-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NGpT+5cJx+UqMI7oB/zAhNQ1FRpKqkYRW7O4nIi0Zz8RW86froh7E/QcmFxZ4lLl mWzpzUlrlN2QwxWEL5Znwg== 0000927946-98-000089.txt : 19981228 0000927946-98-000089.hdr.sgml : 19981228 ACCESSION NUMBER: 0000927946-98-000089 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAYNES INTERNATIONAL INC CENTRAL INDEX KEY: 0000858655 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 061185400 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-32617 FILM NUMBER: 98773943 BUSINESS ADDRESS: STREET 1: 1020 WEST PARK AVE STREET 2: PO BOX 9013 CITY: KOKOMO STATE: IN ZIP: 46904 BUSINESS PHONE: 3174566005 MAIL ADDRESS: STREET 1: 1020 WEST PARK AVE CITY: KOKOMO STATE: IN ZIP: 46904-9013 10-K 1 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, 1998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 333-5411 - ------------------------------------------------------------ HAYNES INTERNATIONAL, INC. - ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 06-1185400 - ----------------------------------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1020 West Park Avenue, Kokomo, Indiana 46904-9013 - ------------------------------------------------------------ --------------------------------- (Address of principal executive offices) (Zip Code) (765) 456-6000 - ------------------------------------------------------------ (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None - ------------------------------------------------------------ ---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 by Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any Amendment to this Form 10-K. X --- The registrant is a privately held corporation. As such, there is no practicable method to determine the aggregate market value of the voting stock held by non-affiliates of the registrant. The number of shares of Common Stock, $.01 par value, of Haynes International, Inc. outstanding as of December 18, 1998 was 100. Documents Incorporated by Reference: None The Index to Exhibits begins on page 72 in the sequential numbering system. ----- Total pages: 76 ------ PAGE
TABLE OF CONTENTS PART I Page ---- Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Consolidated Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7a. Quantitative and Qualitative Disclosures About Market Risk 31 Item 8. Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements with Accountants on Accounting 56 and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 57 Item 11. Executive Compensation 60 Item 12. Security Ownership of Certain Beneficial Owners and Management 68 Item 13. Certain Relationships and Related Transactions 69 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 69
PAGE PART I ITEM 1. BUSINESS GENERAL The Company develops, manufactures and markets technologically advanced, high performance alloys primarily for use in the aerospace and chemical processing industries. The Company's products are high temperature alloys ("HTA") and corrosion resistant alloys ("CRA"). The Company's HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines for the aerospace industry, gas turbine engines used for power generation, and waste incineration and industrial heating equipment. The Company's CRA products are used in applications that require resistance to extreme corrosion, such as chemical processing, power plant emissions control and hazardous waste treatment. The Company produces its high performance alloy products primarily in sheet, coil and plate forms, which in the aggregate represented approximately 63% of the Company's net revenues in fiscal 1998. 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 28% of its fiscal 1998 net revenues from products that are protected by United States patents and derived an additional approximately 21% of its fiscal 1998 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 1998, HTA and CRA products accounted for approximately 64% and 36%, respectively, of the Company's net revenues. HTA products are used primarily in manufacturing components 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 continues to represent an area of potential long-term growth for the Company. Unlike aerospace applications within the HTA product market, the development of new market applications for CRA products generally does not require long lead times. PAGE 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 at 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) (2) Aero-burner cans, after-burner High strength, oxidation resistant components cobalt-based alloys HAYNES 625 (1964) Aero/CPI-ducting, tanks, vessels, weld Good fabricability and general overlays corrosion resistance HAYNES 263 (1960) Aero/LBGT-components for gas turbine Good ductility and high strength at hot gas exhaust pan temperatures up to 1600 F 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 jet aircraft engines and LBGT. These products have been used in such applications since the 1950's and because of their widespread use have been most subject to competitive pricing pressures. In fiscal 1998, sales of these HTA products accounted for approximately 23% 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 11% of the Company's net revenues in fiscal 1998. Three of the more recently introduced HTA products, HAYNES 242, HAYNES 230 and HAYNES 214, initially developed for the aerospace and LBGT markets, are still patent-protected and together accounted for approximately 7% of the Company's net revenues in fiscal 1998. These newer alloys are continuing to gain acceptance for applications in industrial heating and waste incineration. PAGE 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 are also less effective. In fiscal 1998, these two alloys accounted for approximately 2% 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 1998, sales of these products accounted for approximately 4% of the Company's net revenues. CORROSION RESISTANT ALLOYS The following table sets forth information with respect to certain of the Company's significant corrosion resistant alloys:
ALLOY AND YEAR INTRODUCED END MARKETS AND APPLICATIONS (1) - --------------------------- ------------------------------------------ HASTELLOY C-2000 (1995) (2) CPI-tanks, mixers, piping HASTELLOY B-3 (1994) (2) CPI-acetic acid plants HASTELLOY D-205 (1993) (2) CPI-plate heat exchangers. ULTIMET (1990) (2) CPI-pumps, valves HASTELLOY G-50 (1989) Oil and gas-sour gas tubulars HASTELLOY C-22 (1985) (2) CPI/FGD-tanks, mixers, piping HASTELLOY G-30 (1985) (2) CPI-tanks, mixers, piping HASTELLOY B-2 (1974) CPI-acetic acid HASTELLOY C-4 (1973) CPI-tanks, mixers, piping HASTELLOY C-276 (1968) CPI/FGD/oil and gas-tanks, mixers, piping ALLOY AND YEAR INTRODUCED FEATURES - --------------------------- ----------------------------------------------------------------------------- HASTELLOY C-2000 (1995) (2) Versatile alloy with good resistance to uniform corrosion HASTELLOY B-3 (1994) (2) Better fabrication characteristics compared to other nickel-molybdenum alloys HASTELLOY D-205 (1993) (2) Corrosion resistance to hot sulfuric acid ULTIMET (1990) (2) Wear and corrosion resistant nickel-based alloy HASTELLOY G-50 (1989) Good resistance to down hole corrosive environments HASTELLOY C-22 (1985) (2) Resistance to localized corrosion and pitting HASTELLOY G-30 (1985) (2) Lower cost alloy with good corrosion resistance in phosphoric acid HASTELLOY B-2 (1974) Resistance to hydrochloric acid and other reducing acids Good thermal stability HASTELLOY C-4 (1973) HASTELLOY C-276 (1968) 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.
During fiscal 1998, sales of the CRA alloys HASTELLOY C-276, HASTELLOY C-22 and HASTELLOY C-4 accounted for approximately 26% of the Company's net revenues. HASTELLOY C-276, introduced by the Company in 1968, is recognized as a standard for corrosion protection in the chemical processing industry and is also used extensively for FGD and oil and gas exploration and production applications. HASTELLOY C-22, a proprietary alloy of the Company, was introduced in 1985 as an improvement on HASTELLOY C-276 and is currently sold to the chemical processing and FGD markets for essentially the same applications as HASTELLOY C-276. HASTELLOY C-22 offers greater and more versatile corrosion resistance and therefore has gained market share at the expense of the non-proprietary HASTELLOY C-276. HASTELLOY C-4 is specified in many chemical processing applications in Germany and is sold almost exclusively to that market. PAGE The Company also produces alloys for more specialized applications in the chemical processing industry and other industries. For example, HASTELLOY B-2 was introduced in 1970 for use in the manufacture of equipment utilized in the production of acetic acid and ethyl benzine and is still sold almost exclusively for those purposes. HASTELLOY B-3 was developed for the same applications and has greater ease in fabrication. The Company expects HASTELLOY B-3 to eventually replace HASTELLOY B-2. HASTELLOY G-30 is used primarily in the production of super phosphoric acid and fluorinated aromatics. HASTELLOY G-50 has gained acceptance as a lower priced alternative to HASTELLOY C-276 for production of tubing for use in sour gas wells. These more specialized products accounted for approximately 8% of the Company's net revenues in fiscal 1998. The Company's patented alloy, ULTIMET, is used in a variety of industrial applications that result in material degradation by "corrosion-wear". ULTIMET is designed for applications where conditions require resistance to corrosion and wear and is currently being tested in spray nozzles, fan blades, filters, bolts, rolls, pump and valve parts where these properties are critical. HASTELLOY D-205, introduced in 1993, is designed for use in handling hot concentrated sulfuric acid and other highly corrosive substances. The Company 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. Customers in the aerospace markets tend to be the most demanding with respect to meeting specifications within very low tolerances and achieving new product performance standards. Stringent safety standards and continuous efforts to reduce equipment weight require close coordination between the Company and its customers in the selection and development of HTA products. As a result, sales to aerospace customers tend to be made through the Company's direct sales force. Unlike the FGD and oil and gas production industries, where large, competitively bid projects can have a significant impact on demand and prices, demand for the Company's products in the aerospace industry is based on the new and replacement market for jet engines and the maintenance needs of operators of commercial and military aircraft. The hot sections of jet engines are subjected to substantial wear and tear and accordingly require periodic maintenance and replacement. This maintenance-based demand, while potentially volatile, is generally less subject to wide fluctuations than demand in the FGD and sour gas production industries. Chemical Processing. The chemical processing industry segment represents a large base of customers with diverse CRA applications driven by demand for key end use industries such as automobiles, housing, health care, agriculture, and metals production. CRA products supplied by the Company have been used in the chemical processing industry since the early 1930s. Demand for the Company's products in this industry is based on the level of maintenance, repair and expansion of existing chemical processing facilities as well as the construction of new facilities. The Company believes the extensive worldwide network of Company-owned service centers and independent distributors is a competitive advantage in marketing its CRA products to this market. Sales of the Company's products in the chemical processing industry tend to be more stable than the aerospace, FGD and oil and gas markets. Increased concerns regarding the reliability of chemical processing facilities, their potential environmental impact and safety hazards to their personnel have led to an increased demand for more sophisticated alloys, such as the Company's CRA products. 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. The demand for land-based gas turbines is also growing rapidly for use in power barges with mobility and as temporary base-load-generating units for countries that have numerous islands and a large coast line. PAGE Flue Gas Desulfurization. The FGD industry has been driven by both legislated and self-imposed standards for lowering emissions from fossil fuel-fired electric generating facilities. In the United States, the Clean Air Act of 1990, as amended (the "Clean Air Act"), mandates a two-phase program aimed at significantly reducing sulfur dioxide ("SO2") emissions from electric generating facilities powered by fossil fuels by 2000. Canada and its provinces have also set goals to reduce emissions of SO2 over the next several years. Phase I of the Clean Air Act program affected approximately 100 steam-generating plants representing 261 operating units fueled by fossil fuels, primarily coal. Of these 261 units, 25 units were retrofitted with FGD systems while the balance opted mostly for switching to low sulfur coal to achieve compliance. The market for FGD systems peaked in 1992 at approximately $1.1 billion, and then dropped sharply in 1993 to a level of approximately $174.0 million due to a curtailment of activity associated with Phase I. Phase II compliance begins in 2000 and affects 785 generating plants with more than 2,100 operating units. Options available under the Clean Air Act to bring the targeted facilities into compliance with Phase II SO2 emissions requirements include fuel switching, clean coal technologies, purchase of SO2 allowances, closure of facilities and off-gas scrubbing utilizing FGD technology. Oil and Gas. The Company also sells its products for use in the oil and gas industry, primarily in connection with sour gas production. Sour gas contains extremely corrosive materials and is produced under high pressure, necessitating the use of corrosion resistant materials. The demand for sour gas tubulars is driven by the rate of development of sour gas fields. The factors influencing the development of sour gas fields include the price of natural gas and the need to commence drilling in order to protect leases that have been purchased from either the federal or state governments. As a result, competing oil companies often place orders for the Company's products at approximately the same time, adding volatility to the market. This market was very active in 1991, especially in the offshore sour gas fields in the Gulf of Mexico, but demand for the Company's products declined significantly thereafter. More recently there has been less drilling activity and more use of lower performing alloys, which together have resulted in intense price competition. Demand for the Company's products in the oil and gas industry is tied to the global demand for natural gas. Other Markets. In addition to the industries described above, the Company also targets a variety of other markets. Other industries to which the Company sells its HTA products include waste incineration, industrial heat treating, automotive and instrumentation. Demand in these markets for many of the Company's lower volume proprietary alloys has grown in recent periods. For example, incineration of municipal, biological, industrial and hazardous waste products typically produces very corrosive conditions that demand high performance alloys. Markets capable of providing growth are being driven by increasing performance, reliability and service life requirements for products used in these markets which could provide further applications for the Company's products. SALES AND MARKETING Providing technical assistance to customers is an important part of the Company's marketing strategy. The Company provides analyses of its products and those of its competitors for its customers. These analyses enable the Company to evaluate the performance of its products and to make recommendations as to the substitution of Company products for other products in appropriate applications, enabling the Company's products to be specified for use in the production of customers' products. Market development professionals are assisted by the research and development staff in directing the sales force to new opportunities. The Company believes its combination of direct sales, technical marketing and research and development customer support provides an advantage over other manufacturers in the high performance industry. This activity allows the Company to obtain direct insight into customers' alloy needs and allows the Company to develop proprietary alloys that provide solutions to customers' problems. PAGE The Company sells its products primarily through its direct sales organization, which includes four domestic Company-owned service centers, three wholly-owned European subsidiaries and sales agents serving the Asia Pacific Rim. Effective January, 1999, the Company will transfer its Kokomo, Indiana service center to a leased site in Lebanon, Indiana. This new facility will have water jet cutting capability and specialized cutting equipment to service the Company's customers more efficiently. Approximately 78% of the Company's net revenues in fiscal 1998 was generated by the Company's direct sales organization. The remaining 22% of the Company's fiscal 1998 net revenues was generated by independent distributors and licensees in the United States, Europe and Japan, some of whom have been associated with the Company for over 30 years. The following table sets forth the approximate percentage of the Company's fiscal 1998 net revenues generated through each of the Company's distribution channels.
DOMESTIC FOREIGN TOTAL ------------ ----------- --------- Company sales office/direct 29% 9% 38% Company-owned service centers 18% 22% 40% Independent distributors/sales agents 13% 9% 22% ------------ ----------- --------- Total 60% 40% 100% ============ =========== =========
The top twenty customers not affiliated with the Company accounted for approximately 39% of the Company's net revenues in fiscal 1998. Sales to Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each other, accounted for an aggregate of 10% of the Company's net revenues in fiscal 1998. No other customer of the Company accounted for more than 10% of the Company's net revenues in fiscal 1998. The Company's foreign and export sales were approximately $84.3 million, $81.4 million and $100.4 million for fiscal 1996, 1997 and 1998, respectively. Additional information concerning foreign operations and export sales is set forth in Note 14 of the Notes to Consolidated Financial Statements appearing elsewhere herein. MANUFACTURING PROCESS High performance alloys require a lengthier, more complex melting process and are more difficult to manufacture than lower performance alloys, such as stainless steels. The alloying elements in high performance alloys must be highly refined, and the manufacturing process must be tightly controlled to produce precise chemical properties. The resulting alloyed material is more difficult to process because, by design, it is more resistant to deformation. Consequently, high performance alloys require that greater force be applied when hot or cold working and are less susceptible to reduction or thinning when rolling or forging, 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 43%, 24%, 10%, 15%, 5% and 3%, respectively, of total volume sold in fiscal 1998 (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. PAGE 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, 1998, the Company's backlog orders aggregated approximately $40.2 million, compared to approximately $60.6 million at September 30, 1997, and approximately $53.7 million at September 30, 1996. The decrease in backlog orders is primarily due to a decrease in orders for chemical processing and aerospace products worldwide during the latter half of fiscal 1998. Substantially all orders in the backlog at September 30, 1998 are expected to be shipped within the twelve months beginning October 1, 1998. 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.
THE COMPANY'S BACKLOG AT FISCAL QUARTER END (IN MILLIONS) 1994 1995 1996 1997 1998 ----- ----- ----- ----- ------ 1st $29.5 $49.7 $61.2 $63.8 $ 60.8 2nd $35.5 $64.8 $61.9 $65.4 $ 56.2 3rd $38.0 $55.8 $57.5 $55.5 $ 51.0 4th $41.5 $49.9 $53.7 $60.6 $ 40.2* *Backlog at October 31, 1998 increased to $48.4.
