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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1996. (Fee
Required)
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
Commission File Number: 333-5411
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HAYNES INTERNATIONAL, INC.
- ----------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1185400
- ------------------ ------------------------------
(State or other jurisdiction of (IRS Employer
Identification No.)
incorporation or organization)
1020 West Park Avenue, Kokomo, Indiana 46904-9013
- ------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(317) 456-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
by Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any Amendment to
this Form 10-K. X
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The registrant is a privately held corporation. As such, there is no
practicable method to determine the aggregate market value of the voting stock
held by non-affiliates of the registrant.
The number of shares of Common Stock, $.01 par value, of Haynes International,
Inc. outstanding as of December 20, 1996 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 79 in the sequential numbering system.
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Total pages: 83
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TABLE OF CONTENTS
PART I Page
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Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related 20
Stockholder Matters
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial 23
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on 62
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 63
Item 11. Executive Compensation 66
Item 12. Security of Ownership of Certain Beneficial Owners and 76
Management
Item 13. Certain Relationships and Related Transactions 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports 80
on Form 8-K
PART I
ITEM 1. BUSINESS
GENERAL
The Company develops, manufactures and markets technologically advanced,
high performance alloys primarily for use in the aerospace and chemical
processing industries. The Company's products are high temperature alloys
("HTA") and corrosion resistant alloys ("CRA"). The Company's HTA products are
used by manufacturers of equipment that is subjected to extremely high
temperatures, such as jet engines for the aerospace industry, gas turbine
engines used for power generation, and waste incineration and industrial
heating equipment. The Company's CRA products are used in applications that
require resistance to extreme corrosion, such as chemical processing, power
plant emissions control and hazardous waste treatment. The Company produces
its high performance alloy products primarily in sheet, coil and plate forms,
which in the aggregate represented approximately 65% of the Company's net
revenues in fiscal 1996. In addition, the Company produces its alloy products
as seamless and welded tubulars, and in bar, billet and wire forms.
High performance alloys are characterized by highly engineered, often
proprietary, metallurgical formulations primarily of nickel, cobalt and other
metals with complex physical properties. The complexity of the manufacturing
process for high performance alloys is reflected in the Company's relatively
high average selling price per pound, compared to the average selling price of
other metals such as carbon steel sheet, stainless steel sheet and aluminum.
Demanding end-user specifications, a multi-stage manufacturing process and the
technical sales, marketing and manufacturing expertise required to develop new
applications combine to create significant barriers to entry in the high
performance alloy industry. The Company derived approximately 25% of its
fiscal 1996 net revenues from products that are protected by United States
patents and derived an additional approximately 19% of its fiscal 1996 net
revenues from sales of products that are not patented, but for which the
Company has limited or no competition.
PRODUCTS
The alloy market consists of four primary segments: stainless steel, super
stainless steel, nickel alloys and high performance alloys. The Company
competes exclusively in the high performance alloy segment, which includes HTA
and CRA products. The Company believes that the high performance alloy segment
represents less than 10% of the total alloy market. The percentages of the
Company's total product revenue and volume presented in this section are based
on data which include revenue and volume associated with sales by the Company
to its foreign subsidiaries, but exclude revenue and volume associated with
sales by such foreign subsidiaries to their customers. Management believes,
however, that the effect of including revenue and volume data associated with
sales by its foreign subsidiaries would not materially change the percentages
presented in this section. In fiscal 1996, HTA and CRA products accounted for
approximately 61% and 39%, respectively, of the Company's net revenues.
HTA products are used primarily in manufacturing components used in the
hot sections of jet engines. Stringent safety and performance standards in the
aerospace industry result in development lead times typically as long as eight
to ten years in the introduction of new aerospace-related market applications
for HTA products. However, once a particular new alloy is shown to possess the
properties required for a specific application in the aerospace industry, it
tends to remain in use for extended periods. HTA products are also used in gas
turbine engines produced for use in applications such as naval and commercial
vessels, electric power generators, power sources for offshore drilling
platforms, gas pipeline booster stations and emergency standby power stations.
CRA products are used in a variety of applications, such as chemical
processing, power plant emissions control, hazardous waste treatment and sour
gas production. Historically, the chemical processing industry has represented
the largest end-user segment for CRA products. Due to maintenance, safety and
environmental considerations, the Company believes this industry represents an
area of potential long-term growth for the Company. Unlike aerospace
applications within the HTA product market, the development of new market
applications for CRA products generally does not require long lead times.
HIGH TEMPERATURE ALLOYS. The following table sets forth information with
respect to certain of the Company's significant high temperature alloys:
Alloy and Year Introduced End Markets and Applications (1) Features
- -------------------------- ------------------------------------------------ -------------------------------
Haynes HR-160 (1990) (2) Waste incineration/CPI-boiler tube shields Good resistance to sulfidation
high temperatures
Haynes 242 (1990) (2) Aero-seal rings High strength, low expansion
and good fabricability
Haynes HR-120 (1990) (2) Industrial heating-heat-treating baskets Good strength-to-cost ratio as
compared to competing alloys
Haynes 230 (1984) (2) Aero/LBGT-ducting Good combination of strength,
stability, oxidation resistance
and fabricability
Haynes 214 (1981) (2) Aero-honeycomb seals Good combination of oxidation
resistance and fabricability
among nickel-based alloys
Haynes 188 (1968) Aero-burner cans, after-burner components High strength, oxidation
resistant cobalt-based alloys
Haynes 625 (1964) Aero/CPI-ducting, tanks, vessels, weld overlays Good fabricability and general
corrosion resistance
Haynes 263 (1960) Aero/LBGT-components for gas turbine hot gas Good ductility and high
exhaust pan strength at temperatures up to
1600EF
Haynes 718 (1955) Aero-ducting, vanes, nozzles Weldable high strength alloy
with good fabricability
Hastelloy X (1954) Aero/LBGT-burner cans, transition ducts Good high temperature
strength at relatively low cost
Haynes Ti 3-2.5 (1950) Aero-aircraft hydraulic and fuel systems Light weight, high strength
components titanium-based alloy
- -------------
(1) "Aero" refers to aerospace; "LBGT" refers to land-based gas turbines; "CPI" refers to the chemical
processing industry.
(2) Represents a patented product or a product with respect to which the Company believes it has limited
or no competition.
The higher volume HTA products, including Haynes 625, Haynes 718 and
Hastelloy X, are generally considered industry standards, especially in the
manufacture of aircraft and LBGT. These products have been used in such
applications since the 1950's and because of their widespread use have been
most subject to competitive pricing pressures. In fiscal 1996, sales of these
HTA products accounted for approximately 25% of the Company's net revenues.
The Company also produces and sells cobalt-based alloys introduced over
the last three decades, which are more highly specialized and less price
competitive than nickel-based alloys. Haynes 188 and Haynes 263 are the most
widely used of the Company's cobalt-based products and accounted for
approximately 10% of the Company's net revenues in fiscal 1996. Three of the
more recently introduced HTA products, Haynes 242, Haynes 230 and Haynes 214,
initially developed for the aerospace and LBGT markets, are still
patent-protected and together accounted for approximately 6% of the Company's
net revenues in fiscal 1996. These newer alloys are gaining acceptance for
applications in industrial heating and waste incineration.
Haynes HR-160 and Haynes HR-120 were introduced in fiscal 1990 and
targeted for sale in industrial heat treating applications. Haynes HR-160 is a
higher priced cobalt-based alloy designed for use when the need for long-term
performance outweighs initial cost considerations. Potential applications for
Haynes HR-160 include use in key components in waste incinerators, chemical
processing equipment, mineral processing kilns and fossil fuel energy plants.
Haynes HR-120 is a lower priced, iron-based alloy and is designed to replace
competitive alloys not manufactured by the Company that may be slightly lower
in price but also less effective. In fiscal 1996, these two alloys accounted
for approximately 1% of the Company's net revenues.
The Company also produces seamless titanium tubing for use as hydraulic
lines in airframes and as bicycle frames. During fiscal 1996, sales of these
products accounted for approximately 4% of the Company's net revenues.
[Remainder of page intentionally left blank.]
CORROSION RESISTANT ALLOYS. The following table sets forth information
with respect to certain of the Company's significant corrosion resistant
alloys:
Alloy and Year Introduced End Markets and Applications (1) Features
- --------------------------- ------------------------------------------ -----------------------------------------
Hastelloy C-2000 (1995) (2) CPI-tanks, mixers, piping Versatile alloy with good resistance to
uniform corrosion
Hastelloy B-3 (1994) (2) CPI-acetic acid plants Better fabrication characteristics
compared to other nickel-molybdenum
alloys
Hastelloy D-205 (1993) (2) CPI-plate heat exchangers Corrosion resistance to hot sulfuric acid
Ultimet (1990) (2) CPI-pumps, valves Wear and corrosion resistant
nickel-based alloy
Hastelloy G-50 (1989) (2) Oil and gas-sour gas tubulars Good resistance to down hole corrosive
environments
Hastelloy C-22 (1985) (2) CPI/FGD-tanks, mixers, piping Resistance to localized corrosion and
pitting
Hastelloy G-30 (1985) (2) CPI-tanks, mixers, piping Lower cost alloy with good corrosion
resistance in phosphoric acid
Hastelloy B-2 (1974) CPI-acetic acid Resistance to hydrochloric acid and other
reducing acids
Hastelloy C-4 (1973) CPI-tanks, mixers, piping Good thermal stability
Hastelloy C-276 (1968) CPI/FGD/oil and gas-tanks, mixers, piping Broad resistance to many environments
- -------------
(1) "CPI" refers to the chemical processing industry; "FGD" refers to flue gas
desulfurization.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
[Remainder of page intentionally left blank.]
During fiscal 1996, sales of the CRA alloys Hastelloy C-276, Hastelloy
C-22 and Hastelloy C-4 accounted for approximately 31% of the Company's net
revenues. Hastelloy C-276, introduced by the Company in 1968, is recognized as
a standard for corrosion protection in the chemical processing industry and is
also used extensively for FGD and oil and gas exploration and production
applications. Hastelloy C-22, a proprietary alloy of the Company, was
introduced in 1985 as an improvement on Hastelloy C-276 and is currently sold
to the chemical processing and FGD markets for essentially the same
applications as Hastelloy C-276. Hastelloy C-22 offers greater and more
versatile corrosion resistance and therefore has gained market share at the
expense of the non-proprietary Hastelloy C-276. Hastelloy C-22's improved
corrosion resistance has led to increased sales in semiconductor gas handling
systems, pharmaceutical manufacturing and waste treatment applications.
Hastelloy C-4 is specified in many chemical processing applications in Germany
and is sold almost exclusively to that market.
The Company also produces alloys for more specialized applications in the
chemical processing industry and other industries. For example, Hastelloy B-2
was introduced in 1970 for use in the manufacture of equipment utilized in the
production of acetic acid and ethyl benzine and is still sold almost
exclusively for those purposes. Due to its limited use and complex
manufacturing process, there is little competition for sales of this material.
Hastelloy B-3 was developed for the same applications and has greater ease in
fabrication. The Company expects Hastelloy B-3 to eventually replace Hastelloy
B-2. Hastelloy G-30 is used primarily in the production of super phosphoric
acid and fluorinated aromatics. Hastelloy G-50 has gained acceptance as a
lower priced alternative to Hastelloy C-276 for production of tubing for use
in sour gas wells. These more specialized products accounted for approximately
7% of the Company's net revenues in fiscal 1996.
The Company's patented Ultimet is used in a variety of industrial
applications that result in material degradation by "corrosion-wear." Ultimet
is designed for applications where conditions require resistance to corrosion
and wear and is currently being tested in spray nozzles, fan blades, filters,
bolts, rolls, pump and valve parts where these properties are critical.
Hastelloy D-205, introduced in 1993, is designed for use in handling hot
concentrated sulfuric acid and other highly corrosive substances.
The Company believes that its most recently introduced alloy, Hastelloy
C-2000, improves upon Hastelloy C-22. Hastelloy C-2000, which the Company
expects will be used extensively in the chemical processing industry, can be
used in both oxidizing and reducing environments.
END MARKETS
Aerospace. The Company has manufactured HTA products for the aerospace
market since it entered the market in the late 1930s, and has developed
numerous proprietary alloys for this market. The Company sold products to
approximately 500 customers in this segment in fiscal 1996, and no one
customer accounted for more than 2% of the Company's net revenues.
Customers in the aerospace markets tend to be the most demanding with
respect to meeting specifications within very low tolerances and achieving new
product performance standards. Stringent safety standards and continuous
efforts to reduce equipment weight require close coordination between the
Company and its customers in the selection and development of HTA products. As
a result, sales to aerospace customers tend to be made through the Company's
direct sales force. Unlike the FGD and oil and gas production industries,
where large,competitively bid projects can have a significant impact on demand
and prices, demand for the Company's products in the aerospace industry is
based on the new and replacement market for jet engines and the maintenance
needs of operators of commercial and military aircraft. The hot sections of
jet engines are subjected to substantial wear and tear and accordingly require
periodic maintenance and replacement. This maintenance-based demand, while
potentially volatile, is generally less subject to wide fluctuations than
demand in the FGD and sour gas production industries.
Chemical Processing. The chemical processing industry segment represents a
large base of customers with diverse CRA applications. The Company sells its
CRA products to hundreds of chemical processing customers worldwide and no one
customer in this industry accounted for over 2% of the Company's net revenues
in fiscal 1996. CRA products supplied by the Company have been used in the
chemical processing industry since the early 1930s.
Demand for the Company's products in this industry is based on the level
of maintenance, repair and expansion of existing chemical processing
facilities as well as the construction of new facilities. The Company believes
the extensive worldwide network of Company-owned service centers and
independent distributors is a competitive advantage in marketing its CRA
products to this market. Sales of the Company's products in the chemical
processing industry tend to be more stable than the aerospace, FGD and oil and
gas markets. Increased concerns regarding the reliability of chemical
processing facilities, their potential environmental impact and safety hazards
to their personnel have led to an increased demand for more sophisticated
alloys, such as the Company's CRA products.
Land-Based Gas Turbines. The LBGT industry represents a growing market,
with demand for the Company's products driven by the construction of
cogeneration facilities and electric utilities operating electric generating
facilities. Demand for the Company's alloys in the LBGT industry has also
been driven by concerns regarding lowering emissions from generating
facilities powered by fossil fuels. LBGT generating facilities are gaining
acceptance as clean,low-cost alternatives to fossil fuel-fired electric
generating facilities.
Flue Gas Desulfurization. The FGD industry has been driven by both
legislated and self-imposed standards for lowering emissions from fossil
fuel-fired electric generating facilities. In the United States, the Clean Air
Act mandates a two-phase program aimed at significantly reducing SO2 emissions
from electric generating facilities powered by fossil fuels by 2000. Canada
and its provinces have also set goals to reduce emissions of SO2 over the next
several years. Phase I of the Clean Air Act program affected approximately 100
steam-generating plants representing 261 operating units fueled by fossil
fuels,primarily coal. Of these 261 units, 25 units were retrofitted with FGD
systems while the balance opted mostly for switching to low sulfur coal to
achieve compliance. The market for FGD systems peaked in 1992 at approximately
$1.1 billion, and then dropped sharply in 1993 to a level of approximately
$174.0 million due to a curtailment of activity associated with Phase I. Phase
II compliance begins in 2000 and affects 785 generating plants with more than
2,100 operating units. Options available under the Clean Air Act to bring the
targeted facilities into compliance with Phase II SO2 emissions requirements
include fuel switching, clean coal technologies, purchase of SO2 allowances,
closure off facilities and off-gas scrubbing utilizing FGD technology.
Oil and Gas. The Company also sells its products for use in the oil and
gas industry, primarily in connection with sour gas production. Sour gas
contains extremely corrosive materials and is produced under high pressure,
necessitating the use of corrosion resistant materials. The demand for sour
gas tubulars is driven by the rate of development of sour gas fields. The
factors influencing the development of sour gas fields include the price of
natural gas and the need to commence drilling in order to protect leases that
have been purchased from either the federal or state governments. As a result,
competing oil companies often place orders for the Company's products at
approximately the same time, adding volatility to the market. This market was
very active in 1991, especially in the offshore sour gas fields in the Gulf of
Mexico, but demand for the Company's products declined significantly
thereafter. More recently there has been less drilling activity and more use
of lower performing alloys, which together have resulted in intense price
competition. Demand for the Company's products in the oil and gas industry is
tied to the global demand for natural gas.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Other industries to which the Company
sells its HTA products include waste incineration, industrial heat treating,
automotive and instrumentation. Other industries to which the Company sells
its CRA products include automotive, medical and instrumentation. Demand in
these markets for many of the Company's lower volume proprietary alloys has
grown in recent periods. For example, incineration of municipal, biological,
industrial and hazardous waste products typically produces very corrosive
conditions that demand high performance alloys. Markets capable of providing
growth are being driven by increasing performance, reliability and service
life requirements for products used in these markets which could provide
further applications for the Company's products.
[Remainder of page intentionally left blank.]
SALES AND MARKETING
Providing technical assistance to customers is an important part of the
Company's marketing strategy. The Company provides analyses of its products
and those of its competitors for its customers. These analyses enable the
Company to evaluate the performance of its products and to make
recommendations as to the substitution of Company products for other products
in appropriate applications,enabling the Company's products to be specified
for use in the production of customers' products. The market development
engineers, five of whom have doctoral degrees in metallurgy, are assisted by
the research and development staff in directing the sales force to new
opportunities. The Company believes its combination of direct sales, technical
marketing and research and development customer support provides an advantage
over other manufacturers in the high performance industry. This activity
allows the Company to obtain direct insight into customers' alloy needs and
allows the Company to develop proprietary alloys that provide solutions to
customers' problems.
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers,
three wholly-owned European subsidiaries and sales agents serving the Asia
Pacific Rim. Approximately 75% of the Company's net revenues in fiscal 1996
was generated by the Company's direct sales organization. The remaining 25% of
the Company's fiscal 1996 net revenues was generated by independent
distributors and licensees in the United States, Europe and Japan,some of whom
have been associated with the Company for over 25 years. The following table
sets forth the approximate percentage of the Company's fiscal 1996 net
revenues generated through each of the Company's distribution channels.
DOMESTIC FOREIGN TOTAL
--------------- ------------- ----------
Company sales office/direct . . . . . 34% 8% 42%
Company-owned service centers . . . . 13 20 33
Independent distributors/sales agents 17 8 25
---------------- -------------- -----------
Total . . . . . . . . . . . . . . 64% 36% 100%
================ ============== ===========
The top twenty customers not affiliated with the Company accounted for
approximately 41% of the Company's net revenues in fiscal 1996. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 12% of the Company's net revenues in
fiscal 1996. No other customer of the Company accounted for more than 10% of
the Company's net revenues in fiscal 1996.
The Company's foreign and export sales were approximately $55.7
million,$79.6 million and $84.3 million for fiscal 1994, 1995 and 1996,
respectively. Additional information concerning foreign operations and export
sales is set forth in Note 12 of the Notes to Consolidated Financial
Statements appearing elsewhere herein.
MANUFACTURING PROCESS
High performance alloys require a lengthier, more complex melting process
and are more difficult to manufacture than lower performance alloys, such as
stainless steels. The alloying elements in high performance alloys must be
highly refined, and the manufacturing process must be tightly controlled to
produce precise chemical properties. The resulting alloyed material is more
difficult to process because, by design, it is more resistant to deformation.
Consequently, high performance alloys require that greater force be applied
when hot or cold working and are less susceptible to reduction or thinning
when rolling or forging, resulting in more cycles of rolling, annealing and
pickling than a lower performance alloy to achieve proper dimensions. Certain
alloys may undergo as many as 40 distinct stages of melting, remelting,
annealing, forging, rolling and pickling before they achieve the
specifications required by a customer. The Company manufactures products in
sheet, plate, tubular, billet, bar and wire forms, which represented 48%, 23%,
12%, 12%, 3% and 2%, respectively, of total volume sold in fiscal 1996 (after
giving effect to the conversion of billet to bar by the Company's
U.K.subsidiary).
The manufacturing process begins with raw materials being combined, melted
and refined in a precise manner to produce the chemical composition specified
for each alloy. For most alloys, this molten material is cast into electrodes
and additionally refined through electroslag remelting. The resulting ingots
are then forged or rolled to an intermediate shape and size depending upon the
intended final product. Intermediate shapes destined for flat products are
then sent through a series of hot and cold rolling, annealing and pickling
operations before being cut to final size.
