLANS PLANS PLANS PLANS PLANS PLANS
-------- ----- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Service cost......................... $223 $ 838 $ 169 $ 868 $ 174 $1,074
Interest cost on projected benefit
obligation......................... 203 298 232 387 200 466
Return on assets -- actual........... (68) 45 (122) (1,006) (201) (488)
Net amortization and deferral........ 36 (256) 40 667 323 82
---- ----- ------ ------- ------ ------
Net periodic pension cost............ $394 $ 925 $ 319 $ 916 $ 496 $1,134
==== ===== ====== ======= ====== ======
</TABLE>
Plan assets consist principally of investments in bonds and debentures,
common stocks and cash. The Company also has a defined contribution 401(k) plan,
covering substantially all of its U.S. employees. No Company contributions were
made to the 401(k) plan in 1994, 1995 and the period January 1, 1996 through
November 22, 1996.
11. OTHER POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company maintains union and non-union benefit plans that provide
postretirement medical and life insurance to U.S. retirees and eligible
dependents. These benefits are funded as incurred from the general assets of the
Company. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," requires that the cost of such benefits be recognized in the
financial statements during the period employees provide service to the Company.
The medical and life insurance costs for active employees during active service
are not covered by SFAS No. 106 and are charged directly to expense on a
pay-as-you-go basis. The Company's Canadian subsidiary also maintains a
postretirement plan, however, the postretirement cost of the Canadian plan is
not significant to the Company.
The components of non-pension postretirement benefit cost of the Company
for 1994, 1995 and the period January 1, 1996 through November 22, 1996 are set
forth below (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Benefits earned during the year/period........................ $384 $303 $377
Interest accrued on benefits attributed to prior year......... 137 137 170
Net amortization of actuarial (gain)/loss..................... (26) 277
---- ---- ----
Total non-pension postretirement benefit cost................. $495 $440 $824
==== ==== ====
</TABLE>
F-62
<PAGE> 128
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
As of January 1, 1995, the Company changed its method of recognizing
actuarial gains or losses from the defer and amortize method described in SFAS
No. 106 to the immediate recognition of such gains or losses, if the accumulated
net gain or loss exceeds 10% of the greater of the accumulated benefit
obligation or market-related value of plan assets (Note 2).
No retiree benefit payments were made during the years ended December 31,
1994 and 1995 and the period January 1, 1996 through November 22, 1996.
The table below displays the components of the Company's U.S.
postretirement benefit obligation as recognized in the consolidated balance
sheets at December 31, 1995 and November 22, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 22,
1995 1996
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Current retirees......................................... $ 201 $ 288
Fully eligible active plan participants.................. 170 156
Other active plan participants........................... 2,357 2,472
------ ------
APBO....................................................... 2,728 2,916
Unrecognized net gain...................................... (9)
------ ------
U.S. obligation recognized in consolidated balance
sheets................................................... $2,728 $2,925
====== ======
</TABLE>
The following table summarizes the principal assumptions used in
determining the actuarial value of the APBO:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 22,
1995 1996
------------ ------------
<S> <C> <C>
Weighted average discount rate........................... 6.8 7.8%
Weighted average health care trend rate.................. 6.0* 5.0
Ultimate sustained weighted average health care cost
trend rate in 1997..................................... 5.0 5.0
</TABLE>
- ---------------
* Rate decreases on a linear basis through 1997, to the ultimate weighted
average trend rate of 5.0%.
The following increase would result from a one percentage point increase in
the weighted average health care trend rates:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
APBO......................................................... $288,945 $453,438
Service and interest costs of postretirement expense......... 90,703 134,786
</TABLE>
12. UNITED STATES, FOREIGN AND OTHER INCOME TAXES -- DEFERRED AND PAYABLE
Deferred income tax assets and liabilities reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial reporting
purposes and the bases of such assets and liabilities as measured by tax laws
and rates applicable to periods in which differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to
F-63
<PAGE> 129
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
be realized. Temporary differences and carryforwards which give rise to the
deferred tax asset at December 31, 1995 and November 22, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current deferred tax assets:
Pension and other employee benefits........................ $ 711 $ 602
Postretirement benefits other than pensions................ 752 1,036
Special provision for plant closing and other
restructuring........................................... 304
Other non-deductible reserves.............................. 523 580
-------- --------
Total current deferred tax asset................... 2,290 2,218
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards........................... 15,206 16,847
Capital lease obligations.................................. (92) (94)
Depreciation............................................... (3,747) (2,811)
Minimum pension liability.................................. 361 164
Accumulated translation adjustment......................... (648) (654)
Alternative minimum tax credit carryforward................ 139 178
Other...................................................... 69
-------- --------
Total net noncurrent deferred tax asset............ 11,219 13,699
-------- --------
Total net deferred tax asset................................. 13,509 15,917
Less valuation allowance..................................... (13,509) (15,917)
-------- --------
Net deferred tax asset....................................... None None
======== ========
</TABLE>
The Company had U.S. federal net operating loss carryforwards for tax
purposes of approximately $31.8 million and $30.9 million at December 31, 1995
and November 22, 1996, respectively. These net operating loss carryforwards
expire on various dates between the years 2004 and 2007. The Company also had
approximately $12.3 million and $17.9 million of loss carryforwards for tax
purposes for ICM/Krebsoge Canada, Ltd. at December 31, 1995 and November 22,
1996, respectively. These loss carryforwards expire on various dates between the
years 2000 and 2001.
