As filed with the Securities and Exchange Commission on September 14, 2009
Registration No. 333-161260
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 2004
REGISTRATION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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1
TO
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNDER
THE SECURITIES ACT OF 1933
BRUSH ENGINEERED MATERIALS INC.
(Exact
(Exact Name of Registrant as Specified in Its Charter)
| Ohio | 34-1919973 | |
| (State or Other Jurisdiction of Incorporation or | (I.R.S. Employer Identification Number) |
6070 Parkland Blvd.
Mayfield Heights, Ohio 44124
(216) 486-4200
(Address,
(Address, Including Zip Code, and Telephone Number, Including Area Code, ofRegistrant'sRegistrant’s Principal Executive Offices)
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JOHN J. PALLAM
VICE PRESIDENT, GENERAL COUNSEL
MICHAEL
Mayfield Heights, Ohio 44124
(216) 486-4200
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Michael C. HASYCHAK
VICE PRESIDENT, TREASURER AND SECRETARY
17876 ST. CLAIR AVENUE
CLEVELAND, OHIO 44110
TELEPHONE: Hasychak
Vice President, Treasurer and Secretary
6070 Parkland Blvd.
Mayfield Heights, Ohio 44124
(216) 486-4200
(Name,
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of AgentforFor Service)
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COPIES TO:
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable
Vice President, Treasurer and Secretary
6070 Parkland Blvd.
Mayfield Heights, Ohio 44124
(216) 486-4200
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent
Copies To:
Michael J. Solecki
Jones Day
901 Lakeside Avenue
Cleveland, Ohio 44114
Phone: (216) 586-3939
Fax: (216) 579-0212
Michael J. Solecki
Jones Day
901 Lakeside Avenue
Cleveland, Ohio 44114
Phone: (216) 586-3939
Fax: (216) 579-0212
Approximate date of commencement of proposed sale to the public:From time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ]o
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [ ]þ
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]o
If delivery ofthis form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the prospectus is expected to be madeCommission pursuant to Rule 434,
please462(e) under the Securities Act, check the following box. [ ]
o
If this form is a post-effective amendment to a registration statement pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filerþ | Accelerated filero | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting companyo |
CALCULATION OF REGISTRATION FEE
| Proposed | ||||||||||||||||||||||
| Maximum | Proposed Maximum | |||||||||||||||||||||
| Title of Each Class of | Amount to be | Offering Price | Aggregate Offering | Amount of | ||||||||||||||||||
| Securities to be Registered | Registered (1) | Per Unit (1) (2) | Price (1) (3) | Registration Fee(1) | ||||||||||||||||||
| Common Shares, no par value (4)(11) | ||||||||||||||||||||||
| Preferred Shares, no par value (5)(11) | ||||||||||||||||||||||
| Depositary Shares (6)(11) | ||||||||||||||||||||||
| Warrants (7)(11) | ||||||||||||||||||||||
| Subscription Rights (8)(11) | ||||||||||||||||||||||
| Debt Securities (9)(11) | ||||||||||||||||||||||
| Units (10)(11) | ||||||||||||||||||||||
| Total | $ | 150,000,000 | 100 | % | $ | 150,000,000 | (12) | $ | 8,370 | (13) | ||||||||||||
| (1) | Not specified as to each class of securities to be registered pursuant to General Instruction II.D. to Form S-3. | |
| (2) | The proposed maximum offering price per unit will be determined from time to time by the registrant in connection with the issuance by the registrant of the securities registered hereunder. | |
| (3) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o). | |
| (4) | Subject to note (12) below, there is being registered an indeterminate number of common shares. Each common share includes a right (“Right”) to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, | |
| (5) | Subject to note (12) below, there is being registered an indeterminate number of preferred shares. | |
| (6) | Subject to note (12) below, there is being registered an indeterminate number of depositary shares to be evidenced by depositary receipts issued pursuant to a deposit agreement. If the registrant elects to offer to the public fractional interests in preferred shares, then depositary receipts will be distributed to those persons purchasing the fractional interests and the shares will be issued to the depositary under the deposit agreement. | |
| (7) | Subject to note (12) below, there is being registered hereunder an indeterminate amount and number of warrants. The warrants may represent the right to purchase common shares, preferred shares or debt securities. | |
| (8) | Subject to note (12) below, there is being registered an indeterminate number of subscription rights that may represent a right to purchase common shares, preferred shares or debt securities. | |
| (9) | Subject to note (12) below, there is being registered an indeterminate principal amount of debt securities. | |
| (10) | Subject to note (12) below, there is being registered an indeterminate number of units. Each unit will be issued under a unit agreement and will represent an interest in a combination of one or more of the securities registered hereunder. | |
| (11) | Subject to note (12) below, this registration statement also covers an indeterminate amount of securities as may be issued in exchange for, or upon conversion or exercise of, as the case may be, the preferred shares, depositary shares, warrants or subscription rights registered hereunder. Any securities registered hereunder may be sold separately or as units with other securities registered hereunder. No separate consideration will be received for any securities registered hereunder that are issued in exchange for, or upon conversion of, as the case may be, the preferred shares, depositary shares, warrants or subscription rights. | |
| (12) | In no event will the aggregate initial offering price of all securities issued from time to time pursuant to the prospectus contained in this registration statement exceed $150,000,000 or the equivalent thereof in one or more foreign currencies or foreign currency units. Such amount represents the offering price of any common shares, preferred shares and depositary shares, the principal amount of any debt securities issued at their stated principal amount, the issue price rather than the principal amount of any debt securities issued at an original issue discount, the issue price of any warrants, the exercise price of any securities issuable upon the exercise of warrants and the issue price of any securities issuable upon the exercise of subscription rights. The aggregate principal amount of debt securities may be increased if any debt securities are issued at an original issue discount by an amount such that the offering price to be received by the registrant shall be equal to the above amount to be registered. Any offering of securities denominated other than in United States dollars will be treated as the equivalent of United States dollars based on the exchange rate applicable to the purchase of such securities at the time of initial offering. The securities registered hereunder may be sold separately or as units with other securities registered hereunder. | |
| (13) | Previously paid. | |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the purposeregistrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of determining the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933 or until the registration statement shall become effective on such date as the basisSecurities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell securities under this registration statement until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell any securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject To Completion, Dated September 14, 2009
PROSPECTUS
$150,000,000
Common Shares
Preferred Shares
Depositary Shares
Warrants
Subscription Rights
Debt Securities
Units
Preferred Shares
Depositary Shares
Warrants
Subscription Rights
Debt Securities
Units
We may offer and sell from time to time our common shares, preferred shares, depositary shares, warrants, subscription rights and debt securities, as well as units that include any of these securities. We may sell any combination of these securities in one or more offerings with an aggregate initial offering price of $150,000,000 or the equivalent amount in other currencies or currency units.
We will provide the specific terms of the averagesecurities to be offered in one or more supplements to this prospectus. You should read this prospectus and the applicable prospectus supplement carefully before you invest in our securities. This prospectus may not be used to offer and sell our securities unless accompanied by a prospectus supplement describing the method and terms of the highoffering of those offered securities.
We may sell the securities directly or to or through underwriters or dealers, and low intra-day sales pricesalso to other purchasers or through agents. The names of any underwriters or agents that are included in a sale of securities to you, and any applicable commissions or discounts, will be stated in an accompanying prospectus supplement. In addition, the underwriters, if any, may over-allot a portion of the common shares
on the New York Stock Exchange on March 26, 2004, which date is within five
business days prior to filing.
(2) This registration statement also relates to rights to purchase the
registrant's preferred stock issued pursuant to the Rights Agreement, dated
May 10, 2000, by and between Brush Engineered Materials Inc. and National
City Bank, N.A., as rights agent. Until the occurrence of certain events
specifiedsecurities.
Investing in the Rights Agreement, these rights are not exercisable, are
evidenced by the certificates for the common shares and are transferred
solely with the common shares. The value attributable to these rights, if
any, is reflected in the value of the common shares, and, accordingly, no
separate fee is paid.
(3) This amount represents 1,700,000 common shares being sold by the registrant,
115,000 common shares that are issuable upon exercise of warrants to
purchase common shares of the registrant and are being registered for resale
by certain holders of warrants to purchase common shares and 272,250 common
shares that the underwriters have the option to purchase to cover
over-allotments, if any.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE AND
THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT THAT IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 1, 2004
PROSPECTUS
[BRUSH LOGO]
1,815,000 SHARES
BRUSH ENGINEERED MATERIALS INC.
COMMON STOCK
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We are offering 1,700,000 common shares and the selling shareholders are
offering 115,000 common shares through a syndicate of underwriters. We will not
receive any of our securities involves risk. Please read carefully the proceeds from the salesection entitled “Risk Factors” beginning on page 4 of common shares by the selling
shareholders.this prospectus.
Our common shares are tradedlisted on the New York Stock Exchange under the symbol "BW."“BW.” The last reported saleclosing price of our common shares on the New York Stock Exchange on April 1, 2004September 11, 2009 was $20.98 per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTING IN OUR COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
We have granted$23.86. None of the underwriters an optionother securities that we may offer under this prospectus are currently publicly traded.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to purchase up to 272,250
additional common shares to cover over-allotments.
We expect that the common shares will be ready for delivery on or about
, 2004.
KEYBANC CAPITAL MARKETS
contrary is a criminal offense.
The date of this prospectus is �� , 2004.
[DESCRIPTION OF ARTWORK]
The following is a description of graphics that will be included on the
inside front cover of the prospectus:
[Company Logo]
1. Under the Company's Logo is the following text: "We are a leading global
provider of high-performance engineered materials for a growing variety of
commercial and industrial applications where superior performance and
reliability are essential. We are the world's only fully-integrated provider of
beryllium, beryllium-containing alloys and beryllia ceramics. Beryllium is a key
raw material in many of our products and is the lightest structural metal on
Earth. We have two business segments: Metal Systems Group and Microelectronics
Group."
2. A photograph of a cellular tower under a caption titled "Metal Systems
Group" with the following text to the right of the photograph: "We produce and
distribute high-performance alloy products, beryllium products and engineered
material systems. These highly engineered products have applications in the
telecommunications and computer, automotive electronics, industrial components,
aerospace and defense, appliance and other markets."
3. A photograph of DVDs under a caption titled "Microelectronics Group"
with the following text above the photograph: "We manufacture precious metal and
specialty alloy products, electronic packaging, circuitry and beryllia ceramic
materials. These products are used in the wireless telecommunications and
computer, semi-conductor, optical media, automotive, medical, aerospace and
defense, laser and other markets."
4. A pie chart titled "2003 Revenue by Segment."
5. A pie chart titled "2003 Revenue by Market."
6. A pie chart titled "2003 Revenue by Geographic Area."
2009
TABLE OF CONTENTS
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ABOUT THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhereprospectus is part of a registration statement that we filed with the SEC using a “shelf” registration process. Under this shelf process, we may from time to time sell any combination of the securities described in this prospectus.prospectus in one or more offerings up to a total dollar amount of $150,000,000 or the equivalent amount in other currencies or currency units.
This summary may not contain allprospectus provides you with a general description of the securities we may offer. Each time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. For a more complete understanding of the offering of the securities, you should consider
before investing in our common shares. We urge you to read this entire
prospectus and the documents incorporated by reference into this prospectus
carefully, including the "Risk Factors" section and our consolidated financial
statements and the related notes included elsewhere in this prospectus. Unless
the context otherwise requires, references to "we," "us" or "our" refer
collectively to Brush Engineered Materials Inc. and its subsidiaries. The term
"common shares" means our shares of common stock, no par value, unless the
context indicates a different meaning. Unless otherwise specified, all
information assumes the underwriters do not exercise their over-allotment
option.
BRUSH ENGINEERED MATERIALS INC.
We are a leading global provider of high-performance engineered materials
for a growing variety of commercial and industrial applications where superior
performance and reliability are essential. Our engineered materials are critical
components of many high-technology or high-performance products and enable those
products to be made stronger, smaller and lighter, with improved performance
characteristics. We produce and distribute high-performance beryllium products,
alloy products, electronic products, precious metal products and engineered
material systems. Our engineered materials have product applications in a
variety of end-use markets, including telecommunications and computer,
automotive electronics, optical media, industrial components, appliance,
aerospace and defense.
Beryllium is a key raw material in many of our products. Beryllium is a
naturally occurring element -- number four on the periodic table of elements,
with the symbol "Be" -- and is the lightest structural metal on Earth. It is
stiffer than steel, lighter than aluminum and possesses other unique mechanical
and thermal properties. Beryllium is extracted from bertrandite and beryl ores.
We operate the only active bertrandite ore mine in the developed world, located
on 7,500 acres in Juab County, Utah. Through our subsidiaries Brush Wellman
Inc., Brush Resources Inc. and Brush Ceramic Products Inc., we are the world's
only fully integrated provider of beryllium, beryllium-containing alloys and
beryllia ceramics.
We were organized as a holding company for our various businesses in 2000.
Our subsidiary Brush Wellman Inc. was founded in 1931 as The Brush Beryllium
Company, was publicly traded since 1956 and was listed on the NYSE in 1972. We
currently operate 16 manufacturing facilities located in the United States,
Singapore and the Philippines. We also have global service and distribution
centers in Germany, Japan, Singapore, England and the United States, and sales
offices throughout the United States, China and Taiwan.
We have two business segments: Metal Systems Group and Microelectronics
Group. Our Metal Systems Group accounted for approximately 60% of our sales
during 2003, and our Microelectronics Group accounted for approximately 39% of
our sales during 2003. The balance of our sales during 2003 were from Brush
Resources, which sells beryllium hydroxide produced through its Utah operations
to businesses within our Metal Systems Group and to outside customers.
METAL SYSTEMS GROUP
Our Metal Systems Group includes Alloy Products, Beryllium Products and
Technical Materials Inc., or TMI.
Alloy Products, our largest business, manufactures and sells copper and
nickel-based alloy systems, most of which incorporate beryllium. These beryllium
alloys exhibit high strength and hardness, good formability and excellent
resistance to corrosion, wear and fatigue, while retaining good thermal and
electrical conductivity. They often are the material of choice for critical
components in cell phones and wireless communications equipment, notebook and
network computers and web servers, personal digital assistants, or PDAs,
automotive electronics and industrial products. Alloy Products also manufactures
non-beryllium-containing alloys -- including ToughMet(R), a copper-nickel-tin
alloy -- which are corrosion and wear resistant, have excellent lubricity
properties and are used in plastic mold tooling, aerospace, oil and gas and
heavy equipment product applications.
1
Beryllium Products manufactures pure beryllium and aluminum-beryllium
composites that are used in many high-performance applications, primarily for
the defense and aerospace industries. Beryllium's unique
properties -- stiffness, strength, lightweight, temperature resistance and
reflectivity -- are critical to a number of NASA programs. For example, in
September 2003, beryllium was chosen by Northrop Grumman Space Technology as the
material for the 18 segment, 6.5-meter primary mirror of NASA's James Webb Space
Telescope. This state-of-the-art lightweight beryllium mirror will allow
scientists to see ten to eleven billion light years away. We expect this
application to add approximately $15 million in sales of optical grade beryllium
over the next two to three years.
TMI produces engineered material systems including clad metals, plated
metals and electron beam welded, solder coated and reflow materials. These
engineered material systems are produced by combining precious and non-precious
metals in continuous strip form, which provide a variety of thermal, electrical
or mechanical properties over a surface area or particular section of the
material. TMI's products are used in complex electrical components in
telecommunications systems, automotive electronics, semi-conductors and
computers, as well as other high-technology applications.
MICROELECTRONICS GROUP
Our Microelectronics Group includes Williams Advanced Materials Inc., or
WAM, and Electronic Products, which consists of Brush Ceramic Products and
Zentrix Technologies Inc.
WAM manufactures precious metal and specialty alloy products specifically
fabricated to meet the exacting standards required in high reliability
applications for the microelectronics, semi-conductor, optical media (including
DVDs), electron tube, magnetic head, aerospace and performance film industries.
Brush Ceramic Products produces beryllia ceramic materials used in wireless
telecommunications, laser, medical and defense applications. Zentrix
manufactures electronic packaging and circuitry used in wireless
telecommunications, automotive, medical, aerospace and defense applications.
OUR FINANCIAL AND OPERATIONAL INITIATIVES
After generating record sales of $147.2 million during the fourth quarter
of 2000 and strong sales of $145.5 million during the first quarter of 2001, we
experienced a dramatic and sustained decline in sales. Our quarterly revenue has
ranged between approximately $89 million and $106 million since the second
quarter of 2001. This drop in sales levels was primarily due to the collapse of
the global telecommunications and computer market, which accounted for
approximately 50% of our sales in 2000 and approximately 35% of sales in 2003.
As a result, we recorded significant operating losses in 2001, 2002 and 2003.
In 2001, we implemented several financial and operational initiatives
designed to return us to consistent profitability. These initiatives are focused
on five key areas: reducing debt, reducing overhead, improving margins,
broadening our revenue base and positioning ourselves to capitalize on a general
economic recovery,registration statement, including a recovery in the telecommunications and computer
market.
Through these initiatives, we have reduced total debt, off-balance sheet
financing and precious metal consignment obligations by more than $80 million
since the end of 2000. In December 2003, we completed a five-year, $147.5
million debt refinancing that lowered costs compared to an existing credit and
lease facility. We used the proceeds from the transaction to retire existing
debt and terminate an existing key off-balance sheet obligation through the
purchase of certain leased assets.its exhibits. The refinancingprospectus supplement may also provides increased
liquidity to support working capital requirements for future growth. We achieved
targeted overhead cost reductions through, among other things, improved
efficiencies, a 27% reduction in headcount from 2000 year-end levels, a wage
freeze and fringe benefit reductions. Despite a decline in revenue, our variable
margins, which we define as sales less materials and direct manufacturing cost,
have improved as a percent of sales approximately 2.3 percentage points since
2000. In 2003, Alloy Products reduced manufacturing cycle times for our alloy
products by 18%, improved manufacturing inventory turns by 48%, raised yields by
11% and shipped 23% more pounds per manufacturing employee. We also broadened
our revenue base through the introduction of several new products for existing
and new markets and positioned ourselves to capitalize on growth in Asia by
developing sales, marketing and distribution capabilities in a number of markets
in the region.
2
OUR COMPETITIVE STRENGTHS
We believe that we maintain the following competitive strengths:
- UNIQUE STATUS AS A FULLY INTEGRATED PROVIDER OF BERYLLIUM-CONTAINING
PRODUCTS. We operate the only active bertrandite ore mine in the
developed world and are the world's only fully integrated provider of
beryllium, beryllium-containing alloys and beryllia ceramics. We mine
bertrandite ore at our 7,500-acre mine in Juab County, Utah and extract
beryllium from that ore at our processing facility in Delta, Utah. Based
on average production levels in recent years, our proven bertrandite ore
reserves would last approximately 100 years. As a fully integrated
provider, we offer our customers the convenience and security of a single
supply chain source for critical engineered materials.
- HIGH BARRIERS TO ENTRY. Our vertical integration, access to beryllium
resources, know-how and expertise in refining and processing beryllium
and beryllium-containing materials, and the capital investment required
in the plant, equipment and health and safety infrastructure for our
business establish high barriers to entry for potential competitors.
- PRODUCT BREADTH WITHIN EXISTING MARKETS. Each of our businesses provides
a diverse selection of products. Product breadth is an important
consideration for many customers and distributors in their selection of
suppliers. Our extensive product offerings provide an advantage in
developing and maintaining relationships with original equipment
manufacturers,add, update or OEMs, and in establishing partnerships with
distributors.
- GLOBAL DISTRIBUTION NETWORK. Our global distribution network allows us
to actively market our products and effectively respond to our customers'
needs throughout the world. This network includes sales, service and
distribution centers in the United States and in key European and Asian
markets, as well as sales offices throughout the United States, China and
Taiwan. We augment our internal distribution capabilities with a
worldwide network of independent distributors.
- STRATEGIC CUSTOMER RELATIONSHIPS. We have established long-term
relationships with a variety of customers in key growth end markets.
These relationships allow us to work cooperatively with customers in
their new product development activities, which often results in our
products being included in design specifications for a customer's new
product. We believe that these relationships have resulted from our
responsiveness, our ability to meet special customer requirements based
on innovative technology, the quality of our products and the speed of
our delivery.
- TECHNOLOGICAL CAPABILITIES AND PRODUCT QUALITY. We believe that our
precious and base metal alloys, precious metal products, precious metal
refining, precious metal plating technologies, customized machinery,
processes and attention to quality are competitive advantages. A portion
of our products and processes are proprietary. We believe that our
products' superior characteristics and performance tolerances provide an
important competitive advantage, particularly in the sophisticated alloys
required for the most demanding end user applications.
- CAPACITY TO SUPPORT PROFITABLE MARKET GROWTH. As the market's demand for
engineered materials increases, we are well-positioned to expand our
manufacturing output without significant incremental cash investment. In
addition to manufacturing capacity, our focus on Six Sigma and lean
manufacturing techniques and emphasis on worker productivity have
significantly improved our manufacturing efficiency and have positioned
us to improve our profitability. Six Sigma is an analytical process that
helps companies to improve efficiency, quality and customer satisfaction
while reducing cycle time and operating costs.
- SIGNIFICANT OPERATING EXPERTISE. Our senior managers have significant
experience in the engineered materials industry. We believe that our
management team is successfully implementing our financial and
operational initiatives to return us to profitability. We also believe
that our management team's extensive experience positions us to identify
and capitalize on emerging growth opportunities.
3
OUR GROWTH STRATEGY
Our objective is to grow our business profitably while strengthening our
position as a leading global provider of high-performance engineered materials.
Key elements of our growth strategy are to:
- CAPTURE IMPROVED DEMAND IN THE TELECOMMUNICATIONS AND COMPUTER
MARKET. We are positioned to benefit from an increase in equipment
spending and a general improvement in the conditions of the
telecommunications and computer market. During 2003, demand for
telecommunications and computer products began to improve as commercial
and industrial users began to make more significant expenditures on
information and communication systems. This increasing demand among
commercial customers was augmented by increasing consumer demand for
cellular phones, wireless communication systems and other communication
products. We are well positioned in these markets and expect to benefit
from improvements in market conditions.
- CAPITALIZE ON THE TREND TOWARDS HIGHER PERFORMANCE AND MINIATURIZATION OF
ELECTRONIC COMPONENTS. We seek to capitalize on our ability to provide
our customers with engineered materials that are well suited to meet the
demanding standards associated with the trend towards higher performance
and miniaturization of electronic components. New electronic components
must meet enhanced performance requirements, which in turn require
materials that can meet demanding mechanical, electrical and thermal
properties. These demands for heightened performance are coupled with
ongoing efforts to make these components stronger, smaller and lighter.
As manufacturers continue to miniaturize their products, more
high-performance engineered materials capable of meeting stringent
performance and reliability standards need to be included in those
products.
- EXPAND AND DIVERSIFY OUR REVENUE BASE. We seek to build on existing
customer relationships and our core manufacturing competencies to
increase the breadth of our product offerings in existing markets and
diversify into additional markets. We intend to reduce our susceptibility
to economic cycles and increase our prospects for profitable growth by
continuing to expand the markets and customers we serve and products we
offer.
- INCREASE OUR GLOBAL PRESENCE. We support our customers in their
geographic markets throughout the world. As the trend towards
high-performance materials and miniaturization continues, we believe that
new market opportunities and new potential customers will emerge. We
intend to continue to expand our sales, marketing and service
capabilities into international markets in response to our existing
customers' needs and new business opportunities. Our presence in the
local markets of our customers allows us to quickly respond to their
needs and requests, which we believe provides us with a key competitive
advantage. For example, Alloy Products is focused on expanding its
foothold in the high growth China and other Asian markets where consumer,
personal computer and wireless applications are key drivers to future
development. Alloy Products' focus in this region complements the solid
foundations it has already established in Europe.
- INCREASE OPERATIONAL EFFICIENCY. We intend to build upon the success of
our existing cost reduction and manufacturing efficiency initiatives to
improve margins and position ourselves for profitable growth in both
strong and weak economic environments.
- PURSUE SELECTIVE ACQUISITIONS IN OUR STRATEGIC MARKETS. We intend to
selectively pursue acquisitions that can extend our geographic reach,
expand and diversify our customer base or increase the breadth of our
product and service offerings.
4
CORPORATE INFORMATION
Brush Engineered Materials Inc. is an Ohio corporation. Our principal
executive offices are located at 17876 St. Clair Avenue, Cleveland, Ohio 44110.
Our telephone number is (216) 486-4200. Our website is www.beminc.com. The
information on our website is not part of this prospectus.
THE OFFERING
Common shares offered by us... 1,700,000 shares
Common shares offered by the
selling shareholders.......... 115,000 shares
Common shares to be
outstanding immediately after
this offering................. 18,559,184 shares
Use of proceeds............... We intend to use the net proceeds of
approximately $ million, based on an
offering price of $ per share, from this
offering to repay a portion of the amounts
outstanding under credit facilities and for
working capital and general corporate purposes,
including capital expenditures, acquisitions of
businesses or assets and investments. We will
not receive any of the proceeds from the sale
of common shares by the selling shareholders.
See "Use of Proceeds" on page 19.
Over-allotment option......... We have granted to the underwriters an option
to purchase up to an additional 272,250 common
shares solely to cover over-allotments.
NYSE symbol................... BW
The number of common shares to be outstanding after the offering is based
on the number of common shares outstanding as of March 31, 2004 plus a total of
115,000 shares issued or to be issued to the selling shareholders upon the
exercise of outstanding warrants. Unless we specifically state otherwise, thechange information contained in this prospectus excludes 1,573,868 common shares
reserved for issuance upon the exercise of options granted under our equity
compensation plans.
RISK FACTORS
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF MATERIAL RISKS
THAT PROSPECTIVE PURCHASERS OF OUR COMMON SHARES SHOULD CONSIDER.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The tables below set forth our summary consolidated financial data for the
years ended December 31, 1999, 2000, 2001, 2002 and 2003. This financial data
has been derived from our audited consolidated financial statements. Prospective
investorsprospectus. You should read both this prospectus and any prospectus supplement together with additional information under the summary consolidated financial data in conjunction
with "Selected Consolidated Financial Data," "Management's Discussionheading “Where You Can Find More Information” and Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
The "As Adjusted" column in the consolidated balance sheet data below gives
effect to the exercise of the warrants and the sale of the 1,700,000 common
shares offered by us at an assumed public offering price of $ per share, the
last reported sale price of our common shares on , 2004, after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us.
6
RISK FACTORS“Information We Incorporate By Reference.”
You should carefully consider the risks described below and all other
information contained in or incorporated by reference into this prospectus
before purchasing our common shares. Some of the following risks relate
principally to the industry in which we operate and to our business. Other risks
relate principally to the securities markets and ownership of our common shares.
Additional risks and uncertainties not presently known to us, or risks that we
currently do not consider to be material, may also impair our operations or
results. If any of the following risks actually occurs, we may not be able to
conduct our business as currently planned, and our financial condition and
sales, margins and profitability could be seriously harmed. In that case, the
market price of our common shares could decline, and you could lose all or part
of your investment.
RISKS RELATING TO OUR BUSINESS
HEALTH ISSUES AND LITIGATION RELATING TO MACHINING AND MANUFACTURING OF
BERYLLIUM-CONTAINING PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR SALES,
MARGINS AND PROFITABILITY.
If exposed to respirable beryllium fumes, dusts or powder, some individuals
may demonstrate an allergic reaction to beryllium and may later develop a
chronic lung disease known as chronic beryllium disease, or CBD. Some people who
are diagnosed with CBD do not develop clinical symptoms at all. In others, the
disease can lead to scarring and damage of lung tissue, causing clinical
symptoms that include shortness of breath, wheezing and coughing. Severe cases
of CBD can cause disability or death.
Further, some scientists claim there is evidence of an association between
beryllium exposure and lung cancer, and certain standard-setting organizations
have classified beryllium and beryllium compounds as human carcinogens.
The health risks relating to exposure to beryllium have been, and will
continue to be, a significant issue confronting the beryllium-containing
products industry. The health risks associated with beryllium have resulted in
product liability claims, employee and third-party lawsuits and increased levels
of scrutiny by federal and state regulatory authorities of us and our customers.
Concerns over CBD and other potential adverse health effects relating to
beryllium, as well as concerns regarding potential liability from the use of
beryllium, may discourage our customers' use of our beryllium-containing
products and reduce demand for our products.
One of our subsidiaries, Brush Wellman, is a defendant in proceedings in
various state and federal courts brought by plaintiffs alleging that they have
contracted CBD or other lung conditions as a result of exposure to beryllium.
Plaintiffs include persons employed by Brush Wellman, contractors at Brush
Wellman's facilities and its customers and users of beryllium-containing
products, and their family members. As of March 31, 2004, there were 14
beryllium-related claims pending in which Brush Wellman is a defendant, three of
which are putative class actions. Many of the plaintiffs in these suits do not
currently have any symptoms of CBD, though we cannot assure you they will not
exhibit symptoms in the future. All but one of these actions are currently
covered under varying levels of pre-existing insurance coverage through
third-party carriers, although we may not be able to collect fully on our
insurance coverage. A substantial portion of our insurance coverage is provided
through various Lloyd's of London syndicates, some of whose names are or may
become insolvent.
Our sales, margins and profitability could be affected adversely by
unfavorable results in one or more of those cases. In addition, continued or
increased adverse media coverage relating to our beryllium-containing products
could damage our reputation or cause a decrease in demand for
beryllium-containing products, which could adversely affect our sales, margins
and profitability. Further, an unfavorable outcome or settlement of a pending
beryllium case or additional adverse media coverage could encourage the
commencement of additional similar litigation.
7
WE ARE CURRENTLY SELF-INSURED FOR PRODUCT LIABILITY CLAIMS BASED ON EXPOSURE TO
BERYLLIUM AFTER JULY 2001, AND MATERIAL LOSSES FROM THOSE CLAIMS COULD ADVERSELY
AFFECT OUR SALES, MARGINS AND PROFITABILITY.
Although we have varying levels of insurance coverage from insurance
carriers for product liability claims based on exposure to beryllium for most
periods prior to July 2001, we are self-insured for product liability claims
based on exposure to beryllium after July 2001 and for a short period in the
1980s. We may not be able to provide adequate coverage against all potential
liabilities. Significant losses from any of the claims for which we are
self-insured could adversely affect our sales, margins and profitability.
OUR BUSINESS AND OUR CUSTOMERS' BUSINESSES ARE SUBJECT TO EXTENSIVE HEALTH AND
SAFETY REGULATIONS THAT IMPOSE, AND WILL CONTINUE TO IMPOSE, SIGNIFICANT COSTS
AND LIABILITIES, AND FUTURE REGULATION COULD INCREASE THOSE COSTS AND
LIABILITIES OR EFFECTIVELY PROHIBIT PRODUCTION OR USE OF BERYLLIUM-CONTAINING
PRODUCTS.
We and our customers are subject to laws regulating worker exposure to
beryllium. Standards for exposure to beryllium are under review by various
governmental and private standard-setting organizations. One such review is
being conducted by the United States Occupational Safety and Health
Administration, which has commenced a rulemaking process to decide whether to
revise its current standards for workers exposed to beryllium. Those reviews may
result in more stringent worker safety standards, which may significantly
increase our costs of production. More stringent worker safety standards may
also cause users of beryllium-containing products to choose alternative
materials or otherwise reduce demand for beryllium-containing products.
Reduction in demand for our products or an increase in our production costs
could adversely affect our sales, margins and profitability. Further, production
or use of beryllium may be effectively prohibited, at least for some
applications, if worker safety standards were increased significantly, which
would cause us to shut down a portion or all of our operations relating to
beryllium-containing materials. Present and future environmental regulations
could also impair our customers' ability and willingness to use our
beryllium-containing products.
OUR BUSINESS IS SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATIONS THAT IMPOSE, AND
WILL CONTINUE TO IMPOSE, SIGNIFICANT COSTS AND LIABILITIES ON US, AND FUTURE
REGULATION COULD INCREASE THESE COSTS AND LIABILITIES OR PREVENT PRODUCTION OF
BERYLLIUM-CONTAINING PRODUCTS.
We are subject to a variety of governmental regulations relating to the
environment, including those relating to our handling of hazardous materials and
air and wastewater emissions. Some environmental laws impose substantial
penalties for noncompliance. Others, such as the federal Comprehensive
Environmental Response, Compensation, and Liability Act, impose strict,
retroactive and joint and several liability upon entities responsible for
releases of hazardous substances. Bertrandite ore mining is also subject to
extensive governmental regulation on matters such as permitting and licensing
requirements, plant and wildlife protection, reclamation and restoration of
mining properties, the discharge of materials into the environment and the
effects that mining has on groundwater quality and availability. If we fail to
comply with present and future environmental laws and regulations, we could be
subject to liabilities or our operations could be interrupted. In addition,
future environmental laws and regulations could restrict our ability to expand
our facilities or extract our bertrandite ore deposits. They could also require
us to acquire costly equipment or to incur other significant expenses in
connection with our business, which could adversely affect our business.
WE HAVE RECENTLY INCURRED SIGNIFICANT LOSSES, AND WE MAY NOT BE ABLE TO SUSTAIN
PROFITABILITY IF WE ATTAIN IT.
We have not generated an annual operating profit since 2000. Although we
have taken steps under our business strategy to improve our operating
performance, those measures may not result in profitability, or, if they do
result in profitability, that trend may not continue. If we fail to establish
profitable operations and continue to incur losses, the price of our common
shares may fall.
We have implemented strategic initiatives designed to improve our operating
performance. We may not be able to successfully implement or realize the
expected benefits of any of those initiatives or sustain
8
improvements made to date. If we fail to achieve the goals of those initiatives,
our sales, margins and profitability may be adversely affected.
OUR CUSTOMERS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AS A RESULT OF THE
CYCLICAL NATURE OF THEIR INDUSTRIES AND THEIR SENSITIVITY TO GENERAL ECONOMIC
CONDITIONS, WHICH COULD ADVERSELY AFFECT THEIR DEMAND FOR OUR PRODUCTS AND
COULD, IN TURN, ADVERSELY AFFECT OUR SALES, MARGINS AND PROFITABILITY.
A substantial number of our customers are in the telecommunications and
computer, and automotive electronics industries. Each of those industries is
cyclical in nature, influenced by a combination of factors, including, among
other things, periods of economic growth or recession, strength or weakness of
the United States dollar, the strength of the automotive electronics and
computer industries and the rate of construction of telecommunications
infrastructure equipment.
The demand for our products is generally affected by macroeconomic
fluctuations in the global economies in which we sell our products. The United
States and other world markets have experienced an economic downturn in recent
years, which had a significant negative impact on our customers' financial
performance, which in turn has had a significant negative impact on our
financial performance. The severity and duration of this downturn could cause
additional adverse impacts on our financial performance. Future economic
downturns, stagnant economies or global currency fluctuations could
significantly affect our financial performance.
In addition, a disruption or downturn in the telecommunications and
computer or automotive electronic industries could negatively impact demand for
our products and adversely affect our sales, margins and profitability. For
instance, bulk product sales into the undersea telecommunications market, which
was our largest market segment for bulk products as recently as 2000, began to
decline in the second half of 2001 and were minimal in 2002 due to the severe
reduction in the number of new undersea fiber optic line installation projects
throughout the world.
Our business is dependent on continued capital spending by the
telecommunications and computer industries, and a decrease in capital spending
for infrastructure and equipment could affect our revenue more than we currently
expect. Our business could be exposed to unexpected or extended downturns in
capital spending, which could adversely affect our sales, margins and
profitability. In addition, a decrease in military, aerospace or defense-related
spending could adversely affect our sales, margins and profitability.