The Argon Oxygen Decarburization ("AOD") gas controls in the Company's
primary melt facility remove carbon and other undesirable elements, thereby
allowing more tightly-controlled chemistries which in turn produce more
consistent properties in the alloys. The AOD gas control system also allows
for statistical process control monitoring in real time to improve product
quality.
The Company has a four-high Steckel mill for use in hot rolling
material.The four-high mill was installed in 1982 at a cost of approximately
$60.0 million and is one of only two such mills in the high performance alloy
industry. The mill is capable of generating approximately 12.0 million pounds
of separating force and rolling plate up to 72 inches wide. The mill includes
integrated computer controls (with automatic gauge control and programmed
rolling schedules), two coiling Steckel furnaces and five heating furnaces.
Computer-controlled rolling schedules for each of the hundreds of combinations
of alloy shapes and sizes the Company produces allow the mill to roll numerous
widths and gauges to exact specifications without stoppages or changeovers.
The Company also operates a three-high rolling mill and a two-high rolling
mill, each of which is capable of custom processing much smaller quantities of
material than the four-high mill. These mills provide the Company with
significant flexibility in running smaller batches of varied products in
response to customer requirements. The Company believes the flexibility
provided by the three-high and two-high mills provides the Company an
advantage over its major competitors in obtaining smaller specialty orders.
BACKLOG
As of September 30, 1996, the Company's backlog orders aggregated
approximately $53.7 million, compared to approximately $49.9 million at
September 30, 1995,and approximately $41.5 million at September 30, 1994. The
increase in backlog orders is primarily due to an increase in orders for
chemical processing and aerospace products worldwide during fiscal 1996.
Substantially all orders in the backlog at September 30, 1996 are expected to
be shipped within the twelve months beginning October 1, 1996. Due to the
cyclical nature of order entry experienced by the Company, there can be no
assurance that order entry will continue at current levels. The historical
and current backlog amounts shown in the following table are also indicative
of relative demand over the past few years.
HAYNES BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
1993 1994 1995 1996
----- ----- ----- -----
1st $41.5 $29.5 $49.7 $61.2
- --- ----- ----- ----- -----
2nd $38.9 $35.5 $64.8 $61.9
----- ----- ----- -----
3rd $31.5 $38.0 $55.8 $57.5
----- ----- ----- -----
4th $31.1 $41.5 $49.9 $53.7
- --- ----- ----- ----- -----
RAW MATERIALS
Nickel is the primary material used in the Company's alloys. Each pound of
alloy contains, on average, 0.48 pounds of nickel. Other raw materials include
cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin
raw material, purchased scrap and internally produced scrap. The significant
sources of cobalt are the countries of Zambia, Zaire and Russia; all other raw
materials used by the Company are available from a number of alternative
sources.
Since most of the Company's products are produced to specific orders, the
Company purchases materials against known production schedules. Materials are
purchased from several different suppliers, through consignment arrangements,
annual contracts and spot purchases. These arrangements involve a variety of
pricing mechanisms, but the Company generally can establish selling prices
with reference to known costs of materials, thereby reducing the risk
associated with changes in the cost of raw materials. The Company maintains a
policy of pricing its products at the time of order placement. As a result,
rapidly escalating raw material costs during the period between the time the
Company receives an order and the time the Company purchases the raw materials
used to fill such order, which has averaged approximately 30 days in recent
months, can negatively affect profitability even though the high performance
alloy industry has generally been able to pass raw material price increases
through to its customers.
Raw material costs account for a significant portion of the Company's cost
of sales. The prices of the Company's products are based in part on the cost
of raw materials, a significant portion of which is nickel. The Company covers
approximately half its open market exposure to nickel price changes through
hedging activities through the London Metals Exchange. The following table
sets forth the average per pound prices for nickel as reported by the London
Metals Exchange for the fiscal years indicated.
YEAR ENDED
SEPTEMBER 30, AVERAGE PRICE
- ---------------------------------------------------------- -----------------
1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.12
1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.77
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.29
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.21
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.48
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.53
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.54
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.66
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.56
RESEARCH AND TECHNICAL DEVELOPMENT
The Company's research facilities are located at the Company's Kokomo
facility and consist of 90,000 square feet of offices and laboratories, as
well as an additional 90,000 square feet of paved storage area. The Company
has ten fully equipped laboratories, including a mechanical test lab, a
metallographic lab, an electron microscopy lab, a corrosion lab and a high
temperature lab,among others. These facilities also contain a reduced scale,
fully equipped melt shop and process lab. As of September 30, 1996, the
research and technical development staff consisted of 37 persons, 15 of whom
have engineering or science degrees, including six with doctoral degrees, with
the majority of degrees in the field of metallurgical engineering.
Research and technical development costs relate to efforts to develop new
proprietary alloys, to improve current or develop new manufacturing methods,
to provide technical service to customers, to maintain quality assurance
methods and to provide metallurgical training to engineer and non-engineer
employees. The Company spent approximately $3.6 million, $3.0 million and
$3.4 million for research and technical development activities for fiscal
1994, 1995 and 1996, respectively.
During fiscal 1996, exploratory alloy development projects were focused
on new CRA products for hydrofluoric and phosphoric acid service. Engineering
projects include manufacturing process development, welding development and
application support for two large volume projects involving the LBGT and steel
making industries. The Company is also developing a computerized database
management system to better manage its corrosion, high temperature and
mechanical property data.
Over the last seven years, the Company's technical programs have yielded
seven new proprietary alloys and seven United States patents, with an
additional three United States patent applications pending. The Company
currently maintains a total of 42 United States patents and approximately 147
foreign counterpart patents targeted at countries with significant or
potential markets for the patented products. In fiscal 1996, approximately 25%
of the Company's net revenues was derived from the sale of patented products
and an additional approximately 46% was derived from the sale of products for
which patents formerly held by the Company had expired. While the Company
believes its patents are important to its competitive position, significant
barriers to entry continue to exist beyond the expiration of any patent
period. Five of the alloys considered by management to be of future commercial
significance, Ultimet, Hastelloy C-22, Haynes 230, Hastelloy G-30 and
Hastelloy G-50, are protected by United States patents that continue until the
years 2009, 2008, 2002, 2001 and 1998, respectively.
COMPETITION
The high performance alloy market is a highly competitive market in which
eight to ten producers participate in various product forms. The Company faces
strong competition from domestic and foreign manufacturers of both the
Company's high performance alloys and other competing metals. The Company's
primary competitors include Inco Alloys International, Inc., a subsidiary of
Inco Limited, Allegheny Ludlum Corporation and Krupp VDM GmbH. Prior to fiscal
1994,this competition, coupled with declining demand in several of the
Company's key markets, led to significant erosion in the price for certain of
the Company's products. The Company may face additional competition in the
future to the extent new materials are developed, such as plastics or
ceramics, that may be substituted for the Company's products.
EMPLOYEES
As of September 30, 1996, the Company had approximately 931 employees. All
eligible hourly employees at the Kokomo plant are covered by a collective
bargaining agreement with the United Steelworkers of America ("USWA") which
was ratified on June 11, 1996 and which expires on June 11, 1999. As of
September 30, 1996, 474 employees of the Kokomo facility were covered by the
collective bargaining agreement. The Company has not experienced a strike at
the Kokomo plant since 1967. None of the employees of the Company's Arcadia or
Openshaw plants are represented by a labor union. Management considers its
employee relations in each of the facilities to be satisfactory.
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ENVIRONMENTAL MATTERS
The Company's facilities and operations are subject to certain
foreign,federal, state and local laws and regulations relating to the
protection of human health and the environment, including those governing the
discharge of pollutants into the environment and the storage, handling, use,
treatment and disposal of hazardous substances and wastes. Violations of these
laws and regulations can result in the imposition of substantial penalties and
can require facilities improvements. In addition, the Company may be required
in the future to comply with certain regulations pertaining to the emission of
hazardous air pollutants under the Clean Air Act. However, since these
regulations have not been proposed or promulgated, the Company cannot predict
the cost, if any, associated with compliance with such regulations. Expenses
related to environmental compliance were $1.3 million for fiscal 1996 and are
expected to be approximately $3.2 million for fiscal year 1997 through fiscal
year 1998. Although there can be no assurance, based upon current information
available to the Company, the Company does not expect that costs of
environmental contingencies, individually or in the aggregate, will have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
The Company's facilities are subject to periodic inspection by various
regulatory authorities, who from time to time have issued findings of
violations of governing laws, regulations and permits. In the past five years,
the Company has paid administrative fines, none of which has exceeded $50,000,
for alleged violations relating to environmental matters, including the
handling and storage of hazardous wastes, and record keeping requirements
relating to, and handling of, polychlorinated biphenyls ("PCBs"). Although the
Company does not believe that similar regulatory or enforcement actions would
have a material impact on its operations, there can be no assurance that
violations will not be alleged or will not result in the assessment of
additional penalties in the future.
The Company has received permits from IDEM and EPA to close and to provide
post-closure monitoring and care for certain areas at the Kokomo facility used
for the storage and disposal of wastes, some of which are classified as
hazardous under applicable regulations. The closure project, essentially
complete, entailed installation of a clay liner under the disposal areas, a
leachate collection system and a clay cap and revegetation of the site.
Construction was completed in May 1994 and a closure certification has been
filed with IDEM. Thereafter, the Company will be required to monitor
groundwater and to continue post-closure maintenance of the former disposal
areas. The Company is aware of elevated levels of certain contaminants in the
groundwater. The Company believes that some or all of these contaminants may
have migrated from a nearby superfund site. If it is determined that the
disposal areas have impacted the groundwater underlying the Kokomo facility,
additional corrective action by the Company could be required. The Company is
unable to estimate the costs of such action, if any. There can be no
assurance, however, that the costs of future corrective action would not have
a material effect on the Company's financial condition, results of operations
or liquidity. Additionally, it is possible that the Company could be required
to obtain permits and undertake other closure projects and post-closure
commitments for any other waste management unit determined to exist at the
facility.
As a condition of these closure and post-closure permits, the Company must
provide and maintain assurances to IDEM and EPA of the Company's capability to
satisfy closure and post-closure ground water monitoring requirements,
including possible future corrective action as necessary. On April 8, 1996,
IDEM issued a Notice of Violation relating to the requirements for the former
disposal areas. An Agreed Order dated July 2, 1996 was entered into between
the Company and the IDEM in resolution of this Notice of Violation. The
Company paid a civil penalty of $15,000 provided for by the Agreed Order.
The Company has completed an investigation, pursuant to a work plan
approved by the EPA, of eight specifically identified solid waste management
units at the Kokomo facility. Results of this investigation have been filed
with the EPA. Based on the results of this investigation compared to
Indiana's Tier II clean-up goals, the Company believes that no further actions
will be necessary. Until the EPA reviews the results, the Company is unable
to determine whether further corrective action will be required or, if
required, whether it will have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The Company may also incur liability for alleged environmental damages
associated with the off-site transportation and disposal of its wastes. The
Company's operations generate hazardous wastes, and, while a large percentage
of these wastes are reclaimed or recycled, the Company also accumulates
hazardous wastes at each of its facilities for subsequent transportation and
disposal off-site by third parties. Generators of hazardous waste transported
to disposal sites where environmental problems are alleged to exist are
subject to claims under CERCLA, and state counterparts. CERCLA imposes strict,
joint and several liability for investigatory and cleanup costs upon waste
generators, site owners and operators and other "potentially responsible
parties" ("PRPs"). Based on its prior shipment of waste oil contaminated with
PCBs, the Company is one of approximately 700 PRPs in connection with the
cleanup of PCB contamination at the Rose Chemical site in Missouri. The
Company has contributed over $130,000 toward the private cleanup currently
being implemented by a group of many of these PRPs, approximately $52,000 of
which has been refunded, and does not anticipate that further significant
expenditures by the Company will be required in connection with this site.
Based on its prior shipment of certain hydraulic fluid, the Company is one of
approximately 300 PRPs in connection with the proposed cleanup of the
Fisher-Calo site in Indiana. The PRPs have negotiated a Consent Decree
implementing a remedial design/remedial action plan ("RD/RA") for the site
with the EPA. The Company has paid approximately $138,000 as its share of the
total estimated cost of the RD/RA under the Consent Decree. Based on
information available to the Company concerning the status of the cleanup
efforts at the Rose Chemical and Fisher-Calo sites, the large number of PRPs
at each site and the prior payments made by the Company in connection with
these sites, management does not expect the Company's involvement in these
sites to have a material adverse effect on the financial condition, results of
operations or liquidity of the Company. The Company may have generated
hazardous wastes disposed of at other sites potentially subject to CERCLA or
equivalent state law remedial action. Thus, there can be no assurance that the
Company will not be named as a PRP at additional sites in the future or that
the costs associated with those sites would not have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
In November 1988, the EPA approved start-up of a new waste water treatment
plant at the Arcadia, Louisiana facility, which discharges treated industrial
waste water to the municipal sewage system. After the Company exceeded certain
EPA effluent limitations in 1989, the EPA issued an administrative order in
1992 which set new effluent limitations for the facility. The waste water
plant is currently operating under this order and the Company believes it is
meeting such effluent limitations. However, the Company anticipates that in
the future Louisiana will take over waste water permitting authority from the
EPA and may issue a waste water permit, the conditions of which could require
modification to the plant. Reasonably anticipated modifications are not
expected to have a substantial impact on operations.
ITEM 2. PROPERTIES
The Company's owned facilities, and the products provided at each
facility, are as follows:
Kokomo, Indiana--all product forms, other than tubular goods.
Arcadia, Louisiana--welded and seamless tubular goods.
Openshaw, England--bar and billet for the European market.
The Kokomo plant, the primary production facility, is located on
approximately 236 acres of industrial property and includes over one million
square feet of building space. There are three sites consisting of ahead
quarters and research lab; melting and annealing furnaces, forge press and
several hot mills; and the four-high mill and sheet product cold working
equipment, including two cold strip mills. All alloys and product forms other
than tubular goods are produced in Kokomo.
The Arcadia plant consists of approximately 42 acres of land and over
135,000 square feet of buildings on a single site. Arcadia uses feedstock
produced in Kokomo to fabricate welded and seamless alloy pipe and tubing and
purchases extruded tube hollows to produce seamless titanium tubing.
Manufacturing processes at Arcadia require cold pilger mills, weld mills,
drawbenches, annealing furnaces and pickling facilities.
The United States facilities are subject to a mortgage which secures the
Company's obligations under the Company's Revolving Credit Facility. See Note
6 of Notes to Consolidated Financial Statements.
The Openshaw plant, located near Manchester, England, consists of
approximately 15 acres of land and over 200,000 square feet of buildings on a
single site. The plant produces bar and billet using billets produced in
Kokomo as feedstock. Additionally, products not competitive with the Company's
products are processed for third parties. The processes conducted at the
facility require hot rotary forges, bar mills and miscellaneous straightening,
turning and cutting equipment.
Although capacity can be limited from time to time by certain production
processes, the Company believes that its existing facilities will provide
sufficient capacity for current demand.
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ITEM 3. LEGAL PROCEEDINGS
In Leslie Baxter, et. al. vs. Haynes International, Inc. and Haynes Group
Insurance Plan, filed July 6, 1995 in the U.S. District Court, Southern
District of Indiana, Indianapolis Division, retirees and the surviving spouse
of a retiree filed suit on behalf of themselves and similarly situated
retirees and surviving spouses for restoration of the retiree health insurance
to benefit levels prevailing before the reduction of those benefit levels on
January 1, 1995 and to maintain the restored insurance benefit levels for the
lives of the covered retirees and their surviving spouses. The suit also seeks
judgment in damages for the benefits that have been lost as a result of the
January 1, 1995 reductions in benefit levels and for the medical expenses,
premiums paid and other damages incurred, including reasonable attorneys' fees
and costs of maintaining the suit. This lawsuit is in the very early stages of
discovery, and the Company is not able at this time to assess the likelihood
that or the extent to which this lawsuit could have an impact on the Company's
financial position or operations. The Company intends to vigorously defend
against the claims.
The Company recently completed an examination by the Internal Revenue
Service ("IRS") for the five taxable years ended September 30, 1993 (the
"Years in Issue"). The IRS has proposed to disallow aggregate deductions
claimed by the Company during the Years in Issue in an amount aggregating
approximately $5.5 million, relating to the amortization of certain loan fees
totaling $10.4 million incurred in connection with the acquisition of the
Company by Morgan, Lewis, Githens & Ahn ("MLGA") and the management of the
Company in August 1989 ("1989 Acquisition"). The Company claimed similar
deductions in 1994 through 1996. The loan fees are being amortized over a
10-year period ending in 1999. In addition to proposed disallowance of
deductions claimed during the Years in Issue, the IRS' position, if sustained,
would prohibit amortization deductions for the years following the Years in
Issue in an aggregate amount of approximately $4.9 million, and the amount of
available net operating loss carryforwards would be reduced accordingly. The
Company has formally protested the disallowance of these deductions. On
August 28, 1996, the Company met with officials from the IRS Appeals Office
and received a favorable verbal confirmation that the deductions would be
allowed as a result of the recent passage of the Small Business Job Protection
Act of 1996. The Company is awaiting written confirmation of the IRS'
position.
The Company also is involved in other routine litigation incidental to the
conduct of its business, none of which is believed by management to be
material.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established trading market for the common stock of the
Company.
As of December 26, 1996 there was one holder of the common stock of the
Company.
There have been no cash dividends declared on the common stock for the
two fiscal years ended September 30, 1996.
The payment of dividends is limited by terms of certain debt agreements
to which the Company is a party. See Note 6 to the Consolidated Financial
Statements of the Company included in this Annual Report in response to Item
8.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIO AND OPERATING DATA)
The following table sets forth selected consolidated financial data of
the Company. The selected consolidated financial data as of and for the years
ended September 30, 1992, 1993, 1994, 1995 and 1996 are derived from the
audited consolidated financial statements of the Company.
These selected financial data are not covered by the auditor's report and
are qualified in their entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Form 10-K.
Year Ended September 30,
Statement of Operations Data:
1992 1993 1994 1995 1996
------------ ----------- ------------ --------- -----------
Net revenues $ 169,344 $ 162,454 $ 150,578 $201,933 $ 226,402
Cost of sales 152,911(2) 137,102 171,957(3) 167,196 181,173
Selling and administrative expenses 19,641(2) 14,569 15,039 15,475 19,966
Research and technical expenses 3,894 3,603 3,630 3,049 3,411
Operating income (loss) (7,102) 7,180 (40,048) 16,213 21,852
Other cost, net 882(2) 400 816 1,767 590
Interest expense, net 20,107 18,497 19,582 19,904 21,102
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (16,771) (8,275) (60,866) (6,771) 160
Extraordinary item, net of tax benefit (7,256)(9)
Cumulative effect of change in accounting
principle (net of tax benefit) -- -- (79,630)(4) -- --
------------ ----------- ------------ --------- -----------
Net loss (16,771) (8,275) (140,496) (6,771) (9,036)
Year Ended September 30,
Balance Sheet Data: 1992 1993 1994 1995 1996
----------- ---------- ---------- ---------- ----------
Working capital (5) $ 39,344 $ 72,131 $ 60,182 $ 62,616 $ 57,307
Property, plant and equipment, net 60,700 51,676 43,119 36,863 31,157
Total assets 214,585 194,200 145,723 151,316 161,489
Total debt 142,194 140,180 148,141 152,477 168,238
Accrued post-retirement benefits -- -- 94,148 94,830 95,813
Stockholder's equity (Capital deficit) 35,162 22,938 (116,029) (121,909) (130,341)
September 30,
Other Financial Data: 1992 1993 1994 1995 1996
--------- ----------- --------- -------- --------
Depreciation and amortization (6) $ 16,484 $ 13,766 $ 51,555 $ 9,000 $ 9,042
Capital expenditures 821 56 771 1,934 2,092
EBITDA (7) 8,500 20,546 10,691 23,446 32,141
Ratio of EBITDA to interest expense 0.42x 1.11x 0.55x 1.18x 1.52x
Ratio of earnings before fixed
charges to fixed charges (8) -- -- -- -- 1.01x
Net cash provided from (used in) operations $ 19,850 $ 5,711 $(12,801) $(2,883) $(5,343)
Net cash provided from (used in) investment activities (757) 318 746 (1,895) (2,025)
Net cash provided from (used in) financing
activities (16,440) (2,014) 7,102 3,912 7,116
(1) The Company was acquired by MLGA and the management of the Company in August 1989. For financial
statement purposes, the 1989 Acquisition was accounted for as a purchase transaction effective September 1,
1989; accordingly, inventories were adjusted to reflect estimated fair values at that date. This adjustment to
inventories was amortized to cost of sales as inventories were reduced from the base layer. Non-cash charges
for this adjustment included in cost of sales were $5,210, $3,686 and $488 for fiscal 1992, 1993 and 1994,
respectively; no charges have been recognized since fiscal 1994.