PAGE 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 averages approximately 30 days, can negatively affect profitability even though the high performance alloy industry has generally been able to pass raw material price increases through to its customers. Raw material costs account for a significant portion of the Company's cost of sales. The prices of the Company's products are based in part on the cost of raw materials, a significant portion of which is nickel. The Company has in the past, including fiscal 1998, covered approximately 25% to 50% of its open market exposure to nickel price changes through hedging activities with brokers on the London Metals Exchange. Effective October 1, 1998, the Company has ceased its hedging activities for nickel due to the recent low sustained levels of nickel prices. 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 1997 3.22 1998 2.40
PAGE 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, 1998, the research and technical development staff consisted of 39 persons, 16 of whom have engineering or science degrees, including seven 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 $3.9 million, $3.8 million and $3.4 million for research and technical development activities for fiscal 1998, 1997 and 1996, respectively. During fiscal 1998, exploratory alloy development projects were focused on new high temperature alloy products for gas turbine and industrial heat service. Engineering projects include new manufacturing process development, specialized test data development and application support for large volume projects involving power generation and radioactive waste containment. The Company is continuing to develop an extensive database storage and retrieval system to better manage its corrosion, high temperature and mechanical property data. Over the last ten years, the Company's technical programs have yielded nine new proprietary alloys and 14 United States patents, with an additional two United States patent applications pending. The Company currently maintains a total of about 31 United States patents and approximately 200 foreign counterpart patents and applications targeted at countries with significant or potential markets for the patented products. In fiscal 1998, approximately 28% of the Company's net revenues was derived from the sale of patented products and an additional approximately 42% was derived from the sale of products for which patents formerly held by the Company had expired. While the Company believes its patents are important to its competitive position, significant barriers to entry continue to exist beyond the expiration of any patent period. Six of the alloys considered by management to be of future commercial significance, HASTELLOY G-30, HAYNES 230, HASTELLOY C-22, HAYNES HR-120, HAYNES 242 and ULTIMET, are protected by United States patents that continue until the years 2001, 2002, 2002, 2008, 2008 and 2009, respectively. COMPETITION The high performance alloy market is a highly competitive market in which eight to ten producers participate in various product forms. The Company faces strong competition from domestic and foreign manufacturers of both the Company's high performance alloys and other competing metals. The Company's primary competitors include Inco Alloys International, Inc., a subsidiary of Special Metals, Allegheny Ludlum Corporation, a subsidiary of Allegheny Teledyne, Inc. and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stahl AG. Prior to fiscal 1994, this competition, coupled with declining demand in several of the Company's key markets, led to significant erosion in the price for certain of the Company's products. The Company may face additional competition in the future to the extent new materials are developed, such as plastics or ceramics, that may be substituted for the Company's products. EMPLOYEES As of September 30, 1998, the Company had approximately 993 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, 1998, 500 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, Louisiana or Openshaw, England plants are represented by a labor union. Management considers its employee relations in each of the facilities to be satisfactory. PAGE ENVIRONMENTAL MATTERS The Company's facilities and operations are subject to certain foreign, federal, state and local laws and regulations relating to the protection of human health and the environment, including those governing the discharge of pollutants into the environment and the storage, handling, use, treatment and disposal of hazardous substances and wastes. Violations of these laws and regulations can result in the imposition of substantial penalties and can require facilities improvements. In addition, the Company may be required in the future to comply with certain regulations pertaining to the emission of hazardous air pollutants under the Clean Air Act. However, since these regulations have not been proposed or promulgated, the Company cannot predict the cost, if any, associated with compliance with such regulations. Expenses related to environmental compliance were approximately $1.4 million for fiscal 1998 and are expected to be approximately $1.3 million for fiscal year 1999. 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, record keeping requirements relating to, and handling of, polychlorinated biphenyls and violations of record keeping and notification requirements relating to industrial waste water discharge. Additions and improvements may be required at the Kokomo, Indiana Wastewater Treatment Facility based on proposed restrictions of the local sewer use ordinance. Although the Company does not believe that similar regulatory or enforcement actions would have a material impact on its operations, there can be no assurance that violations will not be alleged or will not result in the assessment of additional penalties in the future. As of September 30,1998, capital expenditures of approximately $100,000 are budgeted for wastewater treatment improvements. The Company has received permits from the Indiana Department of Environmental Management ("IDEM") and the U.S. Environmental Protection Agency ("EPA") to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. The closure project, 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. At September 30, 1998, approximately $150,000 was accrued for final closure related costs. Closure certification is anticipated in fiscal 1999. 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. 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. PAGE 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 certain hydraulic fluid, the Company is one of approximately 300 PRPs in connection with the proposed cleanup of the Fisher-Calo site in Indiana. The PRPs have negotiated a Consent Decree implementing a remedial design/remedial action plan ("RD/RA") for the site with the EPA. The Company has paid approximately $138,000 as its share of the total estimated cost of the RD/RA under the Consent Decree. Based on information available to the Company concerning the status of the cleanup efforts at the site, the large number of PRPs and the prior payments made by the Company, management does not expect the Company's involvement in this site to have a material adverse effect on the financial condition, results of operations or liquidity of the Company. The Company may have generated hazardous wastes disposed of at other sites potentially subject to CERCLA or equivalent state law remedial action. Thus, there can be no assurance that the Company will not be named as a PRP at additional sites in the future or that the costs associated with those sites would not have a material adverse effect on the Company's financial condition, results of operations or liquidity. In November 1988, the EPA approved start-up of a new waste water treatment plant at the Arcadia, Louisiana facility, which discharges treated industrial waste water to the municipal sewage system. After the Company exceeded certain EPA effluent limitations in 1989, the EPA issued an administrative order in 1992 which set new effluent limitations for the facility. The waste water plant is currently operating under this order and the Company believes it is meeting such effluent limitations. However, the Company anticipates that in the future Louisiana will take over waste water permitting authority from the EPA and may issue a waste water permit, the conditions of which could require modification to the plant. Reasonably anticipated modifications are not expected to have a substantial impact on operations. ITEM 2. PROPERTIES The Company's owned facilities, and the products provided at each facility, are as follows: Kokomo, Indiana--all product forms, other than tubular goods. Arcadia, Louisiana--welded and seamless tubular goods. Openshaw, England--bar and billet for the European market. Zurich, Switzerland--all product forms. The Kokomo plant, the primary production facility, is located on approximately 230 acres of industrial property and includes over one million square feet of building space. There are three sites consisting of a headquarters and research lab; melting and annealing furnaces, forge press and several hot mills; and the four-high mill and sheet product cold working equipment, including two cold strip mills. All alloys and product forms other than tubular goods are produced in Kokomo. The Arcadia plant consists of approximately 42 acres of land and over 135,000 square feet of buildings on a single site. Arcadia uses feedstock produced in Kokomo to fabricate welded and seamless alloy pipe and tubing and purchases extruded tube hollows to produce seamless titanium tubing. Manufacturing processes at Arcadia require cold pilger mills, weld mills, drawbenches, annealing furnaces and pickling facilities. The United States facilities are subject to a mortgage which secures the Company's obligations under the Company's Revolving Credit Facility. See Note 6 of the Notes to Consolidated Financial Statements. The Openshaw plant, located near Manchester, England, consists of approximately 15 acres of land and over 200,000 square feet of buildings on a single site. The plant produces bar and billet using billets produced in Kokomo as feedstock. Additionally, products not competitive with the Company's products are processed for third parties. The processes conducted at the facility require hot rotary forges, bar mills and miscellaneous straightening, turning and cutting equipment. The Zurich warehouse consists of over 50,000 square feet of building on a single site. Although capacity can be limited from time to time by certain production processes, the Company believes that its existing facilities will provide sufficient capacity for current demand. PAGE 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 benefits to levels prevailing before the reduction of those benefit levels on January 1, 1995, and to maintain the restored benefit levels for the lives of the covered retirees and their surviving spouses. The parties have settled the lawsuit, and such lawsuit was dismissed as of September 18, 1998 pursuant to an agreement which provides that the Company will provide a lifetime medical benefit plan for the Plaintiffs in exchange for the retirees assuming a greater portion of future health cost increases. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established trading market for the common stock of the Company. As of December 18, 1998 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, 1998 and 1997. The payment of dividends is limited by terms of certain debt agreements to which the Company is a party. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 6 of the Notes to Consolidated Financial Statements of the Company included herein in response to Item 8. (Remainder of page intentionally left blank.) PAGE ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT RATIO DATA) The following table sets forth selected consolidated financial data of the Company. The selected consolidated financial data as of and for the years ended September 30, 1994, 1995, 1996, 1997 and 1998 are derived from the audited consolidated financial statements of the Company. These selected financial data are not covered by the auditors' report and are qualified in their entirety by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the Consolidated Financial Statements of the Company and the related notes thereto included elsewhere in this Form 10-K.
Year Ended Year Ended Year Ended Year Ended September 30, September 30, September 30, September 30, STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 -------------- -------------- -------------- -------------- Net revenues $ 150,578 $ 201,933 $ 226,402 $ 235,760 Cost of sales(1) 171,957(2) 167,196 181,173 180,504 Selling and administrative expenses 15,039 15,475 19,966(3) 18,311 Recapitalization expense - - - 8,694(4) Research and technical expenses 3,630 3,049 3,411 3,814 Operating income (loss) (40,048) 16,213 21,852 24,437 Other cost, net 816 1,767 590 276 Terminated acquisition costs - - - - Interest expense, net 19,582 19,904 21,102(3) 20,456 Income (loss) before extraordinary item and cumulative effect of change in accounting principle (60,866) (6,771) (1,780) 36,315(6) Extraordinary item, net of tax benefit (7,256)(3) - Cumulative effect of change in accounting principle (net of tax benefit) (79,630)(7) - - - -------------- -------------- -------------- -------------- Net income (loss) (140,496) (6,771) (9,036) 36,315 September 30, September 30, September 30, September 30, BALANCE SHEET DATA: 1994 1995 1996 1997 -------------- -------------- -------------- -------------- Working capital (9) $ 60,182 $ 62,616 $ 57,307 $ 57,063 Property, plant and equipment, net 43,119 36,863 31,157 32,551 Total assets 145,723 151,316 161,489 216,319 Total debt 148,141 152,477 169,097 184,213 Accrued post-retirement benefits 94,148 94,830 95,813 96,201 Stockholder's equity (Capital deficiency) (116,029) (121,909) (130,341) (94,435) September 30, September 30, September 30, September 30, OTHER FINANCIAL DATA: 1994 1995 1996 1997 -------------- -------------- -------------- -------------- Depreciation and amortization (10) $ 51,555 $ 9,000 $ 9,042 $ 8,197 Capital expenditures 771 1,934 2,092 8,863 EBITDA (11) 10,691 23,446 32,141 41,302 Ratio of EBITDA to interest expense 0.55x 1.18x 1.52x 2.02x Ratio of earnings before fixed charges to fixed charges (12) - - 1.01x 1.17x Net cash provided from (used in) operating activities $ (12,801) $ (2,883) $ (5,343) $ (6,596) Net cash provided from (used in) investment activities 746 (1,895) (2,025) (8,830) Net cash provided from (used in) financing activities 7,102 3,912 7,116 14,185 -------------- -------------- -------------- -------------- PAGE Year Ended September 30, STATEMENT OF OPERATIONS DATA: 1998 -------------- Net revenues $ 246,944 Cost of sales(1) 191,849 Selling and administrative expenses 18,166 Recapitalization expense - Research and technical expenses 3,939 Operating income (loss) 32,990 Other cost, net 952 Terminated acquisition costs 6,199(5) Interest expense, net 21,066 Income (loss) before extraordinary item and cumulative effect of change in accounting principle 2,456 Extraordinary item, net of tax benefit - Cumulative effect of change in accounting principle (net of tax benefit) (450)(8) -------------- Net income (loss) 2,006 September 30, BALANCE SHEET DATA: 1998 -------------- Working capital (9) $ 66,974 Property, plant and equipment, net 29,627 Total assets 207,263 Total debt 175,877 Accrued post-retirement benefits 96,483 Stockholder's equity (Capital deficiency) (90,938) September 30, OTHER FINANCIAL DATA: 1998 -------------- Depreciation and amortization (10) $ 8,148 Capital expenditures 5,919 EBITDA (11) 40,186 Ratio of EBITDA to interest expense 1.91x Ratio of earnings before fixed charges to fixed charges (12) 1.22x Net cash provided from (used in) operating activities $ 14,584 Net cash provided from (used in) investment activities (5,750) Net cash provided from (used in) financing activities (8,562) -------------- (1) The Company was acquired by Morgan, Lewis, Githens & Ahn ("MLGA") and the management of the Company in August 1989 (the "1989 Acquisition"). For financial statement purposes, the 1989 Acquisition was accounted for as a purchase transaction effective September 1, 1989; accordingly, inventories were adjusted to reflect estimated fair 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 $488 for fiscal 1994. No charges have been recognized since fiscal 1994. (2) Reflects the write-off of $37,117 of goodwill created in connection with the 1989 Acquisition remaining at September 30, 1994. (3) During fiscal 1996, the Company successfully refinanced its debt with the issuance of $140,000 Senior Notes due 2004 and an amendment to its Revolving Credit Facility with Congress Financial Corporation ("Congress"). As a result of this refinancing effort, certain non-recurring charges were recorded as follows: (a) $7,256 was recorded as the aggregate of extraordinary items which represents the extraordinary loss on the redemption of the Company's 11 % Senior Secured Notes due 1998, and 13 % Senior Subordinated Notes due 1999 (collectively, the "Old Notes") and is comprised of $3,911 of prepayment penalties incurred in connection with the redemption of the Old Notes and $3,345 of deferred debt issuance costs which were written off upon consummation of the redemption of the Old Notes; (b) $1,837 of Selling and Administrative Expense which represents costs incurred with a terminated initial public offering of the Company's common stock; and (c) $924 of Interest Expense which represents the net interest expense (approximately $1,500 interest expense, less approximately $600 interest income) incurred during the period between the issuance of the Senior Notes and the redemption of the Old Notes. PAGE (4) On January 29, 1997, the Company announced that Haynes Holdings, Inc. ("Holdings"), its parent corporation, had effected the recapitalization of the Company and Holdings pursuant to which Blackstone Capital Partners II Merchant Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of Holdings' outstanding shares (the "Recapitalization"). Certain fees, totaling $6,237, paid by the Company in connection with the Recapitalization were accounted for as recapitalization expenses and charged against income in the period. Also in connection with the recapitalization, the Company recorded $2,457 of non-cash stock compensation expense, also included as recapitalization expenses, pertaining to certain modifications to management stock option agreements which eliminated put and call rights associated with the options. (5) Terminated acquisition costs of approximately $6,199 were recorded in fiscal 1998 in connection with the abandoned attempt to acquire Inco Alloys International by Holdings. These costs previously had been deferred. (6) The Company recorded profit before tax of $3,705 and net income of $36,315. During the third quarter of fiscal 1997, the Company reversed its deferred income tax valuation allowance of approximately $36,431. See Note 5 of the Notes to Consolidated Financial Statements of the Company included in this Annual Report in response to Item 8. (7) 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 principle. The tax benefit recognized was limited to then existing net deferred tax liabilities. (8) On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") issued a consensus ruling which requires that certain business process reengineering and information technology transformation costs be expensed as incurred. The EITF also consented that if such costs were previously capitalized, then any remaining unamortized portion of those identifiable costs should be written off and reported as a cumulative effect of a change in accounting principle in the first quarter of fiscal 1998. Accordingly, the Company recorded the cumulative effect of this accounting change, net of tax, of $450, resulting from a pre-tax write-off of $750 related to reengineering charges involved in the implementation of an information technology project. (9) Reflects the excess of current assets over current liabilities as set forth in the Consolidated Financial Statements. (10) Reflects (a) depreciation and amortization as presented in the Company's Consolidated Statement of Cash Flows and set forth in Note (11) below, plus or minus (b) other non-cash charges, including the amortization of prepaid pension costs (which is included in the change in other asset category) and the amortization of inventory costs as described in Note (1) above, minus amortization of debt issuance costs, all as set forth in Note (11) below. (11) Represents for the relevant period net income plus expenses recognized for interest, taxes, depreciation, amortization and other non-cash charges, (i) plus the refinancing costs set forth in Note 3, part (a) and (b) for fiscal 1996, (ii) plus recapitalization costs outlined in Note 4, and $250 of failed acquisition costs for fiscal 1997, and (iii) plus terminated acquisition costs outlined in Note 5, and $450 of business process reengineering costs outlined in Note 8 for fiscal 1998. In addition to net interest expense as listed in the table, the following charges are added to net income to calculate EBITDA: 1994 1995 1996 1997 1998 -------- -------- -------- --------- -------- Provision for (benefit from) income taxes $ 420 $ 1,313 $ 1,940 $(32,610) $ 2,317 Depreciation 8,208 8,188 7,751 7,477 8,029 Amortization: Debt issuance costs 1,680 1,444 4,698 1,144 1,247 Goodwill 38,607 - - - - Inventory (see note (1) above) 488 - - - - Prepaid pension costs 314 130 308 333 (163) -------- -------- -------- --------- -------- 41,089 1,574 5,006 (23,656) 11,430 SFAS 106-Post-retirement 3,938 682 983 387 282 Amortization of debt issuance costs (1,680) (1,444) (4,698) (1,144) (1,247) -------- -------- -------- --------- -------- Total $51,975 $10,313 $10,982 $(24,413) $10,465 ======== ======== ======== ========= ========
PAGE 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. (12) For purposes of these computations, earnings before fixed charges consist of income (loss) before provision for (benefit from) income taxes, extraordinary item and cumulative effect of a change in accounting principle, plus fixed charges. Fixed charges consist of interest on debt, amortization of debt issuance costs and estimated interest portion of rental expense. Earnings were insufficient to cover fixed charges by $60,446 and $5,458 for fiscal 1994 and 1995, respectively. (Remainder of page intentionally left blank.) PAGE ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Report and may include statements regarding the intent, belief or current expectations of the Company or its officers with respect to (i) the Company's strategic plans, (ii) the policies of the Company regarding capital expenditures, financing and other matters, and (iii) industry trends affecting the Company's financial condition or results of operations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward looking statements as a result of various factors, many of which are beyond the control of the Company. COMPANY BACKGROUND The Company sells high temperature alloys and corrosion resistant alloys, which accounted for 64% and 36%, respectively, of the Company's net revenues in fiscal 1998. 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. The Company also produces its alloys in round and tubular forms. In fiscal 1998, flat products accounted for 65% of shipments and 62% of net revenues. The Company's annual production capacity varies depending upon the mix of alloys, forms, product sizes, gauges and order sizes. Based on the current product mix, the Company estimates that its annual production capacity, which has been unchanged for the past five years, is approximately 20.0 million pounds. As a result of changes in the Company's primary markets, sales volume has ranged from a high of 18.5 million pounds in fiscal 1998, to a low of 13.3 million pounds in fiscal 1994. The Company is not currently capacity constrained. See "--Liquidity and Capital Resources." The Company sells its products primarily through its direct sales organization, which includes four domestic Company-owned service centers, three wholly-owned European subsidiaries and sales agents serving the Pacific Rim who operate on a commission basis. Effective January, 1999, the Company will transfer its Kokomo, Indiana service center to a leased site in Lebanon, Indiana. This new facility will have water jet cutting capability and specialized cutting equipment to service the Company's customers more efficiently. Approximately 78% of the Company's net revenues in fiscal 1998 was generated by the Company's direct sales organization. The remaining 22% of the Company's fiscal 1998 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 1998, sales to customers outside the United States accounted for approximately 41% of the Company's net revenues. The high performance alloy industry is characterized by high capital investment and high fixed costs, and profitability is therefore very sensitive to changes in volume. The cost of raw materials is the primary variable cost in the high performance alloy manufacturing process and represents approximately one-half of total manufacturing costs. Other manufacturing costs, such as labor, energy, maintenance and supplies, often thought of as variable, have a significant fixed element. Accordingly, relatively small changes in volume can result in significant variations in earnings. PAGE In fiscal 1998, proprietary products represented approximately 28% 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 1998, these other alloys represented approximately 21% 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 lead times from order to shipment are approximately 15 to 17 weeks. OVERVIEW OF MARKETS A breakdown of sales, shipments and average selling prices to the markets served by the Company for the last five fiscal years is shown in the following table: (Note: Markets prior to 1997 have been reclassified due to improved identification techniques implemented in 1997 by the Company.)