THE AVAILABILITY OF COMPETITIVE SUBSTITUTE MATERIALS FOR BERYLLIUM-CONTAINING
PRODUCTS MAY REDUCE OUR CUSTOMERS' DEMAND FOR THESE PRODUCTS AND ADVERSELY
AFFECT OUR SALES, MARGINS AND PROFITABILITY.
In certain product applications, we compete with manufacturers of
non-beryllium-containing products, including organic composites, metal alloys or
composites, titanium and aluminum. Our customers may choose to use substitutes
for beryllium-containing products in their products for a variety of reasons,
including, among other things, the lower costs of those substitutes, the health
and safety concerns relating to these products and the risk of litigation
relating to beryllium-containing products. If our customers use substitutes for
beryllium-containing products in their products, the demand for our products may
decrease, which could adversely affect our sales, margins and profitability.
THERE ARE LIMITED SOURCES OF BERYLLIUM AND BERTRANDITE AND BERYL ORES, AND IF WE
ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF THOSE MATERIALS, OUR SALES,
MARGINS AND PROFITABILITY COULD BE ADVERSELY AFFECTED.
Over 50% of our sales in 2003 related to products that contain beryllium
and beryllium alloys. Currently there arerely only three primary sources for
beryllium and materials from which beryllium can be extracted: the United States
government, sources in Kazakhstan and our bertrandite ore mine in Utah. We
currently obtain beryllium and bertrandite and beryl ores from one or more of
these sources. If we were unable to obtain a sufficient amount of beryllium from
those sources, we would have to construct a new ore processing facility or make
substantial improvements to our existing facilities, which would require
significant capital expenditures and would not alleviate any supply shortage in
the short term. In the event of a prolonged supply shortage of our access to
beryllium or bertrandite and beryl ore, our sales, margins and profitability
could be adversely affected.
9
WE MAY NOT BE ABLE TO COMPLETE OUR ACQUISITION STRATEGY OR SUCCESSFULLY
INTEGRATE ACQUIRED BUSINESSES.
Although we have not been an active acquiror in the past, we intend to
pursue further growth through the acquisition of assets or companies involved in
the engineered materials industry and routinely review acquisition
opportunities. While we believe that there are available a number of potential
acquisition candidates that would complement our businesses, we currently have
no agreements, understandings or arrangements to acquire any specific business
or material assets. We cannot predict whether we will be successful in pursuing
any acquisition opportunities or what the consequences of any acquisition would
be. Future acquisitions may involve the expenditure of significant funds and
management time. Depending upon the nature, size and timing of future
acquisitions, we may be required to raise additional financing, which may not be
available to us on acceptable terms. Further, we may not be able to successfully
integrate any acquired business with our existing businesses or recognize any
expected advantages from any completed acquisition.
OUR OPERATIONS ARE CONDUCTED WORLDWIDE AND ARE SUBJECT TO THE RISKS ASSOCIATED
WITH DOING BUSINESS OUTSIDE THE UNITED STATES.
We sell to customers outside of the United States from our United States
and international operations. Shipments to customers outside of the United
States accounted for approximately 31% of our sales in 2003, 28% in 2002 and 28%
in 2001. We anticipate that international shipments will account for a
significant portion of our sales for the foreseeable future. Revenue from
non-United States operations (principally Europe and the Pacific Rim) amounted
to approximately 22% of our sales in 2003, 19% in 2002 and 18% in 2001. There
are a number of risks associated with international business activities,
including:
- burdens to comply with multiple and potentially conflicting foreign laws
and regulations, including export requirements, tariffs and other
barriers, environmental health and safety requirements and unexpected
changes in any of these factors;
- difficulty in obtaining export licenses from the United States
government;
- political and economic instability and disruptions;
- potentially adverse tax consequences due to overlapping or differing tax
structures; and
- fluctuations in currency exchange rates.
Any of these risks could adversely affect our sales, margins and profitability.
THE AVAILABILITY AND PRICES OF SOME RAW MATERIALS WE USE IN OUR OPERATIONS
FLUCTUATE, WHICH CAN ADVERSELY AFFECT OUR SALES, MARGINS AND PROFITABILITY.
We manufacture engineered materials using various precious and non-precious
metals, including gold, silver, palladium, platinum, copper and nickel. The
availability of and prices for these raw materials are subject to volatility and
are influenced by worldwide economic conditions, speculative action, world
supply and demand balances, inventory levels, availability of substitute metals,
the United States dollar exchange rate, production costs of United States and
foreign competitors, anticipated or perceived shortages and other factors.
Decreased availability and fluctuating prices of precious and non-precious
metals that we use in our manufacturing may adversely affect our sales, margins
and profitability. For example, prices for copper have recently reached
eight-year highs due to, among other things, increased Chinese demand. Further,
we maintain some precious metals on a consigned inventory basis. The owners of
the precious metals charge a fee that fluctuates based on the market price of
those metals and other factors. A significant increase in the market price of
precious metals or the consignment fee could increase our financing costs, which
could adversely affect our profitability.
BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR SALES, OUR QUARTERLY RESULTS
WILL FLUCTUATE, AND OUR ANNUAL PERFORMANCE WILL BE AFFECTED BY THOSE
FLUCTUATIONS.
Because many of our European and automotive electronics customers slow or
cease operations during the summer months, we have generally had weaker demand
in the quarters ending in September compared to the
10
quarters ending in March, June and December. We expect this seasonal pattern to
continue, which causes our quarterly results to fluctuate. If our revenue during
any quarter were to fall below the expectations of investors or securities
analysts, our share price could decline, perhaps significantly. Unfavorable
economic conditions, lower than normal levels of demand and other occurrences in
any of the other quarters could also adversely affect our operating results.
NATURAL DISASTERS, EQUIPMENT FAILURES, WORK STOPPAGES AND OTHER UNEXPECTED
EVENTS MAY LEAD OUR CUSTOMERS TO CURTAIL PRODUCTION OR SHUT DOWN THEIR
OPERATIONS.
Our customers' operations are subject to conditions beyond their control,
including raw material shortages, natural disasters, interruptions in electrical
power or other energy services, equipment failures, work stoppages due to
strikes or lockouts, particularly those affecting the automotive industry, and
other unexpected events. Any of those events could also affect other suppliers
to our customers. In either case, those events could cause our customers to
curtail production or to shut down a portion or all of their operations, which
could reduce their demand for our products. Decreased demand for our products
could adversely affect our sales, margins and profitability.
UNEXPECTED EVENTS AND NATURAL DISASTERS AT OUR MINE COULD INCREASE THE COST OF
OPERATING OUR BUSINESS.
A portion of our production costs at our mine are fixed regardless of
current operating levels. Our operating levels are subject to conditions beyond
our control that may increase the cost of mining for varying lengths of time.
These conditions include, among other things, fire, natural disasters, pit wall
failures and ore processing changes. Our mining operations also involve the
handling and production of potentially explosive materials. It is possible that
an explosion could result in death and injuries to employees and others and
material property damage to us and third parties. Any explosion could expose us
to adverse publicity or liability for damages and materially adversely affect
our operations. These conditions could adversely affect our sales, margins and
profitability.
EQUIPMENT FAILURES AND OTHER UNEXPECTED EVENTS AT OUR FACILITIES MAY LEAD TO
MANUFACTURING CURTAILMENTS OR SHUTDOWNS.
The manufacturing processes that take place in our mining operation, as
well as in our manufacturing facilities, depend on critical pieces of equipment.
This equipment may, on occasion, be out of service because of unanticipated
failure, and some equipment is not readily available or replaceable. In addition
to equipment failures, our facilities are also subject to the risk of loss due
to unanticipated events such as fires, explosions or other disasters. Material
plant shutdowns or reductions in operations could adversely affect our sales,
margins and profitability. Further, remediation of any interruption in
production capability may require us to make large capital expenditures that may
have a negative effect on our profitability and cash flows. Our business
interruption insurance may not cover all of the lost revenues associated with
interruptions in our manufacturing capabilities. Further, longer-term business
disruptions could result in a loss of customers, which could adversely affect
our future sales, margins and profitability.
MANY OF OUR MANUFACTURING FACILITIES ARE DEPENDENT ON SINGLE SOURCE ENERGY
SUPPLIERS, AND INTERRUPTION IN ENERGY SERVICES MAY ADVERSELY EFFECT OUR SALES,
MARGINS AND PROFITABILITY.
Many of our manufacturing facilities depend on one source for electric
power and for natural gas. For example, Utah Power is the sole supplier of
electric power to the processing facility for our mining operations in Utah. A
significant interruption in service from our energy suppliers due to equipment
failures, terrorism or any other cause may result in substantial losses that are
not fully covered by our business interruption insurance. While we have some
long-term contracts with energy suppliers, supplies of energy may be curtailed
during periods of peak usage. Any substantial unmitigated interruption of our
operations due to these conditions could adversely affect our sales, margins and
profitability.
IF THE PRICE OF ELECTRICAL POWER, FUEL OR OTHER ENERGY SOURCES INCREASES, OUR
OPERATING EXPENSES COULD INCREASE SIGNIFICANTLY.
Our operating expenses are sensitive to changes in electricity prices and
fuel prices, including natural gas prices. Prices for electricity and natural
gas can fluctuate widely with availability and demand levels from
11
other users. During periods of peak usage, supplies of energy may be curtailed,
and we may not be able to purchase at historical market rates. While we have
some long-term contracts with energy suppliers, we are exposed to fluctuations
in energy costs that can affect our production costs. Although we enter into
forward fixed price supply contracts for natural gas and electricity for use in
our operations, those contracts are of limited duration and do not cover all of
our fuel or electricity needs. Price increases in fuel and electricity costs
could cause our profitability to decrease significantly.
WE HAVE A LIMITED NUMBER OF MANUFACTURING FACILITIES, AND DAMAGE TO THOSE
FACILITIES COULD INTERRUPT OUR OPERATIONS, INCREASE OUR COSTS OF DOING BUSINESS
AND ADVERSELY AFFECT OUR ABILITY TO DELIVER OUR PRODUCTS ON A TIMELY BASIS.
We have 16 manufacturing facilities and one mining operation. Some of our
facilities are interdependent. For instance, our manufacturing facility in
Elmore, Ohio relies on our mining operation for its supply of beryllium
hydroxide used in production of most of its beryllium-containing materials. The
destruction or closure of any of our manufacturing facilities or our mine for a
significant period of time as a result of fire, explosion, act of war or
terrorism or other natural disaster or unexpected event may interrupt our
manufacturing capabilities, increase our capital expenditures and our costs of
doing business and impair our ability to deliver our products on a timely basis.
In such an event, we may need to resort to an alternative source of
manufacturing or to delay production, which could increase our costs of doing
business. Our property damage and business interruption insurance may not cover
all of our potential losses and may not continue to be available to us on
acceptable terms, if at all. Any such delays or increased costs could adversely
affect our sales, margins and profitability.
THE MARKETS FOR OUR PRODUCTS ARE EXPERIENCING RAPID CHANGES IN TECHNOLOGY.
We operate in markets characterized by rapidly changing technology and
evolving customer specifications and industry standards. New products may
quickly render an existing product obsolete and unmarketable. Our growth and
future results of operations depend in part upon our ability to enhance existing
products and introduce newly developed products on a timely basis that conform
to prevailing and evolving industry standards, meet or exceed technological
advances in the marketplace, meet changing customer specifications, achieve
market acceptance and respond to our competitors' products.
The process of developing new products can be technologically challenging
and requires the accurate anticipation of technological and market trends. We
may not be able to introduce new products successfully or do so on a timely
basis. If we fail to develop new products that are appealing to our customers or
fail to develop products on time and within budgeted amounts, we may be unable
to recover our significant research and development costs, which could adversely
affect our sales, margins and profitability.
IF WE CANNOT DELIVER PRODUCTS THAT MEET OUR CUSTOMER-DEFINED SPECIFICATIONS IN A
PROFITABLE AND TIMELY MANNER, OUR SALES, MARGINS AND PROFITABILITY MAY BE
ADVERSELY EFFECTED.
Our ability to generate future sales depends upon our ability to
manufacture and supply products that meet customer-defined specifications on a
timely basis. If we incur higher costs than anticipated when we price our
products, our gross margins on those products will decrease, and they may not be
as profitable as expected. In addition, if we are unable to deliver our products
as required by the terms of our product sales contracts, our customers may
cancel those contracts. In that event, we might not recover costs that we
incurred for research and development, production and otherwise, and we may
incur additional costs as contractual penalties. If we fail to meet a delivery
deadline, or a customer determines that the products we deliver do not meet its
specifications, we may have to reduce the price we can charge for our products,
or we may be liable to pay damages to the customer. Failing to successfully
manage these risks could adversely affect our sales, margins and profitability.
OUR LENGTHY AND VARIABLE SALES AND DEVELOPMENT CYCLE MAKES IT DIFFICULT FOR US
TO PREDICT IF AND WHEN A SALE CAN BE MADE AND MAY ADVERSELY AFFECT OUR SALES,
MARGINS AND PROFITABILITY.
Our sales and development cycle, which is the period from the generation of
a sales lead or new product idea through the development of the product and the
recording of sales, could be as long as several years,
12
making it very difficult to forecast sales and results of operations. Our
inability to accurately predict the timing and magnitude of sales of our
products could affect our ability to meet our customers' product delivery
requirements or cause our results of operations to suffer if we incur expenses
in a particular period that do not translate into sales during that period, or
at all. In addition, these failures would make it difficult to plan future
capital expenditure needs and could cause us to fail to meet our cash flow
requirements. These problems could adversely affect our sales, margins and
profitability.
OUR PRODUCTS ARE DEPLOYED IN COMPLEX APPLICATIONS AND MAY HAVE ERRORS OR DEFECTS
THAT WE FIND ONLY AFTER DEPLOYMENT.
Our products are highly complex, designed to be deployed in complicated
applications and may contain undetected defects, errors or failures. Although
our products are generally tested during manufacturing, prior to deployment,
they can only be fully tested when deployed in specific applications.
Consequently, our customers may discover errors after the products have been
deployed. The occurrence of any defects, errors or failures could result in
installation delays, product returns, termination of contracts with our
customers, diversion of our resources, increased service and warranty costs and
other losses to us or to our customers or end users. Any of these occurrences
could also result in the loss of or delay in market acceptance of our products
and could damage our reputation, which could adversely affect our sales, margins
and profitability.
FUTURE TERRORIST ATTACKS AND OTHER ACTS OF VIOLENCE OR WAR MAY DIRECTLY IMPACT
OUR SALES, MARGINS AND PROFITABILITY.
Future terrorist attacks or other acts of violence or war may directly
impact our physical facilities. In addition, future terrorist attacks, related
armed conflicts or prolonged or increased tensions in the Middle East or other
regions of the world could cause consumer confidence and spending to decrease,
thereby decreasing demand for consumer goods that contain our products. Further,
when United States forces are involved in active hostilities or large-scale
deployments, defense spending tends to focus more on meeting the physical needs
of the troops, and planned expenditures on weapons and other systems
incorporating our products may be reduced or deferred. Any of these occurrences
could also increase volatility in the United States and worldwide financial
markets, which could adversely affect our sales, margins and profitability.
OUR EXPENDITURES FOR POST-RETIREMENT PENSION OBLIGATIONS COULD BE MATERIALLY
HIGHER THAN WE HAVE PREDICTED IF OUR UNDERLYING ASSUMPTIONS PROVE TO BE
INCORRECT.
We provide defined benefit pension plans to eligible employees. Our pension
expense and our required contributions to our pension plans are directly
affected by the value of plan assets, the projected rate of return on plan
assets, the actual rate of return on plan assets and the actuarial assumptions
we use to measure our defined benefit pension plan obligations, including the
rate at which future obligations are discounted to a present value, or the
discount rate. For pension accounting purposes, we assumed a 9.0% rate of return
on pension plan assets. We decreased the discount rate to 6.375% at December 31,
2003 from 6.75% at December 31, 2002, 7.125% at December 31, 2001 and 8.0% at
December 31, 2000.
Lower investment performance of our pension plan assets resulting from a
decline in the stock market could significantly increase the deficit position of
our plans. Should the assets earn an average return less than 9.0% over time, it
is likely that future pension expenses would increase. Investment earnings in
excess of 9.0% may reduce future pension expenses. The actual return on our plan
assets was 19.7% in 2003 and the ten-year average return as of year-end 2003 was
7.9%.
We establish the discount rate used to determine the present value of the
projected and accumulated benefit obligation at the end of each year based upon
the available market rates for high quality, fixed income investments. An
increase to the discount rate would reduce the future pension expense and
conversely, a lower discount rate would raise the future pension expense. We
estimate that the change in the discount rate and other actuarial assumptions
and valuations combined with the amortization of prior differences between
actual and expected results will result in a $1.0 million increase in the net
expense from our pension plan in 2004 over 2003 with the 2005 expense estimated
to be an additional $1.1 million higher than the 2004 expense. If the expected
rate of return assumption was changed by 50 basis points (0.50%) and all other
pension assumptions remained the same, the 2004 projected expense would change
by approximately $0.5 million. If the December 31, 2003 discount rate were
reduced by 25 basis points (0.25%) and all other
13
pension assumptions remained the same, the 2004 pension expense would increase
by approximately an additional $0.3 million.
Based on current guidelines, assumptions and estimates, including stock
market prices and interest rates, we anticipate that we may be required to make
a cash contribution of approximately $1.7 million to our pension plan in 2004.
If our current assumptions and estimates are not correct, a contribution in
years beyond 2004 may be greater than the projected 2004 contribution.
In addition, we cannot predict whether changing market or economic
conditions, regulatory changes or other factors will increase our pension
expenses or our funding obligations, diverting funds we would otherwise apply to
other uses.
OUR EXPENDITURES FOR POST-RETIREMENT HEALTH BENEFITS COULD BE MATERIALLY HIGHER
THAN WE HAVE PREDICTED IF OUR UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT.
We also provide post-retirement health benefits to eligible employees. Our
retiree health expense is directly affected by the assumptions we use to measure
our retiree health plan obligations, including the assumed rate at which health
care costs will increase and the discount rate used to calculate future
obligations. For retiree health accounting purposes, we decreased the assumed
rate at which health care costs will increase for the next year to 8.0% at
December 31, 2003 from 9.0% at December 31, 2002. In addition, we have assumed
that this health care cost increase trend rate will decline to 6.0% by 2008. We
have used the same discount rates for our retiree health plans that we use for
our pension plan accounting.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A 1.0% increase in assumed health
care cost trend rates would have increased the post-employment benefits included
among the liabilities in our balance sheet by $2.4 million at December 31, 2003,
while a 1.0% decrease in assumed health care cost trend rates would have
decreased those benefits by $2.1 million at December 31, 2003.
In addition, we cannot predict whether changing market or economic
conditions, regulatory changes or other factors will further increase our
retiree health care expenses or obligations, diverting funds we would otherwise
apply to other uses.
OUR TAX POSITION MAY CREATE VOLATILITY IN OUR NET INCOME, AND OUR ABILITY TO USE
OUR NET OPERATING LOSS CARRYFORWARDS AND ALTERNATIVE MINIMUM TAX CREDITS MAY BE
IMPAIRED.
At December 31, 2003, we had a tax deferred asset of approximately $10.6
million relating to alternative minimum tax credits and approximately $32.2
million of net operating loss carryforwards. We recently evaluated all of our
deferred tax assets for impairment due to our recent operating losses and
recorded valuation allowances of $7.2 million in 2003, with $5.3 million charged
to expense and $1.9 million charged to other comprehensive income, and $27.2
million in 2002, with $19.9 million charged to expense and $7.3 million charged
to other comprehensive income. If we generate a domestic pre-tax profit in
subsequent periods, the valuation allowance will be reversed against the federal
tax expense in the current period, resulting in higher net income and net income
per share for that period. If we achieve and sustain profitability, significant
portions or all of the remaining valuation allowance may be reversed back to
income. If we generate domestic pre-tax losses in subsequent periods, a federal
tax benefit will not be recorded and the valuation allowance recorded against
the net deferred tax assets will increase. This would result in a larger net
loss and net loss per share for the period versus a comparable period when a
favorable tax benefit was recorded. If these factors were to occur and our
operating results were affected, it would impair our ability to use our net
operating loss carryforwards and alternative minimum tax credits.
A MAJOR PORTION OF OUR BANK DEBT CONSISTS OF VARIABLE-RATE OBLIGATIONS, WHICH
SUBJECTS US TO INTEREST RATE FLUCTUATIONS.
Our credit facilities are secured by our working capital, and we have other
term loans secured by plant, property and equipment, and, in one instance, some
export accounts receivable. Our working capital line-of-credit and term loans
are variable-rate obligations, which expose us to interest rate risks. If
interest rates increase, our debt service obligations on our variable-rate
indebtedness would increase even if the amount
14
borrowed remained the same, resulting in a decrease in our net income. We have
developed a hedging program to manage the risks associated with interest rate
fluctuations, but our program may not effectively eliminate all of the financial
exposure associated with interest rate fluctuations. We currently have
instruments in place that have the effect of fixing the interest rate on a
portion of our outstanding debt for various time periods up to five years.
SHOULD WE BE UNABLE TO ACCESS THE FINANCIAL MARKETS ON FAVORABLE TERMS, OUR
LIQUIDITY, BUSINESSES AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
The inability to raise capital on favorable terms, particularly during
times of uncertainty in the financial markets, could impact our ability to
sustain and grow our business and would increase our capital costs. We rely on
access to financial markets as a significant source of liquidity for capital
requirements not satisfied by cash on hand or operating cash flows. Our access
to the financial markets could be adversely impacted by various factors,
including:
- changes in credit markets that reduce available credit or the ability to
renew existing liquidity facilities on acceptable terms;
- a deterioration of our credit or a reduction in our credit ratings or the
credit ratings of our subsidiaries;
- extreme volatility in our markets that increases margin or credit
requirements;
- a material breakdown in our risk management procedures;
- the collateral pledge of substantially all of our assets in connection
with our existing indebtedness, which limits our flexibility in raising
additional capital; and
- the occurrence of material adverse changes in our business that restrict
our ability to access our liquidity facilities.
A lack of necessary capital and cash reserves could adversely impact our credit
ratings.
THE TERMS OF OUR INDEBTEDNESS MAY RESTRICT OUR ABILITY TO PURSUE OUR GROWTH AND
ACQUISITION STRATEGIES.
The terms of our credit facilities restrict our ability to, among other
things, borrow and make investments, acquire other businesses, make capital
expenditures and declare dividends on our common shares. In addition, the terms
of our indebtedness require us to satisfy specified financial covenants. Our
ability to comply with these provisions depends, in part, on factors over which
we may have no control. These restrictions could adversely affect our ability to
pursue our growth and acquisition strategies. If we breach any of our financial
covenants or fail to make scheduled payments, our creditors could declare all
amounts owed to them to be immediately due and payable, and we may not have
sufficient available funds to repay the amounts due, in which case we may be
required to seek legal protection from our creditors.
WE ARE SUBJECT TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES, WHICH CAN ADVERSELY
IMPACT OUR SALES, MARGINS AND PROFITABILITY.
A significant portion of our sales is conducted in international markets
and priced in currencies other than the United States dollar. Significant
fluctuations in currency values relative to the United States dollar may affect
our financial performance and adversely affect our sales, margins and
profitability. While we may hedge our currency transactions to mitigate the
impact of currency price volatility on our earnings, any hedging activities may
not be successful.
OUR HOLDING COMPANY STRUCTURE CAUSES US TO RELY ON FUNDS FROM OUR SUBSIDIARIES.
We are a holding company and conduct substantially all our operations
through our subsidiaries. As a holding company, we are dependent upon dividends
or other intercompany transfers of funds from our subsidiaries. The payment of
dividends and other payments to us by our subsidiaries may be restricted by,
among other things, applicable corporate and other laws and regulations,
agreements of the subsidiaries and the terms of our current and future
indebtedness.
15
RISKS RELATED TO THIS OFFERING
OUR SHARE PRICE IS VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR COMMON
SHARES AT OR ABOVE THE OFFERING PRICE.
The market price and trading volume of our common shares has been subject
to volatility, and this trend may continue. In particular, trading volume
historically has been low, and the market price of our common shares has
increased significantly in recent months. The value of our common shares may
decline regardless of our operating performance or prospects. Factors affecting
our market price include:
- our perceived prospects;
- variations in our operating results and whether we have achieved our key
business targets;
- the limited number of our common shares available for purchase or sale in
the public markets;
- sales or purchases of large blocks of our common shares;
- changes in, or our failure to meet, our earnings estimates;
- changes in securities analysts' ratings and recommendations;
- differences between our reported results and those expected by investors
and securities analysts;
- announcements of new contracts by us or our competitors;
- market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors;
- developments in the financial markets; and
- general economic, political or stock market conditions.
The general economic, political and stock market conditions that may affect the
market price of our common shares are beyond our control. The market price of
our common shares at any particular time may not remain the market price in the
future.
OUR ABILITY TO ISSUE PREFERRED STOCK IN THE FUTURE COULD ADVERSELY AFFECT THE
RIGHTS OF HOLDERS OF OUR COMMON SHARES.
Our board of directors is authorized, without shareholder approval, to
issue up to 5,000,000 shares of preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions granted to or imposed upon
the preferred stock, including voting rights, dividend rights, conversion
rights, terms of redemption, liquidation preference, sinking fund terms and the
number of shares constituting any series or the designation of a series. Our
board of directors can, without shareholder approval, issue preferred stock with
voting and conversion rights that could adversely affect the voting power of the
holders of our common shares. Any preferred stock issued would also rank senior
to our common shares as to rights upon liquidation, winding-up or dissolution.
WE DO NOT ANTICIPATE DECLARING ANY CASH DIVIDENDS ON OUR COMMON SHARES.
We have no intention to declare dividends on our common shares in the near
term. Our current policy is to retain all funds and earnings for use in the
operation and expansion of our business, and our ability to pay dividends is
restricted by the terms of our credit facilities.
THE OHIO TAKEOVER STATUTES, OUR CONSTITUENT DOCUMENTS AND RIGHTS PLAN COULD
DETER, DELAY OR PREVENT A THIRD PARTY FROM ACQUIRING US, WHICH COULD DEPRIVE YOU
OF AN OPPORTUNITY TO OBTAIN A TAKEOVER PREMIUM FOR OUR COMMON SHARES.
We are subject to the Ohio statutes relating to control share acquisitions,
which restrict the ability of an acquiror to acquire a significant amount of our
outstanding common shares without shareholder approval, as well as Ohio's merger
moratorium statute, which restricts the ability of certain interested
shareholders to effect transactions involving us or our assets. Our articles of
incorporation provide that our board of directors,
16
without shareholder approval, may issue up to 5,000,000 shares of preferred
stock, which, if convertible in common shares, could have the effect of
delaying, deferring or preventing a change in control of our company. Our
articles of incorporation also restrict some transactions with related parties,
which could also have the affect of delaying, deferring or preventing a change
in control of our company. In addition, we have a shareholder rights plan that
under certain circumstances would significantly impair the ability of third
parties to acquire control of us without prior approval of our board of
directors. Together, these provisions may discourage transactions that otherwise
could provide for the payment of a premium over prevailing market prices for our
common shares and could also limit the price that investor may be willing to pay
in the future for our common shares.
17
FORWARD-LOOKING STATEMENTS
All statements set forthinformation contained or incorporated by reference in this prospectus and in any prospectus supplement or in any free writing prospectus that we may provide you. We have not authorized anyone to provide you with different information. You should not assume that the information contained in this prospectus, any prospectus supplement, any document incorporated by reference or any free writing prospectus is accurate as of any date, other than the date mentioned on the cover page of these documents. We are not historicalmaking offers to sell the securities in nature are forward-looking statements withinany jurisdiction in which an offer or solicitation is not authorized or in which the meaning ofperson making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make an offer or solicitation.
References in this prospectus to the Private Securities Litigation Reform Act of 1995. We have
attempted to identify forward-looking statements by using such words as
"anticipates," "believes," "can," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "potential," "should"terms “we,” “us” or "will"“the Company” or other similar expressions. These forward-looking statements, whichterms mean Brush Engineered Materials Inc. and its consolidated subsidiaries, unless we state otherwise or the context indicates otherwise.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to risksthe informational reporting requirements of the Securities Exchange Act of 1934. We file reports, proxy statements and uncertainties,other information with the SEC. Our SEC filings are available over the Internet at the SEC’s web site at http://www.sec.gov. You may read and assumptions aboutcopy any reports, statements and other information filed by us at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on the Public Reference Room. You may include, amongalso inspect our SEC reports and other things,
projectionsinformation at the New York Stock Exchange, 20 Broad Street, New York, New York 10005, or at our web site at http://www.beminc.com. We do not intend for information contained on or accessible through our web site to be part of our future financial performance, our anticipated growth
strategies and anticipated trends in our industry, including potential growth
opportunities,this prospectus, other than the documents that we file with the SEC that are integrated by reference into this prospectus.
INFORMATION WE INCORPORATE BY REFERENCE
The SEC allows us to incorporate by reference the information we file with them, which means:
| • | incorporated documents are considered part of the prospectus; | ||
| • | we can disclose important information to you by referring you to those documents; and | ||
| • | information that we file with the SEC after the date of this prospectus will automatically update and supersede the information contained in this prospectus and incorporated filings. |
We incorporate by reference the documents listed below that we filed with the SEC under the Exchange Act:
| • | our Annual Report on Form 10-K for the year ended December 31, 2008; | ||
| • | our Quarterly Reports on Form 10-Q for the quarters ended April 3, 2009 and July 3, 2009; | ||
| • | our Current Reports on Form 8-K filed on February 3, 2009 and February 6, 2009; | ||
| • | the description of our capital stock contained in the registration statement on Form 8-A filed with the SEC on May 16, 2000, and all amendments and reports filed for the purpose of updating that description; and |
1
the description of the Series A Junior Participating Preferred Stock purchase rights under the Rights Agreement filed as Exhibit 4(a) to the registration statement on Form 8-A filed on May 16, 2000, as amended by the registration statement on Form 8-A/A filed on December 13, 2004 and the effects of litigationregistration statement on Form 8-A/A filed July 31, 2008, and future regulation. These
statements are only predictions based on our current expectationsany subsequently filed amendments and projections about future events. Because these forward-looking statements
involve risks and uncertainties, you should be aware that there are important
factors that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or impliedreports updating such description.
We also incorporate by these forward-looking
statements, including, but not limited to:
- health issues, litigation and regulation relating to mining bertrandite
ore and producing and using beryllium-containing materials;
- our ability to achieve and sustain profitability;
- significant cyclical fluctuations in our customers' businesses;
- the availability of competitive substitute materials for
beryllium-containing materials;
- our ability to obtain beryllium from limited sources;
- our ability to complete and integrate acquisitions successfully;
- risks associated with our international operations;
- the availability and prices of raw materials;
- seasonal fluctuations in our net sales;
- natural disasters, equipment failures, interruptions in energy supplies
and other unexpected events that may affect our business or our
customers' businesses;
- increases in energy costs;
- rapid changes in technology, which may make our existing products
obsolete;
- our ability to deliver products that are free of defects and meet our
customers' specifications;
- risks associated with our lengthy sales and development cycle;
- risks associated with terrorists attacks;
- risks associated with our pension and retiree health obligations;
- risks associated with our tax position;
- risks associated with our indebtedness and our ability to access the
financial markets on favorable terms;
- fluctuations in currency exchange rates; and
- our reliance on funds from our subsidiaries.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, level of
activity, performance or achievement. Further, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
disclaim any obligation to update anyreference each of the forward-looking statementsdocuments that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act (1) after the date of the initial filing of the registration statement of which this prospectus forms a part, prior to the effectiveness of the registration statement, and (2) after the date of this prospectus until the offering of the securities terminates. We will not, however, incorporate by reference in this prospectus any documents or portions thereof that are not deemed “filed” with the SEC, including any information furnished pursuant to conformItem 2.02 or Item 7.01 of our current reports on Form 8-K after the date of this prospectus unless, and except to the extent, specified in such current reports.
We will provide you with a copy of any of these statementsfilings (other than an exhibit to actual results.
You should not place undue reliance on forward-looking statementsthese filings, unless the exhibit is specifically incorporated by reference into the filing requested) at no cost, if you submit a request to us by writing or telephoning us at the following address and telephone number:
Brush Engineered Materials Inc.
6070 Parkland Blvd.
Mayfield Heights, Ohio 44124
Telephone Number: (216) 486-4200
Attn: Secretary
6070 Parkland Blvd.
Mayfield Heights, Ohio 44124
Telephone Number: (216) 486-4200
Attn: Secretary
Any statement contained in or incorporated by reference intoin this prospectus shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein, or in any subsequently filed document which also is incorporated herein by reference, modifies or supersedes such earlier statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. 18
USE OF PROCEEDS
We estimate the net proceeds to us of this offering to be approximately $
million, based upon the last reported sale price of our common shares on
, 2004 of $ per share, after deducting the estimated expenses
related to this offering and the portion of the underwriting discount payable by
us. We will not receive any proceeds from the sale of common shares by the
selling shareholders in this offering.
We intend to use the net proceeds from this offering to repay a portion of
the amounts outstanding under the credit facilities that are part of the
refinancing we completed in December 2003. Any remaining net proceeds will be
used for working capital and general corporate purposes, including capital
expenditures, acquisitions of businesses or assets and investments. We used the
proceeds from the refinancing to retire existing debt and terminate an existing
key off-balance sheet obligation through the purchase of certain leased assets.
Pending final use, we may invest the net proceeds of this offering in
short-term, investment grade, interest-bearing securities or guaranteed
obligations of the United States or its agencies.
Our current credit facilities will mature in 2008 and are described in the
notes to the consolidated financial statements included elsewhere in this
document. We have not yet determined which credit facilities or combination of
credit facilities we will repay with a portion of the net proceeds of this
offering. These facilities are variable rate obligations, and as of March 29,
2004, we had $85.6 million outstanding under these facilities with a weighted
average interest rate of 8.33%.
19
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 2003 on an actual basis and on an "As Adjusted" basis. The "As
Adjusted" basis reflects our sale of 1,700,000 common shares at an assumed
offering price of $ per share, the last reported sale price of our common
shares on , 2004, after deducting underwriting discounts and
commissions and the estimated offering expenses payable by us. The common shares
to be outstanding after this offering exclude 272,250 common shares we will
issue if the underwriters exercise their over-allotment option and 1,573,868
common shares reserved for issuance upon the exercise of options granted under
our equity compensation plans.
You should read this table together with "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and related notes
included elsewhere in this prospectus.
- ---------------
(1) As described in "Use of Proceeds," we intend to use a portion of the net
proceeds from this offering to repay a portion of the amounts outstanding
under our credit facilities.
20
MARKET PRICE OF COMMON SHARES AND DIVIDENDS
Our common shares are traded on the New York Stock Exchange under the
symbol "BW." The following table shows for the periods indicated the range of
the high and low intra-day sales prices per common share as reported by the New
York Stock Exchange.
On April 1, 2004, the closing price of our common shares as reported by the New
York Stock Exchange was $20.98 per share. We did not pay any dividends in 2002
or 2003. We have no current intention to declare dividends on our common shares
in the near term. Our current policy is to retain all funds and earnings for use
in the operation and expansion of our business, and our ability to pay dividends
is restricted by the terms of our credit facilities.