(2) Includes costs related to the implementation of certain cost reduction measures, the implementation of
a just-in-time and total quality management program and the renegotiation of the terms of the 1989 Acquisition
credit agreement. In fiscal 1992, these charges were reflected in cost of sales, selling and administrative
expenses, and other cost, net in the amounts of $6,937, $1,156 and $603, respectively.
(3) Reflects the write-off of $37,117 of goodwill created in connection with the 1989 Acquisition
remaining at September 30, 1994. See Note 10 of the Notes to Consolidated Financial Statements.
(4) During fiscal 1994, the Company adopted SFAS 106. The Company elected to immediately recognize the
transition obligation for benefits earned as of October 1, 1993, resulting in a non-cash charge of $79,630,
net of a $10,580 tax benefit, representing the cumulative effect of the change in accounting principles. The
tax benefit recognized was limited to then existing net deferred tax liabilities. See Note 8 of the Notes to
Consolidated Financial Statements.
(5) Reflects the excess of current assets over historical and adjusted current liabilities as set forth in
the Consolidated Financial Statements.
(6) Reflects (i) depreciation and amortization as presented in the Company's Consolidated Statement of
Cash Flows and set forth in note (7) below, plus (ii) other non-cash charges, including the amortization of
prepaid pension costs (which is included in the change in other asset category) and the amortization of
inventory costs as described in note (1) above, minus amortization of debt issuance costs, all as set forth in
note (7) below.
(7) Represents for the relevant period net income plus expenses recognized for interest, taxes,
depreciation, amortization and other non-cash charges (excluding any non-cash charges which require accrual or
reserve for cash charges for any future period and excluding the refinancing costs set forth in Note 9, part
(a) and (b) below for fiscal 1996). In addition to net interest expense as listed in the table, the following
charges are added to net income to calculate EBITDA:
1992 1993 1994 1995 1996
--------- -------- -------- -------- --------
Provision for (benefit from) income taxes $(11,320) $(3,442) $ 420 $ 1,313 $ 1,940
Depreciation 8,752 8,650 8,208 8,188 7,751
Amortization:
Debt issuance costs 1,333 2,120 1,680 1,444 4,698
Goodwill 1,490 1,487 38,607 -- --
Inventory (see note (1) above) 5,210 3,686 488 -- --
Prepaid pension costs 1,032 (57) 314 130 308
--------- -------- -------- -------- --------
9,065 7,236 41,089 1,574 5,006
SFAS 106-Post-retirement -- -- 3,938 682 983
Amortization of debt issuance costs (1,333) (2,120) (1,680) (1,444) (4,698)
--------- -------- -------- -------- --------
Total $ 5,164 $10,324 $51,975 $10,313 $10,982
- ------------------------------------------ ========= ======== ======== ======== ========
EBITDA should not be construed as a substitute for income from operations, net earnings
(loss) or cash flows from operating activities determined in accordance with Generally
Accepted Accounting Principles ("GAAP"). The Company has included EBITDA because it believes
it is commonly used by certain investors and analysts to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a company's ability
to service debt. Because EBITDA is not calculated in the same manner by all entities, EBITDA
as calculated by the Company may not necessarily be comparable to that of the Company's
competitors or of other entities.
(8) For purposes of these computations, earnings before fixed charges consist of income
(loss) before provision for (benefit from) income taxes and cumulative effect of change in
accounting principle plus fixed charges. Fixed charges consist of interest on debt and
amortization of debt issuance costs. Earnings were insufficient to cover fixed charges by
$28,091, $11,717, $60,446, and $5,458 for fiscal 1992, 1993, 1994 and 1995, respectively.
(9) During fiscal 1996, the Company successfully refinanced its debt with the issuance of
$140,000 Senior Notes due 2004 and an amendment to its Revolving Credit Facility with
Congress Financial Corporation ("Congress"). As a result of this refinancing effort, certain
non-recurring charges were recorded as follows: (a) $7,256 was recorded as the aggregate of
extraordinary items which represents the extraordinary loss on the redemption of the
Company's 113% Senior Secured Notes due 1998 and 132% Senior Subordinated Notes due 1999
(collectively, the "Old Notes") and is comprised of $3,911 of prepayment penalties incurred
in connection with the redemption and $3,345 of deferred debt issuance costs which were
written off upon consummation of the redemption; (b) $1,837 of Selling and Administrative
Expense which represents costs incurred with a postponed initial public offering of the
Company's common stock; and (c) $924 of Interest Expense which represents the net interest
expense (approximately $1,500 interest expense, less approximately $600 interest income)
incurred during the period between the issuance of the Senior Notes and the redemption of the
Old Notes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 61% and 39%, respectively, of the Company's net revenues
in fiscal 1996. Based on available industry data, the Company believes that it
is one of three principal producers of high performance alloys in flat product
form, which includes sheet, coil and plate forms, and also produces its alloys
in round and tubular forms. In fiscal 1996, flat products accounted for 72% of
shipments and 65% of net revenues.
The Company's annual production capacity varies depending upon the mix of
alloys, forms, product sizes, gauges and order sizes. Based on the current
product mix, the Company estimates that its annual production capacity, which
has been unchanged for the past five years, is approximately 20.0 million
pounds. As a result of changes in the Company's primary markets, sales volume
has ranged from a high of 16.4 million pounds in fiscal 1996, to a low of 13.3
million pounds in fiscal 1994. The Company is not currently capacity
constrained, but has planned capital expenditures of approximately $17.6
million from fiscal 1997 through fiscal 1998, one of the principal benefits of
which will be to increase annual capacity by approximately 25% to
approximately 25.0 million pounds. See "--Liquidity and Capital Resources."
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers,
three wholly-owned European subsidiaries and sales agents serving the Pacific
Rim who operate on a commission basis. Approximately 75% of the Company's net
revenues in fiscal 1996 was generated by the Company's direct sales
organization. The remaining 25% of the Company's fiscal 1996 net revenues was
generated by independent distributors and licensees in the United States,
Europe and Japan, some of whom have been associated with the Company for over
25 years.
The proximity of production facilities to export customers is not a
significant competitive factor, since freight and duty costs per pound are
minor in comparison to the selling price per pound of high performance alloy
products. In fiscal 1996, sales to customers outside the United States
accounted for approximately 36% of the Company's net revenues. Sales of
domestically-produced products accounted for approximately 38% of the
Company's foreign sales in fiscal 1996, and the balance of foreign sales was
derived from sales of products produced overseas.
The high performance alloy industry is characterized by high capital
investment and high fixed costs, and profitability is therefore very sensitive
to changes in volume. The cost of raw materials is the primary variable cost
in the high performance alloy manufacturing process and represents
approximately one-half of total manufacturing costs. Other manufacturing
costs, such as labor, energy, maintenance and supplies, often thought of as
variable, have a significant fixed element. Accordingly, relatively small
changes in volume can result in significant variations in earnings. The
Company's results in fiscal 1994 reflect this sensitivity. While volume
declined by 13% from fiscal 1993 to fiscal 1994, primarily due to declines in
demand for the Company's products in the oil and gas and FGD markets, EBITDA
calculated as described in Note (7) to Selected Consolidated Financial Data,
declined 48%, despite a 7% increase in the average selling price per pound of
the Company's products.
In fiscal 1996, proprietary products represented approximately 25% of the
Company's net revenues. In addition to these patent-protected alloys, several
other alloys manufactured by the Company have little or no direct competition
because they are difficult to produce and require relatively small production
runs to satisfy demand. In fiscal 1996, these other alloys represented
approximately 19% of the Company's net revenues.
Order to shipment lead times can be a competitive factor as well as an
indication of the strength of the demand for high performance alloys. The
Company's current average manufacturing lead time for flat products is
approximately 10 to 12 weeks, although due to current backlog levels, lead
times from order to shipment are approximately 14 to 18 weeks.
OVERVIEW OF MARKETS
A breakdown of sales, shipments and average selling prices to the markets
served by the Company for the last five fiscal years is shown in the following
table:
1992 1992 1993 1993 1994 1994 1995 1995 1996
SALES (DOLLARS % of % of % of Total % of Total
IN MILLIONS) Amount Total Amount Total Amount Amount Amount
--------- ------- --------- ------- --------- ------- --------- ------- ---------
Aerospace. . . . . . $ 45.7 27.0% $ 46.7 28.7% $ 46.4 30.8% $ 66.4 32.9% $ 87.1
Chemical processing 52.8 31.2 52.2 32.1 50.1 33.3 72.2 35.8 83.0
Land-based gas 10.7 6.3 12.6 7.8 17.0 11.3 14.3 7.1 16.4
turbines
Flue gas 11.4 6.7 17.4 10.7 10.2 6.7 6.6 3.3 8.2
desulfurization
Oil and gas 18.8 11.1 11.0 6.8 4.2 2.8 4.5 2.2 4.3
Other markets 28.0 16.6 20.5 12.6 20.6 13.7 34.6 17.1 23.8
------ ------ ------ ------ ------ ------ ------ ------ ------
Total product 167.4 98.9 160.4 98.7 148.5 98.6 198.6 98.4 222.8
Other revenue(1) 1.9 1.1 2.1 1.3 2.1 1.4 3.3 1.6 3.6
Net revenues $ 169.3 100.0% $ 162.5 100.0% $ 150.6 100.0% $ 201.9 100.0% $ 226.4
U.S. $ 116.4 $ 109.1 $ 94.8 $ 122.3 $ 142.0
Foreign $ 52.9 $ 53.4 $ 55.8 $ 79.6 $ 84.4
SHIPMENTS BY OF
MARKET (MILLIONS
POUNDS)
Aerospace 3.4 24.5% 3.3 21.6% 3.3 24.8% 4.7 28.8% 5.8
Chemical processing 4.6 33.1 5.2 34.0 5.0 37.6 6.1 37.4 6.6
Land-based gas
turbines 1.3 9.4 1.2 7.8 1.6 12.0 1.3 8.0 1.4
Flue gas
desulfurization 1.6 11.4 2.9 19.0 1.5 11.3 0.9 5.5 0.9
Oil and gas 1.3 9.4 1.1 7.2 0.4 3.0 0.5 3.1 0.3
Other markets 1.7 12.2 1.6 10.4 1.5 11.3 2.8 17.2 1.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Total shipments 13.9 100.0% 15.3 100.0% 13.3 100.0% 16.3 100.0% 16.4
AVERAGE SELLING
PRICE PER POUND
Aerospace. . . . . . $ 13.44 $ 14.15 $ 14.06 $ 14.13 $ 15.02
Chemical processing 11.48 10.04 10.02 11.84 12.58
Land-based gas
turbines 8.23 10.50 10.63 11.00 11.71
Flue gas
desulfurization 7.13 6.00 6.80 7.33 9.11
Oil and gas 14.46 10.00 10.50 9.00 14.33
Other markets 16.47 12.81 13.73 12.36 17.00
All markets 12.04 10.48 11.17 12.18 13.59
1996
SALES (DOLLARS % of
IN MILLIONS) Total
-------
Aerospace. . . . . . 38.5%
Chemical processing 36.7
Land-based gas 7.2
turbines
Flue gas 3.6
desulfurization
Oil and gas 1.9
Other markets 10.5
------
Total product 98.4
Other revenue(1) 1.6
Net revenues 100.0%
U.S.
Foreign
SHIPMENTS BY OF
MARKET (MILLIONS
POUNDS)
Aerospace 35.4%
Chemical processing 40.2
Land-based gas
turbines 8.5
Flue gas
desulfurization 5.5
Oil and gas 1.8
Other markets 8.6
------
Total shipments 100.0%
AVERAGE SELLING
PRICE PER POUND
Aerospace
Chemical processing
Land-based gas
turbines
Flue gas
desulfurization
Oil and gas
Other markets
All markets
- --------------------
(1) Includes toll conversion and royalty income.
Fluctuations in net revenues and volume from fiscal 1992 through fiscal
1996 are a direct result of significant changes in each of the Company's major
markets.
Aerospace. Demand for the Company's products in the aerospace industry is
driven by orders for new jet engines as well as requirements for spare parts
and replacement parts for jet engines. Demand for the Company's aerospace
products declined significantly from fiscal 1991 to fiscal 1992, as order
rates for commercial aircraft fell below delivery rates due to cancellations
and deferrals of previously placed orders. The Company believes that, as a
result of these cancellations and deferrals, engine manufacturers and their
fabricators and suppliers were caught with excess inventories. The draw down
of these inventories, and the implementation of just-in-time delivery
requirements by many jet engine manufacturers, exacerbated the decline
experienced by suppliers to these manufacturers, including the Company. Demand
for products used in manufacturing military aircraft and engines also dropped
during this period as domestic defense spending declined following the Persian
Gulf War. These conditions persisted through fiscal 1994.
The Company began to see a recovery in the demand for its aerospace
products at the beginning of fiscal 1995. Reflecting increased aircraft
production and maintenance, the Company's net revenues from sales to the
aerospace industry in 1996 increased 31.2% over the comparable period in
fiscal 1995.
Chemical Processing. Demand for the Company's products in the chemical
processing industry is driven primarily by maintenance requirements of
chemical processing facilities, and tends to track overall economic activity
due to the diverse nature of chemical products and their applications. Major
projects involving the expansion of existing chemical processing facilities or
the construction of new facilities periodically increase demand for CRA
products in the industry. Demand for the Company's products used in the
chemical processing industry declined in fiscal 1991 and fiscal 1992, but
began to increase in late fiscal 1993. In fiscal 1996, sales of the Company's
products to the chemical processing industry reached a five-year high, and the
Company believes that the outlook for sales of the Company's products to the
chemical processing industry continues to improve. Concerns regarding the
reliability of chemical processing facilities, their potential impact on the
environment and the safety of their personnel as well as the need for higher
throughput should support demand for more sophisticated alloys, such as the
Company's CRA products.
The Company expects that growth in the chemical processing industry will
result from volume increases and selective price increases as a result of
increased demand. In addition, the Company's key proprietary CRA products, the
recently introduced Hastelloy C-2000, which the Company believes provides
better overall corrosion resistance and versatility than any other readily
available CRA product, and Hastelloy C-22, are expected to contribute to the
Company's growth in this market, although there can be no assurance that this
will be the case.
Land-Based Gas Turbines. The Company leveraged its metallurgical expertise
to develop LBGT applications for alloys it had historically sold to the
aerospace industry. Electric generating facilities powered by land-based gas
turbines are less expensive to construct and operate and produce fewer sulfur
dioxide ("SO2") emissions than traditional fossil fuel-fired facilities. The
Company believes these factors are primarily responsible for creating demand
for its products in the LBGT industry. Prior to the enactment of the Clean Air
Act of 1990, as amended (the "Clean Air Act"), land-based gas turbines were
used primarily to satisfy peak power requirements. However, legislated
standards for lowering emissions from fossil fuel-fired electric utilities and
cogeneration facilities, such as the Clean Air Act, together with self-imposed
standards, contributed to increased demand for some of the Company's products
in the early 1990s, when Phase I of the Clean Air Act was being implemented.
The Company believes that land-based gas turbines are gaining acceptance as a
clean, low-cost alternative to fossil fuel-fired electric generating
facilities. The Company believes that compliance with Phase II of the Clean
Air Act, which begins in 2000, will further contribute to demand for its
products.
Flue Gas Desulfurization. The Clean Air Act is the primary factor
determining the demand for high performance alloys in the FGD industry. FGD
projects have been undertaken by electric utilities and cogeneration
facilities powered by fossil fuels in the United States, Europe and the
Pacific Rim in response to concerns over emissions. FGD projects are generally
highly visible and as a result are highly price competitive, especially when
demand for high performance alloys in other major markets is weak. The
Company anticipates increasing sales opportunities in the FGD market as
deadlines for Phase II of the Clean Air Act approach in 2000.
Oil and Gas. The Company's participation in the oil and gas industry
consists primarily of providing tubular goods for sour gas production. Demand
for the Company's products in this industry is driven by the rate of
development of sour gas fields, which in turn is driven by the price of
natural gas and the need to commence production in order to protect leases.
This market was very active in fiscal 1991, especially in the offshore sour
gas fields in the Gulf of Mexico, but demand for the Company's sour gas
tubular products has declined significantly since that time. Due to the
volatility of the oil and gas industry, the Company has chosen not to invest
in certain manufacturing equipment necessary to perform certain intermediate
steps of the manufacturing process for these tubular products. However, the
Company can outsource the necessary processing steps in the manufacture of
these tubulars when prices rise to attractive levels. The Company intends to
selectively take advantage of future opportunities as they arise, but plans no
capital expenditures to increase its internal capabilities in this area.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1996 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. Many of the Company's lower volume proprietary
alloys are experiencing growing demand in these other markets. Markets capable
of providing growth are being driven by increasing performance, reliability
and service life requirements for products used in these markets, which could
provide further applications for the Company's products.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated
statements of operations data as a percentage of net revenues:
YEAR ENDED September 30,
----------- ---------- --------
1994 1995 1996
----------- ---------- --------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 89.6(1) 82.8 80.0
Selling and administrative expenses 10.0 7.7 8.8(4)
Research and technical expenses 2.4 1.5 1.5
Other cost, net 0.5 0.9 0.3
Interest expense 13.2 10.0 9.7(4)
Interest income (0.2) (0.2) (0.4)(4)
Goodwill write-off 24.6(2) -- --
Income (loss) before provision for income taxes, extraordinary
items, and cumulative effect of change in accounting principle (40.1) (2.7) 0.1
Provision for (benefit from) income taxes 0.3 0.6 0.9
Extraordinary item, net of tax benefit (3.2)(4)
Cumulative effect of change in accounting principle, (net of tax
benefit) (52.9)(3) -- --
Net loss (93.3)% (3.3)% (4.0)%
- ----------------------------------------------------------------- =========== ========== ========
- -----------------------------
(1) For financial statement purposes, the 1989 Acquisition was accounted for as a purchase
transaction effective September 1, 1989; accordingly, inventories were adjusted to reflect estimated
fair values at that date. This adjustment to inventories was amortized to cost of sales as
inventories were reduced from the base layer. Non-cash charges for this adjustment included in cost
of sales were approximately $488,000 for fiscal 1994 and no charges have been recognized since
fiscal 1994.
(2) Reflects the write-off of $37.1 million of goodwill created in connection with the 1989
Acquisition remaining at September 30, 1994. See Note 10 of the Notes to Consolidated Financial
Statements.
(3) During fiscal 1994, the Company adopted SFAS 106. The Company elected to immediately
recognize the transition obligation for benefits earned as of October 1, 1993, resulting in a
non-cash charge of approximately $79.6 million net of an approximately $10.6 million tax benefit,
representing the cumulative effect of the change in accounting principle. The tax benefit recognized
was limited to then existing net deferred tax liabilities. See Note 8 of the Notes to Consolidated
Financial Statements.
(4) During 1996, the Company refinanced its debt and certain non-recurring charges were recorded
as a result of this refinancing effort as follows: (a) approximately $7.3 million was recorded as
the aggregate of extraordinary items which represents the extraordinary loss on the redemption of
the Senior Secured Notes and Senior Subordinated Notes and is comprised of approximately $3.9
million of prepayment penalties incurred in connection with the redemption and approximately $3.3
million of deferred debt issuance costs which were written off upon consummation of the redemption;
(b) approximately $1.8 million of Selling and Administrative Expense which represents costs incurred
with a postponed initial public offering of the Company's common stock; and (c) $924,000 of Interest
Expense which represents the net interest expense (approximately $1.5 million interest expense less
approximately $600,000 interest income) incurred during the period between the issuance of the
Senior Notes and the redemption of the Senior Secured and Senior Subordinated Notes.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Net revenues increased approximately $24.5 million, or 12.1%, to
approximately $226.4 million in fiscal 1996 from approximately $201.9 million
in fiscal 1995, primarily as a result of an 11.6% increase in the average
selling price per pound, from $12.18 to $13.59. Shipments increased by 0.6%
to 16.4 million pounds in fiscal 1996 from 16.3 million pounds in fiscal 1995,
as volume increases in the aerospace, chemical processing and LBGT markets
offset lower volumes in the oil and gas and other markets.