1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ SALES (DOLLARS IN % OF % OF % OF % OF % OF MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Aerospace $ 47.9 31.8% $ 68.2 33.8% $ 95.3 42.1% $ 111.2 47.2% $ 111.9 45.3% Chemical processing 51.9 34.5 74.1 36.7 77.9 34.4 69.3 29.4 79.7 32.3 Land-based gas turbines 17.0 11.3 14.3 7.1 17.4 7.7 17.2 7.4 17.5 7.1 Flue gas desulfurization 10.2 6.7 6.6 3.3 8.3 3.7 6.7 2.7 8.4 3.4 Oil and gas 4.2 2.8 4.5 2.2 4.3 1.9 7.8 3.3 5.9 2.4 Other markets 17.3 11.5 30.9 15.3 19.6 8.6 20.1 8.5 19.8 8.0 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total product 148.5 98.6 198.6 98.4 222.8 98.4 232.3 98.5 243.2 98.5 Other revenue (1) 2.1 1.4 3.3 1.6 3.6 1.6 3.5 1.5 3.7 1.5 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net revenues $ 150.6 100.0% $ 201.9 100.0% $ 226.4 100.0% $ 235.8 100.0% $ 246.9 100.0% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== U.S. $ 94.8 $ 122.3 $ 142.0 $ 154.3 $ 146.5 Foreign $ 55.8 $ 79.6 $ 84.4 $ 81.5 $ 100.4 SHIPMENTS BY MARKET (MILLIONS OF POUNDS) Aerospace 3.4 25.6% 4.8 29.4% 6.6 40.2% 8.3 45.9% 7.6 41.1% Chemical processing 5.2 39.1 6.4 39.3 6.0 36.6 5.7 31.9 6.7 36.2 Land-based gas turbines 1.6 12.0 1.3 8.0 1.5 9.2 1.4 8.1 1.6 8.7 Flue gas desulfurization 1.5 11.3 0.9 5.5 1.0 6.1 0.7 3.8 1.1 5.9 Oil and gas 0.4 3.0 0.5 3.1 0.3 1.8 0.7 3.8 0.5 2.7 Other markets 1.2 9.0 2.4 14.7 1.0 6.1 1.2 6.5 1.0 5.4 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total Shipments 13.3 100.0% 16.3 100.0% 16.4 100.0% 18.0 100.0% 18.5 100.0% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== AVERAGE SELLING PRICE PER POUND Aerospace $ 14.09 $ 14.21 $ 14.44 $ 13.40 $ 14.72 Chemical processing 9.98 11.58 12.98 12.16 11.90 Land-based gas turbines 10.63 11.00 11.60 12.29 10.94 Flue gas desulfurization 6.80 7.33 8.30 9.57 7.64 Oil and gas 10.50 9.00 14.33 11.14 11.80 Other markets 14.42 12.88 19.60 16.75 19.80 All markets $ 11.17 $ 12.18 $ 13.59 $ 12.91 $ 13.15 ------- ------- ------- ------- ------- - -------------------- (1) Includes toll conversion and royalty income.
Fluctuations in net revenues and volume from fiscal 1994 through fiscal 1998 are a direct result of significant changes in each of the Company's major markets. PAGE 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 and 1997 increased 39.7% and 16.7%, respectively, over the preceding period. Sales to the aerospace market in fiscal 1998 were negatively affected by weaker than expected deliveries of commercial aircraft due to deferrals and cancellations at the major aircraft producers. However, the Company expects the increase in the number of "in-service" gas turbine engines through fiscal 1998 to provide a consistent stream of maintenance and repair requirements for Haynes products. In addition, the Company expects continued compliance efforts with Stage III noise regulations to keep demand strong for Haynes products in the "hush kit" retrofitting aerospace market segment. Chemical Processing. Demand for the Company's products in the chemical processing industry tends to track overall economic activity and is driven by maintenance requirements of chemical processing facilities and the expansion of existing chemical processing facilities or the construction of new facilities. In fiscal 1998, 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 gradually 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 moderate 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. Chemical processing markets are expected to see moderate growth in export markets and specific industry sectors (agricultural chemicals and pharmaceuticals). The chemicals sector comprises both specialty and basic organic and inorganic chemicals. Mergers and acquisitions of chemical companies continue as companies make strategic acquisitions and divestitures in efforts to enhance their global competitiveness. The agricultural chemical sector is benefitting from changes in U.S. agricultural programs that now place fewer limits on farmers' ability to plant preferred crops on the acreage they choose. Growth in the pharmaceutical sector is being spurred by continuing advances in both traditional drug research and the fast growing biotech sector. Land-Based Gas Turbines. The Company 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 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, 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 1990's, 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. PAGE Flue Gas Desulfurization. The Clean Air Act is the primary factor determining the demand for high performance alloys in the FGD industry. FGD projects have been undertaken by electric utilities and cogeneration facilities powered by fossil fuels in the United States, Europe and the Pacific Rim in response to concerns over emissions. FGD projects are generally highly visible and as a result are highly price competitive, especially when demand for high performance alloys in other major markets is weak. The Company anticipates limited sales opportunities in the FGD market as deadlines for Phase II of the Clean Air Act approach in 2000, due to the over-compliance with Phase I requirements as discussed below. The Clean Air Act addresses numerous air quality problems in the United States that are not entirely covered in earlier legislation. One of these problems is acid rain caused by SO2 and nitrogen oxides ("NO") emissions from fossil-fueled electric power. Title IV of the Clean Air Act created a two-phased plan to reduce acid rain in the U.S. Phase I runs from 1995 through 1999, and Phase II, which is more stringent than Phase I, begins in 2000. The acid rain program allocated emission allowances to Phase I units, authorizing them to emit one ton of SO2 for each allowance. Some utilities obtained additional allowances from three auctions and from bonus provisions in the Clean Air Act. To reach compliance, a Phase I utility could use one or more of the following compliance methods: (1) fuel switching and/or fuel blending with lower sulfur coal; (2) obtaining additional allowances; (3) installing flue gas desulfurization equipment (i.e., scrubbers); (4) using previously implemented emission controls; (5) retiring units; (6) boiler repowering; (7) substituting Phase II units for Phase I units; and (8) compensating Phase I units with Phase II units. For Phase II, more than 2,000 operating units will be affected. While many utilities have not finalized their plans to comply with the more stringent Phase II requirements, most of them have elected to over-comply with Phase I requirements, thus creating a surplus of allowances. Increased competition has caused the electric utility industry to make major changes in the way it is structured. On April 26, 1996, the Federal Energy Regulatory Commission ("FERC") issued the final rule, Order No. 888, in response to provisions of the Energy Policy Act ("EPACT") of 1992. Order No. 888 opens wholesale electric power sales to competition and requires each utility that owns transmission lines to allow buyers and sellers of power the same access to these lines as the utility provides for its own generation. In a noncompetitive, regulated environment, state regulators allowed electric utilities to pass on costs of pollution control requirements to consumers. In a competitive environment, however, utilities with higher rates due to environmental controls would be at a relative disadvantage, while those with lower costs could increase market share. With increasing competition and Phase II of the Clean Air Act slated for implementation on January 1, 2000, utilities are showing less interest in making capital investments in expensive pollution control equipment, are uncertain about cost recovery, and want to be more competitive. A number of scrubbers for Phase II are being deferred. Planning and building a scrubber takes four years, so in many cases capital for scrubbers will not be committed until after the year 2000. Repowering older fossil-fuel units is another alternative to meet Phase II compliance. Oil and Gas. The Company's participation in the oil and gas industry consists primarily of providing tubular goods for sour gas production. Demand for the Company's products in this industry is driven by the rate of development of sour gas fields, which in turn is driven by the price of natural gas and the need to commence production in order to protect leases. Due to the volatility of the oil and gas industry, the Company has chosen not to invest in certain manufacturing equipment necessary to perform certain intermediate steps of the manufacturing process for these tubular products. However, the Company can 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. The gas drilling rate remains strong, as is the rig count in both the Gulf of Mexico and inland areas. Demand for natural gas is expected to grow moderately over the next several years. PAGE Other Markets. In addition to the industries described above, the Company also targets a variety of other markets. Representative industries served in fiscal 1998 include waste incineration, industrial heat treating, automotive, medical and instrumentation. The automotive and industrial heating markets are highly cyclical and very competitive. However, continual growth opportunities exist in the automotive industry due to new safety, engine controls, and emission systems technologies. Also, increasing requirements for improved materials performance in industrial heating are expected to increase demand for the Company's products. Waste incineration presents opportunities for the Company's alloys as landfill space is diminishing and government concerns over pollution, chemical weapon stockpiles, and chemical and nuclear waste handling are heightening. Many of the Company's lower volume proprietary alloys are experiencing growing demand in these other markets. Markets capable of providing growth are being driven by increasing performance, reliability and service life requirements for products used in these markets, which could provide further applications for the Company's products. (Remainder of page intentionally left blank.) PAGE 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 YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1998 ------------- ------------- ------------- Net revenues 100.0% 100.0% 100.0% Cost of sales 80.0 76.6 77.7 Selling and administrative expenses 8.8(1) 7.8 7.4 Recapitalization expense - 3.7(2) - Research and technical expenses 1.5 1.6 1.6 ------------- ------------- ------------- Operating income 9.7 10.3 13.3 Other cost, net 0.3 0.1 0.4 Terminated acquisition costs - - 2.5(3) Interest expense 9.7(1) 8.7 8.6 Interest income (0.4)(1) (0.1) (0.1) Income (loss) before provision for income taxes, extraordinary items, and cumulative effect of change in accounting principle 0.1 1.6 1.9 Provision for (benefit from) income taxes 0.9 (13.8) 0.9 Extraordinary item, net of tax benefit (3.2)(1) - - Cumulative effect of a change in accounting principle - - (0.2)(4) Net income (loss) (4.0)% 15.4% .8% - ----------------------------- (1) 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 Old Notes and is comprised of approximately $3.9 million of prepayment penalties incurred in connection with the redemption of the Old Notes and approximately $3.4 million of deferred debt issuance costs which were written off upon consummation of the redemption of the Old Notes; (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) approximately $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 Old Notes. (2) On January 29, 1997, the Company announced that Haynes Holdings, Inc. ("Holdings"), its parent corporation, had effected the recapitalization of the Company and Holdings pursuant to which Blackstone Capital Partners II Merchant Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of Holdings' outstanding shares. Certain fees totaling approximately $6.2 million paid by the Company in connection with the Recapitalization have been accounted for as recapitalization expenses, and charged against income in the period. Also in connection with the Recapitalization, the Company recorded approximately $2.5 million of non-cash stock compensation expense, also included as recapitalization expenses, pertaining to certain modifications to management stock option agreements which eliminated put and call rights associated with the options. (3) Terminated acquisition costs of approximately $6.2 million were recorded in fiscal 1998 in connection with the abandoned attempt to acquire Inco Alloys International by Holdings. These costs previously had been deferred. (4) On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") issued a consensus ruling which requires that certain business process reengineering and information technology transformation costs be expensed as incurred. The EITF also consented that if such costs were previously capitalized, then any remaining unamortized portion of those identifiable costs should be written off and reported as a cumulative effect of a change in accounting principle in the first quarter of fiscal 1998. Accordingly, the Company recorded the cumulative effect of this accounting change, net of tax, of $450,000, resulting from a pre-tax write-off of $750,000 related to reengineering charges involved in the implementation of an information technology project.