DILUTION
Purchasers of our common shares offered by this prospectus will suffer
immediate and substantial dilution in the net tangible book value per share. Our
net tangible book value as of December 31, 2003 was approximately $133.6
million, or approximately $8.04 per common share. Net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the number of our common shares outstanding as of December 31, 2003.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common shares in this
offering and the net tangible book value per share of our common shares
immediately after this offering. After giving effect to our sale of 1,700,000
common shares in this offering at an assumed offering price of $ per share,
the last reported sale price of our common shares on the New York Stock Exchange
on , 2004, and after deduction of the estimated underwriting discounts
and commissions and estimated offering expenses payable by us, our net tangible
book value as of December 31, 2003 would have been approximately $ million, or
$ per share. This represents and immediate increase in net tangible book
value of $ per common share to existing shareholders and an immediate
dilution of $ per common share to purchasers of common shares in this
offering.
The foregoing does not take into account further dilution to new investors
that could occur upon the issuance of additional common shares. The above
discussion excludes 1,573,868 common shares reserved for issuance upon the
exercise of options under our equity compensation plans.
21
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The tables below set forth selected consolidated financial data for the
years ended December 31, 1999, 2000, 2001, 2002 and 2003. We derived the
selected consolidated financial data for the years ended and as of December 31,
1999, 2000, 2001, 2002 and 2003 from our audited consolidated financial
statements.
Prospective investors should read the selected consolidated financial data
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and related notes included elsewhere in this prospectus. Portions of this
document that are not statements of historical or current fact are
forward-looking statements. This discussion contains forward-looking statements
that involve risk and uncertainties, such as statements of our plans,
objectives, expectations and intentions. The cautionary statementsstatement made in this prospectus concerning the contents of any contract, agreement or other document is only a summary of the actual contract, agreement or other document. If we have filed or incorporated by reference any contract, agreement or other document as an exhibit to the registration statement, you should be read as applyingthe exhibit for a more complete understanding of the document or matter involved. Each statement regarding a contract, agreement or other document is qualified by reference to all related forward-looking statements
wherever they appear in this prospectus. Ourthe actual results could differ
materially from those anticipated in the forward-looking statements. Factors
that could cause our actual results to differ materially from those anticipated
include those discussed in "Risk Factors," as well as those discussed elsewhere.
See "Risk Factors" and "Forward-Looking Statements."
OVERVIEW
We are an integrated producerdocument.
2
THE COMPANY
Brush Engineered Materials Inc., through its wholly owned subsidiaries, is a manufacturer of high performance advanced enabling engineered materials used in a variety of
electrical, electronic, thermal and structural applications. After achieving
record sales of $563.7 million in 2000, our sales declined rapidly over the next
two years mainly as a result of the collapse ofserving the global telecommunications and computer, market. In lightdata storage, aerospace and defense, automotive electronics, industrial components (including oil and gas, heavy equipment and plastic mold tooling), appliance and medical markets.
Our businesses are organized under four reportable segments: Advanced Material Technologies and Services (AMTS); Specialty Engineered Alloys (SEA); Beryllium and Beryllium Composites; and Engineered Material Systems. AMTS consists of the lower sales volumes, beginning in 2001, we
implemented various financialWilliams Advanced Materials Inc. (WAM) and operational initiatives to sustainZentrix Technologies, Inc. SEA consists of Alloy Products, which includes bulk and improve
cash flow and to position ourselves to return to profitability by broadening our
market base, increasing margins, controlling costs, improving working capital
utilization and reducing debt.
Sales rebounded in 2003, growing $28.2 million over 2002, due in part to
our efforts to broaden our revenue base by developing newstrip form products, and expanding
our market penetration. Gross margin in turn grew over $25.0 million in 2003beryllium hydroxide produced by Brush Resources Inc. (BRI). The Beryllium and Beryllium Composites segment consists of Beryllium Products and Brush Ceramic Products Inc. while the operating loss was reduced by $13.5 million. This leverage resulted
from a combinationEngineered Material Systems segment consists of an improved product mix, i.e., an increase in sales of
higher margin products, manufacturing efficiencies, cost control and other
factors. The manufacturing efficiencies helped to improve the margin
contribution rate and the manpower and other cost saving initiatives initially
implemented beginning in mid-2001 reduced the 2003 manufacturing overhead by
$25.8 million from the 2001 level. Selling, general and administrative expenses
and research and development expenses in 2003 were down an additional $8.6
million from the annual expense two years earlier. Cost control programs
continued during 2003, and manpower levels by year-end 2003 were 27% lower than
the peak level in 2001.
Working capital utilization improved through a $6.9 million reduction in
inventories in 2003 after a $14.8 million reduction in 2002. Buffer inventories
have been deployed to allow for faster customer response times and inventory
turns have increased over this time period as well. The accounts receivable
balance increased in 2003 due to the higher sales, but the average collection
period was shorter than at the end of the prior year.
The working capital, margin and cost improvements allowed us to reduce our
total outstanding debt, key leases and other off-balance sheet obligations by
$24.8 million in 2003 and $36.2 million in 2002. In addition, late in the fourth
quarter 2003, we refinanced our debt on a long-term basis. The new structure
provides increased borrowing capacity and extended maturity dates while lowering
the projected financing costs and required cash payments in 2004.
RESULTS OF OPERATIONS
23
Sales of $401.0 million in 2003 grew 8% over sales of $372.8 million in
2002 after having declined 21% in 2002 from sales in 2001. Approximately half of
the sales increase in 2003 was due to higher precious metal prices and favorable
foreign currency translation effect. For the year, domestic sales grew 3%, and
international sales grew 19% as we aggressively pursued marketing opportunities
overseas. Sales in each quarter of 2003 were higher than the comparable quarter
in 2002. The lower sales in 2002 as compared to 2001 were caused mainly by the
significant decline in demand from the telecommunications and computer market
that began in the second quarter 2001 and continued throughout that year. Demand
for isolated applications from this key market, which accounted for 35% of sales
in 2003, compared to 30% of sales in 2002 and 42% of sales in 2001, increased in
the early portion of 2003 while the overall market demand started to show some
improvement in the fourth quarter. Sales into the automotive market, after
improving slightly in 2002 over 2001, declined slightly in 2003. Sales for
defense applications remained strong during this time period, as did sales into
the optical media and magnetic head markets. Demand from other key markets,
including industrial components and plastic tooling, remained weak through the
majority of 2003, although certain sectors started to improve at the end of the
year. A portion of the sales growth in 2003 was attributable to market share
gains and new product development. Sales from both reportable segments -- the
Metal Systems Group and the Microelectronics Group -- improved in 2003 after
declining in 2002.
The sales order backlog entering 2004 was $65.5 million compared to $57.7
million at the beginning of 2003 and $91.1 million at the beginning of 2002.
Sales order entry rates improved in the fourth quarter 2003 and early in 2004.
Lead times continued to be very short, and we have made improvements in our
manufacturing processes and inventory positions to more quickly respond to our
customers' needs.
The gross margin of $73.0 million was 18% of sales in 2003 compared to a
gross margin of $47.9 million, or 13% of sales, in 2002 and $68.0 million, or
14% of sales, in 2001. Approximately 89% of the sales increase in 2003 flowed
through to gross margin. In addition to the increased margin contribution due to
the higher sales, gross margin improved due to a favorable product mix,
operational improvements on the manufacturing floor, foreign currency
translation benefits and manufacturing overhead cost reductions. Margins from
both segments improved in 2003 over 2002. The decline in gross margin in 2002
from 2001 was caused by the significant decline in sales volumes offset in part
by a favorable product mix and a reduction in manufacturing overhead and
inventory valuation adjustments.
Selling, general and administrative expenses, or SG&A, were $68.8 million,
or 17% of sales, in 2003; $61.3 million, or 16% of sales in 2002; and $75.3
million, or 16% of sales, in 2001. Differences in the amounts charged or
credited to expense from movements in the legal reserves and insurance recovery
accounts caused $4.2 million of the increase in 2003 over 2002 and $6.3 million
of the decrease in 2002 from 2001. We negotiated legal settlements on various
cases involving chronic beryllium disease, or CBD, while other cases were
dismissed in 2003 and 2002. In addition, we have also received several favorable
court rulings on our litigation during the last two years. As a result of a
court ruling in 2002, we increased the recovery portion on insured legal claims
that previously were subject to apportionment. Changes in the legal reserve and
insurance recoverable charged to SG&A expense were limited to $0.2 million in
2003 while in 2002 changes in the legal reserve and recoverable accounts
generated a credit, i.e., reduction to expense, of $4.0 million. In 2001, the
comparable expense was $2.3 million.
In addition to the impact of the legal reserve and recoverable accounts,
SG&A expenses were higher in 2003 than 2002 due to an increase in incentive
compensation expense, as a result of operational improvements implemented in the
year, and an increase in costs under the company-owned life insurance program,
while the weaker dollar caused a $1.2 million increase in the translated value
of the international subsidiaries' expenses. SG&A expenses in 2003 also included
$0.6 million of the $6.0 million one-time charge associated with refinancing the
debt in 2003, as further explained under "-- Financial Position -- Refinancing."
SG&A manpower and other activity levels remained relatively unchanged in 2003 as
compared to the latter half of 2002. Cost saving initiatives and manpower
reductions, net of severance costs, implemented in the second half of 2001 and
in 2002 in response to the decrease in sales volume also served to reduce SG&A
expenses in 2002 as compared to 2001. Offsetting a portion of these savings in
2002 was an increase in incentive compensation expense as several operating
units achieved their objectives.
24
Research and development expenses, or R&D, were $4.2 million in 2003, $4.3
million in 2002 and $6.3 million in 2001. R&D expenses were approximately 1% of
sales in each of the three years. Overall R&D spending was reduced during the
latter half of 2001 as part of the cost reduction initiatives and spending has
remained essentially unchanged since that time. Approximately two-thirds of the
R&D spending supports the Metal Systems Group and one-third supports the
Microelectronics Group.
Other-net expense was $9.3 million in 2003, $5.2 million in 2002 and $0.4
million in 2001 as the expense in both 2003 and 2002 included significant
one-time items. The 2003 expense included $4.7 million of the $6.0 million
refinancing charge as more fully described under "-- Financial Position --
Refinancing." In 2002, we recorded asset impairment charges of $4.4 million in
accordance with SFAS No. 144 that are described in further detail in the segment
disclosures and Note C to the consolidated financial statements included
elsewhere in this prospectus. In addition to the difference in these two
charges, other-net expense was higher in 2003 due to a combination of other
factors. Foreign exchange losses totaled $0.9 million in 2003 compared to gains
of $1.5 million in 2002 with the difference attributable to the decline in the
dollar's average value versus the euro, yen and pound sterling in 2003 compared
to 2002. The unrealized valuation of the stock-based directors' compensation
plan was a $2.0 million swing between years. The valuation, and, therefore, the
liability to us, is based upon the number of shares outstanding and the current
common share price; in 2003, we recorded an expense of $0.9 million due to the
increase in the share price of our common share while in 2002 we recorded income
of $1.1 million due to the decline in the share price that year. Metal financing
fees were $0.6 million lower in 2003 than in 2002, due to a decline in financed
inventory on hand, while the bad debt expense as well as changes in the
allowance for doubtful accounts was $0.3 million higher in 2003 than in 2002.
In addition to the asset impairment charge (see "-- Critical Accounting
Policies" and the notes to our consolidated financial statements included
elsewhere in this prospectus), other-net expense was higher in 2002 than in 2001
as a result of a $0.8 million decline in exchange gains in 2002 compared to
2001, which was offset in part by lower metal financing fees and the elimination
of goodwill amortization due to the adoption of SFAS No. 142 in 2002. Other-net
expense also includes amortization of intangible assets, gain or loss on the
disposal of fixed assets, cash discounts and other non-operating income and
expense items.
The operating loss was $9.3 million in 2003, a $13.5 million improvement
over the $22.8 million loss in 2002. The operating loss was $14.1 million in
2001.
Interest expense was $3.4 million in 2003 compared to $3.0 million in 2002
and $3.3 million in 2001. Balance sheet debt increased by over $50.0 million due
to the purchase of previously leased assets as part of the fourth quarter 2003
refinancing and resulted in an increase in interest expense of approximately
$0.4 million. Prior to the refinancing, average debt levels were lower in 2003
than in 2002, and the effective interest rate was slightly higher. The 2002
expense was lower than 2001 due to a lower average debt level and a lower
effective interest rate. Offsetting a portion of these benefits in 2002 was a
$0.5 million decline in interest capitalized in association with long-term
capital projects from 2001.
The loss before income taxes was $12.7 million in 2003, a $13.2 million
improvement over 2002. The improvement resulted from the margin contribution on
the increase in sales, an increase in margin contribution rate and continued
manufacturing overhead control offset in part by higher SG&A expenses and the
impact of the one-time charges. The 2002 loss before income taxes of $25.9
million as compared to $17.4 million in 2001 resulted primarily from the lower
margins due to the significant drop in sales volumes, partially offset by
overhead cost reductions.
The 2003 income tax expense of $0.6 million included a favorable tax
provision of $4.7 million and a deferred tax valuation allowance of $5.3 million
while the 2002 expense of $9.7 million included a favorable provision of $10.2
million and a deferred tax valuation allowance of $19.9 million. The 2001 tax
benefit was $7.1 million. A valuation allowance was not required for 2001.
Prior to the recognition of the valuation allowances, tax benefit rates of
37.3%, 39.4% and 40.9% were applied against the loss before income taxes to
calculate the favorable tax provisions in 2003, 2002 and 2001, respectively. The
effects of percentage depletion and foreign source income were the major causes
of the differences between the effective and statutory rates for all three
years. The relative impact of percentage
25
depletion and the company-owned life insurance program were the main differences
between the 2003 and 2002 effective rates.
The deferred tax valuation allowances were recorded in 2003 and 2002 in
accordance with SFAS No. 109, "Accounting for Income Taxes." This statement
requires a company to evaluate its deferred tax assets on its balance sheet for
impairment in the event of recent operating losses. This evaluation process is
not based upon the specific expiration date of the individual deferrals but
rather on the company's ability to demonstrate taxable income that will result
in utilization of those assets. As a result of a review in the fourth quarter
2002, we determined that the majority of our deferred tax assets were impaired
and a valuation allowance was recorded with $19.9 million charged against
expense and $7.3 million to other comprehensive income within shareholders'
equity. In 2003, the $5.3 million valuation allowance offset the deferred tax
assets that were created by the current year domestic federal and various
foreign tax benefits. The 2003 net tax expense of $0.6 million, therefore,
represents the provision for state, local and certain other foreign taxes, which
were not subject to a valuation allowance. An additional $1.9 million valuation
allowance was charged against other comprehensive income in 2003 for deferred
tax assets associated with the net charge to equity for the change in derivative
fair values and the accrued pension liability. See Note I to the consolidated
financial statements included elsewhere in this prospectus.
As a result of the preceding, the net loss was $13.2 million, or $0.80 per
share, in 2003 compared to $35.6 million, or $2.15 per share, in 2002 and $10.3
million, or $0.62 per share, in 2001.
We aggregate our businesses into two reportable segments -- the Metal
Systems Group and the Microelectronics Group.Technical Materials, Inc. (TMI).
Our parent company, Brush Engineered Materials Inc., and other corporate expenses, as well as the operating results from BEM Services, Inc. and
Brush Resources Inc., twoa wholly owned subsidiaries,subsidiary, are not included in eitherpart of any reportable segment and are shownremain in the "All Other" column in the segment results contained
in Note M to the consolidated financial statements included elsewhere in this
prospectus. BEM“All Other”.
Advanced Material Technologies and Services charges a management fee for the services it provides,
primarily corporate, administrative and financial oversight, to the other
businesses within our company on a cost-plus basis. Brush Resources sells
beryllium hydroxide, produced through its Utah operations, to outside customers
and to businesses within the Metal Systems Group. The profitability within All
Other declined in 2003 as compared to 2002 as a result of the $6.0 million
one-time charge associated with the debt refinancing, the $4.2 million
difference in movements in the legal reserve, the increase in the company-owned
life insurance expense and reduced profitability of Brush Resources primarily
due to lower production activity.
METAL SYSTEMS GROUP
The Metal Systems Group is the larger of our reportable segments,
accounting for approximately 60% of total sales and almost 70% of total assets.
The group consists of Alloy Products; TMI, one of our wholly owned subsidiaries;
and Beryllium Products. These units manufacture a variety of engineered
materials that provide superior performance in demanding applications and
compete against beryllium and non-beryllium-containing alloys. The Elmore, Ohio
facility manufactures finished goods for Alloy Products and Beryllium Products
as well as materials for further processing and sale by other operations within
Alloy Products, Beryllium Products and TMI. Customers typically use our
materials from this segment as their raw material input and are also usually one
or more tiers removed from the end-use demand generator in a given market. After
declining significantly in each of the last two years, primarily as a result of
softness in the
26
telecommunications and computer market, sales grew 5% in 2003 over 2002. Sales
to external customers by business unit within the Metal Systems Group during the
2001 to 2003 time frame were as follows:
Alloy Products
Alloy Products, the largest unit within our company,
AMTS manufactures and sells
copper and nickel-based alloy systems, the majority of which also contain
beryllium, and consists of two major product families -- strip and bulk
products. Strip products, which include thin gauge precision strip and thin
diameter rod and wire, provide a combination of high conductivity, high
reliability and formability for use as connectors, contacts, switches, relays
and shielding. Major markets for strip products include telecommunications and
computer, automotive electronics and appliances. Bulk products include plate,
rod, bar, tube and other customized forms that, depending upon the application,
may provide superior strength, corrosion or wear resistance or thermal
conductivity. Applications for bulk products include plastic mold tooling,
bearings, bushings, welding rods and telecommunications housing equipment. Alloy
Products are manufactured at our facilities in Ohio and Pennsylvania and are
distributed worldwide through a network of our own service centers and outside
distributors and agents.
Alloy Products' sales of $162.3 million improved 7% over sales in 2002
while sales of $151.9 million in 2002 were 30% lower than sales in 2001. The
improvement in sales in 2003 was due to strip products as sales of bulk products
declined during 2003. The strip sales growth was caused by an increase in demand
for the higher beryllium-containing and, therefore, higher priced alloys.
Underlying volumes of these products improved 22% in 2003 over 2002. Sales of
thin diameter rod and wire products also showed double-digit growth in 2003.
Bulk sales volumes were 9% lower in 2003 than in 2002.
The Alloy Products' sales growth in 2003 was in the international markets
as domestic sales declined slightly. A portion of this international growth is
due to domestic customers shifting manufacturing operations overseas,
particularly to Asia. Alloy Products recently established additional sales and
marketing offices in China to augment its existing service centers in Japan and
Singapore in order to maintain and grow sales applications in the region. The
sales growth also resulted from an increase in market share and the development
of various new products. Demand from the telecommunications and computer market
was unchanged for the first three quarters of 2003 and then showed some
improvements in the fourth quarter. Demand for strip products from the
automotive market remained sluggish in 2003. The lower bulk products sales was
caused in part by soft demand from the plastic tooling market for the majority
of the year (although demand started to improve in the fourth quarter), while
demand from the industrial components market declined during 2003. The increased
demand from the telecommunications and computer and plastic tooling markets
continued into early 2004. Orders for new products, including the
non-beryllium-containing ToughMet(R) alloy used in bearing applications in heavy
equipment, also showed improvement in late 2003 and early 2004.
Sales of strip and bulk products both declined significantly in 2002 as
compared to 2001. Strip volumes were down 17% and bulk volumes were down 33%.
The lower sales were due in large part to the precipitous decline in demand from
the telecommunications and computer market that began in the second quarter
2001. Automotive sales of strip products were essentially unchanged in 2002 as
compared to 2001. Bulk sales into the undersea telecommunications market, which
was the largest market segment for bulk products as recently as 2000, began to
decline in the second half of 2001 and were minimal in 2002 due to the severe
reduction in the number of new undersea fiber optic line installation projects
throughout the world. Bulk product sales
27
for plastic tooling applications also declined in 2002 due in part to customers
adjusting their inventory positions.
Technical Materials, Inc.
TMI manufactures engineered materials systems, including clad inlay and
overlay metals, precious and base metal electroplated systems, electron beam
welded systems, contour profiled systems and solder-coated metal systems. These
specialty strip metal products provide a variety of thermal, electrical or
mechanical properties from a surface area or particular section of the material.
Major markets for TMI products include telecommunications and computer and
automotive electronics while major applications include connectors, contacts and
semi-conductors.
TMI sales were $41.9 million in 2003, $44.4 million in 2002 and $50.5
million in 2001. The lower sales in each of the last two fiscal years were due
to the continued soft demand from the telecommunications and computer market.
Automotive sales, which had been relatively unchanged in the prior two years,
also softened during the third and fourth quarters of 2003. However, overall
sales order entry rates improved in the fourth quarter 2003 over the first nine
months of the year, and this trend continued into early 2004.
Production capacity within the markets served by TMI continued to be
transferred from the United States to Asia, and TMI has aggressively managed its
marketing efforts and manufacturing and overhead cost structure in order to
profitably position itself to maintain and grow its base business while
expanding into new applications and markets. As a result, TMI's profits
increased in 2003 over 2002 despite the 6% decline in sales.
Beryllium Products
Beryllium Products manufactures pure beryllium and beryllium aluminum
alloys in rod, tube, sheet and a variety of customized forms at the Elmore, Ohio
and Fremont, California facilities. These materials are used in applications
that require high stiffness and/or low density, and they tend to be premium
priced due to their unique combination of properties. Defense and
government-related applications remain the largest market for Beryllium
Products, accounting for approximately two-thirds of sales, while other markets
served include automotive, electronics, medical and optical scanning.
Revenues from Beryllium Products were $35.2 million in 2003, $31.6 million
in 2002 and $27.7 million in 2001. Revenues from Beryllium Products have grown
for four consecutive years, including annual growth rates of 11% and 14% in 2003
and 2002, respectively. Sales for defense and government-related applications
remained strong throughout this period. Several system upgrades for F-16 fighter
jets and the new F-22 fighter are two of the largest platforms for Beryllium
Products. Sales to the electronics market for acoustic components increased in
2003 over 2002 and represent a commercial growth opportunity for Beryllium
Products. Acoustic component sales had declined in 2002 due to customers' excess
inventory positions. Performance automotive sales contributed to the sales
growth in 2003 and 2002 as well; however, management is uncertain as to the
growth prospects for this market in the coming year. In the third quarter 2003,
we secured a material supply contract for NASA's James Webb Space Telescope
program, which is anticipated to generate an additional $15.0 million in
revenue, the majority of which should be invoiced in the 2004 to 2005 time
frame.
Metal Systems Gross Margin and Expenses
The gross margin on Metal System sales was $39.5 million, or 16% of segment
sales, in 2003 compared to $18.0 million, or 8% of segment sales, in 2002. The
increased sales volume improved the margin contribution by $2.8 million in 2003
as compared to 2002. A favorable product mix, operational improvements and a
favorable currency effect increased margins by $12.1 million. The favorable mix
resulted primarily from strip products, although TMI and Beryllium Products had
mix shifts due to higher margin generating products as well. Operational
improvements were made at the Elmore, Ohio facility, including yield and machine
utilization rates, and at the TMI facility in Lincoln, Rhode Island, including
yields and cost controls. Manufacturing overhead costs and inventory valuation
adjustments were $6.6 million lower in
28
2003 than in 2002, with the majority of savings coming from manpower, supplies
and services at the Elmore facility.
The 2002 gross margin of $18.0 million was $21.1 million lower than the
gross margin in 2001. The margin contribution decline due to the lower sales
volume in 2002 totaled $30.7 million. An unfavorable product mix, primarily from
Alloy Products, combined with a slightly unfavorable currency and copper impact,
reduced margins by an additional $6.3 million. Mitigating the impact of these
negative factors on margins was a reduction in manufacturing overhead expense
and inventory valuation adjustments of $15.9 million. Overhead costs were
reduced at all of the Metal Systems Group's manufacturing facilities in response
to the lower sales volume. This decrease in overhead in 2002 was net of a $4.7
million increase in rent expense from the off-balance sheet operating lease that
was subsequently refinanced in December 2003.
SG&A, R&D and other-net expenses were $0.5 million higher in 2003 than in
2002 as a result of the foreign currency exchange gain/loss difference and an
increase to incentive compensation accruals. SG&A and R&D manpower levels were
relatively unchanged for the year. The $0.5 million increase was net of the
impact of a one-time asset impairment charge in 2002. We determined that the
projected cash flow from various assets used in the production of beryllium was
less than the carrying value. The assets were written down to their net
realizable values, and a $3.1 million charge was recorded against other-net
expense in the fourth quarter 2002. The equipment has been shut down due to the
use of alternative input materials and manufacturing processes. Expenses in 2002
were $3.5 million lower than 2001 as manpower and other cost savings initiatives
reduced expenses by $6.6 million in 2002 compared to the prior year, the benefit
of which was offset in part by the impairment charge.
The Metal Systems Group recorded an operating loss of $16.6 million in
2003, a $21.1 million improvement over the $37.7 million loss in 2002. The
improvement was caused by the additional margin generated by the higher sales,
favorable mix, operational efficiencies and manufacturing overhead cost
reductions. In 2001, the Metal Systems Group lost $20.1 million.
MICROELECTRONICS GROUP
Microelectronics Group includes WAM and Electronic Products. These
businesses manufacture a variety of high quality precision parts that are sold
to assemblers and other fabricators of electronic components and equipment.
Sales grew 13% in 2003 over 2002 after declining 18% in 2002 from 2001.
Operating profit improved by $8.8 million in 2003. Sales to external customers
by business unit within the Microelectronics Group during the 2001 to 2003 time
frame were as follows:
Williams Advanced Materials Inc.
WAM manufacturesfabricates precious, non-precious and specialty metal products at its
facilities in New York, California and Asia. Specific products include vapor
deposition targets, frame lid assemblies, clad and precious metal preforms, high
temperature braze materials and ultra fine wire. Major markets for WAM's
products include optical media, magnetic head, electron tube, performance filmthe data storage, medical and the wireless, semi-conductor, photonicphotonics, semiconductor and hybrid segments of the microelectronics market. 29
Sales from WAM were $127.8 million in 2003, $109.1 million in 2002 and
$135.3 million in 2001. WAM adjusts its selling prices daily to reflectAMTS also has refining capabilities for the current costreclaim of the precious and non-precious metals sold. The cost of the metal
is a pass-through to the customer, and WAM generatesfrom internally or customer-generated scrap. In addition, AMTS provides chamber services for its margin on its
fabrication efforts irrespective of the type or cost of the metal used in a
given application. Therefore, the cost and mix of metals sold will affect sales
but not necessarily the margins generated by those sales. Metal prices increased
on average in 2003 over 2002, and the underlying volumes grew 7% compared to a
17% growth in sales. In 2002, a mix shift to lower priced metals as compared to
2001 caused the majority of the decrease in sales, as volumes were only 2% lower
than the prior year.
Sales of vapor deposition targets grew in 2003 from the 2002 level driven
by the continued strong end-use demand from the optical media market for digital
versatile disks. Demand for targets from the photonics and other segments of the
microelectronics market, which was soft and caused a slight overall decline in
target sales in 2002, started to improve in the latter part of 2003. Sales of
various products into the wireless segment demonstrated improvement in 2003 over
2002. Demand for data storage applications for giant magnetic resistive thin
film applications remained strong throughout the 2001 to 2003 time period. Frame
lid assembly sales grew in 2003 and in 2002 as a result of acquiring various
assets of competitors who exited the market in the second quarter 2001 and the
second quarter 2003.
Due to the precious metal content of many of its products, WAM's customers
continuously evaluate alternative lower cost materials and systems, and WAM
faces stiff competition from other material providers. WAM strives to develop
new alloys and products that satisfy its customers' quality, cost and service
objectives. A key competitive advantage for WAM is its ability to reclaim precious metals fromand refurbish reusable components used in its own or customers' scrap, through its in-house
refinery. WAM also emphasizes newcustomers’ vapor deposition systems. AMTS’ major product lines include vapor deposition targets, clad and application developmentprecious metals preforms, high temperature braze materials, ultra fine wire, sealing lids, optics, performance coatings, specialty inorganic materials and microelectronic packages. In February 2008, AMTS purchased the assets of Techni-Met, Inc. based in order
to keep pace with technological advancements.
Electronic Products
Electronic ProductsWindsor, Connecticut, which supplies a wide range of high end applications for advanced technology industries, including supporting downstream customers in developing more accurate diagnostic devices for diabetes management.
Specialty Engineered Alloys
SEA manufactures beryllia ceramics, electronic packages and
circuitry for sale into the telecommunications and computer, medical,
electronics, automotive and defense markets. These products provide specific
thermal and/or electrical conductivity characteristics and are used as
components in a variety of applications, including wireless telecommunications
equipment, fiber optics, lasers for medicalberyllium-containing and other electronic equipment,
automotive ignition module systems, satellites and radar systems. Electronic
Products are manufactured by Zentrix Technologies Inc. and Brush Ceramic
Products, two wholly owned subsidiaries. Sales from Electronic Products were
$29.5 million in 2003 compared to $30.1 million in 2002 and $34.3 million in
2001.
Sales of beryllia ceramics were essentially unchanged in 2003 compared to
2002 after declining in 2002. This is a mature product line with established
applications but limited growth opportunities. A temporary disruption in the
sales order pattern from the largest ceramics customer during a plant relocation
offset mild improvements during 2003. Sales order entry levels for ceramics
strengthened in the fourth quarter 2003. Softer demand from the
telecommunications and computer market caused the lower sales of ceramics in
2002 as compared to 2001. Sales of electronic packages also declined in each of
the last two years due to the slowdown in build rates for telecommunications
infrastructure equipment. Sales into the automotive market declined in 2003
after growing in 2002 over 2001. Sales of circuitry, which are manufactured by
Circuits Processing Technology, Inc., a wholly owned subsidiary of Zentrix,
increased in 2003 due to strengthening defense orders after declining in 2002
due to softer demand for commercial applications.
Microelectronics Group Gross Margin and Expenses
The gross margin on Microelectronics Group sales was $32.8 million, or 21%
of segment sales, in 2003, compared to $26.4 million, or 19% of segment sales,
in 2002 and $25.6 million, or 15% of sales, in 2001. The margin contribution in
2003 improved by $3.3 million as a result of the increased sales. The product
mix effect, as well as operational efficiencies, primarily in Electronic
Products, generated an additional $1.6 million in gross margin while
manufacturing overhead costs and inventory adjustments were $1.4 million lower
in 2003 than in 2002. The $0.8 million margin improvement in 2002 over 2001
resulted from an
30
$8.1 million favorable mix effect, primarily from WAM, combining with a $3.1
million reduction in manufacturing overhead and inventory valuation adjustments
to more than offset the reduction in margin contribution from the lower sales
volume.
SG&A, R&D and other-net expenses were $2.4 million lower in 2003 than in
2002 in part due to one-time charges of $1.9 million recorded in 2002.
Management determined that the projected cash flow from various assets used by
Electronic Products was less than the carrying value. A charge of $1.3 million
was recorded in other-net expense to write down the assets to their fair value
as determined by an outside appraisal. See Note C to the consolidated financial
statements included elsewhere in this prospectus. Expenses in 2002 also included
severance costs of $0.6 million as we restructured the management of Electronic
Products, eliminating various positions and closing two small foreign offices.
In addition, expenses were lower in 2003 due to the full-year benefit of the
manpower reductions made in 2002. The precious metal financing fee was lower in
2003 than in 2002 as well. Offsetting a portion of these benefits were increased
costs to support the WAM sales growth and higher incentive accruals. Expenses
were $1.6 million higher in 2002 than in 2001. In addition to the $1.9 million
one-time items, WAM's SG&A and R&D expenses grew in 2002 over 2001 while the
precious metal financing fee declined by $0.7 million.
The Microelectronics Group operating profit was $12.6 million, or 8% of
segment sales, in 2003 compared to $3.8 million, or 3% of segment sales, in
2002. Improved margins and lower expenses combined to generate the profit
improvement. Operating profit for the Microelectronics Group was $4.6 million,
or 3% of segment sales, in 2001.
INTERNATIONAL SALES AND OPERATIONS
The international sales presented in the preceding table are included in
the Metal Systems Group and Microelectronics Group sales figures previously
discussed. The majority of international sales are to the Pacific Rim, Europe
and Canada. Sales to the Pacific Rim and Europe showed strong growth in 2003
resulting from a combination of additional market penetration, the relocation of
United States production to overseas locations, increased market share and a
favorable currency exchange effect. Sales into each major region were lower in
2002 than in 2001 with European sales accounting for over 60% of the total
falloff.
International operations include service centers in Germany, England, Japan
and Singapore that primarily focus on the distribution of Alloy Products while
providing additional local support to various other businesses within our
company. WAM has finishing operations in Singapore and the Philippines and a
small joint venture that was established in Taiwan in 2003. We also have branch
sales offices in the Republic of China and in Taiwan as well as an established
network of independent distributors and agents.
As is the case domestically, telecommunications and computer and automotive
electronics are the largest international markets for our products. Defense
applications are not as prevalent overseas while the appliance market for alloy
products is a more significant market, primarily in Europe, than it is
domestically. Our market share is smaller in the overseas markets than it is
domestically and given the macro-economic growth potential for the international
economies, the international markets may present greater long-term growth
opportunities for us.
Sales from the international operations are typically denominated in the
local currency, particularly in Europe and Japan. Exports from the United States
and sales from the Singapore operations are predominately denominated in United
States dollars. Movements in the foreign currency exchange rates will affect the
reported translated value of foreign currency-denominated sales while local
competition limits our ability to adjust selling prices upwards to compensate
for short-term unfavorable exchange rate movements. The dollar
31
was weaker against the euro, yen and sterling over the course of 2003 compared
to 2002, resulting in a favorable translation impact on sales of $6.4 million.
The dollar was slightly stronger in 2002 than in 2001, resulting in an
unfavorable translation impact on sales of $1.1 million in 2002. We have a hedge
program with the objective of minimizing the impact of fluctuating currency
values on our reported results.
LEGAL PROCEEDINGS
Our subsidiary, Brush Wellman Inc., is a defendant in 14 proceedings in
various state and federal courts brought by plaintiffs alleging that they have
contracted CBD or other lung conditions as a result of exposure to beryllium.
Plaintiffs in beryllium cases seek recovery under theories of intentional tort
and various other legal theories and seek compensatory and punitive damages, in
many cases of an unspecified sum. Spouses of some plaintiffs claim loss of
consortium.
The following table summarizes the associated activity with beryllium
cases. Settlement payment and dismissal for a single case may not occur in the
same period.
The 2003 data includes five claims that were settled and dismissed late in
the fourth quarter 2003, with the settlement payments of $0.9 million made or
scheduled to be made in early 2004. Additional beryllium claims may arise.
Management believes that we have substantial defenses in these cases and intends
to contest the suits vigorously. Employee cases, in which plaintiffs have a high burden of proof, have historically involved relatively small losses to us.
Third-party plaintiffs, typically employees of customers or contractors, face a
lower burden of proof than do employees or former employees, but these cases are
generally covered by varying levels of insurance. A reserve was recorded for
beryllium litigation of $2.9 million at December 31, 2003 and $4.2 million at
December 31, 2002. A receivable was recorded of $3.2 million at December 31,
2003 and $4.9 million at December 31, 2002 from our insurance carriers as
recoveries for insured claims.
Although it is not possible to predict the outcome of the litigation
pending against us and our subsidiaries, we provide for costs related to these
matters when a loss is probable and the amount is reasonably estimable.
Litigation is subject to many uncertainties, and it is possible that some of
these actions could be decided unfavorably in amounts exceeding our reserves. An
unfavorable outcome or settlement of a pending beryllium case or additional
adverse media coverage could encourage the commencement of additional similar
litigation. We are unable to estimate our potential exposure to unasserted
claims.