Sales to the aerospace market increased by 31.2% to approximately $87.1
millon in fiscal 1996 from approximately $66.4 million in fiscal 1995. Volume
increased 23.4% and the average selling price per pound increased 6.3%.
Increased demand for the Company's products in fiscal 1996 from the aerospace
market was generated primarily by domestic engine producers, as demand in
Europe remained relatively flat.
Sales to the chemical processing industry increased 15.0% to
approximately $83.0 million in fiscal 1996 from approximately $72.2 million in
fiscal 1995. Volume increased 8.2% despite lower exports to the Asia Pacific
Rim. In addition, the average selling price per pound increased 6.3% as a
result of higher demand from both the domestic and European markets.
Sales to the LBGT market increased 14.7% to approximately $16.4 million
in fiscal 1996 from approximately $14.3 million in fiscal 1995 as a result of
an 7.7% increase in volume and a 6.5% increase in the average selling price
per pound. This reflected strong demand for cleaner burning power generation
from gas turbines. In addition, the Company's sales to this market have been
favorably impacted by its success in marketing Haynes 230 to European turbine
manufacturers as a replacement for competing alloys.
Sales to the FGD market increased 24.2% to approximately $8.2 million in
fiscal 1996 from approximately $6.6 million in fiscal 1995. Volume was
essentially unchanged; however, average selling price per pound increased by
24.3%.
Sales to the oil and gas industry decreased 4.4% to approximately $4.3
million in fiscal 1996 from sales of approximately $4.5 million in fiscal
1995. Sales to this market occurred primarily in the third quarter for both
fiscal years due to sour gas projects in Mobile Bay off the coast of Alabama.
Volume decreased 40.0%, while average selling price per pound increased 59.2%
due primarily to a favorable product mix.
Sales to other markets decreased by 31.8% to approximately $23.8 million
for fiscal 1996 from approximately $34.9 million in fiscal 1995, as a result
of a 50.0% decrease in volume which was only partially offset by a 37.5%
increase in average selling price per pound. The Company benefitted from a
one-time order of approximately $3.5 million for a major waste treatment
facility in Eastern Europe and a $5.1 million one-time order for
defense-related recuperators on M-1 tanks in the first nine months of fiscal
1995. Sales to the waste incineration market increased as a result of greater
use of the Company's products in high temperature corrosion applications. In
addition, increased use of Haynes HR-120 as a substitute for competing
products (including stainless steel) in the industrial heating market led to
higher sales in that segment.
Cost of sales increased by approximately $14.0 million, or 8.4% to
approximately $181.2 million in fiscal 1996 from approximately $167.2 million
in fiscal 1995. However, cost of sales as a percent of net revenues decreased
to 80.0% from 82.3% in the respective periods as a result of higher average
selling prices and a favorable change in product mix. Volume in the
higher-market high value-added product forms such as sheet, wire and seamless
tubulars increased in fiscal 1996 over fiscal 1995 levels. Increased capacity
utilization in the higher-cost operations used to manufacture these forms led
to efficiencies that lowered the per unit cost. Also, during fiscal 1995 raw
material costs escalated thereby temporarily reducing margins until price
increases could be fully implemented. In fiscal 1996, these increased costs
had been fully passed through to a greater extent as reflected in higher
selling prices.
Selling and administrative expenses increased approximately $4.5 million,
or 29.0% to approximately $20.0 million for fiscal 1996 from approximately
$15.5 million in fiscal 1995. The increase was primarily a result of salary
increases and the payment and accrual of management and employee bonuses of
approximately $1.9 million which were awarded for fiscal 1995 and fiscal 1996
performance. Selling and administrative expenses also include approximately
$1.8 million of costs incurred in connection with a postponed initial public
offering of the Company's common stock. In addition, sales and marketing
personnel were hired as a part of the Company's efforts to increase market
coverage and customer contact.
Research and technical expenses increased approximately $362,000 or
11.9%, to approximately $3.4 million in fiscal 1996 from approximately $3.0
million in fiscal 1995, primarily as a result of salary increases. Headcount
increased as part of the Company's ongoing commitment to technological
leadership.
As a result of the above factors, the Company recognized operating income
for fiscal 1996 of approximately $21.9 million, approximately $4.9 million of
which was contributed by the Company's foreign subsidiaries. For fiscal 1995,
operating income was approximately $16.2 million, of which approximately $5.3
million was contributed by the Company's foreign subsidiaries.
Other costs, net decreased approximately $1.2 million or 66.6% to
approximately $590,000 for fiscal 1996 from approximately $1.8 million in the
same period in fiscal 1995, primarily as a result of foreign exchange gains in
fiscal 1996 compared to foreign exchange losses in fiscal 1995 and a $582,000
reduction in other costs associated with the fiscal 1995 purchase of options
to acquire the then outstanding Subordinated Notes.
Interest expense increased approximately $1.8 million or 8.7% to
approximately $22.0 million or fiscal 1996 from approximately $20.2 million
for the same period in fiscal 1995, due primarily to higher average borrowings
under the Existing Credit Facility and an additional $1.5 million of interest
expense incurred during the period between the issuance of the Senior Notes
and the redemption of the Senior Secured Notes and Senior Subordinated Notes.
The provision for income taxes of approximately $1.9 million for fiscal
1996 increased by approximately $672,000 from approximately $1.3 million for
fiscal 1995, due primarily to taxes on foreign earnings against which the
Company was unable to utilize its U.S. federal income tax net operating loss
carryforwards.
Extraordinary items, net of tax benefit of approximately $7.3 million,
were recorded in fiscal 1996 representing the extraordinary loss on the
redemption of the Senior Secured Notes and Senior Subordinated Notes and is
comprised of approximately $3.9 million of prepayment penalties incurred as a
result of the redemption and approximately $3.3 million of deferred debt
issuance costs which were written off upon redemption. No tax benefit was
recognized due to the valuation reserve established for tax reporting
purposes.
As a result of the above factors, the Company recognized a net loss for
fiscal 1996 of approximately $9.0 mllion, compared to a net loss of
approximately $6.8 million for fiscal 1995.
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YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Net revenues increased approximately $51.3 million, or 34.1%, to
approximately $201.9 million in fiscal 1995 from approximately $150.6 million
in fiscal 1994, as a result of a 22.6% increase in volume to 16.3 million
pounds from approximately 13.3 million pounds and a 9.0% increase in average
selling price to $12.18 per pound from $11.17 per pound. Volume increases were
due to higher demand in the aerospace, chemical processing, waste incineration
and industrial heating industries. Alloy price increases were implemented in
fiscal 1995 in response to rising raw material costs, which resulted in higher
average selling prices.
Sales to the aerospace market increased 43.1% to approximately $66.4
million in fiscal 1995 from approximately $46.4 million in fiscal 1994 due to
a 42.4% increase in volume as reflected by the increased order backlog for
commercial aircraft and jet engines in fiscal 1995. In addition, the Company
greatly increased its sales to distributors serving the aerospace market by
meeting competitive prices for certain higher volume HTA products. Due to
changes in product mix, the average selling price per pound to the aerospace
market in fiscal 1995 remained essentially flat as compared to fiscal 1994
despite generally higher alloy prices.
Sales to the chemical processing industry increased 44.1% to approximately
$72.2 million in fiscal 1995 from approximately $50.1 million in fiscal 1994
as a result of higher spending in the United States and Europe for smaller
maintenance and improvement projects, as well as along the Pacific Rim for
certain large capacity expansion projects. Volume increased 22.0% and average
selling price per pound increased 18.2%. The large Pacific Rim projects were
very competitively bid upon, resulting in lower average selling prices per
pound for these projects as compared to other projects. The lower average
selling prices for these products were more than offset, however, by higher
prices in smaller projects. In addition, the Company was favorably impacted in
fiscal 1995 by its shift from production of a low-priced duplex stainless
steel that it had manufactured for several years to other higher-priced,
higher-margin products as a result of stronger market demand for such
products.
Sales to the LBGT market decreased 15.9% to approximately $14.3 million in
fiscal 1995 from approximately $17.0 million in fiscal 1994. During fiscal
1995, a few of the larger LBGT manufacturers decreased purchases of alloys as
they reduced their inventories; as a result, the Company's volume decreased
18.8%. Although Haynes 230 was gaining acceptance, especially in Europe, the
Company experienced temporary disruptions in sales of this product due to
production and delivery problems, and as a result the Company's fiscal 1995
average selling price per pound was unchanged as compared to fiscal 1994.
Sales to the FGD market declined 35.3% to approximately $6.6 million in
fiscal 1995 from approximately $10.2 million in fiscal 1994 as a result of a
40.0% decrease in volume and a 7.8% increase in average selling price per
pound. Sharply lower domestic sales were partially offset by increased sales
in Europe and along the Pacific Rim. The weakness in domestic markets
reflected lower demand for wet scrubbing facilities for fossil fuel-fired
electric generating plants.
Demand in the oil and gas market has been weak and orders have been only
sporadic since fiscal 1992, when a major sour gas production project in the
Gulf of Mexico was completed. Sales increased 7.1% in fiscal 1995 as compared
to fiscal 1994 as a result of a 25.0% increase in volume, which was partially
offset by a 14.3% decrease in average selling price per pound.
Sales to other markets increased 68.0% to approximately $34.6 million in
fiscal 1995 from approximately $20.6 million in fiscal 1994 due primarily to a
shipment in fiscal 1995 to a large waste treatment project destined for
installation in Eastern Europe and the completion of a short-term contract in
support of the U.S. Army's M-1 tank program. These projects resulted in an
86.7% increase in volume in fiscal 1995 as compared to fiscal 1994 and a 10.0%
decrease in average selling price per pound for the same periods.
Cost of sales decreased approximately $4.8 million, or 2.8%, to
approximately $167.2 million in fiscal 1995 from approximately $172.0 million
in fiscal 1994. Fiscal 1994 cost of sales included the write-off of goodwill
as discussed in Note 10 of the Notes to Consolidated Financial Statements.
Cost of sales as a percent of the Company's net revenues decreased to 82.8%
from 89.6% in the respective years, excluding the effect of the write-off of
goodwill in fiscal 1994 as discussed above. This was due primarily to
increased capacity utilization and increased profitability in the European
subsidiaries. During the first half of fiscal 1995, raw material costs
escalated rapidly, resulting in lower margins. As a result, the spread between
average selling price and material cost per pound was lower in fiscal 1995
than in fiscal 1994. This was partially offset in the second half of fiscal
1995 as price increases for the Company's alloys became effective. Higher
volume reduced unit fixed costs and led to improved operating efficiencies. In
addition, the European subsidiaries experienced improved volume and margins in
fiscal 1995, reflecting improved business conditions which further improved
the Company's cost of sales as a percent of net revenues.
Selling and administrative expenses increased approximately $436,000, or
2.9%, to approximately $15.5 million in fiscal 1995 from approximately $15.0
million in fiscal 1994 primarily as a result of expenses which previously had
been reported as research and technology expenses in fiscal 1994 being
reclassified as selling and administrative expenses in fiscal 1995.
Research and technical expenses decreased approximately $581,000, or
16.0%, to approximately $3.0 million in fiscal 1995 from approximately $3.6
million in fiscal 1994 due in part to the reclassification of expenses noted
above. In addition, certain costs associated with engineering functions
recorded as manufacturing costs in fiscal 1995 were reported as research and
technical expenses in fiscal 1994.
As a result of the above factors, the Company recognized operating income
in fiscal 1995 of approximately $16.2 million as compared to an operating loss
of approximately $40.0 million in fiscal 1994. Operating loss in fiscal 1994
was approximately $2.9 million prior to the write off of approximately $37.1
million of goodwill as described in Note 10 of the Notes to Consolidated
Financial Statements. Operating income contributed by the Company's foreign
subsidiaries was approximately $5.3 million in fiscal 1995 and approximately
$1.6 million in fiscal 1994.
Other costs, net increased approximately $951,000, or 116.5%, to
approximately $1.8 million in fiscal 1995 from approximately $816,000 in
fiscal 1994, primarily as a result of fluctuations in foreign exchange rates,
which accounted for approximately $150,000 of the increase, and approximately
$478,000 in costs incurred associated with obtaining options to purchase
certain of the Company's Existing Subordinated Notes. The options expired in
October 1995.
Interest expense increased approximately $317,000, or 1.6%, to
approximately $20.2 million in fiscal 1995 from approximately $19.9 million in
fiscal 1994, primarily as a result of higher average borrowings under the
Existing Credit Facility.
The provision for income taxes for fiscal 1995 was approximately $1.3
million compared to approximately $420,000 in fiscal 1994, due primarily to
taxes on foreign earnings against which the Company was unable to utilize its
NOLs.
As a result of the above factors, the Company reported a net loss of
approximately $6.8 million in fiscal 1995 compared to a net loss of
approximately $140.5 million in fiscal 1994, including SFAS 106 expense of
approximately $79.6 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's near-term future cash needs will be driven by working
capital requirements, which are likely to increase, and planned capital
expenditures. Capital expenditures were approximately $2.1 million in fiscal
1996 and are expected to be approximately $8.0 million in fiscal 1997 and
approximately $9.6 million in fiscal 1998. Capital expenditures were
approximately $772,000 and $1.9 million for fiscal 1994 and 1995,
respectively. The increased capital investments for fiscal 1997 and 1998 are
designated for significant new equipment additions and expenditures of
approximately $3.1 million for new integrated information systems. The primary
benefits of this spending are expected to be (i) the expansion of annual
production capacity by 25% from approximately 20.0 million pounds to
approximately 25.0 million pounds, based on the current product mix, (ii)
improved production quality resulting in lower internal rejection rates and
rework costs and (iii) improved coordination among sales, marketing and
manufacturing personnel resulting in more efficient pricing practices. The
Company does not expect such capital expenditures to have a material adverse
effect on its long-term liquidity. Moreover, the Company does not currently
have any significant capital expenditure commitments. The Company expects to
fund its working capital needs and capital expenditures with cash provided
from operations, supplemented by borrowings under its Revolving Credit
Facility. The Company believes these sources of capital will be sufficient to
fund these capital expenditures and working capital requirements over the next
12 months and on a long-term basis, although there can be no assurance that
this will be the case.
Net cash used in operations in fiscal 1996 was approximately $5.3 million,
as compared to approximately $2.9 million for fiscal 1995. The negative cash
flow from operations for fiscal 1996 was primarily a result of increases of
approximately $15.1 million in inventories and approximately $1.6 million in
accounts receivable, which were offset by non-cash depreciation and
amortization expenses of approximately $9.1 million, extraordinary item of
$7.3 million, an increase in the accounts payable and accrued expenses balance
of approximately $2.5 million and other adjustments. Cash used for investing
activities increased from approximately $1.9 million in fiscal 1995 to
approximately $2.0 million in fiscal 1996, primarily as a result of higher
capital expenditures. Cash provided by financing activities for fiscal 1996
was approximately $7.1 million due primarily to $18.4 million increased
borrowings under the Revolving Credit Facility offset by a net payment on
refinancing of long-term debt of $12.0 million. Cash for fiscal 1996 decreased
approximately $347,000, resulting in a September 30, 1996 cash balance of
approximately $4.7 million. Cash in fiscal 1995 decreased approximately
$655,000, resulting in a cash balance of approximately $5.0 million at
September 30, 1995.
On August 23, 1996, the Company issued $140.0 million of its 11 5/8%
Senior Notes due 2004 and amended its Revolving Credit Facility with Congress
Financial Corporation ("Congress") to increase the maximum amount available
under the Revolving Line of Credit to $50.0 million. With the proceeds from
the issuance of the Senior Notes and borrowings under the Revolving Credit
Facility, the Company redeemed all of its outstanding Senior Secured Notes and
Senior Subordinated Notes on September 23, 1996. See Note 6 of the Notes to
Consolidated Financial Statements for a description of the terms of the
Senior Notes and the Revolving Credit Facility.
The Senior Notes and the Revolving Credit Facility contain a number of
covenants limiting the Company's access to capital, including covenants that
restrict the ability of the Company and its subsidiaries to (i) incur
additional Indebtedness, (ii) make certain restricted payments, (iii) engage
in transactions with affiliates, (iv) create liens on assets, (v) sell assets,
(vi) issue and sell preferred stock of subsidiaries, and (vii) engage in
consolidations, mergers and transfers.
The Company is currently conducting groundwater monitoring and
post-closure monitoring in connection with certain disposal areas, and has
completed an investigation of eight specifically identified solid waste
management units at the Kokomo facility. The results of the investigation have
been filed with the U.S. Environmental Protection Agency ("EPA"). If the EPA
or the Indiana Department of Environmental Management ("IDEM") were to require
corrective action in connection with such disposal areas or solid waste
management units, there can be no assurance that the costs of such corrective
action will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity. In addition, the Company has
been named as a potentially responsible party at two waste disposal sites.
Although there can be no assurance, based on current information, the Company
believes that its involvement at these two sites will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. Expenses related to environmental compliance were $1.3 million for
fiscal 1996 and
are expected to be approximately $3.2 million for fiscal 1997 through fiscal
1998. See "Business-- Environmental Matters." Based on information currently
available to the Company, the Company is not aware of any information which
would indicate that litigation pending against the Company is reasonably
likely to have a material adverse effect on the Company's operations or
liquidity. See "Business--Legal Proceedings."
INFLATION
The Company believes that inflation has not had a material impact on its
operations.
INCOME TAX CONSIDERATIONS
For financial reporting purposes the Company recognizes deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
recording of a valuation allowance when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. This statement
further states that forming a conclusion that a valuation allowance is not
needed may be difficult, especially when there is negative evidence such as
cumulative losses in recent years. The ultimate realization of all or part of
the Company's deferred tax assets depends upon the Company's ability to
generate sufficient taxable income in the future.
At September 30, 1996, the Company had a net deferred tax asset
approximating $36.4 million consisting principally of temporary differences
relating to available Net Operating Losses ("NOL's") and accruals for
postretirement benefits other than pensions partially offset by depreciation.
Because of unfavorable operating results in recent years, the Company has
established a 100% valuation allowance to offset the net deferred tax asset,
resulting in a charge to operations and a corresponding reduction of equity.
The Company will periodically evaluate its strategic and business plans in
light of evolving business conditions and actual operating results, and the
valuation allowance may be adjusted for future income expectations resulting
from that process.
As a result, the application of the valuation allowance determination
process could result in recognition of significant income tax provisions or
benefits in a single interim or annual period due to actual operating results
and changes in future income expectations over several years. Such tax
provision or benefit effect could likely be material in the context of the
specific interim or annual financial reporting period in which changes in
judgment about extended future periods are reported. The valuation allowance
determination process is a balance sheet approach and does not have as its
objective the periodic matching of pre-tax income or loss with the related
actual income tax effects.
If the Company's principal markets continue to exhibit improvement, and
such improvement is manifested in positive trends in the value and
profitability of customer orders and backlog, additional tax benefits may be
reported in future periods as the valuation allowance is reduced.
Alternatively, to the extent that the Company's future profit expectations
remain static or are diminished, tax provisions may be charged against pretax
income. In either event, such valuation allowance-related tax provisions or
benefits should not necessarily be viewed as recurring. Further, the amount of
current taxes that the Company expects to pay for the foreseeable future is
minimal, and the Company's carryforward tax attributes are viewed by
management as a significant competitive advantage to the extent that profits
can be sheltered effectively from tax and re-employed in the growth of the
business.
See "Legal Proceedings" with respect to certain other tax matters.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" are effective for the year ending September 30, 1997. In the
opinion of management, these statements will not impact the Company's
financial position or results of operations.
SFAS No. 123, "Accounting for Stock Based Compensation," was issued and is
also effective for the year ending September 30, 1997. The Company has not
decided how it intends to apply the accounting and disclosure provisions of
this statement.
ITEM 8. Financial Statements and Supplementary Data
Board of Directors
Haynes International, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Haynes International, Inc. (the Company), a wholly owned
subsidiary of Haynes Holdings, Inc., listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted 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 consolidated financial position of
Haynes International, Inc. as of September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Notes 1 and 8 to the consolidated financial statements,
the Company changed its method of accounting for income taxes and
postretirement benefits during 1994.