PAGE YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997 Net Revenues. Net revenues increased approximately $11.2 million, or 4.7%, to approximately $246.9 million in fiscal 1998 from approximately $235.8 million in fiscal 1997, primarily as a result of a 2.8% increase in shipments, from approximately 18.0 million pounds in fiscal 1997 to approximately 18.5 million pounds in fiscal 1998, and a 1.9% increase in average selling prices, from approximately $12.91 per pound in fiscal 1997 to approximately $13.15 per pound in fiscal 1998. Sales to the aerospace industry for fiscal 1998 increased slightly to approximately $111.9 million from approximately $111.2 million for fiscal 1997. The increase in revenue can be attributed to a 9.9% increase in average selling prices per pound to approximately $14.72 in fiscal 1998 from approximately $13.40 in fiscal 1997. This increase was due to proportionately more sales of the higher-priced, cobalt-based alloys and higher value added forms. This price increase offset an 8.4% decline in volume caused by some slackening in demand exacerbated by some unplanned production outages. The drop in demand during the last six months of fiscal 1998 appears to be a result of inventory corrections by commercial aircraft and component suppliers. Sales to the chemical processing industry during fiscal 1998 increased by 15.0% to approximately $79.7 million from approximately $69.3 million for fiscal 1997. Volume shipped to the chemical processing industry during fiscal 1998 increased by 17.5% to approximately 6.7 million pounds, compared to 5.7 million pounds in fiscal 1997. The increase in volume stems from higher sales to export markets including project sales through the Company's foreign subsidiaries. Average selling prices per pound were lower in fiscal 1998 reflecting heightened competition, lower raw material costs, and a higher percentage of project versus maintenance business. Sales to the LBGT industry during fiscal 1998 increased 1.7% to approximately $17.5 million from approximately $17.2 million in fiscal 1997. Volume increased by 14.3% to approximately 1.6 million pounds, compared to 1.4 million pounds in fiscal 1997 while average selling prices decreased 11.0% The volume increase is primarily attributable to improved sales during the fourth quarter of the Company's proprietary alloys (HAYNES 230 alloy and HAYNES HR-120 alloy) for a major gas turbine manufacturer. The decrease in average selling price is a result of higher sales of lower cost, lower priced iron-based alloys. Sales to the FGD industry increased 25.4% to approximately $8.4 million in fiscal 1998 from approximately $6.7 million in fiscal 1997. Volume increased 57.1% while average selling price per pound decreased 20.2% reflecting the highly cyclical and competitive nature of this market. Sales to the oil and gas industry decreased 24.4% to approximately $5.9 million for fiscal 1998 from approximately $7.8 million in fiscal 1997 as a result of lower activity in the production of deep sour gas. These are typically large projects and may vary in number significantly from year to year. Sales to other industries decreased 1.5% in fiscal 1998 to approximately $19.8 million from approximately $20.1 million for the same period a year ago, as a result of a volume decrease of 16.7% partially offset by an 18.2% increase in average selling price. The decrease in volume can be attributed to lower sales for automotive applications. The increase in the average selling price per pound stems from a better mix of higher priced products during fiscal 1998 compared to fiscal 1997. Cost of Sales. Cost of sales as a percentage of net revenues increased to 77.7% in fiscal 1998 compared to 76.6% in fiscal 1997. Volume in the higher priced, higher value added sheet and coil forms decreased in fiscal 1998 in part due to unplanned outages in sheet and coil production equipment. This decrease was partially offset by reduced material costs, primarily nickel, during fiscal 1998 compared to fiscal 1997. Selling and Administrative Expenses. Selling and administrative expenses decreased approximately $100,000 to approximately $18.2 million for fiscal 1998 from approximately $18.3 million in fiscal 1997 primarily as a result of lower benefit related costs partially offset by increased headcount. Research and Technical Expenses. Research and technical expenses increased approximately $100,000, to approximately $3.9 million in fiscal 1998 from approximately $3.8 million in fiscal 1997, primarily as a result of salary increases. Operating Income. As a result of the above factors, the Company recognized operating income for fiscal 1998 of approximately $33.0 million, approximately $5.9 million of which was contributed by the Company's foreign subsidiaries. For fiscal 1997, operating income was approximately $24.4 million, of which approximately $4.1 million was contributed by the Company's foreign subsidiaries. PAGE Other Costs (Income). Other cost (income), net, increased approximately $676,000, from approximately $276,000 in fiscal 1997 to approximately $952,000 for fiscal 1998, primarily as a result of foreign exchange losses realized in fiscal 1998, as compared to foreign exchange gains experienced during fiscal 1997. Terminated Acquisition Costs. Terminated acquisition costs of approximately $6.2 million were recorded in fiscal 1998 in connection with the abandoned attempt by Holdings to acquire Inco Alloys International. These costs previously had been deferred. Interest Expense. Interest expense increased approximately $600,000, to approximately $21.2 million for fiscal 1998 from approximately $20.6 million for fiscal 1997. Higher revolving credit balances during the first nine months of fiscal 1998 compared to the same period in fiscal 1997 and higher debt issuance cost amortization in fiscal 1998 contributed to this increase. Income Taxes. The provision for income taxes of approximately $2.3 million for fiscal 1998 was primarily due to taxes on higher foreign earnings. The benefit from income taxes of approximately $32.6 million for fiscal 1997 was due primarily to the Company's reversal of its deferred tax valuation allowance. Net Income. As a result of the above factors, the Company recognized net income for fiscal 1998 of approximately $2.0 million, compared to net income of approximately $36.3 million for fiscal 1997. (Remainder of page intentionally left blank.) PAGE YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996 Net Revenues. Net revenues increased approximately $9.4 million, or 4.2%, to approximately $235.8 million in fiscal 1997 from approximately $226.4 million in fiscal 1996, primarily as a result of a 9.8% increase in shipments, from approximately 16.4 million pounds in fiscal 1996 to approximately 18.0 million pounds in fiscal 1997. Sales to the aerospace industry for fiscal 1997 increased 16.7%, to approximately $111.2 million from approximately $95.3 million for fiscal 1996. The increase in revenue can be attributed to a 25.8% increase in volume to approximately 8.3 million pounds in fiscal 1997 from approximately 6.6 million pounds in fiscal 1996. This volume increase offset a decline in average selling price per pound, caused by a proportionately higher increase in the volume of the lower-priced, nickel-based alloys and forms, compared to the higher-priced, cobalt-containing alloys and forms. Sales to the chemical processing industry during fiscal 1997 declined by 11.0% to approximately $69.3 million from approximately $77.9 million for fiscal 1996. Volume shipped to the chemical processing industry during fiscal 1997 decreased by 5.0% to approximately 5.7 million pounds, compared to 6.0 million pounds in fiscal 1996. The drop in the average selling price per pound reflects lower sales of higher cost, higher priced product forms, and higher sales of lower cost, lower priced product forms. In particular, sales of tubular products declined, while sales of forged billet and forged bar products increased during fiscal 1997 compared to the same period a year ago. Much of the decline in volume in the domestic market can be attributed to lower sales to key distributors and sharply lower sales for project business in the agrochemical sector. For the export market, the decline in volume can be attributed to lower sales to key distributors and a drop in sales to a key manufacturer of heat exchanger components. Sales to the LBGT industry during fiscal 1997 decreased 1.1% to approximately $17.2 million from approximately $17.4 million in fiscal 1996. Volume decreased by 6.7% to approximately 1.4 million pounds, compared to 1.5 million pounds in fiscal 1996, while average selling prices increased 5.9%. Higher domestic activity was offset by lower export and European activity. Sales to the FGD industry declined 19.3% to approximately $6.7 million in fiscal 1997, from approximately $8.3 million in fiscal 1996. Volume declined 30.0% while average selling price per pound increased 15.3%. The decline in volume can be attributed to the lack of significant project activity in the domestic market and heightened competition for foreign projects. Sales to the oil and gas industry increased 81.4% to approximately $7.8 million for fiscal 1997 from approximately $4.3 million in fiscal 1996. Sales to this sector are typically linked to sour gas project requirements. These requirements vary substantially from quarter to quarter and year to year. Sales to other industries increased 2.6% in fiscal 1997 to approximately $20.1 million from approximately $19.6 million for the same period a year ago, as a result of volume increase of 20.0% partially offset by a 14.5% decline in average selling price. The increase in volume can be attributed to higher sales for automotive application. The decline in the average selling price per pound stems from lower sales of higher cost, higher priced products during fiscal 1997 compared to fiscal 1996. Cost of Sales. Cost of sales as a percentage of net revenues decreased to 76.6% in fiscal 1997 compared to 80.0% in fiscal 1996, as a result of lower raw material costs and higher capacity utilization. Volume in the higher priced, higher value added, sheet, coil, and seamless forms increased in fiscal 1997, compared to fiscal 1996. Increased capacity utilization in these operations led to efficiencies that lowered average per-unit cost. PAGE Selling and Administrative Expenses. Selling and administrative expenses decreased approximately $1.7 million, or 8.5%, to approximately $18.3 million for fiscal 1997 from approximately $20.0 million in fiscal 1996. The decrease was primarily the result of a net decrease of approximately $800,000 for incentive compensation in fiscal 1997, compared to the same period in fiscal 1996. In addition, selling and administrative expenses in fiscal 1996 included approximately $1.8 million of postponed initial public offering costs. Recapitalization Expense. Recapitalization expense of approximately $8.7 million recorded in fiscal 1997 includes approximately $6.2 million of expenses paid by the Company in connection with the Recapitalization (discussed below) and approximately $2.5 million in non-cash compensation expense pertaining to certain modifications to management stock option agreements which eliminated put and call rights provided therein. Research and Technical Expenses. Research and technical expenses increased approximately $400,000, or 11.8%, to approximately $3.8 million in fiscal 1997 from approximately $3.4 million in fiscal 1996, primarily as a result of salary increases combined with headcount additions which occurred in the latter part of fiscal 1996. Also, research efforts sponsored by the Company at various universities were increased during fiscal 1997, as compared to the same period a year ago. Operating Income. As a result of the above factors, the Company recognized operating income for fiscal 1997 of approximately $24.4 million, approximately $4.1 million of which was contributed by the Company's foreign subsidiaries. For fiscal 1996, operating income was approximately $21.9 million, of which approximately $4.9 million was contributed by the Company's foreign subsidiaries. Other Costs (Income). Other cost (income), net, decreased approximately $314,000, or 53.2%, from approximately $590,000 in fiscal 1996 to approximately $276,000 for fiscal 1997, primarily as a result of foreign exchange gains realized and lower domestic bank charges in fiscal 1997, as compared to foreign exchange losses experienced during fiscal 1996. Interest Expense. Interest expense decreased approximately $1.4 million, or 6.4%, to approximately $20.6 million for fiscal 1997 from approximately $22.0 million for fiscal 1996, due primarily to lower interest rates and reduced debt issue cost amortization achieved as a result of the refinancing of the Company's long-term debt in fiscal 1996. This decrease was partially offset by higher revolving credit balances during fiscal 1997, compared to the same period in fiscal 1996. In addition, interest expense for fiscal 1996 included an additional approximately $1.5 million interest expense incurred during the period between the issuance of the 11 5/8% Senior Notes due 2004 and the redemption of the Old Notes. Income Taxes. The provision for (benefit from) income taxes decreased by approximately $34.6 million during fiscal 1997. During the third quarter of fiscal 1997, the Company reversed its deferred income tax valuation allowance. This reversal was due to the Company's assessment of past earnings history and trends (exclusive of non-recurring charges), sales backlog, budgeted sales and earnings, stabilization of financial condition, and the periods available to realize the future tax benefits. Net Income. As a result of the above factors, the Company recognized net income for fiscal 1997 of approximately $36.3 million, compared to a net loss of approximately $9.0 million for fiscal 1996. (Remainder of page intentionally left blank.) PAGE 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 $5.9 million in fiscal 1998 and are expected to be approximately $14.2 million in fiscal 1999. Capital expenditures were approximately $2.1 million and $8.9 million for fiscal 1996 and 1997, respectively. The largest capital item for fiscal 1998 was $2.5 million for the purchase of the warehouse formerly leased by the Company's Swiss subsidiary, Nickel Contor AG. Certain anticipated spending was deferred during the acquisition attempt of Inco Alloys International. Planned fiscal 1999 capital spending is targeted for the new Midwest Service Center in Lebanon, Indiana and for the Company's flat product production areas including the four high mill and cold finishing areas. The Company expects the primary benefits of the four high mill and cold finishing capital expenditures will be to increase the annual production capacity of cold finished flat product by 80% from 10 million pounds to 18 million pounds. The Company does not expect such capital expenditures will have a material adverse effect on its long-term liquidity. The Company expects to fund its working capital needs and capital expenditures with cash provided from operations, supplemented by borrowings under its Revolving Credit Facility. The Revolving Credit Facility expires August 23, 1999. The Company expects the facility to be either renewed or refinanced. The Company believes these sources of capital will be sufficient to fund planned capital expenditures and working capital requirements over the next 12 months and on a long-term basis, although there can be no assurance that this will be the case. Net cash provided from operating activities in fiscal 1998 was approximately $14.6 million, as compared to net cash used in operating activities of approximately $6.6 million for fiscal 1997. The positive cash flow from operations for fiscal 1998 was primarily a result of a decrease of approximately $12.9 million in inventories and by non-cash depreciation and amortization expenses of approximately $9.3 million, a decrease in the accounts payable and accrued expenses balance of approximately $3.9 million, an increase in accounts receivable of approximately $7.1 million and other adjustments. Cash used for investing activities decreased from approximately $8.9 million in fiscal 1997 to approximately $5.8 million in fiscal 1998, almost entirely due to reduction in capital expenditures. Cash used in financing activities for fiscal 1998 was approximately $8.6 million due primarily to $10.4 million in decreased borrowings under the Revolving Credit Facility, partially offset by approximately $1.8 million in long term borrowing by the Company's Swiss subsidiary. Cash for fiscal 1998 increased approximately $400,000, resulting in a September 30, 1998 cash balance of approximately $3.7 million. Cash in fiscal 1997 decreased approximately $1.4 million from fiscal 1996, resulting in a cash balance of approximately $3.3 million at September 30, 1997. 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 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 Old Notes on September 23, 1996. On January 24, 1997, the Company amended its Revolving Credit Facility by increasing the maximum credit from $50.0 million to $60.0 million. 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 EPA. If the EPA or IDEM were to require corrective action in connection with such disposal areas or solid waste management units, there can be no assurance that the costs of such corrective action will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. In addition, the Company has been named as a PRP at one waste disposal site. Based on current information, the Company believes that its involvement at this site will not have a material adverse effect on the Company's financial condition, results of operations or liquidity although there can be no assurance with respect thereto. Expenses related to environmental compliance were $1.4 million for fiscal 1998 and are expected to be approximately $1.3 million for fiscal 1999. See "Business-- Environmental Matters." Based on information currently available to the Company, the Company is not aware of any information which would indicate that litigation pending against the Company is reasonably likely to have a material adverse effect on the Company's operations or liquidity. See "Business--Environmental Matters." PAGE INFLATION The Company believes that inflation has not had a material impact on its operations. INCOME TAX CONSIDERATIONS For financial reporting purposes the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Statement of Financial Accounting Standards ("SFAS") No. 109 requires the recording of a valuation allowance when it is more likely than not that some portion or all of a deferred tax asset will not be realized. This statement further states that forming a conclusion that a valuation allowance is not needed may be difficult, especially when there is negative evidence such as cumulative losses in recent years. The ultimate realization of all or part of the Company's deferred tax assets depends upon the Company's ability to generate sufficient taxable income in the future. During the third quarter of fiscal 1997, the Company reversed its deferred income tax valuation allowance of approximately $36.4 million. This reversal was due to the Company's assessment of past earnings history and trends (exclusive of non-recurring charges), sales backlog, budgeted sales and earnings, stabilization of financial condition, and the periods available to realize the future tax benefits. YEAR 2000 The Company has recognized that the Year 2000 will affect certain business systems currently being used and has taken steps to (1) protect the ability of the Company to do business, (2) minimize the risk to the Company from Year 2000 exposure and (3) enhance or expand capabilities as exposures are eliminated. The areas of exposure include the Company's computer systems and certain non-Information Technology ("IT") equipment. The Company's products are not date sensitive. Areas considered "critical" to fix are the current mainframe computer in Kokomo, Indiana, the Argon-Oxygen Decarburization ("AOD") software and the least-cost melt software in the melt area, the four-high Steckel mill computer and automatic gauge controls in the hot rolling production area, the power consumption system, the computer in the Electro-slag remelt area, the gauge controls for one cold rolling mill, the engineering test lab computer, the telephone system, and the payroll system. Areas which present a "slight to negligible" exposure if not fixed include various non-IT program logic controllers, lab collection computers, various gauges, various test equipment, electronic scales, desktop software, voice mail, faxes, copiers, and printers. The Company has already devoted significant amounts of time to ensure all exposures are eliminated by December 1999, or sooner. In fiscal 1995, the Company began its upgrade of the current IBM mainframe and an IBM System/36 used for the Company's primary business system and received board approval in early fiscal 1996 for a $4.4 million new integrated information system to replace the mainframe (of which approximately $2.1 million had been spent through September 30, 1998, including $750,000 of business process reengineering costs). This project includes new IBM AS/400 equipment and an enterprise level software package called BPCS , by System Software and Associates, which is Year 2000 compliant and is slated for completion in June 1999. The costs for upgrading the stand-alone manufacturing and lab equipment controls have been budgeted for fiscal 1999 as part of the spending or capital expenditure budgets. The payroll system became Year 2000 compliant in October, 1998. Over 150 surveys have been completed for the Company's customers and the Company has sent surveys to its critical suppliers (generally $100,000 in purchases and above) to assess their Year 2000 readiness. Currently there is no indication that our suppliers will not be Year 2000 ready. The total estimated costs as of September 30, 1998 for Year 2000 compliance (other than the $4.4 million integrated information system mentioned above) are currently estimated at approximately $600,000 for some critical and all non-critical exposures and $1.65 million for capital expenditures related to critical exposures. The Company intends to use its cash availability under its revolving credit facility to finance these expenditures. The Company's contingency plan if the Company is not ready by Year 2000 is to have an immediate upgrade of the current IBM mainframe for its primary business system and to have an immediate hardware upgrade for as many stand-alone computer systems, data collection systems, test equipment and process control devices used throughout the Company, the cost of which is not known. PAGE RECAPITALIZATION The Company announced on January 29, 1997 that the Recapitalization had been effected, and that in connection therewith Holdings had completed a stock purchase transaction with Blackstone Capital Partners II Merchant Banking Fund L.P. and two of its affiliates ("Blackstone") and a stock redemption transaction with MLGA Fund II, L.P. and MLGAL Partners L.P., the principal investors in Holdings prior to the Recapitalization. As part of the Recapitalization, Holdings redeemed approximately 79.9% of its outstanding shares of common stock at $10.15 per share in cash and Blackstone purchased a like number of shares at the same price. Due to this change in ownership, the Company's ability to utilize its U.S. net operating loss carryforwards will be limited in the future. In conjunction with the above mentioned transactions, the maximum amount available under the Company's Revolving Credit Facility was increased from $50 to $60 million. TERMINATED ACQUISITION BY HOLDINGS In June 1997 Inco Limited ("Inco") and Blackstone jointly announced the execution of a definitive agreement for the sale by Inco of 100% of its Inco Alloy International ("IAI") business unit to Holdings. On March 3, 1998, Blackstone and Holdings abandoned their attempt to purchase IAI after the Department of Justice announced its intention to challenge the proposed acquisition. Certain fees paid and accrued by the Company in connection with the Acquisition have been accounted for as terminated acquisition costs and charged against income in fiscal 1998. ACCOUNTING PRONOUNCEMENTS On November 20, 1997, the Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force ("EITF") issued a consensus ruling which requires that certain business process reengineering and information technology transformation costs be expensed as incurred. The EITF also consented that if such costs were previously capitalized, then any remaining unamortized portion of those identifiable costs should be written off and reported as a cumulative effect of a change in accounting principle. Accordingly, the Company recorded the cumulative effect of this accounting change, net of tax, of $450,000 resulting from a pre-tax write-off of $750,000 related to reengineering charges involved in the implementation of an information technology project. The FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits, "which will be effective for the Company's fiscal year 1999 and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for the Company's fiscal year 2000. SFAS No. 130 requires that all items which are defined as components of comprehensive income be reported in the financial statements and displayed with the same prominence as other financial statements. SFAS No. 