While we are unable to predict the outcome of the current or future
beryllium proceedings, based upon currently known facts and assuming
collectibility of insurance, we do not believe that resolution of these
proceedings will have a material adverse effect on the financial condition or
our cash flow. However, our results of operations could be materially affected
by unfavorable results in one or more of these cases. As of December 31, 2003,
two purported class actions were pending.
Standards for exposure to beryllium are under review by the United States
Occupational Safety and Health Administration and by other standard-setting
organizations. One result of these reviews might be more stringent worker safety
standards. More stringent standards may affect buying decisions by the users of
beryllium-containing products. If the standards are made more stringent or our
customers decide to reduce
32
their use of beryllium-containing products, our operating results, liquidity and
capital resources could be materially adversely affected. The extent of the
adverse effect would depend on the nature and extent of the changes to the
standards, the cost and ability to meet the new standards, the extent of any
reduction in customer use and other factors that cannot be estimated.
The 15 pending beryllium cases as of December 31, 2003 fall into three
categories: one "employee case" involving one former employee; 12 cases
involving third-party individual plaintiffs, with 12 individuals (and five
spouses who have filed claims as part of their spouse's case, and five children
who have filed claims as part of their parent's case); and two purported class
actions, involving ten individuals, as discussed more fully below.
In one purported class action in which Brush Wellman is seeking review of
the appellate court's reversal of the trial court's denial of class
certification, the named plaintiffs allege that past exposure to beryllium has
increased their risk of contracting CBD and possibly cancer, although they do
not claim to have actually contracted any disease. They seek medical monitoring
funds to be used to detect medical problems that they believe may develop as a
result of their exposure and punitive damages. This purported class action was
brought by named plaintiffs on behalf of tradesmen who worked in one of Brush
Wellman's facilities as employees of independent contractors.
In the second purported class action that is pending against Brush Wellman,
the named plaintiffs allege that they were exposed to beryllium in the course of
their employment with a customer of Brush Wellman and that they are sensitized
to beryllium. They seek medical monitoring funds to be used to detect medical
problems that they believe may develop as a result of their exposure and
punitive damages. This purported class action was brought by named plaintiffs on
behalf of employees who worked in the State of California at the facilities of
one of Brush Wellman's customers and the spouses of those workers.
From January 1, 2004 to April 1, 2004, Brush Wellman was served with a
third purported class action, in which the named plaintiffs allege that they
were exposed to beryllium in the course of their employment with a customer of
Brush Wellman. They seek medical monitoring funds to be used to detect medical
problems that they believe may develop as a result of their exposure and
punitive damages. This purported class action was brought on behalf of current
and former employees who worked at the Marietta, Georgia facility of one of
Brush Wellman's customers and their spouses. Also during this period, one
third-party case, involving one plaintiff, was filed. Two third-party cases,
involving seven plaintiffs, were voluntarily dismissed by the plaintiffs. The
settlement amounts in five third-party cases, involving 14 plaintiffs, that were
settled and dismissed in 2003 have been paid to the plaintiffs. One employee
case, involving one plaintiff, was settled and dismissed.
FINANCIAL POSITION
WORKING CAPITAL
Cash flow from operations totaled $26.3 million in 2003 as depreciation,
other non-cash items and changes in working capital items more than offset the
net loss of $13.2 million. Cash flow from operations in 2003 was a $10.6 million
improvement over the $15.7 million generated in 2002. The cash balance was $5.1
million at December 31, 2003, an increase of $0.7 million for the year, as the
balance of the cash generated from operations was used to reduce debt and fund
capital expenditures.
The accounts receivable balance was $55.1 million at year-end 2003, an
increase of $7.6 million from year-end 2002. The increase is largely due to the
higher sales in the fourth quarter 2003 relative to the fourth quarter 2002 as
the days sales outstanding, or DSO, a measure of how quickly receivables are
collected, improved one day to 47 days. The DSO improved despite an increase in
international sales, which typically take longer to collect. Accounts receivable
declined in 2002 as a result of lower sales and a five-day improvement in the
DSO.
Inventories declined $6.9 million in 2003 to $87.4 million after declining
$14.8 million in 2002 as we continued to improve our manufacturing efficiencies
and inventory utilization in order to improve customer response time and lower
our working capital investment. The reduction in inventories in 2002 was net of
a
33
$6.0 million increase due to the termination of an off-balance sheet copper
financing arrangement in the fourth quarter 2002. Total Metal Systems Group
inventory was down 12% on a first-in, first-out, or FIFO, valuation basis in
2003. Each unit within the Metal Systems Group lowered its inventories in 2003,
with Alloy Products responsible for the largest decline. Alloy inventory pounds
declined 15% during the year and were down 50% from their peak levels in 2001.
FIFO inventories within the Microelectronics Group increased 13% as WAM's
inventories increased in order to support the higher sales volumes and as a
result of higher precious metal prices. Brush Resources also increased its
inventory, as ore was mined in excess of current production requirements in
order to extract the ore from the existing pits within the allowable safety time
frame. Overall inventory turns as of the fourth quarter 2003 improved over the
fourth quarter 2002. The majority of the inventory reduction in 2002 was in the
Metal Systems Group as Microelectronics Group inventories declined only
slightly.
Prepaid expenses declined during 2003 mainly due to the collection of a
$3.8 million federal income tax refund. The accounts payable balance was $0.9
million higher at year-end 2003 than at year-end 2002 due to higher activity
levels. Other liabilities and accruals increased $7.0 million as a result of
higher incentive compensation accruals, a change in the fair value of derivative
financial instruments, higher interest accruals and other miscellaneous items.
Other long-term liabilities of $14.7 million at December 31, 2003 were $2.8
million lower than at December 31, 2002 due to reductions in the legal reserves
and changes in the long-term portion of the fair value of derivatives. We paid
$1.2 million in 2003 for legal settlements, primarily for CBD cases, and
received $1.6 million from our insurance carriers as partial reimbursement for
the insured portions of claims paid in the current and prior years. In 2002, we
paid $4.9 million in settlements and recovered $2.3 million from our insurance
carriers.
DEPRECIATION AND AMORTIZATION
Depreciation, amortization and depletion was $19.5 million in 2003 and
$20.4 million in 2002. The lower expense in 2003 resulted from the reduced level
of capital spending. Amortization of deferred mine development was $1.2 million
in 2003 and $0.3 million in 2002. Mine development costs are amortized based
upon the units-of-production method as ore is extracted from the pits.
CAPITAL EXPENDITURES
Capital expenditures for property, plant and equipment and mine development
totaled $6.3 million in 2003 compared to $5.4 million in 2002. Spending by the
Metal Systems Group totaled $2.8 million in 2003 and $1.9 million in 2002, while
the Microelectronics Group spending totaled $2.9 million in 2003 and $2.4
million in 2002. The majority of the spending was on small infrastructure and
other individual projects as in general we had sufficient production capacity to
meet the level of demand in 2003. The Microelectronics Group spending included
the acquisition of various assets used to manufacture frame lid assemblies from
a competitor who exited the market. In addition to the $6.3 million of spending,
as part of the December 2003 refinancing, we purchased $51.8 million of assets
previously held under an operating lease that have been in use at the Elmore
facility since 1998 by the Metal Systems Group. Management anticipates that
capital expenditures should increase in 2004 over the $6.3 million spent in 2003
but will still be below the level of depreciation.
PENSION LIABILITY
SFAS No. 87, "Employers' Accounting for Pensions", requires the recognition
of a minimum pension liability if the present value of the accumulated benefit
obligation is greater than the market value of the pension assets at year end.
The market value of our pension assets in our domestic defined benefits plan was
$85.8 million while the present value of the accumulated benefit obligation was
$95.4 million as of December 31, 2003. We, therefore, reduced our minimum
pension liability to $9.6 million (in other long-term liabilities) by adjusting
the intangible pension asset by $0.6 million in other assets and recording a
pre-tax credit of $1.0 million against other comprehensive income, a component
of shareholders' equity, in the fourth quarter 2003. The 2003 pension expense,
which had increased the minimum liability, was $1.6 million. We had initially
recorded a $13.6 million charge against other comprehensive income in the fourth
quarter 2002
34
to adjust the carrying value of the recognized pension asset and to establish a
minimum pension liability of $9.6 million based upon an asset market value of
$78.1 million and an accumulated benefit obligation of $87.7 million at December
31, 2002. During 2003, the fair value of the pension assets increased as the
investment earnings exceeded the plan payouts and expenses by $7.7 million while
the accumulated benefit obligation increased a similar amount due to a lower
discount rate, an additional year of service earned and other actuarial
assumptions.
REFINANCING
We refinanced our debt on a long-term basis with the completion of new debt
facilities totaling $147.5 million in the fourth quarter 2003. The new financing
includes an $85.0 million revolving line of credit secured by our working
capital, $20.0 million of term loans secured by real estate and machinery and
equipment and a $7.5 million facility secured by certain export accounts
receivable. The remaining $35.0 million consists of a subordinated term loan
that is secured by a second lien on our working capital, real estate and
machinery and equipment and is payable at the end of five years. All of the new
debt is variable rate based upon spreads over LIBOR or prime. The new debt
provides additional capacity to fund our growth and provides stability through
extension of maturity dates. See Note E to the consolidated financial statements
included elsewhere in this prospectus.
Proceeds from the refinancing were used to retire the existing revolving
credit agreement that was scheduled to mature in April 2004 and to purchase
$51.8 million of leased assets, thereby terminating an existing off-balance
sheet lease obligation. The leased assets have been used at the Elmore facility
in the manufacture of alloy strip products since 1998. The $51.8 million
purchase price was the notional value of the lease at the time of the purchase
and, therefore, while the balance sheet debt increased by $51.8 million as
result of this transaction, our total obligations, as defined by debt plus
off-balance sheet obligations, were unchanged.
The refinancing increases our liquidity and available credit lines, and we
anticipate the related expense and repayments in 2004 will be lower than the
projected expense and payments under the prior debt and lease structure. Lease
payments to be expensed against cost of sales under the terminated lease would
have been $10.4 million in 2004. Under the new structure, this expense has been
eliminated and replaced by approximately $4.0 million of depreciation expense on
the purchased assets. Therefore, cost of sales will be $6.4 million lower and
gross margin will be $6.4 million higher in 2004 than it would have been under
the prior financing arrangement. The margin improvement will flow through the
Metal Systems Group. This benefit will be partially offset by an increase in the
amortization of deferred financing fees and higher interest costs due to the
increase in debt and changes in the interest rate structure. Based upon the
interest rates and debt levels at the time of the refinancing, the increase in
these costs are estimated to be $5.0 million in 2004 and, therefore, management
estimates that earnings before income taxes in 2004 will improve by $1.4 million
as a result of the refinancing. In addition, the increased interest payments
plus the required debt repayments in 2004 are estimated to be $5.2 million lower
than the 2004 lease payment would have been.
As a result of the refinancing, we recorded a $6.0 million one-time charge
in the fourth quarter 2003 to write off deferred costs associated with the prior
financing arrangement and to record derivative ineffectiveness on an associated
interest rate swap. We have an interest rate swap that initially was designated
as a hedge of the equipment operating lease payments. With the termination of
the lease, the swap no longer qualified for hedge accounting, and the $4.6
million unfavorable fair value at the time of the refinancing that previously
was deferred into other comprehensive income on our consolidated balance sheet
was charged against the other-net expense on our consolidated income statements.
We kept this swap in place, as its cash flows will serve to hedge a portion of
the outstanding variable rate debt even though the swap does not technically
qualify for hedge accounting. See Note G to the consolidated financial
statements included elsewhere in this prospectus. An additional $0.1 million was
recorded against other-net expense for other deferred costs while $0.7 million
was recorded against cost of sales and $0.6 million against SG&A expense as part
of the $6.0 million charge.
35
Debt issuance costs associated with the December 2003 refinancing totaling
$6.2 million were deferred and included in other assets on the consolidated
balance sheet. The issuance costs included $4.6 million of cash payments and
$1.6 million representing the fair value of warrants to purchase 115,000 common
shares and are being amortized using the effective interest method over the life
of the debt.
DEBT AND OFF-BALANCE SHEET OBLIGATIONS
Total debt on the balance sheet was $99.1 million as of December 31, 2003
compared to $63.5 million as of December 31, 2002. The $35.6 million increase
resulted from the $51.8 million purchase of the leased assets and the retirement
of an existing off-balance sheet obligation as part of the refinancing partially
offset by a $15.8 million reduction paid by cash flow from operations.
Short-term debt totaled $13.4 million at year-end 2003 and included $2.1 million
borrowed under the new revolving credit agreement, $9.7 million of gold
denominated debt and $0.1 million of foreign currency-denominated debt. The gold
loan is designed as a hedge against gold inventory. Short-term debt also
includes $1.5 million of the current portion of long-term debt obligations. In
addition to the new long-term debt obtained in the fourth quarter, we also had
an $8.3 million variable rate industrial development bond, a $3.0 million
variable rate demand note and a $0.9 million promissory note outstanding at
December 31, 2003. We were in compliance with all of our debt covenants as of
December 31, 2003.
In addition to the $99.1 million of balance sheet debt, we have an
off-balance sheet operating lease with a notional value of $14.4 million that
finances a building at the Elmore facility. Annual payments under this lease are
$2.3 million. See Note F to the consolidated financial statements included
elsewhere in this prospectus for further leasing details.
We maintain a portion of our precious metal inventories on a consignment
basis in order to reduce our price exposure. See "-- Market Risk Disclosures."
The notional value of this inventory was $11.5 million at December 31, 2003 and
$15.6 million at December 31, 2002. The value of the consigned precious metals
declined during 2003 due to inventory reduction efforts and changes in the
product mix. The impact of the decrease in quantity on hand was offset in part
by higher prices at year-end 2003 than at year-end 2002. Since third parties own
the consigned precious metal, its cost is not reflected in the total inventory
on our balance sheet. We maintained an off-balance sheet financing arrangement
with a bank for a portion of our copper-based inventories until it was
terminated in the fourth quarter 2002. We purchased the copper inventory for
$6.0 million from the bank and added it into our balance sheet inventory as we
determined it was more cost effective to finance these inventories with
traditional balance sheet debt.
A summary of contractual payments under long-term debt agreements,
operating leases and material purchase commitments by year is as follows:
See "-- Refinancing."
The new revolving credit agreement, the $35.0 million subordinated loan and
the $20.0 million term loans mature in 2008. Management anticipates that new
debt agreements will be negotiated prior to the maturation of these agreements
in 2008, as warranted. Quarterly installments against the term loans begin in
2004 while annual repayments are also required to be made against other portions
of our long-term debt in each of the next five years. See Note E to the
consolidated financial statements included elsewhere in this
36
prospectus for additional debt information. The lease payments represent
payments under non-cancelable leases with initial lease terms in excess of one
year as of December 31, 2003. See Note F to the consolidated financial
statements included elsewhere in this prospectus. The purchase obligations
include $0.3 million for capital equipment to be acquired in 2004. The balance
of the obligations are for raw materials to be acquired under long-term supply
agreements. These commitments end in 2007, although we have the opportunity to
negotiate an extension for one of the agreements. See Note L to the consolidated
financial statements included elsewhere in this prospectus.
We are offering 1,700,000 of our common shares for sale under this
prospectus. We intend to use the net proceeds from this offering to repay a
portion of the amounts outstanding under the credit facilities that are part of
the refinancing we completed in December 2003. Any remaining net proceeds will
be used for working capital and general corporate purposes, including capital
expenditures, acquisitions of businesses or assets and investments. As part of
this offering, the selling shareholders are selling 115,000 of our common
shares, which were issued upon exercise of warrants that were issued in
connection with our December 2003 refinancing. The issuance of our common shares
upon exercise of the warrants does not materially change our total shareholder
equity, although it does increase the total number of our common shares
outstanding.
As a result of this offering and the repayment of our debt, our liquidity,
debt-to-equity ratio and available unused debt capacity will increase, while our
future mandatory debt repayments will decline. The issuance of our common shares
in this offering and subsequent debt reduction should also result in a lower
interest expense in 2004 than it would have been otherwise.
OTHER
Management believes that cash flow from operations plus the available
borrowing capacity are adequate to support operating requirements, capital
expenditures, projected pension plan contributions and remediation projects. The
refinanced debt structure provides improved stability in terms of maturity dates
and improved flexibility in terms of available credit and covenant structures.
Our cost control and working capital management efforts have allowed cash flow
from operations to remain positive despite the operating losses the last three
years, while the capital expenditure limitations and the elimination of the
regular dividend in the third quarter 2001 have further helped to reduce cash
outlays. Our current debt-to-equity ratio, recent operating losses or other
financial measures may limit our ability to raise debt financing in excess of
the existing revolving credit agreement and other established lines. However,
availability under existing unused lines of credit totaled $36.9 million as of
December 31, 2003.
We attempt to maintain cash balances at a minimum with any excess cash used
to reduce overnight or other short-term borrowings. Cash balances, if any, are
invested in high quality, highly liquid investments.
ENVIRONMENTAL
We have an active program of environmental compliance. We estimate the
probable cost of identified environmental remediation projects and establish
reserves accordingly. The environmental remediation reserve balance was $6.9
million at December 31, 2003 and $7.7 million at December 31, 2002. The reserve
was reduced in 2003 for changes in the estimated cost for various projects based
on analyses of the projected required remediation effort and payments for
current activity. See Note L to the consolidated financial statements included
elsewhere in this prospectus.
ORE RESERVES
Our reserves of bertrandite ore are located in Juab County, Utah. An
ongoing drilling program has generally added to proven reserves. Proven reserves
are the measured quantities of ore commercially recoverable through the open pit
method. Probable reserves are the estimated quantities of ore known to exist,
principally at greater depths, but prospects for commercial recovery are
indeterminable. Ore dilution that occurs during mining is approximately seven
percent. Approximately 87% of beryllium in ore is recovered in
37
the extraction process. We augment our proven reserves of bertrandite ore
through the purchase of imported beryl ore, approximately 4% beryllium, which is
also processed at the Utah extraction facility.
We use computer models to estimate ore reserves, which are subject to
economic and physical evaluation. Development drilling can also affect the total
ore reserves to some degree. The requirement that reserves pass an economic test
causes open-pit mineable ore to be found in both proven and probable geologic
settings. Proven reserves decreased slightly and probable reserves were
unchanged in 2003 while proven reserves decreased and probable reserves
increased in 2002. We own approximately 95% of the proven reserves and lease the
balance. Based upon average production levels in recent years, proven reserves
would last approximately 100 years. Ore reserves classified as possible are
excluded from the following table.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires the inherent
use of estimates and management's judgment in establishing those estimates. The
following are the most significant accounting policies used by us that rely upon
management's judgment.
Accrued Liabilities. We have various accruals on our balance sheet that
are based in part upon management's judgment, including accruals for litigation,
environmental remediation and workers' compensation costs. We establish accrual
balances at the best estimate determined by a review of the available facts and
trends by management and independent advisors and specialists as appropriate.
Absent a best estimate, the accrual is established at the low end of the
estimated reasonable range in accordance with SFAS No. 5, "Accounting for
Contingencies." Accruals are only established for identified and/or asserted
claims; future claims, therefore, could give rise to increases to the accruals.
The accruals are adjusted as the facts and circumstances change. The accruals
may also be adjusted for changes in our strategies or regulatory requirements.
Since these accruals are estimates, the ultimate resolution may be greater or
less than the established accrual balance for a variety of reasons, including
court decisions, additional discovery, inflation levels, cost control efforts
and resolution of similar cases. Changes to the accruals would then result in an
additional charge or credit to income. See Note L to the consolidated financial
statements included elsewhere in this prospectus.
The accrued legal liability only includes the estimated indemnity cost, if
any, to resolve the claim through a settlement or court verdict. The legal
defense costs are not included in the accrual and are expensed in the period
incurred, with the level of expense in a given year affected by the number and
types of claims we are actively defending. Certain legal claims are subject to
partial or complete insurance recovery. The accrued liability is recorded at the
gross amount of the estimated cost and the insurance recoverable, if any, is
recorded as a separate asset and is not netted against the liability.
Pensions. We have a defined benefit pension plan that covers a large
portion of our current and former domestic employees. We account for this plan
in accordance with SFAS No. 87, "Employers' Accounting for Pensions." Under
Statement No. 87, the carrying values of the associated assets and liabilities
are determined on an actuarial basis using numerous actuarial and financial
assumptions. Differences between the assumptions and current period actual
results may be deferred into the net pension asset value and amortized against
future income under established guidelines. The deferral process generally
reduces the volatility of the recognized net pension asset or liability and
current period income or expense. The actuaries adjust their
38
assumptions to reflect changes in demographics and other factors, including
mortality rates and employee turnover, as warranted. We periodically review
other key assumptions, including the expected return on plan assets, the
discount rate and the average wage rate increase, against actual results, trends
and industry standards and make adjustments accordingly. These adjustments may
then lead to a higher or lower expense in a future period.
We maintained our expected long-term rate of return on plan assets
assumption at 9.0% as of December 31, 2003, unchanged from the previous year
end. While our pension assets earned well in excess of 9.0% in 2003, the plan
underperformed this level for several years prior to 2003. However, our
long-term experience indicates that a 9.0% return is reasonable. Our pension
plan investment strategies are governed by a policy adopted by the Retirement
Plan Review Committee of the Board of Directors. The future return on pension
assets is dependent upon the plan's asset allocation, which changes from time to
time, and the performance of the underlying investments. Should the assets earn
an average return less than 9.0% over time, in all likelihood the future pension
expense would increase. Investment earnings in excess of 9.0% would tend to
reduce the future expense. We establish the discount rate used to determine the
present value of the projected and accumulated benefit obligation at the end of
each year based upon the available market rates for high quality, fixed income
investments. An increase to the discount rate would reduce the future pension
expense and, conversely, a lower discount rate would raise the future pension
expense. As of December 31, 2003, we elected to use a discount rate of 6.375%
compared to a rate of 6.75% as of December 31, 2002. We estimate that the change
in the discount rate and other actuarial assumptions and valuations combined
with the amortization of prior differences between actual and expected results
will result in a $1.0 million increase in the net expense from our qualified
pension plan in 2004 over 2003 with the 2005 expense estimated to be an
additional $1.1 million higher than the 2004 expense. If the expected rate of
return assumption was changed by 50 basis points (0.50%) and all other pension
assumptions remained constant, the 2004 projected expense would change by
approximately $0.5 million. If the December 31, 2003 discount rate were reduced
by 25 basis points (0.25%) and all other pension assumptions remained constant,
the 2004 pension expense would increase by approximately an additional $0.3
million.
The $9.6 million additional minimum pension liability recorded as of
December 31, 2003 does not by itself indicate that a cash contribution to the
plan is required. This liability was recorded according to SFAS No. 87, while
cash contributions and funding requirements are governed by ERISA and IRS
guidelines. Based upon these guidelines and current assumptions and estimates,
we anticipate that a cash contribution to the pension plan of approximately $1.7
million may be required in 2004. The inter-relationship of the many factors
affecting the plan assets and liabilities makes it difficult to project
contributions beyond one year out; however, a contribution may be required in
2005 that is greater than the 2004 projected contribution. The minimum pension
liability under SFAS No. 87 will be recalculated at the measurement date,
December 31 of each year, and any adjustments to this account and other
comprehensive income within shareholders' equity will be recorded at that time
accordingly. See Note K to the consolidated financial statements included
elsewhere in this prospectus for additional details on our pension plan.
LIFO Inventory. The prices of certain major rawperformance-based materials including copper, nickel, gold, silver and other precious metals purchased by us,
fluctuate during a given year. Such changes in costs are generally reflected in
selling price adjustments. The prices of labor and other factors of production
generally increase with inflation. Additions to capacity, while more expensive
over time usually result in greater productivity or improved yields. However,
market factors, alternative materials and competitive pricing affect our ability
to offset wage, benefit and other cost increases. Therefore, we use the last-in,
first-out, or LIFO, method for costing the majority of our domestic inventories.
Under the LIFO method, inflationary cost increases are charged against the
current cost of goods sold in order to more closely match the cost with revenue.
The carrying value of the inventory is based upon older costs and as a result,
the LIFO cost of the inventory on the balance sheet is typically lower than it
would be under most alternative costing methods. The LIFO impact on the income
statement in a given year is dependent upon the inflation rate effect on raw
material purchases and manufacturing conversion costs, the level of purchases in
a given year and the inventory mix and balance. In 2003, the average inflation
rate was low, and we reduced our inventories. As a result, LIFO inventory layers
were liquidatedcopper-nickel-tin alloys that reduced cost of sales by $3.6 million in 2003. However, the
cost of
39
various raw materials, including copper and nickel, increased near the end of
the fourth quarter 2003, and prices continued to rise in the early portion of
2004.
Deferred Tax Assets. We record deferred tax assets and liabilities in
accordance with SFAS No. 109, "Accounting For Income Taxes." The deferrals are
determined based upon the temporary difference between the financial reporting
and tax bases of assets and liabilities. We review the expiration dates of the
deferrals against projected income levels to determine if the deferral will or
can be realized. If it is determined that it is not probable a deferral will be
realized, a valuation allowance would be established for that item. Certain
deferrals, including the alternative minimum tax credit, do not have an
expiration date. See Note I to the consolidated financial statements included
elsewhere in this prospectus for additional deferred tax details.
In addition to reviewing the deferred tax assets against their expiration
dates, we evaluated our deferred tax assets for impairment due to the recent
operating losses, as previously described, and recorded valuation allowances of
$7.2 million in 2003, with $5.3 million charged to expense and $1.9 million
charged to other comprehensive income, and $27.2 million in 2002, with $19.9
million charged to expense and $7.3 million charged to other comprehensive
income. Should we generate a domestic pre-tax profit in subsequent periods, the
valuation allowance will be reversed against the current period domestic federal
tax expense, resulting in higher net income and net income per share for that
period. Once we establish a trend of consistent actual and projected positive
earnings, significant portions or all of the remaining valuation allowance may
be reversed back to income. Should we generate domestic pre-tax losses in
subsequent periods, a domestic federal tax benefit will not be recorded, and the
valuation allowance recorded against the net deferred tax assets will increase.
This will result in a larger net loss and net loss per share for that period
versus a comparable period when a favorable tax benefit was recorded. We will
continue to record tax provisions or benefits as appropriate for state and local
taxes and various foreign taxes regardless of the status of this valuation
allowance.
Derivatives. We may use derivative financial instruments to hedge our
foreign currency, commodity price and interest rate exposures. We apply hedge
accounting when an effective hedge relationship can be documented and
maintained. If a hedge is deemed effective, changes in its fair value are
recorded in other comprehensive income until the underlying hedged item matures.
If a hedge does not qualify as effective, changes in its fair value are recorded
against income in the current period. We secure derivatives with the intention
of hedging existing or forecasted transactions only and do not engage in
speculative trading or holding derivatives for investment purposes. Our annual
budget and quarterly forecasts serve as the basis for determining forecasted
transactions. The use of derivatives is governed by policies established by the
Board of Directors. The level of derivatives outstanding may be limited by the
availability of credit from financial institutions. See "-- Market Risk
Disclosures" and Note G to the consolidated financial statements included
elsewhere in this prospectus for more information on our derivatives.
MARKET RISK DISCLOSURES
We are exposed to precious metal and commodity price, interest rate and
foreign exchange rate differences. While the degree of exposure varies from year
to year, our methods and policies designed to manage these exposures have
remained fairly consistent. We attempt to minimize the effects of these
exposures through a combination of natural hedges and the use of derivatives.
Our use of derivatives is governed by policies adopted by the Board of
Directors.
We use gold and other precious metals in manufacturing various
Microelectronics Group and Metal Systems products. To reduce the exposure to
market price changes, certain amounts of precious metals are maintained on a
consigned inventory basis. The metal is purchased out of consignment when it is
ready to ship to a customer as a finished product. Our purchase price forms the
basis for the price charged to the customer for the precious metal content and,
therefore, the current cost is matched to the selling price and the price
exposure is minimized. We maintain a certain amount of gold in our own
inventory, which is typically balanced out by having a loan denominated in gold
for the same number of ounces. Any change in the market price of gold, either
higher or lower, will result in an equal change in the fair value of the asset
and liability recorded on the balance sheet.
40
We are charged a consignment fee by the financial institutions that
actually own the precious metals. This fee, along with the interest charged on
the gold-denominated loan, is partially a function of the market price of the
metal. Because of market forces and competition, the fee, but not the interest
on the loan, can be charged to customers on a case-by-case basis. To further
limit price and financing rate exposures, under some circumstances we will
require customers to furnish their own metal for processing. This practice is
used more frequently when the rates are high and/or more volatile. Should the
market price of precious metals used by us increase by 15% from the prices on
December 31, 2003, the additional pre-tax cost to us on an annual basis would be
approximately $0.2 million. This calculation assumes no changes in the quantity
of inventory or the underlying fee and interest rates and that none of the
additional fee is charged to customers.
We also use base metals, primarily copper, in our production processes.
Fluctuations in the market price of copper are passed on to customers in the
form of price adders or reductions for the majority of the copper sales volumes.
However, when we cannot pass through the price of copper, margins can be reduced
by increases in the market price of copper. To hedge this exposure, we may enter
into copper swaps with financial institutions that exchange a variable price of
copper for a fixed price. By so doing, the difference between our purchase price
and selling price of copper will be a known, fixed value for the quantities
covered by the swaps. We did not have any copper swaps outstanding as of
December 31, 2003, in part due to credit constraints. The notional value of the
outstanding copper swaps was $1.8 million as of December 31, 2002.
We are exposed to changes in interest rates on our debt and cash. This
interest rate exposure is managed by maintaining a combination of short-term and
long-term debt and variable and fixed rate instruments. We also use interest
rate swaps to fix the interest rate on variable debt obligations, as we deem
appropriate. Excess cash, if any, is typically invested in high quality
instruments that mature in seven days or less. We had $95.2 million in variable
rate debt and variable-to-fixed interest rate swaps with a notional value of
$55.9 million outstanding at December 31, 2003. If interest rates were to
increase 200 basis points (2.0%) from the December 31, 2003 rates and assuming
no changes in debt or cash from the December 31, 2003 levels, the additional
annual net expense would be $0.8 million on a pre-tax basis. The calculation
excludes any additional expense on fixed rate debt that upon maturity may or may
not be extended at the prevailing interest rates.
Our international operations sell products priced in foreign currencies,
mainly the euro, yen and sterling, while the majority of these products' costs
are incurred in United States dollars. We are exposed to currency movements in
that if the United States dollar strengthens, the translated value of the
foreign currency sale and the resulting margin on that sale will be reduced. We
typically cannot increase the price of our products for short-term exchange rate
movements because of our local competition. To minimize this exposure, we may
purchase foreign currency forward contracts, options and collars. Should the
dollar strengthen, the decline in the translated value of the margins should be
offset by a gain on the contract. A decrease in the value of the dollar would
result in larger margins but potentially a loss on the contract, depending upon
the method used to hedge the exposure. The notional value of the outstanding
currency contracts was $39.8 million as of December 31, 2003 compared to $26.4
million as of December 31, 2002. If the dollar weakened 10% against all
currencies from the December 31, 2003 exchange rates, the increased loss on the
outstanding contracts as of December 31, 2003 would reduce pre-tax profits by
approximately $4.5 million. This calculation does not take into account the
increase in margins as a result of translating foreign currency sales at the
more favorable exchange rate, any changes in margins from potential volume
fluctuations caused by currency movements or the translation effects on any
other foreign currency-denominated income statement or balance sheet item.
We record the fair values of derivatives on our balance sheet in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." The fair values are determined by financial
institutions and represent the market price for the instrument between two
willing parties as of the balance sheet dates. Changes in the fair value of
outstanding derivatives are recorded in equity or against income as appropriate
under the statement guidelines. The fair value of the outstanding foreign
currency contracts was a liability of $2.9 million at December 31, 2003,
indicating that the average hedge rates were unfavorable compared to the actual
year-end market exchange rates. The fair value of the interest rate swaps was a
loss of
41
$5.3 million as the available interest rates were lower than the rates fixed
under the swap contracts. The net derivative loss recorded in other
comprehensive income within shareholders' equity was $3.2 million as of December
31, 2003 compared to $7.8 million at December 31, 2002.
OUTLOOK
Shipment and sales order trends in early 2004 were positive. Key markets
for our products, including telecommunications and computer and plastic tooling,
showed signs of improvement while other markets, including defense and optical
media, remained strong. Shipments for the new James Webb Space Telescope have
begun, and this will add to the expected revenue growth in 2004. New products
from Alloy Products, TMI and WAM offer realistic opportunities for further
growth in 2004. We also plan on increasing our international presence in 2004 in
efforts to continue to position ourselves to capture applications in the rapidly
changing and growing international markets.
We remain committed to cost control and improving operational efficiencies.
The margin improvements generated in 2003 demonstrated the leverage to be gained
through increasing yields, optimizing machinery and inventory utilization and
various cost control programs. The principles of Six Sigma will continue to be
used to help drive further improvements in margins and working capital in 2004.
Improved profitability combined with working capital management should help
to reduce debt in 2004. In addition, the refinanced debt brings stability to our
capital structure and provides the borrowing capacity to support our growth.
We made additional progress on our CBD litigation in 2003, reducing the
number of outstanding claims without a material impact on cash flows or
financial position. We are encouraged by this progress but caution that it is
difficult to predict the outcome of the remaining claims or the probability and
the potential impact of future claims. The progress made thus far is a testament
to our health and safety measures and our investment in worker protection,
education and medical research.
42
BUSINESS
OVERVIEW
We are a leading global provider of high-performance engineered materials
for a growing variety of commercial and industrial applications where superior
performance and reliability are essential. Our engineered materials are critical
components of many high-technology or high-performance products and enable those
products to be made stronger, smaller and lighter, with improved performance
characteristics. We produce and distribute high-performance beryllium products,
alloy products, electronic products, precious metal products and engineered
material systems. Our engineered materials have product applications in a
variety of end-use markets, including telecommunications and computer,
automotive electronics, optical media, industrial components, appliance,
aerospace and defense.
Beryllium is a key raw material in many of our products. Beryllium is a
naturally occurring element -- number four on the periodic table of elements,
with the symbol "Be" -- and is the lightest structural metal on Earth. It is
stiffer than steel, lighter than aluminum and possesses other unique mechanical
and thermal properties. Beryllium is extracted from bertrandite and beryl ores.
We operate the only active bertrandite ore mine in the developed world, located
on 7,500 acres in Juab County, Utah. Through our subsidiaries Brush Wellman
Inc., Brush Resources Inc. and Brush Ceramic Products Inc., we are the world's
only fully integrated provider of beryllium, beryllium-containing alloys and
beryllia ceramics.
We were organized as a holding company for our various businesses in 2000.
Our subsidiary Brush Wellman Inc. was founded in 1931 as The Brush Beryllium
Company, was publicly traded since 1956 and was listed on the NYSE in 1972. We
currently operate 16 manufacturing facilities located in the United States,
Singapore and the Philippines. We also have global service and distribution
centers in Germany, Japan, Singapore, England and the United States, and sales
offices throughout the United States, China and Taiwan.
We have two business segments: Metal Systems Group and Microelectronics
Group. Our Metal Systems Group accounted for approximately 60% of our sales
during 2003, and our Microelectronics Group accounted for approximately 39% of
our sales during 2003. The balance of our sales during 2003 were from Brush
Resources, which sells beryllium hydroxide produced through its Utah operations
to businesses within our Metal Systems Group and to outside customers.