Coopers & Lybrand L.L.P.
Fort Wayne, Indiana
November 6, 1996
HAYNES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, September 30,
ASSETS 1995 1996
- ---------------------------------------------------------- --------------- ---------------
Current Assets:
Cash and cash equivalents $ 5,035 $ 4,688
Accounts and notes receivable, less allowance for
doubtful accounts of $979 and $900, respectively 38,089 39,624
Inventories 60,234 74,755
--------------- ---------------
Total current assets 103,358 119,067
--------------- ---------------
Net property, plant and equipment 36,863 31,157
Prepayments and deferred charges, net 11,095 11,265
--------------- ---------------
Total assets $ 151,316 $ 161,489
=============== ===============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 22,975 $ 24,814
Accrued postretirement benefits 4,100 4,000
Revolving credit 12,477 30,888
Note payable 859
Income taxes payable 1,190 1,199
--------------- ---------------
Total current liabilities 40,742 61,760
--------------- ---------------
Long-term debt, net of unamortized discount 140,000 137,350
Deferred income taxes 326 485
Accrued postretirement benefits 90,730 91,813
--------------- ---------------
Total liabilities 271,798 291,408
--------------- ---------------
Redeemable common stock of parent company 1,427 422
Capital deficiency:
Common stock, $.01 par value (100 shares authorized,
issued and outstanding)
Additional paid-in capital 46,306 47,985
Accumulated deficit (172,285) (181,321)
Foreign currency translation adjustment 4,070 2,995
--------------- ---------------
Total capital deficiency (121,909) (130,341)
--------------- ---------------
Total liabilities and capital deficiency $ 151,316 $ 161,489
- ---------------------------------------------------------- =============== ===============
The accompanying notes are an integral part of these financial statements.
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1994 1995 1996
--------------- --------------- ---------------
Net revenues $ 150,578 $ 201,933 $ 226,402
Costs and expenses:
Cost of sales 134,840 167,196 181,173
Goodwill write-off 37,117
Selling and administrative 15,039 15,475 19,966
Research and technical 3,630 3,049 3,411
Other costs, net 816 1,767 590
Interest expense 19,916 20,233 21,991
Interest income (334) (329) (889)
--------------- --------------- ---------------
Total costs and expenses 211,024 207,391 226,242
--------------- --------------- ---------------
Income (loss) before provision for income taxes,
extraordinary item and cumulative effect of change in
accounting principle (60,446) (5,458) 160
Provision for income taxes 420 1,313 1,940
--------------- --------------- ---------------
Loss before extraordinary item and cumulative effect
of change in accounting principle (60,866) (6,771) (1,780)
Extraordinary item, net of tax benefit (7,256)
Cumulative effect of change in accounting principle,
net of tax benefit (79,630)
---------------
Net loss $ (140,496) $ (6,771) $ (9,036)
- ----------------------------------------------------- =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1994 1995 1996
--------------- --------------- ---------------
Cash flows from operating activities:
Net loss $ (140,496) $ (6,771) $ (9,036)
Adjustments to reconcile net loss to
net cash used in operations:
Extraordinary item 7,256
Depreciation 8,208 8,188 7,751
Amortization and goodwill write-off 40,287 1,444 1,353
Deferred income taxes (10,633) 2 213
Gain on disposition of property and equipment (397) (37) (20)
Change in assets and liabilities:
Accounts and notes receivable (3,028) (7,354) (1,599)
Inventories (951) (6,480) (15,132)
Other assets (58) 347 (335)
Accounts payable and accrued expenses 4,291 6,322 2,543
Income taxes payable (234) 774 10
Accrued postretirement benefits 90,210 682 983
--------------- --------------- ---------------
Net cash used in operating activities (12,801) (2,883) (5,343)
--------------- --------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (771) (1,934) (2,092)
Proceeds from disposals of property, plant,
and equipment 1,517 39 67
--------------- --------------- ---------------
Net cash provided from (used in) investing
activities 746 (1,895) (2,025)
--------------- --------------- ---------------
Cash flows from financing activities:
Net additions of revolving credit 7,960 4,337 18,411
Borrowings of long-term debt 137,350
Repayments of long-term debt (140,000)
Payment of debt issuance costs (5,408)
Prepayment penalties on debt retirement (3,911)
Dividend from parent company on exercise of
stock options 674
Retirement of stock options (858) (425)
--------------- ---------------
Net cash provided from financing activities 7,102 3,912 7,116
--------------- --------------- ---------------
Effect of exchange rates on cash 129 211 (95)
--------------- --------------- ---------------
Decrease in cash and cash equivalents (4,824) (655) (347)
Cash and cash equivalents:
Beginning of year 10,514 5,690 5,035
--------------- --------------- ---------------
End of year $ 5,690 $ 5,035 $ 4,688
=============== =============== ===============
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 17,891 $ 18,840 $ 22,076
=============== =============== ===============
Income taxes $ 848 $ 560 $ 1,717
- --------------------------------------------------- =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Haynes
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances are
eliminated. The Company develops, manufactures and markets technologically
advanced, high performance alloys primarily for use in the aerospace and
chemical processing industries worldwide.
B.CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments, including
investments with maturities of three months or less at acquisition, to be cash
equivalents, the carrying value of which approximates fair value due to the
short maturity of these investments.
C.INVENTORIES
Inventories are stated at the lower of cost or market. The cost of domestic
inventories is determined using the last-in, first-out method (LIFO). The
cost of foreign inventories is determined using the first-in, first-out (FIFO)
method and average cost method.
D.PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost with
depreciation calculated primarily by using the straight-line method based on
estimated economic useful lives. Buildings are generally depreciated over 40
years and machinery and equipment are depreciated over periods ranging from 5
to 14 years.
Expenditures for maintenance and repairs and minor renewals are charged to
expense; major renewals are capitalized. Upon retirement or sale of assets,
the cost of the disposed assets and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is credited or
charged to operations.
E.FOREIGN CURRENCY TRANSLATION
The Company's foreign operating entities' financial statements are stated in
the functional currencies of each respective country, which are the local
currencies. Substantially all assets and liabilities are translated to U.S.
dollars using exchange rates in effect at the end of the year and revenues and
expenses are translated at the weighted average rate for the year.
Translation gains or losses are recorded as a separate component of capital
deficiency and transaction gains and losses are reflected in net losses.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
F. INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This
statement applies an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized (see Note 5). Previously, the Company accounted for income taxes
under the provisions of SFAS No. 96, "Accounting for Income Taxes". Financial
statements for the prior years have not been restated and the cumulative
effect of the change in accounting principle was not material.
G. DEFERRED CHARGES
Deferred charges consist primarily of debt issuance costs which are amortized
over the terms of the related debt using the effective interest method.
Accumulated amortization at September 30, 1995 and 1996 was $9,266 and $63,
respectively. During 1996, the Company wrote off approximately $3,345 of
deferred debt issuance costs and capitalized approximately $5,408 of costs
incurred in connection with the refinancing of the Company's debt.
H. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
The Company enters into forward currency exchange contracts and nickel futures
contracts on a continuing basis for periods consistent with contractual
exposures. The effect of this practice is to minimize the variability in the
Company's operating results arising from foreign exchange rate and nickel
price movements. These contracts are considered short-term financial
instruments, the carrying value of which approximates fair value due to the
relatively short duration of the contracts. The Company does not engage in
foreign currency or nickel futures speculation. Gains and losses on these
contracts are reflected in the statement of operations in the month the
contracts are settled. At September 30, 1995 and 1996, the Company had $1,700
and $1,360 of foreign currency exchange contracts, respectively, and $4,441
and $3,512 of nickel futures contracts, respectively, outstanding with a
combined net unrealized loss of $103 and $192, respectively. With respect to
the Consolidated Statement of Cash Flows, contracts accounted for as hedges
are classified in the same category as the items being hedged.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents. At September 30, 1996
and periodically throughout the year the Company has maintained cash balances
in excess of federally insured limits.
During 1995 and 1996, sales to one group of affiliated customers approximated
$23,718 and $26,937, respectively, or 12% of net revenues for both years. At
September 30, 1995 and 1996, receivables from the customers approximated
$3,338 and $5,034, respectively. During 1994, sales to a single customer
approximated $15,452 or 10% of net revenues. The Company does not believe it
is significantly vulnerable to certain business concentrations with respect to
customers, suppliers, products, markets or geographic areas that make the
Company vulnerable to the risk of a near-term severe impact.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
I. RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified to
conform with current year presentation.
J. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company does not
believe that it has assets, liabilities or contingencies that are particularly
sensitive to changes in estimates in the near term.
K. ACCOUNTING PRONOUNCEMENTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived assets and for
Long-Lived assets to Be Disposed Of" and SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" are effective for the year ending September 30, 1997. In the
opinion of management, these statements will not impact the Company's
financial position or results of operations. The Company currently accounts
for stock options under the provisions of Accounting Principles Board Opinion
(APB) No. 25. Recently, SFAS No. 123, "Accounting for Stock Based
Compensation", was issued and is also effective for the year ending September
30, 1997. The Company has not decided how it intends to apply the accounting
and disclosure provisions of this statement.
[Remainder of page intentionally left blank.]
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2: INVENTORIES
The following is a summary of the major classes of inventories:
September 30, September 30,
1995 1996
--------------- ---------------
Raw materials $ 2,998 $ 4,296
Work-in-process 38,488 37,643
Finished goods 20,616 32,046
Other 2,428 861
Amount necessary to decrease certain inventories to the LIFO method
(4,296) (91)
--------------- ---------------
Net inventories $ 60,234 $ 74,755
- ------------------------------------------------------------------- =============== ===============
Inventories valued using the LIFO method comprise 73% and 74% of consolidated FIFO inventories at
September 30, 1995 and 1996, respectively.
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the major classes of property, plant, and
equipment:
September 30, September 30,
1995 1996
---------------- ---------------
Land and land improvements $ 1,920 $ 1,918
Buildings 6,623 6,623
Machinery and equipment 74,951 76,336
Construction in process 664 900
---------------- ---------------
84,158 85,777
Less accumulated depreciation (47,295) (54,620)
---------------- ---------------
Net property, plant and equipment $ 36,863 $ 31,157
- ---------------------------------- ================ ===============
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of the major classes of accounts payable and
accrued expenses:
September 30, September 30,
1995 1996
-------------- --------------
Accounts payable, trade $ 14,477 $ 15,285
Employee compensation 1,995 4,214
Taxes, other than income taxes 2,226 1,977
Interest 3,160 1,718
Other 1,117 1,620
-------------- --------------
Total $ 22,975 $ 24,814
- ------------------------------ ============== ==============
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5: INCOME TAXES
The components of income (loss) before provision for income taxes, extraordinary item and cumulative
effect of change in accounting principle consist of the following:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1994 1995 1996
--------------- --------------- ---------------
Income (loss) before provision for income taxes,
extraordinary item and cumulative effect of change
in accounting principle
U.S. $ (58,509) $ (9,332) $ (4,558)
Foreign (1,937) 3,874 4,718
--------------- --------------- ---------------
Total $ (60,446) $ (5,458) $ 160
=============== =============== ===============
Income tax provision (benefit):
Current:
U.S. Federal $ 187
Foreign $ 411 $ 1,284 1,509
State 62 27 31
--------------- --------------- ---------------
Current total 473 1,311 1,727
--------------- --------------- ---------------
Deferred:
U. S. Federal 2 131
Foreign (53) 82
--------------- ---------------
Deferred total (53) 2 213
--------------- --------------- ---------------
Total provision for income taxes $ 420 $ 1,313 $ 1,940
- -------------------------------------------------- =============== =============== ===============
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The provision for income taxes applicable to results of operations before extraordinary item and
cumulative effect of change in accounting principle differed from the U.S. federal statutory
rate as follows:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1994 1995 1996
--------------- --------------- ---------------
Statutory federal tax rate 34% 34% 34%
Tax provision (benefit) at the statutory rate $ (20,552) $ (1,856) $ 54
Foreign tax rate differentials 951 (162) (24)
Goodwill amortization and write-off 12,054
Withholding tax on undistributed earnings of
foreign subsidiaries 131
Provision for state taxes, net of federal tax 62 27 31
Exercise of stock options of parent company 400
U.S. tax on distributed and undistributed
earnings of foreign subsidiaries 1,735 980 760
Increase in valuation allowance 5,639 2,057 363
Other 531 267 225
--------------- --------------- ---------------
Provision at effective tax rate $ 420 $ 1,313 $ 1,940
- --------------------------------------------- =============== =============== ===============
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred income tax assets (liabilities) are comprised of the following:
Current defferred income tax assets September 30, September 30,
(liabilities): 1995 1996
--------------- ---------------
Inventory capitalization $ 853 $ 962
Postretirement benefits other than pensions 1,590 1,553
Accrued expenses for vacation 446 470
Other 606 700
--------------- ---------------
Gross deferred tax assets 3,495 3,685
Less: Valuation allowance (2,132) (2,434)
--------------- ---------------
1,363 1,251
Inventory purchase accounting adjustment (5,637) (5,646)
--------------- ---------------
Total net current deferred tax liability (4,274) (4,395)
--------------- ---------------
Noncurrent deferred income tax assets
(liabilities):
Property, plant and equipment, net (9,344) (7,069)
Prepaid pension costs (2,107) (1,990)
Investment in subsidiary (466) (466)
Other foreign related (390) (475)
Undistributed earnings of foreign subsidiaries (2,669) (3,420)
--------------- ---------------
Gross noncurrent deferred tax liability (14,976) (13,420)
--------------- ---------------
Postretirement benefits other than pensions 35,182 35,656
Executive compensation 553 164
Investment in subsidiary 563 563
Net operating loss carryforwards 13,283 14,406
Alternative minimum tax credit carryforwards 414 538
--------------- ---------------
Gross noncurrent deferred tax asset 49,995 51,327
Less: Valuation allowance (31,071) (33,997)
--------------- ---------------
18,924 17,330
--------------- ---------------
Total net noncurrent deferred tax asset 3,948 3,910
--------------- ---------------
Total $ (326) $ (485)
- ---------------------------------------------- =============== ===============
The valuation allowance used to offset deferred tax assets is as follows:
Allowance at October 1, 1993 $24,422
- ------------------------------- -------
Increase in allowance 6,435
-------
Allowance at October 1, 1994 30,857
Increase in allowance 2,346
-------
Allowance at October 1, 1995 33,203
Increase in allowance 3,228
-------
Allowance at September 30, 1996 $36,431
- ------------------------------- =======
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of September 30, 1996 the Company had net operating loss carryforwards
for regular tax purposes of approximately $39,700 (expiring in fiscal years
2005 to 2011), of which $19,800 are available for alternative minimum tax.
The Company has alternative minimum tax credit carryforwards of approximately
$500 which are available to reduce federal regular income taxes, if any, over
an indefinite period.
Because of unfavorable operating results in recent years and the Company's
net operating loss carryforward position, the Company has established a
valuation allowance to offset certain deferred tax assets created by
operations. If in the future the facts and circumstances of the Company's
financial position and operating performance consistently improve over a
period of time, the valuation allowance will be adjusted accordingly.
The Company recently completed an examination by the Internal Revenue
Service (IRS) for the five taxable years ended September 30, 1993. The IRS
has proposed to disallow aggregate deductions in the amount of $5,500 relative
to the amortization of certain loan fees, totaling $10,400, incurred in
connection with the 1989 acquisition of the Company. The Company claimed
similar deductions in 1994 through 1996. The Company has formally protested
the disallowance of these deductions. On August 28, 1996, the Company met
with officials from the IRS Appeals Office and received a favorable verbal
confirmation that the deductions would be allowed as a result of the recent
passage of the Small Business Job Protection Act of 1996. The Company is
presently awaiting a written confirmation from the IRS. If the Company does
not prevail in its defense, the amount of available net operating loss
carryforwards will be reduced accordingly.
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6: DEBT
Long-term debt, consists of the following:
September 30, September 30,
1995 1996
-------------- --------------
Senior Notes (due 2004, 11.625%) net of $2,650
unamortized discount (effective rate of 12.0%) $ 137,350
Senior Subordinated Notes (due 1997-1999, 13.5%) $ 90,000
Senior Secured Notes (due 1998, 11.25%) 50,000
--------------
$ 140,000 $ 137,350
============== ==============
On August 23, 1996, the Company successfully refinanced its debt with the
issuance of $140,000 Senior Notes due 2004 and an amendment to its then
existing revolving credit facility with Congress Financial Corporation
("Congress").
Certain non recurring charges were recorded as a result of this
refinancing effort as follows:
@ $7,256 of extraordinary losses were incurred resulting from the
redemption of the Senior Secured and Senior Subordinated Notes. The losses
are comprised of $3,911 in prepayment penalties incurred with the redemption
and $3,345 of deferred debt issuance costs which were written off upon
redemption of the related debt;
@ $1,837 of Selling and Administrative Expense which represents costs
incurred from a deferred initial public offering of the Company's common
stock; and
@ $924 of net Interest Expense incurred during the period between the
issuance of the Senior Notes and the redemption of the Senior Secured and
Senior Subordinated Notes.
The Company now has available a $50,000 working capital facility (the
"Revolving Credit Facility") with Congress. The amount available for
revolving credit loans equals the difference between the $50,000 total
facility amount less any letter of credit reimbursement obligations incurred
by the Company, which are subject to a sublimit of $10,000. The total
availability may not exceed the sum of 85% of eligible accounts receivable
(generally, accounts receivable of the Company from domestic and export
customers that are less than 60 days outstanding) plus 60% of eligible
inventories consisting of finished goods and raw materials plus 45% of
eligible inventories consisting of work-in-process and semi-finished goods
calculated at the lower of cost or current market value minus any availability
reserves established by Congress. Unused line of credit fees during the
revolving credit loan period are .375% of the amount by which the $50,000
million maximum credit exceeds the average daily principal balance of the
outstanding revolving loans and letter of credit accommodations.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Revolving Credit Facility bears interest at a fluctuating per annum
rate equal to a combination of prime rate plus 0.75% and London Interbank
Offered Rates ("LIBOR") plus 2.75%. At September 30, 1996 the effective
interest rates for revolving credit loans were 8.238% for $24,000 of the
Revolving Credit Facility and 9.0% for $6,900 of the Revolving Credit
Facility. As of September 30, 1996, $3,025 in letter of credit reimbursement
obligations have been incurred by the Company. The availability for revolving
credit loans at September 30, 1996 was $16,075.
The Revolving Credit Facility contains covenants common to such agreements
including the maintenance of certain net worth levels and limitations on
capital expenditures, investments, incurrences of debt, impositions of liens,
dispositions of assets and payments of dividends and distributions. The
Revolving Credit Facility is collateralized by first priority security
interests in all accounts receivable and inventories (excluding all accounts
receivable and inventories of the Company's foreign subsidiaries) and fixed
assets of the Company and the sales proceeds therefrom.
The estimated fair value, based upon an independent market quotation, of
the Company's long-term debt was approximately $106,750 and $145,600 at
September 30, 1995 and 1996, respectively. The carrying value of the
Company's Revolving Credit Facility approximates fair value.
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SENIOR NOTES DUE 2004
- ------------------------
The Senior Notes are uncollateralized obligations of the Company and are
effectively subordinated in right of payment to obligations under the
Revolving Credit Facility. Interest is payable semi-annually on March 1 and
September 1.
The notes are redeemable, in whole or in part, at the Company's option at
any time on or after September 1, 2000 at redemption prices ranging from
105.813% to 100% plus accrued interest to the date of redemption. In
addition, prior to September 1, 1999, in the event one or more public equity
offerings of the Company are consummated, the Company may redeem in the
aggregate up to a maximum of 35% of the initial aggregate principal amount of
the Notes with the net proceeds thereof at a redemption price equal to
111.625% of the principal amount thereof plus accrued and unpaid interest to
the date of redemption; provided that, after giving effect thereto, at least
$85,000 aggregate principal amount of Notes remains outstanding.
The Senior Notes limit the incurrence of additional indebtedness,
restricted payments, mergers, consolidations and asset sales.