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas, and major customers. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In the opinion of management, SFAS No. 130, 131 and 132 will not have a material impact on the Company's financial position, results of operations, or cash flows, as these statements are disclosure oriented. Management has not yet quantified the effect of SFAS No. 133 on the consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At September 30, 1998, the Company's primary market risk exposure was foreign currency exchange rate risk with respect to forward contracts entered into by the Company's foreign subsidiaries located in England and France. Prior to September 30, 1998, the Company also had commodity price risk with respect to nickel forward contracts, but closed out all existing contracts at September 30, 1998, due to the recent low sustained levels of nickel prices. The nickel contracts closed will be settled in fiscal 1999 at a loss of approximately $68,000 and this loss is not at risk of changing. If the Company decides to hedge its nickel price exposure in the future, Board of Director approval will be obtained prior to entering into any contracts. The foreign currency exchange risk exists primarily because the two foreign subsidiaries need U.S. dollars in order to pay for their intercompany purchases of high performance alloys from the Company's U.S. locations. The foreign subsidiaries manage their own foreign currency exchange risk. Any U.S. dollar exposure aggregating more than $500,000 requires approval from the Company's Vice President of Finance. Most of the currency contracts to buy U.S. dollars are with maturity dates of less than six months. PAGE At September 30, 1998, the unrealized gain (loss) on these foreign currency exchange contracts was not material to the future results of the Company (see Note 1 of Item 8. Financial Statements and Supplementary Data). (Remainder of page intentionally left blank.) PAGE ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors Haynes International, Inc. Kokomo, Indiana We have audited the accompanying consolidated balance sheet of Haynes International, Inc. a wholly owned subsidiary of Haynes Holdings, Inc., as of September 30, 1998, and the related consolidated statements of operations and of cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. The financial statements and the financial statement schedule of the Company for the years ended September 30, 1997 and 1996, were audited by other auditors whose report, dated November 3, 1997, expressed an unqualified opinion on those statements and the financial statement schedule. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1998 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 1998, and the results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic 1998 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the financial statements, the Company changed its method of accounting for certain business process reengineering costs effective October 1, 1997. DELOITTE & TOUCHE LLP Indianapolis, Indiana November 6, 1998 PAGE REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Haynes International, Inc. We have audited the 1997 and 1996 consolidated financial statements and the financial statement schedules listed in Item 14(a) of this Form 10-K of Haynes International, Inc. (the Company), a wholly owned subsidiary of Haynes Holdings, Inc. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Haynes International, Inc. as of September 30, 1997, and the consolidated results of their operations and their cash flows for each of the two years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP Fort Wayne, Indiana November 3, 1997 PAGE
HAYNES INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) SEPTEMBER 30, SEPTEMBER 30, ASSETS 1997 1998 --------------- --------------- Current assets: Cash and cash equivalents $ 3,281 $ 3,720 Accounts and notes receivable, less allowance for doubtful accounts of $657 and $662, respectively 38,500 45,974 Inventories 94,081 81,861 --------------- --------------- Total current assets 135,862 131,555 --------------- --------------- Property, plant and equipment, net 32,551 29,627 Deferred income taxes 37,057 36,549 Prepayments and deferred charges, net 10,849 9,532 --------------- --------------- Total assets $ 216,319 $ 207,263 =============== =============== LIABILITIES AND CAPITAL DEFICIENCY Current liabilities: Accounts payable and accrued expenses $ 24,938 $ 20,823 Accrued postretirement benefits 3,900 4,500 Revolving credit facility 45,239 35,273 Note payable 1,408 1,055 Income taxes payable 1,566 1,731 Deferred income taxes 1,748 1,199 --------------- --------------- Total current liabilities 78,799 64,581 --------------- --------------- Long-term debt, net of unamortized discount 137,566 139,549 Accrued postretirement benefits 92,301 91,983 --------------- --------------- Total liabilities 308,666 296,113 --------------- --------------- Redeemable common stock of parent company 2,088 2,088 Capital deficiency: Common stock, $.01 par value (100 shares authorized, issued and outstanding) Additional paid-in capital 49,070 49,087 Accumulated deficit (145,006) (143,000) Foreign currency translation adjustment 1,501 2,975 --------------- --------------- Total capital deficiency (94,435) (90,938) --------------- --------------- Total liabilities and capital deficiency $ 216,319 $ 207,263 =============== ===============
The accompanying notes are an integral part of these financial statements. PAGE
HAYNES INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1998 --------------- --------------- --------------- Net revenues $ 226,402 $ 235,760 $ 246,944 Cost of sales 181,173 180,504 191,849 Selling and administrative 19,966 18,311 18,166 Recapitalization expense 8,694 Research and technical 3,411 3,814 3,939 --------------- --------------- --------------- Operating income 21,852 24,437 32,990 Other costs, net 590 276 952 Terminated acquisition costs 6,199 Interest expense 21,991 20,608 21,171 Interest income (889) (152) (105) --------------- --------------- --------------- Income before provision for (benefit from) income taxes, extraordinary item, and cumulative effect of a change in accounting principle 160 3,705 4,773 Provision for (benefit from) income taxes 1,940 (32,610) 2,317 --------------- --------------- --------------- Income (loss) before extraordinary item and cumulative effect of a change in accounting principle (1,780) 36,315 2,456 Extraordinary item, net of tax benefit (7,256) --------------- --------------- --------------- Income (loss) before cumulative effect of a change in accounting principle (9,036) 36,315 2,456 Cumulative effect of a change in accounting principle, net of tax benefit (450) --------------- --------------- --------------- Net income (loss) $ (9,036) $ 36,315 $ 2,006 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. PAGE
HAYNES INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1998 --------------- --------------- --------------- Cash flows from operating activities: Net income (loss) $ (9,036) $ 36,315 $ 2,006 Adjustments to reconcile net income (loss) to net cash provided from (used in) operating activities: Extraordinary item 7,256 Cumulative effect of a change in accounting principle 750 Depreciation 7,751 7,477 8,029 Amortization 1,353 1,144 1,247 Deferred income taxes 213 (35,718) 19 Gain on disposition of property and equipment (20) (39) (105) Non-cash stock option expense 2,457 Change in assets and liabilities: Accounts and notes receivable (1,599) 1,053 (7,086) Inventories (15,132) (20,527) 12,856 Prepayments and deferred charges 335 (97) 327 Accounts payable and accrued expenses 2,543 608 (3,915) Income taxes payable 10 344 174 Accrued postretirement benefits 983 387 282 --------------- --------------- --------------- Net cash provided from (used in) operating activities (5,343) (6,596) 14,584 --------------- --------------- --------------- Cash flows from investing activities: Additions to property, plant and equipment (2,092) (8,863) (5,919) Proceeds from disposals of property, plant, and equipment 67 33 169 --------------- --------------- --------------- Net cash used in investing activities (2,025) (8,830) (5,750) --------------- --------------- --------------- Cash flows from financing activities: Net additions (reductions) of revolving credit 18,411 14,567 (10,392) Borrowings of long-term debt 137,350 1,813 Repayments of long-term debt (140,000) Payment of debt issuance costs (5,408) (676) Payment of prepayment penalties on debt retirement (3,911) Capital contribution from parent company of proceeds from exercise of stock options 674 294 17 --------------- --------------- --------------- Net cash provided from (used in) financing activities 7,116 14,185 (8,562) --------------- --------------- --------------- Effect of exchange rates on cash (95) (166) 167 --------------- --------------- --------------- Increase (Decrease) in cash and cash equivalents (347) (1,407) 439 Cash and cash equivalents: Beginning of year 5,035 4,688 3,281 --------------- --------------- --------------- End of year $ 4,688 $ 3,281 $ 3,720 =============== =============== =============== Supplemental disclosures of cash flow information: Cash paid during period for: Interest $ 22,076 $ 20,968 $ 19,924 =============== =============== =============== Income taxes $ 1,717 $ 3,040 $ 1,832 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS The consolidated financial statements include the accounts of Haynes International, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany transactions and balances are eliminated. The Company develops, manufactures and markets technologically advanced, high performance alloys primarily for use in the aerospace and chemical processing industries worldwide. The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Openshaw, England; with distribution service centers in Anaheim, California; Houston, Texas; Windsor, Connecticut; Paris, France; and Zurich, Switzerland. B. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investment instruments, including investments with original maturities of three months or less at acquisition, to be cash equivalents, the carrying value of which approximates fair value due to the short maturity of these investments. C. INVENTORIES Inventories are stated at the lower of cost or market. The cost of domestic inventories is determined using the last-in, first-out method (LIFO). The cost of foreign inventories is determined using the first-in, first-out (FIFO) method and average cost method. D. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost with depreciation calculated primarily by using the straight-line method based on estimated economic useful lives. Buildings are generally depreciated over 40 years and machinery and equipment are depreciated over periods ranging from 5 to 14 years. Expenditures for maintenance and repairs and minor renewals are charged to expense; major renewals are capitalized. Upon retirement or sale of assets, the cost of the disposed assets and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. E. LONG-LIVED ASSETS The Company regularly evaluates whether events and circumstances have occurred which may indicate that the carrying amount of intangible or other long-lived assets warrant revision or may not be recoverable. When factors indicate that an asset or assets should be evaluated for possible impairment, an evaluation would be performed whereby the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value is required. As of September 30, 1997 and 1998, management considered the Company's intangible and other long-lived assets to be fully recoverable. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 F. ENVIRONMENTAL EXPENDITURES Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with the Company's capitalization policy. Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities, including remediation investigation and feasibility study costs, when the cleanup is probable and the cost can be reasonably estimated. Recoveries of expenditures are recognized as receivables when they are estimable and probable. G. FOREIGN CURRENCY EXCHANGE The Company's foreign operating entities' financial statements are stated in the functional currencies of each respective country, which are the local currencies. Substantially all assets and liabilities are translated to U.S. dollars using exchange rates in effect at the end of the year; and revenues and expenses are translated at the weighted average rate for the year. Translation gains or losses are recorded as a separate component of capital deficiency and transaction gains and losses are reflected in the consolidated statement of operations. H. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. I. 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, 1997 and 1998 was $992 and $1,995, 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. During 1997, the Company capitalized approximately $676 of costs incurred in connection with an increase in the Company's existing revolving line of credit. J. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK The Company enters into forward currency exchange contracts on a continuing basis and nickel future contracts on a periodic basis for periods consistent with contractual exposures. The effect of this practice is to minimize the variability in the Company's operating results arising from foreign exchange rate and nickel price movements. The Company does not engage in foreign currency or nickel futures speculation. Gains and losses on these contracts are reflected in the statement of operations in the month the contracts are settled. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 At September 30, 1997 and 1998, the Company had $6,616 and $6,800 of foreign currency exchange contracts, respectively, and $2,328 and $0 of nickel futures contracts, respectively, outstanding, with a combined net unrealized loss of $104 and $295. With respect to the consolidated statements of cash flows, contracts accounted for as hedges are classified in the same category as the items being hedged. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. At September 30, 1998, and periodically throughout the year, the Company has maintained cash balances in excess of federally insured limits. During 1996, 1997 and 1998, sales to one group of affiliated customers approximated $26,937, $24,854, and $23,517 respectively, or 12%, 11% and 10% of net revenues, respectively. The Company generally does not require collateral and credit losses have been within management's expectations. The Company does not believe it is significantly vulnerable to the risk of a near-term severe impact from business concentrations with respect to customers, suppliers, products, markets or geographic areas. K. 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. L. CHANGE IN ACCOUNTING PRINCIPLE On November 20, 1997, the Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force ("EITF") issued a consensus ruling which requires that certain business process reengineering and information technology transformation costs be expensed as incurred. The EITF also consented that if such costs were previously capitalized, then any remaining unamortized portion of those identifiable costs should be written off and reported as a cumulative effect of a change in accounting principle. Accordingly, the Company recorded the cumulative effect of this accounting change, net of tax, of $450, resulting from a pre-tax write-off of $750 related to reengineering charges involved in the implementation of an information technology project. M. NEW ACCOUNTING PRONOUNCEMENTS The FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits,"which will be effective for fiscal year 1999 and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for fiscal year 2000. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 SFAS No. 130 requires that all items which are defined as components of comprehensive income be reported in the financial statements and displayed with the same prominence as other financial statements. SFAS No. 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas, and major customers. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable. In the opinion of management, SFAS No. 130, 131 and 132 will not have a material impact on the Company's financial position, results of operations, or cash flows, as these statements are disclosure oriented. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Management has not yet quantified the effect of this new standard on the consolidated financial statements. (Remainder of page intentionally left blank.) PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 NOTE 2: INVENTORIES The following is a summary of the major classes of inventories:
SEPTEMBER 30, SEPTEMBER 30, 1997 1998 -------------- -------------- Raw materials $ 5,012 $ 3,535 Work-in-process 50,240 35,215 Finished goods 33,641 31,752 Other 984 837 Amount necessary to increase certain net inventories to the LIFO method 4,204 10,522 -------------- -------------- $ 94,081 $ 81,861 ============== ==============
Inventories valued using the LIFO method comprise 77% and 73% of consolidated inventories at September 30, 1997 and 1998, 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, 1997 1998 --------------- --------------- Land and land improvements $ 1,951 $ 3,144 Buildings 6,715 8,449 Machinery and equipment 81,831 85,586 Construction in process 4,030 2,565 --------------- --------------- 94,527 99,744 Less accumulated depreciation (61,976) (70,117) --------------- --------------- $ 32,551 $ 29,627 =============== ===============
PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 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, 1997 1998 -------------- -------------- Accounts payable, trade $ 16,990 $ 12,078 Employee compensation 3,476 2,762 Taxes, other than income taxes 2,086 2,178 Interest 1,356 1,417 Other 1,030 2,388 -------------- -------------- $ 24,938 $ 20,823 ============== ==============
(Remainder of page intentionally left blank.) PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 NOTE 5: INCOME TAXES The components of income (loss) before provision for (benefit from) income taxes, extraordinary item, and cumulative effect of a change in accounting principle consist of the following:
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1998 --------------- --------------- --------------- Income (loss) before provision for (benefit from) income taxes, extraordinary item, and cumulative effect of a change in accounting principle U.S. $ (4,558) $ (677) $ (1,110) Foreign 4,718 4,382 5,883 --------------- --------------- --------------- Total $ 160 $ 3,705 $ 4,773 =============== =============== =============== Income tax provision (benefit): Current: U.S. Federal $ 187 $ 1,401 $ 793 Foreign 1,509 1,285 1,599 State 31 422 (94) --------------- --------------- --------------- Current total 1,727 3,108 2,298 --------------- --------------- --------------- Deferred: U. S. Federal 131 (30,294) (42) Foreign 82 (498) 104 State (4,926) (43) --------------- --------------- --------------- Deferred total 213 (35,718) 19 --------------- --------------- --------------- Total provision for (benefit from) income taxes $ 1,940 $ (32,610) $ 2,317 =============== =============== ===============
PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 The provision for (benefit from) income taxes applicable to results of operations before extraordinary item and cumulative effect of a 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, 1996 1997 1998 --------------- --------------- --------------- Statutory federal tax rate 34% 34% 34% Tax provision at the statutory rate $ 54 $ 1,260 $ 1,623 Foreign tax rate differentials (24) (202) (606) Utilization of alternative minimum tax credit (534) Utilization of net operating loss (2,705) Withholding tax on undistributed earnings of foreign subsidiaries 131 155 225 Provision for state taxes, net of federal tax benefit 31 422 (49) Exercise of stock options of parent company 400 (167) U.S. tax on distributed and undistributed earnings of foreign subsidiaries 760 1,097 1,443 Increase (decrease) in valuation allowance related to continuing operations 363 (31,923) Other 225 (13) (319) --------------- --------------- --------------- Provision (benefit) at effective tax rate $ 1,940 $ (32,610) $ 2,317 =============== =============== ===============
PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 Deferred income tax assets (liabilities) are comprised of the following:
Current deferred income tax assets (liabilities): SEPTEMBER 30, SEPTEMBER 30, 1997 1998 --------------- --------------- Inventory capitalization $ 1,110 $ 769 Postretirement benefits other than pensions 1,541 1,778 Accrued expenses for vacation 596 636 Inventory profit reserve 1,265 909 Other 475 720 --------------- --------------- Gross current deferred tax assets 4,987 4,812 --------------- --------------- Inventory purchase accounting adjustment (6,378) (5,744) Mark to market reserve (357) (267) --------------- --------------- Gross current deferred tax liability (6,735) (6,011) --------------- --------------- Total net current deferred tax liability (1,748) (1,199) --------------- --------------- Noncurrent deferred income tax assets (liabilities): Property, plant and equipment, net (4,969) (3,120) Prepaid pension costs (1,893) (1,957) Investment in subsidiary (475) (475) Other foreign related (690) (1,242) Undistributed earnings of foreign subsidiaries (4,575) (6,062) --------------- --------------- Gross noncurrent deferred tax liability (12,602) (12,856) --------------- --------------- Postretirement benefits other than pensions 35,827 35,702 Executive compensation 825 825 Investment in subsidiary 573 604 Net operating loss carryforwards 12,434 11,700 Alternative minimum tax credit carryforwards 534 Other 40 --------------- --------------- Gross noncurrent deferred tax asset 49,659 49,405 --------------- --------------- Total net noncurrent deferred tax asset 37,057 36,549 --------------- --------------- Total $ 35,309 $ 35,350 =============== ===============
As of September 30, 1998, the Company had net operating loss carryforwards for regular tax purposes of approximately $31,519 (expiring in fiscal years 2007 to 2011), of which approximately $21,433 are available for alternative minimum tax. During fiscal 1997, the Company reversed its deferred income tax valuation allowance of approximately $36,431. This reversal was due to the Company's assessment of past earnings history and trends (exclusive of non-recurring charges), sales backlog, budgeted sales and earnings, stabilization of financial condition, and the periods available to realize the future tax benefits. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 NOTE 6: DEBT Long-term debt consists of the following:
September 30, SEPTEMBER 30, 1997 1998 -------------- -------------- Revolving Credit Facility, due August 23, 1999 $ 45,239 $ 35,273 ============== ============== 5 Year Mortgage Note, 4.25%, due in 2003 (Swiss Subsidiary) $ 1,813 Senior Notes, 11.625%, due in 2004, net of $2,434 and $2,191, respectively, unamortized discount (effective rate of 12.0%) $ 137,566 137,809 -------------- -------------- 137,566 139,622 Less amounts due within one year (Swiss Subsidiary Note) 73 -------------- -------------- $ 137,566 $ 139,549 ============== ==============
BANK FINANCING - --------------- On August 23, 1996, the Company successfully refinanced its then existing debt with the issuance of $140,000 Senior Notes due 2004 and an amendment to its working capital facility (the "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 which represents the extraordinary loss on the redemption of the Senior Secured and Senior Subordinated Notes and is comprised of $3,911 of 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 with a postponed initial public offering of the Company's common stock. - $924 of net interest expense incurred during the period between the the issuance of the Senior Notes and the redemption of the Senior Secured and Senior Subordinated Notes. On January 24, 1997, the Company amended its Revolving Credit Facility by increasing the maximum credit from $50,000 to $60,000. The amount available for revolving credit loans equals the difference between the $60,000 total facility amount, less any letter of credit reimbursement obligations incurred by the Company, which are subject to a sub limit of $10,000. The total availability may not exceed the sum of 85% of eligible accounts receivable (generally, accounts receivable of the Company from domestic and export customers that are less than 60 days outstanding), plus 60% of eligible inventories consisting of finished goods and raw materials, plus 45% of eligible inventories consisting of work-in-process and semi-finished goods calculated at the lower of cost or current market value, minus any availability reserves established by Congress. Unused line of credit fees during the revolving credit loan period are .375% of the amount by which $48,000 exceeds the average daily principal balance of the outstanding revolving loans and letter of credit accommodations. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 The Revolving Credit Facility bears interest at a fluctuating per annum rate equal to a combination of prime rate plus 0.50% and London Interbank Offered Rates ("LIBOR") plus 2.50%. At September 30, 1998, the effective interest rates for revolving credit loans were 8.09% for $29,000 of the Revolving Credit Facility, and 9.0% for the remaining $6,273. At September 30, 1997, the effective interest rates for revolving credit loans were 8.156% for $31,500 of the Revolving Credit Facility, and 9.0% for the remaining $13,739. As of September 30, 1998, $3,255 in letter of credit reimbursement obligations have been incurred by the Company. The availability for revolving credit loans at September 30, 1998 was $11,637. The Revolving Credit Facility contains covenants common to such agreements including the maintenance of certain net worth levels and limitations on capital expenditures, investments, incurrence of debt, impositions of liens, dispositions of assets and payments of dividends and distributions. The Revolving Credit Facility is collateralized by first priority security interests on all accounts receivable and inventories (excluding all accounts receivable and inventories of the Company's foreign subsidiaries) and fixed assets of the Company and the proceeds therefrom. The carrying value of the Company's Revolving Credit Facility approximates fair value. SENIOR NOTES DUE 2004 - ------------------------ The Senior Notes are uncollateralized obligations of the Company and are effectively subordinated in right of payment to obligations under the Revolving Credit Facility. Interest is payable semi-annually on March 1 and September 1. The notes are redeemable, in whole or in part, at the Company's option at any time on or after September 1, 2000, at redemption prices ranging from 105.813% to 100% plus accrued interest to the date of redemption. 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. The estimated fair value, based upon an independent market quotation, of the Company's Senior Notes was approximately $161,700 and $149,800 at September 30, 1997 and 1998, respectively. OTHER - ----- In addition to the aforementioned debt, the Company's UK affiliate (Haynes International, Ltd.) has a revolving credit agreement with Midland Bank that provides for availability of 1,000 pounds sterling ($1,700) collateralized by the assets of the affiliate. This revolving credit agreement was available in its entirety on September 30, 1998, 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 10,000 french francs ($1,787) and utilized 5,492 french francs ($981) of the facility as of September 30, 1998. The Company's Swiss affiliate (Nickel-Contor AG) has an overdraft banking facility of 3,500 swiss francs ($2,538) all of which was available on September 30, 1998. HAYNES INTERNATIONAL, INC. PAGE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 NOTE 7: CAPITAL DEFICIENCY The following is a summary of changes in stockholder's equity (capital deficiency):
COMMON COMMON STOCK STOCK ------ ------ ADDITIONAL FOREIGN CURRENCY TOTAL NO. OF AT PAID IN (ACCUMULATED TRANSLATION CAPITAL SHARES PAR CAPITAL DEFICIT) ADJUSTMENT DEFICIENCY ------ ------ ----------- -------------- ------------------ ------------ Balance at - ---------------------------------- October 1, 1995 100 0 $ 46,306 $ (172,285) $ 4,070 $ (121,909) - ---------------------------------- Year ended September 30, 1996: Net loss (9,036) (9,036) Capital contribution from parent company on exercise of stock option 674 674 Reclassification of redeemable common stock 1,005 1,005 Foreign Exchange (1,075) (1,075) ------ ------ ----------- -------------- ------------------ ------------ Balance at - ---------------------------------- September 30, 1996 100 0 47,985 (181,321) 2,995 (130,341) - ---------------------------------- Year ended September 30, 1997: Net income 36,315 36,315 Capital contribution from parent company on exercise of stock option 294 294 Reclassification of redeemable common stock 791 791 Foreign Exchange (1,494) (1,494) ------ ------ ----------- -------------- ------------------ ------------ Balance at - ---------------------------------- September 30, 1997 100 0 49,070 (145,006) 1,501 (94,435) - ---------------------------------- Year ended September 30, 1998: Net income 2,006 2,006 Capital contribution from parent company on exercise of stock option 17 17 Foreign Exchange 1,474 1,474 ------ ------ ----------- -------------- ------------------ ------------ Balance at - ---------------------------------- September 30, 1998 100 0 $ 49,087 $ (143,000) $ 2,975 $ (90,938) - ---------------------------------- ====== ====== =========== ============== ================== ============
PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 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 $720, $767, and $252 for the years ended September 30, 1996, 1997 and 1998, 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, 1996 1997 1998 --------------- --------------- --------------- Service cost $ 2,042 $ 2,156 $ 2,355 Interest cost 7,027 7,370 7,256 Actual return on plan assets (13,431) (22,820) (4,955) Net amortization and deferral 4,670 13,627 (4,819) --------------- --------------- --------------- Net periodic pension cost $ 308 $ 333 $ (163) =============== =============== ===============
(Remainder of page intentionally left blank.) PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 The following table sets forth the domestic pension plan's funded status:
SEPTEMBER 30, SEPTEMBER 30, 1997 1998 --------------- --------------- Accumulated benefit obligation, including vested benefits of $88,576 and $99,910, respectively $ 92,702 $ 103,735 =============== =============== Projected benefit obligation for service rendered to date $ 107,347 $ 123,481 Plan assets at fair value (primarily debt securities) 143,577 141,061 --------------- --------------- Plan assets in excess of projected benefit obligation 36,230 17,580 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (34,364) (15,330) Unrecognized prior service costs 2,926 2,705 --------------- --------------- Prepaid pension cost recognized in the consolidated balance sheet $ 4,792 $ 4,955 =============== =============== Assumptions: Weighted average discount rate 7.00% 6.25% =============== =============== Average rate of increase in compensation levels 5.25% 5.25% =============== =============== Expected rate of return on plan assets during year 8.25% 7.50% =============== ===============
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all domestic employees become eligible for these benefits if they reach normal retirement age while working for the Company. Prior to 1994, the cost of retiree health care and life insurance benefits was recognized as expense upon payment of claims or insurance premiums. The Company follows SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions," which requires the cost of post retirement benefits to be accrued over the years employees provide service to the date of their full eligibility for such benefits. The Company's policy is to fund the cost of claims on an annual basis. Operations were charged approximately $4,823, $3,869 and $4,479 for these benefits during fiscal 1996, 1997 and 1998, respectively. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 The following sets forth the status of the plans in the aggregate reconciled with amounts reported in the Company's balance sheet:
SEPTEMBER 30, September 30, 1997 1998 -------------- -------------- Accumulated post retirement benefit obligation (APBO): Retirees and dependents $ 45,463 $ 46,813 Active plan participants eligible to receive benefits 8,624 9,704 Active plan participants not yet eligible to receive benefits 16,487 17,690 -------------- -------------- Total APBO 70,574 74,207 Unrecognized prior service cost 10,492 13,623 Unrecognized net gain 15,135 8,653 -------------- -------------- Accrued postretirement liability $ 96,201 $ 96,483 ============== ==============
Net periodic postretirement benefit cost included the following components:
YEAR ENDED YEAR ENDED Year Ended SEPTEMBER 30, SEPTEMBER 30, September 30, 1996 1997 1998 --------------- --------------- --------------- Service cost $ 1,131 $ 1,130 $ 1,265 Interest cost 5,089 4,653 4,785 Amortization of net gain (306) (823) (480) Amortization of prior service cost (1,091) (1,091) (1,091) --------------- --------------- --------------- Net periodic postretirement benefit cost $ 4,823 $ 3,869 $ 4,479 =============== =============== ===============
A 9.00% annual rate of increase for ages under 65 and an 8.60% annual rate of increase for ages over 65 in the costs of covered health care benefits was assumed for 1998, gradually decreasing for both age groups to 5.30% by the year 2009. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post retirement benefit obligation as of September 30, 1998, by $9,350, and increase the net periodic post retirement benefit cost for 1998 by $961. A discount rate of 7.50%, 7.00%, and 6.25% was used to determine the accumulated post retirement benefit obligation at September 30, 1996, 1997, and 1998, respectively. 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, 1998. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 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 $1,392, $1,768 and $1,691 for the years ended September 30, 1996, 1997, and 1998, respectively. Future minimum rental commitments under non-cancelable leases in effect at September 30, 1998, are as follows:
1999 $1,696 2000 1,494 2001 1,095 2002 298 2003 and thereafter 229 ------ $4,812 ======
NOTE 10: OTHER Other costs, net, consists of net foreign currency transaction (gains) and losses in the amounts of $(185), $(524) and $84 for the years ended September 30, 1996, 1997 and 1998, respectively, and miscellaneous costs. The Company is involved as the defendant in various legal actions and is subject to extensive federal, state and local environmental laws and regulations. Although Company environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent regulation could require the Company to make additional unforeseen environmental expenditures. Although the level of future expenditures for environmental and other legal matters cannot be determined with any degree of certainty, based on the facts presently known, management does not believe that such costs will have a material effect on the Company's financial position, results of operations or liquidity. NOTE 11: RELATED PARTY On January 29, 1997, the Company announced that Haynes Holdings, Inc. ("Holdings"), its parent corporation, had effected a recapitalization of the Company and Holdings pursuant to which Blackstone Capital Partners II Merchant Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of Holdings' outstanding shares (the "Recapitalization"). As part of the Recapitalization, Blackstone agreed to provide financial support and assistance to the Company. Fees totaling $6,237 paid by the Company to Blackstone and other unrelated parties in connection with the Recapitalization have been accounted for as recapitalization expenses and charged against income in the period. Also in connection with this transaction, the Company recorded $2,457 of non-cash stock compensation expense, also included as recapitalization expenses, pertaining to certain modifications to management's stock options agreements, which eliminated put and call rights associated with the options. As a result of the Recapitalization, all outstanding unexercised options were immediately vested as part of the change in control provisions of the Plan. In addition, the Company has agreed to pay Blackstone an annual monitoring fee of $500, not to exceed $2,500 in the aggregate, which is included in selling and administrative expenses, and of which $333 is included in other accrued expenses at September 30, 1998. Due to this change in ownership, the Company's ability to utilize its U.S. federal net operating loss carryforwards will be limited in the future. PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 NOTE 12: TERMINATED ACQUISITION COSTS On March 3, 1998, the Company announced that Holdings and Blackstone had abandoned their attempt to acquire Inco Alloys International, a 100% owned business unit of Inco Limited. Approximately $6,199 of deferred acquisition costs were charged to operations in fiscal 1998. NOTE 13: STOCK-BASED COMPENSATION Holdings has a stock option plan ("Plan") which allows for the granting of options to certain key employees and directors of the Company. Under the Plan, options to purchase up to 915,880 shares of Holdings 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. On October 22, 1996, 133,000 options were granted to certain key management personnel with exercise prices of $8.00 per share, the estimated fair value on that date. Due to the exercise and/or redemption of some of these options, redeemable common stock was reduced by $1,005 during 1996. Redeemable common stock was increased by $1,666 during 1997 after accounting for the modifications to management's stock option agreements in connection with the Recapitalization and the redemption and/or exercise of some of the options. On June 1, 1998, Holdings granted 24,632 options to an outside director at an exercise price of $10.15 per share, which approximates the fair market value at that date. Pertinent information covering the Plan is as follows:
WEIGHTED NUMBER AVERAGE OF OPTION PRICE FISCAL SHARES EXERCISE SHARES PER SHARE YEAR OF EXPIRATION EXERCISABLE PRICES --------- ------------- ------------------- ----------- --------- Outstanding at September 30, 1995 820,045 $ 2.28 - 5.00 1999 - 2005 377,145 $ 4.46 Granted - - - Exercised (201,931) 2.28 - 5.00 3.34 Canceled ( 64,000) 2.50 2.50 --------- Outstanding at September 30, 1996 554,114 2.28 - 3.24 1999 - 2005 279,794 2.54 Granted 133,000 8.00 8.00 Exercised (106,114) 2.28 - 3.24 2.70 Canceled - --------- Outstanding at September 30, 1997 581,000 2.50 - 8.00 1999 - 2007 581,000 3.76 Granted 24,632 10.15 10.15 Exercised (7,000) 2.50 2.50 Canceled (4,000) 8.00 8.00 --------- Outstanding at September 30, 1998 594,632 2.50 - 10.15 1999 - 2008 574,926 $ 4.01 ========= Options Outstanding at September 30, 1998 consist of: 129,000 8.00 129,000 441,000 2.50 441,000 24,632 10.15 4,926 --------- ----------- 594,632 574,926 ========= ===========
PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 Effective October 1, 1996, the Company adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the existing stock option plan under the provisions of this pronouncement as the Company accounts for stock options under the provisions of Accounting Principles Board Opinion ("APB") No. 25. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards in accordance with the provisions of SFAS No. 123, net income would have been reduced by $167, net of $112 deferred tax benefit, in fiscal 1997, and $7, net of $5 deferred tax benefit in 1998. There would have been no effect on net income in fiscal 1996 as no options were granted. These pro forma adjustments were calculated using the minimum value method to value all stock options granted since October 1, 1995, using the following assumptions:
1997 1998 -------- -------- Risk free interest rate 6.27% 5.53% Expected life of options 5 years 5 years
(Remainder of page intentionally left blank.) PAGE HAYNES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998 NOTE 14: 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, 1996 1997 1998 -------------- -------------- --------------- Sales United States $ 142,132 $ 154,403 $ 146,574 Export Sales 66,777 65,199 78,187 -------------- -------------- --------------- 208,909 219,602 224,761 Europe 54,173 54,116 63,835 -------------- -------------- --------------- 263,082 273,718 288,596 Less: Eliminations 36,680 37,958 41,652 -------------- -------------- --------------- Net revenues $ 226,402 $ 235,760 $ 246,944 ============== ============== =============== Operating income and other cost, net United States $ 17,345 $ 19,827 $ 19,948 Europe 4,806 4,486 5,996 -------------- -------------- --------------- Total operating income (loss) and other cost, net 22,151 24,313 25,944 Interest expense 21,991 20,608 21,171 -------------- -------------- --------------- Income before provision for (benefit from) income taxes, extraordinary item, and cumulative effect of a change in accounting principle $ 160 $ 3,705 $ 4,773 ============== ============== =============== Identifiable assets United States $ 122,400 $ 178,343 $ 163,881 Europe 34,314 34,693 39,707 General corporate assets* 4,688 3,281 3,720 Equity in affiliates 87 2 (45) -------------- -------------- --------------- $ 161,489 $ 216,319 $ 207,263 ============== ============== ===============
* General corporate assets include cash and cash equivalents. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. (Remainder of page intentionally left blank.) PAGE PART III ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the persons who served as the directors and executive officers of the Company as of September 30, 1998. 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 58 President and Chief Executive Officer; Director Joseph F. Barker 51 Chief Financial Officer; Vice President, Finance; Treasurer F. Galen Hodge 60 Vice President, Marketing Michael F. Rothman 51 Vice President, Engineering & Technology Charles J. Sponaugle 50 Vice President, Sales Frank J. LaRosa 39 Vice President, Human Resources and Information Technology August A. Cijan 43 Vice President, Operations Theodore T. Brown 40 Controller; Chief Accounting Officer Robert I. Hanson 54 General Manager, Arcadia Tubular Products R. Steven Linne 54 General Counsel and Secretary Glenn H. Hutchins 43 Director, Member Compensation Committee David A. Stockman 52 Director Chinh E. Chu 32 Director, Member Audit Committee Marshall A. Cohen 63 Director, Member Compensation Committee Eric Ruttenberg 42 Director, Member Audit Committee