METAL SYSTEMS GROUP
Our Metal Systems Group includes Alloy Products, Beryllium Products and
Technical Materials Inc., or TMI.
Alloy Products, our largest business, manufactures and sells copper and
nickel-based alloy systems, most of which incorporate beryllium. These beryllium
alloys exhibit high strength and hardness, good formability and excellent
resistance to corrosion, wear and fatigue, while retaining good thermal and
electrical conductivity. They often are the material of choice for critical
components in cell phones and wireless communications equipment, notebook and
network computers and web servers, PDAs, automotive electronics and industrial
products. Alloy Products also manufactures non-beryllium-containing
alloys -- including ToughMet(R), a copper-nickel-tin alloy -- which are
corrosion and wear resistant, have excellent lubricity properties and are used
in plastic mold tooling, aerospace, oil and gas and heavy equipment product
applications.
Beryllium Products manufactures pure beryllium and aluminum-beryllium
composites that are used in many high-performance applications, primarily for
the defense and aerospace industries. Beryllium's unique
properties -- stiffness, strength, lightweight, temperature resistance and
reflectivity -- are critical to a number of NASA programs.
TMI produces engineered material systems including clad metals, plated
metals and electron beam welded, solder coated and reflow materials. These
engineered material systems are produced by combining precious and non-precious
metals in continuous strip form, which provide a variety of thermal, electrical
or mechanical properties over a surface area or particular section of the
material. TMI's products are used in
43
complex electrical components in telecommunications systems, automotive
electronics, semi-conductors and computers, as well as other high-technology
applications.
MICROELECTRONICS GROUP
Our Microelectronics Group includes Williams Advanced Materials Inc., or
WAM, and Electronic Products, which consists of Brush Ceramic Products and
Zentrix Technologies Inc.
WAM manufactures precious metal and specialty alloy products specifically
fabricated to meet the exacting standards required in high reliability
applications for the microelectronics, semi-conductor, optical media, including
DVDs, electron tube, magnetic head, aerospace and performance film industries.
Brush Ceramic Products produces beryllia ceramic materials used in wireless
telecommunications, laser, medical and defense applications. Zentrix
manufactures electronic packaging and circuitry used in wireless
telecommunications, automotive, medical, aerospace and defense applications.
OUR FINANCIAL AND OPERATIONAL INITIATIVES
After generating record sales of $147.2 million during the fourth quarter
of 2000 and strong sales of $145.5 million during the first quarter of 2001, we
experienced a dramatic and sustained decline in sales. Our quarterly revenue has
ranged between approximately $89 million and $106 million since the second
quarter of 2001. This drop in sales levels was primarily due to the collapse of
the global telecommunications and computer market, which accounted for
approximately 50% of our sales in 2000 and approximately 35% of sales in 2003.
As a result, we recorded significant operating losses in 2001, 2002 and 2003.
In 2001, we implemented several financial and operational initiatives
designed to return us to consistent profitability. These initiatives are focused
on five key areas: reducing debt, reducing overhead, improving margins,
broadening our revenue base and positioning ourselves to capitalize on a general
economic recovery, including a recovery in the telecommunications and computer
market.
Through these initiatives, we have reduced total debt, off-balance sheet
financing and precious metal consignment obligations by more than $80 million
since the end of 2000. In December 2003, we completed a five-year, $147.5
million debt refinancing that lowered costs compared to an existing credit and
lease facility. We used the proceeds from the transaction to retire existing
debt and terminate an existing key off-balance sheet obligation through the
purchase of certain leased assets. The refinancing also provides increased
liquidity to support working capital requirements for future growth. We achieved
targeted overhead cost reductions through, among other things, improved
efficiencies, a 27% reduction in headcount from 2000 year-end levels, a wage
freeze and fringe benefit reductions. Despite a decline in revenue, our variable
margins, which we define as our sales less materials and direct manufacturing
costs, as a percent of sales, have improved approximately 2.3 percentage points
since 2000. In 2003, Alloy Products reduced manufacturing cycle times for our
alloy products by 18%, improved manufacturing inventory turns by 48%, raised
yields by 11% and shipped 23% more pounds per manufacturing employee. We also
broadened our revenue base through the introduction of several new products for
existing and new markets and positioned ourselves to capitalize on growth in
Asia by developing sales, marketing and distribution capabilities in a number of
markets in the region.
OUR COMPETITIVE STRENGTHS
UNIQUE STATUS AS A FULLY INTEGRATED PROVIDER OF BERYLLIUM PRODUCTS
We operate the only active bertrandite ore mine in the developed world and
are the world's only fully integrated provider of beryllium,
beryllium-containing alloys and beryllia ceramics. We mine bertrandite ore at
our 7,500-acre mine in Juab County, Utah and extract beryllium from that ore at
our processing facility in Delta, Utah. Based on average production levels in
recent years, our proven bertrandite ore reserves would last approximately 100
years. As a fully integrated provider, we offer our customers the convenience
and security of a single supply chain source for critical engineered materials.
44
HIGH BARRIERS TO ENTRY
Our vertical integration, access to beryllium resources, know-how and
expertise in refining and processing beryllium and beryllium-containing
materials, and the capital investment required in the plant, equipment and
health and safety infrastructure for our business establish high barriers to
entry for potential competitors.
PRODUCT BREADTH WITHIN EXISTING MARKETS
Each of our businesses provides a diverse selection of products. Product
breadth is an important consideration for many customers and distributors in
their selection of suppliers. Our extensive product offerings provide an
advantage in developing and maintaining relationships with OEMs and in
establishing partnerships with distributors.
GLOBAL DISTRIBUTION NETWORK
Our global distribution network allows us to actively market our products
and effectively respond to our customers' needs throughout the world. This
network includes sales, service and distribution centers in the United States
and in key European and Asian markets, as well as sales offices throughout the
United States, China and Taiwan. We augment our internal distribution
capabilities with a worldwide network of independent distributors.
STRATEGIC CUSTOMER RELATIONSHIPS
We have established long-term relationships with a variety of customers in
key growth end markets. These relationships allow us to work cooperatively with
customers in their new product development activities, which often results in
our products being included in design specifications for a customer's new
product. We believe that these relationships have resulted from our
responsiveness, our ability to meet special customer requirements based on
innovative technology, the quality of our products and the speed of our
delivery.
TECHNOLOGICAL CAPABILITIES AND PRODUCT QUALITY
We believe that our precious and base metal alloys, precious metal
products, precious metal refining, precious metal plating technologies,
customized machinery, processes and attention to quality are competitive
advantages. A portion of our products and processes are proprietary. We believe
that our products' superior characteristics and performance tolerances provide
an important competitive advantage, particularly in the sophisticated alloys
required for the most demanding end user applications.
CAPACITY TO SUPPORT PROFITABLE MARKET GROWTH
As the market's demand for engineered materials increases, we are
well-positioned to expand our manufacturing output without significant
incremental cash investment. In addition to manufacturing capacity, our focus on
Six Sigma and lean manufacturing techniques and emphasis on worker productivity
have significantly improved our manufacturing efficiency and have positioned us
to improve our profitability. Six Sigma is an analytical process that helps
companies to improve efficiency, quality and customer satisfaction while
reducing cycle time and operating costs.
SIGNIFICANT OPERATING EXPERTISE
Our senior managers have significant experience in the engineered materials
industry. We believe that our management team is successfully implementing our
financial and operational initiatives to return us to profitability. We also
believe that our management team's extensive experience positions us to identify
and capitalize on emerging growth opportunities.
45
OUR GROWTH STRATEGY
Our objective is to grow our business profitably while strengthening our
position as a leading global provider of high-performance engineered materials.
Key elements of our growth strategy are to:
CAPTURE IMPROVED DEMAND IN TELECOMMUNICATIONS AND COMPUTER MARKET
We are positioned to benefit from an increase in equipment spending and a
general improvement in the conditions of the telecommunications and computer
market. During 2003, demand for telecommunications and computer products began
to improve as commercial and industrial users began to make more significant
expenditures on information and communication systems. This increasing demand
among commercial customers was augmented by increasing consumer demand for
cellular phones, wireless communication systems and other communication
products. We are well positioned in these markets and expect to benefit from
improvements in market conditions.
CAPITALIZE ON THE TREND TOWARDS HIGHER PERFORMANCE AND MINIATURIZATION OF
ELECTRONIC COMPONENTS
We seek to capitalize on our ability to provide our customers with
engineered materials that are well suited to meet the demanding standards
associated with the trend towards higher performance and miniaturization of
electronic components. New electronic components must meet enhanced performance
requirements, which in turn require materials that can meet demanding
mechanical, electrical and thermal properties. These demands for heightened
performance are coupled with ongoing efforts to make these components stronger,
smaller and lighter. As manufacturers continue to miniaturize their products,
more high-performance engineered materials capable of meeting stringent
performance and reliability standards need to be included in those products.
EXPAND AND DIVERSIFY OUR REVENUE BASE
We seek to build on existing customer relationships and our core
manufacturing competencies to increase the breadth of our product offerings in
existing markets and diversify into additional markets. We intend to reduce our
susceptibility to economic cycles and increase our prospects for profitable
growth by continuing to expand the markets and customers we serve and products
we offer.
Today, the telecommunications and computer market comprises approximately
35% of worldwide sales versus nearly 50% in 2001. We are not content to "wait it
out" until there is a robust recovery in the telecommunications and computer
market. Although we remain well-positioned in existing markets, efforts are
continuing to broaden the product base and diversify into other potential
long-term growth markets.
Some examples of our new products and their applications and markets
include:
46
The following charts indicate our percentage of sales by market for years
2000 and 2003:
2000
2003
INCREASE OUR GLOBAL PRESENCE
We support our customers in their geographic markets throughout the world.
As the trend towards high-performance materials and miniaturization continues,
we believe that new market opportunities and new potential customers will
emerge. We intend to continue to expand our sales, marketing and service
capabilities into international markets in response to our existing customers'
needs and new business opportunities. Our presence in the local markets of our
customers allows us to quickly respond to their needs and requests, which we
believe provides us with a key competitive advantage. For example, Alloy
Products is focused on expanding its foothold in the high growth China and other
Asian markets where consumer, personal computer and wireless applications are
key drivers to future development. Alloy Products' focus in this region
complements the solid foundations it has already established in Europe.
INCREASE OPERATIONAL EFFICIENCY
We intend to build upon the success of our existing cost reduction and
manufacturing efficiency initiatives to improve margins and position ourselves
for profitable growth in both strong and weak economic environments. Despite the
fall in revenue, variable margins, defined as sales less materials and direct
manufacturing costs, have improved approximately 2.3% since 2000.
In 2003, for example, Alloy Products reduced manufacturing cycle times by
18%, improved manufacturing inventory turns by 48%, raised yields by 11% and
shipped 23% more pounds per manufacturing employee. At TMI, margins improved and
earnings increased despite lower sales. At WAM, after considering metal prices,
operating margin increased approximately 10%. In 2003, margins also improved in
all of our other units.
We have programs in place, including Six Sigma and lean manufacturing
techniques, to address and improve costs, manufacturing processes and inventory
utilization on an ongoing basis.
As the following chart indicates, our efforts to improve margins have
succeeded, despite the fall in our revenue:
47
PURSUE SELECTIVE ACQUISITIONS IN OUR SELECTIVE MARKETS
We intend to selectively pursue acquisitions that can extend our geographic
reach, expand and diversify our customer base or increase the breadth of our
product and services offerings.
SEGMENT REPORTING
Our operations are organized under two reportable segments, the Metal
Systems Group and the Microelectronics Group, as follows:
(FLOWCHART)
The Metal Systems Group includes Brush Wellman Inc. (Alloy Products and
Beryllium Products) and TMI. The Microelectronics Group includes WAM and
Electronic Products, which in turn, consists of Zentrix, and Brush Ceramic
Products Inc., a wholly owned subsidiary of Brush Wellman Inc. Portions of Brush
International, Inc. are included in both segments. Included in "All Other" in
our consolidated financial statements included elsewhere in this prospectus are
the operating results from BEM Services, Inc. and Brush Resources Inc., two of
our wholly owned subsidiaries. BEM Services charges a management fee for
services, such as administrative and financial oversight, to the other
businesses within our company on a cost-plus basis. Brush Resources sells
beryllium hydroxide produced through its Utah operations to outside customers
and to businesses within the Metal Systems Group.
METAL SYSTEMS GROUP
The Metal Systems Group is comprised of Alloy Products, Beryllium Products
and TMI. In 2003, 60% of our sales were from this segment (61% in 2002 and 63%
in 2001). As of December 31, 2003 the Metal Systems Group had 1,125 employees.
Alloy Products
Alloy Products, the largest unit within our company and this segment,
manufactures and sells copper and nickel-based alloy systems, the majority of
which also contain beryllium. These products are metallurgically tailored to meet specific customer performance requirements. Copper-beryllium alloysThese products exhibit high electrical and thermal conductivities, high strength and hardness, good formability, lubricity, and excellent resistance to corrosion, wear and fatigue. These alloys, sold in strip and bulk form, are ideal choices for demanding applications in the following markets:
- telecommunications and computer;
- automotive electronics;
- aerospace;
- oil and gas;
- undersea housings for electronics equipment;
- foundry;
- appliances; and
- plastic mold tooling.
48
Copper-beryllium strip is an ideal electronic connector material for
telecommunications and computer, and automotive electronic product applications.
As electronicaerospace, industrial components require miniaturization, thinner connector design,
lighter material and faster processing, copper-beryllium can provide the
appropriate level of physical properties for applications such as
electromagnetic imaging shieldings, burn-in test sockets, modular jacks,
processor sockets and battery and subscriber identity module, or SIM, card
contacts. Alloy Products recently introduced Alloy 390(TM) specifically designed
for high-power applications, providing a unique combination of high strength and
high thermal and electrical conductivity.
Alloy Products also manufactures non-beryllium-containing alloys including
ToughMet(R), a copper-nickel-tin alloy. Bearings made with ToughMet(R) last
longer and require less frequent maintenance and lubrication while significantly
reducing unplanned downtime. These alloys are corrosion and wear resistant and
have excellent lubricity properties and are used in plastic mold tooling, heavy
equipment, aerospace and(including oil and gas, product applications.
Alloy products are sold domesticallyheavy equipment and plastic mold tooling), appliance and medical markets. SEA, through BRI, manages our distribution centersmine and internationally throughmilling operations. The milling operations produce beryllium hydroxide from mined bertrandite ore and purchased beryl ore. The beryllium hydroxide is used primarily as a raw material input by certain businesses within our independent distribution centerscompany.
Beryllium and independent
sales representatives. NGK Insulators, Ltd. of Nagoya, Japan, with subsidiaries
in the United StatesBeryllium Composites
Beryllium and Europe, competes with beryllium alloy strip products
and beryllium products. Alloy Products also competes with alloy systems
manufactured by Olin Corporation, Wieland Electric, Inc. and Stolberger
Metallwerke GmbH, Nippon Mining, PMX and other generally less expensive
materials, including phosphor bronze, stainless steel and other specialty copper
and nickel alloys that are produced by a variety of companies around the world.
In the area of beryllium alloy bulk products (bar, plate, tube and rod), in
addition to NGK Insulators, we compete with several smaller regional producers
such as Freedom Alloys in the United States, LaBronze Industriel in Europe and
Young II in Asia.
The following charts highlight the markets and applications for Alloy
Products:
ALLOY STRIP PRODUCTS
ALLOY BULK PRODUCTS
49
Beryllium Products
Beryllium ProductsComposites manufactures products that include beryllium AlBeMet(R)
and E-materials.AlBeMet®. Beryllium is a lightweight metal possessing unique mechanical and thermal properties. Its specific stiffness is much greater than other engineered structural materials such as aluminum, titanium and steel. Beryllium is extracted from both bertrandite and beryl ores.
In September 2003, beryllium was chosen by Northrop Grumman Space
Technology as the material for the 18 segment, 6.5-meter primary mirror of
NASA's James Webb Space Telescope. This state-of-the-art lightweight beryllium
mirror will allow scientists to see ten to eleven billion light years away. We
expect this application to add approximately $15 million in sales of optical
grade beryllium over the next two to three years.
Beryllium-containing products are sold throughout the world through a
direct sales organization and through our independent distribution centers.
While Beryllium Products is the only domestic producer of metallic beryllium, it
competes primarily with engineering designs utilizing other materials. Our
Beryllium Products include:
- Beryllium metal -- One of the lightest, low density metals, beryllium
metal is a vacuum cast and hot/cold isostatically pressed powder-derived
metal. Beryllium metal exhibits high stiffness, thermal conductivity and
low thermal expansion. Beryllium metal is transparent and is a neutron
reflector.
- AlBeMet(R) -- These lightweight aluminum/beryllium composites are
powder-derived metals and are either extruded, rolled sheet or
isostatically pressed. AlBeMet(R) exhibits many of the same properties as
beryllium metal but is easier to fabricate.
- E-Materials -- These low expansion, lightweight electronic packaging
materials are composites of beryllium metals and beryllium oxide.
- Beryllium oxide and chemicals -- Beryllium oxide and chemicals are
specialty beryllium-containing chemicals and ceramic-grade beryllium
oxide powder.
The following chart highlights the markets and applications for our
Beryllium Products:
BERYLLIUM PRODUCTS
50
TMI
TMI manufacturers engineered material systems that are combinations of
precious and non-precious metals in continuous strip form and are used in
complex electronic and electrical components in telecommunications systems,
automotive electronics, semi-conductors and computers. TMI's products are sold
directly and through its sales representatives. TMI has limited competition in
the United States and several European manufacturers are competitors for the
sale of inlaid strip. Strip with selective electroplating is a competitive
alternative as are other design approaches. Additional competition for TMI
exists in the plating area in North America and worldwide. The following chart
indicates some of the applications of TMI products:
TMI PRODUCT APPLICATIONS
Sales and Backlog
The backlog of unshipped orders for the Metal Systems Group as of December
31, 2003, 2002 and 2001 was $47.7 million, $35.1 million and $61.0 million,
respectively. Backlog is generally represented by purchase orders that may be
terminated under certain conditions. We expect that substantially all of our
backlog of orders for this segment at December 31, 2003 will be filled during
2004.
Sales are made to approximately 1,700 customers. Government sales,
principally subcontracts, accounted for about 7.9% of Metal Systems Group net
sales in 2003 as compared to 9.3% in 2002 and 3.3% in 2001. Sales outside the
United States, principally to Western Europe, Canada and the Pacific Rim,
accounted for approximately 42% of the Metal Systems Group sales in 2003, 35% in
2002 and 38% in 2001. Other segment reporting and geographic information is set
forth in Note M to the consolidated financial statements included elsewhere in
this prospectus.
Research and Development
Active research and development programs seek new product compositions and
designs as well as process innovations for the Metal Systems Group. Expenditures
for research and development amounted to $2.8 million in 2003, $2.5 million in
2002 and $4.7 million in 2001. A staff of 21 scientists, engineers and
technicians was employed in this effort as of year end 2003. Some research and
development projects, expenditures for which are not material, were externally
sponsored.
MICROELECTRONICS GROUP
The Microelectronics Group is comprised of WAM and Electronic Products,
which consists of Zentrix and Brush Ceramic Products. In 2003, 39% of our sales
were from this segment, compared to 37% in 2002 and 36% in 2001. As of December
31, 2003, the Microelectronics Group had 552 employees.
WAM
WAM manufactures and fabricates precious metal and specialty alloy metal
products for the optical media, magnetic head, including magnetic resistive, or
MR, and giant magnetic resistive, or GMR, materials, electron tube, performance
film and the wireless, semi-conductor, photonic and hybrid segments of the
microelectronics market. WAM's major product lines include vapor deposition
plating materials, clad and precious metals preforms, high temperature braze
materials, ultra fine wire, sealing lids for the semi-
51
conductor/hybrid markets and restorative dental alloys. The following chart
indicates the businesses, markets and end uses for WAM products:
WILLIAMS ADVANCED MATERIALS
WAM's products are sold directly from WAM's facilities in Buffalo, Brewster
and Wheatfield, New York, Singapore, Taiwan and the Philippines, as well as
through direct sales offices and independent sales representatives throughout
the world. Principal competition includes companies such as Sumitomo Metals,
Praxair, Inc., Honeywell International Inc. and a number of smaller regional and
national suppliers.
Electronic Products
Electronic Products has two business groups: Zentrix and Brush Ceramic
Products. Zentrix processes electronic packages at our production site in
Newburyport, Massachusetts. Its products are used in wireless,a variety of high performance applications in the defense, aerospace, industrial, scientific equipment, electronics (including acoustics), medical and optical scanning markets. Beryllium and Beryllium Composites also manufactures beryllia ceramics for electronic packaging and electro-optical applications including lasers. Electronic components utilizing beryllia are used in the telecommunications, fiberoptic, automotivemedical, industrial and defense applications. Zentrix
competes with other electronic packaging suppliers, including Kyocera
Corporation.
Circuits Processing Technology Inc., or CPT, a subsidiary of Zentrix,
manufacturers electronic circuitrymarkets.
Engineered Material Systems
3
Engineered Material Systems manufactures clad inlay and circuit components at its production site
in Oceanside, California. Itsoverlay metals, precious and base metal electroplated systems, electron beam welded systems, contour profiled systems and solder-coated metals systems. These products are used in telecommunications and computer systems, data storage, automotive electronics, semi-conductors, energy, defense and wireless
telecommunicationsmedical applications. CPT competes
Corporate Information
Brush Engineered Materials Inc. is an Ohio corporation. Our principal executive offices are located at 6070 Parkland Boulevard, Mayfield Heights, Ohio 44124. Our telephone number is (216) 486-4200. Our website is www.beminc.com. The information contained on or accessible through our website is not part of this prospectus, other than the documents that we file with other circuitry suppliers,
including Anaren Microwavethe SEC that are incorporated by reference into this prospectus.
RISK FACTORS
Investing in our securities involves risk. Prior to making a decision about investing in our securities, you should carefully consider the specific factors discussed under the heading “Risk Factors” in our most recent Annual Report on Form 10-K and Aeroflex, Inc.
Brush Ceramic Products, located in Tucson, Arizona, produces beryllia
ceramics used in wireless telecommunications, laser, automotiveour most recent Quarterly Reports on Form 10-Q, which are incorporated herein by reference and defense
product applications. Principal competitors include CBL Ceramics Ltd. and
American Beryllia, Inc. Competitive materials include aluminum nitride and metal
matrix composites.
52
The following chart indicates the businesses and applications for
Electronic Products:
ELECTRONIC PRODUCTS GROUP
Sales and Backlog
The backlog of unshipped orders for the Microelectronics Group as of
December 31, 2003, 2002 and 2001 was $13.7 million, $19.8 million and $20.5
million, respectively. Backlog is generally represented by purchase orders that may be terminated under certain conditions. We expectamended, supplemented or superseded from time to time by other reports we file with the SEC in the future. The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that substantially allwe currently deem immaterial may also affect our operations. If any of these risks actually occurs, our business, results of operations and financial condition could suffer. In that case, the trading price of our backlogsecurities could decline, and you could lose all or part of orders for this segment at December 31, 2003 will be filled
during 2004.
Sales are made to approximately 1,700 customers. Government sales,
principally subcontracts, accounted for less than 1% of Microelectronics Group
net sales in 2003 as compared to less than 1% in 2002your investment.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes, and 2.8% in 2001. Sales
outsideany prospectus supplement may include, forward-looking statements. Our actual future performance may materially differ from that contemplated by the United States, principally to Western Europe, Canada and the Pacific
Rim, accounted for approximately 15% of Microelectronics Group net sales in
2003, 18% in 2002 and 13% in 2001. Other segment reporting and geographic
information is set forth in Note M to the consolidated financialforward-looking statements
included elsewhere in this prospectus.
Research and Development
Active research and development programs seek new product compositions and
designs as well as process innovations for the Microelectronics Group.
Expenditures for Microelectronics Group research and development amounted to
$1.4 million for 2003, $1.7 million for 2002 and $1.6 million in 2001. A staff
of 6 scientists, engineers and technicians was employed in this effort as of
year end 2003.
RAW MATERIALS
Our principal raw materials are beryllium (extracted from both imported
beryl ore and bertrandite mined from our Utah properties), copper, gold, silver,
nickel, platinum, palladium and aluminum. See ore reserve data in "Management's
Discussion and Analysis" included elsewhere in this prospectus. We have
agreements to purchase stated quantities of beryl ore, beryllium metal and
beryllium-copper master alloy from the Defense Logistics Agency of the United
States government. In addition, we have a long-term supply arrangement with
Ulba/Kazatomprom of the Republic of Kazakhstan and its marketing representative,
Nukem, Inc. of New York, to purchase quantities of beryllium-copper master and
beryllium vacuum cast billet. The availability of these raw materials, as well
as other materials used by us, is adequate and generally not dependent on any
one supplier.
53
PATENTS AND LICENSES
We own patents, patent applications and licenses relating to certain of our
products and processes. While our rights under the patents and licenses are of
some importance to our operations, our business is not materially dependent on
any one patent or license or on all of our patents and licenses as a group.
REGULATORY MATTERS
We are subject toresult of a variety of laws which regulate the manufacture,
processing, use, handling, storage, transport, treatment, emission, release and
disposal of substances and wastes used or generated in manufacturing. For
decades,factors. These factors include, without limitation:
| • | the global and domestic economies, including the uncertainties related to the impact of the current global economic crisis; | ||
| • | the condition of the markets in which we serve, whether defined geographically or by segment, with the major market segments being telecommunications and computer, data storage, aerospace and defense, automotive electronics, industrial components, appliance and medical; | ||
| • | changes in product mix and the financial condition of customers; | ||
| • | our success in developing and introducing new products and new product ramp-up rates, especially for media applications in the data storage market; | ||
| • | our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values; | ||
| • | our success in integrating newly acquired businesses; | ||
| • | our success in implementing our strategic plans and the timely and successful completion of any capital projects; | ||
| • | the availability of adequate lines of credit and the associated interest rates and/or fees; | ||
| • | other financial factors, including cost and availability of raw materials (both base and precious metals), tax rates, exchange rates, metal financing fees, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, and the impact |
4
| of our stock price on the cost of incentive plans; | |||
| • | the uncertainties related to the impact of war and terrorist activities; | ||
| • | changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations; | ||
| • | the conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects; and | ||
| • | the risk factors referred to elsewhere in this prospectus. |
5
USE OF PROCEEDS
Unless we have operated our facilities under applicable standards of inplant
and outplant concentrations of berylliuminform you otherwise in the air. The inhalation of airborne
beryllium particulate may present a health hazardapplicable prospectus supplement, we expect to certain individuals. The
Occupational Safety and Health Administration is currently reviewing its
beryllium standards.
PROPERTIES
We have 16 manufacturing facilities, which are located in Arizona,
California, Massachusetts, New York, Ohio, Pennsylvania, Rhode Island, Utah,use the Philippines and Singapore. We also have global service and distribution centers
in England, Germany, Japan, Singapore andnet proceeds from the United States, and sales offices
throughout the United States, China and Taiwan. Our material properties, all of
which are owned in fee except as otherwise indicated, are as follows:
MANUFACTURING FACILITIES
- Brewster, New York -- A 35,000-square-foot leased facility on a 6.0-acre
site for manufacturing services relating to non-precious metals.
- Buffalo, New York -- A complex of approximately 97,000 square feet on a
3.8-acre site providing facilities for manufacturing, refining and
laboratory services relating to high purity precious metals.
- Delta, Utah -- An ore extraction plant consisting of 86,000 square feet
of buildings and large outdoor facilities situated on a 4,400-acre site.
This plant extracts beryllium from bertrandite ore from our mines as well
as from imported beryl ore.
- Elmore, Ohio -- A complex containing approximately 856,000 square feet of
building space on a 439-acre plant site. This facility employs diverse
chemical, metallurgical and metalworking processes in the production of
beryllium, beryllium oxide, beryllium alloys and related products.
- Fremont, California -- A 16,800-square-foot leased facility for the
fabrication of precision electron beam welded, brazed and diffusion
bonded beryllium structures.
- Juab County, Utah -- 7,500 acres with respective mineral rights from
which the beryllium-bearing ore, bertrandite, is mined by the open pit
method. A portion of the mineral rights is held under lease.
- Lincoln, Rhode Island -- A manufacturing facility consisting of 140,000
square feet located on 7.5 acres. This facility produces reel-to-reel
strip metal products which combine precious and non-precious metals in
continuous strip form and related metal systems products.
- Lorain, Ohio -- A manufacturing facility consisting of 55,000 square feet
located on 15 acres. This facility produces non-beryllium metal alloys in
electronic induction furnaces which are continually cast into bar stock
and heat treated.
- Newburyport, Massachusetts -- A 30,000-square-foot manufacturing facility
on a four-acre site that produces alumina, beryllia ceramic and direct
bond copper products.
- Oceanside, California -- Two leased facilities totaling 20,200 square
feet on 1.25 acres of leased land. Over three-quarters of these
facilities are comprised of clean rooms for the production of thick-film
circuits and other complex circuits.
- Santa Clara, California -- A 5,800-square-foot leased facility that
provides bonding services relating to physical vapor deposition
materials.
54
- Shoemakersville, Pennsylvania -- A 123,000-square-foot plant on a 55-acre
site that produces thin precision strips of copper beryllium and other
alloys and copper beryllium rod and wire.
- Singapore -- A 4,500-square-foot leased facility for the assembly and sale of precious metal hermetic sealing lids.
- Subic Bay, Philippines -- A 5,000-square-foot leased facility that
manufactures Combo-Lid(R) and performs preform assembly, inspection and
packaging.
- Taipei, Taiwan -- A 5,000-square-foot leased service/bonding center
supportingsecurities for general corporate purposes. These purposes may include, but are not limited to:
| • | reduction or refinancing of outstanding indebtedness or other corporate obligations; | ||
| • | additions to working capital; | ||
| • | capital expenditures; and | ||
| • | acquisitions. |
Pending any specific application, we may initially invest funds in short-term marketable securities or apply them to the physical vapor deposition product market in Asia.
- Tucson, Arizona -- A complex containing approximately 63,000 square feetreduction of building space on a ten-acre site for the production of beryllium
oxide ceramic substrates.
- Wheatfield, New York -- A 29,000-square-foot facility on a 10.2-acre site
for manufacturing services relating to braze material and specialty
alloys.
RESEARCH FACILITIES AND ADMINISTRATIVE OFFICES
- Cleveland, Ohio -- A 110,000-square-foot building on an 18-acre site
housing corporate and administrative offices, data processing and
research and development facilities.
SERVICE AND DISTRIBUTION CENTERS
- Elmhurst, Illinois -- A 28,500-square-foot leased facility principally
for distribution of copper beryllium alloys.
- Fairfield, New Jersey -- A 24,500-square-foot leased facility principally
for distribution of copper beryllium alloys.
- Fukaya, Japan -- A 35,500-square-foot facility on 1.8 acres of land in
Saitama Prefecture principally for distribution of copper beryllium
alloys.
- Singapore -- A 2,500-square-foot leased sales office that houses
employees of Alloy Products and WAM Far East.
- Stuttgart, Germany -- A 24,750-square-foot leased facility principally
for distribution of copper beryllium alloys.
- Theale, England -- A 19,700-square-foot leased facility principally for
distribution of copper beryllium alloys.
- Warren, Michigan -- A 34,500-square-foot leased facility principally for
distribution of copper beryllium alloys.
55
MANAGEMENTshort-term indebtedness.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of consolidated earnings to fixed charges for the names and agesperiods presented:
| Six months | ||||||||||||||||||||
| ended | ||||||||||||||||||||
| Year ended December 31, | July 3, | |||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||
| 1.80x | 1.81x | 8.07x | 27.12x | 8.49x | — | |||||||||||||||
Fixed charges are equal to interest expense (including amortization of our directors and
executive officers, as well asdeferred financing costs), plus the positions and offices heldportion of rent expense estimated to represent interest.
Total earnings were insufficient to cover the fixed charges for the six months ended July 3, 2009 by those persons.
Set forth below$14.3 million primarily due to operating losses. Accordingly, such ratio is biographical informationnot presented for our directors and executive
officers.
GORDON D. HARNETT. Mr. Harnett was elected our Chairmansuch period.
6
DESCRIPTION OF CAPITAL STOCK
The following description is a general summary of the Board,
Chief Executive Officer and Director effective January 1991. In addition, Mr.
Harnett has served as our President from January 1991 to May 2001 and from May
2002 to the present. He is a directorterms of Lubrizol Corporation, EnPro Industries,
Inc. and PolyOne Corporation.
JOHN D. GRAMPA. Mr. Grampa was elected our Vice President Finance and
Chief Financial Officer in November 1999. He had served as our Vice President
Finance since October 1998. Prior to that, he had served as Vice President,
Finance for the Worldwide Materials Business of Avery Dennison Corporation since
March 1994 and held other various financial positions at Avery Dennison
Corporation from 1984.
DANIEL A. SKOCH. Mr. Skoch was elected our Senior Vice President
Administration in July 2000. Prior to that time, he had served as our Vice
President Administration and Human Resources since March 1996.
ALBERT C. BERSTICKER. Mr. Bersticker has been a Director since 1993. He
was elected Chairman of Ferro Corporation, a producer of a diverse array of
performance materials, in February 1996 and retired in 1999. He served as Chief
Executive Officer of Ferro Corporation, a producer of performance materials,
from 1991 until January 1999 and as its President from 1988 until February 1996.
Mr. Bersticker is the non-executive Chairman of the Board of Oglebay Norton
Company. Oglebay Norton Company filed for chapter 11 bankruptcy protection in
February 2004. He is currently Secretary, Treasurer and a member of the Board of
Directors of St. John's Medical Center in Jackson, Wyoming.
DAVID H. HOAG. Mr. Hoag has been a Director since 1999. He retired as
Chairman of the Board of The LTV Corporation in January 1999. He had served as
its Chairman since June 1991, as Chief Executive Officer from February 1991
until September 1998 and as President from January 1991 until July 1997. The LTV
Corporation filed for chapter 11 bankruptcy protection in December 2000. Mr.
Hoag is a director of Lubrizol Corporation, NACCO Industries, Inc., PolyOne
Corporation and The Chubb Corporation. He is also a member of the Boards of
Trustees of Allegheny College and University Hospitals of Cleveland.
JOSEPH P. KEITHLEY. Mr. Keithley has been a Director since 1997. He has
been Chairman of the Board of Keithley Instruments, Inc., a designer, developer,
manufacturer and marketer of complex electronic instruments and systems, since
1991. He has served as Chief Executive Officer of Keithley Instruments, Inc.
since November 1993 and as its President since May 1994. He is a director of
Keithley Instruments, Inc. and Nordson Corporation, a designer, manufacturer and
marketer of precision dispensing systems.
56
WILLIAM B. LAWRENCE. Mr. Lawrence has been a Director since 2003. He
served as Executive Vice President, General Counsel & Secretary of TRW Inc., an
automotive, defense, aerospace and information technology company, from 1997
until the sale of TRW to Northrop Grumman Corporation in December 2002. Prior to
1997, he also held various other positions at TRW since 1976. Mr. Lawrence has
been a director of Ferro Corporation since 1999.
WILLIAM P. MADAR. Mr. Madar has been a Director since 1988. He retired as
Chairman of the Board of Nordson Corporation effective March 2004, a position he
held since December 1997. Prior to that time, he served as Vice Chairman of
Nordson Corporation from August 1996 until October 1997 and as Chief Executive
Officer from February 1986 until October 1997. From February 1986 until August
1996, he also served as its President. He is a director of Lubrizol Corporation
and Nordson Corporation.