OTHER
- -----
In addition, the Company's UK affiliate (Haynes International, Ltd.) has a
revolving credit agreement with Midland Bank that provides for availability of
1 million pounds sterling collateralized by the assets of the affiliate. This
revolving credit agreement was available in its entirety on September 30, 1996
as a means of financing the activities of the affiliate including payments to
the Company for intercompany purchases. The Company's French affiliate
(Haynes International, SARL) has an overdraft banking facility of 7.0 million
French francs ($1,400) and utilized 4.4 million French francs ($896) of the
facility as of September 30, 1996.
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7: STOCKHOLDER'S EQUITY (CAPITAL DEFICIENCY)
The following is a summary of changes in stockholder's equity (capital deficiency):
Common Stock
Foreign
Additional Currency
No. of At Paid in (Accumulated Translation
Shares Par Capital Deficit) Adjustment
----------------- ------- ----------------- ------------------- -------------------
Balance at
September 30, 1993 100 $ 0 $ 46,087 $ (25,018) $ 1,869
- ------------------------------
Year ended
September 30, 1994:
Net loss (140,496)
Dividend to parent
company to repurchase
stock (83)
Reclassification of re-
deemable common stock 272
Foreign exchange 1,342
----------------- ------ --------------- ----------------- -----------------
Balance at
September 30, 1994 100 0 46,276 (165,514) 3,211
- ------------------------------
Year ended
September 30, 1995:
Net Loss (6,771)
Dividend to parent company
to repurchase stock (70)
Reclassification of
redeemable common stock 100
Foreign Exchange 859
----------------- ------ --------------- ----------------- -----------------
Balance at
September 30, 1995 100 0 46,306 (172,285) 4,070
- ------------------------------
Year ended
September 30, 1996:
Net Loss (9,036)
Dividend from parent
company on exercise of
stock option 674
Reclassification of
redeemable common stock 1,005
Foreign Exchange (1,075)
----------------- ------ --------------- ----------------- -----------------
Balance at
September 30, 1996 100 $ 0 $ 47,985 $ (181,321) $ 2,995
- ------------------------------ ================= ======= ================= =================== ===================
Total
Stockholder's
Equity
(Capital
Deficiency)
---------------------
Balance at
September 30, 1993 $ 22,938
- ------------------------------
Year ended
September 30, 1994:
Net loss (140,496)
Dividend to parent
company to repurchase
stock (83)
Reclassification of re-
deemable common stock 272
Foreign exchange 1,342
-------------------
Balance at
September 30, 1994 (116,027)
- ------------------------------
Year ended
September 30, 1995:
Net Loss (6,771)
Dividend to parent company
to repurchase stock (70)
Reclassification of
redeemable common stock 100
Foreign Exchange 859
-------------------
Balance at
September 30, 1995 (121,909)
- ------------------------------
Year ended
September 30, 1996:
Net Loss (9,036)
Dividend from parent
company on exercise of
stock option 674
Reclassification of
redeemable common stock 1,005
Foreign Exchange (1,075)
-------------------
Balance at
September 30, 1996 $ (130,341)
- ------------------------------ =====================
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8: PENSION PLAN AND RETIREMENT BENEFITS
The Company has non-contributory defined benefit pension plans which cover
most employees in the United States and certain foreign subsidiaries.
Benefits provided under the Company's domestic defined benefit pension
plan are based on years of service and the employee's final compensation. The
Company's funding policy is to contribute annually an amount deductible for
federal income tax purposes based upon an actuarial cost method using
actuarial and economic assumptions designed to achieve adequate funding of
benefit obligations.
Net periodic pension cost on a consolidated basis was $611, $458, and $720
for the years ended September 30, 1994, 1995 and 1996, respectively.
For the domestic pension plan, net periodic pension cost was comprised of
the following elements:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1994 1995 1996
--------------- --------------- ---------------
Service cost $ 2,165 $ 1,713 $ 2,042
Interest cost 6,536 7,060 7,027
Actual return on plan assets (639) (18,727) (13,431)
Net amortization and deferral (7,748) 10,084 4,670
--------------- --------------- ---------------
Net periodic pension cost $ 314 $ 130 $ 308
- ----------------------------- =============== =============== ===============
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth the domestic pension plan's funded status:
September 30, September 30,
1995 1996
--------------- ---------------
Accumulated benefit obligation, including vested
benefits of $86,227 and $83,516, respectively $ 90,285 $ 87,469
=============== ===============
Projected benefit obligation for
service rendered to date $ (103,149) $ (101,922)
Plan assets at fair value
(primarily debt securities) 122,103 128,264
--------------- ---------------
Plan assets in excess of projected
benefit obligation 18,954 26,342
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions (13,459) (24,364)
Unrecognized prior service costs (62) 3,146
--------------- ---------------
Prepaid pension cost recognized in the consolidated balance sheet $ 5,433 $ 5,124
=============== ===============
Assumptions:
Weighted average discount rate 7.00% 7.50%
=============== ===============
Average rate of increase in
compensation levels 5.25% 5.75%
=============== ===============
Expected rate of return on plan
assets during year 7.50% 7.75%
- ------------------------------------------------------------------ =============== ===============
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all domestic employees become eligible for these benefits if they reach normal
retirement age while working for the Company. Prior to 1994, the cost of
retiree health care and life insurance benefits was recognized as expense upon
payment of claims or insurance premiums.
Effective October 1, 1993, the Company adopted SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions" which requires the
cost of postretirement benefits to be accrued over the years employees provide
services to the date of their full eligibility for such benefits. The
Company's policy is to fund the cost these of benefits on an annual basis.
The Company elected to immediately recognize the transition obligation for
benefits earned as of October 1, 1993, resulting in a pre-tax, non-cash charge
of $90,210 representing the cumulative effect of the change in accounting
principle, which along with the establishment of a deferred tax valuation
allowance, reduced net worth at September 30, 1994 by $79,630. Operations
were charged approximately $7,997, $4,671 and $4,823 for these benefits during
fiscal 1994, 1995 and 1996, respectively.
Effective January 1, 1995, the Company amended its health care plan by
requiring retirees and surviving spouses to share in the cost of medical care
by paying a portion of the cost of continuing health care insurance
protection. As a result of this amendment, the accumulated postretirement
benefit obligation was reduced by $13,583 and will be amortized to operations
over approximately 12.5 years.
(Remainder of page intentionally left blank.)
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following sets forth the funded status of the plans in the aggregate
reconciled with amounts reported in the Company's balance sheet:
September 30, September 30, September 30,
1994 1995 1996
-------------- -------------- --------------
Accumulated postretirement benefit
obligation (APBO):
Retirees and dependents $ 59,907 $ 47,039 $ 48,380
Active plan participants eligible to
receive benefits 8,286 6,941 7,813
Active plan participants not yet
eligible to receive benefits 18,087 15,823 16,043
-------------- -------------- --------------
Total APBO 86,280 69,803 72,236
Unrecognized prior service cost 12,674 11,582
Unrecognized net gain 7,868 12,353 11,995
-------------- -------------- --------------
Accrued postretirement liability $ 94,148 $ 94,830 $ 95,813
- ----------------------------------------- ============== ============== ==============
Net periodic postretirement benefit cost included the following components:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1994 1995 1996
---------------------- ----------------------- -----------------------
Service cost $ 1,624 $ 1,036 $ 1,131
Interest cost 6,373 5,126 5,089
Amortization of net gain (582) (306)
Amortization of prior service cost (909) (1,091)
--------------------- --------------------- ---------------------
---------------------- ----------------------- -----------------------
Net periodic postretirement
benefit cost $ 7,997 $ 4,671 $ 4,823
- ---------------------------------- ====================== ======================= =======================
An 11.46% annual rate of increase for ages under 65 and a 9.32% annual
rate of increase for ages over 65 in the costs of covered health care benefits
was assumed for 1996, gradually decreasing for both age groups to 5.25% by the
year 2010. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of September 30, 1996 by $9,903 and increase the net
periodic postretirement benefit cost for 1996 by $973. A discount rate of
8.0% was used to determine the accumulated postretirement benefit obligation
at September 30, 1994 and a discount rate of 7.5% was used to determine the
accumulated postretirement benefit obligation at September 30, 1995 and 1996.
The Company sponsors certain profit sharing plans for the benefit of
employees meeting certain eligibility requirements. There were no
contributions for these plans for the three years in the period ended
September 30, 1996.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9:COMMITMENTS
The Company leases certain transportation vehicles, warehouse facilities,
office space and machinery and equipment under cancelable and non-cancelable
leases, most of which expire within 10 years and may be renewed by the
Company. Rent expense under such arrangements totaled $1,567, $1,431 and
$1,392 for the periods ended September 30, 1994, 1995 and 1996, respectively.
Future minimum rental commitments under non-cancelable leases in effect at
September 30, 1996 are as follows:
1997 $1,234
- ------------------- ------
1998 1,086
1999 806
2000 563
2001 and thereafter 928
------
$4,617
======
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10: OTHER
Other costs, net consists of net foreign currency transaction (gains) and
losses in the amounts of $56, $207, and $(185) for the periods ended September
30, 1994, 1995 and 1996, respectively, and miscellaneous costs.
At September 30, 1994 the Company elected to write-off the remaining
goodwill balance of $37,117. The reason for the write-off was that excess
industry capacity, aggressive competitive activity, just-in-time inventory
management programs, and weakness in certain economic sectors of the economy
adversely affected the specialty corrosion and high-temperature alloy industry
operating conditions and the Company's operating results since 1992.
Accordingly, the Company revised its projections and determined that its
projected operating results would not support the future amortization of the
Company's remaining goodwill balance.
The methodology employed to assess the recoverability of the Company's
goodwill first involved the projection of operating results forward 25 years,
which approximated the remaining amortization period of goodwill as of
September 30, 1994. The Company then evaluated the recoverability of goodwill
on the basis of this forecast of future operations. Based on this forecast,
the cumulative discounted net loss, before goodwill amortization and after
interest expense, was insufficient to recover the remaining goodwill balance
and accordingly, operations were charged for the entire unamortized balance.
The Company, like others in similar businesses, is involved as the
defendant in several legal actions and is subject to extensive federal, state
and local environmental laws and regulations. Although Company environmental
policies and practices are designed to ensure compliance with these laws and
regulations, future developments and increasingly stringent regulation could
require the Company to make additional unforeseen environmental expenditures.
Although the level of future expenditures for environmental and other
legal matters cannot be determined with any degree of certainty, based on the
facts presently known, management does not believe that such costs will have a
material effect on the Company's financial position, results of operations or
liquidity.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11: STOCK OPTION PLAN
The Company's parent has a stock option plan (the "Plan") which allows for
the granting of options to certain key employees and directors of the Company.
Under the Plan, options to purchase up to 905,880 shares of common stock may
be granted at a price not less than the lower of book value or 50% of fair
market value, as defined in the Plan. The options must be exercised within
ten years from the date of grant and become exercisable on a pro rata basis
over a five year period from the date of grant, subject to approval by the
Board of Directors.
All holders of options with exercise prices of $2.28 and $3.24 per share
have the right to redeem such options at a price equal to book value per
share, as defined in the Plan. Further, the Company has the right to call
these options at an amount equal to the greater of $10.00 per share or fair
market value per share, as defined in the Plan. The difference between the
fair market value of the stock on the last measurement date and the exercise
price of these options is classified as redeemable common stock. Due to the
exercise and/or redemption of some of these options, redeemable common stock
was reduced by $454 and $1,005 during 1995 and 1996, respectively.
Certain holders of 320,000 options with exercise prices of $5.00 per share
have the right to redeem such options at a price equal to book value per
share, as defined in the Plan. Further, the Company has the right to call
these options at an amount equal to the greater of $5.00 per share (the
estimated fair market value on the last measurement date) or fair market value
per share, as defined in the Plan.
In January 1996, a majority of the options with exercise prices of $5.00
per share were re-priced to $2.50 per share (the estimated fair market value
on that date).
On October 22, 1996, 133,000 options were granted to certain key
management personnel at an exercise price of $8.00 per share.
(Remainder of page intentionally left blank.)
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pertinent information covering the Plan is as follows:
Number of Option Price Fiscal Year Shares
Shares Per Share of Expiration Exercisable
---------- ------------- -------------- -----------
Outstanding at September 30, 1993 836,058 $ 2.28-5.00 1999-2003 592,078
Granted 7,000 5.00
Redeemed (139,315) 2.28-3.24
Canceled (107,300) 5.00
----------
Outstanding at September 30, 1994 596,443 2.28-5.00 1999-2004 434,443
Granted 322,900 5.00
Redeemed (62,798) 2.28-3.24
Canceled (36,500) 5.00
----------
Outstanding at September 30, 1995 820,045 2.28-5.00 1999-2005 377,145
Granted --- ---
Exercised (201,931) 2.28-5.00
Canceled (32,000) 2.50
----------
Outstanding at September 30, 1996 586,114 $ 2.28-2.50 1999-2005 279,794
========== ============= ===========
Options Outstanding at
September 30, 1996 consist of: 23,644 $ 2.28 23,644
35,470 3.24 35,470
527,000 2.50 220,680
---------- -----------
586,114 279,794
========== ===========
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12: FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Financial information by geographic area is as follows:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1994 1995 1996
--------------- --------------- --------------
Sales
United States $ 94,830 $ 122,334 $ 142,132
Export Sales 43,045 63,235 66,777
--------------- --------------- --------------
137,875 185,569 208,909
Europe 31,560 42,935 54,173
--------------- --------------- --------------
169,435 228,504 263,082
Less: Eliminations 18,857 26,571 36,680
--------------- --------------- --------------
Net revenues $ 150,578 $ 201,933 $ 226,402
=============== =============== ==============
Operating income (loss) and other cost, net
United States $ (38,636) $ 10,825 $ 17,345
Europe (1,894) 3,950 4,806
--------------- --------------- --------------
Total operating income (loss) and other cost, net
(40,530) 14,775 22,151
Interest 19,916 20,233 21,991
--------------- --------------- --------------
Income (loss) before provision for income taxes,
extraordinary item and cumulative effect of
change in accounting principle $ (60,446) $ (5,458) $ 160
=============== =============== ==============
Identifiable assets
United States $ 115,251 $ 116,428 $ 122,400
Europe 24,490 29,649 34,314
General corporate assets* 5,690 5,035 4,688
Equity in affiliates 292 204 87
--------------- --------------- --------------
$ 145,723 $ 151,316 $ 161,489
=============== =============== ==============
- - General corporate assets include cash and cash equivalents.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the persons
who served as the directors and executive officers of the Company as of
September 30, 1996. Except as indicated in the following paragraphs, the
principal occupations of these persons have not changed during the past five
years.
NAME AGE POSITION WITH THE COMPANY
- ----------------------------- --------- ---------------------------------------------------------------------
Michael D. Austin . . . . . . 56 President and Chief Executive Officer; Director
Joseph F. Barker. . . . . . . 49 Chief Financial Officer; Vice President,
Finance; Secretary; Treasurer; Director
F. Galen Hodge. . . . . . . . 58 Vice President, International
Michael F. Rothman. . . . . . 49 Vice President, Engineering & Technology
Charles J. Sponaugle. . . . . 48 Vice President, Sales and Marketing
Frank J. LaRosa . . . . . . . 37 Vice President, Human Resources and Information Technology
August A. Cijan . . . . . . . 41 Vice President, Operations
Theodore T. Brown . . . . . . 38 Controller; Chief Accounting Officer
Robert I. Hanson. . . . . . . 52 General Manager, Arcadia Tubular Products
Perry J. Lewis. . . . . . . . 58 Director, Chairman of the Board
Robert Egan . . . . . . . . . 65 Director, Vice Chairman of the Board
John A. Morgan. . . . . . . . 66 Director
Thomas F. Githens . . . . . . 69 Director
Sangwoo Ahn . . . . . . . . . 58 Director
Ira Starr . . . . . . . . . . 37 Director
Mr. Austin was elected President, Chief Executive Officer and a director
of the Company in September 1993. From 1987 to the time he joined the Company,
Mr. Austin was President and Chief Executive Officer of Tuscaloosa Steel
Corporation, a mini hot strip mill owned by British Steel PLC with
approximately $200 million in annual revenue ("Tuscaloosa"). Mr. Austin also
serves on the board of directors of Chicago Metallic Corporation.
Mr. Barker was elected Vice President, Finance and a director of the
Company in September 1992 and Treasurer and Secretary in September 1993. Mr.
Barker was also elected Chief Financial Officer in May 1996. He had served as
Controller of the Company and its predecessors since November 1986.
Dr. Hodge was elected Vice President, International in June 1994 after
having served as Vice President of Technology since September 1989. He was
Marketing and Technical Manager for the European Sales and Distribution
operations from 1985 to 1987 and Director of Technology from 1987 to 1989.
Mr. Rothman was elected Vice President, Engineering and Technology in
October 1995 after having served as Marketing Manager since 1994. He
previously served in various marketing and technical positions since joining
the Company in 1975.
Mr. Sponaugle was elected Vice President, Sales and Marketing in October
1994 after having served as Quality Control Manager and Total Quality Manager
since September 1992. He previously served as Marketing Manager from 1985 to
1992.
Mr. LaRosa was elected Vice President, Human Resources and Information
Technology in April 1996 after having served as Manager, Human Resources and
Information Technology from June 1994 to April 1996. From September 1993 until
June 1994, Mr. LaRosa served as Manager, Human Resources. From December 1990
until joining the Company in September 1993, he served in various management
capacities at Tuscaloosa.
Mr. Cijan was elected Vice President, Operations in April 1996. He joined
the Company in 1993 as Manufacturing Manager and was Manager, Maintenance and
Engineering for Tuscaloosa from 1987 until he joined the Company in 1993.
Mr. Brown was elected Controller and Chief Accounting Officer of the
Company in May, 1996 after having served as General Accounting Manager since
1992. From 1988 to 1992 he served in various financial capacities with the
Company.
Mr. Hanson was named General Manager, Arcadia Tubular Products Facility in
November 1994. He previously served the Company and its predecessors in
various technical, production and engineering capacities since October 1987.
Mr. Lewis has served as a general partner of MLGAL Partners L.P.
("MLGAL"), a Connecticut limited partnership that is the general partner of
Fund II, since its formation in 1987. He was elected a director of the Company
in 1989 and has served as Chairman of the Board of the Company since October
1993. Mr. Lewis also serves on the boards of directors of Aon Corporation,
Evergreen Media Corporation, Tyler Corporation, Quaker Fabric Corporation,
Stuart Entertainment, Inc. and ITI Technologies, Inc.
Mr. Egan was elected as a director and Vice Chairman of the Board of the
Company in December 1993. Mr. Egan is retired. He was formerly the Chairman
and Chief Executive Officer of Alloy Rods Corporation from 1985 to 1993. Mr.
Egan also serves on the board of directors of Robroy Inc. See Item 12 for a
summary of these agreements.
Mr. Morgan has served as a general partner of MLGAL since its formation in
1987. He was elected a director of the Company in 1989. Mr. Morgan also serves
on the boards of directors of TriMas Corporation, Flight Safety International,
Mascotech, Inc., Masco Corp., Allied Digital Technologies, Inc. and McDermott
International Incorporated.
Mr. Githens has been a retired partner of MLGAL since January 1, 1993.
From 1982 until his retirement, Mr. Githens was a partner in MLGAL, although
he ceased his active involvement in the operations of MLGAL in December 1991.
Mr. Ahn has served as a general partner of MLGAL since its formation in
1987. He was elected a director of the Company in 1989. Mr. Ahn also serves on
the boards of directors of Kaneb Services, Inc., Kaneb Pipe Line Partners,
L.P., PAR Technology Corp., Quaker Fabric Corporation, Stuart Entertainment,
Inc. and ITI Technologies, Inc.
Mr. Starr has served as a general partner of MLGAL since 1994. Mr. Starr
served as Vice President of MLGAL from 1988 to 1994. He was elected a director
of the Company in 1989. Mr. Starr also serves on the boards of directors of
Quaker Fabric Corporation and Stuart Entertainment, Inc.
The Company, Holdings, Fund II and the investors in the Company who are
officers or directors of the Company or employees of MLGA or the Company
entered into the Stock Subscription Agreement, which requires certain persons
be elected to the board of directors. The same parties, together with certain
institutional investors, entered into a Stockholders Agreement dated August
31, 1989 (the "Stockholder Agreement"). See Item 12 for a summary of these
agreements.
Each member of the board of directors is elected for a term of one year.
Except for Messrs. Austin, Barker and Egan, who were elected in September
1993, September 1992 and October 1993, respectively, each of the directors has
served in that capacity since August 1989. Each of the directors is nominated
and elected pursuant to the terms of the Stock Subscription Agreement.