For the year ended December 31, 1995 and the period January 1, 1996 through
November 22, 1996, the Company paid income taxes of $220,750 and $38,000,
respectively. No income taxes were paid in 1994.
F-64
<PAGE> 130
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Domestic:
Current..................................................... $ 1,308 $ (253) $ 518
Deferred.................................................... 1,615 991 247
Benefit of operating loss carryforwards..................... (1,308) (480)
Adjustment in valuation allowance........................... (1,615) (991) (247)
------- ------- -------
Total domestic...................................... None (253) 38
Foreign:
Current..................................................... 1,483
Deferred.................................................... (1,959) 3,024 (2,858)
Benefit of operating loss carryforwards..................... (1,483)
Adjustment in valuation allowance........................... 1,959 (3,024) 2,858
------- ------- -------
Total foreign....................................... None None None
------- ------- -------
Income tax (credit)........................................... None $ (253) $ 38
------- ------- -------
</TABLE>
The domestic and foreign components of income (loss) before income tax
expense are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
U.S........................................................... $ 6,724 $ 4,081 $ 3,619
Foreign....................................................... (1,330) 5,487 (1,409)
------- ------- -------
Income before income taxes.................................... $ 5,394 $ 9,568 $ 2,210
======= ======= =======
</TABLE>
The consolidated income tax benefit (exclusive of the tax effect related to
the cumulative effect of accounting changes) was different than the amount
computed using the U.S. statutory income tax rate for the reasons set forth in
the following table (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Expected tax at U.S. statutory income tax rate................ $ 1,834 $ 3,253 $ 751
Net effect of Canadian losses at rates other than 34%......... (20) 82 (21)
Amortization of debt and accrued interest forgiven by
lender...................................................... (873) (873) (800)
Alternative minimum tax....................................... 143 38
Nondeductible restructuring credit............................ 3,216
Change in valuation allowance................................. 344 (4,015) 2,611
Change in valuation allowance for tax effected components of
shareholders' deficit....................................... (287) (203)
Benefits of net operating loss carryforwards.................. (1,308) (1,483) (480)
Other items................................................... 23 (289) (1,858)
------- ------- -------
Income tax (credit)........................................... None $ (253) $ 38
======= ======= =======
</TABLE>
F-65
<PAGE> 131
POWDER METAL HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 22, 1996
13. COMMITMENTS AND CONTINGENCIES
Self-Insurance Program -- The Company is self-insured for health care
claims for active employees. The Company maintains excess insurance coverage for
claims exceeding $150,000 per individual. The Company accrues for incurred but
not reported claims based on the history of such claims. The Company paid claims
of $1.9 million, $2.6 million and $2.7 million for the years ended December 31,
1994 and 1995 and the period January 1, 1996 through November 22, 1996,
respectively.
Employment Agreements -- On October 1, 1996 ICM/Krebsoge, Inc. entered into
a Supplemental Executive Retirement Program ("SERP") and a two year
Non-Disclosure, Non-Solicitation Non-Competition and Severance Agreement (the
"Employment Agreements") with seven key employees. The Employment Agreements
provide that in the event of termination of employment within the contract term
for reasons other than cause or disability, then the salary and benefits for the
remainder of the contract term shall be paid.
Consulting Agreement -- On January 1, 1994, ICM/Krebsoge, Inc. entered into
a consulting agreement with International Consulting Management, Ltd., a
Delaware corporation. International Consulting Management, Ltd. is owned in part
by a director of the Company. The consulting agreement retained the services of
the director to act as President of ICM/Krebsoge, Inc. through December 31,
1996. In consideration of such services, ICM/Krebsoge, Inc. paid International
Consulting Management, Ltd. a monthly consulting fee of $30,000, plus expenses.
At December 31, 1995, the Company had recorded an accrued liability of
$600,000, related to an anticipated bonus (Notes 5 and 9). During 1996, it was
agreed among the involved parties that such bonus would not be paid and the
liability was reversed.
Claims, Legal Actions and Environmental Matters -- The Company is subject
to potential liability under various claims and legal actions which are pending
or may be asserted against them. Groundwater and soil contamination has been
identified at the St. Thomas, Ontario facility, although there have been no
environmental asserted claims against the Company. The sources of contamination
have not been positively identified and may be related to either past facility
operations or off-site origins. The ultimate liability of the Company under
these claim actions was not determinable at November 22, 1996.
14. SUBSEQUENT EVENT
On December 19, 1996, SMI acquired 70% of the shares of PMH for $65 million
less the principal amount of the indebtedness of PMH plus all accrued but unpaid
interest. As a result of the transaction, PMH became a wholly-owned entity of
SMI.
All obligations to Heller were repaid in connection with this transfer of
interest. This included Term Loan A, $26.9 million; Term Loan B, $12.3 million;
and the Revolving Loan, $10.0 million. In addition, the MAAG subordinated note
including principal and interest of $2.1 million was repaid.
F-66
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SINTER METALS, INC. Worldwide Locations
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