WILLIAM G. PRYOR. Mr. Pryor has been a Director since 2003. He retired as
President of Van Dorn Demag Corporation, a manufacturer of plastic injection
molding equipment, in 2002. He had also served as President and Chief Executive
Officer of Van Dorn Corporation, predecessor to Van Dorn Demag Corporation. Mr.
Pryor is a director of Oglebay Norton Company and Oxis International, Inc., a
biopharmaceutical/nutraceutical/diagnostic company.
DR. N. MOHAN REDDY. Dr. Reddy has been a Director since 2000. He has been
a professor at the Weatherhead School of Management, Case Western Reserve
University for the past five years. Dr. Reddy is a director of Keithley
Instruments, Inc.
WILLIAM R. ROBERTSON. Mr. Robertson has been a Director since 1997. He has
been a Managing Partner of Kirtland Capital Partners, a private venture capital
fund business, since September 1997. Prior to that time, he was president and a
director of National City Corporation from October 1995 until July 1997. He also
served as Deputy Chairman and a director of National City Corporation from
August 1988 until October 1995. Mr. Robertson is a member of the Board of
Managers of the Prentiss Foundation and a member of and a vice president of the
Board of Trustees of the Cleveland Museum of Art. He is a director of Gries
Financial LLC, Fairport Asset Management LLC, and Instron Corporation, a
designer, manufacturer, marketer and servicer of materials and structural
testing systems, software and accessories.
JOHN SHERWIN, JR. Mr. Sherwin has been a Director since 1981. He has been
President of Mid-Continent Ventures, Inc., a private venture capital fund
business, during the past five years. Mr. Sherwin is a director of John Carroll
University and Shorebank Cleveland, a trustee of The Cleveland Clinic Foundation
and Chairman of The Cleveland Foundation.
57
SELLING SHAREHOLDERS
In connection with the debt refinancing we completed on December 4, 2003,
we issued warrants to purchase 115,000 common shares to our subordinated lenders
as part of the consideration for a $35.0 million subordinated loan. One of these
warrants to purchase 16,429 of our common shares was issued to Bank One, NA,
which subsequently transferred the warrant to one of its affiliates, First
Chicago Capital Corporation. In addition, one of the warrants to purchase 20,000
of our common shares was issued to H/Z Acquisition Partners LLC, which
subsequently transferred the warrant to one of its affiliates, Cochran Road,
LLC. The common shares registered for sale by the selling shareholders in the
registration statement of which this prospectus is a part are the common shares and preferred shares that we may issue. The description below and in any prospectus supplement does not include all of the selling shareholdersterms of the common shares and preferred shares and should be read together with our Amended and Restated Articles of Incorporation and Amended and Restated Code of Regulations, copies of which have acquired or may acquire upon exercise of those
warrants. The table below sets forthbeen filed previously with the SEC. For more information regarding ownershipon how you can obtain copies of our common shares by the selling shareholdersAmended and the numberRestated Articles of shares that may be
sold by them under this prospectus.
NoneIncorporation and Amended and Restated Code of the selling shareholders has had any position or office or material
relationship with us during the past three years, other than as a security
holder, except that certain affiliates of the selling shareholders are lenders
under the above-mentioned subordinated loan and/or our $105.0 million senior
secured credit facility. The $35.0 million subordinated loan and the $105.0
million senior secured credit facility are described in the notes to our
consolidated financial statements included elsewhere in this prospectus.
- ---------------
* Less than 1% of outstanding common shares.
(1) Includes 16,429 common shares issuable upon exercise of the warrants.
(2) Includes 20,000 common shares issuable upon exercise of the warrants.
(3) Includes 78,571 common shares issuable upon exercise of the warrants.
58
DESCRIPTION OF CAPITAL STOCK AND WARRANTS
Upon completion of this offering, there will be 18,559,184 common shares
issued and outstanding, based on the number of shares outstanding as of March
31, 2004, and no shares of preferred stock issued and outstanding.
As of March 31, 2004, ourRegulations, see “Where You Can Find More Information.”
Our authorized capital stock consistedconsists of 60,000,000
common shares, no par value, of which 16,744,184 shares were issued and
outstanding, and 5,000,00065,000,000 shares of preferred stock, no par value, of which no
shares were issued and outstanding.
COMMON SHARESincluding:
| • | 60,000,000 common shares, no par value; and | ||
| • | 5,000,000 preferred shares, no par value. |
Common Shares
Each outstanding common share is entitled to one vote on all matters submitted to a vote of shareholders. Pursuant to Ohio law, holders of our common shares have the right to cumulative voting. Our articles of incorporation provide for our board to be divided into three classes of directors, as nearly equal in number as possible, serving staggered terms. Approximately one-third of our board will be elected by the shareholders each year.
Subject to any superior rights of any holders of preferred stock,shares, each outstanding common share will be entitled to such dividends as may be declared from time to time by our board of directors out of legally available funds. We have no current intention to declare dividends on our common shares in the near term. Our current policy is to retain all funds and earnings for use in the operation and expansion of our business, and our ability tobusiness. Additionally, the amount of dividends that we may pay dividends is restricted by the terms of our credit facilities. In the event of our liquidation, dissolution or winding up, holders of our common shares will be entitled to their proportionate share of any assets remaining after payment of liabilities and any amounts due to the holders of preferred stock.shares. Holders of our common shares have no preemptive rights and no right to convert or exchange their common shares into any other securities. No redemption or sinking fund provisions apply to our common shares. All outstanding common shares are, and
all common shares to be outstanding upon completion of this offering will be,
fully paid and non-assessable.
Shareholder Rights Plan
Under the terms of our shareholder rights plan,agreement, one preferred share purchase right is associated with each of our outstanding common shares. Until the occurrence of specified events described in the shareholder rights plan,agreement, the preferred share purchase rights are not exercisable, are evidenced by the certificates for our common shares and may be transferred only with our common shares. The preferred share purchase rights will expire on May 16, 2010.
PREFERRED STOCK
Each preferred share purchase right entitles the registered holder to purchase from us one one-hundredth of a share of Series A Junior Participating Preferred Stock, without par value, at a price of $110.00 per one one-hundredth of a preferred share, subject to adjustment. The rights agreement also provides, subject to specified exceptions and limitations, that common shares issued or delivered from our treasury after the record date will be entitled to and accompanied by preferred share purchase rights. The preferred share purchase rights are in all respects subject to and governed by the provisions of the rights agreement.
Preferred Shares
Our board of directors is authorized, without shareholder approval, to issue up to 5,000,000 shares of preferred stockshares in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon the preferred stock,shares, including voting rights, dividend rights, conversion rights, terms of redemption, liquidation preference, sinking fund terms and the number of shares constituting any series or the designation of a series. Our board of directors can, without shareholder approval, issue preferred stockshares with voting and conversion rights that could adversely affect the voting power of the holders of common shares. Any preferred stockshares issued would also rank senior to our common shares as to rights up on liquidation, winding-up or dissolution. The issuance of
7
convertible preferred stockshares could have the effect of delaying, deferring or preventing a change in control of our company. We have no present plan to issue any shares of preferred stock.
WARRANTS
In connection with the debt refinancing completed on December 4, 2003, we
issued warrants to purchase 115,000 common shares to our subordinated lenders as
part of the consideration for a $35 million subordinated loan. One of these
warrants to purchase 16,429 of our common shares was issued to Bank One, NA,
which subsequently transferred the warrant to one of its affiliates, First
Chicago Capital Corporation. In addition, one of the warrants to purchase 20,000
of our common shares was issued to H/Z Acquisition Partners LLC, which
subsequently transferred the warrant to one of its affiliates, Cochran Road,
LLC. The initial exercise price of the
59
warrants is $0.01 per share. The warrants are subject to anti-dilution and other
adjustments. The warrants are immediately exercisable and expire at 5:00 p.m.,
New York time, on December 5, 2008. All of the warrants have been or will be
exercised in connection with this offering.
REGISTRATION RIGHTS
The selling shareholders have demand registration rights with respect to
common shares that may be issued upon exercise of the warrants pursuant to the
terms of their warrants. Pursuant to those rights, we are required, upon
request, to file a registration statement relating to the common shares as
expeditiously as possible after the filing of our annual report on Form 10-K for
the fiscal year ending December 31, 2003. We are also required to use our
commercially reasonable efforts to cause such registration statement to become
and remain effective for a period of time not to exceed 120 days. We have also
granted the selling shareholders "piggyback" registration rights pursuant to the
warrants, which entitle the selling shareholders to notice and to include, at
our expense, their common shares in some registrations of our common shares. The
selling shareholders have exercised their rights to include in this offering the
common shares they have received or will receive upon exercise of the warrants
described above.
OHIO CONTROL SHARE STATUTE
Control Share Acquisitions
Section 1701.831 of the Ohio Revised Code requiresprovides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed “control share acquisition.” The Ohio Revised Code defines a “control share acquisition” as any acquisition of an issuer’s shares which would entitle the prior authorization
of the shareholders of certain corporations in order for any person to acquire,
eitheracquirer, immediately after that acquisition, directly or indirectly, shares of that corporation that would entitle the
acquiring person to exercise or direct the exercise of 20% or more of the voting power of that corporationthe issuer in the election of directors or to exceed specified
other percentageswithin any one of the following ranges of that voting power. Inpower:
| • | one-fifth or more but less than one-third of that voting power; | ||
| • | one-third or more but less than a majority of that voting power; or | ||
| • | a majority or more of that voting power. |
Assuming compliance with the event an acquiring person proposes to
make such an acquisition, the person is required to deliver to the corporation a
statement disclosing, among other things, the number of shares owned, directly
or indirectly,notice and information filings prescribed by the person, the range of voting power that may result fromstatute, the proposed control share acquisition and the identity of the acquiring person. Within 10 days
after receipt of this statement, the corporation must callmay be made only if, at a special meeting of shareholders, to vote on the proposed acquisition. The acquiring person may
complete the proposed acquisition only if the acquisition is approved by the
affirmative vote ofat least a majority of the voting power of the corporation in the
election of directorsissuer represented at the meeting and at least a majority of the portion
ofvoting power remaining after excluding the combined voting power of all shares entitle to vote in the election of directors
represented at“interested shares.” “Interested shares” are the meeting excluding the voting power of all "interested shares"
represented at the meeting. Interested shares include any shares held by the acquiring personintended acquirer and those held bythe employee-directors and officers and directors of the corporationissuer, as well as by certain others, including many holders commonly characterized as
arbitrageurs. Section 1701.831 does not applyshares that were acquired after the date of the first public disclosure of the acquisition but before the record date for the meeting of shareholders and shares that were transferred, together with the voting power thereof, after the record date for the meeting of shareholders.
Business Combinations with Certain Persons
We are subject to a corporation if its articles
of incorporation or code of regulations state that the statute does not apply to
that corporation. Neither our articles of incorporation nor our regulations
contain a provision opting out of this statute.
OHIO INTERESTED SHAREHOLDER STATUTE Chapter 1704 of the Ohio Revised Code, which prohibits certain corporations from
engaging in a "chapter 1704 transaction" withbusiness combinations and transactions between an "interested shareholder"“issuing public corporation” and an “Ohio law interested shareholder” for a
period ofat least three years after the date of the transaction in which the person
became anOhio law interested shareholder attains 10% ownership, unless among other things:
- the articles of incorporation expressly provide that the corporation is
not subject to the statute (we have not made this election); or
- the board of directors of the issuing public corporation approves the chapter 1704
transaction or the acquisition of the shares before the date the shares
were acquired.
After the three-year moratorium period, the corporation may not consummate
a chapter 1704 transaction unless, among other things, it is approved by the
affirmative vote of the holders of at least two-thirds of the voting power in
the election of directors and the holders of a majority of the voting shares,
excluding all shares beneficially owned by anOhio law interested shareholder attains 10% ownership. An “issuing public corporation” is an Ohio corporation with 50 or an
affiliatemore shareholders that has its principal place of business, principal executive offices, or associatesubstantial assets within the State of anOhio, and as to which no close corporation agreement exists. An “Ohio law interested shareholder, or the shareholders receive
certain minimum consideration for their shares. A "chapter 1704 transaction"
includes certain mergers, sales of assets, consolidations, combinations and
majority share acquisitions
60
involving an interested shareholder. An "interested shareholder"shareholder” is defined to
include, with limited exceptions, any person who, together with affiliates and
associates, is thea beneficial owner of a sufficient number of shares of the
corporation to entitle the person, directly or indirectly, alone or with others,
to exercise or direct the exercise of 10% or more of the voting power inshares of a corporation. Examples of transactions regulated by Chapter 1704 include the
election of directors after taking into account all of the person's beneficially
owned shares that are not then outstanding.
RELATED PARTY TRANSACTIONS
Pursuant to our articles of incorporation, related party transactions
require the affirmative vote of both a majority of our outstanding voting stock
and a majority of the portion of our outstanding voting stock not including the
voting stock owned by the related party involved in the related party
transaction. A "related party" means any party, together with its affiliates or
associates, that is the beneficial owner of 10% or more but less than 90% of our
voting stock. A "related party transaction" means:
- any merger or consolidation between us or a subsidiary with a related
party;
- any transaction outside the ordinary course of business between us or
a subsidiary and a related party involving the acquisition or disposition of assets, for $5 million or more in value;
-mergers and consolidations, voluntary dissolutions and the issuance or transfer of any of our securities orshares.
Subsequent to the three-year period, a transaction subject to Chapter 1704 may take place provided that of our
subsidiaries to a related party, excluding pro rata distributionscertain conditions are satisfied, including:
| • | prior to the interested shareholder’s share acquisition date, the board of directors approved the purchase of shares by the interested shareholder; | ||
| • | the transaction is approved by the holders of shares with at least 662/3% of the voting power of the corporation (or a different proportion set forth in the articles of incorporation), including at least a majority of the outstanding shares after excluding shares controlled by the Ohio law interested shareholder; or | ||
| • | the business combination results in shareholders, other than the Ohio law interested shareholder, receiving a fair price plus interest for their shares. |
Chapter 1704 is applicable to all of our shareholders;
- any reclassification of our securities or any recapitalization or
other transaction that would increase the voting power of a related
party;corporations formed under Ohio law.
Transfer Agent and - the adoption by us of any liquidation or dissolution plan or proposal
which the related party votes in favor of.
TRANSFER AGENT AND REGISTRAR
National CityRegistrar
Wells Fargo Bank, N.A. isserves as the transfer agent and registrar for our common shares. LISTING
OurWe will select the transfer agent and registrar for a series of preferred shares, and each one will be described in the applicable prospectus supplement.
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DESCRIPTION OF DEPOSITARY SHARES
We may offer depositary shares representing fractional shares of our preferred shares of any series. The following description sets forth certain general terms and provisions of the depositary shares that we may offer pursuant to this prospectus. The particular terms of the depositary shares, including the fraction of a preferred share that such depositary share will represent, and the extent, if any, to which the general terms and provisions may apply to the depositary shares so offered will be described in the applicable prospectus supplement.
The preferred shares represented by depositary shares will be deposited under a depositary agreement between us and a bank or trust company that meets certain requirements and is selected by us, which we refer to as the Bank Depositary. Each owner of a depositary share will be entitled to all the rights and preferences of the preferred shares represented by the depositary share. The depositary shares will be evidenced by depositary receipts issued pursuant to the depositary agreement. Depositary receipts will be distributed to those persons purchasing the fractional preferred shares in accordance with the terms of the offering. The deposit agreement will also contain provisions relating to the manner in which any subscription or similar rights we offer to holders of the preferred shares will be made available to the holders of depositary shares.
The following description is a general summary of some common provisions of a depositary agreement and the related depositary receipts. The description below and in any prospectus supplement does not include all of the terms of the depositary agreement and the related depositary receipts. Copies of the forms of depositary agreement and the depositary receipts relating to any particular issue of depositary shares will be filed with the SEC each time we issue depositary shares, and you should read those documents for provisions that may be important to you. For more information on how you can obtain copies of the forms of the depositary agreement and the related depositary receipts, see “Where You Can Find More Information.”
Dividends and Other Distributions
If we pay a cash distribution or dividend on a series of preferred shares represented by depositary shares, the Bank Depositary will distribute these dividends to the record holders of these depositary shares. If the distributions are in property other than cash, the Bank Depositary will distribute the property to the record holders of the depositary shares. However, if the Bank Depositary determines that it is not feasible to make the distribution of property, the Bank Depositary may, with our approval, sell this property and distribute the net proceeds from this sale to the record holders of the depositary shares.
Redemption of Depositary Shares
If we redeem a series of preferred shares represented by depositary shares, the Bank Depositary will redeem the depositary shares from the proceeds received by the Bank Depositary in connection with the redemption. The redemption price per depositary share will equal the applicable fraction of the redemption price per share of the preferred shares. If fewer than all the depositary shares are listedredeemed, the depositary shares to be redeemed will be selected by lot or pro rata as the Bank Depositary may determine.
Voting the Preferred Shares
Upon receipt of notice of any meeting at which the holders of the preferred shares represented by depositary shares are entitled to vote, the Bank Depositary will mail the notice to the record holders of the depositary shares relating to these preferred shares. Each record holder of these depositary shares on the New York Stock Exchange underrecord date (which will be the symbol "BW."
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UNDERWRITING
Subjectsame date as the record date for the preferred shares) may instruct the Bank Depositary as to how to vote the preferred shares represented by this holder’s depositary shares. The Bank Depositary will endeavor, insofar as practicable, to vote the amount of the preferred shares represented by such depositary shares in accordance with these instructions, and we will take all action which the Bank Depositary deems necessary in order to enable the Bank Depositary to do so. The Bank Depositary will abstain from voting shares of the preferred shares to the extent it does not receive specific instructions from the holders of depositary shares representing these preferred shares.
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Amendment and Termination of the Depositary Agreement
The form of depositary receipt evidencing the depositary shares and any provision of the depositary agreement may be amended by agreement between the Bank Depositary and us. However, any amendment that materially and adversely alters the rights of the holders of depositary shares will not be effective unless this amendment has been approved by the holders of at least a majority of the depositary shares then outstanding. The depositary agreement may be terminated by the Bank Depositary or us only if:
| • | all outstanding depositary shares have been redeemed; or | ||
| • | there has been a final distribution in respect of the preferred shares in connection with any liquidation, dissolution or winding up of the Company and this distribution has been distributed to the holders of depositary receipts. |
Charges of Bank Depositary
We will pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements. We will pay charges of the Bank Depositary in connection with the initial deposit of the preferred shares and any redemption of the preferred shares. Holders of depositary receipts will pay other transfer and other taxes and governmental charges and any other charges, including a fee for the withdrawal of preferred shares upon surrender of depositary receipts, as are expressly provided in the depositary agreement to be for their accounts.
Withdrawal of Preferred Shares
Except as may be provided otherwise in the applicable prospectus supplement, upon surrender of depositary receipts at the principal office of the Bank Depositary, subject to the terms of the depositary agreement, the owner of the depositary shares may demand delivery of the number of whole preferred shares and conditionsall money and other property, if any, represented by those depositary shares. Fractional preferred shares will not be issued. If the depositary receipts delivered by the holder evidence a number of depositary shares in excess of the number of depositary shares representing the number of whole preferred shares to be withdrawn, the Bank Depositary will deliver to this holder at the same time a new depositary receipt evidencing the excess number of depositary shares. Holders of preferred shares thus withdrawn may not thereafter deposit those shares under the depositary agreement or receive depositary receipts evidencing depositary shares therefor.
Miscellaneous
The Bank Depositary will forward to holders of depositary receipts all reports and communications from us that are delivered to the Bank Depositary and that we are required to furnish to the holders of preferred shares.
Neither the Bank Depositary nor we will be liable if we are prevented or delayed by law or any circumstance beyond our control in performing our obligations under the depositary agreement. The obligations of the Bank Depositary and us under the depositary agreement will be limited to performance in good faith of our duties thereunder, and we will not be obligated to prosecute or defend any legal proceeding in respect of any depositary shares or preferred shares unless satisfactory indemnity is furnished. We may rely upon written advice of counsel or accountants, or upon information provided by persons presenting preferred shares for deposit, holders of depositary receipts or other persons believed to be competent and on documents believed to be genuine.
Resignation and Removal of Bank Depositary
The Bank Depositary may resign at any time by delivering to us notice of its election to do so, and we may at any time remove the Bank Depositary. Any such resignation or removal will take effect upon the appointment of a successor Bank Depositary and the successor’s acceptance of this appointment. The successor Bank Depositary must be appointed within 60 days after delivery of the notice of resignation or removal and must be a bank or trust company meeting the requirements of the depositary agreement.
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DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of common shares, preferred shares, depositary shares or debt securities. The following description sets forth certain general terms and provisions of the warrants that we may offer pursuant to this prospectus. The particular terms of the warrants and the extent, if any, to which the general terms and provisions may apply to the warrants so offered will be described in the applicable prospectus supplement.
Warrants may be issued independently or together with other securities and may be attached to or separate from any offered securities. Each series of warrants will be issued under a separate warrant agreement to be entered into between us and a bank or trust company, as warrant agent. The warrant agent will act solely as our agent in connection with the warrants and will not have any obligation or relationship of agency or trust for or with any holders or beneficial owners of warrants.
A copy of the forms of the warrant agreement and the warrant certificate relating to any particular issue of warrants will be filed with the SEC each time we issue warrants, and you should read those documents for provisions that may be important to you. For more information on how you can obtain copies of the forms of the warrant agreement and the related warrant certificate, see “Where You Can Find More Information.”
Debt Warrants
The prospectus supplement relating to a particular issue of warrants to issue debt securities will describe the terms of those warrants, including the following:
| • | the title of the warrants; | ||
| • | the offering price for the warrants, if any; | ||
| • | the aggregate number of the warrants; | ||
| • | the designation and terms of the debt securities purchasable upon exercise of the warrants; | ||
| • | if applicable, the designation and terms of the debt securities that the warrants are issued with and the number of warrants issued with each debt security; | ||
| • | if applicable, the date from and after which the warrants and any debt securities issued with them will be separately transferable; | ||
| • | the principal amount of debt securities that may be purchased upon exercise of a warrant and the price at which the debt securities may be purchased upon exercise; | ||
| • | the dates on which the right to exercise the warrants will commence and expire; | ||
| • | if applicable, the minimum or maximum amount of the warrants that may be exercised at any one time; | ||
| • | whether the warrants represented by the warrant certificates or debt securities that may be issued upon exercise of the warrants will be issued in registered or bearer form; | ||
| • | information relating to book-entry procedures, if any; | ||
| • | the currency or currency units in which the offering price, if any, and the exercise price are payable; | ||
| • | if applicable, a discussion of material United States federal income tax considerations; | ||
| • | anti-dilution provisions of the warrants, if any; | ||
| • | redemption or call provisions, if any, applicable to the warrants; | ||
| • | any additional terms of the warrants, including terms, procedures and limitations relating to the exchange and exercise of the warrants; and | ||
| • | any other information we think is important about the warrants. |
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Stock Warrants
The prospectus supplement relating to a particular issue of warrants to issue common shares, preferred shares or depositary shares will describe the terms of the common share warrants and preferred shares warrants, including the following:
| • | the title of the warrants; | ||
| • | the offering price for the warrants, if any; | ||
| • | the aggregate number of the warrants; | ||
| • | the designation and terms of the common shares, preferred shares or depositary shares that may be purchased upon exercise of the warrants; | ||
| • | if applicable, the designation and terms of the securities that the warrants are issued with and the number of warrants issued with each security; | ||
| • | if applicable, the date from and after which the warrants and any securities issued with the warrants will be separately transferable; | ||
| • | the number of common shares, preferred shares or depositary shares that may be purchased upon exercise of a warrant and the price at which the shares may be purchased upon exercise; | ||
| • | the dates on which the right to exercise the warrants commence and expire; | ||
| • | if applicable, the minimum or maximum amount of the warrants that may be exercised at any one time; | ||
| • | the currency or currency units in which the offering price, if any, and the exercise price are payable; | ||
| • | if applicable, a discussion of material United States federal income tax considerations; | ||
| • | anti-dilution provisions of the warrants, if any; | ||
| • | redemption or call provisions, if any, applicable to the warrants; | ||
| • | any additional terms of the warrants, including terms, procedures and limitations relating to the exchange and exercise of the warrants; and | ||
| • | any other information we think is important about the warrants. |
Exercise of Warrants
Each warrant will entitle the holder of the warrant to purchase at the exercise price set forth in an underwriting agreement
by and among the selling shareholders, KeyBanc Capital Markets, a division of
McDonald Investments Inc., as representative for the underwriters named in the
agreement, and us, we and the selling shareholders have agreed to sell to each
underwriter, and each underwriter has severally agreed to purchase from the
selling shareholders and us,applicable prospectus supplement the number of common shares, preferred shares or depositary shares or the principal amount of debt securities being offered. Holders may exercise warrants at any time up to the close of business on the expiration date set forth opposite its
name in the table below.
Underapplicable prospectus supplement. After the close of business on the expiration date, unexercised warrants are void. Holders may exercise warrants as set forth in the prospectus supplement relating to the warrants being offered.
Until a holder exercises the warrants to purchase our common shares, preferred shares, depositary shares or debt securities, the holder will not have any rights as a holder of our common shares, preferred shares, depositary shares or debt securities, as the case may be, by virtue of ownership of warrants.
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DESCRIPTION OF SUBSCRIPTION RIGHTS
We may issue to our shareholders subscription rights to purchase our common shares, preferred shares, depositary shares or debt securities. The following description sets forth certain general terms and provisions of the subscription rights that we may offer pursuant to this prospectus. The particular terms of the subscription rights and the extent, if any, to which the general terms and provisions may apply to the subscription rights so offered will be described in the applicable prospectus supplement.
Subscription rights may be issued independently or together with any other security offered by this prospectus and may or may not be transferable by the shareholder receiving the rights in the rights offering. In connection with any rights offering, we may enter into a standby underwriting agreement with one or more underwriters pursuant to which the underwriter will purchase any securities that remain unsubscribed for upon completion of the rights offering, or offer these securities to other parties who are not our shareholders. A copy of the form of subscription rights certificate will be filed with the SEC each time we issue subscription rights, and you should read that document for provisions that may be important to you. For more information on how you can obtain a copy of any subscription rights certificate, see “Where You Can Find More Information.”
The applicable prospectus supplement relating to any subscription rights will describe the terms of the offered subscription rights, including, where applicable, the following:
| • | the exercise price for the subscription rights; | ||
| • | the number of subscription rights issued to each shareholder; | ||
| • | the extent to which the subscription rights are transferable; | ||
| • | any other terms of the subscription rights, including terms, procedures and limitations relating to the exchange and exercise of the subscription rights; | ||
| • | the date on which the right to exercise the subscription rights will commence and the date on which the right will expire; | ||
| • | the extent to which the subscription rights include an over-subscription privilege with respect to unsubscribed securities; and | ||
| • | the material terms of any standby underwriting arrangement entered into by us in connection with the subscription rights offering. |
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DESCRIPTION OF DEBT SECURITIES
The following description sets forth general terms and provisions of the debt securities that we may issue, which may be issued as convertible or exchangeable debt securities. We will set forth the particular terms of the debt securities we offer in a prospectus supplement. The extent, if any, to which the following general provisions apply to particular debt securities will be described in the applicable prospectus supplement. The following description of general terms relating to the debt securities and the indenture under which the debt securities will be issued are summaries only and therefore are not complete. You should read the indenture and the prospectus supplement regarding any particular issuance of debt securities.
The debt securities will represent our unsecured general obligations, unless otherwise provided in the prospectus supplement. We currently conduct all of our operations through our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the debt securities or to make any funds available therefor, whether by dividends, loans or other payments. The holders of debt securities (whether senior or subordinated debt securities) will be effectively subordinated to the creditors of our subsidiaries. This means that creditors of our subsidiaries will have a claim to the assets of our subsidiaries that is superior to the claim of our creditors, including holders of our debt securities.
The debt securities will be issued under an indenture between us and Wells Fargo Bank, N.A., as trustee, and may be supplemented or amended from time to time following its execution. The indenture, and any supplemental indentures thereto, will be subject to, and governed by, the Trust Indenture Act of 1939, as amended.
The form of indenture gives us broad authority to set the particular terms of each series of debt securities issued thereunder, including, without limitation, the right to modify certain of the terms contained in the indenture.
Except to the extent set forth in a prospectus supplement, the indenture does not contain any covenants or restrictions that afford holders of the debt securities special protection in the event of a change of control or highly leveraged transaction.
General
The indenture will not limit the aggregate principal amount of debt securities that may be issued under it and provides that debt securities may be issued in one or more series, in such form or forms, with such terms and up to the aggregate principal amount, that we may authorize from time to time. We will establish the terms of each series of debt securities, and such terms will be set forth or determined in the manner provided in one or more resolutions of the board of directors or by a supplemental indenture. The particular terms of the debt securities offered pursuant to any prospectus supplement will be described in the prospectus supplement. All debt securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of any holder, for issuances of additional debt securities of that series.
The applicable prospectus supplement will describe the following terms of any series of debt securities that we may offer (to the extent applicable to the debt securities):
| • | the title and designation of the debt securities (which shall distinguish debt securities of one series from debt securities of any other series), including whether the debt securities shall be issued as senior debt securities, senior subordinated debt securities or subordinated debt securities, any subordination provisions particular to such series of debt securities and whether such debt securities are convertible and/or exchangeable for other securities; | ||
| • | the aggregate principal amount of the debt securities and any limit upon the aggregate principal amount of the debt securities; | ||
| • | the date or dates (whether fixed or extendable) on which the principal of the debt securities is payable or the method of determination thereof; | ||
| • | the rate or rates (which may be fixed, floating or adjustable) at which the debt securities shall bear interest, if any, the method of calculating the rates, the date or dates from which interest shall accrue or the manner of determining those dates, the interest payment dates on which interest shall be payable, the record dates for the determination of holders to whom interest is payable, and the basis upon which interest shall be calculated if other than that of a 360-day year consisting of twelve 30-day months; |
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| • | the place or places where the principal and premium, if any, make-whole amount, if any, and interest on the debt securities, if any, shall be payable, where the holders may surrender debt securities for conversion, transfer or exchange and where notices or demands to or upon us may be served; | ||
| • | any provisions relating to the issuance of the debt securities at an original issue discount; | ||
| • | the price or prices at which, the period or periods within which and the terms and conditions upon which we may redeem the debt securities, in whole or in part, pursuant to any sinking fund or otherwise (including, without limitation, the form or method of payment if other than in cash); | ||
| • | our obligation, if any, to redeem, purchase or repay the debt securities pursuant to any mandatory redemption, sinking fund or analogous provisions or at the option of a holder, the price at which, the period within which and the terms and conditions upon which the debt securities shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation (including, without limitation, the form or method of payment thereof if other than in cash) and any provisions for the remarketing of the debt securities; | ||
| • | if other than denominations of $1,000 and any integral multiple thereof, the denominations in which the debt securities of the series shall be issuable; | ||
| • | if other than the principal amount thereof, the portion of the principal amount of the debt securities which shall be payable upon declaration of acceleration of the maturity or provable in bankruptcy, or, if applicable, the portion of the principal amount which is convertible or exchangeable in accordance with the provisions of the debt securities or the resolution of our board of directors or any supplemental indenture pursuant to which such debt securities are issued; | ||
| • | any events of default with respect to the debt securities, in lieu of or in addition to those set forth in the indenture and the remedies therefor; | ||
| • | our obligation, if any, to permit the conversion or exchange of the debt securities of such series into shares of common stock or other capital stock or property, or combination thereof, and the terms and conditions upon which such conversion shall be effected (including, without limitation, the initial conversion or exchange price or rate, the conversion or exchange period, the provisions for conversion or exchange price or rate adjustments and any other provision relative to such obligation) and any limitations on the ownership or transferability of the securities or property into which holders may convert or exchange the debt securities; | ||
| • | any trustees, authenticating or paying agents, transfer agents or registrars or any other agents with respect to the debt securities; | ||
| • | the currency or currency units, including composite currencies, in which the debt securities shall be denominated if other than the currency of the United States of America; | ||
| • | if other than the currency or currency units in which the debt securities are denominated, the currency or currency units in which payment of the principal of, premium, if any, make-whole amount, if any or interest on the debt securities shall be payable (and the manner in which the equivalent of the principal amount thereof in the currency of the United States of America is to be determined for any purpose, including for the determination of the principal amount outstanding); | ||
| • | if the principal of, premium, if any, make-whole amount, if any, or interest on the debt securities is to be payable, at our election or the election of a holder, in currency or currency units other than that in which the debt securities are denominated or stated, the period within which, and the terms and conditions upon which such election may be made and the time and manner of and identity of the exchange rate agent with responsibility for determining the exchange rate between the currency or currency units in which the debt securities are denominated or stated to be payable and the currency or currency units in which the debt securities will be payable; | ||
| • | if the amount of the payments of principal of, premium, if any, make-whole amount, if any, and interest on the debt securities may be determined with reference to an index, the manner in which the amount shall be determined from that index; | ||
| • | whether and under what circumstances we will pay additional amounts on the debt securities held by foreign holders in respect of any tax, assessment or governmental charge withheld or |
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| deducted and, if so, whether we will have the option to redeem the debt securities rather than pay such additional amounts; | |||
| • | if receipt of certain certificates or other documents or satisfaction of other conditions will be necessary for any purpose, including, without limitation, as a condition to the issuance of the debt securities in definitive form (whether upon original issue or upon exchange of a temporary debt security), the form and terms of such certificates, documents or conditions; | ||
| • | any other affirmative or negative covenants with respect to the debt securities; | ||
| • | whether the debt securities shall be issued in whole or in part in the form of one or more global securities and the depositary for the global securities or debt securities, the circumstances under which any global security may be exchanged for debt securities registered in the name of any person other than the depositary or its nominee and any other provisions regarding the global securities; | ||
| • | whether the debt securities are defeasible; and | ||
| • | any other terms of a particular series. |
Unless otherwise indicated in the prospectus supplement relating to the debt securities, the principal amount of and any premium or make-whole amount or interest on the debt securities will be payable, and the debt securities will be exchangeable and transfers thereof will be registrable, at the office of the trustee. However, at our option, payment of interest may be made by check mailed to the address of the person entitled thereto as it appears in the debt security register. Any payment of principal and any premium or make-whole amount or interest required to be made on an interest payment date, redemption date or at maturity that is not a business day need not be made on such date, but may be made on the next succeeding business day with the same force and effect as if made on the applicable date, and no interest shall accrue for the period from and after such date.
Unless otherwise indicated in the prospectus supplement relating to debt securities, the debt securities will be issued only in fully registered form, without coupons, in denominations of $1,000 or any integral multiple thereof. No service charge will be made for any transfer or exchange of the debt securities, but we may require payment of a sum sufficient to cover any tax or other governmental charge required to be paid in connection with a transfer or exchange.
Debt securities may bear interest at fixed or floating rates. We may issue our debt securities at an original issue discount, bearing no interest or bearing interest at a rate that, at the time of issuance, is below market rate, to be sold at a substantial discount below their stated principal amount. Generally speaking, if our debt securities are issued at an original issue discount and there is an acceleration of their maturity, holders will receive an amount less than the debt securities’ principal amount. Tax and other special considerations applicable to any series of debt securities, including original issue discount debt, will be described in the prospectus supplement in which we offer those debt securities. In addition, certain United States federal income tax or other considerations, if any, applicable to any debt securities which are denominated in a currency or currency unit other than United States dollars may be described in the applicable prospectus supplement.