The Company's Certificate of Incorporation (the "Certificate") authorizes
the board of directors to designate the number of directors. The board
currently has designated eleven directors, and there are three existing
vacancies on the board of directors, which the Company does not intend to fill
in the near future. Directors of the Company serve until their successors are
duly elected and qualified or until their earlier resignation or removal.
Officers of the Company serve at the discretion of the board of directors,
subject, in the case of Mr. Austin, to the terms of his employment contract.
See "--Austin Employment Agreement."
The board has established an Audit Committee and a Compensation Committee.
The Audit Committee consists of Messrs. Egan, Githens and Starr and the
Compensation Committee consists of Messrs. Lewis, Ahn and Egan. The Audit
Committee is responsible for recommending independent auditors, reviewing, in
connection with the independent auditors, the audit plan, the adequacy of
internal controls, the audit report and management letter and undertaking such
other incidental functions as the board may authorize. The Compensation
Committee is responsible for administering the Stock Option Plans, determining
executive compensation policies and administering compensation plans and
salary programs, including performing an annual review of the total
compensation and recommended adjustments for all executive officers. See Item
11.
[Remainder of page intentionally left blank.]
ITEM 11. EXECUTIVE COMPENSATION
The following tables and notes present the compensation provided by the
Company to its Chief Executive Officer and the Company's four most highly
compensated executive officers, who served as executive officers as of
September 30, 1996.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------- -------------
LONG-TERM
COMPENSATION
AWARDS/OPTIONS
NAME AND PRINCIPAL POSITION FISCAL (NUMBER OF ALL OTHER
YEAR SALARY BONUS SHARES COMPENSATION(3)
- ---------------------------- ----------- ----------- ----------- ------------------------ ------------------------
Michael D. Austin 1996 $ 351,250 $ 67,000 -- $ 104,519
President and Chief 1995 314,167 -- -- 75,631
Executive Officer 1994 314,167 100,000(2) -- 5,520
Joseph F. Barker 1996 150,000 27,000 -- 2,073
Vice President, Finance; 1995 130,500 -- 28,400 1,808
Secretary; Treasurer 1994 130,500 -- -- 2,252
F. Galen Hodge 1996 136,750 26,700 -- 3,236
Vice President, 1995 129,033 -- 23,00 3,651
International 1994 129,033 -- -- 2,580
August A. Cijan 1996 139,350 25,100 -- 743
Vice President, Operations 1995 117,800 -- 40,000 55,677
1994 106,893 -- -- 295
Charles J. Sponaugle 1996 134,042 23,100 -- 1,191
Vice President, Sales 1995 109,908 -- 40,00 1,555
and Marketing 1994 83,733 -- -- 682
- --------------------------
(1) Additional compensation in the form of perquisites was paid to certain of the named officers in the perids presented;
however, the amount of such compensation was less than the level required for reporting.
(2) Mr. Austin was elected President and Chief Executive Officer of the Company on September 2, 1993 and, under the terms
of an Executive Employment Agreement with the Company, Mr. Austin received a $100,000 bonus to cover deferred compensation
forfeited at his former employer. See "Austin Employment Agreement" below.
(3) Premium payments to the group term life insurance plan, gainsharing payments and relocation reimbursements which
were made by the Company.
STOCK OPTION PLANS
In 1986, the Company adopted a stock incentive plan, which was amended and
restated in 1987, for certain key management employees (the "Prior Option
Plan"). The Prior Option Plan allowed participants to acquire restricted
common stock from the Company by exercising stock options (the "Prior
Options") granted pursuant to the terms and conditions of the Prior Option
Plan. In connection with the 1989 Acquisition, Holdings established the Haynes
Holdings, Inc. Employee Stock Option Plan (the "Existing Stock Option Plan").
The Existing Stock Option Plan authorizes the granting of options to certain
key employees and directors of Holdings and its subsidiaries (including the
Company) for the purchase of a maximum of 905,880 shares of Holdings' Common
Stock. As of September 30, 1996, options to purchase 820,045 shares were
outstanding under the Existing Stock Option Plan, leaving 85,835 options
available for grant. Upon consummation of the 1989 Acquisition, the holders of
the Prior Options exchanged all of their remaining Prior Options for options
pursuant to the Stock Option Plan (the "Rollover Options"). Except for the
Rollover Options, the Compensation Committee, which administers the Existing
Stock Option Plan, is authorized to determine which eligible employees will
receive options and the amount of such options. Pursuant to the Existing Stock
Option Plan, the Compensation Committee is authorized to grant options to
purchase Common Stock at any price in excess of the lower of Book Value (as
defined in the Existing Stock Option Plan) or 50% of the Fair Market Value (as
defined in the Existing Stock Option Plan) per share of Common Stock on the
date of the award. However, actual options outstanding under the Existing
Stock Option Plan have been granted at the estimated fair market value per
share at the date of grant, resulting is no compensation being charged to
operations.
Subject to earlier exercise upon death, disability or normal retirement,
upon a change of control (as defined in the Existing Stock Option Plan) of
Holdings, upon the determination of the Compensation Committee in its
discretion, or upon the sale of all or substantially all of the assets of the
Company, options granted under the Existing Stock Option Plan (other than the
Rollover Options and options granted to existing Management Holders (as
defined in the Existing Stock Option Plan) that are immediately exercisable)
become exercisable on the third anniversary thereof unless otherwise provided
by the Compensation Committee and terminate on the earlier of (i) three months
after the optionee ceases to be employed by the Company or any of its
subsidiaries or (ii) ten years and two days after the date of grant. Options
granted pursuant to the Existing Stock Option Plan may not be assigned or
transferred by an optionee other than by last will and testament or by the
laws of descent and distribution, and any attempted transfer of such options
may result in termination thereof. The grant, holding or exercise of options
granted pursuant to the Existing Stock Option Plan may, in the Compensation
Committee's discretion, be conditioned upon the optionee becoming a party to
the Stock Subscription Agreement or the Stockholders Agreement entered into by
the investors in the Company at the time of the 1989 Acquisition. See
"Principal Stockholders."
In fiscal 1995, 322,900 options were granted by the Compensation Committee
pursuant to the Existing Stock Option Plan. No options were granted in fiscal
1996. On October 22, 1996, 133,000 options were granted to certain key
management personnel with exercise prices of $8.00 per share.
Certain options were originally granted in December 1994 with an exercise
price of $5.00 per share. In order to provide a meaningful incentive to
management, in January 1996 the Company's board of directors reduced the
exercise price for the options listed in the table (and options to purchase an
additional 191,500 shares of Common Stock granted to other members of the
Company's management) to $2.50 per share, which the board of directors
determined was the fair market value at that time.
The following table sets forth the number of shares of Holdings common stock covered by exercisable
and unexercisable options held by the persons named in the Summary Compensation Table.
Fiscal Year End Option Values
Number of Unexercised Options Value of Unexercised In-the-Money
at September 30, 1996 (#) Options at September 30, 1996 ($)(1)
------------ -------------------- ------------- ------------- --------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------ -------------------- ------------- ------------- --------------
Michael D. Austin 120,000 80,000 660,000 440,000
F. Galen Hodge 57,070 18,400 287,637 101,200
Joseph F. Barker 40,924 22,720 230,284 124,960
August A. Cijan 8,000 32,000 44,000 176,000
Charles J. Sponaugle 14,800 25,200 81,400 138,600
------------ -------- ------------ --------- -----------
(1) Because there is no market for Holdings common stock, the value of unexercised "In-the Money"
options is based on the most recent value of Holdings common stock as determined by the Holdings Board
of Directors.
SEVERANCE AGREEMENTS
In connection with the events leading up to the acquisition of the Company
by Morgan Lewis Githens & Ahn and management of the Company in August 1989,
the Company entered into Severance Agreements with certain key employees (the
"Prior Severance Agreements"). In 1995, the Company determined that the
provisions of the Prior Severance Agreements were no longer appropriate for
the key employees who were parties thereto and that several other key
employees who were employed after 1989 should be entitled to severance
benefits. Consequently, during and after July 1995, the Company entered into
Severance Agreements (the "Severance Agreements") with Messrs. Austin, Barker,
Cijan, Hodge, LaRosa and Sponaugle and with certain other key employees of the
Company (the "Eligible Employees"). The Severance Agreements superseded in all
respects the Prior Severance Agreements that were then in effect.
The Severance Agreements provide for an initial term expiring April 30,
1996, subject to one-year automatic extensions (unless terminated by the
Company or the Eligible Employee 60 days prior to May 1 of any year). The
Severance Agreements automatically terminate upon termination of the Eligible
Employee's employment prior to a Change in Control of the Company, as defined
in the Severance Agreements (a "Severance Change in Control"), unless the
termination of employment occurs as a result of action of the Company other
than for Cause (as defined in the Severance Agreements) within 90 days of a
Severance Change in Control. A Severance Change in Control occurs upon a
change in ownership of 50.0% or more of the combined voting power of the
outstanding securities of the Company or upon the merger, consolidation, sale
of all or substantially all of the assets or liquidation of the Company.
The Severance Agreements provide that if an Eligible Employee's employment
with the Company is terminated within six months following a Severance Change
in Control by reason of such Eligible Employee's disability, retirement or
death, the Company will pay the Eligible Employee (or his estate) his Base
Salary (as defined in the Severance Agreements) plus any bonuses or incentive
compensation earned or payable as of the date of termination. In the event
that the Eligible Employee's employment is terminated by the Company for Cause
(as defined in the Severance Agreements) within the six-month period, the
Company is obligated only to pay the Eligible Employee his Base Salary through
the date of termination. In addition, if within the six-month period the
Eligible Employee's employment is terminated by the Eligible Employee or the
Company (other than for Cause or due to disability, retirement or death), the
Company must (among other things) (i) pay to the Eligible Employee such
Eligible Employee's full Base Salary and any bonuses or incentive compensation
earned or payable as of the date of termination; (ii) continue to provide life
insurance and medical and hospital benefits to the Eligible Employee for up to
12 months following the date of termination (18 months for Messrs. Austin and
Barker); (iii) pay to the Eligible Employee $12,000 for outplacement costs to
be incurred, (iv) pay to the Eligible Employee a lump sum cash payment equal
to either (a) 150% of the Eligible Employee's Base Salary in the case of
Messrs. Austin and Barker, or (b) 100% of the Eligible Employee's Base Salary
in the case of the other Eligible Employees, provided that the Company may
elect to make such payments in installments over an 18 month period in the
case of Messrs. Austin or Barker or a 12 month period in the case of the other
Eligible Employees. As a condition to receipt of severance payments and
benefits, the Severance Agreements require that Eligible Employees execute a
release of all claims.
Pursuant to the Severance Agreements, each Eligible Employee agrees that
during his employment with the Company and for an additional one year
following the termination of the Eligible Employee's employment with the
Company by reason of disability or retirement, by the Eligible Employee within
six months following a Severance Change in Control or by the Company for
Cause, the Eligible Employee will not, directly or indirectly, engage in any
business in competition with the business of the Company.
AUSTIN EMPLOYMENT AGREEMENT
On September 2, 1993, the board of directors elected Michael D. Austin
President and Chief Executive Officer of the Company. The Company and Holdings
entered into an Executive Employment Agreement with Mr. Austin (the "Executive
Employment Agreement") which provides that, in exchange for his services as
President and Chief Executive Officer of the Company, the Company will pay Mr.
Austin (1) an annual base salary of not less than $325,000, subject to annual
adjustment at the sole discretion of the board of directors, and (2) incentive
compensation as determined by the board of directors based on the actual
results of operations of the Company in relation to budgeted results of
operation of the Company. In addition, Mr. Austin is entitled to receive
vacation leave and to participate in all benefit plans generally applicable to
senior executives of the Company and to receive fringe benefits as are
customary for the position of Chief Executive Officer.
Under the terms of the Executive Employment Agreement, the Company agreed
to pay Mr. Austin the sum of $100,000 as compensation for deferred
compensation forfeited by Mr. Austin at his former employer. The Company also
indemnified Mr. Austin against any loss incurred in the sale of Mr. Austin's
residence at his prior location and paid certain financing costs incurred in
connection with the residence. The Company provided supplemental life, health,
and accident coverage for Mr. Austin until he was eligible to participate in
the Company's benefit plans.
Pursuant to the Executive Employment Agreement, Holdings also granted Mr.
Austin the option to purchase 200,000 shares of Common Stock of Holdings at a
purchase price of $5.00 per share under the Existing Stock Option Plan. In
January 1996, the purchase price for exercise of the option was reduced to
$2.50 per share. These options vest at a rate of 40,000 shares on September 1
of each year commencing September 1, 1994 until fully vested, so long as Mr.
Austin continues to be employed by the Company on such dates and provided that
all options would vest upon a "change in control" as defined in the Existing
Stock Option Plan or certain sales of assets as specified in the Existing
Stock Option Plan. Mr. Austin also became a party to the Stock Subscription
Agreement and the Stockholders Agreement. In the event of a change in control
and the termination of Mr. Austin's employment by the Company thereafter, the
Company is also obligated to pay the difference, if any, between the pension
benefit payable to Mr. Austin under the U.S. Pension Plan (as defined below)
at the time of such change in control and the pension benefit that would be
payable under the U.S. Pension Plan if Mr. Austin had completed 10 years of
service with the Company.
On July 15, 1996, the Company, Holdings and Mr. Austin entered into an
amendment of the Executive Employment Agreement which extends its term to
August 31, 1999 (with year to year continuation thereafter unless the Company
or Mr. Austin elects otherwise) and requires the Company to reimburse Mr.
Austin for up to $10,000 for estate or financial planning services. The
amendment of the Executive Employment Agreement also requires that in 1996 the
Company review and evaluate the existing bonus plans and consider, among other
alternatives, a deferred compensation plan for the management of the Company.
If Mr. Austin's employment is terminated by the Company prior to August
31, 1999 without "Cause," as defined in the Executive Employment Agreement, as
amended, Mr. Austin is entitled to continuation of his annual base salary
until the later of August 31, 1999 or 24 months following the date of
termination. Also, if the Company terminates Mr. Austin's employment without
Cause after August 31, 1999 or elects not to renew the Executive Employment
Agreement on a one-year basis, Mr. Austin is entitled to annual base salary
continuation for a period of 12 months following the date of termination of
his employment. In the event that Mr. Austin is entitled to termination
benefits under the Severance Agreement to which he is a party, he is not
entitled to salary continuation or benefits under the Executive Employment
Agreement, as amended.
U.S. PENSION PLAN
The Company maintains for the benefit of eligible domestic employees a
defined benefit pension plan, designated as the Haynes International, Inc.
Pension Plan (the "U.S. Pension Plan"). Under the U.S. Pension Plan, all
Company employees completing at least 1,000 hours of employment in a 12-month
period become eligible to participate in the plan. Employees are eligible to
receive an unreduced pension annuity on reaching age 65, reaching age 62 and
completing 10 years of service, or completing 30 years of service. The final
option is available only for union employees hired before July 3, 1988 or for
salaried employees who were plan participants on March 31, 1987.
For salaried employees employed on or after July 3, 1988, the normal
monthly pension benefit provided under the U.S. Pension Plan is the greater of
(i) 1.31% of the employee's average monthly earnings multiplied by years of
credited service, plus an additional 0.5% of the employee's average monthly
earnings, if any, in excess of Social Security covered compensation
multiplied by years of credited service up to 35 years, or (ii) the
employee's accrued benefit as of March 31, 1987.
There are provisions for delayed retirement benefits, early retirement
benefits, disability and death benefits, optional methods of benefit payments,
payments to an employee who leaves after five or more years of service
and payments to an employee's surviving spouse. Employees are vested and
eligible to receive pension benefits after completing five years of service.
Vested benefits are generally paid beginning at or after age 55;
however, benefits maybe paid earlier in the event of disability, death, or
completion of 30 years service prior to age 55.
The following table sets forth the range of estimated annual benefits
payable upon retirement for graduated levels of average annual earnings and
years of service for employees under the plan, based on retirement at age 65
in 1996. The maximum annual benefit permitted for 1996 under Section 415(b) of
the Code is $120,000.
YEARS OF
---------
SERVICE
---------
AVERAGE ANNUAL
REMUNERATION 15 20 25 30 35
-------- -------- --------- -------- --------
100,000 $ 23,800 $ 31,700 $ 39,700 $ 47,600 $ 55,500
150,000 36,500 48,700 60,900 73,100 85,300
200,000 49,300 65,700 82,200 98,600 115,000
250,000 62,000 82,700 103,400 124,100 144,800
300,000 74,800 99,700 124,700 149,600 174,500
350,000 87,500 116,700 145,900 175,100 204,300
400,000 100,300 133,700 167,200 200,600 234,000
450,000 113,000 150,700 188,400 226,100 263,800
The estimated credited years of service of each of the individuals named
in the Summary Compensation Table as of September 30, 1996 are as follows:
CREDITED
SERVICE
--------
Michael D. Austin 2
F. Galen Hodge 26
Joseph F. Barker 15
Charles J. Sponaugle 15
August A. Cijan 2
- -------------------- --------
U.K. PENSION PLAN
The Company maintains a pension plan for its employees in the United
Kingdom (the "U.K. Pension Plan"). The U.K. Pension Plan is a contributory
plan under which eligible employees contribute 3% or 6% of their annual
earnings. Normal retirement age under the U.K. Pension Plan is age 65 for
males and age 60 for females. The annual pension benefit provided at normal
retirement age under the U.K. Pension Plan ranges from 1% to 1 2/3% of the
employee's final average annual earnings for each year of credited service,
depending on the level of employee contributions made each year during the
employee's period of service with the Company. The maximum annual pension
benefit for employees with at least 10 years of service is two-thirds of the
individual's final average annual earnings. Similar to the U.S. Pension Plan,
the U.K. Pension Plan also includes provisions for delayed retirement
benefits, early retirement benefits, disability and death benefits, optional
methods of benefit payments, payments to employees who leave after a certain
number of years of service, and payments to an employee's surviving spouse.
The U.K. Pension Plan also provides for payments to an employee's surviving
children.
PROFIT SHARING AND SAVINGS PLAN
The Company maintains the Haynes International, Inc. Profit Sharing and
Savings Plan and the Haynes International, Inc. Hourly Profit Sharing and
Savings Plan (the "Profit Sharing Plans") to provide retirement, tax-deferred
savings for eligible employees and their beneficiaries.
The board of directors has sole discretion to determine the amount, if
any, to be contributed by the Company. No Company contributions were made to
the Profit Sharing Plans for the fiscal years ended September 30, 1994, 1995
and 1996.
The Profit Sharing Plans are qualified under Section 401 of the Code,
permitting the Company to deduct for federal income tax purposes all amounts
contributed by it to the Profit Sharing Plans.
In general, all salaried employees completing at least 1,000 hours of
employment in a 12-month period are eligible to participate after completion
of one full year of employment. Each participant's share in the annual
allocation, if any, to the Profit Sharing Plans is represented by the
percentage which his or her plan compensation (up to $260,000) bears to the
total plan compensation of all participants in the plan. Employees may also
elect to make elective salary reduction contributions to the Profit Sharing
Plans, in amounts up to 10% of their plan compensation. Elective salary
reduction contributions may be withdrawn subject to the terms of the Profit
Sharing Plans.
Vested individual account balances attributable to Company contributions
may be withdrawn only after the amount to be distributed has been held by the
plan trustee in the profit sharing account for at least 24 consecutive
calendar months. Participants vest in their individual account balances
attributable to Company contributions at age 65, death, disability or on
completing five years of service.
INCENTIVE PLAN
In January 1996, the Company awarded and paid management bonuses of
approximately $439,000 pursuant to its management incentive program. The
January bonuses were calculated based on the Company's fiscal 1995
performance. Additionally, the Company adopted a management incentive plan
effective for fiscal 1996 pursuant to which senior managers and managers in
the level below senior managers will be paid a bonus based on actual EBITDA
compared to budgeted EBITDA. Based on results for fiscal 1996, the Company
accrued approximately $1.5 million for fiscal 1996 which was paid to all
domestic employees meeting certain service requirements on November 15, 1996.
HAYNES INTERNATIONAL, LTD. PLAN
In fiscal 1995, the Company's affiliate Haynes International, LTD
instituted a gainsharing plan. For fiscal 1995 and 1996, the Company made
gainsharing payments pursuant to this plan of approximately $269,000 and
$266,000, respectively.