Mr. Austin was elected President, Chief Executive Officer and a director of the Company in September 1993. From 1987 to the time he joined the Company, Mr. Austin was President and Chief Executive Officer of Tuscaloosa Steel Corporation, a mini hot strip mill owned by British Steel PLC with approximately $200 million in annual revenue ("Tuscaloosa"). Mr. Barker was elected Vice President, Finance, of the Company in September 1992 and Treasurer and Secretary in September 1993. Mr. Barker was also elected Chief Financial Officer in May 1996. He had served as Controller of the Company and its predecessors since November 1986. Dr. Hodge was elected Vice President, Marketing, in June 1998 after having served as Vice President of International since 1994. He had served as Vice President, Technology, since September 1989 and in various technical and production positions with the Company and its predecessors since 1970. Mr. Rothman was elected Vice President, Engineering and Technology in October 1995 after having served as Marketing Manager since 1994. He previously served in various marketing and technical positions since joining the Company in 1975. Mr. Sponaugle was elected Vice President, Sales, in June 1998 after having served as Vice President, Sales and Marketing since October 1994. He had served in various quality control and marketing positions since 1985. 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. PAGE Mr. Hanson was named General Manager, Arcadia Tubular Products Facility in November 1994. He previously served the Company and its predecessors in various technical, production and engineering capacities since October 1987. Mr. Linne was elected General Counsel and Secretary of the Company in October 1996 after having served as a patent and trademark attorney in private practice and for the Company and its predecessors since 1989. Mr. Hutchins is currently a Senior Managing Director of Blackstone, which he joined in September 1994. Mr. Hutchins was a Managing Director of Thomas H. Lee Co. from 1987 until 1994. While on leave from Thomas H. Lee Co. during parts of 1993 and 1994, he was a Special Advisor in the White House. Mr. Hutchins currently serves on the Boards of Haynes International, Inc., American Axle & Manufacturing Inc. (Del.), American Axle & Manufacturing Inc. (Mich.), Corp Group C.V. and Corp Banca (Argentina) S.A. Mr. Stockman is currently a Senior Managing Director of Blackstone, which he joined in 1988. Prior to joining Blackstone, Mr. Stockman was a Managing Director in the Corporate Finance Department of Salomon Brothers, Inc. from 1985 to 1988. He currently serves on the Boards of Directors of Bar Technologies, Collins & Aikman, Haynes International, Inc. and American Axle & Manufacturing, Inc. Mr. Chu is currently a Managing Director of The Blackstone Group L.P., which he joined in 1990. Prior to joining The Blackstone Group L.P., Mr. Chu was a member of the Mergers and Acquisitions Group of Salomon Brothers, Inc. from 1988 to 1990. He currently serves on the Boards of Directors of Haynes International, Inc., Prime Succession and Rose Hills Company. Mr. Cohen was elected as a director of Haynes International, Inc. in June 1998. He has served as counsel to Cassels, Brock & Blackwell in Toronto, Canada since October 1996. From November 1988 to September 1996, Mr. Cohen was President and Chief Executive Officer of The Molson Companies Limited. He was Chairman of Gulf Canada Resources Limited and President of Olympia & York Enterprises corporation From October 1986 to October 1988. He currently serves on the Boards of Directors of American International Group, Inc., Lafarge Corporation, Speedy Muffler King Inc., The Goldfarb Corporation, and The Toronto-Dominion Bank. Mr. Ruttenberg was elected as a director of Haynes International, Inc. in June 1998. He is a General Partner of Tinicum, a Ruttenberg family investment company. He is also a Director of SPS Technologies and Environmental Strategies Corporation and a Trustee of mount Sinai Medical Center. PAGE The Amended Stockholder's Agreement by and among Holdings and certain investors, including Blackstone, adopted on January 31, 1997 (the "Agreement"), imposes certain transfer restrictions on Holdings' common stock, including provisions that (i) Holdings common stock may be transferred only to those persons agreeing to be bound by the Agreement except if such transfer is pursuant to a public offering or made following a public offering, or made in compliance with the Securities Act of 1933, as amended (the "Securities Act"); (ii) the investors may not grant any proxy or enter into or agree to be bound by any voting trust with respect to the Holdings common stock; (iii) if the Blackstone Investors (as defined) or their permitted transferees propose to sell any of their Holdings common stock, the other investors shall in most instances have the right to participate ratably in the proposed sale or, under certain circumstances, to sell all of their Holdings common stock in the proposed sale; and (iv) a majority in interest of the Blackstone Investors may compel all other such investors to sell their shares under certain circumstances. The Agreement also contains a commitment on the part of Holdings to register the shares under the Securities Act upon request by the Blackstone Investors, subject to certain conditions and limitations. The Agreement terminates on the tenth anniversary of its effective date. The By-Laws of Haynes International, Inc. ("By-Laws") authorize the board of directors to designate the number of directors to be not less than three nor more than eleven. The board currently has six directors. Directors of the Company serve until their successors are duly elected and qualified or until their earlier resignation or removal. Officers of the Company serve at the discretion of the board of directors, subject, in the case of Mr. Austin, to the terms of his employment contract. See "Executive Compensation--Austin Employment Agreement." The board has established an Audit Committee and a Compensation Committee. The Audit Committee is responsible for recommending independent auditors, reviewing, in connection with the independent auditors, the audit plan, the adequacy of internal controls, the audit report and management letter and undertaking such other incidental functions as the board may authorize. The Compensation Committee is responsible for administering the Stock Option Plans, determining executive compensation policies and administering compensation plans and salary programs, including performing an annual review of the total compensation and recommended adjustments for all executive officers. See Item 11. (Remainder of page intentionally left blank.) PAGE ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company to its Chief Executive Officer and each of the Company's four other most highly compensated Executive Officers, who served as executive officers as of September 30, 1998.
SUMMARY COMPENSATION TABLE Annual Long-Term Compensation(1) Compensation Annual Annual Awards Name Compensation(1) Compensation(1) Other and Annual Principal Fiscal Salary Bonus Compensation Options All Other Position Year $ $ $ # Compensation - --------------------- ------ --------------- --------------- --------------- ------------ ------------ Michael D. Austin 1998 414,000 42,869 - - $ 8,663 President and Chief 1997 387,000 81,497 - - 9,000 Executive Officer 1996 351,167 233,704 - - 104,519 Joseph F. Barker 1998 176,275 18,189 - - 2,713 Vice President, 1997 166,625 35,089 - - 2,575 Finance; Treasurer 1996 150,000 92,567 - - 2,073 Charles J. Sponaugle 1998 152,500 15,719 - - 2,079 Vice President, Sales 1997 148,000 30,458 - - 1,371 1996 134,042 79,967 - - 1,191 August A. Cijan 1998 154,700 16,045 - - 840 Vice President, 1997 149,400 31,117 - - 812 Operations 1996 139,350 73,482 - - 743 F. Galen Hodge 1998 149,875 15,749 - - 5,116 Vice President, 1997 143,500 30,541 - - 3,371 Marketing 1996 136,750 51,996 - - 3,236 - -------------------------- (1) Additional compensation in the form of perquisites was paid to certain of the named officers in the periods presented; however, the amount of such compensation was less than the level required for reporting. (2) Premium payments to the group term life insurance plan, gainsharing payments and relocation reimbursements which were made by the Company.
PAGE STOCK OPTION PLANS In 1986, the Company adopted a stock incentive plan, which was amended and restated in 1987, for certain key management employees (the "Prior Option Plan"). The Prior Option Plan allowed participants to acquire restricted common stock from the Company by exercising stock options (the "Prior Options") granted pursuant to the terms and conditions of the Prior Option Plan. In connection with the 1989 Acquisition, Holdings established the Haynes Holdings, Inc. Employee Stock Option Plan (the "Existing Stock Option Plan"). The Existing Stock Option Plan (as amended) authorizes the granting of options to certain key employees and directors of Holdings and its subsidiaries (including the Company) for the purchase of a maximum of 915,880 shares of Holdings' common stock. As of September 30, 1998, options to purchase 594,632 shares were outstanding under the Existing Stock Option Plan. 6,205 options are available for grant. Upon consummation of the 1989 Acquisition, the holders of the Prior Options exchanged all of their remaining Prior Options for options pursuant to the Existing Stock Option Plan (the "Rollover Options"). Except for the Rollover Options, the Compensation Committee, which administers the Existing Stock Option Plan, is authorized to determine which eligible employees will receive options and the amount of such options. Pursuant to the Existing Stock Option Plan, the Compensation Committee is authorized to grant options to purchase Common Stock at any price in excess of the lower of Book Value (as defined in the Existing Stock Option Plan) or 50% of the Fair Market Value (as defined in the Existing Stock Option Plan) per share of Common Stock on the date of the award. However, actual options outstanding under the Existing Stock Option Plan have been granted at the estimated fair market value per share at the date of grant, resulting in no compensation being charged to operations. 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. 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. On June 1, 1998, a total of 24,632 options were granted to Marshall A. Cohen, Director, at an exercise price of $10.15 per share. 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. (Remainder of page intentionally left blank.) PAGE The following table sets forth certain information with respect to stock options held by the persons named in the Summary Compensation Table. No persons named in the Summary Compensation Table were granted or exercised stock options during fiscal 1998. STOCK OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS
Number of Number of Securities Securities Value of Value of Underlying Underlying Unexercised Unexercised Unexercised Unexercised In-The-Money In-The-Money Options at Options at Options at Options at Fiscal Year End Fiscal Year End Fiscal Year End(1) Fiscal Year End(1) -------------------- --------------- ------------------- ------------------ Name Exercisable Unexercisable Exercisable Unexercisable - -------------------- -------------------- --------------- ------------------- ------------------ Michael D. Austin 160,000 - $ 1,224,000 - Joseph F. Barker 40,000 - $ 306,000 - Charles J. Sponaugle 33,000 - $ 252,450 - August A. Cijan 40,000 - $ 306,000 - F. Galen Hodge 40,000 - $ 306,000 - - ---------------------- (1) Because there is no market for Holdings common stock, the value of unexercised "in the money" options is based on the most recent value of Holdings common stock determined by the Holdings Board of Directors ($10.15).
SEVERANCE AGREEMENTS In connection with the events leading up to the acquisition of the Company by Morgan Lewis Githens & Ahn and management of the Company in August 1989, the Company entered into Severance Agreements with certain key employees (the "Prior Severance Agreements"). In 1995, the Company determined that the provisions of the Prior Severance Agreements were no longer appropriate for the key employees who were parties thereto and that several other key employees who were employed after 1989 should be entitled to severance benefits. Consequently, during and after July 1995, the Company entered into Severance Agreements (the "Severance Agreements") with Messrs. Austin, Barker, Cijan, Hodge, and Sponaugle and with certain other key employees of the Company (the "Eligible Employees"). The Severance Agreements superseded in all respects the Prior Severance Agreements that were then in effect. The Severance Agreements provide for an initial term expiring April 30, 1996, subject to one-year automatic extensions (unless terminated by the Company or the Eligible Employee 60 days prior to May 1 of any year). The Severance Agreements automatically terminate upon termination of the Eligible Employee's employment prior to a Change in Control of the Company, as defined in the Severance Agreements (a "Severance Change in Control"), unless the termination of employment occurs as a result of action of the Company other than for Cause (as defined in the Severance Agreements) within 90 days of a Severance Change in Control. A Severance Change in Control occurs upon a change in ownership of 50.0% or more of the combined voting power of the outstanding securities of the Company or Holdings or upon the merger, consolidation, sale of all or substantially all of the assets or liquidation of the Company or Holdings. PAGE 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 are fully vested, and Mr. Austin exercised a portion of these options to acquire 40,000 shares of Holdings Common Stock in fiscal 1997. PAGE 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 required 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 may be paid earlier in the event of disability, death, or completion of 30 years of service prior to age 55. PAGE 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 1998. The maximum annual benefit permitted for 1998 under Section 415(b) of the Code is $125,000.
YEARS YEARS YEARS YEARS YEARS OF OF OF OF OF SERVICE SERVICE SERVICE SERVICE 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, 1998 are as follows:
CREDITED SERVICE -------- Michael D. Austin 5 F. Galen Hodge 28 Joseph F. Barker 17 Charles J. Sponaugle 17 August A. Cijan 4
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. PAGE PROFIT SHARING AND SAVINGS PLAN The Company maintains the Haynes International, Inc. Combined Profit Sharing and Savings Plan ("Profit Sharing Plan") to provide retirement, tax-deferred savings for eligible employees and their beneficiaries. The board of directors has sole discretion to determine the amount, if any, to be contributed by the Company. No Company contributions were made to the Profit Sharing Plan for the fiscal years ended September 30, 1996, 1997 and 1998. The Profit Sharing Plan is qualified under Section 401 of the Code, permitting the Company to deduct for federal income tax purposes all amounts contributed by it to the Profit Sharing Plan. In general, all salaried employees completing at least 1,000 hours of employment in a 12-month period are eligible to participate after completion of one full year of employment. Each participant's share in the Company's annual allocation, if any, to the Profit Sharing Plan is represented by the percentage which his or her plan compensation (up to $260,000) bears to the total plan compensation of all participants in the plan. Employees may also elect to make elective salary reduction contributions to the Profit Sharing Plan, in amounts up to 20% of their plan compensation. Elective salary reduction contributions may be withdrawn subject to the terms of the Profit Sharing Plan. Vested individual account balances attributable to Company contributions may be withdrawn only after the amount to be distributed has been held by the plan trustee in the profit sharing account for at least 24 consecutive calendar months. Participants vest in their individual account balances attributable to Company contributions at age 65, death, disability or on completing five years of service. INCENTIVE PLAN In January 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. In January 1997, the Company awarded and paid management bonuses of $200,000 pursuant to a board resolution. Additionally, an incentive plan similar to the 1996 plan was approved for 1997 subject to higher targets. Based on results for fiscal 1997, the Company accrued $925,000 for fiscal 1997 which was paid to all domestic salaried employees meeting certain service requirements on November 12, 1997. For fiscal 1998, the Board again approved an incentive plan similar to the 1997 plan subject to higher targets. Based on results for fiscal 1998 the Company accrued $315,000 for fiscal 1998, which was paid to certain domestic salaried employees meeting specific service requirements on November 18, 1998. HAYNES INTERNATIONAL, LTD. PLAN In fiscal 1995, the Company's affiliate Haynes International, Ltd. instituted a gainsharing plan. For fiscal 1995 and 1996, the Company made gainsharing payments pursuant to this plan of approximately $269,000 and $266,000, respectively. In fiscal 1997 and 1998, Haynes International, Ltd. made incentive payments similar to the domestic incentive plan of approximately $115,000 and $98,000, respectively. DIRECTOR COMPENSATION The directors of the Company receive no compensation for their services as such. The non-management members of the board of directors are reimbursed by the Company for their out-of-pocket expenses incurred in attending meetings of the board of directors. Mr. Cohen has a consulting agreement with Holdings under which he has received 24,632 shares of Holdings common stock. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee are now serving or previously have served as employees or officers of the Company or any subsidiary, and none of the Company's executive officers serve as directors of, or in any compensation related capacity for, companies with which members of the Compensation Committee are affiliated. PAGE REPORT OF THE COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors is responsible for administering the Existing Stock Option Plan, determining executive compensation policies and administering compensation plans and salary programs. The Committee is currently comprised solely of non-employee directors. The following report is submitted by the members of the Compensation Committee. * * * The Company's executive compensation program is designed to align executive compensation with the financial performance, business strategies and objectives of the Company. The Company's compensation philosophy is to ensure that the delivery of compensation, both in the short- and long-term, is consistent with the sustained progress, growth and profitability of the Company and acts as an inducement to attract and retain qualified individuals. Under the guidance of the Company's Compensation Committee, the Company has developed and implemented an executive compensation program to achieve these objectives while providing executives with compensation opportunities that are competitive with companies of comparable size in related industries. The Company's executive compensation program has been designed to implement the objectives described above and is comprised of the following fundamental three elements: - a base salary that is determined by individual contributions and sustained performance within an established competitive salary range. Pay for performance recognizes the achievement of financial goals and accomplishment of corporate and functional objectives of the Company. - an annual cash bonus, based upon corporate and individual performance during the fiscal year. - grants of stock options, also based upon corporate and individual performance during the fiscal year, which focus executives on managing the Company from the perspective of an owner with an equity position in the business. Base Salary. The salary, and any periodic increase thereof, of the President and Chief Executive Officer was and is determined by the Board of Directors of the Company based on recommendations made by the Compensation Committee. The salaries, and any periodic increases thereof, of the 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 1998 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 1997. 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, 1997 and 1998 reflected the accomplishment of corporate and functional objectives in fiscal 1996, 1997 and 1998, respectively. Stock Option Grants. Stock options under the Existing Stock Option Plan are granted to key executives and officers based upon individual and corporate performance and are determined by the Board of Directors of the Company based on recommendations made by the Compensation Committee. On October 22, 1996, 133,000 options were granted to certain key management personnel with exercise prices of $8.00 per share. On June 1, 1998, a total of 24,632 options were granted to Marshall A. Cohen, Director, at an exercise price of $10.15 per share. SUBMITTED BY THE COMPENSATION COMMITTEE (Remainder of page intentionally left blank.) PAGE ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the outstanding capital stock of the Company is owned by Holdings. The only stockholders of record at September 30, 1998 known to be owning more than five percent of Holdings' outstanding Common Stock were: Blackstone Capital Partners II Merchant Banking Fund L.P.; Blackstone Offshore Capital Partners II L.P.; and Blackstone Family Investment Partnership II L.P. (collectively, "The Blackstone Partnerships"), all of which are limited partnerships duly organized and existing in good standing under the laws of the State of Delaware, the Cayman Islands and the State of Delaware, respectively. The following table sets forth the number and percentage of shares of Common Stock of Holdings owned by (i) The Blackstone Partnerships, (ii) each of the executive officers named in the Summary Compensation Table, and (iii) all directors and executive officers of the Company as a group, as of September 30, 1998. The address of The Blackstone Partnerships is 345 Park Avenue, 31st Floor, New York, NY 10154. The address of Messrs. Austin, Barker, Cijan, Hodge and Sponaugle is 1020 W. Park Avenue, P.O. Box 9013, Kokomo, IN 46904-9013.