Global Securities
The debt securities of a series may be issued in the form of one or more global securities that will be deposited with a depositary or its nominees identified in the prospectus supplement relating to the debt securities. In such a case, one or more global securities will be issued in a denomination or aggregate denominations equal to the portion of the aggregate principal amount of outstanding debt securities of the series to be represented by such global security or securities.
Unless and until it is exchanged in whole or in part for debt securities in definitive registered form, a global security may not be registered for transfer or exchange except as a whole by the depositary for such global security to a nominee of the depositary and except in the circumstances described in the prospectus supplement relating to the debt securities. The specific terms of the depositary arrangement with respect to a series of debt securities will be described in the prospectus supplement relating to such series.
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Modification of the Indenture
We and the trustee may modify the indenture with respect to the debt securities of any series, with or without the consent of the holders of debt securities, under certain circumstances to be described in a prospectus supplement.
Defeasance; Satisfaction and Discharge
The prospectus supplement will outline the conditions under which we may elect to have certain of our obligations under the indenture discharged and under which the indenture obligations will be deemed to be satisfied.
Defaults and Notice
The debt securities of any series will contain events of default to be specified in the applicable prospectus supplement, including, without limitation:
| • | failure to pay the principal of, or premium or make-whole amount, if any, on any debt security of such series when due and payable (whether at maturity, by call for redemption, through any mandatory sinking fund, by redemption at the option of the holder, by declaration of acceleration or otherwise); | ||
| • | failure to make a payment of any interest on any debt security of such series when due, which failure shall have continued for a period of 30 days; | ||
| • | failure to perform or observe any of our other covenants or agreements in the indenture with respect to the debt securities of such series; | ||
| • | certain events relating to our bankruptcy, insolvency or reorganization; and | ||
| �� | |||
| • | certain cross defaults. |
If an event of default with respect to debt securities of any series shall occur and be continuing, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding debt securities of such series may declare the principal amount (or, if the debt securities of such series are issued at an original issue discount, such portion of the principal amount as may be specified in the terms of the debt securities of such series) of all debt securities of such series and/or such other amount or amounts as the debt securities or supplemental indenture with respect to such series may provide, to be immediately due and payable.
The trustee under the indenture shall, within 90 days after the occurrence of a default, give to the holders of debt securities of any series notice of all uncured defaults with respect to such series known to it. However, in the case of a default that results from the failure to make any payment of the principal of, premium or make-whole amount, if any, or interest on the debt securities of any series, or in the payment of any mandatory sinking fund installment with respect to the debt securities of such series, the trustee may withhold giving such notice if it in good faith determines that the withholding of such notice is in the interest of the holders of the debt securities of such series.
The indenture will contain a provision entitling the trustee to be indemnified by holders of debt securities before proceeding to exercise any trust or power under the indenture at the request of such holders. The indenture will provide that the holders of at least a majority in aggregate principal amount of the then outstanding debt securities of any series may direct the time, method and place of conducting any proceedings for any remedy available to the trustee, or of exercising any trust or power conferred upon the trustee, with respect to the debt securities of such series. However, the trustee may decline to follow any such direction if, among other reasons, the trustee determines in good faith that the actions or proceedings as directed may not lawfully be taken, would involve the trustee in personal liability or would be unduly prejudicial to the holders of the debt securities of such series not joining in such direction.
The right of a holder to institute a proceeding with respect to the indenture is subject to certain conditions including, that the holders of at least a majority in aggregate principal amount of the then outstanding debt securities of such series make a written request upon the trustee to exercise its power under the indenture, indemnify the trustee to its satisfaction and afford the trustee reasonable opportunity to act. Even so, the holder has an absolute right to receipt of the principal of, premium or make-whole amount, if any, and interest when due, to require
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conversion or exchange of debt securities if the indenture provides for convertibility or exchangeability at the option of the holder and to institute suit for the enforcement of such rights.
Conversion or Exchange Rights
If debt securities of any series are convertible or exchangeable, the applicable prospectus supplement will specify:
| • | the type of securities into which they may be converted or exchanged; | ||
| • | the conversion price or exchange ratio, or its method of calculation; | ||
| • | whether conversion or exchange is mandatory or at the holder’s election; | ||
| • | how and when the conversion price or exchange ratio may be adjusted; and | ||
| • | any other important terms concerning the conversion or exchange rights. |
Concerning the Trustee
Wells Fargo Bank, N.A. will serve as the trustee under the indenture pursuant to which any debt securities will be issued. The prospectus supplement with respect to particular debt securities will describe any other relationship that we may have with Wells Fargo Bank, N.A.
Governing Law
The indenture and the debt securities will be governed by the laws of the State of New York.
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DESCRIPTION OF UNITS
We may issue units comprising one or more securities described in this prospectus in any combination. The following description sets forth certain general terms and provisions of the units that we may offer pursuant to this prospectus. The particular terms of the units and the extent, if any, to which the general terms and provisions may apply to the units so offered will be described in the applicable prospectus supplement.
Each unit will be issued so that the holder of the unit also is the holder of each security included in the unit. Thus, the unit will have the rights and obligations of a holder of each included security. Units will be issued pursuant to the terms of a unit agreement, which may provide that the securities included in the unit may not be held or transferred separately at any time or at any time before a specified date. A copy of the forms of the unit agreement and the unit certificate relating to any particular issue of units will be filed with the SEC each time we issue units, and you should read those documents for provisions that may be important to you. For more information on how you can obtain copies of the forms of the unit agreement and the related unit certificate, see “Where You Can Find More Information.”
The prospectus supplement relating to any particular issuance of units will describe the terms of those units, including, to the extent applicable, the following:
| • | the designation and terms of the units and the securities comprising the units, including whether and under what circumstances those securities may be held or transferred separately; | ||
| • | any provision for the issuance, payment, settlement, transfer or exchange of the units or of the securities comprising the units; and | ||
| • | whether the units will be issued in fully registered or global form. | ||
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PLAN OF DISTRIBUTION
We may sell the offered securities in and outside the United States:
| • | through underwriters or dealers; | ||
| • | directly to purchasers; | ||
| • | in a rights offering; | ||
| • | in “at the market” offerings, within the meaning of Rule 415(a)(4) of the Securities Act, to or through a market maker or into an existing trading market on an exchange or otherwise; | ||
| • | through agents; or | ||
| • | through a combination of any of these methods. |
The prospectus supplement will include the following information:
| • | the terms of the offering; | ||
| • | the names of any underwriters or agents; | ||
| • | the name or names of any managing underwriter or underwriters; | ||
| • | the purchase price or initial public offering price of the securities; | ||
| • | the net proceeds from the sale of the securities; | ||
| • | any delayed delivery arrangements; | ||
| • | any underwriting discounts, commissions and other items constituting underwriters’ compensation; | ||
| • | any discounts or concessions allowed or reallowed or paid to dealers; and | ||
| • | any commissions paid to agents. |
Sale through Underwriters or Dealers
If underwriters are used in the sale, the underwriters are
committedwill acquire the securities for their own account. The underwriters may resell the securities from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Underwriters may offer securities to the public either through underwriting syndicates represented by one or more managing underwriters or directly by one or more firms acting as underwriters. Unless we inform you otherwise in the prospectus supplement, the obligations of the underwriters to purchase the securities will be subject to certain conditions, and the underwriters will be obligated to purchase all of these common sharesthe offered securities if any shares are purchased. If
an underwriter defaults, the underwriting agreement provides that thethey purchase
commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated.
We and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, or to contribute to payments the underwriters may be required
to make because of any of those liabilities.
The underwriting agreement provides that the underwriters' obligations to
purchase the common shares depend on the satisfaction of the conditions
contained in the underwriting agreement. The conditions contained in the
underwriting agreement include the requirement that the representations and
warranties made by the selling shareholders and us to the underwriters are true,
that there is no material change in the financial markets and that we deliver to
the underwriters customary closing documents.
The underwriters propose to offer the selling shareholders' and our common
shares directly to the public at $ per share and to certain dealers at such
price less a concession not in excess of $ per share.them. The underwriters may allow, and such dealers may reallow, a concession not in excess of $ per
sharechange from time to other dealers. If all of the shares are not sold at the public offering
price, the representatives of the underwriters may change thetime any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers.
If we offer securities in a subscription rights offering to our existing security holders, we may enter into a standby underwriting agreement with dealers, acting as standby underwriters. We may pay the other selling terms.
The following table showsstandby underwriters a commitment fee for the per share and total underwriting discount
that the selling shareholders and we will pay to the underwriters. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
optionsecurities they commit to purchase 272,250 additional common shares.
- ---------------
(1) The underwriting discount is %, or $ per share.
62
We estimate that the total expenses related to this offering payable by us,
excluding underwriting discounts and commissions, will be approximately $ .
We have granted the underwriters an option to purchase up to 272,250
additional common shares at the public offering price less the underwriting
discount. The underwriters may exercise the option for 30 days from the date of
this prospectus solely to cover any over-allotments.on a standby basis. If the underwriters
exercise this option, each will be obligated, subject to conditions contained in
thewe do not enter into a standby underwriting agreement, we may retain a dealer-manager to purchasemanage a number of additional common shares
proportionate to that underwriter's initial amount reflected in the above table.
We, our officerssubscription rights offering for us.
During and directors and the selling shareholders have agreed
with theafter an offering through underwriters, for a period of 90 days after the date of this
prospectus, subject to certain exceptions, not to offer, sell, hedge or
otherwise dispose of any common shares or any securities convertible into or
exchangeable for common shares, without the prior written consent of McDonald
Investments Inc. However, McDonald Investments Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to these lock-up agreements.
Until the distribution of common shares is completed, Securities and
Exchange Commission rules may limit the underwriters and selling group members
from bidding for and purchasing our common shares. However, the underwriters may engage in transactions that stabilizepurchase and sell the price of the common shares, such as
bids or purchases of sharessecurities in the open market while the offering is in progress
to peg, fix, or maintain that price.market. These transactions also may include short
salesoverallotment and stabilizing transactions and purchases to cover syndicate short positions created by short sales. Short sales
involve the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in an
amount not greater than the underwriters' option to purchase additional shares
from the selling shareholders in the offering. The underwriters may reduce that
short position by purchasing shares in the open market and/or by exercising all
or part of the over-allotment option described above. In determining the source
of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase additional
shares pursuant to the option granted to them. "Naked" short sales are any sales
in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common shares in the open market after
pricing that could adversely affect investors who purchase inconnection with the offering. The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repaysbid, which means that selling concessions allowed to the underwriters a portion of the underwriting
discount received by it because the representative has repurchased shares sold
bysyndicate members or other broker-dealers for the offered securities sold for their account of such underwritermay be reclaimed by the syndicate if the offered securities are repurchased by the syndicate in stabilizing or short covering transactions. Neither we nor the underwriters makes any representation or prediction as
to the effect the transactions described above may have on the price of the
common shares. Any of theseThese activities may have the effect of preventingstabilize, maintain or retarding a decline inotherwise affect the market price of our common shares. Theythe offered securities, which may also
cause the price of our common shares to be higher than the price that wouldmight otherwise exist onprevail in the open market. If commenced, the underwriters may discontinue these activities at any time.
Some or all of the securities that we offer though this prospectus may be new issues of securities with no established trading market. Any underwriters to whom we sell our securities for public offering and sale may make
20
a market in the absence of these transactions. The
underwriters may conduct these transactions on the New York Stock Exchange or in
the over-the-counter market, or otherwise. If the underwriters commence any of
these transactions,those securities, but they will not be obligated to do so and they may discontinue them without noticeany market making at any time.
Victory Capital Management, Inc., an affiliate of McDonald Investments
Inc., manages accounts that beneficially own 54,298 of our common shares as of
April 1, 2004. In addition, sometime without notice. Accordingly, we cannot assure you of the underwriters and their affiliates have
engaged in, and mayliquidity of, or continued trading markets for, any securities that we offer.
If dealers are used in the future engagesale of securities, we will sell the securities to them as principals. They may then resell those securities to the public at varying prices determined by the dealers at the time of resale. We will include in investment bankingthe prospectus supplement the names of the dealers and other
transactionsthe terms of the transaction.
Direct Sales and Sales through Agents
We may sell the securities directly. In this case, no underwriters or agents would be involved. We may also sell the securities through agents designated from time to time. In the prospectus supplement, we will name any agent involved in the offer or sale of the offered securities, and we will describe any commissions payable to the agent. Unless we inform you otherwise in the prospectus supplement, any agent will agree to use its reasonable best efforts to solicit purchases for the period of its appointment.
We may sell the securities directly to institutional investors or others who may be deemed to be underwriters within the meaning of the Securities Act with respect to any sale of those securities. We will describe the terms of any sales of these securities in the prospectus supplement.
Remarketing Arrangements
Offered securities may also be offered and sold, if so indicated in the applicable prospectus supplement, in connection with a remarketing upon their purchase, in accordance with a redemption or repayment pursuant to their terms, or otherwise, by one or more remarketing firms, acting as principals for their own accounts or as agents for us. Any remarketing firm will be identified and the terms of its agreements, if any, with us and its compensation will be described in the applicable prospectus supplement.
Delayed Delivery Contracts
If we so indicate in the prospectus supplement, we may authorize agents, underwriters or dealers to solicit offers from certain types of institutions to purchase securities from us at the public offering price under delayed delivery contracts. These contracts would provide for payment and delivery on a specified date in the future. The contracts would be subject only to those conditions described in the prospectus supplement. The prospectus supplement will describe the commission payable for solicitation of those contracts.
General Information
We may have agreements with the agents, dealers, underwriters and remarketing firms to indemnify them against certain civil liabilities, including liabilities under the Securities Act, or to contribute with respect to payments that the agents, dealers, underwriters or remarketing firms may be required to make. Agents, dealers, underwriters and remarketing firms may be customers of, engage in transactions with or perform services for us in the ordinary course of their business. They have received customary fees and commissions for those
transactions.
63
businesses.
21
LEGAL MATTERS
Jones Day Cleveland, Ohio, will pass upon the validity of the issuance of
the sharessecurities being sold in this offering. Certain matters will be passed upon for
the underwriters by Calfee, Halter & Griswold LLP, Cleveland, Ohio.
offered hereby.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our
The consolidated financial statements (including a schedule incorporated by reference) at
December 31, 2003 and 2002, and for each of the three yearsBrush Engineered Material Inc. appearing in the period ended
December 31, 2003 as set forth in their reports included herein and incorporated
by reference in our Annual Report on Form 10-K, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements are included and incorporated by reference in this
prospectus and registration statement in reliance on Ernst & Young LLP's report,
given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934. We file reports, proxy statements and other
information with the Securities and Exchange Commission. These reports, proxy
statements and other information can be read and copied at the SEC's Public
Reference Room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC maintains a website at
www.sec.gov that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC, including Brush Engineered Materials Inc. Our website is www.beminc.com. The information
on our website is not a part of this prospectus.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the documents that we file
with the SEC. This means that we can disclose important information to you by
referring you to those documents rather than repeating them in full in this
prospectus. The information incorporated by reference into this prospectus
includes important business and financial information. Any information we
incorporate in this manner is considered part of this prospectus except to the
extent updated and superseded by information contained in this prospectus. Some
information we file with the SEC after the date of this prospectus and until
this offering is completed will automatically update and supersede the
information contained in this prospectus.
We incorporate by reference the following documents (Commission File No.
1-15885) that we have filed with the SEC and any filings that we will make with
the SEC in the future under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until this offering is completed:
-’s Annual Report on Form 10-K for the year ended December 31, 2003;
-2008 (including the "Description of the Common Shares"schedule appearing therein), and the "Description of the
Rights" contained in the Form 8-A filed on May 16, 2000; and
- Current Report on Form 8-K filed on March 12, 2004.
We will provide without charge, upon written or oral request, a copy of any
or all of the documents that are incorporated by reference into this prospectus.
Requests should be directed to:
Brush Engineered Materials Inc.
Attention: Michael C. Hasychak
Vice President, Treasurer and Secretary
17876 St. Clair Avenue
Cleveland, Ohio 44110
Telephone number: (216) 486-4200
64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Brush Engineered Materials Inc.
We have audited the accompanying consolidated balance sheetseffectiveness of Brush Engineered Materials Inc. and subsidiaries’s internal control over financial reporting as of December 31, 2003 and 2002, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made2008 have been audited 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 Brush
Engineered Materials Inc. and subsidiaries at December 31, 2003 and 2002, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP, Cleveland, Ohio
January 28, 2004
F-2
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements.
F-3
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
F-4
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
F-5
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
See Notes to Consolidated Financial Statements.
F-6
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The Company is a holding company with subsidiaries that have
operationsindependent registered public accounting firm, as set forth in the United States, Western Europetheir reports thereon, included therein, and Asia. These operations
manufacture engineered materials used in a variety of markets, including
telecommunications and computer electronics, automotive electronics, optical
media, data storage, decorative and performance film, industrial components,
aerospace and defense, and appliance. The Company's operations are aggregated
into two business segments -- the Metal Systems Group and the Microelectronics
Group -- based upon the commonalities of their products, manufacturing
processes, customers and other factors. The Metal Systems Group produces strip
and bulk alloys (primarily copper beryllium), beryllium metal products and
engineered material systems while the Microelectronics Group manufactures
precious and non-precious vapor deposition targets, frame lid assemblies, other
precious and non-precious metal products, ceramics, electronic packages and
thick film circuits. The Company is vertically integrated and distributes its
products through a combination of company-owned facilities and independent
distributors and agents.
USE OF ESTIMATES: The preparation ofincorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results may differ from
those estimates.
CONSOLIDATION: The Consolidated Financial Statements include the accounts
of Brush Engineered Materials Inc. and its subsidiaries. All of the Company's
subsidiaries are wholly owned except for an insignificant joint venture in
Taiwan established in 2003. Inter-company accounts and transactions are
eliminated in consolidation.
CASH EQUIVALENTS: All highly liquid investments with a put option or
maturity of three months or less when purchased are considered to be cash
equivalents.
ACCOUNTS RECEIVABLE: An allowance for doubtful accounts is maintained for
the estimated losses resulting from the inability of customers to pay the
amounts due.
INVENTORIES: Inventories are stated at the lower of cost or market. The
cost of domestic inventories except ore and supplies is principally determined
using the last-in, first-out (LIFO) method. The remaining inventories are stated
principally at average cost.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is statedreliance upon such reports given on the basisauthority of cost. Depreciation is computed principally by the straight-line
method, except certain facilities for which depreciation is computed by the
sum-of-the-years digits or units-of-production method. Depreciable lives that
are used in computing the annual provision for depreciation by class of asset
aresuch firm as follows:
F-7
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense was $18.6 million in 2003, $19.8 million in 2002, and
$19.9 million in 2001. Repair and maintenance costs are expensed as incurred.
MINERAL RESOURCES AND MINE DEVELOPMENT: Property acquisition costs and
mining costs associated with waste rock removal are recorded at cost and are
depleted or amortized by the units-of-production method based on recoverable
proven beryllium reserves. Exploration and pre-production mine development
expenses are charged to operations in the period in which they are incurred.
INTANGIBLE ASSETS: The Company adopted Statement No. 142, "Goodwill and
Other Intangible Assets" as of January 1, 2002. Under this statement, goodwill
and other indefinite-lived intangible assets are no longer amortized, but
instead reviewed annually, or more frequently under certain circumstances, for
impairment. The Company determined that a goodwill impairment charge was not
required upon adoption of the statement or subsequently during 2002 and 2003.
The Company had goodwill of $7.9 million on its balance sheet as of December 31,
2003 and 2002. Goodwill amortization expense was $0.3 million in 2001, all of
which was recorded by the Microelectronics Group. Intangible assets with finite
lives will continue to be amortized. The cost of intangible assets is amortized
using the straight-line method over the periods estimated to be benefited, which
is generally 20 years or less.
ASSET IMPAIRMENT: In the event that facts and circumstances indicate that
the carrying value of long-lived and intangible assets may be impaired, an
evaluation of recoverability is performed. If an evaluation is required, the
estimated future undiscounted cash flow associated with the asset or asset group
would be compared to the carrying amount to determine if a write-down is
required. In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The statement amends prior
pronouncements and prescribes a uniform approach to accounting for long-lived
assets to be held and used, long-lived assets to be disposed of by other than a
sale and long-lived assets to be disposed of by sale. The statement was
effective January 1, 2002 and had no effect on the Company upon adoption.
DERIVATIVES: The Company records the changes in the fair values of
derivative financial instruments in accordance with Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Company
recognizes all derivatives on the balance sheet at their fair values. If the
derivative is a hedge, depending upon the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of the hedged asset, liability or firm commitment through earnings or recognized
in other comprehensive income (loss) until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value, if
any, is recognized in earnings immediately. If a derivative is not a hedge,
changes in its fair value are adjusted through income.
ASSET REMOVAL OBLIGATION: The Company adopted Statement No. 143,
"Accounting for Asset Retirement Obligations" in the fourth quarter 2002. Under
this statement, a liability must be recorded to recognize the legal obligation
to remove an asset at the time the asset is acquired or when the legal liability
arises. The liability is recorded for the present value of the ultimate
obligation by discounting the estimated future cash flows using a
credit-adjusted risk-free interest rate. The liability is accreted over time,
with the accretion charged to expense. An asset equal to the fair value of the
liability is recorded concurrent with the liability. The asset is then
depreciated over the life of the asset. Adoption of this statement did not have
a material effect on the Company's results of operations or financial position.
REVENUE RECOGNITION: The Company recognizes revenue when the title to the
goods passes to the customer.
SHIPPING AND HANDLING COSTS: The Company records shipping and handling
costs for products sold to customers in cost of sales on the Consolidated
Statements of Income.
ADVERTISING COSTS: The Company expenses all advertising costs as incurred.
Advertising costs were immaterial for the years presented in the Consolidated
Financial Statements.
F-8
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES: The Company uses the liability method in measuring the
provision for income taxes and recognizing deferred tax assets and liabilities
on the balance sheet. The Company records a valuation allowance to reduce the
deferred tax assets to the amount that is more likely than not to be realized.
RECLASSIFICATION: Certain amounts in prior years have been reclassified to
conform to the 2003 consolidated financial statement presentation.
NET INCOME PER SHARE: Basic earnings per share (EPS) is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the assumed
conversion of all dilutive common stock equivalents as appropriate under the
treasury stock method.
STOCK OPTIONS: The Company provides a stock incentive plan for eligible
employees. See Note H to the Consolidated Financial Statements for further
details. The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" and applies the intrinsic value method
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretationsexperts in accounting for its stock incentive
plan. If the Company had elected to recognize compensation expense for its stock
incentive plan awards based on the estimated fair value of the awards on the
grant dates, consistent with the method proscribed by SFAS No. 123 by amortizing
the expense over the options' vesting period, the pro forma net loss and loss
per share (E.P.S.) would have been as noted below:
Note: The pro forma disclosures shown are not representative of the effects on
net income and earnings per share in future years.
The weighted-average fair value of the Company's stock options used to
compute the pro forma net income and earnings per share disclosures is $2.79,
$6.40 and $9.10 for 2003, 2002 and 2001, respectively. The fair value is the
estimated present value at grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the various grants in
2003, 2002 and 2001:
NEW PRONOUNCEMENT: The FASB issued FIN 46, "Consolidation of Variable
Interest Entities" in January 2003 effective for periods ending subsequent to
June 15, 2003 for variable entities for which an enterprise holds a variable
interest that it acquired prior to February 1, 2003. The release clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to certain entities in which the equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from others. The Company adopted FIN 46 as
proscribed and its adoption did not have a material impact on the Company's
results of operations or financial position.
F-9
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- INVENTORIES
Inventories in the Consolidated Balance Sheets are summarized as follows:
Average cost approximates current cost. Gross inventories accounted for
using the LIFO method totaled $73.9 million at December 31, 2003 and $81.8
million at December 31, 2002. The liquidation of LIFO inventory layers in 2003
reduced cost of sales by $3.6 million.
NOTE C -- IMPAIRMENT CHARGE
The Company recorded asset impairment charges of $4.4 million in the fourth
quarter 2002 in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The impairment charges resulted from the assets'
undiscounted projected cash flows being less than their carrying values. The
Metal Systems Group wrote off $3.1 million of equipment and related facilities
formerly used in the production of beryllium. The equipment has been shut down
due to the use of alternate input materials and manufacturing processes.
Management does not believe these assets are salable. The Microelectronics Group
wrote down equipment and a building $1.3 million from its net book value of $1.9
million to its estimated fair market value of $0.6 million. The fair market
value was determined by an appraisal by an independent firm. The equipment was
shut down in 2003. The impairment charges were recorded in other-net on the
Company's 2002 Consolidated Statement of Income.
NOTE D -- INTEREST
Interest expense associated with active construction and mine development
projects is capitalized and amortized over the future useful lives of the
related assets. The following chart summarizes the interest incurred,
capitalized and paid, as well as the amortization of capitalized interest for
2003, 2002 and 2001.
In 1986, the Company purchased company-owned life insurance policies
insuring the lives of certain United States employees. The contracts are
recorded at cash surrender value, net of policy loans, in other assets. The net
contract (income) expense, including interest expense recorded in selling,
general and
F-10
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administrative expenses, was $1.4 million, ($0.5) million and ($0.3) million in
2003, 2002 and 2001, respectively. The related interest expense was $1.3
million, $1.5 million and $1.4 million, in 2003, 2002 and 2001, respectively.
NOTE E -- DEBT
A summary of long-term debt follows:
Maturities on long-term debt instruments as of December 31, 2003 are as
follows:
In December 2003, the Company refinanced its existing revolving credit
agreement and a synthetic operating lease with a new debt structure totaling
$147.5 million. The refinancing included a five-year $105.0 million senior
secured credit agreement, a five-year $35.0 million subordinated term loan and a
$7.5 million Exim line of credit.
The senior secured credit agreement is with six financial institutions and
provides a maximum availability of $105.0 million. It consists of an $85.0
million revolving credit line secured by a portion of the Company's working
capital, a $12.0 million term note secured by a portion of the Company's real
estate and an $8.0 million term note secured by the Company's machinery and
equipment. At December 31, 2003, there was $20.0 million in long-term borrowings
outstanding against the revolving credit portion of the agreement at an average
rate of 5.00% that is fixed through January 2004, at which time it will be reset
according to the terms and options available to the Company under the agreement.
The credit agreement allows the Company
F-11
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to borrow money at a premium over LIBOR or prime rate and at varying maturities.
Also at December 31, 2003, there was $20.0 million outstanding on the two term
loans at an average rate of 5.35%, which is fixed through March 2004, at which
time it will be reset according to the terms and conditions available under the
agreement. The term notes are payable in quarterly installments beginning in
July 2004 and include a balloon payment upon maturity in 2008.
The $35.0 million subordinated term note is secured by a second lien on the
Company's working capital, real estate and machinery and equipment and is
payable in five years with the option to prepay $5.0 million prior to September
2004 without penalty. The interest rate is based on variable prime plus a
premium and resets quarterly. To hedge a portion of this variability, the
company entered into an interest rate swap that fixed the rate on a notional
value of $10.0 million over the life of the note. At December 2003, the Company
had $35.0 million in long-term borrowings outstanding on this note at an average
effective rate of 14.10%.
Both the credit agreement and the subordinated term note are subject to
restrictive covenants including leverage, fixed charges and capital
expenditures. The subordinated term loan restricts the issuance of dividends.
The senior credit agreement and the subordinated term note are also secured by a
first and second lien on the stock of certain of the Company's direct and
indirect subsidiaries.
The $7.5 million Exim facility is secured by certain foreign accounts
receivable of the Company. The interest rate is LIBOR-based plus a premium.
There were no outstanding borrowings against this facility at the end of 2003.
Proceeds from the December 2003 refinancing were used to retire the
existing revolving credit agreement and to terminate an off-balance sheet
operating lease by purchasing the assets being leased for $51.8 million. See
Note F to the Consolidated Financial Statements. Financing fees of $6.2 million
associated with the debt refinancing were deferred and are included in other
assets on the Consolidated Balance Sheet. The deferred costs are being amortized
using the effective interest method over the life of the underlying debt.
Included in the $6.2 million deferred financing cost was the fair value of
115,000 warrants for the purchase of the Company's common stock.
The following table summarizes the Company's short-term lines of credit.
Amounts shown as outstanding are included in short-term debt on the Consolidated
Balance Sheets.
The domestic line is committed and included in the $85.0 million maximum
borrowing under the revolving credit agreement and the $7.5 million Exim
facility. The foreign lines are uncommitted, unsecured and renewed annually. The
precious metal facility (primarily gold) is secured and renewed annually. The
average interest rate on short-term debt was 5.50% and 4.50% as of December 31,
2003 and 2002, respectively.
In November 1996, the Company entered into an agreement with the Lorain
Port Authority, Ohio to issue $8.3 million in variable rate industrial revenue
bonds, maturing in 2016. The variable rate ranged from 0.85% to 1.81% in 2003
and 1.28% to 2.12% during 2002.
In 1994, the Company refunded its $3.0 million industrial development
revenue bonds. The 7.25% bonds were refunded into variable rate demand bonds.
The variable rate ranged from 0.78% to 1.65% during 2003
F-12
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and from 1.15% to 1.95% during 2002. In December 1995, the Company entered into
an interest rate swap agreement to manage its interest rate exposure on the
bond. The Company converted the variable rate to a fixed rate of 4.75% under the
interest rate swap agreement. This swap matured in 2002.
The prior revolving credit agreement, as amended, was terminated in
December 2003. A portion of the Company's domestic receivables and inventory up
to a maximum of $55.0 million secured the agreement. In January and March 2003,
this agreement was amended to waive and revise various covenants and to extend
the maturity until April 2004. At December 31, 2002, there was $24.0 million in
long-term borrowings outstanding at an average interest rate of 4.92%.
NOTE F -- LEASING ARRANGEMENTS
The Company leases warehouse and manufacturing space and manufacturing and
computer equipment under operating leases with terms ranging up to 14 years.
Rent expense amounted to $16.2 million, $17.3 million, and $13.1 million during
2003, 2002, and 2001, respectively. The future estimated minimum lease payments
under non-cancelable operating leases with initial lease terms in excess of one
year at December 31, 2003 are as follows: 2004 -- $5.0 million; 2005 -- $4.2
million; 2006 -- $3.6 million; 2007 -- $3.3 million; 2008 -- $3.3 million and
thereafter -- $9.7 million.
The Company has an operating lease for one of its major production
facilities. This facility is owned by a third party and cost approximately $20.3
million to build. Occupancy of the facility began in 1997. Lease payments for
the facility continue through 2011 with options for renewal. The estimated
minimum payments are included in the preceding paragraph. The facility lease is
subject to certain restrictive covenants including leverage, fixed charges and
annual capital expenditures.
In December 2003, the Company terminated an operating lease for certain
equipment located in Elmore, Ohio and purchased the assets for a residual value
of $51.8 million as part of the Company's refinancing. See Note E to the
Consolidated Financial Statements. This leasing arrangement, which began in
1996, was structured as a synthetic lease, which meant it was an operating lease
for financial reporting purposes and a capital lease for federal income tax
purposes. Lease payments for the related equipment began in 1999 and continued
through the initial lease term expiring in 2001. The Company then exercised its
option to renew the lease of the equipment annually for one-year periods and in
2003 purchased the equipment. The 2003 expense for this lease was $9.3 million
and is included in the amounts in the above paragraph.
NOTE G -- DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE INFORMATION
The Company is exposed to commodity price, interest rate and foreign
currency exchange rate differences and attempts to minimize the effects of these
exposures through a combination of natural hedges and the use of derivative
financial instruments. The Company has policies approved by the Board of
Directors that establish the parameters for the allowable types of derivative
instruments to be used, the maximum allowable contract periods, aggregate dollar
limitations and other hedging guidelines. The Company will only secure a
derivative if there is an identifiable underlying exposure that is not otherwise
covered by a natural
F-13
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedge. In general, derivatives will be held until maturity. The following table
summarizes the fair value of the Company's outstanding derivatives and debt as
of December 31, 2003 and 2002.
The fair values equal the carrying amounts in the Company's Consolidated
Balance Sheets as of December 31, 2003 and 2002. SFAS No. 107 defines fair value
as the amount at which an instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. The fair
value of the foreign currency forward contracts and options and the commodity
and interest rate contracts was calculated by third parties on behalf of the
Company using the applicable market rates at December 31, 2003 and December 31,
2002. The fair value of the Company's debt was estimated using a discounted cash
flow analysis based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
The Company records derivatives in its financial statements in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", which amended SFAS No. 133. Each of the Company's
commodity swaps, interest rate swaps and foreign currency derivative contracts
have been designated as cash flow hedges as defined under these statements. SFAS
No. 133 requires the fair value of outstanding derivative instruments to be
recorded on the balance sheet. Accordingly, derivative fair values were included
in the balance sheet line items as follows:
F-14
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The balance sheet classification of the fair values is dependent upon the
Company's rights and obligations under each derivative and the remaining term to
maturity. Changes in fair values of derivatives are recorded in income or other
comprehensive income (loss) (hereafter "OCI") as appropriate under SFAS No. 133
guidelines. A reconciliation of the changes in fair values and other derivative
activity recorded in OCI for 2003 and 2002 is as follows:
One of the Company's interest rate swaps has a notional value of $45.9
million and initially was designated as a hedge of the variable rate portion of
an operating lease. As a result of the refinancing in December 2003, as further
described in Notes E and F to the Consolidated Financial Statements, that lease
was terminated and the $4.6 million cumulative loss previously recorded in OCI
that was associated with the swap was charged to expense on the Consolidated
Statements of Income as the swap no longer qualified for hedge accounting
treatment. The swap remained in place after the refinancing as payments under
the swap serve as a hedge against the interest rate payments on the new variable
rate debt. However, changes in the fair value of the swap due to movements in
the market interest rates from the date of the refinancing going forward will be
charged to income or expense in the current period. The majority of the $6.6
million change in fair value and other current period hedging activity in 2002
was caused by a decline in the fair value (an increase to the loss) on this
interest rate swap as a result of a decline in interest rates during that year.
Hedge ineffectiveness, including amounts charged from OCI and other adjustments
to the fair values of derivatives that did not flow through OCI, was a $5.1
million expense in 2003 and a $0.3 million credit in 2002 and was included in
other -- net expense on the Company's Consolidated Statements of Income. The
Company estimates that approximately $3.0 million of the balance in OCI at
December 31, 2003 will be charged to income during 2004 as a result of maturing
derivatives.
The Company hedged a portion of its net investment in its Japanese
subsidiary using yen-denominated debt until this loan was repaid in December
2003. A net loss of $0.6 million associated with translating this debt into
dollars was recorded in the cumulative translation adjustment as of December 31,
2003. This balance will remain in cumulative translation adjustment and will
only be charged to income should the Company ever liquidate its investment. The
comparable balance in cumulative translation adjustment as of December 31, 2002
was a net loss of $29,000.
FOREIGN EXCHANGE HEDGE CONTRACTS
The Company uses forward and option contracts to hedge anticipated foreign
currency transactions, primarily foreign sales. The purpose of the program is to
protect against the reduction in value of the foreign currency transactions from
adverse exchange rate movements. Should the dollar strengthen significantly, the
decrease in the translated value of the foreign currency transactions should be
partially offset by gains on the hedge contracts. Depending upon the method
used, the contract may limit the benefits from a weakening of the dollar. The
Company's policy limits contracts to maturities of two years or less from the
date of issuance. All of the contracts outstanding as of December 31, 2003 are
scheduled to mature during 2004. Realized gains and losses on foreign exchange
contracts are recorded in other--net on the Consolidated Statements of Income.