DIRECTOR COMPENSATION
The directors of the Company other than Thomas F. Githens and Robert Egan
receive no compensation for their services as such. The non-management members
of the board of directors are reimbursed by the Company for their
out-of-pocket expenses incurred in attending meetings of the board of
directors. Mr. Githens receives a director's fee of $3,000 per calendar
quarter, $1,000 per board meeting attended and $750 per board committee
meeting attended. Mr. Egan receives a director's fee of $2,000 per month plus
an advisory fee of $2,000 per month.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Sangwoo Ahn, Perry J. Lewis and Robert Egan served on the Compensation
Committee during fiscal 1996. None of the members of the Compensation
Committee are now serving or previously have served as employees or officers
of the Company or any subsidiary, and none of the Company's executive officers
serve as directors of, or in any compensation related capacity for, companies
with which members of the Compensation Committee are affiliated.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
administering the Existing Stock Option Plan, determining executive
compensation policies and administering compensation plans and salary
programs. The Committee is currently comprised solely of non-employee
directors. The Committee is chaired by Mr. Perry J. Lewis. The other
Committee members are Mr. Sangwoo Ahn and Mr. Robert Egan. The following
report is submitted by the members of the Compensation Committee.
* * *
The Company's executive compensation program is designed to align
executive compensation with the financial performance, business strategies and
objectives of the Company. The Company's compensation philosophy is to ensure
that the delivery of compensation, both in the short- and long-term, is
consistent with the sustained progress, growth and profitability of the
Company and acts as an inducement to attract and retain qualified individuals.
Under the guidance of the Company's Compensation Committee, the Company has
developed and implemented an executive compensation program to achieve these
objectives while providing executives with compensation opportunities that are
competitive with companies of comparable size in related industries.
The Company's executive compensation program has been designed to
implement the objectives described above and is comprised of the following
fundamental three elements:
C a base salary that is determined by individual contributions and
sustained performance within an established competitive salary range. Pay for
performance recognizes the achievement of financial goals and accomplishment
of corporate and functional objectives of the Company.
C an annual cash bonus, based upon corporate and individual performance
during the fiscal year.
C grants of stock options, also based upon corporate and individual
performance during the fiscal year, which focus executives on managing the
Company from the perspective of an owner with an equity position in the
business.
Base Salary. The salary, and any periodic increase thereof, of the
President and Chief Executive Officer was and is determined by the Board of
Directors of the Company based on recommendations made by the Compensation
Committee. The salaries, and any periodic increases thereof, of the Vice
President, Finance, Secretary and Treasurer, the Vice President,
International, the Vice President, Operations, and the Vice President,
Marketing, were and are determined by the Board of Directors based on
recommendations made by the President and Chief Executive Officer and approved
by the Committee.
The Company, in establishing base salaries, levels of incidental and/or
supplemental compensation, and incentive compensation programs for its
officers and key executives, assesses periodic compensation surveys and
published data covering the industry in which the Company operates and
industry in general. The level of base salary compensation for officers and
key executives is determined by both their scope and responsibility and the
established salary ranges for officers and key executives of the Company.
Periodic increases in base salary are dependent on the executive's proficiency
of performance in the individual's position for a given period, and on the
executive's competency, skill and experience.
Compensation levels for fiscal 1996 for the President and Chief Executive
Officer, and for the other executive officers of the Company, reflected the
accomplishment of corporate and functional objectives in fiscal 1995.
Bonus Payments. Bonus awards are determined by the Board of Directors of
the Company based on recommendations made by the Compensation Committee.
Bonus awards for fiscal 1996 reflected the accomplishment of corporate and
functional objectives in fiscal 1996, including the successful refinancing of
the Company's debt.
Stock Option Grants. Stock options under the Existing Option Plan are
granted to key executives and officers based upon individual and corporate
performance and are determined by the Board of Directors of the Company based
on recommendations made by the Compensation Committee. No stock options were
granted in fiscal 1996.
SUBMITTED BY THE COMPENSATION COMMITTEE
Mr. Perry J. Lewis
Mr. Sangwoo Ahn
Mr. Robert Egan
[Remainder of page intentionally left blank.]
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of the Company is owned by Holdings.
The only stockholder of record of Holdings owning more than five percent of
its outstanding Common Stock at September 30, 1996 was MLGA Fund II, L.P.
("Fund II"), a Connecticut limited partnership that is controlled by John A.
Morgan, Perry J. Lewis, Sangwoo Ahn, Ira Starr and William C. Ughetta, Jr.,
all principals of MLGAL. The following table sets forth the number and
percentage of shares of Common Stock of Holdings owned by (i) Fund II, (ii)
all affiliates of Fund II, (iii) each of the directors of the Company and each
of the executive officers named in the Summary Compensation Table, (iv) all
affiliates of Fund II as a group and (v) all directors and executive officers
of the Company as a group, as of September 30, 1996. The address of Fund II,
and of Messrs. Ahn, Lewis, Morgan, Starr and Ughetta, is 2 Greenwich Plaza,
Greenwich, Connecticut 06830. The address of Messrs, Austin, Hodge, Barker,
Cijan, and Sponaugle is 1020 West Park Avenue, Kokomo, Indiana 46904-9013. The
address of Mr. Githens is 41 Crescent Place, Short Hills, New Jersey 07078.
The address of Mr. Egan is 4 Foxwood Drive, Pittsburgh, Pennsylvania 15238.
Shares Beneficially Owned(1)
Name Number Percent
- ------------------------------------ ---------------------------- --------
Fund II 5,759,894 87.6%
Sangwoo Ann 5,879,836(2)(3) 89.4
Perry J. Lewis 5,879,836(2)(3) 89.4
John A. Morgan 5,879,836(2)(3) 89.4
Ira Starr 5,854,251(2)(3) 89.0
William C. Ughetta, Jr. 5,846,751(2)(3) 88.9
Thomas F. Githens 54,799 (6)
Robert Egan 0 --
Michael D. Austin 120,000(4) 1.8
F. Galen Hodge 57,070(6) (6)
Joseph F. Barker 40,924(6) (6)
August A. Cijan 8,000(6) (6)
Charles J. Sponaugle 19,800(5) (6)
All Fund II affiliates as a group 5,953,506 90.6
All directors and executive officers
of the Company as a group 6,270,099(2) 91.8
- ------------------------------------ ---------------------------- --------
- ----------------------------
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
(2) Includes the shares reported in the table as owned by Fund II and
86,857 shares owned by MLGAL.
(3) The named stockholder disclaims beneficial ownership of the shares
held by Fund II and MLGAL, except to the extent of his pecuniary interest
therein arising from his general partnership interest in MLGAL.
(4) Represents shares of Common Stock underlying options exercisable
within 60 days of September 30, 1996 which are deemed to be beneficially owned
by the holders of such options. See Item 11 - "Executive Compensation - Stock
Option Plans."
(5) Includes 14,800 shares of Common Stock underlying options exercisable
within 60 days of September 30, 1996 which are deemed to be beneficially owned
by Mr. Sponaugle. See Item 11 - "Executive Compensation - Stock Option
Plans."
(6) Less than 1%.
AGREEMENTS AMONG STOCKHOLDERS
Holdings, the Company, MLGA Fund II and the investors in Holdings who were
officers or directors of the Company or affiliates of MLGA Fund II or the
Company at the time of the 1989 Acquisition have entered into the Stock
Subscription Agreement and Holdings and all of the investors in Holdings have
entered into the Stockholder Agreement, both dated August 31, 1989 and amended
as of August 14, 1992 to add MLGAL as a party. The Stock Subscription
Agreement was further amended on March 16, 1993 to reduce the Company's
purchase price for Holdings common stock and stock options described below.
The Stock Subscription Agreement provides that each of the investors who
is a party to the agreement shall have a right of first refusal with respect
to any transfer by an investor of Holdings common stock unless the transfer
complies with all applicable securities laws and all other agreements made by
the investors who are parties to the agreement, or the transferee is Holdings
or a person specified in the Stock Subscription Agreement as a "Permitted
Transferee", or the transfer is made pursuant to a public offering of Holdings
common stock. Investors who are management employees of the Company or their
Permitted Transferees (the "Management Holders") have the right to sell their
Holdings common stock or their options to purchase Holdings common stock, in
whole or in part, to Holdings at a price equal to (i) 6.3 multiplied by the
Company's EBITDA (as defined in the Stock Subscription Agreement) for the
immediately preceding four fiscal quarters less the average indebtedness of
Holdings, the Company and its subsidiaries for the immediately preceding four
fiscal quarters, all to be determined on a consolidated basis, divided by (ii)
the total number of fully diluted shares of Holdings common stock outstanding
(the "Fair Market Value") net of the applicable exercise price, if any, within
five years after termination of employment because of disability, retirement
or death, after which time the Holdings common stock and options to purchase
Holdings common stock may be called by Holdings for redemption at the Fair
Market Value. Additionally, upon the termination of employment of any
Management Holder other than for disability, retirement or death, the Stock
Subscription Agreement contains provisions for the purchase and sale of
Holdings common stock and options to purchase Holdings common stock at prices
based on formulas which take into account the reason for the termination.
The Stock Subscription Agreement contains voting requirements which
provide for the election as directors of Holdings and of the Company of six
persons (including the Chairman of the Board) designated by the Founding
Investors (as defined in the Stock Subscription Agreement) and of five persons
designated by the Management Holders. A change in the number of directors
requires the approval of a majority of all the investors who are parties to
the agreement and a majority of the Management Holders. The Board of Directors
must approve all capital expenditures over $500,000, mergers, adjustments to
management's compensation, promotions of officers, incurrence of debt, loans,
sales of shares, and any disposal of substantially all the assets of the
Company. The Stock Subscription Agreement also requires that the investors who
are parties to the agreement vote to amend the Certificate of Incorporation of
Holdings if necessary to accommodate a public offering; however, newly issued
shares must be approved by a majority of the Management Holders if the
issuance price is below certain specified minimum prices. The Stock
Subscription Agreement terminates upon the earlier of an initial public
offering, the consent of a majority of all the investors who are parties to
the agreement and of a majority of the Management Holders, or the tenth
anniversary of the 1989 Acquisition.
The Stockholder Agreement imposes certain transfer restrictions on the
Holdings common stock, including provisions that (i) Holdings common stock may
be transferred only to those persons agreeing to be bound by the Stockholder
Agreement, and the Stock Subscription Agreement if the transferor is a party
thereto, except if such transfer is pursuant to a public offering or made
following a public offering in compliance with Rule 144 under the Securities
Act; (ii) the investors may not grant any proxy or enter into or agree to be
bound by any voting trust with respect to the Holdings common stock; (iii) if
the Founding Investors, the Management Holders or their permitted transferees
propose to sell any of their Holdings common stock, the other investors shall
in most instances have the right to participate ratably in the proposed sale
or, under certain circumstances, to sell all of their Holdings common stock in
the proposed sale; (iv) if a majority in interest of the investors propose to
sell a majority of the Holdings common stock or substantially all of the
assets of Holdings or the Company to a third party, the Management Holders
shall have a right to bid for such stock or assets; and (v) a majority in
interest of the investors may compel all other such investors to sell their
shares under certain circumstances. The Stockholder Agreement also contains a
commitment on the part of Holdings to register the shares under the Securities
Act upon request by investors holding at least 25% of the fully diluted shares
of Holdings common stock outstanding, or if Holdings otherwise proposes to
register shares, subject to certain conditions and limitations. The
Stockholder Agreement terminates on the earlier of the sale of 15% or more of
the fully diluted stock pursuant to a public offering and the qualification of
the common stock for listing on the New York Stock Exchange, the American
Stock Exchange or Nasdaq, or upon the tenth anniversary of the Acquisition.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report.
---------------------------------------------
1. Financial Statements:
----------------------
Included as outlined in Item 8 of Part II of this report:
Report of Independent Accountants.
Consolidated Balance Sheet as of September 30, 1995 and September 30, 1996.
Consolidated Statement of Operations for the Years Ended September 30, 1994,
1995 and 1996.
Consolidated Statement of Cash Flows for the Years Ended September 30, 1994,
1995 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
-------------------------------
Included as outlined in Item 8 of Part II of this report:
Schedule VIII - Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted as they are not required,
are not applicable, or the information is shown in the Notes to the
Consolidated Financial Statements.
(b) Reports on Form 8-K. None.
----------------------
(c) Exhibits. See Index to Exhibits.
--------
[Remainder of page intentionally left blank.]
HAYNES INTERNATIONAL, INC.
SCHEDULE VIII
EVALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Year Ended Year Ended Year Ended
Sept. 30, 1994 Sept. 30, 1995 Sept. 30, 1996
---------------- ---------------- ----------------
Balance at beginning of period $ 450 $ 520 $ 979
Provisions 863 553 26
Write-Offs (805) (151) (152)
Recoveries 12 57 47
---------------- ---------------- ----------------
Balance at end of period $ 520 $ 979 $ 900
================ ================ ================
[Remainder of page intentionally left blank.]
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HAYNES INTERNATIONAL, INC.
----------------------------
(Registrant)
By:/s/ Michael D. Austin
---------------------------------
Michael D. Austin, President
Date: December 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------------------- ------------------------------ -----------------
/s/ Michael D. Austin President and Director December 20, 1996
- ---------------------
Michael D. Austin (Principle Executive Officer)
/s/ Joseph F. Barker Vice President, Finance; December 20, 1996
- ---------------------
Joseph F. Barker Treasurer and Director
Principle Financial Officer
/s/ Theodore T. Brown Controller December 20, 1996
- ---------------------
Theodore T. Brown (Principal Accounting Officer)
/s/ John A. Morgan Director December 20, 1996
- ---------------------
John A. Morgan
/s/ Perry J. Lewis Director December 20, 1996
- ---------------------
Perry J. Lewis
/s/ Thomas F. Githens Director December 20, 1996
- ---------------------
Thomas F. Githens
/s/ Sangwoo Ahn Director December 20, 1996
- ---------------------
Sangwoo Ahn
/s/ Ira Starr Director December 20, 1996
- ---------------------
Ira Starr
/s/ Robert Egan Director December 20, 1996
- ---------------------
Robert Egan
INDEX TO EXHIBITS
Sequential
Number Numbering
Assigned In System Page
Regulation S-K Number of
Item 601 Description of Exhibit Exhibit
- ---------------- ------------------------------------------------------------------------- -----------
(2) No Exhibit.
(3) 3.01 Restated Certificate of Incorporation of Registrant. (Incorporated by
reference to Exhibit 3.01 to Registration Statement on Form S-1,
Registration No. 33-32617.)
3.02 Bylaws of Registrant. (Incorporated by reference to Exhibit 3.02 to
Registration Statement on Form S-1, Registration No. 33-32617.)
(4) 4.01 Indenture, dated as of August 23, 1996, between Haynes
International, Inc., and National City Bank, as
Trustee, relating to the 11-5/8% Senior Notes Due 2004, table of
contents and cross-reference sheet
4.02 Form of 11 5/8% Senior Note Due 2004.
(9) No Exhibit
(10) 10.01 Form of Severance Agreements, dated as of March 10, 1989, between
Haynes International, Inc. and the employees of Haynes International,
Inc. named in the schedule to the Exhibit. (Incorporated by reference
to Exhibit 10.03 to Registration Statement on Form S-1, Registration
No. 33-32617.)
10.02 Stock Subscription Agreement, dated as of August 31, 1989, among
Haynes Holdings, Inc., Haynes International, Inc. and the persons
listed on the signature pages thereto (Investors). (Incorporated by
reference to Exhibit 4.07 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.03 Amendment to the Stock Subscription Agreement To Add a Party,
dated August 14, 1992, among Haynes Holdings, Inc., Haynes
International, Inc., MLGA Fund II, L.P., and the persons listed on the
signature pages thereto. (Incorporated by reference to Exhibit 10.17 to
Registration Statement on Form S-4, Registration No. 33-66346.)
10.04 Second Amendment to Stock Subscription Agreement, dated
March 16, 1993, among Haynes Holdings, Inc., Haynes International,
Inc., MLGA Fund II, L.P., MLGAL Partners, Limited Partnership, and
the persons listed on the signature pages thereto. (Incorporated by
reference to Exhibit 10.21 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.05 Stockholders Agreement, dated as of August 31, 1989, among Haynes
Holdings, Inc. and the persons listed on the signature pages thereto
(Investors). (Incorporated by reference to Exhibit 4.08 to Registration
Statement on Form S-1, Registration No. 33-32617.)
10.06 Amendment to the Stockholders Agreement To Add a Party, dated
August 14, 1992, among Haynes Holdings, Inc., MLGA Fund II, L.P.,
and the persons listed on the signature pages thereto. (Incorporated
by reference to Exhibit 10.18 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.07 Investment Agreement, dated August 10, 1992, between MLGA Fund
II, L.P., and Haynes Holdings, Inc. (Incorporated by reference to
Exhibit 10.22 to Registration Statement on Form S-4, Registration
No. 33-66346.)
10.08 Investment Agreement, dated August 10, 1992, between MLGAL
Partners, Limited Partnership and Haynes Holdings, Inc. (Incorporated
by reference to Exhibit 10.23 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.09 Investment Agreement, dated August 10, 1992, between Thomas F.
Githens and Haynes Holdings, Inc. (Incorporated by reference to
Exhibit 10.24 to Registration Statement on Form S-4, Registration
No. 33-66346.)
10.10 Consent and Waiver Agreement, dated August 14, 1992, among
Haynes Holdings, Inc., Haynes International, Inc., MLGA Fund II, L.P.,
and the persons listed on the signature pages thereto. (Incorporated
by reference to Exhibit 10.19 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.11 Retirement Agreement, dated as of May 21, 1993, between Haynes
International, Inc. and Paul F. Troiano (Incorporated by reference to
Exhibit 10.02 to Registration Statement on Form S-4, Registration
No. 33-66346.)
10.12 Executive Employment Agreement, dated as of September 1, 1993, by
and among Haynes International, Inc., Haynes Holdings, Inc. and
Michael D. Austin. (Incorporated by reference to Exhibit 10.26 to the
Registration Statement on Form S-4, Registration No. 33-66346.)
10.13 Amendment to Employment Agreement, dated as of July 15, 1996 by
and among Haynes International, Inc., Haynes Holdings, Inc. and
Michael D. Austin. (Incorporated by reference to Exhibit 10.15 to
Registration Statement on Form S-1, Registration No. 333-05411.)
10.14 Haynes Holdings, Inc. Employee Stock Option Plan. (Incorporated by
reference to Exhibit 10.08 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.15 Form of "New Option" Agreements between Haynes Holdings, Inc. and
the executive officers of Haynes International, Inc. named in the
schedule to the Exhibit. (Incorporated by reference to Exhibit 10.09 to
Registration Statement on Form S-1, Registration No. 33-32617.)
10.16 Form of "September Option" Agreements between Haynes Holdings,
Inc. and the executive officers of Haynes International, Inc. named in
the schedule to the Exhibit. (Incorporated by reference to Exhibit 10.10
to Registration Statement on Form S-1, Registration No. 33-66346.)
10.17 Form of "January 1992 Option" Agreements between Haynes Holdings,
Inc. and the executive officers of Haynes International, Inc. named in
the schedule to the Exhibit. (Incorporated by reference to Exhibit 10.08
to Registration Statement on Form S-4, Registration No. 33-66346.)
10.18 Form of "Amendment to Holdings Option Agreements" between
Haynes Holdings, Inc. and the executive officers of Haynes
International, Inc. named in the schedule to the Exhibit. (Incorporated
by reference to Exhibit 10.09 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.19 Amended and Restated Loan Agreement by and among CoreStates
Bank, N.A. and Congress Financial Corporation (Central), as Lenders,
Congress Financial Corporation (Central), as Agent of Lenders, and
Haynes International, Inc., as Borrower.
(11) No Exhibit.
(12) 12.01 Statement re: computation of ratio of earnings to fixed charges.
(13) No Exhibit.
(16) No Exhibit.
(18) No Exhibit.
(21) 21.01 Subsidiaries of the Registrant. (Incorporated by Reference to
Exhibit 21.01 to Registration Statement on Form S-1, Registration
No. 333-05411.)
(22) No Exhibit.
(23) No Exhibit.
(24) No Exhibit.
(27) 27.01 Financial Data Schedule
(28) No Exhibit.
(99) No Exhibit.
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