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED (1) OWNED (1) ------------- ------------- NAME NUMBER PERCENT - ------------------------------------------- ------------- ------------- The Blackstone Partnerships 5,323,799 73.0 Michael D. Austin 160,000(1) 2.2 Joseph F. Barker 40,000(1) (2) August A. Cijan 40,000(1) (2) F. Galen Hodge 40,000(1) (2) Charles J. Sponaugle 38,000(3) (2) All directors and executive officers of the Company as a group 470,632 6.5 - ---------------------------- (1) Represents shares of Common Stock underlying options exercisable at any time which are deemed to be beneficially owned by the holders of such options. See Item 11 - "Executive Compensation - Stock Option Plans." (2) Less than 1%. (3) Includes 33,000 shares of Common Stock underlying options exercisable at any time which are deemed to be beneficially owned by Mr. Sponaugle. See Item 11 - "Executive Compensation - Stock Option Plans."
AGREEMENTS AMONG STOCKHOLDERS The Amended Stockholders' 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 except if such transfer is pursuant to a public offering or made following a public offering, or made in compliance with the Securities Act; (ii) the investors may not grant any proxy or enter into or agree to be bound by any voting trust with respect to the Holdings common stock; (iii) if the Blackstone Investors or their permitted transferees, propose to sell any of their Holdings common stock, the other investors shall in most instances have the right to participate ratably in the proposed sale or, under certain circumstances, to sell all of their Holdings common stock in the proposed sale; and (iv) a majority in interest of the Blackstone Investors may compel all other such investors to sell their shares under certain circumstances. The Stockholders' Agreement also contains a commitment on the part of Holdings to register the shares under the Securities Act upon request by the Blackstone Investors, subject to certain conditions and limitations. The Stockholders' Agreement terminates on the tenth anniversary of its effective date. PAGE ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is required to pay a monitoring fee to Blackstone Management Partners L.P. in the amount of $500,000 annually on each anniversary of the recapitalization date, with the aggregate amount not to exceed $2.5 million. On June 1, 1998, a total of 24,632 shares of Holdings common stock shares were issued to Marshall A. Cohen, Director, for consulting services and options to acquire 24,632 shares of Holdings common stock were granted to Mr. Cohen at an exercise price of $10.15 per share. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report. --------------------------------------------- 1. Financial Statements: ---------------------- Included as outlined in Item 8 of Part II of this report. Report of Independent Auditors. Consolidated Balance Sheets as of September 30, 1997 and September 30, 1998. Consolidated Statements of Operations for the Years Ended September 30, 1996, 1997 and 1998. Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1997 and 1998. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules: ------------------------------- Included as outlined in Item 8 of Part II of this report. Schedule II - Valuation and Qualifying Accounts and Reserves Schedules other than those listed above are omitted as they are not required, are not applicable, or the information is shown in the Notes to the Consolidated Financial Statements. (b) Reports on Form 8-K. None. ---------------------- (c) Exhibits. See Index to Exhibits. -------- (Remainder of page intentionally left blank.) PAGE
HAYNES INTERNATIONAL, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS) YEAR ENDED YEAR ENDED YEAR ENDED SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1998 ---------------- ---------------- ---------------- Balance at beginning of period $ 979 $ 900 $ 657 Provisions 26 (6) 221 Write-Offs (152) (251) (287) Recoveries 47 14 71 ---------------- ---------------- ---------------- Balance at end of period $ 900 $ 657 $ 662 - ------------------------------ ================ ================ ================
(Remainder of page intentionally left blank.) PAGE SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HAYNES INTERNATIONAL, INC. ---------------------------- (Registrant) By:/s/ Michael D. Austin ------------------------------- Michael D. Austin, President Date: December 22, 1998 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 22, 1998 Michael D. Austin (Principal Executive Officer) /s/ Joseph F. Barker Vice President, Finance; December 22, 1998 Joseph F. Barker Treasurer (Principal Financial Officer) /s/ Theodore T. Brown Controller December 22, 1998 Theodore T. Brown (Principal Accounting Officer) /s/ Glenn H. Hutchins Director December 22, 1998 Glenn H. Hutchins /s/ David A. Stockman Director December 22, 1998 David A. Stockman /s/ Chinh E. Chu Director December 22, 1998 Chinh E. Chu /s/ Marshall A. Cohen Director December 22, 1998 Marshall A. Cohen /s/ Eric Ruttenberg Director December 22, 1998 Eric Ruttenberg
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INDEX TO EXHIBITS SEQUENTIAL NUMBER NUMBERING ASSIGNED IN SYSTEM PAGE REGULATION S-K NUMBER OF ITEM 601 DESCRIPTION OF EXHIBIT EXHIBIT - --------------- ------------------------------------------------------------ ----------- (2) 2.01 Stock Purchase Agreement, dated as of January 24, 1997, among Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore Capital Partners II Merchant Banking Fund L.P., Blackstone Family Investment Partnership L.P., Haynes Holdings, Inc. and Haynes International, Inc. (Incorporated by reference to Exhibit 2.01 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) 2.02 Stock Redemption Agreement, dated as of January 24, 1997, among MLGA Fund II, L.P., MLGAL Partners, L.P. and Haynes Holdings, Inc. (Incorporated by reference to Exhibit 2.02 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) 2.03 Exercise and Repurchase Agreement, dated as of January 24, 1997, among Haynes Holdings, Inc. and the holders as listed therein. (Incorporated by reference to Exhibit 2.03 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) 2.04 Consent Solicitation and Offer to Redeem, dated January 30, 1997. (Incorporated by reference to Exhibit 2.04 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) 2.05 Letter of Transmittal, dated January 30, 1997. (Incorporated by reference to Exhibit 2.05 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) (3) 3.01 Restated Certificate of Incorporation of Registrant. (Incorporated by reference to Exhibit 3.01 to Registration Statement on Form S-1, Registration No. 33-32617.) 3.02 Bylaws of Registrant. (Incorporated by reference to Exhibit 3.02 to Registration Statement on Form S-1, Registration No. 33-32617.) (4) 4.01 Indenture, dated as of August 23, 1996, between Haynes International, Inc. and National City Bank, as Trustee, relating to the 11 5.8% Senior Notes Due 2004, table of contents and cross-reference sheet. (Incorporated by reference to Exhibit 4.01 to the Registrant's Form 10-K Report for the year ended September 30, 1996, File No. 333-5411.) 4.02 Form of 11 5/8% Senior Note Due 2004. (Incorporated by reference to Exhibit 4.02 to the Registrant's Form 10- K Report for the year ended September 30, 1996, File No. 333-5411.) (9) No Exhibit. (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.) PAGE 10.05 Fifth Amendment to Stock Subscription Agreement, dated as of January 29, 1997, among Haynes Holdings, Inc., Haynes International, Inc. and the persons on the signature pages thereof. (Incorporated by reference to Exhibit 4.02 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) 10.06 Termination of Stock Subscription Agreement, dated March 31, 1997. (Incorporated by reference to Exhibit 10.06 to Registrant's Form 10-Q Report, filed May 15, 1997, File No. 333-5411.) 10.07 Stockholders Agreement, dated as of August 31, 1989, among Haynes Holdings, Inc. and the persons listed on the signature pages thereto (Investors). (Incorporated by reference to Exhibit 4.08 to Registration Statement on Form S-1, Registration No. 33-32617.) 10.08 Amendment to the Stockholders Agreement To Add a Party, dated August 14, 1992, among Haynes Holdings, Inc., MLGA Fund II, L.P., and the persons listed on the signature pages thereto. (Incorporated by reference to Exhibit 10.18 to Registration Statement on Form S-4, Registration No. 33-66346.) 10.09 Amended Stockholders Agreement, dated as of January 29, 1997, among Haynes Holdings, Inc. and the investors listed therein. (Incorporated by reference to Exhibit 4.01 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) 10.10 First Amendment to the Amended Stockholders' Agreement, dated March 31, 1997. (Incorporated by reference to Exhibit 10.10 to Registrant's Form 10-Q Report, filed may 15, 1997, File No. 33-5411.) 10.11 Investment Agreement, dated August 10, 1992, between MLGA Fund II, L.P., and Haynes Holdings, Inc. (Incorporated by reference to Exhibit 10.22 to Registration Statement on Form S-4, Registration No. 33-66346.) 10.12 Investment Agreement, dated August 10, 1992, between MLGAL Partners, Limited Partnership and Haynes Holdings, Inc. (Incorporated by reference to Exhibit 10.23 to Registration Statement on Form S-4, Registration No. 33-66346.) 10.13 Investment Agreement, dated August 10, 1992, between Thomas F. Githens and Haynes Holdings, Inc. (Incorporated by reference to Exhibit 10.24 to Registration Statement on Form S-4, Registration No. 33-66346.) 10.14 Consent and Waiver Agreement, dated August 14, 1992, among Haynes Holdings, Inc., Haynes International, Inc., MLGA Fund II, L.P., and the persons listed on the signature pages thereto. (Incorporated by reference to Exhibit 10.19 to Registration Statement on Form S-4, Registration No. 33-66346.) 10.15 Executive Employment Agreement, dated as of September 1, 1993, by and among Haynes International, Inc., Haynes Holdings, Inc. and Michael D. Austin. (Incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-4, Registration No. 33-66346.) 10.16 Amendment to Employment Agreement, dated as of July 15, 1996 by and among Haynes International, Inc., Haynes Holdings, Inc. and Michael D. Austin (Incorporated by reference to Exhibit 10.15 to Registration Statement on S-1, Registration No. 333-05411). 10.17 Haynes Holdings, Inc. Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.08 to Registration Statement on Form S-1, Registration No. 33-32617.) 10.18 First Amendment to the Haynes Holdings, Inc. Employee Stock Option Plan, dated March 31, 1997. (Incorporated by reference to Exhibit 10.18 to Registrant's Form 10-Q Report, filed May 15, 1997, File no. 333-5411.) 10.19 Form of "New Option" Agreements between Haynes Holdings, Inc. and the executive officers of Haynes International, Inc. named in the schedule to the Exhibit. (Incorporated by reference to Exhibit 10.09 to Registration Statement on Form S-1, Registration No. 33-32617.) 10.20 Form of "September Option" Agreements between Haynes Holdings, Inc. and the executive officers of Haynes International, Inc. named in the schedule to the Exhibit. (Incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-1, Registration No. 33-32617.) PAGE 10.21 Form of "January 1992 Option" Agreements between Haynes Holdings, Inc. and the executive officers of Haynes International, Inc. named in the schedule to the Exhibit. (Incorporated by reference to Exhibit 10.08 to Registration Statement on Form S-4, Registration No. 33-66346.) 10.22 Form of "Amendment to Holdings Option Agreements" between Haynes Holdings, Inc. and the executive officers of Haynes International, Inc. named in the schedule to the Exhibit. (Incorporated by reference to Exhibit 10.09 to Registration Statement on Form S-4, Registration No. 33-66346.) 10.23 Form of March 1997 Amendment to holdings Option Agreements. (Incorporated by reference to Exhibit 10.23 to Registrant's Form 10-Q Report, filed May 15, 1997, File No. 333-5411.) 10.24 March 1997 Amendment to Amended and Restated holdings Option Agreement, dated March 31, 1997. Incorporated by reference to Exhibit 10.24 to Registrant's Form 10-Q Report, filed May 15, 1997, File No. 333-5411.) 10.25 Amended and Restated Loan and Security Agreement by and among CoreStates Bank, N.A. and Congress Financial Corporation (Central), as lenders, Congress Financial Corporation (Central), as Agent for lenders, and Haynes International, Inc., as Borrower. (Incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K Report for the year ended September 30, 1996, File No. 333-5411.) 10.26 Amendment No. 1 to Amended and Restated Loan and Security Agreement by and among CoreStates Bank, N.A. and Congress Financial Corporation (Central), as Lenders, Congress Financial Corporation (central) as Agent for Lenders, and Haynes International, Inc., as Borrower. (Incorporated by reference to Exhibit 10.01 to Registrant's Form 8-K Report, filed January 22, 1997, File No. 333-5411.) 10.27 Amendment No. 2 to Amended and Restated Loan and Security Agreement, dated January 29, 1997, among CoreStates Bank, N.A. and Congress Financial Corporation (Central), as Lenders, Congress financial Corporation (Central), as agent for Lenders, and Haynes International, Inc. (Incorporated by reference to Exhibit 10.01 to Registrant's Form 8-K Report, filed February 13, 1997, File No. 333-5411.) (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.
PAGE EX-12.1 2 EXHIBIT 12.01
HAYNES INTERNATIONAL, INC. RATIO OF EARNINGS BEFORE FIXED CHARGES TO FIXED CHARGES 1994 1995 1996 1997 1998 --------- -------- ------- ---------- ---------- Line 1 Income (Loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle $(60,446) $(5,458) $ 160 $ 3,705 $ 4,773 Line 2 Interest on indebtedness 18,236 18,789 20,638 19,464 19,924 Line 3 Amortization of debt issuance costs 1,680 1,444 1,353 1,144 1,247 Line 4 Estimated interest portion of rental expense 522 477 464 589 564 --------- -------- ------- ---------- ---------- Line 5 Total earnings before fixed charges $(40,008) $15,252 $22,615 $ 24,902 $ 26,508 Line 6 Interest on indebtedness $ 18,236 $18,789 $20,638 $19,596(1) 19,934(1) Line 7 Amortization of debt issuance costs 1,680 1,444 1,353 1,144 1,247 Line 8 Estimated interest portion of rental expense 522 477 464 589 564 --------- -------- ------- ---------- ---------- Line 9 Total fixed charges $ 20,438 $20,710 $22,455 $ 21,329 $ 21,745 Ratio of earnings before fixed charges to fixed charges N/A(2) N/A(2) 1.01 1.17 1.22 (1) Includes $132 and $10, for 1997 and 1998, respectively, of capitalized interest expense. (2) Earnings before fixed charges were insufficient to cover fixed charges.
PAGE EX-27.1 3
5 HAYNES INTERNATIONAL, INC. FINANCIAL DATA SCHEDULE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The schedule contains summary financial information extracted from the consolidated condensed financial statements of Haynes International, Inc. and is qualified in its entirety by reference to such financial statements. YEAR YEAR SEP-30-1997 SEP-30-1998 SEP-30-1997 SEP-30-1998 3,281 3,720 0 0 39,157 46,636 (657) (662) 94,081 81,861 135,862 135,555 94,527 99,744 (61,976) (70,117) 216,319 207,263 78,799 64,581 137,566 139,549 0 0 0 0 0 0 (94,435) (90,938) 216,319 207,263 235,760 246,944 235,760 246,944 180,504 191,849 232,055 242,171 276 952 0 0 20,608 21,171 3,705 4,773 (32,610) 2,317 36,315 2,456 0 0 0 0 0 (450) 36,315 2,006 363,150 20,060 363,150 20,060
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