The total exchange gain/(loss), which includes realized and unrealized losses,
was $(0.9) million in 2003, $1.5 million in 2002 and $2.3 million in 2001.
F-15
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE HEDGE CONTRACTS
The Company attempts to minimize its exposure to interest rate variations
by using combinations of fixed and variable rate instruments with varying
lengths of maturities. Depending upon the interest rate yield curve, credit
spreads, projected borrowing requirements and rates, cash flow considerations
and other factors, the Company may elect to secure interest rate swaps, caps,
collars, options or other related derivative instruments. Both fixed-to-variable
and variable-to-fixed interest rate swaps may be used.
In December 2003, the Company entered into a five-year variable-to-fixed
interest rate swap with a $10.0 million notional value designated as a hedge of
a portion of its new variable rate debt.
The Company also has the previously discussed $45.9 million interest rate
swap that does not qualify for hedge accounting under the current regulations,
but cash payments made or received under this swap will tend to offset changes
in the interest payments made on portions of its outstanding variable rate debt
not otherwise hedged. The swap matures in 2008 and its notional value declines
over time. Gains and losses on this swap were charged to cost of sales over its
life until the underlying hedged item, an equipment operating lease, was
terminated in December 2003. Gains and losses from that point forward are
recorded as derivative ineffectiveness within other-net on the Consolidated
Statements of Income.
In December 1995, the Company entered into an interest rate swap,
converting to a fixed rate from a variable rate on a $3.0 million industrial
revenue development bond. Gains and losses on this swap were recorded in
interest expense on the Consolidated Statements of Income. This swap matured
during 2002.
COMMODITY PRICE CONTRACTS
The Company purchases and manufactures products containing copper.
Purchases are exposed to price fluctuations in the copper market. However, for
the majority of its copper-based products, the Company will adjust its selling
prices to customers to reflect the change in its copper purchase price. This
program is designed to be profit neutral; i.e., any changes in copper prices,
either up or down, will be directly passed on to the customer.
The Company may use commodity price contracts (i.e., swaps) to hedge the
copper purchase price for those volumes where price fluctuations cannot be
passed on to the customer. Under these swaps, which are purchased from financial
institutions, the Company makes or receives payments based on a difference
between a fixed price (as specified in each individual contract) and the market
price of copper. These payments will offset the change in prices of the
underlying purchases and effectively fix the price of copper at the swap rate
for the contracted volume. The Company's policy limits commodity hedge contracts
to maturities of 27 months or less from the original date of issuance. The
Company did not have any copper swaps outstanding as of December 31, 2003. While
various copper swaps that matured during 2002 were deemed to be effective as
defined by SFAS No. 133, all of the swaps outstanding as of December 31, 2002
were deemed to be ineffective. Realized gains and losses on copper swap
contracts are recorded in cost of sales on the Consolidated Statements of
Income.
NOTE H -- CAPITAL STOCK
In connection with the Company's refinancing agreement dated December 4,
2003, 115,000 $0.01 common stock warrants were issued to the lenders as part of
their fee. Holders of the warrants are entitled to redeem them for an equal
number of shares of Company common stock. The warrants were recorded as a
component of shareholders' equity at their fair value at the time of issuance.
The warrants expire December 5, 2008.
F-16
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has 5 million shares of Serial Preferred Stock authorized (no
par value), none of which has been issued. Certain terms of the Serial Preferred
Stock, including dividends, redemption and conversion, will be determined by the
Board of Directors prior to issuance.
On January 27, 1998 the Company's Board of Directors adopted a new share
purchase rights plan and declared a dividend distribution of one right for each
share of common stock outstanding as of the close of business on February 9,
1998. The plan allows for new shares issued after February 9, 1998 to receive
one right subject to certain limitations and exceptions. Each right entitles the
shareholder to buy one one-hundredth of a share of Serial Preferred Stock,
Series A, at an initial exercise price of $110. A total of 450,000 unissued
shares of Serial Preferred Stock will be designated as Series A Preferred Stock.
Each share of Series A Preferred Stock will be entitled to participate in
dividends on an equivalent basis with 100 shares of common stock and will be
entitled to one vote. The rights will not be exercisable and will not be
evidenced by separate right certificates until a specified time after any person
or group acquires beneficial ownership of 20% or more (or announces a tender
offer for 20% or more) of common stock. The rights expire on January 27, 2008,
and can be redeemed for 1 cent per right under certain circumstances.
The amended 1995 Stock Incentive Plan authorizes the granting of five
categories of incentive awards: option rights, performance restricted shares,
performance shares, performance units and restricted shares. As of December 31,
2003, no performance units have been granted.
Option rights entitle the optionee to purchase common shares at a price
equal to or greater than market value on the date of grant. Option rights
outstanding under the amended 1995 Stock Incentive Plan and previous plans
generally become exercisable over a four-year period and expire 10 years from
the date of the grant. In 1995, the Company's right to grant options on a total
of 228,565 shares (under the Company's 1979, 1984 and 1989 stock option plans)
was terminated upon shareholder approval of the amended 1995 Stock Incentive
Plan. No further stock awards will be made under the Company's 1979, 1984 and
1989 stock option plans except to the extent that shares become available for
grant under these plans by reason of termination of options previously granted.
The 1990 Stock Option Plan for Non-employee Directors (the "1990 Plan") was
terminated effective May 7, 1998. The 1997 Stock Incentive Plan for Non-employee
Directors replaced the 1990 Plan and provided for a one-time grant of 5,000
options to up to six new non-employee directors who have not yet received
options under the 1990 Plan at an option price equal to the fair market value of
the shares at the date of the grant. Options are non-qualified and become
exercisable six months after the date of grant. The options generally expire 10
years after the date they were granted. The 1997 Stock Incentive Plan for Non-
employee Directors was amended on May 1, 2001. The amendment added 100,000
shares to the Plan and established a grant of up to 2,000 options to each
Director annually.
F-17
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option, performance restricted share award, performance share award,
and restricted share award activities are summarized in the following table:
The market value of the performance restricted shares and the performance
shares adjusted for management's expectation of reaching the management
objectives as outlined in the Plan agreement, and the related dividends on the
performance restricted shares have been recorded as deferred
compensation-restricted stock and are a component of other equity transactions
of shareholders' equity. Deferred compensation is amortized over the vesting
period. Amounts recorded against selling, general and administrative expense on
the Consolidated Statements of Income totaled $0.3 million in 2003, $0.4 million
in 2002 and $0.4 million in 2001.
F-18
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides additional information about stock options
outstanding as of December 31, 2003:
The weighted-average remaining contractual life of options outstanding at
December 31, 2002 and 2001 is 6.04 years and 6.22 years, respectively. The
number of shares available for future grants as of December 31, 2003, 2002 and
2001 is 472,331 shares, 550,986 shares and 631,906 shares, respectively.
NOTE I -- INCOME TAXES
Income (loss) before income taxes and income taxes (benefit) are comprised
of the following components, respectively:
F-19
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the federal statutory and effective income tax rates
follows:
In accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes," the Company recorded a valuation allowance of $5.3 million in 2003 and
$19.9 million in 2002 as part of tax expense. In addition, the Company recorded
a $1.9 million valuation allowance reduction to OCI in 2003 and $7.3 million in
2002 for deferred tax assets associated with the changes to OCI for the minimum
pension liability and derivative and hedging activities. No valuation allowance
was required on $1.0 million of net deferred tax assets associated with certain
foreign subsidiaries.
The Company intends to maintain a valuation allowance on the net deferred
tax assets until a realization event occurs to support reversal of all or a
portion of the reserve.
Included in current domestic income taxes, as shown in the Consolidated
Statements of Income, are $0.2 million, $0.2 million and $0.3 million of state
and local income taxes in 2003, 2002 and 2001, respectively.
The Company had domestic and foreign income tax payments (refunds), of
$(3.3) million, $(1.1) million and $0.6 million in 2003, 2002 and 2001,
respectively.
F-20
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting bases and the tax bases of assets
and liabilities. Deferred tax assets and (liabilities) recorded in the
Consolidated Balance Sheets consist of the following at December 31, 2003 and
2002:
At December 31, 2003, for income tax purposes, the Company had domestic net
operating loss carryforwards of $88.1 million, which are scheduled to expire in
calendar years 2019 through 2023. The Company also had foreign net operating
loss carryforwards for income tax purposes totaling $5.3 million, comprised of
$4.7 million that do not expire, and $0.6 million which are scheduled to expire
in calendar year 2007.
At December 31, 2003, the Company had research and experimentation tax
credit carryforwards of $1.9 million that are scheduled to expire in calendar
years 2008 through 2020.
A provision has not been made with respect to $8.5 million of unremitted
earnings at December 31, 2003 that have been invested by foreign subsidiaries.
It is not practical to estimate the amount of unrecognized deferred tax
liability for undistributed foreign earnings.
F-21
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share (E.P.S.):
Under SFAS No. 128, "Earnings per Share," no potential common shares are
included in the computation of diluted per-share amounts when a loss from
continuing operations exists. Accordingly, dilutive securities have been
excluded from the diluted E.P.S. calculation of 109,052 for 2003, 51,337 for
2002 and 131,896 for 2001.
Options to purchase common stock with exercise prices in excess of the
average share price totaling 1,217,643 at December 31, 2003; 1,394,688 at
December 31, 2002; and 749,488 at December 31, 2001 were excluded from the
diluted E.P.S. calculations as their effect would have been anti-dilutive.
F-22
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The obligation and funded status of the Company's domestic defined benefit
pension plan, unfunded supplemental retirement plan and retiree medical and life
insurance plan are as follows:
F-23
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded a plan curtailment in the fourth quarter 2001 in
accordance with SFAS No. 88, "Employers' Accounting for Settlement and
Curtailment of Defined Benefit Pension Plans and for Termination Benefits". The
curtailment was required because of the significant reduction in the number of
plan participants. The curtailment increased the pension expense in 2001 by $0.6
million and reduced the benefit obligation by $2.4 million at December 31, 2001.
The Company uses a December 31 measurement date for the above plans.
In 2003, the Company revised the expected long-term rate of return
assumption used in calculating the annual expense for its domestic pension plan
in accordance with SFAS No. 87, "Employers' Accounting for Pensions". The
assumed expected rate of return was decreased to 9.0% from 10.0% with the impact
being accounted for as a change in estimate.
Management establishes the expected long-term rate of return assumption by
reviewing its historical trends and analyzing the current and projected market
conditions in relation to the plan's asset allocation and risk management
objectives. Management consults with outside investment advisors and actuaries
when establishing the rate and reviews their assumptions with the Retirement
Plan Review Committee of the Board
F-24
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Directors. The actual return on plan assets was 19.7% in 2003 and the 10-year
average return as of year-end 2003 was 7.9%. While the current 10-year average
is below the 9.0% assumption, primarily due to the poor performance of the U.S.
equity markets in the 2000 to 2002 time frame, the 10-year rolling average
return was over 10.0% in seven of the last 10 years. Management believes that
the 9.0% expected long-term rate of return assumption is achievable and
reasonable given current market conditions and forecasts.
The rate of compensation increase assumption was changed to use a graded
assumption beginning at 2.0% for the 2003 fiscal year and increasing 0.75% per
year until it reaches 5.0% for the 2007 fiscal year and later.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act expanded
Medicare to include, for the first time, coverage for prescription drugs. The
Company sponsors retiree medical programs for certain of its locations and
expects that this legislation may eventually reduce the Company's costs for some
of these programs. At present, no analysis of the potential reduction in the
Company's costs or obligations has been performed as the Company awaits guidance
from various governmental and regulatory agencies concerning the requirements
that must be met to obtain these cost reductions, as well as the manner in which
such savings should be measured. Because of various uncertainties related to the
Company's response to this legislation and the appropriate accounting
methodology for this event, the Company has elected to defer financial
recognition of this legislation until the Financial Accounting Standards Board
issues final accounting guidance. When issued, that final guidance could require
the Company to change previously reported information. This deferral election is
permitted under FSP No. FAS 106-1.
F-25
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PLAN ASSETS
The Company's domestic defined benefit pension plan weighted-average asset
allocation at fiscal year-end 2003 and 2002 and target allocation are as
follows:
The Company's pension plan investment strategy, as approved by the
Retirement Plan Review Committee, is to employ an allocation of investments that
will generate returns equal to or better than the projected long-term growth of
pension liabilities so that the plan will be self-funding. The return objective
is to earn a real return (i.e., the actual return less inflation) of 6.0% as
measured on a 10-year moving-average basis. The allocation of investments is
designed to maximize the advantages of diversification while mitigating the risk
to achieve the return objective. Risk is defined as the annual variability in
value and is measured in terms of the standard deviation of investment return.
Under the Company's investment policies, allowable investments include domestic
equities, international equities, fixed income securities, alternative
securities (which include real estate and private venture capital investments)
and tactical allocation (a mix of equities and bonds). Ranges, in terms of a
percentage of the total assets, are established for each allowable class of
security. The Company may vary the actual asset mix based on the ratio of the
plan assets and liabilities. The investment policy prohibits the use of
derivative financial instruments that create or add leverage to an existing
security position. Derivatives may be used to hedge an existing security or as a
risk reduction strategy. Management reviews the asset allocation on an annual or
more frequent basis and makes revisions as deemed necessary.
None of the plan assets noted above are invested in the Company's common
stock.
CASH FLOWS -- EMPLOYER CONTRIBUTIONS
The Company expects to contribute $1.7 million to its pension benefit plans
and $3.6 million to its other benefit plans in 2004.
OTHER BENEFIT PLANS
The Company also has accrued unfunded retirement arrangements for certain
directors. The projected benefit obligation was $0.1 million at December 31,
2003 and $0.2 million at December 31, 2002. A corresponding accumulated benefit
obligation of $0.1 million at December 31, 2003 and $0.2 million at December 31,
2002 has been recognized as a liability and is included in retirement and
post-employment benefits. Certain foreign subsidiaries have funded and accrued
unfunded pension and other post-employment arrangements. The liability for these
plans was $4.7 million at December 31, 2003 and $3.6 million at December 31,
2002 and was included in retirement and post-employment benefits on the
Consolidated Balance Sheet.
F-26
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also sponsors a defined contribution plan available to
substantially all U.S. employees. Company contributions to the plan are based on
matching a percentage of employee savings up to a specified savings level. The
Company's contributions were $1.0 million in 2003, $1.0 million in 2002 and $2.5
million in 2001. The Company reduced its matching percentage in half effective
with the beginning of the fourth quarter 2001.
NOTE L -- CONTINGENCIES AND COMMITMENTS
CHRONIC BERYLLIUM DISEASE CLAIMS
The Company is a defendant in proceedings in various state and federal
courts by plaintiffs alleging that they have contracted chronic beryllium
disease, or CBD, or related ailments as a result of exposure to beryllium.
Plaintiffs in CBD cases seek recovery under theories of intentional tort and
various other legal theories and seek compensatory and punitive damages, in many
cases of an unspecified sum. Spouses, if any, claim loss of consortium.
Additional CBD claims may arise.
Management believes the Company has substantial defenses in these cases and
intends to contest the suits vigorously. Employee cases, in which plaintiffs
have a high burden of proof, have historically involved relatively small losses
to the Company. Third-party plaintiffs (typically employees of customers) face a
lower burden of proof than do the Company's employees, but these cases are
generally covered by varying levels of insurance.
Although it is not possible to predict the outcome of the litigation
pending against the Company and its subsidiaries, the Company provides for costs
related to these matters when a loss is probable and the amount is reasonably
estimable. Litigation is subject to many uncertainties, and it is possible that
some of the actions could be decided unfavorably in amounts exceeding the
Company's reserves. An unfavorable outcome or settlement of a pending CBD case
or additional adverse media coverage could encourage the commencement of
additional similar litigation. The Company is unable to estimate its potential
exposure to unasserted claims. The Company recorded a reserve for CBD litigation
of $2.9 million at December 31, 2003 and $4.2 million at December 31, 2002. The
reserve was reduced in both 2003 and 2002 for settlement payments as well as for
changes in estimates for the outstanding claims as a result of favorable rulings
and agreements. An asset of $3.2 million was recorded at December 31, 2003 and
$4.9 million at December 31, 2002 for recoveries from insurance carriers for
outstanding claims that are insured and for prior settlements initially paid
directly by the Company to the plaintiff on insured claims. The reserve is
included in other long-term liabilities and the recovery is included in other
assets on the Consolidated Balance Sheets.
While the Company is unable to predict the outcome of the current or future
CBD proceedings based upon currently known facts and assuming collectibility of
insurance, the Company does not believe that resolution of these proceedings
will have a material adverse effect on the financial condition or cash flow of
the Company. However, the Company's results of operations could be materially
affected by unfavorable results in one or more of these cases.
ENVIRONMENTAL PROCEEDINGS
The Company has an active program for environmental compliance that
includes the identification of environmental projects and estimating their
impact on the Company's financial performance and available resources.
Environmental expenditures that relate to current operations, such as wastewater
treatment and control of airborne emissions, are either expensed or capitalized
as appropriate. The Company records reserves for the probable costs for
environmental remediation projects. The Company's environmental engineers
perform routine ongoing analyses of the remediation sites. Accruals are based
upon their analyses and are established at either the best estimate or, absent a
best estimate, at the low end of the estimated range of costs. The accruals are
revised for the results of ongoing studies and for differences between actual
and
F-27
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
projected costs. The accruals are also affected by rulings and negotiations with
regulatory agencies. The timing of payments often lags the accrual, as
environmental projects typically require a number of years to complete. The
Company established undiscounted reserves for environmental remediation projects
of $6.9 million at December 31, 2003 and $7.7 million at December 31, 2002. The
current portion of the reserve totaled $0.7 million at December 31, 2003 and was
included in other liabilities and accrued items while the remaining $6.2 million
of the reserve at December 31, 2003 is considered long-term and is included in
other long-term liabilities on the Consolidated Balance Sheet. These reserves
cover existing or currently foreseen projects. It is possible that additional
environmental losses may occur beyond the current reserve, the extent of which
cannot be estimated.
The environmental reserve was reduced by $0.6 million in 2003 as a result
of revised estimates of the required remediation work and related costs,
primarily for RCRA projects, SWMU closure and other projects at the Company's
Elmore, Ohio site. Payments against the reserve totaled $0.2 million in 2003.
The environmental expense was $0.6 million in 2002. The environmental reserve
was reduced by $1.0 million during 2001 as result of a revised cost estimate for
an established Voluntary Action Plan and the completion of another project for
less than the previously estimated cost. The reserve was increased by $0.7
million in 2001 for various projects at the Elmore site. These items combined
for a net credit of $0.3 million to income in 2001.
LONG-TERM OBLIGATION
The Company has a long-term supply arrangement with Ulba/Kazatomprom of the
Republic of Kazakhstan and their marketing representative, Nukem, Inc. of
Connecticut. The agreement was signed in 2000 and amended in 2001 and 2003.
Under the amended 2003 agreement, the purchase commitments for copper beryllium
master alloy have been significantly reduced from the previous levels. The 2003
amended agreement also added purchase commitments for beryllium vacuum cast
billets and extended the contract period to 2012. All materials under the
arrangement are sourced from Ulba/Kazatomprom. The annual base purchase
commitments total between $5.3 and $5.6 million for 2004 through 2007. The price
per pound escalates each year through 2007. A new price will be renegotiated for
the years 2008 through 2012. If a new price cannot be agreed to by December 31,
2007, then the material purchases will terminate with the 2008 delivery volumes.
The contract allows for the Company to purchase additional quantities of copper
beryllium master alloy up to an annual maximum of 150,000 pounds of beryllium
contained in the master alloy. The purchase of beryllium vacuum cast billets can
be plus or minus 10% of the annual base quantity. Purchases of
beryllium-containing materials from Nukem were $3.3 million in 2001 and
immaterial in both 2003 and 2002.
The Company has agreements to purchase stated quantities of beryl ore,
beryllium metal and copper beryllium master alloy from the Defense Logistics
Agency of the U.S. Government. The agreements expire in 2007. Annual purchase
commitments total approximately $6.4 million in 2004 through 2007. The beryllium
component of the contract price is adjusted quarterly from these stated totals
based upon fluctuations in the non-seasonally adjusted consumer price index. The
Company may elect to take delivery of the materials in advance of the commitment
dates. Purchases under these agreements totaled approximately $5.7 million in
2003, $3.9 million in 2002 and $6.4 million in 2001. The purchased material will
serve as raw material input for operations within Brush Wellman Inc. and Brush
Resources Inc.
OTHER
The Company has outstanding letters of credit totaling $7.1 million related
to workers' compensation, consigned precious metal guarantees and environmental
remediation issues that expire in 2004.
The Company is subject to various other legal or other proceedings that
relate to the ordinary course of its business. The Company believes that the
resolution of these other legal or other proceedings, individually
F-28
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or in the aggregate, will not have a material adverse impact upon the Company's
Consolidated Financial Statements.
NOTE M -- SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
Selected financial data by business segment as proscribed by SFAS No.131,
"Disclosures about Segments of an Enterprise and Related Information," for 2003,
2002 and 2001 are as follows:
Segments are evaluated using earnings before interest and taxes. The "All
Other" column includes the operating results of BEM Services, Inc. and Brush
Resources Inc., two wholly owned subsidiaries of the Company, as well as the
parent company's and other corporate expenses. BEM Services charges a management
fee for the services provided to the other businesses within the Company on a
cost-plus basis. Brush Resources sells beryllium hydroxide, produced from its
mine and extraction mill in Utah, to external customers and to businesses within
the Metal Systems Group. Assets shown in All Other include cash, computer
hardware and software, deferred taxes, capitalized interest and the operating
assets for Brush Resources. Inventories for Metal Systems and Microelectronics
are shown at their FIFO values with the LIFO reserve included under the All
Other column. Intersegment revenues are eliminated in consolidation. The
revenues from external customer totals are presented net of the intersegment
revenues. Assets for the Metals Systems Group include the $51.8 million of
equipment purchased in 2003 that was previously held under an operating lease.
F-29
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's sales from U.S. operations to external customers, including
exports, were $311.5 million in 2003, $301.1 million in 2002, and $385.8 million
in 2001. Revenues attributed to countries based upon the location of customers
and long-lived assets deployed by the Company by country are as follows:
No individual country, other than the United States, or customer accounted
for 10% or more of the Company's revenues for the years presented. Revenues from
outside the U.S. are primarily from Europe and Asia.
NOTE N -- RELATED PARTY TRANSACTIONS
The Company has outstanding loans of $0.4 million with six employees,
including two executive officers, as of December 31, 2003. The loan balance was
$0.4 million as of December 31, 2002 as well. The loans were made in the first
quarter 2002 pursuant to life insurance agreements between the Company and the
employees. The portion of the premium paid by the Company is treated as a loan
from the Company to the employee and the loans are secured by the insurance
policies, which are owned by the employees. The agreements require the employee
to maintain the insurance policy's cash surrender value in an amount at least
equal to the outstanding loan balance. The loan is payable from the insurance
proceeds upon the employee's death or at an earlier date due to the occurrence
of specified events. The loans bear an interest rate equal to the applicable
federal rate.
NOTE O -- OTHER COMPREHENSIVE INCOME
The following table summarizes the net gain/(loss) by component within
other comprehensive income as of December 31, 2003, 2002 and 2001.
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BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE P -- QUARTERLY DATA (UNAUDITED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
Fourth quarter 2003 results include a $6.0 million pre-tax charge to write
off deferred costs and recognize derivative ineffectiveness as a result of the
debt refinancing.
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[This Page Intentionally Left Blank.]
[DESCRIPTION OF ARTWORK]
The following is a description of photographs that will be included on the
inside back cover of the prospectus.
[Company Logo]
1. A photograph of ToughMet(R) copper-nickel-tin alloy materials used in
undersea oil and gas drilling.
2. A photograph of metallic beryllium and AlBeMet(R) materials used for
fighter jet optical targeting systems.
3. A photograph of a cellular phone and a high-performance copper-beryllium
strip for input-output connectors of cellular phones.
4. A photograph of high-strength and conductivity alloy for computer
testing and production sockets.
5. A photograph of precious metal sputtering materials that form the
metallic coating on semi-conductor wafers and data storage devices,
including DVDs.
6. A photograph of a high-purity beryllium transmission window used in
medical diagnostic x-ray equipment.
7. A photograph of aluminum clad specialty alloys used in digital cameras
and photo-capable cellular phones.
8. A photograph of NASA's Mars Rover, which utilizes AlBeMet(R) and
metallic beryllium materials.
[Back Cover of Prospectus]
auditing.
22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forthOther Expenses of Issuance and Distribution.
The following are the estimated expenses of the issuance and distribution of the securities being registered, all of which are payable by us. All of the items below, is an estimate (exceptexcept for the registration fee, the NASD
filing feeare estimates.
| Securities and Exchange Commission registration fee | $ | 8,370 | ||
| Trustee’s fees and expenses | * | |||
| Transfer agent and registrar fees | * | |||
| Printing expenses | * | |||
| Accountant’s fees and expenses | * | |||
| Legal fees and expenses | * | |||
| Miscellaneous | * | |||
| Total | $ | * |
| * | Estimated expenses are presently not known and cannot be estimated. |
Item 15. Indemnification of Directors and the New York Stock Exchange filing fee) of the fees and expenses
(other than underwriting discounts and commissions) payable by us in connection
with the sale of common shares being registered.
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* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.Officers.
We will indemnify, to the full extent then permitted by law, any director or officer or former director or officer of our company who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a member of our Board of Directors or our officer, employee or agent, or is or was serving at our request as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. We will pay, to the full extent then required by law, expenses, including attorney'sattorney’s fees, incurred by a member of our Board of Directors in defending any such action, suit or proceeding as they are incurred, in advance of the final disposition thereof.
To the full extent then permitted by law, we may indemnify employees, agents and other persons and may pay expenses, including attorney'sattorney’s fees, incurred by any employee, agent or other person in defending any action, suit or proceeding as such expenses are incurred, in advance of the final disposition thereof.
The indemnification and payment of expenses described above will not be exclusive of, and will be in addition to, any other rights granted to any person seeking indemnification under any law, our amended and restated articles of incorporation, any agreement, vote of shareholders or disinterested members of our Board of Directors, or otherwise, both as to action in official capacities and as to action in another capacity while he or she is a member of our Board of Directors or our officer, employee or agent, and shall continue as to a person who has ceased to be a member of our Board of Directors, trustee, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.
We may, to the full extent then permitted by law and authorized by our Board of Directors, purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any persons described above against any liability asserted against and incurred by any such person in any such capacity, or arising out of his status as such, whether or not we would have the power to indemnify such person against such liability. Insurance may be purchased from or maintained with a person in which we have a financial interest.
We, upon approval by our Board of Directors, may enter into agreements with any persons who we may indemnify under our amended and restated code of regulations or under law and may undertake thereby to
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indemnify such persons and to pay the expenses incurred by them in defending any action, suit or proceeding against them, whether or not we would have the power under law or our amended and restated code of regulations to indemnify any such person.
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Under Section 1701.13 of the Ohio law,Revised Code, Ohio corporations are authorized to indemnify directors, officers, employees and agents within prescribed limits and must indemnify them under certain circumstances. Ohio law does not provide statutory authorization for a corporation to indemnify directors, officers, employees and agents for settlements, fines or judgments in the context of derivative suits. However, it provides that directors (but not officers, employees or agents) are entitled to mandatory advancement of expenses, including attorneys'attorneys’ fees, incurred in defending any action, including derivative actions, brought against the director, provided that the director agrees to cooperate with the corporation concerning the matter and to repay the amount advanced if it is proved by clear and convincing evidence that the director'sdirector’s act or failure to act was done with deliberate intent to cause injury to the corporation or with reckless disregard for the corporation'scorporation’s best interests.
Ohio law does not authorize payment of judgments to a director, officer, employee or agent after a finding of negligence or misconduct in a derivative suit absent a court order. Indemnification is permitted, however, to the extent such person succeeds on the merits. In all other cases, if a director, officer, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to be the best interests of the corporation, indemnification is discretionary except as otherwise provided by a corporation'scorporation’s articles, code of regulations or by contract except with respect to the advancement of expenses of directors.
Under Ohio law, a director is not liable for monetary damages unless it is proved by clear and convincing evidence that his action or failure to act was undertaken with deliberate intent to cause injury to the corporation or with reckless disregard for the best interests of the corporation. There is, however, no comparable provision limiting the liability of officers, employees or agents of a corporation. The statutory right to indemnification is not exclusive in Ohio, and Ohio corporations may, among other things, procure insurance for such persons.
ITEM
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits.
The following documents are exhibits to the registration statement:
| Exhibit Number | Description | |
| 1.1* | Form of Underwriting Agreement | |
| 1.2* | Form of Agency Agreement | |
| 4.1 | Amended and Restated Articles of Incorporation of Brush Engineered Materials Inc. (filed as Annex B to the Registration Statement on Form S-4 filed by | |
| 4.2 | Amended and Restated Code of Regulations of Brush Engineered Materials Inc. (filed as Exhibit | |
| 4.3 | Rights Agreement, dated as of May 10, 2000, by and between Brush Engineered Materials Inc. and National City Bank, N.A. as Rights Agent, including form of certificate of designations Series A Junior Participating Preferred Stock (filed as Exhibit 4(a) to the Current Report on Form 8-K filed by | |
| 4.4 | First Amendment to Rights Agreement, dated as of December | |
| 4.5 | Second Amendment to Rights Agreement, dated as of July 31, 2008, by and between Brush Engineered Materials Inc. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Registration Statement on |
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| Exhibit Number | Description | |
| 4.6* | Preferred Stock Certificate of Designations | |
| 4.7 | Form of Debt Securities Indenture | |
| 4.8* | Form of Debt Securities | |
| 4.9* | Form of Warrant | |
| 4.10* | Form of | |
| 4.11* | Form | |
| 4.12* | Form | |
| 4.13* | Form of Subscription Rights Certificate | |
| 4.14* | Form of Unit Agreement | |
| 4.15* | Form of Unit Certificate | |
| 5.1 | Opinion of Jones |
| 12.1† | Calculation of Ratio of Earnings to Fixed Charges | |
| 23.1 | Consent of Ernst & Young | |
| 23.2 | Consent of Jones Day (included in Exhibit | |
| 24.1† | Power of | |
| 25.1† | Form T-1 Statement of Eligibility under Trust Indenture Act of 1939 of Trustee under Debt Securities Indenture |
| * | To be filed either by amendment or as an exhibit to a report filed under the Securities Exchange Act of 1934, and incorporated herein by reference. | |
| † | Previously filed. | |
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
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provided,however, that the undertakings set forth in paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of this registration statement.
2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.
3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
4. That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be a part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by amendment.
ITEM 17. UNDERTAKINGS.section 10(a) of the Securities Act of 1933 shall be deemed to be a part of and included in the registration statement as of the earlier date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is a part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
5. That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant'sregistrant’s annual report pursuant to Section 13(a) or section 15(d) of the
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Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fideoffering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposesto supplement the prospectus, after the expiration of determining any liability under the Securities Actsubscription period, to set forth the results of 1933, the information omitted fromsubscription offer, the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filedtransactions by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) underunderwriters during the Securities Act shall be deemedsubscription period, the amount of unsubscribed securities to be partpurchased by the underwriters, and the terms of this
registration statement asany subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, eachprospectus, a post-effective amendment that contains a form of
prospectus shallwill be deemedfiled to be a new registration statement relating toset forth the securities offered therein, and this offeringterms of such securities at
that time shall be deemed to be the initial bona fide offering thereof.offering.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, described under Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration
Statementregistration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland,Mayfield Heights, State of Ohio, on April 1, 2004.
BRUSH ENGINEERED MATERIALS INC.
Date: April 1, 2004 By: /s/ GORDON D. HARNETT
------------------------------------
Gordon D. Harnett
Chairman of the Board, President
and Chief ExecutiveSeptember 14, 2009.
| BRUSH ENGINEERED MATERIALS INC. | ||||
| By | /s/ John D. Grampa | |||
| John D. Grampa | ||||
| Senior Vice President Finance and Chief Financial Officer | ||||
Pursuant to the requirements of the Securities Act of 1933, this Registration Statementregistration statement on Form S-3 has been signed below by the following persons in the capacities and on the dates indicated:
indicated as of September 14, 2009:
| Signatures | Title | |
*Richard J. Hipple | Chairman of the Board, President and Chief Executive Officer | |
/s/ John D. GrampaJohn D. Grampa | Senior Vice President Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
* | Director | |
* | Director | |
* | Director | |
*William B. Lawrence | Director | |
* | Director | |
* |
| Director | ||
* | Director | |
* | Director | |
* | Director | |
*Craig S. Shular | Director |
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| * | The undersigned by signing his name hereto does sign and execute this registration statement on Form S-3 pursuant to the Power of Attorney executed by the above-named directors and officers of the registrant, which has been filed as an exhibit to this registration statement on behalf of such directors and officers. |
| By: | /s/ Gregory R. Chemnitz | September 14, 2009 | ||
| Gregory R. Chemnitz | ||||
| Attorney-in-Fact | ||||
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INDEX TO EXHIBITS
| Exhibit Number | Description | |
| 1.1* | Form of Underwriting Agreement | |
| 1.2* | Form of Agency Agreement | |
| 4.1 | Amended and Restated Articles of Incorporation of Brush Engineered Materials Inc. (filed as Annex B to the Registration Statement on Form S-4 filed by the registrant on February 1, 2000, Registration No. 333-95917), incorporated herein by reference | |
| 4.2 | Amended and Restated Code of Regulations of Brush Engineered Materials Inc. (filed as Exhibit 3 to the Quarterly Report on Form 10-Q for the period ended July 3, 2009), incorporated herein by reference | |
| 4.3 | Rights Agreement, dated as of May 10, 2000, by and between Brush Engineered Materials Inc. and National City Bank, N.A. as Rights Agent, including form of Series A Junior Participating Preferred Stock (filed as Exhibit 4(a) to the Current Report on Form 8-K filed by the registrant on May 16, 2000), incorporated herein by reference | |
| 4.4 | First Amendment to Rights Agreement, dated as of December 7, 2004, by and between Brush Engineered Materials Inc. and LaSalle Bank, N.A. as Rights Agent (filed as Exhibit 4.1 to the Registration Statement on Form 8-A/A filed by the registrant on December 13, 2004), incorporated herein by reference | |
| 4.5 | Second Amendment to Rights Agreement, dated as of July 31, 2008, by and between Brush Engineered Materials Inc. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Registration Statement on Form 8-A/A filed on July 31, 2008) incorporated herein by reference | |
| 4.6* | Preferred Stock Certificate of Designations | |
| 4.7 | Form of Debt Securities Indenture | |
| 4.8* | Form of Debt Securities | |
| 4.9* | Form of Warrant Agreement | |
| 4.10* | Form of Warrant Certificate | |
| 4.11* | Form of Depositary Agreement | |
| 4.12* | Form of Depositary Receipt | |
| 4.13* | Form of Subscription Rights Certificate | |
| 4.14* | Form of Unit Agreement | |
| 4.15* | Form of Unit Certificate | |
| 5.1 | Opinion of Jones Day | |
| 12.1† | Calculation of Ratio of Earnings to Fixed Charges | |
| 23.1 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
| 23.2 | Consent of Jones Day (included in Exhibit 5.1 to this Registration Statement) | |
| 24.1† | Power of Attorney |
| Exhibit Number | Description | |
| 25.1† | Form T-1 Statement of Eligibility under Trust Indenture Act of 1939 of Trustee under Debt Securities Indenture | |
| * | To be filed either by amendment or as an exhibit to a report filed under the Securities Exchange Act of 1934, and incorporated herein by reference. | |
| † | Previously filed. | |